Turvern Pty Ltd v Jemwire Pty Ltd & anor

EMS Quarries Pty Ltd v Beaumont [2001] NSWSC 355 Evans v Collins [2006] NSWSC 427 Geltch v McDonald [2007] NSWSC 1000 Jabetin Pty Ltd v Liquor Administration Board [2005] NSWCA 92; (2005) 63 NSWLR 602 Jegon v Vivian (1871) LR 6 ChApp 742 CASES CITED : Jervis v Tomkinson (1856) 1 H & N 195 Krstic v Brindley [2006] NSWSC 1414 Masters v Garcia [2005] NSWCA 287; (2005) 65 NSWLR 92 Oblift Pty Ltd v Liquor Administration Board [2006] NSWSC 1279 Tsangaris v Gaymark Investments Pty Ltd (1986) 82 FLR 269 Wheatley v Westminster Brymbo Coal Company (1869) LR 9 Eq 538 Zangne Pty Ltd v Cooper [2007] NSWSC 173

Turvern Pty Ltd (plaintiff) PARTIES : Jemwire Pty Ltd (first defendant) Liquor Administration Board (second defendant)

COUNSEL : Mr J M Ireland QC (plaintiff) Mr M J Leeming SC & Ms J K Taylor (first defendant)

Don McDougal Lawyer (plaintiff) SOLICITORS : Deutsch Partners Lawyers P/L (first defendant) I V Knight, Crown Solicitor (second defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EXPEDITION LIST

2005/08 Turvern Pty Ltd v Jemwire Pty Ltd & 1 or JUDGMENT (ex tempore) 1 HIS HONOUR: By summons filed on 25 March 2008, the plaintiff Turvern Pty Ltd, which is the owner of the Turvey Tavern in Wagga Wagga, claims an injunction restraining the first defendant Jemwire Pty Ltd from selling, transferring, assigning, mortgaging, charging or otherwise encumbering or dealing with all or any of the Poker Machine Entitlements presently allocated in respect of the hotelier's licence No 121229, pertaining to the Turvey Tavern, of which Jemwire is the lessee and licensee. Although an injunction is also claimed against the second defendant Liquor Administration Board, to restrain it from considering or determining any application to transfer any of those Poker Machine Entitlements, and the Board has filed a submitting appearance, because the case depends not on any question of jurisdiction of the Board, but on the contractual rights, if any, of the plaintiff, such relief would have been inappropriate and need be considered no further. 2 Jemwire is the lessee of the Turvey Tavern as assignee of Registered Lease 2298529J, originally granted by Turvern to Armcross Pty Limited for a term of 15 years commencing on 7 June 1996 and expiring on 6 June 2011, more than three years hence. Jemwire is also the licensee of the hotel. Allocated in respect of the licence are 15 Poker Machine Entitlements pursuant to the (NSW) Gaming Machines Act 2001. 3 On 11 March 2008, Ms Dixon, on behalf of Jemwire, executed a transfer of one block of three Poker Machine Entitlements in favour of Peter Thomas Ryan, the licensee of the Mt Druitt Inn. That transfer was lodged with the Board for approval and, in accordance with its usual practises, the Board required notice of the application to be given to Turvern. These proceedings were instituted last Tuesday, 25 March 2008, and come on for final hearing only seven days later, today. 4 In Geltch v McDonald [2007] NSWSC 1000, I sought to summarise the essential legal propositions in respect of Poker Machine Entitlements, and dealings with them in the context of leasehold interests in hotels, as they have been expounded by the Court of Appeal in Jabetin Pty Ltd v Liquor Administration Board [2005] NSWCA 92; (2005) 63 NSWLR 602 and Masters v Garcia [2005] NSWCA 287; (2005) 65 NSWLR 92, as follows (at [14]-[19]): [14] First, a Poker Machine Entitlement is a species of property capable of being owned, disposed of and made the subject of a trust.

[15] Secondly, although Poker Machine Entitlements are initially allocated "in respect of the hotelier's licence", they can be dealt with separately from the licence, but only within the legislative framework.

[16] Thirdly, a Poker Machine Entitlement can be transferred, but only from one licence to another.

