Lontav Pty Ltd v Pineross Custodial Services Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

No. 2088 of 2011

LONTAV PTY LTD (ACN 112 630 190)	Plaintiff
v
PINEROSS CUSTODIAL SERVICES PTY LTD (ACN 097 434 145)	Defendant

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JUDGE:	HARGRAVE J
WHERE HELD:	Melbourne
DATE OF HEARING:	6 & 7 June 2011
DATE OF JUDGMENT:	23 June 2011
CASE MAY BE CITED AS:	Lontav Pty Ltd v Pineross Custodial Services Pty Ltd
MEDIUM NEUTRAL CITATION:	[2011] VSC 278

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LANDLORD AND TENANT – Lease of hotel premises – Whether lessee parted with possession of leased premises – Whether lessee should have relief against forfeiture – ACE Property Holdings Pty Ltd v Australian Postal Corporation [2010] QCA 55 considered.

NOTICES – Time for performance on expiring on public holiday – Whether time for compliance extended to next business day.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr S Horgan SC with Mr A Klotz	Lewenberg & Lewenberg
For the Defendant	Mr M Robins	Nathan Kuperholz

TABLE OF CONTENTS

Parties and introduction.................................................................................................................... 2

Material terms of the lease................................................................................................................ 3

Relevant background facts and circumstances............................................................................. 5

Did the lessee remedy any of the breaches within the time specified?................................. 21

Was the lessee required to provide an increased bank guarantee?........................................ 23

Has the lessee parted with possession of the premises?........................................................... 25

Is the lessee entitled to relief against forfeiture?........................................................................ 36

HIS HONOUR:

Parties and introduction

The plaintiff, Lontav Pty Ltd, is the lessee of The London Café Bar & Restaurant in Beach Street, Port Melbourne (‘the premises’). The defendant, Pineross Custodial Services Pty Ltd, is the owner and lessor of the premises. The lessor contends that the lessee is in material breach of the lease, that it has failed to rectify those breaches within the time specified in a notice to remedy and that, accordingly, the lease has been terminated by re-entry. The lessee acknowledges some of the breaches alleged in the notice, contends that it remedied those breaches within the time specified, and denies the other breaches. Accordingly, the lessee contends that the lease remains valid and enforceable. Alternatively, if it has failed to remedy any breach within the time specified in the notice, the lessee seeks relief against forfeiture of the lease.

The parties agreed to a sensible holding position pending determination of the dispute by this Court. Without prejudice to its rights to contend that the lease has been terminated, and subject to the lessee paying the rent and otherwise observing the terms of the lease, the lessor has allowed the lessee and its alleged manager to remain in possession of the premises and trade. The alleged manager is Jamal Mohammad and/or a company controlled by him, Melbourne Entertainment Corporation Pty Ltd (‘MEC’). As appears below, the central issue for determination is the capacity in which Mr Mohammad and MEC occupy the premises.

Disputes of this kind always have a real sense of commercial urgency. That urgency is increased in this case, because the sole director of the lessee, Domenic Tenuta, is gravely ill with a number of cancers. His capacity to give material evidence, while significantly compromised at the trial, may become further compromised as time goes by.

The notice to remedy specified the following relevant defaults,[1] and required that they all be remedied (to the extent that they were capable of remedy) within 30 days after the date of service of the notice:
[1]Two specified defaults are no longer relied upon and need not be referred to.

(1) Failure to pay monthly rent of $35,418.85 in advance for the months of February and March 2011. This breach is acknowledged. The lessee contends it was remedied within the time specified in the notice.

(2) Failure to pay interest of $17,107.27 on amounts overdue from time to time under the lease, calculated as at 28 February 2011. Again, this breach is acknowledged and the lessee contends it was remedied.

(3) Failure to provide an increased bank guarantee to reflect rental adjustments under the lease. This breach is denied, on the basis that the lease does not require an increased deposit or guarantee. However, the lessee contends that it remedied, any such breach under protest.

(4) Parting with possession of the premises without the prior written consent of the lessor, by giving possession of the premises to Mr Mohammad and/or MEC. This breach is denied.

The following issues arise for determination:

(1) Did the lessee remedy any of the breaches within the time specified?

(2) Was the lessee required to provide an increased bank guarantee?

(3) Has the lessee parted with possession of the premises?

(4) Is the lessee entitled to relief against forfeiture?

Before considering these questions, it is necessary to set out the material terms of the lease and the relevant background facts and circumstances.

Material terms of the lease

The lease is dated 1 October 2001. The lessee was not the original tenant. It took an assignment of the lease on 29 July 2005.

The initial term of the lease was for 10 years. Accordingly, it expires on 30 September 2011.

The lease contains three options to renew for further terms of five years each. Accordingly, if the lease remains valid and subsisting, there are prospective further terms of 15 years.

Rental is payable monthly, in advance (cl 5).

The rental is automatically adjusted at the end of each year, in accordance with a formula (cl 6.1).

The rental is to be adjusted to the ‘current annual market rent’ upon the exercise of an option to renew (cls 6.2, 6.3).

Where any amount due under the lease is unpaid for a period of seven days, the lessee must pay interest at the rate of 14 per cent per annum on any overdue amounts until paid (cl 11).

The lessee agreed to carry on a business, involving the supply of liquor at the premises, throughout the term of the lease. The lessee agreed to maintain its liquor licence in respect of the premises, and not to apply for a transfer or transfer that licence to any other person without the written consent of the lessor. That consent may not be unreasonably withheld (cl 17).

The lessee agreed that it would not transfer, assign, underlet or part with possession of the premises during the term of the lease to any firm, person, company or corporation whatsoever without the prior written consent of the lessor. That consent must not be unreasonably withheld if the proposed assignment or sublease is to a ‘respectable, solvent, responsible and suitable person who has a demonstrable experience in the conduct of a business in licensed premises’ (cl 18).

The lessee agreed to provide a bank guarantee for an amount equal to six months rent in a form acceptable to the lessor, and agreed to adjust the guaranteed sum ‘upon any review or re-assessment of the rent’, so that the amount of the bank guarantee would equal six months of the re-assessed rental (cl 19). In the notice to remedy, the lessor sought an increase in the ‘security deposit’. This does not strictly follow the language of cl 19, which provides for a bank guarantee. Clause 7 deals with security deposits. The amount specified for the deposit is ‘nil’.

The lessor may terminate the lease if the lessee fails to remedy any breach which is capable of remedy within 30 days after service of a notice to remedy (cl 15.2).

Relevant background facts and circumstances

Since the commencement of the lease, the lessee has persistently failed to pay rent on time. Indeed, only one month’s rent, that due on 1 April 2006, was paid on time. The remaining rental instalments have been paid late, many of them significantly late. Some rental payments were only days late, but the majority of them were weeks or months overdue at the time of payment. Those defaults have given rise to the liability to pay interest. The interest is at a high rate (14 per cent) and, if paid, would provide full recompense to the lessor for any financial defaults.

The lessor tolerated the late payment of rent in a generally patient manner. I infer that it was comforted by the fact that it held a bank guarantee provided by the lessee, in the sum of $188,581.98, representing six months of the annual rent for the first year of the lease and, in addition, was entitled to 14 per cent interest on overdue amounts. Although the rental arrears were often significant, they never exceeded the amount of the bank guarantee. Further, there is evidence from which it can be inferred that the level of the rent may be more favourable to the lessor than the lessee. For example, the lessee’s accountant gave evidence that, in his experience, businesses such as that conducted at the premises generally incur rental expenses of between 8 per cent and 10 per cent of turnover. This evidence was supported by the Australian Taxation Office benchmark findings, which indicate a range of between 5 per cent and 14 per cent of rental expenses to turnover, depending on the size of the business. These ratios are to be compared with the actual performance of the lessee’s business at the premises. Based on its 2010 financial statements, the lessee has been paying rental equal to 38 per cent of its gross turnover. On this basis, the accountant deposed that his expectation is that the rent for the premises will significantly reduce upon a market review due at the commencement of a further term, on 1 October 2011. Further, as appears below, this issue also has some relevance to the relief against forfeiture issues.

In June 2008, the lessee was in substantial default. Not only had it failed to pay rent for some months, but the lessor contended that the lessee was in default by failing to provide an increased bank guarantee, equal in amount to six months of the adjusted annual rental. At this time, the lessor involved its solicitor, Nathan Kuperholz, in a meeting with Mr Tenuta. Following that meeting, Mr Kuperholz corresponded with Mr Tenuta as to arrangements to pay the overdue rental and as to future rental payments. Further, Mr Kuperholz sought an increased bank guarantee from the lessee. Correspondence with Mr Tenuta continued until November 2008 on these issues. At no stage, did Mr Tenuta dispute the lessee’s obligation to provide an increased bank guarantee. At this time, the amount of the claimed increase was $13,532.07. By email sent 27 November 2008, Mr Tenuta promised that all rental arrears and the ‘updated’ bank guarantee would be provided by the following Monday.

