Italia Ceramics International Super P/L v CM Corporation P/L - [2018] SADC 8

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
ITALIA CERAMICS INTERNATIONAL SUPER P/L & ANOR v CM CORPORATION P/L & ORS
[2018] SADC 8
Judgment of His Honour Judge Chivell
16 February 2018
LANDLORD AND TENANT - RENT - BREACH OF COVENANT TO PAY - ACTIONS TO RECOVER RENT OR DAMAGES - ACTION TO RECOVER RENT
LANDLORD AND TENANT - RENT - ABATEMENT
LANDLORD AND TENANT - RETAIL AND COMMERCIAL TENANCIES LEGISLATION - OBLIGATIONS, PROHIBITED TERMS AND PROTECTION FOR LESSEES
Claim for outstanding rent by a landlord against former tenant and guarantor. Premises sustained storm damage in September 2015 which was not repaired until 4 December 2015. Whether tenant entitled to abatement of rent during that period. Landlord issued a Notice to Remedy Default on 20 November and a Notice of Termination on 7 December.
Held: Tenant entitled to a 50% abatement of rent for the period September to December 2015. Accordingly, tenant was in credit at the time of the Notice of Termination. The termination of the lease and eviction of the tenant was therefore unlawful.
Retail and Commercial Leases Act 1995 (SA) s 40(1)(b), referred to.

ITALIA CERAMICS INTERNATIONAL SUPER P/L & ANOR v CM CORPORATION P/L & ORS
[2018] SADC 8

This is a claim for outstanding rent and associated expenses by a landlord against a former tenant and a guarantor.
Italia Ceramics International Super Pty Ltd and Italia Ceramics Super Pty Ltd jointly owned a commercial building at St Peters. The building is situated at 155-157 Payneham Road, St Peters, near the intersection of that road with Stephen Terrace.
It is a large, relatively modern commercial building. It presents a two‑storey‑high façade to the street, with massive glass windows. Inside is a large, two-storey‑high showroom. Staircases at each side of the showroom lead from the ground floor to a mezzanine. Behind the showroom were two warehouse areas, each occupying approximately one-third of the floor area.
On 16 June 2014, the owners (I will refer to the two companies as ‘Italia Ceramics’) granted a lease of the premises to CM Corporation Pty Ltd for five years commencing 1 July 2014.
During the first year of the tenancy, with the permission of Italia Ceramics, CM installed a floor in the middle warehouse space, creating two floors in the middle third of the building, effectively doubling the area of the mezzanine on the first floor. The rear third of the building remained a two-storey‑high warehouse space.
The details of the extended mezzanine were described in the Agreement to Lease Premises.[1] The Agreement described the permitted use of the building as ‘Offices, Showroom, Salon, Retail Areas, Personal Services Establishment and Warehouse’.[2]
[1] Exhibit P1, Tab 185, pp 1097-1162.
[2] Exhibit P1, Tab 1, p 45.
Mr Cain Rumbelow and Mr Mark Hamence guaranteed the performance by CM of its obligations under the lease. Judgment has already been entered against Mr Hamence.
On 20 November 2015, Italia Ceramics issued a Notice to Remedy Default.[3] The notice asserted that CM owed $14,537.16 in outstanding rent.
[3] Exhibit P1, Tab 96, pp 418-19.
On 7 December 2015, Italia Ceramics issued a Notice of Re-Entry, Termination and Demand,[4] claiming that the amount outstanding at that stage was $36,194.28. In fact, the amount allegedly outstanding was $29,208.52. The balance of the claim appears to be legal costs, although this is not made clear in the notice.
[4] Exhibit P1, Tab 125, pp 496-98.
On 8 December 2015, Italia Ceramic’s representatives took possession of the building, and changed the locks and security system.
Italia Ceramics now claims $156,894.52 in lost rent for the balance of the lease period, $23,433.61 for outgoings and $8,965.19 for ‘other losses’, including disbursements incurred in taking possession and re-leasing.
The total claim is therefore $189,293.32 plus interest payable under the lease, or interest as ordered by the court, and costs on an indemnity basis in accordance with the lease, or alternatively costs as ordered by the court.[5] A further claim for $117,611.85, for repairs to the premises and improvements in order to attract a new tenant, was not pursued.
[5] Third Statement of Claim.
