Supreme Court New South Wales Medium Neutral Citation: Darzi Group Pty Ltd v Nolde Pty Ltd (No 2) [2022] NSWSC 643 Hearing dates: On the papers Date of orders: 23 May 2022 Decision date: 23 May 2022 Jurisdiction: Equity Before: Robb J Decision: The Court: (1) Declares that the defendant is unable to take any "prescribed action" as defined in the Retail and Other Commercial Leases (COVID-19 Regulation) 2020 against the plaintiff in respect of any shortfall in rent that the plaintiff was otherwise obliged to pay to the defendant for the months of May and June 2020. (2) Orders the defendant to pay the plaintiff's costs of this application. Catchwords: LEASES AND TENANCIES — retail leases — retail shop lease — whether to make declaration that defendant lessor unable to take "prescribed action" as defined in Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) against plaintiff lessee in respect of any shortfall in rent plaintiff otherwise obliged to pay to defendant for period of two months Legislation Cited: Conveyancing Act 1919 (NSW), s 129 Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW), cll 4, 7, 8, 9 Retail Leases Act 1994 (NSW), Pt 8, s 88 Supreme Court Act 1970 (NSW), s 63 Cases Cited: Darzi Group Pty Ltd v Nolde Pty Ltd [2021] NSWSC 774 Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 Category: Consequential orders Parties: Darzi Group Pty Ltd (Plaintiff) Nolde Pty Ltd (Defendant) Representation: Counsel: WG Muddle SC & E Peden SC (Plaintiff) CD Wood SC & DW Robertson (Defendant) Solicitors: Pigott Stinson (Plaintiff) Brown Wright Stein (Defendant) File Number(s): 2019/00316670 Judgment 1. The Court delivered its principal judgment in these proceedings on 28 June 2021: Darzi Group Pty Ltd v Nolde Pty Ltd [2021] NSWSC 774 ("J"). The abbreviations used in that judgment are employed again in these reasons. 2. The Court required the parties to confer and to forward to my Associate draft short minutes of order to give effect to the reasons for judgment. 3. On 14 October 2021, the Court made orders in the proceedings, which relevantly included a declaration that Darzi had validly exercised the option to renew the Lease and an order that Nolde specifically perform its agreement to grant a new Lease. Other orders were made and have been made subsequently that are not relevant to the issue the subject of these reasons. 4. As I understand Darzi's position, the parties were unable to agree as to what orders should be made in relation to the matters dealt with at J [55]-[144] concerning the significance of Darzi's failure to pay rent in the amount required by the Lease for the months of May and June 2020 as a result of the Restaurant being closed because of the COVID-19 pandemic. Darzi sought and was given leave on 14 October 2021 to file a further amended statement of claim. 5. By revision to its prayers for relief in the further amended statement of claim, Darzi has asked the Court to make the following additional declaration, notwithstanding that a declaration to that effect was not sought in its pleadings before or during the hearing of these proceedings. The declaration sought is: Declaration that the defendant is unable to take any "prescribed action" as defined in the Retail and Other Commercial Leases (COVID-19 Regulation) 2020 against the plaintiff in respect of any shortfall in rent that the plaintiff was otherwise obliged to pay to the defendant for the months of May and June 2020. 1. Darzi seeks this declaration on the basis that it follows from the reasoning in the principal judgment and submits that it should be made because of s 63 of the Supreme Court Act 1970 (NSW), which provides: The Court shall grant, either absolutely or on terms, all such remedies as any party may appear to be entitled to in respect of any legal or equitable claim brought forward in the proceedings so that, as far as possible, all matters in controversy between the parties may be completely and finally determined, and all multiplicity of legal proceedings concerning any of those matters avoided. 1. This statutory requirement that the Court grant all remedies to which any party may appear to be entitled, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined in the one proceedings is a cardinal principle of our society's system of justice. 2. The issue that is required to be resolved by these reasons is factually complex and it will be necessary for the Court to assume that the reader understands the part of the principal judgment to which I have referred above. 