Mitchell Supermarkets Pty Ltd v CJR Asset Management Pty Ltd
[2021] ACTMC 10
•13 August 2021
MAGISTRATES COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Mitchell Supermarkets Pty Ltd v CJR Asset Management Pty Ltd |
Citation: | [2021] ACTMC 10 |
Hearing Date(s): | 12 – 16 April 2021, 5 July 2021 |
DecisionDate: | 13 August 2021 |
Before: | Special Magistrate Campbell |
Decision: | See [71] – [73] and [94] – [98] |
Catchwords: | CIVIL LAW – COMMERCIAL LEASE DISPUTE – Derogation of Grant – Breach of quiet enjoyment – termination of lease |
Legislation Cited: | Leases (Commercial and Retail) Act 2001 (ACT) |
Cases Cited: | Aussie Traveller Pty Ltd v Marklea Pty Ltd [1998] 1 QDR 1 Bankstown Trotting Recreational Club Ltd v Chisholm [2016] NSWCA 274 |
Parties: | Mitchell Supermarkets Pty Ltd (Plaintiff / First Defendant to Counterclaim) CJR Asset Management Pty Ltd (Defendant/ Plaintiff to Counterclaim) Harry Vangelatos (Second Defendant to Counterclaim) Fofi Poulakis (Third Defendant to Counterclaim) |
Representation: | Counsel John Masters (Plaintiff/ First, Second and Third Defendant to Counterclaim) Jason Moffett (Defendant/Plaintiff to counterclaim) |
| Solicitors Baker Deane & Nutt (Plaintiff) BAL Lawyers (Defendant) | |
File Number(s): | CL23 of 2019 |
SPECIAL MAGISTRATE CAMPBELL:
Mitchell Supermarket Pty Ltd (“Mitchell”) commenced proceedings against CJR Asset Management Pty Ltd (“CJR”) on 15 April 2019, initially in the Supreme Court of the ACT. The proceedings were transferred to the Magistrates Court on 11 September 2019, that being the appropriate Court for proceedings under the Leases (Commercial and Retail) Act 2001 (ACT) (‘the Act’). The Respondent filed its defence and counterclaim on 16 October 2019. The matter proceeded to hearing before me on 12 - 16 April and 5 July 2021.
At all relevant times, Harry Vangelatos, and his wife, Fofi Poulakis were directors of Mitchell.
The proceedings relate to the lease between the parties, whereby Mitchell leased premises in a small local shopping centre from CJR. During the period of the lease, CJR granted a lease to a tattoo parlour in the same shopping centre. Mitchell claim that this was a derogation from the grant, and that as a result there was a significant decline in their business. Mitchell was in default of the rental payments and CJR terminated the lease on 29 April 2019. CJR counterclaim for damages associated with the loss of rent, and early termination of the lease. CJR’s counterclaim is also against Harry Vangelatos and Fofi Poulakis, pursuant to the indemnity and guarantee they each personally provided for Mitchell.
Background
CJR is the registered proprietor of land and buildings situated at Block 23, Section 161, Monash, known as 25-27 Barraclough Place, Monash. The Crown Lease provided:
Clause 3(a) To use the premises only for the purpose of retail, personal services, restaurant and/or take-away provided always that a portion of the premises with a gross floor area of not less than 300 square metres is to be used for the purpose of a supermarket for the sale of food beverages and domestic household goods.
There are two buildings on the land, one housing tenancy 3, the subject premises of the lease between CJR and Mitchell, (“the premises”) and a smaller building, housing tenancies 1 and 2. There is a carpark located on the land to be used by each of the tenants. At the time that Mitchell commenced its lease of tenancy 3, tenancy 1 and 2 were leased to a hairdresser and a Chinese restaurant. A veterinary clinic operates next to the shopping centre but is not part of the land owned by CJR.
On 26 September 2013 CJR purchased the property and became the lessor for the premises under the sublease (registration number 1891788), which at the time was Canberra Choice Supermarkets Pty Ltd.
On 3 May 2016, Mitchell purchased the supermarket business from Canberra Choice Supermarkets for $420,000. Canberra Choice Supermarkets transferred its interest in the sublease to Mitchell with the settlement date being 29 June 2016.
By Deed of Consent to Assignment and Guarantee and Indemnity dated 29 June 2016, CJR consented to the assignment of the lease of the premises to Mitchell. Clause 9 of the Deed provides:
In consideration of the Owner consenting to the assignment the Incoming Guarantor (Vangelatos and Poulakis) jointly and severally covenants with the Owner that each of them will be jointly and individually liable to the Owner:
a) For the due and punctual payment of all rent and other moneys payable under the Lease and;
b) For the due and punctual performance and observance of all the terms, covenants, and conditions on the part of the Assignee or the Tenant contained in the Lease.
The sublease of the premises was transferred to Mitchell Supermarkets on 29 June 2016 and Mitchell commenced trading as Spar Supermarket from 30 June 2016.
