Viefill Pty Limited v Hagood Holdings Pty Limited

[2001] NSWADT 160

CITATION:	Viefill Pty Limited -v- Hagood Holdings Pty Limited & anor [2001] NSWADT 160
DIVISION:	Retail Leases Division
PARTIES:	APPLICANT Viefill Pty Limited RESPONDENTS Hagood Holdings Pty Limited Birack Pty Limited
FILE NUMBER:	015063
HEARING DATES:	28/08/2001, 04/09/2001
SUBMISSIONS CLOSED:	09/07/2001
DATE OF DECISION:	09/26/2001
BEFORE:	Donald B - Judicial Member
APPLICATION:	Claim for declaration of rights, obligations and liabilities under a lease - Costs
MATTER FOR DECISION:	Principal matter
LEGISLATION CITED:	Retail Leases Act 1994
CASES CITED:	Prasad v Fairfield City Council [2001] NSWADT 28 Loretta Le Corrs v. Inominata Pty Ltd (unrep.) 9 June 1999 citing International Drilling Fluids Ltd v. Louisville Investments (Uxbridge) Ltd Calvin v Bowen (1958) 75 WM (NSW) 262 Pimms Ltd v Tallow Chandlers Company [1964] 2QB 547 Alessa Pty Ltd v. Total and Universal [2001] NSWADT 150
REPRESENTATION:	APPLICANT H Woods, barrister RESPONDENTS G Blake, barrister
ORDERS:	1. Application dismissed; 2. Applicant to pay three-quarters of the costs reasonably and properly incurred by the Respondents assessed on a party and party basis within 21 days of the date on which the parties may agree on the amount of those costs or failing agreement, such costs to be as assessed.

1 The Respondents ("Lessors") own two ground floor shops in Mena House facing onto Macquarie Street, Sydney, under strata title.

2 From May 1995 the Lessors and their principal shareholders have operated a take-away food business known as Macquarie Street Gourmet ("MSG") in Shop 1. They have a licence from Sydney City Council for 5 tables and 10 chairs on the Macquarie Street pavement adjacent to Shop 1 but from time to time they place out two more tables with chairs, not in strict compliance with the licence.

3 MSG sells a range of take-away food and drinks including (as will become important) cakes, pastries, slices croissants, muffins and toast together with hot and cold beverages, the principal hot beverage being take-away coffee.

4 By registered Lease commencing 26 September 1997 the Lessors leased the other shop, Shop 2, to Mr. and Mrs. Morris for 10 years with a particularly clear and explicit permitted use provision as follows:
Sale of food and drink which must be consumed on the premises under no condition is food or drink to be allowed to be sold for consumption outside the premises. The Lessee shall not under any circumstances be entitled to sell coffee or tea which is not or is not likely to be consumed on the premises. Further, the Lessee shall not be entitled under any circumstances to sell coffee or tea in disposable receptacles.

5 This permitted use was identical to the permitted use annexed to the Disclosure Statement provided prior to entry into the Lease.

6 Clause 6.2 of the Lease stated:
The Landlord can consent to a change of use and cannot withhold consent unreasonably.

7 The lessee had a licence from Sydney City Council for 8 tables and 16 chairs on the Macquarie Street pavement.

8 The business in Shop 1 was re-named Mena Café ("MC").

9 In December 1998 Mr. and Mrs. Morris agreed to assign the Lease to the Applicant ("Lessee"), a family company controlled by Mr. and Mrs. Jackson, which commenced the business in early January 1999 and applied for a footpath licence which currently permits 12 tables and 24 chairs.

10 The Lessors gave evidence that at the time of the transfer, Mr. Jackson of the Lessee was told "There is no take-away to be sold next door, no coffee or drinks." Mr. Jackson gave evidence that the Morrises had told him of an arrangement permitting sale of cakes and pastries for take-away and that when he asked the Lessors about this they said "Yes, that's okay but you can't do general take-away like tea, coffee and sandwiches", a statement denied by the Lessors. There was no evidence that the Lessee documented any such arrangement between itself and the Lessors then or at any time in the future, or had any further conversation about it with the Lessors.

11 By letter sent 14 May 1999 the Lessee through its solicitors asked the Lessors to "consent to a change of the permitted use of the premises to ‘Café, including the sale of take-away food and drinks’". This letter did not specify any reason for the request or set out any matters contended to be relevant. It simply made the request. The solicitors for the Lessors by reply referred to the permitted use under licence 16 and denied consent.

