Victorian Civil and Administrative Tribunal|2013-06-18

The Applicant ("the Landlord") is the owner of a recently constructed lock-up shop in Sydney Road Brunswick ("the Premises").
The Respondent ("the Tenant") is a manufacturer, retailer and wholesaler of bridal wear.
The Tenant started its business in High Street Armadale. It offers services to customers of its Armadale store whereby its designs and styles can be modified in order to suit the customer's specific requirements. Manufacturing occurs in China which, according to the evidence, gives the Tenant a competitive edge.
In late 2010 the Tenant's director, Mr Rong, decided to open another store in High Street Brunswick which, he says, is another centre for bridal wear shops in the Metropolitan area. The Landlord's agent, Miss McLaughlin, showed him the Premises which had been newly constructed.
The whole frontage of the Premises is taken up by an entrance door and a big display window on Brunswick Street. It is part of a larger developer incorporating residential apartments on the floors above. Directly above the front part of the Premises is a balcony open to the weather.
When he inspected the shop Mr Rong noticed that there were water stains down the wall of the Premises on the side furthest from the entrance door, near the front and below the overhead balcony which indicated a substantial leaking problem. It is common ground that he told Miss McLaughlin that before the Tenant would enter into a lease the Landlord would need to fix the leak and Miss McLaughlin on behalf of the Landlord agreed that it would do so.

"Have you received my email about the leaking? Please get this fixed urgently so work can start without any delay. The starting date of the lease is pending on the fix of this leaking problem." (sic)

Miss McLaughlin contacted the builder of the development who visited the Premises and carried out some work and told her that the repairs had been done.
In the belief that the leak had been repaired the Tenant executed the Lease and fitted out the Premises.

The leaks were not repaired. On 5 January 2011 Mr Rong sent Miss McLaughlin an email in the following terms:

"Please understand my frustration here. The lease should only start when the property is 100% ready. I took up the lease with your undertaking that the problem would be rectified before Christmas. Apparently this is not the case. Now this water leak problem has turned my plan and scheduled work upside down. Worst of all, it has caused delay to the opening of the shop. My only remedy here is to ask the Landlord for rent compensation from today till the day when the problem is fully fixed. Please pass this on the Landlord ASAP." (sic).

Photographs of the water stains on the wall show a substantial water entrance problem at this time.
Miss McLaughlin contacted the Builder who told her that he went back on four further occasions, the last being on 22 January. However the leaks were not repaired.
Nothing further was then done by the Builder and so Miss McLaughlin engaged another Builder to inspect. This builder advised her that the balcony needed re-sealing. After unsuccessfully trying to get the Builder to go back and do the work she contacted a sealing company which inspected the balcony and subsequently claimed to have resealed it between April and May 2011.
In the meantime, further emails from the Tenant complained that the leak continued as previously and Miss McLaughlin asked the sealing company to return. They did so and claimed again to have repaired it. The leaks nonetheless continued.
The sealing company then asserted that their work had been satisfactory and that the leak must have been from some other cause. The roof was suggested as a possible source.
In July 2011 Miss McLaughlin sent a roofing specialist to have a look at the roof. It reported that there was no issue with the roof or flashings and suggested that the hot water unit be investigated as a possible source of the water entry.
Miss McLaughlin then engaged yet another builder to inspect and was advised by that builder following some further work that the plumbing was not leaking.
The leak into the Premises continued.
In November 2011 Miss McLaughlin engaged yet another builder to provide a further report. Pursuant to the report of this builder a contractor was engaged to seal a hole below the hot water service and this work was completed by early March 2012. It was however ineffective to stop the leak.
Following further complaints by the Tenant Miss McLaughlin sent yet another builder to investigate who organised for a plumber to inspect the Premises. The plumber advised that the source of water was from the balcony and the edges of the balcony were then resealed. On 6 July 2012, following this work, the Tenant was contacted and the Landlord was informed by the Tenant that further leaks had occurred on that day.
Miss McLaughlin recalled the plumber to the site and was advised that the balcony tiling should be re-done. Later advice was to remove the balcony and rebuild it. The Landlord approved the proposed work and that was carried out on 8 February 2013.
According to Miss McLaughlin's evidence there were no further complaints of any leaks. However on 14 May 2013 that is, less than 2 weeks before the hearing, she was advised that water was seen leaking from the same spot which would suggest that whatever work was carried out in February has now failed.
During the whole of this period there were constant emails from Mr Rong to the Landlord complaining about leaks and re-stating the position that he had adopted from the beginning, that the rent free period would not commence until the leaks had been fixed. That position was not accepted by the Landlord in any of the numerous emails that have been tendered. In one email a staff member of the Landlord, while expressing sympathy for the Tenant's position, said that nonetheless the rental had to be paid. Further, monthly invoices for the rent were sent to the Tenant but were not paid.

