Bonafair Holdings Pty Ltd v Hungry Jack's Pty Ltd

[2016] NSWCA 276

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:	Bonafair Holdings Pty Ltd v Hungry Jack’s Pty Ltd [2016] NSWCA 276
Hearing dates:	15 August 2016
Decision date:	06 October 2016
Before:	McColl JA at [1] Meagher JA at [2] Sackville AJA at [3]
Decision:	1. Appeal dismissed. 2. Cross-appeal dismissed. 3. No order as to the costs of the appeal and cross-appeal.
Catchwords:	LANDLORD AND TENANT – construction of lease – whether lessee obliged to pay the cost of replacing the main electrical switchboard (MSB) servicing the leasehold premises – whether lessee liable for deterioration of MSB during the period preceding commencement of the lease LANDLORD AND TENANT – lessee covenants to pay “land tax assessed on a single holding basis” – leasehold premises held in a “special trust” – lessor not entitled to take advantage of tax free threshold usually available – whether lessor entitled to recover from lessee actual amount of land tax paid in respect of the premises LANDLORD AND TENANT – covenant to repair – whether primary Judge erred in finding that repairs to the premises were required by reason of “reasonable wear and tear”
Legislation Cited:	Land Tax Act 1956 (NSW), s 3AL Land Tax Management Act 1956 (NSW), s 3A Occupational Health and Safety Act 2000 (NSW), s 8 Retail Leases Act 1994 (NSW), s 26(1)(b), s 7
Cases Cited:	Alamdo Holdings Pty Ltd v Australian Window Furnishings (NSW) Pty Ltd [2006] NSWCA 224; [2007] NSW ConvR 56-167 Bonafair Holdings Pty Ltd v Hungry Jack’s Pty Ltd, unrep, 10 November 2015, District Court (Curtis DCJ) Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Haskell v Marlow [1928] 2 KB 45 Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8 Regis Property Co Ltd v Dudley [1959] AC 370 Tooth & Co Ltd v Newcastle Developments Ltd (1966) 116 CLR 167; [1966] HCA 57 Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12
Category:	Principal judgment
Parties:	Bonafair Holdings Pty Limited (Appellant/Cross Respondent) Hungry Jack’s Pty Limited (Respondent/Cross-Appellant)
Representation:	Counsel: Mr S A Bogan (Appellant/Cross Respondent) Mr C E Bannan (Respondent/Cross-Appellant)   Solicitors: Charles G Roth Solicitor (Appellant/Cross Respondent) Piper Alderman Lawyers (Respondent/Cross-Appellant)
File Number(s):	2015/356697
Decision under appeal	Court or tribunal: District Court of New South Wales Citation: 2013/133205 Date of Decision: 10 November 2015 Before: Curtis DCJ File Number(s): 2013/133205

Judgment

1. McCOLL JA: I agree with Sackville AJA’s reasons and the orders his Honour proposes.

2. MEAGHER JA: I agree with Sackville AJA.

3. SACKVILLE AJA: The principal issue in this appeal is whether the lessor or the lessee of commercial premises must bear the cost of replacing and relocating the main electrical switchboard (MSB) installed in the premises. The lessor (Bonafair) commenced proceedings in the District Court against the lessee (Hungry Jack’s) to recover the cost of the required works, said to amount to $246,545.55. Bonafair claimed that the lease of the premises required Hungry Jack’s, as the lessee, to bear the cost of replacing and relocating the MSB.

4. For unexplained reasons, Bonafair did not institute proceedings until 2013, some five years after it carried out the works. Bonafair’s claim prompted Hungry Jack’s to file a cross-claim. Hungry Jack’s’ Further Amended First Cross-Claim (Cross-Claim) pleaded that it overpaid a total of $189,192.04 in 33 separate payments to Bonafair between February 2009 and May 2013. These amounts were said to have been wrongly demanded by Bonafair as outgoings payable by Hungry Jack’s under the terms of the lease. Hungry Jack’s claimed these amounts as moneys had and received by Bonafair to Hungry Jack’s’ use.

5. Hungry Jack’s also sought to recover from Bonafair amounts totalling $47,325.57 paid to Bonafair in respect of land tax. Hungry Jack’s claimed that it was not liable to make these payments under the lease and that therefore Bonafair had to refund the moneys it had wrongfully demanded and received on account of land tax. The sum of $47,325.57 was made up of nine separate payments over the financial years 2005/2006 to 2013/2014.

6. The parties presented the primary Judge with a plethora of issues. In a commendably concise judgment, [1] his Honour rejected Bonafair’s claim to recover the cost of replacing and relocating the MSB and also rejected Hungry Jack’s claim to recover moneys paid by it in respect of land tax. The primary Judge found in Hungry Jack’s’ favour on some of the other claims it made against Bonafair. In the result, the primary Judge dismissed Bonafair’s claim and entered judgment for Hungry Jack’s on its cross-claim in the sum of $167,253.28, inclusive of interest of $38,626.99.

   1. Bonafair Holdings Pty Ltd v Hungry Jack’s Pty Ltd, unrep, 10 November 2015, District Court (Curtis DCJ) (Primary Judgment).

7. Bonafair has appealed and Hungry Jack’s has cross-appealed. Hungry Jack’s has also filed a Notice of Contention. From the 75 pages of written submissions and various schedules handed up during the course of argument, the following issues appear to be before the Court:

1. Does the lease require Hungry Jack’s to pay for the replacement and relocation of the MSB (as Bonafair contends and Hungry Jack’s disputes)?

2. If Bonafair succeeds in its appeal in relation to the cost of replacing and relocating the MSB, should Hungry Jack’s be permitted to dispute the amount claimed by Bonafair in respect of the works (an issue not addressed by the primary Judge)?

3. Does the lease require Hungry Jack’s to pay the amounts demanded by Bonafair and paid by Hungry Jack’s in respect of land tax (as Bonafair contends and Hungry Jack’s disputes)?

4. Did the primary Judge err (as Bonafair contends) in finding that ten sets of repairs costing a total of $107,949.57 were required as a result of reasonable wear and tear and thus Hungry Jack’s is entitled to recover the amounts paid by it to Bonafair in respect of those repairs?

5. Did the primary Judge err (as Hungry Jack’s contends) in finding that the replacement of heritage tiles was not due to reasonable wear and tear and thus Hungry Jack’s is not entitled to recover the amounts paid by it to Bonafair in respect of the replacement of the tiles?

The conclusions I have reached on these questions are as follows:

(1)   No.

(2)   Does not arise.

(3)   No.

(4)   No.

(5)   No.

The result is that Bonafair’s appeal and Hungry Jack’s cross-appeal must be dismissed.

Background

8. By a lease dated 28 July 2006 (Lease), Bonafair leased premises incorporating the heritage listed Century Hotel located in George Street Sydney (Premises) to Hungry Jack’s. The Lease commenced on 1 March 2006 and was to terminate on 29 February 2016. The lease granted Hungry Jack’s options to renew for two successive terms of ten years and five years. The Court was informed that Hungry Jack’s did not exercise the first option to renew the Lease, which accordingly has now expired.

9. The Century Hotel was constructed in 1941. The building consists of a basement level, a ground floor and five upper floors. Hungry Jack’s admitted in its Amended Defence to Bonafair’s Amended Statement of Claim that it was:

“at all material times the operator of a fast food business and has operated its business in the basement and ground floor of the [Premises] continuously since 1980.”

10. From at least 1980, the MSB servicing the entire building was located in the basement.

11. Bonafair purchased the Premises in 1991. On 17 October 1991, Bonafair leased the basement and ground floor of the Premises to Competitive Foods Australia Limited (Foods), Hungry Jack’s holding company, for a term of five years, with an option to renew for a further period of five years (1991 Lease). The 1991 Lease prohibited Foods from carrying on any business other than that of a fast food restaurant, except with Bonafair’s consent. The 1991 Lease also required Foods to reconstruct the demised premises (that is, the ground floor and basement of the Premises), in accordance with approved plans.

12. Foods carried out all works required by the 1991 Lease. Thereafter Hungry Jack’s resumed operating its business from the basement and ground floor of the Premises. Whether as part of the works carried out by Foods or otherwise, the MSB serving the entire building was installed within the kitchen of the fast food restaurant. This was apparently not a particularly good idea.

13. On 4 November 1996, Bonafair and Foods varied the terms of the 1991 Lease. The termination date was amended from 16 October 1996 to 28 February 2006 and Foods was granted an option to renew the lease for a further term of five years.

14. Foods’ lease under the 1991 Lease, as amended, expired on 28 February 2006 without Foods exercising the option to renew.

