FEDERAL COURT OF AUSTRALIA

Lindholm, in the matter of Munday Group Pty Limited (Receivers and Managers Appointed) (In Liquidation) v Tsourlinis Distributors Pty Ltd

[2011] FCA 195

IN THE MATTER OF MUNDAY GROUP PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (AND OTHERS ACCORDING TO THE ATTACHED SCHEDULE)

REASONS FOR JUDGMENT

Introduction

1    The Munday group of companies operated a large number of hotels, some with gaming venues, throughout Victoria. Many hotels were held under a lease. The group got into financial difficulty in 2009 when deterioration in general economic conditions adversely affected the gaming and hospitality sector. On 9 April 2010 the group’s banker, National Australia Bank (NAB), which was owed around $50 million, secured by debentures over group assets, appointed Ian Carson and Craig Crosbie of PPB as the receivers of some group companies. Later Stephen Longley of PPB was appointed as an additional receiver. On the same day the receivers went in, NAB also appointed John Lindholm and Peter McCluskey of Ferrier Hodgson as administrators of several group companies. They later became deed administrators of those companies that executed a deed of arrangement (DOCA) and liquidators of those companies that were wound up.

2    The group structure was that each operating company was the trustee of a unit trust. The assets (hotels) were held by the group company as a trustee of the unit trust.

3    On 27 May 2010 the receivers and two holding companies, Dontaris Pty Limited and Munday Group Holdings Pty Ltd, agreed to sell to Melbourne Racing Club Investments Pty Ltd, a subsidiary of the Melbourne Racing Club (MRC), for the sum of $50 million, the shares in seven group companies and the units in the seven trusts of which those companies were the trustee. One of the companies was Upday and one of the trusts was the Upday Unit Trust.

4    The sale agreement was subject to several conditions precedent. One was that each company execute a DOCA pursuant to which the company’s creditors would release their claims in consideration of them receiving a proportionate share of $200,000. Another condition was that, where required under the lease of the relevant hotel premises, the consent of the landlord be obtained to a change in control of the relevant trustee company.

5    The conditions were to be satisfied by 27 November 2010. If they were not satisfied, the MRC could elect to terminate the sale agreement or complete the agreement in respect of the companies and trusts in relation to which the conditions had been satisfied, in which event the purchase price would be adjusted.

6    Originally three landlords (those defendants who are the landlords of the second to fourth plaintiffs) sought to prevent the sale from going ahead. Two of them were placated. The unresolved dispute was between the second plaintiff, Upday Pty Ltd (recrs and mgrs apptd, subject to deed of company arrangement), and its landlord, the first defendant, Tsourlinis Distributors Pty Ltd.

7    Upday operates the Golden Fleece Hotel. It holds the hotel under a lease from Tsourlinis Distributors. That company is one of a number of companies controlled by the Tsourlinis family. The family own four or five hotels. When it was discovered that receivers and administrators had been appointed to Upday, Tsourlinis Distributors served a notice pursuant to s 146 of the Property Law Act 1958 (Vic) relying upon the appointment as the ground of termination. Later it served four more notices, relying on other alleged breaches of the lease, in an attempt to avoid the lease. Each s 146 notice was followed by a notice of termination.

8    The receivers dispute Tsourlinis Distributors’ rights to terminate the lease. It was important that its right to do so be resolved before 27 November 2010; otherwise the sale agreement may have gone off. The parties, ie the receivers, the deed administrators, Tsourlinis Distributors and Mr Munday, who was also involved in one aspect of the dispute, through their lawyers co-operated to enable this to be done. Several applications were filed, in which the parties put forward their various claims. One was transferred from the Victorian Civil and Administrative Tribunal. The parties were given a short period within which to file their evidence. The shortness of time did not prevent them filing voluminous material. The trial, at which all applications were considered, was held on 15-18 and 23 November 2010. As the trial unfolded, many of the issues fell away and some new issues arose. Still, I was able to make orders disposing of each application on 26 November 2010. The orders were made on the basis that I would later publish my reasons. What follows are those reasons.

The Golden Fleece Hotel Lease

9    The lease was executed on 30 November 2004 to Inkavar Pty Ltd for a term of five years commencing on 17 October 2003 and expiring on 16 October 2008. It was assigned to Upday on 7 March 2005 and the term extended until 6 March 2015. The important provisions of the lease are:

7.10    In the event that the Tenant at any time during the term hereby created desires to dispose of the residue of the term of the lease the said residue together with the Licence goodwill and the Tenant’s furniture, plant and equipment situated at the hotel shall be first offered to the Landlord at the same price and on the same terms that a bona fide purchaser is prepared to pay on the open market such offer to be made in writing to the Landlord or its Solicitor and the Landlord shall have fourteen (14) days from the date of receipt of such notice to accept such offer by notice in writing to the Tenant.

8.1    The Tenant shall at its cost keep the Premises clean and in good substantial and tenantable repair and condition (having regard to its condition at the date that the Tenant first occupied the premise) PROVIDED THAT the Tenant shall not be obliged:

(a)    to repair damage caused by risks against which the Landlord is obliged to insure pursuant to clause 11.3 of this Lease unless the policy of insurance has been invalidated by the acts or omissions of the Tenant or the Tenant’s employees or agents; and

(b)    to maintain in good repair items that are the Landlord’s responsibility to maintain and repair under this Lease and the Act.

However, notwithstanding subclause (a), the Tenant shall pay or reimburse the Landlord for any costs incurred by the Landlord because of any acts or omissions by the Tenant.

10.1    The Tenant may not assign this Lease unless:

(a)    the Landlord has consent to the assignment; (which consent shall not be unreasonably withheld) or

(b)    the Landlord has withheld its consent to the assignment in circumstances where the Act does not entitle the Landlord to withhold its consent; or

(c)    under the provisions of the Act the Landlord is taken to have consented to the assignment.

