New South Wales Supreme Court CITATION : Krstic v Brindley [2006] NSWSC 1414 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 1 December 2006 JUDGMENT DATE : 1 December 2006 JURISDICTION : Equity JUDGMENT OF : Campbell J EX TEMPORE JUDGMENT DATE : 12/01/2006 DECISION : Injunction granted restraining a particular proposed transfer of one poker machine entitlement. CATCHWORDS : GAMING AND WAGERING - poker machine entitlements - whether lease covenant prohibits transfer - LIQUOR LAW - other matters - poker machine entitlements - whether lease covenant to use best endeavours to maintain and extend the business prevents lessee from seeking transfer of poker machine entitlement - nature of "the business of hoteliers" - meaning of "best endeavours" clause - LANDLORD AND TENANT - covenants - to use best endeavours to maintain and extend the business - to carry on the business of a hotelier LEGISLATION CITED : Gaming Machines Act 2001 Apollo Shower Screens Pty Ltd & Anor v Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561 Baiada & Ors v Waste Recycling & Processing Service Of NSW [1999] NSWCA 139; (1999)130 LGERA 52 CASES CITED : Hampton Court Ltd v Crooks (1957) 97 CLR 367 Jones v Dunkel (1959) 101 CLR 298 Transfield Pty Ltd v Arlo International Limited (1980) 144 CLR 83 Vojislay Krstic - First Plaintiff Kovilkja Krstic - Second Plaintiff PARTIES : Goran Krstic - Third Plaintiff Dragan Krstic - Fourth Defendant John Brindley - Defendant FILE NUMBER(S) : SC 6002/06 COUNSEL : S Brennan - Plaintiffs A Hatzis - Defendant SOLICITORS : Creaghe Lisle Temora - Plaintiffs Deutsche Partners - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J 1 DECEMBER 2006 6002/06 VOJOSLAY KRSTIC & ORS v JOHN BRINDLEY JUDGMENT – Ex Tempore (revised 18 December 2006) 1 HIS HONOUR: This is an application for a final injunction restraining the defendant from selling any poker machine entitlement that is allocated in respect of the licence for the Royal Hotel, Temora during the term of the current lease between the parties. There is also an application for an order restraining the defendant from further prosecuting before the Liquor Administration Board its application to transfer one poker machine entitlement from the Royal Hotel, Temora to a particular hotel in Armidale during the term of the current lease between the parties. 2 The plaintiffs are the owners of the freehold of the Royal Hotel, Temora. At some stage prior to 22 August 2002 the plaintiffs made application to the Liquor Administration Board for approval to keep six hardship gaming machines. The result of that application was notified on 22 August 2002 when the Board informed one of the plaintiffs that it had determined to approve only three hardship gaming machines. One of the grounds that the Board relied upon for that decision to not grant the full number sought was: "The Board had regard to your client's stated hardship circumstances and the likely profits that will be generated by the hardship gaming machines to be approved." 3 Once that approval had been obtained, the plaintiffs purchased, at their sole cost, three second-hand poker machines on 14 November 2003. One of them was a Flame of Olympus, another was Indian Dreaming and the third was Queen of the Nile. They paid $7,000 in all for those three machines. Those three specific machines were notified to the Board. 4 An inventory of items contained in the hotel is attached to the lease. It confirms that at the date of commencement of the lease there were no poker machines on the premises. 5 The defendant made application to the Liquor Administration Board in 2006 to allocate three poker machines entitlements to the licence, pursuant to section 31(1) of the Gaming Machines Act 2001. That is the section that provides: "(1) The Board may, on application by a hotelier or registered club, allocate one poker machine entitlement for each hardship gaming machine approved to be kept in the hotel or on the premises of the club." 6 By that means the right to operate three hardship machines has in effect been converted to a right to three ordinary poker machine entitlements. 7 There continue to be three poker machine entitlements allocated with respect to the licence of the hotel. 8 Pursuant to section 19 of the Gaming Machines Act 2001, a poker machine entitlement allocated in respect of a hotelier's licence is transferable. 9 It appears that the plaintiffs had, prior to August 2002, run the hotel themselves. A lease for five years, commencing on 6 August 2002, was executed on 22 November 2002. That lease was to one Michael Abraham. He has assigned the lease, by a tripartite deed of assignment of lease entered in 2003, to the defendant. That assignment agreement contains a specific covenant on the part of the defendant that he will carry out each of the covenants of the lessee set out in the lease. 10 The sole basis upon which the plaintiff claims the relief in this case is as an injunction to restrain alleged breaches of covenants in the lease. The relevant provisions of the lease include 3(g): "If after the commencement hereof, the Lessor obtains a gaming permit for the Hotel and installs a poker machine for the benefit of the Lessee, then the Lessee shall pay by way of additional rental, the sum of One Hundred Dollars ($100.00) per week." 11 Clause 4 under the heading "Use of the Demised Premises by the Lessee" contains a variety of covenants. Amongst them are: "(a) The Lessee will not use, or permit to be used, the demised premises or any part thereof, for any purpose other than hotel, restaurant, motel or other like use or any other associated use connected with the sale of good [sic] and liquor in accordance with the law for the time being in force in the said State of New South Wales. … (c) So long as the current hotelier's licence … shall be in existence authorising the sale of liquor upon the premises the lessee will carry on the business of hoteliers and conduct of the same in an orderly manner and will apply for renewal of the licence and the lessee will keep the premises upon [sic] for the sale of liquor during all lawful hours and (without in any way affecting or limiting