On 1 September, I made orders dismissing the plaintiff's application for "interim relief" in these proceedings. This judgment sets out the reasons for my decision.
The proceedings arise from a dispute under a lease of commercial premises at Caringbah, in the southern suburbs of Sydney. The plaintiff, A Lloyd Babb Pty Limited ("ALB"), is the tenant. The defendant, Bexgrove Pty Limited ("Bexgrove"), is the landlord.
[2]
Background and procedural history
The lease between parties (which is unregistered) bore the date 9 November 2021 but specified the commencement date as having been 1 October of that year. The lease was for a period of five years, until 30 September 2026, with an option to renew for a further five years. There was also an option to purchase (clause 18), exercisable within the first three years, on specified terms.
The property owned by Bexgrove is a strata plan unit in a multi-storey mixed residential and commercial building (Bexgrove undertook the development and also remains the owner of six of the residential units). The unit in question is subject to a registered mortgage in favour of a bank lender. Its entrance is at street level.
The lease described the leased premises as part of the unit, namely the "first floor area". This was an area which had been created by a horizontal internal partition of the unit, and was accessed via an internal staircase.
A Lloyd Babb Pty Ltd v Bexgrove Pty Ltd [2023] NSWSC 1167 | Case summary | Zoe
The lease provided, in the conventional way, for the lessee to pay rent, increasing each year, with a market review as at 1 October 2026 and 4% increases thereafter (if the lease was renewed). The specified rent was to be discounted for the first three years of the term, provided that the lessee was not in breach of its obligations. The rent (as discounted) for the first year was $117,000 plus GST and for the second year it was $143,000 plus GST. The tenant was also obliged to pay two-thirds of the outgoings on the unit as a whole.
The lease provided for certain works to be undertaken by the lessor, at its own expense, to upgrade and provide access to the first-floor area. These works were referred to as the "Landlord's Works". These works involved: removing the internal staircase and infilling the section; installing a platform lift to provide "direct frontal entrance and exit" with new stairs adjacent to the lift; completing "all common area finishes"; and completing the fit-out of amenities. A plan depicting the layout of the first-floor area was annexed to the lease (annexure B).
The lease went on to provide that the lessee was to complete the rest of the fit-out of the leased area for itself. The lessee's fit-out works were referred to in the lease as the "Tenant's Works".
ALB has paid the rent due to Bexgrove under the lease (at the discounted rate) since 1 October 2021, as well as outgoings. The outgoings have been about $2,000 plus GST per month. The total amount paid as at July was $307,000 (including GST).
ALB's contention is that, on the true construction of the lease, the Landlord's Works needed to be completed by 30 April 2022. It does not appear to be disputed that the Works were not completed by that date. Indeed, they are apparently still incomplete.
In correspondence between the parties' solicitors in the second half of 2022, Bexgrove's position was that the Landlord's Works and the Tenant's Works were interdependent (or the parties had agreed to a program of undertaking the Works which made them so). It was suggested that there was a problem with obtaining a complying development certificate (CDC) for the Tenant's Works.
ALB commenced these proceedings, by Summons, on 31 May of this year. By that, it sought both interim and final relief. It filed a Statement of Claim on 27 July, also seeking both interim and final relief.
ALB sought the following, by way of final relief. First, ALB sought declarations that Bexgrove was obliged to provide it with exclusive possession of the leased premises from 1 May 2022 (the day after which ALB contends the landlord works and other landlord obligations needed to be done by), and that it breached the lease by failing to do so. Second, ALB sought a declaration that it was not obliged to pay rent or outgoings to Bexgrove until it has exclusive possession. Third, ALB sought restitution of rent and outgoings paid to Bexgrove since 1 May 2022, or, alternatively, damages for breach of the lease for rent and outgoings paid to and retained by Bexgrove since that date. Fourth, ALB sought an order in the nature of specific performance, requiring Bexgrove to do all things reasonably necessary to comply with its obligation to complete the Landlord's Works and its repair and maintenance obligations in the lease. Fifth, ALB sought a declaration that it is entitled to exercise the option to purchase after 1 May 2022, or, alternatively, that Bexgrove is liable to pay damages at the time of ALB's exercise of the option to purchase. ALB sought damages generally, as well.
