Brookfield Multiplex WS Retail Landowner (ACN 109 033 794) and AWPF Management No 2 Pty Ltd (ACN 135 365 365) v Valentino Franchise Pty Ltd (ACN 114 469 662)
[2011] NSWADT 184
•02 August 2011
Administrative Decisions Tribunal
New South Wales
Medium Neutral Citation: Brookfield Multiplex WS Retail Landowner (ACN 109 033 794) and AWPF Management No 2 Pty Ltd (ACN 135 365 365) v Valentino Franchise Pty Ltd (ACN 114 469 662) [2011] NSWADT 184 Hearing dates: 6 April 2011 Decision date: 02 August 2011 Jurisdiction: Retail Leases Division Before: D Patten, Deputy President Decision: 1. Respondent to pay the applicants the sum of $248,499.30.
2. Costs reserved until further order.
3. Operation of Order 1 stayed for 30 days.
Catchwords: Summary disposal of proceedings - no defence disclosed - no right to set off claim for damages against claim for rent Legislation Cited: Administrative Decisions Tribunal Act 1997
Building and Construction Industry Security of Payment Act 1999
Commonwealth Constitution
Retail Leases Act 1994
Trade Practices Act 1974 (Cth)Cases Cited: Batiste v Lenin [2002] NSWCA 316
Batiste v Lenin [2002] NSWSC 233
Bitannia Pty Ltd & Anor v Parkline Constructions Pty Ltd (2006) 67 NSWLR 9
Citibank Savings Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168
Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4 All ER 834
Famous Army Stores v Meehan [1993] IEGLR73
Lord v Direct Acceptance Corporation Ltd (1993) 32 NSWLR 362
Miwa Pty Ltd v Siantan Properties Pty Ltd [2010] NSWSC 1203
Sarip Investment Pty Ltd v Uno Uno Pty Ltd [2004] NSWADT 27
Wytell Pty Ltd v Glowinski [Retail Tenancies] [2006] VCAT 454Category: Interlocutory applications Parties: Brookfield Multiplex WS Retail Landowner (ACN 109 033 794) (First Applicant)
AWPF Management No 2 Pty Ltd (ACN 135 365 365) (Second Applicant)
Valentino Franchise Pty Ltd (ACN 114 469 662) (Respondent)Representation: Counsel
J Hynes (Applicants)
Minter Ellison (Applicants)
C Kelly (Agent - Respondents)
File Number(s): 095135
REasons for decision
RETAIL LEASES DIVISION (D PATTEN (DEPUTY PRESIDENT)): By its amended application for original decision in matter 085095 (the earlier proceedings), Valentino Franchise Pty Ltd, the present respondent and hereafter "the respondent" sought orders against the present applicants (hereafter "the applicants") for payment of damages in respect of alleged breaches of the covenant for quiet enjoyment contained in a lease from the applicants to the respondent (hereafter "the lease") of premises known as shops 10.61 and 10.63 World Square Shopping Centre, George Street, Sydney (hereafter "the premises"). The application also sought damages on the basis that the applicants had "derogated from the grant" and for alleged breaches by the applicants of sections 33 and 34 of the Retail Leases Act 1994 (the Act).
On 6 April 2011, I ordered that the earlier proceedings be stayed pending payment by the respondent of costs ordered to be paid on 22 March 2011 or further order of the Tribunal.
In these proceedings the applicants seek an order for payment of the liquidated amount of $227,842 plus accruing interest. The liquidated claim principally comprises alleged arrears of rent payable under the lease but it also includes $14,013.09 said to be payable pursuant to an order of Judicial Member Fox made on 16 May 2008.
A Statement of Defence filed by the respondent admitted arrears of rent but in effect denied an obligation to pay anything on the basis "that the rent withheld has been offset against the loss and damage suffered by the lessee as pleaded in the lessee's Amended Application for Original Decision" in the earlier proceedings.
