Starkey v Mitchforce Pty Ltd

RESPONDENT Mitchforce Pty Limited FILE NUMBER: IRC 3326 of 1999 CORAM: Hungerford J CATCHWORDS : Unfair contract - Lease of hotel/tavern - Assignment of original lease on same terms - Jurisdiction - Whether a contract whereby work is performed in an industry - Level of rent and its annual increase under the lease - Relevance of movements in Consumer Price Index - Arrangement to defer rental payments - Claim for payment of deferred rent - Adverse economic conditions - Exercise of option for a further lease term - Whether failure to pay deferred rent a breach of lease to justify refusal to grant option - Waiver of breach - Whether contract unfair - Claim for avoidance or variation of lease - Claim for payment of money plus interest and costs - Application for declarations of right - Open offer of settlement - Unfairness found - Exercise of discretion - Whether a calculated business risk - Contract varied to substitute new rental regime - Declarations made as to valid exercise of option and current market value of rent - Order for payment of money in connection with contract as varied - Interest disallowed - Costs. Conciliation and Arbitration Act 1904 (Cth) s 140(1)(c) (repealed) LEGISLATION CITED : Industrial Arbitration Act 1940 s 88F (repealed) Industrial Relations Act 1991 s 275 (repealed) Industrial Relations Act 1996 s 105 s 106 s 154 A & M Thompson Pty Ltd v Total Australia Ltd [1980] 2 NSWLR 1, [1980] AR (NSW) 399 Australian Institute of Music Ltd v LM Investment Management Pty Ltd [2000] NSWIRComm 201 Autobake Pty Ltd v Budd [1986] 19 IR 18 Booth v Kritikos Developments Pty Ltd (1995) 59 IR 298 BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hasting [1978] 52 ALJR 20 Caltex Oil (Australia) Pty Ltd v Feenan [1981] 1 NSWLR 169 Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 Erven Warnink Beloten Vennootschap v J Townend & Sons (Hull) Ltd [1979] AC 731 Ford v SAS Trustee Corporation [2000] NSWIRComm 92 CASES CITED : Harris v Hammon (No 2) (1995) 59 IR 232 Jennings v Auto Plaza Ltd [1993] 46 IR 413 Kostakis v New World Oil & Developments Pty Ltd (unreported, Schmidt J, CT96/1157, 25 July 1997) Majik Markets Pty Ltd v Brake and Service Centre Drummoyne Pty Ltd (1991) 28 NSWLR 443, [1991] 39 IR 169 Municipal Officers' Association of Australia v Lancaster [1981] 54 FLR 129 Nagle (t/as WD & JL Nagle & Sons) v Tilburg [1993] 51 IR 8 Pay v Canterbury-Bankstown Rugby League Club Ltd (1995) 72 IR 358 Port Macquarie Golf Club Ltd v Stead (1996) 64 IR 53 Production Spray Painting & Panel Beating Pty Ltd v Newnham (1991) 27 NSWLR 644, [1991] 37 IR 46 Stevenson v Barham (1977) 136 CLR 190 HEARING DATES: 05/22/2000; 05/23/2000; 05/24/2000; 06/22/2000; 09/13/2000 DATE OF JUDGMENT: 11/03/2000

APPLICANTS Mr M J Kimber SC and Mr A B Gotting of counsel Solicitor: Mr B R Belling Abbott Tout LEGAL REPRESENTATIVES: RESPONDENT Mr D E Grieve QC and Mr B D Hodgkinson of counsel Solicitor: Mr I A Player Ian Player, Adamstown, NSW

JUDGMENT:

• 101 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION CORAM: HUNGERFORD J Friday, 3 November 2000 Matter No IRC 3326 of 1999 KEITH ABNER SIDNEY STARKEY AND DAWN NELL STARKEY v MITCHFORCE PTY LIMITED Application for orders under s 106 of the Industrial Relations Act 1996 re unfair contract. JUDGMENT [2000] NSWIRComm 216 1 The Court has before it an application by Keith Abner Sidney Starkey and Dawn Nell Starkey for orders against the respondent, Mitchforce Pty Limited, under the unfair contracts provisions in Pt 9 of Ch 2 (ss 105 to 109A) of the Industrial Relations Act 1996. The claim relates to the operation by the applicants as lessees of an hotel known as the Empire Bay Tavern, at Empire Bay on the Central Coast of the State, owned by the respondent. 2 The applicants are the working proprietors of the Tavern, having acquired it from Sherwood Trading Pty Limited who was the original lessee under a lease for a term of 10 years commencing on 10 July 1989 with an option for renewal for a further period of 10 years. Within about two years of acquiring the interest from 1 May 1990, however, the applicants experienced difficulty in meeting the rental payments to the respondents in accordance with the lease. Time went by, with deferred rent continuing to mount, until the applicants exercised on 9 July 1999 the option to renew the lease for a further 10-year period. The respondent, because of the applicants' default with rental payments, declined to recognise the option and gave notice for them to quit the premises. The resultant dispute requiring resolution concerns the rental provisions of the lease, the option to renew the lease for a further period and losses said to be suffered by the applicants in the operation of the lease following the respondent's refusal to provide appropriate rental relief. The conduct of the respondent in so refusing relief to the applicants was alleged to make the lease and related transactions unfair, harsh, unconscionable and contrary to the public interest within the meaning of s 106 of the Industrial Relations Act so as to entitle the applicants to remedial orders. 3 Sections 105 and 106 of the Industrial Relations Act state : 105 Definitions

In this Part: contract means any contract or arrangement, or any related condition or collateral arrangement, but does not include an industrial instrument.

unfair contract means a contract: (a) that is unfair, harsh or unconscionable, or (b) that is against the public interest, or (c) that provides a total remuneration that is less than a person performing the work would receive as an employee performing the work, or (d) that is designed to, or does, avoid the provisions of an industrial instrument. 106 Power of the Commission to declare contracts void or varied

(1) The Commission may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if the Commission finds that the contract is an unfair contract.

(2) The Commission may find that it was an unfair contract at the time it was entered into or that it subsequently became an unfair contract because of any conduct of the parties, any variation of the contract or any other reason.

(3) A contract may be declared wholly or partly void, or varied, either from the commencement of the contract or from some other time.

(4) In considering whether a contract is unfair because it is against the public interest, the matters to which the Commission is to have regard must include the effect that the contract, or a series of such contracts, has had, or may have, on any system of apprenticeship and other methods of providing a sufficient and trained labour force. (5) In making an order under this section, the Commission may make such order as to the payment of money in connection with any contract declared wholly or partly void, or varied, as the Commission considers just in the circumstances of the case. 4 It seems that the Empire Bay Tavern was built by the respondent in the late 1980s as a dedicated hotel/tavern at a cost of about $1.84 million; the investment was made in the expectation that the area was about to grow with the construction of new homes and an associated shopping centre complex. On completion of the Tavern, the respondent granted Sherwood Trading a 10-year lease of the premises from 10 July 1989 at an initial annual rental of $156,000 plus $7,800 per annum for residential flat accommodation on the site under a variation of the lease (subject to annual increases of 8 per cent or increases in the Consumer Price Index, whichever be the greater) in return for the payment of $400,000 by Sherwood Trading to the respondent. The applicants, who were experienced hoteliers having been the owners of a number of hotels since 1963, acquired their interest in the Tavern from Sherwood Trading by way of an assignment of the lease, to which the respondent consented, effective as from 1 May 1990 and in consequence of which assignment they assumed liability to the respondent as if they had been a party to the original lease. Sherwood Trading received a payment of $650,000 from the applicants for the business but remained liable, including as to personal guarantees given by its principals (Ronald Leslie Madden and Valerie Madden), to the respondent in respect of the performance by the applicants of all the covenants contained in the lease. What then transpired according to the case put for the applicants, was conveniently set out in the grounds contained in the further amended summons on which the applicants moved in the following way : 1. The respondent was at all material times, and is, a company capable of being sued in and by its corporate name and style.

The applicants took over (as assignees) a lease to operate the hotel/tavern known as the Empire Bay Hotel in May 1990 and have continued to operate that business albeit under extreme financial difficulties right through until the present time.

The applicants paid to the assignor, Sherwood Trading Pty Limited, the sum of $650,000 and took over obligations under the said lease that incuded, inter alia, an obligation to pay $156,000 rent in the first year with increases in each year thereafter based on the CPI or an 8% increase on the previous year's rental (whichever was the greater).

The applicants, whilst believing that the assignment price and the proposed rent were very high, nevertheless committed themselves to the deal on the basis that they were advised that a major shopping centre was to be built in the area along with a housing development for 750 houses.

Regrettably, neither of the above proposals went ahead and the area did not generally "go ahead" as the applicants, the assignor and the respondent had all contemplated. Furthermore the economy went into recession.

The inevitable and almost immediate consequence for the applicants was, however, that the turnover of the business was not thereafter capable of sustaining the significant annual rent increases especially when calculated off the excessive starting rental of $156,000.

The applicants were soon confronted with serious financial difficulties but were unable to further assign the said lease as prospective assignees regarded the rental arrangements as entirely excessive.

The applicants repeatedly sought rent reduction from the respondent due to their financial difficulties but the respondent was only prepared to provide rent deferral. The applicants accepted in 1992 the deferred rent proposal not only because they had little alternative but also because they believed that their position under the contract was secure, that is that they would hold the lease until the business could be sold, the applicants accepted the rent deferral arrangement that then operated from 1992 right through until the present time. They also knew that once they were able to sell their tavern business they would at least have the possibility of paying the respondent the balance of the deferred rent.

The applicants were never advised by the respondent that one consequence of deferring the payment of rent was that, if the business was not sold beforehand, they would not be able to exercise their option right under the contract as at March 1999, unless they had, by that time, paid the respondent all the deferred rent.

At the time the rent deferral arrangement was first entered into in about June 1992, the applicants still owned their own home and the level of their indebtedness was manageable (albeit getting worse as time ran). Had they been advised (at that time) that they would lose their option right if they still owned the business in July 1999 but had not paid all the deferred rent by that time, they would not have accepted the rent deferral arrangement. They would instead have moved to cut their losses by getting out of the business immediately at any price as they knew that they would not be able to trade out of their difficulties in the short or medium term and would not be able to service the ever-growing debt to the respondent.

The applicants are now financially destitute, having sold all their assets with a view to servicing debt or otherwise "staying afloat" and they, together with their adult son, are working the business either for no remuneration whatsoever or at remuneration levels substantially lower than they should be receiving for the work/hours undertaken.

The said lease expired on the 9th of July 1999 and whilst the applicants sought to exercise their option for a lease for a further period of 10 years, the respondent wrongfully refused to accept the validity of that request for the exercise of the option on the basis of the applicants' alleged "default" with respect to rent unless the applicants corrected the alleged default by a payment to the respondent of a sum in the vicinity of $329,316.17 and interest in the vicinity of $130,000. 5 The contract between the applicants and the respondent, as represented by the original lease as made applicable by the deed of assignment of lease, was claimed by the applicants in the further amended summons to be unfair, harsh, unconscionable and contrary to the public interest in that : (a) it contained clause 3.1(b) and clause 3.2(b) being clauses that are, on their face, harsh unjust and/or unconscionable as they impose excessive financial obligations on the applicants;

(b) it failed to contain the amended versions of clauses 3.1(b) and 3.2(b) as claimed in proposed order 1(a) and (b) above in circumstances where the inclusion of that version of those clauses would have been fair and reasonable in the circumstances and reflective of generally accepted practice within the hotel industry in this State;

(c) it failed to contain any provision that required the respondent to adjust the basis/level of the rent in a downward direction in circumstances where the applicants could show that the turnover of the business simply could not sustain the rental regime set out in the contract as claimed in proposed order 10 above;

(d) it permitted the respondent to merely suspend or defer the applicants' obligation to make rent payments in accordance with the contract, thereby carrying forward indefinitely the applicants' alleged "default" to be used, inter alia, as a foundation for denying the applicants the right to exercise the 10 year renewal option under the contract;

(e) it failed to provide a term that required the respondent to connect the sewer to the Hotel at its own cost, once that service became available in 1993 in circumstances where it would have been reasonable for such an obligation to fall on the respondent;

(f) it permitted the respondent to ignore the valid exercise of the option contained in clause 15 of the contract;

(g) it permitted the respondent to refuse to issue a new lease to the applicants relating to the period covered by the valid exercise of the option contained in clause 15 of the contract;

(h) it permitted the respondent to refuse to participate in the process contained in clause 15 of the contract for the determination of the current market rental;

(i) it provided the applicants with a total remuneration that is less than a person performing the work would receive as an employee performing the work. 6 The rent for the Tavern was increased, in accordance with the lease, on the anniversary dates in July 1990 and 1991. However, by that stage it became clear that the proposed housing development and shopping centre complex would not be proceeding and, in compounding the effect on the applicants' viable operation of the Tavern, the economy suffered a recession. Understandably perhaps in that situation as it had developed, the first-named applicant endeavoured to meet with the principal of the respondent to discuss the rent, but apparently to no avail. Indeed, so concerned were the applicants about the situation that after about one year's occupancy of the Tavern they took steps to sell their leasehold interest but were unsuccessful because, as they believed, the level of rent was seen by potential purchasers as being too high. 7 In June 1992, just before the rental review on the third anniversary of the lease in July 1992, the first-named applicant arranged a meeting attended by him, the second-named applicant and their accountant, together with the respondent's principal and accountant to discuss the difficulties the applicants were experiencing in meeting the increasing rentals - the applicants sought a reduction in the level of rent. Although no agreement was reached at that meeting, shortly thereafter the applicants were informed (either orally or in writing was unclear) by the respondent that the rent would not be increased for that year and the matter would be reconsidered at the time of the next annual review. And so it was that by letter dated 12 July 1993 the respondent informed the applicants in the following terms : I refer to clause 3.2 (b) of the above lease. You will note that rent can be increased by 8% per year.

On the last anniversary of the lease it was agreed that the provisions of this clause would be postponed although you are still liable for payment of the postponed increase.

On this anniversary 10th July 1993 I am prepared to increase rent by only 4% and to again postpone the balance of 4% increase.

Should you at anytime terminate your lease for any reason the rent postponed will become due and payable forthwith.

As from 10 July 1993 your new rental will be $198,792.00 per annum payable monthly in advance at the rate of $16,566.00 per month.

Please confirm that you are in agreement with the terms of this letter. 8 An issue arose between the parties as to the precise meaning and effect of the arrangement made between them in or about June 1992, as recorded in the letter of 12 July 1993, concerning the deferral of rent due under the lease. For their part, the applicants sought remedies under s 106 in respect of that arrangement on the basis that it was unfair, harsh, unconscionable and contrary to the public interest in that : (a) it failed to contain the clauses set out in proposed order 12 above in circumstances where it would have been fair, reasonable and appropriate for such terms to have been included.

(b) it permitted the respondent to put the applicants in a position where they would inevitably lose their valuable option right without first advising them that this would be a consequence of the arrangement if all deferred rent was not paid by July 1999.

(c) it permitted the respondent to effectively block various proposals for the assignment/sale of the business by the applicants, by not requiring the respondent to reduce the rent payment/increase regime to more realistic levels (hooked to turnover) that prospective assignees were prepared to accept. 9 Further, or in the alternative, the applicants claimed, as set out in the further amended summons, that the lease contract and the arrangement concerning rent deferral together became an unfair contract under s 106 because of the conduct of the respondent in that : (a) the respondent has, at all material times, refused to alter the rent regime set out in the contract even when the respondent was aware from as early as 1992 that the applicants were in serious financial difficulties as a consequence of the poor relationship between turnover levels and rent obligations;

(b) the respondent refused to take any effective steps to relieve the applicants of their financial difficulties, in circumstances where the respondent had the power to provide such relief either by direct and permanent rent relief for the future and/or by facilitating the applicant's ability to further assign the lease by indicating a preparedness to consider a more fair and reasonable rent regime for any such incoming assignees;

(c) the respondent effectively "locked in" the applicants to what was, or became, an unconscionable contract, by virtue of the above behaviour;

(d) the respondent used the applicants' alleged "default" with respect to rent as a foundation for denying them the right to exercise their option under the contract, in circumstances where: (i) the default only occurred because of the unconscionable terms in the original contract and/or by the abovementioned unconscionable conduct of the respondent in not agreeing to a permanent variation to the contract so as to enable the applicants to correct the rent default situation and to otherwise trade profitably; and (ii) the respondent knew that the only way the applicants had any chance of getting out of their serious financial problems was, inter alia, for them to have a new 10 year lease with a reasonable rent regime so that they had a viable business they could then assign for real value or work for a profit.

(e) the respondent led the applicants to believe that they would be secure in the tavern business until it was sold but never advised them that such security would be lost if they still owned the business as at July 1999 but had not paid all deferred rent by then. 10 The further amended summons particularised the primary orders sought by the applicants, together with those sought in the alternative and in the further alternative, which, in summary, were- (a) An order varying as from 1 May 1990 the rental regime in the subject lease contract by deleting the amounts of the initial rental of $156,000 per annum and $13,000 per month and inserting in lieu thereof the respective amounts of $100,000 and $8,333.33. (b) An order that the respondent pay to the applicants the sum of $525,640.90 in connection with the contract so varied, being the difference between rent actually paid by the applicants from 1 May 1990 to 9 July 1999 and the revised rent pursuant to the said variation and thereby also relieving the applicants of payment to the respondent of the sum of $329,316.72, and any interest thereon, by way of deferred or accrued rent from 10 July 1992 to 9 July 1999. (c) An order varying in part the subject lease contract as from 10 July 1999 to provide that the rental amounts for the period from 10 July 1999 to 9 July 2000 be $169,520 per annum and thereafter increasing by the greater of 4 per cent or increases in the Consumer Price Index. (d) An order that the respondent pay to the applicants the sum of $144,906.74 in connection with the said contract so varied, or such higher sum as may be due by the time of any order, being the difference between the rent actually paid by the applicants since the expiration of the lease on 9 July 1999 and the revised rent of $169,520 per annum payable pursuant to the said variation.

