Alamdo Holdings Pty Ltd v Croc's Franchising Pty Ltd (No 2) - [2023] NSWSC 60

Supreme Court

New South Wales

Medium Neutral Citation: Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd (No 2) [2023] NSWSC 60
Hearing dates: 5 - 7 December 2022
Date of orders: 09 February 2023
Decision date: 09 February 2023
Jurisdiction: Equity - Commercial List
Before: Stevenson J
Decision:
Plaintiff entitled to terminate lease and enter possession; plaintiff entitled to damages for unpaid rent and loss of bargain; plaintiff not entitled to relief in relation to fitout costs; plaintiff entitled to succeed against guarantors

Catchwords:
LEASES AND TENANCIES – Retail lease – where parties executed agreement for lease and lease for period of 10 years – where lease not registered – whether lease for 10 years nonetheless arose – effect of and proper construction of Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) and leasing principles of National Code of Conduct – proper construction of provisions in Small Business Commissioner Act 2013 (NSW) concerning admissibility of statements made at mediation – whether lessor entitled to terminate lease and enter possession – whether lessor elected to affirm lease – whether provision concerning recoupment of fitout costs a penalty – proper construction of guarantee – whether guarantors liable for obligations of lessee

Legislation Cited:
Civil Procedure Act 2005 (NSW)
Conveyancing Act 1919 (NSW)
Conveyancing (General) Regulation 2018 (NSW)
Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth)
Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth)
Evidence Act 1995 (NSW)
Interpretation Act 1987 (NSW)
Public Health (COVID-19 Mass Gatherings) Order 2020 (NSW)
Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW)
Real Property Act 1900 (NSW)
Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW)
Retail Leases Act 1994 (NSW)
Small Business Commissioner Act 2013 (NSW)

Cases Cited:
Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd [2022] NSWSC 1746
Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38
Australian International Academy of Education Limited v Dr Nirmal Taluga & Ors [2011] NSWSC 647
Chan v Cresdon Pty Ltd (1989) 168 CLR 242; [1989] HCA 63
Commissioner of Stamp Duties (NSW) v Permanent Trustee Co Ltd (Trustee for Anzareno Dal Bon and Silvanio Dal Bon) (1987) 9 NSWLR 719
Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149; [2011] FCAFC 74
Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79
Gray t/as Clarence Valley Plumbing Services v Ware Building Pty Ltd [2013] NSWCA 271
GWC Property Group Pty Ltd v Higginson [2014] QSC 264
JC v Director of Public Prosecutions (NSW) (2014) 87 NSWLR 320; [2014] NSWCA 228
Lazaris v R [2014] NSWCCA 163
Leitz Leeholme Stud Pty Ltd v Robinson [1977] 2 NSWLR 544
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (2010) 383 ALR 577; [2010] NSWCA 268
Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28
Panayi v Deputy Commissioner of Taxation (2017) 319 FLR 228; [2017] NSWCA 93
Pozetu Pty Ltd v Alexander James Pty Ltd (2016) 18 BPR 36,141; [2016] NSWCA 208
Progressive Mailinghouse v Tabali Pty Ltd (1985) 157 CLR 17; [1985] HCA 14
Regina v Reid [1999] NSWCCA 258
Seltsam Pty Limited v McGuiness; James Hardie & Coy Pty Limited v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29
Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317; [2019] NSWCA 11
Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318; [2010] WASCA 222
Telado Pty Ltd v Vincent (1996) 7 BPR 14,874
Todarello Property Investments Pty Ltd v GJA Kalra Pty Ltd [2021] NSWSC 1678
Woollahra Municipal Council v Secure Parking Pty Ltd (No 2) [2015] NSWSC 452

Texts Cited:
P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters)

Category: Principal judgment
Parties: Alamdo Holdings Pty Ltd (Plaintiff)
Croc’s Franchising Pty Ltd (First Defendant)
Brett Christopher Aldons (Second Defendant)
Lawrence John Cusdin (Third Defendant)
State of New South Wales (Fourth Defendant)
Representation:
Counsel:
J A C Potts SC with A R Langshaw (Plaintiff)
G Farland with D Meyerowitz-Katz (First, Second and Third Defendants)
L Waterson (Fourth Defendant)
Solicitors:
Speed and Stracey Lawyers Pty Ltd (Plaintiff)
Newhouse & Arnold Solicitors (First, Second and Third Defendants)
Crown Solicitor’s Office (Fourth Defendant)

File Number(s): 2021/136164

Judgment

The plaintiff, Alamdo Holdings Pty Ltd (“Alamdo”), is the registered proprietor of Unit 5 of a property in Hudson Avenue, Castle Hill (“the Premises”).
On 18 April 2017, Alamdo and the first defendant, Croc’s Franchising Pty Ltd (“Croc’s”), executed a Heads of Agreement in relation to a proposed lease by Alamdo to Croc’s of the Premises.
On 16 November 2017, Alamdo and Croc’s entered a suite of documents comprising:

an Agreement for Lease of the Premises;

a Memorandum of Lease in registrable form (“the Lease Document”) which was expressed to provide for a lease term of 10 years; and

an Incentive Deed pursuant to which Alamdo agreed to pay Croc’s $250,000 as a contribution towards the fitout of the Premises.

Croc’s accepts that it “entered into possession of the Premises” on 18 June 2018, following completion of the fitout. [1]
1. Opening submissions at par 13.
Croc’s is a franchisor of a number of playcentres in various locations throughout Australia.
Although Croc’s accepts that on 18 June 2018 it entered possession of the Premises, the actual occupant of the Premises was one of Croc’s franchisees, Golden Rock & Hope Pty Ltd (“the Franchisee”).
Unbeknown to Alamdo at the time that Croc’s entered possession of the Premises, pursuant to the license agreement between Croc’s and the Franchisee, the Franchisee was required to pay the full amount of the rent due to Alamdo.
Between June 2018 and March 2020, no controversy arose between Alamdo and Croc’s.
However, the onset of the COVID-19 pandemic in March 2020 adversely affected the business conducted at the Premises by the Franchisee, giving rise to the dispute with which these proceedings are concerned.
Ultimately, on 3 December 2020, Alamdo purported to terminate Croc’s entitlement to possession of the Premises and retook possession.
Alamdo now seeks to recover from Croc’s unpaid rent and outgoings, loss of bargain damages and a refund of a proportion of an incentive payment, to which I will refer.
Alamdo also seeks to recover these amounts from the second and third defendants, Mr Brett Aldons and Mr Lawrence Cusdin, as guarantors of Croc’s obligations.
Croc’s contends that Alamdo’s purported termination of the lease was carried out in contravention of a regulation made pursuant to s 87 of the Retail Leases Act 1994 (NSW), comprising Sch 5 to the Conveyancing (General) Regulation 2018 (NSW) entitled “Commercial leases – COVID-19 pandemic special provisions” (“the COVID Regulation”).
There is a dispute as to whether the steps Alamdo took in 2020, leading up to its retaking of possession on 3 December 2020, were in contravention of the COVID Regulation.
There is also a dispute as to Alamdo’s entitlement to terminate the lease, and recover the amounts claimed, quite apart from the effect of the COVID Regulation.
Alamdo submitted that the COVID Regulation was in any event ultra vires and invalid insofar as it purported to prohibit the recovery of possession or termination of a lease by a lessor under the terms of a lease. For the reasons set out in my judgment of 21 December 2022,[2] I have held that the COVID Regulation was not ultra vires and invalid.
2. Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd [2022] NSWSC 1746.

The response to the COVID-19 pandemic

On 11 March 2020, the World Health Organization declared COVID-19 to be a worldwide pandemic.
On 18 and 23 March 2020, the relevant Minister made the Public Health (COVID-19 Mass Gatherings) Order 2020 (NSW) and the Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW), which had the effect of restricting the size of mass gatherings in indoor areas to 100 persons and prohibiting recreation facilities (such as the Croc’s playcentres) from being open to members of the public, respectively.
On 7 April 2020, the National Cabinet adopted the “National Cabinet Mandatory Code of Conduct – SME [3] Commercial Leasing Principles during COVID-19” (“the National Code”) and State and Territory Cabinets committed to implement legislative measures giving effect to it.
3. “Small Medium Enterprise”.
On 9 April 2020, the Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth) came into effect, permitting the Commonwealth to prescribe the payment of benefits to respond to the COVID-19 pandemic. On the same day the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) (“the JobKeeper Rules”) came into effect which created the “JobKeeper” benefits scheme.
The COVID Regulation was promulgated to give effect, in New South Wales, to the National Code.
The COVID Regulation was inserted into the Conveyancing (General) Regulation by the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) and took effect on 24 April 2020.
The COVID Regulation was amended on 3 July 2020 and ceased to have effect on 23 October 2020. On 24 October 2020 a further regulation, in substantively the same form, commenced. Subject to a savings provision to which I will return, it ceased to have effect on 31 December 2020.
There are some differences between the pre and post 24 October 2020 COVID Regulations. Where it is necessary to distinguish between the two, I will refer to the post 24 October 2020 regulation as the “Second COVID Regulation”.

Clause 4 of the COVID Regulation

Clause 4 of the COVID Regulation was entitled “Prohibitions and restrictions relating to commercial leases”[4] and, relevantly, was in the following terms:
4. The heading is not part of the Regulation but is available to assist in its constructions: ss 34(2) and 35(2) of the Interpretation Act 1987 (NSW).

“(1)    If a lessee is an impacted lessee, a lessor must not take any prescribed action against the lessee on the grounds of a breach of the commercial lease during the prescribed period consisting of—
(a)    a failure to pay rent, or
(b)    a failure to pay outgoings, or
(c)    the business operating under the lease not being open for business during the hours specified in the lease.

Note. See leasing principles No. 1, 11 and 14 in the National Code of Conduct
...” (Italicised emphasis added, bold emphasis in original.)

The “Note” to cl 4(1) refers to the leasing principles in the National Code. The Notes were not themselves a part of the COVID Regulation[5] but comprise material available to construe the COVID Regulation. [6]
5. Conveyancing (General) Regulation, cl 3(2).
6. Interpretation Act, s 34(2).
Clause 4 incorporated a number of terms, that I have emphasised in italics, that were defined elsewhere in the COVID Regulation.
“Impacted lessee” was defined as follows:

“(1)   A lessee is an impacted lessee if—
(a)    the lessee qualifies for the jobkeeper scheme under sections 7 and 8 of the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 of the Commonwealth, and
(b)    the following turnover in the 2018-2019 financial year was less than $50 million—
(i)   if the lessee is a franchisee—the turnover of the business conducted at the premises or land concerned,
(ii)   if the lessee is a corporation that is a member of a group—the turnover of the group,
(iii)    in any other case—the turnover of the business conducted by the lessee.” (Emphasis in original.)

