Morabito v Kingston Industries Pty Ltd

1. [1]

   This is a dispute between a landlord and tenant about the permitted use and make good obligations under a lease.

2. [2]

   Diana Nella Morabito, the Plaintiff, is the registered proprietor of Units 1 and 2, 2 Avalli Road, Prestons (Premises), an industrial warehouse and carpark.

3. [3]

   Kingston Industries Pty Ltd, the Defendant, was the lessee of the Premises pursuant to a registered lease commencing on 16 August 2010. The parties agreed to various extensions of the lease to July 2017. From 15 July 2017, the final registered lease continued on a month-to-month basis to 15 December 2017, when Kingston vacated the leased Premises. Each lease contained relevantly identical terms (Lease).

4. [4]

   It is not in dispute that during its occupation of the Premises, and in the course of its business of plant (machinery) hire, Kingston moved and stored plant and equipment at the Premises. This included machinery weighing over 22 tonnes, as well as some with steel tracks, not just pneumatic tyres.

5. [5]

   Mrs Morabito claims that by moving steel track machinery onto and around the Premises, Kingston breached the permitted use under the Lease. She also alleges Kingston breached the make good obligation at the end of the final Lease, because it failed to replace 55% of the concrete flooring inside the warehouse and all the concrete carparking, said to have been damaged by the steel track machinery.

6. [6]

   Mrs Morabito claims from Kingston the cost of replacing the concrete in the sum of $344,000.00 and lost rent in the sum of $294,416.73 for the time between Kingston vacating the Premises and when the Premises were finally let to a new tenant in June 2019. Further costs in the sum of $3,320.00 are claimed for additional make good for “plumbing works, grates, fire hydrant, and fire rated door”.

7. [7]

   Kingston denies all liability for various reasons, including that there is no demonstrated breach, the loss was not caused by any alleged breach because the concrete was inherently defective, and Mrs Morabito failed to mitigate her loss.

8. [8]

   While the parties provided a list of 23 “real issues in dispute”, the issues can be described briefly as follows:

   1. (1)

      Whether Kingston was in breach of the “permitted use” of the Premises;

   2. (2)

      Whether Kingston breached the make good obligation, having regard to the permitted use in the Lease;

   3. (3)

      If a breach of the make good obligation is found, whether the appropriate make good involved replacement of the whole of the internal concrete or whether repair was sufficient;

   4. (4)

      Whether Mrs Morabito can prove Kingston is liable for other make good in the sum of $3,320; and

   5. (5)

      Whether Mrs Morabito can prove Kingston is liable for lost rent at all, or for a period of time, including whether she acted reasonably in mitigating her loss.

9. [9]

   The parties provided a court book of over 2,000 pages, detailed written submissions and further documents. Despite the volume of material, the parties informed me that they would take me to the documents, upon which they relied. Most material in the court book was unnecessary, including a large number of documents, which were reproduced in such a small font as to be illegible.

Relevant lease terms

1. [10]

   The clauses relevant to this dispute include the following.

2. [11]

   The “Permitted Use” is identified in item 12 of Annexure A of the Lease as “Plant Hire/Distribution”.

3. [12]

   Clause 6 concerns the tenant’s use of the Premises and relevantly includes in clause 6.1:

4. [13]

   Clause 7 concerns repairs and clause 7.1 provides:

5. [14]

   Clause 7.2 provides:

6. [15]

   Clause 8.6(b) provides for indemnities from the Tenant:

7. [16]

   Clause 9.1 provides the landlord with a right to enter to inspect and carry out works, including repairing damage to the Premises on reasonable notice to the tenant.

8. [17]

   Clause 11.2 provides:

9. [18]

   Clause 12.4(a) provides that the essential terms of the Lease included clause 6.1(a). Further, clause 12.4 includes:

10. [19]

    Clause 15.5 provides:

Did Kingston breach the permitted use?

1. [20]

   Mrs Morabito alleges that Kingston’s movement and storage of heavy machinery with steel tracks was outside the scope of the permitted use of “Plant Hire/Distribution”, and that Kingston therefore breached clause 6.1(a) of the Lease.

2. [21]

   It is therefore necessary to construe the permitted use “Plant Hire/Distribution”, and the compare that to the use Kingston made of the Premises.

3. [22]

   The principles concerning the proper construction of a commercial contract, including a lease, are not in dispute. Terms are to be objectively construed from the perspective of a reasonable person in the position of the parties, with a view to giving it a commercial result. Regard must be had to the contract as a whole. Further, regard may be had to the genesis, aim and purpose of the contract: see eg Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52], and Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16].

4. [23]

   Kingston referred to the principle in Westfield Management Ltd v Perpetual Trustee Company Ltd (2007) 233 CLR 528 (Westfield), as an exception to the usual construction principles applicable to registered leases. I consider this further below.

5. [24]

   When asked in submissions, Mr Stapleton, counsel for the plaintiff, submitted that the Court ought to construe “Plant Hire / Distribution” the following way:

6. [25]

   Mr Stapleton expressly disavowed any reliance upon any implied term or industry meaning of “plant” and accepted Kingston’s machinery fell within the meaning of “plant”. However, it was said that it was appropriate to have regard to specific surrounding circumstances in construing the permitted use:

7. [26]

   Mr Stapleton’s submission included:

8. [27]

   The “Australian Standard” or the “standard” referred to in those submissions was not building standard AS36000, but the “Guide to industrial floors and pavements – design, construction and specification” or CCAA T48 published by the not-for-profit organisation, Cement Concrete & Aggregates Australia.

9. [28]

   Mr Stapleton did concede that the part of the guide, upon which Mrs Morabito relied, “is a guideline as opposed to a, shall we say, a mandate”. He continued:

10. [29]

    Kingston submits that either the permitted use can be construed on the terms of the Lease alone, and Kingston’s machinery with steel tracks was “plant” and therefore permitted. Alternatively, Kingston says the principle in Westfield has the effect that CCAA T48 was inadmissible on the question of the construction of the permitted use.

11. [30]

    In Westfield at [39], the High Court explained that, despite general principles of contractual construction, the use of extrinsic material ought be limited when construing the terms of a registered easement:

12. [31]

    However, at [44] the High Court acknowledged that some extrinsic evidence may be used to construe the grant:

13. [32]

    The High Court in Westfield did not state that the principle of construction applied to other registered instruments, such as leases.

