Mitchforce v Starkey and Anor - [2002] NSWIRComm 85 - NSWIRComm 1997 case summary — Zoe

NSWNSWIRComm

Mitchforce v Starkey and Anor

[2002] NSWIRComm 85

Industrial Relations Commission (NSW)|1997-07-25|Before: Wright J, Walton J, Boland J, Schmidt J, Hungerford J

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At a glance

Source facts

Court

Industrial Relations Commission (NSW)

Decision date

1997-07-25

Before

Wright J, Walton J, Boland J, Schmidt J, Hungerford J

Source

Original judgment source is linked above.

Judgment (45 paragraphs)

[1]

Background 2 The claim for relief at first instance related to the operation of the Empire Bay Tavern, a hotel located in Empire Bay on the Central Coast of New South Wales, by Mr and Mrs Starkey ("the respondents") as lessees.

[2]

3 The respondents were the working proprietors of the Tavern, having acquired it as sub-lessees by way of assignment from Sherwood Trading Pty Ltd ("Sherwood"), the original lessee from Mitchforce Pty Ltd ("the appellant").

[3]

4 The Empire Bay Tavern was a dedicated hotel built by the appellant in the late 1980's at a cost of around $1.84 million. The investment was made in the expectation that the area was about to grow significantly due to the development of new homes and an associated shopping centre. Sherwood obtained a lease of the Tavern, at a premium of $400,000 for a period of 10 years commencing on 10 July 1989, with an option to renew for 10 years. The respondents obtained a sub-lease by way of assignment on 1 May 1990 at a premium, paid to Sherwood, of $650,000. The assignment of the lease to the respondents resulted in the respondents assuming liability to the appellant as if they had been a party to the original lease. Sherwood were, however, still liable to the appellant, including for personal guarantees given by its principals in respect of the performance of all the covenants in the lease by the respondents. The appellant consented to the assignment of the lease.

[12]

13 Having heard the evidence, his Honour made findings in the following terms (at [63]-[65]): 63 The picture which emerges from the whole of the evidence is, I think, demonstrably clear. Having been in the hotel industry for about 27 years and then financially secure in semi-retirement, the applicants had an interest in acquiring another hotel. And so it was they acquired the Empire Bay Tavern from 1 May 1990 by way of an assignment of the lease from Sherwood Trading, with the consent of the respondent as lessor and licensee of the hotel, for the amount of $650,000 in light of the generally understood position that a housing development and shopping centre complex were to be constructed in the area. The applicants considered the amount to be a fair price at the time; similarly, and although thought to be a bit on the high side, they accepted the then level of initial rent under the lease of $163,800 per annum ($156,000 for the hotel premises and $7,800 for the residential flat accommodation) with its annual adjustment by the greater of 8 per cent or Consumer Price Index increases. In that latter respect, the increase in the Index for the year 1989-90 was 8.1 per cent and that was in line with such increases during the 1980s. It was common ground that no representations were made to the applicants by the respondent as would affect their decision to obtain the Tavern. However, the housing development and shopping centre complex did not proceed and the economy started to decline. The Consumer Price Index dropped sharply. 64 At the time of the rent review in July 1992, the applicants found difficulty in meeting rental payments with lower than expected earnings from the hotel but with increased costs, including the annual 8 per cent rent increase. Although they sought a reduction, they were only successful in the respondent agreeing to defer the rent due under the lease on the basis that such deferred rent would be merely postponed. On the anniversary of the lease on 9 July 1993, the respondent again declined the applicants' request for a rental reduction but agreed to increase the rent by only 4 per cent, with the unpaid portion being postponed - the respondent advised at that time that "should you at any time terminate your lease for any reason the rent postponed will become due and payable forthwith". Further rent deferrals were allowed by the respondent during the balance of the term of the lease. The applicants always understood that the deferred rent would not be payable until they sold the business whereas Mr Mitchell and Mr Sutton for the respondent denied that understanding; the respondent took the position that the deferred rent was payable on demand, not limited to the termination of the lease and that, in any event, the non-payment of the deferred rent was a breach or default under the lease which entitled it to refuse the option exercised by the applicants for a further lease term as from 10 July 1999. Both Mr and Mrs Starkey said the respondent never advised them that the consequence of accepting the rent deferral arrangement would be the loss of the option right nor that the deferred rent could be demanded at any time prior to their sale of the business. 65 On this aspect of the rent deferral arrangement, I accept the evidence of the applicants in preference to that given for the respondent. The understanding as stated by Mr Starkey was consistently maintained by him and it was consistent too with the contents of the respondent's letter dated 12 July 1993 in stating that the deferred rent would become due and payable should the applicants terminate the lease. Also, Mrs Starkey's unchallenged evidence was to the same effect. I find, therefore, that the respondent agreed in July 1992 and at each succeeding annual rental review to defer part of the rent due under the lease with such deferred rent becoming due and payable on the sale by the applicants of the hotel business. The arrangement so made, I find, was not a breach or non-observance of the lease terms by the applicants in that it constituted a waiver by the respondent of the obligation on the applicants to pay on the due date the full amount of rent under the lease. There was, in my view, no basis upon which the respondent could properly decline, as it purported to do on 1 April 1999, to grant the applicants a further lease term of 10 years as from 10 July 1999. Indeed, the failure to vary the lease to reflect the rent deferral arrangement was unreasonably prejudicial to the interests of the applicants, particularly having in mind their continued operation of the hotel with the increasing debt of accrued rent plus interest. That was unfair to them as they endeavoured, to the knowledge of the respondent, to trade out of their financial difficulties. The prejudice so found became manifested by the respondent serving on 1 October 1997 a Notice of Default under the lease for payment of the accrued rent plus interest thereon.