The Lease was for a period of 10 years (1 July 2013 – 30 June 2023) with an option to renew for a further 10 years. The rent was set at $155,250 per annum (subject to rent review provisions) and the equal monthly amount was payable in advance on the first day of each month during the term of the lease.
In or about February 2017, the tenant operating the hairdressing business in the shopping centre vacated its premises (Tenancy 1). These premises were vacant until Studio Wake commenced trading in September 2017.
Studio Wake is a business providing tattoos, which has been referred to a ‘Tattoo Parlour’ during these proceedings. A sublease for Tenancy 1 between the proprietors of the Studio Wake and CJR commenced on 1 May 2017, however trading did not commence until 1 September 2017.
During 2017, Mitchell failed to pay rent in accordance with the terms of the lease, firstly commencing with late payments, then making only partial payments. On 4 April 2019, CJR served a Notice of Default in relation to $195,553.79 owing in rental payments, following application of the bank guarantee of $46,652.
Mitchell commenced these proceedings on 15 April 2019.
Mitchell made no payments following service of the Notice of Default and on 26 April 2019, CJR served a Termination Notice on Mitchell. Mitchell returned the keys on 14 May 2019, leaving their existing fit out in the premises.
Mitchell’s claims
Mitchell seeks damages for breach of contract by CJR, namely breaching the covenant for quiet enjoyment and derogation from the grant. It further seeks compensation pursuant to s81(1)(b) and (e) of the Act, which provides:
The lessor is liable to pay the tenant reasonable compensation for loss or damage (other than nominal loss or damage) suffered by the tenant if the lessor—
(b) takes action that would materially inhibit or alter the flow of customers to the premises; or
(e) otherwise adversely affects the trade of the tenant by the lessor’s conduct without reasonable cause, whether by act or omission
There are three issues for determination. Firstly, whether Mitchell has established on the balance of probabilities, that CJR substantially disturbed, or interfered with Mitchell’s occupation of the leased premises, by providing a lease to Studio Wake, such that it amounted to a breach of CJR’s implied obligation as lessor not to derogate from its grant. The second issue is whether the granting of the lease to Studio Wake was a breach of the quiet enjoyment clause in the Lease. Finally, whether CJR’s actions have materially inhibited or altered the flow of customers to the premises or otherwise adversely affected the trade of the tenant by the lessor’s conduct.
CJR’s counterclaim
CJR denies that granting a lease to Studio Wake was a derogation from the grant to Mitchell or in any way constitutes conduct that would enliven the compensation provision in s81 of the Act. It further denies any breach of the Lessor’s Covenant for Quiet Enjoyment and submits that in any event, this clause in the lease only applied whilst the tenant was compliant with its financial and other obligations under the lease.
CJR claim that Mitchell had breached the Rent Term, the Outgoings Term, the Interest Term, and the GST Term of the Lease, and that Mr Vangelatos and Ms Poulakis breached the Guarantee Term and Indemnity Term by not paying the arrears payable by Mitchell.
CJR further claim that Mitchell has breached the Maintenance Term and the Repair Term in failing to ‘make good’ the premises, and again that Mr Vangelatos and Ms Poulakis have breached the Guarantee Term and Indemnity Term by not remedying these breaches by Mitchell.
CJR seeks against Mitchell, Mr Vangelatos and Ms Poulakis the rental arrears, its losses for the vacant period, interest, and legal costs pursuant to the Costs Term in the lease, and its costs in making good and repair of the premises.
The plaintiff’s claim that the decline in sales it experienced in 2017 – 2019 was due to the opening of the tattoo parlour, in particular to the unsavoury persons that attended the tattoo parlour. It claims that these factors, and publicity associated with Outlaw Motorcycle Gangs (‘OMCG’) committing offences against the proprietors of the tattoo parlour, deterred the local community from buying their groceries from the supermarket, when other supermarkets were also nearby. It is claimed that the tattoo parlour itself and the customers it attracted, damaged, or destroyed the nature of the safe, local, ‘family friendly’, shopping centre.
CJR claim that the decline in sales and Mitchell’s financial difficulties were already occurring before the opening of the tattoo parlour and that there was no substantial interference with the purposes of the use of the supermarket premises by the tattoo parlour.
The alleged interference or disturbance
Mitchell claims in paragraph 25 of its Statement of Claim:
Immediately upon the Tattoo Parlour opening for the business, its clientele commenced:
a) Parking in areas not designated for parking
b) Smoking cigarettes in front of the tattoo parlour and the premises
c) Loitering, including in gang associated uniform and other dramatic garb
d) Speeding, performing burnouts and donuts and revving motorcycles
e) Consuming alcohol in front of the tattoo parlour
f) Engaging in harassment and other antisocial behaviour towards the customers of Mitchell
g) Engaging in criminal acts, including physical abuse and brandishing a gun in public.
