New South Wales Supreme Court CITATION : Solowave Pty Ltd v Nechi Holdings Pty Ltd [2005] NSWSC 837 HEARING DATE(S) : 16/08/05 JUDGMENT DATE : 17 August 2005 JUDGMENT OF : White J DECISION : See para 63 of judgment. CATCHWORDS : REAL PROPERTY - Leases - Lessor terminated lease by re-entering leased premises for lessee's default in respect of rent payments - Deed of variation allowed setting off a proportion of expenses incurred in pursuit of a development application against rent payable - Obligation to pay rent an essential term of the original lease - Whether arguable that time made inessential by deed of variation - Dispute about amounts set off and essentiality of time for payment - PRACTICE AND PROCEDURE - Application to extend interlocutory injunction restraining lessor from taking physical possession of the leased premises - Serious question as to whether lessee is entitled to relief against forfeiture - Whether lease has been determined and status quo is that lessee is not entitled to possession - Held that lessee's right in equity to revive his interest in the property did not end at termination - Balance of convenience favours the lessee - Injunction extended on terms. LEGISLATION CITED : Supreme Court Act 1970 (NSW) Pioneer Quarry (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 9562 Brooker's Colours Ltd v Sproules (1910) 10 SR (NSW) 839 Platt v Ong [1972] VR 197 Riddington v Pye (1989) 9 BPR 16,643 Sufigoe Pty Ltd v Amber Properties Pty Ltd, (01/08/95, unreported, McClelland CJ in Eq) CASES CITED : Horwath Corporate Pty Ltd v Huie [1999] NSWSC 242 Kumaragamage v Rallis [2001] NSWSC 466 MI Design Pty Ltd v Dunecar Pty Ltd (2000) 10 BPR 18,387 Islam v South Sydney City Council (1998) 9 BPR at 16,865 Tannous v Cipolla Bros Holdings Pty Ltd [2001] NSWSC 236 Solowave Pty Ltd PARTIES : v Nechi Holdings Pty Ltd FILE NUMBER(S) : SC 4488/05 Plaintiff: B Coles QC & J-J Loofs COUNSEL : Defendant: J Simpkins SC Plaintiff: Alexanders Lawyers SOLICITORS : Defendant: Barringer Leather Lawyers LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WHITE J Wednesday, 17 August 2005 4488/05 Solowave Pty Ltd v Nechi Holdings Pty Ltd JUDGMENT 1 HIS HONOUR: This is an application to continue an interlocutory injunction restraining the defendant from keeping the plaintiff from possession of premises at levels 1 and 2, 31-35 Oxford Street, Darlinghurst. 2 The defendant is the owner of the property. The plaintiff is or was a lessee under a lease made on 9 April 2003. 3 The lease was for a term of 10 years commencing on 1 March 2003 with an option for renewal for a further 10 years. 4 The defendant purported to terminate the lease by re-entry on the morning of 11 August 2005. 5 On 12 August 2005, the plaintiff obtained an interlocutory injunction restraining the defendant from keeping it from possession of the premises. That injunction has been extended until today. 6 The defendant claims to have terminated the lease for non-payment of rent and other moneys. The plaintiff denies that the defendant was entitled to terminate the lease. In the alternative, it claims relief against forfeiture. 7 The lease provides that the plaintiff should pay the base rent of $250,000 per anum on the first day of each month. The plaintiff is also required to pay a proportion of increases in outgoings, initially as estimated by the lessor. The lessee's proportion of outgoings is payable on the same day rent is payable. 8 The base rent was subject to automatic annual increases in the accordance with the Consumer Price Index. The increased rent was payable on the first Rent Payment Day after the information was available to make the calculation. 9 Clause 18.1 of the lease provided that each obligation of the tenant to pay money was an essential term of lease. By clause 18.2, the landlord could terminate the lease by giving notice, or by re-entry, if the tenant did not comply with an essential term. 10 The premises are used as a hotel and nightclub. In 2003, an issue arose as to whether requisite development consents had been obtained for that use, particularly, I infer, for use as a nightclub. 11 The plaintiff and the defendant, it seems, agreed that an application would be made for a further development consent. According to the plaintiff, in May 2004 the parties orally agreed that the costs of the development application would be borne as to 80 percent by the defendant and as to 20 percent by the plaintiff, that the rent would be paid to the plaintiff's solicitor, that expenses of the development application would be paid by him, and that there would be a reconciliation when the development application was approved. That there was some such agreement would appear to be corroborated by the fact that after 6 May 2004, the plaintiff stopped paying rent to the defendant's agent, without complaint by the defendant until April of this year. 12 On 23 March 2005, the parties entered into a deed in relation to the payment of the costs of the development application lodged with the Council on 17 May 2004. 