Xclusive Pty Ltd v Christian Brothers Inc No. Scciv-01-1191

XCLUSIVE PTY LTD v CHRISTIAN BROTHERS INC.
[2001] SASC 380
Miscellaneous Appeal

MARTIN J. The appellant (“the tenant”) leased a premises containing a swimming pool and gymnasium located at 235 Flinders Street, Adelaide from Christian Brothers Incorporated (“the landlord”). The tenant operates a business from the premises known as Adelaide City Swim. On 8 August 2001 the landlord brought an application in the District Court for an order that the tenants surrender possession of the premises. On 13 August 2001 the learned trial Judge made an order requiring the appellant to forthwith surrender possession. The tenant appeals against that order.
The agreement pursuant to which the tenant leases the premises was entered into on 25 November 1998. A letter of that date from the landlord’s real estate agent to the tenant evidences the agreement. The letter includes conditions that from 1 July 2000 the monthly rent would increase from $4 000 to $6 666.67 per month and the utilities and other outgoings be paid by the tenant. Service and maintenance of the plant and equipment was the tenant’s responsibility. The tenant took possession on 1 December 1998, at which time the parties are presumed to have entered into a retail shop lease: s 6(b) Retail and Commercial Leases Act 1995 (“the Act”). No formal lease has been executed.
Disputes arose about the deficiencies in the premises and concerning the high cost of outgoings claimed by the landlord. The tenant failed to pay all the outgoings claimed by the landlord and failed to pay the amount of the increase in rent owing as of 1 July 2000. On 21 September 2000 the landlord notified the tenant that the tenant might be required to vacate the premises.
On 15 November 2000 the tenant instituted proceedings against the landlord in the Magistrates Court seeking variation of the terms of the lease. The proceedings were subsequently transferred to the District Court. In an amended Statement of Claim filed on 16 July 2001, the tenant alleges that the landlord failed to make proper disclosure as required by s 12 of the Act and that the landlord engaged in misleading and deceptive conduct contrary to both s 52 of the Trade Practices Act 1974. and s 56 of the Fair Trading Act 1987. The landlord has not filed a defence in those proceedings. The tenant also alleges that portions of the facility are not structurally suitable for the purposes for which they were leased.
On 29 June 2001, the landlord served a notice of default on the tenant. The landlord claimed non-payment of rent in the amount of $31 200, council rates of $12 239.20, water rates of $5 603 and electricity costs of $30 372.51. Allowing for interest, the amount now claimed to be owing is in excess of $90 000.
On 6 August 2001 the landlord served a Notice of Termination of Tenancy and a Notice of Re-Entry. The landlord changed the locks on the premises and turned off the power and water services. The tenant immediately sought an injunction restraining the landlord from re-entering or accessing the premises and an order re-instating the tenant’s rights under the lease. The tenant’s applications were refused. No appeal has been lodged against that decision.
Following the refusal of the tenant’s application, although communication occurred between the parties about the tenant vacating the premises, the tenant did not vacate. On 8 August 2001 the landlord applied for an order requiring the tenant to surrender possession of the premises. The application was made pursuant to s 68(2)(i) of the Act. The trial Judge heard submissions on 9 August 2001 and, on 13 August 2001, made the order for surrender of possession against which the tenant now appeals.
As mentioned, the lease commenced on 1 December 1998. It is for a minimum period of five years: s 20B of the Act.The business known as Adelaide City Swim is a substantial business and has been described by the sole director of the tenant, Mr Matthew Michaelis, in the following terms:
“Adelaide City Swim has 887 contracts with customers. These are pre purchased swimming parcels for customers who use the swimming pool facility on a regular basis. These people would come at least once a week in the main. Adelaide City Swim also has 5 groups of amateur and professional swimming organisations which regularly hire space from us. We have bookings with these groups that run to the end of the year. Adelaide City Swim also has approximately 500 casual swimmers that regularly swim at the facility. There is also a personal training business run under the Xclusive logo. There are 227 contracts for personal training. There are 9 personal trainers and persons involved in those contracts attend several times a week on average. The contracts, many of which are prepaid, amount to over $250,000.00.”
The effect of the trial Judge’s order that the tenant surrender possession is to close the tenant’s business. It also has the effect of giving a summary judgment in favour of the landlord in the proceedings taken by the tenant against the landlord to the extent that the tenant sought a variation of the terms of the lease and an order affirming the lease for a term of three years commencing on 1 January 1999 with two options to renew for a total of eight years. If the landlord had sought summary judgment in those proceedings, the application would have been doomed to failure. Counsel for the landlord did not dispute that serious issues to be tried exist in the tenant’s proceedings.
The trial Judge referred to the submission by the tenant that an order for possession would entirely pre-empt the tenant’s claim. His Honour also referred to the reliance by the tenant upon s 12 of the Act and the tenant’s submission that the tenant could rely upon s 26 and not pay the landlord any amount in respect of outgoings. After referring to those matters, his Honour said:
“In other circumstances there may be some merit in these submissions. However, the fact is that I do not have before me an application by the tenant under s 12 or 26 or 68 of the Act – or any application at all. All I have before me is an application by the landlord for possession of premises as a result of the tenant ignoring a Notice of Default and failing to comply with notices terminating the tenancy and retaking possession.”
In my opinion, his Honour misunderstood the relevance of the tenant’s reliance upon the various provisions of the Act. Those provisions were relied upon by the tenant as demonstrating that there were serious issues to be tried in the tenant’s proceedings and that, if those proceedings were successful, the Court might make orders which have the effect of negating or reducing the liability of the tenant to pay the amounts due under the current terms of the lease. The tenant argued that the existence of those serious issues to be tried weighed against the making of an order which would summarily have the effects to which I have referred. These matters bore upon the exercise of the discretion possessed by the trial Judge.
