Damm v Fentway Pty Ltd (No 2) [2001] RSLT 8

1 [2001] RSLT 8 THE RETAIL SHOP LEASES ACT In the matter of Dispute 45/2000 ROLF and KATHY DAMM - Claimants and FENTWAY PTY LIMITED - Respondent DECISION Given in Brisbane on 4 May, 2001. -- 1 of 7 -- Damm-v-Fentway 2 Decision This matter was previously before the Tribunal when we had to consider the question of jurisdiction. Jurisdiction depended upon there being a valid lease. We came to the conclusion that an option to renew in the original lease had been validly executed by the claimants. Mr Damm had not done so in terms of the lease, in that he was out of time and the option was exercised verbally and not in writing. Nevertheless, we had come to the conclusion that this late and informal exercise of the option was in a manner acceptable to the respondent. The option exercised was a further option, as the lease had previously been renewed. It was therefore exercised under Clause 6.02.01 of the lease. The new lease was to be "upon the same terms and conditions as are herein contained, save and except this clause, and save and except that the rental shall be as follows - - - " There is then provision for determining the new rental. Messrs McCarthy Durie Ryan Neil, Solicitors, were instructed by the respondent with regard to the preparation of the new lease. We are advised that the instructions to MDRN was that the new lease was to incorporate a further option to renew for a term of three years. This to us indicates a willingness, if not a keenness, by the respondent, to retain the claimants as a tenant. The subsequent actions as set out in the correspondence from MDRN can at best be described as extremely careless. The first two draft leases prepared by them contained both or at least one of the following important errors: - 1. The usage clause was totally inappropriate. The claimants had been running a business selling fish and chips and hot takeaway food. The draft lease contained a user clause appropriate to a liquor store. 2. The area of the leased premises was incorrectly described at about 33% greater than the true area. 3. Clauses in the drafts had been changed from those appearing in the original lease. These changes included (a) the deletion of an exclusivity clause protecting the claimant; (b) a change to the user clause preventing the claimants from using the demised premises from selling Chinese or Asiatic food, whereas the original user clause only prevented the claimants from selling Chinese food; (c) reference to a clause 9.2 of a lease which was not defined, and was certainly not of the original lease. We were told that the reference had been to another draft which was never produced, but this reference continued throughout negotiations; (d) an ill-drawn and undefined clause relating to the payment of a bond which had already been paid under the earlier lease or leases without any indication that the same bond was to be carried forward. -- 2 of 7 -- Damm-v-Fentway 3 Decision The draft lease contained a clause requiring the respondent to pay Goods and Services Tax. The question of the incorporation of this clause has been a matter of contention between the parties. The respondent has maintained that as the original lease commenced in 1993, subsequent renewals were not subject to the payment of GST. The rental for the period of renewal with which we are concerned is provided for in clause 6.02.02 of the original lease. In terms of that clause, the rental for the first 12 months was to be agreed and, failing agreement, by a valuer appointed in terms of that clause. The Chairman has ruled that GST was payable in terms of that clause on any renewal, and that a clause in a new lease requiring the claimants to pay GST on the rental correctly set out the law. The first draft new lease was considered by the claimants and its deficiencies advised to the respondent. This happened again with regard to the second draft. This advice was not acted upon by the respondent or its solicitors, neither correcting the incorrect provisions. That led to further correspondence and, in at least one place in the second draft, the incorporation of a further error. Matters were complicated by the claimants seeking a Deed of Extension instead of a new lease, although the legal effects of each would have been the same. They were further complicated by the respondent's solicitor referring to a repealed Act as though it were still in force, and repeatedly referring to a clause 9.2 of a lease which on the documents before us was completely different to the 9.2 appearing in the original lease. This reference was obviously confusing to the claimants. A pattern in the dealings between the claimants, the respondent's employees and the respondent's solicitor developed. On receiving a document, the claimant took some time in considering it. He thereafter raised his difficulties and pointed out errors to the respondent or its solicitors. He then demanded quick action from the respondent. The male claimant is obviously a persistent person and made frequent approaches for a quick reply to his various requests. It appears that he dug