10.4    The parties expressly acknowledge that they have entered into this Lease on the clear understanding that the following are reasonable assignment provisions that the Tenant must comply with before the Landlord will consider whether or not to consent to an assignment of this Lease:

(a)    the Tenant has complied with every provision in the Act for obtaining consent to an assignment;

(b)    the proposed assignee executes an assignment of this Lease to which the Landlord shall be a party in such form as the Landlord and its solicitors shall reasonably approve and in which the proposed assignee convenants with the Landlord to observe and perform the conditions in this Lease;

(c)    where the proposed assignee is a company, the convenants on the part of the assignee contained in the assignment shall (if so required by the Landlord) be guaranteed by the directors of the company in the form of Clause 17 of this Lease;

(d)    the Tenant has remedied any existing breaches of the conditions in this Lease; and

(e)    the Tenant pays to the Landlord the relevant expenses detailed in clause 6.1(c);

(f)    the proposed assignee executes a set of the following documents to be delivered to the Landlord namely three blank forms of Application for Transfer of the General Licence for the hotel, one blank form of Authority to obtain delivery of the Certificate of Renewal of such licence and one blank form of Authority to carry on the business of the said hotel as agent of such assignee.

If the Tenant has complied with all of the above reasonable assignment conditions and the Landlord is not entitled under the Act to withhold consent to the assignment then the Landlord will give its consent to the assignment requested by the Tenant.

10.7    Where the Tenant is a company other than a public company listed on the Australian Stock Exchange, any change in the principal shareholding or directors altering the effective control of the Tenant shall be deemed an assignment of this Lease and shall require the written consent of the Landlord.

13.1    In the event that:-

…

(c)    The Tenant is a company, and –

(i)    an order is made or a resolution passed for its winding up (except for the purpose of reconstruction or amalgamation with the written consent of the Landlord); or

(ii)    it goes into liquidation or administration or makes an assignment for the benefit of or enters into an arrangement or composition with its creditors or is unable to pay its debts within the meaning of the Corporations Law; or

(iii)    it is placed under official management or a receiver or manager of any of its assets is appointed or an inspector is appointed under the Corporations Law; or

(v)    the Tenant is a natural person, and – execution is levied against the Tenant and is not satisfied within 30 days; or

(vi)    the Tenant commits an act of bankruptcy or executes a deed of arrangement or deed of assignment under the provisions of the Bankruptcy Act 1966; or

…

THEN, subject to the provisions of Section 146 of the Property Law Act, the Landlord may re-enter the Premises and put an end to this Lease but without prejudice to any other remedy the Landlord has as a result of any such event, and the Lordlord may upon such re-entry remove from the Premises any of the Tenant’s fittings, fixtures, chattels, stock-in-trade, money or any other property (“the Tenant’s Property”) and deal with the Tenant’s Property pursuant to clauses 13.16 - 13.25 without being deemed guilty of conversion or becoming liable for any loss or damage occasioned by dealing with the Tenant’s Property.

13.5    Each of the covenants by the Tenant which are specified in this sub-clause are essential Terms of this Lease:

(a)    the covenant to pay Rent throughout the Term at a date not later than 14 days after it should have been paid being the combined effect of clauses 4.1 and 13.1(a).

(b)    the obligations contained in clauses 5.2, 7.1, 7.2, 7.8, 7.9, 8.1, 8.2, 9.1, 9.4, 10.1, 10.2, 17.1, 18.1, 18.4, 18.6, 19.

16.5    Where any act of the Tenant requires the Landlord’s consent the Landlord shall not (except where this Lease otherwise expressly provides) unreasonably withhold consent but the Landlord may require the Tenant to comply with reasonable conditions specified by the Landlord before giving consent. The Tenant shall, on demand, reimburse the Landlord for any expenses, including fees paid to consultants, reasonably incurred by the Landlord in relation to any application by the Tenant for the Landlord’s consent.

20.1    If the premises are Licensed Premises as defined by the Liquor Control Reform Act 1998 then:

20.1.1    the Tenant shall not without obtaining the Landlord’s prior written consent apply to the Liquor Licensing Victoria to vary, remove, transfer, or surrender any Licence and/or Permit applicable to the premises;

20.1.2.    the Landlord may refuse or grant consent subject to any conditions deemed appropriate provided that if the Landlord consents to an assignment of this Lease then it shall consent to a transfer of any Licence or Permit applicable to the premises;

20.1.3    the permitted use of the premises shall be: Hotel Premises operating in accordance with a General Licence issued under the Liquor Control Reform Act 1998.

21.1    In the event that the Landlord decides to sell the Premises the Landlord shall first offer the same to the lessee at a price and upon the terms the Landlord is prepared to accept from a bona fide purchaser and the Tenant shall upon receipt of such offer advise the Landlord in writing within fourteen (14) days whether the Tenant is prepared to purchase the Premises upon such price and such terms and such offer will remain open for a period of fourteen (14) days PROVIDED THAT this right of first refusal shall not apply where the Landlord has decided to offer the Premises for sale by public auction or public tender.

The Notices of Termination

10    At law a lease may be determined for a forfeiture incurred either by a breach of a condition in the lease or for the breach of any covenant where the lease contains a proviso for re-entry for the breach of that covenant. If a lessor re-enters upon a forfeiture the same estate becomes revested in him/her as was vested in him/her at the time of granting the lease. The re-entry does not put an end to the lessee’s liability for damages for breach of the lease.

11    A lessor’s power to enforce a forfeiture is restricted. It is restricted by statute (eg s 146 of the Property Law Act) and relief from forfeiture may be granted, either under s 146(2) or by a court of equity on such terms, if any, as to costs, expenses, damages and compensation as the court thinks fit.

