Rundle Leasecorp 2 P/L v Carraccia & Ors - [2005] SADC 37

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
RUNDLE LEASECORP 2 P/L v CARRACCIA & ORS
Judgment of His Honour Judge Burley
3 May 2005
GUARANTEE AND INDEMNITY - ACTIONS AGAINST SURETY - EVIDENCE
Plaintiff leased basement level of building to first defendant - Agreement reached - Lease to be guaranteed by first, second and third defendants - First defendant established music retail store - Lease guaranteed by first defendant - First defendant receives imprisonment on unrelated matters - Lease and guarantee then executed by second and third defendants - First defendant released from prison - Lease payment in arrears - Lessees vacated premises - Plaintiff seeks enforcement of guarantee - guarantee enforced - Plaintiff awarded sum of $84,800.
Equity - Unconscionable Conduct - Defendants claim unconscionable to enforce guarantee - No unconscionable conduct found.
Contract - Breach of Contract - Mitigation of Loss - Defendants claim Plaintiffs failure to mitigate loss caused by delay and failure to accept offer of new lessee - No failure to mitigate found.

RUNDLE LEASECORP 2 P/L v CARRACCIA & ORS
[2005] SADC 37

Plaintiff claims from the Defendants the sum of $65,900 together with interest thereon being the arrears of rent due under a lease agreement, the performance of which the Plaintiff says was guaranteed jointly and severally by the Defendants.
When the trial was called on for hearing on 20 April 2005, the first defendant appeared in person. There was no attendance by or on behalf of the second and third defendants. The first defendant informed me that he was in contact with the second and third defendants. He understood that the second defendant was unwell and the third defendant was interstate.
I informed the first defendant (to whom I shall refer as Mr Carraccia) that, according to the court file, all the defendants had been given adequate notice of the date of trial and that as there was no appearance by or on behalf of the second and third defendants, the trial would proceed in their absence. The Plaintiff did not then seek a default judgment but indicated that a joint and several judgment would be sought against each of the three defendants at the conclusion of the trial.
The Plaintiff called two of its directors, Mr Syrianos and Mr Scaffidi, in addition to tendering a great deal of documentary evidence without opposition from Mr Carraccia.
The pleadings reveal the issues in dispute between the parties. The three defendants were represented by one firm up to the time of filing an amended defence on 24 September 2003. It is clear from the evidence adduced at trial by both parties that there was little, if any, material factual dispute between them. It is therefore convenient to refer to the Statement of Claim before setting out my findings in relation to the Plaintiff’s claim and to the Defence in relation to the defences pleaded by the defendants.
The incorporation of the Plaintiff was admitted.
Paragraph 2 of the Statement of Claim refers to a lease of the lower ground floor at 51-53 Rundle Mall, Adelaide. The lease was between the Plaintiff as lessor and companies called Domanton Pty Ltd and C Holis Pty Ltd as lessees. The lease is part of Exhibit P3. By an addendum made to the lease at the request of Domanton Pty Ltd and C Holis Pty Ltd, the document tendered for signature by the lessees was modified to provide for a lease commencing on 1 November 2001 for a period of four years with a rental of $80,000 per annum for the first two years. C Holis Pty Ltd was added as an additional lessee. These changes were accepted by the Plaintiff. Included within the lease was a document of guarantee. It was originally drawn up to provide for Mr Carraccia and the second defendant to be guarantors. It was modified by the lessees to include a third guarantor, Mr Arthur Tsiolis.
The guarantee agreement is referred to in paragraph 5 of the Statement of Claim. In response to paragraph 5 the defendants pleaded:
“4.     As to paragraph 5 of the claim, the defendants say that:
4.1    In or about September 2001, each of the defendants executed a document entitled “Guarantee” which document was attached to the Memorandum of Lease;
4.2    The document entitled “Guarantee” was executed by the second and third defendants under duress or, in the alternative, as a result of the unconscionable conduct of the Plaintiff.
PARTICULARS
4.2.1 The second and third defendants referred to and repeat paragraphs 2.1.1 and 2.1.2) hereof.”
Mr Carraccia did not dispute that the guarantee referred to in paragraph 5 of the Statement of Claim was the same guarantee referred to in paragraph 4 of the Defence.
