Vicliz Pty Limited v FAS Timber Pty Limited

Vicliz Pty Limited (Plaintiff) PARTIES: FAS Timber Pty Limited (First defendant) Mustapha Mohamad Rachid Elmir (Second Defendant) Fouad Talal Antar (Third Defendant)

COUNSEL: Mr Slowgrove (Plaintiff) Mr Rollinson (First and Second Defendants)

Albert A Macri Partners (Plaintiff) SOLICITORS: Benjamin & Khoury (First and Second Defendants) Third defendant - No appearance

1 HIS HONOUR: These proceedings concern the lease of premises at 2/33 Heathcote Road, Moorebank, New South Wales ("the premises"), which premises are owned by the plaintiff, Vicliz Pty Limited, a company controlled by Mr Maggiotto.

2 The first defendant, which I shall refer to as FAST, entered into occupation of the premises on 8 October 2003 and surrendered the keys to the premises on 19 February 2004.

3 The second defendant and the third defendant are, or were, directors of FAST but the third defendant has entered no appearance to the claim and did not appear on Tuesday when the matter was called on for hearing.

4 The plaintiff's claim against both the second defendant and the third defendant is as guarantors of the obligations of FAST. The plaintiff claims that FAST entered into a three year lease and is liable for rent for the period from February 2004 to November 2004 when a new tenant was found, less the application of a bond of approximately $27,000 which was paid to the plaintiff by FAST along with $6,000 as a deposit for one months rent. The figure claimed is excluding interest of $52,000 and there is no dispute that if a three year lease was on foot as at February 2004, that the amount claimed is the amount to which the plaintiff is entitled as against the first defendant.

5 The defendants deny that any three year lease was created and submit that what arose was a tenancy at will which could be terminated on one months written notice: see s 127 of the Conveyancing Act 1919 (NSW). The defendant does accept that it only gave oral notice of termination of that tenancy and by the latest, by 6 February 2004, but it submits that the most to which the plaintiff is entitled by reason of that failure to give one months notice in writing is one months rent, and that the defendant has paid more than one months rent by means of application of the bond, so that it owes nothing to the plaintiff. Indeed the plaintiff would owe it money although I should note that no cross-claim is pursued.

6 To understand the competing arguments it is necessary to set out the history of the matter, very little of which is in dispute. There were negotiations between Mr Antar on behalf of FAST and employees of Elders Real Estate at Liverpool on behalf of the plaintiff and then involving Mr Elmir, the second defendant, which led to agreement about the terms of a lease of unit 2 ("the premises"). On 1 October, Elders sent a lease details sheet to FAST (see Exhibit 2, annexure B) which document refers to the use of the premises as "furniture manufacture". It also refers to three months rent free and also "subject to Council approval". On 6 October, a letter of intent was signed by Mr Elmir and Mr Antar on behalf of FAST and by the real estate agent which was headed "Letter of Intent (Lessee)" and set out the details of the property and the lessor, lessee and their solicitors, in the following terms: "The purpose of this letter of intent is to confirm that I have agreed on behalf of the lessee to accept the lease of the above premises from the lessor for the agreed term and subject to the conditions set out in a schedule below.

9. Permitted usage: Furniture manufacture and showroom.

11. Amount of Bond: Amount equal to three months rent.

12. Special conditions: Access upon signing of lease agreement and payment of first months rent and Bond.

I confirm that I have paid a deposit equal to one (1) months rent and Bond $27,500 (GST inclusive) which: (a) will be applied towards rental under the terms of the lease in final form, or (b) will be refunded to me after deduction of any administrative, management or legal costs incurred by the lessor in the event that the Lessee does not proceed with the signing of the lease provided that the said lease is based on the above agreed schedule.

It has been made clear to me that this letter of intent will not bind the lessee to take up the lease if the lease documentation is not based on the above terms and conditions".

