Carr v Chen & Ors [2000] RSLT 23

1 [2000] RSLT 23 THE RETAIL SHOP LEASES ACT In the matter of Dispute No. 125/99 DARREN NOEL CARR and SHERRIE GAY CARR - Claimants - and- ZHEN QUAN CHEN and QUIONG SING LAY - First Respondents BRUCE ROBINSON (RICHARDSON & WRENCH) - Second Respondent DECISION Given in Brisbane on 28 August 2000. -- 1 of 17 -- 2 -- 2 of 17 -- Carr-v-Chen & Ors 3 Decision This dispute arises out of a lease entered into between the lessees and lessors on or about 8 August 1997 in respect of premises known as Shop 5/72 Sugar Road Maroochydore. The owners of the property, the lessors, had appointed Mr Bruce Robinson of Richardson and Wrench as the property manager in respect of the premises. The dispute arises from the fact that during the first year of the lease storm water entered the premises and it is the case for the lessees that their occupation of the leased area was so seriously compromised by the entry of water that they repudiated the lease after a period of approximately one year. They claim reasonable compensation pursuant to s.43 of the Retail Shop Leases Act 1994. This is quantified in the sum of $150,000 which it is alleged was the value of the business which in their view they were forced to abandon. The business in question traded as The Bike Pitt, a motor cycle repairs and accessories retail outlet. Prior to their assuming the occupancy of Shop 5, the lessees had, since June 1994, leased through the agency of Mr Robinson the premises known as Shop 6/72 Sugar Road. These were smaller premises than Shop 5, and it was at Shop 6 that the lessees commenced to operate their business which was based on Mr Darren Carr’s expertise with motor cycles and their repair. The business when conducted during the period of the three year lease in respect of Shop 6 was apparently successful and the lessees were anxious to expand into larger premises so that the business could extend beyond the repair of motor cycles into the sale of secondhand vehicles and the sale of a wide range of motor cycle accessories and clothing. At about the time of the expiry of their lease in respect of Shop 6, the lessees became aware that the lessee of Shop 5 was contemplating relocating his motor vehicle repair business from Shop 5 to other premises which he was intending to acquire. -- 3 of 17 -- Carr-v-Chen & Ors 4 Decision According by the lessees, in the course of discussions with the former lessee of Shop 5 and Mr Robinson, commenced to negotiate a lease of Shop 5. Shop 5 had a much larger floor area and had the capacity to locate the enlarged business which the lessees were very actively contemplating. Shop 6 did not. Shop 6 had provided them with the base from which to launch their new business venture, The Bike Pitt; they saw Shop 5 as the means for them to expand and develop it further. Prior to entering into the lease of Shop 5, the lessees had with the approval of the former lessee closely inspected the premises and had measured the same, and with the assistance of an interior designer had developed the interior plan for the relocation of the expanded business which they proposed. They had occupied the adjoining premises for the previous three years and in that time had become the friendly neighbours of the previous lessee of Shop 5. The latter had serviced their motor vehicle during that period. Documents obtained from the Body Corporate, Abetta Body Corporate Management Pty Ltd (“Abetta”) disclose that Shop 5 when previously occupied by the former lessee had incurred the significant entry of water which had caused a substantial problem for the former lessee. Although the lessees were at the time the occupiers of Shop 6 adjoining and were on friendly terms with the previous lessee of Shop 5, both lessees denied any knowledge of the fact that Shop 5 had a significant problem with the entry of storm water run off in times of heavy rain. That denial needs to be later assessed in the light of certain correspondence written prior to their entry into the new lease of Shop 5 and during the period of lease negotiations. Darren Carr was concerned with the repair side of the business; his wife Sherri was the person concerned with administrative and financial issues. It had been the original intention that the three year lease of Shop 5 would commence on 1 August 1997. Negotiations were somewhat protracted and it was agreed that the commencement date of the lease would be 15 August -- 4 of 17 -- Carr-v-Chen & Ors 5 Decision 1997. The correspondence between the respective solicitors suggests that an earlier date – 8 August 1997 – was finally chosen as the commencement date as the agent on the morning of that day made the keys available to the lessees. On 24 July 1997 during the lease negotiations, Darren Carr signed a letter composed by his wife Sherri and addressed to Mr Robinson. Part of the letter reads: We would also appreciate a clause in the lease that the water problems 5/72 Sugar Road