Fergusson Digital Pty Ltd v Colymea Pty Ltd
[2019] ACTMC 18
•21 June 2019
MAGISTRATES COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Fergusson Digital Pty Ltd v Colymea Pty Ltd |
Citation: | [2019] ACTMC 18 |
Hearing Dates: | 12 October 2018; 24 & 25 January 2019; 4 March 2019 |
Last Submissions: | 11 June 2019 |
DecisionDate: | 21 June 2019 |
Before: | Magistrate Theakston |
Decision: | See [112] |
Catchwords: | COMMERCIAL LEASES – Disturbance – Concessions – whether damaged premises can be used |
Legislation Cited: | A New Tax System (Goods and Services Tax) Act 1999 (Cth) Leases (Commercial and Retail) Act 2001 (ACT) ss 19, 22(2), 76, 81, 84, 85 Court Procedures Rules 2006 (ACT) rr 220, 1619 Australian Tax Office, Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4) |
Cases Cited: | Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51 Blomley v Ryan (1956) 99 CLR 362 |
Parties: | Fergusson Digital Pty Ltd (Applicant and First Defendant to the Counterclaim) Colymea Pty Ltd (Respondent and Counterclaimant) Louise Curtis (Second Defendant to the Counterclaim) |
Representation: | Counsel David Robens (Applicant and First Defendant to the Counterclaim) John Larkings (Respondent and Counterclaimant) |
| Solicitors Kamy Saeedi Law (Applicant and First Defendant to the Counterclaim) Gil-Jones Barker Solicitors (Respondent and Counterclaimant) | |
File Number(s): | CL 30 of 2017 |
MAGISTRATE THEAKSTON:
Background
This matter involves a dispute between a tenant and lessor about commercial premises located in Fyshwick within the ACT. There were difficulties with the premises. Rent was withheld and the lessor issued a termination notice. The tenant brought these proceedings to contest the termination, obtain abatement of rent, obtain the return of the bond, and to claim damages. The lessor counter claimed seeking unpaid rent, and damages flowing from the termination. Prior to the hearing, the tenant consented to an order confirming the termination and quantifying an amount of unpaid rent. The tenant had already vacated the premises.
Situation
In August 2017:
(a)Colymea Pty Ltd, the lessor;
(b)Fergusson Digital Pty Ltd, the tenant; and
(c)Louise Curtis, the guarantor;
signed a lease for commercial premises located on the ground floor of 72 Gladstone Street Fyshwick. That lease was for three years. It had an option to extend and was backdated to take effect on 1 July 2017.
Mr Phillip Keogh was and remains the sole director of the lessor. His son, Mr Andrew Keogh, managed the premises on behalf of the lessor.
Ms Curtis was and remains the director of the tenant. Ms Curtis operated and continues to operate the business Pink Frosting. She does so through a separate entity, namely 86 CANDLES PTY LIMITED as trustee for 86 Candles Unit Trust, which I will refer to as 86 Candles. Ms Curtis is the sole director of 86 Candles.
Pink Frosting offers online wedding and party supplies, including items that are customised by printing. Ms Curtis purchased that business in 2015. From that time and up until the termination of the above lease, Pink Frosting operated from the premises located at 72 Gladstone Street. Ms Curtis intended to transfer the operation of the business from 86 Candles to the tenant. By the end of the hearing that had not occurred. While the tenant submitted that it should be taken that the business was transferred as at July 2017, there was no evidence to support that position.
In August 2015 an existing lease between the previous owner of Pink Frosting and the lessor was assigned to 86 Candles. The end date for that lease was November 2016 and there were negotiations from early 2016 to August 2017 about a new lease.
In May 2017 when the negotiations temporarily broke down, the lessor presented the bank guarantee provided by 86 Candles. The lessor offered to return that money to 86 Candles upon the signing of a new lease and the provision of a new bank guarantee. The latter never occurred and the money was never refunded. The tenant claims the money from the bank guarantee was effectively assigned as a bond for the benefit of the tenant and seeks its return to the tenant.
I will address the issues that need to be resolved in the following order:
(a)return of the bank guarantee funds,
(b)difficulties with the premises,
(c)abatement of rent,
(d)compensation to the tenant, and
(e)compensation to the lessor.
Return of the bank guarantee funds
When 86 Candles initially purchased the Pink Frosting, Brett Barton was a business partner with Ms Curtis. In early 2016 Mr Barton commenced negotiations with Mr Phillip Keogh about a new lease. It was agreed that, as an incentive to enter a new lease, rent would be reduced from $94,000 to $72,000 per annum. That reduction equated to approximately three month’s rent free, or six months at half rent across a 12 month period. Ms Curtis conceded that the discount was on the basis that a new lease would be signed. The concession commenced in March 2016.
There followed a dispute between Ms Curtis, Mr Barton and Mr Barton’s wife, the then shareholders of 86 Candles. The old lease was not assigned, extended or replaced. It transitioned into a month to month lease. Negotiations for a new lease continued for 14 months, while 86 Candles paid rent at the reduced rate.
In April 2017 Mr Andrew Keogh sent an email to Ms Curtis chasing up unpaid rent. He also enquired about where they were at with the new lease. Ms Curtis’ response indicated that as far as she was concerned nothing was agreed with respect to a new lease and the incentives already enjoyed by 86 Candles. She also made reference to being unable to move forward with the new lease until the shareholders’ dispute had been resolved.
