TianyD Beauty & Hairdressing Australia Pty Ltd v Fasako Pty Ltd

Introduction

1. This appeal concerns a dispute under the Retail Leases Act, 1994 (NSW) (RL Act) and the termination of a retail lease in respect of shop 7 (premises or shop 7) in a building located in Sussex Street, Sydney (building).
2. The first appellant (TianyD or tenant) entered into a lease of the premises dated 24 March 2017 (lease) with the respondent (Fasako or landlord). The lease commenced on 27 March 2017. The tenant provided a bank guarantee of $133,944.54 (bond). A personal guarantee was also provided by the second appellant Mr Zhu (Mr Zhu or guarantor), a director of the tenant.
3. The lease was for a period of 5 years with an option to renew for a further 5 years. Inter-alia, there was an initial three month rent free period to allow the tenant to carry out fit out of the premises for use as a beauty salon business.
4. Part of the proposed fit out work included modifications to the lower ground floor area by the installation of various partitions to create 18 enclosed rooms. This work required alterations to the existing fire sprinkler system to meet fire safety requirements. These requirements in respect of the fire safety system for the premises arose as part of obtaining local Council development approval for the fit out works and by reason of the requirements in the Building Code of Australia (BCA) and relevant Australian Standards (AS).
5. A dispute arose because the tenant said that the pumps in the building were incapable of providing the requisite water flow rate to supply the existing fire sprinkler system in the premises. That is, prior to the carrying out its fit out, the tenant said the existing fire sprinkler system was deficient and non-compliant with fire safety requirements. The tenant said that there were obligations on the landlord under the lease to provide a compliant system, at least in respect of the building in its original configuration. The tenant said that despite requests to do so, the landlord failed to provide modifications to the existing system to bring it into compliance.
6. On the other hand, the landlord contended that any modifications to the existing system to enable the tenant to fit out and occupy the premises were to be paid for by the tenant as required by clause 7.8(b) of the lease.
7. Following several months of negotiation, on 13 September 2017 the tenant served a termination notice on the landlord (termination notice). On 15 September 2017 the tenant returned the keys to the premises.
8. After that time, there was a period of enquiry by the parties' respective experts trying to find a fire engineered solution and a means by which the dispute concerning the fire services might be resolved so that the lease could continue. The landlord said a fire engineered solution was an alternative to the need to modify the water pumps. These negotiations were unsuccessful and, following mediation under the RL Act, the landlord filed an application seeking damages against the tenant for breach of the lease and for orders in respect of the bank guarantee and against the guarantor, Mr Zhu. This was application COM 18/21300 (landlord's application). The tenant and Mr Zhu subsequently filed a claim seeking orders that the tenant had validly terminated the lease and damages said to arise from the landlord's breach of the lease. This was application COM 18/40196 (tenant's application).
9. On 17 October 2019, the Tribunal determined both applications. The Tribunal published reasons for decision (Reasons).
10. The Tribunal found: 1. the termination notice was ineffective, 2. that the landlord had not breached any relevant obligation under the lease; 3. the tenant breached an implied term of the lease to "do all things necessary to maintain the benefit of the bargain or promise": 1. by failing to undertake its fit out and "by not pursuing a fire engineered solution that was available"; and 2. by not accepting "the open offer of [the landlord] … to adopt the performance engineered solution to the fit out and take up the offer of the additional months of rent free" made by a letter dated 5 January 2018 from the landlord's lawyer; 1. service of the termination notice constituted repudiatory conduct of the tenant but that the landlord did not terminate the lease which remained on foot.
11. The Tribunal made orders that the tenant and Mr Zhu pay the landlord "all rent and outgoings pursuant to the lease and damages" and that the landlord could apply the bond in reduction of any amounts owing to it. The tenant's application was dismissed.

Notice of appeal and submissions

1. By Notice of Appeal filed on 14 November 2019, the appellants appealed the decision. The appeal was filed in time.
2. The appellants sought orders that the decision of the Tribunal be set aside and in lieu thereof the following orders/declarations be made: 1. a declaration that the respondent had breached clause 9.3 (or alternatively clause 9.2) of the lease and breached an implied term of the lease that the respondent would not derogate from the grant of the premises the subject of the lease. 2. A declaration that the first appellant had validly terminated the lease on 13 September 2017 upon a repudiation of the lease by the respondent. 3. That the proceedings be remitted to the Tribunal for determination of the damages to which the first appellant is entitled for breach of the lease and/or for compensation pursuant to s 34 of the RL Act. 4. That the respondent pays the appellants' costs of the proceedings at first instance and on appeal.
3. To the extent necessary, the appellants sought leave to appeal.
4. The grounds of appeal were as follows: 1. The Tribunal erred by: 1. Failing to have regard to its own finding at [75], based on the unchallenged and uncontroverted evidence of Mr Moon (the tenant's fire engineering expert), to the effect that there was, within the fire sprinkler system servicing the premises, "a systems shortfall when assessing the maximum flow rate capability of the pumps when compared against a hydraulically calculated fire sprinkler system demand". 2. Failing to have regard to the further unchallenged and uncontroverted evidence of Mr Moon, referred to at [66] (paragraph 1.4), that "the existing water supply infrastructure of the fire sprinkler system in the building is inadequate for" the premises; and/or to have regard to the further evidence referred to at [64]; 3. Failing to have regard to the statement by the landlord's hydraulic consultant (see [19]), recorded at [23], that "the existing pump cannot provide the required flow"; 4. Erroneously concluding, implicitly, at [149] and [150] that the evidence of Mr Moon referred to above should not be accepted in the absence of evidence from "any Council or fire authority to support the assertions" (of Mr Moon). 1. The Tribunal erred by failing to conclude that, as a matter of law, there was implied into the lease, as there is implied into every lease of premises, an implied term as to non-derogation from grant of the Premises, including the plant and equipment within the premises (given that the term "Premises" was defined in the lease to include "plant and equipment") (Implied Term as to Non-Derogation from Grant). 2. The Tribunal erred by failing to conclude that, in the light of the evidence referred to in ground 1 above, there was a breach of: 1. The Implied Term as to Non-Derogation from Grant, in that the Premises (and in particular the plant and equipment therein) were not fit and/or not safe for occupation and/or use as retail premises (having regard to the matters referred to in ground 1 above and having regard to the fact that the premises were to be used as a "retail shop" within the meaning of the RL Act); 2. Clause 9.3 of the Lease (on the proper construction of that term), in that the premises were not, in the light of the matters referred to in ground 1 above, in "sound structural condition". 1. The Tribunal erred in failing to find that, in all the circumstances, each of those breaches was to be regarded as repudiatory, having regard in particular to: 1. The conduct of the landlord in continuously contending that the responsibility for, and cost associated with, the inadequacy of the fire sprinkler system for the premises fell to the tenant (see, e.g., the finding at [87]), when in fact and in law it fell to the landlord; 2. The continuous refusal of the landlord at all times up to and including 13 September 2017 to assume responsibility for the fact that the premises (including the plant and equipment therein) were not fit (and/or not safe) for occupation and use as retail premises; 3. The fact that the premises were to be the subject of commercial operations, for the operation of a business which the tenant had, in May 2017 (erroneously referred to by the Tribunal at [18] as May 2018), announced publicly would commence "from mid-2017) (as found by the Tribunal at [18]). 1. The Tribunal erred by failing to conclude that the tenant accepted that repudiation and validly terminated the Lease on 13 September 2017, bringing the lease to an end and enlivening an entitlement to damages consequent upon the repudiation. 2. The Tribunal erred in implicitly concluding at (e.g.) [155] and [157] that, on the proper construction of clause 7.8(b) of the lease, the responsibility for, and the cost associated with rectifying the inadequacy of the fire sprinkler for the premises fell to the tenant. 3. The Tribunal ought to have concluded, on the proper construction of clause 7.8(b) of the lease, that the inadequacy of the fire sprinkler system for the premises (and consequent need to "change" the sprinkler system) did not "result" from the tenant's fit-out of the premises and, accordingly, that clause 7.8(b) was irrelevant to the issues for determination in the proceedings. 4. The Tribunal erred at [92] by misapprehending the submission on behalf of the appellants as to clause 7.8(b) (which was that it did not impose on the tenant responsibility for, or cost associated with, the inadequacy of the fire sprinkler system for the premises, but that, if it did, then that raised a non-disclosure issue). 5. The Tribunal erred in concluding at [178] that the tenant breached an implied term of the kind described at [178] "by not pursuing a fire performance engineered solution that was available": 1. Given that it should have concluded that the fact that the premises (including the plant and equipment therein) were not fit (and/or not safe) for occupation and use as retail premises was something that fell to the landlord to remedy, pursuant to the Implied Term as to Non-Derogation from Grant and/or clause 9.3 of the Lease; 2. Given that, in reaching that conclusion, it erroneously failed to disregard all the facts, circumstances and conduct which occurred after the effective termination of the Lease by the tenant on 13 September 2017 (e.g., at [43]-[57], [158], [171]-[172] and [177]-[178]), despite having correctly accepted earlier in its reasons (at [141]) that post-termination events were irrelevant; 3. Given that there was no evidence capable of satisfying the Tribunal that the performance solution proffered by the landlord was adequate to render the premises (including the plant and equipment therein) fit and safe for occupation and use as retail premises; 4. Given that, even if the performance solution proffered by the landlord was adequate, it was first proffered by the landlord after the effective termination of the lease by the tenant; 5. Given that the conclusion that the performance solution proffered by the landlord's consultant Warren Smith & Partners (Warren Smith) was an effective solution was erroneous on the grounds referred to in subparagraphs (b) to (d) above and, in addition, because that conclusion was infected by a misapplication of the principles in Jones v Dunkel, which were, as a matter of law, irrelevant. 1. The Tribunal erred by failing to conclude that the landlord breached clause 9.2 of the Lease, on the proper construction of that term. 2. The Tribunal erred by: 1. Apparently treating its determination against the appellants of the issue whether the lease had been effectively terminated by the tenant as decisive of all claims made by the tenant (e.g., at [176], line 8 - "if I am correct" (sic)); 2. Failing to deal with the tenant's claim for damages or compensation for the breaches by the Respondent of clauses 9.2 and 9.3 of the Lease and/or pursuant to section 34 of the RL Act, the entitlement to which damages or compensation the tenant had, regardless of whether it had validly termination the Lease. 1. The Tribunal, having regard to the above errors: 1. Failed to determine, in accordance with section 38(4) of the Civil and Administrative Tribunal Act 2013 (NSW) (NCAT Act), the substantial merits of the case; 2. Failed to consider, in accordance with section 38(5)(c) of the NCAT Act, the submissions by the appellants as to the entitlement of the tenant to damages and/or compensation.
5. In respect of leave to appeal, the Notice of Appeal identified evidence relied upon in support of the appellants' contention that the decision was against the weight of evidence. However, no information was provided as to why the appellants contended the decision was not fair and equitable.
6. The landlord filed a reply to appeal. In essence, the landlord said: 1. The Tribunal properly dealt with the evidence of Mr Moon; 2. The appellants did not assert an implied term of "non-derogation from grant of the premises" in the proceedings at first instance but rather an implied term the appellants would be able to use the premises to conduct a retail business; 3. The premises were able to be occupied because of the existence of a performance-based fire engineered solution. Therefore the suggestion that the building was not structurally sound is not made out; 4. The claims made in respect of cl 7.8(b) of the lease in the proceedings at first instance related to the issue of nondisclosure and an entitlement to terminate on this basis. The Tribunal found "that the real issue was not whether the building pumps were adequate or not but whether the appellants could in the normal course of events conduct its fit out". There was no misapprehension by the Tribunal of the issues raised in connection with cl 7.8(b), that issue being the tenant's "obligation to pay or contribute to the cost of equipment or services" which was not disclosed in the Disclosure Statement; 5. In relation to an implied term to maintain the benefit of the bargain, the existence of the performance engineered fire solution meant that the tenant could proceed with its fit out. Its failure to do so constituted a breach by the tenant of the implied term and not a breach by the landlord. 6. Otherwise, the Tribunal dealt with the arguments of the appellants in relation to clause 9.2 of the lease. 7. Consequently, there had been no conduct of the landlord that constituted a breach of the lease, no failure deal with the appellants' claims and no error shown.
7. The parties provided written submissions in support of their respective positions. In addition, oral submissions were made by the parties' Counsel at the hearing on 25 February 2020.

