Southern Cross Capital Partners Pty Ltd v Owners Corporation No. PS 542645C
[2014] VCC 1738
•7 November 2014
| IN THE COUNTY COURT OF VICTORIA | Revised (Not) Restricted |
AT MELBOURNE
COMMERCIAL LIST
GENERAL DIVISION
Case No. CI-13-04064
| SOUTHERN CROSS CAPITAL PARTNERS PTY LTD | Plaintiff |
| v. | |
| OWNERS CORPORATION NO. PS 542645C | Defendant |
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JUDGE: | His Honour Judge Anderson | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 22-24 October 2014 | |
DATE OF JUDGMENT: | 7 November 2014 | |
CASE MAY BE CITED AS: | Southern Cross Capital Partners Pty Ltd v. Owners Corporation No. PS 542645C | |
MEDIUM NEUTRAL CITATION: | [2014] VCC 1738 | |
REASONS FOR JUDGMENT
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Catchwords: Lease – Two subdivided office suites – Suites adjoined but had no dividing wall on the title boundary – Suites separately owned but leased to a single tenant by two “related” and “interdependent” leases – Under each lease the tenant was obliged to undertake works at termination – Works were “so that the premises are returned to the landlord in a condition suitable to be used as an office suites” – Whether termination works required the suite to be divided from the adjoining suite.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P.W. Lithgow | Zervos Lawyers |
| For the Defendant | Mr C.R. Northrop | Kliger Partners |
HIS HONOUR:
1Southern Cross Capital Partners Pty Ltd (“Southern Cross”) became the landlord of two suites in a Melbourne CBD office block. Owners Corporation no. PS 542645C (“Owners Corportation”) was the tenant. There were separate leases in respect of each suite. Essentially, both leases contained the same provisions.
2When the term of the leases expired, Southern Cross demanded that Owners Corporation carry out certain restoration works it said were required by clauses 9.1 and 9.2 of the leases. Owners Corporation expressed a different view as to its obligations.
3The works were not carried out, either by Owners Corporation as tenant, or Southern Cross as the landlord. Southern Cross claims the sum of $129,145.50 as the cost of the restoraton works and the further sum of $93,413.55 as the net loss of rental and contribution to outgoings, from the expiration of the lease on 19 December 2012 to
31 August 2013 when the premises were re-let.4The principal issue for determination in the proceeding is the interpretation to be given to clauses 9.1 and 9.2 of the leases. If the leases required Owners Corporation to carry out works at the expiration of the lease, it will be necessary to assess the cost of these works and, if appropriate, any further losses consequential upon the failure to carry out the works.
Background events
5The background events were not in dispute:
a.the office tower was the Q2 building at the north east corner of Queen and Flinders Streets;
b.in about 2007, the building was subdivided into offices – generally 10 separate titles for each floor, from levels 1 to 11;
c.Southern Cross have owned suites 1008, 1009 and 1010 since the building opened;
d.Owners Corporation is the building’s owners corporation. It leased suites 10.06 and 10.07 from two separate owners by “related” and “interdependent” leases which expired after a 5 year term on 19 December 2012;
e.Southern Cross purchased both of these properties during the terms of the leases, 10.06 in January 2011 and 10.07 in March 2010;
f.Owners Corporation determined that, at least by March 2012, it would not exercise the option to renew the lease beyond December 2012 and that it would need to negotiate with the landlord the “amount of work required” to return “the two lots to the landlord in the condition in which they were at the beginning of the lease”;
g.by letter dated 15 November 2012, Southern Cross sought information from Owners Corporation “in relation to its obligations to undertake works to restore the premises to the stipulated requirements of Item 22 Clause 9.1 of the schedule to lease”;
h.a dispute arose about the extent of the restoration works required to be undertaken by Owners Corporation;
i.from November 2012, Southern Cross took steps to re-let the premises through an estate agent, DTZ;
j.the advertising material and other documents, including correspondence between the agent and Southern Cross and a proposal to a potential tenant, suggested that the suites were to be leased as one space. Mr Andrew McLauchlan, a director of the plaintiff, gave evidence that Southern Cross’ direction to the agent was that the properties be marketed either together or separately;
k.the two suites were re-let at the end of August 2013 by separate leases to Redcore Pty Ltd, an entity associated with Southern Cross, and have continued to be used without any dividing wall between the two suites;
l.since the termination of the leases in December 2012, no restoration works have been carried out to the properties either by Owners Corporation, Southern Cross or Redcore Pty Ltd.