15. In early March 2006, the Premises were inspected by Mr Chan, a director of Bonafair, and Mr Drosinos, who at the time conducted a property management business and “personally manage[d] all aspects of the Building”. [2] They observed during this inspection that the MSB had sustained external damage and was generally in poor condition. Mr Drosinos commissioned a report from Phytek Pty Ltd (Phytek), to provide thermal information about the building’s electrical facilities.

    2. This was Mr Drosinos’ description in his affidavit of his role.

16. On 13 April 2006, Phytek reported that the MSB required urgent attention. The report stated that the MSB appeared to have been installed no less than ten years before the date of inspection. While the MSB was “relatively new”, it was in very poor condition due to its location and the nature of the building. The MSB was “in need of immediate repairs and/or replacement”. The Phytek report also commented that the MSB was “running hot”, meaning that it was very near or above its design capacity. This reduced the life of the MSB and increased the risk of fire. Moreover, the MSB was located in a position where there was access to live parts of the equipment. In view of this report, Mr Chan instructed Mr Drosinos to do everything necessary to make the MSB safe and compliant with relevant standards.

17. Mr Drosinos then commissioned a report from a firm of engineering consultants, Medland Metropolis (MM). In a report dated 9 June 2006, MM stated that the condition of the MSB violated Australian Standards and strongly recommended that the MSB should be replaced as soon as possible. MM further recommended that the MSB should be located in a fire rated Main Switch Room. The primary Judge found that as a consequence of this report, Bonafair by its agent, Mr Drosinos, and its director, Mr Chan, knew that the MSB had reached the end of its useful life and required replacement.

18. As I have noted, Bonafair and Hungry Jack’s executed the Lease of the Premises on 28 July 2006. The “Premises” was defined to mean the whole of the “Building”, being the land on which the hotel stood and all improvements thereon, including the “Lessor’s Fixtures and Fittings”. The definition excluded “Common Areas”, such as fire staircases, and a part of the roof of the building. I infer from a Dealing Number recorded on a Variation of Lease executed in December 2002, that the Lease was duly registered on the title to the Premises.

19. On 1 August 2006, Mr Drosinos wrote to Mr McMahon of Hungry Jack’s advising that there was no alternative but to replace and relocate the MSB in order to comply with relevant standards. The letter attached plans suggesting alternative locations for the new MSB that would afford the necessary access to Energy Australia and the Fire Brigade.

20. In April 2007, Mr McMahon sent emails to Mr Drosinos complaining that the recommendations in the MM report had not been implemented and pointing out dangers posed by the MSB in its then current condition.

21. The replacement and relocation of the MSB was completed in about October 2007, with the MSB being relocated elsewhere in the basement of the building. The primary Judge found that the delay in completion was caused, at least in part, by difficulties in obtaining planning and regulatory approval.

22. On 1 June 2009, Hungry Jack’s sub-let floors 1-5 of the building to Oscars Hotels Australia Pty Ltd (Oscars). There was evidence, accepted by the primary Judge, that Oscars was responsible for causing damage to heritage tiling located at the entrance to the building.

The Lease

23. Clause 4.1 of the Lease relevantly provided as follows:

“The Lessee covenants with the Lessor that it shall, without demand, deduction or set off, pay to the Lessor the Lessee’s Proportion of Outgoings specified in Item 14 in the Reference Schedule in respect of all Outgoings incurred or payable in respect of any period after the Commencement Date.”

The Proportion specified in Item 14 was 100 per cent.

24. Clause 1.1 defined “Outgoings” as follows:

“‘Outgoings’ means the sum of all outgoings, costs and expenses of the Lessor properly or reasonably assessed or assessable charged or payable or otherwise incurred upon or in respect of the Land and improvements on the Land or upon the Lessor in relation to the Land and improvements on the Land or in relation to the contract management and maintenance of the Land and improvements on the Land and in particular but without limiting the generality of the foregoing shall include:

(a)   All taxes including any land tax assessed on a single holding basis only (but excluding income tax payable by the Lessor on its income).

…

(g)   All costs of repairs, maintenance, painting, renovations and replacements of and to the exterior of the Building and the improvements thereon (including any of the Lessor’s plant, equipment, fittings, fixtures and improvements on the exterior of the Building and including any lighting upgrades), other than work that is the responsibility of the Lessor pursuant to this Lease.

…

(i)   All reasonable costs and expenses relating to the fire protection services and upgrades in relation to the Building.”

25. Clause 7.3 contained a covenant by the Lessee as follows:

“At all times the cost of the Lessee observe and comply with:

(a)   the laws and regulation for the time being relating to fires (and the prevention thereof) and every requirement of the Fire and Accident Underwriters Association the Board of Fire Commissioners of the State in which the Premises are situated and any other relevant Authority; and

(b)   the provisions of every Authority,

PROVIDED however that nothing herein contained shall impose any obligation upon the Lessee to do any work other than such as may be occasioned by the Lessee’s use or occupancy of the Premises.”

26. Clause 9 dealt with “MAINTENANCE AND REPAIR BY LESSEE”, as follows:

“9.1 Lessee’s Repair Obligation

(a)   The Lessee must:

(i)   keep the Premises in good and tenantable repair and condition (having regard to their condition at the Commencement Date); and

…

(b)   Nothing in paragraph (a) requires the Lessee to repair:

(i)   damage resulting from reasonable wear and tear …

(ii)   any part of the structure of the Building,

unless:

(A)   the damage or need for repair was caused or contributed to by the Lessee; or

…

9.6   Damage to the Building

The Lessee must, at its own cost make good any breakage, defect or damage to the Building, or the Services caused or contributed to by any act, omission or default of the Lessee”

27. Clause 11 contained an indemnity in the following terms:

“11.1   Indemnity

The Lessee indemnifies the Lessor and agrees to keep the Lessor indemnified against all actions, claims, demands, losses, damages, costs and expenses for which the Lessor is or may be or becomes liable in respect of or arising from:

(a)   any default by the Lessee under this Lease;

(b)   the Lessee’s negligent act or omission;

…

(d)   loss, damage or injury to property or persons caused or contributed to by the Lessee’s use of the Premises or by the Lessee’s negligent act, omission or default.”

28. Clause 13 contained a covenant for quiet enjoyment, as follows:

“13.1   Quiet Enjoyment

Subject to the Lessee paying the Rent and otherwise complying with this Lease, the Lessor covenants with the Lessee that the Lessee may possess and enjoy the Premises during the Term without any interruption or disturbance from the Lessor, except as provided for in this Lease.”

29. The Lessor also covenanted as follows:

“21.1   The Lessor must take all reasonable action to keep:

(a)   the Services to or of the Building and the Premises provided by Authorities or the Lessor available to the Premises at all times.

…

21.2   The Lessor warrants that it is not aware of any necessary consents, authorities and permissions not having been obtained or any conditions not complied with including without limit Council, building, health, fire and other authority requirements in relation to the construction and use of the Building and the Premises.”

Bonafair’s MSB Claim

The Primary Judge’s Findings

30. Bonafair argued before the primary Judge that the cost of replacing the MSB was an “Outgoing” within the meaning of cl 4.1 of the Lease and that Hungry Jack’s was not excused from meeting the cost by reason of the exemption in cl 9.1(b)(i) for “damage resulting from reasonable wear and tear”. The primary Judge rejected this argument, finding that the need to replace the MSB was occasioned by damage resulting from wear and tear due to “natural forces and the reasonable use of the premises”. [3]

    3. Primary Judgment at [20].

31. Grounds 1 and 2 of Bonafair’s Notice of Appeal challenge this finding but Mr Bogan, who appeared for Bonafair, abandoned Grounds 1 and 2 at the hearing of the appeal. It is significant, however, that the primary Judge’s finding was largely based on an expert report of an electrical engineer, Mr Gardner, tendered on behalf of Bonafair. Mr Gardner examined the contemporaneous reports addressing the condition of the MSB and concluded, in the words of the primary Judge, that:[4]

“there had been wear and deterioration of the spring contacts in the fuse switches exacerbated by the switchboard being exposed to a moist and humid atmosphere in the work area. [Mr Gardner] was of the opinion that the switchboard would have required replacement within 12 months of Phytek’s inspection because the fuse switches were not repairable components.”

