JUSTELLE NOMINEES PTY LTD -v- MARTIN [No 3] [2009] WASC 264 (17 September 2009)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : JUSTELLE NOMINEES PTY LTD -v- MARTIN [No 3] [2009] WASC 264

HEARD : 16, 17 & 23 FEBRUARY, 23 & 29 APRIL 2009

Landlord and tenant - Purported termination of lease for non-payment of rent - Action by landlord for possession, arrears of rent and damages - Counterclaim for damages for landlord's breach of repair covenant - Extent of landlord's obligation to repair - Whether lease validly terminated by service of writ - Causal nexus between non-payment of rent and landlord's breach of repair covenant - Surrender of lease by operation of law

Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 14

Property Law Act 1969 (WA), s 81

Andrews v Hogan [1952] HCA 37; (1952) 86 CLR 223

Clowes v Bentley Pty Ltd (1970) WAR 24

Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658

Dickinson v St Aubyn (1944) 1 All ER 370

DTR Nominees Pty Ltd v Mona Homes [1978] HCA 12; (1978) 138 CLR 423

Emhill Pty Ltd v Bonsoc Pty Ltd (No 2) [2007] VSCA 108

Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd (1958) 2 All ER 551

Idameneo Pty Ltd v Ticco Pty Ltd [2004] NSWCA 329

McCarrick v Liverpool Corporation [1947] AC 219

Morris v Baron & Co [1918] AC 1

Oastler v Henderson (1877) 2 QBD 575

Roadshow Entertainment Pty Ltd v CEL Home Video Pty Ltd [1997] NSWSC 473; [1997] 42 NSWLR 462

Rosa Investments Pty Ltd v Spencer Shier Pty Ltd [1965] VicRp 13; [1965] VR 97

Sharp v O'Driscoll (Unreported, Library No 970111, 21 March 1997)

Tomlinson v Cut Price Deli Pty Ltd [1992] FCA 555; (1992) 38 FCR 490

Wheeler v Keeble Ltd [1920] 1 Ch 57

1 BLAXELL J: The present proceedings arise from a lease of the hotel premises at Lot 4 Great Eastern Highway, Bindoon known as the Bindoon Country Inn (the property).

2 At all material times prior to July 2002, the registered proprietor of the property was Mr Ian Henry, and he was also the licensee and owner of the business of the inn. On 22 July 2002 the freehold in the property was sold to the plaintiff, but Mr Henry continued to occupy the premises as licensee, and as lessee of the inn for a term of 15 years.

3 On 20 February 2004 Mr Henry sold the business of the Inn to the defendants, and they entered into occupation of the property as assignees of the lease for the balance of the term. Thereafter, disputes arose between the parties over various matters including arrears of rent, non-payment of rates, and responsibility for repair of damage caused by termites. Notices of default were exchanged, and on 17 August 2006 the plaintiff commenced the present proceedings claiming possession of the property.

4 The defendants counterclaimed for damages for the plaintiff's alleged breach of a term of the lease requiring it to maintain the property in a sound structural condition. On 10 January 2007, they also obtained an interim injunction which restrained the plaintiff from re-entering the property.

5 On 30 April 2007, the interim injunction was dissolved by consent and the plaintiff re-took possession. The plaintiff then amended its claim to seek various amounts including arrears of rent, as well as damages for the defendants' alleged breaches of particular terms of the lease, including the obligation to keep the premises in good repair.

6 The defendants have maintained their counterclaim for damages, and seek to set off those damages against any sums recovered by the plaintiff. The defendants also contend that they were obliged to vacate the property as a result of the plaintiff's failure to maintain the structural integrity of the premises. Accordingly, the damages counterclaimed include components for the loss of the value of the residue of the lease and of the goodwill of the business.

7 The resolution of these issues has been hampered by the defendants' lack of representation at trial. In this regard, the defendants have relied upon amended pleadings which do not properly define the issues between the parties. This problem was aggravated on the first day of trial when the plaintiff obtained leave to make substantial amendments to the statement of claim (by which it effectively abandoned many of its claims). Notwithstanding the deficiencies in the pleadings, I was able to clarify the real issues that needed to be determined. The parties were content to proceed with the trial on this basis and I considered it appropriate to do so (see Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658, 664).

8 A further problem arises from the defendants' misunderstanding of the rules of evidence. They came to trial expecting to prove certain facts by tendering hearsay evidence in the form of reports or other documents from third parties. The plaintiff agreed to the partial tender of one of these reports, but the defendants declined the opportunity of applying for an adjournment of the trial so that they could call witnesses to prove the remaining matters. Accordingly there are significant gaps in the evidence which might have otherwise supported the defendants' case.

Facts which are readily established by the evidence

9 The evidence shows that the Bindoon Country Inn is a very small hotel operating from premises which are relatively modest in nature. The main hotel building is fairly old, and it has stonework walls, which at all material times were subject to cracking (due to expansion and contraction of the underlying clay soil). This building comprises a bar and dining area with kitchen and toilets to the rear, all of which are housed under a part corrugated iron and part asbestos pitched roof. A more recently constructed 'games room' with a skillion roof has been added at the side.

10 Adjacent to the main building is a separate manager's residence, and this also has stone walls which have been subject to (severe) cracking. Attached to the front of the manager's residence is a separate building housing four accommodation units each with its own bathroom. At all material times this accommodation building was constructed of timber studs with asbestos cladding and an asbestos roof.

11 Some distance to the rear of these three buildings is a separate and lower standard accommodation building which at all material times was used to house backpackers (and was described in evidence as the 'dongas').

12 Mr Ian Henry acquired the property in 1997 at which time it was known as the 'Bindoon Hotel' and was in a rundown condition. Mr Henry then carried out certain renovations and improvements with a view to changing the character of the property and attracting a new clientele. He also installed satellite television and obtained a licence to operate a TAB facility in the main building.

13 It is Mr Henry's evidence that as a result of these changes, he increased the turnover of the hotel from $3,000 or $4,000 per week (at the time he first acquired it) to $10,000 per week by the time the property was sold to the plaintiff. It is also his evidence that at all times the bar in the Inn could be very easily run by one person. In this regard, one person could 'do the bar, the TAB, simple sandwiches, all in very small proximity' (ts 193).

14 On 22 July 2002, Mr Henry accepted an offer from the plaintiff to purchase the freehold of the property for the sum of $335,000. The contract was subject to a condition that the plaintiff would lease the property to Mr Henry for a term of 15 years at an initial rental of $44,000 per annum. The sale of the property settled on 22 August, and the plaintiff and Mr Henry executed a formal lease agreement on 11 September 2002 (exhibit 3).

