711 Hogben Pty Ltd v Anthony Tadros

Supreme Court of NSW|2022-09-01|Before: Hammerschlag CJ, Stevenson J, Beech-Jones J, Hammerschlag J

Solicitors: Finn Roache Lawyers - Defendants/Cross Claimants One Group Legal - Plaintiff/Third Cross Defendant File Number(s): 2015/330101

JUDGMENT

HIS HONOUR: This is yet another chapter, regrettably probably not the last, in this long running dispute between a landlord and its tenants. The lengthy history of the proceedings is attributable largely to the obdurate default of the landlord, who does not dispute that it was in continuous breach of the lease from 2015 to 8 October 2020.
This is the hearing of the tenants' claim for damages for that breach. Only quantum is in issue.
The proceedings have spawned no less than seven judgments of the Court, all of which have been adverse to the landlord: see 711 Hogben Pty Ltd v Tadros [2016] NSWSC 697 (Stevenson J); 711 Hogben Pty Ltd v Tadros [2016] NSWCA 244 (Meagher and Leeming JJA); 711 Hogben Pty Ltd v Tadros [2016] NSWSC 1238 (Stevenson J); 711 Hogben Pty Ltd v Tadros [2016] NSWSC 1683 (Beech-Jones J - as his Honour then was); 711 Hogben Pty Ltd v Anthony Tadros [2018] NSWSC 628 (Hammerschlag J); 711 Hogben Pty Ltd v Anthony Tadros [2021] NSWSC 1463 (Stevenson J); 711 Hogben Pty Ltd v Tadros [2022] NSWSC 1085 (Stevenson J).
The proceedings concern a Deed of Agreement for Lease (the AFL) dated 11 April 2014 between the plaintiff (Hogben or the Landlord) and the first and second defendants (the tenants) for premises (the Premises) owned by Hogben at levels one and two, 7-11 Hogben Street, Kogarah, which is in the southern suburbs of Sydney. The tenants' obligations were guaranteed by their father, George Tadros, the third defendant, who has represented them in many of their dealings with Hogben. I shall refer to him as George, with no disrespect intended.

This Hearing

The hearing before me took three and a half days.
The Court Book runs to over 2,600 pages.
George gave evidence, as did Mr Peter Panopoulos, who is the son of Hogben's director. Both were cross examined. There was something of an attack on George's credit, but my impression was that he was making an effort to give honest evidence, as was Panopoulos, despite the fact that their relationship is very tense.
Each side called an expert in the field of the provision of childcare services. They gave evidence in concurrent session.
The tenants called Mr John Wall (Mr Wall), who, as appears from the first judgment, gave evidence at the hearing before me in 2018. He has many years' practical experience in managing new start long day-care centres. I considered him then to be impressive and my view has not changed. He is undoubtedly passionate about his work.
Hogben called Ms Lynda Campbell (Ms Campbell), an early childhood education and care consultant. She too is impressive. She is more understated.
The experts produced a joint report.
Hogben also called:

Mr Benedict Jun-Hae Youn, a forensic accountant, who was cross examined briefly;
Mr Kim Jones, an architect, whose unchallenged evidence included the results of a survey which establishes that the tenants did not construct the fit out in accordance with the Plan; and
Mr Allan Harriman, a fire safety engineer and building regulations consultant, who gave evidence about the state of the Premises and what is required to be done to put them in a proper state.

At the suggestion of senior counsel for Hogben, which was not opposed by senior counsel for the tenants, I visited the Premises in the presence of the parties on 7 September 2022.

