Step Footwear Pty Ltd v Accord Pacific Land Pty Ltd [2005] NSWADT 191

CITATION: Step Footwear Pty Ltd v Accord Pacific Land Pty Ltd [2005] NSWADT 191 DIVISION: Retail Leases Division APPLICANT PARTIES: Step Footwear Pty Ltd RESPONDENT Accord Pacific Land Pty Ltd FILE NUMBER: 045072 HEARING DATES: 23-25/05/2005, 9/06/2005 & 5/07/2005 SUBMISSIONS CLOSED: 07/05/2005 DATE OF DECISION: 08/15/2005

BEFORE: Donald BG - Judicial Member APPLICATION: Claim for declaration of rights, obligations and liabilities under a lease MATTER FOR DECISION: Principal matter LEGISLATION CITED : Retail Leases Act 1994 CASES CITED: Trust Company of Australia Ltd (Stockland Property Management Ltd) v Skiwing Pty Ltd trading as Cafe Tiffany's (No 4) (RLD) [2005] NSWADTAP 32 APPLICANT REPRESENTATION: J Trebeck, Barrister RESPONDENT A Tudehope, Barrister ORDERS: Application dismissed. No order as to costs

REASONS FOR DECISION 1 On the night of 18 June 2001 a fire broke out at 722 George Street, Sydney, one of a strip of shops from 712-722 George Street, all owned by Accord Pacific Land Pty Ltd, the Lessor. The shops were managed for the Lessor by Mr Albert Hui of Ray White City South. The shops are a single storey strip with a common ceiling void as a result of which smoke from the fire in 722 George Street permeated all the other shops. The fire was not the fault of either the Lessee or the Lessor. 2 At the time the other shops were closed except for 712-714 where Mr Pen-Hsiang Sun, a proprietor of their Lessee, Step Footwear Pty Ltd, was working late. The doors of 712-714 were open, a factor said to have drawn the smoke more intensively through those two premises prior to the fire being put out. All shops in the strip were affected and clean up works were undertaken. At least by the end of August 2001, shops 714A-718A had resumed trading (Ex. 2, DW1 p. 21; Ex. 15). Shops 712-714 remained closed so Mr Hui called a meeting to determine why. 3 Following that meeting Mr Hui wrote to the Lessee (Ex.2, DW1, p.55) denying responsibility to remediate the premises and requiring the Lessee to recommence paying rent. 4 On 31 August 2001 the solicitor for the Lessee (Ex. 2, DW1, p. 58) then raised the legal claim that the Lessor remained liable to carry out further repair works. That letter read: Under clause 16 and 22 (a) of the Retail Lease, the tenant is only responsible for the indemnity and repairs to the Premises for damage caused by either themselves or a person on the Premises with Tenant's authority. Furthermore clause 22 (b) states that the Landlord shall carry out without delay all reasonable repairs necessary for the Tenant's ordinary use and occupation of the premises, having regard to the condition of the Premises at the Commencement of the Lease. As such, it is your client's responsibility to ensure that the repairs to the premises are completed. 5 The Lessor in its letter of 17 October 2001 asserted that in any event it had fulfilled any obligation it may have had to reinstate the premises and required that rent recommence from the 1 September 2001, (Ex.2, DW1, p.73). 6 The clauses of the Lease (Ex.A, Annex. L) relied on by the parties are:- 22(b)…the Landlord shall carry out without delay all reasonable repairs necessary for the Tenant's ordinary use and occupation of the premises, having regard to the condition of the premises at the commencement of the lease. 27. Where there has been a breach of any of the conditions of the lease by either party, the other party shall take all reasonable steps to minimise any resultant loss or damage. 7 The Lessee says that the clean up, particularly of the ceiling and the ceiling void including of the air conditioning unit and ducting in the ceiling, was the Lessor's responsibility under the Lease; the Lessor has failed in that responsibility to reinstate causing the Lessee to be unable to continue trading and to have suffered substantial loss. The Lessee declined to pay rent and resume trading until the Lessor completed the clean up to an acceptable standard. 8 The Lessor says the fire was not its fault, that it was not liable to re-instate and that whatever its liability was in relation to the fire and the reinstatement of the premises, it had fully acquitted that responsibility. The Lessor ultimately terminated the Lease for the Lessee's failure to trade and pay rent and applied the security deposit bond to unpaid rent which the Lessee says was not justified. 9 The Lessee applies to the Tribunal claiming damages for the alleged failure of the Lessor and for return of the security deposit. 10 The Tribunal having considered all the evidence and the submissions considers that the applicant Lessee's claim is not sustained either as to liability or as to damages. The leased 'premises'. 