The dispute was unsuccessfully mediated before the Small Business Commissioner and ultimately came before me for hearing on 27 May 2013 with one day allocated. Mr Strauch of Counsel appeared for the Landlord and the Tenant was represented by its Director Mr Rong and a Miss Yao, who is a manager employed by the Tenant. All three witnesses appeared to give honest evidence.
There was little dispute as to the facts, simply the consequences that follow and what ought to be done.

The rental fixed by the Lease was $40,000 per annum plus GST, or $3,666.66 per month. There was a bond of $7,333.33, which is equivalent to two months' rent. The Tenant also paid a further two months rental in advance. The Lease provided for CPI adjustments and so thereafter the renal increased incrementally, details of which appear below.
There was a three month rent free period and so taking into account the two months rental paid in advance but without taking into account the bond or any rebate of rental, rental would be paid to 14 May 2011. No further rental has been paid since.
According to Miss McLaughlin's evidence, taking into account the last rental which fell due on 15 May, arrears of rental are now $94,588.05. Mr Rong and Miss Yao maintained that no rental at all is due because the Lease is "invalid" because of the failure of the Landlord to fix the leaks.

The Landlord now claims the arrears of rent but is willing to allow an abatement of rental to take account of the leak. According to Mr Strauch a proportion of twenty per cent of the rent has been offered by way of abatement which he submits is more than generous.
The Tenant has counterclaimed for damages, claiming the Lease is "invalid". It claims:
- (a) Up to six months rent-free use of the Premises to enable it to relocate, with the Tenant to give the Landlord two months' notice prior to vacating;
- (b) Compensation for the loss of business opportunities of $134,922;
- (c) Reimbursement for the shop fit-out to the value of $20,872;
- (d) The return of its bond of $7,333 and the two months' rent of $7,333 paid in advance;
- (e) Reimbursement of damaged stock worth $3,850.
Evidence to support these figures and its claim was somewhat sparse and, as Mr Strauch suggested, was more in the nature of conclusions than evidence. Nevertheless, a breakdown of the costs of the fit-out was provided as was a method of calculation of the loss of stock.

I am satisfied that there was an express collateral agreement between the parties that, in consideration of the Tenant taking a lease of the Premises, the leak would be repaired by the Landlord. Contractual liability is strict and although it seems that Miss McLaughlin tried her best the leak was not repaired and so there is a breach of that agreement which will sound in damages.

Mr Strauch questioned what had become of the damaged stock. It was removed to a warehouse but has not been sold. Considering the extent of the leaking problem and the nature of the merchandise in the shop it is unsurprising that some stock has been damaged. It also seems unlikely that an intending bride would purchase a damaged wedding dress. The amount of $3,850 claimed seems modest and it will be allowed.

