Alpha Investment Management Pty Ltd (formerly known as Patron Financial Services Pty Ltd) v Nationwide Mercantile Corporation Pty Ltd

District Court of NSW|2021-09-14

Introduction

The plaintiff, "Alpha Investment Management Pty Ltd (formerly known as Patron Financial Services Pty Ltd)", [1] a lessee of certain premises, sues the sublessee, Nationwide Mercantile Corporation Pty Ltd, for losses including legal fees arising from a claim on Alpha by the lessor in connection with make good obligations at the end of a lease.
The lease commenced on 1 October 2014 and the sublease and Deed of Consent were dated 23 December 2016. The lease and sublease were terminated on 29 September 2019. Both Alpha, in the lease, and Nationwide, in the Deed of Consent, [2] were obliged to provide bank guarantees to the lessor. Whether Nationwide provided a guarantee or not, and despite the entitlement of Alpha to require the lessor to call upon Nationwide's bank guarantee under cl 8.2(b) of the Deed of Consent, the lessor called upon Alpha's bank guarantee to cover make good costs involving carpet replacement, kitchen renovations, ceiling repairs, some electrical work, legal costs and a one-month occupancy fee.
Nationwide was in breach of the sublease prior to termination. Alpha sued Nationwide under the sublease for unpaid rent, for the money paid under the bank guarantee, and for legal costs.

(b) The real issues

Nationwide failed to pay the rent in accordance with the sublease, and a claim for rent was part of the proceedings commenced on 26 June 2020. The breach of the rental covenant in the sublease was admitted in the defence filed 15 March 2021, and the unpaid rent together with interest was paid on 16 June 2021. The trial commenced on 11 August 2021 in respect of the other claims in the proceedings. The only continuing relevance of the rent is that, presumably, some of the legal costs up to the time the rent was paid are attributable to Nationwide's breach in failing to pay rent.
The claims other than rent arose out of the landlord, 93 George Street, calling upon a bank guarantee given by Alpha, after the lease and sublease were terminated, in respect of alleged breaches of the make good covenants in the lease and Nationwide's obligation under the sublease to indemnify Alpha in respect of breaches. The sum paid by Alpha [11] pursuant to that guarantee was $78,792.53. That sum comprised various components identified by the landlord: failing to make good the carpet ($21,360), the kitchen ($13,160), the ceiling ($4,200) and electrical safety ($1,008) as well as the landlord's legal costs ($10,315.90) and a one-month occupancy fee ($28,792.63).
The primary defence to the first four items comprising the make good obligations rested upon the asserted poor condition of the premises at the commencement of the sublease, notwithstanding contrary contractual acknowledgements in the sublease.
There was no issue that the amount of one-month's occupancy fee was the amount of $28,792.63 asserted. However, Nationwide disputed that Alpha or Nationwide was in breach of the make good covenant in respect of the carpet, the kitchen, the ceiling and the electrical safety, and thus disputed, as a consequence, that it was liable for the landlord's legal fees and the occupancy fee.
The liability of Nationwide for these six items of loss constitutes the primary issue in the proceedings.
Alpha also claimed as damages its own legal costs and interest under provisions of the sublease. Nationwide made no submission about the interest rate in its submissions, but there is a question about the appropriate rate. As to legal costs, Alpha was content that any entitlement it possessed in respect of costs be dealt with by an appropriate costs order, so long as the order included the legal costs between the breaches in September 2019 and the commencement of proceedings in June 2020, which it said are secured by its contractual right to an indemnity. Nationwide disputed Alpha's entitlement to the assessment of the costs being broadened and backdated in this way.
The real issues can thus be listed as: 1. What are the relevant contractual provisions, and what obligations do they impose on Nationwide. 2. What is Nationwide's liability in respect of: 1. the carpet; 2. the kitchen; 3. the ceiling; 4. the electrical safety; 5. the landlord's legal costs; 6. the one-month occupancy fee; and 7. Alpha's costs and what is the appropriate costs order.

