Set aside by Appeal : Set aside in part by Appeal 1/11/2004 (Petria Pty Limited v Makhoul [2004] NSWADTAP 47) CITATION: Makhoul v Petria Pty Ltd [2004] NSWADT 51 DIVISION: Retail Leases Division 1. APPLICANT Edward Makhoul RESPONDENT PARTIES: Petria Pty Limited 2. APPLICANT Petria Pty Limited RESPONDENT Edward Makhoul FILE NUMBER: 035090, 035146 HEARING DATES: 10/11/2003, 28/01/2004 SUBMISSIONS CLOSED: 01/28/2004 DATE OF DECISION: 03/10/2004 BEFORE: Fox R - Judicial Member APPLICATION: Claim for declaration of rights, obligations and liabilities under a lease MATTER FOR DECISION: Principal matter LEGISLATION CITED : Conveyancing Act 1919 Retail Leases Act 1994 Cronulla Newsagency v Pizzata [2002] NSWADT 121 CASES CITED: Davies v Lyndhurst [2000] NSWADT 196 Punya v Corantin [2000] NSWADT 161 Waltons Stores (Interstate) Pty Ltd v Maher [1988] 164 CLR 387 1. APPLICANT R Lee, barrister 2. APPLICANT REPRESENTATION: G Sirtes, barrister 1. RESPONDENT G Sirtes, barrister 2. RESPONDENT R Lee, barrister ORDERS: 1. Petria Pty Limited obliged to tender to Edward Makhoul:- Lease in accordance with Option of Renewal contained in Lease registered as 2767538U; 2. Leased premises are the whole of the former Lot B DP 437525, subject to right of others to use southern side passage, and noting Lessor's right to vary the two carparking spaces at rear; 3. Rent not determined, but such rent as is determined to take into account the expenditure of applicant on those items listed in letter 30th May 2001 which are either refurbishment to the building or are otherwise fixtures; 4.Both parties have liberty to apply within 28 days to argue costs, if no application in that time, no order for costs 1 In these proceedings the Applicant, as occupant of restaurant premises in Norton Street Leichhardt, sought orders declaring that:- (a) option to renew for a further six year term had been validly exercised, (b) the rent for the new term had been agreed, (c) outgoings had been overpaid and there is entitlement to refund, (d) the actual area leased be defined and (e) Respondent landlord obliged to effect structural repairs. 2 The Respondent made counter claim (in matter number 035146) for declaration that:- (a) there had been no valid exercise, (b) there was no entitlement to a new lease, and (c) costs. 3 No evidence at all was given in relation to the claim for repairs. There was very little contest about the claim for outgoings, because the Respondent freely admitted that Sections 27 and 28 The Retail Leases Act 1994 (RLA) had not been complied with. The claim for definition of the area was also not greatly debated. The contest was whether the option had been exercised, and if so, what rent had been agreed. 4 The Lease in issue was for six years, commencing on 1 May 1995 and ending 30April 2001, with two six year options of renewal. The property leased is described as "Folio Identifier 1/793141 Being the whole of the premises situated at 20 Norton Street Leichhardt" The Lessees are described as "Gianfranco Inverso, Franco Andreaccio & Eddie Makhoul". The initial rental was $3379 per month with annual increases at 5%, resulting in the monthly figure being $4313 in the last year of the term. The Disclosure Statement, varied Clause 22 of the Lease and required the Lessee to pay half Council Rates, half Water Rates, all storm and tempest insurance. It went on to refer to half land tax payable (presumably) in respect of 20 Norton Street and one of the other two address, a provision which is difficult to reconcile with the Lease which referred to the land tax calculated on a single holding basis, and can only have referred to 20 Norton Street. 5 The description of the premises was less than clear, because the folio identifier was a consolidation of three separate pre-federation two-storey residential buildings and yards, known as numbers 18 and 20 Norton Street, and (to the rear) 25 Renwick Street. The two Norton Street buildings were separated by a metre wide passage. The passage gave pedestrian access to Norton street from the rear yard of the restaurant and, apparently also from the rear of the Renwick Street building (from which the directors and family of the Lessor company conducted their building business). There also appears to have been vehicular access for the restaurant from Renwick Street because clause 23 of the Lease gave the Lessees the right to use two car spaces "at the rear of the premises as designated from time to time" by the Respondent. 