Battik Pty Ltd (Acn 070 032 905) v Hawkesbury Nominees Pty Ltd (Acn 008 500 178) & Ors [1999] ACTSC 55 (8 June 1999)

Last Updated: 6 October 1999

BATTIK PTY LTD (ACN 070 032 905) v HAWKESBURY NOMINEES PTY LTD (ACN 008 500 178) & ORS [1999] ACTSC 55 (8 June 1999)

CATCHWORDS

LEASE - covenants in - express covenant for lessee's quiet enjoyment of premises - whether breach of covenant by lessor - whether lessor's conduct interfered with lessee's use of premises - conduct of lessor causing reduced efficiency and profitability of lessee's business.

LEASE - assignment of - whether lessee to take premises as found on assignment - whether lessee's implied rights transferred on assignment.

LEASE - termination - whether repudiation of lease by lessor or lessee - whether intent to abandon possession of premises by lessee - acts constituting repudiation.

DAMAGES - termination of lease by lessee - lessor's entitlement to damages - circumstances surrounding lessee's repudiation of lease - lessee's repudiation justified - lessor's right to damages restricted accordingly.

Moore v Western Australia [1907] HCA 56; (1907) 5 CLR 326, referred to

Goldsworthy Mining Ltd v Commissioner of Taxation (Cth) [1973] HCA 7; (1973) 128 CLR 199, referred to

Duke of Westminster v Guild [1983] EWCA Civ 1; [1985] 1 QB 688, distinguished

Burnard v Lysnar [1927] NZLR 757, mentioned

Measures v McFadyen [1910] HCA 74; (1910) 11 CLR 723, mentioned

Brilee Consultants Pty Ltd v Tibal holdings Pty Ltd (1985) NSW ConvR 55-255, distinguished

Telex (Australasia) Pty Ltd v Thomas Cook & Son (Australasia) Pty Ltd [1970] 2 NSWR 257, considered

Haig v Chesney [1925] SASR 82, applied

Baier v Heinemann [1962] Qd R 192, applied

Martins Camera Corner Pty Ltd v Hotel Mayfair Ltd [1976] 2 NSWLR 15, applied

Reid House Pty Ltd v Beneke (1986) 5 ACLC 451, referred to

Gordon v Lidcombe Developments Pty Ltd [1966] 2 NSWR 9, doubted

Bradford House Pty Ltd v Leroy Fashion Group Ltd (1983) ATPR 40-387, distinguished

Lend Lease Development Pty Ltd v Zemlicka [1985] 3 NSWLR 207, applied

Aussie Traveller Pty Ltd v Marklea Pty Ltd [1998] 1 Qd R 1, followed

Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, applied

Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620; 56 ALJR 793; 42 ALR 305, applied

No. SC 193 of 1996

Judge: Higgins J

Supreme Court of the ACT

Date: 8 June 1999

IN THE SUPREME COURT OF THE )

) No. SC 193 of 1996

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: BATTIK PTY LTD

(ACN 070 032 905)

Plaintiff

AND: HAWKESBURY NOMINEES PTY LTD (ACN 008 500 178)

First Defendant

and: DEBRA NOMINEES PTY LTD (ACN 008 500 016)

Second Defendant

and: NECTARIA NOMINEES PTY LTD (ACN 008 500 007)

Third Defendant

and: PATRICIA LAURIAN LENFIELD, IVAR LENFIELD and SIMON BRITTON

Third Parties

ORDER

Judge: Higgins J

Date: 8 June 1999

Place: Canberra

THE COURT ORDERS THAT:

1. There be judgment for the plaintiff in the sum of $130,000 with interest of $38,400 - a total sum of $168,400.

2. The claim of the first, second and third defendants against the third parties be dismissed.

1. The plaintiff, Battik Pty Ltd (Battik) on 22 November 1995 took an assignment from Gregory John Williams and Michael Andrew Brayshaw of a sublease (the lease) of premises situated in the basement of 8-10 Hobart Place, Canberra City (the premises). The defendants are the proprietors of the Crown lease over the whole of the building of which the basement area forms a part. I will refer to the defendants collectively as "the lessor".

2. The premises have, for many years, been used for the purposes of a restaurant. Messrs Williams and Brayshaw had, before 22 November 1995, conducted a restaurant from the premises, under various names, since 1990. At the time they sold their business to Battik it was known as Vivaz.

3. Battik was owned by Mrs Patricia Lenfield, Mr Ivar Lenfield and Mr Simon Britton. None of them was a restaurateur. Mr Britton was engaged to Mr and Mrs Lenfield's daughter, Keli. Mr Britton also had a business involvement with a restaurant at Manuka called Roberto's. In that business he was involved with Mr Simon Lignieres. The latter was a chef and had experience in managing Roberto's restaurant. He had previous restaurant experience. Roberto's had suffered extensive fire damage and had, as a result, closed for renovations. Messrs Britton and Lignieres were attracted to the prospect of running a restaurant from the premises. Mr and Mrs Lenfield were attracted by the prospect that such a business would provide employment for both Keli and her younger brother, Brock. The latter two were each interested in pursuing a career in the hospitality industry. Mrs Lenfield would provide bookkeeping skills.

4. An agreement was entered into between Battik and Weagle Pty Ltd (Weagle). The latter was a company owned by Messrs Britton and Lignieres. It agreed to manage the restaurant business to be known as Cascades on Battik's behalf.

5. The disposition of the anticipated revenue was dealt with in the following terms. Weagle agreed to:

"on the first day of every month pay to the lessee [Battik] a sum equal to all the monthly expenses due that month and incurred by the lessee in respect of the restaurant including, but not limited to, the monthly rent payable on the restaurant premises; loan repayments on moneys borrowed to finance the purchase and refurbishment of the restaurant; and costs incidental to the operation of the restaurant - with any remaining profits disbursed by agreement reviewed monthly between the operator [Weagle] and the lessee."

6. The agreement did not address the issue as to how losses would be apportioned. It did not specifically refer to whether remuneration for Mr Lignieres' services was to be paid from "monthly expenses" or from the "remaining profits".

7. The terms of the sale of Vivaz were that in consideration of $30,000 paid by Battik, the vendors transferred all their interest in the business conducted on the premises including tenant fixtures and fittings. The vendors also disclosed an inspection report from the Department of Health. That report detailed remedial work which was required to be done. It was dated 25 May 1995 and required various remedial works within periods ranging from twenty-four hours to three months. However, despite the peremptory tone of this notice, it did not appear to have been followed up. It seems that all or most of the work remained to be done. However, that did not concern Battik as it intended to renovate the premises in any event. None of the identified defects seems relevant for the purposes of these proceedings.

8. There was an inventory of plant and equipment. It is relevant that the exhaust system is referred to only as "4 filter exhaust hood with 4 new filters".