15 The directors of the plaintiff are Mr Michael Thompson and his wife Merrim. The plaintiff is the trustee of their family trust and it operates their business of automobile air-conditioning. The purchase of the Bindoon Country Inn was financed with a mortgage loan of $600,000 and the balance of those funds were used in the Thompsons' business. Their intention in having the plaintiff acquire the property was that it would be an investment for a period of six years. It was their hope that at the end of that period there would be a sufficient capital appreciation to pay off the whole of the $600,000 loan.

16 Mr Henry continued as lessee of the property for approximately 17 months following the sale to the plaintiff. For most of that period he did not operate the hotel business himself, but sublet the property to two women (a mother and daughter with the surname of Granville). Mr Henry had hopes that the Granvilles would go on to purchase the hotel business but they vacated the property some months before it was sold to the defendants. During the period following the Granvilles' departure, Mr Henry operated the business with the assistance of a manager (Mr Bob Lamonby).

17 Because of contradictory evidence from Mr Henry (ts 211 - 212, 217 - 219) I am unable to determine the periods when he sublet the property, and when he operated the business with the assistance of Mr Lamonby. However, Mr Henry has testified to the effect that the business went into decline during the period that it was sublet, and that it was only successful when he had 'hands on' control (ts 211 - 213). In that regard, it is Mr Henry's evidence that in the final period leading up to the sale to the defendants, the weekly turnover of the business was $8,000 and 'heading towards $10,000' (ts 217).

18 On 8 December 2003, the defendants entered into an agreement with Mr Henry to purchase the hotel business for the sum of $90,000 plus stock. The agreement was conditional upon the defendants obtaining a bank loan in the sum of $150,000. A formal assignment of the lease was executed by the parties and Mr Henry on 20 February, and the defendants entered into possession of the property on 9 March 2004.

19 The defendants are a father and daughter who have always had strong connections with the local Bindoon community. Mr Martin had not previously worked in licensed premises, but Ms Martin had past experience in the hospitality industry and had managed a retail liquor outlet in the United Kingdom. Following the purchase of the business, they both resided at the property along with Ms Martin's young daughter.

20 It is not in issue that the defendants purchased the hotel business in the expectation that they would be able to achieve a turnover target of $10,000 per week. In that regard, Mr Henry had provided them with trading accounts for the six months ending 30 May 2001 showing an average weekly turnover of $9,461 during that period. Mr Henry had also made representations to the effect that he was 'turning over about $10,000 a week' immediately prior to the sale (ts 217 - 218).

21 Unfortunately, the defendants' expectations as to turnover were never fully realised. They experienced only one month (September 2004) when the average turnover reached at least $10,000 per week. During their first year, their average turnovers were mostly within the range of $30,000 - $35,000 per month. Thereafter there was a steady decline, and average turnovers during 2005/2006 were mostly within the range of $17,500 - $25,000 per month. There was a further deterioration in the following year, and during the first quarter of 2007, the average turnover was less than $7,500 per month. (The cause or causes of the overall decline in turnover is a very live issue between the parties.)

22 Although the defendants have not tendered any profit and loss accounts, the evidence does not suggest that their operation of the business was a great financial success. From about March 2005 there were delays in their payments of rent and as at 9 May 2006 their arrears totalled $9,606.

23 By a notice of default served on the defendants and dated 21 June 2006 (exhibit 10) the plaintiff claimed that the arrears of rent then outstanding totalled $16,479.37. The notice stipulated that if the sum of $16,479.37 was not paid within 14 days the plaintiff would 'exercise the remedies available to it on default under the Lease as the Lessor sees fit including the right to terminate the Lease and re-take possession of the premises'.

24 By a letter in response dated 30 June 2006 (exhibit D18) the defendants claimed that the arrears of rent outstanding were only $8,875.53. They have maintained this assertion at trial but have not produced any evidence to substantiate the same. The plaintiff on the other hand has tendered bank statements (exhibit 6.1) which record each and every payment received from the defendants during the period 1 March 2004 to 30 August 2006. The plaintiff has also tendered the transcript of interlocutory proceedings in early 2007 (exhibits 6.2, 6.3 and 6.4) in the course of which the defendants' counsel made certain admissions as to the quantum of arrears. This evidence establishes that the arrears of rent as at 21 June 2006 were $13,146.01.

25 As already noted, the plaintiff commenced the present proceedings on 17 August 2006, and the writ simply claimed possession of the property (without any claim for arrears of rent, mesne profits or damages). However, on 8 September 2006 (and notwithstanding that the parties were each legally represented), Mr Thompson sent a letter on the plaintiff's letterhead (exhibit 9) directly to the defendants in the following terms:

Dear Natalie

On 13th September 2002 I purchased the Bindoon Hotel Inn, at that time there was a white ant inspection done and the hotel was clear of white ants. At that time Jock signed a 15 year lease, which stated that at least every 12 months there was to be a white ant inspection, had this been done the damage to the hotel would have been prevented, this is a breach of the lease.

Also, the rent is supposed to be paid one month in advance, you are three months behind, plus the one month in advance which makes you four months behind. This is also a breach of the lease and has been so for twelve months or more.

On the 13th September 2006, there is a rent review due, the CPI is running at 4% at present, which means the rent should be $3,680.00 per month.

I have just received the Rate notice from the Chittering Shire for the total of $17,761.76, which is unpaid, and this is also a breach of the lease.

I will give you four weeks to rectify these breaches of the lease, if this is done the rent increase will not be inforced until the 13th December 2006.

If this is not done you will have to vacate the premises and hand back the hotel to me.

Yours truly,

Michael Thompson

26 The defendants did not make any payments of rent following receipt of this letter. By 10 January 2007 (the date on which the defendants obtained an interlocutory injunction restraining the plaintiff from re-entering the property) the arrears of rent/mesne profits outstanding had increased to $37,926.01.

27 At the time of granting the injunction, Heenan J made an order that the defendants pay $25,000 to their then solicitors, which sum was to be held in trust in an interest-bearing account until further order of this court. The defendants duly complied with that order.

28 On 13 March 2007, Heenan J made a further interlocutory order that the defendants pay an additional sum of $10,620 into the same trust account to be followed by 'monthly rent payments of $3,540 as and when they fall due, until further order'. The evidence establishes that that order was complied with at least until payment of the monthly rental due in March 2007. On 30 April 2007 the injunction was dissolved, and all payments of monthly rental into the trust account ceased. On the assumption that the plaintiff was entitled to rent/mesne profits up until 30 April 2007, the total arrears as at that date were $48,546.01 (which figure does not take account of the moneys in the trust account).

