CITATION: John's Warehouse Pty Ltd v Chang Yam Nominees Pty Ltd [2004] NSWADT 144 DIVISION: Retail Leases Division APPLICANT PARTIES: John's Warehouse Pty Ltd RESPONDENT Chang Yam Nominees Pty Ltd FILE NUMBER: 045052 HEARING DATES: 07/05/2004, 17/05/2004, 09/06/2004, 09/07/2004 SUBMISSIONS CLOSED: 07/09/2004 DATE OF DECISION: 07/14/2004 BEFORE: Montgomery S - 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: Universal Roofing and Accessories Pty Ltd v Singh [2004] NSWSC 32 APPLICANT REPRESENTATION: P Livingstone, barrister RESPONDENT A Monzo, barrister ORDERS: 1. The application is dismissed; 2. The Respondent has leave to have this matter relisted to argue the issue of damages. Any such application should be brought within 14 days of this decision; 3. In the absence of agreement on the issue of costs, the Respondent is invited to file submissions in relation to the issue within 14 days of this decision. The Applicant is invited to make submissions in reply within a further 14 days. If no application to have the matter relisted for oral argument is received within 14 days of this decision, the issue of costs will be determined on the basis of any written submissions received. REASONS FOR DECISION 1 This is an application brought by John's Warehouse Pty Ltd ("the Applicant") in relation to a retail shop lease ("the Lease") for premises located at Basement Level, 67-73 Main Street, Blacktown, ("the Premises"). The registered proprietor of the Premises is Cheng Yam Nominees Pty Ltd ("the Respondent"). The Premises were used for the business of a furniture and footwear retailing outlet. 2 The Lease is governed by the Retail Leases Act 1994 ("the Act"). The Term of the Lease is expressed to be for a period of five years commencing 1 December 1998 and terminating 30 November 2003. Item 11 of Annexure A to the Lease makes provision for an option to renew the Lease in the following terms: "A. Further period of five (5) years from 1 December 2003 to 30 November 2008 B. Further period of N/A years from to C. Maximum period of tenancy under this lease and permitted renewals: Ten (10) years D. First day option for renewal can be exercised: 1 June 2003 D. Last day option for renewal can be exercised: 31 August 2003" 3 Clause 4 of Annexure B to the Lease provided for the Lease Period in the following terms: "How long is this lease for? 4.1 This lease is for the period as stated in item 1 in the schedule, commences on the date stated in item 2 in the schedule and ends on the date stated in item 3 in the schedule. 4.2 If a further period, commencing when this lease ends, is stated in item 11A in the schedule then the tenant has the option to renew this lease for that period. 4.3 The tenant can renew this lease more than once if that is stated in item 11B in the schedule. However the period of tenancy under this lease and under any renewal(s) is, in total, not longer than the maximum period stated in item 11C in the schedule. 4.4 The tenant can exercise the option only if 4.4.1 the tenant serves on the landlord a notice of exercise of option not earlier than the first day stated in item 11D in the schedule and not later than the last day stated in item 11E in the schedule; 4.4.2 there is at the time of service no rent or outgoing that is overdue for payment; and 4.4.3 at the time of service all the other obligations of the tenant have been complied with or fully remedied in accordance with the terms of any notice to remedy given by the landlord." 4 There is a dispute as to whether or not the Applicant has exercised an option to renew the Lease. The Applicant asserts that it exercised the option to renew, however the Respondent disputes this assertion. A document in evidence ("the 15 June letter") is dated 15 June 2003, is addressed to Mr Trent Watkins who was Associate Director of Asset Management with the Respondent's agent, Chesterton International (NSW) Pty Ltd ("Chestertons"), and is signed by Mr Zhi Qiang Zhang, Director of the Applicant. That document states: "I am writing about the lease of the shop (Basement, No.67-73 Main St Blacktown). The shop lease will be expired at 30 November 2003. Anyway, I would like to take a renewal option A of 5 years. If there is any questions, please contact me". 5 The Respondent asserts that it never received the 15 June letter or any other notice purporting to exercise the option. Accordingly, it argues, the Lease expired on 30 November 2003. 6 The evidence before the Tribunal suggests that between June 2003 and the commencement of proceedings in the Tribunal, the following sequence of communication between the parties in relation to the Lease occurred: 7 On 4 September 2003 Mr Watkins wrote to Mr Zhang as follows: "We refer to your premises at the above property and note your lease is due to expire 30 November 2003. We note that your lease contains a further option for five years and we look forward to hearing from you regarding this matter. If you have any further queries please contact Joshua McNamara or the writer." 