9. It appears that between 14-16 August 1995, the lessor had at their own expense, relocated the exhaust fan which was, though external to the premises, in the basement area, to the roof of the premises. The exhaust system was ducted to the roof. The lower position of the fan had meant that odours from the restaurant dissipated up the exhaust ducting more slowly and were detectable by other tenants. The relocation was intended to more effectively exhaust odours and fumes in the ducting system and thus avoid annoyance to other tenants.

10. It is the exhaust system and its efficiency or otherwise which is the issue central to this litigation.

11. In its statement of claim, Battik alleged that the exhaust and air-conditioning systems were defective. It further alleged that the lessor failed to remedy those defects. The effect of this was said to have been that the premises could not be safely or effectively operated as a restaurant.

12. That, in turn, was alleged to have led to financial loss.

13. Battik further claimed, as a result, to have been entitled to terminate the lease and to have done so from 26 June 1996.

14. A further claim relates to an auction of tenant possessions and fixtures held on 24 June 1996. It is alleged that, after the auction, the lessor denied access to the premises so that purchasers could not obtain possession of the goods in question. Nor was Battik able to obtain possession of unsold goods. Battik claims damages for conversion of the retained goods.

15. By way of defence, the lessor claims that the exhaust system, inclusive of the fan and ducts, were tenant fixtures. Thus, they contended, they had no responsibility for its functioning or for any shortcomings therein. They further contended that, even if the air-conditioning system was defective, the lease (cl 23) denied any right to determine the lease or even to claim damages in respect thereof. As to the goods allegedly converted, the lessor denied that they refused access but conceded that they demanded payment of rent to date and reinstatement of the bank guarantee pursuant to cl 28 of the lease before granting such access. By way of set-off, the lessor complained that Battik had not paid rent from January 1996. That claim, of course, is limited to the period ending on 25 June 1996 when the lessor resumed possession of the demised premises.

16. The lessor further claims that, on 24 June 1996, Battik held an auction of the contents of the premises. That, it is alleged, was a breach of cl 5(c)(6) of the lease. It is further alleged that on 25 June 1996 there was an attempt to remove "trade fixtures" from the premises, contrary to cl 9 of the lease.

17. Each of these matters is alleged to have amounted to a repudiation of the lease, accepted by the lessor on 25 June 1996. Battik was "locked out" as from 26 June 1996.

18. It is further alleged that the attempts by Battik to remove fixtures caused damage to the premises and that, in any event, the premises were not yielded up in the state required by cl 8 of the lease.

19. Arrears of rent and damages are claimed.

20. In reply Battik says it had been denied "quiet enjoyment" thus relieving it of the obligation to pay rent. It agrees that it attempted to remove its goods but contends that if there was damage, the lessor prevented it from attending to make good that damage.

21. It further raised an issue that if the extractor fan and ducting system was a tenant fixture, the lessor had "wrongfully interferred (sic)" with it.

22. That is alleged to have been a breach of the covenant contained in the lease for quiet enjoyment, as well as implied covenants that the premises would not be rendered unfit for use as a restaurant and that the lessor would not do or allow anything to be done which would be inconsistent with that purpose.

23. As against the third parties, Mrs Lenfield, Mr Lenfield and Mr Britton, the lessor claims indemnity pursuant to their guarantees of Battik's performance of the terms of the lease.

24. At the hearing, without objection, Battik amended its claim to rely upon alleged breaches of s 51A of the Trade Practice Act 1974 (Cth). The breaches alleged are misrepresentations made in November 1995 that:

* the premises were suitable for use as a restaurant; and

* the lessor would cause the exhaust system to be rectified "shortly".

The evidence

25. Mrs Patricia Lenfield gave an account of the negotiations with Mr Williams. She inspected the premises. She saw a number of freestanding fans. She asked why they were there. She was told, she says, that the exhaust system was not working. She was informed that the extractor fan had been moved to the roof by the lessor who was, however, fixing it. This conversation occurred, apparently, in October 1995.

26. Battik's owners met together and decided to purchase the business. The agreed price was $30,000 of which $20,000 was borrowed privately, the balance being borrowed from CPS Credit Union.

27. It was intended to refurbish the premises before they opened for business. The total cost of the refurbishment was not disputed. It was $69,586.12. The purchase costs were not disputed. Including stock and legal and other fees, the total was $37,365.

28. The premises opened for business on 14 December 1995 under the name Cascades. Mr Lignieres was to be chef and manager. Brock Lenfield was to be apprentice chef and waiter. Keli Lenfield would also be a waiter and do promotions. Mrs Lenfield was to do the bookkeeping.

29. The profit share with Weagle was intentionally left undetermined. It was intended that the launch of the business would be in the new year.

30. It seems that the trading period till then was intended as a "settling in" for the business.

31. However, Battik's expectations concerning the exhaust system were not met. It was not sufficient to cope with the smoke and heat when grilling or barbecuing meat.

32. At times the smoke would billow out into the bar area.

33. The kitchen had twelve burners but only four could be used at once. Mrs Lenfield complained, she said, to the lessor's agent. She was told, however, that negotiations with the lessor had "broken down".

34. The inefficiency of the exhaust system was not, it seems, attributable to any blockage or uncleanliness of the hoods or filters. They had been cleaned by professional cleaners on 4 December 1995.

35. Mrs Lenfield recounted one particular conversation with Mr Peter Sarris who was acting as the lessor's agent. In fact, his family, including himself, were the owners of the companies which were named as the lessor.

36. Mr Peter Sarris did not dispute the need for remediation of the system. He told Mrs Lenfield that he had engaged Stellar Engineering to fix the problem. He said "They're waiting on a pulley. I'm getting the run-around from Purves (the principal of Stellar Engineering). You might get a result. Ring him".

37. Nothing was said by Mr Sarris about the ownership of, or responsibility for, the efficient functioning of the exhaust system.

38. Mr Purves was contacted and did attend from time to time during December 1995 and January 1996. Apart from drilling holes and creating dust which caused the kitchen to be temporarily closed, Mr Purves effected no improvement in the performance of the exhaust system.

39. The restaurant capacity was 137. There was seating provided for eighty. It was intended, ultimately, to employ an additional chef and two kitchen hands. Generally, patronage was limited to twenty or thirty who could be catered for as a result of the inefficiency of the exhaust system. The menu was modified to reduce smoke.

40. After new year, in early January 1996, Mrs Lenfield again spoke to Mr Peter Sarris. He told her that there needed to be an "in line fan". The pulley hadn't worked. The new fan work would cost $3,500. He asked if she would contribute $900. Mrs Lenfield took advice and, as a result, told Mr Jim Sarris, brother of Mr Peter Sarris and a co-principal of the lessor companies, that Battik declined to accept that offer.

41. Mr Jim Sarris responded:

"Well, in that case, we won't do anything".

42. There were further negotiations. On 7 February 1996, Mrs Lenfield wrote to Mr Peter Sarris repeating her request for rectification of the exhaust system.

