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[2009] NSWCA 44
Court of Appeal (NSW)
2011-09-14
Original judgment source is linked above.
The Dispute 1The Applicant ("2FC") is the owner of premises known as Shop 39, Italian Forum, 23 Norton Street, Leichhardt NSW ("the premises"). 2Based upon the terms of the original lease agreement between 2FC and the First Respondent ("Sokkon") in respect of the premises as well as the terms of a new lease agreement claimed to have been entered into with one or more of the Respondents, 2FC seeks the following orders:- (a)that the First and Fifth Respondents pay compensation to the Applicant in the sum of $34,198.42 being the cost of rectifying the premises after they were vacated (b)a declaration that, pursuant to Section 8 of the Retail Leases Act 1994 , a lease existed between the Applicant and the First Respondent, the Second Respondent or the Fifth Respondent as and from 1 March 2009 (c)an order that the First and Fifth Respondents pay compensation for rent payable under the new lease entered into as and from 1 March 2009 at the rate of $17,160 per month for a period of 5 years less actual rent payments received (d)in the alternative to the orders sought in (c) above, the First Respondent pay compensation for unpaid rent at the rate of $19,596.43 per month for the period from 1 March 2009 to May 2010 less any amounts actually paid (e)that the First and Fifth Respondents pay interest upon any compensation ordered as duly payable by them 3Although orders were originally sought against the Third and Fourth Respondents as guarantors for Sokkon, such claims were withdrawn at the commencement of the hearing. 4The premises were used as a restaurant. There is no issue that the premises constitute a "retail shop" as defined by the Retail Leases Act 1994 . 5In summary, the Respondents contend that:- (a) neither the Second Respondent ("Thita") nor the Fifth Respondent Sam Bakas at any time entered into possession of the premises in their own right nor entered into any lease agreement with the Applicant and, accordingly, neither are responsible for any claimed loss (b)Sokkon is not liable for any compensation relating to claimed rectification of the premises (c)Sokkon did not enter into any new lease with 2FC but instead held over under the previous lease whereby it was responsible to pay rent at the rate of $19,596.43 per month; accordingly, Sokkon concedes that it is liable to 2FC for the shortfall in rent paid for the period 1 March 2009 and March 2010, but is not liable for payment of any rent thereafter. 6Mediation was attempted by the parties but was unsuccessful. Hearing of this matter then took place on 14 September 2011. On behalf of the Applicant, affidavits of Christofer Fratzia sworn 15 June 2011 and 14 September 2011, an affidavit of Leo Dick sworn 28 June 2011, and an affidavit of Gail Marshall sworn 12 July 2011, were admitted into evidence. Each of these deponents also gave evidence and were cross examined. On behalf of the Respondents, affidavits of Anthony Elias sworn 8 September 2011, Sam Bakas sworn 8 September 2011, Konstantine Bakafoukas sworn 8 September 2011 and Sokratis Bakafoukas sworn 8 September 2011 were admitted into evidence; Anthony Elias and Sam Bakas also gave evidence in person and were cross examined. Factual Background 7The lease agreement which originally determined the respective rights and liabilities of the parties to these proceedings ("the original lease agreement") was entered into between the previous owner of the premises Chase (No 1) Property Investment Pty Limited as lessor and Dante S.P.A Pty Limited ("Dante") as lessee, and commenced on 6 December 1999 for a period of 5 years with an option period of a further 5 years. On 27 November 2002, the same parties entered into an agreement for variation of the lease whereby the term of the lease was extended to 12 August 2007 with a 5 year option period thereafter. 8On 10 February 2004, 2FC purchased the premises. 9On 26 August 2005, Dante sold the restaurant business conducted at the premises to Sokkon and the lease was subsequently assigned on 14 October 2005. 10Upon expiry of the term of the lease on 12 August 2007, the option to renew had not been exercised by Sokkon and so it remained in possession upon a holding over basis, as provided for by clause 3.3 of the original lease agreement. 