United Petroleum Pty Ltd v Coastal Service Centres Pty Ltd

[2024] NSWCA 97

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

United Petroleum Pty Ltd v Coastal Service Centres Pty Ltd [2024] NSWCA 97

Hearing dates:

11-12 March 2024

Date of orders:

3 May 2024

Decision date:

03 May 2024

Before:

White JA at [1];
Harrison JA at [2];
Basten AJA at [3]

Decision:

(1)   Dismiss the appeal from the judgment and orders in the Equity Division.

(2)   Order that the appellant pay the respondent’s costs in this Court.

Catchwords:

APPEALS – fact-finding – challenge to genuineness of belief – witness’ credibility – belief not glaringly improbable – whether belief objectively unreasonable – witness with expertise to form belief – no expert evidence to contradict reasonableness

CONTRACTS – commercial lease – construction – implication of terms – landlord’s power to issue notice where leased property suffered fire damage – effect of notice to allow landlord to terminate lease – criterion for issue of notice was landlord’s belief that repair “impracticable or undesirable” – whether belief to be objectively reasonable – whether belief to be formed in good faith

LEASES AND TENANCIES – termination without default – leased property damaged by fire – lessor’s power to serve notice if repair impracticable or undesirable – effect of notice to allow termination – whether notice given within reasonable time – period of reasonable time commencing when damage occurred – further period from time when lessor formed opinion permitting service of notice

Legislation Cited:

Conveyancing Act 1919 (NSW), s 133E

Cases Cited:

Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349

Buck v Bavone (1976) 135 CLR 110; [1976] HCA 24

Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187

Elder’s Trustee and Executor Company Ltd v Higgins (1963) 113 CLR 426; [1963] HCA 48

Finch v Telstra Super Pty Ltd (2010) 242 CLR 254; [2010] HCA 36

Fox v Percy (2003) 214 CLR 118; [2003] HCA 22

Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR151; [1997] FCA 558

Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church, Archdiocese of Sydney (1993) 31 NSWLR 91

Karger v Paul [1984] VR 161

Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268; 383 ALR 577

McIntosh v Dylcote Pty Ltd [1999] NSWSC 230; 9 BPR 16805

Realestate.com.au Pty Ltd v Hardingham [2022] HCA 39; (2022) 97 ALJR 40

Renard Constructions (ME) Pty Ltd v Minister forPublic Works (1992) 26 NSWLR 234

Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5

Service Station Association Limited v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84; [1993] FCA 638

TheKing v Connell; Ex parte Hetton Bellbird Collieries Ltd (1944) 69 CLR 407; [1944] HCA 42

Category:

Principal judgment

Parties:

United Petroleum Pty Ltd (Appellant)
Coastal Service Centres Pty Ltd (Respondent)

Representation:

Counsel:
A Harding SC / M Youssef (Appellant)
D Klineberg / C Clarke (Respondent)

Solicitors:
K & L Gates (Appellant)
Elliot & Sochacki Lawyers (Respondent)

File Number(s):

2023/271139

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity – Real Property List

Citation:

[2023] NSWSC 1010

Date of Decision:

23 August 2023

Before:

Peden J

File Number(s):

2019/373788

HEADNOTE

[This headnote is not to be read as part of the judgment]

In July 2018 the appellant, United Petroleum Pty Ltd (United), operated a service station at “The Rock Roadhouse” on the Pacific Highway at North Arm Cove. The previous owner of the property had entered into a lease with United, which had commenced on 1 July 2016. On 31 July 2018, a fire destroyed the buildings, but not the fuel pumps and tanks.

On 31 May 2018 the respondent, Coastal Service Centres Pty Ltd (Coastal), had entered into a contract to buy the property, subject to various leases, including the lease to United. Following the fire and further negotiations, the sale settled on 20 June 2019. Following the fire, United briefly halted trading before resuming business in December 2018 using demountable buildings. Relying on a rent abatement clause in the lease, United paid 44% of the contractual rent; while Coastal invoiced 75% of the rent. The dispute over the rent abatement was settled by agreement on 17 January 2022, with consent orders being made on 27 January 2022.

Pursuant to cl 8.2.3 of the lease, Coastal was entitled to serve on United a notice if satisfied that the fire damage made repairs “impracticable or undesirable”, with the effect that Coastal could then terminate the lease on 14 days’ notice. On 18 January 2022, Coastal served a cl 8.2.3 notice.

By a cross-claim in rent recovery proceedings commenced by Coastal in the Equity Division, United challenged the validity of the notice and thus the entitlement of Coastal to terminate the lease. On 23 August 2023, the trial judge, Peden J, dismissed United’s claim. On 9 November 2023, United filed a notice of appeal. The issues for determination on appeal were whether the cl 8.2.3 notice was served by the lessor:

1. within a reasonable time;

2. acting reasonably, and

3. acting in good faith.

The Court (Basten AJA, White and Harrison JJA agreeing) dismissing the appeal, held:

As to (i)

1. There was no dispute that the cl 8.2.3 notice needed to be served within a reasonable time; the first issue was whether a reasonable period ran from the event causing damage to the property (as contended by United) or from the date that the lessor formed the opinion triggering the entitlement to serve the notice (as contended by Coastal). The lease required that each step be taken within a reasonable time: at [37], [40].

2. The second issue was whether Coastal in fact acted within a reasonable time in assessing the practicability of rebuilding. The activities undertaken by Coastal from June 2019 to November 2021, on which United relied to prove unreasonable delay were steps which it was reasonable to undertake in order to make a firm decision as to whether rebuilding should proceed. The steps included resolving the rent abatement dispute which was appropriate as that issue was not an insignificant issue. The focus must be on reaching a state of mind; not merely considering the issues: [37], [45]-[48].

3. There was no significant delay after Mr Roberts determined that rebuilding was not practicable or desirable: [42].

As to (ii)

1. The terms of cl 8.2.3 did not invoke a standard of objective reasonableness, but rather the exercise of a power in good faith based upon the subjective belief of the lessor: [56], [102]-[106].

2. Although there are cases which require a principal asserting a breach of contract to act reasonably, as well as in good faith, that element will turn on the proper construction of the contract and not an implied condition imposed by law: [97]-[101]. The reasoning is not transferable to non-breach cases; nor is it necessary to imply a constraint to prevent a principal acting on trivial or insignificant breaches: [86]-[88]. No different conclusion is required by the lease cases: [95].

Buck v Bavone (1976) 135 CLR 110; [1976] HCA 24; Karger v Paul [1984] VR 161; The King v Connell; Ex parte Hetton Bellbird CollieriesLtd (1944) 69 CLR 407; [1944] HCA 42; applied; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5 considered. Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 distinguished.

1. If a reasonableness standard were to be applied, it was satisfied: [113]-[116], [147], [154].

As to (iii)

1. The lessor was not required to take the lessee’s interests into account: [102], [104], [111]. Nor was it required to engage in an analysis of building costs and rental income that utilised the best information in hindsight but rather to conduct an analysis that was rational and genuine at the time of consideration: [105], [127]-[128], [144].

Burger King; Renard Constructions applied.

1. The appellant failed to (i) provide any expert evidence regarding building estimates, (ii) challenge the respondent’s own experience and expertise in the field and (iii) challenge the credit findings made by the trial judge about the respondent. Accordingly, the genuineness of the respondent’s analysis could not be overturned: [126]-[128].

JUDGMENT

1. WHITE JA: I agree with Basten AJA.

2. HARRISON JA: I agree with Basten AJA.

3. BASTEN AJA: The respondent, Coastal Service Centres Pty Ltd (Coastal), is the owner of land near the Pacific Highway at North Arm Cove, north of Newcastle. Pursuant to a lease which commenced on 1 July 2016 (Lease), part of the property was leased to the appellant, United Petroleum Pty Ltd (United). The site was known as “The Rock Roadhouse” because the building was in the form of a replica of Uluru.

4. On 31 July 2018, a fire destroyed the building. The fuel pumps and tanks were not damaged and United has continued, after a brief suspension of services, to operate as a service station with demountable buildings.

5. On 18 January 2022, Coastal served on United a notice pursuant to annexure B, cl 8.2.3 of the Lease that Coastal considered that “the damage is such as to make its repair impracticable or undesirable” (cl 8.2.3 notice). The effect of the notice was to permit Coastal to terminate the Lease on 14 days’ notice. The notice itself did not purport to terminate the lease.

6. Pursuant to proceedings in the Equity Division, heard between 24 and 27 July 2023, United challenged the validity of the notice and thus the entitlement of Coastal to rely upon the notice to terminate the lease. By orders made on 23 August 2023, the trial judge, Peden J, dismissed United’s claim. ^[1] On 9 November 2023, United filed a notice of appeal.

   1. Coastal Service Centres v United Petroleum [2023] NSWSC 1010 (Coastal v United)

Issues on appeal

7. The issues as to the validity of the notice of consideration arose on the pleadings by way of a second cross-claim and a further amended statement of cross-claim filed by United on 11 July 2023. The question of validity arose in that way because the initial proceeding was commenced by Coastal seeking a declaration that United was in breach of the Lease, primarily on account of unpaid rent and unpaid outgoings. The pleading of the temporal issue was succinct: namely that the termination of the Lease was invalid because “the notice was given approximately 3½ years after the fire, which was not within a reasonable time of the damage occurring”. ^[2] This allegation was met with a simple denial in the amended defence to the cross-claim. ^[3]

   2. Further amended statement of cross-claim, par 39(a).

   3. Amended defence, filed 4 November 2022, par 60. Although that defence predated the further amended statement of cross-claim, the defence was not further amended.

8. A number of grounds of invalidity raised in the pleading and pursued before the trial judge were not the subject of the appeal. The first was that, having earlier formed a view that it intended to repair the premises, and communicated that intention to United, Coastal was not thereafter entitled to issue a cl 8.2.3 notice, either because it had elected not to issue the notice or had waived its right to issue the notice. Secondly, similar circumstances were said to estop Coastal reversing its position on rebuilding and issuing the notice. Each of these challenges was rejected by the trial judge and not reagitated on appeal.

