Palermo Seafoods Pty Ltd v Lunapas Pty Ltd

Supreme Court of NSW|2014-05-20

Metford Industries Ltd, Ex parte; Re Hall, Commissioner for Railways (NSW) [1962] NSWR 1228 Nicholson v Smith (1882) 22 Ch D 640 Proudfeet v Hart (1890) 25 QBD 42 Rawson v Samuel (1841) Cr&Ph 161; 41 ER 451 Sleafer v Lambeth MBC [1960] 1 QB 43 Trustees Executors and Agency Co Ltd v Peters [1960] HCA 16;102 CLR 537 United Scientific Holdings Ltd v Burnley BC [1978] AC 904 Texts Cited: Glanville Williams, Joint obligations: a treatise on joint and joint and several liability in contract, quasi-contract and trusts in England, Ireland and the common-law Dominions (Butterworths, 1949) Butterworth's Annotated Conveyancing and Real Property Legislation, 2012-2013 (Butterworths, 2012) Rory Derham, Derham on the law of set-off (4th ed., Oxford University Press, 2010) P. Meagher, J. D. Heydon, M. J. Leeming, Meagher, Gummow & Lehane's, Equity: Doctrines & Remedies (4th ed., Butterworths 2002) Category: Principal judgment Parties: Palermo Seafoods Pty Ltd (plaintiff) Lunapas Pty Ltd (first defendant) Luciano Menniti (second defendant) Representation: Counsel: Mr Jean Jacques Loofs (plaintiff) Ms Le-Ann Walsh Mr Brad Wright (first and second defendant) Solicitors: Sambrook Grant Lawyers (plaintiff) Ardor Legal (first and second defendants) File Number(s): 2013/206954 Publication restriction: None

Judgment 1This is a dispute between tenant and landlord over premises used as a seafood shop and restaurant in Tweed Heads. The plaintiff, the former tenant, seeks damages for the allegedly wrongful termination of its tenancy on 8 May 2013, particularly damages for loss of the chance to earn profits from the business it was carrying on at the site. 2The plaintiff commenced occupation in November 2005. At that time its occupation was authorised under a lease to the previous proprietors of the business. That lease was in favour of Seamax Australia Pty Ltd from 2 July 2003 to 1 July 2006. The lease appears to have been in a standard form for NSW retail leases. 3It is necessary to set out clauses 7 and 8.2 which have appeared in the lease to Seamax and in the lease between the plaintiff and the first defendant which was in force between 2 July 2006 and 1 July 2012 (the "2006 lease"). 4Clause 7 is headed, "Who is to repair the property" and is as follows 7.1 The landlord must - 7.1.1 maintain in a state of good condition and serviceable repair the roof, the ceiling, the external walls, and the floors of the property and must fix structural defects; 7.1.2 maintain the property in a structurally sound condition; and 7.1.3 maintain essential services. 7.2 The tenant must otherwise maintain the property in its condition at the commencement date and promptly do repairs needed to keep it in that condition but the tenant does not have to - 7.2.1 alter or improve the property; or 7.2.2 fix structural defects; or 7.2.3 repair fair wear and tear. 7.3 The tenant must also - 7.3.1 reimburse the landlord for the cost of fixing structural damage caused by the tenant, apart from fair wear and tear; 7.3.2 maintain and decorate the shop front if the property has one; and 7.3.3 decorate the inside of the property in the last 3 months of the lease period (however it ends) - 'decorate' here means restoring the surfaces of the property in a style and to a standard of finish originally used e.g. by repainting. 7.4 If an authority requires work to be done on the property and it is structural work or work needed to make the property safe to use then the landlord must do the work unless it is required only because of the way the tenant uses the property. But if it is any other work or is required only because of the way the tenant uses the property then the tenant must do the work. 7.5 If the tenant fails to do any work that the tenant must do the landlord can give the tenant a notice in writing stating what the tenant has failed to do. After the notice is given the tenant must - 7.5.1 do the work immediately if there is an emergency; and 7.5.2 do the work promptly and diligently in any other case. If the tenant does not do the work, the landlord can do it and the tenant must reimburse the landlord for the cost of the work. 7.6 The tenant must not make structural alterations to the property. Any other alterations require the landlord's consent in writing (but the landlord cannot withhold consent unreasonably). 5Clause 8.2 is headed "What happens if the property is damaged?" and is as follows: 8.2 If the property or the building of which it is part is damaged (a term which includes destroyed) - 8.2.1 the tenant is not liable to pay rent, or any amount payable to the landlord in respect of outgoings or other charges, that is attributable to any period during which the property cannot be used under this lease or is inaccessible due to that damage; 8.2.2 if the property is still usable under this lease but its usability is diminished due to the damage, the tenant's liability for rent and any amount in respect of outgoings attributable to any period during which usability is diminished is reduced in proportion to the reduction in usability caused by the damage; 8.2.3 if the landlord notifies the tenant in writing that the landlord considers that the damage is such as to make its repair impracticable or undesirable, the landlord or the tenant can terminate this lease by giving not less than 7 days notice in writing or termination to the other and no compensation is payable in respect of that termination; 8.2.4 if the landlord fails to repair the damage within a reasonable time after the tenant requests the landlord to do so the tenant can terminate this lease by giving not less than 7 days notice in writing of termination to the landlord; and 8.2.5 nothing in clause 8.2 affects any right of the landlord to recover damages from the tenant in respect of any damage or destruction to which the clause applies. 6The 2006 lease was from the first defendant to the plaintiff for six years from 2 July 2006 to 1 July 2012. However, the lease document would not appear to have been executed by the landlord until February 2007. The first two pages of this document were in Torrens system lease form and the remainder was in the standard retail lease form. The lease was never registered even though it was for more than three years. Originally the lease had no option to renew. 7On 5 January 2009 the parties entered into a "Memorandum of Agreement". Clause 5 of this memorandum reads as follows: The revised term of a tenancy is an initial period to 1 July 2012 with a further option for a further three years to 1 July 2015 at an initial agreed amended rent of $3,050.00 per week (including GST) payable on the Tuesday of each week. 8There was nothing in that Memorandum of Agreement as to how the option would be exercised. 9However the landlord reckons, and the tenant now accepts this reckoning, that the agreement of 5 January 2009 varied the actual lease. This means that one would read into the agreement clause 4.4 which is as follows: 4.4 The tenant can exercise the option only if - 4.4.1 The tenant serves on the landlord a notice of exercise of option not earlier than the first day stated in item 12D in the schedule and not later than the last day stated in item 12E in the schedule; 4.4.2 There is at the time of service no rent or outgoing that is overdue for payment; and 4.4.3 At the time of service all other obligations of the tenant have been complied with or fully remedied in accordance with the terms of any notice to remedy given by the landlord. If this lease is extended by legislation, items 12D and 12E in the schedule are adjusted accordingly. 10The schedule clause 12 starts with the words "Option to renew not applicable" and there is no material in items 12D or 12E. 11Paragraph 11 of the Further Amended Statement of Claim is as follows: 11 The plaintiff exercised the option Particulars (a) The option was exercised by the plaintiff by its Director Joseph Palermo orally advising the second defendant, the agent of the first defendant that the plaintiff was exercising the option; (b) The conversation occurred at the premises on 23 June 2012; (c) The substance of the conversation concerning the exercise of the option was that on 7 June 2012 the plaintiff had received a valuation of the premises obtained by the National Australia Bank at $800,000, in consequence to which the plaintiff was unable to obtain finance to proceed with the intended purchase of the premises, which would have required a valuation of $1,500,000; as the plaintiff was unable to proceed with the purchase of the premises, it chose to exercise the option for the further term. The second defendant agreed to the option being exercised. (d) Present at the time of the conversation with Joseph Palermo, Frank Palermo and the second defendant. 12The second defendant is Luciano Menniti. It is clear from the evidence that there was no conversation of that nature on 23 June 2012. However the plaintiff proceeded on the basis that that conversation was the one of which evidence was given that occurred, he says on 30 June 2012. 13There are a large number of issues between the parties. I will list in the best way I can what these issues are and then proceed to deal with each one of them in turn: However, as the case proceeded, some of these issues fell away and the case ended with the plaintiff indicating that its principal claim was for loss of the expectation of earnings to be derived from the restaurant conducted on the premises which it lost because of a wrongful re-entry. 14The issues are:- (1)Did the plaintiff have an option to renew from 2 July 2012 to 1 July 2015? (2)Did the plaintiff duly exercise such option? (3)If the answer to (2) is no, are the defendant estopped from denying that the option was exercised? (4)Does the non-compliance with s 133E of the Conveyancing Act 1919 have any significance? (5)Was a fresh lease granted to take effect from 2 July 2012. and, if so, what is its nature? (6)Questions of Credit. (7)As to a question of fact, are the defendants correct in saying that they were never notified of any problem with defects in the building until 2012? (8)What is the significance if any of the defendants taking possession on 8 May 2013? This raises sub questions: A Was any reduction of liability to pay rent brought about in the circumstances reflected in clause 8.2.2 of the lease? B Was there a right of recoupment arising from the fact that the tenant paid for repairs? C Is there any equitable set-off applicable against rent? (9)What rebate if any should be allowed for non-repair? (10)Is the plaintiff entitled to any damages for loss of expectation or otherwise and, if so, in what amount? (11)What is the result of the case? 15There are considerable factual disputes between the parties. Most of these arise in questions 6 and following and unless some particular matter is relevant to an earlier question I will deal with them when I am considering question 6 and following. I will now proceed to deal with the questions that I have set out in the order in which I have listed them. 16I heard these proceedings on 20 and 21 May 2014. Mr J-J Loofs and Ms L-A Walsh appeared for the plaintiff and Mr B Wright appeared for the defendant. I reserved my decision after giving counsel leave to put in additional submissions by the 28 May.