12    Section 146 relevantly provides:

(1)    A right of re-entry or forfeiture under any proviso or stipulation in a lease or otherwise arising by operation of law for a breach of any covenant or condition in the lease, including a breach amounting to repudiation, shall not be enforceable, by action or otherwise, unless and until the lessor serves on the lessee a notice—

(a)    specifying the particular breach complained of; and

(b)    if the breach is capable of remedy, requiring the lessee to remedy the breach; and

(c)    in any case, requiring the lessee to make compensation in money for the breach—

and the lessee fails, within a reasonable time thereafter, or the time not being less than fourteen days fixed by the lease to remedy the breach, if it is capable of remedy, and to make reasonable compensation in money, to the satisfaction of the lessor, for the breach.

(2)    Where a lessor is proceeding, by action or otherwise, to enforce or has enforced without the aid of the Court or the County Court such a right of re-entry or forfeiture, the lessee may apply to the Court for relief; and the Court may grant or refuse relief, as the Court, having regard to the proceedings and conduct of the parties under the foregoing provisions of this section, and to all the other circumstances thinks fit; and in case of relief may grant it on such terms (if any) as to costs, expenses, damages, compensation, penalty or otherwise, including the granting of an injunction to restrain any like breach in the future, as the Court, in the circumstances of each case, thinks fit.

13    It is to be noted that the restriction imposed by s 146(1) on the right to forfeit a lease may require consideration of whether the breach is capable of remedy. If it is capable of remedy, a reasonable time (or 14 days if specified in the lease) must be allowed for the tenant to take the necessary steps. If it is not capable of remedy then, if a notice has to be given at all, 14 days is sufficient notice.

14    The lease of the Golden Fleece Hotel specifies 14 days as the time Tsourlinis Distributors must give Upday to remedy any breaches of the lease.

15    The first notice was served on 30 April 2010. It relied on the appointment of the receivers and administrators as the breach of lease which justified its termination. The notice is of no effect. Prior to NAB taking security over the assets of the Munday group it obtained the consent of Tsourlinis Distributors to mortgage the lease. The deed pursuant to which Tsourlinis Distributors granted that consent provides, among other things, that Tsourlinis Distributors will:

•    Permit [NAB] to enter into possession of the lease premises for the purpose of exercising its rights under its Mortgage.

•    Not treat the exercise by [NAB] of any of its rights and powers under the Mortgage as a default under the Lease on which the Lessor is entitled to rely to exercise any power or right under the Lease.

16    For its part NAB agreed that it:

•    [W]ill notify the Lessor of its intention to enforce its Mortgage against the Lessee and provide the Lessor with a copy of any notice of default which it serves on the Lessee.

17    The effect of the deed is that Tsourlinis Distributors cannot rely on the appointment of receivers as giving rise to a right to terminate the lease. This is so notwithstanding that NAB did not, in breach of its promise, give prior notice of the appointment. The reason is that I do not treat Tsourlinis Distributors’ promises as conditional upon NAB observing its promises: ie they are not inter-dependent provisions. If NAB breaches its promise (eg to notify the lessor of its intention to enforce the mortgage), it may be liable in damages for the breach. But its rights under the mortgage are not lost.

18    The deed does not expressly deal with the appointment of administrators. However, the administrators were appointed by NAB under s 436C of the Corporations Act 2001 (Cth). That section permits a chargee (eg a debenture holder) of a company’s assets to appoint an administrator to the company. It is, therefore, by reason of its mortgage that NAB was able to act under s 436C. On a proper reading of the deed, the appointment of an administrator should be treated as an exercise by NAB of a “power or right” under the mortgage.

19    The second notice was served on 15 July 2010. For this notice Tsourlinis Distributors relied on the successful application by Upday to vary the liquor licence applicable to the demised premises. That application was made without Tsourlinis Distributors’ consent. The licence had provided that the maximum capacity for the hotel was 752 persons. On 4 January 2010 Upday applied to Liquor Licensing Victoria to reduce the capacity to 352 persons. The application was approved on 16 January 2010. The second notice gave Upday 14 days within which to remedy the breach and make reasonable compensation. Upday wrote to Liquor Licensing Victoria requesting that the capacity be increased, but the application was not approved by the end of the 14 day period. Accordingly, Tsourlinis Distributors sent a letter advising that the lease was terminated.

20    Prior to the purported termination, namely on 6 July 2010, the receivers had sought Tsourlinis Distributors’ consent to the variation of the liquor licence. Tsourlinis Distributors refused to give that consent.

21    Initially the receivers argued that the refusal by Tsourlinis Distributors to consent to the variation was unreasonable because (1) Upday had applied to Liquor Licensing Victoria to increase the capacity of the hotel and, (2) Tsourlinis Distributors would not suffer any loss as a result of the reduction in capacity. On this latter point the receivers tendered evidence from Mr Macey, a valuer. He said that given the current mix of trade, the reduced patron numbers would only become an issue if the first floor was refurbished to provide function accommodation (it was used for non-operational purposes at the time) and it would only be an issue during special one-off events. In addition, Mr Gray, the venue manager of the Golden Fleece, said that the hotel rarely accommodated more than 350 patrons. Finally, Mr Parsons, the administration manager of the Golden Fleece, deposed that he was confident that the liquor licence as varied would not result in any patrons being turned away and that a maximum of 350 patrons would have been an appropriate maximum patron number during his entire 15 years working at the Golden Fleece.