43. She stated:

"Due to the exhaust fan having been relocated, the restaurant has suffered unnecessary duress. We have lost staff due to the unbearable working conditions in the kitchen, this being more than two people at any time, in the kitchen the air flow (sic) is such that discomfort is extremely high. Once cooking starts, smoke and heat make it intolerable, followed by the fact patrons are subjected to the odour and smoke of cooking invading the restaurant. This being the case we have one chef and one kitchen hand working which limits the number of patrons we are able to cater to at any one sitting, hence losing custom and income."

44. Rectification was requested within seven days.

45. Mr Peter Sarris replied on 12 February 1996. The lessor's position was expressed as being:

"...we believe that the ownership and responsibility to exhaust kitchen smoke and fumes rest on yourselves as it is particular to your business."

46. Further, the lessor alleged:

"Prior to your purchase we had requested the previous owners of your restaurant to rectify the problem of odours exhausting into the upper levels of the building. When we realised nothing was being done and that the odours were effecting other tenants (who had become quite irate), we had no alternative and were obliged to stop the odours."

47. The lessor offered to remedy the situation only if Battik was prepared to accept an additional rent of not less than $500 per annum and the obligation to maintain the ducting.

48. By this time, the restaurant, though it had been launched, was operating at minimal capacity. Patrons were being turned away, though the restaurant was clearly not full.

49. On 16 February 1996, Battik's solicitors wrote to Mr Peter Sarris. They took the position that the exhaust system was a landlord's fixture. They advised that Battik was prepared to agree to the lessor's demand for additional rent provided that responsibility for the ducting and exhaust fan was to remain with the lessor.

50. Despite this compromise offer, consensus was not achieved.

51. Battik's solicitors wrote again to Mr Peter Sarris on 5 March 1996 reiterating their client's offer. It was not accepted.

52. On 2 March 1996, Mr Simon Lignieres had reported that, due to the conditions in the kitchen, he had fainted at work. He said he could not continue if the heat and fumes could not be rectified. A report of "Injury and Dangerous Occurrence" was filed pursuant to the Occupational Health and Safety Act 1989 (ACT) on 15 March 1996.

53. Mr Peter Sarris responded on behalf of the lessor on 6 March 1996. He reiterated that the lessor would not agree to Battik's offer unless Battik accepted responsibility for cleaning the ducting as well as the range hood and filters. Further, the lessor would not commence repair work in any event until arrears of rental were paid.

54. The fax machine ran hot. The same day, the solicitor for Battik responded reiterating their client's position, pointing out that there was no evidence as to who had previously accepted responsibility for the external ducting as between lessor and lessee. On 11 March 1996, they fired off a further salvo. The lessor was informed that any claim for arrears of rent would be resisted and met by a counter-claim for damages.

55. On 15 March 1996, two events occurred. Weagle terminated its management agreement with Battik as from 1 April 1996. This was on the grounds of intolerable working conditions. Solicitors for the lessor now entered the fray. They denied that any failure to rectify the exhaust system problem could be a breach of the lease. They noted that, although air-conditioning was referred to, the lease was silent as to the responsibility for the exhaust system. They noted rent was then $9154.00 in arrears.

56. A response was faxed forthwith. The location of the exhaust system external to the demised premises was highlighted. Legal action was threatened. Each side retreated behind rigid battle lines.

57. On 19 March 1996 there was not only a further letter evidencing further defiance by the lessor but also an inspection by Mr Michael Hayes, an occupational health and safety inspector, of the premises. He delivered an "improvement notice" to Mr Peter Sarris. He requested the lessor to produce:

"(1)...a report of exhaust ventilation air flow (sic) rates of the kitchen at Cascades (downstairs at) 8-10 Hobart Place, Civic. (2) If air flow (sic) rates are deficient, make necessary improvements. For reference see Australian Standard 1668.2-1991."

58. On 22 March 1996 the lessor called up Battik's bank guarantee to meet the alleged debt of $9154.00 for rental arrears.

59. The, by now, inevitable race to the court registry was won by Battik. It filed a writ of summons on 22 March 1996 alleging breach of the lease by the alteration of the airflow system and claiming damages flowing therefrom.

60. Mr Hayes had required remedial action by 27 March 1996. That did not occur despite a further proposal from Battik's solicitors faxed on 25 March 1996. That proposal depended on the lessor remedying the exhaust system. It was not responded to.

61. However, Mr Jim Sarris did obtain a report from Mr Mike Moon of Rynard Mechanical Building Services. It indicated that airflow was well below standard.

62. On 12 April 1996, there was a meeting with Mr Hayes. He indicated that a partial closing down of the range hoods so as to increase the airflow but restrict the use of the kitchen would be acceptable from a health and safety perspective. It was not acceptable to Battik. By letter dated 26 April 1996 its solicitors rejected the proposal on both economic and safety grounds.

63. On 6 May 1996, a further $1684 was paid to the lessor under the bank guarantee.

64. The lessor also discovered that part of the ventilation problem was a closed fresh air duct. This was part of the air-conditioning system. It did not affect the kitchen exhaust system. It improved conditions when it was opened but did not make the kitchen any more useable. After consultations with Mr Hayes, the lessor agreed that the only solution was a new fan. Mrs Lenfield was not happy with the situation that, until the new fan was installed, the kitchen could not operate effectively.

65. She sought advice from Mr Don Rowling of D A Rowling Engineering Services. He reported on 10 June 1996. He found the exhaust system inadequate even for "steaming". He noted that the non-operation of the air-conditioning system after hours would have exacerbated the smoky conditions within the kitchen area. Even so, he found the air-conditioning system needed improvement to provide an adequate supply of fresh air.

66. As a result of these considerations, Mrs Lenfield, with the concurrence of her co-directors, decided to close down the business and sell the fittings and fixtures. No-one from Battik, it seems, contacted the lessor to inform them of this development.

67. Battik engaged an auctioneer to conduct an auction. A number of persons attended to bid. Bids to the value of $15,292 were received. Some goods were taken immediately. The lessor, however, intervened in the latter stages of the auction process halting further removal of items, particularly fixtures. The net proceeds of the sales were $12,995. Commission was $2293.80, advertising $1185.77, rubbish disposal $50 and cartage $125 - a total of $3654.57. Items for which no bids were received were:

1 exhaust hood

1 SS sink and back plate

1 SS preparation bench w/-drawers

1 microwave stand

1 coolroom motor, condensor and door

4 shelves

1 Hobart sinkerator bench

1 half moon sign

68. The day of the auction, the lessor caused their solicitors to write a letter of protest to Battik's solicitors. They pointed out that cl 5(c) of the lease forbad any such auction. They asserted that Battik was informed that the lessor consented to continuation of the auction when they observed it already in progress provided that the lessee's fixtures were not to be removed without Battik "securing its obligation to make good any damage caused by the removal of the lessee's fixtures".

