Altan Mehmet trading as Altan Fashions v Nikitas Kesidis & Anor

COUNSEL : Mr R Nair - Plaintiff Ms S Hill - Defendants

SOLICITORS : Burn & Company Lawyers - Plaintiff Peter M Wayne & Associates - Defendants

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

No:13154 of 2009 Altan Mehmet t/as Altan Fashions v Nikitas Kesidis & Anor

JUDGMENT 1 This is an appeal from a judgment in the Local Court given by Bradd LCM at Sydney on 27 May 2009. The Plaintiff (Mr Mehmet) who was the defendant in the Local court was ordered to pay the plaintiffs in the Local Court (Mr and Mrs Kesidis) the sum of $19,847.40 and interest in respect of rent and incidental sums payable under a lease, but Mr Mehmet, in turn, was awarded $14,100 damages for breach by Mr and Mrs Kesidis of the covenant for quiet enjoyment contained in the lease. 2 The lease in question was a lease registered under the Real Property Act of premises described as "folio 12/628740, part being factory premises known as 99-101 Lakemba Street Lakemba" for a term of 3 years which commenced on 1 November 1998 and terminated on 31 October 2001. 3 Mr Mehmet does not now seem to challenge the magistrate's finding as to the quantum of the sum payable to Mr and Mrs Kesidis, rather his challenge is to the magistrate's findings upon the cross-claim. The appeal is brought as of right on a question of law under s39 of the Local Court Act. The grounds of appeal, as stated in the Summons, were: "1. The learned magistrate erred in law in that the learned magistrate failed to take into account relevant evidence. Particulars: i) The plaintiff (the defendant and cross claimant in the Local Court matter) gave evidence he had in his possession, at the time of the Local Court hearing, invoices for only part of the rental he had to pay to lease additional space, these invoices amounting to $14,100. ii) The plaintiff (the defendant and cross claimant in the Local Court matter) also gave unchallenged evidence that in addition to the rental of $14,100 for which he had, at the time, invoices, he had also paid further rental to lease additional space, this further amount being in excess of $20,000. iii) The learned magistrate failed to take into account this additional amount in excess of $20,000. 2. The learned magistrate erred in law in that the learned magistrate misconstrued and misapplied the law. Particulars i) The learned magistrate found that the breach of the lease by the plaintiffs in the Local Court was "a substantial breach (paragraphs 25 - 26 of his Honour's judgment. ii) The plaintiff (the defendant and cross claimant in the Local Court matter) gave evidence that prior to entering into the lease he had specifically told the plaintiffs (in the Local Court) that he needed at least 600 square metres of space, and that he was told by the plaintiffs that the premises comprised 600 square metres. iii) The learned magistrate erred in not finding that the breach of the lease (which his Honour found) was breach of an essential term and/or a breach so serious that it went to the root of the lease and/or a sufficiently serious breach of a contractual obligation that made the performance a totally different performance of the lease than that intended (and contracted for) by the parties. 4 It is convenient to deal first with ground 2 above, which seems to me to be based upon a fundamental misunderstanding of the law. Mr Mehmet claimed that he made known to Mr and Mrs Kesidis that he required about 600 square metres of space. It may be assumed that the premises described in the lease approximated that area but Mr Mehmet asserted that he was deprived throughout the term of the lease of the use of about 50 square metres because that area held machinery and property belonging to a previous tenant which Mr and Mrs Kesidis required to remain in situ while they sought a buyer, a circumstance which never eventuated. 5 The magistrate found that this constituted a "substantial" breach of the covenant by the lessor for quiet enjoyment and awarded compensatory damages of $14,100 upon the cross claim. What Mr Mehmet asserted before the magistrate and before me was that the unavailability for his use of about 50 square metres of the leased premises constituted such a fundamental breach of the lease that it amounted to a repudiation by Mr and Mrs Kesidis entitling him to damages for loss of his bargain. The magistrate rejected this contention. 6 The problem for Mr Mehmet is that he waited about 8 years to make this assertion, long after the lease had expired and long after he had commenced to hold over as a monthly tenant. In the meantime, he had remained in occupation of the premises, paid the rent and accepted the lessors promises that the machinery and other property left behind by the previous tenant would be sold and as a result cleared away.