11 I read cl 22(b) to mean that the Lessor's obligation extends to the leased premises and not to what is contained within those premises. Accordingly it is essential first to determine what constituted the leased 'premises'. If that was the shell of shops 712-714 and the suspended tile ceiling and air conditioning unit and ducting were the contents of that shell, the Lessor was not responsible to repair them after the fire. If the premises were the area only beneath the ceiling, then the ceiling and its contents were the responsibility of the Lessor. 12 Unfortunately the Lease is not precise on the issue so it is necessary to have regard to surrounding factors in deciding what was the intention of the parties. 13 As the Lease replaced an existing lease effectively between the same parties, the first relevant surrounding factor is the first lease. This was entered into from 20 March 1995 (Ex. A, Annex. B) by Mr Sun, also a proprietor of the applicant Lessee. It was a five year lease from the predecessor in title to the respondent Lessor. Step Footwear then entered into a Sub-Lease from Mr Sun for the premises and at all relevant times it was the trading entity for the businesses carried on in the premises. 14 The first lease is also not precise on whether the premises were the shop shell including the ceiling void or whether it was the space below the suspended ceiling constructed of ceiling tiles. Nor does the evidence establish who installed the suspended ceiling in the premises although the first Lease does provide for a fit-out period for use of the premises as a shoe shop with a provision for compensation for the fit-out if the Lessor demolished and sold the building. (Ex. A, Annexs. A and B). The Leasing Advice at the time indicates a cost of fit-out exceeding $20,000. 15 Nor is it clear from the first lease who installed and owned the air conditioning system in the ceiling 16 In March 2000 the five year term expired at which time Step Footwear was in discussion with the Lessor's agent as to splitting the shops into two businesses, an internet café at 712 and continuing the shoe shop business in 714. The agent agreed and Step Footwear obtained Development Approval from Sydney City Council on 14 August 2000 (Ex. A, Annex. I). The DA is silent on the nature of any ceiling requirement for either of the shops. 17 A new Lease was entered into on 15 November 2000 between the Lessor and Step Footwear directly as Lessee for one year from 1 September 2000 to 31 August 2001 (Ex. A, Annex. L) with a one-year option which was exercised by the Lessee in May 2001 (Ex. A, Annex. P). 18 The Lease again simply defined the premises as "712-714 George Street, Sydney" and similarly was not specific as to the internal space leased or the responsibility for the suspended tile ceiling and the air conditioning in the ceiling void. 19 In February 2001, Sydney City Council issued a formal notice to the Lessee (not the Lessor) concerning the fitness of 712 as a café (Ex. A, Annex. M) stating that an Order was intended to be issued which would include a requirement that:- The ceiling of the preparation/serving area shall be constructed of set plaster or other rigid smooth-faced material and painted with a washable paint of a light colour along with other conditions. 20 However a further inspection report of April 2001 (Ex. A, Annex. M) noted that the premises were 'satisfactory' despite the fact that the plaster ceiling was not installed in place of the tile ceiling. 21 In June 2001 the Lessee had the air-conditioning in the shops inspected (Ex. A, Annex. N) for the purpose of obtaining a certificate to the Council that the ventilation was adequate, in particular for the cooking area. The air-conditioning was duly certified and although the report does not specify who owned the unit, it is clear from this report that it is a unit serving only Shops 712-714. It is also clear that the inspection and report proceeded on the basis that the air conditioning was the Lessee's responsibility. 22 In October 2000 the Lessee insured the contents including stock of 712 against "fire and perils" with CIC Insurance and in March 2001 it renewed its existing contents and stock policy for 714 with QBE, again in respect of fire (Ex. 2, DW1 pp. 1-8). 23 In the subsequent insurance claims after the fire submitted by the Lessee on both policies, the Lessee appears to have proceeded on the basis that its contents policies covered both the suspended ceilings and the ceiling void. 24 Certainly the quotes by cleaners to the loss adjusters for the Lessee's insurers (Ex. 3, JL1 pp. 12-13, JL2 pp. 6-7) contain the following quotes respectively for 712 and 714:- 712 Structure: To clean and de-contaminate all walls, windows, floors, lights, ceiling tiles and one wall divider. This will also include the application of a sealer in the dead air space above the ceiling tiles to impound any air-borne contaminants that are present. Air conditioning: To clean, de-contaminate, sterilise, and duct seal air-conditioning system throughout the affected area. 714 Structure: To clean and de-contaminate in preparation for painting. All walls, ceiling tiles and the ceiling of the dead air space above the ceiling tiles to impound any air borne contaminants that are present. 