Cugg Pty. Ltd. v. Gibo Pty. Ltd. [2001] NSWSC 297

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

NO. 4647 OF 1999 CUGG PTY. LIMITED V. GIBO PTY. LIMITED

JUDGMENT 1 On 16th February 1982, the plaintiff Cugg entered into a registered lease No.T122643 with State Rail Authority of New South Wales (which I will call "the SRA"), by which Cugg became lessee, for a term of twenty years commencing 1st January 1981 plus three options of ten years each, over property described as part of the land in Certificate of Title Volume 11864 Folio 66, being premises described in cl.16 of Schedule 2 to the lease. 2 I will set out cl.16 later, but note here that in essence the premises comprise an office building known as Wembley House, in George Street, Sydney, near Central Railway Station. A railway tunnel passes under the building, and part of the building is built over a slab which forms the ceiling of the railway tunnel. The slab, but not the tunnel, is included in Cugg's lease. 3 On 18th January 1995, Deposited Plan No.654926 was created for the stated purpose of identifying the land comprised in Certificate of Title Volume 11864 Folio 66; and on 15th June 1998, Deposited Plan No.876785 was registered, being a subdivision of land in Lot 1 Deposited Plan No.654926 into two lots. Lot 2 in that deposited plan appears to include the land the subject of the lease, and it also includes the railway tunnel. 4 Lot 2 of Deposited Plan No.876785 was transferred by the SRA to the defendant Gibo by Transfer No.5340828R dated 9th October 1998 and registered 4th November 1998, reserving an easement over the tunnel in favour of the SRA. 5 During 1999, disputes developed between Cugg and Gibo, resulting in the commencement of these proceedings on 11th November 1999. The originating process is now an Amended Summons dated 3rd March 2000, and there is an Amended Cross-claim dated 17th February 2000 joining additional parties. 6 On 26th to 28th June 2000, I conducted a hearing of issues between Cugg and Gibo, which excluded issues involving the additional parties: essentially, these issues concern the obligation to repair the slab over the railway tunnel, and the question of Cugg's liability for Council rates and land taxes. 7 At the end of that hearing, I reserved my decision, and there was shortly afterwards an application by Gibo to re-open the case by calling further evidence. That application was granted, and there was a further hearing on 5th February 2001. I again reserved my decision, and this is the decision arising out of those hearings.

OUTLINE OF FACTS 8 I will commence by outlining the history of the matter, mainly as it relates to the general relationship of the parties and the question of repair to the slab. 9 The lease to Cugg was granted following a tender process. There is some evidence before me as to the negotiations between Cugg and the Public Transport Commission of New South Wales, the predecessor to the SRA, but neither party has submitted it has any relevance. 10 Cugg's tender for the lease, dated 21st February 1979 and accepted on 3rd July 1979, noted as a condition that "any works ... required to the building as a result of the operation ... of the railway track ... under the building will be undertaken by, and at the cost of, the Commission". 11 On about 14th January 1980, there was a meeting between Dennis O'Brien and Peter Howarth, on behalf of Cugg, and representatives of the SRA. Mr. O'Brien received from the SRA a report of an inspection of the building by the SRA's Acting General Manager, made on 3rd October 1979. That report included the following paragraph: 3. The inspection of the roof of the tunnel under the building revealed some spalling of encasing concrete of the floor beams and exposure of some reinforcement. This should be repaired with some gunite or epoxy concrete process. 12 On 18th March 1980, Deposited Plan No.260046, relating to Wembley House and the land on which it was erected, was registered, for the stated purpose of the proposed lease. The part of that deposited plan which was subject to the lease appears to have been Lots 1 to 3. Lot 5 of that deposited plan seems to include the tunnel and strata of land below the tunnel. 13 Cugg, through Peter Howarth & Associates, arranged for a consulting engineer Alexander Wargon to inspect the building. Mr. Wargon reported to Mr. O'Brien, on behalf of Peter Howarth & Associates and Cugg, by a letter dated 17th July 1980. That letter was in the following terms: This confirms our several inspections of the above premises followed by the perusal of some drawings presently held by the Council of the City of Sydney.

These inspections revealed that the main building appears to be of steel frame construction encased in concrete and reinforced concrete floors. Whilst from the information available we were unable to analyse in detail the strength of the structural elements, perusal of the drawings and external elements of the structural building may have been designed to carry a live load of five KPa (100 lbs.per sq.ft). Furthermore, the form of construction, and in particular the column stubs apparent above the roof of the building, would suggest that the building may also have been designed to carry additional floors.

The main building (excluding external steel fire escape stairs), appears in general to be structurally in good condition and, if maintained properly, there is no apparent reason why the building should not perform satisfactorily for the duration of the lease. 14 On 20th August 1980, Cugg wrote to the Public Transport Commission stating that it had received a satisfactory report from a structural engineer. 15 It was a condition of the proposed lease that Cugg undertake extensive improvements to the property. Cugg lodged a development application with Sydney City Council for alterations and additions to the existing building, at an estimated cost of $1 million. Consent was granted on 21st August 1981, and a copy of this consent was sent to the SRA on 17th November 1981. 16 The subject lease is dated 16th February 1982. The land is described in it as "all those premises as defined in cl.16 of Schedule 2". That schedule is in the following terms: The terms "premises" and "demised premises" where used in this lease, shall include where the context shall admit any building, structure, fixture or improvement and all other things thereto belonging (including the building known as "Wembley House", 839-847 George Street, Sydney) which are at the commencement of or made during the term be erected, placed or made by the Lessor or the Lessee on Lots 1-3 inclusive in Deposited Plan 260046 and shall include any part thereof and also such parts of the stratum below the said Lots are the sites of columns, piles, footings, the slab constructed above the railway tracks, or other means of support of the buildings or structures which are erected upon the demised premises during the life of the survivor of the issue now living of Her Majesty Queen Elizabeth II and twenty-one (21) years after the death of such survivor and during such further period (if any) as shall be lawful however such term shall not include the services of the Lessor referred to in this lease and/or Memorandum No.S78957. 17 The lease is expressed as including the terms of that memorandum, with amendments to it specified by the lease. The relevant clauses, incorporating the amendments, are as follows: 2. To the full effect of the covenants next hereinafter shortly noted as the same are set forth in words at length in the second column of Part 2 of the Fourth Schedule to the Conveyancing Act 1919 except where any addition to exception from qualification of or omission from the same hereinafter appears namely: ... 3. And to pay taxes and all impositions and outgoings of whatsoever nature which are at any time during the term payable in respect of the demised premises or the user or occupation thereof or any service or supply thereto. 6. And that the Lessor may at all reasonable times enter and view state of repair and that the Lessee will repair according to notice in writing and that in default the Lessor may repair at the Lessee's expense. ...

8. The Lessee shall at all times during the term well and sufficiently and to the satisfaction of the Lessor, clean repair maintain and keep the demised premises clean and in good and substantial repair when where and so often as need shall be, fair wear and tear excepted but Lessee's obligation is limited to the condition of the premises at the commencement of the Lease.

9. The lessee shall at the expiration or sooner determination of the lease peaceably surrender and yield up unto the Lessor the demised premises so painted papered cleaned repaired maintained and kept as aforesaid fair wear and tear accepted but the Lessee's obligation is limited to the condition of the demised premises at the commencement of the lease.

10. The Lessee shall comply with the terms of any present or future legislation affecting the demised premises and with any notices served upon the Lessor or the Lessee by the Board of Health, licensing, municipal or other competent authority involving the destruction of noxious weeds or animals or the carrying out of any repairs alterations or works (including works of a structural character) and in default of such compliance by the Lessee the Lessor may at all reasonable times during the term with workmen and others and all necessary materials and appliances enter upon the demised premises for the purposes of complying therewith and also except where otherwise expressly provided herein for the purpose of exercising the powers of authority of the Lessor under this Lease: provided that such destruction repairs alterations and works shall be carried out by the Lessor without undue interference with the occupation and use of the demised premises by the Lessee and provided further that the Lessee shall pay to the Lessor on demand any expense incurred by the Lessor in complying with any such legislation or notices. 18 On 22nd December 1997, the SRA obtained a report on the condition of the building from consulting engineers Norman Disney & Young. This report noted as follows: There would appear to have been some structural problems with the building associated with the building span over the railway line and subsequent repairs have been carried out.

