Carmichael Group Holdings Pty Ltd v Gemex Pty Ltd & Ors [2002] QSC 87

SUPREME COURT OF QUEENSLAND CITATION: Carmichael Group Holdings Pty Ltd v Gemex Pty Ltd & Ors [2002] QSC 087 PARTIES: CARMICHAEL GROUP HOLDINGS PTY LTD (Plaintiff) GEMEX PTY LTD (First Defendant) THERESA HERTESS AND HERBERT HERTESS (Second Defendant) FILE NO/S: 66 of 2001 DIVISION: Trial PROCEEDING: ORIGINATING COURT: Supreme Court Cairns DELIVERED ON: 5 April, 2002 DELIVERED AT: Cairns HEARING DATE: 25 February 2002 JUDGE: Jones J ORDER: Judgment for the plaintiff against the first defendant and second named second defendant in the sum of $536,733.63 together with costs to be assessed on the standard basis. CATCHWORDS: CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE – REPUDIATION – where tenant has abandoned premises DAMAGES – GENERAL PRINCIPLES – MEASURE OF – where defendant has tenant has repudiated the contract COUNSEL: Mr. C. Ryall for the plaintiff No appearance for the defendants SOLICITORS: Cameron A. Price for the plaintiff [1] On 13 September 2001 a default judgment was entered in favour of the plaintiff against the first defendant and the first named second defendant for damages to be assessed. The question now before me is to decide what is the quantum of those damages. -- 1 of 7 -- 2 The facts [2] The Plaintiff leased its premises at 57 Abbott Street, Cairns to the First Defendant for a term of 10 years from 1 April, 1999. The premises were located in the CBD of Cairns and were to be used for a commercial purpose as a “jewellery and opal retail outlet”. The terms of the lease were reduced to writing and the instrument of lease was duly registered on 26 November 1999. The second defendant guaranteed the performance by the first defendant of its obligations under the Lease. [3] Rent and outgoings required to be paid by the first defendant were paid only until 11 July 2000. By mid-November 2000 the first defendant had left the premises altogether in an apparent repudiation of the lease agreement. On 16 November 2000 the plaintiff re-took possession of the premises and terminated the lease. In so doing, it accepted the repudiation by the first defendant. That is the fact alleged in the amended statement of claim which was not challenged by the defendants. It is the basis upon which default judgment was therefore entered. None of the defendants sought to be heard on the question of assessment of damages. [4] On 1 October 2001 the premises were re-let to Kaz Opal Pty Ltd for a term of three years with an option to renew for a further three years (“the Kaz Lease”). The new rental was significantly less than the rental in the subject lease and the burden of outgoings was less onerous. However, there is no evidence to suggest this new agreement to lease the premises was entered into other than at arms length. [5] I accept Counsel’s submissions that damages ought to be assessed accordingly to ordinary contractual principles. The lease, by cl 13.4.2, provided a method of calculation of damages if the lessor elected to terminate the lease for breach of an essential term, but that does not preclude the assessment of damages at large when the contract is repudiated. Having pleaded that the basis of the plaintiff’s claim is the defendants’ repudiation of the agreement, then the principle expressed in Copperart Pty Ltd v Bayside Developments Pty Ltd1 applies. Murray J said (at 413):- “In those circumstances, upon the repudiation of the agreement to lease, the acceptance thereof and the termination of the agreement, Bayside became entitled to damages for the breach of the agreement, assessed in the ordinary way by the ordinary contractual measure. The damages to be awarded are for the loss of the bargain: see Progressive Mailing House Pty Ltd v Tabali Pty Ltd. The measure of damages is taken to be the difference between the benefits in rental and outgoings (in this case) which Bayside would have received for the balance of the term, less any benefit of that kind which it has in fact received by re-letting the premises pursuant to its obligation to mitigate its loss, subject to a discount in an appropriate case (which is not this case) for the acceleration of the compensation obtained: see Hughes v NLS Pty Ltd [1966] WAR 100.” 