The Law

At this point, it is appropriate to provide a brief statement of the applicable legal principles which apply to the tenants' claim for damages.
A plaintiff claiming to have suffered loss by reason of a defendant's breach of contract bears the onus of proving the extent of that loss or damage: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286.
The general principle is that when assessing damages for breach of contract, the plaintiff is to be put in the position that he or she would have been in but for the breach, that is, the position if the contract had been performed: Wenham v Ella (1972) 127 CLR 454.
An opportunity may be lost because a party fails, in breach of its contractual obligations, to take steps which it is obliged to take. In such a case, in order to discharge its onus on the issue of causation, the plaintiff must establish (on the probabilities) that had there been no breach, the steps concerned would have been taken, and that the opportunity to gain a financial benefit (or avoid a financial detriment) was thereby lost: Daniels v Anderson (1995) 37 NSWLR 438, 529.
Whether the breach caused loss is to be approached in a practical or common-sense way: March v E & MH Stramare Pty Ltd (1991) 171 CLR 506.
The assessment of damages for a loss which depends on future chances or possibility of benefit may be fraught with difficulty and attended by uncertainty, but the mere fact that damages cannot be assessed without difficulty and uncertainty does not relieve a Court from the responsibility of attempting to assess them as best it can. Where there has been an actual loss of some sort, the common law does not permit difficulties in estimating the loss in monetary terms to defeat an award of damages: Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281.
A lost commercial advantage or opportunity is a compensable loss even where there is a less than 50 per cent likelihood that the commercial advantage will be realised. Damages are to be assessed by reference to the probabilities or possibilities of what would have happened: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 125; Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332, 349.
Where future or hypothetical events must be taken account of in assessing damages and proof of them is necessarily unattainable, the Court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect that degree of probability: Malec v JC Hutton Pty Ltd (1990) 169 CLR 638, 643; Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332, 350.
Different standards apply to proof of damage from those that are involved in the assessment of damages. The general standard of proof applies with respect to the issue of causation and whether a party has suffered loss or damage: Tabet v Gett (2010) 240 CLR 537,585. In relation to the assessment of damages, "the hypothetical may be conjectured": Malec v JC Hutton Pty Ltd (1990) 169 CLR 638, 643. See also: Badenach v Calvert (2016) 257 CLR 440 at [38]-[41].
In Tabet v Gett at 587, Kiefel J said, "[r]esort to the language of 'chance' cannot displace the analysis necessary for the determination of the issue of causation of damage".

The Tenants' Case

The tenants say that had Hogben built in accordance with the Plan, they would have commenced trading at the Centre by July 2015.
For this to have happened, they would have needed Service Approval, which they claim would have been obtained.
They argue that the damages they have suffered by Hogben's breach are: 1. their lost profits for the entire period from May 2015 to date on the basis that the breach caused them to be unable to trade throughout the period; 2. their rental liability from 8 October 2020 (when rent first became payable) to 10 September 2021 on the footing that Hogben's breach rendered them unable to use the Premises. They accept, however that their rental liability (from 2015) is to be taken into account in calculating their lost profits; and 3. their liability for rent after 10 September 2021, which they accept will be the subject of an entitlement by Hogben to set-off against its liability to them for damages (and which must in any event be effectively paid for them to achieve relief against forfeiture).
Their claim for lost profit (or, more accurately, for loss of the opportunity to make a profit) is set out in the following table (Figure 1) (13469, xlsx).

The Landlord's Answers

First, Hogben disputes that the tenants have suffered loss by its breach because, it says, they have not proved that Service Approval would have been given. To the extent that it is relevant, they say that Service Approval would not be given now.
Second, Hogben argues even if the tenants had achieved Service Approval in 2015 (or were to get it now), they would have traded (or will trade) at a loss.
Third, Hogben argues that even if the tenants lost an opportunity to earn profits, their claimed loss should be heavily discounted to take into account the vicissitudes that might adversely have affected their prospects of making profits, which Hogben argues should include the possibility that they would not have achieved Service Approval.
Finally, Hogben argues that, for two periods, it did not cause the delay in the tenants being able to trade. These are the periods between 24 April 2019, the last day for the approval of the modification application, and 16 August 2019, when George first took steps to follow it up (114 days), and between 8 October 2020 and the present date, given that the tenants have not obtained an OC and Service Approval. I observe that Hogben articulated the issues for determination in its comprehensive written closing submissions. It did not identify a failure by the tenants to mitigate as an issue, although in the body of the submissions it did submit in the alternative that for these periods the tenants' failure to take certain steps broke the chain of causation between its breach and them suffering loss based on the same facts. The tenants did not favour the Court with written closing submissions.

