Lee v YOUth OK Pty Ltd

(1) The Post 26 February 2022 Damages Claim

1. The final calculation of any principal sum due by the defendants to the plaintiff for the post 26 February 2022 damages claim depended upon the plaintiff establishing compliance with the lease, clause 12.6, that YOUth OK had done "every reasonable thing to mitigate those losses and try to lease the property to another tenant on reasonable terms" between 27 February and 30 September 2022.
2. Pursuant to the Court's directions in the first judgment (at 303) Ms Lee filed an affidavit giving an account of her efforts to lease the Newport property since the Court reserved judgment in May of this year.
3. Ms Lee's initial evidence filed after the Court's first judgment was that she has done "every reasonable thing to mitigate" losses from YOUth OK's breaches of the lease. As the first judgment explained, she only needed to establish reasonable steps in mitigation between 26 February 2022 and 30 September 2022, as the re-leasing of the property was not possible whilst YOUth OK was in occupation.
4. The position had been reasonably clear until the Court reserved judgment in May of this year: Ms Lee had not released the Newport property up until that time. Since then, the evidence shows that she has not entered any lease over the Newport property and has not received any income from it. The premises were still vacant at the time of these November 2022 supplementary hearings.
5. Mr Sokolov of Raine & Horne, Ms Lee's agent in respect of the Newport property, advised Ms Lee to return the premises to use as a restaurant, which involved a change in the fit-out that had been partially completed on behalf of YOUth OK. Ms Lee took this advice. Due to this reconfiguration work it took some time before the property could be offered to be re-leased.
6. In addition to reconfiguring the property as a restaurant, after YOUth OK left the property Ms Lee was required to remove rubbish, remediate unfinished works, repair water damage, have the premises commercially cleaned and clear up the garden at the rear of the property. Once that work was done the property was offered for lease, but the premises were still on the market, seeking suitable tenants, as of 30 September 2022.
7. The defendants' initial submission was not persuasive. They submitted that the inability of Ms Lee to enter a new lease was solely due to her conduct in allowing the property to fall into disrepair, making it unfit for the operation of any commercial business and that potential lessees have become aware of the non-compliance issues with the Newport property and have been deterred from leasing it.
8. Ms Lee was not responsible for allowing the property to fall into disrepair. Very little had been done to the property by the defendants throughout 2021 after the builders left the property. And as the Court's first judgment shows the evidence does not establish that Ms Lee's dealings with the Council made the premises unfit for operation as a commercial business. Moreover, no clear inference can be drawn against the plaintiff as to whether potential lessees have been deterred by activities on the premises during the period of the defendants' occupation: the defendants' activities on the site causing the premises to be unoccupied and unsightly for a long period would appear to be no less responsible for any deterrent effect on potential lessees.
9. But the main contest between the parties concerned whether Ms Lee had made adequate efforts to release the premises after 27 February 2022. The maximum rent that could accrue between 27 February 2022 and 30 September 2022 was $117,911.18. Any failure to mitigate loss under lease clause 12.6 would go in reduction of that sum. The resolution of this issue can be divided into two sub-periods: the first period from 27 February to 20 May 2022, when the Court reserved judgment and the second period from 21 May 2022 until 30 September 2022.
