Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

S CI 2009 07142

FENRIDGE PTY LTD (ACN 052 286 521)	Plaintiff
v
RETIREMENT CARE AUSTRALIA (PRESTON) PTY LTD (ABN 51 113 960 946) & ORS	Defendants

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JUDGE:	HARGRAVE J
WHERE HELD:	Melbourne
DATE OF HEARING:	6, 7, 11 - 15, 21 and 22 February, 5, 6, 7, 19 and 20 March 2013
DATE OF JUDGMENT:	30 August 2013
CASE MAY BE CITED AS:	Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd & Ors
MEDIUM NEUTRAL CITATION:	[2013] VSC 464

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BREACH OF CONTRACT – Lease of nursing home premises – Whether lessee breached express term in lease by ceasing to operate nursing home business prior to expiration of lease – Whether obligation under express term was inconsistent with obligations under Aged Care Act1997 (Cth) – Held: Lessee breached express term by terminating business prior to expiry of lease – no inconsistency between obligation under express term and statutory obligations.

CONTRACT – IMPLIED TERMS – Lease of nursing home premises – Change in applicable legislative regime during term of lease – During term of lease Aged Care Act 1997 (Cth) replaced legislative regime under National Health Act 1953 (Cth) for operation of nursing homes – Whether term should be implied in lease requiring lessee to transfer its ‘allocated places’ at premises to lessor at end of lease – Held: term should be implied – North Adelaide Nursing Home Pty Ltd v Seely [2000] SASC 455; Harrington v Harrington Services Pty Ltd (in liq) (2002) 55 NSWLR 618.

TORT – WRONGFUL INTERFERENCE WITH CONTRACTUAL RELATIONS – Lessee merged with another entity during term of lease – Whether merged entity (A) induced lessee’s breaches of lease – Held: A liable for tort of wrongful interference with contractual relations between lessor and lessee – Allstate Life Insurance Company & Ors v ANZ Banking Group Ltd (1995) 58 FCR 26; Emerald Construction Co Ltd v Lowthian [1966] 1 WLR 691.

EXEMPLARY DAMAGES – Whether A liable for exemplary damages – Held: Exemplary damages awarded.

DAMAGES – LOSS OF OPPORTUNITY – Whether lessor lost a valuable opportunity as a result of breach of lease – Whether obstacles facing lessor would have prevented lessor from exploiting opportunity to conduct a profitable nursing home business – Lessor completed development of an apartment complex at premises following lease – Whether any award of damages should take account of profit from apartment development – Held: Lessor lost opportunity to conduct profitable nursing home business at premises after expiry of lease – Opportunity had significant value – Lost opportunity should take into account net profit from apartment development – British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673; Tay v Koh [1998] WASCA 138; Manwelland Pty Ltd v Dames & Moore Pty Ltd [2001] QCA 436; Brown v Dream Homes SA Pty Ltd (2008) 102 SASR 93.

LANDLORD AND TENANT – DAMAGES – Lessee breached obligation to deliver up premises at end of lease in as good repair, order and condition as they were at commencement of lease (‘make good obligation’) – In developing apartment complex, lessor did not conduct any of the precise make good works and would never do so – Whether lessor can recover the costs that would have been incurred had it performed the precise make good works – Held: lessor entitled to recover cost of precise make good works – Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; Joyner v Weeks [1891] 2 QB 31; Maori Trustee v Rogross Farms Ltd [1994] 3 NZLR 410; Gagner Pty Ltd v Canturi Corporation Pty Ltd [2009] NSWCA 413.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr C M Scerri QC with Mr C J Horan	Arnold Bloch Leibler
For the Defendants	Mr C Gunst QC with Mr R C Knowles	Clayton Utz

TABLE OF CONTENTS

Factual narrative................................................................................................................................. 5

Was RCA entitled to cease operating the nursing home before the end of the lease?....... 40

Were there implied terms of the lease?........................................................................................ 51

Did Regis induce RCA’s breaches of the lease?......................................................................... 65

Did RCA mislead Fenridge?.......................................................................................................... 73

Did RCA and Regis misled residents and staff?....................................................................... 76

Has Fenridge lost a valuable opportunity?................................................................................. 77

If Fenridge has lost a valuable opportunity, what was the opportunity worth?................. 98

In calculating damages, must Fenridge give credit for any profit from the apartment development?............................................................................................................................................................ 112

Has Fenridge suffered recoverable loss for breach of the make good obligation? If so, in what amount?............................................................................................................................................ 124

Conclusion....................................................................................................................................... 142

HIS HONOUR:

The plaintiff, Fenridge Pty Ltd, is a company owned and controlled by Dr Mark Santini, a general medical practitioner and businessman. In 1991, Fenridge purchased the land and improvements at 36-38 Benambra Street, Preston (‘the premises’), subject to an existing lease dated 3 December 1990.

The improvements on the land included a purpose built nursing home building known as ‘Preston & Districts Nursing Home’, which had been constructed by the previous owner in the early 1980s.

During the term of the lease, following assignments with Fenridge’s consent, the nursing home was operated by a series of companies. Between August 2000 and August 2005, a company related to Moran Health Care Group Pty Ltd, the third defendant, was the lessee and operator. It then sold its business and assigned the lease to the first defendant, Retirement Care Australia (Preston) Pty Ltd (‘RCA’). RCA then engaged Moran to manage the nursing home on its behalf. RCA was the lessee of the premises when the lease ended on 28 February 2008. Moran is a defendant because it guaranteed RCA’s obligations under the lease; as did its ultimate owner, the late Douglas Moran. His executor is the fourth defendant.

By the terms of the lease, the lessee covenanted: (1) to keep the premises continuously open for business as a private nursing home during the currency of the lease (the ‘continuous business obligation’); and (2) to deliver up the premises to the lessor at the end of the lease in as good repair, order and condition as they were at the commencement of the lease, ‘fair wear and tear’ excepted (the ‘make good obligation’).

Fenridge claims that RCA breached these covenants by ceasing its nursing home business about four months before the lease ended, and by failing to make good the premises at the end of the lease. Further, Fenridge claims that the breach of the continuous business obligation was intentionally induced by the fifth defendant, Regis Group Pty Ltd, with knowledge of the terms of the lease. Regis had by then merged with RCA.

Fenridge also contends that there were implied terms of the lease, to the effect that: (1) during the term of the lease, the lessee was required to do all things necessary to maintain and preserve ‘the approval of the premises’ as a nursing home under applicable legislation; (2) at the end of the lease, the lessee was required to do all things necessary to enable the lessor or its nominee to continue the nursing home business at the premises; and (3) at the end of the lease, the lessee was required to do all things necessary to transfer its ‘allocated places’ at the premises to Fenridge at the end of the lease. Fenridge claims that RCA breached those implied terms.

Next, Fenridge claims that RCA engaged in misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth), by misleading it about RCA’s intention to close the nursing home prior to the end of the lease; and that both RCA and Regis misled the residents and staff of the nursing home, by failing to disclose that Fenridge intended to continue operating the nursing home after the lease ended.

Fenridge claims damages for breach of the continuous business obligation, for breach of the implied terms, and by reason of the alleged misleading conduct. Damages are claimed on the basis of diminution in value of the premises and, further, for loss of the opportunity to continue operating the nursing home profitably after the lease ended. Further, Fenridge claims exemplary damages from Regis. The defendants deny the claims. They contend that: (1) there were no implied terms; (2) RCA was not in breach of the continuous business obligation, because the lease should be ‘construed on the footing that’ its obligations to the residents of the nursing home were paramount - and an orderly cessation of business over a six month period was accordingly permitted under the lease notwithstanding the express words of the continuous business obligation; (3) the alleged opportunity had no value; or (4) if the opportunity had some value, Fenridge’s claim is exaggerated and Fenridge must, in any event, bring to account any profit which it has made from re-developing the premises as apartments.

Fenridge also claims damages for breach of the make good obligation, equal to the amount required to reinstate the premises to the state in which RCA was required to deliver up the premises at the end of the lease. The defendants contend that the make good claim should fail because: (1) Fenridge has not undertaken any of the claimed make good works, as it has redeveloped the premises as an apartment complex; and (2) the make good claim is in any event grossly exaggerated for a number of reasons, including that Fenridge has failed to make proper allowance for the condition of the premises at the commencement of the lease and for fair wear and tear.

Based on the above summary, the issues for determination in the proceeding are:

(1) Was RCA entitled to cease operating the nursing home before the end of the lease?

(2) Were there implied terms of the lease?

(3) Did Regis induce RCA’s breaches of the lease?

(4) Did RCA mislead Fenridge?

(5) Did RCA and Regis mislead residents and staff?

(6) Has Fenridge lost a valuable opportunity?

(7) If Fenridge has lost a valuable opportunity, what was the opportunity worth?

(8) In calculating damages, must Fenridge give credit for any profit from the apartment development?

(9) Has Fenridge suffered recoverable loss for breach of the make good obligation? If so, in what amount?

As there is some overlap between the issues for determination, it is convenient to set out the factual narrative in more detail before considering each issue separately.

Factual narrative

The previous owner of the land constructed the nursing home in or around 1980. The premises were then used continuously for the operation of a nursing home until RCA ceased operating its nursing home business on 19 October 2007.

There is no direct evidence as to who conducted the nursing home business until 27 February 1986, when the previous owner leased the premises to the first lessee, Omsa Nominees Pty Ltd for a period of four years commencing on 3 March 1986 (the ‘previous lease’). The lease in issue was executed on 3 December 1990, nine months after the expiry of the previous lease. I infer that Omsa Nominees Pty Ltd over-held the premises as a tenant from month to month, or perhaps pursuant to an agreement for lease for a longer period, until the lease was executed. In any event, the schedule to the lease states that it commenced on 3 March 1990, when the previous lease ended. The lease was for a period of four years, with options for four further consecutive terms of four years each. If all options were exercised, the lessee could occupy the premises for 20 years, until 3 March 2010.

I will set out the relevant terms of the lease when dealing with the individual issues for determination.

In September 1991, Fenridge purchased the premises from the previous owner, subject to the lease.

On 16 July 1992, Fenridge consented to an assignment of the lease from Omsa Nominees to Elmore Quest Pty Ltd.

On 29 April 1994, Fenridge and Elmore Quest agreed to vary and extend the lease. Relevantly, they agreed, in substance, that the first further term of the lease would be 10 years (and not four years as stipulated in the lease) with options for two further consecutive terms of 10 years each. If both options were exercised, the lease would have run until 3 March 2024.

Until 1 October 1997, the premises were operated as a nursing home under the legislative regime established by the National Health Act 1953 (Cth). In brief summary, Commonwealth Government subsidies were paid under the National Health Act to the proprietors of nursing home businesses conducted from ‘approved nursing home’ premises, in respect of the residents occupying the ‘approved number of beds’ at those premises. There could be no subsidy unless the premises were approved. There were 60 approved beds at the premises.

The National Health Act was replaced on 1 October 1997 by the Aged Care Act 1997 (Cth). Under the Aged Care Act, the primary requirements of ’approved nursing home’ premises and ‘approved beds’ were removed, and replaced with primary concepts of ‘approved provider’ and ‘allocated places’. Government subsidies are paid to approved providers in respect of residents occupying allocated places at premises where a certified and accredited ‘residential care service’ is conducted by the approved provider.