3. As will appear from what follows, there is a real prospect that, if the declaration sought by Darzi is not made, a relatively trivial issue between the parties will be enlivened in circumstances that will very likely lead to further legal disputation, whose costs will be entirely out of proportion to the real significance of the outstanding issue. Furthermore, there is doubt that those proceedings will lead to any efficient or proper resolution of the dispute, because of the idiosyncrasies in the regulatory regime that was put in place by the New South Wales Government in response to the COVID-19 pandemic. 4. Nolde opposes the Court making the additional declaration sought by Darzi and submits that the Court should make orders dismissing Darzi's application and that Darzi pay Nolde's costs of this application. 5. To put the matter in its proper perspective, the present dispute arises out of the fact that the Lease required Darzi to pay rent of $12,546.74 each month. In May 2020 Darzi made a rent payment of $1,304.86, and in June 2020 it paid $2,942.21. The total shortfall was $20,846.41. That amount is the subject of the continuing dispute. 6. As I explained at J [55], Nolde pleaded in its cross claim that Darzi had breached the Lease by failing to pay the requisite amount of rent in May and June 2020. At J [56], I set out Darzi's response in par 28 of its defence to the cross claim. In essence, Darzi pleaded that it was not in breach of the Lease because at the relevant time it was an "impacted lessee" as defined in clause 4 of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (which I defined as the COVID-19 Regulation), and that Darzi had paid to Nolde the amount required that was calculated in accordance with the relevant principles of the Code adopted by the National Cabinet. 7. Darzi made the following allegations in par 28 of its defence to the cross claim; that it: f. says that [Darzi] made a request to renegotiate the rent payable under the Lease; g. says that [Nolde] refuses to negotiate the rent and other terms under the Lease despite its obligation under section 7 of the COVID Regulation to do so… 1. Although Darzi did not claim the declaration that it now seeks, it did put in issue whether Nolde had refused to negotiate the rent as required by the COVID-19 Regulation. 2. As I noted at J [60], this case was likely to be unusual as, following the restrictions on the operation of restaurants that were initially introduced by the New South Wales Government in response to the COVID-19 pandemic which interrupted their operation and lead to dramatic declines in turnover, the income of the Restaurant operated by Darzi substantially declined in the months of May and June 2020 relative to the same months in the previous year. However, after the two months' decline in turnover, the turnover of the Restaurant recovered to the extent that Darzi ceased to qualify as an "impacted lessee", and Darzi paid to Nolde the full amount due for rent under the Lease since June 2020. 3. Consequently, the whole dispute was for a closed period of two months in 2020 at the beginning of the commercial restrictions caused by the COVID-19 pandemic. Any continuing disputation by the parties will relate only to the consequences of that closed period. 4. At J [61]-[102], I set out and discussed all the correspondence between the parties and their solicitors concerning the attempt to renegotiate the rent payable by Darzi for the two months on the basis of Darzi's claim that it was an "impacted lessee". I draw attention, in particular, to J [94] where I set out the relevant terms of Nolde's solicitors' 5 June 2020 letter, where they stated that they disagreed with Darzi's solicitors' analysis of the COVID-19 Regulation and stated that Nolde would contact the Small Business Commissioner to organise a mediation between the parties. As I noted at J [97], there was no evidence that Nolde initiated any contact with the Small Business Commissioner. 5. On 16 July 2020, Darzi's solicitors advised Nolde's solicitors that Darzi did not suffer any decline in revenue in June 2020, compared with June 2019, so that, in accordance with the principles in the Code, Darzi paid the full rent under the Lease for the month of July 2020, and has continued to pay the full rent since that time. 6. At J [99], I set out the terms of the second s 129 notice under the Conveyancing Act 1919 (NSW) that Nolde served on Darzi on 17 July 2020, in which it claimed that Darzi was currently in breach of the Lease in not having paid the outstanding rent. Nolde claimed that Darzi unilaterally decreased the payments of the rent without providing sufficient evidence that it was an "impacted lessee" or obtaining Nolde's consent to the payment of the reduced rent or renegotiating the rent payable under the Lease having regard to the COVID-19 Regulation. 7. The relevance of the second s 129 notice is that, after Darzi recommenced paying the full rent payable under the Lease, Nolde ceased to negotiate with Darzi and took the stance that Darzi was in breach of the Lease. The matter then proceeded on the basis that that was Nolde's position until the issue was determined in the principal judgment. 