Question (1) 17Before addressing this question, I need to consider what rights the parties had under the 2006 lease. 18Under s 53 of the Real Property Act 1900, leases of Torrens land over three years must be registered. If the lease is not registered, it operates merely as a lease in equity, and at law, a tenancy at will terminable on one month's notice pursuant to s 127 of the Conveyancing Act 1919. 19However, all the terms of the invalid lease would be incorporated save for those which were inconsistent with a tenancy at will terminable on a month's notice. The only term that would be inconsistent would be a provision allowing the landlord to terminate with less than one month's notice, see Kemp v Lumeah Inverstments Pty Ltd (1983) 3 BPR 9203. 20The law of landlord and tenant is an extremely complex area of law and it is sometimes vital to make very fine distinctions. Unfortunately the parties and their lawyers when dealing with this property have seemed to ignore ost of the technicalities. 21If the lease is not registered then the covenants and the performance of covenants are not enforceable; Joseph v Mason (1912) 12 SR (NSW) 249; Davis v McConochie (1915) 15 SR (NSW) 510; Chan v Cresdon Pty Ltd (1989) 168 CLR 242. Thus, technically speaking, the option did not come into effect. 22I will comment later as to the difficulties that arise not only for the parties, but also for the Court when the legal rules as to form are not observed. The doctrine of estoppel by convention can only be taken so far. 23However, the parties seem to have agreed that the proper construction of the agreement of 5 January 2009 was that the existing lease was varied to include an option for a further term of 3 years and that there was a valid option which was available to the tenant to exercise. On this basis, this question must be answered, "Yes".

Question (2) 24The agreement of 5 January 2009 did not contain any provision dealing with the manner of exercise of the option. Clause 4.4.1 would then come into play. However because neither item 12D nor 12E was filled in in the schedule, the time for exercising the option is not specified. This would introduce the rule that prima facie an option must be exercised before the lease expires, Trustees Executors and Agency Co Ltd v Peters [1960] HCA 16;102 CLR 537, 552. 25Clause 4.4.1 does require the tenant to serve on the landlord a notice of exercise of option. The words "serve...a notice" indicate that there must be a written document. It is common ground that there was no written document. 26Thus, cases which were referred to such as Gardner v Blaxill [1960] 2 All ER 457 and Metford Industries Ltd, Ex parte; Re Hall, Commissioner for Railways (NSW) [1962] NSWR 1228 are of no assistance in the present case. 27Accordingly this question must be answered, "No".

Question (3) 28The plaintiff now accepts that it will only succeed on the question of exercise of the option if it can show that there is an estoppel. Mr Loofs submits that "an invalid exercise of an option may be the subject of an estoppel to a lessor." He cites and he relied on Friary Holroyd and Healey's Breweries Ltd v Singleton [1899] 2h 261. The case is better and more fully reported in (1899) 81 LT 101. A better authority is probably Lee v Ferno Holding Pty Ltd (1993) 33 NSWLR 404 at 413. 29There seems no doubt about the principles they are just an application of estoppel by convention. The real question is whether the facts in this case mean there is an estoppel by convention that operates so that between the parties the option must be treated as if it had been exercised. 30The key part of Mr Palermo's evidence is paragraph 18 of his affidavit. There he says that he met with Mr Menniti at the subject premises at about 10:00am on 30 June 2012. Also present, though neither of these people were called to give evidence, were Frank Palermo and Jessica Towler, the latter being Palermo's shop manager at the time. 31Joseph Palermo says that there was a conversation about the valuation of the premises, the essence of which is that Mr Palermo said that because his bank had received a low valuation he would not be able to purchase the property because he would not be able to get finance and accordingly he wished to exercise his option. He says he told Mr Menniti; I need to continue as lessee and I have decided to take up the lease option. Mr Palermo says that Mr Menniti replied: That's fine, we have an agreement and you can lease it up to 2015. We can discuss a new lease until such time. 32Mr Palermo says there was then an argument about repairs and "we all then calmed down" somewhat and the conversation continued to the following effect: Menniti - I would consider a new lease if you pay the legal fees to have it drawn up and you bring the rent up to date. Palermo - I am not able to buy it. I need to continue as lessee: I have decided to take the lease option. Menniti - That's fine we have an agreement and you can lease it up 2015. We can discuss a new lease until such time. 33If this is accepted, it would seems that there was a recognition by all parties that the option in the 2006 lease as varied by the 2009 Memorandum of Agreement was exercised and that the tenant was the lessee in equity for a further three years until 1 July 2015 and that a longer lease would be negotiated to continue for a longer period. 34Mr Menniti's affidavit does not deal very satisfactorily with this conversation. He says that there was discussion about a new lease and he did say: First you need to bring the rent up to date. However he denies that Joseph Palermo said: We would have been able to bring the rent up to date if we did not have to keep maintaining and fixing the place up and if you actually did as landlord what you should be doing. 35Not one word however was said in his affidavit respecting the conversation about the option. 36It seems to me that in those circumstances I must accept the Palermo version that the parties agreed that the option was to be treated as having been exercised and that the plaintiff had a right to require the first defendant to provide a new lease. 37Putting aside the effect of the Retail Leases Act 1994, the position then was that in equity the plaintiff was entitled to be granted a lease up until 2 July 2015. At common law it had a tenancy at will terminable on a months notice under s 127 of the Conveyancing Act 1919. 38It must be noted that the 2006 lease had come to an end on 1 July 2012. When a lease is renewed under an option a new lease comes into effect (see United Scientific Holdings Ltd v Burnley BC [1978] AC 904 at 945 per Lord Simon and 961 per Lord Fraser). 39The first defendant says that the option was not properly exercised because the tenant was in default under the lease both in payment of rent and in some other respects. However no notice was ever given by the defendants under s 133E of the Conveyancing Act 1919 and that section must be complied with strictly under the authorities (see Bay Marine Pty Ltd v Clayton Properties Pty Ltd (1984) 9 ACLR 780). There is no room for agreeing to Mr Wright's submissions that correspondence took the place of a proper 133E notice. 40No argument was addressed as to whether s 133E applied by analogy to the case where the court finds that, by operation of the doctrine of estoppel by convention, the option is deemed to have been exercised. Both parties proceeded on the basis that the section was applicable. 41Accordingly any default of the tenant did not affect the validity of the exercise of the option.

