CITATION: Calleja -v- Malli [2001] NSWADT 20 DIVISION: Retail Leases Division APPLICANT PARTIES: Agostino Calleja RESPONDENT Jasbir Singh Malli FILE NUMBER: 005022 HEARING DATES: 05/10/2000 06/10/2000 SUBMISSIONS CLOSED: 12/08/2000 DATE OF DECISION: 02/13/2001 BEFORE: Fox R - Judicial Member APPLICATION: Claim for payment of money - Claim for relief against forfeiture - Claim for surrender of possession of premises - Jurisdiction MATTER FOR DECISION: Principal matter LEGISLATION CITED : Retail Leases Act 1994 CASES CITED: APPLICANT REPRESENTATION: G Kennedy, barrister RESPONDENT J Burrell, solicitor ORDERS: 1. The Lease be and is hereby forfeited, Applicants entitled to immediate possession of the shop and storeroom.; 2. The Respondent to pay Applicants' costs of attending at hearing on 6 October (but not the cost of preparing for that day's hearing) and the Applicants' subsequent costs of making written submissions- all on a party/party basis.; 3. Respondent's application dismissed. 1 In these proceedings the applicant landlords seek orders forfeiting the respondent tenant's Lease and directing the payment of rent arrears, and the Respondent by way of cross application seeks an order for relief against forfeiture and for damages to compensate for the destruction of the good will of the tenant's convenience store business, and an order that the term of the Lease be extended for a period of twelve months. 2 The premises in question are a residence and attached corner store at 72 Maloney Street, Eastlakes, the whole of the building dating from the 1940s, and apparently always used and occupied as a shop and attached residence. The Applicants purchased the premises as an income earning investment late in 1996, with an existing tenant who subsequently thereafter vacated. 3 As far as I am able to gather from the quite confusing and perhaps marginally relevant evidence, there was a subsequent tenant, but, by 1998, that tenant had vacated and a Mr Marabaanie took occupation. At the time of this changeover, Mr Calleja, who has some building skills, installed new industrial grade lino to the floor. The shop, at that time, had fitted wooden shelves around the walls, and an old display serving counter of some kind, which had previously been refrigerated, but no longer functioned as such. 4 Mr Marabaanie installed several air conditioning units in upper window apertures, but such installation left unglazed gaps between the units and the window frames. 5 In January of 1999 the Respondent entered into an agreement for the purchase of the business for $8,000.00 from Mr Marabaanie, such price being apportioned as follows: $5,000.00 stock in trade on a walk-in walk-out basis, $1,000.00 goodwill $1,000.00 fixtures, $1,000.00 plant and fittings and chattels. 6 The contract contained no inventory to identify the "fixtures, plant and fittings and chattels". 7 As the hearing progressed it became clear that I must decide which of these items belong to the applicant landlords, and which belong to the tenant. 8 The contract was subject to the grant of a Lease by the Applicants to the Respondent, and that was entered into on 8 February, 1999. The document was in standard Law Society approved form, and was for a term of approximately 2 ½ years, to 11 August 2001, with a three year option of renewal thereafter. 9 The Disclosure Statement to the Lease, in the box designed to identify "finishes, fixtures, fittings and equipment to be provided by the Lessor, instead of identifying these, simply said: - "yes" and the next box:- "Lessee to pay for the finishes, fixtures, equipment and services to be provided by the Lessor" also said: - "yes". I can make no sense of this second response but I accept the first as a statement of fact that the shelves, as affixed to the walls, were the landlord's. That certainly was, according to the Mallis, the view taken by the vendor to them and I am satisfied that this is so, despite the Mr Calleja's very clear view to the contrary. 10 I am satisfied that the counter and the air conditioning units, although possibly affixed to the premises, are in fact tenant's fixtures, and are Malli's. These, in my view were the items of plant, fittings, chattels and fixtures referred to in the contract of purchase, in addition to a three-door drinks fridge. 11 I note that Mr Malli vehemently denied that he had purchased these other items, but, having observed him in the witness box for some time, I do not accept him as a witness of candour. It seems fair to point out Mr Calleja's evidence at times also left me to wonder at his candour, although, in the absence of other corroboration, in a contest between Mr Malli and Mr Calleja, Mr Calleja's evidence would have to be preferred. 