City Gym Sydney Pty Ltd v Saipan Holdings Pty Ltd [2022] NSWSC 699 | Case summary

Supreme Court of NSW|2022-05-19|Before: Darke J, Mr P

Introduction

These proceedings concern a sublease of a property at 107 Crown Street, Darlinghurst. The plaintiff is the sublessee and the second defendant is the sublessor. The first defendant is the owner of the property. It gave its consent to the sublease, and acknowledged to the plaintiff that it was bound by its terms.
The sublease was entered into for a five year term commencing on 1 September 2019 and terminating on 31 August 2024. It contains an option to renew for a further term of 5 years.
The parties are in dispute in relation to the defendants' obligations to make good, repair, and maintain the premises, in particular the roof of the building and its air-conditioning system. The plaintiff alleges that the defendants have breached those obligations, causing it to suffer, and continue to suffer, loss and damage. The plaintiff claims various forms of relief, including declaratory relief, orders requiring certain works to be undertaken, and damages.
The defendants deny that the plaintiff is entitled to any of the relief claimed. Whilst it seems to be accepted that the make good obligation in respect of the roof has not been discharged, the defendants contend that this is the result of breaches of the sublease by the plaintiff in unreasonably withholding its consent to the carrying out of works, and in unreasonably denying access to the premises for that purpose.

