McDonald's Australia Limited (Formerly called McDonald's Properties (Australia) Pty Limited) v Challenger Property Nominees Pty Limited & Anor

Supreme Court of NSW|2003-10-10|Before: Einstein J

CITATION : McDonald's Australia Limited (Formerly called McDonald's Properties (Australia) Pty Limited) v Challenger Property Nominees Pty Limited & Anor [2003] NSWSC 963 HEARING DATE(S) : 10/10/03 JUDGMENT DATE : 10 October 2003

JURISDICTION: Equity Division Commercial List JUDGMENT OF : Einstein J DECISION : Court satisfied that mediation unlikely to resolve the dispute. Separate question answered accordingly.

CATCHWORDS : LEASES AND TENANCIES - failure by landlord to provide appropriate goods lift - failure by landlord to provide adequate kitchen exhaust system - change of owner effected by sale of property - numerous complaints by tenant to landlord and managing agent over years - attempts by plaintiff to resolve matters - claim for specific performance - declaration of breach of lease sought - RETAIL LEASES - statutory regime - provision of dispute resolution procedure under Part 8 of the Retail Leases Act 1994 (NSW) - mediation as condition precedent to litigating complaint (section 68) - whether mediation under the Act is "unlikely to resolve" the dispute or matter - PRACTICE AND PROCEDURE - notices of motion seeking an order staying proceedings pending the outcome of mediation - SEPARATE QUESTION - Part 31 rule 1 Supreme Court Rules - Is the Court satisfied that mediation under Part 8 of the Act is unlikely to resolve the dispute or matter? - large volume of correspondence between the parties and their legal representatives since mid-2000 - failure to resolve issues over long period - mediation unlikely to resolve issues Administrative Decisions Tribunal Act 1997 (NSW) LEGISLATION CITED : Retail Leases Act 1994 (NSW) Supreme Court Act 1970 (NSW) Supreme Court Rules 1970 (NSW) CASES CITED : Oriental Carpet Department Store Pty Ltd v SupaCenta Pty Ltd [2003] NSWSC 783 McDonald's Australia Limited (Formerly called McDonald's Properties (Australia) Pty Limited (ACN 008 496 928) (Plaintiff) PARTIES : Challenger Property Nominees Pty Limited (ACN 091 336 793) (First Defendant) Winten Developments Pty Limited (ACN 003 513 219) (Second Defendant) FILE NUMBER(S) : SC 50118/03 CRC Newlinds SC (Plaintiff) COUNSEL : K Andronos (First Defendant) J Clarke (Second Defendant) Michell Sillar (Plaintiff) SOLICITORS : Minter Ellison (First Defendant) Lane & Lane (Second Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

Friday 10 October 2003 ex tempore Revised 30 October 2003

50118/03 McDonald's Australia Pty Ltd v Challenger Properties Nominees Pty Ltd & Anor JUDGMENT 1 The plaintiff, McDonald's Australia Pty Ltd, is the lessee of premises located at and known as Shop 6P8, The Forum, 210 Pacific Highway, St Leonards ["the premises"]. The lease was entered into on or about 3 March 2000, the lessor being the then owner, Winten Developments Pty Ltd ["Winten Developments"], which is the second defendant. The premises were sold by Winten Developments to Challenger Property Nominees Pty Ltd ["Challenger Property Nominees"] under contract for sale completed on 5 January 2001. Challenger Property Nominees is the first defendant in the proceedings. 2 The claims to relief in the proceedings are as follows:

"1. A declaration that the First Defendant (" Challenger ") is in breach of its obligations under lease registered No. 7288566J between the Second Defendant (" Winten ") as lessor and the Plaintiff (" McDonald's ") as lessee (the " lease ") in that: (a) it has failed to provide to the retail premises located at and known as Shop 6P8,The Forum, 210 Pacific Highway, St Leonards (the " premises ") a kitchen exhaust system having a capacity to exhaust 1,500 litre/second from the premises; and

(b) it has failed to make available to McDonald's a goods lift with appropriate load bearing capacity to enable goods and other items used in connection with the business carried on from the premises to be transported from the loading dock facility located in the basement area of the building containing the premises (the " building ") to the level of the building on which the premises are located (being the level known as The Plaza). 2. A declaration that, prior to transferring the building to Challenger, Winten breached its obligations under the lease in that: (a) it failed to provide to the premises a kitchen exhaust system having a capacity to exhaust 1,500 litre/second from the premises; and

(b) it failed to make available to McDonald's a goods lift with appropriate load bearing capacity to enable goods and other items used in connection with the business carried on from the premises to be transported from the loading dock facility located in the basement area of the building to the level of the building on which the premises are located (being the level known as The Plaza). 3. An order that Challenger provide to the premises a kitchen exhaust system having a capacity to exhaust 1,500 litre/second from the premises.

An order that Challenger make available to McDonald's a goods lift with appropriate load bearing capacity to enable goods and other items used in connection with the business carried on from the premises to be transported from the loading dock facility located in the basement area of the building to the level of the building on which the premises are located (being the level known as The Plaza).

Costs." 3 The nature of the dispute is clearly identified in section A of the summons: "The Plaintiff leases from the First Defendant premises located at and known as Shop 6P8, The Forum, 201 Pacific Highway, St Leonards.

At the time the lease was made, the premises were owned by the Second Defendant.

The Plaintiff sub-leases the premises to Freefalle Enterprises Pty Limited, which company conducts from the premises a McDonald's dine-in and take-away restaurant and café.

