Howell and Kakulas and Christodulou
[2012] WASAT 9
•13 JANUARY 2012
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL
STREAM: COMMERCIAL & CIVIL
ACT: COMMERCIAL TENANCY (RETAIL SHOPS) AGREEMENTS ACT 1985 (WA)
CITATION: HOWELL and KAKULAS & CHRISTODULOU [2012] WASAT 9
MEMBER: MS NATASHA OWEN-CONWAY (MEMBER)
HEARD: DETERMINED ON THE DOCUMENTS
DELIVERED : 13 JANUARY 2012
FILE NO/S: CC 1792 of 2011
BETWEEN: BRIAN LESLIE HOWELL
LISA ANNE HOWELL
ApplicantsAND
LOULA KAKULAS
PELAGIA CHRISTODULOU
Respondents
Catchwords:
Substantial landscape work Whether expenditure is an operating expense Whether nature and extent of landscape work was for the operation, maintenance or repair of retail shopping centre common area or an improvement Whether expenditure for an improvement to common area of a retail shopping centre is an operating expense for the purpose of s 12(3) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA)
Legislation:
Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 3, s 12, s 16
Income Tax Assessment Act 1936 (Cth), s 53
Result:
A landlord's expenditure to remodel and renovate the gardens of a retail shopping centre, situated on the common area of the retail shopping centre is not an 'operating expense' within the meaning of that phrase as defined by s 12(3) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) and the terms of the lease in question
Category: B
Representation:
Counsel:
Applicants: Self-represented
Respondents : Mr L Barker
Solicitors:
Applicants: N/A
Respondents : GV Lawyers
Case(s) referred to in decision(s):
Federal Commissioner of Taxation v Western Suburbs Cinemas Ltd (1952) 86 CLR 102
McLaughlin v Dungowan Manly Pty Ltd [2007] NSWSC 197
REASONS FOR DECISION OF THE TRIBUNAL:
Summary of Tribunal's decision
The applicants, the tenants of Unit 3 Mindarie Central Shopping Centre, disputed the claim made by the respondents for a contribution of $883.65 towards the variable outgoings alleged to have been incurred by the former landlord of the Mindarie Central Shopping Centre in the financial year ending 30 June 2011. The respondents claim that there is a shortfall in the budgeted variable outgoings for the Mindarie Central Shopping Centre, in respect of which shortfall they are entitled to seek a contribution from the tenants, including the applicants.
It was common cause that the budgeted variable outgoings for the Mindarie Central Shopping Centre was exceeded in the financial year ending 30 June 2011 as a result of the prior landlord's expenditure on landscaping and gardening works.
The Tribunal has concluded that the expenditure incurred by the former landlord of the Mindarie Central Shopping Centre, and in respect of which the respondents now seek a contribution from the applicants, was not incurred for the operation, maintenance and repair of the Mindarie Central Shopping Centre and the common area thereof, and is not an operating expense of the respondents.
Background
The applicants are the trustees of the Howell Family Trust. On 20 May 2010 the applicants, as trustees, executed a deed of assignment of lease in respect of the property identified in the assigned lease and referred to as Unit 3, Mindarie Central. By the deed of assignment, the unexpired term of the lease between Mr David Paul Hutchinson and Spectator Investments Pty Ltd (Spectator) was assigned to the applicants, as trustees. The lease is the subject of a deed of lease but is undated.
On 18 February 2011, the respondents purchased the title to the Mindarie Central Shopping Centre from Spectator, subject to the applicants' lease of Unit 3, Mindarie Central and also subject to the leases of other units within the Mindarie Central Shopping Centre. The respondents are the current owners of the Mindarie Central Shopping Centre and the applicants' landlords.
It is common cause that Unit 3, Mindarie Central is a 'retail shop', the Mindarie Central Shopping Centre is a 'retail shopping centre' and the assigned lease is a 'retail shop lease' within the meaning of those expressions as defined in s 3 of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (CT(RS)A Act).