9. Although the notice of appeal contained 13 separate grounds, the issues fell conveniently into three categories.

10. The first issue involved an assertion that a cl 8.2.3 notice could only be given within a reasonable time of the event causing damage to the property. Coastal conceded that the notice had to be given within a reasonable time, but there was a dispute as to when the relevant period commenced. United submitted that the relevant period ran from the date of the damage to the date when the landlord decided that cl 8.2.3 was engaged. Coastal submitted that the relevant period ran from the time the landlord formed that opinion until notice was given. Although Coastal denied that there was any temporal limitation arising before its managing director formed the necessary opinion, it also submitted that there had been no unreasonable delay leading up to that decision.

11. For the reasons explained below, both stages involved an implied constraint to act within a reasonable time; however United did not establish that Coastal had failed to act with sufficient diligence at either stage.

12. The second set of issues turned on a separate constraint on the power conferred by cl 8.2.3, namely that it had to be exercised reasonably and in good faith. The trial judge accepted that there was a good faith limitation on the exercise of the power, but did not accept United’s submission that the valid exercise of the power required that it be objectively reasonable. The proper formulation of the legal criterion was an important aspect of the appeal. However, as will be explained, neither the terms of the contract, nor judicially devised principles of construction, permit a simple answer to the question so formulated. Nevertheless, the proper conclusion is that the trial judge did not err in her approach to this issue.

13. Having identified the relevant test, the third category of grounds involved specific challenges to aspects of Coastal’s decision-making which were said to fall foul of the implied constraint. United did not call oral evidence but relied upon documentary evidence and cross-examination to establish that Coastal’s managing director, Mr Roberts, had not acted reasonably in forming an opinion that to repair would have been impracticable or undesirable and, indeed, that he did not genuinely hold such an opinion at the time notice was given.

14. The challenge to the genuineness of Mr Roberts’ beliefs required United to confront the favourable credit findings made by the trial judge. United essayed that task by relying in part on concessions made by Mr Roberts in his cross-examination and in part on documentary evidence said to be inconsistent with aspects of Mr Roberts’ evidence.

15. Ultimately, it will be seen that United’s challenges to the findings of the trial judge must be rejected. It follows that the appeal must be dismissed.

Factual background

Period from May 2018 – December 2019

16. The temporal challenge requires attention to the circumstances from the date of the fire until the issue of the cl 8.2.3 notice. The second group of issues, relating to the circumstances in which the notice was issued, largely depended on steps taken by Mr Roberts between November 2021 and January 2022.

17. On 31 May 2018 Coastal entered into a contract to buy the property. The fire occurred precisely two months later on 30 July 2018 and prior to settlement of the purchase. After further negotiations as to price, settlement ultimately took place on 20 June 2019, with a Deed of Variation adjusting the purchase price from $6.5 million to $5 million (plus GST). At the time of settlement, Coastal took steps to obtain development consent to rebuild the roadhouse. On 18 June 2019 Coastal engaged town planners (Perception Planning) and on 19 July 2019 they lodged a development application with the consent authority, Mid Coast Council. In early October 2019, the remains of the roadhouse were demolished.

18. In the meantime, on 7 November 2018, the previous owner, Whitehorn Estates Pty Ltd, entered into the Lease with United, which was back-dated to commence on 1 July 2016. The Lease was therefore executed at a time when United was not operating, because of the fire-damage. Although the fuel storage tanks were under the destroyed roadhouse, they were not damaged. The bowsers were also undamaged. On 24 August 2018, a development application for “temporary structures for fuel/convenience sales and toilets for service station” was approved. United recommenced operations, for reduced hours, on about 21 December 2018. Its service facilities were located in the demountable buildings which were approached across an uneven gravel area. United took advantage of a rent abatement clause in the Lease to make payments at 44% of the agreed figure in the Lease. Upon becoming the registered owner of the property, and landlord by assignment under the Lease, Coastal immediately commenced invoicing United for 75% of the rent payable under the Lease.

19. Mr Roberts gave evidence of a conversation “around the second half of 2019” with a banker from the National Australia Bank (NAB), which had financed the purchase of the property, in relation to a loan to cover the cost of rebuilding. ^[4] On the basis of that conversation, Mr Roberts formed the view that he would not be able to obtain finance whilst United was paying only 44% of the rent provided for in the Lease.

    4. Affidavit, 19 January 2022, par 19.

20. On 27 November 2019, Coastal commenced proceedings against United seeking to recover unpaid rent. Although commenced in the Local Court, the proceedings were transferred to the Equity Division. As amended on 11 September 2020, the statement of claim sought a declaration that United was in breach of the “usual opening hours requirement” and an order for payment of unpaid rent and unpaid outgoings.

21. Annexure A, cl 16.3 of the Lease provided:

“16.3   Consultation with the tenant

If the Landlord wishes to repair all or any of the leased property that is damaged or destroyed then the landlord will consult with the Tenant regarding the design, fabric, character and dimensions of the leased property.”

22. Steps were taken in December 2019 to engage in consultation at the time that the development application was lodged with the Council. The only relevance of that step for present purposes is that it confirmed that Coastal was then communicating to United its intention to proceed with the rebuilding of the roadhouse.

23. Prior to the fire, the roadhouse included (i) the sales facilities and a convenience store operated by United, (ii) a food outlet operated by Subway, (iii) a take-away food outlet operated by Ms Tania Mangion and (iv) a further food preparation and dining area operated by Great Aussie Bush Camp. None of the operators other than United has resumed business at the property.

Period January 2020 – December 2021

24. In accordance with the terms of the development application, Mr Roberts proposed to undertake the rebuilding of the roadhouse by another company in the Coastal Group, also under his control, namely Coastal Earthmoving Hire Pty Ltd (Coastal Earthmoving). The initial letter from the project coordinator of Coastal Earthmoving, seeking a planning meeting with Perception Planning, commenced:

“Please see attached a plan for stage 1 and 2 works.

The stage 1 works we are going to try hopefully [to] construct under the existing DA and hopefully submit CC plans.

The stage 2 works we would attempt to do at a later date and submit a DA.”

25. Council approval was obtained on 24 December 2019 and Perception Planning was given written notification of the consent on 10 January 2020. In mid-April 2020, Coastal informed United that it intended to commence construction “on or about 1st May 2020”. At that stage, it did not have a construction certificate, but Mr Roberts said he had no doubt that Coastal would be able to obtain one and that there was cleaning up and demolition work to be undertaken as a preliminary step. He was also of the view that finance would not be a problem. ^[5]

    5. Tcpt, p 37(30)-(37), (40).

26. The development application included an estimated cost of development of $1.5 million. Although it is not uncommon for costs to be estimated conservatively where fees may depend upon the estimate, Mr Roberts, confirmed that he had made that estimate in mid-2019. ^[6] It accorded with the reduction in price on the purchase of the property. Mr Roberts also gave evidence that in mid-2020 he had sought a quotation from Drayton Group Pty Ltd (Drayton) to check that his initial estimate was “still realistic”. ^[7] On 7 July 2020 Drayton quoted, to rebuild the roadhouse in accordance with the plans supplied by Perception Planning, an amount of $3,280,000 plus GST, that is more than twice Mr Roberts’ initial estimate of 12 months earlier.

    6. Affidavit, 19 January 2022, par 12.

    7. Affidavit, pars 23, 24.

25. On 29 October 2020, United filed a cross-claim seeking a declaration that the rent payable under the lease, adjusted pursuant to cl 8.2.2, was the amount which it had been paying.

26. In accordance with its commencement date and the specified period of five years, the Lease was due to expire on 30 June 2021. However, United had a right of renewal, which it sought to exercise by serving a notice on Coastal on 25 March 2021. In response, on 31 March 2021, Coastal issued a notice of breach of covenant relying on breach of the usual opening hours requirement, together with a notice under the Conveyancing Act 1919 (NSW), s 133E, noting that the right of renewal was only available if there were no outstanding payments due for rent or outgoings and that, at the time of service of the notice of renewal, United was in default in an amount of some $293,000.

27. On 14 December 2021 United’s lawyers sent Coastal’s lawyers an offer of compromise, on the basis of which the proceedings brought by Coastal were settled.

Events of January 2022

30. The agreement to accept United’s offer of compromise of Coastal’s claim was communicated on 17 January 2022. The agreement provided for United to pay an abated rent calculated at approximately 79% of the rent payable under the Lease. That agreement was formalised in consent orders made by Darke J in the Equity Division on 27 January 2022.

31. The precise timing of various steps taken between 14 December 2021 and 18 January 2022 was a significant issue at the trial and those events will be discussed below.

Notice of Consideration – cl 8.2.3

32. On 18 January 2022 Coastal served on United its cl 8.2.3 notice advising that “Coastal considers that the damage is such as to make its repair impracticable or undesirable”. The notice also contained an express statement that “this is not a termination notice”, stating that “each of Coastal and United have the power under cl 8.2.3 to terminate the lease by giving not less than 14 days’ notice in writing of termination”.

33. The critical provision in the Lease was cl 8.2, which appeared under the heading “What happens if the property is damaged?”. Subclauses 8.2.1 and 8.2.2 provided for a suspension of the tenant’s obligation to pay rent if the property could not be used or was inaccessible due to the damage, and subcl 8.2.2 provided for an abatement of the liability to pay rent if useability was diminished due to the damage. Otherwise, cl 8.2 relevantly provided:

“8.2   If the property or the building of which it is part is damaged (a term which includes destroyed) –

…

8.2.3   if the landlord notifies the tenant in writing that the landlord considers that the damage is such as to make its repair impracticable or undesirable, the landlord or the tenant can terminate this lease by giving not less than [14] days[’] notice in writing of termination to the other and no compensation is payable in respect of that termination;

8.2.4   if the landlord fails to repair the damage within a reasonable time after the tenant requests the landlord to do so, the tenant can terminate this lease by giving not less than [14] days[’] notice in writing of termination to the landlord … ”

34. In his principal affidavit of 19 January 2022, Mr Roberts gave evidence of having formed the belief that it was both “impracticable” and “undesirable” to proceed with the rebuilding of the roadhouse. He gave evidence of the circumstances which led him to that conclusion and the timing of his consideration of those circumstances. That evidence was the subject of challenge by way of cross-examination and the detail of those circumstances and Mr Roberts’ evidence will be addressed below in considering the relevant grounds of appeal. However, the reasoning may be summarised in the following terms.