4. Primary Judgment at [16].

32. Mr Gardner also said in his report that the MSB had been manufactured in about the late 1970s and had a useful commercial life of around 25 years if reasonably well maintained. As the primary Judge noted, Mr Gardner accepted that some switchboards could last for up to 50 years, but said that this one had had a hard life given its location in a commercial kitchen. Mr Gardner’s opinion was that by mid-2006 the MSB was in poor condition and that it was necessary to replace the MSB in order to enable the required repairs to be effected. The most practical and cost-effective option at the time was to install a new MSB at a different location on the Premises and connect it to a new incoming supply from the street.

33. Leaving aside the Grounds not pressed on appeal, Bonafair relied on cll 7.3, 9.6 and 11.1 of the Lease to support its claim in the District Court to recoup from Hungry Jack’s the cost of replacing and relocating the MSB.

34. Bonafair contended that Hungry Jack’s breached cl 7.3 because it failed to comply with the laws in force relating to the prevention of fires, specifically s 8 of the Occupational Health and Safety Act 2000 (NSW) (OHS Act) (now repealed). Section 8(1) of the OHS Act required an employer, so far as is reasonably practicable, to ensure the health, safety and welfare at work of all employees. The obligation included ensuring that any premises controlled by the employer where employees worked were safe and that any plant provided for use by employees was safe when properly used. The primary Judge rejected this argument on the ground that Bonafair had not proved that the duty could not have been discharged by measures other than the replacement and relocation of the MSB at Hungry Jack’s expense. [5]

    5. Primary Judgment at [25].

32. Bonafair next submitted to the primary Judge that cl 9.6 of the Lease obliged Hungry Jack’s to pay for replacing and relocating the MSB because it was required to make good any defect or damage to the building “caused or contributed to by any act or omission of the Lessee”. Finally, Bonafair submitted that Hungry Jack’s was obliged to indemnify Bonafair pursuant to cl 11.1 of the Lease for the cost of replacing and relocating the MSB. These obligations arose, so Bonafair argued, because cll 9.6 and 11.1 applied to damage to the MSB caused by the Lessee’s acts or omissions or use of the Premises. According to Bonafair, the damage to the MSB was caused when Hungry Jack’s was using or was in occupation of the Premises.

33. The primary Judge found that the MSB was in such poor condition that it required replacement before the parties executed the Lease. His Honour therefore found that Hungry Jack’s did not contribute to any damage sustained by the MSB during the currency of the Lease. He rejected Bonafair’s submission that cll 9.6 and 11.1 should be construed so as to cover Hungry Jack’s conduct as occupier of the basement (but not as a lessee) before the Lease commenced.

The Critical Finding

37. Mr Bogan did not dispute the primary Judge’s finding that, before the Lease was executed, the MSB had reached the end of its useful life and required replacement. Mr Bannan, who appeared for Hungry Jack’s, characterised the finding, aptly enough, as demonstrating that the MSB was a “dead duck” before the term of the Lease had commenced.

38. In view of the finding as to the condition of the MSB I did not understand Mr Bogan to challenge the primary Judge’s additional finding that Hungry Jack’s had not done or omitted to do anything during the currency of the Lease to contribute to the damage sustained by the MSB and to the need to replace it. The two findings are fatal to Bonafair’s case insofar as it relies on Hungry Jack’s acts or omissions during the term of the Lease.

39. The proviso to cl 7.3 of the Lease expressly states that the clause imposes no obligation upon the Lessee “to do any work other than such as may be occasioned by the Lessee’s use and occupancy of the Premises”. On the primary Judge’s finding, no work was occasioned by the Lessee’s use or occupancy of the Premises during the currency of the Lease. Thus, subject to a construction argument advanced by Bonafair, which I address below, it cannot rely on cl 7.3.

40. Clause 9.6 requires the Lessee to make good any defect or damage “caused or contributed to by any act, omission or default of the Lessee”. The indemnity created by cl 11.1 relevantly applies to losses or expenses for which the Lessor is liable arising from “the Lessee’s negligent act or omission” or which are “caused or contributed to by the Lessee’s use of the Premises”. There was no negligent act or omission of Hungry Jack’s during the Lease that caused or contributed to the terminal condition of the MSB. Nor did Hungry Jack’s’ use of the Premises during the Lease cause or contribute to the need to replace the MSB. Thus, subject to the construction argument dealt with below, Bonafair cannot rely on either cl 9.6 or cl 11.1.

The Construction Argument

41. Mr Bogan submitted that cll 7.3, 9.6 and 11.1 of the Lease should be construed to apply to Hungry Jack’s acts and omissions pre-dating the commencement of the term of the Lease. Specifically, Mr Bogan contended that:

• the expression “such [work] as may be occasioned by the Lessee’s use or occupancy of the Premises”, contained in the proviso to cl 7.3, extends to work occasioned by Hungry Jack’s use or occupancy of the Premises prior to the commencement of the Lease;

• the expression “contributed to by any act, omission or default of the Lessee”, contained in cl 9.6, extends to conduct by Hungry Jack’s that causes damage to the Building, even if the conduct occurred prior to the commencement of the Lease; and

• the expressions “the Lessee’s negligent act or omission” and “damage…caused or contributed to by the Lessee’s use of the Premises” in cl 11.1 extend to Hungry Jack’s negligence or use of the Premises prior to the commencement of the Lease.

42. In assessing these submissions, it is necessary to bear in mind that the Lease created a proprietary interest in the Premises. As a result of the execution of the Lease and its registration under the Real Property Act 1900 (NSW) (Real Property Act), Hungry Jack’s acquired a legal leasehold estate for a term of 10 years. As between Bonafair, as Lessor, and Hungry Jack’s, as Lessee, the Lease created both privity of contract and privity of estate. Bonafair became entitled to enforce all of the Lessee’s covenants in the Lease against Hungry Jack’s.

43. The covenants in the Lease have a significance beyond defining the contractual relationship between Bonafair and Hungry Jack’s. If a lessee assigns a lease and the assignment is effective at law, there is privity of estate between the lessor and the assignee of the lease (but, subject to statute, not privity of contract). At common law, the lessor can enforce covenants in the lease that “touch and concern the land” against the assignee by virtue of the privity of estate between lessor and assignee. [6] (In New South Wales, the common law has been modified by legislation which effectively deems privity of contract to exist between the lessor and the assignee, at least while the assignee continues to hold the leasehold estate). [7]

    6. Karacominakis v Big Country Developments Pty Ltd v Chadlace Pty Ltd [2000] NSWCA 313; 10 BPR 18,235 at [132] (Giles JA, Handley and Stein JJA agreeing); A J Bradbrook, C E Croft and R S Hay, Commercial Tenancy Law (LexisNexis Butterworths, 3rd ed 2009) at [15.19].

    7. Real Property Act s 51; Karacominakis at [135], [141].

44. Following assignment of a lease, the original lessee remains liable to the original lessor on the covenants in the lease by virtue of their contractual relationship, which is not severed by the assignment. But once the lease is assigned, the original lessee becomes:

“a stranger to the land, in the sense that the relationship of landlord and tenant, in respect of tenure, cannot any longer exist between [the lessor] and [the lessee]. That relationship must depend upon privity of estate”. [8]

8. Milmo v Carreras [1946] KB 306 at 310 (Lord Greene MR); Picton-Warlow v Allendale Holdings Pty Ltd [1988] WAR 107 at 110 (Brinsden J), at 117 (Rowland J).

45. Prior to the execution of the Lease, Hungry Jack’s was a “stranger” in a deeper sense. Assuming it was in occupation of part of the Premises as Bonafair alleged (a claim disputed by Hungry Jack’s), Hungry Jack’s was not in occupation by virtue of any lease from Bonafair or, so far as the evidence indicates, any arrangement with Bonafair. Presumably, if Hungry Jack’s was in occupation of part of the Premises, it was as a consequence of an agreement of some sort with the previous lessee, Foods. In any event, there was neither privity of contract nor privity of estate between Bonafair and Hungry Jack’s at any time prior to the commencement of the Lease.

46. This does not mean that Bonafair was without a remedy for damage caused to the Premises during Hungry Jack’s occupation prior to the commencement of the Lease. During the currency of the 1991 Lease, Bonafair was entitled to enforce the covenants in that Lease against Foods, the lessee of the basement and ground floor of the Premises. If Hungry Jack’s actions while in occupation of the Premises caused Foods to be in breach of the lessee’s covenants in the 1991 Lease, Bonafair had its remedies against Foods.

47. The provisions of the Lease must be understood within the framework I have outlined. By cl 2.1 of the 1991 Lease, Bonafair, as Lessor, leased the Premises to Hungry Jack’s, as Lessee, for a term of ten years, subject to the terms and conditions stated in the Lease. By cl 3.1, the Lessee covenanted that:

“it shall…pay to the Lessor from and including the Rent Commencement Date [1 March 2006] and thereafter throughout the Term … the Rent and any other money payable by the Lessee under this Lease and in the manner specified in Clauses 3 and 4.”

