Cihan v Border Hotels No 2 Pty Ltd

Case •

[2016] NSWSC 1592

•

11 November 2016

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: Cihan v Border Hotels No 2 Pty Ltd [2016] NSWSC 1592
Hearing dates:17-19 October 2016
Decision date: 11 November 2016
Jurisdiction:Equity
Before: White J
Decision:

1. Give judgment for the second plaintiff against the first defendant in the sum of $24,498.
2. Order that the plaintiffs’ claims against the second and third defendants be dismissed.
3. Order that the cross-claim be dismissed.

Catchwords: CONTRACT — contract for sale of business and lease of premises — contract for sale of business required payment of a substantial deposit on the making of the contract — lease required rent to be paid in advance — defendants took possession of the premises and commenced operating the business on providing post-dated cheques for the required deposit and first month’s rent — contract for sale of business not exchanged — cheques for deposit and rent not honoured when presented by the plaintiffs — defendants not entitled to rely on failure of condition for exchange — plaintiffs retook possession of the business — whether defendants entitled to damages — whether plaintiffs agreed to permit defendants to retain possession of the business on payment of a weekly sum with payment of the purchase price to be made after a year — plaintiffs agreed to a short extension of time for the required deposit to be made — defendants failed to pay deposit when required — defendants had no continuing right of possession — defendants not entitled to damages — whether plaintiffs entitled to contract measure of damages and rent — defendants repudiated the agreement by failing to pay deposit — agreement for sale and lease terminated when plaintiffs accepted defendants repudiation of the agreement by retaking possession when defendants failed to make payment of the deposit — damages to put plaintiffs in the same position as they would have been had the contract been perform not claimed nor proved — mesne profits not claimed — plaintiffs entitled to ten precent deposit and one month’s rent less amounts already received
Legislation Cited: Retail Leases Act 1994 (NSW)
Civil Procedure Act 2005 (NSW)
Cases Cited: Cihan v Border Hotels No. 2 [2015] NSWSC 297
Border Hotels No. 2 Pty Ltd v Mehmet Cihan as Trustee for the Cihan Family Trust [2015] NSWSC 273
Border Hotels No. 2 Pty Ltd v Mehmet Cihan as Trustee for the Cihan Family Trust (Court of Appeal (NSW), Ward J, 23 March 2015, unrep)
Masters v Cameron (1954) 91 CLR 353
GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631
Category:Principal judgment
Parties: Mehmet Cihan as Trustee for Cihan Family Trust (1st Plaintiff)
Cihan Family Pty Ltd (2nd Plaintiff)
Border Hotels No 2 Pty Ltd (1st Defendant)
Andrew Bezeg (2nd Defendant)
John Palasty (3rd Defendant)
Representation:

Counsel:
J Jobson (Plaintiffs)
D A Allen (Defendants)

  Solicitors:
Andresakis & Associates (Plaintiffs)
Kekatos Lawyers (Defendants)
File Number(s):2015/29699

Judgment

  1. HIS HONOUR:   This dispute concerns arrangements for the lease of a restaurant in Liverpool Street, Sydney known as Casa Asturiana. In October 2014 the first plaintiff, Mr Mehmet Cihan was the registered proprietor of the land known as 77 Liverpool Street, Sydney and the restaurant business carried on from that property. The land was held on trust for beneficiaries of the Cihan Family Trust. The second plaintiff, Cihan Family Pty Ltd replaced Mr Cihan as trustee of that trust. On 24 February 2015 it became the registered proprietor of the property. Mr Cihan was in poor health and wished to sell the restaurant business to a party that would take a lease of the premises. He negotiated the terms for the sale of the business and the taking of a lease with a Mr John Palasty, who acted on behalf of the first defendant, Border Hotels No. 2 Pty Ltd (“Border Hotels”). Border Hotels was incorporated on 17 October 2014 to be the vehicle through which the business could be acquired. Mr Palasty’s brother-in-law, Mr Andrew Bezeg, the second defendant, was appointed as the sole director and shareholder of the company. He played no role in the relevant transactions other than signing a copy of the contract for the purchase of the business to which was attached a form of lease. At the time Mr Palasty was an undischarged bankrupt and was also subject to an order prohibiting his managing corporations.

  2. Mr Cihan and Mr Palasty negotiated terms that Border Hotels would take a five-year lease with three five-year options for renewal at an initial rent of $360,000 per annum plus GST that would be subject to an annual increase of five per cent with a review to market if the options for renewal were exercised. They agreed that the price to be paid for the purchase of the business would be $550,000. The initial discussions were that vendor finance would be provided for 50 per cent of the purchase price for a period of six months. Mr Palasty told Mr Cihan that the company buying the business would be able to pay for it through finance.

  3. On 28 October 2014 Mr Andresakis, the solicitor for Mr Cihan, had forwarded to Border Hotels’ solicitor, Mr Kekatos, a draft agreement for sale. The draft agreement was sent under cover of a letter that stated:

“We enclose herewith Agreement for Sale of Business for execution by your clients. Please note that the submission of the enclosed Agreement is not to be considered an offer or acceptance of an offer to sell and that unless and until counterparts of the Agreement are formally exchanged no contractual relationship shall be deemed to exist between our respective clients.”

  1. On 13 November 2014, following further negotiations, the solicitor for Border Hotels, Mr Kekatos, wrote to the solicitor acting for Mr Cihan, Mr Andresakis, setting out his understanding of the then proposed terms. Mr Kekatos advised:

“I understand that the agreement to purchase is as follows:

Purchase price: $550,000.00

Deposit: $1

Vendor finance: $420,000.00 payable as follows:

$210,000.00 in 3 months; and

$210,000.00 in 6 months.

Bond: $90,000.00 is to be paid by 31 December 2014.

In relation to one month rent in advance, we advise that our client paid your client $13,000.00 today and the remainder of the monthly rent of $17,000.00 together with $130,000.00 will be paid in two (2) weeks.