11There is no evidence of any direct communication between the parties over the following months. Eventually, by letter dated 10 November 2008, 2FC advised Sokkon that: "Given that the existing lease has expired and you now occupy the premises on a month-by-month basis we wish to advise you that we will be seeking to finalise a new lease in the near future. We will seek to sign a 7 x 5 x 5 year lease that will be commensurate with the existing lease conditions, including the current rental. We wish to offer Sokkon Pty Ltd the opportunity to sign such a lease by 1 December 2008, after which date we will be engaging a leasing agent to find a tenant willing to sign a new lease. Until a new lease is signed, we are willing for Sokkon to remain in the premises on a month-by-month basis as long as all existing lease requirements are met, including timely rental payments." 12The above letter provoked a series of communications between the parties involving negotiations as to the terms of any new lease. 13A letter from Mr Sam Bakas, on behalf of Sokkon, was sent to 2FC on 26 November 2008. This letter referred to some earlier attempts at negotiation, expressed Sokkon's need to now have a reduced rental due to depressed conditions, and proposed that if negotiations were unsuccessful the premises would be vacated on 1 January 2009. This letter further stated that: "In accordance with Clause 8.2 of the lease, we propose to remove all fixtures, fittings and chattels in the premises and ensure that the premises are, following our vacation, left as an empty shell (as they were on commencement of the lease). Alternately, we are prepared to enter into an agreement with you whereby we sell to you the fixtures and fittings in the premises at the price of $200,000." 14By letter dated 27 November 2008, 2FC indicated that it was not interested in purchasing fixtures and fittings. 15A further series of negotiations then transpired between the parties without success following which, in accordance with its previous advice, 2FC appointed an agent Metro Commercial Partners ("Metro Commercial") to manage the property. 16On 30 January 2009, Metro Commercial sent a letter to Sokkon's solicitors ( VA Lawyers) in the following terms: "Re: 2FC Pty Ltd lease to Sam Bakas Ppty: Shop 39, Italian Forum, 23 Norton Street, Leichhardt NSW 2040 With regard to the above we are now pleased to confirm agreement in principal (sic) of all parties in relation to this lease which is subject to formal exchange. Relevant terms are included in the attached leasing advice notice for your information. Accordingly, we have instructed the lessor's solicitor to prepare relevant documents and forward same direct to your office for execution by your client ..." 17The Leasing Advice Notice itself also referred to a lease being given to Sam Bakas for a 5 year term and 5 year option at an annual rental of $187,200 gross plus GST, with the commencement date expressed to be "upon execution of lease". It was further stated that agreement was "subject to receipt of: ... satisfactory executed documentation." The Leasing Advice Notice also provided for execution by 2FC and by Sam Bakas as confirmation of the terms of the agreement reached, but it appears that this document was never executed. 18Metro Commercial was subsequently contacted by or on behalf of Sam Bakas, following which the agent sent an email to the solicitors for 2FC ( Georgiadis & Baker) asking that the base year for calculation of outgoings be set as 2008, that the actual leasing entity be "Phita Hospitality Pty Ltd", and advising that personal guarantees would be given by "Themis Bakasoukis and Kathy Bakasoukis". It is apparent that there were a couple of spelling errors in this communication, as it is common ground that the proposed new lessee was in fact the Second Respondent Thita Hospitality Pty Ltd and the proposed guarantors were the Fifth Respondent Sam Bakas (also known as Themis Bakafoukis) and his wife Kathy. 19The firm VA Lawyers who were acting on behalf of Sokkon were also nominated as the solicitors to act for the new proposed lessee Thita. The solicitors for 2FC sent a letter to VA Lawyers on 25 February 2009 enclosing relevant documentation including a retail tenancy guide, the lessor's disclosure statement and the proposed lease agreement to be entered into by Thita. 20The new rent for the premises which had been negotiated between the parties, according to the Leasing Advice Notice, was to be a monthly sum of $17,160 inclusive of GST. Payment of rent in this sum was subsequently made by Sokkon on 1 March 2009. 21In letters dated 18 March 2009 and 15 April 2009, the solicitors for 2FC asked VA Lawyers to return the lease documents executed by Thita. 