Xin v Zakos [2002] NSWADT 189 (30 September 2002)

Last Updated: 17 October 2002

NEW SOUTH WALES ADMINISTRATIVE DECISIONS TRIBUNAL RETAIL LEASES DIVISION

CITATION: Xin v Zakos [2002] NSWADT 189

PARTIES: APPLICANT

Xiao Di Xin

RESPONDENT

Alex Zakos & Christopher Zakos

FILE NUMBERS: 025042

HEARING DATES: 29/07/02

SUBMISSIONS CLOSED: 16/08/2002

DECISION DATE: 30/09/2002

BEFORE: Donald B - Judicial Member

LEGISLATION CITED: Retail Leases Act 1994

CASES CITED: Walton's Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 76 ALR 513

Gizah Pty Ltd v AXA Trustees [2001] NSWADT 116

APPLICATION: Claim for compensation for pre lease misrepresentations

MATTER FOR DECISION: Principal matter

APPLICANT REPRESENTATIVE: APPLICANT

R Johnson, barrister

RESPONDENT REPRESENTATIVE: RESPONDENT

R Legg, Solicitor

ORDERS: 1 Application dismissed

2 No order as to costs

Reasons for Decision:

1 Mr Xin entered into a four year Lease commencing 12 December 2000 with Mr Alex Zakos for a retail shop at 28 Lawrence Street, Harbord, with one four year option to renew at an annual rent of $48,000 per year escalating annually by 5%.

2 The permitted use for Shop 28 was:

Takeaway Food Bar from which the lessee is permitted to sell fresh seafood, cooked seafood, hamburgers, sandwiches, salads, chicken, hot dogs and spring rolls.

That clause also expressly prohibited the Lessee selling a range of products including large drink containers, confectionary, ice-cream, cigarettes and some specified groceries. The Lease also expressly prohibited placing tables and chairs in the premises.

3 Shop 28 was one of 17 adjacent shops owned by Mr Alex Zakos in Lawrence Street within the Harbord suburban shopping area. The negotiation for and management of the lease was at all times conducted by his son Mr Christopher Zakos and though Mr and Mrs Xin were confused as to who was in fact the Lessor, nothing turns on that.

4 At the time of the commencement of the Lease, there were six other food-related shops and restaurants with permitted uses which excluded the right to sell fish and chips. This exclusion was expressly stated in the permitted use clause for the most similar businesses namely the milk bar, pizza bar and general restaurant/cafe, and was implicit in the uses as defined for the bread shop and the Thai and Chinese restaurants.

5 At the time of commencement of the Lease, Shop 16C contained a fishing equipment business but it soon became vacant in January 2001.

6 The Harbord shopping area contains the expected wide range of suburban shops including a number of other restaurants, grocery shops and food-related shops including takeaway food, as would be expected in a seaside suburb of Sydney, many of which would be in direct competition with Shop 28.

7 Mr Xin acquired an existing business, "The Seafood Spot", then operating in the premises under a Lease from Mr Alex Zakos with an identical permitted use. However he entered into a new Lease, not taking an assignment.

8 Prior to entering into the Lease, there were discussions between Mr Chris Zakos and Mr and Mrs Xin in which they discussed the use of the premises and the use of other premises owned by Mr Zakos. Mr and Mrs Xin gave sworn evidence that Mr Chris Zakos said:

No. I will not allow same business as yours appears in my properties in Harbord.

Mr Chris Zakos did not under oath deny using words to that effect and agreed before the Tribunal that he would have made it clear to Mr Xin in some form that there would be no direct competition between Shop 28 and the other shops owned by Mr Zakos.

9 Further, Mr Chris Zakos did not deny the following interchange which Mr Xin swore in his evidence took place:

I said to him: "Could you put this clause into the Lease."

He replied: "No."

But he continued to say: "Don't worry, I will keep my promise."

10 The draft Lease was then provided to Mr Xin together with Lessor's and Lessee's Disclosure Statements in the form of Schedule 2 for the Retail Leases Act 1994. In the Lessor's Disclosure Statement in the box beginning:

Give details of any other agreements between the Lessor and Lessee, or representations made by the Lessor or Lessee including those relating to exclusivity or limitations on competing uses:...

there was no entry at all, this being left completely blank.

