Helen Lazaros t/as Perfect Health v IOF Custodian Pty Limited

[2015] NSWCATCD 25

Civil and Administrative Tribunal

New South Wales

Medium Neutral Citation:

Helen Lazaros t/as Perfect Health v IOF Custodian Pty Limited [2015] NSWCATCD 25

Hearing dates:

17 March 2015

Decision date:

10 April 2015

Jurisdiction:

Consumer and Commercial Division

Before:

D Bluth, Senior Member

Decision:

The Application is dismissed
No order for costs

Catchwords:

Validity of Demolition Notice, s35 Retail Leases Act, 1994

Legislation Cited:

Retail Leases Act 1994

Cases Cited:

Blackler v Felpure Pty Ltd [1999] NSWSC 958

Certain Lloyds Underwriters v Cross [2012] HCA 56

Premprop Pty Ltd v Mandalong Projects Pty Ltd [2011] NSWADT 274

Smith trading as Flames Grill and Carvey v Trust Company of Australia Ltd [2008] NSWADT 10

Wong v Silkfield Pty Ltd [1999] HCA 48

Category:

Principal judgment

Parties:

Helen Lazaros t/as Perfect Health (applicant)
IOF Custodian Pty Limited (respondent)

Representation:

Counsel: Mr Victor Kerr (applicant)
Mr Guy Parker SC (respondent)

Solicitors: David Landa Stewart (applicant)
Mills Oakley, Lawyers (respondent)

File Number(s):

COM 15/06466

Publication restriction:

Nil

REASONS FOR DECISION

1. The Applicant, Helen Lazaros trading as Perfect Health, filed an Application for an Original Decision on 6 February 2015 consequent upon receipt of a demolition notice issued by the Respondent, IOF Custodian Pty Limited (IOF), requiring the applicant to vacate a retail premises being shop F4, Food Court, 99 Walker Street, North Sydney (the shop) by close of business on 2 March 2015.

2. By that Application filed under COM 15/06466 the Applicant sought a number of declaratory orders from the Tribunal to the effect that the demolition notice was invalid and of no effect. At the same time the Applicant filed a Retail Leases Application for Interim Orders under file number COM 15/06464 seeking an order of the Tribunal, that IOF be restrained from excluding the Applicant from the shop and be restrained from interfering with the applicant's use and occupation of the shop.

3. The Application for Interim Orders was heard on 26 February 2015. Mr Victor Kerr appeared for the Applicant and Mr Guy Parker SC appeared on behalf of IOF. The Tribunal on 10 March 2015 granted the orders sought until resolution of the underlying dispute between the parties.

4. That dispute was heard by the Tribunal on 17 March 2015. The same Counsel that represented the parties in the Application for Interim Orders appeared before the Tribunal.

Lease between the parties

5. In or around May 2012 the Applicant acquired the business of Perfect Health from Mr & Mrs Poulos who had a lease with the previous owner of the property GE Real Estate Investments Australia Pty Limited (GE). That lease was to expire on 28 February 2015. As part of the acquisition of the business the Applicant had sought and obtained agreement from GE to vary the lease to expire on 29 February 2020. The lease is registered number AD930751 and provided to the Applicant occupation of the shop (the Lease).

6. In or about the middle of 2013 GE sold the property in which the shop is situated to IOF and IOF subsequently undertook a review of the retail area in the property.

Proposed redevelopment of the retail complex in the property

7. The property in which the shop is situated is described by Mr Damian Ward Solicitor for IOF in his affidavit of 26 February 2015 as:

'One of the premises owned by the Fund (IOF) is the land and improvements being a complex at 99 Walker Street, North Sydney. This complex contains five levels of basement car parking, a two level lower ground and ground floor podium (featuring a food retail area) and 21 levels of office space situated above the podium.'

8. Mr Ward in his affidavit at paragraphs 2.4 - 2.9 provides a summary of what has transpired:

'2.4   In about 2012, the principle(sic) commercial tenant of the complex, AAMI Insurance, vacated the complex. This caused a significant drop in patronage of the food court.

2.5   In about September and October 2013, IOF undertook negotiations with both Coles and Woolworths in relation to potentially entering into a lease over the food court for use as a supermarket. By about February 2014 IOF had decided it wished to pursue this option. There were further negotiations with Coles and Woolworths until about early June 2014, by which stage IOF elected to continue negotiations with Coles only.

2.6   Agreement on all terms was reached by Coles in mid August 2014, following two-three months of extensive negotiations. The agreement was not signed until 1 October 2014 however this was for logistical reasons regarding arrangements for execution of it by appropriate signatories.

2.7   A Development Application to be lodged with North Sydney Council was prepared with the assistance of external town planning consultants and was ready for lodgement by about 26 August 2014. The DA took several months to prepare.

