Nguyen v Valore

By a summons filed on 18 October 2017, the plaintiff, Mr Ken Nguyen, seeks declarations that he is not in breach of a number of provisions of a lease dated 20 January 2015 (the Lease) between him as lessee and the defendants, Mr Frank Valore and Mrs Angela Valore as lessors, of commercial premises known as Shop 2, 111 John Street, Cabramatta (the Premises). Mr Nguyen also seeks relief under s 133F of the Conveyancing Act 1919 (NSW) permitting him to exercise an option to renew the Lease for a further period of three years notwithstanding the alleged breaches.

Mr and Mrs Valore own approximately 15 residential and commercial properties in various suburbs in New South Wales including Shops 1 and 2 at 111 John Street, Cabramatta, which were acquired by them to earn rental income. They also own a chain of liquor stores, one of which is next to 111 John Street, Cabramatta.

Since about 2000, approximately 12 of the properties owned by Mr and Mrs Valore have been managed by their daughter, Ms Loredana Trajkovski, who is responsible for dealing on their behalf with letting agents and tenants. The agent responsible for the Premises is Ms Ann Dam of LJ Hooker, Cabramatta.

Originally, the Premises were leased by Mr Nguyen and Si Van Huynh pursuant to a three year lease which commenced on 20 January 2012 (the First Lease). Mr Nguyen conducted a real estate business from the Premises and Si Van Huynh operated a money transfer business. At the time the First Lease was entered into, the Premises were vacant. It included a small office at the back of the premises on the right hand side looking from the front of the premises and a toilet on the left hand side. Mr Nguyen installed a floating floor over the original tiles. He also constructed in the centre of the premises running from the front to the rear a counter made of gyprock which was approximately one metre in height, about two metres in width and several metres in length. There were glass panels from the top of the counter to the ceiling. The counter served to create two separate areas in the Premises and provided a counter from which the money transfer business could be operated.

Mr Nguyen says that Ms Dam consented to the construction of the counter. However, Ms Dam denies doing so and she was not cross-examined on that evidence. In the absence of cross-examination, I accept her evidence on this aspect of the case. Ms Trajkovski became aware of the counter in February 2012 and raised it with her parents, who took no action in relation to it.

Although the evidence is not clear, it seems that, at some stage, the money transfer business came to be operated by Huy Tang under the name “Hong Vina Money Transfer”. However, the First Lease was not amended to reflect the change. Mr Nguyen paid all of the rent due under it and, pursuant to an informal agreement, Mr Tang paid him half of the rent and other expenses.

On 20 January 2015, Mr Nguyen entered into the Lease solely in his own name. The Lease was for an initial term of three years expiring on 19 January 2018. It contained an option to renew for a further three years. Under cl 4.4, the option could only be exercised if:

Clause 6.1 of the Lease relevantly provides:

Clause 6.2 of the Lease provides:

Clause 6.3.6 of the Lease provides that the lessee must not “without the prior written consent of the lessor and/or the owners corporation, use the common property for any purpose other than for access to and egress from the property”.

Clause 7.1.1 provides that the lessor must “maintain in a state of good condition and serviceable repair the roof, the ceiling, the external walls and external doors and associated door jambs, and the floors of the property and must fix structural defects”.

Clause 7.2 provides:

Clause 7.6 of the Lease states:

Clause 10 relevantly provides:

Clause 12 deals with termination of the Lease. It relevantly provides:

In about March or April 2017, Mr Tang moved out and Mr Nguyen arranged for Ms Michelle Ivanov, who carried on a mortgage broking business under the name “Mortgage Choice”, to move in in his place. In anticipation of that move, Mr Nguyen, without consent from Mr and Mrs Valore, replaced the counter and glass partition with a gyprock wall. The wall is located in the centre of the Premises, running from the front to the rear. It finishes approximately 600mm short of the front entrance allowing access to both areas from the front door. It stops short of the office at the back of the Premises, again permitting access to both areas. It also includes a partition that is perpendicular to the main wall, which serves to divide the space on the left hand side of the Premises looking from the front. The wall is floor to ceiling in height. It is constructed with a timber frame and lined with gyprock on both sides. It is anchored to the floor and is attached to the false ceiling with glue.

Mr Valore noticed the wall on about 4 April 2017. He raised it with his wife and daughter, following which Ms Trajkovski sent an email to Ms Dam asking her to make Mr Nguyen aware that “any renovations, sub lease etc needs to be approved by landlord”.

On 5 April 2017, apparently unconnected to Ms Trajkovski’s email, Mr Nguyen sent an email to Ms Dam in the following terms:

The following day, Ms Dam sent an email to Ms Trajkovski stating that Mr Nguyen was seeking approval to share the tenancy with Mortgage Choice (which she described as “one of the major financial broker [sic] in Australia”) and asking for instructions.

