Brinca Property Management Pty Ltd v Fibre Tek Global Pty Ltd

[2015] NSWSC 1628

Supreme Court

New South Wales

Medium Neutral Citation:

Brinca Property Management Pty Ltd v Fibre Tek Global Pty Ltd [2015] NSWSC 1628

Hearing dates:

29 and 30 October 2015

Decision date:

06 November 2015

Before:

Ball J

Decision:

See paragraphs 32 and 34 to 38 of this judgment.

Catchwords:

LANDLORD AND TENANT – rent – breach of covenant to pay – accepted that landlord was entitled to terminate the lease for breach of essential term to pay rent – whether tenant owed money as a result of EFTPOS transactions conducted through landlord’s account – whether landlord in breach of plaintiff’s right to quiet enjoyment – entitlement to costs order pursuant to lease

Cases Cited:

Kyabram Property Investments Pty Limited v Murray [2005] NSWCA 87

Category:

Principal judgment

Parties:

Brinca Property Management Pty Ltd ACN 158 929 465 (Plaintiff)
Fibre Tek Global Pty Ltd ACN 603 303 144 (First Defendant)
Marc Victor Edwards (Second Defendant)

Representation:

Counsel:

 

Ms M Painter SC with Ms J Gatland (Plaintiff)
CJ Dibb (Defendants)

  Solicitors:
Moisson Lawyers (Plaintiff)
Carter Ferguson (Defendants)

File Number(s):

2015/276315

Publication restriction:

Nil

Judgment

Introduction

1. By an amended summons filed on 21 September 2015, the plaintiff, Brinca, sought a declaration that it was entitled to terminate a lease to the first defendant, Fibre Tek, of a strata titled motel in Goulburn known as the “Goulburn Heritage Motel” (the Motel) and an order that a writ of possession issue forthwith. It also sought damages.

2. At the conclusion of the hearing on 30 October 2015, and following the abandonment of a claim for relief against forfeiture by Fibre Tek, I indicated that I would make a declaration and order substantially in the terms sought by Brinca and would publish my reasons later. I also said that I would reserve the question whether any further orders should be made. This judgment sets out my reasons for making the orders that I did and deals with the remaining questions in the case.

Background

3. The Motel consists of 43 rooms, a licensed dining room and common areas. Brinca is controlled by Mr Alan Bailey. Brinca purchased the Motel on 26 March 2014 from Mr Aaron Lye. At that time, the Motel was leased to Goulburn Heritage Lodge Pty Ltd (GHL), the sole director and shareholder of which was Mr Lye’s mother, Ms Gail Shields. Ms Shields and her then de facto husband, Mr Victor Ollis, lived on site and managed the Motel. In connection with the purchase, Brinca granted a lease of the Motel to GHL.

4. From about August 2014, GHL got into financial difficulties that appear to have been connected to the breakdown in the relationship between Ms Shields and Mr Ollis. Eventually, Ms Shields moved to Queensland and subsequently Brinca terminated the lease to GHL on or about 27 February 2015 for non-payment of the rent.

5. At the time the lease to GHL was terminated, Mr Ollis was managing the Motel. Mr Bailey reached an agreement with Mr Ollis and Mr Ollis’s son, Mr Marc Edwards, the second defendant, that Mr Ollis would continue to manage the Motel under a licence. There is a question whether he did so in his own right or as agent for Fibre Tek, which is a company controlled by Mr Edwards. However, the resolution of that question is no longer relevant to the issues in the case, and it is sufficient for present purposes simply to observe that during the period from February 2015 to April 2015, either Mr Ollis or Fibre Tek operated the Motel under an informal licence from Brinca. In connection with the new arrangements, Mr Bailey installed an EFTPOS machine at the Motel which was linked to an account in the name of Brinca in place of the EFTPOS machine that had been installed by GHL. The machine installed by Brinca was used in the Motel from February to May 2015.

6. In April 2015, Brinca entered into a new lease of the Motel to Fibre Tek (the Lease). Fibre Tek’s obligations under the Lease were guaranteed by Mr Edwards.

7. Fibre Tek made only three payments of rent under the Lease. They are:

1. $19,704.74 on 6 June 2015;

2. $42,625.00 on 6 July 2015;

3. $20,000.00 on 25 August 2015.

