Ryals Hotel Pty Ltd v Zhaos Pty Ltd

[2020] NSWSC 719

Supreme Court

New South Wales

Medium Neutral Citation:	Ryals Hotel Pty Ltd v Zhaos Pty Ltd [2020] NSWSC 719
Hearing dates:	25-27 May 2020
Date of orders:	11 June 2020
Decision date:	11 June 2020
Jurisdiction:	Equity
Before:	Darke J
Decision:	Plaintiff lessee entitled to recover damages of $190,000 plus pre-judgment interest for breaches of the lease by the first defendant.
Catchwords:	CONTRACTS — remedies — damages — assessment — failure of landlord to install a new lift in the hotel property amounted to breach of the lease — hotel without a functioning lift for a six month period — lift works undertaken in that period — assessment of effect on profitability of hotel business — whether assessment of damages should include a separate amount for inability to use the basement during the lift installation — held that no damages should be given for non-use of the basement where it was not a profit generating venue — whether tenant entitled to abatement of rent under lease — abatement available only if the premises or building are damaged or destroyed — held that the carrying out of lift works did not cause damage within meaning of abatement provision — tenant not entitled to abatement of rent
Legislation Cited:	Civil Procedure Act 2005 (NSW), s 100
Cases Cited:	Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71 Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768; [2003] HCA 10 Robinson v Harman (1848) 1 Exch 850 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 Zorom Enterprises v Zabow (2007) 71 NSWLR 354; [2007] NSWCA 106
Category:	Principal judgment
Parties:	Ryals Hotel Pty Ltd (Plaintiff) Zhaos Pty Ltd (First Defendant) Motel Links Pty Ltd (in liquidation) (Second Defendant)
Representation:	Counsel: Mr D R Stack (Plaintiff) Mr J T Johnson (First Defendant)   Solicitors: Piper Alderman (Plaintiff) Pancific Legal (First Defendant)
File Number(s):	2018/309511
Publication restriction:	None

Judgment

Introduction

1. By its Statement of Claim filed on 19 November 2018, the plaintiff lessee sought a range of declarations and orders against the first defendant lessor in relation to a lease of a commercial property on Broadway, Glebe. The lease is for a term commencing on 7 June 2018 and terminating on 7 January 2028, with four options to renew, each for a further term of 5 years. The leased premises are primarily used for the operation of a hotel, known as Ryals Hotel Broadway.

2. The relief sought fell broadly into four categories. These are:

1. a claim for rectification of a Deed of Surrender of Lease and Agreement to Lease that was entered into in connection with the lease, so that a certain payment would be treated as a payment of rent in advance under cl 25.11 of the lease;

2. a claim for declaratory relief and damages in respect of alleged breaches of cll 6.1, 25.6 and 25.9 of the lease occasioned by a failure on the part of the first defendant to install a new lift at the property, and the related issues of whether the plaintiff is thereby entitled to an abatement of rent pursuant to cl 10.1 of the lease and/or entitled to set-off against rent due under the lease;

3. a claim for declaratory relief and damages under both the Australian Consumer Law and under general law, arising from alleged misrepresentations made by the first defendant about the installation of the new lift, and a related issue of whether the plaintiff is entitled to set-off against rent due under the lease; and

4. relief against forfeiture in relation to a purported re-entry and forfeiture effected by the first defendant on 8 October 2018.

3. As a result of agreements made between the parties, the claims in (a), (c) and (d) above fell away entirely, and the claims in (b) above were considerably narrowed in their scope, during the course of the hearing. Various declarations, orders and notations were accordingly made by consent on the second day of the hearing, and on the day after the hearing.

4. One of the declarations made was a declaration in the following terms:

The Court declares that by:

(a)   failing to install a new lift on the Property by 7 June 2018;

(b)   failing to use its best endeavours between 7 June 2018 and 7 December 2018, to ensure that a new lift was installed on the Property;

(c)   allowing its contractors to undertake works associated with the installation of the new lift on the Property between 7 June 2018 and 7 December 2018;

(d)   failing to provide an operating lift on the Property between 7 June 2018 and 7 December 2018;

(e)   failing to allow the Plaintiff to use the basement area of the Property between 7 June 2018 and 7 December 2018; and

(f)   otherwise diminishing the Plaintiff’s useability of the Property between 7 June 2018 and 7 December 2018,

the First Defendant breached (Breaches):

(g)   clause 25.9 of the Ryals Lease;

(h)   clause 25.6 of the Ryals Lease; and

(i)   clause 6.1 of the Ryals Lease.

In addition, an order was made that:

The First Defendant pay damages to the Plaintiff, together with interest thereon, for the Breaches, with such damages to be assessed by the Court.

5. Accordingly, the issues remaining for determination were the assessment of damages for the breaches of the lease, and the related issues of abatement of rent and set-off.

6. In the plaintiff’s case three affidavits made by Mr Angus Ryals (the sole director of the plaintiff) and two affidavits made by Mr Terry O’Rourke, valuer, were read. In the first defendant’s case, affidavits made by Mr Lawrence Seow (a project manager employed by the first defendant), Mr Zhiqiang (Patrick) Huang (a manager employed by the first defendant), and Mr Christopher Milou, valuer, were read.

7. The second defendant, Motel Links Pty Ltd (in liquidation), was added as a party on the first day of the hearing. It was a necessary party to the proceedings because it was a party to the instrument the subject of the claim for rectification. Through its liquidator (Mr Grahame Ward), the second defendant consented to its joinder. It further indicated that it was aware of the orders sought for rectification, and that it submitted to the making of those orders.

Salient facts

8. The refinement of the issues in the proceedings has the consequence that much of the evidence adduced became insignificant. I set out below a summary of the evidence that is relevant to the remaining issues.

9. Prior to entry into the lease, the premises had been the subject of a lease from the first defendant to the second defendant. This lease, referred to as the Motel Links lease, was for a 10 year term terminating on 21 December 2027. The second defendant agreed to surrender the lease upon the terms contained in the Deed of Surrender of Lease and Agreement to Lease referred to earlier. The second defendant was under the control of Mr Ryals until it went into administration, and then liquidation, in September 2018. The Motel Links lease contained provisions that were, apart from those concerning the term, rent review, bank guarantee and cash security bond, in relevantly the same terms as the lease.

10. The lease provides in cl 3.1 for a rent of $1.4 million exclusive of GST per annum for the first year. The following provisions of the lease should be noted:

6.1   Quiet enjoyment

Subject to the Lessor’s rights under this Lease, if the Lessee is not in default the Lessee may occupy the Premises without interruption by the Lessor.

…

7.1   General obligation

The Lessee must:

(a)   (Permitted Use) use the Premises only for the Permitted Use, and keep the Premises open for business in accordance with the normal business hours attributable to Permitted Use;

“Permitted Use” is defined by cl 1.1 and Item 5 of the Schedule as:

Permitted Use

(a)   Hotel Rooms: minimum of 3.5 stars as accredited by Australian Tourism Industry Council (ATIC) or higher;

(b)   Shops at the front of building: various retail uses as per existing leases or as consented to by the Lessor; and

(c)   Basement: hotel/backpacker accommodation or any other uses as consented to by the Lessor.