There was no dispute that Croc’s satisfied the requirement of subpar (b) of that definition, in that its turnover during FY19 was less than $50 million. There is a dispute, to which I will return, as to whether Croc’s satisfied the further requirements of subpar (a) of the definition; qualification for JobKeeper.
There is no dispute that Alamdo’s purported termination of the Lease and entering into possession was “prescribed action” for the purpose of the COVID Regulation.
“Prescribed period” was defined to mean the period ending at the end of the day that was six months after the date on which the Retail and Other Commercial Leases (COVID-19) Regulation commenced, 24 April 2020. The “prescribed period” thus ended on 23 October 2020. The Second COVID Regulation made on 24 October 2020 had the effect of, amongst other things, extending the “prescribed period” to 31 December 2020, subject to provisions to which I will return.
There is no dispute that the Lease Document was a “commercial lease” for the purpose of the COVID Regulation.

Clause 5 of the COVID Regulation

Clause 5 [7] of the COVID Regulation was headed “Obligation to renegotiate rent and other terms of commercial leases before prescribed action”.
7. Subclauses (1A), (3A) and (3B) were added to the COVID Regulation from 3 July 2020.
It provided:

“(1A)   This clause applies to a commercial lease to which an impacted lessee is a party (an impacted lease).
(1)   A lessor under a commercial lease must not take or continue any prescribed action against an impacted lessee on grounds of a breach of the commercial lease consisting of a failure to pay rent during the prescribed period unless the lessor has complied with this clause.
Note. This clause does not prevent parties to a commercial lease coming to agreements relating to the lease. For example, an impacted lessee may voluntarily agree to pay full rent during the prescribed period. The clause prevents the lessor taking unilateral prescribed action without complying with the requirements set out in subclauses (2)-(4).
(2)   If an impacted lessee is a party to a commercial lease, any party to the lease may request the other parties to renegotiate the rent payable under, and other terms of, the commercial lease.
(3)   A party to a commercial lease must, if requested, renegotiate in good faith the rent payable under, and other terms of, the commercial lease.
(3A)   An impacted lessee must give the lessor the following in respect of the impacted lease—
(a)   a statement to the effect that the lessee is an impacted lessee,
(b)   evidence that the lessee is an impacted lessee.

(3B)   If the impacted lessee does not comply with subclause (3A), the lessor is taken to have complied with this clause.
(4)   The parties are to renegotiate the rent payable under, and other terms of, the commercial lease having regard to—
(a)   the economic impacts of the COVID-19 pandemic, and
(b)   the leasing principles set out in the National Code of Conduct.
Note. See leasing principles No. 3-5, 7-10 and 12 in the National Code of Conduct.
In particular, leasing principle No. 3 in the National Code of Conduct requires landlords to offer rent reductions, in the form of waivers or deferrals of rent, proportionate to lessees’ reductions in turnover.” (Emphasis in original.)

In the Second COVID Regulation, the form of cl 5 was changed, with effect from 24 October 2020, so that it read as follows:

“(1)   A lessor under an impacted lease must not take or continue prescribed action against the impacted lessee on grounds of a breach of the impacted lease consisting of a failure to pay rent during the prescribed period unless the lessor has complied with this clause.
Note. This clause does not prevent parties to an impacted lease coming to agreements relating to the lease. For example, an impacted lessee may voluntarily agree to pay full rent during the prescribed period. The clause prevents the lessor taking unilateral prescribed action without complying with the requirements set out in subclauses (2)-(6).
(2)   A party to an impacted lease may request the other parties to renegotiate the rent payable under, and other terms of, the impacted lease.
(3)   A party to the impacted lease may make a second or subsequent request under subclause (2) but, unless the parties otherwise agree, an impacted lessee may make a second or subsequent request only if the request—
(a)   is made during the prescribed period, and
(b)   does not relate to rent for a period for which rent has been reduced, waived or deferred following a renegotiation under this clause.

(4)   A party to an impacted lease must, if requested under this clause—
(a)   renegotiate in good faith the rent payable under, and other terms of, the impacted lease, and
(b)   commence renegotiations within—
(i)   14 days of receiving the request, or
(ii)   another period agreed to by the parties.

(5)   An impacted lessee must give the lessor the following in respect of the impacted lease—
(a)   a statement to the effect that the lessee is an impacted lessee,
(b)   evidence that the lessee is an impacted lessee.

(6)   The parties are to renegotiate the rent payable under, and other terms of, the impacted lease having regard to—
(a)   the economic impacts of the COVID-19 pandemic, and
(b)   the leasing principles set out in the National Code of Conduct.
Note. See leasing principles No. 3-5, 7-10 and 12 in the National Code of Conduct.
In particular, leasing principle No. 3 in the National Code of Conduct requires landlords to offer rent reductions, in the form of waivers or deferrals of rent, proportionate to lessees’ reductions in turnover.

(7) If the impacted lessee does not comply with subclauses (4)-(6), the lessor is taken to have complied with this clause.
(8) To avoid doubt, a renegotiation commenced but not concluded before the expiry of the prescribed period may be continued and concluded after that expiry.
Note. This clause applies only in relation to breaches of impacted leases consisting of a failure to pay rent during the prescribed period, being 24 April 2020 to 31 December 2020.” (Emphasis in original.)

In relation to this form of cl 5:

clause 5(1) was in the same terms as the earlier cl 5(1);

clause 5(2) was to the same effect as the earlier cl 5(2);

clause 5(3) was new and made provision for a party to an impacted lease to make a second or subsequent request under cl 5(2);

clause 5(4) was equivalent to but more detailed than the earlier cl 5(3);

clause 5(5) was in the same terms as the earlier cl 5(3A);

clause 5(6) was in the same terms as the earlier cl 5(4);

clause 5(7) corresponded to but was more extensive than the earlier cl 5(3B); and

clause 5(8) was new.

Clause 6 of the COVID Regulation

Clause 6 of the COVID Regulation was entitled “Disputes must be submitted to mediation before proceedings can be taken”.
The clause provided:

“A lessor must not do any one or more of the following unless and until the Small Business Commissioner has certified in writing that mediation offered to be conducted by the Small Business Commissioner has failed to resolve the dispute and given reasons for the failure—
(a)   seek to recover possession of premises or land under the commercial lease,
(b)   terminate the commercial lease,
(c)   exercise or enforce any other right of the lessor under the lease.”

The National Code

The National Code provided, relevantly:

“PURPOSE
The purpose of this Code of Conduct (‘the Code’) is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, where the tenant is an eligible business for the purpose of the Commonwealth Government’s JobKeeper programme.
These principles will apply to negotiating amendments in good faith to existing leasing arrangements – to aid the management of cashflow for SME tenants and landlords on a proportionate basis – as a result of the impact and commercial disruption caused by the economic impacts of industry and government responses to the declared Coronavirus (‘COVID-19’) pandemic.

This Code applies to all tenancies that are suffering financial stress or hardship as a result of the COVID-19 pandemic as defined by their eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of up to $50 million (herein referred to as ‘SME tenants’).
The $50 million annual turnover threshold will be applied in respect of franchises at the franchisee level, and in respect of retail corporate groups at the group level (rather than at the individual retail outlet level).” (Emphasis in original.)

And:

“OVERARCHING PRINCIPLES
The objective of the Code is to share, in a proportionate, measured manner, the financial risk and cashflow impact during the COVID-19 period, whilst seeking to appropriately balance the interests of tenants and landlords.
It is intended that landlords will agree tailored, bespoke and appropriate temporary arrangements for each SME tenant, taking into account their particular circumstances on a case-by-case basis.
The following overarching principles of this Code will apply in guiding such arrangements:
• Landlords and tenants share a common interest in working together, to ensure business continuity, and to facilitate the resumption of normal trading activities at the end of the COVID-19 pandemic during a reasonable recovery period.
• Landlords and tenants will be required to discuss relevant issues, to negotiate appropriate temporary leasing arrangements, and to work towards achieving mutually satisfactory outcomes.
• Landlords and tenants will negotiate in good faith.
• Landlords and tenants will act in an open, honest and transparent manner, and will each provide sufficient and accurate information within the context of negotiations to achieve outcomes consistent with this Code.
…
• The Parties will take into account the fact that the risk of default on commercial leases is ultimately (and already) borne by the landlord. The landlord must not seek to permanently mitigate this risk in negotiating temporary arrangements envisaged under this Code.
• All leases must be dealt with on a case-by-case basis, considering factors such as whether the SME tenant has suffered financial hardship due to the COVID-19 pandemic; whether the tenant’s lease has expired or is soon to expire; and whether the tenant is in administration or receivership.” (Emphasis in original.)

The “Leasing Principles” in the National Code

As I have mentioned, the COVID Regulation referred to the Leasing Principles in the National Code.
Those relevant are:

“In negotiating and enacting appropriate temporary arrangements under this Code, the following leasing principles should be applied as soon as practicable on a case-by-case basis:
1. Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
2. Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
3. Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under ‘definitions’, below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
4. Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreement.
5. Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.”

The National Code provided, concerning the word “proportionate” referred to in Leasing Principle 3:

“Proportionate: the amount of rent relief proportionate to the reduction in trade as a result of the COVID-19 pandemic plus a subsequent reasonable recovery period, consistent with assessments undertaken for eligibility for the Commonwealth’s JobKeeper programme.”

The National Code contained the following definitions:

“The following definitions are provided for reference in the application of this Code.
1. Financial Stress or Hardship: an individual, business or company’s inability to generate sufficient revenue as a direct result of the COVID-19 pandemic (including government-mandated trading restrictions) that causes the tenant to be unable to meet its financial and/or contractual (including retail leasing) commitments. SME tenants which are eligible for the federal government’s JobKeeper payment are automatically considered to be in financial distress under this Code.
2. Sufficient and accurate information: this includes information generated from an accounting system, and information provided to and/or received from a financial institution, that impacts the timeliness of the Parties making decisions with regard to the financial stress caused as a direct result of the COVID-19 event.
3. Waiver and deferral: any reference to waiver and deferral may also be interpreted to include other forms of agreed variations to existing leases (such as deferral, pausing and/or hibernating the lease), or any other such commercial outcome of agreements reached between the parties. Any amount of reduction provided by a waiver may not be recouped by the Landlord over the term of the lease.”

The “Binding Mediation” provision in the National Code

Finally, the National Code made the following provision concerning binding mediation:

“Where landlords and tenants cannot reach agreement on leasing arrangements (as a direct result of the COVID-19 pandemic), the matter should be referred and subjected (by either party) to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable.
Landlords and tenants must not use mediation processes to prolong or frustrate the facilitation of amicable resolution outcomes.”

