VI.SA. Australia Pty Limited v Tzaneros Investments Pty Limited

[2009] NSWSC 531

CITATION:	VI.SA. Australia Pty Limited v Tzaneros Investments Pty Limited [2009] NSWSC 531
HEARING DATE(S):	10 June 2009
JUDGMENT OF:	Gzell J
EX TEMPORE JUDGMENT DATE:	10 June 2009
DECISION:	Injuction restraining landlord from calling on performance guarantee extended until further order
CATCHWORDS:	LANDLORD AND TENANT - Use and Occupation - leases terminated - tenant to make good before termination - failure to do so - entry to continue making good whether a holding over constituting a tenancy from month to month - whether tenant in breach of obligation to pay rent - GUARANTEE AND INDEMNITY - The contract of guarantee - whether landlord entitled to call on performance guarantee for failure to make good and failure to pay rent - whether demand to rectify as prerequisite to call on guarantee effective - PROCEDURE - Injunctions - whether serious questions to be tried
LEGISLATION CITED:	Trade Practices Act 1974 (Cth)
CASES CITED:	Clough Engineering Limited v Oil and Natural Gas Corporation Limited [2008] FCAFC 136; (2008) 249 ALR 458 Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] FCA 62; (2002) 117 FCR 301
PARTIES:	VI.SA. Australia Pty Limited (Plaintiff) Tzaneros Investments Pty Limited (Defendant)
FILE NUMBER(S):	SC 2985/09
COUNSEL:	G Sirtes SC (Plaintiff) D Pritchard SC (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL J

WEDNESDAY 10 JUNE 2009

2985/09 VI.SA. AUSTRALIA PTY LIMITED v TZANEROS INVESTMENTS PTY LIMITED

EX TEMPORE JUDGMENT

1 The plaintiff was a sub-tenant of premises, the tenancy of which was assigned to the defendant. There were two sub-leases, one with respect to warehouse 4 and offices, the other with respect to warehouse 3.

2 There are two matters in dispute between the parties. The first relates to an alleged failure, upon the expiration of the sub-lease of warehouse 3, to make good under cl 16.1, which read:

“The Lessee shall on or before the Terminating Date:

(a) yield up the Premises in the state of repair and condition described in clause 9.1; and

(b) remove from the Premises all the Lessee’s Fixtures and Fittings other than those which the Lessor has notified the Lessee in writing need not be removed.”

3 With respect to warehouse 3, a making good under that provision was not completed when the sub lease expired.

4 The defendant is entitled to a performance guarantee under clause 20.2 of each sub-lease. The defendant gave notice of intention to enforce its entitlement under the performance guarantee. An interlocutory injunction was granted restraining the defendant from calling on the guarantee, which expires this evening.

5 The second issue between the parties is whether or not there was a holding over by the plaintiff of warehouse 4 and/or warehouse 3. The defendant has demanded payment of rent on the basis that there is a tenancy from month to month as a result of the holding over. The plaintiff alleges that it is not in possession and has not held over and there is no entitlement to the payment of rent.

6 The interlocutory application before me today is for a declaration that it was an implied term of the sub-leases that the defendant co-operate with the plaintiff so as to allow the plaintiff to undertake its “make good” obligations pursuant to cl 16.1 and a declaration that the defendant cannot draw upon a bank guarantee in the sum of $542,000 held with the St George Bank, having not made a demand on the plaintiff to remedy any alleged breach within 10 business days following the demand.

7 With respect to the first issue, clause 20.2 provided:

“If the Lessee breaches this Lease and does not remedy the breach within 10 Business Days following demand for the same, the Lessor may:
(i) demand the Bank for payment of an amount under the Bank Guarantee to the Lessor; and
(ii) apply the amount received from the Bank to payment of any Rent, Lessee’s Proportion of the Operating Costs or other moneys payable by the Lessee to the Lessor as a result of the Lessee’s breach of this Lease.”

8 On 14 May 2009 notice was given to the plaintiff with respect to warehouses 3 and 4 and the office space. The letter stated:

“In accordance with clause 16 of the Leases your client is obliged to repair and make good on or before the Terminating Date and immediately make good any damage. Your client is in default of its obligations pursuant to clauses 9.1 and 16. We enclose Dilapidation Table dated 13 May 2009 prepared by Fielder Engineers. You will note that of the 114 items listed in the table, 1 item is complete, 8 items appear to be work in progress and 105 items are listed as “No Action”. On this basis, our client does not accept that your client is anxious to comply with its obligations with its obligations with respect to repair and make good and believes that your client’s conduct in this regard to date has been to the contrary.

Insofar as the bank guarantee held by our client, should your client fail to pay the rent demanded and comply with its obligations to repair and make good by Friday 29 May 2009 our client reserves its rights to call upon the bank guarantee without further notice to your client and exercise its rights in accordance with the terms and conditions of the Leases.”

9 The defendant maintained that that document answered the requirements of a demand in cl 20.2 of the sub-leases.

10 In the paragraph that preceded that quoted, however, it was alleged that the plaintiff remained in possession of the premises and in accordance with cl 2.3 of the sub-leases they had reverted to monthly tenancies.