The trial Judge expressed the view that the failure of the tenant to pay the amounts due to the landlord despite the warnings and notices “points strongly to the likelihood that the tenant is not just unwilling to pay, it is unable to pay.” There was no evidence to support that conclusion. The issue of the tenant’s financial resources was not the subject of evidence. After drawing that conclusion his Honour went on to find that, regardless of whether the tenant was unwilling or unable to pay, the tenant’s actions justified a conclusion on the part of the landlord that the tenant’s conduct amounted to a repudiation of the lease or a fundamental breach of its obligations under the lease. On that basis his Honour found that the landlord was entitled to terminate the tenancy and re-enter.
The trial Judge possessed a discretion whether to make the order sought. Section 68 of the Act empowers a court, in the exercise of its discretion, to make various orders upon application by a party or former party to a retail shop lease. The trial Judge also possessed a common law equitable discretion to decline to make the order.
In my opinion, as a consequence of the misapprehension to which I earlier referred, the trial Judge approached the matter from a perspective that was too narrow. His Honour failed to consider the exercise of his discretion. As a consequence, his Honour did not assess and weigh the matters relevant to the exercise of the discretion.
The finding of error does not necessarily mean that the appeal should succeed. Although there are serious issues to be tried, the tenant has failed to comply with the terms of the lease by failing to pay outgoings and the increased rent as required by the terms of the lease. In these respects the tenant has failed to perform the obligations specified in the lease in significant respects and over a substantial period. The landlord argued that the tenant’s failures and delays entitled the landlord to terminate the lease and weighed heavily against the exercise of the discretion in favour of the tenant.
As mentioned, Mr Michaelis is the sole director of the tenant. On the tenant’s application for an injunction, in an affidavit dated 7 August 2001 Mr Michaelis gave a personal undertaking to abide by any order as to damages that the court may require for granting the injunction sought by the tenant. During submissions on the appeal, counsel for the tenant stated that Mr Michaelis gave the undertaking as to damages at large. In other words, the undertaking is no longer limited to damages awarded for the granting of an injunction restraining the landlord from taking possession of the premises.
The undertaking given by Mr Michaelis in his affidavit of 7 August 2001 was subsequently extended during submissions on the hearing of the landlord’s application for possession. Counsel for the landlord indicated that the landlord was currently approximately $4 500 per month out of pocket. That figure was comprised of the increased rent not paid, council rates and water and power charges. In response, counsel for the tenant informed the trial Judge that he was instructed to give a personal undertaking on behalf of Mr Michaelis to pay, in the future, the increased rent and the cost of the other outgoings identified. That personal undertaking was repeated during the hearing of the appeal.
If the tenant pays increased rent and other outgoings in the future, the amount claimed by the landlord will not increase. Additional security in respect of those future payments has been provided by the personal undertaking given by Mr Michaelis.
As to the arrears, no offer of payment on account or security for payment was made before the trial Judge. When pressed during the hearing of the appeal, counsel for the tenant initially stated that Mr and Mrs Michaelis were prepared to offer security by way of jointly owned property for $31 200, being the shortfall of rent. Subsequently, the offer was revised to provide security for $50 000 by way of the equity available in jointly owned property. Following completion of the submissions, the hearing of the appeal was adjourned to enable the tenant to produce evidence or secure the agreement of the landlord as to the equity available in the property and to put forward a specific proposal that would provide the landlord with the appropriate security.
Mr and Mrs Michaelis are prepared to guarantee payment by the tenant to the landlord of any amount determined by the court to be owing up to a limit of $50 000. Additional security will be provided by way of a second mortgage over the jointly owned property to which I have referred. That property is valued at approximately $290 000 and the liability under a first mortgage has been capped at $195 200.
The issue is finely balanced. As I have indicated, the tenant has failed to comply with the terms of the lease in significant respects and over a substantial period of time. Considerable financial detriment has been caused to the landlord. Not unreasonably, the landlord sought to terminate the lease and does not wish to be forced into a continuing relationship with a tenant that has caused detriment to the landlord by not acting in accordance with the terms of the lease. However, in the face of serious issues to be tried in the tenant’s proceedings, it is a significant step for the court to make an order which will have the effect of bringing the tenant’s business to an abrupt conclusion and of giving summary judgment adverse to the tenant on some of the live issues in the tenant’s proceedings. It appears that if the landlord is given possession immediately, the tenant is unlikely to have available funds or assets that could meet any significant proportion of the amount now in arrears. If the tenant is able to continue with its business, the tenant and Mr Michaelis have undertaken to meet the future rent and expenses in accordance with the terms of the lease pending the finalisation of the tenant’s proceedings. Orders permitting the tenant to remain in the premises can be made on condition that, should the tenant fail to comply with its obligations under the lease, the landlord will be at liberty to apply on short notice for appropriate orders including possession. Arrangements have been put in place to secure $50 000 of the arrears. In this way, should the tenant’s claim fail in total or in part, the ability of the landlord to recover a substantial amount has been secured.
In all the circumstances, I have decided that the appeal should be allowed and the orders of trial Judge set aside. On the basis of the undertakings given and security to be provided, I have determined that I should exercise my discretion to refuse the application for possession. The relationship between the parties pending the resolution of the tenant’s claim is to be governed by the terms of the lease evidenced by the letter of 25 November 1998, which letter has represented the terms of the lease since 1 December 1998. I will hear the parties as to the appropriate orders.

[2001] SASC 380

21 December 2001