Summary of salient evidence

The plaintiff operates a gymnasium at the premises. Its occupation of the premises was initially pursuant to a Licence Agreement, entered into with the first defendant, for a 1 year term commencing on 15 August 2017 and terminating on 14 August 2018. The Licence Agreement was varied by a Deed of Variation made on 6 July 2018, which provided for the term to be extended to a date 15 months after completion of a contemplated change in the shareholding of the plaintiff. The Deed of Variation further provided that at the expiration of the extended term, the plaintiff would make good the premises by removing certain items from the premises and allowing various items to remain.
On 4 October 2018 a director of the plaintiff, Mr Andrew Mamasioulas, discovered water leaking out of the ceiling onto the floor of the gym and onto various pieces of gym equipment. Mr Mamasioulas took a number of photographs that show the leaking water.
On 20 December 2018, the building was struck by a hailstorm. Shortly thereafter, Mr Mamasioulas was informed by another director of the plaintiff (Mr Kokkinis) that water was coming through the roof of the gym. There is evidence that suggests that the hailstorm caused significant damage throughout Sydney and other areas.
On 23 February 2019, Mr Mamasioulas attended the premises and again found water leaking from the ceiling of the building. He took a number of photographs, including some that appear to show water damage to a ceiling. A similar incident occurred on 13 March 2019 and, once again, Mr Mamasioulas took some photographs that showed damage to parts of a ceiling. On 24 April 2019, Mr Mamasioulas found that a mirror in the gym had shattered. He said that this occurred because water had seeped in between the mirror and the wall behind it.
Mr Mamasioulas deposed, and I accept, that on 18 June 2019 he had a conversation with two directors of the first defendant, Mr Bill Anderson and Mr Fresno Long, during which he was asked whether the plaintiff would be interested in extending the lease. Mr Mamasioulas said that "if you want us to stay on you will need to fix the leaking roof".
On the following day, Mr Long sent an email to Mr Mamasioulas in which it was stated that "we are interested in extending the lease to City Gym Sydney".
Mr Mamasioulas had another meeting with Mr Anderson and Mr Long on 26 June 2019 about the terms of a new lease. Mr Mamasioulas deposed, and I accept, that in the course of the discussion Mr Anderson said that the leaking roof "is only related to a bit of rusting gutter" and suggested that the repair cost be shared equally. Mr Mamasioulas said that he would need to speak to Mr Kokkinis about that, and that he would "have my roofer come and attend to give me a break down of the gutter repairs".
On 2 July 2019, Mr Mamasioulas sent an email to Mr Long that contained a preliminary offer for a lease for 10 years plus 5 years. Later on 2 July 2019, Mr Long responded by email, stating that at that stage the first defendant was only willing to offer a 6 month lease extension "with same terms as the existing lease". However, on 5 July 2019, Mr Long sent an email to Mr Mamasioulas that contained proposed terms for a 5 year lease with an option for a further 5 year term.
On 9 July 2019, Mr Mamasioulas sent an email to Mr Long that set out the plaintiff's proposed terms for a lease for 5 years with two 5 year options. The email included the following: I have also thoroughly gone through your valuation and it has many variables to achieve the rental rate it states. We both understand that there [sic] a lot of money to be spent on the building to achieve this which would not be viable for both parties. In saying that I believe the offer is fair and reasonable based on the size and the condition of the building. It is a long term lease offer with no contribution offered but the offer we have submitted below takes a lot of this into account.
The negotiations continued. Mr Mamasioulas sent a further lease proposal to Mr Long on 15 July 2019. The proposal includes the following, under the heading "Premises Condition": The Premises shall be provided made good, i.e. Building to be made water tight and compliant with authority bodies. Lessee to maintain premises. Lessee to undertake AFFS.
In that regard, Mr Long's response, sent later that day, was a request for the proposal to be amended to include: Maintain whole building - inside, outside including air-conditioning and fire certificate as Lessee responsibility (lessor not responsible for anything).
Mr Mamasioulas sent a revised version of the proposal later on 15 July 2019 that incorporated the suggested amendment.
On 16 July 2019, Mr Long suggested further amendments to the proposal. His email also included the following: Once you receive the report for the roof please send it through and we can make a plan for it moving forward.
By 24 July 2019, the proposal, under the heading "Premises Condition", was in the following terms: The Premises shall be provided made good by Lessor, including that repairs to the leaking roof be rectified prior to commencement, and Premises to be otherwise made water tight and compliant with all requirements of relevant authorities for the term of the lease. Lessee to maintain premises following make good. Lessee to obtain AFFS and be responsible for the maintenance of the premises both inside and outside and including air-conditioning and fire certificate.
On 25 July 2019, Mr Long requested a further amendment to the proposal under the heading "Premises Condition", to include: 50% cost split between lessor and lessee for roof.
On about 20 August 2019, Mr Grant Perry of Perry's Roofing Pty Ltd carried out an inspection of the roof of the building. It seems that Mr Mamasioulas organised the inspection, and took Mr Perry up to the roof area. He deposed that he noticed hail damage to the roof and to the air-conditioning units situated on the roof. Mr Mamasioulas took a number of photographs of what he observed.
Mr Perry prepared a report that is stated to have been requested by Mr Long. The first defendant is nominated in the report as the client. I note that in cross-examination Mr Mamasioulas said that it was a short report that he and Mr Long had spoken about. A number of photographs are attached to the report. The report includes the following: Report findings Upon inspection of the roof, it was noted that hail damage was to be found on all roof sheeting, flashings, skylights and gutters Recommendations Replace entire roof Conclusion This is considered storm related and considered related to the December 2018 hailstorm as this was not hail damaged during a previous repair 6 months prior General condition of entire roof area Sustainable How many stories high 3-4 storey Roof pitch 7-25 degrees Type of roofing material Zincalume Custom Orb
On 22 August 2019, Mr Mamasioulas sent a copy of the Perry's Roofing Pty Ltd report to Mr Long. The covering email stated: If you require any further assistance with regards to the above, please do not hesitate to contact me.
