Jewell Bay Pty Ltd v DPT Operator Pty Ltd

Mineaplenty Pty Limited v Trek Pty Limited [2006] NSWSC Ballas v Theophilos (No. 2) [HCA] 90; (1957) 98 CLR at 205 Quadling v Robinson [1976] HCA 31; (1976) 137 CLR at 201 CASES CITED: Prudential Assurance Co. Ltd v. Health Minders Pty Ltd (1987) 9 NSWLR 673 Castle Mall Fine Foods Pty Limited v Queensland Investment Corp [2003] NSWADT 207 Exxon Corporation v Exxon Insurance Consultants International Limited [1982] CH at 144 Manly Council v Malouf [2004] 61 NSWCR 394

APPLICANT Mr Sleight, solicitor REPRESENTATION: RESPONDENT Mr Vincent, solicitor

ORDERS: 1. Application dismissed 2. Costs reserved, Applicant to file Submissions on costs within 14 days, Respondent has 14 days to respond, papers then to be referred to me for decision on costs order, if no submissions filed, no order for costs.

1 This is an application by a lessee ("Jewell Bay") claiming an order pursuant to either s39 or s41(d) of the Retail Leases Act 1994 declaring that the Respondent lessor is not entitled to withhold consent to an assignment, or that a deemed assignment had occurred. The proposed assignment was still being negotiated between the Applicant and proposed assignee when it first came before the Tribunal as an Application for Urgent Interim Orders on 23 July 2009. Because of the obvious commercial urgency of the matter, being satisfied that a mediation would be unlikely to resolve the matter, I directed that the primary application be heard eight days later. Section 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. (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."

Section 41 provides:- " Procedure for obtaining consent to assignment A retail shop lease is taken to include the following provisions: (a) A request for the lessor's consent to an assignment of the lease must be made in writing and the lessee must provide the lessor with such information as the lessor may reasonably require concerning the financial standing and business experience of the proposed assignee. The lessee may provide the lessor with a copy of a statement in writing that contains the information that is contained in or required to complete the prescribed form that has been provided to the proposed assignee. The statement may be provided if the assignment is in connection with the lease of a retail shop that will continue to be an ongoing business. The layout of the statement need not comply with that of the prescribed form. (b) Before requesting the consent of the lessor to a proposed assignment of the lease, the lessee must furnish the proposed assignee with a copy of any 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 (being changes of which the lessee is aware or could reasonably be expected to be aware). The lessee may provide the proposed assignee with a copy of a statement in writing that contains the information that is contained in or required to complete the prescribed form. The statement may be provided if the assignment is in connection with the lease of a retail shop that will continue to be an ongoing business. The layout of the statement need not comply with that of the prescribed form. (c) For the purpose of enabling the lessee to comply with paragraph (b), the lessee is entitled to request the lessor to provide the lessee with a copy of the disclosure statement concerned and, if the lessor is unable or unwilling to comply with such a request within 14 days after it is made, paragraph (b) does not apply to the lessee. (d) The lessor must deal expeditiously with a request for consent and is taken to have consented to the assignment if: (i) the lessee has complied with paragraphs (a) and (b), and (ii) the lessor has not, within 28 days (or another period prescribed instead by the regulations) after the request was made or after the lessee complied with those paragraphs, whichever is the later, given notice in writing to the lessee either consenting or withholding consent. Note: Clause 20 of Schedule 3 provides that the form set out in Schedule 2A is taken to be prescribed for the purposes of section 41 until regulations are made prescribing the form and repealing Schedule 2A."

