In the High Court of New Zealand Wellington Registry Civ-2011-418-66

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2011-418-66

IN THE MATTER OF an application under s265 of the Property Law Act 2007 AND IN THE MATTER OF Pike River Coal Limited (in receivership)

BETWEEN PIKE RIVER COAL LIMITED (IN RECEIVERSHIP) First Plaintiff

AND JOHN HOWARD ROSS FISK, DAVID JOHN BRIDGMAN, MALCOLM GRANT HOLLIS Second Plaintiffs

AND O'MALLEY FARMING LIMITED First Defendant

AND ROBERT WILLIAM BROWN, ADRIAN JOHN BENJAMIN, H & M TRUSTEE FIVE LIMITED Second Defendant

AND SOLID ENERGY NEW ZEALAND LIMITED Third Defendant

Hearing: 26 July 2011

Counsel: M D O'Brien and R L Pinny for First and Second Plaintiffs C Carruthers QC for Defendant

Judgment: 14 October 2011

JUDGMENT OF WILLIAMS J

In accordance with r 11.5, I direct the Registrar to endorse this judgment with the delivery time of 10.30am on the 14th October 2011.

PIKE RIVER COAL LIMITED (IN RECEIVERSHIP) V O'MALLEY FARMING LIMITED HC WN CIV-2011- 418-66 14 October 2011 Introduction

[1] Between 2008 and 2010 Pike River Coal Limited (Pike River) operated a coal mine under the Paparoa Ranges near Greymouth. Resource consents permitted Pike River to extract 17.6 million tonnes of coal valued, it is said, at around NZ$4 billion. Between 19 November and 24 November 2010 a series of explosions rocked the mine. Twenty-nine miners were killed within the mine either as a result of the explosions or their toxic aftermath. The mine was sealed and has yet to be reopened. The bodies remain interred. A Royal Commission of Inquiry currently proceeds whose task it is to determine causes and responsibilities for this disaster.

[2] Within three weeks receivers were appointed. Pike River currently owes $75 million to first ranking secured creditors and $15 million to unsecured trade creditors.

[3] The receivers want to sell the mine. Despite uncertainty over whether the mine will be reopened and the bodies of the 29 miners recovered, the receivers say they are “reasonably confident” that a sale will be completed that will benefit all creditors. I understand that indicative offers have been received (including one from Solid Energy New Zealand Limited (Solid Energy)). The receivers hope to complete the sale in a timely fashion.

[4] It is in this context that the receivers of Pike River wearing their lessee’s hat now apply for relief from cancellation against the lessors of Pike River’s Ikamatua rail loading facility.

The Ikamatua facility

[5] When Pike River began to plan its mining operation it needed to find a way of transporting its product to a port for export. The original plan was to move the coal by road to Greymouth and then barge it by sea to New Plymouth for export into Asia and the Indian subcontinent. That proposal was overtaken on 18 December 2007 when Pike River struck a Coal Transport Agreement (CTA) with Solid Energy. [6] Solid Energy is a State-owned Enterprise with a large West Cost-based coal mining business. It operates the Stockton Coal Mine north of Westport.

[7] This agreement with Solid Energy facilitated Pike River’s access to the Midland Railway Line which crosses the Southern Alps into the eastern port of Lyttelton. For reasons not gone into, access to the Midland line represented a better overall deal for Pike River, even though it meant that coal ships from Asia would have to add two extra days’ steaming (around North Cape and back again on the return trip) in order to make Lyttelton rather than New Plymouth.

[8] The reason that Solid Energy was the gateway for Pike River onto the Midland line was that Solid Energy had its own agreements with KiwiRail and Port Lyttelton by which, it seems, Solid Energy had purchased all available capacity on that line. As at December 2007, Solid Energy had excess capacity under the agreements and it made some of that capacity available to Pike River.

