Valentino Franchise Pty Ltd (ACN 114 469 662) v Brookfield Multiplex WS Retail Landowner Pty Ltd (ACN 109 033 794) (RLD)

Case •

[2012] NSWADTAP 22

•

21 June 2012

Administrative Decisions Tribunal


New South Wales

Medium Neutral Citation: Valentino Franchise Pty Ltd (ACN 114 469 662) v Brookfield Multiplex WS Retail Landowner Pty Ltd (ACN 109 033 794) (RLD) [2012] NSWADTAP 22
Hearing dates:27 March 2012
Decision date: 21 June 2012
Jurisdiction:Appeal Panel - Internal
Before: M Chesterman, Deputy President
D Bluth, Judicial Member
J Butlin, Non-judicial Member
Decision:

1. The appeal is dismissed.

2. (a) The following directions apply to both the costs of the first instance proceedings in file 095135 and the costs of these appeal proceedings.

(b) There will be no order for costs unless a party files and serves an application for costs, with supporting submissions, within 21 days of the date of this decision.

(c) In such event, the opposing party is to file and serve submissions in response within a further 21 days.

(d) Any question of costs so raised will then be determined 'on the papers' under section 76 of the Administrative Decisions Tribunal Act 1997, unless the Appeal Panel decides that a further hearing is required.

Catchwords: Retail lease - appeal - whether liability for rent reduced by setting off amounts claimed for damages or by abatement on account of damage to premises
Legislation Cited: Administrative Decisions Tribunal Act 1997
Retail Leases Act 1994
Cases Cited: Batiste v Lenin [2002] NSWCA 316
Batiste v Lenin [2002] NSWSC 233
Brookfield Multiplex WS Retail Landowner (ACN 109 033 794) and AWPF Management No 2 Pty Ltd (ACN 135 365 365) v Valentino Franchise Pty Ltd (ACN 114 469 662) [2011] NSWADT 184
Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4 All ER 834
Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1; [2002] NSWSC 432
Graham v Sutton, Carden & Co [1897] 2 Ch 367
Miwa Pty Ltd v Siantan Properties Pty Ltd [2010] NSWSC 1203
Norman: Re Forest Enterprises v FEA Plantation Ltd (2011) 280 ALR 470; [2011] FCAFC 99
O'Neill v Henry (No 2) (Costs) (RLD) [2010] NSWADTAP 54
Sarip Investment Pty Ltd v Uno Uno Pty Ltd [2004] NSWADT 27
Spuds Surf Chatswood Pty Ltd v PT Ltd [2007] NSWADT 130
Valentino Franchise Pty Ltd (ACN 114 469 662) v Brookfield Multiplex WS Retail Landowner (ACN 109 033 794) and AWPF Management No 2 Pty Ltd (ACN 135 365 365) [2011] NSWADT 143
Texts Cited: Ritchie, Uniform Civil Procedure (NSW)
Category:Principal judgment
Parties: Valentino Franchise Pty Ltd (ACN 114 469 662) (Appellant)
Brookfield Multiplex WS Retail Landowner Pty Ltd (ACN 109 033 794) (First Respondent)
AWPF Management No 2 Pty Ltd (ACN 135 365 365) (Second Respondent)
Representation: Counsel
J Hynes and A Cheshire (Respondents)
C Kelly (Agent - Appellant)
Minter Ellison Lawyers and HWL Ebsworth Lawyers (Respondents)
File Number(s):119043
 Decision under appeal 
Citation:
Valentino Franchise Pty Ltd (ACN 114 469 662) v Brookfield Multiplex WS Retail Landowner (ACN 109 033 794) and AWPF Management No 2 Pty Ltd (ACN 135 365 365) [2011] NSWADT 143
Brookfield Multiplex WS Retail Landowner (ACN 109 033 794) and AWPF Management No 2 Pty Ltd (ACN 135 365 365) v Valentino Franchise Pty Ltd (ACN 114 469 662) [2011] NSWADT 184
Before:
Retail Leases Division
File Number(s):
085095, 095135

decision

Relevant procedural history

  1. On 8 September 2011, the Appellant, Valentino Franchise Pty Ltd (hereafter 'the Lessee'), filed a Notice of Appeal naming Brookfield Multiplex WS Retail Landowner Pty Ltd and AWPF Management No 2 Pty Ltd (hereafter 'the Lessors') as the Respondents.

  1. This Notice indicated that the appeal was brought against two decisions of the Tribunal. In chronological order, these were described as:

(a) The Tribunal's decision that Applicant's [i.e. the Lessee's] claim in proceedings No. 085095 be stayed until the payment of the costs ordered to be paid on 21st March 2011 or further order of the Tribunal.
(b) The Tribunal's decision for the summary disposal of the proceedings, without a hearing upon the grounds of no defence being disclosed, and/or without the Respondent [i.e, the Lessee] being granted leave to amend its defence.

  1. Both of these decisions were decisions of the Retail Leases Division.

  1. The first of them (Valentino Franchise Pty Ltd (ACN 114 469 662) v Brookfield Multiplex WS Retail Landowner (ACN 109 033 794) and AWPF Management No 2 Pty Ltd (ACN 135 365 365) [2011] NSWADT 143 - 'the Tribunal's first decision') was given ex tempore on 6 April 2011. Subsequently, written reasons were published. The decision related, as the Notice of Appeal stated, to the proceedings in file 085095 ('the earlier proceedings').

  1. The second of them (Brookfield Multiplex WS Retail Landowner (ACN 109 033 794) and AWPF Management No 2 Pty Ltd (ACN 135 365 365) v Valentino Franchise Pty Ltd (ACN 114 469 662) [2011] NSWADT 184 - 'the Tribunal's second decision') was given on 2 August 2011. It related to the proceedings in file 095135 ('the later proceedings').

  1. Both sets of proceedings were concerned with a lease between the parties ('the Lease') relating to shop premises in World Square, Sydney. The Lease was governed by the Retail Leases Act 1994 ('the RL Act'). It commenced on 10 November 2005 and had a term of five years. On or about 5 February 2009, however, the Lessee vacated the premises.

