Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Tabbouche Enterprises Pty Ltd (atf Tabbouche Family Trust) v Cromwell Seven Hills Pty Ltd [2016] NSWCATCD 51 Hearing dates: 30 March 2016 Decision date: 21 June 2016 Jurisdiction: Consumer and Commercial Division Before: Geoffrey Meadows, Senior Member Decision: (1) The respondent is ordered to pay compensation to the applicant in the amount of $34,900.00 within 30 days of the date of these reasons. Catchwords: ADMINISTRATIVE LAW—Residential Tenancies—claim for rent reduction for withdrawal of services—claim for rental bond—claim for damage to personal property—claim landlord breached Residential Tenancies Act 2010 and lease—no appearance by landlord—ex parte hearing in the interests of justice—order in favour of tenant—application otherwise dismissed. Legislation Cited: Civil and Administrative Tribunal Act 2013 Residential Tenancies Act 2010 Cases Cited: Bite Food Group Pty Ltd v Ubertas Funds Management Pty Ltd [2010] VCAT 253 Softwash Castle Towers Pty Ltd v Queensland Investment Corporation [2009] NSWSC 490 Category: Principal judgment Parties: Tabbouche Enterprises Pty Ltd (atf Tabbouche Family Trust) - (applicant); Cromwell Seven Hills Pty Ltd (respondent) Representation: Mr Ali Tabbouche (applicant) Mr Firmanis (respondent) File Number(s): COM 15/65606 Publication restriction: Nil REasons for decision BACKGROUND 1. This is an application by a former tenant of retail premises, Bite Food Group Pty Ltd ("the Tenant") for an order pursuant to s 56(4)(b) of the Retail Leases Act 2003 ("the Act") for reasonable compensation for the fit out of leased premises following the determination of a lease pursuant to a demolition clause. 2. The section (where relevant) provides as follows: 35 Demolition (1) … (3A) If a retail shop lease is terminated on such a ground, the lessor is liable to pay the lessee compensation for the fitout of the retail shop if the lessee is required under the lease to fit out the retail shop, whether or not the demolition of the building is carried out. … 1. On or about 23 April 2012 the applicant signed a franchising agreement with a franchisor known as Blow Dry Bar Franchising Pty Ltd. The Schedule to that agreement stated that the premises were Shop 16, 100 Miller Street, North Sydney. 2. On or about 30 January 2013 the applicant signed a sub-lease for a term of 5 years commencing on 1 October 2012, terminating on 30 September 2017 with an option to renew for a further five years. The Torrens Title details in the lease refer to "Shop P17, 100 Miller Street, North Sydney" but there appears to be no dispute that the shop details are correctly set out in the previous paragraph, that the sublease (being No. AH665820V) relates to those premises. 3. The applicant asserts in these proceedings that the franchising agreement provided for the franchisor to complete the fitout of the premises but that the applicant was required to pay for the fitout. The applicant states that the sum of $120,000.00 was expended by it in that regard. 4. The respondent purchased the subject building ("Northpoint Tower") on or about 19 December 2013 and in doing so became the landlord of the applicant. 5. On or about 3 September 2015, desiring to significantly renovate the building or parts of it, the respondent served a demolition notice pursuant to the lease on the applicant. 6. The applicant alleges that the respondent has not agreed to pay reasonable compensation for the fitout pursuant to s 35 of the Retail Leases Act 1994 (RL Act) and filed this application on 8 December 2015. 7. Although it appears there may have been other issues between the parties previously, the applicant states in his affidavit dated 25 January 2016 that the dispute has been resolved except for the provision of reasonable compensation and two other lesser issues, as set out under the heading "The Claim" below. PRE-HEARING PROCEDURES 1. For the sake of completeness only, I note the applicant filed an earlier application in relation to the same leased premises on 7 September 2015, being COM 15/51198. That application was in different terms to the current application. It was dismissed on 2 December 2015 as the application was withdrawn by the applicant. That application is otherwise not relevant to these proceedings. 2. This application was filed on 8 December 2015 as a retail tenancy claim pursuant to s 71 of the Retail Leases Act 1994 (RL Act). The basis of the application was that the respondent landlord had issued a demolition notice to the applicant on 3 September 2015. The applicant requested compensation for fitout costs, that request being denied by the respondent, alleged by the applicant to be in breach of the RL Act. The applicant claimed additional compensation for quantity surveying fees and lost advertising fees. 3. The matter was listed for directions before Member Bluth on 12 January 2016. On that date Member Bluth made orders for the applicant only to provide to the Tribunal and the respondent all documents on which the applicant intends to rely at the hearing, by 27 January 2016. The applicant filed a bundle of documents in the Tribunal on 25 January 2016. 