Elite Promotions & Management Pty Limited v 5A Investments Pty Limited - [2011] NSWSC 590

Supreme Court

New South Wales

Medium Neutral Citation: Elite Promotions & Management Pty Limited v 5A Investments Pty Limited & Ors [2011] NSWSC 590
Hearing dates: 22 & 24 September 2010
Decision date: 17 June 2011
Jurisdiction: Equity Division - Duty List
Before: Brereton J
Decision:
The plaintiff's claim against the first defendant to set-off sums expended in fit-out of the property as prepayments of rent fails and is dismissed.
The plaintiff's claim against the third defendant to set-off sums expended in fit-out of the property as prepayments of rent fails and is dismissed.

Catchwords: REAL PROPERTY - Leases - construction of "lessor's works" - works defined in lease as 'works described in the Plan and Specification' - plaintiff submits prior heads of agreement aid to construction - use of different terminology and provision in lease for mechanism to define lessor's works entails heads of agreement does not assist construction - representations said to be made by lessor to mortgagee as to lessor's works inadmissible as subjective understanding of mortgagee not a permissible basis for interpretation - sketch plan exchanged and initialed at time of execution of lease encapsulates works.
REAL PROPERTY - Leases - lessee asserts variation of registered lease such that lessee to take over lessor's works with lessee's expenditure to be treated as prepayment of rent - discussions as to arrangements for lessee to perform works and for expenditure to be credited as prepayments of rent amount to personal agreement between lessee and lessor - if lessee can establish it paid moneys in relation to obligations of lessor, lessee would be entitled to set-off such sums as prepaid rent - insufficient evidence to establish that lessor did not perform its obligations and that its obligations were performed by lessee - claim against lessor fails - claim against mortgagee must also fail.
REAL PROPERTY - Leases - mortgagee consents to grant of lease under (NSW) Real Property Act (1900) s 53(4) - s 53(4) does not render mortgagee liable to perform lessor's covenants - s 53(4) renders mortgagee bound by lease if mortgagee consents to lease before registration -whether mortgagee could be bound by oral agreement in respect of prepaid rent - oral agreement merely personal agreement between lessee and lessor and cannot bind mortgagee - in any event mortgagee only consented to lease as registered that did not include oral agreement.
REAL PROPERTY - Leases - equitable estoppel - mortgagee said to be estopped from denying consent to oral agreement varying lease - no evidence mortgagee knew of alleged variation - no evidence as to parties proceeding on footing that agreement was varied - mortgagee did not remain deliberately silent - no evidence lessee reasonably relied on such belief - mortgagee not estopped from denying consent to variation.
REAL PROPERTY - Leases - tenant's right of equitable set-off - exclusion by clear words - whether 'without deduction' constitutes such clear words - 'without deduction' apt to exclude common law right to deduct by way of recoupment - such words not sufficiently clear to capture equitable set-off - in circumstances of present case, where express term of oral agreement provided for lessee to be credited as prepaid rent with payments for works within responsibility of lessor, 'without deduction' did not exclude right to equitable set-off - whether set-off available against mortgagee - lessee's personal claim against lessor cannot bind mortgagee in possession - mortgagee in possession has independent statutory right to enforce rent covenant against lessee unaffected by personal claim of lessee against lessor - mortgagee entitled to recover rent accruing to tenant after notice of mortgage regardless of prepayments to lessor prior to mortgage.
Legislation Cited: (NSW) Real Property Act, s 53, s 60, s 63
Cases Cited: Australian Receivables Ltd v Tekitu Pty Ltd [2008] NSWSC 433
Batiste v Lenin [2002] NSWSC 233
British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137
Carrathool Hotel Pty Ltd v Scutti [2005] NSWSC 401
Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] VR 168
Connaught Restaurants Ltd v Indoor Leisure Centre Ltd [1994] 1 WLR 501
De Nicholls v Saunders and Another (1870) LR 5 CP 589
Edlington Properties Ltd v J H Fenner & Co Ltd [2006] EWCA Civ 403
Federal Commissioner of Taxation v Steeves Agnew & Co (Vict) Pty Ltd 82 CLR 408
Grant v NZMC Ltd [1989] 1 NZLR 8 (NZCA)
Hudson v Shewket [2003] NSWSC 648
Miwa Pty Ltd v Siantan Properties Pty Ltd [2010] NSWSC 1203
Lee-Parker v Izzet [1971] 1 WLR 1688
Ory v Betamore Pty Ltd (in liq); Farrow Mortgage Services Pty Ltd (in liq) (1993) 60 SASR 393
R & J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd [2008] NSWSC 310
Partnership Pacific Securities Limited [1994] 1 Qd R 410
Reeves v Pope [1914] 2 KB 284
Sandback Holdings Pty Ltd v Durkan [2010] WASCA 122
Saratoga Integration Pty Ltd v Canjs Pty Ltd [2010] NSWSC 654
Texts Cited: Andrew Waite, "Disrepair and Set-off of Damages against Rent: The Implications of British Anzani" (1983) The Conveyancer 373.
V K & M R Leong Nominees Pty Ltd v Batur [2003] VSC 17
Category: Principal judgment
Parties: Elite Promotion & Management P/L (plaintiff)
5A Investments Pty Ltd (first defendant)
Alex Georgeski (second defendant)
Kingsway Group Limited (third defendant)
Representation: RI Goodridge (plaintiff)
A Georgeski (in person, first & second defendants)
GK Burton SC (third defendant)
Simpson Freed Lawyers (plaintiff)
Willis & Bowring (third defendant)

File Number(s): 2009/ 289211

Judgment

These proceedings arise out of the relationships between the plaintiff Elite Promotions and Management Pty Limited ('Elite') as lessee, the first defendant 5A Investments Pty Limited ('5A') as registered proprietor, lessor and mortgagor, and the third defendant Kingsway Group Limited ('Kingsway') as mortgagee in possession, of premises situate at and known as Suites 9A and 9C, 2-4 Northumberland Road, Taren Point. Elite paid rent to Kingsway for a time after it entered into possession, but now claims that it is entitled to set-off against the rent, or recover from 5A, and have charged upon the land, a sum of $250,000, being expenditure incurred by Elite in fitting out the premises, said to be pursuant to an arrangement with 5A that such expenditure would be treated as a prepayment of rent in circumstances where 5A was bound to but did not contribute that sum to the cost of fit-out. Elite also claims damages for misleading and deceptive conduct against 5A and its sole shareholder, director and managing director, the second defendant Mr Georgeski. Kingsway was joined on its own application, and cross-claims for a declaration that it is entitled to receive the rents free of all deductions.

The main issues are:

(1) What were the respective rights and obligations of Elite and 5A under the lease in respect of "lessor's works"?

(2) Were those obligations varied by an agreement said to have been made between Elite and 5A in October 2007 ("the October agreement")?

(3) Did 5A fail to perform its relevant obligations in that respect?

(4) Is Elite entitled to set off damages for breach of 5A's obligations, and/or expenditure incurred by it in respect of such works, against rent payable under the lease to 5A?

(5) Is Elite entitled to set off such damages and/or expenditure against rent payable under the lease to Kingsway as mortgagee in possession?

Background

Until 5 October 2007, Chain & Power International Pty Limited ('CPI'), of which Mr Georgeski was the sole shareholder and director and managing director, was the registered proprietor of the property that contains the premises - apparently, as trustee of the Georgeski Family Trust. By July 2007, CPI, which had given a fixed and floating charge to Kingsway to secure advances, was in financial distress, and, to the knowledge of Kingsway, probably insolvent.

On 20 July 2007, Mr Georgeski, on behalf of CPI "and its various related entities", entered into Heads of Agreement with Elite's principal Mr Pinn on behalf of the Pinn Deavin Group "and its various related entities", which recorded that Pinn Deavin wished to lease the premises, upon terms that included:

(a) a term of ten years, commencing on 1 September 2007;

(b) CPI would procure its solicitors, CKB Partners, to prepare the lease for $2,500 at Pinn Deavin's cost;

(d) amenities and rest rooms would be provided in the premises at CPI's cost;

(e) "an allowance of $250,000 is provided for fit-out of the premises in accordance with plans to be submitted by Pinn Deavin to CPI. Such works to be carried out by CPI unless agreed otherwise"; and

(f) Pinn Deavin was to provide a bank guarantee equivalent to 3 months rent.

Pinn Deavin paid CPI one month's rent "in confirmation of this agreement". Although not mentioned in the documentation, the rent of $330/m2 was calculated as $250/m2 base rent, plus $35/m2 to cover outgoings, plus $45/m2 to recoup the $250,000 cost of fit-out over the ten-year term.

On 26 July, Elite was identified as the proposed lessee. On 30 July, Mr Georgeski provided a copy of the heads of agreement to Kingsway.

CPI went into voluntary administration on 9 August; subsequently it became subject to a Deed of Company Arrangement, and later it went into liquidation. However, Mr Georgeski pursued the proposed lease of the premises - presumably on the basis that his family trust was the beneficial owner of the property - and during August, he applied to Kingsway for additional finance in the sum of $250,000 to fund the fit-out contemplated by the heads of agreement.

On 11 September 2007, 5A's solicitor Mr Stephen Barry, of CKB Partners, sought an indication from Kingsway as to whether it would consent to the proposed lease, which was then in draft form but which, as to the relevant provisions, did not differ from the lease that was ultimately executed and registered. Relevantly, in the draft lease, clause 12.1 stipulated for payment of rent "without deduction", and clause 19.2 provided that "the lessor must at its own cost ... cause the Lessor's Works to be carried out ...". Clause 19.1 defined the "Lessor's Works" to mean "the works described in the Plans and Specification", and the "Plans and Specifications" to mean "the plans and outline specification marked by the parties for identification"; no such plans or specifications were included with or accompanied the draft lease.

