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Federal Court of Australia |
Last Updated: 31 January 2002
Byrnes v Jokona Pty Ltd [2002] FCA 41
CONTRACT - LEASE - lease of property for business venture - repudiation claimed - collateral contract claimed - estoppel claimed
LANDLORD AND TENANT - covenant for quiet enjoyment - express covenant - general principles - whether material interference with possession - activities of third party and of landlord - whether interference with possession interfered with commercial use of premises for the desired purposes such that business failed
TRADE PRACTICES - claim under Trade Practices Act that landlord failed to make available land surrounding leased premises for expansion of business
DAMAGES - assessment of damages for breach of lease - general principles - where argued business doomed to fail - where lease terminated before term - assessment of impact of interference and of lost future opportunity - calculation of interest
Trade Practices Act 1974 (Cth)
Federal Court of Australia Act 1976 (Cth) s 51A
Hawkesbury Nominees Pty Ltd v Battik Pty Ltd [2000] FCA 185 applied
The Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17 applied and discussed
National Carriers v Panalpina (Northern) Ltd [1980] UKHL 8; [1981] AC 675 applied
Goldsworthy Mining Ltd v FC of T [1973] HCA 7; (1973) 128 CLR 199 applied
O'Keefe v Williams [1910] HCA 40; (1910) 11 CLR 171 applied
Southwark LBC v Tanner [1999] UKHL 40; [2001] 1 AC 1 applied
Kenny v Preen [1963] 1 QB 499 applied
Sarson v Roberts [1895] 2 QB 395 applied
Brilee Consultants Pty Ltd v Tibal Holdings Pty Ltd (1984) 3 BPR 9272 applied
Bradford House Pty Ltd v Leroy Fashion Group Ltd (1983) 46 ALR 305 applied
Teubner v Humble [1963] HCA 11; (1963) 108 CLR 491 applied
Bus v Sydney County Council [1989] HCA 29; (1989) 167 CLR 78 applied
Browne v Flower [1911] 1 Ch 219 referred to
Phelps v City of London Corp [1916] 2 Ch 255 referred to
Aussie Traveller Pty Ltd v Marklea Pty Ltd [1997] 1 Qd R 1 applied
Owen v Gadd [1956] 2 QB 99 referred to
JC Berndt Pty Ltd v Walsh [1969] SASR 34 referred to
Martins Camera Corner Pty Ltd v Hotel Mayfair [1976] 2 NSWLR 15 referred to
Todburn Pty Ltd v Taormina International Pty Ltd (1990) 5 BPR 11,173 applied
Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 referred to
Cehave NV v Bremer Handelsgesellschaft m.b.H. [1976] QB 44 referred to
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 referred to
Federal Commerce and Navigation Co Ltd v Molena Alpha Inc [1979] AC 757 referred to
Bunge Corp v Tradax Export SA [1981] UKHL 11; [1981] 1 WLR 711 referred to
Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 referred to
Associated Newspapers v Bancks [1951] HCA 24; (1951) 83 CLR 322 referred to
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 referred to
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 referred to
Honner v Ashton (1979) 1 BPR 9478 discussed
Woodfactory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105 referred to
J & C Reid Pty Ltd v Abau Holdings (1988) NSW ConvR 55-416 referred to
Ross T Smyth & Co v T D Bailey Son & Co [1940] 3 All ER 60 referred to
Larratt v Bankers & Traders' Insurance Co (1941) 41 SR 215 referred to
Lagouvardis v Brett and Janet Cottee Pty Ltd (1994) NSW ConvR 55-714 referred to
Mersey Steel & Iron Co Ltd v Naylor, Benzon & Co (1884) 9 App Cas 434 referred toDecro Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 referred to
Fullers' Theatres Ltd v Musgrave [1923] HCA 12; (1923) 31 CLR 524 referred to
Knatchbull v Grueber (1817) 3 Mer 124 referred to
Wallis, Son & Wells v Pratt & Haynes [1910] 2 KB 1003 referred to
Wallis, Son & Wells v Pratt & Haynes [1911] AC 394 referred to
Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159 referred to
Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527 referred to
Laurinda Pty Ltd v Capalaba Park Shopping Centre [1989] HCA 23; (1989) 166 CLR 623 referred to
Tricontinental Corporation v HDFI Ltd (1990) 21 NSWLR 689 referred to
Enzed Holdings Limited v Wynthea Pty Ltd (1984) 3 IPR 619 applied
Robinson v Harman (1848) 1 Exch 850, 154 ER 363 applied
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 applied
Fink v Fink [1946] HCA 54; (1946) 74 CLR 127 applied
Jones v Schiffmann [1971] HCA 52; (1971) 124 CLR 303 applied
Sony Computer Entertainment Australia Pty Ltd v Stirling [2001] FCA 1852 applied
Malec v J C Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638 applied
Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 applied
Mallett v McMonagle [1970] AC 166 applied
McCrae v Commonwealth Disposals Commission [1950] HCA 12; (1951) 84 CLR 377 referred to
Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351 referred to
Thompson v Smith Shiprepairers (Northshields) [1984] QB 405 referred to
Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60 referred to
Treitel The Law of Contract (7th Ed)
Treitel Remedies for Breach of Contract: A Comparative Account (Oxford, 1988)
Carter Breach of Contract (2nd Ed)
Restatement of the Law of Contract 2d.
Mark Peter Byrnes and Ors v Jokona Pty Limited
N 1074 of 1997
ALLSOP J
SYDNEY
31 JANUARY 2002
IN THE FEDERAL COURT OF AUSTRALIA |
|
NEW SOUTH WALES DISTRICT REGISTRY |
1. there be judgment in favour of the first and second applicants jointly in the sum of $132,731, which includes interest under s 51A of the Federal Court of Australia Act 1976 (Cth) at 10.5% from 1 September 1995 to 31 January 2002 in respect of $50,000 and from 16 January 1996 to 31 January 2002 in respect of $30,000;
2. the matter be stood over to a date to be fixed for argument (if any) concerning, and the making of orders in respect of, costs of the proceedings, other than the cross-claim;
3. the cross-claim be dismissed;
4. the cross-claimant pay the costs of the cross-respondents of the cross-claim; and
5. any party have liberty to apply within 14 days concerning the form of the order in 1 above.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA |
|
NEW SOUTH WALES DISTRICT REGISTRY |
JUDGE: |
ALLSOP J |
DATE: |
31 JANUARY 2002 |
PLACE: |
SYDNEY |
1 This matter concerns a failed business venture in Liverpool in Sydney. Briefly, and by way of introduction, the first and second applicants (who were shareholders in the third applicant) signed a lease of property granted by the respondent. The lease was for a basement of a building at 2-20 Orange Grove Road, Liverpool. The applicants desired to set up a business in this basement in the running of a "paintball centre". This was a place at which people could come and play organised games firing coloured gelatinous balls of paint using high pressure air guns which require a police supervised firearms licence. A considerable amount of effort was expended by the applicants in putting into some repair and appropriate condition the basement (which was, if not derelict, then at least in extremely poor condition) and the surrounding areas, which were in a shoddy state. The applicants claim that they were in effect promised, in addition to the lease of the indoor basement, an additional outdoor area to the east, south-east and south of the demised premises on which to carry on the proposed business. Thirteen months after the lease took effect, and under a year after commencing the business, the applicants walked away from the lease claiming a repudiation by the respondent landlord. The claims made by them, which are founded upon breaches of the lease, breaches of an alleged collateral contract, estoppel and the Trades Practices Act 1974 (Cth), arise from what they say was a range of interruptions to, and interferences with, the possession of the demised premises, the surrounding land and the business. These interruptions and interferences, it was said, so impeded the commercial use of the premises for the desired purposes that the business failed. The respondent has cross-claimed against the first and second applicants for the balance of the rent and removal expenses.
2 It will be necessary to describe the subject area in a little more detail in due course. It is sufficient, at this point, to say that the respondent owned industrial land at Liverpool upon which there were a number of large warehouse-like buildings, adjacent to which was some acreage of vacant land. One of the buildings had a ground floor or basement level. The basement was not wholly below ground, but the land sloped in a fashion which led to the ground floor area, below a first floor area, being described as the basement. Page 123 of documentary exhibits MPB D1-27 was a site plan which was used by a number of witnesses to explain matters of location. Schedule A to these reasons is a plan of the area taken from that exhibit shorn of most extraneous matters. Page 123 of the above documentary exhibits was part of the development application made by Mr Byrnes and Mr Taprell to the Liverpool City Council (the Council) for the use of the basement as an indoor paintball centre. The shaded area represents the basement, under the first floor which extended to the east of the large rectangle "Existing Building". For ease of later comprehension I have identified on Schedule A physical features or locations which will become relevant to these reasons.
3 The various claims of the applicants can be divided broadly into two: (a) a claim for damages arising from breaches of the lease, undoubtedly entered, of sufficient seriousness as entitled the first and second applicants, the tenants, to terminate the lease; and (b) claims in contract, in estoppel and under the Trade Practices Act arising from the failure of the respondent to make available to the applicants land surrounding the basement area for the expansion of the paintball business. For the reasons set out below I accept the claim in (a), but reject the claims in (b).
4 The applicants were undoubtedly denied the use of the area surrounding the basement. Some months after they took possession, a company called Price and Speed began using the adjacent area to store and work on shipping containers. These events, which will be dealt with in more detail below, formed the foundation of one of the complaints as to a breach of the lease.
5 While the lease was taken out in the names of the first and second applicants, the third applicant appears to have carried on the business. It was a company in which Mr Byrnes and Mr Taprell owned most of the shares. I will refer to all three indiscriminately as `the applicants'. No point was taken at the hearing by the respondent about this apparent division between the tenants and the owner of the business. I deal with this below in discussing the question of damages.
6 It is convenient first to determine the extent of the legal obligations between the parties.
The Facts Concerning the Relationship Between the Parties
7 The first applicant, Mr Byrnes, was the leading force behind the setting up of the business. He was born in 1963. He was 30 or 31 when he first dealt with the principal of the respondent, Mr Gazal, and an employee of the respondent, Mr Ayoub, in May 1994. Mr Byrnes left school at the age of fifteen. He had worked at odd jobs over the years, including as a cleaner and a miller. In his mid-twenties, in "about 1988 to 1989", he developed epilepsy. He then "went on a sickness benefit pension". He had little or no business experience. He had been interested in sport all his life and, up to the time of his sickness, he had been active in sports. He said that he became interested in running a paintball business. He said that he was interested in setting up a business as it was difficult for him to find employment with his condition. He wanted to cease being on a pension. I accept this evidence. I find that one of the strong motivating factors moving not only him, but also others, in the relevant events was an enthusiastic desire to create a business which would provide independence and financial support for those concerned.
8 In early 1994, with the idea of a paintball centre in mind, Mr Byrnes began looking for sites in the Liverpool area for an indoor paintball centre. He found no existing business of this kind in and around Liverpool. He was aware that there were on the outskirts of Sydney existing centres with outdoor playing fields.
9 Mr Byrnes said that he saw advantages in an indoor centre: by allowing disabled people to play, by reducing the effects of the weather and by enabling play at night. I accept his evidence in this regard. He gathered about 1,500 signatures on a petition for the creation of such a centre, presumably, in part, to gauge public support.
10 Mr Byrnes said that in about May 1994 he noticed a `for lease' sign on the building containing the basement and in company with a Mr Stephen Lowes he inspected it. During the inspection they enquired about the basement. Shortly thereafter they met and discussed the possibility of a lease with Mr Ayoub and Mr Gazal.
11 At this point it is necessary to interrupt the narrative and to say something of the witnesses. The evidence given by Mr Byrnes, Ms Wilder and Mr Lowes was in stark contrast to that given by Mr Gazal and Mr Ayoub, in particular concerning the arrangements for the use of the land. The differences between the witnesses were manifold and often minute. It would be impossible, without extending these reasons to inordinate length, to deal with all the inconsistencies and contradictions in the evidence. The most important cleavage in the evidence, in so far as the conduct of the case was concerned, was the question whether or not the respondent, through Mr Gazal, agreed to the applicants using the land outside the basement to extend the paintball operation to an outdoor field or fields. Another important difference in evidence concerned the toilets and whether external access was agreed to them.
12 I will deal with individual aspects of the evidence and with individual witnesses as I need to in due course, but by way of general introduction to the witnesses, it is necessary to say the following. I found Mr Byrnes to be a troublingly unsatisfactory witness. He was at times aggressive and unco-operative. As a general rule, any form of concession had to be wrung from him. On numerous occasions he sought to force evidence on the cross-examiner. At times he displayed an attitude of aggressive churlishness in his answering which I think was only partly explained by his association of cross-examining counsel with Mr Gazal, the latter of whom, it was clear, he had come to despise. At times he sought to display a lack of comprehension of questions which was quite absent from his attitude when it appeared to suit him. At times in the witness box I found him to be answering in a manner to deflect the truth, if he perceived this would advantage his case. Whilst I was less than entirely impressed with the evidence of Mr Gazal, with the exceptions which I will deal with when examining Mr Gazal's evidence, I am not prepared to accept any important evidence of Mr Byrnes where it is substantially in conflict with the evidence of Mr Gazal, Mr Ayoub or Mr Bobyk. It would be time consuming and repetitive to set out exhaustively all the factors which have led me to these views about Mr Byrnes. However, in deference to the submissions of counsel on the matter, I should say that, in particular, in addition to the matters to which I have already referred, I found Mr Byrnes' evidence concerning the "rave party" (including the semantics used by him to the Council and to the Court in relation to the word "fundraiser"), concerning the removal of the sandbags from a flooded area in November 1995 and concerning the damage to a fire door said by him to have taken place in November 1995, to be false; by which I do not mean merely inaccurate. I think he was being untruthful. I also refer in particular to his unwillingness to be frank about the shooter's licence and the reasons why he and others were not put up for it and to his unwillingness to be frank about the affidavit sworn in Local Court proceedings, concerning a suit by a workers' compensation insurer for the recovery of premium, which affidavit, signed by Mr Byrnes, was produced in original form attaching material which was inaccurate. All these matters, in conjunction with the matters to which I have already referred, including in particular his studied unresponsiveness and aggressive deflection of unwelcome questions, persuade me not to accept any contentious piece of evidence from Mr Byrnes, unless otherwise supported by objective evidence or unless specifically the subject of a favourable finding. In some respects Mr Byrnes' evidence was supported by the affidavits and oral evidence of others. For this reason it is necessary to deal with those other witnesses individually.