That report was passed on to Gibo at the time of Gibo's purchase. 19 As noted earlier, Deposited Plan No.876785 was registered on 15th June 1998. 20 On 17th June 1998, Cugg gave notice to the SRA of exercise of option to take a further term of ten years from 1st January 2001. 21 As noted earlier, there was a transfer by the SRA to Gibo of Lot 2 in Deposited Plan No.876785 dated 9th October 1998. The stated consideration was $1.25 million. The transfer was subject, inter alia, to an easement in favour of the SRA in respect of the railway tunnel. 22 In about November 1998, Burger King Australia Pty. Limited was proposing to sublease part of the property known as Shop 2, Wembley House. At the time of fitting out the premises, an engineer engaged by Burger King noted damage to the slab over the tunnel, which also constituted the floor of the Burger King premises. An engineer engaged by Burger King, Mr. B.A. Hutchison, reported in a letter dated 3rd December 1998, his concern about the condition of the slab. The relevant parts of this letter were as follows: We found extensive and severe cracking in those portions of the slab where the base concrete has been exposed. The cracking forms no particular pattern and it is difficult to determine the age of the cracking. The slab panels were subject to vibration to a dropped load.

A drilling for the services penetrations the builder has created and kept concrete cores. From an inspection of these cores we concluded there is little or no top reinforcement, that the slab is at least 175mm. thick and that the bottom reinforcement appears to be 8 or 9mm. wire at 200 centres (ie say f82 mesh).

The mesh appeared to be extremely close to the bottom of the concrete which raised a concern. Inspection of the soffit of the slab from the tunnel below confirmed our fears.

The slab reinforcement is generally totally exposed. We are unsure if this is through long-term concrete spalling or this is how it was left after construction. In either case, it requires urgent remedial action.

This was forwarded to Mr. O'Brien by facsimile on the same date. 23 On 4th December 1998, there was a site meeting, involving Mr. O'Brien and an engineer Eric Smith of Hyder Consultants. On 9th December 1998, Mr. Smith reported by letter to Mr. O'Brien. That letter was in the following terms: Following our recent site meeting (4th December 1998) to view to ground floor slab soffit, we advise that we propose to undertake two lines of attack: · Design/documentation strengthening process. · Review and documentation of long term durability.

It is possible to separate the two and in line with our recent discussions we propose to strengthen the slab by the addition of steel beams connected to existing steelwork. This is our first priority, with our design and consequent construction detailed to reduce the amount of vibration the existing slab will undergo. The introduction of steel beams will increase the stiffness of the existing slab and thus reduce vibration effects on the Burger King tile fitout.

The long term durability is an issue that needs to be addressed, although not with the same sense of urgency as the strengthening exercise. It should be noted that with the builder established on site for the strengthening, it is probably cost effective to carry out the work simultaneously.

As part of the long term durability assessment we require to understand the extent of degradation of the concrete, particularly around the remaining reinforcement. To this end, we enclose a quotation from Mahaffey Associates, Concrete Technologists dated 7 December 1998 to carry out tests related to strength and inclusions relevant to long term durability. The tests would be carried out on existing core samples.

We week (sic) your approval to carry out this work as a matter of urgency. 24 A further letter from Mr. Smith to Mr. O'Brien of the same date confirmed Mr. O'Brien's instructions "to proceed with investigation and rectification documentation of the graded slab underside ground floor slab, Wembley House". 25 On 14th December 1998, Mr. Smith wrote to the SRA seeking access to the tunnel "in order to carry out urgent remedial work to the underside of the ground floor of Wembley House, which also forms the roof of the tunnel". 26 At this stage, the Sydney City Council became concerned about the matter, and there are in evidence internal emails of the Council involving Christopher Jones, a structural specialist at the Council, which show that Council officers were considering whether an order to rectify the defect was warranted. 27 On 18th December 1998, Mr. Smith again wrote to Mr. O'Brien, in the following terms: For your information, we provide an interim report on the slab rectification at the above property. Representatives from Sydney County Council and Rail Services have requested this report.

Our office was invited to attend the site on 4 December 1998 to view and report upon alleged degradation of part of the ground floor slab at Wembley House.

This slab forms the roof of an enclosure of a State Rail train track which connects Central to Darling Harbour. The trace is at grade with the building bridging over.

The ground floor structure comprises primary riveted built up girders spanning across the track. These in turn support secondary steel beams with a 120mm tick concrete slab on top. The slab appears to be reinforced with bottom mesh, with no top reinforcement being visible.

Plumbing cores taken through the slab indicated evidence of degradation of the concrete with some bottom reinforcement being rusted out. Our investigation indicated general areas of spalling with reinforcement exposed, and in some areas reinforcement missing. The slab has a bonded topping of the order of 50mm with general shrinkage cracking in the topping. There was no apparent regularity in cracking which would indicate flexural failure. This fact indicates the likely presence of top steel. The ground floor area is currently subject to a "Burger King" fitout and continued investigation of the top of the slab was not appropriate.

We have reviewed existing documents and have carried out structural checks of our own to determine current load carrying capacity. In the unaffected state, ie, before concrete degradation, the slab and beams have been designed for a working strength live load capacity of in excess of 10Kpa (over and above 50mm topping applied dead load).

Considering the slabs as completely unreinforced (ie, no top or bottom reinforcement) we calculate that the live load capacity varies from 2Kpa dependent upon a slab thickness (ie, not include or include bonded topping) and concrete strength (20Mpa or 25Mpa).

We are of the opinion that, given the extent of concrete and steel degradation, the current performance of the slab and the lack of flexural cracking in either the soffit or top of the slab, the slab will continue to perform and will support the proposed fitout.

Notwithstanding this we recommend the following: · Strengthening of the slab. · Protection of the slab soffit to prevent further degradation.

Strengthening of the Slab To this end we have prepared a strengthening procedure which involves the introduction of additional steel beams to the underside of the slab.

These beams will reduce the slab span to about 1.2m maximum thereby quadrupling the existing slab capacity. The option of bonded carbon fibre or bolted steel plates to the slab soffit was discounted due to the need to remove poor concrete from the soffit and the vibration induced by scabbling/or impact drilling for bolts. This activity would seriously affect the current fitout. The introduction of steel beam also increases local stiffness, which does improve the perception of safety.

Slab Protection We currently have Mahaffey and Associates (Concrete Technologists) carrying out tests on the concrete cores covering strength, depth of carbonation and level of chloride and sulphate/sulphide inclusions. Upon receipt of these tests results, we will determine the most appropriate method of stabilisation of the slab.

In discussion with State Rail, it would appear that ready access to the rail line to carry out scaffolding operation and rectification works will not be available until after January 1999. It was our original intention to expedite strengthening works and follow up with slab protection (recognising the time taken to carry out Concrete Tests). We now suggest that we go to tender with the full package with a view to commencing work end January 1999.

We look forward to a successful reinstatement. Should you require further information, please contact Jim Hayton or the undersigned on 9433 6000. 28 On 22nd December 1998, the Sydney City Council wrote to Mr. O'Brien, in the following terms: I refer to the letter from Eric Smith on behalf of Hyder Consulting (Australia) Pty Limited dated 18 December 1998, relating to the steel framed concrete floor slab structure spanning over rail services at the northern end of Wembley House.

Your advice that, "the slab will continue to perform and will support the proposed fitout" and that to provide for long term safety, further work is recommended for "slab strengthening" and "slab protection", relieves some concern.

However. your report does not provide sufficient detail or information with respect to the existing slab, and the design parameters for the proposed works. In this regard you are advised that a further detailed report is required, which outlines the specific methods of achieving: 1 A minimum requirement that the slab have an FRL240/240/240. Note that AS3600(C5.5.4) refers to "...increasing the overall thickness of the slab by means of a topping ... will have little influence on the temperature of the reinforcement and therefore little influence on structural adequacy. To increase the fire-resistance period with respect to both structural adequacy and insulation, the addition of an insulating material to the soffit of the slab is necessary." 2. Structural reliability. Is there any load testing being considered? Structural Certification of the repaired floor will be required in the form of Attachment Sl.

The proposed work must be to the satisfaction of Rail Services Australia. If you have any further enquires please call me on 9265-9652. 29 On 4th January 1999, Mr Smith of Hyder wrote to the Council in the following terms: We are in receipt of your letter dated 22 December 1998 and respond.

The report issued on 18 December by our company was an interim report. As advised concrete testing is being carried out by Mahaffey and Associates to determine the competence or otherwise of the existing slab to protect and utilise the remaining reinforcement. When this information is known we will be in a position to formulate an appropriate repair and protection methodology for the slab. Results from Mahaffey are expected first week in January 1999. This will be subject to an additional report from our office.

