Terceiro & Anor v Elmore & Ors

• Evans v Collins (3 July 2006, Macready ASJ) CASES CITED : - Harrington v Harrington Services Pty Limited (In liq) (2002) 55 NSWLR 618 - Jabetin Pty Limited v Liquor Administration Board (2005) 63 NSWLR 602 - Wonall Pty Ltd v Clarence Property Corp Pty Ltd (2003) 58 NSWLR 23

Manuel Terceiro - First Plaintiff Maria de los Angeles Terceiro - Second Plaintiff PARTIES : John Gerard Elmore - First Defendant Irene Elmore - Second Defendant Liquor Administration Board - Third Defendant

D.P.M. O'Dowd - Plaintiffs COUNSEL : A. Hatzis - First and Second Defendants No appearance - Third Defendant

O'Sullivan Saddington Lawyers - Plaintiffs SOLICITORS : Deutsche Partners Lawyers - First & Second Defendants Submitting appearance - Third Defendant

1 This is another development in the ongoing contest between hotel owners and hotel lessees as to who has the ultimate benefit of poker machine entitlements created under the Gaming Machines Act 2001 (NSW) ("the Act"). 2 The Plaintiffs are the owners and lessors ("the Lessors") of the Australia Hotel at Corowa ("the Hotel"). The First and Second Defendants are the lessees of the Hotel ("the Lessees"). The First Defendant is the current licensee of the Hotel under the Liquor Act 1982 (NSW). There are fifteen poker machines in the Hotel, each of which is the subject of a poker machine entitlement allocated by the Third Defendant, the Liquor Administration Board ("the Board") under s.15 of the Liquor Act. 3 The Lessees have entered into a contract with a third party to sell three of the poker machine entitlements and have sought the approval of the transfer from the Board, as is required by s.19 of the Act. The Lessors object to the sale of the entitlements. They have made submissions to the Board to the effect that they have a financial interest in the hotelier's licence in respect of the Hotel for the purpose of the transfer provisions of s.19 of the Act and that, as they do not support the transfer of the entitlements, the Board's approval of the transfer must be refused in accordance with s.19(3)(c) of the Act. 4 On 22 August 2006, the Board advised the Lessors that it did not accept their contention that they had a financial interest in the licence of the Hotel for the purposes of s.19 and that it proposed to give its approval to the Lessees' proposed transfer of the entitlements on 25 August (tomorrow) at 9:00am. The Lessors today approached the Duty Judge seeking leave to file in Court a Summons commencing proceedings against the Lessees and the Board. The Summons relevantly seeks the following relief: "2. A Declaration that the Poker Machine Entitlements attaching to the Hoteliers Licence of the Australia Hotel Corowa (the PMEs) are, pursuant to the doctrine of accretion, the property of the Plaintiffs.

3. An Order that the First and Second Defendants be permanently restrained from proceeding with the Transfer of one block of three PMEs to the Charles Hotel Fairymeadow on the grounds that the subject PMEs are the property of the Plaintiffs pursuant to the doctrine of accretion.

4. An Order that the Third Defendant be restrained from determining or in the alternative taking steps to enforce or otherwise implement any decision made by it in respect of the application which has been lodged by the First and Second Defendants with the Third Defendant to Transfer a block of three PMEs to the Charles Hotel Fairymeadow.

5. An Order that the First and Second Defendants be permanently restrained from selling or transferring any of the PMEs attaching to the Hoteliers Licence of the Australia Hotel Corowa without the prior written consent of the Plaintiffs.