The obligations in the lease, sublease and Deed of Consent

In the lease executed in October 2014, Alpha was obliged to keep the premises in good repair and condition, [12] and acknowledged "that the Premises are in good repair and condition at the commencement of the Term". [13] The lease included a "Redecoration" clause as follows: "The Tenant must Redecorate the Premises to the reasonable satisfaction of the Landlord before each of the dates set out in Item 12. If the Tenant fails to Redecorate the Premises by the dates set out in Item 12, the Landlord may undertake the Redecoration at the Tenant's expense. The Tenant must repay amounts for Redecoration on demand." [14]
"Redecorate" was defined in the lease to mean: "(b) replacing all floor coverings, curtains, blinds and furnishings with new items of a similar style and standard to those being replaced which in the reasonable opinion of the Landlord are worn or damaged (otherwise than by fair wear and tear) and in need of replacement". [15]
Clause 23.3 of the lease required the premises to be in good condition on yielding up: "(a) The Tenant must immediately on the expiration or sooner determination of this Lease deliver back possession of the Premises to the Landlord clean and free from rubbish and in good and substantial repair, order and condition subject to the condition of the Premises as at the Commencing Date and in accordance with the Tenant's agreements for maintenance, repair and condition in this Lease." [16] In addition, without limiting this cl 23.3(a), the tenant under cl 23.3(b) of the lease was obliged to: "(i) Redecorate: Redecorate in accordance with clause 11.4; (ii) clean: cleaning of the whole of the Interior of the Premises including all partitions by washing down, steam cleaning or other appropriate method; (iii) repair carpet: either put all the carpet laid in the Premises into good and substantial repair, order and condition (including inconspicuously replacing to the Landlord's satisfaction all areas cut out and steam clean all carpet) or, if it is not possible to inconspicuously repair that carpet, if damage is beyond reasonable fair wear and tear having regard to the condition of the carpet at the Commencing Date, replace that carpet with new carpet approved by the Landlord of a standard not less than that of new carpet then provided by the Landlord to premises in the Building; (iv) shampoo carpet: (unless carpet is newly laid pursuant to paragraph (iii)) have the carpet shampoo cleaned by a reputable contractor; (v) reinstate holes in structure: make good, reinstate, patch and repaint the structure of any part of the Building into which any hole has been made by or on behalf of the Tenant, the Tenant's Associates or any of the Tenant's predecessors; and (vi) other repairs: repair (or replace, if repair would be conspicuous) window mullions, skirtings, finishes on core walls and other parts of the Building which have been damaged because of any works by or on behalf of the Tenant or the Tenant's Associates." [17]
Clause 23.5 provided, under the title "Failure to comply with clauses 23 to 23.3": "(a) Without limiting any other rights the Landlord may have against the Tenant in respect of or arising out of a breach of clauses 23 and 23.3, the Tenant must continue to pay the Occupancy Costs (at the rate applicable immediately prior to the expiration or sooner determination of this Lease) until the Tenant has complied with its obligations under clauses 23 and 23.3." [18]
Clause 11.10 provided: "11.10 Carpet The Tenant must: (a) take all reasonable steps to protect the Carpet from damage and undue wear and tear; and (b) if the Carpet is marked, or damaged as a result of any: (i) use of the Carpet in a way inconsistent with the normal permitted use and occupation of the Premises; or (ii) act, neglect or default by the Tenant or Tenant's Associates, at the Landlord's election, either: (iii) pay to the Landlord the costs of cleaning, repairing or replacing the Carpet; or (iv) clean, repair or replace the Carpet in accordance with the reasonable direction of the Landlord".
Clause 25 of the lease provided: "25 Costs 25.1 Tenant to pay Landlord's costs The Tenant must promptly pay: (a) for everything it must do; … (c) all costs, charges and expenses which the Landlord becomes liable for arising out of any Default including all solicitors' and other consultants' fees on a full indemnity basis; … (e) all reasonable legal costs connected to the exercise or attempted exercise of any right or remedy by the Landlord in connection with this Lease." [19]
The Deed of Consent was executed by 93 George Street, Alpha and Nationwide in December 2016. It relevantly provided: "3.2 Sub-lessee's covenants The Sub-lessee must: (a) perform and observe all of the terms and covenants contained in or implied by the Sub-lease and the Sub-licence Agreement; (b) perform and observe the Lessee's covenants and obligations contained in the Lease and Car Parking Licence Agreement to the extent they are not inconsistent with the Sub-lease and the Sub-licence Agreement; (c) not do anything that might result in the Lessee being in breach of the Lease or the Car Parking Licence Agreement; (d) obtain the Lessor's consent in respect of anything which under the Sub-lease or the Sub-licence Agreement requires the consent of either the Lessee or the Lessor; (e) if, under the Lease or Car Parking Licence Agreement, the doing of any act, matter or thing requires the supervision of the Lessor or a person nominated by the Lessor: (i) ensure that the doing of that act matter or thing by the Sub-lessee is supervised by the Lessor or a person nominated by the Lessor; and (ii) must pay any fees incurred by the Lessor in connection with the supervision, (f) permit the Lessor to exercise any of its rights under the Lease… (g) give notice to the Lessor immediately whenever the Sub-lessee is required to give notice to the Lessee under the Sub-lease or the Sub-licence Agreement." [20] "5. Sub-lease rent The Lessee and the Sub-lessee: (a) acknowledges that the rent payable under the Sub-lease is less than the then current market rent for the Premises; … 6. Make good In addition to the Sub-lessee's obligations under the Sub-lease, the Sub-lessee must perform the Lessee's obligations under clause 23 of the Lease. 7. Indemnities (a) The Sub-lessee indemnifies the Lessor against any loss or damage that the Lessor suffers because of the Sub-lessee's failure to comply with its obligations under the Sub-lease, the Sub-licence Agreement or this document. (b) The Lessee indemnifies the Lessor against any loss or damage that the Lessor suffers because of: (i) the Lessee's failure to comply with its obligations under this document. (ii) the Sub-lessee's failure to comply with its obligations under this document, the Sub-lease or the Sub-licence Agreement." [21]
The sublease executed by Alpha and Nationwide in December 2016 imposed on Nationwide the obligation to pay the rent, service charges for utilities and "Other costs" under cl 3.4, which provided: "3.4 The Lessee must pay to the Lessor: … 3.4.4 the Lessor's reasonable costs and expenses (including solicitor's costs and the Lessor's consultant's costs) for: … (b) anything the Lessor does to enforce this Sublease or because the Lessee breaches this Sublease;" [22]
The sublease also executed by Nationwide and Alpha in December 2016 contained other relevant provisions as follows: "Observe the Head Lease 4.6 The Lessee covenants to perform and observe the Obligations of the Lessor (as tenant) contained in the Head Lease, so far as these relate to the use and occupation of the Premises, except to the extent that those Obligations are inconsistent with the specific terms of this Sublease. Not cause a breach of the Head Lease 4.7 The Lessee must not do, omit or allow anything to be done that would cause the Lessor to be in breach of the Obligations of the Lessor (as tenant) under the Head Lease. Indemnity 4.8 The Lessee indemnifies and must continually keep the Lessor indemnified against all Liabilities suffered or incurred by the Lessor for any breach by the Lessee of the its Obligations under clause 4.6 and clause 4.7 of this Sublease." [23] "Repair 7.1 The Lessee must: 7.1.1 keep the Premises, the Owner's Property and the Lessor's Property in Good Repair and condition except for fair wear and tear, inevitable accident and inherent structural defects; 7.1.2 fix any damage caused by the Lessee or the Lessee's Agents; 7.1.3 repair or replace any power points, switches, light bulbs, tubes, starters and electrical wiring in the Premises; … 7.2 Without limiting or being limited by clause 7.1, the Lessee must, at its own expense: 7.2.1 repaint or otherwise appropriately treat any part of the Premises…which is in any way damaged by the Lessee…; 7.2.2 maintain the Lessee's Property and keep clean and in Good Repair and condition…; and 7.2.3 repair any damage to the carpets and other floor coverings and furnishings in the Premises, where such damage is caused by the deliberate or reckless act or omission of the Lessee or the Lessee's Agents." [24] "Damages 11.4 The Lessee indemnifies and agrees to keep indemnified the Lessor against any Liability arising and any costs (including solicitor and own client legal costs) incurred (whether before or after termination of this Sublease), directly or indirectly arising out of or in connection with: 11.4.1 the Lessee's breach of this Sublease; 11.4.2 the termination of this Sublease, including the Lessor's loss of the benefit of the Lessee performing its Obligations under this Sublease from the date of termination until the Expiry Date of the Sublease." [25] "Interest on overdue money 11.9 The Lessor may charge daily interest to the Lessee on any late payment due by the Lessee at the rate specified in Item 17 from the date that the payment was due until it is paid. The Lessee must pay such interest on demand by the Lessor." [26]
Item 17 provided for an interest rate of 2% above that quoted by Alpha's bank on unsecured overdraft accommodation over $100,000. "12 Termination of term Lessee's obligations 12.1 On termination or the ending of this Sublease, the Lessee must: 12.1.1 comply with all make good obligation which the Lessor is required to comply with under clause 23 of the Lease, except to the extent that the Lessor notifies the Lessee in writing; 12.1.2 vacate the Premises (including the Services) and give them back to the Lessor in good repair and condition as set out in clause 7.1; … 12.1.6 make good any damage caused by the removal of the Lessee's Property including: (a) repairing and filling all ceilings, walls and floors that have been penetrated and professionally repaint ail painted surfaces within the Premises in a colour approved by the Lessor; (b) steam clean all carpets and leave the carpets in good condition and repair; and (c) leave all internal blinds clean and in good working order; and 12.2 If the Lessee fails to carry out and complete its obligations under clause 12.1, the Lessor may do so and recover all costs incurred by the Lessor in undertaking such works. All such costs are payable by the Lessee to the Lessor on demand. …" [27] "Acknowledgement 14.1 The Lessee acknowledges: … 14.1.2 that its occupation of the Premises is conclusive evidence of its acceptance of the Premises being in good order, repair and condition as at the Commencement Date." [28]

