Edex International Holdings Pty. Ltd. v. Marmalade Films Pty. Ltd. [2003] NSWCA 8

CATCHWORDS : LANDLORD AND TENANT - Abatement of rent when property damaged - Whether affectation by rising damp can be damage - Whether tenant must give notice of claim for abatement - Whether abatement can be claimed in respect of rent already paid. BP Refinery (Westernport) Pty. Ltd. v. Shire of Hastings (1977) 180 CLR 266 David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1992) 175 CLR 353 J & S Holdings Pty. Ltd. v. NRMA Insurance Ltd. (1982) 61 FLR 108 CASES CITED : Makin v. Watkinson (1870) LR 6 Ex. 25 McCarrick v. Liverpool Corporation Morgan v. Liverpool Corporation [1927] 2 KB 131 O'Brien v. Robinson [1973] AC 912 PARTIES : Edex International Holdings Pty. Ltd. - appellant Marmalade Films Pty. Ltd. - respondent FILE NUMBER(S) : CA 40638/02 COUNSEL : Mr. J.B. Conomy for appellant Mr. T.G.R. Parker for respondent SOLICITORS : Dibbs Barker Gosling, Sydney for appellant Sachs Gerace, Sydney for respondent

LOWER COURT District Court JURISDICTION : LOWER COURT DC4226/01 FILE NUMBER(S) : LOWER COURT Hogan ADCJ JUDICIAL OFFICER :

IN THE SUPREME COURT COURT OF APPEAL CA 40638/02 DC 4226/01

BEAZLEY JA HEYDON JA HODGSON JA

Thursday 6 February 2003 EDEX INTERNATIONAL HOLDINGS PTY. LTD. V. MARMALADE FILMS PTY. LTD. Judgment 1 BEAZLEY JA: I agree with Hodgson JA. 2 HEYDON JA: I agree with Hodgson JA. 3 HODGSON JA: The opponent Marmalade sued the claimant Edex in the District Court claiming rent and outgoings under a lease, amounting to $56,969.57 plus interest. Edex put on a defence, and also a cross-claim seeking damages and a refund of rent and outgoings. On 5 July 2002, Acting Judge Hogan gave judgment for the opponent in the sum of $63,514.19, gave judgment for the opponent on the claimant's cross-claim, and ordered the claimant to pay the opponent's costs of the proceedings. 4 The claimant seeks leave to appeal from these orders. The matter has been argued on the basis that, if leave is granted, the appeal will be determined without further argument.

CIRCUMSTANCES 5 The proceedings concern a lease of commercial premises for a term of three years from 25 May 1998 to 24 May 2001, from the opponent to the claimant. The claimant and an associated company used the premises for its business of publishing and distributing educational materials. 6 The premises had been managed since 1992 on behalf of the opponent by a real estate agent Bruce Meppem. They became vacant in January 1998, and in accordance with their obligations under the lease, the outgoing tenant paid for the premises to be re-painted and carpeted. 7 Shortly after the claimant took up occupation, there were problems with ingress of water after rain. These problems were reported to the agent and were attended to; and on the findings of the primary judge, not challenged on appeal, ultimately fixed by about August 1999. 8 Some time after those problems first appeared, rising damp became evident in various parts of the premises. It appears that this problem was reported to the directors of the claimant by an employee Mrs. Brinkman, but not reported to the agent or the opponent, at least prior to May 2000. At that time, the directors of the claimant decided to move out, and one of the directors, Mr. Spira, telephoned Mr. Meppem and advised him that the claimant was leaving and expected to be out by the end of July. 9 According to Mr. Spira, he told Mr. Meppem that this was because of water problems which made the premises unsuitable for the claimant's purposes; but Mr. Meppem did not have a clear recollection of this conversation. 10 The claimant moved out of the premises in July 2000, and paid rent up to the end of August 2000. The opponent did not re-let the premises prior to the end of the lease, and claimed rent from the end of August 2000 to the end of the lease in May 2001.