13 The affidavit and oral evidence of a number of witnesses corroborated what Mr Byrnes said about the conversations concerning the original arrangements for the basement and the use of the outside land. Mr Lowes, Ms Wilder and, to a limited degree, Mr Taprell did so. Mr Barber and Ms Hardi corroborated Mr Byrnes on other matters.
14 The affidavit material put forward on behalf of the applicants in places revealed a repetitive similarity. Important matters were expressed in similar language. The degree to which some lack of attention was paid, I think, to the seriousness of the task of giving evidence by affidavit was exhibited by the affidavits of Mr Taprell. He is barely able to read. Yet he was allowed to swear two affidavits. This matter came to the attention of those running the case. As a consequence he had his affidavits read to him before giving evidence. This state of affairs may have been brought about by the confluence of a number of factors. I am not seeking to lay blame or be unnecessarily critical. The preparation of written evidence that reflects the honestly held recollection of individuals, assisted by sensibly ordered and presented documentary and other background material, is a difficult task and one requiring experience and skill. However, I approach the majority of the affidavit material prepared on behalf of the applicants in this case with great caution.
15 Mr Lowes attended some early meetings with Mr Byrnes and for a time was active in the preparation of the site. He gave his evidence in a reasonable manner, but to the extent that he sought to say (as he did in his affidavit) that Mr Gazal agreed to lease the outside area for $1,000 per month and signed a second development application to effect that, I reject it. I deal below with my reasons for, in large part, accepting Mr Gazal about this matter. My acceptance of Mr Gazal in this respect requires me to reject what Mr Lowes said in this regard.
16 I place little weight on the evidence of Ms Wilder. She was an old friend of Mr Byrnes. A book-keeper, she researched the prospective business in 1994 and was responsible, along with Mr Byrnes, for the projections of usage and returns of the prospective business contained in a submission to the National Australia Bank to obtain a loan for working capital. It will be necessary, when later dealing with damages, to say something more about the wholly unrealistic nature of these projections. However, she provided the only real source of advice for Mr Byrnes and Mr Taprell. She was not in any way an independent witness. She was as much involved in the decision to enter the catastrophic venture as was Mr Byrnes. She no doubt blamed Mr Gazal, as Mr Byrnes did. I found her evidence less than satisfactory. At times, as with other witnesses, especially Ms Hardi, she was alive to the need for certain evidence in the case to advance the interests of the applicants. The clearest illustration of this concerned the evidence which she gave about early conversations that she said occurred with Mr Gazal. She gave evidence in paragraph 14 of her affidavit that Mr Gazal said the following:
We are pleased to have you as possible tenants. I look forward to doing business with you. If I can be of any assistance please don't hesitate to speak to me. I am in the process of obtaining approval from the Council to construct a mega shopping centre on the undeveloped area north where you will be [sic]. It will include 16 cinemas.
17 The timing of that conversation was of importance. The structure and content of paragraphs 11 to 32 of her affidavit made it plain that the meaning intended to be conveyed was that this conversation took place in May 1994, or shortly thereafter. This was, however, likely to be destructive of one of the underpinning theories put to me in address about why I should not accept Mr Gazal's evidence about what he said he said to the applicants about their not being entitled to use the outdoor area for paintball - that he, at all times in the discussions from May 1994, said that he had plans for a shopping centre on the land to the north and north-west of the basement. When asked about this paragraph, Ms Wilder gave evidence that the conversation took place in late July or August 1994. I found the episode of the cross-examination on this troubling. She appeared not to be clear about any matters at all, except the change to her evidence concerning the timing of the conversation which deflected an aspect of her affidavit. I do not think Ms Wilder was attempting to be frank in this exchange.
18 Also, in paragraph 13 of her affidavit, when describing the extremely poor state of the premises, she used the expression "caked mud on the floor". She denied that this suggested that there had been flooding of the premises. She denied this in a manner, and with a vehemence, that indicated an appreciation of the nuances of the case which by that time had arisen in connection with the flooding issue. As with the approach of Ms Hardi on this issue (as to which see below) this revealed to me a willingness of Ms Wilder to tailor her evidence to the applicants' case. I place little reliance on her evidence where it is in conflict with that led on behalf of the respondent.
19 Mr Taprell gave some evidence by affidavit which contested matters deposed to by Mr Gazal. He gave some evidence that Mr Gazal had said that they could have the outdoors if they cleaned it up. Mr Taprell did not take part in the negotiations. He had no commercial experience. He could not read beyond rudimentary matters. He had been seriously injured in a car accident as a boy and had obtained a significant damages award which enabled him to buy a home. He had been unemployed for significant periods of his adult life. While I do not think Mr Taprell intended to give false evidence, I can place no reliance at all upon him being able to understand at the time the context or significance of any conversation about the lease. His oral evidence was of little assistance. Most of the time he appeared to have great difficulty in grasping what it was that he was being asked. However, some of his evidence is not without value. His description of the state of the basement, the observation of the interference by Price and Speed and his, and to his knowledge Mr Byrnes', reasons for throwing up the lease, as straightforward accounts of facts of which he was aware, are of real value. The tragedy of this commercial catastrophe was that Mr Taprell (against the wishes of some of those close to him) probably enabled the venture to go forward by putting his house up as security for borrowings from the bank. He has lost his house. He displayed an abiding stoicism in discussing in evidence the events which have cost him so much. Nevertheless, I prefer the evidence of Mr Gazal about the conversations concerning the use of the land outdoors.
20 I place no reliance on the evidence of Ms Hardi, Mr Byrnes' sister. Her recollection was shown in cross-examination to be very unclear. Also, I formed the view that the difficulty she experienced in being clear was based on her not being clear, when being asked questions, as to what was favourable to her brother's case and what was not. On one occasion, at the very commencement of her cross-examination when she was clear about that matter, she had no hesitation in giving evidence which I find was false. In paragraph 3 of her affidavit Ms Hardi had said, as part of her description of the dilapidated state of the basement:
Most of the floor was covered in caked on mud indicating previous flooding.
21 Paragraph 3 was eight lines in length. At the very commencement of her cross-examination, after she had been sworn and after I had spoken to her about listening to the questions and only answering them, the following exchange took place:
Mr Jones: Ms Hardi, if you go to paragraph 3 of your affidavit, can I ask you to quickly read that paragraph please just to refresh your memory as to what you said in it?Ms Hardi: Yes.
Mr Jones: I want to call your attention in particular to the second sentence of that paragraph where you say, "most of the floor", and you're referring I think to the basement floor?
Ms Hardi: Yes.
Mr Jones: "was covered in caked on mud indicating previous flooding"?
Ms Hardi: Well, I wouldn't say indicate previous flooding, there was a lot of dirt there. There was grass, there was - the amount of dust that was there, all you have to do is spill water there and you're going to have caked on mud. It was - I wouldn't say it couldn't flood because it was all over the place. It was there for a long time. It took us a long time to clean - to sweep it all up. So, I wouldn't say previous flooding there because it was like - it was very big area and it would've had to have been a pretty big area to flood the whole lot out.
22 The answers were given by Ms Hardi barely looking at paragraph 3 and in a manner which indicated to me, both by its apparent preparedness and deliberateness and by the speed of its delivery, as one which she had already decided to give, having become apprised of the importance of this issue. This issue was, by this time in the case, one which had been the subject of some cross-examination. I was left with no doubt at the time of hearing and seeing her give this evidence that this was a prepared and deliberate variation of her evidence in chief, consequent upon the gaining of an appreciation of an issue, most likely brought about by discussing her evidence with one or more of the other witnesses. I reject her oral evidence in this regard. Having seen her and heard her evidence, I would place little reliance upon anything Ms Hardi said to the extent that it was in contest.
23 Mr Barber likewise was astute to tailor his evidence to accord with what he perceived to the best interests of the applicants' case. In his affidavit evidence he had described the basement as "derelict in appearance". The context of the use of this phrase was plainly in discussing both inside and outside the basement. However, in his evidence he was aggressively astute to limit "derelict in appearance" to "derelict in appearance on the outside". I do not believe him. Much of Mr Barber's evidence was marked by a display of aggressive dislike of the cross-examiner. At times he was unresponsive. At times he was carping in punctilious correction of the cross-examiner. I gained the distinct impression during his evidence that he was there to give as little information as possible and, if he saw it as harmful to the case of the applicants, to give none in that regard. He gave some evidence concerning the discussions with the Council officers concerning the "rave party" which in terms was very similar to that given by Mr Byrnes in his affidavit. I accept neither of Mr Byrnes and Mr Barber in this respect and the episode reflects a lack of frankness and an untruthfulness in respect of these witnesses. An example of deliberate exaggeration by Mr Barber was the statement in his affidavit that Mr Gazal forced his way into the weapons lock-up and removed weapons without the necessary strict police-approved conditions. He had no basis for saying this. It was a deliberate statement made without any appreciation of the objective truthfulness of it. I place little reliance upon his evidence and none if it is in contest with evidence led by the respondent on any matter, unless it is otherwise objectively supported.
24 Mr Gazal's and, to a degree, Mr Ayoub's evidence was less than entirely satisfactory. At times, they, especially Mr Gazal, displayed a dogmatism that seemed to me to be borne from entrenchment of views since the commencement of the dispute. However, I do not think that either was intending to be untruthful.
25 As I have said, it is not possible without the inordinate lengthening of these reasons to discuss every contradiction in the evidence of the parties about what happened in this case. What follows are my views, taking into account the views that I have formed and expressed above about the relative worth of the evidence of people, the available documents in the case and the inherent probabilities of matters. Counsel assisted me by helpful oral and written submissions. I do not propose to deal with all matters with which they concerned themselves. However, I have been assisted by their submissions in my task of disentangling from the, at times unsatisfactory, evidence, the likelihood as to what happened. I am grateful to both Mr DeBuse and Mr Jones in that regard.
26 I now return to the facts.
27 Mr Byrnes, with Mr Lowes, was introduced to Mr Ayoub. They discussed with Mr Ayoub the availability of the premises and matters attendant thereto. At some point early in negotiations Mr Ayoub made a handwritten note which stated:
"Area Sq ft = 50,000 sq ft @ $2/year= $100,000 / year Rent
toilets: Yes.
3 x 3 lease
28 There was a dispute as to whether this note was written by Mr Ayoub during or after the initial conversation with him and before he accompanied Mr Byrnes and Mr Lowes to see Mr Gazal, or whether it recorded the essence of what Mr Gazal agreed to at the first negotiation with him. Relevant to this is the fact that the original of the note appears to have been given to the applicants. It was said by the applicants to be a record of the consensus after the meeting with Mr Gazal.
29 Mr Ayoub was frank and straightforward in his evidence that his recollection was unclear as to when he prepared the note. His preference was for the view that it was something he wrote after his meeting with Mr Byrnes and before going to see Mr Gazal. That accorded with Mr Gazal's recollection that the note was in existence at the commencement of the first meeting that he had with them.
30 Mr Gazal's evidence was that in early discussion he said he wanted $3 per square foot for the basement (plus outgoings), for which sum he was prepared to put the premises in repair. He said that Mr Byrnes wanted to pay less and that Mr Byrnes suggested $2 per square foot. Mr DeBuse said that this was inherently improbable because of the commercial inexperience of the applicants - that they would not know what to offer. However, Mr Byrnes and Mr Lowes had done some investigations, as had Ms Wilder.
31 Mr Gazal said that he would not have offered a 3 x 3 lease since he had in mind the shopping centre development and the possible redevelopment of the subject building.
32 The note in Mr Ayoub's hand could well be a record of what Mr Byrnes and Mr Ayoub discussed before seeing Mr Gazal - the area, what Mr Byrnes would be prepared to pay, what he wanted (written in the statement form of 3 x 3 by Mr Ayoub) and Mr Ayoub's indication as to their desire for toilet access and his expression of assent to that. Alternatively, it may record the end of the first brief stage of negotiation after seeing Mr Gazal. I doubt whether Mr Byrnes had any real idea what to offer for the premises. I think the probabilities are that the note records what Mr Ayoub thought had been discussed after both his meeting with Mr Byrnes and Mr Lowes and the meeting with Mr Gazal. Mr Gazal did say at this meeting that $2 per square foot was agreeable. I accept his evidence that he said this expressly on the basis that the basement was taken "as is", with the applicants being responsible "for fixing the place". He may also have said "plus outgoings", but I doubt that he spelled this out in money terms. This would explain the absence of a note about outgoings. I think it doubtful that Mr Ayoub would have acceded to anything about a prospective lease before seeing Mr Gazal. Clearly Mr Gazal gave instructions about all matters concerning dealings with third parties. Thus, the reference to toilets in the affirmative is more likely to be after seeing Mr Gazal. I find that Mr Gazal did agree to allow access to the toilets on the first floor to the applicants. There was much evidence, of an adamant kind, from Mr Gazal and Mr Ayoub, that there was discussion about the applicants providing `porta-loos' at this meeting. There may have been some such discussion. I do not think that either Mr Gazal or Mr Ayoub was intending to be untruthful, but I do think that the note reflects an unequivocal assent to the use of the toilets. This is made clear by the notes of a later meeting at which Messrs Gazal, Ayoub and Byrnes attended and which was made by Mr Ayoub. In that note there is recorded "provide external access to toilets".
33 The reference "3 x 3" in this first note may well reflect some discussion at that point as to what Mr Gazal appeared willing to contemplate. It is undoubted that by October 1994 he was willing to grant only 3 years. Further, that is what the lease provided for. The reference ("3 x 3") also no doubt reflected what the applicants desired - a significant degree of security of tenure. I do not think that a finding that a three year lease with a three year option was discussed without demur from Mr Gazal is fatal to his credit. I think his insistence in his evidence that he could only offer a three year lease is probably consistent with recognising shortly thereafter the unwisdom of having anything other than a short term tenancy of this business adjacent to the development of a shopping centre, which was reflected in his later being willing only to grant a three year lease.
34 Not long after these first meetings, Mr Byrnes, with his enthusiasm fired for the venture, began to arrange for family, friends and others to bring the premises into a state approaching some fitness for the commercial use planned. That preparation took time and effort. It was still proceeding in November and December 1994. There was no satisfactory evidence that any undertaking was given to pay these people. Most were friends and family fired by enthusiasm to help. Nevertheless, there were other not insignificant expenses in preparing the site.
