Utmission Pty Limited v Crossan & Anor

District Court of NSW|2008-11-24|Before: Mr J

CITATION: Utmission Pty Limited v Crossan & Anor [2009] NSWDC 15 This decision has been amended. Please see the end of the judgment for a list of the amendments.

Verdict for the Plaintiff in the sum of $42,742.15; DECISION: 2. Verdict for the Cross-Defendant on the Cross-Claim; 3. Defendants to pay the Plaintiff's costs; 4. Cross-Claimants are to pay the Cross- Defendant's costs.

CATCHWORDS: ASSIGNMENT OF LEASE - disputed entitlement of lessor to the payment of rent and outgoings under an assigned lease - DAMAGES - whether alleged consequential business losses by a corporation are claimable in cross-claim brought by individual cross-claimants rather than by the corporation of which they are directors

Husher v Husher [1999] HCA 47; 197 CLR 138 CASES CITED: Taroporewalla v Berkery [1983] 3 NSWLR 28 Vella v Wah Lei Investment (Australia) & Ors [2004] NSWSC 748

Utmission Pty Limited (Plaintiff) PARTIES: Sharon Gail Crossan (First Defendant) Matthew Gordon Crossan (Second Defendant)

COUNSEL: Mr J Sheller, Solicitor (Plaintiff) The Defendants appeared in person

SOLICITORS: Staunton & Thompson Lawyers (Plaintiff)

This is an action brought by a lessor against lessees who took an assignment of a lease of commercial premises. The lessor took possession of the premises for alleged breach of the lease and seeks damages for unpaid rent, outgoings and allied expenses. The lessees claim they were not relevantly in breach of the lease at the time the lessor entered and took possession of the premises. The lessees have cross-claimed for alleged business losses claimed to have been incurred as a consequence of the lessor taking possession of the premises.

The Plaintiff, Utmission Pty Limited ["Utmission"] was the registered proprietor of commercial premises situated at 242 Pennant Hills Road, Thornleigh being Folio Identifier 14/263535 ["the premises"]. The Plaintiff was represented in the proceedings by solicitors and counsel.

The Defendants, who are husband and wife, appeared in person and represented themselves in the proceedings. The Defendants are both directors and in effect the proprietors of SMP Motor Group Pty Ltd ["SMP"] which conducted an automotive muffler repair business at the premises.

The following four issues arise for determination:- (a) Were the Defendants liable to the Plaintiff under the assigned lease?

(b) Was there a relevant breach of the lease when the Plaintiff entered and took possession of the premises on 23 October 2007?

(d) Are the Defendants entitled to the amounts claimed in their Amended Cross-Claim, or any part thereof?

Mr Leslie Wright, an officer of the Plaintiff company gave evidence as did the First Defendant Matthew Crossan. The remainder of the evidence was in the form of affidavits and documents.

The Plaintiff company, through an entity known as the Everlast Trust, was the original owner of an automotive muffler repair business known as Midas. In that capacity and for many years the Plaintiff owned land in various locations in the Sydney metropolitan area from which the business of Midas was conducted until the Plaintiff sold its Midas business to a franchising company. When that sale took place the Plaintiff retained ownership of the various sites upon which the franchised Midas businesses were conducted. SMP was one such franchised Midas business.

SMP conducted its franchised Midas business at the Thornleigh premises. A dispute developed between SMP and the owners of the Midas franchise. Through a series of negotiations which are not relevant to here recount, SMP ceased trading as a Midas franchise and thereafter continued to trade under its own name at the premises. In order to enable this to occur the Defendants personally took an assignment of the lease that had formerly been issued to Midas by the Plaintiff.

The terms of that assignment included the obligation by SMP to make monthly payments of rent to the Plaintiff. This was instead of the former arrangement whereby SMP was obliged to pay monies to Midas which included proportions for rent, utilities and outgoings for the property. Historically, Midas in turn accounted to the Plaintiff in respect of such monies. When the assignment took effect this changed the rental arrangements so that the Defendants personally took on the obligation to pay for the rent, utilities and outgoings, such monies being payable directly to the Plaintiff.

