Sunrise Resources (Australia) Pty Ltd -v- Hilton Hotels of Australia Pty Ltd [2001] NSWSC 380

New South Wales Supreme Court

CITATION : Sunrise Resources (Australia) Pty Ltd -v- Hilton Hotels of Australia Pty Ltd [2001] NSWSC 380 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50133/99 HEARING DATE(S) : 7/05/01 JUDGMENT DATE : 14 May 2001

PARTIES : Sunrise Resources (Australia) Pty Ltd -v- Hilton Hotels of Australia Pty Ltd JUDGMENT OF : Foster AJ at 1

COUNSEL : Mr S.T. White/Ms N. Obrart - Plaintiff Mr P.H. Greenwood SC - Defendant SOLICITORS : Moray & Agnew - Plaintiff Minter Ellison - Defendant CATCHWORDS : Lease between plaintiff and defendant - plaintiff claims that defendant is liable for loss and damage arising from the flooding of the building due to valve requiring replacement - also defendant liable for claims brought against plaintiff by other tenants who suffered water damage - defendant claims that plaintiff had obligation to prevent flooding from spreading and damaging other parts of the building. DECISION : Claim dismissed with costs.; Cross-claim dismissed with costs; Also refer paragraphs 27 and 28.

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

FOSTER AJ

MONDAY, 14 MAY, 2001 50133/99 - SUNRISE RESOURCES (AUSTRALIA) PTY LIMITED - v - HILTON HOTELS OF AUSTRALIA PTY LIMITED JUDGMENT 1 HIS HONOUR: This is a summons in the Commercial List brought by the plaintiff Sunrise Resources (Australia) Pty Limited ("Sunrise") against the defendant Hilton Hotels of Australia Pty Limited ("Hilton"). Hilton has also brought a cross-claim against Sunrise. I shall refer to the issues raised by these pleadings later in these reasons. 2 Sunrise is the owner of a large building at 255 Pitt Street, Sydney, known as the Capital Centre ("the Building"). Hilton is the major tenant of the Building and conducts, in the part of the building leased to it by Sunrise, a hotel business known as The Sydney Hilton Hotel. The lease between Sunrise and Hilton is registered No. T759678 ("the Lease"). It is a lengthy document. Before I consider the provisions of it which are relevant to this litigation, it is convenient to set out the relevant parts of the "Agreed Statement of Facts" which the parties have filed in these proceedings. "7. The Building comprises four basement carpark levels, levels 5 and 6 being the shopping arcade between George and Pitt Streets, levels 7 and 8 being the Hilton reception and convention area and levels 9-17 are leased to various commercial tenants. Level 18 contains the Hilton swimming pool and plant room servicing the Building. Levels 19-43 are the Hilton guest rooms and level 44 another plant room. Hilton is the major tenant of the Building. 8. For many years Sunrise retained building maintenance staff on duty 24 hours per day seven days per week with respect to the Building. Hilton also had its own maintenance personnel. Over the term of the lease a practice had developed whereby Hilton's maintenance staff attended to the air conditioning and plumbing, plant and equipment servicing Hilton's premises. Hilton had a right of access (with Sunrise) pursuant to the lease to plant and equipment in plant rooms on levels 18 and 44. The plant rooms contained air conditioning and plumbing plant and equipment also maintained by Sunrise's staff. 9. The Building contains a number of hot and cold water storage tanks on various levels including the main cold water storage tank on level 44. Piped water descends from this level servicing, in the first instance, the cold water domestic needs of the Hilton accommodation levels 19-42 and also the Hilton domestic hot water storage tanks on level 19. In the level 18 plant room the main pipe from level 44 branches into two sub-mains servicing respectively the Hilton premises below level 9 ("the Hilton sub-main") and Sunrise's commercial tenants' premises on levels 9-17 ("the Sunrise sub-main"). The Sunrise sub-main branches perpendicular to the main pipe and extends a few metres horizontally, through a series of valves before turning downwards vertically towards levels 17 and below. The Hilton sub-main in effect continues vertically downwards in the same line as the main from level 44. Approximately half a metre below the branch on the Hilton sub-main is a series of valves through which water flows to the Hilton premises at level 9 and below ("the pipework"). 10. At or about 6.30am on 1 June 1998 a valve ("the valve") connected to the Hilton sub-main pipework failed resulting in the discharge of a significant amount of water causing damage to common areas, areas leased by Hilton and other tenants together with damage to property owned by Sunrise. The valve which failed was connected to the pipework maintained by Hilton. 11. The failure of the valve was caused by a latent defect. 12. The valve was of a type which did not require any maintenance in the absence of signs of malfunction or imminent failure. 13. At no time prior to the valve's failure did it exhibit signs of malfunction or imminent failure. 14. After the valve failure the valve was replaced by Hilton at Hilton's expense at a cost of $914.59." 3 On these facts and, having regard to relevant provisions of the Lease, Sunrise claims a declaration that Hilton is liable for the loss and damage which has arisen as a result of the flooding to the Building and also in respect of claims which have been brought against Sunrise by other tenants of the Building, whose leased premises and contents have suffered water damage. It asserts that, under the Lease, Hilton had the obligation of preventing damage from any latent defect in the valve. For its part, Hilton denies that the Lease gives rise to any such obligations on its part. It asserts, by way of cross-claim, that Sunrise had an obligation to prevent flooding in the plant room from spreading to and damaging other parts of the Building. In particular it asserts there was a failure to provide adequate drainage in the room. It is convenient, in the first instance, to consider the claim and defence. These are based upon competing submissions as to the correct construction of relevant provisions of the Lease, to which I shall now refer. 