On 5 May 2017 and in response to Ms Curtis’ comments, the lessor sent a formal letter to 86 Candles giving one month’s notice of the termination of the lease, and seeking the payment of all outstanding rent in full, including the payment of any rent due under the original lease, but not paid due to the above incentives. Ms Curtis conceded that at the time of that letter there was approximately one and a half month’s rent outstanding, which I understand would have been approximately $9,000 if calculated at the concessional rate. The letter sought the payment of $57,928.10 as the total amount payable up until the end of the lease. At the same time, Mr Phillip Keogh presented the bank guarantee, and the lessor received $24,366.33.
Negotiations continued and payments of between $13,000 and $15,000 were made by Ms Curtis’ husband on behalf of 86 Candles. Mr Phillip Keogh conceded that upon that payment no rent was outstanding.
An offer was made by Ms Curtis that if a new lease was signed and a new bank guarantee was provided, the amount received by the lessor, minus legal fees, being $20,769.43 would then be refunded by electronic funds transfer. On 24 May 2017 that offer was accepted on behalf of the lessor by Mr Andrew Keogh. Months later, on 8 August 2017, the arrangement was confirmed in writing when the lessor’s solicitors wrote to Ms Curtis and said:
Upon receipt of signed Leases (sic), replacement Bank Guarantee and all other requirements (as already advised in relation to the new lease) to the Lessor’s satisfaction, the Lessor intends to honour the original arrangement and return the amount of the cash Bank Guarantee to the Tenant by way of electronic funds transfer.
As described above on 24 August 2017 the tenant signed a new lease, but no additional bank guarantee was provided to the lessor. Rent was payable at the rate of $74,520 per annum.
The tenant argues that the balance of the bond has been assigned by 86 Candles to the tenant and is therefore held in lieu of a bank guarantee under the new lease. The lessor notes that two different tenants are involved, claims 86 Candles still owes the lessor rent due to full rent being payable, and argues that the tenant did not satisfy their side of the arrangement by providing a new bank guarantee.
It is clear that the lessor was originally willing to offer an incentive by way of reduced rent for the convenience and certainty of a new lease. I am satisfied that the agreement, as described above did exist and did vary the terms of the original lease between the lessors and 86 Candles. By May 2017, some 14 months after the start of the concessions and in response to Ms Curtis’ dismissive comments about there being no agreement, the lessors understandably lost confidence in Ms Curtis’ commitment to a new lease. However, following the jolt of the termination notice, negotiations recommenced and as quoted above, the lessors were willing to honour their original agreement. I find that agreement continued to require the payment of only concessional rent if a new lease was signed. A new lease was signed with the tenant.
The preference by the lessor to withhold the refund of the first bank guarantee until a new bank guarantee was provided is also understandable. It clearly protected the lessor’s interests in circumstances where there had been some financial exposure in the past. However, in the circumstances where the new lease was with a different entity and the requirement to provide a replacement bank guarantee did not form part of the original arrangement, and the statement that the original arrangement would be honoured, I find that that such a requirement was not part of the final agreement between the lessor and 86 Candles that varied the terms of the original lease. I find that ultimately there was an agreement between the lessor and 86 Candles that only the concessional rent needed to be paid if a new lease was signed by an entity controlled by Ms Curtis, and that there was no further requirement under that agreement, between those two entities, that a new bank guarantee needed to be provided. Of course that requirement did exist between the lessor and the tenant following the creation of the new lease.
I also find that it was agreed between the lessor and 86 Candles that the correct adjustment upon the signing of a lease would be the payment by the lessor to 86 Candles of $20,769.43.
Out of completeness, I note there was no evidence to support an assignment between 86 Candles and the tenant of any chose in action arising from the presentation of the bank guarantee.
Rule 220 of the Court Procedures Rules 2006 (the Rules) allows the Court to order the inclusion of a party at any stage of the proceeding if doing so is ‘necessary to enable the court to adjudicate effectively and completely on all issues in dispute in the proceeding’. To my mind the inclusion of 86 Candles as the second plaintiff is necessary to adjudicate the above issue. It is only with such an order that the court could give judgment in favour of 86 Candles. It would clearly be inappropriate to treat the tenant and 86 Candles as one and the same entity and give judgment in favour of the tenant in that regard. It would also be unsatisfactory to leave the matter unresolved after the issue has been litigated as part of these proceedings. I have raised this possibility of adding 86 Candles as the second plaintiff with the parties and received their further submissions.
The lessor submitted that the tenant made forensic decisions and should be bound by those decisions. However, 86 Candles is not the tenant but a separate entity, and it would be 86 Candles and not the tenant who would be the beneficiary of an order including 86 Candles as the second plaintiff. The lessor also submitted that it would have run its case differently had 86 Candles been a party. However, the lessor did not provide any detail in that regard, nor point to any unfair prejudice. The tenant submitted it would be appropriate to make the order.
Accordingly I will order that 86 Candles be added as the second plaintiff and judgment be entered in its favour in the amount of $20,769.43, with pre-judgment interest in accordance with r 1619 of the Rules from the date 24 August 2017, in the amount of $2,084.34.
Difficulties with the premises
The difficulties with the premises included:
(a)a leaking bathroom sink,
(b)overflowing sewerage,
(c)rainwater leaking into the premises through the ceiling and along a wall,
(d)loss of power for a short period of time, and
(e)loss of internet for a week.