22    Whether or not the reduction in capacity had an adverse effect was contested. Mr Nash, a hospitality consultant and assistant manager of the Golden Fleece from 1994-6, deposed that to operate the business at its maximum profitability, he would have a maximum licence of at least 700 patrons to give the operator greater flexibility of the hotel and to minimise the chance of turning patrons away. Ms Freeman, a property valuer engaged by Tsourlinis Distributers, said that the reduced patronage could reasonably be expected to negatively impact on the earning capacity of the business.

23    In my view the reduced capacity at least limited the potential future use of the Golden Fleece, which would likely diminish the value of the business.

24    As events turned out, although well after the expiry of the 14 day notice period, Liquor Licensing Victoria increased the capacity of the hotel to 739 persons, the difference with the original capacity being 13 persons. It is common ground that the increase to near the former capacity means that Tsourlinis Distributors is now no worse off. Still, there was a breach of the lease which justified the service of the second notice.

25    The third notice was served on 12 August 2010. In addition to reliance upon the earlier breaches, this notice related to the failure by Upday to observe the repair and maintenance covenants in the lease. The notice had attached to it a schedule of defects: in all there were 48 alleged defects. The defects range from the absurdly trivial (eg beer stains on the carpet – remember this is a hotel where patrons are supposed to drink) to the more serious (eg damage to ceiling and light fittings including loose electrical wiring extending from the ceiling). Upday was given 14 days to remedy the defects and pay compensation.

26    The receivers dispute that some defects were the tenant’s responsibility, contending they were the consequence of a problem with the roof drainage system, a structural deficiency. Nonetheless, the receivers attended to some, but not all the works, prior to the letter of termination which was served on 29 October 2010. At the trial, NAB undertook to have the remainder of the defects rectified by 23 December 2010.

27    The fourth notice was served on 29 October 2010. This notice was based on the failure by Upday to comply with cl 7.10 of the lease (the right of first refusal clause). Here the contention is that Upday, through the receivers, had formed the desire to dispose of the residue of the lease and, so, Upday was required to offer it to Tsourlinis Distributors.

28    In my view, the trigger to the operation of cl 7.10 is not, as Tsourlinis Distributors would have it, the subjective desire by the tenant to dispose of the residue of the lease. (Here I am assuming in Tsourlinis Distributors’ favour that the intention of the receivers to dispose of the lease is to be attributed to Upday rather than NAB) More is required. What is necessary is a desire to sell the residue on particular terms and conditions, including price, which an actual “bona fide purchaser” is willing to accept. In the absence of an actual bona fide purchaser, Upday is not in a position to offer the residue to Tsourlinis Distributors on the “same” terms as are acceptable to a bona fide purchaser. The notion that the clause comes into operation at the moment the tenant says to itself “I want to sell” is simply unworkable and, in any event, not what was intended.

29    I find support for my conclusion in several cases including Re Sedgefield Steeplechase Co (1927) Ltd [2000] 2 BCLC 212; Scotto v Petch [2001] BCC 889; Tiffany Investments Ltd v Bircham & Co Nominees (No 2) Ltd [2004] 2 P & CR 144.

30    There is another way Tsourlinis Distributors puts its case. As it is quite complex, it is best if I take it from the submissions of Mr Lucarelli QC who with Mr Williams appeared for Tsourlinis Distributors. It runs like this. The combined operation of cls 7.10 and 10.7 provides for a two-stage process when an assignment is contemplated by the tenant. First the tenant must comply with cl 7.10 (ie it must give Tsourlinis Distributors a right of first refusal). If the landlord accepts the offer, cl 10 is not invoked as the landlord acquires the residue. If the landlord does not accept the offer then the provisions of cl 10 must be complied with (ie Upday must procure Tsourlinis Distributors’ consent to an assignment). This reading of the lease, so the argument goes, prevents a “de facto” or “back door” assignment where instead of the tenant disposing of the residue of the lease the owners of the shares in the tenant dispose of them.

31    As to the argument about the construction and effect of cl 7.10 and cl 10.7 it is, in my view, clear that cl 7.10 does not prevent a shareholder of the tenant disposing of its shares without the tenant first having offered the residue of the term to the landlord. Clause 10.7 is confined in its operation to assignments and subletting, the subject of cl 10. That is, it does not operate outside that clause. A similar conclusion was reached by Goldberg J in Kawasaki (Australia) Pty Ltd v ARC Strang Pty Ltd (2008) 247 ALR 333, 344-5 for reasons that I could adopt. Nor, more importantly, does the lease prevent a change in the beneficial ownership of a trust that is the true “owner” of the demised premises. If there can be a change in the beneficial ownership of the trust without triggering cl 7.10, it is difficult to see why a change in shareholding should have a different effect. The result is that the sale to the MRC does not constitute a breach of the lease. Thus, the fourth notice is of no effect.

32    As sometimes happens in litigation, a case is made in running. That is what happened here. On the third day of the trial, the receivers produced heads of agreement dated 17 August 2009 between Upday and Dominion Hotel Group (Vic) Pty Ltd. The heads of agreement record that on that day (ie 17 August 2009) Upday agreed to sell to Dominion Hotel Group the Golden Fleece Hotel, together with all of the plant and equipment used in the hotel business, for $7.5 million. A deposit of $100,000 was paid. The balance of the deposit ($275,000) was due on the exchange of formal contracts.

33    The heads of agreement had several conditions. One was that the purchaser have ten business days within which to complete “a due diligence” investigation. Dominion Hotel Group requested an extension of the due diligence period, which was refused by the solicitors for the Munday group. As a consequence the sale did not proceed.

