Exit Distraction Free Reading Mode
- Unreported Judgment
DISTRICT COURT OF QUEENSLAND
Happy Lounge Pty Ltd v Choi & Lee Pty Ltd and Anor  QDC 184
HAPPY LOUNGE PTY LTD ACN 628 766 361
CHOI & LEE PTY LTD ACN 638 573 305 as Trustee for CHOI & LEE FAMILY TRUST
MINKYU CHOI and TAE MUN CHOI
1066 of 2020
13 August 2020
15 June 2020
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – FRUSTRATION – where the applicant entered into a contract with the first respondent for the sale of a bar and lounge – where the second respondents guaranteed performance of the first respondent’s obligations – whether government orders related to the COVID-19 pandemic frustrated the contract
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – where the respondents allege the applicant breached its obligations under the contract – whether the applicant breached its contractual obligations by failing to obtain the consent of the mortgagee to the assignment of the lease – whether the applicant breached its contractual obligations by failing to provide evidence of the value of the stock – whether the first respondent is entitled to a refund of the deposit paid
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – ILLEGALITY – where the respondents allege the applicant breached its obligations under the contract to operate the bar and lounge as a going concern and in the usual way – where government orders related to the COVID-19 pandemic made it illegal for the bar and lounge to continue operating – whether the applicant is liable for such breaches
Liquor Act 1992 (Qld)
Public Health Act 2005 (Qld) s 326B
Brisbane CC v Group Projects Pty Ltd (1979) 145 CLR 143, applied
Chapman v Taylor  NSWCA 456, applied
Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, applied
Gerraty v McGavin (1914) 18 CLR 152, applied
Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169, applied
Tenants (Lancashire) Ltd v CS Wilson & Co Ltd  AC 495, applied
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 LCR 165, applied
Michael de Waard for the applicant
Rostron Carlyle Rojas Lawyers for the applicant
- By way of an originating application filed on 7 April 2020, the applicant seeks specific performance of a written contract for the sale of its bar and lounge business. The contract was executed with the first respondent on 26 February 2020 (‘the Contract’). In the alternative, it seeks damages for breach of contract. The basis of the applicant’s case is set out in the Points of Claim filed on 24 April 2020. The second respondents are sued in their capacities as guarantors in relation to the first respondent’s obligations.
- In the Points of Defence and Counterclaim, the respondents seek declarations that the Contract was terminated due to frustration upon the making of COVID-19 related directions under the Public Health Act 2005 (Qld), or alternatively because the first respondent lawfully terminated the Contract as a result of the applicant’s breaches of it. It seeks a further declaration that it is entitled to a refund of its deposit of $55,000 paid on 28 February 2020.
- At the pre-trial mention, it was foreshadowed that there were factual issues that required the court’s determination. However, ultimately a statement of agreed facts was tendered and the matter resolved into a dispute as to the correct interpretation of the Contract.
- It is common ground that the Contract comprises the Items Schedule, the Standard Conditions, the Special Conditions (Annexure 1), Staff (Annexure 2) and the List of Plant and Equipment. The contest is as to its meaning and effect.
- In addition to the statement of agreed facts, seven exhibits were tendered. These were copies of the lease, the contract, the mortgage, the letter of approval of transfer of the liquor licence, the notification of the transfer of the liquor licence, a schedule of the value of some stock and print outs/video files from The Palace website.
- The business the subject of the dispute is known as The Palace Lounge or The Palace Supper Club (‘The Palace’). It occupies part of the ground floor, first floor and mezzanine level at 12 Duncan Street Fortitude Valley (‘the premises’). It was being operated by the applicant as a bar and lounge providing rooms and facilities for members of the public to attend in person, purchase food and alcoholic and other drinks and enjoy entertainment, including music. It operates with ordinary trading hours of 8pm until 3am or late each night. It does not provide a take-away food service and does not operate as a bottle shop. It is licensed as a commercial hotel under the Liquor Act 1992 (Qld) and only sells liquor for consumption off its premises in a way that is incidental to its principal activity of selling liquor for consumption on its premises.
