HEADNOTE
[This headnote is not to be read as part of the judgment]
The first appellant, Croc's Franchising Pty Ltd, is the operator of a children's play centre franchise. The second and third appellants are its founders and directors. The first respondent, Alamdo Holdings Pty Ltd, is registered proprietor of a property in Castle Hill, Sydney. In 2017, Alamdo agreed to grant Croc's a commercial lease over the Castle Hill property. Croc's and Alamdo executed an Agreement for Lease ("AfL") and a Lease Document in registrable form which purported to create a 10-year lease with the second and third appellants guaranteeing Croc's obligations. Because Alamdo failed to register the Lease Document, the parties agreed that Croc's only legal proprietary interest in the premises was a tenancy at will. In June 2018, Croc's entered into possession, but the real occupant was its franchisee who traded from the premises.
In March 2020, the World Health Organization declared COVID-19 a worldwide pandemic. In April 2020, the Commonwealth enacted the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) ("Jobkeeper Rules"), creating the Jobkeeper benefits scheme. By December 2020, a business was eligible for Jobkeeper benefits if it satisfied various tests, including, relevantly, the "decline in turnover" test (cl 8). This test was met if, "at or before the end of the fortnight" in which it applied for Jobkeeper, the business showed a year-on-year fall in projected GST turnover either for any calendar month after 30 March 2020 or for any of the three quarters in 2020 except the first.
In March 2020, Australia's "National Cabinet" issued the National Cabinet Mandatory Code of Conduct - SME Commercial Leasing Principles during COVID-19 ("National Code"), designed "to impose a set of good faith leasing principles" for commercial tenancies where the tenant was eligible for Jobkeeper.
To reflect the National Code, New South Wales enacted Sch 5 to the Conveyancing (General) Regulation 2018 (NSW), which came into force on 24 April 2020 and expired on 24 October 2020 ("the First COVID Regulation"). On 24 October 2020, a new form of the regulation was enacted, to expire on 24 April 2021 ("the Second COVID Regulation"). Under both versions of the Regulation, commercial tenants could invoke certain protections if they were eligible for Jobkeeper benefits and therefore "impacted lessees". Central to both regulations was the term "prescribed period". Under the First COVID Regulation, the prescribed period was the entire lifespan of the regulation. Under the Second COVID Regulation, the prescribed period ran from 24 October 2020 to 31 December 2020, leaving almost four months until the regulation expired on 24 April 2021.
Under both regulations, cl 4 prohibited landlords from taking "prescribed action" for, inter alia, non-payment of rent during the prescribed period. Prescribed action included terminating the lease. Clause 5, in terms, prohibited a landlord from taking prescribed action for, inter alia, non-payment of rent unless there had been good faith rent negotiations. Clause 6 prohibited a landlord from, inter alia, terminating the lease unless the Small Business Commissioner certified that a mediation attempt had failed.
In March 2020, Croc's fell behind on its rent to Alamdo. Croc's and Alamdo corresponded about possible rent relief. On 28 April 2020, Alamdo's director, Mr Anthony Maurici, offered Croc's a 50% rent waiver and 24 month deferral on the balance. Croc's did not respond to the offer. Negotiations continued until November 2020. Croc's position was that, under the National Code, it was entitled to rent relief in proportion to its franchisee's business downturn, rather than its own.
On 1 October 2020, Croc's paid its rental arrears for 1 April to 24 April 2020. No rent due after 24 April was paid. On 3 December 2020, Alamdo took possession of the premises and purported to terminate the lease. Alamdo then commenced proceedings seeking damages for, inter alia, unpaid rent and outgoings. Croc's cross-claimed, alleging that Alamdo's termination was prohibited by the Second COVID Regulation and seeking loss of bargain damages.
The primary judge found that Alamdo was entitled to terminate because Croc's was not eligible for Jobkeeper at the date of termination and therefore not an "impacted lessee" under the Second COVID Regulation. In the event this analysis was wrong, the primary judge also found that cll 5 and 6 of the Regulation created a "gateway" through the prohibition in cl 4, and that Alamdo had satisfied both cll 5 and 6. The primary judge also held that, although the Lease Document was unregistered, the parties were bound by the AfL. He awarded loss of bargain damages to Alamdo.
Croc's appealed. Alamdo filed a notice of contention.
The issues on appeal were:
(i) Was Croc's eligible for Jobkeeper benefits and therefore an "impacted lessee" under the Second COVID Regulation?
(ii) Did cll 5 and 6 of the Second COVID Regulation create a gateway through the prohibition in cl 4, or did cl 4 act as a "blanket" prohibition during the prescribed period?