48. The reference in cl 3.1 to the “Term” corresponds to the language in the covenant for quiet enjoyment in cl 13.1, which provides that the Lessee “may possess and enjoy the Premises during the Term”.

49. I have set out earlier the terms of cl 4.1 of the Lease and the definition of “Outgoings” in cl 1.1. [9] Clause 4.1 specifically states that the Lessee’s obligation to pay Outgoings applies “in respect of all Outgoings incurred or payable in respect of any period after the Commencement Date”.

    9. See at [22], [23] above.

50. It is of course possible for a lease to contain provisions attaching consequences to events or conduct pre-dating commencement of the lease. The Lease in the present case, for example, defines “Lessee’s Property” to include “plant, machinery and equipment brought onto the Premises by the Lessee (whether before or after the Commencement Date)”. [10] However, in the absence of language evincing a contrary intention, provisions in a lease for a term of years ordinarily create rights and obligations between lessor and lessee as from the date the term of the lease commences.

    10. The definition is relevant to the Lessee’s obligation to insure the Premises (cl 10) and to its right to remove the “Lessee’s Property” at the termination of the Lease (cl 22.3).

51. The provisions of the Lease in its present case, with very few exceptions, are intended to operate from the commencement of the Lease. This is made explicit in provisions such as cl 2.1 (Rent), cl 4.1 (Outgoings) and cl 13.1 (Quiet Enjoyment). In other provisions, it is implicit. This can be seen from cl 7.3, one of the provisions relied on by Bonafair.

52. Clause 7 is headed “USE OF AND CONDUCT ON PREMISES”. All twelve of the sub-clauses of cl 7 (leaving aside cl 7.3) are clearly intended to operate from the commencement of the Lease. Clause 7.1, by which the Lessee covenants not to use the Premises for certain specified purposes, can only apply for the duration of the leasehold estate created by the Lease (unless the covenant is incorporated in a subsequent lease). The other sub-clauses of cl 7 impose a variety of restraints on the conduct of the Lessee, such as prohibiting the obstruction of laneways or the installation of unduly noisy machinery. These sub-clauses do not use the word “shall”, but they impose restraints on the Lessee that apply from the date the Lease commences and the Lessee becomes entitled to exclusive possession of the Premises.

53. When cl 7.3 is construed in context, it is implausible that the requirement “at all times at the cost of the Lessee [to] observe and comply with” fire regulations and other laws is intended to impose obligations on Hungry Jack’s in respect of a period when it had no contractual or landlord-tenant relationship with Bonafair. Clause 7.3 applies prospectively from the date the term of the Lease commences.

54. The position is similar with cl 9.6 of the Lease, which requires the Lessee to make good any damage in the building caused or contributed to by any act, omission or default of the Lessee. Clause 9 is headed “MAINTENANCE AND REPAIR BY LESSEE”. Clause 9.1 provides that, subject to certain qualifications, the Lessee must keep the Premises in good and tenantable repair, having regard to its condition at the Commencement Date. This language makes it clear that the obligation arises from the commencement of the Lease and cannot relate to any prior period of occupation by the Lessee in a different capacity. The other sub-clauses of cl 9, which impose a variety of obligations on the Lessee, including giving prompt notice to the Lessor of certain defects in the Premises, also are intended to apply from the commencement of the Lease. Again it is implausible to suggest that cl 9.6 is intended to impose liability on Hungry Jack’s for its acts or omissions prior to the commencement of the Lease, at a time when there was neither privity of contract nor privity of estate between it and Bonafair.

55. In my view it is equally implausible to construe the indemnity provided for in cl 11.1 as applying to conduct by the Lessee before it acquired its leasehold estate in the Premises. By cl 11.1(a), the indemnity applies to losses caused by “any default by the Lessee under this Lease”. Clause 11.1(b) uses wider language in that it simply refers to “the Lessee’s negligent act or omission”. However, this language cannot sensibly be given a meaning divorced from its context. Clause 11.1(b) refers to a negligent act or omission by the Lessee (including an assignee of the Lease) during the term of the leasehold estate. Similarly cl 11.1(d) refers to damage caused or contributed to by the Lessee during the term of the leasehold estate.

56. For these reasons I reject Bonafair’s submission that it is entitled to recover from Hungry Jack’s the cost of replacing and relocating the MSB.

Quantification of Bonafair’s Claim

57. Since Bonafair fails in its claim to recover the cost of replacing and relocating the MSB, it is not necessary to consider whether Hungry Jack’s is entitled to challenge the primary Judge’s finding that the cost amounted to $246,545.55. I note, however, that the challenge to that finding could not have been resolved by this Court, but would have had to be remitted to the District Court.

Hungry Jack’s Land Tax Claim

Hungry Jack’s Contentions

58. Hungry Jack’s Cross-Claim pleaded that Bonafair, in breach of cl 4.1 of the Lease (when read with the definition of “Outgoings” in cl 1.1), demanded that Hungry Jack’s “make payment of land tax amounts otherwise than on a single holding basis”. The Cross-Claim alleged that in the nine land tax years from 2006 to 2014 Bonafair demanded and Hungry Jack’s paid $47,325.57 more in respect of land tax than was in fact due to Bonafair. Hungry Jack’s Cross-Claim sought to recover this amount as money paid under a mistake of fact or law or, alternatively, as money had and received to Hungry Jack’s use.

59. It was common ground before the primary Judge that Bonafair held the land pursuant to a “special trust”, as defined in s 3A of the Land Tax Management Act 1956 (NSW) (Management Act). Accordingly, as his Honour found, Bonafair was not entitled to take advantage of the tax free threshold ordinarily available to an owner of land liable to pay land tax in New South Wales. [11]

    11. Primary Judgment at [48].

60. Hungry Jack’s relied on par (a) of the definition of “Outgoings” in cl 1.1 of the Lease, which includes in the definition “any land tax assessed on a single holding basis only”. Hungry Jack’s submitted to the primary Judge that this language, especially the word “only”, indicates that Bonafair can recover from Hungry Jack’s no more than the amount of land tax Bonafair would have been liable to pay had the Premises not been held pursuant to a special trust. In other words, Hungry Jack’s is entitled, as against Bonafair, to the benefit of the tax free threshold even though Bonafair was not able to avail itself of the benefit.

61. The primary Judge was unpersuaded by this argument, given that there were “multiple factors modulating the liability of a proprietor to land tax”. [12] An example was that the land tax payable in respect of the Premises was reduced because the land was heritage listed. Hungry Jack’s was prepared to accept this benefit, which flowed from the particular characteristics of the Premises, but (so his Honour implied) wished to avoid a burden which flowed from the particular characteristics of the Lessor.

    12. Primary Judgment at [51].

62. Hungry Jack’s submitted in this Court that it should not be deprived of the benefit of the tax free threshold simply because Bonafair chose to hold the land through a trust. Mr Bannan contended that the expression “land tax assessed on a single holding basis only” was intended to exclude the possibility that Hungry Jack’s would be “penalised” by having to pay a higher rate of land tax by reason of Bonafair’s organisation of its own affairs. Mr Bannan accepted that if this was the parties’ intention, it could have been expressed more clearly, as in s 26(1)(b) of the Retail Leases Act 1994 (NSW), which expressly provides that a lessor under a retail shop lease can only recover land tax in the amount that would have been payable had the land concerned not been the subject of a special trust. Nonetheless, Mr Bannan submitted that the word “only” in par (a) of the definition of “Outgoings” achieved the same result.

Reasoning

63. The land tax regime created by the Land Tax Act 1956 (NSW) (Land Tax Act) and the Management Act varied during the period from 2006 to 2014. However, neither party suggested that any distinction should be drawn between the land tax regime in force as from 2009 (which has remained largely intact) and the earlier regime. I shall therefore outline only the key elements of the later statutory regime.

64. Section 7 of the Management Act provides that land tax at such rates as may be fixed by legislation is to be levied and paid on the taxable value of all land situated in New South Wales which is owned by taxpayers, other than exempt land. Section 8 provides that land tax shall be charged on land as owned at midnight on the thirty-first day of December immediately preceding the year for which the land tax is levied. That year is the period of twelve months commencing on 1 January. Section 9 states that land tax is payable by the owner of land “on the taxable value of all the land owned by that owner which is not exempt from taxation under this Act” (emphasis added). [13]

    13. The Management Act provides for averaging of the value of land. Those provisions are not relevant to the present appeal.