The course of events

As I have said, from June 2018 until March 2020, no controversy arose between the parties.
On 26 February 2020 Alamdo issued an invoice to Croc’s for the rent payable for March 2020: $26,083.20. Such rent was due on 1 March 2020.
Croc’s paid rent of $2,000 on 4 March 2020 and a further $6,000 on 10 March 2020. Croc’s paid no further rent until 13 July 2020 when it paid a further $5,000 which Alamdo allocated partially to reduce the rent outstanding for March 2020. On 31 August 2020 Croc’s paid a further $4,000, which Alamdo also allocated to the rent due for March 2020.
On 14 March 2020 Mr Aldons and Mr Cusdin, on behalf of Croc’s, wrote to Mr Anthony Maurici, the sole director of Alamdo, describing the impact that COVID-19 was having on the businesses of Croc’s franchisees, and requesting an abatement of rent for two months. This was shortly after the World Health Organization’s pandemic declaration on 11 March 2020 and shortly before the 18 and 23 March 2020 Public Health Orders concerning mass gatherings and the closing of recreational facilities in New South Wales.
Mr Aldons and Mr Cusdin stated:

“Two weeks ago, our stores which are owned and operated by local families began to see a slide in sales and forward party bookings. This week, sales have plummeted across our network to unsustainable levels and huge panic in the ranks has set in. Hundreds of birthday parties that were pre-booked have now been cancelled, refunds provided to customers and our stores are desolate.
We are currently approaching you to … advise you of our predicament and that we are all hoping this will be relatively short lived.
We are hoping the business can get back to normal as soon as possible not only for ourselves but for our customers, casual staff that have now been laid off throughout the network and you as our landlord. Until that point we are requesting you afford our store an abatement of rent for the following 2 months with regular reviews during this time.” (Emphasis added.)

On 16 March 2020 Mr Maurici replied, offering to accept a payment of 50% of rent for three months on the basis that the shortfall would be then repaid.
Mr Maurici wrote:

“I am sorry to see your business suffer, as no doubt are many others until the virus is contained and managed, and that you are experiencing reduced income.
Unfortunately, I am in a similar situation in that my expenses have not abated and there is nothing that I can do to reduce them, including bank interest, land tax and Council rates, insurance and the usual cost in operating the property. I assure you that if there [is] any government regulation passed that abates or reduces these expenses, I will pass them on to my tenants.
As a result I am unable to assist by abating rent because that would put my business in jeopardy. However, I am prepared to accept part payment of say 50% [of] the rent for the next three months on the undertaking that the shortfall will be paid in six equal instalments after that time to catch up. I will not charge interest on the later payment provided that the instalments are made on time.
This is the best that I can do, and your business will have to bear its share of the burden like the rest of us. I suggest that you write to your local federal parliamentary member and ask for government assistance.” (Emphasis added.)

Mr Aldons replied on 19 March 2020, seeking a “complete abatement of rent” for the “next several months”.
Mr Aldons wrote:

“Apologies for the delay in getting back to you. By way of further update since our last email the 100 people or less for public gatherings is in effect for us and we fear that within days we will have a forced closure by the authorities as the situation worsens. Our information is unclear at this stage however we are trading with my franchisee working with zero staff in the store on their own until further notice is provided.
This may be an issue for several months so we hope that you are able to receive the relief required from your own lenders during what must be a very challenging time for landlords as well.
With regards half price rental, this is simply not a possibility for the store as the current situation in sales is simply not even covering the costs to turn the air-conditioning on. We need complete abatement of rental during this period, my franchisee is set to earn $0 income and is reliant on this business as the sole income. We will be happy to review this monthly as the situation may change but at this point in time, any rental payment required will simply not be possible.” (Emphasis added.)

As the passage I have emphasised shows, in this email Mr Aldons referred to the financial performance of “the store” and Croc’s “franchisee” rather than its own financial performance.
On 19 March 2020 Mr Maurici replied:

“I understand your position and you must also understand mine. My bills continue and I can’t go to the bank, Council, NSW Office of State Revenue, and the maintenance contractors at the property and ask for forgiveness of my debt or free services.
I will have to fund these with extra loans or cash, as you will have to also.
Your company, not your franchisee is the Lessee and you have guaranteed its performance. Alamdo as Lessor is not a party in your business and wants and is entitled to its rent. You rented the property at your risk, not mine.
I cannot accept that you are making no effort to pay rent and if rent is not paid, I shall recover from you personally.
Please be reasonable and pay some rent on the timetable that I offered.”

As I have set out above, the National Code came into effect on 7 April 2020 and the COVID Regulation took effect from 24 April 2020.

The “open offer”

On 28 April 2020 Mr Maurici made a further offer, this time to accept a 50% waiver of rent from 24 April 2020, the date on which the COVID Regulation took effect, and a deferral of the balance payable for 24 months following the lifting of business restrictions.
Thus, Mr Maurici wrote:

“Government Coronavirus Code of Conduct states that both tenants and landlords are to share in a proportionate measured manner the financial risk and cashflow impact during the COVID-19 period, to balance the interests of both.
To date I have received no rent from you since March payments of $8000, nor any undertaking to repay any rent deferred. My outgoings on the property remain unchanged and I am not getting any assistance from my bank. The March rent is excluded from the Code which commenced on 4 April. Please pay immediately.
I accept that closure has [meant] no revenue from your business at the Premises, but it also means that your expenses have also reduced because your other operating costs are much less while you are not operating. On my side, no rent from your tenancy and Flip About and reduction at the others means that my revenue has dropped by 66% but my outgoings expenses have not reduced. In other words I have no net income after payment of outgoings and zero from small beginnings is the same as zero from larger beginnings. We are both impacted by a similar degree.
In the spirit of the Code, I will accept a 50% waiver of rent from 4 April 2020, [8] the effective date of the Code in lieu of an extension in the term of the Lease for the period during which your business remains closed by Government mandate. The other 50% payable will be deferred to be paid during the 24 months following the lifting of the government ban on operation of your business. The deferred payments will not attract interest.
If this is acceptable please provide evidence in the form of financial accounts showing revenue, expenses and profitability for your business, at the Premises, during the past twelve months to demonstrate the impact suffered by it as a result of the COVID-19 pandemic.” (Emphasis added.)
8. It is common ground that Mr Maurici intended to say “24 April 2020” in this, and the second paragraph above.

Mr Aldons said that he had not recalled receiving this email until he saw a copy of it in the course of these proceedings. Mr Aldons said that the offer in this email was never discussed or talked about throughout the period leading up to Alamdo retaking possession of the Premises on 3 December 2020.
However, the evidence establishes that Mr Aldons did receive the email, as he accepted.
The fact that the email was received is evident from the terms of Croc’s solicitor’s letter of 24 November 2020, to which I will return.
Mr Maurici said that he regarded the offer as remaining open throughout that period.
The effect of the offer was that, for the moment, Croc’s was not obliged to pay any rent.

Events following the offer

Mr Aldons did not reply to Mr Maurici’s email dated 28 April 2020 . Mr Aldons did not further communicate with Alamdo until 26 May 2020, after receiving an email on 21 May 2020 from Mr Maurici’s son, Mr Seb Maurici, requesting that Mr Aldons pay the remaining rent due for March 2020 “and rent up to the 24th April which is when the COVID legislation came into effect in New South Wales”.
Mr Seb Maurici also requested that Mr Aldons provide “your financials so we can internally process your request for rental abatement” and sought copies of:

“• The last 12 months of BAS Statements.
• Copy of Business Bank Statement(s) for previous 12 months.
• Trading figures or financial reports for FY 2019 (audited and certified reports).
• Trading figures or financial reports for the current Financial Year (certified by an accountant).
• Most up to date financials available for Jan to present showing your loss of income.”

On 27 May 2020 Mr Seb Maurici sent Mr Aldons an invoice for the June 2020 rent which, under the terms of the Agreement for Lease, was due on 1 June 2020.
Alamdo had sent a like invoice on 28 April 2020 for May 2020 rent and subsequently sent invoices on 29 June 2020 for July 2020 rent, 31 July 2020 for August 2020 rent, 28 August 2020 for September 2020 rent, 30 September 2020 for October 2020 rent and 30 November 2020 for December 2020 rent. Croc’s relies upon each of these acts as constituting an election by Alamdo to affirm the Lease. I return to this below.
On 10 June 2020 Mr Seb Maurici sent Mr Aldons a document called “Rental Relief Request Form” under cover of an email in which he stated:

“To allow Alamdo Holdings Pty Ltd to process your request for COVID-19 rental relief, we require the attached documentation to be completed and returned via email by Friday 19^th June 2020.”

The Rental Relief Request Form was in the following format:

Mr Aldons replied on 16 June 2020 providing a Business Activity Statement for the Franchisee for the period January 2020 to March 2020.
That document recorded total sales by the Franchisee of $323,429 for that period. That period was prior to the date of the National Code and the date on which the COVID Regulation took effect.
As I have said, on 1 July 2020 the Franchisee resumed trading from the Premises.
On 31 July 2020 Mr Anthony Maurici sent an email to Mr Aldons:

“You have not provided certified financial accounts and other requested information to allow me to properly assess COVID-19 rental relief.”

Mr Aldons replied on 4 August 2020:

“Are we looking at reverting to the code of conduct for rental amounts payable, deferred and waived?
Please advise ASAP as my franchisee’s sales are around 10% of prior year as NSW is a disaster for our industry at present.
My franchisee is also happy to finalise the last amount due until the 22^nd March when we were forced to close if we can have an agreement around the last week [of March] being nil.”

This email did not engage with Alamdo’s requests for financial information.
On 7 August 2020 Mr Aldons wrote to Mr Seb Maurici:

“The following information relates to the sales for Castle Hill so that you can apply the code of conduct accordingly for rent payable, deferred and waived:
July sales $19,960 versus last year July of $95,431
Sales achieved = 20.92%
Deferred amount = 39.54%
Waived amount = 39.54%
Sales achieved (%) is what is payable by my franchisee for rent ie 20.92% for July.” (Emphasis in original.)

In this email, Mr Aldons was providing information relating to the Franchisee, rather than Croc’s itself. The email, again, did not engage with Alamdo’s request for financial information about Croc’s itself.
Mr Aldons gave this evidence in cross-examination concerning this email:

“Q. And these weren’t figures, weren’t sales figures, of the first defendant, they were the figures for the franchisee, correct?
A. Yes.
Q. You’ve simply stated these figures and you haven’t attempted to provide any underlying financial information to substantiate them, correct?
A. Yes.
Q. You well knew at 7 August 2020, this wasn’t what Alamdo had been asking you for, correct?
A. Yes.
Q. You didn’t want to give Alamdo what it had been asking you for, did you?
A. No.
Q. You’re agreeing with me?
A. Yes.”

And later:

“Q. You see after the first two paragraphs you say in bold print, ‘Sales achieved percentage is what is payable by my franchisee for rent i.e., 20.92% for July’. Do you see that?
A. Yes.
Q. What you were intending to assert by that was that you or perhaps your franchisee were entitled to a rent reduction measured exactly in proportion to the reduction in sales, correct?
A. Yes.
Q. That was your steadfast position in negotiating with Alamdo throughout the second half of 2020, wasn’t it?
A. Yes.

Q. You never wavered from that position, did you?
A. No.
Q. Your attitude was simply, ‘All I have to show Alamdo is how much my franchisee’s sales have reduced’. Correct?
A. As at 7th of August; yes.
Q. Later on, you accepted you might have to show how much Croc’s sales had reduced.
A. Yes.
Q. But beyond that, you weren’t prepared to give them anything, correct?
A. Sorry, beyond?
Q. Beyond the provision of data about how much sales had been reduced; you were not prepared to provide any further financial information to Alamdo.
A. No.
Q. You’re agreeing with me?
A. Yes.”