69. That obligation was already secured by Battik's covenant and the personal guarantee of its directors. The lessor, however, desired that the bank guarantee referred to in cl 28(d) be reinstated. Each of those matters was referred to as a breach of the lease. Additionally, attention was drawn to arrears of rental to that date of $9695 and to cl 9 of the lease. The latter was said to permit removal of fixtures only if arrears of rent were paid, the lease complied with and damage made good.

70. A letter dated 25 June 1996 followed, protesting about attempted removal of fixtures. The lessor's solicitors advised that, absent compliance with the previous request, the lessor proposed to take possession of the premises.

71. Battik's solicitors responded on 25 June 1996 having received the above correspondence. They asserted that Battik did intend to comply with cl 8 and 9. They did not, however, agree to meet the claim for security. Instead, they referred to the "poor airflow" and continued:

"...our client considers the problem with the airflow is a result of the breach of lease by your client. Our client accepts your client's repudiation of the lease and advised (sic) that it terminates all obligations in respect of the lease effective 26 June 1996. Our client will hand back all necessary keys in relation to the same but it will be seeking access to the premises to make good all damage as a result of removal of the tenant's fixtures pursuant to clause 9 of the lease."

72. Next day, the lessor made their position clear. Their solicitors took the view that the lessor had terminated the lease on account of the various breaches of the lease committed by Battik up to and including the auction. They made the point that,

"If your client had been prepared to consult with our client and indeed even sought our clients' consent to the proposed auction, our client may well have been able to assist in the purchase of your client's fittings and fixtures..."

73. They proposed the removal of certain of the remaining items, the rest to remain as an incentive to an incoming tenant.

74. Battik's solicitors agreed to leave the unsold fixtures but pointed out that property had passed to the purchasers of the remainder of the uncollected items. They agreed to the conditions for "making good".

75. Notwithstanding this uncharacteristic outbreak of possible harmony, on 23 July 1996 Battik's solicitors wrote again protesting that their client had been denied access to the premises to remove the fixtures which had been sold. They pointed out that this denial of access negated its opportunity to "make good".

76. On 26 July 1996, the lessor's solicitors explained their apparent intransigence. The lessor was only prepared to grant access to the premises if Battik "complied with its obligations under the lease".

77. It appears that, although the fan was, according to advice from Mr Jim Sarris to Mr Hayes, replaced on 12 June 1996, the system was still unsatisfactory as at 31 July 1996. Rynard Mechanical Building Services on that day reported to the lessor that satisfactory airflow could be achieved only if the ductwork was significantly straightened.

78. Mr Donald Rowling, mechanical engineer, had been engaged to inspect the exhaust system on behalf of Battik. In evidence he confirmed the terms of his report. The lessor's counsel did not challenge his expertise or conclusions. He concluded that the exhaust system could not cope with frying or barbequeing. It did not meet basic standards.

79. Mr Simon Lignieres, Ms Keli Lenfield and Mr Brock Lenfield each attested to the difficult working conditions. Ms Lenfield identified a list of a number of persons who were turned away due to the unsatisfactory air and exhaust system which limited the restaurant's capacity.

80. Mr Lignieres was the person primarily in charge of operations. He had had experience in not only managing a restaurant but also in cooking. He had had a licence agreement with Roberto's restaurant at Manuka. It had been turning over $19,000 to $24,000 weekly. It had seating for seventy to seventy-five inside and thirty to forty outside. In late December 1994, there was a fire which caused the premises to close. He was, therefore, attracted by the offer to run Cascades.

81. Shortly after the refurbishment of the premises, Mr Lignieres said he noticed the lack of fresh air. He contacted Messrs Peter and Jim Sarris. He showed them that the exhaust system was not effective, using a tissue which was not lifted by the exhaust even when placed under the range hood.

82. Mr Peter Sarris said he would look into the situation and see if they could get it fixed.

83. Mr Lignieres saw persons from Stellar Engineering conducting tests. They did not improve matters. Indeed, as I have noted in recounting Mrs Lenfield's evidence, all they succeeded in doing was creating various holes, dust and debris to such an extent that cleaners had to be called in before the restaurant could re-open for business.

84. Mr Lignieres did attempt to operate the restaurant to full capacity. He found, however, that if he used more than four burners of the twelve available, smoke and odours were too uncomfortable, even for diners, let alone for the cooks. Heat levels in the kitchen were also a problem.

85. He conceded that he had catered for a party of sixty-five hosted by the Sarris family. He styled the menu, he said, to cope with it.

86. The usual capacity, however, was thirty to forty-five over a dining period. He would, even so, need to ensure that there was not a build-up of orders, otherwise delay could become too great. This led to him instructing staff to turn patrons away. Most accepted their rejection without comment but many expressed bemusement at being turned away when there appeared to be adequate available seating space.

87. On the evening of 2 March 1996, it was a little busier than usual. The heat build-up in the kitchen was such that Mr Lignieres fainted. Thirteen days later he decided to report the incident to ACT WorkCover. He had expected there might be some improvement. There was not. He also gave notice of termination of Weagle's management agreement with Battik to Battik. He stated that, had the system been fixed he would have returned, even after the 1 April 1996 expiry date of that notice.

88. He identified some figures he had written down, detailing the number of patrons turned away though he conceded that they were not complete. He estimated that twenty to twenty-five people were turned away in total over a trading day.

89. It was suggested to him that the restaurant was, in effect, doomed to fail. While conceding the previous restaurant had, to his knowledge, been unprofitable, he felt that a "downstairs" restaurant could be operated profitably. He felt the price of the business, at $30,000, was "pretty cheap".

90. He agreed that he had attended the previous restaurant as a customer without noticing undue smoke or odours.

91. Notwithstanding the evidence of Mr Lignieres, Mrs Lenfield and of Keli and Brock Lenfield as to the kitchen conditions, the lessor did not concede that the conditions were intolerable or limited the viability of the restaurant business.

92. The lessor called Mr Edwin Sanchez as a witness. He had been a trainee chef. He had worked with the previous restaurant owners when the business was known as La Paella and then Vivaz.

93. Up to August 1995, he said, kitchen conditions were not a major problem. Only if all the ranges were being used did smoke and heat become a problem.

94. He worked, he said, for Cascades. His recollection was that the range hoods were usually adequate to extract smoke. Nor could he recall any customers being sent away because of lack of capacity to use the kitchen fully.

95. As to numbers of diners, he recalled up to 130 at a time had been catered for by La Paella and/or Vivaz. Cascades, he said, would have been "lucky" to get fifty diners at a session.

96. Mr Sanchez conceded that it was only shortly before the hearing that he had been asked to think about the smoke situation as it had been when he worked for Cascades.

97. It is significant, however, that he did recall the "tissue" test at which both the lessor's representatives and those of Battik were present. Those persons either agreed or, at least, did not dispute, that the range hoods when all were open and operating would not even cause a tissue to rise. Mr Sanchez purported to recall that the tissue flew up and stuck to the filters.

