The Daily Pty Limited v Wallis
[2013] NSWADT 152
•08 July 2013
Administrative Decisions Tribunal
New South Wales
Medium Neutral Citation: The Daily Pty Limited v Wallis [2013] NSWADT 152 Hearing dates: 7 and 10 September 2012 Decision date: 08 July 2013 Jurisdiction: Retail Leases Division Before: D Bluth, Judicial member Decision: 1. Leanne Wallis and Mark Wallis are each jointly and severally liable to pay to The Daily Pty Limited the following amounts:
(a) $91,916.84 for unpaid rent and outgoings to 30 November 2011;
(b) Interest in the sum of $11,921.03 on rent and outgoings claimed in 1(a);
(c) Legal costs of default $3,276.24;
(d) Rent and outgoings from 1 December 2011 to 29 February 2012 for 3 months, $36,359.38;
(e) Rent and outgoings from 1 March 2012 to 27 June 2012 for 3 months and 27 days, $48,894.45
(f) Interest on the amounts (a)-(e);
2.The Daily Pty Limited is liable to pay Leanne Wallis and Mark Wallis the sum of $55,000.00.
3.No order as to costs.
Catchwords: Covenant for quiet enjoyment, retail shop lease section 3, compensation for disturbance section 34 and abatement of rent section 36 of Retail Leases Act 1994 Legislation Cited: Administrative Decisions Tribunal Act 1997 Retail Leases Act 1994 Cases Cited: Blandino & Ors v Giardini & Ors [2008] NSWADT AP55
Christofi v Mohammady [2013] NSWADTAP 10
Coco Chocolates Pty Ltd v Lotz [2013] NSWADT 83
Duarte & Ors v Mitchell & Ors [2007] NSWADT 276
Glasshouse Investments Pty Ltd v MPJ Holdings Pty Ltd [2005] NSWSC456
Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited [2008] 234 CLR 237
Lovecek VJ v Idola Pty Ltd & Ors [2011] NSWADT 18
Martins Camera Corner Pty Ltd v Hotel Mayfair Ltd (1976) 2 NSW LR p15
Mohammady v Christofi [2012] NSWADT 122
Mowena Pty Ltd v Stratis Promotions Pty Ltd [2003] NSWCA 376
Paino v Paino [2008] NSWCA276
Roach v Braun [2011] NSWADTAP 40
Shevill & Anor v The Builders Licensing Board (1981-1982) 149 CLR 620
Watts v Rake (1960) HCA, BL 6000 90
Wenkart v Pittman [1998] 46NSWLR 502Texts Cited: Halsbury's Laws of England, 3rd Ed, Vol. 23
McGregor on Damages, 15th Ed, 1988Category: Principal judgment Parties: The Daily Pty Limited (Applicant in 125005/Respondent in 125113)
Mark Wallis and Leanne Wallis (Respondents in 125005/Applicants in 125113)Representation: Counsel
R Chia for the Applicant in 125005/Respondent in 125113
J Clifton for the Respondents in 125113/Applicants 125005
M Micelli (Applicant in 125005/Respondent in 125113)
Grogan & Webb (Respondents in 125113/Applicants in 125005)
File Number(s): 125005, 125113
reasons for decision
Background
The Applicant/cross respondent, the Daily Pty Limited (Daily) is the owner of a building at 5-9 Vista Street, Mosman (the building). On or about 1 March 2008 Daily entered into a lease with the first and second Respondents/cross applicants Mark and Leanne Wallis (Wallis) with respect to premises known as 5A Vista Street, Mosman (the premises).
The lease was for a period of five years commencing on 1 March 2008. The initial rent was $75,000.00 per annum plus GST and a share of outgoings increasing annually and in the last year the annual rent was $128,000.00 plus GST (the Wallis Lease).
The use pursuant to the Wallis Lease was for childcare and associated café. Wallis conducted a business from the premises called "Rascals Playcentre & Coffee Shop". The actual use during the term was for a combined indoor play centre, café and hair salon. The building was occupied by two tenants, Rascals in 5 Vista Street and Fourth Village Providore in 5A Vista Street, Mosman. The roof over the building covered both tenancies, it was a shared roof.
Wallis began to default in payment of rent from around February 2010 and continued to be in default thereafter. Daily called on the bank guarantee in February 2011 and on 30 September 2011 Daily served notice of termination of the Lease. Wallis remained in possession of the premises until late November 2011 when the keys to the premises were returned.
During the term of the Lease there were a number of water leakage issues relating to the premises emanating mainly from the roof which covered the building. On 19 July 2011 part of the bulk head of the ceiling over the premises collapsed due to significant water seepage from the roof that had occurred over some considerable time. The collapse of the ceiling occurred at 10:00 am when the premises were being utilised by children and parents. Ultimately as noted in paragraph 4 of these Reasons Wallis surrendered the premises to Daily.
After receiving back the premises, Daily eventually entered into a new Lease with Premprop Pty Limited t/as Belle Property (the Belle Lease) on 27 June 2012, with a commencing rent of $187,555.58 plus GST and a share in the outgoings of the building.
Daily's Application for Original Decision
Daily filed a number of amended Applications for Original Decision the last being filed on 6 September 2012 in file number 125005. Pursuant to that application Daily sought the following orders that:
1) Wallis are jointly and severally liable to Daily for outstanding rent and outgoings from the sum of $91,916.84 being the rent for 1 January 2010 until 30 November 2011 being their period of occupation of the premises.
2) Wallis are jointly and severally liable to Daily for outstanding interest in the sum of $11,921.03 for the period from 1 January 2010 until 30 November 2011 being their period of occupation.
3) Wallis are jointly and severally liable for reimbursement of legal costs incurred by Daily to its solicitor in the sum of $6,552.48 for the period during which Wallis was in breach and that Wallis pay interest on the total debt.
4) Wallis pay to Daily damages in the amount of $159,686.79 and the sum of $33,400.00 for costs, charges and expenses incurred by Daily in entering into the Belle Lease.
5) Wallis pay Daily's costs of the Application.
Particulars of the damages sought under Order (4) were broken up as follows:
"Rent and outgoings from 1/12/2011 until 27/12/2012.
3 months @$11,982.07 amounting to $35,946.21.
9 months 27 days @$12,537.04 amounting to $123,740.58.
Total: $159,686.79"
Wallis Application for Original Decision
Wallis filed an Application for Original Decision against Daily in file number 125113 seeking the following orders:
1) Damages in the sum of $55,000.00 for loss of business caused by Daily's negligent failure to repair the roof of the premises, resulting in the collapse of part of the ceiling bulkhead of the premises on the 19th of July 2011.
2) In the alternative to (1), damages in the sum of $55,000.00 for loss of business caused by Daily's breach of Clause 15.6.4 of the Wallis Lease in relation to the failure to repair the roof of the premises resulting in the collapse of part of the ceiling of the premises.
3) Damages in the sum of $80,000.00 in respect of the loss of the sale of the business caused by Daily's negligent failure to repair the roof of the premises resulting in the collapse of part of the ceiling of the premises.
4) Daily's claim against Wallis for damages following the termination of the Lease be dismissed with costs.
5) Interest on damages awarded.
6) Costs of the proceedings.
Mr Richard Chia of Counsel appeared for Daily and Mr John Clifton of Counsel appeared for Wallis. Mr Clifton advised the Tribunal that Wallis would not be pursuing Order (3) being the claim for loss of opportunity to sell the business Rascals.
Evidence
Affidavits and Statements were lodged by the parties as follows;
a) Statement of Leanne Wallis dated 20 August 2012
b) Statement of Michael Waight dated 21 February 2012
c) Statement of Michael Waight dated 3 July 2012;
d) Statement of Michael Waight dated 4 September 2012; and
e) Affidavit of Rick Doran dated 3 September 2012
and Michael Waight and Rick Doran gave evidence on behalf of Daily and Leanne Wallis gave evidence.
At the end of the proceedings on the 10th of September 2012, I indicated that the parties should address the following matters in written submissions:
1) The significance of the High Court decision in Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited [2008] 234 CLR 237;
2) The obligation of Daily in respect of the roof and, in particular the covenant for quiet enjoyment and the consequences of the breach of same;
3) The nature of the Wallis financial claim in light of the evidence provided;
4) The obligation of Daily to mitigate its loss and whether this was satisfactorily done; and
5) The claim for legal costs in light of the decision of the Appeal Panel of this Tribunal in Roach v Braun [2011] NSWADTAP 40 and Section 14 of the Retail Leases Act 1994 (the RLA).
Those submissions and the replies were filed by the parties in December 2012.
Mr Michael Waight is the real estate agent for Daily, having had a long relationship with the owners of the company. Mr Waight trades under the business name Blueprint and appears to be the exclusive agent for Daily in respect of the day to day management of the building and for other properties owned by the directors of Daily.
Mr Waight in his evidence before the Tribunal and in his Statements filed tended occasionally to be an advocate for Daily rather than a witness. He was reminded of this problem a number of times. It is also noteworthy that the directors of Daily did not provide any evidence to the Tribunal but relied solely upon its advisers, Mr Waight as its agent and Mr Micelli as its Solicitor and Mr Chia as Counsel.
Retail Shop
The premises were used as noted in paragraph 3 of these Reasons, as indoor play centre, café and hair salon. The permitted use under the Wallis Lease is in clause 1.1. Childcare and Associated Café. Section 3 of the RLA provides:
Retail shop means premises that:
(a)are used, or proposed to be used, wholly or predominantly for the carrying on of one or more of the businesses prescribed for the purposes of this paragraph (whether or not in a retail shopping centre, or
(b)are used or proposed to be used for the carrying on of any business (whether or not a business prescribed for the purposes of paragraph (a) (in a retail shopping centre).
The businesses prescribed are contained in Schedule 1 to the RLA. Childcare is not a listed use in Schedule 1 of the RLA but Café is. The question of whether the premises was a Retail shop was not raised by either party.
In Mowena Pty Ltd v Stratis Promotions Pty Ltd [2003] NSWCA 376, the Court of Appeal upheld the judgment of Barrett J in holding that a lease with the initial use of Reception Lounge/Function Centre when varied to Licensed Restaurant with Ancillary Function and Reception Facilities was a retail shop. The Court held that the change of use brought the premises under the RLA. Young CJ in Equity at (49) held:
It follows that his Honour was also correct in being guarded by the decision of the High Court in Thompson v Easterbrook (1951) 83CLR 467, 481 following the speech of Lord Watson in the House of Lords in Westropp v Elligott (1984) 9 at App Cas 815, that when looking for purpose of a lease, a court looks to the use reasonably contemplated by the parties when they entered into the lease (except when they have varied that intention). Further, if the lease actually states a use that is conclusive....
