Ull Pty Ltd v Adwell Holdings Pty Ltd and Adwell Holdings Pty Ltd v Ull Pty Ltd

[2009] NSWADT 246

CITATION:

Ull Pty Ltd v Adwell Holdings Pty Ltd and Adwell Holdings Pty Ltd v Ull Pty Ltd [2009] NSWADT 246

DIVISION:

Retail Leases Division

PARTIES:

Applicant in 065130:
Ull Pty Ltd

Respondent in 065130:
Adwell Holdings Pty Ltd

Applicant in 065045:
Adwell Holdings Pty Ltd

Respondent in 065045:
Ull Pty Ltd

FILE NUMBER:

065130; 065045

HEARING DATES:

6 December 2007
7 December 2007
4 February 2008

SUBMISSIONS CLOSED:

8 May 2008

 
DATE OF DECISION: 

24 September 2009

BEFORE:

Olsson E, SC - Deputy President; Fagg N - Non-Judicial Member

CATCHWORDS:

Unconscionability, reasonable market valuation

LEGISLATION CITED:

Retail Leases Act 1994

CASES CITED:

AG v World Best Holdings Ltd [2005] 63 NSWLR 557

REPRESENTATION:

Applicant Representative:
Mr Spring for Ull Pty Ltd

Respondent Representative:
Mr B Sharpe for Adwell Holdings Pty Ltd

ORDERS:

1. Amended application by Ull Pty Ltd dismissed.
2. Order in favour of the Respondent Adwell Holdings Pty Ltd on its application in the sum of $3,237.88 plus interest from 22nd January 2006.
3. No order as to costs.

1. This matter arose from a relationship between Adwell Holdings Pty Ltd ( Adwell) which was, at all material times, the registered proprietor and lessor of premises known as West Gosford Shopping Centre, 299 Brisbane Water Drive, Gosford, New South Wales ( the premises ) and Ull Pty Ltd ( Ull ) which carried on, at all material times, the business of a newsagency.

2. Ull commenced operating as West Gosford Newsagency at Shop 27 West Gosford Shopping Centre on or about 18 November 2002 when it purchased the business of the newsagency from its previous owner, Similia Pty Ltd.

3. An assignment of registered lease number 697943OJ (the First Lease) from Similia Pty Ltd to Ull was granted. The lease itself was expressed to commence on 1 April 2000 and expire on 31 March 2005. The assignment took place on or about 18 November 2002.

4. There was no dispute that the lease was a retail lease within the meaning of the Retail Leases Act 1994 (NSW) (“RLA”).

5. In June 2003, the premises were extended into an additional area by an incorporation into the demise of an adjoining shop, Shop 26B, which was then vacant. The area was used by Ull as a storage, office and newspaper delivery room.

6. By Amended Application filed on 25 May 2007, the Applicant (Ull Pty Ltd) sought orders that:


(i) The second lease granted by Adwell Pty Ltd (Adwell) be varied to reflect the true current market rent as at 16 August 2005 and reimburse Ull for overpayment, or, alternatively

(ii) Pay damages to Ull, being the difference between the rent that has and will be paid under the Second Lease and that has and will be payable at true current market rent as if that was the rent under the Second Lease, and

(iii) Abate all alleged underpayment charges allegedly due under the First and Second Lease, where such charges arose from notices arising from Ull’s specific requests for Adwell to comply with the Act

(iv) Pay Ull’s costs of the proceedings on an indemnity basis

(v) Award interest on any amounts of damages or payments made or awarded

(vi) Any or other order

(vii) A declaration that Adwell and its agents have acted unconscionably or contravened sections 23, 25, 27, 28, 29, 53 and 55 of the Retail Leases Act or any other order

7. The Respondent Adwell had earlier filed a Statement of Liquidated Claim in the Local Court alleging that Ull was liable for the payment of outgoings in the sum of $4,089.00 in respect of the First lease. Those proceedings were transferred to this Tribunal and were treated by the parties as a claim for set-off.

8. Evidence was given by Mr Robert Hunter, director of Ull and by Mr Michael Whalan, centre manager, for Adwell. In addition, Mr Hickey of Preston Rowe and Mr T Davis of TJ Davis and Associates, valuers, gave expert evidence. 9. The evidence of Mr Hunter was that Ull was established in 2002 to purchase the West Gosford Newsagency and that it paid approximately $598,000.00 for the business. Tenure was achieved by way of an assignment of a registered lease (No. 6979430J) from the original lessee, Simalia Pty Ltd, which commenced on 1 April 2000 and which ended on 31 March 2005.