2.8   It was anticipated the application would take approximately 6 months to be determined.

2.9 On or about 26 August 2014, IOF issued to each of the tenants in the food court and retail area Demolition Notices under clause 26 of each of the relevant leases and pursuant to Section 35 of the Retail Leases Act 1994.’

9. Mr Ward stated that on 1 October 2014, IOF entered into a binding agreement for lease with Coles Supermarkets (Coles) for a term of 20 years for the whole of the retail floor. Annexed to Mr Ward's affidavit at tab D is a letter from Rider Levett Bucknall, Quantity Surveyors, dated 2 August 2014 estimating that the costs of the preparatory base building works to be undertaken by IOF so as to allow Coles to commence its fit out are $8,450,000.00.

The Lease

10. The first information item on the front page of the Lease is the description of the premises being leased. These are described as:

'Premises' being shop F4 on the Food Court Level of the Building known as 99 Walker Street, North Sydney.

11. Clause 1 of the Lease is the interpretation clause. A number of items are defined and these are as follows:

'Building' means the commercial office building and all other improvements (other than the Tenants' Property) on the Land.

'Centre' means:

(a) the Land and other land which the Landlord uses with the Land for a shopping centre, a parking area or other undertaking related to a shopping centre or a parking area; and

(b) all improvements (other than the Tenants' Property) on the Land and the other land.

12. Clause 26 of the Lease contains a demolition clause as follows:

26   Notice of Termination

If the Landlord wants to demolish, substantially repair, renovate or reconstruct the Centre or the part of it containing the Premises, the Landlord may terminate this lease by giving the Tenant:

(a) sufficient details of the proposed works to indicate a genuine proposal to carry them out within a reasonably practicable time after this lease is terminated; and

(b) at least 6 months' notice of termination, unless the Term is 12 months or less in which case the notice of termination must be at least 3 months.

Retail Leases Act 1994 (RL Act)

13. Section 35 of the RL Act states as follows:

Section 35 - Demolition

(1) If a retail shop lease provides for termination of the lease on the grounds of proposed demolition of the building of which the retail shop forms part, the lease is taken to include provision to the following effect:

(a) The lease cannot be terminated on that ground unless and until the lessor has provided the lessee with details of the proposed demolition sufficient to indicate a genuine proposal to demolish that building within a reasonably practicable time after the lease is to be terminated.

(b) The lease cannot be terminated by the lessor on that ground without at least 6 months written notice of termination.

(c) If notice of termination on that ground is given to the lessee, the lessee may terminate the lease by giving the lessor not less than 7 days written notice of termination at any time within 6 months before the termination date notified by the lessor.

(2) ….

(3) If a retail shop lease is terminated on such a ground and demolition of the building is not carried out within a reasonably practicable time after the termination date notified by the lessor, the lessor is liable to pay the lessee reasonable compensation for damage suffered by the lessee as a consequence of the early termination of the lease, unless the lessor establishes that at the time notice of termination was given by the lessor there was a genuine proposal to demolish the premises within that time,

3(A) ….

(4) For the purposes of this section, "demolition" of the building of which a retail shop forms part includes any substantial repair, renovation or reconstruction of the building that cannot be carried out practicably without vacant possession of the shop.

14. Section 72 of the RL Act provides to this Tribunal certain powers as follows:

Section 72, Powers of Tribunal relating to retail tenancy claims:

(1) In proceedings for a retail tenancy claim lodged with the Tribunal under this Part, the Tribunal is empowered to make any one or more of the following orders that it considers appropriate:

(a) ...

(b) ...

(c) an order that a party to the proceedings:

(i) ….

(ii) surrender possession of specified premises to another person, or

(iii) ….

(iv) do or perform, or refrain from doing or performing, any specified act, matter or thing,

(d) an order granting a party to the proceedings relief against forfeiture,

(e) ….

(f) an order:

(i) declaring any provision made by a lease to be void for being inconsistent with this Act or the regulations, or

(ii) … or

(iii) declaring the rights and liabilities of the parties under law, whether any consequential relief is or could be claimed or not, or

(iv) declaring that a party is or is not entitled to receive payment of the whole or a part of a security bond

(g) ….

(2) The Tribunal may make such ancillary orders as it considers necessary for the purpose of enabling an order under the section to have full effect.

(3) The Tribunal may impose such conditions as it considers appropriate when making an order under this section.

(4) The Tribunal may make an interim order under this section pending final determination of a claim, if it appears to the Tribunal desirable to do so.

15. Certain provisions of the RL Act can override a clause of a lease. Section 7 provides as follows:

Section 7 - This Act overrides leases.

