Reds (WA) Pty Ltd and Eileen Joan Edwards as trustee For the Ron Edwards Family Trust And Bulletin Nominees Pty Ltd as trustee For the VASSILLIOUS Family Trust And Eileen Joan Edwards
[2012] WASAT 85
•30 APRIL 2012
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL
STREAM: COMMERCIAL & CIVIL
ACT: COMMERCIAL TENANCY (RETAIL SHOPS) AGREEMENTS ACT 1985 (WA)
CITATION: REDS (WA) PTY LTD and EILEEN JOAN EDWARDS AS TRUSTEE FOR THE RON EDWARDS FAMILY TRUST AND BULLETIN NOMINEES PTY LTD AS TRUSTEE FOR THE VASSILLIOUS FAMILY TRUST AND EILEEN JOAN EDWARDS [2012] WASAT 85
MEMBER: DR B DE VILLIERS (MEMBER)
HEARD: 8 FEBRUARY 2012 - RESERVED 9 MARCH 2012
DELIVERED : 30 APRIL 2012
FILE NO/S: CC 1291 of 2011
BETWEEN: REDS (WA) PTY LTD
Applicant
AND
EILEEN JOAN EDWARDS AS TRUSTEE FOR THE RON EDWARDS FAMILY TRUST AND BULLETIN NOMINEES PTY LTD AS TRUSTEE FOR THE VASSILLIOUS FAMILY TRUST AND EILEEN JOAN EDWARDS
Respondent
Catchwords:
Commercial tenancies Failure to provide disclosure statement Losses incurred as a result of failure to provide disclosure statement Outgoings payable by tenant Does management component of strata levies form part of 'operating expenses'? Is tenant required to pay expenses that were not provided for in operating budget? Does a landlord forfeit a claim for operating expenses if no estimate of operating expenses is provided in year within which the expenses occur?
Legislation:
Commercial Tenancy (Retail Shops) Agreement Act 1985 (WA), s 3, s 6(1), s 6(1)(a), s 6(1)(b), s 12, s 12(1)
Strata Titles Act 1985 (WA), s 36(1)(c)
Result:
Application successful in part
Category: B
Representation:
Counsel:
Applicant: Mr DH Solomon
Respondent: Mr L Hilton-Barber
Solicitors:
Applicant: Solomon Brothers
Respondent: Civic Legal
Case(s) referred to in decision(s):
Capolingua v Phylum Pty Ltd (1991) 5 WAR 137
Farooqi & Farooqi v Mazzocchetti & Mazzocchetti No. SCGRG971491 (Judgment No. 6619 [1998] SASC 6619 (9 April 1998)
Gill & Ors and Wildnight Pty Ltd [2008] WASAT 84
John Hender Real Estate Pty Ltd v CG Berbatis Holdings Pty Ltd and Ors (CT 670 of 1996)
Lim Hing Heng v Levison [2006] WASCA 67
Maff v Masterkey Properties Pty Ltd [2001] WADC 88
REASONS FOR DECISION OF THE TRIBUNAL:
Summary of Tribunal's decision
Ms EJ Edwards, acting for the respondent, failed to give to Reds (WA) Pty Ltd, the applicant, a disclosure statement prior to a commercial tenancy lease being entered into.
Three issues arose as a result of the disclosure statement not being provided:
1)Whether the applicant suffered pecuniary losses as a result of the omission of the respondent to provide a disclosure statement in which the basis for annual rent review was set out.
2)Whether the applicant is required to pay operating expenses in light of the failure of the respondent to provide a disclosure statement and the failure of the respondent to provide annual estimates of operating expenses.
3)Whether the applicant is required to pay for the management component of the strata levy as an 'operating expense'.
The applicant's position in regard to these three issues was as follows:
1)The rent review clause, which provides for annual market rent review, should have been disclosed in the disclosure statement. If the applicant had known that those were the terms of the annual rent review, it would not have entered into the lease. As a result of the omission on the part of the respondent, the applicant is now suffering substantial losses.
2)The operating expenses that were claimed must be refunded, since the disclosure statement and an annual estimate of operating expenses for each of the subsequent years were not provided.
3)The part of the strata levy that deals with the cost of the strata management cannot be passed on to the applicant as an 'operating expense'.
The respondent's position in regard to the three issues was as follows:
1)A disclosure statement was, due to an oversight, not provided prior to the parties entering into the lease. However, all the terms of the rent review were contained in the lease and the applicant had sufficient opportunity to seek legal advice and/or to discuss any term of the draft lease with the respondent. The director and negotiator who acted on behalf of the applicant during the negotiations is an experienced businessperson, and he could be expected to have read the draft lease, to take advice and to be aware of the terms and conditions thereof. If the applicant had suffered any losses, such losses cannot be attributed to the failure to provide the disclosure statement.
2)All operating expenses as claimed were payable.
3)The entire strata levy can be passed on to the tenant since the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) only seeks to limit the management fee that is payable in relation to a specific tenancy, while the management fee of the strata scheme can be passed on to a tenant.
The Tribunal found as follows:
1)The applicant failed to meet the requirements of s 6(1) of the Commercial Tenancy (Retail Shops) Agreement Act 1985 (WA), since it could not, to the satisfaction of the Tribunal, show that it had suffered a pecuniary loss as a result of the disclosure statement not being provided.
2)The failure to provide an annual estimate of operating expenses does not preclude the respondent from claiming the actual expenses incurred.
