BMG SP Pty Ltd v YFG Strathton Pty Ltd - [2023] QSC 52

SUPREME COURT OF QUEENSLAND

CITATION:

BMG SP Pty Ltd v YFG Strathton Pty Ltd [2023] QSC 52

PARTIES:

BMG SP PTY LTD
ACN 651 189 221

(Applicant)

v

YFG STRATHTON PTY LTD
ACN 655 715 647
As trustee under instrument no. 72131488

(Respondent)

FILE NO:

SC No 11778/22

DIVISION:

Trial Division

PROCEEDING:

Originating Application

ORIGINATING COURT:

Supreme Court at Brisbane

DELIVERED ON:

24 March 2023

DELIVERED AT:

Brisbane

HEARING DATE:

1 December 2022

JUDGE:

Crowley J

ORDER:

1. I declare that clause 3.1(b) of the Incentive Deed and clause 4.1 of Part B of the Lease are penalties and are therefore unenforceable.

2. The application is otherwise dismissed.

CATCHWORDS:

CONTRACTS – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – REPUDIATION AND NON-PERFORMANCE – REPUDIATION – APPLICATION TO LEASES – where the Applicant entered into a lease in respect of a commercial premises – where the Applicant and the original landlord were each required to perform works at the premises – where there were delays in completing the works – where the original landlord assigned its interest in the lease to the Respondent – where the Applicant refused to complete its part of the works unless the Respondent performed additional works and made additional contributions – where the Respondent concluded the Applicant had repudiated the lease – where the Respondent purported to accept the Applicant’s repudiation and terminate the lease – whether the Applicant repudiated the lease – whether the Respondent’s purported termination was valid

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – PENALTIES AND LIQUIDATED DAMAGES – GENERAL PRINCIPLES – where the Applicant and the original landlord also entered into an incentive deed whereby the landlord agreed to provide the applicant with a fitout contribution – where repayment clauses in the lease and the incentive deed required the Applicant to repay to the landlord a portion of the fitout contribution if the lease was terminated due to a default by the Applicant – where the original landlord also assigned its interest in the incentive deed to the Respondent – whether the repayment clauses are a penalty

Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30, applied
Browne v Dunn (1893) 6 R 67, cited
Carr v JA Berriman Pty Ltd (1953) 89 CLR 327; [1953] HCA 31, cited
Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, applied
Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237; [2008] HCA 10, cited
GWC Property Group Pty Ltd v Higginson [2014] QSC 264, followed
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61, applied
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; [1989] HCA 23, applied
Legione v Hateley (1983) 152 CLR 406; [1983] HCA 11, cited
O’Dea v…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2023] QSC 52
Decision Date: 24 March 2023

CaseChat Overview and Summary

BMG SP Pty Ltd, the Applicant, brought proceedings against YFG Strathton Pty Ltd, the Respondent, concerning a lease agreement for commercial premises. The Applicant had entered into a lease with the original landlord, who subsequently assigned its interest in the lease to the Respondent. Delays in completing required works under the lease led to the Applicant refusing to proceed unless the Respondent performed additional works and made additional contributions. The Respondent concluded the Applicant had repudiated the lease and purported to terminate the lease. The Applicant denied repudiation and claimed the Respondent was not entitled to terminate the lease. The Applicant also claimed that the Respondent was required to repay a portion of a fitout contribution under the terms of the lease and an incentive deed. The Respondent argued that the Applicant had repudiated the lease and that the repayment clauses in the lease and the incentive deed were unenforceable penalties.

The primary legal issues before the court were whether the Applicant had repudiated the lease and whether the Respondent's purported termination of the lease was valid. The court also had to determine whether the repayment clauses in the lease and the incentive deed were enforceable penalties. In considering whether the Applicant had repudiated the lease, the court examined the Applicant's refusal to complete its part of the works unless the Respondent performed additional works and made additional contributions. The court found that the Applicant's conduct amounted to a repudiation of the lease, and thus the Respondent was entitled to terminate the lease. However, the court concluded that the repayment clauses in the lease and the incentive deed were unenforceable penalties because they imposed a punishment for default and did not serve to protect any legitimate interest of the landlord.

The court ordered that the repayment clauses in the lease and the incentive deed were unenforceable penalties and, therefore, not binding on the parties. The court dismissed the Applicant's claims for repayment of a portion of the fitout contribution. The court did not make any orders regarding costs at the time of the decision, indicating that it would hear the parties on the question of costs at a later date.

Orders

Orders of the court

1. I declare that clause 3.1(b) of the Incentive Deed and clause 4.1 of Part B of the Lease are penalties and are therefore unenforceable.

2. The application is otherwise dismissed.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

In my opinion, the Repayment Clauses impose a punishment for BMG’s default and do not serve to protect any legitimate interest of the Landlord. The proper construction and characterisation of the effect of the Repayment Clauses is that they instead operate to secure the tenant’s compliance with, and adherence to, its primary obligations under the Lease by a payment stipulation that is extravagant and out of all proportion with the Landlord’s legitimate interest in the commercial leasing of its premises.Conclusion I am satisfied that BMG repudiated the Lease. Accordingly, YFG was entitled to terminate the Lease. YFG did so by serving a valid Notice of Termination. However, I am also satisfied that YFG’s subsequent demand for repayment of a proportion of the Fitout Contribution was made pursuant to Repayment Clauses that amount to unenforceable penalties. Orders Accordingly, with respect to the final orders sought in the Originating Application filed 29 September 2022, I make the following orders:1.I declare that clause 3.1(b) of the Incentive Deed and clause 4.1 of Part B of the Lease are penalties and are therefore unenforceable.2.The application is otherwise dismissed. I will hear the parties on the question of costs.

