Supreme Court New South Wales Medium Neutral Citation: Donalds on Danks Pty Ltd v Alio Pty Ltd [2014] NSWSC 753 Hearing dates: 25 & 26 March 2014 Decision date: 13 June 2014 Jurisdiction: Equity Division Before: Slattery J Decision: See paragraph 108. Catchwords: CONTRACT - contract for sale of restaurant business on leased premises - vendor lets purchaser into leased premises between sale contract and completion - purchaser commences fit-out works without lessor's permission and before assignment of the lease from vendor to purchaser - lessor terminates vendor's lease - sale contract terminated - purchaser seeks return of deposit - vendor seeks damages for loss of a bargain - whether vendor authorised the renovation works - whether the vendor or the purchaser was responsible for the lessor's termination of the lease. Legislation Cited: Conveyancing Act 1919, s 55(2A) Cases Cited: Jones v Dunkel & Anor [1959] 101 CLR 298 Maitland Mayne Colliers Pty Ltd v Xstrata Mt Owen Pty Ltd [2006] NSWSC 1235 Roxborough & Ors v Rothmans of Pall Mall Australia Ltd (2001) 185 ALR 335 Stirling v Maitland & Boyd (1864) 122 ER 1043 Category: Principal judgment Parties: Plaintiff: Donalds on Danks Pty Ltd First Defendant: Alio Pty Ltd (in liq) & Anr Second Defendant: Phillip Beazley Representation: Counsel: Plaintiff: C.P. O'Neill First Defendant: M. Pesman SC Second Defendant: submitting appearance Solicitors: Plaintiff: Malcolm Serman, Serman & Associates First Defendant: Phillip Beazley, Beazley Singleton Lawyers Second Defendant: submitting appearance File Number(s): 2013/291252 Publication restriction: No Judgment 1The plaintiff, Donalds on Danks Pty Limited ("Donalds") seeks a declaration that it has validly rescinded its 15 March 2013 contract to purchase a restaurant business in leased premises ("the premises") from the first defendant Alio Pty Limited ("Alio") as vendor. Donalds claims the return of the $130,000 deposit it paid upon the exchange of contracts. 2Alio cross-claims for the balance of the purchase price of $145,000 and damages consequent upon the termination of its lease by Alio's lessor, the Taoist Association of Australia ("Taoist") 3Without the written permission of the lessor and in breach of the lease in May 2013 Donalds performed structural work at the premises after the March 2013 exchange of contracts with Alio, but prior to the completion of the sale. After these works were done Taoist terminated its lease to Alio and declined to assign it to Donalds. 4Donalds contends it sought, and was granted, Alio's permission on behalf of the lessor to perform the works and that Alio must now return the deposit as it is unable to complete the lease assignment. Alio disputes that it gave any form of permission for the renovations. It contends that Donalds commenced the structural work without permission from the landlord, causing the collapse of both the contract and the lease. Background 5In 2013 Donalds, a company owned and operated by restaurateurs who also run a restaurant in Bronte, Three Blue Ducks, was keen to find a new restaurant business opportunity. Donalds entered into negotiations with the first defendant, Alio, a company which at that time was operating another restaurant in Baptist Street, Redfern. 6The business presented as an attractive option. The premises were within walking distance of the Crown Street restaurant precinct in Surry Hills. But the other attraction was the very reasonable rent under the existing lease. At a yearly rent of $80,000, both Alio and Donalds were aware that the rent was well below market rates for this precinct. 7On 15 March 2013 the parties executed the contract for the sale of the business. The purchase price was $275,000: apportioned as to $200,000 for goodwill and $75,000 for equipment. Upon exchange, a deposit of $130,000 was paid to Alio's solicitor Mr Philip Beazley. 8To complete the sale of the business, the existing lease between Alio and the landlord needed to be assigned to Donalds. Alio's seven year lease for the premises had commenced on 6 September 2009, with a five-year option. Under the terms of the lease the landlord's consent was required for any assignment. Taoist provided its consent to the assignment on 10 April 2013. 9The parties negotiated a Deed of Assignment but it was never executed. Nor was the March 2013 sale contract completed. Events in the month between 10 April and 14 May 2013 led to the termination of the lease, and launched these proceedings. 10The crux of the dispute is another lessor's consent. The lessor's written permission was also required under the lease for any alterations to the property. No structural alterations to the property were permitted at all. 11During May 2013 after contracts had been exchanged but before completion, Donalds engaged in fit-out works at the premises without the lessor's consent. These works were partially structural in nature. Upon learning that the works were taking place, Taoist: refused to assign the lease; cancelled the existing lease; and, took possession of the premises. As a result, the business sale collapsed. 12Donalds claims the return of the $130,000 deposit on the basis that Alio is unable to complete the sale of the business, and submits that a total failure of consideration has occurred. Alio (now in liquidation) refuses to return the deposit to Donalds. It claims that: (1) Donalds' fit-out works went beyond any proposals previously discussed; and (2) Donalds' fit-out caused the termination of Alio's lease, resulting in the termination of the contract and Alio's inability to sell the business. 13It is not contested that in May 2013, Donalds caused some building work to be performed at the premises. But there is dispute as to the content of discussions between the parties in the lead up to those works, including what permission, if any, Alio assured Donalds that it had to commence the work. 14Two difficulties arise in examining the events of the first half of 2013. The first is that the parties present very different versions of these events. There is a core structure to the parties' basic chronology. But they disagree about key discussions within that chronology. The second difficulty is that both parties only imprecisely remember the sequence of events. As a consequence, Donalds' and Alio's stories to a degree run in parallel, making it is difficult to gain a sense of exactly when particular events took place. The Course of Contested Events - November 2012 to July 2013 Sale Contract Negotiations and Signature - November 2012 to March 2013 15Mr Jeffrey Bennett, one of Donalds' five Directors, a former employee of Macquarie Bank with experience in finance and contract management represented Donalds in the purchase negotiations. His acknowledged job within the group was to "free the others to operate the restaurants". Mr Bennett dealt directly with Alio's primary contact, Ms Tracey Clarke, one of the two Directors of Alio, with her brother Mr Ashley Hughes. 