Gigi Entertainment Pty Limited v Schmidt - [2012] NSWSC 1423

Supreme Court

New South Wales

Medium Neutral Citation: Gigi Entertainment Pty Limited v Schmidt [2012] NSWSC 1423
Hearing dates: 9 July 2012, 10 July 2012, 11 July 2012
Decision date: 23 November 2012
Jurisdiction: Common Law
Before: Schmidt J
Decision:
Judgment for Gigi on its claim and for Mr Schmidt on his cross-claim. Orders will be made once the parties have considered the terms of the judgment.

Catchwords:
DAMAGES - leases and tenancies - whether there was a breach of contract - lock out by lessor - hotel - claim for damages for outstanding rent; repair and replacement of plant and equipment; repair and maintenance of hotel; and rent to end of term - defendant in default of various obligations including rent - plaintiff re-entered, occupied and took possession of the hotel - claim that defendant failed to maintain, replace, repair hotel - loss of bargain claim dismissed - referee claims - evidentiary difficulties - nature of lease obligations - was the defendant liable for any prior breach of the lease - observed items - claim for painting-head contractor - claim for costs of re-entry - cross-claim - repayment of security deposit - conversion - claim in respect of mini bus - interest - costs

PROCEDURE - various notice of motions - leave sought to rely on further affidavits - refusal of pleading amendment - refusal of the adjournment application - rejection of the tender
EVIDENCE - admissibility - expert evidence
Legislation Cited: Civil Procedure Act 2005
Conveyancing Act 1919
Evidence Act 1995
Cases Cited: Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175
Australian Broadcasting Corporation v McBride [2001] NSWCA 322; (2001) 53 NSWLR 430
Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588)
Gigi Entertainment Pty Limited v Schmidt [2010] NSWSC 906
Granada Theatres Ltd v Freehold Investments (Leytonstone) Ltd [1959] Ch 592
Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) [2008] HCA 10; (2008) 234 CLR 237
Larking v Great Western (Nepean) Gravel Ltd [1940] HCA 37; (1940) 64 CLR 221
Leotta v Public Transport Commission (NSW) (1976) 9 ALR 437
Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] ASCA 209; (2007) 35 WAR 254
Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705
Texts Cited: Bradbrook, Croft and Hay, Commercial Tenancy Law, 3rd ed (2009) in LexisNexis Butterworths at 15.19
Category: Principal judgment
Parties: Gigi Entertainment Pty Limited
ACN 127 024 168 (Plaintiff)
Michael Karl Schmidt (Defendant)
Representation: Counsel:
Mr C Mobellan (Plaintiff)
Mr S Robertson (Defendant)
Solicitors:
O'Neill Partners (Plaintiff)
McCauley Hawach Lawyers (Defendant)

File Number(s): 2008/289478
Publication restriction: None

Judgment

The defendant, Mr Schmidt, became the lessee of the hundred year old Tattersalls Hotel at Lithgow in January 2007. The plaintiff company, Gigi Entertainment Pty Limited, purchased the hotel in December 2007, at a cost of some $1.6 million. The lease was due to expire in July 2010. Mr Schmidt had paid a security deposit of $250,000 and was paying rent of some $220,000 a year, when Gigi locked him out in February 2008. He was then some 2 weeks in arrears of his rent.

When it went into possession, Gigi refused to repay the security deposit, or to account to Mr Schmidt for cash, stock and various items belonging to him, which were at the hotel when it took possession.

Gigi then operated the hotel itself, commencing these proceedings in September 2008. It claimed some $1.46 million in damages from Mr Schmidt, for outstanding rent, costs of repair or replacement of plant and equipment, repair and maintenance of the hotel, as well as rent and other amounts due under the lease, up until its expiry in 2010.

Mr Schmidt disputed Gigi's right to terminate the lease; that it had suffered the loss and damages it claimed; or that he was responsible for such loss and damages. He brought a cross-claim, seeking repayment of the security deposit, as well as advancing claims in conversion, in relation to cash, stock and other property of his retained by Gigi when it went into possession. He also sought damages, including damages for the loss of his business.

Relevant procedural history

The proceedings had a protracted procedural history. By the time of the hearing in 2012, agreement had been reached as to many matters.

Gigi's repair and maintenance claims rested on the opinions of two experts, Mr Ransley and Mr Seeto. Mr Schmidt engaged his own expert, Mr Barker. A Scott schedule was prepared and in October 2009 a referee, Dr Hutcheson, was appointed. He provided a report in April 2010, in which he concluded that Gigi's claim amounted to some $523,105.

Gigi sought to have the Court adopt the report, which Mr Schmidt opposed. That dispute was dealt with by Hall J, who rejected some parts of the report in a judgment given on 16 August 2010 (see Gigi Entertainment Pty Limited v Schmidt [2010] NSWSC 906). In the result this aspect of Gigi's claim was reduced to some $112,739.

The referee's report did not, however, deal with the question of Mr Schmidt's liability for Gigi's claims, which now arises to be determined.

In April 2011, Gigi pursued an application for leave to amend its pleadings, which was granted by Rothman J, who also gave directions as to the calling of expert evidence. The matter was listed for hearing in August 2011. In July 2011, Gigi engaged new solicitors and gave instructions that a further application to amend the pleadings be made. That application was made on 8 August and on 16 August, an application for leave to rely on further expert evidence was also made.

On 18 August 2011, Adams J vacated the hearing due to commence on 22 August; granted Gigi leave to amend the statement of claim, on specified terms; made an order for security for costs against Gigi and ordered the payment of certain of Mr Schmidt's costs forthwith, on an indemnity basis.

In September 2011, Gigi made an application for a further reference, which came before Garling J. It was resolved on the basis that the parties' experts would be instructed to prepare a joint report, as to the matters in issue. Consent orders were made as to the questions which the experts were to answer. Garling J also made various case management orders and in December 2011 the matter was listed for hearing in July 2012. The experts later provided a joint report, as a result of which Mr Schmidt made a number of concessions, which considerably narrowed the issues which remained to be resolved.

The hearing commenced on 9 July 2012. Gigi was then proceeding on the further amended statement of claim it filed in August 2011.

At the commencement of the hearing, however, by notice of motion filed in court, Gigi sought leave to yet again amend its statement of claim by way of a second further amended statement of claim and to rely on even further evidence, including a further expert's report of a Mr Bell, only recently served on Mr Schmidt. He consented to the proposed amendments, other than in relation to one further claim, in respect of which I refused to grant Gigi leave to amend. I also refused the leave sought in relation to the calling of further evidence, having concluded that it was inadmissible, because it was not relevant to any fact in issue in the proceedings. Leave to rely on one further affidavit was later granted provisionally, its relevance depending on a contested construction of a clause of the lease.

The hearing proceeded, but on the morning of the third day, having already received part of the evidence on which Gigi relied, including certain expert evidence, Gigi made a further application by motion, seeking an adjournment of the hearing, so that it could call further expert evidence. The motion did not seek leave to further amend the statement of claim, but it was conceded for Gigi that such leave needed to be sought and granted, because what Gigi was then seeking to do was to advance a claim against Mr Schmidt, which it had not previously pleaded. It was also accepted that unless the second further amended statement of claim was amended, the proposed new expert evidence would not have been relevant or admissible. The adjournment application was opposed and refused and the hearing then continued

This judgment deals with the reasons for these various rulings, as well as the matters over which the parties otherwise remain in dispute.

There are also claims in relation to interest and costs, which it will be necessary to deal with, after the parties have had an opportunity to consider the conclusions which I have reached as to the matters dealt with in this judgment.

Refusal of pleading amendment

This application, like others which Gigi made, had to be considered in light of the overriding purpose specified by s 56(1) of the Civil Procedure Act 2005, namely to 'to facilitate the just, quick and cheap resolution of the real issues in the dispute or proceedings', as well as the parties' adherence to the obligations imposed upon them by s 56:

"(3) A party to civil proceedings is under a duty to assist the court to further the overriding purpose and, to that effect, to participate in the processes of the court and to comply with directions and orders of the court.

(3A) A party to a civil dispute or civil proceedings is under a duty to take reasonable steps to resolve or narrow the issues in dispute in accordance with the provisions of Part 2A (if any) that are applicable to the dispute or proceedings in a way that is consistent with the overriding purpose."

Also to be considered was the requirement that the Court act in accordance with the dictates of justice (s 58(1)) and in that regard, account had to be taken of the matters specified in s 58(2)(b):

"(i) the degree of difficulty or complexity to which the issues in the proceedings give rise,

(ii) the degree of expedition with which the respective parties have approached the proceedings, including the degree to which they have been timely in their interlocutory activities,

(iii) the degree to which any lack of expedition in approaching the proceedings has arisen from circumstances beyond the control of the respective parties,

(iv) the degree to which the respective parties have fulfilled their duties under section 56 (3),

(v) the use that any party has made, or could have made, of any opportunity that has been available to the party in the course of the proceedings, whether under rules of court, the practice of the court or any direction of a procedural nature given in the proceedings,

(vi) the degree of injustice that would be suffered by the respective parties as a consequence of any order or direction,

(vii) such other matters as the court considers relevant in the circumstances of the case."

The obligation to eliminate delay specified in s 59 also had to be considered, as did the obligation imposed by s 60, to implement the practice and procedures of the Court with the object of resolving the issues between the parties in such a way that the cost to the parties was proportionate to the importance and complexity of the subject matter in dispute.

By the further amended statement of claim filed in August 2011, Gigi pursued damages of various kinds against Mr Schmidt, alleging that prior to being locked out, he was in default of various of his obligations under the lease. This included obligations as to payment of rent; failure to paint and keep equipment in good repair and working order, or to replace plant and equipment which had ceased to work or had become worn out, as the lease required; that he had failed to keep the premises in good order and condition; and that he had failed to carry out various repairs and maintenance. Damages for loss of bargain were also claimed.

Gigi also claimed to be entitled to recourse to the $250,000 security deposit Mr Schmidt had paid, in respect of its claims as to outstanding rent and repairs and maintenance of plant, equipment and the premises, as well as legal costs and expenses.

The further amended statement of claim was the result of the orders made by Adams J, when the first hearing was adjourned in August 2011. Thereby particulars of the claims Gigi pursued against Mr Schmidt were provided, by reference to the provisions of the lease and the Scott Schedule. The questions which the parties later formulated in the proceedings before Garling J, to be put to the experts, had regard to those pleaded claims.

