On 11 September 2019, I published my reasons (the Principal Reasons) for concluding that the plaintiff, Senses Northbridge Pty Ltd (Senses), was entitled to orders for specific performance by the defendant, Sahab Holdings Pty Ltd (Sahab), of its obligations under an agreement for lease entered into on 10 May 2018 (the Agreement) relating to properties situated in Northbridge (the Premises). [1] Senses now claims additional damages pursuant to s 68 of the Supreme Court Act 1970 (NSW). Section 68 relevantly provides that, where the Court has power to order the specific performance of any agreement, the Court may award damages to the party injured in addition to specific performance.
The Agreement provided for the lodging of a development application with Willoughby Municipal Council (the Council) in respect of proposed development of the Premises by Senses. Under cl 3.4 of the Agreement, Sahab, as owner of the Premises, was required to consent to the development application. Senses presented a form of development application to Sahab on 29 November 2018. However, Sahab failed to sign the document. On 24 September 2019, I ordered that, within three business days from the date on which Senses supplemented the proposed development application so as to incorporate the views expressed by Mr Benjamin Dewhurst concerning remediation, Sahab was to deliver to Senses a signed document in the form specified in the order. Ultimately, the document was signed on 30 October 2019 by the Registrar in Equity on behalf of Sahab when Sahab failed to do so and the development application was subsequently lodged with the Council. There is no evidence as to when it was actually lodged.
Senses contends that, had Sahab fulfilled its contractual obligation under the Agreement, the development application would probably have been lodged on or about 30 November 2018 but it was not in fact lodged until on or after 30 October 2019, a delay of some 11 months. Senses seeks compensation for the loss that it contends may reasonably be said to have arisen naturally from the delay or that may be reasonably supposed to have been in the contemplation of the parties, when the Agreement was made, as likely to arise from the breach by Sahab that occurred. [2]
Sahab resists the claim by Senses on the basis that Senses has failed to establish any causal connection between the damages claimed by Senses and the undoubted delay on its part in performing its obligations under the Agreement. In addition, Sahab contends that, even if there was such a causal connection, it should not be ordered to pay damages because of the circumstances that led to its failure to perform its obligations under the Agreement. I shall deal with the latter question first.
[3]
Reasons for the Delay
At the time when Senses presented the development application to Sahab for execution, Sahab's only director, Mr Ken Kanjian, was a party to litigation with other members of his family (the Family Proceedings). On 31 August 2018, in the Family Proceedings, Mr Kanjian had been ordered to provide 48 hours' notice to the remainder of the family before taking any steps in the management of Sahab outside the ordinary course of its business. On 5 December 2019, several days after being presented with the development application, Mr Kanjian notified his family of his intention to sign the document on behalf of Sahab. The other members of the Kanjian family sought to have the Family Proceedings relisted on an urgent basis seeking orders that Mr Kanjian be restrained from providing consent to the development application. On 6 December 2019, Mr Kanjian gave an undertaking to the Court not to provide such consent.
Subsequently, the Court made interlocutory orders in the Family Proceedings restraining Mr Kanjian from providing consent to the development application and, on 25 February 2019, over Mr Kanjian's opposition, appointed receivers to manage the Premises and to conduct the defence of these proceedings on behalf of Sahab. The Court ordered that the receivers were not permitted to compromise these proceedings without the approval of the Court or the agreement of all members of the Kanjian family. Thereafter, the receivers refused to permit Sahab to consent to the development application.
Mr Kanjian was at all times perfectly willing to procure the execution of the development application on behalf of Sahab and would have done so but for the intervention of members of his family and the Court in the Family Proceedings. Sahab says that, in those circumstances, it was not guilty of delay in the proper performance of its obligations under the Agreement and awarding damages would not do complete justice between the parties.