65. Section 3AL of the Land Tax Act provides that in respect of the taxable value of all land owned by a person at midnight on 31 December in any year, land tax is payable at the applicable rates for the period of twelve months commencing on 1 January in the next succeeding year. However, the Management Act provides that there is a tax threshold for each land tax year, which increases annually according to a statutory formula. [14] The Management Act also provides for a premium rate threshold, which is likewise subject to indexation. [15]

    14. Management Act, ss 62TBA, 62TBB.

    15. Management Act, s 62TBC.

66. Part 1 of Sch 13 to the Land Tax Act imposes a “general rate” in cases where the tax threshold applies. The general rate, in effect, leaves the tax threshold amount free of land tax, but imposes a rate of 1.6 per cent on the taxable value of land in excess of the tax threshold. If the taxable value exceeds the premium rate threshold, the rate increases to two per cent of the taxable value of land in excess of the premium tax threshold (in addition to the taxable value of the land that attracts the rate of 1.6 per cent). Part 2 of Sch 13 to the Land Tax Act applies where land is subject to a special trust. In that case, the rate of land tax is 1.6 per cent of the taxable value up to the premium tax threshold. The rate increases to two per cent of land value in excess of the premium rate threshold.

67. It is common ground in the present case that at all material times the only land owned by Bonafair was the land subject to the Lease. As I have noted, it is also common ground that since Bonafair held the land in a special trust, it did not receive the benefit of the tax threshold in any of the relevant land tax years.

68. The parties’ submissions concentrated on par (a) of the definition of “Outgoings”. However, the starting point is cl 4.1 of the Lease. It requires the Lessee to pay to the Lessor the Lessee’s Proportion (100 per cent) “in respect of all Outgoings incurred or payable in respect of any period after the Commencement Date”. “Outgoings” is defined to mean “the sum of all…expenses of the Lessor…charged or payable or otherwise incurred upon or in respect of the Land”.

63. The language of cl 4.1, if read in isolation, strongly suggests that the Lessee is obliged to pay 100 per cent of Outgoings actually incurred or payable by the Lessor during the term of the Lease. The definition of “Outgoings” supports this construction, since it refers to expenses of the Lessor charged, payable or otherwise incurred in respect of the Land. The language of both provisions focuses on expenses or charges actually incurred by the Lessor, which the Lessor is then entitled to recover from the Lessee.

64. The definition goes on to provide that “without limiting the foregoing”, “Outgoings” includes “All taxes including any land tax assessed on a single holding basis only”. When read in context, this language refers to land tax actually incurred by the Lessor by reason of its ownership of the land subject to the Lease. If that land is the only land owned by the Lessor, the amount actually paid or payable by the Lessor in respect of land tax is recoverable from the Lessee pursuant to cl 4.1 of the Lease.

65. In my opinion, par (a) of the definition of “Outgoings” is intended to apply where the Lessor owns more than one property. In that case, all the properties owned by the Lessor will be taken into account in assessing the taxable value of land owned by the Lessor. Where the value of a number of properties is aggregated, the rate of land tax payable by the Lessor may be higher than the standard rate of 1.6 per cent. This is because the aggregated value of all land owned by the Lessee may exceed the premium rate threshold. In these circumstances, par (a) of the definition limits the extent of the Lessee’s obligation to reimburse the Lessor for the land tax incurred in respect of the Premises. The Lessee’s liability is limited to the amount of land tax the Lessor would have been able to pay had the Premises been the only land owned by it.

66. Since Bonafair did not own any land other than the Premises, cl 4.1 obliged Hungry Jack’s to reimburse Bonafair for the actual amount of land tax it paid or was liable to pay in respect of the Premises. Had Bonafair owned other land which took the aggregated taxable value of its land above the premium rate threshold, par (a) of the definition of “Outgoings” would have come into operation. It would have limited Hungry Jack’s liability to reimburse Bonafair to the amount of land tax it would have had to pay had the Premises been the only land it owned during the relevant land tax year. [16]

    16. Thus producing a different result than in Tooth & Co Ltd v Newcastle Developments Ltd (1966) 116 CLR 167; [1966] HCA 57, where the High Court apportioned land tax by reference to the value of the demised land as a proportion of the total value of land owned by the lessor.

67. It follows from what I have said that I consider Mr Bannan’s reliance on the word “only” in par (a) of the definition of “Outgoings” to be misplaced. The word is part of a composite phrase that makes it clear that the Lessee is not liable to reimburse land tax at the premium rate if the Lessor is liable to pay the premium rate only because it owns other land in addition to the Premises. The word “only” cannot be construed as intended to require the Lessee to reimburse land tax on an assumption, contrary to the fact, that the Lessor did not hold the land pursuant to a special trust.

Repairs

The Primary Judge’s Findings

74. Hungry Jack’s submitted to the primary Judge that Bonafair wrongly demanded and received reimbursement of moneys that Bonafair had expended on certain repairs to the Premises. Hungry Jack’s contended that each of the ten amounts claimed by Bonafair pursuant to cl 4.1 of the Lease and paid by Hungry Jack’s were in respect of repairs required by reason of “reasonable wear and tear” within the meaning of cl 9.1(b)(i) of the Lease. Accordingly, so Hungry Jack’s argued, these repairs fell outside Hungry Jack’s obligation pursuant to cl 9.1(a)(i) to “keep the Premises in good and tenantable repair”. Hungry Jack’s sought to recover the moneys it paid to Bonafair in respect of the ten categories of repairs on the basis that the payments were made under a mistake of fact or law.

75. The primary Judge held that Hungry Jack’s bore the onus of proving that each of the required repairs was the consequence of reasonable wear and tear. In determining whether Hungry Jack’s discharged its onus, his Honour placed considerable reliance on the evidence of Mr Holdsworth, a building consultant with experience in assessing the natural deterioration of buildings. Mr Holdsworth expressed the opinion in his report that the ten sets of repairs were required as the result of reasonable wear and tear. The primary Judge in substance accepted Mr Holdsworth’s evidence and made the following findings:

Item 1: Repairs to External Windows

All the amounts paid by Hungry Jack’s for repairs to external windows were referable to reasonable wear and tear, except for the fabrication of a single window. The amount recoverable by Hungry Jack’s in respect of these repairs was $17,727.71.

Item 2: Replace Awning Roof Sheeting

This work involved the removal of old awning roof sheets and their replacement with Colorbond steel. The work was required because of reasonable wear and tear. The amount recoverable by Hungry Jack’s was $9,625.00.

Item 3: Repairs to the Roof and Parapet Walls to Eliminate Ingress of Rainwater

The primary Judge found that these repairs were required as a consequence of reasonable wear and tear, for these reasons: [17]

17. Primary Judgment at [65]-[66].

“This work encompasses repairs to the parapet walls and capping, the waterproofing membrane and waterproof flashings. Mr Holdsworth notes that the invoices span a period of 15 months and chronicle an ongoing saga of repeated visits to effect repairs and modifications to eliminate ingress of rainwater through the roof and parapet walls of the building. He says that a roofing membrane typically has an expected reliable life cycle of around 20 years, and that cracking to the brick parapet walls and cappings usually results from normal weathering.

In the absence of any reference to the effect of sudden external forces upon the roof, a conclusion that the most likely cause of the water ingress was the normal deterioration of materials over time due to reasonable wear and tear is reasonable.”

Hungry Jack’s was entitled to recover $40,601.54 in respect of these repairs.

Item 4: Repairs to Flashings

These repairs were due to reasonable wear and tear of the old lead sheet flashings. Hungry Jack’s was entitled to recover $1,317.00 in respect of these repairs.

Item 5: Repairs of Leaks from Internal Pipework

Mr Holdsworth’s opinion that this work was probably required to remedy gradual deterioration caused by wear and tear on a 60 year old building was “unremarkable”. Hungry Jack’s was entitled to recover $9,618.43 in respect of these repairs.

Item 6: Repairs to Walls and Ceilings Damaged by Water Leaks

These repairs were consequential on the repairs in Item 5. Hungry Jack’s was entitled to recover $5,302.33.

Item 7: Structural Repairs to Parapet Wall

Mr Holdsworth’s view based on the invoices relating to the work, was that the repairs were required because the original steel ties had corroded. Accordingly, the repairs were necessary because of natural forces constituting fair wear and tear. The amount recoverable by Hungry Jack’s was $2,685.10.

Item 8: Repairs to Shower Floor Tiling

These repairs were required because of the failure of tile grouting and bedding due to normal usage. The amount recoverable was $2,946.03.