Question (4) 42Is there a fresh lease from 2 July 2012? The answer for the reasons already given is, "Yes", but the type of lease is as I have set out in my answer to Question 3 (and see also Question 6). There are no arrears of rent leftover from the previous lease, which can be considered as rent owing under the fresh lease.

Question (5) 43The question then is how is the fresh lease brought to an end? 44Where lawyers speak of a lease in equity, what they mean is that equity would grant specific performance of the agreement that has been reached when the option was exercised. By definition an equitable lease would cease when equity no longer would grant specific performance. As a person has to show that they are ready, willing and able to comply with their side of the bargain, it would follow that any substantial non-payment of rent would be a ground whereby equity would no longer enforce the exercise of the option and compel the landlord to grant a new lease by law. 45The facts in the instant case show that there was a substantial non payment of rent after 1 July 2012. The defendants claim that this was some $61,150. The tenant made a statutory demand against the landlord and admitted this figure less $23,400 which it alleged it had paid after 1 July 2012 and for which the landlord had not accounted. 46It is only if one allows the full claim of the plaintiff for recoupment both before and after the fresh lease and allows a set-off either at law or in equity that one can reach the position that the tenant was not in default with the rent. The evidence before me, which I will consider later, does not go that far. I will consider questions of recoupment and set-off when considering Question 8 (b). 47In any event, my view is that, when a court of equity is considering whether to grant specific performance, it does not delve into minutiae, but asks the broad question, "Has the plaintiff shown that it is ready willing and able to fulfil the agreement for lease on its part? The answer to that question is "No", because the rent was not consistently actually paid. 48Accordingly, on the vital date of 8 May 2013, my view is that the plaintiff no longer had a three year lease in equity, but merely had a tenancy at will at law terminable by a month's notice. 49There was a re-entry on 28 March, shortly prior to the Easter holiday weekend. 50I need not dwell on the legal effect of this as the parties soon came to an accommodation. 51Joseph Palermo says that on that day he negotiated an agreement to allow him to get back into the premises. The agreement is set out on page 607 of the Court Book. It reads as follows: 28 March 2013 The lessor being Lou Menniti (Lunapas Pty Ltd) agrees to grant possession to (Menniti Seafood) on the condition of payment of $10,000 no later than 30 March 2013 and a further payment of $10,000 on or before 2 April 2013. Should the lessee fail to comply with the above, possession will be taken over by the lessor. It is agreed upon by the above parties that a market appraisal will be conducted by a registered valuer to determine current market rent. A new lease will be negotiated after the valuation has been received. 52The document is signed by Joseph Palermo, Lou Menniti, and the estate agent Rebecca Moore. 53The $10,000.00 was paid and the plaintiff moved back in and conducted its Easter trade. 28 March was the Thursday immediately preceding Good Friday. The 2nd of April was the Tuesday after Easter 54What happened next is a little confused. It would seem that Mr Palermo went straightaway to see his solicitor. It is unclear whether he took a copy of the agreement which I have set out above with him. 55However, that solicitor created a letter which he sent to the defendants which bears the same date. It was marked "without prejudice", but there was no objection to its tender. 56The plaintiff's solicitor's letter purported to confirm "the without prejudice agreement" (whatever that means) and set out a different form of agreement. This document added additional terms that there would be an agreement to meet at the plaintiff's solicitors' office "next week" with a view to negotiating in good faith a new lease and that the second $10,000.00 would be paid upon finalisation and execution of the new lease on the basis that the parties would negotiate in good faith to have the lease terms finalised and the new lease signed by 5 April 2013. 57Mr Menniti signed a copy of that letter by which he said he acknowledged and agreed to the terms. 58Mr Palermo says that Mr Menniti never did turn up by himself, or his representatives, to negotiate a further 5-year + option lease in good faith and Mr Palermo never did pay the further $10,000.00. 59On the other hand, Mr Menniti says that he and Mr Rossiter did go to the plaintiff's solicitor's offices to endeavour to resolve the matter, but there was an argument in the car park and that put a finish to the affair. 60As I have said, I find what happened on the 28 March 2013 and immediately thereafter very hard to fit together. Doing the best I can it would seem that early on the day there had been a lock out and the landlord had changed the locks. When Joseph Palermo attended he found that the locksmith was still on site, as was Mr Menniti and it would seem Rebecca Moore an officer of Ray White Burleigh Heads, the managing agent. There was then discussion and Rebecca Moore wrote out the document which I have already set out and it was signed by Joseph Palermo, Lou Menniti and Rebecca Moore. 61Subsequently on that day, Mr Palermo went to see his solicitor and the solicitor generated the document to which I have already referred which is set out on page 605 of the Court Book. That was emailed to Mr Menniti. 62It would seem that Mr Menniti called on the solicitors later in the day and signed the document. Why he signed the document is completely unclear. He may have thought that it merely recorded what was agreed to earlier in the morning, but there is nothing in his evidence to suggest that that is so. Indeed in cross-examination the following occurred (T76). Mr Loofs cross-examining on page 606: Q: Look at the second paragraph. You have agreed to sign a copy of this letter and return it immediately to us. In your acceptance in the terms reached, which you acknowledge has been made in good faith, and with the intention binding on the parties you have signed the document and sent it back? A: We signed that, went down and had a meeting with the solicitors and it lasted two minutes. Q: And you signed it indicating you accepted the terms? A: What were the terms? Q: Now if I could move to another area. A: What were the terms please? His Honour: They are on first page 605. A: Our client further (read) that never happened. Later on (T78), Mr Menniti said in answer to a question: Q: This is in your affidavit. This is stuff you have made up, if there was a case, obligation for you to negotiate in good faith to give my client a lease and you did nothing then. There may be consequences. A: No that is totally incorrect, we went down to the lawyers office, had an appointment, had an argument in the car park and that was it. 63Mr Menniti then said it was his idea to offer a five year term with a five year option and Mr Loofs put at T79: Q: That was your attitude was it? You just decided to take it off the table. A: No after he started to get the solicitor, my accountant, John Rossiter and the solicitor went down to the office at Prestige Lawyers, tried to resolve the matter, could not get resolved, we kept the arrangement of going down back there because - (He was interrupted) 64None of the cross-examination really enables me to make a firm finding one way or the other. However it would appear that what Mr Menniti is saying is that he did go down to the solicitors office, he did sign the acknowledgment, but nothing further happened because of some altercation in the car park and that getting lawyers in rather than negotiating between friends was not going to work and he wanted his rent. It seems to me that this is a more likely scenario than that suggested by Joseph Palermo. Indeed it is strange that having made an agreement earlier in the morning on the 28 March that there would then be a solicitor's letter later in the day saying something different. Perhaps Mr Palermo never showed the solicitor what the document that had already been signed said, he may not have had a copy. 65On about 27 March 2013 the plaintiff issued the first defendant a notice to remedy breach. On the 16 April 2013 the first defendant received a letter from the plaintiff's then solicitor attaching a number of documents relating to alleged maintenance and repair of the premises. Mr Menniti says that until receipt of this correspondence he never cited any of the invoices, which were attached to the correspondence and denied that anyone on behalf of the plaintiff had ever handed him any invoices requiring payment by his company. 66On 22 April 2013 a further notice to remedy breach was issued by the landlord. That notice did include "balance due from previous year" $25,650.00 but then showed that about $60,000.00 was not paid in rent from 1 July 2012 onwards. Unfortunately it is a little hard to understand as the creator of the document has used the American rather than the Australian dating system. On 8 of May 2013 the plaintiff was locked out of the premises. This notice was a 14-day notice rather than a one-month notice as required under s 127. 67Presumably a 14 day notice was given because of clause 12.2.2 of the lease. The chapeau to clause 12 reads The landlord can enter and take possession of the property or demand possession of the property if - ... 12.2.2 Rent or any other money due under this lease is 14 days overdue for payment... 68However, that clause is inconsistent with a tenancy at will terminable by a month's notice and so is inapplicable. 69The upshot was that the taking of possession was premature. 70It was submitted that s 16 of the Retail Leases Act 1994 affected the position as its operation is to extend leases, even agreements for lease into leases at law for five years. 71However, s 16(4) makes it clear that the section does not extend to the present case because the 2013 lease followed immediately after the end of the 2006 lease. The section is inapplicable here. 72Thus the result is that the lease was to be determinable on a month's notice, it was determined on 14 day's notice and thus was wrongful. However, the only damages would be nominal, as the tenant only lost two weeks.

