Elike Pty Limited v Tony Elias
[2008] NSWDC 329
•1 December 2008
CITATION: Elike Pty Limited v Tony Elias & Ors [2008] NSWDC 329 HEARING DATE(S): 24/11/08 - 27/11/08 and 1/12/08
JUDGMENT DATE:
1 December 2008JURISDICTION:
CivilJUDGMENT OF: Rolfe DCJ DECISION: See paragraphs 62-66 of Judgment CATCHWORDS: Agreement for lease of unit - Term requiring creation of exclusive use by-law for use of outdoor area as coffee shop - Consideration of whether term was warranty only - Aspects of termination - Claims for reliance damages and expectation losses. LEGISLATION CITED: Strata Schemes (Freehold Development) Act 1973
Strata Schemes Management Act 1996
Civil Procedure Act 2005CASES CITED: North Wind Pty Ltd v Proprietors SP 3143 (1982) 2 NSW LR 809
White v Betalli (2006) NSW SC 537
Luna Park (NSW) Limited v Tramways Advertising Pty Limited (1938) 61 CLR 286
Sargent v ASL Development (1974) 131 CLR 634
Immer (No. 145) Pty Limited v Uniting Church of Australia Property Trust (NSW) (1993) 182 CLR 2
The Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64PARTIES: Elike Pty Limited (Plaintiff)
Tony Elias (1st Defendant) & OrsFILE NUMBER(S): 4712/06 COUNSEL: S Climpson (Plaintiff)
B Debuse (Defendants)
JUDGMENT
1 These proceedings arise out of a lease entered into between the plaintiff as lessee and the defendants as lessor commencing on 2 June 2003 for a term of five years with an option to renew for a further term of five years. The lease can be found at page 110 of Volume 1 of the Plaintiff’s tender bundle (exhibit A).
2 The defendants as lessors were the registered owners of the property known as Unit 3, 54 Glen Street, Belrose, New South Wales. The unit was part of a mixed commercial and residential development, a picture of which can be found at A 66. As the picture discloses, the development consisted of three commercial units and ten residential units.
3 It is the plaintiff’s case that it was an essential term of the lease that upon or following the first general meeting that was to be held by the entity that owned the common property adjacent to unit 3, namely, the Owners Corporation, that a resolution would be passed in the form of an exclusive by-law granting the defendants exclusive use of 36 square metres of common property being an outdoor area immediately adjacent to unit 3. The plaintiff’s case is that such a by-law would enure for the plaintiff’s benefit
4 The plaintiff relies on the clause which is item 26 in annexure A of the lease (A 115) as follows:
The Lessor warrants that upon the first general meeting of the Owners Corporation, a resolution will be passed to grant exclusive use of 36 square metres of the common property area outside of Lot 13 as per the attached diagram. However until the first annual general meeting, and until the resolution is passed granting the exclusive use to lot 13, th Lessor will arrange with the Owners Corporation for a temporary licence for the exclusive use of the area specified in the attached diagram, and the Lessee warrants that this area will only be used for the use of placing outdoor seating and tables for its customers.”“Item 26
5 Relying on clause 26, the plaintiff’s case is that it was also an essential term that until the first general meeting of the Owners Corporation occurred the defendants would arrange with the Owners Corporation for a temporary license for the exclusive use by the plaintiff of the outdoor area.
6 In considering the nature of an exclusive use by-law it is useful to refer to the relevant strata legislation which confers the right on the Owners Corporation to make such by-laws.
7 S 17 of the Strata Schemes (Freehold Development) Act 1973 provides that common property vests in the Owners Corporation upon the registration of the strata plan. S 20 provides that the estate or interest of a body corporate in common property vested in it or acquired by it shall be held by the body corporate as agent for the proprietors as tenants in common in shares proportional to the unit entitlements of their respective lots.
