Evans v Turner

Barnes v Addy (1874) 9 Ch. App 244 Bathurst City Council v PWC Properties Pty Limited (1998) 195 CLR 566 Baumgartner v Baumgartner (1987) 164 CLR 137 CASES CITED : Garcia v Masters [2005] NSWSC 480 Jabetin Pty Ltd v Benwine Pty Ltd [2005] NSWCA 92 Muschinski v Dodds (1985) 160 CLR 583

James Bernard Evans (First Plaintiff) Cherie Joy Evans (Second Plaintiff) PARTIES : Phillip James Turner (First Defendant) Mary Elizabeth Turner (Second Defendant)

Mr J J Garnsey QC with him Mr D J Hand (Plaintiffs) COUNSEL : Mr J M Ireland QC with Mr J Darvall (Defendants)

Deutsch Parners Lawyers Pty Ltd (Plaintiffs) SOLICITORS : Denniston & Day (Defendants)

• 9 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4161/03 JAMES BERNARD EVANS AND CHERIE JOY EVANS V PHILLIP JAMES TURNER AND MARY ELIZABETH TURNER JUDGMENT 1 The plaintiffs purchased, in 1998, the business of the lessees of the Commercial Hotel, Lockhart, taking an assignment of the lease of the land on which the hotel was erected. The first-named plaintiff became the licensee of the hotel until the date of the expiration of the lease, 14 August 2003. The defendants were, and are, the owners of the freehold and they were the lessors of the hotel. 2 The litigation between these parties arises out of the ultimately unfulfilled desire of the plaintiffs to sell a "block" of poker machine entitlements prior to the expiry of the lease, at a time when such a block had a value in excess of $200,000, perhaps about $250,000. A block consisted of three poker machine entitlements, only two of which could be delivered, the third being forfeited as a condition imposed by the legislation upon a sale. At the relevant time, the ability to enter into a transaction of this kind was a quite recent creation of a new legislative regime of regulation of the use of poker machines in hotels. Briefly, the position until 1997, was that the Liquor Act 1982 did not permit hoteliers to install poker machines, but only card machines, otherwise called "approved amusement devices" or "AADs". However, in 1997, poker machines were allowed by virtue of the Liquor and Registered Clubs Legislation (Further Amendment) Act 1996. Following a brief period, during which the sun of legislative approval shone upon the use of poker machines in hotels, regulations were promulgated under the Liquor Regulation 1996 to impose a freeze from 19 April 2001 upon the number of poker machines that could be authorised by the Liquor Administration Board. Then, on 2 April 2002, the Gaming Machines Act 2001 established a new order in respect of poker machines in hotels, bringing the freeze to an end and creating poker machine entitlements with statutory incidents sufficiently uncertain to make a spate of litigation inevitable. 3 The key provision, for the purposes of the present dispute, of the Gaming Machines Act is s19, by which (inter alia) a poker machine entitlement allocated in respect of a hotelier's licence was made transferable but it was provided (by subsection (2)) that the transfer "does not have any effect" unless it is approved by the Liquor Administration Board and (by subsection 3(c)) that an application for the Board's approval "must … demonstrate, to the satisfaction of the Board, that the proposed transfer is supported by each person who, in the opinion of the Board, has a financial interest in the hotelier's licence". There were then provisions, which were held by the Court of Appeal in Jabetin Pty Ltd v Benwine Pty Ltd [2005] NSWCA 92 to be exhaustive, in the following terms: "(5) For the purposes of subsection (3)(c), a person is taken to have a financial interest in a hotelier's licence if the person is entitled to receive any income derived from the business carried on under the authority of the licence or any other financial benefit or financial advantage from the carrying on of the business (whether the entitlement arises at law or in equity or otherwise). (6) However, a person is not, for the purposes of subsection (3)(c), to be considered as having a financial interest in a hotelier's licence by reason only of the person being the owner of the hotel." 4 Stripped of all other issues which might affect the position, the central consequence of s19 for the landlord and lessee of a licensed hotel is that, if the landlord cannot demonstrate to the Board that he "has a financial interest in the hotelier's licence", his ownership of the hotel being in itself insufficient, a poker machine entitlement allocated in respect of the hotelier's licence may be transferred by the lessee during the currency of the lease. The lessee may obtain the full consideration. If, on the other hand, the poker machine entitlement is not transferred during that period, upon the landlord obtaining the hotelier's licence at the termination of the lease, the landlord will be the only person with a financial interest in the licence and will have the disposition of the poker machine entitlement. 5 It is the situation outlined above which has given rise to the present case. The plaintiffs claim to have attempted to dispose of poker machine entitlements during the currency of the lease and to have been prevented from doing so by the defendants, their landlords, in circumstances which they say gave rise to a breach of the lease or, alternatively, to the coming into existence of a constructive trust. On the one basis they claim damages, and on the other equitable compensation. 6 During the course of his conduct of the hotel as licensee, the first-named plaintiff purchased some poker machines and installed them there (two in 1999 and a further two in 2000). As a result, four poker machine entitlements were allocated in respect of the licence under the Gaming Machines Act as at the date of its commencement, 2 April 2002. Late in the year 2002, the plaintiffs decided to attempt to sell three of these poker machine entitlements. Mr Evans obtained from the Australian Hotels Association a list of prospective purchasers of poker machine entitlements. He telephoned a number of the persons on the list, enquiring if they were interested in buying a block of entitlements, but the response was invariably to ask whether Mr Evans was the owner or the lessee of his hotel, and then to decline to pursue the matter upon his saying he was the lessee. Not yet deterred, Mr Evans obtained a second list from the Australian Hotels Association and made a further five or six telephone calls with the same result. However, after the final call had been made, Mr Evans received a call back from a Mr Howard with whom he agreed a price of $250,000 on the basis that Mr Howard's solicitors would be in touch to arrange a contract. As a result of a communication from Messrs Gwynne Thompson & Associates, solicitors acting for Mr Howard, the plaintiffs' then solicitors, Messrs. Gain Kent McRae, on 12 February 2003 forwarded to Messrs Gwynne Thompson & Associates a form of agreement for sale which they indicated their clients were prepared to exchange. The agreement was expressed to be "subject to … approval by all persons having a financial interest in the hotelier's licence owned by or for the vendor". It related to three poker machine entitlements to be transferred from the Commercial Hotel, Lockhart at a price of $250,000 (inclusive of GST). The response of Messrs Gwynne Thompson & Associates, sent by email on 10 March 2003, was to advise they had instructions "to ensure, pre exchange that the freehold owner of the premises does not object to this sale". The email continued: "My client does not want to exchange and then have the vendor approach the solicitor for the freehold owner for consent to the sale. This should be done prior to the exchange. This is not negotiable." [I have corrected an obvious transmission error].