Appellant's submissions

1. The substance of the appellants' submissions can be summarised as follows. 1. The premises had a defective fire sprinkler system which existed prior to the commencement of the lease, defect being that the pumps were of insufficient capacity to supply the existing sprinkler heads in the premises with the required flow rate of water. 2. While the tenant had an obligation under cl 7.8(b) to pay for the costs of any changes to the sprinkler system, air-conditioning ducting or any other building services as a result of carrying out its fit out, the landlord had an obligation to meet the costs of any deficiencies in the building or the premises as existed at the commencement of the lease. 3. This obligation arose in one of two ways: 1. there was an implied term in the lease as to "Non-Derogation from Grant" ("non-derogation term"); 2. cl 9.3 of the lease imposed an obligation on the landlord to keep the building in a "structurally sound condition". 1. In relation to the non-derogation term, the appellants (in their submissions in chief at [35]) expressed such a term in the following way: The effect of such a covenant is that a landlord must not do or allow, either on the leased premises or land under the landlord's control, anything that is inconsistent with the purposes for which the premises are leased, unless the parties have expressly or impliedly agreed otherwise. The purpose for which the premises are leased defines the scope of the landlord's covenant not to derogate. The covenant is breached where the lease is made for a particular purpose, and the landlord's activity or non-activity renders the leased premises "unfit or materially less fit" for that particular purpose. There need not be complete frustration of the intended purpose; the test is whether the premises "for practical purposes" are to be "fairly regarded" as having been rendered unfit. The question is, are the premises "unfit from a reasonable point of view for the purposes for which they were granted". As to all the propositions in this paragraph, see Butt's, Land Law, 7th edition 2017 p 355-356. 1. In relation to cl 9.3, the appellants said a building was not structurally sound if the fire safety system was deficient. Reliance was placed on the decision in Holus Bolus Pty Ltd v The Wicko Pty Ltd [2012] NSWSC 497 (Holus Bolus) particularly at [34]. 2. Clause 7.8(b) did not make the tenant liable to rectify or replace the inadequate pumps. On its proper construction, cl 7.8(b) only imposed an obligation on the tenant to pay for changes to the sprinkler system or building services because of the tenant's fit out. 3. The failure to upgrade the pumps and the persistent denial of an obligation to do so over many months constituted a breach of an intermediate or innominate term which was repudiatory in nature and entitled the tenant to terminate the lease. The tenant did so by the termination notice issued 13 September 2017. Reliance was placed on the decision of the High Court in Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd & Anor [2007] HCA 61; (2007] 233 CLR 115 (Koompahtoo) at [44]. 4. Any offer made by the landlord in connection with a fire engineered solution occurred after the date of termination and was not conduct to be considered in evaluating whether the actions of the landlord were repudiatory and/or of such a serious nature to entitle the tenant to terminate the lease. The fact a fire engineered solution existed and/or could have been implemented by the tenant does not "cure the breach", the landlord remaining responsible for carrying out any necessary work. 5. Further, and in any event, the evidence of Mr Moon concerning the pumps and that the "block plan data" recorded on the pump was incorrect meant that: 1. fire certificates issued in previous years certifying compliance with relevant fire safety standards were incorrect; 2. sprinkler flow test results were incorrect; 3. statements concerning essential services/equipment being maintained to operational capacity or design requirements were incorrect; and therefore the underlying assumptions of the engineered fire solution prepared by i-Fire Engineering (i-Fire) in its report dated 20 November 2017 were false.
2. In so far as the Tribunal relied on reports of Warren Smith and/or RED Fire Engineers Pty Ltd (Red Fire), the appellants also submitted, these reports were not solutions. Rather, they recommended the engagement of a qualified fire engineer to prepare such a solution and themselves relied on incorrect data in respect of the pumps.
3. Mr Moon was not asked and did not accept in evidence that the "solutions" from i-Fire, Warren Smith and/or Red Fire would be acceptable. Otherwise, his answers to hypothetical questions did not assist in determining if there was in fact a solution.
4. Consequently, the appellants said that the lease had been validly terminated and that they were entitled to recover damages. In this regard the appellants said an order should be made remitting the proceedings to the Consumer and Commercial Division for the purpose of assessment of damages.

Respondent's submissions

1. The landlord says that "the real question before the Tribunal was whether the fire sprinkler system could have serviced a fit out of shop 7 by the Appellants".
2. The landlord submits that the Tribunal made that finding and there was no error in doing so.
3. Of the evidence before the Tribunal concerning the position in June 2017, the landlord said "[w]hat was revealed to the [tenant] in June 2017 was that [the] building pump could not provide sufficient flow to the number of sprinklers that the Appellants had included in their plans for the proposed fit out of Shop 7, to comply with the [BCA]. However what was also revealed was that a performance-based solution could be prepared by a fire engineer". Consequently, any suggestion that the premises were not fit for human occupation or were not the subject of a valid occupation certificate were overstated.
4. The landlord contended in its written submissions at [15] that, at its highest: as at June 2017 the Appellants' proposed fit out of shop 7 included a number of sprinkler heads, such that in order to achieve compliance with the BCA either an upgrade of the building's fire sprinkler pump or a fire-engineered performance solution was required. The Appellants adopted neither of the courses available to them, instead issuing the Notice to Terminate.
5. The landlord says that it was not until Mr Moon's report was served on 5 October 2018 that the "Appellants suggested for the first time that the sprinkler system of the whole building … was non-compliant with the BCA" the relevant provision being Australian Standard AS2118. 1-1999. Even so, Mr Moon himself identified that "a 'performance solution' or 'engineered solution' could satisfy the requirements of the BCA. In this regard the landlord submits: 1. The existence of a fire engineered solution or performance solution is critical to the real issue in the proceedings. If the premises "was able to comply (or in fact did comply) with BCA requirements, because of a performance solution, then there could be no basis for the Appellant to allege a breach of Lease"; 2. The possibility of a performance solution was first raised in June 2017.
6. As to Mr Moon's evidence, the Tribunal was not bound to accept any evidence, including expert evidence, simply because it was uncontested. Reliance was placed on the decision in HM&O Investments v Ingram [2012] NSWSC 958 (HM&O) at [235]. In any event, the Tribunal did not make findings of fact inconsistent with Mr Moon's evidence. Mr Moon had concluded that compliance with AS 2118.1-1999 was one option to make the premises compliant with the BCA, the other being a fire engineered solution.
7. As to the non-derogation term, the landlord said this issue was not raised in the proceedings at first instance and was entirely new. No evidence has been call from any witnesses about such a term or its effect and there was no cross-examination on this matter.
8. The Tribunal could not err in failing to consider an issue that was never raised and "what the appellants are attempting to do now is recast the implied term contended for below, namely an implied term to the effect that they would be able to use the premises to conduct a retail business". That implied term argument was dealt with by the Tribunal at [162] and following of the Reasons.
9. Further, the non-derogation term should not be implied. It is not necessary, the appellants having the benefit of an implied term of loyalty to the bargain as found by the Tribunal in its Reasons at [166]. It would also be inconsistent with cl 7.16 which provides there is no warranty as to use.
10. As expressed, such a term would have no application because there was nothing the landlord did or failed to do after the grant of the lease. In this regard Mr Moon's evidence was that the fire sprinkler system did not comply with the Australian standard at the time the lease was entered into. Further the premises as a matter of fact were able to be used to conduct a retail business upon adoption of a performance solution complying with the relevant performance requirements of the BCA. Hence, the premises "were never 'unfit or materially less fit' for a retail shop". On this aspect, the landlord relies on a Report entitled "Alternative solution report" date August 2010 (Defire Report) prepared by engineers Defire (NSW) Pty Ltd (Defire), referred in the Reasons at [28] and [29], which Mr Moon did not consider. This report is found in the Appeal Bundle (AB) Tab 75. Of this report, the landlord submits at [45] of its submissions: … It is possible, but remains untested as this was not a matter pleaded or advanced at trial, that the premises were at all times compliant with the BCA through the existence of the 2010 Defire performance solution. That would also be consistent with the Annual Fire Safety Certificates. In such a case, the premises were never "unfit or materially less fit" for a retail shop.
11. Otherwise, there was no evidence that the premises were unfit for purpose. Rather, a necessary precondition to use required the tenant to obtain relevant consents in the fit out process, a fire engineered solution being available to satisfy fire safety requirements. Such a performance solution "was not supported by the tenant because it would be an additional cost", not because such a solution was unable to be implemented. In this regard the landlord submitted [49]: … Mr Moon's conclusion was that the fire sprinkler system did not comply with the Australian standard AS2118.1-1999, being the standard referenced within the BCA but that the sprinkler system could comply with the performance requirements of the BCA (and thus satisfy the BCA) if a fire engineered solution was adopted.
12. In relation to the submission concerning cl 9.3 of the lease, again the landlord says the appellants did not rely on a breach of this clause in the proceedings at first instance. Consequently, the landlord opposes it being relied on in the appeal.
13. In any event, the existence of a performance solution means that "compliance with the BCA can be achieved by the adoption of a fire engineered solution". The Tribunal found in its reasons at [153] that the appellants would have been able to undertake a fit out by use of such a solution, a matter consistent with Mr Moon's evidence. Consequently, the landlord said in its reply submissions at [55] that the "existence of a performance solution meant that the premises could be fitted out" and that "[i]t cannot be said, in light of these findings, which were open on the evidence before the Tribunal, that the building was not in a sound structural condition".
14. Further, even if there was a breach in the manner contended for, the appellants were still able to use the premises for the purpose of conducting their hair and beauty services and were able to fit out the premises by adoption of a performance solution. The landlord's conduct, "in maintaining the [tenant] was responsible for obtaining a performance solution (and paying costs of same) was not repudiatory. This was because, on Mr Moon's evidence, any fit out of the premises would have required a performance solution in order to achieve compliance with the BCA. Clauses 7.2, 7.3 and 7.8 of the lease make plain that the tenant was responsible for these costs.
15. As to when discussions concerning when a fire engineered solution commenced, the landlord says this was before 13 September 2017, the relevant correspondence being referred to in the Reasons at [23], the appellants' acknowledgement of this solution recorded in the Reasons at [25] and that the solution was not the tenant's preferred solution recorded in the Reasons at [34]. The landlord says that the appellants did not advance an argument in the proceedings at first instance that the tenant was entitled to terminate the lease on the basis that the landlord was responsible for and refused to pay for a performance solution nor was that identified as a basis for termination in the termination notice.
16. Finally, the landlord submits the Tribunal did not and could not conclude the tenant was responsible for rectifying any alleged inadequacy of the fire sprinkler system. Rather, the Tribunal found the existence of a performance solution meant the premises could be fitted out and that "it was incumbent on the [tenant] in accordance with the terms of the lease to undertake that fit out". The obligation to carry out its fit out was acknowledged by Mr Zhu.

