Tsaprazis & Ors. v. Goldcrest Properties Pty. Ltd. & Ors. [2000] NSWSC 765

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

NO. 3353 OF 1999 TSAPRAZIS & ORS. V. GOLDCREST PROPERTIES PTY. LTD. & ORS.

1 HIS HONOUR: I am dealing with the question of what, if any, order for costs should be made in proceedings which are to be terminated in circumstances which I will outline.

OUTLINE OF FACTS 2 The background facts to the proceedings are, briefly, as follows. 3 By a lease dated 16 April 1997, the plaintiffs leased from Dernu Pty Ltd a property at Cronulla for three years, from 24 March 1997 to 23 March 2000, with an option for a further three years. The permitted use was as a licenced restaurant and function centre. The rent was $130,000 per annum, with increases of 4 per cent after the first and second year, with a review to market rent at the commencement of the option period. Clauses 7 and 8 of lease were in the following terms: 7.1 The landlord must - 7.1.1 maintain in a state of good condition and serviceable repair the roof, the ceiling, the external walls, and the floors of the property and must fix structural defects; 7.1.2 maintain the property in a structurally sound condition; and 7.1.3 maintain essential services.

7.2 The tenant must otherwise maintain the property in its condition at the commencement date and promptly do repairs needed to keep it in that condition but the tenant does not have to - 7.2.1 alter or improve the property; or 7.2.2 fix structural defects; or 7.2.3 repair fair wear and tear.

7.3 The tenant must also - 7.3.1 reimburse the landlord for the cost of fixing structural damage caused by the tenant, apart from fair wear and tear; 7.3.2 maintain and decorate the shop front if the property has one; and 7.3.3 decorate the inside of the property in the last 3 months of the lease period (however it ends) - 'decorate' here means restoring the surfaces of the property in a style and to a standard of finish originally used e.g. by repainting.

7.4 If an authority requires work to be done on the property and it is structural work or work needed to make the property safe to use then the landlord must do the work unless it is required only because of the way the tenant uses the property. But if it is any other work or is required only because of the way the tenant uses the property then the tenant must do the work.

7.5 If the tenant fails to do any work that the tenant must do the landlord can give the tenant a notice in writing stating what the tenant has failed to do. After the notice is given the tenant must - 7.5.1 do the work immediately if there is an emergency; and 7.5.2 do the work promptly and diligently in any other case. If the tenant does not do the work, the landlord can do it and the tenant must reimburse the landlord for the cost of the work.

7.6 The tenant must not make any structural alterations to the property. Any other alterations require the landlord's consent in writing (but the landlord cannot withhold consent unreasonably).

8.1 The tenant must keep current an insurance policy covering - 8.1.1 liability to the public in an amount not less than the amount stated in item 17 in the schedule (for each accident or event); and 8.1.2 damage or destruction from any cause to all plate glass in the windows and other portions of the property and must produce to the landlord, upon request, the policy and the receipt for the last premium.