29 The evidence also shows that the defendants did not make payment of rates to the Shire of Chittering as required by cl 6.2 of the lease. This was partly due to the fact that they never received any rate notices (because the Shire was continuing to send the same to the former sublessees, the Granvilles). Ultimately, the plaintiff became aware that there were arrears of rates (including interest) outstanding which totalled $17,761.76. The plaintiff brought this situation to the attention of the defendants (in the letter quoted above) and they then paid the bulk of what was due. However, as at 30 April 2007, there were arrears of $2,073.13 still outstanding. (It should be noted that under cl 6.2 of the lease, the defendants were liable for the interest on the rates.)

30 There are substantial issues between the parties as to the physical condition of the hotel during the period it was occupied by the defendants, and as to who was responsible for repair of the various defects which became apparent. As already noted, there was significant cracking of the stonework walls of the main building and manager's quarters at all material times (including at the time that the lease commenced). There were also other significant defects in the premises throughout the period that it was subject to the lease.

31 In this regard, the roof of the main building was always in a poor condition, and it leaked during heavy rains. (The extent of this leaking was reduced in May 2004 when the defendants expended $698.00 on temporary repairs.) I also accept Ms Martin's evidence that there were frequent blockages of the sewerage system which could be cleared only temporarily by plumbing contractors. (The only reasonable inference is that there had been a collapse or other deterioration of the underground terracotta pipes.) Furthermore, the electrical system in the main building was faulty, and the circuit breaker had a tendency to trip and cut off power. The evidence suggests that these faults were due to the age of the electrical system as well as the water leaks through the roof.

32 However, the main problem with the physical condition of the premises during the defendants' occupation was termite damage to the four accommodation units, and to the front verandah structure and window lintels of the main building. This termite damage was discovered during early 2005, and it had significantly affected the structure of the buildings. Prior to trial there was a major issue between the parties as to the cause of this damage, and the plaintiff claimed that the defendants had breached the terms of the lease by failing to arrange for regular white ant inspections. However, the plaintiff abandoned this claim at the commencement of the trial.

33 The termite damage rendered the four accommodation units unfit for habitation and they had to be progressively closed. This closure of the accommodation units had a detrimental impact on the defendants' business, but there are issues as to the extent of their consequent loss. As a result of the termite damage to the main building, parts of the verandah structure became dangerous and close to collapse. (Exhibit D27 pars 91 and 101). This damage also affected the appearance of the front entry area, and it is reasonable to assume that there was a consequent (but unquantifiable) impact on the defendants' business.

34 The various problems with the physical condition of the premises were raised by Ms Martin a number of times in the course of telephone conversations with Mr Thompson (which telephone calls were usually initiated by Mr Thompson for the purpose of pursuing the arrears of rent). She requested that the plaintiff repair the roof and the terracotta sewerage system, but made these requests in 'tactful' terms (ts 278). From at least September 2005, Ms Martin also made oral and written requests that the plaintiff repair the termite damage (ts 127 - 129, 156). By letter dated 13 June 2006 (exhibit 8) the defendants informed the plaintiff that these problems were 'costing us a lot of trade' and referred to the possibility of an 'appeal to the courts to compel a reduction in rent'.

35 The plaintiff was unresponsive to all of these requests, and Mr Thompson took the view that the plaintiff did not have to repair the termite damage because it 'did not put the white ants there' (ts 156 and 128). He also claimed that the defendants had caused the damage by failing to arrange regular white ant inspections and treatments (ts 129 and exhibit 9). However there was no basis for this claim, and in a letter dated 20 September 2005 (exhibit D14A) Mr Thompson was informed that there had been regular white ant inspections. Furthermore, the records of those white ant inspections (exhibits D8, D9, D10, D11 and D11A) were discovered in the course of the proceedings, but it was not until the first day of trial that the plaintiff was willing to concede that these had in fact occurred.

36 On 24 October 2006 the defendants served a notice of default on the plaintiff requiring it to carry out certain structural repairs to the premises within 14 days pursuant to cl 12.3 of the lease (exhibit D20). The items specified in the notice were very detailed and included repairs to the termite damage, replacement of the roof of the main building, replacement of the terracotta sewerage pipes, remedial work to the electrical system, and rectification of the cracking in the stonework walls. The notice also stated that if the plaintiff did not carry out the repairs, the defendants would (without prejudice to their other rights) carry out the works at their own expense and seek reimbursement. (It is relevant to note that this notice was served some two months after the commencement of the present proceedings.)

37 In late 2006 and early 2007 the Shire of Chittering served notices requiring the parties to carry out certain repairs and rectification work. By a notice dated 18 December 2006 under s 139 of the Health Act 1911 (WA) (addressed to both the plaintiff and the defendants) (exhibit 6A.2), the Shire directed that the accommodation units be repaired by 16 February 2007. By a further notice to the plaintiff dated 11 January 2007 (exhibit 6A.4), the Shire gave numerous other directions under the Health Act which included requirements for repairs to the main building. Yet another notice dated 13 February 2007 (exhibit 6A.5) required the defendants to clean the manager's residence prior to vacating the premises.

38 The evidence also establishes that concurrently with all of the above problems there was a progressive deterioration in the standard of the defendants' overall upkeep and maintenance of the premises. This included failures to clean gutters, mow grass, service equipment and to maintain the premises in a generally tidy and clean condition. (There are issues as to the extent to which this neglect was a contributing cause to the loss claimed by the defendants, and whether or not it also caused loss to the plaintiff once the premises were repossessed).

39 Further matters relevant to the issues of loss include the defendants' decision to close the TAB facility (in November 2005), their removal of the satellite television, and their closure (in November 2006) of the hotel restaurant (while continuing to serve 'snack' food). Towards the end of their occupation the defendants also ran down stock to the extent that they were unable to serve keg beer during their final two weeks.

40 The plaintiff regained possession of the property on 1 May 2007. Prior to then, it had obtained a further bank loan to finance the necessary repairs, and it commenced those repairs in about February 2007. By then, the plaintiff no longer wished to retain ownership of the property and had decided to sell it as soon as it had been repaired.

41 A local Bindoon couple (Mr and Mrs Reid) expressed interest in buying the property, and the plaintiff engaged them as managers so that they could experience a three to six month trial in operating the hotel. Unfortunately, these arrangements were not financially viable, and by November 2007 the Reids decided that they did not wish to proceed with any purchase. They vacated the property, and very soon afterwards the liquor licensing authority suspended the licence. Thereafter, the hotel remained closed until sold by the plaintiff on 18 July 2008. The plaintiff sold the property for the sum of $475,000.