16In November 2012 Donalds became aware of an opportunity to purchase Alio, a restaurant operating in Redfern. Mr Mike Whang, a friend of one of the Three Blue Ducks restaurateurs alerted Mr Bennett to the opportunity. But by late November, as Donalds prepared to make a formal offer, it received news that another party had successfully bid for the restaurant. 17But in the final days of 2012 Mr Whang told Donalds that the deal between Alio and the other party had fallen through. The plaintiff reinitiated contact with Ms Clarke and Mr Hughes, with a view to commencing negotiations to purchase Alio's business. 18During the February and early March negotiations, the parties discussed the possibility that the bargain might include a rent-free period for Donalds as the incoming tenants. Mr Bennett says, and I accept, that Ms Clarke explained that the lessor of the property had caused Alio to miss out on a sale of the business the previous year. It was suggested that a rent-free period would make the business more attractive and act as compensation for Alio's lost sale opportunity. 19At first the proposed rent-free period was six months, but was lowered to three months over the course of negotiations. The parties agreed that if the rent-free period was halved, Alio would also reduce the price of the business by $20,000: approximately equivalent to three months' rent. At $255,000, the new sale price would effectively provide Donalds with the full monetary benefit of a six month rent-free period. 20Mr Bennett claims that even prior to signing the contract Donalds had requested Ms Clarke to establish direct contact between themselves and the lessor of the premises. Mr Bennett says that on 28 February he asked to be put in touch with the lessor. But Ms Clarke responded that Taoist would not speak to Donalds or their representatives until the contract had been settled and the lease assigned. Prudently or not, Mr Bennett formed the view at this point that his dealings with Ms Clarke and Alio really reflected the position of the lessor. His conduct of the negotiations at times expresses an implicit assumption that Alio was a conduit through which he would deal with the lessor. 21On 15 March 2013 the parties executed the sale contract, to which the existing lease for the premises was annexed. The contract provided for a completion date of 5 April 2013. Although not provided for within the sale contract, the parties had agreed that Donalds' three month rent-free period would start from the date of completion. The annual rent of $80,000 would continue to apply to Donalds as the incoming tenant. 22The March 2013 sale contract was a standard form agreement with a series of additional provisions. The deposit was to be deducted when paid from the purchase price of $275,000. The deposit was to be paid to Mr Beazley (clause 54.1). Alio was required to maintain the goodwill of the business and carry on in like manner and ensure the business was to run its ongoing concern (clause 9.1). Alio promised there was no subsisting breach which would entitle the lessor to terminate the agreement (clauses 10.1, 10.2 and 10.3). A rescission mechanism provided that the deposit should be refunded upon a valid rescission (clause 23). A right to rescind was conferred of either party resolved to go into liquidation or an official manager or receiver was appointed (clause 47.1). Alio should remain in possession and operate the business until the completion date (clauses 50.1 and 50.2). The parties agreed that vendor and purchaser should do everything necessary to assist the assignment of a lease (clause 60) - considered further below. A right of access was granted to Donalds from the date the lease was assigned (clause 61). 23Two clauses of the lease would prove to be of particular importance to the parties: (1) under clause 10.3 the landlord's permission was required for the assignment of the existing lease to any new lessee; and (2) clause 7.6 provided that: "The tenant must not make any structural alterations to the property. Any other alterations require the landlord's consent in writing (but the landlord cannot withhold consent unreasonably)". 24Alio disputes the account that Donalds gives of the contract negotiations, particularly as to a proposed rent-free period. Mr Bennett maintains that Ms Clarke presented the rent-free period as a compensatory offer from the landlord. But her version is that it was Mr Bennett who requested the rent-free period, telling Ms Clarke during negotiations: "We are going to spend about a million dollars on a fit out. If we are going to spend that sort of money we want a longer lease and a rent-free period of about 6 months to enable us to do the works". 25Ms Clarke says she told him that she would speak with the landlord on Donalds' behalf to request those terms. And she recalls that following the exchange of contracts, Donalds was told that they would be permitted a three month rent-free period. Mr Anthony Khoury, the landlord's agent was said to have been present for this discussion. Ms Clarke says it was agreed that the rent-free period of three months would begin after the DA had been approved, which it was anticipated would take approximately six weeks. 26Ms Clarke denies that Mr Bennett asked to be put in direct contact with the lessor. Instead she contends that on 27 February, Mr Bennett as a representative of a potential tenant met at the premises Mr Khoury, Taoist's agent. Mr Khoury introduced himself and told Mr Bennett: "I'm acting on behalf of the landlord and am their point of contact, you have my card call me. I manage the site that is the Police, upstairs landscape designers, a child care. Send these through to me direct, you have my number if you have any questions." 27On the basis of this evidence, Alio submits Mr Bennett was aware that Mr Khoury, and not Alio, was the lessor's authorised representative. Planning for the Fit-Out - Mid March to Early May 28It had been Donalds' intention from the outset to replace Alio's existing premises fit-out with a new minimalist aesthetic. Throughout March Mr Bennett and Ms Clarke discussed the works required to achieve this effect: the flooring would be removed to reveal polished concrete floors; the suspended ceiling in the premises would be taken down to expose the structural ceiling above; and certain of the internal plasterboard walls would be taken down to open up the room. Donalds wanted to transform the existing area into a modern, industrial space. 