Supreme Court New South Wales Medium Neutral Citation: Friendly Inn Holdings Pty Ltd v St George Bank [2012] NSWSC 127 Hearing dates: 23, 24 August 2011; 6, 7 February 2012 Decision date: 24 February 2012 Jurisdiction: Equity Division Before: Gzell J Decision: Question answered in the negative Catchwords: LANDLORD AND TENANT - Distinction Between Lease and Licence - whether oral agreement a lease - whether rent paid - mortgagee allows short term licence - whether conditional upon completion of contract for sale - receivers and managers take possession without notice - preliminary question whether a right of occupancy - no principles involved Category: Principal judgment Parties: Friendly Inn Holdings Pty Ltd (First plaintiff) Arcadia Developments Pty Ltd (Second plaintiff) St George Bank - A Division of Westpac Banking Corporation (First defendant) Atle Crowe-Maxwell and John Frederick Lord Receivers and Managers of Hummingbrooke Pty Ltd (Second defendants) Representation: Counsel B DeBuse (Plaintiffs) R de Robillard (Defendants) Solicitors Watson & Watson Solicitors (Plaintiffs) Herbert Geer, Lawyers (Defendants) File Number(s): 2011/44927 Judgment The question to be determined 1The plaintiffs, Friendly Inn Holdings Pty Ltd and Arcadia Developments Pty Ltd, seek declaratory relief as to their right of occupation of hotel premises in Kangaroo Valley known as The Friendly Inn Hotel. 2Holdings and Arcadia also seek a declaration that the stock, cash, fixtures and fittings located within the hotel on 9 February 2011 were their property. And they claim damages including punitive damages. 3On 18 March 2011, Pembroke J ordered that there be separately determined the claim for relief in the first prayer of the amended summons dated 22 February 2011. That paragraph was in the following terms: "1. A declaration that pursuant to an agreement between the Plaintiffs and Hummingbrooke Pty Limited the Plaintiffs: 1.1 Are the owners of the business operating as the Friendly Inn. 1.2 Have the right to occupy the premises at 159 Moss Vale Road, Kangaroo Valley and operate the business known as the Friendly Inn." 4Since the resolution of the separate question was ordered, the terms of paragraph 1 have changed. In the current pleading, a further amended summons filed on 29 March 2011 paragraph 1 is as follows: "1. A declaration that between 9 February 2011 and 23 March 2011 pursuant to an agreement between the Plaintiffs and Hummingbrooke Pty Limited and either consented to by the defendants or by which the defendants by reason of their conduct are bound the Plaintiffs: 1.1 ... 1.2 Had the right to occupy the premises at 159 Moss Vale Road, Kangaroo Valley and operate the business known as the Friendly Inn and not to have such occupation terminated except with reasonable notice from the Defendants." 5I will treat the question to be answered as that in the further amended summons. 6The significance of the dates is that on 9 February 2011 the second defendants, Atle Crowe-Maxwell and John Fredrick Lord, as receivers and managers of Hummingbrooke appointed by the first defendant, St George Bank, took possession of the hotel. Interlocutory relief granted against the bank and the receivers and managers put Holdings and Arcadia back into possession, which was given up voluntarily on 29 March 2011. The purchase of the hotel 7The hotel stands on land owned by Hummingbrooke. The bank is the mortgagee of the premises. The hotel business was managed by the The Friendly Inn Pty Ltd. It and Hummingbrooke had the same five directors including James Neville Barnier and Stuart Andrew Fox. One of the directors resigned and the remaining four all resigned on 1 May 2010. They were replaced by Mary Davies as sole director and subsequently by Mark Ellis. 8Prior to their resignation, Messrs Barnier, Fox and Bryan Anthony Rutter established Holdings in April 2010. On 8 July 2010 Messrs Barnier and Fox transferred their shares to Mr Rutter who has since remained the sole shareholder and director of Holdings. 9Mr Rutter established Arcadia in July 2010 and remains its sole shareholder and director. 10Messrs Rutter, Barnier and Fox have been friends for approximately 20 years. 11Mr Rutter said that he had discussions with Mr Ellis representing Hummingbrooke in relation to the purchase of the hotel by Holdings. According to him, Mr Ellis told him that the hotel was turning over in excess of $2.5 million per year. On that basis, Mr Rutter said he thought an appropriate purchase price for the land and hotel was $2.95 million and he had discussions with Mr Ellis in relation to a purchase at that price. 12On 31 August 2010, John Watson of Fishburn Watson O'Brien, solicitors, received instructions to act for Holdings with respect to a proposed purchase of the hotel. Michael Bigelow, a consultant to the firm, had the carriage of the matter and was instructed by Mr Rutter to do nothing until further instructions. 