35 In about September 1994 Mr Byrnes went to see Mr Gazal. Mr Ayoub was present. At this meeting Mr Byrnes sought a rent reduction. Other matters were discussed. Mr Gazal also recalled meetings earlier than September, after the first meeting. I will return to a meeting in August dealing with a page of a development application form, but it is unnecessary to deal with all aspects of these recollections of Mr Gazal, save that he recalls that he made it clear in these meetings that the applicants could have the premises for $2 per square foot as long as they did all work to bring the premises into the required condition. I accept this evidence.
36 It seems common ground that at the meeting it was agreed that the first year's rent would be reduced to $75,000, the second year's would be reduced to $90,000 and the third year's would remain at $100,000. I find that once again Mr Gazal took this opportunity to say that the applicants bore the responsibility of putting the premises into any necessary improved condition. When cross-examined about this rent reduction Mr Byrnes recognised the "as is" nature of the taking of the tenancy:
Mr Jones: Did you think that he did that as an act of charity, gave you the rental concession that you wanted?Mr Byrnes: I believe he reconsidered the state of the property and thought it was fair thing to lower the rent because of the amount of work that had to be done... and the amount of money that had to be spent on it probably.
37 I find that certainly by this September 1994 meeting the agreement between the parties was that the respondent was not liable for putting the premises in any necessary state of repair. All this work was for the account of the applicants.
38 At this meeting there was plainly discussion about toilet access. There was to be external access to the toilets. That was agreed. That meant, in the context of the topography, an entitlement to use the earthen ramp, which ran in a north-south direction at the east of the small building marked "existing building" to the north-west of the shaded area, up to the first floor level, enabling access to the toilets. However, in the context of the discussion of taking the premises as found, there was plainly no undertaking by Mr Gazal to put the toilets in any improved state of repair.
39 The handwritten notes of the meeting made by Mr Ayoub were as follows:
All necessary work done (security grills, fencing and ramp coverup) to secure the site.Lease includes bldg only - no land.
Provide external access to toilets.
All necessary arrangement regards security to the Viscount property adjacent to your operation.
Pay share of electricity - based on an average figure,
On finalization of lease, to remove all property to Underseige.
- lease costs paid by lessee (Underseige) + stamp duty
- fencing should be erected and planned - with mutual agreement by lessor and lessee
75,000 1st year
90,000 2nd year Gross rent
100,000 3rd year
40 The original notes were given to Mr Byrnes.
41 The notes make plain that the lease was to cover the "building only - no land". Two matters of importance arise from this. First, there was no lease of the toilets. They were not to form part of the demise. However, as I have indicated, there was agreement at the meeting that there should be external access to them. I discuss later the legal consequences of these findings.
42 Secondly, the adamant nature of the note that no land was to be part of the demise raises the question of the claim about the surrounding land. The applicants' case was that, shortly after his first meeting with Mr Gazal, Mr Byrnes raised with Mr Gazal the possibility of using the area outside the basement to extend the paintball business. The essence of the applicants' case was that Mr Gazal agreed to this proposal asking for an additional $1,000 per month. The arrangement, on the evidence put forward on behalf of the applicants, was far from clear. Different people involved who gave evidence at the hearing appeared to have different views of what land was the subject of the arrangement. The arrangement appeared to have an indefinite commencement point - when a development application was submitted or accepted. Ms Wilder seemed to think that the applicants could wait until they had assessed the profitability of the indoor business before deciding whether to take up the land.
43 Mr DeBuse put to me that at the time of these discussions, in mid-1994, Mr Gazal did not have any specific plans for the shopping centre in mind and that he was keen to promote the tenancy of the applicants on as wide a basis as possible. This, he said, explained the agreement for external toilet access, because at that time Mr Gazal had no plans to extend the road called Viscount Place directly through the small building north of building No 1 and to knock down the adjacent earthen ramp providing access to the toilets. He said that this explained a willingness on Mr Gazal's part to say whatever would encourage a prospective tenant to take an otherwise derelict basement and an otherwise unutilised area surrounding it. He said that the reality of the agreement about the use of the area outside was reflected in the applicants building a fence where they did. (See Schedule A.) This location of the fence, he said, reflected the agreement of the parties as to what was contemplated by condition 17.1 of the lease: "to separate the Premises from that part of the land occupied by the Lessor and other tenants or occupiers of the Land."
44 I reject the evidence of Mr Byrnes, Mr Lowes, Ms Wilder and Mr Taprell to the extent that these witnesses say that Mr Gazal agreed to lease or licence the applicants to use the surrounding land. I accept Mr Gazal's and Mr Ayoub's evidence in this regard. While there was no documentary plan tendered which showed the shopping centre development in drawing form in May, it was being manifested in documentary form later in 1994, by at least October. Mr Gazal said that the development was contemplated early in 1994. I accept him. The original affidavit of Ms Wilder made it plain, I think, that he had a shopping centre in mind in May. Even on her "corrected" version (which I do not accept) she said that he said this to her in late July or August. Another matter which Mr Gazal said he always had in mind was linking up Viscount Place from the turning circle to the eastern boundary of the land and thence to Homepride Avenue. This evidence was given in a clear and compelling way by Mr Gazal. Mr Ayoub was aware of Mr Gazal's wishes. I accept both of them. However, it was also clear from Mr Gazal's evidence that as at May 1994 he was not entirely clear of the route of the connection between Viscount Place and Homepride Avenue. In his cross-examination Mr Gazal frankly conceded the following:
Mr DeBuse: What I'm suggesting to you so that it is quite clear, is that as at May 1994, you did not have a developed idea for where the road for the Mega Centre was going to go?Mr Gazal: Not hundred per cent, no.
45 Mr Gazal was always clear that (as long as he could overcome any opposition from the Council) there would be a road running in an east-west direction to the eastern boundary of the land linking Orange Grove Road with Homepride Avenue, by extending Viscount Place. However, he was not, at May 1994, clear about its precise location. That explains, I think, why it is likely that Mr Gazal did not have in mind in May 1994 the destruction of the earthen ramp providing the external access to the toilets. This would have made his discussion about external toilets access more likely. But he did have in mind a significant development for the northern area and a new road skirting the land outside the basement. I think it improbable that in those circumstances he would ever have contemplated for one moment use of his land with a development application involving people shooting high pressure firearms in the open air. Not only would it be likely to interfere with building works, in particular the road, but also it could only potentially harm his prospects of development approval for both the shopping centre and the road extension.
46 The fence was put in a location which accorded with Mr Byrnes' evidence as to the agreement as to the outside land. Mr Gazal said that the location of the fence in the wrong place was pointed out to Mr Byrnes. Mr Ayoub supported this. Mr Gazal said that he did not require it to be moved then because he had a right at any time to do so under the lease. I accept Mr Gazal and Mr Ayoub.
47 Further, I find it unlikely that Mr Gazal, while adamant that the lease would be for the basement only and not for any land, would agree to a side agreement providing for an indeterminate commencement without any clear notion of when rent would commence.
48 A page of a development application was signed in blank by Mr Gazal in about August 1994. Mr Byrnes and Mr Lowes gave evidence that the circumstances of the signing of this document was such as to make plain to Mr Gazal that he was signing a page of a development application for the outside field. Mr Gazal denied this. I accept Mr Gazal. I think it likely that this page was intended to be used in relation to a substitute application for the corporate third applicant in relation to the use of the basement. This page was later filled in by Ms Wilder using the name of the third applicant and not the names of the first and second applicants as had been used in the primary development application. No development application was ever filed with the Council for the outdoor field. The activities of Price and Speed, which might have been seen to put an end to the possibility of using the area outside for an outdoor field, did not begin until May 1995. This is another reason why I am persuaded that there never was an agreement in relation to the outside land for paintball.
49 However, although the claim about the agreement concerning the surrounding land consumed a great deal of energy in the litigation, it is ultimately a matter of little moment. One thing of which Mr Byrnes was apparently unaware in 1994 and 1995, but of which he has since become aware, and which he concedes to be correct, is the fact that, as deposed to by Mr Ballas, local government authorities required a 75 metre buffer zone between the parameter of any paintball field of play and neighbouring land. In his cross-examination, Mr Byrnes sought to identify an area east of the basement which could accommodate this buffer. However, the difficulty with this evidence is that when one looks at a scale plan of the area (exhibit R17) and has regard to the boundaries of the area said by Mr Byrnes to be the subject of the agreement and the external boundaries of the respondent's land, there is simply no room for any paintball field outdoors. While the eastern boundary of the land is somewhat over 110 metres from the eastern (north-south) wall of the basement, the southern and northern boundaries of the outdoor land, constituted by the southern boundary of the respondent's land and the position of the fence running east-west slightly to the north of the basement, are less than 150 metres apart. Therefore a 75 metre buffer from the south and from the north would leave no land on which an outdoor field could be situated. The "upper field", sometimes discussed in the evidence, directly to the south of the basement, is situated north of the southern boundary of the respondent's land. The distance from the southern boundary of that land of the respondent to the southern (east-west) wall of the basement is less than 75 metres.
50 The fact that Mr Byrnes had no idea of an apparent extant regulation or approach of local government authorities indicates the likelihood that the possibility of outdoor paintball was not really to the forefront of his mind at the time.
51 The conclusion which I have reached that there was no agreement about an outdoor field is supported by some contemporaneous documents prepared by Ms Wilder. She engaged in some research prior to commencement of the business. In that research she circulated a promotional brochure prepared, I would take it, by her and Mr Byrnes concerning the proposed business of the applicants. Nowhere in this document was an outdoor field mentioned. Indeed, the advantage of this business was identified and described in that document as follows:
Our aim is to provide full facilities for the sensational new action sport, paintball, concentrating on the inclusion of full provision for wheelchair access and complete mobility inside the complex. [emphasis added]
52 The brochure goes on to say that the strictest guidelines would be enforced in regards to parking and behaviour outside the complex to ensure neighbourhood disruption was minimal.
53 Both these matters rather militate against the likelihood of Mr Byrnes then having a present intention to have an outdoor field. Indeed, when Ms Wilder was putting forward her projections to the National Australia Bank for the first year of operation she made them on the basis of two indoor fields and no outdoor fields. It is plain from the cross-examination of Ms Wilder that the two fields to which she referred were both indoors and referred to the surrounds, camouflage and obstacles of a particular arrangement.
54 So, even if I am wrong about my conclusions about the lack of any agreement as to the use of the outside land, its availability would not have enabled any outdoor play to take place in the light of the uncontradicted evidence of the attitude of councils in this regard and the land would only have been of utility in the operation of the business as a means to provide a more congenial amenity to the business being carried on indoors.
55 By reason of the above, my conclusion is that the rights and liabilities of the parties are to be determined by reference to what happened as judged by the duties and obligations found in the lease. The other claims, including that under the Trade Practices Act necessarily fail.
56 I now turn to those rights and obligations.
The Covenant for Quiet Enjoyment
57 A breach of the covenant for quiet enjoyment was alleged. The covenant was express and contained in clause 11.1 of the lease memorandum filed at the Land Titles Office. It was in the following terms:
Quiet Enjoyment11.1 The Lessee paying the rent hereby reserved and duly and punctually observing and performing the covenants, obligations and provisions in this Lease on the part of the Lessee to be observed and performed, shall and may peaceably possess and enjoy the Premises during the Term and any holding over period without any interruption or disturbance from the Lessor or any other person or persons lawfully claiming under the Lessor subject as provided in this Lease.
58 The law on the covenant for quiet enjoyment has been recently reviewed by a Full Court of this Court in Hawkesbury Nominees Pty Ltd v Battik Pty Ltd [2000] FCA 185. I refer, in particular, to the reasons for judgment of Hill J and Gyles J (with both of whom Gallop J agreed), at paragraphs [35] to [41] and [75] and [76], respectively. Assisted by their Honours' reasons, I take the following to be the relevant principles.
59 It should be recognised that the ordinary principles of contract apply to leases: The Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17; and National Carriers v Panalpina (Northern) Ltd [1980] UKHL 8; [1981] AC 675, 696, 703.
60 The function of the covenant is twofold: (a) it is a limited undertaking as to title; and (b) it is a covenant that the tenant should peaceably hold and enjoy the demised premises without interruption by the lessor or those claiming through the lessor: Goldsworthy Mining Ltd v FC of T [1973] HCA 7; (1973) 128 CLR 199 at 214. The purpose of the covenant is to prevent the landlord annulling its own deed by interfering with the possession of the tenant: Goldsworthy Mining Ltd v FC of T, supra; and O'Keefe v Williams [1910] HCA 40; (1910) 11 CLR 171, 191, 192, 200-201 and 211.
61 Where the demise has been granted for the carrying on by the tenant of a particular business known to both parties, it is that business which forms the framework of the analysis as to whether there has been interference with the possession of the tenant. It is the ordinary and lawful enjoyment of the demised premises for the known purpose which is to be protected from interference which is substantial.
62 It is a question of fact whether the lessee's ordinary use of the premises has been substantially interfered with: Southwark LBC v Tanner [1999] UKHL 40; [2001] 1 AC 1, 9-11. The tenant is entitled to the full benefit of the demise, of the possession, for the known or nominated purpose: Kenny v Preen [1963] 1 QB 499, 511. This is not by any means to elevate matters to a covenant for the fitness of the premises for the nominated purpose: Southwark LBC v Tanner, supra; and cf Sarson v Roberts [1895] 2 QB 395; Brilee Consultants Pty Ltd v Tibal Holdings Pty Ltd (1984) 3 BPR 9272 at p 9274; and Bradford House Pty Ltd v Leroy Fashion Group Ltd (1983) 46 ALR 305.
63 A consequence of the proposition that it is a question of fact as to whether interference with possession for the known or nominated use is substantial is that one should be careful not to elevate factual decisions in other cases to statements of principle: Teubner v Humble [1963] HCA 11; (1963) 108 CLR 491, 503 per Windeyer J and Bus v Sydney County Council [1989] HCA 29; (1989) 167 CLR 78 at 89 per Mason CJ, Deane, Dawson and Toohey JJ. For instance, it has been sometimes said that mere noise or invasion of privacy is insufficient, that there must be "some physical interference with the enjoyment of the demised premises": Browne v Flower [1911] 1 Ch 219, 228 and Phelps v City of London Corp [1916] 2 Ch 255, 267. Such distinctions are factual and not founded in application of principle: cf Southwark LBC v Tanner, supra at 11. For instance, there is no reason why noise alone could not amount to a breach of the covenant in respect of a demise for the purpose of conducting a hospital for persons suffering from nervous shock or nervous breakdown.