Leaking bathroom sink
Ms Curtis gave evidence that at the commencement of the lease a basin tap in the toilets could only be turned off by using a second tap located on the pipe below the basin. An email, from the maintenance contractor used by the lessor, described the issue as the tap on the sink being ‘frozen’. It appears that in late February 2018, after the commencement of these proceedings, that tap was disconnected for approximately a week before being fixed. This was not challenged by the lessor and was confirmed in part by Mr Andrew Keogh.
Overflowing sewerage
Much was made about overflowing toilets during the hearing. This was described by Ms Curtis to be a significant inconvenience.
The premises involved predominantly office space to the left (when viewed from the street), with a loading area on the right. The loading area was accessible by a roller door located at the front of the building as well as by internal doorways from the office area. The two toilets for the premises were located inside the loading area, adjacent to the external wall and not far from the roller door. The nearest overflow gully trap was located within the loading area, outside the toilet cubicles but inside the roller door.
The evidence from the plumbers was that the gully trap was located lower than other openings in the sewer system, such as toilets. The system was designed to overflow, if necessary, at the gully trap rather than anywhere else. However, it was possible for paper and other solids to block the grate on the gully trap, which may lead to sewerage overflowing elsewhere, for example from a toilet bowl.
Ms Curtis explained that the toilets overflowed during the lease. That involved sewerage running from the toilet bowls, across the concrete floor of the loading area, under the roller door and down the driveway. The tenant’s submissions characterised it as a ‘constant problem’ that ‘remained’ for periods during the lease. The evidence was somewhat different.
There was some contest about whether the toilets overflowed, or the sewerage overflowed from the nearby gully trap. I do not think much turns on this point. Either way the environment within the loading area would have been unpleasant and unhygienic, and the toilets would have been unusable.
There was unchallenged evidence that on two occasions, in August 2015 and December 2016, during the previous lease with 86 Candles that sewerage overflowed. Those events are relevant for the purpose of demonstrating that the lessor was aware of the repetitive nature of the problem during the lease with the tenant.
The sewerage started to overflow at 4:00 pm on 9 August 2017. This is evidenced by an email from Ms Curtis. The tenant’s submissions suggested the sewerage continued to overflow until 29 August. That submission appears to be based upon an invoice for plumbing work performed that date, which involved the use of a camera to inspect the sewer pipes. However, an email indicates that a blockage was cleared on 10 August 2017. That is the day after the overflow started. The same email foreshadows the plumber will use a camera in coming weeks to inspect the pipes. Ms Curtis conceded that timing during her cross-examination. On the basis of that evidence I find that sewerage overflowed from either a toilet or the gully trap on 9 August 2017 until the blockage was removed the following day.
The start of the next sewerage overflow event is less clear. The tenant’s submissions suggest that there was one further event and it commenced on 30 November 2017. It relies on an email of that date from Ms Curtis that indicates the toilets are ‘leaking’. However, Ms Curtis’ evidence during cross-examination was that at that point, rather than sewerage overflowing, water was leaking from the toilet. She described water not coming over the top of the toilet bowl, but rather from the back of the toilet at the cistern. Ms Curtis also gave evidence during her examination-in-chief that on 4 December 2017 the toilets were ‘functioning but … still overflowing’. Another email dated 11 December 2017 from Ms Curtis acknowledges that a plumber attended that day. It is unclear if the problem was fixed that day. I note that the tenant has not made any submissions that a leaking cistern was the basis of any claim.
The plumber’s invoices document two occasions when they attended and cleared the sewerage pipes that month, namely on 8 and 20 of December 2017. Ms Curtis’ evidence contains the following passage that shines some light on when the first of those two blockages was first observed:
It got to the point on the Wednesday of that week, so that would have been the 6th that I decided to move all of my staff except for Michael up to the Lollypotz building where they could work with me at Lollypotz where I could actually try and manage both businesses. And I left Michael to – Michael being the only man in the building, he seemed to be less precious about sewerage and toilets and so he lucked out and he had to stay.
I accept Ms Curtis’ evidence that early in the month of December the sewerage overflowed again, and based on the above evidence I find that sewerage was again overflowing during 6, 7 and 8 December 2017.
In relation to the plumber’s attendance on 20 December 2017, the invoice contains the following description of work:
Drain cleaning was performed free of charge down overflow relief gully located inside the garage door to the right cleaning, down 30 m in preparation for relining.
That description is equivocal about any blockage and therefore any overflowing sewerage. However, the attending plumber, Mr Kingston, described the circumstances of that visit as follows:
Discussions we’ve had with our client, Andrew Keogh, about putting some measures in place to reline the drain in an effort to prevent further problems. At the time it was – as you can see on the document 20 December. It’s a period where we go through a shutdown procedure and run a skeleton crew, and relining was not possible and therefore, you know, as a way of keeping our client happy and also working to achieve the relining work which would repair a section of the drain we performed that work at no charge.
and shortly thereafter he expanded:
We wouldn’t – we wouldn’t have performed drain cleaning unless that drain was blocked and in need of drain cleaning.
I was not referred to any evidence about when that drain may have become blocked on that occasion. Accordingly, I find that in December 2017 the sewerage pipe from the premises once again became blocked and was cleared on 20 December 2017.
Ultimately there was no issue about the lessor’s contention that the sewer pipe was relined in February. The work was done across 7, 8 and 9 February 2018, and that work included re-concreting the driveway. A barricade was removed the following Monday being 12 February 2018. During the course of that work, the lessor offered the tenant the use of toilets upstairs in adjoining premises as evidence in an email.