13Joe Ryan of JPR Legal prepared a contract for sale, a copy of which was forwarded to Mr Watson. It was said to be signed by the vendor, but was signed by Mr Rutter. It nominated Mr Watson as the solicitor for the purchaser. It contained no price or date. 14Mr Bigelow wrote to Mr Ryan stating that no legally binding agreement was to exist until written authorisation to exchange any agreement as amended was forwarded. Apart from this he did nothing. He closed his file. He did not raise a bill. 15Mr Rutter said he told Mr Ryan that he was only prepared to proceed with the purchase at $2.95 million if the business was up to expectations. According to him, Mr Ryan said that his clients were happy for Mr Rutter to attend at the hotel and review the operations, but as a sign of good faith he wanted Mr Rutter to sign the contract. Mr Rutter said that he told Mr Ryan that he would sign the contract if it was to be held in escrow and he would give Mr Ryan a cheque for the deposit, which was also to be held in escrow until Mr Ryan had confirmation from Mr Rutter that the contracts could be exchanged. 16Alexander Helmut Roth, a partner in the law firm Herbert Geer, acted for the bank and the receivers and managers. On 12 July 2010, he received a telephone call from Joseph Prestia, a financial adviser to Mr Barnier and Mr Fox. Mr Prestia said that he had facilitated the sale of the hotel for $2.95 million, that Members Equity was financing the purchaser and that the vendor's lawyers would contact him shortly with details. Mr Prestia also said that an exchange would happen in the next couple of days. 17Mr Prestia gave evidence that he was not aware of the proposal to purchase the hotel for $2.95 million and he denied having said to bank officers that it was sold and awaiting settlement. 18I do not accept that evidence. Mr Roth had a diary note of the conversation and he was not required for cross-examination. I have no reason to reject his testimony. 19Mr Roth received a telephone call from Mr Barnier on 21 September 2010 when he was told all was going well with the sale, settlement should occur soon and Mr Ryan would be in touch to discuss details shortly. Again there is a diary note of the conversation. 20On 24 September 2010, Mr Roth was sent a copy of the front page of the contract for sale of the hotel together with a copy of a cheque made out to Hummingbrooke for $295,000 dated 23 September 2010 and signed by Mr Rutter on behalf of Holdings. The front page was identical to the copy sent to Mr Watson, except that it had the price of $2.95 million filled in and it was dated 23 September 2010. 21Mr Roth said that the usual conveyancing practice was for a contract for sale to be dated only upon exchange and not before. 22Mr Roth had difficulties obtaining the full contract. On 29 September 2010 he sent an email to Mr Ryan stating that the bank had not consented to the occupation of the property by a third party and the bank intended to appoint a receiver and manager and remove the present occupant should a full copy of the contract for sale not be furnished by the close of business that day. The alleged agreement with Hummingbrooke 23Mr Rutter said he reached an oral agreement with Mr Ellis to occupy the hotel to ensure that its operations were as profitable as Mr Ellis had represented. He was to pay rent or an occupation fee of $12,000 per month. He moved in and took over the management of the hotel from, he said, 1 October 2010. Mr Ryan completed the documentation for him to become the licensee of the hotel. 24As Holdings was to buy the hotel for $2.95 million, the negotiations to occupy the hotel Mr Rutter said he had with Mr Ellis were, presumably, on behalf of Holdings and it was that company that was to occupy the hotel. The position of Arcadia is unclear. The Casino Liquor & Gaming Control Authority records of 2 December 2010 had Arcadia as the owner of the hotel business, but Mr Rutter acknowledged that this was not correct. The records had Holdings as the owner of the premises, which Mr Rutter acknowledged was also incorrect. 25Mr Rutter said that in late September 2010 he told Mr Ellis that he would not proceed with the purchase of the hotel at $2.95 million but was prepared to take over the business and after a few months he would advise Mr Ellis whether he would purchase the property. 26Mr Rutter said that Mr Ellis responded that if the turnover was not $2.5 million he could pay the bank its debt of $1.95 million and could purchase the property for that. According to Mr Rutter, Mr Ellis said he would need to pay $12,000 per month for occupation from 1 October 2010. 27Mr Rutter said he told Mr Ellis that he would only take over the business and operate on the basis that his company was the owner of the business and then later, if the hotel performed sufficiently, he could purchase the land for the payout to the bank. He said Mr Ellis agreed to this proposal. 28Mr Ellis was not called as a witness. The alleged conversations with bank officers 29Mr Rutter or his companies took over the management of the hotel replacing ALG. He did not cause the bank to be informed of this change. 30While ALG was managing the hotel, the bank received regular reports as required by the security documents. But the reporting ceased in July 2010. 31Bruce Harrison was the officer of the bank who then had the carriage of the hotel's account. He made requests of Mr Barnier for the reports but they did not bear fruit. 