Charlie Bridge Street Pty Ltd v Petrazzuolo; Petrazzuolo v Charlie Bridge Street Pty Ltd

Applicant's First and Second Retail Leases Applications

1. The Applicant is seeking compensation of damages for wrongful termination of the Lease by the Respondents in an amount of $300,000.00 comprising, as set out in the Submissions,: 1. staff costs in the amount of $6,000.00; 2. inventory costs of $4,000.00; 3. loss of business reputation and goodwill at $100,000.00; 4. loss of revenue, or loss of opportunity to earn revenue for the balance of the lease term of the Lease for $110,000.00; and 5. value of the fitout of $80,000.00.
2. The Applicant is also seeking return of the bank guarantee of $27,500.00, which had been cashed in by the Respondents.
3. The Respondents have stated that, save for the roller door which remains in the premises and is currently being used by the new tenant, the balance of the fitout has been removed, destroyed or discarded by the new tenant and that the rental equipment is being kept in storage by the Respondents in Melbourne.

Respondents' Retail Leases Application

1. The Respondents claim damages from the Applicant for breach of Lease by the Applicant as follows: 1. the difference between the incentive rent paid for the first 12 months and the rent payable under the Lease (on the basis that the incentive rent was only agreed on the assumption of a five year Lease remaining in place) being the sum of $41,250.00; 2. unpaid part of rent for June and July 2017 amounting to $461.70; 3. loss of rent from October 2017 to June 2018 (when the new tenant commenced to pay rent) amounting to $64,300.00; 4. costs of termination, being the costs of the locksmith, window cleaning, Sydney Water, mediation costs and travel expenses in the sum of $4,688.34; 5. NCAT legal costs of $29,419.20 plus costs incurred after 29 May 2018; and 6. the costs for preparation of the new lease for the new tenant and the agent's costs for finding the new tenant amounting to $9,892.56.
2. The Respondents confirmed that they will credit against the sum awarded to them the amount of the bank guarantee of $27,500.00 cashed in by them plus cash left at the premises of $836.40, which amounts to a credit of $28,336.40.

Terms of the Lease

1. The relevant clauses of the Lease are as follows: Clause 5 Money What money must the lessee pay? The lessee must pay to the lessor or as the lessor directs - 5.1.1 The rent stated in item 13A in the Schedule;
2. The rent stated in item 13A in the Schedule is $6,250.00 per month plus GST.
3. The rent incentive is contained in special condition 25 which states as follows: 25.1 The lessor grants to the lessee a rental discount where by the lessee will pay rent from 1 June 2016 to 31 May 2017 (the discount period) the discounted monthly rental of $3,125.00 plus GST. 25.2 All payments other than rent must continue to be paid as required under the lease during the discount period.
4. The next relevant provision is the make good provision under special condition 22 which states: 22.1 When this lease ends or terminates the lessee must: 1. deliver the property leased back to the lessor in a neat and tidy state and in good and substantial repair, having regard to the lessee's obligations under clause 7; 2. replace any item of the lessor's property which the lessee has broken or damaged; 3. remove all of the lessee's fixtures, fittings, furniture and chattels (including signs) and make good any damage caused by the removal; and 4. restore the property leased back to its condition at the commencement of the lease including the reinstatement of existing false ceiling, cameras and lighting. 22.2 Any property of the lessee not removed becomes the property of the lessor who can keep it or remove and dispose of it and charge to the lessee the cost of removal and disposal.
5. Clause 7 of the Lease is the clause which relates to the condition and repairs. Clause 7.2 states as follows: The lessee must otherwise maintain the property in its condition at the commencement date and promptly do repairs needed to keep it in that condition but the lessee does not have to - 7.2.1 alter or improve the property; or 7.2.2 fix structural defects; or 7.2.3 repair fair wear and tear.
6. Clause 12 of the Lease relates to forfeiture and end of the Lease and states as follows: When does this lease end? 12.1 This lease ends - 12.1.1 … 12.1.2 If the lessor lawfully enters and takes possession of any part of the property; or 12.1.3 If the lessor lawfully demands possession of the property. 12.2 The lessor can enter and take possession of the property or demand possession of the property if - 12.2.1 the lessee has repudiated this lease; or 12.2.2 rent or any other monies due under this lease is 14 days overdue for payment; or 12.2.3 the lessee has failed to comply with the lessor's notice under section 129 of the Conveyancing Act 1919; or 12.2.4 the lessee has not complied with any term of this lease where a lessor's notice is not required under section 129 of the Conveyancing Act 1919 and the lessor has given at least 14 days' written notice of the lessor's intention to end this lease. 12.3 [Deleted by special condition 19.1 in the Lease] 12.5 Essential terms of this lease include - 12.5.1 The obligation to pay rent not later than 14 days after the due date for payment of each periodic instalment (and this obligation, stays essential even if the lessor, from time to time, accepted late payment). 12.6 If there is a breach of an essential term the lessor can recover damages for losses over the entire period of this lease but must do every reasonable thing to mitigate those losses and try to lease the property to another lessee on reasonable terms. 12.7 The lessor can recover damages even if - 12.7.1 … 12.7.2 The lessor ends the lease by entering and taking possession of any part of the property or by demanding possession of the property; or …
7. Clause 14.3 of the Lease provides: This lease is subject to any legislation that cannot be excluded.
8. Section 129 of the Conveyancing Act 1919 states as follows: 129(1) A right of re-entry or forfeiture under any proviso or stipulation in a lease, for a breach of any covenant, condition or agreement (expressed or implied) in the lease, shall not be enforceable by action or otherwise unless and until the lessor serves on the lessee a notice: 1. specifying the particular breach complained of; and 2. if the breach is capable of remedy, requiring the lessee to remedy the breach; and 3. in case the lessor claims compensation and money for the breach, requiring the lessee to pay the same, and the lessee fails within a reasonable time thereafter to remedy the breach, if it is capable of remedy, and where compensation and money and is required to pay reasonable compensation to the satisfaction of the lessor for the breach. 129(3) The provisions of subsection (1) shall not extend to a covenant or condition or agreement against doing, committing, or suffering anything whereby or by means whereof either a loan or with other circumstances any licence under the Liquor Act 2007 is or may be endangered, or is or may be liable to lapse or be suspended, cancelled or refused. 129(8) This section shall not effect the law relating to re‑entry or forfeiture or relief in case of non‑payment of rent. 129(10) This section applies to leases made either before or after the commencement of this Act, and shall have effect notwithstanding any stipulation to the contrary.