Notwithstanding this correspondence, and arrangements made in the course of it, the lessee continued to make default in the timely payment of rent. Further, the increased bank guarantee was not provided. This conduct by Mr Tenuta, being subsequent to the making of the lease and its assignment to the lessee, is irrelevant to the proper interpretation of this aspect of the lease. However, even if the lease were not, contrary to my finding below, to require an increased guarantee upon annual adjustment of rental, the acceptance by Mr Tenuta that it did, and his failure to provide the promised increase, has some relevance to a consideration of relief against forfeiture.

In 2009, Mr Mohammad approached Mr Tenuta and expressed interest in purchasing the lessee’s business at the premises. Mr Mohammad was familiar with the business from his experience as the chief operating officer of the company which has provided security services to the lessee in connection with the business since approximately 2007. Further, Mr Mohammad lives within walking distance of the premises. He had been a regular patron of the business and had come to know Mr Tenuta. At this time, Mr Mohammad thought that the business had ‘a lot of potential’ but needed to ‘be upgraded’. For example, the upstairs restaurant had been closed for some years and Mr Mohammad saw potential in renovating and re-opening it for business.

After a few hours discussion, Mr Tenuta agreed, in principle, to sell the business to Mr Mohammad. Mr Tenuta told Mr Mohammad that completion of the proposed sale could not occur unless Mr Mohammad was able to obtain two things – ‘Liquor Board approval and then Landlord approval’. The evidence of Mr Tenuta and Mr Mohammad on this aspect of their discussions was not entirely consistent, particularly as to the order in which approvals were required to be obtained. However, I am well satisfied that both men understood from the discussion that no sale could take place unless and until Mr Mohammad had obtained both necessary approvals.

Following this discussion, Mr Mohammad paid a ‘deposit’ of $33,000 to the lessee to secure the right to purchase the business if he was able to obtain the two necessary approvals. Mr Tenuta and Mr Mohammad gave conflicting evidence as to whether a purchase price was agreed. According to Mr Tenuta, there were some discussions about price but no price was agreed. The price remained open for negotiation. On the other hand, Mr Mohammad said that Mr Tenuta asked for $500,000 and that he agreed to that price.

Mr Mohammad then set about taking steps to obtain the necessary approvals. In the first instance, as suggested by Mr Tenuta, he attended a workshop in the Responsible Serving of Alcohol and obtained the necessary certificate. He then engaged solicitors to assist him in connection with an application to the Director of Liquor Licensing (‘the Director’) to transfer the liquor licence for the premises to MEC. He signed the transfer application on MEC’s behalf on 10 August 2009, the day MEC was incorporated.

By letter dated 14 August 2009, hand delivered on 3 September 2009, Mr Tenuta applied to the lessor for approval of a proposed assignment of the lease to MEC. His letter attached a number of documents, including a company search of MEC, a statement as to Mr Mohammad’s experience, financial, business and personal references and blank application forms for transfer of the liquor licence to MEC.

On 10 September 2009, Mr Mohammad’s solicitors wrote to the lessor in connection with the proposed assignment. They proposed a meeting ‘to discuss plans to integrate the business, including providing details of proposed capital expenditure’ and asked whether any further information was required before consent to an assignment of lease was forthcoming. In response, a statement of assets and liabilities was sought from Mr Mohammad. It was provided on 1 October 2009.

The lessor referred the request for an assignment to its solicitor, Mr Kuperholz. He wrote to Mr Mohammad’s solicitors on 12 October 2009. He stated the lessor’s position in direct terms. The lessor refused to consider the proposed assignment until all overdue rent and outgoings under the lease were paid in full. Further, were that to occur, Mr Kuperholz expressed a number of serious concerns about Mr Mohammad’s suitability as an assignee, particularly with respect to his and MEC’s solvency. These concerns were particularised. Moreover, on behalf of the lessor, Mr Kuperholz sought a detailed explanation about specified matters relating to solvency, including a statement as to the amount of the purchase price being paid for the business and how it was intended that the price would be funded. In conclusion, Mr Kuperholz said:

If and when the required information is provided to my client’s satisfaction, it will commence making the appropriate inquiries concerning the references provided as to [MEC’s] respectability, responsibility and suitability as assignee, with particular reference to Mr Jamal Mohammad personally, given that [MEC], the company, has no ‘track record’ in that regard.[2]

[2]Emphasis added.

Given this attitude, Mr Mohammad let the matter rest for the time being. There were, at the time, substantial arrears of rent and outgoings, and it was not in his capacity to bring the outstanding payments up to date. Further, he was at that time occupied with progressing MEC’s application for a liquor licence.

In the meantime, on 22 September 2009, Mr Tenuta signed the application to transfer the lessee’s liquor licence for the premises to MEC. This application had been prepared by or on behalf of Mr Mohammad on 10 August 2009 and signed by him on that date. Taking Mr Tenuta’s evidence as a whole on this issue, and making due allowance for the difficulties under which he was operating when he gave evidence, I find that Mr Tenuta then understood, from his experience in owning and leasing licensed premises, that no licence would be issued to MEC or Mr Mohammad without the lessor first approving an assignment of the lease and settlement of the proposed sale of business. Indeed, Mr Tenuta said expressly that he understood ‘before you get a licence application approved and transferred you’ve got to get a landlord’s approval’. Further, he said that he ‘didn’t expect the licence to be [transferred] straight away as it did because, as I said to Jamal, “Need to get landlord’s approval.” ‘As appears below, that understanding was in accordance with the evidence as to the Director’s standard practice.

The transfer application form includes provision for the proposed transferee (in this case MEC) to declare the names and addresses of ‘the transferee’s associates’ within the meaning of the Liquor Control Reform Act 1998 (‘the Act’). Further, the transferee is required by the standard application form to certify that the transferee will, upon transfer, be either the freehold owner of the premises ‘or will have the exclusive right to occupy the premises’.

It appears that this certification, while a requirement, is insufficient to satisfy the requirements for the issue of a liquor licence to the transferee. In addition, the transfer application form contains a document checklist, which provides for boxes to be ticked adjacent to documents which are required before a permit will be issued. Relevantly, this part of the transfer form provides:

Before a decision can be made on your application, you must provide the following documents:
…
A letter confirming that settlement has occurred must be provided before the licence is issued. The new licensee cannot trade in liquor until such time as their name appears as licensee on the licence.

Further, the requirement for proof of ‘settlement’ was reinforced and restated in the Director’s letter to MEC’s solicitors dated 29 September 2009. In that letter, the Director acknowledged receipt of the transfer application and stated that the application would not be determined until receipt of a number of documents, including:

Letter of Settlement
Before the transfer application can be granted, we require a letter from the transferee confirming that settlement has occurred.

The ‘settlement’ referred to in the transfer application form and the Director’s letter must be understood as a reference to settlement of the transaction by which the proposed assignee (MEC) becomes entitled to the ‘exclusive right to occupy the premises’ and to conduct the business involving the supply of liquor from those premises. In this case, that means, as it must mean in many cases considered by the Director involving licensed premises which are leased by the licensee, confirmation that the sale of business contract has been settled and the lessor has assigned the lease to the purchaser (MEC). As appears below, the Director did not, I infer by mistake, insist upon confirmation that settlement had occurred before he gave conditional approval to a transfer of the liquor licence and issued a new liquor licence for the premises to MEC. Although there is no direct evidence as to how this mistake occurred, the whole of the liquor licensing file relating to the application was in evidence and it would appear that the mistake resulted from a combination of substantial delay in determining the transfer application, involving objections being received; a referral to the Liquor Licensing Panel for determination of the objection; a recommendation by the Panel that the transfer application be refused; refusal of the application by the Director; an application to the Victorian Civil and Administrative Tribunal (‘VCAT’) to review that refusal; consent orders subsequently negotiated between the solicitors acting for MEC and the Director; and the fact that the consent orders were made by VCAT on the papers without any submissions or hearing to explain the circumstances underlying the consent orders. Of course, no criticism can be directed at the VCAT member who made the consent orders, as VCAT was entitled to rely on the fact that the Director was represented by competent lawyers.

MEC’s application to review the Director’s decision to refuse the licence transfer was listed in VCAT for a directions hearing on 14 October 2010. By consent of the solicitors for MEC and the Director, that hearing was adjourned until 25 October 2010, in order to allow ‘ongoing discussions about the possible resolution of the matter’.

