CITATION: Basily & anor v Crichton & anor [2007] NSWADT 288 DIVISION: Retail Leases Division APPLICANTS Nevine Basily And Nady Basily t/a Chantina Restaurant PARTIES: RESPONDENTS Gregory Robert Scott Crichton and Kim Gail Crichton FILE NUMBER: 075084 HEARING DATES: On the papers SUBMISSIONS CLOSED: 20 July 2007 DATE OF DECISION: 12 December 2007 BEFORE: Higgins S - Judicial Member CATCHWORDS: Claim for payment of money MATTER FOR DECISION: Principal matter LEGISLATION CITED : Retail Leases Act 1994 Retail Leases Amendment Act 2005 CASES CITED: Smith & Co (Sales Agency) Pty Ltd v Leather.com Pty Ltd [2006] NSWADT 71 APPLICANTS Nevine Basily REPRESENTATION: RESPONDENTs A Hatsatouris, solicitor ORDERS: 1. Respondents to pay Applicants a sum of $2,030.75; 2. Within 7 days of the publication of these reasons for decision Applicants to file and serve further evidence and submissions in regard to its claim for interest and within a further 7 days Respondents to file and serve evidence and submissions in reply; 3. The matter, in regard to Applicant's claim for interest is adjourned for further directions on 23 January 2008 at 3.00 PM. REASONS FOR DECISION Introduction 1 This is an application by Nevine and Nady Basily ('Basily'), the lessees of premises at 183 Maroubra Road, Maroubra ('the premises') seeking orders for the payment of moneys pursuant to s.72(1)(a) of the Retail Leases Act 1994 ('the Act'). Basily seeks payment from the respondent lessors and owners of the premises, Gregory and Kim Crichton ('Crichton'). 2 Basily used the premises to conduct a restaurant business. In February 2007, Basily sold the business and a new lease was entered into between the purchasers of the business and Crichton. In granting the new lease to the purchasers, Crichton demanded that Basily pay: (a) 'agents fees' of $2,030.75 to the Crichton's agent, Raine & Horne, Maroubra; and (b) 'solicitors costs' of $1,320.00 to the Crichton's solicitor, Patrick Hargrave & Co. 3 Basily paid the amount demanded by Crichton on the sale of their business to the new purchasers and now seeks orders that Crichton repay these amounts as they allege they were amounts that Crichton was not entitled to demand and which they were not required to pay. In addition to seeking repayment of these amounts, Basily seeks payment of interest on the security bond they had paid to Crichton. Crichton repaid the security bond on 20 June 2007. However, the amount that was paid did not include any interest. The Lease and the term of the Lease 4 As the demands for payment are alleged to have arisen by reason of agreement between the parties, the first matter to be determined is the nature of the agreement and its terms. These terms are the subject to the provisions of the Act. 5 Basily provided a copy of the lease agreement between the parties. That agreement stated that the lease commenced on 18 December 2003 and ended on 17 December 2006. The lease agreement contained no option to renew the lease. In written submissions, Crichton asserted that after 17 December 2006 Basily continued to occupy the premises on the basis of a monthly holding over, pursuant to cl.12.4.1 of Annexure B of the lease agreement. Basily does not dispute this assertion. 6 The chronology attached to the written submissions of Crichton state that on 24 May 2002, the previous owner of the premises, Lily Crichton, consented to the assignment of an existing lease of the premises to Basily. Lily Crichton died on 25 November 2003 and the premises were transferred to the current lessors, Crichton. The lease provided to the tribunal by Basily was a renewal of the earlier lease. And according to the chronology of Crichton, on 15 December 2006, Basily negotiated a 'new lease' and this was submitted and prepared by Crichton. On 9 January 2007 Basily's solicitor advised Crichton's solicitor that they had sold the business and requested that the lease documentation be reissued once Crichton had accepted the purchaser. Again this chronology is not disputed by Basily. 7 On the basis of the material before the tribunal I find that the lease, the subject of this application, is the lease as agreed between Basily and Crichton on 15 December 2006. A copy of that lease has not been provided but the tribunal has assumed, for the purpose of this application, its terms were similar to those contained in the lease that has been provided. 8 Furthermore, I find that this lease agreement was not terminated when Crichton issued the purchaser of Basily's business with a new lease document. There is no evidence before the tribunal to this effect. As indicated in the chronology a new lease document was prepared at the request of Basily, presumably this was done so that the new lessee was named as lessee in the document and not Basily. It is clear from the documentation and the correspondence between the parties at the relevant time that Basily sought and obtained an assignment of their renewed lease to the purchasers of their business. There was no further renewal of the lease to the purchasers of the business. 