[9] Once access to the Port of Lyttelton was in hand, this had knock-on effects in terms of Pike River’s supply chain. Pike River needed rail and loading infrastructure adjacent to the Midland line and reasonably close by road to the Pike River mine. In 2008, Pike River found land suitable for a rail, stockpiling and loading facility at Ikamatua north east of Greymouth and about 22 kms by road from the Pike River mine. The necessary land was in two titles owned respectively by O’Malley Farming Limited (O’Malley) and the R W Brown Family Trust (Brown).

[10] In June 2008, Pike River entered into 25 year leases with O’Malley and Brown. The rail, stockpile and loading facility were built on the O’Malley land. It included a large rail loop connecting to the Midland line; a stockpiling area; a loading facility on the loop; and a short stretch of dual carriageway, 11 metres wide, from the loading and stockpile facility to the eastern boundary of the Brown land. The Brown land had a frontage to Atarau Road – a public road – on its west side. Pike River extended the 11 metre dual carriageway private road from the O’Malley boundary, across the Brown land to Atarau Road. [11] The rail loop, road, stockpile and loading facility cost Pike River $10.5 million to build.

[12] To transport the coal from Pike River’s mine to the Ikamatua facility is complicated. The coal is mixed with water into slurry at the mine and piped to a processing plant about seven kms away. There the coal is de-watered and stockpiled. It is then loaded as needed onto trucks and transported by road to the Ikamatua facility.

[13] At the Ikamatua facility the trucks dump the coal into large hoppers. Conveyers then move and drop the coal into trains, the trains having left the Midland line and accessed the Ikamatua loop. Once loaded, the trains rejoin the Midland line and continue to the Port of Lyttelton. I was advised that Ikamatua is the only facility on the West Coast capable of loading “long trains” effectively. Presumably that reflects the size of the loop on the O’Malley land.

Leases

[14] As can be seen the bulk of the Ikamatua facility is contained on the O’Malley lease. Annual rent for that land is $50,000 + GST. The Brown lease has a much lower annual rent of $28,000 + GST since it only provides the road way connection to Atarau Road.

[15] Other terms are common to both leases. The lease, as I have said, is for 25 years. Pike River has a right of renewal for a further five years. Rent is paid annually and in advance. It is subject to annual review. Pike River can assign the lease without prior consent of the lessor provided certain conditions are met. The conditions include that there is “no existing unremedied breach of any of the terms of the lease”. On the other hand, relevantly, the lessor has the right to re-enter the property and determine the lease if:

(a) The landlord gives written notice to the tenant specifying any breach (other than a rent breach) where the breach remains unremedied for 10 working days after notice (clause 10.1(b)); or (b) The tenant is placed in receivership (clause 10.1(f)).

[16] On expiry or termination of the lease, the lessor may require Pike River to remove its structures or additions from the land and make good any damage caused. The obligation is to “as far as is reasonably possible restore” the leased property to its prior condition.

[17] Pike River has no express right to cancel the lease.

[18] The balance of the O’Malley land is run as a sheep and cattle farm with a pine plantation. The pines were planted around 2005 and will mature in 15 to 20 years. Current turnover for the farm is in the range of $700-$800,000 per annum. It supports three O’Malley family members and an employee.

[19] The balance of the Brown land also has a plantation with trees maturing in approximately 12 years. Prior to the Pike River lease, the Brown land also carried beef cattle on its own account. Now a neighbour grazes part of the Brown land in return for maintenance services.

Receivership and sale

[20] The current lease dispute came about as a result of the closure of the mine following the November 2010 explosions. Nearly all of 170 people employed by Pike River have lost their jobs and, as I have said, the current position is that Pike River owes approximately $75 million to secured creditors, and $15 million to unsecured trade creditors.

[21] The receivers’ first goal is to stabilise the atmosphere in the mine so it can be physically reopened. The next goal is to sell it. Indicative bids were received in June 2011. Several indicative bids were either conditional upon continuing access to the Ikamatua facility, or assume such access. Final bids are expected shortly and any sale will follow quickly thereafter. [22] When Pike River went into receivership it gave Solid Energy force majeure notices and Solid Energy cancelled the CTA. This relieved Pike River of its take or pay obligations under the agreement but it also broke Pike River’s export supply chain. This makes no difference in the short term since the mine is closed, but it could have a significant impact on any sale price.