8.2 If the property or the building of which it is part is damaged (a term which includes destroyed) - 8.2.1 the tenant is not liable to pay rent, or any amount payable to the landlord in respect of outgoings or other charges, that is attributable to any period during which the property cannot be used under this lease or is inaccessible due to that damage; 8.2.2 if the property is still usable under this lease but its usability is diminished due to the damage, the tenant's liability for rent and any amount in respect of outgoings attributable to any period during which useability is diminished is reduced in proportion to the reduction in usability caused by the damage; 8.2.3 if the landlord notifies the tenant in writing that the landlord considers that the damage is such as to make its repair impracticable or undesirable, the landlord or the tenant can terminate this lease by giving not less than 7 days notice in writing of termination to the other and no compensation is payable in respect of that termination; 8.2.4 if the landlord fails to repair the damage within a reas nable time after the tenant requests the landlord to do so the tenant can terminate this lease by giving not less than 7 days notice in writing of termination to the landlord; and 8.2.5 nothing in clause 8.2 affects any right of the landlord to recover damages from the tenant in respect of an damage or destruction to which the clause a lies. 4 On 29 May 1998, the first defendant, Goldcrest Properties Pty Ltd, contracted to purchase the property from Dernu Pty Ltd, and this purchase was completed in about September 1998. In about late September 1998, the directors of Goldcrest went to the premises and spoke to the plaintiff. There was some discussion then of water ingress, but there appears to be a dispute as to the precise terms of that discussion. 5 On 8 March 1999, Goldcrest wrote to the plaintiffs, advising that the rent for the next year would be $140,608 per annum, and that, on the basis of advice from the valuers, they expected that the market rent for the year commending March 2000 would be around $200,000. 6 On 13 April 1999, a letter was written on behalf of the plaintiffs to Goldcrest, referring to clause 7.1 of the lease, advising to the effect that "water from the roof is leaking into the premises...and causing us damage", and requesting Goldcrest to undertake necessary repair works. 7 Goldcrest replied by letter dated 28 April 1999, asserting that the plaintiffs' letters was the first communication about water problems, and asking the plaintiffs to "advise the problems and when and how the problems developed". 8 On 30 April 1999, the plaintiffs replied, suggesting that Goldcrest undertake an inspection. This reply also advised that a drain at the back of the property appeared to be blocked, resulting in overflow and damage to the premises. 9 Goldcrest arranged for an inspection by an architect, Mr Sarlos; and Mr Sarlos made a report dated 13 May 1999, dealing with the problems that he found and suggesting that corrective work was required. This report referred to roof problems, including possible roof penetration by air conditioning services, staining to function centre walls due to minor leaks, and also to drainage problems. The report stated that it was a preliminary assessment only. 10 It appears that there was some small items of work done, for example, by an electrician, but no work was done in relation to the roof. 11 On 1 July 1999, the Workcover Authority of New South Wales served a notice on Goldcrest, requiring it on or before 6 August 1999 to provide permanent positive means to prevent water entering the entire premises, which had been made available to persons as a place of work. 12 On 19 July 1999, Goldcrest served on the plaintiffs a notice under clause 8.2 of the lease in the following terms: NOTICE PURSUANT TO CLAUSE 8.2 OF THE LEASE BETWEEN GOLDCREST PROPERTIES PTY LIMITED AND GREGORY TSAPRAZIS, LIAM TSAPRAZIS AND SOPHIA TASOVAC

Land and premises at 107 Gerrale Street, Cronulla ("the premises")

WHEREAS by the Lease dated 16 April. 1997 Dernu Pty, Limited leased the premises to Gregory Tsaprazis, Liam Tsaprazis and Sophia Tasovac ("the tenants")

AND WHEREAS Goldcrest Properties Pty Limited .'the landlord") purchased the premises from Dernu Pty Limited

AND WHEREAS the premises have been damaged by the penetration of water

AND WHEREAS the WorkCover Authority of New South Wales has served a notice on the landlord requiring the landlord, on or before 6 August, 1999 to provided permanent, positive means to prevent water entering the entire premises which have been made available to persons as a place of work.

AND WHEREAS failure to complete with that notice renders of the landlord liable to a penalty pursuant to the Occupational Health and Safety Act

AND WHEREAS the landlord has been advised and considers that the repair of the damage is impracticable or undesirable

Goldcrest Properties Pty Limited hereby gives to Gregory Tsaprazis, Liam Tsaprazis and Sophia Tasovac notice that their Lease of the premises is terminated seven (7) days after service of this notice on them. 13 Thereafter, the solicitors acting for the plaintiffs requested that this notice be withdrawn, and that request was not acceded to. 14 These proceedings were then commenced, and an interlocutory injunction was granted by consent, preventing Goldcrest from re-entering the premises, or interfering with the plaintiffs' use and enjoyment of the premises. The plaintiff also joined as defendants in the proceedings the previous lessor, Dernu, and a director of Dernu, alleging against Dernu breaches of its duty to repair the property. 15 On 3 November 1999, the plaintiffs exercised their option for a further term of three years, commencing in March 2000. 16 On 1 March 2000, Goldcrest entered into a contract to sell the property for $2.8 million. Subsequently, the purchasers under that contract indicated that they would not seek to rely on the notice of termination, and would recognise the plaintiffs' entitlement to a lease pursuant to their exercise of the option. For that reason, it became unnecessary for the plaintiffs to pursue these proceedings against Goldcrest.

ISSUES 17 The plaintiffs' proceedings against the second and third defendants were settled, on the basis that each party in respect of that claim bear its own costs. However, there has not been agreement as to what, if any, order should be made as to costs between the plaintiffs and Goldcrest, and that is the matter which I now have to determine. 18 It is common ground between the parties that the plaintiffs acted reasonably in commencing the proceedings. However, the defendant Goldcrest contends, in effect, that it also acted reasonably in defending the proceedings, and that the principles established by the authorities mean that the appropriate costs orders in circumstances such as these is that each party bear its own costs.