In essence, the loss of business opportunity related to the state of the Premises and its attractiveness to a "high-end" clientele, which according to the evidence of Mr Rong and Miss Yao, would enable them to sell custom-made dresses for a higher price than ready made dresses.
Miss Yao said in evidence, and it seems a reasonable proposition, that this market is quite sensitive and presentation is very important because a girl's wedding is the most important day of her life. She said that the unsightly stains on the wall and the associated smell made the Premises unsuitable for selling to a high-end clientele. Instead, they had to access the ready to wear market which is less profitable and caters to less discriminating customers.
The figures that she gave related to what she claimed were the Tenant's actual sales from the Premises, compared with what she thought they might have earned had they been able to service a higher level clientele.
There is large amount of speculation in this part of the claim.
I asked Mr Rong and Miss Yao why, if the Premises were unsuitable they had remaining trading there for almost two and a half years. They said that they were continually assured by Miss McLaughlin that the problem would be fixed and continued to rely upon these assurances. Also, they had incurred the cost of a fit-out and printing of promotional material for a shop at that address. Further, it was a new shop with an attractive frontage to the street which they would lose if they moved to other Premises.
All that might be so, but if the alternative was to incur losses of the magnitude that they now claim to have suffered it seems to me to have been a poor business decision.
I accept that the Tenant entered into the Lease upon the assurance of Miss McLaughlin, no doubt given in good faith, that the leak would be repaired. Despite Miss McLaughlin's best efforts, this has not occurred.
I accept that as a result of the leak the Premises are less attractive than they otherwise would have been and that they are unsuitable for retailing made-to-measure wedding dresses.
The water from the leak ran down the side wall at the front of the Premises on the side away from the door. I accept Mr Strauch's submission that the problem could probably have been masked in some way by screening or curtains. Of course, the Tenant should not have had to do that. It rented a new shop with an attractive façade in a retail strip suitable for the wedding dress market. It spent a substantial amount on fitting it out. The photographs tendered show an attractive window display to the street although the end of the window where the leak is has been covered with what appears to be a poster and so it seems that the leak has reduced their display area somewhat.
Nevertheless the Tenant must take reasonable steps to mitigate its loss. Apart from screening the stain its staff could have embarked upon a regular program of mopping up, cleaning and drying when water came in. Mr Rong said that was not within the job description of the employees staffing the shop. That may be so but is not a reason to leave the problem unaddressed and the losses to mount. The cost of any reasonable steps taken to mitigate the loss are recoverable as damages (see Halsbury Laws of England 4th Ed Vol 12 para 1193-4).
Weighing up all these considerations I think there must have been some effect on trade but I am not satisfied that the leak has caused most of the trading loss that the Tenant claims. I think the main cause was the Tenant's failure to mitigate and its decision to continue trading from the Premises with a different business model.
I will allow a figure to take into account what the cost to mitigate the loss might reasonably have been. The exercise is far from precise but I think that $5,000 would be reasonable. I will allow a further $5,000 for the effect on trade had there been mitigation. I think the actual trading loss was considerably more than that but the Tenant can be in no better position than it would have been in if it had taken reasonable steps to mitigate its loss.

If the Tenant were to leave the Premises it would lose the value of the fit-out that it has installed. However it is by no means clear that it proposes to do so. It has, according to its Points of Defence, already changed its business model to a ready-to-wear market and it will remain if the rental is sufficiently reduced. It offers $22,000 per annum, presumably including GST, which is half the initial rental fixed by the Lease. The Landlord has offered an abatement of twenty per cent.
I do not believe that I can allow the cost of the fit-out since I cannot approach the matter on the basis that the Tenant is entitled to bring the Lease to an end nor is it clear that it intends to do so. The Tenant's real claim appears to be one of abatement of rental.

Section 57 of the Retail Leases Act 2003 provides (where relevant):

(1) A retail premises lease is taken to provide the following if the retail premises, or the building in which the premises are located, is damaged-

(a) except where the tenant caused the damage, the tenant is not liable to pay rent, or any amount in respect of outgoings or other charges, that is attributable to any period during which the premises cannot be used under the lease or are inaccessible due to that damage; and

(b) except where the tenant caused the damage, if the premises can be used under the lease but that use is reduced to some extent by the damage, the tenant's liability for rent, and any amount in respect of outgoings or other charges, that is attributable to any period during which the use is reduced is decreased to the same extent; and

(c) if the landlord reasonably considers that the extent of damage makes its repair impracticable or undesirable and notifies the tenant in writing of that, the landlord or tenant may terminate the lease by giving not less than 7 days' written notice of termination to the other party; and

(d) if the landlord fails to repair the damage within a reasonable time after the tenant asks the landlord in writing to do so, the tenant may terminate the lease by giving not less than 7 days' written notice of termination to the landlord; and

...............................................................................................