(e) An order declaring that the applicants validly exercised on 31 March 1999 their option to have the respondent grant them a lease of the premises occupied by the Tavern for a further period of 10 years from 10 July 1999 on terms and conditions consistent with the original lease as so varied.

(f) In the alternative to the orders sought in paras (a) and (b) above, an order varying as from 1 May 1990 the subject lease contract to provide that in the event the applicants can establish the turnover of the Tavern to be insufficient to support the revised rent then the respondent will agree to reduce the rent to 10 per cent of turnover reviewable annually.

(g) Consequent upon the order in para (f) above, an order that the respondent pay to the applicants the sum of $690,973.50 in connection with the said contract so varied, being the difference between the rent actually paid by the applicants during the period from 1 May 1990 to 9 July 1999 and the revised rent payable pursuant to the said variation.

(h) In the further alternative to the orders sought in paras (a), (b), (f) and (g) above, an order varying from its commencement on 10 July 1992 the rent deferral arrangement entered into between the applicants and the respondent in or about June 1992 to provide - (i) such accumulated deferred rent shall be repayable by the applicants only in the event of an assignment of the lease contract or the termination thereof at their initiative; (ii) in the event such deferred rent becomes payable, the applicants shall have 36 months from the date of assignment or termination of the said lease in which to repay the respondent that deferred rent; (iii) the respondent shall not charge the applicants interest on any such deferred rent; and (iv) in the event the applicants still owe rent deferred pursuant to this arrangement at the expiration of the term of the lease, the respondent agrees not to rely on that fact as a "default" under the terms of the lease so as to refuse any request from the applicants to exercise the option for a lease for a further period of 10 years. (i) In the further alternative to the orders sought in the above paras (a) to (h) inclusive, orders to the following effect - (i) the subject lease contract be void from its commencement on 1 May 1990; (ii) the subject rent deferral arrangement be void from its commencement on 10 July 1992; (iii) the respondent pay to the applicants the sum of $525,640.90 in connection with the avoided contract and arrangement as to overpayments of rent from 1 May 1990 to 9 July 1999; (iv) the respondent pay to the applicants the sum of $144,906.74, or such greater sum due, in connection with the avoided contract and arrangement as to overpayments of rent from 10 July 1999 to the time any order be made on the basis of an annual rental of $169,520; and (v) the respondent pay to the applicants in connection with the avoided contract and arrangement an amount for the furnishings, fixtures and equipment owned by the applicants and used in the Tavern in a sum as agreed between them or as determined by a valuer nominated by the Australian Property Institute. (j) An order that the respondent pay to the applicants interest on monies ordered to be paid plus the applicants' costs of the proceedings. 11 During the final submissions of the respondent in the proceedings, an open offer of settlement was made by it in the following terms : 1. The Respondent to grant the Applicants a new ten (10) year Lease of the Tavern, commencing 10 July, 1999 at a commencing rental of $199,900.00 per annum. The rent to be reviewed in accordance with the following :- · 4% increases applicable on 10 July 2000, 10 July 2001, 10 July 2003, 10 July 2004, 10 July 2006, 10 July 2007 and 10 July 2008. · The rent from time to time to be reviewed according to market rent on 10 July 2002 and 10 July 2005.

The Respondent waives any and all rights to claim interest accrued on deferred rent under the previous Lease.

The Applicants to pay all accrued deferred rent to 9 July 1999 in the sum of $211,285.72 on or before 1 July 2001, in which case the Respondent will waive any entitlement to claim interest in relation to the said accrued deferrals. The said sum of $211,285.72 has been calculated by crediting payments made in excess of the rent referred to in paragraph 1, above, since 10 July 1999.

In the event that the Applicants shall not have paid the said accrued deferred rent in full on or before 1 July 2001, then the Applicants' Lease for the period commencing 10 July 1999 shall be forfeited and the Applicants will vacate the Tavern and surrender up possession of the said premises to the Respondent on or before 31 August 2001.

The Applicants' Industrial Relations Commission proceedings shall be dismissed by Consent with no order as to costs.

The Respondent's Supreme Court proceedings shall be dismissed by Consent with no order as to costs.

The applicants rejected the above open offer as being inappropriate. 12 Apart from the arguments put as to the substantive merits of the case in terms of s 106 of the Industrial Relations Act , the respondent by notice of motion filed on 28 July 1999 claimed an order dismissing with costs the applicants' summons for lack of jurisdiction on the basis that the impugned contract and arrangement were not contracts whereby a person performs work in any industry as required by s 106(1). This jurisdictional issue, properly in my view, was dealt with as part of the substantive hearing when all the facts were in evidence: see Nagle (t/as WD & JL Nagle & Sons) v Tilburg [1993] 51 IR 8. I will therefore consider it later in these reasons after referring to the circumstances as they developed in the case and the findings made thereon. 13 After reserving judgment in this matter and having reviewed the material in a preliminary way, I caused my Associate to communicate to counsel the following : His Honour would like to list at 10 am Wednesday 13 September to hear further from counsel in relation to the effect of the respondent's open offer of settlement. His Honour does so having been through the material but without reaching any final conclusions on the case. His Honour is concerned that the offer came, as Mr Kimber said, at the "heel of the hunt". As such, of course, his Honour is concerned that insufficient attention may have been given to it, particularly as it seems to represent a significant move by the respondent to permit the applicant to remain in occupation and not to quit the premises with no opportunity to retrieve what they said were losses. If his Honour goes to judgment one party will win and the other lose to a greater or lesser extent. Again his Honour does not feel comfortably satisfied in light of the open offer that the matter is not capable of resolution by way of appropriate arrangements between the parties. His Honour is of the view before proceeding to judgment at an appropriate time, that these thoughts should be conveyed and his Honour would wish to hear from the parties as to whether judgment should be delayed to permit that to occur. For that purpose 10 am Wednesday 13 September. His Honour specifically refers you to the scheme of conciliation under s 109 and in particular sub-s (3) thereof.

Counsel were so heard on 13 September 2000. It may be added, as I did on that occasion, that the circumstances of this case and with a continuing relationship between the parties brought very much into operation the inherent scheme of conciliation in the unfair contracts provisions in Pt 9 of Ch 2 of the Industrial Relations Act and, in particular, those in s 109(3). Even though, as here, a certificate of unsuccessful conciliation was issued by Marks J on 29 November 1999 and a full hearing conducted before me, s 109(3) explicitly envisages "further conciliation … at any time before … an order". My intention in re-listing the matter while reserved was to effect that intent by giving the parties a final opportunity to themselves resolve their differences - I thought the circumstances required as much. Regrettably, and after consideration in conference, the parties advised me there was no agreement. I am satisfied that conciliation is exhausted and, accordingly, I proceed to determine the matter. 14 In opening the applicant's case, Mr M J Kimber SC (with whom Mr A B Gotting of counsel appeared) frankly conceded that no claim was made that in entering into the contract the applicants "were misled by anybody" in that "everybody had thought the area was going to go ahead"; however, in the result, "everybody turned out to be mistaken in their judgment of the matter at that time". Senior counsel succinctly put the pith of the applicants' case in this way - "When objectively viewed, the initial rent of $156,000 and the mechanism for further increases in the amount - that is CPI or 8 per cent increase, whichever is the greater - we objectively infer provisions in the lease operated unfairly thereafter in changed circumstances". The changed circumstances clearly involved the failure of the housing development and shopping centre to proceed, together with the downturn at the time in the economy. In light of those changed circumstances, Mr Kimber put the applicants' position thus : By late 1991 or early 1992 the Starkeys were contemplating a sale of business to get out of it because things were not going in accordance with the initial perception. The problem that they met at that time and have met ever since in trying to get out of the lease was that any potential assignee that they managed to come across - and there were a number over the years, as the evidence will reveal - potential assignees were put off by the rent - not only by its size at the particular time in question, but also by the operation of the compounding 8 per cent mechanism so they could not get anybody to take over their existing lease.

The alternative was to go to Mr Mitchell, the principal of the respondent, to explain their situation to him - namely that the turnover of the business could not possibly sustain this rent as a matter of fact. They asked Mr Mitchell for a rent reduction. This was in 1992 and they asked for a rent reduction, and we say on the evidence that your Honour will have, your Honour will be satisfied that they repeatedly at various times requested that and even right through to April 1997. They were still asking for a formal rent reduction - not a deferral - but rent reduction .

They wanted that rent reduction for two reasons. With a rent reduction the business would be more viable and they could make a dollar and the alternative was, if the lease was formally varied, it then immediately made it more attractive for the parties to sell. The respondent in these proceedings has refused and did refuse at all material times to countenance a variation of the lease to lower the rent payable. Every time that they asked Mr Mitchell for a rent reduction, no matter how badly they were travelling - and they had accountants meeting and meetings with the bank, they had the figures - the respondent did not give them any rent reduction. This is an important point in terms of where this case then develops.

Even though he knew of the looming financial difficulties they were in, he refused to give a rent reduction. All he was prepared to do was to defer the rent that was otherwise payable under the lease and he was able to do that on an annual basis either by not requiring the full 8 per cent increase being paid - if that was the right figure - 8 per cent or the CPI, whichever is the higher amount - or to only seek to pass on or to insist upon a portion of that 8 per cent increase and in one year he did that - that was 4 per cent rather than 8 per cent. It is apparent, therefore, that the applicants' case focused on two relevant transactions said to operate unfairly: first, the lease contract in terms of the level of the initial rent and the means whereby it was increased annually thereafter; and, second, the arrangement whereby the respondent would only agree to rent deferral but where an issue arose as to when such deferred rent was to be payable and where that issue affected the exercise by the applicants of the option to renew the lease for a further term. As Mr Kimber stated, the applicants' position in 1992/93 was that "without an assignee prepared to take on the lease, the rent due and payable on the terms of the lease, $156,000, compounded annually by 8 per cent or CPI, they couldn't get anyone to take on a lease like that. They had no choice but to accept Mr Mitchell's offer of rent deferral. They had no bargaining power at that stage". 15 On the other hand, senior counsel for the respondent, Mr D E Grieve QC (who appeared with Mr B D Hodgkinson of counsel), put the primary position (the jurisdictional argument) "that this is not a case within the terms of section 106" in that the applicants bought an interest in land; as senior counsel said : They bought an interest in land which subject to their compliance with the option was anticipated to see them in exclusive possession of that land for 20 years and in possession of that land to the exclusion of all, including the lessor. So explained, they quite clearly acquired a capital asset which they thought at the time had a very significant present day value of $650,000 and an even greater prospective value. They were not acquiring the rights to earn a living simplicita on the footing at the end of day they would have whatever they earn from wages or commissions and the like. Not at all. Derivation of revenue or income was incidental to the overall game plan which was the derivation of capital profit by resale.

Mr Grieve emphasised that whilst performance of work was an incident or a consequence of the contract it was not its purpose and, on the authorities, was not therefore a contract comprehended within s 106. Reference in that respect was made to Production Spray Painting & Panelbeating Pty Ltd v Newnham (1991) 27 NSWLR 644 at 649, [1991] 37 IR 46 at 50 and Autobake Pty Ltd v Budd [1986] 19 IR 18 at 21, 29-30 rather than those cases such as Booth v Kritikos Developments Pty Ltd (1995) 59 IR 298 and other cases relied on by the applicants which were not analogous. 16 As to the question of "unfairness" of the subject lease contract and the rent deferral arrangement, assuming jurisdiction existed, Mr Grieve identified the kernel of the applicants' case as being that "Mitchforce (the respondent) acted unfairly, harshly, unconscionably in declining to reduce the rent in the early-mid 90s. This Commission should make an order effectively compelling Mitchforce to do that". Against that proposition, senior counsel, assuming it be found contrary to the jurisdictional argument that the lease was a contract whereby work was performed and that it was an unfair contract, submitted that any order under s 106 should properly have regard to the fact the applicants have not exhausted their remedies under the section; that is, as senior counsel said, "they can have and should make a claim against Sherwood. … Why should Mitchforce alone bear the brunt of all this? The answer is it should not". In a very real sense, the respondent described the applicants' case as one seeking relief or some concession from the respondent but where what was sought related to the applicants' own error of financial judgment in paying such a high price to Sherwood Trading for the assignment of the rights under the lease and the consequent liability for a level of rent which, as the events turned out, was unsustainable. 17 In describing the applicants' claim as "a very very ambitious claim" and not one which was "a fair or reasonable claim", Mr Grieve emphasised the effect of the relief sought as being to deprive the respondent of the arrears of rent plus interest thereon, together with a substantial payment of money to the applicants to compensate for rental payments made by them in excess of a revised rent said to be at a fair and proper level; also, the relief sought the grant of a fresh lease at a rental level more favourable to the applicants, thereby enabling them to more readily sell the tenancy and the hotel business for a not inconsiderable sum. In the result, so senior counsel submitted, a more appropriate resolution of the dispute would be along the lines of the respondent's offer of settlement, as earlier specified. In making that proposal, Mr Grieve supported it by the following points - (i) The respondent had a contractual right to interest on the outstanding rent so that the concession to waive the interest accrued on deferred rent was a substantial concession.

(ii) The proposal gave the applicants 12 months within which to pay the arrears in rent without interest. (iii) The applicants would benefit from a fresh lease at a realistic rental level.

(iv) The applicants could market their business for sale during the next 12 months and from the sale proceeds pay the arrears in rent.

(v) In the alternative, the applicants could retain their business and either borrow to pay the accrued rent or meet it from anticipated more favourable trading conditions.

(vi) Finally, the applicants could make a claim against Sherwood Trading to recover some of the alleged unfair excess payments of rent.

(vii) On the above bases, it was reasonable to accommodate the costs of these proceedings by each party bearing its own costs. 18 As to the salient aspects put by Mr Grieve , Mr Kimber responded in this way - (i) The respondent could have moved, but did not, to join Sherwood Trading to the proceedings for contribution by way of apportionment for any moneys found to be payable to the applicants for what occurred. However, it was considered it would have been more difficult for the applicants to have sued Sherwood Trading to recover an excess in the purchase price of the business.

(ii) In any event, it was far from clear that, at the time, the applicants in paying $650,000 to Sherwood Trading paid too much.

(iii) Further in any event, the respondent continues to have against Sherwood Trading, and its principals under the guarantee, a surviving action depending upon the form of relief obtained here by the applicants against the respondent.

(iv) The terms of the lease itself made it plain that the applicants were thereby required to trade, necessarily involving the performance of work in an industry, so that the challenged lease was within s 106 and the jurisdictional argument was not sustainable.

(v) It was important to appreciate that the applicants did and do not seek a return of part of the $650,000 paid to Sherwood Trading but rather as against the respondent a remedy which was within its power, namely, rent relief in the form of a lower rate under the lease to which lease the applicants and the respondent were parties.

(vi) The level of rent paid by the applicants was set on the premise of an exceptional trading experience which did not eventuate - that was the nature of the problem giving rise to these proceedings.

(vii) As to the arrangement to defer portion of the rental payments, there was no proper understanding or agreement between the parties concerning the circumstances and the timing for payment of the arrears and on what terms.

(viii) The respondent's open offer was not a reasonable or fair compromise because it left untouched the question of the payment of the deferred rent and the high level of rent as from 10 July 1999; the applicants' financial position was such that the option for them to borrow money to pay the deferred rent was no viable option.

(ix) On the figures available, the applicants would require a period of 2 years to pay the deferred rent, provided the current rental was reduced to a proper market level. 19 In light of the way in which the respective cases were thus put, it is necessary to review the evidence in the proceedings and to which I now turn. 20 The first-named applicant, Mr Keith Starkey, was the principal witness in the applicants' case. He swore a detailed and comprehensive affidavit and was extensively cross-examined. Mr Starkey had been involved in the hotel industry since 1963 as the owner of a number of hotels in partnership with his wife, Mrs Dawn Starkey, the second-named applicant. An affidavit sworn by Mrs Starkey was read into evidence, but she was not cross-examined. As a general comment, it is clear from the affidavit of each applicant that by the late-1980s in semi-retirement, and in a relatively sound financial position with no debts, they were interested in re-entering the hotel industry and from time-to-time inspected hotels at various places for that purpose. And so it was in early-1990 that the applicants visited the Empire Bay Tavern and negotiated with Mr Ronald Madden their purchase of the business and the assignment to them of the lease with the respondent from Sherwood Trading. Although they endeavoured to pay a price of $600,000, Mr Madden would not negotiate below $650,000; the applicants, after reviewing certain financial records, acquired the Tavern for $650,000 plus stock financed from their savings of $400,000 and a bank loan of $300,000. After the courtesy of meeting Mr Noel Mitchell, the principal for the respondent as the lessor of the Tavern, the applicants assumed occupancy and commenced business as from 1 May 1990. 21 From the outset, the applicants were concerned that the level of rent for the Tavern was, as Mr Starkey said, "a bit high". However, and as he admitted in his affidavit, "at that time, hotel businesses, generally speaking, were doing quite well generating profitable income with good prospects". Mr Starkey added in his affidavit : 21. Based on my experience, I thought that the rental, which at that time was about $3,000.00 a week was too high. My enquiries revealed takings of about $18,000.00 a week. The hotel industry rule of thumb is rental should be about 10% to 12% of takings. Hence, 12% of takings at that time was $2,160.00 a week, hence the rental was about $840 per week above the industry standard.

