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Squash Vision Pty Ltd v Il Mito Pty Ltd[2020] QSC 328

Squash Vision Pty Ltd v Il Mito Pty Ltd[2020] QSC 328

SUPREME COURT OF QUEENSLAND

CITATION:

Squash Vision Pty Ltd v Il Mito Pty Ltd & Ors [2020] QSC 328

PARTIES:

SQUASH VISION PTY LTD ACN 129 055 689

(applicant)

v

IL MITO PTY LTD ACN 078 415 157 as Trustee

(first respondent)

and

PROTEZIONE PTY LTD ACN 116 171 101 as Trustee

(second respondent)

and

MANEGGIO PTY LTD ACN 131 623 026 as Trustee

(third respondent)

FILE NO:

7745 of 2020

DIVISION:

Trial

PROCEEDING:

Originating application

ORIGINATING COURT:

Supreme Court at Brisbane

DELIVERED ON:

30 October 2020

DELIVERED AT:

Brisbane

HEARING DATE:

8 September 2020

JUDGE:

Flanagan J

ORDER:

The Court will hear from the parties as to:

  1. The wording of the declaratory relief sought in paragraphs 1, 2 and 3(b) of the originating application.
  2. The wording of the order directing an account and any directions for the taking of the account.
  3. Costs.

CATCHWORDS:

LANDLORD AND TENANT – RENT – PROVISIONS AS TO RENT IN AGREEMENT FOR LEASE OR LEASE – DETERMINATION OF RENTAL – where a lease over retail premises prescribed the annual rent for the first three years and provided that the rent for the fourth and subsequent years would be 105% of the rent for the previous year – where another clause of the lease prescribed lower amounts of rent for the first three years if the tenant strictly performed and observed the covenants of the lease – whether the rent for the fourth lease year is derived by multiplying the higher or lower amount by 105%

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – PENALTIES AND LIQUIDATED DAMAGES – GENERAL PRINCIPLES – where a lease prescribed lower rent if the tenant strictly performed and observed the covenants of the lease – where, if the tenant failed to strictly perform and observe the covenants of the lease, rent would become payable at the higher rate including any shortfall – whether that provision of the lease amounted to an unenforceable penalty 

LANDLORD AND TENANT – LEASES AND TENANCY AGREEMENTS – CONSTRUCTION AND INTERPRETATION – PRIOR NEGOTIATIONS – where a lease provided for the tenant to pay a proportion of the outgoings relating to the premises – where the outgoings charged to the applicant were calculated with reference to the respondent’s outgoings relating to Lots 1 and 2 on the land – whether, under the terms of the lease, the outgoings should have been calculated with reference to the outgoings relating to Lot 2 only

O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359, cited

Kellas-Sharpe v PSAL Ltd [2013] 2 Qd R 233, cited

Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, cited

Quantum Asset Management Pty Ltd v Love Properties (WA) Pty Ltd [2017] WASC 167, cited

GWC Property Group Pty Ltd v Higginson [2014] QSC 264, applied

COUNSEL:

FL Harrison QC for the applicant

AW Duffy QC for the respondents

SOLICITORS:

Conomos Lawyers for the applicant

Piper Alderman for the respondents

  1. [1]
    The applicant, as tenant, and the first, second and third respondents, as landlords, are parties to a lease for an initial period of 10 years which commenced on 17 February 2012.
  2. [2]
    The lease is over part of Lot 2 of SP230908 situated at Adelaide Street, Brisbane (“the premises”).  Lot 2 is one of three lots in scheme land for a community title scheme pursuant to the Body Corporate and Community Management Act 1997 (Qld) and is subject to a registered building management statement (“BMS”). 
  3. [3]
    The BMS manages the complex known as The Macrossan Residences, which comprises:
    1. (a)
      a retail precinct made up of Lot 1 and Lot 2 on SP230908; and
    2. (b)
      a residential precinct, being Lot 3 on SP230908, which is a 37-storey residential high-rise building.
  4. [4]
    Prior to 23 August 2013, Mr Emmanuel Londy acted as manager of the applicant’s dry cleaning business conducted from the premises at the direction of Mr Marc Forster, who was then the sole director of the applicant.  Mr Londy replaced Mr Forster as the sole director of the applicant on 23 August 2013. 
  5. [5]
    On 30 June 2020, the respondents served on the applicant a notice to remedy breach of covenant pursuant to s 124 of the Property Law Act 1974 (Qld) (“PLA”).  The notice referred to various covenants under the lease which required the applicant to pay rent pursuant to cl 3.1, to pay GST on the rent pursuant to cl 3.2 and to provide a bond, by way of Australian Trading bank guarantee or cash, to the respondents prior to entering into possession of the premises pursuant to cl 22.1.  The notice required the applicant to remedy those breaches by paying an amount of $95,518.25 for outstanding rent, a further amount of $9,551.83 for outstanding GST and to provide a cash bond or bank guarantee to the value of $46,065.80.
  6. [6]
    The applicant, in response to this notice, filed the present originating application seeking both final and interlocutory relief.  On 24 July 2020, Boddice J made various orders relevant to the interlocutory relief.  The applicant and Mr Londy, by their counsel, gave the usual undertaking as to damages and further undertook to deliver to the respondents’ solicitors a bank guarantee in the amount of $46,065.80, or a cash bond in the same amount, on or by 12 August 2020.  On 13 August 2020, the applicant provided a bank guarantee to the respondents in the stated amount.  The respondents undertook not to  exercise any right of re-entry under the lease in reliance on the notice to remedy breach before the final determination of the application or earlier order.  His Honour made directions for the hearing of the matter, including the filing and serving by each party of a statement of facts, issues and contentions.