Question (6) 73I now turn to questions of credit. 74This is an awkward matter because I found that neither side impressed as to presenting witnesses and material which one would expect to be produced, and that neither Mr Palermo nor Mr Menitti were impressive witnesses. 75The plaintiff's case depended almost entirely on Mr Palermo's evidence plus documents he assembled. 76Furthermore, in a case where both sides complain that the other has breached covenants in a lease, we have a position where the covenants strictly speaking are not enforceable as such. What does the Judge do? Does he or she ignore the statute and deal with the "realities" that existed between the parties by way of some sort of conventional estoppel or otherwise? How does he or she treat the case? 77Then the parties have ignored that the lease of 2006 came to an end on 1 July 2012, and seem to have treated their relationship as continuing on under the 2006 lease even though the option must be taken on the facts to be deemed to have been exercised. 78Superadded to all this is the way in which the evidence was presented. Mr Joseph Palermo's evidence was in many respects presented in a form such that had I applied the strict rules of evidence, perhaps a third of it would not have been admitted. That however would have meant that the case would have had to be adjourned at great expense and I form the view that my duty under s 56 to 59 of the Civil Procedure Act 2005 meant that I should admit the material. However there was no supporting evidence from people who one would have considered could have supported Joseph Palermo in key parts of his evidence. It was clear to everyone I would have thought that the conversation of 30 June 2012 was vital. Notwithstanding that as I have already remarked, two witnesses to that conversation were not called. 79Mr Lou Menitti's evidence was even worse. Not only does he fail to deal with vital parts of the plaintiff's evidence such as, as I have indicated, the full conversation of June 2012, but he also resorts to such weak answers to allegations of lack of repairs such as in paragraph 86 "I do not propose to go through every invoice that is referred to in the affidavit of Joseph Palermo other than to say that until August 2012 none of those invoices had ever been brought to my attention or the attention of the first defendant." 80Even worse is paragraph 103 "I have specifically not refer to part of Joseph Palermo's affidavit where I thought it irrelevant to the central issues associated with this matter." That just means that there is no answer to matters, which the court might think relevant even though the deponent might have thought them irrelevant. 81Furthermore, the whole case seems to have changed from the time it was pleaded to the time it commenced in court and then again at the time it finished in court. In accordance with my usual practice I set out what I thought were the issues when I was listening to the evidence on the first day of hearing, but by the time the plaintiff put in it's submissions in reply it would seem that the whole case had turned 90 degrees. 82Mr Loofs in his final written submissions put that the principal point involved in this case was whether there was a loss of opportunity to the plaintiff to earn income from the seafood business at Tweed Heads because of the landlord's activities in March, April and May 2013. I must confess I found that it was hard to see that this was the principal point of the case when it opened on the first day of hearing. Having made these necessary comments I will now pass on to the next question. 83As to Mr Menniti's evidence, I was concerned at the end of the first day of hearing that he seemed to have so little understanding of the questions that were being put to him that I thought that it may be that a tutor needed to be appointed. However it may be that as an elderly gentlemen he was just getting overtired because on the beginning of the second day he did not seem to have this problem. However he was a very determined person and it seemed to me it would be very difficult to get him to depart from a view he might initially form. He was quite sure in his own mind that none of the matters about which the tenant complained were his responsibility. 84I do not consider that he actually spent sufficient time considering the questions raised, he was so sure in his own mind that they were not his responsibility. This state of affairs was not assisted by the fact that the invoices involved often contained a series of items only some of which were obviously structural matters and there was little explanation provided. 85As to Mr Joseph Palermo's credibility, Mr Menniti suggests that because Joseph Palermo gave his evidence from a prison in Queensland where he is currently on remand on a charge of conspiracy to murder Mr Menniti that that in itself affected his credibility. I am not at all sure that it does and I do not consider that I should take into account the fact that Queensland Police have charged Joseph Palermo with that offence or that a Magistrate refused bail. 86More significant is the fact that there is no documentary evidence which supports Mr Palermo's allegations that he gave the invoices to Mr Menniti at their regular meetings and that the plaintiff did not call Frank Palermo or Jessica Towler who were present at the vital conversation. Of course that has to be set against the fact that Mr Rossiter was not called on the other side. The onus is on Joseph Palermo and his case is severely weakened by not calling those persons and by the fact that there is little to corroborate his story. However there is some corroboration in that Mr Menniti does acknowledge that he was regularly at the Tweed Head premises and it is clear that he was there on 27 November 2005 when there was a downpour and that he sent his son to effect some repairs. There is also the almost incredible story with respect to the second document of 28 March 2013. 87There are various reasons why I have great doubt as to Palermo's claims for loss of profits. 88It seems quite clear that Mr Menniti was constantly under the impression that back rent would be paid after the plaintiff's insurance claims for loss of business were processed. It is also clear that some claims for loss of profits were made and paid by the insurer. 89Mr Menniti is quite clear in his own mind that these were very substantial claims. Mr Palermo has never denied that he did receive some monies but his evidence as to how much has always been merely to deny that they were large amounts. 90This makes me discount Mr Palermo's credibility. 91The other significant matter of these insurance claims is that records would have to be produced in order to justify the insurance claims. Those records would have been a far better guide as to what business was lost than the hundreds of pages of meteorological records and then a reconstruction as to how many days were lost and what was the average gross profit. 92Mr Palermo says that all his records were lost when the landlord re-entered. I can accept this at least partially but one would have thought that if there was a substantial claim the accountant would have become involved in processing the claim and there was never any attempt to say that the accountant, who did give evidence, did not have some records and even if the accountant did not have records the insurance company would have to have had records which could have been subpoenaed. 93Again this makes me discount Mr Palermo's credibility. 94However, the mere fact that a judge considers that all the evidence may be unreliable does not discharge him or her from the obligation to find the necessary facts. I will now proceed to do so.

