Testarossa Pty Ltd v Portrich 2 Pty Ltd

[2007] NSWSC 738

CITATION:	Testarossa Pty Ltd v Portrich 2 Pty Ltd [2007] NSWSC 738
HEARING DATE(S):	4/07/07
JUDGMENT DATE :	9 July 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Young CJ in Eq
DECISION:	Interlocutory injunction granted.
CATCHWORDS:	EQUITY [341]- Equitable remedies- Injunctions- Interlocutory injunctions- Covenant in hotel lease against lessees acting to affect value of business- Defendant lessees wish to sell three poker machine entitlements- Plaintiff lessor claims this is breach- Damages only suffered at end of long lease- Whether interlocutory injunction should be granted- Principles considered- Injunction granted. LANDLORD &TENANT [45]- Covenant- Hotel lease containing covenant against diminishing value of business- Proposed disposal of three poker machine entitlements by lessees- Whether breach- Whether interlocutory injunction should go.
CASES CITED:	Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 Bullock v Federated Furnishing Trades Society of Australasia (No 1) (1985) 5 FCR 464 Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 Cayne v Global Natural Resources plc [1984] 1 All ER 225 Dartford Brewery Company Ltd v Till (1906) LT 636 Goyal v Chandra (2006) 12 BPR 23,553 Heard v Stuart (1907) 24 TLR 104 Hooper v Brodrick (1840) 11 Sim 47; 59 ER 791 Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 Mostyn v Lancaster (1883) 23 Ch D 583 Nuneaton Local Board v General Sewage Company (1875) LR 20 Eq 127 Phipps v Jackson (1887) 56 LJ Ch 550 Shercliff v Engadine Acceptance Corporation Ltd [1978] 1 NSWLR 729 Terceiro v Elmore [2006] NSWSC 893
PARTIES:	Testarossa Pty Ltd (P) Portrich 2 Pty Ltd (D1) The Olivero Corporation Pty Ltd (D2)
COUNSEL:	D H Murr SC and J B Conomy (P) D P O'Dowd (D)
SOLICITORS:	Mackenzie & Vardanega (P) O'Sullivan Saddington Lawyers (D)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

YOUNG CJ in EQ

Monday 9 July 2007

3414/07 – TESTAROSSA PTY LTD v PORTRICH 2 PTY LTD

JUDGMENT

1 YOUNG CJ in EQ: This is an application for an interlocutory injunction in a dispute between landlord and tenant of a hotel in Griffith.

2 The tenants occupy the hotel under a lease granted on 29 September 2006 for the term of 1 December 2006 until 30 November 2011 with an option to renew for a further five years. I will refer to this as “the Current Lease”.

3 The Current Lease was granted after exercise of an option to renew in a former lease which operated for the five years before 1 December 2006. I will refer to this as “the Former Lease”.

4 There are currently 15 poker machines in the hotel.

5 The defendants have given notice that they intend to sell three of the poker machine entitlements to an hotel in Kyogle. The plaintiff has notified the defendants that, in its opinion, such a transaction would be in breach of cl 6.14.3.4 of the Current Lease (an identical clause was contained in the Former Lease with the identical number).

6 The defendants dispute this assertion of the plaintiff and intend to proceed with the proposed transaction.

7 The plaintiff thus seeks an interlocutory injunction to prevent the defendants from so proceeding.

8 I am informed by counsel that the probabilities are that the case would take about two months to prepare for final hearing. As the parties could not agree on an interim regime, I need to consider whether an interlocutory injunction should be granted to prevent the transaction from proceeding until at least the court can hear the proceedings on a final basis.

9 The application was made on 4 July, Mr D H Murr SC and Mr J B Conomy appearing for the plaintiff and Mr D P O’Dowd for the defendants. I reserved my decision until today.

10 Although it has often been said, it bears repeating that in an interlocutory application for injunction, as Jordan said in his Chapters on Equity in New South Wales and as affirmed by Gleeson CJ in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199, 216:

"The purpose of an interlocutory injunction is to keep matters in statu quo until the rights of the parties can be determined at the hearing of the suit."

11 As is well known, in order for the plaintiff to gain an interlocutory injunction, apart from some exceptional cases, it must establish that:

(a) It has at least an arguable case for final relief;

(b) The balance of convenience favours the grant rather than the refusal of an injunction; and

(c) Damages are not an adequate remedy.

12 However, as the English Court of Appeal pointed out in Cayne v Global Natural Resources plc [1984] 1 All ER 225, the decision as to whether or not to grant an interlocutory injunction is ultimately a matter of exercising a statutory discretion vested in the court to achieve, as far as it is possible, justice between the parties pending the final hearing of the case.

13 The subject clause is as follows:

[The lessee shall] not do or omit to do anything in relation to the Demised Premises the Licence or the conduct of the business on the Demised Premises which would or might impair or prejudice or reduce in value the Licensed Premises or the Licence or any business conducted on the Demised Premises.