6 The evidence given in regard to the extent of the premises was peripheral to the main issue, but, from the little evidence given I am satisfied that the Lease intended to give no more than a right of exclusive occupancy of the building known as 20 Norton Street, together with a shared right of access to the passage at the south side of that building, and two car spaces in the rear yards (if any) of the three addresses (with shared right of appropriate access if such spaces not contiguous). I am satisfied that the current custom of the site indicates that the Lessees are entitled to regard as the let area the whole of the land which was formerly Lot B in DP 437525 (subject to the right of others to use the side passage), but I am not prepared to hold that that whole area was intended always to be the Lessees' exclusively. This is because much of the backyard of former Lot B was used as the Lessees' car parking spaces and these are variable at the Lessor's discretion, presumably anywhere within the three identified former lots, which make up the folio identifier. The right of exclusive use of the rear yard would only extend to the toilets and the space to store the firewood. The very fact that this aspect of the matter had potential for dispute illustrates the wisdom of using an accurate plan or metes and bounds description of the premises in a Lease. 7 The claim in relation to outgoings is limited to payments made after 18th August 2000 (see Davidson JM in Davies v Lyndhurst [2000] NSWADT 196). I was given no convenient accurate break-up of the payments actually made by the Applicant in this time period, but a useful working summary would appear to be:- Water rates: $1879.20, Council rates: $5785.90, Insurance:$1991.50, and Land tax: $8882.50. 8 The Applicant's uncontested evidence is that he was given no detail of any kind, and that he simply paid the amounts demanded. This is a significant difference to the factual situation in Cronulla Newsagency v Pizzata [2002 NSWADT, 121] in which Judicial Member Montgomery held that failure to comply with the statutory annual disclosure regime did not avoid the liability for contribution, but gave a right of damages instead. In that case a land tax liability was the only outgoing in issue, the Lessor failed to lodge returns for some years, received a late assessment including penalty interest, and the Lessee was ordered to pay the tax (but not the penalty). It was found that the Lessor did supply the land tax assessment information reasonably promptly once received, but of course this was some years after the actual due date for assessment, and so was some years late by reference to the time limits set by section 27 and 28 of the RLA. The initial land tax liability had been shown in the Disclosure Statement. In the matter at hand there has been no disclosure of any kind, which in any way might be said to be an attempt at complying with the annual disclosure regime, (other than the appropriate initial disclosure in the Disclosure Statement) and that is a significant distinction to the Cronulla Newsagency ruling. 9 I am satisfied that, where the Lessor has not submitted proofs of the basis for the annual outgoings contribution claims within a reasonable time of receipt of those assessments, so that there has not been any attempt at complying with the statutory regime, even in spirit if not in substance, the Lessor loses the right to claim those payments. To hold otherwise would put this Tribunal in a situation where its' orders condone a failure to abide by the clear spirit of the Act. 10 Had all other things been equal, I would have been comfortable in ordering the Respondent to give the Applicant refund or credit for the amounts in question. That is especially so in relation to the Land Tax claim, because, even on the limited information in evidence, the method used in calculating that amount clearly did not conform with the "single holding" requirement of the Lease. However the comments which I make at the end of these reasons in relation to the absence of two of the three original Lessees have application to limit the orders which I am willing to make, and so I make no order of any kind in relation to the claim for outgoings. 11 It is acknowledged by all parties that the Applicant, on or about 15th January 2001 gave the Agent Nick La Rosa a hand written letter headed "Edward Makhoul Café Jovanotti", the text of which was: - "Dear Nick, I would like to exercise my option on the lease for the premises on 20 Norton Street, Leichhardt, Yours Faithfully, Eddie Makhoul" 12 It was eventually argued that these words were only an indication of intent to exercise, as opposed to an actual exercise. I reject that proposition, and find that the letter was a clear and unequivocal statement sufficient to exercise the option. 