implied terms of retail lease agreement
Legislation Cited: Retail Leases Act 1994
Cases Cited: Golden Harvest (Australia) P/L v Paing P/L & ors [2002] NSWADTAP 40
Toll (FCGT) Pty Ltd v Alphapharm P/L [2004] HCA 52
Source
Original judgment source is linked above.
Catchwords
Pre-lease misrepresentationsmisleading or deceptive conductimplied terms of retail lease agreement
Legislation Cited: Retail Leases Act 1994
Cases Cited: Golden Harvest (Australia) P/L v Paing P/L & ors [2002] NSWADTAP 40Toll (FCGT) Pty Ltd v Alphapharm P/L [2004] HCA 52COM 14/39748
Publication restriction: Nil
Judgment (5 paragraphs)
[1]
Background to Dispute; The Proceedings
The subject proceedings arise from a retail lease agreement which commenced on 7 November 2013 between George's Spice Pty Ltd ("the lessee") and Southern Highlands Rentals Pty Ltd (" the lessor") in respect of restaurant premises located at 95 Old Hume Highway, Mittagong NSW.
In summary:
the lessee claims compensation for cost of wasted foodstuff, loss of equipment and loss of business claimed to arise from the unsatisfactory condition of the restaurant premises; and
the lessor claims compensation for unpaid rent and outgoings pursuant to the terms of the lease agreement
The lessee's application was filed on 26 May 2014, setting out the reasons for the application but without providing details of the orders sought, other than stating "Orders pursuant to section 71 and 71A of the Retail Leases Act 1994".
Relevantly, section 71 simply permits a party or former party to a retail lease to lodge a claim with the Tribunal within 3 years of the claimed liability or obligation arising, and section 71A permits a claim of unconscionable conduct to also be lodged within the same period.
The lessee's application was listed for directions on 17 June 2014, when the Tribunal was advised that the lessor was now proposing to lodge its own application. Accordingly, the presiding member made directions for filing and service of evidence by each party and for any application filed by the lessor to be listed and heard together with the existing application lodged by the lessee.
The lessor then sought amendments to the timetable, due to certain difficulties with compliance. These amendments were agreed to on behalf of the lessee and amended procedural directions were made.
The lessor subsequently filed its application on 30 July 2014, within which it was stated that the lessee had "breached their lease and has not paid rent" and that the lessee had "now tried to claim compensation from us, which we do not believe they are entitled to as per conditions of lease and all other evidence attached". However, in somewhat similar fashion to the lessee, there was no express statement of exactly what orders were being sought, although annexed to the application was a schedule of what was stated to be rent and interest payable by the lessee under the terms of the lease until the end of its term.
The lessee's application was originally stated to include a claim that the lessor had engaged in unconscionable conduct. The lessor's application also in turn alleged unconscionable conduct on the part of the lessee. It should be here stated that there appears to have been no real analysis by either party of the subject facts within the context of the applicable law relating to claims of unconscionable conduct, prior to these claims being made and then maintained through until the hearing.
No evidence or submissions were provided by the lessor which related to or supported its claim that the lessee had engaged in unconscionable conduct. The lessee's claim that the lessor had engaged in unconscionable conduct was expressly abandoned within the written submissions handed up at the end of the hearing.
By notice dated 14 August 2014, the registry advised the parties that hearing of the proceedings would take place on 25 September 2014. On 23 September 2014, the lessor's solicitor contacted the registry to advise that an adjournment was sought because the lessor had now decided to instruct lawyers in the proceedings and the lawyers needed time to properly prepare. A copy of a letter sent by the lessor's solicitors to the lessee's solicitor on 18 September 2014 was provided to the registry setting out this request for an adjournment. This letter sought the lessee's consent to the adjournment and advised that, if the proceedings were to be heard on the set date of 25 September 2014, all of the deponents to the affidavits filed on behalf of the lessee would be required for cross examination.
It is appropriate at this point to state, without coming to any final conclusion, that an indiscriminate threat of inconvenience to an opposing party which might also cause inconvenience and avoidable waste of resources to the Tribunal, and is made for no apparent forensic purpose other than to encourage consent to an adjournment application, is entirely inappropriate.