(iii) Did Alamdo comply with cl 5 of the Second COVID Regulation?
(iv) Did the Retail Leases Act 1994 (NSW), s 88(2) extend the operation of the COVID Regulation beyond its expiration?
(v) Although there was no registered lease, did the AfL create contractually binding obligations whose breach by Croc's could sound in damages?
(vi) By sending a tax invoice for rent due in December 2020, did Alamdo affirm the lease?
(vii) Despite the Second COVID Regulation, was Alamdo entitled to terminate because of Croc's failure to pay rent before that regulation came into force?
(viii) Was the primary judge wrong to find the second and third appellants guaranteed all of Croc's obligations under the AfL, and remained guarantors despite the terms of a "guarantor release" clause in the AfL?
(ix) On its cross-claim, was Croc's entitled to damages for Alamdo's repudiation by wrongfully terminating the lease?
The Court of Appeal (Payne and Stern JJA agreeing, Basten AJA dissenting) held, allowing the appeal and remitting the matter to the Equity Division:
On issue (i) (Payne JA at [39]-[53], Stern JA at [187], Basten AJA at [199]):
(1) Alamdo conceded it had led the primary judge into error when construing the Jobkeeper Rules. This concession was correct: an entity was eligible for Jobkeeper, so long as it satisfied the "decline in turnover" test in cl 8 at some point before the end of the fortnight (but not necessarily during that fortnight) in which it first applied for Jobkeeper benefits. Eligibility did not fluctuate from fortnight to fortnight: at [46]-[50].
(2) Croc's was an "impacted lessee" under the Second COVID Regulation: at [51].
On issue (ii)
(3) The general principles for interpreting Acts of Parliament are applicable when interpreting delegated legislation: at [82], [202].
Interpretation Act 1987 (NSW) ss 21, 32, 33 applied;
Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 at 398; Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101; [2008] HCA 38 at [19] applied.
(4) Subordinate legislation should, however, be construed bearing in mind that often it will not have been drafted with the same care as an Act of Parliament: at [84], [197], [202].
Environment Protection Authority v Orchard Holdings (NSW) Pty Ltd (in liq) (2014) 86 NSWLR 499; [2014] NSWCA 149 at [44]-[45] applied.
On issue (ii) (Payne JA at [54]-[110], Stern JA at [187]-[198]):
(5) The National Code and the commercial leasing principles it contained were available extrinsic material when construing the COVID Regulations: at [103], at [190]. Both COVID Regulations in terms permitted the Court to take the leasing principles into account: at [103], [195].
Interpretation Act 1987 (NSW) s 34(1)(b)(i); Conveyancing (General) Regulation 2018 (NSW) Sch 5 cl 7 applied.
(6) The leasing principles prohibited termination of a commercial lease for non-payment of rent during the COVID-19 pandemic period and a reasonable subsequent recovery period: at [59].
(7) Unlike in the First COVID Regulation, cl 4 in the Second COVID Regulation applied only if the landlord sought to terminate during the prescribed period itself. Further, while the First COVID Regulation's "prescribed period" covered its entire lifespan, the Second COVID Regulation's "prescribed period" covered only two months of its six month duration. Because of this significant change, the Second COVID Regulation's meaning should not be tied to that of the First COVID Regulation: at [98], at [196], [198].
(8) Under the Second COVID Regulation, the cl 4 prohibition applied during the two-month prescribed period, equivalent to the "COVID-19 pandemic period" in the leasing principles. Clauses 5 and 6 were not temporally limited to the prescribed period and could operate for the four months after the prescribed period: at [104]-[107], [109], [197]. For the prescribed period, cl 4 created a blanket prohibition, while for the remaining four months, cll 5 and 6 created narrower restrictions and gateways through those restrictions. This construction was coherent and consistent with the leasing principles and National Code: at [108], [197].
(9) Because 3 December 2020 fell within the Second COVID Regulation's prescribed period, cl 4's blanket prohibition prevented Alamdo from terminating: at [110]. The prohibition applied to both Croc's tenancy at will and to the agreement created by the AfL, since the AfL was an "agreement for a lease" where the lessee was entitled to have the lease granted (Conveyancing Act 1919 (NSW) s 128): at [63], [148].
(Basten AJA contra):
(10) A coherent application should be given to cll 4, 5, 6 and 7 of the second version of Schedule 5, consistent with the leasing principles in the National Code, by reading them as a package. Clauses 5 and 6 contained internal indications that expressly permitted the taking of action otherwise prohibited by cl 4(2); it was not possible to give them effect unless they qualified so much of the prohibition in cl 4 as fell within their compass: at [273]. Clause 5(1), while repeating one of the prohibitions in cl 4, did so in order to qualify it, in part. Clause 6 was not so limited, but imposed its own separate condition, cumulatively on cl 5: at [284].
