CITATION: Wanice Pty Ltd v Bocove Pty Ltd [2003] NSWADT 17 DIVISION: Retail Leases Division FIRST APPLICANT Wanice Pty Ltd FIRST RESPONDENT PARTIES: Bocove Pty Ltd SECOND APPLICANT Bocove Pty Ltd SECOND RESPONDENT Wanice Pty Ltd FILE NUMBER: 025094; 025130 HEARING DATES: 11/11/2002 SUBMISSIONS CLOSED: 11/11/2002 DATE OF DECISION: 01/24/2003 BEFORE: Donald BG - Judicial Member APPLICATION: Claim for declaration of rights, obligations and liabilities under a lease - Claim for payment of money MATTER FOR DECISION: Principal LEGISLATION CITED : Retail Leases Act 1994 CASES CITED: Aspromonte Pty Ltd v Zagari [1999] NSW SC831 FIRST APPLICANT M Scheib, barrister SECOND APPLICANT REPRESENTATION: R Olsen, agent FIRST RESPONDENT R Olsen, agent SECOND RESPONDENT M Scheib ORDERS: The Lessee shall pay the Lessor the sum of $10,970.54 plus interest of $1,517.54 on 14 February 2003 i.e. a total of $12,488.08 Applications 1 This is, first, an application by a Lessor, Wanice Pty Ltd, to recover unpaid rent and outgoings from the Lessee, Bocove Pty Ltd under a registered Lease 6405462A executed on 17 May 1999 with an expressed commencement date of 8 April 1999 for a five year term with a five year option. 2 The matter was commenced in the Local Court on 7 May 2002 but transferred to this Tribunal pursuant to s.75 of the Retail Leases Act 1994, being received on 14 August 2002. 3 Secondly, the Lessee filed a cross-application on 8 November 2002 seeking a declaration concerning an alleged breach of s.9 of the Act (re failure to provide a prior copy of the lease), declarations concerning outgoings and further orders. 4 The matter was heard on 11 November 2002. During the hearing the Tribunal raised with the parties the implications of the Lessee having entered into possession of the premises on 16 March 1999 with the Disclosure Statement and the lease documentation following on or about 8 April 1999, the Lease being executed on or about 17 May 1999. The attention of the parties was drawn to the provisions of the Act including s.8 and the decision of the Supreme Court in Aspromonte Pty Ltd v Zagari [1999] NSW SC831. The Tribunal requested the parties to file further written submissions on that issue and other issues concerning the application of s.22, 27-29 of the Act to the claim for outgoings. The Lessor filed submissions in that regard on 12 December 2002, no submission being received from the Lessee. Findings of fact 5 Since 1995, the Lessee ran an established business as a film processor and photographic equipment retailer in the Town Hall Shopping Arcade Sydney. In early 1999 it decided to expand and seek another shop for lease. 6 Between 8 and 16 March 1999 a director of the Lessee, Mr Olson, had discussions with the agent for the Lessor concerning Shop 7/348-354 Sussex Street, Sydney, and on 16 March 1999 they agreed to a lease at a rental of $685 per week. 7 Mr Olson gave evidence that in the conversation on 16 March the Lessor's agent agreed that there were no extra payments due in addition to the rent which was agreed as "an all up rent of $685 per week". The Lessee supported this evidence with an affidavit of another person present during this conversation who confirmed Mr Olson asking 'No hidden extras, no surprises?' and the Lessor's agent saying 'Yes that's it, there's no more to pay.' 8 The Lessor led no specific evidence concerning that conversation but in cross-examination Mr Olson agreed that the conversation with the agent was concerning rent and when asked "Did he say 'all up'?', Mr Olson agreed that those words were "my words rather than his". 9 On the same day the lessee paid the agent $685 receipted by the agent on his business card as '…deposit for shop 7/348 Sussex St., Sydney for lease." The Lessee obtained keys a couple of days later and commenced fitting out the premises on or about 24 March 1999 incurring about $30,000 in fitout expenses. Trading commenced on or about 7 April 1999. 10 A Disclosure Statement and a form of Lease was provided to the Lessee at some time prior to 8 April 1999. The Disclosure Statement clearly and expressly listed outgoings to be paid by the Lessee including 100% of utilities, land tax, rates and "management costs", all of which were estimated in the Disclosure Statement together with a reference to garbage fees and costs incidental to grease trap and exhaust systems. 