The above history of the progress of these proceedings is set out because it is relevant to consideration of applications for costs orders which each of the parties have either alluded to or expressly made.
It should also be noted at this point that the majority of the lessee's witnesses were subsequently cross examined at the hearing, but the subject matter and result of such cross examination did not in my view, except in the case of the lessee's accountant, significantly assist in resolution of the real issues in the proceedings. A number of the lessor's witnesses were also required for cross-examination at the hearing and a large component of such cross-examination was of marginal ultimate value, save for a portion of the evidence of Mr Pikkat and Mr Mountford.
On 24 September 2014 I made orders vacating the hearing date. The proceedings were adjourned for hearing to a later date and the parties were provided with a further opportunity to file and serve any additional material upon which they proposed to rely. A notation was made within these orders that each party faced the prospect of having their application dismissed if they were not ready to proceed on the next hearing date.
The proceedings were ultimately heard at Moss Vale on 4 December 2014. An accredited interpreter was in attendance to assist the lessee's witnesses, and both parties were legally represented. On behalf of the lessee, affidavits were admitted and evidence received from Mr Nur-a-alam Khan, Mr Khan's wife Ms Ekutun Nahar, Mr Habinur Rahman, and Mr Joarder Hussein. Mr Hossain stated that he was the lessee's accountant; his affidavit set out his assessment of economic loss suffered by the lessee as a result of the claimed misrepresentations and contractual breaches by the lessor. An affidavit of a Mr Mostafa Mollah sworn 7 July 2014 was also admitted into evidence. Mr Mollah did not give oral evidence.
On behalf of the lessor, evidence was given and affidavits admitted from the managing director of the respondent Mr Arvo Pikkat, the lessor's property manager Alicia Deveny and by two tradesmen who attended and undertook work at the subject premises, Paul Stokes and Morgan Mountford. Affidavits were also admitted into evidence upon a restricted basis from an electrician Josh Britten and from an accountant Allan McGillivray, neither of whom gave evidence.
On completion of the hearing, orders were made that all submissions by the applicant in each case (that is, by the lessor in its case and by the lessee in its case) were to be filed and served by 11 December 2014 and that any submissions in reply from either party were to be filed and served by 18 December 2014.
[2]
The Lessee's Claim
The exact scope and nature of the lessee's claim eventually crystallised within the affidavit and evidence of the accountant Mr Hussein and within the written submissions filed after the hearing.
The lessee's claim was originally based upon unconscionable conduct; however, this ground was withdrawn during the hearing and such withdrawal was confirmed within written submissions.
Ultimately, the lessee claimed compensation from the lessor based upon alleged breaches by the lessor of:
sections 10(1) and 62D of the Retail Leases Act 1994;
implied terms of the lease that the lessor would work with the lessee in good faith and that the premises would be fit for purpose;
section 34 of the Retail Leases Act 1994.
Section 10 of the Retail Leases Act 1994 is as follows:
10 Right to compensation for pre-lease misrepresentations
(1) A party to a retail shop lease is liable to pay another party to the lease ("the injured party") reasonable compensation for damage suffered by the injured party that is attributable to the injured party's entering into the lease as a result of a false or misleading statement or representation made by the party, or any person acting under the party's authority, with knowledge that it was false or misleading.
(2) The giving of a lessor's disclosure statement to a prospective lessee under a retail shop lease is considered to be the making of a representation by the lessor to the lessee as to the information in the disclosure statement.
(2A) The making of a representation by a prospective lessee in a lessee's disclosure statement given to a prospective lessor under a retail shop lease that the prospective lessee has sought independent advice, or as to statements or representations relied on by the prospective lessee in entering the lease, is considered to be the making of a representation by a lessee to the lessor.
(3) This section extends to apply to a statement or representation made before the commencement of this section.