Principles of construction

As the lease, Deed of Consent and sublease were between different commercial entities, they are to be construed according to the principles of construction of commercial contracts. The Court is to adopt an objective approach, ascertaining the meaning conveyed to a reasonable person having the background knowledge common to the parties, including as to matters of law. [29] Reference is to be made to the contractual language, the surrounding circumstances and the purposes and objects secured by the contracts. [30] This includes the background and context of the contracts. [31] Each contract is construed as a whole, [32] with the Deed of Consent and the sublease to be read in conjunction with the other contractual documents to which they refer.
Generally the Court approaches the task of construction on the assumption that the parties intended to produce a commercial result. [33] Nevertheless, if the words used are not ambiguous, the Court must give effect to them, unless the literal meaning "flouts business common sense" [34] or would lead to an absurd result. [35] If a provision is open to two possible constructions, the preferred construction is one which will avoid apparently capricious, unreasonable, inconvenient or unjust consequences, [36] even if that construction is not the most obvious, [37] especially if it is "most consistent with business common sense". [38]

Analysis

By the sublease, Nationwide contractually accepted that the premises were in good order, repair and condition at the start of the sublease, [39] and that it was responsible to keep the premises in good repair and condition and return them in that state. [40]
Separately, Nationwide accepted the obligation to perform and observe the obligations of Alpha in the lease, [41] not cause Alpha to be in breach [42] and indemnify Alpha against all liabilities for breach of these obligations. [43] As Alpha had acknowledged the premises were in good repair and condition at the commencement of the term, [44] and promised to return them in good and substantial repair on the expiration of the lease, [45] Nationwide had taken upon itself this same obligation. Subject to a matter of inconsistency considered below, Nationwide was bound by every obligation regarding the condition of the premises that Alpha undertook in the lease, including the obligations of redecoration, carpet repair, and reinstatement of holes in the structure. [46]
Further, any breach of these obligations gave rise to an obligation in Alpha, and thus to an obligation in Nationwide, to pay occupancy costs until the obligations had been met, [47] including all solicitor's costs on a full indemnity basis. [48]
The obligations undertaken by Nationwide in the Deed of Consent, to "perform and observe [Alpha's] covenants and obligations in the lease", [49] "to perform [Alpha's] obligations under clause 23 of the Lease" [50] and to indemnify Alpha against any loss or damage by Nationwide's failure to comply, [51] are to the same effect.
Nationwide was also obliged to meet Alpha's reasonable solicitor's costs. [52] While cl 3.4.4 of the sublease did not specify that the reasonable solicitor's costs were payable on an indemnity basis, as did cl 25.1(c) of the lease and in respect of the landlord's costs, cl 4.8 of the sublease, as indicated, obliged Nationwide to indemnify Alpha against "all liabilities suffered or incurred by any breach" of Nationwide of Alpha's covenants in the lease, which would extend to legal costs. Clause 11.4 of the sublease removed any doubt about the matter by specifically extending the indemnity to "solicitor and own client legal costs" arising directly or indirectly from Nationwide's breach.
In the result, it makes no difference whether an obligation lay upon Alpha in the lease, or Nationwide in the Deed of Consent or sublease. Because of the obligation on Nationwide to perform all of Alpha's relevant obligations, [53] as well as the obligation to indemnify Alpha [54] , any obligation on Alpha became an additional Nationwide obligation. And any limit on an obligation on Nationwide to make good, "fair wear and tear excepted", only reduced Nationwide's obligation if Alpha was likewise subject to the limited obligation, and if Alpha suffered no loss as a result of Nationwide's failure to repair.
Once the landlord had claimed on the bank guarantee, Alpha suffered a loss. If there were steps available to Alpha to reclaim some of that loss from the landlord, it had an obligation to mitigate. But the onus lay on Nationwide to prove that Alpha could recover those sums. Nationwide neither pleaded a failure to mitigate by Alpha, or led evidence to enable the Court to conclude that Alpha could lessen its damage by taking some form of recovery proceedings.
Nationwide did however argue this point. It asserted that Alpha "was also obliged to mitigate its loss" and referred to Rockdale City Council v Micro Developments Pty Ltd [55] at [55]. In the preceding sentence concluding [54], in that case, Giles JA, with whom the other members of the Court agreed, [56] stated that the wrongdoer "bore the burden of establishing that [the claimant] had acted unreasonably and failed to mitigate its loss".
Nationwide's identification of the conduct constituting a failure to mitigate is limited. Nationwide asserted that Alpha "did not seek clarification" from Nationwide "as to the condition of the premises" and "did not seek proof of the actual incurrence of loss" by the landlord. [57] Neither of these matters establishes a failure to mitigate, for Alpha had suffered loss once the bank guarantee was called upon. Nor was there evidence that Alpha "conceded responsibility".
Any claim of mitigation could only succeed if Nationwide established that there was an alternative course open to Alpha to avoid or recover its loss. That was not the subject of any evidence. There was, for example, no attempt to show that Alpha could have successfully sued the landlord for return of the monies claimed. Nationwide was a party to the Deed of Consent and could have maintained those proceedings itself, including by joining the landlord. That it failed to take that course only indicates that there was no merit in it so doing, or in Alpha so doing.
I do not see any merit in the assertion that Alpha failed to mitigate its loss.
Nationwide submitted that "the condition of the Premises at the commencement of the Headlease is irrelevant". [58] If "condition" is a reference to the actual condition, this is correct, since Nationwide had accepted Alpha's acknowledgement that the premises were in good order and repair. That Nationwide also submitted that a Jones v Dunkel inference arises from the absence of evidence of the condition of the premises at that time [59] is thus both curiously inconsistent and misconceived.