Applicant's Submissions

1. The Applicant first submitted that there were ongoing discussions between the parties concerning the calculation of the proposed amortisation of a rental incentive agreed to by the parties and as such and in light of those ongoing discussions, there was a lack of clarity as to the quantum of rent that the Applicant was to pay to the Respondents for the month of September 2017 and but for this ongoing discussion and lack of clarity, the rent would have otherwise been paid.
2. The Applicant's second submission is that the Respondents were not entitled to terminate the Lease for breach even of an essential term, such as the non payment of rent, without first issuing a clear notice to the Applicant of the purported breach of the Lease and requiring the Applicant to make good such breach within a reasonable period of time, being 14 days from the date of such notice.
3. Significantly, in relation to the second submission, the Applicant relies on the Judgment of Santow J in MI Design Pty Ltd v Dunecar Pty Ltd & Ors [2000] NSWSC 996 where his Honour critically examined clause 12 of the Lease, which is the same clause in the lease under discussion in that case, being the clause in the Law Society's form of Commercial Lease.
4. The submission of the Applicant significantly relies on that analysis and the conclusion of Santow J at [22] that: … There is a mandatory 14 day's notice, either statutory under s129 if applicable (with its concomitant obligatory opportunity to the tenant to remedy, if capable of remedy, or pay claimed compensation) or else contractual. The original Lease makes clear that such notice is an essential pre‑condition for taking possession of the property, irrespective of the nature of the breach (apart from the tenant repudiating the Lease as provided in 12.2.1).
5. Consequently, the submission is that the re‑entry by the Respondents is illegal because the Respondents failed to give at least 14 days' written notice of the breach and specifically of the Respondents' intention to end the Lease in accordance with clause 12.2.4, which provides that the Respondents can enter and take possession of the premises if: the lessee has not complied with any term of this lease where a lessor's notice is not required under section 129 of the Conveyancing Act 1919 and the lessor has given at least 14 days written notice of the lessor's intention to end this lease.
6. As the Respondents did not provide such notice, the Applicant's submission is that the lockout and re-entry was illegal and rendered the Respondents liable to the Applicant for damages.