[14]

15 His Honour then discussed what he described as a 'modern commercial context where protection against relief from oppressive conditions have rightful recognition'. His Honour referred, by way of analogy, to the judgments of Lord Diplock in Erven Warnink Besloten Vennootschap v J Townend & Sons (Hull) Ltd [1979] AC 731 at 742 - 743 and the Full Court of the Federal Court in Municipal Officers' Association of Australia v Lancaster (1981) 54 FLR 129. His Honour referred to the 'seminal decision' of Sheldon J in Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 at 373 - 374, as to the inherent nature of the statutory predecessor of s106 of the Act (as was considered by the majority judgment of the Full Commission in Court Session in A & M Thompson Pty Ltd v Total Australia Ltd [1980] 2 NSWLR 1 at 12 - 14). His Honour then continued (at [70] - [71]): 70 I consider the approach followed in A & M Thompson v Total Australia to be particularly instructive for the case before me. The applicants here fully understood the agreement they made with the respondent for the assignment of the hotel lease and where the respondent made no fraudulent or misleading representations; but they did so by accepting the terms in whole of the existing lease from Sherwood Trading without any negotiation with the respondent of the rental level and its adjustment. When circumstances shortly changed, as to the proposed development of the area and, in particular, the state of the economy, the very basis and understanding on which the original lease was made were changed to the severe detriment of the applicants. Importantly, the lease was made at a time when the rent escalation of 8 per cent was consistent with the Consumer Price Index; that sharply changed so that the average increase in the Index over the 10-year term of the lease was 2.29 per cent per annum. Of course, the lease term, without any provision for a review, had nearly 9 years to run but the respondent would not countenance a rental reduction. The position of the applicants was, in my view, well demonstrated by the evidence of Mr Cooper and Mr Robertson that their endeavours to remedy the situation were unavailable due to the high level of rent and the annual adjustment provision - in a real sense, therefore, the relative position of the parties under the contract was weighted very much in favour of the respondent to the point where the applicants' viability in conducting the business was in peril. Even so, the respondent persisted in declining relief to them and, importantly, to the extent of refusing a further lease term in circumstances where the applicants were thereby denied the opportunity to trade out of their difficulties in an improved economic climate or, alternatively, sell their business and obtain some return of goodwill. 71 In the circumstances as they developed, I am satisfied the respondent exploited the position of advantage it had against the applicants in terms of the lease rental provisions. It also effectively appropriated for itself any benefits the applicants had to accumulated goodwill in the business, where the applicants had paid $650,000 for it, by denying them a further lease and, at the same time, itself benefiting from the admitted capital appreciation in the freehold of the premises. Those consequences of the respondent's conduct were exacerbated by it leading the applicants to understand that the deferred rent would not be payable until they sold their hotel business. In my view, the subject lease operated unfairly against the applicants and where its terms were not "equal" for both parties to the point where they were oppressive on the applicants. To use the words of Deane J in Municipal Officers' Association v Lancaster (54 FLR at 165) - "To be oppressive, a condition, obligation or restriction must be burdensome, harsh and wrongful". I conclude, therefore, that the lease as to the rental level and the adjustment thereof was in its terms and in its operation unfair and harsh; it was unconscionable, in my view, for the respondent not to have agreed to vary the lease so as to provide reasonable relief for the applicants in light of the then rental market for hotels.