- The premises is leased by the applicant from Tsuen Fung Holdings Pty Ltd (‘the landlord’) pursuant to a lease dated 9 August 2017. The existing lease finishes on 19 August 2022 with options for two further five year extensions. This means that The Palace could continue to operate from the premises until 18 August 2032. The premises is subject to a mortgage in favour of Westpac Banking Corporation as the mortgagee.
- On 26 February 2020, the applicant as seller entered into the Contract with the first respondent as buyer for the sale of The Palace for $550,000. The purchase price was apportioned $500,000 for the assets and $50,000 for the goodwill of the business. The date of completion was three weeks from the date of the Contract, namely 18 March 2020. It was not subject to finance. On 28 February 2020, the first respondent paid a deposit of $55,000.
- Prior to the Contract being executed, on:
- (i)29 January 2020 the Queensland Health Minister (‘the Minister’) declared a public health emergency in relation to COVID-19;
- (ii)5 February 2020 the Minister extended the public health emergency until 12 February 2020;
- (iii)18 February 2020 the Minister further extended the public health emergency until 19 May 2020.
- Item S of the Items Schedule of the Contract provided for the lease to be assigned to the first respondent. On 13 March 2020, the landlord’s representative confirmed the landlord’s consent to the assignment of the lease. This is contained in a signed version of a document entitled Deed of Consent and Assignment, which was provided to the applicant’s solicitors on 16 March 2020. It is not clear from the Items Schedule whether the consent of the mortgagee of the premises to the assignment of the lease was required. The reason for this is that both the boxes providing whether consent ‘is required’ and ‘is not required’ have been filled in.
- On 17 March 2020 the parties to the Contract agreed to the extension of the settlement date from 18 March to 24 March 2020.
- The Office of Liquor and Gaming Regulation approved the transfer of the applicant’s liquor licence to the first respondent on 19 March 2020. On the same day, Queensland’s Chief Health Officer (‘the CHO’) issued a Public Health Direction pursuant to s 362B of the Public Health Act 2005 (Qld) entitled Non-Essential Indoor Gatherings Direction (‘the First Direction’). The practical effect of it was to prohibit gatherings of 100 persons or more at premises, including The Palace and to require patrons to be at least four square metres apart.
- A further Public Health Direction entitled Mass Gatherings Direction (No 2) was issued by the CHO on 21 March 2020. It revoked the First Direction and further regulated the number of people permitted to gather at premises, including The Palace. It required patrons to be at least four square metres apart (‘the Second Direction’).
- On 23 March 2020, the CHO issued another Public Health Direction. It was entitled Non-essential Business Closure Direction and revoked the Second Direction. It had the effect of prohibiting premises, including The Palace from operating from midday on that day until the end of the declared public health emergency, unless it was revoked or replaced.
- Relevant to the Contract, the following also occurred on 23 March 2020:
- (i)the landlord consented to an amendment of the Deed of Consent and Assignment which had the effect of removing from it any reference to the mortgagee’s consent to assign the lease;
- (ii)the applicant provided to the first respondent at 3.43pm a draft settlement proposing settlement at 3pm on the following day, namely 24 March 2020;
- (iii)in a response provided at 3.50pm, the first respondent objected to the settlement proceeding on the basis that The Palace was no longer operating as a bar and lounge and the applicant had not provided a week of tuition in accordance with its obligations under the Contract.
- On the morning of 24 March 2020, Mr Choi on behalf of the first respondent attended The Palace. He did not inspect or request to inspect the stock. The applicant called for settlement to occur in accordance with the settlement statement provided on the previous day. In the early afternoon, the applicant by email enquired of the first respondent as to whether someone on its behalf would be attending the settlement and was advised that they would be.
- At approximately 3pm on 24 March 2020, the first respondent’s solicitor attended at the applicant’s solicitor’s offices for settlement and requested the mortgagee’s consent to the lease; documents required to transfer the business name; a director’s covenant relating to the restriction on the applicant’s competition; evidence that the stock value was at least $30,000; and information, documents and records relating to the transfer of employees. The first respondent’s solicitor proceeded to show the applicant’s solicitor bank cheques for the purchase price but then stated words to the effect that they were not prepared to hand over the cheques as they were of the view that the applicant had not complied with the terms of the Contract.