Submissions from the Respondents

1. The Respondents submit that repossession of the premises and termination of the Lease was lawful and done pursuant to the rights under the terms of the Lease, specifically clause 5.1, which provides that the lessee must pay to the lessor the rent, and clauses 12.2.2 and 12.5.1. The submission continues: [The Respondents] submit that the MI Design case was not determined on the basis of the requirements of clauses 12.2.2 and/or 12.2.4 as the case was decided on alleged breaches of the lease other than the non‑payment of rent. The alleged breaches in the MI Design case were about the Liquor Act and subletting of a bottle shop premises and therefore related to s129(3) of the Conveyancing Act. The MI Design case can therefore be distinguished from this case and no ratio decidendi from the MI Design case is relevant to this case.
2. In a further submission, the Respondents assert that there is no legal precedence established by MI Design which requires a lessor to issue a notice and give a further 14 days in the case non-payment of rent after the rent is 14 days in arrears.
3. In an alternate submission, the Respondents point to the High Court decision in Shevill and Anor v Builders Licensing Board [1982] 42ALR 305 stating that: Although the lease contained different wording to this lease, the effect was that a failure to pay rent within the 14 day period entitled the lessor to bring the lease to an end.
4. Shevill has been considered in more recent cases, including Wash Investments Pty Limited v SCK Properties Pty Ltd [2016] QCA 258 which considered section 124 of the Property Law Act 1974 (Qld) (similar in wording to section 129 of the Conveyancing Act 1919 (NSW)). In Wash Investments, the Queensland Court of Appeal held that a lessor was entitled to re‑enter, forfeit and terminate the lease based on a 'common law' right due to the conduct of the lessee demonstrating unwillingness to perform the contract.

Resolution by the Tribunal

1. The Applicant's first submission has no legal foundation and is merely an explanation as to why the Applicant chose not to pay the rent when called upon due to difficult trading conditions. The second submission from the Applicant is based on clause 12.2.4 of the Lease, as considered in MI Design, that notice must be provided before the lessor can exercise rights of re-entry and forfeiture.
2. To resolve the issue as to whether notice was required before the Respondents could re‑enter and re‑take possession of the premises, the Tribunal will look critically at the decision of Santow J in MI Design. The Tribunal notes the reference to MI Design in Lang's Commercial Leasing in Australia published by CCH which states as follows: The lessee sought restoration into possession and relief against forfeiture claiming that the lessor's re‑entry was invalid due to no proper notice of breach. The Court held that the re‑entry for the non‑payment of rent was defective for want of proper notice due to the notice requirements contained in the lease. Defective re‑entry will expose the lessor to a substantial claim for damages from the lessee and may have professional liability ramifications for the lessor's solicitor.
3. On a first reading of the decision of Santow J in MI Design, I find that the case note referred to in the paragraph above accords with the submissions from the Applicant that Santow J made it very clear that he has read clause 12.2.4 of the lease to mean that whilst subsection 129(8) would normally prevail in relation to a breach by a lessee for non-payment of rent and thereby not require a lessor to give any notice (rent being an essential term of the lease along the lines as stated in Shevill's case referred to above), the terms of clause 12.2.4 require the Respondents, as lessor, to give at least 14 days' written notice of its intention to end the Lease.
4. On a critical examination of the whole of section 129 of the Conveyancing Act 1919, I note firstly subsection (8) provides that the law relating to re-entry or forfeiture of the lease in case of non payment of rent is not to be affected. Consequently, as the common law recognises, no notice is necessary in respect of re-entry or forfeiture of the lease for any default for non-payment of rent. Significantly, section 129(3) also seeks to preserve the position that no notice is required in connection with certain breaches under the Liquor Act 2007.
