ISPT Pty Ltd and AWPF Management No. 2 Pty Ltd v Cao and Zhao

[2023] NSWSC 1115

Supreme Court

New South Wales

Medium Neutral Citation:

ISPT Pty Ltd and AWPF Management No. 2 Pty Ltd v Cao and Zhao [2023] NSWSC 1115

Hearing dates:

21 – 22 August 2023

Date of orders:

14 September 2023

Decision date:

14 September 2023

Jurisdiction:

Equity

Before:

Nixon J

Decision:

(1) Direct that the parties bring in short minutes of order that give effect to these reasons for judgment, and that deal with the calculation of interest if it can be agreed.

(2) If the parties cannot agree on the form of orders referred to in order (1), leave is granted for the parties to approach the Associate to Nixon J to relist the matter.

Catchwords:

REAL PROPERTY – COMMERCIAL LEASES – lease of restaurant for three-year term – public health orders imposed from March 2020 onwards in response to COVID-19 pandemic prohibited or restricted dining on premises – tenant closed restaurant when restrictions first imposed and ceased paying rent – claim against guarantors for unpaid rent and damages – whether discharge by frustration – whether a lease is capable of being frustrated – no binding precedent to the effect that the doctrine of frustration is incapable of applying to a lease – whether the public health orders rendered the leasehold estate unusable and unsaleable – whether essential term regarding the opening of the premises for business became incapable of performance – whether frustration can be established by radical change in the nature of tenant's business – no finding made as to whether tenant’s business had been rendered unviable by the public health orders – held that lease not frustrated

REAL PROPERTY – COMMERCIAL LEASES – claim for unpaid rent and outgoings up to the date of termination – claim for loss of future rent – whether Plaintiffs had taken reasonable steps to mitigate loss – held that failure to mitigate not established – whether Plaintiffs entitled to costs of making good the premises – whether tenant was obliged to remove fixtures and fittings – held that claim for costs of making good the premises not established

Legislation Cited:

Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth)

Frustrated Contracts Act 1978 (NSW) s 7(1)

Public Health Act 1902-1952 (NSW) s 58

Public Health Act 2010 (NSW) s 7

Public Health (COVID-19 Additional Restrictions for Delta Outbreak) Order (No 2) 2021 (NSW)

Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW)

Public Health (COVID-19 Temporary Movement and Gathering Restrictions) Order 2021 (NSW)

Retail and Other Commercial Lease (COVID-19) Regulation 2020 (NSW)

Retail Leases Act 1994 (NSW) s 5(a)

Cases Cited:

Ashington Holdings Pty Ltd v Wipema Services Pty Ltd (No 2) [1998] NSWSC 414

Bank of New York Mellon (International) Limited v Cine-UK Ltd [2021] EWHC 1013 (QB)

Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143

Chinatex (Australia) Pty Limited v Bindaree Beef Pty Limited [2018] NSWCA 126

City of Subiaco v Heytesbury Properties Pty Ltd (2001) 24 WAR 146; [2001] WASCA 140

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24

Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696

Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265

Diakou Nominees Pty Ltd v Gouger Street Pty Ltd& Anor; Gouger Street Pty Ltd v Diakou Nominees Pty Ltd [2023] SASC 66

Dyco Hotels Pty Ltd & Ors v Laundy Hotels (Quarry) Pty Ltd [2021] NSWCA 332

Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd [2021] NSWSC 504

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12

Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The “Sea Angel”) [2007] 2 Lloyd’s Rep 517; [2007] EWCA Civ 547

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22

Firth v Halloran (1926) 38 CLR 261; [1926] HCA 24

Foot Locker Retail Ireland Ltd v Percy Nominees Ltd [2021] IEHC 749

Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd [2008] HCA 10

Halloran v Firth (1926) 26 SR (NSW) 183

Hugo Boss Retail, Inc v A/R Retail, LLC, 145 NYS 3d 329, 2021

Karacominakis v Big Country Developments Pty Ltd & Big Country Developments Pty Ltd & Ors J W Wall Investment Co Pty Ltd & Ors v Big Country Developments Pty Ltd & Ors v Big Country Developments Pty Ltd & Ors Hollingsworth & v Big Country Developments Pty Ltd & Ors [2000] NSWCA 313

Krell v Henry [1903] 2 KB 740

Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6

Lee v YOUth OK Pty Ltd [2022] NSWSC 1356

London and Northern Estates Co v Schlesinger [1916] 1 KB 20

Luxer Holdings Pty Ltd v Glentham Pty Ltd (2007) 35 WAR 254; [2007] WASCA 209

Matthey v Curling [1922] 2 AC 180

Minister of State for the Army v Dalziel (1944) 68 CLR 261

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37

National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675

Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35

Re Equity Trustees Executors & Agency Co Ltd and Considine’s Contract [1932] VLR 137

Re Willmott Forests Ltd (in liq) (2012) 36 VR 472; [2012] VSCA 202

Robertson v Wilson (1958) 75 WN (NSW) 503

Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5

Scanlan’s New Neon Ltd v Tooheys Ltd; Caldwell v Neon Electric Signs Ltd (1943) 67 CLR 169

The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; [1985] HCA 14

Thearle v Keeley (1958) 76 WN (NSW) 48

Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2010] NSWSC 29

Woolworths Group Ltd v Gazcorp Pty Ltd [2022] NSWCA 19

Texts Cited:

JW Carter, Carter on Contract (2022, JW Carter Publishing Pty Ltd)

Category:

Principal judgment

Parties:

ISPT Pty Ltd ACN 064 041 283 (First Plaintiff)
AWPF Management No. 2 Pty Ltd (Second Plaintiff)
Howard Cao (First Defendant)
Yuan Zhao (Second Defendant)

Representation:

Counsel:
J Mee (Plaintiffs)

Solicitors:
B Haines, Holding Redlich (Plaintiffs)
T D Tzovaras (Defendants)

File Number(s):

2021/348454

Publication restriction:

Nil

Judgment

Introduction

1. In these proceedings, ISPT Pty Ltd and AWPF Management No. 2 Pty Ltd (the Plaintiffs) bring a claim for unpaid rent and damages in respect of a commercial lease of a large Chinese restaurant in the Sydney Central Business District. The principal issue is whether the lease, which was entered in early 2020, was frustrated as a result of the lockdown imposed in late March 2020 in response to the COVID-19 pandemic.

2. The Plaintiffs are the proprietors of the land at 644 George Street, Sydney, which is known as World Square Shopping Centre. This is a three-level shopping centre with approximately 90 shops.

3. In early 2020, the Plaintiffs leased shops 10.41 and 11.05 in the World Square Shopping Centre (Premises) to Beijing Roast Duck Sydney Pty Ltd (the Tenant). The lease was in writing and was executed by each of Howard Cao (First Defendant) and Yuan Zhao (Second Defendant) as a guarantor, and by Mr Zhao as the director of the Tenant (Lease). The Lease was for a term of three years, with a commencement date of 1 October 2019, and with an option to renew for a further three years.

4. The Premises covered a total area of 1,092.4 square metres over two levels, with shop 10.41 being located on level 1 and shop 11.05 on level 2 of the World Square Shopping Centre. Shops 10.41 and 11.05 are connected by an internal staircase.

5. On the commencement of the Lease, the Tenant was carrying on a pre-existing Chinese restaurant business at the Premises called Quanjude. This was described by the Defendants as an up-market licensed a la carte restaurant business. This restaurant was spread over both levels of the Premises. According to Mr Cao, the restaurant had a total of 250 seats. This included, on level 1, a large bar area seating 42 persons, a restaurant area seating 54 persons, and two private function rooms seating 12 and 16 persons respectively; and, on level 2, a large restaurant area seating 84 persons, and four private function rooms seating, in total, 42 persons. There was also a large kitchen, performance stage and a tea drinking ceremony area on level 1.

6. The Base Rent payable under the Lease was $1.2m per annum plus GST in Year 1, to be increased by fixed increments of 4% in each of Year 2 and Year 3. The rent was payable monthly in advance.

7. Each of the Defendants provided a guarantee and indemnity in respect of the Tenant’s obligations under the Lease.

8. The Plaintiffs also entered into an agreement with the Tenant, entitled “Incentive Deed”, by which the Plaintiffs agreed to discount the monthly instalment of rent by 50% for the first four months after the Commencement Date, and by 25% for the following two months (the amount of the reductions being described as an “Abatement”). The Incentive Deed provided that, if the Tenant does not perform its obligations under the Lease, the Abatement becomes due and payable by the Tenant on demand by the Plaintiffs.

9. When the first lockdown commenced in New South Wales in response to the COVID-19 pandemic, with the issue of the Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW) dated 23 March 2020, the Tenant was already significantly in arrears in its payment of rent, having failed to make any payments for January, February or March 2020.

10. The Tenant shut the restaurant on 23 March 2020. The Tenant did not open the restaurant for take away business at any time thereafter, even though this was permitted under all of the various lockdown restrictions in place during the COVID-19 pandemic. Further, the Tenant did not reopen the restaurant when restrictions were eased from 15 May 2020 onwards, with dining once again being permitted on the Premises, subject to restrictions on numbers.

11. The last payment made by the Tenant to the Plaintiffs for rent was an amount of $100,000 on 14 July 2020. On 21 May 2021, the Plaintiffs issued a breach notice to the Tenant, claiming some $1.661m in unpaid rent and other amounts under the Lease. On 26 May 2021, the Tenant went into liquidation. On 10 June 2021, the Plaintiffs issued a termination notice.

12. The Plaintiffs claimed from the Defendants, pursuant to their guarantee and indemnity, the outstanding arrears of rent and other amounts claimed to be owing under the Lease up to the date of termination, together with the amount of the “Abatement” owed under the Incentive Deed, less the amount of the bank guarantee of $330,000. The Plaintiffs also claimed the loss of the rent and the promotion levy for the balance of the term of the Lease, legal costs of enforcement, and certain “make good” costs.

13. There was no dispute that the Tenant had not performed its obligations under the Lease, and that the Defendants had guaranteed those obligations. The three main issues that arose were as follows:

1. Was the Lease frustrated by the lockdown that commenced on 23 March 2020 in response to the COVID-19 pandemic?

2. Did the Plaintiffs fail to take reasonable steps to mitigate their loss?

3. Are the Plaintiffs entitled to the amounts claimed to “make good” the Premises?

14. Before turning to address those issues, I set out below certain key terms of the Lease and the Incentive Deed, the evidence concerning the trading of the restaurant up to 23 March 2020, and a summary of the dates, and effect, of the relevant public health orders that were operative from 23 March 2020 to early June 2021.