72 Powers of Tribunal relating to retail tenancy claims s72(1(f)(ii) and (iii) provide:- "1) In proceedings for a retail tenancy claim lodged with the Tribunal under this Part, the Tribunal is empowered to make any one or more of the following orders that it considers appropriate: (f) an order: (ii) declaring that a lessor is not entitled to withhold consent to an assignment of the rights of a lessee, or (iii) declaring the rights and liabilities of the parties under law, whether any consequential relief is or could be claimed or not…"

2 It follows that if a deemed consent has occurred, the Tribunal has power under s72(1)(f)(ii) or (iii) to make a declaration confirming that fact; if a lessor has specifically refused to consent, then the Tribunal has power to declare that consent impermissibly withheld, and if the whole procedure prescribed by s41 has not been followed, then the two subsections enable the Tribunal to make orders to the effect that a lessor must grant consent, or, alternatively, is not obliged to.

3 It should be noted that s39 and s41 do not quite cover the same ground; s41(2) can operate in respect of requests for assignment which do not involve a continuation of the use authorised by the lease.

4 Jewell Bay conducts a restaurant called "Coast" from premises in the development known as Cockle Bay Wharf which is owned and operated by the Respondent DPT Operator Pty Limited and DPPT Operator Pty Limited ("DPT"). There is a 15 year lease registered on title, (with a 5 year option of renewal) which commenced in 2002. Jewell's operation is substantial, it having spent some $1.5 million in the original fitout, and paying an initial base rental of some $29,600.00 per month. However, the Affidavit of Mr Timothy Connell, director of Jewell Bay, established that "Coast" had not been a financial success for some time, and in order to avoid ongoing losses, it was placed on the market for sale in the month of September 2008.

5 Prior to listing the business with Feszt & Feszt, restaurant brokers, Mr Connell had approached DPT's onsite managing agent, Miss Cassidy, seeking rent relief, but that was not forthcoming.

6 By email of 11 February 2009 Mr Connell advised Miss Cassidy that he was in discussions with Gourmet Pizza Kitchen Pty Limited, a company which has traded in Sydney for some ten years, and at the time of the hearing operated from 6 suburban locations, about the sale of the business. There followed a series of emails and conversations, as established by the Affidavits of Mr Connell, and his fellow director, Mr Michael McCann on behalf of the Applicant, and Miss Montgomery on behalf of the Respondent. All were cross examined.

7 The menus of "Coast" and GPK were in evidence, as was the Lease, and the Deed of Assignment between Jewell Bay and GPK.

8 Jewell's lease allows it to trade as a "Contemporary modern Licensed Australian Restaurant with Italian and Mediterranean Bias"; GPK's offering is mainly of pizzas, with various pasta dishes being available as well. GPK is licensed, and lists 27 local wines, whilst Coast has a cellar listing of 327 wines from perhaps 7 different countries.

9 Not surprisingly I was given evidence by three witnesses expert in the restaurant trade, being Mr Tony Eldred and Mr Michael Fischer on behalf of Jewell, and Mr John Close on behalf of DPT. These three were also cross examined before me.

10 GPK's involvement in the negotiations, and the nature of its operations were established by the Affidavits of Mr Anthony J. Barbour sworn 20 and 26 July 2009. Mr Barbour, too, was cross examined.

11 The issue of the width of the kind of restaurant which might operate within the use authorised by the Lease was not the only issue ventilated in the hearing. In argument Mr Vincent raised the very interesting suggestion that the enquiry should focus on a comparison of the actual use of the premises with the proposed use, as opposed to the authorised use. More predictably, the separate question of deemed consent also arose.

12 Apart from the broker's September 2008 request for a copy of the Disclosure Statements, the first indication of the negotiations which gave rise to the issue now to be resolved was Mr Connell's email of 11 February 2009 to Miss Montgomery. It asked for some plan details, and concluded:- "We are confident that we will have a Heads of Agreement for the Sale within 7 days, and a contract shortly after. Once this is in place we will commence the process for the Assignment of the Lease."

13 Miss Montgomery's response of the same day did not address the request about the "process".

14 On 16 February 2009 Miss Montgomery enquired about rent arrears, and Mr Connell's response to that was, in part:- "We are progressing to contract for the sale of the business and urgently request your advice. I imagine you have a standard set of questions you would like answered. If I could have this by return it would be appreciated."