Consideration

Where the damage suffered is loss of a commercial opportunity, the line between things which need to be proved as being causative of damage and things which are merely factors relevant to the evaluation of the opportunity may not always be bright: cf Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357.
This is a case in point. It is common cause that without Service Approval the tenants could not lawfully trade.
On one view, the lease itself provided the commercial opportunity to trade, the value of which was dependant amongst others on obtaining Service Approval, the prospect of which is just one of the multiple factors to be assessed in evaluating the commercial opportunity. This approach would not require the tenants to prove on the balance of probabilities that they would have obtained Service Approval. In my view, this approach might in this case be described as resorting to the language of chance and displacing the analysis necessary for the determination of the issue of causation or damage: see Daniels v Anderson (1995) 37 NSWLR 438 at 529; Tabet v Gett (2010) 240 CLR 537.
Hence, the approach I have taken, which I consider to be more in accordance with the approach taken by the High Court in Tabet v Gett, is that obtaining Service Approval is a step which the tenants must show they would have taken to discharge the onus of proving loss, to which the balance of probabilities applies as opposed to the evaluation of the opportunity to trade which they had, provided they achieved Service Approval.
I record that on the former approach the result would not be any different because had I assessed the opportunity on the basis that it included an evaluation of the tenants' prospects of obtaining Service Approval, I would have adopted the same percentage I have adopted in assessing the damage they have suffered.
There is a third possible approach, which was urged upon me by Hogben, namely, to require the tenants to prove on the probabilities that they would have got Service Approval, and then to evaluate the commercial opportunity by including a discount attributable to the possibility that they would not have obtained Service Approval. I consider this to be circular, incorrect and not in accordance with the authorities.