  1. The permitted use under the Lease was 'the retail sale of homewares and furniture'. The copies of the Lease filed in the Tribunal did not state the rent. From material tendered by the Lessors in the later proceedings the total monthly amount payable for base rent and outgoings, including GST, would appear to have been about $16,000.

  1. According to the evidence filed in the earlier proceedings, the premises were in fact occupied by a company called Future Progressions Pty Ltd ('the Franchisee') pursuant to a sublease from the Lessee. Under an accompanying franchise agreement, the Lessee was entitled to receive 'franchise fees', calculated by reference to the Franchisee's sales. By arrangement with the Lessors, the Franchisee made direct payments to the Lessors of the instalments of rent and outgoings due from the Lessee.

  1. In the earlier proceedings, the Lessee claimed, in an Amended Application filed on 7 October 2009, that its occupation of the premises had been disrupted by numerous 'disturbances' and that the Lessors should be ordered to pay damages to it, amounting to nearly $400,000, on the grounds of breach of a covenant for quiet enjoyment contained in the Lease, conduct derogating from the grant of the Lease and contraventions of sections 33 and 34 of the RL Act.

  1. Subsequently, both parties filed significant quantities of written evidence. There were also a number of interlocutory hearings, which need not be described here.

  1. The written reasons for the Tribunal's first decision are reproduced in full below. The starting-point for the decision was the fact that while the Lessors were ready on 21 March 2011 to go ahead with a four-day hearing of both sets of proceedings, the Lessee's agent on those days, Mr Phillip Kelly, indicated both on that day and on the following day that it was not ready. On 22 March, the Tribunal ordered that for this reason the Lessee should pay the Lessors' costs of that day, quantified at $9,570, within a period of 21 days. At an adjourned hearing on 6 April 2011, having been advised by the Lessee that it was considering an appeal against this order, the Tribunal made what we are calling its first decision, staying the earlier proceedings until these costs had been paid. It had foreshadowed a stay order along these lines during the hearing on 22 March.

  1. No appeal against the Tribunal's first decision was initiated until the Notice of Appeal giving rise to the present proceedings was filed on 6 September 2011. In that Notice, the Lessee stated that the reason why its appeal was lodged outside the prescribed time was that 'in order to enable a single notice of appeal to be filed', it waited for what we are calling the Tribunal's second decision to be handed down. Under section 113(3) of the Administrative Decisions Tribunal Act 1997 ('the ADT Act'), an appeal must be made within 28 days after the appellant has received oral or written reasons (whichever is the later) for the decision under appeal (see paragraph (a)), or within 'such further time as the Appeal Panel may allow' under paragraph (b).

  1. Since the Tribunal's first decision, staying the earlier proceedings, was given, these proceedings have been the subject of further orders. They culminated in an order, made on 2 February 2012 following a hearing on 24 November 2011, that the Lessee's Amended Application should be dismissed. The reason for the dismissal was that the Lessee, despite receiving warnings from the Tribunal, had still not complied with the order to pay costs of $9,750 made on 22 March 2011.

  1. The later proceedings commenced with the filing of an Application by the Lessors on 12 August 2009. In it, they sought to recover from the Lessee arrears of rent and outgoings amounting to $227,842.17, plus interest calculated at 10% per annum and continuing, pursuant to a clause in the Lease. The period in respect of which they claimed the arrears commenced in May 2007 and concluded in December 2008, though their claim relating to the period between May and December 2008 only amounted to about one month's rent.

  1. On 7 October 2009, the Lessee filed a Statement of Defence. The Lessee admitted that the rent due under the Lease was in arrears, but claimed to be under no liability to pay it because of an entitlement to offset it against the loss and damage for which it claimed compensation in the earlier proceedings.

  1. At a hearing in the later proceedings on 6 April 2011, the Lessors applied for a summary order that the Lessee should pay the sum that they claimed. The ground that they put forward was that the Statement of Defence disclosed no defence in law. The Tribunal heard argument on this application and reserved its decision.

  1. Subsequently, the Tribunal formed the view that the matters alleged in the Statement of Defence might have attracted the operation of section 36 of the RL Act. It therefore sought and obtained supplementary written submissions from the parties.

  1. In its second decision, delivered on 2 August 2011, the Tribunal rejected the arguments advanced by the Lessee, on grounds that are outlined below. It ordered the Lessee to pay the sum of $248,499.30 to the Lessors and reserved the question of costs.

  1. In addition, the Tribunal stayed for 30 days its order for payment of the sum of $248,499.30. Its reason, stated at [27], was that it anticipated that the Lessee would take steps to have the earlier proceedings once more listed for hearing. As indicated above, this did not occur.

  1. The Notice of Appeal instigating these proceedings was filed on 8 September 2011, a little more than 28 days after the delivery of the second decision. Although the Lessors stated, in a Notice of Reply to Appeal filed on 2 February 2012, that they would oppose any extension of the time stipulated in section 113(3)(a) of the ADT Act, they withdrew this objection at the hearing of the appeal.

  1. The Notice of Appeal set out nine grounds on which the appeal was based. The first eight of these alleged errors of law by the Tribunal in its second decision. Ground 9 claimed that the Tribunal, in the first decision, erred in staying the earlier proceedings until the costs order previously made had been complied with.

  1. On 22 March 2012, the Lessors filed an outline of submissions addressing Grounds 1 to 8 of the Notice of Appeal. It made no comment on Ground 9.

  1. The hearing of the appeal took place before us on 27 March 2012. We granted leave to Mr Craig Kelly ('Mr Kelly') to appear as agent for the Lessee. In circumstances and for reasons outlined below, both Mr Hynes and Mr Cheshire of counsel addressed us on behalf of the Lessors.