The issues

  1. [7]
    In paragraph 4 of the originating application, the applicant seeks a declaration that the notice to remedy breach was ineffective to give the respondents a right of re‑entry or forfeiture of the lease.  By paragraph 5, the applicant seeks, in the alternative, relief against forfeiture under s 124 of the PLA on such terms as the Court thinks fit.  The total amount in dispute between the parties is well under $750,000.  The present dispute would ordinarily fall within the monetary jurisdiction of the District Court.  The only reason the matter is before this Court is the definition of “court” in Schedule 6 to the PLA results in an application for relief against forfeiture under s 124 of the PLA having to be made to this Court.[1]
  2. [8]
    The primary relief sought in the originating application is for an account to be taken “by which the amounts paid by the Applicant pursuant to the lease up until 28 March 2020 are more than or less than the amount properly due under the lease”.[2]  The applicant’s case is that it has been charged amounts for rent and outgoings which, on a proper construction of the lease, were excessive.  The applicant seeks declaratory relief as to the proper construction of various clauses of the lease so that an account may be taken.  It is not until an account is taken that the validity of the notice to remedy breach and any alternative application for relief against forfeiture may be determined.  From the parties’ statements of facts, issues and contentions and written submissions, the issues are as follows:
    1. (a)
      whether, on the proper construction of cl 3.2.1.4 of the lease, the rent for the fourth and subsequent years is to be calculated by the formula stated in cl 3.2.1.4 at the lower rate derived by applying that formula to the rent calculated in accordance with cl 23.1.1.3 (The Rent Reduction Issue);
    2. (b)
      whether cl 23.1.2 of the lease applies to the calculation of rent for the first, second and third years of the term of the lease, notwithstanding that the applicant did not provide a bond in accordance with cl 22.1 of the lease (Shortfall in Rent Issue), and in particular:
      1. does cl 23.1.2 constitute an unenforceable penalty? (The Penalty Issue); and
      2. if cl 23.1.2 does not constitute a penalty, are the respondents otherwise estopped from relying on this clause in order to recoup any alleged shortfall in rent? (The Estoppel Issue);
    3. (c)
      whether the outgoings charged to and paid by the applicant have been calculated in accordance with the terms of the lease, and in particular:
      1. have outgoings been calculated by reference to the landlord’s outgoings relating to Lots 1 and 2 of SP230908, whereas on the proper construction of the lease and having regard to the fact that the respondents are not registered proprietors of Lot 1, should outgoings have been calculated by reference to the outgoings relating to Lot 2 only?;
      2. should the Court order a rectification of the terms of Item 7 to the Schedule to the lease or alternatively, the definition of “Land” in cl 2.1.14 of the lease (The Outgoings Issue)?;
    4. (d)
      whether the Court should order an account in the terms sought by the applicant.

Background

  1. [9]
    Before I consider these issues, it is necessary to set out some of the background to the present dispute.[3]
  2. [10]
    The premises comprise an area of approximately 222m2 of Lot 2.  Item 5 of the Form 7 describes the premises being leased as “[t]hat part of the lower ground floor of the building erected on the land shown hatched in black on the attached plan”.  The attached plan has two sheets.  The second sheet (2 of 2), describes the leased area as “2G 222m2”.  The first sheet (1 of 2) is a “Plan of Lease 2G” and identifies (without reference to area in m2) the other portion of Lot 2, as well as Lots 1 and 3.
  3. [11]
    At some time between March 2018 and July 2018, Mr Frank Allen, who is the director of the first and second respondents and a sole director of the third respondent, approached Mr Londy in relation to a proposed variation to the lease.  Mr Allen informed Mr Londy that the respondents had a buyer for Lot 2 and he wanted to give Mr Londy the first right of refusal (as provided for in the lease) to purchase Lot 2 at the price offered by the buyer, namely $2.6 million.  According to Mr Allen, the proposed amendments to the lease made the property more attractive to the buyer by extending the existing term of the lease.  Mr Allen informed Mr Londy that the applicant would be “better off financially” under the amendments in that:
    1. (i)
      they would extend the existing term of the lease;
    2. (ii)
      the outgoings would be fixed at 10% of the rent;
    3. (iii)
      the rent plus outgoings fixed at 10% of the rent would come out at less than the combined rent and outgoings under the existing lease;
    4. (iv)
      they would remove the clause that stated the applicant must provide a bond.[4]
  4. [12]
    Mr Londy rejected Mr Allen’s offer to purchase Lot 2 and made a counteroffer in the amount of $1.6 million.  That counteroffer was not accepted nor was any agreement reached between Mr Londy and Mr Allen as to the proposed amendments to the lease.
  5. [13]
    Mr Londy received an email from Mr Allen dated 19 July 2018 which attached a Form 13 Amendment of Lease.  Mr Londy forwarded this email to his solicitor, George Conomos, and asked him to review the Form 13 and advise whether the applicant would be better off financially under the proposed amendments.  As part of this process, Mr Londy also sent to Mr Conomos details of the invoices for rent and outgoings over the term of the lease and the payments that had been made by the applicant.
  6. [14]
    Mr Conomos subsequently advised Mr Londy that the proposed amendments to the lease would not place the applicant in a better financial position, that the invoices for rent were not consistent with the terms of the lease and that the invoices for outgoings “were suspicious in that they were for the exact same amount for almost six years”.[5]
  7. [15]
    The concerns expressed by Mr Conomos were communicated to Mr Allen and were the subject of correspondence between the parties.[6]
  8. [16]
    Ultimately, in response to the applicant’s suggestion that it had overpaid rent and outgoings, the respondents alleged numerous underpayments of rent.  By reference to cl 23.1.2 of the lease, which effectively provided for a reduced rent if the tenant strictly performed all its obligations under the lease, the respondents alleged that:
    1. (a)
      the applicant had failed on one occasion to pay the rent on time; and
    2. (b)
      the applicant had failed to provide a bond.
  9. [17]
    As to (a) above, Mr Londy’s evidence is that:

“Squash Vision Pty Ltd has paid on time every time all invoices issued by the owners, except for the June 2013 invoice that was paid 2 days late due to an oversight …”[7]