There are real barriers to success of the lessee's claim based upon contravention of the above section. These barriers were outlined by the Appeal Panel (and subsequently cited with approval by the Court of Appeal) in Golden Harvest (Australia) Pty Ltd v Paing Pty Ltd and ors. [2002] NSWADTAP 40:
[32] The terms of section 10 of the Retail Leases Act 1994 are reminiscent of the interpretation and application given to section 52 Trade Practices Act 1974 with respect to statements and representations as to future matters and matters of intention before the introduction of section 51A. The terms of section 10 require demonstration, as a condition of liability, that the representor knew that a statement or representation was false or misleading. Where the statement or representation goes to a future fact or matter or is a statement of intention, we are of the view that the representor will not be liable unless the representor knew that the statement was false or misleading at the time it was made. That is to say, it must be shown that the representor had no intention of making good the representation or was aware of circumstances which would prevent the making good of the representation: [authorities cited].
The evidence in these proceedings does not establish that the lessor knew, at the time that he told the lessee that certain remedial works would be undertaken in relation to the refrigeration and the smell in the premises prior to commencement of the lease, that such statement was false or misleading. It is clear in fact that such works were undertaken. In addition, both the Lessor's Disclosure Statement and the lease agreement expressly stated that further responsibility for, inter alia, maintenance of equipment and of drains would rest with the lessee as and from commencement of the lease.
The lessee also relies upon the provisions of Section 62D of the Retail Leases Act 1994 which are as follows:
62D Misleading or deceptive conduct in connection with retail leases
A party to a retail shop lease must not, in connection with the lease, engage in conduct that it is misleading or deceptive to another party to the lease or that it is likely to mislead or deceive another party to the lease.
Determination as to whether the lessor's conduct was misleading or deceptive involves an objective assessment.
Mr Khan inspected the premises with Mr Pikkat on or about 7 October 2013. Following that inspection, agreement in principle was reached that the lessee would enter into a lease of the premises. The premises were intended to be used as an Indian restaurant. The Lessor's Disclosure Statement was later prepared and sent to the lessee on 29 October 2013.
The lessee contends that Mr Pikkat gave unqualified undertakings to remove a smell which was present at the premises when first inspected, that he would ensure that all equipment and fixtures including the cool room, freezer and air conditioner were in and would remain in good working order, that a qualified tradesperson would inspect and ensure that this would be so before the handing over of keys, that a tank at the rear of the premises would be prepared and that the liquor licence would be transferred. The lessees claim that they entered into the lease based upon these representations.
A number of difficulties exist in relation to the above contentions. None of the alleged representations were set out within the Lessee's Disclosure Statement or recited within the terms of the lease. Further, the express terms of the lease as set out in Items 22 and 23 of Annexure A were as follows:-
Item 22: the lessee is responsible for the maintenance and running costs of the cool room, stoves, dishwasher and all permanent fixtures and fittings within the building.
Item 23: the lessee is responsible for the servicing of the grease trap, drainage and plumbing at the property.
There is a degree of dispute between Mr Khan and Mr Pikkat as to exactly what was said during their conversations at the premises. Having considered the context within which these discussions took place, the content of the Disclosure Statement, the terms of the resulting written lease which was executed by the parties, and the evidence as presented by all of the witnesses at the hearing, the version generally given by Mr Pikkat for the respondent is preferred; namely, that he stated to Mr Khan that he would ensure that the walk-in freezer, the cool room and the air conditioning were in working order prior to commencement of business and that he would take steps to remove the smell emanating from the drainage, with no further undertaking given.
On 15 November 2013 the agent Ms Deveny arranged for a technician to attend and inspect the freezer. The freezer was later again found to be malfunctioning on 10 December 2013 and the lessor arranged for the unit to be inspected on the following day by a tradesman.
The "grand opening" of the restaurant had been advertised for, and then took place on, 13 December 2013. Notwithstanding the problems with the cool room and freezer, food had been purchased on 7 December 2013 and was served on that evening. The lessee claims that there was still a smell existing in the restaurant premises at that time. Certainly the existence of this smell had been acknowledged by Mr Pikkat in early November when inspecting the premises. Although his evidence was that he considered that he had resolved this problem himself at the time by flushing out a section of the drains, it is clear that Mittagong Plumbing was later called in by the agents to again inspect the drains and undertake work.