…

10.1   Damage to Premises or Building

Subject to clause 10.2, this clause 10.1 applies if the Premises or the Building are damaged or destroyed:

(a)   (abatement) if the Premises:

(i)   cannot be used by the Lessee, the Lessee is not liable to pay Rent or the Lessee’s Contribution for the period that the Premises cannot be used; or

(ii)   are useable by the Lessee, but the useability is diminished because of the damage or destruction, the Lessee’s liability to pay Rent and the Lessee’s Contribution is reduced in proportion to the reduction in useability;

(b)   (no repair) if the Lessor gives the Lessee written notice that the Lessor considers that, in its absolute discretion, it is impracticable or undesirable to repair the damage, then either the Lessor or the Lessee may terminate this Lease by giving at least 7 days’ notice to the other and no compensation is payable in respect of that termination; and

(c)   (request to repair) within 14 days of the damage occurring the Lessee may request the Lessor in writing to repair the damage and:

(i)   if the Lessor does not notify the Lessee within 30 days of receiving the Lessee’s request that it intends to repair the damage; or

(ii)   the Lessor notifies the Lessee that it intends to repair the damage but does not do so within a reasonable time,

the Lessee may terminate this Lease by giving at least 30 days written notice to the Lessor.

10.2   Damage caused by Lessee

If the damage or destruction referred to in clause 10.1 is caused by the Lessee or the Lessee’s Agents:

(a)   clauses 10.1(a) and 10.1(c) do not apply; and

(b)   the Lessee cannot terminate this Lease under clause 10.1(b).

…

15.16   Payments under this Lease

(a)   The Lessee must make payments under this Lease:

(i)   to the Lessor (or to a person nominated by the Lessor in a notice to the Lessee) by the method the Lessor reasonably requires;

(ii)   without withholding any part of any payment by way of deduction, set off or counterclaim; and

(iii)   if no date for payment is specified, within 7 days of being asked by the Lessor.

…

25.1   Nature of the lease and use of the Premises

(i)   The Lessor discloses and the Lessee acknowledges that Lessor used to conduct a hotel business on the Premises and the majority of the Premises is being newly fitted out as hotel rooms of about 3.5 stars standard. A total of 48 rooms are so fitted. Notwithstanding the above, there is no warranty in relation to the quality and suitability of the fit out or the building as a whole in relation to its use as hotel business including but not limited to fire safety standards, development approval, hotel rating standard and occupancy rates, et cetera.

…

(v)   The Lessor and the Lessee acknowledge and agree that the basement is in need of attention and refurbishment in order to explore its potential as a profit generating venue and for any future use. Subject to the Lessor’s work herein, the Lessee will do all works necessary at its own costs including work of capital and/or structural in nature and obtain all necessary consent from the Lessor (if the basement is not used as hotel accommodation) and development approvals et cetera to ensure that the basement can be used accordingly. Any sublease of the basement must be conducted in accordance with clause 11 of this lease.

…

25.6   Installation and Replacement of Lift

The Lessor discloses that it is in the process of installing a new lift system in the Premises and the installation is expected to be effected around April 2018. However, the Lessor is not in a position to guarantee punctuality but will use its best endeavour in procuring such installation. The Lessee acknowledges and agrees that it will take out maintenance contract for the lift and will conduct all repairs to ensure that the lift is functioning properly. In the event of the lift requiring replacement during the term of the lease, the Lessee is required to effect such replacement at its own cost notwithstanding the fact that the air-conditioning system may be a capital item.

…

25.9   Lessor and Lessee’s works

The parties agree that the following works are to be conducted by the respective parties

Lessor’s work

Lessor must conduct the following works prior to or upon the commencement of the lease:

…

Lower Ground/Basement Tenancy

i.   Existing fire sprinklers are to be made compliant with the current open plan layout;

ii.   Demolition and removal of internal tenancy wall ready for painting;

iii.   Provide electrical sub-board for the tenancy;

iv.   Provide basic Lighting equivalent to standard office lighting of an open plan office;

v.   New Stairway from Broadway into the Lower Ground tenancy and if required to meet fire safety standard of a hotel;

vi.   Ventilation system as required by council;

vii.   Air conditioning Plan to a standard office environment excluding ducting to a cost of $70,000 only.

Lift installation

i.   Provide and install a new lift scheduled for about April 2018;

Lessee’s work

Subject to clause 20 of the lease, the Lessee is to conduct the following upon the commencement of or during the terms of the lease:

…

Lower Ground/Basement Tenancy

Council application and approval;

New sprinkler adjustments for the tenancy use;

Electrical wiring of the Tenancy;

Air-conditioning ducting and Installation;

…

25.12   Justification of Rental and Market rental

(i)   The Lessee acknowledges and agrees that the initial rent is calculated as follows:

a)   Basement/Lower level valued at $250,000 + GST P.A. at commencement of lease

b)   Street front retail shops valued at $150,000 + GST P.A. at commencement of lease

c)   48 hotel rooms are valued at $1,000,000 + GST, that is $20,833 + GST per room P.A. at commencement of lease.

…

25.13   Use of the Premises

(i)   The Lessee is entitled to the use of the whole premises as follows:

1.   48 hotel rooms – the lessee must continue to operate these hotel rooms as a 3.5 stars hotel rooms or higher.

2.   Shops at the front of the building – to honour any existing leases entered (as attached in Schedule 2) and subject to clause 11 of the lease, to continue to sublease and enjoy the benefit of any subleases entered by the lessee and other retail uses as consented to by the Lessor

3.   The basement – to develop and refurbish for use as hotel accommodation.

11. Despite the terms of the lease, it seems that in fact the hotel may have only 47 rooms. The rooms are located throughout the ground floor, first floor and second floor. The leased premises include, in addition, four retail shops and a lower ground floor/basement area. A survey plan showing the layout of each floor, including the basement, was attached to the lease.

12. Mr Ryals deposed in his affidavit sworn on 9 October 2019 that at the time the lease was entered into (which appears to be on or about 6 June 2018) works were being undertaken with respect to the lift at the premises and were yet to be completed. It is common ground that those works were not completed until 7 December 2018. Mr Ryals further deposed:

…currently the basement area is only used by Ryals to store some linen and this is a temporary measure pending the lifts becoming operational. In early April I moved a lot of furniture into the basement, this furniture has been steadily taken away however given the works on the lift and the fact that Ryals cannot use the space I have decided to leave furniture in the basement until it is empty and usable.

…

The lack of a working lift is causing significant loss and damage to the Ryals Hotel business. Currently, the hotel is located across four levels and stairs are required to be used for guests carrying luggage.

…

The primary practical and financial issues that have arisen as a result of the lift works include the following:

As a result of the lift not working, when a guest arrives to the hotel and realises that they are required to use stairs and no lift is available, they immediately become unhappy. This takes the polish off the rest of the good work and service that the staff of Ryals Hotel are providing.