In the month in which the changeover occurred whereby the Defendants became assignees of the lease, Midas took the monthly rent payment for April 2006 from the Defendants by means of an existing periodical payment authorisation from the bank account of the Defendants. There is no dispute that Midas did not remit to the Plaintiff the monies it received in this way. This later triggered a 14 day arrears clause in the lease.

This occurred because the parties each derived a different understanding of the characterisation of the payment made to Midas in the changeover month. In the following months the Defendants continued to make payments to the Plaintiff for rent and outgoings but following an overall accounting, the Plaintiff demanded rent for the initial month from the Defendants on account of alleged arrears. The Defendants maintained they were not in arrears with rent payments. The Plaintiff lessor took a different view and ultimately, on 23 October 2007, entered into possession of the premises before the lease had expired and thereafter brought these proceedings claiming damages for rent owing, together with related expenses.

During the course of the hearing the parties were encouraged to try and reach agreement on the factual issues. This occurred with commendable co-operation and had the effect of shortening the hearing and limiting the resultant costs. Except where otherwise noted the facts set out in the ensuing paragraphs were agreed upon during the course of the hearing.

On 27 July 2001, SMP, a company owned by the Defendants Matthew and Sharon Crossan, entered into a licence agreement with Midas to operate a Midas Franchise business at 242 Pennant Hills Road, Thornleigh. The Thornleigh premises were owned by the Plaintiff and were the subject of a lease to Midas.
Effective from 1 December 2002, Midas renewed its lease of the Plaintiff's premises at Thornleigh for a further term of 5 years.

On 13 February 2006, the Office of State Revenue issued a notice of land tax payable for the Plaintiff's property at Thornleigh to Utmission Pty Limited as trustee for the Everlast Trust for the financial year ended 30 June 2006. The relevance of this issue is that the Plaintiff asserts that no tax-free threshold applied to that assessment.

The Defendants dispute that there was no applicable tax threshold for land tax. The Defendants claim that they had no notice that Utmission Pty Limited was a trustee for Everlast Trust. The Defendants claim this status affected the extent of their liability for the payment of outgoings on the property, notably, land tax.

Whilst it is true that the Defendants had no such notice of trustee issues and therefore the effect of this on land tax, in my view nothing turns on this issue. I find that there was no tax-free threshold benefit offset or credit to be applied to the benefit of the Defendants in respect of the premises as the evidence does not show otherwise. In this regard I accept the evidence of Mr Wright.

On 15 February 2006, following a dispute with Midas and the Defendants, SMP and the Defendants entered into a Deed with Midas and with the Plaintiff which had the effect of terminating the franchise agreement between SMP and Midas with effect from 3 April 2006.

On 17 February 2006, Midas wrote to the Plaintiff indicating its intention to terminate the lease by requesting an assignment of the lease of the Thornleigh property to the Defendants. This request was made pursuant to an agreement by which the dispute between SMP and Midas had been resolved.

On 4 March 2006, Midas made payment to the Plaintiff in respect of rent for the Thornleigh property. It did so using funds provided by the Defendants to Midas for this purpose pursuant to the arrangements that subsisted between Midas and the Plaintiff for that purpose.

On an unknown date in March 2006, the Defendants made arrangements for the cancellation of the facility by which rental payments had been made periodically by direct bank debit in favour of Midas in respect of the Thornleigh property.

On 3 April 2006, the franchise agreement between Midas and SMP ended pursuant to the February 2006 agreement that had been reached between Midas and SMP.

On or about 3 April 2006 Midas took its usual monthly periodical payment for rent and outgoings from the bank account of the Defendants without regard to the changed arrangements under the lease.

On 4 April 2006, Midas paid rent for two other premises it rented from the Plaintiff namely, properties at Liverpool and West Ryde, however, it did not pay the Plaintiff any rent due for the Thornleigh property for that month.

On 13 and 18 April 2006, the Defendants made payments to the Plaintiff which in aggregate represented payment of first rent for the Thornleigh property pursuant to the newly assigned lease.

On 2 May 2006, the Defendants paid rent to the Plaintiff for the Thornleigh property.

On about 14 July 2006 the Deed of Assignment of Lease, which assigned the lease from Midas to the Defendants was signed, and it appears, executed.

The Deed of Assignment that created the relationship of lessor and lessee between the Plaintiff and the Defendants took effect from 1 April 2006.