1. First, Mr Roberts made a fresh calculation of the likely cost of rebuilding the roadhouse based in part on Drayton’s quote, together with the expected cost of additional items which were not covered by the quote and by making allowance for an increase over Drayton’s June 2020 figure to take account of the surge in costs over the period of COVID and subsequent experience.

2. Secondly, he took into account the likely increase in rental income which included an increase of 21% in the rental payable by United (which would no longer be subject to abatement) together with the income obtainable from three additional tenants.

3. Thirdly, he calculated a rate of return as a percentage of the rebuilding costs, concluding that the rate of return would not satisfy a bank from whom a loan would be required to cover the costs. Furthermore, Mr Roberts reasoned, even if a bank would accept a lower estimated rate of return, he was not prepared to risk incurring a major liability for the anticipated lower rate of return.

35. Apart from the third step in the analysis, challenges were made to the amounts relied upon at each of the two prior steps. Those challenges will be addressed below.

Temporal limitation (grounds 1-4)

36. The parties each accepted that the power conferred on Coastal by cl 8.2.3 should be exercised “within a reasonable time”. The point of difference was said to be that, on Coastal’s contention, the period ran from the time at which Mr Roberts (as the personification of the company) formed the view that permitted the giving of a notification. Coastal disputed the alternative approach relied on by United, namely that a view had to be formed and notification given within a reasonable time after the occurrence of the damage. Clearly, however, there were two potential triggers and the reasons for accepting one applied equally to the other.

37. There is a sense in which this was a false issue. As Coastal submitted in writing, “[u]ntil the circumstances are such that the landlord can, as a matter of fact, consider whether the repair is impracticable or undesirable, the reasonable period in which to issue the notice will not have commenced”. ^[8] It is clear that if that point of time has not arisen, there can be no finding of unreasonable delay. However, in principle United’s position should be accepted. The whole of cl 8 is concerned with the rights of the parties in circumstances where justice requires some adjustment of the obligations imposed by the lease. Coastal submitted that if there were some concern about injustice to the lessee in not imposing a time constraint on the giving of notification by the landlord of an intention not to repair, the answer is found in cl 8.2.4 which permits the lessee to require the landlord to repair and expressly provides that failure to repair within a reasonable time permits the tenant to terminate the lease. However, that clause only protects a tenant who does not wish to stay unless the premises are rebuilt. Further, it is arguable that the right of the tenant to take such a step is also required to be exercised within a reasonable time after the damage occurs.

    8. Respondent’s written submissions, 29 February 2024, par 22.

38. United complains that the trial judge adopted Coastal’s contention without considering the contrary arguments. That proposition need not be accepted, but it is true that the key passage in the reasoning is obscure:

“38   The language of the clause clearly provides that the trigger for the notice is the ‘consideration’ of the landlord. It does not make commercial sense that the landlord must notify the tenant of a decision not to repair within a reasonable time of the damage, although that is likely to also follow from the landlord’s consideration contemplated in clause 8.2.3.”

39. The difficulty arises in part from the fact that this statement occurs in the course of addressing United’s submission that “Coastal is not entitled to issue a [cl 8.2.3 notice] in circumstances where it had made a decision to repair and rebuild the Rock”. ^[9] This was the “election” submission which was rejected and not pursued in this Court. ^[10] Given that the constraint is to be imposed by way of an implied term in the contract, a plausible form of cl 8.2.3 would commence as follows:

“If the landlord notifies the tenant in writing within a reasonable time that the landlord considers that the damage ….”

9. Coastal v United at [31].

10. The discussion ran from [32]-[40].

40. So understood, the subject-matter of the notification is the landlord’s opinion as to the practicability and the desirability of repairing the damage which, the provision assumes, is unrepaired. The ordinary reading of such a provision would be that notification must be given within a reasonable time of the damage, meaning that the landlord must give consideration to repairs and, if it forms the view that repairs are impracticable or undesirable, give notice to the tenant, all those steps being required within a reasonable time.

41. To the extent that the trial judge did not consider the issue in those terms, grounds 1 and 3 should be upheld. (It is not necessary to address the detailed particulars in ground 2.) The question then raised by ground 4 is whether the trial judge ought to have found that the cl 8.2.3 notice was not given within a reasonable time. Both parties addressed that issue.

42. Coastal’s position, as expressed in its written submissions, was that “it was not until the abated rent was known that Coastal was able to determine the additional revenue it would earn if it rebuilt the Rock”. Once it knew its legal entitlement in that respect, Coastal submitted that Mr Roberts acted promptly to assess the situation and give notice to United. The latter submission was not seriously challenged and should be accepted.

43. United’s response was that Coastal “was able to, and did in fact, consider the practicability and desirability of rebuilding even whilst the rate abatement dispute was ongoing”. ^[11] Further, according to United, Coastal took a number of steps in pursuit of a proposed rebuilding exercise during that period. United concluded:

“… if and to the extent there is uncertainty as to one aspect of the practicability or desirability of rebuilding (such as anticipated rental income from one tenant), that does not prevent a landlord from forming the relevant consideration. Indeed, the very fact of uncertainty may, of itself, be a reason why a landlord might consider it was not practical or desirable to rebuild.”

11. Appellant’s reply submissions, 4 March 2024, par 4.

44. The last proposition should not be accepted. Uncertainty is surely not a basis to force a landlord to take a step which may result in the termination of the lease, for fear of losing the opportunity to do so if the uncertainty is resolved in one way rather than another. It is difficult to see that such a position advances the interests of the tenant.

45. On the other hand, to rely on a course of conduct from which it may be inferred that the landlord was giving serious consideration to rebuilding the premises is perhaps to focus upon the ambiguous term “considers” in cl 8.2.3. To consider something to be true is to hold a belief; to consider whether something is true is to go through a process preceding the belief. Clause 8.2.3 refers to the notification of the tenant that “the landlord considers that … repair [is] impracticable or undesirable”. It thus refers to an actual belief and not to a consideration of circumstances which may or may not lead to that belief. The activities on which United relies as having been undertaken from June 2019 to November 2021 were steps which it was reasonable to undertake in order to make a firm decision as to whether rebuilding should proceed.

46. Finally, the uncertainty as to the rent payable by “one tenant”, namely United, which was the only tenant at that point, was not insignificant. The annual rent payable by United under the Lease in the financial year 2019-2020 was $535,000. Whilst United was paying 44% as the abated rate, the shortfall was $300,000. Calculated at 79% the shortfall (21%) was $112,350. The difference was $270,650. Given that other tenants were expected to pay a figure in the order of $180,000 (including GST) some 75% of the anticipated revenue would be paid by United. More importantly for Mr Roberts’ calculations, the benefit from rebuilding, so far as United’s Lease was concerned, would be the difference between the full rent and the 79% being paid under the agreed settlement. That figure for that particular year (21% of $535,000) was $112,350. The benefit to Coastal of spending a significant sum in rebuilding the premises was to obtain revenue, inclusive of GST, in a greater amount of $300,000. This was, once GST was allowed for, the calculation undertaken by Mr Roberts at par 78 of his affidavit. Thus, although the higher abated rate agreed in the settlement may have provided Coastal with more immediate cash, it reduced the desirability from Coastal’s point of view of undertaking the rebuilding exercise. Thus, whether or not the precise calculations are correct or reasonable, it was not unreasonable to await the resolution of the rental abatement dispute. That dispute may be said to have been resolved by acceptance of United’s offer of 14 December 2021. The offer was open for 28 days. There appears to have been correspondence between the solicitors on 10 and 13 January 2022, which resulted in the formulation of consent orders but was not available to this Court. ^[12] A delay of one month (over the Christmas/New Year period) before the offer was formally accepted and the cl 8.2.3 notice was given, could not be said to be an unreasonable delay.

    12. See email from United’s solicitors to Coastal’s solicitors of 17 January 2022, par 1. 2 Bl 587

47. Mr Roberts gave evidence of the steps he took over that period, which was the subject of cross-examination going to his credit, but the details are not relevant to this point.

48. It therefore follows that, whilst it is appropriate to take account of the period from the date of the damage until the date the cl 8.2.3 notice is given, United failed to establish that, in the circumstances of the case, the notice had not been given within a reasonable time.

Validity of cl 8.2.3 notice – legal principles (grounds 5 and 6)

49. Grounds 5 and 6 in the notice of appeal took issue with a finding by the trial judge that the obligation of the landlord when exercising the power in cl 8.2.3 was to form a genuine opinion, acting in good faith. The terminology adopted in ground 6 reflected the approach United said should have been adopted:

“6   The primary judge ought to have found that the power in clause 8.2.3 of the Lease is governed by a requirement for the lessor to act objectively and subjectively reasonably (although not to the level of a duty to exercise due care and skill or to produce a reasonable outcome) when exercising the powers and discretions given by that clause.”

50. Ground 5 took issue with two passages in the judgment below, which were said to reflect acceptance of the parties which United denied ever having accepted. Rather, United said it had insisted at trial that there was a separate part of the test which required objective reasonableness. However, on an appeal by way of rehearing, there is no utility in analysing the submissions of the parties as opposed to determining the substantive issue, namely whether Mr Roberts’ conduct was to be assessed according to an objective reasonableness criterion.

51. The impugned passage in the reasons of the trial judge read as follows:

“47   Both parties accept that the power in clause 8.2.3 is not unfettered, and Coastal must exercise it for the purpose for which it was given, in good faith or subjectively reasonably and not arbitrarily or capriciously. However, the fetter does not require Coastal to prefer the interests of the other party over its own in making the decision. Coastal required a rational and genuine reason for exercising the power for such exercise to be valid.

48   Therefore, in determining whether Coastal is entitled to exercise the right under clause 8.2.3, it must be determined as a matter of fact whether Coastal genuinely considered the repairs were not practical or desirable.”

It is by no means clear that the judge made the error alleged in ground 5, namely attributing to United a position it expressly eschewed. The better reading of the first sentence is that both parties accepted two propositions, one was that the power is “not unfettered” and the other that it must be exercised “for the purpose for which it is given” etc. That is, there was no dispute that there was a fetter and that it involved the subjective elements identified. However, the inference may be drawn that the trial judge did not apply an objective reasonableness standard because at no stage thereafter did she do so.

