Headway Global Pty Ltd v Golden Seeds Education Pty Ltd

Supreme Court of NSW|2024-08-20|Before: Peden J

en (Plaintiff) J Mack (Defendant)

Solicitors: CMI Legal (Plaintiff) Harris Freidman Lawyers (Defendant) File Number(s): 2021/00263565 Publication restriction: Nil

Judgment

This is a lease dispute about its commencement date, and the date from which rent was payable. That issue must be determined as a matter of construction or rectification of the commencement date. The determination of the correct commencement date decides whether the lessee, Golden Seeds Education Pty Ltd, was late in paying rent and whether the lessor, Headway Global Pty Ltd's demands for rent and threats of legal action were appropriate. Golden Seeds claims the demands amounted to a repudiation, entitling it to terminate and recover damages.

Background

In January 2019, Headway Global Pty Ltd, purchased the leased property in Condell Park, New South Wales, with a development approval to build a childcare centre.
In April 2019, the parties signed a 5-year lease drafted by Headway Global's lawyers, and after negotiation with Golden Seeds. It is an imperfect document, which has led to this dispute.
The specified permitted use of the premises was as a "Childcare Centre". The lease commencement date is expressed as when "the Lessor obtained Childcare centre provider approval". The parties accept that "Lessor" must be read as "Lessee". However, the dispute concerns the meaning of "Childcare centre provider approval".
After the signing of the lease, the parties appeared to work together towards the construction of the childcare centre. For example, in July 2019, Golden Seeds received a construction certificate for the property and assisted at the building site. While there is little evidence of the actual agreed arrangements between the parties concerning the construction process, the lease contained two bespoke "items" in the schedule that were not referrable to any clause in the lease, but were accepted by the parties to be operative terms. I consider they provide important detail of the parties' objective intention: Item 21 Development of Childcare centre The Lessee shall participate in the process of development of childcare centre and may offer opinion and advice on specifications. The Lessor shall agree to such advice provided that the advice does not result in development outside the scope of Development Approval or Construction Certificate and will not result in material increases in construction costs. Item 22 Minimum Standards for Childcare Centre Operation The Lessor warrants that the development of childcare centre shall meet minimum standards required for childcare operation in NSW. The Lessee shall also provide advice on the required standards during the construction phase of the childcare centre.
Before construction was complete, on 22 April 2020, Golden Seeds obtained "provider approval" for "the provision of an education and care service" (provider approval) under Part 2 of the Children (Education and Care Services) National Law 2010 (NSW) (National Law) and Part 2.1 of the Education and Care Services National Regulations 2011 (NSW) (National Regulations). It did not inform Headway Global of that fact. Golden Seeds then required "approval" for a particular "education and care service" to be operated at the premises (service approval): Part 3 of the National Law and Part 2.2 of the National Regulations.
On or about 3 September 2020, a final occupation certificate was issued for the premises with building details: Partial demolition of existing dwelling and associated structures and alterations and addition to existing dwelling for use as a twenty-seven (27) place child care centre.
On or about 6 October 2020, Golden Seeds lodged its application for childcare centre service approval for the premises.
On 12 January 2021, Golden Seeds received service approval for a 23-place childcare centre at the premises under s 48 National Law.
On 15 January 2021, Headway Global alleged that Golden Seeds was in breach of the lease, by not having paid rent from April 2020 when it obtained provider approval. Headway Global also reminded Golden Seeds that the lease provided the right to Headway Global to take legal action including seeking possession for a failure to pay rent.
Until 19 February 2021, the parties engaged in further legal correspondence and exchanged WeChat messages. On 19 February 2021, Headway Global called in the bank guarantee as partial payment of rent said to be owing.
On 27 April 2021, Golden Seeds asserted it was accepting the repudiation of Headway Global and vacated the premises.
Headway Global claims: 1. Unpaid rent for the period from April 2020 to April 2021, less the bank guarantee amount; 2. Rent for 6 months after Golden Seeds vacated, representing a reasonable time to mitigate its loss and find an alternative tenant which occurred on 15 November 2021; 3. Unpaid outgoings pursuant to the lease for the periods above; and 4. Interest on the sums above.
The parties provided an agreed calculation of those sums, should Headway Global be successful.
Golden Seeds has submitted, by reference to its cross-claim, that: 1. The proper construction of the commencement date is when the final government approval was obtained by Golden Seeds to operate a childcare centre in the premises, namely on 12 January 2021; 2. Alternatively, the lease ought to be rectified to reflect the common intention of the parties concerning the commencement date to the same effect as the proposed construction; 3. Golden Seeds was not in breach of the lease based on the correct commencement date, and therefore Headway Global's threats were repudiatory; 4. Golden Seeds accepted the repudiation and terminated the lease by vacating the premises; and 5. Golden Seeds is entitled to loss of bargain damages in the form of loss of expected profits that it would be made, had the lease remained on foot for its term.