Mr Mamasioulas deposed, and I accept, that on about 27 August 2019 he had a telephone conversation with Mr Long in which Mr Long requested that, instead of a lease, the plaintiff enter into a sublease with the second defendant, who would have a headlease from the first defendant. Mr Mamasioulas said that this did not seem like a problem, but that he would seek advice about it.
It is clear that by about that time both sides had retained their own solicitors in relation to the transaction. These were Alan Rigas Solicitors ("Rigas") for the plaintiff, and Creagh & Creagh Solicitors ("Creagh") for the defendants. By 29 August 2019 a draft sublease had been prepared and sent by Creagh to Rigas.
On 9 September 2019, Rigas sent an email to Creagh in relation to the draft sublease. The draft sublease is not in evidence, but it is apparent that Item 22 of the schedule to the draft concerned "Condition of Premises". The email sent by Rigas included the following: In relation to Item 22 - this clause needs to be amended. We are instructed that the roof is to be repaired pursuant to an insurance claim to be made by the lessor.
Later on 9 September 2019, Mr Long sent an email to Mr Mamasioulas which included the abovementioned email from Rigas to Creagh. Mr Long's email included the following: And for the insurance claim for the roof, excess to be split 50/50 as discussed on phone. Also there should be a contingency in the event that the insurance claim somehow does not go through then we would still go as per the original agreement of splitting the repair cost 50/50.
On 17 September 2019, Creagh sent an email to Rigas that attached an amended form of sublease. The email included the following: We confirm that our client Saipan Holdings Pty Ltd consents to this Sub Lease from City Gym (Aust) Pty Limited to your client and shall acknowledge and be bound by the terms of the Sub Lease.
The draft sublease sent on 17 September 2019 contained Item 22 in the following terms: Item 22 Condition of Premises The Premises shall be provided made good by the Lessor, including that repairs to the leaking roof be rectified by the Lessor pursuant to an insurance claim to be made by the Lessor prior to commencement, and the Premises to be otherwise made water-tight and compliant with all requirements of relevant authorities for the term of the Leas[e]. The Lessee will pay 50% of the actual direct costs of rectification of the leaking roof upon provision of invoices from the Contractor. Contractor to be approved by the Lessee prior to engagement by the Lessor, including terms of Contract. The Lessee is to maintain the premises following making good. Lessee to obtain AFFS and be responsible for the maintenance of the premises both inside and outside and including air conditioning and fire certificate. The Schedule to the sublease that was ultimately executed contained Item 22 in those terms.
The sublease, in its final form, was sent by Rigas to Mr Mamasioulas on 2 October 2019. Mr Mamasioulas and Mr Kokkinis signed the sublease on behalf of the plaintiff (and as guarantors of the plaintiff's obligations) on about 3 October 2019.
As already mentioned, the sublease provides for a 5 year term terminating on 31 August 2024, with an option for a further term of 5 years. The sublease incorporates the provisions of Annexure B (which contains 18 printed clauses), Annexure A (which contains the schedule consisting of Items 10 to 34), and Annexure C (which specifies items to be removed or to remain at the conclusion of the tenancy).
In addition to Item 22, which is set out above at [28], reference should be made to Item 23 which is in the following terms: Item 23 Access to Premises Access to the premises to commence repair and renovation works and provision of the following from the Lessee: Lessor approved and correctly executed lease by the Lessee; 1 Month Bank Guarantee or Bond Required insurance Certificate of Currency in relation to requirement for $20 million public liability insurances.
Access to the property by the lessor is also the subject of printed cl 9 which provides: CLAUSE 9 ACCESS What are the lessor's rights of access to the property? 9.1 The lessee must give the lessor (or anyone authorised in writing by the lessor) access to the property at any reasonable time for the purpose of - 9.1.1 inspecting the condition of the property, or how it is being used; or 9.1.2 doing anything that the lessor can or must do under this lease or must do by law; or 9.1.3 viewing the property as a valuer, prospective buyer or mortgagee; or 9.1.4 fixing a notice in a reasonable position on the outside of the property saying that it is for sale; or 9.1.5 viewing the property as a prospective lessee not earlier than 6 months before the lease period ends; or 9.1.6 fixing a notice not earlier than 6 months before the lease period ends in a reasonable position on the outside of the property saying that it is to let; or 9.1.7 inspecting, cleaning or repairing another property or any services to another property. 9.2 The lessor must give the lessee at least 2 days written notice for access (except in an emergency). The day of the giving of the notice and any Saturday, Sunday or public holiday on which the property is not open for business are not counted. 9.3 The lessor must promptly make good any damage caused to the property and to any of the lessee's belongings which results from exercising these rights. 9.4 The lessee must give to the lessor a copy of any notice relating to the property or relating to any neighbouring property immediately after receiving the notice.
Finally, reference should be made to printed cll 7.1 and 7.2 which are in the following terms: CLAUSE 7 CONDITION AND REPAIRS Who is to repair the property? 7.1 The lessor must - 7.1.1 maintain in a state of good condition and serviceable repair the roof, the ceiling, the external walls and external doors and associated door jambs, and the floors of the property and must fix structural defects; 7.1.2 maintain the property in a structurally sound condition; and 7.1.3 maintain essential services. 7.2 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.
On 28 October 2019, Rigas sent to Creagh the signed sublease, a cheque for registration of the sublease, a certificate of currency for public liability insurance of $20 million, and a bank guarantee in the sum of $41,250 (representing one month's rent plus GST).
On 20 November 2019, Mr Mamasioulas sent an email to Mr Long, enquiring as to how he was going with the insurance claim for the roof. Mr Long responded by email later on 20 November 2019 in the following terms: Yes we've filled out the claim request form for Pen Insurance and submitted the report that you provided on the 20/08/19. I'll let you know as soon as I hear anything.
Mr Mamasioulas, in his response, reminded Mr Long that there were also damaged air-conditioning units on the roof.