The Plaintiff's position concerning this Deed is that it took retrospective effect on 1 April 2006 notwithstanding that it was not executed until some months later, it appears on 14 July 2006. The Defendants contend that as the Deed of Assignment was not in existence on 1 April 2006 it could not therefore have had any effect as at that date until it was executed in July 2006.

On 24 August 2006, the Transfer of Lease from Midas to the Defendants was executed thereby formally completing the assignment of the lease.

On 11 January 2007, the Office of State Revenue issued a Notice of Land Tax to the Plaintiff in respect of land tax payable for the Thornleigh property for the financial year ended 30 June 2007. Although the Defendants have placed some significance on the fact that the Notice of Land Tax was issued to Utmission Pty Limited as trustee for Everlast Trust, I have found that nothing turns on this fact.

On 7 March 2007, in the course of ventilating the issues that gave rise to the litigation Mr Matthew Crossan, the First Defendant, emailed the solicitor for Plaintiff asserting that Midas had paid rent for April 2006 on behalf of the Defendants. That email queried the land tax calculations that had been disclosed to him.

On 13 March 2007, the solicitor for the Plaintiff wrote to Mr Crossan concerning the rent and land tax threshold issues.

This correspondence crystallised the dispute between the parties.

The Plaintiff asserts that the Defendants did not pay rent, outgoings and related monetary adjustments for the Thornleigh property for the months of September, October and November 2007. The Defendants contend that by reason of the alleged double payment in April 2006 they were not in breach of the lease and they were not in arrears for rent and outgoings for October and November of 2007.

Following the crystallisation of the dispute between the parties the Plaintiff entered and took possession of the premises.

The Plaintiff made a claim on the Defendants for three months unpaid rent and outgoing expenses that related to the entry into possession of the premises.

The Defendants maintained that they had paid the rent for April 2006 twice by means of the direct debit payment taken from their bank account by Midas. Mr Wright, on behalf of the Plaintiff gave evidence that this was not the concern of the Plaintiff but rather, was a matter the Defendants should take up with Midas.

The position of the Defendants concerning outstanding rent and other monies claimed by the Plaintiff was essentially based on the following contentions: (a) A double payment had been made in respect of the rent for April 2006 because Midas received the April monies that were due to be paid to the Plaintiff;

(b) Midas was the agent of the Plaintiff for the receipt of those monies;

(c) The Plaintiff had not passed on to the Defendants the tax-free threshold for land tax liability that the Defendants alleged was the Plaintiff's entitlement.

(d) The Defendants sought to agitate alleged over-payments in respect of outgoings for land tax going back to July 2001.

I now turn to analyse the respective component of the claim and cross-claim.

The Plaintiff proceeded by an Amended Statement of Claim filed in Court on 14 November 2008. The material difference between the Amended Statement of Claim and the Original Statement of Claim filed on 11 April 2008 was as a minor decrease in the amount claimed. There were no other material differences.

The Plaintiff lessor has claimed the amount of $60,170.68 from the Defendants which is comprised of the following elements: (a) Arrears of rent being $30,038.25.

(b) Arrears of outgoings instalments being $4,161.99.

(d) Arrears of shortfall in outgoings to 30 November 2007 being $4,737.37.

(h) Interest at 18% per annum on arrears of rent to 14 November 2008 being:

(i) annual rent calculated from 1 September 2007 being $6,067.50; (ii) outgoings instalments calculated from 1 September 2007 being $840.79; (iii) actual outgoings for 2006 from 1 April 2006 being $1,492.96.

The Defendants disputed the Plaintiff's claims on various bases. The Defence was filed on 6 August 2008 and asserted that the assignment and registration of the lease were delayed in their completion. The Defendants maintain that as such, having made a double payment of rent in April 2006 and having made another payment in May 2006, they were not relevantly in arrears at the time the documents had been executed and registered. The Defendants consequently maintain, on the basis of those payments, that as at the time of the Plaintiff's entry into the premises, they were not in arrears and argue that the Plaintiff wrongfully took possession of the premises.

By a Cross-Claim filed on 4 June 2008, the Defendants initially cross-claimed for claimed losses in the amount of $406,859 comprising the following amounts:- (a) Tax-free threshold in regards to land tax for the period August 2001 to November 2007 $30,996.