Proper construction of the commencement date

Neither party provided opening written submissions as to the appropriate constructional process to determine the commencement date, even though Golden Seeds submitted that construction had become its primary argument, contrary to its pleaded cross-claim. Detailed oral closing submissions were made by Golden Seeds on the issue. Golden Seeds provided more detailed closing submissions. Headway Global made brief oral submissions in response, but did not seek further time to address the Court on any matter.
The relevant principles for contractual construction cannot be in dispute: see, eg, Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [46]-[52] (French CJ, Nettle and Gordon JJ); Cherry v Steele-Park (2017) 96 NSWLR 548 at [46]-[47] and [57]-[90] (Leeming JA, Gleeson JA agreeing). These principles apply to leases: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 at [16]-[17] (Kiefel, Bell and Gordon JJ).
The question is what meaning ought to be given to the trigger for the commencement of the lease, described in the lease as when Golden Seeds obtained "childcare centre provider approval".
A contract must be construed in accordance with its objective meaning. A technical meaning can be given to words when it is apparent that the parties intended such a technical meaning. I do not consider that Headway Global is able to establish that the parties intended receipt of "provider approval", as understood in the National Law, to be the commencement date. Instead, for the following reasons, I consider the proper construction of the commencement date is the date on which Golden Seeds obtained all approvals necessary to operate the childcare centre from the premises.

Context

The proper construction of the commencement date requires consideration in the context of the lease as a whole.
The lease was entered into in circumstances where the parties knew that there were legislative restrictions on the construction and operation of a childcare centre. It is often the case that the relevant legislative framework must be taken into account as a relevant surrounding circumstance: see eg Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 at [24] (Spigelman CJ); not questioned on appeal in (2008) 238 CLR 570. Further, as Campbell JA explained in Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 at [174] (Spigelman CJ agreeing): If the document in question is drawn by a lawyer, is manifestly intended to effect a legal transaction, and uses an expression that is not an expression in common use but that has a meaning in an area of legal discourse that is relevant to the document in question, that in itself provides a basis for the reasonable reader concluding that that expression is used in its special legal sense, unless there are other factors present that show it is not used in that special legal sense. So understood, the [rebuttable presumption that parties intended technical words to bare a technical meaning] is consistent with the current approach to construction.
Here, I do not accept that a technical meaning ought to be given to "provider approval", for the following reasons: 1. While the legislative context, in which the parties entered into the lease, included the National Law, they did not use the precise language of "provider approval" for "the provision of an education and care service" as found in Part 2 of the National Law. The language of "childcare centre provider approval" is not a phrase used in the National Law. Instead, the word "centre" is only used in the context of "service approvals": see Part 2.2 National Regulations. Therefore, there is no technical language that has been adopted. 2. I consider that the inclusion of items 21 and 22 further rebut any presumption of a technical meaning, and are further considered below.
The most telling features of the lease are the two bespoke "items", 21 and 22 set out above. The rest of the lease is a standard form lease, and therefore is of less assistance in determining the intention of the parties concerning the uniquely expressed commencement date.
Item 21 requires Headway Global to complete the "construction" of the premises in accordance with the development approval and construction certificate for a "childcare centre".
Further, the warranty given by Headway Global in item 22 requires the premises to be a completed childcare centre that meets "minimum standards required for childcare operation in NSW". I consider this indicates that the parties intended for the lease to commence after the construction was completed to a standard that would enable Golden Seeds to "operate" a "childcare centre" in the premises in accordance with government regulations. Whether that standard had been met would only be known after the regulator provided approval to operate a childcare centre there, by giving a "service approval".
This is also consistent with the parties' references in the lease to a "childcare centre" at the premises. The parties were not agreeing on Golden Seeds' ability to operate a childcare centre anywhere else. Objectively they were concerned about the government regulations for the particular premises.
There is one aspect of the lease that might tell against this construction, namely the detail included in item 16, "rent review". Because only three dates are included for rent review and they indicate that the lease's 5-year term would conclude on 29 June 2025, this might suggest that the parties intended the lease to commence in June 2020. However, I do not accept that the inclusion of the dates requires that conclusion, in circumstances where at the date of signing the lease, there was no specified time for the construction or approval process that would impact on commencement. I consider it would have been possible to read the rent review clause without adopting the specific dates, and instead, by reference to the commencement date as found. As noted earlier, the lease is imperfect.

Pre-contractual negotiations

Golden Seeds places great emphasis on pre-contractual discussions and communications between the parties, dealt with further below. However, I do not accept that the material relied upon takes the evidence of objective facts known to both parties further; it does not assist in the constructional process of the written lease.
As was stated in WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd [2016] NSWCA 297 at [57] (Barrett JA, McColl JA and Sackville AJA agreeing): Evidence of prior negotiations is admissible to the extent that it establishes objective facts known to both parties and the subject matter of the contract. Conversely, evidence reflecting the subjective intentions of the parties is, in accordance with long-standing authority, necessarily inadmissible for the purpose of determining the meaning of the contract (unless it demonstrates knowledge of surrounding circumstances).

Did Golden Seeds lose the rent-free period?