We note your requirement that the slab has a 240/240/240 FRL. This is obviously well in excess of that currently and in fact in excess of that when first constructed. It is our intention to review the concrete repair necessary (following Mahaffey report) and assess the level of firerating we will achieve when strength and durability requirements are achieved. This work will also involve repair of some areas of concrete protection to the existing steelwork. Again, the level of FPL achieved in this operation will be assessed. We are not aware of the BCA clauses that require FRL 240/240/240 for this situation and given the very low level of firesource we would seek to discuss this issue with you when we are in a more learned position with respect to necessary repair of concrete.

With respect to structural reliability, load testing is not considered and our company will, when we are satisfied ourselves, submit a properly executed structural design certificate.

We thank you for your prompt response in this matter and trust we can all bring this to a successful conclusion.

Please contact Jim Hayton in Dr Eric Smiths' absence for further information on 9433 6000. 30 On 18th January 1999, Rail Services Australia wrote to Hyder giving conditional consent to access to the tunnel to repair the slab. 31 On 28th January 1999, Mr. Mahaffey, a specialist consultant in concrete technology, gave a report concerning the condition of the slab. That report was in the following terms: We have now completed testing of a series of concrete core samples from the above site.

5 cores were tested. These were drilled by others, and collected by us from the site. We are aware that the testing was required to assess the likely causes of concrete deterioration. Accordingly, the following testing was carried out. · Depth of carbonation · Chloride ion content · Sulphate ion content · Sulphide ion content

Each core was cut into three sections, representing concrete at three depths. These were as follows: · Near the inside surface · At the centre of the concrete · Near the outside surface.

The results of the testing are shown in the attached test report. Our comments on these results are as follows.

1. Depth of Carbonation Carbonation depths were measured from the inside surface only, as it is understood that this is the surface where most deterioration is apparent. The results range from 15 to 20mm.

The depth of carbonation is measured from the exposed surface of the concrete, and reinforcement (or any embedded steel) that falls within the carbonated zone is at risk of corrosion. Further, the effects of carbonation are felt beyond the actual measured depth, so in this case, any steel within 25 to 30mm of the surface may be at risk of corrosion because of the effects of carbonation.

Carbonation is a time related process, and the depth of carbonation will increase with time. Given the likely age of this particular structure, these carbonation depths are not excessive, and this indicates that the concrete is likely to be of a reasonably high quality for its age.

2. Chloride Ion Content Chloride ion contents in excess of 0.4% (when expressed as a percentage of cement) are likely to be sufficient to initiate corrosion of embedded steel. This is likely to be equivalent to 0.055 when expressed as a percentage of the concrete (the results in the attached test report are expressed in this matter).

On this basis, there is only one result which indicates that the reinforcement may be at risk of corrosion from the presence of chloride ions. There are three other results which approach this threshold, however on the whole, the chloride levels are low.

3. Sulphide Ion Content Sulphide ions are also a possible cause of corrosion of embedded steel in concrete. In this case, the sulphide contents are relatively high, and consistently so through the thickness of the concrete.

This is the most likely cause of any reinforcement corrosion that may be occurring.

4. Sulphate Ion Content Sulphate ions in concrete take part in a chemical reaction that produces an expansive produce. The resultant internal bursting pressure causes fretting and then more substantial breakdown of the concrete itself. This is known as sulphate attack.

A sulphate content of around 5% when expressed as a percentage of the cement is likely to be sufficient to cause this type of breakdown. This is likely to be equivalent to 0.6 to 0.7% by weight of concrete (the results in the attached test report are expressed in this manner).

In all cases, the outside concrete had sulphate levels in excess of this threshold, and this indicates that any deterioration of this concrete is likely to be the result of sulphate attack. There are also a number of other results that exceed this threshold.

We trust that this information is of assistance, however please do not hesitate to contact the writer should you require anything further. 32 On 1st March 1999, Mr. Smith of Hyder wrote to the Council. This letter included the following: The degradation of the reinforcing steel with subsequent loss of concrete cover is primarily a result of sulphide ion and sulphate ion attack, most probably due to pollution from steam trains. The tests indicated that continued attack is likely due to the presence of sulphides and sulphates in and around the concrete.

Discussions with Mahaffey have centred around stabilising the concrete and providing fire protection, in accordance with Council requirements.

It is not our decision to cover the concrete with Bondek or plywood, to pick up loose material but, as noted before, stabilise the concrete.

To this end we will treat the underside of the concrete with silane to prevent ingress of water vapour (thus preventing continued formation of acids) and then fire spray with a compatible material. 33 An internal Council memorandum from Mr. Jones, dated 15th March 1999, noted that the engineers had given a structural solution for the floor slab, and went on to note to the effect that either the Council should issue a Notice of Intention to issue an Order, or the owner might opt to submit a building application. 34 On 3rd May 1999, Hyder notified Rail Services Australia advising that tenders had been called for the work; but the work did not in fact proceed. The reason for this was that, apparently, Cugg had formed the view that the responsibility to repair the slab was not Cugg's, but Gibo's. 35 On 12th July 1999, Mr. O'Brien wrote to David Holgate, an agent for Gibo, a letter in the following terms: At the time of fitting out their premises an engineer from Burger King noticed some damage to the underside of the slab which forms part of the floor of Burger King and the roof of the rail tunnel.

We had Hyder (Australia) Pty. Ltd., Consulting Engineers, investigate and they advised that the cause of the damage, spalling and exposed reinforcing, is erosion of the concrete caused by sulphur emissions from steam trains using the tunnel. The cost of repairs will be in the order of $120,000-$150,000.

As steam trains were phased out many decades ago. it is clear that the damage was caused during the early life of the building and is therefore the responsibility of the owner to undertake the repairs at its expense.

As a precaution we have advised our client's insurer and you may also wish to advise Gibo's insurers. Could you please confirm that Gibo will attend to the repairs as a matter of priority.

Thank you for your advice in respect of the rental payments.

This was in fact the first notification to Gibo concerning problems with the slab. 36 On 2nd August 1999, Gibo's solicitor Mr. Trayer wrote to Mr. O'Brien on behalf of Cugg advising that Gibo was obtaining its own engineer's report, and enquiring whether anything was done about the spalling problem following its disclosure in 1979. 37 On 24th August 1999, Mr. Trayer wrote to Cugg's solicitors Cutler Hughes & Harris a letter, which included the following paragraph: Your client has raised issues with my client in relation to the repair of alleged damage to a concrete slab beneath the building. I am instructed that from documents available to me, your client was fully aware of the problems with the slab when your client entered into the Lease, and has ignored maintenance of the slab for 19 years. I am further instructed that my client is endeavouring to obtain an independent engineers report. The engineer nominated by my client has asked your clients engineer for plans upon which the original engineers report obtained by your client was based. Your clients engineer has not made those plans available to my client. Your client's engineer stated that he was seriously considering condemning the slab from the outset and that he was worried about the delay in strengthening and repairing it. Your client failed to inform my client for 8 months following the discovery of the fault with the slab, and this delay may have allowed further damage to the slab. 38 The engineer engaged by Gibo, namely Mr. Barry Smith of Taylor Thomson Whitting, reported by a letter dated 26th September 1999. That letter was in the following terms: Following our meeting on site on Thursday 5th August 1999 we provide the following comments regarding the condition of the structure over the rail tunnel and other visible structural defects to the building.

The existing slabs over the rail tunnel span approximately 2.4m between concrete encased steel beams. The soffit of the slab has considerable areas of exposed and corroded reinforcement. The concrete itself has also undergone significant degradation. Coreholes drilled through the slab for plumbing of services for the Burger King store have further reduced the structural adequacy of the slabs. The degree of deterioration of the slab is such that it would not be adequate to support the required design loads in accordance with present design standards.

Testing of core samples has been undertaken by Mahaffey Associates on instruction from Hyder. The cause of the deterioration of the slab over the rail tunnel appears to be a combination of high Sulphate ion content and high Sulphide ion content either present within the original materials of the concrete mix or absorbed from sulphur in the coal, together with carbonation of the exposed surface. The condensation from steam trains would have promoted corrosion of the reinforcement when the depth of carbonation reached the level of the reinforcement.

