Total Destination Marketing Pty Limited v Horizons Snowy Mountains Pty Limited

Supreme Court of NSW|2011-12-15|Before: Pembroke J

Introduction 1In my decision given on 4 November 2011, [2011] NSWSC 1349, I determined a question of construction of clause 21.5 of the lease between the plaintiff (lessee) and the defendant (lessor). The effect of that decision was that certain breach notices issued by the lessor pursuant to section 133E of the Conveyancing Act 1919 were valid. The primary breach which was the subject of the notices was a breach of the obligation to pay turnover rent. The notices stated, in accordance with section 133E, that subject to any order of the Court under section 133F, the lessor proposed to treat the breach as precluding the lease from entitlement to an option for renewal. The lessee now seeks relief from the consequences of its breach pursuant to section 133F. In other words, notwithstanding that it has no contractual entitlement to do so (because I have concluded that the breach notices are valid), it seeks to invoke the Court's discretion to relieve it from those consequences. If I were to grant the relief which it seeks, this would compel the lessor and lessee to remain in a commercial and contractual relationship as lessor and lessee for a further five years. 2The underlying dispute relates to the contention that the lessee has repeatedly under-declared its "Gross Rooms Revenue" for the purpose of enabling the calculation of turnover rent by the lessor. If all of the figures in contention are accepted, the total revenue that has not been reported by the lessee is $3,460,367. This would result in further turnover rent payable in the sum of $311,433, excluding interest.

Refurbishment Levy 4The lessee has a practice of allocating part of room revenue paid by guests on account of a refurbishment levy in respect of those rooms which the owners have refurbished. The levy is $20 per night per refurbished room. This levy amount has been deducted from Gross Rooms Revenue. Since December 2006 the plaintiff has allocated the total amount of $524,935 to this account. Assuming the turnover threshold (as defined in the lease) is reached, the amount of turnover rent due for this item is $47,244.15 excluding interest. 5Mr Barry, the principal of the lessor, became aware that refurbishment charges had been deducted from Gross Rooms Revenue on 4 September 2010 after he was provided with a profit and loss statement by the lessee. A further instance was revealed to him during an inspection on 1 April 2011. That involved a guest who had been charged $930 for 'Bed And Breakfast Winter', (310 per night), only $660 of which was allocated to room revenue with $20 per night allocated to the refurbishment levy. A number of other recent examples were provided in the evidence.

Bicycle Hire 6The lessee has had a similar practice of deducting an item from Gross Rooms Revenue called bicycle hire. This appears to have been introduced in June 2010. The total revenue involved is $38,905. What happened was that $20 was deducted from room revenue and allocated to bicycle hire. It does not matter why the bicycle hire was introduced. It was said to be because the 2010 ski season was poor. What matters is that bicycle hire was charged in June, July, August and September 2010. The sum of $20 per adult per night was deducted from revenue and the sum allocated to bicycle hire. The total sum deducted from what would otherwise have been Gross Rooms Revenue was $38,905. I should observe there are only seven bicycles available for use.

Cancellation Fees 7The inspection of records which the lessee was able to undertake following my decision on 4 November 2011 also revealed that cancellation fees had not been reported as part of the Gross Rooms Revenue. The evidence by Mr Elliott on behalf of the lessee in relation to this topic was evasive, implausible and sometimes dissembling. He was unwilling to concede that the lessee treated cancellation fees as revenue and insisted that they were held in trust. There was no supporting evidence to corroborate his contention and much evidence that was inconsistent with it. Total cancellation fees in the period December 2006 to November 2011 was $73,650. These fees were not included in Gross Rooms Revenue. If the turnover threshold is reached, the turnover rent payable in respect of this item is $6,620.42 excluding interest.

Amenities Cleaning 8The inspection of the plaintiff's records in November 2011 also revealed that revenue which would otherwise have been included in Gross Rooms Revenue had been allocated to an item described as amenities cleaning. From January 2007 to 8 November 2011 the revenue in this category was approximately $15,000. If the turnover threshold is reached, the additional turnover rent attributable to this item is $1,300. I should observe that there were a number of examples of the contrived manner in which this item was accounted for. They included an invoice which included a nil room charge and an $80 amenities cleaning charge. They also included another invoice for a guest who stayed between 24 and 29 October 2011. Her tax invoice was for $675. The only room revenue recorded was $80 and that was for the first night. On the four subsequent nights (25-29 October), no room revenue was reported. However revenue was allocated to amenities cleaning on each of those nights in the sum of $70. There were other examples in the evidence which I need not repeat.

Bed Split Charge 9The final item which I can deal with briefly was described as bed split charges. The lessee has a practice, apparently recently introduced, of allocating guest revenue on account of a bed split charge. This was achieved by deducting $10 from the Gross Rooms Revenue and allocating that amount to the item described as bed split charge. While this may possibly have made sense on the first night of a stay in certain circumstances, it makes little sense on subsequent nights. In any event, the lessee now concedes that all monies relating to cancellation fees, bed split charges, amenities cleaning, bicycle hire and the refurbishment levy do in fact constitute Gross Rooms Revenue for the purposes of the lease.