It can be inferred that the report referred to in Mr Long's email is the report of Perry's Roofing Pty Ltd that contained the recommendation that the entire roof be replaced.
The claim form (issued by Pen Underwriting) that was filled out by Mr Long is dated 20 November 2019, and is signed by him on behalf of the first defendant as the insured. Under the sub-heading "Incident Details", Mr Long wrote that damage occurred in December 2018. His description of what happened was as follows: Hail storm caused damage to roof sheeting, flashings, skylights and gutters.
Mr Long wrote that the damage had been discovered by Grant Perry - roof specialist, on 20 August 2019. Some of the questions on the claim form were left unanswered by Mr Long, including the question - "Is the property repairable?"
The claim form, together with the Perry's Roofing Pty Ltd report, was sent by Mr Goble of Quattrorisk to a claims handling entity on 25 November 2019. It is apparent from the subject line of Mr Goble's email that he regarded the claim as arising from the hailstorm that struck Sydney and other areas on 20 December 2018.
On 2 December 2019, Mr Goble sent an email to Mr Long to inform him that YDR Loss Adjusters had been appointed to assist the insurer with the assessment of the claim. It seems that at about that time an inspection of the roof was arranged for 5 December 2019. It also appears that on 10 December 2019, Advanced Buildings (NSW) Pty Ltd ("Advanced") attended the property in order to prepare a quotation. Advanced subsequently produced a quotation, dated 5 February 2020, in respect of both roofing and air-conditioning works in a sum of $280,200 plus GST (i.e, $308,220).
On 9 February 2020, Mr Mamasioulas attended the building and found that there was water falling out from the light fittings and the ceiling. Once again, Mr Mamasioulas took some photographs of what he observed.
On 10 February 2020, Mr Mamasioulas spoke to Mr Long about the roof leaks and progress with the insurance claim. On 11 February 2020, Mr Long sent an email to Mr Goble, enquiring as to the status of the claim. On 13 February 2020, Mr Goble (now at Steadfast) sent an email to Mr Long in which he stated that the claims handler was "awaiting a further report from the builder with respect to the air conditioning". Mr Long forwarded the email to Mr Mamasioulas.
On 18 February 2020, Mr Mamasioulas attended the building. He found that there was water falling out from light fittings and the ceiling, and again took some photographs of what he observed. These included photographs showing damage to the flooring.
On 26 February 2020, Mr James Wallace of Steadfast sent an email to Mr Long about the progress of the claim. It appears from the email that the loss adjuster had submitted a report to the insurer and had recommended "acceptance and approval of the roof repairs and an allowance for the costs of the Air-Conditioners". Mr Long forwarded the email to Mr Mamasioulas on the same day.
On 4 March 2020, Mr Mamasioulas attended the building and, once more, found water falling out of light fittings onto the floor in several locations on the ground and second floors of the gym. Again, Mr Mamasioulas took some photographs of what he observed.
On 9 March 2020, Mr Mamasioulas sent to Mr Long a mechanical assessment report, servicing reports, and a quotation, all from Atlasair, in respect of the air-conditioning.
On 17 March 2020, Mr Goble sent an email to Mr Long in which he advised that the assessor had confirmed that: …the roof replacement and removal of the air conditioning units are covered but that the actual replacement of the air conditioning units would not be covered as this is a maintenance issue as the damaged units were old and dilapidated. We await the insurer's response, which is expected in the next day or so, and we will provide their formal advices on receipt. Mr Long forwarded the email to Mr Mamasioulas.
Mr Mamasioulas took issue with the notion that the air-conditioning units were a maintenance issue, given that they were working before the hail damage and now "don't work and have errors".
However, on 19 March 2020, Mr Goble was advised that the insurer had agreed to accept the claim in the following manner: Roof replacement and cost to remove A/C units only (with actual replacement of the units excluded) Re-install of A/C units if the insured decides to keep the current units in place Mr Goble was further advised that as the current estimate for repairs had been set at $308,220 (including GST and builder's margin), the insurers wanted to see a comparative quote before deciding how to proceed, and that Johns Lyng Group had been contacted to provide the quote. Mr Goble forwarded the above advice to Mr Long on 26 March 2020.
I note that at about that time, the onset of the COVID-19 pandemic, and the introduction of Public Health Orders in response, caused significant disruption to the plaintiff's operations, and there was concern about its ability to pay the rent under the sublease.
On 6 May 2020, Johns Lyng Group prepared a quotation/scope of works in respect of roof works in a sum of $198,500 plus GST (i.e, $218,350). The quotation/scope of works allowed, inter alia, for the removal and replacement of approximately 1000m2 of roofing.
On 15 May 2020, Mr Goble sent an email to Mr Long in which it was stated that the insurer's response "as to repairs being authorised or a cash settlement being offered" should be known in the next week or so. Mr Long forwarded the email to Mr Mamasioulas.
On 21 May 2020, Mr Goble was advised that the insurer had accepted the claim and approved the following two options: Cash settlement for [$]196,000.00 (excluding GST and Nett policy excess $2,500.00) Authorise repairs to Johns Lyng Group
Whilst the evidence is not entirely clear, it seems that by 25 May 2020, Mr Goble had advised Mr Long of the approval given by the insurer. Mr Goble sent a copy of the Johns Lyng Group quotation/scope of works to Mr Long on 25 May 2020. In his covering email, he stated that he was "looking forward to your advices in due course". Mr Long forwarded the quotation/scope of works to Mr Mamasioulas and asked him for his views. At about that time, Mr Long also received from Mr Goble a copy of the Advanced quotation, and a report of YDR Loss Adjusters dated 8 May 2020. It appears (from an email dated 11 June 2020 from Mr Wallace to Mr Long) that Mr Long provided at least the Advanced quotation to Mr Mamasioulas.
On 15 June 2020, Mr Long sent an email to Mr Wallace which included the following: Settlement based on the Advance Building [sic] Quote would be acceptable, other than the Air Conditioning clarification that is still required, we believe that everything is sufficient to cover repairs.
However, on 25 June 2020, Mr Wallace advised Mr Long that the assessor had submitted the Advanced quote to Johns Lyng Group "to be quoted".