(b) Interest calculated at 18% per annum i.e. $18,143.

(d) Unauthorised use of workshop tools and equipment by Lesley Wright on behalf of the Plaintiff $11,000.

(h) Pole sign left in place as required by Mr Wright on behalf of lessor $15,000.

(i) Loss of trade, reputation and goodwill $308,000.

On 17 November 2008, on the second day of the trial, the Defendants/Cross-Claimants sought to file an Amended Cross-Claim which reiterated the above claims, the difference being that the claim for loss of profits was amended to increase the claim for loss of profits from $308,000 to $1,022,034. This amendment had the effect of amending the Cross-Claim to claim total damages of $1,120,893.

At the time the amendments were sought the Defendants/Cross-Claimants were made aware that the proposed amendment was for an amount that exceeded the jurisdictional limit of the District Court for such claims. The Defendants/Cross-Claimants elected to nevertheless proceed rather than seek an adjournment in order to seek to transfer the proceedings to the Supreme Court. Leave was then given to file the Amended Cross-Claim.

The first issue - The liabilities of the Defendants under the assigned lease

The Defendants finalised their negotiations with Midas and the Plaintiff on 15 February 2006. In the following months, namely March and April 2006, Midas received monies for rent and outgoings from the Defendants pursuant to an existing direct debit facility made pursuant to the former arrangements.

I find that the former arrangements, whereby the Defendants paid Midas which in turn paid the Plaintiff, comprised a relationship of agency between the Plaintiff and Midas whereby Midas collected and received monies from the Defendants as the agent of the Plaintiff. The mechanism whereby the agency operated was that the Defendants made payments to Midas and in turn Midas made corresponding payments to the Plaintiff to account for the monies it received from the Defendants.

In my view this indicates that before the lease was assigned by Midas to the Defendants the parties were in a fiduciary relationship and I am satisfied that this was so. Until the lease was formally executed in July/August 2006 and registered subsequently, this meant that when Midas received monies from the Defendants it did so as the agent of Utmission. In my view this is evidenced by the fact that Midas adopted the practice of passing on those monies to the Plaintiff for payment of rent and outgoings in respect of the premises. I am satisfied that this course of dealings was conducted with the full authorisation of Utmission.

Accordingly, I find that when Midas received monies from the Defendants' bank account in March and April 2006 Midas did so as agent for the Plaintiff.

The Defendants remained in possession of the premises as a carry over from the previous lease they had with Midas. Whilst they were in possession of the premises that lease was assigned to them to take effect on 1 April 2006. The Defendants executed a deed embodying the agreement between the parties to that effect. The defendants executed that Deed on 14 July 2006. In doing so I find that they acknowledged the terms and conditions of the lease, including the effective date of the new arrangements, namely 1 April 2006.

The Defendants argue that their obligations under the lease cannot be determined retrospectively. I do not accept that argument. In my view, having negotiated the new arrangements, having remained in possession of the premises and having paid the agreed rent demanded of them in March, April and May of 2006, the Defendants are estopped from denying the terms and the effect of their agreement : See for example, Vella v Wah Lei Investment (Australia) & Ors [2004 NSWSC 748 per Campbell J at [167]-[168].

In my view this position obtains notwithstanding that the Deed was not executed until 14 July 2006 and was not registered until later. The material fact is that the terms of the new arrangements were agreed to by the Defendants and the Defendants continued in possession with payment of rent until arrears ultimately occurred.

I find that the Defendants were bound by the terms of the lease they had assigned to them.

The second issue - Were the Defendants in breach of the lease

I accept the evidence of Mr Wright that from time to time in 2006 and 2007 the Defendants were behind in their obligations to the Plaintiff to pay the monthly rent and outgoings that had accrued pursuant to the terms of the lease.

An additional issue emerged with these arrears in the context of a query that was raised by the Defendants concerning the extent of the land tax payable as an outgoing. I am satisfied that the claim by the Defendants asserting that land tax was not payable under the lease because of a claimed entitlement to the benefit of a tax-free threshold was unfounded and wrong in fact. In this regard I accept the evidence of Mr Wright to the effect that there was no entitlement to a tax-free threshold in respect of land tax relating to the premises. Therefore there was no legitimate basis upon which the Defendants could maintain an entitlement that such a benefit be passed on to them in reduction of the outgoings for which they were otherwise liable under the terms of the lease to which they had agreed.