The appeal against the Tribunal's first decision

  1. The Tribunal's written reasons for the first decision, published subsequently to its being delivered ex tempore on 6 April 2011, were comparatively brief. They were as follows:-

1 This matter was fixed for a four day hearing commencing on 21 March 2011. On 24 February the respondents served further evidence outside the time limited by previous directions of the Tribunal. Obviously if the evidence were objected to the Tribunal would need to exercise a discretion as to whether it could be relied upon and if appropriate give the applicant the opportunity to overcome any prejudice.
2 By email sent to the Tribunal on 14 March the applicant foreshadowed an application to vacate the hearing date. These matters came to my notice in the week prior to 21 March and I asked the Registrar to notify the parties that I would deal with the matter on the first day of the hearing.
3 When the matter was called on for hearing on 21 March, Mr Phillip Kelly appeared by leave as agent for the applicant. Previously on most occasions when the matter was before the Tribunal, a Mr Craig Kelly appeared as the applicant's agent.
4 Mr Phillip Kelly professed to have very little knowledge of the matter and could provide no useful assistance. Having regard to the nature of the fresh evidence sought to be relied upon by the respondents there seemed to me no reason to vacate the hearing date. Rather the matter could be dealt with at the appropriate stage of the proceedings, the new evidence going only to damages, and if necessary, the case could be then adjourned. The applicant's case on liability seemed likely to occupy most if not all the allotted hearing time.
5 However obviously the matter could not proceed on 21 March. In that circumstance I directed that it stand over until the next day for hearing.
6 On 22 March, Mr Phillip Kelly again appeared for the applicant. Mr Cheshire of counsel appeared for the respondents as he had done the day previously. He was ready to proceed. Mr Kelly was not and so far as I could tell had done nothing to advance the matter in the previous 24 hours. In the interests of justice I decided that a further adjournment was required but that the applicant should be penalised as to costs, the respondents in accordance with my order of the previous day having prepared themselves for a hearing.
7 As the respondents had been willing to consent to an adjournment on 21 March, I made no order in respect of their costs for that day but I did order that the applicant pay the respondents' costs of 22 March. They were quantified at $9570 and in the circumstances I considered that the costs should be paid before the matter was finalised. Accordingly I ordered that the applicant pay the respondents' costs of $9570 on or before 12 April 2011. I stood the matter over for further directions on 6 April.
8 On 6 April Mr Craig Kelly appeared for the applicant. He told me that its solicitors were considering an appeal against the costs order. In light of that information I ordered that the proceedings be stayed until the costs were paid or further order of the Tribunal.

  1. A preliminary question confronting us at the hearing of the appeal was whether we should deal at all with the Lessee's appeal against this decision.

  1. In the proceedings leading to the decision, the Lessors' solicitors were HWL Ebsworth Lawyers ('Ebsworths'). We were told that they had been instructed by the Lessors' insurers. But the reasons published for the decision stated erroneously that the Lessors' solicitors were Minter Ellison. This firm acted for the Lessors in the later proceedings.

  1. By virtue of this error (presumably), the Notice of Appeal filed by the Lessee identified only Minter Ellison as the Lessors' solicitors. Accordingly, although the Notice stated on the cover sheet that it related to both decisions and contained a ground (Ground 9) specifically addressing the first decision, it was not served on Ebsworths.

  1. At a directions hearing for the appeal on 18 October 2011, the Lessee did not appear. The Tribunal's President, Judge O'Connor, struck out the appeal. His notes of the hearing include a statement that the appeal was confined to the Tribunal's second decision.

  1. At a further directions hearing on 13 December 2011, the President granted an application by the Lessee to reinstate the appeal. He gave directions for the filing of written submissions and for the hearing that ultimately took place. His notes of this hearing did not mention the question of the scope of the appeal.

  1. At the hearing of the appeal, Mr Cheshire, who was instructed by Ebsworths, submitted on behalf of the Lessors that we should not entertain the appeal against the Tribunal's first decision because of the Lessee's failure to serve the Notice of Appeal on Ebsworths.

  1. Mr Cheshire advised us that during the Tribunal hearings on 24 November 2011 and 2 February 2012, culminating in the dismissal of the Lessee's Application in the earlier proceedings (see [13] above), he drew attention to this failure, in the presence of Mr Kelly. Despite this, the Notice had still not been served on Ebsworths.

  1. Mr Cheshire also made submissions to the effect that, if we ruled that we should nonetheless entertain the appeal against the first decision, we were bound to dismiss it. The reasons that he gave were as follows: (a) the appeal was manifestly out of time; (b) the Lessee's explanation for its delay - namely, that it waited for the Tribunal's second decision to be handed down 'in order to enable a single notice of appeal to be filed' - was clearly inadequate; (c) no grounds for setting aside the decision had been advanced; and (d) because the decision was interlocutory only, the Lessee was bound to demonstrate that the Tribunal's discretion had miscarried, but had failed to do this.

  1. In response, Mr Kelly pointed out that Mr Cheshire's presence at the hearing of the appeal demonstrated that, despite the failure to serve the Notice on Ebsworths, the Lessors had been made sufficiently aware of the Lessee's desire to challenge the Tribunal's first decision in this appeal. Mr Kelly suggested also that service of the Notice on Ebsworths would have incurred unnecessary expense.

  1. As to the merits of the Tribunal's first decision, Mr Kelly claimed that while it was appropriate for the Tribunal to have ordered the Lessee to pay the Lessors' costs of the hearing on 22 March 2011, it was unfair to have required that they be paid within a relatively short period of time (21 days) and to have stayed the proceedings until they were paid. He maintained that the Lessors had in fact agreed initially to the adjournment of the four-day hearing scheduled to commence on 21 March 2011.

  1. In our opinion, it is appropriate for us, despite Mr Cheshire's submissions to the contrary, to give consideration to the Lessee's appeal against the first decision. The defect of process constituted by the Lessee's failure to serve the Notice of Appeal on Ebsworths was cured by Mr Cheshire's appearance. He clearly had instructions, which he carried out, to present submissions to us regarding the appeal if the occasion so required.

  1. Our conclusion regarding this appeal against the first decision is however that it must fail. In formal terms, our decision is that leave should not be granted for the appeal to proceed.

