Industrial Relations Commission of New South Wales in Court Session CITATION : Australian Institute of Music Ltd v LM Investment Management Pty Ltd [2000] NSWIRComm 201 APPLICANT/RESPONDENT ON THE MOTION The Australian Institute of Music Limited PARTIES : RESPONDENT/APPLICANT ONTHE MOTION L M Investment Management Pty Ltd FILE NUMBER: 993 of 2000 CORAM: Peterson J CATCHWORDS : Unfair contract - notice of motion - whether Commission has jurisdiction - meaning and effect of the lease - whether contract or arrangement 'whereby' work is performed in an industry - terms of lease requiring conduct of a business - jurisdiction found motion dismissed. LEGISLATION CITED : Industrial Arbitration Act 1940 Industrial Relations Act 1996 Becker v Harry M Miller Attractions Pty Ltd (1972) AR 298 Caltex Oil (Australia) Pty Limited v Feenan and Ors (1981) 1 NSWLR 169 at 173 Production Spray Painting & Panel Beating Pty Ltd v Newnham (1991) 37 IR 46 CASES CITED : Jennings and Ors v Auto Plaza Limited (1993) 46 IR 413 Booth v Kritikos Developments Pty Limited and Anor (1995) 59 IR 298 Constandinos Iannou Kostakis and Anor v New World Oil & Developments Pty Limited and Ors (Unreported, 25 July 1997 - CT1157 of 1996) Stevenson v Barham (1976-77) 136 CLR 190 HEARING DATES: 08/08/2000 DATE OF JUDGMENT: 10/20/2000 APPLICANT/RESPONDENT ON THE MOTION Mr M J Steele of counsel SOLICITOR Mr T McNally Lobban McNally & Harney SYDNEY LEGAL REPRESENTATIVES: RESPONDENT/APPLICANT ON THE MOTION Mr L.J.W. Aitken of counsel SOLICITOR Mr J Wakefield Messrs Holman Webb SYDNEY. JUDGMENT: - 14 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION CORAM: PETERSON J DATE: 20 OCTOBER 2000 Matter No. IRC993 of 2000 THE AUSTRALIAN INSTITUTE OF MUSIC LIMITED v L M INVESTMENT MANAGEMENT PTY LTD Application under s106 of the Industrial Relations Act 1996 INTERLOCUTORY JUDGMENT 1 The applicant, the Australian Institute of Music Limited, commenced proceedings under s106 of the Industrial Relations Act 1996 against the respondent, L M Investment Management Pty Ltd in relation to a lease under which it occupies premises owned by the respondent at 200 Goulburn Street, Sydney. The premises are utilised by the applicant for the purpose of conducting a music education facility. 2 The claim made by the summons for relief is for: An order varying the contract or arrangement between the First Applicant and the Respondent referred to in paragraph B2 below, with effect from 1 July 1999, so as to provide in clause 4 thereof that outgoings, costs or expenses reasonably identifiable as having been incurred in respect of tenants other than the Applicant shall be excluded from the assessment of the Operating Expenses of the Building for the purposes of that clause. 3 The respondent has by motion sought a preliminary ruling that the Commission is without jurisdiction to deal with the claim and an order that these proceedings be dismissed or permanently stayed for want of jurisdiction on the following grounds: (a) The contract between the parties did not relevantly involve a person performing work in an industry within the meaning of section 106 of the Industrial Relations Act; (b) On the face of its application the Applicant does not plead any material facts which enliven jurisdiction of this Honourable Commission; and (c) The terms of the Lease relied upon by the Applicant do not involve the performance of work in any industry. 4 For the purposes of dealing with the motion the matter has been approached upon the usual basis, namely that the facts as alleged in the applicant's pleading, are to be taken at their highest in the interests of the applicant. That said, it does appear that the matters of fact contended for in the summons for relief are beyond dispute in any sense presently relevant. 5 The essential factual matters as contained in the summons are as follows: 1. The applicant is a private, non-profit tertiary and secondary educational organisation, offering education in music and the performing arts. The applicant offers students the opportunity to qualify for a range of qualifications, including Certificate in Music, Diploma of Music, Bachelor of Music and Master of Arts. 2. On or about 1 February 1994, the applicant entered into a lease of premises at 200-218 Gouldburn (sic) Street, Darlinghurst in the State of New South Wales (the "Building") from the Commonwealth of Australia (the "Lease"). 3. The Lease has a term of 10 years, with an option to renew for a further period of 5 years. 4. The premises leased by the Applicant under the Lease comprise part of the ground floor of the Building and are used as a teaching facility for the education and training of students in the operation of a sound studio and sound recording equipment (the "Premises"). 5. Clause 5.1.1 of the Lease obliges the Applicant to operate and conduct on the Premises the business of a music education facility in a properly, orderly and businesslike manner, including properly staffing the Premises. 6. Other provisions of the Lease also oblige either the Applicant or the Lessor to engage in activity which would necessarily require work to be performed in New South Wales; in particular, clauses 5.1.3, 5.8, 6.1 and 9 of the Lease. 7. The Premises are self-contained, with a separate entrance from other parts of the building, separate air-conditioning plant, separate electronic security system and separately metered electricity. The air-conditioning plant and electronic security system which serves the Premises is maintained and serviced by the Applicant. The only utility which is supplied to the Premises and which is not separately metered and paid for directly by the Applicant is water. 