15 Later that day Miss Montgomery sent an email which did not respond to the request of earlier that day, but instead replied to the 11 February 2009 request. It said that an assignment would only be considered if it was the same permitted use, drew attention to the retailing and financial resources information requirements and went on to say that if the use was to be changed that would not be an assignment of lease, but instead would be a request for a use change:- "In which approval is at the absolute discretion of the lessor".

Such a use change, if agreed, would have to be documented by a variation of lease or new lease.

16 A further email from Miss Montgomery on 19 February 2009 went over much the same ground (about the need to adhere to the use, in the case of an assignment, and discretion to refuse consent to assignment if the use was to be changed) and then said:- "In summary it appears to me that you are proposing an Assignment of Lease with a change of permitted use and trading name and alterations and additions to the premises. The best way to proceed is for you to make a formal written request to assign the lease and to have the proposed assignee to complete the attached retail application…"

17 All of the information sought in the retail application was couriered to Miss Montgomery on 25 February 2009.

18 Mr Connell by email dated 4 March 2009 referred to previous correspondence and conversations and;- "I formally request the lessors consider the surrender of our existing lease and the entering of a new lease with Gourmet Pizza Kitchen Pty Limited".

19 The next relevant communication was dated 12 March 2009 in which Miss Montgomery said:- "…. We confirm that we do not believe that GPK is a good fit for the Coast premises. Our reasons being as per our discussions regarding similar offer to Baia and Blackbird."

The oral evidence showed that Baia and Blackbird are other restaurants in the complex, offering fare thought to be similar to GPK.

20 Mr Connell answered by a long letter dated 16 March 2009, addressed to the Respondent's joint owners, setting out the history of the trading difficulties on the site as the market evolved and changed, complaining of the rejection of GPK without it having had an opportunity to make a full presentation, and, in the alternative, seeking a partial rent moratorium. It should be noted that the letter referred to a lease surrender followed by new lease for GPK.

21 It was contended by Mr Vincent on behalf of DPT that, strictly construed, Jewell's written request for consent to assignment was withdrawn by the later email of 4 March 2009 which used the words "surrender and new lease" in response to terminology used by Miss Cassidy in her email of 16 February 2009. I note the subsequent emails back and forth spoke more often of surrender and new lease, although assignment is also mentioned.

22 In response, Mr Sleight, on behalf of Jewell sought to establish that, even if there had been a withdrawal, there was subsequent electronic correspondence on 3 June 2009 which amounted to a further request for assignment, which had not been the subject of notification of a decision within the 28 day time period, and so it brought a s42(d) deemed consent into play, because a response of 1 July 2009 included:- "Landlord will not agree to a change of use," and

Also indicated that the financial and retailing skills issues had not been considered and:- "Makes no representation as to whether this criteria has been satisfied".

It followed, he argued orally, that the request for consent to assignment had not been either rejected or agreed to because all 3 requirements had not been specifically addressed, and so a deemed consent came into operation.

23 Mr Vincent contended that all other considerations apart, both requests had been the subject of a proper notification of withholding of consent, and so no deemed consent was before me. I suppose it to follow that the submission was that the only order which I could make was one to the effect that consent had been impermissibly withheld. The descriptor "impermissible" was used to avoid confusion with case law dealing with consent to assignment being unreasonably withheld pursuant to the covenants either written into commercial leases, or implied into them by s133B of the Conveyancing Act 1919.