3)The management component of the strata levy cannot be passed on to the applicant as an 'operating expense'.
The application was successful in part.
Introduction
The application concerns Café Villa, No 128 Oxford Street, Leederville, where a dispute has arisen as a result of the failure of Ms EJ Edwards acting for the respondent (respondent) to provide to Reds (WA) Pty Ltd (applicant) a disclosure statement prior to the applicant entering into a commercial tenancy lease (lease). The lease provides for a market rent review on an annual basis and the applicant says that, if it had known of the basis for rent review, it would not have entered into the lease. The applicant claims compensation for the pecuniary losses it says it suffers as a result of the failure of the respondent to provide a disclosure statement. Several other questions that relate to the payment of outgoings flow from the core contention of the applicant.
Question to be determined
The following three questions are the subject of the proceedings:
1)Did the applicant suffer pecuniary loss as a result of the omission of the respondent to provide a disclosure statement prior to the lease being entered into?
2)Can the entire strata levy, in particular, the part of the strata levy that deals with the payment for services of the strata manager, be classified as a 'variable outgoing', and therefore be passed on to the applicant as an operating expense?
3)Is the applicant entitled to be reimbursed for operating expenses and/or other direct expenses if no operating expenses budget was provided in any particular accounting period?
Background
The parties entered into the lease on or about 30 June 2010 for No 128 Oxford Street, Leederville. The applicant leases the whole of Lot 1 on Strata Plan 13339 (a four lot strata scheme), which operates as a café. The term of the lease is 10 years.
The respondent did not, as is required by the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (CTRSA Act), provide to the applicant a disclosure statement prior to the parties entering into the lease. The applicant did not, as it was entitled to, seek to terminate the lease within 60 days after the lease was entered into, pursuant to s 6(1)(a) of the CTRSA Act for the failure of the respondent to provide a disclosure statement. The applicant says it is suffering pecuniary losses as a result of the failure of the respondent to provide a disclosure statement.
The lease provides, in cl 5.1.2 and in the First Schedule, that the base rent shall be 'reviewed on the 1st day of May 2011 and thereafter on the 1st day in each and every year throughout the term of the lease'. The basis whereupon the rent is reviewed on an annual basis is as determined 'after the application of the following Market Rent formula'.
The respondent seeks to exercise the rent review as per the contract, while the applicant seeks an order for compensation suffered as a result of the failure of the respondent to provide the applicant with a disclosure statement in which the rent review formula was set out. The parties are also in dispute as to what items of expenditure can be claimed from the applicant as 'operating expenses' or other expenses.
The application was lodged on 30 August 2011. On 15 September 2011, the first directions hearing took place and the dispute was referred for mediation. The mediation was unsuccessful. On 6 October 2011, programming orders were made for the hearing which was set down for 7 December 2011. At a directions hearing that took place on 10 November 2011, the date of the hearing was varied to 8 February 2012.
The hearing took place on 8 February 2012. Various persons gave evidence and oral submissions were made. At the conclusion of the hearing, the parties were given an opportunity to make final submissions in writing. On 9 March 2012, after receipt of the final submissions, the decision was reserved.
Statutory framework
The CTRSA Act provides as follows in s 6(1):
Where a retail shop lease is entered into and the tenant has not, at least 7 days before the entering into of the lease, been given a disclosure statement in accordance with subsection (4) or the disclosure statement given contains false or misleading information, the tenant may, in addition to exercising any other right, do either or both of the following
…
(b)apply in writing to the Tribunal for an order that the landlord pay compensation to the tenant in respect of pecuniary loss suffered by the tenant as a result of the omission of the landlord to give a disclosure statement in accordance with subsection (4) or of the giving of false or misleading information by the landlord in the disclosure statement.
The CTRSA Act provides in s 12(1f):
If there is a provision in a retail shop lease in respect of any premises to the effect that the tenant is obliged to make a payment to or for the benefit of the landlord for management fees, the landlord is not entitled to recover, and the tenant is not obliged to make, that payment.
The CTRSA Act provides in s 3:
management fees means fees in respect of costs for or incidental to the collection of rent or other moneys or the management of premises including, but not limited to, such of those costs
(a)in respect of
(i)management offices;
(ii)plant and equipment;
(iii)staff;
and
(b)as are of a kind prescribed[.]
Contentions
Both parties made extensive oral and written submissions and several witnesses were called to give evidence at the hearing. The Tribunal took all of the information before it into account in makings its determination.
The Tribunal will consider each of the questions separately under the following headings:
1)Contentions regarding the failure to provide a disclosure statement.
2)Contentions regarding the obligation to pay strata management expenses.
3)Contentions regarding the payment of operating and other expenses.
Contentions regarding the failure to provide a disclosure statement
The Tribunal will commence by summarising the contentions of the respondent and thereafter the contentions of the applicant.
The respondent says that it is aware that a disclosure statement had to be provided to the applicant prior to the lease being entered into; it acknowledges that it failed to provide a disclosure statement, but it says that its failure was not intentional but, rather, due to an oversight; it further says that the terms of the rent review were discussed orally between the parties when they were introduced to each other, and those terms were also contained in the lease. The respondent concludes, firstly, that the applicant, who is represented by a director who is an experienced businessperson, can be assumed to have known, or should have known, the contents of the lease, and, secondly, that the applicant failed to demonstrate that it suffered any pecuniary losses as a result of the failure of the respondent to provide a disclosure statement.