Appellants' reply submissions

1. In reply, the appellants submitted that there was no fire engineered solution actually available. The language used in the landlord's submissions was that a fire engineered solution "could" be prepared and/or "could" be satisfactory and that such a solution was "hypothetically available" or "would have been available". The appellants say in fact "no performance solution existed even in draft prior to 13 September 2017 when the Lease was terminated for repudiation".
2. Further, even if a performance solution did exist, it was for the landlord to rectify the breach. The landlord could not "avoid a finding a breach because at some indeterminate time in the future there was (let it be assumed) a real possibility that a performance solution could be developed, finalised, certified by a principal certifying authority (PCA) and fully implemented in an effective way". There was no obligation on the tenant to "mitigate its loss" by carrying out work to rectify the landlord's breach. The obligation to remedy the deficiency in respect of the fire safety system that existed at the commencement of the lease remained on the landlord, whether by carrying out works by replacing the pumps or providing a "complying performance solution".
3. The obligations on the tenant in respect to carrying out its fit out did not affect this situation. The non-compliance of the fire system was unrelated to the fit out. In this regard the appellants, in their reply submissions at [15] referred to the evidence of Mr Moon to the effect that "both pumps in the Building and their associated water supplies were incapable of satisfying the "minimum requirements" for Shop 7, even if "an open plan layout".
4. As to the landlord's submission that the tenant had cast its claim in terms of the inadequacy of the pumps and did not assert in its termination notice that the landlord was in breach of its obligation to rectify the pumps or implement a fire engineered solution, the appellants rely on the decision in Shepherd v Felt & Textiles of Australia Ltd [1931 HCA 21; (1931) 45 CLR 359, namely that it could rely on any valid ground for termination, even if not known or alleged at the time of termination.

The Tribunal's Reasons

1. A resolution of this appeal first requires a review of the Tribunal's findings of fact and conclusions arising therefrom.