8. The Premises have no access to those parts of the building which contain lifts and the Applicant has no access to and makes no use of the lifts in the building. 9. Clause 4 of the Lease provides for the Applicant to contribute to the Operating Expenses (as defined) of the Building in the proportion which the lettable floor areas of the Premises (as defined) bears to the total lettable area of the Building (as defined). 10. Clause 4.2(e) of the Lease provides for the inclusion in the calculation of Operating Expenses of the costs of repairs and maintenance of the Building, including the cost of operating, supplying, maintaining and repairing all services from time to time provided by the Lessor for tenants and occupiers of the Building, including lifts. 11. Clause 4.3 of the Lease provides for a discretion for the Lessor, in assessing the amount of Operating Expenses, in its "sole judgment", to allocate to particular tenants outgoings, costs or expenses identifiable, "in the Lessor's opinion", as incurred in respect of such tenants and to exclude the same from the Operating Expenses for which other tenants are liable. 12. Clauses 4.4.2 and 4.4.3 of the Lease provide for the Lessor to notify the Applicant in writing of its reasonable estimate of Operating Expenses and to require the Applicant to pay its proportional contribution to those expenses monthly in advance, subject to final adjustment when actual figures are determined ("Budgeted Operating Expenses"). 13. Between 1 February 1994 and around May 1998, the Commonwealth of Australia was the Lessor under the Lease. 14. During that period, the Lessor assessed the Operating Expenses of the Building to which the Applicant was required to contribute so as to exclude from that calculation any amounts in respect of electrical service, electricity, repairs and maintenance of the lifts for the Building and repairs and maintenance for areas not accessible by the Applicant, and restricted its assessment to an amount in respect of water rates only. 15. This approach to the assessment of Operating Expenses resulted in the Applicant being required to contribute approximately $4-5,000 per annum to the Operating Expenses of the Building. 16. In around May 1998, the Commonwealth of Australia transferred ownership of the Building to Marlin Darlinghurst Pty Ltd. 17. Between around May 1998 and August 1999, Marlin Darlinghurst Pty Ltd assessed the Operating Expenses of the Building to which the Applicant was required to contribute so as to exclude from the calculation any amounts in respect of electrical services, electricity, repairs and maintenance of the lifts for the Building and repairs and maintenance for areas not accessible by the Applicant. 18. This approach to the assessment of Operating Expenses resulted in the Applicant being required to contribute approximately $21,000 per annum to the Operating Expenses of the Building in the year ended 30 June 1998. 19. The difference between this amount and the amounts previously assessed by the Commonwealth of Australia was largely accounted for by the inclusion in the calculation by Marlin Darlinghurst Pty Ltd of an amount in respect of council rates and land tax. 20. On 27 May 1999, Marlin Darlinghurst Pty Ltd notified the Applicant of Budgeted Operating Expenses for the year ending 30 June 2000. Those Budgeted Operating Expenses did not include any amounts in respect of electrical service, electricity, repairs and maintenance of the lifts for the Building and repairs and maintenance for areas not accessible by the Applicant and would have required the Applicant to contribute approximately $29,000 to the Operating Expenses of the Building for the year ended 30 June 2000. 21. In around August 1999, Marlin Darlinghurst Pty Ltd transferred ownership of the Building to the Respondent. 22. On 31 August 1999, the Respondent, through its Managing Agent, Doug Robbie & Associates Pty Ltd (trading as DRA Property Services), wrote to the Applicant enclosing a revised statement of Budgeted Operating Expenses and informed the Applicant that "items that may previously not have been recovered can no longer be waived" . 23. That revised statement of Budgeted Operating Expenses included amounts in respect of electrical service, electricity, repairs and maintenance of the lifts for the Building and repairs and maintenance for areas not accessible by the Applicant and would have required the Applicant to contribute approximately $54,000 to the Operating Expenses of the Building for the year ended 30 June 2000. 24. On 1 September 1999, the Applicant wrote to the Respondent's Managing Agent requesting the exclusion from the calculation of Budgeted Operating Expenses of the amounts in respect of electrical service, electricity, repairs and maintenance of the lifts for the Building and repairs and maintenance for areas not accessible by the Applicant. 6 This approach was rejected and so the applicant commenced to make monthly payments in advance of an amount in respect of its contribution to Budgeted Operating Expenses but excluding amounts in respect of lift maintenance and repairs and maintenance for areas of the building not accessible by the applicant. The respondent then in January 2000 commenced proceedings against the applicant in the Local Court for the balance of its proportion of expenses. 