On 7 November 2011, the respondents' managing agents issued the applicants with a statement claiming payment in the sum of $883.65, being the applicants' proportionate share of the shortfall of the budgeted variable outgoings for the period 1 July 2010 to 30 July 2011. It was common cause between the parties that the cause for the claim for the shortfall of the budgeted variable outgoings was the cost of landscaping work undertaken by Spectator as the landlord between 1 July 2010 and 18 February 2011. The applicants object to the claim.
The issue
The application has been commenced pursuant to s 12(1)(b) of the CT(RS)A Act, although in the Tribunal's view it is, in truth, an application made pursuant to s 16 of the CT(RS)A Act. Section 16 of the CT(RS)A Act provides that a party to a retail shop lease may refer to the Tribunal any question between the parties to a retail shop lease that the referring party believes is a question arising under the lease.
The question raised for the Tribunal's consideration in this dispute is whether, in all of the circumstances surrounding the dispute, the applicants are obliged, as the tenants of Unit 3, Mindarie Central, to pay to the respondents the sum of $883.65, being a share of the costs of the landscaping work undertaken by Spectator, as the former landlord, proportionate to Unit 3, Mindarie Central. The underlying issue is whether such expenditure by a landlord falls within the meaning of 'operating expense' as defined in the assigned lease and s 12(3) of the CT(RS)A Act and whether the expense was incurred for the operation, maintenance or reparation of the Mindarie Central Shopping Centre or common area, such that the cost is to be borne proportionately amongst the tenants of the Mindarie Central Shopping Centre, including the applicants.
The proceedings in the Tribunal
The application was commenced on 16 November 2011 and on 1 December 2011 was listed for a directions hearing and was programmed for a speedy resolution by way of a determination on the papers.
In the application form, when asked what orders he wanted the Tribunal to make, the applicant responded:
I would like the [T]ribunal to order my landlord to remove an invoice sent to me for the amount of $883 for a landscaping bill.
As at 1 December 2011, only Mr Howell was named as an applicant and Mr Theo Kakulas and Mrs Loula Kakulas were named as the respondents. On 1 December 2011, GV Lawyers filed a Notice of Representation to record the fact that that firm was representing Mrs Loula Kakulas and Mrs Pelagia Christodulou as the correct respondents in this matter. On 1 December 2011, the Tribunal amended the application to reflect that the respondents are Mrs Loula Kakulas and Mrs Pelagia Christodolou. It was not until the hearing on 19 December 2011 that the application was amended to reflect that the applicants, correctly named, are Mr and Mrs Howell as trustees for the Howell Family Trust.
On 1 December 2011, the Tribunal directed that by 8 December 2011 the then applicant, Mr Howell, file and serve a statement of facts, issues and contentions, together with any documents upon which he sought reliance. The respondents were directed to file and serve their responsive statement of issues, facts and contentions together with any documents upon which they intended to rely before 15 December 2011.
On 6 December 2011, the then applicant, Mr Howell, filed in the Tribunal a letter dated 5 December 2011 that minimally expanded on the grounds of the application, and filed the following documents:
1)an email dated 12 October 2011 to the applicant from the respondents' managing agent identifying the cost of the landscaping work;
2)a copy of the respondents' statement dated 7 November 2011 to the applicant noting the addition of $883.65 for 'variable outgoing shortfall' for the financial year ending 30 June 2011;
3)an A4 sized photograph of the Mindarie Central Shopping Centre prior to the landscaping works; and
4)an A4 sized photograph of the Mindarie Central Shopping Centre after the landscaping works were completed.
All of these documents had been provided to the Tribunal with the original application on 16 November 2011. The applicant had also attached to the original application a letter from the respondents' managing agent to the applicant dated 12 September 2011. This document was not reproduced to the Tribunal on 6 December 2011.
