Darlington No. 1 Pty Ltd v White Label Hospitality Group Pty Ltd

Supreme Court of NSW|2020-07-17|Before: Fagan J

Judgment

This is an action for recovery of arrears of rent and damages for loss of bargain in connection with a lease of commercial premises granted by the plaintiff to the first defendant. The second and third defendants are directors of the first defendant and guarantors of its obligations under the lease. Judgment was entered against the second defendant for $994,872.95 on 21 February 2020. The plaintiff's claims are contested by the first and third defendants, to whom I will refer in these reasons simply as the defendants.
The subject premises are at 231 Oxford Street Sydney comprising two floors. Under a lease to the first defendant the premises were used for the conduct of a bar, nightclub and restaurant. The lease commenced on 22 June 2017 for a term of four years and six months at an annual rent of $269,178 payable monthly in advance at the rate of $22,431.50 per month plus GST (total $24,674.65). Rent was paid in full up to the month ended 21 October 2017, although every payment was to some extent late. For the month from 22 October 2017 to 21 November 2017 $20,000 was paid by instalments during November and December 2017. The balance of $4,674 for the month ending 21 November 2017 has never been paid and no rent was paid in respect of the next month, to 21 December 2017.
Notices requiring the first defendant to remedy its defaults with respect to rent were given by the plaintiff on 9 and 20 November 2017. When no further payment had been received by 22 December 2017 the plaintiff determined the lease on that day and re-entered and changed the locks. The defendants were then given notice to arrange a time to attend and collect their movable property. There subsequently arose a dispute about alleged conversion of the first defendant's movables but that dispute has been resolved.

Facts

The plaintiff purchased the property in late 2016. It was subject to a lease to Oxford Circus 231 Pty Ltd ("Oxford Circus") for a term of five years from 5 December 2014; that is, expiring on 4 December 2021. The principal of Oxford Circus was Mr Jaroudy. Oxford Circus operated a bar, restaurant and nightclub business in the premises. During March and April 2017 Mr Jaroudy and his sales agent negotiated with the second and third defendants for the sale to the first defendant of the Oxford Circus business. On 12 April 2017 a contract of sale was entered into at the price of $160,000, of which $5,000 was apportioned to goodwill and the balance to plant and equipment.
By special conditions 45-49 of the contract the parties acknowledged the existing lease, a copy of which was annexed to the contract. Completion of the sale of business was conditional upon the parties procuring from the lessor approval for an assignment of the lease from Oxford Circus to the first defendant. By special conditions 50-52 completion was conditional upon transfer to the first defendant or its nominee of the liquor licence for the business. By special condition 63 Oxford Circus warranted the accuracy of an inventory of plant and equipment that was annexure C to the contract.
In the course of negotiations for this contract Oxford Circus represented that the total value of the plant and equipment in the inventory was over $900,000. The third defendant said in evidence that this was important to him. He thought that the acquisition of the inventory would afford some protection if the business should experience poor trading, in that valuable items could then be sold off. It is apparent that many of the listed items were fixtures of the premises, attached to the property in such a way as to have become part of the realty. Oxford Circus had no title to sell such fixtures and the first defendant did not acquire ownership of them.
It is not necessary for the Court to determine which items were of this nature. However the following are examples of things that are likely to have been landlord's fixtures: Bespoke front bar, […] including 1900s iron fireplace […] $35,000 Custom designed stainless steel bar service area, set down sink $18,500 Stainless steel shelves, benches […] set down sink, hand basin $28,000 3.5m range hood and splashback $25,000 Cool room […] $45,000 Acoustic treated purple vinyl panel walling $28,000 Antique cast iron fireplace […] $24,000 Cast-iron antique stair bannister $15,000 The inventory was padded out with numerous items, to a significant purported total value, that were almost certainly landlord's fixtures; for example toilet bowls and cisterns, urinals, hand basins, taps, window grates and "painting of entire walls and ceilings $52,700".
The lease in favour of Oxford Circus that was attached to the contract of sale of business included provisions for the following:

A term of seven years, expiring on 4 December 2021.
Rent of $260,000 per annum, payable monthly in advance, plus GST. No turnover rent.
A bond of three months' rent or equivalent bank guarantee.
Annual rent reviews in accordance with the Sydney all groups Consumer Price Index ("CPI").
Outgoings for gas, electricity and phone but not for land tax, council rates, water rates or water usage.
Interest of 5% pa on overdue payments.
An option to renew for up to three further terms of five years each.
Use of premises: licensed restaurant/bar/club.
Insurance and indemnity: $10m public liability.