Paragraph 2 of the Defence refers to paragraph 2 of the Statement of Claim. The first part of that paragraph is as follows:
“2.The defendants admit the facts contained in paragraph 2 of the claim, save that they say that the second and third defendants executed a Memorandum of Lease under duress or, in the alternative, as a result of the unconscionable conduct of the Plaintiff”.
Particulars of the alleged duress or unconscionable conduct then follow. It is to be noted that by paragraphs 2 and 4 the three defendants have pleaded that only the second and third defendants were subjected to the alleged duress or unconscionable conduct.
I mention, in addition, that paragraph 2 of the Defence refers to execution of the Memorandum of Lease by the second and third defendants. It is quite clear that the second and third defendants did not, in their own right, execute the Memorandum of Lease, although it appears that Mr Carraccia, the second defendant, and the third defendant all signed as officers of the respective corporate lessees. Nothing turns on this point because no evidence was called by any of the defendants to support the allegations made in the particulars.
In addition, the evidence of Mr Scaffidi, which I accept as reliable, established that there was no conduct on the part of “the Plaintiff’s representatives” which came anywhere near constituting duress or unconscionable conduct. He said, and I find, that towards the end of September 2001, it was necessary to request the return of the executed lease and guarantee on a number of occasions because the Plaintiff’s bank required to see the documentation. He telephoned the office of Domanton Pty Ltd on a number of occasions and spoke to Mr Carraccia’s wife. Eventually he was able to collect the executed documentation. He was not asked to consider re-negotiation of the lease and guarantee on account of Mr Carraccia’s imprisonment as alleged in paragraph 2.1.2. On the contrary, I find that apologies for the delay in executing the documentation were given when he collected the executed lease and guarantee.
In paragraph 4 of the Defence, the defendants admit that they executed the guarantee. The absence of evidence from the second and third defendants or from any other witnesses that might support the allegations of duress or unconscionable conduct referred to in paragraph 2 of the Defence and incorporated by reference into paragraph 4 means that the second and third defendants cannot succeed in the Defence as pleaded in paragraph 4.
The only question in issue in relation to the liability of the second and third defendants is whether or not I come to the view that the Plaintiff has established that the guarantee is enforceable to the extent that the Plaintiff is entitled to recover the amount equivalent to rental not paid by the lessees and interest thereon.
Mr Carraccia’s position during the course of the trial was somewhat unusual. When he gave evidence it became clear that he voluntarily signed the guarantee agreement in about July 2001 but retained the lease and guarantee documentation which had been forwarded to him under cover of a letter from the Plaintiff’s broker, a Mr Manolakis. Exhibit P3 commences with a copy letter from Mr Manolakis dated 19 July 2001 under the cover of which he forwarded the lease and guarantee documentation to Domanton Pty Ltd, the company of which Mr Carraccia was the director. Mr Carraccia did not at any time suggest that, when he signed the guarantee, he was pressured into doing so.
It was apparent from Mr Carraccia’s evidence that in July 2001 he was a defendant to serious criminal charges, the trial for which was scheduled to commence in September 2001. He did not suggest, nor could he, that the mere fact of being subject to serious criminal charges could in any way vitiate the guarantee agreement that he had signed.
Mr Carraccia said that he pleaded guilty to the criminal charges and he was sentenced to six months imprisonment on 24 September 2001. He said that this was shortly prior to the time that the guarantee agreement was signed by the second and third defendants. He said that because he had just been sentenced to a period of imprisonment, he and the other guarantors should have been given the opportunity to renegotiate the terms of the lease and presumably the terms of the guarantee. He said that to the extent that such an opportunity was not provided the guarantee could not be said to be effective against him or the other defendants.
No such plea is raised on behalf of the first defendant in the Defence, but the trial proceeded on the basis that, to the extent that the first defendant was pursuing a defence that, if successful, would lead to the setting aside of the guarantee agreement, no objection was taken by the Plaintiff that such a defence had not been specifically pleaded.
It seems to me that Mr Carraccia has attempted to pursue a ground of defence which, if it has any efficacy, could only exonerate the second and third defendants. This was consistent with what Mr Carraccia said on a number of occasions during the course of the trial, namely that he was responsible for the non-payment of rent by the lessees because the second and third defendants did not participate in the running of the business conducted by Mr Carraccia at the leased premises.