This Act operates despite the provision of a lease. A provision of a lease is void to the extent that the provision is inconsistent with the provision of this Act. A provision of any agreement or arrangement between the parties to a lease is void to the extent that the provision would be void if it were in the lease.

Demolition Notice

16. The demolition notice issued by IOF to the Applicant is a notice dated 26 August 2014 purportedly given under section 35 of the RL Act and clause 26 of the Lease addressed to the Applicant (Demolition Notice) and states as follows:

The Tenant leases the Premises from the Landlord pursuant to the lease in respect of the Premises registered as AD930751 (transfer pursuant to registered transfer of lease AH491801 and varied by registered variation of lease AH4918012 (Lease). The Food Court Level is also known as the Ground Level of the Building.

The Landlord gives notice to the Tenant in accordance with clause 26 of the Lease and s 35 of the Retail Leases Act 1994 (NSW):

1. that the Landlord:

(a) has entered into an agreement to lease the majority of the ground floor of the Building (among other parts of the Building) (Coles Premises) to Coles Supermarkets Australia Pty Limited ACN 004 189 708 (Coles) for use as a supermarket. The part of the ground floor being leased to Coles is shown on the attached plan as 'Retail Tenant 1';

(b) will lodge the Application for development approval (DA) with the North Sydney City Council either on 22 August 2014 or in the week commencing on 25 August 2014. The DA is for a number of items relating to the Coles Premises, including the use of the Coles Premises for the permitted use under the lease and also the works necessary to create and fit out the Coles Premises for use as a supermarket. The Landlord has a reasonable expectation that the DA will be approved within 4-6 months from the date it is lodged. The works necessary to create and fit out the Coles Premises will commence shortly after the approval of the DA; and

(c) will demolish, substantially renovate and/or substantially reconstruct the ground floor (which contains the Premises) by removing all of the existing shops to create the Coles Premises.

2. the demolition, renovation works and/or reconstruction works cannot be carried out practicably without vacant possession of the Premises; and

3. vacant possession of the Premises is required by close of business on 2 March 2015.

17. Annexed to the Demolition Notice is an architectural drawing showing that the Coles premises takes up nearly all of the ground floor retail fronting Mount Street, Little Walker Street and Walker Street, North Sydney.

Proposed Works

18. The proposed works are for redevelopment of the Basement Level, Lower Ground and Ground Floor levels of 99 Walker Street. The works as set out in the Statement of Environmental Effects Report dated 27 August 2014 will involve the following:

Basement 2 & 3

1. New lift pit (loss of 6 car parks).

Basement 1

1. New end of trip facilities (73sqm) and bike storage (35sqm) for 33 bicycles;

2. Reconfigured loading areas;

3. Coles back of house areas and storage areas;

4. New services and plan areas;

5. New garbage room;

6. New inter-tenancy stair to service Coles lower ground and ground floor;

7. Two new service hoists to service Coles tenancy.

Lower Ground Floor

1. Reconfigured layout to create two retail tenancies of 206sqm and 178sqm to the north eastern part of the building;

2. Reconfigured 'back of house' areas to provide additional office/store area of 181sqm GFA;

3. New openings for passenger lift;

4. New services and plant areas.

Ground Floor

1. Internal demolition of partitioning, slab infill and reconfigured tenancies to create a 1,530sqm supermarket;

2. Infill of outdoor seating areas to north east (83sqm) and north western frontages (65sqm) as well as Mount Street entry (44sqm);

3. Smaller retail tenancies (117sqm and 89sqm) for future food and beverage outlets and retail liquor store to the Walker Street frontage;

4. Extend façade to create a consistent frontage to the Walker Street frontage;

5. Fire exit removed and new floor area added (14sqm);

6. New services including new fire stair and service hoists and retail lift.

Level 1

1. Fire exit removed and new floor area added (15sqm);

2. Slab/façade extended to building line to Walker Street for additional commercial floor space (21sqm).

Level 2

1. New external plan areas (screened) for Coles.

External

1. New glazing;

2. Signage to the Walker, Mount and Little Walker Street frontages;

3. Building line extended to the allotment boundary at the two building entries at the northern and southern ends of the Miller Street frontage.

Orders sought by the Applicant

19. The Applicant applied for the following orders and declarations:

1. A declaration pursuant to section 72(1)(f)(iii) that the Demolition Notice dated and served on the Applicant by IOF is invalid and of no effect.

2. A declaration pursuant to section 72(1)(f)(iii) that IOF has no entitlement to terminate the Lease on the basis set out in the Demolition Notice.

3. An order pursuant to section 72(1)(f)(i) declaring that clause 26.1 of the Lease is void for being inconsistent with section 35 of the RL Act.

4. An order pursuant to section 72(1)(c)(iv) restraining IOF from excluding the Applicant from the shop, prior to the termination of the Lease on 29 February 2020 on the basis of any demolition notice.