The memo dated 21/9/79 from the General Manager, WAY & WORKS BRANCH to the General Manager, PROPERTY BRANCH indicated that this area required repair by the prospective lessee. We would expect that the Structural Engineer's report prepared for Cugg Pty Ltd would have investigated this area with recommendations on repair. This report would have been prepared some time between the tender submission on 21/2/79 and 20/8/80 when Cugg Pty Ltd advised to the Public Transport Commission that due diligence, including the structural report had been satisfactorily completed. We suggest that a copy of this report be obtained to determine the extent of the deterioration 20 years ago. This report would have been prepared by Wargon Chapman & Associate Pty Ltd. now known as HYDER Consulting.

The rail line under Railway Square was electrified in 1959. The rate of deterioration of the slab would have reduced considerably after this time as only occasional steam trains would have used the line. It appears that the degree of degradation of the concrete and degree of corrosion of the reinforcement would have been significant to warrant repair 20 years ago at the commencement of the lease by the Public Transport Commission to Cugg Pty Ltd. We are surprised that no repairs have been made to date.

The repairs proposed by Hyder Consulting, rely on increasing the load carrying capacity of the existing slab by installing additional steel beams to halve the span of the slab. While we agree that this should increase the load carrying capacity, we don't believe that it is possible to certify that the slab is structural adequacy for the required design loads. The method of determining the strength of the slab as an unreinforced concrete element is not permitted by Australian Standard AS3600 for suspended slabs. The calculated capacity of the slab based on the tensile strength of the concrete is considerably reduced by existing shrinkage cracks, existing shrinkage stresses and existing flexural stresses, all of which are difficult if not impossible to quantify.

We have discussed this difference of opinion with Dr Eric Smith of Hyder who advised that they would be prepared to certify the structure following adequate repairs based on the relative increase in capacity of the reinforced slab by means of reducing the span. Hyder are relying on the preservation of the current strength of the slab by treatment with Silane and confirmation of this by inspections every 5 years. Hyder's opinion is based on engineering judgement rather then calculations, as the amount of effective reinforcement remaining is not known.

We suggest that a light weight floor system such as Hebel floor panels be provided to support the existing slab and imposed loads. The same steel beam configuration could be used with the new steel beams supporting the Hebel panels. The structural adequacy of the floor system could then be certified with confidence. Silane treatment and future inspections would then not be required. The effect of the additional load on the existing steel beams would need to be determined.

Drainage pipes for Burger King have been installed through the Ground Floor slab directly over the tunnel. Some sections of the pipework protrude below the existing beams. It should be checked to confirm that these pipes do not project into the rail tunnel easement. The piping may also hinder the planned re-electrification of the line due to proximity to the power lines.

Additionally, the concrete encasement to the columns in the tunnel that was removed to expose the steel sections during the due diligence period by Cugg Pty Ltd does not appear to have been reinstated. This needs to be attended to, or further corrosion of the exposed columns will occur.

Our inspection also revealed significant corrosion in sections of the rear steel fire escape stairs. The paint protection of the steel has had only limited effect in areas where water has been trapped, such as under the f1oor plates. These areas need to be repaired.

Finally we stress that the degree of degradation of the slab over the rail tunnel is such that repair must be conducted in the near future.

Should you require any further information please contact the undersigned.

By another letter to Gibo the following day, Taylor Thomson Whitting advised "repair work on the slab over the rail tunnel must commence as soon as possible or there will be an unacceptable risk of structural failure". 39 On 1st October 1999, Mr. Trayer wrote to Cutler Hughes & Harris requiring Cugg to carry out at its own expense the work detailed in the Taylor Thomson Whitting report. 40 On 13th October 1999, Gibo gave to Cugg notice of breach of covenant, alleging breaches of clauses 2(6), 8 and 10. 41 These proceedings were commenced on 11th November 1999 by a Summons filed by Cugg. 42 At about this time, Dr. Abeshouse, the principal of Gibo, was attempting to contact the Sydney City Council about the matter. Towards the end of November, he spoke to Kenneth Kiely, a building surveyor at the Council. On 22nd November 1999, Dr. Abeshouse sent a facsimile to Mr. Keily, in the following terms: I refer to a meeting Mr. Shane Kelly attended on 4/12/98 following the discovery of a problem discovered in the slab during the Burger King Australia Pty. Limited installation of its pipe, which penetrated the slab.

I was not informed of the problem til the middle of this year and was not invited to attend that meeting.

I wish to clarify as to what expectations or reassurances you were given at that time in regard to the problem.

I wish clarify (sic) if any notices to repair have been issued.

I enclose a copy of reports of structural engineer.

Please inform us as to whether the slab complies with the terms of present legislation. 43 On 24th November 1999, Mr. Kiely posted to Gibo a Notice of Intention to Give an Order in relation to Wembley House. That Notice was in the following terms: Sydney City Council intends to give you an Order under the Environmental Planning and Assessment Act 1979. PREMISES: 839-847 GEORGE STREET SYDNEY 2000 WEMBLEY HOUSE

Circumstances: Inspection of the soffit to the concrete structure and a report from consulting engineers Taylor Thomson Whitting dated 26th September 1999 over the state rail tunnel at the above premises revealed reinforcement exposed and corroded due to degradation of the concrete slab.

Terms: The terms of the Order will be: To submit to Council 1. Structural details for proposed strengthening of the suspended slab. 2. Structural certification for design in the form of Attachment S1 [copy attached] calculated by a (sic) appropriately qualified practising structural engineer. 3. A make safe program for the proposed strengthening work. 4. Copy of clearance required by State Rail for Right of Way showing that no building works or associated service pipes protruding are not within State Rail easement.

Period: The proposed period for compliance with the Order is twenty-eight (28) days. Representations: You may make representations to Council about why this Order should not be given or about the terms or period for compliance of this Order. If you make representations about this Order, you may be represented by a barrister, solicitor or agent. Representations should be made to Ken Kiely on 9265-9722 on or before 14 days from the date of this notice of intent.

After hearing any representations made by you or if you do not make any representations, Council may give the Order as proposed, not give an Order or give a modified Order.

Relevant Authority: The relevant legislative provisions are Section 121B, Order No 4 of the Environmental Planning and Assessment Act 1979 as amended. 44 On the same day, Mr. Kiely sent a further letter to Gibo, in the following terms: Following our phone discussion regarding the fire rating to the slabs and PVC piping I have amended the Notice of Intention to include item No 5. For any enquiries please contact Ken Kiely on 9265-9722. 45 A further Notice was then sent to Gibo, in the same terms as the previous one except that it added an order 5, in the following terms: 5. Details of fire rating to underside of concrete slab and protruding PVC piping.

This Notice was passed on to Mr. O'Brien by Mr. Holgate on 25th November 1999. 46 On 9th December 1999, a facsimile was sent by Dr. Abeshouse to Mr. Kiely asking to be informed if the building complied with present fire safety legislation, and enclosing a report relating to that matter. 47 On the same day, an Order was issued by the Sydney City Council to Gibo, in the following terms: This is an Order under the Environmental Planning and Assessment Act 1979.

Premises: 839-847 GEORGE STREET SYDNEY 2000 WEMBLEY HOUSE

Circumstances: Inspection of the soffit to the concrete structure and a report from consulting, engineers Taylor Thompson Whiting dated 26th September 1999 over the State Rail tunnel at the above premises revealed reinforcement exposed and corroded due to degradation of the concrete slab.

Terms: The terms of this Order are: To structurally rectify and fire rate the slab and all penetrations and protruding PVC piping. Prior to carrying out the work Council require to be submitted with:

1 Structural details for proposed strengthening of the concrete slab.

2. Structural certification in the form of Attachment SI [copy attached] calculated by a qualified practising engineer.

3 A make safe program for the proposed strengthening work.

4 Copy of clearance required by State Rail for Right of Way showing that no building works or associated service pipes protruding are not within State Rail easement.

5 Details of fire rating to the underside of concrete stab and protruding PVC piping.

Period: You must comply with this Order within twenty eight [28] days from the date of this order.

If you do not comply with this Order, you will be guilty of an offence carrying a maximum penalty of 100 penalty units being to the value of $110,000 Council will be entitled to give effect to the order and recover its expenses and costs in doing so from you.

Appeal: You may appeal to the Land and Environment Court against the order or a specified pact of the order. An appeal must be made within 28 days of service of the order and does not affect the requirement for you to carry out this Order.

Relevant Authority: The relevant legislative provisions are Section 121B, Order No 4 of the Environmental Planning and Assessment Act 1979 as amended.