13 Clause 2.2.1 of the deed provided that subject to clause 2.3, 80 percent of the "Incurred Development Costs" and "Future Development Costs" would be allowed by the lessor in the form of a rent free period under the lease. The remaining 20 percent of those costs was to be paid by the plaintiff. 14 "Incurred Development Costs" meant costs paid to date, which I take to be the date of the deed, that both parties agreed were directly related to the development application lodged with the council on 17 May 2004. 15 "Future Development Costs" meant future costs to be paid by the lessee, that both parties agreed were directly related to the development application. 16 Clause 2.3.3 provided that no part of those costs would be allowed under clause 2.2.1 unless they were actually paid by the lessee. 17 The deed defined "Outstanding Rent" as meaning the outstanding rent and outgoings that were due under the lease but remained unpaid by the lessee. 18 Clauses 2.2.3 and 2.2.4 provide for the difference between the total value of the Incurred Development Costs and the Future Development Costs either to be allowed by the lessor as a further rent free period under the lease, or to be paid by the lessee within 7 days of demand, as the case might be. Time for payment after demand under clause 2.2.4 was not expressly made essential. 19 The deed necessarily contemplated that the rent and outgoings due under the lease would not be paid to the lessor. Rather, the lessor would be entitled to occupy the premises for a period free of an obligation to pay rent or outgoings. That period is to be calculated on the basis of 80 percent of the Incurred and Future Development Costs paid by the lessee. 20 If the Outstanding Rent, including outgoings, which was due and unpaid exceeded 80 percent of the Incurred and Future Development Costs, the lessee is obliged to pay the difference within 7 days of demand. 21 There is a serious question to be tried as to whether the lessor can rely upon clause 18.2 of the lease as a basis for terminating the lease for the alleged breach the obligation to pay rent and outgoings on the stipulated monthly intervals, or whether the parties varied that obligation by the deed. 22 Inevitably, there would fluctuations in when development costs would fall due for payment. Inevitably, costs in varying amounts would fall due for payment which related directly to the development application. 23 There was likely to be uncertainty as to what costs should properly be treated as being directly related to the development application. The deed contemplated that rent and outgoings might be due, or would be due, and be unpaid. If provided for their payment, not monthly in accordance with the lease, but 7 days after demand. No express provision made the time for payment within 7 days of demand under clause 2.2.4 essential. 24 The defendant relied upon clauses 5.1 and 5.2 of the deed which provide: "5.1. This Deed is not a waiver of any breach under the Lease and is not a waiver of the Lessor's rights under the Lease. 5.2. This Deed is supplemental to the Lease and shall be interpreted with and having regard to the terms of the Lease". 25 It is, at least, seriously arguable that what is involved is not a waiver of the lessor's rights under the lease but a variation of lease. 26 It is also seriously arguable that interpreting the deed "with regard to the terms of the lease" does not mean the time for payment of money under 2.2.4 is essential, notwithstanding that time for payment of moneys due under the lease is essential. That may be reinforced by clause 2.3.2 of the deed which provides that any dispute as to whether an Incurred Development Cost or Future Development Cost is directly related to the development approval is to be determined in accordance with clause 4. 27 Clause 4 provides for mediation of such a dispute before court or arbitration proceedings may be commenced. 28 It is one thing to make time essential for the payment for rent and goings and any moneys under the lease about which there is likely to be little ground for genuine dispute. There is a serious question, however, as to whether it is quite another to infer that time is also essential to the payment of a balance due under 2.2.4, where the calculation of that balance may raise difficult questions, which the parties appear to have recognised by the dispute mechanism they have provided for. 29 It was submitted for the defendant that there is no arguable case that the plaintiff does not owe a substantial sum of money of at least $168,086.57. It is also submitted for the defendant that there is no arguable case that the defendant was therefore not entitled to re-enter. Assuming for present purposes the correctness of the first proposition, I do not accept the second. 30 In any event, the plaintiff's makes alternative claims for relief against forfeiture and offers to pay any amounts which may be found to be due. Equity regards a lessor's right to determine a lease by re-entry for non-payment of rent as a security for the rent due, provided the lessee pays the outstanding rent or other moneys, interest and costs. It is only in special circumstances that relief against forfeiture for non-payment of rent will be refused, although the relief remains discretionary. See Pioneer Quarry (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 9562. 