4. The matter was listed for further directions before Member Bluth on 2 February 2016. On that date the Member ordered the respondent "to make enquiries of the previous owner regarding the fit out of the premises". No date or other orders were made in relation to the results of such enquiries and the matter was listed for further directions on 16 February 2016. On that date Member Bluth ordered that the respondent was to file a summons to produce by 19 February 2016 and was to serve its evidence by 14 March 2016. Although no order appears to have been made in relation to providing information about unavailable dates for a hearing (as would be the usual Tribunal order), both parties in fact did provide available dates for hearing, also on 16 February 2016. 5. On 19 February 2016 the respondent did file an application for the issue of a summons in compliance with the previous direction to do so. The summons application sought the following documents: 1. Copies of the complete version of the depreciation schedules and all asset registers for the years ended 30 June 2013, 30 June 2014 and 30 June 2015 in respect of Tabbouche Enterprises Pty Limited ATF Tabbouche Family Trust ("Tabbouche"). 2. Copies of all tax returns, notices of assessments, financial statements and profit and loss for the financial years ending 30 June 2013, 30 June 2014 and 30 June 2015 to current in respect of the Tabbouche. 3. Copies of business activity statements for period 1 July 2012 to current in respect of Tabbouche. 4. Copy of the general ledger with respect to Tabbouche for the period 1 September 2012 to 31 December 2012. 5. Copies of all documents , including but not limited to any letters of instruction, correspondence entered into between Ali Tabbouche (or Tabbouche) and ACP and financial documentation not otherwise listed at paragraphs 1 to 3 above, that Ali Tabbouche (or Tabbouche) provided to ACP to assist with the compilation of the reports dated 6 November 2015 and 10 February 2016. 6. Copy of the Deed of Settlement entered into between Tabbouche on the one hade and Blow Dry Bar Franchising Pty Ltd on the other hand and as referred to in the statement of Ali Tabbouche dated 11 February 2016 contained in the email from Emma George dated 4 November 2014. 7. Copies of all remittance slips which t4end to establish payments made by Tabbouche or Ali Tabbouche to Blow Dry Bar Franchising Pty Ltd in the following bank statements: 1. Westpac Banking Corporation BSB 032-044 A/C 40-3350 in the name of Tabbouche for the periods 25 to 26 September 2012 and 3 October 2012. 2. UBank BSB 082-991 A/C 37-416-0033 in the name of Ali Tabbouche for the periods 1 January 2012 to 31 December 2012. 1. Copies of all correspondence between Tabbouche or Ali Tabbouche and Blow Dry Bar Franchising Pty Ltd for the period 23 April2012 to current in regards to any fitout at the premises known as P17 100 Miller Street, North Sydney. 1. The purpose of the summons was stated to be related to the two financial reports prepared by ACP which were said to be "flawed" and the respondent seeks the supporting financial statements so as to properly assess the applicant's claim. 2. The summons was issued and was returnable on 7 March 2016. On that date, Member Thode noted that the applicant had provided documents to Tribunal also on 7 March 2016, that the respondent was to have first access to the documents produced and that no further return date was required. 3. The matter thus proceeded to hearing on 30 March 2016. THE CLAIM 1. By a document headed "Additional Evidence" filed in the Tribunal on 7 March 2016, the applicant seeks the following: 1. $74,769.00 being the figure specified in the ACP Quantity Surveyors report: 2. $750.00 being 50% of the costs of the original ACP report "commissioned jointly by Applicant & Respondent"; 3. $900.00 being "the pro rata advertising cost of lost advertising resulting from demolition". The total sought by the applicant is thus $76,419.00 (incorrectly noted in this document as $74,419.00 which was clearly a typographical error). 