8 S 52 of the Strata Schemes Management Act 1996 provides that an Owners Corporation may make by-laws to which Div 40 Part 5 of Chapter 2 applies if certain conditions are satisfied. Such by-laws are made at meetings of the Owners Corporation.
9 Rights of exclusive use created under an exclusive use by-law have contractual effect and may be enforced in the ordinary way: North Wind Pty Ltd v Proprietors SP 3143 (1982) 2 NSWLR 809. They may also be proprietary in nature, depending on the circumstances: White v Betalli (2006) NSW SC 537.
10 S 55 (1) of the Strata Schemes Management Act 1996 makes it clear that an exclusive use by-law whilst in force continues to operate for the benefit of and is binding on the owners for the time being of the lot or lots specified in the by-law. S 51 of the same Act contemplates by-laws can confer rights of exclusive use and enjoyment of the whole or any specified part of common property.
11 Taking into account the above statutory provisions, I am satisfied that the essential terms relied on by the plaintiff have been made out for the following reasons. First of all, it is clear from item 25 of the preceding deed of agreement to lease entered into between the plaintiff and the defendants (A 46) that the defendants would register an exclusive use by-law for the outdoor area. The area in item 25 being referred to as “hatched” coincides with the diagram attached to the lease itself as well as the area identified at A 73, 77 and 79.
12 Secondly, in the letter (A 138) from the defendants’ solicitors to the plaintiff’s solicitors dated 26 May 2003 enclosing the lease for execution, the solicitors noted the following:
“In relation to the Exclusive Use Area we confirm that the Owners Corporation has granted Elias, the registered proprietor of lot 13, temporary license for the exclusive right to use the area outside of lot 13, until the first annual general meeting is held granting exclusive use to lot 13. In this regard, and pursuant to the enclosed lease, Elias confers this right to the lessee, until a resolution is passed.”
13 Moreover, the defendants, through their solicitors (exhibit G) took steps to have the special by-law passed and procured the consent of three proprietors of other lots (exhibit H).
14 At the same time, the documentary evidence establishes that the plaintiff wished to have a pergola erected over the area where the defendants were seeking to obtain exclusive use. This was to enable the plaintiff to operate the proposed restaurant and coffee shop in all weather conditions. The work on the pergola could not be carried out until the exclusive use by-law was passed.
15 The defendants acknowledged that they were obliged to have the exclusive use by-law passed but contended that the terms pleaded by the plaintiff were not essential but were in the nature of warranties only. The defendants relied on the use of the word “warrants” in clause 26 to make good the submission. They also submitted that timing was not essential and that so long as the defendants provided the plaintiff with a temporary licence the plaintiff’s position would be covered.
16 It is clear from the High Court’s decision in Luna Park (NSW) Limited v Tramways Advertising Pty Limited (1938) 61 CLR 286 that the use of the word “warrants” does not necessarily determine whether a clause is a condition or a warranty. It is the essential character of the clause which determines this issue (per Latham CJ at 302).
17 As to the issue of timing, the defendants’ point carries no weight because although it was important for the exclusive use by-law to be obtained at the first annual general meeting, that in itself was not critical because, through the temporary licence granted by the Owners Corporation to the defendants, the plaintiff had the temporary use of the outdoor area.
18 It is clear from the lease and the documents referred to that the parties recognised that the exclusive use by-law was intended to confer valuable rights of exclusive use of the common property adjacent to the defendants’ lot 13 and that such rights would enure for the plaintiff’s benefit for at least 5 years or more than that should the option be exercised. In this respect, the obtaining of the grant of exclusive use by the defendants from the Owners Corporation went to the very heart of the contractual arrangements between the plaintiff and the defendants contained in their lease. It therefore follows that the plaintiff has made out its case on the essential terms referred to earlier.