[17] Fourthly, the persons entitled to transfer a Poker Machine Entitlement are the persons who, for the time being, have a financial interest in the licence. For that purpose, the definition of "financial interest" in s 19(5) is exhaustive, and the mere circumstance that a person is the owner of a hotel does not give that person such a financial interest.

[18] Fifthly, a party who has a financial interest in an hotelier's licence can be bound by contractual obligations not to deal, or to deal in a particular way, with Poker Machine Entitlements allocated in respect of that licence, so long as the obligation is not inconsistent with the scheme of the Act.

[19] Sixthly, at least generally speaking, where a hotel business is operated under a lease from the proprietor of the freehold, those with the relevant financial interest will be the lessees, who will be entitled to transfer the Poker Machine Entitlements during the term of the lease without the consent of the lessor (except where the lease is one that gives the lessor a financial interest in the licence), unless a term of the lease binds the lessee not to deal with the entitlement. However, upon termination of the lease, the licence reverts to the freehold, the lessor is deemed to be the licensee, and the ability to transfer any Poker Machine Entitlements allocated in respect of the licence reverts to the lessor. 5 In the present case it is common ground that Turvern, the lessor, does not have a relevant financial interest in the licence. Rather, it relies on what it contends are contractual obligations binding on Jemwire as the lessee not to deal, or to deal in a particular way, with Poker Machine Entitlements allocated in respect of the licence - although on its case in a rather indirect way, to which I shall come. In particular, it relies on the following covenants in the lease: 4.5 Not deal with licence without consent

Not to make or permit or to suffer to be made any application of whatsoever nature in respect of the licence or the Hotel including but without limiting the generality thereof any application for the transfer removal variation or extension of the licence or for any permit thereunder or endorsement thereof without the prior written consent of the Lessor. ...

Not to do or suffer to be done any act matter or thing in or about the premises whereby the licence may be or become liable to be forfeited or suspended or the renewal thereof refused or in any way imperilled or jeopardised. ...

At all times to manage and conduct the business in a proper businesslike efficient and orderly manner and unless otherwise excused by the Licensing Court or Liquor Administration Board and the Lessor in writing to reside on the premises. 6 It is also germane at this point to observe that the lease contains the following definitions:

'Licence' means the Hotelier's Licence in respect of the Hotel including any permits thereunder or endorsements thereon. ... 'Business' means the lessee's business of whatsoever nature conducted on the premises including the goodwill and the furniture and stock-in-trade contained therein. 7 Accordingly, the issues are, first, whether the application for approval of the proposed transfer of Poker Machine Entitlements is an application in respect of the licence or for transfer or variation of a permit under the licence made without the consent of the lessor, in contravention of covenant 4.5; secondly, whether the application amounts to an act whereby the licence is liable in some way to be jeopardised in contravention of covenant 7.4; and, thirdly, whether the proposal to transfer the Poker Machine Entitlement is a failure to manage and conduct the business in a proper businesslike, efficient and orderly manner, in contravention of covenant 7.7. 8 As to the first of those issues, it is accepted that an application to transfer Poker Machine Entitlements is not per se an application in respect of the licence in respect of which they are allocated. As I sought to explain in Geltch v McDonald (at [32]-[34]), Poker Machine Entitlements are not an endorsement on the licence (as was common ground in this case - inevitably so, given the judgment in Evans v Collins [2006] NSWSC 427). If an application for approval of Poker Machine Entitlements is approved, the licence itself is unaffected. While the Poker Machine Entitlements are, in a sense, an adjunct to the licence, the licence is a permission to sell liquor (when to do so would otherwise be unlawful), not to keep poker machines, the source of the permission to keep poker machines being the authorisation under Gaming Machines Act, s 56, not the liquor licence. Although Poker Machine Entitlements are allocated in respect of a licence, their alienation from a licence does not affect the rights and obligations conferred and imposed by the licence, and thus does not affect the licence. It follows, in my view, that an application for approval for a transfer of a Poker Machine Entitlement under Gaming Machines Act, s 19(2)(a), is not an application in respect of the licence, at least in the absence of an extended definition of "licence". 9 However, Mr J M Ireland QC, for Turvern, puts the case in two ways. First, it was submitted that a poker machine authority under s 56 of the Gaming Machines Act is a permit under the licence, within the extended definition of "licence" in the lease; that such authority will be affected by the application, if granted; and accordingly, that the application is one "in respect of the licence", or for "variation of a permit under the licence", for the purposes of the lease. Secondly, it was put that quite apart from whether or not a s 56 authority is a permit under the licence, because of the relationship between such an authority and the licence, and because a transfer of the Poker Machine Entitlements would result in the extinction of the corresponding s 56 authority, which could be said to be attached to the licence, the application was one "in respect of the licence". 10 Gaming Machines Act, s 56, imposes a requirement on an hotelier who keeps or disposes of a gaming machine to have an authorisation to do so. Relevantly, it provides as follows: 56 Requirement for authorisation to keep or dispose of gaming machines