On 20 September, Kingsway's solicitors Willis & Bowring responded that Kingsway would consent to the lease in that form, subject to execution by the lessor and lessee of enclosed terms of consent, clause 3(c) of which provided that any set-off against the lessor could not be enforced against the mortgagee/lender, and clause 5(b) that provided that there was to be no variation of the lease without the mortgagee's written consent. On 21 September, CKB Partners forwarded the draft lease and terms of consent to Elite.

Between 21 and 27 September, Mr Pinn commented on some aspects of the lease and terms of consent (specifically, clause 5(a) of the terms of consent), but not on those aspects that are relevant to the issues in these proceedings (namely, clauses 3(c) and 5(b)). On 4 October, Mr Barry sent an email to Mr Pinn, with a copy to Mr Georgeski:

Once you and Alex are satisfied as to the terms of the deal; we will need to pass the changed document via Kingsway Finance/W & B as their consent is needed.

On 24 September, Kingsway formally offered 5A a loan of $4,450,000, to refinance the existing loan to CPI of $3,962,348, plus "fit out and subdivision costs" of $275,000, and application fee and loan-funded interest.

CKB's bill of costs records, on 5 October:

Stephen Barry telephone call with client Alex - he spoke with M Pinn who is still considering matter. Alex will forward the marked up changes to Kingsway Finance for approval.

This indicates that the question of Kingsway's consent to the lease had not yet been finalised.

CPI transferred the title to the property to 5A - according to Mr Georgeski, by way of retirement and appointment of the trustee of the Georgeski Family Trust - on 5 October 2007. The mortgage and loan agreement were dated on 22 October, and the mortgage was registered on 1 November.

Although the lease bears an execution date of 1 March 2008, Mr Georgeski says that Mr Pinn handed him the lease, executed by Elite, on an occasion between 9 and 19 October 2007; and while Mr Pinn says, in his affidavit of 12 June 2009, that it was executed on 1 March 2008, in an email of 26 March 2009 to Kingsway's Business Development Manager, Mr Hatheier, he said that he had first signed it "back in 2007 before half of what happened occurred' - referring specifically to an alleged agreement about prepayment of rent in late October 2007. I find that Mr Pinn executed the lease and delivered it to Mr Georgeski, as Mr Georgeski asserts, between 9 and 19 October 2007; the error in his affidavit in that respect is the understandable result of the date appearing on the lease. [It seems that 5A executed the lease in or about May 2008, in circumstances where it was not prepared to do so until the bank guarantee, referred to in the heads of agreement, had been supplied by Elite.]

5A fell behind schedule, and Mr Georgeski had an overseas trip planned for a fortnight in late October. Prior to his departure, he and Mr Pinn discussed arrangements for completion of the works. Elite says that they agreed that, in lieu of 5A performing the works up to a ceiling of $250,000, Elite would complete the remaining works, and the $250,000 (at least) would be treated as a prepayment of rent "in the event that 5A was unable to refinance the property or otherwise reimburse Elite". 5A says that it was agreed that Elite would supervise the remaining works, but disputes that there was any concluded agreement about treating the $250,000, or the cost of completing the works, as a pre-payment of rent. I shall have to return to this controversy concerning the October agreement in due course. However, Elite oversaw the completion of the remaining works, expended in excess of $250,000 on contractors and tradespersons for that purpose, and went into occupation in or about November 2007.

On 9 October 2008, Kingsway served on Elite a notice under Real Property Act, s 63, demanding that all future rents be paid to Kingsway. There ensued correspondence between Elite, Kingsway and 5A, in which Mr Pinn asserted that the rent had been paid in advance pursuant to the October 2007 agreement between him and Mr Georgeski.

In an email to Mr Georgeski and Mr Polito (of Kingsway's solicitors Willis & Bowring) on 19 February 2009, Mr Pinn wrote:

A term of the lease with 5A ... was that it would provide $250,000 towards the fit out and the tenant would pay the balance. 5A then requested the tenant to fund the fit out cost and deduct the fit out allowance from future rents if an agreement to the contrary was not entered into. We have waited patiently for approximately 15 months for such an alternative agreement to be entered into. We have continued to pay rent in good faith in the meantime. ... The remaining tenancy issues include ... Return of a registered lease which we were advised by SB some time ago (mid 2008) was ready for registration and stamping ...

That email was forwarded by Mr Polito to Mr Hatheier at Kingsway, who printed it and made on it a note:

- Who is he going to take action against?

- Are we bound by the lease?

- KGL has not consented to the lease.

- No prior indication of the fit out adjustment.

...

On 23 February, Mr Pinn sent an email to Mr Barry and Mr Polito:

I'm now being told that Kingsway never consented to the lease ... It is my recollection that I was told the draft was provided to Kingsway in August/September 2007 ... I was certainly led to believe that Kingsway had provided informed consent to the lease. ...

Mr Pinn's recollection was imperfect - he may have been told that Kingsway had indicated that it would consent subject to the "terms of consent", but there is no evidence that he was ever told that it had consented.

Also on 23 February, Kingsway instructed its solicitors Willis & Bowring in the following terms:

The consent to lease does not appear to have been signed by the lessee or lessor and returned to Kingsway.

Between then and mid-March, it emerged that due to subdivision of the property of which the premises formed part, it would be necessary for some amendments to be made to the particulars of title on the coversheet, and for such amendments to be initialled. Mr Pinn on behalf of Elite was pressing for registration of the lease. On 20 March, Mr Barry sent an email to Mr Christie (of Simpson Freed Lawyers, who were now acting for Elite), with copies to Mr Polito and Mr Georgeski:

On my instructions the most profitable course for our clients at this time is to focus on registration of the lease. The other disputes can be resolved at a later date however I am instructed to observe that my client does not accept your client's contentions as to many factual matters and advise that silence at this stage by my client should not be interpreted as any concession on its part.

I have spoken to Mr Polito and he is happy to have the lease stamped and registered after the amendments provided that he is provided with the necessary funds.

Mr Christie responded to Kingsway on behalf of Elite on 23 March:

3. My client does wish to continue with its requirement that the lease be registered. I note that you have consented to the registration of the lease and that its only issues raised by Stephen Barry in relation to some alterations precipitated by a change in the legal description of the premises which needed attending to in order for the registration procedure may proceed.

On 26 March, Mr Pinn sent an email to Mr Hatheier:

Geoff is away this week. However when I talked to him via phone on Monday morning he raised with me the issue that I had signed a lease that did not include all of the detail that was in the heads of agreement and that was making it hard for you guys to recognise what I was saying no matter how much sense it may make. I signed the lease originally back in 2007 before half of what happened occurred, i.e. rent prepayment, etc. At that point Alex was going to engage all of the contractors and pay for $250k of fit out with me topping up any extra. That was the basis of the extra $45/m2 in the rent and Stephen Barry was well aware of it.

My concern now is that if I sign the lease changes that it will be construed that I actually agree with the lack of detail provided and that what I am saying about the detail has been made obsolete. ...

On 30 March, Mr Christie emailed Mr Polito that he would be at Mr Pinn's office the following morning, and:

If you would like to bring the lease to the premises at that time I will have Michael initial the alterations and you can then proceed with the registration of the lease.

Mr Pinn initialled the amendments on 16 or 17 April, and the signed pages were returned by Mr Christie to Mr Polito on 21 April, under cover of a letter of 20 April which, inter alia, noted the absence of the plans and specifications referred to in clause 19, and sought advice as to where they resided, and provision of a copy. While continuing to assert its version of the October 2007 agreement, Elite did not seek to impose any caveat on the effect of re-executing the lease.

On 21 April 2009, Mr Polito at the request of and as agent for Mr Barry attended to registration of the lease. Save for the changes to the particulars of title on the coversheet, the registered lease was the same as the draft of September 2007. In particular, there was no amendment made to it to reflect any October 2007 agreement. Nor was it accompanied by any "plans and specifications". Nor did it bear any formal indicia of Kingsway's consent; indeed, there appears to be no executed instrument of consent on the part of Kingsway.

In early May, Kingsway withdrew its s 63 notice. Disputation continued in respect of the alleged prepayment, and Elite continued to pay rent, albeit under protest.

On 19 May 2009, Elite lodged a caveat in respect of the property. On 1 June, 5A purported to terminate the lease and gave notice to quit. On 5 June, 5A served a lapsing notice in respect of Elite's caveat, and on 11 June locked Elite out of the premises. On 15 June, Elite's interlocutory application came before Gzell J, who made interlocutory orders to the effect that 5A permit Elite to re-enter, occupy and have possession of the premises. Elite did not press for extension of the caveat, which therefore lapsed on or about 26 June 2009.

Kingsway served a further s 63 notice on 9 July 2009, which it withdrew on 31 August 2009. Further notices were subsequently served on 26 November 2009, and 23 February 2010.

The lessor's works

Elite contends that 5A agreed, in the heads of agreement, to carry out the tenant's fit-out at its own expense - provided that, should the tenant's fit-out as specified by the tenant exceed $250,000, Elite would pay so much of the cost as exceeded that ceiling. Elite further contends that, in the lease, this obligation was repeated, in cl 19, as one to perform the "Lessor's Works". 5A does not dispute that it was obliged to contribute the first $250,000 for certain works. The essential dispute is as to what works were the subject of this agreement: Elite contends, and 5A disputes, that they comprised works described in a plan prepared by Mr Jupp.

