Frank and Ena Busic, Ivan and Veselka Milicevic v Dolly Tokoregi and the Estate of the late Roger Franchi

[2018] NSWCATCD 41

Civil and Administrative Tribunal

New South Wales

Medium Neutral Citation:	Frank and Ena Busic, Ivan and Veselka Milicevic v Dolly Tokoregi and the Estate of the late Roger Franchi [2018] NSWCATCD 41
Hearing dates:	27 March 2018
Date of orders:	13 August 2018
Decision date:	13 August 2018
Jurisdiction:	Consumer and Commercial Division
Before:	D Bluth, Senior Member
Decision:	Application is dismissed
Catchwords:	Guarantee under Law Society Commercial Lease Clause 13
Cases Cited:	Ankar Pty Ltd v National Westminister Finance (Australia) Pty Ltd (1987) HCA 15 Bofinger v Kingsway Group Ltd [2009] HCA 44 Brambles Holdings Ltd v Bathurst City Council [2001] NSW CA 61 Meriton Properties Pty Ltd v DCM Leases-5 Pty Ltd [2009] NSW ADT 121 Plant v Meriton Properties Pty Ltd (2009) NSW AD TAP 62 Zang v BM Sydney Building Materials Pty Ltd (2016) NSWCA166 [47]
Category:	Principal judgment
Parties:	Frank and Ena Busic and Ivan and Veselka Milicevic (applicants) Dolly Tokoragi (respondent) Estate of the late Roger Franchi (second respondent)
Representation:	Mark Marando (applicants) Gells Lawyers (first respondent)
File Number(s):	COM 16/44117
Publication restriction:	Nil

REASONS FOR DECISION

1. Frank and Ena Busic and Ivan and Veleska Milicevic (the applicants) own the premises at XXX XXX Road, Drummoyne (the premises). The applicants granted a lease to New Design Centres Pty Ltd (New Design) for a term of five years is commencing on 1 April 2013 and ending on 31 March 2018 (the Lease).

2. New Design which sells kitchens and kitchen fit outs went into liquidation on 17 August 2016. Dolly Tokoragi (first respondent) and her late husband Roger Franchi were the directors of New Design and were equal shareholders.

3. The applicants seek to enforce, against the first respondent the obligations that the applicants claimed were assumed by the first respondent as a guarantor under the Lease (the Guarantee).

Background

4. New Design first leased the premises in 2008 from the new then owner Prolet Enterprises Pty Ltd (Prolet) for a term of 5 years ending on 27 July 2013 (Prolet Lease).

5. The directors of New Design, the late Mr Franchi and the first respondent guaranteed the obligations of New Design under the Prolet Lease.

6. The applicants purchased the premises from Prolet and the premises were transferred to the applicants on 20 July 2009.

7. In April 2013 negotiations were conducted between the applicants and New Design regarding a new lease of the premises, even though there was an option to renew under the Prolet Lease.

8. Mr Mark Marando, solicitor for the applicants was instructed to prepare a new lease which he forwarded to Mr Coffey of Gells Lawyers acting on behalf of New Design.

9. On 7 May 2013, Mr Coffey returned to Mr Marando two signed copies of the Lease, the disclosure statement and a surrender of the Prolet Lease.

10. There were two problems with the execution of the Lease:

1. One copy of the Lease (Copy A) had no signature by the first respondent in the New Design execution block on page 2 but the initials D.T. were located at the foot of each page;

2. The other copy of the Lease (Copy B) included a signature by the first respondent in the New Design execution block on page 2 and her initials were on the other pages, except for pages 3, 4 and 5 which were missing from Copy B.

11. On 17 May 2013, Mr Marando only returned to Mr Coffey Copy B of the Lease having inserted pages 3, 4 and 5 for signature on those pages.

12. Mr Marando also asked Mr Coffey when New Design would be in a position to provide the replacement bank guarantee, that is to replace the original bank guarantee provided by New Design under the Prolet Lease.

13. In October 2013 Mr Coffey returned to Mr Marando Copy B of the Lease which included pages 3, 4 and 5 that purported to bear the full signature of the first respondent.