It further claims at para 34:
As a result of the existence of the Tattoo Parlour and the occurrences pleaded in paragraph 25, Mitchell’s profitability was reduced drastically in that:
a) Regular and potential customers avoiding the area due to the existence of the Tattoo Parlour
b) Customer and potential customers being intimidated by the Tattoo Parlour clientele
c) Customers are required to pass through inebriated clientele of the Tattoo parlour and their inebriated behaviour in order to enter and egress from the supermarket
d) Customers cannot shop with ease and feel threatened and intimidated by the tattoo parlour clientele
e) Customers are not able to park in the complex due to the motorbikes being parked in the complex, including being parked in spots reserved or marked for cars
f) Customers prefer to shop at competitor supermarkets not blighted by a tattoo parlour.
The Evidence
The evidence of the alleged conduct of the customers of the Tattoo Parlour came from Harry Vangelatos. Most of this was very generalised comments of people smoking, drinking, and loitering in front of the Tattoo Parlour. Mr Vangelatos referred to heavily tattooed members of OMCG’s frequenting the area. Mr Vangelatos said he regularly spoke to Kym at Civium Property Group (who became the property manager in August 2017) about these matters and was told there was nothing he could do.
There was no evidence of any specific examples of customers of Mitchell being intimidated or frightened to attend the supermarket, nor having to pass through inebriated clientele or being unable to find parking due to the number of motorcycles parked in the parking area.
Mr Vangelatos referred to three incidents where the proprietor of Studio Wake was assaulted by an OMCG member (July 2017, September 2017, and February 2018). The last incident was reported in the Canberra Times, stating the President of the Nomads OMCG punched a man in the face at the Tattoo Parlour. Mr Vangelatos states that following these incidents, he noticed a significant decline in his profits, and he attempted to negotiate a reduction of rent. It is clear from evidence which will be referred to later in these reasons, that Mr Vangelatos had sought a reduction in his rent in August 2017, that is prior to the incident reported in the Canberra Times in February 2018.
Mr Vangelatos also stated that the police presence in the area became commonplace once the Tattoo Parlour opened. The PROMIS records produced under subpoena by the Australian Federal Police for all attendances at Monash Shops for the period July 2013 to 18 March 2021 do not support this claim. Prior to 2017, the police regularly attended the area for burglary, shoplifting and damage property offences mostly in relation to the supermarket. In 2017, police attended the area on three occasions for report of thefts from the supermarket. In February 2018 police attended the Tattoo Parlour in relation to an assault and a person brandishing a firearm (this being the OMCG incident reported by the Canberra Times). The remaining five reports for 2018 all relate to conduct involving the supermarket, including theft, robbery, burglary, and property damage. This data is similar in number and types of offences involving the supermarket in the period 2014- 2017. I am unable to conclude that there was an increase of police presence at the Monash shops following the opening of the Tattoo Parlour.
There has been no complaint regarding the customers of the tattoo parlour from the other tenant, being the Chinese Restaurant, nor has there been any complaint from the Veterinary Clinic, although they are not a tenant of CJR.
On 1 March 2018, Mr Vangelatos’s solicitors sent a letter to CJR alleging that the antisocial behaviour of the Tattoo Parlour’s customers has caused substantial business losses for Mitchell. It claimed an entitlement to compensation for CJR’s breach of covenant of quiet enjoyment. Mitchell requested CJR terminate the lease to the Tattoo Parlour and reduce the rent payable by Mitchell
CJR through its solicitor, responded by asserting they had no legal basis to terminate the lease with Studio Wake nor was it liable for the acts of a third party. It had in fact provided directions to Studio Wake that smoking was not to occur in the vicinity of the shopfronts. CJR stated that it had investigated the complaints regarding drinking alcohol (including contacting the other tenant) and found that claim unsubstantiated. However, it had asked Studio Wake to ensure no such behaviour occurs. Finally CJR referred to the right to quiet enjoyment provision in the lease was “subject to the tenant paying the rent” which Mitchell was in default (arrears of $95,478 owing at date of the letter). CJR demanded that the arrears be paid within 14 days, and its intention to call on the bank guarantee if Mitchell failed to pay.
Mitchell relied on the expert evidence of John Milhailaros who provided a report date 31 July 2020. The report stated
It our understanding that the tattoo parlour commenced operating on or around September 2017. When analysing the spreadsheet prepared by Burwood Accountants there is a significant drop in revenue in the month of November 2017, compared to the respective month in the previous year.
Overall the monthly sales appear to drop around this time and a pattern is established whereby each month thereafter is significantly lower than in the prior year.
In preparing the report, Mr Milhailaros had enquired as to whether there had been any due diligence to establish the basis of the valuation of the business at $420,000. In cross examination, Mr Milhailaros agreed that taking advice about the value of the business from the vendor of the business (as was established in the evidence from Mr Vangelatos) was unusual and that he would expect a buyer to do their own due diligence.
Mr Milhailaros had requested till rolls to assist with assessing foot traffic and purchases and was told that all relevant till rolls was kept at the store premises, which was no longer in the custody of Mitchell. Mr Vangelatos had in fact admitted in his evidence that he still had the “end of day” records which could have been provided. Mr Milhailaros agreed that these would have provided useful additional information.