52. If it were necessary to determine how precisely United ran its case at trial, there must be doubt as to whether an objective standard of reasonableness was adopted and, to the extent that there were references in the pleading and in the written submissions to “reasonableness”, as to how that term was to be understood.

53. First, so far as the pleading was concerned, the further amended statement of cross-claim contained the following allegation:

“7   There were implied terms of the lease that the landlord must:

(a)   do all that was reasonably necessary to enable a tenant to enjoy the benefits of the lease;

(b)   act reasonably in exercising its powers under the lease; and

(c)   act in good faith in the exercise of its contractual powers.”

54. That pleading was no doubt succinct but could not be taken at face value. Paragraph 7(a) suggests an implied obligation to rebuild, a proposition properly disclaimed by the appellant. Paragraphs 7(b) and (c) may be intended to distinguish an obligation to act reasonably from acting in good faith, although, as will be seen, it is not clear that the case law relied upon in submissions makes that distinction. Importantly, in the opening outline of submissions provided to the trial judge, the present issue was addressed under the heading “Any exercise of cl 8.2.3 must be done in good faith”. ^[13] The statement of principles commenced by reference to “the imposition of good faith in commercial contracts” and continued over several paragraphs in identifying the content of the obligation of “good faith”. That obligation was said to include a requirement to “act reasonably and with fair dealing having regard to the interests of the parties …”. The only submissions which took the matter any further are those which relied upon a passage in the judgment of Bryson J in McIntosh v Dylcote Pty Ltd ^[14] to which reference will be made below.

    13. Cross-claimant’s outline of opening submissions, 14 July 2023, pars 49ff.

    14. [1999] NSWSC 230; 9 BPR 16805, 16809.

55. For the reasons which follow, the trial judge was in any event correct in the principles she adopted in assessing the validity of the notification under cl 8.2.3.

Nature of power invoked

General principles

56. Although the appellant sought to justify a review of the exercise of power under the Lease by reference to statements made in judgments, the starting point for the inquiry must be the language of cl 8.2.3 itself, read in its contractual context. That focus reveals two critical factors. First, the criterion of the engagement of the power to give a notice turns on what “the landlord considers”. That is, the objective fact is an opinion, belief or state of satisfaction of the landlord as to particular matters: it is not the objective existence of the specified criteria. That distinction is commonplace in construing instruments conferring powers. In relation to a statute, Gibbs J stated in Buck v Bavone:^[15]

“It is not uncommon for statutes to provide that a board or other authority shall or may take certain action if it is satisfied of the existence of certain matters specified in the statute. Whether the decision of the authority under such a statute can be effectively reviewed by the courts will often largely depend on the nature of the matters of which the authority is required to be satisfied. In all such cases, the authority must act in good faith; it cannot act merely arbitrarily or capriciously. Moreover, a person affected will obtain relief from the courts if he can show that the authority has misdirected itself in law or that it has failed to consider matters that it was required to consider or has taken irrelevant matters into account. Even if none of these things can be established, the courts will interfere if the decision reached by the authority appears so unreasonable that no reasonable authority could properly have arrived at it.”

15. (1976) 135 CLR 110; [1976] HCA 24 at p 118.

57. That approach has a long history in public law and permits a resolution of the tension between ensuring that public authorities operate strictly within the scope of their statutory functions, while acknowledging that the decision-making authority, which may require the exercise of evaluative judgment, is vested in the authority and not the Court. In TheKing v Connell; Ex parte Hetton Bellbird Collieries Ltd ^[16] Latham CJ stated:

“It is therefore well settled that if a statute provides that a power may be exercised if a person is of a particular opinion, such a provision does not mean that the person may act upon such an opinion if it is shown that he has misunderstood the nature of the opinion which he is to form. Unless such a rule were applied legislation of this character would mean that the person concerned had an absolutely uncontrolled and unlimited discretion with respect to the extent of his jurisdiction and could make orders which had no relation to the matters with which he was authorised to deal. It should be emphasised that the application of the principle now under discussion does not mean that the court substitutes its opinion for the opinion of the person or authority in question. What the court does do is to inquire whether the opinion required by the relevant legislative provision has really been formed. If the opinion which was in fact formed was reached by taking into account irrelevant considerations or by otherwise misconstruing the terms of the relevant legislation, then it must be held that the opinion required has not been formed. In that event the basis for the exercise of power is absent, just as if it were shown that the opinion was arbitrary, capricious, irrational, or not bona fide.”

16. (1944) 69 CLR 407 at 432; [1944] HCA 42.

58. These principles are not restricted to public law: very similar principles apply with respect to the exercise of functions by trustees. A canonical statement of the constraints on review of the exercise of powers conferred on a trustee may be found in the judgment of McGarvie J in Karger v Paul:^[17]

“The issues which are examinable by the court are limited to whether there has been a failure to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. In short, the court examines whether the discretion was exercised but does not examine how it was exercised.”

17. [1984] VR 161 at 164.

59. McGarvie J further noted that it was relevant to look at “evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercising their discretion”. He continued:

“However, it is not open to the court to look at these matters for the independent purpose of impugning the exercise of the discretion on the grounds that their inquiries, information or reasons or the manner of exercise of the discretion, fell short of what was appropriate and sufficient. Nor is it open to the court to look at the factual situation established by the evidence for the independent purpose of impugning the exercise of the discretion on the grounds the trustees were wrong in their appreciation of the facts or made an unwise or unjustified exercise of discretion in the circumstances.”

60. The private trustee is not acting in his or her own interests, but on behalf of others. That is so even if the trustee is a corporation which is remunerated for its services. ^[18] (A more interventionist approach will be justified in the case of a superannuation trustee which is required to make a payment to a beneficiary where specified criteria are satisfied. ^[19] )

    18. Elder’s Trustee and Executor Company Ltd v Higgins (1963) 113 CLR 426, 449 (Dixon CJ, McTiernan and Windeyer JJ); [1963] HCA 48.

    19. Finch v Telstra Super Pty Ltd (2010) 242 CLR 254; [2010] HCA 36 at [57]-[66].

61. The second aspect of cl 8.2.3 which is significant is the statement of criteria for the consideration of the landlord. The two criteria, disjunctively expressed, are impracticability and undesirability. The criterion of impracticability implies an assessment of factual considerations, such as the nature of the damage, the likely cost of repair and other related physical or financial circumstances. By contrast, the concept of desirability allows both a wider range of factors to be taken into account and permits a broad discretionary element as to the intentions of the landlord, including its assessment of available resources. Indeed, the latter consideration comes close to freeing the landlord from reviewable decision-making. As Gibbs J noted in Buck v Bavone, in relation to a statutory power, “where the matter of which the authority is required to be satisfied is a matter of opinion or policy or taste it may be very difficult to show that it has erred in one of [the ways discussed], or that its decision could not reasonably have been reached. In such cases, the authority will be left with a very wide discretion which cannot be effectively reviewed by the courts”. ^[20]

    20. Buck v Bavone at 119.

62. It is clear that in the contrasting case, a decision which “could not reasonably have been reached” is one which, as described above, was “so unreasonable that no reasonable authority could properly have arrived at it”. That appears from the following passage in the reasoning of Gibbs J: ^[21]

“Where the authority is required to be satisfied of the existence of particular matters of objective fact, the position may be very different. It may then be possible to show clearly not only that the material facts existed but that an authority acting in accordance with its duty could have reached no other conclusion than that they existed.”

21. Ibid.

63. The point of the discussion was that if a person could demonstrate that he or she was growing potatoes, there being no other criterion for registration, or for refusing registration, the registration board, acting in good faith, could not fail to register such a person.

64. There is no doubt that the exercises of judicial control over public authorities and over trustees each involve different issues from the control of a discretionary power conferred on one party to a commercial contract which may effect termination of the contract. Nevertheless, the common elements of control of administrative decision-making and trustees demonstrate that the former are not divorced from private law. Further, it would be curious, if not incoherent, for the law to impose on the consensual agreements of commercial parties, absent proof of unequal bargaining power or unconscionability, a higher level of control than that which applies to public authorities. At the very least, care should be taken not to read statements in contract cases too broadly in their apparent effects so as to give rise to potential incoherence.

Contractual cases – effects of breach

65. Turning to the authorities relied upon by the appellant, two points should be borne in mind. The first is that a range of epithets is used to describe possible bases of intervention, without a consistent attempt to define their scope. That may appear bewildering, but the foregoing discussion indicates that most if not all of the terminology has been applied in other analogous situations. The second, and related, point is that where words have been used in analogous contexts, without further definition, they should be understood to refer to established concepts.

66. Although the application of principles of good faith to the performance of contracts is treated as commencing with a judgment in 1992, Renard Constructions (ME) Pty Ltd v Minister for Public Works,^[22] there is a separate line of authority dealing with the scope of express obligations to negotiate in good faith. Because there was no dispute, and the trial judge accepted, that Mr Roberts was required to give genuine consideration to matters relevant to the exercise of the cl 8.2.3 power, and not to exercise it arbitrarily or capriciously or, which may be much the same thing, for a purpose foreign to the purpose for which it was agreed upon in the contract, what the cases have to say generally about good faith is of limited significance. The material question is whether the cases prescribed that a criterion of objective reasonableness be read into the exercise of cl 8.2.3.

    22. (1992) 26 NSWLR 234 (Priestley JA, Meagher JA and Handley JA).

67. The contract in Renard Constructions established a scheme by which the principal was required to give the contractor a notice in writing to show cause why, in a case of default by the contractor, a power to take work away from the contractor should not be exercised. The default was to be specified in the show cause notice, and if the principal did not accept the contractor’s response, the contractor was entitled to refer the matter to arbitration on the basis of “objective considerations including questions of reasonableness in showing cause against the exercise of the powers”. ^[23]

    23. Renard Constructions at 279G (Handley JA).

68. Priestley JA noted that questions had arisen as to whether there was an obligation imposed on the principal to act objectively reasonably either in exercising the power or in dealing with a response to a show cause notice. Priestley JA held: ^[24]

“For myself, I cannot see why a term should not be implied at both stages; that is, it seems to me relatively obvious that an objective and reasonable outsider to this contract upon reading subcl 44.1 would assume without serious question that the principal would have to give reasonable consideration to the question whether the contractor had failed to show cause and then, if the principal had reasonably concluded that the contractor had failed, that reasonable consideration must be given to whether any power and if any which power should be exercised.”

