Parabanks Shopping Centre Pty Ltd v Brine
[2014] SADC 123
•14 July 2014
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
PARABANKS SHOPPING CENTRE PTY LTD v BRINE
[2014] SADC 123
Judgment of His Honour Judge Tilmouth
14 July 2014
GUARANTEE AND INDEMNITY - THE CONTRACT OF GUARANTEE - CONSTRUCTION AND EFFECT - EXTENT OF LIABILITY
On the proper construction of a clause of guarantee and indemnity contained within a shopping centre lease, the guarantor was bound by the covenants contained in it, but not by the wider obligations as between lessor and lessee in other parts of the lease itself.
Retail and Commercial Leases Act (SA) s 12; Masters v Cameron (1954) 91 CLR; Mercantile Credits Ltd v Shell Co of Australia Ltd (1976) 136 CLR 326; Tessari v Bais Pty Ltd (1990) 54 SASR 274; Yulin Pty Ltd v Japan Building Products (Australia) Pty Ltd Unreported Supreme Court NSW 28 March 1991; North Terrace Properties Pty Ltd v Lawbitax Pty Ltd & Ors [2005] SADC 69; Rider v Ford [1923] 1 Ch 541; Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; Ankar Pty Ltd v National Estminster Finance (Aust) Ltd (1987) 162 CLR 549; Chan v Cresdon Pty Ltd (1989) 168 CLR 242; Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1, referred to.
GUARANTEE AND INDEMNITY - THE CONTRACT OF GUARANTEE - CONSTRUCTION AND EFFECT - VARIANCE BETWEEN GUARANTEE AND PRINCIPAL OBLIGATION
A guarantee and indemnity of 'the payment by the lessee of the rent and other monies payable ... and the observance and performance of the lessee's obligations ...' under the lease, do not encompass loss of bargain damages.
Tall-Bennett & Co Pty Ltd v Sadot Holdings Pty Ltd (1988) 4 BPR 9522; Darbishire v Warren [1963] 1 WLR 1067; Moschi v Lep Air Services Ltd [1973] AC 331; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101; Ankar v Westminster Finance (Australia) Limited (1987) 162 CLR 549, referred to.
Lewy v Moss Nominees Pty Ltd [1997] ANZ ConvR 239, distinguished.
Chan & Anor v Cresdon Pty Ltd (1989) 186 CLR 242, discussed.
DAMAGES - GENERAL PRINCIPLES - MITIGATION OF DAMAGES
In light of the haste at which the subject lease was entered into and the failure to attempt to obtain a new tenant at the rent stipulated in the proceeding lease, amongst other things, the plaintuiff has manifestly failed to mitigate its loss. In any case the valuation evidence demonstrates the new lease was entered into at less than true market value.
Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] WASCA 209; Testel Australia Pty Ltd v KRG Electrics Pty Ltd & Anor [2013] SASC 91; Karacominakis v Big Country Developments Pty Ltd (2000) ANZ ConvR 513; Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 440; Holland v Wiltshire (1954) 90 CLR 409; Gigi Entertainment Pty Ltd v Schmidt [2013] NSWCA 287; Spencer v Commonwealth of Australia (1907) 5 CLR 418; Yap v Flinders Reproductive Medicine Pty Ltd [2014] SADC 82; Chadwick v Allen [2012] SADC 105; Donkin v AGC (Advances) Ltd (1991) 103 ALR 95; Carr v Finance Corp of Australia Ltd (1981) 147 CLR 246; Trade Practices Commission v TNT Management Pty Ltd (1985) 58 ALR 423; McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; Bale v Mills (2011) 81 NSWLR 498, referred to.
TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd (1963) 180 CLR 130; Darbishire v Warren [1963] 1 WLR 1067, applied.
Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237, discussed.
PARABANKS SHOPPING CENTRE PTY LTD v BRINE
[2014] SADC 123PARABANKS SHOPPING CENTRE PTY LTD V BRINE
The issues
Background formalities
The subject agreements
Summary of the case for Parabanks
Summary of the case for EDH
Parabank’s case as now pleaded
The nature and content of the agreement with Mr BrineThe proper construction of the guarantee and indemnity
The extent of the obligations imposed under the guarantee and indemnityMitigation of loss
The valuation evidence
The measure of Parabanks’ loss and damage?
Costs on an indemnity or solicitor/client basis?
Another afterword
Summary and ordersThe issues
This is an action for the enforcement of a guarantee and indemnity executed by the defendant Mr Brine, as security in respect of a shop lease. The lessee was EDH Pty Ltd (EDH) and the lessor is the plaintiff, Parabanks Shopping Centre Pty Ltd (Parabanks). The lease was in respect of Shop 11 in the Parabanks Shopping Centre, situated in the northern Adelaide suburb of Salisbury.
Parabanks asserts that Mr Brine, who was the sole Director of EDH, personally committed himself to be responsible for any failure by EDH to comply with the terms of the lease and for damages suffered by Parabanks. Mr Brine denies responsibility under the guarantee and indemnity. He maintains that Parabanks failed to mitigate its losses following a breach of the lease by EDH and he puts in issue the measure of damages to which Parabanks may thereby be entitled.
Background formalities
The Parabanks Shopping Centre is owned by Parabanks. It is considered to be a sub-regional centre, as distinct from smaller neighbourhood, or larger regional shopping centre, and comprises some 80 tenancies.[1] The Centre manager Angaet Management Pty Ltd (Angaet) is a related entity. The Directors of Parabanks are Nicholas Di Mauro and his son Michael. Michael Di Mauro is the principal of a legal firm Michael Di Mauro & Associates, sometimes engaged as solicitor for Parabanks, but not for the purposes of these proceedings. He has been a Director of Angaet since 2003. Other companies associated with Parabanks and the Di Mauros, own another nine or ten shopping centers in South Australia and about 23 nationally, businesses they have built up over several decades.[2] Mr Di Mauro senior described himself as virtually overseeing ‘everything within the group…all leasing deals come through me.[3]
[1] T155.8-.17, T185.9-.28. A plan can be seen in Exhibit P1, Vol 4, Tab 129.
[2] T91.21-.38.
[3] T92.12-13.
EDH conducted business under the name ‘Ed Harry’ as a retail menswear store from Shop 11. The original lease dated 31 August 2007, was due to expire on 28 February 2011.[4] It contained no contractual rights of renewal. The lessor was originally the Trust Company Ltd, however its interest was assigned to Parabanks in May 2008.[5] The guarantor thereunder was Biron Apparel Limited (Biron), a public company and a former shareholder of EDH.[6]
[4] Exhibit P1, Vol 1, Tab 6, p22.
[5] Exhibit P1, Vol 1, Tab 7.
[6] Exhibit P1, Vol 1, Tab 1, pp 3-4.
Biron acquired the Ed Harry business in 2005, structured through EDH as a subsidiary company specifically incorporated in connection with Biron’s acquisition thereof.[7] At the same time Mr Brine was appointed a Director of EDH, his prime role being to attend to the assignment to EDH.[8] He became sole Director from 17 October 2006. Even so he was not involved in the day-to-day running of the business, although he did manage the period of expansion.[9]
[7] T374.23-32.
[8] T374.18–T375.10.
[9] T374.13-375.22.
At a time which is not precisely clear but in any case sometime around late 2006, Mr Brine and a business partner negotiated to acquire the Ed Harry business back from Biron, whereupon Mr Brine ceased to be a Director on 21 December 2006.[10]
[10] T375.13, 395.32-396.8, Exhibit P1, Vol 1, Tab 4, p 15.
The subject agreements
As noted, the guarantor under the original lease was Biron. The precise terms of that guarantee as incorporated into the body of the 2007 lease itself, were these:[11]
[11] Exhibit P1, Tab 6, p 60.
25.2 Guarantee and indemnity
…
(c)The Guarantor unconditionally and irrevocably guarantees to the Lessor that the Lessee will comply on time with the Lessee’s obligations:
(i) under this lease, even if this lease is not registered or is found to be a lease or is found to be a lease for a term less than the Term; and
(ii) in connection with the Lessee’s occupation of the Premises,
(iii) including the Lessee’s obligations to pay money. The Guarantor must comply with all obligations or pay all money on demand.
(d)As a separate undertaking, the Guarantor unconditionally and irrevocably indemnifies the Lessor against and agrees as principal debtor to pay to the Lessor on demand a sum equal to any liability, loss, claim, damages, costs and expenses arising from or incurred in connection with any one or more of the following:
(i) the Lessee’s breach of this lease;
(ii) the Lessee’s occupation of the Premises, including a breach of the Lessee’s obligations to pay money;
(iii) a representation or warranty by the Lessee in this lease being incorrect or misleading when made or at any time before this lease expires or is terminated (whichever is the earlier);
(iv) a liquidator or trustee in bankruptcy disclaiming this lease;
(v) this lease not binding the Lessee.
In anticipation of this lease expiring, EDH submitted an offer to extend the lease dated 27 September 2010 at a base rent of $83,827.41 pa, plus GST.[12] Although in form this was put forward by EDH to Parabanks and Angaet, it appears in substance to be a template document commonly employed by the lessor when leases at the Centre were about to expire.[13] The EDH offer provided in an amendment made in handwriting, that Mr Brine replaced Biron as guarantor.[14] EDH returned a duly executed ‘Offer to Extend the Lease’, received on 23 December 2010.[15] This was accepted by Parabanks, a fully executed copy being sent to EDH by Di Mauro & Associates on 7 February 2011.[16]
[12] Exhibit P1, Vol 1, Tab 12.
[13] See for example Exhibit P1, Tabs 66, 79, 82, 87, 87, 90, 93, 94, 97, 114, 118, 119, 120 and 125.
[14] Exhibit P1, Vol 1, Tab 17, p 90.
[15] Exhibit P1, Vol 1, Tab 17.
[16] Exhibit P1, Vol 1, Tab 23.
The precise terms of the guarantee given by Mr Brine in the offer to extend, were those spelt out in clause 12, quoted in full later. Commencing on 1 March 2011, the extension lease was for a term of five years expiring in 2016, again without rights of renewal. However Mr Brine wanted some changes which he spelled out in a letter to Angaet of 2 February 2011.[17]
[17] Exhibit P1, Vol 1, Tab 22.
Re: Ed Harry Deed of Guarantee and Indemnity
I am in receipt of the above document and respond as follows.
Item 5.4 – is to be noted as subject to provisions of the Retail and Commercial Leases Act 1995.
Item 5.11 – to be deleted.
Item 7 – to be deleted. Principal and Primary responsibility is to be with the Lessee.
Item 9 – words “at all” to be replaced with “as covered under the Retail and Commercial Leases Act 1995”.
Item 13 – delete. Lessor to be bound to pursue Lessee for remedy before making claim against Guarantor.