6. An Order that the First Defendant be permanently restrained from making or lodging with the Third Defendant any further applications relating to any of the PMEs attaching to the Hoteliers Licence of the Australia Hotel Corowa with the prior written consent of the Plaintiffs." 5 The Lessors also sought leave to file in Court a Notice of Motion returnable instanter for an interlocutory injunction restraining the Board from implementing any decision in respect of the Lessees' application to transfer the entitlements pending determination of the Summons. 6 When the matter was called on, Mr O'Dowd of Counsel appeared for the Lessors and Mr Hatzis of Counsel appeared for the Lessees. There was no appearance for the Board. Mr O'Dowd and Mr Hatzis desired the Notice of Motion to be determined on a contested interlocutory basis today. Mr O'Dowd shortly afterwards advised the Court that his instructing solicitors had spoken by telephone to the Board's legal representatives, who said that the Board was aware of the proceedings and would submit to such order as the Court might make, save as to costs. I have proceeded with the hearing of the case on that basis. Issues

7 The issues which have been debated between the Lessors and the Lessees are as follows:

• is there a serious question to be tried that the Lessors have a financial interest in the Hotel licence for the purposes of s.19(3) of the Act

• where does the balance of convenience lie. Here, the debate has been principally whether damages are an adequate remedy for the Lessors if they succeed ultimately at trial;

• should the Lessors' application be refused on the discretionary ground of delay.

No party addressed submissions as to whether the Court should at this stage exercise its supervisory jurisdiction over decisions of the Board: see Wonall Pty Ltd v Clarence Property Corp Pty Ltd (2003) 58 NSWLR 23, at par 57 per Campbell J. Delay

8 I may conveniently dispose of the issue of delay at once. 9 The agreed sequence of events is that the Lessees lodged their application for transfer of the poker machine entitlements with the Board on 5 June 2006. The Lessors were given notice of the application on 27 June 2006. On 14 August the Board invited the Lessors to put submissions to it by 18 August. The Lessors did so. On 22 August, the Board advised that it intended to approve the Lessees' application on 25 August. 10 I accept Mr O'Dowd's submission that it would have been premature for the Lessors to have approached this Court seeking exercise of its supervisory jurisdiction over the Board before the Board had at least indicated what its decision would be: see the remarks of Campbell J in Wonall (supra). Further, the Lessees have not demonstrated that they have suffered any prejudice by reason of the fact that the Lessors took one, or perhaps at the most two, days after becoming aware of the Board's decision to bring their case before the Court. The Lessees are here represented by Counsel and with affidavit evidence ready to argue the Notice of Motion on a contested basis. Whether "serious question" as to Lessors' financial interest

11 The relevant facts may be shortly stated. The freehold of the Hotel was formerly owned by a company called Vielong Pty Ltd ("Vielong"). The Lessees were the directors of that company and conducted the hotel business in the Hotel from 1989 to March 1996. 12 By a Contract for Sale of Land made on or about 17 March 1996, Vielong sold the freehold and specified chattels to the Lessors for the price of $410,000. It was a condition of that contract that Vielong would be granted a lease of the Hotel for a term of fifteen years. By an Agreement for Sale of Business dated 20 March 1996, Vielong sold to the Lessees the business of the Hotel for a price of $180,000, $130,000 of which was apportioned to goodwill. It was a term of that agreement that the Lessees be granted a lease of the Hotel premises for fifteen years. 13 By a deed dated 17 March 1996 between the Lessors, the Lessees and Vielong, it was provided as follows: "A. By agreement of even date made between the Vendor as vendor and the Purchasers as purchasers the Vendor agreed to sell premises known as the "Hotel Australia" Sanger Street Corowa more particularly described as the whole of the land in Folio Identifier 1/82911 ("the Hotel").

B. The Lessees as lessees have entered into a Lease of the Hotel with the Purchasers as lessors for the term of fifteen (15) years with an option for renewal ("the lease").

