Diagnostic X-ray Services Pty Ltd v Jewel Food Stores Pty Ltd [2001] VSC 9

[2001] VSC 9

Mandatory injunction - breach of covenant in lease by tenant -.

exceptional circumstance - tenant ordered to continue to conduct business.

2. The plaintiff, Diagnostic X-ray Services Pty Ltd, is the owner of the Werribee Village Shopping Centre. By lease dated 31 May 1995 the plaintiff leased the supermarket at the centre and the adjacent petrol station to the defendant, Jewel Food Stores Pty Ltd, for a period of 15 years as from 25 November 1993. The lease will run, therefore, until 25 November 2008.

5. The defendant was the anchor-tenant of the shopping centre. The petrol station was a strong attraction at the centre and by its presence increased the patronage of the centre, both to the benefit of the defendant and the other tenants who conduct businesses at the centre.

8. In about June 2000 the defendant sold its supermarket business to Sims Supermarkets. Sims has taken a sublease of the supermarket from the defendant and continues to operate the supermarket. It was apparently made known to Sims by the defendant that the defendant also wished to cease operating the petrol station. There were negotiations between Sims and the defendant with a view to Sims taking over the petrol station but those negotiations have been unsuccessful. It would appear that the rent Sims was prepared to pay was considered by the defendant to be uncommercial.

11. On 20 December 2000 the defendant abandoned the petrol station and evinced an intention to remove the fuel pumps at the petrol station, seal off the underground tanks and erect a fence around it. The closure of the petrol station is causing significant financial loss to the plaintiff, to Sims and to the other tenants in the centre.

14. The reason given by the defendant for the closure of the petrol station is that the petrol station has never operated in a financially viable way. Although at one stage the defendant operated seven petrol stations as adjuncts to supermarkets conducted by it, since 1998 it has engaged in a process of decommissioning and/or selling all its retail supermarket operations. At the present time the subject petrol station was the last petrol station operated by the defendant. As a consequence of disposing of the other petrol stations conducted by it, the defendant says that it was unable to obtain fuel at the same price as operators buying for a number of sites. That fact was apparently exacerbating the poor financial performance of the petrol station prior to its closure. The defendant now says that, having closed the petrol station, it would be unfair and detrimental to it to recommence the business.

17. Matters relied upon by the defendant in that regard are set out in para.13 of the affidavit of Glen Anthony Fagan sworn 17 January. It is unnecessary to rehearse them in my reasons. Basically, such matters relate to the costs the defendant would incur if it was forced to resume the petrol station business.

20. In his submissions counsel for the defendant placed great reliance upon the decision of the House of Lords in Cooperative Insurance Society Ltd v. Argyll Stores (Holdings) Ltd [1997] UKHL 17; (1998) A.C. 1, a decision which I followed recently in Ruffy Investments Pty Ltd v. Payless Superbarn (Vic.) Pty Ltd (unreported) 11 November 1999. In Argyll the House of Lords held that the settled practice of the court was not to grant a mandatory injunction requiring the carrying on of a business having regard to the difficulty of drawing any such order with sufficient precision to avoid wasteful litigation regarding compliance with it and that the lessee might suffer far greater loss by having to comply with the order than the lessor would suffer from the contract being broken.

23. At p.4 and following their Lordships set out some of the considerations giving rise to that rule of practice:

"None of the authorities contains a comprehensive explanation of the rationale behind the rule of practice, (that is the rule of practice that the court will not grant such a mandatory injunction) but it may be based on or justified by the following pragmatic considerations. (1) In most commercial situations, where the object of the exercise is to make money, damages will be an adequate remedy, even though the breach causes the plaintiff considerable commercial inconvenience. (2) Clarity is essential in the court's order, which has to be specific. An order merely to open a shop or to operate a particular business is not specific as to what is to be done ... (3) An order to perform a series of acts continuously and indefinitely creates the possibility of repeated applications to interpret and enforce the order, which the court does not welcome. Moreover, the longer the period the more likely the changes in trading practices and fashions and thus the modus operandi of the business and changes in the surrounding circumstances and economic climate may give rise to difficulties of interpretation and application of the order. The court cannot foresee these changes and it is therefore impossible for the court to make an order that deals with them in any specific manner so that the order has the degree of clarity required. (4) Specific performance should be refused if it would be a potential instrument of oppression. The consequences of an order compelling a person to run a business for a substantial or indefinite period cannot be predicted by the court. (5) It will often be possible for a defendant to evade the spirit of such an order, while obeying its letter. (6) To compel the operation for an indefinite period of a business by a person who is unwilling to operate it and has formed a commercial judgment that it is not viable is a serious restriction on the operation of the market and commercial flexibility. (7) The availability of the remedy of specific performance, a fortiori the making of a decree, may put a plaintiff in a position to extract from the defendant as the price of releasing him from his obligation a much greater sum of money than the loss occasioned. (8) Businessmen needed to know where they stand. If the making of an order is to turn in every case on 'the balance of advantage and disadvantage', they will not."