Item 18.1 – amend to read “The covenants on the part of the Guarantor in this Deed shall be binding upon all of such persons jointly and severally”. Delete remainder of sentence.
Item 19 – amend to read “This Deed and the obligations hereunder shall be governed and construed in all respects in accordance with the law of the State of South Australia and the Retail and Commercial Leases Act 1995 and the parties hereto hereby submit to the jurisdiction thereof”
Item 21 – Remove final sentence “this clause will survive the termination of the Guarantee”.
In the meantime, Mr Brine and Michael Di Mauro continued to negotiate over the final details of the proposed formal Deed of Guarantee and Indemnity. By 17 February 2011, they had still not reached a completed agreement. It appears that Michael Di Mauro’s letter in response of that date was not seen by Mr Brine until after an Administrator was appointed.[18] Despite this situation, no point was made on Mr Brine’s behalf that the executed offer to extend, including the covenants contained in Clause 12, were not binding in terms.
[18] Exhibit P1, Vol 1, Tab 25; T402.2-.14.
EDH went into voluntary administration on 22 February 2011.[19] Administrators were appointed pursuant to s 436A of the Corporations Act, on the footing that it was likely to become insolvent.[20] The Administrator initially remained in occupation of Shop 11, paying rent for a short period of time, but subsequently surrendering possession, effective from midnight on 28 March 2011.[21] EDH went into voluntary liquidation on 6 May 2011.[22]
[19] Exhibit P1, Vol 1, Tab 31.
[20] Exhibit P1, Vol 1, Tab 31, pp 181 & 183.
[21] Exhibit P1, Vol 1, Tab 35.
[22] Admitted Statement of Claim and defence, para 17, Exhibit P1, Tab 1.
The plaintiff repossessed Shop 11 by arranging for the locks to be changed on 29 March 2011,[23] thus terminating the extension agreement. Termination was said to be justified on account of the breach of essential terms, namely the failure to pay rent after 28 March and by the Administrators’ act of giving up possession on behalf of EDH, pursuant s 440C of the Corporations (South Australia) Act. It is not disputed by Mr Brine that EDH fell into breach of the lease on at least these two counts.
[23] T259.35-.260.4.
In the meantime, an agreement in principle was reached with respect to Shop 11 on 22 March 2011, by which it was to be re-let to Lowes-Manhattan Pty Ltd (Lowes) another menswear retailer, at a base rent of $80,000 pa plus GST.[24] A formal Memorandum of Lease dated 9 June 2011, was to commence on 19 April 2011 and expire on 18 April 2016.[25]
[24] Exhibit P1, Vol 1, Tabs 45 and 51.
[25] Exhibit P1, Vol 1, Tab 51, pp 218, 219, 226, 240.
Over a week prior to 22 March, Lowes wrote to Parabanks informing the Centre Manager that it was ‘interested in leasing Shop 11’.[26] The terms of the letter expressed Lowes keenness to impress Parabanks of its financial strength and standing as menswear retailers on the eastern seaboard States and the two Territories of the Commonwealth, and that it was expanding in Western Australia and South Australia. It concluded with an invitation to contact them ‘as a matter of urgency’. The body of the letter dated Monday March 11, 2011 read:
Re: Lease of Shop
Dear Sir/Madam,
We have become aware that Ed Harry Pty Limited (trading as Ed Harry) menswear retailer is currently in administration. As there is an Ed Harry menswear outlet currently in your centre, we Lowes Manhattan Pty Limited, (trading as Lowes) also a menswear retailer would be very much interested in talking to you about leasing this premise should it become available.
As you may be aware, Lowes has over 160 plus menswear retail outlets in NSW, Qld, Vic, ACT and NT. Our latest business expansion has been in Western Australia and South Australian states. It is a profitable business that has been operating since 1898, with an average of 13 million transactions pa.
If you would like to discuss our offer, please contact David Johnston (National Property Manager) on 02 9562-1104 as a matter of urgency.
Thank you.
[26] Exhibit P1, Vol 1, Tab 37.
It appears that this was received by Angaet on 15 March 2011, as the incoming date stamp on its face suggests. The following day, the Administrators co-incidentally sent an email to Ms Fremlin, the Manager of Angaet at Parabanks, advising of a party ‘interested in assigning the Lease’ over Shop 11. It concluded by asking ‘would you please give me a call as soon as you can in relation to the Company’.[27] All that is known from the evidence presented in the case is that this party was probably Lowes, nevertheless there is no clear proof that it was. There is a distinct lack of evidence as to what action, if any, was taken by Angaet or Parabanks, having received this information from the Administrator. For some inexplicable reason it does not seem as if it was passed onto Mr Di Mauro senior.[28]
[27] Exhibit P1, Vol 1, Tab 34.
[28] T156.9-157.
What is known is that on 22 March at 3.37pm (EST), Lowes emailed Ms Fremlin submitting proposed terms of lease over Shop 11.[29] At 3.17pm (CST) Ms Fremlin immediately forwarded the email to Mr Di Mauro and at 4.02pm (CST), he replied by directing her to accept the offer, which she did at 4.47pm (CST).[30] The Lowes Board of Management approved the proposal at 3.23pm the following day.[31] Just how or why this marked about-face came to pass between Lowes position as of 11 and 22 March 2011, is not explained on the evidence adduced, so far as it went. The letter of 22 March came literally out of the blue.
[29] Exhibit P1, Vol 1, Tab 46, pp 242-243.
[30] Exhibit P1, Vol 1, Tab 46, p 241, 244.
[31] Exhibit P1, Vol 1, Tab 47, p 241.
All that remains to complete this part of the narrative, is to record that Michael Di Mauro & Associates wrote to Mr Brine on 5 May 2011 on behalf of Parabanks claiming damages of $136,724.90, calculated by reference to the ‘shortfall between the charges payable under the Lease for the balance of the term’ and what it ‘stands to receive from the new tenant’.[32] The terminology employed appears to resort to the terms of the original guarantee and indemnity, rather than those in clause 12 of the Offer to Extend the Lease as will appear later, since the reference to the Lessees obligation to ‘pay money’, has a closer resonance with clause 25.2(c)(iii) of the original lease.
[32] Exhibit P1, Vol 1, Tab 1, Tab 30.
Summary of the case for Parabanks
Parabanks contends that a binding lease was formed by the acceptance of the extension offer on the terms set out therein. It submits this agreement had the effect of incorporating the terms of the guarantee and indemnity contained in the original lease as against Mr Brine, except to the extent that they were inconsistent, or were not otherwise specifically dealt with in the extension agreement. That stance arises directly from the introductory words of the offer itself:[33]
[33] Exhibit P1, Vol 1, Tab 12, p 86.
OFFER TO EXTEND LEASE
The Lessee HEREBY OFFERS TO EXTEND the lease as described below on the same terms and conditions as contained in the Lease as described below except where otherwise indicated in this offer.
Clause 1 proceeds to define the ‘lease below’ as the Memorandum of Lease made between Trust company Limited and EDH Pty Ltd dated 31 August 2007.
The case for Parabanks is that clause 12 of the executed offer to extend the original lease (reproduced below), stands as a separately enforceable undertaking by Mr Brine in the nature of a guarantee and indemnity, either standing alone, or alternatively, coupled with clauses 25.2(c) and (d) of the original lease (reproduced above). The plaintiff submits that although clause 12 contemplated the later execution of a ‘formal Deed or Agreement of Guarantee and Indemnity’ by Mr Brine as guarantor, it nevertheless amounted to a binding agreement even though the preparation of formal documentation was overtaken by the administration and subsequent liquidation of EDH. The entitlement to enforce the guarantee arises on account of the admitted breaches of the lease by EDH.
On the question of mitigation, Parabanks maintains that the level of rent agreed with Lowes was reasonable market rent at that time, especially given the uncertain state of the economy. It was the considered opinion of Mr Di Mauro senior, based on substantial experience in the leasing of premises in shopping centres, that it was an acceptable rent in the circumstances. It was contended that the base rate struck in the EDH extension, was above current market value, because it was based on that set in 2007 when the economy was in a much stronger position prior to the onset of the Global Financial Crisis (GFC). Parabanks maintains at that time, rents paid by ‘sitting’ tenants without contractual rights of renewal, were higher because of lesser bargaining power in stronger economic times.
The measure of damages claimed are said to be properly calculated by the difference between the monies that would be payable by EDH under the terms of the extension, and those payable by Lowes under its lease, in addition to sundry expenses incurred in connection with termination: Luxer Holdings Pty Ltd v Glentham Pty Ltd.[34] Such damages are estimated at around $150,000.00 plus GST, assessed on the basis of a net present value as of 1 April 2013. The calculations are contained in an expert report prepared by Mr G Weise of BDO at $144,177.45.[35] The calculations as such, are not disputed by the defendant.[36]
[34] [2007] WASCA 209, [28]-[49] and [151]-[165].
[35] Exhibit P3, Tab 1.
[36] T682.18-.29.
Finally, legal costs are sought, including those in respect of these proceedings, under provisions of the extension Lease on a contractual basis, as opposed to costs awarded under the Rules of Court: Testel Australia Pty Ltd v KRG Electrics Pty Ltd & Anor.[37]
[37] [2013] SASC 91, [146]-[151].
Summary of the case for EDH
The position of EDH begins with the proposition that the obligations of guarantee and indemnity under the original lease were those of Biron and not Mr Brine. Since the term thereof expired on 28 February 2011 without the right of extension or renewal, the situation became one of holding over, EDH remaining in possession in the interim until the locks were changed. In his defence there was originally a plea that Parabanks was required to negotiate with EDH and Biron for renewal by not later than 31 October 2010, and were further obliged to make an offer to EDH and Biron to renew or extend the lease, pursuant to s 20E and s 20G of the Retail and Commercial Leases Act 1995 (SA). These pleas were however abandoned after a third Statement of Claim was permitted to be filed, so there is no occasion to consider those issues any further.[38]
[38] T610.14-611.28.
Likewise, a further plea that Parabanks abandoned or repudiated the lease upon reletting to Lowes and that a purported termination by letter of 5 May 2011 was ineffective, as given without prior notice to EDH pursuant to s 10 of the Landlord and Tenant Act 1936 (SA), was not pursued at trial. Nor was a plea that there was no agreement binding on Mr Brine pursued, effectively amounting to a concession that he fell within one of the classes identified in Masters v Cameron.[39] Finally there is the plea that Parabanks failed to mitigate its loss, on account of an ill-considered re-letting to Lowes in haste at less than market value.
[39] (1954) 91 CLR 353, 360.
The issues arising from the above summary effectively distill under three discrete heads, namely the content of the obligations of guarantee and indemnity given by Mr Brine, whether Parabanks failed to mitigate its loss, and what the appropriate market rent for Shop 11 was at the time of re-letting.