The Lease

Term

15. The Lease had a commencement date of 1 October 2019, a term of three years, and an expiry date of 30 September 2022: Reference Schedule, items 6-7; Annexure A, cl 4.1. The Lease also gave the Tenant an option to renew for a further three-year term: Reference Schedule, item 17; Annexure A, cl 4.2, 5.

Rent and other payments

16. Clause 11 of Annexure A to the Lease provided that:

“The tenant must pay the base rent set out in Item 8 to the landlord in equal monthly instalments in advance and on or before the first day of each month.”

17. Item 8 of the Reference Schedule specified the Base Rent to be as follows for Years 1 to 3:

“Year 1: $1,200,000 per annum plus GST

Year 2: $1,248,000 per annum plus GST (being Year 1 increased by 4%)

Year 3: $1,297,920 per annum plus GST (being Year 2 increased by 4%)”

18. As set out below, the monthly rent payable was reduced in the first six months of the term, pursuant to the Incentive Deed.

19. In addition to the Base Rent, the Tenant was required to pay specific outgoings for the Premises and a promotion levy. Clauses 18 and 19 of Annexure A provided as follows:

“18. Tenant’s specific outgoings

18.1 The tenant must pay on time for all services (including electricity, gas, oil, water and telephone services) supplied to the premises.

18.2 The tenant must pay the landlord all specific outgoings for the premises not later than 1 month after the landlord gives the tenant a notice asking for the payment.

18.3 If the landlord supplies air conditioning or another mechanical service separately to the premises, the tenant must pay the landlord’s costs of supplying, operating, maintaining and repairing that mechanical service.

19. The promotion levy

19.1 The tenant must pay the landlord the promotion levy set out in Item 11 monthly and in advance on the first day of each month.

19.2 The landlord must use the promotion levy only to advertise and promote the Centre.

…”

20. Item 11 of the Reference Schedule specified the amount of the promotion levy to be as follows for Years 1 to 3:

“Year 1: $52,500

Year 2: $54,600 plus GST (being year 1 increased by 4%)

Year 3: $56,784 plus GST (being year 2 increased by 4%)”

Use of Premises

21. Clause 28.1 of Annexure A provided that the Tenant may only use the Premises for the purposes set out in Item 13 of the Reference Schedule. Item 13 was in the following terms:

“Use of Premises

Franchise and licenced a la carte / take away offering in keeping with the agreed menu as attached to this lease at Exhibit A”.

22. There was no menu attached to the copy of the Lease that was in evidence. However, a copy of the menu as at early 2020 was exhibited to Mr Cao’s affidavit.

23. Clauses 28.3 and 28.4 of Annexure A provided as follows:

“The tenant must operate the tenant’s business in accordance with best practice for a business of that nature.

The tenant must do all that is necessary to operate the tenant’s business at the premises to the best advantage.”

24. Clause 61 of Annexure A provided that the special conditions set out in Item 23 of the Reference Schedule bind the Tenant and the Plaintiffs and prevail in the event of any inconsistency with the terms of the Lease.

25. Special Condition 4 provided as follows:

“Tenant’s trading hours

(a) Despite any other provisions in this lease, the Tenant must open the premises for business during the following trading hours:

Monday – Sunday – 11:30am to 12am

(Tenant Trading Hours)

(b) This special condition 4 is an essential term of the lease.

(c) The Tenant may extend trading hours in response to customer demand subject to Landlord approval, which should not be unreasonably withheld.

(d) If the Tenant fails to open during the Tenant Trading Hours, the Tenant agrees to pay to the Landlord liquidated damages of $250.00 per hour for each hour the Tenant is in breach of this clause.

(e) This hourly amount is a genuine pre-estimate of the damage likely to be suffered by the Landlord as a result of the Tenant’s breach.

(f) The Tenant’s obligation to pay the Landlord the liquidated damages under special condition 4 is independent from any claim that the Landlord may make against the Tenant for breach of this Lease, except that the Landlord cannot recover from the Tenant, for breach of the Lease an amount which the Landlord has been compensated for by payment of the liquidated damages.”

26. Clause 29 of Annexure A was an essential term of the Lease: Reference Schedule, item 21; cl 56.2. It provided as follows:

“29. Trading Hours

29.1   The tenant must keep the premises open for business during the Centre trading hours as set out in the Centre rules.

29.2   The tenant is not required to keep the premises open for business at any time which is prohibited by law.”

27. The Centre Rules, to which clause 29.1 refers, are set out in Sch 1 to the Lease. They are part of the Lease and the Tenant must obey them: cl 54. Relevantly, clause 4.3 of the Centre Rules provided as follows:

“The tenant must not open the premises for business if any law prohibits this for the tenant’s type of business or premises.”

28. Further, clause 22 of Annexure A provided as follows:

“The tenant must obey all laws relating to and the directions of any authority that requires the tenant to do anything concerning the premises, the tenant’s use of the premises or this lease.”

Risk

29. Clause 7.1 of Annexure A provided that:

“The tenant must pay the landlord the rent, statutory charges, the tenant’s share of the outgoings, the promotion levy and any other money the tenant must pay the landlord under this lease on time and in full, without deduction or set-off.”

30. There were clauses requiring additional rent to be paid where the Tenant’s turnover exceeded a specified benchmark. The Lease provided that the Tenant was liable to pay, in addition to the base rent, a “percentage rent” being 10% of the Tenant’s gross sales in excess of an agreed amount, which was $10m in Year 1, with this figure being increased by 4% in each subsequent year: cl 14.1; Item 23 (special condition 7); and Item 9. However, there was no clause providing for the base rent to be reduced, in the event that gross sales fell below any specified amount.

31. Clause 49 of Annexure A provided as follows:

“49. Tenant’s risk

The tenant’s property, the tenant’s use or occupation of the premises and the Centre and the conduct of or ability to use the premises for the purposes described in Item 13 are each at the tenant’s own risk. The tenant will also carry out any works in the premises at the tenant’s own risk.”

32. Clause 47 provided as follows:

“47. If damaged or destroyed

47.1 If the premises or the Centre or both are damaged or destroyed and as a result the tenant cannot use or have access to the premises, the tenant may ask the landlord to re-build either or both of them. Meanwhile the tenant must continue to use any part of the premises that is useable, safe and accessible.

47.2 If the landlord does not re-build the Centre or the premises (as the case may be) within a reasonable time after the tenant asks or if the landlord serves notice on the tenant that the landlord has decided not to re-build either of them, the tenant or the landlord may end this lease by giving not less than 7 days’ notice to the other.

47.3 The landlord will not be liable to pay the tenant compensation but the landlord must reduce the tenant’s rent and any other money payable by the tenant under this lease by a reasonable amount, depending on the type and extent of the damage or destruction, from the date on which the damage or destruction occurs until the premises are again fit for use and accessible or this lease is ended.

47.4 The tenant cannot end this lease and must continue to pay rent and all other money payable by the tenant under this lease up to the expiry date if the landlord’s insurer is not legally required to pay to reinstate the Centre or the premises because of anything done or not done by the tenant.”

Breach

33. Clause 55 of Annexure A relevantly provided that:

“The tenant will be in breach of this lease if:

1. the tenant does not pay the landlord any part of the rent on time and whether or not the landlord has asked the tenant to pay that rent;

2. the tenant does not pay the landlord on time … the promotion levy or any other money which the tenant must pay to the landlord under this lease and does not make that payment within 14 days after the landlord gives the tenant a notice requiring that payment…”

34. Clause 56.1 provided that:

“If the tenant breaches this lease and does not remedy it as required, the landlord may but subject to the provisions of section 129 of the Conveyancing Act 1919 (NSW) do any one or more of the following:

(a) re-enter and take possession of the premises;

(b) end this lease (see clause 35.1);

(c) recover from the tenant any Loss the landlord suffers due to the tenant’s breach;

(d) use the bank guarantee (see clause 21) to recover any Loss the landlord suffers due to the tenant’s breach; or

(e) exercise any of the landlord’s other legal rights.”

35. Clause 56.2 of Annexure A provided:

“The essential terms of this lease are described in Item 21. If the tenant breaches an essential term and the landlord re-enters and takes possession of the premises or ends this lease, the landlord may recover all money payable by the tenant under this lease up to the expiry date.”

36. The essential terms identified in Item 21 include clause 11 (payment of base rent), clause 19 (payment of promotion levy), clause 28 (use of premises) and clause 29 (trading hours).

Guarantee

37. Each of the Defendants executed the Lease as a Guarantor. Item 2 of the Reference Schedule named each of them as a Guarantor.

38. Clause 1.2(n) of Annexure A provided that:

“An obligation … on the part of 2 or more persons binds them jointly and severally and an obligation … in favour of 2 or more persons benefits them jointly and severally.”

39. Clause 57.1 of Annexure A provided as follows:

“Because the landlord agreed to lease the premises to the tenant at the request of the guarantor, the guarantor:

(a) unconditionally guarantees to the landlord the tenant’s due and punctual performance of the tenant’s obligations under this lease;

(b) unconditionally agrees that if the tenant breaches any of the tenant’s obligations under this lease, the guarantor will perform that obligation;

(c) will indemnify the landlord and keep the landlord indemnified for any Loss incurred by the landlord in respect of the tenant’s breach under this lease;

(d) will indemnify the landlord and keep the landlord indemnified for any liability incurred by the landlord arising out of the disclaimer of this lease by the tenant’s trustee in bankruptcy or the tenant’s liquidator.”

40. In addition, clause 57.5 provided as follows:

“This guarantee is a principal obligation and is not to be treated as ancillary or collateral to any other obligation whatsoever and:

(a) the landlord may act as though the guarantor is the principal debtor of the landlord; and

(b) the guarantor waives any rights as surety which may at any time be inconsistent with the provisions of this guarantee.”

41. Clause 21.2 of Annexure A required the Tenant to deliver a bank guarantee to the Plaintiffs, and to maintain it during the term. The bank guarantee was to be for an amount equal to the sum of three months’ rent plus GST, being an amount of $330,000.

42. Clause 21.4 provided as follows:

“If the tenant does not comply with any of its obligations under this lease (see clause 55), whether this lease is registered or not, then the landlord may without notice present and drawdown on the bank guarantee and apply the sum received to compensate the landlord for any loss suffered or incurred by the landlord caused or contributed to by that breach. Any drawdown on the bank guarantee will not waive the breach or prejudice any other right or remedy of the landlord arising from or in respect of that breach.”