22VA Lawyers eventually replied on 21 May 2009 and advised that, although the documents had been executed by Thita, certain financial advice had been provided as a result of which the proposed lessee was now again to be Sokkon. The question was asked whether the existing lease documents should merely be amended with the name of Sokkon endorsed thereon, or whether fresh lease documents should now be issued. 23The solicitors for 2FC, Georgiadis & Baker, then replied that fresh lease documents should re-issue, and confirmation was sought as to the identity of the proposed guarantors for Sokkon. Subsequently, by letter dated 29 May 2009, VA Lawyers advised that the guarantors would be Sam Bakas (that is, Themis Bakafoukis) and Kathy Bakafoukis. 24Fresh lease documentation, with Sokkon Pty Ltd as lessee and the new guarantors as above, was then sent by letter dated 5 June 2009 from Georgiadis & Baker. It was later asserted by VA Lawyers that this letter and its documents had not arrived, and so a fresh set of documents were sent on 8 July 2009. 25Another letter was then sent by Georgiadis & Baker to VA Lawyers on 15 July 2009 indicating that, unless duly executed lease documents were received within 7 days, the offer to lease the premises would be withdrawn and Sokkon would therefore remain upon a month to month tenancy as before, at a rental of $19,320.69 per month. 26A further series of negotiations then occurred, whereby Sokkon initially proposed that it would pay the existing lower rental figure of $17,160 for a 3 month period whilst the premises were re-configured; this proposal was then met with a counter proposal from 2FC. What then followed were a series of proposals and counter proposals, none of which were accepted. It should be here noted that one consistent feature of the correspondence which ensued between the solicitors over this period was the acknowledgement that there was no new lease and that Sokkon was holding over. 27Eventually, as the negotiations broke down, VA Lawyers advised that the property would be vacated. The date for vacation was originally set at 28 February 2010, then at 7 March 2010, and finally at 14 March 2010. Contractors were engaged by Mr Sam Bakas during March 2010 to remove all fixtures, fittings and chattels removed such that the premises were returned to a bare state and certain finishes applied. This work was not completed until 31 March 2010, when stud and track gyprock was installed, and certain patching and repair work undertaken by a business known as "CT Building", as set out within its invoice of the same date.
Was a new lease entered into by either Sokkon, Thita or Sam Bakas? 28The Applicant contends that at least one of these parties committed to a new lease for 5 years, and that the existence of this new lease agreement is proved by the payment of rent in the amount of $17,160 inclusive of GST per month as and from 1 March 2009, which is in accord with the annual rent figure agreed between Sam Bakas and 2FC and set out within the Leasing Advice Notice sent by Metro Commercial on 30 January 2009. 29One factor which clearly emerges from the evidence is that neither Sam Bakas nor Thita at any time in their own right occupied the premises or paid rent. 30Sokkon effected all rental payments as and from 1 March 2009. 31In determining whether a binding lease agreement was reached between the parties, the appropriate starting point is the approach set out by the High Court in Masters v Cameron [1954] 91 CLR 353 at 360 where the Court distinguished between three situations: "(9) Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract." 32The Court in Masters v Cameron went on to confirm that in the first two cases above there is a binding contract, whereas no binding contract is created in cases of the third class because they are cases in which the terms of agreement are not intended to have, and therefore do not have any binding effect of their own. 33It is clear from the pattern of correspondence and communications which occurred during 2009, that there was never any lease agreement between the parties as a result of which either Thita or Sam Bakas occupied the premises. The remaining issue to be determined is whether 2FC and Sokkon entered into a new lease agreement as and from 1 March 2009, such that the continued occupation of the premises by Sokkon as and from that date can only relate to this new lease agreement. As outlined above, 2FC relies upon the conduct of Sokkon in continuing to pay rent at the lower renegotiated amount in accordance with the Leasing Advice Notice issued on 30 January 2009, as establishing that a new and binding lease agreement had been made. 34In considering whether a new lease agreement had been made between 2FC and Sokkon as and from 1 