25 Tax invoices of 12/7/2001 and 31/7/2001 for that work appear to have been duly paid by the insurers (Ex. 3, JL1, p. 61/JL 2, p. 22). In relation to the invoice for 714 it should also be noted that it included the extra comment "To clean and de-contaminate air conditioning 50% of unit that services Step Furniture (sic) and next door." 26 In the course of the dispute the shops were inspected by Mr Marcel Weyland, an architect and building expert. Referring to the air conditioning unit in the first version of his report to the Lessee's solicitor in his letter of 10 September 2001 (Ex.2, DW1, p59), he noted 'Though apparently installed by the lessee, it is probably classed as a fixture.' While this is obviously indirect evidence and not of itself determinative, it does support a conclusion that the air conditioning unit and ducting were part of the contents owned by the Lessee. 27 The Lessee's claim under its insurance policy for 714 also included a claim for the replacement of the damaged ceiling tiles (Ex. 3, JL2, p. 33/38) which was in fact paid although Mr Sun, the proprietor of the Lessee, acknowledged in evidence that he did not in fact spend the money for that purpose but treated it as funds of the Lessee company. A similar claim in respect of the ceiling tiles was made for 712 (see Ex. 3, JL1, p. 64) and while there does not appear to be specific evidence of payment of this claim it is likely that it was paid and the funds were similarly treated by Mr Sun on behalf of the Lessee, namely not being spent for that purpose but being retained by the company. 28 All of this evidence satisfies the Tribunal that as between the parties, the Lease and its insurances were managed on the basis that the Lessee was responsible for the contents of the premises including the suspended ceiling and the air-conditioning unit and ducting within the ceiling void. The history of the matter suggests this, the arrangements with Sydney City Council and also the claims upon the insurer following the fire are all consistent with that position. Accordingly the Tribunal is satisfied the evidence establishes that the intention of the parties was that the leased premises in this Lease were the entire internal space including the ceiling void. 29 On that basis the Tribunal determines that the Lessor did not carry the obligation under cl 22(b) of the Lease to re-instate and clean the interior of the premises as a result of the fire. Section 36 Retail Leases Act 30 Did the Lessor have that obligation under s.36 of the Retail Leases Act which provides:- 36 Damaged premises (1) A retail shop lease is taken to provide for the following if the shop or the building of which the shop forms part is damaged: (a) The lessee is not liable to pay rent, or any amount payable to the lessor in respect of outgoings or other charges, that is attributable to any period during which the shop cannot be used under the lease or is inaccessible due to that damage. (b) If the shop is still useable under the lease but its useability is diminished due to the damage, the lessee's liability for rent and any amount in respect of outgoings attributable to any period during which useability is diminished is reduced in proportion to the reduction in useability caused by the damage. (c) If the lessor notifies the lessee in writing that the lessor considers that the damage is such as to make its repair impracticable or undesirable, the lessor or the lessee may terminate the lease by giving not less than 7 days notice in writing to the other and no compensation is payable in respect of that termination. (d) If the lessor fails to repair the damage within a reasonable time after the lessee requests the lessor in writing to do so, the lessee may terminate the lease by giving not less than 7 days notice in writing of termination to the lessor. (e) Paragraphs (a)–(d) do not affect any right of the lessor to recover damages from the lessee in respect of any damage or destruction to which those paragraphs apply. (2) A retail shop lease must not contain any provision the effect of which is to limit any liability of a party to the lease to pay compensation to another party to the lease in respect of damage to the shop or the building of which the shop forms part. 31 Section 7 of the Act also 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. 32 In my opinion, these provisions do not operate to change the way a particular lease allocates responsibility for the condition of premises and contents. They do have the effect that, subject to such allocation, while any inaccessability continues to be the result of the damage in question, in this case the fire, rent need not be paid or is proportionately reduced. 33 In this case, applying my interpretation of this Lease, until the Lessee has had a reasonable opportunity to remediate the interior of the premises pursuant to its responsibility under the Lease, rent is not payable. However the Lessor did not seek rent until after 1 September 2001 by which time there had been ample time for the Lessee, given the insurance back-up and funds available to it for replacing the ceiling, to have remediated the damage. 