Relevant provisions of the leases
6 The leases for both suites 10.06 and 10.07 were in essentially the same form. The relevant provisions of the lease for suite 10.07 are as follows:
a.the term was for “Five (5) years starting on 20 December 2007…and ending on 19 December 2012”;
b.clause 4.1 provided as follows:
“4 REDECORATION
4.1 Subject to Additional Provision 9, the tenant must redecorate the premises during the last month of the term, unless it has exercised its option to renew this lease for a further term under clause 12, and then during the last month of its occupation of the premises to the same standard to that existing on the commencement of the term.
Redecoration of the premises includes, without limitation:
(a) washing the interior surfaces; and
(b) painting or otherwise treating all interior surfaces in the same way as when last redecorated with the landlord’s approval or, if the premises have not been redecorated with the landlord’s approval, as they were on the commencement of the term; and
(c) replacing damaged floor coverings, fair wear and tear excepted”.
c.clauses 7.1 and 7.6 provided as follows:
“7 ALTERATION TO THE PREMISES
7.1 The tenant must not make any alteration or addition to the premises or the building (including the erection of a sign) (“Works”) without the landlord’s consent (which may not be unreasonably withheld in relation to non-structural alterations or additions):
…
7.6Prior to the expiration of the term, the tenant must reinstate the premises so as to convert them back to the same arrangement they were in prior to the commencement of any Works and otherwise in accordance with the condition report”.
d.clauses 9.1, 9.2 and 9.5 provided as follows:
“9 EXPIRATION OF THE TERM
9.1 Notwithstanding any other provision of this lease, prior to the expiration of the term, the tenant must undertake works to the premises in accordance with this Additional Provision 9 so that the premises are returned to the landlord in a condition suitable to be used as an office suite (“Termination Works”) at the expiration of the term.
9.2The tenant must at its cost and prior to the expiration of the term, procure the carrying out of the Termination Works:
(a) in accordance with the plans and specifications attached as Annexure C (“Plans and Specifications”);
(b) promptly and in a proper and workmanlike manner, using good quality, new and undamaged materials;
(c) in compliance with all laws;
(d) in accordance with proper practices of the respective trades;
(e) obtain all approvals necessary for the Termination Works and deliver to the landlord a copy of all approvals required for the Termination Works;
(f) effect appropriate insurance in respect of the Termination Works; and
(g) in compliance with the reasonable directions of the landlord.
…
9.5The tenant indemnifies the landlord against:
(a) damage caused to the premises or the building caused or contributed by the carrying out of the Termination Works; and
(b) all costs, liability, loss or damage incurred or suffered directly by the landlord under this Additional Provision 9, except to the extent it is caused or contributed to by the negligence of the landlord”.
e.clause 10 provided as follows:
“10 RELATED LEASE
10.1This lease is interdependent with the lease of Suite 10.06 to the tenant (“Related Lease”) and if the Related Lease terminates for any reason, then the tenant may terminate this lease by notice in writing to the landlord.
10.2In the event this lease is terminated pursuant to Additional Provision 20, the tenant must immediately comply with Additional Provision 9”.
f.annexure C contained the following “plans and specifications”;
(i)drawing E003 – Electrical Services, Typical floors L1-L11 except L2, Lighting and power layouts;
(ii)drawing F002 – Fire Protection Services, Ground, mezzanine, Typical floors L1-L12 and roof sprinkler and detection layouts;
(iii)drawing H006 – Hydraulic services, typical floor L2 – L11, Sanitary and hot and cold water layouts;
(iv)drawing M101 – Mechanical services, condenser water A/C system option, siteplan, drawing index, legends and notes;
(v)drawing A07 – Levels 9 and 10 floor plan and reflected ceiling plans;
(vi)drawing M104 – Mechanical services, condenser water A/C system option, Ground, mezzanine and typical floor L1-11 Layouts.