Further, we advise that our client wishes to exchange the contracts and to take over the business tomorrow.

Please advise whether this is acceptable to your client.”

Mr Cihan did not agree to this proposal.

  1. The sum of $13,000 was paid to Mr Cihan on 13 November 2014. There is no evidence as to who was the drawer of the cheque.

  2. Mr Cihan deposed that whilst he did not initially agree with the proposal, after a while he agreed to exchange contracts on the basis that contracts would be exchanged with a deposit of $130,000 to be paid by a post-dated cheque dated 28 November 2014 and that he would receive a further post-dated cheque for $20,000 dated 28 November 2014 which would be the balance of the first month’s rent to be paid in advance.

  3. Border Hotels signed a copy of the contract for sale of business and provided it to the vendor’s solicitor.

  4. Clause 2.2 of the contract for the sale of business provided that the purchaser was required to pay the deposit on the making of the contract. The contract provided for a completion date of 30 April 2015. It provided that the price for the purchase of the business was $550,000 and that a deposit of $130,000 was payable. The purchase price was allocated as to $330,000 to goodwill, and $220,000 for equipment.

  5. The contract provided special conditions that included the following:

“11.   The Vendor and Purchaser agree that the deposit payable herein of $130,000.00 shall be paid direct to the Vendor forthwith and the Purchaser shall pay the further sum of $210,000.00 of the purchase price on or before the 30 January 2015 and the completion of this contract shall take place on or before the 30 April 2015 with the payment of the balance of purchase monies of $210,000.00 and the time for payment set out herein is time for the essence.

12.   The Vendor agrees to transfer to the registration of the Toyota Hiace BHM 89B.

13.   The sale is conditional upon the Transfer of the On-Licence (Restaurant) licence No 24003367 to the Purchaser or Purchasers employee or officer.

14.   The Vendor and Purchaser agree that from the date of exchange the Purchaser will take possession of the premises pursuant to the term of the lease annexed hereto and marked ‘A’. If the Purchaser fails to pay the balance of purchase monies as per clause 11 hereto, then the Vendor upon 7 days written notices to the Purchaser the Vendor will serve a notice terminating the agreement and the lease amended hereto and marked ‘A’ shall also be terminated and the Purchaser shall have no claim against the Vendor as either Vendor or Lessor pursuant to lease referred to herein.

15.   The Purchaser acknowledges that from the date of this contract until settlement the plant and equipment and goodwill sold herein remains the property of the Vendor and the Purchaser shall at its own expense repair and maintain such plant and equipment and insure such equipment and plant and effect such other insurances as required by the lease annexed hereto.”

  1. The lease was an annexure to the sale contract and was separately executed by Border Hotels. The lease provided for a commencement date of 17 November 2014 and was to be for a period of five years with three five-year options of renewal. Rent was to be $360,000 a year to be paid by monthly instalments in advance of $30,000 plus GST per month for the first year and afterwards with annual increases of five per cent with a review to market if the options were exercised. Clause 16 and item 19 provided that the lessee should provide a bank guarantee equivalent of three months’ rent on or before 31 December 2014, failing which the lessor would have a right to terminate the lease by giving seven days’ written notice to the lessee. Clause 17 that provided for payment of a security deposit was inapplicable. Clause 12.2 provided that:

“12.2   The lessor can enter and take possession of the property or demand possession of the property if –

12.2.1   the lessee has repudiated this lease; or

12.2.2   rent or any other money due under this lease is 14 days overdue for payment; or

…”

  1. There was no exchange of contracts for the sale of business. Nor did Mr Cihan provide to Border Hotels a copy of a lease signed by him.

  2. Border Hotels was let into possession on 21 November 2014 on the basis of its provision of two post-dated cheques: one for $130,000 and one for $20,000. The cheques were drawn on a company called AJ Cruise Building Pty Ltd (“AJ Cruise Building”). They were signed by Mr Palasty. The cheques were dated 28 November 2014. Mr Palasty deposed that Mr Cihan’s solicitor was to hold the signed contract until 28 November on which date they were to be presented by the vendor and contracts would then be exchanged.

  3. Mr Cihan contends that Mr Palasty, who acted for Border Hotels on the transaction, knew that the cheques would not be met on presentation. Mr Palasty accepted that neither Border Hotels nor AJ Cruise Building then had funds from which the cheques could be met. Mr Palasty said in substance that he had obtained approval for finance and anticipated that moneys would be available to AJ Cruise Building by 28 November so that the cheques would be honoured on presentation. For the reasons below I do not accept that evidence.

  4. Mr Palasty deposed that during negotiations Mr Cihan had told him that the restaurant turned over $1.5 million a year. He said that after Border Hotels took possession he ascertained from the computer records to which he had access that the business had not had that level of turnover. He said his application for finance on behalf of Border Hotels was on the basis of its declaring that the annual gross turnover of the restaurant was $1.5 million and he could see no good coming from revising that figure down by almost a third, being what he said was disclosed as the turnover. Mr Palasty deposed that he had a conversation with Mr Cihan in which he said to Mr Cihan words to the effect that:

“Mehmet you have not been honest with me, the books for Casa Asturiana show a turnover of only $1.074 million per annum and you said the turnover was $1.5 million, and you haven’t transferred the liquor licence and you have removed all of the stock before I took possession and we agreed that there would be $50,000 in stock.”

  1. Mr Palasty deposed that Mr Cihan said that:

“The books don’t show all the money, I didn’t record all the cash. I will transfer the license. The stock is the stock”,

and that he said to Mr Cihan:

“I am not paying $550,000 we will have to sought [sic] something out and if we don’t we are pulling out.”

