R&J Lyons Family Settlement Pty Limited v 155 Macquarie Street Pty Limited

R&J Lyons Family Settlement Pty Limited (First Plaintiff/First Cross-Defendant) Geoffrey Charles Tablot (Second Plaintiff/Second Cross-Defendant) PARTIES : 155 Macquarie Street Pty Limited (First Defendant/First Cross-Claimant) Ranec Pty Limited (Second Defendant/Second Cross-Claimant) Lend Lease Development Pty Limited (Third Defendant)

COUNSEL : Mr M L D Einfeld QC with him Mr M Cohen (Plaintiffs/Cross-defendants) Mr M T McCulloch SC with him Ms P McDonald (Defendants/Cross-claimants)

SOLICITORS : Wright Stell (Plaintiffs/Cross-Defendants) Henry Davis York (Defendants/Cross-Claimants)

• 14 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1652/06 R & J LYONS FAMILY SETTLEMENT PTY LTD v 155 MACQUARIE STREET PTY LIMITED JUDGMENT 1 This judgment deals with the determination of an issue raised by the defence to cross-claim and reply to that defence filed in this action. On 19 June I ordered that the issue be tried as a separate issue prior to the determination of other issues on the cross-claim. The matter came on for hearing as an urgent matter in the duty list. 2 The evidence led consisted of the pleadings in the action and a settlement deed executed on completion of a mediation between all the parties to the original proceedings. The cross-claim presently in issue is between the first and second defendants as cross-claimants and the plaintiffs as cross-defendants. 3 It was accepted by the parties that the pleadings I should consider were the further amended statement of claim filed on 21 December 2004; the amended defence and cross-claim of the first and second defendants filed on 28 February 2005; the cross-claim originally filed in June 2003, but repeated in the same terms with the amended defence of 28 February 2005; and the defence to cross-claim filed on 15 October 2003, but on the understanding that paragraph 2(a)(1) of that defence to cross-claim where it refers to paragraphs 11 to 20 of the amended statement of claim, should be treated as a reference to paragraphs 11 to 20 of the further amended statement of claim. 4 The plaintiffs entered into an agreement for sub-lease from the first, second and third defendants as sub-lessors in respect of part of premises 155 Macquarie Street, Sydney. The obligations under that agreement would appear to have merged as a matter of law in the sub-lease from the first and second defendants to the plaintiffs dated 24 July 2001. That however need not be decided and some of the claims of the plaintiffs, at least against the third defendant, are pleaded as based upon the agreement for sub-lease, rather than on the sub-lease itself. The commencing date for payment of rent under the sub-lease was 1 February 2002. The initial rent was $465,000 per annum plus $32,500 for use of one kiosk in what was termed an exclusive use licence space. 5 The first claim in the further amended statement of claim can be called the "kiosk claim". It is a claim of breach of contract through refusal of the first and second defendants to permit the operation of the kiosk in the exclusive use space. Orders were sought for specific performance of that agreement and damages equal to the rent paid in respect of the kiosk from 6 June 2002. There is an alternative claim for compensation and loss of the opportunity to make profits. The kiosk claim can be disregarded. 6 The claim relevant to this judgment is pleaded in paragraphs 11 to 20 of the amended statement of claim. Put briefly, the plaintiffs allege that under the terms of agreement for lease the first, second and third defendants were to provide the plaintiffs with the necessary information to enable the plaintiffs to prepare fit-out plans in respect of the premises the subject of the proposed lease, that these were submitted to those defendants and approved on 7 June 2000; that the said defendants were to use reasonable endeavours to make the premises available to the plaintiffs for the purpose of carrying out the fit-out works; that the said defendants would supply hydraulic connection to the premises for future connection by the plaintiffs at the expense of the plaintiffs and in particular would provide hydraulic services to suit the particular kitchen layout; that the provision of these hydraulic services required penetration of the floor slab of not only premises the subject of the sub-lease but of parts of the common property and particular lots in the relevant strata plan below the sub-leased premises; and that there was thereby an implied term or warranty by those defendants that they were legally entitled to carry out of the penetrations required to provide the hydraulic services. 