R & J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd - [2008] NSWSC 310

No judgment structure available for this case.

CITATION: R&J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd [2008] NSWSC 310

HEARING DATE(S): 17/9/07-21/9/07

JUDGMENT DATE :
11 April 2008

JURISDICTION: Equity

JUDGMENT OF: Bryson AJ

DECISION: Orders Upon the Cross-claim:
1. Give judgment for the Cross-claimants for rent, parking fees, increased outgoings, interest and other charges payable under Lease 8258311P up to the date of this order and thereafter pending the assessment until the Cross-defendants surrender possession.
2. Direct that an Inquiry be held to ascertain and certify the amount payable under Order 1 and further direct that judgment be entered for the amount so certified.
3. Dismiss claim 7(a) in the Second Further Amended Cross-claim.
4. Give judgment for the Cross-claimants for damages and indemnity claimed in paras 9 to 12 of the Second Further Amended Cross-claim.
5. Direct that an Inquiry be held to ascertain and certify the amount of damages and indemnity under Order 4 and further direct that judgment be entered for the amount so certified.
6. Upon the Second Further Amended Statement of Claim.
Dismiss the claim in paras 27 to 32.
7. Reserve further consideration of consequential orders under Part 8 Division 4 of the Conveyancing Act 1919 particularly section 133G.
8. Reserve all questions of Costs.

CATCHWORDS: LESSOR and LESSEE - lease of commercial premises on Macquarie Street level and Plaza Level of tower in Renzo Piano development Macquarie Street Sydney - issues between lessors and lessees re (1) whether rent conditional on state of premises being suitable for lessees' intended use - implied precondition - held, No.(2) - whether election exercised in accordance with clause in lease varying rent according to number of kiosks - held, it was not (3) whether lessors entitled to restitution by lessees of $75,000 the lessors paid to Owners Corporation to permit penetrations in floor slab for water sewerage and other services - held, they were not - (4) whether lessors entitled to damages for breach of earlier Settlement Deed by making further claim - held, they were - (5) whether Option of Renewal should be extended notwithsanding failures to pay rent, under discretionary power in s.133F(2) Conveyancing Act - review of litigation and disputes in Leasehold relationship - in view of poor quality of relationship, held, relief refused - Judgment for rent and damages to be assessed.

LEGISLATION CITED: Conveyancing Act 1919 s.133F(2) and (3)
Conveyancing Act 1919 ss 133C to 133G

CASES CITED: Advanced Fitness Corporation Pty Ltd v Bondi Diggers Memorial Sporting Club Ltd [1999] NSWSC 264
Alcatel v Scarcella (1998) 44 NSWLR 349
Batiste v Lenin [2002] 10 BPR 19,441
Batiste v Lenin [2002] NSWCA 316, 11BPR 20,403
Best and Less (Leasing) Pty Ltd v Darin Nominees Pty Ltd (1994) 6 BPR 13,783
Bishop v Moy [1963] NSWLR 468
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
Carbure v Brile Pty Ltd [2002] VSC 272
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353
Edward Kazas & Associates Pty Ltd v Multiplex (Mountain Street) Pty Ltd (2002) 11 BPR 20,353
Ell v Cisera [2000] NSWSC 768, 10BPR 18,045
Evenel v Stellar Mining NL [1982] 1 NSWLR 380
Fallon Street Properties Pty Ltd v Steel & Stuff Pty Ltd [2006] NSWCA 296
FGCT Pty Ltd v Alphafarm Pty Ltd (2004) 219 CLR 165
Gilbert J. McCaul (Aust) Pty Ltd v Pitt Club Ltd [1959] SR NSW 122
Gordon v Lidcombe Developments (1966) 2 NSWR 9
Henderson v Ross [1981] 1 NZLR 417
Hide & Skin Trading Pty Ltd v Asiatic Meat Traders Ltd (1990) 20 NSWLR 310
Homebush Abattoir Corporation v Bermria Pty Ltd (1991) 22 NSWLR 605
Israel v Foreshore Properties Pty Ltd (in Liq) (1980) 54 ALJR 421
Mannai Investment Co. Ltd v Eagle Star Assurance Co. Ltd [1997] AC 749
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Pavey Matthews Pty Ltd v Paull (1987) 162 CLR 221
Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17
Reilly v Liangis Investments Pty Ltd [2000] NSWSC 47
Reliance Developments (NSW) Pty Ltd v Lumley General Insurance Ltd [2008] NSWSC 172
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234
Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] 12 BPR 23,923
Sinclair v Brougham [1914] AC 398
Steel & Stuff Pty Ltd v Fallon Street Properties Pty Ltd [2005] NSWSC 1148
United Australia Ltd v Barclays Bank Ltd [1941] AC 1
Vasile v Perpetual Trustees (1987) 10 BPR 18,091
Wettern Electric Limited v Welsh Development Agency [1983] 2 All ER 629

PARTIES: R&J Lyons Family Settlement Pty Limited - First Plaintiff
Geoffrey Charles Talbot - Second Plaintiff
155 Macquarie Street Pty Limited - First Defendant
Ranec Pty Limited - Second Defendant

FILE NUMBER(S): SC 1652/2006

COUNSEL: J Simpkins SC and S Phillips - Plaintiffs
M McCulloch SC, Ms P McDonald and D Sulan - Defendants

SOLICITORS: Galilee Solicitors - Plaintiffs
Henry Davis York - Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRYSON AJ

Friday 11 April 2008

1652/2006 R & J Lyons Family Settlement Pty Ltd & Anor v 155 Macquarie Street Pty Ltd & 3 Ors

JUDGMENT

1 BRYSON AJ: This elaborate litigation relates to disputes arising out of a lease by the first and second defendants as lessors to the plaintiffs as lessees of premises in the well-known city building at 155 Macquarie Street, one of the two towers associated with the architect Renzo Piano and known in 2001 as Aurora Place. The parties made an agreement for sublease dated 25 July 2000; there were other parties to that agreement, but the issues now remaining do not involve them. The lessors were themselves sublessees in a lease ultimately derived from a head lease from the State expiring on 10 July 2095. The premises leased included two shops and a lobby café on the upper ground floor at the Macquarie Street level and the shops and associated areas of the lower ground floor. Associated with the leased areas were Licensed Space and Exclusive Licensed Space. When the agreement for sublease was entered into the building work was not completed and the demised premises were not in a state where they could be used commercially. The agreement for sublease made elaborate provisions for carrying out fit-out works. Much of the Macquarie Street tower was to be used and is now used for residences, and Strata Plan 62588 was registered on 27 June 2000, bringing into existence an Owners Corporation, common property and strata titles for many dwelling units and also for parking spaces in the basement at two lower levels. Many problems and disputes have arisen out of the circumstance that for the effective commercial utilisation of the demised space there is a need to provide services by penetrations through the slab under the lower ground floor; the slab forms the ceiling of the basement where there are parking spaces owned by owners of dwelling units and common areas owned by the Owners Corporation. When the building was designed and while it was being constructed there were plans for penetrations in the slab to provide services for what came to be the demised areas. Before registration of the Strata Plan it would have been relatively easy to obtain the approval and co-operation of the persons who had practical control of the building for the purpose of installing services; and practical problems presented by the lessees’ and for that matter the lessors’ not having ownership rights or other rights to work on the concrete slab, make penetrations through it and instal service pipes were surmountable.

2 The area leased is indicated in Lease cl 1.1(a) and (b):

1.1 Parties’ Intentions

(a) The Lessor grants to the Lessee and the Lessee accepts from the Lessor the right to use in accordance with this Lease, the retail shop premises comprising:

(1) the Premises: being Shops P-01A, P-01B and P-01C on the Plaza Level of the Building and Shops M-01 and M-02 on the Macquarie Street Level of the Building;

(2) the Licensed Space; and

all of which together have a lettable area in excess of 1,000 square metres. The parties acknowledge that the Retail Leases Act does not apply to this Lease.

(1) lease the Premises to the Lessee and the Lessee wishes to take a lease of the Premises; and

3 The Plaza level is also referred to as the Piazza level and as the lower ground floor. Generally (and not exactly) the shops are within the Tower nearer to Macquarie Street and the Licensed Space, some of which on the Plaza level is Exclusive, is more open and includes passageways. There are two shops on the Macquarie Street level with frontage to Macquarie Street. There is some Exclusive Licensed Space associated with one of these shops. The heart of conflict and the need to penetrate the floor slab and use space in the garage area relates to the Plaza level.

4 The parts of the building which the lease makes available to the lessees are referred to, not entirely accurately, as the demised premises; to include not only premises which are demised in the sense that the lessees have a leasehold interest in them, but also Licensed Space, part of which is Exclusive Licensed Space.

5 Two large and related sources of difficulty presented themselves. One was that the lessors did not have and were not able to confer on the lessees the benefits of any rights in the nature of easements to use existing penetrations in the slab, or to make further penetrations in the slab and use them for services. The other was that the lessors and the lessees had no physical control of the slab and were unable to do any work or make any further penetrations in it without the leave and licence of the Owners Corporation which had come to be the owner of the slab. The complexities included that for services to be effective it would not only be necessary to make penetrations through the slab, but it would also be necessary to run service pipes through the space below the slab; and as sales of dwelling units progressed, the Owners Corporation and a number of different owners of units came to be entitled to parts of the space up to the ceiling of the basement. Service pipes could not be installed there without the concurrence of those owners.

6 The agreement for sublease speaks of the parties in the singular – Lessor and Lessee – and this is reflected in some of my quotations and references. It is a document of astonishing elaboration. Neither side understood or made provision for the contingency that putting the demised premises to the commercial uses that the lessees came to wish to make for them might involve penetrating the slab and installing service pipes for long-term use in different positions to the penetrations which the agreement for sublease provided for. Nor it seems was the agreement entered into with an appreciation of the need to have easement rights as against the Owners Corporation and individual owners of units. Provision was made for easements which related to carrying pipes for services to the common stack of service pipes in the south-eastern corner of the building; this was inadequate in that those easements did not extend to any entitlement to make further penetrations in the slab or to put further service pipes under the slab. In any event those easements went out of existence through some unintended effect of registration of documents; how that happened was not explained to me, but all parties accepted that it did. When the time came when the lessees wished to carry out works so as to make the demised premises serviceable for their purposes, the absence of any right to do so presented itself as a formidable difficulty. By that time penetrations which according to the agreement for sublease were to be put into place in the slab when the slab was being constructed were not regarded by the lessees as in appropriate positions for their needs or as useful at all.

7 After the agreement for sublease was made work on the building continued and there was continued communication between representatives of the parties, the business in hand from the lessees’ point of view being design of the fit-out of the area to be demised to it. A significant event from the point of view of later controversy was that on 27 November 2000 Mr Nedeljkovic, director of Ladowin Pty Ltd which was the project consultant and manager for the lessees, sent Mr Schibrowsky, Development Manager for Lend Lease Development, then an interest associated with the lessors, “… copies of plans showing proposed preliminary locations of penetrations through the slab for services required for the tenancy fit-out for the retail areas” with a letter giving a description of the proposed work involving penetrations through the slab. This was far from being the last position adopted by the lessees: Mr Nedeljkovic gave evidence that the lessees’ requirements were changed four or five times after the sublease was granted.