Parabank’s case as now pleaded
Before embarking on an examination of those issues, it should be noted that Parabanks went to trial, with leave of the court given during the trial on 21 February 2014, pursuant to 6R DCR 54(6) and (7) of the District Court Civil Rules (2006) on what became its third Statement of Claim. These amendments were first proposed at the very beginning of the trial, on just a few minutes notice beforehand. After adjournments to enable the defendant to consider his position, the amendment was eventually not opposed.[40]
[40] T352.5-.11.
Nevertheless it is important to recognize the significance of the amendments. Although arguably based essentially on the same underlying facts, the focus of the claim was radically different. In the first place it was a plea based on an entirely different document, i.e. that Mr Brine entered into a ‘separate undertaking’ to that entered into by EDH, which extended to the liability ‘to pay money’.[41] More significantly, the focus became on the enforcement of the ‘Extension of Lease’ as opposed to what was previously alleged to have been a renewal of the original one.[42] This is in contrast to the earlier pleadings whose focus was squarely on the extension lease.[43]
[41] Paragraphs 7.13, 9, 11 and 19A.
[42] Paragraphs 15, 18, 19, 19A and 21.
[43] Paragraphs 7, 15, 18 and 19 of the second Statement of Claim.
In order to appreciate the significance of the change in tack by Parabanks, it is perhaps necessary to set out the most significant amendments proposed to the Statement of Claim, as marked up by Parabanks’ solicitors:
7.13As a separate undertaking, the Guarantor indemnifies Parabanks against and agrees as principal debtor to pay to Parabanks on demand a sum equal to any liability, loss, claim, damages, costs and expenses arising from or incurred in connection with EDH’s breach of the Lease or EDH’s occupation of the Premises, including in each of those cases a breach of EDH’s obligations to pay money, or a liquidator disclaiming the Lease.
…
9.
On 27 September 2010By letter dated 22 December 2010 from EDH to Angaet Management Pty Ltd (being Centre Manager for the Parabanks Shopping Centre and a company related to Parabanks) and the document enclosed with that letter titled “Offer to Extend the Lease”, which had been executed by EDH (and by the Defendant as guarantor, in lieu of Biron), EDH offered to Parabanks to extend the Lease (“Extension Offer”) on the same terms and conditions as contained in the Lease, except where otherwise indicated in the Extension Offer.…
11.The Extension Offer referred to in paragraph 9 above that had been
wasexecuted by EDH as lessee by its then sole director, the Defendant, and by the Defendant in his individual capacity as guarantor (who in his handwriting nominated himself as guarantor, in lieu of Biron),andwasthen submitted by EDH to Parabanksreceived at the office of Angaet Management Pty Ltd on or about 23 December 2010 and in turn provided by Angaet Management Pty Ltd to Parabanks on 5 January 2011,via Angaet Management Pty Ltd.…
15.The Administrators occupied the Premises from 23 February 2011 until 28 March 2011 and paid the rent and other charges payable pursuant to the Lease/Extension of Lease for the period from 2 March 2011 up to and including 28 March 2011.
…
18.EDH was in breach of the following clauses of the Lease, which were incorporated in the Extension of Lease:
…
18.3Clause 8.3(a) and (b) of the Lease by failing to keep the Premises fully stocked and staffed, operating the business with due diligence and efficiency and on a proper and businesslike manner and failing to keep the Premises open for business during the term of the Lease and during any holding over period, or alternatively EDH repudiated the Extension of Lease as a result of one or more of those matters.
…
19.As a result of the various Breaches of the Extension of Lease set out in paragraph 18 above and/or as a result of the Administrators giving up possession of the Premises, Parabanks was entitled to and did terminate the Extension of Lease and repossess the Premises with effect from 28 March 2011.
19A.Alternatively, on or around 28 March 2011 Parabanks (accepted) EDH’s repudiation of the Extension of Lease and took possession of the Premises, thereby terminating the Extension of Lease.
…
21.Parabanks has suffered loss and damage as a result of EDH’s breaches of, or the termination of, the Extension of Lease.
The significance of this appreciable change in course will become more apparent as the issues unfold throughout the course of these reasons. In particular the addition of a new paragraph 7.13 pleaded for the first time a liability for ‘loss, claim [and] damages’, plainly resorted to paragraph 25.2(d) of the original lease.
The nature and content of the agreement with Mr Brine
Since there was no right of renewal in either the original or extended leases, the circumstances are that upon acceptance of the offer to extend, a fresh lease was created between Parabanks and EDH: Mercantile Credits Ltd v Shell Co of Australia Ltd,[44] Tessari v Bais Pty Ltd,[45] Yulin Pty Ltd v Japan Building Products (Australia) Pty Ltd,[46] North Terrace Properties Pty Ltd v Lawbitax Pty Ltd & Ors,[47] and Rider v Ford.[48] It was conceded by defence counsel that EDH was in breach of the extension by reason of the Administrators’ election to give up possession of the Shop 11 effectively on its behalf and to relinquish EDH’s rights under the extension by giving the notice to that effect of 24 March 2011.[49] It is implicit in those concessions that Parabanks was then entitled to terminate; Mr Hoile mounted no submission to the contrary. In light of those concessions, the central point of contention became the precise subject matter of the guarantee and indemnity Mr Brine was bound to perform. This is a question of construction of the extension agreement itself.
[44] (1976) 136 CLR 326.
[45] (1990) 54 SASR 274 and on appeal (1992) 60 SASR 59.
[46] Unreported, Supreme Court, NSW, Young J, 28 March 1991.
[47] [2005] SADC 69.
[48] [1923] 1 Ch 541.
[49] Exhibit P1, Vol 1, Tab 35, T430.34-431.30.
The proper construction of the guarantee and indemnity
The terms of the critical guarantee and indemnity conferred by clause 12 of the extension agreement were these:[50]
12.Guarantee
In consideration of the Lessor entering into this Agreement at the request of the person/s (if any) who have signed this Agreement as guarantor/s (“the Guarantors”) the Guarantors HEREBY GUARANTEE the payment by the Lessee of the rent and any other monies payable by the Lessee pursuant to this Agreement and the observance and performance of all the Lessee’s obligations as specified in or implied by the Agreement and the observance and performance by the Lessee of the covenants terms and conditions which are to be embodied in the formal Lease to be prepared by the Lessor’s solicitors and agree to indemnify the lessor in respect of any failure by the Lessee to pay the rent or monies or to observe or perform any of the obligations.
The Guarantor/s will execute such formal deed or Agreement of guarantee and indemnity as may be prepared by the Lessor’s solicitors to embody the terms of this clause. Failure by the Guarantors to execute such formal guarantee and indemnity will not in any way affect the binding nature of this clause. In the event that more than one person shall sign this Agreement as guarantor this clause will bind those persons jointly and severally.
[50] Exhibit P1, Vol 1, Tab 12, p 87, emphasis supplied.
Parabanks further relies on Clause 14 of the extension agreement:[51]
14. Binding Agreement
a) The Lessor and the Lessee agree that the execution of this Offer to Extend the Lease by or on behalf of the Lessor will constitute an acceptance of the Lessee’s and the Guarantor’s offer and upon the execution of this Offer to Extend the Lease by or on behalf of all parties this Offer to Extend the Lease will constitute an agreement for the extension of the lease which shall be binding upon all parties and shall be enforceable by each of them.
…
e) Within seven days of the receipt of the Extension of Lease the Lessee shall execute each copy of the Extension of Lease and shall return each copy to the Lessor. Failure to do so will not in any way affect the binding nature of this Agreement. The obligations of the Lessor and Lessee are not conditional or in any way dependant on the preparation or execution of the Extension of Lease and are not affected by any default or delay.
[51] Exhibit P1, Tab 12, pp 87 & 88.
Like clause 14, clause 15 proceeds to contemplate the preparation of a formal lease in registerable form. It added nothing to the guarantee and indemnity furnished under clause 12.
It is noticeable there are two distinct parts to clause 12. The first provides for giving a guarantee and indemnity, whereas the second provides for the execution of a formal agreement to give effect to the first part. It is readily apparent that clause 12 variously makes reference to a number of agreements in as much as it refers to ‘this Agreement’, ‘the Agreement’, the ‘formal lease’ and ‘formal deed or Agreement of guarantee and indemnity’. The expression ‘this agreement’ can sensibly only be referable to the offer to extend the lease as a whole. The references to ‘formal documents’ clearly relate to such documents later contemplated by clauses 12, 14 and 15.
The pivotal question then is, what was the remaining reference ‘the Agreement’ in clause 12 intended to refer to? The differentiated nomenclature within clause 12 was the subject of a good deal of debate and contention between counsel. Clause 12 stands alone so far as the obligations of Mr Brine as guarantor are concerned. The only other reference to the guarantor are within the acknowledgement given in clause 18 that the Guarantor has made his own inquiries. This adds nothing to the scope of the obligations assumed under clause 12.
In contrast, the other obligations in the wider agreement are incurred inter-partes as between lessor and lesee; there is no privity of contract on those aspects as between Parabanks and Mr Brine. For instance, the introductory words of the agreement quoted earlier are expressly as between lessor and lessee as are those in clauses 13, 14 and 16.
To compound matters further, scattered throughout other parts of the offer to extend are references to ‘this Agreement’ in clause 12, clauses 14(b),(d), (e) & (g), and once each in clauses 15(b), and 16. The term ‘the Extension of Lease’, occurs multiple times in clause 14(b), (c), (d), (e), (f) 1, 2, and 3, and in (g), as well as clause 15(b). The term ‘original Lease’ appears in clauses 14(b) and 17(2).
Significantly the expression ‘the agreement’ occurs but once, in clause 12 itself. That expression could hardly be read as a reference to the 2006 Lease, since quite apart from the definition in clause 1, it is otherwise clearly referred to as ‘the original Lease’. Likewise ‘this agreement’ can only be referable to the extension offer itself.
By a process of elimination therefore, ‘the Agreement’ referred to in the first part of clause 12, can only be a reference to something other than those specified agreements. It makes sense therefore to read ‘the agreement’ as a reference to the guarantee and indemnity given within clause 12 itself. That view is reinforced by the fact that the expression ‘this clause’ appears in each of the two parts of clause 12. Being the odd term out, so to speak, it is difficult to think that the singular change in terminology was not other than deliberative. Plainly because of the juxtaposition of terms in clause 12, ‘the Agreement’ could hardly be said to be a slip reference to ‘this Agreement’. That would be a contradiction in terms. Being an isolated occurrence confined solely to the guarantee and indemnity clause, ‘the Agreement’ can only therefore be considered as an intrinsic reference to the guarantee and indemnity given by Mr Brine itself. On that basis the undertakings in clause 12 are to be read as limited to those confined within the four walls of clause 12 itself.