14. [33]

    In Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 at [157]-[158] (Phoenix Commercial), Campbell JA explained with reference to Westfield:

15. [34]

    A reason why the Westfield principle may apply is because anyone reviewing the register ought be able to understand the nature of the registered interest. However, in Phoenix Commercial, at [159] and [161], Campbell JA recognised that, in contrast with an easement, “a lease…is a consensual document, and creates both contractual rights and property rights” and, as such, “there can be some provisions of a registered lease to which indefeasibility does not attach (citations omitted)”. Despite this, his Honour concluded that the principle in Westfield is “not dependent upon any considerations of the extent of indefeasibility, but rather on the inherent probabilities concerning the inquiries that a purchaser of Torrens title land will make” (at [162]).

16. [35]

    Further, in Alliance Engineering Pty Ltd v Yarraburn Nominees Pty Ltd [2011] NSWCA 301 at [54], Sackville AJA (Macfarlan and Whealy JJA agreeing) stated:

17. [36]

    That case also concerned the construction of a permitted use clause under a lease. However, because the point was not argued, the Court did not consider whether the principle in Westfield applies to permitted use clauses.

18. [37]

    Mr Stapleton did not provide any submissions about whether the Westfield principle ought be applied in this case. As above, Mr Stapleton did concede that CCAT 48 was, at most, a guideline or an opinion, to which I should have regard when construing the permitted use. However, Mr Stapleton eschewed any industry meaning or incorporation by reference, and advanced no evidence that the parties were aware of the document at the time the Lease was formed.

19. [38]

    It has been said that covenants concerning permitted use “are strictly construed against a lessor”: WD Duncan and Sharon Christensen, Commercial Leases in Australia, 9th ed, 2020, [100.600], citing Ex parte Bungey [1979] Qd R 23. Mr Stapleton accepted that was an accurate statement of principle. However, it does not appear to have been cited by any intermediate appellate courts, including since more recent High Court decisions concerning the construction of leases. Despite this, Mr Stapleton appeared to consider that I ought to construe the permitted use against his client. For the reasons below, it has not been necessary to have recourse to any type of contra proferentum constructional tool here.

20. [39]

    I do not accept that there is any ambiguity in the word “plant”. Kingston’s equipment was “plant” and was therefore permitted to be moved and placed at the Premises. Other parts of the Lease also lead to the conclusion that “plant” included machinery of the type hired by Kingston. Schedule 1 identifies “Landlord’s Works” including:

21. [40]

    This agreement by Mrs Morabito to construct a large wash bay for equipment and provide consents “for the use proposed by the Lessee” suggests that Mrs Morabito was likely aware of exactly the types of “plant” Kingston intended to store and distribute from the Premises.

22. [41]

    Even if that is not the case, I do not accept Mrs Morabito’s construction of the permitted use, or that any breach has been proved. There is nothing in the meaning of “plant” that limits the type of equipment Kingston was permitted to store and hire from the Premises. There is no basis upon which to incorporate a limitation on the word “plant” as suggested by Mrs Morabito. The business Kingston carried on at the Premises was plant hire and distribution.

23. [42]

    I consider that there was no need to resort to extrinsic material to construe the meaning of “plant”. Even if that is wrong, I do not accept that the CCAA T48 “Guide” should inform the construction of the permitted use, where that document concerned construction of pavements and there was no evidence that the parties had regard to that document at the time of formation, nor as to the general availability of that document.

24. [43]

    I note Mrs Morabito’s submission that during lease negotiations Kingston did not disclose that its intended use of the Premises included the movement and storage of heavy earth moving construction equipment with steel tracks. I do not consider that it was necessary for Kingston to do so in circumstances where Mrs Morabito engaged an experienced real estate agent to negotiate the terms of the lease and offered a permitted use of “Plant hire/Distribution” without limitation.

25. [44]

    At the time the Lease was negotiated, neither party was aware that the concrete had inconsistencies in its strength and there had been a failure to comply in all aspects with the concrete’s design. I reject the submission that there was an onus on Kingston to specifically seek information as to the composition of the concrete flooring.

26. [45]

    For the reasons above, Mrs Morabito has not demonstrated any breach of the permitted use clause.

27. [46]

    Even if that conclusion is incorrect, Mrs Morabito does not suggest that damages for breach of the permitted use would be assessed differently to a breach of the make good obligation, which is considered below. I note for completeness, Mrs Morabito did not seek to exercise a contractual right to terminate for a breach of the permitted use, despite Kingston having used the Premises consistently for seven years, and being aware of that use either by driving past the Premises herself or by her agent attending the Premises.

Did Kingston breach the make good obligation?

1. [47]

   Kingston accepts that it was obliged to “make good” at the conclusion of its occupation of the Premises. However, it does not agree with Mrs Morabito’s construction of what was required by that obligation.

2. [48]

   I accept Kingston’s submission as to the proper construction of the make good clause, being clause 7 of the Lease. Taken in the context of the Lease as a whole, clause 7 requires Kingston to keep the Premises and deliver them up at the time of vacation in “good repair and condition”, except to the extent that any damage is:

   1. (1)

      Fair wear and tear: clause 7.1(b)(i);

   2. (2)

      Caused by the landlord’s negligence: see clause 7.1(b)(i); or

   3. (3)

      “Anything beyond the control” of Kingston: see clause 7.1(c).

3. [49]

   While Kingston was required to reinstate the “warehouse floor to its condition at the commencement of the Lease subject to wear and tear” (clause 7.1(c)(iv)), that obligation must be understood as subject to the other clauses in the Lease. Therefore, if damage to the floor occurred because of something beyond the control of Kingston, then Kingston would not be obliged to reinstate the warehouse floor to its original condition.

4. [50]

   I accept that the proper construction of clause 6 requires it to be read subject to clause 7, such that the promises not to:

   1. (1)

      “Mark or damage” the Premises (clause 6(h)); or

   2. (2)

      Allow the “floor to be broken or damaged by overloading” (clause 6(i)),

   3. (3)

      must be read as excluding situations where marks, or damage are caused by Kingston using the Premises for the permitted use, and where those issues are caused by fair wear and tear or by a matter beyond the control of Kingston.