- The applicant’s solicitor held the liquor licence consent approval letter and a copy of the liquor licence issued to the first respondent, the consent to the transfer of the domain name/website of The Palace and passwords for the email account. The first respondent’s solicitor left the applicant’s solicitor’s offices without settling the Contract. At 4.11pm, the applicant sent a letter confirming that it was ready, willing and able to settle the Contract and attached a list described as “proof showing the value of the stocks at $60,100”.
- On 25 March 2020 at 10.59am, the first respondent wrote to the applicant purporting to terminate the Contract and calling for a return of the deposit of $55,000 held by the applicant’s solicitors. In response, on 3 April 2020 the applicant wrote to the first respondent purporting to treat its notice of termination as a repudiation of the Contract and advising that the applicant elected to affirm the Contract and to sue for specific performance of its terms.
Has the Contract been frustrated?
- The law permits contracts to be automatically terminated by frustration if an event or events occur which create a situation radically or fundamentally different from that in contemplation by the parties when the contract was made. It is not to be lightly invoked because of the risks it poses to the enforceability of contracts. The incidence of hardship, inconvenience or material loss to a party on account of increased expense, delay or onerousness are generally not sufficient to frustrate a contract. All contracts involve the preparedness by a party of an obligation to perform in the face of an uncertain future.
- The question as to whether there has been frustration must be decided at the time when the relevant alleged event happens. It is to be determined upon probabilities and not upon a certainty arrived at after the event. The exercise of comparing the situation envisaged by the contract with the situation that has eventuated necessarily involves a difficult judgement of degree. It involves a value judgment by the court and often depends on numerous factors of varying weight. The relevant factors include the terms and content of the contract; the mutual and objective knowledge of the parties; contemplations and expectations, particularly as to risk at the time of the execution of the contract; the nature of the supervening event; the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance of the new circumstances and the demands of justice. Whether a fundamental difference exists between the contemplated and actual situation often depends on the degree to which the benefit of performing the contract has been diminished by the event in question.
- In paragraphs 44 to 46 of the Points of Defence and Counterclaim, the respondents plead that the Contract was frustrated and thereby automatically terminated with effect from:
- (i)19 March 2020 because of the First Direction; or
- (ii)21 March 2020 because of the Second Direction; or
- (iii)12pm on 23 March 2020 because of the Third Direction.
- While the statement of agreed facts addresses the legal impact of the making of each of the directions on a number of businesses, including The Palace, it does not address the practical effect of each of these directions on the operation of The Palace. It is clear that the Third Direction had the effect of preventing it from operating, however the same cannot be said for the First and Second Directions. Given that there is no evidence as to whether these earlier directions did adversely impact upon the operation of The Palace and if so the nature and extent of such impact, the potentially frustrating event to be considered is the Third Direction, which took effect from midday on 23 March 2020.
- In the Points of Claim, the applicant asserts that by Special Condition 9(b) the first respondent is precluded from relying on the doctrine of frustration. The clause reads as follows:
“The Buyer acknowledges and agrees that all the Assets are sold “as is and where is” at the Completion Date. The Business and the Assets are sold with all faults or defects (if any) whether or not apparent.”
- The applicant contends that the effect of the provision is that the first respondent agreed to take the Business and Assets “as is and where is” at the Completion Date. This is expanded on in paragraph 85 of the applicant’s written submissions and in paragraphs 7 and 21 of the Reply. According to the applicant the effect of Special Conditions 1(b) and 9(b) when read together, is that the first respondent accepted the ‘Business’ (as defined by clauses 1.1 and 3.1 of the Standard Conditions) “as is and where is” as at the Completion Date. The contended consequence is that the first respondent agreed to purchase the Business irrespective of any short term trading restrictions imposed by the Government pursuant to the Third Direction (or any other restriction).