If contrary to that view, the inevitable conclusion must otherwise be that clause 12 is inherently ambiguous, owing to the internal shifting and inconsistent references to different agreements, an ambiguity compounded by the context of other definitions contained elsewhere in the wider agreement. The disparate submissions of counsel on the point serve only to illustrate the intransigent nature of the ambiguity involved.
An identical conclusion may therefore be reached by a different line of reasoning. It is an established principle of construction that doubts as to the construction of the provisions of a guarantee, should be construed in favour of the surety: Bofinger v Kingsway Group Ltd,[52] Ankar Pty Ltd v National Westminster Finance (Aust) Ltd,[53] Chan v Cresdon Pty Ltd,[54] Andar Transport Pty Ltd v Brambles Ltd.[55] Since clause 12 is inherently ambiguous, the interpretation of clause 12 should be resolved in the same way, with the same result.
[52] (2009) 239 CLR 269, [53].
[53] (1987) 162 CLR 549, 561.
[54] (1989) 168 CLR 242, 256.
[55] (2004) 217 CLR 424, [17]–[18].
On this construction, Mr Brine has then committed to guarantee the payment by EDH of the rent and other monies payable by it pursuant to the extension, and the observance and performance of EDH’s obligations specified or implied in or by clause 12, and then the observance and performance of EDH’s covenants to be embodied in the formal lease. Although he bound himself to the observation and performance of EDH’s obligations under the contemplated formal agreement, that is of no consequence as one was not drawn up, still less executed. Of course he also indemnified the failure by EDH to pay the rent or monies or to ‘perform any of the obligations’ as specified.
Any suggestion that the words ‘the Agreement’ could be referable to something else, must be rejected as tantamount to impermissible rectification. For that reason the submission on behalf of Parabanks that it is reference to ‘this Agreement’, namely the entire offer to extend, must be rejected. If that construction were accepted the expression ‘this clause’ would be rendered nugatory.
Likewise the submission of Mr Hoile that it refers merely to the proposed formal agreement(s) must also be rejected. To read clause 12 in that way would render the words ‘failure … to execute such formal guarantee and indemnity will not in any way affect the binding nature of this clause’, with no practical work to do. His contention also overlooks the consideration that clause 12 is permissive of later formal agreements, and yet it does not mandate them. To the extent that Mr Brine guaranteed the observance and performance by EDH of the covenants terms and conditions to be embodied in a formal Lease, as that was never extended or registered, there is simply nothing for Mr Brine to guarantee in that respect. The apparent self-executing nature of clause 12 in the event of the failure of formal agreements, captured in the words ‘will not in any way affect the binding nature of this clause’, appears directed to the refusal or neglect to execute, as it does in the case of the Extension of Lease in clause 14(e). That part of clause 12 is therefore directed to perfecting the obligations of advancing towards completion, execution and registration of a formal Memorandum of Lease.
It follows on this construction that what is guaranteed and indemnified in clause 12 is confined to the payment of rent and other monies due under the extension and the obligations of EDH therein. That being so, Mr Brine becomes personally responsible for what he committed to, whereas the wider obligations to which EDH separately committed to are not co-extensive with his. The case for the plaintiff assumes that they are. That is to say, the obligations of guarantee and indemnity Mr Brine has assumed do not extend to the performance of any of EDH’s obligations under the original lease of August 2007. The inter-parties disclosure statement as between lessor and lessee as contemplated by clause 14(1) of the extension, has nothing to do with him.[56] Pursuant to s 12 of the Retail and Commercial Leases Act, its purpose is to satisfy certain statutory obligations of disclosure by the lessor and to afford a measure of protection to a prospective leasee, pre-lease.
[56] Exhibit P1, Tab 13.
A further submission mounted on behalf of the plaintiff was that the guarantee and indemnity embodied in clauses 25.2(c) and (d) of the Original Lease were incorporated by reference into the extension Lease ‘except where otherwise indicated in this offer’, so that it extends the ambit of clause 12. To the extent that clause 25.2(c) and (d) of the original Lease serves to augment clause 12, it may well do so as between lessor and lessee, but it does not as between them and the guarantor. As noted earlier, the opening words of the extension are expressly as between lessee and lessor. Those words ‘except unless otherwise indicated’ do not serve to pick up the former guarantee and indemnity, qua the guarantor. Expressed in another way, having identified ambiguity in the language of clause 12, the surrounding circumstances and the objectives of the transaction were to secure a fresh guarantee and indemnity on fresh terms as between lessor and guarantor: Western Export Services Inc v Jireh International Pty Ltd.[57]
[57] (2011) 86 ALJR 1, [2].
The extent of the obligations imposed under the guarantee and indemnity
No doubt Parabanks was entitled to sue for the unpaid rent as it fell due following breach by EDH. However it elected to terminate and sue for damages, as it was otherwise entitled to by law: Tall-Bennett & Co Pty Ltd v Sadot Holdings Pty Ltd,[58] Darbishire v Warren.[59]
[58] (1988) 4 BPR 9522.
[59] [1963] 1 WLR 1067.
In that situation, what then is the precise content of the obligations of guarantee and indemnity? There can be no doubting the fundamental distinction between a claim for rent or monies due under a lease, as opposed to a claim for damages for loss of bargain following a fundamental breach thereof: Moschi v Lep Air Services Ltd,[60] Progressive Mailing House Pty Ltd v Tabali Pty Ltd,[61] Sunbird Plaza Pty Ltd v Maloney.[62]
[60] [1973] AC 331, 344-345, 347-349.
[61] (1985) 157 CLR 17, 31-32.
[62] (1988) 166 CLR 245, 260-261, 273.
Mason CJ made it clear in Sunbird Plaza Proprietary Limited v Maloney,[63] that a guarantee of monies payable under a contract assumes a different obligation from a guarantee to meet damages payable upon breach:
There are, however, two common classes of guarantee of the payment of instalments by the principal debtor. The first is an undertaking by the guarantor that if the debtor fails to pay an instalment he will pay. This is a conditional agreement. The guarantor's obligation to pay arises on the debtor's failure to pay. The second is an undertaking by the guarantor that the debtor will carry out his contract. Then a failure by the debtor to perform his contract puts the guarantor in breach of his.
…
The appellant's argument is that the respondent guarantors were promising to pay a sum of money if the purchaser did not complete the contract. The terms of the guarantee do not support the argument. The respondents guaranteed "THE PERFORMANCE ... OF ALL THE TERMS AND CONDITIONS of the Contract including the payment of all moneys payable ... by the ... Purchaser". The respondents' promise was that the purchaser would perform its contractual obligations including the payment of all moneys payable under the contract. The promise falls within the second class discussed above, except, perhaps, in so far as the promise relates specifically to the payment of all moneys payable. In that respect the promise might well fall within the first category. Accordingly, if the balance of the purchase price had become payable, and had not been paid by the purchaser, the vendor might well have been entitled to sue the respondents for a liquidated amount, rather than claim damages for breach of contract. …
Another example of the application of this distinction occurs in Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd.[64]
[63] Above, 256 – 257.
[64] (2000) 22 WAR 101 at [28] – [31].
In Lewy v Moss Nominees Pty Ltd,[65] the lessee guaranteed:
… the due and punctual payment of all rent and other monies and the due and punctual performance and observance by the Lessee of all other covenants and conditions on the part of the Lessee to be performed and observed under the lease … AND the guarantor hereby indemnifies the Lessor against all loss and damage … as a result of any failure … to pay – the rent or other monies payable.
[65] [1997] ANZ ConvR 239, [1996] NSWCA 325.
This obligation was held to contemplate loss of bargain damages, having regard to the fact that it expressly referred to the recovery of all loss and damage suffered by the lessor during the ‘entire term’ of the lease. The particular covenants in question (clauses 41(iii), 42(ii) and (iii)) expressly referred to the capacity to recover such damages, and were thus apt to embrace liability for loss of bargain damages. The terms of clause 12 are not so expressed.
A further decision in point is Chan & Anor v Cresdon Pty Ltd.[66] This case concerned a guarantee of the ‘due and punctual performance of the obligations to be performed… under this lease’. The underlying agreement provided the parties would execute and register a lease in the form annexed. Although a lease was executed, it was not registered. At issue was whether the guarantee was intended to apply only to a registered lease, as opposed to an equitable one. Applying Ankar v Westminster Finance (Australia) Limited,[67] it was held the guarantors were not liable under the guarantee, which operated only in respect of ‘obligations … under this lease’, and which therefore could not have effect until the lease was registered. The Court held there was no justification for reading into the words of the guarantee so as to extend the obligations thereunder.
[66] (1989) 186 CLR 242.
[67] (1987) 162 CLR 549, 561.
It must follow from the above analysis that clause 12 of the extended lease did not hold Mr Brine to any obligation to guarantee or indemnify against loss of bargain damages, even though such damages remain recoverable as against EDH. An obligation by Mr Brine to guarantee the payment to Parabanks of loss of bargain damages, is nowhere specified in the offer to extend, nor can it be implied. The situation is quite different to what it was in Lewy v Moss Nominees,[68] as there are no equivalent or akin expressions within clause 12.
[68] Above.
The fact remains that Parabanks elected, no doubt for sound commercial reasons, to terminate the extended lease and to sue EDH for such damages. It is not suing for rent, as rent is no longer due and payable, fundamentally because the lease was terminated. The action of Parabanks therefore fails on this ground as well.
Mitigation of loss
Mr Brine bears the onus of establishing his plea that Parabanks failed to mitigate its loss: TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd.[69] In considering this issue it pays to bear in mind that it can be misleading to speak of a ‘duty to mitigate’, for the sounder question to posit in point of principle, is whether the plaintiff has acted unreasonably: Karacominakis v Big Country Developments Pty Ltd.[70]
[69] (1963) 180 CLR 130, 138.
[70] (2000) ANZ ConvR 513, [187], [2000] NSWCA 313.
The lease with Lowes was entered into shortly after the Administrator gave up possession. It was the evidence of Mr Di Mauro senior that the offer was promptly accepted, because of the prevailing economic circumstances. The Centre Manager, Melinda Fremlin, gave evidence as to circumstances associated with re-letting of the property, as did a leasing agent engaged by Parabanks, Mr Peter Borda of Intrepid Property.
The defence accepts that Parabanks was entitled to make a subjective assessment of its commercial interests in terminating the lease and in re-leasing Shop 11 on the terms that it did. The election to terminate is final and binding: Ogle v Comboyuro Investments Pty Ltd,[71] so that both parties thereby were discharged from further performance of the lease; Holland v Wiltshire,[72] even though Parabanks retained the right to sue for damages. However that position does not thereby automatically entitle it to recoup consequent losses, unless Parabanks has acted reasonably to mitigate its loss. Reliance for this proposition was placed upon Darbishire v Warren,[73] which holds that a plaintiff having acted legitimately in its commercial self-interest, remains required to mitigate loss.
