Harbourside Catering Pty Ltd v TMG Developments Pty Ltd

Request for consent to assignment

1. Although there were a number of prior communications between Bicher (and its solicitors Hall & Wilcox) and WFM (and its solicitors HWL Ebsworth), the relevant formal request for consent to an assignment to Bicher was - as was submitted for WFM by its counsel Mr Fernon - contained in an email from the Administrator's solicitors Johnson Winter & Slattery (JW&S) to HWL Ebsworth of 8 August 2018, as follows: Thank you for your email below. We have provided it to Hall & Wilcox as solicitors for Pettruco Pty Ltd, Bicher Truco Pty Ltd and Bicher & Son Pty Ltd (PBB). PBB have requested that my client seek the consent of your client will consent to the transfer of the lease to PBB. The relevant material PBB wish to put to your client is attached. If you or your client require any further information, please let us know. I have copied PBB solicitors to this communication. My client is content for the parties to deal directly in relation to this issue if that is more convenient.
2. The email was accompanied by a letter from Hall & Wilcox to Johnson Winter & Slattery and its enclosures, which comprised: 1. Vision for Bar Machiavelli restaurant; 2. Bar Machiavelli Marketing Plan; 3. Bar Machiavelli Staff Manual; 4. Transitional Plan; 5. Financial report for 30 June 2016; 6. Financial report for 30 June 2017; 7. Bank statement for 30 June 2017 showing balance of operating accounts; 8. Profit and loss and balance sheet for 30 June 2018; 9. Bank statement for 30 June 2018 showing balance of operating accounts; 10. Cash flow forecast for twelve months ending June 2019; 11. Evidence of capacity to pay security deposit for lease.
3. The letter also contained submissions in response to an earlier letter of 7 August 2018 from HWL Ebsworth to JW&S, in which it had been advised that while reserving its position that it had received no compliant request for consent, the lessor did not consent to the proposed assignment to PBB on the basis that it considered the financial resources and retailing skills of PBB to be inferior to those of the current lessee, and listed a number of factors on which its decision was said to be based.

Refusal of consent

1. WFM (and its solicitors) made no request or requirement for any further information. However, on 16 August, Hall & Wilcox sent to HWL Ebsworths a copy of the affidavit of Rosanna Riccio (who the plaintiffs proposed would operate the restaurant should the Lease be assigned to Bicher).
2. On 27 August 2018, HWL Ebsworth sent a letter to Hall & Wilcox and JW&S, which referred to the Lease and the request of 8 August 2018 for consent to the assignment of the Lease, stated that their client (WFM) had considered the assignment request and supporting documents, and had determined that it would not consent to the assignment of the Lease to the plaintiffs. After setting out its reasons under the headings "Financial resources" and "Retailing skills", the letter concluded: As set out above, our client has made [the decision that it would not consent] taking into account the requirements under the Retail Leases Act NSW and has concluded based on the information available to it that: (a) the retailing skills of the Plaintiffs are inferior to those of Bar Machiavelli / Ms Toppi; and (b) the lessee has not complied with section 41 of the Retail Leases Act NSW as it has not provided the lessor with such information as the lessor reasonably requires to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee.
3. It is noteworthy that: 1. There was no assertion that (as a matter of objective fact) the financial resources of the proposed assignee were inferior to those of the company; 2. In the statement of the "rationale" for the decision, there was no reference to any "requirement" of the lessor for provision of additional information, nor to any failure to comply with any such requirement.

When can consent be withheld?