The applicant says it was aware at the time of entering into the lease that it was entitled to receive a disclosure statement, but no statement had been received, and the respondent did not explain to the applicant the basis upon which rent reviews would take place. The applicant would not have entered into the lease had it known that a market rent review would be conducted every year. The applicant expected a rent review arrangement whereby a combination of inflationindex adjustment (CPI) and market rent review would occur. It says it has suffered and will continue to suffer substantial pecuniary losses for the duration of the lease due to the failure of the respondent to provide a disclosure statement.
Consideration regarding the failure to provide a disclosure statement
The statutory duty that rests upon a landlord to provide a disclosure statement to a prospective tenant pursuant to the CTRSA Act is to ensure that a tenant understands the essential elements of a lease. Leases are complex documents and prospective tenants may be at a loss as to the essential characteristics of a lease, unless those are explained in the disclosure statement. Failure by a landlord to provide a tenant with a disclosure statement can have serious consequences; for example, a tenant can terminate a lease within 60 days after a lease is entered into (s 6(1)(a) of the CTRSA Act) or the tenant may apply to the Tribunal for an order that the landlord pay compensation for the pecuniary loss suffered by a tenant 'as a result' of the omission to provide a disclosure statement (s 6(1)(b) of the CTRSA Act).
The fact that the information which is supposed to be contained in the disclosure statement is within a lease does not absolve a landlord from the obligation to provide a disclosure statement. The provision of a disclosure statement is obligatory: Capolingua v Phylum Pty Ltd (1991) 5 WAR 137 at [15].
Emphasis must be placed on the words pecuniary loss suffered 'as a result' of the failure to provide a disclosure statement.
The fact that a landlord omitted to provide to a tenant a disclosure statement does not automatically mean that compensation can be ordered by the Tribunal for any losses suffered by a tenant in the conduct of its business. It is incumbent on the tenant to satisfy the Tribunal, firstly, that it had suffered pecuniary loss as a result of the omission to provide a disclosure statement and, secondly, the tenant must demonstrate the extent of loss so as to enable the Tribunal to award compensation.
There must be causal link or, put otherwise, a sufficient connection, between the omission to provide a disclosure statement on the part of the landlord and the loss suffered on the part of the tenant. In the matter of Farooqi & Farooqi v Mazzocchetti & Mazzocchetti No. SCGRG971491 (Judgment No. 6619 [1998] SASC 6619 (9 April 1998), this connection between failure to provide a disclosure statement and loss suffered was expressed as follows by the Supreme Court of South Australia:
In my opinion, before that [compensation] can be ordered, it must be shown that the loss or damage for which compensation is sought was incurred or at least contributed to by the failure to provide the statement.
Commercial tenancies face many challenges that may cause or contribute to pecuniary losses, and it is therefore essential that the Tribunal must be satisfied that the reason for the losses suffered (if any) in a particular case can be attributed to the omission to provide a disclosure statement.
The Tribunal will therefore firstly consider the question whether it is satisfied that the applicant had suffered pecuniary loss as a result of the omission of the respondent to provide a disclosure statement and, if such a finding is made, the Tribunal will go on to consider what amount of compensation should be awarded. If the reply to the first question is in the negative, there is no reason for the Tribunal to deal with the second question.
In response to the first question, the Tribunal will give its decision followed by the reasons for the decision.
The Tribunal is not satisfied that the applicant has demonstrated that it had suffered any pecuniary loss as a result of the omission of the respondent to provide the applicant with a disclosure statement prior to the lease being entered into.
The reasons for this finding are as follows:
a)The Tribunal notes that Mr R Introvigne, a director of the applicant and its negotiator of the lease, says he would not have entered into the lease if he had known that a market review would be conducted annually. Mr Introvigne did not, however, provide any evidence to the Tribunal in which he made it known before the lease was concluded that his preferred basis for rent adjustment was CPI. It may have been a consideration in his mind, but he did not reduce it to writing nor did he convey it verbally to the respondent. At the same time, however, the respondent also says it would not have entered into a lease on any basis other than an annual market rent review, in light of the popularity of the location of this premises and the provision for an annual market rent review in the previous lease. The protection afforded by s 6(1)(b) of the CTRSA Act is not aimed at allowing parties to renegotiate an arrangement or to revisit the bargain they had entered into voluntarily. Both parties may have preferred the lease to contain rent review provisions more favourable to them, and both may wish to revisit those negotiations, but that is not the purpose of s 6(1)(b) of the CTRSA Act.
b)The lease sets out the provisions for the annual rent review. Clause 5.1.2 provides that the rent shall be increased and varied from each relevant review date as determined in item 4 of the First Schedule of the lease in accordance with market rent review. Clause 5.1.3 sets out how the market rent is to be determined. Item 4 of the First Schedule is headed 'Review date for base rent' and provides that the base rent shall be reviewed on 1 May 2011 and thereafter on 1 May of every year for the duration of the lease. These terms in the lease are clear, concise, written in plain English and easily understandable. There is no particular complexity about the basis for rent review or the formula used. The First Schedule to the lease contains, in some respects, the same information that would be expected to be in a disclosure statement; for example, the commencement and term of the lease (item 2); the base rent (item 3); and the review date for base rent (item 4). The rent review terms were simple even at a very cursory reading of the lease.