14. In March 2016 Mr Roger Franchi died. By July 2016 New Design was substantially in arrears under the Lease. The keys were returned to the applicants on 5 July 2016 and the Lease was terminated. The applicants re-let the premises from 1 December 2016 at a reduced rent of $165,000.00 plus GST to Franjel Pty Limited.

15. Under the Lease, the rent for the first year was $186,000.00 inclusive of GST. There was an annual 4% increase on the anniversary of the commencement date so that in year two the rent was $193,440.00 and in year three the rent was $201,177.60. The Lease to Franjel Pty Limited was subject only to annual CPI increases.

16. Consequently, the loss of rent by the applicants is in the order of $250,000 plus interest.

Terms of the Guarantee

17. Clause 13 of the Lease is the relevant clause containing the terms of the Guarantee and states as follows:

13.   Guarantee

What are the obligations of a Guarantor.

13.1   This clause applies to the Guarantor of the Lessee who is named in item 10A in the Schedule and has signed or executed this Lease or, if this Lease is a renewal of an earlier Lease, the earlier Lease.

13.2   The Guarantor guarantees to the Lessor the performance by the Lessee of all the Lessee's obligations (including any obligations to pay rent, outgoings or damages) under this Lease, under every extension of it or under any renewal of it or under any tenancy and including obligations that are later changed or created.

13.3    If the Lessee does not pay any money due under this Lease, under any extension of it or under any renewal of it or under any tenancy the Guarantor must pay that money to the Lessor on demand even if the Lessor has not tried to recover payment from the Lessee.

13.4   If the Lessee does not perform any of the Lessee's obligations under this Lease, under an extension of it or under any renewal of it or under any tenancy the Guarantor must compensate the Lessor even if the Lessor has not tried to recover compensation from the Lessee.

13.5    (Not relevant)

13.6   (Not relevant)

13.7   (Not relevant)

13.8   The terms of this guarantee apply even if this Lease is not registered, even if any obligation of the Lessee is only an equitable one, and even if this Lease is extended by legislation.

18. In the Schedule, Item 10A lists as Guarantors Roger Franchi and Dolly Tokoragi. Under Item 10B the limit of the Guarantors' liability is unlimited.

Hearing on 27 March 2018

19. At the hearing Mr Patrick Bolster of Counsel appeared on behalf of the applicants and Mr Geoffrey McDonald appeared on behalf of the first respondent but there was no appearance on behalf of the estate of the late Roger Franchi, the second respondent.

20. The first respondent's defence to the claim is set out in the outline of submissions. There is no dispute between the applicants and New Design that New Design occupied the premises and was in default under the lease.

21. The issue from the first respondent's point of view is whether the first respondent is liable to pay the debt of New Design under the Guarantee.

22. Mr McDonald makes the following submissions:

1. The Guarantee which is relied upon by the applicants is not an oral agreement nor a document separate to the lease documents but is found within the terms of the Lease under clause 13 headed Guarantee.

2. Accordingly, in order for the applicants to succeed the applicants must satisfy the Tribunal that:

1. there is a document which records the agreed terms of the Lease between the applicants as landlord and New Design as tenant (such that there is no doubt about what agreement is being guaranteed); and

2. the first respondent has indicated her intention to be bound by the Guarantee in accordance with the manner specified in the Lease, in particular clause 13.1 which specifies 'sign or execute'.

23. The position of the first respondent is that there is no lease document which actually records the terms of the underlying agreement between the parties.

24. The second position is that the first respondent did not execute the Lease in the manner specified in the Lease: that is she did not sign or execute as required by clause 13.1.

25. The third position is put in the alternative, that if the Tribunal is against the first respondent on the first two matters then in order for the applicants to succeed the respondent relies on the conduct of the applicants in failing to procure the bank guarantee such failure amounting to a release of the Guarantee granted by the first respondent, based on the principles set out in Ankar Pty Ltd v National Westminster Finance (Australia) Pty Ltd (1987) HCA 15.

26. During the course of the hearing the first respondent agreed that the Lease does accurately reflect the terms of the agreement between the applicants and New Design and accordingly Mr McDonald's first submission falls away.