98. He also purported to recall that the restaurant opened Sundays. It had no customers on such days. However, he conceded he was not rostered on on Sundays. He also agreed that he had been unhappy about not being paid all of his wages.

99. In my view, Mr Sanchez was confused. He may have confused his time with Vivaz with his service with Cascades in some respects.

100. I do not consider that his evidence is to be preferred to that of the Lenfields and Mr Lignieres, each of whom impressed me as doing their best to tell the truth. Further, their evidence is substantially corroborated by Mr Hayes as well as by the correspondence between the parties and even by Mr Peter Sarris himself. Mr Sanchez's evidence is significantly at variance with all of that other evidence.

101. The evidence of Mr Gregory John Williams should be mentioned. He had commenced a Spanish-style restaurant on the premises in 1990. It had been named La Paella, then Vivaz.

102. He confirmed that originally the exhaust fan had been located outside the restaurant area but on the same level. Then the building owners (the lessor) decided to relocate it to the roof. There was, thereafter, an increase in smoke and heat in the kitchen.

103. The issue was raised with the lessor. Mr Williams said he suspected holes in the risers; that is, gaps in the joins in the ducting. Nothing was done to improve the situation. He did have a complaint once from customers adjacent to the kitchen. It was a "heavy" lunch. He could serve 120 people at a session with eighty to ninety at one time. He had installed a free-standing fan in the kitchen to alleviate the ventilation problem. He had not felt obliged to send persons away.

104. It will be observed that Mr Williams does corroborate Mr Lignieres' description of kitchen conditions. It is true that Mr Lignieres suggested a worse situation than did Mr Williams. However, it seems to me that two factors explain this. First, there is the season of the year. By December it was Summer. Second, if Mr Williams' hypothesis was right, then the gaps in the joins of the ducting he referred to were likely to have gradually grown. He did not corroborate the claim advanced on behalf of the lessor that he had been told by the lessor to fix the exhaust system but, without protesting that it was not his responsibility, had left it to the lessor to do so.

105. That the exhaust system had become faulty for the reasons supposed by Mr Williams is supported by the reason given by the lessor for moving the fan. They had complaints that odours were leaking from the ducting into areas occupied by other tenants. That had, it may be inferred, been a relatively recent phenomenon as at August 1995.

106. Also corroborating Battik's complaint was the evidence of Mr Hayes. He agreed with the complaint as to inadequate ventilation. Part of that inadequacy was due to the post 6.00 pm shutdown of the air-conditioning system. Mr Hayes had pointed that out to Mr Jim Sarris, who promised to remedy the situation. Indeed, it seems that he did remedy that deficiency relatively promptly thereafter. In any event, I do not think the air-conditioning deficience contributed significantly to Battik's problems. It is, therefore, unnecessary to consider the effect of cl 23 of the lease.

107. The improvement notice issued by Mr Hayes was revoked on 26 June 1996. The revocation was based on an assertion by Mr Jim Sarris that a new fan had been installed on 12 June 1996. Mr Hayes had required testing of the system as so modified but agreed to waive that requirement after Mr Sarris represented that the tenant had failed to give access to the premises for testing. There was no evidence supporting that assertion, though nothing turns on it for present purposes.

108. The premises were relet as a restaurant from 1 November 1996. A "BYO" Vietnamese restaurant now operates upon the premises, apparently successfully.

109. Mr Jim Sarris gave evidence on behalf of the lessor. The lessor had purchased the building in question in September 1994. The basement area was already let to Mr Williams and his partner. It was already being used as a restaurant. Mr Sarris agreed that the exhaust fan had been shifted by the lessor in August 1995 in response to complaints of odours from the kitchen made by other tenants.

110. He did not concede, however, that it had been the lessor's responsibility to maintain or repair the exhaust and ducting system. He did not suggest, however, that Mr Williams had led him to believe that he had accepted that it was the lessee's responsibility to do so.

111. After the fan relocation he agreed that Mr Williams had complained of "smoke" in the restaurant with a "full house".

112. Even at 1 July 1996, after the new fan had been installed, he conceded that the exhaust system was only achieving a volume rate of 1481 litres/second. 2500l/s was, he was aware, the Australian Standard. After 23 July 1996, he said, that standard was achieved following further remedial work. He did not give details as to what that work had been.

113. It was, Mr Sarris agreed, obvious that, unless the exhaust system had permitted the restaurant to operate at full capacity instead of less than one-third to one-half thereof, the restaurant would lose money.

114. Again, it is apparent that Mr Sarris's evidence is essentially consistent with that of the Lenfields and of Mr Lignieres. It is clear that the exhaust system was defective and its inefficiency was exacerbated by the lessor's actions in attempting to assuage complaints from other tenants.

115. The first issue to be determined is as to the responsibility for the exhaust fan and ducting system.

116. It is not disputed that Battik was responsible for and owned the range hoods, but they played no part in the inadequacy of the system.

117. The issue is whether, either because they had responsibility to repair and maintain the extraction system or because they altered it so as to reduce its efficiency, the lessor had breached the covenant for quiet enjoyment. If so, an issue arises as to whether Battik is entitled to any and what damages.

118. The next issue is as to whether the lease was wrongfully terminated by the lessor or by Battik. Dependent on the determination of that question is the issue as to whether the lessor is entitled to any and what damages as a result.

119. Finally, there is a separate issue as to the recompense, if any, which Battik is entitled to by reason of the partially aborted auction of 24 June 1996.

The implied term as to quiet enjoyment

120. The lease itself provides, at covering cl 6, "THE COVENANTS IMPLIED AT SECTION 119 AND 120 OF THE REAL PROPERTY ACT 1925 ARE HEREBY NEGATED." However, it also provides in cl 1:

"The covenants, powers and provisions implied in every Memorandum of Sublease by virtue of the Real Property Act 1925, or any amendment thereof are hereby expressly declared to be negatived or modified so far only as the same are inconsistent with the terms and provisions hereof."

121. The latter clause has priority over covering cl 6.

122. Clause 4 adds certain further "covenants and powers". Of relevance is the reservation of rights to the lessor to "enter and view" without notice but subject to reasonableness. The right to re-enter and determine the lease for arrears of rent or other breach is to be exercisable upon such default "continuing for seven days" (cl 4(d)). There is also a right of entry to carry out repairs "provided that the business of the Lessee shall not be unduly or unreasonably interfered with" (cl 4(e)).

123. Although neither s 119 nor s 120 of the Land Titles Act 1925 (ACT) implies any covenant by the lessor to give quiet enjoyment of the premises to the lessee, in the present case, cl 25(b) of the lease requires the lessor to give quiet enjoyment. That covenant may also be expressed as an obligation not to derogate from the grant: see Moore v Western Australia [1907] HCA 56; (1907) 5 CLR 326; Goldsworthy Mining Ltd v Commissioner of Taxation (Cth) [1973] HCA 7; (1973) 128 CLR 199.

