Medi-Aid Centre Foundation Ltd v Joys Child Care Ltd (No 2) [2019] NSWSC 1105

Supreme Court New South Wales

Medium Neutral Citation: Medi-Aid Centre Foundation Ltd v Joys Child Care Ltd (No 2) [2019] NSWSC 1105 Hearing dates: 27 October and 1 December 2017; 7 March 2018; 15 May 2019 (written submissions) Date of orders: 27 August 2019 Decision date: 27 August 2019 Jurisdiction: Common Law Before: Walton J Decision: The plaintiff shall bring in short minutes of order reflecting this judgment within 7 days of the publication of this judgment. Catchwords: POSSESSION OF LAND – mesne profits – principles – quantification – mesne profits awarded

COSTS – ordinary basis – costs follow the event Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300; [1993] HCA 6 Gabriel v Grech [2018] NSWSC 1652 Gaetani v Schiliro (No 2) [2019] NSWSC 533 Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432 Medi-Aid Centre Foundation Ltd v Joys Child Care Ltd [2018] NSWSC 1586 Moseley v AB (No 2) [2017] NSWSC 1812 Category: Principal judgment Parties: Medi-Aid Centre Foundation Ltd (Plaintiff) Joys Child Care Ltd (Defendant) Representation: Counsel: J E Lazarus with M E Sheldon (Plaintiff)

Solicitors: Storey & Gough Lawyers (Plaintiff) File Number(s): 2017/101154

Judgment 1. HIS HONOUR: By an amended statement of claim filed 11 July 2017, Medi-Aid Centre Foundation Ltd ("the plaintiff") brought proceedings for vacant possession of its property, being the ground floor, level 1 and level 2 of 60 Campbell Street, Parramatta ("the premises"), together with claims for rental arrears, mesne profits (pursuant to an express contractual right and at law) and damages against Joys Child Care Ltd ("the defendant"). The defendant operated a child care centre on the premises called "Joys Child Care" ("the centre"). The plaintiff also sought orders for rectification of the terms of the clause of an agreement to lease, interest and costs. 2. The relief was predicated upon two fundamental considerations. The first was that the plaintiff and defendant were parties to a valid registered lease for the premises (the lease relied upon was given registration number AJ578972 and hereafter called "the registered lease"). The second was that the defendant, as lessee, had committed breaches of the lease consisting of a failure to pay rent for more than two years, using the premises contrary to its permitted use as a childcare centre by allowing people to live at the premises and using the premises in a manner contrary to law, by operating a childcare centre without the relevant approvals and by failing to keep the approvals current. 3. By a cross-claim filed on 3 July 2017, the defendant sought a declaration that the lease had no legal force and effect and that rent was not owing or outstanding to the plaintiff. The defendant also sought that the plaintiff "remove from the [lease] register managed by Land and Property Information" registration of the lease, a declaration that the plaintiff had breached a contractual licence held by the defendant and had wrongly excluded the defendant from its lawful occupation of the premises. 4. On 22 October 2018, the court gave judgment in the matter: Medi-Aid Centre Foundation Ltd v Joys Child Care Ltd [2018] NSWSC 1586 ("Medi-Aid No 1"). 5. As to the existence of a validly registered lease, the Court made the following findings at [131]-[134]: [131] The agreement to lease was an agreement between the plaintiff and the defendant to enter into a lease of the premises. Clause 2.6 of the agreement to lease provided that the defendant was to have access to the premises for fit-out purposes following the receipt of a development consent or as soon as practicable after that time subject to the provision of an insurance certificate of currency. There was no rent or licence payable under the agreement to lease whilst the defendant used the premises for fit-out purposes. That provision gave no right to the defendant to occupy the premises, as it did, for the purposes of conducting child care services. The only document that gave the defendant any such right was the lease. [132] I have rejected the contention of the defendant that the parties' relationship was governed by the agreement to lease and not the lease itself. Upon the proper construction of the agreement to lease, the pre-conditions for the lease operating were met, albeit at a time after the lease was registered. [133] For the reasons I have given, I consider that the lease operated from the date of its registration on 27 July 2015. It was unnecessary to consider the plaintiff's alternative submission that the lease would operate from 13 November 2015 when all pre-conditions were satisfied including an approval to carry out child care services. [134] Hence, a lease was validly entered into on and from 27 July 2015 and, as discussed, was terminated upon the plaintiff's exercise of the power of entry on 23 March 2017. 