29Donalds were keen to begin work as soon as possible and began planning to that end. But the fit-out did not take place immediately. 30The proposed renovations were an important part of the discussion surrounding the proposed rent-free period. Alio knew that Donalds was eager to change the internal design of the restaurant. But the deal was not yet complete. Alio remained the tenant at the premises until settlement. Nonetheless, Ms Clarke was prepared to offer Donalds entry to the restaurant so that they could commence planning. 31Over two months following the sale contract in mid March, Donalds was granted increasing levels of access to, and control over the premises. Ms Clarke originally provided Mr Bennett with the security code for the premises. But the keys remained with a friend of Ms Clarke, Dylan, who lived in Redfern, close to the premises. Alio retained control over entry to the premises through Dylan, although Dylan never denied Mr Bennett access. During the second half of March Donalds engaged architects, designers and town planners to advance the refurbishment plans. 32But after the first three visits to the restaurant in late March, Mr Bennett says that he and Ms Clarke jointly determined that it would be easier for Donalds simply to take possession of the keys. Mr Bennett recalled being uneasy about constantly contacting Ms Clarke's friend Dylan to arrange the exchange of keys. Dylan looked after his son during the day and worked. Mr Bennett worried that his regular requests to organise the collection of keys were becoming an annoyance. By about 20 March Dylan had ceased to be an intermediary. From then Donalds had the keys, granting it full practical access to the premises. 33Donalds had begun to make progress with architectural planning. About 25 March Mr Bennett met with a town planner, Damien O'Toole, to discuss the preparation of a Development Application (DA) for the proposed structural works to the restaurant. On 28 March Mr Bennett phoned Sydney City Council to enquire about the DA process. He was informed that any structural changes to the building would require the consent of the property owner, Taoist. 34Although by late March Donalds had full access, to plan and commence the new fit-out this access was not yet accompanied by permission to commence any works. Three subsequent conversations took place between himself and Ms Clarke before anything close to what Mr Bennett thought was permission, was granted. But in all these conversation I prefer Ms Clarke's version of what happened where there is conflict. Nevertheless some of Mr Bennett's narrative can be accepted. 35The First Fit-Out Conversation. The first fit-out related conversation took place on 30 March, when Mr Bennett explained to Ms Clarke that Donalds' proposed fit-out would be in two stages. The first stage would involve removal of the existing fit-out to reveal a bare industrial space, for use as a "pop-up" restaurant; the second stage would be the main renovation, which could be scheduled to take place some time later, as required. Mr Bennett was keen to start work immediately and asked Ms Clarke's permission to do so. Ms Clarke telephoned Mr Bennett the following day to inform him that, although she was not opposed to the arrangement, her solicitor had recommended that work not be commenced until settlement, in case the sale fell through. 36Mr Bennett was at least aware from Sydney City Council the proposed renovations would require lessor's permission. In the first week of April Mr Bennett says that he made many attempts both through Ms Clarke and the lessor's agent, Mr Anthony Khoury, to forward the necessary paperwork to Taoist for their approval of structural works. Mr Khoury confirmed that the application paperwork had been forward to Taoist. He received no response at this time. 37Settlement was due on 5 April. Mr Bennett recalls hearing nothing from either Alio or its solicitors about completion, as the 5 April date passed. Mr Bennett maintains that he tried to contact Ms Clarke around this time but received no response. Nonetheless planning continued, as did limited correspondence among Donalds, Mr Khoury and the lessor's lawyer, Mr Carroll. The parties discussed arrangements for the lease assignment and exchanged other paperwork. Mr Bennett was not concerned that the delay in settlement represented any problem. 38The Second Fit-Out Conversation. Mr Bennett did not speak with Ms Clarke again until 25 April. He then learned that she had been involved in a serious accident a few weeks earlier and had been out of contact during her convalescence. Once more, he requested that permission to commence works be granted. He recalls the conversation taking place as follows: Bennett: "Do you think you'll be able to get permission for us to commence works - the delay is concerning." Clarke: "I'm just concerned that if you pull out of the sale we will be left without a restaurant." Bennett: "But you will get to keep our deposit. In any event, there is no way we are pulling out and losing the $130,000" Clarke: "Look, why don't we just leave it for now." Bennett: "Ok." 39What Mr Bennett recalls to this point can be accepted only to the extent it is consistent with Ms Clarke's evidence. And this was not a clear permission. Mr Bennett's view was that because Donalds was "getting a fair bit of planning done" during this period, it was not "overly concerned" with the settlement delay after 5 April. Mr Bennett conceded that he had not agitated for the completion of the sale, in addition to permission for commencement of the works, because Donalds was not unhappy with the situation as it had developed. Any delay in settlement after 5 April also delayed activation of the rent-free period. Donalds would benefit from the additional time to prepare and fit-out the restaurant, which would otherwise have eroded their rent-free period. 40The Third Fit-Out Conversation. Finally on 6 May - more than a full month after the proposed settlement date - Mr Bennett and Ms Clarke discussed the fit-out for the third time. A friend of the Three Blue Ducks restaurateurs had been diagnosed with a serious illness. Donalds wished to hold a fundraiser for her at the new premises in June. Given the tight planning required to be ready for a June event, Mr Bennett enquired once more whether fit-out could commence. Mr Bennett says Ms Clarke telephoned him a few minutes later and informed him: "I've spoken with Ash and it is ok to begin. I am confident that settlement is going ahead and as the work is only to do with internal finishes that Alio paid for so the lessor will not have a problem with it." 41Mr Bennett took this to be full permission to commence fit-out. Donalds started the proposed fit-out. But I do not accept that Mr Bennett had this conversation with Ms Clarke. 