Evidence before the Tribunal

1. The Tribunal had before it evidence concerning the fire safety system for the building generally and the premises, its compliance with relevant standards and the parties' position as to the responsibility to rectify any deficiencies in the base building (prior to any fit out being undertaken).
2. In relation to events prior to the termination notice being issued, the Tribunal records the following: 1. On 18 May 2017, Mr Hajek of Austronics (the hydraulic consultant for the landlord) advised Mr Leung of ProjectAC (the design representative of the tenant coordinating the fit out) that there was "a bit of a hold" because it appeared "the pipework may not be big enough to supply the correct amount of water" for the basement fit out": Reasons at [19]. 2. On 26 June 2017 Mr Hajek advise Mr Leung that "the existing sprinkler pump can't supply enough water … We also need to see if your existing PCI who was looking after the project can sign off on a fire engineered solution, if not we could assist with this, could you please ask the question of your PCI": Reasons at [22]. 3. On 27 June 2000 1217 Mr Hajek advised Mr Leong that while there was "enough water in the existing fire sprinkler tank … the existing pump cannot provide the required flow". Two options were proposed. First was to "upgrade the existing fire sprinkler diesel pump to allow the required new flow". The second option, which Mr Hajek said was the "preferred solution", was to "engage a fire engineer to justify a reduction in the number of heads required to flow via a performance-based fire engineering assessment". Of the first option Mr Hajek said it "will come at great cost to the building owner". As 2 option 2, Mr Hajek said: We are able to assist with Option 2, and the pumps will not require any further work. Option 2 is dependent on whether or not your PCA who has been engaged for shop 7 for the CDC can sign off on performance solutions. Reasons at [23]. 1. Subsequently, on 28 June 2017, Mr Hajek provided a quotation (AB 2 Tab 71) to the tenant for the fire service works to be carried out by his company on behalf of the tenant: Reasons at [24]. The quotation said: Despite the intention of the design team, our scope of work does not provide any guarantee that the proposed fire safety strategies would be accepted by the consent authority or the nominated PCA for peer review. As such the results of the fire engineering process will dictate which fire strategies will be adopted as part of the final engineering report. The proposed report will be prepared under the supposition that there are no other existing or proposed performance solutions applicable to the subject building. 1. By letter dated 29 June 2017, the lawyers for the tenant wrote to the landlord's lawyers advising that the tenant's view was that the existing pump should be upgraded, the cost of which "would form part of the building's outgoings and payable by all tenants". The letter concluded: We note our client is responsible under clause 7.8 for any costs and expenses involved with the adding and relocating fire sprinklers, but the Landlord has obligation to ensure the base building standard for the system is sufficient, supportive and able to sustaining (sic) use by each tenancy and any respective general renovations undertaken. Reasons at [25]. 1. At this time, Mr Hasham (a "strategic consultant" for the tenant) became involved "to try to resolve the issues of the fire sprinklers and pumps": Reasons at [27]. Mr Lou of CI Australia (a consultant for the landlord involved with approval of the tenant's fit out) sent a copy of the Defire Report to Mr Hasham on 3 July 2017. The Defire Report: 1. "documented the findings of the Fire safety engineering assessment undertaken to determine whether the proposed building complies with the relevant performance requirements of the [BCA]; ... 2. found that the design of the building includes areas which do not comply with the deemed-to-satisfy provisions of the BCA"; and 3. recommended "[a]lternative solutions … to overcome these non-compliance issues": Reasons at [28]-[29]. 1. Following a meeting on 30 June 2017, Mr Skotadis (also from CI Australia) sent an email dated 10 July 2017 to Mr Hasham. This email said: Any shortcomings relating to any base building services due to the specific tenant fit out requirements is not the responsibility of the owner to rectify the. This is a tenant specific issue relating to their specific fit out requirements. Reasons at [31]. 1. Correspondence was then exchanged between the lawyers for the parties concerning the alleged non-disclosure of the Defire Report and the building fire safety issues: Reasons at [33]. Correspondence was also sent from Mr Leung to Mr Jackson (also of CI Australia) concerning these issues and the discussions concerning a "proposed performance solution". In that email, Mr Leong said: The cost of the solution is approximately $10,000.00 (client not supporting this option because it is an additional cost for them to spend resolving building existing issues. They also doubted if an alternative fire solution can be found firstly, and secondly, even if a solution was found, there will be additional cost to them to make the solution comply (e.g. fire curtain, firewalls, smoke curtain etc). Reasons at [34]. 1. On 29 August 2017 Mr Skotadis sent an email to Mr Leung in which the landlord offered to assist the tenant by engaging "an independent consultant to review the proposed fit out plans and to cross-reference against the current base building fire safety equipment specifications and limitations" and by the landlord waiving rent "up to the date the report is received: reasons at [35]. This report was expected by 4 September 2017. However, on 12 September 2017 the tenant's lawyer Avantro emailed Mr Skotadis in the following terms: Our client cannot wait any longer for this matter to be resolved. Despite assurances that a consultant report would be ready by Monday, 4 September 2017, it appears that a consultant is only now been engaged for further discussions. Reasons at [37].
3. The termination notice was served on 13 September 2017; Reasons at [40] Inter alia, the termination notice provided: Particulars of Breach Non-disclosure of material facts relating to the existing base building fire services; representations by the age of the premise [sic] will be suitable for the Lessee's intended business; breaches under s62B and s62D of the Retail Leases Act and s18 of the Australian Consumer Law. TAKE NOTICE that the Lessee has relied on the representations of the agent that the premise can be renovated as per the Lessee's intended works conveyed to the agent prior to entering the lease for the premises. TAKE NOTICE that the Lessee is unable to proceed with renovation works due to the building's inadequate fire services to meet the Lessee's intended use of the premise [sic]. The agent and/or Landlord was or should be aware of the issues relating to the building's fire services which were not disclosed to the Lessee. TAKE NOTICE that the Landlord has refused to comply with the Lease in fulfilling its obligations in upgrading the building water pressure system so as to allow the Lessee to proceed with the renovation works. TAKE NOTICE that since the matter was raised to the Landlord, the Landlord has not provided a solution despite numerous requests by the Lessee that time was of the essence and a major concern for the Lessee, that there was substantial losses incurred by the Lessee for the delay. TAKE NOTICE that as you have failed to comply with the Lessee's request to rectify the base building fire service's issued, the Lessee hereby terminates the Lease pursuant to its terms, non-disclosure of facts, and provisions under the Retail Leases Act 1994 and Competition and Consumer Act 2010.
4. Following the termination notice being served, the Tribunal records the following: 1. The landlord "proceeded to investigate the possibility of a fire engineered solution" in conjunction with Advanced Building Approvals Pty Ltd, the private certifying authority for the tenant: Reasons at [40]. 2. On 3 November 2017, Warren Smith provided a report entitled "Hydraulic Assessment of Fire Sprinkler System" (AB 1077). At [43] of the Reasons, the Tribunal recorded the following extract from that report: The system was observed to be designed in accordance with AS2118.1-1999 Ordinary Hazard 3. The hydraulic calculations performed by the consultant showed a system demand of 40.33 l/s at 608.22 kpa flowing 37 heads with an area of 216 m2 located on the ground and lower ground floor levels of the shop. The technical details of the existing pumps including the flow test results and pump curve data were obtained from Innovative Fire who were the original base building contractors. The existing town's main connection and the pump system were found unsuitable to supply the required demand in the tenancy. We confirm that the system would comply if it can be certified in accordance with AS2118.1-2017. For ordinary hazard 3AS2118.1- 1999 requires assistance to provide required design density of discharge over the most unfavourable array of 216 m2. In the current design, this 216 m2 houses 36 sprinklers. These 36 sprinklers will require a large amount of water supply to maintain the required design density of discharge thus making existing town's main supply and the pumps unsuitable. AS2118.1-2017 requires a system to provide required design density of discharge over the most unfavourable array of 18 sprinklers. This reduced the number of sprinklers by around 50% thus considerably reducing the required water supply. Hydraulic calculations using Hyena 6102 was required to confirm the flow and pressure from both scenarios. A study on the alternate solution report by Defire was conducted to get a broader understanding of the scenario and to understand the existing alternate solutions. The study confirmed that the existing report did not mention the use of AS2118.1-2017 in lieu of AS2118.1- 1999 as a performance solution. … A hydraulic calculation was then performed using Hyena 6102 in accordance with AS2118.1-2017. The obtained duty points were found to be below the pump curve and the existing pressure flow details from the town's main connection and the pump system was suitable for the new design. RECOMMENDATIONS We recommend engaging a qualified fire engineer to provide a performance solution to use AS2118.1-2017 in lieu of AS2118.1-1999. The alternative solution will allow the tenancy to use the existing town's main connection and the existing pump system along with the proposed design without further base building upgrades. 1. That report recorded the following "Outcomes": The fire services design in the tenancy is not feasible with AS2118.1-1999. The fire services design in the tenancy is feasible with AS2118.1-2006. Reasons at [39]. 1. Prior to this time, i-Fire had prepared a report on behalf of the landlord dated 26 October 2017. i-Fire had been engaged to provide a performance solution associated with the fire sprinkler system designed as part of the fit out works for Shop 7: Reasons at [44]. In its report, i-Fire said at p 22: Based on the fire engineering analysis above, the proposed performance solution is considered to be acceptable and that fire spread is unlikely based on the proposed sprinkler design for Shop 7 (design based on 18 sprinklers operating simultaneously in lieu of a minimum area of operation of 216 m2 including the provision of additional fire safety features (such as fast response sprinkler heads throughout the shop and imperforate baffles around the internal tenancy stair void). Reasons at [45]. 1. While this report was subsequently modified, a peer review by Red Fire on 6 December 2017 confirmed that the proposed design would meet the "relevant fire safety performance requirements of the BCA to the extent required by the EP&A Regulations". In reaching this conclusion Red Fire "suggested the removal of the comparison between AS2118.1-1999 and AS2118.1- 2006/2017": Reasons at [46]-[47].
5. During this period the parties and their lawyers continued to meet and exchange correspondence concerning "the issues and whether or not [the tenant] would withdraw its notice of termination": Reasons at [49]-[57]. In this regard, the landlord, through its lawyer: 1. maintained "the building as constructed was compliant with AS 1999 which was the applicable standard at the time"; and 2. noted "there was a period thereafter of 5.5 months before a solution based on 2016 standard was developed which satisfied the requirements of the principle certifying authority appointed by the tenant" and that this "solution does not require any additional expense to be incurred by the tenant in relation to the fire sprinkler requirements notwithstanding the intensive number of self-contained consulting rooms required as part of the fit out". Reasons at [52] - see item 3 and 8 in quotation from correspondence.
6. The Tribunal dealt with Mr Moon's evidence at [63] and following. The Reasons record: 1. Mr Moon specialises in the safety, engineering and design of fire system. He had been "involved in an aspect of the fire sprinkler design at the building in July 2016 which noted in 2016 the inadequacy in respect of the existing fire sprinkler pumps" in the following terms: Hydraulic calculations show that the existing diesel pump serving the shop 7 sprinkler system is not capable of providing the required flow rate as such, the diesel pump will need to be upgraded to satisfy the system demand. Alternatively seek the services of a fire engineer to justify the shortfall as part of a performance solution referred to in FS04. Reasons at [64]. 1. In his report of 5 October 2018, Mr Moon focused "on the minimum requirements of the relevant standard at the time of the building's construction as well as in March 2017 when the lease was entered into". His approach was a "liberal approach", which assumed that "all ancillary areas within the premises were to be considered minor and not constituting a high hazard classification": Reasons at [65]. At [66] of the Reasons the Tribunal extracted various parts of his report as follows: 1.2 The focus of my opinion is whether or not the original design of the existing fire sprinkler system satisfies the minimum requirements of Australian Standard AS2118.1-1999 (Automatic Fire Sprinkler Systems-Part one; General Requirements) … This is the reference standard within the Building Code of Australia being the Standard applied at the time of construction of the building and continued to operate as at March 2017 (I'm instructed that the lease of Shop 7 was entered into in March 2017 by my instructor's client). 1.4 I conclude that the existing water supply infrastructure of the fire sprinkler system in the building is inadequate for shop 7. The fire sprinkler system is therefore non-compliant with the Standard. 5.12 In response to question five, What is the Effect, if any, of full height partitioning of an area, on a fire sprinkler system? How, if at all, does this differ from an 'open plan' layout? (a) Internal full-height partitioning of a fire sprinkler protected space a result in requiring additional five sprinklers (and associated pipework) to be installed depending on the location of the internal full-height partition/walls. Typically, it is likely that full-height partitioning will result in the need for additional fire sprinklers (and associated pipework). (b) An 'open plan' layout would typically minimise a number of fire sprinklers (and associated pipework) required because there would be less obstructions to consider for fire sprinkler spacing. .… An open plan configuration is typically the least demanding configuration for a fire sprinkler system including the flow rate requirements of pumps. 5.17 Shop 7 is not capable of being serviced by the pumps. The flow rate of the pumps is not adequate. Neither of the pumps is able to provide the required flow rate of 36.7L/S (required for an open plan layout of Shop 7). 5.21 If Shop 7 was to be partitioned, it is highly likely that it would require additional fire sprinklers to be installed due to the limitations in terms of the fire sprinkler spacing. 5.29 With consideration of the proposed fit out of Shop 7 as a 'beauty and hair salon' with full height walls and partitions, the number of fire sprinklers and the most hydraulically unfavourable area of operation increases to 37 fire sprinkler heads, resulting in a total flow rate requirement of 40.3L/S. 5.34 The fire safety Standard that applied to this building in March 2017 was AS2118.1999 - automatic fire sprinkler system. This was the Standard that was 'referenced' by the Building Code of Australia at the time of construction of the building and it remains a current reference standard as of the date of this report. 5.38 (a) A 'Performance Solution Report' is a fire engineering assessment of a fire safety measure (for example, a construction element, egress requirement or building fire safety system). It is designed to satisfy the 'performance requirements' of the Building Code of Australia (not its 'deemed to satisfy' requirements). (b) If a 'Performance Solution Report' is commissioned, it is typically at the time of project completion or soon after occupation of a building (for example, following identification of defective and/or non-compliant issues by a third party that was not part of the design and construction team). A Performance Solution Report occurs at approximately 5% of workflow cases. 6.2 Based on the results of the hydraulic models in the flow rate test, I conclude that there is a flow rate shortfall of 4.62L/S in the pumps. Given that the pumps cannot provide the required system demand of the as-installed fire sprinkler system in Shop 7, it is my opinion that the existing system as-installed is not compliant, nor will any future alterations to increase the number of fire sprinklers within Shop 7 be compliant. This assumes that the hazard category of a fire sprinkler system is retained as a minimum Ordinary hazard three classification (which includes a beauty/hairdressing salon). 6.3 The as-installed fire sprinkler system for Shop 7 does not comply with the Standard for an ordinary hazard three classification. 1. Having noted at [68] of the Reasons that Fire Safety Statements had been "signed off and sent to the Fire Commission of New South Wales in relation to the active and passive systems referred to in the 2010 Defire report, at [69] and following the Tribunal set out the cross-examination of Mr Moon on this aspect. Mr Moon contended that the information on the "block plan" as to the system demand for water flow rate and pressure was incorrect for the sprinklers installed and that the pump when tested was unable to provide the correct flow rates required for the sprinklers as installed. 2. At [72]-[75] the Tribunal recorded the effect of Mr Moon's evidence in respect of the original sprinkler system and pumps in the following terms: 72 Flowrate is a measure of the volume of water over a period of time. Mr Moon performed two assessments. The first assessment was to determine the actual system demand (rather than simply assuming the veracity of the underlying recorded design as noted on the block plan/plaque. Second a maximum flow rate test. Mr Moon undertook hydraulic modelling to determine the system demand of the existing fire sprinkler system. He did so via the PIPES program. He prepared four separate hydraulic models (for the lower ground and ground floors for both the proposed and existing fire sprinkler system design. The hydraulic model results from the existing sprinkler system (unmodified) indicating the system demand (required flow rate and pressure) of 36.7 L/S & A 579.7 9 kPa. This is significant as it shows a different system demand (significantly higher) from the assumed system demand, that is the amount shown on the block plan and the pump plaque. They recorded the system demand flow rate at 21.8 5L/S (or 1311 L/Min (this figure represents the original system demand flow rate for the building's sprinkler system. 73 Mr Moon concluded that this flow rate representing the fire sprinkler system demand as noted on the block plan and pump plaque is erroneous and insufficient. This information is recorded in the graphs and models prepared by Mr Moon and annexed to his report. It is based on the numerical results of the flow rate test with the system demand plotted for reference to the results from the Flow Rate Test. These graphs and models show the discharge pressure and flow of the pumps which is inclusive of the towns mains water support, and its capacity (or in Mr Moon's opinion the lack of ability) to accommodate for the hydraulically calculated fire sprinkler system demand of the existing fire sprinkler system for the premises. 74 Mr Moon's report shows that this system demand is erroneous. He was cross-examined about this and he confirmed that he had performed an audit of the system demand which demonstrated that the information recorded on the block plan was erroneous. 75 Secondly, Mr Moon's report documented the maximum flow rate capacity of the pump. The results show that the maximum rate achievable for each of the pumps was 32.08 L/S (1,925 L/MIN). This was assessed by the Flow Rate Test which was to run as much water through the pumps to test their capacity. This test was not to plot the system demand points. Rather, it was to look at the flow rate capacity of the pumps. Accordingly Mr Moon concluded that there was a system shortfall when assessing the maximum flow rate capability of the pumps when compared against a hydraulically calculated fire sprinkler system demand. 1. As to a performance solution and Mr Moon's evidence on this topic, the Tribunal recorded the following: 1. Mr Moon stated that "a performance solution is a somewhat atypical occurrence. It occurs in approximately 5% of work locators for the base building (post-construction scenario)": Reasons at [76]. 2. Mr Moon reviewed the i-Fire report, verified by Red Fire, the Tribunal noting "the sources of information which were required in the i-Fire report include the information on the sprinkler block plan which (following from Mr Moon's report) may record an erroneous system demand.": Reasons at [77]. 3. Counsel for the tenant had submitted that: 1. no evidence had been called by the landlord from Red Fire or i-Fire to respond to Mr Moon's evidence, "especially evidence regarding the erroneous system demand information upon which, presumably, all fire system work in the building had been based": Reasons at [78]; and 2. the cross-examination of Mr Moon on this topic was on an "entirely hypothetical basis" and was not a concession that the proposal in November 2017 would be suitable: Reasons at [80]. 1. Finally, in relation to the Annual Fire Safety Statement, Mr Moon gave evidence that the "information inscribed within the block plan" was wrong and any testing done would have been based on "incorrect data". Mr Moon said that the whole building must be assessed on the "worst-case scenario" and that the system demand of 21.85 litres per second upon which the system was originally designed is inadequate based on an audit of Shop 7: Reasons at [81]-[82].
7. In respect of this evidence, in its reasons at [144] and following the Tribunal recorded its "position" concerning the "Pumps in the building and sprinklers in the premises": 1. Mr Moon's evidence was that the pumps in the building are defective and the Annual Fire Safety Statements are incorrect "based on the collection of wrong data relating to the flow system" consequently Mr Moon concluded "the premises is non-compliant with the Standard". Mr Moon was "adamant about the inability of the pumps to service the premises and in his view the building was suspect from a fire safety point of view". Reasons at [144]-[145]. 2. While there was "non-satisfaction by the building of certain BCA requirements relating to fire safety as of 2010" as recorded in the Defire report in 2010, that report made "no mention of the inadequacy of the pumps and the sprinklers": Reasons at [146]. 3. Mr Moon "accepted that a fire performance engineered solution could be a satisfactory result for the occupation of the premises by [the tenant]: Reasons at [147]. 4. While the tenant asserted the pumps in the building were inadequate and did not comply with the BCA requirements, no evidence from any Council or fire authority was produced to support the assertion. The only evidence the Tribunal had that the pumps for the building were inadequate was from Mr Moon: Reasons at [149]-[150].
8. The Tribunal was "not convinced" that that the two propositions were "mutually exclusive", namely that the pumps were inadequate and that the tenant could not undertake its fit out: Reasons at [150]. Rather, there was in fact "a performance engineered solution resolved by [the landlord's] consultants" and "(a)s mentioned in paragraph 43 of the Reasons" there was a recommendation from Warren Smith that an engineer should be engaged to provide a performance solution and that the "alternative solution will allow the tenancy to use the existing town's main connection and the existing pump system along with the proposed design without further base building upgrade": Reasons at [151]. The Tribunal noted the competing views concerning whether the relevant standard that applied to the building was AS2118.1-1999 (as contended by Mr Moon) or whether AS2118.1- 2017 should be applied to the premises (as contended by Warren Smith). As to the use of 2017 Standard, the Tribunal said it "was accepted by peer review by Red Fire and acknowledged by Advanced Building Approvals, the certifier for [the tenant] in conjunction with the suggested performance engineered solution"): Reasons at [152].
9. Having done so, at [153] of the Reasons the Tribunal defined the issues for determination in the proceedings concerning this evidence as follows: TianyD focused on the question whether the building pumps were adequate or not. The Tribunal believes that the real issue is whether in the normal course of events TianyD could conduct its fitout. On the evidence the Tribunal finds that notwithstanding the report from Mr Moon, that TianyD in the normal course of events would have been able to undertake its particular fitout by use of a fire engineered solution.
10. The Tribunal then found: 1. There was no nondisclosure in the 2010 Defire report and no mention in that report "of any alleged failure of the pumps or sprinklers, particularly in relation to Shop 7" although the report did focus "on particular non-compliant issues in the building relating to fire safety and provided recommendations for the building owner to follow, to ensure that the building was compliant with BCA requirements": Reasons at [155]. 2. Mr Zhu, on behalf of the tenant, accepted that the tenant was liable to pay for the costs of its fit out and any costs caused to the building as a result of that fit out: Reasons at [157]. 3. Consequently, upon Warren Smith and Red Fire, on behalf of the landlord, determining a fire engineered solution that could be used by the tenant which solution would "not cause any alterations to the building (thereby possibly invoking clause 7.8(b) of the Lease), any alleged non-compliance was "irrelevant as there were no costs to be incurred". Reasons at [158]. 4. On 29 August 2017, in a communication from Mr Skotadis, the landlord "as a gesture of good faith" offered to "waive the rent up to the date of the report" which was being obtained from its fire engineering consultants: Reasons at [169]. 5. The landlord had "offered to consider a fire engineered solution and ultimately … took responsibility for achieving a fire engineered solution to the problem of the pumps and the sprinklers in order for [the tenant] to obtain approval from the PCA for its fit out and occupation": Reasons at [170]. 6. By a letter from its solicitors dated 5 January 2018 the landlord "offered the performance solution to the sprinklers, and no substantial cost to TianyD and certainly no imposed cost under clause 7.8(b) of the Lease and offered to increase the rent free period substantially to accommodate TianyD's delays": Reasons at [171].
11. Consequently, the Tribunal concluded that it was the tenant and not the landlord which had breached the lease, the tenant failing to proceed with its fit out. At [172] of the Reasons the Tribunal said: I agree with submissions from Ms Avery-Williams that the responsibility to undertake the fit out of the premises lay with TianyD pursuant to clause 7 of the Lease. Whatever problems were thought to be in relation to the pumps in the building, nevertheless there was available as demonstrated by the consultants to Fasako a fire engineered solution to the fit out which TianyD chose not to pursue. Similar to the position taken by Ms News, TianyD continued to blame Fasako for the delay in TianyD undertaking its fitout due to the inadequacy of the pumps. However, the Tribunal finds that Fasako did endeavour to facilitate the Fitout by TianyD through the offers made by Hunt & Hunt and Mr Skotadis. Consequently the Tribunal finds that it was TianyD rather than Fasako that breached the implied term to deny Fasako the bargain or benefit of a five year lease to a tenant of the premises.