In this case, the use contemplated by the parties was childcare and associated café. The café is not an ancillary use but an associated use. The business name "Rascals Playcentre & Coffee Shop" has both uses equally. There was also a hair salon as part of the business.
In Mowena, Young CJ in Equity continued at (51):
Of course there may be cases where the circumstances of the actual user of the premises with the acquiescence of the lessor may show that there has been some variation of the lease and that the purpose of the letting has changed. There may even be an oral arrangement which operates by way of estoppel.
Hair salon is also a business listed in Schedule 1 of the RLA. As will be seen later in these Reasons, the business plan of Rascals was, in essence, that the childcare facility was a way of attracting patronage to the business of the café and hair salon which generated the major sales revenues. In these circumstances, the Tribunal is satisfied that the premises is a retail shop and the Wallis Lease is a retail shop lease within the terms of the RLA.
Evidence regarding the water leaks in the premises
Mr Waight In his Statement of 4 September 2012, at paragraphs 3, 4 and 9 describes his approach to attending to the water leakage issues in the building as follows:
3.Since as early as 2008, issues have arisen from water ingress at the property which have affected both the respondents' business, 'Rascals' and the neighbouring tenancy 'Fourth Village Providore'. I would estimate that approximately 40% of the work undertaken to address water ingress relating to Rascals alone, a further 40% related only to Fourth Village Providore and the balance related to both Rascals and Fourth Village Providore.
4.The property is a single storey building and the portion of the roof above Rascals alone was some 360 square metres in area. It is also centrally located in a commercial area that attracts a significant amount of pedestrian traffic and it is not uncommon for plastic bags, plastic containers, newspapers, baseballs, tennis balls, bark, leaves and other rubbish to blow up on to the roof and find its way into the box gutter. I would estimate that half of the times water leakage issues were reported to me, I would be advised by the plumber who attended to inspect the roof that the problem was due to such items having found there way into and blocking the drainage systems that caused the box gutter to overflow. This was an issue that, I was advised, could only be addressed by regular inspection and maintenance and accordingly plumbers were engaged on a regular basis either solely for this purpose or to deal at the same time with issues that had been reported to me. If a plumber had been called in response to the report of a specific issue, I always specifically instructed them to 'have a look for any other problems while you are up there on the roof'.
9In dealing with the water ingress issue, I relied upon the advice of Dr Drip and the other plumbers who attended, however I did not always follow their recommendations. For instance, in July 2009, I inspected the roof above the café in Fourth Village Providore with a plumber from Dr Drip. It was recommended that drainage relief be provided by knocking an overflow out from the side of the building and running into (the) neighbouring property's garden. Instead of adopting this recommendation, the problem was addressed by increasing the capacity of the downpipe that serviced that area above Fourth Village Providore.
A summons to produce was issued by Wallis to Dr Drip to produce from 12 December 2006 all reports, invoices, letters and emails in relation to the building owned by Daily at 5-9 Vista Street, Mosman. The documents produced were tabled by Mr Clifton and marked by me as Exhibit C. Dr Drip advised the Tribunal that the information requested between 12 December 2006 and 27 May 2008 had been archived and therefore not available, however 12 invoices and 2 estimates were provided commencing on 10 April 2008.
The first invoice for a job dated 10 April 2008 stated:
To investigate report of water leaks from roof.
Upon inspection on 19.3.08, found a few spots where water is coming in, inspected roof and found that there are a loose roof sheets, leaking gutters, open windows and water seeping through brickwork. Need to return after approval and water proof and refix sheets into position.
Returned to property to fix leaking sections as per quote 10147.
Resecured roof sheets and water proofed faulty areas. Box gutters cleaned out, faulty sections sealed. Refitted glass panels.
The next two invoices for jobs dated 27 May 2008 and 10 September 2008 stated:
To supply labour and material to further repair roof leaks - found existing rainwater sump in front of right corner of 5 Vista Street to be rusted out and box gutter directly above sump to be rusted and leaking. Had a new rainwater sump and a new section of box gutter manufactured. Installed new section of box gutter in place over the top of existing rusted section and installed new 150mm round outlet. Installed new rainwater sump in position to replace rusted one and sealed to existing downpipe. Installed support bracket under edge of sump. Waterproofed all section as required and removed rubbish from site, and
To supply labour and material to further repair roof leaks and various issues - further investigated leaks at rear right of 5 Vista Street. Found box gutter in this area in poor condition and the outlet closest to the rear wall to be badly rusted. Cut out and replaced pop outlet and applied waterproof membrane to entire length of box gutter. Sealed up holes in badly rusted sections. Resealed edges. Roof sheet in poor condition in front of 5 Vista Street. Replaced all roof screw seals in poor condition on fibreglass sheets in this area.
There were invoices for work done on 29 November 2008 and 30 January 2009 described as relating to water leaks from central box gutter into Rascals Playcentre. On 9 February 2009 Mr Barros at Dr Drip advised that the roof above Rascals Playcentre was inspected and "the course of action to be taken was that the power box and timber to be removed from the wall, parapet flashing approximately 4m long and vicinity of issues needs to be removed, ordered new flashing for this section. Side and top of wall to be fully waterproofed as required, the box gutter to be cleaned and re-waterproofed and any loose roof sheets to be re-secured and re-sealed." This work appears was carried out on 27 February 2009. On 10 March 2009 Mr Barros reported that he had spoken to the owner of Rascals and there was no water penetration after the weekend downpour.
Mr Barros now at My Personal Plumber, in his job completion statement for 29 April 2010 stated Returned to property to begin rectification work to areas of roof that are of concern. Roof and box gutter above Fourth Village Providore was cleaned & box gutter water proofed with duram roof sheets extending over box gutter was trimmed back by 100ml - 200ml to allow gutter to self clean...roof, box gutter and sawtooth wall above Rascals Playland was painted/waterproofed with emer clad and box gutter was waterproofed with duram. If the problems persist, especially above Rascals then a section of the roof will need to be replaced [emphasis added by the Tribunal].
Mr Waight, at paragraph 13 of his Statement of 4 September 2012, says In October 2010 I received a report from Mr Barros... in which he said: 'As discussed, over the last 12 months we have completed numerous repairs on the roof, gutter and parapet walls over 5A Vista Street, Mosman. In particular major leaks rectified over this period have been - a recurring leak over Rascals play land. This was rectified by waterproofing and plugging adjacent wall to leak, renewing flashing and waterproofing box gutter. Since repairs were completed, there has been no leak reported. Since repairing sections of roof there have been torrential rainfall, and as no leaks from affected areas have been reported, I believe all repair work has been successful'.
Further work was carried out on 10 November 2010 to investigate more water leaks into the children's play area. On that day Mr Barros now back with Dr Drip together with Mr Waight inspected the roof and agreed that waterproofing and overflow installation would be the most efficient repair. On 1 and 22 March 2011 Mr Barros was again attending to the leaks at the premises. On 22 March 2011 he provided an estimate to Daily for two 4 metre sections of gutter to be lifted up over side wall of the neighbouring block, entire area will be cleaned and then treated before thoroughly dried. A small section of roof sheets will need to be loosened to allow for installation and a new two piece box gutter will then be sealed into fixed position. An extra waterproof layer will be installed at each end and jointed overlap. Roof sheets will then be resecured. An estimate of $2,347.40 including GST.
However, that work was not requested to be carried out by Mr Waight on behalf of Daily.
Then, on 19 July 2011 part of the bulkhead of the ceiling at the premises collapsed. Leanne Wallis, at paragraph 14 in her Statement of 20 August 2012, says:
On 19 July 2011 at approximately 10:00am I received a call from Eloise McFarlane, a staff member who said words to the effect of:
'Leanne, part of a bulkhead above the walkway has collapsed and there is a lot of rainwater coming in. The café was full of people, but no one was hurt. However almost everyone left and some said they were not coming back until it is safe. Can you come over and have a look. I am really worried about it'.
I left my work as soon as possible and went to Rascals to see what had happened. When I arrived I found Rascals almost empty of patrons and observed the walkway area of the floor was very wet. I took a photograph of the collapsed bulkhead, which is annexed and marked "B".
The photo marked "B" shows a large hole in the ceiling bulkhead. From the above description the collapse occurred in the café part of the premises.
Mr Waight at paragraph 17 in his Statement of 4 September 2012 says:
When Rascals had been fitted out by Wallis, a gyprock bulkhead had been constructed to conceal the existing box gutter running parallel to the wall between Rascals and Fourth Village Providore. The gyprock sheeting was not supported by a timber frame but was held together with construction glue and, as a result, water leaking from the box gutter caused part of the gyprock bulkhead approximately one square metre in size to sag, crumble and disintegrate. Although the bulkhead ran along the length of the building, that particular spot was at the rain back up point to the rain water head at the Rascals Vista Street frontage of the property. That was the only drainage outlet at this end of the gutter system above Rascals and would be also subject to overflow when there were blockages due to debris.
Mr Waight in his statement of 22 February 2012 annexed at "N" a copy of an email he sent to Wallis on 21 July 2011, after the collapse of the ceiling/bulkhead. In that he email he says:
I have organised Statusflow plumbing group to attend 7.30am, Thursday 21 July to see if they can fix this particular problem... As you are aware, this is not the first time I have arranged to repair various water issues on your roof; and over the last 3 years, I have responded every time there was a new issue brought to my attention. I have also made added maintenance upgrades to your roof sections at the same time as adjoining Fourth Village Providore has had some waterproofing upgrades, as the internal roof access is via Village Providore ladder access.
Mr Waight at paragraphs 20, 21 and 22 of his Statement of 4 September 2012 describes what then took place after Statusflow Plumbing attended the premises:
20At or about that time, I engaged new plumbers Statusflow Plumbing to investigate the water ingress problem. However, Statusflow did not immediately advise that the box gutter be replaced but rather recommended program maintenance to ensure that the gutters were cleaned out.
21Ultimately, in early 2012, Statusflow replaced the box guttering. The invoices issued by Statusflow dated 28 February 2012, and 4 April 2012 (showed 34m of box guttering having been replaced).
22.However this did not resolve the issue of water leakage. In May 2012, Statusflow was again asked to investigate continuing water ingress. Annexed to the Statement is the invoice issued by Statusflow dated 17 May 2012.
That invoice stated Investigate roof leak. Replace old lead flashing that was patchy and old, penetration hold. Since the existing lead patch was reacting with the zincalum sheets causing it to rust out we replaced it with a zinc patch.