Question (7) 95Are the defendants correct in saying that they were never notified of defects in the building until 2012? 96It is clear that in order to render a landlord liable on the covenant to repair, the tenant must first notify the landlord that repairs are needed, see eg Sleafer v Lambeth MBC [1960] 1 QB 43. 97The present question is of course is a question of fact. I am very much handicapped in answering it because of the paucity of the evidence and the absence of people being called such as, Frank Palermo on the plaintiff's side, and John Rossiter on the defendants side, who could have assisted in answering the question. 98It seems common ground that the parties or alternatively their relations were once quite friendly. Although Mr Menitti lives in a Brisbane suburb, he apparently has a dwelling at Surfers Paradise, which is about half an hour away from the subject premises at Tweed Heads. Mr Menitti came down to see Frank Palermo in Tweed Heads whenever he was in Surfers Paradise and this seemed to be about once a week. 99Joseph Palermo says that when Mr Menitti was calling at the Tweed Heads premises he was given various invoices which had been paid by the tenant to affect repairs with the landlord had not attended to and that Mr Menniti's reaction was that he would pay it or look into it or something to that effect. There was no written advice of the defects that should have been paid for by the landlord but were paid for by the tenant. Some of those invoices are in evidence. Many of them contain a number of items not all of which would be payable by the landlord under the lease. 100Mr Menitti was actually present during a severe storm in November 2005 when there was inundation of the eating area of the premises. 101It is necessary briefly to describe the suite in order to understand the evidence. The building is a rectangular building with the longer side facing the road on one side and the river on the other. The main roof of the building covers the building from its street frontage to a relatively open area near the river. The relatively open area is covered with a fixed awning, which has fibreglass panels. Customers of the business can then consume their fish and chips or other seafood at tables in this open area whilst they have a river view. It is this area that gets flooded with rain. 102It must be remembered that under the lease the landlord only has an obligation to "maintain in a state of good condition and serviceable repair the roof, the ceiling, the external walls and external doors and associated door jams, and the floors of the property and structural defects plus essential services". 103Mr Menniti says that when he did see the invoices after the termination of the 2006 to 2012 lease he quickly came to the view that none of them were his responsibility. In order to sound more impressive in that statement he said that he was a builder and that he knew that this was so. 104To my mind this attitude fitted in quite nicely with his statement at the end of his affidavit that he did not bother to reply to allegations which were (in his view irrelevant. When he saw the invoices he says on 2012 he thought they were irrelevant and so he did not consider that he need do anything about it. 105One can well imagine that he would have taken the same attitude to invoices that he saw during the currency of the lease, if any. 106However, Mr Palermo's evidence shows that on occasions Mr Menniti did do something about the invoices or alternatively did send his son down to do some repairs and this would indicate that he did have some knowledge during the term that there were some defects. 107On the other hand Mr Menniti submits that no tenant in his right mind would allow constant inundation of water which cost him as is claimed $2,400.00 a day for 6 years without doing something about it either himself or pursuing the landlord and the fact that this did not occur is strong material to suggest that the landlord never received any claims during this time. 108As to the deluge of November 2005 Mr Menniti says it was not his responsibility because it wasn't the roof of the main building which was at fault and that is all that he covenanted to repair it was the awning with the fibreglass over it. On the other hand Mr Palermo says that that is a roof it was a permanent structure and it was the landlord's obligation to repair. 109I was not assisted by much argument on the meaning of clause 7.1.1 of the lease as to what was meant by "the roof". The impression that Mr Menniti tried to give me was that the shelter over the eating area was something that was just very temporary and could be easily removed. I do not accept this, it would seem from what little material has been shown to me that there was a permanent structure over the eating area including metal sections and fibreglass panels. Certainly it was possible for the strong winds that can afflict that area to get under that roof and for the rain to get under it but it was a permanent roof. The question is whether it was "the roof" 110It would seem to me that when one is seeing the phrase "the roof, the ceiling the external walls and external doors" one is looking to the main structure and not to ancillary structures such as the so called awning. Accordingly it does not seem to me that the problem with the roof over the eating area was the landlord's responsibility under the lease. 111If I were wrong on this then the tenant had to mitigate its damage and the way of mitigating the damage would be to effect proper repairs to the roof over the eating area. If the first inundation was 22 November 2005 then one would have expected this to have been done by the commencement of the new lease on 2 July 2006 or before the new lease was signed which seems to be in mid 2007. There does not however appear to be any discussion when the new lease was entered into about this matter. 112The Court book was needlessly expanded by hundreds of pages of meteorological records showing what rain had fallen over the Tweed Heads premises from November 2005 through to 8 May 2013. These occupy pages 205 to 491 of the Court book that is 286 pages. 113Those 286 pages were used by the plaintiff and its advisors to work out how many days there were in that period of heavy rain they then took the gross retail profit for each day and multiplied that by the days of heavy rain to get a rather large amount which they claim against the landlord as recoupment or alternatively as an equitable set-off. 114There are a number of flaws in this method of procedure. First one would have expected the tenant to mitigate its damage and do proper repairs even before the lease of 2006 was entered into in which case no heavy rain after that date could have made any difference. Secondly, one would have expected the tenant to have kept proper records and to have made written complaints to the landlord when, if it be accepted that a landlord was given invoices, there was no action. Yet we find no written complaints and we find that the rain interrupted business according to the plaintiff for approximately 8 years. Thirdly, the landlord's covenant does not extend to ensuring that the premises are completely weatherproof so as to keep out abnormal rainstorms, Masterton Lincensing Trust v Finco [1957] NZLR 1137. 115Next the 27 November 2005 flood was when the plaintiff was holding as assignee (unregistered) of the lease given to the previous owner. It had nothing to do with liability under the 2006 lease just as problems that occurred after 2 July 2012 had nothing to do with the 2006 to 2012 lease nor did problems under the 2006 to 2012 lease have any relevance to rent under the 2012 lease if there be one. 116That last point is particularly important because it must be realised that the final version of the plaintiff's case is that the landlord wrongfully re-entered on 8 May 2013 and as a result confiscated the plaintiff's business and the plaintiff lost its opportunity to earn income for the next 5, 10 or 15 years. Whether that re-entry was appropriate or not depends on whether his rent was owing and whether rent was owing is to be worked out in one of two ways. (a)If the tenant can convince me that its solicitors letter of 28 March 2013 displaced the earlier hand-written agreement of that date and if the effect of that was to suspend any liability to pay rent until negotiations had proceeded in good faith for the possible grant of a new lease then there was no rent owing because $10,000.00 had been paid the balance of the rent owing had been commuted to $20,000.00 and the other $10,000.00 was not to be paid until the negotiations for the new lease had been completed; or (b)That so much was owing by the landlord to the tenant for repairs which the tenant had done and the landlord should have done that even though an amount of $72,000.00 was claimed by the landlord the tenant either had the right of recoupment which it could set-off at law or a right of equitable set-off of a greater amount so that nothing was owing. 117Accordingly the assumption that seems to have been made by both sides is that not only could the tenant off-set what was able to be recouped under the lease since 2 July 2013 but it could also recoup what was due under the 2006 lease and perhaps the lease of which it was the equitable assignee prior to 2006. 118Again this was not properly argued. There is no doubt that one can set-off at law against liability to pay rent what the landlord owes to recoup the tenant for expenses the tenant has incurred in repairing, where the liability to repair is on the landlord see eg. Lee-Parker v Izzet [1971] 1 WLR 1688. 119In Asco Developments Ltd v Gordon (1978) 248 EG 683; [1978] 2 EGLR 41 at [42] Megarry VC cited the Izzeti case and said: In that case the right of recoupment was said to be a common law right which was exercisable in respect of future rents The reporter then goes on to say But his Lordship (meaning of course Megarry VC) did not see why it should not be equally applicable to arrears of rent. 120That seems to be the only authority and not a very strong one despite the eminence of Megarry VC in this field that there is a right of recoupment for arrears of rent under the lease. It is one step further back to say that there is also a right of recoupment for repairs done by a tenant under a previous lease of the same premises. As I say the point was not argued but Mr Loofs put the proposition under the dictum of Megarry VC as I cited. If the tenant's other argument was correct then there would be a different result. However, there are very great difficulties in accepting the tenant's second scenario. 121 At common law an obligation suspended is virtually forgiven see Ford v Beech (1848) 11 QB 852; 116 ER 693 and the discussion in Glanville Williams, Joint Obligations (Butterworths 1948 art 61 p 130). There is no need to look at the position in equity (as to which see Beech v Ford (1848) 7 Hare 208: 68 ER 85.). 122Mr Loofs did not put in any authority as to how there could be a suspension of the obligation to pay rent. This is for the good reason that there is not any. I thus reject the proposition that the obligation was suspended. 123In any event if there were such a possibility of that happening at law then one must ask what was the consideration for the agreement. If some $72,000.00 was owing where was the consideration for accepting a lessor sum of $20,000.00? It may be argued that there was some consideration but unfortunately no argument was put on either side before me. I cannot see how it is sufficiently arguable that the solicitor's letter, even with the agreement of Mr Lou Menniti brought about by him signing the letter, could amount to a forgoing of all rent over $20,000.00. 124There is then the further point that the whole $20,000.00 was never paid. Mr Loofs says that the obligation was not to pay the opposition the other $10,000.00 until after the full and fair negotiations and extended lease concluded, and because Menniti did not take part in such negotiations that never happened, and therefore the $10,000.00 was never payable. Whilst it is the case that there is a series of principals of law at equity which are combined in the maxim" a party cannot take advantage of his or her own wrong" that maxim has never been extended so as to excuse a person from paying money because of some default on the other side which has little to do with the payment of that money. Again this was not argued. 125Accordingly I do not consider that this was a reason why rent should not be considered owing under the terms of the 2012 lease. In any event I would think that at least $10,000.00 should be said to be owing even if that agreement was enforced. 126After that digression, I must get back to the actual question that I asked myself that is, is the defendant correct in saying that it was never notified of any problem with defects in the building until 2012. 127It will be remembered that the complaint about repairs falls into three categories; (a) water damage, (b) electrical damage (mainly caused by ingress of water) and (c) drainage and sewerage problems. 128I consider on the whole of the material that the likelihood is that Mr Menniti was given invoices however it also seems to me that the invoices of themselves would not be sufficient to have the landlord appreciate that he was responsible for all of the invoices. The invoices do seem to cover a number of matters some of which are clearly not the responsibility of the landlord. 129It may be that casting his eye over them he got the general impression (and people generally like getting an impression which is favourable to them) that it was none of his responsibility and he kept that view in mind for the whole time. 130I believe this is more likely to be the case than any other and it fits in with the tenant's evidence that he at the regular weekly meetings at Tweed Heads gave the landlord the invoices. 131However it is significant that the tenant did allow its problems to continue for 8 years and that even though it was out of pocket it did not formally press for reimbursement until it was locked out in 2013 and did not give a formal list of defects until after the 2006 lease expired giving the first list in August 2012. 132This awareness would be sufficient to trigger the landlord's liability to repair. A tenant is not expected to analyse the reason why there is a structural defect, all it needs to do is to notify the landlord of the general nature of the problem that has arisen, Griffin v Pillet [1926] 1 KB 17. 133In the present case, the landlord was made aware of the problem with water ingress and also the note of one of the plumbers who, at the tenant's request repaired leaking sewer pipes, that there was more than a temporary problem.