The second defendant engaged Ms A Bernauer of Wood Marshall Williams Solicitors to act for himself and the first and third defendants on the purchase of the business and the lease of the premises. The third defendant did not meet Ms Bernauer at any time and he did not retain any other legal advisor in relation to his separate interest as guarantor of both the contract for sale of business and the lease. All communications with Ms Bernauer were by the second defendant.
Oxford Circus did not inform the plaintiff of its negotiations to sell the business and to assign the lease until after the agreement for sale had been executed. By email of 18 April 2017 Mr Jaroudy informed the principal of the plaintiff, Mr Matterson, that the business had been sold and attached CVs of the second and third defendants. On 21 April 2017 Ms Bernauer wrote to the plaintiff's solicitor, Mr Cameron, as follows: We act [for] White Label Hospitality Group Pty Ltd, the purchaser of the above-mentioned business [referring to Oxford Circus' business] and understand that you act for the lessor in respect of the lease. We confirm that exchange of contracts took place for the sale of business on 12 April 2017. Please kindly provide us with your client's requirements in respect of the consent to an assignment of lease to our client. We enclose a copy of an ASIC search of White Label Hospitality Group Pty Ltd. We are advised that further documents as to our client's suitability as lessee have been provided to your client direct.
A copy of the contract for sale of the business was provided to the plaintiff at this time but it did not include the inventory of plant and equipment that Oxford Circus purported to have sold to the first defendant. On Mr Cameron's advice, the plaintiff adopted the position that it required a new lease to be entered into between itself and the first defendant, rather than an assignment of the existing lease from Oxford Circus to the first defendant. The reason for this advice was that the plaintiff had not received an original of the lease to Oxford Circus when it completed its purchase of the property in late 2016 and that lease had never been registered. By email of 1 May 2017 Mr Cameron sought Ms Bernauer's response to various proposed conditions of the plaintiff consenting to the transaction, which included the following: 1. That the parties enter into [and] execute a new lease - in substantially the same conditions as the former lease + variation.
Ms Bernauer's response included that "the parties propose that the transaction be documented by way of a Deed of Assignment of Lease rather than a new Lease". On 3 May 2017 Mr Cameron answered that point as follows: No, a new lease is required so to incorporate all previous variations and other agreements etc. We also want them to forfeit the previous lessee's fit out or does this happen naturally when a new lease is made?
In some of this email correspondence Mr Cameron expressed the plaintiff's reservations about the financial capacity of the first defendant and its directors, the second and third defendants. By email of 9 May 2017 Ms Bernauer advised Mr Cameron that she was instructed "Chris Duff and Chris White will agree to provide personal guarantees". In a further email of 12 May 2017 she said this: We are instructed that our respective clients have now met in person to discuss the proposed assignment of Lease. Please kindly confirm that your client approves the assignment of Lease. Our client's position is that the Lease should be assigned on the same terms that currently apply. Both Chris White and Chris Duff will agree to provide personal guarantees.