(2) A provision of a retail premises lease is void to the extent that it has the effect of limiting the liability of a party to the lease to pay compensation to another party to the lease in respect of damage to the retail premises or the building in which the premises are located.

.........................................................................................."

There word "damaged" is not defined in the Act and so it would have its ordinary meaning. The primary meanings given for the word in the Oxford Dictionary are:

"1. Loss or detriment caused by hurt or injury affecting estate condition or circumstances; 2.Injury, harm esp injury to a thing such as impairs its value or usefulness".

What the evidence discloses in this case is a leak. There is no direct evidence of any hurt or injury causing this leak but it may be inferred that the building was not constructed so as to have a leak and that some waterproofing material has failed. I think that is sufficient to say that the Premises are "damaged" and the contrary position was not asserted.
The Premises were never "unable to be used" or "inaccessible" by reason of the leaking and neither party has sought to terminate the Lease in accordance with this section.
The Landlord has offered an abatement of twenty percent. The Tenant seeks an abatement of 5fifty per cent. It is not the function of this tribunal to make an agreement for the parties. However if the claim is for an abatement of rental then we can fix an appropriate rental for the period of the abatement.
The agreement was that the Landlord would repair the leak as a condition of the Tenant taking the Lease and so it is clear that the rental fixed by the Lease was what the parties agreed was the rental value of the Premises in its undamaged state. The Tenant is entitled to a reduction of rent until such time as the leaks are repaired. The Landlord has said that its offer of a twenty per cent rebate is more than generous but having regard to the severity of the problem as shown by the photographs I think that a more appropriate figure would be twenty five per cent until such time as the leak is properly repaired.
Recalculating the rental from the date of the expiration of the rent free period up to 15 July 2013 at the rebated rate gives rise to a figure of $76,490, calculated as follows:

15/3/2011 to 14/12/2011 $3,666.66 x 8 $29,333 $22,000

15/12/2011 to 14/12/2012 $3,798.66 x 12 $45,584 $34,188

15/12/2012 to 14/07/2013 $3,867.04 x 7 $27,069 $20,302

Total rebated rental after rent free period $76,490

Less rental paid (two months) $ 7,333.32 Balance of rebated rental due up to 15 July 2013 $69,156.68

There will be an order that the Tenant pay this sum to the Landlord. The bond of $7,333.33 has not been deducted and will continue to be held in accordance with the Lease.
Although rental under the Lease is to be paid "without deduction", once there is an order in favour of the Landlord for payment of the amount of outstanding rent (adjusted taking into account the abatement) it becomes a monetary award and it is convenient to set off against it the damages awarded to the Tenant.

I will order that until such time as the leak is repaired the Tenant is only liable for rental at three quarters of the amount otherwise payable under the terms of the Lease.
Liberty to apply will be reserved if there should be any future dispute as to whether or not the leak has been fixed.
Costs will also be reserved simply because I heard no argument about costs. The attention of the parties is drawn to s.92 of the Retail Lease Act 2003. Since this dispute was mediated it is difficult to see how any order for costs could be made.

Cooley's Pty Ltd v Z & R Holdings Pty Ltd (Retail Tenancies) [2013] VCAT 1005 (18 June 2013)

Cooley's Pty Ltd v Z & R Holdings Pty Ltd

At a glance

Court

Decision date

Source

Judgment (33 paragraphs)

Parties

Cases Cited (1)

Cooley's Pty Ltd v Z & R Holdings Pty Ltd (Retail Tenancies) [2013] VCAT 1005 (18 June 2013)