Supreme Court New South Wales Medium Neutral Citation: Sunny Superior Seafood Pty Ltd v Stevens [2021] NSWSC 381 Hearing dates: Written submissions ending 2 March 2021 Date of orders: 16 April 2021 Decision date: 16 April 2021 Jurisdiction: Equity Before: Parker J Decision: See [33] Catchwords: COSTS – party/party – indemnity costs – dispute concerning termination of lease – where the plaintiff discontinued proceedings – whether indemnity costs should be awarded – indemnity costs refused Legislation Cited: Civil Procedure Act 2005 (NSW), s 98 Conveyancing (General) Regulation 2018 (NSW), sch 5 cll 1, 2, 4, 5, 6 Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) Retail and Other Commercial Leases (COVID-19) Regulation 2020 (No 2) (NSW) Retail and Other Commercial Leases (COVID-19) Regulation 2020 (No 3) (NSW) Uniform Civil Procedure Rules 2005 (NSW), r 42.2 Cases Cited: Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (No 2) [2009] NSWCA 12 Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356 Category: Costs Parties: Sunny Superior Seafood Pty Ltd (Plaintiff) Maria Stevens (Defendant) Representation: Counsel: B Lloyd (Defendant) Solicitors: Yingke Law Firm (Plaintiff) Herro Solicitors (Defendant) File Number(s): 2021/33749 Publication restriction: Nil Judgment 1. This judgment arises out of proceedings that were brought before me in the Duty List in February 2021. The defendant, Maria Stevens, is the registered proprietor of a three storey commercial property at Crofts Avenue, Hurstville NSW. The plaintiff, Sunny Superior Seafood Pty Ltd ("Sunny Superior"), was the owner of a Chinese restaurant which it operated at the Crofts Avenue property pursuant to a commercial lease agreement with Ms Stevens. 2. As of February, Sunny Superior was almost $700,000 in arrears on its rent. Ms Stevens issued a notice of termination of the lease and re-entered the property. Sunny Superior filed a summons challenging the validity of the termination, but abandoned its claim shortly afterwards. 3. Ms Stevens now seeks an order that Sunny Superior pay her costs of the proceedings on an indemnity basis. Claims and procedural history 1. Sunny Superior had leased the Crofts Avenue property from Ms Stevens for a number of years prior to November 2017. On 1 November the parties entered into a further written lease agreement for a term of five years. It was due to expire on 31 October 2022. 2. The rent payable under the lease was $76,000 per month. If Sunny Superior failed to pay rent in accordance with the terms of the lease, and rent was outstanding for more than 14 days, Ms Stevens could, without notice, re-enter the property and terminate the lease. 3. Interest was payable on any rent that was outstanding for more than 14 days. Additionally, the agreement required Sunny Superior to provide Ms Stevens with a bank guarantee, or alternatively a bond, which could be called on to recover any outstanding rent. If the bank guarantee was called on, Sunny Superior had an obligation to replace it within 14 days. As of February 2021, the amount provided by Sunny Superior by way of guarantee was $508,000. 4. In April 2020, in response to the COVID-19 emergency, the National Cabinet adopted what was described as a Mandatory Code of Conduct applicable to all commercial leases that were suffering financial stress or hardship as a result of the pandemic (the "Code of Conduct"). Among other things, the Code of Conduct set out a number of principles to be followed when re-negotiating commercial leases. 5. Following the adoption of the Code of Conduct, in April 2020 the New South Wales Government enacted the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW). It was repealed and replaced by the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (No 2) (NSW) in October, and again in January 2021 by the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (No 3) (NSW). 6. The COVID-19 Regulations amended the Conveyancing (General) Regulation 2018 (NSW) ("Conveyancing Regulations") by inserting Schedule 5 which applied to commercial (not retail) leases. Under Schedule 5, either party to a lease could request that the other party re-negotiate the rent payable: cl 5(2). Once a request had been made, the parties were required to re-negotiate the rent in good faith: cl 5(4)(a). 7. Additionally, Schedule 5 prevented a lessor from taking certain prescribed actions against an impacted lessee during the prescribed period if the lessee had, in breach of a lease, failed to pay rent: cl 4(2) (now repealed). The prescribed period was the period between 24 April 2020 and 31 December 2020: cl 1. An impacted lessee was defined to include a lessee that qualified for the JobKeeper scheme and whose turnover in the 2018-2019 financial year was less than $50 million: cl 2. A lessor was also unable to recover possession of the premises or terminate the lease until the NSW Small Business Commissioner had certified that the dispute could not be resolved by mediation: cl 6. 