19 In reaching this conclusion, the Court has rejected the defendants’ submission that the obtaining by the defendants of the exclusive use by-law was conditional on the plaintiff acting in accordance with the provisions of clause 6.1. In other words, the defendants submitted that item 26 was interdependent with clause 6.1. In my opinion, clause 6.1 is to be read in the light of the wording deliberately omitted from item 26. When that is done, one concludes that the parties cannot have intended that the obtaining of the exclusive use by-law was to be conditional upon anything which the plaintiff was required to do. In other words, there was no inter-dependency between clause 6.1 and item 26. This means, on the one hand, the plaintiff is entitled to recover damages for breach of the essential terms. On the other hand, if the defendants had suffered loss for breach of clause 6.1 by the plaintiff, there was nothing to prevent them from bringing a cross-claim for damages against the plaintiff. No such cross-claim has been filed.
20 The plaintiff opened its restaurant and coffee shop on 10 July 2003 and on 20 August 2003 the first annual general meeting of the Owners Corporation was held. The minutes at A 148 make no reference to the exclusive use by-law.
21 Subsequently, as exhibit G and exhibit A 151, 152 & 153 make clear, the defendants attempted to have a special resolution passed to create the exclusive use by-law, but they were unsuccessful (A 156 & 157). Although at some point the defendants obtained a temporary licence (A 141), as can be seen from its terms, clause 20 in particular, the licence was personal to the defendants and was not capable of assignment.
22 On 26 November 2003 the executive committee of the Owners Corporation unaminously agreed that the licence agreement would be terminated (A 163, 164).
23 On 30 November 2003 the plaintiff ceased using the outdoor area. The evidence establishes that it was unsatisfactory for the plaintiff to trade in that area because inclement weather affected the operation of the business without adequate cover from a pergola. Nevertheless, the plaintiff continued to trade inside lot 13 as a takeaway pizza restaurant.
24 On 9 December 2003 the licence agreement was terminated by the Owners Corporation (A 166, 167).
25 In the result, the plaintiff ceased trading altogether on 24 December 2003 and removed its equipment from the premises in January 2004.
26 I am satisfied that the plaintiff terminated the lease when it removed its equipment from the leased premises in January 2004. In this respect, the defendants faintly submitted, following Sargent v ASL Development (1974) 131 CLR 634 and Immer (No. 145) Pty Limited v Uniting Church of Australia Property Trust (NSW) (1993) 182 CLR 2, that there had been no termination because the plaintiff had affirmed the lease. This was said to have arisen because of a meeting which took place between Mr Houssos, on behalf of the plaintiff, and Mr Tony Elias, on behalf of the defendants, at the house of Mr Elias on 21 December 2004. I am satisfied that all Mr Houssos agreed to do was to pay a small amount of rent for only a few weeks more and to judge the position shortly thereafter. This is exactly what he did by closing the business down and, importantly, removing the equipment in January 2004. Therefore, there was no election to affirm the lease as had been submitted by the defendants.
27 I turn now to consider the plaintiff’s claim for damages.
28 The plaintiff claims both reliance damages and expectation losses. Such a claim is clearly permissible: The Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64. The High Court’s decision in that case also recognised that reliance damages can include wasted expenditure incurred by the plaintiff prior to the lease being entered into.
29 The plaintiff’s principal witnesses were Mr Houssos, the director of the plaintiff and Mr Cipriano, the plaintiff’s accountant. I accept Mr Cipriano as an honest and reliable witness. Mr Cipriano prepared the plaintiff’s financial statements and, importantly, the ledgers upon which it relies to make out its claim for lost and wasted expenses. With the exception of a few small items identified below, I am satisfied that Mr Cipriano was able to reconcile and identify the source documents which prove the plaintiff’s wasted set up and running expenditure.