Question (8) 134The first defendant re-entered on 8 May 2013. When it re-took possession. Normally, re-entry is the method of determining tenancies for a term, where the term is not expired. It is quite superfluous to do this where there is a tenancy at will or a tenancy from week to week. Notice to Quit suffices. However, a tenancy at will can be determined in any way which shows a definite intention to terminate the tenancy and a re-entry surely shows this. 135The landlord's action was wrongful was because a month's notice had not been given. However, the tenant has accepted the termination of the lease as a repudiation of the lease, so there is no issue as to who has the right to possession.. 136I would have thought that it would have been arguable that this was not a repudiation but a mere breach of warranty, but this was not argued. 137What is clear is that the tenant's right of occupation ceased on 8 May 2013.

Question (8)(a) 138It must be remembered that when applying 8.2.2 or s 36 of the Retail Leases Act 1994 one is only talking about the third lease, that is the tenancy at will terminable by a months notice, that commenced on 2 July 2012. 139Both clause 8.2.2 and s 36 of the Retail Leases Act say that the provisions apply when the property is damaged. They do not say damage by whom or whether the damage is contractually liable to be remedied by landlord or tenant. 140It is clear that it is only for repairs to the roof etc. or structural defects that the landlord has the obligation to fix and it would be odd if the tenant could get a reduction of rent if it itself was the cause of the damage or when I say it itself was the cause of the damage because it had failed to comply with its obligation under the lease to keep the building in good repair subject to what the landlord's obligations were under clause 7. 141The matter was briefly considered by Palmer J in Cakirgoz v Crouch (2008) NSWSC 1124. However his Honour did not need to decide the present point. The learned author of the commentary in Butterworth's Annotated Conveyancing and Real Property Legislation 2012-2013 page 727 [58306.1] (which was not me) says that Palmer J suggested that a lessee could not rely on repairs for which it was responsible as the basis of its claim for abatement. I do not consider that Palmer J went that far but it does seem to me that unless one reaches that conclusion the operation of 8.2.2 and s 36 does not have a meaningful operation. 142Section 36 does not deal with the situation where the landlord is at fault for not doing repairs but any reasonable tenant would have mitigated its loss by doing the repairs itself and charging the landlord with the fair costs of those repairs. It would seem to me that in that situation useability would not be diminished due to the damage for any period after which it would have been reasonable to have the tenant mitigate its damage by doing the repair itself. It seems to me that this is in accordance with the authorities that say that in determining the question of whether premises are fit for use the tenant's obligation to repair may be relevant see eg. Proudfeet v Hart (1890) 25 QBD 42 and my decision in Dalla Costa v Beydoun (1990) 5 BPR 11379. Finally as to renewal of options by informal means see also Nicholson v Smith (1882) 22 Ch D 640 at 659 and Gardner v Blaxill [1960] 2 ALL ER 457. 143Accordingly in my view it must be shown that the reduction of useability is a result of a breach by the landlord of some obligation. 144The only obligation one would think would be the ingress of water. I have already noted that the failure was not on the main roof but was on the awning over the eating area. I do not consider as I have indicated earlier that that was a failure to repair the roof. Accordingly the lack of useability was not a matter of the fault of the landlord. 145There was some suggestion in evidence that if there was a problem with the main roof that the tenant had some how or other interfered with it. There is no doubt that the tenant did put some silicon on the main roof to stop some leaks but there is no material to suggest that any of the water damage was a result of the tenant's activities. 146So far as the electrical work is concerned it seems to me that all this flows from water damage and for the reasons I gave when dealing with water damage these cannot be laid at the feet of the landlord. 147Accordingly I pass to sewerage and drainage. 148As to sewerage and drainage there is no doubt that there were some problems from time to time with drainage and that sewerage did overflow into some of the public areas. There is a question as to whether this is structural damage. Some serious problems with pipes are considered structural damage, but not all of them. It is not clear whether the alleged defective piping was structural work within this definition. It would only be if it was structural damage that the landlord could be made accountable. 149In any event Mr Menniti says that the problem with the sewerage was that, as in many areas of public use, people put stuff down the toilets which block the system. If this were so it would be an operational matter and at the foot of the tenant. Although the parties exchanged these views there is not sufficient evidence one way or the other to show what was the real cause. Mr Palermo points to the report of the plumber that he needed to discuss that more work ought to be done to solve the problem and he says that this shows that it was a structural problem. This is not necessarily so, it may merely have been that some filter or screen needed to be put in to collect more solid matter that might be put down the toilet by members of the public rather than actually fixing the pipes, though on the balance of probabilities this is not likely. 150Accordingly there is probably just sufficient evidence to show that the sewerage and drainage problem at least in part was within clause 7 of the lease, but there is no proper quantification as to how much so as to get a firm figure for recoupment or equitable set-off. In any event as I have indicated earlier this is of no moment. 151I should conclude this sub-question with a consideration of the term, "unuseability" in the lease and in s 36 of the Retail Leases Act. 152Section 36(1)(b) of the Retail Leases Act 1994 says: If a shop is still useable under the lease but its useability is diminished...the lessee's liability for rent...is reduced in proportion to the reduction in useability caused by the damage. 153Clause 8.2.2 is in almost identical words. What does this strange word "useability mean"? It is not a word one finds in the legal dictionaries. 154Although I have not been given a full description of the shop it would seem from what details I have been given that it sold fish and chips both to eat at the tables near the river on the premises or alternatively to take-away. It also sold prawns, fish and other seafoods which again could be either eaten on the premises or taken away. The evidence does not go so far to show there was ever total "unuseability". We do not know what proportion of the trade involved people eating at the tables as opposed to taking their fish and chips etc. away. 155It is almost impossible to work out what percentage "useability" was diminished. In the upshot it is not necessary to do this, but judges are obliged to do the best they can even if inadequate material is put before them, but bearing in mind that people presenting cases are presumed to be aware of what they have to prove, and if there is no evidence on the matter then the court can make inferences against the party bearing the onus of proof. If I had to make an estimate I would have thought that no more than 50% reduction in useability was a result of the wet weather etc.