his heels in in regard to certain matters, including GST, and his persistence and frequent requests for action reached a point where Mr Karreman, the Controlling Director of the respondent, refused to speak to him directly and either had Miss Taylor, a member of his staff, deal with these requests or referred them to MDRN. Mr Damm has informed us that he was under substantial pressure at this stage and decided to sell the claimants' business. He got in touch with Mr Graeme Donaldson, a business broker, and listed the business for sale at $75,000 including fixtures and fittings, less stock in trade at cost. In about December of 1999, he discussed with Donaldson the price at which the business was listed, and as a result the listed price was reduced to $50,000, with the price to be negotiable. -- 3 of 7 -- Damm-v-Fentway 4 Decision In May or June 2000 Mr and Mrs Butts approached Mr Donaldson and through him made an offer of $45,000, subject to the lease being in order and the equipment being free of encumbrances. No written agreement was ever prepared or signed. According to Donaldson, the claimants were still considering the offer when on or about 29th June 2000 Mr Damm showed Donaldson a Notice to Quit which had been served by the respondent. Mr and Mrs Butts resolved not to proceed with the purchase of the business. Donaldson had formed the opinion that they would have proceeded, had the lease been in order. Donaldson has stated that his commission on the sale would have been approximately $3,925.00 plus GST, making a net amount receivable by the claimant of $41,075.00. The renewal of the original lease in 1996 had been by Deed of Extension and not by the execution of a new lease. What was offered to the claimants in the year 2000 was not a Deed of Extension, but a new lease. As has been pointed out in our previous decision, although the exercise of an option brings about a new lease, it is often referred to as an extension or renewal. Mr McDonnell-Staff, an employee of MDRN, took the view that once the lease had passed the end of its term, it could not be renewed by Deed of Extension. The Chairman finds no justification in law for this view. In any event, the respondent through MDRN insisted on a fresh lease, whereas Mr Damm wished a Deed of Extension. Provided the new lease was in terms of the rights created by the renewal, a new lease or Deed of Extension would, in the Chairman's opinion, have no practical differences. We have referred to the slipshod actions by MDRN. We have also referred to the persistence by Mr Damm. As a result of these, Mr Damm and Mr Karreman both exhibited signs of frustration. This probably led to Mr Damm tape-recording telephone conversations he had with representatives of the respondent. The transcripts of these conversations which he supplied to us are undated. However, he has supplied numbered pages stapled together, and we assume they follow a chronological order. We cannot be sure but by placing the contents in the context of what happened, on the balance of probabilities the tape conversations cover from April 2000 until June 2000. At this stage it appears to us that the possible points of difference between the parties were (1) the payment of the bond; (2) the usage clause; (3) GST; (4) whether the new lease was to be by Deed of Extension or the signing of a completely fresh document. On this point Damm dug his heels in and made it quite clear that he wanted a Deed of Extension and not a new Lease. In our opinion this amounted to an unjustified refusal by Damm to accept what the Respondent was legally entitled to do and could be treated by Respondent as entitling it to end negotiations and terminate any existing relationship. On page 2 of the transcript of the taped telephone conversations, reference is made to the first of these issues, namely, the bond. The original lessee of the premises had been a Margaret Barr. She had sub-leased or assigned her -- 4 of 7 -- Damm-v-Fentway 5 Decision interest in the lease to the claimants. Mrs Barr had paid an initial security bond of $1750. The lease prepared by MDRN provided for a security bond in this amount. The question was whether the original bond, the amount of which had been paid by the claimants to Mrs Barr, was being continued forward, or whether an additional bond was required. According to the transcript of the telephone conversation at some later stage Mr Damm telephoned and spoke to Miss Taylor. She told him that Mr Karreman has instructed McCarthy Durie Ryan Neil to serve a notice to quit. Subsequently in the same conversation she suggested that Mr Damm telephone Mr Karreman or Mr McDonnell-Staff to clarify the issue of the bond. We attach a copy of the transcript of that conversation and draw attention to parts of its contents, which we paraphrase: (1) Miss Taylor stated that Mr Karreman wanted a new lease and Mr Damm insisted on a Deed of Extension. (2) Miss Taylor states that McCarthy Durie Ryan Neil will change the usage clause. (3) Mr Damm asks if McCarthy Durie Ryan Neil will issue a Notice to Quit, because of his insistence on a Deed of Extension. He is told