1. The applicant's affidavit (referred to below) notes that the dispute between the parties has been resolved except for the issue of compensation for the applicant's fitout and other items as specified in the previous paragraph. EVIDENCE AND SUBMISSIONS 1. Both parties provided large bundles of documentary evidence. Applicant's Evidence 1. The applicant's evidence consisted of: 1. An affidavit dated 21 January 2016 (filed on 25 January 2016) with attachments including an accountant's tax depreciation report, the "Evoke Fitout Letter" dated 14 October 2014, an ACP quantity surveying report dated 6 November 2015 (alleged to be jointly commissioned by the parties), the Lease between the parties dated 30 January 2013 and the demolition notice dated 3 September 2015. This affidavit sought the amount of $99,528.00 being the amount specified in the "Depreciation Report" less the value of certain items retained by the applicant. 2. "Additional Evidence" filed on 11 February 2016 consisting of: 1. Franchise agreement with Blow Dry Bar (BDB) being the former franchisor; 2. Bank statements showing payments in relation to the fitout; 3. Documents from BDB confirming payment for the fitout; 4. An ASIC extract confirming the builder is insolvent or deregistered; 5. An email from Emma George of Thomsons Lawyers confirming a deed of settlement with BDB and that the applicant is no longer part of that franchise; and 6. A revised ACP Report showing a current valuation as at the date the premises were vacated on 07 November 2015. The additional evidence concluded with an updated claim as set out in paragraph 10 above. 1. The further additional evidence filed on 07 March 2016 consisting of photographs from which it is stated "[r]econstruction of fitout possible through photography", and a further ASIC extract in relation to the original builder of the fitout not being contactable due to deregistration/insolvency. Respondent's Evidence 1. The respondent's evidence consisted of: 1. A statement of Carlos Maureira dated 4 March 2016 with a large bundle of attachments as follows: 1. Site survey; 2. Disclosure statement from Ozton Pty Ltd being the vendors of the subject property acquired by the respondent on or about 19 December 2013; 3. A copy of the sublease of the subject premises between Ozton as sublessor and the applicant as sublessee; 4. The development application in relation to the proposed redevelopment of the property by the respondent; 5. A copy of the Notice to Applicant of Determination of a Development Application; 6. A copy of the subject demolition notice; 7. Copy of an accident report dated 15 September 2015; 8. Copy of an accident report dated 22 September 2015; 9. An email from Mr Maureira to Mr Ali Tabbouche dated 02 November 2015; 10. A reply email from Mr Tabbouche dated later the same day; 11. Further email to Mr Tabbouche dated 03 November 2015; and 12. Deed of Release dated 18 November 2015 between the parties. 1. An expert report dated 15 March 2016 prepared by Mr Ostapenko, quantity surveyor, in relation to these proceedings. 1. Both parties also provided oral submissions at the hearing. 2. The applicant's submission is to the effect that the Tribunal should order payment in the amount specified by the ACP reports, or rather the second ACP report, plus the smaller amounts specified above. LEGISLATION 1. As noted above, the claim is made pursuant to s 35 of the RL Act. 2. There is no dispute between the parties that the application is properly brought pursuant to the RL Act, that the subject premises comprise (or comprised) a retail shop for the purposes of Schedule 1 of the RL Act and that the application is otherwise within the constraints of the RL Act. There is thus no dispute that the Tribunal has jurisdiction to hear and determine this claim. THE ISSUES TO BE DECIDED 1. The issues for determination are: 1. Was the applicant required, pursuant to the lease, to fit out the retail shop; 2. If so, what amount or amounts were expended by the applicant in fitting out the retail shop; 3. What is the appropriate method of calculating the value to the applicant of the lost fit out works as at the date the premises were vacated, including any allowance for items of value retained by or removed by the applicant; and 4. What is the reasonable compensation payable under the lease and the RL Act to the applicant. CONSIDERATION AND DETERMINATION Was the applicant required to fit out the premises? 1. Although the respondent's evidence filed on 9 March 2016, and in particular the statement of Carlos Maureira date 4 March 2016, appears to dispute the applicant has any entitlement to compensation for the fit out on the basis that there was no evidence of any such fit out or the cost if there was such fit out provided by the applicant, the respondent appears to have conducted the hearing and provided further evidence on the basis that the applicant is entitled to such compensation. The disputes remaining between the parties relate to the other three issues listed above. 