11 The Lessee's Disclosure Statement, signed by Mr Olson on 8 April 1999, acknowledged that the Lessee had sought independent legal advice and had received the Disclosure Statement and the copy of the Lease which also included as item 13 of its Schedule as outgoings 100% of:- a) local council rates and charges b) water, sewage and drainage charges c) land tax d) Strata Management Costs/ Strata Levey (sic) 12 The Lease stated the commencement date as 8 April 1999 and is dated as finally executed on 17 May 1999 being thereafter duly stamped and registered. The executed Lease clearly includes an obligation to pay the nominated outgoings and despite Mr Olson's evidence that he had relied on his lawyer to ensure the lease was only for the $685 rent, I find there is no question that the finally agreed position as between the parties included the outgoings. Whatever may have been said on 16 March, the Lessee was subsequently in receipt of legal advice and the Disclosure Statement, receipt of which was acknowledged by Mr Olson's signature, and the Lease signed between the parties, expressly included outgoings. If the lawyer has failed to explain the document to the Lessee, that is a matter between lawyer and client and cannot prejudice the lessor's proper reliance on the executed document 13 During August/September 1999 the Lessee received certain notices regarding unpaid invoices for Strata Title levies and other outgoings and in December 1999 Mr Olson of the Lessee met with the agent of the Lessor in which he contended the Lessee was being billed for outgoings it had not agreed to. In April 2000 the Lessee corresponded with the Lessor's agent seeking amendment of the Lease on the basis that the Lessee had not agreed to any amounts other than rent, in response to which the Lessor's agent referred the Lessee to the terms of the Lease. The parties remained in dispute as to outgoings during 2000. 14 The Lessee began to fall into arrears in relation to rent from March 2000 and letters of demand in that respect appeared to have been satisfied in relation to rent up to 8 February 2001 but thereafter rent remained unpaid. Outgoings were never paid based on the Lessee's position that it had never agreed to them. 15 The Lessee vacated the premises on 1 April 2001 citing unresolved problems that existed between the parties and referring to the correspondence concerning the disputed outgoings. The Lessor replied that the Lessee remained liable for rent and outgoings under the Lease. 16 By August 2001 the Lessor had found another tenant and negotiated a Deed of Surrender of Lease with the Lessee. Under the Deed, the Surrender Date was the date prior to the commencement of the new Lease namely 3 August 2001. Clause 4 of the Deed provided for a procedure on surrender to be concluded prior to the Surrender Date including f) The parties must make an appropriate adjustment of the rent and other moneys payable under the Lease as at the Surrender Date. 17 By clause 5 of the Deed 5. ARRANGEMENTS PENDING SURRENDER Until compliance with clause 4 the Lessee must continue to observe and perform the Lessee's Covenants (which were defined to be all the covenants in the provisions of the Lease to be performed and observed by the Lessee). The Deed was executed by both the Lessor and the Lessee. The Lessee did not seek independent legal advice concerning the Deed which was drawn by the Lessor's lawyers. 18 The Lessee having made no further payments as demanded since the rent payment up to 8 February 2001, a Statement of Liquidated Claim was filed in the Local Court for rent and outgoings with particulars thereof, together with claims for interest due on all items. 19 In the cross-application the Lessee not only challenges the claim for outgoings but also asserts that the intent of the Deed of Surrender was to excuse the Lessee from unpaid rent on the basis that the Lessor retained the fitout of the premises and that it would be an unjust enrichment for the Lessor to have the benefit of both. The Deed of Surrender contained no provision to that effect. 20 In this regard clause 12.3 of the Lease provides that, at the end of the Lease, the tenant must:- …have removed … anything that the tenant fixed to the property and have made good any damage caused by the removal. Anything not removed becomes the property of the landlord who can keep it or remove and dispose of it and charge to the tenant the cost of the removal, making good and disposal. The nature of the Lease 21 The first issue for determination is the nature of the Lease and its terms and conditions in circumstances where the Lessee had entered possession, incurred very significant costs in fitting out the premises and begun trading prior to the presentation of the Disclosure Statement, the Lessee's Disclosure Statement, the draft Lease and the ultimate execution of the Lease. 22 Section 8 of the Act provides:- 8. When the Lease is entered into (1) For the purposes of this Act, a retail shop lease is considered to have been entered into when a person enters into possession of the retail shop as lessee under the lease or begins to pay rent as lessee under the lease (whichever happens first). (2) However, if both parties execute the lease before the lessee enters into possession under the lease or begins to pay rent under the lease, the lease is considered to have been entered into as soon as both parties have executed the lease. Note: Therefore, if the lessee starts to pay rent as lessee or enters into possession as lessee, the lease is considered to have been entered into even if neither party has executed the lease at that time. Money paid in advance (purportedly as rent) as a deposit to secure premises for a proposed lease does not constitute rent paid as lessee under the lease. 