Execution of the Lease by the first respondent

27. Given the position of the first respondent that she did not sign the lease the parties jointly engaged a handwriting expert to provide a report. The handwriting expert, Ms Michelle Novotny examined the two counterparts of the Lease document MF1B (Copy A) and MF1C (Copy B) and compared the signatures of the first respondent to sample signatures submitted by her.

28. The conclusion of Ms Novotny was that the first respondent did in fact sign Copy B in the execution block as a director of New Design but that it was inconclusive whether the first respondent actually signed Copy B at the foot of pages 3, 4 and 5.

29. To a certain extent the evidence of the expert witness Ms Novotny became less critical given the admission by the first respondent under cross-examination that it was most probably likely that she did execute Copy B of the Lease as a director of New Design. However, the first respondent maintained that her signature on pages 3, 4 and 5 of Copy B was not her signatures. Further the expert witness Ms Novotny was unable to conclude positively whether the signature on pages 3, 4 and 5 was in fact that of the first respondent.

30. Consequently the Tribunal finds that the first respondent did execute Copy B of the Lease as a director of New Design, but did not otherwise execute or sign Copy A or Copy B of the Lease.

31. Therefore it is critical to examine whether by signing Copy B of the Lease, the first respondent indicated her intention to be bound by the Guarantee under the Lease. It should be noted that only one counterpart of the Lease need be signed.

Submissions by Mr McDonald on behalf of the first respondent

32. It is necessary to examine critically the terms of the Guarantee particularly clause 13.1. The principles of construction arise from authorities such as Zhang v BM Sydney Building Materials Pty Ltd (2016) NSWCA166 [47] that:

47.   The liability of the surety is strictissimo juris such that ambiguous contractual provisions should be construed in the surety's favour. While, accordingly, guarantees are to be read contra proferentem, that does not exclude reference to the circumstances surrounding the execution of the document as an aid to construction where the words are ambiguous.

33. Mr McDonald also referred to Bofinger v Kingsway Group Ltd [2009] HCA 44 (13 October 2009) [53]:

53.   It is convenient to turn first to the terms if the appellant's guarantee given by deed on 14 March 2003 to the second mortgagee. The instrument is described on the cover sheet as a 'Deed of Guarantee and Indemnity'. The settled principle in Australia governing the interpretation of contracts of guarantee and indemnity has been stated by this Court in authorities the most recent of which is found in the joint reasons of Andar Transport Pty Ltd v Brambles Ltd. The principle is that a doubt as to the construction of a provision in such a contract should be resolved in favour of the surety or indemnify. It is implicit in this that the doubt may arise not only from the uncertain meaning of a particular expression but from its apparent width of possible application.

34. Accordingly, Mr McDonald believes that the issue to be determined by the Tribunal is whether the first respondent conducted herself in the manner specified within the Lease, so as to evidence an intention to be bound personally as a guarantor under the Lease. The Lease contains a guarantee provision in clause 13. Clause 13.1 expressly provides that the guarantee clause should only apply if a person 'is named in item 10A of the Schedule and has signed or executed this Lease'.

35. Mr McDonald submitted that clause 13.1 is ambiguous by the use of the words 'signed or executed this Lease'. One interpretation put forward by Mr McDonald is that the proper construction of this clause is that the Lease document must be signed or executed by the purported guarantor on each and every page which calls for any signature.

36. The applicants contended that other constructions were sufficient to satisfy the clause such as initialling of the lease document, or the lease document having only one signature. Mr McDonald says that the existence of these alternative constructions are further indications of the ambiguity. Accordingly, in light of the ambiguity the contra proferentem rule must apply to the benefit of the surety, namely the first respondent; that is the document should be interpreted against the party who provided it, namely the applicants..