Consideration

1. This case involves termination of the lease by the tenant on notice and a claim by the landlord that such notice was not validly given. Each party claims damages asserting the opponent's conduct constituted a breach of the lease.
2. At [153] of the Reasons, the Tribunal said that the real issue in the proceedings was "whether in the normal course of events the [tenant] could conduct its fit out". In our view, this question misstates the issues to be resolved.
3. Rather, the central questions raised in the proceedings at first instance and in this appeal are whether there was a term in the lease requiring the landlord to carry out repairs to the existing fire safety system and, if so, was the tenant entitled to terminate the lease because the landlord had breached that term.
4. In essence the appellants contend that the landlord had a primary obligation to bring the fire safety system in the base building into conformance with relevant fire safety requirements and was obliged to undertake this work at its cost. Any obligations of the tenant arising under cl 7.8 and the carrying out of its fit out did not require it to undertake rectify any existing deficiencies in the fire safety system, the landlord being required to provide to the tenant a building that was structurally sound. The denial of liability to undertake the work or pay for the work meant that the landlord had breached its obligation. The persistent failure to meet this obligation constituted repudiation in the sense used in Koompahtoo. This was so whether the water pumps needed to be upgraded or some alternative engineered fire solution put in place. In short, the landlord was first required to make the building structurally sound, including bringing the building into compliance with relevant fire safety requirements, the liability of the tenant being for alterations made to the compliant building as necessary in consequence of its fit out.
5. The appellants rely on two terms, one implied and one in writing. These are: 1. The non-derogation term which should be implied into the lease; and 2. Clause 9.3 of the lease.
6. These questions raise questions of law for which there is a right of appeal: s 80(2)(b) of the NCAT Act.
7. There is also an issue concerning whether the Tribunal determined relevant facts about the state of the building's compliance with fire safety requirements and, if not, whether we should determine that issue. Leave is required on this aspect: see s 80(2)(b) of the NCAT Act. It may only be granted if an appellant may have suffered a substantial miscarriage of justice: Sch 4 cl 12 of the NACT Act. Collins v Urban [2014] NSWCATAP 17 sets out the general principals applicable to the grant of leave.
8. We have decided that, to the extent necessary, leave to appeal should be granted. Our reasons are as follows.
9. The Tribunal made findings relevant to the question it said was the real issue in dispute. We will return to the question of what was the real issue below. The Tribunal's findings concerned whether the tenant could carry out its fit out in a manner that complied with fire safety requirements by utilising a fire engineered solution rather than upgrading the base building pumps used to supply the existing sprinkler system in the building and whether this constituted a breach by the tenant of an implied term "to do all that was necessary to maintain the benefit of the bargain or promises": Reasons at [178].
10. However, it is unclear from these findings what conclusions the Tribunal reached about whether the building and the premises in its original configuration (at commencement of the lease) complied with fire safety standards or whether, by reason of the inadequate pumps, the building and the premises were non-compliant.
11. On the one hand the Tribunal appears to have accepted Mr Moon's evidence, he being the only expert called by either party, that the pumps were inadequate, the block plan and pump plaque was inaccurate and that any fire certificates issued over the previous years relied on inaccurate information. On the other, there were reports from other fire engineers, not called as witnesses, which provided information about the existing fire engineering design of the building as well as designs for prospective work which it was said the tenant could undertake to fit out the premises in a manner that complied with fire safety requirements: Reasons at [144]- [145] and [150].
12. The appellants say that the premises in their original state did not comply with relevant fire safety standards and, in so far as the Tribunal found to the contrary, such a finding was against the weight of the evidence and that the decision was not fair and equitable.
13. We have been provided with the evidence from the proceedings at first instance, including a transcript of the hearing. Our review of this material is set out below. Having regard to the approach of the Tribunal in defining the issues and finding relevant facts and the uncertainty as to the precise findings that were made, we are satisfied the appellants may have suffered a substantial miscarriage of justice because any findings (in so far as one can be identified from the Reasons) concerning the state of the building at the commencement of the lease was against the weight of evidence or was not fair and equitable.

New matters not available on appeal

1. There is a preliminary issue to be dealt with in connection with the appellants' challenge based on the non-derogation term and cl 9.3.
2. The landlord says these allegations cannot be raised on appeal as they are new arguments that were not advanced in the proceedings at first instance. In the case of the non-derogation term, it is an attempt by the appellants to recast their case on appeal. Further, the alleged defects in the building "ignore the existence of a performance solution" and at best "only sound in damages" and do not "[give] rise to a right to terminate".
3. In response, the appellants rely on the decision of the High Court in Suttor v Gundowda Proprietary Limited [1950] HCA 35; (1950) 81 CLR 418. In referring to the decision of the Privy Council in Connecticut Fire Insurance Co v Kavanagh (1892) AC 473, the Court said at 438: … The circumstances in which an appellate court will entertain a point not raised in the court below are well established. Where a point is not taken in the court below and evidence could have been given there which by any possibility could have prevented the point from succeeding, it cannot be taken afterwards. In Connecticut Fire Insurance Co. v. Kavanagh (1892) AC 473 , Lord Watson, delivering the judgment of the Privy Council, said, "When a question of law is raised for the first time in a court of last resort, upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is not only competent but expedient in the interests of justice, to entertain the plea. The expediency of adopting that course may be doubted, when the plea cannot be disposed of without deciding nice questions of fact, in considering which the court of ultimate review is placed in a much less advantageous position than the courts below." (1892) AC, at p 480.
4. In the proceedings at first instance, the Tribunal recorded that the implied term asserted by the appellants was that the tenant "would be able to use the premises to conduct a retail business and this was an essential term of the lease": see Reasons at [99]. The "Grounds of Cross claim" attached to the appellants' retail lease application recorded the same implied term at paragraph 13, AB Tab 2 (cross claim).
5. On appeal, the non-derogation term was variously expressed as: 1. the landlord must ensure the premises (which includes its fixtures, fittings, plant and equipment) are "fit and/or … safe for occupation and/or use as retail premises", or 2. "that a landlord must not do or allow either on the leased premises or land under the landlord's control, anything inconsistent with the purposes for which the premises are leased" and that such a term would be breached where "the lease is made for a particular purpose, and the landlord's activity or non-activity renders the leased premises 'unfit or materially less fit' for the particular purpose": see grounds 2 and 3(a) of the Notice of Appeal and the appellants' submissions in chief at [35] set out above.
6. The term in the alternative forms asserted in this appeal and the breach are new points not raised in the original proceedings. Accordingly, they can only be raised in this appeal if it arises from "the construction of a document, or upon facts either admitted or proved beyond controversy": per Suttor at 438.
7. In relation to the cl 9.3 argument, this raises a more difficult issue. A breach of this clause was asserted in the application. Also, at first instance, Counsel for the tenant opened the appellants' case concerning termination of the lease relying on a breach of clause 9.3. However, in written submissions filed after the conclusion of the hearing the entitlement to terminate was said to arise under s 11(2) of the RL Act (termination because disclosure statement given to the lessee was incomplete or contained information that at the time it was given was a materially false or misleading nondisclosure) and by reason of the breach of the then asserted implied term: see cross claim AB Tab 2 para 17(d), 27(e),(f) and (n). While cl 9.3 was referenced in the submissions as a term that had been breached, no express submissions were otherwise made that breach of this clause constituted grounds for termination: see AB Tab 172, 174 and 176. On the other hand, the appellants made clear in their reply submissions at first instance that in respect of a breach of cl 9.2(a) the tenant is seeking compensation but did not make a similar statement in respect of cl 9.3: see AB Tab 176 submissions at [71] and [72]. Otherwise, the appellants appear to have relied on a breach of cl 9.3 as supporting both "validation of its termination of the lease by notice dated 13 September 2017" and for "compensation and/damages": AB Tab 176 at [216] and [217].
8. On balance, we are satisfied that cl 9.3 was relied upon by the appellants in the proceedings at first instance and was not a new matter. It was one of the terms relied upon in support of the claims in the termination notice that: 1. The tenant was "unable to proceed with renovation works due to the building's inadequate fire services to meet the [tenant's] intended use of the premise; 2. the landlord had "refused to comply with the lease in fulfilling its obligations in upgrading the building water pressure system so as to allow the [tenant to proceed with the renovation works".
9. Further, having regard to the manner in which the Tribunal expressed the issue for determination at [153] and dealt with that issue at [172], it seems clear the Tribunal did not deal with the effect of this term and its breach either on the issue of termination or damages for breach. In part, this appears to have arisen because of the submissions of the parties and the focus of the parties upon whether or not a fire engineered solution was an available approach in carrying out the fit out as an alternative to upgrading the fire sprinkler system. Be that as it may, reliance on cl 9.3 was not abandoned by the appellants in the proceedings at first instance.
10. In these circumstances, in our view this ground can be pursued in this appeal.