4 In the interpretation section of the Lease there is a definition of "Demised Premises". They are defined as meaning "the Premises within the Building described in the First Schedule hereto and includes any fixtures, fittings, plant, machinery and equipment installed or hereafter to be installed therein by the Lessor". 5 The First Schedule is headed "Description of the Demised Premises". It incorporates detailed descriptions of each area of the Building which is the subject of the Lease to Hilton. It is agreed by the parties that the area in which the pipeworks and valve are located, on level 18 of the Building, is not part of the Demised Premises. However, reliance is placed, by Sunrise, on note 2 at page 18 of the First Schedule which provides that "the Lessee shall have the right of access to its plant machinery and equipment located within any of the Lessor's Plant Rooms on this level". I shall refer to this note later. 6 The provisions upon which Sunrise places major importance are to be found in the section headed "Maintenance, Repair, Alterations etc." Within that section, the paragraph to which it attributes the most significance is paragraph 6(a), which records the Lessee's covenant that: "6.(a) The Lessee will during the whole of the said term and otherwise so long as the Lessee may remain in possession or occupation, when where and so often as need shall be, maintain renew replace repair and keep the whole of the interior and exterior of and the areas of roof covering any part of the Demised Premises in good and substantial repair working order and condition and particularly all machinery plant equipment fixtures and things thereto belonging or appurtenant or which at any time during the term, or possession or occupation as aforesaid, shall be erected therein or be appurtenant thereto or be part thereof." 7 Counsel for Sunrise described this clause as being a "risk-allocation" clause. However, I have come to the conclusion that this description does not properly describe the clause, which, certainly, presents difficult features. Counsel's general submission is that it has the effect of requiring Hilton to renew and/or replace the defective valve, even though the defect was latent and undiscoverable in the absence of signs of malfunction or imminent failure (which signs were not relevantly exhibited), and was situated in a part of the Building which did not form portion of the Demised Premises. 8 Counsel sought to achieve this result by submitting that the clause, when properly construed, imposed upon Hilton two distinct obligations, being (a) an obligation to renew, replace, repair the Demised Premises and all things thereto belonging or appurtenant and (b) an obligation to keep the Demised Premises and all things thereto belonging or appurtenant in good and substantial repair, working order and condition. Counsel asserted that the first of these obligations was more onerous than the second. It was unqualified whereas the second obligation was both qualitative (good) and quantitative (substantial). The words "maintain renew replace repair" evinced an intention of the parties that the defendant should have an obligation beyond merely keeping the Demised Premises and their appurtenances in good and substantial repair. 9 With respect, I find this construction both artificial and strained. There is, undoubtedly, a difficulty with the clause. The verbs "maintain renew replace repair" do not appear to have an object unless it be the same object as is governed by the verb "keep", namely "the whole of the interior and exterior and the areas of roof covering any part of the Demised Premises." This would be plainly absurd as it would place upon Hilton the obligation to e.g. renew the whole of the interior and exterior of the Demised Premises. The alternative that those verbs should, as a matter of construction, apply directly to the words "all machinery plant equipment fixtures and things thereto belonging or appurtenant" is even less likely as being quite insupportable, in my view, as a matter of grammar and syntax. 10 I am satisfied that the clause is not intended to establish such dual obligations. Its thrust is to impose upon the Lessee, Hilton, an obligation to keep the Demised Premises, including machinery plant equipment etc "iin good and substantial repair working order and condition". It is to do so by maintaining renewing replacing and repairing "when where and so often as need shall be." 11 In my view, the best way to make sense out of this difficult clause is to read the word "and" where it appears between the words "repair" and "keep" as though it was "so as to". 12 This construction does not dispose of other important work that counsel submits is done by the clause in favour of Sunrise. He contends that the words "particularly all machinery plant equipment fixtures and things thereto belonging to and appurtenant" are apt to include the pipework and valves situated outside the Demised Premises in the Plant Room at level 18. 13 Can the pipework and valve be described as "equipment…belonging or appurtenant" to "the interior…of the Demised Premises"? They, obviously, could not apply to the exterior or roof. It is submitted that the valve and pipework were so "appurtenant" because they exclusively serviced the Demised Premises and were necessary for their use and enjoyment. The valve controlled the flow of cold water through the pipework to levels 7-9 of the Building which were exclusively used by Hilton. Consequently the necessary attribute of "belonging or appurtenant" was made out. 14 I have found this submission attractive but consider that I must reject it. Although the valve and pipework exclusively serviced the Demised Premises they were a part of a more extensive and connected pipework system at level 18, which system included, in close proximity, an associated pipe and valve conveying water to areas of the Building occupied by Sunrise and the other tenants. Moreover, it does not appear that the Lease provided any right of access to Hilton to the area of level 18, where the valve and pipework were situated. Note 2 to the First Schedule, set out above, limits the right of access to "its plant machinery and equipment…". The valve and pipework could not be described, in any sense, as relevantly owned or even possessed by Hilton. 