8 Variations to the agreement for sublease were effected under an agreement in writing reached in a meeting held on 11 July 2001. The Variation Documents of 24 July 2001 were a Deed of Variation of Agreement for Sub-lease and a Variation of Lease which on registration varied the registered lease. There were variations both to the Agreement for Sub-lease of 25 July 2000 and to the Lease which was to be granted under it. The parties entered into the sublease on the same day. The sublease was registered 8258311P and relates to the land in Folio Identifiers 101/1011617 and 1022/1011618. The term of the lease commenced on 15 July 2001 and ran for five years, to terminate on 15 July 2006. The lease contained options to renew on three occasions, each for five years; so if all options were duly exercised the term could potentially be extended to 15 July 2021. Provisions for determining the amount of the rent are elaborate and include CPI reviews and an element relating to the turnover of the businesses conducted in the demised premises. As well as rent the lessees were liable to pay parking fees and a proportion of outgoings. It is useful to note at this stage part of the elaborate provisions relating to the rent in the lease.

PART 3

Lessee’s Obligations – Rent and Other Money

3.1 payment of rent and other money

Rent

Outgoings

Timing for payment of rent and outgoings

…

9 Clause 3.1(i) of the Lease provided for a rent-free period of six months. This was varied and new cl 3.1(i) extended the rent-free period to (but not including) 1 February 2002. The lessees were not in a position to make use of all the demised premises for commercial purposes by 1 February 2002 or for long after. To put the matter extremely shortly, the lessees could not complete their fit-out for reasons the most significant of which was that the concurrence of the Owners Corporation was necessary, and that concurrence was obtained by the lessors and only with great difficulty, delay and expense. The lessees’ position, which I do not understand to be disputed, was that they were only able to make commercial use of the lower ground floor on and after 18 January 2003. They dispute that in the circumstances rent is payable in respect of the period before that date. This is the first controversy which came before me, referred to as the Rent Commencement Date Issue. It affects the amount of rent which should be awarded to the lessors, who sue for unpaid rent in their Cross-claim.

10 The second controversy, referred to briefly as the Kiosk Issue, also affects the amount which the lessors should recover for rent. It arose out of new cl 13.2(j) in the lease, provided for by the Deed of Variation of Agreement for Sublease.

Approvals

(A) Notwithstanding any other clause in this Lease but subject to clause 13.2(j)(D)(2) the parties agree that the Lessee is responsible for obtaining all necessary approvals for any Kiosk to be placed in the Exclusive Use Licensed Space.

(B) The parties agree that the Lessee may seek the consent of the Council of up to 4 Kiosks in the Exclusive Use Licensed Space which are in addition to Coffee Kiosk in the lobby of the Commercial Building.

(C) In the event of the Lessee obtaining approval to any Kiosk from the Council (“Lessee’s Kiosk”) then the Lessee will pay to be Lessor the sum of $32,500.00 per annum for each Lessee’s Kiosk computed from and the first payment being due and payable in respect of each Lessee’s Kiosk on the earlier of the date of the Council approval to such Lessee’s Kiosk and the date of the commencement of trading from such Lessee’s Kiosk and otherwise payable in accordance with the provisions of Part 3 of the Lease and payable to 15 July 2002.

(D) In the event of the Lessee obtaining the approval of the Council to less than 4 Kiosks by 16 July 2002, then at the election of the Lessee to be given by notice in writing to the Lessor not later than 31 July 2002 (the Lessee’s Notice”) either:

(1) On and from 16 July 2002 the Lessee will pay Rent at the rate of $595,000.00 per annum reviewed as at 16 July 2002 in accordance with Item 2(2) of Exhibit 1 and thereafter reviewed in accordance with the provisions of Item 2 (2) of Exhibit 1 of the Lease; or

(2) (A) On and from 16 July 2002 the Lessee will pay to the Lessor Rent at the rate of $465,000.00 per annum plus the sum of $32,500.00 per annum for each Lessees Kiosk reviewed as at 16 July 2002 in accordance with Item 2(2) of Exhibit 1 and thereafter reviewed in accordance with the provisions of Item 2 (2) of Exhibit 1 of the Lease; and

(B) The Lessor is to have the right to seek the consent of the Council of up to 4 kiosks less the number of Lessee’s Kiosks, to be placed in any area of the Building including the Licensed Space (“Lessor’s Kiosk”), in which event:

(ii) The Lessee’s Proportion for Outgoings in respect of the Licensed Space shall be reduced in respect of any approved Lessor’s Kiosk by such amount as is calculated on the basis of the area of the Lessor’s Kiosk or Kiosks compared with the total area of the Licensed Space.

In the event of the Lessee failing to give the Lessee’s Notice by 31 July 2002 then the provisions of clause 13.2(j)(b)(1) shall apply.

11 The Kiosk Issue relates to whether a communication dated 6 June 2002 effected an election by notice in writing of the kind referred to in para (D). An effective election has at least two significances; if an effective election is made for fewer than 4 kiosks the rent will be less than $595,000 per annum; significantly less if, as the lessees contend, only $32,500 per annum is payable for one kiosk. Its other significance is that if there were an effective election the lessors would gain the right to seek Council consent and place other kiosks (up to 4 in all) in any area of the building including the Licensed Space.

12 The third controversy relates to the lessors’ claim to recover from the lessees a sum of $75,000 and other payments which the lessors made to the Owners Corporation to obtain rights to penetrate the slab, instal service pipes and continue them under an easement. The fourth controversy, the Indemnity costs Cross-claim, relates to the lessees’ claim for damages and indemnity under a Settlement Deed.

13 The fifth controversy is the Option Issue. The Option Issue relates to the lessees’ claim to be entitled to a second term of five years commencing on 16 July 2006 on an exercise of the first of the three options of renewal. The lessors dispute entitlement to renewal and rely on breaches of obligations to pay rent. The entitlement of the lessors to rely on breaches is regulated by Conveyancing Act 1919 Pt 8 Div 4. The lessees claim an order granting relief against the breaches under ss 133E and 133F of the Conveyancing Act. Evaluation of the breaches of the covenant to pay rent is affected by determination of the Rent Commencement Date issue and the Kiosk Issue, which will establish the extent of failures to pay rent. The difference between the base rent for which the lessees contend and the base rent which the lessors contend is $97,500 per annum calculated (according to the lessors) from 1 February 2002 and (according to the lessees) from 18 January 2003.

14 The present proceedings were commenced as 20065 of 2003 in the Common Law Division. By a Settlement Deed dated 3 December 2005, reached after mediation on 2 December 2005, many issues in these and other proceedings 20148 of 2004 referred to as the Gaming Proceedings were settled, with mutual releases. At that time the lessees and also a company called Lyons Brothers Ltd were plaintiffs in these proceedings and the lessors and also Lend Lease Development Pty Ltd and the partners in the law firm Freehills were defendants. The Settlement Deed provided for payment to the plaintiffs (which then included Lyons Brothers Ltd) of the settlement amount of $1.1 million without any admission of liability by all the then defendants. There was no allocation of parts of the settlement amount to particular claims or to claims against particular defendants, and there was no indication of the contributions made by defendants to the settlement amount. The releases and the associated covenants put an end to claims made by the plaintiffs against the lessors and the other then defendants, in respect of the circumstances in which the lessees took their lease without appropriate services or appropriate penetrations and other works to support such services or any easements supporting them. Any position taken by the lessees which is a claim must fall within an exception to those releases. The claims against Lend Lease Development Pty Ltd and Freehills were discontinued.

15 The releases related, in extensive language, to claims relating to the Easement Proceedings (among other things), and Easement Proceedings were defined in cl 7.1 as follows:

Easement Proceedings

and the matters the subject of order 1 of the Notice of Motion filed by the Plaintiffs in the Easement Proceedings and dated 25/11/2005.

16 So now before me for adjudication are the Cross-claim (and, of course, Defences to the Cross-claim) and the lessees’ claims 2(a) to 2(e), which have been added to the Second Further Amended Statement of Claim by amendment and raise matters which were the subject of the Notice of Motion of 25 November 2005: the effectiveness of the lessees’ notice of exercise of option of renewal of 27 October 2005 and the claim for relief under s 133F(2) of the Conveyancing Act 1919 against the effect any breach of obligations under the sublease may have.

17 The first controversy is the Rent Commencement Date Issue. The lessors cross-claim rent under the sublease, including rent for the period from 16 January 2002 to 18 January 2003, which the lessees have not paid. (I leave to one side for the time being determination of the exact amount payable, which involves consideration of parking fees, increased outgoings, rent review, interest, and credit for $100,000 under the Deed of Release of 24 December 2002). These claims are made under paras 3 to 6 of the Second Further Amended Cross-claim (2FACC) which extends to claims for unpaid rent at later times as well. The Lessees’ Defences to this part of the claim appear in paras 2 and 3 of their Defence.

2. In answer to paragraphs 3, 4, 5 and 6 of the Amended Cross-Claim, the Lyons parties say that:

(a) It was a precondition to the Cross-Claimants’ entitlement to receive rent and other moneys payable under the Lease Agreements (to be implied from the terms of the Lease Agreements themselves or by custom and usage) that such moneys would not become payable, or alternatively would abate, unless and until practical completion of the fitout works which the Cross-Claimants were obliged by the Lease Agreements to undertake;

(b) the Cross-Claimants did not provide practical completion of the fitout works until 18 January 2003;

(c) by reason thereof, the Cross-Claimants did not become entitled to receive moneys payable by the Lyons parties, or alternatively the obligation of the Lyons parties to pay such moneys abated, until 18 January 2003, whereby the Lyons parties are not now liable to pay such moneys to the Cross-Claimants.

3. (a) it is an implied term of the Lease Agreements that the Cross-Claimants co-operate with and act in good faith towards the Lyons parties in procuring and completing with due diligence and expedition the said fitout works, so as to provide to theLyons parties the timely occupation of the premises and the benefit for their part of the Lease Agreements;

(b) in breach of such implied term, the Cross-Claimants did not provide to the Lyons parties timely occupation of the Premises nor the benefit of the Lease Agreements until 18 January 2003;

(c) by reason thereof, the Cross-Claimants are not at liberty to take advantage of their own default so as to set up their claim propounded by the Amended Cross-Claim.

18 The lessees’ counsel contended that the effect of the implied term was that the obligation to pay rent and the availability of premises suitable for the permitted and required use were interdependent with the consequence that until the premises were fit to be occupied there was no obligation to pay rent. It was contended that the term so implied is not inconsistent with the express terms of the lease and the variation documents.

19 The particulars of these allegations were extensive, and the lessors in their Reply pleaded a number of matters in reply to paras 2 and 3. I will refer to these so far as appears necessary for disposition. Mr Lyons and Mr Talbot, and interests associated with them, negotiated with Lend Lease Development Pty Ltd and East Asia Property Group in 1999 for a leasehold interest in parts of the retail area and entered into Heads of Agreements on 2 December 1999. The lessors are related to or successors of these corporations. The interest of Lend Lease Development Pty Ltd was transferred to Ranec Pty Ltd the second defendant in May 2000. In the agreement for sublease on 25 July 2000 the defendants and also Lend Lease Development were then named as Lessor, the plaintiffs were named as Lessee and Savoy International Hotel and Food Services (Australia) Pty Ltd was a party as the Lessee’s agent. A s 88B Instrument created an easement to have and maintain services. On 27 June 2000 Strata Plan 62588 was registered. In some way which was not explained to me and which was not necessary to pursue, this extinguished the easement. The extinguishment of the easement went unknown to the parties to this litigation, or it would seem to anyone else now relevant, for over two years.