Mr Milhailaros said in evidence that the information he had been provided showed Mitchell was making money prior to the opening of the Tattoo Parlour. He was unaware that Mitchell had made application for rent relief in about July - August 2017. In cross examination Mr Milhailaros was shown profit and loss statements for Mitchell for the period July 2016 – June 2017,[1] and 1 July - 6 December 2017.[2] The first period showed a loss of just under $60,000 and the second period showed a loss of just over $18,000. Neither of these documents had been provided to Mr Milhailaros when preparing his report.
[1] Court book, page 340.
[2] Ibid 342.
Mr Milhailaros believed that Mitchell was paying its debts in the relevant period and was never told that it was experiencing financial difficulties. Mr Milhailaros accepted that had he been aware of these matters his opinion could have been different to that expressed in his report.
I am of the view that Mr Milhailaros’ report has been seriously undermined by this cross examination. Mr Milhailaros’ report shows that there were business losses for Mitchell after the opening of the Tattoo Parlour, however other evidence suggests that the pattern of business losses commenced at a time prior to the opening of the Tattoo Parlour. Mr Milhailaros’ evidence does not support the plaintiff’s case that the losses were solely attributable to the opening of the Tattoo Parlour.
CJR relied on the expert report and evidence of Andrew Sykes. His report stated
4.55: As demonstrated in the above chart, there is a clear trend of declining sales.
4.56: However, what is also evidence from the chart is that the declining trend in sales commenced in or around February 2017 which is well before the opening of the Tattoo Parlour, which opened in September 2017. This trend has then simply continued throughout the period.
4.57: Had the decline in performance of Mitchell been linked to the opening of the Tattoo parlour, I would expect to see the 3 months trailing average sales of Mitchell to be above the linear trend line up until 1 September 2017 and then fall below the trend line, thereafter.
4.58: Based on this analysis I consider it unlikely that the trend of reducing sales can be linked to the opening of the Tattoo Parlour given the trend commenced some 4 to 5 months prior to this event.
In his affidavit dated 8 December 2020, Harry Vangelatos referred to roadworks on Ashley Drive commencing in October 2016 and completing in March 2018. He stated this had an impact on the business and accounted for the decline in sales for the period prior to the opening of the Tattoo parlour. Only very vague details about these roadworks were provided so it is difficult to assess whether they had any impact on the business.
Ms Poulakis sent a text message to Mr Ryan on 14 July 2017 apologising for the late rent and stating the “Late upgrades to Ashley Drive has slowed our trade right down this month.” This does not support the claim that the impact of the roadworks had commenced by February 2017.
As Mitchell was experiencing financial difficulties by mid-2017, Mr Vangelatos approached CJR to seek a rent reduction. Although Mr Vangelatos said the meeting occurred in April 2018, it is accepted from the evidence of Christopher Ryan, Director of CJR, that this meeting occurred on 2 August 2017.
Mr Vangelatos said that it was orally agreed at that meeting that Mitchell would pay a reduced rent of 50% with a view to reviewing the rent once the road works were complete. Christopher Ryan denies any such agreement was reached; however it is apparent from Mr Ryan’s email to Ms Poulakis dated 10 August that there had been a discussion about reducing the rent. In this email, Mr Ryan informs Ms Poulakis that he had engaged Civium Property Group to manage the shops and states
“Now seems like a good time with a new tenant starting in the saloon (sic) and they also probably have more expertise dealing with the options around the proposed rent abatement for the supermarket.”
The activity statement from CJR shows the following rental payments for the months of 2017 prior to the opening of the tattoo parlour:
Due date Rent payable Date paid Amount paid Outstanding balance 1 Feb 2017 $18,434.47 6 Feb 2017 $12,600
$5,834.47 (credit card payment)1 March 2017 $18,692.01 9 March 2017 $10,000
$86701 April 2017 $18,320.07 7 April 2017 $18,320.07 1 May 2017 $18,320.07 8 May 2017 $18,320.07 1 June 2017 $18,320.07 12 June 2017 $9,320.07
$9,000 (credit card payment)1 July 2017 $18,786.59 2 August 2017 $9,786.59 25 August 2017 $9,000 1 Aug 2017 $18,786.59 25 August 2017 $393.30 $18,393.29
It is apparent that Mitchell had a pattern of paying rent late, and by 1 September 2017 were already owing $18,393.29 in outstanding rent to CJR.
The Tenant Activity Report prepared by Civium for the period commencing 1 September 2017, shows an opening balance of $0, so I am unclear whether further payments were made by Mitchell before this date to reduce the outstanding balance of $18,393.29.
Mr Vangelatos states that $18,000 was paid by Mitchell to settle the outstanding rent. This is denied by Mr Ryan, however the fact that the opening balance as of 1 September supports Mr Vangelatos’ statement.