CM and Mr Rumbelow dispute the claim on the basis that:
·the premises became unuseable following a severe hailstorm on 16 September 2015, and so the liability to pay rent and outgoings was reduced pursuant to s 40(1)(a) or (b) of the Retail and Commercial Leases Act 1995 (SA), which reads:
40—Damaged premises
(1)A retail shop lease is taken to provide for the following if the shop or the building of which the shop forms part is damaged—
(a) the lessee is not liable to pay rent, or any amount payable to the lessor in respect of outgoings or other charges, that is attributable to a period during which the shop cannot be used under the lease or is inaccessible due to that damage;
(b) if the shop is still useable under the lease but its useability is diminished due to the damage, the lessee's liability for rent and any amount for outgoings attributable to a period during which useability is diminished is reduced in proportion to the reduction in useability caused by the damage;
…
·for that reason, they deny that they were in default of their obligations under the lease, that Italia Ceramics had the right to evict CM from the premises, and that they are liable for any amount.
The September Hailstorm
It is common ground that a severe hailstorm occurred on 16 September 2015 and caused substantial damage to the building.
CM and Mr Rumbelow assert that the damage rendered the building unuseable. Italia Ceramics asserts that the extent to which the building could be used was unaffected.
The extent of the damage is described in the report of Cunningham Lindsey Australia Pty Ltd, Chartered Loss Adjusters for Allianz Australia Insurance Ltd, the insurer of the building, dated 9 October 2015,[6] and the invoice dated 7 December 2015 from HAS Building Services Pty Ltd,[7] which carried out the repairs.
[6] Exhibit P1, Tab 55, pp 267-72.
[7] Exhibit P1, Tab 122, pp 486-87.
In summary, the hailstorm blocked the roof gutters on the building with ice, causing water to overflow into the upper (mezzanine) level of the building. The water then flowed into various parts of the ground floor level of the building. Extensive damage was caused to plasterboard ceilings on both levels, as well as damage to the electrical system, the air-conditioning system and the lighting system.
The total cost of repairs, including the excess payment by the insured, was $32,444.32.[8]
[8] Ibid.
It is asserted by Italia Ceramics that:
The evidence establishes that the impact of the storm was significant and required prompt action to be taken. That action was taken by Allison Maas who immediately arranged for workers to attend on site and carry out electrical works, roof repairs and water pumping. These works enabled the First Defendant to continue to utilise the premises in the same way as they had been utilised pre-storm except for a short interruption of a couple of days.
…
The reduction in useability of the premises was minimal. It is submitted that useability should be considered in the practical sense of how the premises were being used prior to the storm compared to how the premises were being used after the storm. [9]
[9] Closing Submissions of the Plaintiffs, [21]-[22].
I reject that submission. It is plainly inconsistent with the evidence of Allison Maas, a senior commercial property manager with Leedwell Asset Management Pty Ltd. Leedwell was the property manager appointed by Italia Ceramics to manage the subject property. Ms Maas was therefore Italia Ceramic’s agent when it dealt with the defendants.
Ms Maas was the only witness for the plaintiffs who saw the damage. Mr Robert Vozzo, the managing director of the companies, did not see the damage at the relevant time.
Ms Maas attended the subject premises during the morning after the storm. She promptly and efficiently arranged for contractors to attend. She arranged for the water in the warehouse area (which was about ‘half a foot’ deep[10]) to be pumped out. She called an electrician to make the building safe. To achieve that end, the electrical supply to the upper (mezzanine) level was turned off.
[10] T 205.
From that fact alone, it can be concluded that the upper floor of the building was unuseable by the defendants.
It is clear that the defendants planned to fit out the mezzanine level, including the area added by them to the middle third of the building, for use as a hairdressing salon and beauty ‘spa’. That was clearly stated in the plans submitted with the development application which was appended to the Agreement to Lease Premises.[11]
[11] Exhibit P1, Tab 185, pp 1098-1102.
Mr Rumbelow gave evidence that he hoped to have the area fitted out and operating by November 2015. However, he said that such a timeline became impossible because he was informed by Ms Maas that they could not use the upper floor of the building until the insurance company had indicated that the repairs to the storm damage were complete.[12]
[12] T 362.
It is common ground that the repairs were completed on 4 December 2015, only four days before the defendants were evicted.
Ms Maas’ evidence about this was somewhat self-contradictory. She said:
Q.… did you tell Cain or Carolyn Rumbelow that they couldn't start doing their stage two fitout of the mezzanine area until after the insurance works had been completed.
A.Well, basically, there was no electricity up there and the mezzanine looked bowed.
Q.Sorry, it's just I guess I've got to get your answer to the question. Did you tell Cain or Carolyn Rumbelow that they couldn't start any of the proposed works for the fitout of the mezzanine level, did you ever tell them that.
A.Well, I just advised them to - no, I would have probably advised them not to go ahead until the insurance had done their work.
Q.When you say you would have, did Cain ever say to you that he wanted to carry out the - you're aware of the fitout that they were planning in the mezzanine area; they were going to put a hairdressing salon up there, were you aware of that.
A.Yeah, to a degree, yes.