8. From 1 January 2021, lessors are no longer statutorily prohibited from terminating a commercial lease for non-payment of rent payable after the end of the prescribed period. Lessors remain prohibited from terminating a lease for non-payment of rent during the prescribed period, unless the lessor has attempted to re-negotiate the rent and failed to resolve the dispute at mediation. 9. Prior to the COVID-19 emergency, Sunny Superior had repeatedly failed to pay rent. In March 2020, once the pandemic had set in, Sunny Superior and Ms Stevens entered into negotiations concerning a reduction in the rent payable under the lease. A reduced amount was agreed for the period between March and August, but the parties were unable to agree as to what relief Sunny Superior would be entitled to beyond September. They attended an unsuccessful mediation in October, following which the NSW Small Business Commissioner issued a certificate of failed mediation. 10. Despite the agreement to pay a reduced amount of rent, the evidence before me indicates that from March 2020 to February 2021 little rent was actually paid by Sunny Superior. In fact, it appears no rent was paid at all in the first two months of this year. As of February, the total amount outstanding was $696,000. Following repeated requests for repayment by Ms Stevens, on 4 February she terminated the lease and re-entered the property. She also called on the bank guarantee provided by Sunny Superior in the amount of $508,000. 11. The following day, 5 February, a solicitor acting for Sunny Superior appeared before me in the Duty List seeking leave to file a summons against Ms Stevens. I granted the necessary leave and ordered that the time for service be abridged to 8 February. 12. The gravamen of Sunny Superior's claim was that Ms Stevens' notice of termination and re-entry was unlawful under the Code of Conduct and the COVID-19 Regulations. It sought orders which would allow it to re-enter the Crofts Avenue property and to restrain Ms Stevens from taking steps to enforce the notice until the conclusion of the final hearing. 13. At the hearing on 10 February, counsel for Sunny Superior accepted that the Code of Conduct did not have the force of law and that the applicable law was contained in the COVID-19 Regulations and Conveyancing Regulations. Counsel also accepted that given the parties had participated in an unsuccessful mediation, Ms Stevens had the right to terminate the lease as a result of failure to pay rent prior to 31 December. 14. There was no evidence before me that indicated Sunny Superior was in any position to satisfy its outstanding financial liabilities. As a result, counsel conceded that Sunny Superior could not obtain relief against forfeiture if it could not repay the outstanding rent and replace the bank guarantee within 14 days. 15. The hearing was adjourned to allow counsel to seek instructions on the issue. The matter returned before me on 12 February, at which time Sunny Superior informed the Court that it wished to discontinue the proceedings. Counsel for Ms Stevens then applied to have its costs paid on an indemnity basis. 16. On 15 February I made orders that the proceedings be dismissed and the question of costs be reserved. Costs 1. Rule 42.2 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") provides that unless the Court otherwise orders, costs are to be assessed on the ordinary basis. In exceptional cases, the Court may, in its discretion, award costs on an indemnity basis: Civil Procedure Act 2005 (NSW), s 98(1)(c). 2. In written submissions, counsel for Ms Stevens submitted that this is an appropriate case for an order of indemnity costs for a number of reasons. First, the argument for invalid termination was never particularised. Second, given Sunny Superior had no capacity to pay the outstanding rent owing to Ms Stevens, there was never any realistic chance it could obtain relief against forfeiture. Counsel submitted this was a wilful disregard of the established legal principles upon which relief against forfeiture may be granted. In such circumstances, counsel submitted that it was unreasonable for Sunny Superior to subject Ms Stevens to the expenditure of legal costs. 3. Counsel referred me to the decision of Black J in In the matter of Indoor Climate Technologies Pty Ltd [2019] NSWSC 356. His Honour stated the applicable principles as follows (at [8]): Costs are awarded on the ordinary basis unless there are exceptional circumstances: Leichhardt Municipal Council v Green [2004] NSWCA 341. An order for indemnity costs is not made to punish an unsuccessful party for persisting with a case that fails, but to compensate a successful party fully for costs incurred, when the Court takes the view that it was unreasonable for the other party to have subjected the successful party to the expenditure of costs: Hamod v New South Wales [2002] FCAFC 97; (2002) 188 ALR 659 at [20]. Whether an indemnity costs order should be made depends, at least in part, on whether there was a relevant delinquency on the part of the unsuccessful party: Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (No 7) [2008] NSWSC 199; (2008) 65 ACSR 324 at [24]; Cabport Pty Ltd v Marinchek (No 2) [2013] NSWCA 131 at [6]. That is to be determined by reference to the conduct of the proceedings, not the conduct that is the subject of the substantive dispute. 