Camperdown Dairy International Pty Ltd v The Camperdown Cheese Company Pty Ltd (No 2)
[2017] VSC 107
•16 March 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
S CI 2016 01283
| CAMPERDOWN DAIRY INTERNATIONAL PTY LTD (ACN 168 442 2006) | Plaintiff |
| v | |
| THE CAMPERDOWN CHEESE COMPANY PTY LTD (ACN 102 694 673) | Defendant |
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JUDGE: | Ginnane J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 13 December 2016 |
DATE OF JUDGMENT: | 16 March 2017 |
CASE MAY BE CITED AS: | Camperdown Dairy International Pty Ltd v The Camperdown Cheese Company Pty Ltd (No 2) |
MEDIUM NEUTRAL CITATION: | [2017] VSC 107 |
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LANDLORD AND TENANT — Tenant’s request to demolish building — Landlord’s conditions — Commercial context — Tenant with right to purchase shares in Landlord — Whether unreasonable withholding of consent — Appropriate declarations
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr G Kozminsky | McCullough Robertson |
| For the Defendant | Mr D G Collins QC and Mr A Rollnik | HWL Ebsworth |
HIS HONOUR:
This proceeding concerns a dispute between a landlord and a tenant who wishes to demolish a substantial shed on a property at Camperdown. On 17 November 2016, I gave judgment (‘the first judgment’) and summarised my conclusions as follows:
I have found that the Landlord was entitled to impose a condition of granting consent for the demolition of the shed that the Tenant provide security in a reasonable sum against the possible diminution of the value of the property that might result.
I have found that the sum of $2 million contained in the condition was greater than was reasonable by way of security.
I have set above the statements of MacKinnon LJ in Lambert’s Case as to effect of the Landlord seeking greater compensation that was justified for the effect of ‘improvements’ to the property and whether the Landlord had thereby unreasonably withheld consent to the improvements.
The parties did not address the orders that should be made if I found that the Landlord was entitled to some security against any diminution of the property from the demolition of the shed, but not in the amount claimed.
I concluded that the $2 million security sought by the Landlord appeared to be an arbitrary figure and that there was no evidence as to how it was calculated. I did not decide that the Landlord had unreasonably withheld its consent to the Tenant’s demolition of the shed.
On 13 December 2016, I heard argument about the orders that should be made and some matters dealing with my conclusions in the first judgment.
In late January 2017, the parties informed the Court that they were negotiating in an attempt to settle the proceeding and thereafter requested that the Court not deliver a further judgment while that occurred. On 28 February 2017, they informed the Court that they had ceased settlement negotiations and had not resolved the issues in dispute in the proceedings. I therefore deliver this judgment.
I first mention the defendant’s, the Landlord’s, application that the Court should provide supplementary or revised reasons and, if the Court considered necessary, hear further submissions, because, so it was said, the first judgment did not contain reasons for rejecting one of its principal submissions.
That submission by the Landlord was recorded in the first judgment in the following terms:
The Landlord submitted that the demolition of the shed would be a breach of express terms of the Lease. Clause 7.1 of the Lease obliged the Tenant to keep the ‘Buildings’ in good repair and order, and Clause 15.3 required the Tenant on the expiration or termination of the Lease, to restore the ‘Premises’ to the condition they were in at its commencement. The Landlord submitted that it was entitled to withhold consent to work which would deprive it of its rights arising under the Lease, namely to have the property restored to its original condition or the termination or expiry of the Lease. The Tenant was seeking to demolish the existing building, but accepting no obligation to replace it.[1]
[1]Camperdown Dairy International Pty Ltd v The Camperdown Cheese Company Pty Ltd [2016] VSC 693 [49] (‘first judgment’).
I made clear in my reasons that I did not accept the Landlord’ submissions about the effect of cl 7.2(d), and that I considered that clause 12.1 applied. I concluded that clause 12.1 rather than clause 7.2(d) was the operative provision governing the validity of the Landlord’s consent to the Tenant’s request to demolish the shed.[2] I considered that the Tenant had a right to apply to the Landlord to carry out Tenant’s works, which would include the demolition of the shed.
[2]Ibid [66] .
