Plaintiff v Defendant

Supreme Court of Victoria|2014-11-07|Before: MUKHTAR AsJ

LANDLORD AND TENANT ― Retail premises lease ― Landlord's statutory liability to maintain premises in same condition when lease was entered into ― Renewal of lease ― Defects in installations in initial leasehold term continuing into renewed leasehold term ― ― Express term of initial lease that landlord's obligation for repairs extended to renewals of lease ― Statutory obligation of repair arising only on entry of lease and referable to condition of installations as at renewal ― Whether express term more favourable to tenant is void as being contrary to or inconsistent with statute ― Tribunal finding of no invalidity ― Decision not attended with sufficient doubt ― Leave to appeal refused ― Retail Leases Act 2003 (Vic), ss 52, 94

1 This application for leave to appeal a decision of the Victorian Civil and Administrative Tribunal (constituted by Senior Member Riegler) concerns a dispute under a lease of retail premises used to operate a BP retail petrol station in Kealba. The installations on the land included five underground fuel storage tanks that feed the petrol bowsers.

2 The defendant ('the tenant') made the lease with the plaintiff's predecessor in title on 9 July 2007 for an initial term of five years to commence on 31 August 2007. The lease gave an option to renew the lease for three additional terms of five years each. The plaintiff ('the landlord') purchased the freehold in February 2009.

3 After October 2010 there was ingress of water, of an unexpected quantity, into three of the five tanks as a result of defects in or associated with the tanks. The expiry date for the initial leasehold term was 31 August 2012. After that expiry, an equitable renewed lease arose by virtue of the tenant having exercised its option for renewal. There was uncontradicted evidence from the landlord's expert repairer that the tanks and all associated infrastructure were operating correctly by September 2013 which is the month when the Tribunal hearing commenced.

4 In its application to the Tribunal, the tenant contended that the contamination caused damage to the fuel delivery equipment and to the cars that took fuel, and that it harmed its business trading in a substantial financial way. The tenant claimed loss and damage from October 2010 to 30 June 2013. It also claimed future losses of profits into the financial year ending 30 June 2014 because, so contended, it would take the business many months to get back to where it was. The tenant also claimed damages for loss of goodwill, liability for damaged vehicles, and the costs for the repair of fuel tanks and associated equipment. Its total claim was $1 194 585.

5 I need not rehearse the outcome or the individual financial result of the multiple issues before the Tribunal. It is sufficient for present purposes to say only a number of things. First, the Tribunal held there was insufficient evidence to sustain any claim for loss of future profits after the financial year 2013. Secondly, despite some discrepancies and uncertainties in the tenant's internal business records, the Tribunal found that the data to be found in the financial statements forming part of the tenant's tax returns and Business Activity Statements was sufficiently reliable to enable the assessment of damages to be made for loss of profits. Thirdly, the Tribunal allowed the cost of repairs to the fuel tanks and equipment and the cost of wasted fuel. The end result was an order that the landlord pay to the tenant an amount of $508 380. The loss of profits component was $442 401. The question of costs and interest has been held in abeyance.

6 The landlord's proposed notice of appeal on this leave application identified four questions of law, but the third and fourth of those were abandoned at the hearing.

7 The second proposed question of law concerned the assessment of the tenant's damages for loss of profit. The question agitated was whether there was sufficient evidence, or a credible basis, to equip the Tribunal with facts to properly assess that claim. As is common in a loss of profits claim, the tenant relied on expert accounting evidence, as did the landlord. The expert evidence was, in part, heard concurrently. The Tribunal preferred the methodology of the tenant's accountant.[1] In the quantification component of the exercise, paragraphs 23 to 32 of the Tribunal's reasons describe the discrepancies that were exposed between the data recorded in the tenant's internal documentation compared with the data recorded in financial statements forming part of its tax returns. In the course of this application, Mr Mackay of counsel for the landlord took me to salient parts of the documentary evidence and the transcript to expose what he said was the seriousness of the discrepancies. Much of it had to do with the question of the cost of sales and substantial write-downs of stock, which it seemed to me resulted in a lower gross profits figure, and thus, would work in favour of reducing the ultimate damages bill. That aside, and despite the able argument of Mr McKay, at the conclusion of argument on this leave application, the Court decided to refuse leave to appeal on that second question on the ground that on the Hulls[2] test for leave, the Tribunal's decision was not to my mind attended with sufficient doubt. I shall recapitulate my reasons.