However, there is no reason why Senses, an innocent party, should be deprived of any entitlement to damages by reason of internal conflict concerning the management of Sahab. Even if, ultimately, in the Family Proceedings, it were to be established that Sahab should not have given its consent, Senses should not be penalised. On the other hand, if, in the event, it is held in the Family Proceedings that Sahab was entitled to give its consent and the injunction and appointment of receivers should not have been ordered, any damages awarded against Sahab by reason of its delay in complying with its obligations under the Agreement would be recoverable from the plaintiffs in the Family Proceedings under the usual undertaking as to damages. In the circumstances, the reason for Sahab's failure to comply with its obligations under the Agreement does not excuse it from any liability that might otherwise properly arise under s 68.
[4]
Heads of Claim
Senses claims that it has suffered loss under three heads. Each arises under a different provision of the Agreement, namely, cll 6.1, 6.3 and 7. In addition, Senses claims damages for lost opportunity. I shall deal with each claim separately.
[5]
Clause 6.1
The first head of claim by Senses arises out of cl 6.1 of the Agreement. Clause 6.1 relevantly provided that, on and from the date of the Agreement up to the earlier of the date on which the Agreement is lawfully rescinded or the date (the possession date) on which Sahab gives Senses exclusive possession of the Premises for the purpose of carrying out the works intended to be carried out by Senses (defined as Phase 1). Under cl 6.1(a), Sahab was to be entitled to all rental income from the Premises and was obliged to bear all outgoings. However, by cl 6.1(b), Senses was to pay to Sahab the sum of $4,200 net of GST monthly in advance. Clause 6.2 of the Agreement relevantly provided that, from the possession date to the date on which the proposed lease vests (defined as Phase 2), the monthly instalment payable by Senses to Sahab pursuant to cl 6.1(b) was to be increased to $12,500 net of GST payable in advance.
Since Senses has not yet taken exclusive possession of the Premises for the purpose of carrying out its works, Phase 1 has not ended. Sahab accepts that, pursuant to cl 6.1(b) of the Agreement, it received from Senses 11 monthly instalments of $4,200 net of GST for the period from 1 December 2018 to 31 October 2019, a total of $46,200 net of GST. Senses has been making the payments contemplated by cl 6.1(b) since the execution of the Agreement. Senses claims the sum of $46,200 in respect of the 11 months of delay. There may be some merit in such a claim if Senses is able to establish that the breach by Sahab led to a delay of 11 months in the grant of approval by the Council.
[6]
Clause 6.3
The second head of claim by Senses arises out of cl 6.3 of the Agreement. Under cl 6.3, Sahab was required, as soon as practicable after the end of each quarter during Phase 1, to give an account to Senses of all rental income received during that quarter from the Premises and all outgoings paid or borne in respect of the Premises during that quarter. Where, after taking into account the monthly instalments net of GST paid by Senses pursuant to cl 6.1, a deficiency resulted, Senses was required, within 14 days after receiving Sahab's accounting, to reimburse Sahab for the deficiency, so that Sahab was not out-of-pocket for that quarter. The inclusion of cl 6.3 in the Agreement suggests that Senses was always aware of the risk of the loss of rental income but voluntarily assumed that risk.
In fact, Sahab has never provided Senses with a quarterly accounting as contemplated by cl 6.3 and, on 18 September 2019, the legal representatives of Senses wrote to the legal representatives of Sahab inviting Sahab to waive its rights to the additional payment under cl 6.3. No response has been received to that invitation. Despite the lack of a quarterly accounting, Senses has been paying to Sahab the sum of $4,620 inclusive of GST each month following the execution of the Agreement.
Mr Michael Reid gave evidence by affidavit sworn on 29 October 2019 that the Premises consist of nine tenancies, being eight shops and a first floor office. The details of the tenancies that follow are taken from that affidavit.
The lease for shop 1 in the Premises expired on 31 October 2017 and is presently occupied on a monthly tenancy for a monthly rent of $6,239.27. Shop 2 was also subject to a lease that expired on 31 October 2017 and is now occupied on a monthly tenancy for a monthly rent of $4,713.03. Shop 3 was vacant as at the date of execution of the Agreement. The first floor office was also vacant at the time of execution of the Agreement.