During the hearing on 13 December 2016, the Landlord repeated its submission that the effect of clauses 7.2(d) and 15.3 was that it had an absolute right to refuse the Tenant’s application and that therefore the case had to be decided in its favour.[3]
[3]Transcript of Proceedings, Camperdown Dairy International Pty Ltd v The Camperdown Cheese Company Pty Ltd, Supreme Court of Victoria, (Proceeding SCI 2016 01283, 13 December 2016), 41 L22-29 and 77 L 20-31.
I did not accept that the Landlord had an absolute right to receive the property back at the end of the Lease in the condition that it was in at the commencement of the Lease. That conclusion was clear enough in my reasons and I therefore dismiss the Landlord’s application for supplementary or revised reasons.
Relevant communications between the landlord and tenant
To give context to the reasons that I next give, it is appropriate to repeat the final emails passing between the parties about the demolition of the shed.
On 1 April 2016, the Tenant’s solicitors sent an email to the Landlord’s solicitors stating: ‘As we have previously requested could you also take your client’s instructions regarding the demolition of the back shed’.
On 4 April 2016, the Landlord’s solicitors replied by email stating:
I have discussed the request in your email of 1 April 2016 below with my client today. My client fails to understand why there is such urgency to this request.
I am instructed to respond as follows:
…
2. Demolition of back shed
The shed located at the rear of the property has significant commercial value. As stated on previous occasions, my client is concerned that it has appropriate security to ensure that any structure that your client demolishes is replaced with another structure of equal value. I am instructed that my client requires either a cash deposit, or bank guarantee, for $2 million, as security for diminution in the value of the property if a new structure is not erected by the tenant after demolition of the back shed. The provision of the security is a pre-condition to the landlord consenting to the demolition of the back shed.
My client also requires the following to be provided prior to the commencement of the demolition works to the back shed:
…
For the avoidance of doubt, before any new structure is erected on the property, the tenant must comply with the Lease in respect of such works, including providing to the landlord for approval detailed specifications for the proposed new building works.
The email from the Tenant’s solicitors dated 5 April 2016 stated:
Demolition of the Back Shed
We do not wish to traverse the previous arguments on this issue. We do however note that the security amount she is demanding relates to a dilapidated unused shed. More importantly however it is the building that houses the powder bins that your client (on her case) should have removed. In order to remove them you need to demolish the shed. That is an issue which has been argued in earlier correspondence with her previous lawyers. Further your client was obtaining valuations as we understood it to justify her position however that appears to have come to nothing.
Our client has no obligation in any of the Transaction documents to provide security as a precondition to your client giving her consent. She has a positive obligation not to act unreasonably. We cannot think of a more obvious example of acting unreasonably than to demand further compensation or security beyond the terms of the existing deal. Your client’s demand for security is entirely unreasonable. We take it that is now your client[‘s] final position in which case we are instructed to move the court for orders compelling her to give the consent. Your email will be filed as part of the evidence of your client’s unreasonable conduct.
The claim against your client will include interlocutory relief and final relief. Our client will be including a claim for damages arising from the delay caused by your client’s refusal to provide the consent since February 2015 which will run to many hundred thousands of dollars.
Our client will of course be seeking its costs of the interlocutory relief and the final relief from your clients.
Do you have instructions to accept service of those proceedings?
It seems extraordinary that your client is willing to put at risk hundreds of thousands of dollars in damages and court costs (leaving aside the costs she will be paying you and your counsel to defend our action) by refusing to provide a consent to demolish a building that needs to come down and was always contemplated by her as having to come down.
Your client has the personal guarantee of Mr McDonald who has to date honoured every financial obligation under the Transaction Documents. We had hoped that your client would have reassessed her position after the last unsuccessful foray into Court.
Our client will give her one final chance to provide her consent by 3pm today failing which we will be finalising the preparation of the material. Counsel is already briefed.
Landlord’s submissions
The Landlord submitted that the plaintiff, the Tenant, did not conduct the trial or seek relief on the basis that it was entitled to consent from the Landlord to the demolition of the shed on condition that it provided security in a reasonable sum for the possible resulting diminution in the value of the property. Rather, the Tenant sought two declarations: that the Landlord had unreasonably withheld its consent to the Tenant undertaking demolition of the shed and a declaration that the Tenant was entitled to undertake demolition of the shed.