7 It may be readily said that the terms of a lease of the perhaps more usual kind, under which the principal benefit obtained by the lessee is the right to occupy premises, would appear to be beyond the scope of s106. The primary jurisdictional requirement that the contract or arrangement be one "whereby a person performs work in any industry" is unlikely to be satisfied in such a case. That, of course, is not the question for decision here; the present matter relates to a lease which imposes an obligation to use the lease property in a particular way; the issue revolves around the terms of Part 5, Use of Premises, of the lease. That Part provides a clause under which is described the limited use of the premises permitted by the lease and a number of particular obligations, some of which are here not relevant. The relevant provisions of the clause appear to be as follows: Permitted Use 5.1(a) The Lessee shall not without the prior written consent of the Lessor (which consent may be withheld at the absolute discretion of the Lessor) carry on or permit or suffer any other person to carry on in or from the Premises any trade business profession or purpose except the Lessee's business set out in Item 11 of the Schedule. (b) Any dispute or difference which may arise as to whether any item is permitted to be sold on the premises or as to whether, any conduct of the Lessee is within the scope of Item 11 of the Schedule shall be determined by the Lessor or a person or body appointed by the Lessor in its absolute discretion and the decision of the Lessor or the Lessor's appointee shall be final and binding on the Lessee. (c) Without limiting the generality of the foregoing the Lessee shall: Maintain Capacity of Business 5.1.1 At all times required by this Lease operate and conduct its business for the purpose set out in Item 11 of the Schedule in a proper orderly and businesslike manner including the proper staffing and, where appropriate, stocking of the Premises. 8 Item 11 of the Schedule describes the permitted use as "Music education facility". 9 In Part 12, Default, Termination etc the following is included: Essential Terms 12.13 It is hereby expressly agreed and declared that the covenants and agreements on the part of the Lessee contained or implied in: (b) Part 5 relating to the use and conduct of the Premises and the Lessee's Business; (c) Part 6 relating to maintenance and repair to the Premises; (d) . . . . are essential and fundamental terms of the Lease and the breach non-observance or non-performance of any one or more of such covenants terms and conditions shall be deemed to be a fundamental breach of the provisions of the Lease on the part of the Lessee to be observed and performed . . . . 10 Is the lease a contract or arrangement whereby work is performed in an industry? To satisfy this essential jurisdictional requirement it is necessary that the contract be one "whereby" work is performed. The cases explain "whereby" as "by means of or by the agency of which", "in consequence of", "as a result of", and "owing to which" (see Becker v Harry M Miller Attractions Pty. Ltd. (1972) AR 298). 11 In Caltex Oil (Australia) Pty Limited v Feenan and ors (1981) 1 NSWLR 169 at 173 the Privy Council described the meaning of "whereby" as "in consequence of which" or "in fulfilment of which". Either meaning was held to be sufficient to bring the relevant contract, under which the operator was enabled to conduct a Caltex Service Station as licensee, within the descriptions of contracts to which s88F of the Industrial Arbitration Act 1940 applied. 12 There was also a discussion of "whereby" in a separate but concurring judgment of Mahoney JA in Production Spray Painting & Panel Beating Pty Ltd v Newnham (1991) 37 IR 46 where his Honour made the following points (extracted in this form by Cahill Dep. CJ in Jennings and Ors v Auto Plaza Limited and Ors (1993) 46 IR 413 at 421)): "'Whereby' is a word which, in its ordinary signification, is capable of denoting a large number of things or, more accurately, a large number of relationships. It connotes a casual relationship." "What s88F is concerned with is causes or things which 'lead directly to' a person doing work in an industry, ie, to things which lead one person to offer and another person or persons to accept work in an industry." "It would not be expected that the section would apply to a transaction in which the performance of work was merely an accidental incident or consequence of it." "Similarly, it would not be sufficient for the application of the section that the performance of relevant work would be (to adapt the language of the Commission) merely 'contemplated' or 'envisaged' as a possible consequence of the transaction." "The section looks to the purpose of the transaction itself and to whether the purpose of the transaction was that relevant work be performed. In the terms of the section, it is the transaction, ie, the 'contract or arrangement or . . . ' that is to be the cause of ('whereby') the work being performed. This suggests that what is in question is not merely an accidental consequence of the transaction but that which was its purpose to bring about. If this be so, the purpose must be that of both of the parties." "Section 88F confers jurisdiction only where the transaction has as its purpose the performance of relevant work. The