Construction of clause 9.1 – contentions and legal principles
7Owners Corporation’s counsel, Mr Northrop, submitted that I should adopt a plain reading of clause 9.1. When Southern Cross retook possession of suites 10.06 and 10.07, it was able to re-let the suites for the purpose of them being used as “office premises”. In those circumstances, he submitted, it was clear that the suites had been “returned to the landlord in a condition suitable to be used as an office suite”.
8Southern Cross’ counsel, Mr Lithgow, submitted that this construction of clause 9.1 ignored the word “premises”. In each lease, the word “premises” was defined as meaning the individual suite. In order for the individual suites to be regarded as “suitable to be used as an office suite”, it was necessary for the outgoing tenant to carry out works including the erection of a dividing wall along the title boundary between the two suites.
9There was little disagreement between the parties as to the applicable principles of construction:
a. the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at paragraph 40 stated that, “What matters is what each party by words and conduct would have a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That normally requires consideration not only of the text but also of the surrounding circumstances known to the parties and the purpose and object of the transaction”;
b. it is not appropriate to construe a contract on the basis that one construction “would make more sense from a commercial point of view”. In Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 at paragraph 1, the High Court quoted with approval the remarks of Macfarlan JA, in the decision from which special leave to appeal was sought, where he said, “A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and business-like operation if an interpretation different to that dictated by the language were adopted”;
c. where a single transaction is recorded in several documents, a court may have regard to all the documents and may consider them together.
Construction of clause 9.1 – defendant’s submissions
10Mr Northrop submitted that although the leases should be construed in the light of the surrounding circumstances at the time the leases were entered into, regard should be had to the variety of circumstances that the lease provisions placed in contemplation, as possibly existing at the time when clause 9 would come into operation. These circumstances included the following:
a. the lease of suite 10.06 was dated 15 February 2008. Owners Corporation was the tenant. Artemis Nominees Pty Ltd (the landlord), sold the property to Southern Cross in about January 2011;
b. the lease of suite 10.07 was dated 20 December 2007. Owners Corporation was the tenant. Delfin Marketing Australia Pty Ltd (the landlord) sold the property to Southern Cross in about March 2010;
c. clause 10 of each lease describe the lease of the other suite as a “related lease” and “interdependent” with it;
d. by clause 10.1, if one lease “terminates for any reason”, the tenant of the other lease had the right to terminate “by notice in writing”;
e. if a tenant exercised the right to terminate under clause 10.1 (upon the termination of the other lease), the tenant was required by clause 10.2 to “immediately comply” with clause 9;
f. the term of each lease was “five (5) years starting on 20 December 2007…and ending on 19 December 2012”;
g. the leases provided in condition 12 for the tenant to have “an option to renew” the lease for “two (2) further terms of five (5) years each”;
h. the leases provided in condition 4 a procedure by which the tenant may obtain the landlord’s consent to “a transfer or sub-lease”. By condition 4.8, “the obligations to the landlord of every tenant who has transferred this lease continue until this lease ends”.
11Mr Northrop submitted that as a consequence of these matters:
a. each lease may terminate at the same time or at different times. If the options were not exercised, the lease would end in 2012. Otherwise, the term might be extended to 2017 or 2022. The leases might terminate at other times by reason of the operation of the provisions of a lease as they related to the circumstances applying to that lease;
b. the leases may have separate owners (landlords), as they had at the commencement of the leases, but at termination there may be the same or different or a single owner (landlord) of the two suites;
c. the leases may have been sub-let or transferred to a different tenant (or tenants), although it is likely that Owners Corporation, as the original tenant, would continue to have the obligations pursuant to clause 9.1 of the leases.
12Mr Northrop also relied upon the interaction between clause 9 and other clauses of the leases, particularly clauses 4.1 and 7.6. Clause 4.1 is expressed to be “subject to additional provision 9”. Clause 9.1 correspondingly provides that the clause operates “notwithstanding any other provision of this lease”. Clause 4.1 requires a tenant, in the last month of the term or the further term of the lease, to “redecorate” the suite “to the same standard to that existing on the commencement of the term”. Clause 4.2 lists three specific requirements (washing and painting interior surfaces and replacing damaged floor coverings) without limiting the required redecoration to those matters. Clause 7.6 required the tenant to reinstate premises altered or added to during the term of the lease. This involved converting the premises [the suite] “back to the same arrangement they were in prior to the commencement of any works”.