8 On 23 October 2003 Mr Michael Williams, the then Asset Manager with Chestertons, wrote to the Applicant informing it that Mr Watkins was leaving Chestertons and that he was taking over Mr Watkins' responsibilities in relation to the Lease. 9 20 November 2003 Mr Joshua McNamara, an Assistant Asset Manager with Chestertons, wrote to the Applicant in terms almost identical to those of Mr Watkins' 4 September 2003. On 24 November 2003 Chestertons sent the Applicant a tax invoice for rent for the month of December 2003. 10 On 3 December 2003 Richard Cook, Director of Asset Management Services with Chestertons, wrote to the Applicant informing it that Ms Natalie Myatt had taken up the position of Property Asset Manager as of 1 December 2003 and had taken responsibility for property management matters. 11 On 5 December 2003 Mr Joshua McNamara, an Assistant Asset Manager with Chestertons, wrote to the Applicant as follows: "We refer to the premises at the above property and note that your lease has expired effective 30 November 2003. We note that the 5 year option was not exercised and you are now on a month to month basis. If you have any further queries regarding this matter please contact the writer." 12 Mr Zhang was in telephone contact with Mr McNamara during this period. It seems that the discussions between them concerned the issue of whether the Applicant proposed to continue in the Premises. Mr Zhang expressed his concerns about the rent, asserting that it was too high. 13 On 23 December 2003 Mr McNamara wrote to the Applicant indicating that Chestertons were prepared to recommend a new lease at a rent of $110,000 per annum, with yearly CPI rent reviews. 14 Mr Zhang was again in telephone contact with Mr McNamara during January 2004. At this time Mr Zhang informed Mr McNamara that he had exercised the option in writing on 15 June 2003. 15 On 30 January 2004 Mr McNamara wrote to the Applicant giving the Applicant notice to vacate the Premises by 1 March 2004. That letter stated: "A you are aware your lease expired 30 November 2003, and your five year option was not exercised. As such under Section 12.4.1 of your lease you remain in the premises on a month to month basis. We wish to advise that as a new rental amount could not be agreed upon, Sections 12.4.3 & 12.4.4 of your lease state that, "either the landlord or the tenant can end the monthly tenancy by giving, at anytime, one month's written notice to the other expiring on any date; and' "anything that the tenant must do by the end of this lease must be done by the end of the monthly tenancy." We are giving you the required one month's notice to vacate the above mentioned premises by 1st March 2004." 16 At some time after this letter and prior to the end of April 2004, management of the property was transferred from Chestertons to Metro Commercial Property Services ("Metro"). 17 On 28 April 2004 Mr Zhang wrote to Ms Katherine Abbas of Metro and advised that he was willing to pay a 10% increase in rent or alternatively that he needed 6 months to close the shop. Ms Abbas responded on 29 April 2004 rejecting the Applicant's proposal and requiring vacant possession by 30 April 2004. 18 On 4 May 2004 the Applicant was locked out of the Premises. 19 By its application to this Tribunal filed on 4 May 2004, the Applicant sought orders in the following terms: "That Cheng Yam Nominees refrain from entering and/or taking possession of at Basement Level, 67-73 Main Street, Blacktown, NSW 2148. That Cheng Yam Nominees have been notified in accordance with the lease of the Blacktown premises of the lessee's lawful exercise of his option to renew the lease for a period of 5 years. That rental increases over the period of the option be of the same percentage level as during the first 5 years of the lease." 20 The Applicant nominated the following grounds for the orders sought: "On 15.6.03 I exercised an option to renew the lease, in writing. The lessor's agent is now seeking the claim that the option was not exercised. The lessor seeks to enter and take possession in breach of the lease." 21 The Applicant also sought an interim order in the following terms: "The Respondent landlord, Cheng Yam Nominees allow the Applicant Zhang Zhi Qiang to operate his business in the premises known as the Basement Level, 67-73 Main Street, Blacktown NSW in the manner it has been done for the past 5 years for the rent being paid upon the expiry of the lease, until a further order of the Tribunal determines the matter or agreement between the parties." 