present transaction did not have, in the relevant sense, that purpose. Its purpose was that the assets constituting the business of 'Yasmin boutique' be transferred to the purchasers for the consideration stated in the agreement. It was not, in the relevant sense, the purpose of the transaction that the purchasers should perform work in it. They might, of course, do so and no doubt the vendor and the purchaser thought it likely or 'contemplated' that they would. But that was not the purpose, ie, that which was sought to be achieved by it. It was of no interest to the vendor whether the purchasers worked in the business or closed it up." 13 There are three decisions of this Court (or its predecessors) to which the parties have referred concerning lease arrangements under which a lessee was compelled by the lease to maintain a particular use of the leased premises. 14 In Jennings v Auto Plaza Cahill Dep.CJ held that jurisdiction existed under s275 of the Industrial Relations Act 1991 ("the 1991 Act") to hear and determine proceedings relating to a lease which required the premises to be utilised as a licensed restaurant and take away food outlet. After referring at length to the judgments in Production Spray Painting his Honour said: Returning to the circumstances of the present case, it is obvious, as already noted, that the contract here under consideration is substantially different from the contract in Production Spray Painting. That contract, which involved the sale of a business for a consideration calculated by reference to several factors, the most important being goodwill, was characterised by (a) the absence of any ongoing relationship between the parties upon completion and (b) a complete indifference, so far as the vendor was concerned, as to whether the purchaser continued to carry on the business, as no doubt was the purchaser's intention, or not. In the present case, however, the contract is a lease between the parties of part of large shopping centre premises obviously at least intended by both parties to be used by the lessees for the conduct of a restaurant business. The lease prescribes a term of years (with provision for the exercise of an option of renewal), during which the provisions of the lease are to govern and bind the relationship of the parties: it thus postulates and requires an ongoing relationship. It imposes a restriction on the lessees as to the use of the premises. Except with consent the premises are not to be used otherwise than as a licensed restaurant and takeaway food outlet (cl II(15)). . . . . . In my view, the terms of the lease, and particularly those to which reference has been made, require the lessees to establish the demised premises in restaurant mode and to carry on therein a restaurant business during lawful trading hours. I also consider that the carrying on of such a business in accordance with that obligation necessarily requires and results in the performance of work in the restaurant industry by the lessees themselves and/or by other persons whom the lessees engage to work in the business. Furthermore, that work provides any necessary "industrial colour or flavour" which might be needed in order that s275 should apply. 15 In Booth v Kritikos Developments Pty Limited and Anor (1995) 59 IR 298 Schmidt J held that the Industrial Court had jurisdiction under s275 of the 1991 Act to hear and determine the claim advanced under that section. Her Honour's judgment summarises the facts this way: The arrangement involved a contract for the sale of a hotel business between the first respondent and the applicant and a contract of lease of the hotel between a related company (the second respondent), and the applicant. . . . . . The lease of the hotel was for 10 years. It imposed various obligations upon the applicant as matters such as the conduct of the hotel; the maintenance of the licences under the relevant legislation; at the conclusion of the lease, the transfer to the second respondent of those licences, together with various items of plant and equipment and the performance of various work. Two terms particularly relied upon by the applicant provided: "3(p)(18) That the Lessee will carry on the business of an hotel-keeper, conduct the same in an orderly manner but not less than two (2) recorded convictions under the provisions of any Act or Acts affecting Hotels or licensed Publicans shall operate as a breach of this covenant." And: "3(aa) That the Lessee will at all times cause a competent Licensee to reside upon the said premises and manage and conduct the said business thereof in a proper, orderly and competent manner." 16 In the course of her conclusions, Schmidt J said at p.304: The arrangement between the parties contained express written terms requiring the applicant to conduct a hotel business at the premises and to ensure that particular work was performed. Those terms directly required the performance of work. The obligations imposed upon the applicant by the lease, particularly those in cll3(p)(18), 3(aa) and 15 are not properly described as merely indirect, remote or consequential. Nor were they merely covenants as to the use to which the premises could be put during the term of the lease. (There were in fact other covenants which went to use, cl3(w) of the lease for example). These provisions went further. They were specific and positive obligations requiring the applicant to ensure that particular work was performed during the term of the lease. These obligations reflected the respondent's continuing interest in the land and the premises, the continuing relationship between the parties and the respondent's interest in the continuation of the business sold to the applicant during the term of the lease. 