  1. A requirement of leave is imposed in section 113(3)(b) of the ADT Act, to which we have already referred. In relation to the Tribunal's first decision, the appeal was filed some three to four months after the time allowed by section 113(3)(a). We consider the Lessee's explanation for delaying in this way to be inadequate. In its Amended Application in the earlier proceedings, it sought damages significantly exceeding those claimed against it in the later proceedings. They were therefore distinct sets of proceedings, even though the facts and circumstances by virtue of which the Lessee sought to defend the later proceedings were in essence those on which it relied in the earlier proceedings. If it wished to assert in an appeal that the Tribunal acted unfairly in requiring that a costs order made in the earlier proceedings be paid within 21 days, and in ordering a stay of those proceedings until the costs had been paid, it should have complied, at least in substance, with the standard time requirement.

  1. A further reason why leave was required, stemming from section 113(2A) of the ADT Act, is that the Tribunal's first decision involved the exercise of an 'interlocutory function'. In determining whether it would have been proper to grant leave under this provision, a major consideration for us would have been whether the Lessee's grounds for challenging the decision had merit.

  1. In our opinion, the Lessee did not demonstrate any error on the part of the Tribunal in stipulating that the interim costs that it ordered should be paid within a relatively short period of time. It has been held that such an order may be warranted when the conduct of the party against whom it is made was 'unreasonable': see e.g. Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1; [2002] NSWSC 432 at [12]. The Tribunal clearly took this view of the Lessee's failure to prepare for the scheduled hearing commencing on 22 March 2011. Such a view was entirely open to it.

  1. We would add that in decisions of the Retail Leases Division, orders of this nature have been made on occasions. An example is Spuds Surf Chatswood Pty Ltd v PT Ltd [2007] NSWADT 130, in which a factor taken into account was that the party against which the order was made, a lessee, was impecunious. In the present case, the transcript of the hearing on 22 March 2011, during which the Tribunal ordered payment by the Lessee of the costs of that day, shows that according to its agent on that day, Mr Phillip Kelly, the Lessee did not have any funds because of the disruptions to trading caused by the events described in its Amended Application.

  1. As Mr Hynes submitted, and as indeed we have verified by reading this transcript, Mr Phillip Kelly did not oppose the making of the stay order. But for this, the correctness of the Tribunal's decision to make this order might have been open to question. In Graham v Sutton, Carden & Co [1897] 2 Ch 367, a decision of the English Court of Appeal cited in Ritchie's Uniform Civil Procedure (NSW) at [s 67.40], it was held that a stay order of this nature should not be made against a party, particularly an impecunious party, unless that party was behaving vexatiously. The Tribunal was critical of the Lessee's conduct in failing to prepare for the hearing, but it did not make an express finding of vexatious behaviour.

  1. A major consequence of the Lessee's delay in appealing, coupled with its failure to pay the costs ordered against it, was however that on 2 February 2012, before the hearing of this appeal took place, its Application in the earlier proceedings was dismissed. The ground of the dismissal was the continuing failure of the Lessee to comply with the order for payment of the costs order forthwith. As Mr Hynes pointed out, this order of dismissal has not been the subject of appeal in the present proceedings.

  1. We accordingly refuse leave for the appeal to proceed in so far as it was made against the Tribunal's first decision.

The appeal against the Tribunal's second decision

  1. The reasons given by the Tribunal. As indicated above, the Tribunal's second decision was to the effect that the Statement of Defence filed by the Lessee in the later proceedings disclosed no defence in law to the Lessors' claim for arrears of rent plus interest, and that the Lessors were therefore entitled to summary judgment for the amount claimed by them, namely, $248,499.390.

  1. The principal question addressed in the decision was whether the Lessee would be entitled to set off its claim against the Lessors in the earlier proceedings - being for damages for breach of the covenant for quiet enjoyment, conduct derogating from the grant of the Lease and contraventions of sections 33 and 34 of the RL Act - against the Lessor's claim in the later proceedings.

  1. The position taken by the Lessors was that any right of set off arising under general equitable principles was excluded by clause 8.1 of the Lease. This stated:-

8.1 The Lessee must make payments under this lease to the Lessor (or to a person nominated by the Lessor in a notice to the Lessee) by the method the Lessor reasonably requires without set-off, counterclaim, withholding or deduction.

  1. In its decision at [8 - 11], the Tribunal held that a right of set off arose when the asserted set off went 'to the root of' or was 'essentially bound up with', so as to 'impeach the title of' the initial complainant. It expressed the view that it was 'well arguable' that the Lessee's claim in the earlier proceedings sufficiently impeached the Lessors' title. It then discussed a decision of the English Court of Appeal, Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4 All ER 834.

  1. In that case, a claim by the lessee involved damage from water penetration and alleged breach of the lessor's covenant for quiet enjoyment. It was accepted that the lessee had the right of equitable set off against a claim for outstanding rent, even though the lessee covenanted in the lease to pay rent 'without any deduction'. The Court proceeded on the basis that a right of set off could be excluded by express words or necessary implication, but that any such exclusion must be effected by clear words. The Court's conclusion was that the words used were insufficient for this purpose.

  1. Paragraphs [12] to [14] of the Tribunal's decision contained a discussion of Australian decisions on this question of exclusion of the right of set off. The Tribunal quoted passages from two decisions in the Supreme Court, Batiste v Lenin [2002] NSWSC 233 (Bryson J) and Miwa Pty Ltd v Siantan Properties Pty Ltd [2010] NSWSC 1203 (Windeyer AJ). In both of them, a right of set off or 'recoupment' claimed by a lessee against a lessor's claim for rent was held to have been excluded by a clause similar to clause 8.1 of the Lease in the present case. The Tribunal also referred to a passage in the judgment of Sheller JA, with whom Giles and Santow JJA agreed, in Batiste v Lenin [2002] NSWCA 316 at [49]. In this passage, his Honour stated that he was 'not persuaded' of the correctness of Bryson JA's opinion regarding the effect of the clause purporting to exclude the right of set off, but that he did not need to consider the matter further.

  1. At [15], the Tribunal stated:-

In my view I am bound to follow the decision of Bryson J in Batiste. I note incidentally that the relevant covenant under my consideration is in much stronger terms than the one before Bryson J in that cl 8.1 of the lease refers expressly to "set off, counterclaim, withholding or deduction".

