Wilkinson v S & S Gikas Pty Ltd [2006] NSWSC 1314 | Case summary

5939/06 JOHN PAUL WILKINSON & ANOR v S & S GIKAS PTY LIMITED JUDGMENT - Ex Tempore 1 HIS HONOUR: This is the final hearing of an application for relief against forfeiture of a lease of some lock-up shop premises located at 141 Oak Road, Kirrawee. The plaintiffs are the tenant of those premises, and conducted the business of a takeaway food shop in them. 2 The plaintiffs purchased that business in March 2005, for a price of $221,000. They took over a lease, that terminated on 30 April 2005, but had an option for a further term, of five years, and it is not disputed that that option was exercised. 3 The business was primarily run by the male plaintiff. The female plaintiff was in employment, but her employment came to an end in the early months of this year. 4 The rental that is due under the lease is, currently, $2,336.22 per month. There have been some arrears of rental incurred, beginning from August 2005, but those arrears were ones that were caught up within the month that the arrears arose, at least up to the end of February 2006. However, since March 2006, there have been some months when no rental at all was paid, and other months when only part rental was paid. 5 Mr Steven Gikas, his wife, and Mr Gikas' brother, are the three directors of the defendant company. Mr Steven Gikas has been overseas for some months now, and his brother ordinarily lives in Greece. 6 The rental was ordinarily paid by a direct credit to the account of the landlords. On 27 July 2006, the male plaintiff had a conversation with Mr Steven Gikas, in which he volunteered the information that he was some months behind in the rent. This was, it seems, news to Mr Gikas. The male plaintiff told Mr Gikas that they were trying to sell the business, and Mr Gikas told him that he could fix up the arrears on the sale of the business. Mr Gikas said nothing to indicate that that was not satisfactory. 7 After the arrears had been in existence for some months, on 12 October 2006, Mrs Gikas told the male plaintiff that he had to pay the rental arrears within fourteen days, or they would need to commence legal action. I accept the evidence of Mrs Gikas, in which she denies that she said that she would wait for the rest of the money on the sale of the business. 8 The plaintiffs have had the business listed with a business broker, for at least the last six months. They have received two approaches, both to purchase the business for $145,000. One of those approaches came to nothing, and the other involved the prospective purchaser wanting to speak to the landlord. 9 On 13 November 2006, the solicitors for the defendant wrote to the solicitors for the plaintiff, referring to a conversation that had occurred between the solicitors on 10 November 2006, and saying: "We are instructed that, given that your client is approximately seven (7) months in arrears of payment of rent, that our client will not consent to the grant of any new lease of the premises. The principal of our client's company has instructed that your client has had sufficient time to remedy the breach of the lease and are not prepared to extend to your client any further time to pay rental arrears. Accordingly, our client now intends to pursue its rights to secure vacant possession of the premises." 10 Action was taken on the night of 13 November 2006. An agent of the defendant physically re-entered the shop, had a locksmith change the locks, and posted a security guard outside the store. The plaintiffs have been allowed inside the store on one occasion only. 11 It appears that the police attended at the time that possession was retaken. There was no court order in existence, or any order of any tribunal, to provide any authority for the re-entry, beyond that which the lessor had by virtue of its contractual rights. 12 On 15 November 2006, the plaintiffs paid to the landlord's solicitor a bank cheque for $12,000. That was done at a time when there had been no calculation communicated to the plaintiffs by the defendant of the amount owing for arrears, or for any other expenses connected with the termination of the lease. 13 By letter dated 16 November 2006, the solicitor for the defendant claimed that an additional $3,989.76 was due for rental arrears, an amount of $335 for a locksmith's charge, an amount of $4,584 for a security guard, and an amount of $2,750 for the estimated solicitor's costs to that time. A security guard had, it appears, been posted 24 hours a day. Further, a security guard was still there as at 16 November 2006, and continued to be there until 20 November 2006. 14 On 17 November 2006, the solicitor for the plaintiff wrote to the solicitors for the defendant, saying: "The fact that a security guard has been positioned outside the shop since late Monday night has placed our clients in a precarious position in relation not only to their own reputation but that of the business. The security guard has, apparently, been showing your letter of 13 November 2006 written to this office to all interested parties who have been left in no doubt as to the financial viability of the business and, more particularly, that the business has severe financial difficulties and would be a very poor prospect by way of purchase except at a bargain basement price. Our client continued negotiations with the prospective purchaser. That purchaser was made aware of the position by the security guard and notwithstanding the fact that he had agreed on a price of $160,000 for the business and obtained finance for the purpose of the transaction he has now reconsidered his decision. He now considers that as our clients were unable to make a proper financial return in respect of the business activities, he has decided that he has no further interest in proceeding with the transaction." 15 The letter of 13 November 2006, referred to in that letter, is the letter that I have quoted part of earlier, which referred to the existence of seven months of arrears, and that the client would not consent to the grant of any new lease. 