March 2009, the correct approach is contained within the judgment of the Court of Appeal in Laidlaw v Hillier Hewitt Elsley Pty Ltd [2009] NSWCA 44 and is recited within the Tribunal's decision in Dong v West Services Pty Ltd [2010] NSWADT 150 : "(30) A number of propositions as to what constitutes the settled law surrounding the formation of an enforceable agreement were accepted by the Court of Appeal in Laidlaw v Hillier Hewitt Elsley Pty Ltd [2009] NSWCA 44 and are set out within paragraphs 58 and 59 of the decision of Handley AJ. These propositions emerge from previous decisions of superior courts as follows: (a)A contract may come into existence through conduct: Empirnall Holdings Pty Ltd -v- Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523, 535; Brambles Holdings Ltd -v- Bathurst City Council (2001) NSWLR 153, 177-9 (b)The conduct is to be viewed in the light of the surrounding circumstances and in the commercial context in which the dispute arose: ABC-v- XIVth Commonwealth Games (1988) NSWLR 540,584 (c)The conduct must be of such a character as necessarily to lead to an inference that an agreement has been made and its terms: Empirnall (1988)14 NSWLR at 535; Brambles (2001) 53 NSWLR at 195 (d)It is an error to suppose that merely because something has been done there is a contract in existence which has thereby been partly performed; Computer Services Pty Ltd -v- Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR at 11,117 (e)Business people not uncommonly act on an anticipated contractual relationship prior to the contract being formed: Sagacious Procurement Pty Ltd -v- Symbion Health Ltd [2008] NSWCA 149, paragraph [117] (f)Subsequent conduct is admissible to determine whether a contract has been entered into: Sagacious (above) at paragraphs [69], [99]-[106] (g)Subsequent correspondence showing that the parties continued in negotiation negatives a concluded contract: Barrier Wharfs Ltd -v- W Scott Fell & Co Ltd (1908) 5 CLR 647; Sagacious (above) paragraph [104] (h)The retention of lawyers supports the view that the parties intended to contract through formal documentation: Carruthers -v- Whittaker [1975] NZLR 667 CA,671 (i)It is one thing for the parties to settle what are to be the terms of an agreement, if it should be made, and quite another to make that agreement; Barrier Wharfs (above) at paragraph 650 (j)The use of the words "in principle" ordinarily requires a conclusion that there will be no binding contract until formal contracts are executed and exchanged: Baulkham Hills Private Hospital Pty Ltd -v- G R Securities Pty Ltd (1986) 40 NSWLR 631,636; Stephenson -v- Dwyer [2008] NSWCA 123 at paragraphs 106-126, but this will not be so in every case: Baulkham Hills (above) at 628." 35With particular relevance to the present matter, MacFarlan JA in Laidlaw reinforced the test set out in Empirnall and in Brambles which should be applied when considering whether the conduct of parties establishes an enforceable agreement, by reference to a much earlier House of Lords decision: "(5) The decision of the House of Lords in Brogden v Metropolitan Railway Co (1876-77) 2 App Cas 666 establishes that the conduct of parties may give rise to a contract. It was made clear however that the character and circumstances of the conduct must indicate unambiguously that the parties intended to contract. For example the Lord Chancellor said about the conduct in question in that case that "no explanation can be given of it unless it refers to the contract in question" (at 678) and that the conduct was "referable in my mind only to the contract ..." (at 680). Lord Hatherley spoke in similar terms about the conduct: "It does establish a course of action on the part of the Plaintiffs of such a character as necessarily to lead to the inference on the part of the Defendants that the agreement had been accepted on the part of the Plaintiffs, and was to be acted upon by them; and they did act upon it accordingly" (at 686). (6) Likewise, Lord Selborne said that "it appears to me that every single circumstance points quite unequivocally to this agreement" (at 689)." 36In the present matter, it is clear that the initial offer of a new lease made by 2FC to Sokkon was expressly withdrawn. The original submission of lease documents was expressed to be upon the condition that a lease would not be considered as having been entered into until documents had been formally executed. In the period following submission of lease documents to Sokkon, there were continued negotiations between the parties through their lawyers while Sokkon remained in occupation. These negotiations were ultimately unsuccessful, no executed documents were returned to 2FC's solicitors, and Sokkon then eventually vacated the premises. In these circumstances, the payment of rent by Sokkon at the rate of $17,160 per month inclusive of GST cannot, given the respective conduct of the parties throughout 2009 and into 2010, be said to "indicate unambiguously that the parties intended to contract". 