FIRST INSTANCE PROCEEDINGS 11 The claimant defended the claim on the basis that the opponent's failure to rectify the rising damp problem amounted to repudiation of the lease, the basis of the opponent's failure to mitigate its loss by re-letting, and on the basis of its cross-claim. The cross-claim relied inter alia on cl.7 and 8 of the lease, which were in the following terms: Part 7 - CONDITIONS AND REPAIRS Who is to repair the property? 7.1 The Landlord must - 7.1.1 maintain in a state of good condition and serviceable repair the roof, the ceiling, the external walls, and the floors of the property and must fix structural defects; and 7.1.2 maintain the property in a structurally sound condition; and 7.1.3 maintain essential services.

7.2 The tenant must otherwise maintain the property in its condition at the commencement date and promptly do repairs needed to keep it in that condition but the tenant does not have to - 7.2.1 alter or improve the property; or 7.2.2 fix structural defects; or 7.2.3 repair fair wear and tear.

The tenant must also - 7.3.1 reimburse the landlord for the cost of fixing structural damage caused by the tenant, apart from fair wear and tear; and 7.3.2 maintain and decorate the shop front if the property has one; and 7.3.3 decorate the inside of the property in the last 3 months of the lease period (however it ends) - 'decorate' here means restoring the surfaces of the property in a style and to a standard of finish originally used e.g. by repainting.

7.4 If an authority requires work to be done on the property and it is structural work or work needed to make the property safe to use then the landlord must do the work unless it is required only because of the way the tenant uses the property. But if it is any other work or is required only because of the way the tenant uses the property then the tenant must do the work.

7.5 If the tenant fails to do any work that the tenant must do the landlord can give the tenant a notice in writing stating what the tenant has failed to do. After the notice is given the tenant must - 7.5.1 do the work immediately if there is an emergency; and 7.5.2 do the work promptly and diligently in any other case. If the tenant does not do the work, the landlord can do it and the tenant must reimburse the landlord for the cost of the work.

7.6 The tenant must not make any structural alterations to the property. Any other alterations require the landlords consent in writing (but the landlord cannot withhold consent unreasonably).

Part 8 - INSURANCE AND DAMAGE What insurances must the tenant take out? 8.1 The tenant must keep current an insurance policy covering - 8.1.1 liability to the public in an amount not less than the amount stated in item 17 in the schedule (for each accident or event): and 8.1.2 damage or destruction from any cause to all plate glass in the windows and other portions of the property and must produce to the landlord, upon request, the policy and the receipt for the last premium.

What happens if the property is damaged? 8.2 If the property or the building of which it is part is damaged (a term which includes destroyed) - 8.2.1 the tenant is not liable to pay rent, or any amount payable to the landlord in respect of outgoings or other charges, that is attributable to any period during which the property cannot be used under this lease or is inaccessible due to that damage; and 8.2.2 if the property is still useable under this lease but its useability is diminished due to the damage, the tenant's liability for rent and any amount in respect of outgoings attributable to any period during which useability is diminished is reduced in proportion to the reduction in useability caused by the damage; and 8.2.3 the landlord notifies the tenant in writing that the landlord considers that the damage is such as to make its repairs impracticable or undesirable, the landlord or the tenant can terminate this lease by giving not less than 7 days notice in writing of termination to the other and no compensation is payable in respect of that termination; and 8.2.4 if the landlord fails to repair the damage within a reasonable time after the tenant requests the landlord to do so the tenant can terminate this lease by giving not less than 7 days notice in writing of termination to the landlord; and 8.2.5 nothing in clause 8.2 affects any right of the landlord to recover damages from the tenant in respect of any damage or destruction to which the clause applies. 12 The claimant alleged that the opponent breached its obligation under cl.7.1.1, and that the premises were damaged and not fit for occupation for the purposes of cl.8.2: the opponent claimed damages and re-payment of moneys paid under the lease. It also claimed damages for misleading and deceptive conduct. 13 The primary judge rejected the claimant's defences and claims. No appeal is brought in relation to his decision concerning repudiation, failure to mitigate, damages pursuant to cl.7.1.1, and misleading and deceptive conduct. The only issues concern the effect of cl.8.2. 14 In relation to that issue, the primary judge referred to evidence from Mr. Massia, an expert called for the opponent, and Mr. Walton, an expert called for the claimant. He referred to the following paragraph of Mr. Massia's report: 2.6 Nonetheless, it is our opinion that the presence of the damp does not render the property unsuitable for rental but may limit or prevent some particular uses such as the storage of delicate electrical instruments, cardboard containers or paper and the like against the affected walls.