13The three clauses requiring the tenant to do work before the expiration of the lease appeared to operate together:
a. if alterations or additions have been made, the suite must be reinstated to its arrangement, before these works were undertaken (clause 7.6);
b. the suite must be redecorated to the same standard existing at the commencement of the lease (clause 4.1);
c. the suite must be returned in a condition suitable to be used as an office suite (clause 9.1).
14Mr Northrop submitted that any interpretation of clause 9.1 that required the tenant, upon termination of the lease, to create a separate suite would leave clauses 4.1 and 7.6 with no work to do, and therefore the clause must have more limited application. That limited application, he submitted, was clear from the plain meaning of the words used in clause 9.1.
15Mr Northrop further submitted that clause 9.1 only requires works to be undertaken if such works are necessary to return the premises in a condition that makes them “suitable to be used as an office suite”. Clause 9.2 simply prescribes a standard for the works, but only if the works are identified as necessary to be performed under clause 9.1. However, if clause 9.2 were intended to detail what is to be regarded as a “suitable” condition for the premises, Mr Northrop submitted that “the plans and specifications attached as annexure C” only contain one architectural drawing, A.07, which shows suites 10.06 and 10.07 configured without a wall on the title boundary between the suites.
16Accordingly, if the “termination works” required by clause 9.1 were to be carried out, “in accordance with the plans and specifications attached as annexure C”, the relevant architectural plan does not require a dividing wall between the two suites. This is a further indication that the dividing wall was not required in order to return the premises in “a condition suitable to be used as an office suite”, and that conformity with drawing A.07 would be sufficient compliance with clause 9.2.
17The requirement in clause 9 is defined by reference to the “condition” of the premises being “suitable to be used as an office suite”. This requirement, on the tenant’s part, Mr Northrop submitted, had nothing to do with the “marketability” of the premises or with its “best use”, or with the landlord obtaining the highest rental for the premises.
18Mr Northrop submitted that the fact the condition of each of the premises was “suitable” for use as an office suite was obvious from the circumstances which followed termination of the leases. The suites were essentially marketed as a single space and were ultimately re-let together for use as an office.
19Mr Northrop also relied upon the history of the building since the sub-division in 2007 and the use made of other suites in the building. Some of this history is set out in paragraph 5. Other relevant matters relied on were derived from evidence of the building manager’s ownership records and observation of the present fit-out of the suites by the tenants. This information included the following:
a. the plan of subdivision of the building, primarily into office suites, was prepared and registered in 2007;
b. each of the floors of the building from levels 1-11 are subdivided into 10 separate titles;
c. properties were sold “off the plan”, and many were configured by their original purchasers;
d. many of the properties are owned by the same person and, since 2007, properties have change ownership;
e. most of the properties are now not configured in accordance with the title boundaries;
f. on most floors of the building, there are suites where dividing walls are not on the title boundaries, or do not exist;
g. in addition, there are internal partitions erected which configure the office suites in ways different to the layout shown on the plan of subdivision.
20Mr Northrop submitted that, both at the time the leases were entered into and at the termination of the leases in December 2012, there were many different configurations of office suites in the building, all of which could be said to be in a “condition suitable to be used as an office suite”.
21Mr Northrop submitted that the evidence of the marketing of the suites after the agent DTZ was engaged in November 2012, as a combined area rather than as two discreet office suites, supports the conclusion that the erection of a wall on the title boundary was not required to let the premises as an office suite.
22In the circumstances, Mr Northrop submitted the Court should not read into clause 9.1 a requirement that the “return” of the premises in a “condition suitable to be used as an office suite” required the two suites to be separated by the erection of a dividing wall along the title boundary. This was unnecessary, particularly in circumstances where the two leases had terminated at the same time and both properties were in the same ownership.