Q.You knew a little bit about that.
A.A little bit, yes.
Q.Did Cain ever say to you that, you know, he wanted to get on and do that at around October -
A.No.
Q.- or anytime.
A.No.
Q.Did you ever tell him that he could not do that work.
A.No, I didn't say he couldn't perform the work. The only thing is just to wait for the insurance to do repairs and then after that, it's fine, as long as things are done with reputable builders and with the consent of the owners. [13]
[13] T 224-25.
The evidence that Mr Rumbelow had never told her that he wanted to get on with the fitout was clearly untrue.
In correspondence between the property manager and the loss adjusters, the following note, apparently dated 2 November 2015, appears:
**MD spoke to Allison @ Leedwell – tenant is very very upset that repairs have not yet been completed – they are threatening not to pay rent until repairs are completed** – will chase Allianz tomorrow[14]
[14] Exhibit P1, Tab 40, p 185.
Ms Maas confirmed that this was the first complaint by one of the defendants about being prevented from moving forward with their fitout.[15]
[15] T 227.
The records indicate that the insurance company had still not accepted the quotation from the builders and authorised them to commence repairs by 2 November 2015. This was hurriedly attended to on 4 November 2015.[16] This urgency was obviously a reaction to Mr Rumbelow’s distress that the repairs had still not been completed.
[16] Exhibit P1, Tab 40, p 185.
Ms Maas said that she advised Mr Rumbelow on 4 November 2015 that the insurance company had approved the repair quotation and repairs would commence shortly. She said that Mr Rumbelow responded by asking for an ‘abatement’ of the rent.[17] By that stage, rent for September and October 2015 had been paid. The November payment was due on 1 November 2015. It had not been paid by 4 November.
[17] T 229.
Ms Maas responded to Mr Rumbelow’s request by saying:
… non-payment of rent and outgoings will not be tolerated and is a separate matter to the insurance claim.[18]
Her understanding was that abatement was prohibited by the terms of the lease.[19]
[18] Exhibit P1, Tab 69, p 304.
[19] T 231.
This was plainly wrong. The defendants were clearly entitled to an abatement of the rent pursuant to s 40 of the Retail and Commercial Leases Act. Ms Maas had directed the defendants not to proceed with their renovations until the insurance company’s repairs were complete. By 4 November 2015, seven weeks had passed since the storm. By the time the repairs were completed, more than 11 weeks had passed.
I find that Ms Maas did inform Mr Rumbelow that the defendants could not use the upper level of the building until the insurance company had certified that the repairs were complete.
Further, I find that the defendants were entitled to an abatement of the rent pursuant to s 40(1)(b) of the Retail and Commercial Leases Act throughout that period from 16 September 2015 to 4 December 2015.
The Insurance Claim for Loss of Rent
Italia Ceramic’s submissions that the reduction in useability of the premises was minimal do not sit well with its behaviour in relation to the insurance claim for loss of rent.
On 16 November 2015, Ms Maas wrote an email to the insurance brokers, saying:
… can you please confirm the status of the insurance for loss of rent as the tenant is now in breach of their lease for non payment for November rent by 16 days. [20]
[20] Exhibit P1, Tab 40, p 186.
After speaking to Allianz, Ms Fiona Bailey from the lost adjusters sought further details of Italia Ceramic’s claim for ‘loss of rent’. Ms Bailey also said:
They (Allianz) have also requested a copy of the lease to confirm if the tenant is still required to pay rent in this situation.[21]
Ms Maas replied, on 19 November 2015:
Hi, Fiona,
· The entire top floor has been and still is unusable and unsafe and electricity was turned off and is still off.
· The ground floor has a gaping hole in the ceiling and was a few inches deep in water and unsafe for trade or for customers to walk in.[22]
A copy of the lease was attached to the email.
[21] Ibid.
[22] Ibid, p 187.
Three days after Ms Maas advised the insurance company that the property was effectively unuseable – that is, on 19 November 2015 – Mr Robert Vozzo instructed Ms Maas that if payment in full was not received by close of business on 18 November 2015, the tenant should be evicted.[23] Ms Maas had given Mr Vozzo no advice about the provisions of s 40 of the Retail and Commercial Leases Act. His instructions were clearly based upon his understanding that the tenant was ‘formally in breach of his Lease Agreement’.[24]
[23] Exhibit P1, Tab 76, p 320.
[24] Ibid.