42 I find that the termite damage to the property was not in any way attributable to fault on the part of the defendants. In this regard, the defendants took reasonable precautions to keep the premises free of termites by arranging for regular inspections by a pest control expert. These inspections occurred on 30 March and 2 June 2005, and on 5 October and 8 November 2006. During those inspections no active termites were found, but there were signs of previous termite activity.

43 The only reasonable inference from all the circumstances disclosed by the evidence, is that the termite damage had occurred prior to the defendants' occupation of the property. It is significant in this regard that at some time in the past a termite damaged windowsill at the front of the main building had been filled with a proprietary filler and repainted (pars 115 and 116, exhibit D27). Furthermore, in the bathroom areas of the accommodation units (where the greatest damage had occurred), new floor tiles had been laid on top of existing ceramic tiling. I accept Ms Martin's evidence that renovations to the accommodation units were taking place at the time of her inspection of the property in December 2003, and that the new tiles had been installed by the time of her next inspection in January 2004. The extraordinary fact that the new tiles were laid in this way strongly suggests that the person or persons responsible had difficulty in removing the old tiles (because of the damage to the timber floors underneath).

44 In this regard I accept the evidence in the report (exhibit D27) of the expert architect Phil Faigen, who inspected the property on 5 and 9 February 2007. Mr Faigen observed clear evidence of old termite damage to structural parts of the accommodation units and mainly in the bathroom areas. He also used an electronic moisture meter to measure the relative humidity of these same structures and found that they were 'saturated' with water (notwithstanding that it was mid summer, and that the bathrooms had not been used for some months).

45 I accept Mr Faigen's opinion that termites are renowned for being attracted to timber where water is present, which explained why the damage appeared to emanate from the bathrooms and spread out towards the other structures. I further accept his observations that the plumbing fixtures and shower bases had not been properly installed, which had allowed water to flow through to the timber structures underneath.

46 Other than to determine that the termite damage occurred some time prior to the defendants' occupation of the property, I am unable to make any more specific finding. The plaintiff does not claim that the damage occurred as a result of some breach by Mr Henry of the lease agreement (for which the defendants as assignees are responsible). In any event, Mr Henry was not questioned about the matter, and there is simply no evidence to show whether the damage occurred before or after commencement of the lease.

47 I also accept Mr Faigen's evidence as to the following matters:

- the stonework walls of the main building and manager's residence had been built without a cavity and on 'reactive foundation material with inadequate safeguards';

- accordingly, movements of the clay soil underneath (which expands when moist and contracts when dry) had caused cracking to the masonry;

- the clay brick chimney to the manager's residence had lost its footing, was unstable and dangerous;

- there was serious water damage to the rear part of the kitchen because of a 'poorly lapped roof', as well as leaking in the vicinity of the toilets which had been caused by a 'sag' in the roof;

- a roof leak in the games room was attributable to a box gutter overflowing because the gutters had not been kept clear of leaf litter;

- damage to the urinal in the male toilets had occurred because of movement in the clay soil underneath the stonework wall;

- the floors in all of the accommodation units were 'spongy' and those in the bathrooms showed 'excessive movement'.

48 The defendants became aware of the presence of the termite damage during early 2005. On 21 March 2005, a customer put a foot through the floor in room 1 of the accommodation units, and that room had to be closed. On 31 March 2005 the defendants discovered holes in the floor under the carpet of room 3 (due to old termite damage), and that room also had to be closed. For the same reason, room 2 was closed on 23 September 2005. This left only room 4 in use, but that room had to be closed on 26 June 2006 when the floor under the toilet was found to provide insufficient support. In the meantime (in September 2005), a beam supporting part of the verandah at the front entrance to the main building had fallen down because of termite damage.

49 The parties are at issue as to when the plaintiff was first informed of the termite damage, and Mr Thompson maintains that this was not until receipt of a letter from the defendants dated 20 September 2005 (exhibit 8). However, I accept Ms Martin's evidence that she had requested repairs to the termite damage during her prior telephone discussions with Mr Thompson. In my view, it is highly unlikely that Ms Martin would have refrained from raising this issue given the impact that the termite damage was having on the defendants' business. Furthermore, the plaintiff's lack of response to these requests is consistent with its later behaviour in refusing to acknowledge that there had been regular termite inspections despite being presented with proof to the contrary.

50 Although the income from the accommodation units was only about 10 % of turnover, I accept Ms Martin's evidence that the closure of these rooms had further flow-on effects on the hotel's trade generally. People staying in the rooms would use the main building for meals and drinks, and they tended to attract additional custom from work colleagues (eg road repair teams) staying at other places in town. Although I am satisfied that this loss in trade was significant the evidence does not enable any quantification of the same.

51 With regard to the other defects in the hotel building, I find that the cracking in the stonework walls did not have any impact on trade. The structural defects in the roof caused leaks and (in combination with the old electrical system) intermittent power outages. However, these problems were more of an inconvenience than any significant detriment to trade. Similarly, the problems with the sewerage system did not affect trade, but did result in the defendants incurring expense in having plumbers clear the blockages.

52 I am unable to make any specific findings as to the extent of the loss suffered by the defendants as a result of all or any of the defects (including termite damage) in the hotel. I am nevertheless satisfied that the defendants' operation of the business was never more than marginally profitable, and that the loss of income caused by the termite damage impaired their ability to make payments of rent. It is consistent with this finding that the arrears of rent did not commence until after the first two closures of accommodation units. Thereafter, the progressive closure of the remaining rooms was matched by an increased rate in accumulation of arrears.

53 I also find that the defendants failed to do all they could to mitigate their loss. They progressively took steps which reduced their trade including the closure of the TAB facility, the disconnection of the satellite television, and the shutting down of the restaurant. Although financial constraints had a large part to play in these measures, the defendants also allowed the general upkeep of the hotel premises to deteriorate, which undoubtedly had an effect on their trade. The evidence suggests that they essentially 'gave up' on trying to operate the hotel to the best of their ability.

54 Under the terms of the lease, the defendants had the following obligations in respect of repairs and maintenance:

The Lessee at the Lessee's own expense shall at all times ... maintain, replace, repair and keep the Leased Premises and every part thereof and all additions thereto and all the Lessors' fixtures therein and the doors, windows, roof and guttering thereof and all furnishings, equipment, locks, keys and fittings thereof in good clean and substantial repair and condition (fair wear and tear and damage by fire, storm, earthquake, tempest and Act of God excepted save by some act, omission or default on the part of the Lessee the Lessee's servants, agents or lawful visitors) and not do or suffer to be done any act or thing which may cause loss or damage to the same or which may choke or otherwise damage sewerage connections, drains and fittings ...

...