The applicants, on 6 April, moved for a summary order for payment of the liquidated sum claimed. They did so on the basis, so they submitted, that the Statement of Defence disclosed no defence in law to the claim. There is a difficulty with this contention in that it in effect seeks an order that the defence be struck out on the ground that it is untenable in law. There is in the Administrative Decisions Tribunal Act 1997 (ADTA) no express power to strike out a defence. The summary dismissal power contained in s 73(5)(h) refers to "proceedings" and must in my view as a matter of construction refer to the proceedings commenced by an applicant. However under the duty to act as quickly as practicable (s 73(5)(a)) I have decided to consider the case on the merits as argued by the parties. If in the result no arguable defence is exposed then in light of the unchallenged evidence relied upon by the applicants they should be held entitled to the orders they seek.
As argued the issue was whether the respondent is entitled to set off in these proceedings its claim in the earlier proceedings, such claim being in effect incorporated into its defence as earlier indicated.
The applicants through their counsel Mr Hynes contend that no set off is available at least to the claim for rental arrears which make up a very large proportion of the claim. They rely on cl 8.1 of the lease:
8.1 The Lessee must make payments under this lease to the Lessor (or to a person nominated by the Lessor in a notice to the Lessee) by the method the Lessor reasonably requires without set-off, counterclaim, withholding or deduction.
The entitlement to set off a claim against the claim of another arises in equity when the asserted set off goes "to the root of, be essentially bound up with, impeach the title of the plaintiff" ( Lord v Direct Acceptance Corporation Ltd (1993) 32 NSWLR 362). See also for instance in a landlord and tenant case, Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4 All ER 834.
In my opinion it is well arguable that the respondent's claim in the earlier proceedings sufficiently impeaches the applicants' title so as to create a right of equitable set off. In Connaught Restaurants where the lessees claim involved damage from water penetration and alleged breach of the lessor's covenant for quiet enjoyment, it was accepted that the lessee had the right of equitable set off against a claim for outstanding rent.
The more difficult question which arises in this case and which arose in Connaught Restaurants is whether the right of equitable set off has been excluded by the terms of the lease, there being ample authority that a right of set off may be excluded by contract (see for instance Famous Army Stores v Meehan [1993] IEGLR73).
In Connaught Restaurants the phrase in the covenant to pay rent was "without any deduction". Counsel accepted that it was open to the parties to exclude a right of equitable set off by express words or necessary implication but that there is a starting presumption that such exclusion must be effected by clear words. In the result the Court of Appeal held that the words used were insufficient for the purpose.
Relevant authorities are conveniently collected in the decision of the Victorian Civil and Administrative Tribunal in Wytell Pty Ltd v Glowinski [Retail Tenancies] [2006] VCAT 454. The cases referred to include the decision of Beach J in Citibank Savings Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168. In that case the relevant phrase was "without any deduction whatsoever" and Beach J concluded that this phrase excluded any right of the tenant to rely on an equitable set off. Although other Australian decisions seem to have taken a different approach, Bryson J in Batiste v Lenin [2002] NSWSC 233 took the same view as Beach J albeit without referring to the case. In Batiste the lessee covenanted to pay rent "without deduction". In relation to what was referred to as the "right of recoupment", Bryson J observed:
102 Recoupment as an answer to failure to pay rent . In answer to the lessor's cross-claim for possession insofar as it was based on breaches of covenants to pay rent and outgoings the lessee relied upon the right of recoupment established by the judgment of Goff J in Lee-Parker v. Izzet [1971] 1WLR 1688. His Lordship referred to the history of recoupment at 1692G to 1693F and concluded "I do not think this is bound up with technical rules of set off. It is an ancient common law right. I therefore declare that so far as the repairs are within the express or implied covenants of the landlord, the third and fourth defendants are entitled to recoup themselves out of future rents and defend any action for payment thereof. It does not follow however that the full amount expended by the third and fourth defendants on such repairs can properly be treated as payment of rent. It is a question of facts in every case, whether or to what extent the expenditure was proper." The subject was considered again, with further references to authority, in British Anzani (Felixstowe) Ltd v. International Marine Management (UK) Ltd [1980] 1 QB 137. Payments made by a lessee in situations of necessity which had the effect of meeting some obligation which by the terms of the lease the lessor was obliged to meet have been treated as payments to the use of the lessor and as discharging pro tanto the obligation to pay rent. The lessor's obligations considered have usually but not invariably been obligations to repair. There is no reason in principle why the same rules should not be applied to recoup lessee's expenditure against other moneys payable to the lessors, such as obligations to repay outgoings.