On 15 December 2011 at 6.01 pm, Mr Brian McCubbing, the principal of a business known as BMC Realty, sent an email submission to the Tribunal apparently in support of the respondents' position. Mr McCubbing, is not a party to the proceedings and is not the respondents' representative. On 16 December 2011, the Tribunal received a facsimile copy of Mr McCubbing's email to the Tribunal sent on 15 December 2011.
On 15 December 2011 at 5.15 pm, the Tribunal received an email letter from the respondents' solicitors enclosing an email thread on 14 and 15 September 2011 between the respondents' solicitors and Mr McCubbing and 24 copy invoices rendered by a business styled 'Panoramic Gardens and Turf Management' for the period from and including June 2010 to February 2011. The respondents' solicitors' letter notes:
…
As our client [sic] was not involved in the disputed expenditure and is not aware of the background to it, we invited the vendor to provide a written response to the issues raised by the Applicant. We enclose two emails from the vendor's managing agent in response to our request dated 14 and 15 September 2011 and a bundle of invoices from Panoramic Gardens and Turf Maintenance which comprises the Respondent's [sic] written response to the Applicant's submission.
The Tribunal does not accept filing of any documentation by way of email. The same letter and documentation was filed in the Tribunal on 16 December 2011 and the Tribunal has received these documents as being the respondents' statement of issues, facts and contentions and the documents upon which the respondents intend to rely in opposition to the applicants' application, although they were filed outside of the time prescribed by the orders made on 1 December 2011. The Tribunal accepts that the respondents' solicitors did attempt to file the same by email attachment on 15 December 2011 and that the documents are material to the issue for determination. The Tribunal also accepts the document sent to the Tribunal by Mr McCubbing by facsimile on 16 December 2011, as being additional information upon which the respondents seek to rely Mr McCubbing being Spectator's managing agent while Spectator was the owner of the Mindarie Central Shopping Centre and the applicants' landlord.
The respondents' solicitors provided the Tribunal with a copy of the deed of assignment and the assigned lease by facsimile on 16 December 2011, at the Tribunal's request.
On 19 December 2011, the Tribunal announced its decision and delivered short oral reasons but reserved the right to amend and vary any published reasons so as to make typographical, grammatical and stylistic alterations. The reasons are taken from the transcript and contain typographical, grammatical and stylistic alterations to the short oral reasons delivered on 19 December 2011.
The statutory framework
The stated purpose of the CT(RS)A Act is to regulate commercial tenancy agreements relating to retail shops. As stated, it is common cause that Unit 3, Mindarie Central is a 'retail shop', the Mindarie Central Shopping Centre is a 'retail shopping centre' and the assigned lease is a 'retail shop lease' for the purposes of the CT(RS)A Act. Section 12 of the CT(RS)A Act is a law concerning the application and validity of clauses in retail shop leases whereby the tenant is obliged to contribute to the landlord's expenses. Section 12(1) of the CT(RS)A Act limits the tenant's obligation to contribute to the landlord's operating expenses specifically referred to in the lease and only where the lease identifies how the tenant's contribution is to be determined, apportioned and paid.
In the case of a retail shop lease in a retail shopping centre, s 12(2) of the CT(RS)A Act makes 'void' any clause in a lease the effect of which is to oblige the tenant:
(2)… to make a payment to or for the benefit of the landlord … for or in respect of the amortisation of all or part of the costs of or incidental to
(a)the construction of the retail shopping centre;
(b)any extension of the centre or structural improvement to the centre; or
(c)any plant or equipment that is or becomes the property of the owner of the retail shopping centre[.]
There is no clause in the assigned lease in this matter which obliges the tenant to pay a contribution for those specified capital costs identified in s 12(2)(a), s 12(2)(b) and s 12(2)(c) of the CT(RS)A Act.