7.2.4 pay the costs of repairing and making good any damage to the Leased Premises or to any parts thereof caused by or through the act, neglect, default or omission of the Lessee or the employees, agents, clients, customers, invitees or licensees of the Lessee.

...

11.1 Condition upon Vacation

At the expiration or sooner determination of this Lease: -

11.1.3 the Lessee shall peaceably and quietly deliver up possession of the Leased Premises in such good and substantial repair, order and condition as shall be consistent with the covenants herein contained and in the case of all mechanical and air conditioning or cooling equipment certified by some competent authority to be in sound working condition having regard to the age thereof and reasonable wear and tear and the risks covered by the Lessee's insurance.

55 The plaintiff's obligations in respect of repairs were as follows:

12.3 [T]he Lessor shall maintain the Leased Premises and buildings of which the Leased Premises form part in a sound structural condition and shall repair all items of damage in respect of the Leased Premises which are not specifically the responsibility of the Lessee to repair under this Lease;

...

12.5 [T]he Lessor shall at its own expense promptly comply with and observe all notices and requirements of any statutory public local or other competent authority with respect to the Land and/or the Leased Premises whether involving structural alterations or not except such as may be served on the Lessor arising out of or in the course of the Lessee's occupation and/or use of the Leased Premises.

56 Under cl 14.1 of the lease, particular covenants by the lessees were deemed to be essential terms. These included the covenant to pay rent 'throughout the term at a date not later than 14 days after the due date for the payment of each month's instalment', and the covenant to pay outgoings. Clause 14.1 also contained the following provisions:

14.1.3 The Lessee covenants to compensate the Lessor in respect of any breach of an essential term of this Lease and the Lessor is entitled to recover damages from the Lessee in respect of such breaches. The Lessor's entitlement under this Clause is in addition to any other remedy or entitlement to which the Lessor is entitled (including termination of this Lease).

14.1.4 In the event that the Lessee's conduct (whether an act or an omission) constitutes a repudiation of this Lease (or of the Lessee's obligations under this Lease) or constitutes a breach of any Lease covenants the Lessee covenants to compensate the Lessor for the loss or damage suffered by reason of the repudiation or breach.

14.1.5 The Lessor shall be entitled to recover damages against the Lessee in respect of repudiation or breach of covenant for the damage suffered by the Lessor during the Term.

14.1.6 The Lessor's entitlement to recover damages shall not be affected or limited by any of the following: -

14.1.6.1 if the Lessee shall abandon or vacate the Leased Premises;

14.1.6.2 if the Lessor shall elect to re-enter or to terminate the Lease;

14.1.6.3 if the Lessor shall accept the Lessee's repudiation;

14.1.6.4 if the parties conduct shall constitute a surrender by operation of law.

14.1.7 The Lessor shall be entitled to institute legal proceedings claiming against the Lessee in respect of the Term including the periods before and after the Lessee has vacated the Leased Premises, and before and after the abandonment termination repudiation acceptance of repudiation or surrender by operation of law of this Lease whether the proceedings are instituted either before or after such conduct.

14.1.8 In the event of the Lessee vacating the Leased Premises whether with or without the Lessor's consent the Lessor shall be obliged to take reasonable steps to mitigate its damages and to endeavour to lease the Leased Premises at a reasonable Rent and on reasonable terms. The Lessor's entitlement to damage shall be assessed on the basis that the Lessor should have observed the obligation to mitigate damages contained in this sub-clause. The Lessor's conduct taken in pursuance of the duty to mitigate damages shall not by itself constitute acceptance of the Lessee's breach of repudiation or a surrender by operation by law.

57 Clause 14.2 made the following provision for notice of any breach of covenant by the defendants:

If the Lessee fails to perform or observe any covenant contained in this Lease, or any condition described in this Lease ceases to be complied with, then the Lessor may give the Lessee in respect of that default such written notice as is required by law to be given before the Lessor can commence any action for recovery of the Leased Premises, or if no notice is so prescribed, a written notice addressed to the Lessee describing the default and requiring the Lessee to remedy the default within fourteen (14) days.

58 Clause 14.3 included the following provisions for termination of the lease:

14.3 Termination

If: -

14.3.1 the Rent hereby reserved or any part thereof or any other moneys payable by the Lessee hereunder shall at any time be in arrears and unpaid for fourteen (14) days after the same shall have become due (whether any formal or legal demand shall have been made or not);

14.3.2 the Lessee fails to comply fully with any notice served on the Lessee by the Lessor under this Lease requiring the Lessee to take any action, within the time limited in that notice for taking that action (if any), or within a reasonable time (if no time is specified in the notice);

...

THEN the Lessor or any person or persons duly authorised by it may immediately after the happening of any of those events: -

14.3.5.1 without any notice, enter the Leased Premises (or part of the Leased Premises in the name of the whole) or, in any other way, retake possession of the Leased Premises to the exclusion of the Lessee and immediately upon that re-entry, or retaking of possession, this Lease shall terminate absolutely and ...

14.3.5.2 by written notification to the Lessee (with or without re-entering the Leased Premises) terminate the Lease forthwith.

14.4 Termination Not to Affect Preceding Breaches

Any termination of the Lease under this Clause shall not release or discharge the Lessee from liability in respect of Rent accrued up until the determination, or for breaches of any covenant antecedent to the determination and following such termination, the Lessor shall be entitled to recover from the Lessee damages for loss of the benefits which performance of the covenants of the Lease by the Lessee would have conferred on the Lessor between the date of termination and the expiry of the Lease by effluxion of time.

Whether the 'Retail Shops Act' applies to the lease

59 The lease agreement included a number of provisions which only apply if it was subject to the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (the Act). The defendants contend that the Act does apply, and claim that pursuant to s 14(c) the plaintiff is liable to pay compensation for failing to make reasonable efforts to prevent or remove the defects in the premises which caused 'disruption to any trading'. They also say that the plaintiff engaged in unconscionable conduct contrary to s 15C by refusing to effect repairs with the intention of forcing the defendants from the property, thus allowing it to be sold without the burden of the lease.

60 This last contention does not require further consideration, because there is simply no basis for the claim that the plaintiff engaged in unconscionable conduct. I accept Mr Thompson's denial of the substance of this allegation (ts 156), and there is no evidence capable of justifying an inference to the contrary. In my view, the fair inference from all of the evidence is that the plaintiff's refusal to effect any repairs was motivated by a lack of funds rather than some other ulterior motive.

61 The defendants' claim under s 14(c) also requires little consideration. Consistent with the decision of the Full Court in Sharp v O'Driscoll (Unreported, Library No 970111, 21 March 1997) per Malcolm CJ (20 - 23); and Franklyn J (8), the Bindoon Country Inn was at all material times a 'retail shop' within the meaning of the Act. The evidence also establishes that the Inn had a total retail floor area of less than 1,000 sqm which made the lease agreement a 'retail shop lease' within the meaning of the Act.

