Karate 4 Kids Pty Ltd t/as Karate 4 Kids v Orgwa Pty Ltd - [2024] QCAT 191

QUEENSLAND CIVIL AND
ADMINISTRATIVE TRIBUNAL

CITATION:

Karate 4 Kids Pty Ltd t/as Karate 4 Kids v Orgwa Pty Ltd [2024] QCAT 191

PARTIES:

KARATE 4 KIDS PTY LTD T/AS KARATE 4 KIDS

(applicant)

v

ORGWA PTY LTD

(respondent)

APPLICATION NO/S:

RSL093-21

MATTER TYPE:

Retail shop leases matter

DELIVERED ON:

7 May 2024

HEARING DATE:

25 March 2024

HEARD AT:

Brisbane

DECISION OF:

Presiding Member Poteri
Member Norling
Member McBride

ORDERS:

1.     The Respondent has failed to cooperate and act reasonably and in good faith with the Applicant in rental negotiations during the COVID-19 emergency.

2.     All other claims are dismissed.

3.     The Respondent must pay the sum of $2,236 into the nominated bank account of Applicant by 4pm on 6 June 2024.

CATCHWORDS:

LANDLORD AND TENANT – RETAIL AND COMMERCIAL TENANCIES LEGISLATION – dispute between lessor and lessee during the COVID-19 emergency – whether lessor acted reasonably and in good faith – whether the lessor acted unconscionably – whether lessor should have offered an extension to the lease

Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 (Cth)

Retail Shop Leases Act1994 (Qld)
Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation2020 (Qld)

Retail Shop Leases Regulation2016 (Qld)

ACCC v Berbatis Holdings [2003] 197 ALR 153

ASIC v Kobelt [2019] HCA 18
Belmed Pty Ltd t/as Belmont Medical Centre v Nichols Construction Pty Ltd [2013] QCAT 158

APPEARANCES & REPRESENTATION:

Applicant:

Mr and Mrs French, self-represented

Respondent:

Ms Musgrave and Mr Moxey, self-represented

REASONS FOR DECISION

What is this Dispute About?

This is a Dispute between a lessor (‘Respondent’) and a lessee (‘Applicant’) about whether they acted in accordance with the requirements set out in the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (‘Qld’) (‘Regulation’). The main issues were whether the Respondent cooperated and acted reasonably and in good faith or unconscionably in its negotiations with the Applicant over rent during the COVID-19 emergency period and whether the Respondent should have offered an extension to the lease at its conclusion in accordance with that Regulation.
We find that the Respondent did not cooperate or act reasonably and in good faith in its negotiations with the Applicant over rent during the COVID-19 emergency period.

What are the Relevant Facts?

The Applicant operated an adult and children’s fitness training centre from a former squash court complex (approximately 400m² in area) at Nanango pursuant to a 5-year lease that commenced on 1 November 2015, and which included one 3-year option, which was exercised. The option period therefore was to expire on 31 October 2021.
The Respondent purchased the complex in January 2019, becoming the lessor from that time.
The Applicant’s business was forced to close its operations on 23 March 2020 in order to prevent the spread of the COVID-19 virus. Whilst the business may have been able to reopen during June 2020 with a COVID-19 Safe Plan, we understand that businesses such as gymnasiums continued to suffer low patronage numbers after this period due to the public’s general fear of contracting the virus.
In response to the COVID-19 virus, the federal and state governments enacted various legislations and pronouncements designed to keep Australians safe and to ensure that affected businesses and employees were compensated. Of specific relevance to this Dispute is the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation2020 (Qld), which was designed to mitigate the effects of the COVID-19 emergency on lessors and lessees, giving effect to the good faith leasing principles set out in the National Code and to establish a process for resolving disputes (clause 3).
The Respondent granted a 50% reduction in rent for the months of April and May, 2020. The parties were not able to subsequently agree on rent relief in a timely manner.
A Mediation was held with the Small Business Commissioner in July 2020, which failed to resolve the disagreement over rent waivers and/or deferment from June 2020.
The Applicant lodged this Dispute with QCAT in February 2021.
A QCAT Mediation was held in May 2021, which also failed to resolve the matter.
The parties have advised the Tribunal that negotiation over the rent was subsequently resolved in about June 2021 and that the Applicant has paid all outstanding rents in accordance with that negotiated settlement.
Despite the Applicant requesting an extension to the lease, the Respondent did not grant an extension and the Applicant exited the complex at the expiry of the lease, on 31 October 2021.