42Alio does not dispute that Donalds was granted access to the premises. Nor does it dispute that Mr Bennett took control of a set of keys to the premises. But Ms Clarke denies that she told Mr Bennett to keep the keys. Instead she contends, and I accept, that the arrangement was for him to assume possession of the keys only until the end of the four day Easter long weekend, from 29 March 2013 to 1 April 2013, so that Donalds could use that time to complete its DA. She says Mr Bennett's increased access, through his possession of the keys, was not a permanent arrangement. 43Ms Clarke remembers, and I accept, that the greater access afforded to Donalds at first caused her concern. She questioned the security of Alio's stock and possessions left in the premises. But Mr Bennett assured her: "You have over 100 grand of our money. That should cover the equipment you have left behind and we are not pulling out of this to lose that sort of money". 44The most significant difference between Alio and Donalds' version of events relates to permission for the plaintiff to begin the new fit-out. Mr Bennett maintains that on 30 and 31 March he and Ms Clarke discussed the possibility of the commencement of works and she expressed that she was not opposed to their commencement in principle, but that she withheld permission on the basis of advice from her lawyer. 45Ms Clarke disputes that the conversations he alleges with her took place. She points out that the days he said the conversation took place, 30 and 31 March, fell on the 2013 Easter long weekend and that it was unlikely that the parties would have been speaking at this time. Moreover, she recalls that this was shortly after her accident and that she had spent much of this and the following week in bed recovering. Whether she is right about this or not, this was not a clear permission from Ms Clarke, even on Mr Bennetts' version, for Donalds to start works. 46Some conversations on this topic did take place. Ms Clarke confirms that she did tell Mr Bennett: "My solicitor's advice is that you cannot do anything until (the contract) is all signed sealed and delivered". Ms Clarke felt that it was clearly understood that they could plan out what they wanted to do for the purpose of the DA, but nothing more. Alio understood that Donalds was keen to begin work, but its position that the fit-out could not be commenced had not changed. 47But other delays were dragging the timetable. The lessor did not advise it had consented to the assignment of the lease until 8 April. Communications with Taoist were taking more time than expected. Alio was comfortable in declining Donalds' requests to begin the fit-out: Taoist's delay, not Alio's, was holding up Donalds. 48In what seems to be Mr Bennett's 25 April conversation, Ms Clarke importantly maintains that she reiterated her approach of declining Mr Bennett's requests. She recalls, and I accept, Mr Bennett tried to convince her that Donalds should be permitted to start the works, saying: "You have 100 grand of our money, if we clear the place out that would be enough to start a restaurant for you", 49To this she says, and I accept, she replied: "Obviously that's not what we want. We want to get this finalised. Philip has advised you can't start any work, I have to go with what he says." 50Ms Clarke maintained that Mr Bennett understood and accepted her position, telling her that it was "fair enough". But the subject was raised again nearly two weeks later, in what Donalds describes as the 6 May conversation. Mr Bennett maintains that this was the discussion during which Ms Clarke finally granted permission for the fit-out works to commence. She disputes this. I prefer her version of this last request, which she declined. 51Ms Clarke says that the 6 May conversation did not take place. Instead she recalls telling Mr Bennett, and I accept: "Ashley and I don't have a problem with you starting to move things about. We do hold 130k that is non refundable. I'm told by Anthony Khoury and Philip the assignment of lease is on its way. We will need to address the rent free period. The owners won't commit without knowing what is planned and seem to be dicking about. I will need to discuss this with Philip as to how this happens. We will honour the agreement I just don't know how it is legally done." 52Ms Clarke says that Mr Bennett replied: "Fair enough. I guess this is how lawyers make their money. Making everything so complicated." 53Ms Clarke denies ever having given permission for the works to commence. She maintains her consent was only for Donalds to move Alio's furniture and possessions so that Donalds could plan its DA, not that Donalds could commence a full scale fit-out. And this is what happened. In my judgment Mr Bennett went in because he was keen for Donalds to get started at the premises and tired of waiting. The Fit-Out Commences - Mid May 54The fit-out works took place between 8 May and 14 May 2013. During that time, three main physical changes were made to the premises: (1) the suspended ceiling was pulled down to expose the structural ceiling above; (2) the flooring was removed to expose the concrete floor beneath; and (3) internal plasterboard walls that separated the kitchen from the main dining area were removed. Although not comprehensive, these were certainly significant renovations generating several skips of building refuse for removal. 55The works caused contact to increase among Messrs Bennett, Khoury and Carroll. Completion appeared to Mr Bennett to be on track. From Donalds' perspective in mid-May nothing seemed amiss. 56But on the morning of 15 May Ms Clarke says, and I accept, she received a phone call from her brother Ashley, alerting her to the works that were taking place in the restaurant. He had visited the premises the day before around noon to access a Post Office Box opposite the restaurant and had observed rubbish and construction materials being removed from the premises. He told her: "The car park at Alio was full of building rubble, I looked in and they have pulled up the carpet and removed the ceiling and obviously the aircon as the silver ducting pipes are in the car park. David (the caretaker) is going to have a fit at the mess." 57Ms Clarke claims that she asked, and I accept: "Is it a big mess?", to which he replied "Yes". She and Ashley mooted whether it was possible that Donalds had lodged a DA by this time but decided that it was not. Ms Clarke called Alio's solicitor, Philip Beazley. Ashley said to her: "Remember what we went through with the untidy skip bin and David?...well the car park is a mess, the Taoist are going to have a fit over this". 