The end result of that process was that in their joint report, the experts had agreed about a number of matters. In the case of most of the matters about which there then remained a disagreement, prior to the hearing Mr Schmidt conceded the conclusion which Gigi's expert had reached. This included the claims advanced by Gigi in the further amended statement of claim as to various painting obligations. In the result, Mr Schmidt did not propose to call evidence from his expert at the hearing and Gigi's experts were each required only shortly for cross-examination as to the limited matters still in issue.

The further amendments which Gigi sought to make at the commencement of the hearing were not opposed, except for a claim in relation to the cost of the repainting of the entire hotel.

As Gigi submitted, the cost of repainting the entire hotel was a matter about which one of its experts had initially expressed a view in 2008, but it was not a claim later advanced in the various pleadings which resulted from the orders made by Rothman J, or by Adams J. Nor had the experts considered such a claim, as the result of the proceedings before Garling J. The experts had dealt with a range of claims for the repainting of various parts of the hotel. None of those claims were any longer in issue, when the hearing commenced.

Leave to pursue the further amendment by which the cost of repainting the entire hotel was sought, was opposed by Mr Schmidt, having regard to the convoluted procedural history of the proceedings, which had resulted in the experts not being asked to consider any question as to the cost of repainting the entire hotel. His case was that he had accepted the views reached by the experts as to the painting claims which Gigi had pressed by the further amended statement of claim and which the experts had been asked to consider. In those circumstances Mr Schmidt did not need to call evidence from his expert and he objected to another new claim being advanced only at the hearing, which the experts would have to belatedly consider and the parties would have to address, given questions as to the provisions made in the lease, which such a claim would raise and the further cost and delay which would follow, if the leave sought were granted.

In the result, I took the view that justice did not permit Gigi being granted leave to embark upon yet another late alteration in its course. It had been repeatedly given leave to make further amendments to its claims. The leave granted when it sought the adjournment of the hearing fixed in August 2011 was granted on strict terms, as to the amendments which Gigi was permitted to pursue and on the basis of a costs thrown away order, those costs being payable forthwith. Having then pursued the further steps which had resulted in an agreement between the parties in relation to painting claims as to various parts of the building, there was in my assessment no just basis on which Gigi could be permitted to embark on yet another late alteration in course at the hearing, in order to advance a claim that Mr Schmidt should be liable for the cost of repainting the entire hotel.

As discussed in Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175, the real issues in the proceedings are those raised by the parties in their pleadings. Given the procedural history of these proceedings, the commencement of the hearing of the claims advanced in the further amended statement of claim was not a time when Gigi could justly be permitted to advance yet another claim in respect of painting, particularly given the agreement reached as to all of the other painting claims.

Given the obligations imposed on both the Court and the parties by s 56 and their respective adherence to those obligations, it was abundantly clear, in my view, that the application had to be refused. It was simply too late to advance yet another claim in relation to Mr Schmidt's alleged breach of the lease terminated when Gigi locked him out in February 2008.

Inadmissible evidence

By the motion filed in Court at the commencement of the hearing, Gigi also sought leave to rely on four further affidavits recently served, including an affidavit which annexed a further expert's report of Mr Bell. That report sought to address an error identified in his first report. Mr Bell's second report was served only after 6pm on the Friday before the hearing, without it being identified that the effect of the report was to increase the amount of Gigi's claim by some $50,000, although that was not a complaint which Mr Schmidt pressed.

Ordinarily the correction of an error in an expert's report is not something to which objection could reasonably be taken, notwithstanding its late service. In this case, however, the objection to the leave sought was pressed in circumstances where there was an issue lying between the parties as to whether Mr Bell's first report was admissible at all, having in mind the provisions of s 55 and s 56 of the Evidence Act 1995. They provide:

"55 Relevant evidence

(1) The evidence that is relevant in a proceeding is evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding.

(2) In particular, evidence is not taken to be irrelevant only because it relates only to:

(a) the credibility of a witness, or

(b) the admissibility of other evidence, or

(c) a failure to adduce evidence.

56 Relevant evidence to be admissible

(1) Except as otherwise provided by this Act, evidence that is relevant in a proceeding is admissible in the proceeding.

(2) Evidence that is not relevant in the proceeding is not admissible"

Two of the affidavits served late were lay affidavits, which sought to prove assumptions on which Mr Bell's first report rested and the third, an affidavit designed to provide evidence in support of one aspect of the claim, which had not to that point been addressed in the evidence. The latter affidavit was eventually received provisionally, but the other two were not.

Without Gigi being granted leave to lead the two affidavits, which sought to provide a basis for the assumptions Mr Bell had been instructed to make, neither of Mr Bell's reports were admissible (see Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588). Further, if the first report was not admissible in any event, as Mr Schmidt contended, because it was not relevant to the matters lying in issue between the parties, there was clearly no point in granting the leave sought in respect of the recently served affidavits. Hence, in considering the application pressed by the motion, I heard the parties on the question of the admissibility of Mr Bell's reports and concluded that Mr Bell's reports were not admissible. These are the reasons for that conclusion.

Prior to the hearing, it was conceded for Mr Schmidt that Gigi was entitled to take possession in February 2008 and that thereby, the lease was terminated. A number of other concessions were also made, by which the issues requiring the Court's determination in the proceedings were considerably narrowed.

In the result it was not in issue that Gigi, having accepted Mr Schmidt's breach of a fundamental term of the contract, by failing to pay rent on time, had taken steps available to it under the lease to bring the contract to an end. That left a position where Mr Schmidt was thereupon discharged from his future obligations under the lease and Gigi was entitled to recover from him any damages which had resulted from any of his earlier breaches of the lease.

One of the things which remained in issue was what Gigi claimed in relation to the 'lost benefit of the lease'. This claim, it was explained at the hearing, was advanced in the second further amended statement of claim in clause 12C, which provided:

"12C. Further and in the alternative, as a consequence of the matters pleaded and particularised above, the Plaintiff has lost the benefit of the Lease as a consequence of a breach or breaches by the Defendant and has therefore suffered loss and damage.

Particulars

(a) Amount claimed by the plaintiff is $321,334 being rent from 19 February 2008 to 3 July 2010 of $20,166.66 (incl GST) per month being $571,590 less the profits from the use of the premises by the plaintiff between the date of termination and the date on which the lease would otherwise have expired calculated at $250,256."

That claim was defended in circumstances where a notice of intention to terminate the lease for breach of essential terms of 22 January 2008 had been served; the then outstanding rent had been paid; further rent had not been paid; and Gigi had then taken possession of the hotel on 19 February 2008, without giving any further notice. It then stayed in occupation and operated the hotel for itself.

That Gigi had suffered the loss claimed, as the consequence of Mr Schmidt's breach of the lease was denied. In his defence Mr Schmidt said that:

"(d) without limiting subparagraphs (a) to (c) of this paragraph says that, if (which is denied) the Lease was terminated in the manner alleged (if at all) and if (which is denied) the Plaintiff is prima facie entitled to damages for the "lost .. benefit of the Lease":

(i) the correct measure of damages for any "lost ... benefit of the Lease" is :

A. the rent that Defendant would have been liable to pay the Plaintiff had the Lease not been terminated; minus

B. the rent capable of being earned by re-letting of the demised premises;

[see, eg, Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 at [55]-[56]]

(ii) the rent capable of being earned by a re-letting of the demised premises was the same or more than the amount of rent that the Defendant would have been liable to pay the Plaintiff had the Lease not been terminated;

(iii) in the premises:

A. the Plaintiff has not suffered any loss or damage as result of any "lost ... benefit of the Lease"; and

B. the Plaintiff is not entitled to the amount claimed or any amount on the account of any "lost ... benefit of the Lease"; "

Mr Bell's report showed that he had identified that under the lease, between 19 February 2008, when Gigi took possession and 3 July 2010, when the lease was due to expire, net rent and outgoings payable by Mr Schmidt under the lease would have amounted to some $571,590. That mathematical calculation was not in issue between the parties.

On the basis of assumptions he was instructed to make, Mr Bell concluded that during that period, Gigi had operated the hotel at a profit of some $302,868. Mr Bell's calculations took no account, however, of the benefit which Gigi had received from its occupation of the hotel. The damages Gigi claimed were the difference between the profit Mr Bell had calculated and the $571,590 rent and outgoings which Gigi would have received from Mr Schmidt under the lease, had it not taken possession.

Mr Schmidt's case was that Gigi was not entitled to damages so calculated and that accordingly, Mr Bell's report was not admissible, not being relevant to any fact in issue in the proceedings, that is, the issues in the proceedings defined by the pleadings and the substantive law (see Australian Broadcasting Corporation v McBride [2001] NSWCA 322; (2001) 53 NSWLR 430 at [90]).

There was no issue between the parties that upon the termination of the lease, the obligation to pay rent came to an end, but that Gigi was entitled to pursue any loss of bargain damages which it suffered. They also agreed that such damages had to be assessed as at the date of termination of the lease; that Gigi then had an obligation to mitigate its damages; and that evidence as to subsequent events were relevant to be taken into account, in assessing both whether the obligation to mitigate had been met and whether damages had been suffered. Mr Schmidt also accepted that Gigi's decision itself to remain in possession of the premises and to operate the hotel, satisfied its obligation to mitigate.

What was in issue was how loss of bargain damages were to be assessed in those circumstances, that is, where after taking possession the landlord remained in occupation of the property, rather than seeking another tenant. Mr Bell's report did not deal with this issue.

The parties were unable to find any authority where such a situation had arisen for consideration. There appears to be an obvious explanation. If a landlord such as Gigi, who takes possession of a property after changing the locks decides to occupy the premises itself for the balance of the term of the lease, rather than obtaining another tenant, the landlord thereby obtains the benefit of that ongoing occupation. The value of that benefit has to be considered, if an action for loss of bargain damages is later pursued against the former tenant, when damages are assessed.

Unless the rental market is falling, such a landlord is unlikely to be able to establish that it has suffered any loss. In a static or rising market the value of the landlord's occupation of the property will be equal to, or greater than the rent which the former tenant would have had to pay under the lease. In those circumstances the landlord will not have sustained any damages. By way of contrast, in a falling market, the landlord will be able to lead evidence to establish that the property could only have been let for a lesser rent, or in the worst case, that no tenant could be found at all. In those circumstances, the landlord may be able to recover damages from the former tenant, on evidence which establishes the difference between the rent the former tenant had to pay under the lease and what it could have been rented for in the market.