C. The parties desire that the goodwill of the Hotel is protected and preserved on the present site of the Hotel.

NOW THIS DEED WITNESSETH that in consideration of the premises the Vendor and the Lessees and each of them hereby covenant with the Purchasers that the Vendor and the Lessees and each of them that they will not directly or indirectly and whether solely or jointly with or as director manager agent or servant of any person or corporation carry on or be engaged or interested in any business of hotelkeepers or any significant component thereof or permit their names or the name of any of them to be used in connection with any such business -

(i) within the period of three (3) years from the date which is the sooner of:-

(a) the date on which the lease expires (or if renewed) the expiry date of such renewed lease or;

(b) the date on which the earlier termination of or assignment by the Lessees of their interest in the lease or the renewal thereof occurs or;

(c) the date on which the Lessees cease to exclusively operate the business of hotelkeepers at the Hotel;

(ii) and that such restriction shall apply to the area within the township of Corowa in the State of New South Wales;

and the parties hereto and each of them hereby acknowledge that the period and area aforesaid are no greater than reasonably required to protect the goodwill of the said business conducted by the Lessees AND it is acknowledged that the covenants hereinbefore contained shall be deemed to include and extend to the respective executors and administrators of the Vendor and the Lessees and each of them and to the assigns of each of them." 14 Section 19 of the Act relevantly provides: " Transfer of poker machine entitlements

(1) A poker machine entitlement allocated in respect of a hotelier's licence or the premises of a registered club is transferable.

(2) The transfer of a poker machine entitlement does not have any effect unless the transfer:

(b) complies with the requirements of this Division and any requirements specified in the regulations.

(3) An application for the Board's approval of the transfer of a poker machine entitlement must:

(a) be accompanied by the fee (if any) prescribed by the regulations, and

(b) be accompanied by such particulars or other matter as may be required by the Board in relation to the proposed transfer, and

(c) in the case of an application for the transfer of an entitlement allocated in respect of a hotelier's licence - demonstrate, to the satisfaction of the Board, that the proposed transfer is supported by each person who, in the opinion of the Board, has a financial interest in the hotelier's licence, and

(d) be in the form and manner determined by the Board from time to time.

(4) If a poker machine entitlement is transferred to another hotelier's licence or premises of a registered club in accordance with this Division, the transferred entitlement is, for the purposes of this Division, taken to have been allocated by the Board in respect of the other hotelier's licence or club premises.

(5) For the purposes of subsection (3) (c), a person is taken to have a financial interest in a hotelier's licence if the person is entitled to receive any income derived from the business carried on under the authority of the licence or any other financial benefit or financial advantage from the carrying on of the business (whether the entitlement arises at law or in equity or otherwise).

(6) However, a person is not, for the purposes of subsection (3) (c), to be considered as having a financial interest in a hotelier's licence by reason only of the person being the owner of the hotel." Mr O'Dowd submits that the Lessors have, at the very least, an arguable case that they have a financial interest in the hotel licence for the purposes of s.19. Mr O'Dowd's submission may be summarised as follows:

• the hotel business, including its goodwill, has been leased to the Lessees;

• when the lease of the hotel business expires in 2011 the Lessees must, under the terms of the lease implied by law, transfer to the Lessors the leased hotel business, the leased chattels and the leased goodwill of the business, including all of the components or sources of that goodwill;

• the poker machine entitlements have come into existence during the course of the Lessees' tenancy and are a source of the goodwill of the Hotel's business

• by virtue of the doctrine of accretion, those entitlements now form a part of the goodwill of the business and must be returned to the Lessors upon expiry of the lease of the hotel business. He relies in this regard upon Harrington v Harrington Services Pty Limited (In liq) (2002) 55 NSWLR 618;

• the reversionary interest in the poker machine entitlements which the Lessors presently have is a financial interest for the purposes of s.19(3)(c) of the Act which the Board must take into account. 15 Mr Hatzis submits that there is no serious question to be tried. His submissions in summary are as follows:

• the goodwill of the hotel business is not leased to the Lessors, rather it has been sold outright to the Lessees under the Agreement for Sale of Business so that the goodwill of the hotel business and all of its components and sources may be dealt with by the Lessees as their absolute property;