24 I indicated in oral argument that, in my view, had the correspondence all been between solicitors for the parties, the technical difference between the request for consent to assignment and surrender and new grant, might well have needed further exploration. I now observe that not the least of these might have been to establish exactly when time starts to run in a requirement of "within 28 days" of a certain event. However, in my view the correspondence, being as it was between ordinary business persons, should not be constructed as one might a Deed, presumed to have been drawn with skill and attention to fine detail. The approach should be by reference to the general clear thrust of the communications. In this regard I accept Mr Vincent's contention that the same principles should be applied as those which apply in matters relating to the exercise of options, as summarised by Brereton J in Mineaplenty Pty Limited v Trek Pty Limited [2006] NSWSC 1203. See especially Ballas v Theophilos (No. 2) [HCA] 90; (1957) 98 CLR at 205 "so long as the notice conveys an unequivocal intent, it is not fatal that it does not use terminology precisely to the terms of the option granted" "or even misstates it terms" Quadling v Robinson [1976] HCA 31; (1976) 137 CLR at 201; Prudential Assurance Co. Ltd v. Health Minders Pty Ltd (1987) 9 NSWLR 673. That, it seems to me, applies just as strongly to the terms required by s41(d).

25 On that basis, I do not believe that it can be said of the 11 February 2009 request that it was a request for consent to assignment, because it very clearly indicated that the process would be started once a contract had been entered into. However the terms of the email of 16 February 2009, especially in view of the 11 February 2009 "forerunner", are a clear reference, in writing, to a proposed assignment. On the other hand, I do not accept that the later references to surrender (no matter who actually "caused" them) were intended to specifically avoid the concept of assignment. They were all communications on the same subject, which was the request for consent to assignment of the lease, which, I find, had been made by the email of 16 February 2009.

26 On the same reasoning, the response of 12 March 2009 is clear enough to be a written refusal of that application, despite its reference to "surrender and new lease" instead of assignment. This rejection, coming some 15 days after the submission of the required information, was well within the statutory limit.

27 Once the request had been refused, the later request of 3 June 2009 had no relevance. To allow it to have any function would be to encourage parties to indulge in a series of repeated requests, in the hope that one of those, by chance, happened not to be answered by a refusal within 28 days, and so allowed s41(d) to operate.

28 Even if I am wrong in that rejection, I am satisfied (on the Ballas v Theophilos rationale above) that the words of the 1 July 2009 were clear enough to constitute a rejection, despite the acknowledgement that not all matters of statutory relevance had been considered.

29 If I understood him correctly, Mr Vincent proposed that the decision of the Appeal Panel of this Tribunal in Castle Mall Fine Foods Pty Limited v Queensland Investment Corp [2003] NSWADT 207 meant that I should refer in my assessment of the similarity or otherwise of the two restaurant uses, to the actual use by Jewell Bay, as represented by "Coast", rather than the possible ambit of the use as defined by the words in the Lease. In Castle Mall the question to be resolved was whether a lessor could, having allowed a lessee for many years to operate as a coffee shop/café, restrict the consent to assignment to the much more limited range of food encompassed by the coffee shop concept which was the use authorised by the lease. The Panel held that the lessor was bound by the width of the use which it had allowed to develop over the years. Applying that decision to the facts before me, it was argued, I should regard myself as bound by the use to which the premises are presently put, which, if not fine dining, was something very close to that, whilst, of course the words of the Lease made no reference to "fine dining" at all.

30 Mr Sleight, against that, drew my attention to the fact that there was nothing preventing a lessee, a week or two before a proposed assignment, reverting to a use of premises which fully exhausted the use definition, no matter what had been the prevailing previous narrow actual use. I am satisfied that, as a matter of basic principle, that is correct.

31 The facts in Castle Mall were that the lessee had relied for many years on the lessor's concession and that concession could not, capriciously be reversed, and so the lessor was "caught" with the wider use. That does not, without some evidence similar to that of Castle Foods, telegraph through to the present instance. The following example used in argument is instructive to indicate why.

32 Assume that a lease in a small mall allowed a use as Confectionary Shop and that over some years the shop keeper had reduced his offering to only chocolates, and that no one else in the mall had taken it on themselves to sell specialised confectionery of the non-chocolate variety. There would be nothing to stop our shopkeeper from reverting to the wider range, unless he had previously, on being approached by the landlord, agreed to allow another trader into the mall for the purpose of selling sugar sweets.