What are the Issues in this Dispute?

The Applicant claims that the Respondent:
(a)Failed to negotiate rents reasonably and in good faith;
(b)Engaged in unconscionable conduct;
(c)Failed to offer an extension to the lease in accordance with the Regulation;
(d)Has and/or will replicate the Applicant’s business in the complex;
(e)Breached the quiet enjoyment of the Applicant’s business by entering the complex; and
(f)Should compensate the Applicant in the amount of $25,000.
The Respondent claims that:
(a)The Lessee failed to provide sufficient financial information upon which rent negotiations could be conducted;
(b)It did not engage in unconscionable conduct;
(c)The dispute over rent has subsequently been resolved, with all outstanding rent paid;
(d)Its failure to offer an extension to the lease complied with clause 18(4)(b) of the Regulation; and
(e)The Applicant should compensate its costs of this Dispute in the amount of $6,187.50.
The Respondent further claimed in oral evidence during the hearing that the Applicant left the premises in such a state as to be untenantable unless major repairs and structural changes were undertaken.

Does QCAT have Jurisdiction?

We find that the lease between the Applicant and Respondent satisfies the definition of an affected lease and is therefore subject to the provisions of the Regulation.[1] It is a prescribed lease, binding on the Applicant, the Applicant is an SME entity,[2] and the Applicant employs staff in its business.
[1]Regulation, cl 5.
[2]As defined by the rule 5 of the Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Rules 2020 (Cth).
QCAT has jurisdiction to hear and decide eligible lease disputes,[3] with none of the listed exclusions applying.
[3]Regulation, cls 21, 42.
We further find that clause 41 of the Regulation has been satisfied in that, at the time of lodgement of the Notice of Dispute, a settlement agreement had not been reached, the dispute was not settled within 30 days of the Notice and the lease was operational. Whilst the amount of rent has subsequently been agreed by the parties, we note that there remain other issues of disagreement.
No party argued that QCAT did not have jurisdiction to hear this Dispute.
It is briefly relevant to note that the Retail Shop Leases Act1994 (Qld) does not apply to this Dispute. This is due to the premises not comprising a Retail Shop because they are not located in a shopping centre or used wholly or predominantly for the carrying on of a Retail Business, with an Indoor Sports Centre not being listed as a Retail Business.[4]
[4]Retail Shop Leases Act1994 (Qld), ss 5A, 5B; Retail Shop Leases Regulation2016 (Qld), ss 5C, 8(1)(a), sch 1.

Did the Respondent Cooperate and Act Reasonably and in Good Faith in the Rental Negotiations?