Item 9: Repairs of Rusted Lintel Bars

These repairs were necessary because of corrosion due to naturally operating causes. Accordingly, they were required due to reasonable wear and tear. The amount recoverable by Hungry Jack’s was $14,990.80.

Item 10: Repairs to Rusted Fire Escape Door

The description of the work on the invoices showed that it was due to wear and tear. The amount recoverable was $2,687.30.

76. In reaching these conclusions, the primary Judge rejected Bonafair’s contention that Mr Holdsworth’s evidence did not rise above the level of speculation. In his Honour’s view, Mr Holdsworth’s evidence was based on reasonable inferences from his experience in the natural deterioration of buildings and in his evaluation of the description of the work performed in each case. [18]

    18. Primary Judgment at [81].

77. The primary Judge also took into account that Mr Drosinos had regularly inspected the Premises and commissioned each and every set of repairs. Mr Drosinos gave evidence on behalf of Bonafair, but did not contradict Mr Holdsworth’s evidence on these issues. In his Honour’s opinion, the failure by Bonafair to adduce evidence from Mr Drosinos contradicting Mr Holdsworth’s opinion justified an inference that his evidence would have not assisted its case. The failure to adduce such evidence also allowed his Honour more readily to accept Mr Holdsworth’s evidence. [19]

    19. Primary Judgment at [88].

78. The issue on which the primary Judge accepted Mr Drosinos’ evidence concerned the replacement of heritage tiles at the Liverpool Street entrance to the Premises, at a cost of $33,537.37. Mr Drosinos testified that the work was required because of damage caused during renovations carried out by Hungry Jack’s in 1996 and because Oscars’ employees moved beer kegs across the entrance to the Building. On this basis, his Honour found that the work was not required as the result of reasonable wear and tear and that Hungry Jack’s was not entitled to recover the amount it had paid to Bonafair in respect of replacement of the heritage tiles. [20]

    20. Primary Judgment at [79].

The Challenges

79. Bonafair’s appeal challenges the primary Judge’s findings in relation to Items 1-10 set out above. Hungry Jack’s cross-appeal challenges the rejection of its claim to recover the cost of replacing the heritage tiles.

80. Both parties, but particularly Bonafair, appeared to think that the appeal was an opportunity to conduct something approximating a building dispute heard by a trial judge. Documents with a striking resemblance to Scott Schedules were handed up, presumably to encourage the Court to form its own view as to whether the works covered by each Item were required as the result of reasonable fair wear and tear. Since some Items included a series of apparently unrelated works involving individual amounts of as little as a few hundred dollars, this is not an attractive option.

81. The question for determination on the appeal is whether any error has been shown in the primary Judge’s statement of the law or on his Honour’s findings of fact. The parties should have co-operated to identify common issues to enable the appeal to be conducted as efficiently as possible. In the absence of that co-operation, the most convenient course is to attempt to identify Bonafair’s main arguments and test them by reference to the two most costly sets of repairs. These are Item 1 (repairs to external windows) and Item 3 (repairs to roof and parapet to eliminate ingress of water).

Bonafair’s Challenge

82. Bonafair relied on three main arguments, of which Mr Bogan said the first was his principal contention. The three arguments are these:

• The primary Judge erred in accepting the opinions given by Mr Holdsworth because his report was based on speculation or supposition and lacked a factual foundation. According to Mr Bogan, Mr Holdsworth had not examined the Premises prior to the works being carried out and thus was forced to make assumptions unsupported by evidence.

• His Honour incorrectly drew a Jones v Dunkel [21] inference against Bonafair from the failure of Mr Drosinos to contradict Mr Holdsworth’s evidence. Mr Bogan submitted that it was up to Hungry Jack’s to prove that the repairs were due to reasonable wear and tear and that the absence of evidence from Mr Drosinos could not fill gaps in the evidence.

• The primary Judge should have found that at least some of the work was not directly necessitated by fair wear and tear, but due to a combination of factors. These included the failure of Hungry Jack’s to perform work that would prevent “the consequences flowing from wear and tear…producing other consequences which wear and tear would not directly produce”.

Bonafair did not dispute that if these arguments were rejected, the primary Judge was correct to find that Hungry Jack’s was entitled to recover the moneys it had paid to Bonafair.

Hungry Jack’s Challenge

21. (1959) 101 CLR 298; [1959] HCA 8.

83. Mr Bannan submitted that the primary Judge’s finding that the work was required, at least in part, because of damage done to the tiling in 1996 during renovations by Hungry Jack’s did not support his Honour’s conclusion that the repairs were not the result of reasonable wear and tear. Mr Bannan pointed out that cl 9.1(a)(i) of the Lease required Hungry Jack’s to keep the Premises in good and tenantable condition having regard to their condition at the Commencement Date. Since the heritage tiles damaged in 1996 were already in need of replacement at the Commencement Date, Hungry Jack’s could not be liable for the cost of replacement.

84. Mr Bannan also submitted that the evidence suggested that although some damage had occurred after the Lease commenced, “the vast majority” of the tiles replaced had been damaged in 1996 or at least before 2009.

Reasoning: Bonafair’s Challenge

85. It is important to appreciate that the works for which Bonafair sought reimbursement from Hungry Jack’s were carried out by Bonafair without prior reference to Hungry Jack’s. As Mr Bogan accepted, Mr Drosinos decided on behalf of Bonafair when repairs were required and engaged contractors to perform the works. After the works were completed, Bonafair sent invoices to Hungry Jack’s which paid the amounts demanded, apparently without inquiring as to whether the works were required due to fair wear and tear. While Hungry Jack’s enthusiasm for disputation may have been inspired by later events, it appears that the procedure adapted by Bonafair meant that Hungry Jack’s did not consider the proposed works in advance and did not take steps to ascertain why the works were required. Moreover, there was no evidence that an inspection report was prepared in contemplation of the commencement of the Lease. Thus there was no evidence as to the state of repair of the building at that time.

86. In these circumstances, Hungry Jack’s faced a difficult task in establishing that each of the disputed works was carried out in order to effect repairs necessitated by reasonable wear and tear. It approached that task by engaging Mr Holdsworth to prepare a report on the basis of the available material and express his opinion as to whether the works in issue were required as the result of reasonable wear and tear. Mr Holdsworth’s report was admitted into evidence over an objection that he was purporting to give an opinion on a legal issue. No objection was taken on the ground that the report involved speculation or was founded on assumptions for which there was no evidence.

87. Mr Holdsworth acknowledged that his inspection of the Premises occurred after the works had been undertaken. He frankly accepted that to some extent his opinions were based on assumptions but said that he had identified the assumptions in the report. In expressing his views, he took into account that the building was about 70 years of age when the various works were carried out. More importantly, his assessment of whether the works were required because of reasonable wear and tear was based on the information in the invoices prepared by the contractors and sent to Bonafair.

88. As I have noted, it is convenient to approach Bonafair’s challenge to the primary Judge’s findings by considering Mr Holdsworth’s analysis of the two most expensive items, namely Item 1 (repairs to external windows) and Item 3 (repairs to the roof and parapet walls).

Item 1

89. In the case of the timber windows, Mr Holdsworth took as his starting point the description of the works in the invoices. The contractor described part of the works carried out on the timber windows as follows:

“ 38 TIMBER DOUBLE HUNG SASH WINDOWS

a.   Remove stop beads and parting beads then remove upper and lower sash window from the frame.

b.   Remove side pockets housing sash cords and weights.

c.    Remove and inspect the sash pulleys then lubricate/repair and refit or replace with new as required. Note each window has 4 sash pulleys.

d.   Trim sides of each window sash to remove old paint build up and swelling to free up movement.

e.    Replace any broken or cracked glass panels and re clamp lose[sic] frames as required.

f.    Replace broken or worn sash cords with new 7mm cord. Note each window requires approx 10 metres of cord.

g.   Replace missing weights or adjust original weights to suit new pulleys. Note each window requires between 10-14 kg of weights.

h.   Refit window sashes and replace as required broken timber beads and missing or broken sash locks.”

The works also included (among other things) removing awning windows and trimming sides to free up movement and reclamping loose frames.

90. Mr Holdsworth explained, for example, that work described as “Trim sides of each window sash to remove old paint build up and swelling” was likely to have been required as the result of moisture ingress causing an increase in paint thickness. Mr Holdsworth thought that the replacement of broken or worn sash cords was likely to have been required because the original sash cords would typically have been of biodegradable braided cotton and involved extremely labour intensive work. Similarly, Mr Holdsworth opined that the replacement of rotten timbers, which formed part of the work on the timber awning windows, was needed because timber rots when exposed to moisture over time.