7 It was then pleaded by paragraph 16A and 16B put in by way of amendment in the further amended statement of claim first that it was an implied term of the agreement for sub-lease that the first, second and third defendants would procure the necessary easements for the purpose of making the necessary penetration so as to enable timely completion of the lessee's fit-out works and commencement of trading; and further that it was an implied term of the agreement for sub-lease that in the event that the first, second and third defendants were not legally entitled to make the penetrations through the strata lots as required for the purposes of providing hydraulic and other services then (a) the rent reserved pursuant to the agreement for lease and sub-lease thereby abated for the whole period of the plaintiffs' inability to have the benefit of the hydraulic services or (b) that any or all rent paid by the plaintiffs during the whole of the period in which services could not be made available constituted liquidated damages of the plaintiffs and (c) that any costs, expenses or damage arising from or consequential upon the absence of entitlement to make the penetration constituted liquidated damages or general damages incurred by the plaintiff and payable by the first, second and third defendants in the event of a breach of such implied terms. 8 Paragraphs 17 and 18 then plead breach of the express and implied terms relied upon through the failure to make the hydraulic services available; paragraph 20 then pleads loss and damage resulting from delay in completion of the plaintiff's fit-out works and gives particulars of the loss and damage as follows: (a) rent due and payable for the period from 1 February 2002 until 18 January 2003, (b) loss of profits arising from delay in completion of fit-out works; (c) interest on borrowings for the fit-out works from 27 March 2002 to date; (d) abatement of rent; (e) costs and expenses flowing from inability to make penetrations. 9 There was also a claim brought against the partners of Messrs Freehill Hollingdale and Page, but that can be disregarded. Cross-claim 10 The cross-claim of the first and second defendants is first a claim for rent due under the lease and second a claim for costs incurred at the request of the defendants in obtaining an easement for services. The second claim can be disregarded at the present moment as not relevant to the separate question. Paragraphs 23 and 24 of the original cross-claim which have now become paragraphs 35 and 36 of the document filed on 28 February 2005 are as follows: 35. Pursuant to the Lease Agreements, the first and second cross-defendants were liable to pay rent to the first and second cross-claimants on 1 February 2002 with a base rental of $465,000, such payments to be made in equal monthly payments together with a proportion of outgoings specified to be 1.784%. 36. The first and second cross-defendants have failed to pay rental for the period July 2001 to 31 January 2003 and 1 February 2003 to 30 June 2003 (entire rent not paid) less $100,000 pain on or about 24 December 2002 on account of unpaid rent. 11 The relevant claim under the cross-claim is for damages and interest for breach of the covenant to pay rent including rent for the period from 1 February 2002 until 18 January 2003.. 12 The defence to cross-claim admits paragraphs 19, 20, 21 and 22 of the cross-claim, now by paragraphs 31 to 34 of the current document, those being the averments relating to the claim for rent including an admission of paragraph 21 (now 33) of the cross-claim, namely that it was a term and condition of the lease agreements that rental would be paid at monthly intervals from 1 February 2002. What is at issue here is paragraph 2 of the defence to cross-claim, which is in the following terms: 2. In answer to paragraphs 23 and 24 of the Cross-Claim the Cross-Defendants say as follows: (a) As to the period 1 February 2002 to 31 January 2003 the Cross-Defendants: (i) Refer to and rely on the matters pleaded at paragraphs 11-20 of the Amended Statement of Claim and say that by reason of those matters the Cross-Defendants are not indebted as alleged or at all in relation to the Cross-Claimants' claim for rent for the period 1 February 2002 to 31 January 2003; and (ii) In addition, or in the alternative, say that by reason of the Deed of Release entered into between the Cross-Defendants and the Cross-Claimants on 24 December 2002 ( "the Deed of Release" ), which the Cross-Defendants rely on as if it were pleaded here in full, even if, despite the matters pleaded at paragraphs 11-20 of the Amended Statement of Claim, and which is denied, the Cross-Defendants are or could be indebted as alleged in relation to the Cross-Claimants' claim for rent for the period 1 February 2002 to 31 January 2003, no such rent is due and payable by the Cross-Defendants to the Cross-Claimants until, and depending on, the outcome of these proceedings; (b) As to the period 1 February 2003 to 30 June 2003 the Cross-Defendants say that they have fully complied with their obligations to pay rent pursuant to the Lease Agreements and the Deed of Release; and (c) Save as aforesaid the Cross-Defendants do not admit paragraph 23 and deny paragraph 24 of the Cross-Claim. 13 It is only paragraph 2(a)(i) which is relevant to this decision. 2(a)(ii) has no bearing on the matter being relevant to an agreement which had the effect of preventing the lessor calling upon a bank guarantee in certain circumstances. Mediation 14 The parties (including Freehills) entered upon a mediation of the proceedings before the Honourable G E Fitzgerald, AC, QC. 15 The mediation led to a document called a settlement deed of 3 December 2005. The mediation covered not only the proceedings the subject of this judgment but other proceedings numbered 20148 of 2004. The terms of settlement included the following:

(a) 1 Payment 1.1.1 Payment by 155 Macquarie, Ranec, LLD and Freehills Without any admission of liability, LLD, 155 Macquarie, Ranec and Freehills agree to pay to R&J Lyons, Mr Talbot and Lyons Brothers the total amount of $1.1 million inclusive of costs and interest (" Settlement amount ") (b) The release by the plaintiffs in this action and the plaintiffs in the other proceedings which were known as the gaming proceedings of Lend Lease Developments and Messrs. Freehill Hollingdale and Page in respect of all claims made against them in both proceedings (c) The release by Lend Lease and Freehills of the plaintiffs in each claim from all claims relating to either action and the documents relevant to the sub-lease. (d) Release by R&J Lyons, Lyons Brothers and Mr Talbot of the first and second defendants in the following terms: Upon the execution of this Settlement deed, R&J Lyons, Lyons Brothers and Mr Talbot:

(a) Release each of 155 Macquarie and Ranec of all claims, actions and causes of action (including any claims for costs), present and future, including relating to the Easement Proceedings, the Gaming Proceedings and the Heads of Agreement.

(b) agree that 155 Macquarie and Ranec may plead this Deed to bar any claim, action or cause of action (including any claim for costs) brought by R&J Lyons, Lyons Brothers and Mr Talbot relating to the Easement Proceedings, the Gaming Proceedings and the Heads of Agreement.

(c) agree not to commence or maintain any claim, action or cause of action (including any claim for costs) against 155 Macquarie and Ranec relating to the Easement Proceedings, the Gaming Proceedings and the Heads of Agreement.

(d) agree to indemnify 155 Macquarie and Ranec against any liability, loss or costs arising from a breach of paragraph (c); and

(e) agree to ensure that any person with whom it is associated in any way does not commence or maintain any claim, action or cause of action (including any claim for costs) against 155 Macquarie and Ranec relating to the Easement Proceedings, the Gaming Proceedings and the Heads of Agreement." (e) Clause 7 which is an interpretation clause includes a definition of "cross-claim" as being the cross-claim in these proceedings and a definition of "easement proceedings" as follows: Easement proceedings means proceedings No 20065 of 2003 in which R & J Lyons and Mr Talbot are the plaintiffs (not including the cross-claim which is defined above); and the matter the content of order 1 of the notice of motion filed by the plaintiff in the easement proceedings and dated 25.11.2005. 16 The proceedings referred to as number 20065 of 2003 were this action under its previous Common Law Division number before it was transferred to Equity. The notice of motion was not put into evidence before me but it is a court document under which the plaintiff seeks orders relevant to matters arising under s133E of the Conveyancing Act 1919 as to whether the plaintiffs are entitled to exercise an option for a new sub-lease. 17 By reply filed in court on 19 June 2006 the cross-claimants plead the release contained in the mediation settlement deed of 3 December 2005 and say that paragraph 2(a) of the defence to cross-claim is a "claim", "action" or "cause of action" within the meaning of clause 2.3 of the settlement deed and that accordingly the allegations contained in paragraph 2(a) of the defence to cross-claim cannot be maintained against the cross claimants. They further say that it was agreed under the settlement deed that it could be pleaded in bar "to any claim, action or cause of action brought by the cross defendants relating to the Easement proceedings" and further that under the settlement deed the cross-defendants agreed not to maintain any "claim, action or cause of action against the cross-claimants". Separate Questions 18 The order which I made for a trial of a separate issue was that the following questions be determined:

(a) Whether the cross-defendants are entitled to maintain by way of defence the matters pleaded in paragraph 2(a) of the defence to cross-claim.

(b) Upon the true construction of the deed of settlement dated 3 December 2005, did the cross defendants release the cross claimants in respect of any, and if so which, matters in paragraph 2a(i) and (ii) of the defence to cross-claim so as to prevent them from relying on paragraphs 2a(i) and (ii) of the defence? 19 The competing arguments on the questions can be summarised as follows:

1. That the defences raised in paragraph 2(a) do no more than raise as a set off the same claims pleaded in paragraph 11 to 20 of the further amended statement of claim; and that this is a claim barred by the release.

2. That the plaintiffs' claim in the proceedings has been settled by payment and under the release cannot be brought again.