103 Plaintiffs' counsel was not able to refer me to any case in which a right of recoupment has been upheld notwithstanding a provision to the effect that rent will be paid "without deduction", as in Art.11. Counsel contended that recoupment by the lessee under this principle is not a deduction but that when the obligation to pay rent arises it is immediately discharged, so that there is no further obligation to make a payment, and withholding an amount paid to meet an obligation which the lessor should have met is not a deduction. Counsel pointed to the view expressed by Mr Andrew Waite in his article "Repairs and Deduction from Rent" in The Conveyancer and Property Lawyer , (1981) 45 Conv. (NS) 199; at p210 Mr Waite expressed the view that "Where the tenant has carried out repairs in accordance with the rules and deducted the cost from rent, the rent is deemed to have been paid. In other words the tenant has lawfully spent the rent on carrying out the repairs. The landlord has no claim for the rent. The tenant's action does not merely provide a defence to a claim for rent (as in the case of set-off), it negates the landlord's claim." Mr Waite went on to refer to Sapsford v. Fletcher (1792) 4 T.R. 511, 100 ER 1147 which however does not directly deal with a covenant to pay rent without deduction.
104 In Debonair Nominees Pty Ltd v. J & K Berry Nominees Pty Ltd (2000) 77 SASR 261 at 271 Mullighan J decided to the effect that literal operation should be given to a provision that rent must be paid clear of all deduction. The authorities to which his Honour referred relate to the principle, which is well established, that the lessee's obligation to pay rent is independent of any obligation of the lessor to effect repairs; the premises may be in disrepair or may have been destroyed but, subject to any provision of the lease, the obligation to pay rent continues. The operation of reference to payment without any deduction whatsoever in Pt.2 of Schd.4 of the Conveyancing Act 1919 was noted, without decision, by McLelland J in Lambert Pty Ltd v. Papadatos Pty Ltd (1991) 5 ACSR 468 at 471.
105 My view is that on the literal and true meaning of the covenant to pay rent without deduction, there is no room for reliance on the right of recoupment referred to in Lee-Parker v. Izzett . In my opinion the literal meaning of "without deduction" makes this clear, and looking further to the purpose of using those words, there is no other purpose available than to prevent the lessee from relying on rights or claims to be entitled to set off, recoup or otherwise withhold payment of part of the rent. In the ordinary use of language to recoup another obligation out of rent is to make a deduction from the rent, and if the use of the words "without deduction" did not achieve this result I cannot see what they would achieve, as the ordinary obligation of a debtor is to pay the whole debt.
The decision of Bryson J went on appeal to the Court of Appeal ( Batiste v Lenin [2002] NSWCA 316). The correctness of Bryson J's view on recoupment did not arise for decision but Sheller JA in the course of his reasons observed:
I should add that I am not persuaded that had the lessee been entitled to be recouped on the basis of the common law principle the claim could have been defeated by the provision in Art 11.01(a) requiring the lessee to pay rental "without deduction"; see Waite, "Repairs and Deduction from Rent" (1981) 45 Conv (NS) 199 at 210. But I do not need to consider this further.