34 Even if s. 36 (1) (d) applies to a failure of a lessor to repair damage under notice where a lease places the responsibility for the contents of a shop which are fittings or fixtures on the lessee, which I doubt, it does not create an obligation to repair but only permits termination of the lease. The Lessee in this case did not seek to terminate the Lease. 35 Accordingly, I do not consider that s. 36 changes my initial conclusion that the Lessor was not, under this Lease, liable to clean the ceiling void, the air conditioning unit and ducting and the ceiling tiles. The extent of the cleaning 36 If that determination were to be overturned for any reason, it is necessary to decide whether, if the Lessor did have an obligation under cl 22(b), it had breached that obligation having regard also to the effect of cl 27 and the obligation of the lessee to minimise the impact of any breach. In my opinion, the answer is 'no'. 37 There was extensive evidence concerning the cleaning of the premises after the fire. 38 From the evidence referred to above in relation to the Lessee's insurance claim, it is clear that substantial cleaning work was carried out by the cleaning contractor paid for by the insurers. There are fact two final releases for that work acknowledged by the Lessee (Ex. 3, JL1, p. 114, JL2, p. 38). 39 There is also evidence that the interior of the premises were painted as part of the Lessee's insurance claim (Ex. 3, JL1, p. 104-110) although the precise date on which that took place is not clear. 40 Further, the Lessor itself engaged a contractor to provide services of "cleaning of smoke-damaged walls panels, ceiling, in the roof space, floors, light fittings, front windows and aluminium frames', which work was carried out in both 712 and 714 (Ex. 2, DW1, pp. 109-110). That work included the cleaning of the ceiling tiles. 41 After the 20 August 2001 meeting called by Mr Hui of Ray White for the Lessor with representatives of both the Lessee and the Lessor to discuss why shops 712-714 were still not trading, the Lessor while not accepting any liability in that regard undertook to arrange further cleaning and painting of walls and ceiling tiles. (Ex.2, DW1, p.55) 42 A painter's invoice received by the Lessor on 3 September 2001 states that the shops were painted including the ceiling panels. (Ex. 2, DW1, p. 101). This would not appear to have included the space in the ceiling void. 43 The principal evidence the Lessee relies on to establish that the Lessor had failed to ensure the premises were adequately cleaned was from three sources. 44 Firstly, there was Mr Sun's own opinion that the shops remained dirty and smelly, (Ex. A, pars 41, 49). Mr Sun also gave evidence that his two shops were particularly contaminated because he was the only person there at the time of the fire and left his doors open which had the affect of drawing much more smoke through his premises by way of escape than would have applied to the other premises. This was not supported by any particular expert evidence but it does stand for what it is worth. However it just means that perhaps further cleaning would have been necessary in comparison with the other shops. 45 Secondly, Mr Simon Liu a former employee in the shop gave evidence that even by the end of January 2002 when assisting the Lessee to vacate the premises, "I could not remain inside the shops more than 30 minutes without feeling sick and uncomfortable." (Ex. C). 46 Thirdly, the report of Mr Marcel Weyland, first produced on 10 September 2001 (Ex. 2, DW1, p. 59) found that:- 1.01 The premises are in reasonably clean condition. Some walls, which apparently had been smoke stained have been re-painted to an acceptable standard…. 1.02 On entering the premises one is immediately conscious of the odour associated with soot and burning. 1.03 …There was no accumulation of soot to be seen [in the ceiling space]… The cleaning however was not thorough: soot deposits still exist on "hard to get at items" such as coils of air-conditioning ducts and wiring: some attempt to clean the upper surface of the panels is evident but falling well short of thorough. Many areas are still completely black… 2.01 On any common sense view the odour mentioned above precludes the commercial use of the premises, especially where food is to be prepared and consumed. 47 Accordingly in Mr Weyland's opinion as an experienced architect and builder familiar with the prevailing ANZFA food safety standard, shop 712 was not in a satisfactory condition for the purpose of carrying on the food business. However he importantly observed that the suspended ceiling in any event did not comply with the relevant standard which requires a sealed ceiling. He also observed that City Council requirements include this however he observes "It is possible that this was overlooked by the Council when the DA was granted or that special circumstances existed and may still exist for Council to waive this requirement." It would appear obvious that Mr Weyland was not made aware that as at April the Council had indeed issued a report which did not insist upon this requirement. 