Shortly after handing back of the premises to Daily by Wallis, Belle Property showed an interest in leasing the premises. Negotiations proceeded through the early part of 2012. Through the process of discovery an email was produced from Michael Waight of Blueprint to Mr Michael Micelli, solicitor for Daily, dated 6 June 2012, which was tabled by Mr Clifton and marked by me as Exhibit "E". In that email Mr Waight discussed with Mr Micelli a number of issues but relevantly in relation to the negotiations with the incoming tenant, Belle Property, Mr Waight said:
10.They have picked up on the ongoing maintenance for the roof. The reality is that the lessor has to maintain the structure/building and their words:
'the landlord shall take reasonable steps to maintain the premises in a watertight condition'
are only a reflection of that lessor obligation. I don't want an annual report (as with Peter Q) [presumably reference to Peter Quattroville being the tenant of the next door property Fourth Village Povidore] it is best on a regular each three month basis that actually works in practicality. Annually it's useless - if it fails in December and the report is only due in July. They then wait six months for the report? No.
The Belle Lease contains the following clause:
13.3State of Repair
The landlord shall at the commencement of the initial term of the Lease:
13.3.1have the roof area of the building ('Roof') inspected and provide the Tenant with a certification by an appropriately qualified and reputable licensed plumber ('Roofer') that the roof is effective to prevent the entry of rain water into the premises.
13.3.2attend to all repair work to the roof in a timely manner, (generally determined to be within 48 business hours and subject to issues of weather and availability of access) or of receiving a written notice by the lessee that the roof has permitted the entry of water into the premises.
13.3.3ensure that all repairs as determined the roofer will be carried out promptly in a proper and workmanlike manner; Provided Always that where the roof has been compromised by the Tenant's works upon the roof, then the lessee agrees that any such repairs to seal the roof shall be performed by the person reasonably nominated by the landlord at the costs of the Tenant.
13.3AThe landlord shall take reasonable steps to maintain the premises free of water penetration.
In comparison, Clause 13.3 in the Wallis Lease states:
State of Repair
The Tenant acknowledges that the premises were in good repair at the Commencement Date.
Wallis claimed damages caused to their business, Rascals, due to the failure of Daily to remedy and stop the continual water leakage through the roof of the building to the premises and the subsequent collapse of the ceiling/bulkhead on two bases. Firstly, following the decision of Yeldham J in Martins Camera Corner Pty Ltd v Hotel Mayfair Ltd (1976) 2 NSWLR 15 Wallis claim that Daily was negligent in not attending to repairs to the roof and consequently being in breach of the covenant for quiet enjoyment and secondly, pursuant to clause 15.6.4 of the Wallis Lease, Daily should pay Wallis damages for its failure not to take reasonable steps to prevent those leaks and for the consequential loss of income to the business, Rascals.
Lessor's obligation to provide quiet enjoyment
The obligation of a lessor to provide to the lessee quiet enjoyment is well settled law. Repairs to the structure of a building may become necessary to be undertaken by the lessor so that the lessor does not breach the implied covenant of quiet enjoyment or the express covenant in the lease if it is so found. The covenant of quiet enjoyment is to secure of the lessee uninterrupted enjoyment of the leased premises. In Martins Camera Corner, Yeldham J held [23]
I take the relevant law in relation to the covenant for quiet enjoyment to be correctly set out at Halsbury's Laws of England, 3rd Ed, Vol.23, pp 605, 606 in these terms:
The covenant for quiet enjoyment operates according to its terms to secure the tenant, not merely in the possession, but in the enjoyment of the premises for all usual purposes; and where the ordinary and lawful enjoyment of the demised premises is substantially interfered with by the acts or omissions of the landlord or those lawfully claiming under him, the covenant is broken, although neither the title to, nor the possession of the land may be otherwise affected...
If the act causes physical interference of the demised premises, there is a breach of covenant, notwithstanding that the act itself is done off the premises...
Yeldham J continued [24]:
In Anderson v Oppenheimer (1880) 5 Q.B.D. 602, the Court of Appeal observed that, to constitute a breach of a covenant for quiet enjoyment, in circumstances where a burst water pipe, in a portion of the building retained by the landlord, had caused water to flow into the demised premises, it was necessary that negligence on the part of the lessor, whether by an act of commission or of omission, be shown. There the action failed because no negligence was proved. ... Although it is not clear that, for there to be a breach of this covenant in circumstances such as exist in the present case, there must be present all the ingredients of a cause of action in tort for negligence (i.e. duty of care and breach) - and, indeed, if this is required, such a covenant would in most cases be redundant - nonetheless, I am prepared to assume, for present purposes, that these must be shown to exist. I turn, therefore, to the plaintiff's claim in negligence, and to a consideration, independently of the provisions of the lease, of whether it is established by the evidence.
The facts in Martins Camera Corner were that after very heavy rain a drain on the roof became blocked and caused water to enter into the leased premises being a camera store and substantially damaging the stock of the lessee. Yeldham J found that the lessor had failed to ensure that the drains and downpipes from the roof were kept free from rubbish and debris which congregated and thus caused the water to overflow. In the circumstances of that case Yeldham J held that the lessor, by not maintaining the roof clear of debris, was in breach of its duty of care, and that such breach was the cause of the lessee's loss.
The Tribunal notes from the decision in Duarte & Ors v Mitchell& Ors [2007] NSWADT 276 that the onus to prove that the lessor Daily had acted negligently when attending to the repairs to the roof, or admitting to attend to those repairs, lies with the lessee Wallis, following the familiar principle that "those who assert must prove". The same applies to the alleged breach of clause 15.6.4 of the Wallis lease.
The covenant for quiet enjoyment is expressed in the Wallis Lease at Clause 15.1 as follows:
Subject to the landlord's rights, while a tenant complies with its obligations under this Lease, it may occupy the premises during the term without interference by the landlord.
Submissions by Wallis
Mr Clifton submitted that Daily was on regular notice regarding water leakage to the premises as evidenced by the number of visits to the building made by the various plumbers and consultants and through their reports, estimates and invoices Daily would have been under no illusion that ultimately the roof required proper repair and attention as well as a regular maintenance system. However, the question to be considered is whether Daily was negligent in relation to maintenance of the roof and ceiling to the premises in that it failed to prevent continual water leakage and the subsequent collapse of the ceiling/bulkhead.
However, the collapse of the bulkhead is in reality the culmination of a long build up of continual water leakages over a period of time similar to the facts in the Martins Camera Corner. As Mr Clifton states in his written submissions:
In Martins Camera Corner the plaintiff brought a claim for failure to clear and/or maintain roof drains, causing water ingress and damage to his premises. The facts involved were remarkably similar to what occurred in this case. In particular, the lessor was on notice of a possibility of drains above the demised premises blocking in rain and the lease contained a covenant for quiet enjoyment in substantially the same terms as the covenant for quiet enjoyment in the Wallis lease.
Submissions by Daily
Mr Chia's first submission is that Wallis cannot obtain the benefit of Clause 15.1 whilst in default. Wallis was in default since early 2010 in paying the rent, a requirement rendered an essential term under Clause 19.1 of the Wallis Lease. Mr Chia also submitted that "under the terms of the Lease, the lessee has agreed that the covenant would not apply whilst they were in default". No explanation is given by Mr Chia for this submission as to an agreement unless it be implied under the terms of the Wallis Lease.
Mr Chia's next submission was that Mr Waight acted responsibly in attending to all the water leaks at the premises, engaging professional plumbers to attend the premises and do all that was necessary and took advice from the plumbers but he did not necessarily always have to follow that advice. Mr Chia submitted that there was no negligence by Daily in this regard. Further, that in light of the evidence from Mr Waight regarding the installation by Wallis of the bulkhead in the ceiling that it was not supported by a timber frame and that the installation was problematic and deficient, the inference that such installation made a substantial contribution to the collapse.
In relation to the first submission of Mr Chia the Tribunal could find no express statement regarding an agreement that the covenant will not apply whilst Wallis was in default. Accordingly, such submission by Mr Chia must be based on Clause 22.2 of the Lease, the waiver provision which provides:
22.2 No Waiver
If the landlord:
22.2.2does not exercise or delays exercising any right under Clause 19; or
22.2.3gives any concession to the tenant,
it is not a waiver of any breach or of the landlord's rights under this Lease ".
Clause 22.2 refers to the landlord's rights. Those rights are, of course, the rights of the landlord should the lessee default, such as a right to terminate the Lease, as contained in Clause 19.2 and as contained in every Lease. However, does this mean that if Wallis is in default under the lease and Daily has not exercised a right arising from that default or has given a concession to Wallis that Wallis has waived the obligations of the landlord to perform under the lease?
Clause 15.1, the provision for quiet enjoyment is under the heading "Landlord's Additional Obligations and Rights". The rights referred to in the heading are set out in Clause 15.4, the right of the landlord to carry out work on the premises. Clause 15.1 is not expressed as a landlord right, it is in fact a right of the lessee for quiet enjoyment and an obligation of the landlord to provide to the tenant quiet enjoyment. Clause 15.1 commences "subject to the landlord's rights". In my view, the clause in fact can be interpreted against what Mr Chia has submitted. The waiver referred to in Clause 22.2 is a waiver by the landlord, that is, if the landlord waives exercising its rights while the tenant is in default or gives a concession, the landlord can still, of course, exercise those rights, having waived previously such default and is not to be bound by such waiver when exercising those rights, such as the right to terminate the Lease. However, that should not be interpreted as a waiver by the lessee of the overriding obligation of the landlord to provide quiet enjoyment. Clause 15.1 does not say: "Subject to the landlord's Rights and Obligations". The landlord's obligations continue, notwithstanding any waiver or concession.
Mr Chia referred to Clause 19.1 of the Wallis Lease regarding essentiality of terms. Clause 19.1 states:
"19.1 Essential Terms
Each obligation of the tenant to pay money and its obligations under Clauses 8, 10, 13 and 13 are essential terms of this Lease. Other obligations under this Lease may also be essential terms".
Mr Chia then says that by Clause 19.1 the obligation of Wallis to pay the rent is an essential term and breach by Wallis renders Wallis unable to require Daily to comply with its obligations under clause 15.1.
The question of what is an essential term of a lease was closely examined by the Tribunal in the recent decision of Coco Chocolates Pty Ltd v Lotz [2013] NSWADT 83. In that case the Tribunal followed the High Court in Shevill and Anor v The Builders' Licensing Board (1981 - 1982) 149CLR 620 where the High Court held that in construing a contract, a court may find that a term in it is essential, even though the parties have not expressly agreed that it is essential. The objective test is whether the term is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor. see Shevill at 627, where Gibbs CJ applied the test laid down in Associated Newspaper Ltd v Bancks (1951) 83CLR 322 at 337.