The parties to an affected lease “must cooperate and act reasonably and in good faith in all discussions and actions associated with … mitigating the effect of the COVID-19 emergency on the parties to the lease.”[5]
[5]Regulation, cl 11.
A lessor under an affected lease “must not, during or after the response period or extension period, take a prescribed action on any of the following grounds -” failure to pay rent; failure to pay outgoings; or the lessee not opening its business.[6] Sub-clause 12(2) provides some exceptions, which do not apply in this Dispute. Prescribed actions are defined in clause 9 of the Regulation and, of relevance to this Dispute, include recovery of possession, termination of the lease, eviction of the lessee and exercising a right of re-entry to premises.
[6]Ibid., cl 12(1).
“A lessor under an affected lease must not increase the rent payable by the lessee during the response period or extension period.”[7] If the lease provides for a rent review during the response or extension periods, the lessor may review the rent, but must not give effect to an increase in rent until the extension period ends.
[7]Ibid., cl 13.
Clause 14 of the Regulation imposes obligations on the parties to an affected lease. These include the ability to request the other party to negotiate any or all of the rent payable during the response and extension periods and the need to provide the other party with accurate and sufficient information relating to the negotiation as soon as practicable. It is noted that “accurate financial information or statements about the turnover of the lessee’s business” is cited as an example of accurate and sufficient information.
Clause 15 of the Regulation requires the lessor to offer the lessee a reduction in rent within 30 days of receiving the accurate and sufficient information and that not less than 50% of the rent reduction during the response period be in the form of a waiver.
The Applicant claims that the Respondent:[8]
[8]Statement of Evidence by Mr French on behalf of the Applicant.
(a)Sent several emails claiming that rent was in arrears in circumstances where it was not (for example, 27 April 2020, 29 April 2020);
(b)Delayed the planned 12 June 2020 Mediation with the Queensland Small Business Commissioner (email from the Mediator dated 8 June 2020);
(c)Unsuccessfully sought a delay to the second scheduled date of Mediation (19 June 2020);
(d)Failed to reach agreement at the 19 June 2020 Mediation;
(e)Offered to defer rent for the July to September 2020 period by letter dated 9 July 2020;
(f)Threatened “to take action under the regulations” if the 9 July 2020 offer was not accepted by letter dated 21 July 2020;
(g)Sent an email claiming that “outstanding rent is a breach of the tenancy agreement” by letter dated 18 August 2020;
(h)Advised that insufficient financial information (specifically referencing business activity statements (‘BAS statements’) and profit and loss statements) had been received from the Applicant and claimed that the Applicant had not negotiated in good faith by letter dated 16 September 2020 (via its solicitor, Paul Dent Lawyers);
(i)Sent a letter advising that the Applicant was in breach of its lease for non-payment of rent dated 20 October 2020;
(j)Sent an email advising that the CPI rent increase had not been paid dated 27 October 2020:
(k)Sent a letter claiming the Applicant was in breach of its lease due to unpaid rent and unpaid deferred rent dated 24 November 2020;
(l)Sent an invoice for CPI rent increase for the period October, November and December 2020 on 9 December 2020;
(m)Sent a letter claiming that the Applicant was in breach of its lease on the basis of rental arrears on 11 December 2020;
(n)Sent an email claiming significant rental arrears and threatening to terminate the lease if not fully paid within 10 days dated 29 December 2020; and
(o)Sent an email (via its agent, Your Leasing Co) advising “we are investigating the legal options available to you under the lease in relation to locking your tenant out” dated 2 February 2021.
Evidence has been provided to the Tribunal confirming all of the above claims.
The evidence also demonstrates that the Respondent:
(a)Did not attend the follow-up Mediation scheduled for 3 July 2020 due to it not having received “verifiable documentation” (email dated 3 July 2020);
(b)Sent an offer to settle the rent negotiation that did not comply with clause 15 of the Regulation by letter dated 9 July 2020;
(c)Sent an offer seeking to settle the rent negotiation that did not comply with clauses 13 and 15 of the Regulation by letter dated 9 April 2021 (via its solicitor, Salerno Law); and
(d)Sent an offer to settle the rent negotiation that did not comply with clause 15 of the Regulation by email dated 24 November 2020;
The Applicant claims that it provided accurate and sufficient financial information to the Respondent as follows:
(a)19 June 2020 – documentation demonstrating that the business qualified for JobKeeper (including monthly downturns for the months of April, May and June 2020 in comparison to the same months in the previous year) and Profit and Loss statements for the months of March to June 2020;
(b)2 September 2020 – documentation demonstrating that the business qualified for JobKeeper (including monthly downturns for the months of April, May, June, July and August 2020 in comparison to the same months in the previous year);
(c)18 September 2020 – profit and loss statements for the two quarters ended 31 March 2020 and 30 June 2020 and for the year to date and BAS statement for the June 2020 quarter;
(d)30 October 2020 – JobKeeper documentation for July, August and September 2020, documentation confirming that the Applicant also qualified for JobKeeper for the December 2020 quarter and its Tax Return for the year ended 30 June 2020; and
(e)18 May 2021 - six BAS statements in respect of the quarters ending June, September and December for 2019 and 2020.
It is common ground that the Respondent offered (and the Applicant accepted) a 50% waiver of rent for the months of April and May 2020 in a timely fashion. It is also common ground that rents for the period June to December 2020 were not agreed until 10 June 2021, some six to twelve months after the period involved.
It is readily apparent from the above that a key issue in the rent negotiations was the disagreement as to whether the financial information submitted by the Applicant was timely, accurate and sufficient.
We further note that the key document upon which the final rent settlement was reached was the letter of offer from the Respondent dated 19 May 2021 (via its agent, Your Leasing Co). This letter was based upon the following turnover downturns in the Applicant’s business during 2020:
(a)June - -58.98%;
(b)July to September - -59.90%; and
(c)October to December - +35.97%.
No supporting documentation was attached to this letter or submitted to the Tribunal. Consequently, the Tribunal issued an Order on the 25 March 2024 for each of the parties to submit the financial data upon which that letter was based to the Tribunal by 12 April 2024. The Respondent failed to comply with this Order. The Applicant sent a copy of an email it sent to Your Leasing Co on 18 May 2021 attaching six BAS statements in respect of the quarters ending June, September and December for 2019 and 2020.
We find that the downturns in turnover adopted by the Your Leasing Co letter corresponded with the BAS statements submitted by the Applicant. Of greater importance to this issue, we also find that the financial information previously submitted to the Respondent and rejected by it was consistent with the downturns accepted by the Respondent on 19 May 2021, after allowing for the Applicant’s restraint in only being able to submit financial information in respect of historical performances on each occasion it submitted data.
Accordingly, we find that the Respondent did not cooperate, nor act reasonably or in good faith in its rental negotiations with the Applicant. Key reasons for this finding include:
(a)The Respondent rejected financial information that was submitted by the Applicant on a timely, accurate and sufficient basis;
(b)The Respondent consistently made offers that were not compliant with the Regulation; and
(c)The Respondent focused its attention on unpaid rent rather than on negotiating the amount of rent waivers and deferrals during the emergency period.

