Honey Bees leased premises for a preschool. A second lift was important to operating the business. The landlord agreed to install it by a set date and, if it did not, to indemnify Honey Bees for lease obligations. The lift was late and the landlord argued the indemnity was an unenforceable penalty.
Selected cases
Supreme Court of New Zealand · [2020] NZSC 53
127 Hobson Street Ltd v Honey Bees Preschool Ltd
The Supreme Court of New Zealand considered whether a commercial lease indemnity was an unenforceable penalty.
Supreme Court of New Zealand5 June 2020
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Quick read
- Commercial default clauses can be enforceable when they protect a real business interest and are proportionate.
- The Supreme Court of New Zealand considered whether a commercial lease indemnity was an unenforceable penalty.
Use this to check
- Record why a default clause matters commercially
- Avoid penalty-style drafting that looks punitive
- Match remedies to the business harm the clause is meant to manage
Decision snapshot
What happened
- Honey Bees leased premises for a preschool.
- A second lift was important to operating the business.
- The landlord agreed to install it by a set date and, if it did not, to indemnify Honey Bees for lease obligations.
- The lift was late and the landlord argued the indemnity was an unenforceable penalty.
What the court had to decide
- The issue was whether the indemnity imposed a consequence for breach that was out of proportion to the legitimate interests protected by the obligation.
What the court decided
- The Supreme Court held the clause was enforceable.
- The decision modernised the New Zealand penalty analysis and focused on legitimate interests and proportionality.
Practical impact
Practical read
- Commercial default clauses can be enforceable when they protect a real business interest and are proportionate.
- Drafting should show why the obligation matters, especially where delay or access problems can affect the whole deal.
Useful next steps
- Record why a default clause matters commercially
- Avoid penalty-style drafting that looks punitive
- Match remedies to the business harm the clause is meant to manage
How businesses should read it
Commercial default clauses can be enforceable when they protect a real business interest and are proportionate. Drafting should show why the obligation matters, especially where delay or access problems can affect the whole deal.
Key takeaways
- Record why a default clause matters commercially
- Avoid penalty-style drafting that looks punitive
- Match remedies to the business harm the clause is meant to manage