64 The real question is, what is the best way to express the degree of interference with possession required (bearing in mind the known or designated purpose of the demise). One needs to be careful with the adverb "substantially" in the phrase "substantially interfered with." It does not elevate the requirement to one of "practical frustration" of the lease: Aussie Traveller Pty Ltd v Marklea Pty Ltd [1997] 1 Qd R 1 at 8-10 (per McPherson JA, Thomas J agreeing at p 19) and Hill J in Hawkesbury Nominees Pty Ltd v Battik Pty Ltd, supra at paragraph [39]. If full enjoyment is the entitlement: Kenny v Preen, supra at 511, then a material reduction in that fitness suffices to create a breach. Whilst bearing in mind the cautionary injunction of Windeyer J in Teubner v Humble, supra, the importance of not over-emphasising the word "substantially" is reflected in the decisions of Owen v Gadd [1956] 2 QB 99; JC Berndt Pty Ltd v Walsh [1969] SASR 34; and Martins Camera Corner Pty Ltd v Hotel Mayfair [1976] 2 NSWLR 15, 27. I agree with McPherson JA in Aussie Traveller Pty Ltd v Marklea Pty Ltd supra, at 8-12, that it is not necessary for there to be practical frustration of the lease, or that the interference render it impracticable or uneconomic to carry on the lessee's business for there to be a breach of the covenant. However, as is discussed below, the degree of seriousness of the breach is central to the assessment of the legal consequences of breach, in particular whether the tenant is entitled to terminate the lease.
65 In assessing whether there has been a material reduction in the fitness of the premises for the business, the accepted state of the premises at the time of grant is relevant. The covenant does not apply to things done before, or the state of affairs at, the grant. The tenant takes the property not only in the physical condition in which he, she or it finds it, but also subject to the uses which the parties must have contemplated would be made of the parts retained by the landlord: Southwark LBC v Tanner, supra at 11-12. One should be careful about finding a breach of the covenant where the matters complained of worsen the position little from the state of affairs at the date of the grant.
66 Where the acts are not those of the lessor, the lessor is nevertheless liable for them if it fails to take steps to eliminate or prevent them. Older authorities suggest authorisation is required, or at least that the acts were reasonably foreseeable. See generally the discussion by McPherson JA in Aussie Traveller v Marklea Pty Ltd, supra at p12. I do not think any differences between these formulations matter here. The respondent had control over and could be said to have authorised most of the matters complained of.
67 Further, the enjoyment to which the tenant is entitled is possession of the demised premises, in the manner that I have identified, and also of the rights appurtenant thereto: Todburn Pty Ltd v Taormina International Pty Ltd (1990) 5 BPR 11,173 at p 11,177 (per Powell J, as his Honour then was) and the cases there cited.
68 Finally, the assessment of the interference concerns the possession of the premises for the purpose known. This may be demonstrated by the business purpose being shown to be tangibly interfered with. It is unnecessary in this process to show that the business was or would have been otherwise a success. If a demise is made for a business purpose and interference is caused such that the possession for that purpose is materially affected in the way I have described, it is no answer to say that the business as run by these tenants was otherwise hopeless and their business, in the sense of their profitability, was harmed only marginally. If the ordinary lawful use of the premises, the possession of the premises, for that known purpose, has been the subject of material derogation or interference, a breach has occurred. The question of whether there was any affectation of profitability, and if so, to what degree, is a question for the assessment of damages. This reflects something objective about the quality of the interference with possession or use by reference to a particular purpose - not something judged merely by the effects on the particular business carried on. Though guided or informed by the (business) purpose of the use of the demised premises, it is an interference with a property right (possession or the grant) and not interference with the business activity that is the legal foundation of the right to complain about the breach of the covenant.
69 If a breach has occurred, the question arises as to the consequences thereof. A breach will sound in damages. It will also entitle termination where the interference is of a sufficiently serious nature.
70 I agree with Powell J in Todburn Pty Ltd v Taormina International Pty Ltd, supra at p11,176 that, specific terms of the lease to the contrary, the covenant for quiet enjoyment is not an essential condition of a lease, any breach of which will entitle a tenant to terminate the lease. The lease here did not so elevate the covenant into a condition. Rather, a breach of the covenant may range from minor to major matters of disturbance. If the degree or nature of the conduct is such as would be described as serious or substantial it may be that it evinces an intention by the landlord not to be bound by the lease and thus amounts a repudiation by the landlord. Another way of examining the matter is to assess the extent and gravity of the breach and determine whether the breaches deprive the party not in default of substantially the whole benefit which it was intended that he, she or it should obtain from the contract: Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 69 (per Diplock LJ); Cehave NV v Bremer Handelsgesellschaft m.b.H. [1976] 1 QB 44; Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 998; Federal Commerce and Navigation Co Ltd v Molena Alpha Inc [1979] AC 757; Bunge Corp v Tradax Export SA [1981] UKHL 11; [1981] 1 WLR 711; Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, 625-626, 637; Associated Newspapers v Bancks [1951] HCA 24; (1951) 83 CLR 322, 339; Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, 642; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549, 556-57, 561-62; Progressive Mailing House v Tabali, supra at 31 and 33.
71 A distinction can be drawn between conduct amounting to a breach which is to be taken as repudiation, that is evincing an intention of the guilty party not to be bound by the contract, and a breach sufficiently serious in kind to give rise to the right to terminate. Mahoney JA, in Honner v Ashton (1979) 1 BPR 9478 at 9489-93, drew a distinction between the right to terminate for what his Honour identified as a serious breach of contract (which he referred to as "fundamental breach", though by no means participating in any pre-Suisse Atlantique heresy thereby) and repudiation. In some cases the two notions have been run together: see, for example, Federal Commerce and Navigation v Molena Alpha, supra at 778-9. The distinction was referred to by Gibbs CJ in Shevill, supra at 625-26 and by Upjohn LJ in Hongkong Fir, supra, at 64. Mason J in Progressive Mailing House v Tabali, supra at p 31 viewed the two as synonymous. However, Mason J's treatment of the primary judge's findings at p 33 indicates that though synonymous, the two can probably be seen as distinct, though his Honour left open the formal correctness of the distinction.
72 Conceptually, there is much to be said for distinguishing repudiation and substantial breach warranting termination. Mahoney JA's views in Honner v Ashton, supra were echoed by those of McHugh JA (as his Honour then was) in Woodfactory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105, 144-145; though compare the views of Kirby P (as his Honour then was) in J & C Reid Pty Ltd v Abau Holdings (1988) NSW ConvR 55,416 at pp 57-802 - 57-806. In the case of repudiation, as Mahoney JA said in Honner v Ashton, supra at p 9492, the intention or the acts of the defaulting party can be distilled as the relevant factor. There is an evincing of an intention not to be bound by the obligations of the contract, or whilst intending to comply, only to do so in a manner inconsistent with those obligations and in no other way: Ross T Smyth & Co v T D Bailey and Son & Co [1940] 3 All ER 60 at 71-2 per Lord Wright and Larratt v Bankers & Traders' Insurance Co (1941) 41 SR 215 at 233 per Jordan CJ. In the case of substantial failure of performance (to borrow the phrase used by Treitel in The Law of Contract (7th Ed) at pp 585-6), one looks to the nature and consequences of the breaches, which may or may not direct attention to acts of the other contracting party.
73 The potential significance of the difference which Mahoney JA identified between repudiation (as the evincing of an intention not to be bound by the terms of the contract) and rescission or termination for serious breach is perhaps illustrated by the kind of considerations thrown up by Lagouvardis v Brett and Janet Cottee Pty Ltd (1994) NSW ConvR 55-714. The case was an appeal from the decision of a magistrate who had found a repudiation of a commercial lease by the landlord by its failure to prevent dust generated from an adjacent carpark entering the demised premises and interfering with the tenant's window tinting operations. The damages suffered by the tenant amounted only to $3,000. The balance of the rent owing was $40,000. Young J, whilst recognising that repudiation is not lightly to be inferred (Ross T Smyth & Co Ltd v T D Bailey Son & Co, supra, at 71) said the finding was open because of the landlord's failures to comply with the lease. His Honour said:
It might be thought that some of the factors mentioned are minor, but it is clear that a series of minor matters may together constitute repudiation: Hudson Crushed Metals Pty Ltd v Hendy [1985] 1 Qd R 202.
74 Thus, although the consequences of the breaches were relatively minor, together they evinced an intention not to be bound by the contract.
75 Irrespective as to whether or not substantial failure should be seen as a species of repudiation, it is necessary to express what it is that entitles the innocent party to terminate. Unfortunately there appears to be no generally accepted terminology: see Treitel Remedies for Breach of Contract: A Comparative Account (Oxford, 1988) pp 350-51 and Carter Breach of Contract (2nd Ed) pp 158-59. As Mahoney JA said in Honner v Ashton, supra at p 9492, the expressions going to the `root of the contract' or to the `foundation of the contract' (Mersey Steel & Iron Co Ltd v Naylor, Benzon & Co (1884) 9 App Cas 434, 443-44) only lead to a need to elucidate the meaning of `root' and `foundation'. He then referred to the following expressions of opinion as to the degree of breach required to justify termination (whether or not properly referred to as `repudiation'):
(a) Ross T Smyth & Co v T D Baily Son & Co, supra at 72 per Lord Wright: "[He] may be determined to do so [that is fulfil his contract] only in a manner substantially inconsistent with his obligations...";(b) Hongkong Fir, supra at p 72 per Diplock LJ: where what had occurred deprived the innocent party "of substantially the whole benefit which it was the intention of the parties... that [the other] should obtain..."
(c) Decro Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 per Buckley LJ: "...such as to deprive the ... party of a substantial part of the benefit to which he is entitled... Will the consequences of the breach be such that it would be unfair to the injured party to hold him to the contract and leave him to his remedy in damages?"
(d) Fullers' Theatres Ltd v Musgrave [1923] HCA 12; (1923) 31 CLR 524 at 537-38 per Isaacs and Rich JJ: "...[O]ne party to a contract is not entitled to force upon the other party something which, by reason of the departure from the terms of the contract, is so materially altered in character as to be in substance a different thing from that contracted for." And their Honours quoting what Lord Eldon said in Knatchbull v Grueber (1817) 3 Mer 124, 146 concerning whether something different was being proffered: "... if, on the other hand, the subject matter remains unaffected, or so little affected as to be substantially that which was agreed to be sold, then the purchaser must be held to his contract."
76 See also in this regard Wallis, Son & Wells v Pratt & Haynes [1910] 2 KB 1003, 1012; and on appeal [1911] AC 394 and Bowes v Chaleyer [1923] HCA 15; (1923) 32 CLR 159, 178.
77 The necessity for the effect of the failure or breach to affect the substance of what was intended to be contracted for is reflected in the damages recoverable upon termination: the loss of the benefit of the whole contract.
78 However one expresses it, the essential element is the deprivation of a benefit or of an entitlement or the imposition of a burden, sufficiently serious as to change the character of the grant to, or of the obligations or entitlements of, the other party to the contract to such a degree that it can be said to be a commercially different bargain. Such a rendering of difference from that which was intended may be caused by the breach, the actual consequences of the breach or the foreseeable consequences of the breach: see Carter op.cit. p.164 Article 24. Or, as Burchett J put it in Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527 at 553, if the breach is of such seriousness that (to borrow from Jordan CJ in Tramways Advertising, supra and Brennan J in Laurinda Pty Ltd v Capalaba Park Shopping Centre [1989] HCA 23; (1989) 166 CLR 623 at 642) it can be inferred that the innocent party would not have entered the contract unless assured that a breach of that gravity would not occur. See also here Treitel Remedies for Breach of Contract p 351 ftnt 61.
79 In respect of breaches of the required seriousness it can be said that the breach went to the `root' of the contract (properly construed), that commercially it could not be performed (as originally contracted for) and that the party has been deprived of substantially the whole benefit of the contract (as originally agreed) - even if some residual contractual purpose or benefit is provided, if it is not what, in substance, was contracted for. In this respect see the discussion by Samuels JA in Tricontinental Corporation v HDFI Ltd (1990) 21 NSWLR 689 at 703 of the reference by Jordan CJ in Tramways Advertising, supra to the phrase `substantial performance' and its relationship to the development of the innominate or intermediate term after Hongkong Fir, supra.
80 Whatever be the most appropriate expression of the degree of seriousness required to amount to circumstances which entitle termination, it is also necessary to identify the kinds of factors to which the court will or may have regard, in addition to the question of interpretation and construction of the contract, in assessing the seriousness of any breach. The following are relevant considerations in assessing that seriousness: the adequacy of damages and the ability to quantify damages; any apparent injustice, including unjust enrichment of the innocent party, should that party terminate; the possibility of forfeiture by the party in breach; the uncertainty or not surrounding future compliance with the contract; the history of the standard of contractual compliance hitherto; the expressed or otherwise evident attitude of the party in breach to its obligations; the ability of either party to cure the breach; and, perhaps, the extent to which the behaviour of the party in breach comports with standards of good faith and fair dealing. These matters may not be exhaustive, but they may, in any given case, assist in an assessment of a breach as of sufficient seriousness or not to warrant termination. See generally Treitel, Remedies for Breach of Contract pp356-60; Treitel The Law of Contract (7th Ed) pp 585-618; and the Restatement of the Law of Contract 2d. [241].
81 I turn to deal with the matters said to have amounted a breach of the covenant.
The Question of Interference with Quiet Enjoyment
82 The complaints of the applicants about the alleged breach of the term of quiet enjoyment fall into a number of categories. The first category of complaint was the noise said to have come from the floor above by other tenants ("Cartech") who used the premises for storing new cars. Undoubtedly there was a significant amount of noise caused by this. A video placed in evidence attested to that. However the behaviour was stopped once it was brought to the attention of Mr Gazal who spoke to the tenants. Further, and more importantly, the activity complained of ceased before the commencement of the operation of the business. This can be put to one side.