(1) A hotelier or registered club must not keep or dispose of an approved gaming machine unless: (a) the keeping or disposal of the gaming machine is authorised by the Board, and (b) the hotelier or club complies with the requirements of or under this Act in relation to the keeping or disposal of the gaming machine and with the conditions to which the authorisation is subject.

(2) The Board may, by instrument in writing, authorise a hotelier or registered club to keep or dispose of approved gaming machines. An authorisation to keep approved gaming machines may be varied by the Board from time to time.

11 Thus, while sub-section (1) prohibits and makes it an offence to keep or dispose of a gaming machine unless the keeping or disposal is authorised, sub-section (2) empowers the Board to authorise a hotelier to keep or dispose of such machines and to vary such authorisation from time to time. 12 Section 20(7) provides that if the Board approves the transfer of Poker Machine Entitlements, it is also to vary the authorisation under Pt 5 of both the transferor and transferee to keep approved poker machines. Given that upon a transfer of a block of three poker machines, one would have to be forfeited, the result would be that the authorisations of the transferor would be reduced by three, and those of the transferee would be increased by two. 13 Section 56(2) has the effect that only an hotelier or a registered club can be given a s 56 authorisation, and that is reflected in s 57(1) (which provides for applications for such authorisation or variations of them by an hotelier or registered club). But it does not follow that an authorisation granted under s 56(2) is an authorisation, a permit or anything else "under" the licence held by the hotelier. The licence does not provide for, or authorise, or govern, the issue of authorisations, nor contemplate their existence or their grant. Provision in respect of those matters is made by s 56 and other aspects of Pt 5 of the Gaming Machines Act. A s 56 authorisation is granted under s 56, not under the liquor licence. It is not a permit under the relevant liquor licence. 14 In Zangne Pty Ltd v Cooper [2007] NSWSC 173, White J expressed the view on an interlocutory application, that it was at least seriously arguable (and indeed, prima facie correct) that an authority to keep Poker Machine Entitlements under s 56, given to the holder of an hotelier's licence, could be said to attach to the licence. However, in that case his Honour was concerned with a definition of "licence" which extended its ordinary meaning to include "all permits and authorities attaching thereto". Accordingly, the substance of what his Honour concluded was that, for the purpose of the particular definition of "licence" applicable in that case, a s 56 authority could be said to be an authority attaching to the relevant licence. There is no equivalent definition in this case, the term used being "permit under", which differs in content from "authority attaching to". 15 Accordingly I do not accept that the authorities are "under the license" nor that an application which could ultimately lead to the extinction of a poker machine entitlement is one in respect of the license as defined. 16 Turning to the second issue, Mr Ireland submitted that the extended definition of licence, as including a "permit under the licence", brought a poker machine authority, which would be jeopardised by an application to transfer the corresponding entitlements, within the scope of covenant 7.4. My above conclusion that a poker machine authority is not a permit under the relevant licence disposes of that submission also. 17 I turn then to the third issue, namely the submission that the proposed transfer of the Poker Machine Entitlements amounts to a failure to manage and conduct the business in a proper businesslike, efficient and orderly manner in contravention of covenant 7.7. 18 First, I have already referred to the definition of "business", but it is to be noted that the business is, of course, the lessee's business, and is presumably carried on primarily for the benefit of the lessee. And the definition - in referring to the lessee's business of whatsoever nature - does not convey the sense of a business necessarily fixed in time, but connotes a substantial degree of flexibility about the content of the business. In that respect, the case is different from Oblift Pty Ltd v Liquor Administration Board [2006] NSWSC 1279, in which a covenant "to manage and conduct the said business and to procure that the same is managed and conducted at all times in a proper and orderly manner" was complicated by the absence of any definition for prior reference to "the said business", a lacuna which was to some extent overcome by evidence of the nature of the business at the