  1. Paragraphs [16] and [17] were concerned with a submission by the Lessee relating to rights of set-off as between a claim under NSW legislation regulating the building industry and a claim under Commonwealth trade practices legislation. The Tribunal held this submission to be irrelevant.

  1. At [18 - 19], the Tribunal held as follows:-

18 There is in my view no reason to suppose that the legislature intended in the absence of an express reference that the provisions of ss 33 and 34 of the [RL Act] would affect contractual obligations in relation to the payment of rent. Particularly is that so in this case where the respondent's [i.e. the Lessee's] right to continue with the earlier proceedings would remain unaffected by the making of the orders sought by the applicants [i.e. the Lessors]. There is in my opinion no inconsistency, as submitted by the respondent, between the provisions of sections 33 and 34 of the Act and the provisions of the lease, and as a consequence, s 7 of the Act does not apply.
19 It follows from what I have said that, as the matter was argued, no defence was disclosed which could operate in law as a defence to the applicants' claim.

  1. The Tribunal then went on to deal with an argument, which it invited the Lessee to put forward in supplementary submissions after the hearing, that it had a right of set off based on a possible claim against the Lessors under section 36 of the RL Act.

  1. So far as relevant, section 36 states:-

36 Damaged premises
(1) A retail shop lease is taken to provide for the following if the shop or the building of which the shop forms part is damaged:
(a) The lessee is not liable to pay rent, or any amount payable to the lessor in respect of outgoings or other charges, that is attributable to any period during which the shop cannot be used under the lease or is inaccessible due to that damage.
(b) If the shop is still useable under the lease but its useability is diminished due to the damage, the lessee's liability for rent and any amount in respect of outgoings attributable to any period during which useability is diminished is reduced in proportion to the reduction in useability caused by the damage...

  1. At [22 - 26], the Tribunal said:-

22 The applicants' further submissions pointed to the circumstances that their claim is for rent dating back to May 2007 which with interest amounts to nearly $250,000 that a defence based upon s 36 of the Act has never been raised or sought to be raised, that Mr Craig Kelly on 6 April 2011 told the Tribunal that the respondent had in effect no funds and would be unable to satisfy the costs order made on 22 March, that on 25 March 2011 Mr Craig Kelly ceased to be a director of the respondent, that the making of orders against the respondent upon the present application will not affect its rights to continue the proceedings numbered 085095, that s 36 can have no material application in light of the absence of evidence that the premises could not be used or were inaccessible for the whole or a substantial part of the period of 60 days for which rent is being claimed, that at its highest evidence filed on the part of the respondent claimed that the useability of the premises was diminished for no more than 13 days of the relevant period and that s 36 does not permit a lessee simply to withhold rent absent agreement with the lessor (see Sarip Investment Pty Ltd v Uno Uno Pty Ltd [2004] NSWADT 27).
23 The respondent in its submissions in reply referred to the defences already pleaded including alleged breaches of the covenant for quiet enjoyment and of ss 33 and 34 of the Act. It submitted that it "has additional grounds of defence arising from the same factual matrix as is the evidence already filed under the provisions of ss 36, 62B and 62D of (the Act)".
24 For reasons given earlier I reject the proposition that the respondent is entitled to defend these proceedings by way of set off relying on asserted breaches of the covenant for quiet enjoyment and ss 34 and 34 of the Act.
25 If I gave leave for a defence based on s 36 to be raised then on the material before me it could only relate to a small part of the period for which rent is claimed. The utility of allowing that course would thus be very limited and potentially wasteful of the resources of both this Tribunal and the parties, particularly as the applicants are separately represented in the two proceedings. The balance of convenience overwhelmingly in my opinion favours the course of requiring the respondent to agitate all its complaints in matter 085095 where it is the applicant. Its rights in the meantime can be effectively protected by a stay granted in these proceedings.
26 In my opinion I should refuse the respondent leave to raise by way of set off a defence based on s 36 of the Act.

  1. The Tribunal's reasons concluded as follows:-

27 Pursuant to s 72(1)(a) of the Act I propose to order that the respondent pay to the applicants the sum of $248,499.30 inclusive of interest to 22 March 2011. I will reserve costs until the other proceedings are disposed of and I will grant a stay of the order for payment of $248,499.30 for a limited period during which I would anticipate that the respondent will take steps to have matter 085095 once more listed for hearing.

  1. The period of the stay that the Tribunal granted was 30 days.

  1. As indicated above, the Lessee put forward eight grounds of appeal relating to this decision. We will consider them in turn.

  1. Ground 1: Inconsistency between clause 8.1 of the Lease and section 72 of the RL Act. Mr Kelly argued that the Tribunal erred in not ruling that clause 8.1 was overridden by the combined operation of section 72(1)(a) and (b) and section 7 of the RL Act.

  1. Section 72 is headed 'Powers of Tribunal relating to retail tenancy claims'. Subsection (1) commences as follows:-

(1) In proceedings for a retail tenancy claim lodged with the Tribunal under this Part, the Tribunal is empowered to make any one or more of the following orders that it considers appropriate:
(a) an order that a party to the proceedings pay money to a person specified in the order, whether by way of debt, damages or restitution, or refund any money paid by a specified person,
(b) an order that a specified amount of money is not due or owing by a party to the proceedings to a specified person, or that a party to the proceedings is not entitled to a refund of any money paid to another party to the proceedings...

  1. Under the heading 'This Act overrides leases', section 7 states:-

This Act operates despite the provisions of a lease. A provision of a lease is void to the extent that the provision is inconsistent with a provision of this Act. A provision of any agreement or arrangement between the parties to a lease is void to the extent that the provision would be void if it were in the lease.

  1. Mr Kelly's argument was along the following lines: (a) section 72(1)(a) and (b) of the RL Act confers power on the Tribunal to order (amongst other things) that a rent obligation should be reduced by way of equitable set off; (b) clause 8.1 is in conflict with this power; (c) section 7 provides that where any conflict arises between a term of a retail lease and a provision of the Act, the Act should prevail.