The Plaintiff claims that the First Defendant and the Second Defendant have breached express and implied terms of the lease by: (a) failing to provide to the premises a kitchen exhaust system having a capacity to exhaust 1,500 litre/second from the premises; and

(b) failing to make available to the lessee of the premises a goods lift with appropriate load bearing capacity to enable goods and other items used in connection with the business conducted by the sub-lessee from the premises to be transported from the loading dock facility located in the basement area of the building containing the premises to the level of the building on which the premises are located. The Plaintiff further claims that it is entitled to specific performance of the obligations imposed on the lessor by the lease by the First Defendant: (a) providing to the leased premises a kitchen exhaust system having a capacity to exhaust 1,500 litre/second; and

(b) making available to the Plaintiff (and its sub-lessee) a goods lift with appropriate load bearing capacity to enable goods and other items used in connection with the business conducted from the leased premises to be transported from the loading dock facility located in the basement area of the building containing the leased premises to the level of the building on which the leased premises are located. The Plaintiff further claims that it has suffered loss and damage as a result of the First Defendant's and the Second Defendant's breaches of the lease referred to in A4. above." 4 The issues likely to arise as perceived by the plaintiff are clearly set out in section B of the summons and they are as follows:

"Whether the First Defendant has breached the lease by failing to:

(a) provide to the leased premises a kitchen exhaust system having a capacity to exhaust 1,500 litre/second from the leased premises; and

(b) make available to the Plaintiff (and its sub-lessee) a goods lift with appropriate load bearing capacity to enable goods and other items used in connection with the business conducted from the leased premises to be transported from the loading dock facility located in the basement area of the building containing the leased premises to the level of the building on which the leased premises are located. If the First Defendant has breached the lease, whether the Plaintiff is entitled to an order that the First Defendant specifically performs its obligations under the lease by: (a) providing to the leased premises a kitchen exhaust system having a capacity to exhaust 1,500 litre/second from the premises; and

(b) making available to the Plaintiff (and its sub-lessee) a goods lift with appropriate load bearing capacity to enable goods and other items used in connection with business conducted from the leased premises to be transported from the loading dock facility located in the basement area of the building containing the leased premises to the level of the building on which the leased premises are located. If the First Defendant has breached the lease, whether the Plaintiff has suffered loss and damage as a result of the breach or breaches, and if it has, the quantum of such loss and damage.

Whether the Second Defendant breached the lease prior to transferring the leased premises to the First Defendant, and if it did, whether the Plaintiff has suffered loss and damage as a result of the breach or breaches and the quantum of any such loss and damage." 5 The proceedings before the Court and the application which the first and second defendants pursued at the commencement of the day were by notices of motion [filed by the first defendant on 29 September 2003 and by the second defendant on 30 September 2003], each materially seeking an order that the hearing of the proceedings be stayed pending the outcome of a mediation of the claim between the plaintiff and the first defendant and a claim between the plaintiff and the second defendant pursuant to section 65 of the Retail Leases Act 1994 (NSW) ["the Act"]. Part 8 of the Act deals with dispute resolution. Sections 63 to 69 of Part 8 are in the following terms:

"63. Interpretation (1) In this Part: "court" means a court, tribunal or other body or person authorised by law, or by consent or agreement of parties, to decide or resolve any issue that is in dispute between parties, and includes an arbitrator.

"party" or "former party" to a retail shop lease or former retail shop lease includes a person who is a guarantor or covenantor under a lease or former lease.

"retail tenancy dispute" means any dispute concerning the liabilities or obligations (including any obligation to pay money) of a party or former party to a retail shop lease or former lease, being liabilities or obligations which arose under the lease or former lease or which arose in connection with the use or occupation of the retail shop to which the lease or former lease relates.

"Tribunal" means the Administrative Decisions Tribunal of New South Wales established by the Administrative Decisions Tribunal Act 1997. (2) This Part extends to apply to: (a) a retail shop lease that was entered into before the commencement of section 6 or under an option granted or agreement made before the commencement of section 6, and (b) a dispute that arose before the commencement of section 6 or which concerns a liability or obligation that arose before the commencement of section 6.

64 The Registrar (1) The Minister is to appoint the holder of a statutory office or a public servant as the Registrar of Retail Tenancy Disputes for the purposes of this Act. (2) The Registrar may, for the purposes of this Act and with the approval of the Minister, arrange for the use of the services of any staff or facilities of a government department, administrative office or a public or local authority. (3) The Registrar may delegate to any public servant the exercise of any function of the Registrar under this Act, except this power of delegation.

65 Functions of Registrar (1) The Registrar has the following functions:

(a) to make arrangements to facilitate the resolution by mediation of retail tenancy disputes (whether or not a dispute has been formally referred to the Registrar under this Act),

(a1) to make arrangements to facilitate the resolution by mediation of disputes or applications under section 19 (3), 19A (3), 31 (3) or 31A (3) or the subject, or possible subject, of a claim under section 62B,

(b) to report to the Minister on the operation of this Act,

(c) to take proceedings for an offence against this Act or to authorise persons to take proceedings for offences against this Act,

(d) such other functions as may be conferred or imposed on the Registrar by or under this or any other Act.

(2) The Registrar may, at any stage of proceedings brought before a court concerning a retail tenancy dispute intervene in the proceedings. If the Registrar intervenes in proceedings, the Registrar becomes a party to the proceedings and has all the rights (including rights of appeal) of a party to the proceedings.

(3) In making arrangements for the resolution by mediation of disputes or other matters, the Registrar is to have regard to the need for mediation of those disputes or other matters to be conducted by persons who are experienced in the field of retail shop leases.

(4) In the exercise of his or her functions under this Act, the Registrar is not subject to the control or direction of the Minister. 66 Mediation of disputes and other matters (1) Any or all of the parties or former parties to a retail shop lease may refer a retail tenancy dispute or other dispute or matter referred to in section 65 (1) (a1) to the Registrar for mediation of the dispute. The Registrar is entitled to charge an application fee (not exceeding any maximum fee prescribed by the regulations) for the referral of a retail tenancy dispute or other dispute or matter referred to in section 65 (1) (a1) to the Registrar. Note: Before applying for formal mediation of a dispute parties are encouraged to approach the Registrar for preliminary assistance of the kind referred to in section 67. There is no charge for this.

(2) The costs of and associated with formal mediation before a mediator of a retail tenancy dispute or other dispute or matter under arrangements made by the Registrar are to be paid by the parties to the mediation in such proportions as they may agree among themselves or, failing agreement, in equal shares.

(3) A mediator has, in the exercise of functions performed as a mediator under this Act, the same protection and immunities as a Judge of the Supreme Court. 67 The nature of mediation (1) In this Division:

"mediation" is not limited to formal mediation procedures and includes the following:

(a) preliminary assistance in dispute resolution, such as the giving of advice designed to ensure that the parties are fully aware of their rights and obligations and that there is full and open communication between the parties concerning the dispute,

(b) other appropriate forms of alternative dispute resolution.