58Mr Bennett and Ms Clarke spoke again about 24 May. She told him Alio would be in a position to settle by 29 May. Probably the same day Mr McDonald, Mr Bennett's solicitor, telephoned him and informed him that Taoist had "discovered" that the fit out had taken place without its consent. Mr Bennett's account, which I accept, is that Mr McDonald further informed him that Taoist had informed Mr McDonald that Alio were around 6 months behind in rent and that Donalds had applied for the transfer of the liquor licence. Mr McDonald further informed Mr Bennett "that the combination of the events had caused [Taoist] to change the locks and board up the property". This was certainly some indication of Taoist's thinking at the time. Taoist Discovers the Works and Reacts - Late May 59Following the commencement of works, and certainly by 24 May, the lessor, Taoist, was aware of the fit-out. Taoist reacted firmly as a result and the situation between the parties rapidly deteriorated. Given Mr Khoury's contact with Mr Bennett at this time it is perhaps surprising that Taoist was not aware as soon as the fit-out began. 60Through Mr Bennett's evidence, Donalds maintains permission had been granted for the fit-out. But this was not the case. At most, Donalds had some form of consent from Alio to undertake the work. Ms Clarke, whose evidence I prefer says the permission did not even extend that far. Taoist had certainly not provided formal permission as lessor. Whether Taoist knew of the proposed works but had not consented, or whether they had no knowledge of the proposal is unclear. But given the landlord's reaction the latter seems more likely. 61The Deed of Assignment of lease had been prepared prior to 28 May and had been returned that day to the landlord for execution. But later that same day Taoist's solicitors, Carroll & O'Dea, wrote to Donalds' solicitors, about the situation that had then arisen, from the lessor's perspective. The Carroll & O'Dea letter sets out a history of events, and a conclusion which show the lessor's approach. The letter set out the following chronology: "Further to our telephone conversations 24 May 2013 we confirm we act for the Landlord and note you act for Jeff Bennett (and others) who have been negotiating for the purchase of Alio's business. We confirm: 1. Alio is in significant arrears and abandoned the Premises some months ago. 2. Notwithstanding the arrears and abandonment of the Premises, our client agreed to allow Alio a period of time in which to sell her business and we issued Deed of Consent to Assignment to Alio's solicitor on 10 April 2013. 3. The Deed of Consent contained a provision whereby Ali released the Landlord from all and any claims. 4. On 8 May 2013 Alio's solicitor asked that the release be deleted. 5. By letter 16 May 2013 we confirmed the Landlord agreed to delete the release of liability clause, acceding to Alio's request. 6. By letter dated 16 May 2013 we advised Alio's solicitors that the landlord had just discovered there are people (and possibly contractors) accessing the premises without permission. We directed Alio's solicitors to inform their client to hand over all keys to the Premises and cease all access by any persons. 7. On 24 May 2013 our client observed at least four building contractors inside the Premises, effectively trespassers. The situation has become completely untenable for the Landlord and the Landlord reserves all its rights to take whatever steps it deems necessary to protect its legal rights." 62The lessor's conclusion that the situation was "completely untenable" and the landlord "reserves all its rights" is a clear indication of the lessor's escalating exasperation with this chronology of developments. Mr Bennett says that he was first informed at this time that Alio was in arrears on its rent, and had ceased making payments some six months earlier. On 30 May 2013 the landlord terminated its lease to Alio and re-entered the premises. 63Donalds reacted swiftly, to manage the situation. Between 24 May and 30 May, Donalds initiated communications with all the parties involved. Within a few days, Donalds had: (1) tried to arrange a meeting with Taoist via the lessor's lawyers; (2) contacted Ms Clarke, asking her to speak with the lessor on Donalds' behalf; (3) emailed the lessor's lawyers directly to explain the situation and request a meeting; and (4) spoken on several occasions with the offices of Anthony Khoury, the lessor's agent. Mr Bennett's actions show just how keen he was to negotiate a satisfactory outcome. His not unreasonable objective was to assure Taoist that the works had only commenced as a result of miscommunication, and to keep the lease and the sale contract on foot. 64But despite Mr Bennett's best efforts, Taoist showed no interest in restoring a commercial relationship with either Alio or Donalds. Lease and Deal Failure - June to July 65On or about 5 June Mr Bennett spoke with Ms Clarke, saying to her: "Despite your lease being cancelled, if we were to resolve matters with the lessor and secure the lease then we will still honour the deal we made with you". 66Ms Clarke called back the following day, saying: "I have been unable to make any contact with the lessor. I have been advised by Mr Beazley to lodge an application for mediation. This will force the lessor to respond to my queries." 67Mr Bennett claims that on or about 10 June Ms Clarke told him that a mediation had been set down for the following week. 68In the aftermath of Taoist's reaction to the works, Ms Clarke says she was in daily contact with the lessor's agent, and, intermittently, with Mr Beazley to try and redress the situation. By 11 June Alio's own efforts to resolve the dispute had all come to nothing. Ms Clarke recalls, and I accept, the conversation between herself and Mr Bennett in similar terms to his version: Ms Clarke: "The lessor has a claim against us, and you started works without permission causing this." Mr Bennett: "You gave us permission." Ms Clarke: "No I didn't. You wanted to clear out the restaurant. I understood you to be planning a DA meaning clear out tables and chairs. Not walls, carpet. We never discussed you were planning to demolish walls you were planning a DA and that was what we had discussed." Mr Bennett: "That's ridiculous. You knew what we wanted to do." Ms Clarke: "No, I never." Mr Bennett: "Is this your position?" Ms Clarke: "Yes." 69Ms Clarke says that this was the last time she spoke with Mr Bennett, except in the presence of her lawyer on loudspeaker. 