83 The second category of complaint was one based on the failure by the respondent to attend to matters within the demised premises or the toilets. The particulars under paragraph 8 of the Further Amended Statement of Claim contain an assortment of such complaints. They include the failure to install drains under taps in the basement, the poor housing of electrical wiring, the failure to provide lighting in the toilets, the failure to provide proper nozzles on taps to the showers, the failure to connect drains to stormwater drains and inadequate security to the premises. There was evidence about all these things to a greater or lesser degree. Much of it, in terms of its alleged seriousness, relied on the evidence of Mr Byrnes. However, all of these complaints are answered by the simple fact that there was no obligation on the respondent whatever to attend to these matters. There was nothing express in the lease. There could be nothing implied since Mr Gazal made it quite clear that the $2 per square foot was on the basis that all work to bring the premises into a state of repair was the responsibility of the applicants.
84 The third category of complaint was interference with the premises by the ingress of rainwater whenever it rained. This difficulty, if it existed, was said to be a result not of the condition of the demised premises as leased but the roof of the building. The evidence was vague and unconvincing as to the source of any leaking. Mr Byrnes affidavit says that the leaking was caused by "rust holes in the guttering". There was also evidence of a separate problem caused by glass falling on to the roof which caused holes which caused leaking. First, I see no reason why the repair of the guttering would not be covered by the "as is" basis of the lease. The premises leaked before. They leaked still. See in particular in this respect [62] and [65] above. The caution about converting the covenant into one for fitness for purposes should be recalled. This is especially so when Mr Gazal had clearly expressed the foundation of the lease to be that the premises were taken "as is". The applicants had access to the basement for months before the lease was signed. No attempt was made to deal with the question of leaking in the lease. In any event, I am reluctant to accept that the matter was of such seriousness as to materially affect use of the premises. Notwithstanding my view that this matter did not amount to a breach of the covenant for quiet enjoyment, I will take it into account when assessing damages caused by those matters which I have decided were breaches of the covenant.
85 The fourth category of complaint was a disconnection of water for four days in about April 1995. It was said by Mr Byrnes that this "caused customers, including large parties, to cancel bookings because the toilets and showers could not be used, sprinklers and fire hydrants were disabled and there was no drinking water." The rudimentary hand-kept book which recorded bookings and cancellations provides some evidence for some cancellations in April. A booking for "Lisa" between 9 and 14 April for "once a fortnight" was cancelled. There may have been a cancellation on 30 April for 18 people, but Mr Barber, one of the people who kept the book, did not recognise it as a cancellation. There was an undated cancellation of "Tom" for 12 people in a position in the book which could have made it a March or April booking. There is no satisfactory evidence to corroborate Mr Byrnes' assertion as to a significant impact. However, once again, I will take this into account in damages, lest I be wrong in my conclusion that it did not amount to a breach of the covenant.
86 The fifth category concerned the failure in May 1995 to have reconnected for a period of four days a telephone line which had been disconnected. As far as the evidence of Mr Byrnes is concerned, I cannot conclude that there was any lack of attendance to the obligations under the lease by the respondent.
87 This brings me to the sixth category of complaint. This is the complaint concerning the activities of a company called Price and Speed. Before turning to the evidence concerning this activity, it is necessary to recall that the lease provided for the basement only. However, in determining the rights and obligations of the landlord and tenant, and in particular whether there had been a breach of the covenant for quiet enjoyment, not only the demised premises, but also the rights appurtenant thereto must be considered. For instance, access was required to the demised premises and the right to such access would be implied. External access to the toilets was agreed and would be implied in the circumstances of that agreement. The development application submitted by the applicants, which Mr Gazal signed as owner, identified 20 car parking spaces on a concrete area on the eastern side of the basement. It was, strictly speaking, not land subject to the demise. However, it was explicit that the premises were to be used a paintball business which had customers. A right of a reasonable amount of car parking, at least 20 as identified in the development application, should be implied as appurtenant to the lease.
88 In, or shortly prior to, May 1995, after the business had been operating for approximately two to three months, Mr Gazal leased to Price and Speed, on a casual basis, the area to the east and south east of the basement. Price and Speed carried on the business of storage of, and maintaining and dealing with, marine shipping containers. In May of 1995 (the precise date being unclear in the evidence) Price and Speed began to move some 800 containers into the area to the east and south-east of the basement. These containers were moved in on articulated lorries which were supposed to enter the premises through Viscount Place across the turning circle and into the land to the east of the basement via a gate in the fence in the northern part of the vacant land to the east of the basement. The area covered by the containers was in the square to the east of the basement and also along the southern boundary of the land to the south-east of the basement.
89 It is tolerably plain from the evidence that for a period of about two weeks these containers moved in one after the other and Price and Speed worked day and night to put as many containers on the land as were ultimately put there, that is about 800. There were in evidence pictures showing lorry after lorry bringing these containers to the land. The applicants tendered a video, though it was of very poor visual and aural quality. It dealt with many of their complaints and did show these containers coming on the land. During the period of this initial stacking of the land, a number of these lorries apparently entered by the Homepride Avenue entrance. Some damage was done to the entrance gate.
90 My conclusions about this Price and Speed activity are necessarily clouded by my view of the distinct likelihood that Mr Byrnes exaggerated significant parts of his evidence. However, I think the history recounted by Mr Johnson, a Price and Speed employee, was in all likelihood somewhat anodyne it its description of the impact of the activity. I am content to find that during this early period there was significant noise and disruption, dislocation to any party attempting to enter or leave the premises and a great deal of dust created. Parking was in all likelihood impeded, if not perhaps prevented. Mr Taprell, in whose willingness to give evidence without exaggeration I place more faith, gave a terse, but to the point, description of some of this activity. He saw large transport containers stacked over the land so much so that the premises could not be seen. He observed trucks driving in and out of the driveway. He observed trucks blocking the premises' driveway. He observed forklifts loaded with containers which were lifted up and down all day long and at times close to the office. He said this practice continued for months.
91 Much of the evidence was sketchy about precisely what interference was caused. In fairness, it is not easy to be linguistically precise about the overall effect of such activity. It has been necessary to piece together fragments of images from photographs and the video and from listening to the various people who were there, more or less articulately, describe what happened. After the container yard was set up after the first few weeks there was the coming and going of lorries from time to time delivering and taking away containers. I am satisfied on the evidence that after this initial period this activity took place substantially, if not wholly, during the day time. However, the ending of the constant ingress and egress of container lorries at all hours of the day and night did not bring tranquility to the area surrounding the basement. This was not just a storage facility. It was also a place where Price and Speed repaired and maintained containers. For instance, in the area on Schedule A identified as carparking space for 20 cars, Price and Speed set up a workshop to attend to the repair of containers. From the evidence this involved not only the hammering out with large hammers of indentations and the like in containers, but the use of oxy-acetaline equipment. Containers were moved around and from time to time came and went. I do not think it is likely to be too much of an exaggeration of Mr Byrnes to say that while in full swing this sort of activity seriously impaired his ability to speak with people on the telephone inside the basement and would hinder communication between people in the basement. I am also satisfied on the evidence that containers were stacked quite close to the walls on the southern as well as the eastern side of the basement. This cut off natural light and impeded airflow into the premises.
92 I have come to the view that the activity of Price and Speed was a real interference with the quiet enjoyment of these premises to carry on business as a paintball centre open to the public. Access, whilst not denied, was made more difficult. There was a significant amount of noise and interference by large articulated lorries depositing containers. There was interference by the movement of forklift trucks around the yard moving containers as they arrived. There was the creation of large amounts of noise and dust from all this activity, including the workshop. I think the applicants have a complaint about this that is genuine and I think the activity amounted to a breach of the covenant.
93 Mr Jones, in characteristically blunt and forceful submissions, pointed to the lack of real activity in the paintball business during the day as important. He said that it was really a business carried on at night and, at least after the introductory period when most of the containers arrived, there was no such interference during the night. There is a measure of validity in these submissions. However, they rather brush aside the degree of interference in the first few weeks. Further, they tend to ignore the fact that it was a business which was anticipated to operate during the day. Perhaps it did not operate during the day with the frequency that it was hoped would occur at night and on the weekends. However this business was in its infancy. It had been barely operating for three months before the premises were flanked by 800 stacked containers brought in one after the other by large articulated vehicles. It is, with respect, a little too easy to say that little business was done during the day during this period of the business' infancy, when it was suffering from the kind of interference to which I have referred. Also, it should be remembered, as I have earlier identified, that it is not the business that is to be interfered with to cause a breach, but the possession of the premises, bearing in mind the purpose of the business anticipated to be carried on on the premises. The appropriate way to look at it is to ask whether the possession of the premises, used for the purpose of a day and night paintball business, was interfered with by the activity. In my view it was.
94 Whether or not, standing alone, this activity was enough to entitle termination need not be decided. It was a breach of the covenant and of a material kind. I am inclined to the view that it was sufficiently serious to have provided grounds for termination of the lease. It sounds in damages whether or not it was sufficient to entitle termination. Termination occurred not only because of this activity, but because of matters which occurred in November 1995. To assess the entitlement to the applicants to walk away from the lease requires an understanding of what then happened in conjunction with the matters brought about by the activity of Price and Speed. There was no pleading of affirmation or waiver of any breach by the applicants remaining on the premises and "soldiering on" until January. No occasion therefore arises to discuss whether, by application of these notions, I should not consider the Price and Speed activity when assessing termination in January 1996.
95 November 1995 saw the commencement, by either the respondent or some other entity controlled by Mr Gazal, of the construction of the large shopping centre to the north and north-west of the basement. This led to the seventh category of complaint: the effect of these building works. The works involved a number of things. First, they involved the pulling down of the buildings then on the site: buildings known as Nos. 2, 3 and 4. One of the matters which this generated was the dispersal of some asbestos particles in a manner not approved of by a relevant State authority. The presence of asbestos particles from the demolition of these buildings is identified as a nominated breach of the covenant of quiet enjoyment. The evidence concerning interference is less than satisfactory and I do not conclude that this amounted to a breach of the covenant.
96 More importantly however, work began upon the construction of a road, being the extension of Viscount Place, off Orange Grove Road, directly east towards the eastern boundary of the respondent's premises. This meant that the building immediately to the north of building no. 1, the small building identified as "existing building" in Schedule A, was demolished. It also meant that the earthen ramp giving external access to the toilets was demolished. This was done without any apparent warning or explanation to the applicants. There was no attempt to offer alternative access to the toilets. The ramp was simply removed. There is some suggestion in the affidavit evidence of Mr Gazal that steel steps were installed to allow access to the toilets. There was no mention of this in the oral evidence. There was no identification of such steel steps in any photograph in evidence. No cross-examination took place of Mr Byrnes to the effect that such steel steps were there. From the evidence before me there is little support for these assertions in the affidavit. However, they were not cross-examined upon as false; indeed, Mr Byrnes on a number of occasions referred to the removal of access for disabled persons, rather than removal of access entirely. On other occasions in the evidence there was mention of removal of access, simpliciter. It is quite unclear when those steel steps were put in place, if they were. I am not prepared to find that those steel steps were built immediately or within a reasonable time after the destruction of the earthen ramp. I find that no warning of the removal of the ramp was given. I find that no offer was made to replace the withdrawn external access. This was a breach of the covenant of quiet enjoyment in that it materially interfered with access to the toilets which was a right appurtenant to the lease.
97 Not only was the road built, but also there was a significant amount of earthworks attended to on the northern property. This involved changing the grade of the land. One consequence of this, which Mr Bobyk recognised, was the likely higher incidence of flooding of the basement, should heavy rain occur. Heavy rain occurred in November. The question of flooding is clouded by two related issues. First, the basement was said by the respondent to be flood prone. I referred earlier to the evidence of caked mud and caked mud caused by flooding which appeared in various persons' affidavits and which was the subject of attempted variation under cross-examination by Ms Wilder and Ms Hardi. It is quite likely that this basement had had flooding in the past. However, it is also plain from the evidence that prior to November, all throughout 1995, flooding was not a problem. The extracts of the official meteorological records tendered in the proceedings reveal that there were days of heavy rain in Sydney during the course of 1995. Mr Bobyk himself recognised that the grading and the earthworks made the basement more prone to flooding.
98 The second issue clouding the flooding question is the assertion by the respondent, in particular through the evidence of Mr Bobyk, that Mr Byrnes and one other deliberately removed a sandbag levy, which he, Mr Bobyk, had put in place in an attempt to minimise or prevent the flooding. Mr Byrnes vehemently denied it. Mr Bobyk was cross-examined. I will not repeat my views about Mr Byrnes' credit. I think it highly likely that Mr Bobyk's interpretation of Mr Byrnes' amused facial expressions when Mr Bobyk confronted him about the matter was correct. However, I do not think this issue goes anywhere. It is plain from the photographs that with the levy, which Mr Bobyk constructed at the northern door of the premises, in place, there was nevertheless significant flooding into the basement. Mr Bobyk may well be correct that Mr Byrnes deliberately made things worse on one particular day. However, the objective evidence from the photographs indicates that the flooding within the basement occurred irrespective of any such sabotage. Mr Bobyk put up waterproofing to the northern side of the building. However, this was not done until after significant flooding occurred.
99 Like the removal of the earthen ramp, all this work was done without consultation with the tenants. Among the sorts of factors to which I referred in [32] above, of relevance here in assessing consequences of these matters, are the facts that no remedial work was promptly offered, that the respondent must have known that these matters would interfere with possession, that there was no prior consultation, that those matters came on top of past and continuing breach of the same covenant through the activity of Price and Speed, the ingress of sewage (to which I will come in a moment) and the lack of ability or knowledge in the applicants to be able to assess what might be the likely limited or extended duration of the breaches. Taking into account all these factors I think that the applicants were entitled to view the flooding and the removal of the access to the toilets as matters, in conjunction with the interference from Price and Speed, entitling them to terminate the lease. The fact that the business was on its knees by that time, in any event, is not to the point. Once again I should emphasise that the breach is the interference with the possession not the marginal interference with a moribund commercial activity. (I set to one side the question as to whether the state of the commercial activity was a result of the Price and Speed activity. I will return to this in discussing damages.)