- Whether these given set of circumstances are within or outside Special Condition 9(b) is a question of fact. The Court is required to construe the clause by determining what a reasonable person in the positon of the parties at the time the Contract was made would have understood it to mean. This involves a consideration of not only the text as a whole, but also of the surrounding circumstances known to the parties and the purpose and object of the transaction. In the absence of an inconsistency or absurdity, the natural meaning of the language used should receive its effect.
- Special Condition 9(b) is not well drafted and the language is quite general. It is difficult to explain its structure or reconcile all its parts, particularly when regard is had to Special Condition 9(c). Having said this I am not persuaded by the applicant’s argument that the effect of the provision is that the first respondent agreed to take the Business “as is and where is” at the Completion Date. This is because the clause seems to be concerned with the “Assets” to be handed over at settlement, and appears to be designed to cover any defects or faults in them. The Assets did not include the Business.
- In my view, clearer words would be required before reaching the conclusion that Special Condition 9(b) means that the first respondent was contractually required to take the Business in a temporary state of suspension and that it is precluded from relying on the doctrine of frustration. To support the applicant’s construction would be to force upon the words an uncommercial interpretation and a meaning which they cannot fairly bear.
- According to the respondents, the making of the Third Direction had the consequence that the applicant was unable to comply with Standard Conditions 7.1, 3.3(d), 9.1(a), 9.1(b), and 20.1 of the Contract. This had the consequence that the nature of the Business the subject of the Contract had radically changed in that it could no longer operate within ordinary trading hours as a bar and lounge providing facilities for members of the public to attend, purchase food and drink, and enjoy entertainment.
- The relevant Standard Conditions read as follows:
“On the date of Completion … the Seller must give and the Buyer must take possession of the Business and the Business Assets.”
The “Business” being sold by the applicant under the Contract is defined in Standard Condition 1.1 as the ‘Bar & Lounge’ known as The Palace Lounge referred to in Item J.
“If this clause 3.3 applies:
(d) the Seller must carry on the Business as a going concern until the Completion.”
Clauses 9.1(a) and (b):
“Until the date of Completion, the Seller will:
- (a)remain in possession of the Business and the premises and will manage the Business as a going concern; and
- (b)ensure that the Business is carried out in its usual way (having regard to the nature of the Business and past practice), including without limitation, the maintenance of the trading hours of the Business that apply as at the Contract date.”
“The Seller or a nominee of the Seller familiar with the Business must attend at the Business on and from the date of Completion for the number of Business Days set out in Item U(b) during normal business hours or such other hours as may be agreed at no cost to the Buyer to give tuition to the Buyer in relation to the conduct of the Business and to introduce to the Buyer customers and clients of the Business and suppliers of goods, services and stock-in-trade used in the Business and generally to use his, her or its best endeavours to retain for the Buyer the benefit of the goodwill of the Business.”
The number of Business Days set out in Items Schedule U(b) is a week.
- In my view Standard Condition 7.1 does not assist the respondents. It requires the applicant to give the first respondent possession of the Business and the Business Assets on the settlement date.
- The type of business that the applicant was to give the first respondent possession of, was expressed in the Contract to be a bar and lounge. While it may have been an important benefit for the first respondent and the parties contemplated that it would get the benefit of the Business for such use, in my view it was not essential for the fulfilment of the Contract.
- The applicant’s purpose in selling the Business and the Business Assets was to obtain the purchase price of $550,000. The obligations of the first respondent were to accept and take possession of the Business and the Business Assets and pay the purchase price. The Third Direction did not interfere with the performance of any of those obligations. Rather, it simply placed a restriction on the liberty of the action of the first respondent when it became the owner of the Business. This restriction would no doubt cause hardship to the first respondent by temporarily depriving it of the right to make an important use of the Business, but in my view the applicant fulfilled its obligations pursuant to this clause.