12 The ownership of the shelves, and the other items, becomes germane when the effect of the Botany Council's Food Establishment Inspection Report is considered later in these reasons. 13 The Lease of the premises, in accordance with the recommendation of learned commentators on Section 79 of the Retail Leases Act, did not seek to differentiate between the retail part of the premises and the residential part, despite the fact that my jurisdiction does not extend to the residential rooms. Although one can see the logic of such an approach, especially in view of the fact that the Residential Tenancies Act virtually fully prescribes all the terms and conditions of occupation of the residential part, in case of dispute, the absence of a distinction does appear to give rise to some practical difficulties. It would have been preferable had the Lease identified that part of the premises which was the retail section, and that part which was the residential section, and, it would also have been extremely useful for the parties to have apportioned the rental (and even perhaps the bond, which I suppose preferably would have been in two parts, the residential part of which to be dealt with in accordance with the Residential Tenancies Act). 14 In the absence of these matters having been agreed initially by contract (so to speak), I directed the parties to have a valuation carried out which identified the separate rental value of the residential part and the rental value of the shop together with a separate storeroom which is inside the residence, prior to the commencement of the hearing proper. The end result was that 39.58% of the rental value of the premises is retail and 60.42% of the rental is residential. This meant that my jurisdiction in relation to the rent was limited to $150.00 per week up to 12 April 1999 and thereafter, in accordance with the rent increase provisions in the Lease, the retail rental increased to $157.90 per week. 15 The Applicants conceded that the initial claim for unpaid rent (being for the rental for the whole of the premises) was misconceived, and in fact reduced the claim to $157.90 per week, from 23 August 1999. (The rent increase could not be claimed from 12 August for reasons will appear later). 16 Mr Malli took occupation on or about 8 February and traded (apparently very profitably) until 15 April 1999. As at 15 April the stock level, as purchased only from funds generated by trade, had increased from a value of $5,000.00 to $10,000.00. On 15 April the premises were damaged by the catastrophic hailstorm which struck the southern coastal parts of Sydney. The relevant provisions of the Lease operated to lead the Applicants' insurer to reach agreement with the Respondent to reduce the rent to $190.00 per week until repairs could be effected. 17 The Respondent traded on, although, apparently, with difficulties, and for reduced hours. 18 I am satisfied from the evidence that at some time during the period immediately after the hailstorm damage, relations between the Applicant and Mr Calleja became hostile to the point of being properly described as "poisonous". The cause of this unfortunate circumstance was not in evidence before me, but its results certainly were. 19 In order to effect the necessary repairs, the shop was closed on 10 August 1999 and stripped of its stock and remained so until 23 August. During this period all roof and ceiling repairs were effected (the ceiling was in fact fully re-sheeted) and the painting and associated finishing was achieved by 23 August, but the Respondent did not start to trade again. 20 It is necessary at this point to "back track" to 9 April 1999- six days before the hail storm, when Mr Charker on behalf of Botany Council, carried out the standard inspection of the premises, pursuant to the Food Act 1989 and issued a report which was critical of the premises in the following detail: - 1/ "Generally make comply with the Council's food premises code" (Mr Charker's evidence was that these requirements are well known to licensed builders) 2/ "Defective flooring in the shop to be repaired or renewed. If the existing timber floor is retained ensure the floor and joists are free from defect and that the flooring boards are without holes or damage, tightly jointed and finished to a smooth even surface". 3/ The third requirement was that the vinyl floor covering be replaced, the new vinyl to have "welded joints laid over a solid base or approved underlay. The intersection of the walls with the floors and exposed points to be coved…." 4/ "Provide sill glazing around two air conditioning units at the front of the shop". 5/ "Remove existing rough uneven and poorly fitted timber shelving from the shop, all new shelves to be constructed of or covered with a smooth impervious material capable of being easily cleaned. Contact paper is not suitable. Shelving to be bracketed at least 25mm from the wall". 