Carter v Mackey Motels Pty Ltd
[2023] QSC 128
•22 June 2023
SUPREME COURT OF QUEENSLAND
CITATION:
Carter v Mackey Motels Pty Ltd [2023] QSC 128
PARTIES:
GARY JOHN CARTER AND WENDY MAREE KLEIN-CARTER AS TRUSTEES FOR THE CARTER FAMILY TRUST
(plaintiffs)
v
MACKEY MOTELS PTY LTD(defendant)
FILE NO:
7 of 2016
DIVISION:
Trial
PROCEEDING:
Trial
ORIGINATING COURT:
Supreme Court
DELIVERED ON:
22 June 2023
DELIVERED AT:
Brisbane
HEARING DATES:
23, 24, 27, 28 February, 1, 2, 6, 7 March and 20 April 2023. Further written submissions were received from the plaintiffs on 27 April 2023
JUDGE:
Freeburn J
ORDERS:
1. The plaintiffs’ claims are dismissed.
2. The defendant is entitled to judgment on the counterclaim in the sum of $7,016.13 plus interest (to be calculated).
3. I will hear the parties on the form of the orders (including the calculation of interest) and costs.
CATCHWORDS:
PROPERTY LAW – LEASE – INSURANCE – OUTGOINGS – where the plaintiffs were the lessees of a motel – where the plaintiffs dispute their obligation to pay insurance premiums as ‘outgoings’ under the lease – where it is argued that having the insurance policy under the sole name of the defendant is in breach of the lease – where the defendant has a counterclaim for the outstanding outgoings – whether the defendant obtained insurance which was substantially different to insurances held by the landlord prior to the commencement of lease – whether the higher cost of the insurance policy makes the policy substantially different to insurances held by the landlord prior to the commencement
PROPERTY LAW – LEASE – MAINTENANCE AND REPAIR – where the plaintiffs had an obligation to keep the motel in good and substantial repair as a high quality motel – where the plaintiffs argue that the defendant had an obligation under the lease to keep the motel and landlord’s property in good and substantial repair – where the defendant’s actual obligation under the lease was to take reasonable action to ensure that the motel and landlord’s property is in good and substantial structural state and condition – whether the defendant was required under the lease to expend on capital works – whether the defendant was in breach of the lease because of the failure to expend on capital works – whether there is evidence of structural damage to the motel
PROPERTY LAW – LEASE – REPUDIATION – TRESPASS – where the plaintiffs failed to pay rent – where failure to pay rent was an essential term of the lease – where a notice to remedy breach of covenant was not complied with by the plaintiffs and QCAT proceedings were initiated by the defendant – where the plaintiffs allege that the conduct of the defendants was a repudiation of the lease – where the plaintiffs allege that the defendants entered the motel without consent – where the defendant diverts the phone line of the motel after the plaintiffs were required to deliver up possession – whether the plaintiffs were given a reasonable time to comply with the notice to remedy breach of covenant – whether there is sufficient evidence to demonstrate repudiation – whether there is sufficient evidence to establish the cause of action of trespass – whether there is a discernible cause of action in the plaintiffs’ pleadings concerning the diversion of the phone line
PROPERTY LAW – LEASE – LOSS OF PROFITS – where the plaintiffs plead that the breaches of the lease have caused them loss – where the plaintiffs plead that the loss of opportunity to exercise the option caused a loss in future profits – whether there is evidence that the alleged breaches caused loss – whether the plaintiffs would have exercised the option but for the alleged breaches of lease
PROPERTY LAW – LEASE – CHATTELS – where the lease provided for a compulsory purchase of the chattels contained in an annexed inventory to the lease upon termination of the lease – where the value of the chattels is not agreed – whether a compulsory purchase was still required by the lease in absence of the annexed inventory
Authorities
Limitations of Actions Act 1974 (Qld) s 10
Property Law Act 1974 (Qld) s 124, 126, 131BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283
Castle Constructions Pty Ltd v Fekala Pty Ltd (2006) 65 NSWLR 648Codelfa Construction Pty Ltd v State Rail Authority(NSW) (1982) 149 CLR 337
Delaney v T P Smith Limited [1946] KB 393
DTS Succession Pty Ltd v Survco Pty Ltd [2021] QSC 283
Grainger v Williams [2005] WASC 286
Hawkins v Clayton (1988) 164 CLR 539
Holus Bolus Pty Ltd v Wicko Pty Ltd [2012] NSWSC 497
Hookey & Anor v Whitelaw & Ors [2020] QSC 63
Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314
Lewis v Australian Capital Territory (2020) 271 CLR 192
Manren Ltd v Royal & Sun Alliance Insurance Australia Ltd (2003) 12 ANZ Ins Cases 61-568
Narni Pty Ltd v National Australia Bank Limited [2001] VSCA 31New South Wales v Banabelle (2002) 54 NSWLR 503
Pagano v Cama (1995) NSW Conv R 55-755
Plenty v Dillon (1991) 171 CLR 635
Robinson v Young [2005] NSWSC 777
Spectra Pty Ltd v Pindari [1974] 2 NSWLR 617 at 620-621
Speets Investment Pty Ltd v Bencol Pty Ltd [2020] QCA 247
Steak Plains Olive Farm Pty Ltd v Australian Executor Trustees Limited [2015] NSWSC 289
SDW2 Pty ltd v JLF Corporation Pty Ltd [2017] QSC 1
TCN Channel Nine Pty Ltd v Ilvariy Pty Ltd [2008] NSWCA 9
Vural Ltd v Security Archives Ltd (1989) 60 P & Cr 258 at 273
COUNSEL:
Mr DJ Kelly (plaintiffs)
Mr D Piggott KC and Mr M Windsor (defendant)SOLICITORS:
William Roberts Lawyers for the plaintiffs
Baker O’Brien & Toll for the defendant
REASONS
PART A: BACKGROUND
The Oscar Motel is a 3.5-star motel complex at 252 Bourbong Street at Bundaberg West (the Motel). The complex includes three buildings:
(a)Block A contains guest rooms 1-12, an office, a commercial kitchen, a guest laundry, and a linen storage room;
(b)Block B contains guest rooms 14-23 and a linen storage; and
(c)a residence which is a two-bedroom house, sometimes called ‘Oscar House’.
The complex also includes undercover carparking, a swimming pool and barbeque area, and a lawn.[1]
[1]Affidavit of Scott Mackey sworn 7 November 2022 at [12] to [14].
The plaintiffs, Mr Carter and Ms Klein-Carter, as trustees for the Carter Family Trust, (the Carters), were the lessees of the Oscar Motel from 16 April 2002 until they vacated the Motel on 5 October 2016.[2]
[2]I will put aside for the moment the contractual status of the Carters at the end of the lease.
The defendant, Mackey Motels Pty Ltd (Mackey Motels), became the registered owner of the Oscar Motel in December 2007. As a consequence, it also became the landlord under the registered lease (the Lease).
Over a significant period of time there was a souring of the relationship between the Carters and Mackey Motels. From 2011 onwards there were disputes about the Carters’ obligations to pay, as ‘outgoings’ under the Lease, insurance premiums that had been paid by Mackey Motels. Over roughly the same period there were disputes about Mackey Motels’ obligation to maintain and repair. Eventually the Carters refused or failed to pay rent.
The disputes came to a head in May 2015, and again in May 2016, when the Carters did not pay outgoings due and payable under the Lease for insurance premiums paid by Mackey Motels. On 4 May 2016 and 1 June 2016, Mackey Motels served on the Carters notices to remedy breach of covenant for those failures to pay outgoings.[3] The Carters did not pay the outstanding outgoings.
[3]A notice to remedy covenant is required as a prerequisite to a right to terminate or re-enter: see s 124 of the Property Law Act 1974.
On 16 July 2016, the Carters did not pay the rent which was due and payable under the Lease. Ms Klein-Carter explains the decision not to pay the rent in this way:
“If we had adjusted our short-term priorities, we could have made the rent payment for July 2016, but we took the view that a dispute over payment of rent and the Court action we were about to commence might cause the Defendant to deal with us properly and start doing repairs and other outstanding works at the Motel. We had always paid rent and outgoings up to that time, so the Defendant had not been impacted by the decline in revenues of the Motel. We hoped that holding back the rent and serving Court process might get results, as nothing else had worked for us up to that point.” [4]
[4]Affidavit of Wendy Klein-Carter sworn 12 September 2022 at [79].
Mr Carter’s explanation for the decision is as follows:
“… We considered holding back rent as a short-term tactic while we pursued relief in court, and that the problem of meeting rent thereafter would be something which we would readily overcome if we were able to get on with running the Motel. To deal with putting things in order we needed some time to put our minds to the legal process (of seeking relief due to the Defendant’s breaches) while still running the Motel. We also discussed the prospect that holding back rent may lead to a positive response by the Defendant in dealing with us and by starting to make improvements to the Motel …”[5]
[5]Affidavit of Gary Carter sworn 13 September 2022 at [38].
Mackey Motels contend that the Carters’ decision not to pay rent was a tactical decision to hold back the rent while at the same time commencing this proceeding against Mackey Motels. As Ms Klein-Carter explained it in her evidence, the Carters hoped to hit Mackey Motels “in the hip pocket” so as to drive Mackey Motels to the negotiating table.[6] Instead, the tactic drove Mackey Motels, or at least its lawyers, to the bar table. Both parties have been engaged in litigation since July 2016.
[6]Transcript Day 3 page 46 at line 5.
Procedural History
On 25 July 2016, Mackey Motels served a notice to remedy breach of covenant for the failure to pay the rent. The rent remained unpaid.
On 29 July 2016, Mackey Motels commenced a proceeding in QCAT seeking orders for payment of the outstanding rent. On 9 August 2016, the Carters commenced this proceeding seeking relief from all breach notices and relief from their obligation to pay rent. In response, Mackey Motels made an interlocutory application in this court for possession of the Oscar Motel. That application was to be heard on 7 October 2016.
However, in the meantime, on 5 October 2016, the Carters gave up possession of the Oscar Motel. They appeared for themselves at the hearing on 7 October 2016 before Burns J. Because the Carters had left the Oscar Motel, Mackey Motels did not pursue its claim for possession of the Motel. However, Mackey Motels pursued the outstanding rent. Burns J gave Mackey Motels summary judgment for the two months of outstanding rent. That was because clause 20.1 of the Lease expressly provided that the Carters must make payments under the Lease “without set-off or counterclaim and free and clear of any withholding or deduction”.
The Issues
The Carters’ claims broadly cover the topics of insurance, the condition of the building, the events leading to their leaving the Oscar Motel, a claim for the value of the chattels left at the premises on 5 October 2016, and a loss of profits claim. In broad terms, the Carters claim that their eviction from the Oscar Motel was high-handed and a repudiation of the lease and caused the loss of profits of approximately $2 million.