70But by early June these events had caused Alio to be placed in administration. The administration commencing 5 June 2013. And Alio was placed in liquidation on 11 July 2013. 71Mr Bennett continued to pursue all avenues to retrieve the situation. On 12 June Mr Bennett once again emailed the lessor's lawyers and agent to reiterate Donalds' position, saying: "We have invested a lot of time and money in this project and we are still very keen to take on the lease. We are in a position to settle all outstanding monies, including rental arrears and legal costs incurred, up to the amount still owed to Tracey and Ashley by us for the purchase of Alio, which is approximately $100,000 including GST." 72But by 19 June Mr Bennett decided he had done all he could. He consulted Donalds' lawyers and called Ms Clarke. He had what he recalls was the following conversation with her: Mr Bennett: "Look, I'm really sorry. Our solicitor is saying we should get the deposit back and resolve it after that." Ms Clarke: "I understand. That is what our solicitor had told us he would advise you to do if you were in the position you are in". Mr Bennett: "I will get our solicitor to contact yours". 73On or about 21 June Mr Serman on Donalds' behalf sent a letter of demand to Alio for the refund of the deposit within seven days. By 9 July Donalds had received no response to this letter. Mr Bennett emailed Ms Clarke. Having still not received a response by 11 July, he called her. He recalls that Ms Clarke reversed her position on the deposit during this conversation: Ms Clarke: "We will not be returning the deposit." Mr Bennett: "Why not? You no longer have a lease to transfer to us so you can not satisfy your end of the arrangement." Ms Clarke: "We are expecting the lessor to claim damages for the work you have done to their property so we are holding on to the deposit to cover these damages." Mr Bennett: "But you gave us permission to do the work in the first place." Ms Clarke: "I didn't realise what work you were planning to do, I thought you were only going to move the chairs and tables downstairs." Mr Bennett: "That's ridiculous, of course you knew what we were going to do. So, that's your position?" Ms Clarke: "Yes." 74I do not accept Mr Bennett's account of this conversation to the extent that it contains an admission by Ms Clarke that she gave him permission to commence fit out works. 75About a week later, Mr Bennett says he had a conversation with Mr Khoury that led him to believe that Alio had not lodged an application for an Alio-Taoist mediation. On 20 July Mr Bennett attempted once again to contact Taoist's solicitors directly to winkle out an agreement of some description. But his efforts were unsuccessful. 76By now Ms Clarke and Mr Bennett's relationship was fraying. But they were still in contact. On 22 July Ms Clarke emailed Mr Bennett that she had damaged her iPhone, making it difficult for him to contact her. Ms Clarke suggested alternative contact arrangements. But two days later their relations worsened. Mr Bennett notified her on 24 July that he had been advised that the lessor would not make a damages claim against Alio. He requested her again: "Please return the deposit this week and if you feel, now or in the future, that you have a claim against us for any damages, then you do what you feel is right and we'll cross that bridge then". 77Ms Clarke responded to Mr Bennett approximately an hour later by email deflecting his inquiry: "As per discussions just now with my lawyer I have referred this to him". 78On 5 August 2013 Donalds requested Mr Beazley to release the deposit and on 8 August 2013 Donalds followed up that request with a request to the liquidators of Alio seeking repayment, which the liquidators rejected on 9 August. On 20 August 2013 Mr Beazley replied alleging that Donalds "has caused and delayed the completion of the contract for sale of the business by causing the landlord to terminate the lease". 79In response on 23 August 2013 Donalds rescinded the contract, citing clause 47.1 of the March 2013 sale contract, which gives a right to a party to the contract to rescind if the other party goes into liquidation. Donalds then filed these proceedings in September 2013. The Lessor's Termination of the Lease 80Neither party decided to call any representatives of the lessor to give evidence about the lessor's reasons for terminating the lease. The Court was left to infer what those reasons were from the course of events and the available documentary evidence. A representative of the lessor, Taoist, was not obviously a witness who should be called by one or other party. The Court declines to draw any Jones v Dunkel & Anor [1959] 101 CLR 298 inference against either party for not calling any person from the lessor. 81There are limited sources of relevant information on the subject of the lessor's decision-making processes, although any inference about the lessor's reasons for terminating the lease must be based on circumstantial evidence and of an indirect nature. The Court must approach the issue this way because of the way the parties presented their respective cases. But in the result I infer that Donald's unauthorised fit out was the principal reason the lesser terminated the lease. 82First, Mr Bennett's conversation with Mr McDonald on 24 May is significant. It indicates that such limited information as there is about the nuances of the lessor's thinking show that a combination of events was acting in the lessor's decision: the fit-out works, and Alio being six months behind in the rent. This indicates, in my view, that the fit-out was at least a factor of co-ordinate importance with the rental arrears in the lessor's thinking at this time. 83Secondly, this communication via Mr McDonald is of course only a matter of days before Taoist's solicitors write to Donalds' solicitors on 28 May informing them that "the situation has become completely untenable for the landlord and the landlord reserves all its rights to take whatever steps it deems necessary to protect its legal rights". The tone of this letter indicates the lessor's understandable commercial frustration about the rising tide of adverse events from its perspective. Such was the lessor's calibrated expression of displeasure and reservation of all its rights, that immediate lessor action could be anticipated. And that is just what happened. 