• the decision of the Court of Appeal in Jabetin Pty Limited v Liquor Administration Board (2005) 63 NSWLR 602 precludes an argument that a lessor of hotel premises has a financial interest in poker machine entitlements during the currency of the lease for the purposes of s.19(3) of the Act. 16 In my view, the Lessors have sufficiently demonstrated a serious question to be tried as to whether the goodwill has been sold or leased. It is true that the Agreement for Sale of Business purports to sell the goodwill of the hotel business to the Lessees outright. However, that hotel business could not be conducted independently of the Lessees' rights to occupy the Hotel itself, and their right to occupy is pursuant to a lease for a term of fifteen years. Further, the tripartite deed of 17 March 1996 recognises that, after expiry of the Lessees' lease, the goodwill of the hotel business requires protection against competitive acts of the Lessees themselves. In my opinion, it is open as a matter of construction of all of the relevant documents to hold that the goodwill of the hotel business was leased to the Lessees and not sold outright. 17 Strong reliance is placed by the Lessors on Harrington v Harrington and the doctrine of accretion therein discussed. The same argument was advanced by a hotel lessor to Macready AsJ in Evans v Collins (3 July 2006). His Honour said at para 33 that if the analysis in Harrington v Harrington of the doctrine of accretion as it applied to nursing home bed entitlements was also applicable to poker machine entitlements under the Act, then the doctrine would enable any proposed sale of poker machine entitlements to be restrained during the term of the hotel lease. 18 With great respect to his Honour, I have grave doubts about that proposition. Harrington v Harrington was concerned with nursing home bed entitlements acquired by the lessee during the course of a lease of a nursing home business. Those entitlements were still in existence and were found to be part of the goodwill of the business at the time of expiry of the lease of the business. The question was: at that point of time were the lessors entitled to a reversion of the bed entitlements as part of the reversion of the goodwill. The case had nothing to do with the question whether the lessors had a reversionary interest in the bed entitlements at all times during the term of the lease sufficient to entitle them to restrain the lessee from dealing with the goodwill and its components in the ordinary course of business. The discussion of the doctrine of accretion in paras 77-81 of Harrington is to be understood in the context that the particular components of goodwill in issue in that case happened to be in existence and in the possession of the lessees at the time of expiry of the lease of the business. 19 The question in the present case is different. It is whether the reversionary right of a lessor to components of goodwill of a leased hotel business give that lessor a financial interest in components of goodwill, not only at expiry of the lease but at all times during its term. 20 As was pointed out by Campbell J in Wonall, although the lease in that case provided, as does the common law, that at the expiry of the lease the lessee must do everything necessary to transfer to the lessor the various components of the goodwill of the business, there was no requirement under the lease for the lessee to operate the hotel during the term of the lease with any particular number of poker machines, or indeed with any poker machines at all. 21 There is a strong argument in the present case that, while the doctrine of accretion may compel a lessee to return to the lessor at the expiry of the lease whatever components of goodwill there are then in existence, the doctrine does not extend so as to enable the lessor to dictate to the lessee how to conduct its business at all times during the term of the lease so as to preserve various components of the goodwill of the business which happen to have come into existence during the term of the lease and the lessor wishes to acquire at its expiration. 22 These are difficult questions and I do not think that it is appropriate in an application such as this to determine them. It seems to me, as Mr O'Dowd says, that these questions are not resolved by the decision of the Court of Appeal in Jabetin, although I think it may fairly be said that the judgment of the Court in that case points in a certain direction. Nevertheless, as I say, the particular issue posed by this case not having been raised expressly for consideration previously, I think that a sufficiently arguable case has been demonstrated by the Lessors for the purposes of this application. Balance of convenience

