MOTEKS PTY LTD v MATTHEWS PASTORAL CO PTY LIMITED SUPREME COURT OF NEW SOUTH WALES — COURT OF APPEAL 5 PRIESTLEY JA, MEAGHER JA and SHELLER JA 5 March 1998 [1998] NSWCA 287 LEASE — breach of a covenant of the lease — default resulting in notice of termination — misconstruction of the covenant argued. On appeal 15 The appellant submitted: 1. Windeyer J misconstrued covenant 3(e) by treating the motel business and the restaurant business as disjunctive. 2. On a proper reading of the covenant, there was one business being conducted on the premises consisting of two separate elements; motel accommodation and the restaurant. 3. As there were these two separate elements, the lessee proprietor could decide in what 20 proportions, of the business as a whole, these elements should be run. Held 1. When construing covenant 3(e), Windeyer J clearly treated the restaurant as one element of the whole business being conducted by the lessee; 2. Windeyer J correctly found that to comply with covenant 3(e), the lessee must 25 conduct a licensed restaurant as a requisite element of the overall business; and 3. that upon Windeyer J's construction of covenant 3(e) (and also that of the lessee's solicitor), upon the facts regarding the operation hours of the restaurant as found by Windeyer J, the lessee was in breach of the covenant. Priestley JA. The appellant filed a summons in the Equity Division claiming 30 a declaration that its lease of the Burvale Motor Inn in Albury had not been terminated and claiming further associated declarations. The summons was heard by Windeyer J who dismissed it on 25 June 1997. The appellant lessee then appealed. The reasons for Windeyer J's decision were as follows. 35 The lease was in a form registrable under the Real Property Act and was for a term of three years commencing on 3 August 1995 with options to renew. It incorporated a number of provisions appearing in an annexed schedule. This schedule contained a number of covenants by the lessee relating to the use of the demised premises. One of these was covenant 3(e) which provided that the lessee 40 covenanted: To carry on in and upon the demise premises the business of a motel and licensed restaurant and to keep open and use the premises for that purpose at all times during the term of this lease and to personally attend and in the case of the bodycorporate to ensure that its directors personally attend to the control, supervision and management of the 45 business at all times and to carry on and conduct the business of a motel and licensed restaurant at the demise premises in compliance with all statutes, regulations and by-laws. Windeyer J found, stating it in summary, that what happened about the conduct of the restaurant was that at the time when the lessee took possession of the 50 premises, the restaurant was open for business from 6.30 to 8.30pm each Monday to Thursday. For a time after the lessee began to run the business on the premises, 2 UNREPORTED JUDGMENTS the restaurant hours were extended to Friday and Saturday. This extension was not successful and from about March 1996 the opening times of the restaurant had been reduced and by early 1997 the stage had been reached when the restaurant was only opened when coach parties were booked into the motel, usually on a bed and breakfast basis, or when restaurant bookings of ten or more persons were made. Windeyer J said that on the evidence before him it was almost certain that after December 1996 no persons had been served in the restaurant other than coach parties. These were not regular and in the month preceding the hearing before Windeyer J had been few. The restaurant was seldom open. On 6 February 1997 the lessor gave notice of default alleging breaches of a number of covenants. The only one relied on by the lessor before Windeyer J was breach of covenant 3(e). As to this the notice relevantly stated: (1) The lessee is in breach of covenant 3(e) which requires the lessee to carry on in and upon the demise premises the business of a motel and licensed restaurant and to keep open and use the premises for that purpose at all times during the terms of this lease. The lessee has failedto carry on the business of a licensed restaurant at all times during the term of this lease. Then on 6 March 1997 a notice of termination was served. This referred to the notice of default and alleged that the lessee had failed to remedy the defaults stated in that notice, the first alleged failure being failure to 're-open the licensed restaurant'. The lessee's summons claiming a declaration that the lease had not been terminated was filed on 4 April 1997. (Further notices were served later but Windeyer J thought they were ineffective.) Windeyer J's decision was of the question raised by the summons of 4 April 1997, whether the notices of February and March 1997 had terminated the lease. Having made the findings on the evidence which I have already summarised and in light of those findings he said: On any reading of clause 3(e) of the lease it seems clear to me that this could not possibly be the carrying on of the business of a motel and a licensed restaurant and keeping these premises open for that purpose at all times during the terms of the lease. Obviously one does not expect a restaurant in a motel such as