11 In the Lessee's Disclosure Statement, Clauses 5 and 6 are in the statutory form and relate to statements and representations made by the Lessor and item 5 includes the note

Matters such as agreements or representations relating to exclusivity or limitations on competing uses, sales or customer traffic should be detailed.

This item was, similarly, left entirely blank and was followed by Clause 6 which in statutory form stated that "... no other promises, representations, warranties or undertakings have been made by the Lessor".

12 Mr Xin obtained legal advice as to the Lease and the Disclosure Statements from a lawyer able to advise him in his preferred language (which the Tribunal understands is Mandarin being the language in which he gave evidence to the Tribunal). Mr Xin stated to the Tribunal that he did not have Clauses 5 and 6 of the Lessee's Disclosure Statement explained to him although he says he did speak to his solicitor and repeated what was said to him by Chris Zakos. He acknowledged a signature at the base of the Lessee's Disclosure Statement.

13 Mr and Mrs Xin purchased the business from the previous tenant for $188,000. They did not do an analysis of the financial performance of the business but relied on a verbal representation from the vendor on the basis of turnover that they would be able to have their capital investment returned in two to three years and that the business was generating a net profit in the order of $40,000 to $50,000.

14 Mr and Mrs Xin commenced trading in mid-December and the Business Activity Statement (`BAS') filed with the Tax Office on behalf of the business indicates total sales in the order of $66,000 for the first three quarters of 2001 with expenses of the order of $61,000 and for the December quarter sales of $74,000 with expenses of $63,000. While Mr Xin's evidence was that business from the beginning was "good" the BAS's suggest a net profit on sales more of the order of $25,000 rather than the hoped for $40,000 plus.

15 During October 2001 Chris Zakos began negotiating with a Mr and Mrs Dib for the Lease of Shop 16C which had remained vacant during 2001. They were experienced in the fish retail and café restaurant business and on 1 October 2001 they entered into a Lease with Mr Zakos for Shop 16C to operate a retail fish business, both sit down and take away subject to development approval which was granted on 8 November 2001. The permitted use in the Lease was

Sale of fresh and cooked seafood and seafood products and café.

16 Mr Chris Zakos gave evidence that at the time of signing up this Lease he considered the proposed business pursuant to that use would not be in direct competition with Mr Xin's business. He produced to the Tribunal some photographs of what was said to be "gourmet" style seafood dishes including some prepared fish ready for cooking. He stated to the Tribunal that whereas Mr Xin's shop was not permitted to have tables and chairs but was entirely a take-away business, the business to be conducted at Shop 16C would include a number of tables and chairs. (Other evidence established seating for 32 people i.e. 8 tables of 4, of which 3 tables appeared to be on the pavement.)

17 Although Mr Chris Zakos agreed with the Tribunal that the wording used in the use clauses for Shops 28 and 16C contained the same language namely "fresh and cooked seafood", he persisted with his opinion that the businesses would not be direct competitors.

18 One of the photos provided by Mr Chris Zakos showed the front of Shop 16C with the name "Deep Sea Food" and beneath it the words "Fresh and cooked seafood - Café and Takeway". Another showed the front of Shop 28 with the words "SEAFOOD" in large letters above with the words "Fresh and Cooked Fish" on the window and the name "The Seafood Spot" below that on either side of the door.

19 Mr Dib gave evidence that his business under the name "Deep Sea Food" which commenced trading in February 2002 was a high quality seafood business which he described as "gourmet fish products". He confirmed that Mr Chris Zakos had said to him that he did not want it to be in direct competition with Shop 28. Mr Dib estimated that more than half of his customers would be eat-in with the rest takeaway. He stated that 60% of the fish products would be styled gourmet whether eat-in or takeaway. About 30% of his sales he says comprise fresh fish.

20 The evidence of Mr Xin included an unchallenged menu for "Deep Sea Foods". The menu included under the heading "Single Items", 13 seafood products said to be "(All in a light crispy batter)" at prices ranging from 30 cents to $5.50 including Fish of the Day $4.30 and Chips at $2.20 per serve. The next heading was for "Seafood Packs" which included fish and small chips and a range of packs which included a combination of fish and chips and other combinations of seafood and chips with prices ranging from $6 through to $24 for the large pack of five fish fillets and serve of chips. The other products included "From the grill" and "From the oven" prices ranging from $4.90 through to the top price for Lobster Mornay at $39.00.