Construction of clause 9.1 – plaintiff’s submissions
23Mr Lithgow submitted that properly construed, clause 9 “requires the tenant on the expiration of the lease term to return each of the premises being units 10.06 and 10.07 to the landlord (or two landlords)”, in this instance the plaintiff, “in a condition suitable so that each unit can be used as an office suite”. Mr Lithgow relied on the specific words used in clause 9.1:
a. “the premises”, which was defined in the leases as referring to suite 10.06 or suite 10.07, as the case may be;
b. the condition in which the premises must be returned is so that it is suitable for use as “an office suite”.
24Both of these phrases made it clear that the clause was focussed on the specific suite, the subject of the particular lease, and the use to which that suite was capable of being put after the termination of the lease. In these circumstances, the insertion of the word “separate” so that clause 9.1 read, “used as a separate office suite”, would be unnecessary.
25Mr Lithgow submitted that this conclusion was supported by the reference to “the plans and specifications attached as Annexure C” to each lease, as prescribing the specific works necessary, including the electrical, mechanical and other services to enable each separate premises “to be used as an office suite”.
26It would not be appropriate, Mr Lithgow submitted, to look at drawing A.07 in isolation (and as not requiring the erection of a dividing wall on the title boundary), as this would ignore the inclusion in Annexure C of typical floor plans for electrical, fire protection, hydraulic and mechanical services, and the other requirements of architectural drawing A.07. These drawings are not redundant. They specify the works required so that each of the premises can be used as an office suite.
27Mr Lithgow referred to the following evidence of the valuation experts:
a. Mr John Castran, the expert called by the plaintiff, said that “there would be little prospect of renting the two lots out as separate office suites if the termination works [including the construction of ‘divisional (inter-tenancy) wall’] were not undertaken”;
b. Mr Chris Holroyd, the expert called by the defendant, said that:
“The current configuration [without a dividing wall] significantly impairs the ability for the two lots to be occupied as separate suites as there would be no physical demarcation. Specifically there is not a separate entry into the suites and the inter-tenancy wall is not present. In addition, I understand that the services are not separately configured to each lot. Accordingly, works would be required to be undertaken in order for the lots to be physically, separately occupied.
Given this I do not consider a prospective tenant would readily commit to a lease for a particular suite that would require works to be done. I consider a tenant seeking a suite of this size would instead commit to an alternative unit, either within the building, or within a similar development, where they can immediately visualise the space they are to occupy, and which they can occupy within a reasonable timeframe at no additional cost.
Notwithstanding the above it may be possible, at a suitable rental discount, to attract two related tenancies for whom the current configuration does not present a sufficient obstacle to occupation. Alternatively, a tenant seeking a single unit may be willing to commit to both at no additional cost. On these bases it may be possible to rent the two lots as separate suites”.
28Mr Lithgow submitted that clause 4, dealing with “redecoration”, is expressed to be “subject to clause 9” (which itself is expressed to apply “notwithstanding any other provision of the lease”). It is clear, therefore, that clause 9 “extends and overrides the limited and discrete requirements” of clause 4.
29Mr Lithgow submitted that it is necessary to look at what a “reasonable person” in the position of the parties, having regard not only to the words used in the lease but also “the surrounding circumstances known to the parties and the purpose and object of the transaction” would have understood clause 9 required. Mr Lithgow suggested that the appropriate understanding would be a requirement that, at termination, the tenant must return the particular suite in a condition which would allow that suite to be used as “an office suite”. This was to be achieved by carrying out works necessary to provide a division on the title boundary.
Construction of clause 9.1 - Conclusions
30Simply reading the words of clause 9.1, they do not in my view, yield a clear and unambiguous meaning. The clause refers to the “premises”, meaning the individual office suite covered by the lease, which is to be “returned” in a condition suitable for use as “an office suite”. These words militate against the ready adoption of Mr Northrop’s suggested interpretation.
31On the other hand, Mr Lithgow suggests that the clause should be read as though the premises were to be used as “a separate office suite”. This construction involves reading into the clause a meaning which is not plainly apparent from the words used. I consider that it is necessary, therefore, to have regard, as the authorities require, to “not only … the text, but also … the surrounding circumstances known to the parties, and the purpose and object of the transaction”.