That Order was passed on to Mr. O'Brien by Mr. Holgate on 13th December 1999. 48 Subsequently, extensions of time were granted by the Council. However, as I understand it, the parties have proceeded to organise for work on the slab to be carried out, and the issue that I have to resolve is who is to pay for that work. 49 On 23rd March 2000, Cutler Hughes & Harris wrote to the Council, in effect suggesting that Dr. Abeshouse had procured the Council to give the order for the purpose of improving Gibo's position in the litigation. A copy of the letter was sent to Mr. Trayer, and Mr. Trayer responded by a letter to Cutler Hughes & Harris on 7th April 2000, strongly denying any improper conduct by Dr. Abeshouse.

ISSUES 50 It will be necessary first to consider some factual issues. The first of these concerns the question of good faith: it is alleged by Cugg that Gibo, through Dr. Abeshouse, breached an obligation of good faith in seeking to procure the issue of a notice by the Sydney City Council. 51 The second factual issue which I need to consider relates to the condition of the slab at the commencement of the lease. 52 The third issue to be discussed is whether, in all the circumstances, cl.8 of the lease meant that Cugg had and has an obligation to repair the slab. 53 The fourth issue is whether cl.10, combined with an order issued by the Sydney City Council, would impose an obligation on Cugg to repair the slab. This involves consideration of the relationship of cl.10 with cls.8 and 9, the validity and effect of the Council order, and the question of good faith (this in turn involving consideration of whether there is a relevant implied term in the lease, whether there was a breach of that term, and whether any such breach had causative effect). 54 The fifth issue concerns rates and land tax. That involves some factual questions, in particular the question of what if any differences there were between the leased premises and the land on which rates and taxes have been levied. In so far as there are such differences, then it is necessary to consider how cl.2(3) should be applied, in the light of those differences. Finally under this issue, there is a question of quantification of the liability. 55 Finally, there are some residual issues, concerning renewal of the lease and the withholding of consent by Gibo in relation to certain signs.

GOOD FAITH Submissions 56 During the initial hearing of this case in June last year, Mr. Conti QC, who then appeared for Cugg, submitted that Dr. Abeshouse's approach to the Council was made after this litigation commenced, and for the purposes of the litigation: he had no intention that Gibo should be subject to the burden of any order, but rather proposed that Gibo use the mechanism of the Council order in order to shift the obligation of undertaking repairs to the slab on to Cugg. 57 Mr. Slattery QC, who appeared for Cugg on 5th February this year, submitted that Dr. Abeshouse went to the Council with the dominant purpose of triggering cl.10, rather than any legitimate purpose; and that his doing so contributed to the issue of the Council notice; and that accordingly, Gibo could not rely on the notice. 58 Mr. Slattery submitted that I should not accept Dr. Abeshouse's evidence that he was concerned for public safety and concerned to ensure that the building complied with Council requirements: if that had been the case, he would have approached the Council much earlier. Dr. Abeshouse admitted that he was aware that the issue of a notice by the Council could shift the burden of repair from Gibo to Cugg. Mr. Slattery submitted that Dr. Abeshouse was not frank in his affidavit concerning discussions with Council officers as to the content of the notice, and that Dr. Abeshouse must have raised with the Council the question of the Council's "on-going requirements" as set out in his solicitor's letter of 7th April 2000. Paragraphs 12 and 13 of his affidavit were, Mr. Slattery submitted, intended to convey the impression that the Council could not have been influenced by material supplied by Dr. Abeshouse, because that material was supplied too late: that was an impression that Dr. Abeshouse must have realised was misleading. 59 Mr. Slattery submitted that the notice that was issued did issue as a result of Dr. Abeshouse's intervention. It was not to the point that some other notice may have issued at some other time. 60 Mr. Feller for Gibo submitted that I should accept Dr. Abeshouse's denial that he sought the issue of an order by the Council in order to take advantage of cl.10 of the lease memorandum. He submitted that Dr. Abeshouse had made an honest mistake as to the date of the document sent to the Council, resulting in his affidavit conveying an unintentionally misleading impression. He submitted that I should accept that Dr. Abeshouse's approach to the Council was for the legitimate purpose of protecting Gibo's commercial interests, namely to ensure that the building complied with the requirements of the Council and of other relevant authorities. For this purpose, Dr. Abeshouse needed to ascertain the Council's involvement and attitude. There was no suggestion of improper pressure on the Council, or misleading information, leading to the making of an unjustified order. 61 In any event, Mr. Feller submitted, Gibo's involvement did not cause the making of the order. It merely brought back to the Council's attention issues that the Council had considered important, but of which the Council had lost sight due to administrative matters including the ill-health of a relevant officer, and also the Council's assumption that Cugg was going to go ahead and do the work as previously proposed by Cugg.

Decision 62 I accept Dr. Abeshouse's explanation for the misdating of the copy of the document submitted to the Council: plainly, in my opinion, it was not fabricated for the purpose of giving a misleading impression. However, Dr. Abeshouse's affidavit and the solicitor's letter of 7th April did give a misleading impression to the effect that the Council could not have been influenced by information supplied by Dr. Abseshouse, because it was supplied too late; and Dr. Abeshouse should have been aware that that misleading impression was given. His evidence in relation to that matter was not convincing, and it leads me to have less than full confidence in his evidence. On the other hand, I am not satisfied he deliberately gave false evidence. 63 I accept the evidence of the Council officers, and in particular their evidence to the effect that the state of this concrete slab was a matter of concern from late 1998, and that the Council considered that an order would be required unless the work proceeded without the making of an order. In that sense, in my opinion, the Council's decision to issue an order was not the result of Dr. Abeshouse' s intervention, except to the extent that Dr. Abeshouse brought the matter back to the Council's attention. I accept that there was no prompting by Dr. Abeshouse as to the actual content of the notice or the order. 64 Dr. Abeshouse admitted that he knew that the issue of a Council order could assist his case by shifting the liability to repair the slab from Gibo to Cugg, and in my opinion it was part of his motivation in contacting the Council to see if that contact could result in the issue of an order and thus improve his position in the litigation that had been commenced. However, in my opinion he did also have legitimate purposes, namely to ensure that Gibo's building did comply with the requirements of the Council and other authorities, and to that end to clarify what those requirements were; and to ascertain the nature and extent of the Council's previous involvement. I am not satisfied that his other purpose was predominant over those legitimate purposes. 65 On the question of causation, I accept that, but for Dr. Abeshouse's intervention, the Council would not have issued the notice and order when it did; but only because the Council had lost sight of the matter. This in turn was partly because Cugg had represented to the Council that it would repair the slab, but then did not proceed with this and did not alert the Council to this circumstance. Even without Dr. Abeshouse's intervention, this would probably have come to the Council's attention reasonably soon, and the action would have ensued. Indeed, having regard to its earlier involvement, as a matter of proper business practice, Cugg should have drawn its change of position to the Council's attention.

CONDITION OF SLAB Submissions 66 In written submissions, Mr. Ogborne for Cugg submitted that the slab was relevantly in the same condition in 2000 as it had been at the commencement of the lease. He submitted that I should accept the evidence of the plaintiff's expert Mr. Mahaffey, which was in substance accepted by Gibo's engineer Mr. B. Smith, as to the process by which the slab came to be in its present condition and the probable timing of that process. He submitted that I should accept Mr. Mahaffey's evidence to the effect that at all times there had been low concrete cover to the lower reinforcement of the slab, limited to 10mm or less, that carbonation of the concrete had penetrated to 15-20mm, and that there were high levels of sulphide ions throughout the slab caused by the use of the tunnel by steam trains from 1927 to 1971 and by diesel trains from 1954 to 1984; and that the spalling of the concrete had been caused by the resultant corrosion of this lower reinforcement, and as a consequence concrete had fallen away from about 10% of the underside of the slab. He submitted that I should accept Mr. Mahaffey's evidence to the effect that of that 10%, probably 80% had fallen before about 1982, the time when a footway was installed; and that even in respect of that 80%, the actual falling away of the concrete was only the last stage of a process which had been proceeding for very many years. 67 It was submitted by Mr. Feller for Gibo in written submissions that the current condition of the slab had arisen largely since the commencement of the lease. It was submitted that in 1979, Messrs. Howarth and O'Brien, representing Cugg, had been concerned to ensure that the condition of the building was satisfactory. A report dated 17th October 1979 made available to them at that time disclosed spalling on the underside of the slab. As a result, they had had the property inspected by an engineer Mr. Wargon, and had received a satisfactory report from him. It was submitted for Gibo that the onus of proof was on the plaintiff to establish the condition of the slab at the commencement of the lease. Mr. Mahaffey conceded that, if the damage at the commencement was minor and localised, as suggested by the events just referred to, it was feasible that the deterioration now in evidence could have occurred since.