Consequences of non-compliance with s 11

The plaintiff contends that any right the first defendant may have had under s 11 to terminate - and thereby to relieve itself from the obligations of the lease - expired on 21 December 2017. The first defendant's statutory right of termination arising from the failure of the plaintiff to provide a disclosure schedule had to be exercised by notice in writing "within 6 months after the lease was entered into". The lease was entered into on 22 June 2017. The plaintiff's contention does not take account of the operation of s 36 of the Interpretation Act 1987 (NSW). By force of that section the six months must be reckoned exclusive of 22 June 2017. Thus, the statutory period did not expire until the end of 22 December 2017. The first defendant was still within time to exercise its right of termination throughout that day, albeit just barely.
The plaintiff further submits that the first defendant was not permitted to escape from the lease by terminating it under s 11(2) because the preconditions in pars (a) and (b) of subs (3) were not satisfied. As to par (a) of subs (3), I accept that in entering into the lease without having provided a s 11 schedule the plaintiff acted reasonably and honestly. There is no suggestion of dishonesty. It was reasonable for the plaintiff to have assumed that it did not need to disclose anything to the first defendant because it was the first defendant that came to the plaintiff seeking assignment of the existing, fully documented lease. The dealings between the parties never assumed the substantive character of the plaintiff offering a leasehold of the premises upon terms of its own making, such as to call for full disclosure to the prospective lessee.
When the plaintiff insisted that there should be a new lease rather than an assignment, the plaintiff did not seek to intrude any material departure from the terms of the Oxford Circus lease. The first defendant had had ample opportunity to consider that lease before seeking an assignment of it. From the plaintiff's perspective, far from requiring disclosure of anything, the first defendant had been able to examine the Oxford Circus lease fully with the assistance of a solicitor and was pressing to bind itself to that lease. The plaintiff proffered a new lease in those same, pre-approved terms.
If a disclosure schedule had been completed under s 11 it would have been required to identify, amongst other things, the landlord's fixtures that were part of the premises leased. It was reasonable for the plaintiff to have omitted specific disclosure of its fixtures because the first defendant came to the plaintiff seeking an assignment, after having negotiated with the existing lessee. In the circumstances the plaintiff acted reasonably in proceeding on the assumption that the first defendant was content to take a lease on the same terms as those by which Oxford Circus and the plaintiff were already bound, which of course included that whatever was affixed in the premises as at 12 April 2017 was part of the landlord's realty.
As to par (b) of s 11(3), when the first defendant executed the lease on 22 June 2017 it was in at least as good a position as if it had received a disclosure schedule. That is because the lease as executed was on the same terms, in all material respects, as the Oxford Circus lease and the first defendant had had more than two months within which to peruse, digest, take advice upon and understand that document.
In so far as a s 11 schedule would have required the lessor to state what fixtures and fit-out formed part of the property, the significance of this aspect of disclosure is that it enables the lessee to know what items form part of the demise and are therefore available to be utilised during the lease term, as part of the lessee's enjoyment of the property. This may be important to the lessee's calculations of the commercial value of the lease, just as a residential tenant would take into account whether premises are offered for lease in a furnished or an unfurnished condition.
A retail lease does not transfer to the tenant ownership of any item that is in or on the premises, affixed or otherwise. As between lessor and lessee, provided the lessee has the right to utilise, throughout the term, everything within the premises that it expected would remain and be available to it, the lessee is in as good a position as if the lessor had formally disclosed such items in a schedule under s 11 before the lease was executed. That is the case here. The first defendant at all times throughout the lease had full use of all landlord's fixtures, as well as many movable items that were left in the premises by Oxford Circus. From the point of view of the landlord and tenant relationship the first defendant evidently had an expectation that it would be able to use the fit out and movable items that Oxford Circus had used. That expectation was fulfilled. This is not a case where disclosure of the extent of the fixtures and fit-out on a schedule would have revealed that some items that the first defendant was expecting to use were actually not going to be there, so that if the first defendant had received a s 11 schedule it would have been forewarned and in a better position.
The first defendant cannot say that it was left worse off, in any sense relevant to s 11(3)(b), by the plaintiff's failure to provide a disclosure schedule identifying its fixtures. Identification of fixtures might have alerted the first defendant to the fact that Oxford Circus had purported to sell things under the contract of sale that it did not own. The failure of the plaintiff to provide information relevant to a separate contract between the first defendant and a third party is not a worsening of the first defendant's position, relevantly to its lease from the plaintiff, that would engage s 11(3)(b).
From these considerations I conclude that the first defendant had no right under s 11 to terminate the lease within six months of it being entered into. If I am wrong in that, in any event the first defendant did not in fact purport to terminate under s 11, at any time. If the right had accrued the first defendant could have exercised it up to the end of 22 December 2017. The right would not have been lost merely because the plaintiff gave notice of termination for non-payment of rent and re-entered the premises before the expiry of the six months. There is nothing in s 11 to indicate that the statutory period may be shortened by the lessor pre-empting the lessee's decision.
Counsel for the defendants submitted that "the plaintiff's failure to provide the disclosure statement and the plaintiff's subsequent termination within the 6 month period should be construed as a waiver by the plaintiff to claim any damages". That submission repeats par 36(g) of the amended defence of each of the first and third defendants. The defence contains no further elaboration of how a waiver arises from the facts pleaded. It is far from self-evident. Counsel was not able to support the contention with citation of authority; nor was he able to advance any coherent analysis by which the concept of waiver could be applied. In oral address counsel for the defendants also submitted that by not supplying a disclosure statement under s 11 the plaintiff had become estopped from enforcing its rights pursuant to cl 10 of the lease to recover loss of rent to the end of the term in the event of early termination for default. Counsel was unable to articulate how the prerequisites of an estoppel could be said to arise on these facts. The arguments concerning waiver and estoppel have no substance and I reject them.