9 Accordingly, ss.39 and 40 of the Act apply in regard to that assignment. Section 39(2) of the Act preserves the right of a lessor to require payment of a reasonable sum in respect of any legal or other expense in connection with giving its consent to the assignment and s.40 prohibits a lessor from seeking or accepting 'key money' in regard to that consent. These are discussed more fully below. 10 On the material before the tribunal I also find that other than the renewed lease there was no further contractual agreement between the parties. The Agent's Fees 11 Where there has been an assignment of a lease, s.39(2) of the Act relevantly provides as follows: 39 Grounds on which consent to assignment can be withheld … (2) This section does not preclude any right of the lessor to require payment of a reasonable sum in respect of any legal or other expenses incurred in connection with the consent, so long as the lessor has substantiated those expenses to the lessee at the request of the lessee. 12 As mentioned above, s.40 of the Act prohibits a lessor from seeking or accepting payment of 'key-money' in connection with the granting of consent to the assignment of the lease. It relevantly provides as follow: 40 Key-money on assignment prohibited 1) A person must not, as lessor or on behalf of the lessor, seek or accept the payment of key-money in connection with the granting of consent to the assignment of a retail shop lease and any provision of a retail shop lease is void to the extent that it requires or has the effect of requiring the payment of key-money in connection with the granting of consent to the assignment of the lease. 2) … 3) This section does not preclude any right of the lessor to require payment of a reasonable sum in respect of any legal or other expenses incurred in connection with such a consent. The lessee is entitled to have those expenses substantiated by the lessor before making such a payment. 4) … 13 The term 'key-money' is defined in s.3 of the Act to mean as follows: 'Key-Money' means any money paid to or at the direction of a lessor or lessor's agent, by way of a premium, non-repayable bond or otherwise, or any benefit that is conferred on or at the direction of a lessor or lessor's agent, in connection with the granting, renewing, extension or assignment of a lease (and a reference in this Act to the payment of 'key-money' includes a reference to the conferral of any such benefit). 14 In the written submissions Crichton said that the basis on which agent's fees were requested was set out in a letter dated 12 February 2007 from the their solicitor to the Basily's solicitor. The relevant paragraph stated as follows: "We note that the average monthly rent inclusive of GST and outgoings is $4,061.57 per calendar month. Our client would require this amount to be paid for the month commencing 17 December 2006 and 17 January 2007 and in addition as the Lessor's costs of approving this tenancy a further sum of $4,061.57 payable to Raine & Horne." 15 The amount of agent's fees was subsequently halved to the amount the amount that is now claimed. Notwithstanding the reduction it is clear from the above that this fee was calculated on the basis of the then monthly rental payable under the lease and did not represent what Crichton had incurred in connection with their consent to the assignment. On this basis I find that the agents fees were in effect 'key-money' in that it was money paid at the direction of Crichton in connection with the granting of the assignment of the lease. A demand and acceptance of such a payment is an offence, but for the purpose of this application it is also a payment that Basily was not required to make and should be refunded by Crichton. 16 Crichton contended that Basily agreed to make the payment. In my opinion, even if there was such an agreement, which Basily denies, it would be an agreement that could not be enforced as it would be unlawful by reason of s.40 of the Act. Solicitors' costs 17 Basily asserts that Crichton's demand that they pay their solicitors' costs was in the form of 'key money' which was prohibited under s.45 of the Act. That section prohibits a person, as lessor or on behalf of a lessor, from seeking or accepting the payment of 'key-money' or lease preparation expenses in connection with renewal of extension of a retail shop lease. In my opinion, for the reasons stated above, s.45 of the Act has no application as the dispute arises out of the assignment of the lease and not the renewal of the lease to Basily or the new purchasers. 