The implied covenant for quiet enjoyment by a landlord in favour of a tenant is one of the hallmarks of a lease. It is usually now expressly stated in the lease. On an objective test in accordance with the High Court decision in Shevill, if a tenant such as Wallis, were asked what is the essential obligation expected from a landlord, it would be the covenant for quiet enjoyment, which is the main obligation that a landlord must provide. In these circumstances, following the decision in Shevill, notwithstanding the fact that Clause 15.1 is not expressly made essential pursuant to Clause 19.1 regarding essential terms, it is an obligation which the Tribunal finds as an essential term. Thus as an essential term, notwithstanding any failure by Wallis to comply with the lessee's obligation to pay rent, such failure by Wallis would not in the Tribunal's opinion negate the obligation of Daily to perform its obligations under an essential term of the Wallis Lease.
It is the Tribunal's view that the evidence from Mr Waight and the invoices, reports and estimates of the various plumbers used show a continual leakage problem in relation to the ceiling of the building and with respect to the premises and this was not solved until the Wallis' had vacated the premises. There were recommendations of repairs to the roof over the premises by the plumbers used, notably in the report of 29 April 2010 "if problems persist, especially above Rascals then a section of the roof will need to be replaced" and in the report and recommendation of 22 March 2011. Subsequently, 34m of the box gutter was replaced after the collapse and after Wallis had left the premises.
In fact, as the evidence shows in relation to the negotiations over the Belle Lease the Daily's obligations with respect to the roof and the leakage problems was so significant that a special clause was inserted in the Belle Lease namely clauses 13.3 and 13.A to deal with the issue to the satisfaction of the incoming tenant Belle Property. One could take the view that if Daily could attend to fixing the roof for a new tenant as it did and provide the comfort to the new tenant in clauses in a new lease it was within its power and control to take all reasonable steps to stop anything that causes significant disruption or significant adverse effect to the tenant's trade.
It is instructive to the Tribunal in understanding the attitude of Daily to maintenance of the building to review the language used by Mr Waight in his email of 21 July 2011 to Ms Leanne Wallis very soon after the collapse of the bulkhead/ceiling, recited in paragraph 24 in these Reasons. There Mr Waight refers to the roof of the building above the premises as "on your roof" and "upgrade to your roof sections". However, It is not the Wallis roof, it is the roof owned by the lessor, Daily. In the Wallis Lease "premises" is defined in Clause 1.1 to be "that part of the Building described as premises..., the boundaries of which are (c) the lower surface of the ceiling (above any false or suspended ceiling)." The roof was never to be the responsibility of Wallis. Regarding the submission by Mr Chia that, due to the problematic installation of the bulkhead by Wallis, an inference can be drawn that the installation is partly responsible for the collapse, it is clear from the terms of the Wallis lease that the responsibility for structures above the lower surface of the ceiling was always the responsibility of the lessor Daily.
It is the view of the Tribunal on the evidence that Daily chose not to actively consider what needed to be done and take the advice of its consultant plumbers with respect to an overhaul of the roof to prevent water leaks and in particular to entering into of a regular maintenance system. The reluctance of Daily to do this is clearly evidenced by the attitude of Mr Waight that the roof was somehow the responsibility of Wallis (your roof) and that any maintenance work being done on that roof by Daily was a concession to its tenants. However, in negotiations with Belle Property for a new lease, Mr Waight appears to concede responsibility for the water leakages through the roof lies with the landlord, Daily and is happy to allow appropriate protection to the incoming tenant regarding failure of Daily to attend to its responsibilities regarding the roof and water leakages. In this regard it is submitted by Mr Clifton that Daily was in no different position to the landlord in Martins Camera Corner and Justice Yeldham held the landlord there was negligent in relation to its omission with respect to its tenant and liable to the tenant for the damage caused.
Compensation for failure by Daily to take reasonable steps
The second aspect of the claim for damages by Wallis regarding breach of its obligation under the Wallis Lease by Daily is based on Clause 15.6.4 which provides:
15.6.Compensation
Subject to clauses 15.7 and 15.8, if the landlord,
15.6.4Does not take all reasonable steps to prevent or put a stop to anything, within the landlord's control, that causes significant disruption of, or which has a significant adverse effect on, the tenant's trading in the premises.
and the landlord does not rectify the matter as soon as reasonably practicable after receiving the tenant's notice asking the landlord to do so, then the landlord may be liable to pay the tenant reasonable compensation for any loss or damage (other than nominal damage) which the tenant suffers as a consequence.
Firstly, the Tribunal notes that clause 15.6.4 is a repeat in general terms of section 34(1)(d) of the RLA. Secondly, as in section 34, the clause is predicated upon the lessee providing notice to the lessor to rectify the relevant matter causing disturbance. Whilst the email correspondence between the parties shortly after the collapse may constitute notice for the purposes of the clause and section 34(1)(d) there is no suggestion that Daily did not rectify the collapse of the ceiling/bulkhead expeditiously. However the case put by Wallis relates to a continuum of water leakage from the roof to the premises and the consequential loss flowing as a result of those leaks but there is no notice from Wallis to Daily in accordance with clause 15.6 and section 34(1)(d) of the RLA.
The factual situation in this case is in some respects similar to the factual situation in Duarte and Ors v Mitchell and Ors [2007] NSWADT 276. There, the dispute was between the lessor and the lessee regarding damage to the premises by rain during the early months of 2007. The damage was so serious that the local authority ordered the lessees to cease using the premises until specified repairs had been carried out. The premises were subsequently repaired but there was an argument regarding arrears of rent and damages suffered by the tenant to its trade. That case also turned on whether the lessee could claim compensation under section 34 of the RLA and whether the lessor had acted reasonably in effecting the repairs.
In Duarte, the Tribunal noted at [79] and following:
79.A lessor's obligations under section 34(1)(d) is, however, expressed in terms of failing to take "all reasonable steps" to "prevent or put a stop to" disruption of the lessee's trading. It is not an absolute obligation. Furthermore, compensation may only be claimed if the lessor fails to "rectify the matter as soon as reasonably practicable after being requested in writing by the lessee to do so". The Tribunal is of the opinion that where subparagraph (d) of subsection (1) is the provision specifically relied on, this requirement of "rectifying the matter" does not enlarge the lessor's obligation beyond that of "taking all reasonable steps". In this situation, the concluding words of the subsection make it clear that what are found to constitute "all reasonable steps" must be taken "as soon as reasonably practical" after written notice has been received.
80.In the present case, the lessors were not given any written notice of the relevant disruption of trading.
81.It should be pointed out also that no evidence, expert or non-expert, was tendered suggesting that the repairers engaged by (the lessor) were patently not qualified or that the tasks that they were instructed to carry out were patently inadequate to render the premises fit for the lessee's to resume trading. Similarly, there was no evidence as to when, in the particular circumstances of the case, that steps taken by the lessors to have the repairs carried out should be taken to have infringed the time-limit imposed in section 34(1), namely, "as soon as reasonably practical.
An interesting aspect of Duarte is that the abatement provisions of the lease in that case were invoked, so that whilst the lessee was unable to trade the lessee was entitled to an abatement of rent.
Section 36 of the RLA relevantly provides:
Section 36 - Damaged Premises
(1)A retail shop lease is taken to provide for the following if the shop or the building of which the shop forms part is damaged:
(a)The lessee is not liable to pay rent, or any amount payable to the lessor in respect of outgoings or other charges, that is attributable to any period during which the shop cannot be used under the Lease or is inaccessible due to that damage;
(b)If the shop is still usable under the Lease but its useability is diminished due to the damage, the lessee's liability for rent and any amount in respect of outgoings attributable to any period during which usability is diminished is reduced in proportion to the reduction and useability caused by the damage.
(2)A retail shop lease must not contain any provision the effect of which is to limit any liability of a party to a Lease to pay compensation to another party to the Lease in respect of damage to the shop or the building of which the shop forms part.
In Mohammady v Christofi [2012] NSWADP122 the Tribunal found that the landlord had not taken appropriate action in relation to maintenance of the roof to ensure that water leakage did not continuously occur. The lessee in that case was unable to avail itself of Section 34 because no notice had been provided. The Tribunal found there was water leakage causing damage to the ceiling and in fact to stock. The Tribunal applied the abatement provisions in the lease in conjunction with Section 36(1)(b) calculating the amount of abatement by reference to the proportion of the area of the ceiling that it found had suffered damage. The landlord appealed and was successful in part in reducing the amount of rent to be abated on the basis that less of the ceiling was damaged than determined by the Tribunal. The Appeal Panel in its decision Christofi v Mohammady [2013] NSWADTAP10 at paragraph 32 held:
32.Support for doing so (that is calculating the amount of abatement of rent by reference to the proportion of the area of the ceiling that the Tribunal had found to have suffered damage) is provided by the following passage in a recent decision of the Tribunal, Lovecek v JV Idola Pty Ltd & Ors [2011] NSWADTAT, at [51-54];
51:Section 36(1)(b) of the RLA provides that the lessee's liability for rent for any period during which the useability of the premises has been diminished due to damage is to be reduced in proportion to the reduction of useability caused by the damage;
52:Consideration of the evidence given by the various lay and expert witnesses in these proceedings clearly establishes that the roof, gutter and ventilation at the premises were inadequate to prevent water ingress, dampness and mould that this situation caused a portion of the premises to be unfit for reasonable use as a bridal wear shop for the period from early July 2007 which is the time when further instances of water ingress began and a mouldy smell returned to the rear of the shop;
53:The plain of the premises admitted into evidence establishes that the actual area directly affected by dampness or mould was approximately 25% of the total floor space of the premises. This exact figure is not an absolute indicator of the decrease and useability of the premises, because some of the affected area may have been usable for some purposes while, on the other hand the rest of the premises may still have been affected at different times by a musty smell. This is a reasonable inference arising from the evidence given by a number of witnesses. However, application of this proportional figure is the best available method to approach determination of the extent of any rent abatement or reduction which may be appropriate.
54:The lessee seeks an order for total abatement of rent for the premises from early 2007, such that no arrears of rent are payable. This claim is simply not supported by the evidence. Conversely, the lessor has not provided evidence as to exactly how the sum claimed for arrears of rent arises, except to state that it covers a period until the premises were re-let. Taking these factors into account, I determined that the fair and appropriate approach is to reduce the lessor's claim for rent by 25%..
33.Like the Tribunal in Lovecek, we are inclined, in the absence of expert evidence or other forms of assistance, to follow this methodology.
The Wallis Lease contains an abatement provision at Clause 18.2 as follows:
"18.2 Diminution of Use
If the premises are still usable but the use is diminished because of the damage, the tenant's liability to pay rent and amounts payable for outgoings of the building is reduced in proportion to the reduction in use".