The matter was then resolved between solicitors. I infer that MEC’s solicitors obtained instructions from Mr Mohammad to resolve the matter on the terms contained in a minute of proposed consent orders signed by MEC’s solicitors on 22 October 2010. Those consent orders, with immaterial amendments, were subsequently made by a Deputy President of VCAT on 25 October 2010. The orders were made on the papers without any attendance.

Relevantly, the consent orders adjourned the further hearing of the application for a 12 month period ‘to allow [MEC] to have a “trial period” as licensee of the premises’. Further, the orders provided that, in the absence of further application by the parties, the liquor licence would continue to apply unamended from the expiration of the 12 month period and the proceeding would be struck out. Significantly, the consent orders made no provision for what was to occur if MEC did not comply with the licence during the trial period, and the Director applied to revoke the licence. In particular, no orders were made to protect the lessor’s position if that occurred. These omissions reinforce my finding that there was a mistake. The licence to MEC was issued without any evidence of ‘settlement’ of the sale of the business by the lessee to MEC, and there was no evidence of the lessor having consented to such a sale. In fact MEC did not have the exclusive right to occupy the premises, as required by the Director as a pre-condition to approval of the transfer and issue of a licence to MEC. In my opinion, had the Director and VCAT appreciated the true position, the transfer would not have been approved and the licence would not have been issued to MEC for a trial period. Instead, at best for Mr Mohammad and MEC, the Director could have either indicated he would consent to transfer the licence for a trial period on proof of settlement or, if asked, could have treated the transfer application as an application for Mr Mohammad to be appointed a nominee of the lessee, pursuant to s 54 of the Liquor Control Reform Act 1998, and given approval for him to so act for the trial period.

In his oral evidence, Mr Mohammad said that he was told by his solicitor:

that my liquor licence has been approved and after 21 settlement because he’s put the condition in it will be arrive in the mail.

This answer provides a good example of the difficulties which Mr Mohammad had in expressing himself in evidence. His first language is Urdu, not English. Taking the evidence as a whole, I interpret this evidence as establishing that Mr Mohammad was told about the terms upon which his application to VCAT had been conditionally allowed, and was told that the formal licence would be sent to him in the mail once it had been issued. The licence was not issued until 9 November 2011, and was received by Mr Mohammad after that date.

The conditional approval of the licence transfer was obviously a matter of significance to Mr Mohammad. It roughly coincided with a matter of even greater significance to Mr Tenuta. During September 2010, Mr Tenuta had commenced feeling unwell. He attended his general practitioner on 29 September 2010. CT scans were ordered. From 8 October 2010, Mr Tenuta was diagnosed with a series of serious illnesses. He has cancer of the bowel, bile duct and liver stricture. Since early October 2010, Mr Tenuta has attended many medical appointments, undergone medical procedures and surgery of a serious kind, had chemotherapy and spent long periods in hospital. He takes the powerful pain-killer ‘Endone’ when required for pain, and this affects his mental alertness. Given the physical stress of coming to Court to give evidence, he had taken Endone before giving his evidence. It was obvious that this affected his mental alertness and memory. Accordingly, allowances should be made for this in assessing the reliability of his evidence. However, it was not put that his evidence was deliberately false on any issue.

In these colliding circumstances, Mr Tenuta met with Mr Mohammad in late October 2010. In his affidavit, Mr Tenuta said that this meeting took place on 28 October 2010. It was not put that this date was wrong. The two men discussed the proposal that Mr Mohammad purchase the business. There was obviously discussion about the liquor licence and Mr Tenuta’s ill health. Given that the licence transfer appeared to be in hand, although no formal document had been issued, the next step was securing the lessor’s approval to an assignment of the lease. To this end, Mr Mohammad went to a new solicitor, Mr Alex Lewenberg, for advice. On 3 November 2010, Mr Lewenberg telephoned Mr Kuperholz. Mr Lewenberg’s file note records:

Telephone attendance upon Nathan Kuperholz. He bluntly said there is no business until the $90,000 is paid by the tenant for rent and rates owing. There will be no commencement of any meeting until paid.
After the moneys are paid he may or may not have the meeting, at the moment [MEC] has no assets, is not supportive of a business but we may have a meeting then. At the moment nothing to discuss.

Mr Mohammad and Mr Tenuta then discussed the lessor’s continuing hard attitude. They were disappointed. The evidence does not establish whether the lessor’s representatives knew of Mr Tenuta’s illness, or its extent, at this time. In his affidavit, the lessor’s principal representative, Robert Radman, said that he learned of Mr Tenuta’s illness ‘in or about October 2010’. Mr Radman was not cross-examined. However, by the end of October 2010 it is apparent that the lessor was becoming increasingly impatient at the continuing late payment of rent and the failure of the lessee to provide a guarantee for an increased amount, to reflect automatic rental increases. A formal letter of demand requiring a revised guarantee was sent on 29 October 2010.

There was then a conversation between Mr Tenuta and another of the landlord’s representatives, Rohan McIntosh. During that conversation, Mr McIntosh said words to the effect that the lessee’s priority should be to bring the rent up to date, before arranging for the increased bank guarantee. On this basis, it was contended on behalf of the lessee that the lessor had waived its right to insist on an increased bank guarantee. The evidence does not justify a finding of waiver.

Putting Mr Tenuta’s illness to one side, it appears that the lessor’s increasing impatience led it to consider taking action to terminate the lease. However, upon learning of Mr Tenuta’s illness, Mr Radman said that he and Mr McIntosh decided to defer taking action to terminate the lease, notwithstanding the persistent breaches. In the circumstances described below, the lessor’s patience ran out by March 2011. Notwithstanding Mr Tenuta’s illness, the notice to remedy was then served. The decision to serve that notice was informed by factors additional to the continuing failure to pay rent on time and the failure to provide the revised bank guarantee. The circumstances in which Mr Mohammad and MEC came to be involved in the conduct of the lessee’s business were viewed most seriously by the lessor.

Following Mr Lewenberg’s discussion with Mr Kuperholz on 3 November 2010, and given Mr Tenuta’s illness and consequent inability to attend to the business at the premises, Mr Mohammad and Mr Tenuta met and agreed upon a strategy to preserve the business while Mr Tenuta dealt with his immediate health problems and, I infer, with a view to convincing the lessor that it should agree to an assignment of the lease to Mr Mohammad (MEC). The two men met and negotiated an arrangement to this end.

At this time, the formal liquor licence to MEC has not been received by Mr Mohammad, and Mr Tenuta was still of the belief that no licence could issue until ‘settlement’ of both an assignment of lease and the proposed sale. Further, taking his evidence as a whole, I find that Mr Mohammad did not know on that day precisely what form of approval he had received from the Director. He had only a general understanding that he had received some conditional approval by the Director for a twelve month trial period. In these circumstances, it is likely that it was Mr Tanuta’s understanding of the Director’s standard processes which prevailed at the meeting and influenced the content of the discussions and agreements concerning liquor licensing issues.

The meeting was also attended by another male and Ms Tate. No lawyers were present. The agreements reached were documented in a businessman’s fashion. The major points were initially written down and then Ms Tate typed the management agreement. The document purports to appoint Mr Mohammad as the lessee’s agent to manage the business. I will refer to the document as ‘the management agreement’. It is necessary to set out the management agreement in full:

Jamal Khan Mohammad (Jamal) is to be employed by Lontav Pty Ltd (Lontav) to manage The London Bar situated at 92 Beach Street Port Melbourne and is willing to accept this appointment on the following terms and conditions:
1.The Lease is held by Lontav, and Lontav will transfer leases to Jamal whenever the landlord agrees along with the liquor licence.
2.The Licence is held by Lontav and Jamal can change nominee.
3.The Nominee is presently Ivan Gigliotti.
4.Jamal guarantees as from the date that he takes over management of the bar all financial commitments that are made on behalf of Lontav and also guarantees any losses incurred by Lontav as from the date of being appointed General Manager.
5.Jamal will meet with a representative of Lontav on a weekly basis to reconcile the weekly takings, payroll and expenses, and to report to the owners as from the operation of the business of the bar.
6.Jamal will be paid a management fee as negotiated with Domenic Tenuta.
7.Jamal is to ensure that there are sufficient funds in the Lontav account to pay all expenses as they fall due, including but not limited to the rent, purchases, insurance and outgoings.
8.Jamal acknowledges that there may be business agreements that may incur termination fees, e.g. ATM, Phone system, Foxtel, Nightlife system.
9.Financials, Business Activity Statements, Work Care, Superannuation and Insurance to be controlled by Tramontana Accountants through Domenic Tenuta or his representative.
10.Jamal is responsible for hiring and dismissal of staff and all renovations that will be incurred and Lontav will not interfere.
11.As a management fee Jamal is entitled to any surplus funds or profit after all expenses are paid in full, but always subject to Jamal holding a liquor licence in respect of the bar.
12.Jamal is appointed as General Manager of Lontav in respect of operation of the Bar, and acknowledges that he is neither owner, partner nor shareholder of the business in any way.
13.Lontav will not be liable to refund any monies that Jamal spends on any improvements or maintenance on the business.
14.Jamal is authorized as General Manager to communicate with the landlord as authorized agent of Lontav as from the signing of this agreement.
15.Unless by agreement Jamal may not be removed as the General Manager of the Bar but always subject to Jamal[‘s] compliance with the laws and regulations involving liquor licence legislation.
16.Lontav and Domenic Tenuta must assist and cooperate with Jamal with any legal action [that] Jamal may need to take (Jamal’s position as General Manager is to remain) if the landlord refuses to reassign the lease to Jamal before October 2011.
17.Domenic Tenuta is to authorize Jamal to be a signatory on the cheque book of Lontav and to have the deposit and cheque book available to Jamal and to provide internet banking access for this account only.
18.As of the date of this agreement all monies deposited into Lontav account through EFTPOS and credit card sales are not to be used by Domenic Tenuta.
19.Jamal is the sole operator of the Lontav bank account.