34    As Mr Peters SC, who with Mr Senathirajah appeared for the receivers, fairly acknowledged, Upday should have, but did not, offer to sell the residue of the term to Tsourlinis Distributors upon the terms set out in the heads of agreement. Unsurprisingly, immediately following the production of the heads of agreement, Tsourlinis Distributors served the fifth notice, relying on the failure by Upday to offer the premises to it on those terms and conditions. In view of the sale of the hotel to MRC, Upday had no intention of offering to sell the hotel to Tsourlinis Distributors in the terms set out in the heads of agreement or at all. In other words, it remained in breach and had no intention of rectifying the breach.

Relief from Forfeiture

35    Upday seeks relief. In 1911 Cozens-Hardy MR in Rose v Spicer [1911] 2 KB 234, 241 attempted to lay down some general principles to guide the court in exercising its discretion to grant relief against forfeiture. There are two key rules. First, the applicant must, so far as is possible, remedy the breaches and pay reasonable compensation for the breaches which cannot be remedied. Second, the applicant must undertake to observe the lease in the future. But these are just useful maxims. By and large, the court’s discretion is unfettered.

36    In Tanwar Enterprises Pty Ltd v Cauchie (2003) 217 CLR 315 the High Court referred to the speech of Lord Wilberforce in Shilo Spinners Ltd v Harding [1973] AC 691, which outlined the considerations that guide the exercise of equity’s jurisdiction to relieve against forfeiture for a breach of covenant. There Lord Wilberforce said (at 723-4) “The word ‘appropriate’ involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach”. The High Court went on (at [58]-[60]):

[58]    What Lord Wilberforce in Shiloh Spinners called “the special heads of fraud, accident, mistake or surprise” identify in a broad sense the circumstances making it inequitable for the vendors to rely upon their termination of Tanwar's contracts as an answer to its claim for specific performance. No doubt the decided cases in which the operation of these “special heads” is considered do not disclose exhaustively the circumstances which merit this equitable intervention. But, at least where accident and mistake are not involved, it will be necessary to point to the conduct of the vendor as having in some significant respect caused or contributed to the breach of the essential time stipulation. Tanwar's situation falls beyond that pale. The statement by Mason CJ in Stern respecting the insignificance of subsequent events for which the vendors were in no way responsible is fatal to the main thrust of Tanwar's case.

[59]    It should be made clear that what is said above does not support any proposition that the circumstances must be “exceptional” before equity intervenes. In their joint judgment in Stern, Deane and Dawson JJ, with reference to what had been said by Mason and Deane JJ in Legione, said, in a passage which puts the point of present significance:

Mason and Deane JJ were not saying that there must be unconscionable conduct of an exceptional kind before a case for relief can be made out. Rather, what was being said was that a court will be reluctant to interfere with the contractual rights of parties who have chosen to make time of the essence of the contract. The circumstances must be such as to make it plain that it is necessary to intervene to avoid injustice or, what is the same thing, to relieve against unconscionable — or, more accurately, unconscientious — conduct.

37    In World By Nite Pty Ltd v Michael [2004] 1 Qd R 338 Helman J said (at 343):

A tenant is not entitled to relief against forfeiture as a right. The court has a discretion in the matter. The test is one of unconscionability. In a recent case in which there had been a forfeiture for non-payment of lend Barrett J. put the test in this way: "whether, in the light of the tenant’s remedying of the default in the payment of rent, resort by the landlord to his strict legal right of re-entry would be unconscionable; or, if I may put this another way, whether the tenant has been guilty of conduct over and above the remedied default in payment of rent which is of such gravity that, even accepting that the default for which the right of re-entry is security has been satisfied, it would not be unconscionable on the landlord’s part to insist on his legal right.’ ‘If arrears of rent, costs and interest are paid and the lessor can be put into the same position as before forfeiture or re-entry, the lessee will ordinarily be entitled to relief absent “very special circumstances”.’ Those statements of principle apply mutatis mutandis to the circumstances of this case in which the default relied on is in the payment for something other than rent and about which there was a genuine dispute, but which default the tenant has undertaken to remedy. (citations omitted)

38    In Greek Macedonian Club Ltd v Pan Macedonian Greek Brotherhood NSW Ltd [2007] NSWSC 92, Brereton J said (at [77]):

In considering whether relief against forfeiture should be declined, it is necessary to consider the conduct of the lessee, the nature and gravity of the breach, and its relationship to the value of the property that might be forfeited. Relief is granted in respect of wilful breaches only in exceptional cases, and is not granted where future compliance appears unlikely [Shiloh Spinners Ltd v Harding [1973] AC 691 , 725–6 (Lord Wilberforce)]. Thus in Shiloh Spinners, Lord Wilberforce concluded that the refusal of relief was justified by a case of clear and wilful breaches of more than one covenant which if individually not serious were certainly substantial, and of continuous disregard by the respondent of the appellant’s rights over a period of time, and a total lack of evidence regarding the respondent’s ability to speedily and adequately make good the consequences of default, and finally a failure to show any disproportion between the expenditure required and the value of the interest involved as to amount to a case for hardship. In Batiste v Lenin [2002] NSWCA 316, the Court of Appeal upheld a decision of Bryson J, as his Honour then was, refusing relief against forfeiture where there had been a failure to pay rent for long periods, in circumstances where the tenant failed to demonstrate any ability to pay rent up to date, in the light of other breaches of covenant which extended far beyond failures to pay money, and the absence of any expression of readiness to comply with a covenant relating to fire stairs.

39    In Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd (2010) 14 BPR 27,605; [2010] NSWSC 29 Barrett J said (at [393]):

The equitable jurisdiction to grant relief against forfeiture is today based on the principle that equity will prevent reliance on a legal right where that reliance is unconscionable.

40    Applying these principles to the present context means that it is for Upday to show, in the face of Tsourlinis Distributors’ right to terminate the lease, that it is necessary for the court to intervene to avoid the effects of unconscionable or unconscientious conduct by Tsourlinis Distributors in setting up the termination. In this connection I am prepared to assume that each breach about which Upday has made complaint was a breach of the lease. That is, I will deal with Tsourlinis Distributors’ case at its highest.