“Consequently, you ( sic ) client is obliged to continue to pay rent and any other money payable until possession is given to our client, the appropriate written notice is served ending the monthly tenancy and your client having satisfied all their obligations, including but not limited to the repair and make good provisions of the Leases. We enclose a copy of our client’s Tax Invoices dated 12 May 2009, which we note are due and payable on 15 May 2009.”

11 In my view there is a serious question to be determined as to whether or not the letter of 14 May 2009 constitutes a demand for the purposes of cl 20.2 of the sub-leases. It is a letter that adopts two inconsistent positions. If there was a holding over and if there was a lease as a result, the obligation to make good did not arise. If the obligation to make good arose there could be no continuing lease because cl 16.1 was concerned with the termination of a lease.

12 The entitlements with respect to an unconditional performance guarantee were discussed in Clough Engineering Limited v Oil and Natural Gas Corporation Limited [2008] FCAFC 136; (2008) 249 ALR 458. At [76] reference was made to the observation of Stephen J in Wood Hall Ltd v The Pipeline Authority (1979) 141 CLR 443 at 457, that to introduce a qualification on the entitlement of the owner to call upon performance guarantees would be to deprive them of the quality which gives them commercial currency.

13 Nevertheless, the court recognised at [77] that there are three exceptions to that proposition. The first exception is not relevant in the present circumstances. The second exception is where a party in whose favour the performance guarantee has been given may be enjoined from acting unconscionably in contravention of s 51AA of the Trade Practices Act 1974 (Cth). That section provides that a corporation must not, in trade or commerce, engage in the conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.

14 It was submitted that unconscionability in that context is of the type described in Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 at 461:

“Relief on the ground of unconscionable conduct will be granted when unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary, just as it will be granted when such advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest.”

15 In Clough at [131], it was pointed out that equity does not provide a remedy in respect of conduct in trade or commerce which is, in the opinion of a judge, unfair. It does not apply to unconscionable conduct at large.

16 But as also recognised in Clough at [77], the High Court has not determined the extent of unconscionability for this purpose. Reference was made to Australian Competition and Consumer Commission v Samton Holdings Pty Ltd [2002] FCA 62; (2002) 117 FCR 301 at [48] where the court said that under the rubric of unconscionable conduct, equity will do a number of things, including preventing a party from exercising a legal right in a way that involves unconscionable departure from a representation relied upon by another to his or her detriment.

17 It was submitted that there was a combined nature of the demand in the letter of 14 May 2009 and that the combination of a demand for making good with a demand for rent was sufficient for the purposes of cl 20.2. I have already indicated my view to the contrary.

18 It was argued by the plaintiff in the alternative that the reliance upon the unfinished making good was unconscionable in the circumstances and it was argued that there was interference by the defendant in the process that also rendered its conduct unconscionable. On the other hand, the correspondence reveals that the defendant was requested to give its opinion of the manner in which the plaintiff proposed to make good the slab and its doing so and carrying out inspections of the work being done on behalf of the plaintiff could not constitute interference.

19 In my view, however, there is a serious question to be determined as to whether in the circumstance that the defendant allowed the plaintiff to continue a making good process after the termination of the sub-leases constituted a representation that it would not, until the making good process was complete, seek to rely upon the performance guarantee.

20 So far as the second issue is concerned, it was said that the plaintiff has remained in possession in that it has entered on numerous occasions either warehouse, that ACFS is an under-tenant constituted by a verbal arrangement between it and the plaintiff in February 2009, and it was the obligation of the plaintiff to remove its under-tenant. That may be so, but a failure to perform that obligation does not, of itself, constitute the taking of possession or the continuance of possession and in my view the circumstance that the occupation of the premises has been limited to attempts to make good, does not justify the argument, or at least there is a serious question to be tried as to whether it justifies the argument, that there has been a holding over giving rise to a tenancy from month to month under which rent is due.

21 It was submitted that the balance of convenience favoured the refusal to make the orders sought or any extension of the injunction as damages were an adequate remedy and the defendant was in a position to pay any damages that might be ordered.

22 I do not propose to make the declarations sought in paragraphs 3 and 5 of the summons. From what I have said there are arguments that need to be addressed in relation to those matters before declarations are made or refused.

23 It seems to me that the approach that I should take is to maintain the status quo by extending the injunctive relief that has been granted thus far. On the balance of convenience, that seems to me to be the appropriate course.

24 It was submitted that any extension of the injunction should be limited to the giving of notice and the expiration of 10 days thereafter. I disagree. In my view there are arguments to be determined in relation to the question of unconscionability as well as in relation to the question whether the notice of 14 May 2009 was effective. I therefore propose to extend the injunction for a suitable period.

25 These are the orders I propose to make:

1. I note that the plaintiff by its counsel gives the usual undertaking as to damages;
2. I order that until further order the defendant be restrained from drawing down or calling upon the bank guarantee as that term is defined in the summons dated 26 May 2009;
3. I stand the matter over before the Equity Registrar at 9.15 am on 15 June 2009;
4. I order that costs be costs in the cause.

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