17 There is a marked point of distinction between the facts in Kritikos and those in the present matter. The obligation to conduct the business was a requirement of the lease but in a context where the hotel business required to be maintained had been sold to the applicants and would, presumably, revert to the lessor upon the expiration of the lease. In the present matter the facts demonstrate only that the lessor requires a business of a certain kind to be conducted therein. 18 A case more in line with the facts of the present matter is Constandinos Iannou Kostakis and Anor v New World Oil & Developments Pty Limited and Ors (Unreported, 25 July 1997 - CT1157 of 1996 per Schmidt J). That judgment concerned a question of jurisdiction under s106 of the Act in relation to a lease of retail premises in the "Glasshouse on the Mall" Shopping Centre in Pitt Street, Sydney. The first respondent to the action was the lessor and the second respondent was the lessor's agent. 19 Schmidt J said this of the lease and its requirements: This was not a lease where all that was involved was the lease of premises, it being thereafter a matter of no concern to the lessor whether the lessees put the property to the use specified in the lease. Here the terms of the lease not only specified the use to which the property would be put, it also contained detailed requirements as to how the lessees would conduct the business, particularly the hours during which the business would be kept open. It also required that necessary staff, contractors and subcontractors would be provided to adequately carry on the business. Specific obligations were imposed which required work to be performed in redecorating, repairing and cleaning the premises over the period of the lease. The lease also imposed a positive obligation upon the lessor to operate a promotional fund to promote and advertise the retail section of Glasshouse on the Mall and the businesses conducted there, including the coffee lounge in question. It seems to me that all of these positive obligations remove this lease from the class of contract considered in Production Spray Painting . After referring to the judgment of the High Court in Stevenson v Barham (1976-77) 136 CLR 190, her Honour said: Here there are a number of obligations arising from the terms of the lease which directly require the performance of work. Such work is necessary for the terms of the lease to be satisfied and is not merely an indirect or remote or consequential result of that contract. This is not a case where the lessee could have closed up the business and continued paying rent and thereby have satisfied the terms of the lease. Under the lease the lessor had a clear and ongoing interest in the performance of work in the coffee lounge. The lessee had an ongoing interest in the operation of the promotional fund by the lessor. This was not the mere lease of a piece of property by a lessor, but an ongoing relationship with obligations for the performance of work on both sides. Accordingly , jurisdiction was found to exist. Conclusions 20 The conduct of that business could not be said to be "an accidental incident or consequence" (per Mahoney JA) of the lease. The conduct of that business was a particular and fundamental term thereof. The requirement to conduct the business, which necessarily implies work, as do the words in the lease "proper staffing", make clear that it was an express purpose of the lease. The extent of obligations imposed by the lease is not as found in Kostakis v New World; however, in the critical respect the leases are similar in effect and I find it impossible to take any different view in the present case. The obligation to maintain a particular identified business in a "proper, orderly and businesslike manner including the proper staffing and, where appropriate, stocking of the Premises", as here, achieves in my view satisfaction of the essential jurisdictional fact. 21 The argument for the respondent to the effect that the nature of the relief sought does not relate in any sense to the conduct of the business seems to me not to be germane on a jurisdictional issue. Whether it is an argument of substance on the merits is a matter for another day. Nevertheless, if the nature of the relief sought be thought to be critical at this stage, in my view the relief sought would relate relevantly to the conduct of the business. As the facts of the matter demonstrate, the issue in effect concerns a limitation upon the charges relating to outgoings which have been imposed upon the lessee. Those charges, substantial as they are, seem to me to go to the heart of the business in that they would affect its profitability, perhaps its viability. There is in my opinion no basis upon which it could be said that the notion of increased charges which are to be levied by a lessor would not be a relevant matter for the purposes of a business. 22 I conclude that the Commission has jurisdiction to hear and determine the summons for relief in this matter. The motion is dismissed with costs, as agreed or assessed, to the applicant, the respondent to the motion. 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.