Having carefully considered Mr Carraccia’s evidence and the submissions that he put defending the action, I have come to the view that no ground of defence has been established by him. I have taken into account the fact that on 24 September 2001 he was sentenced to six months imprisonment, that that fact was known to Mr Scaffidi a few days prior to the receipt of the executed lease but I have concluded, as a matter of law, that the factual background relied upon by Mr Carraccia does not give rise to a defence which would relieve him or anyone else from the obligations put in place by the guarantee agreement. Mr Carraccia voluntarily signed the guarantee in July 2001. The fact that his circumstances changed thereafter because he was sentenced to imprisonment does not give rise in law to the right to have the lease and guarantee renegotiated. He remained bound by what he signed. There is no other basis for the setting aside the guarantee agreement which, I find, was voluntarily executed by each of the defendants. In executing the guarantee they each bound themselves to guarantee the performance of the lease.
These conclusions are supported by the admissions contained in Exhibit P12 which is a letter dated 13 October 2002 from Mouldens Solicitors to the Plaintiff’s letting agent. Mouldens wrote the letter on behalf of the defendants and in relation to the guarantee. Immediately after paragraph 10 on page 2 the letter states:
“Our clients do not deny their liability under the guarantee. Recent payments by them is evidence of their acceptance of liability. The liability under the guarantee extends to the loss suffered by the landlord. The landlord has a duty to our clients as guarantors to mitigate the loss he is likely to suffer. The landlord cannot refuse to consider the only offer to lease the premises and then claim a full indemnity from the guarantors the rent payable over the balance of the term.”
I now turn to the lessees’ default under the lease. It is common ground that the lessees got into financial difficulties such that they could no longer afford to pay the rental which accrued at the rate of nearly $6,700 per month plus GST.
By letter dated 28 May 2002 Domanton Pty Ltd, by Mr Carraccia, advised the Plaintiff’s letting agents as follows:
“As per our telephone conversation on 28/5/02 I hereby give notice that I will be searching for a suitable tenant to assign or sub-lease our tenancy at 51-53 Rundle Mall, (basement level), Adelaide 5000.”
In the previous March arrears under the lease agreement had accumulated to more than $15,000 and by letter dated 12 March 2002 (Exhibit P9) the Plaintiff’s letting agents, Colliers Jardine, wrote to Mr Carraccia requesting payment of arrears.
In June or early July 2002 the lessees left the premises the subject of the lease. Shortly after that, by letter dated 4 July 2002 (Exhibit P5), Mr Carraccia advised the Plaintiff’s letting agent that Derringer’s Music was interested in taking over the premises the subject of the lease. Mr Carraccia suggested that the term of the lease with Derringer’s would be for a period of five years, the rental for the first year would be $40,000 and that rental for the second to fifth years would be $80,000 plus CPI.
It is clear from the evidence of Mr Vitek, the proprietor of Derringer’s Music, that he was not prepared to take on the premises on those terms or on terms anywhere near as favourable as those referred to in Mr Carraccia’s letter of 4 July 2002.
The facts that I just referred to constitute the background to the defence of mitigation pursued by the first defendant and referred to in paragraph 7.4 of the Defence the relevant parts of which are as follows:
“7.4.1The defendants say that the Plaintiff failed to mitigate its loss by failing to take steps to:
(a) properly advertise the premises for let (sic) or;
(b)lease the premises to Derringer’s Music Pty Ltd within a reasonable time following the tenants departure.
7.4.2By reason of the Plaintiff’s breaches, the defendants deny that if any rental was lost, which is not known and therefore not admitted, the same is not recoverable from them.”.
Technically this is a defence which, if it were able to be made out, would be available to the lessees (as opposed to the guarantors) against the Plaintiff as lessor. However, no objection was taken to the defendants as guarantors seeking to reduce the claim against them by alleging that there had been a failure to mitigate on the part of the Plaintiff.
Before dealing with the question of mitigation, it is convenient to set out my findings in relation to quantum of the Plaintiff’s claim. Mr Carraccia does not dispute, and it is otherwise established by the documentary evidence, that the arrears of rent up to 1 May 2003 amount to $65,900 and that interest as accrued on that sum, up to 1 May 2003, amounts to $2,994. The Plaintiff also claims interest from 1 May 2003 to notionally, 1 May 2005, a period of two years. The quantum of that interest is $15,887. In round figures, the total claim amounts to $84,800.