  1. Mr Palasty then deposed that on 27 November 2014 he had a conversation with Mr Cihan to the following effect:

“[Palasty]   Mehmet, the companies [sic] funder has been delayed in providing the finance. Can you please not bank the cheques. I will come and see you about negotiating an [sic] new arrangement about the purchase of the Business.

[Cihan]   Okay.”

  1. This is denied by Mr Cihan.

  2. Mr Palasty did not stop payment on the cheques. They were deposited by Mr Cihan on 27 November. The bank statement for AJ Cruise Building shows that the cheques were presented on 28 November, that is, the account statement shows withdrawals of $20,000 and $130,000 from the account of AJ Cruise Building on that day. However, the withdrawals put the account into overdraft to the extent of $143,774.94 and the cheques were not honoured. Notice of dishonour was given to the plaintiffs on 1 December 2014.

  3. Mr Cihan deposed that following the dishonour of the cheques he spoke to Mr Palasty the next day, 2 December 2014. He deposed as follows:

“[Cihan]   John your cheques have bounced. You have to get out of the restaurant.

[Palasty]   Sorry Mehmet I am having problems with the finance it won’t be long. I will pay you $10,000.00 per week until 29 December 2014. On 29 December 2014 I will be able to pay you the remainder of the $130,000.00 and the $90,000.00 bond.”

  1. In cross-examination Mr Cihan admitted that Mr Palasty came to see him at Auburn in November 2014 after he had come to learn that the cheques had been dishonoured. Although he admitted in cross-examination that this was a day in November, Mr Cihan was sometimes confused about dates. If the meeting was after the cheques were dishonoured it must have occurred sometime after 1 December. On that day Mr Palasty paid $10,000 in cash to Mr Cihan. In cross-examination Mr Cihan said that there was a conversation primarily about payment of $150,000 but there was no conversation or talk about the bond.

  2. Otherwise Mr Cihan adhered to his evidence that he agreed to Mr Palasty remaining in possession of the restaurant on the basis that he would be paid $10,000 per week until 29 December 2014 and that by that day he would be paid the remainder of the $130,000 deposit. In cross-examination he said that the conversation was about payment of the $150,000, that is, the $130,000 deposit and the additional $20,000 for rent, rather than payment of a $90,000 bond.

  3. As noted above, the lease did not provide for payment of a $90,000 bond, as distinct from provision of a bank guarantee for $90,000 by 31 December 2014.

  4. Mr Palasty’s evidence was that on 30 November he and Mr Cihan negotiated quite different terms. He said that on 30 November 2014 he had a conversation with Mr Cihan to the following effect:

“23. …

[Palasty]   Mehmet, the company has had issues with raising the funds, because you said the turnover was $1.5 when the books say it was only $1.074, I won[‘]t get funding on that turnover when I have said to the financier that the turnover was $1.5. If you said to me straight up it was $1.074 with cash on top we could have worked out a different arrangement. I cannot because of you not recording a turnover of $1.5 in your books pay you $150,000.00 up front. We have been in the Business for about a week, in a business different to what you promised. What we can do is pay you $10,000.00 per week. That amount will represent the rent of $6,500.00 per week and $3,500.00 towards the purchase price. We can pay the $10,000.00 every week until the purchase price of $550,000.00 is paid. This will be the only change to our agreement. If we don’t come to an agreement about payment we can’t complete the agreement.

[Cihan]   John, I am not happy with that.

[Palasty]   What if we pay you $10,000.00 per week for 1 year and then I pay you the balance of the purchase price. Remember you were not upfront about the turnover, we did not get $50,000.00 worth of stock and we haven’t got the liquor license yet.

[Cihan]   I am not happy. I don’t want to take the Business back, let’s meet tomorrow at Auburn and bring the money with you. If you give me $10,000.00 today and every week after that I will accept the deal.

[Palasty]   On the same basis as we have previously agreed, and you need to sign the liquor licence application.

[Cihan]   If you come with the money we have a deal.

24.   I then drove to the Suncorp Bank branch at Parramatta and withdrew $10,000.00 in cash. I drove back to the respondent at Auburn and gave him the $10,000.00.

[Palasty]   If we have a deal, $10,000 per week until the purchase price is paid off, I have $10,000 to give you.

[Cihan]   Yes we have a deal, give me the money.

I then gave the respondent the money.”

  1. Mr Palasty said that he made further payments of $10,000 on 1 December, $13,000 on 7 December, $10,000 on 14 December and a further $10,000 on 21 December. He said that on Christmas Day he asked Mr Cihan to acknowledge in writing the payments that were made to him. There is no doubt that Mr Cihan signed a document that was prepared by Mr Palasty. It is undated. The document stated that Mr Cihan confirmed having received the sum of $53,000 cash “in terms of our agreement.” There was then a list of figures as follows:

“$13,000 cheque

$10,000

$13,000

$10,000

$10,000

$10,000”

  1. Against those words Mr Palasty wrote “so far”.

  2. Mr Cihan said that he received a second $13,000 payment by cheque, not by cash, and that in total he received four payments in cash, each of $10,000 making a total of $66,000. Mr Palasty said that he paid $10,000 in cash to Mr Cihan on 30 November at a meeting in Auburn at which the alleged agreement upon which Mr Palasty relies was said to have been made, and that between 1 December and 21 December he made three further payments of cash of $10,000 each and a payment of $13,000.

  3. Mr Cihan said that the arrangement he had with Mr Palasty was that he would be paid $10,000 per week to extend the date for payment of the deposit of $130,000 to 29 December 2014. He says that on 28 December he telephoned Mr Palasty to remind him of his obligation to pay by the following day and that Mr Palasty said to him, “Mehmet, I need to talk to you about this. The company won’t be able to pay the money I said it would.” He responded by saying “I’m coming down to the shop now. I want my money or the shop back.” Mr Cihan deposed that he went to the shop and argued with Mr Palasty who offered to pay him $10,000 per week, but he refused the offer. He left the shop and the next day arranged for a locksmith and security guards to attend the premises, that is on 30 December 2014.