8 The permitted usage referred to was "furniture manufacture and showroom". The premises did not have council approval to operate as a place of furniture manufacture and it is conceded by Mr Slowgrove, counsel for the plaintiff, that everybody understood that council's approval would have to be obtained. I shall detail in a moment what was done about council approval. On the following day, 7 October 2003, the plaintiff's solicitor sent a letter to FAST's solicitors. It was in the following terms: "We refer to the abovementioned matter and advise that we act on behalf of the lessor. We enclose the following: (1) lease, in duplicate, for execution by the company and the guarantors; (2) copy of memorandum E315223; (3) our statement of account; and (4) stamp duty schedule. Should this proposed Lease be to your satisfaction, we request that you execute same and, thereafter return the following to our office:- A. lease in duplicate duly executed by the lessee and guarantor; B. bank cheque or bank guarantee in the sum of $20,625 being for the bond; C. cheque in favour of our firm in the sum of $1,537.23 on account of our costs and disbursements; D. cheque in favour of the Office of State Revenue in the sum of $892.75; and E. certificate of currency or insurance policy covering public liability in accordance with clause 15 of the lease.

We advise that this lease is submitted as a proposed lease and no intention to enter into legal relations shall exist pending execution of this document by our client and the company lessee and our client reserves the right to alter any provisions of this proposed lease pending execution in final form.

In order to avoid unnecessary delay and any requisitions, we request that you arrange to have signed each and every page of the lease".

9 On 8 October FAST was let into possession of the properties. On 24 October FAST made out cheques as referred to in the letter from the plaintiff's solicitors of 7 October and Mr Elmir and Mr Antar executed the lease documents and guarantees on behalf of themselves but instructed their solicitor to hold onto the executed lease and guarantees and the cheques pending council approval (see paras 11 and 12 of Mr Elmir's statement, Exhibit 2). Apparently Mr Elmir was departing for China about that time and thought it desirable that the documents be executed in advance. Application was made in fact by FAST to the council on 9 December 2003 for development approval. On 11 December 2003 the solicitors for the plaintiff wrote in the following terms to the solicitors for the defendant. "We refer to a telephone conversation with Mr Uther of your office on 20 November 2003 wherein he advised that the lease was signed, however, your client was awaiting council's consent for the use of the premises before returning the executed lease documents and requirements. Can you please advise if consent has been given and when we are likely to receive the signed lease documents and requirements".

10 On 13 January 2004 Liverpool Council wrote to FAST in the name of Timeless Designs, which I understand was the trading name of FAST, concerning the development application in the following terms: "I refer to the development application that is currently with council for determination proposing a change of use to furniture manufacturing at the abovementioned address.

Please be advised that an assessment of the application has indicated that the proposed use is defined as an "industry" which provides as follows under council's Local Environmental Plan 1997 (LEP):- "Industry means the manufacturing, assembling, altering, repairing, renovating, ornamenting, finishing, cleaning, washing, dismantling, processing or adapting of any goods, articles, materials, liquids or gases for commercial purposes".

It is considered that the proposed development falls within the above definition, which is a prohibited use in the prevailing 4(c) industrial-business park zone. Further to this it is considered that the proposed development is not in keeping with the aims and objectives of the zone. As such the application cannot be supported and it is recommended that you withdraw the application within FOURTEEN (14) DAYS from the date shown hereon, and receive a refund of fees. Should no correspondence be received within the specified timeframe, council will have no option other than to refuse the application.

Should you have any further queries, please do not hesitate to contact me on 98219386".

11 The document is signed Nabila Sarwary, Development Planner, and is on Liverpool City Council letterhead.

12 On receipt of a copy of the letter the plaintiff sought advice in relation to the letter from the council and on 5 February the firm of Rhodes Haskew and Associates, Town Planners, wrote to Liverpool Council submitting that the council's view was incorrect. The document is found at p 37 of Exhibit A and it contains the following words: "Council's response to the applicants has effected (sic) our client's negotiations in terms of the lease of the premises and it imperative that the issue be resolved immediately. Council's review of its advice is requested".

13 By 12 February 2004 the town planners had obtained the advice of Mr Newport, barrister, that the council's interpretation was incorrect. On 16 February 2004 council advised that it had approved the use of the factory for manufacturing of furniture subject to certain conditions which have no relevance to this case (see Exhibit A pp 54-63).

14 There is no dispute that between 13 January and 6 February Mr Elmir on behalf of FAST was looking at other properties and that on 4 February he had informed Mr Polistina, one of the agents on behalf of the plaintiff, that he had been looking at other properties.