32I have discussed already many of the “surrounding circumstances” the parties were aware of at the time. They included:
a. Owners Corporation, as tenant, entered into two separate (though “related”) leases with the separate owners of suite 10.06 and suite 10.07;
b. the suites had always been fitted out without a dividing wall on the title boundary;
c. it was not uncommon in the building for some suites to be used without walls being erected on the title boundaries, although it is not clear whether there were other instances, at that time, of suites being held by separate unrelated owners and being used together;
d. Owners Corporation apparently intended to use the two suites together as a facility for use by the building’s tenants for conferences and other related or ancillary purposes (schedule item 15);
e. the two leases were described in clause 10 of each lease as being “interdependent” and provision was made so that, if one tenancy were terminated, the tenant had the right to terminate the other tenancy;
f. the ultimate term of the leases, (and therefore the date of termination), the future ownership of the two suites, and their occupation by a particular tenant or tenants could vary, depending on the exercise of various rights under the leases, or the sale of the properties;
g. the best use, in terms of the highest rental for the area an owner was likely to obtain, was for each suite to be used as a separate office suite. This was the configuration of the building in the plan of subdivision, and its economic justification was affirmed by the evidence of the valuers.
33The object of each lease was for Owners Corporation to use the premises for the stated purpose and to comply with the obligations upon it, including the payment of rent and outgoings to the owners. Of particular importance was what was to happen when the leases terminated. This was likely to occur at the same time, because of the same terms and option rights and the provisions in clause 10. At or shortly prior to the termination of the leases, the following was intended to occur as part of the tenant’s responsibilities:
a. if alterations or additions had been made to the suite during the tenancy, the premises must be reinstated so that they were converted back to the “same arrangement” as the premises were, before the alterations or additions (clause 7.6);
b. the premises were to be redecorated to the same standard as existed, at the lease’s commencement (clause 4.1);
c. the premises must be returned “in a condition suitable to be used as an office suite” (clause 9.1).
34Each of these provisions required the tenant to do something, which took the premises back to a pre-existing state (the “same arrangement” or the “same standard” as at a previous time), or so that the premises were in a condition suitable for a specific use.
35Clause 9.1 took precedence, particularly, over clause 4.1, which was subject to clause 9. Clause 9 involved something different than redecoration. It was the future use to which the suite might be put, which was important, not simply the return to an “arrangement” or “standard” which had previously existed. Clauses 9.1 and 9.2 provided that “works” would be required “prior to the expiration of the term”. These were the words also used in clause 7.6 in relation to the reinstatement of the premises, where alterations or additions had been carried out. The redecoration works under clause 4.1 were only required to be done, “during the last month of the term”.
36Clause 9.2 set out the specification for the required works. The first item was that the works be “in accordance with” the attached plans and specifications. These six drawings covered each of the relevant services. The architectural drawing A.07 did not show a dividing wall on the title boundary. However, the parties were fully aware that the architectural drawing simply represented the works that had been proposed to be carried out, and, as suites 10.06 and 10.07 had been constructed. Drawing A.07 did not necessarily indicate that a dividing wall was not required to make the premises suitable for use as an office suite. However, if works were necessary under clause 9.1, the drawings attached to each lease set out with what the works must “accord”.
37In these circumstances, I consider that the parties must have anticipated that when the term (or extended terms) of each lease expired, the landlord would need to have returned to it an individual suite which was “suitable” to be, and not simply theoretically capable of being, used as an office suite. This required an appropriate division from the adjoining suite, including compliance with all services requirements.
38In my view, clause 9.1 required the tenant, upon termination of each lease, to return the particular premises leased (suite 10.06 or suite 10.07) to the landlord so that it could be used from the end of the lease “as an office suite”, that is, a single, separate office suite.
39The works the tenant was required to undertake to achieve that end, were to be in accordance with the attached drawings and were to otherwise comply with each of the matters set out in clause 9.2. Accordingly, I am satisfied that Owners Corporation failed in the performance of the obligations imposed upon it prior to the expiration of the term of the leases.
Cost of completing the works required by the lease
40I have determined that Owners Corporation has failed to perform an obligation contained in the leases. Ordinarily, the measure of damages would be a sum sufficient to put Southern Cross in the same position as it would have been if Owners Corporation had complied with its obligations under each lease.