16 By that letter of 17 November 2006, the solicitors for the plaintiffs presented two alternatives. One of them was to deliver immediately a bank cheque for $3,989.76, in payment of rental to the end of November 2006, and to deliver a second bank cheque for $7,669 to be deposited to the defendant's solicitors' trust account, on the basis that, if the plaintiffs began proceedings within 21 days to have a dispute between landlord and tenant arbitrated under the Retail Leases Act 1994, or in the Administrative Decisions Tribunal for relief under the Retail Leases Act, that the second sum of money would be retained in trust until the determination of the arbitration of those Administrative Decisions Tribunal proceedings or, alternatively, if the plaintiffs did not commence those proceedings within 21 days, then the solicitors for the defendant were to be at liberty to account to the defendant for the full extent of the money. 17 The rental to the end of November was brought up to date soon after that letter was written, and before the present proceedings were begun. 18 The present proceedings were begun on 23 November 2006, when leave to serve short notice was granted. 19 Notification of intention to bring the proceedings was given to the solicitors for the defendant on 22 November 2006. 20 The female plaintiff is still not in employment, and there is, apparently, some difficulty in her obtaining employment. The assets that the plaintiffs have, include approximately $5,000 in a bank account. That $5,000 has been lent to them by a friend on the basis that it need not be repaid except out of the proceeds of sale of the business or, alternatively, from sale of their home. As well, they have about $15,000 in shares, and a couple of motor vehicles. Their net assets are of the order of $256,000. The business is valued at $100,000 in that calculation. If the business is not sold as a going concern, the estimate of the plaintiff is that the plant and equipment would realise only about $15,000. 21 If the plaintiffs were to re-enter and trade, they would need to spend about $700 for stock. 22 The male plaintiff, when dealing with a purchaser who was interested in purchasing the business in November 2006, was not prepared to give that purchaser a full trading history. 23 The granting of relief against forfeiture is discretionary. In relation to a lease, the principle that is generally applied is that the power to re-enter or forfeit for non-payment of rent is regarded as being in substance security for the rent. Provided the lessor and other persons concerned can be put in the same position as before the forfeiture or re-entry, the Court will usually grant relief against forfeiture upon payment of rent, costs, interest and other expenses: Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of New South Wales Limited (1970) 2 BPR 9562. If those terms are offered, it is only in a rare case that the Court would refuse relief against forfeiture. The principle on which that is done is that, once the landlord has got all that the right of re-entry was, in equity's eyes, security for, it would be unconscionable for the landlord to insist on its legal right to re-enter. 24 However, such a rare case can occur if the tenant is unable to pay future rent, or may reasonably be expected to become so: Direct Food Supplies Victoria Pty Ltd v DLV Pty Ltd [1975] VR 358; Tannous v Cipolla Bros Holdings Pty Ltd [2001] NSWSC 236 at [38]. If there is a sufficiently serious risk that the tenant will not be able to perform its obligations in the future, it may be that the consequence is that it is not unconscionable for the landlord to insist on its strict legal right. 25 In the present case, there is no rental bond, or any other security available to the landlord for the payment of future rental. The trading of the business has in recent months been precarious. I see no reason why I should not accept the assessment of the plaintiffs' solicitor, that the business has severe financial difficulties. 26 Given the inability of the business to finance the ongoing payment of rental over a period of months this year, and given the modest spare financial resources of the plaintiffs, there must be some doubt about whether they would be able to pay the rental in the future. However, they have some financial resources, and the size of the rental that needs to be paid is not an amount that is large, per month, by comparison with the available equity that they have. 27 They seek to have the opportunity of selling the business. While there were some difficulties with the attractiveness of the business to those prospective purchasers to whom the security guard bad-mouthed the business, and it would probably be unlikely that those purchasers could have their interest revived, the fact is that three different prospective purchasers have expressed interest in the space of the several months that the business has been listed. Under those circumstances, it could not be said that it is unlikely that a sale could be negotiated, if the price was right. The defendant could not, of course, arbitrarily refuse to grant consent to an assignment to an appropriate purchaser of the business. 28 Under those circumstances, I am not persuaded that the ability of the plaintiffs to continue to pay rent is so slight that it would not be just and equitable to grant relief against forfeiture, provided other appropriate conditions were met. 29 One bone of contention between the parties concerns whether it would be a condition of relief against forfeiture to require the lessees to pay the costs of the security guards. The charges that the lessor incurred for those security guards, in total, were of the order of $8,700. There is no evidence that there was a reasonable apprehension that, once excluded, the plaintiffs might seek to re-enter by force. There is no evidence about the character of the area that suggests that unoccupied premises might be in danger. There is no evidence that the premises were not insured or not insurable. Mrs Gikas, when cross-examined, said that there were two purposes in employing a security guard - both to protect the premises and, also, to protect the business of the plaintiffs. She accepts that the security guards were not there to change the locks, and that the guards were eventually stopped on Monday, 20 November 2006 because it was getting too expensive. It was not her decision to put the security guards there - that was decided by her husband and his brother, in Greece. 