Each broad area of dispute will be considered below. In each case it will be necessary to examine the pleadings, the relevant provisions of the Lease and the facts. The pleadings were amended during the course of the trial. In each case, the references to each parties’ pleading are a reference to the latest version of that pleading.
PART B: INSURANCE ISSUES
The Carters’ Insurance Obligation
The Lease has a number of provisions that address insurance. Clause 13.1 provides that, as tenants, the Carters must maintain the following insurances with insurers approved by the landlord (which approval may not be unreasonably withheld). These insurances are required to be in the names of the Carters and the landlord, for their respective rights and interests. The insurances required to be effected by the tenant are:
(a)public risk insurance;
(b)plate glass insurance;
(c)other insurances in the connection with the Motel which, in the reasonable opinion of the landlord, a prudent tenant leasing comparable premises would take out; and
(d)other insurances required by the landlord in connection with works carried out by the Carters under clause 12.7 or procure the contractors to do so.
There is no dispute that the Carters’ discharged their obligations under that clause.
However, the Carters seemed to assume that clause 13.1 imposed obligations on Mackey Motels as the landlord. In particular, the Carters adopted the stance that all insurances must be in their name or, at least in the names of both landlord and tenant. Clause 13.1 cannot be read that way. It cannot be read as if it were blended with clause 5.2.[7] Clause 13.1 imposes obligations on the tenant to take out certain specific types of insurance. Naturally enough, the specific tenant insurances specified in clause 13.1 do not include building insurance. That was the province of the landlord, who could seek reimbursement under clause 5.2 (discussed below).[8]
[7]That seems to be the Carter’s approach: GJC.001.001.0340.
[8]This was explained to the Carters by Mackey Motels in an email dated 28 April 2011; MAC.001.001.0193.
The Outgoings Clause
The insurance disputes centred around the outgoings clause. Clause 5.1 provides that: “The Tenant must pay the Landlord the Outgoings at the times and in the manner set out in clause 5.2.” Clause 5.2 defines ‘Outgoings’:
The Outgoings are the total of all costs paid, charged or otherwise incurred by the Landlord in and about the ownership of the Motel comprising: –
(a) rates, taxes, charges and other levies payable to a Competent Authority for the Motel;
(b) insurance premiums and other charges in connection with insurance cover against insurable risks which the Landlord reasonably considers are appropriate for the Motel, the Landlord’s Property, persons in the Motel for any reason, the Tenant’s Business and this Lease provided always that the insurances required by the Landlord pursuant to this sub-clause shall not be substantially different to the insurances held by the Landlord immediately prior to the commencement of this Lease…[emphasis added]
Thus, the tenant was obliged to pay the landlord’s ‘Outgoings’, a concept that includes those insurances which the landlord considers are reasonably necessary and comprise insurance cover for five specified categories of risk: the Motel, the Landlord’s Property, persons in the Motel for any reason, the Tenant’s Business and this Lease. The proviso at the end of the clause restricts the landlord to those insurances, in those five categories, that are not substantially different to the insurances that the landlord held prior to the commencement of the lease on 16 April 2002.
The Contentions about the Outgoings
The Carters rely on the proviso at the end of clause 5.2(b). Paragraph 6 of the statement of claim[9] is as follows:
From in or about May 2011 the defendant obtained insurance on a substantially different basis to the required insurances in that the building insurance, previously held in the names of the plaintiffs and the defendant for their respective rights and interests, was obtained in the defendant’s name only at a higher cost for insurances than the cost of required insurances.
[9]For convenience, in these reasons I refer to the latest version of the statement of claim (the version filed by leave on 28 February 2023) as the ‘statement of claim’. On Day 3 of the trial leave to file a version that included a fraud allegation was refused (Transcript Day 3 page 89) with reasons delivered on Day 4 (Transcript Day 4 page 2, 3).
It can be seen that the Carters’ complaint is that the 2011 Mackey Motels policy was in the name of Mackey Motels only, in circumstances where the same insurance was “previously held” in the name of both parties.[10] The obvious problem with that complaint is that the comparison is with ‘previous insurances’ taken out by Mackey Motels rather than, as clause 5.2(b) requires, “the insurances held by the Landlord immediately prior to the commencement of this Lease”. It is common ground that the policy that was in existence prior to the commencement of the Lease on 16 April 2002 was a policy held by the previous owners and operators of the Motel, namely Paul and Joyce Galea, trading as Oscar Motel (the Galea Policy). Therefore, any complaint under clause 5.2 must be that the insurance obtained by Mackey Motels in 2011 was substantially different from the Galea Policy.
[10]See, in particular, paragraph [31] of the Plaintiffs’ submissions: “That position prevailed from May 2011 onwards because of the Defendant’s unilateral decision to change the arrangements for taking out of insurance from what had been in place since the commencement of the Lease…”.
Mr DJ Kelly, counsel for the Carters, made a similar submission in his written submissions. There, he submitted that the fact that the building insurance was in the name of the landlords, Mackey Motels, and only in Mackey Motels’ name, was a breach of clause 5.2(b). His submissions were put strongly:
…from in about May 2011 the Defendant obtained insurances on a substantially different basis. For reasons only explained at the time to be on the basis of the changes being “superior” (GJC.001.001.0768) in terms of insurance coverage in favour of the Defendant, from 2011 onwards the Defendant failed, refused or neglected to comply with the terms of the Lease in that it acquired building insurance separately in the Defendant’s name only and at a higher cost than the cost of required insurances available at that time. The approach taken by the Defendant in 2011 onwards was taken with no regard for, and actual disregard of, the Plaintiffs’ insurable interests and related rights pursuant to the Lease.[11] [emphasis added]
[11]Plaintiffs’ submissions at [27].
And so, the Carters’ contention in their submissions is that the two substantial differences were that the building insurance was acquired by Mackey Motels in their name only and at a higher cost than was available at the time. Putting aside for the moment the ‘higher cost’ issue, the problem is that the Carters make no comparison with the Galea Policy.
Mr D Piggott KC, who led Mr M Windsor for Mackey Motels, made this submission in reply:
the Plaintiffs’ complaints [are] that the premiums were for policies which were “substantially different” to the Galea Policy because they were “obtained in the defendant’s name only …”. Given the Galea Policy was also in the name of the registered owners only, that aspect of the Plaintiff’s complaint must fail…[12]
[12]Defendant’s submissions at [208].
In fact, as explained, the Carters’ pleading, and its submissions, do not compare the Mackey Motels policy with the Galea Policy. The statement of claim compares the 2011 insurance policy to the rather nebulous concept of “previous” insurance.[13] The submissions complain of the acquisition of building insurance separately in the Mackey Motel’s name only – without making any comparison or saying why that is a breach of the Lease.
[13]The expression ‘previous insurance’ could refer to Mackey Motels previous policies or it could refer to the Galea policy.
In my view, the Carters can only establish a breach of clause 5.2(b) of the Lease if they can establish, by evidence, that the 2011 Mackey Motels policy is substantially different from the Galea Policy.
Incidentally, contrary to the Mackey Motels’ submissions, it is not clear from the evidence that the Galea Policy can be characterised as a policy in the name of the registered owners only. Immediately before they entered into the Lease with the Carters, Mr and Ms Galea were both the owners and the operators of the Motel. The Galeas’ possessed composite insurable interests because they were the owners of the land and buildings as well as the operators of the motel business.
The Galea Policy
What insurable interests did the Galeas insure? It is impossible to say. The policy wording for the Galea Policy is not in evidence. Only the certificate of insurance for the Galea Policy is in evidence. That certificate lists the insurances by means of short labels such as the building of the Motel, contents of the Motel (with a handwritten addition for ‘House Cover’ which may be building insurance for the residence), burglary/theft, money, glass and liability.[14] From those descriptions, the nature of that insurance appears to be directed to both the Galea’s interests as owners (e.g. building insurance) as well as operators of the motel (e.g. burglary/theft, money, glass and liability).[15] However, it is impossible to tell what insurance is actually effected without seeing the policy wording. Labels are an inadequate guide to the terms and conditions of the Galea Policy.
[14]Ex 1: GJC.001.001.0001.
[15]Some of these, such as glass and liability, might be insurances for the benefit of both the owner and the operator.
And so, the insurance certificate suggests that the Galea Policy was a composite policy, insuring both the Galea’s ownership interests and its operator interests. However, the insurance certificate, on its own, does not enable the court to form any conclusions about the nature of the cover.
It follows that the major problem with the claim by the Carters that Mackey Motels breached clause 5.2(b) of the Lease is that is that it is impossible to conclude that the 2011 policy arranged by Mackey Motels was substantially different to the Galea Policy because the terms of the Galea Policy are not in evidence.
There is no sensible way to compare the Galea policy against the policies that Mackey Motels obtained from May 2011 onwards. It is impossible to compare the rather spare certificate of insurance evidencing the existence of the Galea Policy against a series of policies that Mackey Motels obtained. Of course, if the terms of both the Galea and Mackey Motels policies were in evidence, it may have been useful for the Carters to have adduced the evidence of an insurance broker, or another insurance expert, showing the substantive differences in cover. No such evidence was sought to be tendered.
A Policy in the Name of Mackey Motels Only
The Carters argue that the fact that Mackey Motels acquired building insurance separately, in Mackey Motel’s name only, constitutes a substantive difference to the cover afforded by the Galea Policy. However, again, it is impossible to make the necessary comparison. It is true that the Galea Policy was in the Galeas’ name only, but they were both the owners and the operators of the motel business. In that sense, as explained, the Galea Policy is likely to have been a composite policy, insuring the Galeas in both their roles.
Does that make the Mackey Motels insurance policies taken out after 2011, in the name of Mackey Motels only, substantially different from the Galea Policy? I do not think it does.
First, clause 5.2(b) of the Lease contemplates that the insurance will be taken out by the landlord, that is, Mackey Motels. The Carters claimed to the contrary. They claimed that they were entitled to be an insured.[16] Clause 5.2(b) does not require that. The point of clause 5.2(b) is that the landlord has some measure of discretion as to the insurances which it, that is the landlord, reasonably considers are appropriate. The objective of the provision is for the tenant to reimburse the landlord for those insurances which are reasonably required by the landlord.
[16]For the moment, I am going to put aside the difficulty that an insured might not be the person or entity who takes out the policy of insurance. That issue is discussed below.
Nothing in clause 5.2(b) obliges the landlord to take out insurance in the name of the tenant, or in joint names of landlord and tenant. The insurance premiums are those that are “incurred by the Landlord” for the insurances the landlord considers appropriate. But those premiums paid or incurred by the landlord are to be reimbursed by the tenant. In the same way that clause 5.2(a) requires the tenant to reimburse the landlord for rates, taxes, charges and other levies paid or payable for the motel, clause 5.2(b) requires the tenant to reimburse the landlord for the insurance the landlord pays for the motel.
