V K & M R Leong Nominees Pty Ltd v Batur [2003] VSC 17

5. The basic circumstances attending this dispute can readily be sketched. The defendants are the registered proprietors of premises which comprise a shopping centre at Hoppers Crossing. The shopping centre is the subject of a plan of strata subdivision. It comprises 29 lots and common property. Shop 20 is Lot 13 on the plan of strata subdivision. It is a large allotment in comparative terms. It is, and has been for a number of years, given over to the purposes of a supermarket.

8. The defendants gave a lease of Shop 20 by written lease dated 18 June 1993. On 30 July 1999, the plaintiff was assigned the benefit of the lease as tenant. The term expired on 17 June 2001. Shortly prior to that date the parties agreed to vary the terms of the tenancy so as to diminish the monthly rental. Provision at that time was also made for there to be three months' notice of termination of the tenancy, which then became a tenancy from month to month, otherwise on the same terms as the lease.

11. The plaintiff remains in occupation of the premises notwithstanding that it is in substantial arrears of rent and outgoings. The amount presently in arrears exceeds $35,000. By the terms of the lease, the landlord is entitled to re-enter without giving notice once there is default in payment of rental for 14 days or more.

14. The lease contains a covenant of quiet enjoyment. It reads this way:

"The landlord covenants that if the tenant performs and observes the tenant's obligations under this lease, the tenant may occupy and use the premises during the term without any interruption by the landlord or any person lawfully claiming through the landlord."

18. There is clear evidence before me that in early December last year there was discussion between representatives of the plaintiff and the defendants concerning the plaintiff vacating the premises. The plaintiff informed the defendants that it would be vacating the premises by Christmas. That was not the first occasion upon which Mr Leong, for the plaintiff, indicated an intention of vacating the premises. There is evidence that in about November last year he said that the plaintiff could leave at any time, that most of the stock had been packed up, and that any remaining stock could be sent to his brother-in-law, who had a supermarket in Bulleen or Doncaster.

21. There is evidence, next, that on 10 December 2002, the plaintiff having indicated its intention of leaving the premises before Christmas, the defendant entered into a contract to sell the premises and by that contract to give vacant possession, settlement to occur on 10 February this year. The contract having been made, the evidence shows that one of the defendants regularly attended the premises in December and January. During December, nothing was said for the plaintiff to suggest that it would not be vacating the premises. In January, Mr Leong told one of the defendants that the plaintiff could move at any time but probably by 20 January. On 20 January Mr Leong said that the plaintiff needed a further two days to move out. According to the defendants, there was an agreement that the plaintiff vacate by 24 January. On 24 January, however, Mr Leong informed Mr Victor Bulic that his lawyer had told him not to give up the key of the leased premises and that he could stay for another three months.

24. Also before the court is evidence that until mid-January this year the plaintiff, through Mr Leong, consistently said that when it vacated it would pay all the rental that was due; but that, after I had made the interim order last Saturday, the plaintiff changed its position and indicated that it would only vacate the premises if the defendants gave it $20,000 and accepted that the plaintiff was not responsible for any amounts now owing to the defendants.

27. I mention the sequence of events leading up to and immediately subsequent to the making of the interim order last week because not only have they not been contradicted by evidence adduced for the plaintiff, but because they have some relevance to the question whether I should take certain of the allegations now made by the plaintiff at face value - that is, in considering whether the plaintiff has shown that there is a serious issue or issues to be tried, and, if the plaintiff has so satisfied me, then as to the balance of convenience.

30. The plaintiff unarguably being in breach of its obligation to pay rent, the defendants would undoubtedly be entitled to recover possession subject only to the merits of an argument advanced by counsel for the plaintiff. The essence of the argument was that the defendants breached the covenant of quiet enjoyment to which I earlier referred, that damages are recoverable for breach of that covenant, and that a claim for such damages constitutes an equitable set-off against the rent payable.

33. The way in which the plaintiff developed its argument on the facts was unrelated to the demised premises themselves. According to that argument, certain common areas of the shopping centre in the occupation of the body corporate were, throughout the period of the lease and overholding, left in poor repair. Graffiti was daubed on walls and was not removed; pot-holes developed and were not properly repaired; lights failed and were not promptly replaced. Accepting that it was the responsibility of the body corporate to attend to repairs, the plaintiff submitted by counsel that the defendants, as the owner of an allotment comprising a substantial portion of the shopping centre and thus being entitled to over 50% of the shares in the common property, were in a position to ensure that the body corporate would attend to repairs, to removing the graffiti, and so on, and that the defendants must be taken to have done nothing to cause that work to be done.