48 Even accepting that Mr Weyland's report does support a conclusion that further cleaning and remedial work needed to be done to make the premises fit for occupation, he did not form an opinion on the likely condition of the premises if the ceiling tiles in both shops had been completely replaced using the insurance payment and in the process of that, some further surface cleaning was undertaken in the ceiling void. Nor did he form an opinion of the extent of odour if a sealed ceiling had been installed in compliance with the standard and usual Council regulations. 49 Against this evidence the Lessor points to the fact that by the time Mr Weyland was making his inspection in September, and by January when Mr Liu was making his second visit, at least five of the remaining eight shops had resumed trading. In so far as Mr Weyland's report referred to the need to block the intrusion of other contaminants from the ceiling void beyond shops 712 and 714 even after cleaning had taken place if a suspended ceiling was retained, it is reasonable to infer that any such level of contamination would not have been sufficient to prevent trading as that was happening in the very shops from which the so-called further contamination would come. 50 My conclusion in considering all of this evidence is that even if the Lessor did bear the primary responsibility for reinstating the interior of the shops and for the clean up, it had either taken substantial steps in that regard through its own contractors or was aware that as a result of the cleaning paid for by the Lessee's insurers, substantial works has been undertaken. 51 Even if it was to some degree in breach of clause 22(b), nevertheless the Lessee had a positive obligation under clause 27 itself to take reasonable steps in the event of any such breach to minimise any result of loss or damage. The Lessee had the funds to replace the ceiling tiles and it is reasonable to infer that the only remaining area that required further cleaning in that regard was the ceiling void, which it is reasonable to infer could have been done at the time of replacement of the tiles at relatively low cost having regard to the invoices submitted by other cleaners for the entire shops. 52 Referring again to s.36, I do not think that section applies to change this analysis as it does not set up the obligation as between the parties; it only provides remedies in certain situations. 53 Accordingly I find that in so far as it may be held, contrary to my above decision, that the Lessor had a liability to ensure the cleaning of the interior of the premises following the fire over which it had no control, then it had done so at least to an extent which, even if inadequate, attracted the tenant's obligation in the circumstances under clause 27. Accordingly I cannot conclude that any failure of the Lessor could be considered the cause of any loss by the Lessee. Damages 54 Even if both the above findings were to be overturned, the next question would be whether the Lessee has proven that damage flowed from the failure of the Lessor to reinstate the premises. 55 The major head of damages first claimed as at the commencement of the hearing was for the trading loss in the internet café section of the premises for a particular beverage known as "Pearl Tea", said to have become very popular recently in the Haymarket area. That claim was quantified at the level of $110,334 and the Lessee produced considerable evidence both documentary (including an expert accounting report, Ex.A, attaching Exhibit 10-1) and oral evidence. This was responded to by the Lessor with expert evidence (Ex.5) and in cross examination. However that claim was abandoned during the hearing. As I read the Lessee's final submissions, the small items claimed for expired food stock and certain cup seals for the tea were also not pressed. 56 The next major head of damage is the loss incurred in selling shoes held in warehouse storage at prices below the cost price, quantified at $48,652. (The Lessee acknowledges that the stock in the store at the time of the fire was the subject of insurance; the claim for this was abandoned at the opening of the hearing). This claim is for stock held in the warehouse which it claims could not be sold at even cost recovery because of the unavailability of this particular outlet. 57 The evidence clearly established that for a substantial number of years up to 2001, Step Footwear conducted both a wholesale and retail shoe business with a warehouse first in Mascot and then in Sussex Street, Sydney. The evidence also established that Step Footwear and its wholesale business dealt with a substantial number of wholesale customers as well as selling at retail through its 714 George Street store. 