  4. Mr Palasty’s version of these events was as follows:

“31   On 28 December 2014, I had a telephone conversation with respondent consisting of words in or to the following effect:

[Cihan]   John, I want you to pay me the bond of $90,000.00 and the deposit of $130,000.00 by tomorrow otherwise I and [sic] coming down there with security guards to lock you out.

[Palasty]   That is not what our agreement is.

[Cihan]   I don’t care. I want my money now. I am coming there tomorrow.

32   On 29 December 2014, the respondent attended the Premises and we had a conversation consisting of words in or to the following effect:

[Cihan]   Give me the keys now.

[Palasty]   Mehmet, what are you saying we have an agreement. You agreed that if we continued to pay you $10,000.00 a week we could remain in occupation.

[Cihan]   I don’t care about the agreement. I want the 2 cheques for $220,000.00. I will be back in the morning to get the cheques or the keys. I don’t care what you say or do.

33   On 30 December 2014, I had a conversation with the respondent consisting of words in or to the following effect:

[Palasty]   Mehmet, I want you to honour your agreement with us. We will pay another payment of $10,000.00 today. I get it delivered to you with the liquor licence application which you have to sign. Can you sign the application so I can transfer the licence.

[Cihan]   Okay, get them delivered. I will sign the application and I will wait until my lawyer gets back from holidays on the 15 January.

[Palasty]   Okay.

[Cihan]   And also, I want the Toyota van back. I will take $50,000 from the purchase price for it back.

[Palasty]   Okay, I your nephew Janeet will deliver it to you.

34   I then arranged for the liquor licence, $10,000.00 in cash and the Van to be delivered to the respondent.”

  1. Mr Cihan made an affidavit in which he denied the contents of paragraphs 32, 33 and 34.

  2. Mr Cihan locked Border Hotels and Mr Palasty out of the restaurant on 29 December 2014.

  3. In cross-examination Mr Cihan admitted that at some time prior to 31 December, a man called Janeet brought the keys to the Toyota van to him. He said that that happened either on the day Mr Palasty was locked out of the restaurant or the following day. Mr Cihan denied that this happened as the result of a conversation he had had with Mr Palasty in which, as Mr Palasty deposed to, Mr Palasty told him that he wanted Mr Cihan to honour their agreement and would pay another $10,000 that day and in response that Mr Cihan said he wanted the Toyota van back and would deduct $50,000 from the purchase price for it to come back. He said that the reason he got the keys back to the van was that after talking face-to-face with Mr Palasty on 28 and 29 December, he asked Janeet to bring the van back and he did so. Mr Cihan admitted that Janeet also gave Mr Cihan $10,000 that he accepted must have come from Mr Palasty. But he denied that he had a conversation with Mr Palasty whereby Mr Palasty told him he would pay another $10,000 if he, Mr Cihan, honoured their agreement. He said that the payment received through Janeet was totally unexpected.

  4. On 31 December 2014 Mr Palasty swore an affidavit in the NSW Civil and Administrative Tribunal (“NCAT”) and on the same day the Tribunal made an order that:

“The respondent [that is, Mr Cihan] is restrained from locking the applicant [that is, Border Hotels] out of the premises and is to permit the applicant to operate the business until further order of the Tribunal subject to the applicant paying the respondent the sum of $10,000.00 per week.”

  1. The order was made ex parte and without requiring an undertaking as to damages.

  2. Border Hotels resumed possession of the restaurant immediately following the making of that order.

  3. After the order was made by NCAT requiring possession to be delivered back to Border Hotels the proceedings in the Tribunal were transferred to the Supreme Court.

  4. On 18 March 2015 McDougall J sitting as Duty Judge discharged the injunction on the ground that Border Hotels had failed to comply with the Tribunal’s condition that until further order it pay $10,000 per week. McDougall J said that it appeared to be either common ground, or accepted for the purposes of the hearing on that day, and in any event his Honour found, that since 31 December 2014 up until 18 March 2015 Border Hotels should have paid $110,000, but in fact paid only $75,000. Nor were those payments made regularly in accordance with the condition attached to the Tribunal’s order. McDougall J noted that barring any further intervention by the Court, the likelihood was that Mr Cihan would retake possession. But his Honour noted that that would not bring an end to Border Hotels’ legal rights and it would be left to its right to damages if it was correct in saying that the agreement had been varied (Cihan v Border Hotels No. 2 [2015] NSWSC 297).

  5. On the following day Border Hotels made an application to me sitting as Duty Judge for an interlocutory injunction to restrain Mr Cihan until further order from interfering with its quiet enjoyment of the leased premises or with its occupation of the restaurant business. I refused that application essentially on two grounds. The first was that it sought in substance to re-ventilate the issue that could have arisen and in my view did arise on the hearing before McDougall J, and secondly on the ground that in any event I was not satisfied with the proffered undertaking as to damages. I ordered that Border Hotels’ claim for interlocutory relief in the summons be dismissed with costs. I nonetheless granted an interlocutory injunction to preserve the position pending an application for leave to appeal from my orders and the orders of McDougall J of 18 March (Border Hotels No. 2 Pty Ltd v Mehmet Cihan as Trustee for the Cihan Family Trust [2015] NSWSC 273).

  6. I ordered that Mr Cihan be restrained up to and including 24 March 2015 from interfering with Border Hotels’ occupation and quiet enjoyment of the leased premises or otherwise interfering with its conduct of the business known as Casa Asturiana.

  7. On 23 March 2015 Ward JA dismissed Border Hotels’ application for extension of that interlocutory injunction (Border Hotels No. 2 Pty Ltd v Mehmet Cihan as Trustee for the Cihan Family Trust (Court of Appeal (NSW), Ward J, 23 March 2015, unrep). Ward JA did not discharge the injunction I granted on 19 March for the purpose of holding the position until an application could be made to the Court of Appeal. Accordingly, that order continued in operation up to midnight on 24 March 2015.