32Mr Rutter did not take any steps that corrected the view Mr Roth had that there had been an exchange of contracts at $2.95 million. Mr Rutter did not tell the bank or the receivers and managers that there had not been an exchange of contracts and there would not be, as the original agreement had been supplanted by a new proposal that if the business justified it, Mr Rutter or his companies could acquire the real estate for $1.95 million. 33Mr Barnier said that in August 2010 he told Mr Harrison there were a few possible purchasers but they had offers that would not pay enough to pay out the bank's debt. Mr Barnier said that he told Mr Harrison there was one possible purchaser who was likely to pay sufficient to achieve a payout of the bank's debt. The possible purchaser wanted to go into possession and if satisfied as to the turnover he would purchase the hotel and the bank's debt would be paid out. 34In cross-examination Mr Harrison said this conversation might have occurred and he might have told Mr Barnier and Mr Prestia that the bank agreed to the proposal provided ongoing monthly interest was paid. 35In early September 2010 Mr Harrison spoke to Mr Roth and told him that Mr Prestia had said that the purchaser had cleaned the hotel up. Mr Harrison noted, however, that Mr Prestia would not answer the question what was the position of ALG and who was trading the hotel. Mr Harrison said to Mr Roth that unless he was satisfied with the contract of sale he might need to take a visit to the premises to ascertain who was operating the hotel and under whose licence. 36Mr Barnier said that in late September 2010 Mr Ellis told him that the hotel business was losing money and Mr Rutter would only continue his interest if he took over the business at that stage and then consider whether he would buy the hotel. Mr Barnier said that Mr Ellis told him that he told Mr Rutter that he could take over the business and he needed to pay the running expenses of $12,000 per month from 1 October 2010. 37Mr Barnier said that on 15 October 2010 he had a meeting with Mr Harrison and Mr Prestia at Blue Stone Cafe when he had said that they had an interested purchaser but when the turnover and state of the hotel were looked at, the purchaser did not want to proceed with their previous offer. But the purchaser had agreed to go in and pay the expenses of running the business. The bank would get its interest and Mr Rutter would pay the expenses of running the hotel. If Mr Rutter then wanted to purchase the hotel, the mortgage to the bank would be paid out. 38Mr Harrison did not recall the words used at this meeting but his understanding was that a contract for sale at $2.95 million had been signed several weeks earlier. 39Mr Harrison confirmed in evidnece that the bank's decision to allow Mr Rutter to remain in occupation of the hotel was based on the assumption that the contract for sale had exchanged and would be completed within a relatively short time frame and that the sale was for fair value and at arm's length. 40But Mr Harrison lacked the authority to make the decision to allow Mr Rutter to remain in occupation of the hotel. It was made at a higher level in the bank. 41At the same meeting at Blue Stone Cafe, Mr Prestia also said that Mr Barnier said that they had a proposed purchaser. Mr Rutter or one of his companies wished to purchase the hotel but his interest in purchasing was not the same as it was earlier since Mr Rutter had reviewed the business. Mr Rutter was prepared, however, to go in and have a look and pay all the running expenses of the hotel. In addition, Mr Harrison would receive the bank's interest. If Mr Rutter's company wanted to proceed then the sale would produce enough money to pay the bank out its debt. 42On 1 October 2010, Philip Chamberlain took over the carriage of the hotel's account with the bank from Mr Harrison. 43Mr Chamberlain said the bank's decision to not take possession of the hotel earlier than it did in February 2011, and to allow Mr Rutter to remain in occupation, once the bank had determined he was in occupation, was based on the advice from Mr Roth that the contract for sale had exchanged and was to be completed within a relatively short time frame and that it was for fair value and at arm's length. 44Mr Chamberlain said that on two occasions, in early October 2010 and early December 2010, Mr Prestia advised that the completion of the sale was imminent and interest was to be covered by Mr Rutter pending settlement. 45Mr Chamberlain said that once it became apparent that Mr Roth was unable to obtain proper particulars about the sale and impending settlement from Mr Ryan, the bank decided to appoint receivers and managers to investigate the sale and occupancy of the premises. The conversations with the receivers and managers 46On 13 December 2010, the receivers and managers of Hummingbrooke and Friendly Inn were appointed. 47James White worked with Mr Crowe-Maxwell and Mr Lord. He and Colin Prentice went to the hotel on an inspection. 48Mr Rutter told Mr White that he was a director of Holdings, which had been operating the business since October and paying staff and invoices, and paying rent to Hummingbrooke. According to Mr Rutter, he told Mr White he had spent more than $100,000 in improvements; when he took over the hotel there was no cash and very little stock; he had an agreement with Hummingbrooke to be there; and he was paying them rent of $12,000 per month. Mr White said: "We may need to vary that". 