Upon the commencement of the Aged Care Act, Elmore Quest became, by force of the Act, an approved provider holding 60 allocated places at the premises.[1]
[1]Aged Care (Consequential Provisions) Act 1997, s 20.

On 1 August 2000, Elmore Quest assigned the lease to Moran Health Care Group (Victoria) Pty Ltd with Fenridge’s consent. The third and fourth defendants guaranteed the Moran’s obligations under the assigned lease. For convenience, I will refer to the Moran lessee and guarantors as ‘Moran’ unless it is necessary to distinguish between them.

In June 2001, Moran obtained the necessary approval under the Aged Care Act to transfer 15 of its allocated places at the premises to another nursing home facility conducted by it. This resulted in Moran having only 45 allocated places at the premises; although there were 48 ‘beds’ available for occupation.

On 24 March 2003, Moran’s accreditation at the premises was reviewed under the Aged Care Act and approved. Accreditation was granted for a three year period from 4 June 2003 to 4 June 2006. The accreditation period was later extended to 4 June 2009.

On 14 April 2003, Fenridge and Moran agreed to further vary the terms of the lease. Relevantly, they agreed to extend the term of the lease (which was due to expire on 3 March 2004) until 31 December 2007, with automatic extensions for two further consecutive periods of 10 years each unless Moran gave at least 18 months but no more than 24 months’ notice prior to the end of the lease that it did not wish to extend the term (referred to in the variation as a ‘termination notice’). Further, the parties agreed that Moran would undertake certain sprinkler and airconditioning works at the premises prior to 1 May 2003 and pay one-half of the costs of the works, with the other half to be paid by Fenridge.

The effect of the variation to the period of the lease, and the automatic further extensions, required Moran to give a termination notice between 31 December 2005 and 30 June 2006 if it wished to avoid automatic extension for a further term of 10 years from 31 December 2007.

During 2005, Macquarie Bank Limited negotiated with Moran with a view to purchasing 12 nursing home businesses from Moran in various states, including the Preston Nursing Home which is the subject of this proceeding. Macquarie Bank performed detailed due diligence enquiries for the purposes of the proposed purchase. As part of its due diligence, Macquarie Bank engaged GHD Pty Ltd to give it advice about a range of matters. In the course of its written advice, GHD advised Macquarie Bank that expenditure of approximately $345,000 was required in respect of ‘Backlog Maintenance’ concerning fire safety at the premises.

On 17 August 2005, Retirement Care Australia Operations (2) Pty Ltd (‘RCA Operations’), the second defendant, agreed to purchase the 12 nursing home businesses from Moran. Under the agreement, RCA Operations also purchased at the land on which the other 11 nursing homes were conducted. The nursing home in issue was the only business conducted from premises leased by Moran. RCA Operations paid a significant sum to Moran for goodwill, including for the 45 allocated places at the premises.

The sale and purchase agreement was completed on 1 December 2005. On completion, Fenridge consented to an assignment of the lease from Moran to RCA, RCA Operations and the two Moran defendants guaranteed RCA’s obligations under the lease, and RCA engaged Moran to manage the nursing homes.

RCA is a member of the Retirement Care Australia group of companies (‘RCA group’). At relevant times, Anthony (Tony) Stephenson was the Chief Financial Officer of that group. In that capacity, he was responsible for overseeing the RCA group finances, operating the RCA group’s national office in Sydney and co-ordinating management of the nursing home facilities owned by RCA group companies with the facility managers. His responsibilities included ensuring that RCA’s management contract with Moran was performed. Mr Stephenson reported directly to the Managing Director of the RCA group holding company and its Board, and liaised with representatives of Macquarie Bank as the principal shareholder in the RCA group.

As appears below, from 2 July 2007, the parent company of the RCA group merged with Regis Group Pty Ltd, the fifth defendant. Following the merger, the merged entity became known simply as ‘Regis’. Mr Stephenson commenced reporting directly to Regis’s Chief Financial Officer, Ray Noble. He also reported to or communicated with other Regis senior management personnel from time to time, including Lindsay Bender, Regis’s Director of Operations, William Appleby, Regis’s National Operations Manager, and Dieter Blaich, Regis’s Manager of Capital Works and Planning.

Until 1 July 2007 or thereabouts, Mr Stephenson was a director of RCA. He resigned at that time, but continued as its Chief Financial Officer until he obtained alternative employment in March 2008.

Most of the relevant personal dealings between Dr Santini, as the owner of Fenridge, and RCA were between him and Mr Stephenson. They commenced with an introductory meeting in October 2005, at which a Macquarie Bank representative was also present.

Dr Santini and Mr Stephenson next spoke on the telephone on 26 June 2006. They discussed the fact that RCA had until 30 June 2006 to serve a termination notice, and that the lease would be automatically extended for another 10 year period if no notice was served. In the course of the discussion, Dr Santini told Mr Stephenson of his plans to re-develop the premises.

The best evidence of the discussion is Mr Stephenson’s letter to Dr Santini dated 30 June 2006, which Dr Santini counter-signed as agreement to its contents. The letter records that RCA welcomed the opportunity to discuss Dr Santini’s development plans for the nursing home, but was not in a position to commit to supporting the redevelopment, or to extending the lease for a further 10 year period, without formal Board approval. To enable discussions to take place, it was agreed that the lease be varied by extending the final day for service of a termination notice by two months, to 31 August 2006, and also extending the lease by two months, to end on 28 February 2008. Mr Stephenson concluded his letter with a statement of his understanding about Fenridge’s intentions if the lease was not renewed beyond 28 February 2008:

We understand from our discussions with you that if the lease did expire at February 2008, Fenridge may be interested in operating the facility from that date. Although not our preferred position at this point we would consider discussing with you the transfer of some or all of the bed licences for the facility and/or the viable business to Fenridge to enable a smooth transition of the facility if the lease expires on 28 February 2008 and we would use the additional two months to discuss this issue.[2]

[2]Emphasis added.

In his oral evidence, Dr Santini recalled that he and Mr Stephenson agreed that if the lease expired on 28 February 2008, and in that circumstance Fenridge intended to operate its own service ‘immediately afterwards’, it would be ‘very sensible’ for the parties to discuss a plan for a smooth handover:

because it would mean that they wouldn't have the costs associated with winding down a service and the fact that they may be left with an empty building on which they would have to pay rent as well as all the costs associated with the actual transfer of residents in accordance with the Aged Care Act.

I accept Dr Santini’s oral evidence of this conversation, which was broadly consistent with Mr Stephenson’s letter. So, from this time, the parties agreed that it would be to their mutual benefit to discuss plans for a ‘smooth transition’, or ‘smooth handover’, as the end of the lease approached.

By July 2006, Dr Santini and his architect had prepared a redevelopment plan for a 60 bed nursing home at the premises, including construction of a new wing. The plans were prepared on the basis that the existing and extended nursing home buildings would be assessed by the Department of Health and Family Services (‘the Department’) as ‘existing buildings’ for the purposes of ‘certification’ under the Aged Care Act. This was the crucial basis underlying Dr Santini’s business plans, because the cost of compliance with the ‘new buildings’ criteria under the Act would make the continued operation of the nursing home uneconomic.

On 14 July 2006, Dr Santini met with Mr Stephenson and another representative of RCA, Peter Shepheard. Discussions and email correspondence continued during July and August 2006, as the extended date for service of a termination notice approached. The discussions did not reach any conclusion. By letter dated 30 August 2006, RCA gave Fenridge a termination notice avoiding automatic extension of the lease for a 10 year period to 28 February 2018. Accordingly, the lease was to terminate on 28 February 2008. Mr Stephenson informed Dr Santini that RCA nevertheless welcomed the opportunity to continue discussions regarding Fenridge’s development plans ‘with a view to RCA continuing its occupation of the premises after 29 February 2008’.

There was a telephone discussion on 30 August 2006 between Dr Santini and Mr Stephenson. Dr Santini confirmed the discussion by email on 31 August 2006. He told Mr Stephenson that Fenridge had applied to the local council for a permit for extensions to the nursing home and that Fenridge ‘may be making an application to the Commonwealth for granting us additional beds for the site to justify its ongoing viability as a RACF (residential aged care facility)’.

Dr Santini concluded his email by reference to his intention to continue ‘negotiating an extension to our arrangements’, on the basis that the termination of the lease would not be disclosed to third parties.

On 19 February 2007, the Aged Care Standards and Accreditation Agency (the ‘Accreditation Agency’) notified Mr Stephenson of the results of a review of the premises and the nursing home business on 16 February 2007. The letter stated that there were reasonable grounds to believe that the nursing home may not comply with the Aged Care Act or the ‘Accreditation Standards’, as set out in the Quality of Care Principles 1997 made under the Aged Care Act, and that a review audit had been arranged. The letter annexed details of the issues which needed consideration. Many non-compliances were noted. In breach of the terms of the lease, Mr Stephenson did not provide a copy of this correspondence and attachments to Fenridge.[3]
[3]Lease, clauses 2.15(b), 2.3.5.

The review audit of the nursing home was conducted between 20 and 23 February 2007. The audit report comprised 30 pages of ‘major findings’, including 18 non-compliances with the 44 expected outcomes under the Accreditation Standards. In breach of the lease, RCA did not give Fenridge notice of the audit findings.

By letter dated 20 March 2007 from the Accreditation Agency to Mr Stephenson, RCA was advised that, as a result of the audit, the period of accreditation for the service conducted at the nursing home was reduced from 4 June 2009 to 20 March 2008. Mr Stephenson was informed that RCA would need to make an application for a further period of accreditation by no later than 27 September 2007. Again, Mr Stephenson did not think to give notice of these important events to Fenridge. In his witness statement, Mr Stephenson said that he did not consider that it was his role to ensure that the nursing home service conducted at the premises remained accredited, or to discuss the matter with Dr Santini if there was any risk of non-accreditation. In cross-examination, he said that accreditation was a matter within the responsibility of Moran as the manager of the nursing home. I do not accept Mr Stephenson’s understanding of his responsibilities on this issue. The lease clearly required RCA to give notice of such important matters to Fenridge. It was not until August 2007 that Dr Santini discovered, from his own enquiries, that the period of accreditation for the service at the premises had been shortened by some 15 months, from 4 June 2009 to 20 March 2008. Upon discovering this fact, Dr Santini discussed this issue and others with Mr Stephenson on 9 August 2007. The discussions at this time are referred to below.

On 30 April 2007, the Accreditation Agency reminded Mr Stephenson of the need to apply for a further period of accreditation for the service at the premises by 27 September 2007. Mr Stephenson was informed that a site audit could be expected during December 2007. Mr Stephenson did not cause RCA to make any application for further accreditation, and did not inform Dr Santini of its decision not to do so.

On 3 May 2007, Dr Santini and his wife, Dr Karyn Matotek, spoke with Mr Stephenson on a conference telephone call. Dr Matotek is a registered psychologist specialising in the area of clinical neuropsychology. She has a special interest in the rehabilitation and management of cognitive deterioration and behaviours of concern in people living with dementia and progressive neurological disorders such as multiple sclerosis. Dr Matotek made handwritten notes during the course of this conference telephone call. Those notes provide the best guide as to what was said, given that the conversation took place nearly six years before witnesses gave oral evidence of their recollections about it.