Similarly, Nationwide submitted that Alpha's contractual acknowledgment in the lease "that the Premises are in good repair and condition at the commencement of the Term" did not carry "any weight", was "hearsay" and it was "not actual evidence" of the condition of the premises. [60] This submission manifests a misunderstanding by Nationwide of the effect of its promises in the Deed of Consent and sublease, which was to meet all of Alpha's obligations in respect of the condition and upkeep of the premises.
The acknowledgement of condition in the lease by itself is not binding on Nationwide without the other documents. But this point is of little assistance to Nationwide when it has, by other terms of the Deed of Consent and sublease, effectively adopted the acknowledgment. And as Nationwide accepted in oral submissions, it made a similar acknowledgment about its obligations regarding the condition of the premises at the commencement of the sublease in cl 14.1.2, when it acknowledged that "its occupation of the Premises is conclusive evidence of its acceptance of the Premises being in good order, repair and condition as at the Commencement Date". [61]
Even the absence of the acknowledgment of the premises being in good repair and condition would not assist Nationwide, as there is good authority that an obligation to "keep" and yield up the premises in good order and condition requires the tenant to return the premises to that state irrespective of their condition at commencement. [62]
Nationwide's principal challenge to these obligations in the lease and Deed of Consent is that they were "inconsistent" with the obligations in the sublease, and the latter obligations prevailed. [63] This argument of inconsistency rests upon the existence of similarly but not identically worded obligations in the lease and the sublease. One inconsistency asserted was between the differing commencement dates of the lease and the sublease. [64] But this is immaterial, since none of the damages claimed depends (or is asserted by Nationwide to depend) on a breach by Alpha in the period before the commencement of the sublease. Nor would that matter once Nationwide has undertaken the obligations identified, and has acknowledged that the premises were in good order, repair and condition at the commencement date of the sublease.
The claim of inconsistency also sits uncomfortably with the obligation in cl 6 of the Deed of Consent, which refers to the sublessee's obligation to perform the lessee's obligations.
The argument of inconsistency was also raised, specifically in respect of the carpets. Clause 7.2 of the sublease provides that the carpets must be repaired where Nationwide causes damage by deliberate or reckless action or omission, [65] whereas the lease requires, in cl 23, the tenant to "put all the carpet laid in the Premises into good and substantial repair, order and condition" and "replace that carpet if it is not possible to inconspicuously repair it". [66]
The circumstances that two different obligations in respect of the carpet are imposed upon Nationwide do not of itself render those obligations contractually inconsistent. That would only occur if the obligations cannot both be honoured. Nationwide does not assert this, nor could it as Nationwide was capable of putting the carpet in good condition on yielding up, of replacing the carpet that could not be inconspicuously repaired, and also being obliged as a matter of ongoing maintenance to repair any carpets and furnishings that it has recklessly or deliberately damaged.
Once Nationwide had contractually accepted the premises were in good order, repair and condition, it is of no utility to lead evidence to the contrary. In this respect, the earlier submission of Nationwide is correct: evidence about the actual condition of the premises at the commencement of the lease, or the sublease, is irrelevant since the contractual acknowledgement is conclusive evidence of the matter. At least, evidence of the condition at commencement cannot assist Nationwide, although it may tend to prove the poor condition at the end of the lease.
The force of the contractual acknowledgment to override any extrinsic evidence is fortified by the circumstance that they were contained in a registered lease for a: "third party who inspects the Register cannot be expected, consistently with the scheme of the Torrens system, to look further for extrinsic material which might establish facts or circumstances existing at the time of the creation of the registered dealing". [67]
In the event that I am wrong, and that the actual condition of the carpet at commencement was relevant, I would not accept Nationwide's evidence about it being in poor condition. Ms Karam, a director of Nationwide, exhibited to her affidavit a photograph of the carpet at the time she entered the sublease [68] in asserting "it's quite clear that the carpet is discoloured and it's quite old and [the photo] is a really good indication of what I meant by that." [69] My observation of the carpet shown in the photo does not lead me to conclude that the carpet was worn or discoloured. Rather, the shadowing on the carpet, like the shadowing on the walls, was a function of light rather than the carpet being worn, I concluded.
Nationwide submitted that there was: "No suggestion or evidence that the defendant treated the premises in any way which caused damage to the items complained about beyond reasonable fair wear and tear, or that its conduct during occupation was unreasonable." [70]
First, this is incorrect. Photographs show that the condition of the kitchen [71] and the ripped carpet [72] cannot be attributed to fair wear and tear. [73] Ms Karam conceded that 70 metres squared needed replacing, [74] and by her quote for these repairs, indicated an acceptance of a liability for more than $5,000 in this regard. [75]
Secondly, it is immaterial. The obligation of the tenant was not confined to paying an amount for repair of damage proved by the lessor (or lessee) to have occurred from "unreasonable conduct" or even "beyond reasonable wear and tear". The obligations on the tenant were more detailed, in terms of what it had to do prior to termination, or what level of redecoration was required, of what the condition of the premises needed to be when handed back. Nationwide cannot establish compliance with all of its obligations by establishing compliance with one obligation.
In the result, the only available challenge to Alpha's claim rests upon a challenge to the alleged poor condition at termination. This was not an argument made by Nationwide with any force, asserting rather that the various items were no worse than they were at commencement, even if they were now in poor condition. [76] As the condition of the various items was the subject of debate, I propose to consider each item claimed separately.