Incidentally, I accept the evidence of Ms Curtis that she relocated all but one of her staff from the premises to the location of another business she was running in Fyshwick, due to the ongoing issues at the premises. I note the inconsistent evidence of Ms Jones, but note that the context of the relocation was not squarely put to her and I therefore attribute less weight to her evidence in that regard.
I also note and accept the evidence of the plumber that the cause of the recurrent blockages was the state of the sewer pipes.
Rainwater leaking into the premises through the ceiling and along a wall
The evidence described a number of rain events that resulted in leaking within the premises. The first event was in March 2017 and involved water backing up and leaking from where the internal downpipes connect with drainage pipes under the floor within the office part of the premises. The flooding was minor, and the problem was permanently resolved by the lessor installing additional downpipes within the roof cavity. In any event the tenant makes no claim in relation to that event.
There was a storm on the evening of Sunday 26 November 2017. Ms Curtis was in Vietnam at the time and received a call from her security provider informing her that they had lost data connection with the building. Ms Curtis requested Ms Alison Jones, a manager for her other business Lollypotz, to attend the premises and sort things out.
Ms Jones gave evidence that she attended the premises first thing the following morning. She observed the power, internet and phone to not be working. The power was restored at 10:00 am. She indicated that she tasked staff to tidy things up and conduct stocktakes while they were waiting for the internet and phone to be restored. She made no mention of water leaking into the premises.
Ms Curtis explained that she returned the following Sunday, which I understand to be 3 December 2017. She described water still dripping through a crack in the loading area ceiling, above an Australia Post cage. The ceiling in the loading dock area appears to sit below a concrete car park adjacent to the premises above. Ms Curtis also explained that the water in the toilet area, coming from the cistern and the ceiling caused one of her employees to refuse to work in the premises. However, she also explained that the same employee remained at the site three days later when she moved all of her other staff off site due to the sewerage problem.
The tenant’s submissions suggest that an email of 11 December 2017 evidences that the leaking ceiling was on-going as of that date. The email is unclear in that regard. The email is a response to a reminder to pay rent. It lists issues including a leaking ceiling. The reference to the leaking is equivocal about whether it is on-going or something that occurred in the recent past.
Based on the above evidence I accept on the balance of probabilities the inference that rainwater had been leaking into the premises from a crack in the concrete ceiling in the loading area adjacent to the roller door, from 26 November to 3 December 2017, and find accordingly.
Mr Phillip Keogh indicated that after that leak event the lessor arranged for the sealant in the car park to be resealed and any new cracks to be sealed. Mr Andrew Keogh gave similar evidence but indicated he did not attend to observe this in person. He also conceded that it was not until after the tenant had left the premises that the maintenance contractor realised that he needed to ‘strip out the full silicone and redo the whole job, to replace the whole silicone’ in order to prevent the leaking.
Ms Curtis gave evidence that on Saturday night 24 February 2018 there was another significant storm. She anticipated there would be leaking at the premises and attended the premises somewhere between 4:00 am and 5:00 am the next morning. When she arrived she observed water to be leaking down the centreline of the loading area through eight cracks in the concrete ceiling, and along the edge of the external wall where the ceiling meets the wall. Two of the ceiling leaks involved water leaking through light fittings. The floor was covered with various puddles. Stock that was located in boxes on the floor and on racks along the wall was wet and damaged. She moved stock away from the wet areas and into the office area. She described the damaged stock as being cheap in nature and estimated it to be $5,000. I accept that evidence.
Ms Curtis sent an email to the lessor that morning. A response was received from Mr Andrew Keogh on Monday morning which read:
The work required to fix the leaks is done from the carpark above. When we were first aware of the leaks coming from the carpark we removed a large section of concrete above the side wall of the tenancy, sealed the membrane and replaced the concrete. We also sealed several small cracks in the concrete above. That appeared to solve the problem for a number of years. It appears now that in severe weather events with a very large amount of rain that some water is coming into the tenancy. We will meet with [our maintenance contractor] on site to resolve the problem as soon as possible.
There is no direct evidence about how long the rainwater continued to leak into the premises. However, I note that the earlier incident involved water dripping for approximately a week.
Mr Andrew Keogh explained that after the February 2018 leak, the sealant was stripped out of the concrete joints and replaced. That occurred possibly in March 2018. Mr Phillip Keogh explained that the process included grinding the joints. There was no evidence about the success or otherwise of that subsequent process.
Accordingly I make the following findings. Overnight on 24 and 25 February 2018, there was a storm that resulted in significant rainwater leaking into the premises. That rainwater entered the premises in the loading area from the ceiling and along the edge where the ceiling meets an external wall. The leaking caused water to pool on the concrete floor and $5,000 worth of stock to be damaged. While the ceiling had leaked in the past, the lessor understood the previous leaks had been fixed. Following the November leaks and before the February leaks the lessor arranged for work to fix the leaks. That work was not effective. In about March 2018, the lessor arranged for further and more extensive work to fix the leaks.
Loss of power for a short period
As described above the business lost power for a number of hours following the storm on 26 November 2017. However, once access was gained to the locked electricity mains box for the building, the power was restored. That occurred at approximately 10:00 am on Monday 27 November 2017. Consequently the building was without electricity for approximately two business hours that morning.