  1. [18]
    In a letter dated 9 March 2020 from the solicitors for the respondents to the solicitors for the applicant, the respondents asserted that the applicant was in breach of the lease by failing to provide the bond in accordance with cl 22.1.2, and claimed amounts previously discounted for rent since 17 February 2015.[8]
  2. [19]
    As to the bond, Mr Londy, on a date that he cannot exactly recall but sometime in early 2012, had a conversation with Mr Michael Cohen, who was the leasing agent for the respondents and negotiated with Mr Londy from about December 2011 in respect of leasing the premises.[9]  In the course of the conversation with Mr Cohen in early 2012, Mr Londy recalls stating that the applicant should not have to go to the expense and trouble of obtaining a bank guarantee.  Mr Cohen informed Mr Londy that he would get back to him if the owners insisted upon the bank guarantee.  According to Mr Londy, Mr Cohen did not get back to him about this issue.[10]
  3. [20]
    As matters eventuated, the respondents did not seek the bond from the applicant until 6 February 2018.[11]
  4. [21]
    The explanation given by Mr Allen as to why the bond was not requested until then is that he assumed that the respondents’ then solicitors or the leasing agent had obtained a bank guarantee from the applicant before it entered into possession of the premises.  Mr Allen only found out that a bond had not been obtained when he changed solicitors in early 2018 and discovered that his former solicitors did not hold a bank guarantee from the applicant.  According to Mr Allen, at no point did he instruct his former solicitors or leasing agent that the respondents did not require the applicant to pay the cash bond or provide a bank guarantee.[12]

The Rent Reduction Issue

  1. [22]
    Clause 1 to the lease under “Reference Data” in Item 5(b) states: “Rent: as set out in clause 3.2”.  Clause 2 of the Schedule includes:

“2. DEFINITIONS AND INTERPRETATIONS.

2.1   DEFINITIONS …

2.1.25   ‘Rent’ has the meaning given to that expression in clause 3.2 …”

  1. [23]
    Clause 3 relevantly states:

“3.1 PAYMENT OF RENT

The Tenant will pay to the Landlord (including by way of periodic bank transfer if the Landlord so requires) in each Lease Year the Rent without any formal or other demand by equal monthly instalments in advance on the first day of each month and in the case of any broken period of less than one month by an instalment on the first day of the broken period of an amount ascertained by multiplying the number of days in that broken period by the Rent for the Lease Year of which it forms part and dividing the result by 365.

3.2 RENTAL REVIEWS

3.2.1 Rent and Annual Reviews

The expression Rent means, subject to clause 23, the annual sums as follows:

3.2.1.1 for the first (1st) Lease Year, the sum of $115,000.00 plus GST;

3.2.1.2 for the second (2nd) Lease Year, the sum of $120,000.00 plus GST;

3.2.1.3 for the third (3rd) Lease Year, the sum of $125,000.00 plus GST; and

3.2.1.4 for the fourth (4th) and each subsequent Lease Year that amount derived by multiplying the Rent for the Lease Year last concluded by 105%.”

  1. [24]
    Clause 2.1.17 effectively defines “Lease Year” as the year starting on the commencement date, and each year starting on each anniversary of that date.
  2. [25]
    Clause 3.2.1 is expressly made subject to cl 23 which states:

“23.1 RENT REDUCTION

23.1.1  Provided always that Tenant strictly performs and observes the covenants terms and conditions of this Lease on the part of the Tenant to be performed or observed the Landlord will accept, in full and final payment of Rent for the relevant Lease Year, the following:

23.1.1.1 for the first (1st) Lease Year, the sum of $100,000.00 plus GST;

23.1.1.2 for the second (2nd) Lease Year, the sum of $105,000.00 plus GST; and

23.1.1.3 for the third (3rd) Lease Year, the sum of $110,000.00 plus GST.

23.1.2  Subject to paragraph 13.1.1.1 and to remove any doubt the parties agree that if, at any time, the Tenant fails to strictly performs and observes the covenants terms and conditions of this Lease on the part of the Tenant to be performed or observed the Rent set out in clause 3.2 will immediately become due and payable and the Tenant must, on written demand, pay any shortfall in Rent to the Landlord without delay.”