Mr Anthony Maurici replied to Mr Aldons’ 7 August 2020 email on 10 August 2020:

“Thank you for sending this information. However, it does not provide sufficient information to allow Alamdo Holdings Pty Ltd to properly assess the impact of the COVID-19 shutdown on your business and relative impact on its business as landlord of the Premises. You have not paid any rent from March 2020, with only $13,000 paid of the $26,083.20 due for that month, and have resumed trading since 1 July 2020. Leaving aside the present negotiations for rent relief, NSW COVID regulations relating to rental relief came into effect on 24 April 2020 and rent is due and payable in full up to this date. You are presently in breach of your lease and Alamdo requires that you immediately pay $19,723.19 including GST for April up to the 23^rd and $13,083.20 including GST for March. Failure to pay will lead to a breach of the Lease for which I will issue a Notice of Breach to Croc’s Franchising Pty Ltd and you and Lawrence Cus[d]in as guarantors.
The information you provided does not relate to the lessee Croc’s Franchising Pty Ltd’s business as required by NSW COVID regulations and is of little use in assessing rent relief for the premises to the Lessee.
The BAS statements and cashflows for the franchises operating from the premises indicate that your business generates large cashflows and no doubt profits when trading, more than sufficient to pay rent.
You have been asked many times to provide detailed financial information to support your claim for rent relief and I again attach and ask you to complete Rental Relief request form and provide the requested information. I will give you fourteen (14) days to provide this information and if it is not provided by 5pm Monday 24 August, I shall consider that you have not satisfied section 5(3B) of Schedule 5 of Conveyancing (General) Regulation 2018 and will proceed to issue Croc’s Franchising Pty Ltd with a Notice of Breach for non-payment of rent. Failure to remedy the breach will lead to termination of the Lease.”

Mr Aldons agreed that Croc’s did not ever complete the “Rental Relief Request Form” to which Mr Maurici referred in that email and agreed that this was a “conscious and deliberate choice by you on behalf of” Croc’s.
On 11 August 2020, Mr Aldons sent an email to Mr Anthony Maurici and Mr Seb Maurici enclosing, for the first time, financial information referable to Croc’s itself, rather than its Franchisee.
Attached to that email was a letter from Croc’s accountant, Mr Stephen Penn from Weber Bowman Pty Ltd, Chartered Accountants, that attached a JobKeeper Application made by Croc’s to the Australian Taxation Office on 24 April 2020, together with two documents entitled “Monthly Revenue Summary” for years ended 30 June 2019 and 30 June 2020.
The material provided with this email did not constitute evidence that Croc’s was an “impacted lessee” within the definition of cl 2 and for the purposes of cl 5(3A) of the COVID Regulation as it did not show whether Croc’s qualified for the JobKeeper scheme. Mr Aldons’ email contained an assertion that “we are eligible and are participating in the jobkeeper scheme”. But the attachment to his email was no more than Croc’s 24 April 2020 application for JobKeeper.
Relevantly, those documents showed total income for the period April to June 2019 of $623,455, and for the corresponding period in 2020, $172,566.21.
The material did not reveal what expenses Croc’s had incurred during those periods, nor what profit had been made. Nor did the material reveal Croc’s financial position after June 2020, when the Franchisee had resumed trading from the Premises.
Mr Aldons concluded his email stating:

“We are certainly at the table to work in good faith and try and ensure all parties come out the other side of Covid-19 and hope that you are also of the same view.
Once you have digested this, we will need to work out a plan for the arrears until April 24^th (when NSW code applied) as we all know that this business was closed by the government on March 22^nd.”

The mediation

As I have set out above, it was a requirement of the National Code that where lessors and lessees could not reach agreement on leasing matters they must attend a binding mediation.
On 21 September 2020, Alamdo made an application to the New South Wales Small Business Commissioner. A mediation took place on 29 September 2020.
Section 19(3) of the Small Business Commissioner Act 2013 (NSW) provides:

“Any statement or omission made in connection with any alternative dispute resolution services provided by the Commissioner under this Act is not admissible in any legal proceedings.”

During the hearing I ruled that, by reason of that provision, I was not able to receive into evidence material in a number of affidavits concerning what had occurred at the mediation before the Small Business Commissioner. I gave brief reasons at the time for making that decision and said I would give more fulsome reasons in this judgment. Those reasons appear below. [9]
9. See [198]-[218] below.
On 1 October 2020 Mr Cusdin, on behalf of Croc’s, caused Croc’s to pay Alamdo $29,963, which payment had the effect of bringing rent up to date to 24 April 2020. Mr Cusdin said the payment “takes the store up to the 24^th April”.
Croc’s thus, eventually, paid April 2020 rent up to 24 April. But the rent for all of April was due on 1 April 2020. Croc’s accepts that its failure to pay April 2020 rent on 1 April 2020 was not a failure to pay rent occurring “during the prescribed period” for the purpose of cl 4(2) of the COVID Regulation nor a “failure to pay rent during the prescribed period” for the purpose of cl 5(1) of the COVID Regulation. The COVID Regulation therefore did not prevent Alamdo relying on Croc’s failure to pay the April 2020 rent on 1 April 2020 to terminate the Lease. Cros’s submits that, nonetheless, for reasons I discuss below, Alamdo had no such entitlement. [10]
10. See [149]-[157] below.
On 13 October 2020 Mr Aldons wrote to Mr Anthony Maurici enclosing “sales information for the store” and stating:

“We are requesting a rent reduction between 24^th April to end September in line with the code of conduct based on the proportionate drop in revenue experienced by the entity trading from the [Premises].”

Again, Mr Aldons was advocating for rental relief based upon the Franchisee’s position, rather than that of Croc’s.
Mr Aldons also attached a document prepared by Croc’s accountant, Mr Penn, concerning Croc’s “turnover as per accounting records”.
Mr Penn’s letter stated:

“As per your instructions I have prepared a summary of the income for Croc’s Franchising Pty Ltd from your accounting data file for the periods 1 July 2020 to September 2020 and 1 July 2019 to 30 September 2019.
I can confirm that the figures in Attachment A are correct as reported in your accounting data file.”

The attachment to Mr Penn’s letter recorded that Croc’s “total income” for the period July to September had fallen from $656,604.33 to $375,124.36 between 2019 and 2020. Thus, according to these figures, Croc’s income for the relevant quarter in 2020 was some 57% of that for the preceding year.
In cross-examination Mr Anthony Maurici said that he thought there was no “veracity” in this material as it was “the accountant’s information … based on information provided by Croc’s, and the information provided by Croc’s was not presented, it was only tabulated, as if that’s something that I have to accept”.
Mr Aldons also attached to his information what he described as “sales information for the store”, being a summary of net sales of Croc’s Franchisee which showed a percentage drop of around 80% between July, August and September 2019 and the corresponding months in 2020.
In his covering letter, Mr Aldons requested a rent reduction for the period from 24 April 2020 to 30 September 2020 “in line with the Code of Conduct based on the proportionate drop in revenue experienced by the entity trading from the [Premises]”.
That is, although Croc’s had provided information as to its income, it sought a rental reduction in proportion with a drop of revenue of the Franchisee, as it was the Franchisee that was “the entity trading from” the Premises.
Mr Aldons gave this evidence about that material in cross-examination:

“Q. Can I ask you this about page 0852?
A. Yes.
Q. That material related to [Croc’s] franchisee, correct?
A. Yes, that’s correct.
Q. Could you come back to page 0850?
A. Yes.
Q. This material, by contrast, related to [Croc’s].
A. This is management accounts for [Croc’s], yes.
Q. This material related to the financial position of [Croc’s].
A. Yes.
Q. Again, you’ve provided only figures for income or revenue. Correct?
A. Yes.
Q. There were no figures given for expenses. Correct?
A. No.
Q. And no figures given for profit. Correct?
A. No.
Q. And that was despite the fact that you well understood Mr Tony Maurici wanted transparency about the full impact of the pandemic on [Croc’s]. Correct?
A. Yes.
Q. You didn’t want to be transparent with Alamdo. Did you?
A. No.
Q. You disagree with me?
A. No. We hadn’t had final financial accounts done at that point in time, and we didn’t believe that we had to provide our expenses as part of the process.”

On 5 November 2020, Mr Aldons wrote to Mr Seb Maurici:

“… have you calculated the rent due based on the information I’ve sent previously regarding sales and the downturn?”

Mr Aldons evidently thought that Croc’s had no obligation to negotiate and reach agreement with Alamdo concerning rent relief, but assumed that Croc’s was entitled to a reduction in rent calculated by reference to the revenue position of its Franchisee.
On 10 November 2020 Mr Aldons wrote to Messrs Maurici:

“As promised please find attached sales information from the POS [11] for the previous months to confirm the downturn in sales so that we can work out the rent payable based on the code of conduct in NSW. We will continue to provide this information on a monthly basis so we can determine the rent payable, deferred and waived.”
11. Point of Sale; ie Croc’s Franchisee.

Mr Aldons attached to that letter a schedule setting out the Franchisee’s sales for 2019 and for year-to-date in 2020, showing a significant drop in sales.
Mr Aldons’ email again makes clear that his view was that Croc’s was entitled to a rent reduction proportionate to the Franchisee’s sales reductions throughout 2020.
On 10 November 2020 Alamdo sent Croc’s what the parties described as a “breach notice” and what was, in effect, a notice under s 129 of the Conveyancing Act 1919 (NSW).
The letter stated:

“I give you notice that you are in breach of your undertakings given in clause 4.1 by not paying Rent amounting to $187,785 including GST from 25 April 2020 to 30 November 2020.
Your request for rent relief, which you claim is due to financial distress caused to your company by the coronavirus pandemic, is refused. Despite repeated requests for you to provide verifiable evidence of this financial distress, you have not done so. Therefore, Alamdo relying on the Lease and Schedule 5 of the Conveyancing (General) Regulation 2018 reacts to your breach by this notice.
In particular:
1. You have not paid any rent since 24 April to be now in arrears for $187,785 plus interest;
2. you have not provided evidence that you are an impacted lessee as required by section 5(5)(b) of Schedule 5 of the Conveyancing (General) Regulation 2018;
3. you have not negotiated in good faith having regard to section 6 of Schedule 5 of the Conveyancing (General) Regulation 2018;
…

As a result of the above, my company is free of the prohibition to take this prescribed action as provided in section 5(7) of the Regulation. You have fourteen (14) days to remedy this breach after which the Landlord, reserving all of its rights under the Lease, will re-enter the Premises, repossess them and terminate the Lease.”

Mr Aldons responded to Alamdo’s breach notice as follows:

“In response to your notice of breach we provide the below information:
We are entitled to rent relief as per the NSW code of conduct. The information relating to Croc’s Franchising downturn in sales as well as jobkeeper eligibility has previously been sent and re-confirmed as at October this year as has the franchisees (business operating out of your premises under a license agreement) sales information, P+L’s, participation in jobkeeper etc. We also sent a letter outlining our eligibility under the code.
Nonetheless we are still waiting for you to provide the rental amounts due and payable based on the proportionate drop in sales (as provided). Can you please recalculate the rental due from April 24^th to end November based on the information we have sent (sales)?
We feel that we can get this business back to where it was before Covid and require your assistance until the end of the recovery period as per the code.
We believe that both Croc’s and our franchisee are entitled to the protections provided under the code and that your notice of breach is unlawful.
Please advise the rent payable so that we can work with our franchisee to arrange prompt payment and work with our franchisee to keep the store open and get it profitable again.”