12 The solicitors for the Lessee then by letter of 10 June 1999 contended first that the use restriction lessened competition in the market place and may be viewed as "unconscionable conduct". Secondly, they asserted that for the Lessors to have "refused the request without providing any reasons whatsoever … obviously prevents our client from assessing or testing the reasonableness of your client's refusal." The letter then warned of legal action for damages and declarations. The letter did not set out any commercial considerations or information on the basis of which they contended it would be unreasonable for consent to be denied other than to say that the change ‘is imperative to our client’ and that the Lessee continues ‘to suffer financially from the restriction’ and finds it intolerable to ‘explain to customers that take-away items are not permitted’.

13 By letter of 13 July 1999 the Lessors’ solicitors replied:-
The leased premises is to be used for the sale of food and drinks for consumption on the premises. The adjoining premises owned by the Lessor is used for the sale of food and drink primarily for consumption off the premises. As such, the use of each Lot is complementary one to the other and that is the status quo which the Landlord wishes to maintain.
When your client chose to take an assignment of the Lease, it was well aware of the existing arrangements.
There was no evidence of a reply to that letter.

14 In the period Christmas to New Year 2000/2001 on the days when MSG would not have been open, the Lessors conceded a request from the Lessee to sell take-away food and drink.

15 In about February/early March 2001 the Lessee again asked the Lessors about sale of take-away and was informed that the Lessor wanted to keep the Lessee to its Lease. The Lessee then placed a sign outside MC headed “Pastry, slices, biscuits, desserts”; the sign set out both a seated and take-away price. The Lessors gave evidence that they did not take action over this sign because the dispute soon became the subject of legal debate between the parties.

16 By letter of 28 March 2001 the Lessee through its solicitors wrote
The passage of time has not lessened the necessity with which our client views the change of use to the growth and prosperity of its business.
We are instructed to again request your client's consent to the change of use. We are instructed to put your client on notice that our client will view a further refusal as unreasonable and will pursue its rights accordingly.

17 This letter did not specify the requested new use but by referring to previous correspondence it can be taken to be for use as "Café, including the sale of take-away food and drink". The letter again set out no material relating to the request and the reasons put forward by the Lessee other than the reference to it being necessary for the "growth and prosperity of its business".

18 By letter of 17 April 2001 the solicitors for the Lessors again quoted the stated use in item 16 of the Lease stating that this was "an essential term" under clause 12.5.3. The letter then went on to state:
At the time of entering into the Lease our clients were also the owners of the adjoining premises and carried on the business of selling take-away foods, including providing no table service known as Macquarie Street Gourmet ("the business") from those premises. The permitted use under the Lease was stipulated so as to prevent injury to the business from an adjoining and directly competing business.
At the time of its purchase of the Lessee’s business and assigned Lease your client was aware that our clients were the owners of the adjoining premises and was carrying on the business from those premises.
As our clients continue to own the adjoining premises and carry on the business from the adjoining premises they refuse to consent to the proposed change of use so as to prevent injury to the business from an adjoining and directly competing business.


19 On 14 June 2001 the Lessee applied to the Tribunal under the Act for a declaration that the Lessors had unreasonably refused consent to the use as "Café, including the sale of take-away food and drinks".

20 On 24 July 2001 the Lessee's solicitor wrote an open letter stating that the Lessee would be willing to accept the change of use to "Café, including the sale of take-away drinks, cakes, pastries, slices, croissants, muffins and toast" and the next day they amended the application before the Tribunal adding alternative orders incorporating that amended formulation of the proposed use.

21 The hearing of the application commenced on 28 August 2001 and following the evidence in chief for the Lessee given by Mr. Jackson, I observed to the Lessee's lawyers that, even accepting that evidence, it did not seem possible to sustain an argument that the Lessee had made out a case on the balance of probabilities for the first formulation of the new use and orders sought.

22 I indicated that I could not accept that the Lessor had acted unreasonably in refusing effectively to completely remove the permitted use from Lease in its entirety, which would be the effect of consent to the first formulation of the requested change of use.

23 I pointed out that the Lessee had acknowledged it had been fully aware, when taking the assignment, of the express restrictions of the permitted use in Item 16 (subject only to the disputed evidence concerning a possible concession for cakes and pastries). The Lessee acknowledged that repeated requests over a two year period for an agreed complete change of use to allow take-away had been refused for the stated reason of the Lessors’ desire to maintain complementarity between the two shops.