Receivers move to protect Pike River’s position

[23] When Pike River was placed in receivership, the receivers tried to contact the principals for O’Malley and Brown. They failed to make contact with Brown, but sometime between 26 and 31 January 2011 an employee of PricewaterhouseCoopers named Jeremy Morley made contact with Marianne O’Malley by telephone.1 Mrs O’Malley is the wife of Kenneth O’Malley, one of two directors of O’Malley. She is not herself a director.

[24] Mr Morley and Mrs O’Malley differ in their respective recollections of that telephone conversation.

[25] Mr Morley produced a file note of the conversation as follows:

Call to O’Malley Ikamatua

Spoke to Marianne O’Malley

Gave update on receivership and what we were doing

Advised we wanted to continue occupying land but not adopt lease but would pay rental whilst there

M O’M happy with that - wanted to help out and keep on track for Pike

Advised her I would send letter confirming.

[26] Mrs O’Malley says the foregoing was not at all the tenor of their conversation. She says Mr Morley told her the conversation “was a courtesy call to keep us informed”, and that the letter was simply “acknowledgement of the phone

1 Mr Morley’s evidence is that this conversation took place on 26 January 2011, while Mrs O’Malley’s evidence is that the conversation was on 31 January 2011. It is not necessary to resolve that dispute. call”, essentially that they had been contacted. She said that the conversation was “very informal” and that nothing was mentioned about varying the Pike River lease or about the receivers not adopting a lease.

[27] On 31 January 2011, the receivers sent letters to O’Malley and Brown. Relevant parts of the Brown letter (it will be remembered no direct personal contact had been made yet) were as follows:

We understand that the annual rental is $28,000 plus GST (subject to the rent review conditions outlined in Clause 5 of the lease). The rental is paid annually in advance and is currently paid until 16 June 2011 at which time the next rental will be due. At that time we will contact you to arrange payment in the event that the Company remains in occupation of the land and we have not provided you with three months notice as above to vacate the land.

[28] The O’Malley letter (reflecting the fact that contact had been made with Marianne O’Malley) provided relevantly as follows:

... We refer to the recent discussions on 26 January 2011 between Jeremy Morley of this office and Marianne O’Malley and thank you for the understanding you have in respect of this matter and your indication that you are prepared to work with the Company to resolve the Lease in the context of the Company’s ongoing plans for the facility.

As indicated in those discussions, we are working to preserve the value of the load out facility which may include continued usage or lease of the facility to a third party(s). ... We understand that you are amenable to those options.

The receivers act as agents for the Company and shall incur no personal liability under any circumstances. Please also note that the receivers will not be adopting the Lease during receivership. However, the Company wishes to continue occupying the land whilst it continues to do so will meet the costs of the Lease while maintaining its rights under the Lease. We undertake to provide you with a minimum of three months notice in writing should we wish to terminate those arrangements. We understand that the annual rental of $50,000 plus GST is paid annually in advance subject to the rent review conditions contained within Section 6 of the lease. This rent is currently paid until 16 June 2011 at which time the next rental will be due. At that time we will contact you to arrange payment in the event that the Company remains in occupation of the land and we have not provided you with three months notice as above to vacate the land.

We trust that these arrangements are satisfactory to you. If you are in agreement with this letter, could you please countersign the enclosed copy to evidence your agreement and return the signed agreement ...

[29] The O’Malley directors, Kenneth and Peter O’Malley, countersigned the letter and returned it to the receivers by 4 February 2011. Brown did not respond to the letter.

Brown and O’Malley move to cancel

[30] Kenneth and Peter O’Malley became concerned about the letter they had signed and sought legal advice. O’Malley’s solicitor subsequently wrote to the receivers on 10 February 2011. He purported to reserve O’Malley’s rights under the lease in the event of default by Pike River.