10. The defendants' submissions are not persuasive in respect of the period up to 20 May. This is so for two reasons. First, the various repairs and renovations that Ms Lee has undertaken since YOUth OK vacated the property could only be assessed and then executed by her after YOUth OK had left the premises. Initially upon re-entering into possession, Ms Lee needed an opportunity to assess what needed to be done with the premises to turn them to account to her best advantage. The Court can accept that this would have taken several months until about the time judgment was reserved. Second, Ms Lee was still much distracted by this litigation until Court reserved judgment on 20 May 2022. And it was not reasonable to expect her to take final decisions about undertaking a major renovation project until the intense preparation for final submissions was complete and it was clear what the final issues for judgment were to be.
11. The period after 20 May 2022 is more contentious. Ms Lee says that after 20 May 2022 she was fully occupied for a period of a little over four months (until the expiry of the lease on 30 September) with cleaning up and preparing the property for re-leasing and offering it to the market. She says that she was unable to lease out the property during this period. That is a matter of contention between the parties which is resolved by these reasons.
12. For the period from 21 May 2022 to 30 September 2022, the issue of whether the plaintiff took reasonable steps in mitigation of loss is best analysed by reference to Ms Lee's actions in relation to the commercial portion of the premises and then her actions in relation to the residential portion of the premises.
13. As to the commercial portion of the premises, once she was back in possession Ms Lee took advice and decided based on that advice to attempt to release the premises as a restaurant. Given that the premises had been used as a restaurant before being leased to YOUth OK, Ms Lee's decision to return it to that use based on advice was reasonable. For this purpose, she needed to renovate the premises by removing many of the fixtures and fittings that had been added by YOUth OK and to bring the structure back to a format that would be attractive to potential restauranteur tenants.
14. Ms Lee's pace of renovations to the commercial part of the premises was reasonable in the circumstances. It took some time to clear the debris out of the property that YOUth OK had left, then to rework the walls. Following that work the premises were offered for release. The Court is satisfied that Ms Lee commissioned this work in a timely and efficient manner.
15. As to the residential portion of the premises, in the Court's view Ms Lee could have done more to lease this area than she did after 21 May 2022. Ms Lee could have prioritised the renovation of Flats 1,2, 3 and 4 at the Newport property. The Court accepts Mr Hawkins' evidence that there was considerable demand for residential accommodation in the Newport area this year and that residential tenants could readily have been found in the middle of the year.
16. Ms Lee's plan was to renovate the residential portion of the premises at the same time as the commercial portion of the premises then to market the whole property. That is indeed what she did. That plan does not differentiate between the greater workload both of removing debris and renovation associated with the commercial part of the premises compared with the residential part of the premises.
17. The residential premises had not had the substantial building work done to them during YOUth OK's occupation that the commercial part of the premises had done. They needed to be repainted and tidied up for occupation by residential tenants, but they did not have to be re-converted back to a different use, as was required of the commercial part of the premises before they could be leased. In the Court's view Ms Lee's work could have been planned to address the residential parts of the premises first to undertake the less complex work required upon them and to lease them whilst the other work on the commercial parts of the premises was continuing.
18. Ms Lee had several arguments against this approach. One was that she wanted to take advantage of having the builders on site to do the residential and commercial portions of the premises of the same time. But this is not an answer to the argument for accelerating the renovation of the commercial premises. It would not have been difficult for the builders, if so directed, to complete residential areas of the premises first and then, without leaving the site, to turn to address the commercial part of the premises.