21 The menu for Mr Xin's business is standard fish and chips with a range of fish types in a price range from $1.50 - $9.00 and special meals including packs up to $31.90. It did not include any gourmet food. The evidence did not establish significant fresh seafood sales.

22 In November 2001 Mr Xin learnt of the proposed Lease of Shop 16 when Mr Chris Zakos told him that it had been leased as a "Fish Café". Mr Xin complained that:

The business is the same as mine. When I signed the lease you promised me no same business will be run in this side of your property in Harbord.

23 Mr Zakos asked for time to think this over and told his lawyer to pause with the documentation. He says that he then spoke to Mr Dib to discuss Mr Xin's concerns but formed the view that the two businesses would be of a different type and so he informed Mr Xin that he intended to go ahead.

24 Mr Xin gave evidence that following the commencement of trading of Deep Sea Food, his business suffered a downturn. He gave evidence that his business now made a loss. The BAS for the March quarter 2002 showed sales down to $57,000 with expenses of $55,000.

25 Mr Xin called evidence from Mr Warren He, a certified accountant, that a cash flow analysis for The Seafood Spot business demonstrated that he had lost his goodwill. The report of Mr He attached a business summary of bookkeeping records of the business on the basis of which Mr He's assessment had been prepared and which gave a better picture of the profitability of the business up to the end of April 2002. The business records for the business ultimately produced by Mr Zin in the Tribunal were his own unaudited records of sales and expenses and generally tally with the figures in the BAS and in Mr He's summary.

26 The cash flow analysis revealed a net cash flow for 2001 of $19,106 with the net cash flow dropping substantially from February 2002 with a loss for March and a net cash surplus for April 2002 of $800. Mr He projected a net cash loss for 2002 of some $45,000 although on the business summary records and the records produced by Mr Xin, the gross sales continuing at around about the $14,000 to $15,000 per month level through to the end of June would suggest (depending upon stock purchased in response to any down turn in demand) a projected cash negative result for 2002 more of the order of up to $12,000.

27 Mr He concluded that the net present value of the business, without the competition, to the end of the initial the term of the lease to 2004, would be $14,000 after recovery of the initial investment. He compared that with a net present value for the initial lease period based on the projections after the commencement of the Deep Sea Food business, of a loss of $236,686 including the loss of the investment. He made no assessment of the basis for the value of the $155 465 goodwill paid by the Lessees which if it had been justified by an expected annual profit of $40-50 000, would on any view of the evidence appear substantially overpriced.

28 Mr Zakos led evidence from Mr Rickard, a registered business agent conducting a business broking and corporate advice service. Mr Rickard questioned Mr He's valuation of the loss of value of the business on the basis that the cash flow valuation method was not appropriate, that the data on which it is based is unverified and unsourced and not reconcilable and that the assumptions made are not substantiated and justified. He concluded that it was not possible on the information before him to value the business.

Factual status of the non-competition assurances

29 The first key issue in this case is the status, in fact, of representations by Mr Chris Zakos as to the control of competition between the shops owned by his family.

30 It is clearly established on the evidence that before Mr Xin entered into the lease, Mr Chris Zakos made it clear in some form that he would not permit direct competition against Shop 28 from other premises owned by his family, intending to comply with that commercial promise. His intention to comply is confirmed by the restrictions on use of the other shops under the leases current when he leased Shop 28 to Mr Xin.

31 It is also clear on the evidence and conceded by the lawyers for Mr Xin that this assurance, promise or representation, was not a condition of the Lease in contractual terms and it is equally clear that it was not included in either the Lessor's or the Lessee's Disclosure Statements as a representation upon which Mr Xin did rely and on which the Lessor acknowledged and accepted he was entitled to rely.

32 Nevertheless I conclude that as a commercial matter, Mr Xin did rely upon this assurance when entering into the Lease.

33 My assessment of the evidence also is that the assurance of no direct competition was not in fact complied with by Mr Chris Zakos on behalf of the Lessor, despite his belief and assertion that he did comply with it:

- the Permitted Use Clause for Shop 16C specifically permits direct competition in fresh and cooked seafoods.

- Deep Sea Food described itself on its window as "Fresh and Cooked Seafood Café and Takeaway" when The Seafood Spot currently existed as a takeaway shop, described on its shop front as "Seafood -- Fresh and Cooked Fish".