The subject was more recently before Windeyer AJ in Miwa Pty Ltd v Siantan Properties Pty Ltd [2010] NSWSC 1203. After referring to the judgment of Bryson J in Batiste and to the remarks on appeal of Sheller JA, Windeyer AJ observed:
22 The article in The Conveyancer is not really relevant here as it makes clear that the common law right of recoupment is limited to cases where a landlord is responsible for repairs but fails to carry them out and a tenant then spends money on those repairs thereby paying the rent. Whatever the principle it is not suggested in the article that it extends to an obligation to contribute to fit out costs so as to bring about a result that rent has been paid by the lessee carrying out the fit out. The common law recoupment principle is separate from set off.
23 In R & J Lyons Family Settlement Pty Limited v 155 Macquarie Street Pty Limited [2008] NSWSC 310 Bryson J referred to the passage which I have set out from the judgment of Sheller JA acknowledging and said:
At para [49] observations of Sheller JA show that he did not endorse my view at para [105] on the effect of a "without deduction" provision in a covenant to pay rent; Sheller JA did not express disapproval or dispose of the subject.
24 He then went on to say in para [73]:
I remain of the view which I expressed in that case. In the present case the lessees made no expenditure which could be treated as recoupment or equitable set off against rent. Even if they had done so the "without deduction" provision in the present lease would bar a claim of recoupment.
25 I am always reluctant to add another decision of a single judge to those already published on a contentious subject. If I am correct on the construction point it is unnecessary to do so but as it was an important issue I consider it proper to decide it. In my view the decision of Bryson J is convincing and should be followed. I refer in particular to paragraph 105. It is clear there could be no deduction relying upon some cross-claim unconnected with the subject matter of liability for rent. It follows that if the words are to be of use they must refer to recoupment or set off. It follows that I am of the view that a requirement to pay rent without deduction eliminated any entitlement to set off.
In my view I am bound to follow the decision of Bryson J in Batiste . I note incidentally that the relevant covenant under my consideration is in much stronger terms than the one before Bryson J in that cl 8.1 of the lease refers expressly to "set off, counterclaim, withholding or deduction".
In written submissions the respondent referred to the decision of the Court of Appeal in Bitannia Pty Ltd & Anor v Parkline Constructions Pty Ltd (2006) 67 NSWLR 9. That was a case in which it was argued that s 15(4)(b) of the Building and Construction Industry Security of Payment Act 1999 does not prevent a defence being raised to an action under the section based upon asserted breaches of the Trade Practices Act . The Court of Appeal held that as a matter of construction s 15(4)(b) did not preclude the defence but that in any event by virtue of s 109 of the Commonwealth Constitution s 15(4)(b) is invalid in so far as it prevents the raising of a claim under the Trade Practices Act .
However as it seems to me the decision in Bitannia has no relevance to this case. No constitutional question arises and there is no doubt that the respondent's position in relation to the earlier action can if appropriate be protected by a stay of any order in these proceedings. The decision in Bitannia did not concern, as this case does, the impact of contractual obligations.
There is in my view no reason to suppose that the legislature intended in the absence of an express reference that the provisions of ss 33 and 34 of the Act would affect contractual obligations in relation to the payment of rent. Particularly is that so in this case where the respondent's right to continue with the earlier proceedings would remain unaffected by the making of the orders sought by the applicants. There is in my opinion no inconsistency, as submitted by the respondent, between the provisions of sections 33 and 34 of the Act and the provisions of the lease, and as a consequence, s 7 of the Act does not apply.
It follows from what I have said that, as the matter was argued, no defence was disclosed which could operate in law as a defence to the applicants' claim.
On that basis the applicants would be entitled to an order for payment of the amount claimed with interest as particularised in the three affidavits of Adam Paul Dillon sworn in the applicants' case. During the preparation of these reasons however I became concerned that the respondent's defence might have enlivened the operation of s 36 of the Act and I arranged for the Registrar to invite the parties to make further submissions. The applicants through their counsel did so and I gave the respondent leave to make submissions in reply.
Section 36 of the Act is in the following terms:
36 Damaged premises
(1) A retail shop lease is taken to provide for the following if the shop or the building of which the shop forms part is damaged:
(a) The lessee is not liable to pay rent, or any amount payable to the lessor in respect of outgoings or other charges, that is attributable to any period during which the shop cannot be used under the lease or is inaccessible due to that damage.