  1. [26]
    Clause 23.1.2 is made subject to cl 13.1.1.1 which provides for a right of re-entry if rent is unpaid for seven days. 
  2. [27]
    The issue is whether the Rent for the fourth Lease Year is derived by multiplying $125,000 plus GST (the amount stated in cl 3.2.1.3) by 105%, or $110,000 plus GST (the reduced amount stated in cl 23.1.1.3) by 105%.
  3. [28]
    The applicant submits that cl 3.2.1.4 operates in accordance with its terms, “and accordingly the calculation is to be reference to the actual rent (that is to say, in the present case, the rent that was actually payable having regard to the operation of clause 23.1 (Rent reduction) … There is no other explanation for the departure from the form of words used for the first three years.”[13]  The respondents submit that cl 23 does not alter the definition of Rent in cl 3.2 but provides that (subject to its terms) the respondents will accept a lesser amount set out in cl 23 “in full and final settlement of the Rent payable for the relevant year”.  Accordingly, the respondents argue that the Rent for the third Lease Year remains $125,000 plus GST and that the Rent payable in the fourth Lease Year is calculated by multiplying that sum by 105%.[14]
  4. [29]
    Neither construction is without its difficulties.  The lease is a commercial contract which is to be given an objective, businesslike construction on the assumption that the parties intended to produce a commercial result.  The proper construction depends upon the particular words of the lease.
  5. [30]
    Clauses 3.1, 3.2 and 23.1 each have headings, namely “PAYMENT OF RENT”, “RENTAL REVIEWS” and “RENT REDUCTION”.  Clause 2.2 of the lease deals with interpretation and cl 2.2.13 provides that the headings or marginal notes of the lease are included for convenience only and do not affect the construction of the lease.
  6. [31]
    “Rent”, by cl 2.1.25, has the meaning given to that expression in cl 3.2.  Clause 3.2.1 commences with the words “The expression Rent means” which evidences that it gives a meaning to the expression “Rent”.  Clause 3.2.1 thereafter identifies “the annual sums” of $115,000, $120,000 and $125,000 for the first, second and third Lease Years.  In giving the expression “Rent” its meaning, cl 3.2.1 is made expressly subject to cl 23.  Clause 23.1.1 identifies reduced sums for the first, second and third Lease Years.  These reductions are subject to a proviso: “Provided always that Tenant strictly performs and observes the covenants terms and conditions of this Lease on the part of the Tenant to be performed or observed”.  The reduced sum for the third year pursuant to cl 23.1.1.3 is $110,000 plus GST.  The issue may therefore be further refined as to whether that amount falls within the expression “Rent” for the purposes of the calculation required by cl 3.2.1.4 for the fourth and subsequent Lease Years.
  7. [32]
    The respondents submit that the amounts of $100,000, $105,000 and $110,000 are not “Rent”, but rather amounts that the lessor “will accept, in full and final payment of Rent for the relevant Lease Year”.  I do not accept this construction.  In my view, the calculation for the purposes of cl 3.2.1.4 should be made by reference to the sum of $110,000 plus GST, rather than the sum of $125,000 plus GST.  As a matter of ordinary construction, even though the sums identified in cl 23.1.1 constitute reduced amounts to those in cl 3.2.1, they otherwise constitute sums of “Rent”.  Clause 23.1.2 deals with the situation in which the lessee fails to strictly perform and observe the covenants, terms and conditions of the lease “at any time”.  If there is not strict performance, the Rent set out in cl 3.2 “will immediately become due and payable and the Tenant must, on written demand, pay any shortfall in Rent to the Landlord without delay”.  The use of the term “shortfall” means that any reduced amounts paid for the first, second and third Lease Years in accordance with cl 23.1.1 are amounts that are also Rent.  The term “shortfall” denotes a deficit in terms of the quantity, rather than the quality or nature, of what has been provided.  
  8. [33]
    Further, “Rent” is a defined term and should be given a consistent meaning throughout the lease.  If the reduced sums in cl 23.1.1 do not constitute Rent, there would be no specific obligation on the part of the applicant to pay the reduced sums as “Rent”.  Clause 3.1, which is set out at [23] above, obligates the tenant to pay to the landlord in each Lease Year the Rent without any formal or other demand, by equal monthly instalments in advance.  It would make no commercial sense for the tenant to be able to avoid this obligation to pay Rent in circumstances where, because of the operation of cl 23.1.1, the tenant is able to pay reduced sums not constituting “Rent” for the first three years.
  9. [34]
    The effect of the meaning given to Rent in cl 3.2.1 being made subject to cl 23 is that where the lessee strictly complies with its obligations under the lease, the reduced sums in cl 23.1.1 constitute the Rent which the tenant is required to pay for the first three years, with the reduced sum for the third year constituting the basis for the ongoing calculation in cl 3.2.1.4.
  10. [35]
    It is convenient at this stage to deal with the respondents’ reliance on cl 13.3 of the lease which is headed “ACCORD AND SATISFACTION”.  Clause 13.3 states:

“No payment by the Tenant or receipt by the Landlord of a lesser amount than the Rent stipulated in this Lease will be considered to be other than on account of the stipulated Rent, and an endorsement or statement on a cheque or in a letter accompanying a cheque or payment as Rent will not be considered to be an accord or satisfaction, and the Landlord may accept a cheque or payment without prejudice to the Landlord’s right to recover the balance of the Rent or pursue any other remedy.”

  1. [36]
    The respondents rely on this clause to assert that the rental arrears claimed in the invoice dated 9 March 2020 are payable by the applicant.[15]
  2. [37]
    With one exception, the applicant always paid rent in accordance with invoices which included the statement “… Macrossan Partnership 2 will accept the following sum in full and final payment of the monthly rent.”[16]  The fact that rent was always paid, with the one exception outlined in [17] above, is accepted by the respondents.[17]
  3. [38]
    The reliance of the respondents on cl 13.3 proceeds on the basis that the lesser sums paid by the applicant pursuant to cl 23.1.1 do not constitute “Rent” in accordance with cl 3.2.  For the reasons outlined above, I am of the view that the lesser sums paid under cl 3.2.1 constitute “Rent” and accordingly, the respondents’ reliance on cl 13.3 is misplaced.  The amounts paid by the applicant pursuant to the invoices are for sums that represent “the Rent stipulated in [the] Lease”.[18]
  4. [39]
    Further, I accept the applicant’s submission that when properly construed, cl 13.3 is not concerned with a payment of Rent in the reduced amounts pursuant to cl 23.1.1:

“Clause 13.3 is not concerned with such a case.  Rather it is concerned with a case where a tenant pays less than the invoiced amount in the invoices.  In effect, the landlord was saying if you pay me in accordance with these invoices, then you have fully complied with your rental obligations.  There is no legal basis on which the landlord can resile from that offer, which was accepted on payment in respect of each invoice.”[19] (Footnotes omitted)

  1. [40]
    The applicant is entitled to the declaratory relief sought in paragraph 1 of the originating application but I will hear the parties as to the wording of the relief.

Shortfall in Rent Issue

  1. [41]
    This issue should be resolved in favour of the applicant on the basis that cl 23.1.2 constitutes an unenforceable penalty.  In the result, it is unnecessary to determine The Estoppel Issue. 
  2. [42]
    Clause 23.1.2 is set out above.  The applicant submits, and I accept, that cl 23.1.2 has a two prong operation:

“To be entitled to a reduction in the first place, the tenant must have complied with all the terms of the lease.  But even if the tenant was originally entitled to the reduction, if the tenant later commits a breach, no matter how trivial, not only is the tenant no longer entitled to the reduction in the future, but as well, the tenant is liable to pay back rent to make it up to the higher rate.”