58 The evidence also established that Mr Sun had interests in what appear to be related companies carrying on business at those same addresses including Kick Start Footwear Pty Ltd and Sun Forward Pty Ltd, which carried on business at various times during the period 1995-2001 (Ex. 3, Annexs. A, C and D). At least Kick Start was at times a supplier to Step Footwear. 59 The tax returns for Step Footwear (Ex. 7) show an operating loss for each of the financial years 1998-2001 in excess of $30,000 in each year. The figures from those tax returns relating to goods acquired and sold are :- 1998 Sales $716305 Cost of sales $531057 1999 Sales $700680 Cost of sales $468050 2000 Sales $557816 Cost of sales $373737 2001 Sales $153871 Cost of sales $101115 60 This demonstrates that well before the fire the business had suffered a sharp decline. Mr Sun agreed in oral evidence that Step Footwear for its entire wholesale and retail business did not make any substantial purchases of stock after January 2001, said to be because of exchange rate factors. 61 It is not possible for this Tribunal to be satisfied on the basis of the evidence that the wholesale stock being held in the warehouse of this company as at the date of the fire was unable to be sold because of the unavailability of this particular outlet. 62 The daily sales reports for the 714 George Street store (Ex. K for 2001, January to June; Ex N) suggest that sales on a daily basis were averaging less than $500 which supports a conclusion that it was by then trading poorly. 63 This evidence combines to lead to a conclusion that the shoe business of the Lessee had been in decline for some time, a trend which became much more marked in financial 2001. The George Street store, even before the fire, was not the retail outlet likely to be able to be relied on to move stock on hand, which had been run down in any event with no buying since January 2001 64 The Tribunal could not be satisfied on the evidence that the fire was the proximate cause of the requirement to sell the remaining stock held in the wholesale business of Step Footwear at below cost or that the inability to sell through the George Street store was a significant cause of the loss. 65 Substantial cross-examination was devoted to testing the reliability of the sales figures of Step Footwear for the forced disposal but even if those figures are sound, I do not accept that the loss can safely be attributed to the fire. Accordingly I do not propose to undertake the complex task of evaluating and ruling on that criticism of the figures or their accuracy. 66 The same conclusion must follow for the unsold shoes still held on hand in the Lessee's wholesale warehouse claimed at $9,890. 67 The next major claim is for operating expenditures for Step Footwear from the fire until the closure of the business of Step Footwear in May 2002, quantified at $56,233. The principal items in these (Ex. F) are salary of some $30,000 and car lease costs, car parking and petrol of some $13,000 and travel of $3,000. 68 I am not satisfied that the evidence shows those expenses to be necessarily required to be continued while the company was unable to trade, nor indeed that all them have been established to be solely attributable to the George Street shops rather than to other aspects of wholesale business. The parties were well into dispute in this matter by September/October 2001 and even if there were a liability in the Lessor, it would be difficult to justify that, particularly given the obligation to an attempt to seek to minimise any loss, such expenditures need necessarily have been continued. Accordingly I am not satisfied that this head of damage has been made out. 69 As to the security deposit bond, given my decision that there is not a proper basis for the Lessee to have refused to trade after about September 2001 and given that the premises were not re-let until January or February the following year, it is reasonable under ordinary principles of landlord and tenant law for this security deposit to be claimed against unpaid rent. 70 For these reasons I dismiss the Lessee's claim. 71 As to costs, notwithstanding that the Lessor has been successful on the substantive issues in the case, and that a significant element of the case, the so-called Pearl Tea claim, was abandoned during the hearing, I nevertheless do not consider that special circumstances exist in this case which justify an order for costs, applying the principles in this Tribunal relating to costs. The circumstances of the Lessor's success in the proceedings are not so 'out of the ordinary' as to constitute special circumstances; see Trust Company of Australia Ltd (Stockland Property Management Ltd) v Skiwing Pty Ltd trading as Cafe Tiffany's (No 4) (RLD) [2005] NSWADTAP 32. In any event the claim for costs was not pressed by the Respondent Lessor in its submissions.