[71] (1976) 136 CLR 440, 450-451.
[72] (1954) 90 CLR 409, 416.
[73] [1963] 1 WLR 1067, 1075.
Having terminated, Parabanks therefore remained obliged to take reasonable steps to mitigate its loss: Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd.[74] As established by that case, a landlord only recovers loss of bargain damages after having attempted unsuccessfully to obtain a new tenant at the rent stipulated by the preceding breached lease. The High Court unanimously held in Gumland Property Holdings:
[55] … The Lessor could not have got both damages (namely, the present value of the unpaid rent from the time of termination until the expiry of the lease), in addition to any rent capable of being earned by a re-letting of the Demised Premises …
There can be no double recovery by landlords. If landlords obtain possession, they can only recover loss of bargain damages if they have tried unsuccessfully to obtain a new tenant at the rent stipulated in the terminated lease. The monetary equivalent of what they would have got if they had not taken possession of the property reflects the fact that they cannot obtain tenants, or cannot obtain tenants who promise to pay as much as the defaulting tenants promised.
…
[64] The need for a landlord to recover loss of bargain damages from a tenant only arises when the market is falling, for if the market is static or rising, the landlord can re-enter against the defaulting tenant, recover arrears of rent, and promptly install a new tenant at the same or a higher rent”… It is also difficult to see why the law – whether the relevant rule which the Lessee was urging be a rule of construction or some rule of substantive law – should have the result of placing the risks of a falling market on landlords, and of depriving them of the opportunity by agreement to allocate the risk otherwise.
[74] (2008) 234 CLR 237, [55].
Gumland Properties is not distinguishable on the narrow and somewhat unprincipled factual basis that the lessor had bargained for higher rent in a bullish market. The observations of the court merely reflect the fact that in a falling market a comparison of ‘the rent payable under the lease with that recovered or to be recovered from any new lease’ is unlikely to result in any proof of damage,[75] in the ‘particular factual circumstances then under consideration’: Gigi Entertainment Pty Ltd v Schmidt.[76] On Parabanks’ case, the situation here is one of a falling market. All the same Gumland Properties establishes a broader principle of general application. It is clear however that the driving principle lies in the fact that the lessor must have unsuccessfully tried and failed to obtain a tenant willing to pay as much as the defaulting tenant. Patently this process was not even remotely attempted in this instance.
[75] Above [72].
[76] [2013] NSWCA 287, [79].
Applying these principles to the facts of the case, it becomes apparent that the defendant has clearly demonstrated on balance that Parabanks has failed to act reasonably on this account and in a number of other significant respects. These may be summarized as follows.
Firstly, it produced no evidence that it followed up or responded to the email from the Administrator of 16 March 2011, giving it notice of the presence of a party keenly interested in taking an assignment of the Lease. By his own admission, Mr Di Mauro made no attempt to negotiate, bargain or even begin discussions for that matter with Lowes on the basis of an assignment of the lease, or more importantly on account of its preparedness to match the current rent paid by EDH, as the email from the Administrators suggested was the case.[77] This omission became particularly acute in light of his concession that it was unusual for a tenant to express interest as keenly and strongly as Lowes had.[78]
[77] T119-120.
[78] T152.13-.21, 178-10-.32.
Secondly, given that there is simply no explanation as to why he did not negotiate for an assignment as he ordinarily did, ‘an assignment is the best; I don't pay anything, so that would have been my best course of action’.[79] This transaction stands in complete contrast to his past negotiating practices, which was ‘… negotiating … getting the best outcome for the centre that we can …’.[80]
[79] T172.24-173.9.
[80] T164.25-.32.
Thirdly, Mr Di Mauro was in a strong bargaining position with Lowes, as Shop 11 was ideally suited to its specific requirements, (as Mr Di Mauro eventually and somewhat reluctantly conceded) especially as Lowes benefited from acquiring a shop with similar fittings and fixtures to its requirements, without the need of major refurbishment, or the additional costs that may have entailed - this was ‘a plus for them I suppose’.[81] In addition to these specific advantages, Shop 11 was favourably located near the John Street entrance of the Centre, close to the car park, enjoyed a dual frontage, and situated where the Mall at that point carried the most foot traffic into the Centre.
[81] T181.4-.27
Fourthly, the sheer speed of acceptance itself beggars belief, taking just over 20 minutes, without discussion or negotiation, which demonstrates no thought was given to alternative strategies, still less to the exposure of Mr Brine under the guarantee. Mr Di Mauro accepted ‘the deal was done pretty quickly’.[82] It pays to remember at this point in the analysis, that just on five weeks earlier Parabanks had perfected the agreement with EDH for a higher rent.
[82] T140.13-.16.
Fifthly, Mr Di Mauro claimed a major motivation in the immediate acceptance of Lowes offer, was that ‘retail was very bad at the time ... retail spending was down … banks weren't lending much [making] it hard for us … because of funding …’.[83] Yet in the same period (March 2010) he claimed to have been concerned by the GFC, he successfully negotiated the rent with another tenant Noni B, up from its original offer of $50,000, to a base rent of $76,649.20 pa.[84] Quite apart from that, there was no economic crisis with respect to the Centre itself; there were low vacancy rates, visitation rates over the previous four years and indeed over the previous 12 months were particularly good, so he was both subjectively and objectively well positioned to bargain for a more favourable rent.[85]
[83] T112.8-.12.
[84] T128,20-129.23, T163.28-164.8.
[85] T187.37-196.29.
Although Mr Di Mauro was no doubt quite experienced in negotiating shopping centre leases, his endeavors to explain the speed at which Lowes offer came to be accepted, was unconvincing, especially his resort to the GFC as a shield against explaining the abject haste, coupled with his constant refrain that it was the ‘best deal’.[86] When one considers another shopping centre owned by his group, ‘Sefton Plaza had been fully leased for six or seven years’,[87] that vacancy rates at the Parabanks Shopping Centre were historically low, that there were no vacancies between September 2010 and January 2011 and that between February and June 2011 there were just one or two vacancies out of the 80 tenancies, it is difficult to fathom the urgency or imperative to transact.[88]
[86] T119.37-120.6, T125.31-.37, T138.7-.16, T140.16-141.4, T142.2-.26, T152.26-.35, T154.5-.11, T155.21-.34, T164.32-165.22, T167.29-.30, T170.26-.35, T174.24-.29, T210.5-.6.
[87] T155.4-.6.
[88] T187.37-190.19, 191.3-.21, 192.11-.35, 193.20-.38.
Sixthly, it is of significance that Parabanks failed to implement its own practices of engaging leasing agents (‘the more that are on the job the more chance there is of getting one’), such as Mr Borda, or Jones Lang and Knight Frank, to properly market the tenancy, an omission not explained satisfactorily.[89] That this course of alternative action was conventional is consistent with the evidence given by the agent Mr Borda.[90] It is also consistent with the evidence of the plaintiff’s own valuer Mr Wood to the effect that an adequate marketing campaign depends on the width, length and the means employed in the marketing campaign itself.[91] It might be added in this context that the definitions of ‘market value’ employed by him and by the defence valuer Mr Waterhouse, both embraced the necessary component ‘after proper marketing’.[92] Of even greater significance was the complete failure to comply with the Gumland requirements by attempting and failing to obtain a fresh tenant at the rent stipulated in the terminated lease, especially given that Mr Di Mauro had the legal advice of Di Mauro and Associates readily at hand had he wanted it.
[89] T101.29-.36, T137.12-142.4.
[90] T309.22-312.2, 314.14-315.2.
[91] T338.11-339.14.
[92] Exhibit P3, Tab 2, p 40 and Exhibit D3 Tab 3, p 91, respectively.
A further reason advanced for so readily accepting Lowes proposal was claimed to be the perceived need to offer incentives. This practice was however specifically developed as an inducement to tenants to commit to a proposed $100m re-development put forward in 2009, to add another 30-40 new specialty shops and a Coles supermarket, which did not eventuate.[93] It is difficult to see such a need applied in the case of the Lowes tenancy – it had incentive enough as revealed by its own correspondence.
[93] T106.8-107.16, 113.34-115.31, 116.17-.36, 218.15-.20, 321.20-.37.
This analysis of the evidence leads to the inescapable conclusion that although Mr Di Mauro subjectively considered the Lowes offer to be a reasonable one, it was hardly reasonable when considered objectively, from any point of view. The offer was accepted with astonishing haste following a spot judgment, without regard to the implications, without consultation, internal discussion and of course without entering into any negotiations whatsoever. Usual practices were abandoned.
It follows that it is clearly demonstrated Parabanks failed to act reasonably in mitigating its loss. The claimed GFC crisis as it affected the Parabanks Shopping Centre and the unsatisfactory retort that Lowes was the ‘best deal’, must both the rejected as unsubstantiated by the evidence.
The valuation evidence
Much attention was devoted by counsel to a consideration of the proper market rent for Shop 11, as it bears on the mitigation issue and as a necessary component of the proof of loss. The plaintiff called the valuer Mr Wood, whose expert opinion was that the market rent for Shop 11 as of 22 March 2011 (when Lowes offer was accepted), was $79,000 pa on a gross basis.[94] His qualifications, like that of the defence valuer Mr Waterhouse, are not in question. Under the original EDH lease, the current annual rent was $80,616 which together with outgoings and promotions levy totaled $97,336.58. The EDH extension was for a base rent of $83,827.41, and with outgoings totalled $93,373.29.
[94] Exhibit P3, Tab 2, p 49.
The conclusion of Mr Wood was based upon rents paid by other tenants in the Parabanks Shopping Centre, which for the most part, traded under the same or analogous permitted uses to that of Shop 11. He considered the Rockmans tenancy over shops 18 and 19 to be the closest comparator. That lease was executed on 24 August 2010 and provided for a base rent of $66,500 pa, CPI reviews annually, plus outgoings and a promotions levy.[95] He considered Lowes were in a better bargaining position as an incoming tenant seeking a new lease, than Rockmans were as a sitting tenant negotiating renewal or extension.
[95] Exhibit P1, Vol 2, Tab 80.
It became apparent during the course of his evidence that Mr Wood’s assessment was lower than it otherwise would have been, because he proceeded on the assumption that Shop 11 was restricted to the previous use as a mens wear retailer, or the use permitted by the landlords under the lease. This emerged under cross-examination:[96]
[96] T332.22-334.22.
QIn reaching your assessment of market value, what assumptions have you made about permitted use.
AI’ve made the assumption that they've taken into account the use of the tenancy as for the previous lease in assessing the market value as at 22 March 2011.