(2) A reference in this Division to a "mediator" includes a reference to a person who provides the assistance or alternative dispute resolution referred to in subsection (1). Note: The first step in any dispute is to ensure that the parties have read their lease and have spoken to one another about their concerns in an effort to resolve the dispute. 68 Disputes and other matters must be submitted to mediation before proceedings can be taken (1) A retail tenancy dispute or other dispute or matter referred to in section 65 (1) (a1) may not be the subject of proceedings before any court unless and until the Registrar has certified in writing that mediation under this Part has failed to resolve the dispute or matter or the court is otherwise satisfied that mediation under this Part is unlikely to resolve the dispute or matter.

(2) The Registrar must certify that mediation under this Part has failed to resolve a retail tenancy dispute or other dispute or matter referred to in section 65 (1) (a1) if the Registrar is satisfied that any one or more of the parties to the dispute or matter has refused to take part in or has withdrawn from mediation of the dispute or matter.

(3) This section does not apply to proceedings before a court for an order in the nature of an injunction... 6 After the proceedings today commenced, and following an exposition by counsel for the parties of the issues, by consent an order pursuant to Part 31 Rule 1 of the Supreme Court Rules was made for the determination of the following preliminary question before any other question in the proceedings: Is this Court satisfied pursuant to section 68 (1) of the Act that mediation under Part 8 of the Act is unlikely to resolve the dispute or matter raised in the Summons filed on 2 September 2003? The evidence 7 The evidence relied upon by the plaintiff, in the form of affidavits of Mr Loxton made on 1 October 2003, an affidavit by Ms Richards sworn 2 October 2003, an affidavit by Miss Cooper on 3 October 2003, essentially prove the following matters: · McDonald's leases the premises; · McDonald's subleases the premises to Freefalle Enterprises Pty Ltd which conducts a McDonald's dine-in and take-away restaurant and cafe from the premises; · the premises form part of a retail commercial development near the train station at St Leonards. The retail component of the development is located on various levels. The premises are located on the level known as the retail level. The premises are provided with a kitchen exhaust system shared with other tenancies on the retail level. The premises are located above the street level. Deliveries of goods for use in connection with the business conducted at the premises are made to a loading dock which is located in the basement area of the building containing the premises and is shared by the retail tenants. A number of lifts service the loading dock; however, not all of those lifts are available to all tenants at any time. One of those lifts is known as the goods lift. 8 Appended to the affidavit of Mr Loxton is a considerable volume of correspondence running from 18 July 2000 up to 19 July 2001. That correspondence comprises, essentially, complaints made by McDonald's to the relevant registered proprietor of the premises or to the managing agent of the premises at the material time. The correspondence deals relevantly with problems in terms of what is said to have been the breakdown of a disabled lift from the underpass to the plaza. That disabled lift, it is common ground, is the only mode by which it is possible for direct access to be reached from the loading dock to the retail level upon which the McDonald's premises are situated. The complaints in relation to the disabled lift have never been rectified and the extent of the problem faced in this regard by McDonald's is evident in the circumstance that the manager has to leave the store and physically pick up the goods from trolleys and carry the items upstairs to the McDonald's store. So much was made plain in a letter of 9 February 2001 from Mr Loxton, a senior property manager of McDonald's to the managing agent Forum Properties Pty Ltd ["Forum Properties"]. 9 It is unnecessary for present purposes to repeat the terms of the correspondence to which I have referred save to thumbnail sketch that correspondence in terms of the finding that notwithstanding the obvious difficulty which is inherent in the inability of McDonald's to use the disabled lift, the problem was not the subject of resolution through the parties' communications, and has not been resolved until today when it remains entirely unresolved. In much the same vein, there were many other communications and they are, generally, to an extent, summarised in a letter of 15 May 2003 to Mr Richard Opie, a copy of which was sent to Challenger Property Nominees; that chronology itself having a reasonably extensive summary of the communications and events which took place in relation to the fact that there was no goods lift to the retail area available for McDonald's use and the public lift not being able to carry a goods load. The subject communication extended in terms of the conclusion of the author of the chronology that this was an occupational and health safety issue. Likewise, the other annexures to the affidavit of Mr Richard Opie of 2 October 2003 and the annexures to the affidavit of Miss Nicola Cooper of 2 October 2003 are of similar effect, generally the effect of inter-party communications. 10 The other matter that has separated the parties and continues and is the subject of the claims made in the summons concerns the exhaust fan. Here again, the correspondence concerns complaints from McDonald's, as to the lack of air conditioning and exhaust to the tenancy, going the distance of expressing a concern that staff could collapse due to, in one instance, excessive heat. Detail of the kitchen exhaust is given in the correspondence and the capacity of the exhaust system to service the premises was the subject of cross-correspondence. It only remains to find, as the Court does, that notwithstanding the extremely extensive correspondence and communications in relation to this issue, it remains unresolved up to this day. 11 It is relevant to note that, insofar as the position of the second defendant is concerned, the communications which the Court may infer were addressed to it or came to its notice ran up to 7 December 2000, there being several such communications of the nature to which I have referred. There is no evidence of any other communications to the second defendant, in terms of the continued problems during the period after 5 January 2001. 12 Although a question arises as to the precise date when the managing agent, Forum Properties, which, apparently, had been the managing agent, saw a change in the facilities manager (see facsimile from Mr Winten to Mr Loxton of 1 March 2001) - and it is possible that that communication could have come to the notice of the second defendant - the position is somewhat incoherent, in terms of the new evidence. 13 The events of 2003 include the sending on 15 May 2003 of a letter by the property manager of McDonald's to Richard Ellis, the managing agent for the property, confirming a meeting scheduled for Wednesday 28 May 2003 at the tenancy to resolve all outstanding issues, inter alia dealing with the lack of exhaust and the problems with the goods lift. That letter identified the lack of exhaust system policies as causing occupational, health, and safety issues for the staff, impact on the equipment, and the collapse of a gyprock ceiling and stained grouting in the kitchen. The evidence is that there was then a meeting attended by Ms Richards with Mr Opie and attended by Mr Winten of Forum Properties and others. "3. On 28 May 2003, I attended a meeting with Mr Opie which I had convened to resolve various issues relating to McDonald's lease of the premises, including the lack of an adequate kitchen exhaust system for the premises and the lack of a goods lift to transport goods used in connection with the dine-in and takeaway restaurant and café business conducted at the premises from the loading dock facility located in the basement area of the property to the level of the building on which the premises are located. The meeting was also attended by Mr Craig Winter of Forum Properties Pty Limited (the former Property Manager) Mr Nick Fisher of Walters Construction, Mr Richard Opie of CB Ellis, Ms Nicola Cooper of McDonald's, Mr George Davis of Engineering Partners, Mr Adrian Marks of Freefalle Enterprises Pty Limited, a franchisee of McDonald's and the sub-lessee of the premises and Mr Damien Vella of McDonald's.