Maroochydore has will be rectified before 1 st September 1997 as we are not prepared to take the risk of our stock and office equipment being damaged. As you can understand, the smell is not pleasant and would create mould, etc. and we plan to start painting on Saturday the 26 th July, 1997.” This letter needs to be read with a letter dated 25 July 1997 from the lessees’ solicitor to the lessors’ solicitors during the lease negotiations. Omitting formal parts, this letter reads: My clients have just informed me that on inspection of the premises today they note that water is entering the premises through the exterior wall and also the lock on the sliding door would appear not to be operating effectively. I am simply raising these matters so they can be the subject of discussions with Mr McColm on Monday. When both lessees were questioned concerning the matters relating to the entry of water into the premises and their prior knowledge of that fact, both asserted that they had seen evidence on the floor and wall in the office area where water had entered the premises, but that they regarded the same as insignificant and not of the same proportion as that which allegedly occurred in February 1998 and on later occasions during the first year of the lease. In short, their evidence in the Tribunal tended to underscore their obvious -- 5 of 17 -- Carr-v-Chen & Ors 6 Decision concern expressed in correspondence in July 1997 immediately prior to their execution of the lease. There can be no mistaking the lessees’ prior knowledge of the fact that water entered the premises, as evidenced by the content of the contemporary correspondence. Whether or not Mrs Carr’s reference to “the water problems 5/72 Sugar Road Maroochydore has” impliedly comprehends knowledge by her of the water problems encountered by the previous lessee, when they were the lessees of the adjoining Shop 6, is really beside the point. The letter evidences clearly and unequivocally the fact that on 24 July 1997 the lessees knew that the proposed area for lease had “water problems” and the evidence of both lessees is that they had seen the evidence of the “problem” and indeed required that it be rectified before 1 st September 1997 and requested that the lease include a clause to that effect. No clause to that effect was inserted into the lease which was executed subsequently, nor is there any evidence as to why that was so. The lease is silent in respect of this issue. Furthermore, there is no evidence that the “water problems” were “rectified” prior to the execution of the lease on 7 August 1997. The seriousness of the problem as perceived by the lessees on 24 July 1997 was such that it was seen as a “risk to our stock and office equipment being damaged.” Evidence to be referred to later is to the effect that the later entry of water did damage both stock and office equipment. Mrs Carr’s letter went on to emphasise that “the smell is not pleasant.” The language of that part of the letter is inconsistent with Mr Carr’s evidence that it was a reference only to the chance of smell developing prospectively were water to enter the shop. Clearly Mrs Carr is referring to a then contemporaneous state of affairs. The fact that there was present evidence of mould is confirmed by Mrs Carr’s evidence that they painted over it. -- 6 of 17 -- Carr-v-Chen & Ors 7 Decision We are in no doubt that at the date of the letter, 24 July 1997, the lessees were well aware of the fact that there were “water problems” with Shop 5 to the extent that the same might put at the risk of damage “our stock and office equipment” and further, that the same was the cause of an unpleasant odour in the shop and, also, that there was visual evidence of mould. Our finding in this respect is confirmed by the letter of the lessees’ solicitor dated 25 July, 1997. The solicitor refers to his being informed by his clients that they had inspected the premises “today” and “note that water is entering the premises through the exterior wall.” We are not clear as to whether the reference to “the water problems 5/72 Sugar Road Maroochydore has” in Mrs Carr’s letter is a reference to knowledge acquired by the lessees prior to or on 24 July 1997 or whether it was the same information given by them to the solicitor and acquired on a further inspection “today” – 25 July, 1997. It may be that the “water problems” referred to by Mrs Carr in her letter dated 24 July 1997 is the same phenomenon – “water is entering the premises through the exterior” – acquired on the inspection “today.” Perhaps the solicitor’s letter refers to his being told on 25 July 1997 by his clients of knowledge acquired in the course of inspection prior to 24/25 July 1997. In any event, it is strikingly clear that by 25 July 1997, at the latest, the lessees were well aware of “water problems” with the area which they proposed to lease and that inspection by them had revealed that the source of the problem was