The lease in respect of shop 4 expired on 16 March 2019 and shop 4 was vacated in April 2019. Shop 5 is subject to a lease that expires on 9 February 2022. The tenant pays rent of $5,807.33 per month. Shop 6 is the subject of an unregistered lease. The tenant pays $4,561 per month. Shop 7 was subject to a lease that has expired. The tenant holds subject to a monthly tenancy for a monthly rent of $4,234.33. The ground floor shop was subject to a lease that expired on 31 January 2018. The tenant remains in occupation as a monthly tenant at a monthly rent of $3,575.52.
Thus, only one tenant remains in the Premises subject to a lease for a term. The other tenants remain in occupation under monthly tenancies. Nevertheless, Senses claims that the delay in lodging the development application exposes it to the risk of the loss of rental income.
Senses asserts that it was careful not to alert the tenants to the existence of the Agreement and the preparation of the proposed development application. However, shortly after the development application was lodged, the tenants became aware of the lodging of the development application with the Council. There is no evidence that any of the tenants acted in any way by reason or in consequence of the lodging of the development application.
Mr Kanjian asserted, without objection, that the monthly instalments under cl 6.1 were intended to compensate Sahab for its inability, after 10 May 2018, to lease parts of the Premises on a long term basis because of the pendency of the proposed lease to Senses. Mr Kanjian also asserted, without objection, that he always had concerns that, once the Senses development application was made public, as it was shortly after 31 October 2019, the tenants of the Premises would become concerned about their ongoing tenure. He asserted that that is why cl 6.3 was inserted in the Agreement to protect Sahab against loss of income resulting from tenants surrendering their leasehold interests prematurely before Senses was able to take full possession of the Premises to commence construction work.
Mr Kanjian said, without objection, that he has spoken at length to all tenants since Sahab resumed management of the Premises on 17 December 2019 and that he had formed the view that there is no valid reason for any concern on the part of Senses that the delay in lodgement of the development application will expose Senses to lost rental income. He said that, despite the publication of the fact of the lodgement of the development application, none of the tenants has expressed a desire to vacate. In fact, following the appointment of the receivers on 25 February 2019, only the tenant of shop 4 in the Premises surrendered a leasehold interest. That tenant did so towards the end of March 2019. Mr Kanjian asserted, without objection, that the departure was not connected with the Agreement because, at that point, it was still confidential and it was not known to the tenant.
Senses is concerned that, if all of the monthly tenants were to vacate the parts of the Premises occupied by them, the income derived from the Premises would be limited to that derived from the lease of shop 5. That income may be insufficient to cover Sahab's expenses, which in the preceding 12 months amounted to $302,211.38. That would expose Senses to a liability of at least $232,523.42 pursuant to the provisions of cl 6.3. For 11 months, that exposure could be the sum of $213,146.47.
However, the possibility that the remaining monthly tenants will vacate the Premises is a matter of conjecture. It may have been open to Senses to inquire of the tenants as to whether they have the intention to vacate the Premises. On the contrary, the evidence of Mr Kanjian suggests that they do not. I do not consider that the evidence justifies a finding that it is more probable than not that Senses will incur any liability under cl 6.3 of the Agreement. A fortiori, Senses will not incur a greater liability by reason of any delay on the part of Sahab in consenting to the development application.
[7]
Clause 7
The third head of damage claimed by Senses is based on cl 7 of the Agreement. By cl 7.1, Senses was required to deliver a bank guarantee to Sahab on or before the commencement of the Agreement. Under cl 7.2, Senses was required to deliver a second bank guarantee to Sahab on or before the possession date. The guarantees were to secure to Sahab compliance by Senses with its obligations under the Agreement and compliance by Senses with its obligations under the proposed lease. Senses incurred a liability to its bankers for those guarantees in the sum of $3,437.50 per annum. Senses claims that the 11 month delay alleged by it has the consequence that it would pay that fee to its bank for 11 months longer than it would otherwise have to pay. There may be some merit in such a claim if Senses is able to establish that the breach by Sahab led to a delay of 11 months in the grant of approval by the Council.