Did the Lessee Act Unconscionably?

Clause 44(4) of the Regulation provides that QCAT must make orders in a specific form where it finds that a party has engaged in unconscionable conduct.
The equitable doctrine of unconscionable conduct is a high bar[9] to prove. The case law essentially requires three elements to exist: there must be a special disadvantage between the parties; there must be an unconscientious taking of that advantage; and the defendant is unable to establish that the transaction was fair, just and reasonable.
[9]See ASIC v Kobelt [22019] HCA 18; ACCC v Berbatis Holdings [2003] 197 ALR 153, for example.
We find that there is not a special disadvantage between the parties in this Dispute. The Respondent (claimed to have engaged in unconscionable conduct) is not a sophisticated lessor, whereas the Applicant, whilst undertaking a small business, has experience in operating several business operations under leases with different lessors.
We also find that the evidence of the actions taken by the Respondent in the negotiation of rents falls well short of unconscionable conduct.

Did the Lessee Comply with the Regulation in offering an extension to the lease?

Due to the rent under the affected lease having been waived and deferred for a period of time, clause 18 of the Regulation requires the Respondent to offer the Applicant an extension to its lease on the same conditions contained in the lease for an equivalent period for which the rent was waived or deferred.
Sub-clause 18(4) of the Regulation provides for two exceptions to this requirement, the second of which is relevant to this Dispute: “if the lessor demonstrates that the lease can not be extended because the lessor intends to use the leased premises for a commercial purpose of the lessor.”[10]
[10]Regulation, cl 18(4)(b).
The evidence establishes that it was finally agreed between the parties that rent was waived or deferred for a period of nine months (April to December 2020).[11] Prima facie, the Respondent should have offered an extension to the lease of nine months to comply with clause 18.
[11]Email exchanges between the parties dated from 19 May 2021 to 17 June 2021.
In contrast, the Applicant was seeking an extension of two to three years.[12]
[12]Emails from the Applicant to the Respondent dated 28 May 2021, 9 June 2021, 10 June 2021.
The Respondent advised the Applicant that it was not able to offer an extension to the lease due to “the Landlord does have other plans for the leased premises … and intends to make significant changes to the property.”[13] It is noted that plans were attached to this emailed advice showing proposed changes to improve disabled access, completely renovate the amenities, insert a new mezzanine floor, add a window to the mezzanine area and construct offices.
[13]By email dated 29 June 2021.
There was much evidence submitted at the Hearing concerning the state of the premises as at and after the expiry of the lease. This is discussed further below under another heading. With respect to this issue, the evidence demonstrated that the premises were approximately a 40-year-old squash court complex that had been crudely adapted quite some time ago for other indoor sports activities, with very little capital or maintenance expenditure being spent on the building for many years. The building therefore appeared to be non-compliant with standards applying to modern buildings and was badly in need of cosmetic and structural changes in order to be ‘fit-for-purpose’ as an indoor sports centre.

The Tribunal’s questioning of the Respondent’s representatives revealed that after the expiry of the lease, some painting and minor electrical work was undertaken, but the planned major structural changes were substantially delayed, claimed to be due to a dearth of tradesmen in the local area, which is consistent with the experience of many regions in the aftermath of the COVID-19 pandemic.
The Respondent further advised that the majority of the premises presently lies untenanted and awaiting major structural works.
A question to be determined by the Tribunal on this issue is whether the intention of the Respondent to make significant changes to the property satisfies the clause 18(4) exception of “the lessor intends to use the leased premises for a commercial purpose of the lessor.”
This phrase should be interpreted according to its ordinary meaning within the context of the Regulation itself.
‘Purpose’ as a noun has been defined as “1. the object for which anything exists or is done, made, used, etc. 2. an intended or desired result; end or aim. 3. intention or determination. 4. that which one puts before oneself as something to be done or accomplished. 5. the subject in hand; the point at issue: to the purpose.”[14]
[14]Macquarie Dictionary, (Revised Third Edition, 2001) ‘Purpose’.
‘Commercial’ is an adjective defined as “1. of, or of the nature of, commerce. 2. engaged in commerce. 3. capable of returning a profit; a commercial project. 4. capable of being sold in great numbers: is the invention commercial? 5. setting possible commercial return above artistic considerations. 6. preoccupied with profits or immediate gains.”[15]
[15]Ibid, ‘Commercial’.
The evidence before the Tribunal, including many photos, demonstrates that the leased premises were in a sub-standard condition at the expiry of the lease. Accordingly, we find that the reason advanced by the Respondent in not offering a lease extension satisfies the clause 18(4) exception due to the Respondent’s desire to bring the premises up to a standard in which they were capable of returning a profit.
The Tribunal notes that this intention has not been achieved to the standard intended, finding that it is due to a combination of a general shortage of tradespersons and the Respondent being less sophisticated than many other lessors.

Has or Will the Respondent Replicate the Applicant’s Business in the Premises?

The Applicant complained that the Respondent had or was likely to replicate the Applicant’s business in the leased premises after expiry of the lease.[16] The Tribunal invited the Applicant to direct its attention to the legal basis supporting its claim. No legal basis was advanced.
[16]Applicant’s Statement of Evidence (page 12).
The Tribunal can find no legal basis for this claim. It must therefore be rejected.

Did the Respondent Breach the Quiet Enjoyment of the Applicant’s Business by entering the Premises?