c)Mr Introvigne is, according to his evidence, a person with extensive commercial experience; he owns commercial and residential properties and he has extensive experience as the ownermanager of restaurants. Mr Introvigne says that he was aware that a disclosure statement had to be given to a commercial retail tenant; he noted in his letter of 1 April 2010 that a disclosure statement had not been provided, and yet he entered into the lease without having received the disclosure statement. He also did not terminate the lease, as he was entitled to do, as a result of the failure of the respondent to provide a disclosure statement. Although it is not Mr Introvigne's obligation to request a disclosure statement, he knew he was entitled to it and he noted the absence of the disclosure statement in his letter, and this demonstrates his experience and knowledge in the field of commercial retail shop negotiations and tenancies. The evidence before the Tribunal shows that the relationship between the applicant and the respondent was those of equals, where both had something the other wanted and, after free negotiations, an agreement was reached as reflected in the lease. From the evidence, it appears that Mr Introvigne's main concern at the time of the negotiations was to achieve an option to renew an existing lease, since he was concerned that he would not have enough time to recoup his investment. The parties then agreed on a new 10 year lease and Mr Introvigne was satisfied with the deal regardless of the rent review provision.
d)Mr Introvigne says he undertook a due diligence of the business prior to the parties concluding the lease. The due diligence was done prior to Mr Introvigne having met the representatives of the respondent. While undertaking the due diligence, Mr Introvigne says he was assisted by an accountant and business broker. Mr Introvigne says he realised, after he had assessed the existing practice and the way the restaurant was operating, that if he could reduce labour costs by operating the business on his own and/or with family members, the restaurant could be much more profitable. Mr Introvigne says, in his negotiations to acquire the business, he asked the vendor about monthly rent payable, but he did not make any enquiries about the basis upon which rent is reviewed (T:58; 08.02.12). It seems from the evidence of Mr Introvigne that he saw the main risk regarding the commercial viability of the restaurant as being the cost of labour, while rent and rent reviews did not constitute a major threat to the success of the business. If he was concerned about rent and rent reviews, the decision not to seek legal advice or other professional advice about the lease, not to read and/or analyse the lease in detail or to sign a lease that provides for annual market rent review, was extremely reckless. In evidence, Mr Introvigne, in effect, admitted that he either did not care to pay attention to the rent review aspects of the lease or, even if he did, that he accepted the terms thereof. He says:
… To be honest, with the previous business we had never had [a] business or leases that market every year, so it was not really something that I was aware, that you can have market every year. I actually [was] told from my managing agent that you cannot have the same form every year. (T:19 and T:20; 08.02.12)
e)There is insufficient evidence to support the contention of the applicant that the respondent omitted to provide the disclosure statement on purpose or with the intention to deceive. Although the CTRSA Act does not require proof of an intention on the part of the landlord to deceive for an application for damages to be successful, Mr Solomon suggested in submissions and during the hearing that the omission may have been intentional ('You didn't give him a disclosure statement because you didn't want that to be made clear to him' (T:86; 08.02.12 and para 9 of the applicant's closing submission). There is insufficient evidence to support such an allegation or inference. In the absence of evidence by Mr Ozich who, as legal practitioner acting for the respondent, had close involvement with the drafting of the lease and exchange of correspondence the Tribunal cannot conclude, as is proposed by Mr Solomon, that the respondent was made aware of its obligation to provide a disclosure statement and, on purpose, failed to comply with the advice. It is total speculation on the part of Mr Solomon to suggest that Mr Ozich had made a recommendation or had reminded the respondent that a disclosure statement had to be provided and that the respondent on purpose failed to act accordingly so as to prevent the applicant from realising what the basis was of rent review. Mr Ronald Harrison Edwards, the real estate agent acting for the respondent, explained in his evidence that it was an oversight not to have provided the disclosure statement, and that he cannot explain why their normal procedures were not adhered to. Mr Edwards said that the omission may have been due to the fact that, at the initial stages, the applicant sought for the previous lease to be assigned in which case, no disclosure statement was required. The evidence of Mr Edwards is that the previous lease also provided for an annual market rent review and that other properties in the same street are also subject to annual market rent reviews. Whatever the reason for the omission on the part of the respondent, the terms and conditions of the rent review were clearly set out in the lease and the Tribunal is not satisfied that any losses were incurred as a result of the omission to enclose a disclosure statement.
f)It is not agreed between the parties what precisely was said during the oral discussions their representatives had at the meeting in March 2010 when they were introduced to each other. On the part of the respondent, evidence was given by Mr Eftos that he was happy to accept the applicant as a tenant, in light of its vast experience in the restaurant business, but he (Mr Eftos) refused to give to the applicant an option to renew the existing lease, although he was willing to offer a new lease to the applicant. According to Mr Eftos, the parties agreed on a new lease with a term of 10 years with an annual market rent review. Mr Robert James Harrison Edwards confirmed that he had overheard the conversation and that no objection to the market rent review was raised by Mr Introvigne. Mr Ronald Harrison Edwards also says he overheard the discussion and that words were said to the effect that rent reviews were to be conducted annually on market. The Tribunal accepts that there are some discrepancies between the witnesses in how they recall the meeting, but the essence of their evidence is consistent, namely, that the topic of annual market rent review was raised and that Mr Introvigne accepted it. Mr Introvigne, on the other hand, says no mention of any rent review was made and that he did not enquire at all about the basis for rent reviews. Mr Introvigne did not call his wife, who, according to the evidence, attended the meeting, to give evidence about what was said. Mr Introvigne says that during the meeting he did not raise any matter other than the duration of the lease; he was satisfied with the 10 year lease. The Tribunal accepts, on the basis of the evidence before it, that mention was made of market rent review on an annual basis during this meeting and that the lease reflects those terms.
