CITATION: Evans & ors -v- Coughlin [2000] NSWADT 162 DIVISION: Retail Leases Division APPLICANT Ronald & Pamela Evans, Kenneth & Julie Wilson, Jeffrey & Joy Welbourne, Vicbar (Kingsway Plaza) Pty Ltd PARTIES: RESPONDENT Steven James Coughlin FILE NUMBER: 005035 HEARING DATES: 2310/2000 SUBMISSIONS CLOSED: 10/23/2000 DATE OF DECISION: 11/14/2000 BEFORE: Donald B - Judicial Member APPLICATION: Claim for payment of money MATTER FOR DECISION: Principal matter LEGISLATION CITED : Retail Leases Act 1994 CASES CITED: REPRESENTATION: P Walsh, barrister In person ORDERS: 1. The respondent to pay the applicants the sum of $8660 in respect of rent due under the invalidly terminated Lease; 2. Calim for future loss stood over. The Lessors to file further evidence relating to their claim for continuing damages; 3. No order as to costs. 1 The Applicant Lessors are partners who own the Kingsway Plaza Shopping Centre at Kurri Kurri, with 24 shops on two levels. They have lodged a retail tenancy claim under s.71 of the Retail Leases Act 1994 against the Respondent Lessee claiming payment of arrears of rent and outgoings to the point of the Lessee vacating (and future rent and outgoings for the remainder of the Lease) together with compensation for damage to the premises. 2 The lease is a two-year lease commencing 31 May 1999 with two three year options, of Shop 8 in the Plaza for use as a retail sea food outlet. Although the Lessee executed the lease in the presence of a solicitor, he acknowledged in his undated "Advice to Lessors" that he had not sought independent advice in respect of the commercial terms in the Disclosure Statement and the obligations in the proposed Lease. 3 The Lessee gave evidence to the Tribunal that he had for ten years been in the business of managing retail outlets and that under the "Mermaid's Catch" name he either himself or by franchise had been successfully associated with other retail fish outlets for some years. He also confirmed that he had at other times himself sought legal advice in preparing leases. This shop had previously been operated as a "Mermaid's Catch" outlet by a Mr Yeomans under franchise from the Lessee. 4 The lease, typically, imposes virtually all the obligations on the Lessee and while the Lessor reserves rights particularly in respect of the Common Parts of the shopping centre and requires contribution to the outgoings, notably cleaning and sewage disposal in respect of those common areas, it contains no express obligation on the Lessor to maintain in a clean manner the centre and the Common Parts upon which each of the shops, including Shop 8, will rely. Notwithstanding this, the ordinary meaning of the Lease including the provisions as to outgoings (cl.5.1) and "Common Parts" (cl.15.23), make it clear that the Lessor accepts an obligation to maintain the Common Parts, toilets and access ways in a clean and well-repaired state. Indeed the Lessor did not seek to suggest otherwise as a general matter. 5 The Lessors did refer to Part 9 of the Lease relating to the operation of the air-conditioning: "If … the air-conditioning plant fails to function for any reason the Lessee shall not by reason of such failure be entitled to determine the Lease nor shall the Lessee have any right of action to claim for compensation or damages against the Lessor in respect thereof." They submitted this protects them from any liability in relation to the operation of the system. However I strictly construe Part 9 on air-conditioning, being an exclusion clause, and hold that it would not protect the Lessors from the functioning of the air-conditioning in a manner which, as is alleged here, emits sooty dust into the common areas outside a tenant's premises. 6 On about 28 January 2000 the Lessee vacated the premises without having given any written notice of either intention to do so or of reasons for doing so. Accumulated rent and outgoings as at the date of vacation was $3,069.12, with rent and outgoings of $1,116.52 allegedly continuing to accrue monthly. There was no dispute about the calculation of the figures, only of the obligation to pay. The Lessors also alleged that repair costs of the order of $465 are due and the Lessee does not strenuously dispute that figure. 7 What is in dispute is the obligation of the Lessee to pay any of the sums and any continuing obligation because the Lessee alleges that he was entitled to vacate the premises, terminate the Lease and claim damages. The claimed reason for this entitlement is that the Lessor had failed to maintain and clean the Common Parts, air-conditioning system, toilets and passageways to such an extent that this failure caused Shop 8 to be effectively unusable as a fish shop. 8 The Lessee was unrepresented before the Tribunal and accordingly I endeavoured to ensure that as he conducted his case, he both fully understood the proceedings and had full opportunity to present his information, evidence and submissions. I also permitted him to submit a further statement with photographs after conclusion of the hearing subject to copies going to the Lessors with a right of reply which they have exercised. 