1. Although the Lease contains a provision which limits the Lessor's right to refuse consent to an assignment (clause 16.2), it was common ground that, as the Lease is a retail shop lease for the purposes of (NSW) Retail Leases Act 1994, this clause had no practical relevance, as the provisions of the Act left no room for its operation.
2. (NSW) Retail Leases Act, s 39, provides as follows: 39 Grounds on which consent to assignment can be withheld (1) The lessor is entitled to withhold consent to the assignment of a retail shop lease in any of the following circumstances (and is not entitled to withhold that consent in any other circumstances): (a) if the proposed assignee proposes to change the use to which the shop is put, (b) if the proposed assignee has financial resources or retailing skills that are inferior to those of the proposed assignor, (c) if the lessee has not complied with section 41 (Procedure for obtaining consent to assignment), (d) the circumstances set out in section 80E, (e) in the case of a retail shop lease that has been awarded by public tender, if the assignee fails to meet any criteria of the tender. (2) This section does not preclude any right of the lessor to require payment of a reasonable sum in respect of any legal or other expenses incurred in connection with the consent, so long as the lessor has substantiated those expenses to the lessee at the request of the lessee.
3. Section 41 provides as follows: 41 Procedure for obtaining consent to assignment The following procedure applies to the assignment of a retail shop lease that requires the consent of the lessor: (a) A request for the lessor's consent to an assignment of the lease must be made by the lessee in writing. (b) The lessee must provide the lessor with such information as the lessor may reasonably require to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee. (c) The lessee must provide the proposed assignee with an updated lessor's disclosure statement (comprising a copy of the lessor's disclosure statement given to the lessee in respect of the lease together with details of any changes that have occurred in respect of the information contained in that disclosure statement since it was given to the lessee). (d) For the purpose of enabling the lessee to provide the proposed assignee with the required updated lessor's disclosure statement, the lessor must provide the lessee with an updated lessor's disclosure statement within 14 days after being requested to do so by the lessee. (e) If the lessor fails to provide the updated lessor's disclosure statement, it is sufficient compliance with the requirement to provide the proposed assignee with an updated lessor's disclosure statement if the lessee instead provides a lessor's disclosure statement completed by the lessee to the best of the lessee's knowledge (but with information as to current outgoings in place of information as to estimated outgoings). (f) The lessor must deal expeditiously with a request for consent to assignment of the lease. (g) The lessor has 28 days (the decision period) to decide whether to consent or to refuse consent to assignment. The decision period starts from when the request for consent was made by the lessee or from when the lessee has complied with the requirements of this section (whichever is later). (h) The lessor is taken to have consented to assignment if the lessee has complied with this section and the lessor has not, within the decision period, given notice in writing to the lessee either consenting or withholding consent to assignment. (i) The regulations may prescribe a period that is to replace the period of 28 days as the decision period in this section.
4. Section 39 states the circumstances in which a lessor is entitled to withhold consent, not as matters of which the lessor must be reasonably satisfied, but as objective facts. The lessor is entitled to withhold consent only if one or more of the circumstances referred to in s 39(1)(a) to (e) objectively exists, regardless of whether or not in the lessor's opinion, reasonable or otherwise, one exists. The question whether such circumstances exist is ultimately one for determination by the Court, on the evidence before the Court. I do not accept the submission made, on behalf of WFM, that the Court is confined to the material that was before lessor. Such confinement might be appropriate if the test were the state of mind of the lessor. But it is not; it is whether a relevant circumstance objectively exists.
5. A further reason for rejecting the view that the decision is confined to evidence that was before the lessor is that (1) the objective existence (or not) of one of the specified circumstances does not depend only on what is provided to the lessor; (2) there is no reason why the lessor could not later rely on grounds additional to those invoked when it made its decision; (3) while it may not be difficult to establish what was placed before the lessor by the lessee, it will be often be difficult to ascertain what other material the lessor may have taken into account.
6. Here, where the plaintiffs seek to establish that the lessor was not entitled to withhold consent, the plaintiffs must show that none of the circumstances referred to in s 39(1) exist. As WFM relied only on the grounds referred to in the HWL Ebsworth letter of 27 August 2018, and there was no suggestion that any other circumstance referred to in s 39(1) was relevant, this means that, as a matter of practicality and reality, the plaintiffs must establish that: 1. Bicher (being the proposed assignee) has financial resources and retailing skills that are not inferior to those of the company (being the proposed assignor); and 2. The company has not failed to comply with section 41 (Procedure for obtaining consent to assignment).
7. I accept that in considering these questions, it is appropriate to acknowledge that the lessor is entitled to act in its own interests, and also that for present purposes the circumstance that the plaintiff's DOCA would produce a better return for creditors than Ms Toppi's DOCA is entirely irrelevant.