Again, Mr Aldons’ letter asserted an entitlement that the rent of the Premises be reduced in proportion to the drop in sales of the Franchisee.
Croc’s now engaged a lawyer to represent it.
Thus, on 24 November 2020, Ms Lauren Smyth, solicitor, sent Alamdo a letter enclosing Croc’s Business Activity Statements for each quarter from September 2018 to June 2020, together with Croc’s JobKeeper application of 9 October 2020 and a statement from the Australian Taxation Office that, for the September 2020 quarter, Croc’s had “satisfied the decline in turnover requirements and are eligible for JobKeeper”.
On behalf of Croc’s, Ms Smyth wrote, under the heading “Rent Relief”:

“Having regard to the economic impact of the COVID-19 pandemic and the leasing principles of the Code, Croc’s is seeking to renegotiate the rent payable and to agree with the Landlord, the following temporary arrangements:
(a)   The rent is reduced proportionately to the franchisee’s reduction in turnover associated with the Premises for each month (Rent Reduction);
(b)   50% of the Rent Reduction is waived;
(c)   50% of the Rent Reduction is deferred, with the total deferred rent liability to be payable from 1 January 2021 and amortised over the balance of the lease term.” (Emphasis in original.)

Ms Smyth stated that the reduction in turnover associated with the Premises was set out in a table as follows:

Ms Smyth, in effect, repeated Croc’s ongoing assertion that it was entitled to a rent reduction in proportion to the Franchisee’s reduction in turnover.
Ms Smyth’s reference, in the first three rows of her table, to “rent waived” and “rent deferred” of 50% appears to bespeak her understanding, and thus that of Croc’s, that Mr Maurici’s 28 April 2020 offer had remained on the table for at least April to June 2020.
By reference to Croc’s Business Activity Statements, Mr Potts SC and Mr Langshaw, who appeared for Alamdo, produced a calculation that showed that, despite a fall in income from 2019 to 2020, Croc’s nonetheless made a profit, excluding GST, of $19,690 for the quarter ending June 2020 and $79,120 for the quarter ending September 2020.
On 27 November 2020 Ms Smyth sent Mr Maurici a further email, again focusing on the position of the Franchisee. Ms Smyth said:

“Covid-19 has had a severe impact on the business. As an indoor playcentre, the franchisee was required to cease trading immediately. Unlike many other businesses, it had no opportunity to pivot its model or adjust its operations to generate an income. In circumstances where it has had no or minimal sales, it has not been in a position to pay rent, which is precisely why our client contacted you in March for rent relief.”

Again, the focus of Ms Smyth’s contentions was on the position of the Franchisee, rather than Croc’s itself.
On 30 November 2020, Alamdo sent an email to Croc’s attaching “rent invoice for December” and stating:

“Please pay your back rent arrears immediately. You are in breach of the lease agreement and Alamdo Holdings reserves all of its right to terminate the agreement and repossess the Premises.”

On 3 December 2020, Alamdo took possession of the Premises and purported to terminate the Lease.
Alamdo then took steps to locate an alternative lessee of the Premises.
Ultimately, on 7 June 2022, it entered a lease with Dutton Retail 2 Pty Ltd for a tenure of 10 years from 7 June 2022.

The consequences of the Lease not being registered

Clause 3.1 of the Agreement for Lease provided:

“Subject to clause 2, [Alamdo] grants the Lease to [Croc’s], and [Croc’s] accepts, the grant of the Lease from the Commencing Date.”

“Lease” was defined to mean a lease of the Premises in the form annexed to the Agreement for Lease.
Clause 3.2 made provision for the preparation and execution of the Lease.
Clause 3.2(d) provided:

“After [Alamdo] receives the Lease signed by [Croc’s] and completes it under clause 3.2(c), [Alamdo] must:
(i)   sign it (in duplicate); and
(ii)   arrange for the Lease to be registered, at [Croc’s] cost, as soon as practicable after the Commencing Date is determined; and
(iii)   return one counterpart of the Lease to [Croc’s].”

Alamdo and Croc’s executed the Lease.
Alamdo, for reasons unexplained, did not cause the Lease to be registered.
Clause 3.3 was expressed to be “subject to clause 2”, that is cl 3.2.
Clause 3.3 of the Agreement for Lease provided:

“(a) Subject to clause 2, from the Commencing Date [Croc’s] and [Alamdo] are bound by the Lease as if the Lease were completed, signed and delivered.
(b) Clause 3.3(a) applies whether or not [Croc’s] or [Alamdo] has signed the Lease.”

It is common ground that the “Commencing Date” referred to in cll 3.1 and 3.3(a) was 18 June 2018.
Alamdo accepted that:

the consequence of the Lease not being registered was that, by reason of ss 41 and 43 of the Real Property Act 1900 (NSW), no legal leasehold estate was conveyed to Croc’s; and

the only legal leasehold estate that was conveyed to Croc’s was a monthly tenancy at will implied by s 127 of the Conveyancing Act.

However, Alamdo submitted that the Agreement for Lease operated to create an agreement for lease enforceable in equity and that on and from the “Commencing Date” of 18 June 2018 a lease of the Premises from Alamdo to Croc’s for a term of 10 years arose by operation of the Agreement for Lease, and otherwise on the terms recorded in the Lease document itself.
Clause 12.10 of the Agreement for Lease provided:

“The provisions of this Document do not merge on the grant of the Lease.”

By reason of cl 3.3(a) of the Agreement of Lease, Croc’s became “bound by the Lease as if the Lease were completed, signed and delivered”.
It is true that cl 3.3(a) does not say that Croc’s became bound by the Lease “as if it had been registered”. However, that is the effect of cl 3.3(a).
In Leitz Leeholme Stud Pty Ltd v Robinson, [12] Glass JA, with whom Hope JA agreed, held, in circumstances relevantly indistinguishable from those in this case, that an informal lease operating as an agreement for lease enforceable in equity predicates not only the availability of equitable relief but the existence and an entitlement to sue on the lease in contract at common law.
12. [1977] 2 NSWLR 544.

In Leitz Leeholme, as is the case here, the lessee executed a memorandum of lease and entered occupation and paid rent. The lease was not registered.
Glass JA said:

“The agreement and the tenancy at will are independent sources of rights. At no stage do they merge, so that the termination of the estate automatically extinguishes the agreement. The relevant principles are, in my view, as follows. A lease of land under the Real Property Act for a term exceeding three years creates no legal term unless it is both registrable and registered. But the informal instrument may be treated as evidencing an agreement for a formal lease. The unregistered memorandum of lease operates merely as an agreement specifically enforceable in equity, but not itself creating a legal term in the land. Entry into possession and payment of rent bring into existence a common law tenancy upon such terms of the unregistered memorandum as are applicable to the tenancy at will. But, in so far as the memorandum operates as an agreement, it retains a separate identity as the repository of the substantial rights of the parties. The doctrine relevant for present purposes had been previously worked out in relation to demises which were void at law, not having been made by deed as required by the statute. The purported lease, nevertheless, took effect as an executory agreement for a lease enforceable in equity, and there entitling the lessee to a formal lease. The existence or otherwise of a contract is determined exclusively by common law principle. Accordingly, when these decisions allude to an informal lease operating as an agreement for a lease enforceable in equity, they affirm, not only the availability of equitable relief, but also the existence of a contract at law. If the innocent party deems damages to be adequate, there is no reason why the contract may not be enforced at law.” [13] (Citations omitted.)
13. At 547.

The authority of Leitz Leeholme has never been doubted. [14]
14. For example, Progressive Mailinghouse v Tabali Pty Ltd (1985) 157 CLR 17; [1985] HCA 14 at [4], [26] (Mason J); Chan v Cresdon Pty Ltd (1989) 168 CLR 242; [1989] HCA 63 at [13] (Toohey J); Telado Pty Ltd v Vincent (1996) 7 BPR 14,874 at 14,881 (Powell JA, Sheller and Priestley JJA agreeing); Pozetu Pty Ltd v Alexander James Pty Ltd (2016) 18 BPR 36,141; [2016] NSWCA 208 at [52]-[53] (Sackville AJA, McColl and Ward JJA agreeing); Australian International Academy of Education Limited v Dr Nirmal Taluga & Ors [2011] NSWSC 647 at [3] (Ball J).
I think Alamdo was correct to submit that based on this authority, the correct conclusion is that, pursuant to cl 3.1 of the Agreement for Lease, a lease was granted and accepted on and from the Commencing Date, 18 June 2018. None of the terms of the Agreement for Lease merged on the grant of the Lease, or indeed would have merged upon registration of the Lease Document. [15] The rights created by the Agreement for Lease existed concurrently with any other rights which arose by the Lease document; had it been registered.
15. See cl 12.10 of the Agreement for Lease.
On behalf of Croc’s it was submitted that the High Court’s decision in Chan v Cresdon [16] stands for the proposition that “the claim depends on the entitlement to specific performance”.
16. Supra.
That is not correct. In Chan v Cresdon the majority dealt with the question of whether a lease arose in equity and said:

“First, the court’s willingness to treat the agreement as a lease in equity, on the footing that equity regards as done what ought to be done and equity looks to the intent rather than the form, rests upon the specific enforceability of the agreement. Secondly, an agreement for a lease will be treated by a court administering equity as an equitable lease for the term agreed upon and, as between the parties, as the equivalent of a lease at law, though the lessee does not have a lease at law in the sense of having a legal interest in the term.”[17]
17. At [20].

As was submitted on behalf of Alamdo, that passage did not deal at all with enforceability of contractual rights of the parties under a contract giving rise to an unregistered lease, but only the nature of the interest in land that arose at law and equity.
I turn now to the effect of the COVID Regulation on Alamdo’s entitlements under the Lease.

The effect of the COVID Regulation

Unpaid rent - April 2020

Alamdo submitted that a complete answer to Croc’s submissions concerning the COVID Regulation was Croc’s failure to pay all of the rent for April 2020, prior to the “prescribed period”.
As I have set out above,[18] by 1 October 2020 Croc’s had paid rent up to 24 April 2020. However, rent for all of April 2020 was due on 1 April 2020. Croc’s accepts that its failure to pay such rent was not within the “prescribed period” of the COVID Regulation.
18. At [93].
Clause 8 of the COVID Regulation provided:

“Nothing in this Schedule prevents a lessor taking a prescribed action on grounds not related to the economic impact of the COVID-19 pandemic.”

