Home Ideas Centre Sydney Pty Ltd v Alem Pty Ltd

PARTIES : Home Ideas Centre Sydney Pty Ltd (Plaintiff) Alem Pty Ltd (Defendant)

COUNSEL : J.C. Giles (Plaintiff) J.B. Simpkins SC, D.C. Price (Defendant)

SOLICITORS : Kosmin & Associates (Plaintiff) Harris Freidman Hyde Page (Defendant)

2010/136320 Home Ideas Centre Sydney Pty Ltd v Alem Pty Ltd

1 The Plaintiff was the lessee of commercial premises in O'Riordan Street, Alexandria. The Defendant was the lessor. The lease was for a term of ten years, expiring in 2016. 2 On 31 May 2010, the Defendant purported to terminate the lease for failure to pay rent and outgoings and re-entered the premises. On 1 June, the Plaintiff commenced these proceedings, seeking a declaration that the termination of the lease was invalid and, in the alternative, relief against forfeiture. 3 On 2 June, by consent, the Defendant gave an undertaking to allow the Plaintiff to remain in possession, upon certain terms. The proceedings were expedited and came on for final hearing on 11 June. At the conclusion of submissions, I informed the parties that I had concluded that the termination of the lease was valid but that the Plaintiff should have relief against forfeiture, if it were able to comply with certain conditions by 16 June. 4 The matter was re-listed on 16 June. The parties informed me that they had agreed upon undertakings which should be given and the orders which should be made. I made orders in accordance with the agreed Short Minutes and informed the parties that I would give my reasons for my conclusions. These are those reasons. The facts 5 Soon after the commencement of the lease, the Plaintiff fell into arrears in the payment of rent and outgoings. From February 2007 onwards a succession of e-mails from the Plaintiff's managing director, Mr Lowery, to the Defendant sought a reduction in rent on the basis that the Plaintiff was suffering from difficult financial conditions. The amount of rent and outgoings in arrears kept increasing over this time. 6 By June 2007, Mr Lowery was suggesting that the Plaintiff would go 'belly up' if a rent reduction were not given. On 8 December 2008, Mr Lowery wrote asking for a 25% reduction in the rent, saying that without the reduction the Plaintiff would have to go into receivership. Mr Lowery kept up a continual stream of such e-mails through January and February 2009, each painting a bleaker picture of the Plaintiff's prospects and begging desperately for a rent reduction. 7 By letter dated 25 March 2009, the Defendant agreed to reduce the rent by $240,000 for a period of twelve months, i.e. a reduction of $20,000 per month, and to apply that amount towards the reduction of the outgoings for which the Plaintiff was liable under the lease. The reduction was by way of loan until the end of the lease provided that the loan would be written off at that time if the Plaintiff had met all its obligations under the lease. 8 The Plaintiff accepted the rent reduction but soon fell into arrears again. Mr Lowery continued to write to the Defendant, piteously begging for a further reduction and strongly suggesting that the Plaintiff was tottering on the verge of liquidation and would collapse if future rent indulgences were not given. 9 By 21 May 2010, the Defendant had lost patience with the Plaintiff's defaults in payment of rent and outgoings. It invoiced the Plaintiff for its proportion of outgoings for the ten months up to and including April 2010 - an amount of $166,048.08. The Plaintiff failed to pay. On 31 May, the Defendant terminated the lease and re-entered the premises. At that time the Plaintiff owed:

• the unpaid balance of actual 2008 and 2009 outgoings of $69,549;

• its proportion of outgoings for the ten months up to and including April 2010 - $166,048;

• rent in arrears for the months January 2009 to May 2010 amounting to $34,158. 10 Shortly before the commencement of the trial, the Plaintiff paid to the Defendant all outstanding rent and outgoings. It also paid a further $264,000, being the amount of the twelve month rent reduction which the Defendant had allowed on 25 March 2009. The Plaintiff made this payment under protest, asserting that the Defendant was not entitled to the payment. 11 When the trial began, Mr J. Giles of Counsel, who appeared for the Plaintiff, informed me that as a condition of granting relief against forfeiture, the Plaintiff would procure a bank guarantee for six months' rent and outgoings in advance and further that the New Zealand parent company of the Plaintiff would itself guarantee the Plaintiff's performance of its obligations under the lease. Mr Simpkins SC, who appeared with Mr D.C. Price of Counsel for the Defendant, informed me that in view of the Plaintiff's history of non-performance, the severe doubts about the continuing financial viability of the Plaintiff and the lack of financial information about the New Zealand parent company, the Defendant refused these undertakings and insisted upon termination of the lease. Issues