the extent of the other covenants thereof) provide all meals services, and entertainment required to be provided by the Lessee's under the provisions of the Liquor Act 1982 or any Act or Acts for the time being in force having reference to or regulating the sale of intoxicating liquors and the management and control of the licensed public houses and will use the best endeavours to maintain and extend the business of the Terminus Hotel, Temora and to preserve and improve the character thereof with the licensing authorities and the public and will properly and adequately equip and keep so equipped the premises and all partes thereof with furniture furnishings and plant of as high a standard as from time to time may be reasonably be required by the Lessor having regard to the nature of the trade at the commencement of this Lease and which may be reasonably be expected to be provided for by the premises …" 12 There are some provisions in clause 4, notwithstanding the heading to the clause, that do not relate to the use of the demised premises by the lessee. For instance, there is an acknowledgment that ownership of the beneficial interest in the licence remains with the lessor and that the lease does not operate as an assignment or sale of it. There is a covenant for the lessee to pay the licence fees. There is a covenant for the lessee to lodge certain returns with the licensing authorities. In that situation I will not use the heading of clause 4 as the sort of aid to construction that limits covenants within clause 4 to meanings that are within the scope of the heading. 13 The critical parts of clause 4 that the plaintiffs rely on are in clause 4(c). There are three particular portions relied on, which I will repeat, as though they are separate covenants whereby the lessee promises: 1. To use the best endeavours to maintain and extend the business of the Terminus Hotel, Temora. 2. To preserve and improve the character thereof with the licensing authorities and the public. 3. To properly and adequately equip and keep so equipped the premises and all parts thereof with, furniture furnishings and plant of as high a standard as from time to time may reasonably be required by the Lessor having regard to the nature of the trade at the commencement of this Lease and which may be reasonably be expected to be provided for by the premises. 14 This is not the sort of lease in which I am prepared to draw inferences, on an assumption that the document is a carefully crafted piece of drafting. It manifestly is not. In covenant one, the draughtsman even got the name of the hotel wrong, though everyone agrees that it is intended to be a reference to the Royal Hotel, Temora. The grammar of covenant three is clumsy in the phrase "which may be reasonably be expected". It does not look like a lease that has even been proof read. 15 Mr Hatzis, counsel for the defendant, draws to my attention that there are various covenants in the lease that deal specifically with the liquor licence, that clause 3(g) relates specifically to the possibility that the lessor might obtain a "gaming permit", but that there is no express provision in the lease that prohibits any such "gaming permit", if obtained, from being transferred away from the hotel. 16 While I accept there is no express provision to that effect, the sloppiness of drafting of the lease means that it is not one where I would regard it as likely that, if the parties had intended there to be such a provision, they would have said so expressly. 17 Clause 4(c) requires the Lessee to carry on "the business of hoteliers" in an orderly manner. Various manifestations of some parts of the "business of hoteliers" are referred to in clause 4(a). I accept Mr Hatzis' submission that a requirement of the business of hoteliers is the selling of liquor by retail on the licensed premises. However, there are other activities, which could properly as a matter of ordinary English be described as part of the business of hoteliers, that can be carried out as part of that business in a way that is incidental to the sale of liquor by retail from the licensed premises. The possibility that a hotelier might choose to operate a restaurant or provide entertainment, is such an ancillary matter. The way clause 4(c) operates is that, if the hotelier chooses to conduct any of those ancillary activities, those ancillary activities, as well as the sale of liquor, must be conducted in an orderly manner. 18 I mention these matters, because they can bear upon the content of the first of the covenants that is sued on. Mr Brennan, for the plaintiffs, maintains that it would not be possible to "maintain the business" of the hotel if one was selling a revenue stream, such as the revenue stream that arises from operating a poker machine. He maintains that the obligation to "extend the business" is one that requires the business to be added to, not subtracted from by the removal of a poker machine from the premises. 19 I observe that the first covenant is one that involves the use of best endeavours. In Transfield Pty Ltd v Arlo International Limited (1980) 144 CLR 83, at 101, Mason J said: "A best endeavours clause thus prescribes a standard of endeavour which is measured what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in the light of the particular contract." 20 I accept Mr Hatzis' submission that maintaining and extending the business of the hotel is concerned with maintaining and extending the patronage of the hotel. I accept Mr Hatzis' submission that the lease, because of the way it leaves open to the hotelier a choice about which ancillary activities to the sale of liquor will be carried on, if any, gives the Lessee the practical alternative of choosing what will make up the precise business activities that will be carried on. 21 What the first covenant sued on does is to require the Lessee to do what is reasonable, in the way explained by Mason J, to not only keep the extent of patronage that the hotel had at the start of the lease but also to make it greater. It is quite possible that, consistently with using best endeavours in that way, a Lessee might decide to make a change in the activities that were carried on, and for that change to be one that involved the reduction, or maybe even the total abandonment, of some revenue streams. It would be, however, only if that was done as part of a larger and reasonable endeavour to increase the patronage of the hotel that it could be said that the Lessee was using its best endeavours to maintain and extend the business of the hotel. 