5. An order pursuant to section 72(1)(c)(iv) that IOF be restrained from interfering with the Applicant's use and occupation of the shop, up to the termination of the Lease on 29 February 2020.

Applicant’s challenge

20. Mr Kerr submitted that the Demolition Notice does not comply with clause 26 of the Lease and section 35 of the RL Act because:

1. The work which IOF "wants" to carry out, as detailed in the Demolition Notice and the development application, does not involve the demolition of the whole building; rather it is the reconstruction of only a small part of the building.

2. Section 35 only permits a lessor to terminate a lease for the purposes of demolition if the thing to be demolished is the whole building.

3. Alternatively, section 35 only permits a lessor to terminate a lease for the purpose of demolition if the demolition is considerable, as opposed to being merely ephemeral or nominal.

4. To the extent clause 26 would permit IOF to terminate the Lease for the purpose of demolishing something less than the entirety of the building, it is inconsistent with section 35 and is thus, by the operation of section 7, void.

21. As these arguments regarding section 35 do not appear to have been put before the Tribunal previously, I set out in some detail the submissions from Mr Kerr for consideration by the Tribunal.

IOF “demolishing” only part

22. IOF’s proposed works do not involve the demolition of the building. Rather, they involve the reconstruction of the internal part of the ground level of the building together with relatively insignificant work on six other levels. The remaining 21 levels will have no work done to them.

Whole building

23. Section 35 applies if a retail shop lease "provides for termination of the lease on the grounds of proposed demolition of the building of which the retail shop forms part".

24. Section 35 is a provision which protects lessees by restricting the operation of demolition clauses: Blackler v Felpure Pty Ltd [1999] NSWSC 958 at [26]. Thus a lessor is only permitted to terminate a lease for the purposes of demolition if:

1. the lease permits such a termination (and the lessor complies with it); and

2. the lease is consistent with section 35.

25. The Lease provides for termination for the purpose of demolition in clause 26.1 which provides that "If the Landlord wants to demolish, substantially repair, renovate or reconstruct the Centre or the part of it containing the Premises, the Landlord may terminate this lease…" Thus clause 26.1 includes the power to terminate where IOF, as landlord, wants to demolish the Centre (the definition of which is set out in paragraph 11 of these Reasons) or the part of it containing the Applicant’s leased premises (the shop). It is necessary to construe section 35(1) in accordance with the ordinary rules of statutory construction to establish if IOF has properly exercised the power to terminate.

26. The duty of the Court is to give the words of a statutory provision the meaning the legislature is taken to have intended. Ordinarily, but not always, that will correspond to the grammatical meaning of the provision. The purpose of legislation must be derived from what the legislation says - the language of the relevant provision and the scope and object of the whole statute - and not from any assumption about the desired or desirable reach or operation of the relevant provisions. See generally Project Blue Sky Inc v Australian Broadcasting [1998] HCA 28; (1998) 194 CLR 355 at [69], [78], [93]; Certain Lloyd's Underwriters v Cross [2012] HCA 56 at [23]-[26].

27. The critical words in section 35 are "demolition of the building of which the retail shop forms part". Although the expression must be construed as a whole Mr Kerr submitted that it is convenient to observe that it has two elements.

28. First, the thing which is to be demolished is "the building of which the retail shop forms part". It refers to the singular and whole building. It does not refer to parts of the building or portions of the building. Second, it applies where the proposed act is one of "demolition". In ordinary English "demolition" means destruction - to tear down. However the legislature has ameliorated the absolute nature of the expression "demolition" by giving the word an extended meaning in section 35(4). Thus "demolition" includes acts which are less destructive such as "substantial repair, renovation or reconstruction of the building".

25. The extension in section 35(4) applies only to the word "demolition". It extends the nature of the work which is permitted to be carried out under the auspices of demolition (to include repair, renovation or reconstruction). It does not qualify the thing which is to be demolished (or repaired, renovated or reconstructed), which remains the (whole) building. That is made clear by two matters.

First, only the word "demolition" is italicised and bolded in section 35(4). Had the legislature intended to extend the entire expression "demolition of the building of which the retail shop forms part" then it would have italicised and bolded the entire expression. Second, section 35(4) continues to use the definitive article "the building" in identifying the subject matter of the provision. Therefore, according to the Applicant, the definition in section 35(4) does not extend section 35 to situations which involve the demolition (even within the extended meaning of repair, renovation or reconstruction") of something less than the whole building.

30. The consequence of the Applicant’s arguments as set out above is that a landlord may only avail itself of a contractual power to terminate a lease if it proposes to demolish the whole, as opposed to part of, the building of which the leased premises form part.