5. [51]

   Mrs Morabito did not make any submission contrary to that construction. Therefore, the issues to be determined are factual and concern whether the damage to the concrete on balance was caused by Kingston’s “lack of care or misuse” of the Premises, rather than occurring in a different way that would not amount to a breach of the Lease.

6. [52]

   Mrs Morabito alleges that Kingston damaged the concrete by misuse of the Premises by moving steel track machinery across the concrete. Kingston resists liability on the bases that:

   1. (1)

      The use of steel track machinery was permitted;

   2. (2)

      Any damage was fair wear and tear, because appropriately constructed concrete would not have suffered the damage alleged by Mrs Morabito; and/or

   3. (3)

      It is not liable for damage, where the most likely cause is the defective construction of the concrete, which was either caused by Mrs Morabito’s negligence or was a matter beyond Kingston’s control.

7. [53]

   In essence, Kingston asserts the evidence demonstrates that, had the concrete been properly laid, then it would not have been damaged by its machinery.

What was damaged?

1. [54]

   The concrete has been replaced and therefore can no longer be inspected. It was not inspected by the parties’ experts, who gave evidence. Therefore, the type of damage to the concrete must be discerned from correspondence and the evidence of those who observed the damaged concrete before it was replaced.

2. [55]

   Mrs Morabito first raised the issue of damage to the concrete in 2017.

3. [56]

   On 15 July 2017, Kingston’s final lease was due to expire. On 4 May 2017, Mrs Morabito and her managing agent carried out a pre-vacation inspection of the Premises. Damage to parts of the internal and external concrete were identified by Mrs Morabito’s agent, who emailed her including:

4. [57]

   The referenced photos show damage to the kerbs and some joints in the external concrete and joints in the internal concrete and some marks on the internal concrete.

5. [58]

   On 30 June 2017, Mrs Morabito’s real estate agent emailed “John at JD Concrete” requesting a quote on the costs of repairing the concrete. It appears that over the next 15 months various quotes were obtained.

6. [59]

   From 15 July 2017, Kingston began holding over its tenancy under the Lease on a month-by-month basis. On 2 August 2017, Kingston indicated that “we would prefer to stay month to month but it is our intention to be out by the end of the year”.

7. [60]

   On 21 August 2017, Mrs Morabito’s agent informed Kingston that she would agree to a month to month tenancy “if you agree to the following”:

8. [61]

   On 6 October 2017, Kingston responded:

9. [62]

   Despite Kingston’s apparent agreement to repair the concrete, Mrs Morabito does not allege that Kingston has breached any agreement to repair the concrete outside of the make good obligations under the Lease.

10. [63]

    By the end of October 2017, the parties had divergent positions as to what concrete repair work was necessary. Mrs Morabito wanted the concrete to be replaced. Kingston wanted to repair the concrete using an epoxy resin inside and by using a penetrating sealer in the carpark.

11. [64]

    Mrs Morabito retained an engineer, Mr Fernando Algorry, who originally designed and certified the concrete at the Premises. On 30 October 2017, Mr Algorry provided Mrs Morabito with an inspection report, which included:

12. [65]

    He recommended complete removal and replacement of the concrete. The photos attached to his report were close ups of damaged joints at unknown locations.

13. [66]

    On 27 November 2017, Kingston wrote to Mrs Morabito stating:

14. [67]

    Thereafter, Kingston continued to deny liability, even though it sought to resolve the issue commercially.

15. [68]

    Kingston engaged Mr James Griffiths from Griffiths Engineers Pty Ltd to provide advice about the concrete. His informal summary included:

16. [69]

    In early December 2017, Mr Griffiths carried out various tests on the concrete and prepared a report dated 12 December 2017. It relevantly provided an analysis of the internal and external concrete, particularly in relation to strength. Two tests were carried out to measure strength: a core hole test of two samples, one internally and one externally, and a rebound hammer in 47 locations internally and externally. All the experts agreed that a core hole test is more accurate than the rebound hammer test. They agreed that the hammer test may require a 20% margin either way, with the results commonly underestimating the strength of the concrete.

17. [70]

    Mr Griffiths’ core hole tests revealed the strength of the internal sample was 22.5MPa and the external sample was 19.5MPa. The hammer testing revealed a variety of results over the 47 locations, ranging from 24.5 to 56.5MPa.

18. [71]

    On 20 December 2017, Mr Griffiths produced a “structural report” on the concrete slabs. The report included:

19. [72]

    On 15 March 2018, Mr Algorry produced a second report. He had been provided with Mr Griffiths’ report. Mr Algorry also considered:

    1. (1)

       A report concerning three core samples “of the external pavement” prepared by Coffey Services Australia (Coffey Report);

    2. (2)

       A report carrying out hammer testing in three locations prepared by the company that delivered the concrete to the site (Hanson Report); and

    3. (3)

       A slab scan report which undertook ground penetrating radar testing of two cored samples of the concrete (Slab Scan Report).

20. [73]

    Notably, and in distinction to Mr Griffiths’ report, there is no evidence about where in the Premises the Coffey Report additional core samples were taken, nor where the hammer testing in the Hanson Report was carried out. It is also not known who took the core samples, or when they were taken.

21. [74]

    Mr Algorry noted that the Coffey Report core testing revealed results of 37MPa, 50.5MPa and 43MPa. The Hanson Report hammer testing results were 39MPa, 42MPa and 42MPa. Mr Algorry provided an analysis and conclusions including:

22. [75]

    Kingston submits that from the “significant difference” in the core sample strength test results, and the highly variable results across the hammer testing, it can be inferred that the concrete was not laid properly and in accordance with its design.

23. [76]

    It is not in dispute that there were construction deficiencies as detailed below.

24. [77]

    Mrs Morabito had engaged professionals to construct the warehouse and surrounding concrete carpark. At all times, Mrs Morabito had the ability to provide particular instructions to the engineer.

25. [78]

    Mr Algorry, the engineer who designed the concrete surface in the car park and inside the warehouse, gave evidence that he was not provided with specific instructions about the type of concrete required. For that reason, he included in his design a standard type of concrete suitable for light to medium industry and machinery with pneumatic tyres.