  1. This argument clearly fails. As Mr Hynes pointed out, section 72(1) merely confers power on the Tribunal to make orders, such as those defined in paragraphs (a) and (b), in the exercise of its jurisdiction under the RL Act. It does not prescribe the circumstances in which any particular orders must be made. There is therefore no inconsistency between these paragraphs within section 72(1) and a clause such as clause 8.1 of the Lease.

  1. Ground 2: Batiste v Lenin not applicable. The proposition that the Lessee advanced here was that because the decision in Batiste v Lenin [2002] NSWCA 316 related to a commercial lease, not a retail lease governed by the RL Act, the Tribunal erred in following it. In support of this Ground, the Notice of Appeal maintained that 'the intention behind' this Act, including section 7, was to 'safeguard the powers of the Tribunal to make appropriate orders in disputes between lessors and lessees, including orders that a specified amount of money claimed as owing under a lease, is not due or owing either in part or full, without the Tribunal being restricted... by such clauses as 8.1 contained in the lease'.

  1. This submission is flawed for the same reasons as its predecessor. Indeed, it does little more than rephrase that submission. It does not point to any provision of the RL Act that is incompatible with clause 8.1 and for this reason triggers the operation of section 7.

  1. Furthermore, neither Batiste v Lenin nor Miwa Pty Ltd v Siantan Properties Pty Ltd [2010] NSWSC 1203, both of which received consideration by the Tribunal, contained any express or implied indication that a lease falling under the RL Act would be subject to a different ruling on this question. The same can be said of a detailed analysis of the law conducted by the Full Federal Court in a case to which Mr Hynes referred us, Norman: Re Forest Enterprises v FEA Plantation Ltd (2011) 280 ALR 470; [2011] FCAFC 99 at [180 - 202].

  1. In the course of this analysis, the Federal Court commented at [194] that while 'the weight of appellate authority... does not support the view that "without deduction" excludes equitable set off', it nevertheless saw 'considerable force' in the observations of Bryson J in Batiste. The Court went on to hold at [199] that the phrase in the lease that it was considering - 'without any deductions whatsoever' - could not be 'consistent with an entitlement to maintain an equitable set off'. At [200], it said that it regarded as important the presence of 'the emphatic word "whatsoever"'.

  1. Mr Hynes argued that, as the Tribunal had noted at [15], the phrase in clause 8.1 of the Lease - 'without set-off, counterclaim, withholding or deduction' - was also 'stronger' than the phrase 'without deduction' that had been the subject of Bryson J's ruling in Batiste.

  1. Ground 3: Inconsistency between clause 8.1 of the Lease and section 33 of the RL Act. Section 33 requires that, except in an emergency, a lessor must give at least two months' notice in writing to a lessee before commencing any alteration or refurbishment of the building or shopping centre where the leased premises are located, if the alteration or refurbishment is likely to affect the lessee's business adversely.

  1. Mr Kelly submitted along the same lines as under Ground 1. He claimed that the power conferred by section 72(1) to make orders for the payment of damages under section 33 was inconsistent with clause 8.1 of the Lease and should have been held by the Tribunal to override this clause, by virtue of section 7.

  1. This Ground fails for the same reason as Ground 1. In addition, as Mr Hynes observed, the Amended Application filed by the Lessee did not appear to allege any conduct by the Lessors contravening section 33.

  1. Ground 4: Inconsistency between clause 8.1 of the Lease and section 34 of the RL Act. So far as relevant, section 34 states:-

34 Lessee to be compensated for disturbance
(1) A retail shop lease is taken to provide that if the lessor:
(a) inhibits access of the lessee to the shop in any substantial manner, or
(b) takes any action that would inhibit or alter, to a substantial extent, the flow of customers to the shop, or
(c) unreasonably takes any action that causes significant disruption of, or has a significant adverse effect on, trading of the lessee in the shop, or
(d) fails to take all reasonable steps to prevent or put a stop to anything that causes significant disruption of, or which has a significant adverse effect on, trading of the lessee in the shop and that is attributable to causes within the lessor's control, or
(e) fails to rectify any breakdown of plant or equipment under the lessor's care or maintenance, or...
and the lessor does not rectify the matter as soon as reasonably practicable after being requested in writing by the lessee to do so, the lessor is liable to pay the lessee reasonable compensation for any loss or damage (other than nominal damage) suffered by the lessee as a consequence.

  1. Invoking the same reasoning as he had advanced with reference to Grounds 1 and 3, Mr Kelly argued that section 'took precedence' over clause 8.1. He indicated that the provision within section 34 on which the Lessee chiefly relied was paragraph (e) of subsection (1).

  1. For much the same reasons as Grounds 1 and 3, this Ground fails. We note in addition that the Lessee would appear to be unable to sustain any claim under paragraph (c) or (d) of section 34(1). These paragraphs allow for claims for disruption to, or adverse effects on, 'trading of the lessee in the shop'. As stated above at [8], it was the Franchisee, not the Lessee, that conducted business in the premises pursuant to the Lease.

  1. Ground 5: Availability of a claim under section 36. The relevant provisions within this section have already been quoted.

  1. According to Mr Kelly, the Tribunal erred in three ways in rejecting the Lessee's arguments deriving from section 36. First, it erred in law in refusing leave for a defence based on the section to be raised by way of set off. Secondly, it erred in finding that the disturbances of which the Lessee complained rendered the premises totally unusable for periods totalling 13 days, whereas it was clear from the filed evidence that in fact they had been unusable for periods totalling 22 days. Thirdly, it erred by not taking account of the provision in section 36(1)(b) that when the useability of the premises was 'diminished' by damage to them, the lessee's liability for rent and outgoings was reduced in proportion to the reduction in useability caused by the damage.

  1. As to the first of these matters, we agree with Mr Kelly in so far as the language of the Tribunal suggested that the question to be considered was whether a defence by way of 'set off' should be permitted. As we read section 36, a lessee who invokes subsection (1) or (2) does not claim a 'set off'. The claim is instead that, for the relevant period of time, the lessee either has no liability to pay rent or has a reduced liability. In these ways, the contractual liability to pay rent is varied by statute, for the lessee's benefit. It is not a matter of the lessee responding to a claim for unpaid rent by putting forward a claim of a wholly different nature, such as a claim for damages for conduct by the lessor disrupting its trading.