Accordingly, I find that the claimed set-offs in respect of land tax were not maintainable by the Defendants. In my view it was the concern of the Defendants over these alleged set-offs, the pre-occupation of the Defendants with the fact of the overpayment of the April rent and the related correspondence over these matters, that distracted the Defendants from their obligations under the lease. In my view this caused them to enter into further arrears.

On behalf of the Plaintiff it was submitted that whatever the position with the dispute over the overpayment of the rent for April 2006 this did not provide any justification for the subsequent non-payment of rent for September and October 2007. These arrears caused the Plaintiff to enter and take possession of the premises. In accordance with the terms of the lease, this enabled the Plaintiff to make a legitimate claim for additional rent due for the balance of the period of the lease, namely November 2007.

I therefore find that the Defendants were in breach of the lease when the Plaintiff entered and took possession of the premises on 23 October 2007.

I have found that as at March and April 2006 the Defendants were not in arrears in respect of the payment of rent and outgoings for one month's rental of the premises. This finding has to be reflected in the award of damages to the Plaintiff.

Except for that one qualification, I accept the evidence of Mr Wright to the effect that the Plaintiff's entitlement to damages has been made out as has been claimed. The qualification relates to an offset that is required to be made for the rent for April 2006, which I have found to have been paid to the Plaintiff's agent, Midas.

The Plaintiff's claim for damages is identified as being $60,170.68 including interest. Of this sum $43,884.35 represents rent and outgoings, $7,884.68 represents security and legal expenses incurred under the terms of the lease and $8,401.25 represents interest on the foregoing amounts.

I approach the assessment of the offset in a broad way as the evidence does not permit me to calculate a precise offset in respect of one month of interest and the related outgoings.

Accordingly, doing the best I can on the evidence I reduce the amounts claimed by the Plaintiff for rent, outgoings and interest in the total sum of $52,285.60 by one third, namely $17,428.53 to reflect my finding that the Defendants had paid the rent for April 2006.

Accordingly, I assess the Plaintiff's entitlement to damages as being the difference between the amount of $60,170.68 claimed, and the amount to be offset, namely, $17,428.53, resulting in the sum of $42,742.15.

The damages claimed on the Cross-Claim covered numerous items many of which involved extravagant and inflated claims for loss of profits, fixtures and the other items already listed.

There was no dispute that the alleged losses, including the claim for loss of profits which were the subject of the Cross-Claim, in fact related to the corporate entity SMP and as such these did not vest in the Defendants personally. In these circumstances it is clear that the Cross-Claim must fail because, as individuals, the Defendants cannot bring such a claim on behalf of a corporate entity in the manner they have purported to maintain here. The subject matter of the Cross-Claim is such that it cannot be regarded as being the property of the Defendants so as to ignore a corporate veil or partnership arrangements as is sometimes permitted when assessing the issue of loss of earning capacity in certain claims for damages for personal injury: Husher v Husher [1999] HCA 47; 197 CLR 138; Taroporewalla v Berkery [1983] 3 NSWLR 28. In these circumstances I consider that the Cross-Claim is not competently maintained and I consider that it would be futile to assess damages in such circumstances.

I have found that the Defendants are liable for part of the disputed amounts claimed to be owing under the lease. Accordingly, the Plaintiff's claim succeeds against each Defendant. I have found that the Cross-Claim is without legal foundation in that it has been brought by the Defendants in their own capacity and not in the name of SMP which was the owner of the business which incurred the alleged losses. Accordingly, I have found that the Cross-Claim must fail.

I make the following orders: (a) Verdict and judgment for the Plaintiff in the sum of $42,742.15;

(b) Verdict and judgment for the Cross-Defendant on the Cross-Claim;

(d) The Cross-Claimants are to pay the costs of the Cross-Defendant;

(f) Liberty to apply on 7 days notice if further orders are required.

30/06/2009 - Slip Rule corrections noted on 30 June 2009 - Paragraph(s) Para 68(c) text is replaced with : "The Defendants are to pay the costs of the Plaintiff;"

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