23 I now turn to the question of whether the balance of convenience favours the grant of an injunction or militates against it. As I have said, the principal argument here has been directed to whether or not the Lessors, if ultimately found successful, would be adequately compensated by an award of damages. 24 Mr Hatzis says that an award of damages would be adequate, and points also to the fact that if an injunction goes now then the sale which is presently on foot between the Lessees and the third party will very probably be frustrated and the Lessees will lose the benefit of it entirely. 25 Mr O'Dowd's principal contention in this regard is that the quantification of damages would be far too difficult an exercise, bearing in mind the peculiar nature of these rights. It is conceded by both sides that there is at present a market in poker machine entitlement rights. They may be bought and sold, and no doubt it is possible to ascertain from persons experienced in the industry what the market value of such rights are at any particular time. I do not think that there is a very close analogy between poker machine entitlements and, for example, interests in land, because land may be used for a variety of different purposes and may have its own special appeal, quite apart from its financial or monetary value, whereas poker machine rights have only one purpose or application and I do not think that anyone could reasonably be sentimentally attached to them. Accordingly, there is a market for the rights which are now in question and the real question is whether, in all of the circumstances, damages would be an adequate remedy having regard to the way in which such rights can be valued in the market. 26 In my view, it is of decisive importance in this regard to bear in mind that the lease now in question has a further five years to run. As I have said, there is no provision in the lease to which I have been taken which requires the Lessees to have any particular number of poker machines in the Hotel or, indeed, to have any poker machines at all in the Hotel. There is no provision in the lease to which I have been taken which gives to the Lessors a right to dictate to the Lessees how the business of the Hotel will be conducted. There are, no doubt, the usual covenants which protect the Lessors from waste, but there is nothing, as far as I can see, directing the Lessees as to what they may do, or may not do, with poker machines or poker machine entitlements if they wish to have poker machines in the premises. 27 If it is ultimately held in these proceedings that the Lessors have an interest in these particular poker machine entitlements, being an interest which required those entitlements, once acquired, to be preserved throughout the currency of the lease and handed over to the Lessors at the expiry of the lease, then any damage which will be suffered by the Lessors if the Lessees dispose of these entitlements will be suffered at the expiry of the lease and not before. That is because, as the Lessors concede, they are not entitled during the currency of the lease to any income from poker machines on the premises. All they have is an entitlement to the rent of the premises under the lease. 28 Accordingly, if it is ultimately held that, when the lease expires, the Lessors are entitled to have a particular number of poker machine entitlements transferred to them, including the entitlements the subject of this application, then the value of the entitlements to be transferred and, consequently, the loss suffered by the Lessors if they are not transferred, will be ascertained as at the date when the entitlements ought to have been transferred, that is in 2011. 29 It would be open to the Lessors to continue with the present proceedings, seeking a declaration of right that the poker machine entitlements are part of the reversionary property of the Lessors under the doctrine of accretion. If that declaration of right is made, then it will follow that in five years' time the Lessors will be entitled to insist on transfer of the relevant number of poker machine entitlements. If the present sale of the entitlements proceeds, the Lessees may fail to transfer those entitlements at the relevant time, exposing themselves to an action for specific performance or damages, or they may choose to buy in the relevant number of entitlements for the purpose of transfer to the Lessors at the then-current market price. 30 In short, the damage which the Lessors may suffer will, if suffered, be occasioned some five years hence and may, in any event, be avoided if the Lessors succeed in their present proceedings, obtain a declaration, and the Lessees perform their obligations, as so declared, when the time for performance arrives. In the meantime, in my view, there is not sufficient warrant for an injunction requiring the Lessees, in effect, to conduct their business in the Hotel in such a way as the Lessors consider best in order to preserve certain elements of the goodwill of the business for the ultimate benefit of the Lessors. Orders

31 For those reasons, it seems to me in the exercise of discretion, having regard to the balance of convenience between the parties and the adequacy of such damages as may be payable in five years' time, the application for the injunction ought to be refused. For those reasons the Notice of Motion will be dismissed. 32 I do not think this is a proper case for reserving the costs of the motion. The motion raised discrete considerations to do with the peculiarities of interlocutory applications. The Plaintiffs should pay the costs of the First and Second Defendants of the Notice of Motion, and I so order. 33 The matter will be stood over before the Registrar for further directions on 8 September 2006 with the usual undertakings to pay the usual filing fee.

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