Dr Matotek’s notes comprise three pages. It was put to her and Dr Santini in cross-examination that the third page of the notes does not contain a record of the conversation with Mr Stephenson, but represents notes of a ‘debrief’ discussion between Dr Matotek and Dr Santini after the end of the conversation. Each of them denied that this was so, and Mr Stephenson could not positively say that the matters recorded on that page of the notes were not discussed during the conversation. He could not recall. In these circumstances, I accept the evidence of Dr Santini and Dr Matotek.

Further to Dr Matotek’s notes, Dr Santini made a reasonably contemporaneous written record of the matters discussed during the 3 May telephone conference in his email to Mr Stephenson about three weeks later, on 25 May 2007.

Dr Santini gave evidence about the 3 May telephone conference to the following effect:

(1) By this time, ‘RCA and Stephenson had not gotten [sic] back to us with any sort of firm proposal about remaining’ at the premises after the end of the lease.

(2) In this context, he had decided that Fenridge would apply to the Department for allocated places at the premises (which he referred to as ‘bed licences’) so that it could continue a nursing home business at the premises after the end of the lease. Applications for allocated places are made annually in what are known as ‘ACAR’ rounds.

(3) He was concerned that, before Fenridge made an application to the Department, RCA should know of Fenridge’s plans so that, if a Department officer contacted RCA, RCA would be able to confirm that RCA and Fenridge were ‘working co-operatively for a handover strategy … of residents’ when the lease ended.

(4) He recalled explaining this to Mr Stephenson in the telephone conference and that Mr Stephenson said that he understood Fenridge’s intentions and ‘said that he would help’. He thanked him and said that he would keep him informed once Fenridge’s ACAR application had been submitted, with a view to discussing ‘the mechanics’ of a handover strategy.

(4) In summary, Dr Santini said that there was an ‘in principle’ agreement to discuss the mechanics of a handover of residents from RCA to Fenridge at the end of the lease.

Dr Matotek gave evidence which was broadly consistent with Dr Santini’s evidence. She recalled that the telephone conference was ‘in order to discuss the handover process’ and that Mr Stephenson agreed ‘that a handover process was a good idea’. She also recalled some more specific items being discussed, to the following effect:

(1) Mr Stephenson said that RCA would like to keep their allocated places (which she referred to as ‘licences’) at the premises ‘offline’ and relocate them to another location.

(2) Mr Stephenson said that RCA would ‘keep the premises operating’ until the end of the lease and that RCA and Fenridge could ‘work together to achieve that outcome’.

(3) There was discussion about RCA staff. Mr Stephenson said that some staff would be transferred to other locations, and Dr Santini replied that Fenridge would be interested in retaining the remaining RCA staff for its nursing home service. Mr Stephenson said that may benefit RCA, because it would reduce redundancy costs for any staff who could not be relocated.

(4) There was discussion about Fenridge’s intention to assume the care of residents at the premises at the end of the lease, and how that may be achieved having regard to the need for Fenridge to have allocated places at the premises.

In cross-examination, Dr Matotek said that there was ‘a commitment from Tony Stephenson that a handover should occur’, but that the conversation ‘wasn’t really about details, it was more about just obtaining a direction forward and a commitment to the handover process and the details were to be arranged later, working together’. She recalled that Mr Stephenson’s statement about continuing to operate a service at the premises until the end of the lease was made in the context of Dr Santini referring to RCA’s continuing business obligation under the lease.

Dr Matotek’s notes are consistent with the evidence given by her and Dr Santini. For example:

(1) The notes: ’49-46 Beds. Keep existing residents’; ‘interested in buying licences?’; and ‘keep operational way we want it until handover. Work together’. These notes are consistent with discussion concerning a handover of an operational nursing home business at the end of the lease.

(2) The note: ‘redeploying to other sites but if [can’t transfer] – avoid redundancy costs’. This supports Dr Matotek’s recollection that Mr Stephenson and Dr Santini discussed the possibility of RCA staff who could not be relocated to other RCA facilities being transferred to Fenridge, thus avoiding redundancy costs for RCA.

The first note made by Dr Matotek was this: ‘6 months prior to end of Feb to allow [transfer] of residents (July/Aug)’. Dr Matotek recalled that ‘a timeline of six months before the end of the lease’ was suggested by Mr Stephenson in connection with a handover at the end of the lease. She agreed that this was a reasonable timeline for an ‘orderly process which respects the rights and well-being of residents and staff’. It was not put to her or Dr Santini that Mr Stephenson would say that he mentioned this timeline in the context of RCA commencing a transfer of all residents and staff from the nursing home to other nursing home facilities before the end of the lease. Nor was it put to Dr Matotek, or Dr Santini, that the 3 May telephone conference concerned a handover of an ‘empty building’ following that process being completed before to the end of the lease.

Mr Stephenson gave contrary evidence about the 3 May telephone conference in material respects. In his witness statement, Mr Stephenson said that he understood the main purpose of the 3 May telephone conference was for Dr Santini to inform RCA of Fenridge’s application for allocated places, so that RCA would be aware of Fenridge’s intentions if RCA received a communication from the Department. His witness statement then continued:

I have reviewed [Dr Matotek’s file note] and based on this file note and my own recollection, I recall that the following matters were discussed on 3 May 2007:
a.A sensible approach would be to discuss a potential handover six months prior to RCA Preston exiting the facility;
b.RCA’s preference would be to retain its 45 bed licences so as to utilise the licences at RCA’s alternative green field site;
c.It would be easier for RCA Preston to keep its licences in same DOHA ‘planning area’ as Preston;
d.That Fenridge was not interested in buying licences from RCA;
e.It would be beneficial for Fenridge if RCA Preston kept the facility operational up until the day of exiting the facility;
f.Because RCA Preston was acting on the basis that the lease was expiring, PNH’s facility manager was only contracted by RCA Preston until the end of the Lease and that any potential staff transfers from RCA Preston to Fenridge needed further investigation;
g.Fenridge may lease bed licences from RCA Preston but that legal advice would need to be obtained; and
h.Fenridge had applied to ACAR for bed licences and RCA Preston may receive a phone call or correspondence from DOHA in respect of Fenridge’s application.[4]

[4]Emphasis added.

Mr Stephenson then said that, during the 3 May telephone conference, no commitment was made by either him or Dr Santini ‘regarding the process of RCA exiting the facility’.[5]
[5]Emphasis added.

In cross-examination, for the first time, Mr Stephenson asserted that the focus of the discussions concerning ‘handover’ in the 3 May telephone conference ‘was a handover procedure if you were closing a facility and you were transferring residents’. When further cross-examined, it became apparent that he was contending that the principal focus of the discussions concerning handover during the telephone conference was the handover of a ‘vacant facility’ or an ‘empty building’, on the basis that RCA intended to close the nursing home business before the end of the lease. As I have said, this was not put to either Dr Santini or Dr Matotek. This position is not contained in Mr Stephenson’s witness statement – except, perhaps, in the use of the loose phrase ‘exiting the facility’. If that were the intent of his evidence, however, I would have expected the matter to have been put to Dr Santini and Dr Matotek.

Mr Stephenson went on to explain that the handover of an empty building would require much more lead time and planning than a smooth handover of an existing nursing home business from one operator to another at the end of a lease:

… in reflecting on the meeting, my clear recollection was the purpose of the meeting was potentially the Department of Health and Ageing might give me a phone call and that was the purpose of the meeting and that's how I remember the meeting. The meeting then went on to having a discussion about what would be involved in a well planned handover but the handover at this stage was actually RCA exiting the facility and transferring the residents to another facility and, as I said, that is a much more complicated process than having a process where it's one operator transferring the business to another operator which is fairly streamlined and really only involves communication, good communication to staff, residents and families, as well as approval from the Department of Health and Ageing.
Yes, but the handover that you were talking about in your email, in this phone call wasn't to another operator, it was to Fenridge, wasn't it? --- Incorrect.
Why is it incorrect? --- The discussion that I had with Dr Santini during that telephone conversation when he asked what was involved in a handover, I alluded to a handover in relation to the residents exiting the facility and going to a new facility and we discussed a social worker and the need to give residents time and their families time to make that decision which is why we talked about a period of some five months.[6]

[6]Emphasis added.

There was then further cross-examination in which Mr Stephenson acknowledged that some of the matters listed in sub-paragraphs (a) to (h) of his witness statement (quoted above) related to the handover of an empty building and others related to the handover of an existing business. For example, point e. of Mr Stephenson’s notes makes no sense if RCA was going to ‘exit the facility’ months before the end of the lease and hand over an empty building. Any benefits to Fenridge were surely dependent on RCA ‘keeping the facility operational’ until the end of the lease.

I reject Mr Stephenson’s evidence on this issue. It was not put to Dr Santini or Dr Matotek, Mr Stephenson’s demeanour in giving it was evasive, and the evidence is inconsistent with the surrounding contemporaneous correspondence described below.

The 3 May telephone conference was arranged by an exchange of emails sent 30 April 2007. Dr Santini emailed Mr Stephenson in the following terms:

We are currently in the process of applying for beds to continue to operate the Preston Nursing Home as a going concern. The Department has expressed interest in how we will resolve the handover.
Can we please organise a conference call later this week to arrange a hand-over and to have a common voice when discussing this facility with third parties. I am currently free all day Thursday 3/5 after 10 am.

Mr Stephenson replied about half an hour later:

Mark that is a good idea. Happy to help.
I could do 10 am to 11 am or 1 pm to 2 pm.

From this email exchange, Mr Stephenson must have understood that the handover to be discussed was a handover of the nursing home residents at the end of the lease. When this was put to Mr Stephenson in cross-examination, he maintained that the focus of the telephone conference concerning handover was in respect of an empty building. I reject that evidence.

The subsequent email from Dr Santini to Mr Stephenson on 25 May 2007 is also inconsistent with Mr Stephenson’s evidence. For completeness, that email is reproduced in full below –

[omitting formal parts]
Dear Tony,
Following the phone meeting a few weeks ago re the Preston Nursing Home I have taken the liberty of jotting down a few points from that conversation and previous ones, together with some advice that I got from the Department.
· Fenridge remains interested in continuing a service at PNH and providing existing residents and appropriate staff with the opportunity of transferring to this service.
· I understand that as part of its obligations as an Approved Provider, RCA will need to develop a strategy for discharging the current residents and obtain DoHA approval for such a strategy.

·     I understand that DOHA would view favourably any transfer of residents to a service operating in the existing premises, subject to a transfer strategy which consults residents and their families about the new service. In Fenridge’s application for beds, I propose to mention that discussions are in place between RCA and Fenridge to provide existing residents with the choice of remaining at PNH in a service similar to the one that is currently operational.
·     Fenridge will learn whether or not it was successful in its application for bed licences in December this year. The outcome of this round will greatly influence our planning including organising an orderly handover with RCA.
·     I understand that RCA is unable to commit to a 10 year lease, but is not urgently looking to close the operation at PNH and it could consider extending the lease.
As previously discussed we are looking forward to developing a plan with you re the residents and staff. Given, the timelines that we are working under and some of the unresolved issues still outstanding, I believe it would be advantageous to all parties for Fenridge to extend the lease until November 1, 2008 to allow more time to plan and carry out an orderly hand-over strategy. I look forward to further discussing these issues.
Regards
Mark Santini

Although this email purports to summarise ‘a few points from that conversation and previous ones, together with some advice that [Dr Santini] got from the Department [of Health]’, this email nevertheless throws light upon the likely content of the 3 May telephone conference. In particular, consistent with Dr Matotek’s notes and the oral evidence, Dr Santini’s email records that ‘Fenridge remains interested in continuing a service at [the premises] and providing existing residents and appropriate staff with the opportunity of transferring to this service’. Further, the email made it clear to Mr Stephenson that Fenridge wanted to discuss with RCA an appropriate transfer strategy, and informed RCA that it was making an application to become an approved provider and ‘for beds’ (allocated places under the Aged Care Act) to enable it to continue operating the nursing home when the lease ended. Dr Santini ended his email with a proposal to extend the lease until 1 November 2007, to enable continuing discussions about an orderly handover of residents and staff.