Service Approval

Two questions require answers: 1. would the tenants have obtained Service Approval and started trading in 2015? 2. will the tenants obtain Service Approval?
As I have said, to establish that Hogben's breach caused them loss, the tenants must prove on the probabilities that the answer to the first question is in the affirmative.
For the reasons which follow, I am persuaded that it is more probable than not that the tenants would have obtained Service Approval in 2015 and started trading in 2015, although later than July. However, I am not satisfied that it is more probable than not that they would now obtain Service Approval. I consider it to be unlikely that they will.
It is common cause that it is a prerequisite for the grant of Service Approval that there be an OC for the Premises. The EPA Act and the Environmental Planning and Assessment Regulation 2021 (NSW) (EPA Regulations) govern the issue of DCs, CCs and OCs. The EPA Regulations prescribe that it must be a condition of a DC that building works must be carried out in accordance with the BCA. A CC must be issued before building work under a DC is carried out. Upon the satisfactory completion of all works, an OC is issued by a Principal Certifying Authority (this can be the Council or an accredited certifier) which states that the building is suitable for use in accordance with its classification under the BCA.
It is not in dispute that the Council cannot lawfully issue an OC for building work which was carried out other than in accordance with a CC. However, such construction may be the subject of a Building Information Certificate (BIC) under which, in effect, the Council certifies that it does not intend to take action with respect to the non-compliance. Division 6.7 of the EPA Act makes provision for the issue of a BIC. A BIC operates to prevent a council from taking action for 7 years in relation to the non-compliance. It is difficult to imagine that if the Council issued a BIC in this case, it would not issue another one, or that it would then take action. It is not in issue that if all other requirements were satisfied, an CC in relation to the fit out could be given if the Council also gave a BIC.
Hogben's primary submission is that Service Approval cannot be granted for the Centre because the tenants constructed the fit out other than in accordance with the Plan (read with the BCA) so that an OC cannot be issued, with the consequence that Service Approval cannot be obtained.
Mr Harriman identified a number of non-compliances of the Premises, including that the ceiling height is less than that required by the BCA and the layout of each floor is "vastly different" to the Plan. He observed that the ceiling panels in the outdoor area are designed for internal spaces and are likely to collapse over time. He opined that the defects/divergences need to be rectified, a modified DC is needed because of changes to the floor layout, and that it will take 15 to 21 weeks for the tenants to obtain a modified DC, a BIC and a CC, which includes carrying out all of the building works necessary to rectify the Premises. As appears later, a period should be factored into the assessment of when they would have started to trade.
Mr Harriman was not available to be cross examined at the hearing. I was informed that counsel for both sides had agreed that no submission would be made that anything turned on the tenants' failure to cross examine.
Mr Harriman's own evidence undermines Hogben's position. Mr Harriman did not suggest that a BIC cannot be (or would not have been) obtained. Indeed, it is implicit in his evidence that it can and would have been obtained.
Consistent with this conclusion, it is to be observed that as late as 2 August 2022, the Council informed Hogben that it would require a BIC application to be lodged and that application to be determined prior to the issue of an OC. The tenants lodged a BIC application with Hogben's authority shortly thereafter. There is no suggestion that the application would not succeed.
At the hearing in 2018, Mr Wall gave evidence that had the Premises been constructed in accordance with the Plan, Service Approval would have been obtained so that the tenants would have been able to trade by July 2015.
There is every reason to conclude that had it been evident in 2015 that the steps identified by Mr Harriman were necessary to obtain Service Approval, the tenants would have taken them (Mr Harriman did not cost the steps). The tenants were already invested in the Centre, and George had not spent all his money on needless court cases.
At that hearing, Hogben called its own expert, Dr Abbey, whose opinion was that there would be issues to be resolved but, importantly, Dr Abbey did not hold the view that Service Approval would not be given, even if certain requirements of the Department needed to be the subject of a waiver: see 711 Hogben Pty Ltd v Anthony Tadros [2018] NSWSC 628 at [26]. Sections 87 and 90 of the Act make provision for the grant of waivers.
One respect on which Dr Abbey and Mr Wall agreed was that the natural elements in the simulated outdoor space on level one and the outdoor space on level two did not meet the requirements of the Regulations, because the children would not have opportunities to explore and experience the natural environment (e.g. plants, water, natural elements and vegetation). This is a reference to reg 113, which provides: 113 Outdoor space - natural environment The approved provider of a centre-based service must ensure that the outdoor spaces provided at the education and care service premises allow children to explore and experience the natural environment.
However, Mr Wall gave evidence that in his experience it is the interpretation of the visiting inspector from the Department which counts, that inspectors would provide recommendations on improvements to meet regulations and standards, and that this inadequacy would easily be fixed. He gave evidence that in his experience inspectors would provide direction and support and are always pleased to help the success of a new application.
I preferred Mr Wall's evidence to that of Dr Abbey's on the question of whether Service Approval would have been achieved in 2015.
Ms Campbell was asked to opine whether the Premises in their present configuration would have been likely to have received Service Approval under the Regulations as they were at 20 January 2015, when an application for Service Approval was first lodged. In her report dated 15 July 2022, her view is that the Premises would not have been likely to be approved because the Regulations were the same then as they are now and the Premises would have been non-compliant with respect to three of them, being regs 97, 108 and 113. I observe that her opinion assumes an 81-place operation, but I infer that her view would remain the same for a 61-place operation.
Regulation 113 has been referred to above.
Regulation 97(1) requires an operator to have specified emergency and evacuation procedures. This requirement can immediately be put to one side because nothing stood in the way of the tenants having the necessary emergency and evacuation procedures in place, which I am confident they would have had at that time (and will do if they get relief against forfeiture and intend to trade).
Regulation 108(2) of the Regulations provides: 108 Space requirements - outdoor space … (2) The approved provider of an education and care service must ensure that, for each child being educated and cared for by the service, the education and care service premises has at least 7 square metres of unencumbered outdoor space.