19. Ms Lee's next argument was to say that if this sequential building approach had been used that the actions of the builders would have deterred potential residential tenants from leasing of the property. But the answer to that argument largely lies in the structure of the Newport property. Flats 3 and 4 are separate from the main building on Barrenjoey Road and are approached by stairs at the end of the laneway on the southern side of the Newport property. Provide some basic discipline was imposed upon the builders to not spread out their work area and to work within required working hours, Flats 3 and 4 should have been able to be leased despite the building work continuing at the first floor commercial area of the main building on Barrenjoey Road.
20. Flats 1 and 2 would have been more difficult to lease to residential tenants. But they have entrances into side lanes on either side of the Barrenjoey Road building. They could be entered without going through the disrupted commercial space on the first floor and could have been leased whilst the building work continued. Nevertheless, the continuing building works would certainly have been a disincentive to their being leased. They may have to have been leased at a reduced rent. Perhaps only one of them could have been leased. To give proper weight to these considerations the Court infers that only one of Flats 1 and 2 of them could have been leased before 30 September had Ms Lee taken reasonable steps in mitigation.
21. When would these residential leases have started? There is no clear evidence how long it would have taken to renovate the residential flats had work on them been sequenced before the work on the commercial premises. But the work on the whole premises was completed by 30 September. It is reasonable to infer therefore that the work on the residential part of the premises would have taken approximately four weeks. Another three weeks should be allowed for preparation for the builders to come on site and for making efforts to let the residential flats, making seven weeks in total before residential leasing could commence.
22. This is a reasonable period to ready the residential areas for letting. Builder engagement could well have been underway before 21 May. Given the evidence of Mr Hawkins about the strength of the local residential tenancy market - including potential residential tenants that he has individually identified in his evidence - the premises would probably have been let quite quickly.
23. Thus, the Court will reduce the damages on account of rent that would otherwise have accrued under the lease from 26 February to 30 September 2022 in the sum of $117,911.18, by the rent that would have been earned for a period of 12 weeks leading up to 30 September 2022. There are approximately seven weeks between 21 May and 11 July 2022, leading into this final 12-week period.
24. Conflicting evidence was given as to the amount of rent that could have been recovered during this 12 week period. The Court accepts the Raine & Horne current rent schedule for Flats 1 - 4, provided pursuant to the Court's directions, as a good indication of market price of renting these flats in the second half of this year. The asking prices for these flats were as follows: Flat 1 - $600 per week, Flat 2 - $580 per week, Flat 3 - $450 per week and Flat 4 - $450 per week. Flats 1, 3 and 4 have been leased at these asking prices, indicating that they represent market value. But there is sufficient uncertainty about market rates that it would be reasonable in the circumstances of this case to take a flat rate of $500 per week for three flats, being a little more than the rate at which Flats 3 and 4 were leased but less than the market rates for Flats 1 and 2.
25. In conclusion, the plaintiff by taking reasonable steps in mitigation could have released three of the four residential flats at the premises for a period of 12 weeks ending on 30 September 2022 at the rate of $500 per week per flat. This is a total of $18,000.
26. The final interest calculation on this amount should now be undertaken by the plaintiff and submitted to the Court and to the plaintiff by Monday 23 January 2023. The calculation should be undertaken consistently with earlier calculations directed by the Court with the first judgment, so that interest will run on any amounts due and unpaid from time to time at the rate of 10 per cent fixed under the lease.