7 There is much authority as to the rights and obligations of an innocent party to a contract faced with a fundamental breach of its terms by the other party. The decision of the High Court in The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 59 ALJR 373 is authority for the proposition that despite earlier suggestions to the contrary, ordinary principles of contract law apply equally to leases. 8 In Tramways Advertising Pty Ltd v Luna Park (NSW) Pty Ltd 38 SR 632, Jordan CJ (with whom Davidson J agreed) said at 644 (omitting references): "It needs to be remembered also that if a party who becomes entitled to put an end to a contract by reason of a breach of an essential promise does not exercise this right when he becomes aware of the breach, he loses his right, and is remitted to his remedy by way of damages only, in the following events; (1) if, notwithstanding knowledge of the breach, he proceeds to do some act, referable to the contract, which could only be properly done by him by virtue of the contract treated as a subsisting contract; or (2) if the party in default proceeds to carry on with the performance of the contract at the request or with the permission, express or tacit, of the innocent party, made of given with knowledge of the breach." 9 Later at page 645, his Honour said: "In cases where, notwithstanding a breach of an essential promise, the innocent party by choice refrains, or through force of circumstances is prevented, from putting an end to the contract, so that it remains on foot, the contract continues to be binding on both parties. In such cases, it is sometime said that the condition is reduced to a warranty. In truth it continues to be a condition, but no higher relief can be obtained in respect of the particular breach than if it were a breach of warranty." 10 In Larratt v Bankers and Traders' Insurance (1941) 41 SR 215 Jordan CJ (with whom Halse, Rogers J and Roper J agreed) said at page 229: "According to the general law, when a party to a contract becomes aware of facts which show that the other party has committed a breach of an essential term, he may in general, at his option, adopt either of two courses. He may avoid the contract, in which case, as already pointed out, it is determined so far as it is executory only - as a source of future obligations. Or he may elect not to avoid it but to treat it as being still on foot for all purposes, in which case he can obtain no higher relief in respect of the breach than if it had been a breach of a non-essential warranty; he must perform the contract on his part but may obtain damages for the breach." 11 In England, a statement to similar effect was made by Lord Atkin in United Australia Ltd v Barclays Bank Ltd [1941] AC 1: "On the other hand, if a man is entitled to one of two inconsistent rights it is fitting that when with full knowledge he has done an unequivocal act showing that he has chosen the one he cannot afterwards pursue the other, which after the first choice is by reason of the inconsistency no longer his to choose. Instances are the right of a principle dealing with an agent for an undisclosed principal to choose the liability of the agent or the principal: the right of a landlord where forfeiture of a lease has been committed to exact the forfeiture or to treat the former tenant as still tenant and the like." 12 The question was before the High Court in Sargent v ASL Developments Ltd [1974] 131 CLR 634. At page 653 and following, Mason J discussed the exercise of an election between alternative and inconsistent rights and considered when the election was required to be exercised (omitting references): A person confronted with a choice between the exercise of alternative and inconsistent rights is not bound to elect at once. He may keep the question open, so long as he does not affirm the contract or continuance of the estate and so long as the delay does not cause prejudice to the other side. An election takes place when the conduct of the party is such that it would be justifiable only if an election had been made one way or the other. So, words or conduct which do not constitute the exercise of a right conferred by or under a contract and merely involve a recognition of the contract may not amount to an election to affirm the contract.