- At least 40% of the business for Deep Sea Food was takeaway and at least 40% of its business was ordinary seafood sales, that is other than "gourmet" sales. The menu for Deep Sea Food indicates a wide range of fish and chips-style products at a usual fish and chips shop price range that is up to $6 to $8 for fish or seafood with chips, and at a price point the same as for the fish and chips/seafood and chips combination at The Seafood Spot.

- Accordingly about 30- 40% of the business of Deep Sea Food was in direct competition with the established business of The Seafood Spot. (I note that in his evidence Mr Dib stated to the Tribunal that he thought competition was generally good for people.)

Legal status of the non-competition assurances

34 The next question therefore is whether the assurance or representation by Mr Chris Zakos forms part of the legal or equitable relations between the parties such as to entitle Mr Xin to base a claim for damages or rent reduction on non-compliance with the assurance.

35 The Retail Leases Act 1994 establishes a system for disclosure of important information separately from and prior to the parties concluding the lease. It does this first by requiring in s.9 that a copy of the lease is to be provided at the negotiation stage and then sets out in s.10 a right to compensation for intentionally misleading statements or representations by either party prior to entering into the lease. Subsections 2 and 2A of s.10 make it clear that statements in the lessor and lessee disclosure statements are representations for the purposes of this right to compensation. Sections 11 and 11A require the respective parties to provide disclosure statements in terms of Schedule 2 of the Act covering a range of general information about the shopping centre and the lease, and in both of which there is a specific section for the parties to give details of statements or representations made by either party including those relating to exclusivity or limitations on competing uses.

36 Accordingly the detailed pre-contractual information process established by the Act provides an express opportunity for the parties to clarify any pre-contractual representations which are pertinent to entering into the Lease. Lessees are expressly advised to seek legal advice which in this case the Lessee did.

37 Where lessors comply with their obligations under that system, it is only proper that in the ordinary course, they be entitled to rely on what is the outcome of that system in terms of the representations identified or not identified.

38 The very difficult question that arises therefore in this case is whether a representation which I have found was actually made and relied upon by the Lessee and intended by the Lessor to have been complied with but which was in fact subsequently not complied with, can have any legal or equitable force between the parties when it was not included in any of the places for detailing representations.

39 The Lessee did not contend that the representation was a contractual term but submits that the Lessor is in equity estopped from denying his undertaking not to permit direct competition. His lawyer cites the familiar High Court authority of Walton's Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 76 ALR 513. It is well known that this case involved a vendor of a building commencing demolition prior to final exchange of contracts which specifically required demolition within a particular time frame, this in circumstances where the vendor had been informed that all final details for the contract had been concluded and exchange, which in fact did not take place, was at time of demolition a mere formality.

40 The formulations of the test of when an equitable estoppel arises vary but they establish a significant burden for the party asserting the equity arises. Mason CJ and Wilson J at 525 said:

As failure to fulfil a promise does not of itself amount to unconscionable conduct, mere reliance on an executory promise to do something, resulting in the promisee changing his position or suffering detriment, does not bring promissory estoppel into play. Something more would be required. ... this may be found ... in the creation or encouragement by the party estopped in the other party of an assumption that a contract will come into existence or a promise will be performed and that the other party relied on that assumption to his detriment to the knowledge of the first party.

41 Brennan J at 542 set out six principles:

In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed or expected that a particular legal relationship exists between the plaintiff and the defendant or that a particular legal relationship will exist between them and, in the latter case, that the defendant is not free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise.

42 Deane J at 551 emphasised that the evidence in that case firmly established the belief of the vendors that a contact had come into existence.

43 While I have no doubt that commercially these parties proceeded on the basis that the Lessor would not permit direct competition, the ingredients of an equitable estoppel as set out in Waltons v Maher would regrettably from the Lessee's point of view not appear to be satisfied. The Lessor expressly refused to include such provision in the Lease. The Disclosure Statements did not refer to any such representation. The Lessee received legal advice and although in item 3 of the Lessee's Disclosure Statement this was not confirmed, the evidence does establish that the Lessor was aware that the Lessee was in fact in receipt of legal advice as to the Lease.

44 In all of those circumstances I do not think it is possible to conclude that the requirements of equity are satisfied so as to give rise to an estoppel. While I do not believe this is commercially fair as between these parties, mere unfairness has never been the basis for adjustments to a bargain reached between parties. Considerably more has always been required. In commercial dealings parties are to comply with their contracts and in certain circumstances not to behave unconscionably. But they do not have to be fair. Therefore while I do not think the Lessor has behaved fairly in these circumstances, I do not think those circumstances disclose an entitlement for the Lessee to assert an equitable basis for compensation.