30 On the other hand, my assessment of Mr Houssos was that he was an untruthful and unreliable witness. Apart from where I have expressly said so, I do not accept the evidence of Mr Houssos unless otherwise corroborated by that of Mr Cipriano or the business records of the plaintiff which are in evidence. At all times Mr Houssos sought to maximise the plaintiff’s prospects of success and was prepared to say anything to achieve this outcome. For example, Mr Houssos had to concede that he had paid a number of casual staff cash and that this was not reflected in the accounting records. Another example is his statement in his affidavit of 1 November 2007 at paragraph 75 that removable equipment was sold for $20,000. This was untruthful and had to be corrected in a subsequent affidavit and in oral evidence.
31 Mr Houssos also denied that there was a lot of rubbish left in and around the premises but had to concede this was otherwise when shown the photographs which were in evidence.
32 Most importantly, Mr Houssos lied to the Court about the contemporaneity of the document referred to in evidence as the “business plan”. This is the document described as a “Leasing submission for Glenrose Pizza Pasta Café Restaurant by Elike Pty Limited” which is annexure A to Mr Houssos’ affidavit of 24 November 2008 (exhibit B). The importance of this document was that the plaintiff sought to rely on it to make out its claim for expectation losses. The document was undated and was not discovered until the plaintiff filed its amended list of documents on 19 March 2008.
33 Mr Houssos claimed the document was prepared prior to the lease being entered into. The difficulty with this evidence, as Mr Houssos realised overnight, was that the so-called business plan showed Mr Cipriano’s business address as Level 1, 405 Parramatta Road, Leichhardt. The evidence of Mr Cipriano established that he did not move to this location until well after the lease had been terminated. Mr Houssos realised that this was a problem and sought to put forward a ridiculous explanation to the Court that he had merely updated the so-called business plan document in 2005 because a friend of his had wanted a new accountant and in the process of giving the friend Mr Cipriano’s address, it just so happened that Mr Houssos decided to update Mr Cipriano’s address on the business plan document. This evidence was clearly false and given by Mr Houssos in order to try to explain away the evidence he had given the day before. I therefore do not accept that the so-called business plan was prepared at any time before the plaintiff terminated the lease.
34 In the result, there is no evidence at all before the Court which would enable to the Court even to do the best it could to award the plaintiff expectation losses, including any loss of chance of selling the business. In this respect, the plaintiff had told the defendants in late 2006 that it would be serving an expert’s report to make out its claim for lost profits, but such report never materialised, notwithstanding the fact that there was an earlier hearing in this Court in March this year which was vacated. The plaintiff made no attempt between then and the hearing which commenced on 24 November 2008 to marshal any evidence to support its claim for expectation losses, which accordingly fails.
35 I turn now to reliance damages.
36 The plaintiff’s claim contains two components. First, wasted set up expenses and, secondly, wasted running expenses. The items are set out in the Schedule of Plaintiff’s Damage handed up by counsel for the plaintiff, which was marked MFI 2. I will now deal with each of the items in that schedule.
Plant and Equipment
37 The amount claimed is $53,645.00.
38 The plaintiff, when it removed the plant and equipment from the leased premises, took it to a restaurant at Forestville operated by Hot Ten Pty Limited, a company in which Mr Houssos was involved. There is no evidence that the plaintiff sold the property to Hot Ten Pty Limited; indeed, the liquidator’s report in relation to Hot Ten Pty Limited (In Liquidation) suggests otherwise.
39 The defendants sought to submit that, somehow or other, because the plant and equipment had been used at the other location, that this prevented the plaintiff from recovering the expenses it incurred in acquiring the plant and equipment. There is no sound basis in law for such a submission and it is rejected.
40 The defendant relied on exhibit 6 to claim a reduction of $3,771. I am not satisfied exhibit 6 proves that the plaintiff’s expenditure for plant and equipment should be reduced in this amount, particularly having regard to Mr Cipriano’s evidence that he relied on the invoices in evidence to calculate the amount which appears in the plaintiff’s general ledger.