Plaintiff's entitlement to damages for loss of bargain

Clause 10 is to be considered in light of the following abridged extract from the judgment of Gibbs CJ (with whom Murphy and Brennan JJ concurred) in Shevill v Builders Licensing Board (1982) 149 CLR 620; [1982] HCA 47 at 627-628 (citations omitted): It is clear that a covenant to pay rent in advance at specified times would not, without more, be a fundamental or essential term having the effect that any failure, however slight, to make payment at the specified times would entitle the lessor to terminate the lease. However, the parties to a contract may stipulate that a term will be treated as having a fundamental character although in itself it may seem of little importance, and effect must be given to any such agreement […]. In other words, a right to forfeit a lease might arise "in the case of any breach of covenant however trifling, if the parties had agreed that a breach of that covenant should create a forfeiture" […]. However, the respondent's argument is that because cl 9(a) gave a right to re-enter for any breach of cl 3 that resulted in rent being unpaid for fourteen days, the covenant in cl 3 as to payment, together with the provisions of cl 9(a), became an essential term, or at least gave the respondent the same rights as are available under the general law to a party who elects to terminate a contract for repudiation or fundamental breach. In my opinion it does not follow from the fact that the contract gave the respondent the right to terminate the contract that it conferred on it the further right to recover damages as compensation for the loss it will sustain as a result of the failure of the lessee to pay the rent and observe the covenants for the rest of the term. […] However it would require very clear words to bring about the result, which in some circumstances would be quite unjust, that whenever a lessor could exercise the right given by the clause to re-enter, he could also recover damages for the loss resulting from the failure of the lessee to carry out all the covenants of the lease - covenants which, in some cases, the lessee might have been both willing and able to perform had it not been for the re-entry.
In cl 10 of the present lease, the words conferring upon the plaintiff an entitlement to recover from the first defendant "all loss of rental incurred as a result of the determination of the lease" are clear enough to bring about the result referred to in the final sentence of the above extract from Gibbs CJ's judgment. The quoted words are very economical compared to the elaborate and repetitive provisions that may be found in some leases, drafted to make it clear beyond argument that in the event of termination for any default the lessee will be liable for full repudiation damages. The lease considered in Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited [2008] HCA 10 is an example. Although cl 10 is worded very simply in this respect, it is sufficient to make the first defendant liable to the plaintiff in damages for the loss of bargain with respect to rent for the balance of the lease term.
This does not mean, as the plaintiff assumed in its conduct of the case, that the plaintiff has a contractual entitlement to a liquidated sum, to be calculated by adding up all rent and interest that would have been payable if the lease had continued and deducting any receipts of rent that the plaintiff may actually have recovered from any subsequent tenant or tenants. Clause 10 does not provide that the first defendant must, in the event of termination, pay the actual rent as calculated under the lease, including annual CPI increases, pursuant to cl 4 and item 1(d), together with interest at 5% pa for overdue amounts, as per cl 4 and item 1(g). It does not specify that rent actually received from other tenants, and only such rent, must be brought to account.
Clause 10 is not worded clearly enough or in sufficient detail to constitute a provision for the plaintiff to recover a liquidated amount. It could only provide for a calculation based upon figures such as those referred to in the preceding paragraph if it was intended not to be applied until the end of the term of the first defendant's lease, at which date actual loss of rent taking into account receipts from other tenants could be calculated. There is no indication that cl 10 is intended to operate in that way, which would involve significant delay and disadvantage to the plaintiff. The words "all loss of rental incurred as a result of the determination of the lease" in cl 10 are no more than descriptive of damages to which the plaintiff is to be entitled following re-entry under the clause, as on repudiation. What is recoverable is "loss of rental", in which expression the word "loss", particularly, describes unliquidated damages. In the context of cl 10 and in the absence of any specification of the integers and method of calculation for a liquidated amount, "loss of rental incurred as a result of the determination" is an expression equivalent to damages for the plaintiff's loss of its bargain.
Immediately following re-entry the plaintiff was entitled to commence an action against the first defendant to recover damages assessed prospectively. The immediate accrual of a cause of action for loss of bargain damages has been recognised in numerous cases concerned with leases brought to an end by acceptance of repudiation following upon conduct of the lessee that was repudiatory in the sense of the general law. For example, in Buchanan v Byrnes (1906) 3 CLR 704; [1906] HCA 21, where a lessee abandoned the leased premises and surrendered the lease, Barton J held: The plaintiff was then entitled to claim in an immediate action, prospectively, such damages as would be caused by a breach at the appointed time, subject to any circumstances which might operate in mitigation of damages ...
In Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; [1985] HCA 14 Brennan J quoted Barton J's decision in Buchanan v Byrnes with evident approval, together with other authorities similarly establishing that the right of action for damages accrues immediately upon the landlord's acceptance of repudiation. Mason J (with whom Wilson and Deane JJ agreed) also cited authority to this effect. Brennan J cited Lamson Store Service Co Ltd v Russell Wilkins & Sons Ltd (1906) 4 CLR. 672; [1906] HCA 87 at 684, where Griffith CJ defined the measure of damages in these terms: In the ordinary case of a demise for a term of years with an express covenant to pay the rent, if the lessee unequivocally repudiates the lease and abandons the land, the lessor may at his option bring an immediate action for breach of covenant, in which he will be entitled to recover the full amount of the agreed rent for the whole term, less such sum as a jury may think he is likely to derive as profits from the use of the land during the residue of the term: Buchanan v Byrnes (1906) 3 CLR 704. ... This is the ordinary rule of damages.
The accrual of a lessor's entitlement to loss of bargain damages immediately upon re-entry has significance for the way in which those damages are to be assessed. This was considered in Nangus Pty Ltd v Charles Donovan Pty Ltd [1989] VR 184 in the following passage of the joint judgment of Kaye and Southwell JJ at 189: Accordingly, there exists what appears to us to be powerful authority for the proposition that at the time of the acceptance by the lessors of the lessee's repudiation of the lease, the lessors were vested with the right to damages for loss of their bargain. Subsequent events may touch upon the extent of that loss, but the damages fall to be assessed as at the date of the acceptance of the repudiation. The same applies in actions of an entirely different nature, for example, an action for damages for personal injuries […]. See also Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] WASCA 209 at [32] (Buss JA, Wheeler JA agreeing).
The plaintiff's entitlement to loss of bargain damages is expressly conferred by cl 10 in circumstances that would not necessarily amount to repudiation under the general law of contract. There is no reason why those damages would accrue any later than when contractual re-entry and determination is effected. The plaintiff's loss of bargain damages under cl 10 would be assessed on the same prospective basis as would apply in the case of acceptance of repudiation under the common law.
In Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited at [61] the High Court referred to the contention of the lessee in that case that loss of bargain damages claimed under the terms of the lease amounted to a penalty. The Court made the following observation concerning difficulties in the lessee's arguments: [62] One is that they entail a sharp distinction between actions for damages on termination for breach of an express term and actions for damages on termination for repudiation. It can be adventitious whether a defaulting tenant simply fails to pay rent or accompanies the failure by a statement of inability and unwillingness to do so.
In other words, there is no such "sharp distinction". In that case cl 16 of the lease provided, inter alia, that: … in the event that the Lease is determined consequent upon default of the Lessee then the Lessee shall be liable to the Lessor for the full loss and/or damages suffered by the Lessor by reason of the non-receipt of such rental for the full term or the non-receipt of any part of it … Clause 7.8 provided that in the event of the lessee vacating the premises the lessor would be obliged to take reasonable steps to mitigate its damages and to endeavour to lease the premises at a reasonable rent and on reasonable terms.
The Court made the following observations on the operation of these provisions (and in this extract I refer to the appellant as the lessor, which is a simplification of the facts): [55] … It is not the case that the [lessor] by its conduct in terminating and suing for loss of bargain damages put itself in a position better than it could have been in if it had kept the Lease on foot and sued from time to time for arrears of rent as they piled up. The [lessor] could not unjustly advantage itself in that way. Clause 7.8 echoes the general law in obliging the Lessor to take reasonable steps to mitigate loss. The Lessor could not have got both damages (namely, the present value of the unpaid rent from the time of termination until the expiry of the Lease) and in addition any rent capable of being earned by a reletting of the [premises]. The Lessor was only entitled to obtain, as damages, the present value of any difference between the rent not paid by the Lessee and the rent received or to be received on reletting. [56] … There can be no double recovery by landlords. If landlords obtain possession, they can only recover loss of bargain damages if they have tried unsuccessfully to obtain a new tenant at the rent stipulated in the terminated lease. The monetary equivalent of what they would have got if they had not taken possession of the property reflects the fact that they cannot obtain tenants, or cannot obtain tenants who promise to pay as much as the defaulting tenants promised.
In Gigi Entertainment Pty Ltd v Schmidt [2013] NSWCA 287 at [83], Ward JA (Beazley P and Sackville AJA agreeing) treated as correct the parties' consensual statement of "the ordinary basis on which damages for loss of bargain are assessed by reference to the market value of the leasehold interest" - in the following terms: [35] It is accepted by both parties that, in accordance with the principles outlined in Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, ordinary contractual principles apply in the calculation of damages for breach of lease and that damages are ordinarily to be assessed at the date of termination of the lease, though evidence of subsequent events may be relevant to the value of the lost bargain or the question whether the lessor has mitigated its damages (Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351).
The principle of taking into account, in an assessment of prospective damages, events that have actually occurred up to the date of the hearing was expressed by Latham CJ in Willis v The Commonwealth (1946) 73 CLR 105; [1946] HCA 22 at 109 as follows: [W]here actual facts are known, speculation as to the probability of those facts occurring is surely an unnecessary second-best. Damages are awarded for injury actually suffered and for prospective injury. Prospective injury can only be estimated with more or less probability. But where the extent and character of what would at one time be described as prospective injury depends upon the happening or non-happening of a particular event and that event has in fact happened, it is unnecessary to speculate as to whether or not this event might happen and, if so, when. In such a case prospective damage (or diminution of damage) has become actual.