Loss of internet for a week
In addition to the issues described above, the storm of 26 November 2017 caused the business’ main server to be disconnected from the internet. That disconnection was significant because, as I understand the evidence, while customers could continue to place orders online, the business was not able to process those orders, including printing the customised part of any order.
Ms Jones gave very clear and chronological evidence. She explained the various communications she had with Ms Curtis while the latter was overseas, and the steps she took to have the internet restored. She reported being told by an iiNet technician that there was internet to the building. She indicated that the computer person they normally use for the Lollypotz business was unable to fix the problem when attempting to do so by phone. On the following Monday, being 4 December 2017, technicians attended and in her absence restored the internet connection to the server.
There was no other evidence about what was wrong with the connection. For example it was not clarified whether the failure of connection involved physical wiring, the settings on the server or something else.
The lessor’s submissions refer to an admission by Ms Curtis that the tenant’s server was not working at that time. Ms Curtis did explain during her evidence-in-chief that the business used the server to print jobs, and during this disruption they were not able to print. Her evidence did not explain precisely why the server was not able to print the jobs. For example, was it due to not being able to receive the jobs, or alternatively the server had jobs to action but was not able to function.
Abatement of rent
The tenant seeks rental abatement in full for the following periods due to the following reasons:
(a)The month of August 2017, due to overflowing sewerage between 9 and 29 August 2017.
(b)The month of December 2017, due to a leak on 30 November, leaking ceiling on 4 December 2017 and issue with sewerage and loss of power and internet.
(c)One week in February 2018, due to the sewerage pipe being fixed between 7 and 12 February 2018.
(d)Five weeks between 25 February and 31 March 2018, due to the significant rain event and consequential disruption on 26 February and premises not being repaired until after the tenant vacated at the end of March.
Goods and Services Tax
Before I deal with each of the claims for abatement, I will initially note the following in relation to the Goods and Services Tax.
The leasing of commercial premises is often a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (Cth). GST is therefore payable on rent paid under such leases. The abatement of rent amounts to a change to the consideration for the supply. That change amounts to an adjustment event which leads to GST adjustments for both the lessor and tenant. If the rent is yet to be paid, GST would be simply calculated on the reduced rent. If the rent had been paid, the abatement would involve a refund of the abated component of the rent, as well as the GST that had been paid for that component. This approach appears consistent with the Australian Tax Office’s ruling Goods and Services Tax: GST consequences of court orders and out-of-court settlements (GSTR 2001/4).
I also note that GST is not payable on damages where there is an insufficient nexus between the payment and a supply.
August 2017
The lessor’s submissions claim that relief under ss 84 and 85 of the Leases (Commercial and Retail) Act 2001 (the Act) was not pleaded. However, abatement of rent was clearly sought in the originating application. I also note that formal pleadings are not required in proceedings under the Act. In any event there is no indication that the lessor was not on notice about this issue or did not have an opportunity to address this issue by way of evidence or submission.
My findings above limit the problem with the overflowing sewerage to 9 and 10 in the month of August 2017. I accept the consequential disruption was more than merely the toilets not working. The overflowing of raw sewerage within the premises, notwithstanding its location in the loading area and adjacent to the roller door, was such as to make the premises unsuitable for use in full during that period. That is because it would not be appropriate to require staff to work in the premises in such conditions. Those conditions would have been unpleasant and unhygienic, and extend beyond the immediate area. It amounted to a substantial interference to the tenant’s quiet enjoyment of the premises.
I also note that, due to the two previous incidents of overflowing sewerage during the previous lease, the lessor was on notice about this recurring problem. The lessor would have known that it was only a matter of time before the sewerage pipe once again became blocked and sewerage would overflow. That knowledge means that the problem was within the lessor’s control and therefore cl 8 of the lease, should it remain effective, would not apply.
Clause 29 of the lease purports to exclude the lessor’s liability for a range of events, including failure of sewerage pipes. That provision, at least as far it could apply here, is inconsistent with ss 81, 84 and 85 of the Act that provide for compensation and abatement of rent. In accordance with s 19 of the Act, that clause is void so far as it is inconsistent with those provisions.
I note that cl 30(3) provides specifically that the tenant is responsible for keeping sewer pipes situated in the premises free from blockage. However, the blockage occurred outside of the premises. Further a careful reading of the provision, particularly in light of the express provision at cl 30(2) that the tenant is not ordinarily responsible for structural repairs, leads to the conclusion that the repairs described at cl 30(3) do not include repairs arising from structurally faulty sewer pipes, as in this case.
In the circumstances of a known recurring problem involving the overflowing of sewerage within the premises, it appears to me to be more than appropriate to provide the tenant with abatement of rent. To do otherwise, would financially reward the lessor for its inattention to correcting this known problem, which substantially interfered with the tenant’s quiet enjoyment of the premises. Here the abatement of rent would be in full for two working days. There were 23 working days in August 2017. The abatement amounts to $540: ($74,520 ÷ 12 x 2 ÷ 23 = $540).
As the rent for August 2017 and associated GST has been paid in full by the tenant, the abatement amount of $540 plus 10% of that amount for GST purposes, being $54, should be refunded to the tenant. Pre-judgment interest in accordance with r 1619 from say 1 August 2018, will amount to $61.67.
December 2017
My findings above limit any overflowing sewerage to 6, 7, 8 and 20 in the month of December 2017. For the same reasons that apply to the August event, it appears to me to be more than appropriate to provide the tenant with abatement of its rent in full for those four working days. There were 19 working days in December. The abatement amounts to $1,307.37: ($74,520 ÷ 12 x 4 ÷ 19 = $1,307.37).