Following the execution of the management agreement, Mr Mohammad commenced managing the business on a day to day basis. Mr Tenuta retained a key to the premises and knowledge of the security code for entry. He accordingly retained the right to enter the premises at any time if he wished. However, Mr Tenuta was so ill that he was often completely unavailable to monitor the business at the premsies. Notwithstanding this, Mr Mohammad continued to meet with Mr Tenuta’s personal assistant, Ms Tate, on at least a weekly basis in accordance with cl 5 of the management agreement. Further, Ms Tate kept Mr Tenuta informed by telephone and email of issues relating to the business and, within the limitations of his illness, Mr Tenuta gave her instructions concerning the business from time to time. The documents maintained by Ms Tate at the lessee’s offices, and the oral evidence of Ms Tate, establish this.

In circumstances where Mr Tenuta was gravely ill and not available to speak with Mr Mohammad on any regular basis, Mr Mohammad took it upon himself to depart from the management agreement in material respects. For example, although the arrangements under cls 17, 18 and 19 of the management agreement envisaged that all payments of business expenses would be made by the lessee from its bank account, albeit under the control of Mr Mohammad, it appears that Mr Mohammad found it easier to operate many aspects of the business through MEC’s bank account directly. In particular, it would appear that MEC assumed the obligation to employ and pay staff directly, and made direct payments of rental to the lessor. Further, MEC paid the insurances which the lessee was obliged to pay under the lease, and arranged to have its interest noted on the insurance policy. In these circumstances, MEC’s business activity statements reflected the receipt of income by MEC, purchase of stock and the payment of wages in the period commencing 1 October 2010 until the present.

In addition, consistent with cls 10 and 13 of the management agreement, MEC paid for significant renovations and improvements to the premises. MEC paid amounts totalling approximately $282,500 in this regard, principally in respect of re-opening the upstairs dining room and erecting structures to enable footpath trading at the premises.

The lessor was informed that Mr Mohammad had commenced managing the business at the premises. This caused Mr Kuperholz to doubt, from an early stage, whether Mr Mohammad was not in fact more than a mere manager, but already in possession as proposed assignee, in breach of the lease. Mr Kuperholz said as much in his facsimile of 9 December 2010 to Mr Lewenberg. Mr Kuperholz repeated these concerns in his facsimile dated 4 March 2011, in which he referred to the lessor’s ‘grave and serious reservations about whether or not the [lessee] has not already parted with possession of the premises to [Mr Mohammad/MEC]’. When Mr Mohammad sent a copy of the insurance certificate to the lessor, noting MEC’s interests as an insured, Mr Kuperholz alleged by facsimile dated 10 March 2011 that this was ‘surely … clear evidence’ that MEC was in possession of the premises in breach of the lease, and not a mere manager. In response, Mr Mohammad’s solicitors stated that he and his company (MEC) were ‘managing the business at the request of the owner who is unwell’, while acknowledging that, in due course, MEC may seek an assignment of the lease.

Neither Mr Kuperholz nor the lessor’s representatives was convinced. The notice of re-entry was prepared and served on 23 March 2011.

Following service of the notice of re-entry, Mr Mohammad’s solicitors, Lewenberg & Lewenberg, commenced acting for the lessee also. That is not surprising, given the management agreement terms, and Mr Tenuta’s illness and consequent difficulties in providing instructions to his own solicitors. Furthermore, by this time, the interests of Mr Mohammad, MEC and the lessee largely coincided. They were seeking to preserve the business for their joint benefit. The lessee was the owner of the business. It wished to sell it to Mr Mohammad or his company. They wished to purchase it. MEC had spent considerable amounts of money on improving the premises with a view to obtaining the lessor’s consent to an assignment of the lease.

In these circumstances, Lewenberg & Lewenberg asked the lessor to provide full particulars of the amounts allegedly owing. The lessor complied with the request. It contended that, as at 1 April 2011, an amount of $134,383.25 was owing in respect of arrears of rental and other amounts payable by the lessee. Further, it maintained that, in addition, the lessee was obliged to pay interest ($17,107.27) and to provide an increased bank guarantee.

Mr Mohammad set about doing what he could to obtain the necessary funds to cure the alleged financial defaults, including the need to provide an increased bank guarantee or security deposit. This was obviously no easy matter.

The final day for compliance with the notice to remedy was 22 April 2011. That was Good Friday. Accordingly, the last working day within the 30 day period was Thursday 21 April 2011. On that day, Lewenberg & Lewenberg prepared a letter to Mr Kuperholz, which was intended to attach a cheque for the full amount of the arrears at 1 April 2011 ($134,383.25), and a cheque for $24,213.40, under protest, representing the additional amount claimed by way of ‘security deposit’ or increased bank guarantee. In the letter, Lewenberg & Lewenberg contended that the specified arrears of $134,383.25 included ‘payment in full’ of the interest claimed in the notice to remedy. That contention was misplaced. The amount paid for arrears was expressly stated in the letter to represent the arrears as at 1 April 2011, and that amount was separate from the interest claimed. It was of course open to the lessee to pay only those amounts specified in the notice to remedy, leaving other defaults as at 1 April 2011 for later payment, but it chose not to do so. Accordingly, whether or not the payment was made within the 30 day period allowed by the notice to remedy, the interest claimed was not paid. Indeed, it remains unpaid.

As events transpired, Mr Mohammad was unable to arrange the funds to meet these cheques on 21 April. Accordingly, the Lewenberg & Lewenberg letter, and attached cheques drawn on MEC’s trading account, were not delivered to Mr Kuperholz until shortly after 9:00 am on Wednesday 27 April 2011, being the first working day after the extended Easter break this year (Tuesday 26 April being a public holiday in lieu of ANZAC Day). This was too late. By that time, about an hour earlier, Mr Kuperholz and Mr Radman had attended at the premises with a locksmith, broken into the premises and posted a notice of re-entry. These events set off the alarm and, living close by, Mr Mohammad attended immediately. There was an altercation. The evidence as to what occurred is in conflict and it is unnecessary to resolve that conflict. Following this altercation, Mr Kuperholz and Mr Radman, together with the locksmith, withdrew and the holding arrangements described above were entered into.

In his letter setting out the agreed holding arrangements, Mr Kuperholz noted that the lessee’s agreement that the sum of $134,383.25 would be banked by the lessor was made without prejudice to the lessor’s right to contend that the payment failed to remedy the breaches relied upon.

Later, on 29 April 2011, Mr Kuperholz contended in correspondence to Lewenberg & Lewenberg that:

(1) although the sum of $134,383.25 exceeded the amount of the financial defaults specified in the notice to remedy, the excess represented amounts otherwise or later accrued due and, accordingly, that the outstanding interest amount of $17,107.27 remained unpaid. As appears above, I accept that contention;

(2) the MEC cheque for $24,213.40, while for the amount by which the lessor sought an increase to the bank guarantee, was not in fact a bank guarantee and thus did not comply with cl 19 of the lease. On this basis, the cheque was not accepted and was returned with the letter; and

(3) the lessor viewed Mr Mohammad’s presence at the premises as no more than a ‘subterfuge/charade/pretence’ and persisted in its contention that the lessee had parted with possession of the premises and that this breach continued unremedied. Mr Kuperholz provided further particulars of this contention by letter dated 2 May 2011.