The heads of agreement provided that amenities and rest rooms would be provided in the premises at CPI's cost, and in addition for "an allowance of $250,000 ... for fit-out of the premises in accordance with plans to be submitted by Pinn Deavin to CPI", such works to be carried out by CPI unless agreed otherwise. However, this was not exactly replicated in the lease, in each version of which, from the September 2007 draft until registration, clause 19.2 provided that "the lessor must at its own cost ... cause the Lessor's Works to be carried out ...", and "the Lessor's Works" were defined, in clause 19.1, by reference to a description of the works on, inter alia , a plan marked for identification by the lessor and lessee.

No such plan was ever included with the registered lease. A "floor plan" of the premises was prepared by Mr Judd in September 2007, "for Pinn Deavin and Mr Georgeski". Mr Pinn initialled it, but there is no evidence that Mr Georgeski ever did so. Nor is there any evidence that Mr Georgeski was involved in giving instructions for or authorising it, and he disputes that he was. Although it could have satisfied the description in the heads of agreement of "plans to be submitted by Pinn Deavin to CPI", it does not meet the requirements of the definition in the lease.

Elite submitted that the concept of "Lessor's Works" in the lease was identical to, albeit using different terminology, that of "fit out" in the heads of agreement. However, as well as different terminology, clause 19 of the lease contained its own mechanism for defining the Lessor's Works - which conceivably might have included items necessary to complete the premises - as well as lessee's fit-out which otherwise would have been the responsibility of the lessee. In those circumstances, the heads of agreement do not provide an acceptable basis for giving content to the "Lessor's Works" in the lease.

In cross-examination, Mr Hatheier confirmed that, before advances were made under the mortgage in respect of the $250,000, he inspected the "works" , and that he had seen a plan similar to the Jupp plan. Elite submitted that 5A effectively represented to Kingsway that it had paid for the works in the Jupp plan, and obtained the $250,000 from Kingsway on that footing, when in truth the works described in it were paid for by Elite, and that this alleged representation to Kingsway gave content to the term "Lessor's Works". However, I do not accept that Mr Hatheier's evidence went so far as Mr Goodridge, for Elite, would have it - he did not say that "the works" as understood by him were those appearing in the Jupp plan, let alone that any such understanding was conveyed by Mr Georgeski. Moreover, Kingsway's subjective understanding of what was intended by the term is not a permissible basis for its interpretation. Nor was any statement on the part of Mr Georgeski established sufficiently to amount to an admission or representation inconsistent with his position that he was seeking from Kingsway finance for the first $250,000 required for the Lessor's Works.

According to Mr Georgeski, when Mr Pinn handed him the executed lease between 9 and 19 October 2007, they both initialled and exchanged copies of a sketch plan [annexure H to Mr Georgeski's affidavit of 28 August 2009], which he had earlier prepared and provided to Mr Pinn, and on which was listed, under the heading "Vendor Works":

1. Kitchen

2. W.C. Male/Female

3. Shower

4. Aircondition

5. Elevator

6. Store

According to Mr Georgeski, he added items 5 and 6 on this occasion, after Mr Pinn had said:

Alex I've got the signed lease for you. For our records this is the drawing showing the works that we agreed you would undertake. The elevator and storeroom are missing from your scope. Can you please write in elevator and store so that we both agree that you will undertake that work.

Mr Pinn never denied this conversation, and recognised the sketch plan - and although he denied that it was the plan contemplated by clause 19 of the lease, that is his subjective opinion, of little moment on this question. He was unsure whether a mark appearing on it was his initials, but (by comparison with his admitted initials on the Jupp plan) I find that it is. Viewed objectively, this sketch plan is the only realistic candidate to be the plans referred to in clause 19: it lists works to be done (albeit described as Vendor as distinct from Lessor Works, but that is a discrepancy of minimal significance), it identifies their location, and it is initialled on behalf of lessor and lessee. The timing and circumstances of its initialling and exchange, concurrently with delivery of the executed lease, as deposed to by Mr Georgeski, and neither challenged nor contradicted, reinforce that conclusion.

The reference to $250,000 contained in the heads of agreement was not repeated in the lease. However, the parties proceeded on the footing that 5A's responsibility would be limited to that amount. This was reflected in conversations deposed to by Mr Georgeski. Elite, in its submissions, accepted that there was such a limitation. Accordingly, although it was not expressed in the terms of the lease, I conclude that 5A's responsibility for the "Lessor's Works" was limited to $250,000, and that Elite would bear so much of the cost as exceeded that ceiling. As the parties were not in issue on that question, it is unnecessary to decide the juridical basis on which that was so, but it if required it could be provided by conventional estoppel, collateral agreement, or rectification.

It follows that, upon the proper construction of the lease and in the events which happened, 5A's obligations in connection with "the Lessor's Works" comprised the installation of the kitchen, male and female water closets, shower, air-conditioning, elevator and store, in accordance with the initialled plan, up to a ceiling of $250,000, with Elite to be responsible for cost in excess of that amount, and any other fit-out.

The October agreement

Elite then contends that in late October 2007, it and 5A agreed that Elite would takeover completion of all the works required to complete and fit-out the premises, and in return would be entitled to treat the cost of doing so as rent paid in advance, unless some other arrangement was reached . This agreement is said to have been made in a conversation in the last part of October 2007, at the Supa Centre at Taren Point. The date, terms and characterisation of that conversation are in dispute.

According to Mr Pinn, the conversation took place on or about 25 October 2007. In response to a request by Mr Georgeski to assign Pinn Deavin's employee Adrian Alessi to manage finalisation of all the remaining works, he said:

The contractors will have to be paid or they won't work. I am prepared to provide the funds to pay the contractors initially on the basis that it is prepaid rent and done at your direction. However, if you can refinance on your return from the USA and reimburse me for the funds extended that would be my preference. However if you are directing me to make the payments as detailed by you in this scope of works as prepaid rent I am prepared to do that.

Mr Georgeski allegedly replied:

I agree that the funds will be treated as pre-paid rent if I can't refinance or reimburse you.

Mr Alessi was present at this meeting, but says that it was on 22 October. He says that Mr Pinn said:

We will pay for the contractors involved with the work and do whatever we need to do to get the rest of the work done as quickly as possible. I am prepared to do this on the basis that you will repay the money from your intended refinance or that the money we spend in this way will be treated as rent in advance until you arrange for reimbursement to us.

Mr Georgeski is said to have responded, "Okay".

Immediately after the meeting, according to Mr Alessi, Mr Pinn emphasised to him that it was important to remember that Mr Georgeski had agreed that anything spent on the fit out would be treated as prepaid rent, and that he would be working for and reporting to Mr Georgeski.

Mr Georgeski denies that there was any conversation on 25 October 2007, but does not dispute that he had a conversation with Mr Pinn and Mr Alessi on 22 October. He says that as at that date Elite was dealing directly with its own subcontractors, and he was assisting with day-to-day management of the fit out; that he had arranged for some of the lessor's works to be performed, but they were not complete; that as they would not be complete by his imminent departure, he asked "Since Adrian is managing your fit out, can he supervise my works". He denies agreeing that any amount spent by Elite on fit out would be treated as prepaid rent. He says that he helped Mr Pinn by offering his contractors, at wholesale rates.

No participant has any notes of this conversation, nor produced any diaries or appointment books to support the date or other details, so that their evidence of it depends on their unassisted recollection.

Mr Pinn appeared in cross-examination to be co-operative and open in his evidence, but he did not recall - though he did not deny - seeing a number of documents (including the draft terms of consent, CKB Partners' letter of 20 September 2007 and the Willis & Bowring letter of 27 April 2009) potentially adverse to his case, which it is very highly probable that he did see. Accordingly, while I think Mr Pinn did his best to give an accurate account, his memory has not captured some matters adverse to his interest.

Mr Georgeski was criticised for asserting that he got on well with the contractors, which is said to be unlikely in circumstances where they were not being paid; but this is a matter of personal perception of little bearing on overall credit. More telling was the criticism of his oral evidence as to the generation and delivery of the "scope of works" document [annexure YYY to Mr Pinn's affidavit of 12 June 2009], which was said to be quite implausible: Mr Georgeski said that the document represented a list of recommended sub-contractors provided by him to Elite, who Elite then engaged. Mr Goodridge, for Elite, submitted that this left unexplained how prices for the work in Mr Georgeski's handwriting appear on the document, and that prices could not have been obtained before the sub-contractors were contacted and asked to quote, which must therefore have been undertaken by Mr Georgeski. There is force in this, and it is consistent with the contemporary documents to which I shall come, and with Mr Georgeski's affidavit [par 64] that he obtained quotes from these contractors, and subsequently provided their prices and contact details to Elite at the 22 October conversation.

Mr Burton SC, for Kingsway, submitted that reliance should not be placed on Mr Alessi, for reasons that included that he could recall no other occasion on which Mr Pinn had reminded him after a conversation of aspects to remember, so that it was unusual - but that is at least as good a reason for Mr Alessi to recall it as to disbelieve it; that Mr Pinn did not refer to having done so - but that tends to tell against an endeavour by Elite's witnesses to concoct a story; that on some of the topics, Mr Alessi had no knowledge apart from what Mr Pinn told him - but that is not so, as Mr Alessi was present at the conversation with Mr Georgeski; that Mr Alessi was a young subordinate who had been in the employ of Pinn Deavin since the age of 16 - which admittedly might make him susceptible to influence and loyalty, but no more so than Mr Pinn who gave no evidence of such a conversation; and that Mr Pinn allegedly relayed to Mr Alessi the alleged agreement about prepayment of rent before it was allegedly said by Mr Georgeski - but that is not so if one accepts Mr Alessi's timing (which conforms with Mr Georgeski's, and with the contemporaneous documents to which reference is made below). My impression was that Mr Alessi seemed entirely plausible, and careful to be accurate without being guarded. There was no apparent reason to disbelieve him, other than the natural inclination of a loyal employee to favour his employer's version.

