New South Wales Supreme Court CITATION : Blacksheep Productions Pty Ltd v Waks [2008] NSWSC 488 HEARING DATE(S) : 16 May 2008 JUDGMENT DATE : 22 May 2008 JURISDICTION : Equity Division JUDGMENT OF : Young CJ in Eq DECISION : Injunction extended on terms to 29 May 2008 for these reasons to be published, but not to be further extended. CATCHWORDS : PROCEDURE [760]- Application for extension of injunction prohibiting defendants from re-entering or gaining possession of lease property- Plaintiff alleges unliquidated off-setting claim against defendants arising from water damage- Distinctions between off-setting claim in Corporations Act and set-off at law or in equity- No set-off- Equitable set-off requires a sufficiently close connection between the demands- Lack of requisite connection in present case. LEGISLATION CITED : Corporations Act 2001 (Cth) s 459H Abignano v Wenkart (1998) 9 BPR 16,765 Batiste v Lenin (2002) 10 BPR 19,441 Batiste v Lenin (2002) 11 BPR 20,403 CASES CITED : Bayview Quarries Pty Ltd v Castley Development Pty Ltd [1963] VR 445 Fong v Cilli (1968) 11 FLR 495 Lighting Sciences Australasia Pty Ltd v Southgate (1997) 15 ACLC 632 McDonnell & East Ltd v McGregor (1936) 56 CLR 50 Rawson v Samuel (1841) Cr & Ph 161; 41 ER 451 Blacksheep Productions Pty Ltd (P) PARTIES : Sheree Waks (D1) Borivoj Maksimovic (D2) FILE NUMBER(S) : SC 2329/08 COUNSEL : A J Rollins (S) (P) J T Johnson (D) SOLICITORS : Deutsch Partners Lawyers Pty Ltd (P) Proctor Phair Lawyers (D) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG CJ in EQ Thursday 22 May 2008 2329/08 – BLACKSHEEP PRODUCTIONS PTY LTD v WAKS JUDGMENT 1 HIS HONOUR: At all material times the plaintiff was the tenant of the defendants of part of a building at Ultimo. It would seem that the plaintiff uses its part of the building for offices and for the production of video and film. 2 The parties have had a stormy relationship. Prior to 30 August 2007, the defendants claim that the plaintiff was extremely dilatory in paying its rent and other obligations under its lease and that it owed a large sum of money. There was a mediation and the result of the mediation is that a deed was entered into between the parties, which is DX02 in these proceedings. The deed bears date 30 August 2007. Pages 11-12 of the deed read as follows: "The parties agree that they shall release one another from all claims and obligations whatsoever arising from or in connection with the occupation of the premises by the tenant, upon the following terms:- (a) the tenant shall pay to the landlord the sum of $285,000 by instalments of:- (i) $100,000 upon execution of a lease on the terms and as described in this agreement; (ii) $100,000 within 30 days after registration of such lease and notification of such registration by the landlord's solicitor to the tenant's solicitor; (iii) $85,000 within 30 days after the time at which the instalment in (ii) above becomes due and payable. (b) The above payments may be made by the tenant's cheque made payable to the landlord and may be delivered to the landlord's solicitor's office or in such other manner as the parties may agree. In the event that the tenant should fail to pay the amounts set out in (a) by the following dates: (i) the amount in sub-paragraph (i) two weeks after its due date; (ii) the amount in sub-paragraph (ii) one month after its due date; (iii) the amount in sub-paragraph (iii) three months after its due date such failure shall constitute a breach of the lease cured by payment of the relevant instalment or instalments." 3 The parties also then entered into a lease which is registered as AD604247U for two years and four months commencing on 1 September 2007 and ending on 31 December 2009 with an option to renew for a period of five years. 4 It would appear that the tenant failed to pay the rent punctually. Various letters were sent by the landlord's solicitors to the tenant's solicitors. 5 On 15 April 2008, the defendants say they took possession of the premises. The plaintiff denies this though it would appear that what it is saying is that whilst the defendants did in fact change the locks, they did so whilst the plaintiff's workers were still inside the building. 6 Whatever the true situation, on the same day, 15 April 2008, the plaintiff approached the Court and Bergin J made an order prohibiting the defendants from taking possession of the premises conditional upon the payment of the rental monies which were then owing. There was probably late payment of the rent, but on 18 April, White J made an almost identical order. 7 The $85,000, being the third payment, was never paid. 8 The defendants issued a statutory demand. The plaintiff moved to set that aside and on 9 May 2008, by consent, the Registrar set the statutory demand aside on the basis that no later than 23 May the plaintiff would take proceedings in the District Court. 