5. Santow J in MI Design looked at the relevant breaches by the lessee and came to a view, based on expert evidence, that such breaches may not have endangered or made the licence liable to be lapsed or suspended. Therefore the provisions of section 129(3) did not apply and consequently the notice provisions under section 129(1) became necessary which accords with the head note of the case as cited in paragraph 46 above.
6. Santow J in MI Design stated at [43]: Provided subsection (3) does not preclude the application of s129 (1), the effect of the statute is that the lessor's right of re‑entry on breach of covenant is not capable of being exercised against the lessee until the notice and other conditions of subsection (1) had been complied with, that is so irrespective of the terms of the lease (s129 (10)).
7. Consequently, Santow J focused on sub-section 129(10) which says that the provisions of section 129 prevail notwithstanding any stipulation to the contrary.
8. Young J in CAC Pty Ltd v Diamond Hill International Pty Ltd (1996) 7 BPR 14, 754 held at [5] in connection with a clause in the lease that read: 6.1 Your obligation is to pay money and your obligation is to insure, repair, to use the shop for the permitted use and to obtain our consent to a transfer or other dealing or essential terms of this lease. We may terminate this lease if you do not comply with an essential term. In any event cl 6.1 could not displace the rights that are given under s129 of the Conveyancing Act because of s129 (10).
9. However, in this case there are no issues with respect to breaches of the Liquor Act 2007. The only breach is the non-payment of rent by the Applicant.
10. In my view, it is clear from the provisions of clause 12.2.4 of the Lease that it is an attempt to have the Respondents, as lessor, provide a notice of intention to re‑enter where in circumstances it ought not otherwise be required to do so, such as re‑entering and forfeiting the lease in the case of non‑payment of rent.
11. In these circumstances, I would have thought that in fact clause 12.2.4 is a clause that does not comply with sub‑section 129(10) of the Conveyancing Act 1919 in that the effect of clause 12.2.4, as determined by Santow J in MI Design and Young J in CAC, is to circumvent the provisions of sub‑section 129(8) relating to the seeking of relief in respect of breaches for non‑payment of rent where notice is not required.
12. Further, I note the provisions of clause 14.3 of the Lease, which provides that the Lease is subject to any legislation that cannot be excluded. Sub‑section 129(8) of the Conveyancing Act 1919 cannot be excluded per sub‑section 129(10). Therefore, the provisions of clause 12.2.4 are rendered inoperable. In these circumstances therefore the Respondents were entitled to re‑enter and re‑take possession of the premises without further notice to the Applicant.
13. Therefore the Applicant's claim pursuant to its Retail Leases Application falls away, other than the claim for return of the value of the fitout or return of the fitout itself or the value of the fitout resulting in damages.
14. Whilst it is not strictly necessary for me to deal with the alternate submission of the Respondents as to why in their view it is not necessary to have provided notice to the Applicants before re-entering and terminating the lease, I observe that the cases relied upon such as Shevill and Wash Investments appear to base the proposition that no notice is necessary on the fact that in those cases the lessee was held to have repudiated the lease. The Court of Appeal in Wash Investments held at [32]: The question here is whether the first Applicant evinced unwillingness or an inability to render substantial performance of the Contract. In Shevill…. it was said that 'repudiation of a contract is a serious matter and is not to be lightly found or inferred'.
15. Whilst the evidence from the Applicant could have led the Tribunal to consider that as the Applicant viewed the continuation of its running of the business in the premises as unprofitable and as such was not prepared to continue to pay the rent and was always asking for a reduction as potentially repudiatory conduct by the Applicant the Tribunal is not prepared to go that far on the evidence as provided to the Tribunal. Accordingly the alternate submission is not supported by the Tribunal.