41Mr Northrop submitted that in circumstances where Southern Cross had:
a. not had the works carried out to make each of the premises suitable for use as a separate office suite; and
b. had let the combined unseparated area of the two suites
it would not be appropriate to allow Southern Cross to recover the cost of those works.
42In my view, this submission must fail. The premises remain in essentially the same condition they were when the leases terminated. The two suites cannot realistically be separately let. In the circumstances, Southern Cross will not be able to use the premises as effectively as it otherwise might. It is likely, also, to be financially affected if it sought to sell one of the suites or to sell the two suites to separate purchasers.
43Accordingly, Southern Cross should recover the usual measure of damages calculated as the reasonable cost to complete the appropriate works.
44Three sources of information were available as to the cost of complying with Southern Cross’ view of Owners Corporation’s obligations upon the termination of the lease:
a.a quotation obtained by Southern Cross in December 2012, for the work to be completed at a cost of $85,000 (inclusive of GST). A later written quotation from Concept Design dated 12 March 2013 revised the cost to $85,000 (exclusive of GST);
b.the expert report of Mr Ken Ryan, a building consultant engaged by Southern Cross, dated 24 May 2014, which assessed the cost of the works at a total of $129,145.50 (inclusive of GST);
c.the expert report of Dr Ian Eilenberg, a building consultant engaged by Owners Corporation, dated 4 July 2014, which assessed the same scope of works as Mr Ryan, at a total cost of $90,362.25 (inclusive of GST).
45Dr Eilenberg agreed that if the works were required, the scope of those works was as set out by Mr Ryan. Mr Ryan conceded that it was possible that some materials, such as one of the glass doors and the door furniture, might be salvaged in an “undamaged” state and reused. He did not concede that the carpet or the door surrounds could be reused, as the carpet would not fit the description in clause 9.2(b) of “good quality new and undamaged materials” and to rework the door surrounds would require them to be taken off-site and would not be cost effective.
46Dr Eilenberg’s estimate for the works was significantly less than Mr Ryan’s. Having heard Mr Ryan’s explanations in relation to specific items, where he differed from Dr Eilenberg’s estimate, I am not persuaded that Mr Ryan’s estimate is inflated. Dr Eilenberg had more confidence that the work could be completed more efficiently, and therefore more cheaply, than Mr Ryan had estimated. I do not, however, consider I need to decide those issues because I have formed the view that Southern Cross should not recover substantially more than Dr Eilenberg’s estimate, for other reasons.
47On 7 December 2012, Southern Cross included in a letter to Owners Corporation an invoice for the cost of the works, being $85,000 (including GST). Mr McLauchlan said that this figure was quoted by Concept Design, at the time, as the cost of completing the works. A written quotation from Concept Design dated 12 March 2013 for $85,000 (excluding GST) is in evidence. This price, including GST, would be $93,500.
48Dr Eilenberg’s estimate was $90,362.25 (including GST) or $82,147.51 (excluding GST). Dr Eilenberg’s figure should, in my view, be increased, to include a higher figure for the replacement of the carpet, rather than simply the cost of making good the existing carpet.
49The written quotation from Concept Design was open to be accepted by Southern Cross for a period of 30 days. Southern Cross chose not to complete the works itself at that time. Southern Cross, without explanation, did not call a witness from Concept Design. In the circumstances, I consider I am entitled to infer that such evidence, if called, would not have assisted its case.
50I consider that I should accept the quotation dated 12 March 2013 as evidence of the reasonable cost of completing the appropriate works. I will allow the sum of $85,000 (exclusive of GST) as Southern Cross’ damages in this regard.
Claim for lost rental and outgoings
51In addition to the claim for the cost of performing the works, Southern Cross had in its statement of claim also sought as damages for breach of the leases, “rental estimated at $75,000 per annum plus GST”.
52It was submitted that a substantial sum had been lost “because the premises cannot be let in their current state”. The claim for loss and damage was increased and further particularised in a document filed on 4 July 2014.
53Evidence was given by three valuers as to the likely level of rental lost, as well as other factors which may affect the period during which rental could not have been expected to be received.