Mr Schmidt's case was that his obligations under the lease ceased on termination and Gigi was not entitled to ignore the value of its occupation of the hotel. That value could not be assessed by reference to what profit Gigi achieved by its operation of the hotel. Its value had to be assessed by reference to what rent Gigi could have obtained from another lessee, in the particular market conditions then prevailing. Gigi did not propose to lead any evidence about such matters. They were not dealt with in Mr Bell's report. Mr Schmidt, on the other hand, intended to lead evidence that there was another purchaser of the lease available, prepared to pay Gigi the rent he had been paying.

Mr Schmidt submitted that the profits which Gigi had achieved in its operation of the hotel business, which Mr Bell's report dealt with, were irrelevant to the facts in issue in the proceedings, namely, whether Gigi had suffered any damage as the result of taking possession of the premises. Mr Bell's report ignored that while Gigi had lost the rent which Mr Schmidt would have paid under the lease, it gained the benefit of vacant possession and occupation of the hotel, which had permitted it to conduct the hotel business for itself, at a profit. That possession had a value, which Mr Bell did not seek to establish or deal with in his reports and, in the result, they were inadmissible.

Mr Schmidt relied on Gumland Property Holdings Pty Ltd v Duffy BrosFruit Market (Campbelltown) [2008] HCA 10; (2008) 234 CLR 237, pointing particularly to what was discussed at [56] and [64]:

"[56] To some extent the Lessee's argument rested on an idea of repugnancy - that there was a repugnancy between landlords having possession of property, but also being given a monetary equivalent for the rent they would have got had they not taken possession of the property and instead continued to allow it to be leased. But there is no true repugnancy. There can be no double recovery by landlords. If landlords obtain possession, they can only recover loss of bargain damages if they have tried unsuccessfully to obtain a new tenant at the rent stipulated in the terminated lease. The monetary equivalent of what they would have got if they had not taken possession of the property reflects the fact that they cannot obtain tenants, or cannot obtain tenants who promise to pay as much as the defaulting tenants promised.

...

[64] The need for a landlord to recover loss of bargain damages from a tenant only arises when the market is falling, for if the market is static or rising, the landlord can re-enter against the defaulting tenant, recover arrears of rent, and promptly install a new tenant at the same or a higher rent. The consequence of the Lessee's submission is that landlords are unable to protect themselves as satisfactorily in a falling market as distinct from one which is static or rising. It is difficult to see why landlords should bear the risks of a falling market rather than their defaulting tenants, particularly where, as the Lessor and the Lessee did in the Lease, the parties explicitly, in many places and in an integrated way, placed that risk on the tenant. It is also difficult to see why the law - whether the relevant rule which the Lessee was urging be a rule of construction or some rule of substantive law - should have the result of placing the risks of a falling market on landlords, and of depriving them of the opportunity by agreement to allocate the risk otherwise. The effect of the Lessee's submission is to cut down on party autonomy, to increase the chance of disputes and to reduce certainty. If the Lessee is wrong, it is open to parties to agree that a particular term is essential, and to agree on the consequences of breach. That avoids arguments about whether the term in question is or is not essential independently of the parties' agreement that it is, and what the consequences of breach of it are. If the Lessee is correct, these dangers increase."

Mr Schmidt's case was that Gigi was in no different position to that of a landlord of a residential property, who, having decided to take vacant possession of a property, by changing the locks when the tenant failed to pay rent, then decided to live in the property him or herself, rather than letting it out to another tenant. Such a landlord, it was argued, could not also seek to recover the amount of the rent which the tenant would have paid, had the lease not been terminated when he changed the locks, having had the benefit of living in the property himself after taking possession. That would give the landlord the double benefit which the High Court said it could not have.

Gigi's case was that such a landlord was entitled to both possession and the rent which the former tenant would have had to pay under the lease as damages.

Gigi submitted that seeking another tenant was not the only way in which a landlord's obligation to mitigate its damages could be met. A landlord was also entitled to mitigate by taking possession. In those circumstances, even having had the benefit of that possession, the landlord was also entitled to recover damages, calculated by reference to the rent which the tenant like Mr Schmidt would have had to pay under the lease, had he not been excluded.

In calculating such damages, no account need be taken of the benefit which the landlord had received from its own occupation of the premises. Nor did the landlord have to lead evidence as to what rent another tenant would have been prepared to pay, if a tenant had been sought. In such a case it would be a matter for the tenant to establish that the landlord's decision to occupy was not reasonable, so as to mitigate the landlord's damage. That was not a claim here advanced by Mr Schmidt's defence.

Gigi's case rested on the observations of Buss J in Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] ASCA 209; (2007) 35 WAR 254 at [40] - [41] where his Honour observed:

"[40] Where the trial of the lessor's action against the lessee occurs after the term of the lease would otherwise have expired, the normal measure of damages is the total rent and outgoings etc that would otherwise have been payable after the date of termination, less any amount the lessor has obtained as profits from the use of the premises between the date of termination and the date on which the lease would otherwise have expired (by re-letting the whole or part of the premises or otherwise). A further deduction will be required if the lessor has failed to mitigate its damage. It will usually be appropriate to order the payment of interest on the award of damages.

[41] There is a clearly-established conceptual difference between the measure of damages, on the one hand, and the doctrine of mitigation, on the other. The onus is on the lessor to prove, according to the applicable measure, that it has suffered damage. But the onus is on the lessee to prove that the lessor has failed to take reasonable steps to mitigate its damage, and to demonstrate the extent to which there has been a failure to mitigate. See Watts v Rake (1960) 108 CLR 158 per Dixon CJ at 159; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 per Murphy J (with whom Brooking and Nicholson JJ agreed) at 512-513; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 per Hope JA (with whom Meagher JA agreed) at 158; Goldburg v Shell Oil Co of Australia Ltd (1990) 95 ALR 711 per Sweeney and Ryan JJ at 714."

:

I was satisfied that Gigi's submissions could not be accepted. In neither Gumland nor Luxer did the circumstances which arose for consideration involve a landlord who had decided to mitigate its damages by occupying the property itself, rather than seeking another tenant.

Buss J contemplated that there could be such mitigation when he referred at [40] to the lessor 'reletting the whole of the premises or otherwise'. In such a case the benefit of the occupation by which the landlord has mitigated the loss, is not properly characterised as a 'profit', but still it is a valuable benefit which the landlord may not ignore, when seeking to establish the damages which have been suffered after the date of termination of the lease. That is not a matter for the former tenant to prove, by way of establishing that there has been a failure to take reasonable steps to mitigate. Retaining possession is not such a failure. To the contrary, it is a reasonable method of mitigation available to be taken by a landlord. In such a case, if the value of the benefit of the occupation is the same as, or more than the rent which the landlord would have obtained from the former tenant under the lease, the landlord will not have suffered any damage.

Here it was not in issue that Gigi had taken reasonable steps to mitigate its loss by occupying the premises, in order that it could itself operate the hotel. That occupation enabled Gigi to operate the hotel at a considerable profit.

After Gigi brought the lease to an end, by changing the locks, it obtained vacant possession. It then mitigated its damages, by itself occupying the property for the balance of the term of the terminated lease, operating the hotel itself, rather than seeking a new tenant. It was entitled so to mitigate its damages, but having done so, it was not also entitled to recover damages from Mr Schmidt, calculated without regard to what the property could have been rented for to another tenant, given the then state of the market.

Some light was cast on the value of its occupation of the hotel by the rent which Mr Schmidt had agreed to pay under the lease. It could also have been established by evidence as to the rent someone else was prepared to pay.

That Gigi might have been better off, had it rented the property out to someone else prepared to pay what Mr Schmidt had agreed, is not a basis upon which damages may be ordered against Mr Schmidt. That, in reality, is what Gigi's claim amounted to, that Mr Schmidt should pay it damages because it would have achieved a more profitable outcome, had it not terminated the lease or had it leased the hotel to someone else, rather than having operated the hotel itself.

On Gigi's approach, even if the market had been rising, it would have been entitled to mitigate its damages by occupying the property, operating the business at a profit and still recovering from Mr Schmidt the difference between the profits it generated in its operation of the hotel and what was payable under the lease. On its approach, Gigi's damages would increase, the more unprofitable its operation of the hotel was

This is because the damages sought were calculated by reference to the amount payable under the lease for the balance of its term and deducting from that amount, the profits Mr Bell assessed had been generated by Gigi's operation of the hotel. He did not consider the value of Gigi's occupation of the property. It followed that his was an exercise which was not relevant to any issue lying between the parties.

Gigi's approach paid no regard to a relevant consideration to its claim for loss of bargain damages, namely the value of its occupation of the property, which must of necessity be assessed by reference to what the property could have been rented for in the marketplace. Instead it rested on an irrelevant consideration, namely its ability, or success, in operating the hotel business it chose to conduct there. That did not depend on what rent the property could have commanded in the marketplace at the time, but other matters, such as Gigi's business acumen and operational skills, or lack of them, as well as the impact of other extraneous matters, on the successful operation of the business.

In the result, it had to be accepted that Mr Bell's reports were inadmissible, being irrelevant to any fact in issue in the proceedings. Gigi made a commercial decision to occupy the property itself in order to operate the hotel, thereby satisfying its obligation to mitigate its damages. Its success in that operation during the period the lease would have run, had it not been terminated by the lockout, is not a basis upon which any damages flowing from its termination of Mr Schmidt's lease, when he fell two weeks in arrears in payment of his rent, could be assessed.

Refusal of the adjournment application

Another motion was filed in Court on the third day of the hearing. Gigi then sought another adjournment, with an order that Gigi bear the costs thrown away within 28 days. It then wanted to seek an expert's opinion as to the value of Gigi's vacant possession of the property. That application was opposed. Gigi also sought to tender Mr Wood's 2007 report as a business record. That was also opposed.

The motion was supported by an affidavit sworn by Gigi's solicitor, Mr Brown. He was cross-examined. It emerged that in 2007, a bank had obtained a written valuation of the property. In that report a Mr Wood had made certain observations about the rent, which he then regarded to be fair and reasonable. Gigi wished to have Mr Wood prepare another report, so that it could advance its loss of bargain claim, on the basis of the value of its occupation of the property.

For Gigi it was explained that on a best case, the adjournment would result in Gigi being able to pursue a claim of some $88,000 against Mr Schmidt. How this figure was calculated was not entirely clear, based as it was on certain assumptions about Mr Wood's report. It was argued, however, that he would be irreparably prejudiced, if it were not granted the adjournment.

Mr Brown's evidence was that he had had a discussion with Mr Wood as to whether he could provide an expert report, but he did not know what opinion Mr Wood would express about the claim which Gigi wished to advance. It became apparent that the adjournment application was made in circumstances where it was not known whether any evidence which Mr Wood could give, would provide a basis for Gigi's claim.