I heard the application for interim relief on 1 September. On that date, I announced my decision and made orders. I gave brief reasons for my decision but indicated that I would publish full reasons in due course. These are those reasons.
As I indicated on 1 September, I decided the application based on the nature of the interim relief sought. I considered that the Court's powers did not, in the circumstances of the case, extend to granting relief of that nature. But I also indicated that, as then advised, I thought there were considerable doubts about whether the relevant claims by ALB for final relief were arguable.
[3]
Application for interim relief
The interim relief sought in ALB's Summons was in the following form:
An order that, pending final resolution of these proceedings or further order of the Court, [ALB] is to pay all rent and outgoings owing to [Bexgrove] for [the premises]:
(a) into a trust account operated by solicitors for [ALB]; or alternatively
(b) into Court
ALB's application was supported by an affidavit from Mr Aaron Babb, whose company ALB apparently is. It was common ground that Mr Babb was given a set of keys to the unit on or soon after the execution of the lease in 2021. At the time, employees or contractors of Bexgrove also had access to the premises so as to be able to undertake the works contemplated by the lease.
ALB has never occupied the premises, apparently because Mr Babb has been waiting for the works to be finished. As already noted, there does not seem to be any dispute that they have not been. Mr Babb deposed that he visited the premises on 21 June this year. They lacked kitchen and toilet facilities, finishes to common areas were incomplete, the access lift had not been installed, and the lifts were inoperable.
An affidavit from Mr Tony Faddoul, who is a director of Bexgrove, was read in opposition to the application. Mr Faddoul's evidence addressed the balance of convenience. He stated that Bexgrove was currently trying to refinance the unit, and that the rent being paid by ALB was necessary to underwrite the refinancing. Counsel for ALB pointed out that some of the monies being borrowed appeared to relate to another venture or ventures. Given the views I have formed on other issues raised by the application, it is not necessary to take this any further. It is also unnecessary to investigate why it is that the Landlord's Works have not been completed.
[4]
Power to make orders sought
It was apparent that Mr Babb, on behalf of ALB, was in a dilemma. On one hand, he did not want to keep paying rent to Bexgrove, in circumstances where, on his contention, ALB was not obliged to pay rent at all (and especially so, given the potential difficulties in recovering overpaid monies from Bexgrove). On the other hand, he did not want to give Bexgrove an opportunity to terminate the lease on the ground of non-payment, leaving ALB without the benefit of the lease, including the option to purchase, if its argument about the construction of the lease ultimately failed.
It would of course have been open to ALB to terminate the lease on the ground that Bexgrove's failure to complete the Landlord's Works was a repudiation, but that too would leave ALB without the ongoing benefit of the lease and the option to purchase. No doubt these considerations explain why the "interim relief" sought on behalf of ALB took the form which it did.
Counsel for ALB rejected the suggestion that ALB was applying for an interlocutory injunction. Rather, counsel presented the application as one which invoked the Court's powers to order that money be set aside or paid into court, pending the outcome of proceedings. Counsel relied on statements of this Court that its inherent jurisdiction extends to making such an order, whenever doing so is appropriate in the administration of justice: JKB Holdings Pty Ltd v De la Vega [2013] NSWSC 501 at [11]-[12]; In the matter of Elegant Swan Pty Ltd [2022] NSWSC 1451 at [62]-[65].
I am not sure that there is really such a clear distinction between an order for payment of monies into court and the grant of an interlocutory injunction, as counsel's argument assumed. An order for the payment of money into court (or into a joint bank account) is often made where there are competing proprietary claims to that money. But in such a case, an equivalent result would be obtained by granting an interlocutory injunction against the party holding the money, so as to prevent that party from dealing with it. In the light of this, the payment of money into court can be seen as an interlocutory remedy which preserves the subject matter of the proceedings, in aid of both parties' claims to it.