SUBMISSIONS 19 I have been provided with extensive written submissions, and I will not repeat them in this judgment. 20 In substance, Mr Jacobs QC, for the plaintiffs, submitted that there should be an order for costs in the plaintiffs' favour, on the basis that the defendant acted unreasonably and/or on the basis that the plaintiff was almost certain to have succeeded at the final hearing. 21 He supported those matters as justifying an order in the plaintiffs' favour by reference to the cases of South East Queensland Electricity Board v. Australian Telecommunications Commission, unreported, Federal Court of Australia Pincus J, 10.2.89; ASC v. Aust-Home Investments (1993) 44 FCR 194; Re Minister for Immigration and Ethnic Affairs, Ex parte Lai Qin (1997) 186 CLR 622; and One-Tel Limited v DCT 2000 171 ALR 227. 22 He submitted that, for a notice of the kind involved in this case to be valid, the lessor must act reasonably in forming the opinion referred to in the notice: see McIntosh v Dylcote Pty Ltd (1999) NSWSC 230, Bryson J. 23 In this case, Mr Jacobs submitted, Goldcrest plainly acted unreasonably, having regard to the plaintiffs' substantial business carried out on the premises and the expense which the plaintiffs had incurred in building up that business, the lessor's obligation to keep the roof in repair, the fact that their architect's report recommended appropriate corrective work, the circumstance that the true cost of the repairs was in the order of no more than about $100,000, and the circumstance that Goldcrest itself had formed the view that a rent of $200,000 per annum would be reasonable as from March 2000. 24 He submitted that the lessor Goldcrest had an obligation to repair the roof, and keep the roof in repair, and could not rely on its own wrong to terminate the lease: see Alghussein Establishment v Eton College (1988) WLR 589 and TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130. 25 In all those circumstances, he submitted that Goldcrest could not have arrived at a genuine opinion that the premises ought to be demolished. 26 Mr Sanderson for Goldcrest submitted that, in circumstances such as these, the ordinary result was that each party should pay its own costs, unless there were extraordinary circumstances. In this case, there should not be a hypothetical trial of the proceedings or an attempt to come to a view as to the result of a trial, particularly in circumstances where, because of frequent amendments to the plaintiffs' Statement of Claim, the pleadings were not complete, and where there had not been, prior to the sale of the property by Goldcrest, an indication from the plaintiffs that their evidence was complete, so that the proceedings had not reached the stage where the defendants were required to put on all their evidence. 27 He submitted that the question of what were the true problems with the building, and what were their causes, and the consequential questions concerning whose responsibility the various aspects were, would have been matters the subject of full and detailed evidence, which the defendant Goldcrest has not put on. 28 He submitted that, having regard to Mr Sarlos' report, which referred to matters such as staining of walls and various items of consequential damage, as well as roof problems, it was certainly open to Goldcrest reasonably to come to the opinion required by clause 8.2. 29 He submitted that, in any event, the roof problem itself was not a matter in respect of which Goldcrest was in breach. Goldcrest had taken the appropriate measures to inspect the problem when the problem was drawn to its attention, and no breach of Goldcrest's obligation would arise until Goldcrest had had a reasonable opportunity to investigate the problem and decide on an appropriate course. 30 He submitted that, if it were necessary that, in forming the opinion required by 8.2, Goldcrest specifically address the question as to what damage could be relied on and what was required to repair that damage, the Court could not conclude from the material before it that Goldcrest had not addressed that question. Goldcrest's evidence was not complete and the matter was not specifically explored in cross-examination. In any event, Mr Sanderson submitted, persons of the experience of the directors of Goldcrest could reasonably form the view required by clause 8, without necessarily having to separate out individual items and consider the position in relation to those individual items. 31 Mr Sanderson further submitted that, at the time the notice was given, the plaintiffs had not exercised their option, so that, if repairs were undertaken by Goldcrest, it could be the case that the lease would come to an end in less than a year, and Goldcrest would then be left with repaired premises and no tenant. Even accepting the plaintiffs' figure of about $100,000 for necessary repairs, the amount of rent payable for the reminder of the term was substantially less than that. 32 Mr Sanderson also submitted that, in many respects, Goldcrest could reasonably conclude that the only way in which damage could satisfactorily be repaired was by attending to design faults in the building, so that it was not appropriate to draw fine distinctions between damage and design faults. Otherwise, as he put it, the landlord would be drawn into a cycle of temporary repairs.