Thus, the COVID Regulation did not operate to prevent Alamdo from taking “prescribed action” including taking possession, based on Croc’s unregulated failure to pay all of the April 2020 rent in advance.
But Alamdo did not seek to take those “prescribed actions” on those grounds.
Rather, as its 10 November 2020 breach notice made clear, Alamdo sought to exercise its rights by reason of Croc’s failure to pay rent since 24 April 2020 and failure to provide evidence that it was an impacted lessee; that is relying on breaches during the “prescribed period”.
A similar circumstance arose in Todarello Property Investments Pty Ltd v GJA Kalra Pty Ltd [19] where Darke J said:

“… It might have been open to the plaintiff in October 2020 to seek to terminate the lease on the grounds of breaches of the lease that had occurred before 24 April 2020 and remained un-remedied. Clause 8 makes it clear that nothing in Sch 5 prevents a lessor from taking prescribed action on grounds not related to the economic impacts of the COVID-19 pandemic.
However, the plaintiff did not pursue such a course. Its purported termination was expressly based, in at least substantial part, upon breaches consisting of failures to pay rent during the prescribed period. In circumstances where the plaintiff had not complied with cl 5, that action was prohibited by Sch 5 to the Conveyancing Regulation. That the plaintiff may have been able to effect a termination of the lease in another way does not detract from the fact that the termination was effected contrary to a legislative prohibition. In my opinion, the purported termination was thereby invalid and of no effect.” [20]
19. [2021] NSWSC 1678.
20. At [75]-[76].

I am unable to see any distinction between the circumstances that were before Darke J in Todarello and the circumstances here.
Accordingly, the mere fact that Alamdo may have been able to rely upon Croc’s failure to pay the April 2020 rent in advance to terminate the Lease is not itself an answer to Croc’s contentions as to the effect of the COVID Regulation on Alamdo’s rights.

Was Croc’s an “impacted lessee”?

As I have set out above, cl 2 of the COVID Regulation provided that a lessee was an “impacted lessee” if its turnover in FY19 was less than $50 million and if it qualified for JobKeeper.
It is common ground that Croc’s turnover for FY19 was less than $50 million.
There is a dispute as to whether Croc’s qualified for JobKeeper at the relevant time, namely on 3 December 2020 when Alamdo took possession of the Premises.
The JobKeeper Rules provided, in cl 7, that an entity qualified for the JobKeeper Scheme for a JobKeeper fortnight if, relevantly, it:

was carrying on business in Australia; and

“has satisfied the decline in turnover test at or before the end of the fortnight”; and

satisfied the “actual decline in turnover test” for a fortnight beginning or after 28 September 2020.

There was no dispute that, on 3 December 2020, Croc’s satisfied requirements (a) and (c).
As to the requirement at (b), it was common ground that “the fortnight” was that commencing on Monday 23 November 2020 and concluding on Friday 6 December 2020, being the fortnight in which 3 December 2020 fell.
There was a dispute as to the meaning of the expression “at or before the end of the fortnight” for the purpose of cl 7(1)(b) of the JobKeeper Rules.
In my opinion, looking at the expression in the context of the JobKeeper Rules as a whole, those words must mean during the fortnight. They cannot mean any time “before” the end of the fortnight as, otherwise, once a lessee became an “impacted lessee”, it would retain that status no matter how its turnover improved in the relevant “fortnight”.
I agree with Alamdo that it was necessary that, here, Croc’s showed that it satisfied the turnover test at some time during the period 23 November to 6 December 2020. I agree that this construction is consistent with the concept of qualification for the JobKeeper Scheme being tied to a specified fortnight and to be subject to the point in time test in cl 8.
Clause 8(1) of the JobKeeper Rules provided that an entity satisfied the decline in turnover test at a time (called the “test time”) if:

“The entity’s projected GST turnover for a turnover test period in which the test time occurs fall short of the entity’s current GST turnover for a relevant comparison period.”

I agree with Alamdo’s submission that the “test time” must be within the applicable JobKeeper fortnight; that is, here, within the period 23 November 2020 to 6 December 2020. That is made clear by the reference in cl 8(1) to the relevant entity’s turnover for the “turnover test period in which the test time occurs”.
Clause 8(7) of the JobKeeper Rules provided that the “turnover test period”:

“Must be:
(i) a calendar month that ends after 30 March 2020 and before 1 January 2021; or
(ii) a quarter that ends on 30 June 2020, 30 September 2020 or 31 December 2020.”

The only “turnover test period” that could be relevant to Croc’s eligibility for JobKeeper as at 3 December 2020 are the months of November or December 2020 (as “the” fortnight occurred in both of those months) or the quarter ended December 2020.
Croc’s only adduced evidence of its decline in turnover for the preceding quarter ending September 2020.
Croc’s has not adduced any evidence of its decline in turnover in November or December 2020 or in the quarter ending December 2020. Nor has Croc’s adduced evidence of its GST turnover for the corresponding periods in 2019.
For those reasons, I accept Alamdo’s submission that Croc’s has not shown that it qualified for JobKeeper at the relevant time, and thus it has not shown that it was an “impacted lessee” at the relevant time.

The relationship between Clauses 4, 5 and 6 in the COVID Regulation

A further matter that divided the parties was the relationship between cll 4, 5 and 6 in the COVID Regulation.
The general rule was established by cl 4(2), which provided that, relevantly to this dispute, if a lessee was an “impacted lessee” the lessor could not take any “prescribed action” against the lessee during the “prescribed period” in relation to failure to pay rent.
The prohibition in cl 4(1) was itself expressed in unconditional terms.
However, cl 4 was followed by cll 5 and 6.
Clause 5(1) was directed to the taking of a “prescribed action” arising from a failure to pay rent during the “prescribed period” and stated that a lessor could not take such action “unless the lessor has complied with this clause”; that is, negotiated in good faith the rent payable having regard to the impact of COVID-19 and the leasing principles in the National Code and in the light of evidence adduced by an “impacted lessee” of its status as such.
Croc’s accepts that the words “unless the lessor has complied with this clause” in cl 5(1) operated to create an exception but submitted that the exception was “to the bar created by cl 5(1), not the bar created by cl 4(2).”
The bars created by cll 4(1) and 5(1) were both directed to taking “prescribed action” against an “impacted lessee” during the “prescribed period” arising from, relevantly, a failure to pay rent.
In my opinion, what cl 5(1) sought to do was to create a circumstance in which, notwithstanding the general prohibition in cl 4(1), “prescribed action” could be taken during the “prescribed period” on the grounds of failure to pay rent provided that the requirements of the succeeding subclauses of cl 5 (that is, the engagement in good faith negotiation) first took place.
That is made clear by the use of the word “unless” in cl 5. If a lessor did not comply with cl 5, the prohibition in cl 4(1) remained.
The lessor could not act inconsistently with cl 4(1) vis-à-vis non-payment of rent “unless” it complied with cl 5. If it did, it could.
This position is confirmed, in my opinion, by the “Note” to cl 5(1). The note, although not a part of the regulation,[21] can nonetheless be taken into account in construing the regulation. [22] The note explained what was sought to be achieved by cl 5(1) when it stated:

“The clause prevents the lessor taking unilateral prescribed action without complying with the requirements set out in subclauses (2) – (4).”
21. See Conveyancing (General) Regulation, cl 3(2).
22. Interpretation Act 1987, s 34(2).

The lessor would not take “unilateral prescribed action without complying with” the balance of cl 5. If it did, it could.
The position is further confirmed by the heading to cl 5 which, again, is able to be taken into account in construing cl 5.
The heading is:

“Obligation to renegotiate rent and other terms of commercial leases before prescribed action” (Emphasis added.)

The use of the word “before” points to the conclusion that the regulatory intention was that a lessor could not take “prescribed action” before engaging in a renegotiation of rent. If it did, it could.
The evident object of the clause was to encourage good faith renegotiation of rent and intended to have effect concurrently with cl 6, to which I will now turn.
Clause 6 prohibited a lessor from seeking to enforce any rights under a commercial lease, including recovery of possession or termination of a lease “unless and until” the Small Business Commissioner had certified that a mediation had taken place and the parties had failed to resolve the dispute. [23]
23. There is a further dispute about the reference in cl 6 for the need for the Small Business Commissioner to give “reasons for the failure”. I return to this below at [218]-[226].
Again, the words “unless and until” create an exception to the general prohibition in cl 4(1). The use of the words “unless and until” make this particularly clear.
On behalf of Croc’s it was submitted that “the provision creates its own bar to certain actions and also specifies exceptions to it (being the issue of the certificate and the reasons by the Commissioner)”.
I do not accept that submission. It appears to me that, just as cl 5 created an exception to the general rule in cl 4, cl 6 created a further exception, that was conditional upon the Small Business Commissioner issuing a certificate of the kind described. The evident object of the clause was to ensure that parties to a lease mediate their differences before a lessor could exercise a right to take any “prescribed action” described.
In those circumstances, I think that Alamdo was correct to contend that cll 5 and 6 created “pathways” by which a lessor might, by satisfying the preconditions contained in those clauses, be permitted to take the “prescribed action” that would otherwise have been prohibited by cl 4.
As Alamdo pointed out in its final reply submissions, the difficulty with Croc’s submission that cll 4, 5 and 6 created a “layered scheme” and operated cumulatively, such that a lessor must comply with each of the provisions, is:

“ … that it renders each of cll 5 and 6 gateways to nowhere, because if the preconditions contained in those clauses are each satisfied by a landlord they are [on Croc’s argument] still prohibited from taking any of the actions that would otherwise then be permissible by the immoveable obstacle of cl 4(2).”

Further, as Alamdo pointed out, were Croc’s submissions correct, there would be no point in the wording “unless” used in cl 5 and “unless and until” in cl 6 because, on Croc’s argument, even if the requirements of cll 5 or 6 were satisfied, the bar in cl 4(2) could not ever be overcome.
In final written submissions, it was submitted on behalf of Croc’s that the point of compliance with the requirements of cll 5 and 6 would be that a lessor would be free to engage in “prescribed action” after the expiration of the “prescribed period”. I can see nothing in the language of the COVID Regulation that provides support for that contention.

Clause 6 - mediation

Before turning to the question of whether Alamdo engaged in good faith negotiations with Croc’s, I turn to deal with two matters arising in relation to the mediation that the parties attended on 29 September 2020.

Section 19 of the Small Business Commissioner Act 2013 (NSW)

As I have set out, cl 6 of the COVID Regulation prohibited a lessor from taking various steps unless and until the Small Business Commissioner had certified that a mediation offered to be conducted by the Commissioner had failed.
In relation to such mediations, s 19 of the Small Business Commissioner Act provides:

“19 Commissioner may certify outcome of dispute resolution assistance
(1)   The Commissioner may certify in writing the outcome of any application made to the Commissioner for assistance in resolving a complaint or other dispute involving a small business.
(2)   Any such certificate is admissible as evidence in any civil proceedings of the outcome of the application.
(3)   Any statement or admission made in connection with any alternative dispute resolution services provided by the Commissioner under this Act is not admissible in any legal proceedings.”