9 As there was no contest about the terms of the Lease as such, and as the only contest concerned the claims of failure to clean and maintain, I proposed that the Lessee present his evidence first with the applicant Lessors replying; this was in the my opinion the preferable way to proceed. 10 The Lessee filed a statement, Exhibit A, which included five photographs taken by him. He also led evidence from Mr Paul Coughlin, a manager of the shop from September 1999 to its closure, and from Mr Charles King, an experienced operator over many years of food businesses and a prospective purchaser of the business. At my suggestion, the Lessee also called evidence from Mr Glenn Riddett, an air-conditioning service manager with over 15 years experience in air-conditioning systems who had provided services to the Lessee for his refrigeration system within his shop but who had also observed and reported to the Lessee on the air-conditioning system of the centre. 11 The key claims by the Lessee are: (a) the air-conditioning system outlet outside the shop emitted sooty particles, which fell on the seafood stock and caused a serious level of wastage. (b) The rear passageways and loading dock access points were not kept properly clean and were a serious detriment for his business. (c) The public toilets within the centre, in the vicinity of Shop 8, were poorly maintained, blocked frequently and caused smells to the serious detriment of his business. 12 The Lessee and his manager said they had regularly complained about these matters to the managing agent and also to some of the Lessors themselves. However the Lessee acknowledged that at no time had he given any written notice of his perceived problems to the agent or the Lessors and had never sent any copy of the written report concerning the air-conditioning which Mr Riddett had prepared shortly after the Lessee took over the shop. 13 Mr King confirmed that the Lessee maintained an excellent state of hygiene within the shop but that he had seen "black flakes" inside the shop and on the counters and covers as well as considering the rear access passageways to be inadequately cleaned; he agreed that the photographs in Exhibit A were a good record of that. As a result he says he did not proceed with his interest in acquiring the business. 14 Mr Riddett gave evidence that in his expert opinion the air-conditioning system was not well maintained and that the slow rate of airflow was likely to have resulted in low temperatures which caused condensation and the collection of dirt both on the outlet and return air inlet points of the system. He advised that this produces a build up of tiny lumps of dust with the appearance of soot which would take about a twelve month period to build up to produce the degree of discolouration on the outlet shown in Photo No.1 of Exhibit A. Mr Riddett advised that a better cleaning of the system and higher airflow would remove this problem and that in particular the removal of dust from the return air grills by a simple washing process would have been likely to have significantly reduced the problem of the sooty exhaust. He said that the problem could be experienced a couple of times per day if an exhaust outlet was close to the air handling unit; less often if further away. He confirmed that he had written a report for the Lessee and had advised him to take the issue up with the air-conditioning maintenance contractor. 15 In response, the Lessors through Mr Manitta, a director of the corporate partner in the partnership, gave evidence that a number of the partners including his company maintained shops within the Centre and that they would hold weekly meetings. He said he did not regularly check the rear passageways but confirmed that there had been to his recollection only one complaint about them during Yeomans' lease as a result of which they had been included in the cleaning contract. However in its final submission following review of the photographs sent by the Lessee after the hearing, the Lessors' lawyers confirmed that the rear service passageways used for meat and other deliveries are cleaned only monthly. 16 Mr Manitta acknowledged that oral complaints were received and acted upon. However he denied being aware of any complaints concerning the toilets or the rear passageways and other common areas during the term of the Lessee's lease whether from the Lessee or any other tenant. Mr Manitta asserted that under the cleaning contract the toilets were cleaned daily. 