30 The aim of providing equitable relief, in many of the different situations in which equitable relief is available, is to make orders that will, so far as is practicable, put parties into the same situation they would have been in if the breach of obligation concerning which the relief is granted had not occurred. In the particular context of relief against forfeiture, the moulding of relief in accordance with that aim requires there to be an inquiry into what are the losses or expenses that have been caused by the tenant's breach that led to the re-entry. Because of the requirement that he who seeks equity must do equity, the tenant should make good all the expenses or losses that have been caused by its failure to, for example, pay the rent on time, if it is to get itself into a situation where it has become unconscionable for the landlord to insist on its strict contractual right to re-enter. In the ordinary course of things, the loss or expense that arises from a tenant's failure to pay the rent on time includes the sum of money that has not been paid as rent, the legal costs that the landlord would never have needed to pay if the tenant had paid the rent on time, interest on late paid money, and any other expenses that are caused by the tenant's breach. However, that is more a guideline than a rigid rule of law. Rather, the relief is moulded by reference to the circumstances of each case, in light of the general principle about the aim of equitable relief. 31 I am not persuaded that the costs of the security guards are part of the costs that the plaintiff ought be required to pay as a condition of obtaining relief against forfeiture. I do not regard the costs of the security guard as having been caused, in the sense relevant to the moulding of equitable relief, by the breach that led to the re-entry. 32 The plaintiff offers an undertaking to pay the defendant virtually forthwith the sum of $3,185, made up of $2,750 for the legal expenses incurred by the defendant to 16 November 2006, $335 for the locksmith, and $100 for the attendance of a security guard for two hours. The plaintiff also offers an undertaking to pay a further sum into court within fourteen days, of $5,815, as security for any additional amount that might be payable by way of costs or other amounts. 33 There is a question about what should be done concerning the costs of the present proceedings. The plaintiffs submit that the present proceedings were necessary only because of the defendant not accepting the offer that was made on 17 November 2006. I do not accept that that is so. Even though the fact is that no proceedings have been begun under the Retail Leases Act 1994 or in the Administrative Decisions Tribunal, the offer that was made was one which required the provision of security for an amount which might be determined, at some indeterminate time in the future, by a particular procedure. I do not think that the discretion of the Court as to the terms on which relief against forfeiture will be granted are so confined. The plaintiffs were not making, for example, an unconditional offer to pay the defendant's legal costs. 34 The anticipated costs of the defendant, up to and including the running of these proceedings, are, according to the defendant, over $15,000. Presumably that includes costs from the inception of the dispute. Whether all of that amount would be recoverable on an assessment is something that might be doubted, but I am not in a position to express a view as to whether it is likely that any of it would be not allowed on assessment. In those circumstances it is hard to order that payment of the totality of the costs claimed be a condition of relief against forfeiture. 35 Further, in the argument before me, the defendant asserted its entitlement to have the security guard fees paid as a condition of the plaintiffs obtaining relief against forfeiture, either by the amount of the fees being paid direct to the defendant, or by that amount being paid into court, to await some process of assessment. The defendant has not achieved that. 36 On the other hand, the Summons in the matter specifically contemplated an order that the plaintiffs pay the defendant's costs of re-entry, excluding the costs of these proceedings, as agreed or assessed. Thus, the plaintiffs were asserting an entitlement to relief against forfeiture on terms excluding payment of the costs of these proceedings, though including the defendant's legal fees up to the time of institution of the proceedings insofar as they counted as "costs of re-entry". 37 Thus, in these various ways, the practical reality is that what has been holding the parties apart is the question of how much ought be paid, beyond making up the arrears of rental that have already been made up. 38 In those circumstances, I would not regard it as appropriate to require an order for the payment of the costs of these proceedings to be a precondition for the granting of relief against forfeiture. One of the causes, and a significant cause, of the litigation has been the defendant's insistence on the full measure of security guard fees. 39 It is a separate question who should pay the costs of the proceedings, on a basis other than being a precondition of relief against forfeiture. 40 Upon the plaintiffs paying to the defendant's solicitor, within 24 hours, the sum of $3,185, and upon the plaintiffs undertaking to the Court to pay into court the further sum of $5,815 within fourteen days, I grant to the plaintiffs relief against forfeiture. I direct that that amount is to act as combined security for payment of rental, and for any costs of the proceedings that I might order. 41 To effect that order, I direct that the defendant forthwith, upon receiving the sum of $3,185, permit the plaintiffs to re-enter possession of the premises. 42 I grant to either party liberty to apply on two days notice. 43 The plaintiffs submit that the appropriate order to make is that each party should pay their own costs. The defendant submits that the plaintiffs ought pay the defendant's costs, as there was an issue to be decided, concerning whether the plaintiff had sufficient capacity to pay the rental. That issue went, however, to a question of whether the capacity was so slight that relief against forfeiture should be denied, an issue on which the defendant lost. 44 Even so, the offer that the plaintiffs made before commencement of the proceedings was an offer under which the defendant would have done less well than it has actually done as a result of running the proceedings. Furthermore, the plaintiffs needed to come to court to seek an exercise of an indulgence in granting relief against forfeiture. 45 In those circumstances, I order the plaintiffs to pay the costs of the defendant of the proceedings. 46 These orders may be entered forthwith. **********

Wilkinson v S & S Gikas Pty Ltd

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Judgment (10 paragraphs)

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