1 (1996) 16 WAR 396 -- 2 of 7 -- 3 [6] The relevant principle from Progressive Mailing House Pty Ltd v Tabali Pty Ltd2 referred to in the above quotation is stated in the judgment of Mason J (as he then was) at p.29 as follows:- “Accordingly, the balance of authority here as well as overseas, and the reasons on which it is based, support the proposition that the ordinary principles of contract law, including that of termination for repudiation or fundamental breach, apply to leases. However, it has been suggested that the presence of an express proviso for re-entry in a lease excludes any other right of termination of the lease by the lessor. Thus, in Rosa Investments Pty Ltd v Spencer Shier Pty Ltd. (1965) VR 97, it was held that at common law re-entry is necessary to forfeit a lease unless dispensed with by contract. The better view is, in my opinion, that re-entry is essential only where the parties stipulate that advantage shall not be taken of a forfeiture except by an entry upon the land (Liddy v Kennedy (1871) LR 5 HL 134, at p. 151). If it be accepted that the principles of contract law apply to leases, it is not easy to see why the mere presence of an express power to terminate should be regarded as excluding the exercise of such common law rights as may otherwise be appropriate. It is, of course, open to the parties by their contract to regulate the exercise of the common law right to determine the repudiation or fundamental breach.” [7] In the computation of damages the plaintiff contends that they are to be assessed under eight headings:- (i) Rentals and outgoings to the date of termination. (ii) Rentals and outgoings from termination to re-letting. (iii) Differential in rental and outgoings for the three year period of the Kaz lease. (iv) Differential in rental and outgoings after the three year term of Kaz lease. (v) Difference in the capital value of the premises as a result of the termination and re-letting. (vi) Legal fees associated with the first defendant’s default. (vii) Legal fees associated with the re-letting. (viii) Costs of cleaning and reinstating the premises. [8] The lease provides for an annual commencing rent of $144,000 payable by 12 monthly instalments of $12,000 each. The rent was subject to upwards adjustment in accordance with movements in the Consumer Price Index (CPI). For the year ended 30 June 2000 the CPI increase was 3.2% and for 30 June 2001 6.0% (including G.S.T. effect). The plaintiff has adopted 3% as the CPI adjustment for both years and projects that level of adjustment for future years. See the affidavit of Roland Peterson, Chartered Accountant.3 [9] The subject lease provided for the payment by the first defendant of 100% of “outgoings” which are defined in the schedule of the lease4. For the purpose of this 2 (1985) 157 CLR 17 3 See ex B to affidavit of Roland Peterson sworn 21 Feb 2002 4 See ex A to affidavit of David Carmichael sworn 10 Dec 2001 at p 5. -- 3 of 7 -- 4 calculation outgoings include municipal rates, insurance and a management fee. These outgoings are quite distinct from rent (see clauses 3.1 and 3.2 of the Lease). These outgoings are not, in my view, subject to any CPI increase. Mr. Peterson’s calculations, however, did adjust the outgoings for CPI movements and to the extent that they include such adjustments his calculations will have to be ignored. [10] The Kaz lease did not impose on the tenant the same obligation to pay outgoings. In fact, the only outgoing payable hereunder was insurance5. The differential in outgoings to be taken into account after 1 October 2001 is ($14,432.33 minus $885.44) $13,546.89. It is likely that the differential in the outgoings between the two leases would increase over the period of the Kaz lease since the relevant outgoings related to municipal rates and management fees. But, as there is no evidence about any changes to those items to date and any attempt to predict them would result in speculation, I will take the conservative approach of projecting that differential into the future calculations. Calculation of loss [11] I propose to deal with the plaintiff’s claim under the headings referred to in paragraph 7 hereof. (i) Rentals and Outgoings to date of termination: For the period between the last receipt of rent and the termination, the CPI adjusted rental was $12,264 per month. During this period the only outgoing claimed was for municipal rates at $5,340.19. The total amount due therefore for the whole period is the amount as claimed in the statement of claim of $49,788.38. This amount is subject to income tax at the assumed rate of 20%, but the net amount ($35,000) would attract interest over the past 2 years on a Hugerfords v Walker6 basis, which again would be subject to income tax. In the end result I allow the net loss for this period at $40,000. (ii) Rentals and Outgoings between termination of lease and re- letting (16 November 2000 – 1 October 2001) During this period there was a CPI adjustment to rent which results in the following rental being due: 16 November – 1 April 4.5 months at $12,264 $ 55,188.00 1 April – 1 October 6 months at $12,963 $ 77,778.00 Outgoings ($9283.63 - $5,340.19) $ 3,943.44 $136,909.44 5 See ex B to affidavit of David Carmichael sworn 10 Dec 2001 – Clause 3.2 This lease is a gross lease and the lessor shall be liable for payment of all outgoings except for insurance premiums detailed in clause 7. 