Mr Carraccia submitted that, if I came to the conclusion that he was liable under the guarantee, I should nevertheless reduce the amount claimed to reflect the fact that the Plaintiff has failed to mitigate its damage. Although paragraph 7.4.1(a) refers to the alleged failure to properly advertise the premises, nothing was said by Mr Carraccia about this aspect of the defendants’ defence during the course of the trial. He did, however, assert that the Plaintiff’s failed to lease the premises to Derringer’s Music within a reasonable time. I have already referred to the fact that negotiations took place between the Plaintiff and Mr Vitek for some ten months after the lessees vacated the premises. These negotiations were brought to an end because, by chance, the Plaintiff received an offer from a third party to purchase the premises. As far as I can tell from the sketchy evidence adduced on this question, it appears that such an agreement for the sale of the property was reached between the third party and the Plaintiff by the beginning of April 2003 and settlement in respect of that contract took place on 1 May 2003. It is for this reason that the Plaintiff’s claim for past rental has been calculated up to 1 May 2003 but not beyond.
The correspondence between the relevant parties from July 2002 to early 2003 was tendered. A brief examination of that correspondence assists as to whether or not there was a failure to mitigate. I have already referred to the letter, Exhibit P5, in which Mr Carraccia indicated that Derringer’s Music would take over on the terms referred to in that letter. In the Book of Documents handed up by the Plaintiff’s counsel, the next letter, Exhibit 1D 19, is one addressed to “To Whom it may Concern” in which Mr Vitek states that he is dealing with Mr Carraccia with regard to taking over the subject premises and that a decision will be reached no later than 17 September. 1D 19 is dated 1 August 2002. He says nothing in the letter about the terms upon which he is prepared to take over the tenancy.
The next relevant letter is to be found at page 71 of the Book of Documents. It was nor formally tendered in evidence but it should have been. It is dated 11 September 2002. It refers to two consecutive six month terms, the first commencing on 14 October 2002, with a proposal that there may be a future long term lease of three years with a right of renewal of three years. The rental was to be $15,000 per six months rising to $40,000 per annum thereafter.
It can be seen that these terms are considerably less than the rental of $80,000 provided for in the original lease. However, a qualification ought to be made to the apparent difference between rental of $30,000 per annum and rental of $80,000 per annum. It was common ground between the parties that the appropriate rental was in the vicinity of $65,000 per annum as at the year 2000 when the lessees first took possession of the premises at a time prior to the execution of the lease. It was also common ground that Domanton Pty Ltd would have trouble paying a rent of $65,000, so it was agreed between the principals that rent would not have to be paid for the first twelve months of occupation and thereafter rent would be paid at the rate of $80,000 per year rather than $65,000 per year. Averaged out over a period of five years the rent would amount to $65,000 per annum. Nevertheless, an offer to take the premises for $30,000 per annum and later $40,000 per annum is substantially less than $65,000 per annum which had been agreed upon over a five year period by the original parties.
The next relevant letter is Exhibit 1D 20. It is a letter from Mr Vitek to the Plaintiff’s letting agents and is dated 13 October 2002. In that letter an offer of $30,000 per annum for the first twelve months was made with a further option for a long term lease of $40,000 for a term to be agreed upon. This is similar to the proposal contained in the letter of 11 September 2002. However, it is clear that even by the beginning of October 2002 Mr Vitek was only prepared to look at taking over the premises on terms that were considerably less attractive than those originally agreed to by the original lessees.
The next letter is Exhibit P12 which has already been referred to as being a letter from Mouldens to the Plaintiff’s letting agents. It is dated 11 October 2002. In paragraph 4 of that letter, reference is made to a proposal by Derringer’s Music to take the lease for a term of three years at a rental of $40,000 for the first year. (It is not clear where that information came from and it is contrary to Exhibit 1D 20 written a week earlier from Derringer’s to the Plaintiff’s letting agent.) Later in Exhibit P12 Mouldens complained that the Plaintiff failed to mitigate its loss by not accepting the offer from Mr Vitek. To the extent that the same complaint is now made by the first defendant, I do not consider that by early October 2002 the Plaintiff was remiss in not accepting the proposal put by Mr Vitek in his letter of 3 October 2002. That offer had a greatly reduced term being limited to twelve months certain at a greatly reduced rental being $30,000 for the first twelve months. In those circumstances I think it was appropriate for the Plaintiff to consider its position as to whether or not it would accept Derringer’s offer. It clearly did so because no such agreement was entered into. I do not think that the Plaintiff acted unreasonably in that regard.