8. On 21 September 2015, Brinca purported to terminate the Lease orally and in writing for non-payment of rent. It then commenced these proceedings.

9. At the hearing, Fibre Tek accepted that it had not paid the full amount of rent payable under the Lease. However, it submitted that Brinca had wrongfully failed to give it credit for amounts Brinca received from EFTPOS transactions using the machine it installed in the Motel. Fibre Tek submitted that once credit was given in respect of those transactions, the amount of rent it owed was substantially less than the amount claimed by Brinca. To the extent that it remained in arrears, it originally claimed relief against forfeiture. However, as I have said, in final submissions it abandoned its claim for that relief. Mr Dibb, who appeared on behalf of the defendants, conceded that the relationship between the parties was so acrimonious that Fibre Tek no longer sought relief against forfeiture.

10. By a cross claim, Fibre Tek also raised a number of other issues. Some of those were also abandoned during the course of the hearing. However, Fibre Tek maintains a claim that Brinca breached its right of quiet enjoyment under the Lease by seeking to take possession of the Motel during the period 22 September 2015 to 24 September 2015, or, alternatively, that Brinca was guilty of trespass during that time. It also claims that, by commencing these proceedings, Brinca breached a dispute resolution clause in the Lease, although it is unclear whether it presses that claim.

11. In the result, then, the principal issue that remained at the end of the hearing was whether Fibre Tek was in arrears in rent and, if so, by how much. The answer to that question turned on the amount that Brinca owed Fibre Tek in respect of EFTPOS transactions, whether Fibre Tek was entitled to recover damages for breach of the obligation of quiet enjoyment or for trespass and whether those amounts could be set off against the rent due under the lease. Also left was the question whether any orders should be made against Mr Edwards and the question whether there had been a breach of the dispute resolution clause of the Lease.

12. For reasons which I explain, it was apparent at the conclusion of the hearing that Fibre Tek was in default in paying rent. That amounted to a breach of an essential term of the Lease. In the absence of a claim for relief against forfeiture, it followed that Brinca was entitled to terminate the Lease for that breach. In my opinion, it was undesirable to leave Fibre Tek in possession of the Motel in circumstances where it was clear that the Lease had come to an end, when it had little interest in promoting the business of the Motel. It was for that reason that I made the orders I did at the end of the hearing.

The Lease

13. The Lease is in registerable form. Its commencement date is stated to be 6 April 2015. It was for a term of 10 years with four five year options. The initial rent was $465,000 plus GST for Year One of the Term, which amounted to $42,625 per calendar month.

14. Clause 3.1(b) of the Lease provides that the rent must be paid “by equal monthly instalments in advance”. Clause 3.1(d) provides:

Tenant must not make any deduction from the Rent.

That clause was reinforced by cl 1.3(m) which provides:

Rent and other moneys: The Tenant and the Guarantor must make payments under this Lease without set-off or counterclaim and free from deduction.

15. Clause 3.1(b) was modified by a letter agreement dated 6 April 2015 entered into between the parties. That letter agreement relevantly provides:

For the first year of the term from 6 April 2015 to 5 April 2016, you may remain in arrears of up to two (2) months on the payment of rent owed under the Lease Agreement, with payment due on the first day of each month immediately following each two (2) month period. For the second year of the term from 6 April 2016 to 5 April 2017, rental payments will be due at the commencement of each month for the month immediately beginning. For the remainder of the term from 5 April 2017 to the termination date on 5 April 2025 and any subsequent extended term exercised under an option to renew within the Lease Agreement, rental payments must be made two (2) months in advance on the commencement of each two (2) month period.

16. Although the letter agreement is not entirely clear, in my view it means that rent in respect of any period could be up to two months late and was payable on the first day of the lease month that followed that two month period. To take an example, under the terms of the lease rent for the period 6 April 2015 to 5 May 2015 was due on 6 April 2015. Under the letter agreement that rent could be up to two months in arrears and was then payable on the first day of the lease month following that two month period. On that basis, the rent due on 6 April 2015 had to be paid no later than 6 June 2015.

17. Clause 4.4 of the Lease provides:

Interest on Late Payments

(a)   The Tenant must pay interest on any moneys that are due and payable under this Lease and have not paid been paid [sic] within 7 days from the due date.

(b)   Interest is charged at the rate of 15% over the annual overdraft rate for an equal sum of money that is charged by the Landlord’s bank.