14 The plaintiff says that the loss of three poker machine entitlements would diminish the value of the business conducted from the hotel. The defendants denies this.

15 The evidence is sparse on the matter. The plaintiff merely quotes a conversation that its solicitor has had with a hotel broker that generally the transfer of three poker machine entitlements would diminish the value of the business conducted at the hotel.

16 The defendants' solicitor has countered this with some ephemeral evidence that the question needs to be considered in the light of the particular circumstances in each case and that, in the instant case, the hotel concentrates on, and makes most of its money, as a nightclub trading late on Friday and Saturday nights and that poker machine revenue is secondary. It is thus, it says, reasonable that it would "cash in" some of its poker machine matter entitlements rather than let a valuable asset lay idle.

17 I would have preferred an interlocutory injunction to be granted for a week so that the parties could each place better evidence on the factual question before the court. However, neither wanted to do this and, bearing in mind the cost of adjourned applications, I considered that I needed to deal with the evidence as it stands.

18 There is some debate in the authorities as to what constitutes an arguable case for the present purpose and there are various synonyms employed such as "prima facie". Probably the best guidance as to the term is to be found in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd where Gleeson CJ said that a plaintiff must:

" … demonstrate that, if the facts alleged are shown to be true, there will be a sufficiently plausible ground for the granting of final relief."

19 The nature of litigation is such that when an interlocutory injunction is sought early on in the proceedings, when there is still considerable investigation to be carried out, less may be accepted as showing a plausible ground for the granting of final relief than if the application is made later in the case or where the facts are clear.

20 The significance of defendants giving evidence is that the court does not evaluate the evidence, but considers the additional material placed before it by the defendants along with that given by the plaintiff when considering whether there is a sufficiently plausible ground shown: Shercliff v Engadine Acceptance Corporation Ltd [1978] 1 NSWLR 729.

21 It is wrong to isolate the three elements required to be established by a plaintiff in this sort of case. The three factors impact on each other and, although this is an over simplification, a plaintiff presenting what might in the early stages of a proceeding be thought to be a relatively weak claim which nonetheless constitutes an arguable case, may obtain relief where the balance of convenience is markedly in their favour; see eg Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148, 155.

22 The court looks for a fairly strong arguable case when the interlocutory injunction, if granted, may see the end of the litigation for all practical purposes; see eg Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533, 536. The same principle applies in the converse case where the litigation will be ended by the refusal of an interlocutory injunction, such as by the conveyance of the property concerned: a relatively weak case may, at least in the initial stages of the proceedings, be sufficient. See Bullock v Federated Furnishing Trades Society of Australasia (No 1) (1985) 5 FCR 464, 472.

23 It should be noted further that, where a question of law or a question of construction arises on an application for interlocutory injunction, normally the court will resolve that question there and then.

24 In the instant case, the parties are not agreed on the true construction of cl 6.14.3.4. I considered whether I should determine that matter now.

25 Mr O’Dowd puts that, cl 6.14.3.4 does not apply to the situation where the lessee seeks to dispose of poker machine entitlements because:

(a) the clause merely repeats the identical clause in the Former Lease which was entered into before there was such property as a poker machine entitlement;

(b) The transaction only affects the defendants’ business. The most that the plaintiff is entitled to is to have the 15 poker machines in situ at the end of the lease;

(c) The clauses is too vague and uncertain to be enforced.

26 It appears to me that the construction may be affected by factual matters which are not yet in evidence, so that I should not deal with the question of construction at this stage.

27 This, however, does not prevent me from remarking that there are a number of possible constructions of the clause as to the operation of the words “might reduce the value of any business” including the width of the word “might” and whether the value is to be affected at the time of breach or at the end of the lease. Presumably, if there is a breach of the lease at the time of the transaction, then a court must assess the damages as at that date in light of the material available at the time of hearing.

28 Of course, the lease is a commercial document and a court will not, unless compelled to do so, treat the parties as having intended a solemn farce and will do its best to find the meaning the parties intended by the clause.

29 Despite Mr O’Dowd’s earnest submissions, I consider that there is sufficient material for me to find that the plaintiff has an arguable case.

30 I turn next to the question of the balance of convenience.

31 Mr O’Dowd strongly relies on the recent decision of Palmer J in Terceiro v Elmore [2006] NSWSC 893. In that case, lessees of a hotel contracted to sell three poker machine entitlements against the wishes of their landlord. A clause such as the present was not a feature of that case. However, Palmer J held that the landlord had an arguable case for an injunction. He then turned to the question of balance of convenience and decided that he should not grant an interlocutory injunction.