62 However, the provisions in s 14 only apply to a retail shop lease which is in a 'retail shopping centre'. At all material times the Bindoon Country Inn was a 'retail shop' operating from premises on its own. It follows that the provisions of the Act have no bearing upon the issues between the parties.

The responsibility of each party for repairs

63 As can be seen from cl 7.1 and cl 12.3 of the lease, there was a substantial overlap in the obligations of the plaintiff and the defendants in respect of repairs. In this regard, the obligation of the plaintiff to 'maintain' the leased premises in 'sound structural condition' would seem to conflict with the defendants' obligation to 'maintain, replace, repair and keep' all parts of the leased premises in 'good clean and substantial repair and condition' (fair wear and tear, etc excepted).

64 There was no conflict in respect of the remaining provisions of each clause. In that regard, the obligation on the defendants not to do any act which may cause damage was complementary to the lessor's obligation to repair all items of damage which were not specifically the responsibility of the lessee.

65 The terms of a lease should be construed contra proferentum against the lessor by whom it was granted (Dickinson v St Aubyn (1944) 1 All ER 370, 371). In my opinion, on a proper construction of the present lease, the repairs which fell upon the landlord under the first part of cl 12.3 must be regarded as a limitation on those that the defendants were obliged to carry out pursuant to cl 7.1. Accordingly, the plaintiff was required to do all that was necessary to maintain the property in a 'sound structural condition' and to repair all items of damage which were not specifically the responsibility of the defendants to repair under the lease. The defendants were obliged to carry out all other repairs which fell within the ambit of cl 7.1.

66 I am unaware of any judicial authority as to the ambit of a covenant in the precise terms of cl 12.3. However, in Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd (1958) 2 All ER 551, Vaisey J dealt with a lease agreement which was similar to the present one in that the tenant was obliged to keep the demised premises in 'good and substantial repair and condition', and the landlord had covenanted to 'repair maintain and keep the main structure walls roofs and drains in good structural repair and condition'. It was held that all repairs to the roof were structural repairs and that the landlord was also liable to replace a wall which needed to be rebuilt. Vaisey J referred to the possibility that:

[T]he items of serious disrepair which have given rise to the landlords' liability have been built up out of, and are the accumulated consequence of, a series of trifling wants of repair which ought to have been attended to from time to time as such by the tenants.

67 However, his Honour disregarded this possibility because of the 'very short interval' which had elapsed between the tenant's acquisition of the property and the discovery of the dilapidations which necessitated the repairs.

68 The age of the demised premises is always a relevant factor when construing repair covenants in a lease. In Clowes v Bentley Pty Ltd (1970) WAR 24, Nevile J held (at 27):

The condition of premises at the commencement of a lease certainly has some significance in the construction of a covenant to repair and keep in repair as under such a covenant premises need only be kept in a state of repair consistent with their age at the time they were demised. A tenant of old premises is, under such a covenant, under no obligation to bring them up to date and what is a proper state of decoration and repair of a palace is entirely different from a proper state of decoration and repair of a tenement building.

69 In the present instance, the demised premises were fairly old and in a poor structural condition at the time that the lease commenced, and the obligations of the landlord under cl 15.3 should be construed consistently with those facts. Accordingly, I find that at all material times the plaintiff was under an obligation to carry out such repairs as would maintain the roof of the main building, the stonework walls the terracotta sewerage pipes and the electrical system (which I consider to be part of the 'structure') in a sound structural condition. The termite damage aside, the defendants were obliged to carry out all other repairs, but only to an extent consistent with the age and prior condition of the premises.

70 All of the damage caused by the termites constituted 'items of damage in respect of the leased premises which are not specifically the responsibility of the lessee'. It follows that cl 12.3 required that the plaintiff repair this damage. However, given that the termite damage was latent and unobservable at the time of commencement of the lease, the obligation under cl 12.3 only arose when the plaintiff became aware of its existence (McCarrick v Liverpool Corporation [1947] AC 219, 231 - 232). On the facts as found, the plaintiff was well aware of the termite damage some months prior to September 2005.

71 To the extent that the defendants failed to clean gutters, service equipment and maintain the premises in a clean condition, I find that they were in breach of the full terms of cl 7.1 of the lease. I also find that pursuant to cl 7.1, cl 11.1 and other terms of the lease, the plaintiffs were responsible for the following repairs (and two additional items) the subject of the claim by the plaintiffs:

Supply and installation of Bosch Hot Water Unit - Eddy's Plumbing & Gas

Supply and installation of Rheem Hot Water Unit - Eddy's Plumbing & Gas

Supply of No 6 long shaft agitator pump - Beertech Dispense

Electrical fault - RCD tripping no power to bar area - Foresthills Electrics Pty Ltd

Reconnect bar Hot Water System for dishwasher, supply fluorescent tubes and starters, disconnect Hot Water System in laundry and reconnect bar display fridge & fault finding - Foresthills Electrics Pty Ltd

Callout fee, replacing of condenser fan motor in display fridge, gas, replace pump & test - Galaxy Airconditioning & Refrigeration

Reactivate satellite system, check wiring, measure free to air TV signal levels, supply of materials and labour - Chittering Communications

Fireblanket and 4.5kg DCP Extinguishers x 3 - Fireless Fire Services

72 For the reasons summarised below, I am not satisfied that the defendants were obliged to carry out the following repair items which are the subject of specific claims by the plaintiff:

1. Supply of electrical items by Zenelec ($1,272.75): the invoice for this item would seem to relate to the accommodation units, and to work which became necessary as a result of the termite damage.

1. Replace fuses at hotel and site meeting with Western Power Inspect - Foresthills Electrics Pty Ltd ($132.00): these costs seem to relate to the repair of damage in the accommodation units.
2. Bin hire - Bullsbrook Hiab ($330.00): it is my understanding that the bins were required for debris from the accommodation units.
3. Repair to urinal and damage to mens toilet - Eddy's Plumbing & Gas, MST and Pekka Korhonen ($3,844.95): the evidence from Mr Faigen's report establishes that this damage was the result of movement of the stonework wall. It was consequential upon the plaintiff's failure to maintain the wall in a sound structural condition.

Whether the plaintiff was entitled to possession of the premises

73 At all material times after 9 April 2005, the defendants were at least 14 days in arrears in payment of rent. Accordingly, cl 14.3.1 allowed the plaintiff to re-enter the leased premises without notice or to terminate the lease forthwith. The plaintiff was under no obligation to serve a notice of default before exercising this right, given that s 81 of the Property Law Act 1969 (WA) does not affect the law relating to re-entry in case of non-payment of rent (see subs 81(9)). Likewise, cl 14.2 of the lease did not make such a notice mandatory.