There are, however, some other, more objective, indicia to assist resolution of this issue. In the below summary of the contemporaneous and later communications between the parties, I have emphasised those aspects that are particularly relevant to my findings.

On Monday 22 October , Mr Pinn sent an email to his partners in Pinn Deavin, relevantly as follows:

We had a good meeting with Alex late this afternoon , including provision of his costings by supplier and the supplier's contact details . Alex & Adrian are to meet with a number of the suppliers tomorrow on site. By Wednesday night Adrian will be project manager coordinating all trades.

...

We expect to use Alex's trades for all but the kitchen and related joinery at this stage. ...

On Thursday 25 October , Mr Pinn sent another email to his partners, relevantly as follows:

I am very happy with how things are coming together under Adrian's stewardship for the move.

...

We are paying a number of the trades direct in order to get them on site and performing in the time frame. We are paying what they quoted Alex . Alex's prices so far seem pretty good and within the budget. We will have an acctg with Alex on his return from overseas . He leaves on Saturday morning and has already given Adrian all phone numbers, keys etc.

I suspect that we will end up funding most of the fit out and then claw it back one way or the other from Alex . So look forward to possibly prepaying part of the 08/09 rent as a tax planning strategy.

Those communications clearly point to the relevant conversation being on 22, not 25, October. They also show that some sort of later accounting between the parties was contemplated, and that Mr Pinn had in mind that prepayment of rent might be the outcome, but are much less categorical than might have been expected had there been so firm and clear an agreement about prepayment of rent as Mr Pinn now alleges.

On Tuesday 13 November, Mr Georgeski, having returned to Australia, sent an email to Mr Pinn, relevantly as follows:

As you know I returned back to Sydney yesterday and site today. Today you advised me not to be involved in the fit-out but to allow Adrian to complete his project management of this project. I therefore confirm that the cost (if any) for Adrian's time has always been a matter for the lessee not the lessor

On 14 November, Mr Pinn replied, relevantly as follows:

Whilst I understand the commerciality behind this email it is really quite insulting given what we have done to date on a handshake.

You also ignore what problems of yours we have absorbed. i.e. tilers demanding payment for work done previously or they would not work the day after you fly out and no time for a contingency plan.

When the dust settles we need to sit down and compare notes. There is middle ground I am sure. I am also aware that you have other issues to deal with such as your fellow owners, refinancing away from Willis & Bowring, etc. I do not wish to deal with things in isolation and keep having further issues turn up. I am sure you think likewise. So let's just leave this until next week when hopefully most things are done, or at least quantified as to what has to be done. That way we can enter into an overall solution .

...

We have found most of your selected trades to be good although they did let us down significantly over the last week and as a result probably caused us a loss of in excess of $10k in revenue.

...

Significant matters emerging from this email include that it was after Mr Georgeski departed that the problem of a threat to cease work in the absence of payment (and not before, as is implicit in Mr Pinn's version of the conversation) - and the need to pay to keep trades on site - apparently arose; and that Mr Pinn envisaged that there was more to be negotiated to reach an "overall solution".

On 15 April 2008, Mr Georgeski sent Mr Pinn an email:

Could you please pay the rent for April. Most of this will be used to pay the outstanding levy fees and special sinking fund .

...

Mr Pinn replied:

...

I will look after the rent payment.

This is somewhat equivocal. On the one hand, it indicates Elite continuing to pay rent despite its claimed prepayment. But on the other, it reveals that 5A was requesting (as distinct from demanding) that it do so, and providing an explanation of why it was required, consistent with an understanding that Elite was not necessarily obliged to do so, and that Elite agreed to do so as a matter of goodwill rather than of obligation.

On 21 July 2008, Mr Pinn emailed Mr Georgeski:

When we talked originally of 80% of $3.4M and we forego our net $200k from you towards the fit out plus kick in $50k into the pot we would have been getting of all of lot 9. Whichever way you cut it, the sale to Bowen is taking roughly 1/3 off the table. So if we were kicking in $250k before we should be kicking in proportionately less anyway. ... So we should be reducing the $250k to $140k anyway. ...

If we proceed one idea for dealing with the $200k reimbursement scenario is to pay $100k p.a. for 2 years to Annette and offset it against what 5A owes Elite in fit out allowance. ...

This is the first explicit reference to any "off-set" arrangement, but it is obscure.

Following service of the first s 63 notice on 12 November 2008, Mr Pinn emailed Mr Hatheier:

I confirm our general discussion of yesterday via phone that the rent has actually been significantly paid in advance and this is part of private arrangements with the landlord predating the notice . We are not averse to making payments and assisting both Alex and yourselves but if we were to do so then it would be as a consequence of clear agreement between us all. ...

Over the last 12 months, in agreement with Alex, we have made payments where and as directed from time to time and would have continued to do so until we received your notice last month. ...

This is the first clear assertion of prepayment by arrangement with the lessor. Mr Hatheier sought details of rent allegedly paid in advance. Mr Pinn replied by letter on 19 November:

The rent was to commence on completion of fit out by the lessor. The lessor was unable to deal with the fit out and requested that the lessee take over fit out management. This was done. Furthermore with the direction of the lessor the lessee agreed to fund the fit out costs directly and defer rent payments until the fit out costs were recouped . ...

This is a further clear assertion of a prepayment agreement of the kind now alleged. In an email to Mr Georgeski and Mr Polito of 19 February 2009, Mr Pinn wrote:

A term of the lease with 5A ... was that it would provide $250,000 towards the fit out and the tenant would pay the balance. 5A then requested the tenant to fund the fit out cost and deduct the fit out allowance from future rents if an agreement to the contrary was not entered into . We have waited patiently for approximately 15 months for such an alternative agreement to be entered into. We have continued to pay rent in good faith in the meantime. ...

This is another clear assertion of a prepayment agreement of the kind now alleged, but the first in a communication to which 5A was party. Elite continued in correspondence to assert that there was an arrangement to that effect. Eventually, on 19 May 2009, Mr Barry on behalf of 5A responded:

In relation to the issue of "lessor's works" my client does not dispute that he'd agreed to perform the lessor's works. My client's position is that it has performed all of the lessor's works .

That was the first clear response on behalf of 5A, and it did not deny some agreement about prepayment of rent, but asserted that 5A had done all that it was obliged to do.

The above - admittedly incomplete - summary of relevant contemporaneous and subsequent communications enables two conclusions to be reached with confidence. The first is that the relevant conversation took place on 22 October (as Mr Alessi says, and Mr Georgeski does not dispute, but arguably contrary to Mr Pinn). However, in circumstances where Mr Pinn's evidence was that it occurred "on or about" 25 October, I do not think this is materially adverse to his credit. The second is that Mr Georgeski handed over the "scope of works" document - the list of contractors and prices - at, and not after, that meeting (again contrary to Mr Pinn's version, but also contrary to Mr Georgeski's affidavit in which he asserted that he had handed it over in September).

Beyond that, while not directly corroborating or contradicting either version of the 22 October conversation, the chain of communications provides some indicia as to the probabilities. It seems that the problem with having to pay contractors to get them on site arose very shortly after, rather than before, Mr Georgeski's departure abroad; this casts doubt on at least one aspect of Mr Pinn's version. Mr Pinn's emails of 22 and 25 October are rather more equivocal about the arrangements with Mr Georgeski than one might have expected had there then been as categorical an agreement as he now alleges, as does his email of 14 November, envisaging an overall agreement yet to be negotiated. On the other hand, the absence of categorical denial on the part of Mr Georgeski of some discussion about prepayment of rent, and the nature of the approaches for and agreement to pay rent during early 2008, suggests that there was some arrangement or understanding on that subject matter.

A further consideration is that the application by 5A for and provision by Kingsway of funding to the extent of a little in excess of $250,000 for works on the premises tends to demonstrate intention on the part of 5A to perform its obligations to fund lessor's works to the extent of $250,000, which would leave nothing to be achieved by an agreement that anything paid by Elite would be treated as "rent in advance". It is improbable that Mr Georgeski would have committed to treating anything paid by Elite to contractors as a prepayment of rent, when 5A's obligation was on any view limited to $250,000, and he was planning to raise that sum from Kingsway. It is far more likely that there was some reference to an accounting once Mr Georgeski returned, to work out just who had paid what on whose account, and that to the extent that it transpired that Elite had funded works for which 5A ought to have been responsible, that could be treated as a prepayment of rent, in the absence of alternative arrangements.

In the context that Elite was in any event responsible for works in excess of the first $250,000, the fact that it incurred expenditure on fit-out does not require further explanation. In those circumstances, it would make sense for Elite to be responsible for completion of the remaining works, in excess of $250,000, in which it had an urgent interest so that it could take up occupation.

While the corroboration of Mr Pinn afforded by Mr Alessi's evidence is of considerable importance, I am unpersuaded that the conversation was so absolute in its terms as Mr Pinn and Mr Alessi would now have it; the chain of communications to which I have referred persuades me that, with the passage of time, their perception of the effect of the conversation has become more categorical than originally it was. On the other hand, I do not think they are mistaken in thinking that there was some reference to Elite being entitled to treat, as prepaid rent, any amount paid by it that ought to have been paid by 5A. On the probabilities, I find that, in the context of Mr Georgeski's imminent departure for overseas, there was a conversation between him and Mr Pinn, in the presence of Mr Alessi, at the Supa Centre on 22 October, in the course of which it was agreed that Elite would supervise the completion of the works on behalf of 5A as well as Elite; Mr Georgeski provided the scope of works document with details of his contractors and their prices to Mr Pinn; it was agreed that they would finalise, at a later date, just how the costs of completing and fitting-out the premises would be adjusted, between them; but that in principle Elite, in the absence of further arrangements, would be entitled to treat as prepaid rent any moneys expended by it in respect of obligations of 5A .