24. Renard Constructions at 257C.

69. Priestley JA implied such a term, considering it was justified both by reference to the implied actual intention of the parties and as a matter of law. (It is not necessary to explore why a court should look for “actual intention” in circumstances where the meaning and operation of a contract is determined objectively by reference to its text.) He reasoned, by reference to cl 44: ^[25]

“It seems clear that the words of the clause empower the principal to give a notice to show cause upon any default in carrying out any requirement in the contract. Thus for a completely trivial default the principal can give a notice to show cause. It is possible to imagine many situations in which, if a notice for some trivial breach were given the contractor might fail, as a matter of fact, to show cause within the specified period to the satisfaction of the principal why the powers should not be exercised against him.”

25. Renard Constructions at 258C (emphasis in original).

70. As will be seen shortly, this reasoning was accepted in the second case involving an unqualified power exercisable upon breach or default. However, there is a question as to why the problem of trivial or insignificant defaults or breaches might not be resolved by reading the contract, including the consequences of the exercise of the power, as only applicable to breaches or defaults which were not trivial and were such as could warrant termination. This point was made by Gummow J in the Federal Court in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd:^[26]

“Where one party has an express power the exercise of which will significantly affect the interests of the other party (eg by cancellation of their supply contract) if the holder of the power is satisfied that a certain state of affairs exists, the words of the contract are fairly readily construed (and the more so when the parties have given such a power to a third party) as requiring a reasonable as well as honest state of satisfaction; see the authorities referred to by Priestley JA and Handley JA in Renard Constructions (supra) at 260, 279-280 … . But this is a result arrived at by a process of construction of the express terms in the setting of the contract as a whole. It is best not seen at all as the implication of a further term.”

26. (1993) 45 FCR 84, 94; [1993] FCA 638.

71. Gordon J adopted a similar approach in Realestate.com.au Pty Ltd v Hardingham. ^[27] However, as the present case does not involve breach or default on the part of either party, nor a case where there is a show cause provision and the opportunity for arbitration, this question need not be pursued.

    27. [2022] HCA 39; (2022) 97 ALJR 40 at [50]-[51], [72]-[73]; see also Kiefel CJ and Gageler J at [22]; Edelman and Steward JJ at [103]-[107].

72. Two other observations should be made, regarding the reasoning in Renard Constructions. First, Priestley JA ended his reasoning by reference to two topics, the first of which was “Good Faith”. ^[28] He stated:

“The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith which are regarded in many of the civil law systems of Europe and in all States in the United States as necessarily implied in many kinds of contract. Although this implication has not yet been accepted to the same extent in Australia as part of judge-made Australian contract law, there are many indications that the time may be fast approaching when the idea, long recognised as implicit in many of the orthodox techniques of solving contractual disputes, will gain explicit recognition in the same way as it has in Europe and in the United States.”

He then gave examples of statutes dealing with unfair contracts, good faith and fair dealing and reasonableness.

28. Renard Constructions at 263G-264A.

73. Secondly, Meagher JA adopted a somewhat different approach, as did Handley JA. However, relevant passages in their reasoning may be addressed having regard to an important element in the appellant’s case which derived from Renard Constructions.

74. Thus, a fundamental element in the appellant’s case, as identified in the grounds of appeal, was that Mr Roberts’ decision to issue the cl 8.2.3 notice was “not rational and informed but grounded upon misleading, incomplete and prejudicial information in important respects”. ^[29] To similar effect, the appellant’s written submissions stated that the obligation of good faith was defined as requiring a party to “not act upon a fundamental misunderstanding of relevant matters, or upon misleading, incomplete and prejudicial information”. ^[30] That terminology was sourced to Renard Constructions at 276, 279.

    29. Ground 7, par (a).

    30. Appellant’s written submissions, par 29(c).

75. The passage at 276, in the judgment of Meagher JA, read as follows:

“The pivotal fact found by the arbitrator – which, so far as I can see from the materials referred to by him is amply justified – is that the principal’s decision was based on a fundamental misunderstanding of relevant matters (principally, that the contractor had been in default since 7 March 1986) and was grounded on ‘misleading, incomplete and prejudicial information’.”

76. The clause permitting the principal to take over the contract and exclude the contractor turned on the state of satisfaction of the principal as to certain matters. Meagher JA held that “[i]nherent in the notion of being ‘satisfied’ is an ability to comprehend the factual background on which satisfaction is required”. He then observed that, on the arbitrator’s findings, “the principal’s mind … was so distorted by prejudice and misinformation that he was unable to comprehend the facts in respect to which he had to pass judgment”.

77. To take the phrase “grounded on misleading, incomplete and prejudicial information” out of context is to give it a flavour as a finding of fact which is misleading; to ascribe to it status as a legal standard is to ignore both the context in which Meagher JA accepted it, and that it was merely a description of certain facts used by the arbitrator whose function it was to review the decision of the principal on the merits once a dispute had arisen.

78. The second passage (at 279) relied upon by the appellant was the following explanation given by Handley JA:

“I also agree with the conclusion by Meagher JA that the principal’s ‘decision was based on a fundamental misunderstanding of relevant matters … and was grounded on misleading, incomplete and prejudicial information’. Meagher JA concludes that these findings demonstrate that the principal could not have given bona fide consideration to the contractor’s submissions and therefore could not have been satisfied that the power which had arisen should be exercised. For myself I prefer to regard these matters as demonstrating that the principal’s decision, however honest, was objectively unreasonable and therefore an invalid exercise of the power.”

Handley JA stated that, “as a matter of construction, the power must be exercised reasonably”. ^[31]

31. Renard Constructions at 279C.

79. In concluding that the relevant contractual power was subject to a condition that it be exercised reasonably, Handley JA took into account a number of considerations. The first, reflecting the point made by Priestley JA set out above, was as follows: ^[32]

“The power arises on the happening of any breach, however minor, and whenever the breach occurs. It also arises upon the contractor neglecting to comply with any direction given by the principal, however minor, accidental or temporary that neglect might be, and regardless of the importance or otherwise of the subject matter. This express power therefore covers many cases where the principal would have no power to rescind the contract for breach under the general law.”

32. Renard Constructions at p 279F.

80. Handley JA noted that the second matter depended upon the fact that the power is engaged by “the satisfaction of the principal”, which had been held in other cases to refer to “an opinion which is reasonable or to one which is merely honest” but stated that the implication of reasonableness was “readily made”. ^[33]

    33. Renard Constructions at p 280A.

81. The third matter was the existence of an opportunity for the contractor to show cause and to take the matter to arbitration. He described the provision for arbitration of disputes as “a further indication that the powers … are subject to some limitations other than honesty”. ^[34]

    34. Renard Constructions at p 281C.

82. A second case involving default was Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church, Archdiocese of Sydney. ^[35] Hughes Bros was decided a year after Renard Constructions and involved the same power to terminate upon default by the contractor, in cl 44 of the then standard construction contract. Default included the commission by the contractor of an act of bankruptcy.

    35. (1993) 31 NSWLR 91 (Kirby P, Priestley JA and Meagher JA).

83. Priestley JA adhered to what he had written in Renard Constructions and implied an obligation on the part of the parties to act reasonably in enforcing provisions in the contract. However, his references to “the reasonableness obligation” omitted references in Renard Constructions to the meaning of that term as an aspect of the implied obligation to act in good faith. Neither Kirby P nor Meagher JA commented on this apparent expansion of the principles stated in Renard. However, both the President and Meagher JA indicated that they were following Renard Constructions only because they were bound by it. Kirby P did not think it distinguishable, but Meagher JA did.

84. A third case involving default was Burger King Corporation v Hungry Jack’s Pty Ltd. ^[36] The case involved a “development agreement” pursuant to which the principal, Burger King, authorised Hungry Jack’s to establish franchise operations in Australia. Burger King enjoyed broad powers under cl 4.1 to terminate the agreement where a franchisee had defaulted or failed to comply with a direction given by Burger King. The Court accepted the respondent’s submission that “unless some restriction was placed upon the operation of cl 4.1, the rights under the development agreement would be illusory”. The Court concluded that the contractual powers under cl 4.1 were to be exercised “in good faith and reasonably”. ^[37] The joint reasons continued:

“That does not mean that Burger King Corporation is not entitled to have regard only to its own legitimate interests in exercising its discretion. However, it must not do so for a purpose extraneous to the contract – for example, by withholding financial or operational approval where there is no basis to do so, so as to thwart Hungry Jack’s Pty Limited’s rights under the contract.”

36. (2001) 69 NSWLR 558; [2001] NSWCA 187 (Sheller, Beazley and Stein JJA).

37. Burger King at [185]; see also [187].

85. In considering Renard Constructions, the Court addressed the “[m]eaning of good faith and reasonableness”:

169   We have already touched upon this … . However, it is worth noting that the Australian cases make no distinction of substance between the implied term of reasonableness and that of good faith. As Priestley JA said in Renard at 263:

‘The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith’.

170   Priestley JA commented further at 265 that:

‘… in ordinary English usage there has been constant association between the words fair and reasonable. Similarly there is a close association of ideas between the terms unreasonableness, lack of good faith and unconscionability.’”

Distinguishing the breach cases

86. United’s claims arise in a different legal context. First, in the breach cases the contractor relied on the potentially arbitrary and capricious operation of a provision which allowed the principal to terminate the contract for any breach, either of a term of the contract or of a direction by the principal, no matter how insignificant. Thus, Renard Constructions involved default resulting from delay combined with a decision of the principal who did not know (because he was not informed) of the reason for the delay, namely unavailability of supplies. The principal was thereby misled by incomplete information which acted adversely (prejudicially) to the interests of the contractor. That finding involved a retrospectant consideration of past circumstances. Neither the language, nor the outcome, can readily be applied to a circumstance where the trigger for the lessor’s power (damage to the premises) is not in doubt and the lessor is required to make an evaluative, prospectant, judgment based on estimations of future costs. To say that a better estimate might have been made on other material is not to say that the lessor acted otherwise than in good faith nor, in the absence of evidence that other material would have led to a different conclusion and was readily available, could it be said that it acted unreasonably in the sense envisaged in Renard Constructions and Burger King.