1. The Court then turned to the question of breach of the lease and, in particular, the three claimed breaches of the lease: failure to pay rent; breaches of governance as to use; and the covenant to comply with all laws regulating the premises. 2. As to a failure to pay rent, the court found at [136]-[137] as follows: [136] Under the lease the defendant covenanted to pay monthly rent to the plaintiff in the sum of $19,328.83 (including GST) per month, with fixed rental increases of 5% on each anniversary of the commencement date (see cl 5, item 13 of Annexure A, cl 5.7 and item 16 of Annexure A of the lease). By reason of an amendment to cl 5.2 of the lease, the defendant was entitled to a rent-free period of 6 months, with monthly rent scheduled to commence on 1 September 2015 (see additional cl 5.2.1 on page 5 in Annexure A of the lease). [137] By cl 12.5 of the lease, the obligation to pay rent no later than 14 days after the due date was an essential term. The defendant did not pay rent after occupation of the premises and did so upon the aforementioned contention that there was no valid lease and a right to occupy the premises under the agreement to lease without rent. This was notwithstanding that the defendant sent a copy of the lease to the Department as part of its application for a service approval. 1. The Court also found that on the balance of probabilities, the defendant, contrary to cl 6.1.1 of the lease, permitted persons to reside at the premises (at [143]) and carry on certain services whilst relevant approvals were suspended or cancelled, which was also a breach of the lease (at [148]). 2. The court then turned to the plaintiff's entitlement to release dealing with possession (at [150]-[154]), rental arrears (at [155]-[160]), mesne profits (at [161]-[166]) and damages (at [167]-[169]). As to mesne profits, the court found as follows (at [161]-[166]): [161] The plaintiff made the following submissions in regard to mesne profits: 23. As the Defendant has remained in unlawful occupation of the Premises since 24 March 2017 and has not paid any rent, the Plaintiff seeks mesne profits for that period of time between the date the Lease was terminated until the date that the Defendant gives up possession of the Premises. 24. Anthony Khoury, an experienced property leasing agent in Parramatta has given unchallenged evidence estimating that the current market rent for a premises of the same grade in Parramatta as the leased Premises would be in the vicinity of $336,350.00 to $384,400.00 per annum plus GST. That evidence should be accepted. 25. The Plaintiff claims mesne profits calculated on that basis. [Footnotes omitted.] [162] I accept the submission of the plaintiff that mesne profits are payable to the plaintiff until the defendant has given possession having regard to the defendant's unlawful occupation of the premises. [163] However, there was a tension between the quantum schedule, the pleadings and the plaintiff's written and oral closing submissions as to the calculation of mesne profits. [164] The quantum schedule included two calculations as to the calculation of mesne profits. They were as follows: the first was in relation to calculations to the same rate of rent payable under the lease at the date of termination – on page 5; and the second was based on Mr Khoury's evidence on market rent – on page 6. [165] The quantum schedule appeared to suggest that the calculation on page 5 should be used (see para 2 on page 5). However, the oral closing submissions by counsel for the plaintiff suggested that the calculation on page 6 should be used; that submission did not explain the apparently different positions as to calculations in the quantum schedule. The plaintiff's written submissions were, in this respect, also productive of some uncertainty as to what basis mesne profits should be calculated. [166] It is appropriate that those issues be resolved, together with any further submissions being obtained from the defendant, before final orders are made awarding mesne profits in favour of the plaintiff. 