From 1 September 2017, the invoices continued to refer to the base rent of $16,017.40 (with the variable outgoings separately itemised in each invoice as $3,046.11) (including GST), totalling $19,063.51 payable by Mitchell on the first day of each month. There is no record that Mitchell paid any money in September 2017, however it made payments of $9,393.30 on 2 October, 2 November, 7 December, 2 January 2018, 22 January, 26 February, 3 April, 30 April, 28 May, 3 July, 6 August 4 September, 1 October, and 15 October. From 15 October onwards, the payments from Mitchell were less regular and of varying amounts.
Following the meeting in August, Mitchell operated on the basis that it had to pay only 50% of the rent, despite the invoices continuing to refer to the full amount payable under the lease. Mr Ryan concedes that Mitchell continued to pay this reduced rent however he states there was no such agreement to vary the terms of the lease. I have earlier referred to the letter from Mitchell’s solicitor in March 2018 where, amongst other matters, it sought a reduction in rent. The fact that in March 2018 Mitchell requested a reduction in rent corroborates Mr Ryan’s evidence that no agreement had been made following the meeting in August 2017.
Mr Vangelatos gave evidence. I formed the impression that he was not a very experienced businessperson and did not keep records of important conversations or meetings. He was at times evasive in his answers, and it became apparent that he had not disclosed all relevant material to his solicitors, such as his “end of day” records. Mr Vangelatos tended to give very generalised accounts of the alleged conduct of the Tattoo Parlour’s clientele. He admitted that he had never reported any of the conduct to the AFP, he had no records of the complaints he had made to Civium about the customers of the Tattoo Parlour, and he had not taken any photographs of the alleged conduct.
Derogation from the grant
Nordern v Blueport Enterprises Ltd [1996] 3 NZLR 450 (‘Norden’) is a decision of the High Court of New Zealand. In Norden it was held that the derogation from the grant in a lease occurs if a lessor interferes substantially with premises that it leased, so as to render them materially less fit for the purposes for which they were leased. This obligation does not depend on any specific covenant in the lease, nor is it implicitly removed by a covenant for quiet enjoyment in a lease. Norden involved a lease in an office building to a tenant operating a computer personnel agency. The lessor later leased the floor above to a business operating a brothel. The two businesses shared a foyer. Unsurprisingly, the first business complained about noises and smells emanating from the brothel, as well as complaints about the unsavoury persons and their behaviour using the area, including urinating, and vomiting in the common foyer. The first business operated during typical business hours, however the brothel operated much longer hours, and this raised additional security concerns.
Elias J stated at 456:
I accept that a lessee who wishes to restrict a landlord’s ability to use or let the premises remaining for any purposes, will need to make explicit provision in the contract in most circumstances. Where, however, the use adopted so substantially affects the purpose for which the lease is granted as to amount to derogation from the grant, then in my view the ordinary approach is displaced. Clause 4.3 of the lease, disclaiming any warranty of suitability, is not to be construed to permit derogation: White v Harrow. Whether such point is reached is, as the cases cited above indicate, a question of fact and degree..
The NSW Court of Appeal recently considered derogation from the grant in Bankstown Trotting Recreational Club Ltd v Chisholm [2016] NSWCA 274. The Court of Appeal held derogation from the grant in relation to leasehold interests is appropriately conceptualised as an implied covenant or agreement by the lessor not to do anything to disturb or derogate from the lessee’s entitlements under the lease. The scope of this covenant will always depend on the scope and terms of the relevant grant.
Beazley P stated at [87] stated:
In Browne v Flower [1911] 1 Ch 219 at 226, Parker J spoke of the covenant of non-derogation as requiring that the grantor not “render the land granted or demised unfit or materially less fit for the particular purpose for which the grant or demise was made”. In the same vein, McPherson JA in Aussie Traveller Pty Ltd v Marklea Pty Ltd [1998] 1 Qd R 1 expressed the view, at 10, that the law does not insist on practical frustration of the purpose of the lease in order to establish a breach of the lessor’s implied obligation. However, as Ellas J suggested in Nordern v Blueport Enterprises Ltd[1996] 3 NZLR 450at 455, “[m]ere interference with convenience or amenities such as privacy or tranquillity … will not be sufficient to constitute a derogation from the grant”.
In Specialist Diagnostic Services Pty Ltd v Healthscope Ltd [2012] VSCA 175 at [109-110] the Victorian Court of Appeal held that the trial judge had correctly decided the question to be determined in order to establish derogation from the grant is that
“it must be established that the disturbance or disruption in breach of the obligation is “substantial”, though the law does not now insist on “practical frustration” of the purpose of the lease. Further the obligation has been applied in circumstances where there has been no direct physical impact or interference with the lease premises.” At [139] the Court stated “It was sufficient if the interference with the use for which the premises were let was substantial and rendered the premises materially less fit for the particular purpose for which they were let”.
In Aussie Traveller Pty Ltd v Marklea Pty Ltd [1998] 1 QDR 1, the Court held that where the interference with the tenant’s use of the premises was due to the conduct of another of the landlord’s tenants and the landlord was capable, under the terms of the lease, of correcting that behaviour or terminating the other lease, its failure to do so can be in breach of the implied obligation to the first tenant not to derogate from its grant.