15 Mr Elmir's evidence was, and he was not challenged on this, that he had been told by the council's officer, Ms Sarwary, that the area of Orange Grove Road was a suitable area for manufacturing of furniture and he had looked in that area.

16 On 6 February 2004 Mr Elmir, on behalf of FAST signed an agreement for lease with Mr Tran, the landlord of premises at Orange Grove Road (see para 17 of Mr Elmir's affidavit and Annexure I to the affidavit). On 6 February FAST started moving out of the premises and apparently that move was completed by 8 February, although the keys were not surrendered until 19 February for reasons to which I shall turn in a moment.

17 Mr Polistina disputes that Mr Elmir told him on 4 February that FAST would be moving out but he accepts that he did so in the next conversation which it appears was on 5 February and again on 6 February. I do not think it matters whether it was 4, 5 or 6 February that Mr Elmir said he would be leaving, and neither Mr Rollinson or Mr Slowgrove asserted that it was.

18 There is no doubt that Mr Polistina had encouraged Mr Elmir to lodge a fresh development application and that he told Mr Elmir that Mr Rhodes had advised the owner that FAST could get an immediate approval if he, that is Mr Elmir, lodged a new development application: see para 11 of Mr Polistina's affidavit. FAST did start moving out on 6 February and moved all equipment out over the next few days. Mr Elmir arranged for cleaners to clean the premises but this was not completed immediately and as I have noted on 19 February Mr Elmir surrendered the keys to the premises to the agent. There is no dispute that until the keys were handed over on 19 February FAST was at law in possession of the premises.

19 In relation to the lease which was forwarded with the letter of 7 October, and which, on the evidence, was executed on 24 October 2003, it should be noted that according to its terms the use of the premises was to be "furniture manufacture" and by its terms that is the only use which can be made of the premises. By another clause in the lease the tenant is not permitted to use the premises for any other purpose and is not permitted to operate the premises in breach of council requirements. The letter of intent referred to FAST's intended use as furniture manufacture and furniture showroom but the lease does not refer to the latter use.

20 Mr Slowgrove puts his client's case on the following alternate bases: 1. That there was an equitable lease, that is an agreement to lease constituted by the letter of intent which had a condition subsequent ie council approval, commencing on 15 October 2003 for three years. This is the plaintiff's primary position.

2. That there was an agreement to lease constituted by the letter of intent which had a condition precedent ie council approval, and therefore the lease, on this alternative submission, commenced on 16 February 2004, which was the date of approval of the use for furniture manufacture.

3. That there was an agreement to lease constituted by the letter of intent with no requirement for council approval.

4. That there was a tenancy at will terminable on one months written notice which was not terminated by written notice, a s 127 tenancy. The fourth basis I should note was added yesterday by Mr Slowgrove and had not in fact been pleaded by the plaintiff. Notwithstanding that it had not be been pleaded Mr Rollinson, counsel for the defendants, did not object to the plaintiff relying on it.

21 Mr Rollinson attacks the first three alternatives with the same weapons, namely: 1. The letter of intent is not an agreement at all.

2. That the letter of 7 October expressly states that there is to be no binding agreement for the three year lease until the plaintiff has executed the document and it is expressly reserved to the plaintiff to amend the lease document as it sees fit at any time prior to execution by it.

22 Mr Rollinson does not dispute that if there was an agreement then in accordance with the principles of Walsh v Lonsdale (1882) 21 Ch D 9 the agreement would contain terms contained in the letter of intent that were in agreement, other than the period of the tenancy. He asserts that the agreement was not one of which equity would, at any time prior to 16 February, have granted specific performance, and so FAST was entitled as at 6 February to treat the lease as at an end.

23 The letter of intent, even in its heading is, subject to one matter, entirely directed to what the defendant intends to do. There is no promise by the plaintiff to grant a lease. The one matter which points to an obligation on the plaintiff is condition 12 of the special conditions, which provides: "access upon signing of lease agreement and payment of first months rent and bond". The condition does not say by whom it is to be signed and as noted, FAST was allowed into the premises on 8 October without either it or the plaintiff having signed the lease although it did pay a deposit equal to one months rent and a bond of $27,500 even though no rent was due until January 2004 according to the letter of intent and the lease document sent the next day to the same effect.