The contrast is with clause 13.1 of the Lease which obliges the tenant to take out specific listed categories of insurance policies, and to do so in the names of both the tenant and the landlord. Therefore, it is a mistake to interpret clause 5.2(b) as requiring the insurance to be taken out in the name of the tenant, or even jointly by landlord and tenant.
Second, it is common that entity B can be insured under a policy taken out by entity A. Indeed, the Lease itself recognises that potential.[17] That means that, even though the policies may have been taken out by Mackey Motels, and in the name of Mackey Motels, those policies may provide some insurance cover for the Carters. The problem, once again, is that there is no ability to make a proper comparison of the cover afforded by the Galea Policy, as against the cover afforded by the Mackey Motels policies.
[17]See clause 13.7 and 13.8 of the Lease. Insurance covering construction sites, for example, may be taken out by the contractor but commonly provides insurance cover for the principal, subcontractors and others.
Therefore, the fact that the policy is not in the name of the landlord and the tenant has not been shown to be a substantially different insurance from the Galea Policy. What the Galea Policy covered is not known because its terms and conditions are not in evidence.
Third, assessing what is ‘substantially different’ under clause 5.2(b) must involve an assessment of the character of the differential feature. Here the Carters contend that the differential feature is that the Mackey Motels policies are in the name of the landlord. But that is what clause 5.2(b) contemplates. Clause 5.2(b) identifies the insurance to be taken out as “insurable risks which the Landlord reasonably considers are appropriate for the Motel, the Landlord’s Property (etc)”. And so, the Lease itself envisages that the insurance will be taken out by the landlord. It can hardly be substantially different for the Mackey Motels insurance policies to conform to the requirements of the Lease.
For those reasons, the Carters have not established by evidence that the fact that the insurance policies were taken out in the name of Mackey Motels only, makes those policies substantially different from the Galea Policy.
Another Substantive Difference – Higher Cost?
The Carters contend that another substantial difference between the Galea policy and the Mackey Motels policies after 2011 is the higher cost of the Mackey Motels policies.
The Lease specifies that “the insurances required by the Landlord” are not to be substantially different to the insurances held by the Landlord under the Galea policy. Applying the ordinary and literal meaning of the words of the Lease, it can be seen that the requirement is focussed on “the insurances” and not on the cost of those insurances. It would be difficult to read the clause as if it read “the insurances and the cost of the insurances” are not to be substantially different from the pre-existing policy. Such an implication is not necessary to give business efficacy to the Lease.[18] To the contrary, the parties are likely to have appreciated that the price for insurance cover might fluctuate over time and that it would be unrealistic to commit the landlord to insurances in any particular price bracket.
[18]Codelfa Construction Pty Ltd v State Rail Authority(NSW) (1982) 149 CLR 337.
In any event, no evidence justifies the conclusion that the price paid for the insurance in 2011 made the 2011 policy substantially different from the Galea policy. No evidence was tendered as to what policies were available in the market in 2011 which comprised equivalents to the Galea policy, and at what premiums. Without proper evidence, it is unremarkable that the premium paid for a policy obtained in 2011 will be more expensive than the premium for an equivalent policy obtained nine years earlier.
The Outgoings Battles in 2011 & 2012
The Carters’ pleading identifies how the arguments about outgoings progressed. On 27 April 2011 Mackey Motels issued an invoice claiming $4,283 for building insurance. That amount was not paid and so on 5 October 2011 Mackey Motels issued a notice to remedy breach of covenant for the $4,283 plus $215.91 for interest and $600.50 for solicitors’ costs. The sums were paid.
A year later, on 26 April 2012, Mackey Motels issued an invoice claiming $4,200 for the 2012-2013 building insurance. The Carters say that they paid that invoice under protest in that, by a letter dated 4 May 2012, they demanded the refund of the amounts paid for the two annual premiums as well as interest and solicitors’ costs. The Carters say that Mackey Motels refused to refund those sums.
For the reasons explained, Mackey Motels was entitled to demand the 2011 and 2012 premiums under clause 5.2(b). The proviso was not triggered because the Mackey Motels insurance policies have not been shown by the evidence to be substantially different from the Galea Policy.
Even if all of that were wrong, any claim based on the 2011 and 2012 premiums is statute-barred.[19] The claims for breach of contract based on those premiums were added in 2019 and 2022.
[19]Limitations of Actions Act 1974 (Qld) s 10.
The Outgoings Battles in 2015
Whilst the Carters made complaints about the 2013 and 2014 outgoings claims for a CGU Padlock insurance policy, the outgoings were paid.
In May 2015 Mackey Motels obtained a CGU Padlock policy for the Motel at a premium of $4,500. The Carters contended that this policy is substantially different from the Galea policy in that it was obtained in the name of Mackey Motels only, and at a higher cost. Again, there is a lack of evidence which demonstrates that the CGU Padlock policy is substantially different to the Galea policy.
The Carters say that in April 2015 they became aware of another insurance policy offered by CGU, a Business Policy which was similar to the Galea Policy, but the premiums were $677 a year cheaper than the CGU Padlock policy. The Carters say that by emails on 4 and 13 May and 4 June 2015 they provided Mackey Motels with the quote for the CGU Business policy that was both compliant with the Lease and a cheaper insurance policy. They complain that Mackey Motels opted to stay with the more expensive policy on the basis that the CGU Padlock policy was “the superior policy coverage wise.”[20]
[20]Mackey Motels email of 21 May 2015; GJC.001.001.0599.
Again, the policy terms and wording are not in evidence for the Galea policy or the CGU policies. There is no evidence, for example, from a broker that compares the Galea and CGU policies. The other problem is that clause 5.2 preserves to the Landlord a right to effect “insurance cover against insurable risks which the Landlord reasonably considers are appropriate”. Mackey Motels was entitled to choose insurance that it reasonably considered to be appropriate. The only restriction was that the choice was required to be reasonable. No evidence demonstrates that the choice of the CGU Padlock policy was unreasonable.
There are some differences in the insurance cover afforded by the CGU Padlock policy as against the cover of the Galea policy. For example, the CGU Padlock policy provided cover for ‘rewriting of records’ but the Galea policy did not.[21] However, it may be that this cover was merely incidental to the building cover. Or it may be that this type of cover became standard. Or it may be that the equivalent policies available in the insurance market altered. Certainly, the types of policies available in the market, and the cover afforded by those policies, was unlikely to have remained static in the period from 2002, when the Galea policy was taken out, and 2015, when the CGU Padlock policy was chosen over the CGU Business policy. There is no proper evidence from which the court can conclude that the insurance cover which Mackey Motels considered appropriate was an unreasonable choice.
[21]Or at least the certificate did not mention any such cover. See the statement of claim at [9], [10].
Mackey Motels was not obliged to select the cheapest policy. And the fact that the CGU Business policy was about 15% cheaper than the CGU Padlock policy does not make the choice unreasonable.
However, the Carters were confident of their position. They notified Mackey Motels that they would pay only the amount of the cheaper policy. On 4 June 2015 they paid only $3,823 of the $4,500 that was claimed. Mackey Motels were also confident. On 26 April 2016, when the policy was to be renewed again, Mackey Motels sent an email to the Carters attaching an email from their insurance brokers regarding the CGU Padlock policy and saying that the CGU policy was superior and that was why that policy would be put in place.[22]
[22]See the statement of claim at [10A] which is admitted by paragraph 10A of the defence.
On 4 May 2016 Mackey Motels served a notice to remedy breach for the shortfall of $677 in the payment of the outgoings for insurance for the May 2015 premium, plus $66.42 for interest and $550 for solicitors’ fees.
In the meantime, on 26 April 2016, the Carters advised Mackey Motels that they had found a quote for the building insurance that met the requirements of clause 5.2 of the Lease. The quote was with AIG and the premium was $3008. Mackey Motels contests that the proposed policy with AIG met the requirements of clause 5.2 for these reasons:
(a)There was no cover for theft, glass or money;
(b)The policy did not cover the loss by theft of any of Mackey Motels’ property;
(c)Professional fees cover was limited to $5,000 whereas the CGU Padlock policy provided unlimited cover for professional fees;
(d)The cover for removal of debris was limited to $100,000 rather than $150,000;
(e)The cover for government fees was limited to $10,000 rather than $25,000;
(f)The AIG policy was a business pack policy rather than a policy specifically tailored for property owner insurance;
(g)The AIG was not insurance cover against insurable risks which Mackey Motels reasonably considered to be appropriate.
The next day, on 27 April 2016, the Carters made clear that they would not be paying for the additional cost of the CGU Padlock policy.
On 4 May 2016 Mackey Motels provided the Carters with a tax invoice in the sum of $4,689 for the renewal of the CGU Padlock policy which included $3,786 for building insurance and public liability cover in the name of Mackey Motels only and at a premium cost of $903. On 1 June 2016 Mackey Motels served the Carters with a notice to remedy breach of covenant for the CGU Padlock policy cost ($4,689) plus interest of $37 and solicitors fees of $550.
The Carters complain that the CGU Padlock policy covered plate glass, albeit in the name of Mackey Motels, and the Carters took out their own glass insurance pursuant to clause 13.1(b) of the Lease. Mackey Motels agrees that plate glass is covered under the CGU Padlock policy but says that that cover satisfied the Carter’s obligation under clause 13.1(b) of the Lease.
That point raises a problem mentioned above. The Carters seemed to be preoccupied with the notion that the CGU policy was taken out in the name of Mackey Motels. But, as mentioned, a policy taken out by A can cover B’s interests. That is particularly so where there are concurrent interests over the same property. Both Mackey Motels and the Carters had an interest in the glass. Broken glass may affect the value and worth of the building as well as the motel business.
In any event, the problem is the same. There is no evidence that Mackey Motels’ choice of insurance was an unreasonable choice. Insurance market evidence from an insurance broker, or other insurance expert, is conspicuous by its absence.
It follows that the insurance complaints made by the Carters do not comprise breaches of the Lease.
Insurance Claim for Rooms 17, 18 & 19
There is a further aspect to the insurance disputes that needs to be considered. Paragraph 7 of the statement of claim pleads that:
Subsequent to the date pleaded in paragraph 6 hereof, no repairs were made to the Motel pursuant to any claims made under insurance, including the insurance policy in the name of the defendant only, despite:
(a) an insurance claim being made by the defendant in 2011 for damage (to rooms 17, 18 and 19) due to escape of liquid; and
(b) insurable damage occurring to the building (to roof, walls, ceilings and windows) on about 26 January 2013, caused by water and flood impacts (during tropical cyclone Oswald).