Consideration
I must consider whether the granting of the lease to Studio Wake substantially interfered with Mitchell’s use of the premises for which it was let so as to render the premises materially less fit for that purpose. It is thus necessary to determine the purposes for which the premises were let, and then to consider whether the lease to Studio Wake interfered with that purpose or use, and if so, whether that interference was substantial in that it rendered the premises materially less fit for that purpose.
The permitted use of the premises was for a supermarket. There is no evidence that there was any physical interference with the operation of the supermarket once the Tattoo Parlour opened.
The lease provided the following:
21(2): The Lessee acknowledges that no promise, representation, warranty or undertaking has been given by or on behalf of the Lessor that any other person has leased or agreed to occupy, will continue to lease or occupy or will lease or occupy premises within the vicinity of the Premises or that the Lessee has any exclusive right to carry on any particular type of business. It is agreed that the Lessor reserves the right to lease or license other premises at or near the Building to persons carrying on the same or a similar type of business or activity as that permitted to be carried on by the Lessee.
28(1): The Lessor has control over the Common Areas.
(2): In respect of the Common Areas and any parts of them, the Lessor may do anyone or more of the following:
(a) restrict access to particular lessees or classes of persons;
(b) restrict or prohibit access during certain periods of time.
41: The Lessor covenants with the Lessee that while the Lessee complies with the financial and other obligations under this Lease and subject to the powers and entitlements conferred on the lessor under this Lease, and subject to the Lessor having no duty to the Lessee to control the conduct of any third party in tort, contract or pursuant to any property interest, the Lessee may occupy and have the use and enjoyment of the Premises for the Term without interruption or disturbance from the Lessor and other persons lawfully claiming through or under the Lessor.
The plaintiff’s pleadings suggest they are relying on a stigma associated with tattoo parlours, as was the “stigma” described in Nordern at 457 where Elias J stated:
“It is consistent with those cases that a landlord who countenances prostitution by a co-tenant, derogates from his grant of a lease to a respectable business. The “stigma” recognised by the authorities cuts both ways. Such activity taints the premises. In such circumstances it was in my view incumbent on the landlord to act decisively in exercise of the powers it had under the lease to remove the taint.”
The pleadings and submissions made in Court focus on delivering a narrative of the Monash shopping Centre as being an idyllic community shopping centre, reminiscent of the typical mythology of the 1950’s, where elderly people walked from the nearby retirement village and children bought their treats on their way home from school.
For example, paragraph 9 of the Statement of Claim states:
Mitchell leased the Premises on the basis that the neighbouring shopfronts or leases were family friendly and frequented by elderly people, families, children, housewives, husbands and other law-abiding members of society.
Paragraph 22 states:
At the time CJR leased the Shopfront for use as a Tattoo Parlour, CJR could reasonably foresee:
a) That the clientele (including its owners, visitors, hangers on and custom) of the Tattoo Parlour would include members of or associated with outlaw motor cycle clubs;
b) That the clientele of the Tattoo Parlour would include person who advertised or portraited themselves to hold disdain for the rule of law;
c) That the clientele of the Tattoo Parlour would include persons who advertised or portraited to be menacing and antisocial;
d) That the clientele of Mitchell would not want to associate themselves with the custom or customers of the Tattoo Parlour.
In a similar vein, Mitchell attempted to portray the tattoo parlour or those who may wish to obtain a tattoo as something akin to the marauding bikies seen in films from the same era of the 1950’s. A tattoo parlour is a legitimate business. It is not required to be allocated in designated areas as are brothels in the ACT. Tattoo parlours are not necessarily the den of iniquity with which they may have previously been viewed generations ago. Many so called law-abiding member of the community have tattoos and attend tattoo parlours.
It is important to consider the evidence objectively and not be influenced by any stereotypes of a “community supermarket” and “tattoo parlours”. I do not accept the very generalised comments regarding customers of both businesses, such as only law-abiding person used the supermarkets and such people would not want to associate with the customers of Tattoo Parlour. It is very likely that customers of the Tattoo Parlour were also customers of the supermarket, and that there were customers of the supermarket who may have been customers of the Tattoo Parlour.
As referred to above, Mitchell has not proved that there was an increase in police attendance at the shopping Centre following the opening of the Tattoo Parlour. Further, Mitchell has not proved that the Tattoo Parlour attracted unsavoury customers who engaged in antisocial behaviour. Even if I was to accept there was an increase in such people, Mitchell has not proved on the balance of probabilities that this was the reason for the decline in sales that Mitchell experienced in late 2017 – 2019.
I can accept that there may have been an increase in tattooed persons attending the shopping centre. However, the lack of evidence of any specific examples of the conduct they engaged in does not allow me to make any finding that these persons affected the movement of customers of the Supermarket as alleged in the Statement of Claim.