87. Secondly, there was no provision in the Lease for arbitration of disputes. An arbitration effectively requires a review of the factual exercise of the power by an independent third party. The possibility of such a review, the result of which will be binding on the parties, takes away an element of control otherwise vested in the principal by the contract.

88. Thirdly, there was no default or breach. Through no fault of either party, the circumstances in which the contract was entered into had changed. It was not open to the tenant to require the landlord to rectify the situation by rebuilding; nor was it open to the tenant to insist on remaining in the premises at an abated rent for decades, thus diminishing the return to the landlord and the value of the property.

The lease cases

89. The approach adopted in Burger King reflected that which had earlier been adopted in Alcatel Australia Ltd v Scarcella. ^[38] The appellant in that case was a lessor; the respondents were the lessees. Under the lease, the lessor was required to maintain the premises and keep them “in good and substantial repair”. The relevant issue was identified in the following passage: ^[39]

“In summary terms, the appellant claimed that because the respondents had pressured the council into imposing stricter and unreasonable fire requirements, it was not obliged to comply with [the covenant for repair]. This result flowed from an implied term of good faith or reasonableness in the respondents’ performance of their lease obligations or exercise of their lease rights which bound them to co-operate in a reasonable way to ensure that the appellant was not subjected to the expense and impact of an unreasonable fire order.

The appellant relied upon the reasons for judgment of Priestley JA in Renard Constructions … and of Finn J in Hughes Aircraft Systems International v Airservices Australia. ^[40] In Renard Constructions, a clause in a building contract empowered the principal to take over the whole or any part of the work or to cancel the contract if the contractor neglected to comply with any direction given by the principal, however minor, accidental or temporary that neglect might be and regardless of the importance or otherwise of the subject matter.”

38. (1998) 44 NSWLR 349 (Sheller JA, Powell and Beazley JJA agreeing).

39. Alcatel at 363C-E.

40. (1997) 146 ALR 1 at 36ff.

90. After discussing the relevant cases, Sheller JA noted: ^[41]

“Sir Anthony Mason said that such cases come close to a recognition of the good faith doctrine described as ‘loyalty to the promise itself’. But such an obligation cannot over-ride the express provisions of the contract.

If a contract confers power on a contracting party in terms wider than necessary for the protection of the legitimate interests of that party, the courts may interpret the power as not extending to the action proposed by the party in whom the power is vested or, alternatively, conclude that the powers are being exercised in a capricious or arbitrary manner or for an extraneous purpose, which is another way of saying the same thing. Thus, a vendor may not be allowed to exercise a contractual power where it would be unconscionable in the circumstances to do so ….”

41. Alcatel at 368C-D.

91. Sheller JA concluded: ^[42]

“The decisions in Renard Constructions and Hughes Bros mean that in New South Wales a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract. There is no reason why such a duty should not be implied as part of this lease. But it remains to decide whether the implication of that duty has any consequence in the resolution of the dispute the subject of this appeal.”

The Court held it did not.

42. Alcatel at 369B.

92. The second lease case upon which United placed reliance was a decision of Bryson J in McIntosh v Dylcote. ^[43] The case concerned a hotel lease with a provision (cl 3.11) dealing with storm damage, which in fact occurred. The chapeau to the provision stated:

“If the whole or any part of the building shall be destroyed or damaged by fire, flood, lightening, storm, tempest or other disabling cause so as to render the Demised Premises during the Term substantially unfit for the use and occupation of the Lessee or so as to render the rebuilding or reconstruction of the building in its previous form impracticable or undesirable, in the opinion of the Lessor, then:

(a)   this lease may be terminated, without compensation, by either the Lessor or the Lessee, by notice in writing to the other provided always that in the latter case the Lessor shall have first failed to rebuild or reinstate the Demised Premises within a reasonable time after being requested so to do in writing by the Lessee;

…

(e)   in the event of any dispute arising out of the operation of this Clause, the same shall be referred to arbitration under the provisions of the laws for the time being in force in the State of New South Wales.”

43. See fn 14 above.

93. Bryson J identified his approach to this provision in the following terms:

“My view on the approach I should take to implication is based on the approach in the Court of Appeal in Renard Constructions … to the contractual provisions there under consideration and their Honours' receptivity to ad hoc implications of obligations of reasonableness. The relevant provisions of cl 3.11 differ markedly from those provisions, but there are some similar elements in the manner in which they work. The provisions of cl 3.11 which refer to the lessor's opinion and the power of either party to terminate are mechanisms ancillary to the overall purposes of the parties' agreement and exist to achieve those purposes; they are not there so as to enable the party forming the opinion or deciding on termination to grasp an advantage for itself, and the implication of reasonableness, which is readily made, is required to be made and governs those steps. Such implications are made readily; see Hughes Brothers …, Alcatel Australia Ltd v Scarcella …. The purposes of the parties' leasehold relationship at large furnish context within which the reasonableness of a decision is to be evaluated.

Handley JA in Renard at 280-283 collected and reviewed case law in which provisions for reference of disputes to arbitration after decisions to the satisfaction or in the discretion of a party have been held to place the arbitrator in the position of hearing an appeal from the party's decision or discretion. The structure of cl 3.11 leads me to the view that the dispute which may be referred to arbitration may relate to any element of cl 3.11, whether a matter or fact, an opinion or a decision of a party. In cl 3.11 the opinion of the lessor or the decision of a party to terminate is, in my opinion, no more than provisional and the machinery for arbitration of a dispute is just as much a part of the mechanism for producing a decision as is the machinery for provisional decision by a party.

The purposes of the lease overall appear to me to require that termination should not follow automatically from damage and at the option of either party: there must be an implication that termination would only happen if the damage was such as to make termination appropriate, and there must be an implication that the dispute and arbitration mechanism would extend to reconsidering any decision by a party bearing on termination. Otherwise the lease would be futile, liable to be defeated by either party in relatively slight circumstances. It would lack business efficacy as a lease for 20 years.

…

In my opinion it is an implied obligation of the lessor to act reasonably in forming an opinion on the undesirability of reconstruction, and it is an implied obligation of each party to act reasonably in terminating the lease. Unless facts objectively exist in which it is reasonable to conclude that reconstruction is undesirable, an opinion that it was undesirable would not have any contractual effect. In an endeavour to articulate what is required by the test of reasonableness when it is to be applied to a decision to terminate under the lease, I will say that it requires proportionality between the outcome of termination without compensation and the nature of the underlying problem.”

94. Although a decision of a single judge and not binding on this Court, the clause in question was similar to cl 8.2.3 of the Lease. However, two points may be made in relation to this reasoning. First, although there were elements of similarity between the provision in the case of damage to premises in McIntosh and in the present case, there was also a major disparity: the present case involved no dispute resolution process, which was a significant factor in the reasoning set out above.

95. Secondly, the implication of reasonableness extending to a determination of whether relevant facts objectively exist, is a significant extrapolation on the principle in Renard. That extrapolation, it may be accepted, finds support in the reasoning of Priestley JA in Hughes Bros, discussed above. The expansion of the stringent obligation to act reasonably in enforcing the wide-ranging default provisions permitting termination, to a clause dealing with the effects of damage to the premises for which neither party was responsible, required consideration of the operation of the storm damage clause: that is not found in McIntosh.

Other authority

96. Before turning to the application of the relevant principles to the Lease, it is necessary to refer to one other case upon which the appellant placed reliance, namely the decision of this Court in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service. ^[44] United relied on the discussion of “good faith” in the concurring reasons of Allsop P at [5]-[17]. In that passage, the President outlined the broad principles derived from earlier cases, key examples of which have been discussed above. However, it should be noted that the discussion took place in a context where the contract expressly stated that the standard of mutual behaviour was that of “utmost good faith”. The President stated:

“14   It is important to recognise that these obligations must be assessed and interpreted in the light of the bargain itself and its contractual terms. Those terms, however, must be assessed and interpreted in the light of the presence of the obligation of good faith, here pursuant to an express clause.”

That took the present matter no further.

44. [2010] NSWCA 268; 383 ALR 577 (Allsop P, Hodgson and Macfarlan JJA).

97. One other case should be referred to in this context. In Royal Botanic Gardens and Domain Trust v South Sydney City Council, ^[45] the High Court considered a dispute as to the basis upon which a landlord was entitled to determine the rent payable with respect to public land used by the Council as a recreation area in the City of Sydney. The lease provided that “in making any such determination the Trustees may have regard to additional costs and expenses which they may incur in regard to the surface of the Domain …”. The question was whether that was the only matter which the Trustees were entitled to consider or whether their discretion was at large. The High Court upheld the conclusion of this Court that the statement was exhaustive. In doing so, the joint reasons noted that there was no mechanism for dispute resolution in relation to periodic rent determinations and their conclusion was consistent with the non-commercial nature of the lease. ^[46]

    45. (2002) 240 CLR 45; [2002] HCA 5.

    46. Royal Botanic Gardens at [37] (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ).

98. The trial judge (Hodgson J) had taken a different view, subject to an implied term that in making a rent determination “the lessor must act bona fide for the purposes of determining a rent which is no more than a fair and reasonable rent”. ^[47] The High Court held that such an implied term “would contradict the express terms [the lease]”. ^[48] However, the Court went on to make the following observations:

“40   The second matter concerns the debate in various Australian authorities concerning the existence and content of an implied obligation or duty of good faith and fair dealing in contractual performance and the exercise of contractual rights and powers. It emerged in argument in this Court that both sides accepted the existence of such an obligation in the exercise by the Lessor of its rental determination power conferred by cl 4(b). Rather, the dispute between them was directed to the content of that power …. The result is that, whilst the issues respecting the existence and scope of a ‘good faith’ doctrine are important, this is an inappropriate occasion to consider them.” [Footnote omitted.]