(c)   Interest is payable from the date that the moneys were due until the date that the moneys are actually paid.

(d)   This Clause does not prevent the Landlord from exercising any other right under this Lease.

18. Clause 9.1 relevantly provides that “The Landlord must, subject to the Tenant’s compliance with this Lease … allow the Tenant to occupy the Motel without interruption or disturbance from the Landlord or the Landlord’s Agents …”

19. Clause 10.1 gives Brinca a right to enter the Motel at reasonable times to ensure that Fibre Tek is complying with the terms of the Lease and to carry out maintenance and repairs.

20. By cl 11.1, the payment of rent is made an essential term of the Lease. Clause 11.2 provides that Fibre Tek is in default of the Lease if, relevantly, it breaches an essential term of the lease or fails to pay money within seven days of the due date. Clause 11.3 gives Brinca a right, if Fibre Tek is in default, to terminate the Lease by notice. Clause 11.4(a) provides:

Indemnity for Termination

If as a result of the Tenant’s default this Lease is terminated, the Tenant must indemnify the Landlord against any liability, loss, costs, charges and expenses incurred:

(i)   in connection with re-entering the Motel; and

(ii)   because the Landlord does not receive the benefit of this Lease from the date of that termination until the Expiry Date (having regard, for example, to the provisions relating to Rent and Outgoings); and

(iii)   in connection with anything else relating to that termination including, but not limited to, in the Landlord attempting to mitigate its loss.

21. The guarantee given by Mr Edwards is contained in cl 17 of the Lease. That clause relevantly provides:

17.1   Guarantee

(a)   The Guarantor guarantees the payment of all amounts payable under this Lease and the performance by the Tenant of the covenants and provisions contained in this Lease.

(b)   The Guarantor must on demand by the Landlord if the Tenant is in default of this Lease pay, observe and perform the obligations of the Tenant under this Lease.

17.2   Indemnity

The Guarantor indemnifies the Landlord from any loss caused by the default of the Tenant.

22. Clause 19 of the Lease deals with dispute resolution. It provides:

If either party disputes any matter under this Lease then the following procedure is to be followed:

(a)   the party disputing the matter must give a notice to the other party setting out the dispute (“Dispute Notice”);

(b)   if the parties cannot subsequently resolve the dispute within 14 days from the Dispute Notice being served, the Landlord or the Tenant may ask the President of the Law Society to appoint an independent expert to determine the dispute;

(c)   The decision made by the expert will be final;

(d)   The Landlord and the Tenant must share the costs of the expert equally.

The loan agreement

23. Mr Bailey was only prepared to grant a lease to Fibre Tek if Fibre Tek agreed to take over responsibility for the rent and other amounts owing by GHL. However, Brinca was willing to give Fibre Tek time to make those payments. Those arrangements were formalised in a loan agreement dated 2 April 2015 between Fibre Tek, Brinca and Mr Edwards as guarantor. Under the terms of that agreement, Fibre Tek agreed to pay Brinca the sum of $580,000 on 2 April 2018. In an email dated 13 April 2015, Mr Dangar explained to Mr Edwards that the “rough numbers” making up the amount to be repaid consisted of the following:

$100,000 bathroom renovation agreed under last lease

$50,000 APB loan to business

$80,000 Strata merger costs agreed under last lease

$150,000 rent arrears

$100,000 electricity

$30,000 strata levy arrears

$20,000 rate arrears

$50,000 Brinca costs to date

Subsequent events

24. As I have said, apart from the payments of rent I have referred to, and one other payment referred to below, Fibre Tek did not make payments of rent due under the Lease. As a result, Brinca commenced these proceedings on 21 September 2015. As at that date four months’ rent was payable – that is, rent for the periods 6 April 2015 to 5 May 2015 (due on 6 June), 6 May 2015 to 5 June 2015 (due on 6 July 2015), 6 June 2015 to 5 July 2015 (due on 6 August 2015) and 6 July 2015 to 5 August 2015 (due on 6 September 2015), making a total of $170,500. Another two months’ rent has fallen due since then, making a total of $255,750.