Further, Mr Kelly’s written submissions make much of an email dated 6 May 2011 in which Mackey Motels instructed the insurer that “all claims … be put on hold” and “we do not give approval for this claim to proceed at this time”.
The broader and “more serious issue” being raised by Mr Kelly is that “insurance claims were not dealt with by the Defendant properly and in a timely way”.[23] Therefore, the submissions foreshadow a claim that Mackey Motels breached the Lease, or some other duty, by failing to prosecute, properly and expediently, the Carters’ insurance claims.[24]
[23]Plaintiffs’ submissions at [37].
[24]Presumably these were insurance claims made by the Carters said to be comprehended by Mackey Motels’ insurance policy.
However, the failure to prosecute repairs to the motel pursuant to insurance claims is not pleaded as a breach of the Lease or any other obligation. No claim is made based on any such breach. Instead, this complaint appears to be designed as a forerunner to the claims made about the condition of the building (discussed below).
Mr Kelly made a further related submission:
The Defendant’s breaches of the Lease included the failures to make and advance insurance claims. The Defendant as landlord was in breach of its obligation to preserve the tenant’s rights by making an insurance claim each and every time when that was appropriate: see Vural Ltd v Security Archives Ltd,[25] which articulates the concept that if the tenant (as here) must pay the insurances in relation to a property, it should follow, and must be taken to have been the intention of the parties, that the insurance should ultimately benefit both the landlord and tenant by claims being made and the funds being applied to the premises and to make good the damage as quickly as possible: cf clause 13.7 of the Lease.[26]
[25](1989) 60 P & Cr 258 at 273.
[26]Plaintiffs’ submissions at [50].
As to that submission:
(a)No provision of the Lease requires that the landlord “make and advance insurance claims”, or that the landlord do so on behalf of the tenant;
(b)There is no reason why a tenant, whose interests are comprehended by a policy, cannot make and advance its own claims;
(c)No provision of the Lease obliges that the landlord “to preserve the tenant’s rights by making an insurance claim each and every time when that was appropriate”;
(d)Vural Ltd v Security Archives Ltd does not assist; in that case Knox J considered an allegation of a breach of an implied term that the landlord was obliged to present and prosecute, with all reasonable speed, a claim under the policy for all moneys receivable and/or recoverable thereunder and necessary to rebuild repair and/or reinstate the demised premises;[27] here there is no plea of any such implied term;
(e)The tenant’s obligation under clause 5.2 of the Lease was not to pay the insurance premium, but to reimburse the landlord for what the landlord paid or incurred for certain specific types of insurance;
(f)The obligation to repair or make good any damage fell upon the tenant, except for the landlord’s obligation to take reasonable action to ensure that the Motel and the Landlord’s Property are kept in a good and substantial structural state and condition (see the discussion in Part C below);
(g)Any claims made by the landlord or the tenant pursuant to an insurance policy do not alter the obligations to repair or make good; the insurance merely provides an indemnity for the costs of repair or making good; therefore, it is a mistake to assume that a claim under an insurance policy must be successfully prosecuted, and the insurance claim paid, before the carrying out of repairs, or work to make good.
[27]The lease in that case contained an express term in similar terms: “…the Landlord shall with all convenient speed apply all moneys received by virtue of the policy or policies of insurance or require the same to be laid out in rebuilding repairing and reinstating the Demised Premises…”: (1989) 60 P & Cr 258 at 260.
Clause 13.7 of the Lease is referred to here, and in the subsequent paragraph of Mr Kelly’s submissions. However, that clause has not been shown to be relevant. First, clause 13.7 is predicated on there being an insurance policy taken out by the tenant under clause 13.1. Clause 13.1 requires the tenant to take out, in the joint names of the tenant and the landlord, a policy covering public risk insurance, plate glass insurance, other insurance which a prudent tenant would take out, and insurance cover the tenant’s works making alterations or additions to the Motel. No such policy has been identified by the Carters.
Second, clause 13.7 operates to quarantine of the balance of any proceeds of an insurance claim which are not required by the insurer to be applied towards the replacement or reinstatement of the thing insured. However, no responsive insurance policy has been identified, and no balance proceeds of any such policy have been identified.
Third, no such claim is pleaded.
Another, related submission made by Mr Kelly is that:
The Defendant, as the insured, made a claim (WFI number 3234322) in February 2013…but did not keep the Plaintiffs informed about or take the required steps to pursue the claim, even though prompted in May 2014… Instead, the episode again demonstrates the Defendant’s casual disregard of the Plaintiff’s rights and interests…
And so, it is alleged that insurance claims were not dealt with by the landlord properly and in a timely way, and that the landlord was required to preserve the tenant’s rights by making an insurance claim each and every time that was appropriate, and that the landlord was obliged to keep the tenant informed about the claim, or to take the required steps to pursue the claim. But none of those obligations can be found in the express terms of the Lease and the Carters do not plead any implied terms let alone specific breaches of the implied terms.
This is no mere technical pleading point. Mackey Motels was entitled to be fairly informed if it was the Carters’ case that there were specific implied terms (in spite of entire agreement clause 26.11[28]) and that those implied terms were breached by specific conduct, and that loss and damage was caused by those breaches.[29]
[28]See the later discussion of implied terms in Part C.
[29]For example, it is hard to see how a failure to keep the tenant informed was causative of any loss or damage.
It follows that the Carters’ claim for $15,869 for recovery of the outgoings paid for insurance and interest and solicitors fees must fail.
Mackey Motels Counterclaim for Outgoings
As explained, the Carters were obliged by clause 5.2(b) of the Lease to pay Mackey Motel’s outgoings. Those outgoings included the premiums for the 2015 and 2016 renewals of the CGU Padlock policy.
It follows that:
(a)an order should be made giving judgment on Mackey Motels counterclaim for $677.00 for the unpaid balance of the insurance premium for the 2015 renewal of the CGU Padlock Policy and $4,689.13 for the May 2016 renewal of the CGU Padlock Policy;
(b)judgment should also be given on Mackey Motels’ counterclaim for the costs associated with the preparation, execution and service of the three notices to remedy breach of covenant delivered by Mackay Motels in 2016 – one notice for the unpaid rent in August 2016, one notice for the outgoings in May 2015 and one notice for the outgoings in May 2016 – an amount of $550 for each notice, making a total of $1,650.[30]
(c)Clause 5.8 of the Lease entitles Mackey Motels to interest on the amounts awarded.
[30]See s 126 of the Property Law Act 1974 (Qld).
Mackey Motels is therefore entitled to judgment on the counterclaim in favour of Mackey Motels for $7,016.13 plus interest.
PART C: CONDITION OF THE BUILDING
Another battleground was the obligations imposed by the Lease in relation the keeping the building in a good state of repair. It is necessary to explain the way the Lease allocates responsibility for the state of the Motel.
Lease Provisions regarding Maintenance and Repair
Clause 12.1 of the Lease provided that:
The Tenant must:
(a) keep the Motel and the Landlord’s Property in good and substantial repair as a high quality motel and (if applicable) conference and/or licensed facility;
(b) keep the Tenant’s Property clean and in good repair: and
(c) if required by the Landlord, promptly rectify defects in and repair damage to the Motel and the Landlord’s Property caused by [negligence etc] and
(d) promptly replace damaged plate glass and other glass in the Building with glass of the same or similar quality to that in place when it was last replaced or if it has not been replaced, then to that in place on the Commencement Date; and
(e) promptly replace broken hot water systems to the building with a hot water system the same or of similar quality and quantity to that in place when it was last replaced; and
(f) promptly repair damage caused by the Tenant or the Tenant’s Agents when removing anything in or fixed to the Motel; and
(g) maintain, protect and promptly repair (or replace…) illuminated signs, light fittings, heating, lighting and other electrical equipment…; and
(h) maintain and properly repair damage caused to any swimming pool, spa or fountain.
Nothing contained in this clause shall require the Tenant to replace the Landlord’s Property where it has reached the end of its normal operating life and has been properly maintained by the Tenant. [emphasis added]
Thus, the tenant was obliged to keep the Motel and the Landlord’s Property in “good and substantial repair”. For the Tenant’s Property the Tenant’s obligation was to keep that property “clean and in good repair”. The proviso at the end ensured that the tenant was not obliged to replace capital items.
Clause 12.2 contained another proviso:
Despite the provisions of Clause 12.1, the Tenant need not carry out work of a structural nature except that which is required because of the act, negligence or default of the Tenant or the Tenant’s Agents or because of the nature of the Tenant’s Business or the Tenant’s use and occupation of the Motel.
Clause 12.4 provided that the Tenant must, as often as the Landlord may reasonably require, paint, repaint, recover or otherwise appropriately treat with materials, all of the interior or exterior of the Building to the satisfaction of the Landlord.
Four defined terms are relevant:
“Motel” - the premises described in Item 2 of the Form 7 to this Lease including:
· the Land; and
· the Building.[31]
“Chattels” – the moveable furniture, office equipment, chattels and effects owned and used by the Tenant in the operation of the Tenant’s Business and set out in the annexed inventory, but excluding any items of property that is the Landlord’s Property.
“Landlord’s Property” - means all the plant and equipment, fixtures and fittings of the Landlord in the Motel but excluding any items of property that are the Tenant’s Property or the Chattels.[32]
“Tenant’s Property” - the Chattels and all fixtures, fittings, plant and equipment of the Tenant and set out in the annexed inventory, but excluding any items of property that are the Landlord’s Property.[33]
[31]The term ‘Building’ is defined as the fixed improvements, other structures and improvements from time to time erected or existing on the Land and includes the Landlord’s Property and any modifications, extensions or alterations from time to time of the Building or the Landlord's Property.
[32]The expression ‘Chattels’ is defined as the movable furniture, office equipment, chattels and effects owned and used by the Tenant in the operation of the Tenant's business and set out in the annexed inventory, but excluding any items of property that is the Landlord's Property.
[33]The definitions are in clause 1.1 of the Lease.
There is an odd circuitousness about the latter two definitions. The concept of the Landlord’s Property excludes the Tenant’s Property, and the concept of the Tenant’s Property excludes the Landlord’s Property. Both expressions involve the concepts of plant and equipment, fixtures and fittings.
Another more serious problem is that the ‘annexed inventory’ is not annexed to the Lease. And so, the expression ‘Tenant’s Property’ is defined as the ‘Chattels’, which are said to be listed in the missing inventory, as well as “all fixtures, fittings, plant and equipment of the Tenant and set out in the annexed inventory”. The use of the word “and” means that the items must fall within one or other of the four categories (fixtures, fittings, plant and equipment) and be set out in the annexed inventory.