100 The eighth category of complaint relates to the notices from the Council to repair the premises and a Work Cover notice issued in November requiring certain work to be done. As to the Council notice I find that it was deliberately provoked by Mr Byrnes in an attempt to extract himself from the lease of the premises at this time. Further, the notice dealt with, in substance, complaints by the Council as to the state of repair of the premises which, as I have earlier indicated, were the applicants' responsibility from the beginning. Also, some of these matters had been present at the time of the original development application and were thereafter waived by the Council. I do not accept that the Council notice was a ground for termination. Nor was the failure by the respondent to deal with it a breach of covenant.
101 The Work Cover notice concerned asbestos from damaged fire doors. The notice was issued on 24 November 1995. On 17 November 1995 the Council inspector had visited the premises and noted a number of matters requiring attention. No mention was made by the Council officer of any broken fire door. The broken fire door must have occurred after 17 November. The applicants' case was that officers or employees of the respondent broke into the premises during November in order to place some support beams underneath a cutting press which was on the first floor. The one piece of evidence of Ms Hardi which I accept is that the people who did this work needed her to open the doors to enter the premises having tried, she said, all their keys. From her evidence it was plain that no break-in took place. This work took place prior to 17 November. Mr Byrnes deposed in his affidavit to the fact that the door was broken by the respondents. I reject this. Whether or not the breakage was caused by him in an act of sabotage I need not find. It is sufficient to find that agents of the respondents did not cause the damage and were not responsible for it.
102 The ninth category of complaint concerned a leak from the toilets upstairs. There was evidence that in the first two to three weeks of November there was a leakage of sewage from the toilet upstairs into the basement downstairs. Given that I am bound to rely upon the evidence of Mr Byrnes for this, I have some caution in relation to the matter. However, I accept that it occurred. He said it lasted approximately two to three weeks. I am prepared to accept this as a matter which occurred in November. As such, it would amount to a real interference in the quiet enjoyment of the possession of the premises. The leak was fixed, although it was said to have taken two to three weeks. I am prepared to accept that this should be seen as one of the breaches of the covenant by the respondent in November.
103 The tenth category of complaint can be identified as a miscellaneous collection of complaints by Mr Byrnes about aspects of his tenancy. In his affidavit he made various complaints about rainwater run-off, including mud, barking dogs, people shooting pigeons, parking by Viscount employees near the office and other matters. I am not prepared to draw the conclusion that any of them was a breach of covenant.
104 In dealing with the various breaches I have borne in mind that each matter should not just be looked at individually, but also collectively or cumulatively.
Damages
105 It is now necessary to assess the consequences of these breaches of covenant. On 15 January 1996 Mr Byrnes paid the last instalment of rent. It would appear that this paid the applicants up to 15 January 1996. The business had effectively closed in the second half of November. The premises were vacated on 15 January 1996. The applicants were entitled to terminate the lease when they did by abandoning it on 15 January 1996. The claim by the respondent for the balance of the rent and other matters therefore fails. In those circumstances the cross claim must be dismissed with costs.
106 As I foreshadowed in [5] above, up to this point I have not concerned myself with the identity of the parties entitled to damages. The parties to the lease were Mr Byrnes and Mr Taprell. A company, the third applicant, was formed to undertake the business. No formal steps appear to have been undertaken to transfer the lease to the company or to regularise any relationship between the company operating the business and the tenants. The tenancy might be seen as being held on trust for the company, though that is far from clear. Given that I propose to make an award of damages, for the reasons expressed below, it is necessary to understand who it is that is entitled to those damages. No particular point was taken in relation to this matter at the hearing. The first and second applicants were the lessees. It was their possession which was interfered with. The damages flowing from that arise from the interference with the returns of the business which was conducted on the premises. The business was, it would seem, conducted by the third applicant. However, the third applicant was a company of which Mr Byrnes and Mr Taprell were the major shareholders. Each of Mr Byrnes and Mr Taprell provided money to the business for such time as it ran. Mr Taprell lost his house to the bank in the satisfaction of the bank's claims. Mr Byrnes put money towards the business. I think the appropriate course is to award the damages for breach of the covenant for quiet enjoyment to the lessees, the first and second applicants, and to assess those damages without any real regard to the niceties of the involvement of the corporate third applicant. This is how the case was approached. No particular point was taken about the existence of the corporation.
107 Lest there be any dispute about the form of the order which I propose to make, I will grant the parties liberty to apply to vary the order should it be thought that some other order ought be made to reflect the destination of the damages.
108 There being a breach of the lease it is necessary to assess what damage, if any, was suffered. If actual damage was suffered, the award should be for more than nominal damages: Enzed Holdings Limited v Wynthea Pty Ltd (1984) 3 IPR 619, 637.
109 The task of the court is to place the party suffering the breach, so far as money can do it, in the same position as if the contract had been performed: Robinson v Harman (1848) 1 Exch 850, 855; 154 ER 363, 365; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64. In circumstances such as the present, that task requires an assessment of the monetary impact of the activities and events which I have described on the business carried on at the demised premises, in so far as those activities and events were a material interference with the full enjoyment of the possession of the premises.
110 That task necessitates assessing what is likely to have occurred in the absence of those interferences. The difficulty in such an estimation does not relieve the Court from the responsibility of estimating them as best it can, even if this involves a measure of guesswork rather than estimation. In carrying out this task the Court is, in effect, doing what is required of a jury when it may have to form conclusions on slender material and make allowances for contingencies. If some broad estimate is capable of being made in this way, it should be. See generally Fink v Fink [1946] HCA 54; (1946) 74 CLR 127, 135 and 143; Jones v Schiffmann [1971] HCA 52; (1971) 124 CLR 303, 308; Amann, supra at 83, 102, 125-26 and 138; Sony Computer Entertainment Australia Pty Ltd v Stirling [2001] FCA 1852 at [7].
111 As was made clear in Malec v J C Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638, 639-40 and 642-43, Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332, 350 and Mallett v McMonagle [1970] AC 166, 176, the approach in assessment of facts differs between proof of historical facts, that is what in fact happened, and proof of future possibilities and past hypothetical situations. In the former circumstance, the civil standard applies. In the latter, it does not, except to the extent that some damage must be demonstrated: Sellars, supra at 355. Once some damage is demonstrated, the Court looks to degrees of probability, possibility, assessment, even guesswork, in doing its best to assess something necessarily hypothetical or of the future.
112 Here, there was a material interference with the possession of the premises. Also, at least by November 1995, and probably earlier, the degree of interference by all the circumstances to which I have referred entitled the applicants to terminate. They availed themselves of that entitlement in January 1996. A business was carried on on the premises. That leads to the necessity to essay two tasks. First, an analysis must be made of the effect of the interference on the conduct of the operating business carried on on the premises. So expressed, that task has the ring of an assessment of historical fact. It is so only in part. It is a question of historical fact only in so far as it is an inquiry to assess whether some damage occurred. As to the assessment of what would have been the position if certain breaches of covenant had not occurred, that is the assessment of a past hypothetical situation, though attended or influenced by historical questions of fact, eg the nature, extent or degree of the interference.
113 Secondly, the value of the lost future - the opportunity of exploiting the remaining period of the lease, must be assessed. Of what value would that have been to the applicants had they been allowed to continue in possession or had they been given the opportunity to continue in possession, without any breach of covenant having occurred or later occurring?
114 This is not a case in which nothing is known of the profitability or likely profitability of the business in question or of the activity of paintball: cf McCrae v Commonwealth Disposals Commission [1950] HCA 12; (1951) 84 CLR 377, with the consequences that would bring in connection with the recovery of wasted expenditure: Amann, supra at 89. There are a number of sources to which one may possibly resort for (more or less) assistance in relation to these questions. First, there are the records of the business. The business was carried on for 9 to 10 months from February 1995 to November 1995. Its accounting records were rudimentary, but to a degree they enabled a reconstruction of what was spent and received. Secondly, there are the conclusions which I can make, and have made, as to the degree of interference with the possession and through that with the business. Thirdly, there are contemporaneous projections of the business undertaken by Ms Wilder. Fourthly, there are the views of accountants called by the parties, Ms Davies and Mr Donnelly, concerning the business and its prospects. Fifthly, there is the evidence of Mr Ballas who was familiar with the premises and the business and who had a decade's experience in operating paintball businesses. He gave evidence of his observations of the quality of the applicants as commercial people and of the business. Also, crucially, based on his knowledge of the premises and the business and on his experience, he gave a best case return for the operation at the site. I need to say something about each of these sources of information.
the records
115 The records of the business were badly kept, but they have allowed some reconstitution. There is agreement on how much revenue the business earned. Mr Donnelly identified the following monthly returns:
Month Deposits$
February 1995 0
March 1995 5,780
April 1995 10,095
May 1995 12,036
June 1995 12,410
July 1995 7,080
August 1995 6,585
September 1995 7,645
October1995 7,939
November 1995 1,110
Total 70,680
116 Ms Wilder, whose calculations underpinned Ms Davies' report, claimed that the revenue totalled $75,391. Mr Donnelly accepted that higher figure for the purposes of analysis. It is not clear in what month or months the additional amount of a little under $5,000 was earned. I will assume it was earned over the period May to November.
117 The absence of appropriate records did lead to debate between Ms Davies and Mr Donnelly about costs expended. Ms Davies recognised $36,899 spent as establishment costs. She recognised another $39,648 spent as capital expenditure, the residual value of which was $10,000. The applicants have retained that equipment worth $10,000. Thus, $76,547 was spent on such start-up and capital costs, with $66,547 unrecouped. Further expenditure of $167,387 was calculated by Ms Davies as operating expenditure to be matched with the revenue of $75,391. Thus, on her calculations a trading loss of $91,996 was made, in addition to the unrecouped start-up and capital costs of $66,547. These three amounts of expenditure total $243,934. Mr Donnelly could only locate expenditure of $195,947 from the Underseige cheque account and from payments by Mr Byrnes. Thus there was an unexplained difference of $47,987. Also, he indicated that a further sum of $25,545 was paid to unknown parties from the business investment loan account but was not deposited into the Underseige cheque account, there being no particulars of the payees and expenditure. Also, the Underseige cheque account had cheque butts with the payee description `cash' totalling over $11,000 which he was not able to verify.
118 There was a dispute between these accountants as to $98,120 which Ms Davies recognised as a liability to pay wages, which had not been paid. The evidence is significantly lacking on this matter. Many of the people who assisted in the early months of clean up did so out of friendship and family loyalty. There is no coherent evidence to found a liability to pay such a large sum to any person or persons. Mr Donnelly refused to recognise these sums on the basis that they were not paid. The evidence does not enable me to conclude that the first or second applicants are liable in restitution or contract to pay anyone for the assistance that they gave. Many, if not all, were family and friends who were not paid. The evidence does not allow a conclusion, in my view, that this is a legal responsibility of Mr Byrnes or Mr Taprell or the third applicant.
119 I do not think that my task will be further advanced by seeking to resolve these particular accounting questions. It is sufficient to know that start-up and establishment costs in the order of $76,000 were probably spent and a significant trading loss was made in the nine to ten months' operation of the business.
the degree of interference
120 The effect on the possession of the premises and the business was material. An assessment of by how much the business was affected, in money terms, is a conclusion to be drawn from all the evidence. I will come back to this in due course.
Ms Wilder's projections
121 Ms Wilder prepared projections in 1994 and provided them to the bank. These projections, in part, provided the foundation for a report provided by Ms Davies. Ms Davies was also provided with further projections by Ms Wilder for the second and third years. These latter projections were based on outdoor and indoor fields and were prepared for the purposes of the litigation. All these projections were wholly unrealistic. For instance, Ms Wilder projected income from the business and the premises in the first three months of operation of almost $500,000. She estimated receipts for the first twelve months at over $2,000,000. She estimated the surplus in the first year of over $830,000. Similarly optimistic projections were made in relation to the second and third years trading and provided to Ms Davies. They revealed, at best, an ingenuous lack of understanding of business reality. They were not based on experience or common sense. They represented hopes of full utilisation and the mathematical and theoretical extrapolation of that.
the views of the accountants
Ms Davies
122 Ms Davies took Ms Wilder's figures and sought, she said, to adjust them where appropriate. She did not adjust the first year's figures. Even after making the so-called appropriate adjustments to the later projections, she was prepared to express a view that the trading profit anticipated for three years for the indoor area only was $10,600,000, before tax. Ms Davies had no experience in a business of this kind. She took figures and projections provided to her by the applicants which on their face were wildly optimistic. She made no real attempt to adjust them to reality by utilisation of such real figures as existed unaffected by any interruption caused by Price and Speed or by utilisation of her common sense or by reference to business models of a comparable industry sector. She made no real businesslike allowance for contingencies. The degree of unreality contained within Ms Davies' report can be gauged by the fact that the pre-tax internal rate of return deduced from her figures for the business was in the order of 2,500%. She accepted in questioning that she would expect an internal rate of return of a business of this kind, in the ordinary course, to be something in the order of 40 to 60%. I do not propose to place any reliance whatsoever on Ms Davies' opinions beyond those reflecting her interpretation of the available accounting records. I will leave my comments at that.
Mr Donnelly
123 Mr Donnelly, a very experienced accountant, liquidator and administrator, gave a somewhat more pessimistic view of the worth of this business. He had visited the site, but at a time when the business was closed. Thus, notwithstanding the real assistance that his report gives, he lacked the critical first-hand knowledge of the business held by Mr Ballas.
the views of Mr Ballas
124 Mr Ballas had run paintball businesses for a number of years. He had been interested in paintball since the mid-1980s and over the last ten years it had become his primary business interest. In partnership with another man, he controlled a business which operated two paintball centres on the outskirts of Sydney. In addition, his business controlled a shop in Bankstown which supplied guns, protective clothing, pellets and other paintball equipment to nearly all paintball operations in Australia. It was through his business of selling equipment that he came to know the applicants and to become familiar with their business. He visited the premises on five occasions in the first half of 1995. He says that on these occasions he was at pains to observe all he could about the business and those running it. He was cross-examined. He was an articulate and intelligent businessman. He exuded confidence, business acumen and resourcefulness. He was familiar with both indoor and outdoor paintball; though his experience of indoor paintball was limited by the fact that there had only been two such centres in Australia. He struck me as a man who knew the paintball business, who knew the applicants' business and who knew business. He gave his evidence in a forthright and plain speaking manner, without apparent bias or exaggeration. His evidence was of great value.
my assessment of damages
125 The respondent's submissions in relation to damages were straightforward and brutal. It was said that the business was doomed to fail completely. There was no dispute that the business took in the order of $75,000 in returns during the period February 1995 to its closure in November 1995. Mr Jones annualised that to $130,000 for the first year. He then doubled that amount for the first year, multiplied it by 2.5 for the second year and by 3 for the third year. The returns brought about by this multiplication were still below what Mr Donnelly calculated to be the likely break-even position of this business, a return of significantly over $30,000 per month. Taking these calculations one can see that with a limitless supply of available funds (which was unlikely to be the case) these parties would have lost even more money than they did, assuming these hypothesised figures are a reasonable estimation of what would have occurred had there been no interference.
