DS Queen Street Mall Pty Ltd v Tortilla Enterprises Pty Ltd & Ors [2004] QDC 365

DISTRICT COURT OF QUEENSLAND CITATION: DS Queen Street Mall Pty Ltd v Tortilla Enterprises Pty Ltd & Ors [2004] QDC 365 PARTIES: DS QUEEN STREET MALL PTY LTD (ACN 070 411 022) (Plaintiff/Respondent) V TORTILLA ENTERPRISES PTY LTD (ACN 079 129 856) (First Defendant/Applicant) AND SHARON MOUGRABI & SALLEYANNE ELANOR JURKOV (Second Defendant) AND VICKI MATILDA BOBROVIZKI (Third Defendant) AND WATSON INVESTMENTS PTY LTD (ACN 096 826 907) (Fourth Defendant) FILE NO/S: 493/04 DIVISION: Civil PROCEEDING: Application ORIGINATING COURT: District Court DELIVERED ON: 1st October 2004 DELIVERED AT: Brisbane HEARING DATE: 8th September 2004 JUDGE: Forde DCJ ORDER: 1. The application for summary judgment is dismissed. 2. It is ordered that the applicants, the first and second defendants do pay the costs of and incidental to this application to be assessed. 3. Liberty to apply as to further directions if necessary. CATCHWORDS: EQUITABLE ASSIGNMENT OF LEASE – SURRENDER OF LEASE – Covenants – Continuation of lease – Non- -- 1 of 15 -- 2 compliance with terms of lease - Compromise Uniform Civil Procedure Rules (Qld) 1999, ss5, 293. Bernstrom v National Australia Bank Ltd [2003] 1 Qd R 469 at 475. Estate Gazette Ltd. V Benjamin Restaurants Ltd and Anor. [1993] 4 All ER 367 at 370. Haidar v Blendalt Pty Ltd [1993] 2 VR 524. Konica Business Machines Australia Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687. National Bank of Australia v Hart [2002] QSC 51. Molina & Anor v Leask & Anor (1998) NSWSC 2293/93. Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. Woodfall on Landlord & Tenant 25th Ed. COUNSEL: Mr P Hackett for the Applicants/First and Second Defendants Ms K Offerdahl for the Plaintiff/Respondent SOLICITORS: Michael Sing Lawyers for the Applicants/First and Second Defendants Raj Lawyers for the Plaintiff/Respondent Introduction [1] The plaintiff seeks to recover monies owing for rent payable by the first defendant as a tenant of property owned by the plaintiff being Shop E140 (the “premises”) at the Wintergarden Shopping Centre and Hilton Hotel in Brisbane (the “shopping centre”). [2] The second defendants are the guarantors of the lease which was for a period of five years commencing on 18 November 1997 and expiring on 17 November 2002 (the “lease”). The sum sued for against the first and second defendants (the “applicants”) is $100,389.25. [3] On or about 16 June 2000, the first defendant sold the business being operated from the premises to Hound Dog Australia Pty Limited (“Hound Dog”). By a deed of assignment dated 16 June 2000 all relevant parties agreed to assign the lease to -- 2 of 15 -- 3 Hound Dog. Clauses 3.1 and 3.5 of the said deed of assignment provided that the first and second defendants would not be released from their obligations under the lease and guarantee respectively. [4] On or about 18 May 2001, the administrators of Hound Dog sold the business being operated from the premises to the fourth defendant. It is pleaded in the Statement of Claim (paras.19 and 20) that it was a term of the contract of sale that Hound Dog’s rights in the enforcement of the lease would be assigned to the fourth defendant. Further that the plaintiff by its conduct in allowing the fourth defendant to continue in occupation of the premises and pay rent and associated charges did ratify the assignment of the lease by Hound Dog to the fourth defendant. It has been argued that this was an equitable assignment. Issues in the case [5] The applicants argue that there was a surrender of the said lease by the conduct of the plaintiff. As evidence of this, the applicants point to the pleading of the plaintiff which alleges in the alternative a monthly tenancy with the fourth defendant.1 Also, the action against the fourth defendant was compromised thereby releasing the second defendants as sureties. [6] The plaintiff relies upon clauses 3.1 and 3.5 of the Deed of Assignment to Hound Dog which provide as follows: “Continuation of Tenant’s Obligations 3.1 The Landlord and Tenant agree that: 1 (para 21A of the statement of Claim). -- 3 of 15 -- 4 (a) the assignment of the Lease to the New Tenant with the Landlord’s consent;; and (b) the New Tenant’s obligations under the Lease and this deed do not in any way release the Tenant from the performance of the Tenant’s obligations expressed or implied in the Lease. Continuation of Guarantor’s Obligations 3.5 The Landlord and the Guarantor agree that: (a) the assignment of the Lease to the New Tenant with the Landlord’s consent; and (b) the New Tenant’s obligations under the Lease and this deed; and (c) any guarantee or guarantee and indemnity of the New Tenant’s obligations provided by another party Do not in any way release the Guarantor from the performance of The Guarantors’ obligations expressed or