Provident Capital Ltd v Zone Developments Pty Ltd [2001] NSWSC 843 | Case summary

Judgment 1 His Honour: On 17 August 2001 the first plaintiff commenced proceedings with an order from the Duty Judge abridging time for service of a summons for an injunction to restrain the defendant from terminating lease 5820938, and for a declaration that the defendant had unreasonably withheld consent to the assignment of that lease to Cabe Investments Pty Limited as trustee for the Zivanovic Family Trust. The summons was returnable on 23 August when Acting Registrar Howe adjourned it to the duty list on 30 August 2001. On that day the summons came before me. Although there were Judges other than the Duty Judge ready, willing and able to hear the case, unfortunately it ended up being heard in the duty list. 2 The first reason for this was that Mr Aitken for the defendant virtually demurred and as the virtual demurrer contained a short point I was tempted to deal with it as Duty Judge. The point was that the plaintiff was a mere mortgagee and was not the lessee and did not have standing to mount these proceedings. After a short adjournment, the plaintiff amended to add as a second plaintiff the lessee, Miranda & Norris Pty Limited (Administrator Appointed). It then seemed that the matter could be dealt with quickly and, as the list collapsed, I commenced it. Unfortunately, I was misinformed as to the availability of witnesses and the landlord tendered a last minute affidavit. 3 There was also some manoeuvring; the defendant wanted an adjournment on the basis that it had only recently been served, and had only recently put together its affidavit. The plaintiffs insisted that the matter be heard straight away, even despite an offer of the defendant to run dead on an injunction for a week. I probably made a mistake in consenting to hear the case because I think, in retrospect, it would have done both parties good to have reflected on it for a week. Unfortunately, the witnesses turned out not to be available and I had to continue the case and finish the evidence yesterday, interrupted by various interlocutory applications made during the day. 4 The second plaintiff is the lessee by assignment of the relevant lease. The lease is on Torrens System Land in Bourke St, Sydney and is for ten years from December 1998 with an option for a further ten years. The land has built on it licensed premises known as the Beresford Hotel. 5 The first plaintiff and the administrator of the second plaintiff have a proposal to transfer the balance of the term and the option to Cabe Investments Pty Limited. It is clear that Cabe Investments Pty Limited is to take the assignment as trustee for what has been described as the Zivanovic Family Trust. Whenever the assignment has been mentioned in correspondence the name of the assignee has always been followed by the words "as trustee for the Zivanovic Family Trust". 6 The lease makes specific provision for assignments in clause 9. By that clause: "The Lessee covenants and agrees that he shall not assign … in benefit of this Lease nor any estate or interest therein without the prior written consent of the Lessor PROVIDED HOWEVER that such consent shall not be unreasonably withheld if the following conditions are fulfilled, namely:- (a) The Lessee proves to the reasonable satisfaction of the Lessor that the proposed assignee or sub-lessee is solvent, respectable and responsible and the Lessee produces to the Lessor all documentary evidence as the Lessor may reasonably require in relation thereto; (b) All rent and other moneys due hereunder to that time are paid and there is not any subsisting breach of any of the covenants provisions and conditions on the Lessee's part contained in or implied by this Lease; (c) An appropriate form of transfer, assignment or sub-lease approved by the Lessor is duly completed, executed, stamped and registered without cost to the Lessor; ( d) The Lessee pays the Lessor's reasonable costs in respect of any such consent, including all fees and charges payable in respect of any enquiries made by the Lessor as to the solvency, responsibility or respectability of the proposed assignee or sub-lessee; (e) If the proposed assignee or sub-lessee is a company, then the Directors or principal Shareholders of that company shall, (if required by the Lessor) execute and complete a Deed of Guarantee in a form approved by the Lessor in respect of the payment of all rent and other moneys hereunder and the due performance of all covenants on the part of the Lessee contained in or implied by this Lease...." 7 In July of this year, there were meetings between representatives of the parties and others, and correspondence flowed between them and their lawyers. The main generator of the correspondence on behalf of the first plaintiff was Michael O'Sullivan and on behalf of the defendant Anne Taylor of Blake Dawson Waldron or Darren Vaux, who is a project manager employed by Summit Projects Australia Pty Limited, Summit being engaged by the defendant in respect of development activities on land, including the subject land, owned by the defendant. The directors of the defendant appear to be two gentlemen in Melbourne, neither of whom gave any evidence. It would appear that the defendant is conducting considerable property development in Bourke St, Sydney involving re-development of the St Margaret's Hospital site which will introduce into the area a large number of high class residences. 