QHow is the previous use by the tenant relevant to the question of the market value of the tenancy as a vacant tenancy after that tenant has gone as at 22 March.
AThat is right, well, as I said, it will impact on the level of rent that you may be able to achieve. If the assumption is that any use could go into a tenancy, well, that may result in a different answer.
QYes, but how is what the previous tenant did, that has now gone, how is that relevant to the assessment of the market value of the tenancy after that tenant has gone and it is now vacant.
AWell, it's generally dictated by the lessor's requirement for that tenancy and that relates back to the tenancy mix generally speaking.
QSo what you're saying is that what might be relevant to the valuation after a vacant tenancy is what may or may not be permitted in the future by the landlord, is that what you're saying.
AYes.
QIs it right to suggest that in your valuation you have proceeded on the basis that there is no relevant issue there, that is to say, there is no issue that either increases or decreases the market value that you have otherwise arrived at based on any consideration of what the landlord might or might not permit.
AWell, explicit in my valuation is assuming similar ongoing use.
QSo in reaching your market value, you have assumed a restriction, have you, on the future use of the -
AI have.
Q- tenancy.
AYes, I have.
QLimited to the type of tenancy that used to exist before.
ACorrect, but I'm not saying explicitly exactly the same but in the same group of type of retailer, so I'm not saying it necessarily had to be that the potential new incoming tenant had to be a menswear retailer but I did assume a similar use as in a clothing retailer or within that group which would include footwear and personal accessories generally considered to be within that group.
QDoes that assumption that you've accepted and used in your report lead to this position that the market value you have reached is lower than it would otherwise be if the tenancy could be made available for other retailers not restricted to the group that you've described.
AThat's right.
QTo put that the other way around, if you had been asked to assume that this tenancy would be available to retailers other than the limited class as I've defined them, that would result in a higher market valuation.
AI think that's correct.
QCan you just assist me in finding where that is actually articulated anywhere in your report. This does seem to be something that I hope I haven't missed but it doesn't actually seem to be identified anywhere as a factor which you have used to effectively express your opinion of market value from what it would otherwise be. Well, you haven't accepted that assumption.
AWe will we go back to s.3 on p.39, the basis of the market valuation and the assumption that the premises is subject to the Retail and Commercial Leases Act of 1995.
QYes, that's the one which in my copy of your first report is at p.2.
AYes, of my report - sorry, that's the page number of mine and in s.1, part A, I'll just quote 'in the current market retail shop is the rent that having regard to the terms, conditions of the lease and other relevant matters, would be reasonably expected for the shop if it were unoccupied and offered for renting for use for which the shop may be put under the lease'.
It is evident from this passage that Mr Wood accepted the restricted assumption of similar use, would produce a lower valuation, lower than it would otherwise be if not so restricted. He also accepted the proposition that this use was in the ‘worst performing category at that point in time’ of all permitted uses, a factor which depressed market value.[97] Mr Wood further conceded that he had not undertaken market valuation at its ‘highest and best use’,[98] because the definition he adopted did not ‘include any concept of limiting the considerations of value on the basis … [of] only a particular defined class of potential lessee’.[99]
[97] T344.22-.27.
[98] T337.17-.35.
[99] T337.36-338.5, Exhibit P3, Tab 2, p 403.
It might be noted in fairness to Mr Wood, that Mr Waterhouse accepted that as Shop 11 had a good track record, it was well suited for a ‘clothing-type store’, and that a change of use might require ‘a substantial fit-out’, for which a potential lessee might ‘be looking for a contribution’ from Parabanks.[100]
[100] T563.32-564.29.
On the defence side, Mr Waterhouse assessed the market rental for Shop 11 as of 28 March 2011 at ‘$84,450 pa (net) subject to the terms of the lease’, that is before any outgoings or promotions levies were factored in. This appraisal was based upon ‘the available rental evidence.[101] This is $5,450 more than that of Mr Wood on a ‘base’ comparison. It is to be recalled that EDH entered into the extended lease roughly one month earlier (effective from 1 March 2011 at $83,827.41), whereas the Lowes lease was counter executed by Lowes Manhattan on 28 March 2011 for the annual rental of $80,000.[102]
[101] Exhibit D3, Tab 3, pp 86 and 109.
[102] Exhibit P1, Tab 45.
It emerged that quite apart from holding unquestioned formal valuation qualifications,[103] Mr Waterhouse had extensive first hand personal experience in lease negotiations. This experience first emerged under cross-examination:[104]
QIf I could just stop you. Briefly you're giving this evidence on the basis that you're not an expert in lease negotiations though, aren't you, you're not a lease negotiator so to speak.
AI've been asked to comment about the -
QI'll come to that. So we can be clear, your expertise is not lease negotiation, is it.
AMy expertise in valuation is extensive. I've extensive experience in lease negotiation as well.
[103] Exhibit D3, Tab 3, pp 89-90.
[104] T480.28-.36.
Mr Waterhouse expanded on the extent of his experience in re-examination:[105]
A… To give a reasonably brief outline. I started as manager for Colliers International Real Estate. I managed shopping centres such as Clearview and cut my teeth on lease negotiations and rentals as a property manager. Moved through to Richard Ellis International Real Estate as a leasing consultant. Sorry, take a step back, I went into leasing at Colliers for a period of time as a negotiator and then furthered my experience, if you like, in real estate at CB Richard Ellis in leasing, sales and leasing agent and at the end of that period in the 1990s with the recession found myself out of work. Thought I'd perhaps try a different field and went into valuation and since that time have built the business, substantial business in valuation. So fundamentally valuations involve understanding the basis of any negotiation and an outcome, not merely the superficial elements. We, as a business, run a business called 'Tenancies solutions' which acts primarily for tenants in negotiations. It acts for clients such as Flight Centre. My specific involvement there was with Radio Rentals as their consultant which involved advising in all areas and aspects of property dealings. Continued to act as a valuer all during that time. That was from 1990 through to now. And whilst I'm involved in valuations I do rental determinations for the Australian Property Institute, instructions that can be in any number of fields and I'm not sure if that is the short story or long story, if there is anything more that you need.
[105] T574.26-575.16.
Therefore any criticism of him straying outside the confines of his expertise, cannot be sustained. An example of this was his reference to the proximity of Harris Scarfe to Shop 11 not necessarily being a disadvantage.[106]
[106] T532.17-533.22.
Mr Waterhouse considered the business records supplied by Angaet revealed over the period between January 2008 and November 2011, demonstrated that Parabanks was maintaining steady visitation rates, and that tenancy vacancy rates were maintained at low levels, well below those expected for similar sub-regional centres having similar ‘anchor’ tenants and mix of specialty shops.[107] The Angaet supplied materials recorded no shop vacancies from September 2010 to January 2011, and that between February and June 2011 vacancy levels were between 0.5 per cent and 1.6 per cent.[108] Based on the combination of the visitation and vacancy rates, Mr Waterhouse considered the Centre did not appear to be experiencing poor trading conditions, sufficient to overlook normal marketing practices with respect to vacant shop tenancies in order to secure a proper rental for ‘a key shop within the strongest mall of the centre’.[109]
[107] Exhibit D3, Tab 3, p 100.
[108] Exhibit D3, Tab 3, p 101.
[109] Exhibit D3, Tab 3, p 109.
In light of the findings made earlier, these conclusions, based as they are on primary records kept on the plaintiff’s side, are clearly well founded. In that connection it might be noted again, that although Mr Di Mauro senior quibbled at times with some of the underlying assumptions, he essentially accepted them, or alternatively could not point to material that might tend to refute them.
The analysis of ‘Letting Up’ periods – that is to say the periods of vacancy between an expired tenancy and a fresh tenancy - from April 2010 to April 2011 varied from between one month and seven months, the average being somewhere between two and five months.[110] Of those involving longer letting-up periods, shop 38, and one of two Suzanne Gray tenancies were situated some distance from Shop 11, considered by both valuers to be an inferior location.[111] Shop 88 was in fact situated in a separate building, vacated by Game Traders and subsequently leased to an Afghan supermarket, so it does not appear to have assumed any particular significance in either report.
[110] Exhibit D3, Tab 3, p 102.
[111] Exhibit P3, Tab 2, p 46, and Exhibit D3, Tab 4, pp 150-151, respectively.
In the opinion of Mr Waterhouse, a period in the vicinity of two to five months was a reasonable time span in which to adequately market this shop, and between one and three months was a reasonable estimate over which to effectively negotiate with Lowes in relation to Shop 11.[112] Of course Mr Di Mauro was entitled to consider what the letting-up period might have been when weighing up the decision to lease with Lowes, however he did not claim this as being of any significance. Mr Waterhouse considered Shop 11 to be a prime corner tenancy, enjoying a dual frontage and of sufficient size for a variety of fashion tenants.[113] These views are consistent with those of Mr Wood, who noted Shop 11 was ‘in a high pedestrian traffic mall at the entry to Harris Scarfe …’.[114]
[112] Exhibit D3, Tab 3, p 112.
[113] Exhibit D3, Tab 3, p 109.
[114] Exhibit D3, Tab 2, p 48.
Based on all the above considerations, Mr Waterhouse formed the view that it could reasonably be expected an agreement with Lowes was negotiable on no more adverse terms than those prevailing in the extension agreement with EDH.[115] In reaching that view he observed the premises were ready for immediate trading in retail clothing (an alignment of use), and that no letting up or rent free periods were warranted given Lowes strong interest in the shop.[116] Furthermore, he considered the Lowes lease was not negotiated in tough economic times, at least in times that were particularly difficult for Parabanks Shopping Centre itself, for the reasons identified earlier.[117]
[115] Exhibit D3, Tab 3, p 111.
[116] T572.19-.26, and the references referred to earlier.
[117] T465.13-.18.
Findings of primary fact have been made earlier in these reasons which entirely support the foundation for these conclusions. Because those findings were based on material sourced from the plaintiff’s side, they are to be preferred to the opinions expressed to the contrary by Mr Wood, despite the criticisms of counsel for the plaintiff leveled at Mr Waterhouse. To so conclude does not involve any adverse reflection on Mr Wood, for as already seen, he proceeded on an incomplete and limited assumption which compromised his valuation in the ways demonstrated earlier.
Mr Waterhouse was comprehensively criticized by counsel for the plaintiff in a number of respects. A major generic criticism was that he did not compare ‘like with like’. For example, it was complained that he compared rents on a net rather than a gross basis, extrapolated rents based on rent reviews applied to passing rents, did not take into account the effect of leasing incentives, or make distinctions between the differing positions of sitting and incoming tenants, and that he made a number of erroneous assumptions in reaching his opinion as to current market value. In short he did not compare ‘apples with apples’ as counsel for the plaintiff was prone to express it. This issue will be considered later.