The problem of parties negotiating terms of a bespoke contract neglecting to include certain words or figures, or forgetting to include a schedule or appendix, is discussed by the authors Lewison and Hughes.[34] The principles explained by those text writers can be summarised as follows:
(a)where the parties have left part of the contract blank, or there is a missing schedule or appendix, the contract will be held to be void for uncertainty unless:
(i)the context and background allow the court to fill in the gap;[35] or
(ii)the defective clause can be severed from the contract;[36]
(b)it will always be permissible for the court to have regard to extrinsic evidence to fill the gap because the presence of a blank space, or the absence of a missing schedule or appendix, will give rise to an ambiguity;[37] and
(c)the question will always be whether the intention of the parties is clear enough to overcome the missing words.[38]
[34]Lewison & Hughes, The Interpretation of Contracts in Australia, Lawbook Co 2012 at [8.15].
[35]An example where the court was able to give content is Manren Ltd v Royal & Sun Alliance Insurance Australia Ltd (2003) 12 ANZ Ins Cases 61-568. See also Robinson v Young [2005] NSWSC 777 and Pagano v Cama (1995) NSW Conv R 55-755.
[36]An example of a case where the court was unable to give content but was able to sever the clause is New South Wales v Banabelle (2002) 54 NSWLR 503.
[37]Lewison & Hughes (supra) at [815].
[38]Lewison & Hughes (supra) at [815].
In Spectra Pty Ltd v Pindari[39] Wootten J took an approach that does not appear to fit neatly within that framework. His Honour said: “In some cases a blank in a document may be dealt with by simply ignoring it, and reading on as if it were not there.” That approach, if it is open to this court, does not assist because the problem here is not a blank space which can be easily ignored.[40] The problem is that the definitions of ‘Tenant’s Property’ and ‘Chattels’ are tied to the missing inventory.
[39][1974] 2 NSWLR 617 at 620-621.
[40]In Spectra Pty Ltd v Pindari [1974] 2 NSWLR 617, the option to renew a lease was as follows: “Should the Lessee desire to exercise this option it shall give to the Lessor notice in writing to be sent by prepaid registered mail to the Lessor's last known place of residence of its desire so to do not later than (blank) calendar months prior to the expiration of the term hereby granted.” Wootten J was able to read the option as if it merely required notice prior to the expiration of the original term.
In this case neither party invited the court to have regard to extrinsic evidence so as to supply the missing ‘annexed inventory’.[41] Neither party contended that the context and background allowed the court to fill the gap or that the definition can be severed from the Lease. And, neither party contended that the missing inventory had the consequence that the Lease was void for uncertainty.[42]
[41]In fact, there is no evidence as to whether the missing inventory ever existed.
[42]Given that the Lease was essentially a demise of motel premises, it would be difficult to argue that the whole Lease was uncertain by reason of the missing inventory.
Therefore, the only remaining sensible interpretation of the Lease is to regard definition of the ‘Tenant’s Property’ as not having any substantive content. In other words, no chattels, fixtures, fittings, plant or equipment falls within the definition of ‘Tenant’s Property’.
That is not as radical an interpretation as it may appear at first blush. The definitions of ‘Landlord’s Property’, ‘Tenant’s Property’ and ‘Chattels’ are designed to serve the purposes of the Lease. Thus, clause 12.1 of the Lease provides that the tenant must keep the Motel and the Landlord’s Property in good and substantial repair, clause 14.5 provides for the landlord to purchase the ‘Chattels’ at termination, and clause 14.6 provides that on termination the landlord must not use the ‘Tenant’s Property’. The fact that the ‘Tenant’s Property’ is a vacuum merely means that the provisions of the Lease do not fasten onto any property of the tenants. But the usual principles of property law continue to apply. At termination, for example, the tenant remains able to take his or her wallet, car keys as well as any other plant, equipment or other property which comprises the tenant’s own property. Fixtures, of course, are the property of the landlord under conventional property law. However, the compulsory purchase regime in clause 14.5 does not fasten onto any specific property because no property is identified by an inventory.
It will be necessary to return to this topic in Part E below.
The Claim under Clause 14.3
The Carters plead that Mackey Motels breached clause 14.3 of the Lease. That clause is as follows:
Subject to the Tenant’s compliance with its obligations under Clause 12.1, the Landlord must take reasonable action to ensure that the Motel and the Landlord’s Property are kept in a good and substantial structural state and condition.
Therefore, Mackey Motels’ obligation is subject to the Carters’ compliance with their obligations under clause 12.1 It will be recalled that clause 12.1 of the Lease provided that the tenant must keep the Motel and the Landlord’s Property in good and substantial repair as a high quality motel and (if applicable) conference and/or licensed facility and keep the Tenant’s Property clean and in good repair.
The actual obligation in clause 14.3, as Mackey Motels points out, is not an obligation to keep the Motel and the Landlord’s Property in good and substantial repair. Instead, it is an obligation to “take reasonable action to ensure” that the Motel and the Landlord’s Property is in “a good and substantial structural state and condition”. That latter expression, and its components, are not defined by the Lease.
Counsel for Mackey Motels referred to the reasons of Callaghan J in Speets Investment Pty Ltd v Bencol Pty Ltd[43] which, in turn, refer to the reasons of Nicholas J in Holus Bolus Pty Ltd v Wicko Pty Ltd where the landlord’s obligation was to “make all amendments alterations reparations and additions of a structural nature”. His Honour said:
There are many cases which discuss the meaning of “structure”, “structural alteration”, and “structural repairs”, but all are with regard to the legislation, lease, or agreement in the particular case. Sometimes they afford helpful, but not determinative, guidance for the approach to be taken. In the end, the question is one of interpretation to ascertain the obligation of the party with regard to the words used in the clause in context, and to the surrounding circumstances.[44]
[43][2020] QCA 247 at [130].
[44][2012] NSWSC 497 at [30], approved by Callaghan J, with whom Sofronoff P agreed, in Speets Investment Pty Ltd v Bencol Pty Ltd [2020] QCA 247 at [128].
Mr Kelly also referred to the reasons of Bond J and Callaghan J in Speets Investment Pty Ltd v Bencol Pty Ltd[45] as delineating the allocation of responsibility between landlord and tenant for repairs and works required to the premises. Mr Kelly’s submission was that the particular breaches of the landlord’s obligations relied upon by the Carters fit neatly within the description of items which were the landlord’s responsibility. At paragraph 24 of the statement of claim, and in their submissions,[46] the Carters contended that the works required, and the allocation of responsibility, was as follows:
[45][2020] QCA 247. Mr Kelly referred specifically to paragraph [71] (Bond J) and paragraphs [121]-[130] (Callaghan J).
[46]The table of defects in paragraph 24 of the statement of claim is reproduced at paragraph [70] of the Plaintiffs’ submissions.
Item
Landlord’s Responsibility (Yes/No)
Lease Clause
1.
The roof to the front building leaks causing water damage to soffits and internal ceilings
Yes
14.3
2.
There are cracks to the brickwork associated with the garden beds
Yes
14.3
3.
The lattice panel on the rear building stairs is rotting and deteriorating to the extent that it requires replacing
Yes
12.1 (see proviso)
4.
Toilet bowls are cracking due to age and present a safety hazard
Yes
14.3
5.
Defective water pipes are causing leaks and damage to paintwork and slip hazards in 10 motel rooms
Yes
14.3
6.
Leaking shower cubicles are causing damage to paintwork and floor-coverings and causing the reinforcing steel in the concrete to rust, thus affecting the structural integrity of the concrete and staining walls and floors
Yes
14.3
7.
Painting and retiling is required to maintain the property in good and substantial condition but cannot be done in many rooms due to wet walls from water leaking from water pipes inside walls
Yes (tiling)
No (as to painting)
(cf paragraph 69 hereof)
12.2
8.
Cracks are present in walls in the front building
Yes
14.3
9.
There are rotted and defective timber shower doors
Yes
14.3
10.
There is resultant water damage from roof leaks in the motel residence and motel rooms
Yes
14.3
11.
The ceiling in the rear building upstairs motel rooms is sagging
Yes
14.3
12.
There are tiles falling off the front patio and steps area of the motel
Yes
14.3
13.
The carport roof guttering in the rear motel building has multiple rust holes causing sections of lining underneath to be water damaged and occasionally fall without notice
Yes
14.3
14.
Fixed cabinets in motel bedrooms and bathrooms are aged and falling apart
Yes
12.1 (see proviso)
15.
Handbasins, tapware and mirrors in most bathrooms are aged and surfaces are breaking down as a result
Yes
12.1 (see proviso)
16.
Fixed toilet bowls in 3 motel bathrooms are unlevel
Yes
12.1 (see proviso)
17.
Many motel room door locks are aged and frequently fail
Yes
12.1 (see proviso)
18.
Roof guttering on motel residence has many rust holes
Yes
14.3
19.
Rusted away metal balustrade on motel residence front porch
Yes
12.1 (see proviso)/14.3
20.
Rust in front motel building stair stringers
Yes
12.1 (see proviso)/14.3
21.
Various sections of the front motel building carport roof leaks creating slip hazards during wet weather
Yes
14.3
That is a mixed bag of defects. Some appear to be entirely cosmetic, such as the lattice panels (item 3), ‘unlevel’ fixed toilet bowls (item 16), and rust in front motel building stair stringers (item 20). For those defects, the Carters largely rely on clause 12.1 as allocating responsibility to the landlord. Other defects in the list have a less superficial description, such as leaks to the front building roof causing water damage to soffits and internal ceilings (item 1) and water damage from roof leaks in the motel residence and motel rooms (item 10). Other items could be either cosmetic or more structural in character. Examples are the cracks are present in walls in the front building (item 8) and the sagging ceilings (item 11).
At least one of the problems with the Carters’ case on the defects is that all that is relied on is that rather arid description of the problem, not supported by any expert evidence on the nature of the defect or what precisely was required to remedy the defect. And so, the cracks present in walls in the front building might be entirely inconsequential and cosmetic, or they may be signal a compromise to the structural integrity of the building.
Before returning to the alleged defects, it is necessary to consider the respective obligations of the parties under the Lease.
Clause 14.3: A good and substantial structural state and condition
As the above quote from Holus Bolus Pty Ltd v Wicko Pty Ltd makes clear, much depends on a proper interpretation of the landlord’s obligation under clause 14.3 of the Lease and the context of that obligation. That clause limits the landlord’s responsibility to an obligation to “take reasonable action to ensure” that the Motel and the Landlord’s Property is in “a good and substantial structural state and condition”. The word “structural” cannot be ignored. Nor can one ignore the context that it is the tenant’s responsibility, not the landlord’s responsibility, to:
(a)keep the Motel and the Landlord’s Property in good and substantial repair as a high quality motel;[47]
[47]Clause 12.1(a) of the Lease.
(b)promptly replace damaged plate glass and other glass in the Building;[48]
[48]Clause 12.1(d) of the Lease.