13 I have, however, great difficulty in accepting an argument that this request was made on behalf of all three Lessees when its plain words indicate that it is made by the Applicant alone. It appears to follow, according to quite well established principles distilled from decisions which precede the RLA, and which are conveniently listed in the decision of Judicial Member Donald in Punya v Coranton [2000] NSWADT 161, that the option has not been validly exercised because the notice was not given on behalf of all three Lessees. 14 The Applicant sought to cure this defect by introducing into evidence separate authorities dated 15 September 2003 signed by each of the other two Lessees in the following identical terms:- "I ……hereby authorise Eddie Makhoul of …….to deal with all matters concerning the Lease and business conducted over and at 20 Norton Street Leichhardt including but not limited to paying rent, exercising the options pursuant to the Lease, hiring and firing of staff and all disputes and all banking." 15 Only Franco Andreachhio was in court to be cross examined on his very short affidavit, which went very little further than the text of the authority, but did establish that the Applicant had the sole conduct and ownership of the business from middle of 1996 onward. It would have been preferable if Mr Inverso had also given evidence, however I am satisfied that both other original Lessees are now prepared to be bound for a further term of six years in terms of their original commitment. 16 I note that these written authorities, given later, could not cure the defect in the exercise document, if defect it be. 17 I am of the view that in leases within the Retail Leases Act there has been a subtle change in relation to the law governing the exercise of options to renew. The accepted ratio of the decided cases is that the Lessor is entitled to be assured that all of those who originally accepted the burden of the covenants now accept that burden for a further term, and so a purported exercise of option is bad if it does not unequivocally establish the joinder of all of those original persons. But these decisions were all in a context where the Lessor, by the conventional terms of leases at general law, either had an absolute right to refuse assignment to other Lessees, or had only an obligation (cf Schedule 4 Conveyancing Act Covenant 16) to not unreasonably withhold consent, with or without fine. Section 39 of the RLA changes the common law in that it brings about a right of assignment, subject only to three conditions, and a procedural requirement. When the operating lessee has been running the business for years, and seeks consent to an assignment to him from his "sleeping" co-lessees, it seems unlikely that the Lessor could rely on either Section 39 (1)(a) [change of use] or Section 39 (1)(b)[lesser retailing skills] and so the only basis on which consent could be validly refused is the other part of Section 39 (1)(b) [lesser financial resources]. The stronger the potential right of the operating Lessee to have an assignment from the co-lessees, the weaker becomes the rationale found in Punja v Corantin. For reasons stated later, I do not need to decide this point, but it seems appropriate to indicate that I am not satisfied that the Punja decision binds me to find, in these particular circumstances, that the failure to exercise on behalf of all three Lessees is sufficient to render the exercise invalid. 18 La Rosa's evidence, as tested in cross examination, satisfies me that he drew the Applicant's attention to the flaws in his notice of exercise, and I accept that he tried to preserve the rights which flowed from that by addressing the letter of 20th February 2000 to all three lessees in the following terms:- "We are in receipt of your request to continue your tenancy by exercise of option in your current lease from PETRIA PTY LTD Subject to an inspection of the premises and your commitment to rectify past damages, we grant on behalf of the Lessors the further term effective 22nd May 2001. The commencement rental for the new period shall be Five thousand, two hundred & fifteen dollars per calendar month, plus G.S.T". 19 The letter was headed "without prejudice", and I note that La Rosa thought that this would prevent it being an admission that the original notice of exercise was valid. That is misconceived, the letter, by its very terms is prejudicial. I am satisfied that this letter is one of the actions which make it difficult for the Respondent to deny valid exercise. 20 The Applicant responded by letter of 19th March 2001, complaining that the proposed new rent [an increase of just over 20%] was excessive, and proposing instead an "increase of 5% as per usual for the last 6 years".. 