31 On the materials before me, the plaintiff would have a strong case for relief against forfeiture on its paying what was due, together with interest and costs. The lease is for a term of ten years and has another 8 years or so to run with a 10-year option for renewal. The plaintiff has contributed 20 percent of the costs of the development application paid, or at least 20 percent of the majority of those costs. The benefit of development approval will enure for the benefit of the lessor as well as any lessee. 32 The defendant did not dispute that there would be a serious question to be tried, that the plaintiff was entitled to relief against forfeiture. But it submitted that an interlocutory injunction should not be granted to give the lessee possession of the premises, before it was determined that the lessee was entitled to that relief. An interlocutory injunction, it was said, should preserve the status quo. The claim for relief against forfeiture involves the lessee's accepting that the lease has been forfeited and seeking relief against that forfeiture by the grant of a new lease. The status quo, it said, is that the tenant has no lease until relief against forfeiture is granted, and therefore no current right to possession which an interlocutory injunction should protect. I do not accept this submission. 33 I accept that a claim for relief against forfeiture assumes that the lease has been brought to an end, or that the lessor is entitled to bring it to an end. However, the termination of the lease does not bring to an end the lessee's right in equity to have his estate revived. (Brooker's Colours Ltd v Sproules (1910) 10 SR (NSW) 839 at 841 to 842). 34 Although it is not determinative of the present issue, it should also be noted that whereas, before Parliament intervened, equity provided relief against forfeiture where the lease had been brought to an end by directing the parties to execute a new lease, (Platt v Ong [1972] VR 197 at 199), s 73 of the Supreme Court Act 1970 (NSW) provides that in proceedings for a forfeiture for non-payment of rent, the Court may on terms give relief, and if the lessee is so relieved, he or she shall hold the demised premises according to the terms of the lease and without the necessity of any new lease. 35 The power to grant an interlocutory injunction under s 66(4) of the Supreme Court Act is a power the grant such an injunction where it appears to the Court to be just or convenient so to do. There is no reason that that power cannot be used, in an appropriate case, in aid of a lessee's prima facie right to be relieved from forfeiture of his estate, by protecting his possession in the mean time. It would be strange that the Court's power to protect a lessee in his possession of the premises should depend upon whether the injunction was sought immediately before or immediately after the lessor terminated the lease. 36 I have found no support in the authorities for the defendant's contention. Authority appears to me to me to be against it. In Riddington v Pye (1989) 9 BPR 16,643, the defendants had taken steps to eject a tenant from the subject property. Powell J (as his Honour then was) said, at (16,647), that the tenants had a strong case for relief against forfeiture and that that being so, the benefit of that claim should be protected in the meantime by an interlocutory injunction. 37 In Sufigoe Pty Ltd v Amber Properties Pty Ltd, (01/08/95, unreported, McClelland CJ in Eq), treated the question of the grant of an interlocutory injunction in proceedings for relief against forfeiture where the lessor had re-entered as raising no question of principle. His Honour addressed the question by reference to whether the plaintiff had an arguable case for final relief against forfeiture, and where the balance of the convenience lay. 38 In Horwath Corporate Pty Ltd v Huie [1999] NSWSC 242 Young J (as his Honour then was), said (at [13],) that he had no doubt, as Powell J had deciding in Riddington v Pye, that in an appropriate case an interlocutory injunction should go to protect an application for relief against forfeiture. 39 Here the balance of convenience is heavily in favour of protecting the plaintiff's possession. The plaintiff is undertaking a business from the premises which is its sole source of income. It opens on Friday and Saturday and on the long weekend, and on average takes about $70,000 during such periods. No doubt there are employees whose employment would be at risk if the plaintiff's business were forced to close. 40 Nor, it seems to me, would there be any countervailing advantage to the defendant if the injunction were refused. The plaintiff, at least prima facie, would in any event be entitled to an interlocutory injunction restraining the defendant from re-letting the premises until after the determination of its claim to be relieved from forfeiture of its estate. If that is so, but the plaintiff were kept out of possession of the premises until its claim for relief against forfeiture were determined, the defendant would find itself in all probability with vacant premises and no rent. 41 It seems to me that there is a serious question to be tried, both as to whether the defendant was entitled to terminate the lease and as to whether the plaintiff will be entitled to relief against forfeiture if the lease was validly terminated. Subject to the questions of what condition should be imposed on any interlocutory injunction, the balance of the convenience favours the grant of such an injunction. 