Staff of Ryals need to carry guests’ luggage to and from rooms which creates extra work and potential occupational health and safety hazards.

There is a full time employee of Ryals whose sole job is to ferry linen and supplies to the various hotel levels. Needing to employ someone in this role causing Ryals to incur liabilities that it wouldn’t need to incur if the lift was operational.

The lack of a working lift hinders opportunity to build repeat business. Repeat business is a predominant source of income for all hotels. This will become particularly evident in the second year of operation of the hotel.

The lift works are occurring at basement level and Ryals has very minimal use of that area, despite paying $250,000 plus GST per annum for its use.

The construction work associated with the lift works is disruptive to hotel guests. Constructions work initially commenced at 7am which caused a great degree of difficulty with guests who were understandably distressed and unhappy with the noise. All of the guests demanded refunds due to their interrupted use of the rooms for sleeping. This caused reputational damage as well as financial loss to the business. I have since negotiated that construction will not begin until 10am.

There is mess created by the construction work that needs to be cleaned by the hotel cleaners whose focus should not have to be on clearing dust created from construction works and tradespeople walking through hallways.

13. On 3 August 2018 Mr Ryals sent an email to Mr Seow and Mr Huang. The email included the following:

Good Afternoon Lawrence and Patrick,

I wanted to touch base with you because I feel like the agreement at the beginning has not ben [sic] held up by your side and as a result I am losing a lot of money and the business is not viable.

As discussed previously the 2 major points of contention are:

1.   The lift – originally the lift was due in April, this was accepted by me. I did not and will not accept the extensive delay’s [sic]. This is costing me huge amounts of money. My experience is that a lift not working can reduce business by up to 50%.

2.   The basement – the basement works were due for completion in March, as you know this was not the case. This has caused significant losses and delays with my DA for the capsule hotel.

The Zhaos are extremely lucky that I did not have a tenant for the basement and I choose to do something on my own. If this was for a tenant with a shorter timeline there would have been a major dispute.

…

I think it is fair that we sit down and work on an appropriate period of rent abatement and an accurate timeline for the lift and any other works in order to make right with the parts of the agreement that have not yet been adhered to by the Zhaos.

14. On 6 August 2018 Mr Huang replied by email in the following terms:

I fully understand what has happened to you.

How about let us meet up with Ada on this Thursday 11am?

15. In his second affidavit (sworn on 1 April 2019) Mr Ryals referred to various conversations he had with hotel guests (or potential guests) concerning the lack of a lift in the premises. Mr Ryals also attached a number of photographs of the basement level taken on 30 August 2018, 17 October 2018 and 22 October 2018. Mr Ryals deposed that the basement level remained in a similar state to that shown in the photographs until the lift works were completed on 7 December 2018.

16. Mr Seow stated in his affidavit that as a project manager he did not have any specific knowledge or expertise in relation to the lift works. However, he deposed:

It did not surprise me that the Lift Works would take around half a year to complete as advised by [the lift contractor] seeing the works involved a major renovation of the hotel.

17. Mr Seow deposed that on about 17 May 2018 an arrangement was made with the lift contractor for work to start at 9:00am instead of 7:00am. There is evidence that some guests were complaining about the early start. However, it appears that on at least one occasion in mid-October 2018, works started at 7:00am, and Mr Ryals again requested that works not start until after 9:00am.

17. The affidavit of Mr Huang did not contain any evidence of significance to the issues that remain for determination.

18. The parties fell into dispute in September 2018 over various issues, including the incomplete lift works. The September 2018 rent was not paid. After issuing a Default Notice on 4 October 2018, the first defendant sought to re-take possession of the premises on 8 October 2018 by means of security guards. This was resisted by the plaintiff, and the police were called. The plaintiff deposed (in his affidavit of 9 October 2018):

At the time of swearing this affidavit, to the best of my knowledge, the security guards engaged by Zhaos remain at the Premises. In addition to the problems created by virtue of having no working lift, the noise issues arising from the works being conducted to the lift (which are now expected to continue for at least 2 months) and the presence of the security guards, Ryals Hotel is suffering loss and damage and these matters are having a negative impact on guest experiences at the hotel.

20. Mr Ryals attached various documents to his affidavit. These included a profit and loss statement for the period from March 2018 to September 2018. Presumably, this statement concerns, in part, trading by the second defendant prior to the commencement of the lease. Mr Ryals also attached a balance sheet of the plaintiff as at September 2018, and a 12 month cashflow forecast for Ryals Hotel Broadway from June 2018 to May 2019. Mr Ryals deposed that he prepared the forecast:

…based on my knowledge of the hotel industry, current bookings and the impacts the lift works are having on the running of the hotel business.

21. The proceedings were commenced on 9 October 2018 in the midst of the attempt to re-take possession of the premises. The plaintiff approached the Duty Judge (Hallen J). On the basis of mutual undertakings given inter partes, the proceedings were adjourned until 10 October 2018. On that occasion, Hallen J made orders by consent including an interlocutory injunction restraining the first defendant until 25 October 2018 from re-taking possession or treating the lease as terminated. It was evidently envisaged that the parties would attend a settlement conference on 16 October 2018. When the matter was next before the Court, on 25 October 2018, orders were made by Rein J including an interlocutory injunction in similar terms to the earlier injunction except that it was expressed to operate until further order. Rein J also noted an agreement between the plaintiff and the first defendant which provided, on a without prejudice basis, for the plaintiff to pay only 75% of the rent payable under the lease until completion of the lift installation works. Pursuant to that agreement, the plaintiff paid a smaller amount of rent in November 2018 than was payable in respect of that month. The interlocutory injunction ordered on 25 October 2018 remains in operation pending further order of the Court.

22. In cross-examination, Mr Ryals said that the profit and loss statement had been prepared by his then bookkeeper and accountant from Retail Solutions Group. Mr Ryals said that he believed the statement to be correct but did not go through it line-by-line to check it. Mr Ryals confirmed that the balance sheet was also prepared by Retail Solutions Group. He said that he checked the accuracy of the document by going through it “at some length” with the accountant. In relation to the cashflow forecast, Mr Ryals said he thought he prepared it prior to June 2018. However, he then said that he was not sure whether the hotel sales figures (or at least some of them) were forecast or actual figures.

23. Later in his cross-examination, Mr Ryals identified another profit and loss statement (contained in Exhibit C) as one prepared by his bookkeeper and accountant. Mr Ryals said in effect that he had gone through the document to check its accuracy but “as I’m not an accountant, I placed my faith in my accountant, and agreed with him”.

24. It should be noted that Mr Ryals gave evidence in cross-examination to the effect that in the period to December 2018 the hotel operated with two shifts, and that apart from himself there were usually two other employees. Mr Ryals said that in periods where there was only one other employee he would do “double shifts”.

25. Mr Ryals confirmed in cross-examination that the plaintiff had not paid the rent under the lease in the months of March, April and May 2020. Mr Ryals said that this was a consequence of the COVID-19 pandemic, in particular the governmental actions taken in response to it. Mr Ryals gave evidence that whilst the hotel is still operating “online”, it has had almost no bookings since about mid-March 2020.