Question 8(b) 156As I indicated earlier, I am not convinced that it is possible to recoup under the common law principal noted in Izzet's case expenses incurred by a tenant under a previous lease. It seems to me that if one opens the door too wide tenants could seek to recoup for all sorts of extraneous expenses and as Megarry VC clearly says in the Asco case, it is his experience that tenants tend to exaggerate these claims, and that the laws should be very careful to keep them within proper bounds. 157If the only recoupment can be made for future rent or alternatively arrears of rent under the current lease then it is clear that rent was owing on 8 May 2013 entitling the landlord to give 14 days' notice under clause 12 of the lease in order to re-enter.

Question 8(c) 158There is a further argument which really is close to the recoupment argument that there is an equitable set-off of what is owing both under the old lease and the then current lease because of the landlord's failure to do repairs. 159It is significant that the defendant has never claimed the rent that it would seem is owing; under the agreement to accept the $20,000.00 or the actual amount that accrued The only relevance of the off-setting claims are (a) as to whether the re-entry on 8 May 2013 was justified and (b) if the doctrine of equitable set-off is invoked. As the landlord has never sued for the back rent, there is no question of a procedural set-off at law under s 21 of the Civil Procedure Act 2005. Equitable set-off is, however, a different matter. 160In his well respected tome Derham on the law of set-off 4th edition Oxford University Press 2010, Mr Rory Derham says that equitable set-off is substantive. In [4.29] the learned author says: A characteristic of the form of equitable set-off which arises in the case of closely connected cross-claims is that it operates as a true or substantive, defence. It may be in both independently of any order of the court or of arbitrators. ...While it is only in comparatively recent times that the substantive nature of this defence has come into prominence, it is consistent with a tenor of Lord Cottenham's judgment in Rawson v Samuel (1841) Cr&Ph 161, 179; 41 ER 451, 458. However the learned author goes on to say in [4.30]: The view that the defence is substantive does not mean that it operates as an automatic extinguish of cross demands. The availability of an equitable set-off operates in equity to impeach the title to a demand. It effects the conscience of a creditor, so as to impugn the creditor's right to assert that any monies are owing by the debtor to the extent of the debtor's cross-claim. At law the cross-demands remain in existence and retain in their separate identities and to extinguish by judgment or agreement. But so far as equity is concerned, it is unconscionable for the creditor, even before judgment, to assert that monies are due to it from the debtor, or to proceed on the basis that the debtor has defaulted in payment, if and to the extent that circumstances exist which support an equitable set-off. Then at [4.31] he says: The notion that this does not extinguish prior to judgment for a set-off is reflected in one of the grounds for the decision of the House of Lords in Aries Tanker Corporation v Total Transport Ltd [1977] 1 WLR 185. 161The learned author quotes authority for his various propositions. There was no deep argument as to the nature of equitable set-off. However, if it is right as it appears to be from Mr Derham's book that at law the creditor's claim still exists then no equitable set-off could effect the obligation of the tenant to pay the rent so that there would be a proper re-entry on 8 May 2013. All that the equitable set-off would do would be to give the tenant the right within the 14 days notice, to approach a court of equity for an injunction to prevent that happening, and argue that because of the equitable set-off the landlord no right to re-enter. The tenant didn't do this. 162This makes it otiose to consider whether in any event there is an equitable set-off and if so for how much. The leading Australian Authority on equitable set-off is still the decision in Woodward J in Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10 and one must find that the transaction on which the defendant relies is so closely related to the transaction on which the plaintiff is suing that the plaintiff's claim is impeached. 163In Bayview Quarries Pty Ltd v Castle Development Pty Ltd [1963] VR 445, the Victorian Supreme Court held that even though contracts for the sale of goods were subject to some overriding master agreement, damages payable for breach of one contract could not be set-off against liability under a later contract under the same overriding agreement. There are contrary views as noted in the authorities as noted in footnote 110 to [4.21] of the Derham book. 164It would seem to me that in general there is no equitable set-off with respect to claims made under a previous lease even though the lease is of the same property. Again this matter was not argued. 165There is also authority for the proposition that one cannot set-off an unliquidated claim against a liquidated claim even under equitable set-off see McDonnell & East Ltd v McGregor [1936] HCA 28; 56 CLR 50. 166It seems clear that the tenant's claim is an unliquidated claim. As Goff J said in Lee-Parker v Izzet (supra): It is a question of fact in every case, whether or to what extent the expenditure was proper 167This was cited with approval by Bryson J in Batiste v Lenin (2002) 10 BPR 19441 at 19468 [102]. 168Before it was realised that equitable set-off was a substantive defence, it was clear why an unliquidated claim could not be set-off against a liquidated claim. That is because if there was to be some virtual cancellation pro tanto of the plaintiff's claim then there had to be a sum certain which could be set-off against it, and a claim which had to go to a jury (or later a judge) for assessment just could not fit that bill. It would be odd if the change in viewing the effect of equitable set-off lead to a different result. 169 Mr Derham does not accept this proposition. He says at [4.01] footnote 2 that: In a number of cases in Australia it was suggested that an unliquidated demand cannot be employed in a set-off 170He cites inter alia the McDonnell & East case but then goes on to say: However that suggestion is clearly incorrect in so far as it relates to equitable set-off see eg. Beasley v Darcy (1800) 2 Sch&Lef 403 n (in which the Lord Chancellor ordered that the defendant's cross-claim for damages be assessed by a jury). The same opinion seems to have been held by Woodward J in Galambos. 171I will not spend much time on this point as it is unnecessary in view of what I have just said. It is also clear that Derham's view is the prevailing one in the Court of Appeal (Lahoud v Lahoud [2012] NSWCA 401 and in academic writing. See eg Meagher, Gummow & Lehane, Equity Doctrines & Remedies, 4th ed (2002) [37-045]. However, more modern thought cannot overrule what the High Court seems to have said in 1936. 172It also should be noted that NSW has not adopted s 38 of the English Judicature Act, 1925. 173This has some significance because, as Megarry VC pointed out in the Asco case that the reason why English courts have not followed what I call the classic law as to when a tenant can deduct expenses from the rent which can be found in Hart v Rogers [1916] 1 KB 646 is because in England s 38 of the Judicature Act 1925 requires a court to give effect to equitable defences in common law actions see ([1978] 2 EGLR at 42). 174New South Wales has not adopted s 38. Instead it merely adopted the key provision of the English Judicature Act in the Law Reform (Law and Equity) Act 1972. Section 5 requires that where there is a conflict or variance between the rules of equity and the rules of common law, the rules of equity shall prevail but does not go so far as to say that one can now plead an equitable defence to a common law action. 175Immediately prior to the coming into force of the Supreme Court Act 1970, one could plead an equitable defence to a common law action provided that the defence would result in an absolute and unconditional perpetual injunction but otherwise the matter had to be transferred to equity. It seems to me that after the Supreme Court Act and the Law Reform (Law and Equity) Act that the same applied in that the court had to consider when an equitable defence was pleaded to a common law claim whether equity would have granted an injunction against the common law claim either an absolute and unconditional perpetual injunction or a conditional injunction. There was no recognition that an equitable defence was an absolute defence minus consideration of discretionary defences in equity. 176In Hart v Rogers Scrutton J declined to find that there was a set-off by a tenant for breach of the covenant of repair against the claim for rent. 177In British Anzani (Felix Stowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137 Forbes J declined to follow Hart v Rogers. In this court in Carrathool Hotel Pty Ltd v Scutti [2005] NSWSC 401 White J at [61] approved of the British Anzani case. I am not at all sure that because of the non-adoption of the English s 38 that it is appropriate to allow a substantive set-off to a tenant for repairs based on the doctrine for equitable set-off as opposed to allowing a set-off under s 21 of the Civil Procedure Act 2005. In few cases this will be of great significance but it would not be in this case because the landlord has not sued for rent so there is no claim by the landlord against which the tenant's claim can be set-off. 178However again this was not argued it seemed to be accepted by both sides that there was a right of set-off (without distinguishing what type of right). The point is controversial and, whilst I have set out my view on it, I have decided the case on the more obvious points. 179Accordingly it seems to me that although there are a lot of complications involved in the plaintiff's assertion of an equitable set-off, it is no answer to the defendants' claim that they were entitled to terminate the lease.