Does the proposed assignee have financial resources and retailing skills that are not inferior to those of the proposed assignor?

1. First, it is important to identify the correct comparator, and when the comparison is to be made. Secondly, that comparison is to be undertaken as at the time of the assignment. In McEvoy Food Company Pty Limited v Miziner and Finch, [1] Senior Member Bluth observed: [43] The facts in this case highlight the question of what is the appropriate time for comparison of the retailing skills. The view of the Tribunal is that the comparison should be made of the relevant skills at the time of the assignment, not at the commencement of the Lease. If the retailing skills of the lessee had to be compared at the time of entry into the lease with the retailing skills of the proposed assignee at the time of the proposed assignment, then of course those retailing skills would be greater than the proposed assignee. But that seems to be an artificial way of looking at the situation given that currently there are no retailing skills demonstrated by the applicant. Why should a lessee be held to account to an earlier time when the retailing skills were there but have now are no longer there? Businesses change over time for the better or for the worse.
2. Further support for that view is to be derived from the context of s 41, which in requiring provision of an updated lessor's disclosure statement shows that the relevant considerations in relation to consent to assignment involve the circumstances that obtain at the time of the proposed assignment, and not at the commencement of the lease.
3. The proposed assignee is, for present purposes, Bicher. The proposed assignor is Bar Machiavelli - a company which is in voluntary administration and therefore presumably insolvent. It is not itself currently operating the restaurant, but has licensed it to Paula Toppi's company Scuie Scuie Pty Ltd. There is no suggestion that the company will resume operation of the restaurant, and if neither DOCA is approved by creditors it will inevitably go into liquidation. The comparison is not between the competing DOCAs, but between the status quo on the one hand, and assignment to Bicher on the other.

Financial resources

1. Although WFM has not contended that, as an objective fact, Bicher's financial resources are inferior to those of the company, the plaintiffs bear the onus of establishing that the circumstance does not exist and accordingly I shall address it, although more cursorily than might have been appropriate had it been truly in issue.
2. Bicher continues to operate its Clarence Street restaurant. There is nothing to suggest that it does not pay its creditors as and when they fall due. It does not have an overdraft; a bank statement shows a credit balance for its operating account as at 2 July 2018 of $30,426.
3. Bicher has proffered financial statements for the years ended 2016 and 2017, and management accounts as at 30 June 2018, according to which: 1. for the year ended 30 June 2016 (which was its first year of operations and represented a 7 month period only) it had net operating profit of $17,591 and as at 30 June 2016 had net assets of $28,730; 2. for the year ended 30 June 2017 it had net operating profit of $26,330 and as at 30 June 2017 had net assets of $55,060; and 3. for the year ended 30 June 2018 it had net operating profit of $289,907 and as at 30 June 2018 had net assets of $366,446.
4. It is true that there are some internal inconsistencies in those financial statements, and that they are not audited. However, in the context of a private company of this kind, it is unsurprising that they are unaudited. In the Hall & Wilcox letter of 8 August 2018, submissions were made to the effect that the financial statements required adjustment and understated the true profit. WFM treated this as a reason for not relying on those financial statements at all; however, I would regard this as a reason for concluding that, on balance, they do not overstate Bicher's position.
5. As to the company, the starting point is that it is implicit in the appointment of an administrator that it is insolvent. The Administrator's report to creditors contains a summary of its financial position, concluding that there is an estimated deficiency of $1,413,366 - before provision for costs of the administration.
6. Notwithstanding that the accounts of Bicher may be unaudited and imperfect, in those circumstances they are ample to support a conclusion that Bicher's financial resources are not inferior to those of the insolvent proposed assignor.