Valuation evidence

26. Mr O’Rourke is a valuer with considerable experience in the area of “going concern accommodation assets”. He inspected the premises on 23 October 2018 and 19 March 2019. His report was dated 1 April 2019.

27. Mr O’Rourke was asked to provide his opinion as to whether the property was damaged as a consequence of the lift works and, if so, the extent to which the useability of the property has been diminished because of such damage. This matter is concerned with the plaintiff’s claim for an abatement of rent pursuant to cl 10.1 of the lease. Mr O’Rourke was also asked to provide his opinion as to what damages, if any, the plaintiff has suffered as a consequence of the failure to complete the lift works by about June 2018.

28. In approaching that question, Mr O’Rourke considered numerous customer reviews of the hotel in respect of the period from March to December 2018, and placed some emphasis upon industry benchmark data obtained through STR Global Ltd (“STR”). As stated by Mr O’Rourke in his report:

I have obtained a report undertaken by STR Hotel and Data Benchmarking – STR, Inc. and STR Global Ltd (STR) from the Plaintiff who is an STR subscriber. Hotel owners and operators benefit from STR benchmarking capabilities. Their reports provide property performance compared to its competitive aggregate and general market, and allows the business operator to follow trends in occupancy, average daily rate (ADR), and revenue per available room (RevPAR).

There are six (6) scale Hotel groups analysed by STR including Luxury, Upper Upscale, Upscale, Upper Midscale, Midscale and Economy.

Based upon my market analysis and onsite inspection, it is my opinion that the subject hotel business represents a classification between the Upper Midscale and Upscale segment of the Sydney Hotel market (assuming operational lift).

The ADR is a statistical measure that represents the average rental income per paid occupied room in a given time period.

RevPAR is another statistical measure calculated by multiplying a hotels ADR by the occupancy rate.

The ADR, Occupancy Rate, and RevPar are fundamental in measuring the businesses financial performance.

29. After setting out tables of such data and graphic comparisons between the performance of the plaintiff’s hotel and industry benchmarks (in the period from February to September 2018) Mr O’Rourke continued:

Guest reviews and Hotel trading information provided confirm that the absence of an operational lift within the four level building is a major factor that prevented the business from operating at optimal levels and fulfilling guest expectations.

The quality of the recently upgraded and refurbished subject Hotel is at a 4 star standard, and this combined with the ideal location of the Property should dictate far higher levels of business performance under current competent management than the levels achieved during the “lift installation works” period, as evidenced by the industry benchmarking/comparison undertaken.

In order to measure the damage sustained as a consequence of the Lift Works, I have undertaken an analysis of the hotel competition in comparison to the subject Property. I have also undertaken analysis of the trading performance of the Ryals Hotel business over the instructed period (June to 7 December 2018).

The reports and graphs depicted under Section 14.03 highlight the fact that the subject hotel business is performing well under market expectation in comparison to industry benchmarks. This is particularly evident in relation to the Occupancy Rate at 63.9% in comparison to the average industry participants of 80.2% over the six month period in question.

Furthermore, the RevPAR for the subject over the same period of $102.66 is well below the Midscale classified hotels industry benchmark at $122.41.

30. Mr O’Rourke relevantly described his valuation methodology as follows:

In order to assess the damages the Plaintiff has suffered as a result of failure to complete the Lift Works by about June 2018, I have utilised both the “Direct Comparison Approach”, and the “Before and After” methodology. These methods involve the assessment of the value of the Hotel’s net trading position in the “before” scenario (with no operational Lift), and the value of the Hotel’s net trading position in the “after” (with operational Lift). The difference between the two values assessed therefore is the value of the impact, or measure of damages the Plaintiff has suffered in monetary terms.

The “Before” assessment represents the performance of the Hotel business without an operation Lift. I have relied upon the financial trading information provided, and undertaken minor adjustments as deemed appropriate in order to assess the net operating profit (after rent) of the going concern for the 190 day period (1 June to 7 December 2018) as instructed.

I have utilised the direct comparison with similarly classified Hotel operations in Sydney to deduce a market based trading position under the assumption that there is an operational Lift within the business during the appropriate 5 month [sic] trading period.

31. Mr O’Rourke evidently relied upon various items of financial information provided by the plaintiff, including the profit and loss statement for the period March to September 2018, monthly trading figures for the period March to September 2018, and the 12 month forecast prepared by Mr Ryals. He had regard to “current tariff and occupancy levels within the Hotel business” and the industry benchmark evidence in order to derive a maintainable occupancy and trading level based on the assumption of an operational lift.

32. Mr O’Rourke proceeded to set out his assessments of the net operating profit business from 1 June 2018 to 7 December 2018, with and without an operational lift (see the table at paragraph 96 of the report). These assessments yielded figures of $438,352 and $24,812 respectively, a difference of about $413,500. Mr O’Rourke continued:

The assessed trading position of the Property without an operational Lift is a Net Profit of $24,812 for the scheduled 190 day period analysed.

The Net assessed trading position of $438,352 (with Lift) for the same scheduled 190 day period analysed is considered somewhat conservative given the potential classification of the Property between the Upper Midscale and Upscale segment of the Sydney Hotel market. Hotels within these sectors of the market attract superior occupancy and higher ADR’s than those adopted within this assessment.

I have allocated total loss of potential revenue (rental income) for the 6 month period to the Basement tenancy area at $125,000, due to occupation by Lift installer. This represents 50% of the agreed rental value for this area of $250,000 per annum.

33. Mr O’Rourke was therefore of the opinion that the damages due to the failure to complete the lift works were $413,500. This amount includes $125,000 in respect of the basement area.

34. As for the abatement of rent issue, Mr O’Rourke expressed the opinion that the property had been damaged as a consequence of the lift works, and that the useability of the property had been diminished due to the damage. He stated:

The Plaintiff has had limited use of the Basement area during the lift installation period, due to it being used by Schindler who were undertaking the Lift Works. Part of the basement was being utilised by the Plaintiff as storage, although the presence of the Lift installation team and the previous incomplete nature of Lift Works prevented commercial use of the Basement by the Plaintiff.

35. In cross-examination, Mr O’Rourke said that he was aware that there was no approval relating to the way the basement could be utilised by the plaintiff. He conceded that he made no enquiries about the seeking of a development approval from the Council in relation to the use of the basement area. However, he said that Mr Ryals had told him that he was interested in obtaining approval for a microbrewery, and was also considering converting the area into a gym. Mr O’Rourke said that he thought that the basement could be used for a number of things as part of the operational hotel.

36. Mr O’Rourke conceded that the damages calculation should only be in respect of the 26 week period from 6 June 2018, not the 27 week period he used.

37. Mr O’Rourke agreed that he did not have regard, in his profit calculations, to any “ramp up period” for the hotel business. Mr O’Rourke explained that the site had previously been used as a hotel and had been “newly badged” and completely refurbished to at least a 3.5 star standard, so there would be a honeymoon period that might mitigate any ramping up period.