Claim by the Applicant for the fitout or compensation

1. Relying on the evidence from the statement given by David Nicoll, the lawyer for the Respondent, and from the affidavit of Mark Greise, the director of the Applicant, I am satisfied that sufficient notice and requests were made to the Applicant to remove the fitout and the rental equipment from the premises. The Applicant either ignored these requests or delayed significantly to act upon them.
2. As I observed in Cihan v City Tobacconist Pty Ltd [2015] NSWCATCD 148, under clause 12.6 of the Lease the landlord covenanted with the tenant to endeavour to mitigate any loss consequent upon a breach of the lease by the tenant. In these circumstances, any delay on the part of the Applicant in removing the fitout and preventing the Respondents from mitigating the loss by reletting inhibited the Respondents from complying with their obligations under clause 12.6.
3. Further, I note that pursuant to special condition 22.2 of the Lease, the Respondents are entitled to deal with any property of the Applicant not removed in that they can either keep it or remove and dispose of it and charge the Applicant the cost of such removal and disposal. This is what the Respondents purportedly did and the Tribunal agrees that the Respondents were entitled to do so.
4. Further, in relation to any rental equipment, Silver Chef can approach the Respondents directly to make the necessary arrangements to collect those items the subject of rental agreements.

Damages claimed by the Respondents

1. The Respondents claim damages from the Applicant for breach of the Lease in respect of number of categories. The first amount claimed is for the difference between the incentive granted to the Applicant for the first 12 months by way of reduced rent and the total rent for the 12 months payable under the Lease in that the incentive was only granted on the basis that the Applicant would continue to pay rent for the full period of the Lease.
2. The provisions of special condition 25 of the Lease are plain - there is no conditionality to them. Further, even if there was an understanding by the parties that the rent incentive was granted on the basis that the Applicant would continue to remain a tenant for the full five years, there is no evidence to suggest that that was the understanding of the Applicant and accordingly the Tribunal rejects the claim.
3. The Respondents claim short paid rent for June and July of $461.70 and loss of rent from October 2017 to June 2018 in the sum of $64,350.00. Mr Raffaele Petrozzuolo, one of the Respondents in his affidavit of 1 June 2018 states at paragraph 4: I confirm that Laura and I have now secured a new tenant at the premises. The new lease was executed on about 19 March 2018 with a commencement date of 23 March 2018. The new tenant took possession on or about 5 April 2018 (and it completed its fitout of the premises by about 1 May 2018. Under the new lease the tenant commences paying rent of $7,150.00 per month (inclusive of GST) commencing on 1 June 2018 (as the lease includes an initial two month rent-free period as part of securing a 5 year lease term).
4. The Tribunal notes that this new rent of $7,150.00 per month inclusive of GST equates to what the Respondents would have received from the Applicant in the second year of the term of the Lease when the rent would have been increased by 4% to $6,500.00 plus GST per month.
5. Further, the Respondents in their submissions refer to my decision in Cihan v City Tobacconist Pty Ltd where I stated the following: '[52] … clause 4.5 of the Lease states that clause 12.6 is an essential term. Consequently, for Mr Mehmet Cihan to recover damages for losses over the entire period he must do every reasonable thing to mitigate those losses and try to find another tenant on reasonable terms. This is no longer a low threshold to meet. The question of who bears the onus in respect of the question of proving or disproving the reasonableness of the Lessor's actions becomes less relevant as clause 12.6 requires a positive obligation on the lessor to mitigate, not the standard position as previously articulated by the courts that a lessor does not have to demonstrate what actions it had taken after the vacation of the leased premises.'
6. As noted above, clause 12.6 of the Lease states: 'If there is a breach of an essential term the Lessor can recover damages for losses over the entire period of this Lease but must do every reasonable thing to mitigate those losses and try to lease the property to another lessee on reasonable terms.'
7. The Applicant made no submissions in relation to this claim and the Tribunal is satisfied that the Respondents have adequately complied with their obligations pursuant to clause 12.6 to relet the premises on reasonable terms and the Tribunal allows the claim of $64,350.00 and the short paid rent of $461.70.
8. The next claim is for the sum of $4,688.34 relating to the costs of termination being for the locksmith, window cleaner, Sydney Water and mediation expenses. The Tribunal will not allow mediation expenses and these should be deducted from the amount. I have deducted the cost of the mediation of $760.00 so the amount allowed is $3,928.34.
9. The next amount claimed is the sum of $9,890.56 for the costs of preparation of a new lease for a new tenant and the agent's costs in finding the tenant. Given the nature of the breach of the Lease by the Applicant it is reasonable for the Respondents to incur costs of finding a new tenant especially when the term of the lease was for five years and the Applicant had only been in possession for one year. Similarly, as the costs of preparing a lease cannot be passed on under the Retail Leases Act 1994, it is burdensome on the Respondents to have to again bear the costs of lease preparation within the space of 15 months. I allow the claim of $9,890.56.
10. The total claimed and allowed is $78,630.60. Offset to the total allowed is the amount of the bank guarantee of $27,500 and cash left in the premises of $836.40, total $28,336.40. Therefore, the Respondents are entitled to $50,294.20.

Respondents' application for an order for costs

1. The Respondents claim the sum of $29,492.20 being costs incurred up until 29 May 2018 in connection with the default by the Applicant under the Lease and also costs of the proceedings in this Tribunal.
2. As is usual the starting point for any application for costs is that parties to proceedings in the Tribunal are to pay their own costs: see s60 (1) of the Civil and Administrative Tribunal Act, 2013 [NCAT Act]. Subsection 60(2) provides costs are awarded only if the Tribunal is satisfied that there are 'special circumstances warranting an award of costs'. Subsection 60(3) provides various instances of special circumstances warranting an award of costs.
3. Rule 38 of the Civil and Administrative Tribunal Rules 2014 (NSW) relates to costs in this Division of the Tribunal, and says that at Rule (2) despite s60 of the NCAT Act a Tribunal may award costs in the absence of special circumstances warranting such an award if the amount claimed or in dispute in the proceedings is more than $30,000.00.
4. As noted the amount claimed originally by the Applicant and more particularly now by the Respondents is in excess of $30,000.00.
5. The Applicant's case was based solely on the proposition that the Respondents were in breach of their obligations under the Lease, namely clause 12.2.4, required the Respondents to provide 14 days' notice before exercising the right of forfeiting the Lease. On a critical examination of the law, the Tribunal finds that clause 12.2.4 is contrary to the provisions of s129 (10) of the Conveyancing Act, 1919 and the Respondents were entitled to act as they did. Accordingly the Respondents are entitled to their costs as determined.
6. I have no measure as to whether the costs claimed are reasonable however, I note that the Applicant has made no submission on the question of these costs other than to say that costs should follow the cause. Consequently, as I have determined that the Applicant is in default under the Lease, I will allow costs to follow the cause. The Tribunal orders that the Applicant is to pay the Respondents' costs as agreed or as assessed in accordance with the applicable costs assessment legislation.

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 February 2019