This provision is similar to general abatement provisions found in leases. Abatement of rent and/or Section 36 of the RLA if there is no abatement clause in the lease applies whether the lessee has made any application or not, dissimilar to section 34 where the lessee must provide written notice to the lessor noting the damage caused and seeking compensation. It was open to Daily to go to Wallis and say that because of the water leaks and inconvenience to your tenancy, until the water leaks have stopped and we the landlord have done all we can to repair the roof to ensure that there are no further leaks and you can enjoy quiet enjoyment of your tenancy, rent and outgoings should abate partially for that period. In the claim by Daily, the rent and outgoings in year four of the Wallis Lease was $11,982.07 per month (see Particulars in paragraph 9 of these Reasons). If the parties had agreed that a 15% abatement of rent should apply (being an estimate of the area that was affected by water leaks and damage) then using the rent for year four as a basis for calculation, Wallis would have been relieved of paying rent and outgoings of $1,798.00 per month. Over a 14 month period from 29 April 2010, being the date of the advice regarding roof repair, up to the collapse of the ceiling/bulkhead on 19 July 2011, this would amount to approximately $25,172.00. As at 28 July 2011 Wallis was $39,195.72 in arrears, after credit of the bank guarantee that had been called upon. Query if abatement had been applied, whether the bank guarantee should have been called up and whether Wallis would have been in significant arrears to be considered in breach of an essential term. Of course this is supposition only.
Claim by Wallis for compensation for breaches by Daily
In the Application for Original Decision File No. 125113 Wallis claims damages of $55,000.00 for loss of business. The main business of Rascals was to entertain children and have mothers and/or fathers attend and spend money in the café and hair dressing salon. In her statement and in her oral evidence, Leanne Wallis mentioned the importance of a singing group called "123 Sing with me". At paragraph 4-5 of her statement Leanne Wallis says:
4.Between 2009 and July 2011 a singing group called "123 sing
with me" ("123") used Rascals to conduct singing classes for young children. 123 conducted singing classes in which mothers would sit on the floor of one of the party rooms with their young children seated in front of them whilst a 123 employee would lead a group singing from the front of the class.
The number of patrons brought in by 123
5.123 attended Rascals 2 days per week from 2009 and on each
day conducted up to 3 classes with around 10-15 children in each class. Therefore, each day 123 attended brought around 30-45 children into Rascals with their mothers. Each 123 class generally brought between 10 and 15 mothers into Rascals, most of who patronised the café after the class. As there were usually 3 123 classes per day, those classes generally brought in between 20 and 45 additional mothers per day or between 40 and 90 additional mothers per week into Rascals.
The additional patronage from 123, resulted in the mothers staying at the premises and spending money at the café and hair salon. Ms Wallis estimated the related patronage at around $1,235.00 per week. The total value of direct billing to 123 and related patronage was estimated by Ms Wallis at $1,715.00 per week. There were, of course, other patrons apart from 123 related patrons. These were estimated by Ms Wallis at between 40 and 70 in the winter months. Assuming an average of 55 patrons in each day in winter at a spend of $19.00 per mother, the total revenue per day was $1,045.00 and $5,225.00 per week.
The water leak to the premises were a problem. Ms Wallis, in her statement says at paragraphs 19-21 inclusive:
19.I was aware that 123 were unhappy with ongoing water leaks into the premises from previous oral complaints.
20.I had observed that non-carpeted areas of the floor were wet and slippery after rain and the party rooms (which were carpeted areas) had a continuous musky smell by early 2011.
21.Following the bulkhead collapse, 123 never again attended the premises. This caused an average loss of revenue of around $2,000.00 per week, which was an amount approaching the weekly rent.
Ms Leanne Wallis asserted as part of the particulars of the Wallis Application that the business "123 Sing With Me" cancelled its contract with Rascals and vacated the premises in essence as a result of the collapse of the ceiling/bulkhead. Subsequently Ms Wallis asked the principal of 123 Sing With Me, Ms Claire Wallis (no relation) to explain the decision to leave and in an email on 29 May 2012 Ms Claire Wallis advised as follows:
Hi Leanne,
Lucy has quickly forwarded me an email based around the leaking/water issues (see below):
On the water/damp issues:
There was at least three occasions where there was serious flooding outside the first party room immediately after the play area (not the one up the stairs). After consistent days of rain or heavy rainfall there was a massive puddle in that hall passage leading up to the stairs. The water on two occasions flowed into the first party room and I ended up switching rooms after the second time, as the time it took me to clean up took away from my own set up time and I was late starting classes due to the flooding. It created a very slippery floor at the bottom of the stairs and so presented a hazard to anyone passing through - mostly people coming to our classes at that point.
I also experienced leaking water in the top party room (next to the hairdressers) twice. It came through the ceiling near the window. It wasn't as severe as the flooding at the bottom of the stairs though but enough that I had to stop the class to wipe the floor dry and organise something to catch the leaking - it wasn't ideal in a class full of toddlers.
If you need anything further please let me know.
Best regards,
Claire
However in fact Ms Claire Wallis of 123 Sing With Me already decided not to continue its arrangements with Rascals. In an email to Ms Leanne Wallis on 18 July 2011, she said:
On a solemn note, a change of circumstances means I need to have Term 3 off from 123 Sing with me ... I'm hoping that Lucy and I will be back as Rascals in the not too distant future ... It should be noted that the bulkhead collapsed on 21 July 2011.
Mr Chia on behalf of Daily made much of the fact that Ms Leanne Wallis had received this email prior to the collapse of the ceiling/bulkhead on 19 July 2011. He says in his submissions that in cross examination Ms Leanne Wallis did not deny receiving the email and accepted that in the email Claire Wallis was cancelling her involvement with Rascals. He did note that Ms Leanne Wallis disputed that Claire Wallis had withdrawn from Rascals for personal reasons and asserted that the cancellation was in fact due to water leakage issues as she stated in her email following the request from Ms Leanne Wallis. Mr Chia submitted that:
"The loss of business from 123 cannot be said to have been caused by the alleged ceiling collapse on 19 July 2011 and it is submitted that that is, in itself, sufficient to dispose of the lessee's financial claim; however Leanne Wallis made the further concession at cross examination that her account of income received from 123 was only an estimate and that her estimate of monthly income exceeded the amounts which were actually invoiced to 123; but part of the reason the business failed was that when the sun was shining parents preferred to bring their children to a park or Balmoral Beach to play and that the business plan of Rascals need to change."
Mr Clifton in his written submissions counters as follows:
Daily makes much of the difficulties surrounding the 123 evidence. However, the explanation offered by Ms Leanne Wallis was to the effect that the 18 July 2011 email was not a true reflection of the reasons for 123's departure. In particular, Ms Leanne Wallis gave evidence that l Ms Claire Wallis was (from personal knowledge of her built up over the years of their business relationship) the type of person who avoided conflict and would be embarrassed to criticise the Rascals business. Therefore, Ms Claire Wallis shied away from the personal criticism of Rascals and justified her decision to move 123 for personal reasons in her 18 July 2011 email. It is submitted that this explanation is, at least, plausible, if not likely.
On review of this material and in light of the submissions made and the evidence provided to the Tribunal it is the view of the Tribunal that the email of 18 July 2011 from Ms Claire Wallis of 123 Sing With Me is of little probative value in relation to assessment of the loss of business, if there was such loss of business by Rascals. The writer refers to the fact that she only wanted to cancel one term and there is an indication that 123 would like to be back at Rascals in the not too distant future. The second email from Ms Wallis on 29 May 2012 regarding the water leakage problems is more helpful and is more consistent with the evidence that there was continuing water leakage during the tenancy of the premises by Wallis. It is however difficult to ascertain what effect that water leakage had on the business of Rascals and consequently the ability of Wallis to trade from the premises.
The financial details of the business of Rascals was not easy to understand and follow. Ms Leanne Wallis annexed to her statement a profit and loss statement for July 2010 through to June 2011 showed an operating loss of $97,466.08 and an overall total loss of $154,917.81. In the statement rent is shown at $145,850.00. She also annexed a statement of daily sales figures for July to September 2011. These show for the month of July a sum of $11,637.24, for August $8,498.90 and September $7,358.10. This is curious because it shows on 22nd and 23 July, a few days after the collapse of the ceiling/bulkhead takings of $1,055.50 and $1,976.75, the highest days trading in the 3 months. Further, there were no comparative sales figures for the earlier months provided, so it is difficult for the Tribunal to make any comparison regarding the loss of sales.
As noted by Mr Chia in his submissions, that despite the documents being the subject of a Summons to Produce documents, Wallis has not produced financial records of their business which could have substantiated any loss in sales or income. From the accounting information provided, it is difficult to come to a view as to whether the business suffered as a result of the water leakages.
Mr Clifton admitted that there were clearly difficulties with the evidence from Ms Leanne Wallis substantiating the claim for damages due to the loss of business as a result of the continual water leaks to the premises and the subsequent collapse of the bulkhead/ceiling and loss of patronage. In summary his submissions were as follows:
i) There were ongoing water leaks into the premises from 2008 as evidenced by the numerous attendances and reports from plumbers;
ii) Objectively, (even without the evidence Ms Leanne Wallis) these water leaks probably made the premises smell dank and damaged the fittings. This is simply a consequence of water penetration in doors and any such smell and damage was significant as Rascals was being pitched as an upmarket café/play centre in an upmarket area. This is confirmed by 123 in the email from Ms Claire Wallis;
iii) A collapse of the ceiling would objectively frighten and deter patrons. Such an event would not normally be expected and is necessarily dramatic. The likely consequence of such an event would be a departure to other cafés in the area, which there are many. It can only be assumed that many such patrons would not have returned;
iv) Consequently some subsequent loss must have occurred as a result of the roof leaks. In Paino v Paino [2008] NSWCA276 Hodgson J.A. and McColl J.A. said at [76 and 77]:
"There is a general principle in relation to damages that where a plaintiff has proved substantial loss but the evidence does not enable precise quantification of it, the Court should "do its best". Fink v Fink [1946] HCA54; State of NSW v Moss [2000] NSWCA133; Uszok v Henly Properties (NSW) Pty Ltd [2007] NSWCA31 at [135-141].
i) This is a case where Wallis cannot adduce precise evidence of what has been lost for two broad reasons. Firstly their records are obviously deficient. Having said this, there was no suggestion of deliberate destruction or non-production of documents. Ms Wallis' evidence was that more complete financial records had simply not been prepared and she had produced all that she had. Secondly, it is simply not possible to note precisely who left and did not continue patronage as a result of either the gradual physical effects of water ingress on the premises or the ceiling collapse or both. However, it is reasonable to conclude some substantial number did.
ii) The claimed figure of $55,000.00 is a reasonable estimate of the likely effect of the ongoing leaks on the premises from 29 April 2010 (i.e. when the report from Dr Drip recommended replacing the roof). Even if the evidence of Ms Wallis is not accepted in full, the period between May 2010 and November 2011 is 18 months or roughly 547 days (i.e. 365 x 1.5). Allowing around $100.00 per day of lost revenue, which amount is not excessive given the affluent nature of the area, a figure of around $55,000.00 is produced.