The Tenant had adopted the position that the Landlord was not entitled to impose any condition on its consent to the demolition of the shed, or to negotiate about reasonable terms for its demolition. The Tenant was in effect contending that further compensation or security was beyond the terms of the commercial transaction into which the parties had entered.
The Landlord submitted that clause 12.1 did not affect the operation of clause 15.3 under which the Tenant on the expiry date or termination of the Lease was required to ‘vacate and restore the Premises to the condition they were in on the Commencement Date’. If that covenant was breached, the Landlord was entitled to damages which would put the premises into the state in which the Tenant was bound to leave them.[4]
[4]Referring to Tabcorp Holdings Pty Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272.
Tenant’s submissions
The Tenant submitted that it was not relevant whether the Landlord could have imposed a lesser condition, for instance one that required a smaller amount of security.[5] The only relevant question was whether the Landlord had unreasonably withheld its consent to the demolition of the shed and thereby breached the covenant contained in clause 12.1. But, in fact, the Landlord never said that it would give consent subject to provision of security of a reasonable amount. Once it was established that there has been an unreasonable withholding of consent, the Tenant was relieved from a further obligation to obtain such consent. Therefore, the Tenant did not have to seek a declaration that it was entitled to undertake the works of demolition, but subject to paying the Landlord such sum as the Court deemed reasonable.[6] There was no absolute obligation on the Tenant to offer to restore the premises at the end of the Lease. The Court should declare that the Tenant was entitled to demolish the shed.
[5]Citing Evans v Levy [1910] 1 Ch 452, 456.
[6]Lambert v F W Woolworth & Co [1938] 1 Ch 37, 47, 54 and 61.
The Court had concluded in the first judgment that the only condition in dispute between the parties was the Landlord’s demand for security of $2 million and that was an arbitrary and unreasonable amount.
Analysis
The Tenant bore the onus of proving that consent has been unreasonably withheld. It is a question of fact depending on consideration of all the circumstances whether the Landlord, having regard to the actual reasons which impelled it to withhold consent, acted unreasonably. Withholding consent, in its ordinary meaning, is refraining from giving consent. An unreasonable demand for security would, in the context of clause 12.1, be an unreasonable withholding of consent.
The Landlord considered that under clause 7.2(d) it had an unfettered discretion to refuse consent absolutely to the Tenant’s request. The Tenant considered that it had no obligation to provide any security to the Landlord in order to obtain its consent. Both parties thereby misunderstood their rights under the Lease.
I do not accept the Landlord’s submission that it had an absolute right to withhold consent to the demolition of the shed. It could not do so unreasonably. Therefore it did not have an absolute right to have the shed preserved in good repair under clause 7.1 or by clause 15.3 to have it returned to it at the end of the Lease in the condition it was at its commencement. The Landlord’s demand for security of $2 million was unequivocal, but no explanation was given as to why that amount was chosen.
On the other hand, I do not accept the Tenant’s submission that the Landlord did not have an interest justifying it seeking security against the diminution in the value of the property resulting from the demolition of the shed. The Landlord sought security or compensation in a sum that was unreasonable, but was entitled to protect its interests in the value that the shed added to its property.
The parties’ rights under the options and other transaction documents did not alter the position. The options may never have been exercised. The option payments made to the Landlord were not to protect its interest in the property.
The demolition of the shed was part of the Tenant’s Stage Two works and followed the performance of Stage One works. The demolition of the shed and other Stage One and Two works were required for the Tenant’s intended use of the property after it became its owner.
The conflict that has given rise to this proceeding is between a Landlord who has demanded an unreasonable amount by way of security as a condition of giving consent and a Tenant who refuses to provide any security or compensation.
However, the fact remains that the Landlord did impose an unreasonable condition for its consent to the demolition of the shed, by requiring security in the amount of $2 million. I explained in the first judgment why I considered that amount to be unreasonable. As I found in that judgment, the Landlord did not expressly refuse consent, but indicated that it would consent if certain conditions were satisfied.[7] But the Tenant has established that the condition as to security was unreasonable. The Landlord thereby unreasonably withheld consent within the meaning of clause 12.1. This action may have been caused by its incorrect belief that it had an unfettered discretion to refuse consent, but, that does not alter the legal consequences of its action.