implied in the Guarantee.” [7] Of relevance also, is clause 3.4 of the guarantee executed by the second defendants and which is part of the said lease2: “3.4 the liability of the Guarantor shall not be affected notwithstanding any of the following circumstances: (a)… (b)… (c) … (d) any composition, compromise, release, discharge, arrangement, abandonment, waiver, variation, relinquishment or renewal of any security or right by the Landlord, (e) … (f) any variation, amendment or addition to the terms of the Lease (whether with our without the consent or knowledge of the Guarantor), (g) any transfer or assignment of the Lease or any sub-lease of the Shop (whether with or without the consent of the Landlord), (h) any determination of the Lease (whether by effluxion of time, re-entry, forfeiture, surrender or otherwise), (i) any absolute or partial release of the Tenant or any Guarantor or any co compromise with the Tenant or any Guarantor, or (j) …” 2 (Ex. A to the affidavit of Mr. Grealy filed 7 September 2004) -- 4 of 15 -- 5 Factual background [8] For the purposes of this application, the applicants rely on the facts as presented in the material of the plaintiff. In the first instance, the applicants submit that the lease required the tenant to give one month’s notice of a desire to transfer the lease. It was submitted that that was not done. Reference was made to the fact that other requirements of clause 4.1.2(b),(c),(d),(e), (g) and (h) were not satisfied. Clause 4 of the lease provided as follows: “Prohibited Dealings 4.1.1 The tenant must not sublet or permit another person to occupy or use the Shop. Transfer conditions 4.1.2 The Tenant may only transfer this lease if, before it transfers, it gives the Landlord at least one (1) month’s notice of its desire and: (a) The Tenant satisfies the Landlord that the proposed new tenant is is respectable and financially sound with experience in and a good reputation for conducting a business permitted under this lease; and (b) The Tenant gives the Landlord a copy of any contract relating to the sale of the Tenant’s Business to the new tenant and provides any other details relating to the sale reasonably requested by the Landlord; and (c) the Tenant, proposed new tenant and any person that has given a guarantee in respect of the Tenant’s obligations under this Lease sign a deed (in a form reasonably required by the Landlord) in which: (i) the new tenant agrees to be bound by this lease as if it were the Tenant; and (ii) the Tenant acknowledges that it continues to be bound by this lease; and (iii) the Tenant releases the Landlord from all claims and demands which the Tenant may then have against the Landlord arising from this lease (other than claims and demands which the Tenant has given the Landlord notice of prior to the time that the Tenant signs the deed); (iv) If there is a guarantor, the guarantor acknowledges that guarantee or guarantee and indemnity given by the guarantor is not affected by transfer of this lease; and -- 5 of 15 -- 6 (d) any guarantee or guarantee and indemnity reasonably required by the landlord is provided; and (e) the Landlord has obtained any consents it has agreed with other persons to obtain; and (f) any default by the Tenant has been remedied by the Tenant or waived by the landlord; and (g) if the Tenant has provided a Bank Guarantee, the new tenant provides a Bank Guarantee in accordance with Clause 1.8; and (h) the Tenant and proposed new tenant comply with all the Landlord’s reasonable requirements including a requirement for the new tenant’s business plan and an up to date statement of its assets and liabilities prepared and signed by a public accountant.” [9] The applicants submit that there was a failure by Hound Dog and the fourth defendant to comply with the terms of the lease as assigned. Further, it was submitted that in view of the plaintiff not being a party to these arrangements there could be no equitable assignment. The administrators of Hound Dog wrote on 22 May 2001 to the plaintiffs informing it that the fourth defendant has acquired the business of Hound Dog.3 It was conceded that the plaintiff adopted those arrangements4. A Deed of Consent and Assignment was sent to the plaintiff in June 2001.5 Any failure to comply with clause 4.1.2 was overtaken by subsequent events. [10] In its reply dated 3 July 2001, the plaintiff indicated the terms upon which it would be prepared to consent to the proposed deed6. A deadline of 20 July 2001 was set. None of the conditions were complied with by that date. The fourth defendant never signed the proposed Deed. The request for payment of arrears was in the sum of $27,119.72. [11] In a letter dated 9 July 20017, the solicitors for the fourth defendant maintained that the only point of contention was the payment of the arrears of rent. In its reply, the 3 (Exhibit D to the affidavit of Mr.Knapp) 4 (p.9.42 of transcript). 