Headway Global pleads that Golden Seeds lost the benefit of the promise of a 4-month rent free period from the commencement date, by reason of its breach of an alleged implied term that Golden Seeds was obliged to "promptly notify" it after it obtained "provider approval". Through an internet search, Headway Global found out about Golden Seeds' provider approval before Golden Seeds notified it.
Because of the conclusion about the proper construction of the commencement date, it is not necessary to determine the implied term argument, because the date of the receipt of provider approval is not the relevant date. Further, I note that Golden Seeds did notify Headway Global of its service approval about 16 days after its receipt.
However, if the construction is incorrect, I do not accept that any test for the alleged implied term has been satisfied.
I do not accept that the term would be implied in fact as "necessary for business efficacy", in circumstances where the lease could operate without such a term and provide the parties with the benefits intended under the lease. Further, such a term was not necessary where the approval was publicly available information and not wholly within the knowledge of Golden Seeds, such that Headway Global required notification from Golden Seeds.
I also do not accept that the term would be implied in law "as part of the duty of good faith as identified in Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50" for two primary reasons. First, there is no generally accepted "duty of good faith" in leases. Secondly, it is not apparent why the notification obligation would arise as part of any such duty of good faith.
Further, even if there was such an implied term that had been breached, I do not accept that it would mean that the whole of the rent-free period was lost. Instead, it would only be for that period, during which the breach persisted.

Conclusion

Based on the above, Headway Global has not established that any rent was outstanding when Golden Seeds vacated the premises, or that the rent-free period was lost.

Rectification

If the above construction ought not be adopted, below I consider Golden Seeds' alternative case of rectification by reason of common mistake.
I note that Golden Seeds originally sought rectification based on its own unilateral mistake in believing that the commencement date of the lease was when it was granted service approval to operate a childcare centre at the premises. Golden Seeds further alleged that Headway Global was aware of the mistake and "either intentionally, or with reckless disregard as to the consequences, allowed [Golden Seeds] to enter into the lease without correcting" the mistake. However, that claim was abandoned during the trial.
The principles concerning rectification for common mistake are not in dispute: see eg Samm Property Holdings Pty Ltd v Shaye Properties Pty Ltd [2017] NSWCA 132 (Samm) at [107]-[120] (McColl JA, Gleeson JA and Sackville AJA agreeing); Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317 (Seymour Whyte) at [12]-[17] (Leeming JA, Payne and White JJA agreeing) and [121]-[124] (Sackville AJA, Leeming, Payne and White JJA agreeing).
The equitable remedy operates to correct a written contract that does not conform with the parties' true agreement because of a common mistake in accurately expressing the true agreement: Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85 (Simic) at [103] (Gageler, Nettle and Gordon JJ). Their Honours in Simic make it plain that it is necessary to establish that: 1. At the time the written instrument was executed, the parties had an agreement, in the sense of a common intention; 2. The written instrument was supposed to conform to that agreement; and 3. Due to a common mistake, the written instrument did not conform with the agreement.
These elements give effect to the rationale which underpins rectification for common mistake: that it is "unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time that the written contract was entered"': Samm at [108].
For a common intention to exist, the parties' subjective or actual intentions which are discerned objectively must be identical in content, and the parties must also have disclosed their intentions by words or conduct: Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 at [279]-[316] (Ryledar) (Campbell JA, Mason P and Tobias JA agreeing); Samm at [111]-[120]; Simic at [42]-[43] and [104]. This common intention must be proved by admissible evidence to a high standard; "clear and convincing proof" is required: Samm at [116]; Seymour Whyte at [13]; Simic at [41].
Post-contractual conduct is admissible in determining the common intention of the parties: see eg Quintis Ltd (Subject to Deed of Company Arrangement) v Certain Underwriters at Lloyd's London Subscribing to Policy Number B0507N16FA15350 [2021] FCA 19 (Quintis) at [221]-[222] (Lee J); not challenged on appeal: Argo Managing Agency Ltd for and on behalf of the underwriting members of Lloyd's Syndicate 1200 v Quintis Ltd (subject to deed of company arrangement) [2022] FCAFC 86 at [9] (Allsop CJ, Middleton and Yates JJ).
While evidence of a party behaving in accordance with the form of the rectified lease may be important, it is not conclusive: see eg Ryledar at [184] (Tobias JA, Mason P and Campbell JA agreeing).