There is no mention in that email of any handover involving the closure of RCA’s nursing home business at the premises prior to the end of the lease and RCA handing over an empty building. If that proposition had been advanced by Mr Stephenson in the 3 May telephone conference, Dr Santini would likely have rejected it and met it head-on in correspondence.

My findings concerning the 3 May telephone conference reflect poorly on Mr Stephenson’s credibility as a witness generally. In my opinion, his evidence in this regard was, at best, reconstruction. The findings also serve to emphasise that RCA can have been in no doubt that Fenridge intended to commence its own nursing home business at the premises immediately upon RCA vacating the premises at the end of the lease and, to that end, was expecting RCA to comply with the continuous business obligation in the lease. The fact that RCA commenced planning to cease conducting its nursing home business at the premises within a week of the 3 May telephone conference, and that there is documentary evidence to support that, provides an explanation for Mr Stephenson giving false or reconstructed evidence concerning the content of the telephone conference.

Although a final RCA Board decision to vacate was not made until mid September 2007, and Mr Stephenson continued to recommend to the Board that RCA continue operating the nursing home at the premises until November 2008, the documentary evidence from this time otherwise points towards an increasing likelihood that RCA would cease conducting a nursing home business at the premises prior to the end of the lease.

On 9 May 2007, Mr Shepheard advised a Moran/RCA project meeting ‘that RCA will exit [the premises] in February 2008’,[7] notwithstanding that Fenridge was ‘pressuring for discussion on other proposals’. The minutes of the meeting also recorded that, at this meeting or an earlier meeting, Mr Shepheard advised the Board that the ‘process for closure [of RCA’s service at the premises] will commence 6 months prior to closure. Therefore target for this commencement should be September 2007’. As appears below, this is what subsequently occurred – RCA commenced vacating the premises in September 2007, five months prior to the end of the lease.
[7]Emphasis added.

By email dated 9 May 2007, Errol Chittick, a project manager employed by Moran, advised other staff that RCA would be ‘exiting’ the premises on 31 March 2008 (later corrected to 28 February 2008) and that the process for closure of the nursing home should commence in September 2007. This indicates that the plans for closure of the nursing home prior to the end of the lease were more than mere discussion points, with those employees likely to be involved in implementing the plans being advised of them as early as 9 May 2007.

On 31 May and 1 June 2007, Messrs Stephenson, Shepheard and Bender exchanged emails concerning the premises. Mr Stephenson advised Messrs Bender and Shepheard that Fenridge was endeavouring to obtain allocated places for use at the premises and also had some ‘offline’ allocated places available for that purpose. Mr Stephenson noted that there were both positives and negatives for RCA to consider in deciding whether to extend the lease until November 2008, as requested by Fenridge. He noted that there was a need ‘to get back to [Fenridge] as I think part of the process is to give them some certainty regarding the facility’s operations’. Mr Bender replied that an extension to November 2008 ‘may well be an option’ but noted the need to consider a number of issues, including whether extending the lease would involve RCA spending any money on the premises and the impact of a lease extension ‘on the viability of the [premises] and more importantly on our ability to ramp down and close’. Mr Bender added that RCA would need ‘at least a 6 month timeframe to decant [ie move the residents to other facilities]’.

On 4 June 2007, Fenridge filed an application to become an approved provider under the Aged Care Act. On 13 June 2007, Fenridge filed an ACAR application for 48 allocated places under the Aged Care Act in respect of the premises.

Also on 4 June 2007, Mr Stephenson prepared a draft Board paper seeking approval from the RCA Board to extend the lease to 1 November 2008. Mr Stephenson’s Board paper recorded the 18 non-compliances noted by the Accreditation Agency, noted the fact that the existing accreditation was due to expire soon after the end of the lease,[8] noted the risks facing RCA about continuing accreditation of the service at the premises if the lease was extended, and stated that:

RCA’s current planning is to start the wind-down of the facility in October 2007 to allow 4 months to transfer all the high care residents and to either transfer staff to other Victorian facilities or terminate their employment. During this 4 month period the facility will cease admissions (other than respite residents) and will operate at [an] inefficient level.
By extending the lease RCA delays the wind-down process and if Fenridge are to continue the operations after the revised lease termination date RCA will avoid the wind-down period altogether as the residents and staff will be transferred to Fenridge from 1 November 2008.[9]

[8]The Board paper mistakenly said that the accreditation expired on 1 March 2008, and not 20 March 2008 as was the fact.

[9]Emphasis added.

In cross-examination, Mr Stephenson took issue with the statement in his own Board paper that ‘RCA’s current planning’ was to start winding-down the facility in October 2007. He said that it would have been more correct for him to say that this was RCA’s ‘current thinking’. He acknowledged that he did not tell Dr Santini about this current thinking or current planning at any time. Instead, he emailed Dr Santini later on 4 June 2007, stating that RCA’s executive and the Board were interested in Dr Santini’s suggestion to extend the lease until 1 November 2008, and that he would respond formally to him the following week.

On 2 July 2007, the relevant company in the Macquarie Bank group which was the parent entity of the RCA group merged with Regis. On 11 July 2007, Mr Stephenson’s draft Board paper concerning the proposal to extend the lease to 31 October 2008 was finalised. In the final Board paper, Mr Stephenson recommended that the lease should be extended until 31 October 2008 on certain terms, including that ‘staff transfer to the new operator at the expiry of the lease’. He set out his understanding of Fenridge’s intentions:

The landlord is seeking to obtain RACF bed licences which would enable them to keep the facility continuously operational following the expiry of our lease. This would be important for the current building code requirements as well as to avoid decanting the residents and recruiting the staff for the facility.
As I understand Fenridge will be including in their application that the RCA lease is expiring and if they are successful with the bed licence application then they will be able to continue the operations without any disruption to the residents of the facility. Fenridge will know if they are successful with the bed licence application by December 07 / January 08.[10]

[10]Emphasis added.

On 1 August 2007, Dr Santini forwarded a draft variation of lease to Mr Stephenson. That draft provided for an extension of the lease term until 1 October 2008, a month earlier than had been discussed, and included obligations designed to facilitate a smooth transition from RCA to Fenridge as the approved provider conducting the nursing home business at the premises from 1 October 2008.

On 6 August 2007, Mr Stephenson sent an email to Messrs Bender, Appleby and Noble, asking them to discuss the outstanding issues with him and noting that Fenridge had sent through a draft lease but that he had not yet indicated whether or not RCA would be proceeding with a lease extension.

By this time, RCA and Regis representatives could have been in no doubt that: (1) Dr Santini, on behalf of Fenridge, was pressing for an answer as to whether the lease would be extended; (2) if no extension was to take place, Fenridge was intending to continue a nursing home service at the premises if it could, and had made applications under the Aged Care Act for that purpose; and (3) Fenridge wanted to arrange with RCA for the smooth hand-over of the nursing home business at the end of the lease.

By email dated 7 August 2007, Dr Santini informed Mr Stephenson of complaints which he had received about the conduct of the nursing home. He referred to allegations from a ‘disgruntled neighbour’ that the nursing home had failed to comply in 18 of 44 accreditation categories and there was a newspaper article to that effect, that RCA staff could be heard abusing patients, and that RCA was generally behaving as a ‘bad corporate citizen’. Dr Santini said that he would be very disappointed if the allegations were true and had not been disclosed to him, particularly as he had been in regular communication with RCA and because the lease required RCA to notify Fenridge of such matters. Dr Santini concluded his email with the following:

As we have previously discussed, RCA has a duty of care to the residents of PNH when it ceases to operate at PNH, and Fenridge is an obvious party to continue the care of these residents into the future given that many may wish to remain in the existing building. Ongoing accreditation and certification of the premises, and the period of accreditation are therefore critical issues. …[11]

Mr Stephenson replied that full compliance with accreditation standards had been restored.

[11]Emphasis added.

There was an ‘Integration Steering Group’ meeting of RCA and Regis management on 27 August 2007. Messrs Stephenson, Bender, Noble, Appleby and Blaich (among others) were present. Mr Bender is recorded in the minutes as stating that a decision should be made by the end of that week as to ‘where we go with the Preston lease’.

On the next day, 28 August 2007, there were concurrent meetings of the boards of the holding companies of the RCA group and the Regis group. The combined boards were referred to as the ‘Operations Board’. Messrs Noble, Bender and Blaich attended. The minutes record:

[Mr Bender] recommended that the lease for the Preston premises not be extended beyond February 2008 and that alternative arrangements be made for the facility’s residents. The Board instructed that a phasing down and relocation plan be developed before any communication regarding this matter.
It was agreed that final recommendation and planning will be submitted to the next Board meeting for ratification.

The next meeting of the Operations Board was fixed for 25 September 2007.

In cross-examination, Mr Stephenson said that at this time he did not know of the decision to allow the lease to expire on 28 February 2008. It surprised him. To his understanding, no final decision had then been made. He agreed that the minutes appear to record a ‘pretty definite plan to close’.

Following this Operations Board meeting, Mr Appleby emailed Regis staff regarding a ‘Closure Plan For Preston CONFIDENTIAL’. One of the recipients was Meigan Lefebure, the Regis State Manager for Victoria. Mr Appleby informed Ms Lefebure and other staff that the Operations Board had that day decided to close the nursing home (‘we will be proceeding with a plan for the successful closure of Preston’), that the decision to close would ‘hopefully’ be ratified at the next Board meeting and that, in the interim, ‘we need to have pull[ed] together our complete strategy for this closure’. Mr Appleby attached a closure plan he had ‘pulled together in anticipation’ and concluded his email as follows:

I would like to ensure this whole thing is executed painlessly and efficiently as possible …
Given current vacancies across Regis, RCA1 & RCA2 the anticipated ramp down will hopefully not be a prolonged effort.
Lastly, please ensure the strictest confidence with this work. This must not be discussed outside our meeting.[12]

[12]Underlining in original; emphasis added.

Mr Stephenson was shown this email in cross-examination. He said that he had not seen it before and was surprised that he had not been informed about the contents of the email. He said that he ‘wasn’t updated in relation to these issues’. When it was put to him that he was ‘kept in the dark’, he effectively agreed (‘I wasn’t informed’). When it was put to him that he would have told Dr Santini about the closure plans referred to in the email, he said that his email to Dr Santini on 6 September 2007, referred to below, ‘would have been different’, as would have been his ‘actions’. When he was pressed about what would have been different, Mr Stephenson became evasive. Instead of stating what he would have done differently towards Dr Santini, which the cross-examiner was obviously enquiring about, he gave evidence about discussions he would have had internally within RCA/Regis and said only that he ‘would have sorted out a communication process’.