At the commencement of the meeting, Richard Opie said to me words to the effect: " Let's put aside the other issues which are important but let's just focus on the exhaust and air conditioning which is the main issue."

During the course of the meeting, I said words to the effect: " I agree to put aside the other issues for this meeting, but this issue [exhaust and air conditioning] has to be right by 12 July for the open door day, when the public will be coming in to the restaurant." 6. During the course of the meeting one of the representatives of Challenger said to me words to the effect: "Yes, we know there is a problem, but we thought that the testing done in December had showed that the problem was alleviated." 7. Adrian Marks responded to this comment, with words to the effect: "I don't know what you are talking about, because nothing has improved." 8. Damien Vella of McDonald's then said words to the effect: "Can you show us the results of the testing in December". 9. Nick Fischer then said words to the effect: "I will send the results of the testing to George Davis today". 10. After further discussion, Richard Opie or one of the representatives of Challenger said words to the effect: "We agree that we will move forward by Nick sending George the results of the testing. George will then do further testing and then assess whether a minor or major change has occurred with the exhaust. I agree that George Davis will be the best person to design any modifications since he knows McDonald's requirements. George should send a design fee proposal to Nick Fischer. This problem can be fixed by 12 July 2003." [Affidavit of Ms Richards Sworn 2 October 2003]

14 Following that meeting, other letters sent by Ms Richards to Mr Opie were dated 2 June 2003 and 13 June 2003. Ms Richards gave evidence that around 9 July 2003, notwithstanding what had been said at the meeting, Ms Richards telephoned Mr Opie:

"Nothing has been done by you. This has been very frustrating and has been going on for years ... they are having to work in and the ceiling is not fixed." 15 The evidence was that Mr Opie responded by saying words to the effect: "I think you are going to have to sue and then Challenger will sue Winten." There was then a further meeting of 22 August 2003 attended by Ms Richards with Mr Opie and others:

"14. On 22 August 2003, I attended a meeting with Richard Opie, Mr Kirby Parsonage of Challenger, Ms Rhona Lawson of McDonald's and Mr Duncan MacKay of McDonald's. 15. At that meeting, I said words to the effect: "As I said to you over the phone, Richard, we are all frustrated at McDonald's that this matter has dragged on for 3 years without any resolution of the problem. You make promises to do something, then nothing happens. I have been told by the Regional Manager to file a lawsuit and should have filed it over a month ago. I am willing to listen to what you have to say today, but unless you undertake to fix the exhaust system, ceiling and goods lift, I have no alternative but to instruct our lawyers to sue. I don't know how the licensee has put up with this for so long." 16. Mr Kirby Parsonage said words to the effect: "Challenger cannot fix the exhaust, because if we do it, we will void the warranty with the builder. We can't just settle with McDonald's because we have overall problems with the exhaust system and with Winten. We are concerned that there will be problems with the exhaust system when we try to lease the space further down the line from McDonald's to a restaurant tenant. We think Winten should have to fix your problem. We have had discussions with Winten this week and are scheduled to meet again with them in the next couple of days. We would like to work with you, but because Winten and Walters are involved, I think you are going to have to sue us before anything gets done." 17. I then said words to the effect: "If you are talking to Winten, I am willing to give you an extra week before I file a lawsuit, but you as the landlord are responsible for these problems now and if you don't agree by noon on Friday next week to fix the problems, we will file a lawsuit against you and Winten." 18. I am informed by McDonald's solicitor, Robert Schneider from Michell Sillar, that on or about 22 August 2003 he sent a letter, a copy of which is annexed and marked "D", to the First Defendant (" Challenger ") which was copied to the Second Defendant (" Winten "). I am further informed by Mr Schneider that no response to that letter was received from either Challenger or Winten prior to these proceedings being commenced.

I received no telephone call or letter from either Challenger or Winton after our meeting.

Based on the length of time McDonald's has been complaining to the landlord and its agents concerning the kitchen exhaust system and the goods lift at the property containing the premises (also referred to in some of the correspondence annexed to this affidavit), and the failure of Winten and, subsequently, Challenger, to address McDonald's complaints adequately or at all, I believe the complaints are unlikely to be resolved by mediation, which will only lead to further costs and delay." [Affidavit of Ms Richards sworn 2 October 2003] 16 On or about 22 August 2003, McDonald's solicitor, Michell Sillar wrote to Challenger Property Nominees a letter, which is also copied to the second defendant's affidavit, indicating that no response to that letter was received by Challenger Property Nominees or Winten Developments prior to the proceedings commenced nor, so Robyn Richards deposes, did she receive any telephone call or letter from either Challenger Property Nominees or Winten Developments after that meeting. 17 Ms Richards deposes that based on the length of time that McDonald's has been complaining to the landlord and its agent and concerning the kitchen exhaust and goods lift contained in the premises and the failure of Winten Developments and, subsequently, Challenger Property Nominees to address McDonald's complaints adequately or at all, she believes that the complaints were unlikely to be resolved by mediation which would only lead to further costs and delay:

"2. Set out below in chronological order are details of conversations I have had concerning the kitchen exhaust system provided to premises leased to McDonald's and located at and known as Shop 6P8, Forum Centre, St Leonards (" premises ").

On 1 October 2002 I telephoned Craig Winter of Forum Properties (" Mr Winter ") and we discussed the airflow readings which had been performed on 6 May 2002.

On 2 October 2002 I telephoned George Davis of Engineering Partners (" Mr Davis ") to discuss the airflow readings referred to in paragraph 3 above.