Determination

I am satisfied that there was a common intention or agreement concerning the commencement date subsisting at the execution of the lease that was not correctly recorded in the executed contract.
Mr Yang, the sole director of Golden Seeds, accepts that he had no direct communication with Mr Ligang Sun, a director of Headway Global, before the lease was signed. Mr Yang's wife, Ms Huixia (Joan) Chen, "facilitated much of the pre-lease negotiations" with Headway Global.
For the purposes of proving its intention, Headway Global relies on the evidence of Mr Zhang, its solicitor, Mr Sun and his wife, Ms Lijun Liu.
Mr Zhang gave evidence concerning the relevant meeting on 4 April 2019 between Mr Zhang, Mr Yang and Ms Chen, at which final negotiations occurred concerning rent and the commencement date, before Mr Yang signed the lease for Golden Seeds: My recollection of the conversation which I had with Mr Yang and Joan [Ms Chen] is as follows: Yang: I want the lease to start only when we get the approval ("Pi Wen") from the government. Me: I will need to check with Mr Sun. Do you know how long it will take for the approval ("Pi Wen")? Yang: A few months. I remember quite clearly Mr Yang used the term "Pi Wen" in the Chinese language. … In the Chinese language, the word "Pi" means "to approve", the word "Wen" means "text" or "document". … At that time, I did not know that for childcare centres, there were two types of approval - the "service approval" and the "provider approval". … I then left the room and had a phone conversation with Mr Sun. …I remember the conversation in the Chinese language, to the following effect: Me: Hello Mr Sun. Song Yang has come to my office to sign the lease. He wants to change the commence date to after the government gives the "Pi Wen". He says it will take a few months. Do you want to agree? Sun: I don't really quite understand it but if you think that it is fair to me then that is OK. I then returned to the room and resumed my meeting with Joan and Mr Yang. We had a conversation in the Chinese language using words to the following effect: Me: Mr Sun said OK to changing the lease commencement date, I will make amendment to the lease. So the term shall be after Mr Sun gets the "Pi Wen"? Mr Yang: you can check from government website on the requirement and put it in.
Mr Sun also provided affidavit evidence and was not required for cross-examination. No submission was made that his evidence was not truthful. I accept his evidence, which includes that on 4 April 2019, Mr Zhang told him: Zhang: … I have Yang Song and Joan in my office. Yang Song says he wants to change the lease to four months after the government gives the approval. But he is otherwise ready to sign the lease. Sun: I just want to make sure the net amount I receive for the first year is $75,000 Australian dollars per year; and then it will go up year by year. For the rest of it, I cannot really bother going back and forth with them. If you think it is fair, I will be happy.
Mr Sun's evidence further is that he did not know the process of approvals for opening a childcare centre in Australia.
Mr Sun's wife, Ms Lijun Liu, also signed the lease. She was not required for cross-examination, and I accept her evidence. She did not pay any attention to the details and signed the document that her husband asked her to sign. In April 2019, she had no understanding of the necessary government approvals for a childcare centre.
Therefore, viewed objectively, Headway Global through Mr Sun and Ms Liu, as advised by Mr Zhang, did not understand the National Law approval process, and therefore did not subjectively intend to specifically include in the commencement date "provider approval" within the meaning of the National Law. Instead, I consider that they intended the commencement date to be on receipt of "the government approval" to operate the childcare centre in the premises.
In cross-examination, Mr Zhang was not challenged on most of his evidence. However, he did not recall many details of the conversations or the preparation of the lease at all. After the conversation with Mr Yang and separately with Mr Sun, Mr Zhang instructed an employed solicitor, Mr Tze Lung Pang, to research the correct English term in the legislation to be used in the commencement date and to insert it into the lease. He did not check the language inserted was accurate. Mr Pang did not give evidence. However, Golden Seeds did not submit that any Jones v Dunkel inference ought to be drawn in relation to Mr Pang. Therefore, I consider that Mr Pang found a phrase in the legislation that he considered was referrable to "the government approval", when in fact, there was no single phrase in the National Law that captured both approvals required to operate a childcare centre.
Mr Yang's evidence of the 4 April 2019 pre-signing conversation is slightly different, but to similar effect: Yang: I will sign the lease with the increased rent if the commencement date is changed to when the kindergarten receives approval to operate from the Department of Education. First Mr Sun needs to get the OC before I can get the approval. Zhang: Do you know how long it takes for a kindergarten to apply for a licence to operate after getting the OC? Yang: I heard about three months at most. Hard to tell, but usually not that long. … Zhang: Mr Sun does not agree to change the rent, but he agrees to change the commencement date. What words should I use for the new commencement date? Yang: Whatever the proper term is for childcare centre approval. I'm not sure what it is. Look up the term used by the Government for approval to operate a childcare centre and put it in the lease.