He continued: Mr Massia was not required to attend for cross-examination. Nevertheless there was a conflict between his opinion and that of Mr Walton. Mr Walton expressed the opinion that the ground floor of the premises was completely unfit for human occupation or storage of the materials used by the lessees.

In the light of findings that I make later in this judgment, I do not need to resolve this disagreement. However I incline to the view that although the premises were not completely unfit for human occupation the dampness was such as to cause substantial inconvenience, and such as would have entitled the tenant to seek abatement of the rent under clause 8.2.2. The defendant however took no action under clause 8.2.4.

Mrs Brinkman reported the rising damp to the directors of the defendant. Mrs Grayling, one of the directors, noticed how damp the whole of the downstairs area appeared to be. Stock that had been stored against the wall in the passageway was moved.

Also, at the rear of the downstairs area, there was a store room, which was not carpeted. After heavy rain staff noticed that water was collecting on the floor of the room and affecting the stock.

Attempts were made to mitigate the problems of the dampness downstairs with fans and heaters. Mrs Grayling's health was adversely affected by the cold and damp conditions. Other members of staff made complaints, and worked upstairs when possible. Some stock was spoiled, and it was necessary to change the storage arrangements. 15 He also held that, apart from the evidence of the conversation between Mr. Spira and Mr. Meppem, there was no evidence that the claimant brought to the attention of the agent or the opponent the problems concerning rising damp or flooding to the storeroom in the downstairs area of the premises. 16 The primary judge found that the claimant repudiated the lease, but that the repudiation was not accepted by the opponent. He held that the failure by the claimant to notify the opponent of the problems in the downstairs area or to give notice under cl.8.2.4 meant that cl.8.2 did not come into operation.

GROUNDS OF APPEAL 17 The claimant seeks leave to appeal on the following grounds: 1. His Honour erred in law in holding that as a matter of construction of clause 8.2 of the lease that notice of termination under clause 8.2.4 was a precondition to abatement of liability of the tenant for rent and outgoings under the clause 8.2.2 of the lease.

2. His Honour should have found that the liability of the appellant on the claim by the respondent for rent had abated under clause 8.2.2 of the lease and reduced the respondent's verdict to $27,694.65 plus interest.

3. His Honour erred in giving judgment for the respondent on the further amended cross claim.

4. His Honour should have found in favour of the appellant on its further amended cross claim in the sum of $57,077.42 plus interest. 18 The submissions in this case have concerned four areas: first, whether the rising damp could constitute damage; second, whether a claim for abatement depended upon notice being given by the tenant; third, whether there was in any event a basis for ordering a refund of rent actually paid; and fourth, consequential matters including whether leave should be granted, and if so, and if the appeal is allowed, what relief should be given. I will deal in turn with the first area, the second and third areas together, and the fourth area.

DAMAGE 19 Mr. Parker for the opponent submitted that the fact that rising damp affected walls of the building did not constitute the building being damaged. The only physical manifestation of the problem was affectation of paint work, and this was insufficient. In any event, he submitted, the property had the problem from the start, and the clause should not be interpreted as providing that something less than the agreed rent should be paid from the commencement of the lease, or as requiring the landlord to improve the property so as to make it something different from the properties leased: see cases referred to in (2000) 74 ALJ 799. 20 In my opinion, there was evidence that, at the commencement of the lease, the premises were freshly painted and gave the appearance of being unaffected by damp; and that progressively signs of damp and deterioration of paintwork occurred, ultimately resulting in the conditions described by the experts. In my opinion, the change from a state where there was no apparent dampness to a state where dampness of the walls affected the use of the premises inter alia by causing damage to paper used in the business and limiting areas where paper could be stored, and giving rise to unpleasant working conditions, does fall within the ambit of the building being damaged within the meaning of cl.8.2. Accordingly, in my opinion the case was one where the tenant could be entitled to a reduction of liability for rent and outgoings proportionate to a reduction in useability due to such damage.