8 Of course, it is necessary for the plaintiff in any claim for contractual damages to prove both the fact and the amount of its loss. The law recognises that it is not always possible to quantify that with exactitude, but the pursuit of compensatory justice to give something more than nominal damages impels the Court, as is frequently said, to do the best it can with the evidence. Difficulties of assessment may be attributable to problems inherent in the subject matter, as distinct from a plaintiff's failure to call available evidence. Where there is no evidentiary foundation for an assessment, then the Court is not bound to make some assessment of the damages. Indeed the case may be held to be not proved. The applicable principle as stated in JLW (Vic) Pty Ltd v Tsiloglou[3] is that if the evidence fails to provide any rational foundation for a proper estimate of damages, then the Court should decline to make an assessment of damages.

9 In my view, it was not possible in this case to say that there was no rational foundation for an assessment of damages, as the landlord submitted. I think there was a natural attraction for the Tribunal to look to data contained in income tax returns believing that such documents by their nature are submitted to the authorities under conditions of severe penalties for any false information. Those financial statements were prepared by external accountants (not called as witnesses) and whilst they are prepared with the usual disclaimers, they are verified as having been prepared on the basis of information from the taxpayer client. I think there was a rational basis for the Tribunal to act on them. Certainly, it cannot be said that the Tribunal descended into speculation or guesswork. True it is, there were instances where the expert called on behalf of the tenant (who did not prepare the financial statement) could not explain some discrepancies, but that was not so much to discredit the calibre of the expert as to cast some doubt on the reliability of the internal business records or instructions. A lack of confidence in the internal business records leads to any fact finder to look, reasonably I think, to officially lodge financial statements as a rational basis for drawing conclusions about financial affairs. In litigation of various types, information in tax returns is used as an evidentiary source and as a test of veracity of other evidence.

10 Accordingly, I took the view the Tribunal's assessment of damages was not attended with sufficient doubt to justify the grant of leave to appeal. Let it not be forgotten that the Tribunal is required under its statute to 'act fairly and according to the substantial merits of the case'. Within and beyond that, if I may say so, I think the Tribunal judiciously went about the assessment task faithful to legal principle and according to the evidence when as is often the case with loss of profits claims, a plaintiff's (small) business records contain some disorder and discrepancies.

11 I reserved my decision on the leave application on the first question because it raises a question of statutory construction of the Retail Leases Act. That is a question of law. At issue was the construction of a clause to be found in many Acts for consumer protection or which regulate contracts of adhesion where a statute, usually for the protection of the party in a weaker bargaining position, implies certain terms into a dealing and provides that any provisions of the dealing that are 'contrary to or inconsistent with' the statutory requirement are void. Mr Frenkel of counsel for the tenant urged the Court to see that the Tribunal's construction, which partly informed the assessment of damages, was plainly correct, and that the landlord's construction would give rise to such an unfair or capricious outcome that the application ought to be refused.

12 On these applications, the applicant does not have to establish error, for I am not deciding the appeal. But it is not enough to merely identify a question of law. Under the applicable rules of court, leave to appeal can be refused if the applicant 'does not have a prima facie case on appeal'.[4] When the Court in Hulls came to consider the test for granting leave under s 148 of the VCAT Act (not by reference to the rules of court), it recognised that expressions such as 'a prima facie case' or 'an arguable case' are no more than attempts to describe the degree to which an applicant test must satisfy the court from which leave is sought that there is a real or significant argument in favour of the applicant on the question of law as identified.[5] It also recognises that to speak of 'sufficient doubt' leaves open unavoidably what is meant by sufficient. It is a matter of judgment. But akin to what happens in summary judgment applications, the Court on a VCAT leave application frequently in my experience receives extensive argument in the exercise of seeing whether the decision is attended with sufficient doubt, and as in this case, there is no avoiding a real evaluation of the Tribunal's decision to see if it truly was.