47. Royal Botanic Gardens at [6].

48. Royal Botanic Gardens at [38].

99. Kirby J in separate dicta opposed such an implied term:

“87   Much time was taken in exploring the common law cases by which, in leases between private parties affording machinery for the determination of a ‘price’ but no explicit formula, obligations to act fairly and reasonably will be implied into the contract so as to save it from failure and to provide a measure by reference to which the ‘price’ can be objectively proved. The Court was taken to case law both in this country and overseas as well as to academic commentary to demonstrate a growing tendency to imply into private contractual dealings a covenant of good faith and fair dealing. As expressed in some United States decisions, this is a principle that is not confined to an obligation to exercise express contractual powers fairly and reasonably. In some parts of the United States, the obligation has been accepted as a general implied contractual term in its own right.

88   However, in Australia, such an implied term appears to conflict with fundamental notions of caveat emptor that are inherent (statute and equitable intervention apart) in common law conceptions of economic freedom. It also appears to be inconsistent with the law as it has developed in this country in respect of the introduction of implied terms into written contracts which the parties have omitted to include.” [Footnotes omitted.]

100. Callinan J reached the same conclusion as to the operation of the clause. He concluded with the following observation:

“156   In view of the conclusion I have reached, it is unnecessary to answer the questions raised by the rather far-reaching contentions of the appellant, and for which, it says, Alcatel Australia Ltd v Scarcella and [Burger King] stand as authorities: whether both in performing obligations and exercising rights under a contract, all parties owe to one another a duty of good faith; and, the extent to which, if such were to be the law, a duty of good faith might deny a party an opportunistic or commercial exercise of an otherwise lawful commercial right.”

101. The observations of Kirby J reflected concerns he had raised whilst on this Court in Hughes Bros. Callinan J, although describing the submissions of the appellant as “far-reaching”, provided no comfort for, or support of, such a conclusion based on the cases referred to. The language of the joint judgment was more neutral, but was certainly not supportive. As noted above, Gummow J, one of the joint authors, whilst on the Federal Court, had rejected the generic implication of a term of good faith. ^[49]

     49. See at [70] above.

Legal principles – conclusions

102. Is the conduct of the landlord in giving notice under a clause of the Lease dealing with the consequences of damage to the leased premises required to justify that conduct according to a standard of objective reasonableness, as assessed by the court? The trial judge used the term “subjective reasonableness” in this context, ^[50] which has the appearance of an oxymoron. However, it is best understood as reflecting the fact that it involves no obligation to take the lessee’s interests into account, on the one hand, but on the other is to be judged against the circumstances, knowledge and interests of the lessor itself. It aptly describes a standard which precludes capricious or arbitrary decision-making and is, in substance, a requirement to act in accordance with the purpose for which the power was agreed upon in the contract.

     50. Coastal v United at [47]

103. As explained above, the cases dealing with clauses permitting termination for even the most insignificant default or breach, which permit review by an independent arbitrator, have no necessary application to cl 8.2.3. Nor is it clear that the concept of unreasonableness engaged in those cases is anything less than a standard of gross or serious unreasonableness, described in public law as legal unreasonableness. Expansion of those principles should be approached with caution, given the doubts expressed by two members of this Court in Hughes Bros and the cautious comments of the High Court in Royal Botanic Gardens.

104. There is a further consideration of principle which militates against the imposition of an objective standard of mere reasonableness. Meagher JA noted in Renard Constructions that counsel for the contractor had “conceded that the principal was not burdened by any element of altruism”. In Burger King the Court observed that the principal was “entitled to have regard only to its own legitimate interests in exercising its discretion”. That is, it was not required to take the contractor’s interests into account in reaching a decision. However, it is difficult to envisage a standard of objective reasonableness which, at least in the present circumstances, would not require the lessor to have regard to the lessee’s interests.

154. Two further propositions were included in that submission. First, “Mr Roberts made no attempt to identify or quantify the margin (if any) that Coastal Earthmoving were charging to Coastal”. That was true, but the cross-examination was limited to one question relied upon by the appellant in its written submissions, namely that a reason for putting the development application in the name of Coastal Earthmoving was to control the builder’s margin.

155. Secondly, it was submitted that, “[t]his was despite the fact that, elsewhere in his evidence, in the context of concreting, Mr Roberts said that by using Coastal Earthmoving there would be a saving on ‘travel and markup’ in the order of 43%”.

156. It is not clear whether that submission was pressed, but it was based on two false premises. The first false premise was that this was a saving which applied across the board, when the figure of 43% was derived from the explanation noted above, that the concreting cost could be reduced by having a batching plant on site. Secondly, as has already been noted, far from ignoring the benefit, Mr Roberts accepted it in pursuing the cost of concreting at the amount of $450,000 not $825,000. The submission ended by the proposition that these matters were not addressed in Mr Roberts’ affidavit (which in the latter case was false) or in her Honour’s reasons (which, with respect to the second matter was false and, as to the first matter, was not necessary as it was not the subject of any evidence or submissions beyond the one question in the opening of the cross-examination).

157. The challenge in respect of this item failed.

25% uplift

160. The challenge to the use of Drayton’s quotation plus a 25% uplift was based upon the proposition that the result “would have major implications for United’s long-term lease” and that the failure to obtain a second from Drayton “demonstrated a lack of good faith and reasonableness”. ^[77]

     77. Appellant’s written submissions, par 54.

161. The trial judge rejected the proposition that Mr Roberts was not genuine in his consideration of the cost of repairs in failing to obtain an updated quote. ^[78] The judge noted that Mr Roberts, being “the director of various companies that are involved in the construction industry … would have some knowledge of general prices and increases in prices”. That was a short reference to more detailed evidence which had been considered earlier that Mr Roberts had spent the better part of a decade undertaking electrical engineering on major infrastructure projects, before moving to Coastal Earthmoving which had been set up in about 2011 or 2012 to undertake “general earthworks projects, subdivisions, and property development” including building homes. Mr Roberts had stated: ^[79]

“Over the past 18 years, I have built up know-how of the construction industry and have been responsible for, and involved in, quoting and costing hundreds if not thousands of jobs relating to earthworks, subdivision, concreting, building and construction, and landscaping.”

78. Judgment, [66(4)], [67].

79. Affidavit, pars 7-9.

162. In the absence of any evidence that contradicted or cast doubt on Mr Roberts’ experience or ability to provide estimates of cost increases over the period of the pandemic and beyond, the trial judge was entitled, if not in practical terms compelled, to accept his evidence given her assessment of his general credibility. His experience in the industry was not challenged in cross-examination.

Inclusion of power, water and fire expenses

163. Mr Roberts included in his calculation current prices for power installation, new water requirements and new fire requirements, totalling $875,000 (including GST of $79,545). United submitted that the items included “hardware” to be acquired from a third party, but Mr Roberts did not obtain quotations. Further, to the extent that the items involved installation costs, there could have been savings by having Coastal Earthmoving do the works. Thirdly, it was “faulty logic” to have included GST when Coastal would receive input tax credits for GST paid.

164. In relation to the fire equipment, Mr Roberts explained in his affidavit the costs he had relied on for two new tanks, a new pump, a concrete base slab and ring beam, and additional pipe work. The costs came to $330,000 to which he added GST and then rounded down to $350,000. The cross-examiner took Mr Roberts to Drayton’s quotation and obtained a concession that it was exclusive of GST. Mr Roberts then said, “so, I probably do need to add GST to that”. ^[80] The cross-examiner then suggested that “for consistency, you should have stripped out the GST for all of the figures in your affidavit [dealing with power, water and fire requirements]”. Mr Roberts responded:

“I should have added GST for all those, that looks like.” ^[81]

80. Tcpt, p 70(38).

81. Tcpt, p 71(7).

165. Mr Roberts confirmed that each was GST inclusive to which the cross-examiner stated, “for consistency with the Drayton’s quote, you should have stripped out GST, shouldn’t you?” to which Mr Roberts replied:

“Well, I only used the 3.28 figure exclusive of GST already. So, I should have added GST to the figure when I worked it.”

166. It was true that Mr Roberts never said “Coastal will have to pay GST on those items”, but the point was self-evident and not in dispute. Rather, the cross-examiner elicited a concession that the input credit would involve a reimbursement. ^[82] The cross-examiner then asked:

“Q.   So, it would be completely faulty logic to include the GST in any rate of return analysis, wouldn’t it?

A.   So, we – we haven’t – so, yes, it would – yeah. You wouldn’t [include] GST.”

82. Tcpt, p 72(23).

167. Counsel then suggested that the amount of GST was $120,000, and, asked:

“Q.   It was quite careless for you to have excluded [sic] the GST figures, wasn’t it?”

168. The question was objected to and withdrawn, counsel for Coastal submitting that Mr Roberts’ evidence related to “the costs to rebuild” and said nothing about “input tax credits”. The line of questioning was not then pursued.

169. The concession as to “faulty logic” was of little significance, absent identification of the premises on which it was based. There was no suggestion put to Mr Roberts that he had been dishonest, or had included GST to inflate the costs (which, arguably, it did not do in any event). A suggestion of carelessness was not pursued. As to the amount of the GST, no explanation was given as to how the figure of $120,000 was obtained: the GST on the three items of power, new water and fire may have been an amount of $79,545 if the only elements were equipment, which they clearly were not. The amount of the excess would then be reduced by the rounding down involved in relation to fire equipment by $13,000.

170. With respect to the inclusion of GST, the trial judge noted that, although input credits might have been obtained, it was not misleading to include GST as a cost, as Coastal would have needed to pay it. United challenged this finding, claiming among other things that the trial judge had “overlooked the fact that at no stage did Mr Roberts give evidence that he included GST because Coastal would still need to pay for it”. The submission was trivial and should not be accepted: it was implicit in Mr Roberts’ repeated statements that GST should have been added that that was because Coastal would have to pay it.

171. As to the other expenses, United noted that the trial judge had not addressed them. The reason the trial judge did not address them is apparent from the cross-examination of Mr Roberts which raised no challenge to the amounts claimed, in circumstances where United did not seek to demonstrate that the amounts were not reasonable and appropriate.