NOTICE AND RECOVERY OF RENT 21 Mr. Conomy for the claimant submitted that nothing in cl.8.2 required notice by the tenant, and that the necessary conditions for the implication of a term requiring notice were not satisfied. Certainly, he submitted, there was no requirement that the tenant give notice in writing under cl.8.2.4, and indeed the express reference to notice here and in cl.8.2.3 confirmed that no notice was required in relation to cl.8.2.2. As regards rent actually paid, it was paid under a mistake as to the tenant's rights under the lease, and was accordingly recoverable. 22 Mr. Parker submitted that cl.8.2.2 was not pleaded as a defence in relation to the claim for unpaid rent and outgoings; but he accepted that the case below had been fought partially on that basis, and took no pleading point. He submitted that the position was analogous to that of a covenant to repair, in relation to which it was established that a landlord was not in breach of a covenant to repair unless the landlord had notice of the relevant need for repair: Makin v. Watkinson (1870) LR 6 Ex. 25 at 28-29; Morgan v. Liverpool Corporation [1927] 2 KB 131; McCarrick v. Liverpool Corporation [1947] AC 219; and O'Brien v. Robinson [1973] AC 912. Otherwise, he submitted, the landlord could be subject to loss of rent, even though it had been given no opportunity to repair or to give notice under cl.8.2.3 - and clearly, the clause contemplated that the landlord would have those options. The landlord could therefore be subject to a very substantial loss of rent in relation to something that could have been easily and cheaply repaired. Accordingly, there should be implied in cl.8.2 a term that abatement was conditional on the landlord being notified of the relevant damage within a reasonable time of the damage having arisen. 23 In any event, Mr. Parker submitted, there should be no refund of rent and outgoings actually paid, since they were voluntary payments and not fairly regarded as induced by mistake: see J & S Holdings Pty. Ltd. v. NRMA Insurance Ltd. (1982) 61 FLR 108 at 124; David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1992) 175 CLR 353 at 373-4. 24 In my opinion, it is convenient to consider the matter separately in relation to a claim for abatement in respect of rent and outgoings already paid, and a claim in respect of rent and outgoings that have not been paid. 25 Dealing first with the case of rent that has already been paid in full, in discharge of a liability for rent that has actually arisen, it would in my opinion be a most unreasonable result if the tenant could claim a refund of that rent or part of it, at least unless the tenant had made a claim for abatement of the rent and had paid the rent under protest or otherwise provisionally pending resolution of that claim. Otherwise, a landlord having no reason to suppose that anything was wrong would be deprived of the option of repairing the damage or terminating the lease under cl.8.2.4, and may be liable to make very substantial refunds of rent. I think it most unlikely that that result could have been intended. 26 There are at least three possible ways in which that result could be avoided. 27 First, it could be avoided by way of implication from the actual language used in cl.8.2. Clause 8.2 relates to adjustment of liability to pay rent or outgoings, and it is implicit in the wording of the clause that some claim for that abatement must be made. Since the adjustment is to liability, it could be understood that the claim for abatement has to be made at a time when the liability exists, or before it arises; so that when there is no liability because the liability has arisen and been discharged, there is nothing to which a claim for abatement can relate. 28 A second way in which the result might be avoided is in terms of non-availability of restitutionary relief, where a payment has been made voluntarily and, by reason of the payment and lack of notification of a claim for abatement, the landlord has lost the opportunity to either repair or terminate the lease. It could well be that in such situation the change in position of the landlord would be enough to deny a restitutionary remedy, even if it could be said that the tenant's payment was relevantly induced by a mistake. 29 The third possible way in which the result could be avoided would be the implication of a term on the basis of business efficacy. If it be the case that neither of the first two alternatives were considered valid, the requirements for implication of a term for business efficacy set out in BP Refinery (Westernport) Pty. Ltd. v. Shire of Hastings (1977) 180 CLR 266 at 283 could be satisfied. The implication would in those circumstances be reasonable and equitable; it would be necessary to give business efficacy, in the sense of avoiding a wholly unreasonable result, and would I think go without saying; it would be capable of clear expression and would not be contradicted by express terms of the contract. 30 It is not necessary to express a final view on which of these three approaches is correct. I propose that leave to appeal be refused in relation to the claim for a refund. 31 Turning to the case of rent and outgoings that have not yet been paid, in my opinion the situation is different. It is by no means obvious that it would be unreasonable for an abatement to occur, even if the landlord does not know about the damage and even if the claim for abatement is not made until proceedings are brought for the rent. For example, if a tenant dies, the property is shortly afterwards destroyed by fire, and for some reason the landlord does not find out about this for some time, it is by no means clear that it would be unreasonable that the estate of deceased tenant should be entitled to an abatement of rent, even in respect of a period before the landlord had notice. I do not think any of the three bases of denying relief to the tenant in relation to rent and outgoings already paid apply here. In particular, I do not think that the implication of a term requiring notice in these circumstances is necessary to give business efficacy to the contract. If in any particular case a landlord is disadvantaged because of some failure by the tenant to communicate the damage to the landlord, in circumstances where such communication should have been made, the landlord may be able to rely on an estoppel. 32 In these circumstances, I do not think there is a ground made out for not applying the literal terms of cl.8.2.2, unaffected by any implication, in relation to rent and outgoings not yet paid.