5 (Ex.E to the affidavit of Mr.Knapp) 6 (Exhibit H to the affidavit of Mr. Knapp) -- 6 of 15 -- 7 plaintiff said that subject to the fulfilment of all of the other conditions listed in the letter of 3 July that it would not insist upon payment of the pre administration arrears of $9,723.97. Counsel for the applicants submits that by not insisting upon payment they waived it and thus were acting outside the express terms of the lease as assigned. [12] Thereafter, matters become somewhat problematical. In a letter dated 12 July8 the plaintiff notes that “if the assignment is to proceed the documentation to be executed by the Administrator should naturally be signed by him prior to that meeting.” In a letter of 10 August9, the plaintiff seeks to know the status of the assignment. Then in a letter dated 23 August10, the solicitors for the fourth defendant seek a copy of the lease. It was further stated that the Administrator had signed the assignment, but they had not received a copy of the lease. [13] In a letter dated 27 August 200111, the plaintiff stated that “it was in reliance on that statement of yours that your client was allowed to take occupation of the premises. He has since then been charged, and paid, rent in accordance with the lease.” It was pointed out that all “that had been required to formally complete the transaction was for the return of the executed documentation in the form that had been agreed upon by all parties.” The plaintiff was still willing to proceed to give effect to the arrangements. [14] The lease referred to in the Deed of Consent to Assignment of Lease was the lease entered into between the plaintiff and the first defendant12. 7 (Ex. “J”) 8 (Ex. “L”) 9 (Ex. “M”) 10 (Ex. “N”) 11 (Ex “O”) 12 (para.1 of Deed attached to the letter Ex.”H”) -- 7 of 15 -- 8 [15] The fourth defendant seems to have occupied the premises from about May or June 2001 until 26 June 2002. Findings of fact [16] There was nothing in the material which would indicate that the plaintiff no longer believed that the said lease was no longer in existence. Its conduct was quite to the contrary: a. In its dealings with the fourth defendant, it referred to the original lease as the lease to be given effect to. b. It was insistent that the Deed be signed which would have given effect to the lease with the first defendant as still being on foot. This was even after the deadline date of 20 July. c. It required a Guarantee and Indemnity as part of the said Deed d. It only waived the pre administration arrears of $9,723,97 when it was realised that the administrator could not be liable for those arrears. e. The plaintiff made it clear that it would not have allowed the fourth defendant possession if it was not going to execute the Deed. There was a common intention to execute the Deed up until 7 September 200113 or at least 9 July 200114. The solicitors for the fourth defendant apologised for the delay on 23 August 13 (Ex.“P) 14 (Ex.”I”) -- 8 of 15 -- 9 stating that their client’s principal Mr.Watson had been involved in a motor vehicle accident15. [17] The applicants contend that by allowing a third party to go into possession of the whole of the premises and to charge them directly for rent and to collect it was to surrender the lease. Also, by allowing the fourth defendant to continue in possession after non-compliance with the 20th of July deadline was contrary to an assignment. The applicants rely upon that pleading as evidencing a surrender of the original lease between the plaintiff and the first defendant. Application of the facts to legal principles Equitable Assignment [18] An assignment for value which is not a legal assignment will be found to be an assignment in equity where there is either written evidence or part performance of that assignment16. In the present case there was both written evidence of the agreement and part performance. The fourth defendant took possession of the premises and paid rent in accord with the lease. The fourth defendant was aware that the transaction involved the transfer of the existing lease. The parties should be placed in the position as if there had been a legal transfer of the lease. In the present case, the plaintiff was involved in the proposed assignment to the fourth defendant. [19] It has been argued that the plaintiff by pleading a monthly tenancy has admitted the surrender of the lease. An alternative pleading does not prevent a finding on the principal issue. The fact that the fourth defendant took possession of the premises and continued to do so does not mean that there was no equitable assignment. In 15 (Ex. “N”) -- 9 of 15 -- 10 Molina’s case, the assignee Mr. Leask was in possession for some four months before he vacated. It did not follow that the court was precluded from finding an enforceable equitable assignment. Non-compliance