On 3 October 2002 I telephoned and left a voice message for Mr Winter to return my call.

On 4 October 2002 I returned Mr Winter's telephone call and left a further message for Mr Winter to return my call.

On 8 October 2002 I had a telephone conversation with Mr Winter during which he said words to the effect: "All operators were trading when the readings were done, the exhaust readings were still down and the exhaust system possibly needs to be rebalanced properly. " 8. On 8 October 2002 I telephoned Adrian Marks, the McDonald's franchisee and sub-lessee of the premises, and said to him words to the effect: "Mr Winter told me that all operators were trading when the readings were done, the exhaust readings were still down and the exhaust system possibly needs to be rebalanced properly." In response, Adrian Marks said to me words to the effect: "This has been done before, but to no avail". 9. On 11 October 2002 I telephoned both Mr Winter and Adrian Marks and said words to the effect: "Has the rebalance of the exhaust system been completed and if so, has it had any effect?" 10. On 8 November 2002 I again telephoned Mr Winter to see if the rebalance of the exhaust system had been completed and if so, whether it had any effect. During the telephone conversation Mr Winter said words to the effect of: "The builders have been followed up with phone calls and it has been agreed the performance of the system is poor and needs to be improved. The developer is holding the retention moneys. A firmer approach needs to be taken, like an email to me indicating that this problem has not been fixed in 2 years." 11. On 13 November 2002 I telephoned Mr Davis and I said words to the effect: "Can I have a timesheet of your involvement over the last 2 years to determine the level of work you have undertaken."

On 27 November 2002 I left a voice mail message for Mr Winter and said words to the effect: "Can we arrange a meeting." 13. On 29 November 2002 a meeting was held at St Leonards with Mr Winter, Nick Fisher (of Walter Construction) and myself. Mr Winter said words to the effect: "We agree that further readings will be undertaken". 14. On 5 December 2002 I telephoned Mr Davis and said words to the effect: "Can I have a copy of the readings?". 15. On 11 December 2002 I telephoned Mr Winter and said words to the effect: "Can we arrange a meeting to follow-up on the exhaust system issue?". 16. On 12 December 2002 I confirmed the meeting to be held on 16 December 2002 with Mr Davis and Mr Winter.

On 16 December 2002 I met with Adrian Marks, Mr Winter, Mr Davis and David McMinimee, an air conditioning/exhaust specialist. One of the persons present at this meeting (whose identity I do not now recall) said words to the effect: "We all agree that there are 5 steps which need to be taken to see an improvement with the exhaust system in the premises and that David McMinimee will undertake more tests." 18. On 24 February 2003 I telephoned Mr Winter and said words to the effect: "Can I have an update on the progress of this matter?"

During that telephone conversation Mr Winter said words to the effect:

"We changed the pulley remain fan to run faster and changed the direction of the kitchen outlet, therefore, there is a disturbance at the fan."

"Walter Construction was the builder, Winten was the developer and the lessor is now Challenger/Forum Properties Management. I am not the person to speak to about the exhaust system as I am the facilities manager. Paul McDonald of CB Richard Ellis is the Property Manager". 19. On 28 May 2003 I attended a meeting with Richard Opie and Robin Richards of McDonald's and Damien Vella of McDonald's." [Ms Cooper's affidavit sworn 3 October 2003 paragraphs 2-19] 18 On 22 August 2003 Michell Sillar wrote to Challenger Property Nominees in the following terms:

"We act for Mc Donald's Properties (Australia) Pty Limited.

By lease registered number 7288566J between Winten Developments Pty Limited ("Winten") as lessor and McDonald's Properties (Australia) Pty Limited ("McDonald's") as lessee (the "lease"), Winten leased to McDonald's the retail premises located at and known as Shop 6P8, The Forum, 201 Pacific Highway, St Leonards (the "premises") for a term of ten years commencing 28 April 2000 and terminating 27 April 2010.

McDonald's has sub-let the premises and since the commencement of the term of the lease the sub-lessee has used the premises as a dine in and takeaway restaurant and café, being the permitted use under the lease.

It was an express term of the lease that the lessor would build the premises and the building containing the premises (the "building") substantially in accordance with the schedule setting out the work to be undertaken by the lessor, being annexure "B" to the lease (the "schedule of landlord's works).

It was a further express term of the lease that the common areas of the building would include a goods lift servicing the retail level of the building.

It was a further express term of the lease that the lessee may peaceably hold and enjoy the premises during the term of the lease without any interruption by the lessor.

It was an implied term of the lease that the lessor would do all such things as are necessary on its part to enable the lessee to have the benefit of the lease.

It was a further implied term of the lease that the lessor would exercise good faith and reasonableness in the performance of the lease.

The work to be undertaken by the lessor, as specified in the schedule of landlord's works, included the provision to the premises by the lessor of a kitchen exhaust system having a capacity to exhaust 1,500 litre/second from the premises.

On or about 11 January 2001 the property at 201 Pacific Highway, St Leonards was sold by Winten to Challenger Property Nominees Pty Limited ("Challenger").

In breach of the express and implied terms of the lease referred to above, the lessor has failed to provide to the premises a kitchen exhaust system having a capacity to exhaust 1,500 litre/second from the premises.

In further breach of the express and implied terms of the lease referred to above, the lessor has failed to make available to the lessee a goods lift with appropriate load bearing capacity to enable goods and other items used in connection with the sub-lessee's business to be transported from the loading dock facility located in the basement area of the building to the level of the building on which the premises are located (being the retail level of the building also known as the Plaza).

The failure of the lessor to provide the premises with a kitchen exhaust system having the requisite exhaust capacity and make available to the lessee a goods lift as referred to in 11 above has been the subject of considerable correspondence (over some three years) from McDonald's to the former and current property managers of the building. In that correspondence requests were made for the lessor to rectify the kitchen exhaust provided to the premises so that if performed to the specified capacity and make available a goods lift so that goods and other items used in connection with the sub-lessee's business could be transferred from the building's loading dock facility to the level of the building on which the premises are located. In this correspondence, McDonald's informed the lessor that its failure to perform its obligations under the lease may result in non-compliance with occupational health and safety and other legislation applying to the use and occupation of the premises.