In cross-examination it was revealed that Mr Brown had been instructed in about August 2011 to make an application to amend the statement of claim, including in relation to loss of the benefit of the lease; that the application had been pursued before Adams J, with the result that leave to pursue that claim had been granted; that he was aware of the basis on which the claim was defended by Mr Schmidt in the second further amended defence filed in November 2011, by reference to the judgment given in the High Court in Gumland Property Holdings; that at that time, Mr Wood's 2007 report was in Gigi's hands.

On Mr Brown's evidence it was apparent that there was no reason why the loss of bargain claim and the evidence which Gigi sought to advance by calling Mr Wood, could not have been advanced earlier. There was no explanation as to why such evidence had not been led in its case to meet this aspect of Mr Schmidt's defence. It was conceded that it could have been. There was no indication that if the adjournment were granted, Mr Wood's opinion would support Gigi's case.

I concluded that this application had to be refused.

It was accepted that the application was the result of the earlier ruling in relation to Mr Bell's report. Mr Schmidt had put Gigi on notice by his defence, that this aspect of its claim was to be defended. The ruling which had been made vindicated that aspect of his defence. That, in my view, was not a basis on which the adjournment could be granted, or Mr Wood's report received.

Gigi had elected not to call evidence on a matter squarely raised by the defence. That was a forensic decision for it to make. Having elected to take a course which had adverse consequences to its case, it was not just, on the third day of the hearing, to permit Gigi to completely alter its course yet again. It urged the view that in the circumstances, to refuse its application would be punitive and that the balancing exercise which had to be undertaken in exercising the Court's discretion in the circumstances, favoured the grant of its applications.

Those submissions could not be accepted. Gigi had elected not to direct evidence to the basis on which this aspect of its claim was to be defended. On the evidence the course taken had not been the result of any oversight. That Gigi might have had an arguable case, had it been advanced on some other basis, was not a sufficient basis upon which the application could be granted in the circumstances. The application was speculative. It was not even known that Mr Wood's opinion would support Gigi's case, no indication having been sought from him as to what his opinion would be.

Mr Wood's 2007 report was also sought to be tendered, but it was not received. Mr Wood had said in his report:

"5.4 GENERAL OBSERVATIONS

We note from the unaudited 2004-2005 financials, poker machine revenue accounted for approximately 43% of total revenue. We are advised that of the $24,000 weekly turnover, poker machine revenue is approximately $9,000 which represents 37.5% of revenue. Based on 2004-2005 financials, the current rent of $220,000 represents approximately 14.6% of gross revenue and 50% of net profit. On current turnover of approximately $1,250,000 annually, this equates to a rental of $182,500 p.a. which we consider to be fair and reasonable.

What Mr Wood meant at 5.4 was not clear. The documents on which his opinions rested were not identified, Mr Wood's reasoning process was not explained and Mr Wood was not available for cross-examination.

The report was not admissible, not adhering to applicable requirements of the Evidence Act in relation to expert evidence, which are discussed in Dasreef. There, at [37], adopting the words of Heydon JA in Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 at 744 [85], it was observed that:

"the expert's evidence must explain how the field of 'specialised knowledge' in which the witness is expert by reason of 'training, study or experience', and on which the opinion is 'wholly or substantially based', applies to the facts assumed or observed so as to produce the opinion propounded".

Mr Wood's report had not been prepared for legal proceedings and so understandably, did not attempt to adhere to such requirements. In the result, however, his report was not admissible. Nor would its admission have been fair, given the time and circumstances in which it was sought to be tendered, without prior notice, when Mr Wood was not available to be cross-examined.

As discussed in Aon at [102] there are cases where it must be concluded that parties have had sufficient opportunity to put their case and it is too late for further alterations in course. This was such a case.

Given the overriding purpose provided in s 56, the time and circumstances in which these applications were made, the course which Gigi had taken to that point and the further costs and delay which would result of the application being granted, I was satisfied that available discretions could not justly be exercised in the way for which Gigi variously contended.

What came to be agreed

The parties identified that it had been agreed that:

Mr Schmidt was entitled to:
return of the $250,000 bond
return of $7,707,25 cash
payment of $7,931.55 in respect of stock

Gigi was entitled to:
$23,470.11 on account of accrued rent and outgoings
$70,708 on account of painting items

The loss of bargain claim must be dismissed

The loss of bargain claim was resolved by the ruling in relation to Mr Bell's report and the refusal of the adjournment application, so that fresh evidence could be called from Mr Wood. Still, in final submissions it was argued that there would be an award in Gigi's favour, at least for an initial period after it took possession of the premises, because it would be accepted that it would be 'almost impossible to find someone immediately' and therefore an order for 3 months' rent was pressed.

Gigi advanced this claim for the first time in those submissions, without notice and without amendment of the statement of claim. It was objected to, properly in my view. The evidence was that it took possession of the property and operated the hotel, having locked Mr Schmidt out. Gigi faced the obvious evidentiary difficulty, that there was no hint or suggestion of either any intention, or attempt, to find another tenant. Had the case been advanced on this basis, Mr Gerzilis could have been cross examined on such matters. In my view, it was also too late for Gigi to attempt to put its claim on this basis for the first time, when making submissions in reply to Mr Schmidt's submissions.

Gigi could not so advance this aspect of its claim. In the result, the loss of bargain claim has not been established and must be dismissed.

The remaining issues

The claims advanced which remain in issue and which must now be resolved are:

Clause 12A, particular (b)(ii) of the second further amended statement of claim - Mr Schmidt's liability for the outstanding referee items

The claim for a head contractor or consultant for agreed painting items, calculated at 20% or the 10% uplift

Clause 16 of the second further amended statement of claim - the claimed costs of re-entry

Mr Schmidt's claim in respect of the mini bus

The referee claims

It was Gigi's claims, as identified in the Scott Schedule, which were considered by the referee Mr Hutcheson. The items in the Scott Schedule originated in Mr Ransley's report, where he said:

"1.4 On the basis of my investigations I formed the view that the Lessee has far-reaching liabilities for extensive overdue maintenance, including:

1.4.1 the costs to service, repair, rectify or replace some deteriorated or defective plant and equipment, listed in the inventory

1.4.2 the costs to repair, rectify or replace defective building components, services, fixtures and fittings, previously identified as defective or deteriorated in the Gillbanks report

1.4.3 costs required for other general maintenance and reinstatement where numerous unauthorized changes have been made."

In his report, Mr Hutcheson dealt with the experts' views as to the cost of the repair of the Schedule items. Hall J decided the findings by which Mr Schmidt was bound. Mr Hutcheson did not, however, deal with the question of Mr Schmidt's liability in respect of any of these claims. That now arises to be determined.

The items remaining in dispute when the hearing commenced fell into two categories, some $85,000 worth of defects dealt with in the 2005 Gillbanks report and another $15,000 worth of additional items identified by Mr Ransley as requiring repair and maintenance in March 2008, when he inspected the hotel after the termination of the lease. These items were referred by the parties as the 'observed items'.

On Gigi's case, Mr Schmidt was liable in damages under the lease for all of these items, although it was common ground that there was no privity of contract between the parties, neither of them being parties to the lease. There was no issue between the parties that the onus falls on Gigi to establish Mr Schmidt's liability for its claims.

The question of Mr Schmidt's liability for Gigi's claims rested on s 117 of the Conveyancing Act 1919, as well as on the proper construction of the lease. It contains both general repair covenants and specifically agreed obligations in relation to defects identified in the 2005 Gillbanks report, which it was common ground do not fall within the general covenants.

Gigi's case was that all of these provisions of the lease imposed continuing obligations for which Mr Schmidt was liable. It was a matter for him to look to the former lessees for contribution in respect of their breaches of the lease. Gigi was entitled to recover damages from him in respect of all breaches, no matter when they occurred.

Mr Schmidt's case was that there were no continuing obligations imposed by the lease and that given the nature of their relationship, Gigi could not look to him to recover damages in respect of any breaches by the former lessees.

The difficulties in Gigi's evidentiary case

The evidence as to the state of the building in 2005, came from what was revealed by the 2005 Gillbanks report. There was no evidence as to its state when Mr Schmidt came to be the lessee in January 2007. The evidence did not address the question of when the obligation imposed by the lease to deal with any of the Gillbanks' defects which Gigi pursued in these proceedings, first arose, but in some cases it is apparent that it was at the time that the lease itself commenced, given the terms of the 2005 report itself.

The September 2007 Gillbanks report showed that some of the defects the subject of the 2005 report had been dealt with, but when that occurred was not revealed.

The reports were based on a visual inspection. They both noted that:

"This Report attempts to assist in judging a building according to its age and level of maintenance and in providing relative comparisons. This inspection and report is not to be considered all encompassing dealing with a building from every aspect. Rather it should be seen as a reasonable attempt to identify any obvious or significant defects apparent at the time of the inspection. Whether or not a defect is considered significant or not, depends, to a large extent, upon the age and type of the building inspected. It is unrealistic to expect comment on minor defects or imperfections in the Standard Property Report. If this is required, a Special Purpose Property Report is recommended.

Whilst buildings may have many pleasing features there are few without defects and many are due naturally to age deterioration. Subject to the level of maintenance on the building it is common for the number of faults to have increased with age."

The observations made in both reports used defined terms including:

"4.0 Definitions

For the purpose of this inspection, the following definitions apply.

4.1 Good - The item or area inspected appears to be in sound condition without any significant visible defects.

4.2 Fair - The item or area inspected exhibits some minor defects, minor damage or deterioration and may require some minor repairs of maintenance.

4.3 Poor - The item or area inspected may be in a badly neglected state of repair, finished in an un-tradesman like manner or deteriorated due to age or lack of maintenance.

4.4 Above Average - All items and areas appear to be very well maintained and show good quality building work, finishes and fittings, when compared with structures of similar age and construction.

4.5 Average - There may be components requiring repair or maintenance consistent with dwellings of similar age or construction. There were no significant items or problems that were not consistent with dwellings of similar age or construction.

4.6 Below Average - The building and its parts are poorly maintained, show roughly executed workmanship neglect or lack of repairs and maintenance. There may be repairs or defects leading to substantial repair or remedial work required."

The overall condition of the building was rated as average, in both 2005 and 2007.

Mr Ransley inspected the building in March 2008. He had both the 2005 and the 2007 Gillbanks reports, but made no reference to what the 2007 report showed in the opinions which he expressed. He did not use the Gillbanks terminology in his report. He identified the repairs and maintenance which he considered needed to be undertaken in March 2008, but as he explained in cross-examination, he never considered when the items he identified had first required attention, that is, before or after Mr Schmidt became the lessee.