With respect to the present, Mr Wall and Ms Campbell agree that: there are significant building faults that need to be rectified including the provision of more natural elements in the outdoor play areas; repair of all fixtures and consideration of lines of sight from the manager office and between play areas before another service approval application is made. current configuration of the proposed outdoor area on level one would need a waiver by the Department of Education to be able to be considered as unencumbered outdoor space. the service would need to consider impact of neighbouring units, above the outdoor play area, on safety and privacy of children playing outdoors on level 2 which the Department of Education (the NSW Regulatory Authority) would check during the service approval process. the service would also need to obtain age appropriate equipment to be used in the case of an emergency evacuation before a service approval would be considered. the current state of repair of the premises and child play resources/equipment is not of high quality, having been at the site for at least 5 years, especially the outdoor play equipment on level two, and currently poses a risk to child health and safety.
Ms Campbell takes the view that the provision of fixtures and equipment was done as cheaply as possible, for example the cots were second-hand. She agrees with Mr Harriman's views of what repairs are needed.
Mr Wall and Ms Campbell agree that a substantial amount of money, in the order of $350,000, is required to be spent by the approved provider before a Service Approval can be lodged. According to George, he does not have the money to meet this expense. His only source will be out of any verdict he might obtain in this case.
Mr Wall maintains his opinion that all matters which will stop a Service Approval being granted can be repaired, renovated or replaced and meet all regulations and National Quality Standards for the purpose of a Service Approval being granted. He somewhat forcefully expressed the view that the Centre would, if the said sum of money were spent, be able to meet these requirements and be a top-class facility. Ms Campbell disagreed.
Ms Campbell places emphasis on the lack of outdoor space and natural elements of the Premises. She drew attention to a publication by the NSW Government called Childcare Planning Guideline September 2021 (first published in August 2017) (the Guideline). The Guideline contains the following in relation to simulated outdoor environments (which applies to level one): Simulated outdoor environments Proponents should aim to provide the requisite amount of unencumbered outdoor space in all development applications. A service approval will only be granted in exceptional circumstances when outdoor space requirements are not met. For an exemption to be granted, the preferred alternate solution is that indoor space be designed as a simulated outdoor environment. Simulated outdoor space must be provided in addition to indoor space and cannot be counted twice when calculating areas. Simulated outdoor environments are internal spaces that have all the features and experiences and qualities of an outdoor space. They should promote the same learning outcomes that are developed during outdoor play. Simulated outdoor environments should have: • more access to natural light and ventilation than required for an internal space through large windows, glass doors and panels to enable views of trees, views of the sky and clouds and movement outside the facility • skylights to give a sense of the external climate • a combination of different floor types and textures, including wooden decking, pebbles, mounds, ridges, grass, bark and artificial grass, to mimic the uneven surfaces of an outdoor environment • sand pits and water play areas • furniture made of logs and stepping logs • dense indoor planting and green vegetated walls • climbing frames, walking and/or bike tracks • vegetable gardens and gardening tubs.
She drew attention to the fact that the Guideline describes a simulated outdoor play area as having all the features and experience of an outdoor space, including waterplay areas and vegetable gardens, and that only in exceptional circumstances will Service Approval be granted where these requirements are not met.
Ms Campbell places emphasis on the restrictions imposed by the Childcare DC on the number of children and times for outdoor play hours. She expressed the opinion that the Department would consider there to be insufficient time for physical activity, which would further limit the number of children it would approve to attend the Centre at any one time. I interpolate that Mr Wall agrees that in this respect the Premises are far from ideal.
Ms Campbell drew attention to the limitation in the Childcare DC that there be no cooking of food without Council approval. I interpolate that Mr Wall agrees that this would need to be addressed.
I prefer Mr Wall's evidence to that of Ms Campbell when it comes to 2015, but I prefer Ms Campbell's evidence when it comes to the present.
This is predominantly because the climate for obtaining Service Approval in 2015 was far more benign than it is now. There has been profound change. Coupled with this, there has been an increase in the supply of childcare places since then.
In their joint report, Mr Wall and Ms Campbell agreed that since 2016 to 2017: a lot of best practices in relation to protection around children have been updated. For example, the supervision of children coming out of a lift is different and a lot of the doors at the premises do not meet a now applicable standard that a director's office have a full glass window.
Mr Wall gave oral evidence that practices have changed. He gave evidence (which I accept) that 2015 was a completely different environment to the present. He says he was delivering 20 to 30 childcare centres a year in 2015, project managing them through to successful Service Approval, whereas last year he did only five, and this year he might do five or six (this aspect plays a part later in connection with the question of the demand for childcare centres in Kogarah).
The interpretation of the National Quality Standards have changed. Since 2015, from a design point of view, practices in relation to baby change areas, doors, visibility, supervision and the way that childcare centres are managed, including walking from room to room and from one activity to another, have changed. Mr Wall gave evidence that departments are a lot "more stricter". There is now a greater emphasis on child safety. He gave evidence that what they were doing in 2014 and 2015 with outdoor playgrounds was nowhere near what they were doing now.
In my view, the open day revealed substantial demand in 2015 for the Centre, a factor which would have enhanced the prospects of getting Service Approval.
It is beyond doubt that obtaining Service Approval in 2015 would have been much easier than it is now. This adds weight to Ms Campbell's opinion that Service Approval is unlikely to be granted now with respect to the Premises. It is to be emphasised that this does not mean that it is not possible.
In their joint report, Mr Wall and Ms Campbell agree that the current configuration of the outdoor area on level one would need a waiver by the Department to be able to be considered unencumbered outdoor space. They differ on whether a waiver would be given now. Mr Wall says it would be. Ms Campbell says it would not be.
One consequence of the finding that the tenants would have achieved Service Approval in 2015 but are unlikely to do so now is that they have proved that Hogben's breach caused them to lose the opportunity to earn a profit for the whole period over which they claim they would have traded.
A second consequence is that no issue arises in connection with the tenants' alleged failure (about which I make no finding) to take steps between 24 April and 16 August 2019, and 8 October 2020 to date, because those steps, even if taken, would not have resulted in a Service Approval.
Hogben took the point that currently neither the tenants nor George are an Approved Provider, and the tenants have not identified any that could operate a childcare centre. However, George's daughter had a provider approval, which was issued on 1 September 2009 and which was apparently current in 2015. This issue does not impact the position in 2015.