Submissions on behalf of IOF

31. Mr Parker SC submitted that the purpose of section 35 is to set criteria or conditions which protect a lessee when demolition is proposed. For example, it prescribes minimum notice periods, and requires that sufficient details of the proposed demolition be provided to be considered a genuine proposal.

32. The Applicant relies upon Blackler v Felpure Pty Ltd [1999] NSWSC 958 as confirming that the general statutory purpose of section 35 is to protect lessees by restricting the operation of demolition clauses. They assert that "the general purpose…is to provide retail shop tenants with a level of protection against lease provisions which provide for alteration to, and interference with their right of occupation of their shops in circumstances where a landlord seeks to alter, redevelop or refurbish the premises…". In fact, however, the statutory purpose is to create a minimum set of standards which operate by way of statutorily implied terms of the lease. This is recognised in Blackler at paragraph 26 where it is held:

"The Retail Leases Act provides a number of protections for lessees. It protects them under s 16 by fixing a minimum term for which a lease is to be entered into, and it protects lessees under s 35 by restricting the operation of demolition clauses. The provisions of the Act overall appear to me to show contemplation that there should be both minimum terms and also demolition clauses which potentially might bring the terms to a premature end."

33. If protection of lessees is the overall goal or purpose, then a purposive approach to section 35 requires that the prefatory words "If a retail shop provides for termination of the lease on the grounds of proposed demolition…the lease is taken to include provision to the following effect" must be construed as broad as possible. That is, it must be construed to cover as many demolition - type situations as possible, so as to ensure that the protections contained in subsections (a) to (c) also apply as extensively as possible.

34. In fact, however, the Applicant is contending for a very narrow application of section 35 in that it only applies if the entire building is to be demolished or something akin to "demolition of the building" is proposed. Accordingly, the protections afforded by section 35 should only extend to a very limited number of lessees.

35. The paradoxical nature of this submission cannot be overlooked. To limit the scope of section 35 in the manner suggested by the Applicant would have the effect that the vast majority of lessees would not be able to rely upon the protective provisions in section 35 because the "proposed works" are not sufficiently substantial to warrant protection in that demolition of the whole building is not completed. In relation to these tenancies, landlords would be free to negotiate leases with allowance for termination for major reconstruction works with minimal or no notice periods, for example. This is entirely contrary to protection of lessees.

36. This is in fact not the first occasion that the Tribunal reviewed section 35 regarding demolition of the whole of the building as opposed to part only. This issue arose in Premprop Pty Ltd v Mandalong Projects Pty Limited [2011] NSWADT 274. The facts of that case appeared to be the reverse of the factual situation currently before the Tribunal. There, the owner of Mosman Village Plaza obtained development consent for the demolition and redevelopment of the plaza into a mixed use retail and residential building of some 29 units. Within days of obtaining development consent the owner, as landlord, served upon the tenants of the plaza notices called 'relocation notices' pursuant to clause 18.1 of the tenants’ respective leases with the owner. Clause 18.1 stated in part:

'If the lessor wishes to extend, alter or refurbish the Centre in a manner which affects a minimum of 550 square metres or adjacent premises and requires the demolition or alteration of the premises … the lessor may give notice requiring the lease to be surrendered'.

and at clause 18.3:

'If the lessor gives a notice under clause 18.1, the lessor must offer the lessee a lease of alternative premises in the Centre …'

37. The problem was that the owner's relocation notice did not in fact provide for any alternative premises. Subsequently the owner issued a second notice called 'demolition notice' pursuant to section 35 of the RL Act.

38. The tenant, Premprop, argued that the first notice being the relocation notice was invalid because at the time of giving the notice the owner did not have 'a wish to extend, alter or refurbish' as required pursuant to clause 18.1 of the lease to trigger the right to relocate and further, there was in fact no alternative premises provided which was contrary to section 34A of the RL Act. It was quite clear that the owner intended to demolish the plaza building in accordance with the development consent obtained.

39. The demolition notice was attacked because section 35 has operation only if a lease “provides for termination of the lease on the grounds of proposed demolition of the building” and clause 18.1 did not in fact provide for termination because there was to be a demolition, it only applied within the terms of clause 18.1 if there was a proposed extension, alteration or refurbishment. So it is the reverse of the Applicant's position in this case, that is, in Premprop the owner wished to demolish the building but the clause in the lease (which purportedly provided the right for the owner to shorten the term by forced surrender) did not refer at all to demolition but only referred to renovation.

40. Mr Kerr, on behalf of the Applicant, submitted that as IOF does not wish to demolish the whole building, but only renovate and refurbish, then clause 26 of the Lease between the parties does not allow IOF to seek termination because the works, being demolition (including repair renovation or reconstruction), must be to the whole of the building and that is not the case. So there is consequently no right for IOF to terminate the Lease.