Carpet

As indicated, Ms Karam gave evidence that at the commencement of occupation the carpet "was in poor condition, visibly worn down and discoloured". [77] She also accepted in September 2019 "that there worn-out bits of carpet". [78] Nationwide did not replace any carpet, so its poor condition and being visibly worn down would remain even if it were possible that steam cleaning by Nationwide might have remedied the discolouration. [79]
There was other evidence about the condition of the carpet at the end of the tenancy. The property manager informed Ms Karam that his inspection revealed the carpet to be in poor condition with a large number of stains and marks across it, "not just in one location but in very visible high traffic areas". [80] As indicated, Nationwide then obtained a quote of $5,120 plus GST to "replace [those parts] of the worn carpet within the Premises to the nearest matching replacement", which the quote indicated was an area of 70 square metres. [81] The company from whom Nationwide obtained the quote told Ms Karam that "there were 70 square metres of soiled carpet tiles that needed removing", and she agreed. [82]
The total area of carpet replaced was apparently 446 metres squared. [83] Ms Karam acknowledged that manufacture and sale of the existing carpet "had been discontinued approximately 10 years prior". [84]
Accordingly, it would seem that returning the carpet uniformly to good order and condition required replacement as "if it is not possible to inconspicuously repair that carpet, [to] replace that carpet with new carpet approved by the Landlord". [85] A different carpet for parts of the premises would hardly be inconspicuous.
The quote for $5,120 calculates to about $73 per metre squared, plus GST. [86] Ultimately, the claim to replace the 446 metres squared [87] of carpet was $21,360, [88] a rate of $48/m2.
The obligation on Alpha, and thus on Nationwide, was to "redecorate the premises to the reasonable satisfaction of the landlord", [89] with "Redecorate" being defined to include "replacing all floor coverings" which, in the reasonable opinion of the landlord, are worn or damaged beyond fair wear and tear and in need of replacement. [90] This, and the separate obligation in cl 23.3(b)(iii) confirm the need for Nationwide in the present circumstances to replace the carpet.
As Nationwide was obliged to replace the carpet, it was in breach of the Deed of Consent and sublease in not doing so, and was obliged under cl 4.8 of the sublease to indemnify Alpha against its liability to the lessor for the lessor's expense of replacing the carpet.