As the rent for December 2017 and associated GST has not been paid by the tenant, I will reduce the rent for December by the abatement amount, and add 10% of the balance for the purposes of GST. This will also involve varying the order made on 28 March 2018. Rent for the month of December 2017 will therefore be $4,902.63: ($74,520 ÷ 12 - $1,307.37); with associated GST of $490.26. Pre-judgment interest from 1 December 2017 at the rate of 10% in accordance with cl 15 of the lease will amount to $837.74.
I have also found that there was a rainwater leak from a crack in the ceiling adjacent to the roller door from 26 November to 3 December 2017. For this period there is insufficient evidence to demonstrate a disruption associated directly with the leak that would justify the abatement of rent. There is also insufficient evidence that the lessor was aware at that time that there remained a problem with the ingress of rainwater.
The leaking cistern of 30 November 2017 is not something to my mind that would come close to triggering the abatement of rent. I take judicial notice that such problems are not uncommon. Clause 30(3) provides that the tenant had responsibility to fix such problems, and that clause would have been effective subject to any inconsistency with the Act, such as should any fix require the replacement of the cistern which may amount to a capital cost and therefore offend against s 76 of the Act. There is no suggestion that the cistern was replaced.
The loss of power in December was for only two hours, and therefore to my mind does not justify an abatement of rent.
As described above the loss of internet to the server at the premises from 26 November to 4 December 2017 was a significant issue for the business operating out of the premises. However, it is unclear what caused that problem. It remains open on the evidence that the disconnection may have been caused by something not associated with the premises.
One week in February
As described above the lessor arranged for the sewer pipe to be repaired by it being relined during 7, 8 and 9 February 2018. It was unclear for what period after that work, if any, the sewer pipes could not be used. In any event, I note that the work was performed essentially outside of the premises. In contrast to the overflowing sewerage problem, this process did not involve raw sewerage flowing through the premises. Further, members of the tenant’s staff were invited to use the toilets in the adjacent premises upstairs. In those circumstances, and while the premises were without the use of toilets for those three days, I am not persuaded that it would be appropriate to allow an abatement of rent.
25 February to 31 March 2018
As described above, a significant amount of rainwater leaked into the premises from eight separate cracks in the ceiling and along the top of an external wall in the loading area on 25 February 2018. Those leaks may have continued to drip for a subsequent week. Prior to that event, the lessor had taken steps to fix the problem by applying silicon to the gaps in the concrete above the premises.
Section 85 of the Act provides that the court may order a reduction in rent for a period in which the premises are damaged and the tenant can use the premises fully or in part for their normal purposes despite the damage. In this case the premises were damaged in the past tense and in the sense that rainwater would enter the loading area if it rained heavily. The part of the premises where the leaking occurred was a not inconsiderable portion of the premises and used for storing stock. The balance of the premises remained unaffected by the rainwater.
The lessor claims that cl 8 of the lease applies and requires the tenant to follow a procedure before making a claim in the Court. I have reservations about whether cl 8 applies in these circumstances, as it requires the building to be wholly or substantially inaccessible or unfit for the tenant’s use or occupation. The tenant was able to continue to access, use and occupy the building. In any event and to the extent that cl 8 would prevent the tenant from relying upon s 85 of the Act, the former must be incompatible with the latter and the former is therefore void to the extent that it is.
A basic feature of a building is to protect the occupants and its contents from external elements such as rain. In this case the building did not do that. Further, once the tenant became aware about the potential for the leaking and the scale of the same, it would have not have had confidence to use the loading area as a location to store stock and equipment for fear of further leaks. The lessor conceded that the problem was not properly fixed until after the tenant left. That amounts to a significant interference with the quiet enjoyment of the tenant. The floor plan of the premises reveals that the loading area is approximately 1/5 of the total floor area. In the circumstances I am satisfied that a reduction in the rent for the period 25 February to 31 March 2018 is justified and that based on the proportion of the floor plan, that reduction should be 20%. That involves abatement of rent for three working days in February and all of March. There were 20 working days in February. The abatement amounts to:
(a)February 2018 – $186.30: ($74,520 ÷ 12 x 3 ÷ 20 x 0.2); and
(b)March 2018 – $1,242: ($74,520 ÷ 12 x 0.2 = $1,242).
As the rent for February 2018 and associated GST has not been paid by the tenant, I will reduce the rent for February by the abatement amount, and add 10% of the balance for the purposes of GST. This will also involve varying the order made on 28 March 2018. Rent for the month of February 2018 will therefore be $6,023.70: ($74,520 ÷ 12 - $186.30); with associated GST of $602.37. Pre-judgment interest from 1 February 2018 at the rate of 10% in accordance with cl 15 of the lease, will amount to $916.76.
As the rent for March 2018 and associated GST has been paid in full by the tenant, the abatement amount of $1,242 plus 10% of that amount for GST purposes, being $124.20, should be refunded to the tenant. Pre-judgment interest in accordance with r 1619 from 1 March 2018, will amount to $98.20.
Frozen tap on the sink in a toilet
While it was not expressly submitted by the tenant that an abatement of rent was justified due to the state of the tap on a sink within one of the toilet cubicles, out of completeness I will deal with this issue.