The definition of 'operating expenses' for the purposes of s 12 of the CT(RS)A Act is defined in s 12(3) of the Act as:
… in relation to a landlord, means expenses of the landlord in operating, repairing or maintaining
…
(b)if that retail shop is in a retail shopping centre, the building or buildings of which a retail shop the subject of the retail shop lease to which the landlord is a party forms the whole or a part and the common area,
…
The landlord is permitted to seek a contribution from a tenant for the cost of operating, repairing and maintaining the common area of a retail shopping centre if the lease provides specifically for the same and the determination, apportionment and payment is prescribed in the lease for the purposes of s 12(1) of the CT(RS)A Act.
The question is: what kind of expenditure falls within the description of 'operating, repairing and maintaining' the retail shopping centre including the common area and, specifically, whether a reconstruction and/or improvement of the landscaped gardens and paths of the retail shopping centre (the common area in this matter) falls within the description of 'operating, repairing and maintaining' the common area of the retail shopping centre. This raises the question whether operation, maintenance and repair expenditure include expenditure that is capital in nature, such as in the case of an improvement or reconstruction. In Federal Commissioner of Taxation v Western Suburbs Cinemas Ltd (1952) 86 CLR 102 (FCT v Western Suburbs Cinemas Ltd), the High Court held that expenditure to effect an improvement (such as a renewal) to an asset is expenditure of a capital nature and not expenditure for the maintenance or repair of that asset, even though in the course of undertaking the improvement the asset was repaired.
Whether expenditure is in truth for the operation, maintenance and/or repair of the common area of a retail shopping centre will depend on the facts of the case and, in particular, the extent and nature of the work undertaken for which the expense was incurred.
The reasons
Relevantly, the facts of the dispute are:
1)The assigned lease obliges the applicants to pay a contribution towards the respondents' 'Operating Expenses' (see clauses 1 and 3 of the assigned lease - definition of 'Operating Expenses').
2)The 'Operating Expenses', as defined in the assigned lease, relevantly include 'external gardening landscaping and reticulation for the Centre where reasonably required by the Landlord and where applicable' (see Schedule 4 Item 4 of the assigned lease). The assigned lease therefore obliges the applicants to contribute towards the respondents' Operating Expenses which are prescribed to include external gardening, landscaping and reticulation where reasonably required by the landlord.
3)Mr McCubbing asserted that Spectator responded to a complaint or a number of complaints from tenants in the Mindarie Central Shopping Centre, other than the applicants, that the growth of the peppermint trees along Marmion Avenue at the front of the Mindarie Central Shopping Centre was:
a)obscuring the front elevation of their leased premises and any signage that they had erected; and
b)obscuring the whole of the Mindarie Central Shopping Centre so that passing traffic could not readily see and observe the Centre.
4)Mr McCubbing asserted that Spectator had responded to what appears to have been a demand from the local municipal council to remove unauthorised bollards located along Marmion Avenue at the front of the Mindarie Central Shopping Centre and also along Mulgrave Loop at the rear of the Centre. Mr McCubbing asserted that the bollards protected the reticulation and the gardens from damage from cars mounting the kerb, driving over the grassed verge and damaging the grass, plants and reticulation.
5)The landscape work was commenced just prior to 1 July 2010 and the first invoice was presented on 1 July 2010 (dated 28 June 2010) and is admitted to include:
a)the removal of existing fencing;
b)the removal of excess soil and concrete kerbing and the levelling of the front portion of the site;
c)the removal of trees (including stump grinding) and garden areas along the Marmion Avenue frontage of the property;
d)the design and installation of the reticulation to suit the new landscaping arrangement;
e)the preparation of the subject area for new turf and garden areas; and
f)the supply of treated pine sleepers for the boxed out garden area along the Marmion Avenue frontage.
The cost of this work is admitted to be $12,537.60, including GST, as invoiced by Panoramic Gardens and Turf Management to BMC Realty and is noted as 'Mindarie Progress payment for revamp works'.