[15]

16 The finding of unfairness having been made, his Honour then considered the jurisdictional argument put by the appellant. Having set out the submissions of the parties on the notice of motion, Hungerford J, in dismissing the notice of motion, stated (at [75] - [79]): 75 The necessary jurisdictional fact for a contract to be within s 106 so as to support the making of orders thereunder was that the contract be one whereby a person performs work in any industry: see Stevenson v Barham (1977) 136 CLR 190 at 201-202; Caltex Oil (Australia) Pty Ltd v Feenan [1981] 1 NSWLR 169 at 171, 173-174; and Production Spray Painting & Panel Beating v Newnham (27 NSWLR at 646, 650, 652-655; 37 IR at 47, 51, 52-56). The question of a lease coming within the scope of s 106, and of its statutory predecessors being s 88F of the Industrial Arbitration Act 1940 and s 275 of the Industrial Relations Act 1991, has been the subject of consideration by members of this Court from time-to-time. The approach of the Court of Appeal in Production Spray Painting & Panel Beating v Newnham in the passages earlier cited, and on which the respondent here relied, were to the effect that to come within the section a contract must directly, that is, under or pursuant to its terms, provide for the performance of work in an industry; the consequential performance of work was not enough. In other words, the section only applied to a contract which had as its purpose the performance of work in an industry and that must be the purpose of both parties. 76 In Jennings v Auto Plaza Ltd [1993] 46 IR 413, Cahill Dep CJ considered this question in relation to a lease of premises in a shopping complex the terms of which required the lessees to carry on business as a restaurant during lawful business hours. In finding the lease to be one whereby work was performed in an industry, and hence within the jurisdiction of s 275, his Honour said (at 421-422): In the present case, however, the contract is a lease between the parties of part of large shopping centre premises obviously at least intended by both parties to be used by the lessees for the conduct of a restaurant business. The lease prescribes a term of years (with provision for the exercise of an option of renewal), during which the provisions of the lease are to govern and bind the relationship of the parties: it thus postulates and requires an ongoing relationship. It imposes a restriction on the lessees as to the use of the premises. Except with consent the premises are not to be used otherwise than as a licensed restaurant and takeaway food outlet (cl II(15)). That restrictive provision is expressed in the negative and, of itself, does not require that the lessees shall use the premises for the carrying on of a business so described. To that negative provision is added another, in the first part of cl IV(ff), to the effect that the lessees "shall not occupy or permit the premises to be occupied or used outside the hours as are from time to time stipulated by law". The second part of that subclause, however, is expressed in positive terms. It requires the lessees to "keep the demised premises (Unit 11 of the Autoplaza Centre) open for business during normal trading hours for such business". Reference is also made to cl XI, which has already been set out in full, under which the lessees "shall be responsible for and shall attend to" the full fitout of the demised premises as a restaurant. In my view, the terms of the lease, and particularly those to which reference has been made, require the lessees to establish the demised premises in restaurant mode and to carry on therein a restaurant business during lawful trading hours. I also consider that the carrying on of such a business in accordance with that obligation necessarily requires and results in the performance of work in the restaurant industry by the lessees themselves and/or by other persons whom the lessees engage to work in the business. Furthermore, that work provides any necessary "industrial colour or flavour" which might be needed in order that s 275 should apply. The terms of the lease thereupon which his Honour relied were, as I read them, directly comparable with the terms of the lease in the present case. 77 Again, in Booth v Kritikos Developments , Schmidt J considered whether a contract for the sale of an hotel business and a contract for the lease of the premises was within the jurisdictional scope of s 275. After referring to Production Spray Painting & Panel Beating v Newnham and the terms of the contract concerned, her Honour said (59 IR at 303-304) : Unlike the situation in Production Spray Painting , the applicant here could not simply close the business up, that being a matter of no interest to the respondents. The continued operation of the hotel as a business was assured by the contractual obligations imposed on the applicant to ensure the performance of work in the business during the term of the lease. This was of real interest to the respondents, as was the performance of the renovation work which reflected the agreed reduction in the purchase price of the business. This arrangement involved not merely the sale of a business by an outgoing proprietor, but an ongoing relationship. Properly analysed, one of the purposes of the arrangement between the parties, namely what was sought to be achieved, was to ensure the performance of certain work in the business during the continuation of the parties' relationship under the lease. Another purpose was to ensure that the specified renovation work was carried out to the premises the subject of the lease.