There was a further meeting of the RCA/Regis Integration Steering Group on 3 September 2007. Mr Stephenson is reported as having been in attendance, although he said in evidence that he was present for only part of the meeting by telephone. The minutes of the meeting record that Mr Bender stated that ‘the Board has agreed that Preston will be closed at the expiration of the lease. [Mr Appleby] is obtaining further information … and a final decision will be put to the Board within the next 7 days’.

Dr Santini emailed Mr Stephenson on the same day, 3 September 2007, stating:

We understand that RCA is undertaking steps to obtain re-accreditation in the context of recent non-compliances and its period of accreditation having been shortened until March 2008. I understand that an accreditation visit by the [Accreditation] Agency will be conducted some time later this year. Fenridge has already stated that it will continue to provide an accredited service at the premises when RCA vacates them and Fenridge is prepared to work with RCA to provide an ongoing service to existing residents, who wish to remain. In accordance with the lease, Fenridge requires that RCA continues to operate its service to the highest standard until the premises revert to Fenridge and that accreditation be maintained in the interim. Specifically, Fenridge requires RCA to meet all 4 standards of accreditation and the 44 accompanying expected outcomes for the remainder of the lease period. We also confirm your advice to us that Fenridge will be notified by RCA of the date of the Accreditation Agency’s visit and the outcome.[13]

[13]Emphasis added.

By 5 September 2007, the RCA financial projections had been revised on the assumption that the lease would end in February 2008.

On 6 September 2007, Dr Santini emailed Mr Stephenson. His email concluded:

I will be on leave from next week for about 1 month, so I would be happy to meet on site (or email/fax me if you prefer) when I get back regarding the plant, building repairs, accreditation, insurance etc.
The other matter we could discuss when I return is the hand-over. In the meantime, are you able to confirm that you will be extending to November 2008?[14]

[14]Emphasis added.

In reply, Mr Stephenson sent his 6 September 2007 email referred to above, which he said in cross-examination would have been in different terms if he had known of the decision to reject Dr Santini’s request for an extension of the lease to October 2008 and, instead, for RCA to commence a ‘ramp down’ of its nursing home business at the premises. Mr Stephenson’s email is in the following terms:

Mark thanks. I will ask Peter [Shepheard] to review your comments and arrange a time to meet on your return from leave. In regards to the lease extension this is an ongoing issue of discussion. As you know the new owners of RCA are Regis and they have to come to grips with a range of issues. They are gather[ing] information regarding Preston from Moran that will help them to finalise their decision. I believe this will be completed in the next month. I am sorry for the delay but we will be in touch as soon as the matter progresses.
I hope you have a great holiday and look forward to catching up soon.
Tony Stephenson[15]

[15]Emphasis added.

Mr Stephenson’s 6 September 2007 email forms a central plank in Fenridge’s misleading and deceptive conduct case. It is also relevant to the claim against Regis for exemplary damages. Fenridge contends that by the time of this email, and unbeknownst to Mr Stephenson, RCA and Regis had in fact already decided that the lease would not be extended and, further, intended that RCA would vacate the nursing home well prior to the end of the lease by transferring residents from the nursing home to fill ‘current vacancies’ at other RCA/Regis nursing homes. I find that RCA and Regis had no intention of engaging in any form of ‘hand-over’ to Fenridge at the end of the lease.

In these circumstances, Fenridge contends that the 6 September email was misleading, because it conveyed that RCA and Regis were still grappling with ‘a range of issues’ concerning whether the lease would be extended, when they were not, and because the email did not inform Dr Santini about the plans for imminent commencement of the closure of the nursing home - without any hand-over at the end of the lease in accordance with the discussions between the parties to that time.

Based on the 6 September email, Dr Santini went on leave in the false belief that RCA and Regis were still considering: (1) whether to agree to a lease extension; and (2) if not, what arrangements should be made for a hand-over of the nursing home business at the end of the lease. Dr Santini was not given any indication that RCA and Regis intended, or were even considering, closing the nursing home business before the end of the lease.

The following day, 7 September 2007, Mr Appleby sent an email to an RCA/Regis employee (copied to Mr Noble and Mr Bender) attaching financial calculations made on the assumption that the nursing home was to close before Christmas 2007. The email was marked of high importance, sought urgent assistance to complete the financial calculations and stated to Mr Noble and Mr Bender that ‘an out of Board ratification to proceed’ would be sought if there were timing difficulties with any communications necessary to achieve closure by Christmas 2007. Although Mr Stephenson was still the Chief Financial Officer of RCA, he was not copied into this email. I infer that, as he was the person dealing with Dr Santini, a deliberate decision was made by one or more of Messrs Appleby, Noble and Bender to exclude him from any detailed knowledge or involvement in the closure plans.

There was another Integration Steering Group meeting on 10 September 2007. Messrs Noble, Appleby and Bender were in attendance. Mr Stephenson is also noted as having been in attendance, but I infer that this was by telephone and for part of the meeting only. The minutes of the meeting record Mr Appleby stating that a draft closure plan for the nursing home had been compiled ‘with final costings being completed’.

On 18 September 2007, Mr Appleby emailed Mr Noble (copied to Mr Bender) stating that Regis was proceeding to close the nursing home. Mr Appleby stated that the closure decision would be kept confidential until letters were sent out to ‘all the stakeholders’ on Friday 21 September 2007.

On Friday 21 September 2007, Ms Lefebure and Mr Appleby signed letters addressed to residents and staff of the nursing home, advising them that the nursing home would be closing on Friday 14 December 2007 – two and a half months prior to the end of the lease.

The notice to residents informed residents and their carers of the merger between RCA and Regis, and relevantly stated:

Since the merger, Regis have reviewed the Preston facility to assess the status of its building, in line with Regis' accepted amenity standards and the future standards that will be soon applied through federal government Certification from 2008.
This review indicated that a significant amount of work would be necessary to bring Preston & Districts Nursing Home up to the standard required by both the new federal government Certification and Regis.
In addition, the Preston & Districts Nursing Home building is leased and this lease will expire in February 2008.
Given these findings, Regis have made the difficult decision to close Preston & Districts Nursing Horne before the end of this calendar year.
Preston & Districts Nursing Home will be closing on Friday, 14 December 2007.
We fully appreciate the concern this news may bring you.
We will ensure that your interests and rights are considered at all times, and you will be given extensive support as we undertake this transition.
Our aim is to offer each Preston & Districts Nursing Home resident an opportunity to relocate to one of our Regis homes located in metropolitan Melbourne, or alternatively another suitable and convenient aged care facility, that is both Commonwealth Government accredited and funded.
A dedicated Community Liaison Officer will meet with you, and your loved ones, to discuss this option and assist you with choosing the home that best suits your needs.
…
Yours Sincerely
Meigan Lefebure
State Manager, Victoria
Regis Group
Yours Sincerely
Bill Appleby
General Manager, Operations
Regis Group[16]

[16]Original emphasis.

The notice to residents was accompanied by a document titled ‘Important Information For Residents’, which included information broadly consistent with the notice. Residents were advised that the nursing home would close on Friday 14 December 2007 and that they would not be able to return after that date, ‘as Regis will discontinue operation of this facility post the closure date’.

The notice to staff was in similar terms, and stated that Regis/RCA intended to offer staff employment at other nursing homes conducted by them in Melbourne.

The notice to staff was also accompanied by a document, called ‘Important Information For Staff’. Again, that information was broadly consistent with the notice enclosing it.

On the following Monday, 24 September 2007, Mr Noble wrote to Dr Santini by courier letter. This was the first contact between the two men. Mr Noble’s letter to Dr Santini is in the following terms:

As you may be aware, on July 2, 2007 Macquarie Capital Alliance Group (MCAG), the parent entity of Retirement Care Australia (RCA) merged with the well established aged care provider, Regis Group Pty Ltd (Regis).
The merger brought together 19 RCA facilities located in Queensland, New South Wales, Victoria, South Australia and Western Australia and 18 facilities owned by Regis located in Queensland and Victoria.
It was agreed that following a transition period, Regis will take over the management of the RCA facilities from their current providers of management services, Moran Health Care Group and Tricare.
The transition of management from Moran Health Care Group to Regis has now occurred in Victoria.
With regard to Preston & Districts Nursing Home, Regis have been provided with a copy of the letter from RCA dated 30 August 2006 providing Fenridge Pty Ltd with notice that RCA did not wish to extend the term of the lease beyond 29 February 2008. We have also been made aware of discussions regarding the possibility of RCA continuing its occupation of the facility after that date.
However, after due consideration of the many factors involved in continued operation of the facility Regis have made the operational decision to close Preston & Districts Nursing Home on Friday, 14 December 2007. We appreciate that you may see this as a disappointing outcome but the decision was based on the assessment of a variety of issues.
We will contact you regarding handover of the building and practical matters such as disconnection of utilities approximately four weeks before the closure date. However, please feel free to contact me if you wish to discuss this matter in the meantime.
Thank you for your support.
Yours sincerely
[Signed]
Ray Noble
Finance Director

On Monday 24 September 2007, Mr Stephenson received copies of the notices sent to staff and of Mr Noble’s letter to Dr Santini. He maintained in cross-examination that he was not aware of, or involved in, the decision to close the nursing home prior to the end of the lease until after it was made. I accept that evidence.

The Regis group Board of Directors met on 25 September 2007. The Board papers included a submission by Mr Appleby recording the fact that the decision to close the nursing home had been made previously and had been ratified by the Board on 17 September 2007. The Board paper records that the ‘ramp down’ had already commenced, and there were only 36 residents at the nursing home at that time. The Board paper annexed the Regis ‘Operational Action Plan’ for the closure of the nursing home, apparently up-dated on 7 September 2007. That Action Plan describes a process commencing on 6 September 2007 with a target completion date and commemorative closure function to be held on 17 December 2007.

The minutes of the Board meeting noted Mr Appleby’s report and record a decision to ratify the decision to close the nursing home in accordance with the tabled recommendation and closure plan.

On 27 September 2007, RCA/Regis conducted information meetings with staff, residents and families at the nursing home. Active steps to relocate residents commenced from this time.

Also on 27 September 2007, the deadline for filing an application to extend the accreditation of the nursing home passed without any application being made by RCA, contrary to Dr Santini’s understanding as set out in his email to Mr Stephenson on 3 September 2007. The date for making an application did not pass by inadvertently. It was the result of a deliberate decision by Regis, as recorded in a Board report prepared by Mr Appleby on 17 September 2007 titled ‘Balanced Scorecard for the September 2007 meeting’ which states:

Accreditation Expiry – Next 3 months
· Decision made not to apply for accreditation for Preston as it will be closed before Accreditation expires.

Regis acted urgently to close the nursing home. It achieved full closure by 19 October 2007, about two months before its target closure date. There is documentary evidence of staff congratulating themselves on achieving this result. For example, on 4 October 2007, Grant Waldron of RCA emailed Ms Lefebure of Regis, with copies to other RCA/Regis employees including Mr Appleby, concerning staff rosters at the nursing home. Mr Waldron referred to discussions with Ms Lefebure, and stated that, in accordance with those discussions, he had treated changes to staff rosters as ‘an emergency’; so as to justify giving staff only seven days’ notice and not the fourteen days’ notice required by the applicable industrial Award: ‘we will run the argument that this is an emergency’. No emergency was involved. This was simply RCA/Regis acting with undue haste to prefer its own commercial interests over those of residents and staff. In an email sent earlier that day, Ms Lefebure had instructed Mr Waldron that urgent action was needed to move staff onto new employment.