1. As to the question of the claim by the plaintiff for damages, the court found (at [167]-[169]): [167] The plaintiff made a claim for relief in the form of damages. No written submissions were made as to that point. Nor were oral submissions received. The only material before the Court on damages was included on page 7 of the quantum schedule which was as follows: Pursuant to clause 12.6 of the Lease, if there is a breach of an essential term of the Lease (which has been submitted by the Plaintiff), the Plaintiff is entitled to recover damages for losses over the entire period of the Lease but must do every reasonable thing to mitigate those losses and try to lease to property to another tenant on reasonable terms. Such damages shall be calculated from the date that the Defendant returns possession of the premises to the earlier of the Lease Expiry date, being 29 February 2020, and the date that the Plaintiff leases the premises to another tenant. The rental rates are calculated as follows: [Table omitted.] An order should be made for the Defendant to pay to the Plaintiff damages calculated in accordance with the abovementioned rental rates from the date that possession of the Premises is returned to the Plaintiff to the earlier of (i) the Lease Expiry date, being 29 February 2020, and (ii) the date that the Plaintiff leases the premises to another tenant. (See paragraph 8 of relief claimed of Amended Statement of Claim filed 11 July 2017). [168] There are two problems that arise as a result of the above considerations. First, the plaintiff did not expand upon the basis on which a damages claim was payable by the defendant. Secondly, the quantum schedule was handed up on the final day of hearing which gives rise to a concern as to whether the defendant had an opportunity to respond to the plaintiff's submission in that respect. [169] Hence, in addition to submissions on the calculation of mesne profits, the Court will require the parties to provide further submissions on the question of damages. 1. The court then turned to the cross-claim concerning damages, fit-out and the nature of the centre and alternative solutions (at [170]-[179]) as follows: Damages [170] For completeness, it should be noted that the defendant appeared to make a positive claim for damages for breaches of the agreement to lease. I accept the submission of the plaintiff that none of those alleged breaches relied upon by the defendant are supported by evidence nor is there evidence of loss or damage suffered as a result of those alleged breaches. It also follows from the aforementioned considerations that the defendant's cross-claim should be refused. In particular, I note that the application for declaratory relief is refused. Fit-out [171] At various points in the hearing, Mr Shang also sought to assert that the defendant should be compensated for money it spent on the premises. The same assertion was made at para 22 of his affidavit. The defendant did not plead a set-off and the evidence, in that respect, therefore, is not relevant to any pleaded issue in the proceedings. [172] The defendant cannot properly raise a claim for set-off in circumstances where the evidence was first introduced after the hearing was part heard and in circumstances where the plaintiff was deprived of the opportunity of leading any evidence about the question. [173] In any event, the evidence is irrelevant because cl 12.3 of the lease, a make-good provision, required the defendant to remove anything brought to or added to the premises. Further, the defendant led no evidence about the value of its contribution. [174] I accept the submission that the defendant had a contractual right pursuant to cl 2.6 of the agreement to lease to fit-out the premises as required for a child care centre. The cost of that fit-out was at the risk of the defendant, especially having regard to the make-good provision in cl 12.3 of the lease. Nature of the centre and alternative solution [175] The defendant contended that the plaintiff should not be granted possession of the premises (and other relief) considering the nature of the centre. First, it was contended that the centre provided child care to children from low-income families who would otherwise not have equal access to a bilingual early childhood education program. [176] Secondly, it was contended that the centre, as a community project, was funded by the community and if the defendant lost possession of the premises, that money generated by the community would be lost. [177] The defendant proposed an alternative resolution