28. On acquisition the trading continued to be at a gross level of about $18,000.00 to $19,000.00 per week. We managed to increase the revenue by about $2,000.00 a week to about $21,000.00 per week in the first 12 months of the lease. It then tended to stagnate at that level.

29. When Pub Tab was finally installed in the Tavern, in 1992 as expected, the revenue increased to about $22,500.00. It was very difficult to move beyond that. 22 Notwithstanding the concern at the then rent level of $3,000 per week, the applicants made the transaction with Sherwood Trading, no doubt encouraged by what the hotel broker, Mr Ronald Codner, and Mr Madden told them as to the proposed housing development and shopping centre to be constructed adjacent to the Tavern; the fact the balance of the lease was about 9½ years with an option for a further 10 years was also of significance to them - in Mr Madden's words, "the length of the lease and the potential that this area has, you can't go wrong". Of course, the shopping centre and housing development were never built. It was common ground that no representations were ever made by Mr Mitchell or by anyone on behalf of the respondent. 23 Pursuant to the lease, the rent was increased by 8.05 per cent as from 10 July 1990 and by 8 per cent from 10 July 1991. Mrs Starkey deposed that "within one year we were having difficulty in meeting the rent"; in that respect, Mr Starkey referred to the adverse effects on the Tavern's business from the economic recession in the early-1990s as compounded by the failure of the proposed developments in the area to proceed. In view of the applicants' difficulties, accompanied by their accountant they met in June 1992 with Mr Mitchell and the respondent's accountant, Mr Brian Sutton, and sought a reduction in the rental level; although no such reduction was accepted, the respondent shortly thereafter agreed, as both Mr and Mrs Starkey said in their affidavits, "that the rent would not be increased that year and the 8% increase would be deferred". Not insignificantly, Mrs Starkey added : We were never advised at this time in August 1992 or subsequently that the consequence of accepting the rent deferral arrangement was that our option right would be lost if we still owned the business at the end of the first 10 year term under the lease (in July 1999), but had not paid all deferred rent by that time. 24 Mrs Starkey deposed to a number of unsuccessful attempts by the applicants to negotiate a reduction in rent with Mr Mitchell. The letter dated 12 July 1993, earlier quoted, from the respondent to the applicants concerning deferral of one-half of the rental increase due on 10 July 1993, provided that should the applicants "at any time terminate [their] lease for any reason the rent postponed will become due and payable forthwith", was the first written evidence of the rent deferral arrangement. However, and like Mrs Starkey, Mr Starkey said the respondent never advised the applicants of the consequence of the rent deferral arrangement as leading to loss of the option right to renew the lease at the end of the first 10-year term for a further term of 10 years. Mr Starkey pleaded in his affidavit : 39. We would not have accepted the rent deferral arrangement if the respondent had advised us that this would be a consequence of the rent deferral arrangement. This is because:- (a) We well knew that we would not be able to pay the accumulating deferred rent from our takings and saw a future assignment/sale of the business as the only means by which we would be able to meet that debt. (b) We could not, however, predict when we would be able to sell the business but we at least believed we had the security of the 10 year plus 10 year lease and, if business improved over time, the prospect of a sale would increase. In any event we knew our chances of a sale would improve in the second 10 years of the lease because of the substantial rent decrease that would arise from the operation of the "review to market" clause in the contract. (c) Without any basis for confidence that we could sell the business before the end of the first 10 year term (ie. by July 1999), agreeing to defer rent and accumulate substantial debt to the respondent with the knowledge that this would prevent us from accessing the second 10 year term, would have been a pointless exercise as the only guaranteed outcomes would be that we would have no business after 9 July 1999 and yet, we would still owe the respondent a very substantial sum of money. (d) Had we been properly informed at this time, when we still owned and lived in our own home and had little accumulated debt, we would have moved to protect our home and prevent the inevitable and fruitless accumulation of debt, by getting out of the tavern business at any price, to cut our losses. 25 The question of the deferral of rent and the conditions attaching thereto loomed as a major issue in the proceedings. On the one hand, the applicants maintained the arrangement involved payment of the deferred amounts from the proceeds when they sold the business. Mr Mitchell, on the other hand for the respondent, denied any such condition and, on the basis the applicants were "very experienced hoteliers", did not consider "Mitchforce owed them any duty to caution them as to their legal obligations, or to provide them with financial counselling services". The extent of the problem, in terms of the applicants' financial exposure and as it impacted upon the respondent, will be appreciated from the fact that in accordance with the lease as at 9 July 1999 (the end of the first 10-year term) the rental arrears totalled $346,696.72 (being deferred arrears in the sum of $329,316.72 and current arrears of $17,380.00); and interest accruals under the lease on the deferred rent amounted to $113,807.74 (being cumulative interest of $105,177.25 on deferred arrears and $8,630.49 on current arrears) - a total amount of $460,504.46. Of course, as time goes by with the applicants continuing to trade the amount of deferred rent due remains outstanding and as attracting further interest. 26 Mr Starkey deposed that throughout the period of occupation of the Tavern the applicants had attempted unsuccessfully to sell the business. He said the high rental level was the factor operating against a sale. The material disclosed that the annual rental for the Tavern increased under the terms of the lease from $163,800 ($13,650 per month) in May 1990 when the applicants commenced trading to $327,594 ($27,299 per month) in July 1999 at the end of the first 10-year term; applying an increase of 8 per cent pursuant to the lease, the new annual rental as from 10 July 1999 would be $353,801 ($29,484 per month) and from 10 July 2000 it would be $382,105 ($31,842 per month). 27 After the rent deferral in mid-1993, the applicants continued their efforts to obtain a reduction in the rent but the respondent was only prepared to allow rent deferral. For instance, by letter dated 22 July 1994 the respondent notified the applicants "that the current rent of $198,792.00 p.a. will be maintained for the next twelve months to 9th July 1995. As previously stated we reserve the right to recoup rent arrears". What then occurred was stated by Mr Starkey in his affidavit in this way : 57. In or around August 1994 I arranged a meeting attended by myself and my wife, Mr Goodacre our accountant, Mr Mitchell and Mr Sutton the respondent's account. The meeting was a further attempt at having the rental reduced. I said:

"Noel I'm getting in deeper and deeper and something will have to be done".

As I recall it, again, we could secure no direct answer from Mr Mitchell. Again there was no agreement secured to reduce the rental.

By this time we had difficulties in meeting our obligations to the Bank. Our son, Robert offered us and we reluctantly accepted unconditional borrowing of $25,000.00 to relieve the financial pressure. At about this time, around September of 1994, I sold my Mercedes motor vehicle to reduce our indebtedness.

In or around 1994 we saw no alternative, in order to discharge some of the indebtedness that we had incurred to the Bank, but to sell our unit property in Terrigal and take up residence in the Tavern. We sold the unit property for $248,000.00 although it took us about 12 months to sell as we were holding out for the best price that we could get. Contracts were exchanged on 12 September 1995. The Bank took all of the proceeds of the sale, being the sale price less agents commission.

Following the sale of our unit there was a shortfall payable to the Bank under the mortgage of about $78,000.00. We borrowed this amount of money from my wife's brother, Bryson Swan, interest free. The majority of that debt is still owing although we have attempted to discharge it as best we could, from time to time.

We continued to suffer considerable financial stress in the years leading up to 1997.

I became ill in April 1997 and I was hospitalised in St Vincents Private Hospital having been diagnosed as having diffuse osteoarthritis, which affected my knees and hips. I was originally admitted to have a left hip and right knee replacement. I was then to have a left knee replacment which did not occur due to complications. I ended up spending about three months in St Vincents Private Hospital. Apart from the conditions with which I was admitted, I suffered significant internal haemorrhaging, in consequence of the surgery and I developed a cardiac condition, namely arterial fibrillation. There were other complications, including a deterioration in my vascular condition.

During my period of hospitalisation, the substantive responsibility of running the business fell upon my wife, Dawn, and my son, Robert. During my hospitalisation, I was unable to attend to the needs of the business, nor did I concern myself with the problems that we had been having. I was virtually completely disabled during that period. In addition to borrowings from our family, my wife borrowed, from her mother, an amount of $4,000.00 in or about May 1997 at the time I was in hospital. This money was borrowed to reduce our bank overdraft to under the acceptable limit. This money is still due and owing to my mother-in-law.

Following my discharge from hospital, I became aware that we continued to experience problems in payment of rent.

During my period of hospitalisation, my wife, Dawn, had commenced some negotiations with the assistance of our accountants, to acquire poker machines to be placed in the Tavern. I understand we sought assistance by way of a guarantee from friends of ours, Bede and Erica Gough, who offered to purchase the poker machines on the basis that we would reimburse them once we were in the position to do so. However, we ultimately agreed that they would guarantee the acquisition of these poker machines on vendor finance. Two machines were acquired in June 1997 and installed in the premises.

By 1 August 1997 my wife and I had stopped taking any drawings from the business because we were unable to afford it. This is even though the takings increased because of the receipt from the poker machines. That additional income was going towards discharge of rental. 28 By letter dated 10 September 1997, the respondent advised the applicants : As you are aware this company has, at your request, from time to time deferred increases in rent due in accordance with the terms of the above lease.

A condition of such deferment was that the rental then payable would be paid on the due date as stated on the lease together with any other monies payable such as outgoings.

The letter then stated that as at 10 September 1997 the current rent and outgoings overdue amounted to $64,763.18. Being unable to allow that position to continue, the respondent advised that all deferred rent was due and payable in the sum of $250,915.75, making a total amount then due of $315,678.93. It was advised further that failure by the applicants to make payment in full by 25 September 1997 would result in the interest provisions of the lease being invoked. It was noted that the current rent was $303,327 per annum payable in advance at the rate of $25,277.25 per month.

The applicants by letter dated 18 September 1997 replied to the respondent as follows : We take note of your letter dated 10 September, 1997.

As stated in our previous letter to you that we are unable to pay the deferred rent, and at this time our position still has not changed.

As to the overdue rent we will endeavour to get this under control over the next few months.

In regard to rental of $25,277 per month, we feel that this is an unreasonable amount under our present monthly turnover.

So would ask that you review this. 29 While Mr Starkey was in hospital, Mrs Starkey managed the Tavern in a climate where, as she said, "the business was very quiet and things were still difficult financially". In or around May/June 1997, Mrs Starkey was visited at the Tavern by Mr Mitchell and again sought from him a reduction in the rent but without any response. Then, as to the possibility of a sale by the respondent of the Tavern, Mrs Starkey deposed in her affidavit as follows : 28. In mid 1998 we were contacted by Mr Mitchell about a possible purchaser for the Empire Bay Tavern. A meeting was set up with Mr Mitchell, his solicitor Mr Player, Mr Sutton his accountant, an adviser to Mr Mitchell and Mr Schwartz the potential buyer. I recall at the meeting Mr Mitchell said : "Mr Schwartz is interested in buying the Tavern with your lease. He wants to lease it back to you on a 3 x 3 arrangement. I am agreeable to this, but you still owe me some money. I will take as part payment your poker machines and your stock which I am prepared to value at $100,000.00." At this stage, Mr Mitchell's adviser said: "Noel, you be quiet, I am tougher than you and should conduct this negotiation. We can walk in and take everything and put you out on the street."

I said: "Do you think we're bloody stupid."

The adviser said: "We can do this if you don't agree to this proposition (Mr Schwartz's)."

Mr Mitchell said: "I've been considering letting you have my two bedroom home that I own in Erina in the way of compensation but my family is against it." 29. We were interested in Mr Schwartz's proposal but Mr Schwartz decided not to proceed for reasons unknown to us.

Mr Starkey gave evidence confirming those conversations, although Mr Mitchell denied that Mr Schwartz attended the meeting and he identified the respondent's then adviser who attended as a Mr Wallace Hill. Otherwise, Mr Mitchell did not challenge what was said to have occurred at that meeting, including the fact, as Mr Starkey recorded, that Mr Mitchell said at the meeting "I'm not going to proceed against Ron Madden because a lawyer tells me it will cost me too much money and I probably won't get anything back". What occurred at that mid-1998 meeting is to be seen in light of a Notice of Default dated 1 October 1997 served by the respondent on the applicants demanding payment by them of the arrears of rent and other monies due pursuant to the lease in the amount of $300,677.93; if the money not be paid then the respondent foreshadowed action to repossess the premises, terminate the lease and recover the monies due. 30 By letter dated 18 August 1998, the respondent notified the applicants that the rent would be increased under the lease by 8 per cent as from 10 July 1998 to a new figure of $327,593 per annum payable at the rate of $27,299.42 per month. 31 The applicants notified the respondent by letter dated 31 March 1999 in accordance with the lease of the exercise of their option for its renewal for a further term of 10 years. As to a new rental, the applicants asked the respondent for a proposal but they reserved their rights under the lease to have the new rent determined by a valuer; in addition, the applicants advised the respondent that the notice was given "without prejudice" to their rights to commence proceedings against the respondent in this Court for relief in respect of the lease. However, by letter dated 1 April 1999 the respondent informed the applicants that it denied any obligation to grant a further lease in view of the default in rental payments which was regarded as a breach and as enabling the respondent to disallow the exercise of the option. 32 Mr Starkey added in his affidavit : 94. Apart from specific meetings I have mentioned in my affidavit, I have had a number of private direct and telephone conversations with Mr Mitchell and Mr Sutton in which I have sought to obtain a variation of the arrangements and in particular a reduction, on a permanent basis, of the rental. As is indicated in my affidavit, the only relief I have succeeded in obtaining is for a deferral of rent but not a forgiveness or variation of the rental obligations under the lease.

95. In addition to the actual conversations I have had with Mr Mitchell I have, on the very many occasions, attempted to make contact with Mr Mitchell without success. He often does not return my calls or respond to communications. Further, during the conversations I had with him, he has been non-responsive or evasive.

96. I have tried on a number of occasions to sell the business and assign the balance of the Lease but I have been unsuccessful. I have indicated above some such occasions. In addition, on a date in 1997 my wife had dealings with a broker, Mr O'Dougherty, of Newcastle, to negotiate an assignment of the Lease but attempts were unsuccessful. This occurred whilst I was in hospital.

Mr Mitchell said he was unaware of the applicants' various attempts to sell the lease of the Tavern. 33 As indicated earlier, the rental adjustment clause in the lease provided for annual increases in the rent over the period of the 10-year term of the greater of 8 per cent or Consumer Price Index increases. Australian Bureau of Statistics figures admitted into evidence showed annual increases in the Index (All Groups) for Sydney, the relevant measure specified in the lease, during the first 10-year term as follows : Year Increase % 1989-90 8.1 1990-91 4.9 1991-92 1.7 1992-93 0.9 1993-94 1.4 1994-95 3.5 1995-96 5.0 1996-97 1.4 1997-98 0.1 1998-99 1.7

It will be apparent that the 8 per cent increase in the lease was explicable, indeed perhaps understandable, by reference to the 8.1 per cent increase in the Index for the 1989-90 year. However, the dramatic reduction which then occurred from the 1990-91 year and continued for the balance of the lease term, no doubt due to the notorious economic downturn which occurred at that time, dramatically demonstrates the nature of the financial difficulties in which the applicants found themselves. They attained the assignment of the lease on 1 May 1990, towards the end of the 1989-90 year, and, as Mrs Starkey said in evidence "within one year we were having difficulty in meeting the rent" - comparing the 8 per cent increase under the lease with the significantly lower increase in the Index, it may be said that the difficulty experienced was not surprising. Indeed, it shows, albeit with hindsight, that where increases in the rent were to be referable to the greater of 8 per cent or Consumer Price Index increases then the increases in each measure were contemplated as being reasonably comparable for the duration of the lease term. Plainly that was not the case as the experience proved, exacerbated by the somewhat lengthy 10-year term without provision for a market review at appropriate times during the term of the level of rent. 34 I have referred earlier in this review of the evidence to the opinion of Mr Starkey based on his experience as an hotelier that the industry's "rule of thumb" was that rental should be about 10 to 12 per cent of takings. Set out below is a table, constructed from the evidence of Mr Starkey, which compares in approximate terms for each of the 9 complete years from 10 July 1990 to 9 July 1999 the rent actually paid by the applicants with that which was due under the lease and that which would have been payable using 12 per cent of takings and Consumer Price Index increases -

Annual Rent ('000s dollars) Year Actual Lease 12% Takings CPI 1990-91 176.9 176.9 127.9 177.1 1991-92 191.1 191.1 137.2 185.7 1992-93 191.1 206.4 151.9 188.9 1993-94 198.1 222.9 158.8 190.6 1994-95 198.8 240.8 159.2 193.3 1995-96 182.3 260.1 156.3 200.1 1996-97 188.2 280.8 156.4 210.1 1997-98 198.1 303.3 187.4 212.9 1998-99 338.5 327.6 176.4 213.2 (to 6.6.99)

The actual rental payments made by the applicants for the first 11 months in the 1999-2000 year amounted to $308,000 which, projected for the twelfth month of a further $27,300, would give a total figure for that year of $335,300.