37. Further, Mr McDonald says that in determining whether there is ambiguity the Tribunal is to have regard to the surrounding circumstances which are as follows:

1. there is a lack of a clear and separate place for the signature of the person simply identified as a guarantor to sign;

2. there was inconsistency in approach compared to the previous Prolet Lease, which was signed on effectively every page by the first respondent including the last page, 18 of 18;

3. Copy B the Lease was signed by the first respondent on the execution page for New Design only;

4. the naming of the guarantors did not appear until page 3 and the terms of the guarantee are on pages 15 of 18 which are the critical terms of the Lease for the purpose of these proceedings; and

5. any initialling of the document (which is not admitted by the first respondent) does not comply with clause 13.1.

Submissions by Mr Bolster on behalf of the applicants

38. Mr Bolster's primary submission was that the first respondent signed both Copy A and Copy B of the Lease. This submission was made notwithstanding the findings by the handwriting expert Ms Novotny that it was conclusive that the first respondent signed Copy B but inconclusive regarding Copy A.

39. Mr Bolster then made further submissions after the hearing taking into account the expert's evidence and the evidence from the first respondent in cross-examination that she most probably did sign Copy B. The submission from Mr Bolster then went to advance a proposition that the first respondent must be bound by her conduct surrounding the 'execution' as showing her assent to being bound as a guarantor.

40. According to Mr Bolster, the conduct of the first respondent needs to be examined objectively in light of all the surrounding circumstances (Brambles Holdings Ltd v Bathurst City Council [2001] NSW CA 61) where Heydon J stated at [81]:

In all the circumstances can an agreement be inferred? Has mutual assent been manifested? What would a reasonable person in the position of the (plaintiff) and a reasonable person in the position of the defendant think as to whether there was a concluded bargain?

41. Mr Bolster then advances his submission by stating that the requirement of personal guarantees by both directors was hardly novel and something that the first respondent understood was required, as it had been with the previous lease. There was no suggestion ever made to the applicants by New Design or by the directors or their solicitor Mr Coffey that the first respondent would not give a personal guarantee.

42. Notwithstanding the convoluted procedure for execution, Mr Bolster submits and the Tribunal agrees that the first respondent had actually signed Copy B. Accordingly as submitted, the reasonable person in the position of both the applicants and the first respondent would conclude that the execution by the first respondent was assent to the obligations of both New Design as lessee and herself as Guarantor.

43. Finally, Mr Bolster says the imperfections regarding execution do not detract from or undermine the quality of the assent of the first respondent of the Lease and the Guarantee. At the very least, her assent can be seen in her actual signature on at least one counterpart, which, by its terms provided that she was bound as a guarantor, and amounted to assent to the Guarantee as well..

44. The position of the applicants is further advanced by the decision of the Appeal Panel in Plant v Meriton Properties Pty Ltd (2009) NSW AD TAP 62 (a decision which was not referred to the Tribunal).

Plant v Meriton Properties Pty Ltd

45. The Appeal Panel examined facts not too dissimilar to the present case. The appeal was a decision of the Retail Leases Division of the forerunner of this Tribunal the Administrative Decisions Tribunal (see Meriton Properties Pty Ltd v DCM Leases-5 Pty Ltd [2009] NSW ADT 121). In those proceedings Meriton Properties Pty Ltd obtained orders for monetary compensation against both the company as lessee and Mr Wayne Plant as guarantor for default following termination of the lease. Mr Plant appealed. I recite the facts in Plant's case because of the closeness of these facts to this case and consequently the importance of the decision. The Appeal Panel set out its decision at paragraph 10 and following:

10   What then occurred is dealt with by the Tribunal as follows. There is no contest with this account. The 'Mr Scott' referred to in the following account is Mr Plant's executive assistant. Mr Scott did not give evidence at the Tribunal hearing. The Tribunal found that Mr Scott was the agent of DCM and Mr Plant. There is no challenge to that finding.

37   In the course of reviewing the file, Ms Wong noted that in the Offer of Lease Meriton had required a director's guarantee and that Mr Plant, in requesting changes to the Offer of Lease, had not asked to be relieved of the obligation of guaranteeing the lessee's obligation. She stated in her evidence that according to her understanding at the time Meriton had in the past had difficulties recovering rental arears from corporate tenants and that it therefore had a policy of requiring personal guarantees from directors.