23 Part 2 of the Act then sets out in s. 9 to 11A procedures that must be complied with and documents that must be provided, before a lease is "entered into". Under s. 9, penalty provisions apply for failure to provide a copy of the lease "as soon as the person enters into negotiations with the prospective lessee concerning the lease'. By s.11 there is also a penalty for failure to provide a Disclosure Statement "at least 7 days before a retail shop lease is entered into". In this case these documents were provided at some time within the 22 day period between the original agreement and the date on which the Disclosure Statement was signed as received. 24 The Act is very difficult to understand in its application to the situation which happened here, and which unfortunately commonly occurs, namely the parties take major commercial action in advance of final lease documentation. It is obviously dangerous for parties to important commercial relationships, which all retail shop leases are, to be so foolish as to incur substantial cost before the lease terms are carefully recorded in an executed document in respect of which they have both received competent legal advice. If the Act were to prevent parties doing so it may substantially reduce the work of this Tribunal and the courts under the Act. However the Act does not do this and s. 8(2), in the Note, expressly contemplates that a lessee can start "to pay rent as lessee or enter into possession as lessee … even if neither party has executed the lease at that time"; most confusingly it then goes on to say that "money paid in advance (purportedly as rent) as a deposit to secure premises for the proposed lease does not constitute rent". 25 The problem is that it is very difficult to apply this legislation in determining the legal relations between parties when possession of the premises is permitted and taken prior to signing a complete lease. The difficulty is illustrated by the decision of the Supreme Court in Aspromonte in which the Court concluded that there can be two leases, one a statutory lease arising by virtue of the Act pursuant to s.8 which cannot, by virtue of s.7 of the Act be replaced by the subsequently executed Lease, the other a written lease. Section 7 provides :- 7 This Act overrides leases This Act operates despite the provisions of a lease. A provision of a lease is void to the extent that the provision is inconsistent with a provision of this Act. A provision of any agreement or arrangement between the parties to a lease is void to the extent that the provision would be void if it were in the lease. 26 I have great difficulty understanding the reasoning in this decision in circumstances specifically contemplated by the Act namely where the entry into possession occurs before the execution of the Lease. I do not think it is correct and I do not propose to follow the decision. 27 In my opinion the Act contemplates that there is only one lease relationship between the parties, even where possession has been entered into prior to due execution of a document. The terms of the lease will include its own written terms as ultimately signed between the parties but subject to the wide range of provisions compulsorily included in any such lease by the Act, which by s.7 override any inconsistent written provisions. 28 As the statutory provisions protect the parties and override subsequent written provisions, the purpose of s.8 is to ensure that the parties have the benefit of the statute from the moment their lease relationship commences even if a lease document is not immediately signed. But in my opinion this does not mean there are two leases, one a statutory lease created by s.8 and one a written lease. That would be artificial and confusing; I do not think the Act intends that result. 29 The next complexity is the effect of the penalty provisions concerning failure to provide the lease upon entering negotiations and failure to provide the Disclosure Statement within seven days before 'entering into the lease', such date now being determined pursuant to s. 8 in a case such as this as at the date of entry into possession. 30 Do these penalty provisions avoid the lease subsequently signed between the parties? The Act does not expressly so provide and indeed in the case of the failure to provide the Disclosure Statement (which it must be noted has to include the lease document) what the Act does say in s.11is that:- (2) If a lessee was not given a disclosure statement as required by subsection (1) [ ie 7 days before an entry into possession where there is no signed lease ] or if the disclosure statement that was given to the lessee was incomplete or contained information that at the time it was given was materially false or misleading, the lessee may terminate the lease by notice in writing to the lessor at any time within 6 months after the lease was entered into, unless subsection (3) prevents