  1. At [22], the Tribunal referred to Sarip Investment Pty Ltd v Uno Uno Pty Ltd [2004] NSWADT 27 in support of its decision. In his submissions in the appeal, Mr Hynes also cited this case. The relevant passage (at [21]) is as follows:-

21 ... Section 36 refers to damage to the demised premises or to the building of which the premises forms part. The Respondent pleaded (as I understand it) that the shop was "still useable under the lease but is useability is diminished due to the (alleged) damage and therefore the Respondent's liability for rent and in amount in respect of outgoings attributable to any period during the useability is diminished caused by the damage". There is no doubt that there was damage and disturbance caused to the Respondent's business by the development of the adjoining property - there is a wealth of letters from the solicitors for the Applicant to the adjoining owners and others. But that of itself does not necessarily amount to a claim under section 36. Although it is true that section 36(1)(b) permits a reduction in rent where useability of demised premises is diminished, there is nothing in that section that would permit a lessee to somehow or other simply withhold rent (absent agreement with the lessor) and expect that by some magical process the amount withheld would equal the lessee's reduced liability. It would seem uncontested that the Respondent commenced withholding rent from or on or about 25 December 2002 and if it had not been for the Applicant filing its Application on 12 August 2003 then there was not put in place by the Respondent any magical process that would have determined, or even touched upon, the amount of its reduced liability. It seems to me that the actions of the Respondent were quite unwarranted and effectively caused the Applicant to seek relief in this Tribunal in circumstances where it should have been the Respondent applying to this Tribunal for a reduction in rent due to the alleged diminished useability...

  1. To the extent that this passage could be read as indicating that the only way in which a lessee may establish entitlement under section 36(1) or (2) to an exemption from rent or a reduction in the amount payable is by applying to the Tribunal, we would respectfully disagree. In contrast to section 34 or indeed section 33, the type of benefit that these subsections of section 36 potentially confer on a lessee facing a claim for arrears of rent goes further than providing grounds for a cross claim seeking damages. As stated above, they extinguish, or reduce the amount of, the lessee's liability to pay rent. If a lessee, relying on either or both of them, pays less rent than the lease requires and for this reason is sued for arrears of rent, it may raise section 36(1) and/or (2) by way of defence, and if it has withheld no more than the court or tribunal hearing the case determines to be warranted by the circumstances, its defence will be successful.

  1. Although at [26] the Tribunal used the term 'set off', the approach that it adopted at [25] displayed, on our understanding, a recognition that a question of set off, strictly so called, did not arise and that the effectiveness of clause 8.1 in precluding a set off was not in issue at this point in the proceedings.

  1. The Tribunal stated instead (at [25]) that the scale of the reduction in rent that might be available to the Lessee was relatively small and that for this reason in particular it was preferable, having regard to the 'balance of convenience', that the Lessee's claim under this section should be dealt with in what we have called the earlier proceedings, alongside its other claims against the Lessor. The Tribunal apparently assumed that the stay of those proceedings would be lifted, following payment by the Lessee of the costs that had been ordered. Accordingly, the Tribunal (at [27]) stayed its order that the Lessee pay arrears of rent and outgoings (plus interest) for 30 days, to provide an opportunity to the Lessee to resuscitate the earlier proceedings.

  1. The remaining matters that Mr Kelly raised in arguing Ground 5 of the appeal concerned directly the factual basis of this aspect of the Tribunal's decision. As far as can be discerned, the Tribunal proceeded on the assumption, stated in [22], that 'at its highest evidence filed on the part of the respondent [Lessee] claimed that the useability of the premises was diminished for no more than 13 days of the relevant period'.

  1. Mr Kelly asserted that the Lessee's evidence showed that the periods when the premises were totally unusable on account of damage - not merely in a state where their useability was 'diminished' - amounted to 22, not 13, days. From our reading of relevant parts of the evidence filed in the matter, we have ascertained that this is only correct if all the disruptions alleged by the Lessee to have caused damage to the premises are taken into account. But as stated above at [14], the period in respect of which the Lessors claimed arrears of rent and outgoings commenced in May 2007, about eight months after the first of the alleged disruptions.

  1. The Lessee's evidence further alleged as follows: (a) the most significant disruption before May 2007 occurred on 6 September 2006; (b) it rendered the premises totally unusable for a period of ten days (between 10 and 20 September); and (c) the Lessors granted an abatement of rent amounting to $7,233.35, on account of this disruption. This amount of abatement seems appropriate under section 36(1), given our understanding that the amount payable for monthly rent and outgoings at that time was about $16,000.

  1. For these reasons, we do not accept Mr Kelly's submission that the Tribunal's quoting of a total of '13 days during the relevant period' was erroneous. But we do agree with him that according to the Lessee's filed evidence these were days where the useability of the premises was nil, not merely diminished.

  1. We agree also that the Tribunal did not appear to take into account the Lessee's filed evidence suggesting that in addition to these 13 days there were other periods when the useability of the premises was 'diminished' within the meaning of section 36(2).

  1. With regard to the period from May 2007 onwards, that evidence described four specific incidents causing disruption, occurring on 24 October 2007, 18 November 2007, 28 March (or in the alternative 28 April) 2008 and 23 June 2008. They principally involved leakage of water from the ceiling, which in one instance (the earliest) caused the floor to buckle. The evidence also alleged disruption caused by electricity outages during September and December 2007.

  1. The descriptions of these incidents did not, however, suggest that significant 'diminution' in the 'useability' of the premises over any significant period occurred as a result of these incidents.

  1. In its submissions on section 36(2) to the Tribunal, the Lessee argued that rent paid to the Lessors before May 2007 should also be regarded as excessive and held liable to be refunded, on account of diminution in useability caused by disruptions. Leaving aside the occurrence on 6 September 2006, outlined above, the Lessee's evidence alleged disruptions on 2, 6 and 8 November 2006 and on 24 March 2007. They mostly involved flooding, but there was also vibration and excessive noise.