with terms of lease [20] It was argued that under the terms of clause 4.1 of the said lease there was non- compliance in relation to the transaction between Hound Dog and the fourth defendant and the plaintiff. That may be the case, but there was an agreement to comply. The signing was not effected. The provisions of clause 3.1 and 3.5 of the original assignment by the first defendant and clause 3.4 (f) of the guarantee as set out above would be of relevance in this respect. Upon a valid assignment any such non-compliance as alleged would be more than covered by these clauses and consistent with no surrender of the lease. Compromise [21] It was suggested that there was a compromise of the pre-administration arrears. Clause 3.4 (d) of the guarantee seems to envisage such a compromise. Alternatively, clause 3.4(i) allows a partial release of the tenant. A tenant for the present purposes would include an assignee of the first defendant’s lease. [22] The action against the fourth defendant was also compromised. An application of clause 3.4(d) of the guarantee would have the second defendants liable in any event. The first defendant is bound by the covenants in the lease. 16 Per Santow J. Molina & Anor. v Leask & Anor. BC 9800182 Supreme Court of NSW 6 February 1998 p.4, affirmed on appeal Leask & Anor v Molina & Anor (1999) NSWCA 14. -- 10 of 15 -- 11 Liability of applicants to the plaintiff [23] The ongoing liability of the applicants under the original assignment to Hound Dog is not in issue. It is the proposed assignment from Hound Dog to the fourth defendant which is in dispute. Usually the applicants would continue to be liable under subsequent assignments such as in Molina’s case17. This would be subject to an express Deed of Assignment to which the plaintiff was a party. Privity of contract between the plaintiff as lessor and the first defendant as lessee is a continuing liability which is usually unaffected by an assignment of interest18. If the proposed assignment with the fourth defendant had been signed the liability of the applicants would have been continuing. It would have given effect to the original lease and the continuing obligations of the applicants pursuant to clauses 3.1 and 3.5 of the Deed of Consent to Assignment of Lease dated 16 June 2000 and 3.4(g) of the guarantee attached to the original lease. The contractual obligations of the first defendant as the original lessee to the plaintiff as the original lessor are to continue regardless of the relationship created between the first defendant and Hound Dog and subsequent assignees. It follows that the second defendants as guarantors are also liable. Nature of Application [24] This application is made pursuant to s.293 of the Uniform Civil Procedure Rules 1999. That rule provides as follows: “(1) A defendant may, at any time after filing a notice of intention to defend, apply to the Court under this part for judgment against the plaintiff. (2) If the Court is satisfied:- 17 op. cit. -- 11 of 15 -- 12 (a) the plaintiff has no real prospects of succeeding on all or a part of the plaintiff’s claim: and (b) there is no need for a trial of the claim or the part of the claim the court may give judgment for the defendant against the plaintiff for all or part of the plaintiff’s claim and may make any other order the court considers appropriate” [25] The plaintiff need only show that there is a realistic as opposed to a fanciful prospect of success of the plaintiff’s claim19. In the present case the plaintiff has more than a realistic prospect of succeeding against the applicants. The following findings are open on the undisputed facts and the law as applicable: a. There is no requirement that the applicants be signatories to any proposed assignment to the fourth defendant. The contractual obligations of the original lessee to the lessor can continue regardless of the relationship created between the lessee and the initial assignee, and subsequent assignees20. Once the fourth defendant defaulted under the lease, then the first defendant must accept liability according to the lease. It was conceded that it would not matter that the applicants were not intended to be parties to the proposed deed involving the fourth defendant21. If there was an assignment, they would be liable. b. The assignment of a lease does not discharge a lessee from the covenants in the lease and relevantly the guarantor in a lease/guarantee as found in the 18 Molinas case p.8-9 19 Bernstrom v National Australia Bank Ltd [2003] 1 Qd R 469 at 475. 20 Molina’s case op. cit.p.9. 