On 7 October 2007, Dr Santini attended at the nursing home. He was intending to inform residents, carers and staff that Fenridge intended to ensure a continuous nursing home service at the premises. One of the nurses, Cathy Loi, approached Dr Santini and they spoke. According to Dr Santini, Ms Loi told him that residents and staff had been told that the nursing home had to close; that Fenridge had no intention of keeping the nursing home open; that most residents, ‘their significant others’, and the staff were very upset that the nursing home was to be closed, and that a staff meeting was being conducted later that week. According to Dr Santini, Ms Loi appeared stunned when he told her that Fenridge had every intention of continuing to operate a nursing home service at the premises. He said that Ms Loi invited him to attend the staff meeting and gave him her mobile number. He told Ms Loi that he intended to attend the staff meeting.

Ms Loi was not called to dispute this account, and Dr Santini’s account is supported by an email sent by Ms Loi on the same day, by a letter from RCA’s solicitors sent later that day, and an internal email between RCA/Regis employees at 6:38 pm that evening. I accept Dr Santini’s evidence that he was invited to attend a staff meeting on 9 October and that he and his wife, Dr Matotek, attended at the premises on that day for that purpose. They were refused entry to the premises by a man who said he worked for Regis and were asked to leave.

By this time, Regis had engaged solicitors to act for them in connection with Dr Santini’s endeavours to attend at the premises and inform staff and residents of Fenridge’s intentions to continue a nursing home service at the end of the lease. By late afternoon on 9 October 2007, Regis’s solicitors had sent a detailed letter to Dr Santini alleging that his attendance at the premises on 7 October 2007 was unauthorised and had caused distress and confusion to staff and residents, requiring meetings to reassure them that the ‘structured closure’ of the nursing home would proceed as previously advised. The letter threatened proceedings for fundamental breaches of the lease and applicable tenancy legislation and sought undertakings from Dr Santini and Fenridge in order to avoid legal proceedings against them. This letter, and other conduct by Regis at the time, showed a firm intention to actively prevent Dr Santini from approaching residents or their families with a view to informing them of Fenridge’s rights under the lease and of its intention to conduct a nursing home business at the premises from the time the lease ended.

On 10 October 2007 Ms Lefebure sent a memo to all staff at the nursing home about Dr Santini’s visit. She misleadingly described Dr Santini as ‘the purported owner of the building’ and asserted that it was incorrect for him to have told staff that the nursing home business would continue after RCA ceased operating the nursing home. The memo was distributed by the Director of Nursing at the premises, who was asked to ensure it was given to all staff and to call the police if Dr Santini attended at the premises again because ‘he is trespassing’.

On 12 October 2007, Mr Noble emailed senior Regis staff including Ms Lefebure and Messrs Bender, Blaich and Appleby about the issues between RCA and Fenridge at the time. Mr Noble recorded his suggestion to Ms Lefebure that RCA:

look at the viability of moving all remaining residents, 9 as at today, to other Regis facilities with an undertaking to move them to their preferred home as soon as a place becomes available … I believe that the nature of this dispute will change once the facility is closed.

RCA and Regis called Patricia Fairman, Regis’s General Manager – Quality and Compliance, to support their case that it was necessary for Regis and RCA to commence relocating the nursing home residents about six months prior to the end of the lease, so as to ensure that the interests of residents were paramount – as required by the Aged Care Act and the User Rights Principles made under the Act. In cross-examination, Ms Fairman agreed that the course of action described in Mr Noble’s email was ‘not preferred’ or ‘not best practice’, because the driving factor in the suggested course of action appeared to be RCA/Regis’s interests in the early closure of the nursing home, and this did not treat the interests of residents as paramount – as the Aged Care Act requires.

Ms Fairman took a similar view of a later email from Mr Appleby to Ms Lefebure, in which Mr Appleby expressed agreement with Ms Lefebure ‘that we need to now fast track’ the closure of the nursing home and ‘fully cost a strategy of very early closure’. Mr Appleby’s email responded to an email from Ms Lefebure, in which she had referred to using another employee’s ‘powers of persuasion’ to obtain the agreement of the remaining few residents to leave the nursing home and the need for Regis to act ‘strategically’ to ‘bring forward the closure date to early November’. Ms Fairman agreed that the use of such pressure (‘powers of persuasion’) was inconsistent with the User Rights Principles made under the Aged Care Act.

There are other contemporaneous emails between Ms Lefebure and Mr Appleby to similar import. I find that they were acting to prefer Regis’s commercial interests to the interests of the residents, in breach of the User Rights Principles.

On 10 October 2007, Fenridge’s previous solicitors wrote to the directors of RCA enclosing a notice pursuant to s 146 of the Property Law Act 1958 (Vic), alleging breaches of a number of clauses of the lease, in particular the continuous business obligation. The letter stated that, if the breaches were not remedied, Fenridge intended to re-enter the premises and require RCA to transfer all of its:

bed licences held in relation to the facility and all related registrations that may be required by any Government Statutory Authority to [Fenridge’s] nominee in order for it to lawfully conduct a private nursing home from the premises (clause 6.12(b)).

In the interim, the letter sought undertakings from RCA. RCA gave limited undertakings in response, which did not prevent the rapid closure of the nursing home.

Fenridge did not enforce its rights arising from RCA’s failure to comply with the s 146 notice, and did not terminate the lease, re-enter the premises and exercise its rights under clause 6.12 of the lease. By the time the s 146 notice expired (24 October 2007), RCA had relocated all residents and staff and closed the nursing home. As appears below, the premature closure of the nursing home resulted in Fenridge losing the opportunity to conduct a nursing home at the premises on the basis that the buildings would be assessed as ‘existing buildings’ – thus making a nursing home business at the premises uneconomic. For its part, RCA simply continued paying rent for the premises until the end of the lease.

By 19 October 2007, following the exercise of ‘powers of persuasion’ over residents, RCA was able to re-locate all of the residents in the nursing home and to close the nursing home business by 1:00 pm on that day. This was viewed by RCA/Regis staff as a most successful outcome, with Ms Lefebure concluding her email on 18 October 2007, in anticipation of closure the next day, as one deserving of celebration:

Thanks to Catherine’s wonderful powers of persuasion, we have agreement from the relatives of the ‘last’ resident that he will transfer to [another nursing home] for a couple of days [as an interim measure] and be at the top of the waiting list at [another nursing home] (his preferred facility). He will transfer from [the first nursing home] to [the second nursing home] as soon as a bed is available (we expect any day now).
So … we will now have no residents from 1 pm tomorrow afternoon.
Security is being organised for the weekend, and we can now move onto the final clean-up and pack-up as per closure action plan.
Well done everyone – thank you!
Celebrations are in order!!! Regards
Meigan Lefebure
State Manager – Victoria
Regis[17]

[17]Emphasis added.

The conduct of RCA and Regis in closing the nursing home business before the end of the lease placed Dr Santini and Fenridge in a difficult position. RCA was denying any breach of the lease on the basis of an implied term (not pursued at trial) permitting it to vacate the premises and close the business in an orderly manner during the period leading to the end of the lease, notwithstanding the express terms of the continuous business obligation. In these circumstances, Dr Santini sought to protect Fenridge’s position. The first thing he did was have Dr Matotek speak with a representative of the Department on 19 October 2007. Coincidently, although Dr Santini did not know it at the time, this was the day RCA closed the nursing home business.

Dr Matotek informed the Department representative that RCA had ‘opted to close its service and relocate all the residents by December 2007’, and that ‘the current service will cease to operate and the building will be unoccupied’. In these circumstances, Dr Matotek informed the Department representative that Fenridge was intending to bring forward the redevelopment of the premises, and otherwise confirmed that Fenridge would be proceeding with its current applications for approved provider status and allocated places. By this communication, Fenridge was endeavouring to preserve the opportunity for it to conduct a nursing home business at the premises from the end of the lease, if it was economically viable for it to do so.

Fenridge’s applications to the Department did not enjoy a smooth run. By letter dated 16 December 2007 to Dr Santini, the Department advised that Fenridge’s approved provider application was ‘deemed’ to be rejected because it was not finalised within the relevant period, due to non-compliance issues at ‘Ardmillan Place’, an aged care service operated by a company then controlled by Dr Santini, and his sister, and in respect of which Dr Santini was one of the Key Personnel. Dr Santini said in his witness statement that from 2002 until 2009 he was a director and 50 per cent shareholder in Derby Place Pty Ltd. Derby Place was an approved provider during this period and operated the ‘Ardmillan Place’ nursing home. Dr Santini, in his capacity as a general practitioner, was the Director, Clinical Care, at that nursing home.

That case concerned the lease of commercial premises. The tenant covenanted that it would not make any substantial alteration or addition to the demised premises without the written approval of the landlord. The tenant breached that obligation early in the lease, by destroying the foyer of the building and substituting a new foyer to meet its requirements. The lease had many years to run. The trial judge described the tenant’s conduct as involving ‘contumelious disregard’ for the landlord’s rights and no challenge was made to that finding.[140]
[140]Ibid 282.

The landlord did not terminate the lease. It sued the tenant claiming damages for breach of the lease. The trial judge awarded damages of only $34,820, representing the difference between the value of the property with the old foyer and the value of the property with the new foyer. The Full Federal Court determined that the landlord was entitled to recover much more: the full cost of restoring the foyer to its original condition ($580,000), and $800,000 for loss of rent while that restoration was taking place, even though the works would not be performed until the lease expired many years in the future. The tenant appealed to the High Court, seeking to restore the trial judge’s decision. In a unanimous decision (French CJ, Gummow, Heydon, Crennan and Kiefel JJ) the High Court dismissed the appeal.

The following principles which are relevant to this case may be distilled from the joint judgment of the High Court:

(1) The ‘ruling principle’ with respect to damages at common law for breach of contract is that a party who sustains a loss by reason of a breach of contract is, so far as money can do it, entitled to be placed in the same position, with respect to damages, as if the contract had been performed.[141]
[141]Ibid [13] citing Robinson v Harman (1848) 1 Exch 850, 855.

(2) The entitlement to be placed in the same situation with respect to damages as if the contract had been performed means just that. It does not mean ‘as good a financial position as if the contract had been performed’.[142]

(3) It is prima facie no answer to a claim for damages on this basis that, viewed objectively, it is not to a plaintiff’s financial advantage to be placed in the same situation as if the contract had been performed. It is for the plaintiff to judge whether he wants damages on that basis ‘subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit’.[143]

(4) There is another qualification to the ruling principle, that the work to be undertaken must be necessary to produce conformity with the contractual obligation and must also ‘be a reasonable course to adopt’.[144] The test of ‘unreasonableness’ is, however, ‘only to be satisfied by fairly exceptional circumstances’.[145] For example, where a building contract required a house to be built with cement rendered external walls of second-hand bricks, but the builder used new bricks of first quality underneath the cement render. The cost of demolition and re-construction with second-hand bricks would not be a reasonable course to adopt.

[142]Ibid quoting Radford v De Froberville [1977] 1 WALR 1262, 1273 (emphasis in original).

[143]Ibid [16] quoting Radford v De Froberville [1977] 1 WALR 1262, 1270.

[144]Ibid [17] quoting Bellgrove v Eldridge (1954) 90 CLR 613, 618.

[145]Ibid [17]-[20].