Non- derogation term

1. There appears no dispute concerning the principles applicable in considering whether a term should be implied.
2. As to the test concerning implication of terms found in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 (BP Refinery), the appellants say it has no application in the present case. The non-derogation term is not a "term implied in fact". Rather, it is "a term implied by law as a legal incident of a particular class or category of contract". Reference is made to JD Heydon: Heydon on Contract (2019) at [10.130].
3. The appellants rely on Butt's, Land Law, 7th edition 2017 (Butt) p 355-356 as to the nature of the implied term. The appellants say that such a term is implied into every lease, reference being made to the decision in Hawkesbury Nominees Pty Ltd v Battik Pty Ltd [2000] FCA 185 (Hawkesbury Nominees) (per Hill J at [36] (Gallop J agreeing) and Gyles J at [83]). Consequently, there is no need to satisfy the requirements in BP Refinery as to the implication of a term.
4. Butt, at 355, expresses the non-derogation term in the following way: … the landlord must not do or allow on the leased premises, or on other land under the landlord's control, anything that is inconsistent with the purposes for which the premises are leased, unless the parties have expressly or impliedly agreed otherwise.
5. At 356 the author continues: The scope of the covenant not to derogate is defined by the purpose for which the premises are leased. The covenant is breached where the premises are leased for a particular purpose, and the landlord's activity or non-activity renders the premises "unfit or materially less fit" for the particular purpose. There need not be complete frustration of the intended purpose; the test is whether the premises "for practical purposes" are to be "fairly regarded" as having been rendered unfit. And so there is no breach where the premises remain "reasonably fit for practical purposes" for their intended use even though less fit than before.
6. In Hawkesbury Nominees, Hill J said at [36]: It is trite law that even if not express, (and the lease in the present case contains an express covenant) a covenant for quiet enjoyment is to be implied in a lease. Common sense requires that a landlord not be permitted to "annul his own deed" by interfering with the possession of the tenant: Goldsworthy Mining Ltd v Federal Commissioner of Taxation; O'Keefe & McKenna v Williams [1910] HCA 40; (1910) 11 CLR 171 at 192, 200-201 and 211. So put, the covenant for quiet enjoyment intersects with the covenant which is also to be implied in every lease that the lessor not do anything which would derogate from the grant. The covenant for quiet enjoyment and the implied covenant not to derogate from the grant are, to the extent that they differ, both instances of the general rule in any contract, implied if not expressed that: "neither party shall do anything to destroy the efficiency of the bargain which he has made." (per Griffiths CJ in O'Keefe v Williams at 191).
7. As stated above, the non-derogation term asserted by the appellants in the present case is expressed in the following way: 1. "the landlord must ensure the premises (which includes its fixtures, fittings, plant and equipment) are "fit and/or … safe for occupation and/or use as retail premises", or 2. "that a landlord must not do or allow either on the leased premises or land under the landlord's control, anything inconsistent with the purposes for which the premises are leased" and that such a term would be breached where "the lease is made for a particular purpose, and the landlord's activity or non-activity renders the leased premises 'unfit or materially less fit' for the particular purpose":
8. As to the first form, in our view it amounts to a term that the premises are fit for purpose at the commencement of the lease. Such a term is inconsistent with cl 7.16 which provides: No warranty as to use The Lessor gives no warranty as to the use of which the Premises may be put. The Lessee has entered into this lease with full knowledge of, and subject to, any restriction on the use of the Premises.
9. As stated in Butt at 355 (set out above), in these circumstances there will be no implication in law. Nor, consistent with BP Refinery, will such a term otherwise be implied due to the fact of inconsistency.
10. In relation to the second form, in our view such a term could only be implied and operate in respect of action or inaction of a landlord after grant of the lease. This seems clear from the cases referred to in Butt at 355 and following and the other cases referred to by the appellants in their submissions. These cases talk of conduct of a landlord after commencement of the lease which derogates from the original grant, not circumstances existing at or before commencement. In the present case, the complaint is the state of the building at or before the commencement of the lease and a failure of the landlord at or prior to delivery up of possession, not any conduct of the landlord subsequent to its commencement.
11. Further, the second form is also a term to the effect that the premises are fit for purpose and is similarly inconsistent with cl 7.12.
12. Accordingly, we do not accept there is an implied term in the form asserted and it is unnecessary to decide if there are questions of fact that might otherwise prevent the appellants from raising this point on appeal.