A number of lesser complaints may be conveniently disposed of first. It was said that Mr Waterhouse proceeded on an assumption that there were other parties interested in Shop 11, namely EDH and an unknown party referred to by the Administrator and Lowes.[118] The only other interested party on the evidence adduced, was in fact Lowes, even though it is not possible to reach that conclusion as a proven fact.[119] This issue is of no consequence since Lowes was keenly interested in the tenancy, as we have seen. It was in any case simply a part of the surrounding information considered by Mr Waterhouse and which if true, would not have affected his conclusion anyway.[120]
[118] Exhibit D3, Tab 3, pp 98 and 108, T 455.30-456.12, T457.32-458.8.
[119] T464.25-565.8.
[120] T465.19-468.17, 569.1-571.25, 572.16-.26.
It was suggested by counsel for Parabanks that an adverse inference ought to be drawn against the defendant for its failure to call the author of the letter written by the Administrator.[121] Since there is no direct evidence whether there were no other interested parties, the point goes nowhere due to the lack of proof of the underlying fact. If anything, the shoe is rather more on the other foot. It emerged during the course of the trial that in order to secure the production of documents from the Administrator, the defence were required to issue subpoenas.[122] More to the point, the plaintiff’s solicitors had themselves made inquiries of the Administrator, who as a consequence became ‘reluctant to talk’ with the defence.[123]
[121] T760.20-.38.
[122] T352.12-353.10.
[123] T85.6-.22.
A second error is said to be an undue reliance on the EDH offer to extend as forming part of the ‘rental evidence’, and what Mr Waterhouse considered to be a successful trading history of EDH from Shop 11, and the increasing rent realized since 2006.[124] It is not demonstrated these underlying trading assumptions are wrong – they are proven on the evidence adduced. The unrefuted evidence of Mr Brine was that this store maintained a steady turnover over the past three financial years.[125] In any case this lease was merely one of a number of ‘rental comparables’, considered by Mr Waterhouse as ‘hard rental evidence’ in reaching his conclusions.[126]
[124] Exhibit D3, Tab 3, p111, T541.11-542.17.
[125] T379.30-384.36.
[126] T460.16, T466.23.
Although EDH went into administration, it did so as a group of 186 stores Australia wide. There is simply no evidence that the EDH Parabanks was in financial difficulty or that it was a contributing cause of the administration.[127] On the contrary, the uncontested evidence of Mr Brine was that it traded satisfactorily.[128] The cross-examination of Mr Waterhouse on the national Ed Harry financial position strayed into generalities as opposed to specifics in relation to the subject property.[129]
[127] T374.8-.12.
[128] T379.30-382.22.
[129] T514.28-.35.
There is nothing to suggest that the EDH extension lease was other than a result of a prudent and willing lessor and lessee reaching an arm’s length agreement following negotiation, and in his report Mr Waterhouse referred to the fair market conditions in which the extension lease was negotiated. He wrote:[130]
The rental paid by the tenant at the end of the lease term as at 28/2/11 was equivalent to $84,790 per annum including the Promotion Levy plus outgoings. The lessor had a target rent of $93,149.16 pa for this tenancy shown in a management report dated 10/11/10. The agreed base rental as shown in the offer to lease dated 18/10/10 was $83,827.41 pa which essentially was equivalent to a 4% increase on the current rental at the end of the lease, (i.e. $80,603 x 1.04). The agreed terms as at 1/3/11 included a base rental of $83,827 pa with no further contribution to the Promotion Levy (which effectively was a saving of $4,396.79 per annum), plus contribution to outgoings.
This was an agreed rental between lessee and lessor and neither party had exercised their rights under the provisions of the lease to have a market value determined by an external party. A long term sitting tenant, aware of the trading capabilities of the tenancy, had negotiated with the landlord an acceptable level of rental for these premises is this location within the centre.
The landlord has foregone the target rental of $93,149.16 pa to negotiate a rental some 11% lower than the target rental which would provide the landlord with less overall gross rental in the first year of the extension of lease.
These circumstances would be deemed as satisfying the definition of an “arms length” agreement for the purposes of determining a market rental under the terms of the lease.
[130] Exhibit D3, Tab 3, p 108.
Given this description is proven historical fact, it is difficult to fathom the point of the criticism.
Mr Waterhouse did concede that a sitting tenant was in a different position to an incoming tenant on renewal, in that the former may be in a weaker bargaining position, however it is clear that he was mindful of the dynamic involved.[131] So much depends on the specifics, the nature of the relationship, permitted uses and so on. As he said under cross-examination:[132]
The tenancy for a specific lease has a particular value. It has a greater value for a chemist shop, greater value for a butcher, greater value for a fruit and veg and a certain value for the class and permitted use under which this shop has been put.
[131] T563.15-.19.
[132] T515.13-.17
Then Mr Waterhouse was criticized for giving inappropriate weight to certain emails which ‘tend to support the notion the level of rent negotiated … was fair and reasonable’.[133] These were two emails in which Parabanks leasing agent Mr Borda sent to prospective tenants at suggested rentals of $80,603 and $85,000 respectively for Shop 11. It was premised by cross-examining counsel that these emails were in the nature of ‘cold calls’ to which the relevant parties expressed no interest.[134] Mr Waterhouse accepted those emails were of no particular relevance to market rent.[135] He explained his reference to them as ‘not indicating the level of rent was unreasonable … it is background information that doesn’t work against that conclusion’.[136] He made it clear that material was employed in a negative rather than affirmative way, ‘there is no suggestion that the level of rent is unreasonable’, and there was no resiling from his original position on this point, so the criticism is without substance.
[133] Exhibit D3, Tab 3, pp 108 and 109.
[134] T552.12.
[135] T468.18-.33.
[136] T469.2-.23.
Yet another suggestion was that as Parabanks had agreed to reductions in rent of around $5,000 pa with two sitting tenants, Rockmans and Suzanne Grae, supported the view that prevailing economic conditions were favourable to tenants at the time.[137] The terms of these leases were noted in his report.[138] When confronted with this point he correctly pointed out that without knowing what ‘other aspects of the negotiations’ came into play, the suggestion these arrangements occurred in conditions ‘favourable to lessees’ made it: [139]
… impossible to make a factual statement about something that has arisen late in the piece without having a full gamut of information surrounding … depending on their compulsion to stay in the complex or be moved.
[137] Exhibit P5, and Exhibit P1, Tabs 79 and 80 respectively.
[138] Exhibit D3, Tab 3 pp 103, 105.
[139] T497.22-498.26, 511.2-512.35.
This stance stands only to reason. It was unfair to confront him without full disclosure of the circumstances surrounding the re-negotiated leases. For those reasons it is not open to make any conclusive findings one way or the other as to whether these leases were indicative of prevailing economic circumstances, as opposed to the particular dynamics pertaining to each lease. As Mr Waterhouse emphasized in his report:[140]
We have not been provided with details of the renewal of these leases so we are not able to compare the levels of rent from these tenancies directly with the subject tenancy. Should subsequent information be provided which enables us to complete a review of the lease renewals of the centre around the date of valuation, we reserve the right to reassess our opinion of rental value for the subject tenancy?
[140] Exhibit D3, Tab 3, p 109 – his emphasis.
Still further as Mr Waterhouse commented in the body of his report:[141]
The rent paid by Susanne Grae in 2006 has been indexed by 4% pa and as at August 2011 the rental rate is considered to be at the low end of an expected range of rentals for fashion tenants in this location. This tenancy is of similar size and similar permitted use and in a central location in the centre on the perimeter of the food court but as it is an older lease the comparison is not useful for this assessment.
[141] Exhibit D3, Tab 3, p 105.
The Suzanne Grae leases over shops 39 and 40 were in inferior locations. Although Mr Waterhouse incorrectly included a promotional levy with respect to them, and the renewal of 2011 was as a sitting tenancy, they were clearly not directly comparable.[142] Furthermore it emerged with respect to the Suzanne Grae leases that rather unique circumstances came into play, because of the prospect of a Dick Smith store entering the Centre, and the consequent possibility of relocating to shop 17, which Noni B coincidentally wanted to take over. This served to work against Noni B’s attempts to negotiate a lower rent for shop 17.[143] Nevertheless Mr Waterhouse also accepted another lease, Millers Fashion, was negotiated when the market was near its peak in around late 2007 and early 2008, and was therefore at a higher end of the expected range for fashion tenants.[144]
[142] Exhibit D3, Tab 3, p 105, T495.4-.16.
[143]Exhibit P1, Vol 2, Tab 76, Exhibit P2, Tab 8, T211.23-.26, T227.17-228.34.
[144] T500.6-.16.
Mr Waterhouse was further criticized for opining that Harris Scarfe, located not that far from Shop 11 was not necessarily detrimental to EDH or Lowes because he was not an expert in the field of economics.[145] His qualifications to give expert evidence on the basis of experience was demonstrated earlier.
[145] T579.38 – 580.11.
At the outset of his report Mr Waterhouse applied the International Rental Assessment Standard Definition of Market Rent. This incorporates the following statement:[146]
The Market Rental Value will not be contingent on any tenancy incentives or inducements (such as cash payments; the Lessor taking over a prospective tenancy obligation in other premises; relocating/reestablishment expenses; rent free periods; rental reductions; supply of chattels, plant and equipment; or fitout for a particular business use).
[146] Exhibit D3, Tab 3, p 91.
He was cross-examined on the basis that leasing incentives should be taken into account.[147] However the expression therein ‘not contingent upon’ was meant to be read as ‘not reliant upon’.[148] He accepted without qualification that ‘leasing incentives were entirely relevant’ and that they were ‘common place in the market place and could be anywhere between 5 per cent and 20 per cent of the rent’.[149] It is clear that consideration was built into his assessment ‘on the basis that if there was a reduction … or a concession, it is most likely in the rental’.[150] In light of that evidence it is difficult to appreciate his opinion relating to market value was compromised, whatever definition he applied. In any case, as the incentives applicable to the tenancies considered ‘for similar permitted uses’, were documented in the report of Mr Wood, it is not established that Mr Waterhouse misconceived matters or compromised his opinions in that regard.[151] As he observed ‘ it revolves around who’s responsible for make good provisions … every case is different and it depends on the bargaining position of the parties’.[152]
[147] T476.29-477.7.
[148] T478.20-479.28.
[149] T478.20-479.16.
[150] T481.32-482.14.
[151] Exhibit P3, Tab 2, pp 45-47.
[152] T520.27-521.21.
Having disposed of these wide ranging criticisms, it is now appropriate to return to the generic submission that Mr Waterhouse failed to ‘compare apples with apples’, by using a net rent basis without factoring outgoings and rent incentives, rather than a gross (total occupancy cost) basis.[153] As a first step it may be accepted that his table of rental evidence did not directly refer to outgoings or promotional levies where they are applicable.[154] A particular criticism was by reference to Noni B (shop 17), in erroneously factoring in a promotion levy of $3,832.46, and that Noni B was not required to pay the full range of outgoings.[155] Hence it is submitted that the rent paid for shop 17, was closer to that paid by Lowes.