CONSEQUENTIAL MATTERS 33 Accordingly, in relation to the claim for a refund of rent and outgoings already paid, I do not think there is any doubt shown as to the result which would justify the grant of leave to appeal. In relation to the landlord's claim for unpaid rent and outgoings, in my opinion the claimant was deprived by the primary judge's error of a possible defence in relation to an amount of up to 50 percent of the claim, that being the figure supported by the claimant's expert. 34 Mr. Parker submitted that there had been no finding by the primary judge resolving a difference between the experts as to whether damage occurred and if so, what percentage reduction of liability was justified. He submitted that this Court could not resolve these matters, so that the only available remedy was to grant a new trial. He may be taken to have suggested that the undesirability of subjecting the parties to a further expensive hearing over a maximum of around $30,000.00 would justify the refusal of leave. 35 Mr. Conomy submitted that the primary judge did find that there was damage and that the complaints of the claimant were correct, so that this Court could resolve the matter. He submitted that it was appropriate to adopt Mr. Walton's figure of 50 percent. He also submitted as a further basis on which leave should be granted that the clause was a clause in common use, and that its terms were reflected in s.36 of the Retail Leases Act 1994. 36 In my opinion, it is appropriate to grant leave and to allow the appeal. 37 In my opinion, the primary judge's recital of evidence given on behalf of the claimant about problems with the premises was such as to indicate substantial acceptance of that evidence. In my opinion, there was no conflict between the experts on the issue of whether there was some lack of useability resulting from the damage, though I do accept that the opponent's expert impliedly put this affectation at substantially less than 50 percent. This view was implied only and not express, but the expert was not cross-examined, so the Court did not have the benefit of quantification of the expert's view. 38 Having regard to these considerations and having regard to the undesirability of a further trial over a relatively small amount, I think it is appropriate for this Court to do its best with the material that it has; and I would assess the percentage of reduction of useability and the consequent reduction in liability at 30 percent. I would propose that the judgment appealed against be reduced to $44,460.00. 39 As regards costs, the result is that the claimant will have had partial success below on a defence that was not properly pleaded. I see no reason for altering the costs order made by the primary judge. However, I also see no reason why the claimant should not have the costs of the application for leave to appeal and of the appeal. 40 Accordingly, the orders that I propose are: 1. Leave to appeal granted in respect of the opponent's claim for unpaid rent and outgoings, subject to a Notice of Appeal being filed within 14 days. 2. Appeal allowed to the extent of substituting for the judgment below a judgment in the sum of $44,460.00. 3. Appeal otherwise dismissed. 4. Opponent to pay claimant's costs of the application for leave and of the appeal, and to have a Suitors Fund certificate if otherwise entitled. **********

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