Mr Yang states that he did not read the new commencement date on the lease when presented to him on 4 April 2019, but he signed it. He did not know that there were two different types of approval required and he had not heard of the two different types of approvals used. His evidence is that: I would never have signed the lease if I knew the commencement date was the date on which [a party] obtained childcare centre provider approval. As I now know, from operating other childcare centres, provider approval only entitles the approved provider to apply for service approval. Service approval is required to operate a childcare centre.
Notably, that evidence demonstrates that even now, he does not precisely know the language of the legislation; there is no statutory phrase "childcare centre provider approval".
In closing submissions, counsel for Headway Global submitted that Mr Yang gave contradictory evidence about his understanding of the approval process, and therefore the Court could not be confident as to his true subjective intention: Q: Is it the case that during this 20-month period [4 April 2019 to 12 January 2021] that you first learned about this thing called service approval? A: Yes. Q: Is it correct that during this 20 month period that you first learned about this thing called provider approval? A: Yes. Q: During this 20 month period that you realised for the first time that childcare centre approval involves two approval and not just one approval. A: Well, I know there was two approvals. Q: You knew you- A: I just - yes, I knew, but I didn't - I don't - I didn't know what exactly called. Is it called either service approval or the provider approval? Q: Your evidence is that before the 20 month period, you had already known there were two approvals? A: Yes.
Despite the last answer in the cross-examination, I do not accept that Mr Yang knew at the time of signing the lease that there were two forms of approval required for a childcare centre. The last question was misleading (while not objected to), because Mr Yang had not given the evidence suggested.
I accept Mr Yang's affidavit evidence, and the initial evidence he gave in cross-examination that he was unaware that two forms of approval existed. That is consistent with Mr Zhang's lack of understanding and his evidence that all that was discussed was "piwen" or "the government approval", which was singular.
To the extent that a submission was made by Headway Global that Mr Yang was "lying" in certain aspects of his evidence, I reject it. While his evidence concerning Golden Seeds' financial statements including PAYG was confusing, he appeared to be at cross-purposes with the cross-examiner. He appeared honest in his concessions, including that Golden Seeds had never operated a childcare centre and after it vacated the premises, it engaged in other businesses selling merchandise during the COVID-19 pandemic, which were completely unrelated to the premises. In any event, I do not consider his evidence on those matters leads to the conclusion that Mr Yang knew there were two different approvals and he intended provider approval as the commencement date.
Mr Yang's wife, Ms Chen, gives evidence in her husband's case, which is consistent with his. She gives affidavit evidence of the alleged conversation between Mr Yang and Mr Zhang: Yang: The government needs to approve the kindergarten before it can operate. The lease should not start until after I get the licence from the ministry of education approving me to operate the kindergarten. I can't get this approval until after Mr Sun gets the OC. Zhang: How long does it take to get the approval from the ministry of education? Yang: About 3 months, I think… to turn a house into a kindergarten is pretty hard - many different, strict standards that must be met… after OC is granted, ministry of education will inspect the kindergarten to see if the construction meets the safety standards. … Zhang: Mr Sun agrees - we will change the contract to a formal one … The new lease agreement.
Ms Chen's evidence was that she observed Mr Yang "look at the new lease agreement for a short time and then he signed it in front of Mr Zhang" and her. Her evidence in cross-examination was also that the approval that was discussed at the meeting when the lease was signed was "'piwen' for "operating a childcare centre". She did not distinguish between provider and service approval, which is consistent with none of the participants in the conversation understanding the differences in approvals. Rather, they focused on the ability of Golden Seeds to "operate the kindergarten".
I consider that all the participants in the negotiations were unaware of the different approvals and, for that reason, were content to sign the lease with a commencement date fixed by when "the Lessor obtained Childcare centre provider approval". That is because they understood that commencement would be when Golden Seeds had "the government approval", for "the kindergarten" or "the childcare centre", in accordance with the permitted use of the leased premises, rather than a general approval to operate unspecified centres. This is consistent with the language in items 21 and 22. I also consider that this is more likely to be what the parties subjectively intended to agree to as a matter of commercial reality, because Golden Seeds was to receive a rent-free period after it was approved to commence operations, and that rent-free period was bargained for in the context of the increase in the agreed rental.
Contrary to Golden Seeds' submission, I do not consider that the post-contractual WeChat messages between Mr Sun and Mr Yang, as explained below take the matter any further. I also do not consider that Mr Sun accepted that there was an error in the lease commencement date. Instead, the messages show that he adhered to the advice he was being given about the language in the lease.