The next relevant letter is Exhibit P18 which consists of a number of documents from the file of the Plaintiff’s solicitor. The first is a letter dated 28 November 2002 from Mr Stewart Rattray forwarding a draft lease to the Plaintiff’s letting agent for the eventual consideration of Mr Vitek.
It appears from the documentation that the only thing that occurred between October and November 2002 was the preparation of the draft by Mr Stewart Rattray.
The next relevant document is the copy of notes made in respect of a telephone attendance between Mr Stewart Rattray and Mr Vitek on 15 November 2002. No agreement was reached at that stage other than that Mr Stewart Rattray would prepare a draft lease. It is apparent from a copy email of 11 December 2002 that the draft of the lease was forwarded by Mr Rattray to Mr Vitek. On the same date a separate letter was sent by Mr Stewart Rattray enclosing a copy of the original lease.
The next document is a fax message dated 16 January 2003 from Derringer’s to Mr Stewart Rattray. In that letter a number of comments were made about the proposed lease. Commencement date was to be 1 March 2003. For the first three years the rental was to be $30,000, $40,000 and $40,000 per annum respectively with an ability to terminate at the six month and twelve month levels. After three years the rental was to be $50,000 per annum.
Mr Vitek followed this up with a telephone call on 23 January 2003 to see what progress was being made by Mr Stewart Rattray.
By letter dated 29 January 2003 Mr Stewart Rattray sent a detailed response containing his client’s attitude to Mr Vitek’s proposal. Mr Vitek then retained Mr Phillips, solicitor to act for him in relation to the proposed lease. Mr Phillips’ letter to Mr Vitek of 11 March 2003 acknowledges receipt of the draft agreement. He enclosed with the letter his notes as to the lease and suggested changes.
It was about this time that the Plaintiff lost interest in negotiations with Mr Vitek because of the proposed purchase of the property by a third party.
It can be seen from the above review of the documentation that negotiations with Mr Vitek proceeded at a leisurely pace. As I have already indicated, I do not think that by October 2002 the Plaintiff’s had acted unreasonably. Looking at the period from October 2002 to March 2003, there was an exchange of proposals between the parties from time to time on several occasions leading in due course to a point of final agreement which could have been reached in March 2003. That was not to be because the Plaintiff chose to sell the premises. This had an advantage to the lessees and the guarantors to the extent that arrears of rent would only run up to the time at which the contract for the sale and purchase of the property was settled. It was common ground that that occurred on 1 May 2003.
In all the circumstances I do not consider that the first defendant has established that the Plaintiff failed to mitigate its loss. It took up negotiations with Derringer’s once that business entity had been referred to it and the initial offer by Mr Vitek on behalf of Derringer’s constituted a significantly lesser bargain for the Plaintiff when compared with the original lease. These negotiations were taking place at a time when Mr Scaffidi, Mr Syrianos and Mr Carraccia accepted that it was getting more difficult to obtain tenants for properties on Rundle Mall because of competition from other shopping areas. Although negotiations with the only prospective tenant who showed interest in taking over the tenancy proceeded at a relatively slow pace, I do not think the Plaintiff acted unreasonably in pursuing negotiations with Mr Vitek in the manner and over the period that it did. I conclude that the Plaintiff could not be said to have failed to mitigate losses arising from unpaid rental by the lessees over the period of negotiations. Accordingly, I hold that it is not appropriate to reduce the agreed quantum of damages by any amount on account of an alleged failure to mitigate damage.
For the sake of completeness, I mention s.10 of the Landlord and Tenant Act 1936. It is relied upon in paragraph 7.3 of the Defence. It requires a notice to remedy breach prior to re-entry of premises by a landlord. It does not apply to this case because the lessees voluntarily gave up possession of the premises.
For the above reasons, there will be judgment for the Plaintiff against the defendants for the sum of $84,800 inclusive of interest to judgment.