84Thirdly, it is not just the tone of the Carroll & O'Dea letter that is significant. The allegations relating to what happened on 16 May show a particular focus on the lessor's part. The lessor refers through its solicitors to events "just discovered", apparently indicating a degree of shock on its part. What has been discovered is that unknown "people [possibly contractors] "were accessing the premises. And the lessor emphasises that this is "without permission". The lessor's first action after discovering this information on 16 May was to direct "Alio's solicitors to inform their client to hand over all keys to the premises and cease all access by any persons". A strong focus of the lessor's attention, not surprisingly, was to prevent any further unauthorised access that might result in structural damage to the premises. All these matters, in my judgment, show the lessor's elevated concern about the unauthorised access issue, over and above the longstanding problem of failure to pay Alio's rental default. 85Fourthly, what Carroll & O'Dea's 28 May letter did not say is that at the same time the landlord was physically re-entering the premises and did so at 8.38am on 28 May 2013, as Carroll & O'Dea subsequently indicated in a letter of 30 May 2013. It may be inferred: (1) that the landlord's clear determination to act simultaneously with its solicitor's letter of 28 May is a strong indication that the letter of 28 May contains the reasons for that action; and (2) that the recent events of the unauthorised fit out were the drivers of the recent action. 86And the timing was important. The landlord had appeared quite willing to live with the rental arrears. It had done so for some six months. It was rational that it should, because the landlord already was aware that the rental arrears would be attended to at settlement. When the issue was only rental arrears the landlord was entitled to assume that it was not a problem that was going to get out of control but would be tidied up at settlement from money that the purchaser, Donalds, was going to provide. Looked at objectively, it was worthwhile for the landlord to wait. 87But unpredictable structural damage to the premises was quite a different matter. Looked at from the landlord's perspective, the conduct of works without permission that were in breach of the lease, objectively indicates a disregard for legal obligations and structural changes to the restaurant presented the spectre of an unpredictable devaluing of the premises, which would be a particular problem in the event sale of the restaurant was not completed. The lessor's reaction to the sudden turn of events was quite understandable. 88The landlord's pre 24 May relatively relaxed attitude to the rental arrears may readily be inferred from a document prepared in April. Messrs Carroll & O'Dea prepared a draft deed of assignment on behalf of the lessor prepared a draft deed of assignment which they sent to the parties on 10 April. Clause 4.1 of the 10 April draft recited as follows: "4.1 The Tenant must comply with all the Tenant's obligations under the Lease and must pay to the Landlord the Rent, the Tenant's Proportion of Outgoings and other money payable up to and including the Assignment Date. As at 6 May 2013 the arrears will be $43,739.74." 89Even on 16 May, the day the "possible" contractors appeared on the premises, and despite sending a letter to Alio setting deadlines for action, the lessor had agreed to the deletion of clause 5 of the April draft Deed of Assignment. The draft clause 5.1 would have released the lessor from any claim from Alio arising from the lease. Its deletion indicates that up until the renovation works started the lessor was prepared to assign the lease on the basis that the arrears would be dealt with at settlement. Moreover it further tends to indicate the correctness of Ms Clarke's evidence that there was then a dispute about the arrears, which would have made a release inappropriate. 90In summary, I accept Alio's submissions that the lessor's principal concern at this time was with Donald's actions, rather than Alio's longstanding financial problems. And it is logically to be expected that a lessor that was undoubtedly letting these premises at well below market rent might be more concerned with the integrity of the premises than a few more months rent. 91Donalds mounts a number of arguments against this conclusion. But none of them are persuasive. 92Donalds points to a Carroll & O'Dea letter of 16 May 2013 to Alio referring to the arrears of rent, and Alio's apparent abandonment of the premises and alerting Ms Clarke to the fact that there were people accessing the premises and placing a deadline of 22 May on rectifying these matters, otherwise the landlord would enter into possession and terminate the lease. But the reality was this was already a reaction to Donalds' unauthorised work on the premises and therefore does not assist Donalds. Further, Donalds submits that had the rental arrears been paid the lease would not have been terminated. In my view such an inference cannot be drawn from the course of events and the landlord's expressions of view. Analysis 93Donalds is in breach of clause 60.1 of the March 2013 sale contract. Clause 60.1 provides as follows: "60.1 The purchaser and vendor must do all things necessary prior to completion of this Contract to cause the Landlord to comply with clause 13 of the lease and the assignment of the Lease by the landlord." 94As purchaser Donalds did not "do all things necessary prior to completion of this contract to cause the landlord to comply with clause 13 of the lease and the assignment of the lease by the landlord". The clause is somewhat oddly worded but the effect is plain. Clause 13 of the March 2013 sale contract relates to GST and relevantly clause 60.1 should be read without the words "comply with clause 13 of the lease and the", and "assignment" should be read as "assign". Once that is done it is clear that the effect of the clause is the purchaser has an obligation to co-operate prior to completion in causing the lease to be assigned by the landlord. Going into the premises without the landlord's permission, as Donalds did, is the antithesis of this obligation and was a failure "to do all things necessary" to cause the landlord to assign the lease. Donald's conduct was a breach of clause 60.1. 