10. On 18 November 2002, Ull received a copy of the First Lease: (Exhibit to Affidavit of Robert Hunter sworn 31 July 2006 pages 61-72) ( Ex Ull-1). It contained a Lessor’s disclosure statement (page 64ff), which, inter alia, disclosed that the lessee would be liable for a proportion of outgoings, expressed in Clause 4.4 of the lease to be 1.4%. It provided for an annual rent of $51,178.00 per annum with annual increases of 5%. There was no option to renew contained within the lease (page 62).

11. Ull undertook some work on the premises and upgraded the facilities of the shop. The First Lease made express provision for this to occur (Special Condition 1, page 60 of Ex Ull-1). Thereafter Ull commenced trading.

12. In June 2003, the shop at 26B became vacant. It was a tobacconist’s shop and 50 square metres in size. This shop adjoins the Applicant’s premises by a common wall.

13. It was Mr Hunter’s evidence (not contradicted by Mr Whalan) that the parties reached agreement for Ull to lease shop 26B for rent of $18,200 plus GST per annum gross. No formal lease was executed.

14. The terms upon which shop 26B were leased were contained in a letter from Adwell to Ull dated 4 June 2003. In that letter (Ex Ull-1 page 201) the annual rental is specified to be $18,200 plus GST to commence on 1 July 2003. The letter made it clear that no outgoings or marketing costs would be charged for this property and the period of agreement was from 1 July 2003 to 31 March 2005 (which kept it in line with the lease period of shop 26). The letter also provided that there would a rent review on 1 July 2004 by CPI.

15. The letter then provided “We will negotiate a new lease for the combined area of Shop 27 (136.1 sq metres) and Shop 26B (50 sq metres) prior to that date. I also confirm that I will assist with the cost of a steel beam if same is required when the inter tenancy wall is demolished.”

16. It was the evidence of both Mr Whalan and Mr Hunter that in 2005, when the lease on shop 26 became due to expire, it was their intention that they would negotiate a new lease which incorporated both shops.

17. Thereafter, Ull demolished the common wall and fitted out shop 26B and commenced using it as a storeroom and office. 18. The cost of all the work carried out by Ull on both shops was said by Mr Hunter to be approximately $107,320.00 exclusive of GST. There was no challenge to this figure.

19. Ull continued to trade apparently without incident until 15 February 2005 when it received a letter from the Adwell which offered a new lease for the combined premises at a rent of $102,355 per annum in addition to outgoings and a marketing levy of 5% of rent. The rental increase was to remain at 5% per annum. A copy of the letter is at page 74 of Ex Ull-1.

20. At the time of that letter, Ull was paying approximately $95,579.00 inclusive of outgoings but exclusive of GST for the two shops (Amended Application paragraph 15). The figure net of outgoings is approximately $82,000.00.

21. When Ull queried the increase in rent, Mr Whalan explained that the new rental reflected market rents in other comparable centres and noted that since the execution of the First Least, the centre was fully leased, it received enquiries seeking space and had upgraded parking facilities (letter dated 3 March 2005, Ex Ull-1 page 75). Mr Whalan repeated these comments in the witness box and the Tribunal accepts the truthfulness of them.

22. The parties negotiated and Adwell made another offer on 11 March 2005 (Ex Ull-1 page 76) in similar terms but with slightly different figures which, if the summary contained in Exhibit 4 is accurate (and the Tribunal accepts that it is) delivered a similar return to the lessor over a five year period.

23. As the date for expiry of the First Lease was approaching, Mr Hunter requested and obtained an extension of the lease pursuant to s44 of the Act until 15 August 2005. However in the letter which granted the extension to the lease, Adwell reiterated its offer of 15 February and asked for either an agreement to lease or for vacant possession to be given (letter of 24 March 2005 at Ex Ull-1 page 78-79).

24. On 20 April Mr Hunter and Mr Whalan met. In evidence they gave slightly different accounts of what occurred and what was said at the meeting but the Tribunal accepts that the parties discussed in general terms a lease for two different shops at a lower rental starting in September 2005. Mr Hunter said Mr Whalan threatened him with an ‘eviction notice’; Mr Whalan denied that he did so. It is not necessary to determine whether or not that threat was made because in one sense, a notice for vacant possession had already been given.

25. To the extent that it is suggested that the threat of an ‘eviction notice’ is relevant to the question of unconscionability, it is rejected. Firstly, notice that the lessor may require vacant possession had already been given and Mr Hunter knew that he had possession at least until 15 August by virtue of the s44 extension.