This proceeding was then commenced, and application was made to the Practice Court for urgent relief. The holding arrangements were continued pending an urgent trial.

Did the lessee remedy any of the breaches within the time specified?

It was submitted on behalf of the lessee that, because the 30 day period specified in the notice to remedy expired on a public holiday (Good Friday), the time for compliance with the notice was extended to the next working day, Wednesday 27 April 2011, and that the lessee remedied all of the specified financial breaches on that day. I reject that submission. At common law, unless a contract provides otherwise, where the contracted time to perform an act falls on a weekend day or public holiday, there is no general extension for performance of the act until the next working day.[3] Given that this was a public holiday, the notice should have been complied with by that day, for example by internet transfer, or the like.
[3]Mardorf Peach & Co Ltd v Attica Sea Carriers Corporation of Liberia [1977] AC 850, 875, 881.

Accordingly, none of the relevant defaults were remedied within the 30 day period specified in the notice to remedy; and the lessor was entitled to terminate the lease and re-enter.

However, putting to one side the period within which the notice should have been complied with, there is nevertheless a dispute as to whether the financial breaches were remedied on 27 April 2011. Given my conclusion as to the time for compliance with the notice, and the urgency within which this proceeding must be determined, I do not propose to consider those issues in any detail. The financial defaults were not remedied within the 30 day period, and the lessor was thus entitled to terminate the lease and re-enter. In these circumstances, the issue with respect to those defaults becomes one of relief against forfeiture. In considering whether relief against forfeiture should be granted, I take the view that all financial defaults have now been remedied or, to any minor extent that they have not been, can be dealt with by imposing conditions to remedy them in formulating an order for relief against forfeiture.

In this context, it is convenient to mention a collateral issue raised by the lessor in an endeavour to multiply the number of defaults upon which it could rely in justifying its opposition to an order for relief against forfeiture being made, the lessor adopted a legally incorrect position concerning the payment of council rates. In summary, when the rent due for June 2011 was paid, in full and on time, the lessor purported to apply the first $4,275 towards an instalment of council rates which had recently become due. The lessor then applied the balance towards part-payment only of the June rental. On this basis, it submitted that the whole of that rent has not been paid and, accordingly, this evidences further default. This artificial approach by the lessor was adopted for the obvious purpose of multiplying the defaults upon which it could rely in the course of this proceeding. It was authorised in neither fact nor law.

In fact, the tender of the rental was a sufficient appropriation by the lessee of its intent to pay the rental debt and no other. The payment was made by Electronic Funds Transfer and designated ‘London h[otel] rent’. In these circumstances, the lessor was obliged to apply the payment towards payment in full of the June rent. This is the effect of the decision in Cory Brothers & Company v Owners of Turkish Steamship ‘Mecca’,[4] where Lord Macnaghten said:

When a debtor is making a payment to his creditor he may appropriate the money as he pleases, and the creditor must apply it accordingly. If the debtor does not make any appropriation at the time when he makes the payment the right of application devolves on the creditor.[5]

[4][1897] AC 286.

[5]Ibid, 293. See also, to the same effect, Deeley v Lloyds Bank Limited [1912] AC 756, 783.

Further, as to the facts, the evidence establishes that the invoice for these council rates had not been received by the lessee when it paid the June rental. In these circumstances, the default in payment is of a highly technical kind, if indeed there was a default until the invoice was received. I reject the lessor’s endeavour to challenge the clear evidence of Ms Tate that, although she knew that the council rates were due at the time, no invoice was received. Ms Tate struck me as a most meticulous bookkeeper.

The council rate instalment has now been substantially paid by later payment, with only $182.67 outstanding.

I turn to consider the alleged breaches, other than accepted financial breaches.

Was the lessee required to provide an increased bank guarantee?

It was submitted on behalf of the lessee that the notice to remedy was ambiguous when it specified a default by failing ‘to provide a security deposit in the amount of $212,513.40 (and which is a breach of clause 19 of the Lease).’ I do not accept that submission. Notices such as the notice to remedy should be given a commercially sensible construction. The task for the Court is to consider how a reasonable recipient would have understood the notice in the relevant surrounding circumstances.[6] Viewed in its context, which included prior demands for and promises to provide an increased bank guarantee, and having regard to the fact that the notice specifically refers to cl 19 of the lease (and not cl 7 which deals with security deposits), the lessee can have been in no doubt as to what was required.
[6]MLW Technology Pty Ltd v May [2005] VSCA 29, [78]-[82].

What was required by the notice was an increased bank guarantee which complied with cl 19 of the lease. No such guarantee was provided within the specified time, and the form of compliance proffered after that time was to provide a cheque from MEC for the increased amount, presumably to be held in conjunction with the existing bank guarantee as security for the rent. Although that conduct constituted practical compliance with cl 19, it was not strict compliance. The lessor was entitled to require strict compliance, because a bank guarantee is unable to be set aside under insolvency legislation, whereas a payment from an insolvent company may be liable to be set aside as a preference or on other grounds.

Next, the lessee in any event contends that no increased bank guarantee is, upon a proper construction of the lease, required. I do not accept that submission. It was submitted on behalf of the lessee that an adjusted bank guarantee is only required under cl 19.7 of the lease upon a ‘review or re-assessment of the rent’; and that a review or re-assessment can only occur upon renewal of the lease, following exercise of an option to renew. It was submitted that this was the combined effect of cls 6.1, 6.2 and 6.2.7 of the lease.

In support of this submission, the lessee relied upon two decisions concerning the meaning of a ‘review’ of rent for retail premises under the Retail Tenancies Act 1986. In Pasen v Buy Rite Discounts Ltd,[7] and GLG Nominees Pty Ltd v J R Prowse & Co Pty Ltd,[8] it was held that, for the purposes of that Act, there is no provision for the review of rental where the lease specifies a formula for the adjustment of rent within the four corners of the lease. Such a process does not provide for a review of the rental, but for the fixing of rental which is not for a uniform amount throughout the term of the lease.
[7]Unreported, Supreme Court of Victoria, 10 February 1992 per Brooking J.
[8]Unreported, Supreme Court of Victoria, 26 June 1991 per Coldrey J.

In my opinion, these cases are of no assistance to the lessee in the context of the lease in this case. Reading the lease as a whole, the concept of a ‘review’ of the rental includes the automatic adjustment process specified in cl 6.1 of the lease.

Clause 19.7 of the lease requires an adjustment to the bank guarantee ‘upon any review or re-assessment of the rent’. The obvious commercial intent is to ensure that the lessor maintains a bank guarantee equal in amount to six months’ rent. In circumstances where the rent is to automatically increase, it should be presumed that businessmen acting reasonably would understand this adjustment to apply whenever the rent is increased following any review or re-assessment.

The text of cl 6.1, which imposes automatic rental increases in accordance with a formula, supports the lessor’s contention that automatic adjustments fall within the concept of review or re-assessment in cl 19.7. Clause 6.1 expressly describes the automatic adjustment process as one of review:

6.1Where in this Lease it is provided that the rent shall be reviewed and adjusted in accordance with this sub-clause then the rent payable hereunder shall be adjusted in accordance with the formula set hereunder …[9]

[9]Emphasis added.

Accordingly, the lessee is obliged to provide an increased bank guarantee. Its endeavours to informally do so, by tendering of a cheque from MEC to be held as a security deposit, have not been accepted. In this regard, I note that Mr Tenuta has sworn that, if the Court decides against the lessee’s construction of the lease, the lessee will provide the increased bank guarantee.

Has the lessee parted with possession of the premises?

On behalf of the lessor, principal reliance was placed upon the recent decision of the Queensland Court of Appeal in ACE Property Holdings Pty Ltd v Australian Postal Corporation.[10] In that case, the tenant allowed a wholly owned subsidiary to occupy the leased premises. The subsidiary conducted a different business to that previously conducted by the tenant, and did so with its own employees and contracts. The subsidiary arranged council permits for and paid for substantial renovations to the leased premises. There was no evidence that the tenant retained any right to occupy or enter the leased premises (such as by retaining a key). Nor was there any evidence that the tenant exercised any degree of monitoring or supervision of the subsidiary’s business. Further, the evidence indicated that the tenant had concealed the true position from the landlord, because of a concern that an application to sub-lease the premises to the subsidiary would cause the landlord to seek a re-negotiation of a low rental which was favourable to the tenant.
[10][2010] QCA 55.

The trial judge held that the tenant had not parted with possession to the subsidiary, on the sole ground that the tenant, as the holding company of the subsidiary, had the power to exercise control over the subsidiary and thus over possession of the leased premises. Unsurprisingly, the Court of Appeal unanimously rejected that reasoning, and the appeal was allowed.