126 There are a number of difficulties with this approach. The first is the arbitrary nature of the multiples applied by Mr Jones. His submission was that they were overly generous. He may be right in that respect, but it is really an exercise in guesswork based on a suppressed premiss that the effect of the interference of Price and Speed was not great. Whilst, as will be clear shortly, estimation involving guesswork is necessary in this case, I think Mr Jones' approach lacks a sufficient evidentiary touchstone.
127 Also, his approach treats the period February to January as part of a three year continuum. What happened was that a business was started in February 1995. During the period February to November there was interference with the possession of the land on which the business was conducted. The applicants terminated the business and shortly thereafter abandoned the lease. If, as I think was the case, there was some affectation of the business, that must be assessed separately from the lost future after the termination. If it can be shown that there was some likely affectation of the business during the period of its currency such that its returns would have been higher and its losses lower, then I think the applicants are entitled to that damage, even if Mr Jones could show (which I do not think he can) that the value of the lost opportunity to carry on the business for a further period was entirely worthless.
128 The matter which caused this interference from May to November was principally the conduct of Price and Speed. It is this conduct which caused the interference with the possession and the operating business in the period May to November. There was also interference with the possession by the escape of sewage in November for two to three weeks, by the flooding in November and by the removal of the earthen ramp access to the toilets. Rent was paid in December and January, at which latter time the business was closed.
129 I think the appropriate way to analyse the damage is to assess the loss to the applicants from likely reduced revenue of the actual business up to mid-January 1996, even though the business was only carried on up to November 1995. Thereafter, that is after mid-January 1996, the enquiry is as to the value of the opportunity of which the applicants were deprived in running this business for a period of twenty three months or having as at January 1996 a business which could be run on the premises for another twenty three months, without interference from a breach of covenant. The fact, if it be proven, which I do not think has been done, that the business in the hands of the applicants would have been hopelessly insolvent in the following period does not affect any conclusion that for the period up to January 1996 takings were in all likelihood reduced because of the interferences during that period. It does not matter that the business was also unprofitable in this period. If there has been material interference not only with the possession of the premises, but also with the business carried on at the premises, then the conclusion may well be that, though carried on at a loss, it would have been carried on at a smaller loss had the interference not occurred. That smaller loss is what the applicants should be required to bear up to January 1996 and not the additional increment of loss which they did, caused by the interference. Having rightfully terminated in January 1996, even if it be the case that they would not have made any money thereafter without any interferences, and even if it be the case that, in one sense, the termination has been a positive benefit to them in that respect, they do not have to give credit for what they have been saved when assessing what they did actually lose up to mid-January 1996. In any event, for the reasons given below, I think their prospective loss was of value.
130 It is by no means straightforward to assess the likely damage in 1995 and early 1996 from the interferences from May onwards. It is, as I have said, primarily an exercise in past hypothesis. That there was interference with possession has been proved. Also, I find that interference caused some real effect on the business. The task is to assess by how much.
131 There are a number of factors which can be used as reference points for the assessment. First, it can be seen that nothing was earned in February 1995. It can also be seen that there was a significant increase in revenue from March to April and a smaller increase from April to May. May was the month in which Price and Speed began its operations. The above figures are not much of a trend, but they do indicate some early upward movement in returns. Thereafter, after a plateau, there is a decrease until in November a somewhat paltry sum was obtained in returns. This was in a month in which not only was there a working container yard outside, but there was a two to three week period in which sewage drained into the basement and construction began on the northern land with the destruction of the access to the toilets and, later in November, flooding. With that, the business was shut. Though I accept the evidence of Mr Ballas, to which I will come in a moment, that the applicants displayed little business knowledge or acumen, I think it unlikely that Mr Byrnes and Mr Taprell would have by any ineptitude on their part destroyed this business within 9 months, in the way reflected in these figures. The fall, then plummeting, of the returns coincides with what was a material interference with possession.
132 It is necessary to say something about the quality of the applicants as business people. Apart from Ms Wilder, who was a book-keeper, there was virtually no business experience of any degree among Mr Byrnes, Mr Lowes, Mr Barber and Mr Taprell. Ms Wilder, from her conduct in putting together these projections, advising Mr Byrnes and Mr Taprell about the matter and in allowing them to risk effectively all their assets on this venture, without more skilled advice, displayed a significant overestimation of her own abilities. The projections she made for the business were quite plainly wildly optimistic and without any rational foundation based in business practice or sound business judgment. In his affidavit Mr Ballas says he made the following observations, which he said were made "during or as a result of the visits":
(a) Underseige had virtually no passing trade and had very limited signage. As a result, to be viable, it would need to be vigorously and ably promoted.(b) Underseige had only one field of play. The advantage of several fields of play is that each field can be used at the same time by different competing teams which can move from field to field.
(c) The field of play was not divided into two identical areas. As a general rule, each field of play will be divided into two identical areas so that neither team (who will start from opposite ends of the field) are disadvantaged.
(d) The basement lights seemed to be vulnerable to breakage. Although neither as hard as a bullet, nor fired as fast, a paintball is hard and flies fast and would easily smash the fluorescent lights which were used throughout the basement.
(e) Mark Byrnes and his colleagues did not appear to have a promotional plan. During my visits, I felt that Mark Byrnes and his colleagues were sitting around waiting for something to happen, rather than getting out and dynamically promoting the business.
(f) Mark Byrnes and his colleagues lacked initiative. From my various visits to be [sic: the] premises as both a player and their supplier, they did not impress me as having either the get up and go or the bedside manner necessary to make the operation viable.
(g) Mark Byrnes and his colleagues lacked the capacity to establish the necessary customer rapport. My experience is that Paintball operations are very sensitive to the capacity of all concerned to carry out their functions in a manner which builds rapport rather than causing offence. For example, if a member of team A claims that a member of team B has been "shot" (and that claim is correct, but disputed) the referee needs charm and tact in order to settle the dispute without humiliating or offending the deemed deceased. I was left with the clear impression that Mark Byrnes and his colleagues did not, with all respect to them, have the necessary inter personal skills to run this sort of business and tactfully settle disputes.
(h) During my visits I suggested that the best way to build up repeat business (which is essential to make an organisation profitable), was for Underseige to run regular tournaments. To my knowledge, no such tournaments were run by Mark Byrnes.
133 These are contemporaneous observations made by an intelligent and acute businessman. I have no hesitation in concluding that Mr Ballas was someone well able to make these judgments. Also, the comments he made in paragraphs (e), (f) and (g) resonate with what I saw of Mr Byrnes and Mr Taprell in the witness box. Mr Byrnes did not strike me as someone with the resourcefulness and determination of a man like Mr Ballas. However, I should not place too much emphasis on my conclusions about the commercial skills of Mr Byrnes drawn from seeing him, other than as confirmatory of the observations of someone much better able to assess relevant business skill than I, that is Mr Ballas.
134 Mr Ballas also provided his assessment of the likely profitability of a paintball business on this site. He was the only person who gave evidence about damages who had experience in running a paintball business. He knew the site. While I found Mr Donnelly's views about the likely future of this business to be not without weight, I prefer to use Mr Ballas' evidence as the touchstone for the assessment of the operation of a paintball business on the premises without interference. Mr Ballas was asked to undertake a financial exercise of assessing what a well run business on the premises could earn in three years. The financial exercise which he was asked to undertake was premissed on certain assumptions which are set out in his report as follows:
(a) the business is conducted at the Premises;(b) the business opened in February /March 1995;
(c) the business had access to the toilets and showers on the first floor of the Premises and that these were operational and in appropriate condition;
(d) the business had exclusive access to the area to the east of the basement so that paintball players could "storm the building";
(e) the lease expired in October 1997, contained no options for renewal, and would not have been renewed;
(f) rent for one year was $75,000;
(g) no other activities whatsoever were conducted on the site during the period of the lease;
(h) access was only to be via Homepride Avenue;
(i) no signage was permitted to be displayed on Orange Grove Road; and
(j) there were no washing facilities at the Premises.
135 A number of matters need be noted about these assumptions. First, assumption (c) would require further expenditure on the toilet/shower area. Mr Ballas estimated these costs to be $15,000. Common sense tells one that that is a not unreasonable figure. This assumption recognised a very important factor which Mr Ballas said, and I accept him, was vital to the success of such a business - the provision of "creature comforts". This, he said, was very important in gaining and retaining custom. To operate this business at this site would require such expenditure. Secondly, assumption (j), if it were to be rectified, required expenditure. Assumption (d) is unlikely to have been permitted by the local council. Thus, theoretically his estimated return should be reduced to reflect the removal of this bettering assumption in (d). However, for the purposes of this assessment I will not do so in order to ensure that the use of Mr Ballas' figures as the central integer in my assessment does not under-compensate the applicants: cf the comments of Mason CJ in a different context in Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351 at 360. It is a means of making the fullest allowances in favour of the applicants for the uncertainties known to be in the assessment: Thompson v Smith Shiprepairers (Northshields) [1984] QB 405, 443-44 per Mustill J (as his Lordship then was).
136 Based on these assumptions, Mr Ballas was of the view that a well run business would be able to earn a weekly profit, before tax, of $1,569 based on weekly expenditure of $5,189. This was a gross trading profit of $81,588 per annum. From this profit would be derived the funds to return total start-up and capital expenses of $103,000. This represented a deduced pre-tax internal rate of return of almost 60%. It should be noted that these returns calculated by Mr Ballas assumed a rent of $75,000. In fact in the second and third years this fixed cost would increase to $90,000 and $100,000 respectively.
137 Mr Ballas was asked about the qualities necessary in those conducting the business to achieve this result. He made the point that the same business or the same type of business at the same site might run at a loss or a profit depending upon the skill and expertise of the management. One of the important matters that he identified was the existence of what he described as "creature comforts". He gave examples of the improvements to his Helensburgh field which he brought in and which he identified as vital in turning that business around from one which was not successful to one which is currently very successful. These sorts of creature comforts were entirely lacking at this indoor site. The showers were not properly operating. This was not a breach of the lease. The toilets had to be reached by walking up an earthen ramp. Even without the interruptions of Price and Speed there is no evidence of any appreciation by Mr Byrnes and his colleagues of what was required to make the site amenable and attractive to customers. Mr Ballas was of the view that from what he had seen these people were unlikely to make any such business viable on the site. Mr Ballas' conclusions included the following:
Doing the best I can, I have prepared an indicative business plan reflecting the sort of net earnings which Underseige might have achieved if expertly managed. For the reasons given, I do not think these figures, or anything like them, would have been achieved by the applicants.[emphasis added]
138 The well run business of Mr Ballas' model on this site would earn in three years in the order of $245,000 profit, less $40,000 for the rent increases in the second and third years, from which there could be the return on capital expenditure of $103,000, which included $15,000 capital expenditure on the toilets, showers etc. In this model there was a relationship between current trading expenditure and a revenue of $5,189 to $6,758. Thus, a trading profit (leaving aside the recouping of start-up and capital expenditure) of $1,569 could be earned from current expenditure of $5,189. Leaving to one side the start-up and capital expenditure, a trading profit margin of 23% can be deduced (1569/6758 x 100). This ignores the need to recover initial outlays, but it provides a guide to understanding what, in trading profit terms, in the first year, has been lost by a reduction in turnover. It is also a percentage based on the first year's rental of $75,000.
139 I think this business model of Mr Ballas is the most reliable guide to, or framework for assessing, what might have happened had the premises been well run with improved facilities.
140 The pre-tax internal rate of return on the business modelled by Mr Ballas in its first year of almost 60% was in the upper range of that given by Ms Davies, during her cross-examination, for a business of this kind. This provides comfort that the model of Mr Ballas is one, at a $75,000 per annum rental, which is at the profitable end of businesses of this kind, if run by people who are skilled and knowledgeable and on the assumptions that he has made, including improvement of the site. If there were to be calculated a 40% internal rate of return rather than 60%, a concomitant lowering of the annual profit would be expected. For the assessment of damages I propose not to reduce Mr Ballas' model (again in order to ensure there is no under-compensation of the applicants) except to the extent that it is necessary to recognise the increased rental in the second and third years of the lease.
141 Mr Donnelly assessed the returns needed to break even for the business as significantly over $30,000 per month. This was a figure to cover not only current trading expenses, but also the start-up and capital costs. From Mr Ballas' model one can deduce that the returns to break-even would be less than those calculated by Mr Donnelly. Returns in the order of $6,758 per week ($29,285 per month) could produce a profit of $1,569 per week ($6,799 per month) representing an internal rate of return of 60%, though producing a lesser profit in the second and third years with the higher rent. So, returns lower than that would meet expenses (being a mixture of fixed and variable costs). To that would be added the $660 per week needed, on a nominal basis, to recover the start-up and capital costs posited by Mr Ballas. Thus, though not calculated in the evidence, monthly returns based on approximately $5,500 per week, that is about $24,000 per month, is perhaps a more reliable break-even calculation.