[31] Between 17 and 21 March 2011, Brown and O’Malley gave notice to the receivers under s 246 of the Property Law Act 2007 that they intended to cancel the leases. They relied on clause 10.1(f) of the lease noting that Pike River was in receivership and that this breach was not capable of remedy. Notice of re-entry and cancellation was given on 22 March 2011.

[32] Cancellation coincided with new lease agreements between Brown and O’Malley on the one hand, and Solid Energy on the other. On 17 March 2011, Brown and O’Malley executed agreements with Solid Energy to cancel the Pike River leases, to request Pike River to remove and make good, and to take steps to oppose any grant of relief against cancellation in favour of Pike River. If cancellation is successful, it was further agreed that new leases would commence on substantially similar terms to those of the Pike River leases. A non-refundable incentive payment of $15,000 was paid to each of the lessors, with further payments totalling $65,000 each to be paid once “there is no longer any realistic chance of relief against cancellation”. Positions

[33] The receivers say that Solid Energy is taking over key infrastructure that has no commercial value except as part of Pike River’s supply chain. The receivers say Solid Energy has done this to gain pole position in sale of Pike River. The receivers say that although the Pike River CTA has been cancelled by Solid Energy, a new agreement will inevitably be reached by any new purchaser if it is not Solid Energy. If Solid Energy does not succeed in buying Pike River, the receivers say any refusal by that company or by KiwiRail to allow the successful purchaser of Pike River to access the Midland line would be seen as blatant anti-competitive behaviour and in breach of the Commerce Act.

[34] Solid Energy rejects these accusations. It says that the Ikamatua facility will provide it with additional stockpile capacity. Solid Energy points to its experience following the second Christchurch earthquake on 22 February 2011 when Port Lyttelton was shut down and Solid Energy’s West Coast stockpile capacity was exhausted. Coal production at the Stockton mine had to be shut down as a result. Solid Energy says it wants to avoid that situation occurring again and the Ikamatua facility provides the company with significant extra stockpiling to allow its mine to stay open longer. Solid Energy also says that the Ikamatua facility is the only West Coast facility able to load long trains. Thus, says Solid Energy, the facility is valuable on a standalone basis.

[35] In relation to a CTA with any Pike River purchaser, Solid Energy says that it is proposing over the next two years to more than double its West Coast production. Solid Energy says that while there was capacity in 2007, there will not be any going forward. That, according to Solid Energy, is the reason that there will be no spare capacity on the Midland line in the medium term.

Issues

[36] The receivers say that O’Malley had no right to cancel the lease because by countersigning the letter of 31 January 2011 they either agreed to vary the terms of the lease in accordance with the letter or waived the right to cancel. Brown is not caught by that argument. It did not reply to the letter. The receivers mount a broader argument. They say that, even if the argument in respect of O’Malley is wrong, they should nonetheless be granted relief from cancellation in both cases so as to allow the Pike River sale to be completed inclusive of the Ikamatua facility. Brown and O’Malley oppose.

[37] On the view I take of the application for relief against cancellation, it is unnecessary for me to address the waiver and variation arguments against O’Malley.

The Property Law Act 2007

[38] Cancellation of leases is governed by ss 243 to 264 of the Property Law Act 2007 (Act). Those provisions are a code. They override the express terms of any lease if inconsistent with those provisions.2

[39] Relief against the cancellation, or proposed cancellation, can be sought where a lessee has breached a lease covenant.3 The court has a broad power to grant appropriate relief including on such conditions as it thinks fit.4 The court may do this even though cancellation is for breach of an essential term of the lease, or is not capable of being remedied.5 A receiver of the lessee can apply for relief.6 Sections 255(2) and (3) of the Act provide as follows:

(2) The application is not, in itself, to be taken as an admission by the person making it–

(a) that there has been a breach of a covenant or condition of the lease by the lessee; or

(b) that, because of the breach, the lessor has the right to cancel the lease; or

(3) The court may grant relief against the cancellation of the lease without determining all or any of the things set out in subsection (2).