8. I then discussed the COVID-19 regulatory regime at J [103]-[125]. As I explained in that part of the principal judgment, the significance of Darzi's failure to pay the full rent for May and June 2020 was the subject of what I called the COVID-19 Regulation (No 1). However, as stated at J [121], the effect of the provisions of that Regulation, and the extensions made by the later versions of the Regulation, was that Nolde was and would continue to be prohibited until 1 July 2021 from prosecuting so much of the then present proceedings as related to seeking an order for possession of the Premises against Darzi, a declaration that Nolde was entitled to re-enter for breach, or any order that Darzi pay to Nolde the alleged shortfall in rent for May and June 2020. 9. I found at J [118] that Darzi was in fact an "impacted lessee" for the months of May and June 2020. I found at J [124] that it was clear that Darzi requested Nolde to renegotiate the rent payable under the Lease, and that Nolde was consequently obliged to renegotiate the rent in good faith. 10. I then concluded at J [125]: [125] The Note to clause 7(4) is in my view material to a consideration of how the renegotiation of the rent under the Lease was required to take place, although the Note did not have the legal effect of restricting the general relevance of the leasing principles in the Code required by clause 7(4)(b). The effect of clause 7 was that Nolde will be perpetually barred from taking any prescribed action to recover from Darzi the shortfall in rent paid for March and June 2020, if Nolde did not comply with its obligation to renegotiate the rent in good faith. 1. The Note referred to in this paragraph of the reasons was to be found in clause 7 of the COVID-19 Regulation (No 1), which I set out in J [122] as follows: 7 Obligation to renegotiate rent and other terms of commercial leases before prescribed action (1) A lessor under a commercial lease must not take or continue any prescribed action against an impacted lessee on grounds of a breach of the commercial lease consisting of a failure to pay rent during the prescribed period unless the lessor has complied with this clause. Note— This clause does not prevent parties to a commercial lease coming to agreements relating to the lease. For example, an impacted lessee may voluntarily agree to pay full rent during the prescribed period. The clause prevents the lessor taking unilateral prescribed action without complying with the requirements set out in subclauses (2)–(4). (2) If an impacted lessee is a party to a commercial lease, any party to the lease may request the other parties to renegotiate the rent payable under, and other terms of, the commercial lease. (3) A party to a commercial lease must, if requested, renegotiate in good faith the rent payable under, and other terms of, the commercial lease. (4) The parties are to renegotiate the rent payable under, and other terms of, the commercial lease having regard to— (a) the economic impacts of the COVID-19 pandemic, and (b) the leasing principles set out in the National Code of Conduct. Note— See leasing principles No. 3–5, 7–10 and 12 in the National Code of Conduct. In particular, leasing principle No. 3 in the National Code of Conduct requires landlords to offer rent reductions, in the form of waivers or deferrals of rent, proportionate to lessees' reductions in turnover. 1. It will be appropriate for me to set out at length the relevant parts of the reasoning in the principal judgment on the issue of whether Nolde complied with its obligations under the COVID-19 Regulation (No 1), which were as follows: [126] As these reasons for judgment have been delivered before 1 July 2021, it is arguable that Nolde's entitlement to commence a prescribed action against Darzi for non-payment of rent after the end of the COVID-19 regime is not strictly an issue in these proceedings. However, in so far as Nolde relies upon the alleged wrongful conduct of Darzi under the Lease as being part of the cumulative grounds for the exercise of the Court's discretion to refuse to make an order for specific performance of the agreement, being the grant by Nolde of the renewed Lease to Darzi, I consider that it is proper for the Court to decide the issue. That conclusion is reinforced by the obligation imposed upon the Court by s 63 of the Supreme Court Act 1970 (NSW) to grant all such remedies as any party may appear to be entitled to in respect of any legal or equitable claim brought forward in the proceedings. [127] I am satisfied that Nolde did not, in fact, comply with its obligation under clause 7 of the COVID-19 Regulation (No 1) to renegotiate the Lease in relation to the rent payable following the request by Darzi. [128] In so