13 For the reasons that follow I have come to the conclusion that leave ought to be refused on the first question too. I do not think the Tribunal's construction of the statute is attended with sufficient doubt. A question of statutory construction can always be re-debated by re-assertion and, it might be said, minds might differ. But in my view there is no significant argument to show the construction to be wrong. I think the literal construction for which the landlord contends cannot be right or countenanced. It gives rise to what a leading authority calls 'an inconvenience of result or improbability of result' and elsewhere, capricious and irrational: see Cooper Brookes Wollongong v FCT.[6]

14 The issue arises in this way. Section 52 of the Retail Leases Act states, where relevant (with my underlining):

(1) A retail premises lease is taken to provide as set out in this section.

(2) The landlord is responsible for maintaining in a condition consistent with the condition of the premises when the retail premises lease was entered into -

(b) plant and equipment at the retail premises; and

15 Section 94 of the Act states, where relevant:

(1) A provision of a retail premises lease or of an agreement (whether or not the agreement is between parties to a retail premises lease) is void to the extent that it is contrary to or inconsistent with anything in this Act (including anything that the lease is taken to include or provide because of a provision of this Act).

16 The landlord's argument proceeded along the following steps −

(a) the initial lease commenced on 31 August 2007;

(b) the ingress of water occurred, or was discovered, in October 2010;

(c) the lease was renewed for a further term of five years commencing 31 August 2012;

(d) a lease obtained by the exercise of an option to renew is a new lease, a new demise;

(e) under s 52 the landlord's obligation was to maintain the tanks in the condition they were in when the renewal was made ;

(f) as at the date of renewal the relevant underground storage tanks were already damaged;

(g) therefore, as the landlord's obligation under s 52 was only to maintain the (defective) condition of the tanks as the commencement of the lease (as distinct from keeping them in good repair) the landlord cannot be liable for damages after August 2012; and

(h) the upshot is that any claim of the tenant will only arise if it can prove that the fuel tanks were affected by new defects that arose after 31 August 2012.

17 On that argument, the landlord's accrued liability for the tenant's continuing loss and compensation for the damages suffered by the tenant from the landlord's admitted liability for the defects, suddenly stops at renewal. If correct, that means the tenant had an invidious choice indeed as the date for renewal approached: to either abandon the business and be content with damages up until renewal; or stay in business but expect no compensation for the continuing loss and damage for the defective tanks after the renewal date.

18 I am told that the difference between an assessment of damages that stopped at 31 August 2012 and an assessment that continued after that date (to 30 June 2013 as it turned out) is around $200 000.

19 The Tribunal accepted that under s 52 of the Act, the comparator for assessing condition was the date of renewal and not the date of the original term of the lease. That is faithful to the words of the section as informed by the legal principle that a renewal is a new demise.[7]

20 But in this case, the tenant had the benefit of clause 6.4 of the lease which stated:

The landlord must keep the structure of the building and the landlord's installations in a condition consistent with their condition at the start of the lease, but is not responsible for repairs which are the responsibility of the tenant under clauses 3.1, 3.2 and 3.3.2.

21 Clause 1.1 of the lease defined 'start of the lease' to be:

The first day of the term but, if this lease is renewable under an option in an earlier lease (whether or not this lease is on terms that are materially different to those contemplated by the earlier lease), the starting date of the first lease to contain an option for renewal.

22 Thus, under clause 6.4, the landlord agreed that upon renewal of the lease the installations (the tanks) had to be maintained in the condition commensurate with their condition at the commencement of the original term. But, the landlord says, if under s 52(2) it is only bound to maintain the condition of the premises as at the beginning of the renewed term, then clause 6.4 is void under s 94 because it is 'contrary to or inconsistent with' the landlord's responsibility under s 52(2).