[16]

In my view, the relationship between the applicants and the respondent here under the lease constituted an ongoing relationship with the clear purpose, on the facts, that the applicants would conduct the business of an hotel from the Tavern for the duration of the lease term and that necessarily contemplated the performance of work, including as to the maintenance of the premises in good order and repair. 78 Finally, I refer to the most recent judgments of this Court upholding power on this jurisdictional question concerning leases, similar to and consistent in effect with that followed in Jennings v Auto Plaza and in Booth v Kritikos Developments , namely, Kostakis v New World Oil & Developments Pty Ltd (unreported, Schmidt J, CT96/1157, 25 July 1997) and Australian Institute of Music Ltd v L M Investment Management Pty Ltd [2000] NSWIRComm 201. 79 In the present case, and although strictly speaking the applicants were not parties to the lease, they were parties to the deed of consent to assignment of lease dated 1 May 1990, to which both the respondent and Sherwood Trading were parties, and cl 4(b) of which represented an agreement between the applicants and the respondent that the applicants "will hereinafter duly perform and observe all terms conditions and covenants expressed or implied in the Lease and on the part of the [applicants] to be performed in the same manner as if the [applicants] had been a party to the Lease". In my view, that sub-clause directly and effectively incorporates in that deed the whole of the terms of the lease originally made between Sherwood Trading and the respondent so that the deed takes on the purpose and character of the original lease. I am satisfied, on the terms of that lease according to the authorities, that it is a contract whereby work was performed in the hotel industry, and, hence, within the jurisdictional scope of s 106. Thus, the impugned contract here is the deed of consent to assignment of lease but as incorporating therein the original lease itself so that any avoidance or variation of such deed would, insofar as the applicants are concerned, effectively avoid or vary the terms of the original lease. The jurisdictional argument of the respondent must fail so that its notice of motion filed on 28 July 1999 should be dismissed, with costs.

[17]