  1. [43]
    As observed above, cl 23.1.2 is made subject to cl 13.1.1.1 which gives the landlord the right to re-enter where the Rent or any part of it is unpaid for seven days after it has become due.  This ensures that the landlord maintains its right to re-enter in addition to the right to make written demand for the payment of any shortfall in Rent.  Clause 23.1.2 is not, however, limited to a failure on the part of the tenant to perform and observe the covenants, terms and conditions in relation to the payment of Rent.  The strict performance required by cl 23.1.2 is of “the covenants terms and conditions of this Lease” which results in the Rent set out in cl 3.2 becoming immediately due and payable for any and all breaches of covenants, terms and conditions of the lease irrespective of how trivial.  By way of example, cl 4.3 provides that the tenant will not use any form of light, power or heat other than electric current or gas supplied through meters.  The covenant does not, however, prevent the use of auxiliary power or lighting (other than an exposed flame) during any period of power failure or power restrictions.  The applicant submits that such a term may be breached by the tenant using, for example, a torch.[20]  Similarly, cl 5.11 states that the tenant will not cause any advertising or other sign or advertisement or hoarding to be painted or erected or otherwise placed on or in the premises without the prior consent of the landlord.  The tenant would not strictly observe this condition if, for example, it placed a temporary sign in the window.[21]  Clause 5.15 requires the tenant to keep the premises free and clear of rodents, termites, cockroaches and other vermin.  As submitted by the applicant, “… unless one can argue de minimis, the presence of any cockroaches, even if they are blow-ins, would be a breach of that clause”.[22]  A further example is cl 5.5 which requires the tenant to duly and punctually comply with and observe all “Statutes and all orders, ordinances, regulations and by-laws relating to the Premises …”.
  2. [44]
    The respondents, in submitting that cl 23.1.2 does not constitute a penalty, rely on the principle identified by Gibbs CJ in O'Dea v Allstates Leasing System (WA) Pty Ltd[23] and more recently discussed by the Queensland Court of Appeal in Kellas-Sharpe v PSAL Ltd.[24] Gibbs CJ identified the principle as follows:

“Similarly there is no penalty where it is agreed to charge a certain rate of interest on condition that if payment is made punctually the rate will be reduced (Astley v Weldon) or where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met he will be entitled to recover the original debt: Thompson v Hudson; Ex parte Burden; In re Neil.  In all the cases of this kind there is a present debt, which, by reason of an indulgence given by the creditor, is payable either in the future, or in a lesser amount, provided that certain conditions are met.  The failure of the conditions does not mean that the creditor becomes entitled to damages; the consequence is that the sum which was always owed, but which the debtor was allowed to pay by instalments or in a smaller amount, becomes recoverable at once or in full.” (Footnotes omitted)

  1. [45]
    Gotterson JA in Kellas-Sharpe v PSAL Ltd identified the relevant principle as:

“… an interest rate provision in which a higher rate is specified with punctual payment at a lower rate being a sufficient discharge of the obligation to pay interest, is not a penalty.”[25]

  1. [46]
    In O'Dea, Gibbs CJ referred with approval to the observation of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd:[26]

“The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.”

  1. [47]
    Applying that principle, Gibbs CJ observed that the contract must be viewed as a whole and not in fragments:

“When cll 1(a), 6(a) and 12 are read together, it becomes apparent that at the date of the contract there was no presently existing obligation to pay the entire rental.  The obligation was to pay the instalments, and if there were a default in payment of the instalments the whole became payable.  The clauses, read together, had the effect that the entire rent only became payable in the events specified in cl 12 – including default in punctual payment of the instalments.  In the circumstances of the present case the obligation to pay the entire rent arose only by reason of a breach, and the amount which the contract makes payable in that event is either a penalty or liquidated damages.”

  1. [48]
    Gibbs CJ, in concluding that the lessor under the hire purchase agreement was not entitled to recover the balance of the entire rent because the claim constituted a penalty, stated:

“However, the outstanding balance of the entire rental could not in the circumstances possibly represent a genuine pre-estimate of the loss which would be caused to the first respondent by a breach of the contract.”

  1. [49]
    In Quantum Asset Management Pty Ltd v Love Properties (WA) Pty Ltd,[27] Banks‑Smith J helpfully summarised the relevant principles concerning penalty:

“[63] In both Andrews v Australia and New Zealand Banking Group Ltd and Paciocco v Australia and New Zealand Banking Group Ltd, the complaint was that fees charged by the bank were penalties.  The High Court endorsed the continued relevance of Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd.  The High Court had previously said in Ringrow Pty Ltd v BP Australia Pty Ltd that Dunlop continued to express the law to be applied to penalties in Australia. 

[64] The following can be drawn from the authorities:

  1. (a)
    the question whether a sum stipulated is a penalty or liquidated damages (that is, a genuine preestimate) is to be judged as at the time of the making of the contract;

…

  1. (c)
    the critical issue is whether the sum agreed was commensurate with the interest protected by the bargain;
  1. (d)
    the nature of the interest sought to be protected is relevant.  The sum agreed may be intended to protect an interest that is different from, and greater than, an interest in compensation for loss caused directly by the breach.  It may be intangible and unquantifiable.  This is consistent with Lord Dunedin’s statement in Dunlop that, ‘the essence of liquidated damages is a genuine preestimate of damage’.  The reference to ‘damage’ as distinct from ‘damages’ is significant;

…

  1. (f)
    a sum that is merely disproportionate to the loss suffered does not qualify as a penalty.  The penalty must be ‘extravagant, exorbitant or unconscionable’ and ‘out of all proportion’ to the interest of the party which it is the purpose of the provision to protect;

…

  1. (k)
    the court will not lightly interfere with the bargain struck between the parties.  The court requires good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed.  That is why the law on penalties is expressed as an exceptional rule and descriptors such as ‘extravagant’ and ‘out of all proportion’ are used in its application;
  1. (l)
    the ultimate question in determining whether a stipulation is a penalty, is whether it is intended only to punish the defaulting party.  Framed another way – does the innocent party’s interest in the observance of the principal contractual obligation explain the agreed stipulation as having a purpose other than punishment …”[28] (Footnotes omitted)
  1. [50]
    By reference to the principles identified above, the applicant submits that in the present case, the landlord has not suffered any damage by the single late payment in 2013 or by not receiving the bond until 2020.  The applicant submits:

“Yet the landlord will be entitled, under this clause, to an additional $150,000 (approximately) over the term of the lease.”[29]

  1. [51]
    The additional sum of $150,000 is therefore not merely “disproportionate” to the loss suffered but is “extravagant, exorbitant or unconscionable” and “out of all proportion” to the interest of the landlord.
  2. [52]
    The respondents, by reference to O'Dea and Kellas-Sharpe, submit that cl 23.1.2 of the lease “fits squarely within the principle”:

“The Rent provided for is what the Applicant covenanted to pay.  The reduced rental that the Respondents agreed to accept provided the Applicant was not in breach does not have the effect of imposing a penalty.  Consistent with the principle discussed in the cases, the provision here does not fall to be treated as a penalty.”[30]

  1. [53]
    The applicant relies on the decision of Dalton J in GWC Property Group Pty Ltd v Higginson.[31]  In that case, Dalton J held that certain incentive clawback provisions relating to the landlord’s fitout contribution and a rent and signage fee abatement contained in an incentive deed, which were triggered by the tenant’s breach of the lease, were unenforceable penalties.[32]  The relevant clause of the incentive deed was as follows:

“3.3 Repayment of rent abatement amount

If:

  1. (a)
    the Lessee terminates the Lease otherwise than in accordance with its rights under the Lease or at law; or
  1. (b)
    the Lessor validly terminates the Lease consequent upon a default of the Lessee (and the Lessee does not obtain relief against forfeiture in respect of that termination),

the Lessor is entitled to claim (without prejudice to any other claim the Lessor has against the Lessee or the Lessee’s Associate) as a liquidated debt from the Lessee and the Lessee must pay on demand from the Lessor, such of the Rent Abatement Amount that has been abated by the Lessee pursuant to this clause 3.”

  1. [54]
    In determining that cl 3.3 constituted an unenforceable penalty, her Honour reasoned as follows:

“… it seems to me that all three payments contended for by the plaintiff share the characteristic that had the tenant not breached the lease agreement, or had it breached the lease agreement only in ways which did not move the landlord to terminate, the sums of money claimed in this proceeding would never have been payable. These sums are not analogous to the acceleration of a delayed payment of monies which will eventually be paid if the contract is fully performed. Nor do I think they are analogous to the types of payments discussed in Astley v Weldon where a higher price is paid if a payment is made at a later date, but nevertheless in the course of an ongoing contract. They are pecuniary obligations which will never arise except on termination.”[33] (Footnotes omitted)

  1. [55]
    Similarly, in the present case, cl 23.1.2 renders immediately due and payable the shortfall in Rent for any failure on the part of the tenant to strictly comply with the covenants, terms and conditions of the lease.  Further, any obligation on the tenant under cl 3.1 to pay in each Lease Year the Rent in the annual sums as stated in cl 3.2.1 would never arise except upon a failure on the part of the tenant to strictly comply with the lease. 
  2. [56]
    Dalton J further reasoned:

“… By the bargain contained in the lease and Incentive Deed, the landlord obtained abated rent and fees in consideration for its lease of the premises, together with the fit-out payment. Had the contract been performed according to its terms, that is all the landlord was entitled to. The repayment clauses at cll 2.4, 3.3 and 4.3 of the Incentive Deed sought to give the landlord an advantage which it would not have had if the lease were performed according to its terms. Before the lease and Incentive Deed were signed the landlord was in the position that its potential tenant would contract only on the basis that it received abatements and a fit-out. The impugned clauses do not restore the landlord to that pre-contractual position; they give it an advantage which it would never have had if the lease had uneventfully run its term.”[34]

  1. [57]
    It may be accepted that, similarly to the present case, before the lease was signed, the landlord was in the position that its potential tenant would contract only on the basis that it received the rent abatement.  As correctly submitted by the applicant, cl 23.1.2 does not restore the landlord to that pre-contractual condition.  It gives the landlord an advantage which it would never have had if the lease had not been breached.[35]  Further, as I have already observed, cl 23.1.2 potentially operates to give the landlord a right to demand any shortfall in Rent for the most trivial of breaches, not limited to a failure on the part of the tenant to pay the Rent.  Clause 23.1.2 of the lease therefore constitutes an unenforceable penalty.  I will hear the parties as to the wording of the declaratory relief sought in paragraph 2 of the originating application.

The Outgoings Issue

  1. [58]
    Pursuant to cl 4.1 of the lease, the applicant is required on demand to pay to the landlord the “Prescribed Percentage of the Outgoings”.  That term is defined in cl 2.1.22 to mean: “… the percentage of the Total Lettable Floor Area of the Building which is from time to time represented by the Floor Area of the Premises …”.  The term “the Building”, which is defined in cl 2.1.3, is the building or that part of the building owned by the landlord erected or to be erected on the Land.  The expression “the Land” is defined in cl 2.1.14 to mean the land described in Item 2 of the Form 7, which is Lot 2 on SP230908.  The expression “the Building” is, in effect, a reference to Lot 2.  Item 7 of “REFERENCE DATA” states:

“OUTGOINGS:

Percentage payable by Tenant:  The Prescribed Percentage (being at the Date of Commencement, 28.2%).”