Question (9) 180What rebate if any should be allowed for non-repair? 181For the reasons given above in my view only that failure to repair that took place after 1 July 2013 could be set-off against the rent. Putting aside the argument that the rent had been commuted to $20,000.00, it is difficult to see how any of the repairs could have been more than the rent and accordingly there is no purpose in answering this question.

Question (10) 182Is the plaintiff entitled to damages for loss of opportunity or otherwise and if so, what? 183In his submissions of 28 May 2014, Mr Loofs put that the actions of the first defendant on 8 May 2013 in taking possession of the premises were without lawful justification and constituted a repudiation of what he calls the option lease and says that the plaintiff accepted such repudiation and sues for both expectation and reliance damages in accordance with the principals in Commonwealth v Amann Aviation Pty Ltd [1991] HCA 51; 174 CLR 64. 184This submission does not get off the ground because for reasons I have already given the action by the landlord on 8 May 2013 was justified. 185Even if this were not the case, I would have great difficulty in finding that the plaintiff suffered any substantial damages as a result. As I have indicated already its situation was that it was at law a tenant at will, terminable by a month's notice. Its equitable lease, if any, would not have been recognised because of the failure to pay any rent and so the claim would fall foul of the principal expressed in the maxim "he who seeks equity must do equity". 186I should point out at this stage that what the plaintiff seeks is in due course an assessment of damages for the loss of its opportunity to earn profits. 187This is purely a common law claim. In such a claim, the plaintiff must prove its damages. There is no room for reference to an enquiry. Normally, the trial judge makes the assessment as there is room at common law for a reference to a Master, see eg Bilambil-Terinanora Pty Ltd v Tweed Shire Council [1980] 1 NSWLR 465. However, if the matter is raised with the trial judge the judge may agree to defer the issue or to refer it out to a referee. 188I note this as it seems to have been expected from both sides that questions of quantum would be left to a later stage but I was not expressly told that. 189In the upshot, questions of quantum do not arise. I should, however, make some remarks on the issue in case this matter goes further. 190Even if the court were to accept the figure of gross retail profits for 1 month of $20,241.00, the damages could not be more than $66,000.00 and probably less. 191A tenant's damages for breach by a landlord of a covenant to repair are the difference of the value to the tenant of the premises. During the period from giving notice to the landlord to the expiry of the term between the premises in their unrepaired condition and that in which they would have been if the landlord had performed its obligations, subject, of course, to the tenant fulfilling its duty to mitigate damages (Hewitt v Rowlands (1924) 93LJKB 1080: [1924] All ER Rep 344) 192There is little evidence to enable such damages to be assessed. 193The tenant's case is that I should make an assessment on the basis of the meteorological records of what rain fell in Tweed Heads in the eight year period and then use a multiplier of the tenant's self assessed gross daily profit. 194That calculation would be a very rough and ready way of finding business profits, but it would not assist in finding the loss of useability of the premises. 195Again, if this calculation were the basis of an assessment of loss of a chance to gain profits in the future, the result of this calculation would have to be severely discounted.

Question 11 196The result of the case is that it does not matter how one looks at the plaintiff's case it must fail. 197However I am disturbed that the case has proceeded along the lines of a series of erroneous assumptions on both sides. I have noted most of these with a comment "this was not argued" as I have dealt with the principals that should have been applied. 198Some of these matters may be dealt with under the principle of conventional estoppel but no argument was actually addressed apart from the exercise of option question as to the extent of the applicability of that principle. For instance how far can the parties supposed mutual understanding that a renewed lease carries over all the rights and liabilities of the former lease, be made the basis of an estoppel by convention? 199It is clear that estoppel by convention cannot cover every field. For instance where there is an agreement to take a lessor sum in this charge of a liability to pay a greater sum the parties may well have reached consensus but the fact that the agreement is a nudum pactum and unenforceable because there is no consideration is not saved by the doctrine of conventional estoppel. 200It seems to me that it would be unwise of me to dismiss the plaintiff's claim at this stage. The High Court and the Court of Appeal have said over and over again that trial judges must deal with the arguments presented by the parties and not go off on some frolic of their own. That action cannot be stretched too far because not only the parties but also the judge are bound by principals of law. As so many vital points were not the subject of proper argument it seems to me that I should publish these reasons and then stand the matter over for further submissions to be made particularly by the plaintiff as to whether there is something that I should have considered, that I have not considered. 201This must not be considered as an invitation to seek to reopen a case, nor to restate what has been said previously. It is merely a safety net to ensure that previous omission to male submissions on a point I have found to be relevant will not have led me into error. 202I will not be sitting again in equity until after 25 August. Accordingly it seems to me that I should at this stage adjourn the matter to say 28 August at 9:30am for mention. If the plaintiff wishes to make further submissions it may do so in writing by 31 July and any reply by the defendant can be done by 15 August so long as copies of both are in my Associate's hands on 25 August, which will be the first day my staff will be returning to chambers. 203If no submissions are made I will on 28 August dismiss the present proceedings with costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 June 2014

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