g)The Tribunal finds it incredulous and almost unbelievable that Mr Introvigne, with his extensive commercial and restaurant experience, would buy a business for approximately $850,000, seek for the existing lease to be assigned, and then negotiate and enter into a new 10 year lease without any consideration or clarification of the basis for rent reviews. Mr Introvigne is not a novice to the commercial world or to commercial negotiations. It was admitted by Mr Introvigne that rent constitutes a major element of a restaurant's overheads, and yet, according to his evidence, he paid no attention to the basis for rent adjustments. Mr Introvigne had possession of the draft lease for a substantial period of time (approximately three months) and there is no evidence that he was put under pressure by the respondent to execute the lease without first obtaining legal and/or other professional advice. If Mr Introvigne's evidence that he did not know the terms of rent review is to be believed, then he was extremely reckless by entering into a 10 year lease with open eyes. He failed to demonstrate that he suffered pecuniary losses as a result of the disclosure statement being omitted. The seemingly casual way in which Mr Introvigne conducted the negotiations is reflected in the following excerpt from his evidence:
… We don't write the contract, the agent writes the contract. I didn't write those conditions in there. The only things I ask was an extension of the lease. All the rest is pretty much a standard every agent, every business broker they've got their own contract and their own variation and annexure to their contract. (T:43; 08.02.12)
He then continues:
… There's been various business owners before us and we didn't expect to find the lease like that to be sincere, to be honest, no. So I expected to be able to lease that's why I didn't really investigate the lease (Tribunal emphasis). (T:44; 08.02.12)
h)The evidence of Mr Introvigne is inconsistent in regard to what he understood about the terms of the draft lease. On the one hand, he says he did not read the draft lease, while, on the other hand, he says that he read the draft lease but did not understand it and assumed the annual rent adjustment would be based on CPI. He knew, however, that a disclosure statement had not been provided; he wrote to the respondent to say a disclosure statement had not been provided and he made detailed comments in regard to the redevelopment clause of the draft lease. But at the same time, he wishes to portray the image of someone who had no idea of the content of the document he was signing. He admits now that if he were to face the same situation, he would seek legal advice, but at the time of negotiating the lease, he says: 'I never really thought to get legal advice. …' (T:62; 08.02.12). It is not clear to the Tribunal whether Mr Introvigne did not read the lease or whether he read it but did not understand it, or whether he read it, understood it, but now seeks to renegotiate it. Regardless, the Tribunal is not satisfied that the applicant suffered any losses as a result of the omission of the respondent to provide a disclosure statement.
i)The Tribunal notes that the applicant acquired the business from the previous owner through the assistance of a broker, Mr Nick Cobilis, who had no involvement or attachment with the respondent. The offer to buy the business was conditional upon the right of Mr Introvigne to undertake a due diligence of the business 'and being satisfied with the profitability of the business' (Annexure A to the Agreement for Sale of Business dated 28 January 2012). The condition for sale also stipulates in para 13 that 'the purchasers have exercised their own due diligence in the Purchase of this business and that the Vendor nor the Vendor's agent Sentosa Estates [] shall in no way be liable' (Tribunal emphasis). The broker approached the respondent on behalf of Mr Introvigne to negotiate an assignment of the lease. The broker provided to the respondent background information about the applicant and its representatives, and facilitated a meeting between Mr Introvigne and representatives of the respondent. Although the broker did not attend the meeting, the purpose was for the parties to be introduced to each other and to finalise the terms of the lease hence, the negotiations about the duration of the lease and the basis for rent reviews in the new lease. Mr Introvigne therefore undertook a due diligence prior to meeting the respondent, and then he approached the respondent with the assistance of a broker and had the professional advice of such person and an accountant available to clarify any aspect of the draft lease. He was, on all accounts, a very wellinformed person.
j)The Tribunal does not accept the evidence of Mr Introvigne that the absence of the disclosure statement contributed to him not seeking legal advice in regard to the lease. The disclosure statement does not substitute common sense. Although the disclosure statement is an important reminder to a prospective tenant to seek legal advice, the absence of a disclosure statement does not mean that, in a transaction of this scale and with a person so experienced, the applicant can attribute losses (if any) to the omission of the disclosure statement. Mr Introvigne made detailed comments on the part of the draft lease that deals with redevelopment. He either sought legal advice in order to make such comments or he relied on previously obtained legal advice for purposes of another transaction. This nevertheless highlights Mr Introvigne's awareness that legal advice had to be sought prior to entering into a lease of this kind.
In light of the above assessment, the Tribunal finds that the applicant has not demonstrated to the satisfaction of the Tribunal that it suffered any pecuniary losses as a result of the omission of the respondent to provide it with a disclosure statement.
The application for compensation must therefore be dismissed.