Johns Lyng Group prepared a quotation dated 2 July 2020 in a sum of $265,500 plus GST (i.e, $292,050). The scope of works upon which the quotation is based seems to involve removal and replacement of the entire roof (i.e, both the skillion roof and gable roof components). An amount of $12,600 is included for the cost to remove 9 air-conditioning units that are attached to the roof. No other amount pertains to the air-conditioning system. The scope of works therefore appears to concern only the roof replacement component of the claim.
On 9 July 2020, Mr Wallace advised Mr Long that he was still waiting for "approval of the cash settlement for the roof". Later on 9 July 2020, Mr Long sent an email to Mr Mamasioulas, asking whether he had had "a chance for your company to prepare a quote for the roof repair", and when such a quote could be expected. The reference to "your company" is a reference to a building company associated with the Mamasioulas family and known as Riverwall Constructions Pty Ltd ("Riverwall").
On 10 July 2020, Mr Wallace advised Mr Long that a settlement based on the Johns Lyng Group quotation, less GST and deductable of $2,500, would be $263,000 for "this component".
On 23 July 2020, Mr Long signed a document on behalf of the first defendant that provided for a payment of $263,000 in partial settlement of the claim. On 28 July 2020, Mr Wallace informed Mr Long that he had received confirmation of settlement of the roof portion of the claim. Presumably, the payment of $263,000 was made to the first defendant shortly thereafter.
I note that Mr Mamasioulas gave evidence that he was not told that $263,000 had been received on account of the roof repairs. Further, Mr Long could not recall speaking to Mr Mamasioulas about that amount, and seemed to accept that he did not do so.
The air-conditioning component of the claim remained unresolved. It appears that an air-conditioning consultant attended the building on 4 August 2020 and prepared a report for the loss assessor. However, the report was considered to be inadequate, and a revised report was thus requested. This caused delay in the finalisation of the claim. Ultimately, and for various reasons, the air-conditioning component of the claim was not settled until early March 2021 when the first defendant agreed to accept a payment of a further sum of $135,000.
In the meantime, on 26 August 2020, Riverwall prepared a quotation, in respect of roof replacement and associated works, in a sum of $283,718 (including GST). The quotation was thereafter provided to Mr Long.
On 14 September 2020, Mr Long sent an email to Mr Mamasioulas in the following terms: Thanks for sending the quote through, we appreciate all the work that has gone into it. Reading through the exclusions, this leaves this quote open to all sorts of issues, we require a fixed price that covers all exclusions and allowances As mentioned previously we are also exploring the option of a watertight patch rather than an entire roof replacement, would you be interested in quoting for this? What payment terms can you offer us, deposit (25%) the balance amortised over 24 months paid monthly?
A meeting was held at Bondi Junction on 8 October 2020 between Messrs Mamasioulas, Long and Anderson. Various issues were discussed in relation to the building and the sublease, including the payment of rent and the repair of the roof. Mr Mamasioulas deposed in his first affidavit that on the latter subject there was a conversation to the following effect: Mr Mamasioulas: Our biggest concern is that the gym is constantly losing members because the air conditioning has failed so it is too hot in the gym and the roof is leaking. Mr Anderson: We don't have enough money to fully repair the roof at the moment, we want to do a temporary fix. Mr Mamasioulas: The roof is in too bad of a state, wait until you get you get [sic] your insurance money and then do a full replacement of the roof. Mr Anderson: Yeah, no worries. What are you going to do about the rent? … (Mr Mamasioulas gave further evidence about this meeting in his second affidavit, made in reply to Mr Long's affidavit.)
After the meeting, Mr Long sent an email to Mr Mamasioulas containing his notes (arranged under four subject headings) of what had been discussed. Under the heading "Air-Con/Roof Repair" the notes included the following: Tenant advised against a roof patch as a roof leak with the current design is impossible to mitigate, will check to see what guarantees can be offered by builder in this regard. Risk is with the flashings and box gutter Andy [Mamasioulas] to check to see what can be done to firm up quote from Riverwall for roof replacement, if not roof replacement then a patch will be the path as there is not sufficient funding
When asked about the Riverwall quote in cross-examination, Mr Mamasioulas stated that he had "stood by" the quote, and did not come back with another one. Mr Mamasioulas also stated that by the time of the meeting he knew that the defendants had been paid by the insurer, or at least that a settlement was happening.
On 14 October 2020, Mr Long sent an email to Mr Mamasioulas in the following terms: We have engaged Timbertek to carry out roof repair works to rectify leaks in to the building, we've been waiting for the revised quote from Riverwall but cannot delay the works any longer. The planned works include: Replacement of damaged roof panels Remove and replace roof ventilators Flashings around skylights Roof Plumbing The works should take approx. 2 weeks and will commence on 19th of October and access will be required to relevant areas. I have advised the builder to minimise disturbance to the gym. Please feel free to contact me if you have any queries.
Mr Mamasioulas promptly responded by email in the following terms: Sorry Fresno. At this point we have not agreed to this. You guys are obviously not taking the matter seriously. Please do not have anybody to attend the premises until we have finalised all matters. Discuss this further next week. If you require any further assistance, please do not hesitate to contact me. Mr Mamasioulas gave an answer in cross-examination to the effect that he refused access for Timbertek because the proposed works were not in accordance with the provisions of the sublease.
I observe here that the impasse between the parties concerning the extent of works required to repair the roof has never been resolved. The plaintiff has essentially maintained that an entire replacement of the roof is required, whereas the defendants have essentially maintained that it is sufficient if repairs of a lesser magnitude are carried out, provided they make the roof watertight. The subsequent dealings between the parties concerning access to the premises must be considered in light of this impasse.
It is convenient to consider the meaning and effect of Item 22 of the sublease before turning to consider whether the plaintiff has unreasonably withheld its consent to the carrying out of works or access to the premises for that purpose.