2. In case the respondent is maintaining its initial position that the applicant is not entitled to compensation in relation to the fit out, I am satisfied the evidence provided by the applicant establishes that entitlement. 3. Clause 12.9 and Special Condition 8 of the franchise agreement demonstrate that the value of the fit out was $85,000.00 payable by the applicant to the franchisor. I therefore find that the applicant was required to fit out the premises. This evidence answers questions (1) and (2) above. 4. Question (3) above is the central issue in this case. 5. The applicant's accountant, Knightsbridge Tax, has provided a copy of the depreciation schedule of the Tabbouche Family Trust for the year ended 30 June 2015 ("the schedule"). "Group 2" of that schedule, referred to as "Leasehold Improvements" shows a "Start Date" of 01/07/2012, an "Original Cost" of $85,000.00, an "Opening Adjusted Value" of $51,000.00, a "Depreciation Rate" of 20.00%, an "Amount" of $17,000.00 and a "Closing Adjusted Value" of $34,000.00. That is, the accountant has taken the opening value (the previously depreciated or written down value), applied a further annual depreciation of 20% to that opening value, and reduced the opening value by that amount to arrive at the closing adjusted value. 6. The applicant's expert report prepared by, or at least signed by, Mr Michael Sturges of Australian Cost Planners Pty Ltd (a registered quantity surveyor), gives a written down value of "capital works" as at 7 November 2015 of $72,769.00, based on the original fit out cost of $85,000.00. The basis for this calculation is a "Life Time Depreciation Schedule" commencing in the financial year ending 30 June 2016 and finishing in the financial year ending 30 June 2053. 7. The actual depreciation schedule comprises two methods of calculation, being the "Diminishing Value Method" and the "Prime Cost Method". There are two categories of depreciation employed in each method: the first being "Division 40 Depreciation" and the second being "Division 43 Capital Works Allowances". The two methods of calculation are then applied to each of those categories, and the final result is essentially identical. The Division 40 depreciation is assessed as $32,458.00 and the Capital Works Allowances is assessed as $40,311.00, in total $72,769.00 as noted above. 8. This report also includes a very brief discussion of the practical differences between the two methods of calculation and also notes that the applicant may be entitled to adjust previous years tax returns if depreciation has not previously been claimed. 9. No explanation is provided for "Division 40" or "Division 43" and there is no information as to what is being referenced in that regard. The ACP Report also does not explain why a lifetime depreciation schedule is appropriate. 10. The respondent's expert evidence is contained in a report prepared by Mr Mathew Ostapenko of WT Partnership. Mr Ostapenko is also a quantity surveyor and his report is dated 15 March 2016. I also note that unlike the Sturges report just described, Mr Ostapenko's report is in the appropriate format and contains the required material for an expert report in this Tribunal. (However, no issue was taken in regard to Mr Sturges' report in that regard.) 11. Mr Ostapenko first states that he adopts the finding of Harrison J at paragraph [87] of Softwash Castle Towers Pty Ltd v Queensland Investment Corporation [2009] NSWSC 490. (I will return to that decision in due course.) 12. Mr Ostapenko then assumes that the "Group 2" figures in the schedule refer to the fit out costs and notes that "in the eyes of the Australian Taxation Office (ATO) and byh means of the depreciation applied by the Applicants accountant the residual fitout value is $34,000.00". 13. Mr Ostapenko then notes that he has adjusted the schedule up to 30 September 2015 which is three years after the lease commencement date of 1 October 2012 and which therefore is in line with the nominal 3 years depreciation applied in the schedule. Mr Ostapenko has further adjusted the schedule to provide for depreciation until the lease termination date of 7 November 2015 which he notes is in line with the schedule calculation. 14. Mr Ostapenko then comments on the ACP report. He notes the reference to possible adjustments of previous tax returns and deals with the implications of that issue in section 4 of his report. 15. In considering those implications, Mr Ostapenko states first that he agrees that the WDV of $72,769.00 is correctly calculated in accordance with ATO guidelines. However, if that figure is to be accepted as the appropriate compensation, Mr Ostapenko concludes that if an appropriate adjustment is not made then the respondent would be providing "over compensation" to the applicant. 