17 There was some conflict between Mr Manitta's filed statement, Exhibit 2, and his oral evidence as to the Lessee personally complaining to him about the air-conditioning; in oral evidence he said he did not recall any complaint. If there had been a complaint the Lessee would have been referred to the air-conditioning maintenance contractor. Mr Manitta said that under the air-conditioning maintenance agreement, this system was maintained. He said he was not aware of the discolouration on the outlet in the corridor ceiling between his company's shop, Dimity's, and Shop 8 opposite. 18 The photographs filed by the Lessee following the hearing clarified the location of the outlet in the ceiling between Dimity's and Shop 8 and showed it to have some black discolouration as at the date of the hearing. They also showed some level of general staining, including an example of some residue from meat going to the butcher shop and a few paper items (probably security cards) in the loading dock and rear passages. In response to these the Lessors' lawyer submitted that the rear areas are only service areas not used by or accessible to the public customers of the centre and that the state of painting and monthly cleaning are both commercially appropriate. 19 The issue for decision by the Tribunal is whether there was evidence of a breach of the obligations of the Lessor under the Lease sufficient to entitle the Lessee to terminate the Lease and vacate the premises and whether the Lessee lawfully did so within the Lease. 20 The Lessee acknowledges having given no written notice at any stage of the concerns as to the Lessor's maintenance of the air-conditioning system and the cleanliness of the premises and acknowledges that he did not provide to the Lessors or the air-conditioning maintenance service company a copy of the written report from Mr Riddett. He acknowledges that he had been in business for many years operating premises of this sort and that he had other premises under the same business name in the region. He also acknowledged that at various times he had used legal assistance in preparing leases for himself. 21 The Lessors submitted that the Lessee had been well acquainted with the general condition of the premises before taking over the lease from his franchisee. The Lessors' case was that the cleanliness issues were not the principal motivating factor for vacating the premises. The Lessor pointed to the fact that the Lessee soon after opened another Mermaid's Catch fish shop outlet some five minutes away at Weston which began to trade in April 2000 to which some of the equipment from Shop 8 had been removed. The Lessor also pointed to admissions by the manager of Shop 8, Mr Paul Coughlin, that there had been insufficient funds generated by the business during November to January to permit payment of the rent in full which was paid from available receipts in the till. Accordingly the Lessor asserts that the facts establish the real reason for vacating the premises was that the business was performing poorly and that an alternative business at Weston would be preferable. The Lessee acknowledged that the Weston business was indeed operating profitably. 22 In my opinion this evidence is not determinative either way of the motives of the Lessee in vacating the premises except that it confirms the business had ceased to be successful at this location. I do however conclude that the failure to provide any written notice to the Lessors of the cleanliness problems and to have pursued them more vigorously when there was a perceived lack of response through the managing agents, establishes on the balance of probabilities that the cleanliness factors are not likely to have been the predominant reasons for the downturn of the business. 23 In my opinion the fact that a businessman of the Lessee's experience did not give any formal written notice at all, including the report of his own refrigeration consultant whom he knew to be an expert also in air-conditioning, advising the Lessor that failure to have remedied the problems would be relied upon as grounds for terminating the Lease and vacating the premises, indicates that those problems had not yet become the determinative problems in his occupation of the premises. 24 Notwithstanding how one-sided a lease may be in its written terms and how limited the Lessor's express obligation to clean common areas may be as is the case here, the Lessor is nevertheless entitled to be clearly notified of an alleged breach of the obligation to keep the premises clean and of the intention of a tenant to rely on that failure as a breach justifying termination of the Lease so that it can take verifiable steps to deal with the problem in order to protect its rights under the Lease. 