42 No point was taken that it was not open to the plaintiff both to deny that the defendant had validly terminated the lease and in the alternative to seek relief against its forfeiture. Notwithstanding the observations of Austin J in Kumaragamage v Rallis [2001] NSWSC 466 at paragraphs 10 to 19, it is at least arguable that such claims can be made in the alternative. (MI Design Pty Ltd v Dunecar Pty Ltd (2000) 10 BPR 18,387 at 18,399 [56]; Islam v South Sydney City Council (1998) 9 BPR at 16,865 at 16,870). Indeed, it might be thought that s 63 of the Supreme Court Act required such an alternative claim to be made. Tannous v Cipolla Bros Holdings Pty Ltd [2001] NSWSC 236 is an example of a plaintiff obtaining relief against forfeiture after unsuccessfully disputing the validity of the termination of the lease. 43 On both grounds, I consider the plaintiff is entitled to interlocutory injunctive relief if it meets appropriate conditions to ensure that it does equity. 44 On the materials before me which, unsurprisingly, are not very satisfactory, it does seem to me that the defendant is correct in saying that it is owed a substantial sum. The defendant calculates that the rent and outgoings due for the period from 1 April 2004 to 31 August 2005 totals $419,144.81. This includes CPI increases which the defendant only belatedly charged. However, the lease provides for automatic CPI adjustments. On the present materials, I do not think there is a serious question that that is not the amount due under the lease. 45 The next question is how much of that sum has been paid to the lessor. There is evidence that the between 16 April and 6 May 2004, the plaintiff paid $32,136.40 to the lessor's agent, Mr Green. $9,000 of that sum seems to referable to rent due in March 2004. There is no evidence from the defendant, on whom on this question the onus lies, to show that the balance of $23,136.40 related to rent or outgoings due before 1 April 2004. I therefore start from the position that the unpaid rent and outgoings totals $396,008.41 so far as the materials before me show. 46 The next question is how much of that amount the plaintiff can contend should be allowed as 80 percent of Incurred and Future Development Costs in respect of which rent and outgoings abate. On the materials before me the total amount of such development costs paid to date is $340,055.24. This includes sums totalling $93,569.58 which the defendant says are disputed, and therefore pursuant to clause 2.3.4 of the deed cannot be allowed under clause 2.2.1 whilst the dispute is unresolved. 47 However, that issue itself raises questions of what constitutes a dispute for the purposes of that clause, whether the lessor is required to act reasonably and in good faith in raising a dispute, and whether there is a genuine dispute in relation to those amounts. 48 The accountant who has carried out an audit for developmental expenses, Ms Yip, said in a fax to Mr Green of 7 June 2005 that "we excluded expenses related to the invoices for the work to carried out and the legal fees incurred during the period from October 2003 to January 2004 even though that were related to the DA submission, but not necessary (sic) related to the particular DA dated 17/5/04 as mentioned in the deed of agreement". I emphasise the intended word "necessarily". 49 Even if the earlier payments are not directly related to the development application dated 17 May 2004, they may be covered by the earlier oral agreement. I think there is an arguable question about this notwithstanding the terms of clause 6.1 of the deed. 50 In the same facsimile, Ms Yip also said "we believe that the following payments (with no invoices supplied) are likely related (sic) to the relevant DA and would be included as approved expenses if invoices are supplied to our office...". Then there followed a number of expenses totalling $28,659.27. 51 In relation to the major item of expense which is so referred to, it is clear from the correspondence from the plaintiff to the defendant that the amount in question has been paid and there is at least a serious question to be tried as to whether the alleged absence of invoices raises a genuine dispute. 52 In calculating what sum, if any, the plaintiff should pay as a condition of obtaining injunctive relief, it would not be right in my view to say that the plaintiff is not entitled to be allowed 80 percent of the amounts in question which are said to be disputed as an abatement of rent, being amounts which it is clear the plaintiff has paid. Eighty percent of $340,055.24 is $272,044.19. 