2 Section 243(3). 3 Section 253(1)(a). 4 Section 256. 5 Section 256(2). 6 Section 253(1)(c). [40] Although comparatively recently recodified, the court’s power to grant relief against cancellation is longstanding. It reflects the fact that the relationship between a lessor and lessee is not just contractual. It is also a relationship that creates an estate in land. From early times the common law has been willing to intervene to prevent the determination of a leaseholder state for breach of covenant if that would be inequitable to the lessee. In the 1806 decision of Sanders v Pope the jurisdiction was said to rest on the principle:7

... that one party is taking advantage of a forfeiture: and as a rigid exercise of the legal right would produce a hardship, a great loss and injury on the one hand arising from going to the full extent of the right, while on the other the party may have the full benefit of the contract, as originally framed, the court will interfere; where a clear mode of compensation can be discovered.

Rent and non-rent covenants

[41] A distinction has been historically drawn in relief cases between rent and non-rent covenants. The courts have been ready to grant relief to a lessee in default of a rent covenant where the arrears is paid up fully, including any costs, by the time the matter comes to court, as long as the lessee is not hopelessly insolvent.8

[42] There is a broad discretion available to the court under the current Property Law Act. For the first time rent default is covered. While caution is appropriate, the breadth of the discretion available under ss 253 to 256 is such that the traditional approach taken in rent cases will remain under the new Act.

[43] In non-rent cases the courts have traditionally taken a broad approach in which the essential justice of the case is transparently assessed in a proportionality exercise. The question asked is whether in all the circumstances, determination of the lease is a proportionate response to the lessee’s breach. The leading case is Studio X Ltd v Mobil Oil NZ Ltd in which Hammond J identified the following factors to be considered:9

7 Sanders v Pope (1806) 12 Ves Jun 282 at 289. 8 For a relatively recent discussion of the UK and NZ authorities on this point see QT Hospitality Limited v Oxford Holdings Limited HC Invercargill CIV-2007-425-178, 1 May 2007. 9 Studio X Ltd v Mobil Oil NZ Ltd [1996] 2 NZLR 697 (HC) at 701. Whether the breach was advertent or deliberately committed. In such a case there are sound reasons why in the normal case relief should not be given: why should a lessor be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations?

Conversely, whether the breach was caused by inadvertence or was entirely beyond the tenant’s control.

Whether the breach involves an immoral/illegal user. It must be wrong in principle for a lessor to be forced into improper or illegal relations, possibly even exposing the lessor himself to some form of legal sanction.

Whether a tenant has made or will make good the breach of the covenant and is able and willing to fulfil his obligations in the future.

The conduct of the landlord.

The personal qualifications of the tenant.

The financial position of the tenant.

Sometimes the position of third parties has had to be considered. For instance the position of a contracting purchaser of the interest.

The gravity of the breach.

Whether a breach has occasioned lasting damage to a landlord.

There is a proportionality concern. Under this head there has to be concern whether whatever damage is said to have been sustained by the landlord can truly be said to be proportionate to the advantages she will obtain if relief is not granted. Generally speaking, and at a greater level of abstraction, there has to be a concern with keeping an even hand. …

[44] Although in that decision Hammond J puts proportionality last, in reality in my view, all factors go to a proportionately assessment.

[45] Understandably, given its broad approach, Studio X has continued to be the starting point under the current Act.10

Receivership clause

[46] This is not a rent default case. Pike River’s rent is up to date, or at least it would be, if O’Malley and Brown were prepared to accept Pike River’s June

10 See Grant v Hannay HC Auckland CIV-2009-404-7248, 17 March 2010, (2010) 11 NZCPR 283 at [32] – [33]; Neglasari Farms Ltd v Brakatin Holdings Ltd HC Auckland CIV-2010-404-756, 10 May 2010, (2011) 11 NZCPR 643 at [80] – [81]. payment for one year’s rental in advance. Indeed Pike River indicated that it was prepared to pay two years’ rent in advance if that would satisfy O’Malley’s and Brown’s concerns.