The meaning and effect of Item 22 of the sublease

The principles to be applied when construing a written commercial agreement such as the sublease are those that have been stated in recent years by the High Court in cases such as Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35], Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52], and Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16]. Accordingly, the meaning of the terms of a contract is to be determined objectively, by what a reasonable business person, placed in the position of the parties, would have understood the terms to mean.
As stated in Electricity Generation Corporation v Woodside Energy Ltd (supra) at [35], the Court is required to consider: …the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties … intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". (footnotes omitted).
It may be added that a commercial contract should be construed as a whole, and, if possible, so as to render its terms harmonious (see Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109).
It is appropriate to commence by examining the language of Item 22 which, for convenience, is again set out below: Item 22 Condition of Premises The Premises shall be provided made good by the Lessor, including that repairs to the leaking roof be rectified by the Lessor pursuant to an insurance claim to be made by the Lessor prior to commencement, and the Premises to be otherwise made water-tight and compliant with all requirements of relevant authorities for the term of the Leas[e]. The Lessee will pay 50% of the actual direct costs of rectification of the leaking roof upon provision of invoices from the Contractor. Contractor to be approved by the Lessee prior to engagement by the Lessor, including terms of Contract. The Lessee is to maintain the premises following making good. Lessee to obtain AFFS and be responsible for the maintenance of the premises both inside and outside and including air conditioning and fire certificate.
The provision can be broadly seen to fall into two parts. The first part imposes a make good obligation upon the Lessor. The second part, which consists of the final two sentences, imposes maintenance obligations (including in relation to air-conditioning), and obligations in respect of fire safety, upon the Lessee.
The opening words in Item 22 state that the Premises "shall be provided made good by the Lessor". Those words suggest that the obligation is to be satisfied by, or at least within a reasonable time after, the commencement of occupation of the Premises pursuant to the sublease. This is further suggested by the terms of Item 23. Item 23 contemplates that access to the Premises to undertake the repair and renovation works can occur once the Lessee binds itself to the sublease and provides the bank guarantee that is required by the commencement date (see cl 16.2) and evidence of compliance with its obligation to maintain public liability insurance (see cl 8.1.1).
The next words in Item 22 indicate that the make good obligation includes the undertaking of certain works to the leaking roof. It is apparent that something has gone awry with the language, insofar as reference is made to repairs to the roof being rectified, rather than the roof itself being rectified. I think that the words "repairs to" may be read down, even if they cannot be entirely disregarded as erroneous inclusions that would, if read literally, give rise to absurdity (see Fitzgerald v Masters (1956) 95 CLR 420 at 426-7 and 437). There is no suggestion in the evidence that the parties were concerned with deficiencies in particular repairs to the roof as opposed to deficiencies in the roof as a whole. If the words "repairs to" are read down so as not to be regarded as that which is to be rectified, the language makes sense by providing that the make good obligation includes a requirement that the leaking roof be rectified by the Lessor. Reading the provision as a whole, that seems more likely to be what was intended. The language is clear, however, in stipulating that the leaking roof be rectified "pursuant to an insurance claim to be made by the Lessor prior to commencement". That is to say, rectified in accordance with or in conformity with the contemplated insurance claim. I do not accept the defendants' submission that "pursuant to" should be read as "subject to".
The circumstances in which the sublease was entered into suggest that the parties contemplated that an insurance claim would be made for the replacement of the entire roof, as recommended by Perry's Roofing Pty Ltd. All parties were of course aware that the roof was in poor condition and that water often leaked into the Premises as a result. Moreover, by about 22 August 2019, the parties were aware of the Perry's Roofing Pty Ltd report. They were thus aware of: 1. the finding that hail damage (related to the December 2018 hail storm) was found on all roof sheeting, flashings, skylights and gutters; and 2. the recommendation that the entire roof be replaced. Mr Long gave evidence to the effect that the extent of the effects of the December 2018 "hail event" was not recognised until that inspection of the building had occurred. It seems clear that, by 9 September 2019, the parties had discussed the making of an insurance claim, and agreed that a claim would indeed be made by the Lessor. I think it can be inferred that the parties contemplated that the claim would be based upon the information contained in the Perry's Roofing Pty Ltd report in respect of storm damage to the roof. No other basis for a claim is apparent, and I note again that the report itself, which had been the subject of discussion between Mr Mamasioulas and Mr Long, is stated to have been prepared for the first defendant, at the request of Mr Long.
The concluding words of the first sentence of Item 22 indicate that, apart from rectification of the leaking roof pursuant to the insurance claim, the Premises were otherwise to be made water-tight and compliant with the requirements of relevant authorities.
The second sentence of Item 22 provides for the Lessee to bear half of the "actual direct costs of rectification of the leaking roof". Read in the context of an obligation to rectify pursuant to an insurance claim, the expression "actual direct costs" seems to me to refer to any direct costs of rectification incurred by the Lessor that are, for whatever reason, not covered by any proceeds of the insurance claim and hence actually borne by the Lessor.
The third sentence of Item 22 provides that any contractor proposed to be engaged by the Lessor to carry out rectification of the leaking roof, and the terms of the proposed contract, are to be approved by the Lessee prior to the engagement.
The opening words of the second part of Item 22 seem to me to provide that the maintenance obligations imposed upon the Lessee by Item 22 only arise once the Lessor has discharged its make good obligations under Item 22.
The central matter of controversy in this case concerns the extent of the Lessor's make good obligation in respect of the roof. The language of Item 22, read in the context of the sublease as a whole, and having regard to the surrounding circumstances known to both parties, obliged the Lessor, within a reasonable time after commencement of occupation under the sublease, to rectify the leaking roof in accordance with or in conformity with an insurance claim to be made by the Lessor for the replacement of the entire roof. In my view, the nature of the contemplated insurance claim, being for a replacement of the entire roof, serves to give content to the ambit of the rectification obligation.
It is true, as submitted by the defendants, that Item 22 does not include any express reference to replacement of the roof as opposed to repair, and it would have been a simple matter to do so. Nevertheless, the relevant expression focusses upon rectification pursuant to a contemplated insurance claim. In my opinion, reasonable businesspersons in the position of the parties to the sublease would have understood the expression to mean rectification in accordance with or in conformity with a claim for the replacement of the entire storm damaged roof. The obligation is thus one to effect a replacement of the entire roof. That is the obligation regardless of the fate of the insurance claim itself. If the claim were to fail, or generate proceeds that were not sufficient to cover the cost of the work, the direct cost actually borne by the Lessor is to be borne equally by the Lessee.
In reaching this conclusion concerning the construction of Item 22, I have not taken into account that, after the sublease was entered into, the insurance claim in fact made by the first defendant was essentially for a replacement of the entire storm-damaged roof (viz, roof sheeting, flashings, skylights and gutters), and that the claim was treated that way by the insurer (see Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [35]).

Breach of Item 22 of the sublease

The plaintiff alleges that the second defendant (as the Lessor under the sublease) and the first defendant (pursuant to a collateral contract whereby it agreed to be bound by the terms of the sublease) breached the obligation in Item 22 to rectify the leaking roof within a reasonable time. I have concluded that the plaintiff has established those breaches.
Based on the construction of Item 22 which I favour, the Lessor was obliged to effect a replacement of the entire roof within a reasonable time after the commencement of occupation pursuant to the sublease. The defendants do not seem to dispute that the obligations of the Lessor under Item 22 were required to be carried out within a reasonable time.
There is no doubt that the Lessor has failed to effect a replacement of the entire roof. The Lessor did not seek to have such works carried out. That is so even after it became apparent that the insurance claim in that regard had been accepted, and even after the first defendant received a payment of $263,000 in settlement of that part of the claim. It seems it would have been open to the first defendant instead to authorise Johns Lyng Group to carry out the works, but a cash settlement was preferred. Once the payment of $263,000 had been received, it was unreasonable for the Lessor to not proceed with alacrity to have the works carried out.
By that time, a request had been made to the plaintiff to provide a quotation from Riverwall. That quotation does not appear to have been received until about 8 September 2020. However, if the Lessor found that quotation unacceptable, as seems to be the case, it was nonetheless required to take steps to obtain an alternative contractor to carry out the works. The defendants instead proposed to do works of a lesser scope, described by Mr Anderson as a "temporary fix" and by Mr Long as a "roof patch". When it was proposed on 14 October 2020 that Timbertek would carry out such works, the plaintiff was entitled to regard that course as not in accordance with what was required by Item 22. It was not unreasonable for the plaintiff to decline to give its approval to Timbertek to carry out such works. (The extent of works proposed to be carried out by Timbertek is reflected in a quotation dated 31 August 2020 that was provided to the first defendant for a sum of $22,055.)
In my opinion, and taking into account the estimated time to complete repairs as stated in the Riverwall quotation dated 28 August 2020, a reasonable time for the carrying out of the roof works required by Item 22 had expired by no later than the end of November 2020.
The second defendant, as the Lessor under the sublease, thereby breached Item 22. The first defendant admits that it entered into a collateral contract with the plaintiff, but denies that it was a term of the collateral contract that it would be bound by the terms of the sublease as if it were the lessee. The denial may be the product of the plainly erroneous reference to "lessee". In any case, it is clear that the first defendant requested that the plaintiff enter into the sublease with the second defendant, and in those circumstances agreed with the plaintiff that it would be bound by the terms of the sublease. That should be understood as an agreement on the part of the first defendant to be bound as if it were the Lessor. I therefore conclude that the Lessor's breach of Item 22 also constitutes a breach by the first defendant of its collateral contract with the plaintiff. In summary, both defendants have obligations to the plaintiff in the terms of Item 22, and both defendants have breached those obligations.
The defendants have never accepted the proposition, maintained by the plaintiff, that the make good obligation in respect of the roof requires an entire replacement of the roof. Moreover, the defendants have never sought access to the premises for the explicit purpose of obtaining a quotation or scope of works for the replacement of the roof. Neither have the defendants proposed a contractor for the carrying out of such works, or sought the plaintiff's approval for such a contractor (and the terms of the contract). In these circumstances, I do not think it can be concluded that any failure on the part of the plaintiff to allow access to the premises or give any relevant approval is a breach of the contract or otherwise conduct that has prevented the defendants from performing their make good obligations in respect of the roof.