54The evidence was given:
a.for Southern Cross, by Mr John Castran, and by Mr Peter Stewart who assisted Mr Castran prepare his report dated 6 June 2014;
b.for Owner’s Corporation, by Mr Chris Holroyd, who prepared a report dated 29 July 2014.
55In his final submissions, Mr Lithgow, for the first time, stated that Southern Cross also relied upon clause 9.5 of the leases whereby it was provided that “the tenant indemnifies the landlord against…all costs, liability, loss or damage incurred or suffered directly by the landlord under this Additional Provision 9”.
56Whilst no leave was sought to amend its Statement of Claim, it is likely that Southern Cross could recover as damages for breach of clause 9.1 whatever “loss or damage” might also be covered by clause 9.5. It would, however, be necessary for Southern Cross to establish that Owners Corporation’s breach of clause 9.1 was “a cause” of the losses claimed.
57Mr Lithgow conceded in the course of argument that the “estimated leasing costs” of $13,636 in respect of suite 10.06, and $13,102 in respect of suite 10.07, could not be claimed. These included a rent free period of two months, the agent’s letting fee and internet advertising. All of these matters would have been incurred in any event upon the termination of the lease, whether or not the tenant carried out the termination works. Further, the rent free period seems to be a duplicate claim as loss of rent is claimed from 20 December 2012 (although the particulars of loss and damage purported to claim rental from 15 November 2012).
58In my view, the relevant factors determining any further loss and damage are as follows:
a. Southern Cross had a quotation to carry out the termination works by 7 December 2012;
b. by the date of termination of the leases on 19 December 2012, it was apparent that Owners Corporation would not be undertaking the works;
c. some allowance should be made for the time needed to engage the contractor who had quoted, or some other contractor, to carry out the works. I consider that taking into account the Christmas shutdown in the industry, these steps should have been completed by 1 February 2013;
d. Mr Ryan foreshadowed in his report that it would have taken about 4 to 6 weeks to complete the required demolition and reinstatement works;
e. it would be reasonable to allow a further period from when the works commenced, or perhaps were completed, before it could be expected that commitments to let the two suites would be finalised. The valuers anticipated that to re-let two separate suites might take a number of months. Mr Castran said that, “they would lease up within approximately two to three months at the assessed rent”. Mr Holroyd considered that there would be “an anticipated period of vacancy in the order of four months”. I will adopt Mr Castran’s estimate as it is likely that part of Mr Holroyd’s longer period would be concurrent with the completion of the construction works;
f. the valuers also agreed that a rent free period of at least two months would need to be offered.
59Taking these factors into account, I consider that if the works had been undertaken by Southern Cross (which is the basis upon which the direct loss and damage has been claimed and quantified), that it would be reasonable to allow until about 1 June 2013 before Southern Cross was likely to have re-let the properties and the new terms of the leases commenced. The fact that it took until 1 September 2013 for the new tenant to go into possession was a consequence of Southern Cross’ decision not to complete the works, at the time of termination, but to seek a tenant primarily for the two suites together.
60In the circumstances, Southern Cross is entitled to claim rent and outgoings for the period 20 December 2012 to about 1 June 2013. The outgoings were fixed. As to the appropriate rental, Mr Castran suggested a rental for the two separate suites, calculated as monthly rent, of $2,680 for 10.06, and $2,520 for 10.07, should have been achieved. Mr Holroyd’s figures, calculated as monthly rental figures, were $2,736 for 10.06, and $2,572 for 10.07.
61I consider that the difference is relatively small and within the reasonable variation which might be expected. I will average the figures for rental to $5,254 per month in total for the two suites. This sum will be allowed for a period of five months. I will leave it to the parties to calculate the appropriate outgoings for this period.
62A number of documents were tendered by Mr Lithgow relating to the cost of the outgoings. The plaintiff should deliver revised calculations, based on these reasons and the supporting material in evidence, to the defendant. The parties should attempt to reach agreement. If they cannot, they will each need to file their alternative calculations and brief supporting submissions. I will either decide the issue “on the papers” or, if a party wishes to be heard, after hearing oral submissions.
63I shall hear from the parties further before making any orders.
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Certificate
I certify that these 19 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 7 November 2014.
Dated: 7 November 2014
Olivia Bramwell
Associate to His Honour Judge Anderson
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