24 I observed that the first legal bases for the claim in the Lessee's solicitor's letter of 10 June 1999, ie claims of unlawful anti-competitive constraint and unconscionable conduct, had no basis at all in law. The lawyer for the Lessee agreed with that observation.

25 The Lessee's evidence in chief made no reference to any other factual information or reasons being provided to the Lessors as the basis for the request for change. I observed that the proper interpretation of clause 6.2 in the Lease which provides that the Lessor "cannot withhold consent unreasonably" must be that a prohibited refusal was one which no commercially reasonable lessor could make, not just one where no reasons were given.

26 I therefore indicated that the first formulation of the claim was in my opinion unsustainable and I invited the Lessee to consider discontinuing that formulation of the claim. The Lessee instructed its lawyer to do so.

27 I am satisfied that my initial holding in that regard was correct in law.

28 I observed that use restrictions are commonplace in retail leases whether in larger shopping centres or indeed in smaller premises whereby building owners take commercial decisions about the mix of businesses in their premises.

29 It has been suggested by this Tribunal in Prasad v Fairfield City Council [2001] NSWADT 28 that a lessor's failure to enforce a use restriction where the non-compliance was said to be damaging a neighbouring lessee’s business, might constitute a derogation from the grant of the Lease to the neighbouring premises. Whether or not that is established law, it is clear that this Tribunal acknowledges the role of use restrictions.

30 Whatever work is properly done by a clause like clause 6.2, it cannot in my view be interpreted to make a lessor's refusal to completely remove a use restriction on the mere request of a lessee unreasonable. I note that the Lessee’s lawyer would later accept that the onus of proving an unreasonable withholding of consent is on a lessee. This is particularly significant given that when requesting the changes, the Lessee provided no material in support other than general statements of financial prejudice.

31 Furthermore the responses from the Lessors in both mid-1999 and April 2001 expressed clear reasons that the Lessors required complementary uses of the two adjoining premises for their business operations in the market place. Those reasons could not in my view be said to be so commercially unsustainable as to be unreasonable.

32 I form this view regardless of whether the Lessors themselves operated the other premises as a complementary business or leased it for that purpose. In my view the same proposition holds true, namely, that a decision by the Lessors to maintain complementary uses between premises, even where they operated the other premises themselves, was not so unreasonable as to be commercially unsustainable.

33 Following that change in the proceedings, I permitted the matter to proceed on the basis of the second formulation and further evidence was taken.

34 During this phase of the case, the Applicant formulated a further alternative proposed use, deleting cold drinks, and proposing the permitted use of "Café, including sale of take-away, tea, coffee, cakes, pastries, slices, croissants, muffins and toast only".

35 That formulation had been the subject of a simultaneous formal request by the Lessee's solicitor for approval under clause 6.2, which approval was declined by letter of 31 August 2001, including on the basis that:
Each of the items referred to form a substantial part of our clients’ business and significantly contribute to the turnover and profitability of the business. Allowing your client to directly compete with a substantial part of their business is likely to have a detrimental impact on the turnover and profitability of the business. Further, in the event that our client sells the business during the remaining term of the lease, it is likely to detrimentally affect the sale price of the business and the rental that can be obtained for Shop 1 in connection with any such sale.

36 The Lessors gave evidence of the significant contribution of drinks and cakes, pastries etc. to their business. In the case of drinks, both coffee and other drinks, these were on the evidence demonstrated to be a significant part of their business.

37 Considerable evidence was put on from a property consultant retained by the Lessee, responded to by a valuer retained by the Lessors, as to the significance of use restrictions in the value of small business premises and leases. These opinions drew a distinction between the factors affecting goodwill and the factors affecting the market rent of premises. In particular the evidence for the Lessee asserted that "permissible use as contained in the lease of a neighbouring property has no bearing on the market rent of the property" (ie. the subject property). This opinion was stated in the context of an opinion which considered that "goodwill of a business is not a relevant consideration in determining the market rent and that "goodwill of neighbouring shops has no bearing on the market rent of the shop". As bald propositions I found those hard to accept from a commercial stand point.

38 The Lessors' valuer's evidence stated the opinion that direct competition between these two shops with the same product lines would have an impact on each other's trade and as a consequence would diminish the goodwill which would affect the likely future rent from the premises.