Conclusion

For the reasons above I consider that the lease ought to be rectified, to the extent that the conclusion on the proper construction ought not to have been reached.
For completeness, I note that I do not accept Headway Global's submission that the most analogous authority is Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450. The English Court of Appeal refused to rectify a contract for the sale of "horsebeans", where the parties believed that an equivalent word for horsebean was "feveroles", but in fact there were different sizes of horsebean, and larger horsebeans, known as "feves", were delivered. Rectification was not ordered even though the parties were subjectively mistaken about the nature of "feveroles" and "horsebeans", because of a factual finding that their objective conduct indicated only an intention to contract for "horsebeans" and not a particular type.
That is not the situation here. While the parties were subjectively ignorant about the types of government approval necessary, for the above reasons, they intended for the lease to commence upon Golden Seeds' receipt of approval to operate the centre at the premises.

Did Headway Global repudiate the lease in February 2021?

On the basis that either the lease ought to be construed as above, or rectified as above, for the following reasons, I do not accept that Golden Seeds has discharged its burden of demonstrating that Headway Global repudiated the lease: see eg Foran v Wight (1989) 168 CLR 385 at 393 (Mason CJ).
Golden Seeds pleaded that Headway Global repudiated the lease by reason of "threats" said to have been made in lawyer drafted letters dated 1, 3 and 9 February 2021, and on 19 February 2021 by calling on the bank guarantee to pay part of the claimed outstanding rent. Those matters are set out and considered below. For the reasons that follow, I do not consider that Headway Global was repudiating the lease and refusing to adhere to its terms; at most, it was threatening legal action for alleged unpaid rent.
On 15 January 2021, Headway Global wrote to Golden Seeds alleging a breach of the lease by failing to notify it that Golden Seeds had obtained provider approval, and demanding rent from that April 2020 date, on the basis of the language in the lease concerning commencement. Further, the letter stated: We note that you are still in default and our client reserves rights under the lease and in law. In particular, we would like to draw your attention to Clause 12.2.2 of the lease, the lessor can enter and take possession of the property or demand possession of the property if the rent or any other money due under the lease is 14 days overdue for payment. Our client will also seek reimbursement in legal costs for taking recovery action.
Golden Seeds submitted that "recovery action" was "clearly a reference to the recovery of the rent, not to repossession action".
Further, the submission was made that "the legal cost component … would suggest to someone that they are taking legal action". However, it was not suggested that taking legal action for recovery of allegedly overdue rent could amount to repudiation.
Later that day, Mr Sun and Mr Yang exchanged WeChat messages including: Yang: Based on our contract, the rent-free period and rent won't start until the Service Provider is granted. Why did you send me the rent bill from April last year? I don't understand. …For your kindergarten, I visited the government countless times for approvals in the past one year or so. … I committed too much effort and time. The accounts for spending between you and I are clear … this relationship is very important to both of us. Sun: … I put lots of trust in you. That's why I asked you to sign the contract with Lawyer Zhang, and the terms were decided by you and Mr Zhang. … On the first page of the contract, the rent should be paid from obtaining the provider approval. ... The one you sent me yesterday is service approval. These are two different approvals. … As kindergarten operation is very complicated and requires multiple approvals, I am not sure about the details. I can only collect rent according to the terms of the contract. … I consulted my lawyer and accountant. They both agreed that the criteria for rental collection has been met according to the contract. Yang: No worries. Mr Sun. You are the landlord. You have the choice of not renting to me. But we both know clearly that you never said rent has to be paid for this period. … Mr Sun, please think twice. It is very unfair to me.
On 28 January 2021, Golden Seeds formally notified Headway Global that it had received service approval for the childcare centre at the premises, but refuted the allegation that it was in breach of the lease. Oddly, Golden Seeds also stated that "the Lessor has not yet obtained the childcare centre provider approval", relying on the clause of the lease both parties now accept must be rectified.
On 1 February 2021, Headway Global rejected Golden Seeds' contentions and, again, demanded rent or vacation of the premises, concluding that: If either of the above demands is not carried out by Global Seeds immediately, our client will take legal action, for which Golden Seeds may become liable for legal costs.
On 2 February 2021, Mr Yang and Mr Sun engaged in WeChat discussions including: Yang: You should really ask Lawyer Zhang more about how the contract was screwed up in the first place by a stupid mistake. If you want to solve the issue with a law suit, I have no disagreement. I believe the law will give us a fair and just ruling. In the meantime, my kindergarten will operate legally and normally according to the original contract. Breaking the contract now is not possible. Please think twice. Sun: …If the disagreement between us is too great, the only solution is to get a ruling. If the contract goes against my true intentions, I will have to sue to void it and look for a new tenant to lease.
Therefore, it appears that the controlling minds of the parties considered the way the dispute about the construction of the lease would be resolved was by court proceedings. Mr Yang affirmed on 2 February 2021 that the lease would remain on foot and he would operate his childcare centre, and Mr Sun accepted that if there was no agreement, then "the only solution is to get a ruling". There was no suggestion of Headway Global taking possession or denying Golden Seeds' entitlement to possess the premises and run the childcare centre.
On 3 February 2021, Golden Seeds proposed a way forward by amending the lease, and demanded the withdrawal of Headway Global's threats, which were alleged to be a "repudiation".
On 9 February 2021, Headway Global again required payment of rent or vacation of the premises, failing which Headway Global would "take legal action". On 19 February 2021, Headway Global called on Golden Seed's bank guarantee for $20,625.
On a date not in evidence, the parties attempted to mediate their dispute. There is no evidence of any communications after 9 February 2021 leading up to or during the mediation.
The next communication is dated 27 April 2021, when Golden Seeds' lawyer wrote to Headway Global indicating that it was vacating the premises because of the threat "to unlawfully enter into possession of the premises and [because Headway Global] has not withdrawn that threat". No mention was made of Headway Global having called on the bank guarantee for the payment of rent. On 10 September 2021, Golden Seeds returned all the keys it had in its possession.
I do not accept that the threat of legal action amounts to Headway Global not being ready, willing and able to perform or stating that it would not perform, such that it repudiated the lease.
A repudiation must appear clearly and without ambiguity: Stevenson v Hook (1956) 73 WN (NSW) 307 at 313 (Street CJ and Herron J). A want of willingness to perform may be established by the promisor's express language to that effect: Hochster v De la Tour (1835) 2 E & B 678; 118 ER 922 at 926 (Lord Campbell CJ, for the Court).
Generally, the bona fides of the party allegedly repudiating are irrelevant, unless that party is acting on a mistaken view of the true legal position. In DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 (DTR) at 453, Stephen, Mason and Jacobs JJ said: No doubt there are cases in which one party, by insisting on an incorrect interpretation of a contract, evinces an intention that he will not perform the contract according to its terms. But there are other cases in which a party, though asserting a wrong view of a contract because he believes it to be correct, is willing to perform the contract according to its tenor. He may be willing to recognise his heresy once the true doctrine is enunciated or he may be willing to accept an authoritative exposition of the correct interpretation. In either event an intention to repudiate the contract could not be attributed to him.
Whether a party has repudiated a contract is a question of fact: see, eg, Batterham v Makeig (2010) 15 BPR 28,713; [2020] NSWCA 86 at [86] (Young JA, McColl JA agreeing). But as Lord Wilberforce stated in Woodar Investment Development Ltd v Wimpey Construction [1980] 1 All ER 571 at 576: [I]t would be a regrettable development of the law of contract to hold that a party who bona fide relies on an express stipulation in a contract in order to rescind or terminate a contract should, by that fact alone, be treated as having repudiated his contractual obligations if he turns out to be mistaken as to his rights. Repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to perform contractual obligations.
Similarly, Ward JA (as her Honour then was) in Allianz Australia Insurance Ltd v Bluescope Steel Ltd (2014) 87 NSWLR 332 at [287] concluded that a party who "was objectively acting in accordance with what it understood to be its legal rights under the contract, [was] not repudiating the contract".
Here, Headway Global did not purport to terminate the lease on the basis of its wrongful construction of the lease. Instead, the parties seemed to agree that the dispute would be resolved by legal action while Golden Seeds remained in possession.
At no point before Golden Seeds vacated the premises did it explain to Headway Global the reasons for its preferred construction of the lease, or its rectification case. Therefore, I do not accept there is any basis from which to infer that Headway Global was persisting "willy nilly" to a wrongful construction of the lease in the face of a clear enunciation of the true agreement (DTR at 432), noting that Golden Seeds submitted that the language was "ambiguous". Instead, Headway Global acted on a bona fide understanding of the construction of the words in the lease. I do not accept that Headway Global's conduct amounted to a repudiation that entitled Golden Seeds to terminate.
The consequence of that conclusion is that Golden Seeds' vacation of the premises and purported termination amounted to a repudiation. Headway Global accepted that wrongful repudiation and terminated the lease and has sought damages for the loss of bargain in the sum of 6 months' lost rent and outgoings, being a reasonable time in which to mitigate its loss and source another tenant.
If that conclusion is erroneous and Golden Seeds was entitled to terminate, below I consider the appropriate quantification of any damages to which it would be entitled.