17 His Honour also set out, in summary form, his findings and conclusions as follows (at [95]): 95 In summary, the findings and conclusions I have reached in this matter are: (1) The deed of consent to assignment of lease made on 1 May 1990, as incorporating therein the terms and conditions of the original lease made on 10 July 1989 and as if the applicants had been parties to that lease, is a contract whereby work is and was performed in the hotel industry. (2) The said deed so incorporating the original lease is within the jurisdictional scope of s 106 of the Industrial Relations Act so that the respondent's notice of motion filed on 28 July 1999 challenging jurisdiction should be dismissed, with costs. (3) The rent deferral arrangement made between the applicants and the respondent in or about mid-1992 and continued on later dates was an agreement by the respondent to defer part of the rent due under the lease to be payable by the applicants on the sale by them of the hotel business. (4) The rent deferral arrangement so made constituted a waiver by the respondent of the applicants' obligations to pay on the due date the full amount of rent under the lease. As such, the applicants did not commit a breach or non-observance of the lease conditions. (5) The applicants validly exercised on 31 March 1999 the option to have the respondent grant them a lease of the Tavern for a further period of 10 years commencing on 10 July 1999 and there was no basis upon which the respondent could properly decline to do so. (6) The applicants are entitled to an appropriate declaration under s 154 of the Industrial Relations Act as to the valid exercise by them of the option as being in relation to the subject contract otherwise found to be within the jurisdictional scope of s 106. (7) The deed of consent to assignment of lease, in applying to the applicants the terms of the original lease as to the rental level and the annual adjustment thereof, was in its terms and in its operation unfair, harsh and unconscionable within the meaning of s 106 as an unfair contract. (8) In all the circumstances found, discretion should be exercised to make appropriate orders in favour of the applicants to remedy their position by varying the subject contract. (9) In determining such orders, the evidence of the expert witnesses called on behalf of the applicants is to be preferred to that called for the respondent where there be conflict. Specifically, the contents of the reports prepared by Mr John Robertson as to fair market rentals for each year the hotel was operated by the applicants, the annual increases in rental under the lease, the absence of a rent review clause and comparable hotel leases in the area are accepted, as is his opinion concerning an appropriate market rental at the commencement of a new 10-year lease term on 10 July 1999 and its annual adjustment for the balance of the term. (10) Subject to a modification in relation to the first 10-year term, Mr Robertson's approach is reasonable and the subject contract should be varied to reflect it. (11) The modification is that the respondent is entitled to have the applicants observe the full terms of the lease and the rent provided by it from the commencement of their occupancy on 1 May 1990 to 9 July 1992 when the rent was first deferred. (12) The subject contract should be varied with effect as from 10 July 1992 to provide an annual rent in respect of the hotel premises and the residential flat accommodation of $124,230; on each 10 July anniversary date thereafter for the balance of the term to 9 July 1999 the annual rental to be increased by 8 per cent per annum. (13) As to the lease term of 10 years commencing on 10 July 1999, the commencing annual rental in respect of the hotel premises and the residential flat accommodation to be $195,000 to be increased on each 10 July anniversary date thereafter for the balance of the term to 9 July 2009 by 4 per cent per annum. (14) A declaration should be made to the effect that the current market rental for the subject premises at 10 July 1999 was $195,000 per annum. (15) An order should be made for the payment of money by the respondent to the applicants in connection with the subject contract so varied, being the difference between the rent actually paid by the applicants and the rent due under the lease as varied, including for the new lease commencing on 10 July 1999. (16) The applicants' claim for interest on any moneys ordered to be paid is refused. (17) The respondent is to pay the applicants' costs of the proceedings, including reserved costs, in an amount as agreed or assessed. Leave to Appeal

[28]

23 In Knowles the Full Bench stated (at 381): We have determined that the Commission should not grant leave to appeal pursuant to s188 of the Act. In doing so we do not propose to depart from the general policy and practice of the Commission not to give reasons for the refusal of leave. However, we do propose to make some observations as to the conduct of appeals where the grant of leave is required which are apposite in the present matter. Firstly, as a Full Bench of this Commission noted in Perrott v Xcellenet Australia Limited (1998) 84 IR 255 at 265 , leave will not lightly or automatically be granted. The statutory scheme makes clear that the legislature intended to restrict access to appeals to appropriate cases meeting the public interest test stated in s188(2) . These principles are also applicable to cases involving questions of jurisdiction. The raising of a jurisdictional issue by an appellant does not, of itself, establish a basis for the grant of leave; each case having to be judged against the statutory criterion. The Commission should have regard to the nature of the jurisdictional issue and whether there is a demonstrable case that the Commission has exceeded or failed to exercise its jurisdiction. Clearly, this consideration will involve a question as to whether the decision appealed from was inconsistent with established law and principle. Secondly, it will be relevant to the grant of leave to consider, amongst other factors, whether the appellant has brought, as in this matter, a substantially different case in the appeal. This is not to say that the admission of new evidence per se would have this result, but that the bringing of, in substance, a new or materially different case on appeal may constitute a basis for the refusal of an application for leave to appeal. In Caltex Petroleum Pty Ltd v Harmer [(1999) 92 IR 264] the Full Bench stated: As to the second matter averted to above, we consider that leave would ordinarily, in the absence of changed circumstances, be refused where an appellant raises arguments or presses issues on the appeal which were not squarely raised at first instance; irrespective of whether the relief sought or the outcome contended for by the appellant remains the same or substantially the same... We agree with the principle so stated. Thirdly, it will be relevant to consider whether an appeal raises substantial and important considerations. The issues raised by an appellant as to the public interest considerations under s188(2) need to be evaluated in the light of the nature of the issues raised in the appeal, including whether the appeal raises substantial issues of principle or law or has wider implications for the jurisprudence of this Commission, including whether the decision has widespread practical application.