36. There are, I think, some strange features of the plaintiff's evidence concerning the breach alleged. According to Mr Leong's first affidavit, sworn 1 February this year, the need for repairs and cleaning was observed when the plaintiff took over the premises, that is, in August 1999. According to that affidavit, complaints were made in February and May 2001. According to Mr Leong's second affidavit, sworn 6 February, complaints were made in August and September 1999, in the later part of 1999, on various occasions in 2000, and in 2001; also, I think, (see paragraph 10 of the affidavit) in early 2002. Notwithstanding this alleged litany of complaint, however, the plaintiff's business went from being one that was unprofitable in its first year to one which was profitable in its second year of operation. Why that should happen, if the condition of the common areas was no better in 2000 and 2001 than it had been in 1999, is something of a mystery. The plaintiff relied upon the fact that the profitability of the business had declined in the last financial year. In fact, turnover in the last two financial years was almost identical and the profit scarcely varied. But accepting that there was some downturn of business, why the graffiti, an unfilled pot-hole and a broken light would have that effect in the third year of operation of the business rather than in the first or second year is not easy to understand. I mention these anomalies, as it seems to me they are, because the plaintiff's claim depends on there being a serious issue to be tried, and an aspect of that question is whether the plaintiff has made out the smell of a case that it suffered any loss, let alone something that could be described as a substantial infringement of its right of quiet enjoyment, upon the material submitted to the court.

39. The first matter agitated today was whether it could be open to the plaintiff to set off against the claim for rent the claim which the plaintiff says it has for damages for breach of the covenant of quiet enjoyment. The lease provides that the tenant shall pay the rent free of all deductions to the landlord: see Clause 2.1.1. That clause applied equally in the period of overholding. According to Mr Best of counsel for the defendants, authorities show that the phrase "free of all deductions" encompasses a claim to an equitable set-off. He cited Citibank Pty Ltd v Simon Fredericks Pty Ltd[1]; Batiste and ors v Lenin[2]; Debonaire Nominees Pty Ltd v J&K Berry Nominees Pty Ltd[3]; Webster v Barning Holdings Pty Ltd[4].

42. Mr Lloyd for the plaintiff relied upon authorities to the contrary. He cited Re Partnership Pacific Securities Ltd[5]; Connaught Restaurants Ltd v Indoor Leisure Ltd[6]; Grant v NZMC Ltd[7] and Durham On Set Off[8].

45. Mr Best argued that it was proper for me to follow the decision of a judge of this court unless there was clear reason for not following it. He referred to Anteden Pty Ltd v Glen Eira City Council[9].

48. I am not prepared to resolve the question whether the plaintiff is entitled to interlocutory relief by reference to the argument which I have just described. The decisions in Citibank and by single judges of courts of coordinate jurisdiction favourable to the defendants' submissions stand opposed to decisions of the Courts of Appeal of the United Kingdom and New Zealand. I think it would be undesirable at an interlocutory hearing, and in circumstances where the matter may be otherwise disposed of, to seek to resolve the competing arguments - arguments which have led judges in courts of high authority to different conclusions.

51. The second question that was argued was whether there was a serious question for trial that there had been breach of the covenant of quiet enjoyment. In that connection there were arguments both of law and of fact. There was argument whether, for a breach to occur, there must be physical interference with the enjoyment of the premises, or whether it is sufficient that the interference touch the tenant's enjoyment of the property but without direct physical interference. Counsel for the plaintiff cited a number of authorities in support of the proposition that physical interference with enjoyment of the premises is not requirement for breach of such a covenant. He referred to Arndale (Kilkenny) Pty Ltd v Gaetjens and anor[10]; Todburn Pty Ltd v Taormina International Pty Ltd[11]; Aussie Traveller Pty Ltd v Marklea Pty Ltd[12]; Byrnes v Jocona Pty Ltd[13]; and Hawkesbury Nominees Pty Ltd v Battik Pty Ltd[14]. Counsel for the defendant cited authorities in this court and in the Supreme Court of New South Wales to the contrary. Thus: Pyskir v Perant[15]; Kohua v Tai Ping Trading Pty Ltd[16]; Martins Camera Corner Pty Ltd v Hotel Mayfair Ltd[17]. Assuming but not deciding that on the authorities there is in truth a continuing division of opinion, I find it unnecessary to resolve that dispute in this case.