Retailing skills

1. As to retailing skills, the retailing skills to be considered are those in the retail sector for the purposes of which the demised premises are used. [2] In this case, that means the operation of a restaurant.
2. Bicher says that its relevant retailing skills are those of Ms Ricci (whom it proposes would manage the restaurant if the Lease were assigned to it), and in addition a range of employees whom it could deploy to operate the restaurant - including a chef, a floor manager, and other staff at its Clarence Street restaurant.
3. WFM contends that the comparison reduces to one between Ms Ricci for Bicher, and Ms Toppi for the company, and that Ms Toppi's skills are by reason of her lengthy experience and proven track record superior.
4. For present purposes I will assume, without deciding, that Ms Toppi's skills as a restauranteur are superior to those of Ms Ricci. At least, it would have been difficult to be affirmatively satisfied that Bicher's skills as a restauranteur in the context of the operation of Bar Machiavelli were not inferior to those of Ms Toppi. However, for the following reasons, I do not accept that that is the relevant comparison.
5. In McEvoy Food Company Pty Limited v Miziner and Finch, [3] Senior Member Bluth pointed out that the skills which the proposed assignor once had before its directors ceased working in the business are no longer its skills: [41] … Accordingly … it is necessary for the Tribunal to compare the retailing skills of the proposed assignee to that of the retailing skills of the lessee, namely the applicant. Mr Byrne has made the point that those retailing skills do not compare given the retailing and restaurant ability of the former directors. There can be no debate about that. Those nominated directors certainly had significant retailing and restaurant ability, however those directors are no longer working in the business, having resigned. Further, the applicant is now not open to business and is not trading and, as the Tribunal was advised, has not traded for some 6 months. In fact, one could take the view that there are currently no retailing skills being demonstrated by the applicant as there is in fact no retailing. Consequently, as there are no retailing skills for comparison, any retailing ability by the proposed assignee must be greater than that currently being demonstrated by the applicant.
6. While, in my view, the question is not what skills a proposed assignor or assignee "demonstrates", but rather what skills they "have", that nonetheless directs attention to the skills that the assignor or assignee presently have to deploy in the business being conducted from the leased premises. The skills of a director, whose powers are suspended by administration, are not skills the company can presently deploy on its own account in the restaurant. The skills of a former employee of the lessee, who is now working for another employer, are no longer skills of the lessee.
7. It is true that Ms Toppi remains a director of the company. However, that does not mean that in the present circumstances, her skills as a restauranteur are skills of the company. With the company in administration, her powers are suspended, and she performs no directorial function. She is no longer employed or otherwise engaged by the company to operate the restaurant; rather, she operates it on her own account for her own company Scuie Scuie. Her skills are now the skills of Scuie Scuie, and no longer those of the company.
8. Although the position might arguably be different it there were a proposal that the company continue to operate the business using Ms Toppi as its manager, that does not arise as there is no intention or proposal that her skills would be engaged by the company to operate the restaurant.
9. In short, Ms Toppi's acknowledged skills are no longer skills of the company. The company, in its current and prospective condition, has no retailing skills as a restauranteur. Such skills of Bicher are manifestly superior.

Has the lessee complied with section 41 (Procedure for obtaining consent to assignment)?