26. [79]

    The design for the concrete was in evidence and it relevantly specified:

    1. (1)

       Standard N32 concrete to produce strength of at least 32MPa. This is the accepted standard suitable for machinery with pneumatic tyres. The parties’ experts agreed that the appropriate design for use with steel tracked machinery ought to be concrete with 40MPa. However, concrete does continue to harden over time.

    2. (2)

       Precast concrete grade shall be 40 MPa minimum. Concrete strength at removal from mould shall be 20 MPa minimum.

    3. (3)

       Concrete “slump” of 80mm. Slump was explained by Mr Algorry as the distance between the height of the concrete when it is fresh and the height that the concrete flows once it has settled. It is a measure of water content and shrinkage, which impacts the compressive strength of the concrete.

    4. (4)

       No additives were to be included in the concrete. Mr Algorry’s evidence was that additives are chemicals and other products added to concrete which can also impact the compressive strength of the concrete.

    5. (5)

       The concrete was to be cured by an acceptable method for a minimum of 7 days. The experts agreed that curing is important to the development of abrasion resistance in concrete. Abrasion had occurred in the Premises. No explanation was given by experts, nor were submissions made as to the inconsistency between the 7 day minimum curing specification and Mr Griffiths’ reference to 28 days of curing.

27. [80]

    The only evidence about whether the concrete was laid as designed comes from some delivery dockets created when concrete was brought to the site during construction.

28. [81]

    Not all the delivery dockets were discovered by Mrs Morabito. No explanation was provided as to how many were missing, nor why. There was no evidence about the total volume of concrete used in order to determine the proportion of dockets missing. Kingston submits, and I accept, that this lacuna in the evidence about the qualities of the concrete delivered was caused by Mrs Morabito, such that it is not possible to know exactly the nature of the concrete that was laid and where various batches were laid. Therefore, she ought not benefit from the lack of evidence.

29. [82]

    Based on the volume of concrete the available dockets demonstrate was delivered:

    1. (1)

       for 13%, water had been added at the site, which was not “good practice”, was not approved by Mr Algorry and was contrary to the design.

    2. (2)

       6% of the concrete did not have the slump designed.

30. [83]

    A few dockets revealed that an additive in the form of a drying accelerant was added contrary to the design. This aspect was less significant, as the experts agreed that this would merely speed the setting time of the concrete. The additive would not accelerate the curing process.

31. [84]

    Mrs Morabito accepts that the evidence does not reveal where the concrete that did not comply with the design was actually laid at the Premises.

32. [85]

    Further, there was no evidence from the company that laid the concrete, JD Concrete, to explain the construction process, including the time allowed for curing, the volume of concrete used and where various batches were laid. Kingston submits, and I accept, that a Jones v Dunkel inference can be drawn from Mrs Morabito’s failure to bring forward that evidence, in circumstances where her evidence was that JD Concrete is run by family friends, whom she trusts: Jones v Dunkel (1959) 101 CLR 298. Further, JD Concrete was consulted in the process of investigating rectification works before the litigation commenced, and in fact carried out the rectification works.

33. [86]

    Mr Stapleton’s only submission against an inference being drawn is that Mrs Morabito was not asked whether the relevant persons at JD Concrete were available to give evidence, but he did accept that is not an absolute requirement.

34. [87]

    I do not accept Kingston was required to elicit an explanation from Mrs Morabito during the course of cross-examination for the absence of JD Concrete. For the Court to draw a Jones v Dunkel inference, the considerations are:

    1. (1)

       Whether a party is required to explain or contradict something; and

    2. (2)

       There is an unexplained failure by that party to call the obvious witness.

35. [88]

    Here, Kingston raised a complaint that the concrete was defective as a complete defence, and it would be expected that Mrs Morabito would explain or contradict that allegation. She did not bring forward the contractors who laid the concrete, and then removed and replaced it. She did not explain why she did not do so. I consider it appropriate to infer from the unexplained failure to call evidence from JD Concrete that such evidence would not have assisted Mrs Morabito.

36. [89]

    The other significant evidence concerning the concrete comes from Mr Algorry, who not only designed the concrete, but certified it. However, he candidly accepted in cross-examination that he never inspected the concrete after it was laid and before he certified it. It is not apparent on what basis he certified it was correctly constructed. He also had no basis for comparing the original concrete, as laid, to the damaged concrete he later saw.

37. [90]

    Further, Mr Algorry conceded that, had he known what was contained in the delivery dockets, he would not have certified the concrete:

38. [91]

    Three experts gave evidence. Mrs Morabito relied on reports by Michael van Koeverden and Mr Ion Dumitru. Kingston relied upon Mr Robert Munn’s reports.

39. [92]

    None of those experts had ever inspected the damaged concrete, because it had been replaced before they were engaged. Instead, they provided their opinions based on Mr Algorry’s reports and Mr Griffiths’ reports, and photos of the damaged concrete. However, they accepted that photo evidence could present a distorted view, and that it was unclear whether they were each provided with the same set of site photos.

40. [93]

    In their joint report, the experts narrowed many issues. They agreed for example:

    1. (1)

       The concrete was not designed to take steel wheeled and tracked vehicles across the surface. However, they also agreed that concrete with a design of 32MPa would become harder over time and could withstand wear from steel based machinery, but would not have as long a life.

    2. (2)

       While they consider concrete with 40Mpa is appropriate design for steel based machinery, many people in the industry use a design of 32Mpa irrespective of the use to which the concrete will be put.

    3. (3)

       There were “some deficiencies in the external pavement as constructed.” By “deficiencies” they were referring to the incorrect placement of the re-enforcement in the concrete. However, they were “not in a position to confirm” the contribution of those defects “to the pavement performance”.

    4. (4)

       The experts were never provided with the concrete delivery dockets, revealing variations in slump to the design and the addition of water at site. They did not know that Mr Algorry would not have certified the concrete, had he known of the delivery dockets.

    5. (5)

       In relation to the strength of the internal concrete, they agreed that it was “adequate for the application”. However, they did not explain what “application” they were referring to.

    6. (6)

       They were unable to know whether curing had taken place, but agreed “curing is very important to the development of abrasion resistance in concrete”. However, they considered that the documentary material they reviewed indicated that the internal strength was consistent with a cured slab. In the joint report, they did not make any comment on the curing of the external slab.