Kitchen

Ms Karam gave evidence that the kitchen was missing handles, [91] and was old. [92] Mr Eiszele gave evidence that lots of the drawers were missing, [93] "there was a lot of damage to the cabinetry", [94] and "it wouldn't be in a state which I would allow any future tenant to use it". [95]
For the reasons addressed earlier, the obligations undertaken by Nationwide rendered the condition at commencement to be immaterial. No argument was advanced that it was more economical to repair the kitchen by replacing the damaged and missing components. Photos of the kitchen at pp 97 and 100 in Exhibit D show both a need for cleaning and substantial cabinet replacement. Photos of the kitchen cabinetry tendered by Nationwide [96] did not show the damaged cabinet, although one photo did [97] show the missing handle. Other photos in evidence show a chipped finish on one drawer, [98] a missing base and handle of another drawer, [99] and markings on the overhead cupboards, in addition to the damaged cabinet referred to earlier. [100]
This evidence established that the kitchen needed to be repaired or replaced to return it to "good and substantial repair" in accordance with cl 23.3. The landlord required repair or replacement, [101] but Nationwide did neither. The landlord then replaced the kitchen and claimed $13,116 from Alpha. Nationwide made no submission, nor led any evidence, to the effect that the repair would have been effected for less cost than the replacement. In accordance with the redecorating clause 11.4 of the lease, the failure of Nationwide to repair or replace the kitchen entitled the landlord to do so, and Nationwide was obliged to pay for the redecoration involved in the replacing of the kitchen. There may be a question whether "redecoration" as defined included the kitchen as "furnishings" (which may include "fittings"), but there was no evidence that replacement was an uneconomic means of rendering the premises in good order and condition. In any event, Nationwide was, like with the carpet, obliged to indemnify Alpha under cl 4.8 of the sublease against all liabilities of Alpha occasioned by Nationwide failing to perform and observe its obligations specified in cll 4.6 and 4.7 of the sublease and Nationwide's failure to repair or replace the kitchen led to the loss to Alpha under the bank guarantee.
In these circumstances, I am satisfied that Nationwide is liable to Alpha for the amount paid by Alpha in respect of the kitchen as a result of the landlord's claim on the guarantee.

Ceiling

Nationwide submits that Alpha has not pleaded a breach of the contract in respect of the ceiling and "should not be permitted to run such case". [102] There is not a specific reference to the ceiling in the pleading, but no other reason is advanced to preclude Alpha from making this claim. Nationwide does not submit that the ceiling claim is a new claim, or that it was taken by surprise, or that it was prejudiced by the omission in the pleading. The statement of claim repeatedly refers to $39,684.00 for the make good works [103] and refers to the landlord's letter of 18 December 2019. A breakdown of these costs was in evidence [104] without objection, which specified $4,200 for ceiling repairs. Alpha also pleads the indemnity provisions of the sublease to recover the amount claimed by the landlord. [105] In these ways, the claim in respect of the ceiling is maintained in the pleading. Further, evidence was led on the ceiling issue by Nationwide, no objection was taken during the trial to evidence related to the ceiling, and this pleading point was not raised until final submissions after the evidence was closed.
So in short, although the statement of claim does not refer to the ceiling in terms, it does refer to the landlord calling upon Alpha's bank guarantee arising from Nationwide's breaches of the sublease [106] and specifies the amounts claimed by the landlord. The landlord's letter particularised part of the claim as pertaining to the ceiling.
In her affidavit, Ms Karam, the director of Nationwide, dealt specifically with the ceiling. [107] Although she refers to "roof tiles", her photos [108] and her statement that the tiles were "hanging out of the ceiling" confirms she is speaking of ceiling tiles.
In these circumstances, the absence of an explicit reference to ceiling is of no significance and has caused no prejudice. The issue has been ventilated by evidence and submissions by both sides. Thus the Court is seized of the issue and it can be dealt with on its merits.
Ms Karam gave evidence that the ceiling tiles at commencement were "in a state of disrepair and were visibly displaced and…hanging out of the ceiling at multiple locations", [109] and that the tiles "were in the same condition that they were at the time the Sublease was entered". [110] The photos she exhibited to her affidavit did not display any defects in the ceiling tiles at commencement.
Mr Eiszele, the property manager, counted about 150 ceiling tiles which needed to be replaced because of bowing or broken tiles. [111] He said: "…there's a lot of bowing or the ceiling tiles - a lot of broken ceiling tiles, a lot of holes in ceiling tiles, I remember counting about 140 to 150 tiles which needed to be replaced. It was in a - quite a bad state, all the ceiling tiles." [112] Photos confirm this evidence. [113]
The obligation to fix the ceiling arises from Nationwide's obligation to yield up the premises in "good and substantial repair", [114] to reinstate and make good holes in the structure [115] and the redecorating obligation [116] since the ceiling tiles are an "internal surface" of the premises [117]
There was no challenge to the amount of $4,200 claimed by the landlord for ceiling repair. There is nothing in the amount that seems inappropriate in view of the evidence of the ceiling condition, and Alpha is entitled to recovery of this sum.

Electrical safety

Photos of the premises [118] confirm that there is loose cabling in the premises, that is not "in good and substantial repair, order and condition" in accordance with cl 23.3 of the lease. The modest amount of $1,008 was claimed by the landlord from Alpha's bank guarantee in respect of works to remedy this problem.
Nationwide asserted a similar pleading point to that asserted in respect of the ceiling. But the statement of claim did refer to in paragraph 12: "c. make good any damage to the premises caused by the removal of the defendant's property; … f. repair holes made in walls; g. repair damage to skirting boards".
No objection was taken to the evidence admitted in respect of the wiring, which showed loose cabling in connection with the damaged skirting boards, [119] in connection with the holes in the walls [120] and being a consequence of the removal of Nationwide property. [121]
On the same basis, there remained work to be done by Nationwide to make good the premises, which was not done, and Nationwide must indemnify Alpha for the loss it incurred in the amount of $1,008 being claimed on its bank guarantee.