124. The question in the present case was whether the lessor breached that covenant by their relocation of the exhaust fan with the consequential reduction in efficiency of the kitchen of the restaurant. I am satisfied that such a reduction occurred. I have found it likely that it was compounded by a gradual deterioration in the capacity of the joints in the ducting to prevent fumes leaking out. There was, therefore, a combination of a failure to repair the exhaust ducting system, a failure to operate the air-conditioning and fresh air ventilation systems satisfactorily, and the effects of the decision to relocate the exhaust fan in an attempt to minimise the leaks of odours from the ducting thereby exacerbating the inefficiency of the system at the range hood level.

125. Battik's counsel submits that it was a breach of the covenant in question to render the premises unfit for use as a commercially viable restaurant or, at least, to fail to keep the exhaust system in good repair so that the premises became unfit for such use.

126. The claims made in the amended statement of claim under the Trade Practices Act 1974 (Cth), s 51A, were not pressed in Battik's final submissions. That section of the Act provides that a representation made by a corporation as to future conduct where there are no reasonable grounds for the representation shall be regarded as misleading. The onus is on the corporation to demonstrate reasonable grounds.

127. It is clear to me that there was a representation by the lessor that it would cause the exhaust system to be fixed, though they denied responsibility for it. It was not fixed. Nevertheless, as Battik did not press the point in submissions, I do not propose to consider whether a breach of s 51A has, in fact, been made out.

128. In answer to the claim that the covenant for quiet enjoyment had been breached, the lessor relied on a number of submissions.

129. First, that the exhaust system was, in its entirety, a tenant fixture.

130. Second, that Battik should be required to take the premises as it found them to be on the assignment of the lease. Reliance was placed on Duke of Westminster v Guild [1983] EWCA Civ 1; [1985] 1 QB 688.

131. Third, that if there was a breach of covenant arising from moving the fan so as to reduce the system's efficiency, the right to sue for it was vested in the previous tenant and not transferred to Battik on assignment. Burnard v Lysnar [1927] NZLR 757 and Measures v McFadyen [1910] HCA 74; (1910) 11 CLR 723 were relied on.

132. Fourth, it was submitted that the covenant for quiet enjoyment did not extend to an obligation to keep the premises fit for use as a restaurant. Brilee Consultants Pty Ltd v Tibal holdings Pty Ltd (1985) NSW ConvR 55-255 was relied upon.

Was the exhaust fan a tenant fixture?

133. The lease itself is silent on the point. It is a question of fact. The lessor points to the fact that the system serves only the basement restaurant. However, it seems to me significant that the fan and ducting extend beyond the demised area. Without express authority, a lessee of the premises would have no right of access to the duct or fan whether for repairs or maintenance. The lessor, on the other hand, has a right of access to the areas through which the ducting passes and terminates. Further the lessor did, in fact, exercise such access by choosing to relocate the fan to the roof end of the ducting.

134. I therefore reject the contention that the duct and fan facility was a tenant fixture, notwithstanding a lack of evidence as to who first installed it. In my view, it was the lessor's property and it was their responsibility to maintain and repair it.

The contention that Battik should take the premises as they were on assignment

135. No express agreement to this effect exists between Battik and the lessor. It may well have been part of the agreement for assignment as between the previous lessee and Battik that Battik would take the premises as it found them. The lessor did consent to the assignment. That, however, effected no change in the rights and duties assigned by the previous lessee to Battik. The assignment would, however, not have included any rights vested in the previous lessee not capable of transfer to Battik. Thus, in so far as the previous lessee had suffered damage by reason of the relocation of the exhaust fan, any cause of action for the recovery of damages for the losses (if any) would not, absent express agreement, be transferred with the lease. However, if the lease implied a right to have the exhaust system maintained at an acceptable standard, that right would be a continuing one and would, necessarily, run with the lease.

136. It follows that whether the changes to the fan system made before assignment give any right to Battik to recover damages for the adverse effects of those changes, does not depend on the agreement for assignment with the previous lessee or the timing of that assignment.

137. Duke of Westminster v Guild [1983] EWCA Civ 1; [1985] 1 QB 688 was not concerned with the proposition that a tenant taking an assignment of a lease was obliged to take the premises as they were on assignment. Rather it was concerned with the scope of an obligation to repair the drainage system serving the demised premises. It also addressed the question whether a failure to repair such services, in the absence of a positive duty to do so, constituted a breach of the covenant for quiet enjoyment or was a derogation from the grant on the part of the lessor. In that case the lessees had been granted an easement to access drains for the purpose of repair. The lessees had covenanted to keep the premises in good repair. The lessors were entitled to carry out works on the drains if they chose to but had no positive obligation, express or implied, to do so. Although the drains were external to the demised premises the tenant had, at least implicitly, accepted the obligation to keep them in repair. There was no such agreement, express or implied in the present case.

138. Reliance was also placed upon Telex (Australasia) Pty Ltd v Thomas Cook & Son (Australasia) Pty Ltd [1970] 2 NSWR 257. In that case, the lessee had agreed to take a lease of premises for the purpose, inter alia, of using the premises for the sale and servicing of audiometric equipment. The lessor thereafter carried out necessary building works as required by the city council and installed an air-conditioning system which interfered with such equipment. The lessee complained that the premises had become unfit for its use. It refused to pay rent. The lessor obtained judgment for unpaid rent and terminated the lease. The lessee sought damages. It succeeded. That was on the basis that the agreement for lease had implicitly bound the lessor not to render the premises unfit for the lessee's special purpose during the currency of the lease. That term had not merged with the lease itself.

139. However, that decision does not suggest that such a term might not be found to be implicit in a lease. Nor does it suggest that such a term may only be implied in the form of a personal agreement between a lessor and lessee so as to be unavailable to benefit an assignee of the lessee: see Telex (Australasia) Pty Ltd v Thomas Cook & Son (Australasia) Pty Ltd (supra) at 266).

140. Conduct by a lessor which interferes with a lessee's use of premises for the agreed purpose for which they were let has been held to be a breach of an implied covenant of the lease not to derogate from the grant, nor to suffer or permit interference with quiet enjoyment. A fortiori, it is capable of being regarded as a breach of such a term when the covenant is express.

141. In Haig v Chesney [1925] SASR 82, a steam cooker was installed by the landlord in a tenant's basement restaurant. It caused fogging of an upstairs tenant's skylight. The steamer was faulty. That was held to constitute a breach by the landlord of the covenant with the upstairs tenant for quiet enjoyment.

142. In Baier v Heinemann [1962] Qd R 192, Gibbs J held that cutting off electricity to premises was a breach of such a covenant even if the tenants could themselves have remedied the defect.