Decision 68 Mr. Mahaffey's concession was made on the basis that, the process of corrosion having started, it would continue. I infer from that this what Mr. Mahaffey had in mind with that concession was that the continuation of the process of corrosion would result in a concealed problem becoming apparent. 69 Mr. Wargon had no recollection of the inspection. I think it likely that he would have carried out some inspection of the underside of the slab, but that inspection would certainly not have been in the detail or with the specific expertise regarding the condition of concrete slabs that Mr. Mahaffey brought to the question. In my opinion, the full significance of the problem was not appreciated at the time of those early inspections in 1979. I accept Mr. Mahaffey's evidence, as set out in my account of Cugg's submissions. 70 In those circumstances, I accept that, while there has been some further deterioration because the corrosion of the reinforcing has progressed somewhat since the commencement of the lease, the difference in the condition of the slab resulting from that process is relatively small, compared with the magnitude of the problem, both at the commencement of the lease and at the present time.

CLAUSE 8 71 Both parties made some submissions concerning cl.2(6) of the lease memorandum; but it is common ground that this clause would only apply if the lessee had an obligation to repair based on some other covenant of the lease; and in my opinion it is not necessary to consider it further.

Submissions 72 In Cugg's written submissions, it was submitted that any deterioration of the slab since the commencement of the lease was due to an inherent defect, namely the level of sulphide ions throughout the slab, the depth of carbonation in the slab, and the insufficient coverage of the lower reinforcement. Accordingly, cl.8 did not require the plaintiff to repair: Lister v. Lane (1893) 2 QB 212 at 216; Graham v. Markets Hotel Pty. Ltd. (1942) 43 SR(NSW) 98 at 103. 73 In any event, any deterioration was due to fair wear and tear: as stated by Mr. Mahaffey, any progression of corrosion and any resultant deterioration of the slab was due to moisture, that is, the ordinary operation of natural forces: cf. Haskell v. Marlow (1928) 2 KB 45 at 59. 74 It was submitted for Cugg that the repairs which the engineers agreed were now required, namely additional steel beams to support the slab, were no different from those which were actually required at the commencement of the lease; and would constitute improvements to the premises: see Sotheby v. Grundy (1942) 2 AllER 761; ACT Construction Ltd. v. Customs & Excise Commissioners (1982) 1 AllER 84 at 88. 75 In any event, no basis was shown for an award of damages: there was no evidence of the cost of that work, and no evidence of any diminution of value of the reversion: see Salsbury (Marquess) v. Gilmour (1942) 2 KB 38 at 48-9. 76 In Gibo's written submissions, it was submitted that, while a covenant to repair does not oblige the lessee to make improvements, nevertheless if the covenant to repair cannot be performed without causing improvements, then to that extent the lessee is obliged to make improvements: see Graham v. The Markets Hotel Pty. Ltd. (1943) 67 CLR 579. 77 It was submitted that in relation to the exception of fair wear and tear, the onus of proof was on the lessee: Brown v. Davies (1957) 3 AllER 401. In any event, this does not excuse the lessee from taking steps to avoid further damage from lack of repair of a problem which was originally due to fair wear and tear: see Regis Property Co. Ltd. v. Dudley (1959) AC 370 at 393-4, where the House of Lords approved a passage in Haskell v. Marlow (1928) 2 KB 45, which gives the example of a tile falling from a roof, and the tenant's liability for damage done to the house by reason of the tile not being replaced. 78 It was submitted for Gibo that on the evidence, putting a protective barrier under the slab in 1980 would have prevented the penetration of moisture and thus prevented further corrosion. On the principle approved in Regis Property, this should have been done. 79 In this case, it was submitted, the only effective way of fulfilling the covenant to repair was by strategies that may lead to some improvement, but this did not affect the lessee's liability.

Decision 80 In accordance with my decision on the facts, I consider that there is no substantial difference between the condition of the slab at the commencement of the lease and now. The rectification that is required is essentially the same now as it was then. In so far as there are any differences which makes works necessary now that were not necessary at the commencement, in my opinion those differences are due to fair wear and tear. 81 Although a protective barrier placed under the slab in 1979 would probably have greatly reduced any ongoing corrosion, in my opinion most of the relevant damage was already done, and the barrier would have made little difference to the problem. In any event, this is not a defect occurring during the lease, like the broken tile discussed in Haskell, but rather is a defect that was present at the commencement of the lease. Further, it is not a case where ordinary ongoing maintenance to deal with defects as they occur saves the occurrence of serious problems going beyond ordinary wear and tear, as with a broken tile: rather the barrier would have been an improvement to the condition of the slab at the commencement of the lease, which may then have reduced the effect of ordinary wear and tear. Accordingly, in my opinion, any deterioration is within the "fair wear and tear" exception. 82 For those reasons, in my opinion, cl.8 did not impose an obligation on the lessee to put up a barrier at the commencement of the lease, nor does it impose an obligation to undertake the structural works that are now recommended by the engineers. 83 I would add that I do not accept Cugg's submission on damage. Had I found breach, there was in my opinion ample evidence that the cost of the required work was substantial, and an inference was available that the value of the reversion would be substantially less if the work was not done.

CLAUSE10 Submissions 84 In Cugg's written submissions, it was put that any obligations imposed by cl.10 did not extend to a requirement to improve the premises, inconsistently with cls.8 and 9: plainly cl.10 had to be read down, because in its terms, it was not even limited to the demised premises; and the limitations to cl.8 and especially cl.9 were added by way of cl.13 of the lease itself, a term specific to the lease, so that they should be given greater weight than the general provision of cl.10 in the lease memorandum. I was referred to Bunyip Buildings v. Gestetner (1969) SASR 87 at 89: in that case, there was an obligation in a lease to keep the premises in good tenantable repair, and also a covenant to yield up the premises in good repair, reasonable wear and tear excepted. It was held that the exception of reasonable wear and tear should be implied into the ongoing obligation of repair. 85 In any event, it was submitted for Cugg that for various reasons the Council order was ineffectual to bring about any obligation on the plaintiff or any breach of the lease. In the first place, time for compliance with the order had been extended, and there was no evidence that the extended time had expired, so that there could be no breach of the order and thus no breach of the lease. Next, on its proper construction, the order only required Gibo to submit plans within 28 days. The Notice of Intention to Issue the Order had only foreshadowed an order for submission of plans, and there was no power to modify what was notified except pursuant to representations: see s.121I to 121K of the Environmental Planning & Assessment Act. Furthermore, s.121M of the Act requires reasonable time for compliance, and while 28 days was a reasonable time for plans, it was plainly not a reasonable time for completion of the works. Alternatively, the order was invalid because it did not conform to the Notice of Intention and because the time limit was unreasonable: see Re Moe (1994) 30 ALD 288 at 291. 86 Furthermore, it was submitted for Cugg that there was implied in the lease a promise by Gibo of good faith and fair dealing: see Rennard Constructions (ME) Pty. Limited v. Minister for Public Works (1992) 26 NSWLR 234; Alcatel Australia Ltd. v. Scarcella (1998) 44 NSWLR 349; Hungry Jacks Pty. Ltd. v. Burger King Corporation (1999) NSWSC 1029; Backler v. Felpure Pty. Ltd. (1999) NSWSC 958; Gary Rogers Motors (Australia) Pty. Ltd. v. Subaru Australia Pty. Ltd. (1999) FCA 903; Aston Australia Pty. Ltd. v. Transfield Pty. Ltd. (1999) NSWSC 996. As submitted on the facts, Gibo had breached that duty of good faith, and could not rely on the Council order. 87 In Gibo's written submissions, it was put that there was no inconsistency between cl.10 and cls.8 and 9, and no reason to read cl.10 down from its natural meaning. 88 In relation to the order, it was submitted that Cugg had not excluded the possibility that the order was one which required immediate compliance, under s.121M of the Environmental Planning & Assessment Act. Alternatively, the order could be construed as a two-stage order, requiring as a first stage the submission of the documents and plans. The second stage then required the performance of rectification work after approval of the submitted documents. 89 Furthermore, it was submitted, any such problem with the notice should be dealt with pursuant to s.121N of the Act, which confers a right of appeal. Cugg did not seek to have any appeal brought against this order. 90 Although Cugg has now provided the plans required by the order, it was submitted that this could not defeat Gibo's entitlement to enforce compliance with its obligation under cl.10. At worst, the Court should determine, as foreshadowed during the hearing, the situation which would ensue if the Council did issue a valid order requiring the actual carrying out of the work. Indeed, it was submitted for Gibo that the submission of the plans irrevocably bound Cugg to an acceptance of an obligation to comply with the Council's order, because it must be taken to have submitted the information on behalf of Gibo with full knowledge of its contractual obligation to do so. It was also submitted that the evidence showed that the order had in fact only been extended to 31st March 2001.