41    In my view, the receivers have shown that Tsourlinis Distributors would obtain a wholly disproportionate benefit from relying on the breaches as a basis for termination. Each of the breaches, other than the non compliance with cl 7.10 has, been remedied or will be remedied in the near future. While the failure to comply with cl 7.10 is a breach not capable of remedy, it can be made good by the payment of compensation. While Tsourlinis Distributors claims that its loss is great (a matter of some dispute) it will be assessed and paid for. One order I made was that Tsourlinis Distributors have judgment against Upday for damages at law for breach of cl 7.10, reserving to it the right to seek equitable damages in lieu of common law damages. And, NAB has undertaken to pay whatever damages or compensation the court finds should be paid to Tsourlinis Distributors.

42    This is sufficient compensation for Tsourlinis Distributors. It is true that the Tsourlinis family owns and operates hotels, and would like to own another hotel. Tsourlinis Distributors’ accountant, Mr Miller, says, and I accept, that it could raise the funds to purchase the residue of the lease for the Golden Fleece Hotel, had it been offered to it. Of course, it would get it at minimal cost if it could simply terminate the lease. According to Mr Page, the General Manager of Tsourlinis Distributors, the Tsourlinis family had not decided whether to keep the hotel for a short period and sell it or retain it as a long-term investment. Either way, the acquisition of the residue of the term is simply a means to obtain a financial gain. It will make an appropriate gain (ie the gain it had bargained for) through the payment of damages, once those damages have been assessed and paid.

43    There is another point that should not be overlooked in this connection. Tsourlinis Distributors had no desire to specifically enforce its rights under cl 7.10. Rather, it was only interested in using a breach of that clause, and any other breach it could identify, to terminate the lease. By its own choice it ran headlong into the court’s power to grant relief.

44    The unsecured creditors would be unaffected by a termination because Tsourlinis Distributors has undertaken to match the $200,000 payment offered to them under the DOCA. But, if relief were not granted NAB would risk a substantial loss. It would suffer this loss if MRC walks away from the purchase of the hotels. Even if MRC goes on with the purchase of six hotels it will surely seek to renegotiate the price and will likely obtain a significant discount (ie it will refuse to purchase the six hotels under the current terms of agreement and will seek to negotiate new terms).

45    I should mention that there is an unresolved question regarding the basis upon which Tsourlinis Distributors’ claim for breach of cl 7.10 is to be assessed. Tsourlinis Distributors lost the right to purchase the residue of the term as at August or September 2009. At that time the hotel’s operations were different from what they are now. In particular, the hotel did not have, as it now has, 45 gaming entitlements which it acquired during the gaming entitlements auction conducted by the Victorian Government. The gaming entitlements do not form part of the assets which should have been offered to Tsourlinis Distributors under cl 7.10. There is, however, an argument that the receivers are estopped from contending that Tsourlinis Distributors has no right to the gaming entitlements because Tsourlinis Distributors said to Upday that it would bid for the gaming entitlements if Upday did not to ensure they remained with the premises. The evidence concerning this alleged estoppel was tendered during and after the hearing. I am not in a position to resolve this issue. It will be addressed when the assessment of damages takes place.

A Future Breach of the Lease

46    There is one last matter with which I must deal which is allied to the relief from forfeiture claim. An order I made was that Tsourlinis Distributors be restrained from exercising any rights it has under the lease in response to a transfer of the shares in Upday to MRC Investments or consequent on the appointment of new directors to Upday, which will occur when MRC Investments obtains control of the company. That order was made because Tsourlinis Distributors indicated it would act on these events as another breach of the lease.

47    The problem arose in this way. Clause 10.7 deems an alteration in effective control of the tenant to be an assignment requiring the written consent of the landlord. Clause 10.4(c) provides that in the case of an assignment of the lease to a company, the tenant’s obligations must, if so required by the landlord, be guaranteed by the directors of the assignee. Tsourlinis Distributors required guarantees from the directors of MRC Investments. The directors did not wish to give guarantees as the MRC is a non-profit organisation and the directors are essentially volunteers. Instead, the MRC has undertaken to guarantee MRC Investments’ obligations under the lease. MRC is a well known, reputable organisation with net assets of around $300 million. Further, the MRC has undertaken to procure an irrevocable bank guarantee of 12 months rent payable by Upday. As well, although Tsourlinis Distributors knows nothing about the proposed new directors, (a point it makes to justify withholding its consent) the likelihood is that they will be reputable and of good character.

48    Clause 16.5 provides that where any “act of the tenant” requires the landlord’s consent, the landlord shall not unreasonably withhold its consent. That provision may not apply because a change in the effective control of the tenant (ie a change in shareholding) is not an “act of the tenant” (it is an act of the shareholders).

49    In any event, when considering whether to consent to a change in shareholding or directorship under cl 10.7, Tsourlinis Distributors is bound to act in good faith: Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd (2005) Aust Contract R 90-213; [2005] FCA 288, [60]-[65]; Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; Australian Securities and Investments Commission v Fortescue Metals Group [2011] FCAFC 19. Although the duty of good faith is not uniformly accepted in Australia, in America, every contract imposes an obligation of good faith and fair dealing. Further, even if a contract gives a party absolute discretion, it must exercise that discretion in good faith: see Williston on Contracts (4th ed), §63:22 and the cases cited therein.

50    Given the financial standing of the MRC and the fact that it has provided an irrevocable bank guarantee, it would not be in good faith (ie it would be unreasonable) for Tsourlinis Distributors to insist on guarantees from the directors of MRC Investments. Those guarantees would add nothing to Tsourlinis Distributors’ financial security under the lease.