22 The matter was initially listed in relation to the interim application on 7 May 2004. The 23 December 2003 from Mr McNamara to the Applicant provided certain disclosures in relation to the property. This indicates that the area of the Premises is "1000 square metre (approx)". The matter was adjourned to allow the Applicant to produce evidence with respect to the size of the property to establish whether the application was excluded from jurisdiction by virtue of section 5 of the Act. Section 5, in so far as is relevant, states: "5 Certain retail shops excluded from the operation of this Act This Act does not apply to any of the following retail shops: (a) shops that have a lettable area of 1,000 square metres or more". 23 The jurisdiction issue was resolved by production of a surveyor's report dated 4 June 2004 prepared by Mr John Teirney, registered surveyor with Michael Bell and Partners Pty Ltd. Mr Teirney's report states that the gross lettable area of the Premises is 974 square metres. 24 The stay proceedings resumed on 9 June 2004. At that time each party gave undertakings as to damages and the stay was granted on the basis that it would remain in place up until the date of hearing. The matter was listed for hearing on 9 July 2004 and proceeded on that day. Following the hearing the stay was extended until Friday 16 July 2004. The Applicant's case 25 The Applicant 's case is essentially that it had exercised the option to renew the Lease by means of the 15 June letter and had done so within the period provided for by the Lease. Therefore, it argues, it is entitled to remain in the Premises. Mr Zhang gave evidence on the Applicant's behalf, as did Mr Zhang's son Zhong Wei Zhang ("William"). 26 Mr Zhang's evidence is that he was aware of his rights under the Lease and that he knew that the Lease contained an option to renew for a period of five years. He said that on 15 June 2003 he asked William to type a letter to Chestertons to exercise the option. He said that on his instructions William typed the 15 June letter and then printed it out. Mr Zhang said that he posted the 15 June letter to Mr Watkins on the same day that it was typed. 27 Mr Zhang said that in December 2003 he received a letter from Mr McNamara and tried to contact him in relation to that letter. He was unable to do so as Mr McNamara was on holiday. He managed to speak with Mr McNamara in January 2004 and told him that he had exercised the option. Mr McNamara sent Mr Zhang a letter with respect to a new lease however Mr Zhang insisted that he had exercised a five-year option under the existing lease. 28 Mr Zhang said that Mr McNamara had told him that Chestertons did not have a copy of the 15 June letter. He conceded that he made no mention of having kept a copy of the 15 June letter during his discussions with Mr McNamara. He said that Mr McNamara did not ask for a copy of the letter and had simply said that it was too late. Mr Zhang also conceded that he made no mention of the 15 June letter in the letter that he wrote to Ms Abbas on 28 April 2004. 29 William also appeared and gave evidence and was subjected to cross-examination. William confirmed that he had typed the 15 June letter for his father. He had no specific recollection of when he had typed the letter but confirmed that the date that he had inserted in the letter was the date that he had typed it. He said that he had never been asked to backdate a letter. William was unable to offer any assistance with respect to the posting of the 15 June letter. 30 The Applicant asserts that Mr Zhang posted the 15 June letter however the letter must have been misplaced within Chestertons' office. Mr Livingstone argued that in the latter part of 2003 there was considerable instability in staffing within Chestertons' office. The evidence shows that between June and December 2003 four separate individuals were handling the Applicant's lease arrangements; Mr Watkins, Mr Williams, Mr McNamara and Ms Myatt. This was during a time where Chestertons' staff were subject to significant commercial pressures and were required to handle numerous documents. There is evidence that only one person was doing Chestertons' filing however she was not called to give evidence. Mr Livingstone submitted that it could be anticipated that she would have agreed that administrative errors could occur within Chestertons' office. 31 Mr Livingstone argued that the system within Chestertons' office cannot be checked. There were many imperfections in the way Chestertons undertook its business. There were many changes in management, there was a trainee associated with the management of the Lease, there was a lack of supervision, there was no system of change-over and there were form letters in use. It is probable, he argued, that these imperfections lead to administrative errors. 