If one were to continue the above table for the year 1999-2000 on available data, the result would be -

Annual Rent ('000s dollars) Year Actual Lease 12% Takings CPI 1999-2000 335.3 353.8 - 216.8

Thus, on those figures, from 10 July 1990 until the commencement of a notional second 10-year term on 10 July 1999 the rental increase under the lease was $176,900 ($176,900 to $353,800) but only $39,700 ($177,100 to $216,800) according to increases in the Consumer Price Index. The annual rental when the lease was assigned to the applicants was $163,800. 35 Not insignificantly as relevant to the above comparative exercise, the applicants' accountants, V J Ryan & Co Services Pty Limited, wrote to the respondent on 25 October 1993 concerning proposals on behalf of the applicants to relieve the financial difficulties and, in particular, the necessity "to formalise in some way the suggested changes concerning the waiving of the rent increases and future rental reviews"; advice was requested by the accountants from the respondent of "some idea of the formulas which might be used to establish the rent payable when the turnover and profitability of the business improves". In reply, the respondent by letter dated 15 November 1993 stated : Rent : The current rent of $198,792.00 will remain firm until 9th July 1994 being the next anniversay (sic) date.

It is proposed that the C.P.I. increase based on what the rent should be under the terms of the lease be applied at each anniversay (sic) date from 9th July 94 in place of the straight 8% increase.

However we reserve the right to recoup rent arrears.

The rent cannot however fall below 12% of total turnover from all sources at the Tavern including but not limited to Bottleshop, Bars, Restaurant, Rent, Card Machines, Telephone Commissions and Receipts of any nature. 36 As to the effect of what occurred, including the ability of the applicants to exercise the option for an extension of the lease after 9 July 1999, Mr Starkey deposed : 5. My confidence in this regard was based on the fact that the rent deferral arrangements that were entered into as and from mid 1992, because of our inability to pay the rent specified under the lease, rested on the premise that the deferred rent would fall due for payment at the time that our Empire Tavern business was sold. My expectation and belief was that we would retain the right to operate the business until it was sold as the proceeds of that sale were the only conceivable means by which my wife and I would have been able to pay the substantial deferred rent.

6. The respondent at no stage advised my wife or I that if the total deferred rent was not repaid in full on or before the expiry of the first 10 year term, ie by 9 July 1999, that we would not be able to exercise our option rights under the lease.

8. We own no property and have no accumulated savings or earning capacity that would facilitate us purchasing or even renting a house in which to live.

13. I am now 70 years of age, and whilst I have not been hospitalised since April 1997 I require daily leg dressings as a consequence of vascular problems and suffer from acute pulmonary odema and arterial fibrillation. The combined effect of these complaints limits my ability to get around. 37 Mr Starkey agreed under cross-examination that within 2 to 3 years after he acquired the Tavern with his wife it became apparent that the applicants paid Sherwood Trading about $400,000 more than it was worth; however, he maintained the view that at the time the Tavern was purchased he did not think too much was paid. Indeed, at the time, Mr Starkey thought the applicants would get on their investment of $650,000 a return to the order of 20 per cent per annum, although that was not the expectation in the first couple of years. He emphasised the importance of being able to develop the business over time with the benefit of the 10-year lease term and the option for a further 10-year term. Mr Starkey agreed that he factored into consideration the rent payable under the lease and that it was reviewable annually in an upwards manner by the greater of 8 per cent or Consumer Price Index increases. Relevantly with respect to the rent, Mr Starkey gave the following evidence : Q. And at the time you considered that it was a realistic and worthwhile commercial formula, having regard to the then current rate of inflation, correct? A. Yes, I knew that I wouldn't be making a lot of money in that couple of years.

Q. And you considered at that time that that was a realistic and reasonable burden for you to assume, having regard to your exceptions as to the profitability of this business, correct? A. I believed that it would be profitable. It would not be really profitable for the first couple of years, but I did think that it would improve over that period of ten years because of the developments there were going on.

It is to be noted that the proposition put to Mr Starkey by the respondent's senior counsel as to the realistic and worthwhile commercial formula for adjustment of the rent was made directly referable to "the then current rate of inflation" - that was to the order of 8 per cent per annum. 38 Further testing by senior counsel of Mr Starkey's decision-making process at the time brought the following evidence : Q. And you were banking on two things, weren't you? You were banking on the fact that the housing development that you had been told about, and with the shopping development, would go ahead, correct? A. I had no reason not to think.

Q. The short answer to my question is "yes", is that right? The short answer to my question is "yes", is it not? You were banking on the housing development and the shopping centre going on, weren't you? A. Yes.

Q. That's one thing. You also were banking on the economy remaining reasonably buoyant, weren't you? A. I was.

Q. And in truth those two speculations on your part as to the future did not come to pass, that's right, isn't it? A. No, I didn't know that there would be a recession at that stage.

Q. Let me put it with crystal clarity. You were speculating that the housing and the shopping development would go on, weren't you? A. I was.

Q. And you were speculating that the economy would remain buoyant, weren't you? A. Well, everyone - yes, I was.

Q. And, as it turned out, both of those speculations didn't come off, that's right, isn't it? A. Yes.

As to Mr Starkey's motivation in bringing the present proceedings against the respondent, he gave the following evidence under cross-examination : Q. The question was this: In this matter you expect Mr Mitchell, or his company Mitchforce Pty Limited, to bear the losses which you had suffered as a result of the two speculations which you made having failed, that is the reality of the matter, is it not? A. Yes, but I was trying to keep it buoyant by using my personal savings, eventually sold my house, that I wouldn't have to do, to still thinking that things might eventuate but not.

Q. You had to sell your house because you couldn't afford to continue paying interest to Westpac on the moneys that you borrowed, is that not the position? A. That is after I spent my personal savings I sold my house.

Q. But my question is: you sold your house because you could not afford to continue paying interest to Westpac on the moneys that you had borrowed from them, that is the fact, is it not? A. That was an option that I had to take. 39 Nevertheless, Mr Starkey accepted that the rent deferral arrangement made with the respondent in July 1993 meant that the respondent could later call upon the applicants for payment of the deferred rent and that should at any time the applicants terminate the lease for any reason then the postponed rent would become due and payable forthwith. It was plain from Mr Starkey's evidence that he placed great importance on the option to obtain a further 10-year lease term in considering the viability of the commitments made and, importantly, the applicants did not breach the terms of the lease by failing to pay the rent due under it because of the agreement with Mr Mitchell to defer part of the rent due. The applicants made provision in their books of account for the deferred rent as a continuing liability. Having in mind the terms of the orders now sought by the applicants, Mr Starkey gave the following evidence under cross-examination concerning payment of the deferred rent to the respondent : Q. And to put no finer point on it, as at that date, 9 July 1999 you and your wife owed Mitchforce Pty Limited $329,316 on account of deferred rent? A. That was right.

Q. And that had accrued on that sum an amount of $105,177 in interest under the lease? A. I believe so.

Q. And you are asking this Court to order that Mr Mitchell or his company should forget about that money that you owe it aren't you? A. I was not expecting it at that stage.

Q. No but that is what you are asking this court to do, to order Mr Mitchell or his company to forget about the money? A. What my, my first idea was, if I received that other ten year lease I would have a business to sell but I would be able to, to pay that money.

Q. But one of the orders you are asking this court to make is to order Mr Mitchell or his company to forget about that money aren't you, just to write it off? A. No.

Q. That is what you are asking aren't you? A. I have no objection.

Q. That is what you are asking this court to do? A. Unless I get that ten year lease I have no option.

Q. You are asking this Court to make an order to that effect? A. If he can.

Q. And you say that this court should do that because you think that is a fair thing? A. No, I don't. I just think, I don't think it is a fair thing.

Q. And you have no doubt that under the terms of the lease arrears totalling almost $330,000 accrued as deferred rent as a debt due by you and your wife to Mr Mitchell's company? A. Yes.

Q. And that at least is a debt you as an honourable man would see yourself bound to pay to Mitchforce Pty Limited? A. I would have yes.

Q. Indeed, you would consider it grossly unfair for you to be simply released from that obligation, unfair to Mitchforce Pty Limited? A. No, I don't think so.

Q. Now you're here, hoping that this court will order Mitchforce Pty Limited to give you another ten year lease aren't you? A. I, I am hopeful, yes, but I would ask Mr Mitchell quite a number of times for a bit of relief. I was not asking for rent, I was asking for relief or reduction of rent which would have enabled me to sell the tavern and I would be able to afford to repay that money. 40 The respondent's group accountant, Brian William Sutton, gave evidence mainly as to the arrangement for rent deferral and a review of the applicants' financial accounts. Mr Sutton reviewed also the respondent's records relating to the purchase in December 1981 of the land upon which the Tavern now stands for a price of $134,060 and the construction of the Tavern in mid-1988 at a total cost of $1,705,972 - he said the cost of the land and the improvements was in the order of $1,840,000. 41 Mr Sutton agreed in cross-examination that the applicants' business at the Tavern was not sufficient to pay the rent under the lease and he did not doubt that they were experiencing genuine financial difficulties. Although he did not know why the respondent would not grant a reduction in rent, Mr Sutton agreed that the relief of deferral was allowed because the applicants were trying to sell the business with the understanding between the parties for payment of the deferred rent out of the proceeds of sale. In that latter respect, Mr Sutton agreed also that the respondent became aware the applicants were trying to sell the business from some time during 1992 up until 1999; a number of people over the years expressed interest in buying either the hotel business alone or both the Tavern freehold and the business but he was not involved personally in those discussions. 42 As to the connection between rent deferral, sale of the business and the exercise of the option, Mr Sutton gave this evidence : Q. I want to put it to you as plainly as I can, I want to suggest this to you, Mitchforce understood the only way the Starkeys would ever be able to repay $300,000 when it accumulated to that sum, indeed at all material times Mitchforce knew the way that money, the deferred rent was going to be paid, was out of the sale of the business, correct? A. Correct.

Q. Because you knew by 1997 for instance or even 1996 you knew they had no money whatsoever didn't you? A. Correct.

Q. What I am suggesting to you is both parties went forward with the notion given the only way they could repay the growing deferred rent was if they sold the business? A. Correct.

Q. What I am suggesting to you, that situation was going to pertain irrespective of whether or not the first ten years expired, do you understand that, i.e. they would be able to continue after the first ten years as long as they continued to try and sell the business. Do you understand that? A. The understanding I always had at the end of the lease if it was not repaid the option would not be granted.

Q. Apart from the letter you have referred to which is your letter of 12 July 1993, you agree with me that suggestion of a link between the deferral of rent and the right to exercise the option was never the subject of any correspondence in the next six years, correct? A. Correct.

Q. Nor on your evidence do you ever suggest there was any conversation with the Starkeys wherein they were told or reminded that the option would not be exercisable unless they paid every penny of that deferred rent, that is true? A. I am not aware of any. 43 The purpose insofar as the respondent was concerned in granting the lease to Sherwood Trading, and consequently the assignment thereof to the applicants, was described in the following way by Mr Sutton : Q. When you entered into a lease with Sherwood Trading, the whole purpose of entering into that contract with Sherwood Trading Pty Limited is that they would operate a licenced premises, correct? A. That's correct.

Q. And they were obliged to operate those premises? A. Correct.

Q. And when Mr and Mrs Starkey took over the assignment, they too were obliged to operate those licenced premises? A. Correct.

Q. Apart from running the Tavern business that the licence was granted for, they were also required to maintain those premises in a good state of repair, were they not? A. Correct, yes.

Q. And again from the file that has been produced, you wouldn't be surprised to find letters from Mitchforce to Mr Madden reminding him of his obligations as to the gardening and shrubs and to keep the place in good repair? A. Yes.

Q. Part of their obligation under the lease was to do that work, to keep the place looking good? A. Yes.

Q. And the object of the exercise was that if everything went well, the business would operate successfully and the value of the whole Tavern as an enterprise, as a piece of real estate, would go up, is that correct? A. Correct.

Q. Mitchforce invested $1.8 million with that end in mind making a profit out of the venture, correct? A. Correct. 44 Interestingly, and even though Mr Sutton denied knowledge of the reasons therefor, he agreed that in 1988 when the respondent was considering its potential exposure to licence fees for the hotel it did two calculations by way of estimates based on sales of $30,000 and $40,000 per week. It was suggested to Mr Sutton in cross-examination that those estimates of weekly turnover formed the basis for the fixation of the initial rent under the lease in the amount of $156,000 per annum. He gave the following evidence : Q. Why did you do the figures in this document in 1988 before even the building was finished on the basis of sales of $30,000 and $40,000 a week? A. I have no idea; I have no idea. I guess it was in relation to working out that clause.

Q. Don't worry about the calculations. Why $30,000 and $40,000 a week in 1988 before the place even opened? A. I have no idea.

Q. Could I suggest the company had a very high expectation as to how this tavern was going to do when the doors opened, would that be right? A. I'm not sure.

Q. Can you think why you would have figures as high as that other that what I have just suggested to you? A. No idea at all.

Q. What you were trying to do was postulate the company's exposure were you not? A. It was a guess, yes.

Q. Can I ask you this, now that you have looked at this it does not help you as to how the start up of $156,000 was obtained? A. Correct.

Q. You say Mr Mitchell and Mr Madden would have been responsible for that? A. I guess, yes.

Q. Is Mr Mitchell an expert in hotels and hotel turnover? A. No.

Q. Were you taking advice from somebody else at this time as to turnover levels in the hotel? A. Not that I am aware of.

Q. If the figures for sales rather than $30,000 a week was $10,000 a week and $20,000 the picture would have been entirely different, its exposure would have been a lot lower? A. At the time we were looking at the clause in the lease.

Q. You are not suggesting these figures were by way of a prediction on your behalf as to likely sales. You are not suggesting that is not true? A. I'm not sure.

Q. Just for the sake of argument if you worked on sales of $30,000 a week and multiplied that by 52 you get $1,560,000 do you not? A. I believe so.

Q. If you divide that by ten per cent you get $156,000, correct? A. Correct.

Q. It would seem to suggest the start up mainly of the Empire Tavern was based on ten per cent of anticipated turnover based on a belief of $30,000 worth of sales a week, do you agree with that? A. No.

Q. Do you say that is wrong? A. No I don't.

Given that it was not until 1998-99 that the Tavern traded at a level of $30,000 per week in sales, Mr Sutton responded in this way: Q. The rent of $156,000 in 1989 which is a reflection of ten per cent of turnover if there be $30,000, in circumstances where those sales that would be needed to support that were not forthcoming for almost ten years, is that right? A. I believe so, yes.

Q. The company thought at the time $156,000 was a fair start up rental? A. I believe so.

Q. But you have no idea why it was so thought at the time? A. No.

For completeness, set out below is a table indicating the takings or turnover for the Tavern, on both a weekly and annual basis, for each of the 9 years from 1990-91 to 1998-99 :

Takings or Turnover ('000s dollars)

Year Per Week Per Annum Rent Percentage of Turnover 1990-91 20.5 1066.4 16.6 1991-92 21.9 1143.9 16.7 1992-93 24.3 1265.8 16.3 1993-94 25.4 1323.7 16.8 1994-95 25.5 1327.9 18.1 1995-96 25.2 1309.4 19.9 1996-97 25.2 1309.4 21.4 1997-98 30.1 1568.3 19.3 1998-99 32.3 1682.5 19.5

Included in the above table are the respective percentages of the rent payable under the lease as a percentage of turnover, having in mind the evidence that the hotel industry range for rent was from 10 to 12 per cent of turnover. 45 Noel Francis Mitchell, a director of the respondent and the principal thereof, gave evidence. The fundamental approach of Mr Mitchell to the applicants' repeated requests for a reduction in the rent for the Tavern having in mind their financial difficulties was apparent from his cross-examination, as follows : Q. You said when I asked you that you wouldn't discuss giving them a rent reduction at any time you said, "Yes, that's right, I would not. They had a contract and I thought they would honour it"; correct? A. Yes.

Q. Just so we don't spend too much time on this, do I understand your company's point of view at all material times during the period between June 1992 and 1999 that the company was not prepared to give the Starkeys a rent reduction in any circumstances; is that right? A. Not when I found out certain deals with the Westpac Bank as the case may be. I had no idea of their financial position. I had no idea of what other money they owed because I had nothing to do with the transaction. I hadn't met the Starkeys until after all the deal was done. I had nothing to do with the deal.

Q. I'm sorry, I hope that is not a question of you hearing me but I will ask you again. The question that I wanted to ask you is this. From what you have just said, his Honour should take this as being the fact, should he not: your company was not prepared to give the Starkeys a rent reduction under the lease by way of a rent variation downwards at any time between 1992 and 1999? A. No.

Q. Regardless of what change of circumstances confronted them, correct? A. They had a contract with our company and they should honour it.

Q. So you are agreeing with my proposition? A. Yes.

Q. So the foundation for your view is if you sign a contract that says you will pay rent at whatever level then, regardless of what circumstances might change, you should honour that contract? A. 99 times out of 100, because I didn't think Mr Starkey was managing the place real well. He wasn't keeping the best of health at one stage.

Q. What, in 1992? A. No, a bit later on.

Q. 1993? A. Well, I couldn't tell you the year but he was in hospital.

Q. 1997 he was in hospital. A. I don't remember those dates, but the place could have been managed a bit better. I didn't know what other debts he had.

Q. Do I understand then it is your evidence that the reason you didn't give him a rent reduction at any time was also because you didn't think he was making a sufficient fist of the business? A. I thought he could have done better.