to the proceedings. It was suggested that the defendant was willing to give up the 6 months' rent free period from the lease commencement date. It was contended that once the service approval for a centre-based service was granted, the defendants would enter into a lease and start paying the rent from the date of approval. [178] The plaintiff was correct to submit that there was no evidence of the prospects of the defendant's application being approached and in any event, the prospect of approval does not affect the plaintiff's legal rights. [179] However commendable that objective of the defendant may be, that does not afford it a right to occupy the premises for over two years without paying rent contrary to a lease (and an agreement to lease). 1. After briefly discussing costs, the court ultimately reached the following conclusion (at [182]-[185]): [182] The registered lease was valid and operative from the date of registration, namely, 27 July 2015. The defendant was in breach of the lease by a failure to pay rent, a breach of covenants as to use and a breach of a covenant to comply with all laws regulating the premises. [183] The first two of those breaches were breaches of essential terms of the lease. [184] The plaintiff had a right to bring the lease to an end pursuant to cl 12 of the lease. The plaintiff served an effective notice upon the defendant on 9 March 2017 and, in the absence of rectification as required by the notice (by 23 March 2017), re-entered the premises and changed the locks. On 24 March 2017, the defendant nonetheless re-entered the premises and remained in unlawful occupation. [185] The plaintiff is entitled to an order for possession together with rental arrears pursuant to an express contractual right and at law, and mesne profits. The Court shall make directions requiring the plaintiff to bring in short minutes of order reflecting this judgment, as well as providing for further submissions as to the quantification of mesne profits, damages and costs which shall be reserved. 1. Orders and directions were made as follows (at [186]-[188]): [186] The Court makes the following directions as to possession, rental arrears, mesne profits and damages: (1) The plaintiff shall file and serve short minutes of order reflecting this judgment within 7 days of the publication of this judgment; (2) The plaintiff shall file and serve a submission in relation to the calculation of mesne profits and the plaintiff's entitlement to damages within 14 days of the publication of this judgment; and (3) The defendant shall file and serve any submission in reply as to mesne profits and damages within 28 days of the publication of this judgment. [187] The issue of mesne profits and damages shall be determined upon the papers (that is, without further oral hearing) unless either party seeks an oral hearing. [188] As to costs, the Court makes the following order and directions: (1) Costs are reserved. (2) The plaintiff shall file and serve upon the defendant and Mr Shang a submission and further evidence in relation to costs including the order for costs sought by the plaintiff within 21 days of the publication of this judgment. (3) The defendant and Mr Shang shall file and serve any submissions and further evidence in reply within 42 days of the publication of this judgment. (4) The further disposition of the issue of costs will be assessed after receipt of the submissions of the respective interests and any evidence. The parties are at liberty to make submissions as to the procedure to be adopted in the resolution of any application for costs made by the plaintiff. 1. On 24 October 2018, the court made orders responsive to short minutes of order filed by the plaintiff. The orders then made were as follows: 1. Judgment for the Plaintiff for possession of the land described as Part Lot 100 of Deposited Plan 1152385, being the Ground Floor, Level 1 and 2 of 60 Campbell Street, Parramatta (the Premises). 2. Declares that the Plaintiff was entitled to forfeit the Lease and re-enter the Premises at all times from 23 March 2017. 3. Judgment for the Plaintiff against the Defendant in the amount of $325,440.46 (inclusive of GST) for arrears in rent and interest under the Lease to 23 March 2017. 4. Costs reserved. 5. The Plaintiff shall file and serve a submission in relation to the calculation of mesne profits and the Plaintiff's entitlement to damages by 5 November 2018. 