38. Mr Milou is also a valuer with considerable experience in the area of going concern properties including hotels, motels and serviced apartments. In essence, Mr Milou was asked to provide his opinion on the same matters that Mr O’Rourke considered. Mr Milou inspected the property on 23 May 2019. His report is dated 23 July 2019.

39. Mr Milou undertook an assessment of reviews of the plaintiff’s hotel by customers who stayed there in the period from June 2018 to December 2018. These reviews were obtained from internet sites Booking.com, Trip Advisor and Google. Mr Milou stated that such reviews are a good indicator of performance of the hotel in general. In relation to his assessment of the reviews on each of the sites, Mr Milou expressed the opinion that “the non-functioning lift was a small component of some of the negative feedback”. Mr Milou identified a number of other factors which appeared to result in a negative guest experience. He said that there were thus multiple factors that impacted negatively on the business throughout the period. These other factors included noise from common areas, adjoining rooms and traffic; dissatisfaction with breakfast; management or customer service issues; air-conditioning not functioning properly; and cleanliness or maintenance of rooms. Mr Milou concluded:

Of the total 194 reviews over the prescribed period, I identified 28 reviews which mention the non-functioning lift, which included negative and neutral overall reviews. This reflects 14.4% of total reviews identified. With regards to noise relating to lift works, I have only identified 4 reviews in total, which were negative or neutral, which reflects a percentage of 2.1% of total reviews. In my view, based on the reviews identified, the lift works do not appear to be a significant issue amongst the reviewers/guests, with a number of other negative factors identified being in the control or management of the hotel Operator/Lessee.

40. Mr Milou expressed the view that the plaintiff’s hotel was of approximately 3 to 3.5 star standard, not the 4 star standard suggested by Mr O’Rourke. I note in passing that in cross-examination Mr O’Rourke conceded that he was incorrect to say the hotel was of 4 star standard, but he maintained that it was at least of 3.5 star standard. Mr O’Rourke further stated that his analysis of STR data was based on their Midscale to Upscale grades, which are equivalent to 3.5 to 4 stars. Mr Milou took the view that the hotel would fall within the STR grades of Midscale to Upper-Midscale.

41. Mr Milou stated that when considering a market data set for a particular hotel it is desirable to have a more targeted data set “which paints a more accurate picture of the performance of the market in which the Property performs”. For that purpose, Mr Milou selected five hotel properties (in the Midscale and Upper-Midscale grades) as being comparable to the plaintiff’s hotel. In cross-examination, Mr Milou said that these hotels were not “directly comparable” but they are “comparable properties” and “then you have to make comparisons with that data set”.

42. Mr Milou used the data in respect of those five properties to derive figures for Occupancy Percentage, Average Daily Rate (“ADR”) and Revenue Per Available Room (“Rev Par”) for the period June to December 2018 (see the table at paragraph 68 of the report). Mr Milou continued:

In order to assess the damages, I have considered the Before and After approach. This Before and After Methodology involves the assessment of operational performance of the property in the ‘Before’ scenario (with no operational lift) being the actual historical data provided and the ‘After’ scenario (with an operational lift) having regard to the analysis of the net operating position of the property assuming the lift was in place. The difference between the Before and After Approach conclusions should give a basis to determine the damages.

However, this difference needs to be adjusted or apportioned given that the actual performance of the Property over the period was also impacted by other factors, such as service levels, noise from people in common areas, maintenance of rooms etc. The full difference in my view between the actual performance of the property in the Before approach to the market based performance in the After approach can not be fully attributed to the Lift Works.

43. Mr Milou considered the actual performance of the hotel against the figures obtained using the five comparable properties. He noted that the hotel’s Occupancy Percentage was below the competitor set. Mr Milou stated:

With regards to occupancy the property has performed below the competitor set. This would be expected given that the property would be in a ramp up period and still establishing itself in the market place, given the refurbishment, rebranding and repositioning of the property in the market place. This change in occupancy is also reflected in the Lessee’s forecast.

In comparison to the Lessee’s forecast the property outperformed the forecast in the months of June and July, however underperformed in the following months to December by an average of 10.5 percentage points. Overall however as an average between June and December 2018, the property underperformed the Lessee’s forecast by 6.9 percentage points. In my view a proportion of this could be attributed to the Lift Works but also to the Lessee’s operational performance, robustness of the initial forecast and other issues raised by the online reviewers over this period.

44. In relation to ADR Mr Milou noted that the hotel outperformed the competitor set by about 5% over the period, and overall underperformed against the forecast by 7.9%. In relation to Rev Par, Mr Milou stated:

RevPar is a function of both Occupancy and ADR (Occupancy x ADR) and is a tool utilised in the industry to compare the overall headline performance of a hotel. The property performed below the competitor set overall at an average of 24%. This in my view is partly attributed to the fact that the property was in a trade up period.

In comparison to the Lessee’s forecast the property underperformed in most months with the exception of November 2018. Overall the average underperformance in comparison to the Lessee’s forecast was 14.6%. As mentioned previously, in my view a proportion of this could be attributed to the Lift Works but also to the Lessee’s actual operational performance, robustness of the initial forecast and other issues raised by the online reviewers over this period.

45. Mr Milou continued:

Taking into account the property’s actual performance in comparison to the competitor set but also the Lessee’s initial forecast, I am of the opinion that the property has underperformed due to a number of reasons. The data shows that the property underperformed the competitor set by approximately 24%, however given the Property would have been in a ramp up period, part of this underperformance can be attributed this ramping up of business.

The Lessee also undertook its own forecast. My understanding is that this was undertaken prior to commencing operations. The forecast did include a fluctuation of occupancy on a monthly basis partly attributed to a ramping up of a new business and partly due to seasonality. Overall the property actually underperformed the forecast by approximately 14.6%. Partly due to the Lift Works, but also in my view partly due to a number of other factors.

…

In my view the under performance of the property must be less than the difference (24%) in comparison to the competitor set given that the Property was in a ramp up period. In addition, the 14.6% underperformance to the Lessee’s forecast in my view is attributed to a number of factors including as part, the Lift Works. It would be difficult in my view to apportion the property’s underperformance compared to the Lessee’s forecast to the various factors (which include the Lift Works) given that this process would be a highly subjective assessment. Assuming that 100% of this underperformance was attributed solely to the Lift Works then an appropriate underperformance factor would be in the region of 15%. In my view however the underperformance of the actual results should be in the region of 10% to 15%. For the purpose of this assessment I have adopted a rate of 12.5%.

I highlight that although [sic] this is a subjective assessment. There is no standard valuation methodology to derive a definitive answer for damages, however I used my hotel valuation experience, facts provided and hotel data in forming my opinion.

46. Proceeding on that basis, Mr Milou determined that accommodation income with an operating lift would have been $1,003,490 compared to his adjusted actual figure of $878,054. That is a difference of $125,436. When costs and expenses are taken into account, the difference in net operating profit is $112,142. Accordingly, Mr Milou expressed the opinion that the damages sustained as a result of the lift works not having been completed was $112,142. Mr Milou did not include any amount in respect of the basement area.