water entering the premises through the exterior wall. Clearly the lessees were aware of the problem prior to their entering into the lease. They were concerned about it and sought prior rectification of the problem by insisting on such a clause in the lease. The fact is that no such clause was inserted and the lease was executed by both lessees notwithstanding. We are unable to find why this was so. It may have been an oversight; on the other hand the lessees were extremely anxious to enter into the leased premises and to develop their expanded business quickly and for whatever reason chose to embark upon the occupation of the premises in the knowledge that there were “water problems” with Shop 5. -- 7 of 17 -- Carr-v-Chen & Ors 8 Decision From the time of the occupation of the premises pursuant to the lease the business allegedly prospered. In February 1998 heavy rain in the area caused the “problem” to re-emerge and on occasions in the subsequent months water again entered the premises. It is alleged that stock and office equipment were damaged. In April 1998 the lessees advised Mr Robinson of the problem and referred to his comment in a prior telephone conversation that “this was a call far beyond (his) responsibility.” It is a persistent theme in the evidence of the lessees that both Mr Robinson and Abetta were unsympathetic to their plight and chose to ignore their several entreaties to have the problem remedied. It may be unfair to criticise both Mr Robinson and Abetta in those terms. Mr Robinson and his colleague, Ms Egan, both insisted that their only course was to advise Abetta and they did so and requested that the problem be resolved. In this context one needs to refer to the evidence that subsequent to their occupying Shop 5 the lessees themselves undertook certain earthworks which Abetta alleged subsequently was the cause of the then problem or which had aggravated the existing problem. This requires some explanation. The premises are approached down a driveway and the lessees occupied that part of the building which at the rear was below ground level and above which were built other leased areas. The building was so constructed that beyond the rear wall of the leased premises (beyond the office wall) there was a “void” which had been excavated in the course of construction and which had an uneven earth floor and was enclosed by the foundation walls built in the course of construction. It was not part of the leased area. The “void” area could be entered by an opening in the rear wall of the office. The lessees after occupation removed earth from against the rear wall of the “void” and set about levelling the area so that it might be more suitably used as a storage area. There is a reference in a later report from Cardno & Davies Consulting Engineers to which we will refer, which suggests that in the course of this work the floor level of the “void” in the area near the rear wall of the office -- 8 of 17 -- Carr-v-Chen & Ors 9 Decision was raised so that water which entered through the ‘void” was able to more easily and readily enter through the rear wall of the leased premises. After the lessees’ approach to Mr Robinson on or about 17 April 1998, who in turn had referred the matter to Abetta, a representative of the Body Corporate inspected the area and by letter to the lessees dated 27 April 1998, the representative of the Body Corporate wrote: On a recent inspection of the common property beside Lot 5, a member of the Body Corporate found that drainage services installed to prevent water entry into Lot 5 had been backfilled to bring the ground level above the floor level which has created the problem. This was a reference to the work done by the lessees. The letter went on to assert that the Body Corporate had “two years ago” had a drainage contractor install an aggregate drain behind the rear wall and that this had successfully stopped seepage through the rear wall of the leased premises. The letter requested that the situation be restored to its former position. It was a significant part of the case for the lessors that the lessees were effectively the source of their own problem and that whatever the state of the problem may have been at the beginning of the lease, it was significantly aggravated by the earthworks undertaken by the lessees themselves in the area of the “void”, which was not part of their lease. The evidence does not enable us to make any definitive finding in this respect. We are satisfied that prior to the lease the lessees were aware of the “water problems” which Shop 5 had and had advised their solicitor on or about 25 July 1997 that an inspection by them had revealed water entering the premises through the rear wall. We are not able to find whether the problems encountered by the lessees in April 1998 and subsequently were caused specifically or aggravated by the earthworks carried out by the lessees after -- 9 of 17 -- Carr-v-Chen & Ors 10 