Contentions regarding the obligation to pay strata management expenses
The applicant contends that s 12(1f) of the CTRSA Act prevents the landlord from reclaiming any sort of 'management fees' as part of the outgoings. This includes, according to the applicant, a prohibiting to pass on strata management fees as 'outgoings'. According to the applicant, strata levies form part of 'management fees' as defined in s 3 of the CTRSA Act and can therefore not be claimed, since such fees do not relate to the 'operating, repairing or maintaining the building or buildings of which the retained shop forms part of that building or those buildings and the common area'. The applicant contends, in the alternative, that the fees are not recoverable, since the lease fails to identify how the fees are apportioned between the various tenancies in the strata scheme.
The respondent contends that the strata levies, other than an amount of $1,212.40, which the respondent acknowledges had been overcharged and will be credited, is recoverable from the applicant since those relate to 'operating, repairing or maintaining' the premises. The respondent says that strata levies can be equated to the payment of local government rates, water rates and land taxes, in the sense that, if strata levies are not paid, the strata company can recover those from the respondent and, as such, it is an 'operating' cost, regardless of how it is made up. The strata levies do not relate to the management of the specific tenancy, but rather, to the management of the strata scheme as a whole, and the cost therefore is reclaimable.
Consideration regarding the obligation to pay strata management expenses
The CTRSA Act contains two key provisions that address the issue of management fees s 3 and s 12(1f), as quoted above.
Section 12(1f) of the CTRSA Act provides that a landlord is not entitled to recover a 'management fee'. 'Management fee' is defined in s 3 of the CTRSA Act as 'fees in respect of costs for or incidental to the collection of rent and other moneys or the management of the premises …' (Tribunal emphasis).
The respondent contends that the management component of the strata levy can be distinguished from the management of the specific tenancy. The respondent says that the management component of the strata levy refers to the maintenance and operation of the entire building, and it falls outside the scope of s 12(1f) of the CTRSA Act. The respondent can therefore pass the cost on to the applicant.
The Tribunal does not accept the reasoning of the respondent.
The definition of 'management fees' as per s 3 of the CTRSA Act is unambiguous, namely, that the types of fees that are precluded from being passed on to the tenant are not only those that relate to the specific management of the tenancy for example, collection of rent. 'Management fees' also include costs incurred for the 'management of the premises' which arise from, but are not limited to, costs associated with management offices, plant and equipment, and staff.
In these proceedings, there is no evidence before the Tribunal to justify a conclusion that the strata management fees fall outside the definition of 'management fees'.
The respondent refers to the decision in Maff v Masterkey Properties Pty Ltd[2001] WADC 88, at [31], in which it was held that costs incurred by a landlord for purposes of paying local government rates, water rates and land taxes could be passed on to a tenant as part of 'operating, repairing and maintaining' a building. The Tribunal does not agree that this principle should, in these proceedings, be applied to management costs that make up a part of strata levies. The mere fact that the landlord can be sued if a strata levy is not paid does not mean such a cost can automatically be passed on to the tenant; there is no statutory basis for such a contention.
The CTRSA Act, by providing a definition for 'management fees', makes it clear that costs of this nature are for the landlord to be borne and not for a tenant. The 'management fee' component of the strata levy does, according to the Tribunal, fall within the definition of 'fees in respect of costs for … the management of premises …' (s 3 of the CTRSA Act). The same applies to the portion of the strata levy that relates to 'bank fees' and 'surplus'. These do not fall within the ambit of operating, repairing and maintaining the premises and must be paid by the respondent.
An order should therefore be made that the respondent must exclude from the claim of annual outgoings the management fee component of the strata levy, including 'bank fees' and 'surplus' and, if any payment had been made by the applicant, a refund thereof must take place.
Contentions in regard to the payment of operating and other expenses
The applicant contends that, due to the failure of the applicant to provide a disclosure statement, the applicant did not receive, as it is entitled to, an operating expenses budget for the first year of the lease. This failure contributed to the pecuniary losses suffered by the applicant. The applicant nevertheless paid, since the commencement of the tenancy, a total of $28,663.87 towards operating expenses, but none of those costs should have been passed on to the applicant, since an estimate of operating expenses for each of the years of the tenancy had not been provided, as required by s 12(1)(d) of the CTRSA Act. By reason of the provision of s 12(1)(d)(i) of the CTRSA Act, the applicant is not required to pay for operating expenses for a particular year if the period for which the expenses is to be paid has expired and the annual estimate had not been provided. The respondent, by failing to provide an annual estimate, cannot claim for actual costs once the year for which the estimate had to be provided had passed. Those operating costs must therefore be borne by the respondent. In the alternative, even if those operating expenses were payable by the applicant, no auditor's report has been provided, as required by s 12(1a)(e) of the CTRSA Act, for any of the accounting periods, and therefore, the amount paid is recoverable since the payment made was a mistake of law or fact: John Hender Real Estate Pty Ltd v CG Berbatis Holdings Pty Ltd and Ors (CT 670 of 1996) (Hender). The applicant says that all other expenditure that is not listed in the annual estimate for example, plumbing, strata levies and general maintenance cannot be claimed by the respondent. All of the operating expenses since the lease was entered into ($28,663.87) must therefore be credited to the applicant.
The respondent contends that, at cl 2, the lease provides that the applicant shall pay the variable outgoings in respect of the premises (cl 5.2), and those outgoings include:
•local government rates;
•water, sewerage and excess water rates;
•garbage and waste disposal rates; and
•the cost of electricity, gas, oil and other energy of relevance to the leased premises.