Damages for lost opportunity?

On the contingency that the conclusion about repudiation ought not to have been reached, it is necessary to determine Golden Seeds' claim for damages for alleged lost profits that would have been earned, had the lease remained on foot for the full lease period (but not the option period). Headway Global resists the quantum of damages on the basis that the profits would not have been made in all likelihood, and significant discounts must be applied.
In Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd [2014] NSWCA 158 at [263], Gleeson JA (Ward JA, as her Honour then was, agreeing) outlined the correct approach towards determining damages for loss of opportunity (citations omitted): On the question of causation, a plaintiff must first prove "on the balance of probabilities that he or she has sustained some loss or damage", whilst on the assessment of damages the value of a lost commercial opportunity is to be "ascertained by reference to the degree of probabilities or possibilities" that it would be realised…
The need to apply a discount to damages for loss of opportunity was explained in Generic Health Pty Ltd v Bayer Pharma Aktiengesellschaft (2018) 267 FCR 428 at [186], where Allsop CJ, Yates and Beach JJ held that: Whichever way one expresses it, in assessing the possibilities or probabilities of a hypothetical counterfactual, one is engaged in the task of estimation, even if the estimation involves an assessment of the counterfactual as being close to a certainty. But being close to a certainty is not the same thing as a certainty. If one is estimating, one still needs to apply a discount, albeit a very modest one, to reflect the assessment that one is not at a certainty. If one is looking at the value of a lost opportunity which is not certain to occur, then the valuation must involve some discount, even if a very modest one.
It has further been explained that a discount is appropriate because there is a prospect that the future profits would not have eventuated due to the risk of "general economic conditions and vicissitudes": see eg Hart Security Australia Pty Ltd v Boucousis [2014] NSWSC 1654 at [212] (Darke J).
Further, it may be appropriate for the discount rate to factor in the time value of money, so as to account for the fact that the party awarded damages for loss of future profits will have an entitlement to such moneys ahead of the date that such profits would have allegedly been derived: see eg Haviv Holdings Pty Ltd v Howards Storage World Pty Ltd [2009] FCA 242 at [63]-[66] (Jagot J).