74 Nevertheless, the plaintiff served on the defendants a notice of default dated 21 June 2006 (exhibit 10) which erroneously overstated the arrears of rent which were then outstanding. Quite obviously, this defect (in what was an unnecessary notice) did not affect the plaintiff's continuing right under cl 14.3.1 to terminate the lease forthwith.

75 However the plaintiff did not at any time serve a further notice terminating the lease, and in these circumstances, the plaintiff must necessarily rely upon service of its writ of summons (on or about 17 August 2006) as having brought the lease to an end. In Rosa Investments Pty Ltd v Spencer Shier Pty Ltd [1965] VicRp 13; [1965] VR 97, Sholl J held (at 105) that:

Unless on the construction of the lease, or otherwise, there is a dispensation with the requirement of re-entry, a lessor must still, I think, in order to take advantage of a forfeiture which requires him to exercise it by re-entry, either proceed by an action for possession in the Supreme Court (which by a long course of authority is held equivalent to re-entry) or do something amounting to a demand on the demised premises, on the lessee or the person in possession, for immediate possession thereof, whether by verbal request or by service of clear written notice.

(See also Wheeler v Keeble Ltd [1920] 1 Ch 57, and Tomlinson v Cut Price Deli Pty Ltd [1992] FCA 555; (1992) 38 FCR 490.)

76 However, there are three potential obstacles to any finding that service of the writ brought the lease to an end. Firstly, the statement of claim endorsed on the writ relied solely on the defendants' failure to remedy the breach specified in the defective notice of default as entitling it 'pursuant to clause 14.3.5.1 to enter the leased premises and to retake possession of the Bindoon Country Inn'.

77 Secondly, approximately three weeks after service of the writ, the plaintiff sent to the defendants the letter dated 8 September 2006 (exhibit 9) referring to the rent review 'due' on 13 September 2006, and offering to defer an increase in rent if the breaches of the lease were rectified within four weeks. By the terms of this letter the plaintiff was clearly treating the lease as being still on foot, which was inconsistent with service of the writ having brought it to an end.

78 The third potential obstacle to service of the writ terminating the lease is that the plaintiff itself was in breach at that time. Even though the plaintiff had been advised of the termite damage at least a year beforehand, it was persisting with its refusal to carry out the necessary repairs. Furthermore, this breach was not a minor breach because it was having a significant detrimental impact on the defendants' business.

79 In light of the particular circumstances surrounding the lease agreement it is my view that this breach by the plaintiff was a breach of an essential term. In DTR Nominees Pty Ltd v Mona Homes [1978] HCA 12; (1978) 138 CLR 423, the majority of the High Court at 431 stated that:

[T]he quality of essentiality depends ... on a judgment which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances.

80 In the present instance, the leased premises at the time of the contract were in a poor structural condition (which may well explain the presence of cl 12.3 in the agreement). As the successful conduct of the lessee's business was dependent upon that structure being adequately maintained, the plaintiff's obligation under cl 12.3 was a matter of considerable commercial significance. Accordingly, I consider that it was an obligation that went directly to the substance of the contract and was essential to the very nature of that agreement.

81 As cl 12.3 did not specify a time for performance, a reasonable time should be implied. By the date of service of the writ, a reasonable time for compliance had long since past, and in my view, the only reasonable inference is that the plaintiff was repudiating the contract. In this regard:

If the inference to be drawn from the circumstances is that the defaulting party intends to perform an essential promise after some minor delay, repudiation cannot be inferred; but if the inference is that the defaulting party intends so to delay performance that the promisee will be substantially deprived of the benefit of the promise, repudiation can be inferred. The inference is not lightly drawn: Progressive Mailing House Pty Ltd v Tabali Pty Ltd ... (Laurinda Pty Ltd v Capalaba Park [1989] HCA 23; (1989) 166 CLR 623, 643).

82 The ordinary principles of contract law apply to leases (Progressive Mailing House at 29) and these principles include restrictions on the ability of repudiating parties to exercise their contractual rights. In Morris v Baron & Co [1918] AC 1, 9, the general principle was expressed as follows:

A party to a contract which imposes certain obligations and confers certain rights upon him cannot claim to exercise these rights while repudiating his obligations in material particulars.

83 In the particular context of a defaulting party exercising the right to terminate a contract (for breach of a non-essential term), the New South Wales Court of Appeal held in Roadshow Entertainment Pty Ltd v CEL Home Video Pty Ltd [[1997] NSWSC 473; 1997] 42 NSWLR 462 (at 479 - 480) that:

As a general rule, a party in breach of a non-essential term is not prevented from rescinding for a fundamental breach or repudiation by the other party: see J W Carter, Breach of Contract, 2nd ed (1991) at 347 and Halsbury's Laws of Australia, vol 6, 'Contract' (1992) par 110-9520, by the same author. The question is whether there is an exception or qualification to this general rule which prevented Roadshow from rescinding. Such an exception or qualification might exist if there were a causal relationship between the breaches of non-essential terms by the party attempting to rescind, and the fundamental breach replied upon: see Nina's Bar Bistro Pty Ltd (formerly Mytcoona Pty Ltd) v MBE Corporation (Sydney) Pty Ltd (at 614, 620 - 621, 632).

84 In circumstances where the terminating party is in breach of an essential term, the majority of a differently constituted Court of Appeal in Idameneo Pty Ltd v Ticco Pty Ltd [2004] NSWCA 329 accepted the principle (at[97]) that:

A contractual party B is not permitted to terminate for alleged breach or repudiation by the other party A, when that party B is itself in breach of a condition, or of an intermediate term having a serious effect which gives rise to a right to terminate, or is engaged in conduct which is repudiatory, even if the other party A has not yet elected to terminate for breach or to accept B's repudiation, provided (a) there is a nexus between A's non-performance and B's breach or repudiatory conduct, and (b) A's conduct does not amount to an election to affirm the contract; see Morris v Baron & Co [1918] AC 1(HL) at 9; Carter 'Breach of Contract' (loose-leaf ed) paras [35-240] to [35-260]; 2nd ed (1991) paras 1033 - 1037; Carter and Harland 'Contract Law in Australia' 3rd ed (1996) paras 1945 - 1947.