24 The clause beneath condition 13(a) and (b) contemplates two alternatives in relation to the use to be made of the deposit and bond, either "application to rental under the terms of the lease in final form" or refund to FAST after deduction of costs incurred by the lessor "in the event that the lessee does not proceed with the signing of the lease provided the said lease is based on the above agreed schedule". This seems to contemplate full refund to FAST if the lease submitted is not based on the terms in the schedule to the letter of intent and partial refund if it is. The last paragraph of the letter, whilst not expressly providing that the lessee will be bound if the lease documentation is based on "the above terms and conditions" seems to imply, standing alone, that this is what was intended. On that basis however, it is not consistent with sub-clause (b) to which I have just referred.

25 I note too that the lease assent strictly did not conform to the schedule because clause 9 of the letter of intent referred to use as a showroom and the lease only refers to manufacture. As a matter of council permission, approval of use as a place of manufacture may include showroom as Mr Slowgrove contended, but the lessee would in my view be entitled to insist on a reference to use as a showroom being included in the lease. It is true that the solicitor for FAST did not pick up this discrepancy but the documents were being held by him pending council approval and they were not handed over.

26 I regard the letters of 7 October and 11 October from the plaintiff's solicitors as very significant. Mr Slowgrove submitted that they were not at all important but I do not accept that submission. The letter of 7 October makes it clear that the plaintiff did not intend to be bound to grant any lease whatsoever until execution by it. That is consistent with a view of the letter of intent imposing no legal obligations on the plaintiff whatsoever. The promise to grant access on signing of the lease and payment of the rent is also not inconsistent with that position. The day after the letter of 7 October the plaintiff permitted FAST access in return for the provision of the deposit and the bond. No details of the means by which the defendant was permitted into possession on 8 October are given, that is to say there were no details of any discussions surrounding this aspect of the matter by any of the four witnesses whose statements were tendered in the case and who were cross-examined. The inference I draw is that the plaintiff was content to allow FAST into possession because it had received the deposit and bond on 6 October and because it thought it likely that council approval would be obtained and the lease entered into by FAST once council approval was obtained.

27 Mr Slowgrove conceded that it was understood by everyone that council approval would have to be obtained for use as a place of manufacture of furniture but the letter of intent says nothing about the topic of council approval and nor does the lease, although as I have noted the agent's leasing details do refer to it. No details of who is to apply, or how, or when it is to be applied for, nor what efforts, if any, by whom must be made in the event of rejection are dealt with in any of the correspondence or documents.

28 Mr Slowgrove also submitted that there was no provision permitting FAST to have the executed lease held in escrow and he pointed out that if read literally the lease and the letter of intent required the plaintiff to take up the tenancy only for use as furniture manufacture but this use could not be undertaken because of the absence of council approval. If read literally he said it would mean that the tenant could effectively "play basket ball". I should point out that he emphasised that this was not the plaintiff's preferred view of the contractual arrangements. It is in this context however, that I regard the letter of 11 December from the plaintiff's solicitor as of considerable significance. It notes the advice from the defendant's solicitor that he is, on the instructions of his clients, holding the executed lease (and guarantee I infer) pending the receipt of council's approval and the plaintiff's solicitors inferentially accept that position, wanting to be told when approval is obtained. If the solicitor for FAST had sent the executed lease prior to ascertainment of council's position then his client would have entered into a three year lease for premises which without approval could not be used for at least one of the two purposes for which it was leased, a completely uncommercial result that could not have been intended by the parties. It is in this context that sense can be made of the letter of intent. FAST, aware that it could commence using the premises as a showroom at least, according to the letter of intent, was willing to move in and take the chance that approval would not be granted for use as a place of manufacture but was not willing to enter into a three year lease until approval was granted. The plaintiff, it would seem, confident that approval would be granted, was willing, with the security of the bond and deposit, to allow the tenant into possession pending approval being granted and the lease being executed by it. In my view this is the type of situation to which a tenancy at will applies and it is the type of situation found in Coggan v Warwicker (1852) 3 Car and K 40 at 42; 175 ER 454 at 455 per Earl J; see also Butt, "Land Law", LBC Information Services, 3rd ed, p 282 and see also Twidale v Bradley [1990] 2 Qd R 464 at 475-6 for a different situation where a tenancy at will will be found.