21 I accept that there were discussions at various times between the Applicant and La Rosa when he called to collect the rent, and at other times, and that these culminated in the on-site meeting of late May 2001 between Fuda, La Rosa and the Applicant. I accept that the earlier discussions were about rent and the Applicant's desire to improve the appearance of the outside of the building and the restaurant, at some cost. The May meeting resulted in an agreement which is evidenced by the letter dated 30th May 2001 forwarded to the Applicant in the following terms;- "Dear Sirs, RE: MEETING 29th MAY 2001 WITH LANDLORD "PETRIA PTY LTD" NORTON STREET, LEICHHARDT We refer to our recent meeting regarding your intended works agreement/schedule in lieu of continued tenancy. It was understood that over the next six (6) weeks you will engage a designer to redecorate your leased premises, namely above mentioned and will submit proposed drawings to the lessors by the 15th July 2001. Such plans should include works to: 1.Flooring: Replace existing tile floors throughout, including front patio and stair area by replacing with (i) tiles, (ii) timber & (iii) polished laminate 2.Ceiling: Fit suspended gyprock ceilings 3.Lighting: Fit new lighting throughout 4.Painting: Both external & internal, including ceilings 5.Bar: Replace & extend existing bar 6.Kitchen: Relocating and reorganising kitchen in order to fit "wood fire over" 7.Patio: (i) Re-tile; (ii) Replace existing canvass awning; (ii) Replace existing aluminium hand rail; (iv) Renew front entrance doors with full glass doors. 8.Amenities:(i) Tile floor areas to both toilets; (ii) Paint both washrooms throughout. 9.Rear Courtyard & Access to Norton St: (i) Side access only permittable to lessee; (ii) Timber cutting used for fireplace to be organised & stored – so not visible to the eye. The above-intended works schedule will require the final consent from your lessors, prior to commencement. You are then required to complete the work in a tradesman like manner by the 1st September 2001, to the satisfaction of the lessors. Upon the works being completed to the satisfaction of the lessors, it is understood that an extension to the existing lease will be granted. Should you have any queries or wish to discuss the above please do not hesitate in contacting the writer. Yours faithfully, RICHARDSON & WRENCH LEICHHARDT" 22 The letter was, as previously, addressed to all three Lessees. 23 I find that this letter of offer superseded a letter of 28th May, written by the Respondent's Solicitor to all three Lessees purporting to refuse the option exercise because of breaches of the Lease which were listed in detail in number. 24 It is clear that the Applicant put the works into effect by closing the restaurant for 6 weeks in July/September 2001 at obvious cost. The Applicant admitted that he is not good at keeping records, and I note that the cost of the works effected as given in his affidavit, although given in a detailed itemised list, is approximate rather than definitive. Nevertheless I am satisfied that the Applicant spent more than $50, 000 in the refurbishment of the outside and inside of the building. 25 It is also clear that not quite all of the works were completed within the deadline set in the letter, and that the toilet floor tiling and the woodshed construction are still to be done. I do not, however accept the Respondent's proposition that the deadline in effect rendered time of the essence and that the failure to complete the works on time ended the Respondent's offer of lease. There was almost complete performance by the Applicant. 26 It is appropriate to note that Mr Fuda was at the onsite meeting, and I am satisfied that he was fully aware of the scope of the works to be done, despite the obvious limitations of his English language skills. I accept that he was aware of the attempt at preserving the right to object to the validity of the option exercise by the making of the offer to all three Lessees. I also note that Mr Fuda had his building business premises at No 27 Renwick St, and daily used the passage between Nos 18 and 20 Norton St., and so was fully aware of the Applicant's refurbishment works. 27 The whole course of conduct, as proven before me, was designed to lead the Applicant to believe that a full renewal of the Lease, in accord with the option would be granted to him and his Co-Lessees. Whatever opportunity the Lessor had of taking the point that the exercise was not valid, if it survived the letter of 20 February 2001, and if it survived the 30 May 2001 letter of offer, failed when Mr Fuda watched the Applicant close the restaurant to commence refurbishment. Broadly in accord with the principles in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR, the Lessor cannot now be allowed to say that it is not now bound to offer a lease, in terms of the option, to all three Lessees. The written authorities given by Inverso and Andreachhio, although not in any way relevant to this aspect of my findings, certainly make it clear that the submission of such a document would not be a futile exercise. 