143. Another instance may be found in Martins Camera Corner Pty Ltd v Hotel Mayfair Ltd [1976] 2 NSWLR 15, Yeldham J held that a failure to remedy roof drains so that they operated efficiently rendered the landlord liable for damages for breach of the covenant for quiet enjoyment when the drains blocked again and water damage was caused to the premises.

144. Even work done as required by a statutory authority, if the performance of that work interferes with the tenant's use of the premises, will be a breach of the covenant: see Reid House Pty Ltd v Beneke (1986) 5 ACLC 451 per Needham J.

145. It is true that Street J in Gordon v Lidcombe Developments Pty Ltd [1966] 2 NSWR 9 held that obscuring a view of the tenant's shop, thereby reducing passing trade, was not a breach of the covenant.

146. Street J considered that, to be a breach, the interfering conduct must be such as to (at 16) "...enable the Court to conclude that the premises are for practical purposes to be fairly regarded as having been rendered unfit". Thus diminution of profitability, in his Honour's view, fell short of a breach of the covenant.

147. The case of Bradford House Pty Ltd v Leroy Fashion Group Ltd (1983) ATPR 40-387, which was also relied upon by the lessor, is distinguishable. That was not a case where the landlord had altered the state of the premises so as to affect their fitness for the intended use. Nor, in the circumstances, had the fitness of the premises for such use been knowingly or negligently misrepresented. It was in that context that the reference to "caveat emptor" occurred at p 44551. The lease itself had excluded any implied covenant as to fitness for the contemplated use. Without a misrepresentation there was no viable Trade Practices Act claim.

148. Brilee Consultants Pty Ltd v Tibal Holdings Pty Ltd (1985) NSW ConvR 55-255, was a similar case. The lease expressly excluded any implied term that the premises were, or would remain, fit for the purposes of the lessee. Nor was there any express or implied term requiring the lessor not only to keep the premises fit for occupation but also to carry out fire safety works which had been required by the local authority so as to enable the premises to be used for the lessee's purposes. Those works went beyond mere repair and required alterations and additions. However, absent their performance, use of the premises at all could be forbidden. In Waddell J's view, no obligation to the tenant arose requiring the lessor to comply with the fire safety notice. The tenant's claim was for an injunction not damages, though, presumably, no action for damages would have succeeded either.

149. In this case, there is an express covenant by the lessor for "quiet enjoyment", expressed in cl 25(b) as an entitlement to "...peaceably hold and enjoy the said premises without hindrance or interruption...".

150. The issue is whether the actions and omissions of the lessor constitute a breach of that obligation.

151. In Lend Lease Development Pty Ltd v Zemlicka [1985] 3 NSWLR 207, the lessor undertook demolition works in the vicinity of the demised premises. This resulted not only in dust and noise but also in reduced security for the demised premises. As a consequence, thieves entered the demised premises and stole some of the lessee's stock. The implied term that the lessor covenanted not to derogate from the grant was not negatived by the terms of the lease. Kirby P considered that the lessor had breached that implied term. Hope JA and Samuels JA agreed.

152. More recently, in Aussie Traveller Pty Ltd v Marklea Pty Ltd [1998] 1 Qd R 1, conduct merely permitted by a landlord was found to breach the covenant. Another tenant of the landlord produced sawdust and noise which caused difficulty to the plaintiff in conducting its business. McPherson JA doubted the reasoning of Street J in Gordon v Lidcombe Developments Pty Ltd, in so far as Street J would have required a "practical frustration" of the lease before the covenant was breached. Nor did McPherson JA consider that the interference needed to be physical. Fitzgerald P and Thomas J agreed with McPherson JA.

153. For my part, I also agree. In any event, in so far as the opinion of Street J is at variance with that of the Court of Appeal in Queensland, I would consider myself obliged to follow that latter view.

154. It follows that, in my view, to have rendered the restaurant premises substantially less economic by rendering the exhaust system less efficient was a breach of both aspects of the covenant contained, expressly in this case, in cl 25(b). Notice to repair having been given, cl 22, requiring notice to remedy a breach, is satisfied. More than a reasonable time elapsed after notice, but the lessor did nothing effective to remedy the situation.

155. It is no answer that the breach was initiated when Battik's predecessor in title was the lessee. It continued up until the time Battik repudiated the lease. It was a continuing breach of an express covenant. Battik is therefore entitled to damages for any loss caused by that breach.

The rights of the lessor

156. The lessor throughout the lease had the right to receive the reserved rent. That right continued until the lease was terminated. The issue between the parties is whether the circumstances surrounding the undoubted termination of the lease, whether on 25 or 26 June 1996, give rise to any action for damages by the lessor or afford Battik any defence to the lessor's cross-claim.

157. The principles to be applied are those that are applicable to contracts generally. So much was affirmed by the High Court in Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17.

158. To amount to repudiatory conduct, the breach said to constitute it must be more than a breach of the terms of the lease, even one persisted in: see Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620; 56 ALJR 793; 42 ALR 305.

159. Progressive Mailing House has some similarity to the present case. The lessor was to carry out certain works before the lessee became obliged to pay rent. The lessor did so. However, the lessee was dissatisfied with the work and refused to pay rent. The lessor sued for possession and damages. The difference, however, from the present case was that the lessee's claim that the works were unsatisfactorily executed was found to be baseless. Had it been otherwise, the lessee's conduct would have been viewed as an attempt to obtain compliance with the terms of the lease rather than evidencing an intention not to be further bound by it. The principle, as Mason J expressed it, at 33, is that:

"What needs to be established in order to constitute a repudiation is that the party evinces an intention no longer to be bound by the contract or that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way..."

160. Of course, a party may so fundamentally breach an agreement, though desirous of performance of it, that further performance according to its terms is not possible.

161. Mason J expressed that principle as follows:

"...a fundamental breach of contract in the sense that the party at fault, though wishing to perform the contract, was guilty of such default in performance that the breach went so much to the root of the contract that it made commercial performance of it impossible."

162. The fact that the agreement is a lease, conferring an interest in land, implies that, in so far as a breach is relied on as supporting repudiation, in the absence of express agreement to the contrary, it needs virtually to amount to abandonment of the premises. That is, of course, why lease agreements typically expressly provide, as this lease does, for re-entry upon failure, if persisted in, to pay rent.

163. To refuse to pay rent at all, without legal excuse, may well entitle the landlord to treat the lease as repudiated.

164. As Mason J noted, at 37, even a well-founded claim that the landlord had failed satisfactorily to carry out the works in question would not entitle the tenant to refuse to pay the rent. A lack of a bona fide attempt to carry out the agreed works might well have been different.

165. However, this is largely academic. In this case, the lessor did not seek to terminate the lease for non-payment of rent. Nor did it take any effective step to remedy the state of the exhaust system despite notice in the clearest possible terms of the consequence of not doing so.