I therefore conclude that, in October 2007, Mr Georgeski on behalf of 5A and Mr Pinn on behalf of Elite agreed that Elite would supervise the completion of the works on behalf of 5A as well as Elite, and in principle Elite, in the absence of further arrangements, would be entitled to treat as prepaid rent any moneys expended by it in respect of obligations of 5A . No other such arrangement having been made, the consequence is that, to the extent that Elite can establish that it paid for works that fell within the responsibility of 5A under the lease, it is entitled, as against 5A, to have those payments treated as advances of rent.

Did 5A fail to perform?

After assuming supervision of the works in October 2007, Elite paid in excess of $260,000 for completion of the balance of the works required to prepare the premises for occupation by them. But in focussing on what Elite has paid, rather than what (if anything) 5A should have but did not pay, Elite's submission overlooks that - in circumstances where, while 5A was obliged to fund lessor's works to the extent of $250,000, it is also common ground that any cost of fit-out in excess of that sum was to Elite's account - the fact that Elite may have paid $260,000 does not begin to establish that 5A did not perform its obligation to contribute $250,000.

Exhibit TX10 evidences the payment, from funds raised by 5A from its mortgagee Kingsway, of in excess $250,000 in relation to completion and fitting-out of the premises. Some of this ($42,020) was paid directly by Kingsway to Peak Air Conditioning, for the supply and installation of air-conditioning. The balance (totalling $208,581) was advanced to CPI, to fund payments by CPI to contractors in respect of installation of elevators; completion of toilets (including male and female) and shower; installation of electrical and data connections to office and meeting rooms; installation of kitchen, tiling and electrical; carpet; and glass partitions to meeting rooms. Although it was put to him that he retained those funds to alleviate 5A's desperate financial position, Mr Georgeski gave evidence that these sums were remitted to the relevant contractors. His assertions were not disproved: while Elite submits that 5A has produced no documentary evidence corroborative of any such payments, that does not prove that they were not made as Mr Georgeski says - especially given that any relevant records might reasonably now be supposed to be in the control of the liquidator of CPI. Elite has not shown Mr Georgeski's assertion - that the proceeds of the funding from Kingsway were applied, directly by Kingsway and indirectly through CPI, to completion and fit-out costs - to be wrong.

Elite relied upon the "scope of works" document provided to it by Mr Georgeski as evidencing that works handed over to Elite were within 5A's responsibility. However, that Mr Georgeski, having obtained prices from contractors for works on the premises, subsequently provided a document containing those prices and contact details to Elite, does not establish that the works referred to in it were within the first $250,000 of the "Lessor's Works", nor any agreement that payments to them by Elite would be treated as an advance of rent.

Elite - who bears the onus - has not established that 5A did not perform its obligations under clause 19.2 of the lease. This is not so much a matter of credit as one of insufficiency of evidence. Elite has failed in the notoriously difficult task of proving the negative, namely that 5A did not pay $250,000, in circumstances where there was at least some evidence on that issue - from Mr Georgeski, and from Kingsway's records as to the direct payments - that 5A had done so.

Accordingly, Elite's claim as against 5A fails on the facts. It follows that its claim against Kingsway must also fail. However, lest I be wrong on that question, I shall consider the remaining issues.

Set-off against 5A

Subject to the effect of cl 12.1 of the lease, breach by 5A of clause 19, if established, would have given Elite a personal right against 5A for damages for breach of covenant, which could have been set-off against rent [ British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137]; and further, p ursuant to the October agreement, Elite would have been entitled to set-off against rent, as against 5A as lessor, such amount (if any - I have found, above, that it has established none) as it expended on lessor's works that were within the responsibility of 5A.

There is controversy as to the effect of a provision such as cl 12.1 of the registered lease, stipulating for payment of rent "without deduction", on any such right of set-off. As White J has observed (in Carrathool Hotel Pty Ltd v Scutti [2005] NSWSC 401):

Does the Covenant to Pay Rent "Without Any Deduction Whatsoever" Exclude the Right of Set-off or Recoupment?

[62] This question is one of some difficulty, upon which the authorities are divided. A right of recoupment may stand in a different position from an equitable set-off. Where a tenant himself carries out repairs which the landlord ought to have carried out, his expenditure is often treated as if it had been a direct payment of rent, such that credit for the cost of repairs in arriving at the figure for outstanding rent is a matter of recoupment, rather than deduction. ( Lee-Parker v Izzet [1971] 1 WLR 1688 at 1693; Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501 at 507; contra Batiste v Lenin (2002) 10 BPR 19,441 at 19,468-19,469, [102]-[105]; but on appeal see Batiste v Lenin (2003) 11 BPR 20,403 at [49].)

[63] The authorities on the question of whether a promise to pay rent without deduction excludes a right of equitable set-off, are also at variance. (See for example Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 at 175; Batiste & Ors v Lenin , supra; Debonair Nominees Pty Ltd v J & K Berry Nominees Pty Ltd (2000) 77 SASR 261 at 271, [43], and compare Waite, Disrepair and Set-Off of Damages Against Rent: The Implications of British Anzani [1983] Conv 373; Waite, Repairs and Deduction from Rent, The Conveyancer and Property Lawyer [1981] 45 Conv (NS) 199; Lee-Parker v Izzet [1971] 1 WLR 1688; Connaught Ltd v Indoor Leisure Ltd [1994] 1 WLR 501; Re Partnership Pacific Securities Ltd [1994] 1 Qd R 410 at 424-425; Grant v NZMC Ltd [1989] 1 NZLR 8; Derham, The Law Relating to Set-Off, 3 ed, paras 5.82-5.85).

...

[65] The question is an important one. I do not think I ought to decide it without properly informed argument. It may well be that I should follow the decision of Bryson J (as his Honour then was), in Batiste v Lenin at [105] where his Honour said that the words "without deduction" prevent the lessee from relying on rights or claims to set-off, recoup or otherwise withhold payment of part of the rent. On the other hand, his Honour may not have had the benefit of a full citation of authority. Further, the Court of Appeal expressed the view, albeit obiter, that it was not persuaded that such a clause could defeat a lessee's right of recoupment.

Similarly, in Australian Receivables Ltd v Tekitu Pty Ltd [ 2008] NSWSC 433, I observed AT [23]:

Secondly, given the obligation under cl 17.5 to pay "immediately and without deduction", it is at least arguable that ARL's claim is not amenable to a set-off. On this, there are cases in both directions, with United Kingdom authorities tending to favour the view that such terminology might be insufficient to exclude the right to set-off [see Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501; Edlington Properties Ltd v J H Fenner & Co Ltd [2006] EWCA Civ 403], while recent New South Wales authority arguably tends in the opposite direction [see Batiste v Lenin [2002] NSWSC 233, [102]-[105]; (2002) 10 BPR 19,441 at 19,468-19,169; cf on appeal Batiste v Lenin [2002] NSWCA 316, [49]; (2002) 11 BPR 20,403 at 20,417; Carrathool Hotel Pty Ltd v Scutti [2005] NSWSC 401, [62]-[65]].

See also Sandbank Holdings Pty Ltd v Durkan [ 2010] WASCA 122 at 36 (Murphy J, Pullin and Newnes JJA agreeing):

[35] There is a line of authority to the effect that the words "clear of all deductions" and cognate phrases such as "without deductions" are to be given their literal and ordinary meaning, and that they exclude any right of set off recoupment: Batiste v Lenin [2002] NSWSC 233 ; (2002) 10 BPR 19,441 [103]-[105]; cf Batiste v Lenin [2002] NSWCA 316; (2002) 11 BPR 20,403 [49]; R & J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd [2008] NSWSC 310; (2008) 13 BPR 25,161 [72]-[73]; Becklay Pty Ltd v ARJ Freight Pty Ltd [2003] NSWSC 155 [25]; Webster v Banning Holdings Pty Ltd [2001] WASC 11 [29]; Debonair Nominees Pty Ltd v J & K Berry Nominees Pty Ltd [2000] SASC 244 ; (2000) 77 SASR 261 [43]; Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 at 175; Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd [2003] NSWSC 851 ; (2003) 59 NSWLR 312 [196]-[198]. There is, on the other hand, authority to the effect that the word "deduction" does not, on its own, embrace equitable set off: Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501; Grant v NZMC Ltd [1989] 1 NZLR 8; Re Partnership Pacific Securities Ltd [1994] 1 Qd R 410 at 424-425. See also Derham R, The Law of Set-Off (3rd ed, 2003) [5.83]-[5.86].

[36] It is unnecessary, in this appeal, to attempt to resolve the divergence of authority or to express a preference for one line of authority over the other, as cl 3.1 in this case expressly uses the words "without set off (whether arising at law or in equity)", in addition to the words "free and clear of all deduction whatsoever". Clause 3.1 is unambiguous and the natural and ordinary meaning of the words preclude any potential for setting off or deducting claims for money had and received against the liability to pay rent.

And see also V K & M R Leong Nominees Pty Ltd v Batur [2003] VSC 17, [13]-[16] (Ashley J).

The position has recently been examined by Windeyer AJ in Miwa Pty Ltd v Siantan Properties Pty Ltd [ 2010] NSWSC 1203, to whose analysis I am greatly indebted.