That passage was adopted and applied in Johnson v Perez (1988) 166 CLR 351; [1988] HCA 64 at 368-369 (Wilson, Toohey and Gaudron JJ). Further authorities are cited by Buss JA in Luxer Holdings Pty Ltd v Glentham Pty Ltd at [35], where his Honour applied the principle to an assessment of damages for repudiation of a lease.
The plaintiff accepts that it was bound to act reasonably to mitigate its loss and that, in respect of the balance of the first defendant's term, it could not recover any loss of rent that may be attributable to failure on its part to undertake reasonable endeavours to relet. This accords with the law as stated, for example, in Luxer Holdings Pty Ltd v Glentham Pty Ltd at [36]-[37].
Applying these principles it would have been open to the plaintiff to prove its "loss of rental incurred as a result of determination of the lease" by adducing expert evidence of the market rental value of the property as at 22 December 2017, for a lease of approximately four years up to 4 December 2021, and claiming the net present value of the difference between the market rent and the rent that would have been payable by the first defendant under its terminated lease. Approaching the matter in that way the plaintiff would also have been entitled to adduce evidence of the likely period of vacancy before the premises could be relet. In respect of the period of vacancy it could claim the whole of the rent that would have been payable by the first defendant rather than merely the shortfall that would arise from the market rent being less than the rent reserved - assuming that to be the case. The likely period of vacancy and the market rent achievable would be assessed, prospectively, on the assumption that the plaintiff would make reasonable endeavours to find a replacement tenant. The whole calculation would be discounted to net present value at the date of termination.
In the present case where the assessment of the plaintiff's loss is to be undertaken following a hearing two years and seven months after re-entry and with 17 months of the original term yet to run, the plaintiff did not take the above approach but relied upon events that had actually occurred. I am satisfied that, despite reasonable endeavours, the plaintiff was unable to relet the premises until the commencement of its lease to JB & DJ on 27 June 2018. I reject the defendants' contention that the plaintiff failed to mitigate its loss up to that date. On the contrary I find that the plaintiff made every reasonable endeavour to find a replacement tenant.
It was reasonable for the plaintiff to have terminated arrangements with the second defendant for the ad hoc use of the property in late December 2017 and early January 2018. Those arrangements did not result in the second defendant making any payments. It was reasonable for the plaintiff to refuse a similar casual arrangement with the third defendant when that was proposed in early January 2018. Having regard to the second defendant's lack of success there was no reason to think the third defendant could do any better. In mid-January 2018 the plaintiff promptly engaged appropriately qualified and experienced real estate agents. There is no evidence that they failed to act diligently in promoting the property and negotiating with prospective tenants.
Having regard to the efforts that had been made in the first half of 2018 to find a tenant and the delay that had been incurred, I also accept that the rent of $225,000 per annum to which JB & DJ agreed represents market rent at that time for a lease of several years duration. There is evidence that JB & DJ originally only offered $210,000 per annum and that it was induced to accept a higher rent on the basis that the first three months of its lease would be rent-free. I accept that that was a further reflection of market conditions. Accordingly, the plaintiff's loss of bargain damages would appropriately be assessed by taking into account following components: 1. The whole of the rent that would have been payable by the first defendant from 22 December 2017 up to and inclusive of 26 September 2018, from which date JB & DJ commenced pay rent. 2. The difference between the rent that would have been payable by the first defendant, including annual CPI increases, and the rent that became payable by JB & DJ, including its annual fixed 3% increase, for the period 27 September 2018 to 4 December 2021. 3. A discount of the sum derived from the above components, to give the net present value as at 22 December 2017 of the loss of rent incurred.
As the plaintiff's claim is for damages, all of the above calculations must be carried out exclusive of GST. The amount to be recovered from the defendants is not for a "supply" within the meaning of the legislation under which GST is payable. The plaintiff submitted a schedule of calculations of its claim under cl 10 prepared on the basis of GST-inclusive figures. A revised schedule was submitted after the hearing, removing the GST and acknowledging that this should not be taken into account.
I am not able to rely upon the plaintiffs revised schedule. It incorporates a calculation of interest at 5% pa on the rent that would have been payable by the first defendant if the lease had remained on foot. That calculation has been made as if monthly instalments of rent continued to fall due and the 5% has been calculated from the due date. That is misconceived as a measure of loss of bargain damages under cl 10.
In the calculation of its claim under cl 10 the plaintiff has brought to account only such rent has JB & DJ actually paid, not the full amount that this replacement tenant was obliged by its lease to pay. For the period after the plaintiff terminated JB & DJ's lease on 7 June 2019 the plaintiff has included in its claim the full amount of rent that would have been payable under the first defendant's lease up to 4 December 2001, without deduction or allowance for the amount that was payable by JB & DJ but on which that party defaulted. This follows from the plaintiff's erroneous approach of quantifying its claim under cl 10 on a mathematical basis, as if all of the first defendant's obligations under its lease continued up to what would have been the expiry of its term.