45 Furthermore, even if an equity were to arise, it can do so only by way of an estoppel, that is, by way of entitling the Lessee to resist a claim by the Lessor based on rights other than those promised. This is often expressed as the equity constituting a shield not a sword but that description needs to be used with care. Accordingly, any equity of the sort claimed by the Lessee could not justify an action by it for damages for the loss of the goodwill of the business as is the primary claim before the Tribunal in this case.

46 However, were I to be considered in error in ruling against an equitable estoppel in this case, the Lessee would be entitled to contend that a claim against him for rent could not be sustained at the level in the Lease but it should be only allowed at a level which would be likely to have been bargained if the promise of no direct competition had not been included in the commercial deal between the parties. In other words he could rely on the equitable estoppel as a shield against full enforcement by the Lessor of the terms of the Lease

47 In that regard, I am satisfied that having regard to the portion of takeaway business achieved by Shop 16C, Deep Sea Food, and the range of items in direct price and product competition, the rental properly claimable from the Lessee would be reduced by 25%.

48 I should add that if I were to be wrong on my analysis to the point where the Lessee were to be considered entitled to a positive claim for damages, the evidence presented by the Lessee for the measure of its loss could not be considered reliable. The records on the basis of which Mr He conducted his cash flow analysis were not audited in any way. The Lessee's cash register did not function and in any event, even that evidence showed a down turn in net cash flow in the immediate 4 to 5 months following the breach of the representation more of the order of $10,000 to $12,000 per year rather than $45,000 per year. Accordingly in my view, the better and more reliable measure of damage would be in terms of the rent payable rather than the loss of goodwill; under that measure the Lessee would be relieved from paying 25% of the rent on the same basis as discussed.

49 I am aware that the result I have reached is different from that in Gizah Pty Ltd v AXA Trustees Ltd [2001] NSWADT 116 in which the Tribunal did find that a misrepresentation was actionable despite the silence as to the representation of no competition or exclusivity in the Disclosure Statements. However, I note in that case the Tribunal did find that representation was known to be wrong at the time it was made so as to be intentionally misleading in the terms of s.10.

50 The Tribunal there was of the view that:

38. It seems to me that all parties to a Retail Lease are bound to ensure that all disclosures and representations are properly set out in the Disclosure Statement.... [The Lessees] should have known and should have insisted upon the representations being properly set out in both those documents. That having been said, however, it does not follow in my view that they are estopped from alleging the representations although it clearly does not assist their case by them having failed to include those representations as part of the Disclosure Statement and as part of the lease itself.

39 However, I am satisfied, and clearly satisfied, that the representations were in fact made by the Respondent as I have found above and although the argument based on the Disclosure Statement and the lease has force, in my view it is not an over-riding argument such that I am precluded from making a finding otherwise.

51 For my part in this case, I am satisfied that a party claiming that the detailed scheme under the Retail Leases Act 1994 for pre-contractual disclosure of representations should not govern the legal and equitable relations between the parties, has a substantial burden. While this may have been able to be achieved in the case of a deliberate misrepresentation under s.10, I am satisfied that it has not been achieved in the circumstances of the present case.

52 It does however indicate that lawyers acting for tenants must be very clear in explaining to their clients that, acknowledging in writing that no representations have been made, can have very important consequences if commercially the parties expect that they will have a degree of exclusivity based on a promise not in the lease or the disclosure statement. Permitted use clauses and the impact of competition on small low-margin retail businesses are so crucial to the economic success of the proprietors that their lawyers owe a particularly important and clear duty to ensure that their clients fully understand their exposure in entering into such leases.

53 The Lessee in this case says he did not fully appreciate the import of Clauses 5 and 6 of his Disclosure Statement. His lawyer should have left him in no doubt at all that if the Lessor changed his mind as to restricting direct competition or while believing he was maintaining that promise nevertheless did permit direct competition, (as I have found to be clearly the case here), he would have no basis for a claim under any legal or equitable principle regulating the relationship between these parties. So advised, a lessee would be expected either to walk away from the deal or insist on a change to the lease.

54 The Application is dismissed. In my view there are no special circumstances entitling the Respondents to costs.