  8. According to Mr Cihan’s oral evidence in cross-examination, although inconsistently with his affidavit, he retook possession at 7am on 24 March. He contends that Border Hotels had abandoned the restaurant. Plainly Border Hotels maintained that it was entitled to possession of the restaurant, but its attempt to obtain interlocutory relief to preserve its possession failed because it did not meet the conditions upon which interlocutory relief had been provided by the Tribunal. It was not in a position further to resist Mr Cihan’s attempt to retake possession.

The Parties’ Claims

  1. As set out above, the contract that was signed by Mr Bezeg for Border Hotels and delivered to Mr Andresakis provided for payment of a deposit of $130,000. But Mr Cihan accepted payment of the deposit and the balance of the first month’s rent (being $20,000, $13,000 having been paid on 13 November 2014) by two post-dated cheques.

  2. The plaintiffs argued that in this case the parties had completely agreed upon all of the terms of their bargain, but made performance of the terms conditional upon the two cheques being met on presentation. They argued that this case is analogous to the second category of case described in Masters v Cameron (1954) 91 CLR 353 at 360 where Dixon CJ, McTiernan and Kitto JJ said:

“Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.”

  1. In respect of the second case their Honours said that in such a case there is a binding contract requiring the parties to join in bringing the formal contract into existence and then to carry it into execution.

  2. The plaintiffs argued that in the present case there was a binding contract requiring Border Hotels to provide two cheques that would be honoured on presentation, following which Mr Cihan was bound to deliver his executed copy of the contract to complete the exchange. They argued that the condition that the cheques be met on completion was to be taken to have been satisfied where it was through the purchaser’s default that the condition was not fulfilled (GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 at 637).

  3. The plaintiffs sought damages for breach of the contract described simply as:

“a.    Loss of contractual amount

b.    Loss of lease payments.”

  1. The plaintiffs made an alternative claim that Border Hotels engaged in false or misleading conduct in breach of the Australian Consumer Law and the Retail Leases Act 1994 (NSW) by, first, inducing Mr Cihan to allow it to take possession of the premises, knowing that the cheques would not be met, by impliedly representing that if possession of the premises were given to it, it would be in a position to meet its financial obligations and, secondly, by inducing Mr Cihan to agree to an oral variation alleged by Mr Cihan in circumstances where Border Hotels through Mr Palasty knew it could not meet the terms of the contract.

  2. A claim against the second defendant Mr Bezeg was abandoned in the course of opening. A further claim was made against Mr Palasty on the basis that he engaged in the false or misleading conduct alleged against Border Hotels.

  3. The loss claimed as a result of the alleged false or misleading conduct was described as loss of the purchase price and loss of rental income. This was a contractual measure of damage. The plaintiffs did not attempt to lead any evidence that they suffered loss as a result of being induced to enter into the arrangements that were made with Border Hotels. This would have required a comparison between the position they would have been in had the agreement not been made and its position as it in fact was under which it received either $66,000 or $76,000 up to 30 December 2014 and various payments, found by McDougall J to be $73,000, thereafter. Measured on this basis the plaintiffs did not show a loss as a result of the alleged misleading or deceptive conduct. In final submissions a claim for damages for misleading or deceptive conduct was not pressed.

  4. For its part Border Hotels claimed damages for breach of the agreement alleged by Mr Palasty. Border Hotels was let into possession under an agreement pursuant to which it would pay rent for the occupation of the premises as well as the purchase price for the acquisition of the restaurant business. This was a retail shop lease within the meaning of the definition of that expression in s 3 of the Retail Leases Act. It was enforceable notwithstanding the absence of writing and was taken to be for a term not less than five years (Retail Leases Act, ss 3 (definition of retail shop lease), 8 and 16(1)). Border Hotels claims damages for the loss of profits it says it suffered as a result of the early termination of the lease. On 28 August 2015 Robb J ordered that if it were determined that Border Hotels was entitled to damages as claimed in the cross-claim, the amount payable as damages be referred to a referee. (No order was made for the separate hearing of quantification of the plaintiffs’ claim for damages.)

Border Hotels’ Cross-Claim

  1. It is convenient to deal first with Border Hotels’ cross-claim. The first issue is whether an agreement was made as deposed to by Mr Palasty on or about 30 November 2014 that Border Hotels could have possession of the premises upon paying $10,000 per week, being $6,500 rent and $3,500 towards the purchase price, with the balance of the purchase price to be paid after one year.

  2. There were no witnesses to the discussions between Mr Cihan and Mr Palasty. Mr Cihan gave evidence through an interpreter. That can pose particular difficulties in assessing a witness’ credit based upon their demeanour in the witness box. There was nothing about Mr Palasty’s demeanour in the witness box which would affect an assessment of his credit.

  3. There are matters that adversely affect the credit of both witnesses.

  4. In the case of Mr Cihan, as noted above, there were discrepancies between his oral evidence and his affidavit evidence in relation to the detail of the arrangement he said had been made with Mr Palasty as to what sum was to be payable on 29 December. In his affidavit Mr Cihan said that the $130,000 deposit and a $90,000 bond was to be paid by 29 December. This was notwithstanding that the lease provided for the provision not of a bond but a bank guarantee and provided that the bank guarantee was required to be provided by 31 December. In oral evidence, Mr Cihan resiled from his affidavit evidence that there had been discussion about a bond, but he said that he agreed to accept payment of the deposit and the balance of the first month’s rent, a sum of $150,000, by 29 December.

  5. A second matter affecting Mr Cihan’s credit is that in an affidavit sworn on 30 January 2015 he deposed that since 23 December 2014 he had received only two payments, namely payments of $10,000 made on 13 and 28 January 2015. In cross-examination Mr Cihan agreed that he had also received $10,000 from “Janeet” on 29 or 30 December 2014 that must have come from Mr Palasty.