In Connaught Restaurants Ltd v Indoor Leisure Centre Ltd [1994] 1 WLR 501, the relevant covenant was "to pay: the rents at the time and in manner aforesaid without any deduction (except as aforesaid) and if so required by banker's standing order". Waite LJ, in the Court of Appeal said that on the proper interpretation of the lease in question those words did not exclude a tenant's equitable right to set-off. His Lordship, following Grant v NZMC Ltd [1989] 1 NZLR 8 where it was held that a covenant to pay rent free and clear of exchange or any deduction whatsoever did not amount to a contract to exclude an equitable right of set off, held that "deduction" did not in its natural sense embrace a set-off, and that, given that c lear words are needed to exclude a tenant's remedy of an equitable right of set-off, the parties to this lease had used language insufficiently clear to carry the implication of an intention to exclude the tenant's equitable right of set-off.

Windeyer AJ observed (at [19]) that this decision had been followed, without discussion, by Macready AsJ in Saratoga v Canjs [2010] NSWSC 65 4 , [40] - which involved a claim to set aside a statutory demand where an offsetting claim includes a cross-claim - and added:

While I am not bound by the English or New Zealand decisions regard must be paid to their authority. I am bound to say that if it were not for them I would have the greatest difficulty in coming to a conclusion that a reduced payment for rent was not a deduction from rent at least in the case of a claimed set off for an unliquidated sum where there is no evidence of expenditure. Where the obligation is to pay the rent without deduction monthly in advance with time being of the essence I would have thought that deduction included claimed set off of sum uncertain.

His Honour then referred to the following passages in the judgment of Bryson J in Batiste v Lenin [2002] NSWSC 23 3 :

Recoupment as an answer to failure to pay rent.

102 In answer to the lessor's cross-claim for possession insofar as it was based on breaches of covenants to pay rent and outgoings the lessee relied upon the right of recoupment established by the judgment of Goff J in Lee-Parker v Izzet [1971] 1 WLR 1688. His Lordship referred to the history of recoupment at 1692G to 1693F and concluded "I do not think this is bound up with technical rules of set off. It is an ancient common law right. I therefore declare that so far as the repairs are within the express or implied covenants of the landlord, the third and fourth defendants are entitled to recoup themselves out of future rents and defend any action for payment thereof. It does not follow however that the full amount expended by the third and fourth defendants on such repairs can properly be treated as payment of rent. It is a question of facts in every case, whether or to what extent the expenditure was proper." The subject was considered again, with further references to authority, in British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] 1 QB 137. Payments made by a lessee in situations of necessity which had the effect of meeting some obligation which by the terms of the lease the lessor was obliged to meet have been treated as payments to the use of the lessor and as discharging pro tanto the obligation to pay rent. The lessor's obligations considered have usually but not invariably been obligations to repair. There is no reason in principle why the same rules should not be applied to recoup lessee's expenditure against other moneys payable to the lessors, such as obligations to repay outgoings.

103 Plaintiffs' counsel was not able to refer me to any case in which a right of recoupment has been upheld notwithstanding a provision to the effect that rent will be paid "without deduction", as in Art.11. Counsel contended that recoupment by the lessee under this principle is not a deduction but that when the obligation to pay rent arises it is immediately discharged, so that there is no further obligation to make a payment, and withholding an amount paid to meet an obligation which the lessor should have met is not a deduction. Counsel pointed to the view expressed by Mr Andrew Waite in his article "Repairs and Deduction from Rent" in The Conveyancer and Property Lawyer , (1981) 45 Conv (NS) 199; at p 210 Mr Waite expressed the view that "Where the tenant has carried out repairs in accordance with the rules and deducted the cost from rent, the rent is deemed to have been paid. In other words the tenant has lawfully spent the rent on carrying out the repairs. The landlord has no claim for the rent. The tenant's action does not merely provide a defence to a claim for rent (as in the case of set-off), it negates the landlord's claim." Mr Waite went on to refer to Sapsford v Fletcher (1792) 4 T.R. 511, 100 ER 1147 which however does not directly deal with a covenant to pay rent without deduction.

104 In Debonair Nominees Pty Ltd v J & K Berry Nominees Pty Ltd (2000) 77 SASR 261 at 271 Mullighan J decided to the effect that literal operation should be given to a provision that rent must be paid clear of all deduction. The authorities to which his Honour referred relate to the principle, which is well established, that the lessee's obligation to pay rent is independent of any obligation of the lessor to effect repairs; the premises may be in disrepair or may have been destroyed but, subject to any provision of the lease, the obligation to pay rent continues. The operation of reference to payment without any deduction whatsoever in Pt 2 of Schd.4 of the Conveyancing Act 1919 was noted, without decision, by McLelland J in Lambert Pty Ltd v Papadatos Pty Ltd (1991) 5 ACSR 468 at 471 .

105 My view is that on the literal and true meaning of the covenant to pay rent without deduction, there is no room for reliance on the right of recoupment referred to in Lee-Parker v Izzet . In my opinion the literal meaning of "without deduction" makes this clear, and looking further to the purpose of using those words, there is no other purpose available than to prevent the lessee from relying on rights or claims to be entitled to set off, recoup or otherwise withhold payment of part of the rent. In the ordinary use of language to recoup another obligation out of rent is to make a deduction from the rent, and if the use of the words "without deduction" did not achieve this result I cannot see what they would achieve, as the ordinary obligation of a debtor is to pay the whole debt.

In the appeal from that decision, it was unnecessary to resolve this issue, but Sheller JA, in whose judgment Giles and Santow JJA agreed, observed ( Batiste v Lenin [2002] NSWCA 316, [49]):

I should add that I am not persuaded that had the lessee been entitled to be recouped on the basis of the common law principle the claim could have been defeated by the provision in Art 11.01(a) requiring the lessee to pay rental "without deduction"; see Waite, "Repairs and Deduction from Rent" (1981) 45 Conv (NS) 199 at 210. But I do not need to consider this further.

Bryson J referred to those observations in R & J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd [2008] NSWSC 310 at [72]-[73], as follows:

At para [49] observations of Sheller JA show that he did not endorse my view at [105] on the effect of a "without deduction" provision in a covenant to pay rent; Sheller JA did not express disapproval or dispose of the subject.

I remain of the view which I expressed in that case. In the present case the lessees made no expenditure which could be treated as recoupment or equitable set-off against rent. Even if they had done so the "without deduction" provision in the present lease would bar a claim of recoupment.

Windeyer AJ concluded:

[25] I am always reluctant to add another decision of a single judge to those already published on a contentious subject. If I am correct on the construction point it is unnecessary to do so but as it was an important issue I consider it proper to decide it. In my view the decision of Bryson J is convincing and should be followed. I refer in particular to para 105. It is clear there could be no deduction relying upon some cross-claim unconnected with the subject matter of liability for rent. It follows that if the words are to be of use they must refer to recoupment or set off. It follows that I am of the view that a requirement to pay rent without deduction eliminated any entitlement to set off.

Beach J had taken the same view in Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 (at 175). However, a contrary view was adopted by Williams J in Re Partnership Pacific Securities Limited [1994] 1 Qd R 410, 424-5, where his Honour endorsed the view expressed in Mr Waite's article, "Disrepair and Set-off of Damages against Rent: The Implications of British Anzani " (1983) The Conveyancer 373, 389, that the words "without deduction" are more apt to catch and exclude the common law right to deduct by way of recoupment - where a landlord responsible for repairs fails to carry them out and the tenant then spends money on those repairs, thereby paying the rent - than an equitable right of set-off, the exclusion of which requires clear words.

I would depart from the conclusions of Windeyer AJ and Bryson J with the greatest diffidence. However, in Miwa, Windeyer AJ was concerned with " the case of a claimed set off for an unliquidated sum where there is no evidence of expenditure". In Batiste, Bryson J was concerned with a claim to recoup at common law under the principle in Lee-Parker v Izzet . Neither was a case of equitable set-off. Moreover, whether such a clause excluded equitable set-off was expressly doubted by the Court of Appeal in Batiste ; that it did not was upheld by the Court of Appeal of England in Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501 and in Edlington Properties Ltd v J H Fenner & Co Ltd [2006] EWCA Civ 403, by the New Zealand Court of Appeal in Grant v NZMC Ltd [1989] 1 NZLR 8, and by Williams J in Re Partnership Pacific Securities Limited [1994] 1 Qd R 410. In the context of equitable set-off, I find the reasoning of Williams J compelling. It still leaves the phrase "without deduction" work to do, in excluding the common law right of deduction for repairs, without extinguishing the equitable right of set-off.

Moreover, in the present case, it was an express term of the October agreement that, to the extent that Elite paid for works within 5A's responsibility, such payments would be treated as a prepayment of rent. In my view, in those circumstances, as between Elite and 5A, clause 12.1 would not have excluded Elite's entitlement in equity to set-off any such payments against rent.

Set-off against Kingsway

(NSW) Real Property Act 1900, s 53, relevantly provides as follows:

53 Land under the provisions of this Act-how leased

(1)When any land under the provisions of this Act is intended to be leased or demised for a life or lives or for any term of years exceeding three years, the proprietor shall execute a lease in the approved form.

...

(6) A lease of land which is subject to a mortgage, charge or covenant charge is not valid or binding on the mortgagee, chargee or covenant chargee unless the mortgagee, chargee or covenant chargee has consented to the lease before it is registered.

Elite contends that Kingsway is bound by the lease, its consent having been given on or about 20 March 2009, or at least before the lease was registered on 21 April 2009. As has been observed, no instrument of consent was ever signed by Kingsway, but Kingsway does not dispute that it consented to the lease in the form in which it was registered. Mr Barry's email of 20 March refers to an oral statement of Mr Polito suggestive of consent, and consent is implicit in Mr Polito, albeit as Mr Barry's agent, attending to registration of the lease on 21 April. In my view, Kingsway consented to the lease prior to registration; alternatively, it would be estopped from denying that it consented. Kingsway did not dispute that it had consented to the lease, in the form in which it was registered.