25 Therefore in my opinion the Lessee has not established that as at 28 January 2000 he had a sufficient basis in law for terminating the Lease and vacating the premises or for refusing to pay the arrears of rent due to that date. 26 The next issue therefore is the consequences of an invalid termination by the Lessee. 27 Notwithstanding the claim in the Application that the Lease continues on foot and that therefore the Lessor is entitled to rent for the remainder of the term, Mr Manitta agrees that by the middle of this year, the Lessors had in fact treated the Lease of Shop 8 as at an end and had begun to renovate the shop with the intention of re-letting it. They had begun to advertise the premises as available through the managing agents and in the Newcastle Herald together with the four other shops (three upstairs and one downstairs) in the Plaza which are vacant. However the funds of the partnership to complete the renovation were blocked as a result of the bankruptcy of one of the partners which commenced in July. 28 In the circumstances I am satisfied that the legal obligations as between these parties mean that the Lessee was obliged to continue paying rent and outgoings (subject to my finding on maintenance issues) up until the time at which the Lessors treated the Lease as terminated and thereafter is liable for damages subject to the usual obligation of the Lessor both to prove that damage and to establish that it has sought to mitigate its loss. In my opinion the Lessor has established a right to the rent and outgoings, or damages in that amount, up until the end of June when the bankruptcy of one of the partners intervened and prevented the Lessors pursuing the re-letting of the premises with proper commercial endeavour. Accordingly in addition to the arrears of rent and outgoings mentioned above and the cost of repairs, the Lessee is liable for a sum equal to the rental amount for the months from February to and including June, a total of $9,116.72, subject to the following adjustment. 29 The evidence of Mr King and Mr Riddett establishes that there was some basis for the complaints the Lessee and his manager made to the agent as to the operation of the air-conditioning system and the cleanliness of the service passageways. This should be reflected in the amount payable. These factors also, on the evidence of Mr King are likely to have had some inhibiting effect on the re-letting of the premises. Accordingly in the interest of fairness between the parties I propose to allow a discount of 5% in the amount awarded up to the bankruptcy. 30 This leaves the issue of the liability of the Lessee and the rights of the Lessors for the period after the bankruptcy. The Lessors through their lawyer acknowledged at the hearing that at least during the last three months they had been unable to proceed to renovate the premises in the condition in which they wished to re-let them and that their claim would be in abeyance for that period. 31 In my view the proper exercise of the jurisdiction of this Tribunal is to stand over any evaluation of any further liability of the Lessee until evidence can be provided that: · the bankruptcy of the partner has ceased to interfere and the premises are once more on the market in a renovated condition in which the Lessors wish to lease them. · sufficient advertising at a realistic market rent has occurred. An appropriate rent sought when a Lessor is endeavouring to mitigate its loss may well be to accept a moderate discount on rents otherwise prevailing at least until the end of the period for which the Lease would have run had it continued to full term, claiming only this discount amount from the Lessee by way of damages if the premises are relet. · the cleanliness issues as to the air-conditioning and the passageways which I have found to some degree made out, have been properly dealt with. 32 These matters can be dealt with by documented evidence without the need for a formal hearing, except possibly a brief telephone hearing to clarify matters. 33 The Lessee may of course attempt to reduce his exposure to damages by seeking a responsible tenant demonstrably able to pay rent at a level the Lessee may agree with that tenant for the balance of the term, meeting any shortfall himself. Refusal by the Lessors to accept a tenant on that basis would disentitle them to further damages. Indeed to find a tenant on that basis but who required and was willing to take a longer term at a market rent for the period following the initial term, would similarly reduce the Lessee's exposure. 34 For these reasons I order that the Lessee is obliged to pay the Lessors the sum of $8660 in respect of rent due under the invalidly terminated, the premises having been vacated without sufficient cause or notice. The Lessor has the right to file further evidence relating to its claim for continuing damages as aforesaid. There will be no order as to costs. 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.