1. Counsel also referred me to the decision of the Court of Appeal in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (No 2) [2009] NSWCA 12. In that case, Allsop P noted at [4] that costs on an indemnity or solicitor and client basis should be awarded where "an action has been commenced or continued in circumstances where the moving party, properly advised, should have known that it had no chance of success". His Honour cited the well-known decision of Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401: I believe that it is appropriate to consider awarding "solicitor and client" or "indemnity" costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law. Such cases are, fortunately, rare. But when they occur, the court will need to consider how it should exercise its unfettered discretion. 1. On the other hand, Sunny Superior submitted that there should be no order as to costs. It contended that where there has been no determination on the merits, there should be no order as to costs. In support of this proposition I was referred to the decision of McHugh J in Re Minister for Immigration & Ethnic Affairs (Cth); Ex Parte Lai Qin (1997) 186 CLR 622 at 624-625: In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs… When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. . . . If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases. 1. However, McHugh J also noted that in an appropriate case, the Court can make an order for costs "even where there has been no hearing on the merits and the moving party no longer wishes to proceed with the action". 2. I reject the submission that there should be no order as to costs. Sunny Superior abandoned its claim against Ms Stevens and there is no reason why costs should not follow the event. 3. But I do not think that Sunny Superior's conduct in the proceedings was so unreasonable as to justify an award of costs on an indemnity basis. Although in hindsight it is clear that Ms Stevens' notice of termination was valid, and that relief against forfeiture was not a viable option, the case must be assessed having regard to the urgent context in which it occurred. 4. At the time Ms Stevens terminated the lease, the Chinese New Year was fast approaching and Sunny Superior had already made a number of bookings in its restaurant for the following week. I was told that it had food that would spoil and water tanks holding live seafood that needed to be maintained. In his supporting affidavit, the director of Sunny Superior, Sunny Cheng, estimated that the business was expected to receive increased cash flow during the week of the Chinese New Year. 5. Gordian Runoff and Fountain Selected Meats were both appellate cases. In such a case there is ample opportunity to obtain proper advice as to the appeal's viability. It is understandable that an appellant who nevertheless proceeds to advance a hopeless case should be presumed to have acted for "some ulterior motive or because of some wilful disregard to the known facts or the clearly established law". 6. But in my view, the same reasoning does not necessarily apply to cases brought on an urgent basis in the Duty List. Plaintiffs in such cases will not always have had the opportunity for full research and dispassionate consideration. 7. In the present case, when the obstacles to Sunny Superior's claim were pointed out at the hearing on 10 February, its legal representatives quite properly acknowledged the problem and sought instructions. I see nothing in this which merits criticism or suggests abuse of process. The very fact that Sunny Superior abandoned the proceedings once it realised it had no valid claim suggests that it was not acting in "wilful disregard of the law". Given the urgency of the matter, and the fact that the prescribed period under the COVID-19 Regulations had only recently ended, it seems much more likely that Sunny Superior was not fully informed of its legal position when the proceedings were commenced. 8. Sunny Superior did not have a valid claim and will have to pay Ms Stevens' costs as a result. But in my view this is not a case in which there were any "special or unusual features" that would justify the Court departing from the ordinary measure of assessment: see Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 233. I do not propose to make an order for indemnity costs. 9. The orders of the Court are: 1. Order that the plaintiff pay the defendant's costs of the proceedings on the ordinary basis. ********** Amendments 16 April 2021 - amend typographical error 16 April 2021 - amend representation DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 April 2021