The facts in ACE Property Holdings are distinguishable from this case in many respects. In that case, the business conducted by the subsidiary at the premises was its business alone; there was no indication that it was a business being conducted on behalf of the tenant. Here, the lessee and Mr Mohammad were endeavouring by their arrangements to protect the very same business which was being conducted by the lessee until Mr Tenuta’s unfortunate illness, and which would remain the lessee’s business in the event that Mr Mohammad or his company (MEC) were unable to secure the lessor’s consent to an assignment of lease. In this sense, Mr Mohammad and MEC were not conducting their own business operations; rather, they were acting in concert with the lessee to preserve the lessee’s business in the exceptional circumstances which prevailed, albeit with the common purpose of endeavouring to obtain the lessor’s consent to an assignment of the lease and thus enable the proposed sale of the business. Further, unlike this case, the tenant did not retain a set of keys, had no right to enter the premises uninvited and did not monitor the subsidiary’s business in any way.

On the other hand, there are also some similarities between the ACE Property Holdings facts and this case. Like Mr Mohammad and MEC, the subsidiary paid all of the rent and outgoings – albeit by funding the tenant so as to enable it to make the actual payments. Like Mr Mohammad and MEC, the subsidiary enjoyed day-to-day control of the premises and conducted the business for their own profit. Like Mr Mohammad and MEC, the subsidiary applied for the council permits and paid for substantial renovations to the premises. Further, following the transfer of the liquor licence to MEC, the lessee in this case could no longer legally conduct the business at the premises. There is thus some similarity with the position of the tenant in ACE Property Holdings, who could not legally conduct the relevant business of the subsidiary with the particular workforce employed.

However, although ACE Property Holdings acts as a convenient collection of a number of factors which may be relevant to a determination of whether a tenant has parted with possession of leased premises, each case must, of course, depend upon its own facts.[11]
[11]Ibid, [84].

In ACE Property Holdings,[12] Keane JA (as his Honour then was) cited and approved the following statement by the Judicial Committee of the Privy Council in Lam Kee Ying v Lam Shes Tong:[13]

A covenant which forbids a parting with possession is not broken by a lessee who in law retains the possession even though he allows another to use and occupy the premises. It may be that the covenant, on this construction, will be of little value to a lessor in many cases and will admit of easy evasion by a lessee who is competently advised, but the words of the covenant must be strictly construed, since if the covenant is broken a forfeiture may result.
… [T]he question whether the first respondent has parted with possession must depend upon all the facts and circumstances …[14]

[12]Ibid.

[13][1975] AC 247.

[14]Ibid, 256-7. Emphasis added.

On behalf of the lessee, reliance was placed on Scala House & District Property Co Ltd v Forbes & Ors.[15] In that case, the tenant intended to appoint a manager of its café-restaurant business conducted on leased premises. However, the tenant’s solicitors mistakenly prepared an agreement with the proposed manager which, as a matter of law, amounted to a sub-lease. Accordingly, the lessee’s covenant against sub-letting without consent was breached and, in addition, it followed that the tenant had parted with possession of the premises. In reaching this result, Russell LJ was sympathetic to the tenant’s plight, because he accepted that a sub-lease had not been intended, only a management agreement. In that context, he said:

The solicitors for the [tenant] were genuinely convinced that there had been no breach: the [tenant] was also of that opinion on the basis of his solicitors’ advice, which coincided with the original intention of the [tenant] that the [proposed managers] were to be only managers for the [tenant] of his business as café proprietor. It is, I remark, not unusual that the business of A on A’s premises should remain his business managed by B on terms that B should pay £x weekly to A and keep the rest of the profits for himself. But, as I have indicated, that was not the whole arrangement between the defendants: the [tenant] was to have no control over the premises or business, and the arrangement amounted in law to a subletting at a profit rental for 12 years.[16]

[15][1974] QB 575.

[16]Ibid, 584.

Russell LJ went on to hold that the sub-letting without consent was a ‘once for all’ breach which was not capable of remedy.[17] However, the tenant had secured the sub-tenant’s surrender of the sub-lease and thus ‘did unscramble the situation’.[18] Accordingly, relief against forfeiture was granted, because to do otherwise would give the landlord ‘pennies from heaven’.[19]
[17]Ibid, 588.
[18]Ibid, 590.
[19]Ibid, 589.

The question for determination in this case is whether the management agreement, if implemented according to its terms on their proper construction, would have the effect that the lessee retained legal possession of the premises. I emphasise if implemented according to its terms on their proper construction. In my opinion, the intention of the lessee and Mr Mohammad, as revealed by the management agreement, should determine whether, as a matter of law, the lessee retained the right to possession of the premises. The fact that Mr Mohammad put the terms of the management agreement to one side in the respects discussed above should not, in circumstances of Mr Tenuta’s illness, alter the legal position under the management agreement. Given the seriousness of Mr Tenuta’s illness, and the effect that it had on his availability to consider issues and on his thinking at relevant times, no variation of the management agreement should be inferred from Mr Tenuta’s apparent acquiescence in Mr Mohammad’s departures from the management agreement.

It was submitted on behalf of the lessor that the arrangements constituted by the management agreement were, on a proper construction of that agreement, inconsistent with management as agent for the lessee, because the lessee retained ‘no rights of substance whatsoever as between it and MEC in respect of either the business or the premises’. For the reasons given below, I do not accept that submission.

The meaning of the management agreement should be ascertained in accordance with accepted principles of contractual interpretation. This requires the Court to consider what reasonable persons in the position of the parties would have understood the words to mean by reference to the text of the agreement, the surrounding circumstances known to the parties and the purpose or object of the transaction.[20] It is not necessary to first conclude that the words used are ambiguous before having regard to the surrounding circumstances and the purpose or object of the transaction.[21] In interpreting the words and resolving any ambiguity, the Court should proceed in a common sense and non-technical way and give the agreement a commercially sensible construction.[22] The Court should have regard to all of the words used in the agreement ‘so as to render them all harmonious’[23] and to ensure the congruent operation of the various components of the agreement as a whole.[24]
[20]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, [40].
[21]Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235, [11]-[13].
[22]Hillas & Co Ltd v Arcos Ltd [1932] All ER 494, 499, 503-4; Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437; Di Dio Nominees Pty Ltd, v Brian Mark Real Estate Pty Ltd [1992] 2 VR 732, 740; MLW Technology Pty Ltd v May [2005] VSCA 29, [76]-[81]; Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 770-1.
[23]ABC v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.
[24]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, [16].

Where the words in a commercial contract, read literally, lead to a conclusion which ‘flouts business commonsense’,[25] or lead to a conclusion ‘that something must have gone wrong with the language’,[26] the Court should endeavour to give the words a meaning which accords with business commonsense. In my opinion, that is especially so where, as here, the contract is made informally by businessmen and is not drafted by or with the assistance of lawyers.[27]
[25]Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201 per Lord Diplock; Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834, 840 per McGarvie J.
[26]Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913; Chartbrook Ltd v Persimmon Homes Ltd & Ors [2009] UKHL 38, [24] & [25].
[27]See for example, Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288, 300 per Isaacs J.

In this case, the relevant surrounding circumstances include:

(1) The lessee’s intention to sell the business conducted at the premises to Mr Mohammad or a company associated with him (MEC).

(2) The oral advice to Mr Mohammad by his solicitors that the transfer of liquor licence application had been conditionally approved by the Director for a trial period of 12 months.

(3) Mr Tenuta’s recent diagnosis with cancer, and his consequent inability to attend to the day to day running of the business for the foreseeable future.

(4) The fact that the rent under the lease was in arrears, and needed to brought up to date before the lessor would even consider discussing the application for an assignment of the lease to Mr Mohammad or MEC.

(5) The prior expressions of doubt by Mr Kuperholz on behalf of the lessor as to the suitability of Mr Mohammad or MEC as assignees of the lease, and the consequent need to provide Mr Mohammad and MEC with an opportunity to establish their suitability as assignees to the lessor’s satisfaction or, if not, to establish objective facts to assist in a court challenge against any refusal by the lessor to assign the lease.

(6) In the prevailing circumstances, the common interest of both the lessee and Mr Mohammad in preserving and developing the business during the currency of Mr Tenuta’s illness and pending finalisation of the application for an assignment of the lease.

Viewed against these surrounding circumstances, I find that the commercial object of the management agreement was to preserve and develop the lessee’s business at the premises for the common interests of the lessee on the one hand and Mr Mohammad and MEC on the other, as referred to above. That commercial purpose had clear benefits for both parties. It gave Mr Mohammad and MEC the opportunity to obtain an assignment of the lease and thus secure the business by purchase from the lessee. It gave the lessee the opportunity to preserve its business while Mr Tenuta dealt with his serious health issues, in the knowledge that if Mr Mohammad was unable to obtain an assignment of the lease there would nevertheless be a viable business for the lessee to either resume managing itself or to sell to another purchaser.