In reliance on Tabcorp v Bowen,[146] RCA contended that, having made a decision that it would not repair the premises, but to instead proceed with the apartment development, Fenridge has suffered no loss and is merely taking advantage of a technical breach to secure an uncovenanted profit. In these circumstances, it was contended that it would be unreasonable for the Court to allow any claim for repair or reinstatement of the premises.
[146]Ibid.

Fenridge relies principally upon the decision in Joyner v Weeks.[147] In that case, the Court of Appeal in England considered a case where the premises were left in a state of disrepair. The Court held that the ‘ordinary prima facie rule’ for assessment of damages for breach of a make good obligation is ‘such a sum as will put the premises into the state of repair in which the tenant was bound to leave them’.[148]
[147][1891] 2 QB 31.
[148]Ibid, 46-7 per Fry LJ, 43 per Lord Esher MR.

Joyner v Weeks has some factual similarity to this case. Before the end of the lease, the landlord re-let the premises to a third person under a second lease, to commence at the end of the first lease. Under the terms of the second lease, the new tenant agreed to ‘pull down and alter part of the premises’.[149] The tenant under the first lease contended that the landlord had not suffered any ‘real loss’, at least with regard to that part of the premises which were to be demolished by the third party under the second lease. The Court of Appeal disagreed.
[149]Ibid 42.

Lord Esher MR was of the opinion that the second lease was irrelevant to the tenant’s obligations under the first lease:

In my opinion the contract between the plaintiff and the third person cannot be taken into account; it is something to which the defendant is a stranger. So, also, anything that may happen between the plaintiff and the third person under that contract after the breach of covenant is equally a matter with which the defendant has nothing to do, and which cannot be taken into account. These are matters which might or might not have happened, and, so far as the defendant is concerned, are mere accidents. The result is that there is nothing to prevent the application of the ordinary rule as to the measure of damages in such a case.[150]

[150]Ibid 44.

Lord Justice Fry emphasised that the rule was the usual, ordinary or prima facie rule, but saw nothing in the circumstances of the case to render it inapplicable.[151]
[151]Ibid 45-8.

Both Lord Esher and Lord Justice Fry thought that the right to claim the ordinary measure of damages arose at the moment of determination of the lease.[152] They then considered whether there was anything in the circumstances of the case to defeat the application of the ordinary rule as to assessment of damages. In this regard, Lord Esher spoke in terms of the ordinary rule applying, ‘unless there be something which affects the condition of the property in such a manner as to affect the relation between the lessor and the lessee in respect to it’.[153] Lord Esher did not give any examples of what he had in mind by this exception to the general rule. He could have been referring to damage to the premises by a cause not covered by the lease, which may raise issues of frustration and the like; to personal rights or equities arising between the parties to the lease; or to circumstances where the lessor has, to the lessee’s knowledge, a pre-existing intention to demolish the premises at the end of the lease and in fact does so. Lord Justice Fry spoke in terms of a vested right to the ordinary measure of damages in the absence of some factor rendering that measure inapplicable. His Lordship did not, however, give any example as to what circumstances might bring about that result.
[152]Ibid 44 per Lord Esher; 47 per Fry LJ.
[153]Ibid 43-4.

In Graham v Markets Hotel Pty Ltd,[154] the High Court stated that ‘the general rule’ for assessing damages for breach by a lessee of a covenant to deliver up the demised premises in good repair was ‘settled’,[155] or ‘authoritatively stated’,[156] in Joyner v Weeks. The High Court did not consider the circumstances in which, at common law, the general rule may be departed from. The case concerned a lease of premises in New South Wales, and was governed by s 133A of the Conveyancing Act 1919-1939 (NSW), which both established a statutory limit upon the amount of damages recoverable for breach of a make good obligation and provided a statutory exception. The section was obviously intended to abolish the effect of the decision in Joyner v Weeks. This is no equivalent statutory provision in Victoria, where the common law continues to govern.
[154](1943) 67 CLR 567.
[155]Ibid 582 per Latham CJ.
[156]Ibid 586 per Starke J.

The general rule stated in Joyner v Weeks was also given express approval by the Full Federal Court in the Tabcorp Holdings case.[157] In that case, all members of the Full Court referred to the decision of the New Zealand Court of Appeal in Maori Trustee v Rogross Farms Ltd.[158] Finkelstein and Gordon JJ,[159] and Rares J,[160] quoted with apparent approval the following passage from the judgment of Tippin J in the Maori Trustee case:

The rule in Joyner v Weeks is not an absolute rule. It is, however, the prima facie rule which will be applied unless the lessee can show by sufficiently cogent evidence that in both the short and the long term the lessor will definitely suffer no loss or will suffer a loss which can definitely be assessed at less than the prima facie measure.[161]

[157]Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494, [10]-[11] per Finkelstein and Gordon JJ, [39]-[40] per Rares J.

[158][1994] 3 NZLR 410.

[159]Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494, [12].

[160]Ibid [40].

[161]Maori Trustee v Rogross Farms Ltd [1994] 3 NZLR 410, 420 per Tippin J (emphasis added).

If this test is accepted as applying in Australia, the use of the word ‘definitely’ shows that a lessee in breach of a make good obligation has a high hurdle to cross before persuading the Court to depart from the general rule in Joyner v Weeks. Earlier in his reasons, Tippin J referred to such cases as being ‘truly out of the ordinary’.[162]
[162]Ibid.

RCA contends that the apartment development made all of the make good works claimed by Fenridge unnecessary, that none of those works have been or will ever be performed, that Fenridge’s claims are therefore for hypothetical works, that Fenridge has therefore definitely suffered no loss, and that the exception expressed in Maori Trustee applies.

Accepting for the purposes of argument that the statement in Maori Trustee is an accurate statement of the principle to be applied, in my opinion RCA has not satisfied the heavy onus upon it to avoid the operation of the usual basis for assessment of damages for breach of a make good obligation. My reasons follow.

The first difficulty with RCA’s submission is that it is directly inconsistent with the result in Joyner v Weeks, where the Court had definite evidence that part of the leased premises would be pulled down and rebuilt at the cost of the new lessee. The second difficulty is more fundamental. The fact that the works undertaken by Fenridge as part of the apartment development do not meet the precise description of the works required to meet the make good obligations is not, at common law, a complete answer to the claim. I say nothing about the position in jurisdictions such as New South Wales where the effect of Joyner v Weeks has been abrogated by statute.

In Gagner Pty Ltd v Canturi Corporation Pty Ltd,[163] the Court of Appeal of New South Wales considered a negligence claim for physical damage to premises operated as a jewellery store in a city building. The plaintiff was the lessee of the jewellery store premises and the defendant was the lessee of restaurant premises immediately above the jewellery store. The defendant’s negligence caused water to escape from the restaurant premises and flow down into the jewellery store, causing damage to the jewellery store premises. After a delay of about seven months, the plaintiff closed the jewellery store for 29 working days while it undertook a complete internal refurbishment of the premises, involving some internal reconfiguration. As the water damage affected only about 10 per cent of the floor area of the jewellery store, the cost of the complete internal refurbishment was substantially greater than would have been the cost of repairing the water damage in a way that would have brought the premises back to their pre-damaged condition. Further, the refurbishment of the 10 per cent portion, while remedying the defects caused by water damage, did not meet the precise description of the works necessary to repair the water damage in a way that would have brought the premises back to their pre-damaged condition.[164]
[163][2009] NSWCA 413.
[164]Ibid [7].

The trial judge nevertheless awarded damages equivalent to the amount it would have cost to bring the premises back to their pre-damaged condition, together with an allowance for 10 working days’ business interruption at an agreed daily rate. The judge held that 10 working days would have been necessary to restore the premises to their pre-damaged condition if that was all that was done.[165]
[165]Ibid [8].

On appeal, the restaurant owner contended that the trial judge had erred in assessing damages in that way because the total refurbishment of the jewellery store premises did not include precise rectification of the water damage, so as to bring those parts of the premises back to their pre-damaged condition. The appeal on this ground was dismissed. It is unnecessary to consider the other issues raised on appeal.

The principal judgment was delivered by Campbell JA (Macfarlane JA and Sackville AJA agreeing). In his reasons, Campbell JA conducted a comprehensive analysis of earlier authorities and concluded:

(1) The general compensatory principle governs the award of damages in tort and contract.[166]
[166]Ibid [30], [89]-[95].

(2) ‘While the law has developed some conventional practices about the ways one applies that compensatory principle in particular fact situations, those conventional practices must yield if the facts of the instant case require some different method to be adopted for assessing the appropriate amount of compensation’.[167]
[167]Ibid [31].

(3) It was no answer to the claim that the damages awarded were ‘theoretical’ because the precise works required to restore the premises to their pre-damaged condition were not and never would be performed.[168]
[168]Ibid [33].

(4) The law has developed to a stage where there is no accrued right to damages of a particular amount upon accrual of a cause of action in tort or contract.[169] The time at which damages are to be assessed and the appropriate measure of damages is to be determined at trial, ‘in light of events then known, to give effect to the compensatory principle of damages’.[170]
[169]Ibid [51]-[55].
[170]Ibid [54].

(5) Where a plaintiff’s property is damaged as a result of a tortious act or a breach of contract, the plaintiff may recover damages for:

rectification work in a loose sense, in that it resulted in the premises no longer being defective, but that work was not rectification work in a more precise sense of doing exactly what was needed to make good the contractual shortcoming (in Hyder Consulting) or to get the premises back as close as possible to their pre-accident condition (in the present case). In both cases it could be said that therefore the rectification work (in the more precise sense) would never be carried out.[171]
[171]Ibid [72].

(6) A plaintiff may recover damages for rectification works in the loose sense, even where the rectification work in the loose sense ‘involved construction of something quite different to that which had been the subject of the original contract’.[172]

(7) The amount recovered on this basis must not, however, exceed the amount which would have been awarded if the premises had been made good by performing works meeting the precise contractual standard or which were required to bring the premises back to their pre-damaged state.[173]

(8) The entitlement to recover damages of this kind is subject to the overriding requirement that the works must be both necessary and reasonable.[174]

[172]Ibid [72], [88]-[89].

[173]Ibid [74], [105], [111]-[113].

[174]Ibid [39], [95], applying Bellgrove v Eldridge (1954) 90 CLR 613, 618-9.

In this case, the evidence establishes that Fenridge conducted a complete refurbishment of the premises, including both internal reconfiguration and extensions, for the purpose of altering their use from one which had become uneconomic by reason of RCA’s breach of the continuing business obligation. RCA contended that the refurbishment works for the apartment development rendered the precise works required to meet its make good obligation theoretical or irrelevant, because none of the precise works, if undertaken, ‘would still exist or be in use’; or, in other words, that none of the precise works would have remained as part of the completed apartment development and thus been of benefit to Fenridge in that respect. On this basis, RCA submits that it has established that Fenridge definitely suffered no loss. This was the same submission which was rejected in Gagner.

RCA relied on the evidence of Anthony Croucher, a building consultant who inspected the premises before and after the apartment development was undertaken. Mr Croucher said that the building at the premises ‘has been totally renovated and extended with very little of the original internal areas remaining’, and that he believed the engineering services in respect of which make good claims are made have been removed.