43. A bank guarantee was provided in the required amount, and the Plaintiffs have drawn on the bank guarantee to the full amount of $330,000. The Plaintiffs have taken this sum into account in calculating the quantum of their claim.

Governing law

44. Clause 65 of Annexure A provided that the Lease is governed by the law of state in which the Premises are located, being New South Wales.

45. By reason of the Premises being 1092.4 square metres in area, the Lease was a commercial lease, and not a retail lease under the Retail Leases Act 1994 (NSW): s 5(a). The statement at Item 22 of the Reference Schedule that this Act applied to the Lease was therefore an error, and was recognised as such in contemporaneous documents when the Lease was executed.

Incentive Deed

46. In early 2020, the Plaintiffs, the Tenant and the Defendants entered into the Incentive Deed. Each of the Defendants was named in the Incentive Deed as a Guarantor, and each of them executed that deed as a Guarantor. The recitals to the Incentive Deed state that it “is supplemental to the Lease between the Landlord and the Tenant in respect of the Premises”.

47. Clause 3 of the Incentive Deed provided as follows:

“(a) On the promise that the Tenant will complete its obligations under the lease for the full term, the Landlord grants to the Tenant the Incentive to be used as a rental discount by deducting 50% from each monthly instalment of rent on and from the Commencement Date until the date that is 4 months after the Commencement Date and by deducing 25% from each monthly instalment of rent for the 5^th and 6^th months after the Commencement Date (Abatement).

(b) If the Tenant does not perform its obligations under the Lease, the Abatement amount becomes due and payable by the Tenant on demand by the Landlord.”

48. In accordance with clause 3(a) of the Incentive Deed, the monthly Base Rent payable under the Lease of $100,000 plus GST was reduced for the first 6 months of the term. The amounts invoiced to the Tenant in this period were as follows:

1. in each of October 2019 to January 2020, $50,000 plus GST; and

2. in each of February and March 2020, $75,000 plus GST.

49. It was a condition precedent to the Incentive Deed that the Tenant deliver to the Plaintiffs the Bank Guarantee required under the Lease: cl 2.2(a)(iii). The Tenant acknowledged that the Plaintiffs will have recourse to the Bank Guarantee provided under the Lease if the Tenant breaches its obligations under the Incentive Deed: cl 4.

Trading up to March 2020

50. Prior to entering the Lease, the Tenant had leased the Premises, on similar terms to the Lease, and had conducted its Quanjude restaurant business on those Premises. This prior lease had a commencement date of 1 August 2017 and was for a three-year term, expiring on 31 July 2020.

51. As at September 2019, the Tenant was in arrears under the 2017 lease. An account statement dated 22 August 2019 shows $110,928.13 being owed.

52. Following negotiations, the 2017 lease was replaced with the Lease, which was entered in early 2020, with a commencement date of 1 October 2019.

53. Mr Cao estimated that during the period from 1 October 2019 through to 31 January 2020, the average turnover of the restaurant business was approximately $350,000 per month and that this decreased to $180,000 for February 2020, and $90,000 for the period from 1 to 22 March 2020.

54. Mr Cao attributed this reduction in turnover to the COVID-19 pandemic. That is, the restaurant’s turnover had fallen off significantly due to public concern about the spread of coronavirus in the community, before any public health order restricting the restaurant’s operations was issued.

55. Mr Cao confirmed that the restaurant, prior to 23 March 2020, offered take away as well as dining on the premises.

Public health orders

56. The first of the relevant public health orders was the Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW), which commenced on 23 March 2020. Clause 5 relevantly provided as follows:

“(1) The Minister directs that the following must not be open to members of the public except as provided in this clause –

…

(b) food and drink premises (other than pubs), except for the purposes of –

(i) selling food or beverages for persons to consume off the premises,

…”

57. This first Public Health Order was, like the replacement orders which followed, made under s 7 of the Public Health Act 2010 (NSW). Section 10 of that Act provides that it is an offence if a person who is subject to such direction and has notice of the direction, fails to comply with the direction, without reasonable cause.

58. The Public Health Order of 23 March 2020 ceased to have effect when Public Health (COVID-19 Gatherings) Order (No 2) 2020 (NSW) was issued on 26 March 2020. Clause 7 of this second order was similar to clause 5 of the first order, and relevantly provided as follows:

“(1) The Minister directs that the following must not be open to members of the public except as provided in this clause –

…

(b) food and drink premises (other than pubs), except for the purposes of –

(i) selling food or beverages for persons to consume off the premises, or

…

(iii) if the premises are part of a shopping centre, selling food or beverages for persons to consume outside of the shopping centre...”

59. This second Public Health Order only had effect on the day it was issued. It was followed by Public Health (COVID-19 Gatherings) Order (No 3) 2020 (NSW), which was in force from 26 to 31 March 2020, and by Public Health (COVID-19 Restrictions on Gathering and Movement) Order (2020) (NSW), which was in force from 31 March to 15 May 2020. Each of these subsequent orders contained directions by the Minister in respect of food and drink premises in relevantly the same terms as the second Public Health Order: see cl 6 of Public Health (COVID-19 Gatherings) Order (No 3) 2020 (NSW); and cl 7(1)(b) of Public Health (COVID-19 Restrictions on Gathering and Movement) Order (2020) (NSW).

60. From 15 May 2020, these restrictions began to be relaxed.

61. Clause 7(2) of Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 2) (2020) (NSW), which was in force from 15 May to 1 June 2020, relevantly provided as follows:

“(2) … food and drink premises … may only be open to the public for the following purposes –

(a) selling food or drinks for not more than 10 persons at any time to consume on the premises, but only if any liquor sold is sold with, or ancillary to, food served in an area for eating on the premises,

(b) selling food or drinks for persons to consume off the premises,

…”

62. This was replaced by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 3) (2020) (NSW), which was in force from 1 to 13 June 2020. Clause 5(1) of that order relevantly provided as follows:

“(1) The Minister directs that premises referred in column 1 of Schedule 1 are subject to –

(a) the limitation on the number of persons that may be on the premises at any time set out opposite the premises in column 2 of the Schedule, and

(b) the condition that no person may be on the premises as part of an individual group of more than 10 persons, and

(c) any other restrictions or conditions set out opposite the premises in column 3 of the Schedule.”

63. Item 10 of Schedule 1 of Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 3) (2020) (NSW), was in the following terms:

Premises	Limitation on number of persons on premises	Restrictions or conditions
10. Food and drink premises, including premises that are within other premises, excluding premises referred to in items 6, 15 and 22.	The number of customers that may consume food or drink on the premises is the lesser of the following number of customers – (a) 50 customers per existing separate seated food or drink area, or (b) the total number of customers calculated by allowing 4 square metres of space for each customer (excluding staff members) on the premises …	…

64. The restrictions were further relaxed by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 3) Amendment Order 2020 (NSW), which came into effect on 13 June 2020. It contained the same restrictions on overall numbers, but allowed individual groups of up to twenty persons to dine at food and drink premises (increased from ten persons).

65. Restrictions were further varied from time to time in the period from July 2020 through to the start of June 2021, when the Lease was terminated. It was common ground between the parties that the effect of the public health orders made in this period was as summarised below:

Instrument	Period	Relevant clauses	Relevant effect
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 4) 2020 (NSW), as amended by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 4) Amendment Order (No 2) 2020 (NSW)	25 July 2020 to 28 September 2020	Clauses 8A and 14A	The maximum number of persons on the premises for a hospitality venue that consists of more than one separate area is the lesser of either one person per 4 square metres of space or 300 persons. Individual group bookings must not exceed ten persons. Persons on the premises remain seated as far as practicable. Corporate and wedding events are limited to 150 persons.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 5) 2020 (NSW)	28 September 2020 to 16 October 2020	Clauses 9 and 17	Same as previous order, but corporate events are now limited to 300 persons.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 5) 2020 (NSW), as amended by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 5) Amendment Order 2020 (NSW)	16 October 2020 to 23 October 2020	Clauses 9 and 17	For hospitality venues consisting of two or more separate areas which has electronic entry recording, the maximum number of persons in each separate area must be the lesser of: one person per two square metres of space in the outdoor area, one person per four square metres of space in the indoor area or 300 persons. For a corporate event, the maximum number of persons is the lesser of: one person per four square metres of space in the premises or 300 persons. For a wedding service, the maximum number of persons is the lesser of: one person per four square metres of space in the premises or 150 persons.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 5) 2020 (NSW), as amended by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 5) Amendment (No 2) Order 2020 (NSW)	23 October 2020 to 23 November 2020	Clauses 9 and 17	Same as previous order, but the maximum number of persons for an individual booking increased from 10 to 30 persons.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 5) 2020 (NSW), as amended by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 5) Amendment (No 3) Order 2020 (NSW)	23 November 2020 to 1 December 2020	Clauses 9 and 17	Same as previous order, but earlier provisions for premises which has electronic entry recording now apply generally to all premises.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 6) 2020 (NSW)	1 December 2020 to 7 December 2020	Clauses 9 and 17	Same as previous order, but the maximum number of persons for a wedding service has increased to 300 persons.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 7) 2020 (NSW)	7 December 2020 to 21 December 2020	Clause 9	An occupier of premises must not allow more than 25 persons on the premises if the size of the premises is insufficient to ensure there is at least two square metres of space for each person on the premises.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 7) 2020 (NSW), as amended by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 7) Amendment (No 2) Order 2020 (NSW)	21 December 2020 to 29 January 2021	Clause 35A	For hospitality venues consisting of one or more separate areas in Greater Sydney, the maximum number of persons in each separate area must be the lesser of: one person per four square metres of space in the area, or 300 persons.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 7) 2020 (NSW), as amended by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 7) Amendment (No 5) Order 2021 (NSW)	29 January 2021 to 12 February 2021	Clause 11A	For hospitality venues in Greater Sydney, the maximum number of persons allowed on the premises cannot be greater than either: one person per four square metres of space in the premises, or 25 persons.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 7) 2020 (NSW), as amended by the Public Health (COVID-19 Restrictions on Gathering and Movement) Order (No 7) Amendment (No 6) Order 2021 (NSW)	12 February 2021 to 26 February 2021	Clause 9	An occupier of premises must not allow more persons on the premises than the greater of either: one person per two square metres of space in the premises, or 25 persons.
Public Health (COVID-19 Restrictions on Gathering and Movement) Order 2021	26 February 2021 to 29 March 2021	Clause 8	Same as previous order.
Public Health (COVID-19 Gathering Restrictions) Order 2021	29 March 2021 to 2 June 2021	Clause 11	Same as previous order.