Inflation of costs – conclusion

172. The relevance of the costs of rebuilding was that it formed the denominator in a calculation of the likely rate of return on investment if the building went ahead. The sum of the expenses calculated by Mr Roberts was $5,425,000. When he undertook the calculation of the rate of return, he did not use that figure, but rather $5 million. In other words, there was a rounding down of $425,000, for which United’s submissions made no allowance. As Coastal submitted, there was no basis for the submission that Mr Roberts had shown any intention to dishonestly inflate the costs of the rebuilding, nor to do otherwise than undertake a genuine exercise in calculating those costs. Whether the overall costing was within a reasonable range could not be determined on the evidence, except to say that there was no evidence other than that of Mr Roberts; United did not demonstrate that his final figure was outside a reasonable range.

Rental income

173. The other integer in the calculation of the rate of return was the likely additional rental income that would be obtained once the rebuilding was completed. Prior to the fire, there had been four tenants, namely United, Aussie Bush Camp, Tania Mangion and Subway. Mr Roberts made three estimates with respect to the calculation of income.

174. First, the effect of the rebuilding would have been to increase United’s payments from 79% to 100% of rent provided for in the Lease, being an amount of $108,400 on the basis of the rental for the 2021/2022 financial year. To that he added an amount of $164,000 for rent from other new tenants. Mr Roberts gave an explanation for that figure: ^[83]

“… other tenants (apart from United) would come into other areas of the Rock and start paying rent. I understood that figure of $164,000 as coming from the fact that, prior to the fire, one of the other tenants had been a Subway shop, which had been paying about $60,000 per year (including GST). If the Rock were rebuilt, then the estimate would be to have three tenants each paying around the same as what Subway was paying. That would be a total of $180,000 in rent. Knocking off the GST would leave about $164,000, which is the estimate from Coastal’s accountant”.

83. Affidavit, 19 January 2022, par 72.

175. United submitted that the rental income was understated.

176. Prior to the fire, there were three other lessees (or licensees) of parts of the roadhouse, in addition to United. These were all food outlets, the two apart from Subway being Aussie Bush Camp and an individual, Ms Tania Mangion. Aussie Bush Camp had a kitchen supplying food for some 12,000 children per week attending the camps, which were in a bush area behind the roadhouse. Mr Roberts agreed that the commencing rent in 2009 paid by Aussie Bush Camp was $100,000. However, he noted that the lease expired in 2014 and Aussie Bush Camp had built their own dining area. ^[84] Mr Roberts was then challenged for not including that information in his affidavit. However, given that it was the cross-examiner who sought to rely upon the existence of a prior arrangement, that complaint, repeated in written submissions, was without substance.

     84. Tcpt, p 98(10)-(26).

177. The lease to Ms Mangion commenced in August 2014 and ran for a period of five years at a rental of $108,000 per annum. Ms Mangion operated a takeaway shop. Mr Roberts agreed in cross-examination that that figure was much higher than the figure he had used for calculating his possible rental income, but explained that the rent was high because Ms Mangion also serviced the Aussie Bush Camp. The cross-examination continued: ^[85]

     85. Tcpt, p 98(31).

“Q.   Did all of that – was all of those considerations apparent to you when you made your affidavit?

A.   Yes. Correct. They were. Yes.

Q.   Were they? So, do you say that you were aware that Tania Mangion had a lease of $100,000 a year commencing rent but that that was an artificially high figure because it was unrealistic assumption for her to continue servicing Aussie Bush Camp?

A.   That’s – that’s correct, because there was no lease in place when we actually purchased it. It was just day to day, I think.

Q.   But none of that’s disclosed in your affidavit, is it?

A.   I wouldn’t have thought that I needed to.

Q.   So, you thought it was a safer bet just to take the figure your accountant had given you. Is that right?

A.   Yeah. We used figures what we thought – to be able to attract – attract cafes or takeaways up to that premise. Yes.”

178. A more effective line of cross-examination relied upon a letter of intent provided by Subway expressing an interest in returning to The Rock Roadhouse if it were rebuilt. On 30 July 2020, Subway provided a letter of intention to lease with a minimum base rent of $60,000 per annum plus GST with a percentage rent of 10% of turnover up to $1 million turnover per annum, and 8% of turnover for more than $1 million per annum. (It did not include payment of any share of outgoings and included an initial six-month rent-free period.)

179. Mr Roberts remembered that the letter contained a base figure of $60,000 but not the percentage of turnover figures. It was put to him that if the turnover was just short of $1 million Coastal would receive an extra $100,000 in rent. He said:

“That’s a lot of turnover. Yes. That’s what we would receive. Yes.” ^[86]

86. Tcpt, p 91(7).

180. As he had expressed some doubt about Subway reaching that target, it was put to him that if it reached half the target he would get an extra $50,000 and he responded:

“I still think sitting half of it, you’d be doing well. Yes.” ^[87]

87. Tcpt, p 91(20).

181. The cross-examiner continued:

“Q.   Well, you know nothing about running a Subway store, do you?

A.   No, that’s right. That’s why I’m saying – yeah. No, I don’t know any –

Q.   You’re just speculating now, aren’t you?

A.   Yeah, that’s correct.

Q.   And you’re doing that to try to shore up your case and make your analysis sound reasonable.

A.   No, not at all.

Q.   You didn’t use the figures in the letter of intention to lease in your affidavit, did you?

A.   No. No, we didn’t. We – we don’t [know] what all the other two suppliers would – would put forward. No.

Q.   I’m not asking about the other two suppliers. I’m just asking you about Subway.

A.   Okay.

Q.   You used Subway as your benchmark, didn’t you, for the other two suppliers would pay?

A.   In my affidavit, I used the accountant’s figure that was given to me to use to work out our rate of return.

Q.   Based on what rent Subway had signed up to back in 2016?

A.   I – I didn’t question what the accountants told me. No.

Q.   You would accept, wouldn’t you, that the figures in the letter of intention to lease were a much more reliable indicator of what Subway would be prepared to pay on the new site, rather than the figures your accountant had given you?

A.   That one shop? Yes.”

182. Annexed to the letter of intent was a letter from Raine and Horne, Commercial, dated 22 July 2020 which contained a proposal with Subway’s amendments and signatures. It did not provide a full copy of the lease conditions, so that the calculation of turnover rent was somewhat obscure. However, it appears that turnover rent was not payable until a turnover threshold had been crossed which was calculated as the gross sales multiplied by the relevant percentage, less the base rent. Accordingly, no turnover rent would be payable until gross sales exceeded $600,000 per annum. There was no evidence before the Court to indicate whether such a figure had ever been reached at The Rock Roadhouse, or would be reached at a rebuilt roadhouse, except Mr Roberts’ doubts that $500,000 would be reached. In any event, the assumption that the gross turnover rent was payable from the first dollar of turnover did not accord with the terms of the proposed lease. 2 Blue 532

183. Mr Roberts gave evidence that the period of rebuilding would have been 18 months. Combined with a rent-free period on the Subway lease of 6 months Coastal had no basis to calculate (or receive) rental income (other than from United) for 2 years. Although that fact was not relied upon by Mr Roberts, it prevents any finding that his approach was objectively unreasonable.

184. With respect to United’s lease, the lines of cross-examination were two-fold. First, it was suggested that the Lease provided for a rent increase of 3% per annum, or market rent, whichever was higher. Mr Roberts agreed that he had calculated the rent by reference to the 3% per annum increase and had not obtained a market appraisal. It was suggested to him that it was “entirely possible that market rent for United, trading from brand-spanking-new premises, would be higher than 3% above the previous year’s rent”, with which he agreed. He rejected the proposition that had he been genuine in his consideration of the practicability of rebuilding, he would have obtained a “market appraisal”.

185. The second line of cross-examination was that he had relied on the current year rental and had not taken account of the increases for the future. He rejected the proposition that without considering future years, he was not “approaching this consideration in a genuine way”. ^[88]

     88. Tcpt, p 112(13).

186. The trial judge accepted Mr Roberts’ explanations of the estimates of likely rent after the rebuild, including his explanation of why previous tenants had been prepared to pay higher rents because the premises were adjacent to their business operations. ^[89] With respect to the failure to consider future increases in United’s rent, based on market rent reviews, the trial judge did not “consider it was inappropriate for Mr Roberts to evaluate the situation as at January 2022, based on United’s then rent, which was a known figure that would be relevant to funding the rebuild”. ^[90]

     89. Coastal v United at [77].

     90. Coastal v United at [79].

187. The trial judge concluded:

“80   I also consider that Mr Roberts was entitled to be conservative in his estimate of rental. He also was conscious of needing to be able to service the loan during the construction period, during which Coastal would not have been receiving rental income from any tenants other than United.

81   I do not consider United has demonstrated Mr Roberts acted disingenuously when assessing the estimated rental income.”

188. The trial judge’s assessment of Mr Robert’s evidence as to anticipated rental income should be accepted. Without the opportunity to service the Aussie Bush Camp customers, there were no locked-in tenants other than United. The evidence indicated that United included in its operations a convenience store. The likely rental from new tenants was speculative. There was no reason to doubt the genuineness of Mr Roberts’ calculations in that respect.

189. To the extent that United suggested that its own rent should have been calculated at a market rate, rather than the prescribed 3%, it was the better placed party to provide evidence of an alternative calculation: it did not do so. As to the suggestion that future rental should have been taken into account, Coastal submitted that future income flows would need to be discounted in the usual way. Alternatively, they would need to be assessed against future levels of outgoings and costs incurred by the landlord. The criticism that Mr Roberts failed to undertake such an exercise was without substance.

190. There being no basis to doubt the genuineness of Mr Robert’s calculations, there is also no basis for doubting the reasonableness of the exercise he undertook with respect to future rental income. The only conclusion available to the Court would be that his calculations were not shown to be unreasonable.

Conclusions

191. United has failed in its challenge to the judgment and orders of the trial judge. Accordingly, the Court should make the following orders:

1. Dismiss the appeal from the judgment and orders in the Equity Division.

2. Order that the appellant pay the respondent’s costs in this Court.

********

Endnotes

Amendments

03 June 2024 - Removed paragraph number at [52]; i.e. paragraph [53] now [52].

Decision last updated: 03 June 2024