Decision 91 The Council order was made under Division 2A of Part 6 of the Environmental Planning & Assessment Act. The relevant sections of this Division are set out below. 92 The basic section is s.121B. Subsection (1) of that provision, and Items (4) and (6) of the Table, are in the following terms: 121B(1) An order may be given to a person by: (a) a council, or (b) any other person who exercises functions as a consent authority, except in relation to complying development for which a complying development certificate has been issued, to do or to refrain from doing a thing specified in the following Table if the circumstances specified opposite it in Column 2 of the Table exist and the person comes within the description opposite it in Column 3 of the Table.

Column 1 Column 2 Column 3 To do what? In what circumstances? To whom? ... 4. To repair or make (a) Building is or is likely to Owner of structural alterations to become a danger to the public building a building (b) Building is so dilapidated as to be prejudicial to its occupants or to persons or property in the neighbourhood ... 6. To do or refrain from (a) Provision for fire safety Owner of doing such things as are or fire safety awareness are premises in specified in the order so as not adequate to prevent fire, the case of a to ensure or promote suppress fire or prevent the place of adequate fire safety or spread of fire or ensure or shared fire safety awareness promote the safety of persons accommod- in the event of fire. ation, the (b) Maintenance or use of owner or the premises constitutes a manager significant fire hazard ... 93 Section 121B(2) provides that regulations may vary items in columns 1 and 2 of the Table; but there appear to be no relevant regulations. 94 The other relevant sections are ss.121H to 121R inclusive. Those sections are in the following terms: 121I(1) A person may, in accordance with a notice under section 121H, make representations concerning the proposed order. (2) For the purpose of making the representations, the person may be represented by a barrister, solicitor or agent.

121J The person who gives the order or the nominated person is required to hear and to consider any representations made under section 121I.

121K(1) After hearing and considering any representations made concerning the proposed order, the person who gives the order or the nominated person may determine: (a) to give an order in accordance with the proposed order, or (b) to give an order in accordance with modifications made to the proposed order, or (c) not to give an order. (2) If the determination is to give an order in accordance with modifications made to the proposed order, the person who gives the order is not required to give notice under this Division of the proposed order as so modified.

121L(1) A person who gives an order must give the person to whom the order is directed the reasons for the order. (2) The reasons may be given in the order or in a separate instrument. (3) The reasons must be given when the order is given, except in an emergency. In an emergency, the reasons may be given the next working day.

121M(1) An order must specify a reasonable period within which the terms of the order are to be complied with, subject to this section. (2) An order may require immediate compliance with its terms in circumstances which the person who gives the order believes constitute a serious risk to health or safety or an emergency.

121N A person who gives an order must, in giving a person notice of the order: (a) state that the person or any other person affected by the order may appeal to the Court against the order or a specified part of the order, and (b) specify the period within which an appeal may be made.

121O A person who carries out work in compliance with a requirement of an order does not have to make an application under Part 4 for consent to carry out the work.

121P(1) Instead of specifying the things the person to whom the order is given must do or refrain from doing, an order: (a) may specify the standard that the premises are required to meet, and (b) may indicate the nature of the work that, if carried out, would satisfy that standard. (2) Such an order may require the owner or occupier to prepare and submit to the person who gives the order, within the period (not exceeding 3 months) specified in the order, particulars of the work the owner or occupier considers necessary to make provision for such matters as may be so specified.

121Q(1) A person complies with a requirement of an order under section 121P (2) by submitting to the person who gives the order such matters as the person would be required to submit if applying to a consent authority for development consent to carry out the work. (2) (Repealed)

121R(1) A person who gives an order must, within 28 days after particulars of work are submitted to the person in accordance with section 121P (2): (a) accept the particulars without modification or with such modifications as the person thinks fit, or (b) reject the particulars. (2) If a person accepts the particulars of work without modification, the person must forthwith order the owner to carry out that work. (3) If a person accepts the particulars of work with modifications or rejects the particulars, or if an owner fails to submit particulars of work in accordance with section 121P (2), the person must: (a) prepare, within 3 months after the acceptance, rejection or failure, particulars of the work that the person considers necessary to make provision for the matters specified in the order given to the owner under section 121P, and (b) order the owner to carry out that work. (4) An order under this section is not invalid merely because of the failure of the person to accept or reject any particulars of work or prepare particulars of any work, as the case may be, within the period it is required to do so by this section. (5) A person may recover from an owner as a debt the person's expenses of preparing particulars of work under this section. (6) Except for the purposes of section 121ZK (3), an order under this section forms part of the order under section 121B to which it relates. 95 In my opinion, the order made in this case to carry out works was invalid, because no notice was given of any intention to make that order: the only notice of intention that was given was a notice of intention to require the submission of plans and associated material, presumably pursuant to s.121P(2). In my opinion, it cannot be suggested that the addition of the requirement to effect the works was justified by s.121K(2), because that provision only applies to modifications made to an order arising out of the hearing and consideration of representations made pursuant to s.121I and s.121J. There were no such representations made in this case. In my opinion, the question of validity can be raised at this hearing, and does not require an appeal under s.121N. 96 In my opinion also, there is a further reason why the requirement in the order that works be carried out was invalid, namely that the time limit of 28 days was plainly not a reasonable time for the carrying out of the works, although I accept that it was a reasonable time for the submission of plans. 97 I see no reason why the order should not be considered as severable, and thus be valid in relation to its requirement that plans and associated material be submitted. I accept that the time for compliance with the order was extended by the Council to 31st March 2000, and I see no reason for supposing that it was extended any longer. The order was accordingly breached once 31st March 2000 had passed. It would appear that the breach was rectified when plans were submitted by Cugg on 23rd June 2000. I would not regard that submission of plans as any kind of election by Cugg, binding it to carry out the works. 98 Plans having been submitted, s.121R in effect required the Council to respond with an order for the carrying out of the work, either in accordance with the plans or in accordance with other plans prepared by the Council. So far as I am aware, there is no evidence whether this was done. In any event, I indicated during the hearing that I would proceed to decide whether, if the Council did issue a valid order for the carrying out of this work, either Cugg or Gibo would be obliged to carry it out; and this was not objected to by Cugg. 99 In my opinion, cl.10 of the memorandum is not restricted in its effect by either cl.8 or cl.9. The two latter clauses in effect require the lessee to repair, and they limit this requirement to the condition of the property at the commencement of the lease. However, consistently with Graham v. The Markets Hotel Pty. Ltd., if a lessee cannot perform a covenant without improving the condition of the premises beyond their condition at the commencement of the lease, the absence of a requirement otherwise to improve the premises will not exempt the lessee from performing this covenant. If there were an inconsistency between cl.8 and/or cl.9 and cl.10, I would prefer cl.8 or cl.9, because the relevant parts of those clauses were inserted by a provision specific to this lease. However, I do not consider there is any inconsistency. 100 The result of this approach is that the lessee would not be under an obligation to repair the slab in the absence of a Council order that the slab be repaired, but would be obliged to repair it if a Council order is made. That view brings into consideration the question of good faith. I think there is an obligation of good faith on Gibo in relation to this lease, and I accept that, if a Council order was procured dishonestly by Gibo, then Gibo could not rely on it. What is contended is that Gibo approached the Council with the predominant purpose of procuring an order, thereby causing an order to be made; and that since the approach with this predominant purpose was a breach of an obligation of good faith, then Gibo cannot rely on the order. 101 It is not necessary for me to decide if the obligation of good faith goes this far. I have already found that, although the purpose of procuring an order was one of Dr. Abeshouse's purposes, it was not the predominant purpose. I have found that Dr. Abeshouse also had the legitimate purposes of ascertaining the Council's requirements and ascertaining what had happened. 102 In my opinion also, Dr. Abeshouse's approach should not be regarded as in substance the cause of the Council's order. The Council had refrained from making an order previously because of Cugg's conduct in representing to the Council that it would do the work, and then failing to notify the Council that it was not going to do so. Dr. Abeshouse's approach triggered the Council's renewed interest in the matter, but in the light of the whole history, I do not think it can in a substantial way be considered as the cause of the Council issuing the order. 103 For those reasons, in my opinion Gibo is entitled to rely on cl.10, and if the Council now issued a valid order requiring the repair of the slab, Cugg would be bound to carry it out at its expense.