The central problem in these cases lies in ascertaining what in the eye of the law are the elements essential to the making of a binding election, in particular whether knowledge of the existence of the alternative right is a prerequisite in the party against whom election is alleged. The question is complicated because in some instances election may take place as a matter of conscious choice with knowledge of the existence of the alternative right and in other cases it may occur when the law attributes the character of an election to the conduct of a party. ……………………………………. For my part this proposition correctly states the law in its application to contracts as well as interests in property. If a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract, exercises rights under the contract, he must be held to have made a binding election to affirm. Such conduct is justifiable only on the footing that an election has been made to affirm the contract; the conduct is adverse to the other party and may therefore be considered unequivocal in its effect. The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon. It is with these considerations in mind that the law attributes to the party the making of a choice, though he be ignorant of his alternative right. For reasons stated earlier the affirming party cannot be permitted to change his position once he has elected." 13 If the breach of Mr and Mrs Kesidis was in truth repudiatory, Mr Mehmet, having knowledge of it was entitled to accept the repudiation and sue for loss of his bargain. He lost that right when he continued in possession of the premises and to pay rent. He was left with his remedy of damages for breach in respect of which, in the words of Jordan CJ quoted above, "he can obtain no higher relief in respect of the breach than if it had been a breach of a non essential warranty". 14 Although the magistrate does not seem to have approached the matter entirely in that way, his failure to make the finding referred to in ground 2(iii) discloses no error of law or, at least, no error which could affect the outcome of the action. 15 Ground 1 in the Summons concerns Mr Mehmet's cross claim which in its amended form pleaded: "1. From 1 November 1998 to 15 September 2006 the Cross-claimant leased from the Cross-defendants premises situated at Unit 1, 99-101 Lakemba Street, Lakemba, New South Wales (the premises). 2. The area of the premises was 600 square metres, however while the Cross-claimant had possession of the premises, 50 square metres was occupied by equipment owned by the Cross-defendants. 3. Notwithstanding repeated requests, the Cross-defendant refused to remove the equipment from the premises. This was in breach of the lease. 4. The Cross-claimant therefore had the quiet enjoyment of only 550 square metres and by way of counterclaim the Cross-claimant seeks reimbursement of the amount of $36,390 (plus interest and costs) being the proportion of the rent that the Cross-claimant paid during his occupation of the premises attributable to the 50 square metres occupied by property belonging to the Cross-defendants. Particulars: Average monthly rent: (4000 + 5241)/ =$4621 Period of lease: 1 Nov 1998 to 15 Sept 2006 (94.5 months) Area of premises: 600 square metres Area occupied by plaintiff: 50 square metres Calculation = (50/600) sq. metres x $4621 x 94.5months =$36,390 4A. The Cross-claimant also had to lease additional space and claims damages in this regard in the amount of the rental paid for this additional space being $14,100 Particulars: Rental for additional space leased by defendant and cross-claimant =$14,100 Total = $36,390.00 +$14,100.00 = $50,490.00 16 In Mr Mehmet's affidavit sworn 9 March 2009, read in the proceedings before the magistrate, there were these paragraphs: "On or about 1 November 1998 I had a conversation with Mr Kesidis to the following effect:- I said: I have to move in, I have already given notice to my other place. But you have not moved your things, the machinery, the door dividers, the glass partitions. You promised me vacant possession. He said: Give me a chance please. I have some customers interested in buying all this stuff. I will be able to sell all this in the next days. The buyers will remove them. I said: I cannot go anywhere else now. Please make sure you remove your stuff ASAP. 8. About four weeks after I first moved into the premises, Mr Kesidis removed a piece of his machinery from the premises. I do not remember what sort of machine it was. 9. Mr Kesidis came to the premises each month to collect the rent. I had several conversations with him to the following effect: I said: When are you removing your things. I need the space. He said: Be patient, I am looking for customers to take them. 10. I could not force the issue by, for example, leaving. I needed the space and had already installed my machinery. I had an ongoing business. I needed the space being used by the Plaintiffs for storage for my goods. I was forced to rent space outside. Annexed marked "A" are five invoices for the storage space I leased because I was unable to use the space occupied by the plaintiff's goods. 11. During the first two years of my occupancy of the premises, I noticed that Mr Kesidis on several occasions brought persons to the premises. I observed that he appeared to be attempting to sell his goods stored in the premises. 12. Other than for the one piece of machinery referred to above which was removed about a month after I moved into the premises, the rest of the plaintiffs' goods remained on the premises and were still there when I vacated the premises in September 2006. 13. The plaintiff made annual increases to the rent. Upon being told of these increases I used to have conversations with him to the following effect: I said: How can you increase the rent when you are still occupying some space. It is not fair. He said: If you don't like it, move out. When I get a reasonable offer, I shall sell my goods. 14. I could not do anything because I had at that time a strong ongoing business. I had, among other orders, large orders to supply Target and Grace Brothers. I was unable to waste time in moving, I would have lost very important orders if I delayed in supplying them. 15. I made an estimate of the space actually occupied by the plaintiffs' goods and estimate it to be 50 square metres. The plaintiffs' good were still there. I decided that I was owed a significant reduction of the rent because I was not provided with quiet enjoyment of the premises. I had also to rent space elsewhere to store my goods which could have easily and more conveniently been stored at the premises. 17 Annexed to the affidavit were 5 documents each purporting to be a "Delivery Docket" on the letterhead of Demcy Industries Pty Ltd, "Import Export and Project Management". Each was addressed to Mr Mehmet's firm Altan Fashions and contained the printed words "Received from Demcy Industries Pty Ltd the following goods in good order and condition". These printed words were followed on each document with handwriting which specified "Storage of " followed by a number and the word "pallets". Each document also bore handwriting specifying a period, followed by a sum of money. The periods encompassed February 1998 to July 2001 and the amounts of money totalled $14,100. 18 The five "Delivery Dockets" became exhibit 5 before the Magistrate but Mr Mehmet did not give any oral evidence in chief about them. He was, however, cross-examined by Mr Maconachie, who appeared for Mr and Mrs Kesidis and there was this exchange: Q. Mr Mehmet, it's the foundation of the second part of your cross-claim if I can refer it in those terms - let me rephrase - the foundation of the second part of your cross-claim. A. Yes.