DECISION 33 In my opinion, as suggested by Burchett, J in One-Tel, there is a distinction to be drawn between a case in which one party effectively surrenders to the other party, and a case in which a supervening event renders the matter moot. In the former case, it is very often appropriate to make an award of costs in favour of the party receiving the effective surrender. In the latter case, I accept that the usual order would be that each party pay its own costs. 34 The present case is certainly closer to the latter situation than the former. The matter has become moot because the defendant, Goldcrest, has entered into a commercial arrangement, which has had the result that the plaintiff has effectively obtained the relief which it sought. It has obtained the relief which it sought, not because of surrender by the defendant, but because a commercial transaction entered into by the defendant for commercial reasons has delivered that result to the plaintiff. 35 I also accept that, in general terms, there should not be a hypothetical trial of the proceedings, and particularly, the Court should not attempt to come to a decision on any seriously disputed question of fact in circumstances where there has not been a full hearing of the proceedings. 36 On the other hand, it seems to me that, where there are substantial costs involved, it may in some cases be appropriate to consider questions of law and questions of interpretation raised by the case, and to come to decisions on those questions; and also, to come to decisions of fact where the facts are clear. 37 However, in considering whether one should come to a decision on facts, it is necessary to keep firmly in mind the matter raised by Mr Sanderson, namely, that the occasion for the defendant completing all its evidence had not arisen at the time when the property was sold. 38 In general terms also, I accept the proposition that there should not be an order for costs in favour of the plaintiffs in this case unless I am satisfied either that the defendant acted unreasonably in conduct bringing about the proceedings, or that the plaintiff was almost certain to succeed. However, I have come to the conclusion that those conditions are satisfied in this case. 39 Clause 8 only allows termination of the lease where, "the landlord considers that the damage is such as to make the repair impractical or undesirable". 40 In my opinion, clause 8 is only activated by damage occurring during the term of the lease, not damage existing prior to the commencement of the lease. The relevant opinion of the landlord applies only to repair of damage, and considerations of prevention of future damage only arise to the extent that those considerations might make the actual repair of the existing damage impractical or undesirable. Plainly, the opinion cannot be based on what is required because of design faults, again, unless those design faults are such as to make the repair of actual damage impractical or undesirable. 41 Furthermore, in my opinion, it is clear that a landlord cannot rely, in forming its opinion, on damage which is due to that landlord's own breach of covenant, because that would be relying on the landlord's own wrong. 42 I accept Mr Sanderson's submission that there was no breach by Goldcrest of the covenant in relation to structural repairs, until it had notice of the need for such repairs and a reasonable time to investigate and carry out such repairs. 43 I accept also that, having regard to the state of the evidence, I cannot make a finding that clear notice was given to Goldcrest of the need for structural repairs prior to the letter of April 1999. I accept also that damage to the roof, which occurred otherwise than by Goldcrest's own breach, could be a basis for a notice, even though Goldcrest would have an obligation to repair that damage. 44 However, when one looks at the report of Mr Sarlos, together with the Workcover notice, on which Goldcrest's opinion was based, it is apparent that most of the substantial items in the report are matters which cannot of themselves base the opinion required by clause 8.2. For example, the report refers to complex roof plumbing with horizontal runs, flashing detail and internal gutters over the conservatory, and drainage functionality, all of which plainly could not qualify as damage. Other items, such as possible roof penetration by air conditioning services and water staining inside the walls, could do so. 45 In my opinion, in order for the lessor to reach the opinion required by clause 8, it would be necessary for it to give some consideration to the question of whether repair of the damage alone was undesirable or impractical. In reaching that opinion, it would be possible to have regard to the circumstance that there were design faults that might result in further damage; but it would be necessary to have regard to the requirement of clause 8.2, that it is only the repair of damage, and not anything else, which can be the basis of the opinion. 46 In my opinion, this is not a technical matter. The power given by clause 8.2 is a power the exercise of which could be extremely detrimental to a tenant, particularly a tenant in the position of the plaintiffs, who have a substantial business running in the premises in respect of which, obviously, a substantial investment had been made. 47 In my opinion, on the evidence led by Goldcrest, it is plain that the lessor did not give consideration to what was damage within the clause on which the lessor could rely, and as to which an opinion had to be formed that repair was impractical or undesirable. 48 The expression of opinion which they reached is contained in their affidavits, firstly, in paragraph 8 of Mr Brand's affidavit which as admitted is in the following terms, and secondly, in paragraph 10 of the affidavit of Mr Jain. BRAND: 8. After discussions with Peter Sarlos as to the extent of repairs required I formed the view that it was impracticable or undesirable to carryo ut further repairs to the building. Annexed hereto and marked "A: is a copy of a report from Mr. Sarlos dated 13 May 1999. That report set out the matters and that require immediate attention. Because of the age of the building and the nature of the problems that are developing, it is apparent that the building will require frequent repairs. It is impossible at this stage to assess what those repairs may be and what the cost of those repairs will be.