  1. [59]
    The expression “the Outgoings” is defined in cl 2.1.19 to mean all expenses and outgoings paid or incurred by the landlord in the repair, maintenance, renewal and insurance of the building. 
  2. [60]
    The dispute between the parties in relation to The Outgoings Issue is that the applicant asserts that it is only liable to pay 28.2% of the outgoings incurred by the respondents in respect of Lot 2, whereas the respondents assert that the 28.2% should be based on the outgoings for both Lots 1 and 2.  A consideration of this issue proceeds on the admitted fact that at no time have any of the respondents been the registered proprietors of Lot 1.[36]  Further, it must be accepted that the various definitions and clauses in the lease referred to above in [58], in their ordinary meaning, result in the applicant being obligated to pay 28.2% of the outgoings for Lot 2 only, not for both Lots 1 and 2.  The respondents, however, submit that on a proper construction of the lease (when read with the BMS and the disclosure statement[37]), the applicant is required to pay 28.2% of the respondents’ outgoings for both Lots 1 and 2. 
  3. [61]
    The respondents rely in particular on Part B of the annexure to the BMS, which identifies shared costs for shared services and the method for apportioning costs.  The notes to this annexure provide, amongst other matters:

“Basis for Apportionment of Costs

Area Basis means the Shared Facility cost for the relevant Shared Facility is apportioned based on the gross floor area of each Precinct benefiting from that Shared Facility expressed as a percentage of the total gross floor area of all the Precincts benefiting.

Number of Car Spaces Basis means the Shared Facility cost for the relevant Shared Facility is apportioned based on the number of car spaces in the Complex available for use by each Precinct benefiting from that Shared Facility expressed as a percentage of the total number of car spaces available in the Complex for all of the Precincts so benefiting.”[38]

  1. [62]
    The respondents also rely on the offer to lease which included the following offer with respect to outgoings:

“A shared [sic] of outgoings calculated as per the Building Management Statement …

We will pay all water, gas, cleaning and any other costs directly attributed to our use of the Premises.

We will pay for the cost of electricity consumed in respect of the Premises, including electricity to operate air condition equipment …

Outgoings include all outgoings including management fees.  Outgoings will exclude land tax which the lessor will carry.  The lessor is welcome to inspect outgoings, however it would appear contemporaneously these are relatively low when compared to other buildings.”

  1. [63]
    On 25 January 2012, Mr Burke of the respondents’ then solicitors sent an email to Mr Conomos attaching a draft copy of the lease and the disclosure statement for his review and comment.  Mr Conomos referred to this letter in his reply correspondence.  The disclosure statement provided:
    1. (a)
      the Premises was defined as “Lower ground floor, Macrossan Residences, 483B Adelaide Street, Brisbane”;
    2. (b)
      at section 13.4, that the formula for apportioning outgoings was: “that percentage of the total lettable floor area of the building which is from time to time represented by the floor area of the premises”; and
    3. (c)
      at section 14.15, that the formula for determining the lessee’s share of the total outgoings for the building/centre was: “Lessee is responsible for 28.2% of the landlord’s total outgoings in relation to the building in which the premises are located.  The landlord’s share of the outgoings for the building is 7.5%”.
  2. [64]
    The respondents contend that the fact the floor area of the leased premises of Lot 2 (222m2) is 66.8675% of the total floor area of Lot 2 (which is 332m2) demonstrates that construing the reference to the building as Lot 2 only is “an obvious error”.[39] 
  3. [65]
    Both Mr Londy and Mr Conomos gave evidence as to any significance they attached to the BMS or the disclosure statement as informing their understanding of the applicant being obligated to pay 28.2% of the outgoings.  Mr Londy did not see or look at the BMS and stated that he did not know what a BMS is.[40]  Mr Londy in cross‑examination readily accepted that Lot 2 has an area of 332m2 with the area leased by the applicant being 222m2.  He did not, however, appreciate at the time of entering into the lease that Lots 1 and 2 comprised approximately 7.5% of the entire building.[41]  He has no recollection of going through the disclosure statement with Mr Conomos but does recall going through the lease.[42]  It was Mr Londy who arranged for Mr Forster to sign the disclosure statement.  According to Mr Londy, Mr Forster “just signed it”.[43]
  4. [66]
    Mr Conomos did not initially recall “going through” the disclosure statement.[44]  By reference to correspondence, he accepted that he would have read the disclosure statement.  Mr Conomos did not, however, read the disclosure statement in such detail “such as to advise my client what was in it”.[45]  I accept the evidence of both Mr Londy and Mr Conomos.  Even if one accepts that Mr Londy had been informed of some of the detail in the disclosure statement, it remains the case that he at no stage read the BMS.  Further, for Mr Londy to appreciate that it was the common intention of the parties, despite the contents of the lease, that the tenant would pay 28.2% of the outgoings for both Lots 1 and 2, this would require a detailed reading and appreciation of the content of the respondents’ outgoings for both the BMS and the disclosure statement, particularly as to area.  Neither document was incorporated into the lease and there is no basis to conclude that either Mr Londy or Mr Conomos appreciated the suggested significance of the detail in either of these documents in relation to outgoings.  There is no basis for a finding that 28.2% applying only to Lot 2 constitutes “an obvious error” as submitted by the respondents.[46]
  5. [67]
    The respondents have not established any basis for rectification.  There is, in my view, no clear and convincing evidence that the actual intention of the parties was any different to what is expressed in the lease.
  6. [68]
    The applicant is entitled to the declaratory relief sought in paragraph 3(b) of the originating application.  I will hear the parties as to the wording of the declaratory relief.

Should an account be ordered?

  1. [69]
    The only basis upon which the respondents resist the ordering of an account is that the applicant is not entitled to the declaratory relief sought.[47]  For the reasons given above, I have generally accepted the applicant’s construction of the relevant clauses of the lease.  The lease has been on foot since 2012 and the transactions between the parties involving rent and outgoings are complex and would be difficult to resolve.[48]  In oral argument, the parties suggested that for the taking of an account, the parties may be able to agree on an independent person for this purpose.  Rule 527(2) of the Uniform Civil Procedure Rules 1999 (Qld) provides an order directing an account to be taken must specify –
  1. “(a)
    the transaction or series of transactions of which the account is to be taken; and
  1. (b)
    the basis of the account; and
  1. (c)
    the period of the account.”
  1. [70]
    I will hear from the parties as to the wording of the order directing an account and any directions, pursuant to r 528 of the UCPR, for the taking of the account.