38   At some time between 9 and 13 December 2005, Ms Wong wrote the name 'Wayne Douglas Plant' in her handwriting underneath the deleted version of this name appearing below the word 'guarantor' in item 15 of the Lease Schedule.

39   On 13 December 2005, Ms Wong sent a letter to DCM in the following terms:

We refer to the lease documents received by our office on 9 December 2005. We note the following:

(1)   Lease (in duplicate)

a.   The leases have not been executed by the tenant on page 2. We enclose the lease (in duplicate) for the tenant to execute on page 2 of the lease.

b.   Item 15 of the lease schedule 'guarantor' has been deleted. This is not agreed by the landlord. We refer to the letter of offer signed and accepted by you that director's guarantee (sic) is required from all directors if the tenant is a company. Therefore I have reinstated 'Wayne Douglas Plant' as the guarantor.

(2)   The following items are still outstanding … (Ms Wong then identified three cheques and a direct debit form required from DCM).

I look forward to receiving the signed Lease (in duplicate) and the items 2(a) to (d) at your earliest convenience.

40   Ms Wong addresses letter to Mr Scott since she had noted from the file that all previous correspondence relating to the Lease had been addressed to him.

41   According to Mr Plant's testimony, he assumed at the time that if Meriton or its lawyers did not accept his deletion of his name from Item 15 of the Lease Schedule, the page would have been reprinted and he would have been asked to sign it once again. He testified that sometime in December 2005 Mr Scott brought him the 'signing pages' of the Lease and told him that he had not signed them on behalf of DCM. He did not see the remainder of the lease or, indeed Ms Wong's letter of 13 December. He signed the lease on page 2 on DCM's behalf and gave the 'signing pages' back to Mr Scott to be returned to Meriton.

42   On 16th December 2005, Ms Wong received from Mr Scott the original of the letter that she sent to him on13 December, together with the two copies of the Lease. She paced ticks against items 1(a) and (b) of the letter (reproduced above) indicating that these two requirements had been satisfied. She then noticed, however, that Mr Plant's signatures (on behalf of DCM) on page 2 of the copies of the Lease were not blue or black ink. She said in evidence that she believed that they were in pencil. She also realised that the documents requested it item 2 of her letter had not been provided.

43   In a letter to DCM dated 16 December 2005, addressed to Mr Scott and enclosing the two copies of the Lease, Ms Wong pointed out that because neither blue nor black ink had been used, the lease had not been properly executed on page 2. She asked that this be rectified and that the three cheques and the direct debit form requested in her letter of 14 December be sent to her.

44   In cross-examination, Mr Plant testified as follows on these matters:

(a)   he did not remember ever signing the Lease in pencil;

(b)   he did not usually sign documents in pencil;

(c)   he remembered receiving and signing the Lease twice, but not three times; and

(d)   on the second occasion he did not read the lease.

45   On 13 January 2006, Ms Wong received from DCM the original offer letter of 16 December 2005. It was accompanied by the two copies of the Lease, executed in ink on page 2, but not by the cheques or the direct debit form. She wrote the phrase 'rec'd 2 leases' on that letter. She made further request to DCM for the cheques and the direct debit form. She received these on 8 February 2006.

11   Mr Plant's case at hearing before the Tribunal was that he had not understood that he was, by signing these pages committing himself personally as guarantor. The appeal panel considered the issues [23-24].

23   … The Appeal Panel's attention (was drawn to) the case of Benson-Brown v Smith (1999) (VSC 208 Ashley J), a director's personal guarantee case. The director's company was the purchaser in a transaction involving a consideration of approximately $1.4 million financed as to $0.3 million by vendor finance supplied by the plaintiff. The purchaser fell into default. The plaintiff sued the director. The transaction documents were defective. They had not included a separate element for the personal guarantee and the usual signature and witnessing clauses. However, the plaintiffs contended that the circumstances of the transaction were clear, that the deal was done on the basis that a director's personal guarantee would be provided to secure the debt of the purchaser company. The defendant had as director executed the principal agreement in the usual way. It referred to the guarantee requirements. The court was satisfied, viewing the circumstances of the transaction as a whole, that the mutual intention of the parties had been that a guarantee would be furnished to secure the deal. The court rejected evidence led by the defendant in support of submissions to the effect that the defect in the document as presented for signature meant that no contract of guarantee had arisen or if there was one it was unenforceable.