16. Mr Ostapenko states that adjusting depreciation on the basis of the ACP report would give a figure of ($12,231.00) which applied to the residual value included in the schedule ($51,000.00) would give an adjustment payable to the ATO of $38,769.00. The current value of the "Evoke Tenancy" (as Mr Ostapenko refers to these circumstances) is $34,000.00 (as above), to which would be added the figure of $38,679.00 just referred to, which would give a total adjustment payable to the ATO of $72,769.00 which could be reimbursed to the applicant. However, Mr Ostapenko states, "prior to any such compensation amount being made to the Applicant it is my opinion that the Applicant should provide all documentation to the Respondent to demonstrate that this adjustments [sic] has been made to the ATO". 17. Mr Ostapenko does not explain why those figures should be used in calculating the adjustment payable to the ATO nor why the current ATO residual value should be payable to the ATO. However, it is clear that Mr Ostapenko considers that simply adopting the compensation value calculated by the ACP report ($72,769.00) while correct as a matter of arithmetic, would over compensate the applicant. 18. Mr Ostapenko then considers the effect of adjusting for items "not deemed fixtures". He is referring to those items not deemed fixtures and which were not located within the premises when he conducted his inspection and he states "it is my understanding that these items were removed by the Applicant and as such compensation for these items is not deemed applicable …". There appears to me to be no dispute that items that were removed and remain in the possession of the applicant (or were disposed of by the applicant) cannot be included as parts of the fit out subject to compensation. 19. Mr Ostapenko then notes that calculating such a deduction "becomes a theoretical exercise", one based on a "reverse calculation". Mr Ostapenko then applies his calculation of these "removed items" to the residual value given in the schedule (the "Closing Adjusted Value") of $34,000.00 and arrives at two possible adjusted values based respectively on 2 years residual value and 1.9 years residual value, of either $29,811.88 or $28,260.03. 20. That is, the applicant claims compensation of $72,769.00 and the respondent assesses compensation of the two amounts just given above, although in submissions during the hearing, the respondent suggested a figure of approximately $32,000.00 was appropriate. 21. The applicant referred me to a VCAT decision, being Bite Food Group Pty Ltd v Ubertas Funds Management Pty Ltd [2010] VCAT 253. That is an interesting decision based on a factual background very similar to the facts in this case. Senior Member R Walker, in a clear and admirably succinct decision, adopted a method of calculation as follows: [51] In the present case, by prematurely terminating the Lease the Tenant has lost the ability to recover a proportion of the cost of the fit out over the balance of the term. I think that the amount of this loss should be quantified by taking the cost of the fit out and dividing it by the number of days of the lease together [with] any option periods and then multiplying the result by the number of days by which the Lease (together with any remaining option periods) was prematurely determined. [52] Taking a hypothetical situation to exemplify how this would work in a straight forward situation where the fit out was installed by the tenant claiming the compensation, if the fit out were to cost $100,000 and the lease were for 5 years with an option for a further period of 5 years, then the tenant would have 10 years in which to recover the outlay of $100,000. If the lease were then determined by the landlord 3 years into the second term in circumstances contemplated by the section, it would follow that the tenant had lost two years recovery period. I think it would be reasonable in those circumstances to award the hypothetical tenant $20,000 compensation. 1. Senior Member Walker also notes at [54] that in order to undertake such a calculation he must be able to determine the value of the fit out at the time the tenant made the investment, objectively. 