[8]
Lost Opportunity
Finally, Senses claims damages in respect of the loss of the use of the funds claimed under the three heads outlined above. Senses calculates its claim as follows:
A. Payments required under cl 6.1of the Agreement for Lease, pro-rated to 11 months:
11/12 x $50,400.00: $46,200
B. Liability to reimburse Sahab's expenses under cl 6.3 of the Agreement for Lease, pro-rated to 11 months:
11/12 x $232,523.42: $213,146.47
C. Bank guarantee annual fee, pro-rated to 11 months:
11/12 x $3,437.50: $3,151.04
D Interest calculated using the following equation:
P(1 + r/n)nt - P, where:
P = A+B+C
r = the interest rate, viz. 0.0175
n = 12
t = 11/12
Assuming that the whole of the amount in B is awarded to Senses, then P=A+B+C equals $4,241.74.
Assuming that 50 per cent of the amount in B is awarded to Senses, then P=A+B+C equals $2,519.60.
Assuming that none of the amount in B is awarded to Senses, then P=A+B+C equals $797.47.
Thus, Senses claims the cost of lost opportunity by way of interest foregone on the monies that it claims under the other heads. The claim ignores other consequences flowing from any delay that might be shown to be attributable to the conduct of Sahab. Once development approval is obtained, it will be necessary for Senses to outlay funds for the cost of demolition and building. Insofar as there is any delay in that outlay, there must be a consequential benefit to Senses in that it can either save the interest on borrowing the funds or will derive the benefit of interest on the funds not expended. That is to say, it is not appropriate to assess the lost opportunity cost without a detailed analysis of the whole of the project for its prospective 45 year term in order to determine the effect, if any, of the assumed 11 month delay.
[9]
Causal Connection
As I indicated in the Principal Reasons, cl 3.1 of the Agreement required Senses to prepare a development application based on the Jago Concept Plans (as defined). The claim for damages by Senses assumes that a development application in respect of the Premises will be approved by the Council, either in the form in which it was lodged or in some amended form that could be said to be based on the Jago Concept Plans. Senses asserts that, but for Sahab's delay in giving its consent to the development application, that approval would have been received 11 months earlier than approval that Senses contends will be given in the future.
However, there is no evidence before the Court as to whether the development application that has been lodged, or any development application in relation to the Premises, is likely to be approved by the Council. It would have been open to Senses to adduce evidence from appropriately qualified witnesses as to the probability or otherwise of a development application being approved by the Council that would satisfy the terms of the Agreement, namely, a development application based on the Jago Concept Plans. There was no such evidence.
Further, it is a matter for conjecture as to whether, had Sahab given its consent to the development application at the time when it was first presented for consent, it would have resulted in an approval 11 months earlier than any such approval may be given. Once again, it would have been open to Senses to adduce evidence from, for example, an officer of the Council, to indicate that the workload of the Council and the policies of the Council during the period from November 2018 to October 2019 were unaltered. That is to say, it is a matter for conjecture as to whether, had the consent been given forthwith, the development application would have been processed and determined by the Council in the same time frame as it will now be processed.
It may well be that the breach by Sahab has resulted in some delay before the Council will consider the development application. However, I am not persuaded that it is more likely than not that the delay on the part of Sahab will ultimately result in a delay of 11 months in development approval being given by the Council.
[10]
Conclusion
I am not satisfied that it is more likely than not that the failure on the part of Sahab to consent to the development application for a period of 11 months will give rise to any ascertainable loss or damage for Senses. It follows that the application for damages under s 68 should be refused.
[11]
Endnotes
See Senses Northbridge Pty Ltd v Sahab Holdings Pty Ltd [2019] NSWSC 1201.
See Lahoud v Lahoud [2009] NSWSC 623 at [122] and following.
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Decision last updated: 02 April 2020