  6. Mr Allen, who appeared for the defendants, also submitted that Mr Cihan’s credit was adversely affected by the fact that he banked the two cheques dated 28 November on 27 November and retook possession of the premises on 24 March 2015 when there was an order restraining his retaking possession until after 24 March.

  7. I do not think there is anything in the former complaint. Mr Cihan was entitled to deposit the cheques with his bank in the expectation that they would be presented for payment the following day, as it appears they were.

  8. The question of the date upon which Mr Cihan retook possession of the premises is somewhat confused. The plaintiffs alleged that Border Hotels abandoned the tenancy on or about 23 March 2015. For the reasons I have given that contention cannot be maintained. Border Hotels pleaded that Mr Cihan took possession of the restaurant and excluded Border Hotels from it on 25 March 2015. This was consistent with Mr Cihan’s affidavit of 29 February 2016 in which he deposed that the first time he became aware of the vacation of the premises by Border Hotels was on 25 March 2015. His evidence was that when he retook possession Mr Palasty had abandoned the restaurant. Thus his initial position was that he retook possession on 25 March, which was the date on which Border Hotels alleged that possession was retaken. This would have been in accordance with my order.

  9. In oral evidence Mr Cihan said that he acted on his solicitor’s advice in taking possession on the morning of 24 March. He said in answer to a question I asked that the reason he recalled the date as being 24 March was that it was the day after the matter was dealt with in the Court of Appeal. Notwithstanding his oral evidence in cross-examination, I think it quite unlikely that having taken legal advice, possession was retaken on 24 March. I think it more likely that possession was retaken on the date that Border Hotels alleged, namely 25 March. I think this evidence is indicative of a lack of precision on the part of Mr Cihan that affects the reliability of his recollection of events so far as the precise details of those events is concerned, but I do not think it otherwise affects his credit.

  10. In the case of Mr Palasty, there are issues concerning his honesty in the transaction. Mr Palasty admitted that at the time he swore his affidavits, that is, on 31 December 2014, 23 January 2015 and 17 March 2015, he was aware that he was unable to act as a manager of a corporation. I upheld an objection to further questions on that matter on the ground of privilege against self-incrimination and did not require the question to be answered subject to a certificate being given under the section. However, Mr Palasty was acting at least as manager of Border Hotels. He admitted to being aware that he could not do so. This is adverse to his credit.

  11. More significant for present purposes is his providing the two post-dated cheques. I do not accept his evidence that he expected the cheques to be able to be met on presentation. Mr Palasty said that “we had finance prepared to go and we were about to take up the offer that was given to us and it fell through at the last minute”. He said that the reason the application for finance fell through was that the application was premised upon the restaurant business having a turnover of $1.5 million and that when, after taking possession, he ascertained that the books did not show that level of revenue, he could not proceed with the application for finance. Mr Palasty provided no details. He did not say with whom the finance had been arranged. He did not produce the application for finance or the terms of the approval. He said that in the middle of 2015 his computer was subject to a malware attack where a ransom was demanded for him to obtain his documents. He suggested that this was the reason that no such evidence was available.

  12. Initially Mr Palasty was unclear as to who made the application for finance. First he said it was Border Hotels, then that it was AJ Cruise Building. He said that Border Hotels was at the same time developing a residential block in Woody Point in Queensland and that “they were going to cross-collateralise the two assets” and that $1 million was going into the Queensland development, and $500,000 would be provided towards the purchase of the restaurant. He gave no such evidence in his affidavits. He could not identify the name of a lender, nor that of the mortgage broker whom he said was used. He said that he did not ask Mr Bezeg to provide him with the name of the mortgage broker. Contrary to his earlier evidence, he said that it was Border Hotels rather than AJ Cruise Building that was granted the loan approval. In re-examination Mr Palasty was asked whether the approval obtained in 2014 was conditional or unconditional and said:

“It was unconditional other than ‑ sorry, it was ‑ it was conditional on having an income of $1.5 million and it was conditional on payment of the ‑ of fees ‑ commencement ‑ you know, the application fees to start ‑ to take the loan ‑ the brokerage fees.  And the valuation as well.”

  1. In answer to questions I then asked, Mr Palasty first denied that the loan approval was conditional on obtaining satisfactory valuations, but then said that the purpose of the valuations was “to check out what the value of the real estate is in Queensland”. The valuations were not obtained. Mr Palasty said that that was because “we couldn’t proceed with it because we just couldn’t get the income right – the 1.5”. He said that the loan could not have been drawn down before valuations were received, but that valuations could have been received in two to three days of instructions being given.

  2. It was common ground that at this time Mr Palasty was also an undischarged bankrupt. Mr Cihan said that Mr Palasty told him as much and that that was the reason the business was being bought by a company of which his brother-in-law was the shareholder and director.

  3. In the absence of any corroborative evidence that a lender had agreed to provide finance to AJ Cruise Building or Border Hotels that would enable the post-dated cheques to be honoured, I do not accept that any such arrangements had been made. Mr Palasty’s own evidence suggests that if any approval for finance had been given it was highly conditional; both on the payment of fees and the obtaining of satisfactory valuations of some properties in Queensland, and that no such valuations had been obtained. In the absence of any corroborative evidence, I cannot accept that it is probable that a lender, who has not been identified, had agreed to provide finance under any conditions that could be expected to have been met, irrespective of the turnover of the restaurant business, to a company managed by an undischarged bankrupt who was disqualified from managing a company.

  1. The evidence as to any representation about the turnover of the restaurant business was unclear. In his affidavit of 31 December 2014 filed in NCAT Mr Palasty made no reference to any alleged misrepresentation as to turnover. However, that affidavit was prepared in circumstances of great urgency which could explain the omission of any such reference. In his affidavit of 23 January 2015, also filed in the Tribunal, Mr Palasty gave the evidence quoted at paras [23] and [28] above.