6/ Replace the rusty counter. 7/ Replace hand basin, install hot and cold water. 21 The report was handed to Mrs Malli at the end of the inspection. Mr Calleja apparently lived nearby and called at the shop every day to buy his milk and papers (and personally collect the rent) and so the report was given to him on the following day. I accept Mrs Malli's evidence that the Applicant reacted in a less than rational manner, asserting that the premises had been used as a shop for more than 25 years, and that there was nothing wrong with them. 22 In any event, Mother Nature intervened, and everyone (including the Council) concentrated on hailstorm damage over the next month or two. However it should be noted that the Mallis, despite the notice and despite the hail damage, traded on, until they were forced to close the shop for the hail damage repairs. 23 Mr Charker carried out his second inspection on 30 August 1999 and issued a second report which on the one hand was given to Mrs Malli in the spot and on the other resulted in the issue of a "Notice of Intention to Issue an Order" on the same day, a document which was posted to both the Applicants at their residence, and the Respondent at the shop. The notice allowed the parties 14 days to make representations to Council to raise objections (and perhaps) propose alternatives to the indicated repairs. The actual words were "Advise why you think the Order should not be given, comment on the terms of the Order; comment on the period for compliance with the Order". 24 It was Mr Charker's evidence that as nothing had been heard (or done) by 1 October 1999, a formal order was issued (and served) requiring the work to be done. 25 What I find surprising is not the fact that the Mallis continued to trade after the first notice, but in view of that fact and the very clear invitation to "negotiate", they did not recommence trading after the second notice. 26 I am satisfied that the requirement to repair the floor was a major issue at the time, and it is one which occupied a substantial amount of hearing time. The evidence establishes that as at late September 2000 the floor and its coverings was best described as a shambles, having been stripped of its lino, and being much the worse for wear. But the state of the floor as at September 2000 is not a relevant issue, the condition of the floor in August 1999 is my concern, and I am satisfied that as at August of 1999 the Mallis had traded on and from the floor for a period of 5 months, and had made no complaint about it (other than to give the Council's notice to the Applicant) and I do not accept that they considered it to be unsafe at that time. 27 In this regard I note the evidence of Mr Vella, Real Estate Agent, who inspected the premises on 23 August 1999, as a preliminary to his taking over the rental management of the premises. He was clear (and I accept) that the floor appeared sound and that it had (perhaps relatively) new lino on it. 28 I find that the underlying floor, as at August 1999, although it may have been reaching the end of its useful life, was safe for the purposes of trade, and was not "damaged" within the terms of Section 36 of the Retail Leases Act. 29 I am also satisfied that the lino on the floor did not comply with the Council's requirements, and was in need of replacement, or at least, reinstallation by an expert at welding the joints, and effecting the necessary coving. I surmise that, had the lino repair or replacement been contemplated in August or September of 1999, it would have been sensible to fully inspect the underlying floor (and I conclude from the observations of the experts in September of 2000) that at least re-sheeting of the floor would have been indicated. The re-sheeting of the floor would have been to the Applicants' account, although the installation of vinyl underlay and vinyl would not have been. No doubt the replacement of all of these items in late August 1999 or early September 1999 would have been most convenient, because the shop had been stripped of its stock and so installation would not necessitate another interruption to trade. 30 In fact the Mallis wrote to Mr Vella early in September 1999, enclosing the Notice and demanding that all work required in the Notice be effected within 7 days. 31 Mr Vella responded by letter of 3 September saying that all the matters in the list were the tenant's responsibility, save the flooring which the Lessor would resolve. This part of the letter was perhaps not as felicitously phrased as might have been desirable, but I am satisfied that its intent was clear enough- the Lessor would inspect and attend to the floor. 32 At about this time the Respondents appear to have decided not to pay the rent, and a standoff ensued which continues virtually to this day:- no rent, no repairs, no trade. 