Clause 9.3

1. In relation to this ground, the Appellants rely on the decision in Holus Bolus and say that the deficiency in the fire safety system meant that the building was not structurally sound in breach of cl 9.3.
2. Clause 9.3 of the lease provides as follows: Structural Repair The Lessor must keep the Building in sound structural condition except for structural damage cause by: a) the Lessee; or b) fire, storm, tempest or similar act of nature, riot or similar event following which the Lessor must, subject to its rights under clause 11, promptly repair.
3. "Building" is defined as follows: "Building" means the building known as Chinatown Centre, 405-411 Sussex Street, Sydney of which the Premises is part and which is constructed on the Land.
4. "Premises means: "Premises" mean that part of the Building demised by this lease, the boundaries of which are: a) the internal face of external walls and any internal structural walls of the Building; b) the false ceiling below the internal face of the concrete ceiling; c) the internal face of the concrete floor; d) the centre line of any partitions which separate the Premises from other parts of the Building; and e) the shop line (being the line along which the entrance doors and openings are closed) and includes the fixtures, fittings, plant and equipment of the Lessor.
5. The word "structural" is not defined in the lease.
6. In Holus Bolus Nicholas J considered what was meant by the expression "structural nature". In that case, cl 12.2 of the lease in question imposed an obligation on the landlord in the following terms: The Lessor COVENANTS with the Lessee: ... 12.2 To make all amendments alterations reparations and additions of a structural nature which by virtue of any statute or by-law now or hereafter in force may be required to be done or executed in or upon the demised premises including compliance with any fire notice or order by the Council or relevant authority at any time during the term of the Lease or any holding over thereof.
7. At [31]-[35] his Honour said: 31 The phrase "of a structural nature" is of wide generality. It concentrates the mind upon the condition, state, or quality of the building. It suggests something which is associated with, relates to, or affects the structure considered as a whole. I would respectfully agree with the following statement of Paine J in Di Francesco & Ors v Blantrix Pty Ltd & Ors [2004] NSWLEC 669: "53 Adopting a practical approach to the provisions of cl 4 of Sch 3 of SEPP 60 ... and mindful of observations in cases such as Bondi Diggers and Almado, I consider that the phrase 'structural alterations' refers to work which is substantial, meaning not de minimis or minor and which changes or adds to the form of the fabric of the building in a manner which cannot be regarded as merely decorative. Works that fall within this description cannot be 'non-structural alterations' ..." 32 The cases establish that the determination of the question whether or not, for example, amendments or alterations are of a structural nature, is largely a matter of fact and degree. The court should apply a practical, "common-sense man-of-the-world view". (Wates v Rowland [1952] 2 QB 12, p 23; Brew Bros. Ltd v Snax (Ross) Ltd [1970] 1 QB 612, pp 640, 641.) 33 In my opinion, the question in this case must be determined with regard to the whole of the works to be done rather than to the component parts of the works individually (Brew Bros p 641, 646). This is because necessary compliance with the fire safety standards under the code depends upon the combined effect of completion of the various items required. The defendant's denial of liability turned on a narrow interpretation of the scope of the term "of a structural nature" which, in the circumstances, I find to be wrong. On this issue I reject the defendant's submissions, and accept generally those for the plaintiff. 34 The inescapable conclusion on the evidence is that the works affect, and are directly related to, the fire safe and fire resistant condition of the hotel building. The evidence shows, and I find, that because the building falls short of the required fire safety standards its utility as a place for public access and accommodation as a hotel is compromised. In my assessment, the works, taken as a whole, involve the installation of a system for the compartmentation and containment of fire in the hotel building. By carrying out the works the condition of the building will be amended or changed to a standard which is regarded as essential for the ordinary use and enjoyment of the amenities of a hotel (cf: R v Lowe (1954) 19 LGR (NSW) 345, p 351). Put another way, without completion of these works the structure could not be lawfully used for the purpose for which it was designed, built, and let to the plaintiff. It is relevant, of course, that under the lease the plaintiff is required to use the premises as a hotel, and to keep it open for the provision of liquor and accommodation to members of the public at all reasonable times (cll 9.1, 9.2, 9.7). 35 In short, performance of the works will change the condition of the building from unsafe to safe. Accordingly, in my opinion, the works the subject of the council's letter of 16 June 2011 require the making of amendments and alterations of a structural nature within the meaning of cl 12.2 of the lease.
8. The landlord submitted that the fire sprinkler system was not structural. Reliance was placed on the decision of Alamdo Holdings Pty Ltd v Australian Window Furnishings (NSW) Pty Ltd [2004] NSWSC 487 (Alamdo) at [40]. That case involved the question of whether an asphalt surface was structural. There Barrett J said: 40 Applying the same concepts, maintenance, replacement or repair is "structural" when its purpose and effect are to remedy some "failure on the part of the structure to remain satisfactorily put together". This is, I think, consistent with the approach taken to the meaning of "structural repairs" in relation to buildings as such in cases such as Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] 1 Ch 592 and Advance Fitness Corporation Pty Ltd v Bondi Diggers Memorial & Sporting Club Ltd [1999] NSWSC 264 to which counsel for both parties referred. Reference may also be made to what was said by Balmford J - again in relation to a building - in Carbure Pty Ltd v Brile Pty Ltd [2002] VSC 272: "'the structure' is that part of the total building that supports the loads and stops the building falling down. It should be emphasised that a building may be structurally sound notwithstanding that it shows signs of movement; as by the opening of cracks. Unless such cracks indicate a real and present threat to load bearing integrity, of building failure or collapse, they may be treated as simply cosmetic defect - susceptible of patching, painting or other straight-forward repair."
9. In our view, the reliance by the landlord on the passage in Alamdo is to take too narrow a view of what the Court was saying constituted "structural". This is clear from the decision of Barrett J at [40]-[42]. It is also clear from the decision on appeal of the Court of Appeal: Alamdo Holdings Pty. Limited v. Australian Window Furnishings (NSW) Pty. Ltd. & Anor. [2006] NSWCA 224 (Alambo Appeal) per Hodgson JA at [39]-[40] (Basten JA agreeing at [117] and McClellan CJ agreeing at CL at [142]) Hodgson JA concluding that structure is not limited to load bearing parts of the building or inter-connectedness of parts.
10. At [41] of Alamdo, Barrett J referred to the decision of the full Court of the Supreme Court of South Australia in J F Hillam Pty Ltd v Mooney (1988) 48 SASR 381 (JF Hillam). There, when considering whether the restoration of the marblesheen swimming pool surface finish was a "major repair of a structural nature", King CJ (with whom Jacobs and von Doussa JJ said at 387: "The swimming pools were undoubtedly part of the structure of the premises. The marblesheen which rendered them usable as swimming pools by providing an appropriate surface must be regarded, to my mind, as part of the structure. The repair or replacement of that marblesheen is therefore a repair of a structural nature."
11. That is, a surface finish that had deteriorated and rendered the pool unusable (although apparently not liable to collapse) was a repair "of a structural nature".
12. In Advanced Fitness v Bondi Diggers [1999] NSWSC 264, Austin J had to consider obligations under a sub-lease to carry out repairs of a "structural nature". There, in connection with the need to do work in compliance with a fire safety notice issued by the local Council, his Honour said at [108]: … The distinction between structural and non-structural repairs requires the Court to make a practical judgment as to whether the work, having regard to its nature and extent, interferes with or alters the framework or structure of the building. Older case law, referred to by Jenkins LJ in [Grenada Theatres Ltd v Freehold Investments (Leytonstone) Ltd [1959] 2 All ER 176] at page 181, tended to describe all non-structural work as 'decorative', but the modern connotation of that word may be too limited to allow it any continuing utility. Having particular regard to their extent, my opinion is that works in the Howse Report include a structural element, particularly as they involve construction of walls and similar sealing structures, and fire doors … .
13. In the present case, the obligation on the landlord is to "keep the building in sound structural condition".
14. Consistent with the view expressed in Holus Bolus and the authorities to which we have referred to above, in our view this obligation would require the landlord to undertake all work necessary to avoid adverse impact by fire in the building on its structural integrity. This obligation would extend to rectifying defects in the fire safety systems of the building which prevented its lawful use or, to adopt the language in JF Hillam, to carry out works necessary to render the building "usable". In this regard, "sound" connotes the concept of being substantially free from flaw, defect, decay or deterioration to the extent that the building or structure is capable of adequately or safely accomplishing the purpose for which it was intended or designed.
15. Seen in this way, the sprinkler system complying with the relevant Australian Standards, which itself suppresses a fire, protects the structure from the impact of fire, and permits the lawful use of the building is properly work necessary to keep the building in a sound structural condition. Certainly, it is not work that could properly be described as decorative.
16. Similarly, the provision of baffling and other physical barriers and carrying out of work alternative to the provision of a complying sprinkler system, as might be required by an alternative fire engineered solution in order to prevents the spread of fire, protect building (and the premises) and permit its lawful use would likewise be work necessary to keep the building in a sound structural condition.
17. A different interpretation of cl 9.3 would mean that if the building could not be lawfully occupied because of inadequate fire safety systems and was susceptible to structural failure in the event of fire due to non-compliance with fire safety requirements, the landlord would have no obligation to provide or repair such systems and the tenant (which itself has no obligation keep the building in a sound structural condition) would have no recourse.
18. A consideration of the landlord's other obligations under cl 9 of the lease does not lead to a different conclusion.
19. Clause 9- the Lessor's covenants, in which cl 9.3 is found, contains two other clauses, cls 9.1 and 9.2. They provide: 9.1 Quiet enjoyment If the Lessee pays the rent and performs the conditions of this lease, then subject to any rights of the Lessor, the Lessee may peacefully and quietly enjoy the Premises without any interruption from the Lessor. 9.2 Maintain Building a) The Lessor must maintain and keep the Building in good order and condition. b) The Lessor is not liable to the Lessee for a breach of this clause because of temporary breakdowns or for interruptions to services unless the Lessor has failed to comply with this covenant within a reasonable time after notice to comply has been given by the Lessee. c) The Lessee is not entitled to terminate the lease due to the Lessor's beach of its obligations under this clause.
20. For present purposes, cl 9.1 is not relevant.
21. Each of cl 9.2 and 9.3 relate the Building, which includes the Premises. Each of these clauses contemplates an obligation on the landlord to maintain the building.
22. The obligations under each clause are continuing, existing at commencement of the lease and continuing until its end. As stated by Dixon J (as he then was) in In Larking v Great Western (Nepean) Gravel Ltd (in Liq) [1940] HCA 37; (1940) 64 CLR 22,at 236: If a covenantor undertakes that he will do a definite act and omits to do it within the time allowed for the purpose, he has broken his covenant finally and his continued failure to do the act is nothing but a failure to remedy his past breach and not the commission of any further breach of his covenant. His duty is not considered as persisting and, so to speak, being for ever renewed until he actually does that which he promised. On the other hand, if his covenant is to maintain a state or condition of affairs, as, for instance, maintaining a building in repair, keeping the insurance of a life on foot, or affording a particular kind of lateral or vertical support to a tenement, then a further breach arises in every successive moment of time during which the state or condition is not as promised, during which, to pursue the examples, the building is out of repair, the life uninsured, or the particular support unprovided.
23. However the obligations are different, with different consequences. One requires maintenance of the building "in good order and condition". One requires maintaining the building in "sound structural condition".
24. As to the first, the landlord is not liable for breach of cl 9.2 for any "temporary breakdowns or for interruptions to services" if rectified in a reasonable time: cl 9.2(b). Further, cl 9.2(c) expressly prevents the tenant terminating for breach.
25. As to the second, under cl 9.3, the landlord must maintain the building in structurally sound condition, there is no similar exclusion of liability for breach of a temporary nature, nor is there an express term preventing termination. Further, under cl 9.3(b), even if the building is rendered structurally unsound because of events for which the landlord is not responsible, such as a fire, the landlord is required to repair the premises promptly unless notice is given under cl 11 that the landlord considers repair is impractical or undesirable. Where notice is given, either party may terminate the lease.
26. The reference to "temporary breakdowns or for interruptions to services" in cl 9.2(b) and the embargo on termination suggests that this obligation under this clause is in relation to maintenance of features of the building that do not affect its structure in a manner to render the building unsound or unable to be lawfully used. This might include repairs required for common toilets and other building services for which the tenant is not otherwise liable under cl 7.10 (tenant's obligation to maintain the Premises). It would extend to obligations to repair what might be described as decorative features of the building and/or to keep in good condition common areas of the building, including floor coverings and painting.
27. This is to be compared with cl 9.3 that has no such embargo and requires the landlord to make the building structurally sound even where that the cause of any defect arises from outside events for which the landlord is not responsible.
28. Seen in this way, our interpretation of these clauses and their operation is consistent with the approach taken by the Court in the cases to which we have referred.
29. Clause 7.8 does not affect this conclusion. This clause provides: 7.8 Not to interfere with services a) The Lessee must not interfere with or overload any of the services that pass through, under or over the Premises and must pay the cost of rectifying any damage which it cause to those services. b) If, as a result of the installation of the Lessee's partitioning or fit out, any change is required to the: 1) sprinkler system; 2) air-conditioning ducting; or 3) any other Building service; the Lessee must pay the cost of those changes.
30. While the tenant has no right to interfere with any services in the building, including the sprinkler system, the tenant is only liable for changes made necessary as a result of the tenant's fit out. However, the clause does not suggest the sprinkler system or fire services fall outside the expression "structural" found in cl 9.3 if a failure or defect in that system would render the building structurally unsound.

Was cl 9.3 breached?

1. Having determined that the landlord's obligations under cl 9.3 to maintain the building in "structural sound condition" required the landlord to maintain the fire safety system including sprinklers in that state, the next question is whether the landlord breached that obligation and, if so, whether there was an entitlement to terminate.
2. It seems clear to us from the evidence set out by the Tribunal and from the Defire Report referred to in the Reasons that the adequacy of the sprinkler system as existed at commencement of the lease, prior to the tenant carrying out any fit out (and therefore the fire safety system of the building) depended upon the pumps supplying the existing sprinkler array in the premises of 36 sprinklers with sufficient water to comply with the requirements of AS 2118.1-1999. In this regard the Defire Report states at para 5.7 (AB Vol 2 p 822): A sprinkler system in accordance with the requirements of specification E1.5 of the BCA and AS2118.1-1999 must be provided throughout the building.
3. It was on this basis that the fire certificates had been issued.
4. It is also clear from the Tribunal's findings and the evidence of Mr Moon to which the Tribunal refers that the pumps supplying the system did not have sufficient flow rate to meet the requirements of AS 2118.1-1999.
5. In any event, during the hearing of the appeal the landlord accepted in submissions that the pumps supplying water to the sprinkler system in the premises had an inadequate flow rate.
6. There is no suggestion in the evidence or any submissions from either party during the appeal that that the premises and the building met fire safety requirements in the absence of a complying sprinkler system. To the contrary, the report of Warren Smith dated 3 November 2017 (AB Tab 109 p 1077-9) makes clear that: 1. the "the current design", housing 36 sprinklers makes "the existing town's main supply and the pumps unsuitable"; and 2. a performance solution could be employed using AS 2118.1-2017 in lieu of AS 2118.1-1999, without upgrading the existing pumps in the base building. That is such a solution could prospectively be implemented.
7. The fact fire certificates had been issued over the years does not displace this conclusion, the only evidence being that the certificates relied on incorrect information on the "block plan and pump plaque" and that the pumps, having been tested by Mr Moon, have an inadequate flow rate to supply the existing sprinkler array.
8. It follows from the above that we are satisfied the fire safety system was defective at the commencement of the tenancy and that this deficiency meant that the premises could not lawfully be occupied and the building was therefore structurally unsound.
9. The landlord submitted that there was available a fire engineered solution which did not require an upgrade to the existing pumps. Rather, the premises could be rendered fire safe by means of carrying out works reducing the need to rely on as many sprinkler heads for fire suppression purposes. That is, the premises could be reconfigured such that the required number of sprinkler heads could be reduced to approximately 18, therefore reducing the required water supply. In this case the landlord said the existing pump system would be adequate for that purpose. This, the landlord submitted, was work to be undertaken by the tenant carrying out its fit out.
10. There was a debate concerning if and when a fire engineered solution became available, a matter to which we will return below. However, what is clear from the above and the documents containing a fire engineered solution to which we have been referred is that such a solution, as an alternative to upgrading the pumping system, would at least require the installation in the premises of "Imperforate baffles of non-combustible and non-shareable construction extending from the underside of the Ground Floor slab to minimum 500 mm below the Lower Ground ceiling … to separate the internal tenancy stair void from the Lower Ground Floor": see eg AB Tab 75 p 1050, Works required- Item 2. That is, the structure of the building would need to be altered.
11. While it can be accepted that this would have been needed for the purpose of carrying out any fit out by the tenant as an alternative to upgrading the water supply, it must also have been a requirement of the building existing at and prior to the commencement of the lease. This is because the existing pumps were unable to provide sufficient water flow to supply the 36 head sprinkler array originally existing in the premises upon which the fire safety system had been designed as recorded in the Defire Report of 2010.
12. It follows that there was an obligation on the landlord to carry out work in order to render the building structurally sound that existed at the commencement of the lease, either by upgrading the existing pumps or by carrying out work in accordance with an alternative fire engineered solution so as to bring the premises into compliance with the relevant fire safety requirements and render the building structurally sound. Its failure to do so constituted a breach of cl 9.3 of the lease.