Parties

Applicant/Plaintiff:

Mitchforce

Respondent/Defendant:

Starkey and Anor

Cases Cited (26)

SECOND RESPONDENT Dawn Nell Starkey FILE NUMBER: IRC 5716 of 2000 CORAM: Wright J President; Walton J Vice-President; Boland J CATCHWORDS : Appeal - Application for leave to appeal and appeal - Unfair Contract - Section 106 of Industrial Relations Act 1996 - Assignment of lease of an hotel - Contract whereby a person performs work in any industry - Leave to appeal refused in respect of both jurisdictional and non-jurisdictional issues - Reasons for refusing leave to appeal - Appeal dismissed Industrial Arbitration Act 1940 s 88F LEGISLATION CITED : Industrial Relations Act 1991 s 275 Industrial Relations Act 1996 s 106 s 154 A & M Thompson Pty Ltd v Total Australia Ltd [1980] 2 NSWLR 1 Australian Institute of Music Ltd v L M Investment Management Pty Ltd [2000] NSWIRComm 201 Booth v Kritikos Developments Pty Limited (1995) 59 IR 298 Box Valley Pty Ltd v Price (2000) 97 IR 484 Caltex Oil (Australia) Pty Ltd v Feenan [1981] 1 NSWLR 169 Caltex Petroleum Pty Ltd v Harmer (1999) 92 IR 264 Cash Converters v Yildiz (1999) 94 IR 474 Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 DeSimone Consulting Pty Limited v Ison (2000) 97 IR 478 Erven Warnink Besloten Vennootschap v J Townend & Sons (Hull) Ltd [1979] AC 731 Gough & Gilmour Holdings Pty Limited v Caterpillar of Australia Limited (No 9) [2001] NSWIRComm 260 Hilton Nursing Home Pty Limited v Maciver (2000) 102 IR 355 Jennings v Auto Plaza Ltd (1993) 46 IR 413 CASES CITED : Knowles v Anglican Church Property Trust (No.2) (1999) 95 IR 380 Kostakis v New World Oil & Developments Limited (unreported, Schmidt J, CT 1157 of 1996, 25 July 1997) Llandilo Staircases Pty Ltd v WorkCover Authority of New South Wales (Inspector Parsons) (2001) 104 IR 204 Municipal Officers' Association of Australia v Lancaster (1981) 54 FLR 129 Loupos v Basa t/as Robert R Andrews Real Estate (1995) 62 IR 397 Perrott v Xcellenet Australia Limited (1998) 84 IR 255 Port Macquarie Golf Club v Stead (1996) 64 IR 53 Production Spray Painting & Panel Beating v Newnham (19991) 27 NSWLR 644, (1991) 37 IR 46 Riley v Australian Grader Hire Pty Ltd (2001) 103 IR 143 Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (2001) 75 ALJR 1342 Starkey v Mitchforce Pty Ltd (2000) 101 IR 177 Stevenson v Barham (1977) 136 CLR 190 Sykes v Alan East Pty Ltd (Formerly National Meat Supplies Pty Ltd) [2000] NSWIRComm 1130 The State of Queensland and another v J L Holdings Pty Ltd (1997) 189 CLR 146 Zakrzewski v Rodgers (2000) 106 IR 1 HEARING DATES: 05/10/2001 DATE OF JUDGMENT: 04/30/2002

[2000] NSWIRComm 1130

(1995) 59 IR 298

(2000) 97 IR 484

(1999) 92 IR 264

(1999) 94 IR 474

(2000) 97 IR 478

(2000) 102 IR 355

(1993) 46 IR 413

(1999) 95 IR 380

(2001) 104 IR 204

(1981) 54 FLR 129

(1995) 62 IR 397

(1998) 84 IR 255

(1996) 64 IR 53

(1991) 37 IR 46

(2001) 103 IR 143

(2001) 75 ALJR 1342

(2000) 101 IR 177

(1977) 136 CLR 190

(1997) 189 CLR 146

(2000) 106 IR 1

(1991) 27 NSWLR 644

(2000) 102 IR 335

[2000] NSWIRComm 201

[2001] NSWIRComm 260