Q. And, therefore, no rent reduction? A. That's right. We had a contract.

Mr Mitchell added : Q. When you went there in August 1993, you weren't interested to find out the extent of his borrowings or his trouble? A. What, to the bank.

Q. When you went to the bank with him? A. That wasn't my business. I went along to see if I could help in any way with him and his wife and his accountant and I was able to help.

Q. By threatening the bank that they would have some difficulties with you if they foreclosed on the Starkeys? A. I told them I would not give them the deal where I was helping him.

Q. You knew full well that the way to satisfy this problem immediately was for your company to agree to a substantial rent reduction. You knew that, didn't you? A. No, you are wrong.

Q. You say you didn't even know that? A. I say you are wrong on that because I asked the Starkeys permission could I speak to their accountant. I'm not sure if it was their accountant or the Westpac Bank accountant and I said to them - I think it was Mr Starkey's accountant and he said will I reduce the rent with us having problems. I said, "Tell me this. We are talking straight". He said yes. I said, "Now, if I pay you, if I give you a rent reduction, what are you going to do with it? You are going to give that to Westpac, aren't you" and he said yes. I said, "I'm giving you my money to give them and I'm not getting my money. No deal". 46 In the period 1993-94, the applicants sought payment from the respondent for connection of the Tavern to the sewer for a cost of $35,000; at that time the applicants were paying $28,000 a year for sewerage to be pumped away. In declining to pay for connection to the sewer, Mr Mitchell gave this evidence : Q. Later on in 1993 or in 1994 they suggested that they wanted you to connect the sewerage because they had a recurring cost of $28,000 a year for pump out; correct? A. Something like that.

Q. And your company wasn't prepared to make that capital contribution to help them save $28,000 a year. That's true, isn't it? A. No, because they wasn't helping themselves. I told them to approach Westpac - and I think I may be in a mess with Westpac, I'm not sure of that. I know I told the Starkeys because they could have nearly got their money back in one year, and I said that would be a good investment for Westpac to help them. Or, if they went to their bank, which was Westpac, and got the money after one year practically it was written off. That was good business sense. They didn't take any notice of it.

Q. Westpac was about to foreclose on them. A. A lot of banks bluff. 47 Mr Mitchell acknowledged that in June 1998 the respondent received an offer from a Mr Schwartz to purchase the freehold of the land on which the Tavern stood for $2 million and for the applicants to be granted a new lease by Mr Schwartz. However, Mr Mitchell declined the offer because, as he said in evidence, "I wasn't prepared to sell for the price he wanted to give us … I have always said that is what it would become, a $4 million to $5 million hotel". Other evidence in the proceedings, notably from the respondent's own accounting and tax adviser, was to the effect that the present market value of the Tavern was $2.75 million; Mr Mitchell accepted that such a valuation rested on the basis that the Tavern was capable of supporting rent of $327,000 per annum. 48 An amount of expert evidence was called by both parties, being from hotel brokers, real estate valuers and chartered accountants concerning appropriate rental levels for the Tavern from time-to-time, reasonable methods for rent adjustment during the lease, an appropriate market rental in July 1999 on exercise of the option and the market value of the Tavern. For the applicants, this evidence was from John Robertson, a real estate valuer, and Glen Cooper, an hotel broker; for the respondent, it was from Hugh Stanley McKensey, a chartered accountant and the respondent's accounting and taxation adviser, and John Thomas Williams, a real estate valuer. 49 Mr Cooper's evidence attended principally to attempts by the applicants from early-1992 to October 1998, plus two other occasions since that latter date, to sell the business and the residual lease of the Tavern. The common response of potential purchasers, on Mr Cooper's evidence, was that they "were put off by the high rental and the annual increase in the lease of 8% per annum". Typical responses by persons interested, as reported by Mr Cooper, were - "the rent is just too expensive"; "the rent is too high based on the current turnover"; and "the rent is too high". As to the involvement of Mr Cooper in introducing to Mr Mitchell persons wishing to purchase the freehold of the Tavern, thus enabling amended conditions for the lease to be settled with the applicants, offers of $2 million were recorded but Mr Mitchell wanted an amount in excess of $3 million. As Mr Cooper deposed : 15. The difficulty that has been experienced in selling the residual of the lease of the Empire Bay Tavern is that any purchasers interested only in purchasing the lease have been put off by the high rent and the annual increase of 8%.

16. Purchasers interested in acquiring the freehold and the leasehold have been put off by the above market value Mr Mitchell has placed on the freehold.

17. This has resulted in Mr and Mrs Starkey being effectively locked in to the lease and unable to sell the leasehold or negotiate with any potential purchaser of the freehold and leasehold. They have had no option but to continue to run the Empire Bay Tavern.

18. In my opinion, based on my experience with similar hotels in the area, the rental paid by Mr and Mrs Starkey is extremely high. 50 The opinion of Mr Cooper was that as at May 1990 the price of $650,000 paid by the applicants to Sherwood Trading, consistent with the evidence given by Mr Starkey, was that "the price was probably a little bit above market but because of the position and newness of the building and the potential growth in the area, it was a reasonable price"; he expressed a similar view as to the initial level of the rent. However, as economic conditions developed in the early to mid-1990s, the difficulties faced by the applicants in operating the Tavern were that "the turnover remained constant but the outgoings kept increasing". Mr Cooper reported that the appellants' asking price to sell the Tavern was $750,000, "a bit on the high side", whereas he assessed an appropriate price in the circumstances of $600,000 to $650,000 as being realistic. Nevertheless, and even though Mr Starkey was prepared to negotiate, the difficulty in selling the Tavern because of the level of and annual increases in the rent was put by Mr Cooper thus : Q. Over the years since February 1992, beyond the period when he spoke with you in that month, has Mr Starkey put any hard figure on the value of his interest in the hotel? A. Well, the last time a figure was put on it, I had a client who was prepared to make an offer to Mr Mitchell for the freehold, once again because he didn't think he could survive with the rent unless it was reduced down and also the increases were reduced; and he was going to negotiate with Mr Starkey a figure between - we are talking about 500 to 750,000 was mentioned.

Q. When was that? A. That was the last client I think was Mr Ferguson, about two years ago I think it was.

Q. Before we get to him, you have related that in July 1994 Mr Moon had expressed interest in the Empire Bay Tavern? A. That is correct.

Q. Did Mr Starkey put any figure on his interest at the time of Mr Moon's expression of interest? A. The asking price was still 750 negotiable.

Q. What did you understand negotiable to mean? A. I was going to get any realistic offer.

Q. Did you get an offer from Mr Moon? A. No, because once again it went back to rentals - when you have a period of reducing interest rates, leases become less favourable because clients can buy and interest is cheaper than rent.

In this case Mr Moon subsequently bought the Kincumber Hotel. That deal I negotiated, where he went in on a lease with option to purchase. He took the freehold up six months after entering into a lease.

Q. Is it your evidence Mr Starkey at no stage during the time of Mr Moon's apparent interest in the Empire Bay Tavern indicated any preparedness to discount his $750,000? A. Yes, Mr Starkey would negotiate.

Q. Did he say to what figure? A. No, he just said, "Get me an offer."

Q. And you couldn't get him one? A. No.

Q. What about Mr Guest, did he make an offer? A. No he didn't.

Q. No offer at all? A. No, because he went to the banks and he couldn't raise any finance, because he though he could borrow against the lease and banks wouldn't lend against the lease.

Q. In par 11 you state, from 1994 to 1998 you put the Empire Bay Tavern to a number of clients to buy the residual of the lease, without success. A. That is correct.

Q. How many? A. A dozen probably.

Q. Names? A. I would have to look at previous notes, but you have mentioned - I mentioned it to every client who was looking for a Central Coast Hotel with a lease or potential freehold.

Q. Did you get any one of them to make an offer? A. Except Mr Ferguson - nobody except Mr Ferguson.

Q. Had Ferguson given you any offer for the Starkeys? A. He indicated to me that he would start negotiating at 550 and he would probably go as high as 700, if he could secure the freehold. 51 Mr Cooper expressed the opinion that nearing the end of the first 10-year term of the lease in July 1999 the market value of the rental on the current turnover was around $175,000 per annum to a maximum of $200,000. As to the level of rent at the time the lease was first entered into, Mr Cooper was of the view that it provided a fair balance as between the interests of the lessor and the lessee, but as to the operation of the lease during the first 10-year period in that respect Mr Cooper gave the following evidence : Q. The rental provided for in the lease for the first ten years in your view, as an experienced hotel broker, reasonably reflected the rival interests of the lessor and the lessee? A. The increase didn't, that was the problem. Mostly leases now that are drawn up that I have been associated within the last five to ten years are generally ten to 12 per cent of turnover.

There is a minimum of two and a maximum of six according to CPI put in, because there are a number of leases that were drawn up in the past where you had eight to ten per cent increases in rent and the most of the tenants were in great difficulty and a lot of them had to walk out of their hotels, because you had rising rents and turnover which was levelling off if not dropping. 52 Mr Williams for the respondent was requested to express his opinion as to certain provisions of the subject lease so far as they compared with common hotel industry practices. After examining the financial information provided to him concerning the Tavern, including the price of $650,000 paid by the applicants to Sherwood Trading and the commencing annual rental for the applicants as at 1 May 1990 of $156,000 for the hotel plus $7,800 per annum for the residential premises attached thereto (a total of $163,800 per annum), Mr Williams expressed the view on the weekly gross sales generated by the Tavern that the rent at the time was 15.75 per cent of turnover; based on his industry experience of average hotel rentals being in the range of 12 to 18 per cent of gross trading revenue, he had the opinion that "the rent payable by the Starkeys was set at the mid to high range of what I consider to be typical industry standards". Mr Williams added that "in my experience, it was commonplace for hotel leases which were drafted around this time (1989) to provide for rent reviews according to either the CPI movements or a fixed percentage increase, whichever was the greater." Mr. Williams added his opinion that in mid-1998 the market rental value of the Tavern was $200,000 per annum, the value of the freehold unencumbered was between $3 million and $3.5 million, but if the freehold was subject to a tenancy with a rent of $200,000 then the value of the freehold would be in the range of $2.5 million to $3 million. 53 Mr Williams maintained his view under cross-examination that average hotel rentals were in the range of 12 to 18 per cent of gross trading revenue but that "in my personal opinion they (the applicants) were paying too much rent. I have no doubt about that". Notwithstanding data provided to him as to the level of rent as a percentage of turnover for brewery hotels being 9 to 11 per cent and for non-brewery hotels being to the order of 7 to 10 per cent, Mr Williams did not accept he was in error in suggesting a range of 12 to 18 per cent as an average for the industry and even though he agreed he had not seen fit to check the accuracy of the data provided to him - he, as he said, relied on his "experience in the industry". 54 The subject matter of Mr Williams' evidence was dealt with in quite some detail by Mr Robertson for the applicants and a comprehensive report prepared by him was admitted into evidence. Initially, in August 1999 Mr Robertson was asked to assess the then current market rental of the Tavern, taking into account the existing lease and trade of the hotel, for the purpose of the lease continuing on the exercise of the option as from July 1999. On analysing the Tavern's trading figures as provided by the applicants' accountants for the financial year 1998/99, Mr Robertson considered an appropriate rental value to be in a range between $120,744 and $169,520 per annum. He then refined his view in two situations: first, assuming the existing lease terms remained in place for the next 10 years; and, second, where the 8 per cent annual increase would be replaced by an annual increase of 4 per cent with a market review after five years. As to the first situation, Mr Robertson expressed the main concern in the existing lease structure as being the annual increase of 8 per cent per annum so that if that figure were to be incorporated in a new 10-year lease then the rent should be at the lower end of the scale, that is, $130,000 per annum. In the second situation, he thought that that would be a more attractive lease, particularly from the lessee's point of view if it desired to sell the leasehold, so that the rental should be at the upper end of the scale, that is, $165,000 per annum. 55 In a later report, Mr Robertson made some additional comments following his further analysis of the Tavern and its trading circumstances and concluded that an appropriate rental for the commencement of a new 10-year lease on the exercise of the option would be $195,000 per annum; he reasoned in the following way : In my opinion, the lease conditions relating to annual increases of 8% would make this lease unsaleable unless the rental value is at a comparatively low level, which I assessed being as a range of $130,000 to $165,000 per annum. This is to allow for the compounding effect of the 8% per annum

However, if increased trade is to be assumed (based on more poker machines), then there are some important consequences from a valuation perspective:-

1. Given the potential for additional poker machines at this tavern, I have calculated that the annual net profit could increase to $438,022 per annum before rent (turnover of $36,106 per week).

2. Assuming 1. as a fact, then fair market rental would be:

a) On the basis of 10% of turnover, i.e. $36,106 per week x 10% = $3610 per week or $187,720 per annum; or

b) 45% of net operating profit of $438,022 = $197,109 per annum.

3. If this is to be a market rental under modern lease conditions, then the 8% per annum would have to be amended. The current evidence in hotel leases is that the annual increases are usually CPI at the minimum, or up to 5% maximum, whichever is the greater. In my view, 4% would be a reasonable compromise if one had to give a fixed compound rate per annum today.

Therefore, it is my opinion that the commencing rental for the new 10 year lease should be $195,000 per annum, but only on the basis that there is a fixed increase of 4% per annum applicable over the term of the lease.

It will be apparent that Mr Robertson's further assessment of market rental depended upon additional poker machines being installed in the Tavern to increase the net operating profit and so sustain a higher rent. As to the poker machines, Mr Robertson considered that an extra 2 machines to a total of 8 would be economical, although, of course, 10 machines could be installed; he said in his report : The Empire Bay Tavern may be able to sustain up to the maximum permitted number of 10 machines without the need for construction of a dedicated gaming lounge. However, there is no guarantee that a pro rata increase in turnover will occur for each additional machine.

In my opinion, new machines should be added one at a time to defray costs and to monitor whether any extra machines are needed. Each machine will cost approximately $14,000. In addition, there will be monitoring charges and the need for a maintenance contract.

Based on the turnover available at the date of inspection of August 13, 1999, I consider that eight machines would be economical. However, I could not rule out the probability that ten machines could be installed. The tenant would, therefore, have to afford a capital investment of say $14,000 x 4 = $56,000 to enable this to occur. 56 Further, Mr Robertson gave an opinion on - (a) the fair market rental for each year the hotel was operated by the applicants; (b) the amount of annual increase in the rental due under the lease;

As to (a), Mr Robertson concluded : Based on this estimated trading level ($15,000 to $20,000 per week), it is my opinion that the rental should have commenced at 10% of turnover or a range between $1,500 and $2,000 per week.

I have a adopted the sum of $100,000 per annum, being a fair market rental at the commencement of the lease, which is approximately $1,900 per week.

Mr Robertson then gave annual rental figures, according to the terms of the lease providing for an increase of 8 per cent per annum, and for the year ended 9 July 1999 obtained a rental figure of $199,900. I interpose the comment that it is that figure which was adopted by the respondent in the open offer of settlement it made to the applicants as stated earlier. Mr Robertson then stated on this aspect : In my view, the single most important factor influencing the tenant's inability to meet the rental commitment with this hotel was the excessive commencing rental which compounded at 8% per annum. It is my opinion that this hotel was an over-development of the site and a more compact and better designed building should have been constructed in order to keep the capital cost in line with a realistic estimate of the hotel's capacity to trade.

As to (b), Mr Robertson said : It is my opinion that the rental increase formulated within the lease document, of an annual increase of the Consumer Price Index or 8%, whichever was the greater, was within industry criteria at the commencement of the lease.

As to (c), Mr Robertson said : In my opinion, the absence of a review clause was not unusual in 1989. It was quite normal to see leases with fixed percentage increases ranging from two-thirds of CPI or full CPI increases or fixed percentage increases ranging from 6% to 10% per annum.

Even today, there are probably more leases executed without the market review clause than with a review clause. If, in 1989, there had been a review clause, then there would most certainly have been a ratchet clause incorporated into the lease, which meant the rent could never be reduced.

As to (d), Mr Robertson said : There is only one hotel, in proximity to the subject, of a similar size and location which is subject to a lease.

This lease commenced May 3, 1993 for a term of 12 years with base rent commencing at $100,000 in Year 1, $110,000 in Year 2 and $125,000 in Year 3, and thereafter annually on May 3, increases in line with the Consumer Price Index would apply. A ratchet clause also applies.

Current lease rental is $134,400 as at August 1999. 57 Mr McKensey swore an affidavit for the respondent, although he was not cross-examined. He expressed the opinion as to the rental paid by the applicants for the Tavern as a measure of the return on the capital invested by the respondent on the acquisition of the land upon which the Tavern stands and the construction of it. On the basis of an initial capital investment of $1.84 million, Mr McKensey noted that the commencing annual rent of $163,800 under the lease provided to the respondent an annual rate of return on investment before income tax of 8.9 per cent; allowing for the premium paid by Sherwood Trading to the respondent of $400,000, thus reducing the capital investment to $1.44 million, the annual rate of return on investment before income tax increased to 11.37 per cent. Mr McKensey expressed the opinion that a return of between 8.9 and 11.37 per cent in July 1989 "was a comparatively low return on Mitchforce's capital investment in the Tavern, having regard to prevailing interest rates and opportunities as at that date". He was of the opinion that commercial property like the Tavern at its location on the Central Coast typically yielded at present an annual net return before income tax of between 11 and 12 per cent of the market value of the property which, in his view, stood at $2.75 million. Thus, given the current annual rental of $327,588 under the lease, the result was an annual return to the respondent before income tax of 11.91 per cent on the market value of $2.75 million. 58 Mr Robertson replied to specific aspects of the evidence given by both Mr Williams and Mr McKensey. The approach of Mr Williams in relating an appropriate commencing rental under the lease to the lessor's costs of constructing and/or developing the premises led to Mr Robertson commenting that "a principal axiom in valuation … states that cost does not necessarily equal value" so that "the tenant must be able to build and operate a business which can support that rental". As to the Tavern here, having conducted a site inspection, he considered : … that a structure at least 40% smaller than that built (and, hence, costing considerably less) would still have produced the turnover which has been achieved. Therefore, it is also my opinion that the initial rental was higher than it needed to be based on trade that could reasonably have been expected to be achieved at that time. In carrying out a feasibility of a new hotel operation, one would normally have regard to the trading patterns of other hotels in the area. I am unaware as to whether this was done with respect to the Empire Bay Tavern in 1989 or 1990.