29 So far as the issue of documents being held in escrow is concerned, it is true that no such provision is found in any of the documents and it is true that Mr Elmir did not assert that he had discussed that aspect with the agents, but it is clear that the solicitors for the plaintiff did not expect the documents to be handed over until council's position was determined and there was no provision as to the time in which the documents were to be executed. There is no evidence of the plaintiff's solicitors ever demanding return of the documents before 11 December 2003 or for that matter afterwards. I do not read the letter of intent as itself evincing a binding agreement for lease as argued by the plaintiff but particularly not so when read together with the letter of 7 October and subsequent entry of the tenant into the premises prior to execution of the lease by either FAST or for the plaintiff. In my view a tenancy at will was created terminable on one months notice.

30 Mr Slowgrove's alternative submission was that even if the tenancy was one at will, s 127 of the Conveyancing Act provided that the tenancy which at common law would be a tenancy for one year, was terminable on [one] months notice provided the statutory requirement of written notice was adhered to. Since it was not, he submitted, the tenant remained liable. This submission was made in the context of another submission, namely that surrender of the keys on 19 February was a repudiation of the lease accepted by the plaintiff which I think is the correct view of the matter. Once the repudiation was accepted the tenancy came to an end. Mr Slowgrove submitted that general contractual principles were applicable to agreements to lease which is clearly correct: see Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17.

31 Mr Slowgrove submitted that the damages included rent up to the time of the new tenancy of the premises in November. Mr Rollinson argued that what the plaintiff was entitled to was damages based on the failure to give one months notice which could not be more than one months rent, ie at worst from FAST's point of view to 19 March 2004. I accept Mr Rollinson's argument. It accords with the approach that the measure of damages is that consistent with the least onerous performance by the party in default: see Carter and Harland, "Contract Law in Australia", 4th ed, Butterworths, para 2162; see also Bauman v Hulton Press Limited [1952] 2 All ER 1121 in the agency field and see "Bowstead on Agency", Sweet and Maxwell, 16th ed, 10-040.

32 It follows that FAST owed one months rent from 19 February to 19 March but in the circumstances where it has paid that amount and more by application of the bond money no monies are owed by it to the plaintiff.

33 I should add that there was some discussion of the merits of the case and Mr Slowgrove pointed out that although the letter of 13 January 2004 was in strong terms, it was not refusal by council of the development application, rather it was an indication that it would be refused. He accepted that Mr Elmir might reasonably have formed the view based on that letter that the council would not grant approval and that he should look elsewhere, but he pointed to the fact that by 6 February Mr Elmir had been informed that the advisers to the plaintiff had formed the view that the council was wrong. Mr Slowgrove argued that it was precipitous of Mr Elmir to not wait for the 14 day period referred to in council's letter. Mr Rollinson countered by pointing out that the letter did not say that the application would be considered within 14 days. What it said was that if FAST withdrew its application within 14 days FAST could get its money back. There is a further point and that is that FAST did wait for more than 14 days before finalising alternative accommodation.

34 Mr Slowgrove also made the point that the council's letter of 13 January was not something for which his client was responsible. That is quite correct and it highlights how in this case the unfortunate predicament in which both the plaintiff and defendants found themselves, arose through no unmeritorious conduct on either of their respective parts. Obviously it would have been better if FAST had given the plaintiff more time to persuade council (as it turned out it was able to do) but the letter from council was in such strong terms that it was not surprising that Mr Elmir did not think FAST should delay long in finding alternative premises and on or by 6 February Mr Elmir had committed FAST to a new alternative lease. I do not think FAST's conduct was unreasonable in the circumstances.