8 One of the underlying matters in this case is that it would seem that the present use of the Beresford Hotel produces considerable noise and is frequented by people who may not be popular to residents of high class residential establishments, and the plaintiffs urge on the Court that the real commercial reason, at least, for there being no consent to the assignment of the lease, is really based on this factor rather than on any opposition to the proposed assignee. 9 The correspondence was often directed to Anne Taylor, a senior associate of Blake Dawson Waldron, solicitors for the defendant. Typical is a letter of 19 July 2001 in which Mr O'Sullivan, after a meeting, said: "Further to our conversation we are hopeful of concluding negotiations with a potential purchaser within the next 7-14 days. The purchaser has indicated that they will require prompt settlement in order to be fully established for the upcoming Sleaze Ball weekend and pre Christmas increase to the recovery market. Accordingly: 1. Please provide your client's specific requirements for the assignment of the lease. 2. Please provide details and the quantum of all money owing to your client under the lease. Please give this your immediate attention". 10 On 24 July there was a follow-up letter indicating that the negotiations with the potential purchaser had "significantly advanced" and again indicating that the upcoming Sleaze Ball weekend was a commercial factor of considerable importance to the first plaintiff. 11 These letters were answered on 26 July 2001, which commenced: "Without admitting that our client is obliged to consent at all to an assignment of the lease, we are instructed to respond as follows: 1. if a proposed purchaser of the business has been found, our client's consent should be sought under the terms of the lease in the usual manner, including by submitting details of the proposed purchaser's background experience and financial status; 2. in considering any such request for consent, our client will need to be satisfied that the proposed purchaser will: (a) operate the business in accordance with the terms of the lease and the conditions of the liquor licence, including (without limitation) with respect to noise mitigation, trading hours and provision of food from the premises; and (b) otherwise comply with the lessee's covenants under the lease, including (without limitation) to provide a bank guarantee; and 3. the lessee should attend to the satisfaction of the attached notice which our client received from South Sydney Council, following the lessee's failure to provide essential services certificates on time. We will forward to you full details of our client's debt shortly. Our client otherwise reserves all its rights in respect of this matter." 12 Mr Angyal for the plaintiffs indicated that those were unhelpful replies and that there was no furnishing of details of all moneys owing. The letters were replied to in the context of meetings where it was quite clear that the commercial interests of the parties were opposed, and that the mortgagee on behalf of the lessee which had negotiated an assignment of the lease would need to proceed with care and comply with the requirements of the lease. 13 On 2 August 2001 the first plaintiff wrote a letter to Ms Taylor (Exhibit DX137) which was accompanied by about sixty pages of information. The application was on the letterhead of the first plaintiff and was signed by Mr O'Sullivan. It commenced: "In accordance with clause 9 of registered lease 5820938J we submit the following proposed transferee for your consideration. Proposed sub-lessee; Cabe Investments ACN 068 575 922 atf Zivanovic Family Trust Managing Director; Lubo Zivanovic.105, 29 Norwest Business Park Solent Cct Baulkham Hills NSW 2153. Registered Office: 1/222 Clarence St Sydney NSW 2000 Accountants; Brentnalls - 1/222 Clarence St Sydney NSW 2000. Attn: Douglas Seymour - Managing Partner (02) 9264 9688 Financial Statements; Summary Balance Sheets provided year to 30 June 1997,1998,1999,2000. Accountants comments 2001. Financial Statements 1999 & 2000. Copy of Cabe Investments Land Tax Notice (to follow). Confirmation of sale 24-28 Brisbane Rd Castle Hill. Hotel Experience; Lessee of the 'Empire Hotel' Nowra since 1996, purchasing the freehold June 1999. Enclosed is a brief synopsis of the proposed transferee's vision for the hotel, which we have requested the proposed transferee to provide in accordance with your instructions. General; The principal activity of Cabe Investments and Mr Zivanovic is scaffold erection and property development. Cabe Investments is the principal shareholder and Mr Zivanovic is the Managing Director of Erect Safe Scaffolding (Australia) Pty Limited ACN 090 682 572 a leading scaffolding firm with turnover in excess of $7,000,000.00. Current property developments include 10 townhouse development at 24-28 Brisbane Rd Castle Hill which is 100% presold with gross sales of $3,296,000 less a first registered mortgage of $400,000. Provident Capital has extended facilities to Cabe Investments secured by the development site at Castle Hill and the 'Empire Hotel' Nowra. With the consent of Mr Zivanovic and Cabe Investments we enclose credit reference reports May 2001. Furthermore, we confirm; - (a) all rental arrears will be paid at assignment. (b) we will have our solicitors prepare an appropriate form of transfer for your prompt approval. The assignment will be duly completed, executed, stamped and registered without cost to your client. (c) Your client's reasonable costs with respect to the transfer and your enquiries will be paid. (d) Personal guarantees are available. (e) All license, lease and Local Municipal Council requirements will be adhered to. As advised, the proposed transferee is keen to conclude the assignment. The proposed transferee has been instructed to obtain a 3-months bank guarantee in favour of Zone Developments which we have been advised will be available within 48-hours of notice...". 14 It will be seen that whilst the letter refers to a proposed sub-lessee, the general tenor of the letter was this was in error for an assignment. No one has taken the point that there was any confusion at all. 15 The letter was accompanied, as I have said, by various documents. One was a letter on the letterhead of the Cabe Group signed by Mr Zivanovic indicating that he intended to take full advantage of the hotel's permissible trading hours of 5am to 3am Monday to Saturday and 5am to midnight on Sunday, and that hours might be altered depending on the viability of trading mid-week. He noted that the hotel had a long and successful history of catering for the gay and recovery market. He further noted that the recovery market will operate early Saturday, Sunday and Monday mornings through to the evening of the same day. High energy dancing music would be provided. The recovery market appears to mean that this is a hotel to which people resort after they have already spent their night drinking or night clubbing so that they continue on with their entertainment for the rest of the day. Further, Mr Zivanovic later noted: "We recognise the licence requirements with respect to noise. This will be strictly adhered to. Furthermore appropriate security will be provided for the benefit of patrons and the local community." 16 This seems to indicate that Mr Zivanovic was alive to the reasonable concerns of others in the area, including the lessor, ie the continued use of the Beresford Hotel for the "recovery market". 17 The financial accounts attached to the letter were not signed and do not appear to be audited. The basic accounts were for the financial year ended 30 June 2000. The chartered accountant who prepared that said in his report: "The Client is solely responsible for the information contained in the special purpose financial report and has determined that the accounting policies used are consistent with the financial reporting requirements of the Client's constitution and are appropriate to meet the needs of the Trustee for the purpose of reporting year end results. Our procedures use accounting expertise to collect, classify and summarise the financial information, which the Client provided, into a financial report. Our procedures do not include verification or validation procedures. No audit or review has been performed and accordingly no assurance is expressed." 18 There then followed a series of accounts which showed that there was a capital profit on disposal of assets of $1,000,000. There were losses on every other venture that the trust took part in, but by reason of sliding the capital profits of $1,000,000 into the income the accounts purported to show a total trading profit of $546,000. Although this was a capital profit, and the beneficiaries were only entitled to receive distribution of income, the accounts showed that the capital profit was in fact distributed as income, or at least it was transferred to various peoples' loan accounts with the company so that at the end of the year the only funds were $500. 19 The accounts also showed that the current liabilities - and there was a reference to note 7 - were in excess of current assets by $3.6 million but that non-current assets exceeded non-current liabilities by the same amount. Note 7 noted that the main liabilities were "loan-related entities" $4.1 million. 20 Later a similar looking document, again bearing date 10 July 2001, was proffered by the first plaintiff to the lessor. The accounts were the same but the notes were different. No explanation was given as to this but the principal difference was that the loans related entities were shown as being from Cabe Investments Pty Limited. Just how Cabe Investments happened to lend the Family Trust $4.1 million was never made clear. No accounts of Cabe Investments Pty Limited were ever furnished, despite the fact that the landlord requested further details. It would appear that Cabe Investments not only was the trustee for the Zivanovic Family Trust, but also was involved in some other business on its own account, otherwise it could not have lent that $4.1 million. As I have said, there is also the indication that Cabe Investments was involved at least at one stage in the scaffolding industry where it was the principal shareholder of the operating company. Whether that was as trustee or not no one has ever told us. 21 As I said, in addition to the unaudited and later adjusted accounts as at 30 June for the Zivanovic Family Trust, there were some skeleton balance sheets for the years 1997,1998 and 1999 which consisted of a two page document. 