20 Provisions in the agreement for sublease which bear on the availability of services to the lessees are these. The agreement for sublease contains provisions establishing the Commencement Date of the intended lease, by reference to a definition of “Commencement Date” in cl 1.1, as the later of

(a) the day immediately following the date of Practical Completion; and

21 I have omitted some parts of the definition which are not now important. There are elaborate provisions relating to the Fit-out Occupation Period.

22 The definition of Date of Practical Completion is (Ex 1, Vol.1, p.136):

Date of Practical Completion means the date specified as the date on which Practical Completion is achieved in the Certificate of Practical Completion issued to the Lessor and Lessee under clause 5.2.

23 Elaborate provisions deal with the Fit-out Occupation Period and its possible extension.

24 Clause 5 relates to Practical Completion and includes cl 5.2 Certificate of Practical Completion.

The Lessor must cause the Lessor’s Architect to issue the Certificate of Practical Completion to the Lessor and a copy thereof to the Lessee forthwith on the achievement of Practical Completion.

25 Practical Completion is also defined, in an elaborate way; stated shortly, Practical Completion means that the building works have been completed except for omissions and defects and a Certificate of Occupation or other Council approval to occupy has issued. The terms of the definition show contemplation that fit-out works may not have been completed at the time of Practical Completion as defined.

26 The work to be done is defined by reference to the specification in Schedule 1 to the agreement for sublease, extremely elaborate provisions relating to contract specifications and drawings. These include provisions stating the scope of works which in relation to the lower ground floor retail and upper ground floor retail are stated in terms which show that those areas were at Practical Completion to be finished to a basic level which could be thought of as the lock-up stage, leaving outside the scope of works the fit-out so as to be suitable for retail use.

27 References to hydraulics services include the following:

31.3.5 Hydraulics

The following will be provided:

· Cold water supply and stop valve at rear of each tenancy for future connection by tenant.

· One drainage connection point (sewerage) at the rear of each tenancy.

· One drainage connection point (trade waste) at the rear of each tenancy.

· Gas supply and stop valve at the rear of each tenancy for future connection by tenant.

Hydraulics

The scope of work associated with the hydraulics includes the following;

· Trade waste facilities are provided for the Macquarie Street tenancies via a grease arrestor on level B1 with a capacity of 30001.

· Trade waste facilities are provided for the Piazza tenancies via a grease arrestor on level B4 with a capacity of 15001.

· Sewer drainage, cold water, and gas services points are provided to each of the Macquarie Street tenancies, the piazza retail area and lobby kiosk area to suit the layout indicated on the Mack Group Kitchen Sketches. The works shall be carried out by Bovis Lend Lease at the expense of the Lessee.

· All services shall be terminated and capped off at slab leve.

28 The MACK Group Kitchen Sketches were annexed to the Agreement for Sublease (commencing on page 269 to 271) and they show (not in high detail) provision for hydraulic services including wastes (drainage apertures) at many places. (The MACK drawings could perhaps be thought of as the Unfortunate MACK drawings).

29 The protection offered to the lessees with respect to the availability of services and penetrations by the terms of the agreement for sublease was that the Commencement Date would not arrive and there would be no obligation to enter into the sublease unless and until the scope of works had been fulfilled and the hydraulic services work had been carried out. However the parties did not proceed in accordance with the agreement for sublease. Works relating to many things including hydraulics and in particular the trade waste facilities, completion of sewer drainage, cold water and gas service points to suit the layout indicated on the MACK Group Kitchen Sketches were to be carried out by Bovis Lend Lease at the expense of the lessee, as provided in the scope definition. However the hydraulics works, and associated penetrations of the floor slab under the retail areas were not carried out within the period contemplated in the agreement for sublease (which gave an anticipated Commencement Date of 30 November 2000) or for long afterwards. The lessees did not wish to have the service points and penetrations in the positions indicated in the MACK drawings, and did not for a long time clearly indicate what their requirements were. When there was a clear indication, Bovis Lend Lease had left the site or was about to do so.

30 A Certificate of Practical Completion was issued on 25 January 2001. Senior Counsel for the lessors made large claims for the effect of this document and there were evidence and submissions about whether the works were carried out to provide hydraulic services including penetrations to the slab in the manner shown in the MACK drawings. I do not regard the certificate and these events as having any real importance, or as having the large significance claimed for them. It was contended by lessors’ counsel that the penetrations indicated in the MACK drawings had been made and then capped off and unused; the evidence did not bear this out and in particular the evidence of Mr Nedeljkovic established distinctly that the penetrations specified on the MACK drawings were not in place as at July 2001. Mr Nedeljkovic as an engineer concerned in the works at the time was in a good position to give evidence of this fact. Mr Lyons’ evidence was unclear; it was not inconsistent with the penetrations having actually been made, but as he did not want them in the positions provided for in the MACK drawings he can have felt little interest whether there were penetrations which had been capped off.

31 The relevant parts of the hydraulics works were to be carried out by Bovis Lend Lease at the expense of the lessees. It is natural and not in any way surprising that any wish by the lessees for modifications should be conformed with. If any work had been done by Bovis Lend Lease with respect to penetrations in the slab under the lower ground floor it is only to be expected that Mr Lyons would be well aware of it, as the lessees would have been called on to pay for it.

32 It is difficult to understand the behaviour of the lessors and their representatives in 2002 if the true position was that the penetrations provided for in the MACK drawings actually existed; if that had been the case it is highly likely that the lessors would have adopted the position that the lessees had to accommodate themselves to them and could not ask for anything else. Evidence of Mr Nedeljkovic in cross-examination shows that there were some penetrations in place, which do not appear to have been shown on the MACK drawings and provided service to retail shops in Macquarie Street, potential kiosks, the Piazza grocery store and some other points. That is to say, there were parts of the leased areas which were not affected or were not severely affected by the problems he perceived. This left a large part of the leased areas severely affected. It was contended on behalf of the lessees that cross-examination of Mr Nedeljkovic did not establish whether these were in place before Mr Lyons became fully seized of the lessees’ difficulties in the period of about October 2001. To my mind the evidence makes it reasonably clear that they were there: but this is not an important issue. What is important is the large part of the leased areas which was severely affected.

33 The body of the Certificate of Practical Completion of 25 January 2001 is:

Pursuant to clause 5.1 and 5.2 of the ‘Agreement for Sub Lease’ dated 25 July 2000 on the above project and following the joint inspection carried out on 17 January 2001 as required under clause 5.1(b), we hereby certify that Practical Completion of the works has been achieved as required under the terms of the above agreement as of 17 January 2001.

Certification of Tenancy Fitout Works to the Upper and Lower Ground Floors as identified under Section 3 of the Aurora Place Retail Status Report dated 07 July 2000 are excluded from the certificate.

In issuing this Certificate of Practical Completion Group GSA Pty Ltd take no responsibility for areas of the works or Fitout Works that fell under the responsibility of other Architectural Design Consultants. Certification of Practical Completion is based upon an inspection of Building Works that were visible during our joint inspection and does not reflect upon works that have been subsequently covered by progressive works.

34 The Certificate of Practical Completion relates to the base building specification and the lessors’ scope definition. The Aurora Place Retail Status Report dated 7 July 2000 is annexed to and forms part of the agreement for sublease – Ex 2, Vol.1, p177 and following. The exclusion from the certificate relates to works within the tenant’s scope of work; these are not works with which the Certificate of Practical Completion should have dealt. They include some work relating to hydraulics which I would think could not be carried out unless penetrations had been made and the lessors’ scope of work relating to hydraulics had been carried out. I regard it as clear and I find that by and on 24 July 2001 the Certificate of Practical Completion had been given, that the penetrations necessary for fulfilment of the MACK drawings had not been carried out, in particular had not been carried out by Bovis Lend Lease at the expense of the lessees, and the lessees did not require them to be carried out. The Deed of Variation and the sublease entered into on 24 July 2001 established that the lessees did not wish that part of the work to be carried out, did not wish to have the protection offered by the terms of the agreement for sublease to ensure that it was carried out, and wished to enter into the sublease without that protection, no doubt contemplating that the work would be done in accordance with their requirements and not with the MACK drawings, and at their expense.

35 Throughout the period from 25 July 2000 to 24 July 2001 there were frequent and intense communications among the persons then interested relating to work to be done including fit-out of retail area, the provision of kiosks, Local Government approvals, claims and disputes and many other matters. Among other things, Lend Lease Development contended that an effect of the Certificate of Practical Completion was that the lease Commencement Date was 18 January 2001; this was disputed.

36 On 24 July 2001 the present parties (and not Lend Lease Development Pty Ltd) executed the sublease (which was later registered) and also entered into variation documents. A Deed of Variation of the agreement for sublease provided for variation of some of the provisions of the agreement for sublease and the lease, and for registration of an instrument of variation of lease. The agreement of 11 July 2001, according to a recital, settled disputes which had arisen. The variations included deletion of the definition of Commencement Date in the agreement for sublease and inserting in lieu “COMMENCEMENT DATE means 16 July 2001”. With this the previous definition of Commencement Date ceased to have any effect, and with its deletion all the contractual mechanism which would have brought it about that works which the lessors were obliged to construct before there could be a Commencement Date ceased to have effect. The parties adopted a form of Reference Schedule which among many other things provided for commencement of the lease on 16 July 2001 and termination on 15 July 2006. Another variation provided for a CPI review date on each anniversary of 16 July. Other variations inserted new cl 13.2(j) (kiosks) and substituted cl 3.1(i) (Rent Commencement Date) for the earlier cl.3.1(i).