33 The critical issue to be resolved is identified in the letter written by the Respondent's then solicitors Ramrahkah Jenkins on 7 October 1999… "Who should remedy the matters set out in the (Council's) notice?"…… Regrettably for the Respondent, that solicitor wrongly suggested that the onus lay on the Applicant. The law is, of course, that the matters raised by the Council were, in the main, matters of fit-out and use, and these are the tenant's responsibility to resolve. 34 The Respondent seems to have assumed that the Applicants were obliged to supply the premises fully fit and fitted out for use as a convenience store, an assumption which is entirely contrary to the usual. I have no doubt that such an obligation is possible to be negotiated between landlord and tenant, but such a situation would require much clearer words than the mere use of the "yes" found in the two Disclosure Schedule boxes. I note that an addendum to the Lease, containing what might be termed the "special conditions", stated in part, "The Lessor makes no warranty as to the suitability of the premises for the purpose for which the Lessee intends to use same. The Lessee shall be responsible for obtaining any and all necessary consents required for the use of the premises for that intended by it….." 35 I am satisfied that it was the premises which were let to the Respondent, not the business. 36 I suppose that there would have been no dispute had the Respondent's investigations and enquiries prior to settlement of the business purchase included the simple precaution of asking the Council to carry out the various inspections which were carried out in April. This process would have flushed out the full list of items in need of repair, and as a consequence, who owned what, and who was obliged to bear the cost of rectifying them. Perhaps the truth of the Respondent's problem is found in Ramrahkah Jenkins' letter, in the observation:- "prior to the Lease being transferred [sic] to our client he was not informed that he would have to carry out substantial repairs". 37 I find that the shelves formed part of that which the Lessor supplied, a conclusion for which I find corroboration from the general appearance of the premises internally and the evidence of the assumption of the parties to the business sale agreement as well as the words in the Disclosure Schedule. That does not mean that the Lessor was obliged to supply them in fit and proper order for the use of the premises as a corner store. 38 Again, there can be no dispute about the fabric of the floor and its supporting timbers etc, that responsibility lies with the landlord, but that does not apply to the vinyl floor covering, that is a matter for the tenant, even in these circumstances where the landlord supplied some such material with the premises. 39 The Applicant seems to have sadly misconstrued the intent of the second Notice. As I understand the process which all Councils apply, and the evidence of Mr Charker certainly confirmed this, the request for objections and all observations from the tenant and the owner is to allow a negotiation of both the method of compliance with the requirement, and the length of time before it is effected. The Mallis, in September of 1999, properly advised, should have consulted with Mr Charker, in relation to the general effect of the notice, and either negotiated the length of time, or a different method of compliance. No doubt, had that been done, the Applicant, would have been drawn into these discussions, and the responsibility for the underlying floor and the shelving would have been identified. 40 Had the Lessee met with Mr Charker, and had all negotiations with the Lessor failed, then the Mallis would have been well advised to do that which they did a year later- i.e. obtain quotations for the work and serve them on the Lessor, and if the Lessor still failed to respond meaningfully, then that would have been a matter properly brought to this Tribunal by the Respondent. 41 Had all of these actions been taken properly and promptly by the Mallis, they might have been justified in the intervening period in not paying the rent, but as I said during the hearing, refusal to pay rent strikes at the very heart of the Lease, and is a course fraught with dangers. It seems to me to be absolutely clear that the Respondent, perhaps through bad advice, sometime in September or October of 1999, abandoned the very thing which he had previously paid for, being the goodwill of the business. 