9 The claim against the statutory demand was that the plaintiff had an off-setting claim which would reduce the statutory demand below the minimum. The off-setting claim comes about because after the lease was entered into, the plaintiff, who is the tenant, suffered damage and it claims that the water damage was the fault of the landlord, or alternatively, was damage for which the landlord was liable to compensate the tenant and that the water completely ruined camera equipment so that the plaintiff says it has a claim of a six-figure amount. 10 That claim has never been tested, nor has it been quantified over and above internal assertions in the plaintiff's camp. However, Mr Rollins, the solicitor who appeared before me on 16 May kept saying that Bergin J on 15 April accepted that it was an arguable off-setting claim. 11 The matter came before me on 16 May. The plaintiff tenant, sought an extension of the orders that had been made prohibiting the landlord from re-entering or gaining possession. This was opposed by the defendants. 12 Mr Rollins said that Bergin J had ruled that there was substance in the off-setting claim, under the terms of the order setting aside the statutory demand, he had until next Friday 23 May to bring his District Court claim, those terms of settlement must have an implied term read into them that the landlord would not seek to deal with the matter in any other way than in the District Court, and was estopped from claiming possession of the land now. 13 Mr J T Johnson of counsel who appeared for the defendants said that there had been breaches of the lease in non payment of rent which had now been cured, the rent was always being paid late, a notice of breach was given in respect of the $85,000 which should have been paid in February, it still had not been paid, and the claim made for water damage was just completely beside the point. He also said that in fact the defendants had re-entered and terminated the lease. Mr Rollins' riposte to that was that rent was accepted only a few days ago, but if this were a lease at common law, the only effect that would normally have would be to show that there was a new lease. 14 However, this lease is under the Torrens system, and under s 55 of the Real Property Act 1900, even though there might have been a physical re-entry, the lease continues until the Registrar-General removes it from the register under that section. Accordingly, it seems to me that the lease AD604247U is still in force. 15 I believe there has been a great deal of confusion in this case between an off-setting claim under the Corporations Act 2001 (Cth) and a set-off at law or in equity. The term "off-setting claim" referred to in s 459H of the Corporations Act is in general interpreted quite broadly by the courts and can be a claim that could not even be raised as a cross-claim in a proper forum for a resolution of the creditor's claim; see eg Lighting Sciences Australasia Pty Ltd v Southgate (1997) 15 ACLC 632 and the material in McPherson, Law of Company Liquidation, 4th ed at p 76. Accordingly, assuming that Mr Rollins has directly remembered what Bergin J said, her Honour's reference to there being a strongly arguable off-setting claim can only have relevance to the statutory demand. 16 There is no doubt at all that the landlord has a claim for $85,000, that that has not been paid, that that is a breach of the lease, that a notice to remedy has been given, and that the money still has not been paid. When I asked Mr Rollins as to whether he was making any offer as a term of getting a further injunction, he informed this Court that the best that the plaintiff could do was to offer to pay $30,000 by 30 May and the balance by 16 June. This was not acceptable to the landlord. However, it does show that the plaintiff is not in a position to pay what it owes and is accordingly must be in a precarious position as to the current rent. Normally this would mean that the Court would have very little to do in aiding the tenant as to relief against forfeiture or otherwise protecting it, because why should a person occupy another person's property without compensation. I referred in argument to the decision of Bryson J and the Court of Appeal in Batiste v Lenin (2002) 10 BPR 19,441 (Bryson J) and (2002) 11 BPR 20, 403 (Court of Appeal) in this connection. 