23 The meaning or operation of s 94 has arisen in the Tribunal in other cases.

24 The Tribunal's decision in Savers Inc v Herosy Nominees[8] was contrary to the landlord's argument. It stands for the proposition that s 52 does not limit a landlord's obligations; it is a baseline obligation; and there is no prohibition on the landlord agreeing to a wider obligation of repair.

25 The landlord sought support from the Tribunal's decision in Ross-Hunt Pty Ltd v Cianjan Pty Ltd.[9] There, the retail lease was made in July 1996 for a three year term, with an option to renew for eight further terms each of two years. After a regular exercise of an option to renew, the relevant lease commenced on 1 August 2007. The tenant applied to have the landlord replace an air conditioning system at the premises. The lease did not have any express covenant to repair. It was argued that the landlord's refusal constituted a breach of responsibilities under s 52 of the Retail Leases Act. The landlord argued that if the air conditioning system was worn out or inadequate, that was its condition at the time the renewed lease was made in August 2007 and therefore there could be no question of any breach of s 52.

26 It is crucial to see that in Ross-Hunt the Tribunal was dealing with a submission the relevant retail lease was to be taken to have been entered into when the initial term was created in 1996 and not when it was renewed in August 2007. The Tribunal held, not unexpectedly, that for the purposes of applying s 52, the relevant lease was the renewal lease entered into on 1 August 2007. That is what the statute says. To try to overcome that, the tenant in Ross-Hunt argued that s 52 should be construed benevolently to relate back to the commencement of the original lease and not the renewal. Traditionally, remedial or beneficial statutes are interpreted having regard to the fact that they are intended to remedy a perceived injustice or provide a benefit to the persons to whom they apply.[10]

27 The Tribunal in Ross-Hunt rejected that argument, saying:

The Retail Leases Act and cognate legislation regulates the rights and liabilities between one another of landlords and tenants; it is a zero sum game. A right given to a tenant is an obligation imposed on the landlord. An immunity given to a landlord is a right removed from the tenant. The policy of the statute such as the Retail Leases Act is to draw what Parliament regards as a proper balance between the rights and liabilities of landlords and tenants to the particular area regulated by the Retail Leases Act. There is no broad outer area from which 'beneficial' principles can be drawn.

28 Great care must be taken with that general statement. It was there to dispel the proposition that a beneficent construction of s 52 ought to lead to the conclusion that despite the words of the statute, the relevant lease is not the current lease but the originating lease. In the present case, the Tribunal accepted that the relevant lease had to be the renewal lease. The difference in this case was that clause 6.4 of the original lease had the effect of placing into the renewed lease an obligation on the landlord not different in kind but which was referable to the condition of the installations at the start of the first lease. Ross-Hunt was unconcerned with s 94 of the Act and the issue in the present case.

29 Despite that, on this application, Mr Mackay's submission was:

By passing s 52 in combination with s 94, Parliament has laid down a compulsory and uniform standard of maintenance for all retail leases in Victoria. If it were possible to 'extend' the obligation in s 52 in ways that operated favourably to tenants by imposing a different and more expansive maintenance obligation in the express terms of the lease, then the 'proper balance' referred to by the learned Deputy President [in Ross-Hunt] would be altered, as an extension of a tenant's rights commensurately increases the burden assumed by a landlord. The legislature has effected a compromise between these competing interests and has prohibited the parties to a particular lease from altering that compromise by forming a contradictory agreement.

30 As is evident in the Tribunal's reasons, the approach to that question can be an adoption from the field of public law which analyses inconsistency according to whether it is direct or indirect. [11] In essence, the technique of statutory construction looks to see whether the clause here would alter, impair or detract from the operation of section 52(2), or whether it is capable of concurrent operation in a supplementary or cumulative way. It will be detraction if section 52 was intended to be a complete and exclusive statement of the limits within which the terms of a lease concerning repairs are to be confined. The landlord's submission was in effect that a 'direct collision' has occurred here because the clause puts a greater obligation (as far as timing is concerned) than that for which s 52(2) provides and the reasoning in Ross-Hunt is a sound basis for concluding a confinement or exclusivity to that section.