As I have said, on the second day of the hearing, I ruled that the effect of s 19 was that I could not receive evidence of any statement made by or on behalf of Alamdo or Croc’s at the mediation or otherwise “in connection with” the mediation: that is, reflecting what was said or agreed at the mediation. I gave brief reasons at the time and said I would give more complete reasons in this judgment. These are those reasons.
Section 19(1) provides that the Commissioner must certify the “outcome” of the mediation and s 19(2) provides that such certificate is admissible in civil proceedings as evidence of the outcome of the mediation.
The relevant prohibition is in s 19(3), which is expressed in unqualified language. Any statement made “in connection with” such a mediation “is not admissible in any legal proceedings”.
The provision thus differs from that in the Civil Procedure Act 2005 (NSW).
Section 30(4) of the Civil Procedure Act provides:

“Subject to section 29(2)—
(a) evidence of anything said or of any admission made in a mediation session is not admissible in any proceedings before any court or other body, and
(b) a document prepared for the purposes of, or in the course of, or as a result of, a mediation session, or any copy of such a document, is not admissible in evidence in any proceedings before any court or other body.”

As the chapeau to that section provides, it is subject to the exception created by s 29(2) of the Civil Procedure Act which provides:

“On any application for an order under this section, any party may call evidence, including evidence from the mediator and any other person engaged in the mediation, as to the fact that an agreement or arrangement has been reached and as to the substance of the agreement or arrangement.”

Section 29(2) can thus be seen as being equivalent to subss 19(1) and (2) of the Small Business Commissioner Act in that it renders admissible a statement to the effect that an agreement was reached at a mediation.

And:

“This doctrine of election by affirmation of a contract has been recognised by decisions, including in this Court, for almost a century. The dominant rationale is that ‘the mere fact of intimating [a] choice’ in relation to these alternative rights makes it ‘inevitable, or necessary in the interests of justice, that the choice, when once made, should be irrevocable’. In other words, the choice between maintaining one right or set of rights and extinguishing an alternative, immediately inconsistent right or set of rights is one that must be irrevocable ‘because [the sets of rights] are inconsistent [so that] neither one may be enjoyed without the extinction of the other and that extinction confers upon the elector the benefit of enjoying the other.”[42] (Citations omitted.)
40. Kiefel CJ, Edelman, Steward and Gleeson JJ.
41. At [49].
42. At [51].

Similarly, Gageler J, although in dissent in the result, said:

“If, on the other hand, the innocent party, having knowledge of facts which give rise to the right to terminate the contract, makes and unequivocally communicates a choice not to exercise that right but instead to affirm the contract, the innocent party will be precluded from later exercising the right to terminate the contract.”[43]
43. At [147].

There has been no communication here by Alamdo of a choice not to exercise its right to terminate but instead to affirm the contract.
In neither its covering email of 30 November 2020, nor in the invoice itself, did Alamdo demand that the December 2020 rent be paid. The demand was for “back rent arrears”.
Alamdo was not required to exercise any right in order to become entitled to the continued payment of rent. Pursuant to cl 4(1) of the Lease Document, rent was payable by Croc’s under the Lease by way of equal monthly instalments in advance on the first day of each month and without demand. The rent was due without any requirement for action by Alamdo. The rent for December 2020 which was the subject of the invoice was due and payable automatically and involved no exercise of any right on the part of Alamdo.
By providing the tax invoice for December 2020 rent Alamdo was doing no more than complying with its obligation under cl 6(2)(c) of the Lease Document to provide a tax invoice. There was no inconsistency in Alamdo discharging that obligation – to furnish a tax invoice – and maintaining its right to terminate the Lease.
I think Alamdo was correct to submit that it was not put to any relevant election by the issue of an invoice for December 2020 rent.
Croc’s also contended that Alamdo, by demanding on 21 May 2020, 30 June 2020 and in August 2020 that Croc’s pay the rent owing for the period to 24 April 2020, elected not to terminate the Lease in reliance on breaches occurring prior to that date.
I cannot see how the making of those demands amounted to any such election.
In any event, for the reasons I have set out above, Alamdo did not seek to terminate the Lease on the basis of Croc’s failure to pay the balance of the rent due for April 2020.

Rental arrears

It is common ground that, as at 3 December 2020, unpaid rent was $213,869.
On 24 December 2020, after termination of the Lease, Alamdo procured payment of $75,240 towards this amount by calling on a bank guarantee given by Croc’s under the Agreement for Lease.
Alamdo seeks the balance of $138,629, together with pre-judgment interest under s 100 of the Civil Procedure Act.
As I understand Croc’s position, the only answers it offers to this claim is its case concerning the COVID Regulation, and Alamdo’s alleged election to affirm the Lease, with which I have dealt.

Loss of bargain damages

Alamdo claims loss of bargain damages for the balance of the term of the Lease and seeks a sum in the order of $630,000 as calculated in reports prepared by its accounting expert, Mr Jeffrey Hall.
Croc’s answer to this claim depended upon its contentions as to affirmation and the consequences of the Lease not being registered, each of which I have rejected.
Croc’s accepted that, otherwise, it did not take issue with the quantum of Alamdo’s claim, save concerning the amount attributable to outgoings.
In that regard, because of the late delivery of objections, Mr Maurici made an affidavit on 5 December 2022 dealing with the question of outgoings. It was agreed that Mr Maurici’s cross-examination would proceed on the basis that he would not be challenged in relation to that material and that the parties would confer and endeavour to agree on the amount of outgoings. I will make appropriate directions for this to happen once these reasons are published.

Repayment of a pro rata proportion of the lease incentive

I have mentioned that one of the documents executed by the parties on 16 November 2017 was an Incentive Deed pursuant to which Alamdo agreed to pay Croc’s $250,000 as a contribution towards the fitout of the Premises.
The effect of cl 5 of the Incentive Deed, and cl 15(10) of the Lease Document, was that Alamdo became entitled, upon termination of the Lease, to repayment of a proportion of that incentive payment calculated on a pro rata basis by reference to the balance of the initial term of the Lease.
Croc’s resisted this aspect of Alamdo’s claim on the basis of its contentions concerning the fact that the Lease was not registered and the effect of the COVID Regulation. I have dealt with those matters above.
Alternatively, Croc’s contended that the obligations imposed under the Incentive Deed and under the Lease concerning the incentive payment were unenforceable as a penalty.
Croc’s did not dispute Alamdo’s summary of the relevant principles as follows:

“In order to be a penalty, the Incentive Repayment Terms must each be properly characterised as a threat which operated in terrorem against Croc’s permitting the Lease to be terminated during the currency of its initial ten year term, or to punish Croc’s for permitting that circumstance to arise. [44] Conversely, the Incentive Repayment Terms will not be void as penalties where they serve a legitimate purpose in guarding the legitimate interests of Alamdo (and are not ‘out of all proportion’ to such interests), including where they reflect a genuine pre-estimate of the damage to Alamdo in the circumstances of their operation.”[45] (Emphasis in original.)
44. Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 at [32] (Kiefel J, French CJ agreeing), [127] (Gageler J).
45. Ibid at [54] (Kiefel J, French CJ agreeing), [222], [270] (Keane J); and Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 at 86-87.

The questions which thus arise are:

can the relevant clauses be characterised as a threat against Croc’s failing to comply with its obligations under the Lease or as a punishment for permitting that circumstance to arise?; [46] and

do the relevant clauses serve to guard the legitimate interests of Alamdo, are not out of all proportion to such interests, and reflect a genuine pre-estimate of Alamdo’s damage?[47]
46. Paciocco v Australia and New Zealand Banking Group Ltd (supra) at [32].
47. Ibid at [54].

Mr Maurici gave this evidence concerning the clause in question:

“8.   In my experience, it is a common practice in commercial leasing to provide a new tenant with incentives. Often an incentive takes the form of upfront payments by the landlord, which is most commonly used by a new tenant to undertake fitout works. On other occasions, usually when a tenant is not undertaking an expensive fitout, or any fitout, an incentive takes the form of a rent-free period.
9.   In calculating the level of the incentive I agreed to include in the Agreement for Lease and the Incentive Deed, I had regard to the rent payable by Croc’s Franchising under the Lease, the length of the Lease term, and my expectation that Croc’s Franchising would remain as a tenant at Unit 5 for at least the ten year period of its initial term under the Lease.
10.   At the time when Alamdo was negotiating with Croc’s Franchising about the Agreement for Lease and the Incentive Deed, and at the time of entering into those agreements, I was conscious that Alamdo was exposed to a commercial risk if it paid the lease incentives but the Lease did not continue for the entire initial ten year term. If the lease ended in less than ten years, then I expected that Alamdo would need to pay a new lease incentive to secure a new tenant, and to locate and provide funding for that incentive, in order to secure a new tenant of the premises. To take an extreme example, if the lease were terminated one week after its commencement, Alamdo would have an obligation to pay the lease incentive payments to Croc’s Franchising, plus in all likelihood need to then immediately pay a further lease incentive payment to secure a new replacement tenant. Conversely, if the Lease continued for its full term, Alamdo would have no need to pay any lease incentive to secure a new tenant, and to source the funding for that payment, for at least ten years from the commencement of the lease.
11.   Prior to the entry into the Agreement for Lease and Incentive Deed, in light of my expectation as to the need to pay a new lease incentive repayment during the term of the Lease if it was terminated, and doing the best I could at that time, I estimated the loss to Alamdo in these circumstances would be a pro rata amount of the lease incentive payment it had paid to secure Croc’s Franchising as a tenant, calculated by reference to the balance of the term of the lease. I developed a formula to calculate the estimated loss to Alamdo in these circumstances, being:
Alamdo’s loss = lease incentive payment x days remaining in the term
total days in the term

12. I proposed the inclusion of clause 5 of the Incentive Deed, and clause 15.10 of the form of lease annexed to the Agreement for Lease, which were ultimately agreed between the parties, based upon my estimate of the loss that Alamdo would suffer in circumstances where the Lease was terminated prior to the end of the initial term as described above.” (Emphasis in original.)

Dalton J (as her Honour then was) considered an Incentive Repayment Term similar to that here in GWC Property Group Pty Ltd v Higginson [48] and concluded:

“In my view the repayment clauses here do impose obligations which are substantially in excess of any genuine pre-estimate of damages. In addition to contractual damages for breach of the lease, the landlord was entitled, by the repayment clauses, to recover monies to which it would never have been entitled had the lease run its course.”[49]
48. [2014] QSC 264.
49. At [39].

There was evidence before her Honour similar to that given by Mr Maurici before me. Thus her Honour said:

“There was evidence on the application before me from a Mr Douglas on behalf of the plaintiff to the effect that the benefits given to the tenant by way of fit-out contribution and abatement in the Incentive Deed reflected prevailing market conditions. This is the very point. Only with those substantial financial concessions did the landlord obtain the lease it did. It is entitled to damages for breach of that lease but it is not entitled to extra payments on the basis that it might have obtained a higher price for its premises had the market conditions been better for it. It is not to the point that Mr Douglas opines that the fit-out may not be attractive to future tenants, or that future tenants might also require incentives such as those contained in the Incentive Deed. The parties’ bargain was that the landlord would own the fit-out. If the landlord has difficulty in re-letting the premises, that fact will be adequately reflected in its contractual damages.”[50]
50. At [40].