22 The accounts also seem to indicate that the scaffolding business was sold at a profit. 23 On 7 August 2001 the defendant's solicitors faxed a memo which referred to the letter of 2 August and said: "We confirm that we have provided a copy of the letter to our client for instructions. Our client is still considering your proposal and will be obtaining the advice of its accountants, however it appears that the proposed lessee will not fit the criteria detailed in the lease. We note that the proposed purchaser's offer is conditional upon completion being effected by 10 August 2001. This does not appear achievable. Please advise if there is some flexibility with this date. We will advise you once we have received further instructions from our client however, if you do have lawyers acting for you in this matter it is appropriate that any further correspondence be through them". 24 The next day there was a letter, again from Mr O'Sullivan to Ms Taylor, which said: "Clearly the proposed Lessee fits the criteria detailed in the lease. The proposed Lessee has both the financial capabilities and experience to fulfil all the lease obligations for the remainder of the lease term and option period. Please provide detail as to how the proposed Lessee does not fulfil the criteria under the lease." 25 The letter then said that there was an extension to 15 August 2001 and Mr O'Sullivan could not see any reason why he should employ lawyers. 26 Further financial information was forwarded on 9 August 2001; this principally consisted of the amended version of the accounts so far as the notes were concerned, and a memorandum from the accountant that the assets were booked at purchase price and that their current value would be about $1,000,000 more than noted; that in addition to the bank guarantee, the personal guarantee of Mr Zivanovic was available. 27 On 10 August 2001 Ms Taylor wrote that the defendant had further considered the material and indicated that no further information had been provided in the letter of 8 August 2001 as the attached accounts were the same as those attached to the letter of 2 August. Pausing there, Mr Angyal was trenchant in his criticism of Ms Taylor for that comment, saying obviously she and her clients had not read the accounts forwarded on 8 August. However, as I have indicated, the only things changed were the notes and the notes were not much more helpful than the earlier set of notes. 28 Ms Taylor's letter then continued: "2.1 You have proposed an assignee which is the trustee of a discretionary trust. Our client is concerned that such an entity will not have the appropriate resources to meet the lessee's financial obligations for the remainder of the term of the lease, which are estimated to be 52,225,000. The lessor has no security if the income and/or capital of the trust is distributed. Our client should be provided with a copy of the trust deed, but we assume that such distributions may be made as a matter of course. "2.2 You have indicated that Mr Zivanovic will personally guarantee the obligations of the lessee. Our client should be provided with current financial information in respect of Mr Zivanovic. "2.3 As well as being satisfied in relation to the proposed assignee's ability to meet the lessee's financial obligations under the lease, our client requires information in relation to the initial funding of the purchase. Will there be further borrowings? If so, please provide us with details of this funding and any security proposed". 29 I will not set out the next page of the letter which contained I think another ten requisitions partly dealing with the operation of the hotel and partly dealing with financial matters. 30 Mr O'Sullivan replied to that letter on 13 August 2001, merely saying: "The financials and supporting information provided clearly demonstrate the proposed assignees capacity to perform under the lease. 2. General Financial . 2.1 A discretionary trust has no more or less capability of performing under the lease than does an individual or a company, both of which can distribute income or divest itself of assets. The question is, does the proposed assignee have the capability to perform both the financial and operating requirements of the lease? Clearly the proposed assignee does." 31 There was then provision of some detail and the letter ended up by saying: "We are however concerned at your client's reluctance to accept the proposed assignee, consent which we believe is being unreasonably withheld". 32 The letter then indicated they would seek an order compelling provision of consent for the assignment of the lease. 33 On 14 August the first plaintiff provided further information indicating that asset revaluations would increase its assets by $1.8 million and enclosing "the draft balance sheet" of the Zivanovic Family Trust. The draft balance sheet did not really appear to be any great improvement, nor were the figures changed in any material respect, the accounts still showing that Cabe Investments Pty Limited had lent $4.1 million. 34 Three days later on 17 August 2001 the current summons was filed. The time for considering the question before the Court is thus 17 August 2001, though of course facts occurring after that date may throw their light on the answer to the question as at 17 August 2001. 35 The matters which I believe I need to consider are:

(3) The onus of proving that the consent has been unreasonably withheld is on the tenant. 43 Proposition (3) needs to be stated because a considerable deal of Mr Angyal's submissions and cross-examination were directed to the proposition that if a landlord, when told by a tenant or the tenant's mortgagee that it proposes to assign the lease shows itself unhelpful or if it does not provide a relatively instant response to what the tenant is seeking the tenant can take it that the landlord is withholding consent. Thus, by a series of correspondence to a landlord one can prove by the landlord's non-helpful responses that the landlord's motive is such that it will never consent. However, it is commercially naive to have thought in the instant case that the landlord would be anxious to consent, and in any event, the landlord had no obligation at all to do anything until an application was made for consent under clause 9 of the lease. 44 It will be observed that the letter of 2 August 2001 was given by the mortgagee for the lessee and not the lessee itself. I noted earlier that this point had been dealt with at a very early stage of these proceedings and I had assumed, until right towards the end of the case, that everything that was being put forward was being put forward by the lessee acting by its agent, the mortgagee. However, when Mr Aitken for the lessor endeavoured at 3.20pm yesterday to tender the letters which were MFI 223, he was met with the objection that these were not letters that had come from the appropriate party. It then became quite clear that the plaintiffs were, in fact, distinguishing between material which had come from the lessee and material which had come from the mortgagee, and that the mortgagee should not always be assumed to be acting as the lessee's agent but rather on its own account. 45 This complicates the matter because it would seem that a case could be made that the letter of 2 August 2001 was a letter by the mortgagee and not a letter on behalf of the lessee and thus there had never been an application for consent. 46 However, as most of the case was conducted on the other basis, I will deal with it as if it were a letter by the mortgagee as agent for the lessee. 47 One then has to consider whether clause 9 has been complied with. First, there has to be an application to the lessor for consent. The lessor is obliged to give that consent or, putting it negatively, it should not unreasonably withhold the consent if and only if the conditions are fulfilled. 48 The clause seems to contemplate that at the time when the application is made there has already been an unconditional contract for assignment. We do not know whether that has been satisfied. It would appear that what has happened in this case is there was a conditional contract for assignment with time limited by 15 August 2001, though whether that was of the essence or not we are not told. 49 Who is the proposed assignee? The answer to that question would appear to be Cabe Investments Pty Limited. Unfortunately, it appears that the mortgagee did not obtain legal advice about this factor at the appropriate time, one reason being that a person with legal qualifications was one of its directors. Indeed, there does not appear to have been any proper analysis on the plaintiffs' side as to what one is really doing when one takes property in the name of X as trustee for Y. I note commercially it is done very often, and accounting firms evidently recommend it. But when one is dealing with a significant amount of property one has to deal with these questions as matters of law and not as matters of accounting practice. 50 There have been a number of cases recently where the status of trading trusts, particularly trading trusts which go into liquidation, have been considered. The principal authorities are Re Suco Gold Pty Limited (1983) 7 ACLR 873 and Re G B Nathan & Co Pty Limited (1991) 24 NSWLR 674. 51 The basic principles appear to be that when one has a contract made by X as trustee for Y, X has, as its own property, only a right of indemnity against such of the trusts assets as are being used in trade. Creditors, including liquidation creditors, cannot touch on the assets of the trust beyond this. 52 There is also an argument, though it depends on a question of fact, that where X trades on behalf of Y, that X can only be sued to the extent of the assets of the trust; see eg Muir v City of Glasgow Bank (1879) 4 App Cas 337; Boag v Ross (1922) 22 SR (NSW) 247; Head v Kelk (1963) 63 SR (NSW) 340; McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623. 