31 The question is whether the enlargement of the landlord's responsibility ― enlargement only in the sense of pushing back the comparator to the commencement of the original lease ― is contrary to or inconsistent with the comparator under s 52(2) and therefore forbidden under s 94.

32 As matter of comparison, the clause is 'inconsistent' in one sense: a strict literal sense. But the enquiry does not stop there, as the landlord's argument seems to do. The question is whether the different clause alters, impairs or detracts from the operation of section 52(2). The Tribunal in this case concluded that s 52 does not prohibit the parties from agreeing to extend the landlord's obligations to repair or maintain its installations.[12] The Tribunal held in essence that s 52 does not limit a landlord's obligations but rather imposes a minimum obligation on the landlord, and it was not 'contrary or inconsistent' for the landlord to agree to a greater obligation.

33 I think it is clear textually that section 52 (2) is not a restriction on the responsibility of the landlord. That is not to beg the question. It is to look at the words and see, without obscurity, that it is not couched in the language of a restriction of responsibility. The words state a responsibility for something. And, as the Tribunal observed, the only restriction or limitation is one that qualifies that responsibility under sub section (3). If it is not a restriction on liability, then the enlargement of the timing of liability cannot be said to alter, impair or detract from the operation of s 52(2).

34 Other factors fortify this view. First, the responsibility under the provision is there for the benefit of the tenant. If the landlord is willing to enlarge the statutory benefit, then to my mind, that does not negate or impair the statute. The two can operate consistently. It is in that sense I think the Tribunal's view that the section imposes a minimum obligation can be endorsed. That is, nothing in the statute curtails the landlord's freedom to agree to give more. If the statute had intended to go that far, there would need to be clear words to reveal such an intention.

35 Thirdly, I think the consequences of the landlord's contention in this demonstrate how an alternative construction can produce capricious results. A lease is a contract, like any other. A breach, which was conceded here by the landlord, sounds in damages. The damages here, from a breach in the initial term, were proven to have inured beyond the expiration of the first term as the breach had ongoing business effect on profits. On the modern purposive approach to statutory interpretation which looks to context in its widest sense (see CIC Insurance Ltd v Bankstown Football Club Ltd[13]) I cannot accept it as being faithful to the apparent objects of this legislation that having agreed to clause 6.4, the landlord can use s 52(2) to deprive justly the tenant of damages for that loss because of the fortuitous renewal of the lease.

36 For those reasons I would refuse leave to appeal. I propose to order:

(a) The application for leave to appeal is refused.

(c) The plaintiff shall pay the defendant's costs of the proceeding.

[1] Subject to a qualification about a zero growth rate for projecting future sales which is not presently relevant - see reasons at para 53.

[2] Secretary to the Dept. of Premier and Cabinet v Hulls [1993] 3 VR 331 at [8]-[13] but esp [12].

[3] [1994] VicRp 16; (1994) 1 VR 237 at 245-6 (per Brooking J).

[5] [1999] VSCA 117; [1999] 3 VR 331 at 335, [10] (per Phillips JA).

[6] [1981] HCA 26; (1980) 147 CLR 297 esp at 321-1 (per Mason and Wilson JJ).

[7] See Bradbrook Croft and Hay, Commercial Tenancy Law (Third ed) at [14.1].

[8] [2011] VCAT 1160 (Senior Member Lothian).

[9] [2009] VCAT 829 (Deputy President Macnamara).

[10] See Pearce and Geddes, Statutory Interpretation in Australia (Eighth ed) at 357-60.

[11] See amongst many authorities, Bow Ye Investments Pty Ltd v DPP [2009} VSCA 149 at 20, [70] ff.

At a glance

Court

Decision date

Before

Source

Judgment (65 paragraphs)

Parties

Legislation Cited (8)

Cases Cited (3)