I am of the same opinion here.
For the reasons I have set out above, Alamdo will recover the rental arrears and loss of bargain damages, the latter reflecting the delay Alamdo encountered in locating an alternative tenant.
Alamdo has also retained the ownership and benefit of the fitout.
Were Alamdo able to recover, in addition to these amounts, a proportion of the fitout costs, it would be better off than had the Lease run its course without incident.
In my opinion, for reasons corresponding to those given by Dalton J in GWC Property Group, the clauses in question here go further than is necessary to protect Alamdo’s legitimate interests and should be characterised as, in effect, a punishment of Croc’s for acting in breach of the Lease.
For those reasons, in my opinion Alamdo is not entitled to enforce the relevant provisions of the Incentive Deed and the Lease Document.

Further costs and expenses

Alamdo also seeks management and security fees of $37,441.80 incurred in connection with Croc’s breaches of the Lease and termination of the Lease, and a further sum of $101,244.66 in respect of marketing and agency fees incurred in re-letting the Premises to the new tenant.
Alamdo also seeks pre-judgment interest on those amounts.
As I understand it, there is no contest about these matters beyond the issues with which I have already dealt.

The claim against the guarantors

Alamdo seeks to recover the amount due to it from Croc’s from the two guarantors, Mr Aldons and Mr Cusdin.
In that regard, Alamdo relies upon a provision in the Agreement for Lease and a provision in the Lease.
Clause 11 of the Agreement for Lease provided:

“For the valuable consideration (including the Landlord agreeing to enter into this Document and the Lease), the Guarantor agrees to guarantee the obligations of the Tenant under this Document on the terms of the guarantee set out in clause 22 of the Lease (as if that clause and the appropriate definitions were set out in full in this Document).”

It is common ground that the reference in that clause to “clause 22” is an error and that the reference should be to “clause 20”.
Croc’s offers two answers to Alamdo’s claim against the guarantors.
The first arises from the fact that the Lease was not registered.
Croc’s referred to the High Court’s decision in Chan v Cresdon. [51]
51. Supra.
In that case, the landlord sued guarantors upon a guarantee clause contained in a registrable form of lease that had not been registered. The terms of the guarantee provided that the guarantors guaranteed to the landlord the “due and punctual performance by [the tenant] of the obligations on its part to be performed under this lease” (emphasis added). As Alamdo has pointed out, applying the general principles of construction that a guarantee is to be construed strictly, the Court construed the reference to “this lease” strictly to mean a lease conveyed at law, and not the agreement to lease otherwise enforceable between the parties in equity. However, in this case, Alamdo sues on the guarantees in the Agreement for Lease that, in terms, refers to the obligations of Croc’s under that document.
Second, Croc’s submitted that Mr Aldons’ and Mr Cusdin’s obligations as guarantors had been released by reason of cl 20.1 of the Lease.
Clause 20.1 of the Lease provided:

“20.1   Guarantee
Subject to clause 20.10, the Guarantor unconditionally and irrevocably guarantees to the Landlord:
(a)   the payment of all money payable to the Landlord under this Lease;
(b)   the performance and observance by the Tenant of the Tenant’s obligations contained in this Lease; and
(c)   the payment by the Tenant of any damages payable by the Tenant for failure to fulfil or delay in fulfilling any of the Tenant’s obligations contained or implied in this Lease.” (Emphasis in original.)

That clause was expressed to be subject to cl 20.10 which was in the following terms:

“20.10   Guarantor Release
(a)   In this clause 20.10, Minimum Guarantee Period means the period of 2 years commencing on the Commencing Date.
(b)   The Guarantor is released from its obligations in this clause 20 on and from the end of the Minimum Guarantee Period so long as there has not been, during the Guarantee Release Period, a breach of an essential term that has resulted in the Landlord serving on the Tenant a notice in accordance with Section 129 of the Conveyancing Act 1919.” (Emphasis in original.)

The matter that divides the parties is the meaning to be given to the expression “Guarantee Release Period” in cl 20.10(b). That expression is not defined in the Agreement for Lease, nor in the Lease.
Croc’s submits that “Guarantee Release Period” should be construed as having the same meaning as the expression “Minimum Guarantee Period” appearing in cl 20.10(a).
I see a number of difficulties with that submission.
The first is that there is a presumption that different words used in a document have different meanings. [52]
52. See P Herzfeld and T Prince, supra at [22.70] and the cases cited therein.
Second, so construed, the effect of cl 20.10 of the Lease would be that the guarantors would only be liable for Croc’s obligations if Croc’s had been in breach of an essential term of the Lease during the period of two years commencing on the Commencing Date of 18 June 2018. That would have the effect that that two year period would represent the maximum period during which they were liable as guarantors, a proposition difficult to reconcile with the expression “Minimum Guarantee Period” in cl 20.10(a).
Further, were it the parties’ intention that the guarantors only be liable for Croc’s breaches of essential terms during the two years commencing on the Commencing Date, they could easily have said so.
A more likely construction is that “Guarantee Release Period” means something different from “Minimum Guarantee Period” and, as Alamdo submitted, means the balance of terms of the Lease following the expiry of the two year “Minimum Guarantee Period”.
As Alamdo submitted, so construed:

“What clause 20.10 therefore does is to effect a change in the scope of the guarantees after the initial two years of the term of the Lease. In the initial two years, the guarantees apply in their totality to all obligations of Croc’s arising under the Lease. After that time, however, the guarantees only arise in the serious circumstances where Croc’s has breached an essential term of the Lease and a s 129 notice has been issued to Croc’s in respect of that breach. It in effect results in a step down of the scope of the guarantee after the first two years of the term of the Lease.”

That appears to me to be a sensible construction of the clause and one that gives effect to the different expressions that the parties have chosen to use in the two subclauses of cl 20.10 of the Lease.
I cannot see any basis for Croc’s submission that this would be an “absurd” result such as would warrant rectification of the clause by construction so as to construe the words “Guarantee Release Period” as meaning “Minimum Guarantee Period”, in accordance with the principles summarised by Leeming JA in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq). [53]
53. (2019) 99 NSWLR 317; [2019] NSWCA 11 at [8].
As I have set out above, on 10 November 2020, Alamdo served on Croc’s a notice under s 129 of the Conveyancing Act in respect of Croc’s failure to pay rent since 24 April 2020. Those breaches were breaches of an essential term.
Accordingly, the guarantors were not released from their obligations as guarantors.

Croc’s cross claim

Croc’s accepted that it could only succeed on its cross claim if I accepted that the Lease was unlawfully terminated by operation of the COVID Regulation.
As I have not accepted that submission, it follows that Croc’s cross claim must fail.

Conclusion

Alamdo is entitled to most of the relief it seeks.
The parties should confer and agree on the orders necessary to give effect to these reasons and to take the steps contemplated at [283] above.
If there is to be a dispute as to costs, the parties should confer and agree a timetable for written submissions. I will deal with that question on the papers, unless either party seeks an oral hearing.

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Endnotes

Decision last updated: 09 February 2023

Medium Neutral Citation:	Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd (No 2) [2023] NSWSC 60
Hearing dates:	5 - 7 December 2022
Date of orders:	09 February 2023
Decision date:	09 February 2023
Jurisdiction:	Equity - Commercial List
Before:	Stevenson J
Decision:	Plaintiff entitled to terminate lease and enter possession; plaintiff entitled to damages for unpaid rent and loss of bargain; plaintiff not entitled to relief in relation to fitout costs; plaintiff entitled to succeed against guarantors
Catchwords:	LEASES AND TENANCIES – Retail lease – where parties executed agreement for lease and lease for period of 10 years – where lease not registered – whether lease for 10 years nonetheless arose – effect of and proper construction of Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) and leasing principles of National Code of Conduct – proper construction of provisions in Small Business Commissioner Act 2013 (NSW) concerning admissibility of statements made at mediation – whether lessor entitled to terminate lease and enter possession – whether lessor elected to affirm lease – whether provision concerning recoupment of fitout costs a penalty – proper construction of guarantee – whether guarantors liable for obligations of lessee
Legislation Cited:	Civil Procedure Act 2005 (NSW) Conveyancing Act 1919 (NSW) Conveyancing (General) Regulation 2018 (NSW) Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth) Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) Evidence Act 1995 (NSW) Interpretation Act 1987 (NSW) Public Health (COVID-19 Mass Gatherings) Order 2020 (NSW) Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW) Real Property Act 1900 (NSW) Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) Retail Leases Act 1994 (NSW) Small Business Commissioner Act 2013 (NSW)
Cases Cited:	Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd [2022] NSWSC 1746 Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38 Australian International Academy of Education Limited v Dr Nirmal Taluga & Ors [2011] NSWSC 647 Chan v Cresdon Pty Ltd (1989) 168 CLR 242; [1989] HCA 63 Commissioner of Stamp Duties (NSW) v Permanent Trustee Co Ltd (Trustee for Anzareno Dal Bon and Silvanio Dal Bon) (1987) 9 NSWLR 719 Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149; [2011] FCAFC 74 Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 Gray t/as Clarence Valley Plumbing Services v Ware Building Pty Ltd [2013] NSWCA 271 GWC Property Group Pty Ltd v Higginson [2014] QSC 264 JC v Director of Public Prosecutions (NSW) (2014) 87 NSWLR 320; [2014] NSWCA 228 Lazaris v R [2014] NSWCCA 163 Leitz Leeholme Stud Pty Ltd v Robinson [1977] 2 NSWLR 544 Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (2010) 383 ALR 577; [2010] NSWCA 268 Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 Panayi v Deputy Commissioner of Taxation (2017) 319 FLR 228; [2017] NSWCA 93 Pozetu Pty Ltd v Alexander James Pty Ltd (2016) 18 BPR 36,141; [2016] NSWCA 208 Progressive Mailinghouse v Tabali Pty Ltd (1985) 157 CLR 17; [1985] HCA 14 Regina v Reid [1999] NSWCCA 258 Seltsam Pty Limited v McGuiness; James Hardie & Coy Pty Limited v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29 Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) (2019) 99 NSWLR 317; [2019] NSWCA 11 Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318; [2010] WASCA 222 Telado Pty Ltd v Vincent (1996) 7 BPR 14,874 Todarello Property Investments Pty Ltd v GJA Kalra Pty Ltd [2021] NSWSC 1678 Woollahra Municipal Council v Secure Parking Pty Ltd (No 2) [2015] NSWSC 452
Texts Cited:	P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters)
Category:	Principal judgment
Parties:	Alamdo Holdings Pty Ltd (Plaintiff) Croc’s Franchising Pty Ltd (First Defendant) Brett Christopher Aldons (Second Defendant) Lawrence John Cusdin (Third Defendant) State of New South Wales (Fourth Defendant)
Representation:	Counsel: J A C Potts SC with A R Langshaw (Plaintiff) G Farland with D Meyerowitz-Katz (First, Second and Third Defendants) L Waterson (Fourth Defendant) Solicitors: Speed and Stracey Lawyers Pty Ltd (Plaintiff) Newhouse & Arnold Solicitors (First, Second and Third Defendants) Crown Solicitor’s Office (Fourth Defendant)
File Number(s):	2021/136164