Mr Ransley's evidence was that in maintenance, what was important was not only what was done, but also when it was done. In his view in many cases a programmed system of maintenance was needed, because by doing work over time, it ended up being less costly than waiting for things to go wrong.

From his evidence it is apparent that many of the problems dealt with in his report, had been in existence for some time. He explained, however, that he had not considered whether the specific items which he identified in his report, had first required attention in 2005, 2006, 2007 or 2008. That was not something he had ever considered. He explained that what his report identified was only that some items showed deterioration, which in his opinion should have been programmed for maintenance earlier than they had been. He had not considered, however when it was that it would have been desirable, or necessary for the items he identified to have been fixed.

In the result, despite the matters dealt with by the various experts and the referee, none of the evidence establishes that the items dealt with in Mr Ransley's report first became necessary to deal with, while Mr Schmidt was the lessee.

That, however, did not resolve the issues lying between the parties, because the nature of the obligations imposed on Mr Schmidt by the lease, were also in dispute.

The nature of the lease obligations

By the deed of consent pursuant to which Mr Schmidt became the lessee in 2007, he agreed with the former lessor that:

"The Lessee covenants with the Lessor that the Lessee will hereinafter duly perform and observe all terms conditions and covenants expressed or implied in the Lease and on the part of the lessee to be performed in the same manner as if the Lessee had been a party to the Lease."

This imposed a future obligation on Mr Schmidt. The former lessees remained liable for all of their obligations under the covenants expressed or implied in the lease, notwithstanding the assignment to Mr Schmidt. They, however, are not parties to these proceedings.

Nor was Gigi a party to this deed. It relies on s 117(1) of the Conveyancing Act which provides:

"117 Rent and benefit of lessees' covenants to run with reversion

(1) Rent reserved by a lease and the benefit of every covenant or provision therein contained having reference to the subject-matter thereof and on the lessee's part to be observed or performed, and every condition of re-entry and other condition therein contained shall be annexed and incident to, and shall go with the reversionary estate in the land or in any part thereof immediately expectant on the term granted by the lease, notwithstanding severance of that reversionary estate, and shall be capable of being recovered, received, enforced, and taken advantage of by the person from time to time entitled, subject to the term, to the income of the whole or any part as the case may require of the land leased.

This subsection extends to a covenant to do some act relating to the land, notwithstanding that the subject-matter may not be in existence when the covenant is made."

The lease contained two provisions on which Gigi relied. The first in relation to defects dealt with in the 2005 Gillbanks report, which were the subject of clause 4(b) of the lease. It provided:

"4(b) The Lessee and Lessor acknowledge that they have had the opportunity of reviewing the reports of Gillbanks Building dated 17th May 2005 and Wass Pest Control dated 17th May 2005. The Lessee agrees to accept the responsibility of carrying out repairs and maintenance of defects identified in the reports notwithstanding that the same were in existence at the date of commencement of the lease. Those works shall be carried out as and when same become necessary during the term of the lease or where the same are required by Lithgow Council or any other competent authority PROVIDED THAT the Lessee shall not be required to carry out works of a structural nature or to provide a damp course to the building."

The general repair obligations imposed by the lease on which Gigi relied were:

"6. MAINTENANCE REPAIR ALTERATIONS

(a) The Lessee will during the whole of the said term and otherwise so long as the Lessee may remain in possession or occupation of the demised premises when where and so often as need be shall maintain replace repair and keep the whole of the building upon the demised premises in good and substantial repair order and condition damage by fire, flood, lightning, storm tempest, Act of God and war damage only excepted PROVIDED THAT this covenant shall not impose on the Lessee any obligation in respect of any structural maintenance replacement or repair except when the same is rendered necessary by any act or omission on the part of the Lessee or his servants or agents.

(b) The Lessee will at the expiration or sooner determination of this Lease peaceably surrender and yield up unto the Lessor the whole of the demised promises and every part thereof in good and substantial repair order and condition in all respects having regard to the condition thereof at the commencement of the Lease damage by fire flood lightning storm tempest, Act of God, war damage, riot and civil commotion only excepted.

(c) The Lessee will without affecting the generality of the preceding sub-clauses (a) and (b) of this clause at the Lessee's expense: -

(i) cause the demised premises to be cleaned and painted in a proper and workmanlike manner and during the whole of the term of this Lease to be kept clean and free from dirt ad rubbish;

(ii) from time to time make good any breakage defect of damage to the building or any facility or appurtenance thereof occasioned by want of care misuse or abuse on the part of the Lessee servants agents sub-tenants or other persons claiming through or under the Lessee or claiming through or under the Lessee or otherwise occasioned by any breach or default of the Lessee hereunder or under any rules or regulations as aforesaid.

(iii) well and faithfully repair maintain employ cleanse mend clean and keep in good and substantial repair and working order the whole of the demised premises and without limiting the generality thereof toilets partitions basins locks keys and all pipes and water apparatus (including pumping equipment) thereon or attached thereto and will clean the outside windows and the frames thereof and will do all things necessary for the purpose of keeping the demised premises clean and in good and substantial repair and condition and up to the standard required for licensed hotel premises)

(iv) . from time to time forthwith comply with all statutes ordinances proclamations orders or regulations present or future affecting or relating to the use of the demised premises and with all requirements which may be made or notices or orders which may be given by any governmental, semi-governmental, city municipal health licensing civic or other authority having jurisdiction or authority over or in respect of the use of the demised premises and will keep the Lessor indemnified in respect of all such matters in this paragraph referred to, provided that the lessee shall not be required to carry out any work of a structural nature.

(v) keep the fittings plant and chattels now from the time to time on the demised premises in a proper state of repair working order and condition having regard to their condition thereof at the date of commencement of this Lease and which condition the parties have ascertained and will replace the same or such part or parts or items thereof as shall become broken worn out destroyed damaged or obsolete with fittings plan and chattels of a like nature and equal value.

(vi) maintain and leave the gardens, grounds and any parking areas clean and in good order and condition and clear of all accumulations of rubbish and shall cause all lawns to be regularly mown and the edges thereof trimmed and will not allow shrubs or ornamental plants to be damaged or removed destructions or damage by storm or other untoward event or natural decay or other inevitable accident expected and the Lessee will cause all garbage and rubbish from the demised premises to be regularly disposed of.

...

(o) The Lessee will cause the whole of the premises to be repainted with three coats (one undercoat and two final coats) prior to the expiration of this Lease, AND at the expiration of each four years calculated from the date of commencement of the Lease in a tradesman like manner provided that the Lessee obligations pursuant to this clause shall be in addition to and not in substitution to the Lessee obligations to paint and maintain the premises herein."

It was common ground that when the defects identified in the 2005 Gillbanks report came to be dealt with, improvements in the condition of the hotel would result. It was also common ground that absent the express obligation in clause 4(b) of the lease to repair and maintain those defects, the lease imposed no obligation on the lessee to effect improvements to the hotel. That is an important consideration in this case.

Gigi also accepted that the obligations imposed by the general repair covenants in clause 6 of the lease were neither to improve, nor to put the hotel back into repair, but rather to keep the building in repair in the state that it was in, at the commencement of the lease in 2005.

During the course of submissions, it was thus conceded for Gigi, by way of example, that if there was a missing architrave when the lease commenced in 2005, something Mr Ransley had identified as needing to be replaced in 2008, there was no obligation imposed on Mr Schmidt by the general repair clause, to replace that architrave.

Mr Schmidt's case

In the result, on Mr Schmidt's case, Gigi's claim failed at the level of proof, so far as the Gillbanks items were concerned. Gigi had not established that any of the Gillbanks defects arose to be dealt with while he was the lessee, clause 4(b) imposing a once and for all obligation in respect of such defects. The Gillbanks defects existed at the beginning of the lease and were not the subject of the general maintenance clause, but defects which had to be dealt with as clause 4(b) provided.

The general clause imposed only an obligation to keep the hotel in the state it was in, as at the commencement of the lease. Mr Schmidt's case in relation to the 'observed items', in respect of which there was no specific agreement to repair defects, was that it was necessary for Gigi to establish the state of the property when the lease commenced in 2005 and that 'on his watch', it had become worse. It was also argued that it was necessary for Gigi to establish the state it was in when he became lessee in January 2007, because he had no obligations for the former lessees' failures to comply with clause 6. It had not done so and so this claim must also fail.

Mr Schmidt accepted that in so far as Gigi could establish in relation to the observed items that while he was the lessee, that is as it was put, 'during his watch' the state of disrepair of the building had become worse, then he was liable for those repairs under the general obligation to repair imposed by clause 6.

Mr Schmidt relied on Granada Theatres Ltd v Freehold Investments (Leytonstone) Ltd [1959] Ch 592, where it was observed at 606:

"An assignee of a term is not liable for particular breaches of tenant's repairing covenants committed by his predecessors. He is, of course, liable for the disrepair of the premises as they stand when he takes over, so far as their then state of disrepair falls within the scope of the tenant's repairing covenants, but particular breaches committed before the assignment to him, as distinct from the state of the premises when he takes over, are matters, generally speaking, with which he is not concerned."

Gigi's case

Gigi's case was that both clauses imposed continuing obligations. Mr Schmidt had obligations in respect of the observed items under clause 6, even if the need to repair had first arisen before Mr Schmidt became the lessee. It was his obligation to undertake such maintenance, even if it ought to have been undertaken by the former lessee.

The concession made in relation to the architrave, however, shed light on a difficulty with Gigi's case, even if its construction of the lease was accepted. The 2005 Gillbanks report indicated its limitations. The onus falls upon Gigi to establish that Mr Schmidt has failed to undertake a repair which clause 6 obliged him to make. It follows from its concession that in respect of the observed items, it had to establish the state of that item when the lease commenced, to establish that an obligation to repair that item had arisen. Otherwise, the result of its approach would be to risk imposing an obligation on Mr Schmidt which it was common ground the lease did not impose on a lessee, that is, an obligation to improve the condition of the hotel as it was in 2005.

As to the Gillbanks items, it was Gigi's case that Mr Ransley's evidence showed that it was necessary for them to have been dealt with. It was irrelevant that this necessity had first arisen before Mr Schmidt became the lessee, because clause 4(b) also imposed a continuing obligation.

Was Mr Schmidt liable for any prior breach of the lease?