That opinion concerning the size of the Tavern as constructed by the respondent may be seen in the context that generally, including by the applicants and by Mr Mitchell, it was thought the Empire Bay area would be developed with new housing and a shopping centre complex.

In disagreeing with Mr Williams that as at 1990 average hotel rentals were in the range of 12 to 18 per cent of gross trading revenue, Mr Robertson provided summaries of the rental levels in respect of seven brewery hotels and six hotels subject to private leases in various areas of the State which confirmed his earlier expressed view that for brewery leases rentals were in the order of 10 to 15 per cent of turnover whereas non-brewery or private leases were in the order of 7 to 10 per cent of turnover; he explained "the reason for the difference being that brewery leases, which were perpetual (unlike private leases which were terminating) had security of tenure and tenants did not pay all the outgoings as in a private lease". Mr Williams, I repeat, did not provide any supporting material for his view and relied upon, as he said, his industry experience.

In respect of Mr McKensey's affidavit, Mr Robertson gave the general answer against the opinions expressed that they "do not relate to the matter of valuation, but rather a level of return in relation to capital cost". As to Mr McKensey's reference to the present commercial investment market on the Central Coast as supporting the present level of rent under the subject lease, Mr Robertson said "that to the best of my knowledge there have been no sales of any investment properties comprising taverns on the Central Coast in the last 15 years." For myself, I think it should be observed that the annual rate of return on an investment, here 11.91 per cent on the current market value of $2.75 million for a lease rental of $327,588, is to be viewed as but one benefit accruing to the lessor/investor - an obvious and significant further benefit is the capital appreciation to the lessor in the freehold value of the leased premises after a period of years from the initial investment; for instance, in this case, the initial cost of the land and of constructing the Tavern was $1.84 million in 1989 and 10 years later its value was between $2.75 million and $3.5 million. Indeed, Mr Mitchell put a value of $4 million to $5 million on it. Mr Robertson concluded on this aspect : … the current annual rental of $327,588 is equivalent to $6,299 per week. In my opinion, the tavern would almost have to double its trade in order to be able to afford this rental. I do not think this is feasible. It is my opinion that the level of trading will influence the rental and the rental will influence the capital value. Replacement cost is rarely equal to value in an income producing entity such as a hotel/tavern. 59 Finally as to the evidence, reference should be made to the relevant terms of the impugned contract here between the parties. The lease was made between Sherwood Trading, as lessee, and the respondent, as lessor and holder of the hotelier's licence attaching to the hotel, on 10 July 1989. The lease in presently relevant respects may be summarised as follows -

Clause 1, Interpretation: Defined "the Lessor" as meaning and including inter alia "the Lessor its successors and assigns"; "the Lessee" as meaning and including inter alia "the Lessee … and permitted assigns of the Lessee"; "Hotel" as meaning inter alia "the licensed premises referred to … and all other buildings, erections, fixtures, fittings, plant, equipment, improvements or things with appurtenances belonging thereto"; "Licence" as meaning "the Hotelier's Licence attaching to the Hotel"; "Licensee" as meaning "the holder of the Licence from time to time"; and "a reference to the Lessee shall include a reference to the Licensee". Clause 3, Rent and Outgoings: Stated the rent payable during the first year as being $156,000 per annum and the means for adjusting such rent from time-to-time by reference to the greater of Consumer Price Index increases or 8 per cent per annum; additional rent of $4.00 for every $100 of liquor purchased pursuant to the licence; and the lessee to pay the lessor all rates, taxes and other outgoings made or assessed against the property. Clause 4, Rent and Abatement of Rent: Dealt with the circumstances where damage to the premises rendered them unfit for the occupation and use of the lessee so as to provide for abatement of rent and termination of the lease. Clause 5, Repair and Maintain: Set out the covenants of the lessee as to the lessee performing certain specific work to the hotel to keep it in good order and repair, together with the effective operation of plant, machinery or equipment in the premises; as to the liquor licence, sub-cll 5.12 to 5.18 inclusive set out various obligations on the lessee requiring the performance of certain work so as not to prejudice the continuation of the hotel licence. Clause 6, Lessor's Right to Enter to Inspect and Carry Out Work: Specified the rights of the lessor to enter the premises and carry out any work which the lessee may be bound but may neglect to do. Clause 7, Insurance: Apart from the obligation on the lessee to effect and keep current a public risk insurance policy, the lessee was prohibited from doing or permitting to be done any act upon the premises whereby any insurances in respect thereof may be effectively negated or rates of insurance premiums increased. Clause 8, Indemnities: The lessee to occupy, use and keep the premises at the risk of the lessee, including to indemnify the lessor against all claims arising from the use of the premises by the lessee. Clause 10, Default, Termination, etc: The lessee shall be in default if the rent reserved or any part shall be in arrears or unpaid for 14 days after becoming due. Clause 11, Assignment: The lessee may assign the lease with the prior written consent of the lessor, which consent not to be unreasonably refused or withheld.

Clause 13, Miscellaneous: The lessee was prohibited from carrying on at the premises certain proscribed behaviour or using any plant or machinery in an annoying or disturbing manner.

Clause 15, Option: At the expiration of the 10-year term of the lease, the lessor will, on the written request of the lessee made at least three months before the expiration of the term and providing there shall not then be any subsisting breach or non-observance of any covenant by the lessee, grant the lessee a lease of the premises for a further 10-year term on the same conditions; the new rent to be equal to the then current market rental determined by a mutually agreed approved valuer or as agreed between the parties or, failing agreement, by a valuer nominated by the President of the New South Wales Institute of Valuers. 60 On 1 May 1990 a deed of variation of lease was made between the respondent and Sherwood Trading, whereby in consideration of the payment of an additional rental of $7,800 per annum the lessor granted to the lessee the right to occupy residential flat accommodation erected upon the premises; such additional rent to be adjusted in the same way as the rent for the hotel. The deed of variation was binding upon inter alia the "assigns of the Lessor and the Lessee". 61 On 1 May 1990 a deed of consent to assignment of lease was made between the applicants, the respondent and Sherwood Trading, the effect of which was to assign the subject lease to the applicants from that date. The deed contained the following two presently relevant provisions: 3. RECITALS

(a) The Lessor is the owner of the freehold of and the Hotelier's Licence in respect of the Licensed Premises and has leased the Licensed Premises to the Assignor pursuant to the Lease. (b) The Assignor, and the Assignee have requested the Lessor to consent to the assignment of the Lease to the Assignee. (c) The Lessor has agreed to consent to the assignment of the Lease on the following terms and conditions.

4. ASSIGNMENT (a) The Lessor hereby consents to the assignment of the Lease to the Assignee but without prejudice to the rights of the Lessor against the Assignor under the covenants contained in the Lease and on the part of the Assignee to be performed. (b) The Assignee covenants with the Lessor that the Assignee will hereinafter duly perform and observe all terms conditions and covenants expressed or implied in the Lease and on the part of the Assignee to be performed in the same manner as if the Assignee had been a party to the Lease. (c) The Assignor acknowledges that he will remain liable to the Lessor in respect of the performance by the Assignee of all the covenants expressed in or implied by the Lease. 62 I have endeavoured to set out what I consider to be the significant pieces of evidence referable to the issues in this case as they were argued by counsel. In a very real sense, the facts themselves are not in dispute, apart from differences in approach and detail in the opinions of the expert witnesses, so that a determination seems to me to depend upon the proper inferences to be drawn from the material in light of the nature of relief which s 106 of the Industrial Relations Act envisages. 63 The picture which emerges from the whole of the evidence is, I think, demonstrably clear. Having been in the hotel industry for about 27 years and then financially secure in semi-retirement, the applicants had an interest in acquiring another hotel. And so it was they acquired the Empire Bay Tavern from 1 May 1990 by way of an assignment of the lease from Sherwood Trading, with the consent of the respondent as lessor and licensee of the hotel, for the amount of $650,000 in light of the generally understood position that a housing development and shopping centre complex were to be constructed in the area. The applicants considered the amount to be a fair price at the time; similarly, and although thought to be a bit on the high side, they accepted the then level of initial rent under the lease of $163,800 per annum ($156,000 for the hotel premises and $7,800 for the residential flat accommodation) with its annual adjustment by the greater of 8 per cent or Consumer Price Index increases. In that latter respect, the increase in the Index for the year 1989-90 was 8.1 per cent and that was in line with such increases during the 1980s. It was common ground that no representations were made to the applicants by the respondent as would affect their decision to obtain the Tavern. However, the housing development and shopping centre complex did not proceed and the economy started to decline. The Consumer Price Index dropped sharply. 64 At the time of the rent review in July 1992, the applicants found difficulty in meeting rental payments with lower than expected earnings from the hotel but with increased costs, including the annual 8 per cent rent increase. Although they sought a reduction, they were only successful in the respondent agreeing to defer the rent due under the lease on the basis that such deferred rent would be merely postponed. On the anniversary of the lease on 9 July 1993, the respondent again declined the applicants' request for a rental reduction but agreed to increase the rent by only 4 per cent, with the unpaid portion being postponed - the respondent advised at that time that "should you at any time terminate your lease for any reason the rent postponed will become due and payable forthwith". Further rent deferrals were allowed by the respondent during the balance of the term of the lease. The applicants always understood that the deferred rent would not be payable until they sold the business whereas Mr Mitchell and Mr Sutton for the respondent denied that understanding; the respondent took the position that the deferred rent was payable on demand, not limited to the termination of the lease and that, in any event, the non-payment of the deferred rent was a breach or default under the lease which entitled it to refuse the option exercised by the applicants for a further lease term as from 10 July 1999. Both Mr and Mrs Starkey said the respondent never advised them that the consequence of accepting the rent deferral arrangement would be the loss of the option right nor that the deferred rent could be demanded at any time prior to their sale of the business. 65 On this aspect of the rent deferral arrangement, I accept the evidence of the applicants in preference to that given for the respondent. The understanding as stated by Mr Starkey was consistently maintained by him and it was consistent too with the contents of the respondent's letter dated 12 July 1993 in stating that the deferred rent would become due and payable should the applicants terminate the lease. Also, Mrs Starkey's unchallenged evidence was to the same effect. I find, therefore, that the respondent agreed in July 1992 and at each succeeding annual rental review to defer part of the rent due under the lease with such deferred rent becoming due and payable on the sale by the applicants of the hotel business. The arrangement so made, I find, was not a breach or non-observance of the lease terms by the applicants in that it constituted a waiver by the respondent of the obligation on the applicants to pay on the due date the full amount of rent under the lease. There was, in my view, no basis upon which the respondent could properly decline, as it purported to do on 1 April 1999, to grant the applicants a further lease term of 10 years as from 10 July 1999. Indeed, the failure to vary the lease to reflect the rent deferral arrangement was unreasonably prejudicial to the interests of the applicants, particularly having in mind their continued operation of the hotel with the increasing debt of accrued rent plus interest. That was unfair to them as they endeavoured, to the knowledge of the respondent, to trade out of their financial difficulties. The prejudice so found became manifested by the respondent serving on 1 October 1997 a Notice of Default under the lease for payment of the accrued rent plus interest thereon. 66 The applicants had, because of the changed circumstances with the proposed development of the area as it affected the operation of the lease, since February 1992 attempted to sell the hotel business and assign the residue of the lease. Those attempts were regularly made until at least October 1998, but the result, on the evidence of Mr Cooper which I accept, was one of inability to do so because the rental level and 8 per cent annual increase under the lease was too high based on the hotel's turnover; Mr Mitchell continued to refuse any reduction in the rent. Further, on Mr Cooper's evidence, Mr Mitchell was willing to sell the freehold of the Tavern premises, thereby enabling the applicants to sell the business or adjust the rent to a reasonable market level under a new lease, and from 1994 to 1998 a number of opportunities to do so arose. However, those attempts failed, due, as Mr Cooper said, to "the above market value Mr Mitchell has placed on the freehold". Mr Cooper agreed with the evidence of Mr Starkey, and so do I in the circumstances as they developed, that the applicants were "effectively locked in to the lease and unable to sell the leasehold or negotiate with any potential purchaser of the freehold and leasehold". That was oppressive to the applicants. 67 There may be no doubt that the respondent was entitled to either sell or not sell the freehold in the Tavern. Equally, and this understandably was the position taken by Mr Mitchell in his evidence, the respondent was entitled not to allow the applicants a rental reduction because there existed a binding contract (the lease as assigned) made with the applicants which they should honour; if it were otherwise it may be said to be unfair. But, it seems to me, whilst those notions traditionally may have operated unaffected by law they are to be seen in a modern commercial context where protection against and relief from oppressive conditions have rightful recognition - in the industrial law sense, in my opinion, s 106 of the Industrial Relations Act in providing relief of avoidance or variation, together with an order for the payment of money, of work contracts found to be unfair, harsh or unconscionable, or against the public interest is but a statutory illustration. For instance and by analogy, in a passing off action Lord Diplock in Erven Warnink Besloten Vennootschap v J Townend & Sons (Hull) Ltd [1979] AC 731 at 742-743 commented as follows as to the development of the common law in the protection of consumers where the legislature had recognised the need for more rigorous standards : Parliament, however, beginning in the 19th century has progressively intervened in the interests of consumers to impose on traders a higher standard of commercial candour than the legal maxim caveat emptor calls for, by prohibiting under penal sanctions misleading descriptions of the character or quality of goods; … Nevertheless the increasing recognition by Parliament of the need for more rigorous standards of commercial honesty is a factor which should not be overlooked by a judge confronted by the choice whether or not to extend by analogy to circumstances in which it has not previously been applied a principle which has been applied in previous cases where the circumstances although different had some features in common with those of the case which he has to decide. Where over a period of years there can be discerned a steady trend in legislation which reflects the view of successive Parliaments as to what the public interest demands in a particular field of law, development of the common law in that part of the same field which has been left to it ought to proceed upon a parallel rather than a diverging course. 68 It perhaps should be emphasised that such an approach does not, nor should it be seen to, limit the primary freedom of parties to contract on terms considered by them to be appropriate. It is only where, as to work contracts, the grounds for relief under s 106 have been established that the Court may intervene in a supervisory way. Again by analogy, in Municipal Officers' Association of Australia v Lancaster [1981] 54 FLR 129, a Full Court of the Federal Court considered whether the rules of an organisation of employees were "oppressive, unreasonable or unjust" contrary to s 140(1)(c) of the then Conciliation and Arbitration Act 1904 (Cth). In a manner which I would respectfully adopt for present purposes, Deane J, as he then was, said (at 164-165) : The constraints and restrictions imposed, by positive and negative requirements of the Act and regulations, upon the freedom of the members of an organization to select, for themselves, the rules which they consider appropriate for their particular organization, are real and significant. It cannot, however, be too strongly stressed that, subject to those constraints and restrictions, the content of the rules of a registered organization is primarily a mater for the members ( Watson v Australian Workers' Union (1967) 10 FLR 347 at p 361); Cassidy v Amalgamated Postal Workers' Union of Australia (1967) 11 FLR 124 at pp 126-127); Wiseman v Professional Radio and Electronics Institute of Australasia (1978) 35 FLR 24); Re Airline Hostesses' Association (1980) 48 FLR 214). This Court has no authority generally to supervise the content of the rules or to require that the rules comply with what those constituting the court might see as preferable, desirable or ideal. To put the matter differently, it is for the members, or those entrusted by the members in that regard, to decide the content of the rules. The function of this Court is to determine, in accordance with ordinary judicial procedure, whether some provision or provisions of the rules adopted by, or on behalf of, the members can properly be described not merely as undesirable but as oppressive, unreasonable or unjust . In this regard, it seems to me that if any of the comments of members of the Commonwealth Industrial Court in Cameron v Australian Workers' Union ((1959) 2 FLR 45) would support the view that the court was exercising a primary, rather than a restricted supervisory, function in determining whether the rules of an organization conflicted with the requirements of s 140(1)(c) of the Act, those comments should not be followed by this Court. Nor am I, with respect, able to agree with the comment of Dunphy J in the last-mentioned case ((1959) 2 FLR at p 68) to the effect that it would appear that, in selecting the words "oppressive, unreasonable or unjust", the "Legislature has endeavoured to cast its net as widely as possible". (emphasis added)

I would apply that approach in considering the present action under s 106 as to whether the impugned contract was unfair, harsh or unconscionable; of course the additional powers in s 106(1) and (5) go somewhat further than those in s 140(1)(c) of the Commonwealth statute considered above, but that raises other issues. I would only add, as did Deane J in Municipal Officers' Association v Lancaster (at 165), that "those three words are used objectively in the clause and each of them is to be given its ordinary strong meaning. Plainly, their meanings overlap …" 69 It is appropriate too in this respect to refer to the seminal decision of Sheldon J in Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 as to the inherent nature of s88F of the Industrial Arbitration Act 1940, the statutory predecessor of the present s 106. His Honour said (at 373-374): It is true, however, that, once it has been confined within its proper industrial context, s 88F acts with drastic and pervasive effect. It certainly plays havoc with the classic principles relating to contracts. "In general, unless a contract is vitiated by duress, fraud or mistake, its terms will be enforced though unreasonable or even harsh and unconscionable … Moreover in the ordinary case the court will not remake a contract; unless in the special case where a contract is severable, it will not strike out one provision as unenforceable and enforce the rest" ( Esso Petroleum v Harper's Garage (per Lord Reid) [1967] 1 All ER at p 705). But s 88F has no such inhibitions; for it not only proscribes transactions which directly undermine awards (see (d) and (e)) or threaten general industrial standards (which, I think, is the most relevant "public interest" referred to in (c)), but it also, in (a) and (b), strikes separately at those which are "unfair" or "harsh" or "unconscionable". Presumably, this is because any transaction, leading to work in an industry, which can be so described is regarded as inimical to the purposes of the Act. In this setting, these words are probably, for practical purposes, a tautological trinity. To find in relation to a shoddy dealing concerning, say, a motor truck and a promise of carrying work, that it is "unfair" but not "harsh" or "unconscionable" suggests an approach too refined for the subject. But, insofar as there are nuances between these words (as Lord Reid's statement suggests), s 88F makes it clear that, for its purposes, any one will serve. As to remaking contracts, this can be done either by omitting parts and retaining the rest, or by adding new terms. Thus, destruction, dilution, renovation and patching are all weapons in the section's arsenal. Nor does it tolerate argument on such nice questions as whether the contractual relationship has been perfected. It is sufficient that there be an "arrangement" and, for good measure, "conditions and collateral arrangements" are also included. Moreover, there is no loophole available in transactions, so dear to those allergic to awards, under which the working party is not an employee but an independent contractor. Unlike some other sections in the Act, s 88F does not transmute contractors into employees; it takes the contract as it finds it but imperils both its continuance and its prior operation. In the result, when deciding actual cases under this section, to seek assistance from authorities on the general law of contract is an arid exercise, for if ever a law was intended to stand on its own feet it is this one.