(c)promptly replace broken hot water systems;[49]
(d)maintain, protect and promptly repair or replace illuminated signs, light fittings, heating, lighting and other electrical equipment;[50]
(e)maintain and properly repair damage caused to any swimming pool, spa or fountain;[51]
(f)maintain and service the air-conditioning equipment and/or air-conditioning units;[52]
(g)keep and maintain the waste pipes drains water supply plumbing conduits and other equipment contained near or about the Motel;[53]
(h)keep the Motel, the Tenant’s Property, the exterior façade of the Building and the exterior and interior portions of windows and the doors and all other plate, glass, glass fixtures, carpets and signage in a neat and clean condition and the Tenant must keep and maintain the interior of the Building in the same physical characteristics and appearance as at the Commencement Date;[54]
(i)comply with all requirements and recommendations contained in the AAA report, except for work of a structural nature that is required or recommended by the AAA report;[55]
(j)paint, repaint, recover, clean or otherwise appropriately treat with materials, all of the interior and exterior of the building;[56]
(k)maintain the gardens and landscaping;[57]
(l)maintain the AAA rating.[58]
[49]Clause 12.1(e) of the Lease.
[50]Clause 12.1(g) of the Lease.
[51]Clause 12.1(h) of the Lease.
[52]Clause 11.6 of the Lease.
[53]Clause 11.9(a) of the Lease.
[54]Clause 11.11 of the Lease
[55]Clause 11.17(c) of the Lease.
[56]Clause 12.4 of the Lease.
[57]Clause 12.5 of the Lease.
[58]Clause 12.6 of the Lease.
That is a rather comprehensive list of the tenant’s responsibilities. The first of the tenant’s obligations, to keep the Motel and the Landlord’s Property in good and substantial repair as a high quality motel, is a broad, general obligation but is supplemented by the more specific obligations that follow. The evident intention of the Lease is that it was the tenant who assumed primary responsibility for keeping the Motel in good and substantial repair.
The landlord has no equivalent duty under the Lease. Clause 14.3, as explained, is more limited. It is subject to the tenant’s compliance with its obligations under clause 12.1 (listed above), and is a narrower duty to “take reasonable action to ensure” that the Motel and the Landlord’s Property is in “a good and substantial structural state and condition”. The narrower, structural confines of that duty are consistent with:
(a)the proviso in clause 12.1 that nothing contained in clause 12.1 shall require the tenant to replace the Landlord’s Property where it has reached the end of its normal operating life and has been properly maintained by the tenant;
(b)clause 12.2 which provides that, despite the provisions of clause 12,1, the tenant need not carry out work of a structural nature except that which is required by reason of the tenant’s negligence, or the negligence of its agents, or the nature of the tenant’s business, or the tenant’s use and occupation of the premises.
Therefore, the demarcation between the repairs that are the responsibility of the tenant and those that are the responsibility of the landlord hinges on the word ‘structural’. It is the tenant’s obligation to keep the Motel and the Landlord’s Property in good and substantial repair as a high quality motel. The landlord’s obligation is a narrower duty to “take reasonable action to ensure” that the Motel and the Landlord’s Property is in “a good and substantial structural state and condition”.
It is also worth noting that the requirement that the landlord take reasonable action to ensure that the Motel[59] is in “a good and substantial structural state and condition” is an obligation that is focussed on an outcome – the good and substantial structural condition of the Motel. In other words, clause 14.3 is aimed at restoring the Motel to a proper structural condition. It is not an obligation to effect repairs to any structural element of the Motel.
[59]For convenience here I have abbreviated “the Motel and the Landlord’s Property” to “the Motel”.
It may be useful to give a simple example. On the one hand, if a structural beam has been damaged by vibrations from nearby building work, clause 14.3 compels the landlord to take reasonable action to repair the structural beam. In that event, the landlord would be required to achieve the outcome that the Motel was returned to a good and substantial structural condition. On the other hand, if the structural beam was affected by superficial damage or surface rust that did not impact the Motel’s structural integrity, clause 14.3 does not require the landlord to respond because the landlord’s obligation is limited to taking reasonable steps to achieve an outcome – the good and substantial structural condition of the Motel. Removing surface rust and repainting would not comprise reasonable steps to achieve that outcome. In this latter situation clause 12.1 is likely to operate because that clause requires the tenant to keep the Motel and the Landlord’s Property in good and substantial repair as a high quality motel.
Of course, as that example illustrates, much depends on the evidence about the defect and the repairs required.
The Carters’ Approach – Capital Works
That analysis exposes a problem which pervaded the Carters’ approach to Mackey Motels as well as the submissions of their counsel. The Carters submitted that:
(a)During the course of the Lease when Mackey Motels was landlord, no or no substantial amount was expended by the Defendant on relevant capital works;[60]
(b)Mackey Motels was in breach of the Lease because Mackey Motels incurred no substantial expenditures on such capital works by the Defendant throughout the course of its ownership up to the termination of the Lease;[61]
(c)“Despite the obvious need for capital works by, at the latest, the time of the 2013 Star Ratings Report, and the oft repeated reference of works to the (fictional) works program or works schedule…the essential problem was that no substantive capital works were performed by the Defendant to upgrade the Motel and Landlord’s Property”;[62]
(d)“The revenue declines at Oscar Motel coincided more closely with the Defendants’ refusal, failure or neglect to commission timely upgrades to the Motel and Landlord’s Property and to repair the rooms timely or at all pursuant to insurance claims and otherwise to respond by actually implementing the capital works the Defendant repeatedly claimed it was putting in its capital works program or schedule”.[63]
[60]Plaintiffs’ submissions at [58].
[61]Plaintiffs’ submissions at [68].
[62]Plaintiffs’ submissions at [75].
[63]Plaintiffs’ submissions at [94].
The problem with that approach is that it misinterprets the Lease. It was, as explained above, the tenant who was obliged to keep the Motel and the Landlord’s Property in “good and substantial repair”. The landlord’s obligation was limited to taking reasonable steps to achieve the good and substantial structural condition of the Motel. Nothing in the Lease obligated the landlord to perform a certain level of capital works.
The Carters’ submission that Mackey Motels was required to expend an unspecified sum on capital works appears to be based on a misinterpretation of clause 12.1.
It will be recalled that the proviso to clause 12.1 states that: “Nothing contained in this clause shall require the Tenant to replace the Landlord’s Property where it has reached the end of its normal operating life and has been properly maintained by the Tenant. The natural and ordinary meaning of that clause is merely to specify an outer limit on the tenant’s obligations under clause 12.1 to keep the Motel and the Landlord’s Property in good and substantial repair as a high quality motel. The proviso to clause 12.1 does not create a converse obligation owed by the landlord to replace the Landlord’s Property or to make any particular expenditure on capital works.
Similarly, it is necessary to reject the Carters’ argument that under clause 14.3 it was the landlord’s obligation to implement “upgrades and refurbishment” of the Motel in addition to taking reasonable action to respond to specific problems with the Motel.[64] The obligation in clause 14.3 is to take reasonable action to ensure that the Motel and the Landlord’s Property are kept in a good and substantial structural state and condition. That is distinctly not an obligation to upgrade the Motel, or to refurbish it, to some unexpressed standard. A moment’s thought exposes the twin difficulties that clause 14.3 does not say that the landlord is required to upgrade and refurbish, and that, if it did, some modicum of detail would be needed so that the parties were clear on when the upgrade and refurbishment was required, and to what standard.
[64]See the plaintiff’s supplementary submissions at [1.9].
The Carters did not plead or argue that Mackey Motels owed an implied obligation to upgrade or refurbish or to make capital expenditures. Perhaps that was because they assumed that Mackey Motels was burdened by such an obligation. Such a plea and argument, if it were made, would be unable to clear the obstacle presented by the test for implied terms.[65] One example of the problems is the requirement that the implied term must be capable of clear expression.[66] It would be difficult to craft an implied term that the landlord must expend a substantial sum on capital works without creating uncertainties regarding the types of capital works or the standard of the capital works.[67]
[65]BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283: “…for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”; cf Narni Pty Ltd v National Australia Bank Limited [2001] VSCA 31 per Tadgell JA at [16].
[66]The context here is that a written contract, the Lease, embodies the entirety of the agreement. For the situation where the contract is oral or partly oral see Hawkins v Clayton (1988) 164 CLR 539 at 571-3 per Deane J; see also the discussion by Lewison & Hughes, The Interpretation of Contracts in Australia, Lawbook Co 2012 at [6.04].
[67]There are, of course, other problems such as the requirements that the implied term be necessary to give business efficacy to the contract and obvious.
As explained above, the landlord’s obligation was limited to taking reasonable steps to achieve the good and substantial structural condition of the Motel.
The Carters’ Approach – Lack of Evidence
Another of the problems for the Carters in prosecuting their case that Mackey Motels breached clause 14.3 is the lack of evidence. For the Carters to succeed under clause 14.3 it was necessary for them to plead and prove that:
(a)they complied with clause 12.1;
(b)a part of the Motel or the Landlord’s Property was not in “a good and substantial structural state and condition”; and
(c)Mackey Motels failed to take reasonable action to put the Motel or the Landlord’s Property in that state and condition.
Paragraph 24 of the statement of claim lists the parts of the Motel and Landlord’s Property that are alleged not to be in “a good and substantial structural state and condition”. As explained above, an arid description of the defects is a poor basis upon which to satisfy the court, on the balance of probabilities, that the defect can be characterised as the Motel not being in a good and substantial structural state and condition. The absence of any expert evidence identifying the nature of the defect and the work required to rectify the defect is decisive.
Applying the principles to the Carters’ list of defects, these are the factual conclusions:
Item
Relates to ‘Good and Substantial Structural State and Condition’?
1.
The roof to the front building leaks causing water damage to soffits and internal ceilings
The roof would ordinarily be regarded as part of the structure of the Motel but nothing in the description enables the court to conclude that the damage has a structural element. There is no evidence that properly identifies the particular defect or its structural element.[68] In any event, the evidence is that Wayne Munn, a professional builder, inspected the problem on 28 August 2011, prepared a quote for works and then completed that work on 25 September 2011. That conduct has not been shown to be a failure to take reasonable action.
2.
There are cracks to the brickwork associated with the garden beds
There is no evidence that these cracks have any structural element. Even the description does not suggest a structural element. This defect would fall within the scope of the tenant’s obligation under clause 12.1(a) to keep the Motel and the Landlord’s Property in good and substantial repair as a high quality motel.
3.
The lattice panel on the rear building stairs is rotting and deteriorating to the extent that it requires replacing
As above.[69]
4.
Toilet bowls are cracking due to age and present a safety hazard
As above.
5.