91. Mr Holdsworth said that he had examined a photograph of the building taken in 1941 (identified in the report) and inferred that the vertical sliding sash timber windows were part of the original construction of the building. He was able to say that the typical life expectancy of timber windows of this kind was 25-50 years. Thus if the windows were original (as he inferred) deterioration would have occurred over the period since their installation.

92. Mr Holdsworth accepted that there were many variables involved in the life cycle of the components of the windows. The variables included the standard of previous maintenance and the extent to which components had been replaced. Nonetheless, he concluded that: “the nature of the work required is highly unlikely to have been caused by anything other than gradual deterioration over time”. Accordingly, he expressed the view that the repairs to the timber windows were undertaken to rectify reasonable wear and tear.

93. Mr Holdsworth’s analysis of other work undertaken in relation to external windows was somewhat different. In the case of the repairs to the steel and aluminium windows, Mr Holdsworth concluded that some of the repairs (replacement of broken swivel points, rectification of binding and lubrication of aluminium windows) were required because of inadequate preventative maintenance, which caused accelerated wear and tear. He did not venture an opinion as to how long the lack of maintenance had continued or whether it was the lack of maintenance after the Lease commenced that created or contributed to the need to carry out replacement or repair work. Nor was he asked about these matters in cross-examination.

Item 3

94. As the primary Judge pointed out, Mr Holdsworth recorded that the work arising from external water ingress had taken place over 15 months. The invoices chronicled an “ongoing saga” of repeated attempts to eliminate the ingress of rainwater. Mr Holdsworth inferred from the invoices that the works were reactive, in that they were initiated in response to the ingress of water that previous repair attempts had not fully rectified. He considered it reasonable to assume that the building was watertight when first constructed and that no issues had existed previously. On this basis, he concluded that the most likely cause of water ingress was the normal deterioration of the materials over time, due to reasonable wear and tear.

94. So far as the waterproofing membrane was concerned, the expected life was about 15 years. Mr Holdsworth had not been able to inspect the roof membrane prior to its replacement, but based on the description of the work undertaken, he thought that the previous waterproof membrane was likely to have reached the end of its life.

95. Mr Holdsworth explained that there are various possible causes of cracking in parapet walls that can provide a pathway for water ingress. He referred to a structural report (appended to his own report) that stated that the cracking in this case was due to wind loads bending the brick parapet and causing cracks because the walls were not constructed to take the loads. Mr Holdsworth had inspected the parapet and his inspection revealed that the worst cases of cracking were remote from the ventilation stacks. He concluded that the additional wind loading was a contributory cause, but not the sole cause of cracking. Taking into account the variations in exposure of the wall to the elements and the location of the cracking, he concluded that the cause was normal deterioration of materials over time due to reasonable wear and tear.

96. The installation of cappings on the parapet was an alternative to rebuilding the cracked, original brick. It followed that this work was also the result of reasonable wear and tear.

The Significance of Mr Drosinos’ Evidence

98. Mr Bogan’s submissions seemed to suggest that Mr Drosinos, at least for some time, played a relatively minor or subordinate role in the maintenance of the Premises, perhaps implying that he would have been unlikely to be able to shed light on why the remedial works were necessary. However, Mr Drosinos’ role was by no means minor. Between 1995 and 1999 he arranged and supervised repairs to the Premises in his capacity as assistant to the property manager of a real estate agency. From 1999 to 2000 he became the senior property manager responsible for the Premises and from 2000 he formally managed the Premises. His role after 2000 included personally overseeing all aspects of building maintenance. In that capacity, Mr Drosinos inspected the building on a monthly basis and more frequently when work was being undertaken. He arranged for repairs to be done to the building. If anybody could give evidence as to the likely causes of the works in respect of which Bonafair sent invoices to Hungry Jack’s, it was Mr Drosinos. Mr Drosinos was clearly in Bonafair’s camp; indeed, he gave evidence in its case.

99. In his cross-examination, Mr Drosinos said that he had read Mr Holdsworth’s report. The following exchange took place:

“Q. To the extent that you’re able you’ve given evidence in relation to the matters in that report, for example the tiling, the damage as a result of water ingress et cetera, the wall penetrations, so to the extent that you’re able to say anything can contradict a conclusion from Mr Holdsworth you’ve done that haven’t you?

A. I believe so.”

Mr Bogan did not direct attention to anything said by Mr Drosinos in his evidence that contradicted the opinions expressed by Mr Holdsworth on any of the ten Items to which I have referred.

100. This is not merely a case where Bonafair did not lead evidence from a witness who might have cast a different light on evidence that was unclear or uncertain. Mr Drosinos clearly was the person best placed to state whether particular works were required because of the wear and tear to be expected in a building of this age and character or whether the necessary repairs were due to other factors. He was also well placed to point to any deficiencies in Mr Holdsworth’s analysis and to explain why (if it was the case) Mr Holdsworth was mistaken in interpreting the information in the invoices or in drawing inferences from that information. While Mr Drosinos gave evidence that the heritage tiles required replacement for reasons other than fair wear and tear, he gave no such evidence about the works included in the ten Items. When offered the opportunity to dispute Mr Holdsworth’s conclusions, he said that he had already indicated where he was able to disagree with Mr Holdsworth.

101. The failure of Mr Drosinos to contradict Mr Holdsworth’s factual assumptions or opinions does not constitute affirmative evidence that the works, or any of them, were required as the result of fair wear and tear. Nor does Mr Drosinos’ failure to contradict Mr Holdsworth’s evidence supply a factual foundation for the latter’s opinions if they are based wholly on speculation or assumptions unsupported by any evidence. However, if there is some evidence to support Mr Holdsworth’s evidence, including his opinions as to whether works were required by reason of fair wear and tear, Mr Drosinos’ evidence (and his failure to address material issues) could be taken into account by the primary Judge. [22] Specifically, his Honour was entitled, as he found, to infer that Mr Drosinos’ evidence would not have assisted Bonafair. His Honour was also entitled to draw inferences adverse to Bonafair more readily from evidence suggesting that particular works were required by reason of fair wear and tear. [23]

Conclusion

22. Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-419 (Handley JA); Ho v Powell (2001) 51 NSWLR 572; [2001] NSWCA 168 at [16] (Hodgson JA, Beazley JA agreeing).

23. Jones v Dunkel at 308 (Kitto J), at 312 (Menzies J), at 320-322 (Windeyer J).

102. Mr Holdsworth’s report, in my opinion, is a careful analysis of the information available to him. The report explains the reasoning process leading to his opinion that the works comprised in Items 1 and 3 were required because of reasonable wear and tear. The report acknowledges the extent to which Mr Holdsworth’s views rest on assumptions and recognises that, although the invoices describe the works in some detail, he did not have the benefit of inspecting the Premises before the works were carried out.

103. I do not accept Mr Bogan’s submission that Mr Holdsworth’s opinions amount merely to speculation devoid of an evidentiary basis. It is true that in cross-examination, Mr Holdsworth agreed that he was not in a position “to say what actually necessitated these repairs [to the timber windows]” and said that he could only speculate. But his report shows that his analysis did not rest simply on speculation. By describing the nature of the works carried out and explaining why his experience indicated that works of this kind were probably necessitated by reasonable wear and tear, Mr Holdsworth provided a basis, supported by evidence, for his opinions. It may be that evidence from Mr Drosinos or some other source contradicting or casting real doubt on aspects of Mr Holdsworth’s analysis would have sufficed to undercut his opinions. However, no such evidence was adduced on behalf of Bonafair.

104. I accept that the strength of the evidence supporting Mr Holdsworth’s opinion varied, depending on the particular work undertaken. For example, there was a good deal of evidence as to the causes of the cracking of the brick parapet and walls and their brick cappings. There was less evidence as to the causes of the deterioration of the timber windows. In my view, however, there was a sufficient evidentiary basis for Mr Holdsworth’s opinions to justify the primary Judge, in the absence of evidence to the contrary, accepting Mr Holdsworth’s opinion that the works comprised in Items 1 and 3 were necessitated by reasonable wear and tear.

105. There is a possible qualification to this conclusion that flows from the principle stated by Talbot J in Haskell v Marlow, as follows: [24]

“The exception of want to repair due to wear and tear must be construed as limited to what is directly due to wear and tear, reasonable conduct on the part of the tenant being assumed. It does not mean that if there is a defect originally proceeding from reasonable wear and tear the tenant is released from his obligation to keep in good repair and condition as to everything which it may be possible to trace ultimately to that defect. He is bound to do such repairs as may be required to prevent the consequences flowing originally from wear and tear from producing others which wear and tear would not directly ‘produce’.”