Disposition

  1. [71]
    The Court will hear from the parties as to:
  1. The wording of the declaratory relief sought in paragraphs 1, 2 and 3(b) of the originating application.
  1. The wording of the order directing an account and any directions for the taking of the account.
  1. Costs.

Footnotes

[1]T 1-34, lines 45-47.

[2]The covering letter which enclosed the notice (Affidavit of George Conomos filed 17 July 2020, Exhibit GC-32, p 344) stated that the amount claimed in the notice related to the period up to and including 28 March 2020, and did not

relate to any amounts that may have been affected by COVID.

[3]After the hearing of the matter, the parties provided an agreed chronology (Exhibit 2).

[4]Affidavit of Emmanuel Harry Londy filed 24 August 2020, para 36.

[5]Affidavit of Emmanuel Harry Londy filed 24 August 2020, para 42.

[6]Affidavit of George Conomos filed 17 July 2020, Exhibit GC18 (p 96), Exhibit GC19 (p 100), and Exhibit GC23 (p 110).

[7]Affidavit of Emmanuel Harry Londy filed 24 August 2020, para 21.

[8]Affidavit of George Conomos filed 17 July 2020, Exhibit GC24 (p 119).

[9]Affidavit of Emmanuel Harry Londy filed 24 August 2020, para 5.

[10]Affidavit of Emmanuel Harry Londy filed 24 August 2020, paras 51 and 52.

[11]Affidavit of George Conomos filed 17 July 2020, Exhibit GC5 (p 54).

[12]Affidavit of Frances Stephen Allen filed 31 August 2020, paras 47-50.

[13]Applicant’s Submissions, para 15.

[14]Respondents’ Outline of Submissions, paras 8-10.

[15]Statement of Facts, Issues and Contentions of the Respondents, para 42.3.

[16]Applicant’s Submissions, para 41.

[17]Statement of Facts, Issues and Contentions of the Respondents, para 42.1.

[18]Clause 13.3 of the Lease.

[19]Applicant’s Submissions, para 42.

[20]T 1-45, line 1.

[21]T 1-45, lines 12-15.

[22]T1-45, lines 19-20.

[23](1983) 152 CLR 359, 366-367.

[24][2013] 2 Qd R 233, [33].

[25][2013] 2 Qd R 233, [21].

[26][1915] AC 79, 86-87; O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359, 368.

[27][2017] WASC 167.

[28][2017] WASC 167, [63]-[64].

[29]Applicant’s Submissions, para 21.

[30]Respondents’ Submissions, para 22.

[31][2014] QSC 264.

[32]Applicant’s Submissions, para 24.

[33][2014] QSC 264, [30].

[34][2014] QSC 264, [36].

[35]Applicant’s Submissions, para 29.

[36]Applicant’s Statement of Facts Issues and Contentions, para 4; Respondents’ Statement of Facts Issues and Contentions, para 6.

[37]Exhibit 1.

[38]Respondents’ Outline of Submissions, para 47.

[39]Respondents’ Outline of Submissions, para 55.

[40]T 1-14, lines 19-22; T 1-9, lines 38-40.

[41]T 1-11, lines 9-11. 

[42]T 1-11, line 40 to T 1-12, line 5.

[43]T 1-13, line 15.

[44]T 1-15, lines 36-40.

[45]T 1-16, lines 45-46.

[46]Respondents’ Outline of Submissions, para 57.

[47]Respondents’ Submissions, para 69.

[48]Meagher, Gummow and Lehane, Equity Doctrines and Remedies, Chapter 26, paras [26-015] and following; Rowe v National Australia Bank Ltd [2019] WASCA 140, [69]; Australian Securities and Investments Commission v GDK Financial

Solutions Pty Ltd (2006) 236 ALR 699.

Close

Editorial Notes

  • Published Case Name:

    Squash Vision Pty Ltd v Il Mito Pty Ltd & Ors

  • Shortened Case Name:

    Squash Vision Pty Ltd v Il Mito Pty Ltd

  • MNC:

    [2020] QSC 328

  • Court:

    QSC

  • Judge(s):

    Flanagan J

  • Date:

    30 Oct 2020

  • White Star Case:

    Yes

Appeal Status

Please note, appeal data is presently unavailable for this judgment. This judgment may have been the subject of an appeal.

Cases Cited

Case NameFull CitationFrequency
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd (1915) AC 79
2 citations
Jump To
Cite 1 - (1915) AC 79
Cite 2 - (1915) AC 79
GDK Financial Solutions Pty Ltd and Others v GDK Financial Solutions Pty Ltd and Others (2006) 236 ALR 699
1 citation
Jump To
Cite 1 - (2006) 236 ALR 699
GWC Property Group Pty Ltd v Higginson [2014] QSC 264
4 citations
Jump To
Cite 1 - [2014] QSC 264
Cite 2 - [2014] QSC 264
Cite 3 - [2014] QSC 264
Cite 4 - [2014] QSC 264
Kellas-Sharpe v PSAL Limited[2013] 2 Qd R 233; [2012] QCA 371
3 citations
Jump To
Cite 1 - [2013] 2 Qd R 233
Cite 2 - [2013] 2 Qd R 233
Cite 3 - [2013] 2 Qd R 233
O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359
3 citations
Jump To
Cite 1 - (1983) 152 CLR 359
Cite 2 - (1983) 152 CLR 359
Cite 3 - (1983) 152 CLR 359
Quantum Asset Management Pty Ltd v Love Properties (WA) Pty Ltd [2017] WASC 167
3 citations
Jump To
Cite 1 - [2017] WASC 167
Cite 2 - [2017] WASC 167
Cite 3 - [2017] WASC 167
Rowe v National Australia Bank Ltd [2019] WASCA 140
1 citation
Jump To
Cite 1 - [2019] WASCA 140

Cases Citing

Case NameFull CitationFrequency
148 Brunswick Street Pty Ltd v Strategix Training Group Pty Ltd [2021] QDC 381 citation
148 Brunswick Street Pty Ltd v Strategix Training Group Pty Ltd (No 2) [2021] QDC 2121 citation
1

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