32 Mr Livingstone urged the Tribunal to find that the 15 June letter had probably been received in Chestertons' office but had been misplaced as a result of an administrative error. Accordingly, the Tribunal should find that notice had been given as required by clause four of the Lease, and therefore the option had been exercised. The Respondent's case 33 Mr Watkins, Mr McNamara, and Ms Myatt each gave evidence on the Respondent's behalf. Each gave evidence of the usual practice in dealing with correspondence received by the Chestertons office. Each conceded that administrative errors within Chestertons' office are possible. 34 Mr Watkins was the officer within Chestertons who was responsible for managing the Lease during June 2003. It is his evidence that it is unlikely that the 15 June letter would have been misplaced or wrongly filed. His evidence was that had the letter been received, correspondence would have been generated within Chestertons in response to the letter. The Respondent would have been notified and advice obtained with respect to the purported exercise of the option and the market rent. If this had occurred, he would expect that copies of the generated correspondence would have been retained on the file that Chestertons maintained in relation to the Premises. 35 Mr McNamara's evidence was that he would have had responsibility for assisting Mr Watkins in any management tasks associated with the exercise of the option. He did not join Chestertons until mid July and so was unable to offer any assistance as to the office procedures in June 2003. However he was able to give evidence of how the exercise of an option to renew a lease would have been handled while he was there. Mr McNamara also gave evidence of conversations with Mr Zhang in which they discussed whether the Applicant would continue to lease the Premises and he said that Mr Zhang had told him that he considered that the rent was too high and he could not afford it. Mr McNamara conceded however that such statements are common in lease negotiations. 36 Ms Myatt gave evidence that she took over from Mr Williams as Senior Assets Manager with Chestertons in December 2003. At that time she was given hand-over notes that Mr Watkins had prepared in relation to the properties that Chestertons managed. She said that the hand-over notes were prepared on a property basis rather than a tenancy basis. She stated that she had reviewed the file in relation to the Premises and had read the hand-over notes. She said that she was not aware of any mention of the Applicant's exercise of the option to renew the Lease in the hand-over notes, or any documentation on the file that related to the Applicant's exercise of the option. She said that she would have expected such documents to be kept on the file. 37 The hand-over notes to which Ms Myatt referred are not in evidence. Ms Myatt conceded that it was not a common practice for Chestertons' staff to keep file notes in relation to telephone conversations. She agreed that it could be good business practice to keep such file notes. Her personal practice is to keep diary notes of telephone conversations but these are not transferred to file. She did not understand there to be any handwritten file notes contained on the Chestertons' file relating to the Premises. 38 Mr Monzo, counsel for the Respondent, submitted that before the Tribunal can accept that an error occurred within Chestertons' office, there must be some evidence to suggest that to be the case. While it is conceded that errors may occur, there is no evidence of any error. Mr Watkins' evidence was that if the letter had been received in Chestertons' office, it would have gone to him after being handled by only one person. There is no suggestion of incompetence. There is evidence of a system, and no concession of any error. 39 Three witnesses gave evidence on behalf of the Respondents and none had any recollection of seeing the 15 June letter or any correspondence generated from within Chestertons' office in relation to the exercise of the option. 40 Mr Zhang gave clear evidence that he understood the Applicant's rights under the Lease. Objectively, if the option had been taken up it could be expected that Mr Zhang would have raised the issue when Chestertons' staff first raised the issue of the expired lease. The Applicant conceded that the Respondent was under no obligation to inform it of the opportunity to exercise the option. Notwithstanding that being the case, Chestertons wrote to the Applicant on 4 September 2003 and 20 November 2003. Each of those letters invited the Applicant to discuss the matter of the option. The Applicant failed to take up either of those opportunities. Mr McNamara's evidence was that Mr Zhang had told him that he did not want to take up the option. Mr Monzo submitted that Mr McNamara's evidence should be accepted. 