33 It may well be said that my decision in this regard gives no heed to the words of s39(1)(a):- "….to which the shop is put ",

or changes the test to ask after:- "The use to which the shop may be put …."

I take comfort from the strong suggestion of wide interpretation flowing from the fact that the Retail Leases Act is beneficial legislation, see Tobias J in Manly Council v Malouf [2004] 61 NSWLR 394 at p74:- "As the primary Judge observed, the Retail Leases Act was " beneficial legislation". Accordingly it should not be narrowly construed".

I also am mindful of the words of Oliver LJ in Exxon Corporation v Exxon Insurance Consultants International Limited [1982] CH at 144 "it is not necessary, in construing a statutory expression, to take leave of one's common sense".

34 Looked at in this way, the question might be put as:- had Mr Connell, in seeking greener pastures, resolved to reduce his wine list, and downscale his menu, moving well away from any concept of fine dining, to a point where he attracted the same kind of clientele who are targeted by GPK, would that be a breach of the terms of the Lease?

35 Having concluded that the actual use of the premises is not necessarily pertinent to the first parameter set by s39, I am led to the expert reports to seek to ascertain what is the possible extent of the formula:- "Contemporary modern Australian Licensed Restaurant with Italian and Mediterranean bias".

36 Although they disagreed on outcome, two experts agreed that the yard stick should be taken from the national industry body "Restaurant and Catering Australia" definitions for its National Awards for Excellence. The formulae for "Contemporary Australian Restaurant" (whether formal or informal) are "Establishments which predominantly offer a menu characterised by fresh seasonal produce and innovative dishes that reflect contemporary trends in Australian cooking provided as a formal, structured dining experience". The "formal" requires it to be "at the premium end of the market", whilst the "informal" requires that it be the same "formal structured dining experience" but "in an informal, relaxed setting".

37 Mr Michael Fischer's expertise is beyond doubt, he being a Certified Professional Restaurateur, and having been inducted into the Restaurant and Catering Association of NSW Hall of Fame in 2001. His Affidavit gave a full explanation of the various Italian preparation and cooking traditions, on the basis that Mediterranean meant "Italian". He concluded that the modern Australian trend is away from formality, "in Sydney and Melbourne, dining is being replaced by eating". "This approach is to utilise the very best Australian produce; cook it in a healthy manner (wood fired pizza oven), serve it on a pizza base and allow the modern Australian diner and/or family to have a cost effective meal".

38 Mr Fischer disclosed that he had a pecuniary interest in the matter, he being a consultant to the broker Feszt and Feszt, and would receive a benefit if my decision favoured the assignment.

39 John Close, as I indicated above, accepted the same formula for describing the use limitation. He too is a restaurant and catering business broker, and has an impressive CV of practical and managerial experience. He is a past Board Member of the Queensland and NSW arms of the Restaurant and Catering associations.

40 Mr Close was of the view that the GPK "structures of menu and compilation of ingredients" fell outside the definition because there were no Italian wines, or wines made from traditional Italian grapes; the starters and salads, as well as the pasta dishes were entirely pedestrian, and showed no innovation at all, the pizzas were not innovative, and did not feature fresh seasonal produce, and did not reflect any contemporary toppings. The desserts, although using some fresh seasonal produce, had no Italian or Mediterranean influence, and were (like the pasta and salads), pedestrian.

41 Mr Tony Eldred has been a hospitality management consultant for 20 years, and regularly contributes to restaurant and catering trade magazines. His view is:- "any restaurant no matter what its ethnic roots, which features a locally adapted menu range in a fashionable environment, should be considered as contemporary Australia cuisine":. In making that observation he admits that most "foodies" would disagree with him, but dismisses them as only representing the 10% which is the "well heeled" top end of the market. He prefers to have regard to his view of what the general community prefers, gained by his objective market surveying experience. He went on to analyse "Italian and Mediterranean bias" by reference to the 13 countries which border on that sea, from Spain and France, to Syria, Israel and Lebanon, and Algeria and Morocco, concluding that GPK's menu or service style which borrows from that region, but which is not exclusively Italian because of the many toppings which are clearly not Italian (or for that matter Mediterranean) would still be within the parameters of the description. He would classify these as "multicultural with Italian roots:, which, because one of the definers of Australian society is its multiculturalism, makes it "modern contemporary Australian".