The next question is whether that consent, when it was given in April 2009, incorporated the terms contained in the "terms of consent" that Kingsway had proffered in September 2007 - notwithstanding that neither 5A nor Elite had ever signed or returned those terms of consent. Kingsway was aware, in February 2009, that the terms of consent had not been signed and returned. There was no reference to the terms of consent in the 2009 communications preceding registration between Kingsway, 5A and Elite. On 20 March, Mr Barry communicated to Elite, with a copy to Kingsway, that if registration were pursued first, the other issues could be addressed later. Elite pressed for registration, but it never assented to the terms of consent. Kingsway procured registration of the lease, without insisting on assent to the terms of consent. Consent is a unilateral act, and does not require the concurrence of the lessor and lessee. However, the mortgagee cannot unilaterally foist additional obligations on, or detract from the rights of, the lessee or lessor, without their agreement. In my judgment, the consent that was given by Kingsway, implicitly by attending to registration of the lease, was given without reference to the September 2007 terms of consent, and did not incorporate them. Accordingly, Kingsway is bound, in the sense intended by s 53(4), by the lease in the form in which it was registered, to which it consented prior to registration - which included, relevantly, Elite's covenant to pay the rent "without deduction" (clause 12.1), and 5A's covenant to pay for lessor's works (clause 19.2), as defined in clause 19.1.

Elite submits that Kingsway is also bound by the October agreement. I reject this, for the following reasons. First , the October agreement was not a variation of the lease, but a personal agreement between 5A and Elite. Despite correspondence in which it asserted that there was a "pre-payment" an agreement, Elite re-executed the lease after minor alterations in April 2009, knowing that it was to be registered without any express alteration of the original terms about lessor's works to reflect the alleged agreement variation. That it was a personal agreement between 5A and Elite, and not a variation of the lease, is concluded by the subsequent amendment and initialling and registration of the lease, without reference to any alleged variation.

Secondly, even if, contrary to my above conclusion, the October agreement amounted to a variation of the lease as between 5A and Elite, Kingsway's consent was only to the lease which was registered, and not to any variation of it. The nature and purpose of the Torrens system in general, and s 53(4) in particular, is such that the requirement for consent extends to any variation, so that a mortgagee would not be bound by a variation of a lease to which it had not consented prior to registration of the variation, any more than it would be bound by a lease to which it had not consented - at least, other than an amendment authorised by and in accordance with the lease, and within the scope of the consent. A variation of lease, enforceable as between 5A and Elite, would not bind the mortgagee unless within the scope of the original consent, or the subject of a further consent. Kingsway only consented to the lease document containing the terms as executed and registered, which did not include, nor authorise, the October agreement.

Thirdly , insofar as Elite alleges that Kingsway is estopped from denying that its consent extends to the October agreement, adequate particulars supporting the allegation are lacking, but its basis appears to be (1) that Kingsway knew of the poor financial position of 5A, and of the lease proposal, including the terms of the lease - specifically those with respect to lessor's works - and believed if the lease proceeded there would at least potentially be a positive impact on 5A, which would be to Kingsway's advantage as its creditor and mortgagee; and (2) that with that knowledge, Kingsway offered to advance to 5A the money required to fund the lessor's works that were 5A's obligation under the lease, and in fact paid for some of the lessor's works by funding 5A, both by direct payments to contractors and by advances to 5A.

However, the first of those matters (which I would accept as established), falls well short of establishing knowledge of the October agreement at the time of the alleged act of acquiescence, which would be fundamental to any case of consent or estoppel. There is no evidence that Kingsway had knowledge, in 2007 (when it agreed to advance funds for the lessor's works), of the October agreement. The alleged variation was first raised in correspondence with Kingsway by Elite during November 2008, after Kingsway had served its first section 63 notice, and long after Kingsway had made the $250,000 advance. Thereafter, Kingsway insisted on being paid the rent without deduction (which is quite inconsistent with consent to the variation) and Elite complied - admittedly under protest or reserving rights, at least on some occasions.

As to the second matter, it is at least as, if not more, consistent with Kingsway funding 5A to perform the lessor's works in accordance with clause 19.2 of the lease, than with consent to or acquiescence in the October agreement. In any event, its effect as an act of consent or acquiescence would depend upon establishing the requisite knowledge, which for the reasons just given is absent.

It is true that, by the time it finally consented to the lease on 21 April 2009, Kingsway knew that Elite claimed to be entitled to a credit for prepayment, but mere consent to the lease that was registered cannot of itself import consent to the October agreement, when Kingsway continued to insist upon rent being paid without deduction. There is no allegation, and no evidence, that the parties proceeded on the footing that Kingsway had consented to the October agreement; nor that Kingsway stood by, knowing that Elite believed that it had so consented; nor that Kingsway represented or conducted itself in such a way as to induce Elite to believe that Kingsway had so consented (to the contrary, it insisted on payment of the rent in full); nor that 5A acted reasonably (or at all) in reliance upon any such belief. Nor is it apparent what relevant detriment Elite incurred and would have avoided but for Kingsway's supposed silence. Elite submitted that Kingsway "remained deliberately silent in circumstances where it knew that [Elite] was acting to its detriment in entering into the lease and [Elite] was a person of special disadvantage being an occupant of commercial premises on which it had been duped into expending significant sums (improving its value for the benefit of Kingsway) and having no alternative premises to conduct its business from", and that the result was an estoppel against denying Elite the "full benefit of the lease" and an equity "to abate and set off the rent, costs and interest". Exactly what erroneous assumption on the part of Elite Kingsway is supposed to have known of but remained silent about, is not apparent. The relevant assumption for Elite would be that it was entitled to have its expenditure on fit-out treated as "pre-paid rent" under the October agreement. But there is no allegation, let alone evidence, that Kingsway knew of the October agreement before November 2008, and once it became aware of Elite's contention in that respect, Kingsway's conduct in insisting upon payment of rent in full is hardly deliberate silence, and could not be understood as acceptance or acquiescence in Elite's position.

Further, it is said that the consent to lease was provided on a "fully informed basis", specifically including that Elite as lessee was paying an additional $45 per square metre in respect of the fit-out, which is agreed to remain the property of the lessor, and that it was unconscionable for Kingsway to insist upon payment of the full rent when, in the events that transpired, Elite had fitted out the premises at its own expense. But even if all that were established - and, as I have found, it is not established that Elite has paid for works which 5A was bound to perform - that does not establish knowledge of, let alone consent to or acquiescence in, the October agreement.

It follows that Kingsway is bound only by the lease as registered, and not by the October agreement between Elite and 5A. The evidence does not establish any wider consent on the part of Kingsway.

Although Kingsway is bound by the registered lease, that does not mean that it was answerable for any breach of the lessor's personal covenants contained in the lease. Elite's case appeared to proceed on the basis that, Kingsway having consented to the lease, it was bound by all the obligations of 5A as lessor and was amenable to any set-off Elite had against 5A. However, s 53(4) does not impose on a mortgagee all of the obligations of the lessor contained in a lease to which it has consented - it merely renders the mortgagee's interest in the land subject to that of the lessee under the lease. It does not render the mortgagee liable to perform the lessor's personal covenants at the suit of the lessee. Accordingly, while consent to the lease is a necessary condition of any right of set-off against Kingsway, it is not a sufficient condition.

As has been observed, breach by 5A of cl 19.2 (by failing to perform the lessor's works), if established, would have given Elite a claim for damages for breach of covenant against 5A which, I am prepared to accept, could have been set off against rent in accordance with the principles discussed in British Anzani. However, whatever the position in that respect between Elite and 5A, as between Elite and Kingsway - even absent clause 12.1 of the lease - neither breach by 5A of clause 19, nor the October agreement, could ground an equitable set-off. This is because, even absent a contractual basis to deny a right of set-off, a lessee's personal claim against a lessor does not affect a mortgagee in possession [ Reeves v Pope [1914] 2 KB 284; Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168; Ory v Betamore Pty Ltd (in liq) (1993) 60 SASR 393]. Even if a personal claim by the lessee can be set off against rent payable to the lessor, in New South Wales (as under the equivalent provisions in Victoria and South Australia, but not in Queensland) the mortgagee has an independent statutory right not only to receive but also to enforce the rent covenant directly against the lessee, which is not affected by any personal claim of the lessee against the lessor [ Real Property Act , ss 60, 63; Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168; Ory v Betamore Pty Ltd (in liq) (1993) 60 SASR 393; cf as to the position in Queensland Re Partnership Pacific Securities Limited [1994] 1 Qd R 410 ].

Although, in Ory v Betamore, the Court emphasised that the overpayments made by the lessee in that case were not rent - suggesting that the position might have been otherwise in the case of an overpayment of rent - in fact the same position would obtain, notwithstanding that the claimed set-off was in respect of a prepayment of rent, as distinct from damages for breach of covenant. This is because of the legal effect of a prepayment of rent in advance by a lessee where there is a prior mortgage, which - albeit in the context of a common law mortgage - was explained by Willes J in De Nicholls v Saunders (1870) LR 5 CP 589 (at 594):

The receipt of rent the could not be treated here as a discharge by the landlord, because by assigning the reversion before the rent was received by him he had parted with the power of giving such a discharge. The plaintiff [mortgagee] lent his money on a contract, which was under an implied condition that the landlord should continue entitled to the rent at the time it became due, and able, therefore, then to give the plaintiff a valid discharge.