Lost Profit

I turn to the question of the value of the lost opportunity. It is an exercise fraught with difficulty, attended by uncertainty, and that requires the hypothetical to be conjectured, but these difficulties are not permitted to defeat the estimation of the tenants' loss in monetary terms.
Whilst I have taken all of the arguments into account, I have not restated them. Whilst I have had regard to all of the evidence, I have not attempted to restate it.
The tenants were not prepared to accept that there should be any allowance for vicissitudes or risks associated with trading which might adversely have affected profitability. They plumped for their full claim and nothing else. I reject their approach. For the reasons which follow, their full claim is to be substantially discounted.
Plainly, there will always be a relationship between price and demand. One would expect the tenants acting rationally to reduce prices if there was insufficient demand. On their claim, there is scope to do this and still remain profitable.
The tenants relied on Mr Wall's evidence. Hogben relied on Ms Campbell's and Mr Youn's evidence.
Mr Youn produced calculations based on assumptions supported by Ms Campbell. I regard Mr Wall's opinions as somewhat optimistic, and Ms Campbell's as somewhat pessimistic.
Whilst it is no doubt possible that the tenants could achieve Mr Wall's projections, I consider that that possibility should be subject to a large discount to reflect the possibilities that his daily fees may not be achieved, the occupancy rates may be lower than he predicts, and the expenses may be higher, and to take account of other vicissitudes which may impact adversely on profitable trading. There will inevitably be some non-recovery of fees payable.
The integers in the tenants' calculation of profit (see Figure 1) which are heavily in dispute are: 1. daily fee; and 2. occupancy rate.
There are other differences.
The tenants' calculations are based on the Centre being open five days a week, 52 weeks a year. Ms Campbell's view is that most centres close over the Christmas period and parents are not charged. Mr Wall had a different view. According to him, he did not have a shutdown period for his own centres. I think it is more probable that the tenants would use every trading day available (especially given the high rent they would be paying - this is referred to later).
There appeared to be initial disagreement about the staffing levels which Mr Wall assumed, but during their evidence in concurrent session he and Ms Campbell appeared to reach consensus that Mr Wall's assumption on staff levels was justified, perhaps with the caveat that Ms Campbell thought a higher staff level might be required to make the offering high-end. The discount will recognise the possibility than an additional teacher might be required.
There is disagreement on how long it would have taken to get the Centre off the ground. The handover date was 26 May 2014, and a fitting out period of 20 weeks was provided for.
Hogben argued that after 8 October 2020, the tenants acted without any haste and the tenants' work remained incomplete and uncertified, and that the Court should find that the tenants would only have been in a position to trade at 20 February 2017, being the sum of the days from 8 October 2020 to the end of the hearing (693 days), 144 days required to rectify the Premises in accordance with Mr Harriman's evidence, 14 days to make a service approval application, 90 days for the Department to deal with a service approval application, and a lead time of 60 days to hire staff.
I do not accept Hogben's position.
The delay to 8 October 2020 was almost exclusively that of Hogben. A potentially valuable period of trading had been lost due to its conduct, and George had spent lots of money, amongst others, fighting this case.
But it is a fact that the tenants have constructed the fit out not in accordance with the Plan, and to have fixed this would have taken between 15 and 21 weeks. I think it is fair to assume that, had their application for Service Approval required this work to be done, the tenants would have attempted to have had it done expeditiously. I think it is fair to adopt a date somewhere around the middle of Mr Harriman's estimate. I consider that the calculation should be done on the footing that the tenants would have commenced trading by 18 November 2015, being after 18 weeks, rather than the middle of July. The same period could have been used as lead time, hiring staff, etc.
Mr Wall varied his calculations just before the hearing to reduce the number of places to 61 from 72, which he originally assumed, to take into account that rent would increase from year to year under the lease and the increase in staff costs. He was criticised for the lateness of these adjustments, but nothing, in my opinion, turns on it. Various other criticisms were directed at Mr Wall, such as an earlier reluctance to make concessions. I consider none of them to be justified.
If a waiver of reg 108 of the Regulations is not obtained, the maximum number of places would be 34 and only level two could operate. It is not in dispute that if only 34 places were available, the tenants would suffer no loss. As I have held earlier, I consider that a waiver would have been obtained in 2015 but would likely not now be obtained. I consider the assumption of 61 places to be justified.
Mr Wall supports the following daily fees for the financial years each ending on 30 June the following year, except for 2023 where the calculations end on 31 December 2023: 2016 2017 2018 2019 2020 2021 2022 2023 to 31 December $115 $121 $126 $131 $136 $141 $146 $151