I accept that the reporting of the assault in February 2018 most likely caused adverse publicity for the entire shopping centre and may have caused some people to shop elsewhere, however this is not sufficient to establish derogation of grant.
Mitchell claims that it was reasonably foreseeable to CJR that granting a lease to the Tattoo Parlour would “affect the use of Mitchell of the premises as a supermarket”. Presumably this is on the basis of the alleged stigma associated with a tattoo parlour. I see no difference between this and a situation where a chemist in a small local shopping centre administers methadone. No doubt this business would attract what some people in the community would regard as “unsavoury types” and their presence at the shopping centre may deter some people from attending that particular shopping centre.
Mitchell rely on the decision of Nordern where the conduct of the customers of the brothel was a critical factor in finding a derogation from grant. There is nothing before me to suggest that the conduct of the customers of the Tattoo Parlour, was to the same extreme level as that in the case of Nordern, nor did the customers of both businesses in the case before me share a common entry as it was in Nordern.
Findings
I am therefore not satisfied that the granting of the lease was a substantial interference with Mitchell’s use of the premises for the purposes it was let so as to render the premises materially less fit for that purpose.
I further find that CJR has not breached the quiet enjoyment clause in the lease by granting the lease to Studio Wake. I accept that CJR investigated the complaints made by Mitchell about the customers drinking and smoking in the common areas, and that where substantiated, it acted appropriately by directing Studio Wake to request its customers not smoke in front of the shops. There were no grounds under the terms of the lease with Studio Wake that CJR could terminate that lease in relation to the conduct of its customers. Accordingly it is not a case where CJR failed to correct another tenant’s behaviour or terminate its lease, which could give rise to breach of the implied obligation to Mitchell not to derogate from its grant.
Finally, I am not satisfied that Mitchell has proved the grounds it relies upon to seek compensation pursuant to s 81(1)(b) and (e) of the Act.
The Counterclaim
Having found that there was no derogation from the grant and no breach of the contract by CJR, I find that Mitchell (the first defendant to the counterclaim) was obliged to comply with the provisions in the lease. I find that upon Mitchell’s failure to pay rent, CJR was entitled to terminate the lease.
Other than objecting to the payment of the utilities (which I have presumed to be a reference to “outgoings” as defined in the lease) for the time following Mitchell’s vacation of the premises and whether or not CJR had mitigated its losses, there was no substantial arguments raised by each of the defendants as to the alleged breaches raised in the counterclaim and each defendant’s liability to pay.
In relation to rent payable by Mitchell, I am not satisfied that there was any agreement to Mitchell to pay 50% of the rent following the meeting in August 2017. Accordingly, I find that Mitchell failed to pay rent in accordance with clause 7(1) and Item 7 of the Schedule of the Lease from 1 September 2017.
As at the date of this decision, CJR have been unable to relet the premises to another tenant. I am satisfied that CJR has made all reasonable attempts to relet the premises, engaging the services of Civium Property Group who placed advertisements online very shortly after Mitchell vacated the premises. I am further satisfied that CJR has made efforts to expand the possible tenants of the premises, by applying for and being granted a variation to the Crown grant, so that the premises are not restricted to the operation of a supermarket. CJR has incurred expenses for the applications and procedures that needed to be undertaken to vary the Crown lease.
I am satisfied that Mitchell has failed to pay its percentage of outgoings under clause 10 and Item 9A of the lease (“the Outgoings Term”).
Mr Sykes in his expert report calculated the rental arrears and losses for the period 1 September 2017 to 1 June 2023, being the date the lease expired. The final amount using the annual rent increase percentage and outgoings is $1,107,784.28 (excluding GST).
The Lease provided that Mitchell was to pay 79% of the outgoings. The outgoings refers to the “operating expenses” as defined in the lease. Clause 10(3) provides:
The Lessor must give the Lessee a written estimate of the operating expenses to which the Lessee is required to contribute where the Leases Act applies to this Lease itemising those expenses using the same items descriptions used in the list of outgoings in the disclosure statement.
The estimate of operating expenses must be given to the Lessee in respect of each annual period during the Term and must be given before the Lease is entered into and thereafter during the Term at least one month before the commencement of each annual period. That estimate shall include calculations of the Lessee’s share and any monthly instalments payable by the Lessee.
Mr Sykes calculation includes an amount of $2,769.19 for outgoings, payable each month for the period September 2017 – June 2023. There is no evidence as to whether the estimate of the operating expenses required by the lease was in fact provided during this period, nor whether there was any adjustments made to the amounts claimed to take into account any underpayment or overpayments made by Mitchell. Mr Sykes made the assumption the monthly outgoings remained the same, however it would be unusual that this amount did not vary over the full period.
The lease does provide at clause 10(3)(l)
“The Lessee’s liability to pay for operating expenses during the Term is not extinguished merely because the Term has expired or has been terminated, subject to any other express agreement between the parties.”