The applicant must also pay any other expense incurred by the respondent on behalf of, or as a service to, the applicant. The applicant must, therefore, firstly pay the costs of all services directly provided to it and, secondly, the outgoings such as strata levies, on the basis of the Schedule of Unit Entitlement. All other costs as assessed against the premises and referred to in Annexure A of the application including hiring of the skip bin, water consumption and installation of a submeter were for the specific benefit of the applicant and should therefore be paid by it. Finally, the respondent says that, in regard to the expenses listed in Annexure A that fall within s 12(1c) of the CTRSA Act, copies of invoices and assessments have been provided to the applicant.
In conclusion, the respondent says the applicant has not suffered any pecuniary losses as a result of the failure of the respondent to provide to the applicant an estimate of operating expenses as required by s 12(1a) of the CTRSA Act. Even though s 12(1a) of the CTRSA Act had not been complied with in the year within which the payment was due, it does not absolve the applicant from paying those expenses. The effect of s 12(1)(d)(ii) of the CTRSA Act is not to extinguish an obligation to pay, but rather, to place a moratorium on payment until the requirements of the CTRSA Act are complied with. The applicant is therefore not entitled to any compensation or refund in respect of operating costs paid to date, since those costs were part of operating expenses and other services for the benefit of the applicant and therefore payable by it.
Consideration in regard to the payment of operating expenses
The Tribunal is not satisfied that the applicant has shown that, in regard to the totality of the operating expenses since the lease had commenced, it had suffered pecuniary loss as a result of the failure by the respondent to enclose an operating expenses estimate with the disclosure documents, or that the operating costs that have been levied and paid were, in totality, in error in law or in fact.
The Tribunal is, however, satisfied that, in regard to some of the expenditure listed in Annexure A, the respondent has failed to demonstrate that those items can be passed on to the applicant pursuant to the lease.
The reasons for the finding are as follows:
a)The applicant has failed to demonstrate to the satisfaction of the Tribunal that any pecuniary loss was suffered as a result of the failure of the respondent to provide the applicant with an estimate of operating expenses for the first year or any subsequent years of the lease. If the applicant paid operating expenses without an estimate being provided as required by s 12(1)(d)(i) of the CTRSA Act, such payment does not, in itself, constitute an error in law or in fact, as in the matter of Hender, so as to justify the orders as sought by the applicant. The applicant is, firstly, not required to make any payment towards operating expenses until such time an estimate is provided (s 12(1)(d)(i) of the CTRSA Act). Secondly, the applicant is entitled to receive an operating expenses statement after each accounting period (s 12(1)(d)(ii) of the CTRSA Act). Thirdly, the applicant is not obliged to make any payment of operating expenses until the operating expenses statement is provided (s 12(1d) of the CTRSA Act). The applicant can therefore demand from the respondent an operating expenses statement for each accounting period so as to establish whether payments and/or claims for payment were proper. If it is found that a payment was not justified, the applicant is entitled to a refund. The applicant's payment of operating expenses for which an estimate or a statement had not been provided does not, however, automatically constitute an error of law or fact, which payment is recoverable pursuant to s 6(1) of the CTRSA Act. The respondent has now, pursuant to orders by the Tribunal, provided operating expenses estimates to the applicant for the periods 2009/2010, 2010/2011 and 2011/2012. Orders should be made for the respondent to provide an operating expenses statement as required by s 12(1)(d)(ii) and s 12(1a)of the CTRSA Act.
b)As said above, the applicant is entitled, pursuant to s 12(1d) of the CTRSA Act, to refuse to make a contribution towards operating expenses until and unless the respondent has provided an annual operating expenses estimate and an operating expenses statement. Failure on the part of the respondent to provide an annual estimate does not absolve the applicant from its obligation to contribute to operating expenses. The obligation to pay is, however, not enforceable by the respondent until it (respondent) has complied with its statutory obligations. The applicant remains liable to make payments towards operating expenses as soon as the respondent has complied with its statutory obligations. The Tribunal therefore does not accept the contention of the applicant that the effect of s 12(1)(d)(ii) of the CTRSA Act is, in effect, that operating expenses for a particular year cannot be recovered unless an annual estimate for expenditure is provided to the tenant by not later than the end of the year in which the expense was incurred. Section 12(1d) of the CTRSA Act clearly keeps alive the obligation to pay operating expenses, albeit that the landlord has not provided an operating expenses statement within three months after the end of the accounting period. The applicant is therefore not entitled to recover all amounts paid for the mere fact that an operating expenses budget had not been provided in time within the year in which the expenditure was incurred. It is not always possible, as has been said in the matter of Lim Hing Heng v Levison [2006] WASCA 67 at [17], to accurately predict, or even to anticipate, all the possible operating expenses that may be incurred in any particular accounting period. The estimate of expenditure is what it says, an 'estimate'. The final reconciliation for a particular year takes place when the annual statement is settled. The purpose of the operating expenses statement is therefore to give certainty and finality in regard to what contribution had to be made by the tenant for a particular accounting period.