26. Secondly, both parties appeared by their correspondence and the conversations that were recounted to the Tribunal to be more than capable and robust in advancing their own views and positions with respect to the new lease.

27. Adwell formalized an offer arising out of the conversation on 20 April in a letter dated 21 April 2005 which does not appear to have been answered until 31 May (pages 81 and 88 of Ex Ull-1) although the parties met on 27 May at Mr Whalan’s office.

28. There is a discrepancy in the evidence as to whether and in what terms a notice of eviction was discussed but the Tribunal accepts that it was raised either at the meeting of 20 April or 27 May because it is referred to in Ull’s letter of 31 May.

29. On 1 June 2005, the parties met again and Mr Whalan reiterated that Ull faced eviction and offered a lease on slightly different terms again. A written offer was made on 2 June with two alternative proposals both of which were open for acceptance for 7 days. The letter made it clear that it was a final offer and unless a lease could be agreed, a notice to terminate the lease would be issued.

30. At this point, Ull retained Australian Retail Lease Management to act for it and Mr Spring, its principal, ably negotiated throughout June, inter alia, obtaining from the lessor a concession that shop 26B attracted the provisions of s.16 (1) of the Act.

31. Adwell replied on 29 June, conceding a 5 year lease over shop 26B and reiterating its most recent offer (2 June). At first blush, this concession might have been a two edged sword for the lessee but on reflection if anything, the lease over shop 26B made the situation more difficult for the lessor. It may have found itself in difficulty if it had sought to terminate the lease on shop 27 but enforce the lease on shop 26B and may well have been met by the argument that a lease had been agreed but only the rent remained to be finalized. In the final analysis, as will be seen, this does not have to be resolved and the Tribunal notes that in terms of its impact on bargaining power between the two parties, it has a neutral effect.

32. The letter made an important point and that was that throughout the negotiations, Ull had disagreed with and queried the lessor’s offers and the basis for the same but had not put a counter offer.

33. Notwithstanding this, Adwell made another offer on 4 July (page 119 of Ex Ull-1). In terms of the comparison of offers which is Exhibit 4, it is the most favourable to the lessee, delivering the lessor a return over 5 years which was significantly below the return contemplated by all previous offers.

34. Ull accepted the offer and executed the Second Lease on or about 11 August 2005.

35. In cross-examination, Mr Hunter borrowed from his parents to purchase the business. At the time, he acknowledged, he knew the lease had only 2.5 years to run and that there was no provision for an option to renew. He acknowledged that he knew that there was no formula for rent review. In some ways, given the amount he then spent on the shop, it was either a poor business decision or a risk he was prepared to take. He said he relied on the fact that the negotiations for a new lease would be a ‘win-win’ although he did not rely on any particular representations said to have been made.

36. He did not seek his own valuation of the premises and did not put a counter offer. He did not go to the Tribunal at that stage. His evidence was that he did not make a counter offer because he was waiting for ‘specific information’ but this was not plausible. The Tribunal has difficulty in accepting that he was coerced or that Adwell’s conduct was harsh or unconscionable.

37. In cross examination, Mr Whalan asserted that outgoings ‘would have been’ sorted out at the time of assignment of the lease and therefore the amount included for Year ending 2003 took into account the fact that Simalia Pty Ltd traded for 5 of the months of that year (July to November). The Tribunal is not satisfied of this; the figure for outgoings for that year is very close to that of subsequent years.

38. There was a suggestion in the evidence that audited reports of the outgoings were not in accordance with the Act and there was also a suggestion that only Ull, of all the speciality shops in the centre, was required to pay the shortfall on outgoings but neither of these points were pursued by the Applicant. Ull was only notified of the claim in 2005 which is strongly suggests that the lessor might not have pursued the matter but for the circumstances of the negotiation of the new lease but this can only be conjecture.

39. That said, the amounts of outgoings were not contested until the evidence was given in the present proceedings and no substantial challenge was made to them with the exception of the period in which Simalia was in occupation and in those circumstances, the Tribunal will allow the claim but for 5 months in 2003.

40. Both parties relied on expert evidence. Both Mr Hickey of Preston Rowe for Adwell and Mr Davis of TJ Davis and Associates were qualified and experienced valuers of retail property. The former opined the market value of the premises at August 2005 to be $112,000.00 net of outgoings and GST and the latter valued it at $86,853.00 net of outgoings and GST. The rent actually paid by Ull in 2005 was, so far as it is able to be determined, $81,432.00 or something close to this figure (Exhibit 4).