41. Judicial Member Fox in Premprop stated at [38] and [40] as follows:

'38 Mr Leggat then advanced an interesting argument based on s 35 that a demolition notice need not envisage anything as drastic as a complete destruction. This comes from s35(4) which indicates that demolition can mean 'any substantial repair, renovation or reconstruction of the building that cannot be carried out practicably without vacant possession of the shop'.

So, obviously, it would lie in the mouth of an aggrieved shopkeeper to complain that the whole Centre was not being demolished, as might well be the impression from the opening words of s35(1) which provides for termination of the lease on the grounds of proposed demolition of the building of which the retail shop forms part.

That argument then developed to say that because clause 18 is triggered by a need to (in the circumstances under consideration) to affect more than 55% of the Centre for the purposes of extension, alteration or refurbishment, that fits within the concept of substantial repair, renovation or reconstruction of the building as set forth in s 35(4). Thus that which is allowable under clause 18 amounts to demolition pursuant to s35. It follows that the notice envisaged by clause 18 can apply to both the requirement for relocation as well as a requirement for demolition.’

40 I think it follows that a giver of the notice must make an election to either have the notice take into account the limitations of the relocation section 34A, or, as an alternative, have it comply with the limitations imposed by the demolition section 35.

42. On closer examination of section 35 the Tribunal is mindful of:

1. the definition of “demolition” contains the entire phrase "demolition of the building of which a retail shop forms part" in section 35(4) although the word demolition is only in bold;

2. the phrase "demolition includes any substantial repair, renovation or reconstruction" is significant. Works of repair and renovation by their very nature can only be undertaken to part of a building. If the building is demolished, then there can be no repair or renovation so the words “substantial repair, renovation or reconstruction” expand the concept of "demolition" beyond its usual sense to include works that are not of a destruction but which are more akin to modifications and improvements to a building; and

3. the words "without vacant possession of the shop" are also significant. If demolition were the only concept considered, then these words would be unnecessary. The fact that they are there, confirms that the section is expanded to contemplate not just destruction of the whole building but repair and renovation of parts of the building requiring the shop to be vacant for that purpose.

43. The Tribunal in Prempop held that the landlord could avail itself use of section 35 on the basis that the section was engaged by the lease as demolition included "any substantial repair, renovation or reconstruction" of the building and it is the same here. Section 35(4) expands the concept of demolition so that the proposal contemplated does not require solely the complete destruction. The interpretation propounded by the Applicant is far too narrow and restrictive.

Meaning of Substantial - Applicant's Submission

44. Mr Kerr for the Applicant then submitted that even though IOF’s proposed works were less than the demolition of the whole building (as is the position) then those works must still answer the description “substantial repair, renovation or reconstruction of the Building that cannot be carried out practicably without vacant possession of the shop”. The word “substantial” provides the defining element of the proposed works, that is, allowable if substantial, and not allowable if not substantial.

45. Mr Kerr referred to considerations of the meaning of “substantial” by Bryson J in Blackler who referred to Powell J in Dainford Pty Ltd v Lam [1985] NSWLR 255 who observed that the word “substantial” is one of “indefinite meaning, and one which, more often than not, will take its colour from the context in which it is used”.

46. In Wong v Silkfield Pty Ltd [1999] HCA 48 the High Court said “the term substantial may have various shades of meanings. Having regard to the context it may mean "large or weighty" or "real or of substance as distinct from ephemeral or nominal.”

47. Mr Kerr submitted that in this case the meaning applied to “substantial” as used in section 35(4) is critical to determine whether the Lease can be terminated. For the works to be “large or weighty” it is the submission on behalf of the Applicant that the relevant works by IOF would need to comprise a very significant part of the building and be work of significant destructive or reformative effect. Mr Kerr seeks to establish that the term “large or weighty” is the correct approach based on the purposive approach of the RL Act and in particular section 35 to protect lessees in restricting the ambit of demolition clauses.

48. Consequently, as the works only affect the retail complex and not the 21 storey commercial tower the works cannot be considered “substantial” in the meaning of “large or weighty” and therefore section 35(4) cannot apply and disentitles IOF to terminate the Lease pursuant to section 35 of the RL Act.

Meaning of substantial - IOF submission

49. Mr Parker SC submitted that “large or weighty” is too narrow a definition, as a purposive approach to section 35 requires a broader definition which will encompass and protect a greater number of lessees. The broader the definition of “substantial”, the more lessees will be able to enjoy the protections afforded by section 35. IOF therefore submitted that a definition of “real or of substance distinct from ephemeral or nominal” is more appropriate in the interests of protection of lessees.