53 The defendant says that there should be deducted from that sum an amount of $62,427.31 which the defendant has paid. Two issues arise about this. First, whether the defendant has paid those sums. Secondly, if it has paid those sums, whether they should be deducted from the sum of $272,044.19, or from the sum $340,055.24, before the 80 percent calculation is made. 54 As to the first, the evidence is somewhat sparse. It consists of Ms Yip's statement that in the process of auditing the DA expenses, she verified that the defendant had paid the sum $62,427.31 in respect of certain invoices that were supplied to her and were marked as having been paid directly by the defendant. The particulars of those payments are given at page 16 of Ms Yip's affidavit. They are said to have consisted of five payments towards engineering, electrical, and air-conditioning costs. 55 The plaintiff submitted that I should find it paid one of the amounts in question namely a sum of $25,000 said to have been paid by the defendant to Barnwall Cambridge Pty Limited on invoice 21168 dated 11 February 2005. However, it seems to me that the only part of that invoice paid by the plaintiff was an amount of $2,940. (See pages 27 to 29 of Mr Riggs' affidavit.) Although the material is somewhat sparse, I should proceed on the basis that the Ms Yip is correct in saying that the defendant has paid development costs of $62,427.21. 56 The consequence is that these are not Incurred or for Future Development Costs under the deed as they were not paid by the lessee. They should therefore be deducted from the sum of $340,055.24, before the allowance under clause 2.2.1 is calculated. Had the costs been paid by the lessee, only 80 percent of the costs would be an allowance against rent, and the lessee would have had, and discharged, a personal liability under clause 2.2.2 of the deed in respect of the remaining 20 percent. It is at least arguable that failure by the lessee to meet a liability under clause 2.2.2 of the deed would not be a breach of the lease, or at least not one which could attract the termination provision in clause 18. 57 The effect of the deducting the lessor's payment from the development costs is to give an allowance under clause 2.2.1 to the lessee of 80 percent of the difference between $340,055.24 and $64,427.31; an amount of $222,102.34. 58 On the materials available to me, it seems that the plaintiff, prima facie, owes the defendant at least the difference between $396,008.41 and $222,102.34. That sum is $173,906.07. 59 It will be condition of the injunctive relief that the plaintiff pay that sum to the defendant. This will not preclude either party when accounts are taken from contending that a greater or lesser sum is due. I understood the plaintiff to have accepted as a condition of the relief that a sum of this order should be paid. Indeed, it offered to make such a payment to an interest-bearing account. 60 I see no reason why the payment should not be made directly to the defendant. No question has been raised about its ability to repay any moneys which may be found on the taking of accounts to have been over paid. 61 For the sake of clarity, I should say that in my view there was no reason that payment cannot be paid using moneys currently standing to the credit of the solicitor's trust account. The source of funds for payment will be a matter for the plaintiff. 62 I will give directions for the filing of a notice of motion for expedition. That notice of motion is to be filed and served by 19 August 2005 returnable before the expedition list judge on 26 August 2005. I direct that affidavits in support of the notice of motion be filed and served by 23 August 2005. 63 I make the following orders: 1. Upon the plaintiff by its counsel giving to the Court: (a) the usual undertaking as to damages; and (b) an undertaking to deliver by 5pm on 19 August 2005 to the defendant one or more bank cheques drawn in favour of the defendant in a total amount of $173,906.07, in respect of the plaintiff's possession of the premises at levels 1 and 2, 31-35 Oxford Street Darlinghurst, order that the defendant by itself, its servants and agents be restrained until the final hearing of these proceedings or further order from interfering with the plaintiff's possession of the said premises. 2. Reserve liberty to the defendants to apply to vary or discharge the above injunction in the event that it claims to be entitled to terminate the lease by reason of any future breaches by the plaintiff, or that it contends that the plaintiff has not prosecuted the proceedings expeditiously. 3. Direct that the plaintiff file and serve a notice of motion for an expedited hearing on or before 19 August 2005. I direct that such a notice of motion be returnable before the expedition list judge on 26 August 2005. 4. Direct that an affidavit, or affidavits, in support of the notice of motion be filed and served by 23 August 2005. The application before me concerned only the relief claimed in paragraph 5 of the summons. I order that the costs of that application be costs in the proceedings. 64 I stand over the proceedings to 26 August 2005 before the expedition judge. ****** 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.