(2) The Claim for Indemnity Costs Under the Lease

1. The Court reserved for further consideration the question of whether Ms Lee's costs of these proceedings should be paid on the indemnity basis. The Court has already made an order that the first and second defendants pay Ms Lee's costs on the ordinary basis: first judgment at [303] (7). Mr Smallbone for Ms Lee argues that costs should be awarded on the indemnity basis. His submissions accept that costs of the proceedings are in the control of the Court: Civil Procedure Act 2005, s 98(2) and that for that reason a contractual provision for indemnification of costs would not automatically prevail. But he submits that the lease, clause 5.1.8 provides an agreement for indemnity costs which would provide a principled basis for the exercise of the Court's discretionary power in these circumstances. Mr Smallbone also referred to Rail Corporation of NSW v Leduva Pty Ltd [2007] NSWSC 800 in which Einstein J made an award of indemnity costs based upon a contractual term that awarded "legal costs incurred in….enforcing this deed".
2. Mr Smallbone also referred the Court to Heaps v Longman [2000] NSWSC 542; [2001] ANZ Conv R; [2000] NSW Conv R 55-945 ("Heaps"), a case involving recovery of monies due under a lease, which awarded costs under the lease, on the ordinary basis only. The default provision in the lease in Heaps required payment to the lessor of "all legal and other costs charges and expenses for which the lessor shall become liable" in connection with the default.
3. But both authority and analysis from first principles indicate that costs should be awarded on the ordinary basis only and not the indemnity basis.
4. As to authority, in Brinca Property Management Pty Ltd v Fibre Tek Global Pty Ltd [2015] NSWSC1628, Ball J considered a clause in substantially identical language to clause 5.1.8; the words were "the tenant must pay…the landlord's reasonable costs…resulting from the default of the tenant". In Brinca (at [36] - [37]), Ball J dismissed an application for indemnity costs in the following terms, which are directly applicable to this case: "[36] Brinca has been successful in the proceedings. It is obviously entitled to an order for costs in its favour. It submits that it should be entitled to those costs on an indemnity basis. In making that submission in relation to Fibre Tek, it relies on cl 4.3(b)(v)(G) of the Lease, which provides that "The Tenant must pay … the Landlord's reasonable costs … resulting from the default of the Tenant". In the case of Mr Edwards, it submits that the court should order that he pay Brinca's costs on an indemnity basis, relying on the indemnity in cl 17.2 of the Lease. [37 I do not accept those submissions. The court retains a discretion in relation to costs, even where the parties have reached an agreement on costs: Kyabram Property Investments Pty Limited v Murray [2005] NSWCA 87 per Beazley JA (with whom Hodgson and Ipp JJA agreed) at [11]-[14]. In the present case, Fibre Tek's obligation under the Lease is to pay Brinca's "reasonable costs". There is no particular reason why Brinca should recover its costs on an indemnity basis in this case. Although it was unsuccessful, I do not think that it could be said that its case was hopeless. There appears to have been a genuine dispute concerning the amount owing by Fibre Tek. Fibre Tek sought to resolve that dispute in accordance with the Lease. In those circumstances, it is appropriate to treat Brinca's reasonable costs as the costs it would recover on the ordinary basis. Brinca should not be entitled to recover under the indemnity given by Mr Edwards more in respect of costs than the amount that it is entitled to recover from Fibre Tek. In the absence of clear words to the contrary, the indemnity should be interpreted as an indemnity in respect of amounts for which Fibre Tek is also liable. On that basis, the defendants should pay the plaintiff's costs on the ordinary basis."
5. Like the situation in Brinca, here there was no conduct on the part of the defendants that would otherwise warrant an award of indemnity costs against them. Although it failed, their case was certainly not unarguable. Nor was there time wasting or procedural delay on the defendants' side warranting an order for indemnity costs.
6. Analysis based on the application of first principles in the proof of a plaintiff's case for breach of contract and damages, leads to the same conclusion. The structure of clause 5.1.8 allows the landlord to recover "the landlord's reasonable legal costs related to the default". On first principles the plaintiff/landlord bears the onus of proof in establishing what are "reasonable" legal costs for recovery. For the Court to award indemnity costs would, as Mr Smallbone rightly concedes, involve a reversal of the onus of proof, such that in the assessment of costs the landlord would be entitled to all costs unless they were shown to have been unreasonably or improperly incurred. Clear and unambiguous contractual words of this kind would be required to reverse the onus of proof. Such clear words are not present in clause 12.6.
7. The obligations of Mr Hawkins as guarantor under the lease, clause 13 to indemnify the plaintiff against the default of the first defendant under the lease does not alter this position. That right of indemnity rises no higher than the first defendant's primary obligation to pay costs to the plaintiff on the ordinary basis.