6 (1980) 171 CLR 125 -- 4 of 7 -- 5 The impact of taxation and off-setting interest has to be taken into account. I allow the net for this period at $100,000. (iii) Differential in rental and outgoings for the three year period of the Kaz lease: In this calculation I have had regard to the figures provided by Mr. Peterson in ex D to his affidavit sworn 21 February 2002. For the period of the three year Kaz lease the calculated net loss of rent and outgoings determined by Mr. Peterson total $188,144.82. This figure, however, contains the error of using CPI adjustment to the outgoings. This has resulted in an over-allowance of approximately $1,500 which, for practical purposes, suggests that I should assess the loss for this particular period at $187,000. (iv) Differential in rental and outgoings after expiration of the Kaz three year lease: This is the area in which greatest uncertainty arises. What has to be balanced is the prospect of the option on the Kaz lease being exercised and some consideration of what might happen at the end of that extended term. Mr. Peterson has prepared figures on the assumption that the Kaz lease would be extended. There seems to me a high probability that it will be, given the extent of renovation work which was carried out prior to Kaz going into occupation. I would not, therefore, discount heavily the figures arrived at from Mr. Peterson’s calculations. For the balance period between 1 October 2007 and 31 March 2009 there is considerable uncertainty, much depending on whether a new lease will be entered into by Kaz. If not, the landlord could be faced with a further period of receiving no rental at all. Having regard to the calculations made by Mr. Peterson, the net loss of rent and outgoings projected by him for that period totals $279,586.38. This amount has to be discounted for the fact that it amounts to an acceleration of future payments. Weighing the uncertainties in assessing the likely flow of income, and balancing against that the need to make some discount to allow for the accelerated benefit, I assess the damages suffered by the plaintiff for this particular period in the sum of $200,000. (v) Difference in capital of premises: Counsel for the plaintiff conceded there is no modern authority for this particular head of claim being included in the measure of damages. It seems to be predicated on the basis that a buyer of the freehold land would take into account, in assessing the price, the differential in the income stream from the subject lease and the Kaz lease. I am not convinced that this is a proper consideration. There is no evidence to suggest that the plaintiff has sought to sell the -- 5 of 7 -- 6 premises or that it intends to in the future. The plaintiff suffers no loss if there is no sale of premises at a reduced value. Even then I have some doubt whether a reduced sale price could be attributed to the lessee’s default. It seems to me that, to the extent that the first defendant’s default has caused loss to the plaintiff, it is fully made up by his receipt of damages for the loss of the income stream. I therefore disallow any claim against the defaulting tenant based on the reduced capital value. (vi)–(viii)Repair costs, commissions, legal fees and costs of cleaning and reinstating the premises: These items are not particularly contentious, now that the plaintiff has abandoned the major expense of $9,305.50 for reinstatement of the building. I shall deal with the out-of-pocket expenses as they are identified in paragraph 9 of the affidavit of David Carmichael sworn on 10 December 2001. (a)Repair work ($9,075) – abandoned at hearing; (b)Cleaning costs – allowed $ 300.00 (c)Survey costs ($575) – not allowed as a cost arising from default. (d)Repair of roof ($230.50) – not allowed as it was not shown to be the result of defendants’ conduct. (e)Change of locks – allowed $ 183.63 (f)Waste bin hire – abandoned (g)(h)(i)These expenses would have been incurred at the end of the lease term in any event. The allowance is based on the acceleration of the expenditure by 8 years using a 5% discount factor (0.677). The items are: Real estate commission $12,100.00 Advertising signage $ 594.00 Legal fees $ 1,628.50 $14,322.50 $ 9,700.00 (j)Legal fees in respect of this claim should be claimed as costs – not allowed Total expenses $10,183.63 (k)Against this amount there is to be set-off the sum of $450 referred to in subparagraph (k) $ 450.00 $ 9,733.63 [12] The total of these allowances leads to an assessment of damages in the sum of $536,733.63. Orders -- 6 of 7 -- 7 [13] I give judgment for the plaintiff against the first defendant and second named second defendant in the sum of $536,733.63 together with costs to be assessed on the standard basis. -- 7 of 7 --