I am of the view that an unserviceable tap is not something that would trigger an abatement of rent. It was open to the tenant to fix this problem, and cl 30(3) of the lease placed the responsibility of doing so on the tenant. That responsibility would be subject to the fix not involving a capital cost. If that were the case the responsibility would be inconsistent with s 76 of the Act and would therefore be void. There was no suggestion that a capital cost was involved.
Compensation to the tenant
The tenant claims compensation arising from:
(a)the disruption of the business while at the premises due to the overflow of sewerage, ingress of rainwater, loss of power and loss of internet;
(b)calling their own plumber; and
(c)the relocation of the business following the termination of the lease.
Paragraphs 81(1)(c) and (e) of the Act provide that a lessor is liable to pay the tenant reasonable compensation suffered by the tenant if the lessor, fails to fix a breakdown of plant or equipment under the lessor’s care and maintenance as soon as practicable, or the lessor otherwise adversely affects the trade of the tenant by the lessor’s conduct without reasonable cause, whether by act or omission. I have read ‘plant or equipment’ to include the sewer pipes and waterproofing of the premises.
While the lessor failed to fix the sewer pipe as soon as practicable and that led to the recurring problem of the blockage and sewerage overflowing, there is insufficient evidence to demonstrate that such disruption had a material effect on the operation of the business and led to any consequential financial loss. As I understand the evidence, the business continued to operate during those periods, albeit on one occasion with most staff relocated to alternative premises where Ms Curtis worked day to day. There was no evidence about any cost associated with that temporary relocation.
In the circumstances of a recurring problem with overflowing sewerage I accept that it was appropriate for the tenant to arrange its own plumber to conduct an inspection of the sewer pipe. That was undertaken by Duncan’s Plumbing at about the same time as the pipe was re-lined. While Ms Curtis indicated that the invoice was paid, there was no evidence that it was paid, or reimbursed, by the tenant. That is significant because the tenant was not trading at that time, and 86 Candles were still operating the business. Therefore there is no evidence that the tenant, as opposed to 86 Candles, suffered a loss. I also note that 86 Candles was not a party to the lease and therefore there is no privity of contract or an associated right for 86 Candles to sue the lessor under the lease. (This is a common issue for each head of damages claimed.)
In relation to the ingress of rainwater into the premises the evidence, which I accept, was that the lessor was not aware of the likelihood of such leaking prior to each of the two rain events. Before the first rain event, the lessor had already undertaken maintenance of the waterproofing membrane and was of the understanding that there was no longer an issue with leaking. In between the two rain events the lessor had again arranged for maintenance to be performed. While there was uncertainty about possible future leaking followed the second rain event and that uncertainty justifies an abatement of rent, there is insufficient evidence to demonstrate that the uncertainty had a material effect on the operation of the business and led to any consequential financial loss. Only a portion of the premises was effected, and there was no evidence to suggest that the loading area was of particular significance for the operation of the business.
In relation to the loss of internet connection, without knowing why that occurred I could not award damages as a consequence. If I needed to quantify any loss suffered by the business due to that disruption, it would be difficult to do so due to the limited and incomplete financial records available.
The loss of power to the premises was for a very short period, but occurred simultaneously with the loss of internet connection. There is insufficient evidence to demonstrate what, if any, additional disruption occurred as a result of the loss of power over those two hours.
In relation to the damaged stock, which I accept amounted to $5,000, there was again no evidence that the tenant, as opposed to 86 Candles, incurred the loss.
In relation to relocation expenses, the tenant conceded that notwithstanding the issues with the premises it was not entitled to withhold rent. When the tenant withheld rent for the month of December 2017 and then failed to remedy that breach after being provided with a reasonable opportunity to do so, the lessor was entitled to issue a termination notice. The lessor did so. While the tenant then made an application in this Court to contest that termination, ultimately the tenant vacated the premises and conceded the termination. That concession was made in late March 2018 after the sewer pipe had been re-lined. It may have also been made after the car park concrete joints had been re-sealed. However, that is less certain and there is no evidence that the tenant was informed about that work having been completed. In those circumstances I could not find that, but for the lessor failing to fix issues as soon as practicable or the lessor otherwise adversely affecting the trade of the tenant by the lessor’s conduct without reasonable cause, the tenant would not have moved out. While the issues with the building were clearly a context in which a dispute between the parties occurred, it was the non-payment of rent that ultimately led to the termination of the lease and the relocation expenses.
Accordingly, the tenant’s claims for compensation must fail.
Compensation to the lessor
I note that on 28 March 2018 an order was made by consent for the tenant to pay the lessor $20,493, being the rent and associated GST for the months of December 2017 and January and February 2018. That amount reflects the monthly rent, without abatement, plus 10% for GST.
The lessor claims losses flowing from the termination of the lease. They are:
(a)loss of rent of three months (April – June 2018) following termination and before a lease with a new tenant commenced – $18,630 (ex GST);
(b)loss by way of providing an incentive to the new tenant amounting to three month’s rent free – $18,630 (ex GST);
(c)real estate agents fees – $7,500 (ex GST); and
(d)legal fees arising from the termination of the lease and the preparation of the subsequent lease – $2,780 (ex GST);
The lessor acknowledged that for approximately two weeks between the tenant’s lease and the subsequent lease, the lessor used the premises for storage. It conceded that this would reduce the claim for lost rent by half a month. That is $3,105 (ex GST).
The tenant speculates that the lessor used the premises for storage for longer than two weeks. There is no evidence to support that suspicion.