47. In relation to the abatement of rent issue, Mr Milou did not think that the property suffered any damage as a consequence of the lift works. Mr Milou further stated that whilst the lift works had some impact upon the useability of the property, he considered that the impact upon the hotel business was nominal.

48. In cross-examination, Mr Milou said that one reason why he did not include any amount for the basement area was a clause in the lease requiring the area to be used for accommodation purposes. He said, in effect, that he excluded any income from the basement in the relevant period because a period of time would be required in order to obtain a development approval. Mr Milou accepted that it would be manifestly unfair to the tenant if it was paying rent for an area that had been taken over by the landlord, but said that under the lease the tenant could only use the basement for accommodation purposes. Mr Milou said that he looked at the issue from a loss of earnings perspective, not whether rent should be rebated.

49. Mr Milou was asked a series of questions about the data he obtained in relation to the five comparable hotels. Mr Milou agreed that as a starting proposition that data set would give an indicative level of revenue for the plaintiff’s hotel.

50. A calculation based on the RevPar figures from that data set yields a total revenue figure of about $1,205,000 for the period from 7 June 2018 to 7 December 2018. The first defendant accepts the accuracy of the calculation. The $1,205,000 figure is about $327,000 higher than Mr Milou’s adjusted actual figure of $878,054. Mr Milou agreed that his figure was significantly under the average for that data set. The $1,205,000 figure is about $200,000 higher than the accommodation income with an operating lift as determined by Mr Milou. He agreed that in his view the $200,000 difference is explained by factors other than the absence of the lift.

51. Mr Milou said that he primarily relied upon the data from the comparable hotels, which he regarded as more reliable than the plaintiff’s forecast, which is “highly subjective”. Mr Milou initially declined to accept that the forecast was probably understated or conservative.

52. A calculation (again accepted by the first defendant as accurate) based on the plaintiff’s forecast figures for RevPar yields a total revenue figure of about $1,086,000 for the period from 7 June 2018 to 7 December 2018. Mr Milou agreed that there was a significant difference between that figure and the $1,205,000 figure, and he seemed to accept that this difference was explained by the fact that the forecast was a very conservative one. However he promptly qualified his answer by stating that as the hotel was in a ramp up period it is difficult to say that the forecast is conservative.

53. Mr Milou did not accept that another way of approaching the matter would be to average the figures from the comparable hotels and the figures from the forecast. He said that was not a proven valuation methodology, although he supposed that “it’s one scenario”. Mr Milou later said that he did not agree that it was a reasonable approach.

54. In relation to customer reviews, Mr Milou said that it was necessary to look at the frequency of complaints. He did not accept that the complaints about matters other than the lift pale into insignificance compared to complaints about the absence of a lift. He agreed that over the relevant period there were not many negative reviews.

55. Mr Milou accepted that a portion of customers would give a rebranded and refurbished hotel a go, but maintained that it was not normal to see a start-off hotel with high occupancy in the first month because of a honeymoon period.

56. Mr Milou later stated that there was no standard valuation methodology to work out what the damages might be in this instance. He also said that the calculation based on the RevPar figures from the comparable hotels data set was a methodology similar to the one he used. When asked about an approach based on a blend of those figures and the RevPar figures from the plaintiff’s forecast, Mr Milou said that he accepted it was one way or one option, but it was not a standard valuation methodology he had seen used. He did not agree that it was the best option.

57. Mr Milou agreed that his assessment of the various “discount factors” was a subjective estimate, with no percentage identified for each factor.

58. In re-examination, Mr Milou said that having considered the various approaches put to him in cross-examination, he stood by the content of his report.

59. Mr O’Rourke prepared a second report, dated 18 October 2019, in response to Mr Milou’s report. In relation to the assessment of damages, Mr O’Rourke stated that he agreed with the “Before and After” methodology employed by Mr Milou. However, Mr O’Rourke took issue with Mr Milou’s discounting of the level of underperformance from 24% to 12.5% in order to reflect factors other than the lack of an operational lift. Mr O’Rourke stated:

I contend that although the property has been rebranded, it is an established accommodation provider in this location. There would also be somewhat of a “honeymoon period” of trade during the initial phase of re-opening after extensive renovations that would negate any requirement to discount maintainable trade levels during the period analysed.

…

I disagree with Mr Milou’s approach in further discounting the underperformance of the subject hotel for the other factors such as service levels, noise, maintenance of rooms etc. If this approach were to be equitable, all of the competition set data relied upon within Mr Milou’s Before and After assessment would have to be similarly discounted. These “other factors” impacting trade performance are not unique to the subject property, and are reflected in the occupancy, ADR and RevPar performance of the competitor set.

60. Mr O’Rourke maintained his position in relation to whether the lift works caused damage to the property and whether such damage diminished the useability of the property. He expressly disagreed with Mr Milou’s opinion that the impact of the lift works upon the business was only nominal.

Determination

61. The terms of the declaration that is set out at [4] above require the Court to proceed on the basis that the plaintiff has established that the first defendant breached cll 6.1, 25.6 and 25.9 of the lease by the conduct described in the declaration. Those provisions (which are set out at [10] above) concern the general obligation on the part of the first defendant not to interrupt the plaintiff’s occupation of the leased premises, and specific obligations to install a new lift in the premises. In essence, the offending conduct was the failure to install the new lift as required by 7 June 2018, the works and associated inconvenience instead continuing until 7 December 2018.

62. The general principle to apply in assessing damages for breach of contract is that stated by Parke B in Robinson v Harman (1848) 1 Exch 850 at 855:

The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

This principle, often described as the “ruling principle”, has been confirmed by the High Court on many occasions (see, for example, Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 at [13]).

63. Accordingly, it is necessary in the present case to consider the position the plaintiff would have been in had the contract been performed in accordance with its terms; that is, had the breaches not occurred. That is not an altogether straightforward matter in this case.

64. It can be accepted (as it was by both parties) that the breaches caused the plaintiff’s hotel business to be adversely affected, in particular by bringing about a reduction in the revenue and hence profitability of the business. The difficulty arises in assessing the extent of the adverse affectation. The plaintiff, of course, bears the onus of proving the extent of its loss (see Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768; [2003] HCA 10 at [37]).

65. The present case is an example of one where it is not possible to adduce precise evidence of loss. The absence of a working lift, and the carrying out of the lift works during the relevant period, was capable of causing loss by detracting from the quality of the experience enjoyed by hotel guests, and hence the overall reputation of the hotel. The manner in which particular losses arose, and the extent to which an overall loss was sustained, are matters which are not able to be directly observed, or measured with exactitude. It is thus a case where estimation, if not guess work, is required in order to assess loss (see Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83 and 138; Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (supra) at [38]). Nevertheless, as further stated in those decisions, difficulties of that nature do not relieve the Court from its responsibility to assess damages. The Court is obliged, despite such difficulties, to estimate damages as best it can.