In my opinion, read in light of the surrounding circumstances and commercial object, the provisions of the management agreement provide that Mr Mohammad was intended to be a manager and agent of the lessee only, as follows:

(1) Clauses 2, 3 and 11 are consistent with and intention that the licence would remain with the lessee, with Mr Mohammad being entitled to appoint himself as nominee. The reference in cl 11 to Mr Mohammad ‘holding a liquor licence’ should be read consistently with cls 2 and 3, as a reference to Mr Mohammad being the lessee’s nominee during the period of his management.

(2) Clauses 5, 9 and 7 provide that the lessee is entitled to exercise a significant degree of control over the management of the business. Under cl 5 it was entitled to be fully informed on a weekly basis of all financial and other issues relating to the operation of the business. Under cl 9, its accountant was to control the formal financial statements, statutory obligations and insurance obligations of the business. Under cl 7, the lessee specified that Mr Mohammad was to ensure that its bank account was at all times placed in sufficient funds to meet the obligations of the business, including rent.

(3) Clauses 17, 18 and 19 provide that Mr Mohammad is to conduct the business by operating it through the lessee’s bank account, and appoint him a signatory with internet banking access for that purpose.

(4) Clause 12 expressly states that Mr Mohammad is to be a manager only, without any interest in the business. Clause 14 authorises him to communicate with the lessor ‘as authorised agent’ of the lessee.

(5) Clauses 4, 6 and 11 provide for management fees. In consideration for Mr Mohammad guaranteeing ‘any losses incurred by [the lessee]’ during the period of management, which losses are described as arising from ‘financial commitments that are made [by Mr Mohammad as manager] on behalf of [the lessee]’ (cl 4), Mr Mohammad is to receive a management fee equal to any net profit made by the lessee during the period of management (cls 6 and 11).

(6) Clause 10 is consistent with the parties defining the scope of the agency and management. For the avoidance of doubt, the manager has the right to hire and fire staff. This right is, when read together with cl 4 (‘financial commitments that are made on behalf of [the lessee]’), cl 5 (meetings to reconcile weekly payroll), cl 7 (Mr Mohammad ‘is to ensure that there are sufficient funds in [the lessee’s] account to pay all expenses’) and cl 9 (‘Business Activity Statements, WorkCare [and] Superannuation … to be controlled by [the lessee’s accountant]’), clearly one to be exercised as agent for the lessee. The fact that Mr Mohammad did not act in this fashion is, for the reasons given above, not to the point.

(7) Clause 8 is also consistent with management. For the avoidance of doubt, in circumstances where Mr Mohammad guarantees all losses, the clause draws attention to the possibility of termination fees being incurred if, in his capacity as manager, he determines to change service providers.

(8) Clause 15 is also consistent with management, as it concerns the duration of the appointment as manager. However, for the reasons given below, the duration of the appointment as manager is limited to the period allowed for Mr Mohammad (or MEC) to pursue its application for an assignment of the lease.

In my opinion it is clear that the management agreement may be terminated if Mr Mohammad fails to obtain an assignment of the lease. Clause 1 expresses an intention to assign the lease, ‘along with the liquor licence’, when the lessor agrees to a transfer of lease. Clause 16 obliges the lessee to assist and cooperate with Mr Mohammad in obtaining an assignment of lease, including by assisting and cooperating with any legal proceedings to compel the lessor to consent if it refuses an assignment. These provisions, the surrounding circumstances and commercial object of the management agreement affect the literal meaning of cl 15, which provides:

Unless by agreement Jamal may not be removed as the General Manager of the Bar but always subject to Jamal[‘s] compliance with the laws and regulations involving liquor licence legislation.[28]

[28]Emphasis added.

On a proper construction of the management agreement, cl 15 does not give Mr Mohammad the right to remain as manager indefinitely, unless he fails to comply with liquor licensing laws or by further agreement. Such an interpretation of cl 15 would be in conflict with the clear intention of cls 1 and 16 when read together, and it would make no commercial sense for the parties to agree that Mr Mohammad would be entitled to remain as general manager on the terms of the management agreement if his application for an assignment of the lease to MEC was refused by the lessor and that refusal was not overturned by a Court. Such a result would be in clear conflict with the commercial purpose of the management agreement, as stated above. Further, on a proper construction of the management agreement, Mr Mohammad has a limited time within which to pursue his assignment of lease application. Under cl 16, the obligation upon the lessee and Mr Tenuta to assist with legal action to challenge a refusal by the lessor to assign is limited to a refusal during the current term of the lease, which expires on 30 September 2011 (‘before October 2011’).

The remaining clauses of the management agreement (cls 10 and 13) concern capital expenditure by Mr Mohammad on renovations or maintenance to the premises. In this respect only, the management agreement contemplates that Mr Mohammad will not pay for works associated with the lessee’s business out of the lessee’s bank account, but will pay for any such works personally. Further, the ordinary meaning of cl 13, when read in the context of the agreement as a whole, is that the lessee is not obliged to refund any moneys spent by Mr Mohammad on capital works even if he fails to obtain an assignment of the lease. Such a result seems commercially unlikely, but not absurd. For example, Mr Mohammad may have not intended to undertake works to the extent that he has when he agreed to these clauses. Alternatively, this may simply be a risk which Mr Mohammad was prepared to bear in his endeavours to obtain an assignment of the lease, and to earn profit from the business in the meantime, because it would demonstrate significant good faith to the lessor. However, it is unnecessary to resolve this issue. The capital works have been undertaken to the benefit of the premises. Apart from contending that they support its contention that the lessee has parted with possession, the lessor makes no complaint about the works. Indeed it is to be inferred that the lessor would intend to take the benefit of the works if its right to re-enter the premises were to be confirmed by this Court. Further, the evidence establishes that the parties to the management agreement have appreciated the harshness of these provisions, and agreed that the cost of the capital works will be refunded to Mr Mohammad upon it becoming clear that no assignment is to take place. Mr Mohammad said so directly, and his evidence was supported by Ms Tate and Mr Tenuta. Such a variation to the management agreement accords with business commonsense and I accept that it is likely to have been made.

Mr Mohammad also gave evidence that he understands the amounts expended by him or MEC on capital works will be deducted from the agreed purchase price of $500,000 if he obtains the lessor’s consent to an assignment of lease and the sale of business is completed. It is unnecessary to determine whether this understanding is correct, and the Court does not have sufficient evidence in any event to decide that issue. Mr Tenuta did not agree that a firm purchase price of $500,000 had been agreed. If that be correct, then the whole of the price, including an allowance to be made for capital works, remains for agreement if the lessor’s consent is received.

The lessor also placed significant weight upon the lessee’s breach of cl 17 of the lease, by applying for a transfer of the liquor licence without consent, and thus facilitating the mistaken issue of a licence to MEC. Those breaches are not the subject of the notice to remedy, and a further notice giving 30 days to remedy is required if they are to be relied upon as separate breaches giving rise to a right to terminate the lease if not remedied. It was submitted, however, that these breaches support a finding that the lessee had parted with possession, because the lessee no longer had a right to conduct the business at the premises. I do not accept that submission. For the reasons given above, I find that Mr Tenuta did not intend for the licence to be transferred until consent was first given by the lessor to an assignment to MEC. Taking his evidence as a whole, I find that Mr Mohammad had no real understanding of the technicalities of liquor licensing. Further, for the reasons given above, I find that the lessee has a right to correct the premature, and thus mistaken, approval of a licence transfer and the issue of a liquor licence to MEC. In that regard, Mr Mohammad gave evidence that he had ‘no problem’ in re-transferring the liquor licence to the lessee if the Court so required. As appears below, I will make it a condition of relief against forfeiture based upon the established financial breaches that the lessee, Mr Mohammad and MEC remedy this situation by applying to the Director to re-transfer the liquor licence to the lessee. Re-transfer will restore the position contemplated by the management agreement. If the condition is not complied with, the forfeiture will simply remain. For the avoidance of doubt, this Court expects that the Director will determine the application promptly and, without binding it to act in a particular way, will pay due regard to these reasons for judgment. If, for reasons which I cannot contemplate, the application is refused, the lessor has its rights under the lease to serve a notice to remedy for breach of cl 17.