15 Moreover, the provisions for insurance in the Lease, in my view, cast some light on the construction of this clause. Hilton is required by clause 7(a) to effect and keep effected adequate insurance against "damage caused by the overflow, leaking or bursting of water or water pipes within the Demised Premises" such insurance would not provide protection where the relevant leakage occurred outside the Demised Premises. Paragraph 7(e) deals with under-insurance. It requires the Lessee to make good any deficiency in the financial cover provided by the policy, by expending out of its own monies "any further money required in reinstating and replacing and repairing and making good the whole of the damaged or destroyed part of the Lessor's fixtures fittings plant and equipment installed within the Demised Premises…". Again, this suggests strongly that Hilton's liability under the Lease, as a matter of overall policy, is not intended to extend beyond events occurring inside the boundaries of the Demised Premises. 16 Reliance was also placed, to a lesser degree, upon the provisions of clause 6(d)(ii). This requires that Hilton will at its expense "keep and maintain clean and in good order repair and condition all fittings plant furnishings and equipment whether of the Lessee or the Lessor." It is acknowledged by counsel for Sunrise that this clause must be subject to qualification as otherwise it would apply to all such items wherever they were in the Building. The obvious qualification is that the clause is intended to relate only to such items as are to be found within the Demised Premises. I so construe the clause. 17 Reliance was also placed upon paragraph 6(g). It reads as follows:- "From time to time and at all times during the said term well and substantially to repair clean and put and keep in good and substantial repair and condition the Demised Premises and all additions thereto (including the renewal and replacement whenever necessary of the Lessor's fixtures and fittings thereon and the said special fixed hotel equipment plant machinery elevators and escalators)." 18 It was submitted that the word "additions" was apt to apply to the valve and pipework. I am not prepared to attribute this meaning to it. I do not consider that they could relevantly be described as "additions to the Demised Premises", especially as they existed outside of those premises in an area to which there was no right of access on the part of Hilton. 19 I have therefore come to the conclusion that the Lease imposed no obligation upon Hilton to service the defective valve. There is no necessity, then, for me to consider whether, in any event, having regard to the phrase "so often as need shall be" Hilton would have any obligation in respect of purely latent defects. 20 I have not overlooked the fact that Hilton employees serviced the equipment. It appears that this practice developed over time. Quite apart from the question whether, in law, I can take account of this fact in the construction of the contract, I am satisfied that, as a matter of fact, it was of no contractual significance. There is nothing in the material before me to suggest that the work was undertaken by Hilton maintenance staff other than as a matter of convenience. 21 Accordingly, the claim is to be dismissed with costs. 22 I turn now to the cross-claim. 23 The cross-claim Hilton asserts that Sunrise was in breach of its covenant in clause 19(a) of the Lease. The covenant reads as follows:- "(a) The Lessee shall peaceably possess and enjoy the Demised Premises for the term hereby granted without any interruption or disturbance from the Lessor or any other person or persons lawfully claiming by from under or in trust for the Lessor." 24 It was submitted that Hilton suffered damage as a result of the flood waters entering the Demised Premises in circumstances constituting a "disturbance from the Lessor". Specifically it was alleged in the cross-claim that the floor drains in the level 18 Plant Room "did not have the capacity to drain water in the event of a flood such as occurred". Allegations based upon negligence and nuisance are also made in the cross-claim but, as I understood the argument, these claims were not relied upon. 25 There is no evidence before me explaining the cause of the failure of the valve, nor is there any evidence as to any available procedures that might have been undertaken to obviate the risk of the valve's failure. Accordingly, I do not have any material upon which a finding could be based that the flood was occasioned by any relevant act or omission on the part of Sunrise, which could put it in breach of the covenant for quiet enjoyment set out above. Moreover, the allegation of inadequate drainage is denied and there is no evidence directed to this issue. 26 Furthermore, it would appear that clause 18(a) of the Lease would exempt Sunrise, as Lessor, from any claim by Hilton, as Lessee, for "any loss of or damage to fixtures or other personal property of the Lessee from any damage occurring within the Demised Premises." Clause 5(f) would also appear to negative any such claim. 27 In all these circumstances, I am satisfied that the cross-claim cannot succeed and should be dismissed with costs. 28 I have been asked by the parties to refrain from making any formal and final orders until these reasons are published, so that they may be considered and Short Minutes brought in. Accordingly, I make no orders at this stage. **********************