The email concluded with the rather pessimistic comment that the "position of the purchaser may be a bar to the matter proceeding in any event". Notwithstanding their pessimism, the purchaser's solicitors submitted an amended form of agreement which, if executed, would have made the owner of the freehold a party to the agreement as a transferor and assignor of the beneficial interest in the poker machine entitlements. At the same time, and with an inconsistency that must have emphasised the purchaser's concern, an agreement in the form proposed would also have had the owner of the freehold acknowledge expressly "that the freehold owner has no interest of whatsoever nature in the Entitlements and in particular the Purchase Items". In addition, the agreement was drafted so as to include a warranty by the freehold owner that "the Vendor has the authority to deal with the Entitlements subject only to the approval of the [Liquor Administration Board]". At about this time, the solicitors for the defendants made it quite clear that they would not consent, by which I take it was meant, in the language of s19(3)(c), the proposed transfer was not "supported" by them. As well, they claimed to have "a financial interest in the hotelier's licence", referring to the form of the lease. 7 Shortly after 20 March 2003, the plaintiffs consulted, at the suggestion of their solicitor, another solicitor who is a specialist in representing lessees in matters arising out of the Gaming Machines Act, being the solicitor for a hotel lessees' association, a so-called "action group". This firm now represents the plaintiffs. 8 Following Mr Howard's counter proposal as to the form of agreement required if the purchase of the poker entitlements was to go ahead, the plaintiffs, as Mr Evans conceded in cross-examination, did "nothing further … to try to press Mr Howard to go ahead". And no other enquiries were made with a view to trying to sell the poker machine entitlements. But the proceedings in this Court were commenced just prior to the expiration of the lease. The explanation given by Mr Evans in evidence for not otherwise pursuing the matter was that it appeared to him "it would not have been worth chasing it up" because "any other purchasers would make the same request as the solicitors for [Mr Howard] had". 9 Although this case involves the delineation of the statutory rights which fell to the lessors and lessees respectively of a licensed hotel, as did Jabetin Pty Ltd, it was pointed out in argument that the leases in the two cases are not identical. In Jabetin Pty Ltd (at paras 31 and 32) Mason P referred with apparent approval to the following remarks that had been made by the Board below, which his Honour said "explain[ed] why the Lease does not confer on the lessor any of the entitlements, benefits or advantages referred to in s19(5)":

"The lease contains no express reference to poker machine entitlements or to any entitlement, concession or authority dealing with the right to keep, use and operate poker machines. The rent payable under the lease is a set amount per annum and does not fluctuate by reference to the quantity of liquor sold at the hotel, gaming turnover or performance of Benwine's business."