The application in the present case was different. There was no suggestion that ALB had any security or other proprietary interest in the rent and outgoings payments. Indeed, the terms of the lease, which provided for payment in full and without deductions, made it clear that ALB had no such interest. Nor was ALB in the position of an interpleader, which is another circumstance where monies can be paid into court at the instance of a plaintiff (see Uniform Civil Procedure Rules 2005, r 43.2(3)(c)).
The form of the order sought reflected the unusual nature of ALB's application. Bexgrove was named as a respondent to the application, but no orders were (at least expressly) sought against it. The form of the order was unilateral in form, ordering ALB, as the applicant, to pay the money into court.
The difficulty for ALB was that, on the face of it, an order of this type would not have safeguarded ALB against the possibility of Bexgrove terminating the lease for non-payment of rent. For ALB to pay an amount equivalent to the rent due into court (or into trust) would not have satisfied its obligation under the lease, which was to make payment to Bexgrove. Dressing this up by obtaining an order from the Court to make the payment would not, and could not, have altered the situation.
Counsel for ALB submitted that Bexgrove would have been unlikely to exercise its power of termination in such circumstances. But it was not clear why that would have been so. On the face of it, Bexgrove would have been entitled to ignore the payment and proceed with terminating the lease. So understood, the "interim relief" lacked utility.
It seemed to me that what the application was really seeking was to effect an interlocutory variation of ALB's obligations under the lease. By seeking an order that the "rent" be paid into court, ALB was, without saying so in so many words, proceeding on the basis that that payment would satisfy ALB's contractual obligations to Bexgrove until determination of the proceedings.
So understood, there was a different problem with the application. It was simply impermissible. The courts lack power to determine substantive obligations in an interim way. This limitation is seen, for instance, in their inability to grant declaratory relief on an interim basis: see BHP Group Ltd v Impiombato (2021) 286 FCR 625 at [7].
Another path to the same conclusion followed from the rule that interim relief can only be granted in aid of some claim for final relief: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [11]-[13], [91]; Rofe Way Pty Ltd v Ronald [2023] NSWSC 1086 at [86]-[89], [92]. ALB was not claiming that the lease entitled it to pay the rent into court or into trust. ALB was merely asserting that such a regime was a convenient holding pattern for resolution of the dispute between the parties. No doubt, it would have been convenient from ALB's point of view. But on analysis, ALB's application was no more than an impermissible application for "free-standing" interlocutory relief (Lenah at [16]).
The decisions of this Court to which counsel referred do not stand in the way of these conclusions. Both passages upon which counsel relied emphasised that monies may be paid into court in a variety of circumstances, but neither addressed circumstances such as those which arose here. In fact, both judgments dealt, as a matter of ratio, with applications to pay out monies which had previously been paid into court.
I suggested to counsel for ALB that it might have been understandable for ALB to have sought an interlocutory injunction restraining Bexgrove from terminating the lease, on the ground that there was an arguable case that no rent was due. I am not necessarily saying that ALB would have succeeded in such an application. But it would at least have had the merit of relating the interlocutory relief to the final relief sought. As interlocutory relief was not sought in that form, it is not necessary to say any more about it.
[5]
Strength of claims for final relief
I offered the parties the opportunity to have the claims for final relief determined at the 1 September hearing. Counsel for Bexgrove declined that opportunity, and it was agreed that the hearing would be confined to ALB's application for "interim relief". Accordingly, it was not necessary to reach any final view on the merits of ALB's claims for final relief. But in case I am wrong on concluding that ALB's application was beyond power, I will now consider whether those claims would have been sufficiently strong to justify such relief.
In what follows, I focus upon the first three categories of final relief, as identified at [13] above. These are the claims for declaratory relief, relieving ALB of the obligation to pay rent and outgoings from 1 May 2022, and seeking restitution of, or damages for, such amounts already paid. I did not understand that the other claims for final relief were relevant to the application.