A summary of Mr Chia's submissions are as follows:
(a) In the absence of evidence the Tribunal cannot be comfortably satisfied that significant losses occurred as a result of water leaks at the premises. In light of Leanne Wallis' evidence and the blatant disregard of the Tribunal's summons to produce documents, little weight can be given to the assertion by Ms Wallis that the ceiling had collapsed in a catastrophic fashion in which it has been portrayed. Leanne Wallis did not herself witness the collapse, and only provides hearsay evidence of what her employee said at the time. No corroborative evidence was provided regarding water damage to carpets, smells or loss of patronage.
(b)Wallis had the opportunity to raise the issue of compensation for any water leaks through the mechanism provided in clause 15.6 of the Wallis Lease. They chose not to avail themselves of this opportunity during the period of their occupation and have only raised the issue after the lessor commenced the current proceedings in an endeavour to resist the unpaid rent claim.
(c)Despite the financial documents of Rascals being the subject of a Summons to Produce, Wallis did not produce financial records which would have substantiated any loss in sales of income. Ms Wallis did not provide a satisfactory explanatory why the documents had not been produced and it is open to the Tribunal to infer had they been produced, they would not have assisted the lessee's case. On the evidence before the Tribunal it appears that the lessee's business was struggling but the more likely reason for this is that the lessees did not have a viable business model. Of those financial statements that were produced, namely the profit and loss statements, it is unreliable as it does not clearly identify what income was recovered from 123.In these circumstances the Tribunal cannot be satisfied that the water leaks were the cause of the failure of the lessee's business or otherwise the cause of any substantial financial loss of the lessees.
(d)The collapse of the bulkhead/ceiling was a one-off incident and consequently not a breach of the covenant of quiet enjoyment and not a breach, for that matter of Clause 15.6.4. This is because where the inference is that the interference is temporary and/or insubstantial, pursuant to Glasshouse Investments Pty Ltd v MPJ Holdings Pty Ltd (2005) NSW SC456, then the covenant for quiet enjoyment is not breached. The collapse of the ceiling/bulkhead was not permanent as it was repaired quickly and Mr Chia submits that even if one were to consider the Wallis case to be one of consistent disturbance by a series of water ingress issues, any interference as such was not substantial.
(e)The only independent evidence before the Tribunal of the effect of water leakage was the email from Claire Wallis' employee, Lucy, prepared as a favour for Ms Leanne Wallis. In that email she makes no reference to the collapse of the ceiling, no reference to any classes having to be cancelled as a result of the water leakage and no reference to any complaints from parents in no longer attending.
View of the Tribunal on the evidence regarding substantial loss suffered by Wallis
The decision in Glasshouse Investments is not as helpful to Daily as submitted by Mr Chia. There, a restaurant in Double Bay was severely damaged in a hailstorm in 1999. The Lessor's insurance company remedied the building and the builders in so doing erected scaffolding over the building and the arcade from which the lessee partly traded as part of its restaurant. The alleged breach of quiet enjoyment related to the erection of the scaffolding, noise, dust from the works and other minor irritations which in the end did not impress Young CJ in Equity as substantially interference to the lessee's quiet enjoyment. There was no real physical impact to the premises. As Young CJ states at [95] "There was noise, there was dust, but nowhere to the extent asserted by the plaintiff and I do not consider that, even putting all the matters together, there was substantial disturbance of the tenant". The Tribunal derives no help from this decision which is far from analogous with the current proceedings.
A number of cases referred to with similar circumstances of breaches by the lessor for quiet enjoyment/or disturbances under section 34 of the RLA followed the path of abatement of rent as an appropriate compensatory method. However, in this case it is very hard to make an assessment of the area of the premises that was affected and unusable. In Mohammady v Christofi [2012] NSWADT122 there was evidence before the Tribunal regarding the area of the ceiling that was damage and remained damaged during the tenancy. In the case of Rascals there was a continuation of water leaks and on best guess perhaps 15% of the premises might have been affected. The Daily's case was put on the basis that there was no breach of its obligations, and even if there was such a breach, Wallis was not entitled to compensation because they were in default of an essential term of the Lease and further Wallis could not properly and effectively substantiate any financial loss or damage and this relieved Daily of payment of damages. The Wallis case is put that there was a breach, yes they have trouble quantifying the loss and damage, but as Mr Clifton submitted, the Tribunal must endeavour to "do its best". Consequently, the Tribunal could allow, as it had done so in other cases such as Mohammady and Lovecek, an abatement of rent based on a guestimate of the area affected up to the collapse of the bulkhead/ceiling with a further quantification of the abatement to compensate Wallis for the more substantial damage caused to the premises and the business from 19 July 2011.
Looking at the accounting information provided, there is decline in sales in the months after the collapse. One could take the anomaly of the high figures on the 22nd and 23rd of July may be explained due to patrons pre-committed to visit Rascals, or an accumulation of earlier days takings only brought to account on those two days. Ignoring those two days there is a definite decline in the business. This may be due to the missing 123 Singing Group. The evidence as to why the Group left is equivocal. They left initially for one term only. If the premises did not suffer from leaks would 123 have returned ? This is also supposition. Ms Wallis estimated additional patrons besides 123 patrons of 55 a day. Even at the lower figure of 40, with an average daily spend of $19.00, this comes to $760.00 per day. Mr Clifton suggested calculating the loss at $100.00 per day for 18 months at 365 days multiplied by 1.5. However, it is the understanding of the Tribunal that Rascals was open for only five (5) days per week. The Tribunal is persuaded that there was a loss to the business of Wallis due to the ongoing water leaks to the premises. It is not satisfactory for Daily to say that there was no loss because it just cannot be accurately established. The submission of Mr Clifton is more acceptable to the Tribunal, that the Tribunal in the circumstances must do its best rather than do nothing.
Mitigation of loss of rent by Daily
As noted earlier Daily retook possession of the premises at the end of November 2011. Mr Waight advised that he had received an expression of interest from a potential tenant, Anytime Fitness, prior to regaining possession. However, the offer was not accepted as it was subject to development approval which Mr Waight estimated takes 3 to 6 months.
Mr Waight advised that he engaged local agent, Tom Doran of Doran Commercial Neutral Bay to assist in marketing the property. In fact Mr Waight called the arrangement a conjunction agency however he let Mr Doran lead in connection with the search for a new tenant. Any leads that he received he would direct them to Doran Commercial to arrange immediate inspection and negotiation of terms. Mr Doran would keep Mr Waight informed and he in turn would report to Daily. Mr Waight had made a couple of these reports setting out the interest in the premises and brief notes on the various potential lessees and the negotiations.
Mr Rick Doran provided an Affidavit dated 3 September 2012 and gave evidence in the Tribunal. However, Mr Doran was not asked whether he was the Tom Doran referred to by Mr Waight. For the purposes of these Reasons I have assumed that they are the same person. In his Affidavit and in the evidence he gave to the Tribunal, Mr Rick Doran explained the campaign to locate a new tenant for the premises. The marketing program developed was the erection of signs on the building, the taking of photographs and the production of a brochure relating to the premises being offered for lease and then lifting these premises on various internet sites for leasing. The brochure prepared by Doran Commercial, a copy of which is annexed to Mr Doran's Affidavit shows an asking rent of $219,600.00 plus GST and outgoings. He advised that the internet sites received on average two enquiries per month.
Mr Rick Doran at paragraph 5 of his Affidavit says:
The area of the shop was 360 square metres and I was of the opinion that a rental in the range between $500.00 and $600.00 per square metre, excluding claim for outgoings would be the market. The shop is positioned with two street frontages, adjacent to a council car park. It would be possible (subject to council approval) to subdivide the shop. It is my experience that the smaller the area, the higher the yield. Indeed, a shop of small area in the vicinity of the property attracting a square meter yield of $1,000.00 per square metre [sic]. Shops of this size have significantly longer vacancy periods because of the fewer number of tenants looking.
Mr Doran then described the negotiations with prospective tenants at or around the asking price for the annual rent. Those negotiations were with a pet shop at $198,000.00, a gymnasium at $189,000.00 and a bakery at $219,600.00. Each of these prospective tenants required development consent because of the change in the use. Belle Property initially offered $205,000.00 in early January 2012. Mr Doran estimated that the time of achieving planning consent was between three and six months (confirming Mr Waight's estimate) and may in relation to some tenancies take nearly twelve months.
Belle Property renewed its initial interest made in January 2012 and a letter of offer was issued by the joint agents on 30 April 2012. Negotiations continued between the parties over the terms of the lease including reference to water ingress issues as evidenced by the email from Mr Waight to Mr Micelli as discussed in paragraph 32 of these Reasons. Eventually the Belle Lease was entered into on 27 June 2012 and provided for a six month rent and outgoings free period and an initial rent of $187,555.58 plus GST and outgoings.
Mr Doran says, at paragraph 21 of his statement:
In my experience a period of vacancy of a commercial shop within a strong retail shopping precinct of seven months is not unusual. The rents are significant and people wish to be as sure as possible before committing to leases and some expenditure of many tens of thousands of dollars on fit-out.
Submissions on behalf of Wallis on Mitigation
(a)The first submission by Mr Clifton on behalf of Wallis was a legal argument based on the decision of the High Court in Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited [2008] 234 CLR 237. There the High Court placed a threshold on the ability of a landlord to claim damages, that threshold being that the claim can only be made if the lessor has tried unsuccessfully to obtain a new tenant at the rent stipulated in the terminated lease. Consequently, as Mr Clifton says, in Gumland because the lessor advertised the premises for an amount substantially in excess of what the lessees were paying, and would have paid in the last year of their lease, and maintained this position until a new tenant was found, the lessor could not obtain loss of bargain damages against the lessees as a matter of law.
(b)Mr Clifton then submits that in this case Daily sought an asking letting price of $219,000.00 plus GST and outgoings which was more than 45% of the rent in the last year of the Wallis Lease ($128,000.00 plus GST and outgoings). This alone indicates in accordance with the view of Mr Clifton that Daily did not take reasonable steps to mitigate its loss.