this to be open for twenty-four hours a day and perhaps one does not expect it to be open on Sundays but certainly where that is part of the business which the lessee covenants to carry on, it has not been carried on if for the most part the restaurant is shut and not available to motel guests or for that matter to members of the public who might wish to attend and dine at such a restaurant. Windeyer J then, after expressing some sympathy with the plight of the tenants — I note he had suggested the possibility of negotiation with the lessor — concluded: It follows in my view that it having been established that there is a breach of the covenant which has not been remedied andwhich will not be remedied, then as this is the plaintiff's claim for a declaration that there has been no default or breach, that claim must fail and the summons should therefore be dismissed with costs. In the appeal, the findings of fact which form part of the passage set out above commencing 'On any reading of clause 3(e)' were not the subject of criticism by the lessee. URJ MOTEKS PTY LTD v MATTHEWS PASTORAL CO PTY LIMITED (Priestley JA) 3 In this court the argument for the lessee has run along the following lines: first, it was said that there had been a misconstruction of the covenant 3(e) by Windeyer J in that he treated the motel business and the restaurant business as disjunctive, whereas the proper reading of the covenant required recognition that there was one business being conducted on the premises which had two separate elements, one relating to motel accommodation and the other to the restaurant business. The passages I have read from Windeyer J's reasons seem to me plainly enough to show that his Honour was construing covenant 3(e) in the way in which the lessee now contends he should have done. He clearly treated the restaurant as part of the whole business being conducted by the lessee pursuant to the terms of the lease. Therefore the first complaint about his Honour's judgment seems to me to fail. However, the remainder of the argument does not necessarily fail because of my opinion that the first step is not made out. The argument continued that on the basis that there were two separate elements of the business, it was a matter for the lessee proprietor of the business to decide in what proportions of the whole business these two separate elements should be run. On this view it would be open to the lessee to restrict the opening hours of the restaurant to practically zero, butnevertheless, it was said, so long as the restaurant was available to be used when the lessee thought it was commercially sensible to do so, then the overall business of motel and restaurant continued to be conducted within the terms of the lease. This argument seems to me to fail on the straightforward footing that it cannot accommodate Windeyer J's factual findings. One way of describing his findings was that the restaurant for very significant parts of the commercial periods during which a restaurant is normally run was not being conducted as a restaurant at all. This factual finding seems to me to lead to the result that against that background he was right to conclude 1. that the lessee was not carrying on the business of a motel and a licensed restaurant; 2. rather, the lessee was carrying on the business of a motel in circumstances where an element of the overall business which the lessee was required to carry on in order that that overall business would comply with what was required under the covenant was the conducting of a licensed restaurant; and 3. that that conducting of a licensed restaurant was not happening. At one stage there had been correspondence between the solicitors for the opposing parties in which the proper construction of covenant 3(e) was discussed and the solicitor for the lessee, in protesting against what he complained was a far too strict reading of the covenant, responded by saying that in his opinion the covenant would be read by a court to mean something like, 'At all reasonable hours having regard to the normal trading hours of a restaurant in a motel'. That seems to me to have been a reasonable construction of the covenant. Thus another reason for refusing the appeal and declining to accept theargument put forward by the lessee today is that upon the construction advanced as I have just read it, which seems to me to be a quite acceptable construction of covenant 3(e), the facts as found by Windeyer J show quite plainly that the lessee was not complying with that covenant at the time when the notice of default was served. My conclusion then is both for the reasons given by Windeyer J and by me in explaining why I do not accept the argument put forward today on behalf of the lessee, the judgment below was correct and the appeal should be dismissed. 4 UNREPORTED JUDGMENTS Meagher JA. I agree with what Priestley JA has said. I also agree with what Windeyer J said in the court below. Sheller JA. I also agree. 5 Priestley JA. The order of the Court then is that the appeal is dismissed with costs. Appeal dismissed with costs. 10 Counsel for the appellant: CJ STEVENS QC / SM KETTLE Solicitors for the appellant: POGSON CRONIN: LAVINGTON Counsel for the respondent: DJ WILLIAMS 15 Solicitors for the respondent: MULCAHYS: BRIGHTON VIC