18 In the written submissions Crichton said that the requested solicitor's costs of sum of $1,320.00 was based on an invoice dated 19 February 2007 from Crichton's solicitor, Mr A. Hatsatouris of Patrick Hargrave & Co. That invoice contained the following description of the costs subject of that invoice: 'TO OUR COSTS of and incidental to acting for the Lessor in relation to approval of proposed Purchase of your business as new Lessee; or attendances upon the Lessor; Lessor's Agent; the proposed new Lessee's solicitors requesting information on Solicitors attending to obtain a Lessor's consent to grant of new Lease and to acting for the Lessor generally in relation to the proposed consent; ascertaining details of, and amounts required to finalise arrears of rental outstanding.' 19 In my opinion, having regard to the terms of the invoice, I am satisfied that the costs are costs that fall within s.39(2) of the Act in that they are legal costs incurred by Crichton in connection with their consent to the assignment of the lease. The new lease document was also a document that Basily requested Crichton to prepare and on this basis it was a cost that Crichton incurred in connection with their consent to the assignment of the lease. 20 Accordingly, for the reasons set out above and the fact that Basily did not challenge the reasonableness of these fees, their application in regard to the solicitor's costs must fail. Interest on security bond money 21 There is no dispute that in 2002 Basily paid an amount of $3,997.60 as a security bond to the then lessor, Lily Crichton. Basily asserts it was paid on 12 April 2002 but Crichton asserts it was paid on 24 May 2002. Crichton states that this security bond was released by the agent to the former lessor, Lily Crichton 22 Nor is it disputed that on 17 December 2003, Basily paid an additional amount of $1,216.50 towards the security bond, making a total of $5,214.17 that was held by way of security. As mentioned above, it is the interest on this security that Basily is seeking to recover. 23 At the time Basily paid the security bond amounts these were governed by s.47 of the Act which provided as follows: 47 Security deposits 1) A retail shop lease is taken to include provision to the following effect: (a) Money paid by the lessee to the lessor as security for the performance of the lessee's obligations under the lease must be held by the lessor on behalf of the lessee in an account bearing interest. (b) The lessor must account to the lessee for interest earned on such a deposit but the lessor is entitled to retain any such interest and deal with it as money paid by the lessee to the lessor to form part of the security deposit concerned. (c) The lessor is not entitled to unreasonably refuse to accept a guarantee from a bank, building society or credit union in satisfaction of any requirement to provide security in the form of a deposit, bond or third party guarantee for the performance of the lessee's obligations under the lease. 2) This section does not prevent the lessor appropriating security moneys in accordance with any lawful entitlement to do so. 24 That section was repealed as of 1 January 2006 when a new scheme for the deposit of security bonds was inserted into the Act by the Retail Leases Amendment Act 2005 (see Part 2A of the Act). Although this scheme became applicable to the security deposits already held with lessors or their agent, it did not alter the operation of s.47 on those leases that had been entered into prior to its repeal. That is, the lease between Basily and Lily Crichton and the lease between Basily and Crichton included a term that required Lily Crichton and Crichton to place the Basily security deposits into an interest bearing account for which they were required to account for. A failure by Lily Crichton and Crichton to hold Basily's security deposit in such an account and to account for the interest is a breach of the lease, giving rise to a claim in damages. 25 Under the new scheme introduced into the Act by the Retail Leases Amendment Act 2005, security deposits are to be paid to the Director-General of the Department of State and Regional Development or a person appointed by the Director-General for this purpose. Section 16C provides that a lessor is to deposit, within 20 days of receipt, all security bonds it receives on or after the commencement of the new scheme with the Director General. Section 16D provides for the deposit of security bonds that were deposited with a lessor pursuant to a retail lease prior to the commencement of the scheme. Where a lessor held a security bond at the commencement of the new scheme, the lessor was required to deposit that security bond with the Director-General within three months after the commencement of the new scheme. A failure by a lessor to comply with the requirements of s.16C and 16D is an offence. Section 16H makes provision for the payment of the bond on application by the lessor or the lessee either jointly or alone. Where an application is lodged pursuant to S.16G. Section 16M makes provision for the payment of interest where the Director-General makes payment pursuant to Section 16H. As Crichton did not deposit the Basily security bond with the Director-General as required it is unnecessary to consider the provisions of the new scheme any further. 