This principle has been adopted by the House of Lords[25] and followed in New South Wales. [26]

24. [1928] 2 KB 45 at 59.

25. Regis Property Co Ltd v Dudley [1959] AC 370 at 394 (Viscount Simonds), at 402 (Lord Tucker), at 410 (Lord Denning).

26. Alamdo Holdings Pty Ltd v Australian Window Furnishings (NSW) Pty Ltd [2006] NSWCA 224 at [35] (Hodgson JA, McClellan CJ at CL agreeing), at [129] (Basten JA).

106. Mr Holdsworth attributed the need for repairs to the steel and aluminium windows to inadequate preventive maintenance which caused accelerated wear and tear. Mr Bogan relied on Mr Holdsworth’s opinion on the absence of preventative maintenance for his submission that Hungry Jack’s could not recoup the cost of these repairs. He contended that the works to the steel and aluminium windows were necessitated by Hungry Jack’s failure to carry out preventative maintenance and thus it could not rely on the reasonable wear and tear exception.

107. The difficulty with this submission is that Bonafair adduced no evidence, whether from Mr Holdsworth or otherwise, tending to show that not only had Hungry Jack’s failed to carry out regular maintenance on the steel and aluminium windows, but it was that failure which caused or at least substantially contributed to the need to carry out remedial works.

108. A period of two years and nine months elapsed between the commencement of the Lease (July 2006) and the repairs to the aluminium and steel windows (April 2009). Mr Holdsworth’s report suggests that, if anything, the lack of preventative maintenance was a longstanding problem, which contributed to accelerated wear and tear. Mr Holdsworth referred to a lack of lubrication “over a period of time” as contributing to the need to replace broken swivel points. He attributed the need to adjust and trim the steel window frames to paint build up caused by repainting without removing previous coatings and to corrosion due to a failure to undertake adequate preventative maintenance. The aluminium windows, which had probably been in place since the 1980s, suffered from similar problems.

109. The primary Judge made no findings on these matters, presumably because he was not asked to do so. Mr Holdsworth did not consider and was not asked whether any lack of maintenance since the commencement of the Lease was likely to have made a material contribution to the need for the works. There was no inspection report in evidence relating to the condition of the Premises at the commencement of the Lease. Mr Drosinos did not give evidence as to the condition of the steel and aluminium windows at that time. Nor did he give evidence as to the results of his regular inspections of the Building. There was no evidence that Hungry Jack’s was asked at any time to carry out preventative maintenance on the aluminium and steel windows.

110. As I have noted, Hungry Jack’s bore the burden of showing that the works were attributable to reasonable wear and tear. The evidence demonstrates that the repairs to the steel and aluminium windows were due to reasonable wear and tear. The evidence is equivocal as to whether Hungry Jack’s apparent failure to carry out preventative maintenance during the term of the Lease accelerated the deterioration to such an extent that it can be said to have materially contributed to the need for the works. In view of the failure of Bonafair to call or adduce evidence that must have been readily available to it, and in the absence of a finding by the primary Judge as to the consequences of Hungry Jack’s failure to carry out preventative maintenance, I do not think that the principle in Haskell v Marlow applies in this case.

111. It is not necessary to proceed seriatim through each of the works covered by Items 2 and 4-10. I have not seen anything in Bonafair’s written submissions that suggests that the conclusions I have reached on Items 1 and 3 would not apply to the remaining Items.

Hungry Jack’s Challenge

112. The primary Judge found that the heritage tiles were damaged during renovations carried out in 1996 by Hungry Jack’s (before the Lease commenced) “and as a result of Oscars’ employees moving beer kegs across the entrance”. The latter finding is a reference to actions of Hungry Jack’s sub-lessee, which occupied levels 1-5 of the building after 2009.

113. Mr Drosinos gave evidence that the actions of the sub-lessee contributed significantly to the damage to the heritage tiling near the doorways because it moved beer kegs in and out of the building using the main entrance, rather than by means of the goods lift. Mr Drosinos also said that damage had been caused to the tiles by guests of a hostel, who moved their luggage in and out of the building.

114. Hungry Jack’s cannot be liable for the cost of repairing or replacing heritage tiles damaged before the commencement of the Lease. Hungry Jack’s was obliged to keep the Premises in good and tenantable repair having regard to its condition at the Commencement Date (cl 9.1(a)(i)). It is, however, liable for any damage caused to the heritage tiling after the commencement of the Lease, otherwise than as a result of reasonable wear and tear.

115. Mr Bannan submitted that the evidence supports an inference that the “vast majority” of the damage to the tiling occurred before the Commencement Date. He supported this submission by referring to Mr Holdsworth’s report, which he said indicated that the total area of tiles that had to be replaced was very small. Mr Bannan also relied on a photograph of damaged tiles taken shortly after the commencement of the Lease. Since the photograph was taken shortly after the Lease commenced, he submitted that the likelihood was that the damage had been sustained before the Lease commenced.

116. The primary Judge did not attempt to assess what proportion of the damage to the tiles occurred before the Lease commenced and what proportion occurred thereafter. He may have refrained from this course because neither party asked him to do so or because the evidence did not allow any such apportionment. But there was clearly sufficient evidence to justify a finding that a substantial proportion of the damage occurred after the Lease commenced and that the damage could not be attributed to reasonable wear and tear. Bearing in mind that the onus was on Hungry Jack’s, it has not demonstrated that the primary Judge’s finding was in error.

Bonafair’s Further Argument

117. Bonafair’s Notice of Appeal contains a ground that relies on par (g) of the definition of “Outgoings” to challenge the amount the primary Judge ordered it to repay to Hungry Jack’s. Paragraph (g) of the definition includes all costs of repairs and replacements of and to the exterior of the building.

118. The Notice of Appeal contends that Hungry Jack’s was liable to pay for all such costs pursuant to cl 4.1 (which requires it to pay for Outgoings) or cl 11.1 (the indemnity provision), regardless of whether the works were required because of reasonable wear and tear. The Notice of Appeal identifies the cost of works in Items 3, 4 and 7 as the works covered by this ground of appeal.

119. The primary Judge did not address this argument in his reasons and accordingly made no findings as to which of the works in Items 3, 4 and 7 related to the “exterior of the Building” within the meaning of par (g) of the definition of Outgoings. Mr Bogan was asked whether the argument had been put to the primary Judge. In response, he pointed to two passages in Bonafair’s written submissions at the trial, both of which referred to par (g) of the definition of “Outgoings”. However, I do not read the references as putting the argument identified in the Notice of Appeal, a reading presumably shared by the primary Judge. The argument was not addressed in Bonafair’s written submissions on the appeal. Mr Bogan, in response to a question from the Court during oral argument, referred to the contention but did not seek to develop it in detail.

120. In these circumstances, I do not think it is in the interests of justice in a case in which the parties have raised a plethora of issues, to allow Bonafair to put an argument on appeal that was not clearly put to the primary Judge and which requires findings of fact to be made. [27]

     27. Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12 at 497 (Mason CJ, Wilson, Brennan and Dawson JJ).

121. In any event, I do not think that the construction argument is well-founded. Paragraph (g) of the definition of “Outgoings” contains an exception for “work that is the responsibility of the Lessor pursuant to the Lease”. Read in context, work that is outside the Lessee’s covenant to repair (because it is due to reasonable fair wear and tear) is properly regarded as the responsibility of the Lessor. The Lessor may or may not be “liable” to undertake such work, depending upon whether a failure to do so breaches the covenant for quiet enjoyment or other covenants (such as keeping “Services” operational). But the Lease itself distinguishes between costs and expenses for which the Lessor is “liable” (cl 11.1) and matters that, as between it and the Lessee, are its “responsibility”. In my opinion, works which are necessitated by reasonable wear and tear are the Lessor’s “responsibility” for the purposes of par (g) of the definition of “Outgoings”.

Orders

122. I have set out earlier the conclusions that I have reached on the issues raised on the appeal and cross-appeal. The result is that the appeal and cross-appeal must be dismissed. Since the appeal and cross-appeal seemed to generate much the same quantity of documentation and submissions, it is appropriate that there be no order as to the costs of either the appeal or cross-appeal.

123. I therefore propose the following orders:

1.   Appeal dismissed.

2.    Cross-appeal dismissed.

3.    No order as to the costs of the appeal and cross-appeal.

Endnotes

Decision last updated: 06 October 2016