50. Whichever definition is adopted, Mr Parker SC submitted that on all accounts the proposed works (as set out in paragraph 18 of these Reasons) are both “large and weighty” and/or “real or of substance” because:

1. by the very nature from their description they are substantial,

2. the costs are estimated at $8.45 million dollars,

3. the works are expected to take six months to complete constituting an entire renovation or reconstruction of the relevant floor on the podium level; and

4. the building contains three key parts [basement, podium and tower] and the entirety of one of those parts is proposed to be demolished.

Tribunal’s view

51. The Tribunal is mindful that the overall purpose of section 35 is to protect a lessee’s security of possession and interest in the goodwill in respect of the lessee’s retail business. This is evident from the examination conducted by Bryson J in Blacker that all the requirements under section 35 must be satisfied. One issue in that case was whether the lessor had provided sufficient details of the proposed works under section 35(1)(a) to be a genuine proposal to demolish. Bryson J held at [37]):

"It is in my view significant to consider the purpose for which the provision which the lease is taken to include requires that details be provided. The requirement to provide details is not merely a formal step imposed in the lessor's path, but the details are to be provided so that the lessee can come to a conclusion about whether the termination will be effective, and whether the lessee should accept that it will be effective or dispute it. The sufficiency of details provided should be tested in relation to that purpose. The question is whether the details provided are sufficient to indicate a genuine proposal to demolish the building. If they are not the termination cannot take place and if they are it will be effective no matter what other details of the proposed demolition exist or could have been provided."

52. The emphasis placed by Bryson J "to indicate a genuine proposal to demolish the building (in the wider context of demolish under section 35(4)) are to my mind quite significant.

Furthermore, Bryson J held at [32]

"A duty of good faith in the exercise of its contractual right to terminate should in my view be implied in the lease; the implication is readily made as it could not possibly have been the intention of the parties that the lease should be terminated on the mere delivery of notice asserting a particular intention but in the absence of any actual intention of that kind. Other principles which also support this conclusion are the principle requiring the exercise of contractual powers which may affect the rights of others to be undertaken in good faith for the purposes for which the power was conferred and at a more basic level the principle which vitiates fraud would deprive a notice asserting that there was an intention to demolish premises from any effect if in fact there was no such intention."

53. Pursuant to section 35(3) the lessee has a right to seek reasonable compensation if the lessor does not proceed with demolition and at the time the notice was given to the lessee the lessor did not have a genuine proposal to demolish. These issues were discussed in Eddie Azzi Australia Pty Limited v Citedin Pty Ltd [2001] NSWADT 79.

54. In that case the genuineness of the proposal of the lessor was called into question where the lessor appeared to seek to use section 35(1) to terminate the lease to install a "better" tenant and that would not be a genuine proposal. There would be a lack of good faith by the lessor.

The Tribunal's view of the operation of section 35 taking into account the approach of Bryson J is that the overriding concern to be tested by a lessee is whether the lessor's proposal to demolish, in the wider context of section 35(4), is a genuine proposal in that the lessor’s works are substantial. It is the context of the substantiality of the works that the Court is to give the words of the statutory provision the meaning the legislative is taken to have intended. The purpose of legislation must be derived from what the legislation says including the language of the relevant provision and the scope and object of the whole statute (see paragraph 26 of these Reasons adopting submissions from the Applicant). Pursuant to section 35(1)(a) the proposed demolition must be “a genuine proposal to demolish” and pursuant to section 35(3) if demolition does not take place within a reasonably practicable time and the lessee has suffered damage then the lessee can seek compensation if the proposal was not genuine.

55. Consequently, rather than concepts of "large or weighty" or "real or of substance" to guide how to measure substantial, the view of the Tribunal is to look at whether the proposal is a genuine proposal to demolish in the wider context of the repair or renovation being substantial. An insubstantial proposal could not be considered to be a genuine proposal in the context of section 35, where it was only repair or renovation to the particular premises even though vacant possession would be required. It would not be a substantial repair unless the premises itself constituted the whole of the building as in Blackler. Substantial repair or renovation to a building connotes improvements to a building in a wider context. A repair or renovation of one or two shops in a very large shopping centre or a commercial/retail complex is not a genuine proposal for substantial repair to a building. To the few shops yes, but not to a building. There would be a lack of good faith. However, where all of the retail premises are being demolished, although part only of a building as is the situation at 99 Walker Street, North Sydney, it is the view of the Tribunal that the demolition is clearly substantial constituting a genuine proposal as required by section 35(1)(a). The Demolition Notice is valid.

Inconsistency between clause 26 of the Lease and Section 35

56. Mr Kerr makes a submission that clause 26.1 of the Lease does not entitle IOF to exercise rights under section 35 as the clause refers to "the Centre or the part of it containing the Premises" and based on the earlier submission section 35 does not permit part demolition. The second element of the argument is that there is some degree of lack of clarity surrounding the definition of Centre in the Lease but the argument still relies on the concept of whole building and part building.