[153]T491.3-.23.
[154]Exhibit D3, Tab 3, pp 103-105, T491.3-.7.
[155] Exhibit P1, Vol 2, Tab 75
Seemingly out of fear of forfeiting the premises, Noni B offered to pay the current rent plus 5 per cent on renewal, which led to the base rent figure of $76,649.20. Mr Waterhouse took issue with the suggestion that this increase was attributable to competition with another tenant.[156] This lease was just another legitimate piece of comparable tenancy material which he rightly considered in the context of a wider range of tenancies. To suggest that Noni B was a better comparitor is antithetical to Mr Wood’s own assessment that the ‘most comparable premises to Shop 11 is shop 18/19 leased to … Rockmans’.[157]
[156]T509.13 – 510.22.
[157] Exhibit P3, Tab 2, p 47.
Mr Waterhouse next conceded overlooking that Destination Fashion (shops 31 and 38) did not pay outgoings or promotional levies, so that the rental levels for its shops in his report should have been described as gross, rather than net rents.[158] All the same, as shops 31 and 38 were located in positions inferior to Shop 11, this consideration hardly had any measurable influence on the ultimate conclusions reached by him. Once again this was simply one small aspect of the entire mix of rental evidence available to him.[159] Likewise Mr Waterhouse’s acknowledgement that a table in his report did not ‘necessarily represent a level of rent actually proposed by the lessor’, is entirely explicable on the basis that he was not given ‘detailed information regarding the outcome of the lease records’, the supply of which lay exclusively in the plaintiff’s hands.[160]
[158]T492.14 – 495.3, T533.24 – 534.1, T494.3 – 495.3.
[159]T494.29 – 495.3.
[160]T515.36 – 516.25, Exhibit D3, Tab 3, p 106.
In this context counsel for the plaintiff placed reliance on the Australia and New Zealand Valuation and Property Standards.[161] These indicate the best evidence of value is generally comparable rentals at relevant times, with similar permitted uses, over vacant possessions agreed at arm’s length. Parabank’s counsel contended the Lowes lease satisfied all these criteria. For the reasons advanced earlier, particularly in the discussion of mitigation, this was far from the situation. On the contrary, the best evidence of market value is glaringly obvious. It was the extension lease, negotiated in circumstances which completely satisfy those very standards, as it does with the definitions adopted by Mr Wood, except for the fact that it was a sitting tenancy.
[161] Exhibit P3, Tab 4, Guidance Note 9.
Both experts were at one on the fact that the Rockmans Destination Fashion (shop 31) and the Suzanne Grae franchise, were relevant to their assessments, so in reality the question was what significance each carried. So far as minute comparison between one lease and another is concerned, the fact of the matter is that with an aged shopping centre such as Parabanks, it was always unlikely there would be any direct comparators at any given point in time, so such comparisons must necessarily be of limited use. Leases would necessarily fall due for renewal, reassignment, renegotiation, or for negotiation with incoming tenants and for that matter upon breach, at different times and under different circumstances, and in the context of quite disparate negotiating strengths and weaknesses.
Quite apart from those considerations, the bargaining dynamics will inherently differ depending on market conditions, whether the tenant was outgoing or incoming, the relative bargaining strengths and stance of the parties, incentives may or may not be given, plus all the other kinds of unique circumstances that might influence the rate of rent. Thus the analysis of ‘comparable’ shops must necessarily be limited because they are likely to be influenced by these kinds of highly subjective and idiosyncratic considerations, especially when in several instances the precise negotiating circumstances remain relatively unknown. Simply put, there are many variety of apples.
Moreover it is difficult to appreciate that outgoings and promotions levies were core values in assessing market rent, and even if they were, they would have operated, if anything to enhance value. To analyse the various comparators in such minute detail as the plaintiff has, fails to see the bigger picture. Indeed as Mr Wood accurately observed:[162]
The rental rates within the centre show wide disparities over the different situations with tenancies and leases which are not readily comparable to each other without further interpretation. Rent rates vary considerably across the centre ranging from less than $400/sqm to $775/sqm depending on the location within the centre, size of tenancy, permitted use and other relevant factors.
The fashion tenancies have tended to be located in the high foot traffic and high exposure areas of the centre and therefore tend to pay rental rates at the higher end of the range.
The subject tenancy seems to fit in the upper end of the range supported by the rental for Tenancy 17 (Noni B tenancy).
[162] Exhibit D3, Tab 3, p 108.
The opinion of Mr Waterhouse that the market value of Shop 11 was $84,450 pa was based on primary sources supplied by Parabanks or Angaet. There was some shortfall in the material discovered for reasons not fully explained by either party, for the want of which he cannot be criticised.[163] The inescapable fact of the matter is that the lease over Shop 11 was re-negotiated shortly before administration in prevailing open market conditions between willing parties at arm’s length for the fair price of $83,827.41 pa: Spencer v Commonwealth of Australia.[164] It is impossible not to accept that this is the most direct and obvious evidence of current market value. Lowes might have held some advantage as an incoming tenant, however this was off-set by the advantage Parabanks held – which it failed to exploit – of vacant premises ideally suited to Lowes needs coupled with its keenness to transact.
[163] T444.11-446.22, 451.26-452.6, 728.24-730.25, plaintiff’s written closing submission, para 241.
[164] (1907) 5 CLR 418, 432; The A & NZ Valuation Standards section 47.
For all the above reasons the opinion of Mr Waterhouse can only be accepted as reliable and soundly based on proven underlying sources. It follows from this conclusion that Parabanks has failed to prove it has suffered any damage on account of the difference between the respective payments due under the EDH and Lowes leases.
The measure of Parabanks’ loss and damage?
The entitlement of Parabanks under the EDH lease was an annual rent of $83,827.41 plus GST payable monthly in advance for a period of 5 years, from 1 March 2011, with annual rent reviews. The Parabanks lease with Lowes was for $80,000 pa. In essence Parabanks claims the difference between the two, with adjustments for the outgoings and a promotions levy, as provided for in the disclosure statement.[165] The measure of its prospective loss is unliquidated damages for loss of its bargain during the balance of the term of the lease: McDonald v Dennys Lascelles Ltd.[166] The calculations are detailed in annexure B to the plaintiff’s written closing submission, and amount to $147,320.95. The precise basis of the calculations are spelt out in the plaintiff’s closing written submission at paragraph 129. As the defendant does not dispute these calculations,[167] it would have been otherwise appropriate for Parabanks to have the benefit of a judgment in that sum.[168] The question of the incidence of GST would require further argument.
[165] Exhibit P1, Tab 13, pp 97 and 99.
[166] (1933) 48 CLR 457, 477.
[167] T682.27-.31.
[168] Plaintiff’s corrected submission para 16, T48.4-.20.
Costs on an indemnity or solicitor/client basis?
The defendant conceded the costs of $1,665.10 for legal fees incurred for the preparation of the formal Lease and Deed of Guarantee claimed, as payable pursuant to the first part of clause 12. He accepts they were ‘monies’ payable by EDH ‘pursuant’ to the Offer to Extend the Lease.[169] It was also accepted by Mr Hoile that clause 12 obliged his client to pay such contractual costs as the plaintiff may be awarded on a solicitor/client basis, as opposed to the customary party/party basis. He was concerned however to protect Mr Brine’s entitlement to orders for costs thrown away, especially on account of the application to amend: Yap v Flinders Reproductive Medicine Pty Ltd.[170] However that is an issue for consideration following delivery of this judgment and before final orders as to costs are made.
[169] Closing submissions paragraph 2.21.1(b).
[170] [2014] SADC 82, [46]-[52], and 6R DCR 263(2)(a).
Another afterword
In Chadwick v Allen,[171] I had occasion to point out the court was likely to be more reluctant to allow unrestrained, over lengthy written submissions. I regret the necessity to comment likewise again. In this instance a written opening, unnecessarily repeated in closing submissions (bar for a few additional transcript references), a written closing submission of some 110 pages (not to mention five annexures), were too long, too discursive and at times too repetitive, not to mention a written response to the defendant’s outline of submission of 14 pages, and corrections to its written submissions of six pages (unmarked up). The defendant’s written submission of thirty eight pages was long as well, albeit far more restrained.
[171] [2012] SADC 105, [346] – [347].
Written submissions should contain single propositions supported by transcript references or case citations, rather than prolix and wordy arguments or lengthy extracts from either. The court has the power to limit the length and content of written submissions pursuant to DCR 6 209. As Beaumont J pointed out in Donkin v AGC (Advances) Ltd,[172] lengthy written submissions may not be used without the leave of the court, because of the burden such a practice places on judges and the possible delay and costs involved, citing Carr v Finance Corp of Australia Ltd,[173] and Trade Practices Commission v TNT Management Pty Ltd.[174] His Honour agreed with the following statement taken from The English Guide to Commercial Court Practice, which counsel would be well advised to abide:[175]
…it is advantageous and economical for counsel to submit a argument on matters of law together with references to legal authorities and to identify the findings of fact asked for in the light of the evidence given during the trial, together with the references to the evidence where necessary.
[172] (1991) 103 ALR 95, 95-96.
[173] (1981) 147 CLR 246.
[174] (1985) 58 ALR 423.
[175] 2nd ed (1990) p 25.
Although there is no equivalent to Supreme Court Practice Direction 5.12.3 as for the District Court is concerned, counsel should also be guided by it, as they would by the practice for written submissions on appeal, as set out in Practice Direction 6.28 and 6.29:
Unless there is a special reason, the summary should not contain quotations from the evidence, statutes, rules or authorities, but should instead give the references to them.
Here both counsel need to be further reminded of the well established practice that no further written submissions are to be filed without the permission of the court: Bale v Mills.[176]
[176] (2011) 81 NSWLR 498, [57].
Summary and orders
On the proper construction of the subject extension lease, Mr Brine committed himself to guarantee and indemnify EDH’s obligations in respect of any failure by it to pay rent or monies, or to observe or perform any of its obligations thereunder, but he did not assume any wider obligations than that, or any of those imposed under the original lease of 31 August 2007. Such liabilities as he did assume did not in any event encompass loss of bargain damages.
Furthermore, Parabanks has manifestly failed to mitigate its loss and it has failed to prove, except in one small respect, that it has suffered damage for which Mr Brine was responsible. The valuation evidence demonstrates that the Lowes lease was entered into at less than market value. The plaintiff’s action is therefore dismissed except that it is entitled to legal fees of $1,665.10. The parties are to be heard on the precise sum applicable, as to interest and of course as to costs.
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