far as Nolde relied, in the second s 129 notice, on the fact that Darzi decreased the payments of rent, I do not accept that that was a contravention of the terms or the spirit of clause 7 by Darzi. The Court should hesitate to make general statements about the proper operation of the Code, given the vast disparity that will exist between the circumstances of the parties to all of the different leases to which the Code and the COVID-19 regime may apply. However, in my view, it is not correct that impacted lessees must continue to pay the rent payable under the lease until such time as the renegotiation process has been completed, and the lessor has agreed to a reduced rent. That situation would run counter to the primary objective of the COVID-19 regime, in preserving leases and the businesses of lessees from the immediate cash flow impacts of the COVID-19 pandemic. The COVID-19 regime assumes that impacted lessees' capacity to pay rent may in fact be immediately affected by the COVID-19 pandemic. It would be entirely counter-productive for the good faith obligation to require lessees to continue to pay the full rent until agreement to the contrary was reached. The reference in clause 8 of the COVID-19 Regulation (No 1) to a dispute resolution process highlights the obvious reality that satisfactory renegotiations may not occur immediately, that a dispute resolution process may be necessary, and that agreement may ultimately not be reached. [129] The extremity of Nolde's position is demonstrated by par 25 of its final written submissions in which it submitted that the COVID-19 Regulation (No 1) should not be interpreted as absolving impacted lessees from the obligation to pay the full rent until lessors have agreed to the contrary because, "[i]f the parliament had intended to override the contract that parties had entered into, it would have required clear words. If the landlord was ungenerous, heavy handed or even unconscionable, the contract stands". I consider that it is hard to imagine a proposition more at odds with the clear intent of the COVID-19 regime than that submission. … [138] As it happened, Nolde took the extreme course of rejecting the continuation of negotiations, and serving on Darzi the second s 129 notice, which in practical terms brought the renegotiation to an abrupt halt. In particular, if Nolde had responded constructively to Darzi's request, it may have been reasonable during the course of the renegotiation process for Nolde to request at least some of the additional financial information that it sought in order, for instance, to determine an appropriate balance between rent to be waived and rent to be deferred as well as the period of the deferment. [139] Consequently, as matters stand at present, Nolde will never be entitled to take a prescribed action against Darzi in respect of the short payments in rent for May and June 2020. … [142] In its submissions, Nolde relied on the observations that I made in Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 at [158] to the effect that the COVID-19 regime does not empower the Court to decide the appropriate rent to be paid under an impacted lease, if the parties are unable to renegotiate the lease and the dispute is not able to be resolved by mediation. I accept that there may be cases that must be addressed by the courts where this question arises in future. The difficulty is that, although it may appear to be a mathematical exercise to determine the appropriate reduction in rent by comparing the turnover figures for the current period with the equivalent figures for the 12 months prior, no principles have been established for determining the appropriate split between the waiver and deferral of rent, the appropriate period to allow the lessee to catch up on deferred rent, and whether an extension of the lease should be granted. For the reasons given above, I do not think that this question arises in the present case. That is because a failure by the lessor to comply with the requirements of clause 7 of any version of the COVID-19 Regulation will lead to a permanent prohibition on the lessor taking any prescribed action against the lessee for non-payment of rent while the lessee was an impacted lessee. The position may be different in cases where the lessor complies with clause 7 in good faith, but the parties to the impacted lease are unable to reach an agreement. 143 It is also unnecessary in this case for the Court to consider whether the NSW Civil and Administrative Tribunal would be empowered by s 72(1)(a) and (b) of the Retail Leases Act to determine the rent payable by an impacted lessee during the prescribed period: see Nolde's closing submissions pars 15 and 16. 