- Even if it could be said that the applicant was unable to give the first respondent possession of the Business as contemplated by Standard Condition 7.1 by virtue of the consequence of the Third Direction, it is my view that it does not approach the gravity of a frustrating event. This is because the Third Direction did not deprive the first respondent of substantially the whole benefit which it was the intention of the parties that it should obtain as consideration for the payment of the purchase price. The Contract was for the sale to the first respondent of the Business and its Business Assets. Of the $550,000 purchase price, the Contract apportioned only $50,000 for the goodwill of the Business. The remaining $500,000 was apportioned to the Business Assets. Pursuant to Standard Condition 3.2 of the Contract, these included those items listed in Schedule A, being fire, electrical, mechanical and security services. It also included music and communication systems; finishes and soft furnishings; refrigeration and kitchen equipment; seating and glassware; industrial and intellectual property. Further, it included the liquor licence (for which approval had been granted for its transfer) and the lease (which had been assigned to the first responded with the approval of the landlord).
- Further, in the weeks and days leading up to the execution of the Contract, the COVID-19 pandemic was widely known to be unfolding and evolving globally, including in Queensland. The Minister in this State had declared three public health emergencies, with the most recent having been made only eight days prior to the execution of the Contract. It remained in place at the time of its execution. In these circumstances, the potential for restrictions to be placed on the use of the premises by the action of the State government subsequent to the execution of the Contract is a risk that the first respondent must have foreseen as an incident of its purchase of The Palace. It is worth observing that despite this known uncertainty, the Contract does not contain a force majeure clause excusing performance for the occurrence of an event beyond the control of the parties. This is in circumstances where the parties incorporated other Special Conditions into the Contract.
- In addition, the effect of the Third Direction was to prohibit The Palace operating and trading for an indefinite, albeit temporary period. The probable length of the period was likely to be relatively short when compared with the remaining length of the lease, being until August 2032 (including the two options to extend it). Therefore, at the time when the Third Direction was made, the first respondent could look forward to operating The Palace at the premises for 12 or so years, in circumstances where any interruption to its trading would in all probability be considerably shorter than this.
- In arriving at this conclusion I am cognisant that a change in circumstances need not be permanent in order to amount to frustration. Codelfa Constructions Pty Ltd v State Rail Authority (NSW) is an apt example of this. However, that case is distinguishable in that it involved a contract to carry out construction work within a specified time and it assumed a work schedule more intensive than that allowed by the Court. The effect of the injunction had the consequence that the contract was prevented from being performed in accordance with the agreement of the parties. It made performance of the contract radically different from that promised.
- Turning to Standard Conditions 3.3(d), 9.1(a) and 9.1(b) (‘the Going Concern Conditions’), in summary these clauses required the applicant to continue operating and managing The Palace as a going concern and have it carry on in its usual way. For the reasons detailed in paragraph 23 above, I am prepared to accept that The Palace was unable to operate as a bar and lounge from the time the Third Direction came into effect, namely from 12 pm on 23 March 2020. While the statement of agreed facts does not specifically address this, it is pleaded in paragraphs 48(c) and (d) of the Defence that the applicant did not continue operating and managing The Palace as a going concern and have it carry on in its usual way. This seems to be accepted by the respondents because it is not disputed in the Reply.
- I am persuaded that by virtue of the Third Direction the applicant was unable to entirely comply with its obligations under these clauses. This is because the Third Direction prohibited The Palace from being operated and managed as a going concern and from it being carried on in its usual way.
- The question is whether the inability of the applicant to discharge its obligations in these regards had the effect of radically changing the situation in which the Contract was to be performed, so as to make performance fundamentally different from that contemplated by the parties at the time the Contract was made.
- The parties entered into the Contract on 26 February 2020. The applicant complied with its obligations provided for in the Going Concern Conditions for the following 26 days, until 23 March 2020. This is in circumstances where the settlement date of the Contract was the following day. Therefore, its non-compliance was for one day only and the applicant’s obligations under the Going Concern Conditions were substantially performed.
- Other obligations assumed by the applicant also remained performable. These included for example, the transfer of the liquor licence, the assignment of the lease and being in a position to give the first respondent possession of the other numerous Business Assets.
- Further, for the reasons detailed in paragraph 35 above, the inability of the applicant to carry out its obligations under the Going Concern Conditions prior to the settlement date, are risks of a kind that before entering into the Contract the first respondent may have expected to encounter in the completion of it.