(b) If the shop is still useable under the lease but its useability is diminished due to the damage, the lessee's liability for rent and any amount in respect of outgoings attributable to any period during which useability is diminished is reduced in proportion to the reduction in useability caused by the damage.
(c) If the lessor notifies the lessee in writing that the lessor considers that the damage is such as to make its repair impracticable or undesirable, the lessor or the lessee may terminate the lease by giving not less than 7 days notice in writing to the other and no compensation is payable in respect of that termination.
(d) If the lessor fails to repair the damage within a reasonable time after the lessee requests the lessor in writing to do so, the lessee may terminate the lease by giving not less than 7 days notice in writing of termination to the lessor.
(e) Paragraphs (a)-(d) do not affect any right of the lessor to recover damages from the lessee in respect of any damage or destruction to which those paragraphs apply.
(2) A retail shop lease must not contain any provision the effect of which is to limit any liability of a party to the lease to pay compensation to another party to the lease in respect of damage to the shop or the building of which the shop forms part.
(3) Nothing in this section prevents the parties to a lease from terminating the lease by agreement if the shop or the building of which it forms part is damaged or destroyed.
The applicants' further submissions pointed to the circumstances that their claim is for rent dating back to May 2007 which with interest amounts to nearly $250,000 that a defence based upon s 36 of the Act has never been raised or sought to be raised, that Mr Craig Kelly on 6 April 2011 told the Tribunal that the respondent had in effect no funds and would be unable to satisfy the costs order made on 22 March, that on 25 March 2011 Mr Craig Kelly ceased to be a director of the respondent, that the making of orders against the respondent upon the present application will not affect its rights to continue the proceedings numbered 085095, that s 36 can have no material application in light of the absence of evidence that the premises could not be used or were inaccessible for the whole or a substantial part of the period of 60 days for which rent is being claimed, that at its highest evidence filed on the part of the respondent claimed that the useability of the premises was diminished for no more than 13 days of the relevant period and that s 36 does not permit a lessee simply to withhold rent absent agreement with the lessor (see Sarip Investment Pty Ltd v Uno Uno Pty Ltd [2004] NSWADT 27).
The respondent in its submissions in reply referred to the defences already pleaded including alleged breaches of the covenant for quiet enjoyment and of ss 33 and 34 of the Act. It submitted that it "has additional grounds of defence arising from the same factual matrix as is the evidence already filed under the provisions of ss 36, 62B and 62D of (the Act)".
For reasons given earlier I reject the proposition that the respondent is entitled to defend these proceedings by way of set off relying on asserted breaches of the covenant for quiet enjoyment and ss 34 and 34 of the Act.
If I gave leave for a defence based on s 36 to be raised then on the material before me it could only relate to a small part of the period for which rent is claimed. The utility of allowing that course would thus be very limited and potentially wasteful of the resources of both this Tribunal and the parties, particularly as the applicants are separately represented in the two proceedings. The balance of convenience overwhelmingly in my opinion favours the course of requiring the respondent to agitate all its complaints in matter 085095 where it is the applicant. Its rights in the meantime can be effectively protected by a stay granted in these proceedings.
In my opinion I should refuse the respondent leave to raise by way of set off a defence based on s 36 of the Act.
Pursuant to s 72(1)(a) of the Act I propose to order that the respondent pay to the applicants the sum of $248,499.30 inclusive of interest to 22 March 2011. I will reserve costs until the other proceedings are disposed of and I will grant a stay of the order for payment of $248,499.30 for a limited period during which I would anticipate that the respondent will take steps to have matter 085095 once more listed for hearing.
I make these orders:
1. Respondent to pay the applicants the sum of $248,499.30.
2. Costs reserved until further order.
3. Operation of Order 1 stayed for 30 days.
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Decision last updated: 04 August 2011
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