1. In summary, I found in favour of Darzi's pleaded allegation that Nolde refused to renegotiate the rent under the Lease in accordance with the COVID-19 Regulation. Insofar as Nolde had claimed relief in its cross claim based upon the alleged failure by Darzi to pay the full rent for May and June 2020, I found that the claim was precluded by the COVID-19 Regulation. I also found that as Nolde had not complied with its obligation to negotiate the rent in good faith but had throughout the whole of the proceedings since the service of its cross claim prosecuted Darzi for breach of the lease, it was precluded from taking a prescribed action against Darzi in the future. That was essentially because the COVID-19 Regulation's objective would be thwarted if lessors could repudiate their obligation to negotiate in good faith with impacted lessees, and then later take proceedings against the lessees for breach of the strict terms of the lease after the proceedings ceased to be a prescribed action. 2. Furthermore, Nolde did not attempt before the end of the hearing and the delivery of the principal judgment to reverse its stance and to renegotiate with Darzi in good faith. 3. Although the COVID-19 Regulation precluded Nolde from taking any prescribed action against Darzi in the period before 1 July 2021, my findings concerning whether Darzi was an "impacted lessee" and whether Nolde had failed to negotiate in good faith, and what the consequences of that failure were, were relevant to my ultimate decision that the Court should not decline to exercise its discretion in favour of ordering specific performance of Nolde's agreement to grant a new Lease to Darzi on the ground asserted by Nolde that Darzi was in breach of the Lease. 4. After the delivery of the principal judgment on 28 June 2021 and after the repeal of the relevant COVID-19 regulation on 1 July 2021, Nolde's solicitors wrote a letter to Darzi's solicitors on 18 August 2021 in which they stated that Nolde wished to enter into discussions with Darzi to renegotiate in good faith the rent payable for the months of April and May 2020 under the Lease. The letter stated that, for the avoidance of doubt, it constituted a request to renegotiate the rent in accordance with clause 7 of the COVID-19 Regulation. 5. Darzi took the view that it was too late for Nolde to require Darzi to enter into a renegotiation to review the rent payable under the lease for the two months, but without prejudice to that position, by its solicitors' letter to the solicitors for Nolde dated 1 September 2021, Darzi offered to pay 50% of the shortfall in rent by instalments commencing on 1 January 2022. 6. Nolde's solicitors responded on 17 September 2021 by stating that Nolde rejected Darzi's offer, and that Nolde wished to continue to negotiate. On the same day, Nolde's solicitors requested extensive financial information from Darzi, apparently so as to be able to further conduct the negotiation. 7. On 20 October 2021, Darzi repeated its offer of 1 September 2021. 8. For the purposes of the present application, Darzi's position is that Nolde, having failed in its obligation to renegotiate the Lease in good faith before the repeal of the relevant COVID-19 Regulation, cannot seek to enliven the provisions of a repealed instrument in an attempt to remedy its failure to comply with the requirements while it was in force. Because Nolde terminated any renegotiation by issuing the second s 129 notice dated 17 July 2020, there was no renegotiation on foot at the time the relevant COVID-19 Regulation was repealed. 9. Darzi's submissions acknowledged the effect of s 88 of the Retail Leases Act 1994 (NSW), which provides: (1) The Retail and Other Commercial Leases (COVID-19 Regulation (No 3) 2020 continues to apply, despite the repeal of that regulation, to anything occurring in relation to a lease while the lease was an impacted lease within the meaning of that regulation. 1. However, Darzi submitted that, at the time the COVID-19 Regulation was repealed, there was no renegotiation occurring, and Nolde cannot now seek to retrospectively remedy its refusal to renegotiate the Lease. 2. Nolde's response to these submissions was to submit, first, that contrary to the Court's "tentative findings" in the principal judgment at J [139] and J [142], Nolde's failure in July 2020 to continue its negotiations with Darzi did not have the result that Nolde was permanently prohibited from either seeking to engage in further negotiations under clause 7 of the COVID-19 Regulation, or alternatively, having the dispute adjudicated by NCAT in accordance with clauses 8 and 9 of the COVID-19 Regulation. 3. Secondly, Nolde submitted that the delivery of the principal judgment has not affected Nolde's entitlement to engage clause 7 of the COVID-19 Regulation because s 88 of the Retail Leases Act has preserved the operation of the Regulation. Nolde submitted in par 29(a) of its written submissions that the renegotiation between Nolde and Darzi was "not concluded" before the expiry of the "prescribed period" so that it may now be continued. 