The parties were not agreed about whether Mr Schmidt was liable for any breach of the lease, which had occurred prior to January 2007. The parties both relied on what Adrian J discussed in Bradbrook, Croft and Hay, Commercial Tenancy Law, 3rd ed (2009) in LexisNexis Butterworths at 15.19:

" Unless the assignee assumes an appropriate liability in contract towards the lessor, he or she will be liable only in respect of rent which accrues due and breaches of covenant which take place after the lease has been assigned to him or her: Grescot v Green [1700] 1 Salk 199; 90 ER 996; Renshaw v Maker [1907] VLR 520; Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] Ch 592 at 606; [1958] 2 All ER 551: this applies even in relation to a rent review under the provisions of the lease with retro-active effect, as rent is to be treated as accruing from day to day even though it may not be payable immediately: Parry v Robinson- Wyllie Ltd [1987] 2 EGLR 133 (Ch), applying the Apportionment Act 1870 (UK); see [16.22]. However, in Estates Gazette Ltd v Benjamin Restaurants Ltd [1994] 1 WLR 1528, it was held that where the licence to assign imposed on the assignee an obligation to pay the rents reserved by the lease at the time and in the manner therein provided for and the rents reserved by the lease were those 'during the said term hereby granted' it was clear that the assignee was bound to pay the rents payable during the whole term. See also Picton-Warlow v Allendale Holdings Pty Ltd [1988] WAR 107 (FC), discussed at [15.18]. It is therefore at times important to consider whether the covenant is a covenant to do a definite act capable only of a breach once for all or a continuing covenant: Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221 at 238. If the covenant is a continuing one, the assignee will be liable, but if the covenant is one which can be broken only once for all, the assignee will be liable by reason of privity of estate only if the breach took place after the assignment: Rankin v Danby (1883) 9 VLR (L) 278; Renshaw v Maher [1907] VLR 520; the assignee will be liable for the disrepair of the premises as they stand when he or she takes over only so far as their then state of disrepair falls within the scope of the tenant's repairing covenants: Granada Theatres Ltd v Freehold Investments (Leytonstone) Ltd; Sleeman v Colonial Distributors Ltd [1956] NZLR 188. A covenant to build is not a continuing covenant: Measures v McFadyen (1910) 11 CLR 723 at 732. If a lessee permits a continuous breach of a covenant in his or her lease, such as allowing the buildings to fall into disrepair, and then assigns the lease, and the assignee continues to permit the breach of covenant, both lessee and assignee can be joined as defendants in an action for damages for this breach, and the continuous breach of covenant gives rise to one cause of action: Fleming v Blythe (1906) 26 NZLR 500. An equitable assignee does not, generally speaking, render him or herself liable to be sued directly by the lessor on the covenants of the lease: Hoskins v Dillon (1950) 67 WN (NSW) 115."

The disagreement turned on whether or not any of the obligations imposed by the lease was 'a covenant to do a definite act capable only of a breach once for all or a continuing covenant'. The former is a breach of a kind which may be waived. By way of contrast, breach of a continuing obligation, 'involves a continuing breach until the omission is made good" (see Dixon J in Larking v Great Western (Nepean) Gravel Ltd [1940] HCA 37; (1940) 64 CLR 221 at 238). There his Honour also observed:

"The distinction between a covenant to do a definite act capable only of a breach once for all and a continuing covenant has consequences not only in relation to waiver but also in the measure of damage, in the effect of lapse of time under statutes of limitation, and, where the covenant runs with the land, in the liability of an assignee to sue or be sued for further breaches."

The distinction is of considerable importance in this case.

Clause 4(b)

By clause 4(b) the original lessees accepted the responsibility of carrying out the repair and maintenance of the defects identified in the 2005 Gillbanks report, notwithstanding that they were in existence at the commencement of the lease and thus did not fall within the general repair covenant. It was agreed that subject to certain exceptions which it is not necessary to consider, those works would have to be carried out when they:

"... became necessary during the term of the lease or where the same are required by Lithgow Council or any other competent authority"

That, it seems to me, is not a continuing covenant, but one broken once and for all, if such a defect was not repaired, either when that 'became necessary' or when it 'was required by Lithgow Council' or when required by 'another competent authority'. It was not suggested that either the Council or any other authority had required any of these defects to be repaired, but the obligation imposed by reference to the possibility that they could impose such a requirement, sheds light on the nature of the obligation imposed by the clause.

The obligation is imposed once and for all and is clearly capable of proof, in the event of any dispute. That it may be easier to establish that the Council or another authority had or had not required that a particular defect be repaired, rather than that it had become necessary, does not alter the character of the obligation which the parties to the lease agreed.

Clause 6

The general obligation imposed by clause 6(a) was to 'maintain replace repair and keep the whole of the building upon the demised premises in good and substantial repair order and condition'. That is in my view a covenant which imposes a continuing obligation to keep the premises in repair, rather than to put them into repair. That is, in the state they were in, in 2005.

Clause 6(a) also specifies, however, that there is no obligation 'in respect of any structural maintenance replacement or repair except when the same is rendered necessary by any act or omission on the part of the Lessee or his servants or agents'. If any of the observed items identified by Mr Ransley as requiring repair falls within this exception, it is not one in respect of which any continuing obligation is imposed by clause 6.

The parties did not direct their submissions to this aspect of the clause. Their real contest was finally directed to the Gillbanks' items.

The Gillbanks' items

In the result it follows that in this case, in order for Gigi to succeed on its claims under clause 4(b) in respect of any of the Gillbanks' items, it had to prove that works which had either become necessary, or were required by the Council or another competent authority, while Mr Schmidt was the lessee, had not been undertaken, as the lease required. That depended on what the 2005 Gillbanks report identified to be the defects to which the obligation imposed by clause 4(b) attached.

Not only was such proof not attempted by Gigi, but a consideration of the 2005 Gillbanks report itself establishes that certain repairs which it pursues were necessary when the lease commenced and thus clearly fell on the former lessees, not Mr Schmidt.

It is convenient to take a few examples, to which reference was made at the hearing, to illustrate the problems with this aspect of Gigi's case.

The referee's report referred to an agreed cost of replacing the roof of $3,200. This agreement related to item 001 at Table 2 of clause 10.2 of Mr Ransley's report. There reference was made to the 2005 Gillbanks report that:

"Rusty roofing iron was noted on the front footpath verandah roof"

Mr Ransley noted that as at 6 March 2008:

"Roof iron corroded and numerous sheets loose or with impact damage. Evidence of roof leaks - Replace veranda roof."

Mr Ransley did not refer to the 2007 Gillbanks report, where it was noted that:

"The overall condition of the roof sheeting coverings appears good but there are a few loose sheets and a little surface rust to the roof and cappings"

Mr Ransley did explain in his report that Gillbanks had used the term 'good' to identify that the 'item or area appears to be in sound condition without any significant defects'.

It follows from this evidence that prior to the inspection on which the September 2007 Gillbanks report rested, that work was undertaken in relation to the defect in the roof which was identified in the 2005 report, that is, the rusty roofing iron on the front footpath verandah roof. Clause 4 obliged that work to be 'carried out as and when same become necessary'. The result was that in 2007 the condition of the roof was good, with the exception then of a few loose sheets and a little surface rust. Whether this was work undertaken by Mr Schmidt, or by the former lessees, is not known. What is apparent is that the defect identified in the 2005 report had been dealt with, as the lease required.

For his part Mr Ransley was giving his opinion as to what repair work was required to be undertaken in 2008. The only inference available from the 2007 Gillbanks report that the roof was then in sound condition without significant defects, is that the defect identified in the 2005 Gillbanks report, the subject of the s 4(b) obligation, had been attended to. That satisfied the obligation imposed by clause 4(b) in relation to this defect.

There were other obligations imposed by clause 6 of the lease, but that was not the basis on which the claims in relation to the Gillbanks items were advanced. If they had been, it would have been necessary to consider whether what was claimed fell within the obligation imposed by clause 6. It is difficult to see that an obligation to replace the entire roof could have arisen under clause 6, given Gigi's concession that it imposed no obligation to improve.

It follows that the evidence did not establish that Mr Schmidt had an obligation under clause 4, to replace the roof as Gigi claimed.

To take another example. In 2005 the Gillbanks report said that:

"Some downpipes appear to be missing. These should be installed. Guttering joints are leaking and should be repaired. Some downpipes do not appear to be connected to a stormwater dispersal system. This should be rectified. Gutters are rusted through in places and should be replaced. A licensed roofing contractor should be called to make further evaluation and repairs as needed."

In the 2007 report it was observed:

"Most gutters appear to be in serviceable condition but where visible some debris and water are present. The rain head and downpipe outside bedrooms one and two appears to leak and water is causing damage to the internal wall finish in these rooms. The garage gutter is rusted through and the downpipe is missing. The courtyard toilet downpipe has parted from the gutter and should be reconnected."

What follows from these reports is clear, namely that repair work was undertaken in relation to the defective downpipes and gutters, consistently with the 2005 report identifying that such work was then 'necessary'. That was an obligation which clearly fell on the former lessees under clause 4(b). If the garage gutter downpipe was then missing and was not replaced, that would have involved a breach of clause 4(b), a failure for which the former lessees were liable, not Mr Schmidt. If it was a downpipe which went missing after the 2007 inspection, it was not a matter in respect of which an obligation arose under clause 4(b), unless, perhaps it could be shown that a licensed roofing contractor had been engaged, as the 2005 report envisaged, who had identified that this downpipe then needed to be replaced and it was not. There was no such evidence.

In 2008 Mr Ransley was of the opinion that:

"Downpipes obstructed or discharge water onto ground at rear and garage downpipes missing - Reinstate missing downpipes and connect to stormwater system"

Mr Ransley's report identified that he, too, was referring to the garage downpipe. His report and the evidence he gave do not establish that Mr Schmidt had any liability under clause 4(b) in respect of that downpipe.

The biggest claim in relation to the Gillbanks items related to windows, which was assessed by the referee to involve a cost of just under $60,000. What the referee meant in this part of the report is not entirely clear, but unnecessary to resolve.

In the 2005 Gillbanks report, it was noted as to the windows that:

"The condition of the windows is generally fair.

Most top sashes are fixed shut in rooms and have no catches. Cracked glass was noted to rooms 1, 5, 7, 8, 15, 19, gents bathroom, downstairs side exit door. Sash cord repairs are required to rooms 3 & 14. The condition of the window hardware is generally fair. Some repairs or maintenance will be required. The windows show signs of age and weathering. Louvre blades were noted missing or broken in toilet/bathroom areas."

In the 2007 Gillbank's report it was also observed:

"The condition of the windows is generally fair. Decay was noted to windows in lobby areas of the first floor. Paint is starting to deteriorate to areas of windows. This appears to be caused by condensation. Extra heating and/or ventilation would help to prevent condensation."