However, as Lord Hoffmann pointed out at p.16 of Argyll:

"Of course the grant or refusal of specific performance remains a matter for the judge's discretion. There are no binding rules, but this does not mean that there cannot be settled principles, founded upon practical considerations of the kind which I have discussed, which do not have to be re-examined in every case, but which the courts will apply in all but exceptional circumstances."

"I can envisage cases of gross breach of personal faith, or attempts to use the threat of non-performance as blackmail, in which the needs of justice will override all the considerations which support the settled practice."

31. In the present case counsel for the plaintiff has pointed to four matters which he contends distinguish this case from Argyll and Ruffy, namely:

1. In Argyll and Ruffy the supermarkets had become unviable over time and so the decisions to walk away were commercial decisions.

There is no evidence that that is so in the present case. Indeed, as the defendant's national property manager, Glen Anthony Fagan has sworn in his affidavit of 17 January:

"5. In the past, Jewel has conducted both retail and wholesale supermarket operations. However, since approximately June 1998 Jewel has engaged in a process of decommissioning and/or selling all of its retail supermarket operations. Jewel has continued its involvement in supermarket wholesaling and holding head-leases of various supermarket properties for the purposes of subleasing such properties to retail supermarket operators."

Further, in this case the petrol station was never a viable business on its own. The defendant always knew that standing alone it would run at a loss.

2. In Argyll the tenant had stripped the supermarket. To reinstate the supermarket in that case would have cost approximately 1 million pounds. In this case the business is still intact, despite the indication that the defendant gave that it would remove the petrol bowsers, seal off the underground tanks and erect a fence around the site.

3 In Argyll and Ruffy the tenancies were of supermarkets. This is a petrol station. It is unique to this complex. It is for that reason that the centre was as successful as it was prior to the closure of the petrol station. It is far less onerous to run a petrol station than a supermarket.

4 In Argyll and Ruffy there were no prospective assignees of the tenant's lease. Here there are and Sims has already made an open offer to lease the petrol station and the defendant is still negotiating with other parties.

41. If the defendant does assign the lease it will not suffer any trading loss, although for the remainder of the term of the lease it may have to make up any shortfall in the rental.

44. Having considered this matter overnight, I have concluded that it is strongly arguable that the facts in this case are so different from the facts in Argyll and Ruffy as to make this case distinguishable, distinguishable because of the exceptional circumstances which surround the closure of the petrol station. Those circumstances may be enumerated as follows:

1. The petrol station was run as an adjunct to the supermarket. As I understand it, if patrons of the supermarket expended more than a certain sum of money at the supermarket they received a discount on the cost of petrol purchased from the petrol station. If I may say so, a quite common practice at certain chains of supermarkets in this state.

When the defendant took a lease of the petrol station it must have been fully aware of the fact that the petrol station would need to be subsidised from the income of the supermarket, as indeed proved to be the case. This is not a case, therefore, where the defendant went into a venture which later turned sour.

2. There was no pressing urgency for the defendant to dispose of the supermarket business and the petrol station. There is no evidence to indicate that operating together they were not operating successfully. The decision to do so was simply a management decision to restructure the operations of the defendant.

3. The defendant is endeavouring to grant a sublease of the petrol station to a new tenant or to assign its present lease to a new tenant. One cannot help but ask, therefore, why close the petrol station down? Surely the defendant's prospects of subleasing or assigning its existing lease would be far better if the petrol station was fully operational thereby enabling a new tenant to go into the business on a walk-in/walk-out basis.

4. In the present case the defendant took no steps at all to advise the plaintiff of its intention to close down the petrol station. It was only by chance that the plaintiff learnt about it. Not only did the defendant determine to close down the petrol station without advising the plaintiff of that fact, it also took preliminary steps to have the bowsers removed, the underground petrol tanks dug up and a fence erected around the site. In that regard see para.9 of the affidavit of Gioacchino Talia sworn 22 September 2000.

5. Significant detriment has been caused to the other tenants of the centre as a consequence of the closure of the petrol station. Of the four shopping centres in the Werribee area this is the only shopping centre with a petrol station. On the evidence the very existence of the petrol station at the centre attracted patrons to the centre.