Decision they commenced to occupy Shop 5. We are satisfied, however, that the “problems” caused to the occupancy of Shop 5 on account of water entering through the rear wall and experienced by the lessees in February, April, July and August 1998 was the same problem of which the lessee Mrs Carr had written in her letter dated 24 July 1997. In May 1998 the solicitor for the lessees engaged Cardno & Davies Consulting Engineers to inspect the premises and to report on the source of the alleged water problems. Their report dated 12 May 1998 recommended certain additional works. These were undertaken by the Body Corporate with the consent of the lessors. A letter from Cardno & Davies dated 26 June 1998 certified that in the course of a further inspection of that date it was noted that the recommended works were being installed in accordance with the intent of the report dated 12 May 1998. The lessees allege that in spite of the additional work the premises were again affected by water entry in July and on or about 8 August 1998 they closed the business and returned the keys to the office of Mr Robinson. At that date the first term of the lease still had two years to run. We will return to this matter below. We repeat that we are satisfied – • that whether or not the lessees were made aware of the water problems in Shop 5 during their occupancy of Shop 6, by the previous lessee, they well knew of “the water problems which Shop 5/72 Sugar Road Maroochydore has” prior to their entry into the lease in respect of Shop 5 and they had this knowledge at the latest by 25th July 1997; • that on inspection of the premises by them on or about 25 July 1997 they knew that water entered the premises through the exterior wall of the leased area; • that the water “problem” was such as to put at risk of damage their stock -- 10 of 17 -- Carr-v-Chen & Ors 11 Decision and office equipment; and • that the unpleasant smell on account of water entry and the incidence of mould were known to the lessees prior to their entering into the lease. We turn to Section 43 of the Retail Shop Leases Act 1994 (the Act). The solicitor for the lessees submitted that the lessees were entitled to “reasonable compensation” on account of s.43(1)(d) and/or (e) of the Act. We will return to deal with these provisions. Section 42 of the Act provides: “A retail shop lease …. Is taken to include sections 43 and 44” By section 20 of the Act it is provided: “If a provision of this Act is inconsistent with a provision of a retail shop lease, the provision of this Act prevails and the provision of the lease is void to the extent of the inconsistency. Clause 11B of the lease is headed, “Assumption of Risk by Lessee” and reads: “The lessee agrees to occupy and use the demised premises at its own risk and the lessor shall not in any circumstances be liable to the lessee for any damage to the plant, equipment, fixtures, fittings or any other property of any description of or in possession of the lessee and contained in or about the demised premises occasioned by water …. or by the entry of water from any source whatsoever … nor for any loss of profits resulting therefrom and notwithstanding that the same may occur by reason of any defect in the construction of the demised premises or any part thereof or of any appurtenances therein contained -- 11 of 17 -- Carr-v-Chen & Ors 12 Decision or by reason of any such damage or loss arising from any act or omission by any contractor or the Lessor or by any member of the public.” By section 43 of the Act there is a provision for reasonable compensation in the circumstances defined by the Act. Whilst the lessees’ claim for compensation goes far beyond a claim for compensation for any damage of the kind specified in clause 11(b) of the lease, it is the fact that the s.43 provisions are deemed to be part of the lease and in accordance with general principles the two provisions have to be read together. On the face of the Act provisions and of clause 11(b) of the lease there is inconsistency in that one provision provides for compensation in circumstances which may fall within clause 11(b) and the other excludes it. We are of the opinion that the preferable view is that the Act provisions prevail. No contrary argument was submitted to us. One needs therefore to examine the relevant clauses of section 43 to determine whether the claim for compensation in the circumstances found is competent. We return to s.43(1)(d) and (e). Sub-clause (d) provides for reasonable compensation for loss or damage suffered by the lessee because the lessor – “causes significant disruption to the lessee’s trading in the leased shop or does not take all reasonable steps to prevent or stop significant disruption within the lessor’s control.” Sub-clause (e) provides a basis for reasonable compensation for loss or damage suffered by the lessee because the lessor – “does not have rectified as soon as is practicable – (i) -------------------- -- 