- As to Standard Condition 20.1, it required the applicant or its nominee to attend at The Palace for a week from the date of settlement and to use its best endeavours to effectively provide a hand over of the Business. This included the provision of information relevant to the conduct of the Business and to introduce the first respondent to suppliers, customers and clients of the Business. There is no evidence that the Third Direction interfered with the ability of the applicant to perform any of these obligations.
- The fact that the applicant was unable to introduce customers and clients to the first respondent while they were at the premises when it was operating as a bar and lounge may of course have been less than ideal for the first respondent. However, the clause did not mandate that the introductions were required to be made in this way. There were any number of options open to the applicant when using its best endeavours to make these introductions. For example, they could have been made via email or the use of a variety of social media platforms.
- It was also not ideal for the first respondent that the Third Direction had the consequence that the remaining components of the hand over could not be provided during periods when The Palace was operating and trading. Having said this, these obligations of the applicant under this clause of the Contract were still capable of performance.
- In short, I am not persuaded that the respondents have demonstrated that the Third Direction unexpectedly created a fundamentally different situation striking at the core of the Contract so as to destroy its commercial purpose. The respondents’ claims for declarations that the parties were discharged from their obligations to perform the Contract by reason of frustration ought to be dismissed.
Purported breaches by the applicant
- In paragraph 47 of the respondents’ Points of Defence and Counterclaim, it is alleged that if the Contract was not automatically terminated due to frustration, then the first respondent lawfully terminated the Contract on 25 March 2020.
- The contended reasons for lawful termination are pleaded in paragraph 48 of the respondents’ pleading. These are because the applicant failed to:
- (i)obtain the mortgagee’s consent to the assignment of the lease by the settlement date in breach of Standard Condition 24.2;
- (ii)provide evidence proving the value of the business stock by the settlement date in breach of Special Condition 12;
- (iii)carry on and manage the business as a going concern and in the usual way until the settlement date in breach of the Going Concern Conditions.
- These purported breaches by the applicant are addressed in turn below.
Consent of the mortgagee
- Item R of the Schedule of the Contract is titled Lease Requirement of the Buyer and provides for the lease between the applicant and the landlord to be assigned from the applicant to the first respondent. On 16 March 2020, the applicant was informed that the landlord had consented to this assignment.
- The issue for determination is whether the consent of the mortgagee of the premises to the assignment of the lease was required. It is uncontentious that it was not obtained.
- Item S of the Schedule of the Contract details particulars of the lease that existed between the applicant and the landlord. In particular (o) of this item, the question is addressed as to whether the consent of the mortgagee of the premises is or is not required to an assignment of the lease. As stated above, unhelpfully the boxes for both ‘is required’ and ‘is not required’ have been filled in.
- In paragraphs 12, 13 and 24(a) of the Reply it is pleaded that such consent was not required. There are three reasons for this. These are that the landlord had given its consent as to the assignment of the lease, the Contract does not require the mortgagee’s consent and the lease does not require the mortgagee’s consent.
- The first reason can be easily disposed of. The fact that the landlord consented to the assignment of the lease is irrelevant to the determination of whether the mortgagee was also required to consent to it.
- As to the second reason, I am not persuaded that the Contract does not require the mortgagee’s consent. Standard Condition 24.2 of it reads:
“The Seller must on or before the date of Completion assign or cause to be assigned to the Buyer the lease of the premises and obtain the consent of the lessor and any mortgagee (if applicable) to such assignment, which is to be at the cost and the expense of the Seller. If as a condition of consent the lessor requires a deed or covenant from the Buyer then the costs of that deed of covenant must be paid by the Seller.”
- Relevantly, the effect of this clause is to require the applicant to assign the lease and to obtain the consent to the assignment from the lessor and “any mortgagee (if applicable)”. The word “any” covers the possibility that there may not be a mortgagee and that leaves the question of the phrase “if applicable”.