41 Mr Monzo referred to the William's evidence and the fact that he had no recollection of exactly when he had typed the letter. Mr Monzo argued that even if William had typed the letter on 15 June 2003, it is possible that the letter was never posted. No one at Chestertons had seen the letter prior to the commencement of those proceedings. No explanation is given as to why the letter was never produced prior to the first day of hearing. 42 Mr Monzo submitted that there is sufficient reason to doubt Mr Zhang's evidence. Accordingly, the Tribunal should conclude that Chestertons never received the 15 June letter and accordingly the Applicant failed to exercise the option within the period specified in the Lease. Findings 43 On the evidence before me I am satisfied that it is possible that William typed the 15 June letter on 15 June 2003. I am also satisfied that it is possible that Mr Zhang posted the letter on that day. Nevertheless I am satisfied that Chestertons never received the 15 June letter. 44 In Universal Roofing and Accessories Pty Ltd v Singh [2004] NSWSC 32 Young CJ in Eq. considered an identical provision to those contained in clause 4 of the Lease. His honour stated at paragraphs 8 to 10 of his judgement: "8 However, in this particular area the whole flow of the authorities is that a notice under this sort of lease to be served needs to be in writing. I decided this in Tsaoucis v Gallipoli Memorial Club Ltd (No 1) (1998) 9 BPR 16265 which was affirmed by the Court of Appeal in (1998) 9 BPR 16275. That finding was certainly nothing novel, it follows from the decision of Goulding J in New Hart Builders Ltd v Brindley [1975] Ch 342 and the other authorities as set out in the Third Edition of my annotated Conveyancing and Real Property Legislation at page 297. 9 Indeed, the use of the word "served" in cl 4.4.1 itself implies that the notice is to be in writing: Wilson v Nightingale (1846) 8 QB 1034; 115 ER 1163 and R v Shurmer (1886) 17 QBD 323. 10 Despite Mr Sahade putting forward all the arguments that could be put the other way, I am not convinced that there is a prima facie case that the option has been properly exercised." 45 It follows that even if Mr Zhang had advised the Respondent of his intention to exercise the option, that advice would be insufficient in the absence of written notice. 46 The issue then it is whether 'service' of a notice exercising an option requires that the Respondent receive it or whether it is sufficient that it be posted. The lease is silent on the issue. It is my view however that the minimum requirement to exercise the option under clause 4 of Annexure B of the Lease would be a notice in writing provided by the Applicant and that the notice was received by the Respondent or the Respondent's agent. In the circumstances of this matter it cannot be said that notice was served on the Respondent. 47 It follows, in my view, that the Applicant failed to exercise the option to renew the Lease in the time provided for by the clear terms of Item 11 of Annexure A to the Lease. It also follows that the Lease expired on 30 November 2003. 48 I note that a stay remains in place until Friday 16 July 2004. I do not propose to interfere with that arrangement. 49 At the hearing on 9 June 2003 each party gave undertakings as to damages. The Respondent has leave to have this matter relisted to argue that issue should it choose to do so. Any such application should be brought within 14 days of this decision. 50 At the hearing on 9 July 2003 Mr Monzo raised the issue of costs. In the absence of agreement on the issue of costs, the Respondent is invited to file submissions in relation to the issue within 14 days of this decision. The Applicant is invited to make submissions in reply within a further 14 days. If either party wishes to present oral argument on that issue they may apply within 14 days. In the absence of further application the issue of costs will be determined on the papers. Order 1. The application is dismissed. 2. The Respondent has leave to have this matter relisted to argue the issue of damages. Any such application should be brought within 14 days of this decision. 3. In the absence of agreement on the issue of costs, the Respondent is invited to file submissions in relation to the issue within 14 days of this decision. The Applicant is invited to make submissions in reply within a further 14 days. If no application to have the matter relisted for oral argument is received within 14 days of this decision, the issue of costs will be determined on the basis of any written submissions received. 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.