22 This case has been characterised by an extraordinary paucity of evidence. It has been brought on at great speed, but as part of the pre-trial preparation program the defendant was given the opportunity to file evidence. The defendant did not file any evidence. 23 Because it is the plaintiff that is asserting that there has been a breach of covenant, it is the plaintiff that bears the onus of proving that there has been a breach, or that a breach is likely to occur if no injunction issues. 24 It is the intention of the Lessee to transfer a poker machine entitlement to a particular hotel in Armidale if it can. It is common ground that it is likely that there will be some loss of revenue as a result of the transfer of a poker machine entitlement. That concession on the part of the defendant was one that I took as referring to not a net loss of revenue for the business of the hotel as a whole, but a loss of revenue relating to poker machine activities. I took the defendant's concession to be one that was simply silent about the net effect that the transfer of the poker machine entitlement would have on the business of the hotel as a whole. 25 Quite what the Lessee's plans are concerning the operations of the hotel is a matter that is peculiarly within the knowledge of the Lessee. It had it within its capacity to put on evidence that would show that, notwithstanding that loss of a poker machine entitlement would reduce the revenue from poker machines, there were other activities planned that would enable the court to conclude that, even though the poker machine was departing, the Lessee was using its best endeavours to maintain and extend the business. When that evidence has not been put on, this is a situation where the court is entitled to draw a Jones v Dunkel (1959) 101 CLR 298 inference, that the removal of the poker machine entitlement is not part of some overall plan of the Lessee to maintain and extend the business. 26 Where the plaintiffs have the legal onus of proving breach of the covenant, and relevant facts are peculiarly in the knowledge of the defendant or where the defendant has the greater means to produce evidence relating to those facts, then provided the plaintiffs establish sufficient evidence from which breach may be inferred, the defendant then comes under an evidential burden, or an onus of adducing evidence: Hampton Court Ltd v Crooks (1957) 97 CLR 367 at 371-372; Apollo Shower Screens Pty Ltd & Anor v Building and Construction Industry Long Service Payments Corporation (1985) 1 NSWLR 561 at 564-5; Baiada & Ors v Waste Recycling & Processing Service Of NSW [1999] NSWCA 139; (1999) 130 LGERA 52 at [55]. 27 When the defendant has not adduced that evidence, in my view the plaintiffs have discharged their onus of showing that a breach of the first covenant is likely. 28 The second covenant is one that the plaintiffs relied on only to a very slight extent. Mr Brennan recognised that there were difficulties in applying the notion of "preserving and improving the character" of the business to a situation where poker machine entitlements were removed. I think his doubts on this score were well based. I am not satisfied that there would be any breach of the second covenant sued on if the poker machine entitlement were to be removed. 29 So far as the third covenant sued on goes, it is common ground that poker machines are part of the "plant". It is also common ground that, if the poker machine entitlement is removed, then a physical poker machine that is located in the premises must also be removed. I am not satisfied, however, that that fact means that there has been a breach of the third covenant sued on. What the third covenant sued on is concerned with, it seems to me, is to ensure that, whatever may be the furniture, fittings and plant in the premises, it is adequate. It is concerned with ensuring that the furniture, fittings and plant are of as high a standard as the Lessor might require, where (a) such requirement is one that has regard to the nature of the trade at the commencement of the lease and (b) has regard to the furniture, fittings and plant which may reasonably be expected to be provided for by the premises. 30 It is not established, in my view, that if this hotel were to lose one poker machine, it would cease to be adequately equipped. Furthermore, the third covenant sued on is concerned with the standard of the furniture, fittings and plant that there might be in the premises from time to time. There is no reason to believe that the two poker machines that will remain are not of a proper standard. At the commencement of the lease, there were no poker machines in the premises at all, so it could not be said that the third covenant required there to be three poker machines "having regard to the nature of the trade at the commencement of this lease". Thus, I am not satisfied that the third covenant sued on has been breached. 31 In light of the breach of the first covenant, however, it is appropriate to issue an injunction. 32 That gives rise to a question of what injunction. The plaintiffs' claimed order 1 seems to be a complete prohibition on any poker machine ever departing under any circumstances. The basis of my reasons would not really justify such an order. Rather, it goes to the immediate threat that there is. When there is only a threat in relation to one poker machine entitlement, there is no reason why an injunction should deal with anything other than the current threat. 33 I make order 2 in accordance with the summons. I order the defendant to pay the plaintiff's costs of the proceedings. ********** 20/12/2006 - Names of defendant's solicitors was amended. - Paragraph(s) Coversheet 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.