Counsel's starting point was that, upon the commencement of the lease on 1 October 2021, ALB did not obtain an entitlement to possession of the premises, or at least did not obtain an entitlement to "exclusive possession" of them. In counsel's submission, ALB's entitlement to possession was deferred until 1 May 2022. This was because, according to counsel, ALB's entitlement arose on the earlier of the date that Bexgrove completed the required works and 1 May 2022. That was said to follow, as a matter of construction, from the terms of the lease.
Counsel then submitted that ALB was prevented from taking exclusive possession of the whole of the premises, as defined in the lease, by Bexgrove's failure to complete the required works. This was said to follow from the rule that the obligation of a tenant to pay rent is suspended for any period of time during which the tenant is put out of possession by the landlord.
Counsel relied on the Court of Appeal decision in Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (2019) 101 NSWLR 573 where the scope of the rule was discussed. The Court held that the rule applied where a landlord, rather than evicting a tenant who had gone into possession, actively prevented the tenant from ever taking possession of the property in the first place.
The immediate difficulty for counsel's reliance on Drama Unit is that, in the present case, Bexgrove has not taken any steps to exclude ALB from the leased area. Mr Babb has a set of keys and is freely able to visit the premises (as he presumably did in order to make the observations recorded in his affidavit). Mr Babb has decided not to go into occupation of the premises (on ALB's case, quite understandably), but that is not the same thing as having been deprived of possession.
Counsel sought to meet this difficulty by submitting that the rule could be further extended in the present case, to cover an omission of the landlord which prevents a tenant from ever taking possession of all (or, if necessary, part) of the property. The omission relied on by counsel was Bexgrove's failure to prepare premises meeting the description in the lease. Counsel placed particular emphasis on the reference to Annexure B in that description, which, according to counsel, made clear that the premises were to include the completed landlord's works.
Counsel's argument faces the preliminary difficulty that it is questionable whether Bexgrove was actually to complete the Landlord's Works by 30 April 2022. The definition of "Landlord's Works" in clause 15.1(k) of the lease appears under the following chapeau:
The Landlord undertakes to complete the following works to the premises [sic, not "Premises"] provided they have [sic; "it has" or "the Landlord has"] received the executed lease from the Tenant prior to the [sic] 30 April 2022
Passing over the curiosity of having an operative obligation as part of a definition, the natural reading of the clause is that the 30 April deadline referred to the delivery of the executed lease. No completion date for the Works was specified. There would of course have been an obligation to complete them within a reasonable time, but an alternative case based on that implication was not pleaded and, if pleaded, might have given rise to contestable factual issues.
But there is a more fundamental problem. Even if there was an obligation to complete the Landlord's Works before 1 May 2022, I do not accept that the lease in some way deferred ALB's right to possession until that date.
Clause 11.1 of the lease is headed "quiet enjoyment". It provides:
Unless provided to the contrary in this Lease, so long as the Tenant pays the Rent and the other moneys payable under this Lease when due and performs the Tenant's obligations under this Lease, the Tenant can occupy the Premises without interruption or disturbance from the Landlord.
Clause 20 is headed "exclusive possession" and provides:
Apart from entry, as provided under this Lease, to the Landlord, this Lease grants the Tenant permission to exclusively use and occupy the Premises and to exclude others from the Premises. This exclusive possession includes the total complete area of Level 1 and all the facilities therein as shown on Annexure "B". Subject to final approval by the Landlord to proceed, exclusive possession includes any extension or alterations or additional works to the common areas and facilities.
The term "Premises", which appears in both clauses 11.1 and 20, is defined in clause 15.1(w) as meaning:
The land and buildings described in Item 3 [of the Lease Schedule] together with all improvements in the Premises owned or controlled by the Landlord, the Landlord's Equipment and any extensions or alterations to the Premises and any part of the Premises.
Item 3 of the Lease Schedule (headed "premises") is:
First Floor Area of Unit X/XXX Taren Point Road, Caringbah … being part of the land comprised in Certificate of Title XX/SP XXXXX as shown in the plan attached as Annexure "B" hereto.