41. Mr Hickey was cross-examined as to the fact that he was not a specialist retail valuer and did not see the Davis report prior to giving evidence. He did not measure the shop but worked from the tenancy schedule. His valuation was based on comparable shops in other centres and other tenancies within the complex: the comparisons are of limited assistance unless all other variables are equal or similar and it is not possible to make that assessment from the evidence. The other shops considered under this method (in Annexure A to his report) are not necessarily newsagencies (some are food shops, coffee shops and so on) and have a wide range of sizes and locations. The range of rents he quoted (from $38,182.00 to $126,938.00) does not assist except in the most general sense.

42. He based his calculation of $112,000.00 on an average rate per square metre of the rents in the range of rents under consideration.

43. Mr Davis’ methodology was more persuasive: it made a detailed analysis of the shops in this particular centre, together with the particular attributes of these premises and then compared them with similar newsagencies’ rentals around the Gosford area.

44. The conclusion that Mr Davis reached was that the appropriate gross market rental value for the shop was in the order of $86,853.00 net of outgoings and GST. He was also a thorough and impressive witness.

45. The Tribunal is not empowered to be a valuer. Net of outgoings and GST, the rent agreed by the parties in the Second Lease was $96,000.00 (Exhibit 4). Thus it was on the high side of the mid-way point between the two experts’ figures. In those circumstances, the Tribunal is not persuaded that it was an inappropriate or unconscionable figure.

46. Even accepting Mr Davis’ figure of $86,853.00, the amount of the Second Lease varied by just over 10% and given the evidence of the two experts, a variation of plus or minus 10% on a valuation of this kind is neither remarkable nor improbable.

47. The first question to be addressed is whether the leases in question are retail leases within the meaning of the Act and the Tribunal has no hesitation in finding that they are retail leases, being premises in the case of shop 27 which are used wholly or predominantly for the carrying on of one or more of the businesses prescribed in schedule 1 of the Act, being a newsagency and in the case of shop 26B premises which are used for and with the carrying on a newsagency business or for the carrying on of any business in a retail shopping centre. The Tribunal notes that for the purposes of the definition of ‘retail shop lease’ it matters not whether the agreement to lease is oral or in writing or partly oral and partly written. In the case of shop 26B, the agreement was not in a standard form lease but in the form of a letter that constitutes writing for the purposes of the definition: s. 3 of the Act. 48. The lessor failed to give notice within the terms of s.44 of the Act between 6 and 12 months before the expiry of the First Lease and accordingly, the First Lease was extended upon a request being made during the currency of the lease by the Applicant. The Tribunal notes that the Respondent conceded that the requisite notice by it was not given and that therefore the First Lease was extended until 15 August 2005. There was no question that the lessor sought to achieve vacant possession prior to that date.

49. However, the consequences of s.44 do not end there: there is an ongoing obligation on both parties that all conduct between a lessee and lessor must be undertaken in good faith and not contradict any notices given under s. 33, follow strict guidelines of timing and procedure fairness and be a genuine attempt to negotiate a mutually agreeable lease outcome.

50. The Tribunal is satisfied that the parties did adhere to relevant notices and timing guidelines and accorded each other the opportunity to consider offers that were made and to obtain legal or other advice. It is also satisfied that there was a genuine attempt by both parties to negotiate a mutually agreeable outcome.

51. Ull alleged that the conduct of Adwell was unconscionable in all of the circumstances and cited various facts to support such a finding. In the Tribunal’s view, the facts fall short of unconscionability.

52. As Spigelman CJ said in AG v World Best Holdings Ltd (2005) 63 NSWLR 557 at paragraph [121]

“ Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what was ‘fair’ or ‘just’ it could transform commercial relationships in a manner which the Minister expressly stated was not the intention of the legislation. The principle of ‘unconscionability’ would not be a doctrine of occasional application, when the circumstances are highly unethical, it would be transformed into the first and easiest port of call when any dispute about a retail lease arises.”
53. Turning to the particular provisions of s.62B of the Act, it is true that Adwell was apparently in the stronger bargaining position in some respects in the sense that it was the lessor of a successful, fully tenanted shopping centre. On the other hand, Mr Whalan acknowledged that Ull was a good tenant which always paid its rent on time and which ran a successful business. Plainly there were strengths in the positions of both parties. 54. In addition, as has been noted, on one view the demise of shop 26B might have given Ull the edge in negotiations.

55. There was nothing in the conduct of the lessor which required the lessee to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the lessor. The terms of the proposed lease were, apart from quantum, the same or similar as those of the First Lease.