Other alleged breaches of the sublease

The plaintiff also alleges breach of a term to the effect that until the Lessor performs its make good obligations under Item 22, it is required to maintain the air-conditioning in a state of good condition and serviceable repair. The term is said to arise on the proper construction of Item 22, or alternatively should be implied to give business efficacy to the sublease.
I do not agree that the term arises on the proper construction of Item 22. It is true that the plaintiff's maintenance obligations with respect to air-conditioning under Item 22 do not arise until after the Lessor has performed its make good obligations. However, it does not follow that, until that time, a maintenance obligation with respect to air-conditioning falls upon the Lessor under Item 22. I would not construe Item 22 in that way. Rather, any obligations upon the Lessor with respect to air-conditioning would need to be found elsewhere (for example, under cl 7.1). Nor do I agree that a term should be implied as submitted by the plaintiff. The suggested term is in my view neither necessary nor obvious, and it might contradict cl 7.1 (see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347).
The plaintiff further alleges that the failure of the Lessor to perform its make good obligations under Item 22 also constitute breaches of cll 7.1.1 and 7.1.2 of the sublease. Those provisions are set out above at [33]. Those provisions, and Item 22, must of course be read together as part of the sublease as a whole. I doubt that it was the intention of the parties that any breaches by the Lessor of the more specific Item 22 could also amount to breaches of the general provisions of cl 7.1. In any case, it is not necessary to determine that question. I have concluded that the Lessor's obligation under Item 22 to rectify the leaking roof has been breached, and it was not suggested that the relief the Court might give in respect of that breach would be affected if the Lessor's failures were also breaches of those other provisions of the sublease.