(11) It would be contrary to principle, inconsistent with authority and defy common sense to interpret cl 4, in the second version of Schedule 5, as a blanket prohibition during the "prescribed period" and cll 5 and 6 as limited prohibitions only applying after the prescribed period. No such conclusion was tenable while the first version of Schedule 5; the amendments to the scheme made by the second version demonstrated no change to the underlying purpose or objects of the Schedule. The mere fact that, for a limited period, cl 5 operated when cl 4 did not, does not warrant the conclusion that cl 5 was to operate only during that period: at [289], [286]-[287].
On issue (iii) (Payne JA at [111]-[119], [125]-[130], Stern JA at [187], Basten AJA at [199]):
(12) The primary judge was correct to find Alamdo satisfied cl 5. Its rent relief offer of 28 April 2020 was never withdrawn: at [116]. None of Croc's communications amounted to a "second or subsequent request" for negotiation, but were re-assertions of its claimed entitlement to have its rental relief calculated by reference to its franchisee's turnover: at [117]-[119].
(13) Privilege under the Small Business Commissioner Act 2013 (NSW) s 19(3) over evidence of the offer made by Alamdo during mediation was waivable by either party, and Croc's correspondence and conduct of the proceedings amounted to a waiver: at [127]-[129].
On issue (iv) (Payne JA at [121]-[124], Stern JA at [187], Basten AJA at [199]):
(14) Section 88 of the Retail Leases Act 1994 (NSW) preserved the accrued operation of the COVID Regulations for the period that they were in force. It did not indefinitely extend the Regulations' effect beyond that period: at [123].
On issue (v) (Payne JA at [131]-[149], Stern JA at [187], Basten AJA at [199]):
(15) The primary judge was correct that, by operation of the AfL, contractual rights arose between Croc's and Alamdo, in the terms of the AfL and Lease Document, and in parallel to any separate equitable or legal estate in the premises: at [144]. Croc's breach of this agreement could sound in damages: at [147].
Leitz Leeholme Stud Pty Ltd v Robinson [1977] 2 NSWLR 544 at 54 applied; Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 252 cited.
On issue (vi) (Payne JA at [150]-[156], Stern JA at [187], Basten AJA at [199]):
(16) The primary judge was correct that Alamdo did not affirm the lease on 30 November 2020 by sending Croc's a tax invoice for rent due in December 2020. There was no inconsistency between Alamdo insisting on its right to receive rent and retaining its right to terminate: at [154].
Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 656; Allianz Australia Insurance Ltd v Delor Vue Apartments CTS 39788 (2022) 406 ALR 632 at [48]-[53] applied.
On issue (vii) (Payne JA at [157]-[166], Stern JA at [187], Basten AJA at [199]):
(17) The primary judge was correct to find that Alamdo was not entitled to terminate for Croc's non-payment of rent between 1 and 24 April 2020 because its stated ground for termination was solely breaches arising after 24 April 2020: Payne JA at [163].
Todarello Property Investments Pty Ltd v GJA Kalra Pty Ltd [2021] NSWSC 1678 at [75]-[76] applied.
(18) Additionally, by in October accepting Croc's late payment of rent up to 24 April 2020, Alamdo waived its entitlement to terminate on the basis the rent had gone unpaid: Payne JA at [164]-[165].
Owendale Pty Ltd v Anthony (1967) 117 CLR 539 at 556-557 applied.
On issue (viii) (Payne JA at [167]-[180], Stern JA at [187], Basten AJA at [199]):
(19) The primary judge was correct that, by cl 11 of the AfL and cl 20.1 of the Lease Document, the second and third appellants agreed to guarantee all of Croc's obligations under the AfL. In cl 20.1 of the Lease Document, any reference to a "Lease" should be read as a reference to the "AfL": Payne JA at [173].
(20) There was no error in the primary judge's construction of the terms "minimum guarantee period" and "guarantee release period" in cl 20.1 of the Lease Document, with the effect that the guarantors were not released if Croc's breached an essential term of the agreement created by the AfL at any point during the lease period: Payne JA at [177]-[179].
On issue (ix) (Payne JA at [181]-[185], Stern JA at [187]):
(21) Croc's entitlement to damages for Alamdo's termination on 3 December 2020 was not properly litigated at first instance. A remitter was necessary to determine this issue: Payne JA at [185].