166. It is also clear that, by holding the auction on the premises, Battik was then indicating an intention to abandon possession. That repudiation was accepted by the lessor physically taking possession of the premises and excluding Battik from them. The holding of the auction was itself a breach of cl 5(c)(6) of the lease. It did afford evidence of Battik's intention to terminate the lease and abandon possession. Clearly, the lessor was entitled to accept that repudiation. Thus, as from 26 June 1996, Battik's obligation to pay rent was terminated.

167. The lessor claims not only damages for loss of the benefit of the rental covenant but also damages for making good the premises after attempts at removal of tenant fixtures. Battik seeks to recover its loss in consequence of the lessor's breach of the covenant for quiet enjoyment and claims that the lessor should pay for the value of the auction items sold but retained. The remainder of the items seem to have been accepted as having no more than nominal value.

168. In Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620; 56 ALJR 793; 42 ALR 305, the High Court had assumed, but not expressly decided, that ordinary contractual principles were applicable to a lease of premises. However, it was held that where the lessor terminated the lease for inadequate cause, the lessee was obliged only to pay rent up until the date of termination. The lessor, having wrongfully terminated the lease, was not entitled to damages for breach of the covenant to pay rent, though the lessor had terminated the lease because of the tenant's persistent late payments of rent which constituted a breach of the terms of the lease but not such as to warrant termination.

169. In the present case, it was the lessor who was in breach of its obligation to Battik. They had insisted, without any apparent justification, on a construction of the lease that it did not reasonably bear. That insistence led to Battik's business becoming uneconomic. It seems to me that, in those circumstances, closing the business down and, as part of that process, handing possession back to the lessor was a reasonable response mitigating its loss. It seems to me, therefore, that the lessor had, as at the date when it accepted the offer of termination constituted by Battik's conduct, shown that they were unable or unwilling to give the quiet enjoyment to which Battik was entitled.

170. It follows that Battik is entitled to damages for the losses caused by the lessor's failure to remedy the defective exhaust system. The lessor is entitled to rent until termination of the lease, but not to damages for loss of the benefit of the covenant for rent. There was a real issue as to the measure of the net loss suffered by Battik. A separate issue related to the lessor's interference with the auction of tenant fixtures and fittings and the failure of Battik to "make good".

Measure of damages for loss of business

171. The lessor's contention was that Cascades was, in any event, a doomed business. Even without the defective exhaust system it would have failed.

172. Certainly, Messrs Brayshaw and Williams, experienced restaurateurs, successful in other locations, returned a trading loss of $13,380 for the year ending March 1996. They sold the business because of poor returns.

173. That, however, does not establish that Battik would not have returned a profit, however modest. The return on invested capital and management expenses are items which might vary from one proprietor to another.

174. The lessor pointed to the undefined nature of the arrangement between Battik and Weagle. No management fee had been negotiated. The profit share was not fixed. That is explained by the family connection between the principals of each company. It was a family venture. The primary objective was a successful source of employment not profit to the company.

175. The money invested by Battik is not in dispute. It paid $30,000 plus incidental costs of $7,365 to purchase the business, including tenant fixtures and fittings. The refurbishment of the premises cost $69,586.12. Substantially all of that investment was lost. All that was recovered was the nett return on sale of the fixtures and fittings which was $12,995.

176. The controversial question was whether, as at the date of termination of the lease, Battik would have been profitable or not absent the breach of covenant by the lessor. Two expert reports were tendered. That of Mr K D Hanna of Houston & Hanna, Chartered Accountants, proclaimed that there had been a total of $713,257 lost as a result of the failure of the business, including capital loss and future profits. Mr Bruce Glanville of Rolins, Chartered Accountants, reporting to the lessor, concluded that the loss was zero even including the invested capital. Indeed, in his view, the restaurant would have returned a net loss of between $40,000 and $50,000.

177. Both these reports, to my mind, are based on fanciful premises. Neither were of any assistance to the court. Mr Glanville's report, for example, ignores the family nature of the relationship between Weagle and Battik. It assumes that the business would invest in expansion even if the returns to justify it had not emerged.

178. On the other hand, many of the criticisms made by Mr Glanville of Mr Hanna's report are valid.

179. In my view, although I have no doubt that Mr Lignieres, if conditions had permitted, would have run an attractive and moderately successful restaurant, it was not going to be a big money-earner. It is realistic to suppose that in terms of returning a living to the staff and management, it would have been successful. It probably would have returned a small profit on the investment. If it had been sold, I do not believe that Battik would have done better than receive its money back, albeit that would, probably, have included the value of the refurbishment.

180. I propose, therefore, to assess the gross loss to Battik including loss of invested capital at $130,000. The loss of earnings upon the capital invested is compensated for by pre-judgment interest which I award as from 26 June 1996. Before that, I consider no return or minimal return over expenses would have been received. Those expenses, I have assumed, include rent as claimed against and as paid by Battik out of the bank guarantee. I appreciate that Mr Lignieres and the two Lenfield children forewent wages or management fees as the case may be. However, I have no evidence as to the extent of their forbearance. Nor is it a direct loss incurred by Battik. I leave it to those parties to readjust their positions as between themselves if they wish to do so.

181. The damages thus assessed take account of the proceeds of the auction. That mitigates, in part, the capital loss. However, against that is the value of tenant fixtures retained by the lessor. There is the damage done to the premises. The lessor was entitled to have that made good. They did not, however, permit Battik access to the premises to do so. The cost of the lessor making good is not, therefore, an accurate measure of their loss. Nevertheless, some expense would have been incurred by Battik in making good. In the absence of any reliable evidence of the net position, taking account of rent and other expenses, I am inclined to believe that the net position would have been close to zero as between goods retained and the cost to Battik of making good the premises. Thus, it seems to me neither addition nor deduction from the sum assessed is warranted.

182. There will be judgment for the plaintiff against the defendants in the sum of $130,000 plus interest in the sum of $38,400.

183. On the cross-claim the lessor is entitled to a set-off for unpaid rent. However, the $130,000 is calculated as a net loss after expenses, including the assumed payment of rent. Thus no adjustment is required. I appreciate that there is also the loss of the bank guarantee and, no doubt, an interest liability as a result. However, I consider that the sum of $130,000 includes compensation for this consideration, when considered with the award of interest made.

184. It also follows that, as there is a net sum owing to Battik by the lessor, there is no claim by the lessor against the guarantors. That claim is dismissed.

185. I will hear the parties as to costs.

I certify that the preceding one hundred and eighty-five (185) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Higgins.

Associate:

Date: 8 June 1999

Counsel for the Plaintiff

And Third Parties: Mr G Stretton

Solicitor for the Plaintiff

And Third Parties: Colquhoun Murphy

Counsel for the First, Second

and Third Defendants: Mr S L Walmsley SC

Solicitor for the First, Second

and Third Defendants: Phelps Reid

Dates of Hearing: 24, 25 September 1998; 10, 11, 12 February 1999

Date of Judgment: 8 June 1999