In this context, I should note that I reject the submissions advanced on behalf of the lessor to the effect that the lessee, through Mr Tenuta, knowingly and deliberately breached cl 17 of the lease by signing the application for a transfer of the liquor licence to MEC; or that Mr Tenuta in any way misled the Director or the Liquor Licensing Panel by failing to specifically draw attention, in his reference for Mr Mohammad and MEC dated 8 April 2010 or otherwise, to the fact that the lessor was yet to consent to an assignment of the lease. Mr Tenuta’s understanding of the applicable process for transfer of a liquor licence was in accordance with the Director’s standard practice, and I accept his evidence that it was not until recently that he first appreciated that a licence had in fact been issued to MEC.

The lessor also relied upon MEC’s application for a footpath trading permit in its own name, based upon production to the local council of its liquor licence, to conduct footpath trading. It was submitted that this conduct by MEC, which was not objected to by the lessee, provided further evidence that the lessee had parted with possession of the premises. I do not accept that submission. Although the application for a footpath trading permit was made in the name of MEC, that was dictated by the fact that it was, by mistake, the only holder of a liquor licence to trade at the premises – and thus on the footpath adjacent to the premises. As appears below, I will also make it a condition of providing relief against forfeiture for the established financial breaches that the lessee apply for the footpath trading permit to be transferred to it, consequent upon regularisation of the liquor licence position. If, for some reason I cannot contemplate, such a transfer application were to be refused, the footpath trading would have to cease upon the liquor licence reverting to the lessee. That result would not be a breach of the lease, however unfortunate it may be for the continuing profitability of the business conducted at the premises. Again, this Court expects the relevant council to deal with such an application promptly and, without binding it to act in a particular way, to pay due regard to these reasons for judgment.

Is the lessee entitled to relief against forfeiture?

In considering relief against forfeiture it is necessary to consider the financial defaults which were not remedied within the 30 day period specified in the notice to remedy. As appears above, a number of these defaults have now been remedied, albeit late. The two unremedied defaults of any significance relate to interest ($17,107.27) and the provision of an increased bank guarantee (by $24,213.40).

At the factual level, the liability to pay interest is acknowledged. As appears above, I do not accept that it was paid as part of the larger cheque accepted by the lessor as part of the holding arrangements. However, there is no reason why this amount cannot now be paid and the default remedied as a condition of granting relief against forfeiture.

As to the increased bank guarantee, the tender of the relevant amount, albeit under protest and not in strict accordance with cl 19 of the lease, and Mr Tenuta’s statement that an increased guarantee will be provided if the Court determines it is required, gives me sufficient comfort that the lessee intends to remedy this default also, and will do so if ordered as a condition of granting relief against forfeiture.

In respect of both of these outstanding financial defaults, although the lessee’s arguments have been rejected, the arguments advanced were open. That is a relevant matter in considering whether relief against forfeiture should be given on condition that the relevant lease covenants be complied with, now that the Court has determined the relevant issues. On the basis that the lessee has not breached the lease by parting with possession of the premises without the lessor’s consent, I would order relief against forfeiture on condition that the lessee pay the amount of outstanding interest, and provide an increased bank guarantee as required by the lease, within 14 days of this day.

It was submitted on behalf of the lessor that relief against forfeiture should not be granted, even on this limited view of the facts, because the Court cannot be confident that the lessee will comply with its financial obligations under the lease in the future. In that regard, the lessor emphasises that there has been a history of continual late payment of rent and other outgoings due by the lessee under the lease, and that promises to increase the bank guarantee (made at a time when Mr Tenuta acknowledged a liability to do so) was not complied with.

Reliance was placed upon the well-known decision of Ormiston J in Jam Factory Pty Ltd v Sunny Paradise Pty Ltd & Ors.[29] In that case, Ormiston J considered a submission by the landlord that the tenant had displayed a chronic inability to meet its obligations and that, accordingly, there could be no assurance that the rent would be paid in the future. This contention was rejected. Ormiston J noted the accepted position, that relief against forfeiture for non-payment of rent ‘should be granted usually as of course, save in exceptional circumstances’, because the right of re-entry for non-payment of rent is ‘primarily a security for that rent‘.[30] As to the specific submission in that case, Ormiston J stated:

The power to refuse relief is clearly reserved for cases of consistently lengthy defaults which may fairly lead to an inference that, even if relief be given, there is a reasonable likelihood that the rent will not be paid in future, at least for some considerable time after the due date for payment.
…
In the present case, the worst that can be said of the tenant was that its approach to its obligations to pay rent and outgoings was desultory. In many respects it does not deserve to be relieved against the forfeiture, but its acts did not display a deliberate denial of the landlord's rights, nor were the earlier breaches of that obligation of a kind which could place this case in the ‘exceptional’ category. The proposal for payment of rent, together with the guarantee, provide at least some assurance against immediate repetition of the breach.[31]

[29][1989] VR 584.

[30]Ibid, 590.

[31]Ibid, 591. Emphasis added.

The reference in the above quoted passage to a guarantee was to directors’ personal guarantees, not to a bank guarantee as here.

In this case, I am not satisfied that it is reasonably likely that the rent will not be paid in the future. The existing bank guarantee is sufficient to cover the rent until the expiration of the current term on 30 September this year. At that time, if the lease remains on foot and, as appears likely, the option for a further term is exercised, there will be a review of the rental to market. As appears above, there is a realistic and not fanciful possibility that the rental may decrease at that time. This will increase the probability of rent being paid on time in the future. Further, in that regard, the evidence would indicate that there has already been some improvement in the takings of the business at the premises, and that recently conducted renovations, the re-opening of the restaurant on the first floor and the obtaining of a permit to enable footpath trading may all increase the takings and thus the likelihood of rent being paid in the future.

However, as indicated above, I propose to order relief against forfeiture for the established financial breaches subject to a number of conditions:

(1) Within 14 days, the lessee pay interest to the lessor in the sum of $17,107.27.

(2) Within 14 days, the lessee provide an increased bank guarantee to the lessor, in the further sum of $24,213.40.

(3) The lessee and Mr Mohammad undertake to the Court to act in accordance with the management agreement as construed by the Court. This will require, in particular, that the business be conducted in the name of the lessee and through its bank account, and that the lessee shall directly employ the staff at the business and pay the rent.

(4) Within 14 days, the lessee apply to the Director for the re-transfer of the liquor licence for the premises to it and for the appointment of Mr Mohammad as its nominee for the balance of the trial period specified in MEC’s current liquor licence; and pursue that application with all reasonable expedition. (This condition is necessary to restore the position intended at all times by the parties, and which would have obtained but for the mistake by the lawyers acting for MEC and Mr Mohammad on the one hand and the Director on the other hand, and unwittingly formalised by the consent orders made by VCAT. This course of action will have the added benefit of curing the lessee’s breaches of cl 17 which have undoubtedly occurred, even though they are not yet the subject of a notice to remedy. If the re-issue of the licence to the lessee on these terms can be achieved promptly, about which I see no difficulty on the material available to this Court, it is likely that a multiplicity of proceedings will be avoided in respect of the breaches relating to the transfer of the liquor licence.)

(5) Within 14 days, and in anticipation of the re-issue of the liquor licence to it, the lessee apply to the City of Port Phillip to transfer the footpath trading permit relating to the premises to it upon re-issue of the liquor licence; and pursue that application with all reasonable expedition.

(6) Mr Mohammad and MEC undertake to the Court that they will support the lessee’s applications required by paras (4) and (5) above, and will also make their own applications to the same effect and pursue those applications with all reasonable expedition.

In the event that I am wrong in my conclusion that, notwithstanding the mistaken transfer of the liquor licence to MEC, the lessee has not parted with possession of the premises, I would have granted relief against forfeiture on the same conditions as specified above. The breaches of cl 17 are in my opinion remediable by paras (4) and (6) of those conditions.

In deciding that this is an appropriate case for relief against forfeiture on the conditions stated, I have concluded that, subject to compliance with these conditions, there is no demonstrated loss to the lessor in this case. That comment applies to the breaches of cl 17, as well as the financial breaches. On the other hand, the effect of forfeiture will be to cause demonstrated loss to the lessee, who will lose whatever goodwill it has built up in the business (including goodwill engendered by the recent actions of Mr Mohammad and MEC in that regard). In that regard, it is relevant that there is a potential further 15 years for the lease to run if all options are exercised. Even if the chance of the lessor consenting to an assignment of lease to Mr Mohammad or MEC is unlikely, Mr Mohammad and MEC have the right to challenge any refusal of consent in this Court. Further, in the event of refusal of consent, the lessee can manage the business itself or else seek to find another proposed assignee who may be acceptable to the lessor or the Court.

I will hear the parties as to the form of orders, and as to costs.

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Citations

Lontav Pty Ltd v Pineross Custodial Services Pty Ltd [2011] VSC 278

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[2011] VSC 278

23 June 2011