JAIN: 10. I have formed the express view that it is impracticable or undesirable to repair the roof due to the extent of the work required and the potential costs and problems which may be uncovered once work commences. I have been advised by Mr. Peter Sarlos that the building is in a poor state of repair. He has informed me that the nature of the damage is typical of buildings of this age and type of constructed in, and that it is like that occurred damage unconnected with the present problems may develop and that those problems will require frequent repairs of unknown cost. For that reason I considered that it is undesirable and impracticable to continue piecemeal repairs to the building. 49 The nature of the problems of the building is also set out at some length in an affidavit of Mr Sarlos, which goes beyond his report and which is based, in part, on an inspection made after the notice was given. 50 On the basis of this evidence and of what was said in cross-examination as to the basis of the opinion, in my opinion there is no realistic possibility that further evidence from Goldcrest could overcome what, in my opinion, is a fatal flaw in Goldcrest's case. In my opinion, it is clear that what the directors of Goldcrest did was to take a view as to the economics of dealing with the problems of the building generally, without doing what they were required to do by the clause, namely, focus on what were truly items of damage within the clause, and consider what was involved in relation to repair of that damage. 51 For those reasons, in my opinion, this is one of the rare cases where, without a full hearing and indeed without the defendant's evidence being fully completed, it is possible to come to the conclusion that the defendant Goldcrest acted unreasonably in its conduct before the commencement of the proceedings, and also that the plaintiff would almost certainly have succeeded at a final hearing.

EXTENT OF COSTS 52 Mr Jacobs submitted that I should make an order ensuring that Goldcrest paid all the costs of the plaintiffs, including those costs which the plaintiff incurred in pursuing the second and third defendants. 53 Mr Sanderson submitted that, on the contrary, whatever was the result as between the plaintiffs and Goldcrest in the case generally, the plaintiffs should pay Goldcrest's costs in so far as they had been increased by the joinder of the second and third defendants. He also submitted that the plaintiffs should not be awarded costs for senior counsel in respect of directions hearings. 54 Mr Jacobs submitted that the joinder of the second and third defendant was prompted by Goldcrest's attitude that any problems with the roof were the responsibility of Dernu; and he submitted further that it was appropriate for senior counsel to be involved at earlier stages of the proceedings because of the attempts to have matters referred out to a referee, which Mr Jacobs submitted would have resulted in unreasonable incurring of costs. 55 I am not persuaded that an order for costs should be made in favour of of the plaintiffs in relation to costs incurred by the plaintiffs in pursuing the second and third defendants. I do not think the conduct of Goldcrest was such as to justify that result, particularly in circumstances where I am deciding costs in the absence of a final hearing of the matter. On the other hand, I am not satisfied that it is appropriate to order the plaintiffs to pay costs incurred by Goldcrest occasioned by the joinder of the second and third defendants. 56 On the whole, I am not satisfied that the case justified the involvement of senior counsel, at least until the hearing which took place yesterday and today. 57 So, for all those reasons, the order that I propose is that the first defendant, Goldcrest, pay the plaintiffs costs of the proceedings, but not including costs of senior counsel, except in relation to the hearing yesterday and today. I would add to my oral reasons the explanation that where other work was done by senior counsel, and not duplicated by junior counsel, costs should be allowed at a rate appropriate to an experienced junior counsel. 58 The orders I make are these. 59 I dismiss the Statement of Claim and Cross-claim. 60 I order that the first defendant pay the plaintiffs' costs of the proceedings in so far as they relate to the first defendant, but not extending to the costs of senior counsel, except costs of senior counsel of and incidental to the hearing which took place yesterday and today. 61 The exhibits may be returned after 28 days, if there is no appeal. *********

Last Modified: 09/26/2000 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.