Accordingly, it was held that pre-payment of rent before it was due was not a fulfilment of the obligation imposed by the covenant to pay rent, but rather an advance to the landlord with an agreement that on the day when the rent became due such advance would be treated as a fulfilment of the obligation to pay rent [see also Federal Commissioner of Taxation v Steeves Agnew & Co (Vict) Pty Ltd (1951) 82 CLR 408, 418 (Dixon J); and Hudson v Shevket [ 2003] NSWSC 648, [17] (Malpass M)]. It followed that a payment by the tenant to the landlord, expressed to be and accepted as a payment of rent in advance, was not effective against a mortgagee who obtained the mortgage before the payment, and the mortgagee was permitted to recover the rent that, according to the terms of the lease, accrued after the tenant had notice of the mortgage, the tenant not being entitled to rely on the advance payment to the landlord as a defence.

Accordingly, neither a claim for damages by Elite for breach by 5A of clause 19, nor a claim that it was entitled to be treated as having prepaid rent under the October agreement, would found an equitable set-off on the part of Elite against Kingsway.

Other matters

My above conclusions concerning the October agreement, and that 5A has not been shown to have failed to perform its obligations under that agreement, also dispose of Elite's claim that 5A (and Mr Georgeski) engaged in misleading and deceptive conduct.

Conclusion

For the foregoing reasons, I have reached the following conclusions:

Upon the proper construction of the lease and in the events which happened, 5A's obligations in connection with "the Lessor's Works" comprised the installation of the kitchen, male and female water closets, shower, air-conditioning, elevator and store, in accordance with the initialled plan, up to a ceiling of $250,000, with Elite to be responsible for cost of fit-out in excess of that amount.

In October 2007, Mr Georgeski on behalf of 5A and Mr Pinn on behalf of Elite agreed that Elite would supervise the completion of the works on behalf of 5A as well as Elite, and in principle Elite, in the absence of further arrangements, would be entitled to treat as prepaid rent any moneys expended by it in respect of obligations of 5A. No other such arrangement having been made, the consequence is that, to the extent that Elite can establish that it paid for works that fell within the responsibility of 5A under the lease, it is entitled, as against 5A, to have those payments treated as advances of rent.

In circumstances where, while it is accepted that 5A was obliged to fund fit-out to the extent of $250,000, it is also common ground that any cost of fit-out in excess of that sum was to the account of Elite, Elite has failed in the notoriously difficult task of proving the negative, namely that 5A did not perform lessor's works to the value of $250,000, in circumstances where there was at least some evidence on that issue - from Mr Georgeski, and from Kingsway's records as to the direct payments - that 5A had done so. Accordingly, Elite has not established that 5A did not perform its obligations under clause 19.2 of the lease, and its claims fail on the facts.

Particularly as it was an express term of the October agreement that, to the extent that Elite paid for works within 5A's responsibility, such payments would be treated as a prepayment of rent, as between Elite and 5A, clause 12.1 would not have excluded Elite's entitlement in equity to set-off any such payments against rent.

Kingsway consented to the lease in the form in which it was registered. That consent was given implicitly by attending to registration of the lease, and without reference to the September 2007 terms of consent, which were not incorporated in it. Kingsway consented to, and is bound by, only the lease as registered, and not the October 2007 agreement

Neither a claim for damages by Elite for breach by 5A of clause 19, nor a claim that it was entitled to be treated as having prepaid rent under the October agreement, would found an equitable set-off on the part of Elite against Kingsway, which as mortgagee in possession has an independent statutory right to recover the rent, free of any personal liability of 5A to Elite, including in respect of rent paid in advance.

It follows that the all Elite's claims fail, and must be dismissed. On its cross-claim, Kingsway is entitled to a declaration, though I think it should be in a form somewhat different from that sought in the cross-claim.

Subject to any submissions counsel may wish to make as to their form, I propose to make the following orders:

(1) Order that the plaintiff's claims be dismissed;

(2) Declare that the cross-claimant Kingsway Group Limited as mortgagee in possession is entitled to recover and receive from the cross defendant Elite Promotion and Management Pty Limited the rent payable under lease registered number AE18882N as it accrues from the date when the cross-claimant entered into receipt of the rent ("the possession date"), free of any claim by the cross-defendant (a) for damages for breach by the lessor of clause 19 of the lease, and/or (b) that any part of the rent was paid in advance before the possession date.

As has been requested, I will afford the parties an opportunity to be heard on the question of costs.

*******

Decision last updated: 27 June 2011

Medium Neutral Citation:	Elite Promotions & Management Pty Limited v 5A Investments Pty Limited & Ors [2011] NSWSC 590
Hearing dates:	22 & 24 September 2010
Decision date:	17 June 2011
Jurisdiction:	Equity Division - Duty List
Before:	Brereton J
Decision:	The plaintiff's claim against the first defendant to set-off sums expended in fit-out of the property as prepayments of rent fails and is dismissed. The plaintiff's claim against the third defendant to set-off sums expended in fit-out of the property as prepayments of rent fails and is dismissed.
Catchwords:	REAL PROPERTY - Leases - construction of "lessor's works" - works defined in lease as 'works described in the Plan and Specification' - plaintiff submits prior heads of agreement aid to construction - use of different terminology and provision in lease for mechanism to define lessor's works entails heads of agreement does not assist construction - representations said to be made by lessor to mortgagee as to lessor's works inadmissible as subjective understanding of mortgagee not a permissible basis for interpretation - sketch plan exchanged and initialed at time of execution of lease encapsulates works. REAL PROPERTY - Leases - lessee asserts variation of registered lease such that lessee to take over lessor's works with lessee's expenditure to be treated as prepayment of rent - discussions as to arrangements for lessee to perform works and for expenditure to be credited as prepayments of rent amount to personal agreement between lessee and lessor - if lessee can establish it paid moneys in relation to obligations of lessor, lessee would be entitled to set-off such sums as prepaid rent - insufficient evidence to establish that lessor did not perform its obligations and that its obligations were performed by lessee - claim against lessor fails - claim against mortgagee must also fail. REAL PROPERTY - Leases - mortgagee consents to grant of lease under (NSW) Real Property Act (1900) s 53(4) - s 53(4) does not render mortgagee liable to perform lessor's covenants - s 53(4) renders mortgagee bound by lease if mortgagee consents to lease before registration -whether mortgagee could be bound by oral agreement in respect of prepaid rent - oral agreement merely personal agreement between lessee and lessor and cannot bind mortgagee - in any event mortgagee only consented to lease as registered that did not include oral agreement. REAL PROPERTY - Leases - equitable estoppel - mortgagee said to be estopped from denying consent to oral agreement varying lease - no evidence mortgagee knew of alleged variation - no evidence as to parties proceeding on footing that agreement was varied - mortgagee did not remain deliberately silent - no evidence lessee reasonably relied on such belief - mortgagee not estopped from denying consent to variation. REAL PROPERTY - Leases - tenant's right of equitable set-off - exclusion by clear words - whether 'without deduction' constitutes such clear words - 'without deduction' apt to exclude common law right to deduct by way of recoupment - such words not sufficiently clear to capture equitable set-off - in circumstances of present case, where express term of oral agreement provided for lessee to be credited as prepaid rent with payments for works within responsibility of lessor, 'without deduction' did not exclude right to equitable set-off - whether set-off available against mortgagee - lessee's personal claim against lessor cannot bind mortgagee in possession - mortgagee in possession has independent statutory right to enforce rent covenant against lessee unaffected by personal claim of lessee against lessor - mortgagee entitled to recover rent accruing to tenant after notice of mortgage regardless of prepayments to lessor prior to mortgage.
Legislation Cited:	(NSW) Real Property Act, s 53, s 60, s 63
Cases Cited:	Australian Receivables Ltd v Tekitu Pty Ltd [2008] NSWSC 433 Batiste v Lenin [2002] NSWSC 233 British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137 Carrathool Hotel Pty Ltd v Scutti [2005] NSWSC 401 Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] VR 168 Connaught Restaurants Ltd v Indoor Leisure Centre Ltd [1994] 1 WLR 501 De Nicholls v Saunders and Another (1870) LR 5 CP 589 Edlington Properties Ltd v J H Fenner & Co Ltd [2006] EWCA Civ 403 Federal Commissioner of Taxation v Steeves Agnew & Co (Vict) Pty Ltd 82 CLR 408 Grant v NZMC Ltd [1989] 1 NZLR 8 (NZCA) Hudson v Shewket [2003] NSWSC 648 Miwa Pty Ltd v Siantan Properties Pty Ltd [2010] NSWSC 1203 Lee-Parker v Izzet [1971] 1 WLR 1688 Ory v Betamore Pty Ltd (in liq); Farrow Mortgage Services Pty Ltd (in liq) (1993) 60 SASR 393 R & J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd [2008] NSWSC 310 Partnership Pacific Securities Limited [1994] 1 Qd R 410 Reeves v Pope [1914] 2 KB 284 Sandback Holdings Pty Ltd v Durkan [2010] WASCA 122 Saratoga Integration Pty Ltd v Canjs Pty Ltd [2010] NSWSC 654
Texts Cited:	Andrew Waite, "Disrepair and Set-off of Damages against Rent: The Implications of British Anzani" (1983) The Conveyancer 373. V K & M R Leong Nominees Pty Ltd v Batur [2003] VSC 17
Category:	Principal judgment
Parties:	Elite Promotion & Management P/L (plaintiff) 5A Investments Pty Ltd (first defendant) Alex Georgeski (second defendant) Kingsway Group Limited (third defendant)
Representation:	RI Goodridge (plaintiff) A Georgeski (in person, first & second defendants) GK Burton SC (third defendant) Simpson Freed Lawyers (plaintiff) Willis & Bowring (third defendant)
File Number(s):	2009/ 289211