51    Unfortunately, that is not the end of the matter. Upday will not be able to comply with cl 10.4(d) of the lease, which requires the tenant to remedy any existing breaches of the lease before the landlord will consider whether or not to consent to an assignment of the lease. Upday will not remedy its breach of cl 7.10 because to do so would mean it could not sell the Golden Fleece to MRC Investments. Clause 10.4(d) does not attract the application of cl 16.5. Further, as the sub-clause confers no duty on the landlord, it is not one that is affected by the landlord’s obligation to act in good faith. The result of this is that if the tenant is in breach of the lease the landlord need not even consider whether to consent to a deemed assignment.

52    Thus, a transfer of the shares to MRC Investments will constitute a breach of the lease. But, logically following from the reasons for my decision to grant relief against forfeiture for the breach of cl 7.10, I would grant relief against forfeiture for the breach of cl 10.4.

53    Strictly, relief against forfeiture could not be granted because the breach had not occurred when I made the order. It will not occur until Upday completes the sale to MRC Investments. As I would have granted relief against forfeiture at that time, it seemed pointless to wait for Upday to breach the lease. Instead I made an appropriate restraining order on a quia timet basis: Proctor v Bayley (1889) 42 Ch D 390, 398.

The Deed Administrators’ Application to Prevent the Landlord Taking Possession

54    The deed administrators were concerned that if Tsourlinis Distributors could forfeit the lease, the DOCA which had been executed by the company, and which would maximise the return to creditors, would be defeated. Accordingly, it sought an order under s 444F(4) of the Corporations Act that Tsourlinis Distributors be prohibited from taking possession of the demised premises. Section 444F applies when creditors have resolved that the company execute a DOCA or where the company has executed a DOCA: s 444F(1). Section 444F(4) provides that the court may make an order that an owner or lessor of property not take possession of it. Section 444F(5) states:

The court may only make an order under subsection (4) if satisfied that:

(a)    for the owner or lessor to take possession of the property or otherwise recover it would have a material adverse effect on achieving the purposes of the deed; and

(b)    having regard to:

(i) the terms of the deed;

(ii) the terms of the order; and

(iii) any other relevant matter;

the interests of the owner or lessor will be adequately protected.

55    As things have turned out it is not necessary to consider whether an order should be made on the deed administrators’ application. It is, nonetheless, appropriate for me to make some observations about the operation of the section. I do that for the reason that if Upday had been unsuccessful in its application for relief from forfeiture, I would have made an order under the section, if it were possible to do so.

56    As to s 444F(5)(a), it is clear that if Tsourlinis Distributors were to take possession of the Golden Fleece Hotel it would have a material adverse effect on achieving the purpose of the DOCA. The purpose of the DOCA is to facilitate the completion of the sale agreement. The DOCA is a condition precedent to the sale. If completion could not occur for any one hotel there was a significant risk that the purchaser would elect to terminate the sale agreement, which would have been severely detrimental to the creditors as a whole.

57    In relation to s 444F(5)(b), the reference to the “interests” of the owner or lessor is to its economic or commercial interests, rather than its legal interests, and the reference to “adequately protected” must be to the economic or commercial adequacy of the protection.

58    Dr Bigos for the deed administrators submitted that the interests of the landlord were adequately protected under the sale agreement and DOCA. The value of the landlord’s reversion was not adversely affected by the sale agreement and if the sale agreement was completed the tenancy would continue with a solid, solvent tenant. As well, past breaches would be remedied and compensation paid. I agree with those submissions.

59    It is useful to bear in mind, as Dr Bigos pointed out, that Pt 5.3A does, in several respects, reflect ideas that are found in Ch 11 of the United States Bankrutpcy Code. In particular, in recommending a moratorium in administrations, the Harmer Committee made express reference to the moratoria imposed by the US Bankruptcy Code as well as by the administration legislation in the United Kingdom and Canada: Australian Law Reform Commission, General Insolvency Inquiry (“The Harmer Report”), Report No 45, Vol 1, 1988 (at [97]-[100]). It is, therefore, instructive to consider the US position.

60    Dr Bigos referred me to a line of US authorities which hold that in a reorganisation, where a debtor is in default under a lease, the court has an equitable power to decline forfeiture of the lease, to deny the lessor’s motion for immediate possession, and to allow the trustee to continue to remain in possession of leased premises in order to accomplish the reorganisation and to prevent the impairment of the opportunity of creditors to recover what they can. The line of authority stems from Smith v Hoboken RR, Warehouse & SS Connecting Co, 328 US 123, 66 SCt 947 (1946), which has been approved by several federal appellate and district courts: In re Fleetwood Motel Corp, 335 F2d 857, 862 (3d Cir 1964); Weaver v Hutson, 459 F2d 741, 745 (4th Cir 1972), cert den 409 US 957, 93 SCt 288 (1973); Queens Boulevard Wine & Liquor Corp v Blum, 503 F2d 202, 205-7 (2d Cir 1974); In re Fontainebleau Hotel Corp, 515 F2d 913, 914-6 (5th Cir 1975); In re M&M Transport Corp, 437 FSupp 821, 822 (SDNY 1977); In re Huntington Ltd, 654 F2d 578, 582-5 (9th Cir 1981); In re Delta Motor Hotel of Syracuse Inc, 10 BR 585, 601-2 (Bankr NDNY 1981); cf In re Triangle Laboratories Inc, 663 F2d 463, 468-70 (3d Cir 1981); In re Moore, 290 BR 851, 901-8 (Bankr NDAlab 2003). The reasoning in those cases is that the purpose of a reorganisation is to preserve a viable business enterprise where possible, especially where that will be in the best interests of creditors.