37There is no evidence establishing a concluded new lease agreement between the parties whereby either Sokkon, Thita or Sam Bakas remained in occupation of the premises either after 12 August 2007, or after 1 March 2009. What clearly emerges from the evidence is that Sokkon remained in occupation of the premises upon a month to month holding over basis both initially after expiry of the term of the lease and later while negotiations ensued, and that the due rent payable for this period, by virtue of the provisions of clause 3.2 of the original lease agreement, was the amount of $19,320.69 per month. That this was the true state of affairs between the parties is exemplified by the letter sent by 2FC's solicitors to Sokkon's solicitors on 15 July 2009; this letter expressly confirmed that, unless executed lease documentation was returned within 7 days, the offer of a lease would be withdrawn and the monthly rental amount calculated in accordance with the terms of the original lease would still apply.
Is Sokkon liable for the claimed costs of rectification? 382FC's claim for compensation is based upon the claimed cost of rectification of damage and disrepair to the premises said to have been occasioned by the lessee. 39The amount claimed is $34,198.42, which comprises amounts paid or payable by 2FC in response to invoices issued by the contractor Argo Electrical for work including electrical repairs, removal of a kitchen ceiling, some work on a water service, air conditioning service and cleaning, and which also comprises amounts set out within quotations received by 2FC for plumbing repairs and further electrical work from Argo Electrical, and from the contractor Australian Five Star Trades for what is described within its invoice as "make good repairs and cleaning". 40The initial difficulty confronting 2FC in relation to this component of its claim is that the contractual responsibility of the lessee pursuant to the terms of the lease agreement was to return the premises to the condition as existed, as best as could reasonably be achieved, at the commencement of the lease. None of the parties to these proceedings were involved with the lease or with the premises back at that time, but Mr Elias has given evidence that when the premises were first leased under the original lease agreement they were, in effect, what could be termed a "bare shell". 41A further point which is quite reasonably raised on behalf of Sokkon and which is supported by the expert opinion of Ms Gail Marshall, is that any new incoming lessee would not usually wish to have the previous lessee's fittings and fixtures remain and would instead expect to re-decorate or re-configure the premises. 42The invoices and quotations placed into evidence by 2FC are deficient in properly identifying the specific works which could arguably lie within Sokkon's responsibility pursuant to the terms of the lease; there is also in many instances a failure to properly itemise the work performed or claimed to be required and to set out the basis upon which charges have been made or the quotation calculated. 43The evidence of Mr Anthony Elias, who was the director of the company which owned the premises at the time of their construction and at the time that the original lease agreement commenced, was that the only installation then within the premises was the electrical box, that there was no air conditioning, that there was drainage to the slab water supplied to a point on the wall, but that there were no other improvements or fittings at all. Under cross examination, Mr Elias confirmed that there were no ceilings, no fan, no gyprock on walls nor electrical installations or lighting when the original lease agreement was entered into. Mr Elias was shown the contract for sale between his company and the 2FC which stated that the inclusions within the sale of the premises were "all inclusions, including fixed partitioning and fixed lighting"; he had no explanation for the appearance of these words within the contract, and merely reiterated his evidence in chief that such items were installed and owned by the original tenant Dante. Having considered this evidence, whilst 2FC may have been wrongly induced to believe that by purchasing the property it was also acquiring the partitions and lighting to which the vendor did not in fact have title, this does not detract from the accuracy or reliability of the observation of Mr Elias that, in effect, at the time of commencement of the original lease, the premises were a "bare shell". 