• whether the Defendant had validly terminated the lease by giving a notice required by clause 12(a)(i) or (ii) of the lease;

• if the lease had been validly terminated, should relief against the forfeiture be granted;

• was the sum of $264,000 payable to the Defendant under the terms of the letter dated 25 March 2009. Valid termination

13 Clause 12(a) of the lease relevantly provides: " DEFAULT

(a) The Lessor and the Lessee covenant and agree that in case: (i) the rent hereby reserved or any part thereof shall be in arrears and after any of the due dates for payment and remains unpaid for seven (7) days after written demand by the Lessor; or

(ii) any monies other than rental shall not have been paid by the Lessee to the Lessor within seven (7) days of demand for payment; or

… then and in any of the said cases the Lessor may immediately thereon or at any time thereafter and without any further notice or demand re-enter (forcibly if necessary) the premises or any part thereof without the necessity of obtaining an ejection order (other than the subject to any notice or order which the Lessor may be required by law to give or obtain) and thereby determine the estate and interest of the lessee therein …" 14 Mr Giles, in his able argument, submitted that the lease had not been validly terminated because:

• clause 12(a)(i) required a number of steps before a right of re-entry could be exercised: first, rent had to be in arrears; second, after the due date for payment had passed a notice demanding payment had to be given; third, seven clear days after the giving of that notice had to elapse without payment;

• in the present case, a demand dated 21 May 2010, purportedly made under clause 12(a)(i), had been sent to the Plaintiff by post but it was actually received by e-mail and read by a responsible officer of the Plaintiff on 24 May;

• seven clear days after receipt of the demand had to expire before the Defendant could exercise its rights and the last day for payment under the notice was 31 May;

• the Defendant re-entered the premises on the morning of 31 May, before expiry of the time for payment, so that the re-entry was invalid. 15 The lease provided a specified mode of service of notices and deemed a notice given in accordance with that mode to have been received after a certain interval: clause 8(u). It is agreed that the demand dated 21 May 2010 was not served in the prescribed mode. 16 Mr Simpkins says that it should be held that notice was given for the purposes of the lease when the demand dated 21 May 2010 was despatched by the Defendant, regardless of when it was received. Accordingly, he says that the seven day period for compliance with the demand expired before the Defendant re-entered. 17 I am unable to accept this submission. In my opinion, if a party to a lease gives a notice to the other party by means of a mode of service prescribed in the lease, the party giving the notice is entitled to rely upon the deemed time of receipt stipulated in the lease, regardless of whether, or when, the other party actually receives the notice. This is because the parties have contractually stipulated for certainty in their dealings, the risk of non-receipt of a communication being assumed by the parties in the light of what they have agreed should be an effective mode of service. However, if a party to a lease chooses to give notice to the other party in a manner which is not the mode of service prescribed in the lease, then it is for the party giving the notice and relying upon its consequences to prove to the Court's satisfaction both the fact and the time of effective service of the notice. Accordingly, the serving party must prove that the notice was actually received by the other party, if a natural person, or if the other party is a corporation, it must prove that the notice actually came to the attention of an officer of the corporation who was either expressly or implicitly authorised to deal directly and responsively with the notice: see the authorities as to "the effective service rule" discussed in Woodgate v Garard Pty Ltd [2010] NSWSC 508 at [44]. 18 In the present case, the Defendant has not proved that the notice dated 21 May 2010 came to the attention of a responsible officer of the Plaintiff before 24 May 2010. Time for compliance with the demand therefore did not expire until midnight on 31 May 2010. 19 Mr Simpkins, however, relies also upon the Plaintiff's failure to pay outgoings and upon the provisions of clause 12(a)(ii). He points to the fact that clause 12(a)(ii), unlike clause 12(a)(i), does not require that the Plaintiff be in default of payment of "monies other than rental" before a demand for payment may be given and the seven day period for payment is set running. He submits:

• clause 17(e) of the lease requires the Defendant to give to the Plaintiff a statement giving reasonable details of the Defendant's outgoings in respect of the premises;