35 Mr Slowgrove submitted initially that Exhibit I was not a binding agreement for lease for the alternative premises, but in the end I think he did accept that, although he submitted that even if that was the case that was not a relevant fact. The plaintiff's position focuses on the significance of council approval on 16 February before the surrender on 19 February, but the real question is in my view what was the nature of the legal relationship between the plaintiff and FAST? If it was a tenancy at will, as I understand it was, it does not matter that after FAST had committed to alternative premises, council approval was obtained. I should note too that Mr Rollinson argued that even if there was an agreement for lease constituted by the letter of intent, it was clearly understood to be subject to council approval and that specific performance would not have been granted. There are difficulties in determining at what date the matter should be considered from the point of view of a grant of specific performance and in view of the conclusion I have come to on Mr Rollinson's principal arguments I do not need to consider this aspect further.

36 Dealing with the guarantees, they if given at all (and they were executed but held by the solicitor for the defendants and only obtained on discovery) were given in support of the lease sent with the correspondence of 7 October. That lease was never entered into. As I have noted, the plaintiff's case is based upon a letter of intent or alternative occupation and rent being paid. Prior to the lease being provided there were no terms of the guarantee. Accordingly, the guarantee contained in the lease documentation on 7 October can have no operation: see Chan v Cresdon Pty Ltd (1989) 168 CLR 242. In any event if FAST owes nothing to the plaintiff then the guarantors are not liable either.

37 In my view there should be judgment for all three defendants on the plaintiff's claim against them.

38 HIS HONOUR: In this matter I have just pronounced judgment in favour of the defendants against the plaintiff. The first and second defendants seek an order that they be entitled to indemnity costs on the basis of a letter of 21 June 2005 written by the solicitors for the first and second defendants to the solicitors for the plaintiff. In the letter the first and second defendants' solicitors point out the deficiencies in the plaintiff's case and those deficiencies are, if not identical, very similar to those which I have just pronounced upon in the judgment. The letter points to the fact that on the basis that there was a tenancy or some obligation under a tenancy arrangement on a monthly basis, which I have described in the judgment as a tenancy at will terminable on one months notice, then damages could not exceed $25,619. The letter points out that in fact the defendants had paid $27,550 to the client. The offer made by the solicitor for the first and second defendants was basically for the plaintiff to withdraw the claim with no order as to costs. The letter is a Calderbank style letter. Mr Rollinson for the defendants also points out that on any view, given the case of Chan v Cresdon in the High Court, no claim could ever succeed against the second defendant in the circumstances.

39 The principles which relate to Calderbank letters, particularly having regard to the existence of an alternative scheme of offers and compromise has been considered most recently by the Court of Appeal in Leichhardt Municipal Council v Green [2004] NSWCA 341, and the essence of that case is summarised in the notes to the Uniform Civil Procedure Rules 2005 at [42.13.25] in Ritchie's "Uniform Civil Procedure NSW", which is that a Calderbank type offer will not justify an indemnity costs order, particularly one in favour of a successful defendant, unless its rejection was unreasonable. The note goes on to say that "the width of the discretion is illustrated by the potential relevance of considerations other than the mere comparison of the settlement and judgment amounts".

40 Mr Slowgrove submits that in fact the defendants, although they have been successful, have not done any better, as it were, in the proceedings than the offer of 21 June. He submits that it is not relevant to have regard to the fact that by its offer the defendants were foregoing or indicating that they would not make any claim for the overpayment by the first defendant in respect of the monies due under the lease taken through the bond.

41 In my view it is appropriate to have regard to that aspect of the offer. It is a relatively small differential of $2,000 that would hardly justify commencement of the proceedings by way of cross-claim in these proceedings but I do not think that it is irrelevant to consideration of the offer. In any event Mr Slowgrove does not assert that agreeing to accept a result of no order as to costs could not amount to an offer having content. His argument is that in the circumstances the defendants have not done better than that offer. The basis of the offer was clearly summarised in the letter, and taking all the circumstances into account, including the position of the guarantors and the amounts involved, I am persuaded that although it is close to the margin, it was unreasonable for the plaintiff not to accept the offer, and accordingly I order that the plaintiff pay the first and second defendants' costs on the ordinary basis up until 21 June and thereafter on an indemnity basis.

42 I direct that the exhibits be retained for a period of 28 days and thereafter returned to the parties in the absence of an appeal and this letter shall be marked Exhibit A on the application for costs.

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