66. I accept that both Mr O’Rourke and Mr Milou faithfully attempted to assess the likely affect upon the hotel business of the lack of an operational lift, and the carrying out of the lift works, in the 6 month period from 7 June 2018 to 7 December 2018. It is evident from the approaches taken by them in their respective reports, and it became even clearer in the course of the cross-examination of Mr Milou, that the assessments involve a significant degree of subjective judgment on matters about which minds may reasonably differ. The testimony of the valuers has been considered in that light alongside the other evidence adduced.

67. Dealing first with Mr O’Rourke’s evidence, it should be noted at the outset that if his allowance of $125,000 in respect of the basement area is put aside, his assessment of loss of profit is $288,500. This figure needs to be reduced by around $10,000 because it was incorrectly based on a period of 27 weeks instead of 26 weeks. More fundamentally, it seems to me that even allowing for the difficulties inherent in the task at hand, some aspects of Mr O’Rourke’s assessment undermine its reliability.

68. For example, some of the STR data he relied upon appears to be concerned with the period prior to June 2018, yet the manner in which this information was used is not clearly explained. Some information of this character was employed in Mr O’Rourke’s selection of occupancy rates and ADR (which in turn give the RevPar) for trading in his assumed operational lift scenario. In addition, it seems that Mr O’Rourke relied upon evidence of the performance of the Sydney market more generally, rather than evidence of the performance of demonstrably comparable hotels. Coupled with that matter, Mr O’Rourke’s derivation of “a maintainable occupancy and trading level based on the assumption of an operational lift” remained somewhat opaque. I accept that a deal of subjective judgment based on experience of properties of this character is involved, thus rendering a clear exposition elusive. Nonetheless, taking the above factors into account, I find that Mr O’Rourke’s assessment of diminished profit cannot be considered as reliably accurate. Accordingly, I do not accept that the plaintiff has established that it suffered loss to that extent.

69. I turn now to Mr Milou’s evidence. Mr Milou assessed the difference in net operating profit between the hotel having an operational lift, and not having an operational lift, as $112,142. That calculation is fundamentally based on a comparison between the hotel’s actual performance during the relevant period and the average performance during the same period of five comparable hotels. Mr Milou stated that the five hotels were not “directly comparable” but they were nonetheless “comparable”. The five hotels were within the STR grades of Midscale to Upper-Midscale. This seems reasonable having regard to the concession made by Mr O’Rourke that the plaintiff’s hotel was only of 3.5 star standard. The five hotels were selected due to their location on the southern end of the Central Business District and City fringe. The plaintiff did not seek to attack the selected hotels as not comparable or as otherwise not suitable for the purposes of assessing how the plaintiff’s hotel may have performed had the lift been installed by 7 June 2018. Indeed, the proposition was put to Mr Milou in cross-examination that as a starting proposition the data set he obtained would give an indicative level of revenue for the plaintiff’s hotel. In my opinion, Mr Milou was correct in stating that “a more targeted data set” such as this will give a more accurate picture of the performance of the market in which the plaintiff’s hotel participates. Unlike the broader market evidence apparently utilised by Mr O’Rourke, I accept that this market evidence provides a reasonably firm basis for comparison with the actual performance of the plaintiff’s hotel.

70. It is accepted that a calculation based on the RevPar figures from that data set yields a total revenue figure of about $1,205,000 for the period 7 June 2018 to 7 December 2018. That is about $327,000 higher than Mr Milou’s adjusted actual figure of $878,054. However, Mr Milou considered that the accommodation income with an operating lift would have been only $1,003,490, a figure about $202,000 below the figure derived from the comparable data set. In other words, Mr Milou thought that about $200,000 out of the $327,000 difference could be attributed to factors other than the absence of a functioning lift.

71. Mr Milou justifies this difference by reference to adjustments that he says ought be made to take into account the fact that the plaintiff’s hotel was in a ramp up period, and factors present other than the absence of the lift that are likely to have brought about the underperformance of the plaintiff’s hotel. For the reasons which follow, I am not convinced that those factors warrant adjustments of the magnitude suggested by Mr Milou.

72. The concept of a ramp up period can be understood in general terms to refer to a period which a newly established hotel business requires in order to find its feet and begin to generate income at optimum or close to optimum levels. Mr Milou did not explain the concept in more specific terms, or attempt to illustrate the likely effect or extent of a ramp up period for a hotel similar to the plaintiff’s hotel. In this regard, I note that the hotel appears to have commenced trading, through Motel Links Pty Ltd, in February 2018, so it had about 4 months of trading under essentially the same management prior to the relevant period. This trading commenced after an extensive renovation of the premises. Further, as pointed out by Mr O’Rourke, the property is an established location for an accommodation business. Against that, I accept Mr Milou’s evidence that it is not normal to see a start-off hotel with high occupancy from the outset due to a honeymoon period. I note further that Mr Ryals himself, in his forecast, allowed for somewhat lower occupancy rates in the period from June to September 2018. Taking all of these factors into consideration, and in the absence of a tangible explanation for the suggested adjustment, I find it difficult to accept that in the circumstances here a large adjustment should be made for the effects of a ramp up period.

73. In relation to factors other than the absence of a lift, I do not think that too much weight can be placed upon Mr Milou’s analysis of the customer reviews. It does appear that the absence of a lift (together with noise associated with the ongoing lift works) was as frequently mentioned as any other issue at least insofar as Booking.com and TripAdvisor is concerned. For some reason, complaints about the lift appeared relatively less frequently in the Google reviews. However, the limited extent of the data, and the arbitrary nature of any classification of types of complaint, means that it is difficult to draw any firm conclusions from the data.

74. At a general level the data suggests that potential custumers doing some research into the hotel are likely to have become aware that aside from various perceived faults or deficiencies concerning customer service and the general quality of the hotel, there was no functioning lift. It is likely that at least some potential customers would find that to be a reason to seek a similar hotel that did not have that problem. Further, whilst many of the various other faults and deficiencies that feature in the customer reviews are likely to feature in the reviews of competitor hotels (as, for example, shown in the course of the cross-examination of Mr Milou), the same is unlikely to be true in relation to the lack of a functioning lift. There is some force in the criticism made by Mr O’Rourke in his report in reply about discounting the performance of the hotel for such other factors, which are not unique to the plaintiff’s hotel, and hence are already likely to be reflected in the data obtained from the comparable properties.

75. Taking all of the above matters into account, it seems to me that a considerably smaller adjustment than that made by Mr Millou should be applied to the revenue figure derived from the comparable hotels to account for a ramp up period and factors other than the absence of a functioning lift. Adopting Mr Milou’s adjusted actual revenue figure of $878,054, which is $327,030 below the total revenue derived from the comparable hotels data set, Mr Milou would attribute about $202,000 of the difference to a ramp up period and factors other than the absence of a functioning lift. That is, about 62% of the underperformance is attributed to those matters, and just over 38% of the underperformance is attributed to the lack of a lift. In my estimation, the evidence viewed overall suggests that an adjustment of no more than one-third would be appropriate to cater for lower occupancy rates in the early months of the relevant period, and faults or deficiencies other than the lack of a functioning lift.