The proper inference is that again, before the 2007 report, repair work had been undertaken to the defective windows specifically mentioned in the 2005 report, which identified that such repair and maintenance was then 'necessary'. That obligation fell on the former lessees. In 2007 some windows not identified as specifically requiring work in 2005 were identified as requiring repair, the windows in the lobby areas of the first floor, for example. It was also then noted, amongst other things, that paint was starting to deteriorate.

Again, Mr Ransley did not consider this. His opinion in 2008 was that the windows showed signs of weathering and ageing and that they should all be replaced.

The obligation imposed by clause 4(b) was to undertake repair and maintenance of defects identified in the 2005 report. That report did not identify that all of the windows needed to be replaced. It showed that in 2005 their condition was generally fair and that some identified repairs or maintenance was then necessary. The evidence established that such work was undertaken. Who had undertaken it and when was not established. Given what the 2005 report provided, it was an obligation which clearly fell on the former lessees, the report itself identifying that repair work was then 'necessary'. If they did not undertake all of the work which was then clearly necessary, they were liable for that breach of the obligation imposed by clause 4(b). What the clause clearly did not impose was an obligation on either Mr Schmidt, or the former lessees, to replace all of the windows.

Again, it follows that the claim that Mr Schmidt should bear the cost of the replacement of all of the windows of this hotel was not an obligation imposed by clause 4(b) of the lease, on which this aspect of Gigi's case rested. That would have required him to pay for a considerable improvement, not imposed by clause 4(b), given the nature of the defect in the windows dealt with in the 2005 report.

It is not necessary to deal with all of the other Gillbanks items. As I have explained, Gigi did not establish any evidentiary foundation for its claims. That required it to show that it was while Mr Schmidt was the lessee, that it had become necessary for the 2005 defects to be dealt with. That was neither attempted, nor established and so the claim must fail.

The observed items

It was at Table 3 of clause 10.3 of Mr Ransley's report where the 'observed items' were dealt with. One difficulty with this aspect of Gigi's claim was that Mr Ransley there indicated that there was 'some overlap likely due to general terminology used in Gillbanks report'. The Gillbanks report was dealing with defects, which it was accepted Mr Schmidt had no obligation to repair or maintain under clause 6 of the lease. The case which Gigi advanced during the course of the hearing did not address what Mr Ransley there said about 'overlap'.

To take an example, he was of the view that all of the windows had deteriorated because they had not been suitably painted and so should all be replaced. Gigi accepted, however, that clause 6 imposed no obligation to improve, only to repair or maintain to the state that the hotel was in, in 2005.

There was also a claim for item 007 on the east side, assessed by the referee to have a value of $2,400, which related to 'several ground floor windows bricked in'. Mr Ransley indicated that the lessee's obligation was 'to reinstate original windows'. Whether this would involve 'structural maintenance replacement or repair' was not addressed.

This was an example, however, of the difficulty with the evidence on which Gigi's case depended. Given its acceptance that clause 6 imposed no obligation on Mr Schmidt to improve the hotel, or to do more than keep the hotel in the state of repair it was in when the lease commenced in 2005, in order for Gigi to succeed on this claim it had to establish that the windows were not already bricked in, when the lease commenced.

The evidence was simply not directed to such matters and so this claim must fail.

A further alteration in Gigi's course may not be permitted

After the hearing, Gigi advanced further submissions by which it sought to pursue even yet another alteration in its course, which was again opposed and in my view may not be permitted. It was advanced when the evidentiary difficulties in its case came to be appreciated.

In Gigi's written submissions some 33 non-painting related work, identified by item number from Mr Ransley's report, were referred to at paragraph 7 e.ii, both Gillbanks items and observed items.

After Mr Schmidt had put his submissions, during the course of Gigi's oral submissions a schedule was produced, which was marked MFI 7, which dealt with 17 Gillbanks items, referring to what Mr Ransley observed in 2008 as to each item, what had been recorded in the 2005 and 2007 Gillbanks reports, as well as Mr Ransley's conclusions. It was explained that this schedule referred to what the evidence established as to the condition of these items in 2005 and 2007 and when Mr Ransley inspected the building in 2008 and that this established deterioration, in respect of which Mr Schmidt had obligations under the lease.

There was a debate about the case, so advanced. Given the time at which the debate over the nature of Gigi's claim and what the evidence referred to in mfi7 actually showed emerged, over Mr Schmidt's objections, I permitted Gigi to file a further written submission. That opportunity was sought after it was submitted for Mr Schmidt, that Gigi could not pursue its case on this new basis, it having never advanced any claim in relation items dealt with in the 2005 Gillbanks' report, which the evidence showed had been repaired, by way of any further alleged deterioration after the 2007 report.

That written submission was accompanied by yet a further 'schedule of deteriorations', which it was submitted identified 6 items in respect of which the evidence showed a deterioration from 4 September 2007, the date of Gillbanks' 2007 report, to 18 March 2008, when Mr Ransley prepared his report.

As to these 6 items Gigi submitted that its claims were advanced under the second further amended statement of claim, where it had pleaded in clause 4B both Mr Schmidt's failure to maintain, replace, repair and keep the premises in good and substantial order and condition in breach of the obligations imposed by clause 6(a), (b), (c) and (o) of the lease and his failure to carry out repair and maintenance of defects identified in the 2005 Gillbanks report under clause 4(b) of the lease. In each case particulars were given by reference to items in Mr Ransley's report, as well as by reference to Mr Hutcheson's report, as adopted by Hall J.

On Gigi's approach, that pleading left it in a position where its claim was 'as broad as the matters set out in those parts of the referee's report which were not rejected, including as to any reports relied upon by the referee'. In the result, the claims pressed in the schedule of deterioration were submitted to be available to be pressed by Gigi. The evidence established that there had been deterioration in each case, from the time of the 2007 Gillbanks report, to the time of Mr Ransley's inspection in 2008, with the result that Mr Schmidt was liable for such repairs.

In so far as there was any pleading deficiency, Gigi submitted that had the point arisen earlier, it would have sought and been granted leave to amend its formal pleadings, so that they could be brought in line with the evidence (see Leotta v Public Transport Commission (NSW) (1976) 9 ALR 437). If Mr Schmidt's objections were upheld, Gigi wished to press such an application.

Gigi accepted that the experts had never been instructed to consider the cost of rectification of the alleged deterioration in the items identified in the schedule of deteriorations. What had been costed was the cost of rectifying the defective item identified in the 2005 Gillbanks report. It was submitted, nevertheless, that if Mr Schmidt was found to be liable for such rectification, because the deterioration had occurred while Mr Schmidt was the lessee, then the cost could only be based on the cost of rectifying what was there, rather than the cost of rectification if the work had been done at some earlier time.

Once it was concluded that Mr Schmidt was liable to rectify items which the evidence established had deteriorated 'on his watch', the cost of rectification of what Mr Ransley had identified, was submitted to be as resolved in the proceedings before Hall J. Otherwise, it was argued, the Court would have to assess the cost by reference to the evidence before it. That could be done by taking as a starting point, the degree of deterioration Mr Ransley identified, with a deduction to reflect the state of the item in 2007.

Mr Schmidt's case was that the Court would not permit Gigi to pursue a new claim as to deterioration in relation to the Gillbanks items, advanced for the first time after the hearing had concluded, in respect of alleged deterioration after September 2007. The case over which the parties had joined issue was whether Mr Schmidt was liable for those items, because he had failed to repair those defects, as he was obliged to do, under clause 4(b) of the lease, that imposing a continuing obligation.

That Gigi could have advanced such claims was not a basis upon which it could be permitted to make a new claim, at this stage of the proceedings. The experts had not been asked to consider or cost such a claim and neither the referee nor Hall J had dealt with any such costing. The referee's report was not in evidence and even if it were, it did not reflect the cost of rectifying any deterioration, after September 2007.

The whole proceedings had been conducted on the basis of the claims advanced in respect of the Scott schedule, that is, specific items identified as involving Mr Schmidt's breach of the obligations imposed upon him either by clause s 4(b) or by 6 of the lease. Had they been conducted on the basis of a deterioration claim after September 2007, the experts could have considered the deterioration alleged and the cost of its rectification in their reports and could have been examined as to their opinions, when called at the hearing.

In the circumstances it was clearly procedurally unfair to permit Gigi the alteration in course it first sought to pursue, after the hearing had concluded. If it was to be permitted, Mr Schmidt sought leave to re-open his case to address the question of whether there had in fact been any deterioration and if so, the cost of its rectification.

Having considered the parties' competing submissions, it seems to me that this further alteration in course may also not be permitted. It is the parties' pleadings which determine what the issues in the proceedings are. They determine how their cases are to be pressed. I have outlined Gigi's constantly changing approach to its case and pleadings. Given the requirements of the Civil Procedure Act, which I have already referred to and the observations of the High Court in Aon, I am well satisfied that this further alteration in course cannot justly be entertained.

To permit what was sought, would allow not only a departure from the pleaded case, but also the basis upon which the experts were engaged and the referee exercise was conducted. It is not to the point that Gigi could have advanced other claims, or could have pursued its claims on a different basis than it did prior to its closing submissions, when further problems with the case it had advanced came to be appreciated. It did not earlier advance the case it finally sought to press with the result that the experts never considered what was advanced so late. By that time, Gigi's experts had long been called and cross-examined.

If such a further alteration in course was to be entertained, as a matter of justice, it had to be revealed before the experts gave their evidence. If it were now to be permitted, Mr Schmidt would obviously have to be given an opportunity to meet it, including by calling evidence from his expert. It would be entirely inconsistent with the overriding purpose of the Civil Procedure Act, the just quick and cheap resolution of the real issues in the proceedings, to now permit what Gigi so belatedly sought to pursue. It would also be inconsistent with the requirements of s 60, which requires that:

"the practice and procedure of the court should be implemented with the object of resolving the issues between the parties in such a way that the cost to the parties is proportionate to the importance and complexity of the subject-matter in dispute."

Given what is here in issue, to permit what is sought would be entirely contrary to this requirement. It must be refused.

Painting - head contractor

Mr Seeto, a quantity surveyor, prepared the joint report with Mr Barker which the referee considered and costed. In issue was whether a head contractor was required to supervise certain works.