32 The core of his Honour’s reasons is in [26]-[27] of the judgment, which, omitting immaterial matters is as follows:

"[26] In my view, it is of decisive importance in this regard to bear in mind that the lease now in question has a further five years to run….There is no provision in the lease…directing the Lessees as to what they may do, or may not do, with poker machines or poker machine entitlements if they wish to have poker machines in the premises."
[27] If it is ultimately held in these proceedings that the Lessors have an interest in these particular poker machine entitlements, being an interest which required those entitlements, once acquired, to be preserved throughout the currency of the lease and handed over to the Lessors at the expiry of the lease, then any damage which will be suffered by the Lessors if the Lessees dispose of these entitlements will be suffered at the expiry of the lease and not before.”

33 Mr O’Dowd says that those words are right in point. Mr Murr says that they refer to discretionary factors taken into account in a particular case and are not necessarily even guidelines as to how a court will exercise its discretion in any other case. Furthermore, the case is distinguishable on the facts.

34 In my view, I should accept Mr Murr’s submissions. Not the least reason for this is that the present case deals with whether the tenants if they implement the transaction, will at that moment commit a breach of the lease rather than whether at the end of the lease, the landlord has received back the property which was covered by the lease.

35 Mr O’Dowd says that to grant an injunction in the present case would virtually make the error of granting an injunction merely because it would not hurt the defendants if it were granted. He says that there is no other reason to grant it.

36 With respect, I disagree. A tenant who has given a covenant not to do something the breach of which the landlord reasonably considers has a serious impact on it, is often entitled to an injunction.

37 Whilst I have not found a case where the covenant was on all fours with the present clause, there have been cases where landlords have obtained injunctions where the lease concerned had many years to run. Some of these involved covenants over licensed premises, seeking to preserve the integrity of the licence, which have been protected by injunction during the currency of the lease.

38 In Dartford Brewery Company Ltd v Till (1906) 95 LT 636, there was a covenant in a lease of a hotel that the lessee would operate an inn or tavern in due and proper course of business during the greatest number of days allowed by law. The tenant put up a notice in the hotel to the effect that only one drink would be served to any customer on any one morning or afternoon or evening and that no liquor would be served on “the Lord’s Day”. The Court of Appeal granted an injunction to have the notice removed. It does not appear that the landlord was entitled to any premium rent depending on the sale of beer, though, as a brewery, doubtless the more beer it sold, the more profit it made.

39 In Heard v Stuart (1907) 24 TLR 104, a lease of glebe lands was granted to a shopkeeper with a covenant that he would not alter the external appearance of the shop or injure the external wall. The defendant had sub-let the outer wall to a bill-posting company which had erected posters of which the church disapproved. Joyce J held the tenant to be in breach of covenant and ordered the posters to be removed even though the lease had 20 years still to run.

40 In Hooper v Brodrick (1840) 11 Sim 47; 59 ER 791 and again in Phipps v Jackson (1887) 56 LJ Ch 550, injunctions would have been granted in respect of covenants of like nature to those I have been discussing were it not for the fact that the court would virtually be granting specific performance of a positive covenant if it did so. That an injunction would otherwise lie is made clear by the judgment of Bacon VC in Nuneaton Local Board v General Sewage Company (1875) LR 20 Eq 127, 133.

41 In Mostyn v Lancaster (1883) 23 Ch D 583, the lease of a coal mine prohibited the tenant from removing pillars of coal which supported the roof of the mine. The landlord obtained an injunction. This case could be explained, of course, on the basis of an injunction to protect the reversion.

42 As to whether damages are an adequate remedy, as Brereton J said in Goyal v Chandra (2006) 12 BPR 23,553, 23,561, that:

“[i]t is sometimes said in applications for interlocutory injunctions that one consideration is whether damages would be a sufficient remedy. Properly understood, the real question is whether final injunctive relief would be declined because damages would be a sufficient remedy; if it can be seen at the interlocutory stage that that would be so, then an interlocutory injunction would be declined [emphasis added].”

43 Mr O’Dowd put that either damages had to be assessed as at the date of the breach and they must be nominal, or else, they would only arise at the end of the lease. In the latter case, all the lessees would have to do would be to buy back in the appropriate number of poker machine entitlements.

44 There was discussion between counsel and the bench as to whether poker machine entitlements could be sold as single units in a country hotel and how the current policy of some entitlements being forfeited whenever there is a transfer would work out in practice, but I cannot see how any of this is really germane to what I need to decide today.

45 I am not convinced at this stage that damages would be an adequate remedy.

46 In the present case, the landlord has the benefit of a covenant. Normally promises in covenants are meant to be kept. That benefit could possibly be lost if the transaction goes ahead. On the other hand, there is no evidence that the proposed transaction has to be consummated in a short period of time.

47 In my view, the balance of convenience favours keeping the status quo until the hearing. This is on the assumption that both parties will co-operate in having the preparation work done for the final hearing as soon as possible and approach the Expedition Judge for an expedited final hearing.

48 Accordingly, upon the plaintiff by its counsel giving to the Court the usual undertaking as to damages, I make order 4 in the summons until further order.

49 The costs of this application are costs in the cause.

50 I will now make directions as to the filing and serving of affidavits and otherwise to move the proceedings along towards their final hearing.

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