53. In his affidavit the plaintiff's managing agent has sworn that he estimates that approximately 20 per cent of the patrons of the shopping centre on any one day purchased petrol or petrol products at the petrol station. He has also sworn that a further significant percentage of patrons who from time to time purchase petrol at the petrol station habitually shop at the centre even when not buying petrol. In other words, the presence of the petrol station attracts them to this shopping centre rather than one of the other three shopping centres identified in his affidavit.

56. The closure of the petrol station must have a significant financial effect, not only on the plaintiff, but on the tenants of the other businesses at the centre. In that latter regard see Exhibit JT5 to Talia's affidavit.

59. Further, in my opinion the actual loss which may be suffered by the plaintiff will be very difficult to quantify. If a tenant finds that his takings drop as a result of the closure of the petrol station, he may take the first opportunity he can to walk away from the centre. Others, whilst prepared to stay, may only do so if they can achieve a reduction in their rental. In either event the plaintiff would suffer loss.

62. For those reasons I think that this case can properly be described as exceptional.

65. The defendant has pointed to a number of matters which it contends would cause it difficulty if it was required to reopen the petrol station. In my opinion, those so-called problems are more imagined than real. Nor, in my view, will the defendant suffer anything like the losses it predicts between now and the time at which it sublets the petrol station or assigns its lease. It is presently negotiating with third parties to dispose of its lease. There is no reason to believe that if it behaves reasonably in that regard it will not achieve its objective, even if to do so may require it to subsidise the rental for the petrol station.

68. In Argyll, in holding that the settled practice of the courts is not to grant a mandatory injunction requiring the carrying on of a business, much emphasis was placed on the fact that the grant of such an injunction would require constant supervision by the court. In my opinion, it is highly doubtful that that can be said in the present case. The defendant operated the petrol station quite successfully over the last seven years. If it is ordered to continue to do so, there is no valid reason why it cannot, and without the supervision of the court.

71. The defendant in this case was the anchor-tenant of the shopping centre. In my opinion, it should be required to comply with the terms of its lease of the petrol station, at least until the trial of this proceeding, or such time as it assigns its lease or sublets the petrol station.

74. Since preparing my reasons for judgment I have been handed a further affidavit sworn this day by the solicitor for the defendant. He exhibits to that affidavit a letter from a third party confirming the fact that it has accepted the defendant's offer to sublease the petrol station as from 1 March. Of course, the sublease will require the approval of the plaintiff. There is no reason to believe that that sublease will not be duly executed by the defendant and the third party and, having regard to the terms of the sublease, it would be most surprising if the sublease was not approved by the plaintiff.

77. What I propose to do is to indicate to the parties the orders I was minded to make prior to being informed of that correspondence this afternoon and then I will hear anything that the parties wish to say in relation to them because it may well be that the parties do not consider that they are appropriate now there appears to be a real prospect that a sublease of the petrol station will be effected.

80. Do you give the usual undertaking as to damages on behalf of the plaintiff, Mr Bloch?

86. HIS HONOUR: The orders I proposed were the following:

1. The defendant within seven days of this date take all necessary steps to maintain, conduct and carry on a petrol station business during usual business hours with all due diligence and efficiency at the petrol station site, being the premises described in para.1.2 of the statement of claim and to maintain such business until the trial of this action or further order, or until such time as it assigns its lease of the premises or sublets the premises.

2. The defendant is restrained from removing fuel pumps from the premises, from sealing off underground storage tanks at the premises and from fencing the premises so that they appear to be abandoned.

3. The proceeding continue as if commenced by writ.

4. The plaintiff's statement of claim filed 22 December 2000 stand as its statement of claim in the proceeding.

5. The defendant file and deliver its defence and counterclaim (if any) on or before 2 February.

6. The plaintiff file and deliver its reply and defence to counterclaim (if any) on or before 9 February.

7. Subject to any order of the trial judge to the contrary, the trial of this proceeding be by affidavit.

8. Any further affidavits to be relied upon by the plaintiff be sworn and filed on or before 16 February.

9. Any further affidavits to be relied upon by the defendant be sworn and filed by 23 February.

10. The proceeding be referred to the Listing Master to have a date fixed for trial after 23 February and I request the Listing Master to give the proceeding such priority as she considers appropriate.

13. I direct that this order be prepared by the solicitors for the plaintiff and within 48 hours be brought to me for authentication.

14. I direct that a copy of the order be served on the associate to the Listing Master within 14 days of its authentication.