95In addition to clause 60.1, the March 2013 sale contract attracted an implied term in conformity with the well-established principle laid down in Stirling v Maitland & Boyd (1864) 122 ER 1043 at 1047 to the effect that a party/purchaser would "do nothing of [it's] own motion to put an end to [a] state of circumstances, under which a loan the arrangement can be operative": see Maitland Mayne Colliers Pty Ltd v Xstrata Mt Owen Pty Ltd [2006] NSWSC 1235. 96Relevantly, the principle here required Donalds to do nothing which would have the effect that the landlord would terminate the lease. Once the lease was terminated an assignment was impossible. 97Donalds unauthorised works on the premises provoked the landlord's predictable reaction of exercising its powers of re-entry under the lease for breach and terminating the lease making the assignment impossible. The result is that not only that Donalds has breached the express and implied terms of the March 2013 sale contract but Alio has also lost the benefit of the lease as a result. Donalds' Case for Return of the Deposit 98Donald contends that Alio breached the March 2013 sale contract by: failing to ensure the business continued to run as a going concern; being in arrears of rent such as to entitle Taoist to terminate the lease; and, failing to complete the contract within 21 days of exchange. Donalds submits these were breaches of the central conditions which granted Donalds a right to terminate the contract. Moreover, Donalds submits that the appointment of administrator to Alio and 5 June 2013 and its liquidation on 11 July 2013 gave Donalds further rights to rescind the contract. Moreover Donalds submits that as Taoist plainly would not be consenting to the assignment of the lease because it had terminated the lease by 28 May that Donalds had a right to terminate the contract pursuant to clause 60. 99Donalds' breach of contract case and claim for the return of the deposit fail to take proper account of the fundamental reality that Donalds' conduct caused the collapse of this agreement. 100Donalds claim to the deposit is based upon the express right to rescind in clause 47.1. I accept that that clause should refer to clause 23 rather than clause 22 of the contract, as Donalds submits, which relevantly provides as follows: "23.1 If this contract expressly gives a party a right to rescind, the party can exercise the right- 23.1.1 only by serving a notice before completion; and 23.1.2 in spite of any making of a claim or requisition, any attempt to satisfy a claim or requisition, any arbitration, litigation, mediation or negotiation or any giving or taking of possession." 101Alternatively, Donalds submits that as there has been no performance of the contract by Alio that Alio would be unjustly enriched as a result of a total failure of consideration: Roxborough & Ors v Rothmans of Pall Mall Australia Ltd (2001) 185 ALR 335 at [20]. 102Finally, Donalds submits that the March 2013 sale contract was a contract to which Conveyancing Act 1919, s 55(2A) applies. But the Court finds that even if Conveyancing Act, s 55(2A) applied that the discretion to afford repayment of the deposit conferred by that section would not be exercised on the facts of this case as found. It is therefore unnecessary to consider whether the section applies. 103But the Donalds case fails on factual grounds. The lease was not terminated because of the arrears of rent, or the first defendant's abandonment of the premises. These matters were known and accepted by the lessor, provided the sale to Donalds went through. Donalds' allegation that Alio failed to abide by a direction by Taoist on 16 May to hand over the keys to the premises and cease all access by other persons to the premises is a rather bold contention that Alio was at fault by giving Donalds the keys to go and undertake structural work without the permission of the lessor. If Donalds had not done the unauthorised structural work, then Alio giving access to unauthorised persons is hardly likely even to have been noticed by the lessor. 104But Donalds further submits that Alio's giving unrestricted access to the premises to Donalds, without warning about what could not be done and without actually getting the consent of the landlord was the default by Alio, which really lead to the landlord's decision to re-enter. 105But Donalds' argument takes insufficient account of Donalds' own responsibility for what happened. Mr Bennett knew the landlord's approval had not been obtained in writing. I find Mr Bennett was taken through the lease documents by his solicitor and should have known that the landlord's consent in writing was required to do any work on the premises. Mr Bennett was speaking to both the landlord's agent and the landlord's solicitor throughout the period and could have approached the lessor to seek consent directly. And in any event about 25 April 2013, when Mr Bennett asked Ms Clarke "do you think you will be able to get permission for us to commence works", it was clear that he fully understood some kind of formal lessor's permission was required. Nor do I accept what Mr Bennett says, that he genuinely believed that form of permission was going to come from Mr Beazley, Alio's solicitor, not the lessor. Alio's Cross Claim 106Alio seeks the balance of the sale price of $145,000, being the total consideration of $275,000 minus the deposit of $130,000. Alio relies upon clause 22 of the contract which permits a purchaser who does not comply with the contract to terminate by serving a notice after termination to keep all or recover the deposit. But whether the contract is terminated or not Alio argues, successfully in my view, that Donalds' breach of clause 60.1 and the Stirling v Maitland & Boyd implied term entitles it to damages. 107The termination of the lease means that Alio has lost the entire benefit of the contract and is entitled to the damages claim. Conclusions and Orders 108In summary the Court has found that Donalds breached the 15 March 2013 sale contract by going into the premises and commencing structural fit out works without the lessor's permission, causing the lessor to terminate Alio's lease. In the result Donalds' claim for recovery of the deposit fails and the cross-claim for the $145,000 balance of the purchase price of succeeds. 109Costs would normally follow the event. But one or other party may seek a special costs order or other consequential orders. For that purpose the proceedings will be listed for further mention. The orders of the Court therefore are: (1) Direct the parties to bring in short minutes of order by 4pm on 8 August 2014 to give effect to these reasons. (2) List the proceedings at 9.30am on 8 August 2014 for further argument on costs and any consequential orders. ********** 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: 13 June 2014