1. One of the circumstances which will entitle the lessor to withhold consent is if the lessee does not comply with s 41 (Procedure for obtaining consent to assignment), and s 41(1)(b) provides that the lessee must provide the lessor with such information as the lessor may reasonably require to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee. The first defendant argued that this had the effect that if the material supplied by the lessee was insufficient to (reasonably) satisfy the lessor that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee, then the lessor was entitled to withhold consent, and moreover that for that reason, the question of whether any of the relevant circumstances existed was to be judged on the evidence that was before the lessor.
2. I do not accept this submission. Section 41 sets out procedural requirements - as distinct from the substantive requirements in s 39, one of which is compliance with the s 41 procedure. Where s 39 requires the objective existence of circumstances to justify withholding consent, it would be curious if s 41 introduced, by a backdoor, a test which turned on the lessor's reasonable satisfaction. In my view, what s 41(1)(b) means is that if the lessor makes a requirement for information, for the purpose of being satisfied whether the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee, and the requirement is a reasonable one, then the lessee must provide the information so required, and failure to do so will be a non-compliance with the s 41 procedure, which will then engage s 39(1)(c) so as to justify withholding consent. But it does not mean, as WFM appeared to contend, that there is a non-compliance merely if the lessee fails to provide sufficient information to satisfy the lessor. There must first be a "requirement", and it must be a "reasonable" one, and a failure to comply with it, before s 39(1)(c) is engaged.
3. This view of s 41 is supported by the observations of Barrett JA (with whom Campbell JA and Meagher JA agreed) in Lockrey v Historic Houses Trust of New South Wales: [4] [41] In approaching the central question whether there has been compliance with clause 3.8(c) and s 41, I concentrate, for the moment, on clause 3.8(c) in its entirety and the first sentence of s 41(1)(a). [42] Compliance with those provisions entails two actions by the lessee: first, communication to the lessor of a written request for consent to assign; and, second, provision by the lessee to the lessor of "such information as the lessor may reasonably require" concerning certain matters, one of which is the "financial standing" of the proposed assignee. [43] Whether the first action has been taken in a particular case is a simple question of fact: did the lessee communicate with the lessor in writing and, if so, did the writing contain a request for the lessor's consent to assignment? The second aspect requires more detailed consideration. [44] The first point to be made about that second aspect is that it necessarily contemplates action by the lessee separate from and subsequent to the making of the lessee's written request for consent to assign. This is because the "information" that must be given by the lessee is information that the lessor requires; and the lessor will have no occasion to require anything unless a request for consent has been made. This is not to say that the lessee, when delivering the written request, might not seek to pre-empt and streamline matters by offering, in an unsolicited way, information about the financial standing of the proposed assignee. If the lessee does that, the volunteered information will necessarily be taken into account in assessing whether any subsequent information request from the lessor is reasonable. [45] This leads to the second point. The lessee comes under no obligation to furnish information about the proposed assignee unless required by the lessor to do so. [46] Third, it is for the lessor to specify the information sought. Thus, in Indian Taj Pty Ltd v Gilany [2004] NSWSC 1249 at [22], for example, the lessor required, in respect of a proposed assignee that was a company, "two years accounts, two years tax returns from the company and an asset and liability statement of the company and all directors verified by statutory declaration". A reasonable degree of specificity of this kind is necessary and was, in that case, provided by describing the required information by reference to the content of particular documents. [47] Fourth, the information that is required must be information "concerning" the particular person's "financial standing", that is, the state of his ability to meet financial commitments. A person's assets and liabilities will be relevant, as will matters of cash flow such as sources and amounts of regular income and requirements for and amounts of regular expenditure. Borrowing capacity may be a factor. In Re RHD Power Services Pty Ltd (1990) 3 ACSR 261, McPherson SPJ said (at 264) that "a person's ability to borrow without security may in some circumstances provide compelling evidence of his strong financial standing". [48] Fifth, the permitted ambit of a requirement imposed by the lessor is that the information sought concerning financial standing be "reasonably required" in the sense of having some rational bearing on an objective assessment of relevant matters concerning the financial standing of the proposed assignee as that standing is material to the lease and the financial obligations it entails. An assessment of what is "reasonably" required will proceed in the way indicated by the following observation of Latham CJ in Opera House Investment Pty Ltd v Devon Buildings Pty Ltd [1936] HCA 14; (1936) 55 CLR 110 at 116: "The word 'reasonable' has often been declared to mean 'reasonable in all the circumstances of the case.' The real question, in my opinion, is to determine what circumstances are relevant. In determining this question regard must be paid to the nature of the transaction." [49] Beyond that, two different views emerged in the course of submissions as to the ambit of the information that a lessor "may reasonably require" within the meaning of clause 3.8(c) of the lease and s 41(a). When considering a lease that is not regulated by the Retail Leases Act but contains (either expressly or by operation of s 133B(1)(a) of the Conveyancing Act) a proviso that the lessor will not unreasonably withhold consent to an assignment, the commercial desirability of the assignee is taken into account in deciding whether consent has been unreasonably withheld. In deciding that question, it is legitimate to take into account matters that bear upon the likelihood that the proposed assignee will be able to pay the rent and perform the other covenants that the lease imposes on a lessee for the balance of the term. [50] However, it may be that for a lease that is regulated by the Act the ambit of the information that the lessor can "reasonably require" within s 41(a) is more limited. It may be that the limited grounds upon which a lessor is entitled to withhold consent to an assignment have the effect that the only information that a lessor may "reasonably require concerning the financial standing and business experience of the proposed assignee", is information that will enable the lessor to decide whether the proposed assignee has financial resources or business experience or retailing or restauranting skills inferior to those of the lessee. [51] The difference between these two approaches to the ambit of the information that the lessor could reasonably require would show up in a situation where the existing lessee was a person of only marginal financial standing and indifferent retailing skills. If the second view of the ambit of the information that the lessor could reasonably require were correct, the lessor would not be able to use the opportunity of an assignment being requested to obtain a tenant that was superior to the tenant to whom the lessor was currently leasing the premises. Counsel for Mr Lockrey argued that the Act was beneficial legislation designed to protect tenants of retail premises, and that that purpose of the Act favoured the second of the two possible constructions. [52] It is not necessary in this case to choose between these alternatives.
4. Those observations establish the following relevant propositions: 1. because the "information" that must be given by the lessee is information that the lessor requires; and the lessor will have no occasion to require anything unless a request for consent has been made, s 41(b) necessarily contemplates action by the lessee separate from and subsequent to the making of the lessee's written request for consent to assign. This is so, even if the lessee when making the request endeavours to streamline matters by offering unsolicited information about the financial standing and/or retailing skills of the proposed assignee; 2. the lessee comes under no obligation to furnish information about the proposed assignee, unless required by the lessor to do so; and 3. it is for the lessor to specify the information sought, and to do so with a reasonable degree of specificity
5. Here, WFM as lessor made no relevant "requirement" after receipt of the request for consent to the proposed assignment. The significance of this is accentuated by the fact that the JW&S letter of 8 August 2018 seeking consent expressly invited the Lessor to "please let us know" … "if you or your client require any further information", yet no such request or requirement was ever made. No such request having been made, the company as lessee came under no obligation to furnish further information, and in those circumstances, there was no failure on the part of the company to provide the lessor with such information as the lessor may reasonably require to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee. Section 39(1)(c) is therefore not engaged.