85 The Victorian Court of Appeal has applied a broader principle. In Emhill Pty Ltd v Bonsoc Pty Ltd (No 2) [2007] VSCA 108, it agreed (at [68]) with the following statement in Cheshire & Fifoot's Law of Contract (8th ed, 2002) at 943:

A party need only be ready and willing to perform the contract in substance. A party who is in breach may nevertheless have the right to terminate, so long as the breach is not repudiatory or of an essential term or such as to deprive the other party of the substantial benefit of the contract.

86 Applying these principles to the present case, I am satisfied that the plaintiff's breach of its repair covenant in cl 12.3, was a substantial contributing cause of the defendants' breach of their obligation to pay rent. This causal nexus between the plaintiff's breach of an essential term and the defendants' breach precluded the former from exercising its right of termination. It follows that the plaintiff was not entitled to possession of the property at the date of service of the writ.

87 The lease nevertheless came to an end on 30 April 2007 after the parties mutually agreed to a dissolution of the interlocutory injunction which had previously restrained the plaintiff from re-entering the property. As a result of this agreement, the defendants abandoned the property and the plaintiff resumed possession. Accordingly there was a 'palpable act' inconsistent with the continuance of the lease (see Oastler v Henderson (1877) 2 QBD 575, 579). The effect of these events was that there was a surrender of the lease by operation of law (Andrews v Hogan [1952] HCA 37; (1952) 86 CLR 223, 253, and Duncan WD, Commercial Leases in Australia (5th ed) at [15.20]).

The liability of the defendants for the plaintiff's claims

88 Putting aside questions of equitable set-off, the defendants are clearly liable for the arrears of rent totalling $48,546.01 that were outstanding when the lease came to an end. They are also liable for the arrears of rates in the sum of $2,073.13.

89 The plaintiff's remaining claims are for damages. The plaintiff firstly claims damages for the costs of repairs which should have been undertaken by the defendants (which I have found to total $7,068.33). The plaintiff also claims damages for the lost opportunity to earn rental income between the termination of the lease and the sale of the property (which lost rental income would total $53,100).

90 These claims for damages are not in any way affected by the termination of the lease or by the manner in which it came to an end. In this regard, cl 14.1.6.4 preserved the plaintiff's entitlement to recover damages if the parties' conduct 'shall constitute a surrender by operation of law'. Clauses 14.1.5 and 14.1.7 further confirm that the plaintiff is entitled to make these claims.

91 There were substantial amendments to the statement of claim in the course of trial, and in the end, all of the damages claimed are said to flow from the defendants' failure to 'adequately or at all clean, repair and/or maintain the property contrary to clause 7.3 of the Lease' (par 12(b) of the statement of claim). It should be noted that up until trial, the main thrust of this plea was the defendants' alleged failure to repair the termite damage.

92 In light of my earlier findings, the major problem that confronted the plaintiff when it re-possessed the property, was its own failure to repair the termite damage at an earlier date. Although the defendants are liable for the costs of repairs that they should have effected, those breaches of their repair covenants were only a minor contributing cause to the other losses claimed by the plaintiff. But for the plaintiff's neglect of the repairs for which it was responsible, there would have been very little impediment to having the premises ready for a new tenant within a relatively short time. In my view, on the facts as found, the plaintiff's failure to carry out repairs was the prime cause of the situation it found itself in after repossessing the property. Apart from the costs of $7,068.33, I am not persuaded that the plaintiff sustained any loss as a result of the defendants' breach, which it would not have sustained if that breach had not occurred.

93 Furthermore the damages claimed by the plaintiff fail to take account of the benefit it received in selling the property without the burden of the lease. The plaintiff purchased the property in 2002 for $335,000, and sold it in 2008 for $475,000. There is no evidence as to the reasons for this capital appreciation, but it is reasonable to assume that there were a variety of factors which impacted on this outcome. One of those factors was the value which could be attributed to the fact that the property was being sold with vacant possession.

94 The plaintiff has expressly pleaded (in par 18 of the statement of claim) that it sold the property 'in mitigation of the loss and damage caused by the defendants' breaches of the lease'. This being so, I consider that the burden is on the plaintiff to show that there was no component within the proceeds of sale which should be offset against the quantum of its claimed loss. Common sense suggests that there was such a component, and I am not satisfied that it would have been less than the residual $7,068.33 damages which is otherwise recoverable from the plaintiff.

95 For these reasons I find that the plaintiff is not entitled to any award of damages.

96 The defendants counterclaim damages for the losses said to have flowed from the plaintiff's breach of cl 12.3 of the lease agreement. Their claim for the period prior to vacating the property, relates to the inability to 'carry on trade in the entire leased premises', and to the loss of the accommodation units. More generally, damages are claimed for a diminution in the value of the lease as an asset, a diminution in value of the goodwill of the business, and a loss of potential income from the sale of the lease.

97 I have already found that the plaintiff's failure to repair the stonework walls, and the electrical system did not result in any loss to the defendants. The failure to repair the sewerage system did result in plumbing expenses, but there is no evidence as to what these were. The defendants also expended $698 on repairs to the roof but their evidence of that expenditure was in the context of them fulfilling their repair covenants, and they have not at any time specifically claimed that sum as damages.

98 The losses claimed by the defendants in respect of the termite damage can only date from the expiration of a reasonable time for the plaintiff to have carried out the repairs. In my view, the expiration of that time was at the end of December 2005. Although I have found that the defendants suffered a loss in trade as a result of the plaintiff's failure to repair the termite damage, the evidence does not enable me to determine the quantum of their actual loss. In essence, I have evidence of turnovers at material times, but no information as to whether the business at any stage was operating at a profit or a loss, or as to the net financial effects of the relevant events. There is also the added complication that the defendants' own actions and neglect necessarily contributed to their loss in trade.

99 All of these considerations impact upon the other aspects of the defendants' claimed loss. There is simply no evidence which would enable me to determine the value of the goodwill of the business or of the value of the lease at any time while it was in the hands of the defendants. Any attempt to assess the quantum of the defendants' damages would be entirely speculative and could only be a stab in the dark.

100 In all of these circumstances, the award to the defendants on their overall counterclaim can only be one of nominal damages. Such an award is appropriate where there is evidence to show that some amount is due but no evidence as to what that amount should be (McGregor on Damages (16th ed) 424). For these reasons I award the defendants the sum of $10 damages on their counterclaim.

101 In light of this finding there is little point in determining whether the defendants are entitled to a set-off of these damages against the amounts for which they are liable to the plaintiff.

102 The plaintiff is entitled to judgment against the defendants on its claim for the total sum of $50,619.14. The defendants are entitled to judgment against the plaintiff on their counterclaim for the sum of $10.00. I will hear submissions from the parties as to the appropriate orders including the disposition of the monies held on trust pursuant to the interlocutory orders made in the course of the proceedings.