Despite McDonald's requests, the kitchen exhaust provided to the premises still does not have the capacity to perform to the specification in the schedule of landlord's works and there is still no goods lift available to the lessee which enables goods and other items used in connection with the business conducted at the premises to be transported from the loading dock facility to the level of the building on which the premises are located.

As a result of the failure of the lessor to perform its obligations under the lease, the use and occupation of the premises has been interfered with and loss and damage has been suffered.

In these circumstances, we are instructed to request that Challenger and/or Winten provide to McDonald's a written undertaking to immediately cause work to be undertaken to: (a) rectify the kitchen exhaust system provided to the premises so that it has a capacity to exhaust 1,500 litre/second from the premises; and (b) make available a goods lift for use by McDonald's (and it sub-tenant) which has appropriate load bearing capacity so as to enable goods and other items used in connection with the business carried on in the premises to be transported from the loading dock facility to the level of the building on which the premises are located.

If this undertaking is not received from Winten and/or Challenger by 12 noon, Friday 29 August 2003, our instructions are to immediately and without further notice commence proceedings for appropriate relief, including, but not limited to, specific performance and damages." 19 Ms Cooper has deposed in paragraph 22 of her affidavit:

"Based on the length of time McDonald's has been complaining to the landlord and its agents concerning the kitchen exhaust system and the goods lift at the property containing the premises (also referred to in some of the correspondence annexed to this affidavit), and the failure of Winten and, subsequently, Challenger, to address McDonald's complaints adequately or at all, I believe the complaints are unlikely to be resolved by mediation, which will only lead to further costs and delay the determination of these proceedings." 20 The affidavits relied upon by the defendants were, insofar as the first defendant was concerned, two affidavits made by Mr Ulman:

I am the solicitor on the record for the first defendant in these proceedings, Challenger Property Nominees Pty Limited…

I am informed by Mr Kirby Parsonage, an officer of the first defendant, that on or about 5 January 2001, the first defendant purchased The Forum from the second defendant.

On 2 September 2003 the plaintiff commenced proceedings against the first and second defendant, claiming certain relief in connection with the alleged breaches of the Lease by the first and second defendant.

On 11 September 2003, I sent a letter to the solicitors for the plaintiff. Exhibited to my affidavit and marked 'GSU 2' is a true copy of that letter.

On 16 September 2003 I received a letter from the solicitors for the plaintiff. Exhibited to my affidavit and marked 'GSU 3' is a true copy of that letter.

On 24 September 2003 I sent a further letter to the solicitors for the plaintiff. Exhibited to my affidavit and marked 'GSU 4' is a true copy of that letter. At the time of swearing this affidavit I have not received a reply to that letter."

Affidavit of Mr G Ulman sworn 9 October 2003 "1. I am the solicitor on the record for the first defendant in these proceedings, Challenger Property Nominees Pty Limited

I swore an affidavit in these proceedings on 25 September 2003 in support of the first defendant's notice of motion filed 29 September 2003.

I am informed by Mr Kirby Parsonage, an officer of the first defendant, and believe that the first defendant is ready, willing and able to participate in a mediation of the dispute the subject of these proceedings.

I am informed by Mr Ken Carlsund, who is the Registrar of Retail Tenancy Disputes under section 64 of the Retail Leases Act 1994 , and believe that he can organize a mediation of a retail tenancy dispute within a week, or within a shorter or longer time frame, depending on the needs of the parties.

I am informed by Mr Tim Ambler, General Manager - Southern Buildings of Walter Construction Group Limited ('Walter Construction') and believe that he is authorized to make a decision as to whether Walter Construction will participate in a mediation and, Walter Construction will agree to participate in a mediation of the dispute the subject of these proceedings." 21 Mr Ulman also deposed that he was informed by Mr Parsonage, an officer of the first defendant, and believed that the first defendant is ready, willing, and able to participate in the mediation of the dispute, the subject of the proceedings, and that he was informed by the Registrar of the Retail Tenancy Board that he could organize a mediation of a retail tenancy dispute within a week, or within a shorter or longer timeframe, depending on the needs of the parties. He also deposed that he was informed by the general manager of the Walter Construction Board and believed that he was authorised to make a decision as to whether Walter Construction would participate in a mediation and that it would agree to participate in a mediation of the dispute, the subject of these proceedings, and to the allegation that Mr Ambler is relevantly the guiding light of Walter Construction and that he is being authorised to speak on behalf of Walter Construction and Walter Construction agrees that it will participate in a mediation. 22 The following correspondence was read: " Letter from Minter Ellison to Michell Sillar 11 September 2003

"We refer to your letter dated 3 September 2003 addressed to Challenger Property Nominees Pty Ltd, for whom we act, and to the Summons you have issued and served on behalf of McDonald's Australia Limited.

Our client's Appearance will be filed and served shortly. The proceedings will be defended and we anticipate receiving instructions to join the builder, Walter Constructions Group Limited.

The Summons alleges certain breaches by our client and Winten Developments Pty Ltd, the second defendant, of lease registered number 7288566J of Shop 6P8, The Forum, at St Leonards ('the Lease').

As you would be aware, the Lease is a ' retail shop lease' as defined under the Retail Leases Act ('the Act') and the allegations raised in the summons constitute a 'retail tenancy dispute' under section 63 of the Act.

Section 68 of the Act provides that a retail tenancy dispute may not be the subject of proceedings until the Registrar of Retail Tenancy Disputes certifies that a mediation has failed to resolve the dispute or the Court is otherwise satisfied that mediation under this part is unlikely to resolve the dispute. In our opinion these proceedings ought not to have been commenced and should now be stayed until a mediation has taken place.

For its part, our client sees any structured dispute resolution process as a logical and inexpensive alternative to litigation. In keeping with the intent of Part 8 of the Act, our client wishes to have the dispute the subject of your client's Summons mediated at the Retail Tenancy Unit before the costs of litigation escalate and become an obstacle to settlement.

Would you please let us know urgently whether your client agrees to participate in a mediation. If there is to be a mediation, then clearly all interested parties should be involved. In addition to our respective clients that would include Winten Developments Pty Ltd and Walter Construction Group Limited, who will almost certainly be joined to the proceedings should the dispute not settle at the mediation." Letter from Michell Sillar to Minter Ellison dated 16 September 2003 "We refer to your letter of 11 September 2003.