57. As the Tribunal has established that section 35 applies to part of the building and not only the whole building there is no inconsistency between clause 26 and section 35. This is further exemplified in Premprop. Whilst the definitions of premises and Centre in the Lease is less than satisfactorily clear there is no doubt that the clause permits IOF to demolish that part of the building containing the premises. It is the premises to be demolished that is relevant in clause 26 not necessarily the description of the structure which contains the premises to engage section 35. The Tribunal is satisfied there is no inconsistency.

Costs

58. The applicant seeks to be heard an order for costs in its favour. If it was successful IOF in in its submissions made no mention of costs. However I believe it is helpful if I provide my preliminary views. Section 60 of the Civil and Administrative Tribunal Act 2013 sets out the approach which the Tribunal must take in relation to deciding whether to award costs:

1. Each party to proceedings in the Tribunal is to pay the party's own costs.

2. The Tribunal may award costs in relation to proceedings before it only if it is satisfied that there are special circumstances warranting an award of costs.

3. In determining whether there are special circumstances warranting an award of costs, the Tribunal may have regard to the following:

1. whether a party has conducted the proceedings in a way that unnecessarily disadvantaged another party to the proceedings.

2. whether a party has been responsible for prolonging unreasonably the time taken to complete the proceedings.

3. the relative strengths of the claims made by each of the parties, including whether a party has made a claim that has no tenable basis in fact or law;

4. the nature and complexity of the proceedings.

5. whether the proceedings were frivolous or vexatious or otherwise misconceived or lacking in substance;

6. whether a party has refused or failed to comply with the duty imposed by section 38 (3),

7. any other matter that the Tribunal considers relevant.

4. If costs are to be awarded by the Tribunal, the Tribunal may:

1. determine by whom and to what extent costs are to be paid, and

2. order costs to be assessed on the basis set out in Division 11 of Part 3.2 of the Legal Profession Act 2004 or on any other basis.

5. In this section:

"costs" includes:

1. the costs of, or incidental to, proceedings in the Tribunal, and

2. the costs of, or incidental to, the proceedings giving rise to the application or appeal, as well as the costs of or incidental to the application or appeal.

59. The above section revives the previous legislative requirement set out under section 88(1) of the Administrative Decisions Tribunal Act 1997 (ADT Act) that "special circumstances warranting an award of costs" had to be identified in order to base an order for costs.

The application of section 60 can be obtained from the decision of Chesterman DP in Smith trading as Flames Grill and Carvery v Trust Company of Australia Ltd [2008] NSWADT 10 at [103 and 104], when considering the former section 88(1) of the ADT Act.

(103) As stated earlier, trust Co claimed costs in the alternative under s 88(1) of the ADT Act. According to the authorities governing this provision in its application to proceedings under the RL Act (see eg Cripps v G & M Dawson Pty Ltd [2006] NSWCA 81, Gizah Pty Ltd v AXA Trustees Ltd (No. 2) [2001] NSWADT 164, Citadin Pty Ltd (No 2) v Eddie Azzi Australia Pty Ltd & General Pants Pty Ltd (RLD) [2001] NSWADTAP 31 and Sotiropoulos v Mattana Coiffure Pty Ltd (No 2) (RLD) [2004] NSWADTAP 43), 'special circumstances' are to be defined as 'circumstances that are out of the ordinary but without having to be extraordinary or exceptional'. It is not enough that the circumstances are 'special' they must also 'warrant' an order for costs. On account of the 'commerciality' of the Retail Leases Division, the interpretation of 'special circumstances' differs significantly from the interpretation that might be adopted in any other Division of the Tribunal. While a finding of 'serious unfairness' or 'grossly unreasonable conduct' on the part of the party resisting an order for costs is not a prerequisite to determining that there are 'special circumstances', it is a highly relevant consideration.

(104) A number of categories of 'special circumstances' have been recognised in retail leases cases. One of them is where the proceedings instigated, or the grounds of defence raised, by the party against whom a costs order is sought are found to have lacked any real prospect of success and therefore to have been unmeritorious.

60. Having regard to the factors set out within section 60, I cannot identify any special circumstances warranting departure from the statutory presumption that each party bears its own costs of the proceedings. Notwithstanding my findings in that the Application be dismissed, I also do not find any component of the Applicant's case which was unarguable or lacked any real prospect of success, nor do I consider that any of the other factors listed within section 60 are present.

Orders

1. The Application is dismissed.

2. No order for costs.

D Bluth

Senior Member

Civil and Administrative Tribunal of New South Wales

10 April 2015

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

Registrar

Decision last updated: 07 May 2015