63. On that basis, the revenue figure of $1,205,084 derived from the comparable hotels would be reduced by $109,010 to $1,096,074. Mr Milou accepted in cross-examination that calculations of the type set out on pages 20 and 21 of Exhibit E would be appropriate in order to derive a figure for net operating profit assuming that there was a functioning lift. If a calculation of that type was performed, based on revenue of $1,096,074, a net operating profit of approximately $127,720 is derived. That figure is $189,142 higher than Mr Milou’s adjusted actual net operating loss of $61,422 for the relevant period. Taking this approach, which I consider to be fair and reasonable in the circumstances, it can be concluded that the plaintiff suffered a loss of about $190,000 due to the failure of the first defendant to install the new lift by 7 June 2018.

64. As it happens, that loss is similar to (about $10,000 more than) the loss if calculated on the basis that the hotel performed in accordance with the forecast prepared by Mr Ryals. However, I do not place any reliance upon the forecast as a factor which supports the calculation of loss. In my view, so little is known about the manner in which the forecast was compiled that it would be unsafe to give the figures in it any significant weight. I am thus not prepared to hold, as suggested by the plaintiff, that the forecast should be regarded as conservative. For the same reasons, I am not prepared to adopt the average of the revenue derived from the forecast and the revenue derived from the comparable hotels. The only real significance of the forecast is that it tends to suggest that occupancy rates were expected by Mr Ryals to be somewhat lower in June to September 2018 than in the following months. To that extent it provides some support for the notion that the business was still in something of a ramp up period at that time.

65. I appreciate that the above assessment of loss is one that involves a degree of estimation, if not guesswork. I nonetheless consider that the evidence adduced, in particular that of the valuers, provides a rational basis for the conclusion reached (see Zorom Enterprises v Zabow (2007) 71 NSWLR 354; [2007] NSWCA 106 at [84] per Campbell JA).

66. The above assessment does not include any separate amount in respect of the basement. Of course, to the extent to which the inability of the plaintiff to make use of the basement throughout the relevant period may have contributed to a reduction in income, it is included within the assessed loss of $190,000. However, it is not appropriate in my view to award any additional amount in respect of the basement. In particular, I do not accept that the plaintiff is entitled to damages of $125,000 because the first defendant failed to allow the plaintiff to use the basement during the relevant period. It is true that under the terms of the lease, $250,000 out of the total initial rent of $1,400,000 per annum was attributed to the basement (see cl 25.12). It does not follow, however, that if the first defendant’s breaches of the lease deprived the plaintiff of use of the basement for 6 months, the plaintiff has suffered damage in the amount of $125,000.

67. Subject to the terms of the lease, the plaintiff was always under an obligation to pay the rent, including the component attributed to the basement. That is to say, breach of the lease by the first defendant does not itself absolve the plaintiff from its obligation to pay rent. The relevant question is what damage has the plaintiff sustained as a result of the breach.

68. For the above reasons, it cannot be simply concluded that the plaintiff lost $125,000 as a result of the first defendant’s breaches. It is in any event difficult to see how deprivation of the use of the basement during the relevant period prevented the plaintiff from earning any income from the basement itself. As pointed out by the first defendant, the permitted use of the basement was hotel/backpacker accommodation and other uses consented to by the lessor, and the effect of cll 25.1(v), 25.9 and 25.13 was to oblige the lessee to obtain Council approval and undertake works so that the basement could be used as a profit generating venue. There was evidence that on 31 October 2018 the plaintiff lodged an application with the Council for approval of a capsule hotel development in the basement. No approval had been given, let alone acted upon, by 7 December 2018.

69. The plaintiff sought to bring this aspect of its claim within the principles discussed in Commonwealth of Australia v Amann Aviation Pty Ltd (supra) concerning damages for wasted expenditure. I do not think that those principles apply in the present circumstances. It is not a case of a contract where no profit would have been earned by the plaintiff, or a situation where the plaintiff is unable to show that it suffered any loss of profit. It is thus not a case where the plaintiff is nonetheless able to recover damages for wasted expenditure reasonably incurred in the performance of the contract (see Commonwealth of Australia v Amann Aviation Pty Ltd (supra) at 81, 104, 126, 135, 155 and 164).

70. The next matter to consider is the plaintiff’s claim for abatement of rent pursuant to cl 10.1 of the lease. This claim depends upon proof that the premises or the building have been damaged or destroyed within the meaning of cl 10.1.

71. The plaintiff claims that the carrying out of the lift works between 7 June 2018 and 7 December 2018 relevantly caused damage to the premises or the building. It was submitted that the works damaged the building in both a physical way and in the sense that they significantly impaired the ability of the plaintiff to make full use of the building for the purpose of operating its hotel business.

72. I do not think that there has been any damage to the premises or the building within the meaning of cl 10.1 as alleged. The first defendant was obliged under the terms of the lease to carry out those works. It ought to have completed the works by 7 June 2018 but failed to do so. As the contract remained on foot, the first defendant remained bound to complete the works. The completion of the works between 7 June 2018 and 7 December 2018 thus bears the character of delayed performance of a contractual obligation. Moreover, the very nature of the obligation is such that occasioning at least some damage to the fabric of the building would be expected to occur in the process of removal of the existing lift and installation of a new lift. The same could be said for much of the other works required to be performed by the first defendant pursuant to the lease. I do not think that damage of that character falls within the ambit of cl 10.1 properly construed. In my opinion, read in the context of the lease as a whole, reasonable business persons in the position of the parties to the lease would not have understood damage within cl 10.1 to mean damage arising in the ordinary course of the carrying out of obligations under the lease. Rather, damage within cl 10.1 would be understood as physical damage arising from events of an unexpected or unintended nature, whether occurring externally to the lease or in the course of its performance. So, for example, damage arising from an earthquake, or damage arising from an accidental explosion or fire in the course of carrying out works required under the lease, would fall within cl 10.1. Here, it was not shown that any damage of that nature was occasioned to the premises or the building. The plaintiff’s claim for an abatement of rent has not been made out.

73. In circumstances where the first defendant does not in these proceedings make any claim for outstanding rent (although it has foreshadowed that it intends in due course to do so), it is not necessary to consider whether the plaintiff would be entitled to set off its damages for breaches of the lease against rent due under the lease. I would observe, however, that cl 15.16 of the lease, which expressly provides that the lessee must make payments under the lease without withholding any part of the payment by way of deduction, set off or counterclaim, may be sufficiently clear to preclude a set off whether at law or in equity (see O’Brien v Bank of Western Australia Ltd [2013] NSWCA 71 at [93]-[107] per Ward JA).

Conclusion

87. The plaintiff is entitled to damages assessed at $190,000 in respect of the first defendant’s breaches of the lease, together with pre-judgment interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW). The parties are directed to confer and seek to agree upon the amount of interest to be included in the judgment, and the appropriate order as to costs. Prima facie, costs will follow the event so that the plaintiff, which has prevailed in its claims for rectification, breaches of the lease and damages, should have its costs.

88. The parties are directed to submit Short Minutes of Order that deal with these matters within 14 days. If there is disagreement, the Court will make further directions for the making of submissions on any unresolved issues.

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Decision last updated: 11 June 2020