Relief

I turn now to consider what, if any, relief should be granted to the plaintiff as a result of the breaches it has established.
When the proceedings were commenced, by Statement of Claim filed on 24 March 2021, the primary relief sought was damages against each defendant. However, by an Amended Statement of Claim (filed pursuant to leave granted at the commencement of the hearing), and a Further Amended Statement of Claim (filed pursuant to leave granted on the third day of the hearing), the primary relief sought has become declaratory relief, coupled with orders in the nature of specific performance or orders in the nature of mandatory injunctive relief to compel the defendants to perform their contractual obligations. The plaintiff suggested that in those circumstances, questions concerning damages should perhaps be deferred. It is fair to say that there was some lack of clarity at the hearing as to the status of the damages claims, but ultimately it appeared to be accepted by both parties, and indeed the Court, that it would be appropriate to defer questions concerning damages.
It therefore remains necessary to consider the extent to which declaratory relief or orders to compel performance should be granted in respect of the breaches of the obligation in Item 22 to rectify the leaking roof.
The plaintiff submitted that in the circumstances of this case, the most appropriate relief which should be granted is an order in the nature of an injunction in mandatory form that the defendants perform their respective obligations under Item 22. The plaintiff accepted that the relief is discretionary, and will only be granted if damages are not an adequate remedy. The plaintiff submitted that damages is a manifestly inadequate remedy because water will continue to come into the premises and interfere with its business until the roof is rectified as contemplated by Item 22, and it is a mere tenant lacking the right to carry out such works itself. The plaintiff referred to a decision of Hammerschlag J in 711 Hogben Pty Ltd v Tadros [2018] NSWSC 628 where his Honour decreed specific performance against a landlord at the suit of a tenant in respect of an outstanding obligation to carry out works in accordance with a certain plan. The plaintiff recognised that there is no equivalent plan in this case, but submitted that this is not an insurmountable problem given that expert evidence was adduced as to what works are required in order to rectify the leaking roof so that it complies with applicable standards. The plaintiff further submitted that declaratory relief which identifies the content of the roof rectification required under Item 22 would itself be of great commercial utility to the parties.
The defendants submitted that, although specific performance may be ordered to require a landlord to perform repair obligations, the Court will not do so unless the work is so defined in the contract that a sufficiently precise order can be made. The defendants submitted that Item 22 fails to identify with any precision what work is to be carried out or how such work is to be carried out. The defendants further submitted that it is not open to the Court to order specific performance by reference to specifications that did not form part of the sublease, or could not have been in the contemplation of the parties at the time it was entered into. In addition, in relation to the orders sought in the nature of specific performance or mandatory injunctive relief, the defendants raised discretionary defences based on failures by the plaintiff to pay all of the rent due under the sublease, and failures by the plaintiff to provide access to the premises as required under the sublease.
Whilst maintaining their opposition to the grant of any relief, the defendants suggested forms of declaratory orders in the event the Court decided that declaratory relief was appropriate. In that regard, some common ground was shared with the declaratory relief claimed by the plaintiff in the Further Amended Statement of Claim.
In my view, in circumstances where the Court has determined that, upon the true construction of Item 22, the Lessor's make good obligation in respect of the roof requires the replacement of the entire roof (i.e, all roof sheets, flashings, skylights and gutters), it is appropriate to give declaratory relief to that effect. Further, given the apparent agreement between the parties concerning the standards that would apply to such works, the declaratory relief ought to include a description of those standards. A declaration will also be made to the effect that, pursuant to a collateral contract between the plaintiff and the first defendant, the first defendant agreed to be bound by the terms of the sublease, including Item 22.
In addition, I consider it appropriate to make orders that the defendants proceed forthwith to perform their outstanding obligations under Item 22 in respect of the roof. A reasonable time for the performance of those obligations has long since passed, and the present condition of the roof leaves the premises vulnerable to significant inundation. The orders I propose will essentially provide for the defendants, within 28 days, to provide to the plaintiff for its approval, the name of a proposed contractor for the undertaking of the roof replacement works, and the terms of the proposed contract. The order will stipulate that such approval is not to be unreasonably withheld. I consider that orders of that character are sufficiently certain, and I do not see any good reason why the Court should, in its discretion, withhold such relief.
It strikes me that damages is in the circumstances of this case an inadequate remedy. The failures of the defendants to discharge their obligations under Item 22 have caused substantial inconvenience to the plaintiff and disruption to its activities, and will almost certainly continue to do so for as long as those obligations remain unperformed. I do not think that either of the discretionary matters raised by the defendants affords a firm basis to decline the relief. The position concerning the rent under the sublease is presently unclear, as it seems that the process of negotiation that is provided for in the COVID-19 pandemic special provisions, contained Schedule 5 of the Conveyancing (General) Regulation 2018 (NSW), has not concluded. I accept that there have been occasional difficulties for the defendants in obtaining access to the premises. However, many of these problems stem from the conflicting views of the parties concerning the content of the make good obligation in respect of the roof. I have held in favour of the plaintiff on that issue. On other occasions, the problems with access appear to be related to the need for the plaintiff, as the operator of a gymnasium, to adhere to various requirements imposed by public health orders (see, for example, the letter from Gilbert & Tobin to Creagh dated 14 September 2021). Viewing the matter overall, including the voluminous documentary evidence and the evidence given by Mr Mamasioulas in cross-examination, I do not think that the defendants have established any clear breaches by the plaintiff of the access provisions of the sublease (cll 9.1 and 9.2), whether in relation to the rectification of the roof, or otherwise.
I appreciate that the defendants, in order to comply with the order described above, may need to obtain access to the premises for the proposed contractor. However, as the central matter in dispute (concerning the content of the make good obligation in respect of the roof) has now been determined, there is no reason to think that any difficulties will arise in the obtaining of such access in accordance with the provisions of the lease. I see no present need for orders in relation to access, or orders in relation to payment by the plaintiff of any of the costs of the works to be carried out.
As noted earlier, all questions concerning the plaintiff's claims for damages will be deferred to a later hearing. As for costs, there seems to be no reason why the usual rule, that costs follow the event, should not apply. Accordingly, it is appropriate that an order be made that the defendants pay the plaintiff's costs of the proceedings to date.
The Court will make the following orders: 1. Declares that upon the true construction of Item 22 of the sublease entered into between the plaintiff and the second defendant in respect of the property known as 107 Crown Street, Darlinghurst, NSW (Folio Identifier 1/68144), the Lessor's make good obligation in respect of the roof requires: 1. that the entire roof (i.e, all roof sheets, flashings, skylights and gutters) be replaced; and 2. that the replacement roof comply with the following requirements: 1. in relation to preventing rainwater from entering the building, the performance requirements of FP1.2 of the National Construction Code ("NCC"); 2. in relation to the rain water drainage system, the performance requirements of FP1.3 of the NCC; 3. in relation to weather proofing, the performance requirements of FP1.4 of the NCC; 4. in relation to the corrugated sheet metal roofing, the requirements of AS1562.1 - Design and Installation of Sheet Roof and Wall Cladding -Metal; 5. in relation to the steel flashings, the requirements of AS2904 - Damp-Proof Courses and Flashings; 6. in relation to the drainage, the requirements of AS3500.3 - Plumbing and Drainage - Stormwater Drainage; 7. in relation to the sump gutters, pipage, outlets and downpipes, the requirements of AS2179.1 - Specifications for Rainwater Goods, Accessories and Fasteners - Metal Shape or Sheet Rainwater Goods, and Metal Accessories and Fasteners; or 8. such requirements as applicable under the NCC and Australian Standards as may have superseded the above. 1. Declares that pursuant to a collateral contract made by the plaintiff and the first defendant, the first defendant agreed to be bound by the terms of the sublease (including Item 22) as if it were the Lessor. 2. Orders that the defendants, within 28 days of the making of these orders, provide to the plaintiff for its approval, such approval not to be unreasonably withheld: 1. the name of a proposed contractor for the undertaking of the roof replacement works required by Item 22 of the sublease; and 2. the terms of the proposed contract with the contractor. 1. Grants liberty to the parties to apply in respect of any issues arising out the execution of order 3 above. 2. Orders that the defendants pay the plaintiff's costs of the proceedings to date. 3. Stands the balance of the proceedings over for further directions on 16 September 2022.

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: 30 May 2022

City Gym Sydney Pty Ltd v Saipan Holdings Pty Ltd

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