42 Mr Vincent described this classification as being so generic as to be meaningless. I agree, because, by that reasoning the concept of "contemporary Australian" would describe a restaurant serving mainly food cooked in the Indian tradition, or for that matter, the various traditions of mainland China. I suspect that my guests having been invited to share a contemporary modern Australian cuisine with me in a restaurant, would be surprised to find themselves in a curry house or the "Chinese" along the street.

43 At first blush I found it surprising that none of the experts indicated that they had dined at Coast or a GPK establishment, and had reached their conclusions entirely based on the printed menus. On reflection, that possible omission does not greatly affect the value of the evidence, because, as I have concluded above, the actual use to which Jewell Bay put the premises is not the starting point of my consideration. It is the possible use within the authorised use definition with which I am concerned.

44 I am satisfied that the expert evidence established that the definition:- "Contemporary modern Australian Licensed Restaurant with Italian and Mediterranean bias" means that such a restaurant must have an emphasis on fresh seasonal produce, which entails a menu which changes quite often, perhaps to reflect the four seasons, as well as having a daily market menu to reflect that which was fresh at market in recent days. Inherent in that is a wide variety of food items combined or prepared in an innovative manner, with some opportunity to match up appropriate wines to make up the structured dining experience. I gained the impression that that meant a quite high price point.

45 On the GPK side, I found the evidence of Mr Barbour somewhat more enlightening than the experts. His fare is in the mass produced market, allowing relatively little variation in the menus. All toppings except prawns are cooked in the company kitchen at Ryde. I note Mr Fischer's observation that the use of fresh seasonal produce does not mean that the foodstuffs have to be cooked on site, but the evidence was that GPK has a summer and winter menu, each of which varies little from year to year. There was no evidence that there is any capacity to react to produce which is available for a very short season. In fact Mr Barbour's evidence was that he could not have anything on the menu for which he could not guarantee a six month supply. Thus, even if one were to ignore the lack of variety imposed by the fact that the main dishes are either pasta or on a pizza base, if there be flair or innovation or ingenuity shown in the creation or assembly of the topping, then that is not practiced with great frequency. Whatever may be said about the style and presentation of the GPK food, it does not describe as a structured dining experience, and that, I am satisfied, is one of the critical differences.

46 The above also highlights another critical difference, being the lack of variety engendered by the pizza/pasta formula. I am satisfied that if Mr Connell, in pursuit of better returns, had restructured his menu so that his whole offering was either pasta or pizza based, he would be in breach of his lease, no matter how innovative or varied his daily offering might be, because that would, in my view, be a Contemporary modern Australian Licensed Pizza Restaurant, even if it was clear that the topping array was such that there was Mediterranean bias as wide as that defined by Mr Eldred.

47 Just as it is so often argued that, no matter how difficult it may be to define a concept, it is not so difficult to identify specific examples of it, because "if it waddles like a duck and it quacks like a duck….", I am satisfied that even the most relaxed structured dining experience allowed by the lease formula excludes the dining experience found in a GPK establishment. That being the case, I find that the use to which GPK proposes to put the premises is not the same as the use to which Jewell Bay could put the premises within the "use" terms allowed by the lease.

49 In accordance with the developing practice of this Division, I indicate that I would propose to make no order for costs unless the parties wish to debate that aspect. I formally reserve the question of costs. If neither party seeks an order for costs, I will simply order "no order for costs" at the expiry of 28 days from the date of application of this decision.

50 To cover all the possibilities, the present order is "costs reserved, applicant has leave to file submissions on costs within 14 days, Respondent has further 14 days to respond, papers then to be referred to me for decision on costs order.

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