The Witnesses 10I should make some observations about the two witnesses. I have to say that Mr Elliott's evidence was evasive and unhelpful in a number of respects. Often he professed to have no knowledge of the lessee's accounting and record-keeping procedures. I would have expected him to have this knowledge. He was, after all, the only witness called for the lessee and has been its protagonist in the dealings with the lessor in relation to this dispute. He sometimes denied the obvious. He was frequently unable or unwilling to answer questions frankly, openly and directly. His evidence in relation to cancellation fees was particularly unimpressive. To a significant extent, his evidence reflected the way in which the lessee appears to have behaved in seeking to avoid or minimise its obligation to pay turnover rent - shifting, sharp and sometimes disingenuous. 11Mr Barry, on the other hand, was straightforward. His evidence was plausible and I have no reason to doubt its veracity. I should add that the relationship between lessor and lessee has deteriorated to the point of threats of violence. There is little trust between Mr Barry and Mr Elliott, something which I do not find surprising in the light of the evidence.

The Exercise of Discretion - Principles 12The exercise of discretion in this case will determine whether the relationship of lessor and lessee should be continued by the Court when the contractual relationship does not require it to continue and the lessor does not wish it to continue. It goes without saying that the relationship of lessor and lessee is not a traditional fiduciary relationship. Nor is the maintenance of mutual trust and confidence an essential prerequisite of such a relationship. The relationship is contractual and is governed by the terms and conditions of the lease. However the terms and conditions of this lease relating to turnover rental make the lessor dependent upon full, accurate and honest reporting by the lessee on a monthly basis. That is a contractual consequence of the terms to which the lessor and lessee have agreed. 13In circumstances where the lessor has reasonable, indeed abundant, grounds to conclude that there has been consistent under-reporting of Gross Rooms Revenue by the lessee, a souring of their relationship is neither surprising nor unexpected. That has clearly happened. Such a deterioration in the relationship between lessor and lessee is a recognised critical factor in the exercise of the discretion to relieve against the consequence of a breach that would otherwise preclude the lessee from entitlement to an option. 14In Butt, Land Law , 6th Edition at 423-424 the author states, in a passage with which I wholly agree: ...the fact that the relationship between the parties has soured and is likely to remain disputatious may not be critical where a tenant seeks relief against forfeiture of the (existing) lease, but it may be critical where a tenant seeks relief against the loss of the right to renew the lease. See also R&J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd (2008) 13 BPR 25,161 at [153]; Capital Projects (Qld ) Pty Ltd v Trust Company of Australia Limited [2008] 2 Qd R 313 at [12]. 15That is this case. To grant to the plaintiff the relief which it seeks would be to compel the defendant to remain for a further five years in a legal and commercial relationship which it has no legal obligation, and no desire, to continue. The words of McLelland CJ in Eq in Best and Less (Leasing) Pty Ltd v Darin Nominees Pty Ltd (1994) NSW Conv R 55-724 at 60,181 are apposite: Not only was there a deliberate breach of clause 15.03 of the lease which could have been avoided with little difficulty but a knowing and continuing deception by the plaintiff of the defendants as to the existence and continuation of that breach. To grant relief would be to compel the defendant to remain for a further five years in a commercial relationship with a company whose executive officers have shown a preparedness to act in such a way towards the defendants.

The Exercise of Discretion - Facts 16In the circumstances that I have explained, the plaintiff has not made out a case for the exercise of the discretion in its favour. I am not satisfied that in relation to turnover rental it has simply made an honest and isolated mistake or series of mistakes. Its behaviour has been consistent, repeated and, to a considerable extent, contrived. 17This is not the occasion to determine on a final basis all issues of construction of the expression Gross Rooms Revenue and whether it applies to every item for which the lessor contends. Nor is it necessary to determine how much turnover rent is, in fact, owed by the lessee to the lessor. However, as I have already mentioned, the lessee has conceded that most of the items in dispute do in fact constitute Gross Rooms Revenue. As to the amounts involved, I should also note that the item relating to bicycle hire in the sum of $38,905.23 has been conceded. There are, in my view, reasonable grounds to conclude that a substantial sum is owing by the lessee to the lessor. More significantly, there is also no doubt that the lessee has, in my view, engaged in a course of conduct designed to avoid or minimise its obligation to pay turnover rent to the lessor. 18The plaintiff now offers to allow a full inspection and audit of its books at its own expense and to pay the turnover rental that is then calculated. This is unpersuasive and, I am afraid to say, lame. It could not restore the necessary trust and will not undo the ill will that the lessee has created by its conduct. It is not without significance that this position has only been reached after two Supreme Court hearings and considerable expense and hardship to the defendant. Nor should it be forgotten that the first issue that brought the parties to court was the insistence by the lessee that the lessor should be restricted in its access to records for the purpose of determining turnover rental. The full extent of the turnover rental due by the lessee to the lessor only began to emerge, and the concessions now made by the lessee were only extracted, under the bright light of litigious controversy. 19I have concluded that the lessee has systematically hindered the lessor from having the benefit of its legal rights. I do not accept its contention that in each case there is an innocent explanation. There is in my view no good reason to relieve the plaintiff from the consequences of its breach and there are sound reasons why to do so would produce injustice and result in the likelihood of further disputation. 20The statutory discretion is entirely general and the onus is on the lessee. For my part, I think that a lessor should only rarely be compelled to remain in a contractual relationship when it has no legal obligation and no wish to do so. Except where the lessee has clearly satisfied its onus, a lessor should, in my view, be entitled to expect that the legal rights of the parties will reflect the terms and conditions of the lease.

Orders 21I refuse the plaintiff's application for relief pursuant to section 133F of the Conveyancing Act . I order the plaintiff to pay the defendant's costs of this hearing. I order the costs of today's hearing and the costs of the hearing on 4 November 2011 to be assessed forthwith. oOo 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: 21 December 2011

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