[47] The breach in this case is the fact of Pike River’s receivership. This breach is somewhere between a rent breach and a general breach. I say this because the receivership clause in the lease was undoubtedly designed as an extra protection against the increased risk that the lessor must shoulder when the lessee is “in trouble”.

[48] In the case of this lease which is long term and involves large scale capital works put there by Pike River, receivership increases risk in two important areas. First, the security of rent payments for the whole term of the lease. Second, Pike River’s ability to complete site rectification at its conclusion.

The Warnocks case

[49] Though the case before me is obviously unique in scale, lease term and the root cause of receivership, the closest comparable case is probably Warnocks (1992) Ltd v Queensgate Centre Ltd.11 In that case, Warnocks, a national clothing chain, had been placed in receivership and was being restructured in preparation for liquidation of part of the undertaking. As here, the receivers did not adopt the clothing chain’s many leases, but maintained occupation and paid rent. One such lease related to a store in Queensgate Mall, Lower Hutt. In the case of that store Warnocks advised Queensgate that it would be restructuring and that the Queensgate lease would be transferred to a new company, Warnocks (1992) Ltd. The new company intended to trade on, keeping the old chain’s performing assets intact, and preparing them for sale at a better than fire sale price. The new company would be directly owned by the receivers. Queensgate made no comment on the restructuring and assignment but continued to accept rent.

[50] At the point of the proposed transfer to the new company, Queensgate advised it intended to cancel the lease and re-enter the premises. Its grounds as

11 Warnocks (1992) Ltd v Queensgate Centre Ltd [1993] 2 NZLR 236. notified were that Warnocks was in receivership and liquidation in breach of the lease covenance. In the meantime an alternative lease had been arranged with Hallensteins – a competing clothing chain.

[51] Heron J weighed the relevant factors and granted relief to Warnocks, though by a narrow margin. It counted significantly in favour of Queensgate that Warnocks was in strife and that the new Hallensteins’ lease provided better security of payment for the remainder of the lease term.12 Yet, the Judge was unwilling to choose between the competing prospects of Hallensteins and Warnocks (1992) Ltd. It was sufficient that the Warnocks receivers had downsized and rationalised the chain into a new company with $5 million in paid up capital. The last mentioned fact was intended by the receivers as a signal that the new Warnocks was a credible operation on an ongoing basis.

[52] The Judge was swayed in the end by the “consistent and conscientious efforts” of the receivers in addressing Warnocks’ difficulties,13 while at the same time honouring rental obligations and constructing a credible rescue package. The package provided increased certainty around future rentals for Queensgate. Warnocks had, in the Judge’s view, been ambushed by Queensgate in terms of the new Hallensteins lease.14

[53] Even though the scales tipped in favour of Warnocks in this case, the Judge added a note of caution. He said:15

Not every case involving reconstruction and rationalisation is a fit one for exercising relief against forfeiture. Indeed in my view they will be the exception rather than the rule for reasons which I have made clear here, namely the uncertain substance of any assignee [i.e. Warnocks (1992) Ltd] ...

The balancing exercise in this case

[54] In my view the following factors are relevant to the Studio X balancing exercise:

12 At 241 and 245. 13 At 245. 14 At 245. 15 At 245-6. (a) Fault in terms of breach of the lease covenants;

(b) Third party and public interest;

(d) Any immediate prejudice to the parties involved;

(e) Whether Brown and O’Malley are being foisted with a hopelessly insolvent lessee;

(f) Whether assignment of the lease is technically possible.

[55] I turn to those factors now.

Is Pike River to blame for its receivership?

[56] There is a Royal Commission currently investigating the causes of the Pike River mine explosions. It cannot be known what conclusions will be reached in that inquiry. It seems appropriate to approach the matter on the basis that the explosions were not, for the purposes of this assessment, the fault of Pike River but rather, occurred for reasons beyond Pike River’s control.

[57] The defendants argue nonetheless that Pike River was always a risky venture and that the operation was in trouble prior to the explosions. I have no direct evidence of this. It seems speculative to proceed in respect of this application on any basis other than the receivership was caused by the explosions, and the company would not be in receivership now without them.