  2. Mr Palasty deposed that during negotiations in October 2014 Mr Cihan told him that the restaurant turned over $1.5 million a year. Mr Cihan denied this. I am not satisfied that a representation to that effect was made. Mr Palasty also deposed to having seen an advertisement for the sale of a business for a price of $550,000 with a stated turnover of $1.5 million per annum. No such advertisement was produced. Mr Palasty deposed that he had seen that advertisement in late September 2014. He produced an advertisement that I accept relates to the restaurant business in question that he said he first saw on 23 or 24 November 2014. That was an advertisement for the sale of the restaurant business for a price of “$400,000 plus SAV” (stock at valuation) based on a turnover of $1.3 million.

  3. Border Hotels does not complain that it was induced to enter into the purchase of the business in reliance on any representation as to turnover. But it does say that the circumstances of the representation provide the context for the agreement it says was made on 30 November 2014. I accept that it is likely that Mr Palasty saw an advertisement for the restaurant business that contained a representation as to turnover. Whether the representation of turnover was $1.5 million or $1.3 million, any such representation would have been substantially in excess of the turnover of the restaurant at the time. I think it likely that Mr Palasty would have used that fact to seek to exact further terms from Mr Cihan as a lever in the negotiations. But the availability of that lever does not make one version of the conversation that took place either on 30 November (according to Mr Palasty) or 2 December (according to Mr Cihan) more probable.

  4. Contrary to Mr Palasty’s denial, I accept Mr Cihan’s evidence that Mr Palasty was given a trial period in the restaurant to observe how the restaurant worked and to see its actual takings. Mr Palasty said that he had not had access to the books of the restaurant business before possession was formally taken on 20 November 2014. I think it unlikely that the signed contract would have been provided on 20 November 2014 and cheques drawn if there had not been such a trial period.

  5. Mr Cihan wanted to sell the restaurant business. He was then in poor health. His son had withdrawn from day-to-day management of the restaurant business. Mr Cihan had rejected Border Hotels’ earlier proposal to exchange contracts on the basis of a nominal deposit of $1 with the deposit of $130,000 to be paid in two weeks and the balance of the purchase price of $420,000 to be paid in three months and then six months (para [3] above). Nonetheless, he had agreed to the payment of the deposit of $130,000 by a post-dated cheque to be paid eight days after letting Border Hotels into possession. Faced with the dishonour of the cheques, I do not think it probable that Mr Cihan would have been content with Mr Palasty’s promise to pay $10,000 per week and then to pay the balance of the purchase price after a year. I think it more probable that, faced with the choice of terminating possession immediately or allowing Mr Palasty further time, he would have allowed a further period for payment of the deposit and rent. This would be broadly consistent with Border Hotels’ proposal of 13 November 2014 that indicates that both parties expected that the very substantial deposit of $130,000 would have to be made within at least a few weeks of Border Hotels’ taking possession. I do not think that Mr Cihan would have taken Mr Palasty’s complaint about turnover seriously. Mr Palasty did not say that he relied upon any representation about turnover on entering into the agreement for the purchase of the restaurant business. It would have been clear to Mr Cihan that he did not. Indeed, the only advertisement that Mr Palasty has identified was one that he did not locate until after 20 November. In all the circumstances I think it more probable that Mr Cihan would have given Mr Palasty an extension of time to pay the agreed sums of $130,000 and $20,000 rather than that he would have agreed to the extended terms to which Mr Palasty deposed.

  6. Although I have reservations about the credit of both Mr Cihan and Mr Palasty, my reservations in relation to Mr Palasty are substantially stronger.

  7. For these reasons I do not accept that there was an agreement to the effect to which Mr Palasty deposed.

  8. Mr Allen for Border Hotels submitted that there was an alternative basis upon which Border Hotels was entitled to the relief it claimed, namely, that on 30 December 2014 an agreement was made between Mr Palasty and Mr Cihan that on Border Hotels’ paying another $10,000 and delivering back the Toyota van with a reduction of purchase price of $50,000, Border Hotels would be able to continue in occupation of the premises on the terms Mr Palasty said had been agreed. Mr Allen submitted that that agreement had been made by Mr Cihan’s accepting the return of the vehicle and accepting the payment of $10,000.

  9. This claim was not pleaded, but I think it should nonetheless be entertained. The issue was litigated. Mr Allen submitted that at this point the parties had renegotiated their position and that there was either a variation of the existing arrangement or a new contract was entered into. I do not accept this submission. Although Mr Cihan accepted the payment of $10,000, I do not accept that he did so as an acceptance of any statement made to him by Mr Palasty that the payment would be made “to honour your agreement with us”. I accept Mr Cihan’s evidence that through “Janeet” he received back the keys to the Toyota van. Mr Cihan accepted the $10,000 that Janeet gave, which obviously had been obtained from Mr Palasty, not as consideration for any new agreement or as a part-payment under the agreement that Mr Palasty asserts, but rather as part of the deposit that was due to have been paid on 29 December that was outstanding.

  10. I conclude that Mr Palasty did not pay the moneys because Mr Cihan had agreed to accept a further payment of $10,000 to adhere to the agreement that Mr Palasty alleges, but paid the moneys either in the hope of negotiating a further extension or simply in the hope that the payment would strengthen his legal position. It may have done so in the short run. It may have been one of the reasons that the Tribunal granted the injunction that it did. In his affidavit before the Tribunal Mr Palasty swore that he had made payments totalling $66,000, including the last payment on 30 December.

  11. However, the payment does not materially improve Border Hotels’ position. Border Hotels failed to meet the condition upon which Mr Cihan had agreed to be bound by the agreement for sale and lease contained in the document that his solicitor had drafted and had been signed by Mr Bezeg for Border Hotels. Border Hotels had no continued right of possession.