Those words have been consistently referred to with approval: see Port Macquarie Golf Club Ltd v Stead (1996) 64 IR 53 at 60. However, as Sheldon J added in Davies v General Transport Development (at 374-375) : On the other hand, the fact that the Commission has been given such massive power makes it imperative that it should be exercised with proper restraint. In particular, when issues arise under (a) or (b), it should not permit itself to become a refuge for those who are merely disgruntled with a bargain entered into on even terms. In my opinion, the discretion should be exercised to protect victims of wrong dealing not to prescribe anodynes. Of course, under (d) or (e), action may be required even when there is no moral distinction between the parties because there the Commission is enforcing more directly an explicit public policy.

That caveat by his Honour has been consistently cited with approval in the cases, particularly in relation to work contracts involving commercial arrangements. For instance, in A & M Thompson Pty Ltd v Total Australia Ltd [1980] 2 NSWLR 1; [1980] AR (NSW) 399) a Full Bench of the Commission in Court Session considered a licence agreement to operate a service station and in the majority decision of Perrignon and Dey JJ it was observed (at 12-14; 418-420) : (59) The duty of the Commission is to reach a conclusion on the issues of whether the subject transaction is "unfair", or "harsh" or "unconscionable".

(60) It has been said that those words are a "tautological trinity": Davies v General Transport Development Pty Ltd ([1967] AR (NSW) 371 at 373), but we prefer to take the view that there is a perceptible difference between the meaning of the term "unfair" and that of the terms "harsh" and "unconscionable". What is unfair may not be so unfair as to be "harsh". But, whether this view be correct or not, once the transaction is found to be unfair the Commission may proceed to exercise its very wide powers.

(61) Over the years, there is observable a gradual change in judicial attitude towards what was known as the "sanctity of a contract" and towards the concept of "freedom of contract".

(62) Whereas there are early cases in the books which appear to take the attitude that the test of "fairness" was whether the complaining party had fully understood and appreciated the terms of the agreement, eg, Re Stuart; Ex parte Cathcart ([1893] 2 QB 201) there has been a distinct move from that view of fairness towards a position in which the quality and terms of a fully understood bargain, and the relative position of the parties, are nevertheless examinable in order to ascertain if the contract or arrangement is really a fair one.

(63) Professor Peden's Report on Harsh and Unconscionable Contracts (October 1976) traces the change in judicial attitude towards the concept of fairness of a contract, and illustrates the increasing willingness of courts to become involved in the task of determining whether or not a contractual arrangement is fair . The use of "standard forms" of contract by large organizations, and the inequality of bargaining positions between an individual, on the one hand, and the other contracting party have come under continually increasing discussion.

(64) Authorities which indicate this change in approach to the question of fairness of a contract include the following: Lloyds Bank Ltd v Bundy ([1975] QB 326); Clifford Davis Management Ltd v WEA Records Ltd ([1975] 1 WLR 61; [1975] 1 All ER 237); and A Schroeder Music Publishing Co Ltd v Macaulay (formerly Instone) ([1974] 1 WLR 1308; [1974] 3 All ER 616).

(65) In Professor Peden's Report on p 9 it is said: "It is just conceivable that the courts, without the assistance of legislation, may use these cases (which include the ones cited above) as a basis for developing a broadly based and comprehensive doctrine of unconscionability."

(66) We have seen in New South Wales the passage of the recent Act dealing with unfair contracts and providing for judicial review of them. This is the Contracts Review Act, 1980, and the Supreme Court and the District Court will soon be required to exercise judgment on the question of whether contracts covered by that Act are "unjust". The matters to be considered by the Court on that issue are recited in s 9, and these reflect the development of judicial and community attitudes which has come about in more recent years.

(67) But, in the case of contracts or arrangements whereby a person performs work in an industry, the Industrial Commission has had for years the power under s 88F to review and inquire into such contracts; and it has, on many occasions, unhesitatingly expressed its conclusions on the fairness, harshness or unconscionability of the contract under its examination.

(69) It has been said that fairness is determined by the commonsense approach of a juryman, and that it is a moral and not a legal issue ( Davies case [1967] AR (NSW) at 374). Whether this be so or not, it does seem that, in distinguishing between what is fair and what is not fair, the judge must apply standards which appear to him to provide a proper balance or division of advantage and disadvantage between the parties who have made the contract or arrangement. In doing so, he would always have to bear in mind the conduct of the parties, their capability to appreciate the bargain which they had made and their comparative bargaining positions when entering into the contract or arrangement .

(70) Again, in our opinion, a case involving the issue of unfairness of a contract cannot be disposed of simply by concluding that the complaining party was fully aware of the nature of the transaction before entering into it, and later came to regret the bargain . It is insufficient to claim, as Total has done here, that the Thompsons "had their eyes open" when they entered into the subject licence agreement in 1977. Section 88F envisages a much more searching examination of the circumstances than that. Otherwise, its purpose would not be achieved.

(71) Again, the absence of fraud, deceit or cheating is not, in itself, an answer to a claim of unfairness. It is true that, in the history of the exercise of jurisdiction under s 88F, the early cases contained many instances of fraud and misrepresentation, particularly in the transport cases. But the section goes well beyond that. In a proper case, in which fraud is not present and in which the complaining party fully understood the bargain, an order may be made based on unfairness. For there may be present elements such as those mentioned by Lord Denning MR in certain of the cases cited. One looks to see whether there were genuine negotiations between the parties prior to the contract; whether it can be said that the contract was "moulded" by negotiation; or whether, on the other hand, it was the case of the imposition of a "standard form" upon a party, who had no choice but to "take it or leave it".

(72) A useful analogy to which reference may be made is the exercise of the discretion in a court of Equity to refuse specific performance of a contract due to unfairness.

(73) Examples of cases in which specific performance has, in the Court's discretion, been refused, are given at Halsbury's Laws of England , 3rd ed, Vol 36, pp 299, 300, 301. The remedy is refused if the contract is not "equal and fair": par 423, p 299. And great hardship, even though without any impropriety on the part of the plaintiff, may result in specific performance being declined: par 428, p 301.

(74) In a recent case in the Equity Division of the Supreme Court of New South Wales: Ashworth v Kirk (28th May, 1980, unreported) Kearney J discussed the question of the fairness of a deed executed by a plaintiff (the only child of the deceased) barring her right to proceed under the Testator's Family Maintenance and Guardianship of Infants Act , 1916 for provision in her favour out of the estate of the deceased. The defendant and sole beneficiary was a next door neighbour.

(75) The judge, in a careful review of the authorities, including some referred to in this judgment, came to the conclusion that the defendant had exploited an advantage, and that the obtaining of the agreement was "virtually one-sided"; and he held that the transaction could not stand, since it was prima facie unfair, and the defendant had not discharged the onus on him, in the circumstances, of showing that it was fair . (emphasis added) 70 I consider the approach followed in A & M Thompson v Total Australia to be particularly instructive for the case before me. The applicants here fully understood the agreement they made with the respondent for the assignment of the hotel lease and where the respondent made no fraudulent or misleading representations; but they did so by accepting the terms in whole of the existing lease from Sherwood Trading without any negotiation with the respondent of the rental level and its adjustment. When circumstances shortly changed, as to the proposed development of the area and, in particular, the state of the economy, the very basis and understanding on which the original lease was made were changed to the severe detriment of the applicants. Importantly, the lease was made at a time when the rent escalation of 8 per cent was consistent with the Consumer Price Index; that sharply changed so that the average increase in the Index over the 10-year term of the lease was 2.29 per cent per annum. Of course, the lease term, without any provision for a review, had nearly 9 years to run but the respondent would not countenance a rental reduction. The position of the applicants was, in my view, well demonstrated by the evidence of Mr Cooper and Mr Robertson that their endeavours to remedy the situation were unavailable due to the high level of rent and the annual adjustment provision - in a real sense, therefore, the relative position of the parties under the contract was weighted very much in favour of the respondent to the point where the applicants' viability in conducting the business was in peril. Even so, the respondent persisted in declining relief to them and, importantly, to the extent of refusing a further lease term in circumstances where the applicants were thereby denied the opportunity to trade out of their difficulties in an improved economic climate or, alternatively, sell their business and obtain some return of goodwill. 71 In the circumstances as they developed, I am satisfied the respondent exploited the position of advantage it had against the applicants in terms of the lease rental provisions. It also effectively appropriated for itself any benefits the applicants had to accumulated goodwill in the business, where the applicants had paid $650,000 for it, by denying them a further lease and, at the same time, itself benefiting from the admitted capital appreciation in the freehold of the premises. Those consequences of the respondent's conduct were exacerbated by it leading the applicants to understand that the deferred rent would not be payable until they sold their hotel business. In my view, the subject lease operated unfairly against the applicants and where its terms were not "equal" for both parties to the point where they were oppressive on the applicants. To use the words of Deane J in Municipal Officers' Association v Lancaster (54 FLR at 165) - "To be oppressive, a condition, obligation or restriction must be burdensome, harsh and wrongful". I conclude, therefore, that the lease as to the rental level and the adjustment thereof was in its terms and in its operation unfair and harsh; it was unconscionable, in my view, for the respondent not to have agreed to vary the lease so as to provide reasonable relief for the applicants in light of the then rental market for hotels. 72 Following the respondent on 1 April 1999 declining to grant the option for a further lease, the applicants on 25 June 1999 filed the summons initiating these proceedings. On 28 July 1999, the respondent filed a notice of motion for an order dismissing the applicants' summons with costs for want of jurisdiction. The jurisdictional argument was heard as part of the substantive proceedings in light of all the facts as they may be found and it is convenient to turn now to that jurisdictional question. It can, I think, be dealt with relatively shortly. 73 Mr Grieves' fundamental submission was that on no view could either of the relevant contracts here be, but as s 106 required, characterised as contracts whereby a person performed work in an industry so as to be susceptible to an order under sub-ss (1) and (5) of the section. The two contracts identified by senior counsel were: first, the deed of consent to assignment of lease dated 1 May 1990; and, second, the "agreement" (or, perhaps more correctly, the arrangement being a mere forbearance of contractual rights) as evidenced by the letter dated 12 July 1993 from the respondent to the applicants as to rent deferral. As to the first contract, senior counsel submitted that it "provided for no more than the respondent's consent to the assignment by Sherwood Trading of the lease dated 10 July 1989 to the applicant on certain terms". As to the second contract/arrangement, senior counsel submitted that it "simply provided for a deferral of the payment by the applicants of the rent payable under the lease". In an endeavour to overcome the jurisdictional objection, Mr Grieve referred to the applicants' reliance upon the lease itself as being the relevant contract since, as a consequence of the applicants' agreement with Sherwood Trading with the respondent's consent, they became parties to it. In any event, reliance on the lease and the assignment agreement did not create the necessary situation for power to be exercised under s 106. Senior counsel made the following points in support of that proposition - (a) The essential purpose of the transaction between the parties was to enable the applicants to acquire a capital asset in the form of the "business" of the Tavern with a view to its eventual resale for gain. (b) Whilst performance of work was an incident or consequence of the contract, it was not its purpose: see Production Spray Painting & Panel Beating v Newnham (27 NSWLR at 649; 37 IR at 50). (c) The transaction was closely analogous to that considered in Autobake v Budd (19 IR at 21, 29-30). (d) The lease conferred on the applicants an interest in land and not merely contractual rights. (e) The lease was truly characterised as the purchase of a leasehold interest. 74 In supporting jurisdiction to make the orders sought, Mr Kimber acknowledged that the lease lacked an express provision requiring the applicants to operate the business of the Tavern on the specified premises and/or an express provision requiring them to operate the business within specified hours. Nevertheless, senior counsel referred to cl 5.17 of the lease which prevented the lessee from trading pursuant to the hotelier's licence other than from the subject premises, preventing the lessee from permitting the licensee so to do and also preventing the lessee or licensee from making any application to remove the hotelier's licence from the subject premises without the written consent of the respondent as lessor. Mr Kimber said that the lease read as a whole, by both express provision and necessary implication, required the applicants to conduct the business of a licensed tavern/hotel on the premises. There was no requirement for the purposes of s 106 that the obligation to perform work under the challenged contract must be set out in express terms: see Harris v Hammon (No 2) (1995) 59 IR 232 at 241. The implication of a term in the subject contract that the applicants were required to operate the Tavern business arose on the facts in accordance with the tests stated by the Privy Council in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of Shire of Hastings [1978] 52 ALJR 20 where their Lordships said (at 26) : Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

Mr Kimber submitted that the above-stated conditions were all satisfied in the instant case according to the facts. But, and consistent with the applicants' obligation to operate the business, the contract also provided in express and comprehensive terms various obligations on them to perform a significant amount of physical work so as to ensure the premises were kept in a fit state to operate the business. Also, senior counsel relied on the evidence of both Mr Sutton and Mr Mitchell to the effect that the work obligations referred to in the lease were reflective of and entirely consistent with the purpose of the contract, that is, to operate a licensed tavern in clean and presentable premises that complied with all relevant laws; specifically, Mr Sutton gave evidence that the obligations cast on the applicants were intended to maximise the chances that the business would operate successfully and the value of the Tavern would increase; Mr Mitchell too in his evidence referred to the obligations imposed on the applicants under the lease as being for "good hotel management". In the result, and unlike the position in Production Spray Painting & Panel Beating v Newnham , the express work obligations imposed by the lease could not be characterised as being only incidental or peripheral to a contract for the sale of the business as opposed to the lease of a business in which the respondent had and continued to have a "real interest": see Majik Markets Pty Ltd v Brake and Service Centre Drummoyne Pty Ltd (1991) 28 NSWLR 443 at 458-459, 465; [1991] 39 IR 169 at 181-182, 189 and Booth v Kritikos Developments (59 IR at 303-304). 75 The necessary jurisdictional fact for a contract to be within s 106 so as to support the making of orders thereunder was that the contract be one whereby a person performs work in any industry: see Stevenson v Barham (1977) 136 CLR 190 at 201-202; Caltex Oil (Australia) Pty Ltd v Feenan [1981] 1 NSWLR 169 at 171, 173-174; and Production Spray Painting & Panel Beating v Newnham (27 NSWLR at 646, 650, 652-655; 37 IR at 47, 51, 52-56). The question of a lease coming within the scope of s 106, and of its statutory predecessors being s 88F of the Industrial Arbitration Act 1940 and s 275 of the Industrial Relations Act 1991, has been the subject of consideration by members of this Court from time-to-time. The approach of the Court of Appeal in Production Spray Painting & Panel Beating v Newnham in the passages earlier cited, and on which the respondent here relied, were to the effect that to come within the section a contract must directly, that is, under or pursuant to its terms, provide for the performance of work in an industry; the consequential performance of work was not enough. In other words, the section only applied to a contract which had as its purpose the performance of work in an industry and that must be the purpose of both parties. 76 In Jennings v Auto Plaza Ltd [1993] 46 IR 413, Cahill Dep CJ considered this question in relation to a lease of premises in a shopping complex the terms of which required the lessees to carry on business as a restaurant during lawful business hours. In finding the lease to be one whereby work was performed in an industry, and hence within the jurisdiction of s 275, his Honour said (at 421-422) : In the present case, however, the contract is a lease between the parties of part of large shopping centre premises obviously at least intended by both parties to be used by the lessees for the conduct of a restaurant business. The lease prescribes a term of years (with provision for the exercise of an option of renewal), during which the provisions of the lease are to govern and bind the relationship of the parties: it thus postulates and requires an ongoing relationship. It imposes a restriction on the lessees as to the use of the premises. Except with consent the premises are not to be used otherwise than as a licensed restaurant and takeaway food outlet (cl II(15)). That restrictive provision is expressed in the negative and, of itself, does not require that the lessees shall use the premises for the carrying on of a business so described. To that negative provision is added another, in the first part of cl IV(ff), to the effect that the lessees "shall not occupy or permit the premises to be occupied or used outside the hours as are from time to time stipulated by law". The second part of that subclause, however, is expressed in positive terms. It requires the lessees to "keep the demised premises (Unit 11 of the Autoplaza Centre) open for business during normal trading hours for such business". Reference is also made to cl XI, which has already been set out in full, under which the lessees "shall be responsible for and shall attend to" the full fitout of the demised premises as a restaurant.