termination. (3) The lessee cannot terminate the lease under this section on the ground that the disclosure statement is incomplete or contains information that is materially false or misleading if: (a) the lessor has acted honestly and reasonably and ought reasonably to be excused for the failure concerned, and (b) the lessee is in substantially as good a position as the lessee would have been if the failure had not occurred. This appears to me specifically contrary to any suggestion that the penalty nature of this provision renders the Lease in some way void ab initio or otherwise unenforceable except pursuant to s.11(2), (3). Section11(3) of the Act only limits the right of termination in the case of incomplete or misleading information in certain circumstances. This quite clearly has the result that a failure to have provided a Disclosure Statement together with the Lease 7 days before the Lease is entered into (i.e. in this case upon the entry into possession pursuant to s.8) carries with it an absolute right to terminate if the Lessee so chooses. 31 For these reasons I am of the opinion that in this case, notwithstanding that the Lessee entered into possession prior to the provision of the Lease and the Disclosure Statement, thus triggering the commencement of the lease relationship for the purposes of the Act, the subsequent execution of a lease between the parties, in relation to which the Lessee received legal advice, constitutes the lease between the parties subject to the inclusion of the provisions of the Act in the Lease. That Lease includes an obligation to pay outgoings, subject again to the Act, ss 22, 27-29. 32 In this case, the problem as to whether payment of outgoings was a term of the Lease having become apparent within the 6 months from commencement, the Lessee did not choose to exercise its right to terminate the Lease and accordingly in my view that Lease stands. The fact that there was a disincentive in that regard due to the sunk costs of the fit out is a result of the Lessee having chosen to act before lease documentation. If before signing the Lease, the Lessee had contested the outgoing provision, there may well have been a dispute as to the terms of the lease then applying, but that is not the case before the Tribunal. 33 Accordingly in determining the right of the Lessor to recover amounts claimed pursuant to the Lease, the relevant provisions are to be found in the executed Lease read in conjunction with the Act. Effect of the Deed of Surrender 34 In my opinion the Deed of Surrender is clear in its terms, particularly clauses 4 and 5 referred to above, that while any obligation on the Lessee to make payments after the Surrender Date ceases, any payments properly claimable pursuant to the provisions of the Lease up to that date are due and payable by the Lessee. I do not accept there is any basis for a claim that the value of the fit-out was agreed to be set off against rent due to the Surrender Date. Nor do I agree that there is an unjust enrichment of the Lessor because the agreed terms of the Lease expressly cover the situation. Obligations in respect of outgoings 35 The overriding provisions of the Act in ss.22, 27-29 specify:- 22 Recovery of outgoings from lessee (1) The lessee under a retail shop lease is not liable to pay any amount to the lessor in respect of any outgoings except in accordance with provisions of the lease that specify: (a) the outgoings that are to be regarded as recoverable, and (b) how the amount of those outgoings will be determined and how they will be apportioned to the lessee, and (c) how those outgoings or any part of them may be recovered by the lessor from the lessee. 27 Estimates and expenditure statement of outgoings to be provided by lessor A retail shop lease is taken to include provision to the following effect: (a) The lessor must give the lessee a written estimate of the outgoings to which the lessee contributes under the lease, itemising those outgoings under the item descriptions used in the list of outgoings in the form of lessor's disclosure statement set out in Part 1 of the form contained in Schedule 2. (b) The estimate of outgoings must be given to the lessee in respect of each accounting period of the lessor during the term of the lease and must be given before the lease is entered into and thereafter during the term of the lease at least 1 month before the commencement of the accounting period concerned. (c) The lessor must make a written expenditure statement available for examination by the lessee detailing all expenditure by the lessor on account of outgoings to which the lessee contributes, itemising those outgoings under the item descriptions used in the list of outgoings in the form of lessor's disclosure statement set out in Part 1 of the form contained in Schedule 2. (d) The expenditure statement must be made available at least twice in each of the lessor's accounting periods during the term of the lease (once in relation to expenditure during the first 6 months of each such accounting period and once in relation to expenditure during the second 6 months of each such accounting period), and in each case must be made available within 1 month after the end of the 6 month period to which it relates. 