• such a statement for the year ended 30 June 2009 was given to the Plaintiff on 7 September 2009;

• clause 17(f) requires that the Plaintiff pay its proportion of the outgoings within twenty-one days from receipt of the statement;

• by an invoice dated 7 September 2009, the Defendant demanded payment of the Plaintiff's proportion of the outgoings, namely $200,717.61;

• the invoice dated 7 September 2009 was a "demand for payment" of "monies other than rental" for the purposes of clause 12(a)((ii);

• the Plaintiff failed to pay the amount due for outgoings within twenty-one days of receiving the 7 September demand;

• as at 31 May 2010, when the Defendant re-entered, the Defendant was entitled to rely on clause 12(a)(ii) to terminate the lease without further notice or demand;

• construed together, clause 12(a)(ii) and clause 17(f) mean that the Defendant cannot terminate in reliance upon a demand for payment under clause 12(a)(ii) until twenty-one days has expired from receipt of the notice under clause 17(f), but when that time has expired the Defendant can then rely upon clause 12(a)(ii) because the seven day period referred to in that provision will have elapsed. 20 Mr Giles submits that the Defendant cannot rely upon clause 12(a)(ii) because that clause must be read in the same way as clause 12(a)(i): first, time for payment within twenty-one days under clause 17(f) must elapse without payment so that the Plaintiff is in arrears; second, the Defendant must give a notice under clause 12(a)(ii); third, the Plaintiff must fail to pay within the seven day period. Mr Giles says that the 7 September 2009 invoice for outgoings cannot be a demand for the purpose of clause 12(a)(ii) because it was given before, not after, the payment of outgoings fell into arrears. 21 I am unable to accept Mr Giles' submission. It requires one to read into clause 12(a)(ii) words which are not there and which are not necessary to give commercial sense to the operation of clause 17(f) in conjunction with the right of termination afforded by clause 12(a)(ii). In my opinion, Mr Simpkins' construction gives a sensible operation to both clauses and it is correct. 22 If I were wrong in this conclusion I would accept Mr Simpkins' alternative submission, viz that if the Defendant's re-entry on 31 May was premature and therefore ineffective to terminate the lease, then its remaining in possession on 1 June was a continuing act of termination, so that the lease was validly terminated on 1 June. As Mr Simpkins says, and I agree, the consequence of premature re-entry on 31 May is merely that the Defendant is liable for the damages, if any, suffered by the Plaintiff in being out of possession from some time in the morning of 31 May until midnight. 23 For these reasons I have concluded that the Defendant validly terminated the lease either on 31 May 2010 for failure to pay outgoings, pursuant to clause 12(a)(ii), or on 1 June 2010 for failure to comply with the demand served on 24 May 2010. Recovery of $264,000

24 Mr Giles says that the sum of $264,000 paid by the Plaintiff to the Defendant under protest before the trial commenced is repayable because the term in the letter of 25 March 2009 requiring that payment is void as a penalty. He submits that the Defendant's characterisation of the obligation as a loan is one of form and not substance, and that the amount stipulated could not be a genuine pre-estimate of the damage which the Defendant would suffer if the Plaintiff had not performed the lease during its term. 25 I am unable to agree with this submission. It is quite clear that the sum of $264,000 represents rent payable under the lease which would have been due but for a conditional indulgence allowed to the Plaintiff at the Plaintiff's request. There is nothing artificial about the characterisation of this indulgence as a loan. 26 The letter of 25 March 2009 provided that the loan would not be repayable only if the Plaintiff had met its obligations during the remaining term of the lease. That condition was not fulfilled because the lease was validly terminated for the Plaintiff's breach. The loan was, therefore, repayable. Relief against forfeiture