25. The matter was mentioned on 22 September 2015. Following that mention, Mr Edwards says that he and his father drove to Goulburn and arrived at the Motel at about 8.00 pm to find a male person in a car parked across the driveway. According to Mr Edwards, from the evening of 22 September 2015 to late Wednesday 23 September 2015, he observed some Brinca staff in reception and saw them take telephone calls and speak to customers and direct Motel staff in relation to various tasks they were to undertake. According to Mr Ollis, there were five males and two women and three security guards at the entrance to the property. Mr Bailey was also present and, as a result of an altercation between him and Mr Ollis, Mr Bailey applied for an Apprehended Violence Order against Mr Ollis, which is yet to be finally determined by the Local Court. During the time that Brinca’s staff attempted to take control of the Motel, the staff were directed to use a mobile EFTPOS machine connected to a bank account controlled by Calfer Pty Ltd, another entity which is part owned by Mr Bailey. However, the bank records indicate that no payments were received into that bank account during the period from 22 to 24 September 2015. There is no evidence that Brinca received any other money during that period.

26. Fibre Tek claims that it is entitled to damages for loss of income and for trespass during the period that Brinca took physical possession of the Motel on 22 to 24 September 2015.

Amounts owing to Fibre Tek in respect of EFTPOS transactions

27. It is quite apparent that Brinca made substantial payments to Fibre Tek in respect of amounts it received into the EFTPOS account. In addition, on 16 March 2015, it credited to that account the sum of $50,000, which was part of the $580,000 that was the subject of the Loan Agreement and that Mr Dangar had described in his email as “APB loan to business”. On the other hand, on 17 March 2015, Brinca made a payment from the account to itself of $42,625. In addition, it paid from the EFTPOS account strata levies payable in respect of the strata title units that comprised the Motel and water rates payable in respect of the strata title units that comprised the Motel. The amount paid in respect of strata levies totalled $10,205.02. The amount paid in respect of water rates totalled $19,088.68. Fibre Tek submits that it should be given credit for each of those amounts towards its obligation to pay rent.

28. The amount of $42,625 that Brinca withdrew from the EFTPOS account and paid to itself was clearly an amount paid in respect of rent and Fibre Tek should get credit for that amount.

29. In cross-examination, Mr Bailey conceded that the amounts deducted for strata levies and water rates appeared to relate to the period when the Motel was leased to GHL. To the extent that Fibre Tek was responsible for the payment of those amounts that could only be because they were included in the amount that was the subject of the loan agreement. On that basis, Brinca did not have a right to deduct those amounts from the EFTPOS account. They were not amounts payable by Fibre Tek and Fibre Tek is entitled to recover those amounts from Brinca. On the other hand, it is difficult to see how that right can be set off against Fibre Tek’s obligations to pay rent having regard to the terms of clause 3.1(d) and 1.3(m) of the Lease.

30. It follows that the total amount of rent that Fibre Tek had paid at the time that Brinca purported to terminate the Lease was $124,954.74 ($19,704.74 plus $42,625.00 plus $20,000.00 plus $42,625.00). Even assuming that the amounts deducted from the EFTPOS account in respect of strata title fees and water rates could be set off against rent, the total amount of rent that had been “paid” as at the date Brinca purported to terminate the Lease was $154,248.44 ($124,954.74 plus $10,205.02 plus $19,088.68). The total rent owing at the time Brinca purported to terminate the Lease was $170,500, leaving a shortfall of $16,251.56.

31. As I have said, Fibre Tek claims damages for breach of the obligation of quiet enjoyment and trespass. However, even assuming that Brinca breached the obligation of quiet enjoyment, I am not satisfied that Fibre Tek suffered any substantial damages as a consequence of that breach. There is no evidence that Brinca appropriated any income of the Motel to itself during the period 22 to 24 September 2015. In particular, the evidence is that it did not use its own EFTPOS terminal to process any payments that were properly payable to Fibre Tek. Fibre Tek submits that it lost income during the two day period. It submits that an analysis of the income earned from the Motel both before and after the period 22 to 24 September 2015 shows that on average the Motel earned approximately $8,000 per day in those days but it earned substantially less revenue in the period 22 to 24 September 2015. In my opinion, those facts do not establish that Fibre Tek suffered a loss. Although the figures vary depending on the period over which they are taken, the average revenue of the Motel was much less than $8,000 per day. It is impossible to say that the results for 22 to 24 September 2015 were affected by Brinca’s conduct, and it is not easy to see how they could have been. No logical explanation is offered for why Brinca’s occupation of the Motel on those days would have caused revenue to drop substantially on those days. Presumably, most guests had pre-booked with the result that they would have stayed in the Motel irrespective of who was in control of it. It is conceivable that Brinca’s occupation of the Motel could have had an effect on future bookings but it is not suggested that Brinca’s occupation affected future bookings. At most, then, Fibre Tek would only be entitled to recover nominal damages for breach of the obligation of quiet enjoyment.