42 It is also relevant to observe that the Lease contained the usual obligation requiring the Lessee to trade during normal business hours, an obligation which the Mallis appear to have ignored, despite the very clear reminder given them by Mr Vella in his September 3rd letter:- "The commercial content of the premise has been ready for your occupation since the completion of the hailstorm repairs on 23rd August 1999. The 'landlord' is concerned that you have not commenced operation. Lease clause 6.1.2 advises that you must open for business at times usual for businesses of your kind to operate. The work requested by Council, the payment of rent, and the commencement of your commercial use require your urgent attention". 43 I am satisfied that there was no reason why, after negotiations with Mr Charker in early September, the premises could not have properly recommenced trading, the necessary refurbishment, mainly at the Lessee's expense, but partly at the Lessors', to take place as and when opportunities arose over the ensuing months. 44 As it is, I am satisfied that, despite the initial obdurate reaction of Mr Calleja in relation to the Council's requirements and despite the fact that the Applicants probably would have had to bear the cost of the underlying floor, the primary responsibility for compliance with the Notice lay with the Lessee. As he failed to take steps to protect himself, I cannot see how he can properly ask this Tribunal to come to his aid. The (ill advised) failure to take protective steps (instead of simply refusing to pay rent) resulted in the term being liable to forfeiture at the behest of the Lessor, and when the Lessor took those steps, that ended the right of occupancy. 45 It also follows that at law the Respondent has no right to the damages claimed and I cannot see how Section 36 of the Retail Leases Act can be called in aid. True it is that fair wear and tear can eventually result in "damage"- as, for instance, when the flooring gives way to the point where it is not safe to walk upon, but that situation did not (and does not to this day) obtain at 72 Maloney Street. 46 I take it to be plain from some of my comments above that I hold little sympathy for the position taken by the Applicants, they too should have been ready to meet with the Council but, perhaps better advised than Mr Malli, they did properly offer (on 3 September 1999) to take the necessary preliminary steps to inspect and if necessary repair the floorboards. I am also satisfied that the Lessors' responsibility did not end there- no sensible response having been received from the tenant, the Lessors were obliged to seek to mitigate the loss by making arrangements to gain access and then taking all further steps to inspect and if necessary repair the floorboards to the point where Mr Charker approved of them, and similarly perhaps, with the shelves, either repair and paint, or alternatively replace after negotiating some recompense from the Lessee for the "upgrade", as is perhaps foreshadowed in the Disclosure Schedule. Mr Calleja would have then been entitled to stand back and say:- "Well I have done my bit- now you do yours, and you start paying rent". 47 These or similar steps not having been taken by the Lessors, I also do not believe that they can ask the Tribunal to do for them that which they did not do for themselves and so no order for the payment of rental arrears is appropriate. 48 Mr Burrell, on behalf of the Respondent, argued that the Lease had, by the Council's order, been frustrated, but that is an entirely unsupportable position. The matters raised by the Council were capable of resolution, and quite readily. I am quite satisfied that the prime cause of the whole difficulty was the Respondent's insistence that all of the matters raised in the Notice were for the Lessor to resolve, when plainly that was not so. 49 The only other matter which I need to address, is the matter of costs. I have jurisdiction to award costs, but only if there are special circumstances, and I am satisfied that the offer of Lease made by the Lessor at the commencement of the second day's hearing was both proper (and perhaps even generous) and amounts to special circumstances. I note that the Respondent did not completely reject the offer at that time, but sought to further negotiate it to terms even more generous, an approach, which in my view at the time (and on mature consideration still was) so inappropriate that it amounted to a full rejection. Thus, Applicants' costs of the last day's hearing (but not the costs of preparing for it) and the costs of making written submissions, all on a party/party basis, must be borne by the Respondent. ORDERS 50 1. The Lease be and is hereby forfeited, Applicants entitled to immediate possession of the shop and storeroom. 2. The Respondent to pay Applicants' costs of attending at hearing on 6 October (but not the cost of preparing for that day's hearing) and the Applicants' subsequent costs of making written submissions- all on a party/party basis. 3. Respondent's application dismissed. 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.