Q. --is these delivery dockets, isn't it? A. Yes.

Q. Those delivery dockets begin almost a year after you occupied the premises, don't they? A. I don't recall…(not transcribable)…

Q. Sorry, do you have a copy of them? A. No.

MACONACHIE: If the witness can see those, thank you, your Honour.

Q. If I can take you to the first of those documents which became the first page of your annexure A to your affidavit. It's dated 29 July 1999. That's the better part of a year after you, well, that's not quite accurate, that's - A. Yes, but -

HIS HONOUR: When did the, just remind me, when did the lease begin?

Q. Eight months after you occupied the premises was the first time that, on your case, you had the need to rely on what you say is external storage? A. Yes.

Q. --only up until 27 July 2001? A. No, I needed, I needed the extra space from the day I moved in to the place. I used to be on 900 Canterbury Road, Belmore. It was only about 300 square metres so my business expanded so I needed a bigger premises. That's why I find this place, 99 Lakemba Street, Belmore and moved into it.

Q. I don't think you understood my question. You needed space additional to that which was available at my client's premises only from - A. It is, you know. Because it wasn't enough space -

Q. If you can just let me - A. --because he was occupying the space.

Q. All right if you can just let me finish the question. You needed the additional space - A. Yes.

Q. --on the evidence before the court - A. Yes.

Q. --only from July 1999 until July 2001? A. I needed the space before 1997. That's why I moved to the premises and I saw the place. It was sufficient enough but -

HIS HONOUR: Maybe you could ask him why he only started storing things externally from that certain time.

Q. Can you explain to the court for me please why it was that you only began using external storage as you claim in July 1999? A. Because he was supposed to move all the goods so I was waiting, waiting -

Q. No, the point is why did it take you until July 1999? A. What, eight months?

Q. Why did it take you eight months to have to do that? A. Because I had big orders from Target and Grace Brothers so I had to get extra fabrics, but I -

Q. That was a case of your business expanding - A. Yeah.

Q. --and you needing extra space at the point in time, all right.

Q. So you were in the business during the period that you rented the premises from my client of manufacturing - A. Bed sheets.

Q. --bed sheets and associated products. Where did you get the raw materials to manufacture those products from? A. From the wholesalers. They were importing the stuff and then you go and buy it from them and you have to take it away. You don't take it away then they charge you because you pay for it then they charge you storage.

Q. Isn't it the case that these dockets represent storage of products whilst they were going through the process of being imported into the country, that's what these dockets represent, isn't it. A. What do you mean?

Q. Were these stores, did they go from the Bonds store to the store place or did they - A. Yeah, importers.

Q. Yeah, they went from the Bonds store directly into external storage? A. Yeah.

Q. It is in fact the case isn't it that these dockets have nothing to do with the premises that you leased from my clients? A. If, if, if I wouldn't have it, I would have enough storage, I would have taken them straight away to, to my place then I wouldn't have to pay extra storage money."