49Mr White said that at the time he was uncertain whether the bank would consent to a licence to occupy pending completion of the contract for sale. He was subsequently instructed by the bank that consent to a licence to occupy was not to be given as there was uncertainty with respect to whether Holdings would be able to complete the contract for sale. 50Mr White told Mr Rutter that he was generally happy with what he had seen. After a discussion with Mr Chamberlain, Mr White advised Mr Rutter that given the Christmas break and delays with finance he had until the end of January 2011 to complete the contract. 51Mr White and Mr Prestia met on 15 December 2010. Mr Prestia said that Mr White did not say the existing occupation was conditional upon anything. 52Mr White said he told Mr Prestia that if he was unable to complete the contract "we'll boot you out." What flows from the conversations? 53I do not accept the evidence of Mr Barnier and Mr Prestia that Mr Barnier told Mr Harrison that Mr Rutter was not proceeding with the contract for sale at $2.95 million because the hotel did not come up to expectation and did not comply with the information provided to him. 54If Mr Harrison had been told this, he would not have told Mr Roth that he might have to make a visit to the hotel to find out who was operating the hotel and under whose licence. 55And his understanding on 15 October 2010 would not have been that a contract for sale of the hotel had been signed a few weeks before. That would have ceased to have relevance. 56Nor would Mr Harrison and Mr Chamberlain have confirmed that the bank's decision to allow Mr Rutter to remain in occupation of the hotel was based on the assumption that the contract for sale had exchanged and would be completed within a relatively short time frame. 57Mr White said he told Mr Rutter that they were expecting him to complete the sale. Mr White said that had an indication been given that the sale would not be completed, Mr Rutter's occupation would have been terminated. 58That is in fact what happened on 9 February 2011 when it became evident that Mr Rutter had no intention of completing the purchase under the contract for sale. 59The evidence of Mr Harrsion and Mr Chamberlain was clear. From Mr Roth they understood that there was an enforceable contract for sale of the hotel for $2.95 million, which was to settle imminently. Had they known that Mr Rutter did not intend to settle the contract for sale the bank and its receivers and managers would not have consented to Mr Rutter's continued occupation of the hotel. 60It beggars belief that the unchallenged assumption by Mr Roth that contracts had been exchanged and the contract for sale of the hotel was enforceable and to be settled imminently which he conveyed to the bank officers and to the receivers and managers was not, as they said, critical to Mr Rutter's continuation of occupancy. 61I find that Mr Barnier and Mr Prestia did not have the conversations they allege informing the bank that the contract for sale of the hotel would not occur. On the contrary they and Mr Rutter were at pains to conceal from the bank, initially, the occupation of the hotel by Holdings and, subsequently, the change of the transaction from a purchase of the land and business to an acquisition of the business and the possible subsequent acquisition of the land. 62Nor do I accept that Mr Rutter was paying $12,000 a month in rent. There was a payment of $12,000 on 30 September 2010 described in the Friendly Inn account with the bank as interest payable on behalf of Hummingbrooke. There was no payment in October 2010 and a further $12,000 was paid in November 2010. In December 2010 there was a payment of $21,148.73 that Mr Rutter suggested was two month's rent reduced by some adjustments. But it was the very amount that had been charged to the account as interest on 30 November 2010. If Mr Rutter was paying rent there would have been equal payments of $12,000 each month. 63The payments made by companies associated with Mr Rutter were not rent but coverage of the interest payable by Friendly Inn on the amount it owed the bank. If Mr Ellis made any arrangements with Holdings, they amounted to no more than a licence terminable at will. The complaint by Holdings that it received no formal notice of termination of its occupancy is misconceived. 64What was granted to Holdings by the bank through its receivers and managers was a licence conditional upon completion of the contract for sale by 31 January 2011. Since the condition did not occur, the bank was entitled to take possession through its receivers and managers without notice of termination of Holdings' occupancy. Subsequent events 65On 22 December 2010, Mr Prestia put a proposal to the receivers and managers for a refinance rather than a purchase of the hotel. It was proposed that the current mortgage debt to the bank be assigned to Holdings to be guaranteed by Mr Rutter. Holdings would undertake to make a principal reduction of $200,000 before 28 February 2011, with the balance of the facility to be amortised over 10 years. 