(c)The next submission put by Mr Clifton was that the Daily failed to drop the asking price at any stage to attract potential lessees. All prospective tenant offers were rejected other than Belle Property, despite those offers being significantly higher than the last year of the Wallis Lease and consequently, Daily chose to wait for a better rent (ie sit back and wait for a tenant of choice) and such decision, to the commercial advantage of Daily, disentitled Daily to damages because it did not reasonably mitigate its loss.
(d)The advertising and marketing for the premises was limited. There was no newspaper advertising and no sign board actually erected. Only one agent was engaged to list the premises, in spite of the fact that the premises received only 2 hits per month on the internet.
(e)Any of the offers made for the premises would have put Daily in the same or a better position than it would have been in had the Wallis Lease not been terminated. As Wallis could not conceivably have exercised the option, Daily would almost certainly have faced re-leasing expenses at the beginning of 2013 and these expenses should not be claimed from Wallis.
Summary of Daily's Submissions in relation to mitigation
(a)At the time of default, the market rent was between $500.00 and $600.00 per square metre ($183,00.000 to $219,000.00 per annum) as demonstrated by the evidence of Mr Doran. Wallis did not provide any evidence to the contrary.
(b)The higher rent at which the premises was advertised was reasonable, as supported by the fact that the lessor had, within three months of regaining possession (February 2012), three offers from potential tenants: being a gymnasium offering $201,600.00, a pet shop offering $198,000.00 and ultimately the Belle Property initially offering $205,000.00.
(c)Daily chose one real estate agent with an 'extensive retail tenant database', and there is no reason to question the efficacy of Doran Commercial's marketing program. It is neither here nor there that the lessor chose one agent as opposed to several.
(d)The fact that Daily had a prospective tenant even before the possession had been regained is evidence indicating that the manner in which the property was marketed did not contribute in the delay in finding a tenant. Belle Property, with whom a new Lease was ultimately negotiated, made its initial offer in January 2012; less than three months after the Applicant regained possession.
(e)The decision of the High Court in Gumland is distinguishable as the facts in that case related to a falling market, that is rent was to be less than the previous rent not more.
Mitigation of damages on re-letting
The Appeal Panel of this Tribunal in its decision of Blandino and Ors v Giardini and Ors [2008] NSWADTAP 55 at paragraph [65] provides an excellent summary of the principles relating to a lessor's duty to mitigate. In commenting on the Tribunal's decision below the Panel said:
It referred to and quoted from relevant authorities (notably the judgment of Giles JA in Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [187] and the judgment of Austin J in Young v Lamb (No 2) [2001] NSWSC 1014 at [31]), establishing the following propositions:
(a)where it is alleged that a plaintiff has acted unreasonably in failing to minimise his or her loss from the defendant's breach of contract, the onus lies on the defendant, who was the wrongdoer, to establish this;
(b)a high standard of conduct is not required;
(c)the plaintiff will not be held to have acted unreasonably simply because the defendant can suggest other and more beneficial conduct, so long as it was reasonable for the plaintiff to do what he or she did; and
(d)where the assessment of damages relates to a commercial operation, the question to be determined is what a person in the plaintiff's situation would do 'in the ordinary course of business'.
The doctrine of mitigation of damage is applicable to a lessor's claim for loss of the benefit of the lessee's covenant to pay future rent, outgoings and other amounts (see e.g. Young v Lamb (No 2) [2001] NSWSC 1014 per Austin J at [9]). If a lessor fails to mitigate in that, acting reasonably, it should have, but did not, re-let the premises, the lessor's damage for loss of future rent, outgoings and other amounts will be reduced by the amount it would have received if it had re-let (see Karacominakis v Big Country Developments Pty Ltd 2000 10 BPR 18,235 per Giles JA).
McGregor on Damages (15th ed. (1988) paras. 275ff) identifies three rules with respect to mitigation of loss:
(a)The plaintiff must take all reasonable steps to mitigate the loss to him consequent upon the defendant's wrong;
(b)Where the plaintiff takes reasonable steps to mitigate the loss to him, he can recover for costs incurred in so doing;
(c)Where the plaintiff takes steps to mitigate the loss to him, and the steps are successful, the defendant is entitled to the benefit accruing from the plaintiff's actions.
Giles JA [187] in Karacominakis held that, it was said that;
A plaintiff who acts unreasonably in failing to minimise his loss from the defendant's breach of contract will have his damages reduced to the extent to which, had he acted reasonably, his loss would have been less. This is often misleadingly referred to as a duty to mitigate, although the plaintiff is not under a positive duty.
There is a conceptual difference between the measure of damages, on the one hand, and the doctrine of mitigation, on the other. The onus is on the lessor to prove, according to the applicable measure, that it has suffered damage. The onus, however, is on the lessee to prove that the lessor has failed to take reasonable steps to mitigate its damage, and to demonstrate the extent to which there has been a failure to mitigate (see e.g. Dixon CJ in Watts v Rake (1960) BC 6000090, unreported decision of the High Court of Australia).
In Blandino & Ors v Giardini & Ors [2008] NSWADP55, the Appeal Panel held [66] and [68][76-79];
[66]the Tribunal referred to the evidence, outlined above at [28-31], showing as follows: (a) the weekly rent under the Lease at the time of termination was $678.57; (b) shortly afterwards, the lessors advertised the Premises at $900.00 per week; (c) some two months later, the advertised rent was reduced to $850.00; and (d) some fifteen months after termination of the Lease, the lessors granted a lease at a rent just under $700.00. The Tribunal then summarised the lessee's contention as being that it was 'inherently unreasonable' for the lessors to seek such a significantly increased rent, and the lessors' argument in response, namely, that they acted reasonably in relying on 'the expert advice of their managing agent'.
[68]the Tribunal (accepted the lessee's arguments and) held that it should therefore assess the loss that the lessors would have been likely to sustain if they acted reasonably. It pointed out that if they had advertised it as the Premises at the rent which they ultimately obtained ($692.00 per week), they would probably have attracted greater interest than in fact was demonstrated. But it added that some period of delay before any new lease commenced would still have been likely.
[76]In our opinion, the Tribunal was correct in holding, for the reasons explained in its judgment at [44-45], that the lessors had failed to take reasonable steps to minimise their loss. Although the nature of the scale of their advertising of the Premises may have been adequate (it seems not to have been alleged otherwise), their decision to increase the rent substantially in reliance only on what the Tribunal described as 'the expertise' of an 'anonymous person or persons within L J Hooker Commercial Sutherland' was not reasonable. In advertising the weekly rent to be paid as $900.00, the lessors increased the existing rent (including the CPI adjustment taking effect on 12 June 2004) by the substantial margin of 29.5%.
[77]We part company with the Tribunal, however, when deciding what follows from this ruling. As we view the matter, what is significant is that, in the absence of any factor tending to increase significantly the market rent obtainable for the Premises, the natural and probable consequence of the lessor's decision to advertise them at this increased rent was that no tenant would be found. This in fact happened, and the lessors' lack of success continued even after they lowered the advertised weekly rent from $900.00 to $850.00. IT was only after they lowered it further to almost exactly the same amount as the CPI-adjusted rent provided for in the Lease and indeed gave a 'rent holiday' of three months - that they secured new tenants.
[78]having regard to these matters, we are of the opinion that the Tribunal erred in awarding the sum indicated in its judgment at [50] ($32,420.38) on account of lost rent between the date of termination of the Lease and the date when the new lease commenced. In order to reflect appropriately the lessors' failure to take reasonable steps to minimise their loss, it was not enough to deduct from the rent lost on account of the lessees' premature termination of the Lease a percentage (23%) roughly representing the differences between the two advertised rents and the rent that would have been payable under the Lease. This approach to assessment did not take sufficient account of the consideration that, on the balance of probabilities, the lessors, for so long as they insisted on an unreasonably high rent, debarred themselves from obtaining a new tenant.
[79]Instead, the question that the Tribunal should have considered was, in our opinion, as follows: if the lessors had advertised the Premises as available for lease at a rent approximating the rent that they ultimately obtained, what loss of rent would they have probably have suffered? An appropriate answer is, as Mr Reimer effectively conceded about three months' worth of rent. This was the rent during what might be called a 'turnover period'. It is lost rent for which the lessees, having terminated the lease prematurely without due cause, must compensate the lessors.
Analysis of Mitigation
Mr Clifton relied on Gumland where according to Mr Clifton the High Court held that a lessor is not able to recover twice because it can only recover damages to the extent that it is not able to mitigate its loss by taking reasonable steps to find a new tenant. He cites the High Court [56];
There can be no double recovery by landlords. If landlords obtain possession, they can only recover loss of bargain damages if they have tried unsuccessfully to obtain a new tenant at the rent stipulated in the terminated lease.
The High Court at [64] considered at a theoretical level that the loss of bargain damages would only be needed in a falling market because in any other market the lessor could promptly install a new tenant at the same or higher rent and no loss of rental income would be incurred. Mr Chia for Daily submitted that Gumland did not speak to circumstances, such as the present case, where the lessor could, and did, re-lease the premises at a substantially higher rent. Mr Chia submitted that, in this case, there is evidence to suggest that the market rate for the premises had increased significantly so that the decision to increase the asking rent would not adversely impact upon the lessor's ability to find a new tenant.
In this case Daily entered into a new Lease at a significantly higher rent within seven months of regaining possession. The Court in Gumland was dealing with a different set of circumstances. The High Court's understanding that a lessor could promptly install a new tenant at the same or higher rent perhaps relates to the "perfect market" but such markets are few and far between. It would be wholly unreasonable to hold Daily in this case to a purely literal interpretation of the passage quoted above without considering such factors as the commercial rental market at the time the lessor regained possession as provided to the Tribunal by Mr Doran in his capacity as a commercial leasing agent in the area.
It would seem unfair to disqualify a lessor from obtaining damages solely on the basis that, when seeking out a new tenant, the lessor stipulated a rent higher than the amount agreed in the terminated Lease based on current market expectations. Authorities such as Wenkart v Pitman (1998) 46 NSWLR 502 stress that, in cases such as these, the question of reasonableness must be asked in the context of the lessor's commercial interests 'in the ordinary course of business'. As an innocent party to a breach, it would seem unfair to hold a lessor to an unreasonably high standard by expecting the lessor to accept a much lower rate of rent; particularly if the commercial climate means that a much higher rent can be obtained. Consequently, the Tribunal agrees with Mr Chia that Gumland is distinguishable on its facts.