Frustration

66. The Defendants contend that the Lease was frustrated because from midday on 23 March 2020, the Tenant was not able to operate the licensed restaurant with its private room business, as the public health orders issued from that date prohibited the Tenant from offering food and beverages to patrons for consumption on the Premises, and later imposed restrictions on the numbers of persons who were permitted on the Premises for the consumption of food and beverages.

67. The Defendants contended that the Lease was discharged “by operation of the doctrine of frustration and s.7(1) [of] the Frustrated Contracts Act 1978 (NSW)”.

68. In response, the Plaintiffs submitted that it has been doubted whether leases are capable of being frustrated, and there is no relevant precedent in which frustration of a lease has been established. Further, they submitted that the Lease expressly contemplated that the use of the Premises would be at the Tenant’s risk, that the COVID-19 trading restrictions were only temporary and that the permitted use of the Premises as described in the Lease specifically contemplated a take away offering, which was not prevented by the COVID-19 restrictions.

Frustrated Contracts Act

69. The Frustrated Contracts Act 1978 (NSW) contains provisions concerning the effect of the frustration of a contract on promises due to be performed before the time of frustration (s 7), and on the assessment of damages for a breach of contract which had accrued before the time of frustration (s 8), as well as provisions concerning adjustments to be made on the frustration of a contract (ss 9-15). It does not contain any provisions regarding the circumstances in which frustration occurs. It therefore is of no assistance in resolving the issue whether the Lease was frustrated by the imposition of the lockdown restrictions from 23 March 2020. This is an issue to be determined by the application of the common law. Further, the Defendants have not made any claim for any monetary adjustments pursuant to the Frustrated Contracts Act 1978 (NSW). The statute can therefore be put to one side.

Can a lease be frustrated?

70. A preliminary issue that arises is whether a lease is capable of being frustrated. It should be noted that the Plaintiffs did not contend that I should find that frustration could not occur as a matter of law, but instead pointed out that this remained an open issue on the current state of the authorities. In response, the Defendants relied on the decision of the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 (National Carriers v Panalpina) as having determined that the doctrine of frustration could apply to a lease, but did not refer to any relevant Australian authorities on this issue.

71. In Halloran v Firth (1926) 26 SR (NSW) 183, the Full Court of the Supreme Court of New South Wales (Street CJ, Harvey CJ in Eq and Campbell J) held that the doctrine of frustration does not apply to a demise by which an estate in land is created and passed to the lessee. The Court observed (at 187) that: “If the doctrine of frustration were to be held to apply in such a case it would have the extraordinary effect of terminating automatically the estate vested in the lessee and of putting the lessor back into possession irrespective of the wishes of the parties.” The Court held (at 187-188) that a further answer to the case was that the doctrine does not apply “unless the real gist of the contract is destroyed”, which was not established on the facts of the case, finding that the alleged frustrating event had not made “any covenant which the parties entered into in the lease … illegal or impossible”.

70. The High Court unanimously dismissed an appeal from the decision: Firth v Halloran (1926) 38 CLR 261; [1926] HCA 24. In a brief joint judgment, Knox CJ and Gavan Duffy J stated (at 268), without any elaboration, that they agreed with the answer given to the special case by the Full Court below, “and in the reasons which they gave in support of their conclusion”. Isaacs J (at 269) agreed that the argument based on frustration was “unmaintainable”, but did not agree that, because the contract relied upon is a lease, “the doctrine of frustration is necessarily excluded”. His Honour observed (at 269) that: “The nature of the relation of landlord and tenant, the history of the doctrine of frustration, its inherent meaning and the judicial determination of relevant cases would lead me to reject so sweeping a rule”. Higgins J dismissed the appeal without the need to decide the issue, having formed the view that “the difficult questions as to frustration of contract … do not even plausibly arise in this case” (at 271). Rich J merely stated, without reasons: “I agree that the appeal should be dismissed” (at 272).

71. Accordingly, there is no clear ratio for the High Court’s decision in Firth v Halloran, and I do not regard it as binding authority for the proposition that the doctrine of frustration is incapable of application to a lease. Nor do I regard the reasons of the various members of the Court as providing any “seriously considered dicta of a majority” on this issue (to use the language of Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [134]).

72. Following Firth v Halloran, differing views were adopted on the question whether a lease could be frustrated, on the limited occasions when it arose.

73. In Re Equity Trustees Executors & Agency Co Ltd and Considine’s Contract [1932] VLR 137, a parcel of land which had for many years been used as a racecourse was leased for a ten year term. Legislation was subsequently passed which prohibited the holding of race meetings on the land. Cussen ACJ rejected (at 141-142) the claim that the lease had been frustrated, preferring the views of Knox CJ and Gavan Duffy J in Firth v Halloran over that of Isaacs J.

74. In Minister of State for the Army v Dalziel (1944) 68 CLR 261 at 302, Williams J observed, in obiter and without reference to Firth v Halloran, that the House of Lords had decided in Matthey v Curling [1922] 2 AC 180 that the doctrine of frustration did not apply to a lease.

75. Shortly afterwards, conflicting views were expressed on the issue by members of the House of Lords in Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 (Cricklewood v Leighton’s). Lord Russell (at 233) and Lord Goddard (at 245) expressed the view that the doctrine of frustration could not apply to a lease, while Viscount Simon LC (at 228) and Lord Wright (at 237-238) held that it could, with Lord Porter (at 243) reserving his opinion until the point arose definitively for consideration. Viscount Simon LC, who favoured the extension of the doctrine to leaseholds, nevertheless considered it likely to be limited to cases where “some vast convulsion of nature swallowed up the property altogether, or buried it in the depths of the sea” (at 229).

76. In Robertson v Wilson (1958) 75 WN (NSW) 503, McClemens J proceeded, without reference to Firth v Halloran, on the basis that there was an open question as to whether a lease was capable of being frustrated, having regard to the conflicting views in Cricklewood v Leighton’s. This case involved a lease of a two-storey brick residence in Annandale. The local council issued a closing order made under s 58 of the Public Health Act 1902-1952 (NSW). This order declared that the house was unfit and unsafe for human habitation or occupation, and had become ruinous and dangerous, and directed that the house not be inhabited or occupied by any person after a month from the date of the order. Pursuant to section 60 of the Act, the tenant was required to cease inhabiting the house, and was liable for a penalty in the event of failing to do so. McClemens J preferred (at 506-507) the views expressed by Viscount Simon LC and Lord Wright in Cricklewoodv Leighton’s, to the effect that the doctrine of frustration was capable of applying to a lease. His Honour concluded that in the circumstances of the case, the effect of the relevant sections of the legislation was “to destroy the whole basis of the tenancy between the claimant and the defendant, by creating a situation under which everyone had to leave the premises whether they liked it or not” (at 507). In particular, “it became illegal for the tenant, his family or anyone else to occupy for an unspecified term the whole of the thing which he had under his lease, namely the residence, and he merely had that lease from week to week” (at 507). His Honour noted that the tenancy in issue was a bare agreement “to give a weekly tenancy at £1 per week”, and observed that different considerations would apply if it were “a lease for one, three, seven or ninety-nine years” (at 507).

77. Shortly after Robertson v Wilson was handed down, another judge of this Court reached the view that it had been decided on an incorrect basis. In Thearle v Keeley (1958) 76 WN (NSW) 48, a very similar set of circumstances arose, with a council issuing a closing order under s 58 of the Public Health Act 1902-1952 (NSW) in respect of a dwelling-house in Burwood which was leased from week to week. Counsel for the tenant accepted that the case was not distinguishable from Robertson v Wilson, but submitted that this decision should not be followed. Walsh J agreed. His Honour held that he was constrained by authority to hold that the principle of frustration cannot operate to determine any lease (at 50). His Honour did add, “without hesitation”, that “if it is open to take the view that a tenancy may be brought to an end by the application of the doctrine of frustration, then, in my opinion, the doctrine should be applied in circumstances such as those which exist in the present case, and which existed in Robertson v Wilson”. Walsh J did not refer to Firth v Halloran, but determined that the doctrine of frustration was inapplicable to leases by reference to decisions of the English Court of Appeal that had been handed down after Cricklewood v Leighton’s.

78. The issue was resolved, as a matter of English law, by the House of Lords in National Carriers Ltd v Panalpina. Lord Hailsham held that there is nothing in principle which ought to prevent a lease from ever being frustrated (at 690), agreeing with observations of Lord Wright in Cricklewood v Leighton’s at 241 that “the doctrine of frustration is modern and flexible and is not subject to being constricted by an arbitrary formula” (at 692). Similar views were expressed by each of Lord Wilberforce (at 695-97), Lord Simon (at 706), and Lord Roskill, who observed that “on the question of principle I find it impossible to justify compartmentalisation of the law or to agree that the doctrine of frustration applies to every type of contract save a lease” (at 717). Further, Lord Wilberforce and Lord Simon pointed out that it had been accepted in both the United States and Canada that a lease may be terminated by frustration (at 695-6 and 702-3).

79. In rejecting the proposition that it was impossible for a lease of real property to be frustrated, Lord Hailsham commented as follows (at 688-689):

“The point, though one of principle, is a narrow one. It is the difference immortalised in H.M.S. Pinafore between ‘never’ and ‘hardly ever’, since both Viscount Simon and Lord Wright [in Cricklewood v Leighton’s] clearly conceded that, though they thought the doctrine applicable in principle to leases, the cases in which it could properly be applied must be extremely rare.”

82. Significantly, in National Carriers v Panalpina, the members of the House of Lords were unanimously of the view that the facts of that case (involving the closure of a road causing a leased warehouse to become inaccessible, and therefore unusable, for a period of some 20 months) did not even raise a triable issue as to whether the lease had been frustrated.