26 Basily has claimed 4.5% compound interest in regard to the interest earned on the security deposits and that interest is claimed up until 20 June 2006 when the security bond was repaid. Basily has not provided any evidence in support of this amount. However, I note that in the decision of Smith & Co (Sales Agency) Pty Ltd v Leather.com Pty Ltd [2006] NSWADT 71 at [36] Judicial Member Fox took judicial notice that interest bearing deposits were earning 4.5% between December 2000 and December 2002. 27 Crichton's written submissions do not dispute that interest was payable. They argue that during the relevant time interest was 0.01% per annum on transaction and savings accounts and they provided a copy from the Commonwealth Bank Personal Interest Rates and Fees web site to support their contention. On the basis of this rate of interest and the circumstances surrounding the Basily tenancy, Crichton argues that no interest should be paid. As to the circumstances surrounding the tenancy, in its chronology Crichton identified various defaults by Basily in regard to the payment of rent and agreements between the parties to forgo a portion of the amount that was owing. In my opinion, these circumstances are not relevant in determining the damages in regard to the failure to account for interest on the security deposits. Had there been evidence to the effect that Crichton had used the interest component of the security bond to offset the amount of rent owing this would have been a relevant factor for determining the amount of damages as a result of a breach of s.47 of the Act. 28 Nor do I accept the interest rate put forward by Crichton. These are for transactions and savings accounts which are accounts that can be operated daily and which have always had a low interest rate. This type of account is not that which is envisaged in s.47 of the Act. What was envisaged was term deposit accounts and the tribunal has not been provided with any evidence as to the interest rates on such accounts during the relevant time, particularly the interest rates of such accounts with the Crichton's bank. 29 On the basis that Crichton does not dispute that there was an obligation to deposit the Basily's security bond into an interest bearing account, I find that Crichton has breached the terms of the lease and the damages that flow from that breach is the interest that would have been earned had the money been deposited into an interest bearing account. There is, however, as mentioned above, insufficient material before the tribunal to calculate this amount. The onus is on Basily to prove the amount of damage it has suffered. In this application Basily has failed to satisfy the tribunal as to the rate of interest that is applicable but has otherwise established its loss and on this basis it is appropriate for the tribunal to receive further submissions in regard to the quantum of loss. However, the tribunal encourages the parties to attempt to seek agreement on the amount in question to avoid further delays and costs. Directions should however be made failing agreement between the parties. Conclusion 30 For the reasons set out above, the tribunal finds that : (a) Crichton was not entitled to demand that Basily pay agent's fees of $2,030.75 and Basily was not required to pay these fees. (b) Crichton's demand that Basily pay solicitor costs of $1,320.00 were costs that were incurred by Crichton in connection with their consent to the assignment of the lease to the purchasers of the Basily's business. (c) Crichton breached the lease in failing to comply with s.47 of the Act. Basily is entitled to damages being the amount of interest that would have been earned had Crichton deposited the security bonds paid by Basily into an interest bearing deposit account. The Tribunal orders: 1. Crichton to pay Basily a sum of $2,030.75. 2. Within 7 days of the publication of these reasons for decision Basily to file and serve further evidence and submissions in regard to its claim for interest and within a further 7 days Crichton to file and serve evidence and submissions in reply. 3. The matter, in regard to Basily's claim for interest is adjourned for further directions on 23 January 2008 at 3.00 PM. 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. 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