Tribunal's decision on Daily's claim for lost rental
The factual situation in the present case is more complex than the factual situation in Blandino. Whilst appearing similar, that is the lessor seeking a higher rent than the rent being paid by the defaulting tenant, one of the distinguishing features is that ultimately Daily entered into a lease at that higher rent or at a rent much higher than the rent paid by Wallis. Mr Clifton on behalf of Wallis made submissions that the advertising was not as extensive as it could have been. He queried why appoint only one agent, and why had Daily not negotiated more extensively with prospective tenants notwithstanding that a change of use required permission from the council. However, as noted, the onus is on Wallis to prove that Daily did not act reasonably, that is, in the ordinary course of business, in seeking to mitigate its loss. Wallis vacated at the end of November 2011 and a new lease with Belle Property was entered into on 27 June 2012. That is about seven months vacancy which in the circumstances of a difficult rental market and larger retail premises is about the allowable time in obtaining a new tenant. This is confirmed by Mr Doran in his evidence to the Tribunal. Although Mr Doran was the agent for Daily, he is a respected commercial real estate agent in the area. His assessment of seven months was not challenged by Wallis with any expert evidence. Wallis bears the onus to prove that seven months is an unreasonable vacancy period. Wallis did not discharge this onus.
The next question is how to treat the rent and outgoings free period of six months under the Belle Lease. Daily seeks to claim six months rent and outgoings albeit at the rate payable by Wallis in the last year of the term. Is this reasonable? For Daily to secure a new tenant in the market of late 2011, early 2012 it had to provide an incentive. That incentive was six months rent and outgoings free period to secure a new tenant. The question asked of the Tribunal is whether that incentive whole or in part representing no rent and outgoings from 27 June to 27 December 2012 should be part of the claim by Daily against Wallis as rental shortfall. The Wallis Lease expired on 28 February 2013, and Daily claims unpaid rent and outgoings until it received rent from 27 December 2012. From that day it actually received significantly more rent than what it would have received had Wallis stayed to the end of its lease. I have calculated that Daily is $15,541.57 better off for the period 27 December 2012 to 28 February 2013, but no credit is offered to Wallis for this amount (see the third rule from McGregor on Damages that the defendant is entitled to a benefit accruing to the plaintiff in these circumstances).
It was acknowledged by both parties that it was unlikely that Wallis would have exercised its option to renew. The market rent for the premises in the last two years of the term of the Wallis lease was already at a much higher amount, as evidenced by the negotiations undertaken with prospective tenants than the rent paid by Wallis. The vacancy by Wallis brought forward to Daily the higher rent on the premises so that, by 1 March 2013 Daily was receiving market rent. If Daily had to install a new tenant from 1 March 2013 there would most likely have been a rent and outgoings free period of at least six months to induce the tenant to enter into the lease.
The breach of lease by Wallis and the surrender of the premises brought forward the Daily's search for a new lessee. It also brought forward the incentive that Daily would most likely give to an incoming tenant from 1March 2013. Whilst the circumstance in Blandino were different, the Appeal Panel allowed three months as the 'turnover period'. Here seven months is allowed as sufficient turnover period. Accordingly, the Tribunal determines that the liability of Wallis for unpaid rent and outgoings should cease on entry by Daily of the Belle Lease on 27 June 2012.
Leasing fees and legal cost on new lease
Daily claims leasing fees of $29,400.00 for its co-agents Blueprint and Doran Commercial in obtaining a new tenant and legal fees of Michael Micelli of $4,000.00 in relation to expenses associated with the Belle Lease.
In Braun v Roach [2011] NSWADT 31 the lessor claimed leasing fees upon default of the existing lessee. There the Tribunal at [36] said;
Whilst it was necessary to obtain a tenant, however, given that the lease was entered into was always for one year terminating on 31 October 2008 with options, one could take the view that the withdrawal by the Respondent from the lease pursuant to the letter of 26 March 2008 was an indication that in any event the option would not be exercised and that a new tenant would have had to be found at the expiry of the lease in any event. Consequently, the Tribunal is of the view that the real estate commission is an expense that the Applicant would have necessarily incurred in any event in those circumstances and is not a cost directly as a consequence of the Respondent's breach of lease.
On appeal in Roach v Braun [RLD] [2011] NSWADTAP 40, the lessee appealed her liability for damages but the lessor did not appeal on the claim for leasing fees denied by the Tribunal. The Tribunal in Braun v Roach allowed the legal costs mistakenly without the actual memorandum of costs being submitted into evidence. The Appeal Panel overruled this allowance as the costs incurred related to the releasing of the premises contrary to section 14 of the RLA. Thus the landlord did not obtain the legal costs. Mr Waight annexed to his statement of 4 September 2012 a copy of tax invoice dated 4 September 3012 from Mr Micelli. In perusing that tax invoice I note that on 16 July 2012 there is a charge for "rising damp issue". There are charges on 30 July 2012 regarding StatusFlow. Why should Wallis bear the costs of these if at all? The costs of Mr Micelli to Daily of $4,000.00 fall in the same category as the costs in Braun v Roach in that they are not costs allowable as part of damages as claimed. They are not costs within Clause 20.2 of the Wallis Lease, being costs allowable in consequence of default of the lessee. These costs, as well as the leasing costs of the agents relating to the Belle Lease, would have been incurred in any event by Daily to obtain a new lessee in late 2012/early 2013. They are not costs that are necessarily directly as a result of the default by Wallis. Section 14 of the RLA also disallows any claim for legal costs for preparation of a Retail Lease.
Summary of Tribunal Findings
(a)Breach of covenant for quiet enjoyment
The evidence is that Daily did not take reasonable steps to comply with its obligations to Wallis to provide quiet enjoyment of the premises. In summary it had received recommendations to repair the roof to prevent leakage, its attitude as demonstrated via its agent Mr Waight was not to follow these recommendations in respect of the roof which it regarded, erroneously, to be the tenants' roof and yet only in its negotiations with an incoming tenant did then Daily assume responsibility and make efforts to repair the roof to prevent leakages.
Notwithstanding the earlier formulation of the claim by Wallis for damages as a result of the collapse of the ceiling/ bulkhead, the claim by Wallis for quiet enjoyment is in reality for ongoing breaches of the covenant from the commencement of the leakages, not just for the collapse of the ceiling bulkhead on 19 July 2011.
(b)Claim for damages under clause 15.6.4 of the Wallis Lease.
Daily, for the reasons above, did not take reasonable steps to prevent or put a stop to the leaking roof and should pay compensation to Wallis for this breach, but for the requirement of the provision of notice under clause 15.6.4 and section 34 of the RLA and no such notice was given by Wallis.
(c)Abatement and Section 36 of RLA
Abatement of rent and outgoings pursuant to clause 18.2 in the Wallis Lease and section 36 of the RLA were available to the parties to utilise. It was open to Daily to make the offer to Wallis, say at 15% of the annual rent and outgoings of $11,982.07 per month, from 1 May 2010, being just after the recommendation by the plumbers for remedial work on the roof, for fourteen months until July 2011. However, the parties did not abate rent and outgoings and it is extremely difficult for the Tribunal to apply abatement without evidence as to the area of the premises affected.
(d)Daily's claim for damages and whether it mitigated its loss
The Tribunal weighed up the evidence and submissions and in light of these accepts that Wallis did not discharge its onus to prove that Daily did not act reasonably and in accordance with ordinary business principles in attempting to relet the premises. Wallis must pay for seven months rent and outgoings. Once the premises was relet, from 27 June 2012, the burden of damages owed to Daily fell away, including the claim for leasing fees and legal costs in relation to reletting.
(e)Damages payable by Daily to Wallis for breach of lease
Mr Clifton submitted that the Tribunal should allow the claim put by Wallis for $55,000 notwithstanding the difficulties with the quantification of such claim. Daily challenged the claim on general principles that damages were not properly quantifiable and the accounting records submitted showed no reconcilable loss to establish loss of patronage and to loss of sales at the café and hair salon. But Mr Clifton's submissions as to how $55,000 is arrived at, taking into account the business loss of Rascals, that the patronage of the childcare was such that the patrons would stay and spend in the café and hair salon has merit as a genuine attempt to provide an estimate of the loss to Wallis as a result of the continuum of water leakage. The calculation is based on loss of $100.00 per day for eighteen months, being 547 days. However, Rascals only opened on weekdays, so the amount of days for loss of revenue could be reduced to 391 days. Daily offered no alternative methodology or amount of compensation and no offer to abate rental outgoings. The submission by Mr Clifton was that to arrive at an appropriate amount of compensation $100 a day was taken as an estimated amount of loss. The Tribunal understands that this was an amount chosen as an average of losses not necessarily an actual day to day loss and therefore whether weekends are included or not is not relevant for the calculation. Accordingly, the Tribunal allows the claim by Wallis of damages of $55,000.00. Further, as the Tribunal has found Daily in breach of the Lease while also Wallis was in breach, it is not reasonable for Daily to be able to claim all its legal costs of default. These should be reduced by fifty percent.
Costs
Section 88 of the Administrative Decisions Tribunal Act 1997 provides that parties are to bear their own respective costs in proceedings unless the Tribunal is satisfied that it is fair to award costs in favour of one party having regard to a number of prescribed factors.
In particular, in determining whether it is fair to make an order for costs, the Tribunal may take into account such factors as whether or not a party has failed to comply with orders of directions of the Tribunal without reasonable excuse, or has caused an adjournment, or has been responsible for unreasonably prolonging the time take to complete the proceedings. The Tribunal may also take into account the relative strengths of the claims made by each of the parties including whether a party has made a claim that has no tenable basis in fact or law.
Both parties did not comply with summons for production and discovery of documents. Mr Waight took the unusual course of action to determine himself what documents should be discovered pursuant to a summons, and the Tribunal had to council Mr Waight. Further, Wallis also delayed these proceedings in initially taking time to engage legal representation and also failed to provide the appropriate financial records and documents subject to summons.
Nevertheless, neither Daily nor Wallis has been totally successful in their claims. In these circumstances where a number of the issues were finely balanced, the Tribunal will not make an order for costs, thus each party should bear their own costs.
Orders
(1)Leanne Wallis and Mark Wallis are each jointly and severally liable to pay to the Daily Pty Limited the following amounts:
(a)$91,916.84 for unpaid rent and outgoings to 30 November 2011;
(b)Interest in the sum of $11,921.03 on rent and outgoings claimed;
(c)Legal costs of default $3,276.24;
(d)Rent and outgoings from 1 December 2011 to 1 March 2012 being 3 months, the claimed amount of $35,946.21 plus 1 day (29 February 2012) $413.17 amounting to $36,359.38;
(e)Rent and outgoings from 1 March 2012 to 27 June 2012 for 3 months and 27 days, $48,894.45
(f)Interest on the amounts (a)-(e);
(2)The Daily Pty Limited is liable to pay Leanne Wallis and Mark Wallis the sum of $55,000.00.
(3)No order as to costs.
Decision last updated: 08 July 2013
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