2. Senior Member Walker had earlier discussed the theoretical nature of "compensation" in these circumstances and made a number of findings: 1. "Replacement value" is an inappropriate measure because in circumstances where the building is to be remodelled the fit out is not to be retained; 2. The value of the fixtures if actually removed from the premises is also not appropriate, as they are of value to the tenant only pursuant to their existence in premises from which he can trade and earn profits; 3. Nor is loss if income an appropriate measure as the purpose of the compensation is for the loss of the fit out itself, not for loss of the tenancy or loss of profits; and, most interesting, 4. Written down book value is inappropriate on the basis that the owner of a commercial asset will depreciate it for his own purposes, usually to do with income tax. Assessing the value of fit out assets in a particular way "might well be very advantageous from a taxation point of view but it does not seem to me to accord with commercial reality". 1. Is it appropriate to adopt the method of assessment used by Senior Member Walker, or by Mr Sturges or by Mr Ostapenko? 2. I am not persuaded by either of the experts. I am unable to understand from their reports the theoretical basis of their calculations nor of their opinions. As noted above, important concepts are not explained and certain terms are not explained. In addition, at least in the case of Mr Ostapenko, a theoretical assessment is undertaken without an explanation as to why that would or should be acceptable. I would only be able to accept the opinions of either of those experts on the basis that, being experts, I should do so. Of course, that would not permit me to decide between them. 3. I am attracted to the common sense and "understandability" of Senior Member Walker's methodology but again, without some expert opinion on its intellectual rigour (with due respect, of course, to Senior Member Walker) or some expert opinion that although it appears admirably sensible and fair it also does not have any hidden errors. 4. However, finally, in my opinion I am bound by the decision of Harrison J in Softwash Castle Towers Pty Ltd v Queensland Investment Corporation at [87]: [87] … The value of the plaintiff's interest in an item of plant or equipment installed as part of the fitout calculated at the date of termination will be the value attributed to that item in the plaintiff's financial and accounting and taxation records, or possibly the records of the partnership in the unusual circumstances of this case. If the plaintiff is able to remove the item and dispose of it at or above that value it will have suffered no loss. If it is only able to recover a portion of its value on sale it will have suffered a loss and will in that respect be entitled to "compensation for the fitout". However, the plaintiff will be required to give credit to the defendant for any such sum recovered on the sale of an item purchased for and installed as part of the fitout. As I understand His Honour's position, I take the value attributed to the item in the applicant's accounting and taxation records, that being, in this case, $34,000.00. 1. I now deal with the remaining issues in the applicant's claim. 2. In relation to the shared cost of obtaining a quality surveyor's report, there is no doubt the respondent offered to contribute to that report in equal shares. However, in submissions the respondent asserts that it did not agree to contribute to that particular report. That may be thought to be an unnecessarily technical position to take, but in my opinion the respondent has every right to do so. A joint expert report is, in my view, somewhat different to the situation where each (or every) party obtains their own independent expert report. There may be some expectation, for example, that the parties may be bound by the joint report (although not always the case). However, the issue is that before a party agrees to pay any particular cost or to be expected to rely on any particular report, they should be given the opportunity to agree on which expert is to be retained. That did not occur in this case and for that reason I do not allow this claim. 3. In relation to the pro rata claim for advertising, it appears to me that the applicant is entitled to that sum. The applicant purchased advertising for a period of time but had the benefit for that advertising only for a limited portion of that period. There is no benefit to the applicant in the advertising continuing and there is no evidence before me that the applicant is entitled to any rebate from the advertising provider. The loss of that benefit is directly attributable to the termination of the lease and in my opinion there are none of the difficulties of calculation of appropriate compensation. I allow the pro rata figure claimed by the applicant. 4. The respondent is ordered to pay compensation to the applicant in the amount of $34,900.00 within 30 days of the date of these reasons. Geoffrey Meadows Senior Member Civil and Administrative Tribunal of New South Wales 21 June 2016 I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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: 10 August 2016