GIBO'S DUTY TO REPAIR? 104 In its written submissions, Cugg accepted that a duty on Gibo to repair the slab would only arise if Gibo allowed the condition of the slab to deteriorate to a state where it prevented Cugg from using the demised premises as a site of commercial activities. Cugg accepted that this stage had not yet been reached. I do not think I should determine a hypothetical question about this matter. I note that Gibo referred to a recent case of Advance Fitness Corporation Pty. Ltd. v. Bondi Diggers Memorial & Sporting Club Ltd. (1999) NSWSC 264; and that case would tend to support a fairly narrow view of a landlord's duty in these circumstances.

RATES AND LAND TAX 105 It is common ground that the demised purposes for the purposes of cl.2(3) of the memorandum of the lease are not identical to Gibo's land on which rates and land tax are now levied, in two respects. 106 Firstly, Lot 4 in Deposited Plan 260046 is not part of the demised premises, but by cl.28(i) of Schedule 2, land the subject of right of user and right of footway is deemed to be part of the demised premises for the purposes of imposing obligations on the lessee. Lot 2 in Deposited Plan 876785 includes part of Lot 4, so that the area of that Lot 2 is 953sq.metres as compared to 926sq.metres for Lots 1, 2 and 3. The difference is essentially that part of Lot 4 which comprised a fire escape, and in respect of which the lessee was given a right of footway and right of user. 107 The second respect in which there is a difference is that Gibo's land, upon which rates and land tax has been levied, is land of unlimited height and depth; whereas the demised premises only includes the building (not including the tunnel below the slab) and supporting structures beneath the building.

Submissions 108 In its written submissions, Cugg submitted that Council rates and land tax are not payable on the demised premises, but on Gibo's land; and are not payable "in respect of the demised premises". I was referred to Technical Products Pty. Ltd. v. State Government Insurance Office (Qld) (1989) 167 CLR 45. At most, it was submitted, only part of the rates and land tax payable on Gibo's land are paid in respect of the demised premises. Furthermore, true land like Gibo's land is fundamentally different from strata like the demised premises, and a proper valuation of these different items would be on an entirely different basis. I should accept Mr. Norris' evidence that it makes a substantial difference to valuation; and Mr. Ferdinand's evidence to the contrary, not being supported by any explanation, should be rejected. 109 It was submitted for Cugg that the High Court case of Tooth & Co. Ltd. v. Newcastle Developments (1966) 116 CLR 167 should be distinguished: in that case, land tax was assessed on the demised premises, and the question arose because land tax was also assessed on other land in addition. 110 In its written submissions, Gibo submitted that the Tooth decision applied to this case. As in that case, the clause here plainly intended that there should be liability to pay something, at least such part of rates and land tax as could be said fairly to be imposed or charged in respect of the demised premises. The amount of that liability should be such that the ratio of the liability to the landlord's total liability would be the same as the ratio of the value of the demised land to the total value of the landlord's land.

Decision 111 In my opinion, rates and land taxes are payable by Gibo "in respect of the demised premises" within cl.2(3), although those rates and land taxes are not necessarily the same as those payable in respect of Gibo's Lot 2. 112 Dealing with the first difference, concerning Lot 4 and the fire escape, in my opinion this difference is de minimis. In my opinion, the demised premises are not deemed to include the whole of Lot 4, but only so much of it as is burdened by the rights of user and footway, that is essentially the fire escape. The difference between the 926.7sq.metres of Lots 1, 2 and 3 of Deposited Plan 260046, and the 953sq.metres of Lot 2 of Deposited Plan 876785, arises broadly from the inclusion of the area of the fire escape into the latter. The discrepancies between the area of the fire escape and the area added to constitute Lot 2, namely dimensions of the order of 0.04 metres and 0.095 metres, are in my opinion de minimis. 113 This means that in substance the whole of the demised premises is included in Lot 2 of Deposited Plan 876785; and in my opinion the principle in Tooth applies, so that at least part of the rates and land tax payable by Gibo on Lot 2 are payable in respect of the demised premises. 114 The exclusion of the tunnel and strata below the building from the demised premises is a matter which is not obviously de minimis. Mr. Ferdinand gave evidence that it made no difference to the highest and best use of the relevant property, and also that, on the basis of the Valuer-General's working papers, it did not make any difference to the Valuer-General's valuation. Those papers do show that, on the balance of probabilities, the Valuer-General did not in fact attribute any additional value to the tunnel or the underlying strata. 115 In a case where the Valuer-General has, in respect of the relevant years, made no valuation of the demised premises, but only a valuation of different premises owned by the lessor, I do not think the principle in the Tooth case depends upon the actual approach of the Valuer-General to the valuation of the lessor's land, but rather depends upon ratios of actual values. That is, if the demised premises, not having been valued for relevant years by the Valuer-General, are in fact of lower value than Gibo's land on which rates and land tax have been levied, that should be taken into account even if the Valuer-General did not in the event itself take note of that difference. I accept, consistently with the evidence of Mr. Norris, that the exclusion of the tunnel and of strata below the building would make a difference to value, by restricting the potential for redevelopment and excluding whatever value the tunnel itself (subject to the easement over it) might have. I do not think Mr. Ferninand gave any cogent reasons to the contrary. 116 There is no valuation evidence before me as to the quantum of this difference. The onus is on Gibo to show the liability of Cugg. I am not affirmatively satisfied by Gibo that there is no appreciable difference; although on the other hand, the difference cannot be great, and it would be absurd to refuse the landlord relief entirely on that basis, because it has not proved the quantum of that difference. Doing the best I can, and having regard to the circumstance that the problem is due to absence of evidence on a matter on which Gibo bears the onus, I would assess the difference at 10%, and decide that Cugg is liable for 90% of the rates and land taxes payable on Lot 2 of Deposited Plan 876785.

RESIDUAL ISSUES 117 In the Amended Summons, Cugg also sought declarations and orders relating to Gibo's withholding of consent to the affixation of signs to the exterior of the demised premises. Gibo had previously indicated that it would consent to the affixation of such signs only on the payment of a licence fee. 118 Almost immediately after the commencement of proceedings, Gibo informed Cugg that it would not pursue its claim for a licence fee and would consent to the relevant signs, but Gibo has not conceded that its demand for a licence fee amounted to an unreasonable withholding of consent. 119 Cugg now submits that I should grant a declaration that Gibo unreasonably withheld its consent, and also an injunction against that kind of conduct in future. 120 However, as pointed out in Gibo's written submissions, the only injunction sought in the Amended Summons on this question was an injunction relating to the withholding of consent to the particular signs originally in question, and that consent has been given. The question of Cugg's entitlement to a permanent injunction relating to future hypothetical circumstances was not litigated. For that reason, I would not grant the injunction now sought by Cugg. Furthermore, in the circumstances, a declaration as to the past withholding of consent has no present utility. 121 For those reasons, I will not grant the declarations and orders sought on this matter. However, these circumstances may be relevant to the costs orders that I ultimately make. 122 Cugg also seeks costs in relation to two other matters, in respect of which Gibo abandoned its position shortly after the commencement of proceedings. I will consider these matters when I consider the question of costs generally. 123 For the reasons I have given, I propose to make orders along the following lines: 1. A declaration that Cugg has not at material times been in breach of the covenant in cl.8 of the memorandum. 2. A declaration that Cugg was bound by cl.10 of the memorandum to comply with the Sydney City Council order of 9th December 1999, and that this order validly required the submission of plans and associated material but not the carrying out of work. 3. A declaration that Cugg would be bound by cl.10 of the memorandum to comply with a valid order of the Sydney City Council to repair the concrete slab over the railway tunnel. 4. A declaration that Cugg is obliged to pay 90% of the land tax and rates levied on Lot 2 in Deposited Plan No.876785. 124 I will hear argument about costs.

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