[7]First judgment [34].
I will make a declaration substantially in the form of the first declaration sought by the Tenant.
I do not consider that I should make the second declaration that the Tenant seeks – that it can now demolish the shed. Declarations are discretionary and this case has features that make the second declaration inappropriate. Both parties have been operating under misunderstandings of their rights and obligations under the Lease concerning the Tenant’s request to demolish the shed. It is not a case where the whole matter, meaning the whole dispute, is before the Court as it was in the authorities on which the Tenant relied.[8] Because of the parties’ misunderstandings, the ‘whole matter’ or the whole dispute as to the Landlord’s and Tenant’s actual rights under the Lease is not before the Court. Neither party acknowledged the other’s actual rights under the Lease. In those circumstances, as a matter of discretion, I consider it inappropriate to make the second declaration.
[8]Contrast Young v Ashby Gardens Properties Ltd [1903] 2 Ch 112, 115 and 116, Balls Bros Ltd v Sinclair [1931] 2 Ch 325 and Commissioner for Railways v Avrom Investments Pty Ltd [1959] 2 All ER 63 which were relied on by the Tenant.
There are additional reasons why the second declaration should not be made. The shed is a substantial building and the Landlord, in addition to the demand for security required the satisfaction of other conditions, which the Tenant appears not to dispute. But there may be other reasonable conditions that as a result of this proceeding or the discussions that the parties have held, that the Landlord wishes to impose for the demolition of the shed. The Lease ends in about four months.
There is one other matter to which I should refer. The Landlord submitted that the English authorities such as Lambert v F.W. Woolworth & Co[9] to which I referred in my first judgment, were not relevant as they depended on the provisions of s 19(2) of the Landlord and Tenant Act 1927 (UK), which has no Victorian equivalent, although it is replicated in some Australian jurisdictions including in New South Wales. The effect of that statute was that any lease that contained a covenant, condition or agreement against the making of improvements without licence or consent, was subject to a proviso. It was that the landlord was not entitled to refuse consent absolutely to a tenant’s request to make improvements and could not unreasonably withhold consent:
but this proviso does not preclude the right to require as a condition of such licence or consent the payment of a reasonable sum in respect of any damage to or diminution in the value of the premises or any neighbouring premises belonging to the landlord, and of any legal or other expenses properly incurred in connection with such licence or consent nor, in the case of an improvement which does not add to the letting value of the holding, does it preclude the right to require as a condition of such licence or consent, where such a requirement would be reasonable, an undertaking on the part of the tenant to reinstate the premises in the condition in which they were before the improvement was executed.
[9][1938] Ch 883.
The Landlord submitted that this provision had been interpreted to mean that a landlord could not say ‘no’ absolutely to a tenant’s request to which it applied, but could make reasonable requirements for security or compensation.
The English authorities to which I referred, are not decisive of this case, but in my opinion they are consistent with my conclusions, as they have been accepted as applying equally to the common law and to the statute. In Sargeant v Macepark (Whittlebury) Ltd[10] after quoting from Lambert’s Case[11], Lewison J stated:
It is clear from these passages that in a case governed by s 19(2) a landlord cannot refuse consent on the ground of pecuniary damage to his interest in the leased property or neighbouring property which belongs to him. His only right is to ask for compensation as a condition of giving consent. In the light of Peter Gibson LJ’s formulation of the common law principles[12], this seems to be part of the common law as well. In most cases it will not matter, because the covenant and the subsection will work in tandem.
[10][2004] 4 All ER 662, 674.
[11][1938] Ch 883.
[12]This was a reference to Iqbal v Thakrar [2004] All ER (D) 304, referred to in the first judgment at [59].
Conclusion
I therefore declare that the defendant has unreasonably withheld its consent for the plaintiff to undertake demolition of a structure marked in green on the colour plan handed up to the Court on 26 May 2016 and marked Plaintiff’s Exhibit E on land owned by the defendant situated at 325 Manifold Street Camperdown in the State of Victoria being all of the land contained in Certificate of Title Volume 2933 Folio 574; Volume 9087 Folio 142; and Volume 10740 Folios 736, 737 and 738 (the land) pursuant to clause 12.1 of a written lease of the land between the plaintiff and the defendant dated 21 May 2014.
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