41. [94]

    Mrs Morabito submits that because the experts were not able to give an opinion as to the extent that the deficiencies in the concrete construction contributed to the damage, it ought be concluded that Kingston’s machinery caused the damage.

42. [95]

    Kingston submits that the likely cause of the inconsistent damage to parts of the concrete was Mrs Morabito’s own negligence in leasing a facility to a plant hire and equipment company which was (unknown to Kingston at the time it entered into the Lease, but known to Mrs Morabito or her agents) not designed for Kingston’s plant. Alternatively, Kingston submits that the defectively installed concrete was a matter beyond its control, for which it is expressly not liable under the Lease.

43. [96]

    I do not accept Kingston’s submission that Mrs Morabito was negligent in the construction of the Premises, and in particular the concrete. I do not accept the submission that the use of the word “negligence” in the Lease is intended to be construed in a general and non-legal way to merely mean “lack of care”. Instead, I consider that the commercial parties, represented by lawyers, intended to adopt a legal meaning for the word “negligence”. I do not accept that Mrs Morabito owed a duty of care to construct the concrete to 40Mpa before leasing to Kingston. This is particularly so in light of the inclusion of clause 15.5 of the Lease, by which Mrs Morabito expressly disavows any promise to provide premises suitable for Kingston’s specific use. The absence of a positive obligation concerning the strength of the concrete on Mrs Morabito’s part does not, however, resolve the issue of Kingston’s possible liability.

44. [97]

    There is more force in Kingston’s submission that the defective concrete was a matter beyond its control and for which it ought not be liable. That turns purely on the question of the most likely cause of the damage.

45. [98]

    Mrs Morabito bears the onus of proving that Kingston’s machinery damaged the concrete beyond fair wear and tear and that concrete damage was not caused by a matter beyond Kingston’s control. In my view, Mrs Morabito has failed in discharging that onus for the following reasons.

46. [99]

    From November 2017, Kingston raised the issue of defects in the concrete, and prepared reports to support that position. While Mr Algorry prepared reports for Mrs Morabito, no conclusive testing was carried out by either party before Mrs Morabito replaced the concrete.

47. [100]

    Of Mr Griffiths and Mr Algorry’s reports, I prefer the opinion of Mr Griffiths. Mr Griffiths provided details of the core test and hammer tests and raised queries about the construction of the concrete. Those queries were not answered by Mr Algorry, nor Mrs Morabito at the hearing, because JD Concrete was not brought forward and neither were all the concrete delivery dockets. Therefore, it is simply not possible to know exactly how the concrete was constructed, where there were deficiencies in terms of slump and added water, and the length of the curing of the concrete.

48. [101]

    Mr Algorry’s opinion that the later three core tests and hammer tests were more “credible”, simply because they accorded with his design, cannot be accepted. Mr Griffiths’ hammer testing was also preferrable to that relied upon by Mr Algorry, because he gives clear evidence about where the testing was carried out and provided 47 readings, instead of the mere three readings in unidentified locations included in Mr Algorry’s report. Further, Hanson carried out those three additional hammer tests, but was also the company that delivered the concrete that failed to comply with Mr Algorry’s design. Mrs Morabito had no explanation for the wide variety of testing results across the concrete.

49. [102]

    I consider it very significant that Mr Algorry’s evidence was that he would not have certified the concrete, had he been provided with the concrete delivery dockets. Had he not certified the concrete, then remediation would have been required before the construction was complete and the current dispute may not have arisen.

50. [103]

    The assessment by expert witnesses is of less assistance because:

    1. (1)

       They never accessed the damaged concrete;

    2. (2)

       They accepted that a visual assessment from photos can distort the true position; and

    3. (3)

       They were not provided with the concrete delivery dockets, nor were they aware that Mr Algorry would not have certified the concrete, had he known the way the concrete was delivered to the site.

51. [104]

    I do not accept Mrs Morabito’s submission that Kingston ought to have used matting and protective plates. While it appears that Kingston has used such protections more recently at a different site, that is not relevant to the Premises. Further, the clear evidence from Kingston’s witnesses was that matting is used at sites where there is a difference in heights between surfaces in order to protect the “lip”. I accept that Kingston does not use matting generally to protect concrete from the steel tracks.

52. [105]

    In the circumstances, for the reasons above based on the evidence before me, I am not persuaded on the balance of probabilities that Kingston’s use of the Premises with its machinery caused the damage to the concrete. This is particularly so when compared to the fact that there were inherent deficiencies in the concrete that had not been constructed according to the design. Mr Algorry would not have certified the concrete, had he had full information. Therefore, Mrs Morabito has not proved Kingston breached the Lease.

Appropriate remedy

1. [106]

   On the basis that the above conclusion is incorrect, I consider the issue of the appropriate measure of damages.

2. [107]

   The parties agree that if Mrs Morabito can otherwise demonstrate that Kingston is liable for the damaged concrete, then she is entitled to the agreed cost of replacement of the external carpark concrete at a value of $179,700.21.

3. [108]

   However, in relation to the 55% of the internal concrete that was allegedly damaged, Kingston submits that an epoxy coating that cost $71,552.00 was adequate to make good, rather than complete replacement, which the parties agree is valued at $116,189.01.

4. [109]

   Kingston submits that the “ordinary principles” can be taken from the High Court’s decision in Bellgrove v Eldridge (1954) 90 CLR 613 at 617-618; a property owner is entitled to “cost of cure” of defective works as the usual measure of damages, rather than diminution in value of the proprietary interest. In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [15] the High Court described the nature of the loss suffered by a landlord, where a tenant breaches an obligation requiring maintenance of the leased premises:

5. [110]

   Kingston submits that to restore the internal concrete in accordance with the make good requirement only necessitated the application of an epoxy overcoat, rather than complete replacement, and if liable, it should only be required to pay for such remediation.

6. [111]

   Mrs Morabito’s experts opine that the appropriate remedy for those parts of the internal concrete that were damaged was replacement because:

   1. (1)

      The life of epoxy is reduced by exposure to ultraviolet light, and because of the large warehouse doors being open during the day, that light would impact some epoxy inside.