39 The Lessee argued that the fact that the accounts of the Lessors do not include a goodwill figure for its business in Shop 1 precludes an argument that the granting of consent to this requested new use is considered by the Lessors to be likely to reduce the goodwill of its business or the future value of it by way of sale as an asset.

40 In my opinion, having considered that evidence, the use restriction is likely to make a significant contribution to the commercial value of Shop 1 to the Lessors in that the preservation of the business in that shop from direct take away food trade in the adjacent shop will enhance the value of its current trade, the value on sale of the business or the likely rent on letting for a take away food premises.

41 The Applicant cited the decision of McNamara P. in the ACT (Vic.) in Loretta Le Corrs v. Inominata Pty Ltd (unrep.) 9 June 1999 citing International Drilling Fluids Ltd v. Louisville Investments (Uxbridge) Ltd [1986] 1 Ch 513 where Balcombe LJ set out certain criteria governing the reasonableness of landlord consents in similar but not identical situations to this case.

42 Those principles acknowledge that the onus of proving an unreasonable withholding of consent is on the tenant (a principle of particular significance to my earlier observations as to the failure of the Lessee in this case to have put forward material relevant to its claim up until the commencement of these proceedings).

43 Also the basis of the decision by a landlord must not be collateral for the purposes of the lease. This is repeated in the often cited opinion of Walsh J in Calvin v Bowen (1958) 75 WM (NSW) 262 at 264; "The reason for the refusal must be something affecting the subject matter of the contract which forms the relationship between the Landlord and Tenant, and not something extraneous and disassociated from the subject matter of the contract."

44 Most significantly the stated principles include one from Pimms Ltd v Tallow Chandlers Company [1964] 2QB 547 at 564 "It is not necessary for the Landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances."

45 I have no doubt applying these principles that the decision by the Lessors to maintain the use restriction in the Lease and not to agree to the range of take-away coffee, tea and food items now requested by the Lessees, in circumstances where all of those items form a significant pat of the take-away business in the adjoining premises owned by them (whether leased by them or operated by them) is not a decision in breach of Clause 6.2. It is clearly a decision which might be reached by a reasonable person in the circumstances.

46 Accordingly, I dismiss the application.

Costs

47 The next question is whether the Lessor's application for costs in the circumstances should be upheld. The parties have both made submissions in this regard.

48 The principles to be applied are fully set out in my recent decision in Alessa Pty Ltd v. Total and Universal [2001] NSWADT 150. The test of whether "special circumstances", as required by s.88 of the ADT Act , exist, depend upon whether the circumstances of the application are seriously beyond the usual or ordinary pursuit of a claim so that it would be seriously unfair to a party in proceedings before the Tribunal not to be awarded some or all of its costs where it is being successful.

49 In my view the claim by the Lessee in its initial form unsubstantiated by any material so lacked merit in fact and law that it would be seriously unfair to the Lessors, having been successful in relation to it, not to be awarded some or all of their costs having been successful.

50 The next question is whether the case having been permitted by the Tribunal to proceed on the more limited basis, an entitlement to costs similarly arises where the Lessors have also been successful after the further consideration of the material placed before the Tribunal.

51 The difficulty I find is that, if the negotiations between the parties had been based from the outset on a request for permission for certain specified food items and coffee only, and if this request had been supported by reasoned commercial analysis from the Lessee accepting that it has the onus of proof, the areas of difference on the question of whether the Lessors were reasonably concerned about being prejudiced by the requested change would have been much more narrowly defined. Any proceedings thereafter brought in this Tribunal would have been on a much more limited and specifically defined basis and possibly as a result of that form of negotiation, the considered legal advice to the Lessee may well have been that such proceedings would be unlikely to succeed. It is certain that the substantial level of expense obviously required of the Lessors, would have been reduced or avoided.

52 In all those circumstances I am of the opinion that it would be seriously unfair for the Lessors, having been successful on all aspects of the case, not to be awarded a substantial part of their costs. In my view the appropriate order is for the Respondent Lessors to be awarded three-quarters of their party and party costs.

53 I will order that the Applicant pay three-quarters of the costs reasonably and properly incurred by the Respondents assessed on a party and party basis within 21 days of the date on which the parties may agree on the amount of those costs or failing agreement, such costs to be as assessed.