142 Returning to what actually happened and seeking to assess the likely effect of the interference of Price and Speed on this fledgling business, one is struck by some simple propositions which the applicants are entitled, I think, to stress. First, although far below the quite unrealistic projections made by Ms Wilder, the business was increasing in revenue in the early months. Secondly, towards the end, in November, at a time when interferences were significant, the business was on its knees. Taking into account all the criticisms made by Mr Ballas, I find it difficult to accept that this new business would not have earnt significantly greater revenue had it not had a container yard working at its front door. I do not think it unreasonable to think that from May to November without the Price and Speed interference, without the toilet leakage and without a significant amount of flooding and with access to the toilets in November a significantly improved revenue would have been earned. I think it unrealistic, given all the circumstances and the evidence of Mr Ballas, to expect that they would have reached a break-even point by November. However, there were six to seven months of interferences. I think those interferences were significant. For some weeks the premises were a working container yard day and night. Thereafter, at least during the day, the noise, dust and other interferences to which I have referred made the place far less attractive to visit. One can expect this lack of amenity to be discussed among prospective customers. As I said earlier, I do not think that there is any basis for thinking that any inexperience or incompetence of Mr Byrnes or his colleagues would have brought this business to its knees by November in the way it was. It may well have continued to have been a less than break-even proposition, but I do not think that I should conclude that it would have collapsed on its own by November. This being the case, I think it more probable than not that there would have continued to be modest increases in revenue during the course of 1995. A 20% increase was gained from April to May even taking into account the affectation during the month of May. Prior to that there had been a 75% increase from March to April. These were early months and so such percentages are not startling. There was an interference in May. Therefore, I think the figure of $12,036 for May would have been somewhat higher. I do not think $15,000 is unrealistic. Continuing modest increases through the following seven months levelling off even to a figure per month below break-even could have led to a doubling of the revenue.
143 Whilst involving a measure of guesswork, I set out below a pattern of revenue (A) which somewhat more than doubles the revenue for the period May to November 1995. Whilst such precise figures are no more than a posited estimation, their likely outer limits are reasonably pointed to and constrained by the evidence of Mr Ballas. A competent skilled operator running a paintball business on this site on assumptions which included the showers and toilet area being improved by $15,000 worth of capital expenditure could expect to receive returns of about $29,285 per month, if he, she or it were to achieve the maximum profitability he, she or it set out to achieve. Not only was the site not of the standard assessed by Mr Ballas (through no breach of the landlord) but these applicants, on Mr Ballas' evidence, lacked the business skill and wherewithal to make the business viable.
144 I set out below a pattern of revenue (B) which rises to something about, or perhaps a little below, a likely break-even point by November. Given the views of Mr Ballas, the state of the premises, the lack of available funds of the applicants to improve the premises and to provide "creature comforts" and my view that Mr Ballas' opinion of the applicants as business people was likely to be correct, I think it far more likely that something like revenue stream (A) would have occurred than revenue stream (B).
Actual Without Interference
(A) (B)
May 12,036 15,000 16,000
June 12,410 16,000 18,000
July 7,080 17,000 20,000
August 6,585 18,000 22,000
September 7,645 19,000 24,000
October 7,939 20,000 24,000
November 1,100 21,000 24,000
Plus Ms Wilder's
Additional 4,711
______ _______ _______
59,516 126,000 148,000
say 59,500
145 Stream (A) produces lost revenue of $66,500 ($126,000 minus $59,500) and stream (B) produces lost revenue of $88,500 ($148,000 minus $59,500). However, whichever revenue stream is taken that would not be the damage. That revenue would have to be paid for in outgoings. Mr Ballas' model contained a gross trading profit margin of 23% of revenue. But that incorporated the payment of rent. The applicants fully paid rent for the period up to 15 January 1996. Excluding rent from such a calculation, the trading profit margin of the business on these returns is close to 45%.
146 It is also necessary to deal with December and January. Rent was paid for those 1 ½ months: $9,375.00. This can be treated as wasted expenditure, or the two income streams can be carried forward to mid-January. I think the latter is more appropriate to maintain consistency, especially since the revenue figures are full months and rent was payable mid-month. Thus, I will complete income streams (A) and (B) as follows:
(A) (B)
May to November 126,000 148,000
December 21,000 24,000
January (to 15/1) 10,500 12,000
_______ _______
157,500 184,000
147 From the above posited figures the reduction in revenue was about $98,500 (stream (A): $157,500 minus $59,500) or $124,500 (stream (B): $184,000 minus $59,500). By using a trading profit margin of 45% one can deduce a lost trading profit of $44,325 or $56,025.
148 I am inclined to think that the lesser of these two figures is the more likely reflection of the impact of the interference. However, I am conscious of the fact that this is an estimation attendant with all the uncertainties reflected in the discussion so far. Also, I recognise that Mr Ballas' views of the business competence of Mr Byrnes and his colleagues are subjective judgments. However, he was not said to be biased in any way; and, as I have said, from my impression of him and the other witnesses, I think that his views in this regard were reliable. For these reasons I am not prepared to assess the further twenty three months on the basis that the business would have been at break-even point by November 1995, in particular because of the state of the showers and toilets and a degree of real confidence that Mr Ballas was correct about the applicants' lack of business capacities. Nevertheless, doing the best I can and in order to ensure no under-compensation, I will round up my estimate of loss of trading profit in stream (A) to $50,000 for the period May 1995 to January 1996. That conclusion and my use of the phrase "trading profit" does not carry with it the view that the business was profitable at this point. Rather the sums represent a proportion of increased returns which would have meant that the loss made in that period would have been reduced by such a sum.
149 Though I have sought to express my reasons for coming to this sum of $50,000 by disclosing a method of calculation, ultimately it is no more than a global estimate of what may well have been the reduction in the loss which was in fact suffered. It reflects about a halving of the trading loss identified by Ms Davies. That accords with my view of the likelihood of the performance of these applicants running this business on this site, especially in the light of Mr Ballas' evidence.
150 I turn now to the loss of the opportunity as at January 1996.
151 Mr Ballas' model, at the highest on his assumptions, would have provided a return of $117,627 in gross profit for the last twenty three months of the lease ($156,377, being 1 11/12 x $81,588, less the increased rental components of 11/12 of $15,000 and $25,000). As I said, I am not prepared to approach the assessment of the value of this opportunity on the basis that the business would have been at break-even by November 1995. I think it far more likely that it would have either been making a trading loss or barely recovering its trading costs, more likely the former. In those circumstances, and in the light of all the evidence that I have discussed, what was the prospect of earning the full amount of return of $117,627 profit for twenty three months? I think virtually none. However, that is not to deny any value to the opportunity. Something may have been earned. It is likely, on Mr Ballas' views, that the business would not have been viable. It is not clear how long their resources would have lasted. However, the applicants may have learnt from running the business. In this respect, also, I do not underestimate the effect after May 1995 of the interferences sapping the enthusiasm and spirit of the applicants. Largely based on Mr Ballas' model and his views of the applicants and the state of the premises I think a sum of $30,000 as the value of this opportunity is reasonable. It represents, in a sense, about a one in four chance of earning the full $117,627. This is, perhaps, a clumsy way of expressing the matter, since I do not think there was any real chance of the full amount being earnt by these applicants. However, it is one way of expressing my estimate of what profit might have been earned by them, bearing in mind the outer limit set by Mr Ballas' evidence which, as I have said, was out of their reach. Put another way, I am prepared to accept that there was a real and not fanciful chance that these applicants would earn some profit by utilisation of the business in the following twenty three months and that the sum of $30,000 is an estimate of what that profit might be. This represents, when added to the lost trading profit for May to January, a sum in the order of the start-up and capital costs calculated by Ms Davies.
152 Further, the amount of $30,000 can be cross-checked by looking at the question from another perspective. In mid-January 1996 the applicants had twenty three months left on the lease. It should not be forgotten that it was not easy in a built-up area to obtain council permission for running a paintball centre over the likely objection of surrounding neighbours. This site was suited to an indoor field, although it clearly needed further expenditure. Mr Ballas' evidence was that the return on an indoor field such as this was less than could be obtained on an outdoor field. The deduced trading profit return of 23% and the pre-tax internal rate of return of 60% for the first year, would be reduced by the increasing rent in the second and third years. However, by the end of the first year of the lease, these people would have established the business and, assuming no interruption, would have been running it, probably at a loss. They would have built up some goodwill. The site was available for nearly two more years' usage as an approved paintball centre. On a well run basis that usage might return about $118,000, if some further expenditure were made of about $15,000. That was an asset which might have been turned to account, notwithstanding the doubtful ability of these people to run the business at a profit. A new tenant with more capital may have been able to persuade Mr Gazal to allow it to improve the toilets and other amenities. The surrounding area may have been able to be improved a little to allow for greater creature comforts of the kind described by Mr Ballas. Thus, even a loss-making business by January 1996 was not valueless. From this perspective, and again though it is far from a precise calculation, it seems to me that what the applicants had was something which someone might buy for the chance to obtain a $118,000 gross profit return for nearly two years. There was no valuation evidence dealing with this. However, from the evidence available, commercial common sense tells one the following.
153 First, on Mr Ballas' model for three years' gross profit the capital outlay was $103,000. For twenty three months' profit on the same basis a proportional capital outlay to achieve the same rate of return would be about $66,000. However, the profitability of the business would decrease with the increasing rental. The extrapolated gross profit of Mr Ballas' first year was $244,764. An adjusted gross profit for twenty three months, taking into account the higher rental was $117,627. An equivalent capital outlay to achieve the same rate of pre-tax internal return of 60% would be about $49,500[1]. Of this sum, $15,000 would need to be spent on the toilets and showers.
154 Any sale might well, to a degree, be a distress sale. Taking these matters into account, I do not think that a purchaser would pay more than $30,000 for the opportunity to take over the site and business in order to try and achieve a gross profit return of about $118,000 at a pre-tax internal rate of return of 60%, bearing in mind the need for expenditure. A purchaser might well pay less. As I said, this is as much the application of commercial common sense as valuation. It is a conclusion which I think is available on the evidence.
155 That way of looking at the matter supports the conclusion I reached earlier that my best assessment of the value of the lost opportunity to have this lease and business for nearly two more years is $30,000.
156 For the above reasons, doing the best I can with the limited material, I think that the proper recompense for the applicants is a sum of $50,000 in reduction of losses for the period May 1995 to January 1996 and $30,000 for the deprivation of the opportunity to have this business in the state it would have been in without interference in January 1996. That $30,000 can be viewed as an estimation of the worth of the chance of making a valuable return in the following twenty three months or as an estimation of what someone might pay in order to gain the opportunity to run a business on the site to reap the maximum profits contained within Mr Ballas' model, properly adjusted for the increasing rent.
157 I referred at [84] above to the alleged interference caused by the leaking roof, and at [85] to the alleged four day interruption to the water supply. Bearing in mind the way I have approached the matter and the necessary estimation involved, the only adjustment which I would have made to damages, had I been of a different view about whether these matters involved a breach of covenant, would be a nominal sum of, say, $1,000 by way of reduced trading profit for any interference prior to May 1995. For interference thereafter, I think my assessment is adequate to incorporate such.
158 Also, the assessment which I have made of the value of the lost opportunity as at January 1996 includes any residual or goodwill value which the business may have had at the termination of the lease. From the evidence, I conclude that it was highly unlikely that the respondent would have extended any occupation past the three years. I conclude from the evidence that it would be not an easy task to find a site in which to obtain Council permission for this activity. There was little evidence to assist me in assessing the likely number of or location of alternative suitable sites. In these circumstances, I am comfortable that the sum of $30,000 is adequate to encompass this matter in a proper compensation of the applicants.
159 I have found earlier that there was no agreement to use the outdoor land. Also, as I have earlier indicated, it is now clear that there were existing local government rules preventing the playing of paintball in the outdoor areas because of the dimensions of the land (see [49] above). As I said in [54] above, if there was an arrangement to use the outdoor area any denial of its usage would only have affected the applicants by disabling them from using the outdoor land to make the basement premises a more congenial amenity free of any activity by others on the land. In these circumstances, should I be wrong about the question of the agreement, I would only assess further damages of something in the order of 15% to recognise an advantage in the applicants in having a right to prevent any use by any third party of the surrounding land, even activity not in breach of any covenant of the lease.
160 In the circumstances, the applicants are entitled to a sum of $50,000 with interest from a mean point of May 1995 to January 1996, say the beginning of September 1995 to date and a sum of $30,000 with interest from mid-January 1996, as the point of accrual of the future loss, treated as a capital item, to date.
161 The applicants are entitled to interest before judgment under s 51A of the Federal Court of Australia Act (the FC Act). Such an award of interest is compensatory: Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60; and there is no good reason why the applicants should not receive interest on the full amounts. The rate of interest and the money upon which it is to be calculated is a matter for me in my discretion: para 51A(1)(a) of the FC Act. I think it appropriate to be guided by rates otherwise provided for in this State and also by this Court's prescribed rate for post-judgment interest. I have had regard to Schedule J.1 to the Supreme Court Rules and the rates of interest from time to time under Order 35 Rule 8. Bearing in mind the minor fluctuations over time in the Supreme Court rates and the fluctuations over time in the prescribed rate in this Court on interest after judgment, I think a rate of 10.5% is fair and appropriate. This rate is applied on a simple interest basis from 1 September 1995 to date on the $50,000 and from 16 January 1996 to date on the $30,000. These calculations lead to an entitlement in the applicants to judgment in the sum of $132,731[2].
162 As I have indicated above, the first and second applicants were the lessees and there was no point taken as to the difference between the first and second applicants and the third applicant as the apparent party running the business. In these circumstances, I propose to order judgment for the first and second applicants jointly in the sum of $132,731.
163 There may be real issues as to who among the applicants is properly entitled to most of this money. While Mr Jones cross-examined Mr Byrnes and Mr Wilder about Mr Taprell's position and the lack of advice he received, this case is not concerned with the rights inter se of Mr Byrnes, Mr Taprell and Ms Wilder.
164 I will hear the parties on costs.
I certify that the preceding one hundred and sixty four (164) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop. |
Associate:
Dated: 31 January 2002
Counsel for the Applicant and Cross-respondents: |
Mr B DeBuse |
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Solicitor for the Applicant and Cross-respondents: |
Marsdens |
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Counsel for the Respondent and Cross-claimant: |
Mr P Jones |
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Solicitor for the Respondent and Cross-claimant: |
Parry Carroll Kanjian |
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Date of Hearing: |
18, 19, 20, 23, 24, 25, 26, 27, 30 and 31 July 2001, 9, 15 and 16 August 2001. Last submissions received 4 September 2001 |
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Date of Judgment: |
31 January 2002 |
[1] (117,627 ÷ 244,764) x 103,000
[2] 1/9/95 - 30/1/02 is 6 years and 5 months: 6 5/12 = 6.42 years x 10.5% x 50,000 = $33,705;
16/01/96 - 30/1/02 is 6 years and 1/2 month: 6 1/24 = 6.04 x 10.5% x 30,000 = $19,026;
$50,000 + $33,705 + $30,000 + $19,026 = $132,731.
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