41 The plaintiff is therefore entitled to recover the amount of $53,645.
Furniture
42 The amount claimed is $11,974.
43 A similar submission was made by the defendants to the effect that the expenses were not wasted because the plaintiff acquired the furniture. The reality was, however, that the furniture was acquired for the business to be conducted at the leased premises and, the termination of the lease being a valid one, this item is clearly a wasted expense and recoverable in full.
Fit out Materials and Labour
44 The plaintiff claims $39,956.
45 Part of this amount includes items in the general ledger at A 173 for shop fit out costs on 6 November 2003 of $1,363.64 and items purchased from Bunnings of $4,771.84. It was submitted by the defendants that the expenses having been incurred so late in the piece, they must have related to Forestville rather than Belrose. However, when the source documents, for example from Bunnings, are considered, it is clear that the two amounts include many expenses incurred prior to November 2003. I am therefore satisfied the plaintiff has discharged the onus in this respect, particularly having regard to Mr Cipriano’s evidence in matching the source documents with the items on the ledger.
Kitchen Utensils
46 The plaintiff claims the amount of $8,426.
47 Mr Houssos agreed that the item dated 5 January 2004 at A 175, kitchen equipment in the amount of $550, related to Forestville, so this should be deducted from the plaintiff’s claim which is otherwise made out.
48 The plaintiff is therefore entitled to recover $7,876.
Architects Fees
49 The plaintiff claims $4,700.
50 Mr Houssos accepted in cross-examination that of the amount claimed fees in the order of $2,500 related to the restaurant at Forestville.
51 The plaintiff is therefore only entitled to recover $2,200.
Restaurant Supplies
52 The plaintiff claims $1,423.
53 The defendants submitted that the plaintiff ought to have been able to use these items elsewhere. There is no evidence to support the submission and therefore the plaintiff is entitled to recover the amount claimed.
Storage costs
54 The plaintiff claims $15,361.
55 It was submitted that these costs were incurred because Hot Ten Pty Limited went into liquidation. The fact is, however, that the costs related to storing the plaintiff’s plant and equipment which the plaintiff was endeavouring to sell.
56 To the extent that it was sought to establish that Mr Houssos’ evidence on the issue was not credible because the storage area had been reduced from four spaces to two, I accept his evidence because it made sense, namely, he initially needed four storage areas in order to properly display the items for the benefit of potential purchasers.
57 The plaintiff is therefore entitled to recover the amount claimed.
Total Wasted Set Up Expenses
58 In the result, after taking into account the amount of $40,000 received for the sale of plant and equipment, the plaintiff is entitled to recover the amount of $92,435 by way of total wasted set up expenses.
59 In terms of wasted running expenses or loss of profit, the plaintiff’s claim is as follows:
Less Kitchen Utensils $7,876As per profit and loss statement for $33,109
July/December 2003
Less Architects Fees $2,200
Less Restaurant Supplies $1,423
Sub-Total $11,499
_______
Total $21,610
60 I reject the defendants’ submission that the plaintiff was not entitled to include the amount of $409.09 at A 176 for accounting fees charged for preparing annual returns because this was part and parcel of the plaintiff’s business at the time.
61 Mr Houssos conceded in cross-examination that he had paid cash in hand to members of his staff who worked on a casual basis. He was not precise about the amount, but he conceded that it had not been taken into account. Accordingly, doing the best I can, I reduce the figure of $33,109 set out above to $30,000.
Total Wasted Running Expenses and Loss of Profit
62 In the result the plaintiff is entitled to recover $18,610 ($30,109 - $11,499).
Total Reliance Damages
63 In view of the Court’s findings above, the plaintiff is entitled to recover total reliance damages in the amount of $111,045 (92,435 + $18,610).
64 The plaintiff is also entitled to interest on the damages awarded in accordance with the Civil Procedure Act 2005. I will stand the matter down so the parties can do the calculations.
65 Costs should follow the event on the ordinary basis, but if either party wishes to contend otherwise I will entertain submissions.
66 I direct the exhibits be returned.
0
5
3