By contrast, clause 29 of the lease in the present case contains the following: "In addition to the rental payable in covenant 1 hereof the Lessee will pay to the Lessor by way of additional rental: … (c) in respect of each twelve monthly period computed from the 16 January 1990 (hereinafter called 'the additional rental year') an amount equal to four per centum (4%) of the gross amount including duties thereon paid or payable for liquor which was purchased in connection with the conduct of the hotel during the twelve month period terminating on the 30th June which immediately precedes the relevant additional rental period which such additional rental shall be paid on the 16th day of January in each year in which the relevant additional rental year commences". 10 For the defendants it was argued that cl 29, by entitling them to an additional rent calculated by reference to liquor purchases, which must reflect sales, conferred a relevant benefit or advantage for the purposes of s19 of the very kind contemplated by the Board in the passage from its reasons to which Mason P referred. That the additional rent had never been demanded was irrelevant to entitlement which is the criterion under s19(5). Furthermore, even if this argument may not be conclusive, it is at least a valid argument that might properly be accepted, and the actual decision is left by s19(3)(c) to the Board, as Mason P emphasized at para 42, where he said: "No party contends that subss (5) and (6) are free-standing in the sense that they provide objective criteria that do not have to be refracted through the opinion of the Board. This approach is clearly correct, having regard to the opening words of subs (5)."

The final phrase in this passage shows that the relevant entitlement to a financial benefit or advantage is not a test to be applied by a court, but a consideration to be weighed by the Board in reaching their own opinion, which will be decisive provided it is open to them. 11 The essential questions are whether, as the plaintiffs claim, the defendants' conduct with respect to the plaintiffs' attempt to sell the block of entitlements amounted to a breach of an implied term of the lease "to act reasonably and in good faith" or was in conflict with obligations imposed by a resulting or constructive trust of the poker machine entitlements. To these claims, the defendants make answer both as to factual matters and as to the law. On the facts, they say the evidence does not show that it was their conduct, in any active sense, which prevented the plaintiffs selling the block of entitlements. They were not bound to express the support for the proposed transfer without which, if the Board was of opinion they had a financial interest in the hotelier's licence, a requirement of a transfer under s19(3) could not be met. Having regard to cl 29 of the lease, they were entitled to seek a favourable opinion. If they had received it, I do not accept the plaintiffs' contention that their success would have been limited to a right to a small share of the proceeds of the sale of the block; on the clear language of s19(3), the transfer could not have proceeded. But matters never advanced to that point. The evidence reveals prospective purchasers required positive support from lessors in the position of the defendants before they were interested in proceeding. The plaintiffs fell at this first hurdle, and never afterwards attempted to surmount it. Indeed, the only prospective purchaser they found, after a number of inquiries, insisted the defendants should be joined as parties to the transfer, something quite outside any possible obligation binding the defendants. 12 Had the plaintiffs negotiated a transfer requiring only the Board's approval and then been blocked by an intervention by the defendants asserting that they had a financial interest in the hotelier's licence and that they declined to support the proposed transfer, the legal bases of the plaintiffs' claim would have had to be explored. Would the defendants' allegation of a financial interest have involved a breach of an implied obligation "to act reasonably and in good faith"? I would not so find. The statute commits the question to the opinion of the Board and the defendants were entitled to have that opinion. Nothing in the evidence leads me to conclude they did not honestly desire to pursue the issue, or that there was or would have been anything unreasonable in their doing so. 13 Then the plaintiffs allege a resulting or constructive trust. In my opinion, the conclusions of Mason P in Jabetin Pty Ltd at paras 64-80 require the rejection of any such trust on the basis of the circumstances surrounding the acquisition of the poker machine entitlements. That really only leaves the possibility of a constructive trust arising out of the circumstances of the attempted sale of a block of poker machine entitlements. But, as Mason P pointed out in Jabetin Pty Ltd at para 75, referring to Muschinski v Dodds (1985) 160 CLR 583 at 616 and Baumgartner v Baumgartner (1987) 164 CLR 137 at 148, "[t]he touchstone of a constructive trust is unconscionability", or, as it was put in the joint judgment of Gaudron, McHugh, Gummow, Hayne and Callinan JJ in Bathurst City Council v PWC Properties Pty Limited (1998) 195 CLR 566 at 584 the relevant kind of constructive trust is "imposed by a court as a remedy for unconscientious conduct by a defendant", and there was nothing unconscionable or unconscientious about the defendants insisting (so far as they actually can be said to have done so) upon their right to the opinion of the Board, and nothing unconscionable, the plaintiffs having abandoned their attempts to sell, about the defendants relying on the rights the Act conferred upon them at the termination of the lease. 14 The plaintiffs sought to find some comfort in Garcia v Masters [2005] NSWSC 480, where a constructive trust of poker machine entitlements was found by Einstein J and enforced. But although his Honour found (at para 83) a constructive trust, it arose out of an express contractual term directed to the question and binding a new lessee. That is a quite different situation from the present, and it is noteworthy that in the same paragraph of his judgment Einstein J recognized that the end of the lease to the trustee would see the end of the equitable interest in the poker machine entitlements. It is true that his Honour also granted relief against the lessors but that, too, arose out of his finding of a trust binding the lessees, for the lessors were affected upon the principle of Barnes v Addy (1874) 9 Ch. App 244, as the authorities cited at para 89 make clear. No argument was put to me that any analogous ground of relief could be found here. 15 For these reasons, the plaintiffs' summons must be dismissed with costs. I direct that the defendants' counsel bring in, on a date to be fixed, short minutes of orders appropriate to be made to reflect these reasons.

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.