12 of 17 -- Carr-v-Chen & Ors 13 Decision (ii) any defect in the retail shopping centre or leased building containing the leased shop other than a defect due to a condition that would be reasonably apparent to the lessee when the lessee entered into the lease ----“ The solicitor for the lessees claims that the lessees are entitled to reasonable compensation pursuant to these two provisions or one or either of them. We deal first with sub-clause (d). It is in two parts. The first part addresses loss or damage suffered because the lessor “causes” significant disruption to trading. This tends to assume some positive act of commission on the part of the lessor which “causes” the disruption to trading. It is strongly arguable that the facts of this case are comprehended by sub- clause (e) rather than by sub-clause (d) and that the latter addresses those matters which often arise in practice where the lessor does some positive act which disrupts trading by the lessee in the leased shop. There is the obvious need to show that that act is causative of the loss and damage resulting from the disruption to trade. In this case one cannot point to any act of the lessor which caused the entry of water which it is alleged disrupted trading. The second part of sub-clause (d) provides for compensating loss and damage because the lessor does not take all reasonable steps to prevent or stop significant disruption to trading which are within the lessor’s control. It is submitted that this part of section 43 supports the lessees’ claim for compensation. For that to be so it must, in our view, be established on the facts of the case that the lessors or the person acting under the lessors’ authority, in this case Mr Robinson, failed or omitted to take all reasonable steps to prevent or stop significant disruption to trading, which steps were within the lessors’ control. -- 13 of 17 -- Carr-v-Chen & Ors 14 Decision As pointed out above the lessees on 17 April 1998 gave notice to the lessors’ agent that, “We are having problems with the water coming through the walls of our building again.” On 20 April 1998 Mr Robinson acknowledged the letter and on the same date wrote to Abetta to have the problem resolved. He later on 19 May 1998 advised the lessors of the problem and advised that the Body Corporate was arranging for quotes for the work which would be considered at the June meeting of Abetta. In determining the lessors’ liability under sub-clause (d), one has to consider whether, if the lessors did not cause the disruption of trading, and it is not submitted that they did, they took “all reasonable steps” within their control to stop or prevent the alleged disruption. The evidence is that the entry of water was from an area within the control of the Body Corporate. The solicitors for the lessees submit that the lessors did not take all reasonable steps in the circumstances. It is said that they did not do enough in attempting to influence Abetta for them to avoid liability under the second part of sub-clause (d). It is clear from the evidence that the lessors, who lived elsewhere, entrusted the management of the property to Mr Robinson. It was recognised on all sides that any action to address the problem required the initiative of Abetta. Mr Robinson shortly after 17 April 1998 referred the problem to the Body Corporate. He advised the lessors also and on 9 June 1998 an extraordinary general meeting of Abetta was held specifically to consider quotes submitted for the work suggested by Cardno and Davies. The minutes of that meeting disclose that certain quotes for “work as detailed” were accepted by Abetta and authority was sought from the lessors, the proprietors of Lot 5, for the works to be carried out. The lessors gave their approval in writing dated 24 June 1998. This was the work detailed in Cardno & Davies’ report and referred to above. In our view the lessors or their agent took all reasonable steps within their -- 14 of 17 -- Carr-v-Chen & Ors 15 Decision control to prevent any alleged disruption to trade caused by the entry of water. Accordingly, were the matter to be properly considered within the terms of section 43(1)(d) we are of the view that the claim for compensation cannot be supported. In our view the issue of compensation in this case falls to be considered in the context of section 43(1))e)(ii). The capacity for water to enter into the leased shop through its walls was a “defect” for the purposes of the section. There was an obligation on the lessors to have such a defect rectified as soon as practicable and the omission to do so was likely to render the lessors liable for any loss or damage suffered by the lessees on that account. That liability however was excluded in respect of “a defect due to a condition that would have been reasonably apparent to the lessees when the lessees entered into the lease.” This raises for consideration again the lessees’ letter to Mr Robinson