I will allow the outgoings for the period 1 September 2017 to 30 June 2019, that being the end of the annual period following the vacation of the premises by Mitchell, on the basis that there is no evidence to show that CJR complied with its obligations under the Lease of providing the estimate at the commencement of the annual periods in July 2019, 2020,2021, 2022 and 2023. There are 48 entries of $2,769.19 which totals $132,921.12. This sum is to be deducted from the amount claimed in Mr Sykes report. Therefore, the amount in rental arrears and losses is $974,863,16 (excluding GST).
I am satisfied that Mitchell has failed to pay the Goods and Services Tax payable pursuant to clause 11(3) of the lease (“the GST Term”). However, given my findings in relation to Mitchell’s obligation to pay the outgoings for the period 1 July 2019 – June 2023, GST is only payable on the amount of $974,863,16.
CJR claim the amount charged by BAL Lawyers in invoice dated 24 May 2019 for the amount of $4,420.35. This relates to costs associated with the correspondence to Mitchell’s solicitor in March 2019 responding to the allegation of breach of the lease and Mitchell’s default in rent. Clause 13(2) of the Lease provides that the Lessee agrees to pay
“all costs, fees, charges, disbursements and expenses properly and reasonably incurred by the Lessor in relation to or incidental to …(c)any breach or default by the Lessee under this Lease. This includes “legal and professional costs and disbursements charged and allowed on a full indemnity basis” (clause 13(3(a)).
I am satisfied that Mitchell is required to pay the sum of $4,420.35 pursuant to clause 13(2), 13(3) and 13(4) of the lease (“the Costs Term”).
Mr Sykes calculation of rental arrears and loss does not include any interest accruing on these amounts. The Lease provides for the payment of interest where Mitchell is in default for a period of more than 7 days (Clause 15). The calculation of interest is provided in the lease as 3% per annum higher than the Bank Rate as defined in the lease.
I am satisfied that Mitchell was in default for a period of more than 7 days, and it is therefore liable to pay CJR interest in accordance with the terms set out in clause 15(2) and (4) of the lease (the Interest term”). I have not been provided with any calculation for this amount and I do not propose to do it myself.
Upon vacating the premises, Mitchell left a large amount of equipment and fittings. Photographs were provided showing the remaining items. A quote of $319,180 plus GST was provided for the costs of removing Mitchell’s fit out and making good the premises. CJR claim these costs for breach of Mitchell’s obligations when it vacated the premises.
I am satisfied that Mitchell has failed to comply with its obligations to remove all alterations, additions, fixtures, partitions, and fittings made or installed by Mitchell in the building, including signs and notices affixed by Mitchell, that it has failed to reinstate the premises and make good the premises, as required upon the termination of the lease pursuant to clause 34(1) and (2) (“the Repair Terms”).
Breach of Guarantee and indemnity
It was an express term of the lease that Mr Vangelatos and Ms Poulakis jointly and severally guaranteed the punctual payment of rent and other money payable by Mitchell to CJR under the lease. It further required that Mr Vangelatos and Ms Poulakis indemnify CJR in respect of all losses, damages and costs incurred or suffered by CJR as a result of Mitchell’s breach or repudiation of the lease. This Guarantee and Indemnity was provided by Mr Vangelatos and Ms Poulakis by the Deed signed on 29 June 2017.
Mr Vangelatos and Ms Poulakis (Second and Third Defendants to the counterclaim) relied on the breach of the covenants as claimed in the originating application and statement of claim and that it was CJR that had breached the agreement and wrongfully terminated the lease.
I have determined the matter that there was no breach of any implied or express obligations in the lease by CJR and that it was Mitchell that breached the contract. Although in their Defence to the Counterclaim, the defendant’s deny liability for these breaches, there was no challenge to the validity of the Guarantee and Indemnity provisions in the lease, nor the Deed itself. In fact, there were no submissions made by the Defendant’s Counsel that Mr Vangelatos and Ms Poulakis would not be liable for CJR’s losses.
Order
In relation to the originating claim, judgment for the defendant CJR.
Judgment for the plaintiff to the counterclaim for the sum of $1,395,949.83 which is calculated by the following amounts:
Rental arrears and losses: $974,863.16
GST: $97,486.32
Legal expenses: $4,420.35
Removal and repair expenses: $319,180
Interest (to be calculated)
Total: $1,395,949.83
I note that interest payable pursuant to the terms of the lease has not been included in the above calculation. The judgment amount is to include interest calculated as provided for in the Lease once this amount has been calculated by the parties. If parties are unable to agree on this amount, parties are to provide written submissions within 14 days of the date of this decision.
Pursuant to the Lease and Deed of Indemnity and Guarantee, all three defendants to the cross claim are jointly and severally liable for the judgment amount.
Costs are reserved. Parties are to provide any further evidence it seeks to rely on and written submissions on the issue of costs within 14 days of the date of this decision.
| I certify that the preceding 98 [ninety-eight] numbered paragraphs are a true copy of the Reasons for Decision of Her Honour Special Magistrate Campbell. Associate: Georgina Price Date: 13 August 2021 |
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