37 In October 2001 it became known to the lessees that the Owners Corporation and individual unit owners refused to provide access to areas underneath the slab for the purpose of penetrating the slab and installing service pipes; and further, that there were no easements which afforded rights either to make penetrations or to use the service pipes after there had been made. The problem became known to the lessors and their representatives as a result of actions by Savoy, the lessees’ agents, and through legal advice which they obtained. It became obvious to both sides, by or about the end of the year 2001, that the lessees could not proceed to obtain effective hydraulic and similar services for the lower ground floor retail area without reaching some arrangement and accommodation with the Owners Corporation and individual proprietors of units. During this period the lessees did not always respond promptly to requests or to needs to state what they required, they put forward several different versions of what they did require, and they had not stated their position clearly or finally when they were presented with the difficulty that Bovis Lend Lease would soon leave the site. A solicitor representing the lessors asserted that the lessees were legally committed to pay rent from 1 February 2002, and Savoy on behalf of the lessees stated that they would not be making any payments until the issue had been resolved. The difficulty affected different parts of the leased areas in different ways, but most of the lower ground floor was unusable. Throughout the first half of 2002 there were intense communications among the parties, and persons associated with them, relating to resolution of the difficulty of providing services, to payment of rent, and to proposals to instal and use kiosks pursuant to cl 13.2(j). In the course of these events a meeting, said at the time to be without prejudice, occurred on 19 April 2002 in which a claim which Mr Lyons then made and the obligation to pay rent, among other things, were discussed. Mr Parker, who was then Fund Manager of Commonwealth Property Investment Trust, an interest associated with the lessors, said to the effect that no further action to recover rent would be taken until some event; there was a difference in the evidence about what that event was and how long the deferral was to exist, and Mr Parker gave a different account of what he said to what is recorded in a minute which he did not accept. I am satisfied that Mr Parker’s account of what was then said was correct and the minute is not. However I do not regard this as an important subject as on no possible view did Mr Parker say anything to the effect that rent would be remitted or would not ultimately be collected, and what Mr Parker said, whatever it was, did not alter the action taken by the lessees who had already decided and stated in the firmest way that they did not intend to pay the rent at all. On the view of the facts most adverse to the lessors any deferral then agreed to could not outlast an agreement which the parties reached on 24 December 2002.

38 The outcome was, to state in a brief summary a long and slow course of events, that the lessors negotiated with the Owners Corporation an arrangement under which they obtained permission to penetrate the slab in the manner which the lessees required, instal and use service pipes and an easement, and the lessors paid a consideration of $75,000. Late in 2002 when this work was completed the lessees proceeded to complete their fit-out and the leased area became, according to their case, fully usable in January 2003; hence their contention that liability to pay rent runs only from 1 February 2003.

39 On 24 December 2002 the present parties entered into a Deed of Release. This deed related principally to the settlement of proceedings 5342 of 2002 in the Equity Division which the lessees commenced on 31 October 2002 when they obtained ex parte orders restraining the lessors from calling up guarantees for rent, and from re-entering for failure to pay rent. Provisions of this deed resolved the litigation relating to the bank guarantee, proceedings 5342 of 2002 were discontinued and the lessors were released from liability relating to action taken under the guarantee and action directed to re-entry. The lessees accepted an obligation to pay rent commencing on 1 February 2003 and to make payment thereafter, and an obligation to pay forthwith $100,000 “… which sum comprises part payment of the unpaid rent under the Sub-Lease for the period prior to 1 January 2003”. Except with respect to payment of $100,000 the Deed left untouched the question whether there actually was an obligation to pay rent in respect of the period before 1 February 2003. There was also an obligation to commence proceedings:

2.4 The Lessee must file and serve proceedings in the Supreme Court of New South Wales in relation to its alleged damages claim for all entitlements to damages that the Lessee now has pursuant to, or in connection with, the Sub-Lease and the Lessee’s occupation of the Premises by no later than 15 March 2003.

2.5 The Lessee must prosecute its claims in the Supreme Court of New South Wales with all due diligence and expedition.

40 The lessees gave particulars of their assertion in Defence 2(a) that there was an implied precondition to the entitlement to receive rent, and referred to many provisions of the agreement for sublease and of the lease as giving rise to the implication. They also referred to the Variation Documents. A claim in the pleadings that the implication arose from custom and usage was not supported by evidence and was abandoned.

41 Provisions of the agreement for sublease said to raise the implication were:

Subclause 2.1 which relates to the obligation of the lessor to procure the building works to be completed in accordance with the agreement,

Clause 2.2(a), (a1), and (b) which relate to action to be taken where there are to the variations in the specification, as a result of government action or otherwise;

Clause 3.2(b) which relates to provision of necessary information to assist the lessee to prepare detailed plans,

Clause 3.3(a), (d) and (e) which relate to approval of fit-out plans and specifications,

Clause 3.4(c) which relates to the lessors’ action in relation to authority approvals obtained by the lessee (and is plainly irrelevant),

Clause 3.6(a) which relates to the lessor procuring compliance with the anticipated fit-out occupation date and making the premises available to the lessee for fit-out works,

Clause 7.2(a) and (c) which relate to measurement of the premises in relation to grant of a lease after the Commencement Date and are plainly irrelevant,

Clause 7.9 which relates to occupation or licence of part of the upper ground floor premises, with a turnover rent; and is plainly irrelevant,

Clause 11.1(a) which enables a party not in default to give notice to a defaulting party,

Clause 12.6 which relates to the effect of inconsistencies between the lease and the agreement for sublease and makes a provision of the lease prevail after the Commencement Date,

Clause 12.8(b) which relates to grants of easement, grants of rights of support or easements or rights to enter by the lessor and is plainly irrelevant,

Clause 12.9 which continues the effect of obligations despite Practical Completion,

42 The particulars also referred to provisions of the agreement for sublease defining terms relating to fit-out, occupation and Practical Completion, and to provisions of the base building specification, the lessor’s scope definition, the lessee’s scope definition, drawings and lessor works program.

43 Particulars referred to some provisions of the sublease;

Clause 2.1 which relates to quiet enjoyment,

Clause 2.3(c) which relates to permitting activities in the common areas and is plainly irrelevant,

44 Overall these provisions fit into and form large parts of the scheme of provisions under which part of the building work was to be done, for the benefit of the lessees, from which the parties departed and to which they did not give effect. In my opinion they have no force to assist the implication for which the lessees contended.

45 The difficulties before the lessees in obtaining services so as to be able to complete their fit-out were not known to the parties when the sublease and the variation documents were entered into on 24 July 2001; nor of course were they known a year earlier. The true extent of the difficulty only became known with the realisation in the period from October to December 2001 of the existence and dimensions of the problems relating to the absence of an easement. I see these circumstances as a large difficulty for making an implication about what the lessors were contractually obliged to do in documents entered into before the existence of the problem became known.

46 It should I think be understood that at the time of entering into the variation documents and granting the lease on 24 July 2001 it was contemplated by both sides that the lessees would put whatever services they wished to have through the slab, with work to be done by the developer and Bovis Lend Lease, and would not encounter any particular difficulty in doing so; in particular neither side adverted to the need for permission or other action by the Owners Corporation or its members to do the work or to obtain an easement. The absence of knowledge at that time of circumstances which then or later existed which might create difficulties for the lessees in acting in this way is a difficulty for implying any obligation about conduct in the event that the difficulty did arise.

47 The problem is one of applying a written agreement to circumstances which were not contemplated at the time when it was made, and in the absence of reliance on some such matter as mistake or frustration the correct approach is almost always to apply strictly the contractual arrangements which the parties in fact made, in the realisation that their application may well produce outcomes which would not have been foreseen, just as the events were not foreseen.

48 Lessors’ Senior Counsel contended that the terms of the sublease as varied show unequivocally in plain language that the rent Commencement Date is to be 1 February 2002, and that this unequivocal express provision excludes any implied conditionality because conditionality would be inconsistent with it.

49 In support of the contention that there should be an implication Senior Counsel for the plaintiffs referred to a passage in Professor Butt’s work Land Law, 5th Ed, Law Bookco. 2006 at para [1573] where the learned author referred to there being, generally, no landlord’s implied covenant that leased premises are suitable for the purpose for which they are let but commented that:

… it is conceivable that a term may be implied that (for example) the landlord will do whatever work is necessary to render the premises fit for the purpose for which they are let and will maintain them in that condition (although in practice such an implication would be difficult to establish)”.

Batiste v Lenin

50 Senior Counsel also referred to a passage in Halsbury’s Laws of Australia at para [245] – [3370] which after saying “The lessee … takes the demised premises as it is” also says:

However, a positive obligation in the lease to use premises for a particular purpose may mean that a term is implied that the lessor, insofar as it is within their power to do so, put the premises in a state that would enable that use.

51 Halsbury refers to Steel & Stuff Pty Ltd v Fallon Street Properties Pty Ltd [2005] NSWSC 1148 (Palmer J), on appeal Fallon Street Properties Pty Ltd v Steel & Stuff Pty Ltd [2006] NSWCA 296. In that case negotiations for the lease of office premises were conducted at a time when building work on the premises was far from complete and there was an oral term that the full rent was not payable until the building work on the premises was completed to the extent required in the Interim Occupation Certificate: see [20]. Palmer J upheld the contention that:

[21]. … there was a term implied in the lease that the [lessor] would complete the building work on the premises, at least to the extent required by the initial development consent and the interim occupation certificate, within a reasonable time from the commencement of the lease.

52 Palmer J made an extensive review of the facts and circumstances surrounding entry into the lease and held that the implication was necessary to give business efficacy to the lease. His Honour upheld a strong case of fact which supported the view that the premises were unusable. An important element in support of the implication was [28] “… the positive requirement in the lease that the plaintiff used the premises in the specified way …”. On appeal Basten JA in the leading judgment upheld [35] the finding that the term was implied as necessary to give business efficacy, after addressing and stating at [26], [27] the general and established principle that it is the business of the tenant to satisfy himself that the premises are fit for the purpose for which he wants to use them; with citations of authority. Santow JA and Hunt AJA agreed; see [1], [61]. In my respectful opinion the basis on which that case was disposed of and the need for the implication for business efficacy was perceived was founded on the facts of that case, in which there was a very clear foundation for the implication, but they are altogether different from the present facts.

53 A significant element in Palmer J’s conclusion was [at 25] “It seems to me that the positive requirement contained in the lease that the Plaintiff not only use the Premises for the stated purpose but actually keep them open for business at times usual for a business of the kind conducted by the Plaintiff, means that the premises must be in a condition to permit the Plaintiff to do just that and therefore to comply with its contractual obligations in the lease.” There is no corresponding obligation in the lease and related documents in the present case.

54 Extensive provisions in cl 4.1 relate to Permitted Use but contain no positive obligation to use the premises nor any provision of the kind which led to the outcome of Steel and Stuff. The lease defines extensively the use to which the Licensed Space may be put and provides in cl 13.3(a) “The lessee must only use the Licensed Space for the use”. Part 13 of the lease does not impose on the lessees a positive obligation to use the Licensed Space. Nor does the Seventh Schedule. The lease does not impose on the lessees a positive obligation to use the premises. Further the agreement for lease in the present case, unlike the lease and oral term in Steel & Stuff contains very elaborate provisions regulating in detail what was to be done, by the lessors and also to some extent by the lessees, in respect of putting the premises into appropriate order; and the lessees bore a significant part of the responsibility. Then in the variation documents, all these arrangements were abridged or altered, or perhaps thrown away, by the parties’ express agreement about what the Commencement Date was to be. In these circumstances it is not in my opinion appropriate to make any implication or to treat the rights of the parts as conditional under the principle established by the authorities reviewed by Basten JA.

55 The lessees’ Senior Counsel placed particular reliance on cl 4.1 Permitted Use introduced by subcl (a) as follows:

(a) The Lessee must only use each part of the Premises for the relevant Permitted Use specified in this Lease in relation to that part of the Premises. The Lessee must comply with the Tenant Use Guidelines.

56 There follow many provisions regulating the permitted use including prohibitions and positive requirements; but there is no positive contractual obligation actually to carry on business in the permitted use.