Defective water pipes are causing leaks and damage to paintwork and slip hazards in 10 motel rooms
Whilst there was evidence about leaks and damage to paintwork in the Motel bathrooms, the evidence was merely of the existence of a problem which the Carters’ asserted was the responsibility of Mackey Motels. No expert evidence has been adduced to support that complaint.[70] The leaks could be the result of any number of possible causes. And, the court is unable to conclude that the damage has a structural element.
6.
Leaking shower cubicles are causing damage to paintwork and floor-coverings and causing the reinforcing steel in the concrete to rust, thus affecting the structural integrity of the concrete and staining walls and floors
As above. There is no evidence that supports the allegation that the structural integrity of the concrete was affected.[71]
7.
Painting and retiling is required to maintain the property in good and substantial condition but cannot be done in many rooms due to wet walls from water leaking from water pipes inside walls
There is no evidence that these cracks have any structural element. Even the description does not suggest a structural element. And, as the Carters concede, painting was their obligation under clause 12.4.
8.
Cracks are present in walls in the front building
There is no evidence as to the nature or location of these cracks or that they have any structural element.
9.
There are rotted and defective timber shower doors
There is no expert or other evidence that suggests that the shower doors had a structural role. It is doubtful that they could have any such role.
10.
There is resultant water damage from roof leaks in the motel residence and motel rooms
From the description, it appears that this is damage caused by another alleged defect – possibly defect 6 above. In any event there is no evidence as to the nature of the problem or that there was any structural element. To the extent that there is any evidence, there is evidence of the complaint on 11 May 2010 and that the problem was attended to by a tradesman on 8 June 2010.[72] Similarly for a complaint on 27 February 2012 which was attended to by a tradesman on 5 March and 20 April 2012.[73]
11.
The ceiling in the rear building upstairs motel rooms is sagging
There is no evidence as to the nature of the problem or that there was any structural element.
12.
There are tiles falling off the front patio and steps area of the motel
As above.[74] In any event, this defect would fall within the scope of the tenant’s obligation under clause 12.1(a) to keep the Motel and the Landlord’s Property in good and substantial repair as a high quality motel.
13.
The carport roof guttering in the rear motel building has multiple rust holes causing sections of lining underneath to be water damaged and occasionally fall without notice
There is no evidence as to the nature of the problem or that there was any structural element.[75]
14.
Fixed cabinets in motel bedrooms and bathrooms are aged and falling apart
Photographs were tendered to support the complaint. However, there is no evidence as to the nature of the problem or that there was any structural element.
15.
Handbasins, tapware and mirrors in most bathrooms are aged and surfaces are breaking down as a result
As above.
16.
Fixed toilet bowls in 3 motel bathrooms are unlevel
As above.
17.
Many motel room door locks are aged and frequently fail
As above.
18.
Roof guttering on motel residence has many rust holes
From the description the defects may or may not have a structural element. However, no evidence demonstrates any structural element.
19.
Rusted away metal balustrade on motel residence front porch
The description suggests that the defect does not have a structural element. No evidence supports any structural element to this defect.
20.
Rust in front motel building stair stringers
As above.
21.
Various sections of the front motel building carport roof leaks creating slip hazards during wet weather
This appears to be the same or a similar complaint to defect 13. The same finding applies - there is no evidence as to the nature of the problem or that there was any structural element.
There are therefore these submissions to consider:
(a)whether the order of Boddice J made on 27 November 2020 resolved the ‘no annexed inventory’ issue;
(b)whether the true meaning and effect of clause 14.5 of the Lease is that the regime in that clause applies to chattels in the Motel at the relevant time, including any chattels listed in an inventory annexed to the Lease;
(c)whether a factor supporting that interpretation is that the inventory was always going to be subject to change given the term of the Lease.
The order of Boddice J was made more than four years after the Carters vacated the Motel. Both the order and a transcript of the review proceeding are in evidence. During the course of the argument there was this exchange:
HIS HONOUR: Because four years is too late. Your client has had the opportunity to participate many years ago. They chose not. That’s their problem. Not the defendants.
MR KELLY: Then obviously the order should reflect that the parties proceed to the valuation pursuant to 14.5.
HIS HONOUR: That’s so. I accept that, at the end of the day, even though there has been an expense to the defendants who have tried to facilitate the process. That the appropriate way is to have an independent person appointed, so that your clients don’t feel that a valuer was picked that they don’t like. But why wouldn’t it effectively be a modification of [paragraph] 3D [of a draft order], that is, that there – a valuer will be appointed to value the chattels on the basis that once – each side will give that valuer what they say were the chattels at the time. That person can provide alternate valuations depending on the process. And there can, if need be, an argument at the trial as to whether the defendants are [indistinct] so they’d need evidence of – from their valuer, in respect of the matter.
It seems to me that that’s the best solution. I am satisfied, notwithstanding what Mr Windsor has said, I am satisfied that it would not be fair to your clients to require them, to any effect, accept the valuation that has been obtained by the defendants. But I’m not going to allow a process where they have to go physically meeting each other and argue about what’s there now and what wasn’t.
The relevant order was that:
The parties are to attend to, cooperate in and do all things reasonably required for the appointment of a valuer to value the chattels in the way prescribed by clause 14.5 of the Lease, with the right of each party to:
(a) provide the valuer with an inventory of chattels they contend were the chattels as at 5 October 2016, and documents relating to replacements made to the inventory thereafter;
(b) provide to the valuer a brief summary of disputed items of chattels the parties contend were the chattels in situ at the leased premises as at 5 October 2016;
(c) request the valuer, so far as necessary or appropriate, to provide alternative values in respect of any chattels insofar as there is a dispute about the items which comprised the chattels as at 5 October 2016.
[emphasis added]
Nothing in the content or context of that order supports the view that His Honour resolved the ‘no annexed inventory’ issue, or indeed any substantive issue. The hearing was a review. The focus was on timetabling of the steps in the proceeding. The parties were largely in agreement about the timetable for the progress of the proceeding. The disagreement concerned the utility of the appointment of a fresh valuer in circumstances where the Carters had, four years before declined to participate in a process in accordance with clause 14.5, Mackey Motels had engaged its own valuer, and four years had elapsed meaning that the items in the Motel were likely to be different. Recognising those difficulties, His Honour made directions for the appointment of a valuer. That appointment had some similarities with the procedure under clause 14.5 of the Lease but there were differences.[144]
[144]For example, each party had the three rights identified in the order. There is no equivalent in clause 14.5. The issue of the status of the valuation is discussed below.
In that context, it is surprising that the Carters contend that Mackey Motels forfeited substantive rights at that review hearing. The whole purpose of the directions, including the directions concerning the proposed valuer, was to progress the proceeding to a trial where the substantive issues were to be decided – including the true value of the chattels claimed by the Carters to be worth $242,000.
The argument concerning the proper interpretation of clause 14.5 of the Lease has a superficial attraction. That interpretation gives the regime in clause 14.5 a wider function. In the context of a 10-year lease, with three five-year options, it extends the compulsory purchase regime to those assets acquired after the commencement of the Lease on 16 April 2002, as well as those listed in the annexed inventory. There are two reasons why that wider interpretation must be rejected.
First, such an interpretation is contrary to the natural and ordinary meaning of clause 14.5 and the definition of Chattels in the Lease. Clause 14.5 requires that the landlord must purchase the Chattels from the tenant upon the landlord re-taking possession of the Motel. That compulsory purchase regime is expressly restricted to the ‘Chattels’ as defined. The definition of ‘Chattels’ is similarly clear.[145]
[145]That definition is discussed above in Part C.
To adopt the wider interpretation, it would be necessary to read clause 14.5 as if it read: “the Landlord must purchase the Chattels and any moveable furniture, office equipment, chattels and effects owned and used by the Tenant in the operation of the Tenant’s Business from the Tenant upon the Landlord re-taking possession of the Motel [added words underlined].[146] Engrafting those additional words into the clause would comprise major surgery.
[146]These suggested added words have been adapted from the definition of Chattels in the Lease.
Second, implying those additional words into clause 14.5 does not meet the test for implication of terms.[147] The proposed implied words are unlikely to meet the other tests for the implication of terms such as: no term will be implied if the contract is effective without it; it must be so obvious that ‘it goes without saying’.[148]
[147]BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283.
[148]Ibid.
And, those additional words are not necessary to give business efficacy to the contract. The Lease could operate satisfactorily without extending the compulsory purchase regime to subsequently acquired property. That is because the tenant did not lose any rights to those items of property that fell outside the compulsory purchase regime. The tenant’s conventional property rights governed property that fell outside the compulsory purchase regime.[149]
[149]Subject, though, to being abandoned under clause 17.3.
The implication of those additional words is also not a necessary implication because the annexed inventory might well have provided, to give an example, ‘23 electric jugs (as replaced from time to time)’. In other words, it should not be assumed that the annexed inventory was a static document – only specifying the property then being used in the Motel.
Incidentally, Mackey Motels contended that the compulsory purchase regime could never have applied to whatever chattels the Carters decided to leave at the Oscar Motel when they left.[150] That may be correct, but the contention cannot be taken too far. The evident objective of clause 14.5 is to ensure that, on termination, the Chattels could be promptly paid for and used in the operation of the Motel as a going concern. The parties were free to agree that a reasonable price, assessed by an independent expert valuer, would be paid for the specific goods listed in the annexed inventory, or for the then current electric jugs, bedside lamps, etc.
[150]Defendant’s submissions at [388].
It follows that the order of Boddice J did not impact the substantive rights of the parties or impede Mackey Motels’ arguments. And clause 14.5 of the Lease does not have the extended meaning contended for by the Carters.
The Pleaded Case for the Chattels
One problem for the Carters is that only one cause of action is pleaded for the value of the chattels at the Motel on termination - that is the claim pursuant to clause 14.5 of the Lease. That pleaded claim is untenable because clause 14.5 requires that Mackey Motels purchase the ‘Chattels’ as defined. As explained above, the Chattels are defined as “the moveable furniture, office equipment, chattels and effects owned and used by the Tenant in the operation of the Tenant’s Business and set out in the annexed inventory…” [emphasis added]. There is no annexed inventory and so there are no items that qualify as ‘Chattels’, as defined.
In case I am wrong, and clause 14.5 is engaged, it is necessary to address the valuation of the chattels at the Motel on 5 October 2016.
Valuation of the Chattels – Which Chattels?
If one ignores the reference to the ‘annexed inventory’ in the definition of ‘Chattels’, the Chattels comprise ‘the moveable furniture, office equipment, chattels and effects owned and used by the Tenant in the operation of the Tenant’s Business’. The reference to ‘moveable furniture’ confirms the general law approach that fixtures and fittings become part of the land.
And so, the first issue is: what chattels were at the Motel when the Carters left on 5 October 2016? Neither party particularly focussed on that question, with more focus on the condition of the chattels as at 5 October 2016, and whether the chattels were subsequently utilised by Mackey Motels in the Motel business or in a related business.