17 Accordingly, it is vital to see whether the tenant's claim for water damage can be set off against the landlord's claim under the deed. 18 As Mr Rory Derham says in his book on Set-Off , 3rd ed (2003 OUP) at para 5.56, it is possible for a tenant to raise an unliquidated cross-claim against a landlord for breach of an obligation to repair as a defence to an action by the landlord for arrears of rent. 19 However, it must be remembered that at law there can only be set-off between liquidated demands and that a counter-claim sounding in damages cannot be pleaded as a defence to a liquidated demand: McDonnell & East Ltd v McGregor (1936) 56 CLR 50; Bayview Quarries Pty Ltd v Castley Development Pty Ltd [1963] VR 445; Fong v Cilli (1968) 11 FLR 495. 20 Section 21 of the Civil Procedure Act 2005, likewise only applies to liquidated claims. 21 Thus, if there is to be any set-off, one has to look to the rules of equity. This is laid down in the leading case of Rawson v Samuel (1841) Cr & Ph 161; 41 ER 451. In that case Lord Cottenham LC said at 178 (458): "We speak familiarly of equitable set-off, as distinguished from the set-off at law; but it will be found that this equitable set-off exists in cases where the party seeking the benefit of it can shew some equitable ground for being protected against his adversary's demand. The mere existence of cross-demands is not sufficient. … Is there, then, any equity in preventing a party who has recovered damages at law from receiving them, because he may be found to be indebted, upon the balance of an unsettled account, to the party against whom the damages have been recovered? … If they have no such equity, there can be no good ground for the injunction." 22 Derham says at 4.03: "The traditional basis of this form of equitable set-off is that the title of the plaintiff to his demand is impeached. The concept of impeachment has not been precisely defined. In general terms, what it requires, in the absence of some other equitable ground for being protected such as fraud, is that there be a sufficiently close connection between the demands. In its traditional sense this was not simply a question whether the demands arose out of the same transaction … It involves a consideration of the circumstances of the particular case, and indeed a close connection may not suffice to impeach the title if there are other discretionary factors which militate against equitable relief. The closeness of the connection that courts of equity traditionally required has been expressed in various terms, for example that the cross-demand must go to the very root of the plaintiff's claim, or that it must call in question, impugn, disparage or impede the title of the claim or that there must be some equitable ground for protection such as inseparability … ". 23 In the present case, the landlord's claim arose out of a deed of August 2007 and the plaintiff's liability to pay was set in concrete by February. The tenant's unliquidated claim arises out of something that happened subsequently and depends on terms of the lease. There does not appear to me to be the closeness of the connection which would warrant the landlord being denied his right to regain possession for the non-payment of the money. 24 As Mr Derham points out, there are more modern utterances of judges, particularly in Lord Denning's era which suggest that equitable set-off may range wider, but it must always be remembered that whether to allow or not allow equitable set-off is in the discretion of the court, and that the court must consider all the relevant circumstances; see Derham para 4.44; see eg Abignano v Wenkart (1998) 9 BPR 16,765. 25 I do not consider the present case is one in which the principles of equitable set-off should be invoked. The whole background is that the plaintiff has been an unsatisfactory tenant for years, it admittedly owes the money (subject to this claimed set-off) which the landlord demands, it is obviously in straitened financial circumstances which is demonstrated by the constant late payment of rent and the fact that no substantial offer can be made to pay the $85,000 and that the quantum of the claim for water damage is completely untested or supported by appropriate evidence. 26 In any event, set-off is mainly procedural. Until there are proceedings between the parties, set-off as such, is academic. At present, the tenant owes the landlord $85,000. The fact that the tenant may have a claim and that in that claim it may induce the landlord to make a counter claim and then plead set-off, is really a distraction. 27 Accordingly, I do not consider that I should extend the injunction. I have, however, extended it on terms to 29 May, both to give myself a chance to prepare these reasons, and also for the landlord to put on a proper motion for possession. 28 Accordingly, I will publish these reasons and then the matter stands adjourned to my list at 10am on Thursday 29 May next. ***************************** 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.