When the matter is approached correctly as an assessment of loss of bargain damages a question of causation arises; namely, whether any amount of rent that JB & DJ was obliged under its lease to pay but which it failed to pay can be characterised as a "loss of rental incurred as a result of the determination of [the first defendant's] lease". This should be resolved by the application of general principles of causation of damage. Clause 10 attaches no special sense to the words "incurred as a result of".
General principles of causation of damage for breach of contract are stated in JD Heydon, Heydon on Contract (2019, Thomson Reuters) 950 at [26.510] in the following terms (extracted so far as relevant and with most of the citations for individual quotations omitted): The leading decision of the High Court on causation is March v E & MH Stramare (1991) 171 CLR 506. It is a negligence case, but its reasoning requires that the ideas about causation employed in that case be applied to contract. That case and others establish the following propositions. It is a precondition to the recovery of non-nominal damages for breach of contract that there be a causal connection between the breach and the plaintiff's loss. That is, or can be, a question of fact. It is a question of fact on which the plaintiff bears the burden of proof. But it is an unusual question of fact. It has to be determined "by a value judgment involving ordinary notions of language and common sense". […]. The "but for" test is a common but not sufficient test for causation. Where a possible cause of loss is the defendant's breach, but other possible causes lie in the conduct of the plaintiff or a third party, "the 'but for' test, while retaining an important role as a negative criterion which will commonly (but not always) exclude causation if not satisfied, is inadequate as a comprehensive test". Mason CJ (Gaudron J concurring) said that "the lesson of experience [is] that the test, applied as an exclusive criterion of causation, yields unacceptable results and that the results which it yields must be tempered by the making of value judgments on the infusion of policy considerations" (March v E & MH Stramare at 516). As McHugh JA said, "in the case of damage caused by the simultaneous operation of two separate and independent events each of which alone was sufficient to cause the damage, the single 'but for' test is plainly inadequate" (Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310 at 351). The points thus made by the authorities are somewhat imprecise. That is not necessarily a vice. As McHugh JA said, "[r]ules relating to causation and remoteness are to be liberally construed and not applied so rigidly as to cause injustice" (Alexander v Cambridge Credit Corp Ltd at 351).
Applying those principles, from 27 September 2018, when JB & DJ's obligation to pay rent commenced, until 4 December 2021, the plaintiff's loss of rental caused by - or "incurred as a result of" - the determination of the first defendant's lease was limited to the difference between the rent that would have been payable by the first defendant and the rent that had become payable by JB & DJ. Additional loss of rental represented by amounts that JB & DJ failed to pay could only be said to have been caused by that party's default. The termination of the first defendant's lease on 22 December 2017 had been a cause of the plaintiff reletting to JB & DJ and of rent from that company, at a lower rate than what the first defendant had been bound to pay, becoming receivable. But there the causative effect of the termination of the first defendant's lease ended. JB & DJ would not have become a lessee and it would not have defaulted on its obligations to the plaintiff "but for" the termination of the first defendant's lease. Application of the "but for" test must be modified by considerations of common sense and in a manner that will avoid injustice in this situation.
If the plaintiff were to recover judgment against the first defendant, by way of damages under cl 10, without deduction for rent that JB & DJ was obliged to pay under its lease, then the plaintiff would be in a position to make double recovery - because it would also be entitled to judgment against JB & DJ for its unpaid rent under cl 21.8(d) in that party's lease, which is the equivalent of cl 10 in the first defendant's lease. Further, to hold the first defendant liable under cl 10 for rent that JB & DJ failed to pay would in effect make the first defendant the guarantor of the obligations of the substitute tenant. There would be inherent injustice in this given that the acceptance of the new tenant was made by the plaintiff without reference to the first defendant - as would always be the case in a reletting following termination for default. Clause 10 is not expressed wide enough to give rise to this result.
If the non-payment by the new tenant were to be treated as caused by the determination of the first defendant's lease, the first defendant would have no realistic prospect of satisfying the burden of proof that it would have to discharge in order to show that the plaintiff failed to mitigate by taking insufficient care with respect to the credit worthiness of JB & DJ. In contrast, if it is recognised that loss of rental incurred as a result of determination of the first defendant's lease is limited to the rent differential that appears from the face of the new lease, the question whether the plaintiff acted reasonably to mitigate its loss is objectively ascertainable by reference to evidence of the market.
The plaintiff has cited no authority that would justify assessing its prospective loss of rent under cl 10 by taking into account only its cash receipts from JB & DJ rather than the accrual of JB & DJ's obligations, thereby disregarding the fact that the plaintiff was able to identify a new tenant at $225,000 per annum and to put that tenant into possession and bind it to a lease. I have been unable to identify any such authority by my own researches, or to find in the cases any definitive statement of how damages for loss of bargain should be assessed in such a case. I therefore assess the plaintiff's loss of bargain damages under cl 10 taking into account the rent differential between the first defendant's lease and JB & DJ's lease and disregarding the latter's default on its obligations.