dated 24 July 1997 and their solicitor’s letter to the solicitor for the lessors dated 25 July 1997. As pointed out above, those contemporaneous documents which were created prior to the lessees entering into the lease really permit of no other finding than that the lessees well knew, at the latest by 25 July 1997, that there was an apparent defect in the leased shop whereby water was likely to enter the leased area in times of heavy rain and that this was reasonably apparent to the lessees prior to their entering into the lease. The references in Mrs Carr’s letter to Mr Robinson dated 24 July 1997 concerning “the water problems” which Shop 5 had, the consequential risk to stock and office equipment, the unpleasant odour created by it and the presence of mould really admit of only one finding, and that is that the lessees well knew of the defect and its possible consequences prior to entering into the lease. The solicitors letter of 25 July 1997 is even more explicit and his reference to their instructions that "on inspection .… today they note that water is entering the premises through the exterior wall” patently discloses their state of -- 15 of 17 -- Carr-v-Chen & Ors 16 Decision knowledge of the very problem of which they now complain and in respect of which they claim substantial compensation. For their own reasons, which are not readily apparent, the lessees despite knowing what they did chose to execute the lease which was silent in respect of the matter. Perhaps the urgency which attended their intention and desire to leave Shop 6 at the expiration of the term of that lease and to commence their expanded business in Shop 5 partly explain their imprudent decision to execute the lease in respect of that shop. In any event, the fact remains that their knowledge of the defect and its likely consequences for the conduct of their business in Shop 5 disqualifies them in our view from claiming compensation pursuant to clause 43(1)(e) of the Act. For the sake of completeness it should be added that the lessees claim that after Abetta completed the works in the “void” area in the period June/July 1998, there was the further entry of water into the premises. It is not clear from the evidence as to why this occurred and whether there was any relationship between it and the drainage works. What is curious is that, rather than attempt to raise again their concerns with Abetta and Mr Robinson, they decided to repudiate the lease and handed the keys to the agent and left the premises when the lease still had 2 years to run. In this context it should also be noted that on 5 May 1998 the lessees had taken steps to attempt to sell the business and had listed it for sale with an agent who had extensively advertised it for sale. The lessees asserted that this was merely an attempt to determine whether there was any prospective purchaser available and they created the impression in the course of evidence that they were only half-hearted in their proposal to dispose of the business. We note in this context that the lessees had espoused a most sophisticated plan for the development of their business and that the move to larger premises was part of a nine year plan, and a part of the projected -- 16 of 17 -- Carr-v-Chen & Ors 17 Decision development. It is curious that in that context the lessees would contemplate the sale of the business after a relatively short time in Shop 5. There is little doubt that they were upset by the extent of the water entry in February and April 1998. On the other hand, by June of that year Abetta planned positive steps to address the problem. Their proposal in May to sell the business seems inconsistent with their original proposals in respect of it. Their decision in August to simply walk out is even more inconsistent with what they had proposed. The lease had at least two years to run but it was repudiated by them without any real explanation. If it was the result of concern about water problems then it was competent for them to again have Abetta address the issue and to persist in having further work done. Rather than pursue the matter, they simply left the premises, sold the stock to another outlet and handed in the keys to the office of the agent. There was evidence concerning outstanding rent from time to time. We cannot confidently make a finding in relation to that part of the evidence. Nor in our view is it relevant that we should. Again it is not for the Tribunal to determine the entitlement or otherwise of the lessees to repudiate their contract with the lessors. Accordingly we are of the view that the circumstances of this case are such that the lessees are not entitled to reasonable compensation pursuant to section 43 of the Act. There is no proper basis on the evidence for the Tribunal to conclude that the lessees are entitled to compensation pursuant to either sub-paragraph (d) or (e) of section 43(1) of the Act. Hon W J Carter QC, Chairman. -- 17 of 17 --