56. It appears from correspondence and from the manner and content of evidence in the witness box that both parties had a reasonably good understanding of the principles of the lease (even if they were not familiar with precise clauses) and the result of the different computations of rent, outgoings and increases which were contemplated over a period of 5 months. It did not seem, and the Tribunal does not find, that the lessee was not able to understand any documents relating to the lease. The Tribunal also notes that both parties engaged knowledgeable representatives to assist them in their negotiations.

57. Adwell committed itself to negotiating a new lease in accordance with its correspondence at the time the least of shop 26B was taken and in accordance with sound retail practice to keep tenancies occupied with good and successful tenants.

58. There was one occasion when Adwell gave very short notice regarding an offer (24 hours in the letter of 4 July). However, that came at the end of a protracted period of negotiation in circumstances where Ull had neither made a counter offer nor presented any evidence which might have tended to show that it could not pay the proposed increase in rent.

59. There is nothing, however which suggests that Adwell’s conduct was unfair nor that it engaged in undue influence.

60. On the other hand, Mr Hunter knew well when he took the assignment of the lease that there were only 2.5 years to run and that there was no formula in place to determine a new rental. He did not obtain an independent valuation of market rent; he did not attempt to argue that he was not able to pay the increase in rent; he did not make any counter offers (a fact he confirmed in cross examination).

61. Finally, in respect to the valuation evidence, the Tribunal is not persuaded that the amount of the Second Lease is outside the range of what is reasonable for a market rent of a shop in the greater Gosford area. As has been observed, there is some basis for the view that it is on the high side of an average rental value but that does not equate to a finding that it was harsh or unconscionable of the lessor to press that figure.

62. The Tribunal reiterates its finding that the negotiations for the Second Lease took place over a protracted period, in circumstances where both parties had a good working knowledge of their rights and obligations and where both parties obtained professional assistance in the latter stages of the negotiations. The Applicant did not avail itself of an independent market valuation of the premises and did not make a counter offer.

63. Accordingly the Tribunal is of the view that the Applicant has not made out a case for variation of the Second Lease or any order for damages. The order will be that the Amended Application is dismissed. 64. With respect to the claim for payment of outgoings, although a defence was filed to the claim for outgoings, the evidence of Mr Whalan was that when the claim was sent, in 2005, no demur or dispute was raised by Ull Pty Ltd.

65. Although Adwell did not concede it, it seems to the Tribunal that it cannot recover outgoings for the period July to November 2003, being the period in which Simalia was in occupation. Mr Whalan said in evidence that he thought there ‘would have been’ an assignor’s disclosure statement at the time of the First Lease but this was denied by Ull and no statement was produced by Adwell in support of its position.

66. Moreover, Adwell did not provide Ull with a detailed account of the figures for outgoings, providing instead a tax invoice in December 2005 in the form that appears as an annexure to the affidavit of Mr Whalan of 20 March 2006. It is the Tribunal’s view that Adwell is not entitled to recover interest on the sum allowed before the date upon which the tax invoice was issued plus a period of 30 days, that is, 30 days after 22 December 2005.

67. The Tribunal will allow an adjusted sum for outgoings to be paid by Ull Pty Ltd, being 7/12 of $1,859.10 together with $1859.06 being the sum of the other two years and GST. This makes a total of $3,237.88 plus interest from 22 January 2006.

68. No submissions were received as to costs and accordingly the Tribunal will make an order that each party pay their own costs but defer entering that order until the expiration of 14 days from the date of publication of the decision to enable either or both parties to file submissions as to costs.

69. One final matter should be raised. At the outset of proceedings, the Applicant sought an adjournment on the basis that the Tribunal was assisted only Mr Fagg and not by Mr Griffiths, who had been listed to assist the Tribunal also but who was ill and unable to attend the hearing. It was urged on behalf of the Applicant that Mr Fagg and Mr Whalan had some acquaintance some 15 years ago. Mr Whalan of course was to be a witness for the Respondent and was the agent who carried out the negotiations for the lease of the premises.

70. The adjournment was refused for two principal reasons: firstly, the legal member who presides constitutes the Tribunal and it is that member who makes the relevant determinations. The lay members of the Tribunal are engaged only to assist the legal member in understanding technical or other particular aspects of the evidence. Secondly, it is inevitable in matters involving specialist Tribunals or Tribunals seized with jurisdiction relating to specialized subject matter that it is likely that lay members who are appointed to assist those Tribunals will, from time to time, know or know of, witnesses who appear before it. This will be particularly the case when the witnesses are appearing as experts. However, mere acquaintance, particularly in the distant past as in the present case, does not, without more, in my view give rise to any reasonable apprehension of bias even if it were the case that the lay members of the Tribunal exercised such influence in the decision making process that questions of bias would arise for consideration.