Contracts Review Act

For the purposes of the Contracts Review Act, a contract may be unjust either because of the way it operates in relation to the claimant for relief or because of the way in which it was made or both: West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 620E (McHugh JA). "Unjust", as used in the Act, "includes unconscionable, harsh or oppressive": s 4.
In the third defendant's amended defence, ground (i) upon which it is said that his guarantee in cl 12 of the lease was unjust is a ground of alleged unjust operation. It is as follows: (i) at the time the lease was entered into its provisions were the subject of limited negotiation that was hurried in circumstances where the plaintiff represented to the defendants that unless the lease was entered into quickly the plaintiff would release the premises to another interested party.
This assertion lacks any foundation in the evidence. The plaintiff already had a lease to Oxford Circus that did not come to an end until the plaintiff accepted a surrender on the same day as a new lease to the first defendant was executed. There was never any rush for the plaintiff to enter into a new lease. It was secure with its lease to Oxford Circus and had bought the property about six months earlier with that lease in place. The process of finalising the transaction with the defendants, during which the possibility of an assignment was considered by the plaintiff and rejected, was anything but rushed. It continued for about two months.
Further, the reason there was limited negotiation of the lease terms was that the third defendant and his co-director wanted exactly the terms that were incorporated in the Oxford Circus lease and the plaintiff was content with those terms, subject to only minor adjustments. No negotiation of the guarantee provision was requested or attempted by the third defendant. Ms Bernauer offered guarantees from the directors of the corporate tenant from the outset, when what was being discussed was an assignment. The third defendant accepted in cross-examination that he must have communicated to Ms Bernauer his willingness to provide a personal guarantee, prior to her offering that to the plaintiff. The guarantee clause was in a common, unremarkable form. It included a guarantee of any liability the first defendant may incur for damages, such as those now claimed by the plaintiff under cl 10.
The second particular relied upon by the third defendant is also a ground of unfair operation, pleaded in these terms: (ii) clause 12(b) of the lease imposes conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of the plaintiff in circumstances where that clause purports to make the guarantors jointly and severally guarantee to the plaintiff performance by the first defendant all its obligations under not only the lease, but under every extension of it, or under any renewal of it or under any tenancy and including obligations that are later changed or created.
There is nothing unjust or unduly onerous about cl 12(b). It is usual and prudent commercial practice for a landlord to require the directors of an insubstantial private company to guarantee all of that company's lease obligations, including the ongoing obligations of the company under extensions of the lease pursuant to the exercise of options.
The third particular of injustice is given in these terms: (iii) the third defendant did not receive any legal advice in respect of the guarantee the subject of the lease. This is a ground of unfairness in the way in which the guarantee contract was made.
I accept the evidence of the third defendant that he did not ever meet Ms Bernauer and that the second defendant assumed responsibility for giving her instructions. Through the second defendant as director, the first defendant engaged Ms Bernauer. The first and third defendants had the benefit of her advice and representation in the negotiations with the plaintiff. It was the third defendant's choice not to engage another solicitor in his own interest and his exercise of that choice did not, of itself, give rise to injustice.
Of the numerous considerations to which s 9 of the Act requires the Court to have regard in determining whether a contract is unjust, the defendants' counsel relied only upon pars (c) and (f) of s 9(2). I have considered all the other factors listed in s 9 but I find that none of them indicates any unfairness to the third defendant in either the formation or the operation of his guarantee. Pars (c) and (f) of s 9(2) are as follows: (c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract, (f) the relative economic circumstances, educational background and literacy of: (i) the parties to the contract (other than a corporation), and (ii) any person who represented any of the parties to the contract.
With respect to par (c), it was submitted that "there was no basis to negotiate out of giving a guarantee". This misconceives the consideration prescribed in s 9(2)(c). The question is not whether it was reasonably practicable for the defendant to refrain from entering into the contract of guarantee at all but whether it was reasonably practicable for him to negotiate the terms of that contract. There was nothing to stop the third defendant refusing to give a guarantee - but if he had adopted that position the plaintiff would have been very unlikely to grant a lease to the first defendant, unless the third defendant could find a substitute guarantor. As for an opportunity to negotiate or reject any of the terms of the guarantee, so far as the evidence shows this was not attempted. The third defendant acknowledged in his oral evidence that he understood the effect of the guarantee that he was required to sign as a condition of the lease being granted.
With respect to par (f), the defendants' counsel referred to the relative lack of business experience and acumen of the third defendant. It is true that he had not had prior experience of conducting a business such as that which was proposed to be carried on in the premises. He knew that Oxford Circus had not been performing strongly in the months leading up to 22 June 2017. He said that the business had been open on fewer and fewer days, progressively, from when the contract of sale was signed. The business had remained closed "for a few weeks" leading up to the date of execution of the lease. It is evident that the third defendant was unjustifiably confident of success in the bar, restaurant and club business that he and the second defendant proposed to conduct.
In giving evidence in these proceedings the third defendant revealed no want of intelligence or understanding. The evidence does not disclose anything concerning his economic circumstances or educational background that would suggest he was in any relevant sense at a disadvantage in the transaction. The business did not succeed and hindsight has shown that the third defendant was overly optimistic and made a poor business decision. Those circumstances do not support a finding that the guarantee was unjust in the circumstances in which was made.
The third defendant has not established an entitlement to relief under the Contracts Review Act.

Orders

The parties agree that the shortfall in payment of rent up to the termination of the lease on 22 December 2017 was $29,349.30, made up as follows: Unpaid rent for 22 October - 21 November 2017 4,674.65 Unpaid rent for 22 November - 22 December 2017 24,674.65 29,349.30 The above total includes GST of $2,668.12. In addition the first defendant was obliged to pay water usage charges of $173.13 in accordance with an invoice dated 7 September 2017. The total due and unpaid at the date of termination was therefore $29,522.43.
The bond of $74,023.95 was applied against the amount due up to 22 December 2017, discharging that debt altogether and leaving $44,501.52 to be applied against the prospective loss rental following termination, payable pursuant to cl 10. Applying CPI increases to the rent that was payable under the first defendant's lease and 3% pa increases to the rent payable by JB & DJ, the respective rates during the relevant time intervals were as set out in the following table. In these figures cents have been disregarded and the difference of five days between the starting point for rental periods under the two leases respectively is disregarded. Interval Months First defendant's rent JB & DJ's rent Difference Extension 22.12.17 - 21.6.18 6 22,431 NA 22,431 134,155 22.06.18 - 26.09.18 3 22,901 NA 22,901 68,703 27.09.18 - 21.06.19 9 22,901 18,750 4,245 38,205 22.06.19 - 26.09.19 3 23,222 18,750 4,472 13,416 27.09.19 - 21.06.20 9 23,222 19,312 3,910 35,190 22.06.20 - 26.09.29 3 23,687 19,312 4375 13,125 27.09.20 - 4.12.21 14.5 23,687 19,891 3,706 53,737 356,962

After applying the balance of the bond referred to at [85] above, the net figure is $312,461. As the assessment of loss of rental incurred is necessarily an approximation, rather than attempt to derive a discounted net present value for this figure as at 22 December 2017, followed by allowing interest up to judgment from that date, I will award the sum of $312,461 with interest up to judgment calculated from 1 January 2019. Judgment for the plaintiff against the first and third defendants will be entered accordingly. An order that the first and third defendants pay the plaintiff's costs of the proceedings against them will be entered at the expiration of seven days from publication of these reasons unless submissions in support of some different order are received in the meantime.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 October 2020

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