Mr Rumbelow was operating under the impression that he was entitled to the benefit of the ‘loss of rent’ insurance, the premiums for which he paid as ‘outgoings’ pursuant to the lease.[25] For example, in a text message to Ms Maas on 2 November 2015, Mr Rumbelow said:
Hey Allison, indeed similarly I’ve been chasing when I’m actually going to see some work carried out for the storm damage. Our other landlord had put a pause on our rent until such time as the work has been done and claimed for loss of rent from the insurance company. I would assume that you’d do the same?[26]
[25] See Outgoings Summary 2015-2016, Exhibit P1, Tab 80, p 331.
[26] Exhibit P1, Tab 68, p 299.
It is apparent that Italia Ceramics did ‘do the same’ and claim on its insurance policy, but they did not ‘put a pause’ on the rent.
Following earlier discussions between Ms Maas and the loss adjusters in November, Cunningham Lindsey, through Mr Chris Martland, advised on 4 December 2015:
Hi, Allison,
We are happy to negotiate a reduced rental for the period from the date of loss until the repairs are completed.
We would suggest a figure of 50% reduction would be fair, given the tenant has continued operating at the premises.
Please submit a rental payment summary confirming payment to date and we will arrange payment asap.[27]
On 16 December 2015, Ms Maas followed up:
Can you please advise when we will receive payment for loss of rent into our Trust account as I have outstanding invoices to pay for the building with no funds.[28]
[27] Exhibit P1, Tab 146, p 601.
[28] Ibid.
Coincidentally, in its report to Allianz dated 16 December 2015, Cunningham Lindsey advised, under the heading ‘Business Interruption’:
We confirm that during the repairs the tenancy was compromised preventing full use of the building.
On this basis we have agreed to a 50% rent reduction from the date of loss to the date of completion of repairs, ie. 16 September 2015 to 4 December 2015.
This equates to 2.5 months rent and based on a rental figure of $14,671.36 per month including outgoings amounts to a loss of $36,678.40 Excl GST.
We therefore recommend settlement of this aspect of the claim with payment outlined below.[29]
[29] Exhibit P1, Tab 147, p 604.
In fact, the payment recommended, $36,678.40, was 100% of the ‘loss’, not 50%. This amount, together with a further $850 for an unrelated matter, was paid by Allianz in a cheque dated 23 December 2015 in the sum of $37,528.40.[30]
[30] Ibid, Tab 155, p 635.
In an email to Mr Vozzo and others dated 23 December 2015, Ms Maas confirmed that the above payment was to occur, and remarked:
This is a very good outcome considering they were looking at paying 50% previously.[31]
[31] Exhibit P1, Tab 154, p 632.
Ms Maas said she had never seen the Cunningham Lindsey report which contained the 50% error.[32] On 23 December 2015, Ms Maas was content to imply to her clients that the 100% payment was due to her negotiating skill.
[32] T 259.
There can be little doubt that through its agent, Ms Maas, Italia Ceramics represented to Allianz that it had suffered a loss of rent revenue pursuant to the lease arising from the damage to the building in the storm of 16 September 2015.
Accepting Ms Maas’ evidence, about which I am extremely sceptical, I find that Italia Ceramics was representing to Allianz that they had suffered a loss of at least 50% of the rent revenue for the period from 16 September 2015 to 4 December 2015. That is 50% of $36,678.40, or $18,339.20. I see no reason to conclude that the useability of the property was reduced to any lesser extent. The evidence does not suggest that the useability of the premises was any less than 50%. There is only the evidence of Ms Alyse Vozzo, who worked for CM at the time, who gave evidence of the extent to which the premises were used during the relevant period, but even that does not allow for any more exact quantification of the loss of useability of the premises.
The defendants had paid the rent for the months of September and October 2015 in full. Allowing a 50% abatement of the rent during the period from 16 September 2015 to 31 October 2015, this was an overpayment of $14,671.36 per month x 1.5 months, less 50%, or $11,003.52.
As for November, allowing for a 50% abatement, the defendants were liable to pay $14,671.36 less 50%, or $7,335.68.
Since the defendants were $11,003.52 in credit, there was no rent outstanding as at 1 December 2015. In fact, the defendants were $11,003.52 – $7,335.68, or $3,667.84, in credit at the time.
I accept that Mr Rumbelow and his mother, Ms C Rumbelow, both indicated that they would try and pay the amounts demanded by Italia Ceramics for the November 2015 rent, but they did so in the face of the misrepresentations by Italia Ceramics that the rent was payable, and the unjustified threats by Italia Ceramics to evict them.

I conclude that CM Corporation Pty Ltd was not in breach of the lease as at the date of the issue of the Notice to Remedy Default on 20 November 2015, nor was it in breach at the time of the Notice of Termination and Re-Entry on 7 December 2015. Italia Ceramics had no right to terminate the lease, and the eviction of the first defendant from the building was unlawful.
The plaintiff’s claim against the first defendant, and against Mr Rumbelow as guarantor, is dismissed.