  1. Again, however, the 'useability' of the premises appears not to have been diminished for any significant period. In addition, we are not persuaded that, in the particular circumstances of this case, the Lessee could invoke section 36(2) to claim, in effect, a refund of rent already paid.

  1. The outcome of these considerations is that the Tribunal appears to have under-estimated the scale of the claim under section 36 that the filed evidence of the Lessee, taken 'at its highest', might have supported. The question for us is whether this aspect of its decision-making undermines the validity of its conclusion that this claim by the Lessee should not be imported as a ground of defence against the Lessors' claim for unpaid rent and outgoings, but should instead be 'agitated' by the Lessee, along with its other claims, in the earlier proceedings.

  1. We have not found this issue easy to resolve. But even when the matters that we have outlined are taken into consideration, it appears to us that the scale of any claim by the Lessee under section 36 could not have been substantial. The Tribunal, by staying its second decision for 30 days, gave the Lessee an opportunity to keep the claim alive. That opportunity was not taken up.

  1. For these reasons, Ground 5 of the appeal against the second decision fails.

  1. Ground 6: Failure to consider evidence that the Lessors agreed to rent being withheld. As formulated in the Notice of Appeal, this Ground was to the effect that an agreement was implicitly reached for the withholding of rent. The evidence for this was that the Lessors (a) allowed the Lessee to remain in occupation for a full year (i.e., between May 2007 and May 2008) while not paying any rent and (b) refrained from taking any action to enforce the payment of rent. For this reason, it was argued, the requirement (suggested in the passage quoted above from Sarip Investment Pty Ltd v Uno Uno Pty Ltd [2004] NSWADT 27 at [21]) that there must be an agreement for the withholding of rent if section 36 is to operate was in fact satisfied.

  1. At the hearing of the appeal, however, Mr Kelly acknowledged that no argument along these lines was put to the Tribunal in the Lessee's submissions.

  1. For this reason alone, this Ground fails. We also accept a contention by Mr Hynes that the relevant parts of the evidence filed by the Lessee do not support any claim that there was an agreement permitting rent to be withheld.

  1. Ground 7: Refusal to permit allegations of breaches of sections 62B and 62D. This Ground comprised a claim that the Tribunal erred in refusing to grant leave to the Lessee to amend its defence to the later proceedings by pleading that the Lessors had breached sections 62B and 62D of the RL Act.

  1. Under sections 62B and 72AA of the RL Act, a lessee under a retail shop lease who has established unconscionable conduct by the lessor may obtain (a) an award of damages against the lessor, (b) an order that 'a specified amount of money is not due or owing' by the lessee to the lessor, or (c) an order that the lessor is 'not entitled to a refund of any money paid to' the lessee. Under sections 62D, 62E and 72, a lessee may recover damages from the lessor on the ground of misleading or deceptive conduct.

  1. The Lessee sought leave along these lines in the supplementary submissions that it filed (see [17] above) following the Tribunal hearing on 6 April 2011. But the only references to sections 62B and 62D in its submissions were in a statement that it had 'additional grounds of defence arising for the same factual matrix as the evidence already filed, under the provisions of s36, 62B and 62D of the Retail Leases Act'. While it developed further its arguments relating to section 36, it said nothing more about the other two sections.

  1. This Ground fails, in our opinion, for essentially the same reasons as Grounds 3 and 4. Like sections 33 and 34, and in contrast to section 36, the relief available to a lessee under sections 62B and 62D does not take the form of elimination or reduction of its liability to pay rent. What the Lessee sought was leave to raise a cross claim for monetary relief, which it was not entitled to set off against the arrears of rent because of the presence of clause 8.1 in the Lease.

  1. Ground 8: Failure to take account of money drawn on the Lessee's bank guarantee. The Lessee claimed that in awarding the sum of $248,499.30 to the Lessors, the Tribunal erred in failing to take account of the Lessors' receipt of the sum of $40,000 under a bank guarantee provided by the Lessee at the commencement of the Lease. The Lessors drew down this sum pursuant to an interlocutory order of the Tribunal.

  1. Mr Hynes pointed out, however, that in the affidavit of debt on which the Tribunal's award of $248,499.30 to the Lessors was based, the Lessee was shown to have been credited with a payment of $45,000 on account of 'the application of the bank guarantee'. This payment was indicated as occurring in December 2010. On the 20th day of that month, the Tribunal made an interlocutory order dissolving an injunction previously granted to restrain the Lessors from having recourse to this guarantee. It noted that in consequence they were entitled to call on the guarantee.

  1. We see no reason to doubt this evidence. Ground 8 is therefore not made out.

Our orders

  1. For the foregoing reasons, the appeal must be dismissed.

  1. The Lessors indicated through their counsel that they sought an order for the costs of the appeal.

  1. As mentioned above, the orders made in the second decision of the Tribunal included an order that the costs of the proceedings to which it related should be reserved until further order. As far as we are aware, no 'further order' has been made. On the other hand, the costs of the earlier proceedings, being the subject of a Tribunal order, require no further consideration.

  1. Section 77A of the RL Act states that costs in proceedings under the Act are to be determined in accordance with section 88 of the ADT Act. Under the latter provision, an Appeal Panel has power to determine the costs of the first instance proceedings from which an appeal derives as well as the costs of the appeal itself: see e.g. O'Neill v Henry (No 2) (Costs) (RLD) [2010] NSWADTAP 54 at [11 - 15]. This is an appropriate case for the exercise of this power.

  1. We accordingly direct as follows with regard to the costs of both the first instance proceedings in file 095135 (i.e. 'the later proceedings') and these appeal proceedings. There will be no order for costs unless a party files and serves an application for costs, with supporting submissions, within 21 days of the date of this decision. In such event, the opposing party is to file and serve submissions in response within a further 21 days. Any question of costs so raised will then be determined 'on the papers' under section 76 of the ADT Act, unless the Appeal Panel decides that a further hearing is required.

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Decision last updated: 21 June 2012

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