It is true that both the definition of the "Premises" and the terms of clause 20 refer to the proposed alterations shown in Annexure B. But it is important to bear the nature of the leased premises in mind. It is part of a larger strata unit owned by Bexgrove. Strictly speaking, the subject matter of strata title is three-dimensional spaces within buildings, the boundaries of which are defined by, but do not include, external walls, floor and ceilings. The "first floor area" is a subdivision of the three-dimensional space which constitutes Bexgrove's unit. It is not defined by any particular internal layout.
In these circumstances I do not think that clause 20 can be construed as conditioning ALB's right to possession on the completion of the Landlord's Works in the leased area. The clause simply makes clear that the right to possession will encompass the fruits of those works as well. Similar observations apply to the definition of "Premises".
Furthermore, there is nothing in the lease to defer ALB's right to possession to a future date. Certainly, the Landlord's Works chapeau in clause 15.1(k), upon which counsel relied, does not say so. And an implication to that effect is, in my view, untenable. There is no foundation for it in the language of the chapeau. Indeed, it would be contrary to clause 11.1, which expressly gives ALB a right of quiet enjoyment, correlative to possession, while ALB is meeting its rent obligations, which began on the commencement date in October 2021.
I also think that there are fundamental problems with applying the rule in Drama Unit to the present case. In the first place, counsel's submissions were expressed in terms of "exclusive possession". This was the terminology of the lease, but I understand the rule to operate by reference to the legal concept of possession. Although it appears that the lease considered in Drama Unit used the language of "exclusive possession" (see [47]), the judgment was couched only in the language of possession (see e.g. [51]).
This means that counsel's submission that any possession ALB may have had was not "exclusive", because of Bexgrove's ongoing obligation to undertake the Landlord's Works, is not to the point. The simple fact is that ALB had legal possession, as distinct from occupation, from the inception of the lease.
A second fundamental difficulty lies in the need to extend the rule beyond its application in earlier cases. In Drama Unit, Meagher JA explained that the rule was derived from the mediaeval conception of rent as a "thing" which was akin to an interest in land (at [15]). That conception has changed, and the obligation to pay rent is now seen as contractual. Although the rule continues to subsist (at [23]), it is an anomalous one.
The lease in the present case was far from a simple one. It contained a complex set of mutual obligations involving not only the payment of rent and outgoings, but also the undertaking of works by both parties at their own expense. It would have been obvious that the works would take time to complete, and it is reasonable to suppose that this played a part in fixing the level of rent to be paid. This was effectively acknowledged by counsel for ALB, who accepted that, on his argument, ALB would be entitled to recover rent paid from 1 May 2022 onwards, but not for the period up to 1 May. Presumably, counsel recognised that Mr Babb was content for ALB to pay rent while the works were undertaken, even though he did not expect ALB to occupy the premises for that period.
The claim which has given rise to the present application is quite separate from the enforcement of Bexgrove's obligation to undertake the Landlord's Works. Nothing prevents ALB from terminating for breach, or seeking orders in the nature of specific performance of Bexgrove's obligation, or claiming damages. The question is whether ALB can, in addition, withhold payment of rent and outgoings, while still keeping the lease on foot, until the Works are completed. In order to achieve that result, counsel for ALB is asking the Court to extend the circumstances in which the rent abatement rule applies, from the active denial of possession to an omission to comply with contractual obligations relevant to the tenant's decision to go into occupation. In my view, there is no good reason to take that step.
For completeness, it should be noted that the Court in Drama Unit unanimously rejected the contention that the rent abatement rule should be extended to outgoings (at [64], [73] and [117]). On any view, therefore, counsel's argument would not have justified the inclusion of outgoings in the "interim relief" sought by ALB.
For these reasons, even if I had not concluded that ALB's application for "interim relief" was beyond power, I would nevertheless have refused the application on the ground that the relevant claims for final relief were not seriously arguable, or at least were too weak to sustain the grant of such relief.
[6]
Orders
The orders of the Court on the plaintiff's application for interim relief, made on 1 September 2023, were:
1. Order that the plaintiff's application be dismissed.
2. Order that the plaintiff pay the defendant's costs of the application.
[7]
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: 27 September 2023