57 Clause 13.1 contains an extensive definition of Use, which is applied in other provisions including the Tenant Use Guidelines. These provisions relate only to Licence and show clear contemplation that the Licensed Space will be put to a number of different kinds of retail uses; but again creates no positive obligation to do so. I was not referred to any contractual provision of the lease under which the lessees owed a contractual obligation to the lessors actually to carry on business during the period from 16 July 2002 to 1 February 2003. From my survey of the lease there is no such provision. The only approach is in Pt 13, which it does not impose an obligation to that effect and relates only to Licensed Space.

58 In Bishop v Moy [1963] NSWLR 468 Ferguson J. dealt with an argument to the effect that a covenant by the lessee to pay an increased rent and a covenant by the lessor to repair stock fences were dependent (scil. on each other) and that the lessee was not obliged to pay the increase while the stock fences were not repaired. Ferguson J. held (at 469-470) that there was no substance in the contention that they were dependent "… as the suggested interpretation is inconsistent with the express terms of the document" by which his Honour must have referred to the express obligation to pay rent. This case is an important illustration of the primacy of the obligation to pay rent and the lack of the effect on it of the existence of any claims by the lessee against the lessor.

59 The conduct of both sides must have been profoundly influenced by the misunderstanding under which both sides laboured about the availability of rights under an easement relating to installing and maintaining services. Both sides were profoundly mistaken both as to the continued existence of the easement and also as to what it authorised. It is conceivable (although I have not examined the subject) that so profound a mistake may have provided some basis on which the parties’ obligations may have been set aside for mistake, frustration or on some other basis; but neither party at any stage sought to do that. What the lessees sought to do was to press on vigorously with their project which involved completing the fit-out and doing all things necessary to achieve that result; and they also brought proceedings for damages against other persons involved, not only the lessors but also the developer and the lessees’ own solicitors. This course was successful in the sense that the lessees recovered a payment of $1.1 million under the Settlement Deed of 3 December 2005, with releases which would preclude their now claiming damages or further damages against the lessors. In my opinion this was the limit of the remedies to which the lessors are entitled.

60 A claim such as is made by Defence para 2 for an implication of a precondition must pass the test stated in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 by Mason J at 346 and 347. The principal reason why in my opinion the implication contended for does not pass those tests and should not be made is that it is inconsistent with express terms of the sublease as varied, which states distinctly and unconditionally the date from which rent is payable. Corresponding rights to occupation otherwise in respect of the premises are conferred as from the same date. The implication contended for is directly inconsistent with these express provisions.

61 In Homebush Abattoir Corporation v Bermria Pty Ltd (1991) 22 NSWLR 605 at 611-613 there was consideration by the Court of Appeal of implication of terms particularly in the context of disturbance by the lessor of the conditions or advantages existing at the commencement of the lease. Counsel also referred me to judicial consideration of related subjects in other cases at first instance. In Advanced Fitness Corporation Pty Ltd v Bondi Diggers Memorial Sporting Club Ltd [1999] NSWSC 264 at [90-101] Austin J considered extensively the impact of relatively recent authority with respect to fitness for a purpose. There was similar consideration in Carbure v Brile Pty Ltd [2002] VSC 272 at [10-29] (Balmford J). I was also referred to Edward Kazas & Associates Pty Ltd v Multiplex (Mountain Street) Pty Ltd (2002) 11 BPR 20,353, to Vasile v Perpetual Trustees (1987) 10 BPR 18,091 (Bryson J) and Gordon v Lidcombe Developments (1966) 2 NSWR 9 at 15. These decisions do not address states of facts or explicit contractual provisions similar to those before me.

62 In Wettern Electric Limited v Welsh Development Agency [1983] 2 All ER 629 the Court appears to have been of the view that an implication that premises were suitable for the stated use could more readily be made in relation to a licence than in relation to a lease. If this were so it would not assist where the implication is sought to be made for both lease and licence.

63 The contractual character of the relationship under a lease (Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17) and the application to leases (as to other contracts) of the implication of terms BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 282-283, Codelfa, do not render leases, or other written contracts, open to ready implications; the primary source of rights is the express provisions in the document, and established principles on the relationship of lessor and lessee are important for understanding their documents. The implication of terms in accordance with Westernport and Codelfa is a process very sensitive to the facts of each particular case and to the circumstances and contractual provisions which give rise to the perception that the implication is necessary for the contract actually to be effective.

64 In my opinion consideration of construction of the lease raised by cl 2(a) of the Defence is dominated by the provisions of Pt 3 of the lease “Lessee’s obligations – rent and other money”. I set out earlier the provisions of cl 3.1(a), (b) and (c). There are further provisions to generally similar effect in cl 3.2(a) relating to payment of turnover rent, cl 3.1 relating to special charges, cl 3.5 relating to increases and outgoings; and similar provisions relating to (cl 3.7) interest and (cl 3.8) costs. These should be understood with the Reference Schedule and the provisions relating to Commencement Date in the Deed of Variation and the Variation of Lease. None of these are expressed in equivocal language and there is no indication of conditionality of the obligation to pay rent in any circumstances.

65 The claim for an implied term relating to acting in good faith and co-operating made in para (3) of the Defence was supported by reference to authorities, principally Alcatel v Scarcella (1998) 44 NSWLR 349 at 369 (Sheller JA) which show the availability of the implication of such a duty, including its availability (as in that case) in a lease. The judgment of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 256 can be regarded as the foundation of the law of New South Wales on the duty of good faith in contractual performance, but must be applied with care as Priestley JA spoke somewhat more widely than has been established by later decisions. I recently stated my understanding of the law in New South Wales in Reliance Developments (NSW) Pty Ltd v Lumley General Insurance Ltd [2008] NSWSC 172 at [51].

Alcatel Australia Ltd v Scarcella & Ors

Renard Constructions

Hughes Brothers

Burger King Corporation v Hungry Jack's Pty Ltd

CGU Workers Compensation (NSW) Ltd v Garcia

66 The express terms of the agreement for lease and the lease contained many express obligations aspects of which are references to best endeavours or similar concepts. Then too, the need for cooperation between the lessee and the lessor or persons such as Bovis Lend Lease named in the specification or to do with work is plain. The situation which was actually encountered, after the course of events and skein of entitlements and obligations provided for in the agreement for sublease were departed from, was not dealt with and was not the subject of express provisions in the lease. In my interpretation of the facts, by entering into the Variation Documents dealing with the date of commencement of the lease both parties abandoned the contractual mechanism and the lessees set about making their own arrangements, producing their own plans and designs and obtaining the services of Bovis Lend Lease to carry them out; it will be remembered that under the terms of the specification, the work of Bovis Lend Lease was to be carried out at the expense of the lessees. I would not doubt that the lessors had a contractual obligation not to impede this work, but they no longer had a positive contractual obligation to carry out work different to the work which they had earlier been contractually obliged to carry out but was no longer required.

67 For the lessees to succeed on this issue what the lessees need to establish is not only a duty of good faith and cooperative action, but a positive duty imposed on the lessors to produce an outcome which was satisfactory to the lessees according to the lessees’ own formulation of the provision for services which they required (and their requirements varied from time to time and they were slow to define them); and further to do so in a time conforming to be lessees’ commercial interests. This is far more than an implication can do. Implications of these kinds are usually encountered in support of restraining parties to contracts from conduct which impedes or detracts from enjoyment by the other party of the benefit of a contractual promise. There is greater difficulty for making an implication which requires positive conduct supporting enjoyment of that benefit.

68 In my opinion the implication of a contractual duty of good faith in the performance of contractual obligations should be made when the tests for implied terms in Westernport and Codelfa are satisfied; including the test of necessity. In my opinion the test for necessity cannot be met so as to justify implication of the term alleged in Defence para 3 if the alleged term is read so extensively as to require conduct on the part of the lessors which would bring about results in which entering into the lease produced results which were satisfactory to the lessees and economically successful. It is a commonplace and parties to contracts should contemplate that there may be unforeseen circumstances in which the contractual relationship may turn out to be diseconomic or disastrous for one party or the other, or for both.

69 I see no indication in the evidence of any breach by the lessors of an obligation of good faith. The concept of bad faith, or want of good faith, in non-performance of an implied obligation is a difficult one, although not I suppose beyond all possibility of realisation. Nothing which could reasonably be supposed to demonstrate bad faith, or want of good faith in the lessors’ relevant conduct towards the lessees and their rights was referred to. Relations between the parties were combative to a considerable degree and each had its own position to maintain and did so with some force; but nothing was put forward in evidence which to my mind tended to show that the lessors acted with bad faith towards the lessees or withheld cooperation towards the achievement of the outcome which the lessees desired. Both sides were in an acutely difficult commercial and practical situation, and both had got into that situation, at least in part, because of an entire misunderstanding of entitlements relating to the easement. Both were presented with a need to come to terms with the Owners Corporation and to find a way to use the common property to make penetrations and instal service pipes; and thereafter maintain the service pipes. The lessors were faced with combative lessees who altogether refused to pay rent for reasons which, whether or not they were legally justified, were humanly understandable as they could not get the commercial benefit of occupation of all the premises. The lessors were the owners of a long term leasehold, with many decades to run, and the problem would remain theirs long after the 20 years of the lessees’ possible entitlement expired. The lessors did ask that they and not the lessees should deal with the Owners Corporation, and the lessees fell in with this; this was a sensible arrangement, not a piece of obstruction, as the lessors were in a far better position to deal for the long term with the Owners Corporation than a person with a leasehold interest of five or conceivably 20 years. The Owners Corporation did not prove easy or expeditious to deal with; Mr Lyons’ evidence shows that he has had experience of the difficulty in dealing with such relatively unwieldy bodies. Although it took many months, the lessors did overcome these difficulties and late in 2002 were able to achieve the result that the slab penetrations were made and the lessees were in a position to complete their fit-out. There is no basis in my judgment on which it could be found that the lessors were in breach of any such term as is alleged in Defence para 3. There could well be some such term, although I did not regard the pleaded formulation as satisfactory; but there is no room for a finding that there was a breach. But further, if such a term existed or was breached, that would not be a ground for finding that the obligation to pay rent abated, or was conditional, or was suspended in any other way; what would follow would be an entitlement to damages, and not a defence to the claim for payment of rent.

70 Senior Counsel for the lessees submitted that the lessors, by breaching an obligation to provide suitable premises but claiming rent, are seeking to take advantage of their own wrong, and that they cannot do that. However Senior Counsel also told me that he accepted that the decision in Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] 12 BPR 23,923 precludes this argument being accepted at first instance, because the wrong relied upon did not give rise to the obligation to pay rent. The submission was made to protect the lessees’ position in the possible event of appeal, and to complete the protection of their position I reject it. I reject it on two grounds; that Ruthol precludes acceptance of the argument, and also on the ground that in my opinion there has been no breach by the lessors of an obligation to provide suitable premises.

71 In relation to Defence para 3 it was contended that the breach of an obligation to provide suitable premises gave rise to a damages claim at least equivalent to the accruing rent, and that pro tanto the rent was reduced by virtue of an equitable set-off. Counsel referred to a number of authorities which bear on the elimination of circularity where a claim which would otherwise be enforceable is subject to a set-off.