- It is true that the lease does not contain a clause requiring the mortgagee’s consent to the assignment of the lease. This is not the end of the matter though. A consideration to the mortgage is required. Standard Condition 2.25 of it is titled “Dealings – such as selling, renting or mortgaging”. It requires the mortgagor to obtain the mortgagee’s consent before doing any list of things.
- The applicant correctly observes that the clause does not use the word ‘assign’ or ‘assignment’. Having said this, the ordinary rules of construction apply. The clause is widely drafted. The intended scope of it must be construed as a whole. There is an air of ‘plain English’ drafting to the mortgage document. Considered in this context, the absence of a formal technical term such as ‘assign’ or ‘assignment’ does not have the consequence that the requirement and process provided for in obtaining the mortgagee’s consent is excluded. The question is whether such a requirement reasonably falls within the terms in fact used in the clause.
- The relevant subsections of Standard Condition 2.25 of the mortgage read:
“2.25 Without our consent you may not, and may not agree to, attempt or take any step to, do any of the following:
(b) lease or licence the property for more than one year, or allow a surrender or variation of any lease or licence (other than leases or licences entered into for less than one year); or
(h) deal in any other way with the property, this mortgage or any interest in them, or allow any interest in them to arise or be varied.”
- In my view, the change in the identity of the lessee under the lease by virtue of an assignment can be seen as a “variation” of it pursuant to subsection (b) and therefore cannot be done without the consent of the mortgagee. Further, the lease of the premises can be fairly described as an “interest” in the property, and consenting to the assignment of the lessee’s interest under a lease can be fairly described as dealing with an interest in the property, or as allowing an interest in the property to arise (in the assignee), or as allowing the interest of the lessee to be varied.
- It follows that I am persuaded that Standard Condition 2.25 of the mortgage required the mortgagee to consent to any consent of the landlord to an assignment of the lease to the first respondent from the applicant. In these circumstances, the mortgagee’s consent was “applicable” and it was required to be obtained pursuant to Clause 24.2 of the Contract. The applicant was contractually required to ensure that the landlord had obtained this consent.
- In paragraph 19 of the statement of agreed facts it is said that on 23 March 2020 the landlord consented to the amendment of the Deed of Consent and Assignment removing any reference to the mortgagee’s consent to assign the lease. This agreement between the landlord and the applicant (and not including the first respondent or mortgagee) does not assist the applicant in its contention that the mortgagee’s consent was not required. This is because the mortgage expressly requires it. The failure to obtain the mortgagee’s consent damages the first respondent’s title to the lease irrespective of any agreement between the landlord and the applicant.
- It follows that the first respondent was entitled to terminate the Contract pursuant to Standard Condition 24.3. This was done on 25 March 2020 when the first respondent gave written notice of this and stated an entitlement to be refunded the $55,000 deposit it paid on 28 February 2020.
Evidence of stock value
- Special Condition 12 of the Contract reads:
“This contract is subject to and conditional upon that the Seller ensure stock valued at least $30,000 on the date of Completion which will be part of the Business, and provide evidences proving the value of the same.”
- The respondents contend that the applicant was in breach of this clause in that evidence was not provided establishing that the value of the stock was at least $30,000. It is not clear from the statement of agreed facts whether this asserted breach was a reason for the first respondent terminating the Contract. Paragraph 28 does not detail whether the first respondent’s solicitor articulated to the applicant’s solicitor at the time of the intended settlement, the particular breaches relied on by the first respondent for not settling the Contract, and if so whether it included this purported breach. Paragraph 32 does not state whether the subsequent correspondence from the first respondent to the applicant on 25 March 2020 detailed this purported breach as being a basis for terminating the Contract.
- In paragraph 14 of the Reply the applicant denies this it was in breach of this clause. It is alleged that the “evidence” was provided by way of the list (exhibit 7) given to the first respondent’s solicitor at the applicant’s solicitor’s offices on the afternoon of 24 March 2020. However, this is inconsistent with the statement of agreed facts which states that the first respondent’s solicitor sought evidence of the value of the stock from the applicant’s solicitor at the time of the intended settlement. However, the applicant’s solicitor did not hold it at this time. It was after the first respondent’s solicitor had left the offices that the applicant sent a letter attaching the list.