We do not cavil with the proposition that the lease the subject of the above proceedings is a "retail shop lease" as defined in the Retail Leases Act, 1994 (the "Act") or with the proposition that the allegations raised in the Summons by which the proceedings were commenced constitute a "retail tenancy dispute" under section 63 of the Act.

However we do not agree that the proceedings ought not to have been commenced and should now be stayed until a mediation under section 68 of the Act, has taken place. Section 68(3) provides that section 68 does not apply to proceedings before a Court for an order in the nature of an injunction. The proceedings commenced by our client are such proceedings as the principal relief sought is an order compelling performance by your client, as the current landlord, of several specific positive contractual obligations imposed on the landlord by the lease, that is, a mandatory injunction. Further, as the learned authors of Equity Doctrines and Remedies state (at paragraph 2192 on page 615 of the third edition of that text), "… in the realm of contract all forms of injunction, mandatory or prohibitory, approximate in some degree to decrees of specific performance".

Accordingly, our client intends to continue to prosecute the proceedings and at the initial directions hearing on 26 September 2003 will seek orders for the further conduct of the proceedings.

Further, our client is of the view that there would be no utility in a mediation of the present dispute on any other basis, given that:

the complaints our client has made regularly over a period of some three years concerning the kitchen exhaust system and the goods lift have yet to be addressed either adequately or at all;

our client is entitled to have the landlord perform its obligation under the lease concerning the kitchen exhaust system and the goods lift and should not have to compromise in any way on either of these matters;

our client has previously participated in meetings and discussions with the landlord and its representatives with a view to resolving our client's complaints, however, such participation has not resulted in the complaints being addressed adequately or at all.

Whilst our client will not agree to participate in a formal mediation, it is prepared to participate in a further informal meeting with a view to resolving the present dispute provided this does not delay or defer the conduct of the proceedings." Letter from Minter Ellison to Michell Sillar dated 24 September 2003 "We refer to your facsimile of 16 September 2003. 1. Our client maintains its position that, by virtue of s68 of the Retail Leases Act 1994, it is necessary that a mediation of this matter occur before the proceedings initiated by your client are pursued. It is our client's view that the reference to 'injunction' in s68(3) of the Retail Leases Act refers only to interim or interlocutory injunction or other relief of that kind. It does not encompass relief in the nature of permanent mandatory inunctions as sought by your client in its summons.

On 26 September 2003 our client will be asking the Court to make orders staying your client's proceedings until the requirements of s68 of the Retail Leases Act are complied with and/or orders under the Supreme Court Act requiring that a mediation of this matter occur.

We also refer to the Summons filed by your client on 2 September 2003. In paragraph C10 of the Summons your client alleges that it was an implied term of the lease that 'the lessor would do all such things as are necessary on its part to enable the lessee to have the benefit of the lease.' That allegation is particularized as arising from 'the conduct of the parties, the express terms of the lease and by operation of law.'

With respect, these particulars do not assist to elucidate the allegation your client makes in that paragraph. In order to know the case which is being made against it in paragraph C10 of the Summons, our client requires to know: (a) whether the term alleged to be implied into the lease is an implied term in law or an implied term in fact;

(b) if, and to the extent that, the term is alleged to be implied at law, what legal principle is relied on to support the allegation;

(c) if, and to the extent that, the term is alleged to be implied in fact, whether it is alleged to be implied in order to give the lease business efficacy and, if so, what facts are relied on to support the allegation that: (i) it is reasonable and equitable;

(ii) it is necessary to give business efficacy to the lease;

(iii) it is so obvious that 'it goes without saying'; and

(iv) it is capable of clear expression; (d) if it is alleged to be implied in fact on some basis other than in order to give the lease business efficacy, what is that basis and what facts are relied on to support the allegation;

(e) what is the 'conduct of the parties' referred to in the particulars to clause 10C; and

(f) what are the 'express terms of the lease' referred to in the particulars clause 10C." 23 The affidavit of Mr Rollason, solicitor for the second defendant included the following: "3. I am informed by Anthony Otto, the Property Manager of the Second Defendant having the management of the Second Defendant's investment in the Forum project that following the completion of the sale by that Company to the First Defendant of the building, it has received no request for mediation or demand for compensation from or on behalf or the Plaintiff of the occupant of the premises the subject to these proceedings claiming compensation or damages as a consequence of any alleged breach of the Retail Lease of the subject premises.

To the knowledge of the Second Defendant, the Registrar has not certified in writing that mediation under this party has failed to resolve any dispute between the Plaintiff and the First Defendant, notwithstanding the terms of Section 68(1) of the Retail Leases Act.

The proceedings, so far, is they concern the Plaintiff and the Second Defendant do not seek any order in the nature of any injunction, specific performance or any order other than for compensation, damages and/or interest and costs.

Prior to the commencement of these proceedings the Second Defendant was unaware of any demand or the quantum of any demand which may or may have been likely to be made against it by the Plaintiff and has, as a consequence, been deprived of the opportunity of participating in a mediation short of court proceedings which might have the effect of resolving any matters in dispute between the Plaintiff and the Second Defendant. " 24 The affidavit of Mr Opie sworn on 8 October 2003, read by the second defendant, reads as follows:

"On October 2003, I, ANTHONY LAWRENCE OTTO of Level 10, 61 Lavender Street, Milsons Point, NSW, Company Director, say on oath: 1. I am Director of Development and Investment Projects of Winten Developments Pty Limited, the First Defendant.

In my role within Winten, I was responsible for the executive management of the acquisition, development, construction, leasing and sale of the Forum Development at St Leonards, being the premises within which the McDonald's outlet, the subject of these proceedings, is situated ("the site").

The construction company engaged to build the development was Walter Constructions Limited.

I am informed by Mr Tim Ambler of Walter Constructions Limited that that company is willing to participate in a mediation between the Plaintiff and either or both Defendants as to the Plaintiff's claim the subject matter of these proceedings.