72 The sublease provides at cl 3.1(e) “All money payable by the lessee must be paid free of exchange, without deduction or set-off.” This is stronger against the lessees than the provisions on which I expressed an adverse view in Batiste v Lenin [2002] 10 BPR 19,441 at [102-105]. The question whether rent should be treated as paid by recoupment so that tenants are entitled to recoup themselves out of rent and defend any action for payment of rent where they pay for repairs which the landlord was obliged to carry out by an express or implied covenant but had failed to carry out was considered extensively in Batiste v Lenin [2002] NSWCA 316, 11BPR 20403. In the leading judgment Sheller JA at 20,412-413 set out paras [102]-[105] of my judgment at first instance where I considered the authorities and stated my views. At 20,416-417 paras [47] and [48] Sheller JA referred to the subject; as appears in para 48 it was his Honour’s view that there was no factual basis for recoupment. At para [49] observations of Sheller JA show that he did not endorse my view at para [105] on the effect of a “without deduction” provision in a covenant to pay rent; Sheller JA did not express disapproval or dispose of the subject.

73 I remain of the view which I expressed in that case. In the present case the lessees made no expenditure which could be treated as recoupment or equitable set-off against rent. Even if they had done so, the “without deduction” provision in the present lease would bar a claim of recoupment.

74 Indeed in my understanding the final position of the lessees’ counsel was only to press reliance on the precondition asserted in Defence para 2. In the place of the positive obligation which was important to the decision in Steel and Stuff Senior Counsel contended that in the present case the lessees had an obligation to complete the fit-out works; that obligation itself was, as I understood the contention, an implied obligation, which I would not uphold.

75 Among the many contentions made on behalf of the lessors it was contended to the effect that the lessees are disentitled to rely on the matter pleaded in Defence paras 2 and 3 by the terms of the release of claims which they gave in the Settlement Deed of 3 December 2005. It is not necessary to found my decision on this contention but I will state my opinion that reliance on the alleged condition for payability of rent in Defence para 2 is not a claim within the meaning of the Settlement Deed; but on the other hand the allegation in para 3 to the effect that there was a breach of a contractual term leading to an obligation, which must be an obligation to pay damages which in some way should be set off against or go to negate the obligation to pay rent is a claim which was barred by the Settlement Deed.

76 Although the subject of Defence para 2 was sometimes spoken of as abatement I would think that it is wrongly classified as a proposition about abatement of rent, which arises only where expressly provided for contractually or by statute when the enjoyment of possession is lost through some cause such as fire, destruction or damage; in the absence of a contractual provision, destruction and unavailability of premises for occupation leaves the obligation to pay rent untouched. A better formulation than “abatement” was made when the lessees’ counsel said that the implied term related to non-fulfilment of a precondition to the obligation to pay rent.

77 The Kiosk Issue relates to the operation under cl 13.2(j) of a fax message of 6 June 2002 which the lessees contend was an election under cl 13.2(j)(D). Clause 13.2 (j) set out earlier was introduced into the lease by the Variation Documents of 24 July 2001. There was no earlier provision dealing with the same subject.

78 The fax message of 6 June 2002 is a message from Mr Lyons to Mr Roger Parker of Commonwealth Property Investment Trust with a copy to Mr Keith Woodward. The fax message was signed by Mr Lyons, and was hand-written by him on a printed message form with a letterhead referring to Lyons Brothers Ltd (with address and contact details) and a list of company names at the foot under the heading “Lyons Brothers Group of Companies (Q8890848) and Associated and Affiliated Entities.” There are also references at the head and foot to Lyons Brothers UK Ltd Established 1929. However there is no reference in the letterhead or elsewhere to the names of either of the lessees. The substance of the communication is in the paragraph headed “Comments”:

RE SAVOY/AURORA

WE HAVE RECEIVED APPROVAL FOR THE COFFEE KIOSK. WE SHOULD COMMENCE TO PAY RENT FOR SUCH KIOSK (CONTIGUOUS TO ZÜRICH WALL CALLED NO. 1 KIOSK) FROM ABOUT 3/ 9/2002 - THREE MONTHS FROM DA. WE ARE SEEKING A CONSTRUCTION CERTIFICATE. - HOWEVER WE ARE STILL NOT ABLE TO PENETRATE THE SLAB FOR THE SERVICES AND ACCORDINGLY REQUEST THAT THE $32,500 P.A. LICENCE FEE BECOMES PAYABLE 3 MONTHS FROM THE TIME THAT WE ARE ABLE TO DRILL THE SLAB.

79 In para 4 of their Defence to the Second Further Amended Cross-claim the lessees dispute that the rent was $595,000 per annum as the lessors claim, and contend that pursuant to cl 13.2(j) the rent payable was at the rate of $465,000 per annum together with $32,500 for one Lessee’s kiosk. The allegation showing how this result was produced was Defence para 4(b).

In accordance with the provisions of sub-clause 13.2(j)D of the Sub-Lease, the Lyons parties on 6 June 2002 gave notice in writing that they were to pay to the Cross-claimants rent at the rate of $465,000 per annum together with the sum of $32,500 per annum for the use of one Lessee's kiosk;

80 In their Reply the lessors (para 13) rely on the terms of cl 13.2(j)(D), (para 14) deny that the communication was a tenant's notice within the meaning of cl 13.2(j)(D), and deny that it was effective and (para 15) say that the rent payable was at the rate of $595,000 per annum because no notice was given.

81 I have omitted references to CPI reviews and escalation of rent, which are also involved. None of the pleaded issues or argument was directed to the operation of para (C) which establishes the rent payable up to 15 July 2002.

82 Generally the operation of cl 13.2(j)(D) to the period from 16 July 2002 is that when the Lessee obtains the approval of the Council to fewer than 4 kiosks the Lessee can elect either (subpara (1)) to pay the full rent (the first option) or (sub-para (2)) to pay $465,000 plus $32,500 for each Lessee’s kiosk (the second option). If the Lessee elects the second option the Lessor is to have the right stated in subpara (2)(B) to seek Council approval for the remaining kiosks up to 4 and place whatever kiosks the Lessor obtains approval for in the Licensed Space (with a restriction on use). The full rent is payable if there is no election.

83 Subparagraph (C) contains a definition of "Lessee’s kiosk” which is the term used in subpara (D)(2)(A) to establish how many sums of $32,500 are to go into the calculation. This term is also used in subpara (D)(2)(B) for the number of Lessee’s Kiosks to be deducted from 4 to produce the number of Lessor’s Kiosks. Mr Lyons’ evidence shows that the lessees obtained consent from the Sydney City Council for two kiosks (t.119).

132 Hodgson JA made some further observations in illustration of the possible subject of amendment to which he referred. I do not read his Honour's observations as endorsing the availability of such a Defence if raised by amendment.

133 Tobias JA also agreed with the reasons given by Mason P, again with one qualification which his Honour expressed, introducing his observations by saying:

39. However, I would not construe clause 2.3 of the Deed of Settlement as denying to the claimants the right to raise a true defence to the opponent’s cross-claim for rent which does not rely upon a defence by way of set-off or the like.

134 Thereafter on 24 July 2006 Windeyer J gave the lessees leave to file an amended Defence to the Amended Cross-claim, thus introducing paras 2 and 3 of the Defence in the form on which I have adjudicated. On 13 November 2006 Lloyd AJ refused to strike out the material so introduced; [2006] NSWSC 1187.

135 As appears elsewhere, I have held against reliance on the matter so introduced.

136 On behalf of the lessors it is contended that in pleading cl 2(a)(i) of their Defence, in the form which it earlier took, the lessees maintained a claim action or cause of action within the meaning of cl 2.3(c) of the Settlement Deed, and maintained it by raising the matter in pleading, insisting on it in correspondence and defending reliance on it in proceedings before Windeyer J and the Court of Appeal. (This correspondence appears in Exhibit D. ) It is contended that the indemnity provided for in cl 2.3(d) of the Settlement Deed carries with it costs assessed on the indemnity basis. As a consequence the lessors claim as damages and indemnity for breach of cl 2.3(d) the whole costs which they incurred in the proceedings before Windeyer J and the Court of Appeal. As they recovered orders for costs, not expressed to be on the indemnity basis, costs payable and actually paid under those orders should be brought into account when assessing damages and indemnity. The claim was that the amount actually expended as costs should be awarded as damages.

137 Submissions by Senior Counsel for the lessees in answer to this claim referred to the terms of the costs orders made by Windeyer J and the Court of Appeal, and to the terms of the claim in the Cross-claim and contended that within the limits of the claims in the Cross-claim there was no basis for reopening cost decisions which have already been made and did not include orders for indemnity costs.

138 Mason P, Hodgson JA and Tobias JA made observations which bear on the operation of the Settlement Deed. These observations were not entirely uniform, they were obiter dicta and it would be an error for me to treat them as conclusive. In the same way I should not treat as conclusive observations made by Windeyer J in the decision then under appeal: [2006] NSWCA 625 at [26]. However I see the matter as their Honours did. In my opinion the subparas in para 2(a) of the Defence were relied on and reliance on them was in breach of the Settlement Deed and the lessors are entitled to damages and to indemnity in respect of the breach.

139 I see no difficulty presented by the earlier costs orders, which were made under the general powers of the Court with respect to costs and were not made to give effect to contractual entitlement under the Settlement Deed. The amount of the damages and indemnity can be determined in the present proceeding on an inquiry, in the same way as damages are usually ascertained. If any costs have been recovered under the costs orders of Windeyer J and the Court of Appeal, credit must be given for them, but there is nothing to be gained by requiring costs to be assessed and enforcement measures to be attempted in respect of those costs orders before assessing the damages and indemnity which are contractually available; circuity can be avoided by leaving the costs orders unenforced and embarking now on an assessment of the whole of damages and indemnity to which the lessees are entitled. This is the process which I will direct.

140 On the Indemnity Costs Claim I will give judgment for the lessors for damages and indemnity be assessed.

141 I turn to the fifth controversy and the option to renew the lease. The term of the lease was five years from 16 July 2001 to 15 July 2006. The lease conferred options for three further terms each of five years, the first expiring on 15 July 2011.

142 Provisions relating to the option for a further term are found in Pt 17 of the Lease. Clause 17.2 includes:

17.2 Conditions for grant of further term

(a) The Lessor must grant to the Lessee and the Lessee must take a lease of the whole of the Premises for the Further Term at an initial Rent determined under clause 17.3, provided that all the following are satisfied:

…

(3) no breach: the Lessee is not in breach of this Lease at the date of service of the Lessee’s Notice or at any subsequent time during the Term (unless the breach has been waived in writing by the Lessor or has been remedied to the Lessor’s reasonable satisfaction within a reasonable time after service on the Lessee of notice specifying the breach); and

…

(b) If the Lessor does not intend to grant to the Lessee the lease for the Further Term due to any breach of this Lease by the Lessee of which the Lessor is aware at the date of service of the Lessee’s Notice, the Lessor must serve on the Lessee within FOURTEEN (14) days of receipt of the Lessee’s Notice, a notice as required under section 133E of the Conveyancing Act specifying the Lessee’s breach.