The Applicant complained that the Respondent breached its quiet enjoyment, specifying a period in November and December 2020 when the Respondent erected a fence in the front of the property in circumstances where we note that the main entrance is to the side of the premises.[17]
[17]Applicant’s Main Points of Dispute attached to the Notice of Dispute (part 9.1).
Quiet enjoyment is a right conferred to the Applicant by clause 9.1 of the lease. We note that this clause provides an exception: “except where interruption or disturbance is permitted by this Lease.” The lease provides for several exceptions, such as those in clauses 5.5, 10.1, 10.3.
We note that we do not have jurisdiction on this point under the Regulation. We further note that it was of a relatively short duration and that no damages resulting directly from this action have been quantified.

Did the Applicant leave the Premises in an Untenantable State?

We note that the Respondent complied with QCAT’s Direction dated 20 August 2021 in this Dispute, which required it to file its Statement of Evidence, its witness’ statements and any documents to be relied upon in the Tribunal by 15 October 2021. Nothing in this material alleged that the Applicant left the leased premises in a sub-standard or untenantable state.
During the Hearing, the Respondent made this allegation in oral evidence, providing a series of photos in support of its claim. Whilst concerned about the raising of a new issue at such a late stage in proceedings (which were commenced in February 2021), we accepted the photos into evidence and much discussion took place between the parties about those photos. The Applicant claimed that the conditions displayed in the photos were in accordance with the premises’ standard when the lease commenced (1 November 2015). We note that there is no evidence to support or refute this claim.
As noted above, these photos showed the premises to be approximately a 40-year-old squash court complex that had been crudely adapted quite some time ago for other indoor sports activities, with very little evidence of capital or maintenance expenditure in the lead-up to the lease expiry date. The building therefore appeared to be non-compliant with standards applying to modern buildings and was badly in need of cosmetic and structural changes in order to be ‘fit-for-purpose’ as a modern indoor sports centre.
It is not necessary for the Tribunal to form a view about this issue on the grounds that this issue arose very late, no damages were claimed by the Respondent in respect of this issue and the limited evidence available to us demonstrates that both the Respondent and the Applicant had failed to keep the premises up to the standards required by the lease for each party.

What Quantum of Compensation is Appropriate?

Clause 44(3) of the Regulation authorises the Tribunal to issue a wide range of orders including requiring a party to pay compensation to another party.
The Applicant submitted that it should ask for compensation of $80,000 for the stress, anxiety, sleepless nights, headaches, mood swings, suicidal thoughts, time, energy, disruption and outlays caused to it and Mr French. However, it has lodged a ‘realistic’ claim for $25,000, including a list of ‘direct expenses’ that totalled $25,000.[18]
[18]Applicant’s Statement of Evidence.
Whilst the evidence demonstrates that this Dispute has been tortuous for both parties, this Tribunal has consistently based any compensation orders on a standard of proof requiring that there must be sufficient evidence to support a claim for loss and that bare allegations, without supporting evidence, are not sufficient.[19] We note that no medical evidence was provided in support of this claim.
[19]See for example, Belmed Pty Ltd t/as Belmont Medical Centre v Nichols Construction Pty Ltd [2013] QCAT 158.
Based upon the quantified evidence submitted to the Tribunal, compensation payable to the Applicant is based upon the following costs incurred by the Applicant, with Tribunal finding that the legal costs were incurred by the Applicant as a direct result of the Respondent not cooperating, acting reasonably and in good faith during the rental negotiations:
(a)Legal Costs – Go To Court  $295
(b)Legal Costs – GTC Lawyers  $990
(c)Legal Costs – Armstrong Legal  $500
(d)Legal Costs – Armstrong Legal   $99
(e)QCAT Lodgement Fees  $352
The Respondent is to pay $2,236 to the Applicant.

Orders

1.   The Respondent has failed to cooperate and act reasonably and in good faith with the Applicant in rental negotiations during the COVID-19 emergency.
2.   All other claims are dismissed.
3.   The Respondent must pay the sum of $2,236 into the nominated bank account of the Applicant by 4pm 6 June 2024.