[58] This factor therefore tends to support Pike River’s application.

Are there third party or wider public interests at stake?

[59] The receivers argue that the Pike River receivership has had a significant impact on the West Coast economy with 170 people losing their jobs. Others in the community and elsewhere are unsecured creditors and a successful sale sees them stand at least some chance of a return.

[60] Solid Energy says that it is not clear whether the mine will reopen at all, and far from clear whether the many unsecured creditors will recover anything.

[61] I accept that there is a great deal of public interest in the circumstances of Pike River’s failure. And of course there is public concern for the predicament the company and its employees find themselves in. I do not however see that as a significant factor in the balancing exercise in this case. Just how a successful sale of the mine might affect employment on the West Coast, or the fortunes of the unsecured creditors owed $15 million is impossible at this stage to calculate. I treat this factor as neutral.

Is the Pike River “pit to port” supply chain still a realistic proposition?

[62] The receivers say that the Ikamatua facility is a core asset of the company. They say its loss will hamper their attempts to sell, and reduce Pike River’s value if a sale is completed. They say this reflects its strategic importance to the company.

[63] Solid Energy rejects this argument. It says the value of the Ikamatua facility pales in comparison to the value of the mine and the mining permit. Crucially, Solid Energy argues that its cancellation of the CTA means that there is no longer any guaranteed access to the Midland line anyway. Solid Energy says there will be no spare capacity available to Pike River in the medium term, even if Solid Energy wanted to offer it.

[64] The receivers’ rejoinder is that there is ample capacity on the track and Solid Energy would be in breach of the Commerce Act if it refused to grant Pike River’s purchaser access for anti-competitive reasons.

[65] I am well satisfied that Ikamatua is a core strategic asset to Pike River and that its loss (even without a subsisting CTA) would materially devalue Pike River as an integrated operation. [66] Clearly the lack of a subsisting CTA is a blow for Pike River but it would in my view be speculative to conclude that it is improbable that this corridor would again be opened up for Pike River’s purchaser.

[67] I conclude that this factor counts somewhat in favour of Pike River, although on its own it would not be decisive.

Who will carry the immediate prejudice?

[68] Reinstatement of the Pike River lease will involve no immediate prejudice to Brown and O’Malley. The incentive payment they have received from Solid Energy is non-refundable. Further incentive payments were always dependent on relief against cancellation being refused, and therefore I put them to one side. Lease payments under both leases are similar. The receivers confirm that they are willing and able to pay the rent due and, as I have said, have offered two years rent in advance.

[69] Nor would there be immediate prejudice to Solid Energy. The receivers have offered to sublease Ikamatua to Solid Energy. Of course Solid Energy loses its initial incentive payments. That is a prejudice to some extent, but on the scale of things it is relatively minor.

[70] On the other hand, if relief is refused, the immediate prejudice to Pike River will be significant. It loses a $10.5 million investment and a physical connection to the Midland line. Even without a CTA with Solid Energy, that physical connection will have value to a purchaser.

[71] This factor counts in favour of Pike River.

In the longer term are Brown and O’Malley being foisted with a hopelessly insolvent lessee?

[72] As I have said, the “hopelessly insolvent” test does not strictly apply in this receivership case, which is somewhere between a rent breach and a general breach. However, it is clear that the lessors’ concerns about receivership relate to the ability of Pike River or its successor to fulfil the lease obligations.

[73] There is a great deal of uncertainty around whether the mine will ever be safe enough to work again. Brown and O’Malley have been put at considerable risk, a long term secure rental income greater than what could be expected from beef or tree farming on the equivalent area of land. What is more, they fear that if Pike River is not sold to a reputable miner and reopened, they will be stuck with a contaminated site and $10.5 million worth of scrap metal. The stakes could not be higher for them. Seen in this context their decision to invite Solid Energy into the facility is understandable.