6)On 28 July 2010, Panoramic Gardens and Turf Management issued an invoice to BMC Realty in the sum of $1,780, inclusive of GST, being for a day's labour in erecting the planter boxes on site and the supply and laying of 6 cubic metres of mulch. The invoice was presented on 28 July 2010 and paid on 3 August 2010.
7)On 24 August 2010, Panoramic Gardens and Turf Management issued an invoice to BMC Realty amounting to $10,320, inclusive of GST, being for the supply and laying of 6 cubic metres of mulch, 3 cubic metres of top dress sand, 645 square metres of roll on lawn, 100 hibiscus plants, six flowering plum trees and three days' labour. Panoramic Gardens and Turf Management describes the invoice as 'MINDARIE REVAMP FINAL PAYMENT'. This invoice was presented on 25 August 2010.
8)The total cost of the three invoices for landscaping work referred to in subparagraphs 1, 2 and 3 is $24,637.60.
9)The remaining invoices in the bundle attached to Mr McCubbing's email and to the respondents' submissions concern the usual monthly maintenance expenditure incurred for repairs to reticulation, fertilisation and mowing of the lawn.
10)The expenditure by Spectator has been included by the respondents as an operating expense to be contributed to by the applicants, amongst others.
There is no dispute about these facts that are the subject of the documents attached to the respondents' letter filed in the Tribunal on 16 December 2011. The photographs of the Mindarie Central Shopping Centre before and after the landscaping works were completed by Panoramic Gardens and Turf Management show a dramatic change in the appearance of the gardens of the Mindarie Central Shopping Centre. The respondents did not object to the photographs or dispute the before and after depiction of the gardens at the Mindarie Central Shopping Centre.
Mr McCubbing's first submission (adopted by the respondents) is that the expenditure, for which the respondents now seek contribution from the applicants, was necessitated by the complaints made by various other tenants and the local municipal council to Spectator. In the Tribunal's view this submission is flawed in that it implies that a decision whether a landlord's expenditure in a retail shopping centre is an operating expense (that is, for the operation, maintenance and repair of the retail shopping centre including the common area) will be determined by the landlord's motivation for the expenditure. The Tribunal considers that the fact of Spectator's expenditure being motivated by complaints by other tenants and a demand from the local municipal council is irrelevant. The motivation for the landscaping work is not material to the determination whether the expenditure was incurred for the operation, maintenance or repair of the Mindarie Central Shopping Centre including the common area and there is nothing in the plain words of the CT(RS)A Act to justify that submission. As for clause 3 of the assigned lease, the expenditure still must fall within the meaning in the lease of 'Operating Expenses' as provided for by clause 1 of the assigned lease, which must be reasonable as an operating expense.
Mr McCubbing's second submission (adopted by the respondents) is that the expenditure, for which the respondents now seek contribution from the applicants, is not expenditure within s 12(2)(a), s 12(2)(b) or s 12(2)(c) of the CT(RS)A Act and therefore the respondents are permitted to seek, and the applicants are obliged to pay, a contribution to the respondents for that expenditure. In the Tribunal's view this submission is flawed and represents an incorrect construction and application of s 12(2) of the CT(RS)A Act. Section 12(2) of the CT(RS)A Act prohibits and makes void any clause in a retail shop lease, the effect of which is to oblige a tenant to pay for the specified capital costs incurred by the landlord. The operation of s 12(2) of the CT(RS)A Act does not permit a landlord of a retail shop lease to recover from the tenant any expenditure that was incurred other than for the operation, maintenance and repair of the retail shopping centre and the common area. Section 12(2) of the CT(RS)A Act is proscriptive not facilitative.