In my opinion, Mr Croucher’s evidence is not sufficiently certain to establish the factual contention advanced; and in any event does not take this case outside of the principles in Gagner, as the apartment development works remedied the defects which RCA was required to make good in a loose sense. Mr Croucher agreed in cross-examination that, in the completed apartment development, the external walls of the building remained in the same place, many of the internal walls were retained, the entry hall, stairwell and car park remained, and that ceilings, walls, and doors where make good works are claimed were repaired. Those repairs involved, for example, replastering and repainting walls, instead of patching and painting only, replacing floor coverings with different materials rather than repairing, patching or replacing with the same or similar materials and other like matters. As to the engineering services, much of his evidence was hearsay or inference. However, even if some engineering services have been replaced rather than repaired, the repair costs would in my opinion remain recoverable under the principles stated in Gagner.

Applying Gagner to the facts of this case, Fenridge is in my view entitled to recover the cost of performing the precise works which were reasonably necessary to bring the premises up to the state they would have been in had RCA complied with its make good obligations during and at the end of the lease. As noted, there is a vast disparity in the evidence on this issue. I will make orders referring the questions as to what works were reasonably necessary to comply with the make good obligations, and as to the reasonable cost of those works, to a Court appointed expert or a special referee who is suitably qualified to consider issues of that kind. I will hear the parties as to the form of the referral order and as to its authority – which could be either under Order 50 of the Court rules[175] or s 65M of the Civil Procedure Act 2010 (Vic).
[175]Supreme Court (General Civil Procedure) Rules 2005.

The parties joined in submitting that the Court should give some guidance to the referee as to matters of fact and law which may assist in the reference. Without being exhaustive, and reserving to the parties leave to put submissions before the Court on what further guidance may be appropriate on the basis of the evidence at trial or on legal issues, I make the following comments for the benefit of the referee.

First, in considering the scope of works required to meet the make good obligation in the lease, I find as a fact that the premises were in good condition at the commencement of the lease on 3 March 1990. Fenridge purchased the premises from the original landlord, Hosrohast Pty Ltd, in 1991. In his witness statement, Dr Santini said that the premises at that time:

presented very well and were purpose built to meet both current and the likely future needs of the aged care sector. My own inspection confirmed that the Premises were in excellent condition and upkeep. Unlike many of the aged care facilities of that era, the Premises were well painted, clean, air conditioned and the general appearance suggested a building and service very well cared for.[176]

[176]Emphasis added.

This evidence was not challenged in cross-examination. It was put to Dr Santini that he could only give evidence about the condition of the premises when he first inspected them in 1991, with which he agreed, but that does not make his evidence irrelevant or deprive it of any weight.

A finding that the premises were in good condition at the commencement of the lease is supported by other evidence:

(1) Dr Santini gave evidence that the purchase of the premises was a large investment for him at the time. On this basis, I infer that it is more likely than not that Dr Santini would have paid particular attention to the condition of the premises at the time of purchase.

(2) In February 1997, a registered valuer engaged by Fenridge (Robert Lister) prepared a valuation report in respect of the premises. In the course of that report, Mr Lister observed that in 1997 the nursing home building had been ‘completed to a good standard of finish and was in good order and structurally sound at the date of our inspection and assessment’.

Second, in considering the scope of works required to meet the make good obligation in the lease, the parties agree that the limit of Fenridge’s claim is that contained in the evidence adduced at the trial. In other words, Fenridge cannot seek items which are not contained in the final RLB estimate.

Third, the referee should act on the basis that the Court has found the make good estimates of Mr van de Staaal and Mr Price to have been honestly prepared and represent their own professional estimates of the scope and cost of the make good works. Whether or not their opinions as to the scope of works, and their estimates, are objectively reasonable in the circumstances is a matter for the referee to determine on the basis of the evidence before him and the application of his or her professional expertise.

Fourth, in determining the scope of works required to meet the make good obligation in the lease, the referee should have regard to Fenridge’s pleaded case,[177] that RCA breached the make good obligation and related obligations by failing to:

(1) maintain the premises during the currency of the lease in good and substantial repair, order and condition, in breach of clauses 2.3.1, 2.3.2 and 2.3.3 of the lease; and

(2) deliver up the premises to Fenridge at the end of the lease in a clean state and in as good repair, order and condition as at the commencement of the lease, with the exception of fair, wear and tear and damage by accidental fire, storm, tempest, act of God, inevitable accident, civil commotion and impact, in breach of clause 2.6 of the lease.

[177]Paragraphs 34-36, further amended statement of claim, 6 February 2013.

Fifth, as to the failure to maintain the premises in good and substantial repair, order and condition during the currency of the lease, the referee should apply the statement of Sheller JA in Alcatel Australia Ltd v Scarcella,[178] that a lessee’s covenant to keep the premises in good and substantial repair imposes an obligation on the tenant:

that so far as repair can make good or protect against the ravages of time and the elements, it must be undertaken to such a degree as to put the building in the condition it would have been in if good and substantial repair had been undertaken during the period of the lease.[179]

[178](1998) 44 NSWLR 349.

[179]Ibid 356.

Sheller JA acknowledged, however, that a covenant to maintain in good and substantial repair did not require the tenant to restore the premises to their original condition at the commencement of the lease. In that case, the building had been newly erected at the commencement of the lease.[180]
[180]Ibid.

Sixth, as to the make good obligation at the end of the lease contained in clause 2.6, the referee should proceed on the basis that RCA was obliged to repair the premises to the repair, order and condition they were in at the commencement of the lease. As I have said, the only evidence about this is that the premises were in good condition.

Seventh, RCA bears the onus of proving that any damage to the premises falls within the fair wear and tear exception.[181] Further that exception did not negate RCA’s obligation to maintain the premises in good and substantial repair during the course of the lease, including its obligation to repair any damage caused by fair wear and tear in order to prevent further damage. The referee should proceed on the basis that the position was correctly stated by Talbot J in Haskell v Marlow:[182]

Reasonable wear and tear means the reasonable use of the house by the tenant and the ordinary operation of natural forces. The exception of want of repair due to wear and tear must be construed as limited to what is directly due to wear and tear, reasonable conduct on the part of the tenant being assumed. It does not mean that if there is a defect originally proceeding from reasonable wear and tear the tenant is released from his obligation to keep in good repair and condition everything which it may be possible to trace ultimately to that defect. He is bound to do such repairs as may be required to prevent the consequences flowing originally from wear and tear from producing others which wear and tear would not directly produce.[183]

[181]Regis Property Co Ltd v Dudley [1959] AC 370, 393.

[182][1928] 2 KB 45.

[183]Ibid 59; expressly approved in Regis Property Co Ltd v Dudley [1959] AC 370, 393-4.

For example, while a tenant may not be responsible for the immediate consequences of a tile falling off a roof, the tenant would be liable if a failure to repair the roof caused water to enter through the roof causing damage to the premises.

There is one further aspect of Fenridge’s make good claim which requires separate consideration. Fenridge alleged in its further amended statement of claim that RCA left the premises in a damaged condition requiring significant repair in the fire services or fittings at the premises. The only particulars given by Fenridge of this claim were that some issues concerning the insufficiency of the fire services at the premises were noted by GHD Pty Ltd in July 2005, in the course of due diligence report provided to Macquarie Bank for the purposes of determining whether to purchase the nursing home from Moran.

Fenridge called an expert fire protection engineer, Lawrence Reddaway, to expand upon the issues at the premises concerning fire safety which required attention. His evidence concerned deficiencies in smoke walls, smoke dampers and the nurse call system. RCA responded with an expert witness statement from Shawn Brosnan, a building surveyor with relevant experience in fire safety. The Court ordered that the two experts confer and provide a joint report containing their joint opinion as to whether the fire safety and other emergency services at the premises complied with all applicable legislation, including any requirements for accreditation and/or certification under the Aged Care Act, when the lease ended on 28 February 2008. In their joint opinion, the experts concluded, reluctantly, that the fire safety and other emergency services at the premises complied with all applicable legislation and that, therefore, there were no works required to be done in that respect to make the premises compliant with any legislative requirement. They expressed the joint view that this result was required by the applicable regulations made under the Building Act 1993 (Vic) and the certification guidelines made the Aged Care Act.

Fenridge nevertheless persists with its claim for the cost of fire services works. Without seeking any further amendment to the further amended statement of claim, Fenridge contended that RCA was obliged to proceed with fire safety upgrades during the term of the lease by reason of clause 3(a) of a Deed of Variation of Lease made in April 2003. This claim was not pleaded and, in my opinion, it is too late to raise it.

Fenridge relies also upon clause 2.3.1 of the lease, which was pleaded. It was submitted that this clause imposed an obligation on RCA to maintain the fire safety works which had been added to the premises during the term of the lease. Although there is an obligation in clause 2.3.1 to maintain any additions to the premises during the term of the lease, there is no evidence that the fire safety additions, whether or not they were compliant with applicable legislative requirements, fell into disrepair in any way before the end of the lease. I am not satisfied that Fenridge has proved any case that it suffered loss or damage as a result of the condition of the fire and emergency services at the premises when the lease ended. That issue will not be referred to the referee.

Conclusion

For the above reasons, Fenridge has established its case in the following respects.

First, that RCA breached the continuous business obligation and the implied terms, and that Regis wrongfully induced those breaches. RCA and Regis are jointly and severally liable to Fenridge for damages to be finally assessed by reference to the following components:

(1) 75 per cent of the value of Fenridge’s lost opportunity to earn income in the period 29 February 2008 to 31 December 2009 from a nursing home business at the premises;

(2) 80 per cent of the value of Fenridge’s lost opportunity to own the premises on 1 January 2010, together with the attached right to operate, lease or sell the redeveloped nursing home with 60 allocated places. I have assessed this aspect of Fenridge’s loss, subject to adjustment for the profits of the apartment development, at $3,956,000;

(3) interest under the express terms of the lease; and

(4) an adjustment for the net profit of the apartment development.

The final calculation of the damages which both RCA and Regis must pay in accordance with sub-paragraphs (1) to (4) above will involve consideration of issues which have not yet been argued, or fully argued. For example:

(1) For what period should interest run?

(2) How should the net profit of the apartment development be adjusted? My preliminary view is that the amount of the net profit should replace the allowance of $1,525,000 for the value of the undeveloped premises in January 2010, as assessed by Mr Brown. But I will hear submissions on that issue.

(3) When should the net profit of the apartment development be brought to account?

Second, that RCA engaged in misleading conduct. Fenridge has not, however, established any loss caused by that conduct.

Third, that Regis’s conduct is sufficiently reprehensible to justify an award of exemplary damages. The amount of the award will be fixed once Fenridge’s compensatory damages for breach of the continuous business obligation are finally assessed.

Fourth, that RCA breached the make good obligation and that it has suffered loss as a result. The amount of that loss will be referred to an expert or special referee for assessment.

When the above assessments have been concluded, I will hear the parties as to interest and costs.

SCHEDULE OF PARTIES

S CI 2009 07142
BETWEEN:
FENRIDGE PTY LTD (ACN 052 286 521)	Plaintiff
- and -
RETIREMENT CARE AUSTRALIA (PRESTON) PTY LTD (ABN 51 113 960 946)	First Defendant
RCA OPERATIONS (2) PTY LTD (ABN 16 113 961 103)	Second Defendant
MORAN HEALTH CARE GROUP PTY LTD (ACN 008 585 242)	Third Defendant
GRETA MORAN (as executor of the estate of the late DOUGLAS JOHN MORAN)	Fourth Defendant
REGIS GROUP PTY LTD (ACN 084 720 561)	Fifth Defendant

[2013] VSC 464

30 August 2013