19 And at the end of the cross-examination: "Q. You never made a formal written complaint because this is a story concocted in order to avoid a liability isn't it? A. I'm not a lawyer or liar (sic) like you. I'm just a simple person running my business. Okay. There's everything there. Things I pay - even those things that I claim that I got the receipt, there's ever more, there is about $25,000 I pay but I couldn't find the receipts, that's why I didn't claim for it, but I find those, I claim, that's on my first affidavit, whatever you call it, it wasn't there and then it's on the second one because I find the receipts but there is more than that but I can't find it, I moved places, I can't find, I don't claim for it." 20 The learned magistrate dealt with the cross claim in his judgment as follows: "27. Mr Mehmet claims damages calculated by the loss of 50 square metres. Counsel for the plaintiffs submits that the calculation is inappropriate because damages are compensatory. 28. Mr Mehmet ought to receive, in respect of the breach of the lease, such as may fairly and reasonably be considered either arising naturally from such breach, or such as may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract, as the probable result of the breach. 29. The question is whether, on the information available to the plaintiffs when the lease was made, they should, or the reasonable man in their position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within their contemplation. 30. Mr Mehmet suffered a loss of $14,100, because having a lack of storage space at the factory he paid for external storage. This is a loss that arises naturally from the breach, and should have been in the contemplation of the plaintiffs at the time they made the lease as a probable consequence of not providing vacant possession of the factory. 31. Further damages are not warranted because there is no other loss naturally arising from the breach. Loss of bargain damages can only be recovered for repudiation or fundamental breach, being a breach of a condition or breach of another term that is so serious it goes to the root of the lease; or sufficiently serious breach of a non-essential term being a breach of a contractual obligation that makes the performance a totally different performance of the lease than that intended by the parties, so as to be so fundamental as to undermine the whole lease. 32. Vacant possession and quiet enjoyment are not listed as essential terms of the lease. The failure of the plaintiffs to remove the machinery and partitions did not undermine the whole lease." 21 In his written submission, Mr Nair, counsel for the Plaintiff, submitted that the magistrate "did not take into account (Mr Mehmet's) unchallenged oral evidence at the hearing that in addition to the $14,100 for which (Mr Mehmet) had provided invoices, he had incurred further expenses of about $25,000 to rent additional space". 22 In relation to this Mr Nair submitted: "The Plaintiff concedes that he did not include these additional rental payments of what he then believed amounted to about $25,000 in his claim. He did not do so because he could not then provide relevant invoices. Nevertheless this unchallenged evidence was a relevant consideration. It clearly could have - and should have - been a consideration in determining not only the losses suffered by the plaintiff but also whether the plaintiff could recover loss of bargain damages. With respect, this court can - and should - infer that this failure to take this evidence into consideration affected his Honour's determination. If a relevant consideration has not been taken into account and this has affected the decision, that purported decision should be set aside (Lovell v Lovell [1950] HCA 52; (1950) 81 CLR 513 (27 November 1950) per Latham CJ at 9." 23 In an attempt to overcome obvious problems arising from this submission, at the hearing before me, Mr Nair read the affidavit of Mr Mehmet sworn 25 September 2009. In part it read: "After the decision of the Local Court matter was handed down on 27 May 2009 and before the Appeal was lodged I continued to search for the missing invoices and found them in one of the unmarked boxes in the garage. These invoices are annexed to this affidavit as follows: a. Invoice dated 2 April 1999 for the period November 1998 to March 1999 for $10,000 which is hereby annexed and marked with the letter F. b. Invoice dated 4 June 2000 for the period January 2000 to May 2000 for $7,500 which is hereby annexed and marked with the letter G. c. Invoice dated 6 February 2002 for the period August 2001 to January 2002 for $10,500 which is hereby annexed and marked with the letter H. The dates of the storage space for the invoices marked F to H are for the period November 1998 to January 2002. I needed the extra storage space as soon as I moved into the premises at 99-101 Lakemba Street, Lakemba. The storage space was invoiced per pallet and I was billed according to how many pallets my stock occupied. During the various relevant invoice periods sometime I had old stock which continued to be stored and sometimes I had new stock which occupied more pallet space. I was billed for the amount of pallets my stock occupied in any one invoice period." 24 I observe that the so called "invoices" were in fact called "Delivery Dockets" and were in the same form as those earlier referred to. 25 The admission of new evidence on the appeal was objected to by Ms Hill who appeared for Mr and Mrs Kesidis. Section 75 A (8) of the rule 50.16 in the circumstances of this case prohibit the receipt of further evidence except on special grounds. In my opinion, such special grounds do not exist. My reasons for that conclusion are based on the clear statement by Mr Mehmet in the passage of transcript quoted above that he did not pursue his cross claim beyond the sum of $14,100 and also upon the fact that the delivery dockets themselves lack any real probative value. There is nothing for instance to support a conclusion that the requirement for external storage was directly related to the unusable space in the leased premises as opposed to a general increase in the volume of Mr Mehmet's business. There was no evidence that the sums of money specified on the delivery dockets were actually paid. I decline to receive further evidence on the hearing of the appeal. 26 Mr Mehmet should be held bound by his concession to Mr Maconachie and, in the absence of further evidence, there is no basis for Mr Nair's submission that the magistrate failed to consider relevant evidence. 27 In my opinion, the magistrate's reasons did not expose either of the errors of law relied upon in the Summons. 28 The Summons is dismissed with costs.

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