Occupancy costs

The claim for occupancy costs amounted to the cost of occupancy for a period of one month. Nationwide's primary answer to this claim was to deny the entitlement to the repairs that required the period of occupancy to effectuate. As Nationwide has failed to resist the claim for the repairs, this argument must likewise fail.
But Nationwide also faintly raised an argument that it would not take a month to organise, order and replace the carpet, repair the ceiling, repair the electrical wires and replace the kitchen. As the amount claimed by Alpha was a loss resulting from the bank guarantee, Nationwide's obligation to indemnify required it to meet this loss unless it could establish that Alpha had failed to mitigate its loss, a matter which I have rejected. The claim for occupancy costs is established.
Even if Alpha was under an obligation (which I do not accept) to prove in these proceedings the reasonableness of the landlord's claim, I am persuaded that the claim is reasonable, both because of my assessment of the time needed to order, obtain and install the carpet and kitchen, as well as repair the ceiling, and the electrical work. Further, there was evidence of a work program [122] that established the reasonableness of the one-month period to do the works. Nationwide could have avoided this cost by itself doing the repairs within the period of its sublease, but having failed to do so, Nationwide must meet the landlord's entitlement to recover costs under cl 11.4 of the lease, and recover its occupancy fee, being its costs of not having the premises available at the end of the term as Nationwide was obliged to ensure.
Alpha, and thus Nationwide, was under the lease obliged to continue to pay occupancy costs comprising rent, outgoings contribution and cleaning charge until the make good obligations were completed. [123]
Accordingly, Alpha is entitled to the sum of $28,793 in respect of occupancy costs.

Landlord's legal costs

Alpha, and thus Nationwide, was obliged under the lease to pay the landlord's legal costs connected with the exercise of the rights of the landlord, [124] including the landlord's right to "undertake the Redecoration at the Tenant's expense" under cl 11.4. Further, Nationwide and Alpha were obliged under the Deed of Consent to indemnify the lessor for any failure to comply with obligations, [125] including "all reasonable legal costs connected to the exercise … of any right or remedy by the Landlord in connection with this Lease," [126] and "all solicitors' … fees on a full indemnity basis" "arising out of any Default". [127]
There is no evidence indicating that Alpha has a proper claim to recover any of the amount of $10,316 claimed by the landlord in respect of its legal costs, and so there is no scope for any defence of a failure to mitigate.
Accordingly, Alpha is entitled to recover the landlord's legal fees component of the money claimed and received by the landlord under the guarantee.

Alpha's legal fees

On the basis of the indemnity in respect of legal fees considered above, Alpha is also entitled to recover its legal fees on an indemnity basis. [128] As those fees include the costs of these proceedings, and continue as each aspect of the proceedings continues, it seems appropriate that in respect of costs, the orders manifest that Alpha is entitled to recover its costs on an indemnity basis, those costs to include costs from 20 September 2019 incurred in respect of the contravention or termination of the lease, together with interest on those costs from the date they were paid by Alpha.

Summary Carpet $ 21,360.00 Kitchen $ 13,116.00 Electrical $ 1,008.00 Ceiling $ 4,200.00 Occupancy costs $ 28,793.00 Landlord legal costs $ 10,316.00 Total $ 78,793.00

Interest

Interest should accrue on the amount claimed by the landlord from 18 December 2019 to today (17 December 2021), that is, two years.
The interest rate agreed in the lease was "2% above that quoted by the lessor's bank on the day of demand on unsecured overdraft accommodation over $100,000". [129] Alpha gave evidence of interest rates of: 1. 11.71% p.a [130] in respect of unsecured amounts up to $50,000. 2. 6.11%.p.a [131] in respect of secured amounts of $100,000.
Together with the 2% uplift, the rates indicate either 13.71% or 8.11%. Each rate also has a management fee of 1.4%, but in view of the terms of the lease not referring to this, I am inclined to disregard it.
Although the unsecured rate appears to be the proper rate applicable under the terms of the sublease, it does not exactly replicate the contractual condition because of the differing amount. It is possible, although perhaps unlikely, that greater borrowings might be subject to a lower rate. I propose to allow the rate of 12%, and for that rate to be applied on a simple interest basis for the two-year period. That amounts to the sum of $18,910.32.

Orders

The orders of the Court are: 1. Judgment for the plaintiff in the sum of $97,703.32 inclusive of interest. 2. Order the defendant to pay the plaintiff's costs: 1. those costs to be assessed on the indemnity basis, and to date from and including 20 September 2019, 2. including all legal costs incurred referable to the termination of the lease and the make good of the premises, as well as the litigation costs, 3. together with interest of 12% on costs incurred and assessed.