27 Mr Simpkins strongly urged that no relief against forfeiture should be granted even if all arrears under the lease were paid, a new bank guarantee for six months' performance were provided, the Defendant were given a right of recourse in the event of default against the New Zealand parent company, which it had not previously had, and the Plaintiff were to pay the Defendant's costs of these proceedings. 28 Mr Simpkins said that even in those circumstances insistence by the Defendant on termination of the lease was not unconscionable because of the long history of default by the Plaintiff and because of the repeated assertions by its managing director, Mr Lowery, that the Plaintiff was on the verge of liquidation. Mr Simpkins also said that there had been insufficient time to investigate adequately the financial position of the Plaintiff's parent company and the worth of the guarantee which it promised to give. In those circumstances, Mr Simpkins said the Court should exercise its discretion against the grant of relief: see Direct Food Supplies (Vic) Pty Ltd v DLV Pty Ltd [1975] VR 358; Tannous v Cipolla Bros Holdings Pty Ltd [2001] NSWSC 236 at [28] per Barrett J; Wilkinson v S & S Gikas Pty Ltd [2006] NSWSC 1314 at [24] per Campbell J. 29 If one were to believe the desperate pleas for rent reduction made by the Plaintiff's managing director, Mr Lowery, throughout the term of the lease to date, one would conclude that the Plaintiff's prospects of being able to pay its future rent were virtually non-existent. However, it emerges that Mr Lowery was not telling the truth - or so the Plaintiff now says. 30 Mr Giles says that the Plaintiff, rather than hovering on the brink of collapse, actually made a profit of just under $168,000 in the last twelve months. He said that the Plaintiff "does not adopt, doesn't accept everything that Mr Lowery said by any means … we come to the Court accepting he has said things we do not stand by … I accept some of the later statements of Mr Lowery are unattractive and we don't stand by them". 31 What Mr Giles was saying, although far more elegantly, was that Mr Lowery had not been telling the truth to the Defendant. In misrepresenting the Plaintiff's financial circumstances, he had been improving the Plaintiff's financial position at the Defendant's expense, by achieving a rent reduction and by deferring payments of rental and outgoings. Doubtless, the Board of the Plaintiff's New Zealand parent congratulated Mr Lowery on his negotiating skills when he achieved the rent reduction of 20% in March 2009. 32 However, it seems that Mr Lowery's negotiating skills have cost the Plaintiff and its New Zealand parent dearly. In order to have any hope of remaining in what are obviously valuable commercial premises, the Plaintiff has had to pay within a very short time all rent and outgoings in arrears, totalling about $534,000, and it has had to satisfy its bank's security requirements for the provision of a new bank guarantee for six months' performance under the lease. Further, it has had to offer direct recourse to the New Zealand parent by guarantee and it will have to pay the Defendant's costs of these proceedings. 33 The conduct of the Plaintiff in misleading the Defendant in order to obtain a rent reduction and to excuse defaults in punctual payment of rent and outgoings is reprehensible. However, the Plaintiff has now paid the price of that conduct in full. The Plaintiff's ability to continue performance of the lease duly and punctually is underwritten by the new bank guarantee now proffered and the guarantee of the parent company. If the promises to procure the two guarantee were performed, the Defendant would be put back in the same position as before the forfeiture or re-entry. Indeed, it would have the benefit of an additional guarantee from the parent company. Those circumstances would constitute strong grounds for relief against forfeiture: see e.g. Wilkinson v S & S Gikas (supra) at [23]. 34 Because these proceedings were brought on urgently, the Defendant did not have as much opportunity as it wished to investigate the financial position of the Plaintiff and its parent company. In those circumstances, I was not willing to grant relief against forfeiture merely on the basis of undertakings or promises by the Plaintiff to procure the new bank guarantee and the guarantee of the New Zealand parent. I stood the proceedings over for a few days to enable the Plaintiff to carry out and procure what it had promised, to the Defendant's satisfaction. I took the view that if the Plaintiff were able to perform its promises at short notice - particularly in procuring a new bank guarantee which would require the bank to be given adequate security - then it and its parent company would demonstrate sufficient financial substance to warrant the granting of relief. 35 When the matter returned to Court a few days later, the parties had agreed upon Short Minutes of Order which disposed of the proceedings. I made the order sought and granted relief against forfeiture. 36 I also ordered the Plaintiff to pay the Defendant's costs of the proceedings on the indemnity basis. I did so because the Defendant should never have been put to the expense of defending these proceedings. What the Plaintiff was able to do in a matter of days in rectifying all breaches of the lease in order to support its application for relief against forfeiture, it ought to have done voluntarily before the Defendant terminated the lease. In the particular circumstances of this case, the Plaintiff should not obtain the indulgence of the Court and a discretionary interference with the Defendant's contractual rights and, at the end of the process, leave the Defendant with legal bills to pay.

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