6. The Plaintiff shall file and serve upon the Defendant and Mr Jan Shang by email, to his email address being [email address omitted], submissions and further evidence in relation to costs including the order for costs sought by 12 November 2018. 7. The Defendant shall file and serve any submissions in reply to the Plaintiff's submissions pursuant to order 5 by 19 November. 8. The Defendant and Mr Jan Shang shall file and serve any submissions and further evidence in reply to the plaintiff's submissions pursuant to order 6 by 26 November 2018. 9. The issue of mesne profits and damages shall be determined upon the papers, without further oral hearing, unless either party seeks an oral hearing. 10. The further disposition of the issues of cost shall be assessed after receipt of the submissions of the respective interest and any evidence pursuant to orders 6 and 8. 11. The parties are at liberty to make submissions as to the procedure to be adopted in the resolution of any application for costs made by the Plaintiff. 1. On 5 November 2018, the plaintiff filed written submission in relation to the question of mesne profits and damages. By that submission, the plaintiff no longer sought damages but made submissions in support of its claim for mesne profits. 2. The defendant filed a submission as to mesne profits and "damages" on 29 November 2018 and sought an oral hearing with regard to the same. The defendant sought an oral hearing on costs. 3. Submissions were also filed by the plaintiff and the defendant on 12 and 27 November 2018 respectively on the question of costs. 4. In the plaintiff's written submissions on costs it sought an order for costs to be paid by the defendant and by Mr Shang personally, on a joint and several basis. Mr Shang appeared for the defendant at the hearing of this matter (see Medi-Aid No 1 at [5]). 5. The plaintiff also sought an order that costs be paid on an indemnity basis. As will become apparent, it is no longer necessary to address the question of indemnity costs in this judgment. The plaintiff ultimately withdrew its application for costs on an indemnity basis and for personal liability in the case of Mr Shang. 6. Returning to the issue of mesne profits, the written submission of counsel for the plaintiff of 5 November 2018 were as follows: 1. These submissions are made pursuant to order 5 of the Court's Orders made on 24 October 2018 (Orders).These submissions are made pursuant to order 5 of the Court's Orders made on 24 October 2018 (Orders). 2. The Plaintiff does not seek a further oral hearing, given that the remaining damages and interest issues are matters of quantification on the basis of the evidence already before the Court. 3. At paragraph 162 of the Judgment ([2018] NSWSC 1586), the Court found that, having regard to the Defendant's unlawful occupation of the premises, mesne profits are payable to the Plaintiff until the defendant gives possession. The Plaintiff re-entered the Premises on 26 October 2018. On that basis, the Plaintiff is entitled to mesne profits until 25 October 2018. 4. The law provides that where a tenancy has been lawfully terminated, a tenant who refuses to vacate the premises is a trespasser and the landlord is entitled to mesne profits, which is generally calculated by the Court at the rate of market rent that could have been obtained absent the trespass. 5. At paragraphs 23 to 25 of the Plaintiffs written submissions filed 22 January 2018, the Plaintiff pointed to the unchallenged evidence of Mr Khoury that established that the market rent for the Premises was between $336,350 and $384,400 per annum plus GST, or $369,985 to $422,840 (inc. GST). The table on page 6 of the Plaintiffs quantum schedule calculated mesne profits on that basis. The calculations in that table should be applied. For convenience, the table from page 6 has been extracted in full below (See Figure 1): Figure 1: Mesne profits calculations as per filed quantum evidence Date From Date to Mesne Profit Installment (inclusive of GST) 24/03/2017 31/03/2017 $7,956.67 - $9,093.33 1/04/2017 30/04/2017 $30,832.08 - $35,236.67 1/05/2017 31/05/2017 $30,832.08 - $35,236.67 1/06/2017 30/06/2017 $30,832.08 - $35,236.67 1/07/2017 31/07/2017 $30,832.08 - $35,236.67 1/08/2017 31/08/2017 $30,832.08 - $35,236.67 1/09/2017 30/09/2017 $30,832.08 - $35,236.67 1/10/2017 31/10/2017 $30,832.08 - $35,236.67 1/11/2017 30/11/2017 $30,832.08 - $35,236.67 1/12/2017 31/12/2017 $30,832.08 - $35,236.67 1/1/2018 31/1/2018 $30,832.08 - $35,236.67 1/2/2018 28/02/2018 $30,832.08 - $35,236.67 1/3/2018 7/3/2018 $6,962.08 - $7,956.67 Total $354,071.63 - $404,653.37