   2. (2)

      The manufacturers’ warranty for an epoxy product is 10 years, which Mrs Morabito considered insufficient because concrete has an estimated standard design life of between 40 and 60 years.

7. [112]

   I accept Kingston’s submission in relation to the issue of ultraviolet light, namely, that for those parts of the internal area that could be impacted, some additional concrete could have been laid, but did not require replacement of the whole internal floor. Further, the actual amount of impact is not clear from the evidence, because the photographic evidence shows that there is likely some shading provided by reason of the doors opening outwards and upwards. Mrs Morabito did not provide evidence of the cost of that alternative solution.

8. [113]

   However, I do not accept Kingston’s submission concerning the warranty. I accept that Mrs Morabito would not obtain at law any statutory warranty for concrete longer than 10 years. However, if Kingston is liable, then it must provide non-defective flooring. The experts agree that concrete has a longer design life than an epoxy. I do not accept that the relevant warranties for each material are the determinative factor. Instead, the appropriate consideration is the design life; epoxy has a design life of about 10 years which is inferior to concrete. I consider that replacement was a reasonable solution and the more appropriate solution in the circumstances.

9. [114]

   Therefore, had it been necessary to decide, I would have determined that Mrs Morabito was entitled to replacement of the damaged concrete inside the warehouse, in addition to the carpark outside.

10. [115]

    Kingston submits that any sum awarded for the replaced concrete ought to be reduced for “betterment”, because the effect of such an order would be that Mrs Morabito would obtain new concrete at the end of Kingston’s occupation, rather than concrete that was seven years and ten months old. The parties agree that if a reduction for betterment is allowed, it ought to be 14.83%, which assumes the concrete had a life of 50 years (being the midpoint between the life range of 40 and 60 years). In effect, that means the Court must consider whether the extra seven years and ten months above the expected 50 years amounts to betterment. If a reduction for betterment is allowed, the parties agree the appropriate reduced damages sum is $255,540.73.

11. [116]

    Kingston relies upon principles concerning betterment from Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 at [261]-[264], where Hodgson JA characterised the concept of betterment as “the basic principle…that the plaintiff is to be compensated for its loss, and no more…”.

12. [117]

    In Tzaneros Investments Pty Limited v Walker Group Constructions Pty Limited [2016] NSWSC 50 (appeal dismissed [2017] NSWCA 27) (Tzaneros Investments), at [133]-[137], Ball J set out the principles concerning a discount for betterment, which can be summarised as follows:

    1. (1)

       A successful plaintiff should not be awarded a windfall amount by reason of obtaining a better outcome, than had the defendant performed its obligations. However, it is relevant to have regard to any inconvenience likely suffered by a plaintiff because of unplanned capital works to rectify the defendant’s breach.

    2. (2)

       A discount for betterment will be applied to a damages award if:

    3. (3)

       No discount will be applied where the benefit is not caused by the defendant’s conduct and the expenditure incurred as a result.

    4. (4)

       Although the plaintiff has the onus of proving the quantum of damages, an evidentiary burden may be placed on a defendant.

13. [118]

    Mr Stapleton’s submissions to faintly resist a reduction of damages by reason of betterment were:

14. [119]

    Mr Stapleton did not make any submissions based on authority, or to the effect that such a benefit was speculative or too remote to be taken into account.

15. [120]

    This is not a case like Tzaneros Investments, where the plaintiff claimed a pavement was constructed defectively and had incurred expenses in maintaining the defective pavement until it was replaced. In that case, Ball J concluded that it could not be said there was a simple betterment, because of the detriment to the plaintiff during the time the pavement was maintained. Further, in that case, the defendant accepted that the plaintiff’s business needed to be closed while the repair work was carried out. However, here, Mrs Morabito claims lost rent during the period while the concrete remained unrectified and there is no evidence she spent money on the concrete during the Lease. In those circumstances, it is not an equivalent case.

16. [121]

    For the reasons above, it is appropriate to reduce damages for the betterment obtained from the new concrete.

Additional make good

1. [122]

   Originally Mrs Morabito claimed $57,871.35 for additional make good works. This figure was taken from an invoice issued by JD Concrete on 30 January 2019 for works it had completed at the property for Mrs Morabito in about October 2018. This figure excludes GST.

2. [123]

   In closing, Mr Stapleton reduced the claim for additional make good to account for Mrs Morabito’s acceptance that some items in that invoice had already been included in the claim for replacement of the concrete. The final claim for additional make good was in the amount of $3,320.00 of the invoice for “plumbing works, grates, fire hydrant, and fire rated door”.

3. [124]

   During cross-examination, Mrs Morabito’s daughter stated that during her inspection of the property on 7 June 2018, the remaining repairs to be carried out at the Premises (unrelated to the concrete) concerned plumbing, the fire door and also internal painting works. She also made reference to exposure of the ventilation system and the fact the fire hose nozzle had been cut off. I note that Mrs Morabito abandoned her claim for the $2,629.00, itemised on the invoice for painting works.

4. [125]

   Mrs Morabito bears the onus of proving the plumbing, grates, fire hydrant and fire door works were caused by Kingston’s breach of the make good obligation, and that those works were not caused by fair wear and tear.

5. [126]

   In her affidavit, Mrs Morabito indicated that she had become alerted to damage to the external plumbing and fire safety door after her inspection of the property on or about 4 May 2017. However, on 21 August 2017, Mrs Morabito’s agent advised Kingston of the make good works Mrs Morabito required to be carried out prior to vacating the Premises. This list of required works made no mention of damaged pipes, grates, fire hydrant or fire door. In its email on 9 October 2017, Kingston proposed some make good works, but did not refer to those items.

6. [127]

   There is no evidence of the likely cause of the damage to the pipes, grates, fire door and fire hydrant. I am not satisfied that Mrs Morabito has demonstrated that this damage was caused by Kingston beyond fair wear and tear, such that Kingston is liable to reimburse her in the amount of $3,320.00.

Lost Rent

1. [128]

   Mrs Morabito claims 17 months of lost rent in the sum of $294,416.73. This period commenced on 15 January 2018, when a prospective tenant sought to rent the Premises, but the concrete had not been rectified, to 30 June 2019, when a new tenant took possession of the Premises pursuant to a lease, after the concrete had been replaced.