The opinion Mr Seeto expressed in the joint report had regard to matters such as the age of the hotel and the need to check the lead based paint there used. In the result, he was of the opinion that in the circumstances, it would be reasonable for the publican to engage a head contractor, or a consultant, to undertake a range of tasks he had identified, in relation to painting items, including testing, writing a specification and scope of works, preparing tender documents, carrying out periodic inspections, approving progress payments and undertaking a final inspection. He estimated a minimum fee of $10,000 and insurance of $1,000 to $1,500 for such a head contractor.

In cross-examination, Mr Seeto agreed that a fair summary of his view was that if any of the items dealt with in cl 5.7 of that report was taken on its own, a head contractor would not be required to supervise the works in question. If, in some sort of combination, such works had to be undertaken, the need for a head contractor would require consideration. He also agreed with an example put to him, that adoption of a claim for a $300 keg door would not result in need for a head contractor and that whether one was required, would require consideration of the number of trades involved and the total size of the job. Mr Seeto also explained that if there was only painting work to be undertaken, the work could be done with a consultant.

Gigi's case was that if it was allowed the painting and other items it had claimed, the head contractor claim would be also allowed and that if it were only the painting claims, or that and a series of other small items, then a consultant would be allowed. It would be considered, at the end of the day, that Gigi was a publican and needed to be able to operate its business. It was accepted, however, that there would be a tipping point at which it would be concluded that a head contractor would not be required.

Mr Schmidt did not concede that either a head contractor or a consultant was necessary, but it was accepted that on the evidence, it was open to conclude that an additional 10% on the sum agreed in relation to the painting items should be paid by Mr Schmidt, for a consultant.

As to the claim for a head contractor it was submitted that it would not be concluded that one was necessary, given the nature of the items in question, all but one of which was worth less than $10,000 and some involving very small amounts, such as $300 for a deteriorated keg door. It was relevant that $60,000 related to the disputed item for replacement of windows. In those circumstances, given Mr Seeto's evidence, it would not be concluded that Mr Schmidt ought to bear an additional 20% of the cost of a head contractor to supervise the work in question.

I am satisfied that this submission should be accepted, given the other conclusions I have reached on the matters remaining in issue, when considered together with the agreements which the parties have reached. In the result, Mr Schmidt should pay 10% on the sum agreed in relation to painting items for a consultant.

The costs of re-entry

This claim was advanced by paragraph 16 of the second further amended statement of claim. It rested on clause 10(f) of the lease, which provides:

"To pay to the Lessor on demand all legal cost charges and expenses (on a solicitor client basis) for which the Lessor shall become liable in consequence of or in connection with any default by the Lessee in performing or observing any covenants conditions or stipulations herein contained or implied and on the part of the Lessee to be performed or observed including (but without limiting the generality of the foregoing) all costs charges and expenses of solicitors surveyors architects other consultants incurred by the Lessor for the purpose of and incidental to the preparation and service of any notice requiring the Lessee to remedy a breach of the covenants conditions or stipulations herein contained or implied notwithstanding forfeiture for such breach shall be avoided by relief granted by the Court or otherwise."

It was not in issue that the lease specifically required that a demand be made for such payment. It was common ground that Mr Schmidt was 2 weeks in default of paying the rent and that no notice had been given, requiring him to remedy his breach, before Gigi took possession. The demand required by clause 10(f) was said by Gigi to have been made in clause 16 of the second further statement of claim. That clause provides:

"16. The plaintiff is entitled to recover all legal costs charges and expenses on a solicitor/client basis pursuant to clause 10(f) of the Lease (Memorandum O468173), full particulars of which will be provided prior to hearing."

A late served affidavit sworn by Mr Gerzilis sought to provide such particulars. It was received conditionally, its relevance depending on the proper construction of this clause. I did not, however, permit Gigi then to pursue a late made claim in relation to wages of Mr Schmidt's former employees, referable to a period before Gigi went into occupation, or in relation to certain taxes referable to that time.

Gigi finally confirmed in submissions that what was pressed in relation to this claim were legal costs and disbursements and various costs which were claimed to be costs it had incurred on re-entry.

The claims which it pressed were for the physical cost of changing locks, including locks on poker machines; the cost of security guards engaged after it took possession; a fee paid to the licensing court in respect of an application to transfer the hotel license and counsel's fees; as well as the costs of a stock take report.

Mr Schmidt's case was put on two bases. Firstly, that Gigi had made no demand for the sums in issue and hence the claim must fail and secondly, that the costs claimed did not to fall within the terms of clause 10(f).

The clause is not as clearly drafted as it could be. Gigi's case rested on the contention that all of the expenses it pressed were expenses which were 'legal cost charges and expenses', for which it become liable under the clause after it went into possession.

It seems to me that if Gigi established by the evidence led that it had incurred legal cost charges and expenses as a result of taking possession, it is entitled to be paid for them, if demand for such payment was made, as the lease requires. Such demand is capable of being made by the claims advanced in these proceedings, notwithstanding that the claims were clearly made late.

The particulars of the claim were only provided during the course of the hearing. It was accepted for Gigi that there had been no prior specific notice given of the particular claims which it pursued, but it argued that all of the claims it finally pressed fell broadly within the demand made in paragraph 16.

That submission may not be accepted, given what was there claimed, namely 'legal costs charges and expenses on a solicitor/client basis pursuant to clause 10(f)'. I cannot see that the expense of changing the hotel's locks, or locks on poker machines, or engaging a security guard, or undertaking a stock take, after Gigi took possession of the hotel were a 'legal cost, charge or expense', which it incurred as a result of taking that possession, even in the expanded sense in which those words were used in clause 10(f).

There was no suggestion that these expenses were disbursements incurred by a solicitor engaged by Gigi, or by any other expert of the kind referred to in the clause, engaged for purposes of the kind dealt with in the clause, that is, 'for the purpose of and incidental to the preparation and service of any notice requiring the Lessee to remedy a breach of the covenants conditions or stipulations herein contained or implied'.

In the result no case has been established in relation to these expenses

As to the court costs and counsel's fees in contention, it seems to me that it may not be overlooked that this was the lease of a hotel. That the termination of the lease for breach would necessarily result in an application to the licensing court, with resulting legal fees and court costs being incurred seems to me both to be in the obvious contemplation of clause 10(f) and in the demand made in clause 16.

In the result I am satisfied that this aspect of the claim has been established.

The cross-claim

Gigi tendered various documents relevant to this issue and Mr Gerzilis gave evidence about it, as to the basis of his belief as to the ownership of the disputed items.

It was not in issue that after it took possession of the hotel, Gigi took the minibus, transferred the registration in its name and later sold it. Mr Gerzilis, a director of Gigi swore in his affidavit that he understood Gigi had bought the bus and was entitled to sell it. He was cross-examined about the minibus. It was sign painted with the name of the hotel. It is impossible to understand his evidence on the basis that there was more than one minibus associated with the operation of the hotel. He confirmed that the minibus was sold for $2,000.

The original lessees of the hotel were Mr Haines and Mr Primmer. In evidence was a document from a former employee at the hotel, that the former lessees had bought the minibus while he was assisting in the operation of the hotel and that Mr Schmidt had bought the bus from them and it had continued being used. The inventory list annexed to the contract between Mr Haines, Mr Primmer and Mr Schmidt also listed a minibus.

Gigi advanced no submissions about this claim, other than that any order has to be limited to $2,000, that being the only evidence as to the value of the minibus.

Mr Gerzilis' understanding is not of assistance to Gigi. The evidence does not leave open the conclusion that there was more than one minibus. There is evidence that Mr Schmidt purchased it from the former lessees. Gigi has not established that its ownership was ever transferred to Gigi. In the circumstances, I am satisfied that there must be judgment in favour of Mr Schmidt in respect of the minibus in the sum of $2,000.

Interest and costs

The parties are to confer about these matters. In the event that they need to be addressed, they should approach my Associate. Otherwise they should provide short minutes of orders.

Orders

For the reasons given there will be judgment for Gigi on its claim and for Mr Schmidt on his cross-claim. Orders will be made once the parties have considered the terms of the judgment.

**********

Decision last updated: 23 November 2012

Medium Neutral Citation:	Gigi Entertainment Pty Limited v Schmidt [2012] NSWSC 1423
Hearing dates:	9 July 2012, 10 July 2012, 11 July 2012
Decision date:	23 November 2012
Jurisdiction:	Common Law
Before:	Schmidt J
Decision:	Judgment for Gigi on its claim and for Mr Schmidt on his cross-claim. Orders will be made once the parties have considered the terms of the judgment.
Catchwords:	DAMAGES - leases and tenancies - whether there was a breach of contract - lock out by lessor - hotel - claim for damages for outstanding rent; repair and replacement of plant and equipment; repair and maintenance of hotel; and rent to end of term - defendant in default of various obligations including rent - plaintiff re-entered, occupied and took possession of the hotel - claim that defendant failed to maintain, replace, repair hotel - loss of bargain claim dismissed - referee claims - evidentiary difficulties - nature of lease obligations - was the defendant liable for any prior breach of the lease - observed items - claim for painting-head contractor - claim for costs of re-entry - cross-claim - repayment of security deposit - conversion - claim in respect of mini bus - interest - costs PROCEDURE - various notice of motions - leave sought to rely on further affidavits - refusal of pleading amendment - refusal of the adjournment application - rejection of the tender EVIDENCE - admissibility - expert evidence
Legislation Cited:	Civil Procedure Act 2005 Conveyancing Act 1919 Evidence Act 1995
Cases Cited:	Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27; (2009) 239 CLR 175 Australian Broadcasting Corporation v McBride [2001] NSWCA 322; (2001) 53 NSWLR 430 Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588) Gigi Entertainment Pty Limited v Schmidt [2010] NSWSC 906 Granada Theatres Ltd v Freehold Investments (Leytonstone) Ltd [1959] Ch 592 Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) [2008] HCA 10; (2008) 234 CLR 237 Larking v Great Western (Nepean) Gravel Ltd [1940] HCA 37; (1940) 64 CLR 221 Leotta v Public Transport Commission (NSW) (1976) 9 ALR 437 Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] ASCA 209; (2007) 35 WAR 254 Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705
Texts Cited:	Bradbrook, Croft and Hay, Commercial Tenancy Law, 3rd ed (2009) in LexisNexis Butterworths at 15.19
Category:	Principal judgment
Parties:	Gigi Entertainment Pty Limited ACN 127 024 168 (Plaintiff) Michael Karl Schmidt (Defendant)
Representation:	Counsel: Mr C Mobellan (Plaintiff) Mr S Robertson (Defendant) Solicitors: O'Neill Partners (Plaintiff) McCauley Hawach Lawyers (Defendant)
File Number(s):	2008/289478
Publication restriction:	None