- The applicant further contends in paragraph 14(b) of the Reply that he offered to show Mr Choi (on behalf of the first respondent) the stock at the premises but Mr Choi refused to participate in this. There is no evidence of Mr Choi’s refusal in this regard. Mr Choi was at the premises on the morning of 24 March 2020. In paragraph 22 of the statement of agreed facts it is said that he did not take up an opportunity to inspect the stock at this time. What this means is not entirely clear. In any event, it needs to be considered in the context that there is no evidence that Mr Choi was provided with exhibit 7 at this time. It was not forwarded to the first respondent until later that day.
- Further, I am not persuaded exhibit 7 is tantamount to evidence as required by the clause. Rather, it is simply a list of beverage items with the quantities and price, said to be the values against each item. There seems to be an assumption that the number of bottles (or perhaps cans in the case of beer) in each carton is obvious, which it is not. Further, the consistent round numbers for the prices raises questions about their accuracy. It seems unlikely that they reflect either the buying or selling prices. For example, $120 for a carton of wine would seem to be at best an arbitrary average for the content of the carton. In the absence of further proof, the price of $3,600 for the carton of Champagne-Dom seems high as does $10,000 for a carton of 6 litre bottles of vodka. There is force in the proposition that “evidence proving” the value of the stock requires more than this.
- It is of even greater force when regard is had to Item L(d) in the Schedule of the Contract. This provides that the Business was being sold on a ‘walk-in walk-out basis’. The consequence of this is that Standard Condition 4.1 has no application. This means that there was no provision for the first respondent to have the value of the stock in trade assessed by a stocktaker appointed under the Contract.
- The applicant’s failure to comply with this term of this Standard Condition entitled the first respondent to terminate the Contract pursuant to Standard Condition 38.1 and it is entitled to be refunded the deposit pursuant to Standard Condition 38.4(a).
Going Concern Conditions
- As discussed above, the Third Direction had the effect of making it impossible by law for the applicant to operate The Palace from midday on 23 March 2020, in circumstances where the settlement date of the Contract was not until the following day. Therefore the applicant is in breach of the Going Concern Conditions. In arriving at this conclusion, for the reasons detailed in paragraphs 24 to 28 above, I reject the assertions by the applicant as pleaded in paragraphs 7, 24(c) and 24(d) of the Reply, that the effect of Special Condition 9(b) was to require the first respondent to accept the Business “as is and where is”, including with any temporary trading restrictions imposed by the State government.
- This illegality that came about as a consequence of the Third Direction has the result that the Going Concern Conditions are unenforceable. This means that there is no liability for breach of them and they cannot be a ground for termination by the first respondent.
- It follows that the applicant’s originating application is dismissed. It is declared that the Contract was lawfully terminated by the first respondent and that it is entitled to a refund of its deposit of $55,000 that it paid on 28 February 2020.
- As to the costs of the proceeding, the respondents have been successful. In these circumstances there will be an order that the applicant pay the respondents’ costs, unless another order is sought. If this is to be contested, the party advancing the contest should file and serve a written outline on the issue, not exceeding four pages, within seven days of delivery of the judgment, with the opposing party to have seven days to respond.
 Exhibit 2.
 Exhibit 1.
 Exhibit 6.
 Exhibit 7.
 Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337.
 Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 at 187.
 Tenants (Lancashire) Ltd v CS Wilson & Co Ltd  AC 495.
 Brisbane CC v Group Projects Pty Ltd (1979) 145 CLR 143 at 164.
 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 LCR 165 at ; Codelfa at 352.
 Standard Condition 1.1.
 Chapman v Taylor  NSWCA 456.
 (1982) 149 CLR 337.
 Statement of Agreed Facts at .
 Gerraty v McGavin (1914) 18 CLR 152.
- Published Case Name:
Happy Lounge Pty Ltd v Choi & Lee Pty Ltd, Minkyu Choi and Tae Mun Choi
- Shortened Case Name:
Happy Lounge Pty Ltd v Choi & Lee Pty Ltd
 QDC 184
13 Aug 2020