83. In The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; [1985] HCA 14 (Progressive Mailing House v Tabali), the High Court referred to the decision in National Carriers v Panalpina in finding that general principles of contract law apply to a lease, including termination for fundamental breach. However, the Court did not deal with the specific issue as to whether a lease could be frustrated. Nonetheless, the reasoning in that case is generally at odds with any absolute view that a particular principle of contract law is incapable of applying to a lease. For example, Deane J, while acknowledging that the actual application to leasehold interests of the doctrine of frustration “involves some unresolved questions which are best left to be considered on a case by case basis”, added that one “cannot however ignore the fact that the clear trend of common law authority is to deny any general immunity of contractual leases from the operation of those doctrines of contract law” (at 52). His Honour observed (at 53) that:

“…it should be accepted that, as a general matter and subject to one qualification, the ordinary principles of contract law are applicable to contractual leases. The qualification is that the further one moves away from the case where the rights of the parties are, as a matter of substance, essentially defined by executory covenant or contractual promise to the case where the tenant's rights are, as a matter of substance, more properly to be viewed by reference to their character as an estate (albeit a chattel one) in land with a root of title in the executed demise, the more difficult it will be to establish that the lease has been avoided or terminated pursuant to the operation of the ordinary principles of frustration or fundamental breach. Indeed, one may reach the case where it would be quite artificial to regard the tenant's rights as anything other than an estate or interest in land (e.g., a ninety-nine year lease of unimproved land on payment of a premium and with no rent, or only a nominal rent, reserved). In such a case, it may be difficult to envisage circumstances in which conduct of the tenant short of actual abandonment would properly be held to constitute repudiation or fundamental breach or in which anything less than a cataclysmic event such as the ‘vast convulsion’ referred to by Viscount Simon L.C. in Cricklewood Property and Investment Trust Ltd. v. Leighton's Investment Trust Ltd. [at 229] would warrant a finding of frustration.”

84. In Ashington Holdings Pty Ltd v Wipema Services Pty Ltd (No 2) [1998] NSWSC 414, Young J expressed the view that the decision of the High Court in Firth v Halloran, “in so far as it deals with the doctrine of frustration qua lease it has been overruled by the later High Court decision” in Progressive Mailing House v Tabali. Similarly, in Re Willmott Forests Ltd (in liq) (2012) 36 VR 472; [2012] VSCA 202 at [41], Warren CJ and Sifris AJA referred to Progressive Mailing House v Tabali, and stated that: “It is clear that in a change from the previous position, the doctrines of frustration and repudiation apply to leases”.

85. In City of Subiaco v Heytesbury Properties Pty Ltd (2001) 24 WAR 146; [2001] WASCA 140, the Full Court of the Supreme Court of Western Australia proceeded on the basis that the doctrine of frustration is capable of applying to a lease, but that cases in which it could properly be so applied are “extremely rare” (at [68] per Ipp J, Malcolm CJ and Wallwork J agreeing):

“One reason for the rarity is that a lease is more than a contract, it conveys an estate in land. Thus, in many instances, frustration of leases will not occur because the tenant will still have that which he or she bargained for, namely, the leasehold estate - particularly when it has considerable value. In that event, the tenant would be ‘left with something he could use’ (per Lord Wilberforce in National Carriers Ltd v Panalpina (Northern) Ltd at (694)). Of course, that would not be so when the estate is ‘unusable and unsaleable’ (per Lord Wilberforce at (695)).”

86. In Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2010] NSWSC 29, Barrett J reviewed the authorities on the issue and expressed the opinion, without reaching a firm conclusion, that “it cannot be said today, as an abstract proposition, that the doctrine of frustration has no application to leases, in the sense that a lease can in no circumstances whatsoever be discharged by frustration” (at [220]).

87. Further, it is well established that the principles of frustration apply to an agreement to lease real property (Woolworths Group Ltd v Gazcorp Pty Ltd [2022] NSWCA 19), a licence to occupy real property (Krell v Henry [1903] 2 KB 740) and a lease of personal property, such as neon signs to be erected on real property (Scanlan’s New Neon Ltd v Tooheys Ltd; Caldwell v Neon Electric Signs Ltd (1943) 67 CLR 169).

88. Nonetheless, some reservations continue to be expressed about the extension of the doctrine of frustration to a lease of real property. In Lee v YOUth OK Pty Ltd [2022] NSWSC 1356 at [240], Slattery J regarded the decision in Firth v Halloran as highly persuasive authority that the doctrine does not apply to leases, and expressed the view that the question was not decided in Progressive Mailing House v Tabali, despite the contrary analysis of Young J in Ashington Holdings v Wipema Services.

89. In Diakou Nominees Pty Ltd v Gouger Street Pty Ltd& Anor; Gouger Street Pty Ltd v Diakou Nominees Pty Ltd [2023] SASC 66 at [146]-[148], Bleby J referred to the current edition of JW Carter, Carter on Contract (2022, JW Carter Publishing Pty Ltd) at [39-390], in which it is observed that most applications of the doctrine of frustration have been to purely contractual relationships that do not involve the conferral of proprietary interests:

“… In discussing the reluctance of the courts to extend the doctrine of frustration to contracts involving land, because of the distinction between property and contract, the author notes that while a lease is a species of contract, an executed or executory contract for the lease of land will confer a proprietary interest on the lessee. The author goes on to observe three practical problems with applying the doctrine of frustration to a lease in additional to the theoretical:

First, such contracts are so common that the incidence of risk between the parties was worked out long ago, and application of the doctrine might upset this.

Second, land is much more permanent than the subject matter of most other contracts, so that frustration by impossibility of performance must be a rare phenomenon.

Third, discharge, when frustration occurs, is automatic and independent of the volition of the parties, so that application of the doctrine to a contract involving land may transfer the proprietary interest, or the termination of an interest in land, irrespective of the knowledge or wishes of the parties.

This commentary does not address registered leases expressly. Layton J’s reliance [in HL (Qld) Nominees Pty Ltd v Jobara Pty Ltd [2009] SASC 165] on a previous publication to similar effect appears to have been an acknowledgment of the general difficulties attending on the potential application of the doctrine to leases and, consistently with the observations in City of Subiaco v Heytesbury Properties Pty Ltd, its likely rarity.

Nevertheless, the third consideration identified by the author of Carter on Contract, above, highlights the significance of registration and s 69 of the Real Property Act 1883 (SA). ‘Land’ under that Act includes every estate or interest in land. A ‘lessee’ is defined as the registered proprietor of a lease. Section 69 confers indefeasibility of title of every registered proprietor of land, subject to the exceptions listed in that section. Indefeasibility of title is a statutory bulwark directed to the very kind of mischief identified in the third practical issue highlighted above. …”

90. Having regard to the authorities set out above, I have reached the view that there is no precedent which is binding on me to the effect that the doctrine of frustration is incapable of applying to a lease. Further, I consider that, consistently with the approach adopted in Progressive Mailing House v Tabali, the issue as to the applicability of the doctrine to leases should be approached on a case-by-case basis, rather than resolved by a blanket and inflexible rule. The imposition of such a rule would seem at odds with the clear trend of common law authority, which is to deny any general immunity to contractual leases from the operation of doctrines of contract law (Progressive Mailing House v Tabali at 52). However, I do not need to express a firm conclusion on the issue. That is because I have determined that frustration cannot in any case be established on the facts of this case, for the reasons set out below.

Principles governing frustration of contracts

91. In Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 at 159-163; [1979] HCA 54, Stephen J reviewed the authorities, and accepted and applied the approach to frustration which had been adopted by Lord Reid and Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696. This approach was subsequently endorsed by a majority of the High Court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 (Codelfa) at 357 per Mason J, and at 376-377 per Aickin J (Stephen J agreeing with both judgments). Mason J (at 357) summarised this approach as follows:

“Lord Reid said that the task of the court is to determine ‘on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances’, ‘whether the contract which they did make is . . . wide enough to apply to the new situation: if it is not, then it is at an end’ [at 720-721]. Later he described frustration as ‘the termination of the contract by operation of law on the emergence of a fundamentally different situation’ [at 723].

Lord Radcliffe said [at 729]:

‘. . . frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. . . . It was not this that I promised to do.’

His Lordship, noting that special importance attaches to an unexpected event, observed ‘There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for’.”

92. Mason J noted (at 359) that Lord Radcliffe also quoted with approval the remarks of Lord Wright in Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 at 274-275 that the “data for decision are, on the one hand, the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred”, and that Lord Reid was of the same opinion. His Honour added (at 360):

“The critical issue then is whether the situation resulting from the [alleged frustrating event] is fundamentally different from the situation contemplated by the contract on its true construction in the light of the surrounding circumstances.”

93. In Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 at [70], Nettle JA (with whom Redlich and Weinberg JJA agreed) referred to these authorities and expressed the relevant principles as follows:

“Consistently with Codelfa, I take the law to be that a contract is not frustrated unless a supervening event:

(a)   confounds a mistaken common assumption that some particular thing or state of affairs essential to the performance of the contract will continue to exist or be available, neither party undertaking responsibility in that regard; and

(b)   in so doing has the effect that, without default of either party, a contractual obligation becomes incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.”

94. This statement was approved as representing the current state of the law in Chinatex (Australia) Pty Limited v Bindaree Beef Pty Limited [2018] NSWCA 126 at [44] per Barrett AJA (McColl and White JJA agreeing); and was also quoted with approval in the recent decision in Woolworths Group Ltd v Gazcorp Pty Ltd at [215] per Bell P (Bathurst CJ and Meagher JA agreeing).

95. As noted above, the principles concerning frustration were applied in the context of a commercial lease in City of Subiaco v Heytesbury Properties. Ipp J quoted (at [67]) the passage of Mason J’s judgment in Codelfa set out above, and contrasted (at [68]) the position where the leasehold estate has been rendered “unusable and unsaleable”, with the situation where the tenant was “left with something he could use” (quoting Lord Wilberforce in National Carriers v Panalpina at 694). By way of example, his Honour referred (at [69]) to London and Northern Estates Co v Schlesinger [1916] 1 KB 20. In that case, an Austrian subject, who was classified as an “alien enemy” in the United Kingdom during the First World War, was prohibited from residing in the area where the leased premises were situated, and therefore could not exercise a right of personal occupation. However, it was held that, because he could sub-let the premises, there was no frustration.

96. In City of Subiaco v Heytesbury, the Court found that the alleged frustrating events did not render the leases at issue either unusable or unsaleable. That case concerned four 99-year leases which the City of Subiaco entered as lessor between 1930 and 1959. Each lease contained a clause obliging the lessee to use the premises for manufacturing. This was subsequently varied in 1984 to provide that the leased premises might also be used for the warehousing, wholesaling or retailing of goods manufactured on the leased premises, manufactured by the lessee, or manufactured by a permitted assignee or sub-tenant, provided that such use did not contravene the provisions of whatever town planning scheme was in force from time to time. In 1993, the City of Subiaco amended the relevant town planning scheme to prohibit the carrying on of a manufacturing business on the premises. The lessee, Heytesbury, contended that this amendment caused the leases to be frustrated. Ipp J held (at [72]) that the leasehold estates remained useable, in the sense that they were regarded by Heytesbury as being the key to the viable redevelopment of the area, and were an important factor in Heytesbury’s plans to participate in that redevelopment; and that the leases also remained saleable, as demonstrated by the fact that they were subsequently sold for a substantial sum.