66This was the first time that it became apparent to Mr Roth that Mr Rutter was proposing to slip into the shoes of the selling entities and extend the outstanding loan facilities for another 10 years by seeking finance from the bank. 67Mr Roth was advised on 23 December 2010 that Watson & Watson Lawyers were acting for Friendly Inn. Mr Roth wrote to them on 4 January 2011 indicating that the bank had received a copy of a contract for sale in respect of the hotel dated 23 September 2010 between Hummingbrooke and Holdings under which completion was to take place 42 days following transfer of the licence to the purchaser. Mr Roth sought confirmation from Watson & Watson that this represented part of the current situation. 68It is clear that Mr Roth was still of the impression that there was a contract for sale on foot. Had he been told that the contract was not proceeding, that Mr Rutter had gone into possession of the business and could purchase the hotel land for $1.95 million if the turnover of the business justified that course, he would not have written in that fashion. 69It was in early January 2011 that Mr Roth was informed by Watson & Watson that there had been no exchange of contracts for the sale of the hotel. 70It was within Mr Chamberlain's authority to instruct the receivers and managers to take possession and he did so. 71Samuel Robert Fuller had been appointed manager of the hotel by Mr Rutter. On 9 February 2011, Mr White and Mr Prentice together with security guards took possession of the hotel, ordering Mr Fuller to pack his bags and leave. 72Criticism was levelled at Mr White for failing to give notice to Mr Rutter terminating his occupation or notice to him of the bank's intention to take possession. Mr White explained that it was not their practice as receivers and managers to announce their intention of taking possession for fear that assets would disappear. 73Mr Fuller asked Mr White whether, if he left the premises, he would be allowed back in to collect his belongings and Mr White promised he would be given access to collect his belongings. He stepped outside and the door was locked behind him. 74Mr White was accused of taking possession by trickery but that does not bear on the question whether on 9 February 2011 Holdings and Arcadia had the right to occupy the hotel and had the right not to have such occupation terminated except with reasonable notice. Resolution 75In my judgment Mr Barnier and Mr Prestia did not tell representatives of the bank or representatives of the receivers and managers that the contract for sale of the hotel at $2.95 million would not be settled and what was proposed was the taking of possession of the business by Mr Rutter's interests with the possibility that he might acquire the realty for $1.95 million later. 76Instead, Messrs Rutter, Barnier and Prestia were at pains to lead Mr Roth to believe that there was a valid contract for sale of the hotel at $2.95 million. 77Having rejected evidence of Mr Rutter, Mr Barnier and Mr Prestia in relation to the abandonment of the contract for sale of the hotel, I am not satisfied that Holdings and Arcadia have overcome their onus of establishing an agreement between them and Hummingbrooke entitling them to occupation of the hotel. 78There were no documents relating to such an agreement which was said to be orally formed between Mr Rutter and Mr Ellis. But Mr Ellis was not called and the inference can be drawn that his evidence would not have assisted Holdings and Arcadia. 79Notwithstanding Mr Roth's continued assertions that the bank did not accept an entitlement to Mr Rutter's interests to remain in occupation, Mr Harrison and Mr Chamberlain confirmed that the bank decided to allow Mr Rutter to remain in occupation of the premises based on the advice that contracts for sale had been exchanged and the sale was to be completed within a relatively short period of time. 80Mr Rutter was put on notice that the short term licence to occupy the hotel granted by the bank or its receivers and managers was conditional upon the contract for sale of the hotel for $2.95 million being completed by 31 January 2011. 81As that did not occur, the licence to Holdings and Arcadia came to an end and the receivers and managers were entitled to take possession on 9 February 2011. 82The fact that Mr Rutter's interests spent considerable amounts on the hotel business does not alter this conclusion. 83Nor did any action of the bank amount to unconscionable conduct binding the bank to recognise occupancy rights in Holdings and Arcadia requiring their possession not to be terminated except on reasonable notice. 84The preliminary question must be answered in the negative. Holdings and Arcadia did not have the right to occupy the hotel and operate the business known as the Friendly Inn and were not entitled to reasonable notice from the bank and the receivers and managers prior to having their occupation terminated. 85 I will hear the parties on costs. I direct the parties to bring in short minutes of order reflecting these reasons. ********** 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. Decision last updated: 27 February 2012