Solicitors:
One Group Legal Pty Ltd - Cross-Claimants/ Defendants
Harrington Maguire & O'Brien - Cross-Defendants/ Plaintiffs
File Number(s): 2015/330101
[2]
Judgment
On 11 April 2014, the second cross-claimant, Anthony Tadros, and the third cross-claimant, Sharon Tadros (collectively, the Tenants), entered into an agreement for lease (AFL) with the third-cross defendant, 711 Hogben Pty Ltd (the Landlord), for premises at levels 1 and 2, 7-11 Hogben Street, Kogarah, which the Tenants proposed to use as a child care centre. The first cross-claimant, George Tadros, guaranteed the Tenants' obligations under the AFL. George is the father of Sharon and Anthony. There was some question as to whether the child care business would be operated by the Tenants themselves or by George and his wife, but, in the way that the case was ultimately conducted on both sides, this question does not arise.
I will refer to the parties by their first names. No disrespect is intended.
The AFL provides for a lease of ten years, with two options to renew of ten years each.
The Landlord agreed to carry out, for the Tenants' benefit, building work designated on a plan numbered CD 1231 (the Plan).
The proposed child care centre is on levels 1 and 2 of a multi-storey building. By all accounts, a child care centre not on ground level would once have been unusual. But it is now not uncommon.
There are planning rules for child care centres, which apparently require provision of indoor areas and outdoor areas.
The outdoor area requirement was intended to be satisfied by walling part of Level 1 on three sides as follows: the distance from floor to ceiling would be 2.8m with a 900mm solid wall and 1200mm of selected glazing. This would leave a 700mm open area between the top of the glazing and the ceiling, which would let in air and light and contribute to an open air feeling.
The Plan appears to indicate that louvres would be installed in the gap.
The Landlord did not construct according to the Plan. Instead, it built floor to ceiling aluminium frames for windows and glazed them (with non-safety glass, so that there was no gap). The window fixtures themselves do not comply with safety requirements. The Landlord denied the Tenants' assertion that it was bound to construct in accordance with the Plan.
Under the provisions of the AFL, the Commencing Date of the Lease was to be the date upon which the Landlord obtained an Occupation Certificate under s 109C of the Environmental Planning and Assessment Act 1979 (NSW) (EP&A Act) with respect to the premises. The parties fell into dispute as to the date the Occupation Certificate was obtained.
The AFL contains a provision for the binding resolution of disputes by an expert.
The disputed questions were answered on 28 July 2015 by an experienced solicitor, Mr Dennis Bluth, who determined that the Occupation Certificate was issued on 18 May 2015 and that the Landlord was obliged to construct in accordance with the Plan, and that it was in breach of the AFL by not doing so.
The Landlord separately challenged each determination and failed: 711 Hogben Pty Ltd v Tadros [2016] NSWSC 1683 (Beech-Jones J); 711 Hogben Pty Ltd v Tadros [2016] NSWSC 697 (Stevenson J). An application for leave to appeal was refused: 711 Hogben Pty Ltd v Tadros [2016] NSWCA 244.
It is not in dispute that the Landlord is, and remains, in breach of the AFL. It has steadfastly refused to alter the premises so as to bring them into conformity with the Plan, and it remains steadfast in that refusal.
The Tenants seek an order for specific performance that the Landlord carry out the work necessary to bring the premises into conformity with the Plan, and claim damages of $1,401,000, said to have been suffered by the breach, being the profits they say they would have earned from operating the child centre business, made up as follows:
1Jul15 - 30Jun16 $316,142
1Jul16 - 30Jun17 $517,112
1Jul17 - 30Jun18 $567,746
[3]
These figures are calculated on the basis that the Tenants paid rental under the lease for the periods concerned.
George joins in the Tenants' claim, but the basis for this is not clear.
No damages are claimed beyond 30 June 2018.
To operate a child care centre, the Tenants require certification, known as a Service Approval, from the Department of Education and Communities (DEC). There are regulations which lay down certain criteria which must be satisfied. It is not necessary, for present purposes, to go into detail as to what this process entails. Suffice it to say that the DEC sends inspectors who exercise a degree of judgement as to whether the premises satisfy the necessary criteria, which include the provision of sufficient space per child and natural light, ventilation and fresh air.
The Tenants would need an Occupation Certification under the EP&A Act. There would also need to be an Amended Development Approval. The alterations would need to comply with applicable provisions in the Building Code of Australia or the appropriate authority would need to waive non-compliance.
It is not in dispute that the premises in their current state are not eligible for Service Approval.
The central controversy in the damages claim is if the premises are altered so as to conform with the Plan, would certification be achieved? If not, the Tenants would not have suffered any loss of profits by reason of the breach.
The Tenants say they would obtain certification. The Landlord says they would not.
George, who is an experienced child care operator, gave evidence of demand for the child care centre, which included enquiries that had been received and an opening day which was held in January 2015. Prospective clients registered and paid registration fees. His ability to operate such a business was not in issue.
The Tenants and the Landlord each called a child care centre expert. Their expert credentials were not in issue. The Tenants called Mr John Wall the principal of 'John Wall Child Care', an organisation which has expertise in new start long day care centres. The Landlord called Dr Brenda Abbey, the principal of an organisation called 'Child Care by Design.' Dr Abbey is frequently engaged to provide consultancy services for individual and corporate child care operators and councils. Both were impressive witnesses.
Mr Wall's opinion was that certification would occur. Ultimately, I think it is fair to characterise Dr Abbey's opinion as that there would be issues to be resolved, but she did not hold the view that certification would not occur. I observed both in concurrent session and under cross-examination. Mr Wall has had significant practical experience in applications for Service Approval which have complexity, and was unshaken in his opinion that, if the premises were modified to conform with the Plan, Service Approval would be obtained, even if, in some respects, a waiver was required from compliance with the regulations. Dr Abbey identified certain issues. She spoke of an instance where there was a difficulty with ceilings, but then gave evidence that the application in that instance succeeded. Mr Wall gave largely, if not entirely, unchallenged evidence as to the profits that would have been earned by the child care business.
I did of course form a view as to whose evidence I prefer. However, it is not necessary to reveal my view at this stage because the parties have agreed (or put nothing against) the Court trying first, as a separate question, whether the Tenants are entitled to a decree of specific performance.
Whether certification ultimately is obtained is presently a matter for speculation. A decision on the probabilities of that occurring in the future could be made now, but a fairer way of proceeding is to determine whether specific performance should be given and if so, then to allow sufficient time for certification to occur or fail as the case may be.
There is no reason, in my opinion, why an order for specific performance requiring the Landlord to construct in accordance with the Plan should not be made, and every reason why it should. The building work is defined by the Plan and the Tenants have a substantial interest in having the AFL performed. The Landlord did not put, indeed it eschewed, any suggestion that specific performance should be refused because damages is an adequate remedy. After all, the lease still has a potential nearly thirty years to run.
The Tenants would be entitled to a verdict for nominal damages in any event.
Pursuant to Part 28 of the Uniform Civil Procedure Rules 2005 (NSW) Rule 28.2, the Court orders that there be tried separately from all other questions in the proceedings whether the Tenants should have a decree that the Landlord construct the premises in conformity with the Plan.
The Court will decree specific performance.
The parties are to bring in short minutes reflecting this outcome.
The short minutes are to reflect the dismissal of the proceedings against the two individuals associated with the Landlord who were unnecessarily joined to the proceedings and against whom the proceedings are unmaintainable.
I will hear the parties on costs, should this prove necessary, on whether the proceedings by George should be dismissed and on the form of any further orders or directions to be made.
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Decision last updated: 10 May 2018