143 Entitlement to renewal is regulated by cl 17.2 of the lease and also by Pt 8 Div. 4 ss 133C to 133G of the Conveyancing Act 1919. In those provisions the relevant power is conferred on the Court by s 133F(2); the power is discretionary and s 133F(3) provides:

(3) The court may, in proceedings referred to in subsection (2), take into consideration:

(a) the nature of the breach complained of,

(b) the extent to which, at the date of the institution of the proceedings, the lessor was prejudiced by the breach,

(c) the conduct of the lessor and the lessee, including conduct after the giving of the prescribed notice referred to in section 133E (2),

(d) the rights of persons other than the lessor and the lessee,

(e) the operation of section 133G, and

(f) any other circumstances considered by the court to be relevant.

144 Clause 17.2(iii) makes it a condition of entitlement to renew that the lessee should not be in breach of the lease not only at the date of service of the lessor’s Notice and also should not be in breach at any subsequent times during the term. The provisions of Div.4 relating to the need for a prescribed notice in effect require not only a prescribed notice within 14 days after the notice of exercise of option, but if there is a later breach, a prescribed notice within 14 days after that breach. See the definition in s 133E(iii). As the lessors gave only one prescribed notice, on 10 November 2005, the difficulties and difference of judicial opinion discussed in Reilly v Liangis Investments Pty Ltd [2000] NSWSC 47 (Young J) do not appear to be now important. Breaches occurring after the notice procedure has been gone through are relevant to the exercise of discretion, but do not make the question of entitlement to renewal fall outside Div. 4.

145 The lessees make claims relating to the option to renew in paras 27 to 32 of 2 FASC; these paragraphs fall within the exception in the Settlement Deed relating to the claims in the Notice of Motion of 25 November 2005. The lessees allege that they served a Lessee’s Notice and exercised the option on 27 October 2005, that the lessors served a purported Notice Refusing Renewal pursuant to s 133E(2) of the Conveyancing Act on 10 November 2005; they allege that they are not in breach so as to entitle the lessors to refuse to renew the sublease, and they claim the following relief:

32 In the premises, the plaintiffs are entitled pursuant to s. 133F of the Act to:

(a) A declaration that the service of the Lessee’s Notice was valid and binding upon the defendants;

(b) A declaration that the Notice refusing renewal is invalid and has no force or effect, or alternatively that it be set aside;

(c) An order for relief against the effect of which any breach by the plaintiffs of their obligations pursuant to Sub-Lease may have in relation to their entitlement to be granted a further Sub-Lease of the premises;

(d) An order that the defendants grant to the plaintiffs a lease for the whole of the Premises for the Further Term reserved by sub-cl. 17.2 of the Sub-Lease.

146 The Defence at paras [10] to [15] relies on a notice of 10 November 2005 refusing renewal and on the breach set out in it; the lessors further deny (para 14(a)) that the lessees were not in breach of the sublease. The material parts of the Notice are in Schedule 1:

SCHEDULE 1

The Lessee has breached this Sub-Lease in failing to pay to the Lessor rent and other money payable under Part 3 of the Sub-Lease due to it in accordance with the terms of the Sub-Lease.

Particulars

The Lessees’ arrears as at 8 November 2005 $866,626. The Lessor does not seek to depart from a separate agreement in relation to rent and other money due from the Lessees to the Lessor for the period from the commencement of the Lease to 1 February 2003 which is in the sum of $543,135. That amount is due to the Lessor from the Lessee but is the subject of a Notice of Cross Claim in proceedings 55065 of 2003.

However, the Lessees’ arrears of the period from 1 February 2003 $323,491.

147 There is no doubt that there were many failures to pay rent and other moneys due, or pay them in full, from 2002 onwards: my earlier holdings show this.

148 The terms and operation of this legislation were considered, relatively early in judicial experience of their application, in Evenel v Stellar Mining NL [1982] 1 NSWLR 380 (Wootten J). Wootten J made a valuable collection of material showing the previous state of the law illustrated in New South Wales by Gilbert J.McCaul (Aust) Pty Ltd v Pitt Club Ltd [1959] SR NSW 122, the respects in which it was perceived to be unsatisfactory, the way in which courts and legislation treated relief against forfeiture of leasehold interests for breach of covenants and the extent to which analogies to the exercise of the Court’s powers can be drawn from earlier law relating to forfeiture for breaches of covenant.

149 The material collected and restated by Wootten J. shows that prominent in the considerations which led to the enactment of this legislation was the disproportionate and in some cases unpredictable nature of the results which might flow from the application of the law in McCaul v Pitt Club Ltd. Breaches of covenant which happened years ago and had not been the subject of any action at the time could be brought forward with the effect of defeating an exercise of option. The passage which Wootten J cited at 386 from the Law Reform Commission’s report on options in leases, LRC 5 (1968) is telling:

( referring to McCaul v Pitt Club)

The result of the judgment of the Full Court would appear to be that a breach of covenant, however trivial and however long before the time of exercise of the option the breach may have occurred, prevents the exercise of the option although the lessor may have waived the breach so far as concerns forfeiture of the original term.

Such a condition could operate harshly, especially where the option is an option to purchase the lease property.

150 At 388 Wootten J reviewed New Zealand authority, at that time most recently Henderson v Ross [1981] 1 NZLR 417, where there was approval of the following statement in an earlier decision of the Court of Appeal of New Zealand: "The obvious final intention of the legislature was to place the Court in a position to do what it thinks fit in accordance with the justice of a particular application." Wootten J said at 388F:

I think any similar approach is appropriate to the New South Wales legislation. At the same time I find it not inconsistent, and indeed natural and proper, to approach the exercise of the discretion in accordance with the long established equitable principles regarding forfeiture of leases, except in so far as those principles may be inconsistent with the legislation or with any policy indicated by it, or inappropriate having regard to the nature of the matter against which relief is given, viz, the forfeiture of an option, in this case to renew.

151 His Honour went on to survey the law relating to relief against forfeiture of leases for breach of covenant.

152 The decision in Evanel has had considerable influence on later judicial opinion. In Ell v Cisera [2000] NSWSC 768, 10BPR 18,045 at 18,055 [25] Hamilton J referred to later authority including Best and Less (Leasing) Pty Ltd v Darin Nominees Pty Ltd (1994) 6 BPR 13,783 (McLelland CJ in Eq) who “ described the power as ‘a general discretionary power, which is to be exercised in the manner best calculated to achieve justice between parties in the circumstances of a particular case’ and again alluded to the analogy of relief against forfeiture". Hamilton J. himself said "the discretion conferred upon the Court to excuse or not excuse the breaches and allowed renewal of the term is an absolutely general one to be exercised in the light of all the circumstances …".

153 In my opinion it would be an error to attribute great significance to the analogy with relief against forfeiture for non-payment of rent or other breach of covenant. The analogy is distant because a long-term lease subject to re-entry for non-payment of rent is much more readily thought of as a piece of valuable property subjected to a charge to secure payment of rent than is a renewed lease the entitlement to which itself depends upon there being no breach of covenant. An assumption that the renewal has in fact taken place followed by treatment of that renewed lease as property charged to secure payment of rent has a large element of circularity. The discretion should always be exercised with a primary view to the considerations mentioned in s 133E(iii) rather than to elements introduced by judicial exposition. What is under consideration is much more than whether the lessor can get remedies for past breaches: the discretion affects whether the relationship should be continued by the power of the Court when the contractual relationship does not require it continue and the lessor does not want it to continue.

154 In support of their claim for a favourable discretionary decision the lessees’ Senior Counsel referred to the circumstances that almost the whole of the amount of rent due as at November 2005 related to the two bases upon which the lessees disputed liability to pay rent in these proceedings. As well as having regard to the existence of the dispute I should also have regard to the outcome. Judicial opinion of Windeyer J, the Court of Appeal and myself has been uniformly and strongly adverse to the view that there was a condition for the payment of rent or that the existence of the lessees’ claims in respect of the penetrations and easement was the reason why the rent was not payable. With respect to the Kiosk Issue, the lessees have been altogether unsuccessful.

155 Rent was withheld for the whole period from 1 February 2002 after expiry of the rent-free period to 24 December 2002 when the lessees agreed to pay $100,000 on account of rent; the balance of the rent was wholly unpaid, payments were to commence on 1 February 2003, and in my understanding no other rent has been paid in respect of the 2002 period. The rent was withheld while unsuccessful claims were made that it was not payable: that is no excuse for withholding performance of a contractual obligation. Withholding so much money for such a long period, about three years at the time of the purported exercise of the option and now over five years, is an enormity in a commercial leasehold arrangement. Withholding large parts of the rent on the basis of the contention relating to the kiosks, continuing over a period again of some years is also an enormity; particularly when that controversy was precipitated by unclear behaviour of the lessees.

156 Another matter on which the lessors rely was consistent lateness in payment of rent month by month; in many months rent was paid on or about the 15th or the 16th day of the month whereas the lease required payment on the first day of the month in terms which are altogether unequivocal. Mr Lyons maintained in correspondence and in evidence that there was an ambiguity. In a letter of the 11 November 2005 Mr Lyons said "it should also be noted that whilst your statement can suggest that the rent is due and payable on the first of each month, we consider that the rent, in accordance with the lease documentation, is due on the sixteenth day of each month (calendar monthly in advance). We are not presently taking issue with such situation, as we have enough ‘issues’ already to do with!”. In oral evidence (t.124-125) when taken to the relevant terms of the lease he said (t.125): "Well, perhaps I took advantage of what I saw was the ambiguity."

157 This position is not reasonable, indeed it is not rational. There is no room to perceive an ambiguity. Consistent late payment of rent has relatively little economic impact if the rent is eventually paid, there being an entitlement to interest; but it generates work to be done on behalf of the lessors in pursuing payment, and it relates to payments of not inconsiderable amounts, in the order of $30,000 or more in each month. I wish to guard against attributing a duly great significance to the often-repeated late payments of rent, but I do regard them as an indication of the poor quality of the relationship between the parties under the lease and of the unsatisfactory nature of Mr Lyons’ approach to the performance of obligations.

158 Mr Lyons also referred (t.129.27) to cash flow difficulty as an explanation for short payments of rent. He said:

SIMPKINS: Tell us what your other explanations are.

A. Because of the issues of wind within this area we found it very difficult to trade from the premises and, as we know, it is the subject of another possible future claim, and our part of this whole problem means that our subtenant and sublicensee at the similar difficulty and are really struggling with paying their rent to us; so just about all of our tenants bar one are well behind in their rent, and so the cash flow we have coming in and we have been subsidising it from other sources. It’s very difficult to make ends meet so it is cash flow but it is cash flow we say relating to the conditions within the area we lease. So that’s partly, part of the other issue.

159 Of this I would say that the cash flow difficulties referred to do not affect or qualify the obligation to pay rent which this passage of evidence shows the lessees subsidised from other sources, indicating their ability to subsidise. Inability to pay the rent would not be a reason for failure supporting a discretionary decision to continue the relationship.