2. [129]

   The sum sought is calculated on the terms of a lease proposal from Petrol Services Australia, which could have commenced on 15 January 2018 with an annual rent of $200,000.00, increasing at 3% annually. That offer was not accepted by Mrs Morabito.

3. [130]

   Mrs Morabito also claims $36,367.11 for outgoings incurred for the same period as for the loss of rent.

4. [131]

   Kingston denies it is liable for any lost rent or outgoings. It submits Mrs Morabito failed to mitigate her loss by failing to rectify the concrete promptly (a process which appears to have taken no longer than six weeks). Further it submits that Mrs Morabito failed to take up offers from viable tenants for 17 months without good reason and thereby did not mitigate her loss.

5. [132]

   Mrs Morabito accepts that clause 12.4(d) of the Lease required her to take reasonable steps to mitigate her damage. When assessing damages at common law, a plaintiff is not entitled to damages which it could reasonably have avoided. The parties did not consider that there was a relevant difference between the operation of clause 12.4(d) and common law damages principles.

6. [133]

   Clause 12.4 provided that when mitigating her loss, Mrs Morabito was entitled to obtain a replacement lease on terms acceptable to her. Her evidence in cross-examination was that her main concern was that a new tenant would pay their rent and look after the Premises. She gave no evidence that she was concerned about the length of the lease, the rent-free period, the rental increases or payment of outgoings. It is in that context the question of mitigation must be judged.

7. [134]

   As noted above, in May 2017, Kingston had notified Mrs Morabito that it would be vacating the premises at the end of 2017.

8. [135]

   By October 2017 Mrs Morabito was marketing the Premises for lease.

9. [136]

   Mrs Morabito’s affidavit evidence concerning her attempts to re-lease the Premises after October 2017 is thin. In her affidavit she makes bald assertions without any supporting explanation. For example, her affidavit evidence is:

10. [137]

    She provides identical evidence about “Colliers” and “LJ Hooker”. She gives no evidence of her instructions to any real estate agent, nor the terms of the agreements with them, nor why the terms proposed by enquirers were not acceptable to her.

11. [138]

    The documentary evidence provides more detail.

12. [139]

    On 13 November 2017, a potential new tenant, MPower, inspected the Premises, with the damaged concrete still unrepaired. The real estate agent emailed Mrs Morabito’s agent, noting that MPower “have some time up their sleeve if they need to wait – they can wait until June 18.” Mrs Morabito did not accept that proposal on the basis that the concrete was not repaired.

13. [140]

    Other interested parties inspected in November 2017. On 28 November 2017, a potential tenant, Hoppt Australia, expressed an interest in leasing the Premises from mid-January 2018, including with the floor “left as is our suggestion”. The terms offered were three-year lease with three -year option, rent of $115 per m2 increasing at 3% per year, outgoings of $18 per m2, and rent-free period of three months. Mrs Morabito did not accept that proposal on the basis that the concrete was not repaired, even though the proposal was that the floor could be left unrepaired.

14. [141]

    On 30 November 2017, a potential tenant, Petrol Services Australia, offered to lease the Premises for three years, for $200,000 per annum, with one month rent-free period. Further, Mrs Morabito’s agent informed her:

15. [142]

    On 4 December 2017, Mrs Morabito rejected this offer. Her agent wrote to the potential tenant’s agent:

16. [143]

    However, Mrs Morabito accepted in cross-examination that the terms that had been offered were acceptable to her. There is no evidence that the process of replacing the concrete was ever discussed with Petrol Services Australia.

17. [144]

    On 22 January 2018, another potential tenant offered a three-year lease with three-year option for $190,000 per annum plus outgoings with two months’ rent-free period. Significantly, the tenant was “willing to take on w/house as is. The concrete condition does not worry us…”. Mrs Morabito also rejected that offer.

18. [145]

    On 6 September 2018, Mrs Morabito’s lawyer sought a quote to repair the concrete.

19. [146]

    On 21 September 2018, an agent had further interest from a potential tenant.

20. [147]

    Until October 2018, the parties continued to negotiate about a possible resolution of the concrete repair. They obtained various quotes and lawyers sent correspondence outlining legal positions and offers.

21. [148]

    On 18 October 2018, JD Concrete completed the concrete removal and replacement at a cost of $403,700.00. As noted above, on 30 January 2019, JD Concrete issued a further invoice for $63,658.49 including GST for extra concrete works, cleaning, landscaping and other works.

22. [149]

    On 1 July 2019, a new tenant commenced leasing the Premises for two years with a two-year option at a base rent of $205,000 including outgoings, increasing at 4%, with two months’ rent-free period.

23. [150]

    Mrs Morabito’s submission is that it was reasonable for her to keep the Premises vacant and to continue negotiations with Kingston from December 2017 until October 2018 in the hope that Kingston would replace all the concrete.

24. [151]

    Mrs Morabito relies upon a decision of White J (as his Honour then was) in Vale v Rosychamp [2008] NSWSC 1373 for the proposition that engaging in negotiations for a long period of time, if done in the ordinary course of business, would not amount to a failure to mitigate loss. That was a very different case to the present. There, the protracted negotiations were between the landlord and a potential tenant. That ongoing negotiation demonstrated the landlord was taking reasonable steps to mitigate the loss of the premises being empty when the previous tenant breached the lease. In contrast, here, the protracted negotiations relied upon by Mrs Morabito are those between her and Kingston about rectification works. That case does not assist Mrs Morabito.

25. [152]

    Similarly, I do not accept Mr Stapleton’s submission that a relevant consideration is that Kingston, as late as June 2018, asked permission to enter the Premises and carry out further testing. The submission was as follows:

26. [153]

    The submission, in effect, is that a plaintiff need not take reasonable steps to mitigate loss so long as the defendant continues to negotiate a possible outcome to a dispute, including for example, carrying out more investigations. I consider a landlord acting reasonably in the face of damaged premises, where liability for that damage is disputed, ought remedy the premises and claim damages for the loss. In fact, that is exactly what Mrs Morabito did, but she delayed by almost 12 months in carrying out the works.