Conclusion

1. My conclusions may be summarised as follows:
2. Bicher's financial resources are not inferior to those of the insolvent proposed assignor. Assuming, without deciding, that Ms Toppi's skills as a restauranteur are superior to those of Ms Ricci, Ms Toppi's skills are no longer skills of the lessee company. The company, in its current and prospective condition, has no retailing skills as a restauranteur. Such skills of Bicher are manifestly superior to those of the company. Section 39(1)(b) is not engaged.
3. WFM as lessor made no relevant "requirement" after receipt of the 8 August 2018 request for consent to the proposed assignment. Even though the JW&S letter of 8 August 2018 seeking consent expressly invited the Lessor to "please let us know" … "if you or your client require any further information", no such request or requirement was ever made. No such request having been made, the company as lessee came under no obligation to furnish further information, and in those circumstances, there was no failure on the part of the company to provide the lessor with such information as the lessor may reasonably require to be satisfied that the financial resources and retailing skills of the proposed assignee are not inferior to those of the lessee. Section 39(1)(c) is therefore not engaged.
4. There being no suggestion that there was any other basis for withholding consent, the plaintiffs have therefore established that WFM was not entitled to withhold consent to the proposed assignment of the Lease to Bicher.

Orders

1. The court: 1. Declares that the first defendant WFM Motors Pty Ltd is not entitled to withhold its consent to the assignment of the Lease by Bar Machiavelli Pty Ltd to Bicher & Son Pty Ltd. 2. Orders that the first defendant consent to the assignment by Bar Machiavelli Pty Ltd to Bicher & Son Pty Ltd. 3. Reserves liberty to apply in the event of any difficulty arising in the implementation of these orders. 4. Orders that the first defendant pay the plaintiffs' costs of the proceedings.

Endnotes

1. [2016] NSWCATCD 99.
2. Harbourside Catering Pty Ltd v TMG Developments Pty Ltd [2007] NSWSC 1375 at [40]-[42].
3. [2016] NSWCATCD 99
4. [2012] NSWCA 249 at [48].

Amendments 11 September 2018 - coversheet - corrected representation. 08 October 2018 - Typographical errors at [19], [38], [40], and [43(1)]

13 November 2018 - Typographical error in party names 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: 13 November 2018