Mr Mountford from Mittagong Plumbing once again attended at the premises at the request of the lessor's agent on 15 January 2014. His frank evidence was that he was still able at that time to detect a "bad smell in the drains". He also stated that he had then proceeded to clean out and fully flush the floor waste existing in various locations within the premises, and that this had the effect of removing the smell. I accept Mr Mountford as an honest and forthright witness. I also accept his evidence that the smell had persisted through until 15 January 2014 and that it was then effectively removed by him.
There was no written notification given by the lessee to the lessor or its agent of difficulties with the freezer or the cool room, or of smell emanating from the drains. The lessee's right to compensation for any of these claimed problems pursuant to section 34 of the Retail Leases Act requires written notice; accordingly, the lessees cannot successfully rely upon this section of the Act in support of their claim.
The rent free period available to the lessee under the terms of the lease as varied by the parties had expired on 7 January 2014, approximately one week before elimination of the drain smell.
On 14 February 2014 the lessee closed the restaurant with the proposal that it would be re-opened on 4 April 2014.
The lessee's evidence is to the effect that the difficulties experienced in its new restaurant business at the premises were in part caused by the lack of refrigeration, but that in particular the smell in the premises caused such an adverse effect at the opening on 13 December 2013 and for the period immediately thereafter that it was impossible to maintain custom, with the result that the restaurant had to be closed. The lessee contends that it proposed to re-open the restaurant in April with a new name, but that this was subject to performance by the lessor of its contractual obligations to repair, which were not met.
Of course, the restaurant did not re-open.
The Retail Leases Act 1994 codifies the respective rights and obligations of lessors and lessees. The lessee claims rights and remedies which are said to arise from implied terms of the lease and which require the lessor to act in good faith and for the premises to be fit for purpose; however, the rights and remedies of a party to a retail lease must be found either within the terms of the actual lease agreement, or within the provisions of the Act.
The lessee's contention of implied rights under the lease agreement must fail. The contract between the parties was comprised within the terms of the subject lease, subject to any statutory modification under the provisions of the Act,
7 This Act overrides leases
This Act operates despite the provisions of a lease. A provision of a lease is void to the extent that the provision is inconsistent with a provision of this Act. A provision of any agreement or arrangement between the parties to a lease is void to the extent that the provision would be void if it were in the lease.
Interpretation of the terms of the lease, subject to the overarching effect of the Act, must be approached upon the basis that the lessor and lessee are commercial entities engaging in a normal commercial activity; see the unanimous decision of the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52:
(40) This Court, in Pacific Carriers Ltd v BNP Paribas [6], has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction[7].
The quantum of the lessee's claim, as disclosed by the tendered evidence, is as follows:-
Compensation for lost stock in the amount of $7,000.
Losses and expenses in relation to fees and equipment as outlined in the affidavit of Mr Khan dated 28 November 2014, in a total sum of $50,188.92.
Compensation for loss of customer goodwill, assessed by the accountant Mr Hussein to be in the sum of $150,000.00.
Consideration of all of the evidence leads to a conclusion that the breakdown of refrigeration equipment was not the proximate cause of the lessee's decision to close the restaurant and not re-open it. Furthermore, having considered all of the evidence, I am not persuaded that there should be any departure from the clear and express terms of the lease that maintenance of the refrigeration, cool room and freezer was the responsibility of the lessees. Accordingly, any failure or defect of refrigeration did not create any liability for damage or loss on the part of the lessor.
The evidence establishes that the problem with smell at the restaurant was something which persisted through from the time of the first inspection in early November 2013 until 15 January 2014 when Mr Mountford from Mittagong Plumbing attended and finally removed the cause of the problem. By then, the restaurant had been operating for a month, affected to a degree by an unpleasant odour.
I hold some real concern as to the extent to which I can rely upon the "customer compliant" documents supplied by the lessee as a reliable record of customer reactions to any smell which existed at meal times. The origin of these documents and the manner in which they were brought into existence is open to question. On the other hand, it was frankly and understandably conceded by all relevant witnesses who gave evidence that the existence of a bad odour would be fatal to the successful operation of the lessee's restaurant business.