53 Accordingly, when a consent to an assignment of a lease is being sought on behalf of an assignee who expressly says that it is a trustee for a discretionary trust and the landlord is considering the question as to whether the proposed assignee is solvent, it must consider the assets of the assignee itself (X) as well as the trust (Y) and work out what are the businesses of X so that it can see to what funds it can resort. Under clause 9(a) of the lease it was the obligation of the lessee to provide to the reasonable satisfaction of the lessor material to prove that the proposed assignee is solvent. By not providing any financial details as to Cabe Investments Pty Limited (other than a rather curious credit bureau report which revealed that it had a credit risk of 1.4% more than normal) and the unaudited 2000 accounts of the trust, the material was not sufficient to prove, to anyone's reasonable satisfaction, that fact. That being so, the condition for the giving of consent had not arisen and accordingly, even if the landlord had delayed it had not withheld its consent. 54 I have not gone into the question of what rent was owing under the lease. The clause itself reads as if, at the time of giving the consent, all rent must actually be paid. The clause is a little difficult to construe as obviously the consent has got to be given before the assignment, yet the assignment is sometimes thought to be of operative date for what is to happen under clause 9, and at other times the application for consent to the assignment. On a strict reading of clause 9(b) all the rent would have to be paid on the date of the application for consent and this did not occur. However, I do not want to go into that particular point because there might be an argument that the precise amount of rent was never given to the applicant despite a request, and that the parties had proceeded on the basis that a promise to pay on completion was sufficient. Accordingly, I merely note the point. 55 That is sufficient to decide the case. However, if I were wrong in what I have just said, then the question would arise as a question of fact, as to whether the consent was withheld and whether the withholding was unreasonable. 56 The application was made on 2 August 2001 and I have set out, I suppose ad nauseam, the correspondence between 2 and 14 August 2001. The application was filed on 17 August 2001. I do not consider in all the circumstances, indeed including the requests for information and the continued responses, "you have got enough" that sufficient time has gone by for there to be a constructive refusal when there was no consent forthcoming by 17 August. Accordingly, I would find as a fact that by 17 August sufficient time had not gone by whereby the non-consent had amounted to a withholding of consent. 57 Even if I was wrong on that, in all the circumstances of the present case I would not find as a fact that the withholding was unreasonable. 58 Mr Angyal stressed and quoted authorities such as Re Smith's Lease [1951] 1 All ER 346, .349; Colvin v Bowen (1958) 75 WN (NSW) 262, 264 and Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Limited (1979) 144 CLR 596, 610, that the landlord cannot refuse consent on the basis that it requires to resume possession of the property itself. This is really Balcombe LJ's second proposition. The proposition itself is quite clear but this means one must work out just what was the ground on which the consent was withheld. It matters not that the landlord might have a motive for using the property itself and thus has been particularly pedantic in scrutinising the application, so long as the genuine reason for withholding consent is lack of information, or alternatively a ground connected with the personality of the tenant or use of the property. It is not uncommon, even in commercial life, for people to have to weigh their preferences on the one hand, with their contractual duty on the other. There will be cases where the landlord says it declined consent on the basis that the tenant has a bad credit rating, but the Court can see as a matter of fact the real reason is the landlord's desire to occupy the property itself. However, there will also be cases where the real reason for refusal in that scenario is actually the bad credit rating. It is a question of fact in each case. 59 I have heard Mr Vaux's evidence, and I have, of course, heard the evidence of Mr O'Sullivan and Mr Bersten. I am not convinced that the reason, if there was a withholding of such consent at any stage, was because the landlord wanted to occupy the property itself. In my view the lack of information, and the quite serious problems that exist with an assignment of a valuable property to someone who is a trustee of a discretionary trust (which the mortgagee does not appear to have comprehended), were sufficient reasons for withholding consent. 60 Accordingly, whichever way one looks at it, the suit fails and must be dismissed with costs. The exhibits should be retained.

Provident Capital Ltd v Zone Developments Pty Ltd

At a glance

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Judgment (13 paragraphs)

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Cited By (4)