Mr Wall's fees do not distinguish between fees that would apply to the different age groups catered for.
Ms Campbell takes issue with Mr Wall's fees. She distinguishes between age groups. In her view, the Centre would have been capable of generating the following daily fees. The fees which she supports for 2-3 year olds are about halfway between those she supports for 0-2 year olds and 3-5 year olds. I consider the differences to be immaterial. The following table is the fees for the 2-3 year olds. 2016 2017 2018 2019 2020 2021 2022 2023 to 31 December $78 $80 $85 $97.50 $105 $112.50 $120 No figure provided

Mr Wall relied on a Childcare Needs Assessment (NA) produced by Business Geographics, an organisation which describes itself as a specialist in childcare location services.
The NA includes a supply analysis for long care day centres in the Kogarah catchment area which supplies 1,177 long day care places at 24 centres. Current fees range from $98 per day to $147 per day. The average is $118 per day.
Added to this, since 2016, there has been an increase of 63.7% in the supply of childcare places (although there also has been an increase in demand, but not quite to this level).
Negative features of the Premises include: 1. they are in a mixed-use apartment building surrounded on all four sides by other buildings with no real outdoor environment. As parents at the open day remarked, the level one simulated outdoor area is hot (although that was by all accounts in mid-summer). 2. there is some risk of hazard from falling items. 3. privacy is not optimal. 4. the restrictions on the numbers of children permitted to play in the "outdoor areas", with no actual outdoor area on level one (where the under three-year-olds would be). 5. travel between the two levels is by lift, there being no internal staircase.
But then again, the Premises are in the vicinity of a major hospital, and in a bustling part of Sydney.
The ceilings give the impression of being low. This may be a function of the fact that their height does not comply with the BCA, but this issue can be resolved.
It will be readily observed that for the 2023 Financial Year, the fees Mr Wall supports are more than the most expensive charged in the whole catchment area. His support for these fees is based on his opinion that, if it operated, the Centre would be of such quality as to attract a premium fee, and that there is high demand in the area.
I think it is appropriate to move, then, to Mr Wall's daily rates for 2022 and 2023, which are $146 and $151 respectively. The discount to be applied will need to recognise that the consumers may not consider fees at this rate to be a reflection of the quality and amenities of the Premises even if additional work is done, as well as the possibility that these rates may negatively affect demand. One of the examples of a high-end childcare centre in Kogarah is Rise and Shine Early Learning Centre, an impressive place going by the photograph in evidence. I consider it unlikely that the Centre will be able to match this facility so as to attract its highest rate.
Ms Campbell's daily rate for 2022 is $120. I think this rate errs on the modest side.
It is common cause that it will necessitate the tenants spending about $350,000 on the Premises before a potentially successful Service Approval application could be lodged. As mentioned earlier, Ms Campbell's view is that the fixtures and equipment are cheap. It is reasonable to assume that between 2015 and the end of 2022, expenditure of this order would have been necessary to keep the Centre operating at the level approaching that postulated by Mr Wall. The amount should be added to the expenses column in the tenants' profit calculations.
Mr Wall assumes a $5 increase in fees every year. Ms Campbell's rates of increase are in fact higher. Mr Wall's rate of increase may be confidently adopted.
Mr Wall and Ms Campbell also differed on the achievable occupancy rate.
Mr Wall's assumed occupancy rates are: 2016 2017 2018 2019 2020 2021 2022 2023 to 31 December 67.08 89.50 89.50 89.50 89.50 89.50 89.50 94.33