Quantification of lost profits

Golden Seeds never enrolled any children in the centre between service approval being granted on 12 January 2021 and it vacating the premises on 27 April 2021. That failure to commence operating the business is unexplained. There is no dispute that between September 2020 and December 2021, Golden Seeds was operating at a loss.
Nevertheless, Golden Seeds relied on the expert opinion of Mr Barry Coad, certified valuer, who calculated possible lost profits of $120,000 in the first year of operation, and $150,000 for the following years 2-5 of the lease. Consequently, on Mr Coad's calculations, the figure of $720,000 ($120,000 plus $150,000 x 4) represents the profits that Golden Seeds would have likely earnt over the duration of the 5-year lease.
In the joint expert report completed during the trial, Mr Coad claimed he based his calculations on alleged comparable trading figures of 5 unidentified childcare centres. While his evidence may have been honest, there was no evidence to demonstrate why he had concluded those centres were comparable, how those other centres' trading figures had been prepared and verified, and how he extrapolated the figures to make his conclusions. Further, there was similarly no evidence of his assumption that, based on that undisclosed information, the occupancy rate for every year after the first would be 95%.
For that reason alone, I reject his evidence. As Jacobson, Foster and Barker JJ held in Eric Preston Pty Ltd v Euroz Securities Ltd [2011] FCAFC 11 at [171] (approved by Heydon J in Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588 at [89] and [103]): The proposition that an expert's opinion based upon certain assumptions which are not ultimately proved in evidence is irrelevant is a fundamental principle of the law …
The basis of Mr Coad's calculations has not been sufficiently demonstrated in order to support his opinion. The mere assertion that the figures which he arrived at are based on comparable childcare centres is insufficient, where Headway Global is unable to test that evidence and where Mr Coad's reasoning process is not apparent. The explanation that the other centres' trading figures were in his opinion "confidential" is not a sufficient excuse for failing to prove those facts, if they were to form the basis of his conclusions. Another minor reason not to accept Mr Coad's figures are that he did not include expenses that he accepted in cross-examination would have been incurred, including advertising and deep cleaning during the COVID-19 pandemic. However, those expenses were only about $12,000. Further, Mr Coad did not provide any working for his conclusion as to quantum of "staff expenses"; it is not possible to understand his final calculations.
I prefer the evidence of Mr Chris Katehos, CAANZ accredited forensic accounting specialist and CAANZ accredited business valuation specialist. Mr Katehos based his assessment of lost profits on public benchmarking data for childcare centres that Mr Coad also accepted were "widely used". While I accept that the benchmarking data was not based on actual comparable centres, but larger multi-centre providers, there is no reliable evidence of actual comparisons, and therefore, Mr Katehos' evidence is the only evidence available that can provide a starting point for calculations. Based on his opinion analysing that data, I accept his assessment of likely occupancy rates and likely trading profits.

Discount

Golden Seeds' expert did not include any discount in his original calculations. However, in the joint expert report, he reduced his lost profit quantification to $550,000 by a "realistic discount factor … in the order of 10.00%", having regard to the government support during COVID-19 and "the industry data and the alleged inexperience of the lessee". He "reluctantly adopted a 10% discount factor", "reluctantly" because he "could have supported a zero percent" discount rate. This attitude casts doubt on what he understood his role to be. Again, he did not explain the "industry data", on which he based his opinion.
In contrast, Mr Katehos adopted a discount rate of 26.82%, based on his expertise and publicly available data. His discount started with an industry discount of between 14.49% and 15.15% for large multi-centre operators, based on published data. He accepted in cross-examination that Golden Seeds was in a different category to a larger centre, and for that reason, he adopted a further discount for the particular risks he considered relevant to a small and inexperienced operation, namely: 1. The childcare centre's lack of reputation; 2. Management depth; 3. The business only operating from one location; 4. Lack of business systems and procedures; and 5. Lack of transferability/continuation of revenue.
I do not accept that Mr Katehos' approach involved any guesswork. Instead, he based it on his expert opinion of discounts generally applied and the particular risk factors that he had identified in regard to Golden Seeds' start-up business.
I reject Mr Coad's unsubstantiated opinion that that Mr Katehos' discount "is not in line with risk factors in this sector". Mr Coad gave no clear evidence of what he considered the appropriate "risk factors in this sector" were and why Mr Katehos was wrong. Further, Mr Katehos expressly distinguished between a discount appropriate for multi-centre operators, compared to Golden Seeds' single-centre operation with 23 places. I also do not accept that Mr Katehos lacked expertise in the "childcare centre sector", when there was no evidence to suggest that he did not have regard to all the relevant features of Golden Seeds' proposed small business and it was not established that there is such a narrow relevant area of expertise.
I do not accept Headway Global's submission that a further discount is appropriate because Mr Yang was charged with various indictable offences in 2023 and Golden Seeds' licence to operate the childcare centre could have been compromised. Mr Yang was not the nominated supervisor of the centre and there is no evidence that the regulator would have terminated the licence in the circumstances. In any event, I note that Mr Katehos had already factored in a discount based on risks concerning "management depth".

Conclusion

Should Golden Seeds be entitled to damages, then I accept the quantum is that calculated by Mr Katehos of $107,757 on the assumption that the childcare business had operated for the full 5 years.
Had I received submissions or expert evidence on the point, I would have considered applying a further discount for the acceleration of the receipt of the lost profits that would not have otherwise been obtained until 2026.

Orders

I make the following orders: 1. Direct the parties to confer and provide to the Chambers of Peden J agreed orders reflecting the above reasons and costs within 7 days of this judgment. 2. Should agreement not be possible, each party is to provide the proposed orders together with submissions of no more than 3 pages within 10 days of these reasons. 3. If appropriate, final orders will be made on the papers.

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: 23 August 2024

At a glance

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