The Carters sent an invoice to Mackey Motels on 5 October 2016 which simply claimed $242,000 for “Goods and Chattels at the Oscar Motel Property as per insured amount.” When they left Ms Klein-Carter took a large number of photographs of the various rooms of the Motel. The photographs are in evidence, but they were in evidence for two purposes: to illustrate the condition the Motel was left in,[151] and to demonstrate that some items in the photographs were subsequently used by Mackey Motels. Neither party sought to extrapolate an inventory from the photographs.
[151]The Carters sought to use the photographs to demonstrate that the Motel and its Chattels were left in a good condition, subject to their complaints about ‘capital’ aspects which they contended were the responsibility of Mackey Motels.
Ms Angela Nightingale prepared a report dated 10 October 2016 on the condition of the Motel.[152] Ms Nightingale’s report also contained photographs, but that report was directed to the work required to put the Motel into a condition where it could resume trading. Ms Nightingale’s report is not a sound basis for assessing what chattels were or were not in the Motel as at 5 October 2016.
[152]Mackey Motels relied on this report as demonstrating that the Motel was left in a poor state.
On 4 January 2017 the Carters wrote to the solicitors for Mackey Motels asserting that appropriate values for the chattels were the insurance value or the replacement value. They attached a copy of the inventory of the chattels they owned that remained at the Motel on 5 October 2016 - on which they had based their invoice. That inventory appears to have been an updated version of an inventory attached to a contract of sale whereby the Carters purchased the Motel business from the Galeas in 2002. The evidence does not establish that the updated list was based on any actual stocktake or similar inventory process. The quantities for some of the items are described in this manner: “120 minimum” suggesting an estimate. And the updated inventory includes, and at least, some furniture that appears from the photographs to be fixtures. It also includes laid carpeting, signage, air conditioners and TVs and TV wall mounts, some or all of which may be fixtures. No break-up of values is included so that all items in the list appear to be allocated a global value of $242,000. The values attributed to individual items cannot be scrutinised.
At least in late 2016 and early 2017, the Carters declined to participate in the appointment of an expert valuer. And so, on 16 January 2017, some three months after the Carters had left, Mr Cameron Johnson, a certified valuer, prepared an expert report on the value of the chattels at the Motel. The report was retrospective to 5 October 2016. That report is in the form of an inventory and attributes market values to each item. Photographs are included as part of the report. The value arrived at by Mr Johnson is $13,450.
Some four years later, on 23 April 2021, pursuant to the directions of Boddice J, the parties’ solicitors jointly instructed Mr Baxter, an expert valuer who had been appointed by the President of the Queensland Law Society. It was a difficult brief. The joint instructions explained the plaintiffs’ contentions in 11 paragraphs with references to other materials, and the defendant’s competing contentions in 9 paragraphs with reference to other materials. It is worth noting that this valuation, directed by the order of Boddice J, was not strictly a valuation under clause 14.5 of the Lease. Clause 14.5 specifies that the landlord was to purchase the Chattels “upon the Landlord re-taking possession”. By April 2021 that opportunity of re-taking of possession was long gone.
Rather than being a valuation pursuant to clause 14.5, Mr Baxter’s valuation was something of a hybrid. On the one hand, the clause 14.5 procedure was adopted. Mr Baxter was nominated as the expert valuer by the President of the Queensland Law Society – the mechanism in clause 14.5. Mr Baxter had the qualifications specified by clause 14.5(a). And Mr Baxter undertook the task of valuing the chattels in accordance with the valuation methodology specified in clause 14.5(b). On the other hand, the expert valuation was one ordered by Boddice J. The expert report expressly stated that it was carried out pursuant to Part 5 of Chapter 11 of the Uniform Civil Procedure Rules 1999. In that way the report resembled an expert report ordered by the court rather than an expert report prepared pursuant to the Lease. And, in accordance with the order of Boddice J, the parties put to the expert their competing contentions about the inventory and disputed items. That process was quite outside what was envisaged by clause 15.4.
By a valuation dated 25 May 2021 Mr Baxter assessed the asset values at $69,205 if the chattels were regarded as being in average condition, and $27,682 if the chattels were regarded as being in poor condition. The report attaches a schedule which assigns a total market value in-situ – in average and in poor condition. The schedule includes laid carpeting, signage, air conditioners and TVs and TV wall mounts, some of which may be fixtures.
Curiously, neither party challenged the lists included as part of Mr Johnson’s report or the schedule to Mr Baxter’s report.
The Challenge to Mr Baxter’s Valuation
The Carters challenge Mr Baxter’s valuation on the following four grounds:
(a)It is inconclusive as the (compulsory) purchase price was not determined in accordance with clause 14.5. The expert was persuaded to treat the inventory as being in dispute in its entirety in order to produce two alternative outcomes in the way set out above.
(b)Instead of setting out a purchase price of the chattels pursuant to clause 14.5 this is left to be done by another process in respect of the whole of the inventory rather than in respect of a select number of chattels said to be genuinely in dispute as to whether they were in situ and in use as at 5 October 2016.
(c)Mr Baxter’s valuation contained manifest errors by treating all items “in a group” and as being 14 years of age despite instructions to the valuer that inventory was updated and replaced from time to time during the relevant period up to 5 October 2016. The valuer accepts that, if the items were not all 14 years of age, the valuation would be higher than $69,205.
(d)The expert was not informed, but was actively misled, by the Mackey Motels about chattels in situ as at 5 October 2016 but still in use either at the Oscar Motel or at another property.[153]
[153]Plaintiff’s submissions at [198].
It is necessary to deal with each of those four criticisms. The first criticism of Mr Baxter’s valuation has some force. Mr Baxter was asked to arrive at a value. He arrived at two alternative values. However, it is necessary to understand the context. Mr Baxter was instructed to assess the value of chattels as at 5 October 2016 – some four and a half years previously. He did not inspect the chattels and, even if he had, it may not have assisted because of the time that had elapsed and because some of the chattels may have been replaced. The parties were at loggerheads about the items that comprised the chattels and the condition of the chattels. Mr Baxter’s valuation exercise was impeded by fundamental unresolved disputes of fact. And, there was no real mechanism available to Mr Baxter to resolve the issues as to what was there on 5 October 2016, and in what condition. He was not able to inspect the items for himself, or to resolve the disputes, or even investigate the issues.[154]
[154]Even trying to resolve the issues by reference to competing photographs.
Further, the order of Boddice J permitted the expert valuer, so far as necessary or appropriate, to provide alternative values in respect of any chattels in so far as there is a dispute about the items which comprised the chattels as at 5 October 2016.
Given that context, it is hardly surprising that Mr Baxter arrived at two alternative values. In fact, the whole regime in clauses 14.5 and 14.6 of the Lease envisages that the parties would attempt to agree on a purchase price and that, if they could not agree, the compulsory purchase will take place promptly, with the chattels being assessed in situ and the Motel operating as a going concern. Mr Baxter’s exercise was an unsuccessful attempt to apply that regime, many years later, in the face of numerous disputes and on-going litigation, and when the condition of the chattels could not be quickly or properly assessed. In those circumstances, it is inappropriate to be critical of Mr Baxter’s approach, particularly when the order of Boddice J contemplated alternative values. Of course, the alternative valuations enabled the parties to contend for either version to be adopted by the court or they could have agreed on the midpoint.
The second criticism seems to be that Mr Baxter was obliged to identify those chattels said to be ‘genuinely in dispute’ as to whether they were in situ and in use as at 5 October 2016. I am unable to see why Mr Baxter was obliged to do that, or how it was possible for him to do that.
The third criticism looks to be justified. It is difficult to see any basis for assuming that all chattels were 14 years old. The extent to which this error may have affected the valuation is not clear.
The fourth criticism is an allegation that Mr Baxter was ‘actively misled’. Despite the serious nature of that allegation, the precise statement said to be misleading is not identified. Presumably, the complaint is that some items, such as chairs and pictures, continued to be used by Mackey Motels in the Oscar Motel and in another business run by Mackey Motels.
For the reasons explained above, clause 14.5 was not engaged, and the valuation ordered by Boddice J was not a process conducted pursuant to clause 14.5. However, even if clause 14.5 was engaged, and the process was a clause 14.5 process, the basis of a report under clause 14.5 is that the parties agree that: “The valuer is to act as an expert and not an arbitrator. Neither the Tenant nor the Landlord may dispute in any way that person’s decision.” Those words are plainly intended to inhibit or prohibit a party’s ability to challenge the valuation.[155]
[155]See the discussion of the expression “final and binding” in DTS Succession Pty Ltd v Survco Pty Ltd [2021] QSC 283.
The alleged discretionary errors of Mr Baxter do not take the valuation outside the terms of clause 14.5.[156]
[156]Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335.
Indeed, Mr Baxter faced a challenging task. He was asked in April 2021 to value chattels as at October 2016 where the parties were in dispute about what he was valuing and the condition of what he was valuing. In my view, the Carters faced some difficult hurdles in seeking to establish the actual value of items such as these without a stocktake or inventory which properly recorded the items to be valued and their condition. Some force needs to be given to the evidence of Mr Johnson. He, at least, assessed the chattels within a few months of October 2016. On the basis of Mr Johnson’s evidence and Mr Baxter’s evidence, I would assess the value of the chattels at the lower point of Mr Baxter’s two options, that is $27,682.
It is worth noting that the Carters placed a great deal of store on the fact that Mackey Motels continued to use at least some of the chattels at the Oscar Motel and at an associated business. That is undoubtedly true. But the continued use of items, such as pictures, chairs and beds does not invalidate the values attributed to them, or the valuation exercise undertaken by Mr Johnson or Mr Baxter.
Underlying the Carters’ approach to this part of their case is the theory that Mackey Motels was saved the expense of replacing the items. Thus, the rationale is that Mackey Motels ought to pay the replacement cost of each item. The problem with that rationale is that replacement value was never contemplated. As clause 14.5 of the Lease records, the expert valuer was to “value the Chattels based on the existing use of the Chattels in situ in the Motel and as a going concern”. The valuer was not required to allocate a replacement or insurance value to each of the chattels.
It follows that clause 14.5 was not engaged, and no valuation was conducted pursuant to the compulsory purchase process in clause 14.5. Instead, the court ordered that the parties obtain a joint expert valuation using, at least in part, some of the procedure that had been agreed in the Lease. Pursuant to that process, the evidence favours the view that the market value of the chattels left by the Carters was $27,682. There is, however, no valid claim made in these proceedings for that sum.
PART G: CONCLUSIONS
It follows that:
(a)The plaintiffs’ claims should be dismissed.
(b)The defendant is entitled to judgment on the counterclaim in the sum of $7,016.13 plus interest.
I will hear the parties on the form of the order and on costs.
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