Ms Campbell's assumed occupancy rates are much lower: 2016 2017 2018 2019 2020 2021 2022 2023 to 31 December 60 70 70 70 63 50 65 -

I consider Mr Wall's rates to be optimistic, and Ms Campbell's to be pessimistic. The discount must recognise the distinct possibility that Mr Wall's occupancy rates will not be achieved, particularly at the daily rates he postulates.
The experts agreed that the restrictions on cooking will have to be addressed. If food has to be brought in, expenses will increase. It is not necessary to consider whether there is any substantive difference between "cooking" and food preparation. Either way, the discount should recognise he possibility, albeit in my view a slim one, that condition 14 of the Childcare DC will not be changed.
I observe that Mr Youn extracted information from a report published by IBISWorld, an industry research organisation, entitled "Childcare Services in Australia", which indicates that over the period of 2017 to 2023 the various integers (expressed as a percentage to revenue) and profit conclusion in Mr Wall's calculations bear the following relationship to the industry average: Integer Tenants IBISWorld Staff costs 52.72% 52.00% Rent 18.26% 9.38% Purchases 4.86% 6.39% Other costs 7.07% 19.75% Profit 17.10% 7.75%

It will be observed that there is a material differential on some of the integers, in particular with respect to the rent, which is the tenants' only fixed cost. The rent payable under the lease is much higher than the industry average. Senior counsel for Hogben described the rent as "way above the odds in this industry" and agreed with the description of the lease as a bad bargain for tenants. This is a factor which I consider should contribute to the discount because it is a constant which the tenants would not have been able to improve.
In its closing written outline, Hogben submitted that if the Court did not reject the entirety of the tenants' loss of chance case there should be a very substantial discount to any damages, "and certainly not less than 50 per cent (and likely closer to 80 or 90 per cent)", on the basis that the Court can have no satisfaction that the tenants are likely to achieve (and ever would have achieved) an OC and Service Approval, and it is most unlikely the Centre will, or would have ever, operated profitably.
In my view, recognising that precision is impossible, the discount that should be applied is 50 per cent, which is hefty, but which reflects the Court's view of the tenants' chances of making the profits they claim they have lost.
If I had approached the matter by including, in the assessment of their percentage chance of making the profits they could have made, the tenants' prospects obtaining approval in 2015, I would still have applied the same percentage.
The calculation is to be done on the basis that the starting day is 18 November 2015, but with rent liability to commence from 15 July 2015.
The following numbers are rounded down in favour of Hogben, and to make due allowance for inaccuracies caused by my arithmetical inadequacies and the complexities involved in adapting the spreadsheets provided by the experts.
Adjusting the starting date to 18 November 2015, but leaving rent being paid from 15 July 2015, total revenue on Figure 1 is reduced to the order of $13,350,000, which yields a profit of $2,160,000, of which 50 per cent is $1,080,000.
In my opinion, the commercial opportunity which the tenants lost by reason of Hogben's breach should be assessed at $1,080,000, less $350,000, that is at $730,000.
As a rough safety check, adopting the start date of 18 November 2015 and the top fee charged by Rise and Shine Early Learning Centre in 2023 of $140 (reducing it by $5 for each preceding year), and reducing Mr Wall's occupancy rate of 94.33 per cent for 2023 to 89.5 per cent (being the rate adopted by him from 2017 and 2022), revenue is of the order of $12,200,000, with profit of $1,020,000.
As another rough safety check, adopting the start date of 18 November 2015 and revenue of $13,350,000 yields $1,030,000 if the industry wide rate of revenue to profit of 7.75 per cent is applied.

Conclusion

There will be a verdict for the tenants (the second and third cross claimants) against Hogben (the third cross defendant) for $730,000.
I will hear the parties on costs if necessary. If after ten days the parties have not reached agreement on costs, they are to exchange position papers setting out their positions on costs, with brief reasons, and to send them to my Associate.
I will stand the matter over to a convenient date to give the parties an opportunity to draw to my attention any issues that remain to be dealt with, including any application for relief against forfeiture and, if necessary, to deal with costs.

Endnote

Now covered by ss 6.3, 6.4 and 6.16 of the EPA Act. 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: 19 September 2022

At a glance

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Judgment (16 paragraphs)

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