24   In our view, this decision does not assist Mr Plant. The court looked closely at the commercial nature of the transaction, and such matters as the letter of offer of the vendor. It had no doubt that the parties had a clear understanding during the deal-making phase that, in the usual way, a personal guarantee would be required of the directors of the purchaser company. The defect in the final documentation was due to a solicitor's error. The execution of the final contract document carried with it a commitment to the giving of a guarantee and indemnity in the terms set out in the schedule to the document.

Resolution by the Tribunal

46. The position of the applicants is that the first respondent by her sole execution of Copy B has assented to being a guarantor of the performance of New Design. Whilst the submissions of Mr McDonald in regard to ambiguity and the construction of the Lease are compelling, they do not of themselves change the view as expressed by Heyden J in Brambles that on the face of the arrangement between the applicants New Design and the previous lessor Prolet, as previous guarantees by the directors had been provided under the Prolet Lease, it was expected by the parties to the Lease that a similar position would apply.

47. This view is supported by the cases of Plant, and particularly Benson-Brown v Smith referred to by the Appeal Panel in the Plant decision where the circumstances of the conduct of a party in executing although imperfectly, a document with a guarantee provision usually binds the guarantor. The Appeal Panel took the view that Mr Plant whilst he did not specifically execute the lease document with Meriton, as a guarantor, but only executed as the evidence showed, as a director of the lessee made himself bound by the guarantee by his conduct, in particular that he had adopted the lease and consequently the guarantee provisions.

48. In particular, it is a common theme throughout the decisions referred to above for the court to not give weight to evidence in support of a submission to the effect that a defect in the execution of the document, as presented for signature meant that no contract or guarantee had arisen or if there was one, that it was unenforceable. Consequently, execution by the guarantor was not critical to the determination that the guarantor was liable under a guarantee provision.

49. However, these cases are to be distinguished from the current facts as presented to the Tribunal in this case. What is absent from these other cases is the specific terms of clause 13.1 in the Lease which states:

13.1   This clause applies if a guarantor of the lessee is named in item 10A in the schedule and has signed or executed this lease…

50. Clause 13.1 requires execution of the Lease by the named guarantors in item 10A. However, the first respondent signed as an officer of the company, New Design to bind New Design to the terms of the Lease. It is a fact that the first respondent only signed once and did not sign in any other capacity.

51. It is the view of the Tribunal that it would be illogical to suggest that the first respondent is caught by clause 13.1 by her execution only as an officer of the lessee. For example, if the guarantor was not an officer of the lessee and therefore did not need to sign on behalf of the lessee and the guarantor had not signed the lease anywhere else, then that guarantor would not be bound because the clause does not operate, eg. This clause applies to a Guarantor… and has signed…

52. To put it in other words, clause 13.1 cannot operate to make a guarantor liable, when such person is an officer of the lessee company and only signs in that capacity. The wording is quite clear. Mr McDonald is correct in submitting that a strict interpretation of the wording of clause 13.1 should apply. There is no ambiguity. Clause 13.1 requires the signing and executing of the Lease to be by the guarantor in the personal capacity of the guarantor for the guarantee clause to apply.

53. In these circumstances the Tribunal finds that in fact the first respondent is not a party to the Lease and consequently has no responsibility for the performance of the lessee, New Design.

54. The Tribunal therefore does not have to specifically deal with the third submission of Mr McDonald that the applicants had somehow by disentitling conduct regarding not following up on New Design to provide a new bank guarantee, therefore released the guarantors under the principles set out Ankar. The short view of the Tribunal is that this is not the case as the obligation to provide the fresh bank guarantee was on the lessee, New Design and the respondents as directors and accordingly they should not benefit from such non‑performance.

55. The application is thereby dismissed.

D Bluth

Senior Member

Civil and Administrative Tribunal of New South Wales

13 August 2018

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I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales.

Registrar

Decision last updated: 23 October 2018