(3) Interest on Costs

1. Ms Lee also claims interest on costs. Civil Procedure Act, s 101(4) provides for an automatic entitlement to interests on costs unless the Court otherwise orders. Such interest shall run at the prescribed rate unless the Court otherwise orders and from the date either that the order was made or from any other date that the Court orders: Civil Procedure Act, s 101(5). Interest on costs is generally awarded under these provisions from the dates of the payment of the costs. Civil Procedure Act, s 101 was amended in 2015 to provide for this automatic entitlement to interest on costs, unless the Court otherwise orders, thereby reducing the scope for argument about whether an order for interest on costs should be made.
2. Formulating an order which provides an appropriate and fair award of interest on costs has been developed through the course of authority. I discussed the applicable authorities on this issue in McCausland v Surfing Hardware International Holdings Pty Ltd ACN 090 252 752 (No. 3) [2014] NSWSC 590 ("McCausland") (at [62] - [65]). A well-accepted set of draft orders for interest on costs has been developed from decisions of the Court of Appeal and at first instance based upon the following primary authorities Leda Pty Ltd v Weerden (No. 2) [2007] NSWCA 283 ("Leda") and in Drummond & Rosen Pty Ltd v Easey (No. 2) [2009] NSWCA 331 ("Easey"). As Ward J (as her honour then was) explained in Ying v Song [2011] NSWSC 618 at [109] the formula developed in the Court of Appeal has the effect of avoiding "the complex and expensive task of a cost assessor calculating interest on individual payments".
3. The Court directed the plaintiff, Ms Lee to provide draft orders based upon the formula discussed in Leda, Easey and McCausland for the defendant's approval. The plaintiff did that and the Court is satisfied that the form of the order made below for interest and costs proposed by the plaintiff is appropriate. The Court will make orders for interest on costs. There is no reason to order otherwise in this case.
4. Ms Lee submits that interest on costs should be charged at the rate of 10 per cent provided for under the lease. Mr Smallbone submits that these amounts are recoverable under the lease, clause 5.1.5 as being "interest on these monies".
5. This submission is not persuasive. The expression "these monies" in the lease, clause 5.1.5 refers to the various sums that may become due under the lease, clauses 5.1.1 to 5.1.4. For example, that applies to unpaid rent and the Court will allow interest on unpaid rent at the rate of 10% under the lease. But the expression "these monies" in clause 5.1.5 does not connote money which becomes due by reason of the statutory entitlement to interests on costs created by Civil Procedure Act, ss 101(4) and (5).

Conclusion and Orders

1. The Court indicated at the hearing on 30 November that because of the forthcoming vacation the Court would stay the judgment granted today until 30 January 2023 when the new law term begins. This would avoid unnecessary applications during the Court vacation.
2. For these reasons the Court will make the following orders: 1. Judgment for principal due by the defendants to the plaintiff for the period on and from 27 February 2022 until 30 September 2022 in the sum of $99,911.18 (which is for a principal amount of $117,911.18 less $18,000); 2. Direct the plaintiff to provide to the defendants and to the Court a calculation of interest up to judgment today on the judgment sum of $99,911.18 in (1) at the rate of 10% on amounts due to the plaintiff and unpaid from time to time ("the interest calculation"); 3. Direct the defendants to provide any amendments to the interest calculation by Friday, 27 January 2023 at 12 noon, and 1. in the absence of notification of amendments to the interest calculation, the Court will enter judgment for interest in accordance with the interest calculation, and 2. any notification of amendments to the interest calculation will be considered by the Court in chambers before the Court enters judgment for interest; 1. For the purposes of order (5) and (6) below the following expressions have the following meanings: 1. "X" equals the total amount of costs and disbursements which the plaintiff has paid or is liable to pay to her legal advisers in connection with these proceedings; 2. "Y" equals the total amount of costs and disbursements allowed on assessment to the plaintiff in connection with these proceedings; and 3. the "Allowed Percentage" equals ((Y/X) x 100)%. 1. The defendants shall pay to the plaintiff interest on costs and disbursements, at the rates prescribed from time to time by operation of r. 36.7 of the Uniform Civil Procedure Rules, on the Allowed Percentage of each amount for costs and disbursements actually paid by the plaintiff, from the date of payment by the plaintiff of each such amount until the first to occur of: 1. such time as the defendants have paid the costs due to the plaintiff under any order made in these proceedings; or 2. any further order relating to interest on costs in these proceedings; 1. Grant liberty to apply upon 3 days' notice for any further order pursuant to order (5)(b); 2. Stay the judgment in (1) until and including 30 January 2023; 3. Note that the file will be returned from the chambers of Slattery J to the Registry upon the entry of judgment for interest in accordance with (3); and 4. Exhibits will be held in the Registry pending the outcome of the defendants' appeal

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: 09 December 2022