32. It follows from what I have said, that even if Fibre Tek is entitled to set off amounts owing to it against rent, it was in arrears in paying rent at the time Brinca purported to terminate the Lease for non-payment of the rent. The payment of rent was an essential term of the Lease. Brinca was entitled to terminate the Lease for breach of that essential term. No application is made for relief against forfeiture. In those circumstances, the termination was valid. It is for those reasons that I made the orders I did on 30 October 2015.

The dispute resolution clause

33. Fibre Tek contends that on 16 September 2015 it gave a Dispute Notice in accordance with cl 19 of the Lease notifying a genuine dispute concerning how much rent, if any, was owing by Fibre Tek and that shortly after receiving that notice Brinca, in breach of cl 19, commenced these proceedings. The difficulty, however, with that submission is that Fibre Tek did nothing other than defend the proceedings after they had been commenced. It was open to Fibre Tek to make an application for a stay of the proceedings on the basis that the parties had agreed to refer their dispute to expert determination in accordance with cl 19. But it did not do so. In those circumstances, nothing can follow from Brinca’s failure to comply with cl 19.

Amounts recoverable by Brinca

34. In addition to the orders I have made, Brinca is entitled to judgment for outstanding rent and for damages under cl 11.4 of the Lease. In the absence of any other method advanced for calculating those damages, it seems to me that the most appropriate basis is to permit Brinca to recover as damages the amount that it would have received in rent from the time the Lease was terminated to the time it obtains possession of the Motel. In calculating the amount payable by Fibre Tek, Brinca must give credit for the amounts it deducted from the EFTPOS account in respect of strata title fees, water rates and rent. Brinca is entitled to interest on the amount payable to it in accordance with cl 4.4 of the Lease.

35. Brinca is also entitled to judgment for the same amount against Mr Edwards under the guarantee he gave.

Costs

36. Brinca has been successful in the proceedings. It is obviously entitled to an order for costs in its favour. It submits that it should be entitled to those costs on an indemnity basis. In making that submission in relation to Fibre Tek, it relies on cl 4.3(b)(v)(G) of the Lease, which provides that “The Tenant must pay … the Landlord’s reasonable costs … resulting from the default of the Tenant”. In the case of Mr Edwards, it submits that the court should order that he pay Brinca’s costs on an indemnity basis, relying on the indemnity in cl 17.2 of the Lease.

37. I do not accept those submissions. The court retains a discretion in relation to costs, even where the parties have reached an agreement on costs: Kyabram Property Investments Pty Limited v Murray [2005] NSWCA 87 per Beazley JA (with whom Hodgson and Ipp JJA agreed) at [11]–[14]. In the present case, Fibre Tek’s obligation under the Lease is to pay Brinca’s “reasonable costs”. There is no particular reason why Brinca should recover its costs on an indemnity basis in this case. Although it was unsuccessful, I do not think that it could be said that its case was hopeless. There appears to have been a genuine dispute concerning the amount owing by Fibre Tek. Fibre Tek sought to resolve that dispute in accordance with the Lease. In those circumstances, it is appropriate to treat Brinca’s reasonable costs as the costs it would recover on the ordinary basis. Brinca should not be entitled to recover under the indemnity given by Mr Edwards more in respect of costs than the amount that it is entitled to recover from Fibre Tek. In the absence of clear words to the contrary, the indemnity should be interpreted as an indemnity in respect of amounts for which Fibre Tek is also liable. On that basis, the defendants should pay the plaintiff’s costs on the ordinary basis.

Orders

38. The parties should, within 14 days of today’s date, bring in short minutes of order to give effect to this judgment to the extent that those orders have not already been made. If the parties cannot agree on the form of the short minutes, the matter should be re-listed by contacting my Associate to deal with any outstanding issues.

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Decision last updated: 06 November 2015