160 Mr Lyons’ evidence also shows that he took a considered decision in about December 2006 not to pay rent in respect of one kiosk. He explained this decision in a letter of 28 December 2005 to a representative of the lessors –stating, at some length, reasons why it was contended that the location of the intended kiosk was entirely unsuitable for reasons which concluded general wind and climatic conditions. In that letter he contended that he would in the future be offsetting payments made in the past relating to that kiosk against future rent. There is of course no basis in the terms of the lease or elsewhere in contractual arrangements for acting in this way. His evidence included the following passage (at t.120):

Q. From December of 2006 you decided that you would no longer pay rent in respect of that single kiosk which you have told us didn’t in fact operate?

A. Yes.

Q. You understood, I take it, that you had a requirement under the terms of the lease to continue to make those payments of rent attributable to the kiosk?

A. I think based on advice I had received, yes.

Q. You took the view, notwithstanding that advice, that it was unfair for you to have to continue to pay the rent because you were not in fact operating a kiosk?

A. I took a commercial view on the subject and decided not to make payments on that kiosk, yes.

Q. Would you accept the characterisation of what you did from about December 2006 as a rent strike?

A. You could described it as that.

161 In my opinion the position taken in the letter of 28 December 2006 was markedly unreasonable. Mr Lyons’ evidence is to the effect that he had advice to the effect that he was required under the terms of the lease to continue to make payments attributable to the kiosk. He spoke of withholding payments as "a commercial view of the subject".

162 Overall, this event and the threat to withhold rent and withholding it for reasons allegedly relating to the kiosk is a forceful illustration of the extremely sour and unsatisfactory nature of the relationship of lessor and lessee and of the lessees’ participation in it. Obligations were consciously departed from with commercial objectives. Although the money amount of rent and other unpaid charges has not yet been assessed it is obvious that it is very large, in the scale of the annual rent; moneys have been outstanding for many years and large sums have been withheld over long periods on grounds which were not upheld when examined by the Court. Non-payment for reasons which are legally insufficient is not an excuse: non-payment for reasons which cannot have been sincerely believed in, pursued for commercial reasons, is not excusable.

163 The relationship between the parties has been extremely unsatisfactory throughout, in many respects. The relationship was very seriously disrupted by the difficulties of making penetrations and completing work to provide services for the lower ground floor. By the end of 2002 the practical work which this made necessary was carried out. It is not surprising that the events should have generated strong feeling and litigious response, as they did, but the difficulties were not solely created by interests associated with the lessors; interests associated with the lessees were also involved in the lessees agreeing to take a lease without ascertaining that there was an entitlement to carry out works which were necessary for full enjoyment of the leasehold interest. The lessees’ remedy was naturally enough the subject of litigation which the lessees pursued with the notable success of recovering a large sum of money as damages (although without admission of liability) under the Settlement Deed of 3 December 2005. However the controversy re-emerged in several ways. There has been repeated litigation. The Equity proceedings of 2002 were resolved by a Deed of Release of 24 December 2002, which provided for the initiation within a limited time of the present proceedings. This was not the first occasion on which there had been an array of disputes followed by a settlement agreement; it was events of that kind which led to the agreement of 11 June 2001 under which the terms of the lease were varied. There were also proceedings in 2004 of which I know little referred to as the Gaming Proceedings, involving among others the present parties. There are also proceedings, first commenced in the Federal Court of Australia but now pending here, which have not yet been resolved. In his letter of 28 December 2006 and again in his oral evidence before me on 19 September 2007 Mr Lyons referred to consideration of the possibility of a further dispute or claim relating to wind or climatic issues; these have some relation to the controversy referred to in the Deed of 24 July 2001 under cl 3 of which the lessees agreed to pay up to $200,000 as a contribution to physical work to enhance the amenity of the area in relation to possible wind issues. There is a possibility that this controversy, apparently resolved in 2001, may re-emerge. A commercial relationship which had given rise to so much disputation and so much litigation should not be continued in existence by a discretionary decision of the Court, in my judgment.

164 If the commercial relationship continues, it is likely that there will be more disputation. In my judgment I should not continue the relationship by a discretionary order under s 133F. On any realistic appraisal in human terms, the whole business has been a complete failure.

165 The lessees are not entitled to a second lease term of five years and I am not prepared to exercise the discretion under Pt 8 Div 4 Conveyancing Act in their favour. I will proceed to consider what orders should be made under s 133G.

166 Orders Upon the Cross-claim:

1. Give judgment for the Cross-claimants for rent, parking fees, increased outgoings, interest and other charges payable under Lease 8258311P up to the date of this order and thereafter pending the assessment until the Cross-defendants surrender possession.

2. Direct that an Inquiry be held to ascertain and certify the amount payable under Order 1 and further direct that judgment be entered for the amount so certified.

3. Dismiss claim 7(a) in the Second Further Amended Cross-claim.

4. Give judgment for the Cross-claimants for damages and indemnity claimed in paras 9 to 12 of the Second Further Amended Cross-claim.

5. Direct that an Inquiry be held to ascertain and certify the amount of damages and indemnity under Order 4 and further direct that judgment be entered for the amount so certified.

6. Upon the Second Further Amended Statement of Claim .
Dismiss the claim in paras 27 to 32.

7 Reserve further consideration of consequential orders under Part 8 Division 4 of the Conveyancing Act 1919 particularly section 133G.

8. Reserve all questions of Costs.

**********

Actions

Download as PDF Download as Word Document

Citations

R & J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd [2008] NSWSC 310

Most Recent Citation

Sandbank Holdings Pty Ltd v Durkan [2010] WASCA 122

Cases Citing This Decision

9

Allsvelte Pty Ltd v Cassegrain Wines Pty Ltd [2015] NSWSC 1370

Tresedar Pty Ltd v Property Builders (Constructions) Pty Ltd (In Liquidation) [2014] NSWSC 382

Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2012] NSWSC 251

Cases Cited

19

Statutory Material Cited

2

Steel & Stuff Pty Ltd v Fallon Street Properties Pty Ltd [2005] NSWSC 1148

Fallon Street Properties Pty Ltd v Steel & Stuff Pty Ltd [2006] NSWCA 296

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24

CITATION:	R&J Lyons Family Settlement Pty Ltd v 155 Macquarie Street Pty Ltd [2008] NSWSC 310
HEARING DATE(S):	17/9/07-21/9/07
JUDGMENT DATE :	11 April 2008
JURISDICTION:	Equity
JUDGMENT OF:	Bryson AJ
DECISION:	Orders Upon the Cross-claim: 1. Give judgment for the Cross-claimants for rent, parking fees, increased outgoings, interest and other charges payable under Lease 8258311P up to the date of this order and thereafter pending the assessment until the Cross-defendants surrender possession. 2. Direct that an Inquiry be held to ascertain and certify the amount payable under Order 1 and further direct that judgment be entered for the amount so certified. 3. Dismiss claim 7(a) in the Second Further Amended Cross-claim. 4. Give judgment for the Cross-claimants for damages and indemnity claimed in paras 9 to 12 of the Second Further Amended Cross-claim. 5. Direct that an Inquiry be held to ascertain and certify the amount of damages and indemnity under Order 4 and further direct that judgment be entered for the amount so certified. 6. Upon the Second Further Amended Statement of Claim. Dismiss the claim in paras 27 to 32. 7. Reserve further consideration of consequential orders under Part 8 Division 4 of the Conveyancing Act 1919 particularly section 133G. 8. Reserve all questions of Costs.
CATCHWORDS:	LESSOR and LESSEE - lease of commercial premises on Macquarie Street level and Plaza Level of tower in Renzo Piano development Macquarie Street Sydney - issues between lessors and lessees re (1) whether rent conditional on state of premises being suitable for lessees' intended use - implied precondition - held, No.(2) - whether election exercised in accordance with clause in lease varying rent according to number of kiosks - held, it was not (3) whether lessors entitled to restitution by lessees of $75,000 the lessors paid to Owners Corporation to permit penetrations in floor slab for water sewerage and other services - held, they were not - (4) whether lessors entitled to damages for breach of earlier Settlement Deed by making further claim - held, they were - (5) whether Option of Renewal should be extended notwithsanding failures to pay rent, under discretionary power in s.133F(2) Conveyancing Act - review of litigation and disputes in Leasehold relationship - in view of poor quality of relationship, held, relief refused - Judgment for rent and damages to be assessed.
LEGISLATION CITED:	Conveyancing Act 1919 s.133F(2) and (3) Conveyancing Act 1919 ss 133C to 133G
CASES CITED:	Advanced Fitness Corporation Pty Ltd v Bondi Diggers Memorial Sporting Club Ltd [1999] NSWSC 264 Alcatel v Scarcella (1998) 44 NSWLR 349 Batiste v Lenin [2002] 10 BPR 19,441 Batiste v Lenin [2002] NSWCA 316, 11BPR 20,403 Best and Less (Leasing) Pty Ltd v Darin Nominees Pty Ltd (1994) 6 BPR 13,783 Bishop v Moy [1963] NSWLR 468 BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 Carbure v Brile Pty Ltd [2002] VSC 272 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 Edward Kazas & Associates Pty Ltd v Multiplex (Mountain Street) Pty Ltd (2002) 11 BPR 20,353 Ell v Cisera [2000] NSWSC 768, 10BPR 18,045 Evenel v Stellar Mining NL [1982] 1 NSWLR 380 Fallon Street Properties Pty Ltd v Steel & Stuff Pty Ltd [2006] NSWCA 296 FGCT Pty Ltd v Alphafarm Pty Ltd (2004) 219 CLR 165 Gilbert J. McCaul (Aust) Pty Ltd v Pitt Club Ltd [1959] SR NSW 122 Gordon v Lidcombe Developments (1966) 2 NSWR 9 Henderson v Ross [1981] 1 NZLR 417 Hide & Skin Trading Pty Ltd v Asiatic Meat Traders Ltd (1990) 20 NSWLR 310 Homebush Abattoir Corporation v Bermria Pty Ltd (1991) 22 NSWLR 605 Israel v Foreshore Properties Pty Ltd (in Liq) (1980) 54 ALJR 421 Mannai Investment Co. Ltd v Eagle Star Assurance Co. Ltd [1997] AC 749 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 Pavey Matthews Pty Ltd v Paull (1987) 162 CLR 221 Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 Reilly v Liangis Investments Pty Ltd [2000] NSWSC 47 Reliance Developments (NSW) Pty Ltd v Lumley General Insurance Ltd [2008] NSWSC 172 Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] 12 BPR 23,923 Sinclair v Brougham [1914] AC 398 Steel & Stuff Pty Ltd v Fallon Street Properties Pty Ltd [2005] NSWSC 1148 United Australia Ltd v Barclays Bank Ltd [1941] AC 1 Vasile v Perpetual Trustees (1987) 10 BPR 18,091 Wettern Electric Limited v Welsh Development Agency [1983] 2 All ER 629
PARTIES:	R&J Lyons Family Settlement Pty Limited - First Plaintiff Geoffrey Charles Talbot - Second Plaintiff 155 Macquarie Street Pty Limited - First Defendant Ranec Pty Limited - Second Defendant
FILE NUMBER(S):	SC 1652/2006
COUNSEL:	J Simpkins SC and S Phillips - Plaintiffs M McCulloch SC, Ms P McDonald and D Sulan - Defendants
SOLICITORS:	Galilee Solicitors - Plaintiffs Henry Davis York - Defendants