“Unusable and unsaleable”

97. The Defendants submitted, relying on National Carriers v Panalpina, that the rare case of a frustrated lease would occur where the leasehold estate is rendered “unusable and unsaleable” by supervening events.

98. However, they did not, in their submissions, identify the basis on which it was contended that the Tenant’s leasehold estate was rendered either unusable or unsaleable as a result of the Public Health Orders imposed from 23 March 2020 onwards.

99. The lockdown restrictions imposed from 23 March 2020 onwards did not prevent or restrict the Tenant’s access to the Premises. In that regard, it is a situation far removed from the facts of Robertson v Wilson, where the effect of the relevant public health orders was to make it illegal for the tenant to occupy the house which he leased from week to week. Instead of preventing or prohibiting the use of the Premises, the Public Health Orders issued from 23 March 2020 limited the uses to which the Premises could be put. Further, it remained the case at all times that the Premises could be used for at least one of the purposes expressly contemplated and permitted under the Lease.

100. Clause 28.1 of the Lease provided that the Tenant could only use the Premises for the purposes set out in Item 13 of the Reference Schedule, namely, “Franchise and licenced a la carte / take away offering in keeping with the agreed menu as attached to this lease at Exhibit A”. It continually remained the case, under each of the Public Health Orders that was in place from 23 March 2020 onwards, that the Tenant could operate a take away business from the Premises.

101. Mr Cao confirmed that the Tenant had been operating a take away business from the Premises in the period prior to the imposition of the lockdown restrictions. Further, Mr Cao estimated that, if a take away business had been operated from the end of March 2020 onwards, it would have resulted in sales of $50,000 per month. There are, as outlined below, some issues with placing reliance on the figures provided by Mr Cao. However, taking that estimate at face value, this is not a trivial sum, and is a significant portion of the sales that had been achieved in the three weeks of March 2020 when the Tenant had been able to operate both a take away business and an in-restaurant dining business ($90,000).

102. Even if the Public Health Orders had the effect that the Premises were not able to be used for any of the purposes permitted under the Lease (which was not the case), it would be necessary to consider how long that state of affairs lasted or was expected to last, and the length of time left to run on the Lease.

103. In National Carriers v Panalpina, a warehouse was leased for a period of ten years, with the lessee covenanting not to use it otherwise than for the purpose of a warehouse without the plaintiffs’ consent. Just over five years into the lease, the only road access to the warehouse was closed. At the time, it was expected that the closure would be for around a year, though it ended up being more than 20 months. During the period of the closure, the warehouse was rendered useless for the lessee’s purposes. As noted above, the House of Lords held that these facts did not raise a triable issue of frustration.

104. Lord Wilberforce (at 697-698) accepted that the lessee’s business had been “severely dislocated” by these events, but found that “this does not approach the gravity of a frustrating event”:

“Out of 10 years [the lessee] will have lost two years of use: there will be nearly three years left after the interruption has ceased. This is a case, similar to others, where the likely continuance of the term after the interruption makes it impossible for the lessee to contend that the lease has been brought to an end. The obligation to pay rent under the lease is unconditional, with a sole exception for the case of fire, as to which the lease provides for a suspension of the obligation. No provision is made for suspension in any other case: the obligation remains. I am of the opinion therefore that the lessee has no defence to the action for rent…”

105. Likewise, Lord Simon (at 707) accepted that the lessee was “undoubtedly put to considerable expense and inconvenience”, but held that that is not enough to give rise to a triable issue of frustration:

“Whenever the performance of a contract is interrupted by a supervening event, the initial judgment is quantitative — what relation does the likely period of interruption bear to the outstanding period for performance? But this must ultimately be translated into qualitative terms: in the light of the quantitative computation and of all other relevant factors (from which I would not entirely exclude executed performance) would outstanding performance in accordance with the literal terms of the contract differ so significantly from what the parties reasonably contemplated at the time of execution that it would be unjust to insist on compliance with those literal terms? In the instant case, at the most favourable to the appellants' contention, they could, at the time when the road was closed, look forward to pristine enjoyment of the warehouse for about two thirds of the remaining currency of the lease. The interruption would be only one sixth of the total term. … The parties can hardly have contemplated that the expressly-provided-for fire risk was the only possible source of interruption of the business of the warehouse — some possible interruption from some cause or other cannot have been beyond the reasonable contemplation of the parties. Weighing all the relevant factors, I do not think that the appellants have demonstrated a triable issue that the closure of the road so significantly changed the nature of the outstanding rights and obligations under the lease from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations.”

106. When the first Public Health Order was issued on 23 March 2020, it was unclear how long the restrictions would last, but there was evidence that they were expected to be temporary. On the date that the restrictions were implemented, the NSW government issued a press release stating that restaurants would “be temporarily shut down”, and “restricted to takeaway and/or home delivery”. On the same day, the Premier of NSW issued a statement to the media in which she said that “all governments are working hard to provide support to help all of us get through the next few months”; and the then Chief Medical Officer of the Commonwealth, Professor Brendan Murphy, stated in a press conference that “the challenge in coming weeks and months is to stop and slow and control community transmission”.

107. Each of the relevant Public Health Orders was made under s 7 of the Public Health Act, which provides that unless it is earlier revoked, an order expires at the end of 90 days after it was made or on such earlier date as may be specified in the order: s 7(5). In fact, as shown by the summary set out above, none of the Public Health Orders issued between late March 2020 to early June 2021 remained operative for a period of 90 days. Instead, there was a series of orders during that period which, depending on the rate of infection in the community at the time, either tightened, maintained or relaxed the restrictions put in place by previous orders.

108. As matters transpired, the total ban on in-restaurant dining that was imposed on 23 March 2020 lasted until mid-May 2020. From 15 to 31 May 2020, the Tenant was permitted to re-open the Premises for dining, but for only ten customers at a time. However, by the start of June 2020, just over two months after the first of the Public Health Orders, there was a significant easing in the restrictions. From that time, the number of persons allowed to consume food or drink on the Premises was the lesser of (a) 50 customers per existing separate seated food or drink area, or (b) the total number of customers calculated by allowing 4 sqm of space for each customer (excluding staff members) on the Premises. Given that the Defendants had two separate large dining areas, each on a different floor, plus a number of separate private dining rooms, and around 500 square metres on each floor, it would appear that the Defendants would have been able, under this regime, to serve at least 100 people (that is, at least 50 on each floor). As outlined below, the calculations which the Defendants advanced in closing submissions, while of limited weight, did support the conclusion that at least this number of people could have been accommodated in the restaurant under the 4 sqm regime.

109. As at 1 June 2020, the Lease still had two years and four months to run, that is, until 30 September 2022. A period of just over two months in which dining on the Premises was banned or severely restricted is not of such significance, in the context of a three year lease, as to lead to the conclusion that the leasehold estate had been rendered unusable. That is particularly so in circumstances where the Tenant was always able to operate a take away business from the Premises, and the period in which the Tenant was prohibited from opening the Premises for dining concluded at a point in time when the Lease still had more than three-quarters of the total term left to run.

110. For those reasons, I find that the leasehold estate was not rendered unusable by the Public Health Orders issued from 23 March 2020 onwards.

111. It is the case that, from late June 2021 onwards, there was a further lengthy lockdown in response to the outbreak of the Delta strain of the coronavirus, and that during this period there was once again a prohibition on opening restaurants in Sydney for service of food and drink on the premises. However, that can have no significance for the issue of whether or not the Lease was frustrated, given that the Defendants’ contention is that frustration occurred at the end of March 2020 and, by the time of the second lockdown, the Tenant had gone into liquidation (26 May 2021) and the Lease had been terminated (10 June 2021).

112. Further, the Defendants have not established that the leasehold estate was unsaleable. Clause 30.4 of the Lease provided that the Plaintiffs “will consent to an assignment of this lease” provided that the Tenant is not in breach and has taken each of the steps set out in clause 30.4(a)-(f). There is no evidence that the Tenant ever considered or explored the possibility of assigning the lease, let alone that it was unable to do so. Nor was there any expert evidence from the Defendants that the leasehold estate was unsaleable in the period from April 2020 to June 2021, noting that it was the Defendants’ burden to establish this was the case insofar as it was put forward by them as the basis for contending frustration.

113. In July 2020, the Defendants were negotiating with the Plaintiffs to reopen the restaurant, at a reduced rent. The terms proposed included, among other things, that the rent owed by the Tenant under the Lease be waived for the period that the restaurant had been closed (that is, from April 2020 to August 2020); that the restaurant reopen at the end of August 2020 under a new lease; and that the base rent under the new lease be set, for the period through to 31 December 2022, at 50% of the rent that had been payable under the Lease. The Plaintiffs did not accept these terms, requiring that 50% of the rent be paid for the period of the restaurant’s closure, and that the 50% reduction in the future rent only apply until March 2021, with the full rent payable thereafter. While no agreement was reached at that time, those negotiations provide some evidence that the leasehold estate remained valuable while restrictions were in place under the Public Health Orders which limited the numbers for dining on the Premises.

114. I have determined, in considering the issue of mitigation (which I address below), that the Plaintiffs did take reasonable steps from the beginning of 2021 to obtain a new tenant, but were unable to do so. However, it does not follow, from the Plaintiffs’ inability to find a tenant, that the leasehold estate was rendered unsaleable as a result of the Public Health Orders issued from 23 March 2020 onwards. The Defendants led no evidence to establish such a proposition, and the evidence of their own offer in mid-2020 to take a lease over the Premises for a rent of $600,000 plus GST per annum is at odds with such a proposition.

115. In any case, the authorities summarised above do not suggest that frustration could be established simply by the fact that a leasehold estate was unsaleable, but only if it was rendered both unusable and unsaleable. That has not been shown on the evidence in this case.