27. [154]

    I do not accept that Mrs Morabito acted reasonably in delaying rectifying the concrete and not accepting one of the leases offered early in 2018, in circumstances where the terms of those leases were acceptable to her. Mrs Morabito could have minimised any lost rent by taking steps to immediately rectify the concrete from November 2017. There is nothing to suggest that the Premises would not have been leased in early 2018.

28. [155]

    Even if the rectification work was not complete by mid-January 2018, there is no evidence that the rectification work would have caused such inconvenience to the new tenant that a new lease would either not have eventuated, or if executed, would have been terminated because of the inconvenience.

29. [156]

    I do not consider Mrs Morabito took reasonable steps to mitigate her loss, such that she is not entitled to any damages for the lost opportunity to obtain rent.

Calculation of lost rent and outgoings

1. [157]

   Should the conclusion above be incorrect, in terms of quantum to be attributed to the lost opportunity to lease the Premises and pay outgoings, I make the following findings.

2. [158]

   Lost rent was calculated at $200,000 per annum, plus outgoings, increasing at 3% in accordance with the lease, which was offered by Petrol Services Australia, but refused by Mrs Morabito.

3. [159]

   Kingston does not take issue with the terms of that lease proposal forming the basis of a calculation for the lost opportunity claimed by Mrs Morabito and therefore, I will use that agreed approach without deciding whether it is correct.

4. [160]

   Kingston does submit that certain deductions ought to be made from the amount claimed by Mrs Morabito:

   1. (1)

      Any claim from the date the concrete was replaced, namely 25 October 2018, because it is not to Kingston’s account that Mrs Morabito first leased the Premises in July 2019;

   2. (2)

      The one month rent free period required by that potential tenant in the sum of $16,666.67;

   3. (3)

      The real estate agent’s commission of one month’s rent, in the amount of $16,666.67; and

   4. (4)

      The managing agent’s fee of 3% excluding GST of rental income, which was said to be $10,457.81.

5. [161]

   I do not accept Kingston’s submission that the end date for the calculation of lost rent ought be the date the concrete works were finished. Instead, Mrs Morabito is entitled to loss caused by the breach, only limited by a failure to prove loss or a failure to have acted reasonably to avoid that loss.

6. [162]

   To the extent that it ought to be concluded that Mrs Morabito proved that she took reasonable steps to market the Premises after the concrete was rectified, she is still entitled to damages, until a new tenant was found. Therefore, it is necessary to determine that issue.

7. [163]

   The documentary evidence from real estate agents relied upon by Mrs Morabito only suggests sporadic marketing activity every second month or so. However, the evidence upon which she relies is three enquires made between November 2018 and when the new lease was formed in July 2019. Those enquiries were as follows:

   1. (1)

      On 19 November 2018, which was an online enquiry and response. There is no evidence that the agent ever followed upon the enquiry.

   2. (2)

      On 29 January 2019, a prospective tenant decided against the site because of the roller door, after a heads of agreement was issued on 13 December 2018.

   3. (3)

      On 25 March 2019, a prospective tenant had obtained better premises at a better price.

8. [164]

   There is no evidence of the marketing campaign during any of the period, nor the state of the market or market rent.

9. [165]

   Had Mrs Morabito taken reasonable steps, it would be expected that there would be more evidence of the market, marketing and engagement with potential tenants. While the Lease entitled her to consider terms of any future lease acceptable to her, that also required her to consider those matters in good faith.

10. [166]

    Had it been necessary to decide, I do not accept that Mrs Morabito took reasonable steps to re-lease the Premises after the concrete was rectified.

11. [167]

    Mr Stapleton did not make any submission against the other reductions sought by Kingston, other than in relation to the rent-free period. His submission was that Mrs Morabito had to give the 2019 incoming tenant two months’ rent-free, and therefore it is not appropriate to reduce her claim for rent by the one month rent-free period that was proposed in January 2018. I do not accept that submission. Mrs Morabito is claiming 100% of the rental according to the January 2018 proposed lease. Therefore, the actual amount that would have been payable under that lease must be assessed on its terms, which includes a rent-free period. The 2019 tenant’s terms are not relevant.

12. [168]

    I also accept that the agent’s commission and management fee must be deducted from the total sum. Mr Stapleton did not suggest the calculation was incorrect.

13. [169]

    Therefore, from the lost rent claim of $294,416.73 would need to be deducted:

    1. (1)

       $16,666.67;

    2. (2)

       $16,666.67; and

    3. (3)

       $10,457.81.

14. [170]

    The lease proposal submitted by Petrol Services Australia indicated that “outgoings” would be payable by the lessee. It is not clear from the proposal what would be included in the outgoings, had it been accepted by Mrs Morabito. Despite this, Mrs Morabito claimed $36,367.11 from Kingston by way of outgoings.

15. [171]

    Of the outgoings amount claimed, $16,028.00 was said to represent land tax. However, Mrs Morabito has no direct evidence of the amount of land tax payable for the Premises, because she owns multiple properties and the land tax assessment notice in evidence did not provide a breakdown of the tax payable for each individual property. I do not accept that it is appropriate to adopt the methodology suggested by Mr Stapleton and apportion the land tax invoiced according the relative proportion of land value assessed in relation to the Premises. It was open to Mrs Morabito to provide an explanation from the Australian Tax Office or a professional qualified to give an opinion about how land tax is assessed, but she did not do so. I would not allow any sum for land tax as the quantum has not been proved to provide certainty to a determination.

16. [172]

    In relation to the other outgoings claimed, $8,858.49 is claimed for insurance. Mrs Morabito gave no evidence of the type of insurance claimed and whether she kept such insurance irrespective of whether the Premises were leased or not. I do not consider she has demonstrated that she is entitled to that sum for insurance.

17. [173]

    Mrs Morabito claims $1,116.46 for water rates and $6,262.21 for council rates. Kingston made no submission in relation to those specific sums. However, I do not accept it can be assumed that the Petrol Services Australia lease would require the tenant to pay statutory outgoings such as rates. I therefore do not accept it can be concluded on the evidence that Kingston is liable for these sums.

18. [174]

    Therefore, Mrs Morabito is not entitled to any sum for lost outgoings.

Orders

1. [175]

   For the reasons above, the appropriate orders are:

   1. (1)

      Plaintiff’s statement of claim dismissed;

   2. (2)

      Plaintiff to pay defendant’s costs as agreed or assessed.