The tenant submits that the lessor’s counterclaim should not be allowed because the lessor acted in an unconscionable or harsh and oppressive way by issuing the termination notice. It relies on the following circumstances:
(a)rent had been paid up to November 2017;
(b)the tenant had notified the lessor about financial hardships arising from issues with the premises;
(c)a toilet cistern had been leaking;
(d)the lessor’s emails to the tenant of 5 and 11 December 2017 only mentioned referring the matter to the lessor’s solicitors and did not warn of termination;
(e)on 6 December 2017 all staff, save one, had been relocated to alternative premises;
(f)on 11 December 2017 the ceiling and the toilet continued to leak (my findings do not support this claim);
(g)notwithstanding many emails from the tenant to the lessor, the sewer pipe was not unblocked between 11 and 20 December 2017 (my findings are that the pipe was unblocked on both 8 and 20 December 2017); and
(h)on 20 December 2017, days before Christmas, the termination notice was issued.
The tenant described the above circumstances as amounting to a situational disadvantage for the tenant.
I was referred to Mason J’s description of ‘unconscionable’ in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 462, which was endorsed by Gummow and Hayne JJ in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51 at [55]. Mason J’s description reads in full:
It is made plain enough, especially by Fullagar J, that the situations mentioned are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition [or] circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word 'disadvantage' by the adjective 'special' in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.
Their Honours Gummow and Hayne JJ further noted at [55]:
It will be apparent that the special disadvantage of which Mason J spoke in this passage was one seriously affecting the ability of the innocent party to make a judgment as to that party's own best interests.
In Berbatis Holdings at [13], Gleeson CJ observed that the term ‘special’ had also been described in Blomley v Ryan (1956) 99 CLR 362 at 415 where Kitto J stated:
It applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands.
In the instant case the tenant calls for equity to intervene in circumstances where the lessor terminates the lease at a time when the tenant was suffering a significant business disruption due to actions by the lessor and those disruptions had a serious financial impact on the business.
However, the evidence does not support the claim that the actions of the lessor led to the business disruption. Additionally, the timing of the key disruption was only days before the rent was due. It is difficult to see how that disruption had time to manifest into a financial impact before the rent was due. I also note that in any event that the business received an insurance payment due to the business disruption in late November 2017. Further and as discussed above, the business was operated by 86 Candles, and not by the tenant. That distinction is real notwithstanding that Ms Curtis controlled both entities and was contemplating transferring the business from one to the other.
I assess that the circumstances considered together do not demonstrate any special disadvantage. The circumstances were not such as to demonstrate that the tenant’s ability to make a judgment as to its own interests was seriously affected. Further, it is not demonstrated that the lessor took advantage of any such circumstances. If anything, the history of the relationships between the lessor and both 86 Candles and the tenant is such to demonstrate a significant degree of patience by the lessor.
For the purposes of determining if the lessor engaged in conduct that was unconscionable or hash and oppressive I also take into account the mandatory considerations at s 22(2) of the Act. Ultimately I find that the lessor did not engage in such conduct.
Accordingly, the tenant and or Ms Curtis, as the guarantor, should pay damages to the lessor for:
(a)the loss of opportunity to receive rent for half of April 2018 and all of May and June 2018, being $15,525: ($74,520 ÷ 12 x 2.5);
(b)the loss arising from the lessor providing an incentive to the new tenant amounting to three month’s rent free, being $18,630;
(c)the real estate agents fees associated with finding a new tenant of $7,500 plus $750 GST, being $8,250;
(d)the legal fees arising from the termination of the lease and the preparation of the subsequent lease of $2,780 plus $278 GST, being $3,058;
Those amounts total $45,463. Pre-judgment interest in accordance with r 1619 from say 1 July 2018, will amount to $2,431.96.
Conclusion
For the reasons described above:
(a)The lessor should pay 86 Candles the agreed portion of the funds received upon presentation of the bank guarantee, in the amount of $20,769.43 with pre-judgment interest of $2,084.34.
(b)The orders of 28 March 2018 should be varied by removing reference to the repayment of rent under the lease.
(c)The lessor should pay to the tenant $655.67: ($540 + $54 + $61.67) due to the abatement of rent already paid for the month of August 2017.
(d)The tenant should pay the lessor $6,230.63: ($4,902.63 + $490.26 + $837.74) for unpaid but reduced rent for the month of December 2017.
(e)The tenant should pay the lessor $6,831: ($74,520 ÷ 12 x 1.1) for unpaid rent for the month of January 2018.
(f)The tenant should pay the lessor $7,542.83: ($6,023.70 + $602.37 + $916.76) for unpaid but reduced rent for the month of February 2018.
(g)The lessor pay the tenant $1,464.40: ($1,242 + $124.20 + $98.20) due to the abatement of rent already paid for the month of March 2018.
(h)The tenant should pay the lessor damages in the amount of $47,894.96: ($45,463 + $2,431.96).
I will hear the parties further on the question of costs.
Orders
I make the following orders:
1. 86 CANDLES PTY LIMITED (ACN 607 264 586) as trustee for 86 Candles Unit Trust is added as the second plaintiff.
2. Orders 3 and 4 made on 28 March 2018 are revoked.
3. Judgment be entered for the second plaintiff in the amount of $22,853.77.
4. Judgment be entered for the counterclaimant against the first and second defendants to the counterclaim in the amount of $66,379.35.
| I certify that the preceding one hundred and twelve [112] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Magistrate Theakston. Associate: Priyanka Koci Date: 21 June 2019 |
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