4. Thirdly, Nolde submitted that the evidence establishes that, after the delivery of the primary judgment, Nolde sought to recommence negotiations with Darzi concerning the rent payable for the months of May and June 2020, and those negotiations have not yet resulted in any agreement between the parties. Nolde submitted that those negotiations are presently stalled because of Darzi's refusal to provide the further financial information requested by Nolde. Nolde wishes to avail itself of the opportunity, if the stalemate continues, to seek to have the dispute determined by NCAT under Part 8 of the Retail Leases Act, pursuant to clauses 8 and 9 of the Covid-19 Regulation. 5. Darzi's response to these submissions was essentially that it was not open for Nolde to assert that the renegotiation had "not concluded" in the face of the Court's finding at J [138] that Nolde's serving on Darzi of the second s 129 notice in practical terms brought the renegotiation to an abrupt halt. 6. Further, Darzi submitted that the appropriate forum for Nolde to dispute the Court's decision as to the consequences of Nolde's failure to renegotiate in good faith would be an appeal. Currently, the Court is concerned only with the form of an order to give effect to the principal judgment. 7. Finally, Darzi submitted that, as Nolde had terminated the renegotiation under the COVID-19 Regulation and had not sought to reinstate the renegotiation before the Regulation was repealed, s 88 of the Retail Leases Act did not preserve any right in Nolde to commence a new renegotiation. 8. The effect of Nolde's submission is that the COVID-19 regulatory regime permits a lessor to refuse at the time a lessee seeks to renegotiate the rent payable under the lease to do so in good faith, to contest the validity of the lease (or, in this case, the enforceability of an agreement to grant a further lease) on the basis that the lessee is in breach of the rent covenant, and then, after judgment is delivered finding that the lessor is legally precluded from asserting the breach of the lease because its conduct wrongfully terminated the renegotiation, to reinstitute a new negotiation to revise the rent covenant. 9. I accept Darzi's submission that, if Nolde wishes to challenge any determination made in the principal judgment that Nolde's conduct had terminated the renegotiation and that the effect of Nolde's refusal to renegotiate in good faith was that it was permanently precluded from seeking to engage the application of the now-repealed COVID-19 Regulation, the proper manner to do that is by prosecuting an appeal from my determination. 10. Furthermore, the parties were given full opportunity to follow the course of action that they considered to be appropriate in the implementation of the COVID-19 Regulation before the conclusion of the hearing, and the Court has determined the rights of the parties on the basis of their conduct as disclosed in the evidence. Nolde's position before the Court was that Darzi had failed to provide it with financial information to which it was entitled during the course of the renegotiation that occurred and that Nolde's service of the second s 129 notice was justified. The Court, by the conclusions reached in the principal judgment, has now finally determined the parties' rights in respect of these issues. Nolde should not now be permitted to require a new renegotiation that may have an outcome that is inconsistent with the result of these proceedings. 11. Nolde's submissions appear to assume that if it is entitled to reinstate the renegotiation of the rent payable under the Lease for May and June 2020 and the parties do not reach agreement, then the dispute can be resolved in the absence of a successful mediation by order made by NCAT under Part 8 of the Retail Leases Act. I refer to my discussion of this issue in Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 at [77]-[87] and observe that it is not clear how NCAT has the power to determine the amount of the rent reduction that should be made or the period over which deferred rent should be paid. 12. In my view the declaration sought by Darzi should be made, and accordingly I make the following orders: The Court: 1. Declares that the defendant is unable to take any "prescribed action" as defined in the Retail and Other Commercial Leases (COVID-19 Regulation) 2020 against the plaintiff in respect of any shortfall in rent that the plaintiff was otherwise obliged to pay to the defendant for the months of May and June 2020. 2. Orders the defendant to pay the plaintiff's costs of this application. ********** 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: 23 May 2022