54. Regardless of resolution of the issue just discussed, a plaintiff must show, to establish breach, that there was interference with or interruption of its enjoyment of premises which was substantial. That is a question of fact. In my view, the plaintiff's evidence of interference, to some of which I have already referred, is unsatisfactory, even allowing for the fact that this is an interlocutory application and that material has been prepared in relatively short time. I am not prepared to conclude that the plaintiff has shown that there is a serious issue to be tried that there was substantial interference with its enjoyment of the premises.

57. A third aspect to this matter requires consideration. It would be necessary, in order that there be a breach of the covenant of quiet enjoyment, that there be interruption by the landlord or a person lawfully claiming through the landlord. In the present case, the plaintiff's attempt to implicate the defendants in causing such an interruption was tenuous indeed, the route being via the body corporate and the defendants' supposed ability to determine the course of action taken by the body corporate. On the evidence submitted for my consideration, I would not conclude that such a link could be established as a serious issue for trial.

60. It follows from what I have said, and assuming for present purposes that an equitable set-off could stand against a landlord's entitlement to unpaid rent, that the plaintiff has not satisfied me that there is a serious issue for trial that it has a tenable claim to such a set-off.

63. If I was wrong about that, I would not, in the exercise of my discretion, grant the plaintiff relief. It seems to me that if the plaintiff has a claim to damages, and if that claim can be established, then damages should be an adequate remedy. This is not a case in which the plaintiff has ever said that it has a desire to occupy the premises in the long term. Indeed, until quite recent times it seems to have been willing not simply to vacate in the month of January 2003 but to vacate and pay outstanding rent when doing so. The adequacy of damages as a remedy bears on the balance of convenience, which in my view tends in favour of refusing the relief sought.

66. Consider the position of the defendants. The plaintiff having told one of them of its intention to vacate before Christmas 2002, they entered into the contract of sale of the premises, a contract containing a vacant possession clause. It seems to me that the defendants would be seriously disadvantaged if they were unable to complete that contract.

69. It might be said that the defendants could be protected by an award of damages if the plaintiff were given interlocutory relief and if the contract of sale for that reason fell through. But that assumes the capacity of the plaintiff to meet a claim for damages, a capacity which might fairly be said to be in some doubt having regard to the fact that the plaintiff, by its own account, operated unprofitably in the last financial year, and having account also of the plaintiff's failure over a protracted period of time to pay rent as it has fallen due.

72. Also relevant to the balance of convenience, and tending against grant of relief, is the circumstance that, as I have previously noted, the plaintiff until very recent times indicated an intention of vacating the premises speedily, and affirmed its capacity to do so. The plaintiff appears to have had a belated, and unexplained, change of heart.

75. In the event, the plaintiff's claim for interlocutory relief should be refused. the appropriate order is that the plaintiff's summons filed 3 February 2003 be dismissed. That is the order I make.

(Discussion ensued re costs).

HIS HONOUR: The summons is dismissed. Order that the plaintiff pay the defendants' costs.

(Discussion ensued).

HIS HONOUR: Having dismissed the summons, the plaintiff's proceeding is on foot. If some issue arises concerning the giving up of possession, it seems to me that the defendants might bring the matter back on a summons that they filed, or perhaps it might be necessary to undertake to file a counterclaim. I do not want to speculate on that at five past 5 on a Friday night.

MR BEST: All I seek is an order for liberty to apply, Your Honour, at this stage, if Your Honour will grant that.

HIS HONOUR: I do not think it is necessary.

MR BEST: If Your Honour pleases.

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[1] [1993] VicRp 66; [1993] 2 VR 168 at 175 per Beach J

[2] [2000] NSWSC 233, [2002]10 BPR at paras. 104, 105

[3] [2000] SASC 244; (2000) 77 SASR 261 at para. 43

[4] [2001] WASC 11

[5] [1994] 1 Qd R 410 at 425 per Williams J

[6] [1994] 1 WLR 501 at 509-510 per Waite LJ

[7] [1988] NZCA 135; [1989] 1 NZLR 8

[9] (2000) 16 VAR 334, [2000] VSC 366

[10] [1970] 44 ALJR 434

[12] [1998] 1 Qd R 1, particularly at 10, per McPherson JA

[13] [2002] FCA 41 at paras. 58-68

[14] [2000] FCA 185 at paras. 35-41

[17] [1976] 2 NSWLR 15 at 23