Ability to perform essential term regarding opening of Premises

116. The Defendants relied on the fact that it was a special condition of the Lease, and an essential term, that the “Tenant must open the premises for business during the following trading hours: Monday – Sunday – 11.30am to 12am” (Item 23 of the Reference Schedule, Special Condition 4). They submitted that the Tenant was no longer able to perform this essential term when the first Public Health Order took effect on 23 March 2020, with the result that “the Lease was discharged and the Tenant was released from performing any obligations under the Lease”.

117. For the reasons set out below, I find that the Tenant was at all times able to comply with its obligations under special condition 4.

118. The terms of a commercial lease are to construed in accordance with the general principles that apply to the construction of written commercial agreements: Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5 at [69]-[73]. In short, the meaning of the terms of the contract are to be determined objectively by what reasonable business persons would have understood those terms to have meant. That determination requires consideration of the language used by the parties, the surrounding circumstances known to them, and the commercial purpose or objects to be secured by the contract: see, in particular, Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22]; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [47]; and Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12 at [16].

119. In my view, the imposition of the lockdown restrictions did not have the result that special condition 4 was incapable of performance, or that performance would have contravened the law. The obligation under that condition is to “open the premises for business” for certain stated hours. It is plain from Item 13 that the business to be conducted on the Premises includes a take away business, and the evidence is that such a business was conducted from the Premises. There was not, at any time from 23 March 2020 onwards, a prohibition on the operation of a take away business at the Premises. Accordingly, at all relevant times, the obligation in special condition 4 to “open the premises for business” could be performed by opening the Premises for the business of offering take away, this being of the forms of business that the Tenant is expressly permitted to operate from the Premises.

120. Further, and in any case, reasonable business persons in the position of these parties would have understood special condition 4 to mean that the defendant had an obligation to carry on the business specified in item 13 (namely, in-restaurant dining and/or take away) during the specified hours, to the extent that it was able to do so in accordance with any applicable law. That interpretation is supported by the following clauses in the Lease:

1. clause 22 provided that the Tenant “must obey all laws relating to and the directions of any authority that requires the tenant to do anything concerning the premises, the tenant’s use of the premises, or this lease”;

2. clause 29, which is an essential term of the Lease (Reference Schedule, Item 21) provided that the Tenant “is not required to keep the premises open for business at any time which is prohibited by law” (cl 29.2);

3. clause 29 also provided that the Tenant “must keep the premises open for business during the Centre trading hours as set out in the Centre rules”, and clause 4.3 of those rules (in Sch 1 to the Lease) provided that the Tenant “must not open the premises for business if any law prohibits this for the tenant’s type of business or premises”;

4. clause 50(b)(i) provided that the Tenant must “promptly comply with all laws for the prevention or control of … emergencies and disruptions”; and

“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.”

181. In Luxer Holdings Pty Ltd v Glentham Pty Ltd (2007) 35 WAR 254; [2007] WASCA 209 at [40], Buss JA (with whom Wheeler JA agreed) held that:

“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.”

182. The present case has been heard after the term of the Lease would otherwise have expired (had it not been terminated for breach), that is, after 30 September 2022. Therefore, in accordance with the normal measure of loss of bargain damages in such a case, the amount to which the Plaintiffs are entitled is the total rent and outgoings that would otherwise have been payable after the date of termination to the end of the Lease term (which has been calculated as $1,925,880.73) less any amount the lessor has obtained from re-letting the whole or part of the Premises (which is zero): Luxer Holdings Pty Ltd v Glentham Pty Ltd at [40].

183. That amount is subject to reduction if the Plaintiffs have failed to mitigate their loss: Luxer Holdings Pty Ltd v Glentham Pty Ltd at [40]. If a lessor fails to mitigate in that, acting reasonably, it should have, but did not, re-let the premises, the lessor’s damages for loss of future rent, outgoings and other amounts will be reduced by the amount it would have received if it had re-let the premises: ibid. at [37].

184. The burden is on the Defendants to establish that the Plaintiffs have failed to mitigate their loss. In Karacominakis v Big Country Developments Pty Ltd & Big Country Developments Pty Ltd & Ors J W Wall Investment Co Pty Ltd & Ors v Big Country Developments Pty Ltd & Ors v Big Country Developments Pty Ltd & Ors Hollingsworth & v Big Country Developments Pty Ltd & Ors [2000] NSWCA 313 at [187], Giles JA (with whom Handley and Stein JJA agreed) said that:

“A plaintiff who acts unreasonably in failing to minimise his loss from the defendant’s breach of contract will have his damages reduced to the extent to which, had he acted reasonably, his loss would have been less. This is often misleadingly referred to as a duty to mitigate, although the plaintiff is not under a positive duty. The plaintiff does not have to show that he has fulfilled his so-called duty, and the onus is on the defendant to show that he has not and the extent to which he has not (TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130). Since the defendant is a wrongdoer, in determining whether the plaintiff has acted unreasonably a high standard of conduct will not be required, and the plaintiff will not be held to have acted unreasonably simply because the defendant can suggest other and more beneficial conduct if it was reasonable for the plaintiff to do what he did (Banco de Portugal v Waterlow and Sons Ltd [1932] UKHL 1; (1932) AC 452; Pilkington v Wood (1953) Ch 770; Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd (1976) 1 NSWLR 5).”

185. Two points should immediately be noted. First, there is an obvious tension between the Defendants’ primary argument, namely, that the imposition of the lockdown restrictions from 23 March 2020 made it “unviable” to carry on the Tenant’s restaurant business, and made the leasehold estate “unusable and unsaleable”, and their contention that the Plaintiffs ought to have taken steps to find an alternative tenant for the restaurant. Secondly, although the Defendants bore the burden of establishing a failure to mitigate, the Defendants did not lead any evidence as to whether there was a market for a lease of the Premises, or any evidence regarding the rent that could be achieved in that period for comparable restaurant premises in the Sydney Central Business District, or any evidence regarding the steps that a competent letting agent would take in order to obtain a lease for the premises.

186. The Defendants sought to establish their defence of frustration through cross-examination of the Plaintiffs’ witnesses and, in particular, Bruce Sedgwick. Mr Sedgwick has been the Plaintiffs’ leasing representative for World Square Shopping Centre since at least 2019.

187. Mr Sedgwick gave evidence that, in around July 2020, he was instructed to start taking steps to find a new tenant for the Premises. Mr Sedgwick was of the view at the time that this would be a long process because of the space and fitout of the Premises. He was not challenged on that view.

188. It is hardly surprising that no step was taken to approach prospective new tenants prior to around July 2020. As outlined above, for much of the period from end March to the start of June 2020, dining on the Premises was either prohibited or severely restricted in terms of numbers. Further, in July 2020, the Defendants were negotiating with the Plaintiffs to reopen the restaurant under a new lease, and payments totalling around $100,000 were made towards rent due under the Lease in connection with those negotiations. In those circumstances, it was reasonable for the Plaintiffs to see whether the negotiations with the Defendants led anywhere before taking steps to find a new restaurant operator.

189. In addition, the Retail and Other Commercial Lease (COVID-19) Regulation 2020, which commenced on 24 April 2020, had the effect that if the Tenant met the definition of an impacted lessee, then the Plaintiffs were prohibited, during the prescribed period, from taking any prescribed action (including termination) on the grounds of a failure to pay rent or outgoings: reg 6(1)(a)-(b). The prescribed period lasted until 24 October 2020. Subsequent regulations had the effect of extending the relevant period through to late March 2021.

190. Mr Sedgwick commenced negotiations with prospective tenants from July 2020 onwards. Such conduct was consistent with the terms of the Lease. Clause 56.3 of Annexure A to the Lease provided that if the Tenant vacates the Premises before the expiry date, whether or not it ceases to pay rent, the Plaintiffs may enter the Premises to show them to prospective tenants, or advertise the premises for re-letting without this being re-entry or waiver of the Plaintiffs’ rights to recover the rent or other money under the Lease. It further provided that the Lease would continue until a new tenant takes possession of the Premises, unless the Plaintiffs accept a surrender of, or terminate, the Lease.

191. Mr Sedgwick approached prospective tenants by way of telephone discussions, email correspondence and in-person meetings. He gave evidence that, over time, he spoke to around a dozen prospective tenants who did not proceed to the letter of offer stage. Negotiations with three prospective tenants did advance to this stage.

192. In early 2021, Mr Sedgwick negotiated an in principle agreement for a company called Palace 9012 Pty Ltd to enter into a lease for the Premises. This company intended to use the Premises as a Chinese restaurant and nightclub. On 3 February 2021, Mr Sedgwick prepared and issued a letter to Palace 9012, attaching a Lease Proposal containing the negotiated terms. The Lease Proposal was signed and returned by Palace 9012 on 25 February 2021.

193. The agreed Lease Proposal was for a lease commencing on 1 April 2021, with a term of 10 years. Under the regime in place at this time, the “prescribed period” during which action could not be taken against an impacted lessee for unpaid rent was due to expire on 28 March 2021. Further, under the Lease Proposal, the proposed rent for the first year was the same as the base rent for Year 1 payable by the Tenant under the Lease ($1.2m per annum plus GST).

194. Having regard to that material, I find that the Plaintiffs had taken steps, before termination of the Lease, to replace the Tenant with another restaurant operator on a comparable rent, with the aim that the new tenant could take over the Premises as soon as the prescribed period under the regulations ended.

195. As matters transpired, Palace 9012 did not enter a lease on these terms. This was not due to any conduct on the Plaintiffs’ part. Instead, Mr Sedgwick explained that, at some point after the Lease Proposal was signed, Palace 9012 ceased to have further communications with the Plaintiffs and ceased to operate its other restaurant venues.

196. After the Lease was terminated on 10 June 2021, there was a further series of Public Health Orders issued in response to the outbreak of the Delta strain of coronavirus, which reimposed a ban on dining in restaurant premises in Sydney. This ban lasted from around 26 June 2021 to 11 October 2021: Public Health (COVID-19 Temporary Movement and Gathering Restrictions) Order 2021 (NSW), cl 24(1)(b); and Public Health (COVID-19 Additional Restrictions for Delta Outbreak) Order (No 2) 2021 (NSW), cl 3.4.

197. By January 2022, Mr Sedgwick had, following telephone, email and in-person discussions, succeeded in negotiating in principle terms with another company, Palace 1888 Pty Ltd, for the Premises to be used as a Chinese restaurant and night-club. On 24 January 2022, he sent a lease proposal to Palace 1888, which was signed and returned on 4 February 2022. The proposed lease had a commencement date of 1 October 2022, a proposed rent for year 1 at the same level as the Lease, and a term of “10+5+5 years”.