c)The Tribunal agrees with the applicant that there is a statutory obligation on the respondent, pursuant to s 12(1a) of the CTRSA Act, to provide to the applicant an operating expenses statement for an accounting period, and that such a statement must comply, in particular, with the provisions of s 12(1a)(e) and s 12(1c) of the CTRSA Act. In other words, if an expense falls outside the ambit of s 12(1c) of the CTRSA Act, then a report, as required by s 12(1a)(e) of the Act, must be given to the applicant so as to explain why such a contribution should be made. This is consistent with the observation of the Tribunal in the matter of Gill & Ors and Wildnight Pty Ltd [2008] WASAT 84 at [102], in which the following was said about the duty that rests upon the landlord to provide a clear basis for claiming expenditure:
Tenants are entitled to know what they will be contributing to during an accounting period; whether their contributions are being utilised for a lawful purpose; and, if there were any deviations from the budget, what those deviations were and whether it was indeed within the obligations of the tenants to pay for it. The importance of receiving an itemised account of all expenditure to which a tenant must contribute during the accounting period is therefore obvious. The statutory duty is on the landlord to comply with the provisions of the CTRSA Act.
d)The respondent says that the costs of the skip bin, the installation of the water meters and the water usage were for the direct benefit of the applicant and should be paid by it. The respondent accepts that those costs do not form part of the operating expenses, but it says the costs were incurred by the respondent on behalf of and for the benefit of the applicant.
The Tribunal finds that the respondent cannot claim those costs in totality pursuant to the lease. The reasons for this finding are as follows:
i)Although the lease provides that the applicant must pay excess water consumption, the apportionment of the water usage by the respondent has, at best, been based on guesswork or speculation rather than contract or accurate measurement. The applicant is entitled to know on what basis water usage is determined and apportioned. If the basis for apportioning water usage is clear, the applicant must pay for such usage. However, the respondent cannot, by its sole discretion, apportion costs of water usage to the applicant. If, as is suggested by the respondent, water usage is by way of a separate water meter, then it is the obligation of the respondent to ensure that the meter functions accurately so as to give a proper reading of water usage. However, the evidence before the Tribunal is that, prior to the installation of the submeters, water use was apportioned in a completely arbitrary fashion by the respondent and, even after the meters had been installed, there were inaccurate readings, since the meters were not functioning properly for some period of time. Although the applicant is liable, in principle, to pay for its water consumption, the respondent can only pass on the cost of water usage if the basis of apportionment is agreed, or if it is on the basis of actual use. In this situation, the respondent cannot pass on the water consumption prior to the installation of the submeters. The Tribunal accepts that the cost of consumption after the installation of the submeters can be passed on, but only to the extent that the respondent can certify that the meters were working properly and accurately. The entire amount of water usage prior to the installation of submeters must therefore be repaid to the applicant. The amount of water consumption after the installation of the submeters can be passed on to the applicant, but only from such time when the meters are certified as functioning properly and accurately.
ii)In regard to the cost of the skip bin, there is insufficient evidence before the Tribunal to conclude that this was a service that was provided exclusively to the applicant; that the applicant had requested it or agreed to it; and/or that the parties had agreed that all costs would be borne by the applicant. The respondent can therefore not claim the amount.
iii)The same reasoning applies to the installation of the submeters. There is insufficient evidence before the Tribunal that the parties had agreed that the installation is a cost that would be borne by the applicant. The contrary appears from the evidence namely, that the respondent had to install the submeters so as to provide to the applicant an accurate reading of water usage. The meters were not installed, as is suggested by the respondent, as an item of 'maintenance' pursuant to cl 7.1 of the lease. The installation of the water meter is, unless otherwise agreed, a cost for the account of the respondent.
f)The Tribunal is satisfied that the apportionment of operating costs are, unless otherwise agreed, levied or determined, to be done in accordance with unit entitlement pursuant to s 36(1)(c) of the Strata Titles Act 1985 (WA). The applicant leases the whole of Lot 1 on a four lot strata scheme. The applicant must therefore pay the proportion of operating expenditure as per the Schedule of Unit Entitlement, unless it is otherwise agreed, levied or determined.
Summary of decision
The Tribunal's decision in regard to the three issues is therefore as follows:
1)The Tribunal is not satisfied that the applicant has demonstrated that it had suffered pecuniary loss as a result of the omission of the respondent to provide a disclosure statement prior to the lease being entered into.
2)The part of the strata levy that deals with the payment for services of the strata manager, banking cost and surplus cannot be classified as 'variable outgoings' and cannot be passed on to the applicant.
3)The applicant is not entitled to be reimbursed for all operating expenses. The following expenses, which the respondent concedes are not operating expenses, cannot be passed to the applicant: water usage for the period prior to the certification of the water meters, hiring of skip bin and installation of water meters.
4)The respondent must forthwith comply with its statutory obligation to provide to the applicant for each accounting period an operating expenses statement that complies with s 12(1a) of the CTRSA Act.
Orders
1.The application succeeds in part.
2.The application for compensation suffered as a result of the omission of the respondent to provide a disclosure statement prior to the lease being entered into is dismissed.
3.The strata levy constitutes an operating expense but the following expenses must be removed from the portion of the strata levy that is passed to the applicant: strata management fees, banking fees and surplus.
4.The following items of expenditure cannot be passed to the applicant: water usage for the period before the water meters are certified as functioning properly, hiring of skip bin and installation of water meters.
5.The respondent must forthwith comply with its statutory obligation to provide for each accounting period to the applicant an operating expenses statement that complies with s 12(1a) of the Commercial Tenancy (Retail Shops) Agreement Act 1985 (WA).
I certify that this and the preceding [53] paragraphs comprise the reasons for decision of the State Administrative Tribunal.
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DR B DE VILLIERS, MEMBER
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