The above conclusion, however, does not mean that the lessee should not remain bound under the terms of the lease agreement to pay rent at least as and from 15 January 2014, nor does it justify the lessee closing its restaurant business, or its claim for loss of profits and compensation for losses said to arise from the claimed breach by the lessor.
The Court of Appeal in Taylor v Dexta Corporation Ltd [2006] NSWCA 310 (see in particular paragraphs 29 to 35) emphasised, and recited earlier authority for, the proposition that commercial contracts must be construed or interpreted so as to be given a "sensible commercial operation" or so as to be "commercially sensible and in accord with commercial reality". It is clear from the express terms of the lease agreement made between the commercial parties in the present proceedings, considered within the context of customary commercial practice, that the lessee bore responsibility for refrigeration, drains and other items, in its role as operator of the restaurant business at the premises as and from commencement of the term of the lease.
If the lessee's claims of breaches by the lessor of their agreement were sustained, there is in any event no evidence to indicate why the lessee took no steps itself to deal with any drainage or refrigeration problems prior to or after the time that the restaurant business had commenced, so as to optimise the prospect of successful presentation of food in a comfortable atmosphere. In failing to take such steps during the period of operation of the business, and in then electing to close the restaurant without notice, the lessee acted unreasonably such that it could not succeed in its claim for damages in the event that breach by the lessor was established. Further, even if these barriers had been overcome, there is no satisfactory evidence to support the lessee's claimed losses. The evidence of the lessee's accountant is unsatisfactory in that his underlying assumptions and method of calculation of loss of future profit and goodwill have not been adequately explained; accordingly the conclusions reached by him as to the lessee's losses and damage appear to be at best speculative.
[3]
The Lessor's Claim
The lessor's claim was confirmed during the course of the hearing and within submissions to be in accordance with the statement which was sent to Mr Alam Khan by Mr Pikkat on 15 October 2014. The amount claimed was in the total sum of $37,133.70 comprising rent arrears, outgoings pursuant to the terms of the lease, and interest covering the period until 7 November 2014 when a new lease of the premises commenced.
As a result of the findings set out above within this judgment, there should be a finding that the lessor is entitled to payment of rent, outgoings and interest due under the terms of the lease agreement.
It had eventually been agreed by the parties at the time of commencement of the lease that the lessee would receive an 8 week rent free period as and from 7 November 2013.
I am accordingly satisfied that rent at the rate of $3,033.33 per month ($99.725917 per day) is due and payable by the lessee to the lessor for the period of 285 days from 15 January 2014, when the smell at the premises was removed, until 27 October 2014, when the premises were re-let. This results in an amount of $28,421.89 payable for rent. Added to this should be the amount of $841.60 payable for outgoings for this period, together with interest in an amount of $2,200.00 which is calculated at 10% per annum and then rounded off.
The above amounts lead to a total amount of $31,463.49 which is ordered to be paid by the lessee to the lessor.
[4]
Costs
The parties have each made claims of unconscionable conduct which were unsustainable. Both parties required witnesses for cross-examination which had the effect of prolonging the hearing and consideration of evidence, in circumstances where I am satisfied that such cross-examination was often unnecessary. While the lessee's claim has been dismissed, the lessor's claim has not fully succeeded, either by comparison to the amount originally sought or to the amount sought by the time of hearing.
Given the matters set out within the preceding paragraph, there presently appears to me to be no reason to depart from the prescription set by section 60 of the Civil and Administrative Tribunal Act 2013 that there should be no order as to costs, with the effect that each party in the present proceedings should bear its own costs. However, if either party asserts that special circumstances exist which do warrant an order in respect of costs, an opportunity should be given for submissions to be presented, following which a decision as to costs will then be made upon the papers filed.
K Rickards
General Member
Civil and Administrative Tribunal of New South Wales
27 March 2015
[5]
I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales.
Registrar
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Decision last updated: 11 June 2015