Endnotes

Cover page of statement of claim.
Clause 9.
Statement of Claim at [3].
Defence at [3].
Statement of Claim at [7].
Defence at [7].
Court Book, p 143.
Statement of Claim at [5].
Bulgo Coal Management Pty Ltd v Hope Wine Group Pty Ltd [2020] NSWSC 1783 at [93], [96], [97].
Midcoast Petroleum Pty Ltd v Keldros Pty Ltd [2019] NSWSC 970 at [279], Bulga Coal at [95].
Court Book, pp 260-264.
Clauses 11.1(a) and 11.2.
Exhibit A at lease cl 11.2; Court Book p 64.
Exhibit A at lease cl 11.4; Court Book, p 65.
Court Book, p 53.
Exhibit A at lease cl 23.3(a); Court Book, p 87.
Exhibit A at lease cl 23.3(b); Court Book, p 88.
Court Book, pp 88-89.
Court Book, p 89.
Court Book, p 146.
Court Book, p 147.
Court Book, pp 163-164.
Court Book, p 166.
Court Book, p 170.
Court Book, p 174.
Court Book, p 175.
Court Book, p 175-176.
Court Book, p 177.
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at [11]; [2001] HCA 70 at [11].
Rinehart v Hancock Prospecting Pty Ltd (2019) 267 CLR 514 at [44]; [2019] HCA 13.
Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7, (2014) 251 CLR 640 at [35].
Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36, (1973) 129 CLR 99 at 109.
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 at [15], see also Motor Yacht Sales Australia Pty Ltd v Blann [2020] NSWCA 349 at [35]-[36].
Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201; Maggbury at [43].
Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183 at [37].
Bank of Queensland Ltd at [37]; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.
Bank of Queensland Ltd at [37].
Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, 2908 at [21].
Clause 14.1 of the sublease.
See cll 7.1.1 and 12.1.2 of the sublease, cll 3.2 and 6 of the Deed of Consent.
Cl 4.6 of the sublease.
Cl 4.7 of the sublease.
Cl 4.8 of the sublease.
Cl 11.2 of the lease.
Cl 23.3(a) of the lease.
See cl 23.3(b) of the lease.
Cl 23.5 of the lease.
Cl 25.1(c).
Deed of Consent, cl 3.2.
Deed of Consent, cl 6.
Cl 7.
Cl 3.4.4 of the sublease.
Deed of Consent cll 3.2(1) and 6 and cll 4.6 and 4.7 of the sublease.
Cll 4.8 and 11.4 of the sublease.
[2008] NSWCA 128.
See at [119], [120].
Defendant's closing submissions, 6/9/21 ("DCS") at [91], [92].
DCS at [8].
DCS at [11].
DCS at [13].
Court Book, p 177.
Cornwall Park Trust Board Inc v Chen [2016] NZCA 65 at [95], Payne v Haine (1847) 16 MZW; 153 ER 1304, Proudfoot v Hart (1890) 25 QBD 42, 50, NSW Rifle Association Inc v Commonwealth [2012] NSWSC 818 at [144].
See cl 4.6 of the sublease and DCS at [20].
DCS at [21].
DCS at [39]-[40], cl 7.2.3 of the sublease.
DCS at [23], cl 23.3(b)(iii) of the lease.
Westfield Management Ltd v Perpetual Trustee Company Ltd [2007] HCA 45 at [39], 233 CLR 528, cf Supabarn Supermarkets Pty Ltd v Cotrell Pty Ltd (No 3) [2020] ACTSC 53 at [157].
Court Book, p 396.
T91/30.
DCS at [78].
Exhibit D, p 97.
Exhibit E, pp DE50, 116, 125, 137 and 147.
See also mission square at Exhibit E, p 141.
T97/1-4.
See also T19/20-24, Exhibit E at DE 32.
See DCS at [16], [27], [54], [59], and [70].
Affidavit 13/4/21 at Court Book, p 385 [6(c)].
T95/40.
See affidavit 13/4/21 at [18].
Exhibit D, p DE46.
Court Book, p 445.
T97/2.
See Court Book, p 442.
Exhibit 1, p 54, CB 447.
Cl 23.3(b) of the lease, see also cll 3.2(a) and 6 of the Deed of Consent.
See Exhibit 1 at p 52, Court Book, p 445.
Court Book, p 442.
Court Book, p 264.
Cl 11.4.
Cl 1.1 at Court Book, p 53.
T98/41.
T98/23.
T79/11.
T79/13.
T79/12.
See Exhibit 1, pp 417-418.
Court Book, p 417.
Exhibit E, p DE102.
Exhibit E, pp DE102, DE117.
Exhibit E, p DE147.
Exhibit D, p 56.
DCS at [58].
At [16] and [18].
Court Book, p 264.
Statement of claim at [17].
Statement of claim at [16].
See affidavit, 13/4/21 at [6(b)], [32].
Exhibit E, pp 15-23, Court Book, pp 408-416.
Affidavit, 13/4/21 at [6(b)].
Affidavit, 13/4/21 at [32].
See T79/19-23.
T79/20
See Exhibit E, pp DE106-DE110, DE112-DE116, DE120-DE125.
Cl 23.3(a) of the lease.
Cl 23.3(b)(v) of the lease.
Cll 11.4 and 23.3(b)(i) of the lease.
See definition of "Redecorate" in cl 1.1, p 15 of 59, Court Book, p 53.
Exhibit E at pp DE97, 101, DE106, 108, 114-116, 118-120, 123, 135, 136, 148.
Exhibit E, p DE97, DE135.
Exhibit E, pp DE101, 106, 111, 114, 115, 118, 123, 148.
Exhibit E, p DE119, 120, 136.
Exhibit E, p DE 77.
See definition in cl 1.1 at Court Book, p 52; and cl 25.5.
Cl 25.1 of the lease.
Cl 7 of the Deed of Consent.
Cl 25.1(e) of the lease.
Cl 25.1(c) of the lease.
Cl 4 of the sublease.
See Item 17, Court Book, p 190.
Court Book, p 95.
Court Book, p 95. 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: 21 September 2022

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Judgment (17 paragraphs)

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Cases Cited (18)