that a Notice to Quit will be issued if he does not sign the new lease. He asks if he will receive the Notice to Quit tomorrow. (4) Mr Damm then raises the bond to $1750. He is told this will be sorted out by the solicitors. (5) Mr Damm then says he is looking forward to see a Notice to Quit and, "I will duly comply." It appears to us that of the four points of difference referred to above the form of lease and GST were based on a false belief by Mr Damm. The usage clause was conceded by Miss Taylor. The payment of a bond was not finalised and Miss Taylor invited Mr Damm to phone McCarthy Durie Ryan Neil or to do so herself. Mr Damm must have known that the claimants would directly or indirectly be entitled to credit for the old bond. Mr Damm stated he would not sign the lease or continue discussions. The Notice to Quit followed and was based on Mr Damm's statements. The Notice was therefore justified, particularly as he virtually invited it. We briefly looked at the background. The evidence before us is that both Mr and Mrs Damm worked long hours in the business. The business's profit was between $15,000 and $25,000 per year. No provision was made for salaries for Mr and Mrs Damm. It is unlikely that there was substantial interest payments taken into account in showing the profitability of the business, as the business had been running for about six years and the equipment was not -- 5 of 7 -- Damm-v-Fentway 6 Decision of great value. They may well have debited the business with some external expenses, such as the running of a motor vehicle. Nevertheless, their earnings for long hours were less than a basic wage. They had indicated their desire to get out of the business by listing it for sale as early as June or July, 1999. The first firm offer they received for the business was some 11 months later, and substantially less than their original asking price. As a matter of course they could have known that the prospective purchasers would withdraw if advised that there was any uncertainty with the lease. At this stage, the differences between the claimant and the respondent were very small: (1) With regard to the security bond, it would either have to be carried over, or they would be entitled to reclaim payment from the respondent on the expired lease and immediately replace the amount of security for the new lease. (2) With regard to the GST question, the attitude taken by the claimants was wrong in law. In any event, Mr Damm had pointed out to Miss Taylor that it was not an important issue. (3) The new lease was a formal question only and of no legal significance, except in the mind of Mr Damm. (4) On page 4 of the transcript of the telephone conversation, Miss Taylor points out that the solicitors would change the usage clause. The objection in regard to usage was that the original usage clause entitled the claimants to sell takeaway foods, excluding Chinese foods. This exclusion was to protect a Chinese restaurant in the same complex. Notwithstanding this provision, they had sold dim sims and spring rolls. The additional provision to which they objected was prohibition against selling Asiatic foods. The difference was not of practical importance, as there had apparently been no objection to their selling dim sims and spring rolls. Although the matter was not canvassed before us, it may be that foods after many years use in a particular country become "naturalised", notwithstanding their origin. In any event, Miss Taylor advised Mr Damm that the solicitors would change the usage clause. Notwithstanding, it appears to us that Mr Damm desired an out from the contract and believed that the offer made to him by Mr and Mrs Butts gave him an opportunity to get out and receive some money. This is confirmed by his statement, "I look forward to the post to see a notice to quit, and I will comply." After he had received the notice to quit and indicated that he intended quitting, he approached Mr Karreman to purchase his fixtures and fittings. He quoted a price of $100,000. A valuation obtained indicates that the value was approximately $20,000 in situ and much less if removed. Mr Karreman offered $15,000. Mr Damm declined and removed the fixtures and fittings and -- 6 of 7 -- Damm-v-Fentway 7 Decision stored them in his garage. They are now of little value. We, in summary, have come to the conclusion that the claimants desire to get rid of their business. They regarded an inchoate offer by Mr and Mrs Butts as fixing the value. They did not do the expected and continue to seek a written lease. Nor did they suggest that Mr and Mrs Butts negotiated a separate lease with the respondent. We have come to the conclusion that the claimants had effectively brought negotiations to an end by insistence on a Deed of Extension and this entitled the Respondents to end the relationship, assuming that the end of negotiations brought about the end of the lease. We also have doubts as to what extent an offer which was made by Mr and Mrs Butts and was still "being considered" (see Mr Donaldson's statement) fixes a value. We dismiss the claim. P V Loewenthal, Chairman. -- 7 of 7 --