In my view, the terms of the lease, and particularly those to which reference has been made, require the lessees to establish the demised premises in restaurant mode and to carry on therein a restaurant business during lawful trading hours.

I also consider that the carrying on of such a business in accordance with that obligation necessarily requires and results in the performance of work in the restaurant industry by the lessees themselves and/or by other persons whom the lessees engage to work in the business. Furthermore, that work provides any necessary "industrial colour or flavour" which might be needed in order that s 275 should apply.

The terms of the lease there upon which his Honour relied were, as I read them, directly comparable with the terms of the lease in the present case. 77 Again, in Booth v Kritikos Developments , Schmidt J considered whether a contract for the sale of an hotel business and a contract for the lease of the premises was within the jurisdictional scope of s 275. After referring to Production Spray Painting & Panel Beating v Newnham and the terms of the contract concerned, her Honour said (59 IR at 303-304) : Unlike the situation in Production Spray Painting , the applicant here could not simply close the business up, that being a matter of no interest to the respondents. The continued operation of the hotel as a business was assured by the contractual obligations imposed on the applicant to ensure the performance of work in the business during the term of the lease. This was of real interest to the respondents, as was the performance of the renovation work which reflected the agreed reduction in the purchase price of the business. This arrangement involved not merely the sale of a business by an outgoing proprietor, but an ongoing relationship. Properly analysed, one of the purposes of the arrangement between the parties, namely what was sought to be achieved, was to ensure the performance of certain work in the business during the continuation of the parties' relationship under the lease. Another purpose was to ensure that the specified renovation work was carried out to the premises the subject of the lease.

In my view, the relationship between the applicants and the respondent here under the lease constituted an ongoing relationship with the clear purpose, on the facts, that the applicants would conduct the business of an hotel from the Tavern for the duration of the lease term and that necessarily contemplated the performance of work, including as to the maintenance of the premises in good order and repair. 78 Finally, I refer to the most recent judgments of this Court upholding power on this jurisdictional question concerning leases, similar to and consistent in effect with that followed in Jennings v Auto Plaza and in Booth v Kritikos Developments , namely, Kostakis v New World Oil & Developments Pty Ltd (unreported, Schmidt J, CT96/1157, 25 July 1997) and Australian Institute of Music Ltd v L M Investment Management Pty Ltd [2000] NSWIRComm 201. 79 In the present case, and although strictly speaking the applicants were not parties to the lease, they were parties to the deed of consent to assignment of lease dated 1 May 1990, to which both the respondent and Sherwood Trading were parties, and cl 4(b) of which represented an agreement between the applicants and the respondent that the applicants "will hereinafter duly perform and observe all terms conditions and covenants expressed or implied in the Lease and on the part of the [applicants] to be performed in the same manner as if the [applicants] had been a party to the Lease". In my view, that sub-clause directly and effectively incorporates in that deed the whole of the terms of the lease originally made between Sherwood Trading and the respondent so that the deed takes on the purpose and character of the original lease. I am satisfied, on the terms of that lease according to the authorities, that it is a contract whereby work was performed in the hotel industry, and, hence, within the jurisdictional scope of s 106. Thus, the impugned contract here is the deed of consent to assignment of lease but as incorporating therein the original lease itself so that any avoidance or variation of such deed would, insofar as the applicants are concerned, effectively avoid or vary the terms of the original lease. The jurisdictional argument of the respondent must fail so that its notice of motion filed on 28 July 1999 should be dismissed, with costs. 80 There was some debate in the proceedings that Sherwood Trading should properly have been made a party as any order made might well affect the rights the respondent had against it under the terms of the original lease. The deed of consent to assignment of lease in cl 4(c) dealt with that situation by providing that Sherwood Trading "will remain liable to the [respondent] in respect of the performance by the [applicants] of all the covenants expressed in or implied by the Lease". There is no claim before the Court which sought to affect sub-cl 4(c) and, therefore, for present purposes as between the applicants and the respondent it is, in my view, unnecessary to consider further this aspect. 81 Having found the relevant grounds under s 106 established in respect of the deed of consent to assignment of lease, as incorporating the terms of the original lease, the remaining issues are whether the said contract should be the subject of remedial orders available under the section and, if so, the content of those orders. It is necessary to consider the discretions involved in the context of the degree of unfairness; that latter question will be assisted by an assessment of the expert evidence and the opinions therein expressed. 82 As to the exercise of such discretions once the finding of unfairness be established concerning a work contract in a commercial setting, the Commission in Court Session in Autobake v Budd said (19 IR at 29-30) : What occurred between the parties in this case was an entrepreneurial exercise. The franchisor stood to make a profit from the "up-front" franchise payment, the rental payments for the Auto-Baker machine and the sale of the raw materials for the manufacture of biscuits. In a general sense, the success of the cross appellants' venture would be to its advantage. For their part, the cross appellants looked forward to operating a profitable business and also, perhaps, to its profitable sale to a purchaser in the future, as other franchisees had succeeded in doing. However, neither of these expectations materialised. Whereas no moral distinctions between the parties need be drawn when dealing with the initial question arising, namely, whether or not the contract offended against s 88F(1)(d), the discretions which then arise under the section require for their exercise more than a mere comparison between award rates and actual remuneration and the circumstance that a calculated business risk, advisedly taken, has proved unsuccessful. Where such a calculated risk is taken it is not intended by s 88F that the other party should become a guarantor, as it were, that the business will be successful, or that the party performing the work will receive at least the rates of pay he would have received had he been an employee. Each case has to be considered on its own merits and the discretion of the Commission exercised accordingly. 83 It will be clear that in exercising discretion the Court has to consider the circumstances of the particular case before it viewed on a reasonable and objective basis: see Pay v Canterbury-Bankstown Rugby League Club Ltd (1995) 72 IR 358 at 393 per Hill J and Port Macquarie Golf Club v Stead (64 IR at 60). 84 I view the facts of the instant case as quite distinguishable and far removed from those in Autobake v Budd as will be apparent from the extract cited above. True it is the applicants took a calculated business risk in May 1990 in commencing business at the Tavern, but they did so not in the expectation that the respondent would guarantee their success. The thrust of the evidence of Mr Starkey was that he acknowledged the rental debt accruing and would pay it on the eventual sale of the business; in the meantime, however, with the changed circumstances the respondent so conducted itself through Mr Mitchell that such a sale was not reasonably practicable and the applicants became locked in to continuing to operate the hotel; and then, when the opportunity arose for them to relieve their position with conditions having become more favourable, the respondent declined a further lease thereby appropriating to itself the applicants' business. Contrary to the understanding which the applicants always had, not only did they face loss of the goodwill in the business but also the ability to pay the deferred rent. And all of that occurred in a context where, on any reasonable view of the evidence, the rent payable under the lease became extraordinarily high compared to market levels and in light of the takings of the hotel. 85 I have already found that the deed of consent to assignment of lease in applying to the applicants the terms of the original lease offended s 106 as being unfair, harsh and unconscionable. In all the circumstances here, I consider discretion should be exercised in favour of the applicants to afford them appropriate orders to remedy their position. That requires attention to the details of the expert evidence. 86 I might interpose and deal first with an appropriate order relating to the finding that the rent deferral arrangement was not a breach or non-observance by the applicants of the lease terms but a waiver by the respondent of the applicants' obligations. As such, the respondent could not properly decline to grant the applicants a new lease term on the exercise by them of the option. The further amended summons claimed a declaration in this respect, in terms that the applicants validly exercised their option under the lease to have the respondent grant to them a lease of the subject premises for a further period of 10 years commencing on 10 July 1999; a further declaration was sought for that purpose that the current market rental be $169,520 per annum. Section 154 of the Industrial Relations Act enables the Court to make binding declarations of right in relation to a matter in which it has jurisdiction and it may do so whether or not any consequential relief is or could be claimed: see Ford v SAS Trustee Corporation [2000] NSWIRComm 92 at par 76. The matter here in which the Court has jurisdiction is the unfair contract under s 106. In my view, the declarations sought are in relation to that matter and so power exists to make them. I propose to do so, subject to considering later the amount of the current market rental. 87 The reports of Mr Robertson admitted into evidence were, I find, compelling and cogent in their detail and reasoning. They were, to the extent covered, supported by the opinion of Mr Cooper as to the high level of rent under the lease and the market value of the rental as at July 1999. Indeed, Mr Williams' evidence for the respondent was that he had no doubt the applicants were paying too much rent, although he suggested a range of 12 to 18 per cent of turnover as an average rental for hotels compared to Mr Robertson's assessment of about 10 per cent. However, Mr Williams' opinion was not, unlike that of Mr Robertson, supported by checked data. The opinion of Mr McKensey, I think, may be discounted as it was based on an accounting approach to the capital value of the respondent's investment as distinct from rental values according to the market. In the result, I accept the evidence of Mr Robertson and Mr Cooper in preference to that of Mr Williams and Mr McKensey where there be conflict. 88 In formulating the terms of appropriate relief, I rely upon the detail and figures contained in Mr Robertson's reports and, specifically, that contained in his report dated 23 March 2000 as to fair market rentals for each year the hotel was operated by the applicants, the amount of annual increase in the rental under the lease, the absence of a rent review clause and comparable hotel leases in the area. That material and Mr Robertson's conclusions thereon were summarised earlier and it is unnecessary to repeat them. 89 Mr Robertson relevantly concluded as to two major aspects arising for determination - first, an appropriate rental level at the commencement of the applicants' occupancy of the premises from 1 May 1990 and its adjustment during the remaining term of the 10-year lease; and, second, an appropriate market rental at the commencement of a new 10-year term on 10 July 1999 and its annual adjustment for the balance of that term. As to the former, Mr Robertson considered an appropriate commencing rental to be $108,000 from 10 July 1990 ($100,000 as at 10 July 1989) adjusted by 8 per cent per annum as reflecting what the annual rental should have been over the period of the lease. As to the latter, he considered the commencing rental for the further 10-year lease from 10 July 1999 should be $195,000 per annum adjusted by a fixed increase of 4 per cent per annum over the term of the lease. Subject to a modification which I would propose in relation to the first 10-year term, I would otherwise accept Mr Robertson's approach as being reasonable and the subject contract should be so varied to reflect it. 90 The modification I have in mind is based upon the fact that at the time the applicants entered into the lease they did so on terms which were considered fair, although the rent was considered to be a bit high, and it was not until the year commencing on 10 July 1992 that rent was deferred by agreement with the respondent. Up to that point of time, I think the respondent is entitled to have the applicants observe the full terms of the lease and the rent provided by it. However, from that date I think a variation should be made to the rental level to provide an amount based upon 10 per cent of the takings or turnover of the hotel for the lease year 1991-92 of $1,143,968 giving an amount of $114,396 rent per annum plus an amount of $9,834 in respect of the residential flat accommodation - the resultant total rent, therefore, for the year commencing on 10 July 1992 is an amount of $124,230. I would then adjust on each anniversary date of 10 July during the balance of the lease term that amount by 8 per cent per annum. The resultant rental figures are thus - Year Annual Rental $ 1990-91 176,995 1991-92 191,150 1992-93 124,230 1993-94 134,168 1994-95 144,902 1995-96 156,494 1996-97 169,014 1997-98 182,535 1998-99 197,138 91 For the further lease term of 10 years commencing on 10 July 1999, I determine that the commencing rental should be $195,000 per annum adjusted by a fixed increase of 4 per cent per annum to give the following rental figures -

1999-2000 195,000 2000-2001 202,800 2001-2002 210,912 2002-2003 219,348 2003-2004 228,122 2004-2005 237,247 2005-2006 246,737 2006-2007 256,607 2007-2008 266,871 2008-2009 277,546

It follows that for the purpose of the declaration as to the current market rental at 10 July 1999 the amount is $195,000 per annum. 92 I intend that the conclusions reached by me as set out above concerning new annual rentals be implemented by a variation to the deed of consent to assignment of lease effective as from 10 July 1992 as conditions qualifying the terms of cl 4(b) of that deed as between the applicants as assignee and the respondent as lessor. 93 Consequent upon the variations thus made, the respondent will be required to pay to the applicants an amount of money in connection with the subject contract as varied so as to take account of the new rental levels, including for the new lease commencing on 10 July 1999; an order for the payment of money will so provide. I note that the applicants sought interest on any moneys ordered to be paid to them, but, in the whole of the circumstances and as a matter of discretion, I decline to allow any interest. I consider the nature and extent of the variations made to the subject contract to be sufficient relief and as providing a proper balance as between the parties. In that respect, I have very much in mind the open offer of settlement made by the respondent which, and although it by no means went as far as the determination I have made, it nevertheless showed a willingness at least to provide some relief to the applicants. 94 The applicants have been largely successful in their claims on what proved to be a detailed and complex hearing. The respondent should pay the applicants' costs of the proceedings, including reserved costs, in an amount as agreed or as assessed. 95 In summary, the findings and conclusions I have reached in this matter are - (1) The deed of consent to assignment of lease made on 1 May 1990, as incorporating therein the terms and conditions of the original lease made on 10 July 1989 and as if the applicants had been parties to that lease, is a contract whereby work is and was performed in the hotel industry. (2) The said deed so incorporating the original lease is within the jurisdictional scope of s 106 of the Industrial Relations Act so that the respondent's notice of motion filed on 28 July 1999 challenging jurisdiction should be dismissed, with costs. (3) The rent deferral arrangement made between the applicants and the respondent in or about mid-1992 and continued on later dates was an agreement by the respondent to defer part of the rent due under the lease to be payable by the applicants on the sale by them of the hotel business. (4) The rent deferral arrangement so made constituted a waiver by the respondent of the applicants' obligations to pay on the due date the full amount of rent under the lease. As such, the applicants did not commit a breach or non-observance of the lease conditions. (5) The applicants validly exercised on 31 March 1999 the option to have the respondent grant them a lease of the Tavern for a further period of 10 years commencing on 10 July 1999 and there was no basis upon which the respondent could properly decline to do so. (6) The applicants are entitled to an appropriate declaration under s 154 of the Industrial Relations Act as to the valid exercise by them of the option as being in relation to the subject contract otherwise found to be within the jurisdictional scope of s 106. (7) The deed of consent to assignment of lease, in applying to the applicants the terms of the original lease as to the rental level and the annual adjustment thereof, was in its terms and in its operation unfair, harsh and unconscionable within the meaning of s 106 as an unfair contract. (8) In all the circumstances found, discretion should be exercised to make appropriate orders in favour of the applicants to remedy their position by varying the subject contract. (9) In determining such orders, the evidence of the expert witnesses called on behalf of the applicants is to be preferred to that called for the respondent where there be conflict. Specifically, the contents of the reports prepared by Mr John Robertson as to fair market rentals for each year the hotel was operated by the applicants, the annual increases in rental under the lease, the absence of a rent review clause and comparable hotel leases in the area are accepted, as is his opinion concerning an appropriate market rental at the commencement of a new 10-year lease term on 10 July 1999 and its annual adjustment for the balance of the term. (10) Subject to a modification in relation to the first 10-year term, Mr Robertson's approach is reasonable and the subject contract should be varied to reflect it. (11) The modification is that the respondent is entitled to have the applicants observe the full terms of the lease and the rent provided by it from the commencement of their occupancy on 1 May 1990 to 9 July 1992 when the rent was first deferred. (12) The subject contract should be varied with effect as from 10 July 1992 to provide an annual rent in respect of the hotel premises and the residential flat accommodation of $124,230; on each 10 July anniversary date thereafter for the balance of the term to 9 July 1999 the annual rental to be increased by 8 per cent per annum. (13) As to the lease term of 10 years commencing on 10 July 1999, the commencing annual rental in respect of the hotel premises and the residential flat accommodation to be $195,000 to be increased on each 10 July anniversary date thereafter for the balance of the term to 9 July 2009 by 4 per cent per annum. (14) A declaration should be made to the effect that the current market rental for the subject premises at 10 July 1999 was $195,000 per annum. (15) An order should be made for the payment of money by the respondent to the applicants in connection with the subject contract so varied, being the difference between the rent actually paid by the applicants and the rent due under the lease as varied, including for the new lease commencing on 10 July 1999. (16) The applicants' claim for interest on any moneys ordered to be paid is refused. (17) The respondent is to pay the applicants' costs of the proceedings, including reserved costs, in an amount as agreed or assessed. 96 The applicants should prepare draft orders to give effect to the conclusions reached in this decision to be filed and served within 7 days of the date hereof. The matter will be listed for hearing at 10 am on Tuesday, 14 November 2000 for the purpose of settling and making final orders. ________________

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