28 Lessor to provide statement and report on outgoings A retail shop lease is taken to include provision to the following effect: (a) The lessor must give the lessee a written statement (an "outgoings statement") that details all expenditure by the lessor in each accounting period of the lessor during the term of the lease on account of outgoings to which the lessee is required to contribute. (b) If the shop is in a retail shopping centre, the outgoings statement must include a statement of the current gross lettable area of the shopping centre and details of any material change in that gross lettable area during the period to which the outgoings statement relates. (c) The outgoings statement is to be prepared in accordance with relevant principles and disclosure requirements of applicable accounting standards made by the Australian Accounting Standards Board, as in force from time to time. (d) The outgoings statement is to be given to the lessee within 3 months after the end of the accounting period to which it relates. (e) The outgoings statement is to be accompanied by a report (an "auditor's report") on the statement prepared by a registered company auditor (within the meaning of the Corporations Act 2001 of the Commonwealth). (f) The auditor's report is to include a statement by the auditor as to whether or not the outgoings statement correctly states the expenditure by the lessor during the accounting period concerned in respect of outgoings to which the lessee is required to contribute, and as to whether or not the total amount of estimated outgoings for that period (as shown in the estimate of outgoings given to the lessee) exceeded the total actual expenditure by the lessor in respect of those outgoings during that period. (g) The outgoings statement may be a composite statement (that is, it may relate to more than one lessee) so long as each lessee to which it relates is able to ascertain from the statement the information required by paragraph (a) that is relevant to that lessee. (h) The outgoings statement need not be accompanied by an auditor's report if the statement does not relate to any outgoings other than land tax, water, sewerage and drainage rates and charges, local council rates and charges and insurance, and it is accompanied by copies of assessments, invoices, receipts or other proof of payment in respect of all expenditure by the lessor as referred to in paragraph (a). 36 By s. 22 there is no liability on the Lessee to pay outgoings except "in accordance with the provisions of the lease" that specify certain matters. Sections 27 and 28 specify that "a retail shop lease is taken to include provision to the following effect … " as set out above and accordingly those provisions are applicable for the purposes of s.22. 37 The Lessor in its later written submissions concedes that the provisions of s.27 and 28 have not been complied with in this case but argues that this does not preclude recovery of the outgoings because the Lessee now has ample evidence of the details of the outgoings from invoices. 38 In my opinion that is quite contrary to the effect of s.22 of the Act and accordingly in my opinion the Lessor is not entitled to recover the outgoings in respect of Council rates, water rates and strata levies as claimed. Even if there were any doubt as to land tax, water and sewage rates and Council rates because the Lessee now has assessment notices and invoices, an auditor's report is specifically required for management fees or strata levies and has not been provided. In any event, I conclude that s.22 read with ss. 27-28 is a complete answer to the claim that the Lessee has an obligation to pay any outgoings. Rent 39 The rent unpaid recoverable from the Lessee is only up to the Surrender Date under the Deed which was re-calculated by the Lessor at the request of the Tribunal to be the sum of $19,875.54. 40 The Lessor's lawyer at the hearing informed the Tribunal that the security deposit of $8,905 had not yet been applied to outstanding amounts claimed and that accordingly should be deducted from them. 41 In the result the Lessee is obliged to pay to the Lessor $10,970.54. I propose to allow the lessee 21 days from this decision to pay this amount. 42 Interest is claimed by the Lessor from the Surrender Date at 12% however any such interest is governed by s.72A of the Act being interest on an amount for a period between when the cause of action arose under the Deed and when the order of the Tribunal takes effect namely 14 February 2003. The interest rate is accordingly 9% for a period of 561 days namely $1,517.54. Order The Lessee shall pay the Lessor the sum of $10,970.54 plus interest of $1,517.54 on 14 February 2003 i.e. a total of $12,488.08. 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.