198. From June 2022, Mr Sedgwick also had discussions with a third company, Zilta World Square Restaurant Pty Ltd, which operates other Chinese restaurants in Sydney. Mr Sedgwick explained that he was, while Palace 1888 was still in play, “hedging [his] bets on who is going to give [them] the better deal”. He issued a lease proposal to this company on 27 July 2022, but this was not accepted.

199. When asked what steps had been taken since July 2022, Mr Sedgwick explained that the Plaintiffs had proceeded with the arrangement with Palace 1888: “So from our perspective the tenancy is committed and no longer available to be leased”. He said that Palace 1888 has now signed a lease, but it is subject to authority approvals.

200. It was put to Mr Sedgwick, and he agreed, that he was not asked by the Plaintiffs to advertise the leasing of the Premises. However, when asked if this is something he would normally do in this Centre, he responded “Never”. He went on to explain that “we don’t broadcast broadly to the market … what spaces we have vacant”, and that instead “we have a more targeted approach on how we lease our stores”: “we know who we want and we’ll approach them directly”. He added that he has lists of contacts that he would target, and that he “spoke to an exhaustive list of other potential tenants for this space”. As noted above, a defendant does not establish a failure to mitigate merely because “the defendant can suggest other and more beneficial conduct if it was reasonable for the plaintiff to do what he did” (Karacominakis v Big Country Developments at [187]). There was no evidence, and no basis to conclude, that the marketing approach adopted by Mr Sedgwick, who is a professional with over 30 years’ experience in the retail leasing industry, was unreasonable.

201. The expiry date under the Lease, and therefore the end point for the Plaintiffs’ claim for future loss of rent and the promotion levy for the remaining term of the Lease after termination, is 30 September 2022. While the steps taken on behalf of the Plaintiffs did not lead to another lease for the Premises being entered before 30 September 2022, the Defendants have not established, on the available evidence summarised above, that this was due to any failure by the Plaintiffs to mitigate their loss and to take all reasonable steps to minimise the effects of that loss and damage.

202. It follows that the Plaintiffs are entitled to recover, as part of their loss suffered due to the Tenant’s breach of the Lease, the total rent and promotion levy that would otherwise have been payable after the date of termination to the end of the Lease term, being the sum of $1,925,880.73.

Legal costs of enforcement

203. The Plaintiffs have claimed the legal costs of taking steps to enforce their rights under the Lease, which are distinct from, and additional to, the costs of these proceedings. Clause 20(e) of the Lease provides that the Tenant must pay the Plaintiffs’ costs incurred if the Tenant is in breach of the Lease. There is evidence that these costs amount to $30,094.29. Other than raising the frustration argument, the Defendants did not dispute the Plaintiffs’ entitlement to that sum. Nor did they challenge that calculation. I find that the Plaintiffs are also entitled to this element of their claim.

“Make Good”

204. As outlined above, the Plaintiffs have in addition claimed costs of changing locks on the Premises following termination ($836.00), and the costs of cleaning the Premises, including the clearing of perishable items from the Premises’ storeroom and fridges ($7,700.00). The Defendants did not dispute this element of the Plaintiffs’ loss. I am satisfied that the Plaintiffs are entitled to those amounts.

205. However, the Defendants did dispute the Plaintiffs’ entitlement to the amount claimed in order to “make good” the Premises. The Plaintiffs have not yet undertaken the works in question, but have instead provided evidence of two quotes obtained in 2022 for carrying out such work, in the amounts of $778,195.55 and $876,458.00 respectively.

206. The “make good” obligation is found in clause 35.1 of the Lease. It relevantly provided as follows:

“When this lease ends the tenant must:

(a) vacate the premises and give them back to the landlord in a clean state, in good and substantial repair and in the base state, except for fair wear and tear;

(b) subject to clause 35.3, make sure all the tenant’s property and other property (excluding only the landlord’s property) is removed within 14 days, whether or not that property was in the premises at the commencement date;

(c) reinstate and make good to the landlord’s reasonable satisfaction any part of the premises or the Centre altered by or for the tenant as part of the tenant’s works or during the term or damaged by the tenant, whether by the removal of property at the end of the term or the return of the premises to the base state or otherwise;

…”

207. According to Mr Bell, who is the Retail Manager of World Square Shopping Centre, the work required to be done to make good the premises includes:

1. hoarding works;

2. de-fitting the Premises;

3. removal and disposal of external signage, internal signage, shop fittings, abandoned stock, furniture, debris and rubbish;

4. painting;

5. cleaning of amenities; and

6. returning the Premises to ‘base state’ as required by clause 35.1 of the Lease.

208. Mr Bell explains that the two quotes obtained for the “make good” work are from contractors that his employer, Jones Lang LaSalle (NSW) Pty Ltd, often uses in de-fitting works. It appears from those quotes, which are in evidence, that the majority of the quoted costs relates to the de-fitting works. For example, the quote from ATAC Group for a total cost of $796,780.00 (excluding GST) includes an amount of $502,500 for:

“Demolition

Full defit of tenancy along with storage rooms

Remove and dispose of all fixtures and fittings

Remove and dispose of set ceilings

Remove and dispose of existing tiling/screed to original slab”

209. However, shortly after the termination of the Lease, there was correspondence in which the Plaintiffs asserted that the Tenants were not entitled to remove the fixtures and fittings from the Premises, and that these had to be left behind for the Plaintiffs.

210. The correspondence concerned Special Condition 3 of the Lease. It provided as follows (emphasis added):

“Condition of premises, fitout and equipment

(a) The tenant acknowledges and agrees that:

(i) the premises are leased to the tenant on an “as is” basis with the Existing Fitout in site inclusive of any fault;

(ii) to the extent it is entitled to and able to, the landlord transfers and the tenant accepts the transfer of the landlord’s right, title and interest in the Existing Fitout. However, the landlord is unable to confirm that no other party has any interest in the Existing Fitout;

(iii) the tenant has relied on [its] own enquiries and the landlord gives no warranty concerning the condition and fitness for purpose of the Existing Fitout; and

(iv) the Existing Fitout will be deemed to form part of the tenant’s property and for the avoidance of any doubt clauses 30, 34 and 51 apply to the Existing Fitout insofar as they apply to the tenant’s property.

(b) Despite any other clause in this lease, the landlord may at its absolute discretion request that at the end of the lease, all or part of the fitout is to remain in the premises.

(c) The following definition will apply in this lease:

Existing Fitout means any plant and equipment and shopfront in the premises at the handover date.”

211. Counsel for the Plaintiffs accepted that, if a request had been issued under special condition 3(b), then “that would suggest that the make good is not required to be carried out”. In fact, as outlined below, the Plaintiffs repeatedly asserted, in correspondence shortly after the Lease was terminated, that such a request had been made, and that the fixtures and fittings belonged to them.

212. On 8 July 2021, shortly after the Lease was terminated, the solicitors for the Plaintiffs, Holding Redlich, sent an email to the liquidator of the Tenant, Mr Philip Newman of PCI Partners (Liquidator), asserting that the fitout was owned by the Plaintiffs, not the Tenant:

“Your 23 June 2021 letter to the company’s creditors said the liquidator was looking into the ownership of the premises’ fitout. Our clients claim ownership …

Please let us know, by Wednesday, 14 July 2021, if the liquidator has any objection to our clients dealing with the fitout. If so, please explain the basis of the objection. This is necessary so our clients can make arrangements for a new tenancy.”

213. On 15 July 2021, the solicitors for the Liquidator, Mills Oakley, responded to the Plaintiffs’ solicitors, denying their claim that the fitout was owned by the Plaintiffs, and indicating that the Liquidator wanted to take steps to value the fitout and determine whether to take possession of it, or disclaim his interest.

214. On 26 July 2021, the solicitors for the Plaintiffs replied to this email. They asserted that the Plaintiffs were entitled to require the fitout to remain on the Premises, and had done so, and that therefore the Plaintiffs had no obligation to provide the fitout to the Liquidator:

“… special condition 3(b) entitled the landlord, when the lease ended, to require the fitout to remain, and removing the tenant’s ability to remove it. The landlords have done so. On this basis, our client does not consider it has any obligation to provide the fitout to your client …”

215. On 27 July 2021, the solicitors for the Liquidator sent a further email, disputing that the Plaintiffs had any right to “direct” or “require” the fitout to remain at the Premises, and disputing whether a request had been made. On 4 August 2021, the solicitors for the Plaintiffs rejected the Liquidator’s interpretation of the special conditions, and stated:

“…the request that the fitout remain was made, and the landlord requires the fitout to remain”.

216. On 9 August 2021, the solicitors for the Liquidator queried the Plaintiffs’ interpretation of special condition 3. On 18 August 2021, the solicitors for the Plaintiffs replied as follows:

“…Our clients do not consider Item 23, clause 3(b) as giving the tenant discretion to accede or refuse a request. The clause’s language and intention seem evident: the landlords receive an ‘absolute discretion’ to request the tenant leave the fitout. Upon the landlord making the request, the tenant must leave the fitout in place.”

217. There is, in evidence, no further correspondence on the issue after this date. The issue was not addressed in any of the Plaintiffs’ affidavit evidence.

218. In the light of this correspondence, and in particular the Plaintiffs’ repeated assertions that the Tenant had been requested, and was required, to leave the fitout in the Premises at the end of the Lease, I am unable to find that the Tenant had an obligation to make good the Premises by removing the fitout. I reject this part of the Plaintiffs’ claim.

Interest and Costs

219. The Plaintiffs sought their costs. There is no reason why costs should not follow the event. Although the Plaintiffs were unsuccessful on the “make good” issue, this occupied a negligible amount of time at the hearing. The Plaintiffs are entitled to their costs of the proceedings on the ordinary basis.

220. The Plaintiffs also sought pre-judgment interest. The Defendants made no submissions in opposition to that claim. However, since I have not been provided with any calculations in respect of interest, I will direct that the parties bring in short minutes to give effect to these reasons, with the intent that I will make those orders in chambers or otherwise hear the parties on any outstanding matter that is disputed.

Orders

221. I make the following orders:

1. Direct that the parties bring in short minutes of order that give effect to these reasons for judgment, and that deal with the calculation of interest if it can be agreed.

2. If the parties cannot agree on the form of orders referred to in order (1), leave is granted for the parties to approach the Associate to Nixon J to relist the matter.

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Decision last updated: 14 September 2023