Ratio Decidendi

Legal Principle Established

Given the importance of commercial certainty and freedom of contract, courts should not lightly invalidate a provision of a contract on the basis that it is a penalty.[27][27]Ibid 594–5 [220] (Keane J); Ringrow [32] (Gleeson CJ, Gummow, Kirby, Hayne, Callinan and Heydon JJ).Consideration In my opinion, the Repayment Clauses amount to a penalty. I consider the present case to be materially indistinguishable from GWC. In GWC, Dalton J held that certain incentive clawback provisions relating to the landlord’s fitout contribution and rent and signage fee abatements, contained in an incentive deed that was executed at the same time as the relevant lease, and which were triggered by the tenant’s breach of the lease, were unenforceable penalties. The relevant fitout contribution clawback provision in the incentive deed in GWC provided:2.4 Repayment of Contribution(a) If the Lease is terminated at any time during the initial Term (other than by expiry of the term or by reason of the Lessor’s default), or the Lessee otherwise parts with possession of the Premises by assignment or subletting without the consent of the Lessor as required under the Lease, then the Lessee will pay to the Lessor a sum calculated as follows:DR x CDTWhere:(i) DR is the number of days between the date the Lease is terminated or the Lessee parts with possession (as the case may be) and the Expiry Date;(ii) DT is the number of days between the Commencement Date and the Expiry Date; and(iii)C is the Contribution.(b) The amount in clause 2.4(a) is payable within five (5) business days after the date the Lease is terminated or the Lessee parts with possession (as the case may be).(c) The Lessee’s obligations under clause 2.4(a) and 2.4(b) [sic] do not affect any other rights of the Lessor against the Lessee.(d) If the Lessee assigns or transfers its interest in the Lease in accordance with its terms, then in lieu of having to comply with clauses 2.4(a) and 2.4(b), the Lessee must obtain a covenant from the assignee/transferee (as the case may be) in favour of the Lessor on terms acceptable by the Lessor to honour the obligations of the Lessee under this deed. By cl 2.2 of the incentive deed, the landlord and tenant agreed that the landlord would own all items paid for with the fitout contribution. The lease was terminated by the plaintiff landlord on the basis that the tenant had repudiated the lease by abandoning the premises in breach of the lease. The plaintiff sought repayment from the guarantor defendants of the various rent and signage fee abatements it had allowed and the fitout contribution it had made. The plaintiff contended that the repayments it sought were not punitive payments for breach of the lease but were instead ‘restitutionary repayments’. It argued that the incentives it offered to the tenant were conditional and that termination of the lease merely provided the occasion for the relevant repayment conditions to be activated. It argued that the conditional payment it had made was just part of the price or consideration for the parties’ bargain.

CITATION:	BMG SP Pty Ltd v YFG Strathton Pty Ltd [2023] QSC 52
PARTIES:	BMG SP PTY LTD ACN 651 189 221 (Applicant) v YFG STRATHTON PTY LTD ACN 655 715 647 As trustee under instrument no. 72131488 (Respondent)
FILE NO:	SC No 11778/22
DIVISION:	Trial Division
PROCEEDING:	Originating Application
ORIGINATING COURT:	Supreme Court at Brisbane
DELIVERED ON:	24 March 2023
DELIVERED AT:	Brisbane
HEARING DATE:	1 December 2022
JUDGE:	Crowley J
ORDER:	1. I declare that clause 3.1(b) of the Incentive Deed and clause 4.1 of Part B of the Lease are penalties and are therefore unenforceable. 2. The application is otherwise dismissed.
CATCHWORDS:	CONTRACTS – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – REPUDIATION AND NON-PERFORMANCE – REPUDIATION – APPLICATION TO LEASES – where the Applicant entered into a lease in respect of a commercial premises – where the Applicant and the original landlord were each required to perform works at the premises – where there were delays in completing the works – where the original landlord assigned its interest in the lease to the Respondent – where the Applicant refused to complete its part of the works unless the Respondent performed additional works and made additional contributions – where the Respondent concluded the Applicant had repudiated the lease – where the Respondent purported to accept the Applicant’s repudiation and terminate the lease – whether the Applicant repudiated the lease – whether the Respondent’s purported termination was valid CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – PENALTIES AND LIQUIDATED DAMAGES – GENERAL PRINCIPLES – where the Applicant and the original landlord also entered into an incentive deed whereby the landlord agreed to provide the applicant with a fitout contribution – where repayment clauses in the lease and the incentive deed required the Applicant to repay to the landlord a portion of the fitout contribution if the lease was terminated due to a default by the Applicant – where the original landlord also assigned its interest in the incentive deed to the Respondent – whether the repayment clauses are a penalty Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30, applied Browne v Dunn (1893) 6 R 67, cited Carr v JA Berriman Pty Ltd (1953) 89 CLR 327; [1953] HCA 31, cited Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, applied Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237; [2008] HCA 10, cited GWC Property Group Pty Ltd v Higginson [2014] QSC 264, followed Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61, applied Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623; [1989] HCA 23, applied Legione v Hateley (1983) 152 CLR 406; [1983] HCA 11, cited O’Dea v…