3. That the proper construction of the deed, including the definition of easement proceedings could not be one that allowed the defence to remain in place. 20 The cross defendants say that the pleaded paragraph 2(a) does not raise any claim by way of set off or by way of counterclaim; that the words of the settlement document are quite clear and that they are a bargain by the cross claimants which the court cannot mend; and that what the paragraphs set out to plead as a defence to the cross-claim is that there was no obligation to pay rent because the sub-lessees could not obtain the benefit which they were entitled to get by the lease which the cross-claimants were obliged to provide. For this last argument, Mr Einfeld QC, senior counsel for the cross-defendant relied upon what might be described as the principle in Mackay v Dick (1881) 6 AppCas 251 as accepted by the High Court in Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited (1979) 144 CLR 596 per Mason J at 607. 21 It is necessary to look carefully at the pleadings. In spite of the careful argument put forward by Mr Einfeld there can be no doubt that at least as originally pleaded paragraphs 11 to 20 of the amended statement of claim made a claim for damages for breach of contract, the contract being either or both of the agreement for sublease and the sub-lease. Those damages, as particularised included rent payable from 1 February 2002 to 18 January 2003. That claim was settled. The payment of $1.1 million made pursuant to the settlement deed was not apportioned to the various plaintiffs nor to the various defendants, but whatever was paid was accepted in satisfaction of the claim for damages. It is probably reasonable to assume, although it is not necessary to do so, that damages were not restricted to what might be described as the kiosk claim, but were for inability to conduct the business while yet remaining liable for rent. 22 As a matter of general principle where a lessor sues for breach of covenant to pay rent and the lessee wishes to counter that claim by alleging breach of a covenant for instance for quiet enjoyment, that claim is brought by the lessee by way of cross-claim or perhaps by way of set off. The breach of covenant of the lessee is not in itself a defence to a claim for breach of covenant to pay rent. It follows from this that leaving aside the new claims pleaded in paragraphs 16A and 16B of the further amended statement of claim, the claim made by the defendant as a defence to the cross-claim raises the same claim as that released by the settlement agreement. The cross-claim is otherwise preserved; it is accepted that issues as to amounts still arise. The claim has been released. It cannot be made again. 23 Mr Einfeld argued the defence to the cross-claim should not be read in this way, but at least on the original pleadings there is no other way to read it. The paragraphs in the amended statement of claim make a claim for damages. The defence to cross-claim alleges that as a result of the facts pleaded to support the damages claim there is no entitlement to rent. That position could have arisen had the only claim been the cross-claim and had the proceedings on the statement of claim not been brought to an end. Once they were then that claim was barred. 24 I turn now to paragraphs 16A and 16B of the further amended statement of claim. As I have said paragraph 16A pleads an implied term that the first, second and third defendants would procure the necessary easements for the purpose of allowing penetration for hydraulic connection to be available to the premises the subject of the sub-lease. As I have pointed out if that implied term were made out, and I should say it was denied in the defence, it would give rise to a claim for damages for breach and would not operate as a defence to a claim for rent. Paragraph 16B however pleads a further implied term that in the event the defendants were not entitled to make the necessary penetrations for the purpose of providing hydraulic services then the rent reserved abated for the whole of the period of any delay. The delay was particularised as the delay up to 18 January 2003 so that therefore it is claimed that the rent abated for the rental period from 1 February 2002 until January 2003. 25 Counsel for the cross-defendant argued that the defence, which presumably is said to be supported by the "damages" claim of abatement, by way of abatement, arose under the principle to which I have referred established by Secured Income Real Estate (Australia) Limited. There is, however, a difference between a duty in the parties to a contract to co-operate in doing all acts they can do necessary to bring about its performance and a duty to do something which they cannot do without co-operation of a third party. While that may mean - and it is accepted - that there was an obligation to make provision for hydraulic services here, those services could not be provided by the lessor other than by co-operation with adjoining owners and obtaining easements through adjoining land. It would not, I think, be possible to make out a defence to a claim for rent other than by way of cross-claim or perhaps set off, particularly as in this case the pleadings show, or it was at least accepted, that liability to pay rent was postponed from the commencement date of the lease until 1 February 2002. The strangely pleaded claim in the further amended statement of claim for abatement of rent was the only claim which could support the claim pleaded in paragraph 16B. That claim was settled by payment and release. 26 On the construction question a construction of the settlement agreement, under which a claim released in one part could remain on foot as a defence to the cross-claim apparently putting one party at risk of a double payment, I consider to be a construction which would be absurd. It would not be allowing a bad bargain to remain, but allowing an absurd result not necessary on the reasonable construction of the document in the context in which it came into existence. That construction is in accordance with the objective intention to keep alive a claim for rent otherwise released in the settlement deed.

Proposed answers and orders 27 It is accepted that paragraph 2(a)(ii) of the defence to cross-claim will be spent on determination of the cross-claim. There is no point in striking it out. 28 The separate questions should be answered as follows:

(a) As to paragraph 2(a)(i) - No. As to paragraph 2(a)(ii) - Yes.

(b) All of the matters in 2(a)(i). 29 Direct the answers be recorded. 30 Order that paragraph 2(a)(i) of the defence to cross-claim be struck out. 31 Order the cross-defendants pay the cross-claimants costs of the separate issues.

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