44The evidence of Mr Elias as to the condition of the premises at the commencement of the original lease agreement accords with significant aspects of the evidence given by Gail Marshall, who was the real estate agent eventually retained by 2FC to market the premises for lease. Ms Marshall agreed during the course of cross examination that it was common industry practice to have what is known as a "make good" clause in a lease agreement, which requires the lessee at the end of the term of the lease to restore the premises to their original condition. Ms Mitchell explained that the reason for this requirement was because a subsequent new tenant usually has a different fashion or need consistent with their personal preferences and with their proposed specific use of the premises. Ms Marshall also agreed that the current commercial rental market was "soft" and that, in response to this situation, instead of lessors accepting reduced rent, it was presently common for there to be increased incentives such as a lessor's contribution to fit out, as well as a rent free period. 45Taking into account the foregoing evidence, the terms of the lease agreement, the state of the premises at the time of commencement of the lease, the works undertaken by or on behalf of Sokkon at the end of its occupation of the premises, the present state of the premises and the deficiencies within the invoices and quotations for work as set out above, 2FC has not established any entitlement to damages or compensation for any rectification or repair of the premises.
What is the extent of outstanding rent due and payable by Sokkon in respect of the premises? 46It is conceded on behalf of Sokkon that a remaining amount of $46,076.19 is due and payable for rent to cover the period 1 March 2009 to 31 March 2010. It is also agreed on behalf of 2FC that if Sokkon's liability for rent is confined to such period, this figure is arithmetically correct. 472FC submits that a further two months' rent is due and payable by Sokkon because of the further period which was required to have the works completed by Argo Electric as set out within the invoices placed into evidence. By reason of the finding that there is no liability on the part of the Respondent in relation to such works, there is accordingly also no liability for payment of rent by Sokkon for this additional period. 48At the end of the hearing, the parties also indicated that agreement had been reached that the amount of the rental bond held in respect of the premises was $15,923.47, and that interest payable in respect of unpaid rent, if confined to the period March 2009 to March 2010, was the sum of $6,424.87, based upon the Westpac overdraft rate of 9.46%. 49Based upon the above findings and agreed figures, the Respondent Sokkon Pty Limited is liable for payment of rental arrears in respect of the premises in the sum of $46,076.19, together with $6,424.87 for interest. 50The appropriate order is that the Rental Bond Board be directed to pay the whole of the security deposit held in respect of the premises to the Applicant 2FC and that it be treated as a credit against the total sum of $52,501.06, comprising unpaid rent of $46,076.19 and the sum of $6,424.87 for interest.
Orders (5)The Respondent Sokkon Pty Limited is to pay the sum of $52,501.06 to the Applicant 2FC Pty Ltd. (6)The claims brought against the Second and Fifth Respondents are dismissed. (7)The Rental Bond Board is directed to pay the whole of the security deposit held in respect of the premises at Shop 39, Italian Forum, 23 Norton Street, Leichhardt New South Wales to the Applicant 2FC Pty Limited. Payment of such security deposit is to be treated as a credit against the order made against order 1 above. (8)Unless either party files and serves a written application for costs together with submissions in support within 14 days, there will be no order as to costs. If an application is made for costs, then the other party is to file and serve any submissions in reply within 14 days of their receipt of the application for costs, and the question of costs will then be determined upon the basis of the written material filed, in accordance with Section 76 of the Administrative Decisions Tribunal Act 1997 .
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 November 2011
2FC Pty Limited
Sokkon Pty Limited