The issue is whether the landscape work, by its nature and scope, is an operating expense within the meaning of that term as provided for by s 12(3) of the CT(RS)A Act and clauses 1 and 3 and Schedule 4 Item 4 of the assigned lease. In this case, both the nature and the scope of the landscape work are so extensive that it cannot be said to amount to an expense incurred by Spectator, as the former landlord, in operating, maintaining or repairing the Mindarie Central Shopping Centre including the common area. The detail of the work undertaken by Panoramic Gardens and Turf Management and referred to in the invoices indicates a substantial remodelling (or 'revamp') of the Mindarie Central Shopping Centre common area with new planter boxes constructed and filled with plants, 100 new hibiscus plants and six new trees supplied and installed, old trees removed, kerbing, gardens and grass removed and replaced, and reticulation redesigned to suit the new remodelled layout of the garden and paths in the Mindarie Central Shopping Centre common area. The photographs produced by the applicants, depicting the Mindarie Central Shopping Centre common area before and after the landscaping work undertaken by Panoramic Gardens and Turf Management, are further testament to the conclusion that the landscaping work was a remodelling, renewal or renovation of the Mindarie Central Shopping Centre common area. The expenditure was incurred to effect an improvement to the Mindarie Central Shopping Centre common area and not to facilitate the operation, maintenance and repair of the same.
Applying FCT v Western Suburbs Cinemas Ltd, Spectator's expenditure, as the landlord, is in the nature of a capital expenditure even though certain items were repaired in the course of the remodelling and improvement to the Mindarie Central Shopping Centre common area. The reasoning applied in FCT v Western Suburbs Cinemas Ltd is not limited to issues of repair or maintenance as they arise under s 53 of the Income Tax Assessment Act 1936 (Cth) (as was the case in that matter) but has been applied more broadly: see McLaughlin v Dungowan Manly Pty Ltd [2007] NSWSC 197.
In the case of clauses 1 and 3 and Schedule 4 Item 4 of the assigned lease, the clauses and item, when read together, are intended to be limited to gardening and landscaping expenses that are reasonably required in the operation of the Mindarie Central Shopping Centre. Such expenditure excludes garden and landscaping expenditure that is by its nature and extent a remodelling or improvement. Such expenditure is not reasonably required for the operation of the Mindarie Central Shopping Centre. Such expenditure is, in truth, in the nature of a capital improvement (FCT v Western Suburbs Cinemas Ltd).
For these reasons, the Tribunal concludes that the landscaping expenditure totalling $24,637.50 undertaken by Spectator as the landlord is not an operating expense for the purposes of the CT(RS)A Act or clauses 1 and 3 and Schedule 4 Item 4 of the assigned lease.
The applicants asserted that Spectator incurred the landscaping expenditure in order to maximise the sale potential of the Mindarie Central Shopping Centre. As with the respondents' first submission, the Tribunal concludes that the motivation for Spectator's expenditure is not relevant and it does not alter the nature of the expenditure for the purposes of these proceedings.
Orders
The Tribunal orders as follows:
1.The application is amended so as to record that it has been made pursuant to s 16 of the Commercial Tenancy (Retail Shops) Agreements Act 1985.
2.The question to be determined by and referred to the Tribunal by the applicants is whether the applicants are obliged to pay the respondents the sum of $883.65 pursuant to a retail shop lease assigned to the applicants on 10 May 2010, as invoiced by the respondents in November 2011 in respect of a share of the cost of landscape work undertaken to the common property to 20 June 2011.
3.The application is amended as to record that the applicants are Brian Leslie Howell and Lisa Anne Howell.
4.The applicants are not obliged to pay to the respondents the sum of $883.65 or any sum at all accruing from the landscaping work undertaken to the premises including the common property in 2010 and 2011, such work being in the nature of a capital improvement and not an expense incurred by the respondents or the earlier landlord in the operation, repair and maintenance of the premises including the common property.
5.The respondents shall withdraw their claim against the applicants, made by invoice or alternative, for a share of the cost of the landscaping work to the premises, including the common property in 2010 and 2011.
I certify that this and the preceding [37] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
___________________________________
MS N OWEN-CONWAY, MEMBER