61    An Australian court has no similar power under s 444F. The application of s 444F to a landlord seeking to recover possession of premises the lease for which had been validly determined was considered in Strazdins v Birch Carroll & Coyle Ltd (2009) 178 FCR 300. There Lander J held that s 444F could apply to property which had been leased where the lease had been determined before the company executed a DOCA. Lander J said (at [133]) that the court’s power to make an order under s 444F(4) is “dependent upon the property being used or occupied by the company or by the company being in possession of the property”. Lander J then considered the facts of the case and made an order under the section.

62    The form of the order shows that s 444F is ill-suited to the task it is required to perform. The order reads:

So long as the [the former tenant] complies with all of the terms and conditions of the memorandum of lease registered number 516196 … as if the Lease had not been terminated including giving the respondent within 28 days an unconditional and irrevocable undertaking in favour of the respondent by ANZ Bank Limited to pay the sum of $79,980 upon demand, the [former landlord] be restrained from taking possession or otherwise recovering the whole of the land … until such time as the [former landlord] would have been entitled to recover possession or otherwise recover the property if the Lease had not been terminated.

63    Importantly, the order recognises that the lease had come to an end, ie that the rights and obligations that were imposed upon the parties by the lease were no longer operative. The order also recognises (as is self-evident from the empowering provision, s 444F(4)) that the court cannot reinstate the lease. The power of the court is confined to preventing a person (owner or landlord) from taking possession of his/her property. But let us look at how this was achieved.

64    First, the order imposes no obligations upon the landlord. That is to say, while the former tenant must comply with the terms and conditions of the former lease as if it had not been terminated, there is no corresponding obligation on the former landlord. That is, the order creates a relationship between the parties not of landlord and tenant but of owner and occupier. That relationship does not carry with it the rights and obligations imposed by law or statute. Thus the former landlord is free to do what it wishes with its premises, apart from taking possession of them. The well-known implied covenants for quiet enjoyment, title and fitness do not apply. The former landlord could allow the premises to fall into a state of disrepair and so make impractical the continued occupation by the tenant.

65    There are other practical difficulties with the order. What is to happen if the former tenant says it is complying with the terms of the former lease, but that is a matter in dispute? What if it turns out that the former tenant is not observing the terms? Is relief from forfeiture, or some equivalent remedy, available? Can relief from forfeiture be available in the event of a failure by the former tenant to comply with a term which it is under no legal obligation to perform? How long should the order run for? Should it take into account an option to renew if the former lease contained an option? The difficulties are endless.

66    Perhaps the issues could be sorted out. But it should not be assumed it would be an easy task. Moreover, the power the court has under s 447A (a very broad power indeed) may not be good enough to deal with the problem.

67    In my opinion the workability of s 444F is a matter that should be addressed by Parliament.

The Deed Administrators’ Transfer of Shares Application

68    The deed administrators’ second application was for an order under s 444GA of the Corporations Act for leave to transfer to MRC Investments the shares in the companies that were being sold. The shares were held by Mr Munday and Mr Upham. Mr Munday had not given his consent to his shares being transferred. Mr Upham did not oppose the transfer.

69    I made the orders for the same reasons I made like orders in Re Munday Group Pty Ltd (recrs and mgrs apptd) (in liq) [2010] FCA 1488.

70    I only wish to add that Mr Munday opposed the making of the orders not only on the basis that his shares had some value (an argument which I rejected out of hand) but also on the basis that s 444GA was invalid by reason of s 51(xxxi) of the Constitution: ie it brought about an acquisition of property on unjust terms. Mr Evans, counsel for Mr Munday, sought to raise this issue on the afternoon of the last day of the hearing. I refused to entertain the argument because of s 78B of the Judiciary Act 1903 (Cth). That section prohibits the Federal Court from dealing with a constitutional issue until notice has been given to the Attorneys-General of the Commonwealth and States.

71    Mr Munday’s lawyers then gave the requisite notices to the Attorneys-General. On 25 November 2010 I was advised that all Attorneys had indicated they did not wish to appear at any hearing of the argument. Accordingly, Mr Munday asked for the matter to be determined on the papers, relying on submissions he had already filed. This was two days before the deadline under the contract of sale. I refused to entertain the application. I did so for the reason that, while I was of the preliminary view the argument lacked merit, it was important that orders were made on all aspects of the case on 26 November 2010, ie the day before the deadline, especially since 27 November 2010 was a Saturday. I also anticipated that it would be necessary for there to be a hearing on Friday 26 November 2010 to finalise the form of orders and that this would take some time (which it did). Quite independently, I was interstate sitting extended hours as a member of a Full Court and had only limited time after hours to consider Mr Munday’s application. It would not have been possible in the time available to consider the submissions that Mr Evans wanted to make. To put the point more directly, raising a significant constitutional point at the last minute which, if it were to be considered, would have run the risk of having the sale go off, was not a step I was prepared to take. Cases require better preparation than this.

Associate:

Dated:    9 March 2011

SCHEDULE OF PARTIES (VID 330 of 2010)

JOHN LINDHOLM AND PETER MCCLUSKEY IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF MUNDAY GROUP PTY LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 116 558 420) (and others according to the attached Schedule of First Plaintiffs)

First Plaintiffs

UPDAY PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Second Plaintiff

JODAY PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Third Plaintiff

HAMDAY PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

Fourth Plaintiff

AND

TSOURLINIS DISTRIBUTORS PTY LTD

First Defendant

CARLTON TOWERS PTY LTD

Second Defendant

GROSVENOR PROPERTY DEVELOPMENT PTY LTD

Third Defendant

SCHEDULE OF FIRST PLAINTIFFS (VID 330 of 2010)