commencement of the lease. There was no such evidence in the present case. 19 Secondly, the evidence plainly establishes that poker machine revenue comprises a very significant component of the business of the Turvey Tavern. However, the evidence also establishes that there has been a reduction in the revenue derived from poker machines since mid 2007 (when restrictions on smoking in club premises and poker machines areas took effect). The evidence also establishes that there has been a reduction in revenue per machine in the hotel since that time. 20 Thirdly, I accept that the proposed transfer of three Poker Machine Entitlements is part of a plan on the part of the lessee to realise for its own benefit all the Poker Machine Entitlements prior to termination of the lease. 21 Generally speaking, covenants of the type contained in covenant 7.7 are concerned with the manner of conducting a business, rather than with an obligation to conduct it at all [see Tsangaris v Gaymark Investments Pty Ltd (1986) 82 FLR 269; Jervis v Tomkinson (1856) 1 H & N 195; Wheatley v Westminster Brymbo Coal Company (1869) LR 9 Eq 538; Jegon v Vivian (1871) LR 6 Ch App 742; and EMS Quarries Pty Ltd v Beaumont [2001] NSWSC 355, where Windeyer J collects and considers the foregoing cases (at [16]-[22])]. 22 In the context of a hotel lease, such a covenant is also concerned to protect the licence, by ensuring that the business is carried on in a manner which does not attract adverse attention of the licensing authorities and jeopardise its future. Unlike the covenant under consideration in Krstic v Brindley [2006] NSWSC 1414, this covenant imposes no obligation to maintain the business, and unlike that in Oblift v Liquor Administration Board, this covenant does not contain separate obligations to manage and conduct the business simpliciter, as well as to procure that it be managed and conducted in a proper and orderly manner: it is noteworthy that clause 13(f) of the lease in Oblift imposed an obligation "to manage and conduct the said business and to procure that the same is managed and conducted, at all times, in a proper and orderly manner" [emphasis added]. In Oblift, Campbell J was assisted by evidence of the nature of the business at the date of the lease, which included the operation of 14 poker machines, to conclude that it at least seriously arguable that that covenant imposed an obligation to retain 14 poker machines on the premises. But in Oblift, the covenant did not use "businesslike" and "efficient" as criteria. 23 Efficient management of a business can clearly involve a reduction, as well as an increase, in the scale of the undertaking. Here, unlike in Oblift, there is a definition of "business" which, as I have said, seems to contemplate a flexible rather than a fixed state of affairs. Unlike in Oblift, there is no obligation to maintain the business in its current form and scale. The efficient and businesslike management of a business is not inconsistent with the withdrawal of capital, or the sale of income-generating assets for profit, at least where it will be more beneficial for the proprietor to realise the asset for profit than to leave it as an income generating asset. Indeed, in some circumstances, to do so may maximise the profitability of the business. The withdrawal of capital from a business may be an efficiency in the conduct of the business. I can see no basis for concluding that the sale of three Poker Machine Entitlements is a failure to manage and conduct the business in a proper businesslike, efficient and orderly manner. 24 Mr Ireland submitted that if it were to be contended that it was an efficiency to realise the Poker Machine Entitlements rather than to retain them, the defendants bore an onus of making good that proposition and adducing evidence to establish it. However, in a case where a plaintiff is asserting that there has been a breach of the relevant covenant, or that such a breach is threatened, the onus must be on the plaintiff to make good that proposition, including to show that what is proposed would not be an efficiency. I do not decide this case on the basis that it is necessarily a financial efficiency to sell the Poker Machine Entitlements now, and that such a course is a more efficient outcome than retaining them in the business, though it may well be: I decide the case on the basis that it has not been shown to my satisfaction that the course prepared by the defendants, at least in respect of these three Poker Machine Entitlements, is a failure to manage the business in a businesslike and efficient manner. 25 Accordingly, on all three contentions the plaintiff fails. 26 I order that the summons be dismissed with costs. 27 I order that the exhibits be returned. **********

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