  12. In its cross-claim Border Hotels claimed that when Cihan Family Pty Ltd (which had become the registered proprietor of the property on 24 February 2015 and had replaced Mr Cihan as trustee of the Cihan Family Trust) retook possession on 25 March 2015 it and Mr Cihan thereafter converted various goods owned by Border Hotels in operating the restaurant. This was said to include food, alcohol, chairs, other furniture and restaurant equipment. Mr Cihan and Cihan Family Pty Ltd contended that Border Hotels had abandoned the premises and stripped it. Mr Palasty did not give evidence that any chattels of Border Hotels had been converted. This claim was not pressed in final submissions.

  13. Accordingly, the cross-claim should be dismissed.

Plaintiffs’ Claim

  1. As noted above, the plaintiffs contended that an agreement in terms of the written agreement signed for Border Hotels came into existence. In their pleading the plaintiffs claimed to be entitled to the “contractual amount” and to rent. However, if the agreement for the sale of business came into existence and there was an agreement for lease in terms of the lease signed by the director of Border Hotels, the agreement for sale and for lease was terminated when the plaintiffs accepted Border Hotels’ repudiation of the agreement when Mr Palasty told Mr Cihan that the balance of the deposit and rent would not be paid on 29 December and Mr Cihan then entered into possession. The plaintiffs would then have been entitled to damages to put them in the same position as they would have been in had the contract been performed. But no such damages were claimed and none was proved.

  2. The contract for sale of business provided that in the event of the purchaser’s default, the vendor was entitled to keep or recover the deposit to a maximum of 10 per cent of the purchase price. Mr Jobson, who appeared for the plaintiffs, submitted that the plaintiffs were thus entitled to retain $55,000 as the deposit. He submitted that the plaintiffs were also entitled to rent up to the time the plaintiffs retook possession on 24 (or 25) March 2015. Under the agreement for lease rent was payable in advance. Five months’ rent would have fallen due by 25 March for a sum of $165,000. On this basis the plaintiffs would have been entitled to $220,000 less the moneys paid to it, although no such calculation was provided and the amount claimed in final submissions was substantially less than this.

  3. Accepting that an agreement for lease had come into existence in terms of the written documents, it does not follow that the plaintiff is entitled to this sum. The plaintiff terminated the agreement when it re-entered on 30 December for Border Hotels’ failure to comply with its obligation to pay the first month’s rent and deposit. Thereafter, it would have been entitled to mesne profits until the time it took repossession. It made no claim for mesne profits and there was no evidence to support such a claim, except as might be inferred from the terms of the agreement for payment of rent in the lease.

  4. As a result of the conversation between Mr Cihan and Mr Palasty on 2 December 2014 Border Hotels was required to pay $10,000 per week and the balance of the deposit and the first month’s rent by 29 December. On payment of those sums Mr Cihan was required to deliver an executed copy of the contract for the sale of business and an executed copy of the lease. I accept Mr Jobson’s submission that Border Hotels cannot rely on the non-fulfilment of the condition that it pay the balance of the deposit by 29 December 2016. On termination of the agreement on 30 December Mr Cihan was entitled to retain 10 per cent of the deposit, that is, $55,000. However, I think he was entitled only to one month’s rent ($33,000). In the conversation on 2 December Mr Cihan must have agreed to defer payment of the second month’s rent which would otherwise have fallen due on 20 December.

  5. There is a dispute as to whether Border Hotels had paid $66,000 or $76,000 by 30 December. In his affidavit of that date, Mr Palasty said that $66,000 had been paid, including the $10,000 paid on 30 December. In his affidavit of 23 January 2015 Mr Palasty also deposed to having paid $53,000 between 1 December and 30 December. This, together with the earlier payment of $13,000 in November, also equalled $66,000. This is what Mr Cihan said had been paid.

  6. Mr Cihan is entitled to recover the difference between that sum and $88,000, being the 10 per cent deposit and one month’s rent.

  7. As noted above, no claim was made for damages for loss of bargain. Nor was there any evidence to support any such claim.

  8. Border Hotels is not entitled to a set-off of the amounts it paid between 4 January and 25 March 2015 against its liability for debt. It was required to pay $10,000 per week as a condition of the injunction granted by the Tribunal. It did not pay all that it was required to pay. In effect, $10,000 per week was a price it was required to pay for retaking possession. No credit was claimed for these payments against the plaintiffs’ claim for the “contractual amount”.

  9. As noted earlier in these reasons, the claim against the second defendant, Mr Bezeg, was not pressed. Judgment was sought against Mr Palasty by reason of his having engaged in misleading or deceptive conduct. As noted earlier in these reasons, that claim was ultimately not pressed. No damages were established.

  10. Mr Cihan’s rights against Border Hotels are now vested in Cihan Family Pty Ltd which succeeded to him as trustee of the Cihan Family Trust. His chose in action was trust property and is vested in the second plaintiff, Cihan Family Pty Ltd.

  11. I conclude that the second plaintiff is entitled to judgment against the first defendant in the sum of $22,000. The second plaintiff is entitled to interest on that sum at the rates prescribed for the purposes of s 100 of the Civil Procedure Act 2005 (NSW) from 31 December 2014 to the date of judgment. That interest totals $2,498.

  12. For these reasons I give judgment for the second plaintiff against the first defendant in the sum of $24,498. I order that the plaintiffs’ claims against the second and third defendants be dismissed. I order that the cross-claim be dismissed. I will hear the parties on costs. It was common ground that a banning order was in force at relevant times that prohibited Mr Palasty from managing a company. I will also hear from counsel for Mr Palasty as to whether the papers should be referred to the Australian Securities and Investments Commission so that it can consider whether proceedings should be brought in relation to the apparent contravention of the banning order.

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Decision last updated: 11 November 2016

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