The Second Defendant sold the site, under a Contract for Sale which was completed on 5 January 2001. Since completion of that sale, apart from being copied with a letter dated 21 August 2003 from the solicitors for the Plaintiff, there has been no direct communication between the Plaintiff and the Second Defendant in which any claim or demand has been made or foreshadowed for compensation, damages or any other relief and there has been no opportunity for anyone on behalf of the Second Defendant to participate in any discussion with the Plaintiff as to the nature of its claim against the Second Defendant.

It is my belief that there is considerable merit to be achieved from the point of view of the Second Defendant in this matter being submitted to mediation involving the parties to this litigation and Walter Constructions Limited providing that, from the Second Defendant's point of view, the Plaintiff advises the basis of its assessment of loss or entitlement to compensation." 25 During the course of the hearing today Mr Newlinds SC made plain that he had instructions which were that the plaintiff would not attend a mediation under the Act unless the defendants were prepared to pay for the plaintiff's costs relating to any such mediation. This was put to the Court on instructions, as I understood it, as an absolutely non-negotiable stance taken by the plaintiff. Dealing with the issue 26 The question which then requires a decision is as to whether in the circumstances the Court on the very particular facts here proven, can be satisfied that mediation under the Act is unlikely to resolve the dispute or matter. It is certainly an unusual parameter for a Court to have to decide such a question where a party makes plain that the only basis upon which it is prepared to participate in a mediation is the basis to which I refer, and where quite plainly the defendants are not prepared to accede to that condition. 27 The first defendant has submitted that there are objective circumstances which indicate that mediation is not unlikely to resolve the dispute, and those circumstances include both defendants being, together with the builder, willing to participate in a mediation and to believe that it may resolve the dispute. 28 The submission has sought to rely upon the proposition that the fact that one party to the proceedings was of the view that a mediation was not unlikely to resolve the dispute was cited by Young CJ in Eq in Oriental Carpet Department Store v SupaCenta Pty Ltd [2003] NSWSC 783 at 17 as not conclusive on the point. Clearly enough, each case requires to be determined upon the facts, matters, and circumstances, comprising the evidence before the Court. I accept that it is, as Young CJ indicated, necessary for the Court to satisfy itself that a reference to mediation is unlikely to resolve the dispute or matter regardless of what is put by the legal practitioners for the parties and regardless of what has been put by the parties. Experience shows that, notwithstanding in certain circumstances the most stringent opposition to being involved in a compulsory mediation, it is sometimes seen to be successful as where the subject of a compulsory order. 29 I am satisfied that mediation under Part 8 is unlikely to resolve the dispute or matter [and in this case the disputes or matters, there being two defendants who are parties to the claims made]. The answer to the Part 31 Rule 1 separate question is "yes". 30 There are very obviously, as the summons throws up, special difficulties in terms of the discernment of what precisely were the terms of the lease which would be engaged in a decision as to whose responsibility it was for the relevant replacement or remediation of the lift and the exhaust. 31 In determining whether or not mediation under Part 8 is unlikely to resolve the disputes or matters, the Court is entitled to take into account precisely what those disputes or matters include. It seems to me quite clear that, insofar as the position between the plaintiff and first defendant is concerned, the very extensive attempts by the plaintiff to have the matter resolved and the innumerable communications between the parties, justifies the plaintiff in the firm stance that it takes; namely, that it is not prepared to participate in a mediation absent an acceptance of the conditions put forward by Mr Newlinds. Further, the finding is, it seems to me, quite clearly supported by the very recent events when, after literally years of attempts to have the matter worked through, the net result of the meeting of 28 May 2003 was the telephone call in which on 9 July 2003, only three days before the open day, Mr Opie stated that he thought that it was necessary for McDonald's to have to sue and then Challenger Property Nominees would sue Winten Developments. 32 The other issue which arises and requires to be referred to, is the necessity for the Court to be satisfied that mediation under Part 8 is unlikely to resolve the dispute or matters as between the plaintiff and second defendant. In that regard, the second defendant submits that it stands in a separate position because the communications with it were those which took place before 5 January 2001. Its submission is that the Court could not be satisfied that mediation with it was unlikely to resolve the dispute or matter. To my mind, the Court is able to be so satisfied for the reason that the types of problem which are raised, quite obviously involve both the first and the second defendants and for the further reason that, curiously, notwithstanding the recent communications and notwithstanding the commencement of the proceedings, there has apparently been no offer made by either defendant in terms of anything of a nature as may lead the plaintiff to have formed the view that there was utility in the holding of a mediation. 33 Towards the end of the addresses the proposition was put that the Court should take into account that if the Court was to stay the proceedings, the plaintiff would have nowhere to go otherwise than by attending a mediation. Whilst that proposition is put forward as a reason for the Court holding that it can be satisfied that mediation under Part 8 is unlikely to resolve the dispute or matter, to my mind the reasoning is misconceived. It is particularly important to note the words "unlikely to resolve". The Court has to be satisfied that mediation is unlikely to resolve the dispute or matter. I am so satisfied in relation to the position as between the plaintiff and each of the defendants, and it does seem to me that the time does come, after, literally, years of a particular and pressing problem of this nature being raised with the original and, then, the successor proprietor of this property, when the Court can be so satisfied. Costs 34 It only remains to deal with the costs in relation to the Part 31 separate question in relation to the motions. It seems to me that there is a difference, insofar as the position of the two defendants are concerned. That difference was dealt with in the reasons for judgment. To a certain extent, the second defendant's position has been determined by reference, inter alia, to a very extensive period of correspondence involving the first defendant, and it has been to a certain extent tarnished in that regard. 35 Insofar as the separate question and the notice of motion filed by the first defendant concerns the plaintiff's position as against that of the first defendant, the appropriate order is that the first defendant pay the costs of the plaintiff of and relating to the hearing of the separate question and the notice of motion filed by the first defendant. 36 Insofar as the separate question concerns the position as between the plaintiff and the second defendant and concerns the second defendant's motion, the appropriate order is that the costs be costs of the cause. 37 The parties outside of those orders have agreed upon directions and I make orders in terms of the short minutes of order which I initial and date 10 October 2003; that is to say, orders 1, 2, and 3.

I certify that paragraphs 1 - 37 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 10 October 2003 ex tempore and revised on 30 October 2003

      Susan Piggott
      Associate

30 October 2003

Last Modified: 11/06/2003 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.

Administrative Decisions Tribunal Act 1997(NSW)

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