28 The most difficult factual aspect of this matter is whether the amount of the rent was agreed. The Applicant certainly did not seek to exercise the very convenient right of pre-assessment created by Section 32 of the RLA. 29 Clause 15 of the Lease, as expanded and clarified by Section 31 of the RLA may be taken to read "and a rental to be agreed upon between the parties and failing agreement such rental shall be such amount as shall be determined [ to be the current market rent ] by a valuer being a member of the Real Estate Institute of New South Wales appointed by the President of such Institute and in no case shall the rental payable during the additional term by less than the rental payable at the termination of this lease and such rental to be increased annually at the rate of 5% per annum ". I add the words "current market rent" because that is the obvious intent of the Clause. The Valuer would have to act properly despite the complete lack of reference standard given, and that, by Section 78 of the RLA imparts the parameters of Section 31. Neither party has enlivened this valuation mechanism, and it seems to me that it is still available. 30 The letter of 20th February 2001 offered $5215.00 per month. The Applicant's response was $4529.07 per month. I accept that the Applicant, at the May meeting offered to pay $4,900 per month, and intended that to be a fixed rent for the whole of the term. I note this to be contrary to the terms and practice of the previous 6 years, because the Lease mandated annual 5% increases. Considering all of the evidence, despite the fact that I found Mr Fuda's evidence quite unsatisfactory in many respects, I am satisfied that La Rosa, on Fuda's behalf, accepted the offer as made for the first year only, to be increased thereafter by 5% annually. The parties simply were not, in this regard, ad idem. The proper amount of the rent remains unresolved, and, save for the fact that I find that the amount spent by the Applicant in refurbishment was agreed to be taken into account in setting the rent, the parties have not progressed to the resolution made available by the valuation regime established by Clause 15. 31 The Respondent argued that I have no power to make any orders favouring Inverso and Andreachhio because they are not parties to the application and drew my attention to the fact that the applicant could easily have joined them in the litigation. That seems to me to be correct. As a matter of law the obligations and benefits of the Lease are complied with and received by the applicant on behalf of all three Lessees. That consideration does not prevent me pursuant to the Section 72 (1) (c) (i) making orders against the Respondent, in favour of the Applicant as one of the Lessees, and his two co-Lessees, all based on the offer of 30th May 2001, which, by its conduct, the Respondent cannot now deny. Whether all three Lessees then acknowledge their entitlement and obligations by executing the document is a matter for them. That being the case, I am also satisfied that it is appropriate pursuant to Section 72 (i) (f) (iii) to define the property leased, and I do so. 32 I accept that the absence of the co-Lessees prevents me making the order for refund of the outgoings contributions. 33 Costs were not specifically argued, and the parties have leave to raise that matter before me if they wish. However as a guide to them, I say that in my view the difficulties which resulted from Mr Fuda virtually rejecting the affidavit which he had sworn amounted to special circumstances entitling the Applicant to a costs order for some part of the proceedings. I have a similar view in favour of the Respondent, finding special circumstances against the Applicant arising from the Applicant's failure to join his fellow Lessees. Subject always to such further argument as the parties may wish to place before me, these two aspects appear to cancel each other out, and so I would propose to make no order for costs 34 My orders are:- 1. Petria Pty Limited obliged to tender to Edward Makhoul:- Lease in accordance with Option of Renewal contained in Lease registered as 2767538U. 2. Leased premises are the whole of the former Lot B DP 437525, subject to right of others to use southern side passage, and noting Lessor's right to vary the two carparking spaces at rear. 3. Rent not determined, but such rent as is determined to take into account the expenditure of applicant on those items listed in letter 30th May 2001 which are either refurbishment to the building or are otherwise fixtures. 4.Both parties have liberty to apply within 28 days to argue costs, if no application in that time, no order for 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.