[74] While I acknowledge that nightmare scenario, I do not think it follows that this is likely and that Brown and O’Malley will be left holding the baby as it were. There is a bona fide sale process in train. As in Warnocks, the receivers are making every effort to provide a return to creditors. The High Court decisions in Neglasari Farms and QT Hospitality show that relief will usually be granted where the lessee is trying to sell as a genuine means of extricating itself from financial difficulty.

[75] The receivers, not known as a species given to overstatement, are positive about the prospects of completing the sale. Mr Hollis, for example, said:

If the facility remains available to Pike, we are reasonably confident that a sale will be concluded and that it will be of benefit to all creditors and the wider West Coast community.

[76] As matters currently stand, there are genuine bidders one of whom is Solid Energy.

[77] In the background there is also the fact that Pike River has insurance cover for the loss it has suffered and is in discussions with its insurers.

[78] Taking all factors into account, it is my view that it is simply too early to know whether Pike River will reopen in the hands of a new owner or whether (if that does not happen) the value of the Ikamatua facility will need to be separately assessed as a standalone stockpiling and loading out-facility for other mines on the West Coast.

[79] The important point is that either way, the Ikamatua facility has its own value to West Coast mining. Solid Energy itself makes that point in order to refute the argument that its lease was an attempt to trump the Pike River sale process by interposing itself in Pike River’s supply chain.

[80] If Solid Energy is to be believed, the risk of Brown’s and O’Malley’s nightmare scenario coming to pass are not as significant as has been suggested. This point takes Pike River outside the spirit of Heron J’s cautionary note at the end of the Warnocks decision.

[81] In any event, the flip side of the argument that Brown and O’Malley will be left with a significantly degraded site to clean up, is the effect on Pike River of losing a facility upon which it has spent $10.5 million. This was a factor that weighed with Randerson J in Harlow Finance and Leasing Ltd v Sterling Nominees Ltd.16

[82] A final factor is that the uncertainty remaining can be further mitigated by limiting the term of any relief to the minimum necessary. The receivers asked for 18-24 months relief arguing that the sale process will have concluded by then and clearer assessments can at that stage be made of the prospects both for Pike River and the Ikamatua facility.

[83] On balance, the factors under this heading favour Pike River.

Can the Ikamatua lease be assigned?

[84] Brown and O’Malley argued that even if an acceptable bid is received, the Ikamatua leases cannot be assigned while Pike River is in breach. Clause 7.1.2(b)

16 Harlow Finance and Leasing Ltd v Sterling Nominees Ltd HC Auckland M1262/00, 17 August 2000 at [12]. provides that assignment is allowed only if “there is not any existing unremedied breach of any of the terms of this lease”.

[85] Whether this could prevent the sale going ahead very much remains to be seen. It may well depend on how the receivers and successful bidder choose to structure the transaction or even whether it would be seen as appropriate in the circumstances to terminate the receivership in order to facilitate the transfer. There is also a question as to whether receivership is a relevant breach for the purposes of clause 7.1.2(b). Counsel spent some time on this question but it is in my view unnecessary to answer it here because there are other options for avoiding the question if necessary, and much water to flow under the bridge until that point is reached.

[86] I do not see clause 7.1.2(b) as a necessary bar in this case.

Conclusion and disposition

[87] It follows that the factors when considered as a whole support the grant of limited relief against cancellation in this case. Cancellation would, in my view, be a disproportionate response to the breach, and any potential prejudice to the parties involved can be minimised through limited relief.

[88] The defendants’ application for relief against cancellation is granted accordingly for 24 months on the following conditions:

(a) The receivers pay Brown and O’Malley two years rent being for the 2011-2012 and 2012-2013 years;

(b) All other lease covenants (with the exception of that relating to receivership) are complied with;

(c) The receivers offer Solid Energy forthwith a two year sublease of the Ikamatua facility on terms no more onerous than those contained in the Brown and O’Malley leases; (d) This proceeding is brought back on for call within six months of this judgment to consider progress toward sale and whether further directions may be needed.

[89] Leave is reserved to all parties to apply for further directions on three days’ notice if necessary.

[90] Costs are reserved to be finally dealt with when the relief order is discharged.

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Williams J