21 Per transcript p. 11.2. -- 12 of 15 -- 13 present case22. In some cases unlike the present case, there is no express covenant in the documents to preserve the rights of the parties.23 Any assignment of a lease by an existing tenant to a third party means that privity of contract will still remain between the landlord and the existing tenant, the contract being the duly executed lease24. If the new tenant, for example by non-payment of rent, breaches the lease, the original tenant will be still liable for breach of contract. The original tenant continues to be personally liable on covenants in the lease. c. There is sufficient evidence presented on the application to find that the agreement between the plaintiff and Hound Dog and the fourth defendant probably amounted to an equitable assignment of the lease25. The failure to comply with s.11 of the Land Title Act 1994 or s.11 of the Property Law Act does not prevent a finding of an equitable assignment.26 The equitable doctrine of part performance will excuse such a failure.27 In the present case the payment of the rent by the fourth defendant pursuant to the lease and the entry into possession are sufficient acts of part performance28 (paras. 24-25 affidavit of Mr. Knapp and Annexure A to the affidavit of Mr. Grealy filed 7 September 2004). It was conceded that if there was such a finding of equitable assignment, then the applicants’ are “arguably liable”. That is the position which I have reached in the present case. The failure to enforce the proposed assignment does not change its nature. The waiver of the pre-administrative arrears does not take the matter further. It 22 Per Molina’s case. 23 Estate Gazette Ltd. V Benjamin Restaurants Ltd and Anor [1993] 4 All ER 367 at 370. 24 Haidar v Blendalt Pty Ltd [1993] 2 VR 524. 25 Molina’s case op. cit. p.4. 26 Walsh v Lonsdale (1882) 21 CRD 9; York House Pty Ltd v FCT (1930) 43 CLR 427 at 436. 27 Walton Stores (Interstate) Ltd v Maher & Anor (1987-88) 164 CLR 387 at 452, 445-6. 28 Woodfall on Landlord & Tenant 25th Ed, para. 411. -- 13 of 15 -- 14 was not argued that the sum of $9,723.97 is part of the present claim. The applicants would be entitled to seek indemnity from Hound Dog if it were. In any event, the provisions of the original lease/guarantee envisage a compromise or waiver op. cit. clause 3.4(d). d. I am not satisfied on the present evidence that there was a surrender of the lease by the plaintiff. The fact that the fourth defendant was in possession for a longer period than the new assignee/tenant Mr. Leask in Molina ‘s case29 has not been fully explored in the present case. However, it does not follow that the plaintiff has unequivocally surrendered the lease because of the longer period of possession by the fourth defendant30. It was argued that then tenancy between the plaintiff and the fourth defendant became a monthly tenancy. It was conceded that the period from 18 May 2001 when the fourth defendant took possession and 20 July 2001 which was the initial deadline imposed by the plaintiff was a negotiation period31. However, apart from the lapse of time, on the material before me, there is nothing to indicate that the plaintiff surrendered the lease. In negotiations, the plaintiff insisted on the assignment and a guarantee to be executed by Mr. Watson as part of the Deed of Consent to Assignment of Lease32. It was submitted by counsel for the applicants that the fourth defendant was in possession of the premises “since 18 May… 2001 … charged and paid rent in accordance with the lease”.33 That submission is more consistent with a continuation of the original lease than a surrender of it. 29 Op. cit. 30 Konica Business Machines Australia Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687 at 695-697. 31 Per transcript 13.40. 32 Ex.”F” to the affidavit of Mr. Grealy filed 7 September 2004. 33 Per transcript p.12.55 -- 14 of 15 -- 15 Pleadings [26] Reference was made to the fact that the pleadings by the plaintiff do not rely on the assignment to Hound Dog as part of the claim. The assignment is referred to in paras. 12A and !2B. As conceded by the applicants’ counsel a simple amendment to rely on those paragraphs would remedy the omission. This application should not be determined on a pleading omission34. Further evidence [27] The plaintiff’s position on this application is that there is further oral evidence which would assist its case. The nature of such evidence is unknown. On the present facts which have not been disputed by the applicants, it is clear that the application for summary judgment under rule 293 must fail. The applicants have failed to discharge the onus of proof to establish that the plaintiff’s prospects of succeeding are so slim as to be fanciful35. If the matter does proceed further, then the plaintiff is entitled to adduce further evidence. Orders 1. The application for summary judgment is dismissed. 2. It is ordered that the applicants, the first and second defendants do pay the costs of and incidental to this application to be assessed. 3. Liberty to apply as to further directions if necessary. 34 see rule 5 UCPR. 35 National Bank of Australia v Hart [2002] QSC 51. -- 15 of 15 --