Was the tenant entitled to terminate the lease?

1. As recognised in the authorities to which we have referred, the obligation to maintain and the work required can vary significantly depending on the nature of the problem requiring rectification or repair. For example, in the context of a fire door with insufficient fire rating, its replacement may be a matter of significance to ensure fire safety, however the work required and cost associated may be relatively small. As such, in the absence of an express right of termination, the circumstances in which the tenant may be entitled terminate the lease for repudiation by reason of the landlord's non-compliance with cl 9.3 will depend on what has occurred.
2. The appellants relied on the decision in Koompahtoo. At [44] the plurality said (citations omitted) The term repudiation is used in different senses. First, it may refer to conduct which evinces an unwillingness or an inability to render substantial performance of the contract. This is sometimes described as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party's obligations. It may be termed renunciation. The test is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it. (In this case, we are not concerned with the issues that arise where the alleged repudiation takes the form of asserting an erroneous interpretation of the contract. Nor are we concerned with questions of inability as distinct from unwillingness.) Secondly, it may refer to any breach of contract which justifies termination by the other party. It will be necessary to return to the matter of classifying such breaches. Campbell J said this was the sense in which he would use the word "repudiation" in his reasons. There may be cases where a failure to perform, even if not a breach of an essential term (as to which more will be said), manifests unwillingness or inability to perform in such circumstances that the other party is entitled to conclude that the contract will not be performed substantially according to its requirements. This overlapping between renunciation and failure of performance may appear conceptually untidy, but unwillingness or inability to perform a contract often is manifested most clearly by the conduct of a party when the time for performance arrives. In contractual renunciation, actions may speak louder than words.
3. The appellants say that the conduct of the parties to be evaluated in determining whether there had been repudiation by the landlord is at and prior to the issue of the termination notice. Consequently, the appellants submit that any post termination offers by the landlord are irrelevant.
4. We agree. A party who has repudiated a contract which is then terminated cannot avoid the termination by subsequently offering performance.
5. However, the issue remains whether the conduct of the landlord entitled the tenant to terminate in the present case.
6. The appellants submit that, up until service of the termination notice, the landlord persistently failed to meet its obligations to upgrade the pumps so as to bring in to compliance the existing sprinkler system. Further, at no time prior to service of the termination notice did the landlord offer to implement any fire engineered solution to overcome the existing deficiencies in the premises. This persistent failure was circumstances of the type referred to by the High Court in Koompahtoo which constituted repudiation by the landlord entitling the tenant to terminate the lease.
7. The appellants relied on the grounds in the termination notice, namely that the landlord refused to fulfil its obligations by "upgrading the building water pressure system" or by providing "a solution". The appellants said that the breach was sufficiently serious to justify termination having regard to the length of time over which requests were made and that the tenant would suffer substantial losses due to the delay of the landlord.
8. Relying on the possibility of a fire engineered solution and a finding of the Tribunal that the tenant was able to fit out the premises without an upgrade to the existing pumps, the landlord submitted: 1. that it could not be said the building was not in a structurally sound condition; and 2. any maintenance by the landlord of a position that the tenant was responsible for obtaining a performance solution and paying the costs of that solution was not repudiatory, Mr Moon accepting in evidence that any fit out of the premises would have required a performance solution.
9. Consequently, it was incumbent upon the tenant to carry out its fit out, an obligation acknowledged by Mr Zhu.
10. For the reasons above, we do not agree the building was structurally sound within the meaning of cl 9.3 of the lease.
11. Further, prior to the termination notice being served, there is evidence that: 1. the tenant requested the pumps to be upgraded and that the tenant was not prepared to incur the additional costs of a fire engineered solution as part of its fit out, estimated at $10,000; 2. the tenant required the landlord to meet its obligation "to ensure the base building standard for the [sprinkler system] is sufficient, supportive and able to [sustain] used by a tenancy and any respective general renovations undertaken" 3. the landlord made clear it would not upgrade the pumps; and 4. while the landlord's consultant, Mr Hajek, had offered to provide for consultancy services to the tenant to develop a fire engineered solution, there was no "guarantee that any proposed fire safety strategies would be accepted by the consent authority or the nominated PCA for peer review" on the basis that the costs of that work would be borne by the tenant. 5. negotiations on the subject matter had continued for at least 4 months prior to the termination notice being served, Mr Hajek having identified in May/June 2017 than "the existing sprinkler pump can't supply enough water", the landlord maintaining its position that it would not upgrade the water pumps and that any shortcomings relating to the base building arose from the tenant's fit out requirements for which the landlord was not responsible by reason of cl 7.8.
12. In Koompahtoo at [54] (citations omitted) the plurality said: We add that recognition that, at the time a contract is entered into, it may not be possible to say that any breach of a particular term will entitle the other party to terminate, but that some breaches of the term may be serious enough to have that consequence, was taken up in Ankar. Breaches of this kind are sometimes described as "going to the root of the contract", a conclusory description that takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party. Since the corollary of a conclusion that there is no right of termination is likely to be that the party not in default is left to rely upon a right to damages, the adequacy of damages as a remedy may be a material factor in deciding whether the breach goes to the root of the contract.
13. As we said above, not all breaches of cl 9.3 would constitute conduct entitling a tenant to terminate the contract. However in this case they do.
14. Our reasons are as follows.
15. First, in our view, the facts prove that prior to the termination notice being issued there was a persistent failure of the landlord to comply with its obligations under cl 9.3.
16. Secondly, the cost to rectify the problems in the premises at the start of the lease may not have been significant, it being unclear what was the cost to replace the pumps and/or what was the extent of work required and its cost if a fire engineered solution was adopted for the existing premises. However, as part of carrying out its fit out, the tenant was not obliged to make good defects for which the landlord was responsible. Rather, it was entitled to have the landlord comply with its obligation to keep the building in sound structural condition and provide a base building complying with relevant fire standards.
17. Thirdly, the breach of cl 9.3, particularly in the context of fire safety, is significant.
18. Fourthly, as any works carried out to make the building comply may have an impact on the premises as a whole and other occupants of the building, even if reduced demand is placed on the existing pumps in any reconfigured fire sprinkler situation arising from the fit out. The requirement for the tenant to disclose any existing non-compliance issues in respect of the building to the local approval authority and the potential for a tenant to be responsible for any works arising therefrom make the availability of damages for breach an inadequate remedy in the present circumstances.
19. It follows that while we accept cl 9.3 is an intermediate or innominate term, in our view the breach was sufficiently serious to justify the termination notice. The termination notice was validly issued. The lease was therefore terminated on 13 September 2017.
20. Consequently, the Tribunal was in error in determining the lease had not been validly terminated in September 2017 and the orders made 17 October 2019 should be set aside.
21. Having regard to the orders sought in this appeal, pursuant to s 72(1)(f)(iii) of the RL Act, we will make a declaration in favour of the appellants that the lease has been validly terminated by the tenant.
22. Otherwise, as there are issues of damages which remain undetermined, the proceedings should be remitted to the Tribunal to assess damages (including the landlord's entitlements, if any, upon termination). On remittal, the proceedings may be dealt with by the Tribunal as originally constituted or by an alternative Member.

Costs

1. The appellants seek costs of the proceedings at first instance and the appeal.
2. The amount claimed or in dispute in the proceedings at first instance in both applications was greater than $30,000. Consequently, r 38 of the Civil and Administrative Tribunal Rules, 2014 (NSW) applies to those proceedings.
3. However, as both applications are being remitted to determine damages, it is inappropriate to make an order for costs at this time. Consequently, costs of the proceedings at first instance should be determined on remittal. Further, there may be interrelated issues and/or offers of compromise that might affect any cost decision.
4. By reason of r 38A, r 38 also applies to the determination of the costs application in this appeal.
5. The amount claimed or in dispute exceeds $30,000, the dispute concerning a challenge to the order for damages made in favour of the respondent and the tenant's own claim for damages arising from the landlord's breach of the lease. Consequently, s 60 of the NCAT Act does not apply and the Tribunal has a general discretion toward cost. Ordinarily, costs should follow the event. See eg Thompson v Chapman [2016] NSWCATAP 6 at [68] and following
6. Because the appellants have been successful, prima facie an order for costs should be made in favour of the appellants, such costs to be as agreed or assessed on an ordinary basis. We will make this order but also make directions to permit the parties to make submissions if either of them contends a different order for costs should be made.

Orders

1. The Appeal Panel makes the following orders: 1. To the extent necessary, leave to appeal is granted, the appeal is allowed and the orders made on 17 October 2019 in applications COM 18/21300 and COM 18/40196 are set aside. 2. In application COM 18/40196 the Appeal Panel declares that on 13 September 2017 TianyD Beauty & Hairdressing Australia Pty Ltd validly terminated the lease dated 24 March 2017 between it and Fasako Pty Ltd. 3. Application COM 18/21300 and application COM 18/40196 are remitted to the Consumer and Commercial Division of the Tribunal to determine: 1. the entitlement of the appellants, if any, to damages or compensation by reason of respondent's breach of the lease dated 24 March 2017; 2. the amounts, if any, due to the respondent under the lease upon termination; and 3. costs of the proceedings, such determination to be in accordance with these reasons of the Appeal Panel and according to law. 1. The Tribunal may be constituted by the Member who made the decision, the subject of this appeal or otherwise as determined on remittal. 2. Subject to any directions of the Tribunal on remittal, the proceedings are to be determined in accordance with the evidence originally filed and the transcript of the original hearing. 3. Subject to order 7, the respondent is to pay the costs of the appellants in respect of this appeal, such costs to be as agreed or assessed on an ordinary basis. 4. Either party may apply for a different costs order to that in order 6 in which case order 6 will cease to have effect and the following directions apply: 1. The applicant for costs (costs applicant) is to file and serve any evidence and submissions on costs within 14 days of the date of publication of these orders; 2. The respondent to the costs application (cost respondent) is to file and serve any evidence and submissions in reply within 14 days of the date of publication of these orders; 3. The costs applicant is to file and serve any submissions in reply within 21 days from the date of publication of these orders; 4. The submissions of the parties are to include submissions about whether an order should be made dispensing with a hearing of the costs application pursuant to s 50(2) of the Civil and Administrative Tribunal Act 2013.

---

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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. Decision last updated: 07 September 2020