Ms Trajkovski replied to that email on 26 April 2017 in the following terms:

On 5 May 2017, Ms Dam wrote to Mr Nguyen saying relevantly:

Following receipt of that letter, Mr Nguyen retained solicitors, Vo Lawyers, who responded to Ms Dam’s letter on 11 May 2017. They denied that Mr Nguyen had breached cl 7.2 of the lease.

Following receipt of that letter, Mr and Mrs Valore retained J A Buda & Associates as their solicitors who sent a letter (the Letter) on the same day replying to the letter from Vo Lawyers. In that response they referred to cl 7.6 of the lease and said:

Subsequently, on 25 May 2017, J A Buda & Associates served a breach notice (the Notice) on Mr Nguyen in the following terms:

Vo Lawyers responded to the Notice by email on 26 May 2017. That email relevantly said:

J A Buda & Associates replied to that email on 2 June 2017. After referring to the Letter and the Notice, the reply said:

Vo Lawyers responded to that letter on 7 June 2017 again denying that there had been any breach of cl 7.6 of the lease. In that letter, they referred to cl 6.2 of the lease and said:

J A Buda & Associates replied to that letter on 8 June 2017. They continued to assert that there had been “significant structural alterations to the premises”. In relation to cl 6.2, they said “Your comments in relation to cl 6.2 are not entertained noting that no request has been made by the lessee, again giving rise to a breach of an essential term of the lease”. The letter also stated:

Vo Lawyers replied to that letter on 14 June 2017. In that letter they suggested organising a conference “for the landlords and tenants to discuss face to face or another option is to book the Mediator or Arbitrator at The NSW Small Business Commissioner Dispute Unit”.

There was no reply to that proposal. Instead, on 19 June 2017, Mr and Mrs Valore purported to retake possession of the premises and installed a padlock on the front door. Mr Nguyen discovered the padlock the following day. He arranged for it to be removed and continued to occupy the Premises.

There was further correspondence between the parties and then on 14 July 2017, J A Buda & Associates sent Mr Nguyen a letter stated to be “FINAL NOTICE PURSUANT TO SECTION 129 OF CONVEYANCING ACT 1919”. That letter referred to a number of clauses of the Lease and alleged that Mr Nguyen was in breach of those clauses. It stated that, unless those breaches were remedied within 14 days, the Lease would be terminated.

On 21 July 2017, Vo Lawyers responded to that letter taking issue with the allegations contained in it and threatening to commence court proceedings unless the letter was withdrawn. The letter was withdrawn by email dated 28 July 2017.

On 7 September 2017, Vo Lawyers sent a notice of exercise of the option.

On 21 September 2017, State Law Group, who had taken over conduct of the matter on behalf of Mr and Mrs Valore, sent Mr Nguyen and Vo Lawyers a notice pursuant to s 133E of the Conveyancing Act. That notice identified the following “wilful and/or persistent breaches of the lease” as precluding Mr Nguyen’s entitlement to exercise the option:

Mortgage Choice moved out of the Premises on 1 May 2018. Following its departure, Mr Nguyen arranged for a friend of his, Mr Michael Feehan, who operates a mortgage/lending business called ITIJ Securities, to move into the Premises. He did so for a short period of time, but left on or about 18 July 2018. At present, no other business occupies the Premises.

Mr Nguyen commenced these proceedings on 18 October 2017.

The provisions of the Conveyancing Act governing the exercise of options are ss 133E and 133F. Section 133E relevantly provides:

Section 133F relevantly provides:

It is common ground that Mr Nguyen served a notice to exercise the option within the period specified in the Lease. It is also common ground that the notice served by Mr and Mrs Valore on 21 September 2017 complied with the form prescribed for the purposes of s 133E of the Conveyancing Act. However, Mr Nguyen takes issue with the contents of the s 133E notice and seeks declarations that each of the breaches relied on by Mr and Mrs Valore are not breaches of the Lease. As I have said, he also seeks relief under s 133F. Mr and Mrs Valore take issue with both aspects of Mr Nguyen’s case – that is, they maintain that he was in breach of the Lease and deny his entitlement to relief under s 133F. In addition, in final submissions, Mr and Mrs Valore submitted that Mr Nguyen was not entitled to exercise the option because the Lease had been terminated before he purported to do so by Mr and Mrs Valore’s re-entry on 19 June 2017. It is convenient to deal with that issue first.

Section 129(1) of the Conveyancing Act provides:

Mr and Mrs Valore accept that they had to give a notice that complied with s 129 before exercising a right of re-entry. However, they submitted that the Letter and the Notice complied with the requirements of that section. Following expiration of the 14 day period allowed for in the Notice, they re-entered the Premises by padlocking the entrance. In accordance with cl 12.1.2 of the Lease, that brought the Lease to an end.

There is a question whether Mr and Mrs Valore were entitled to raise that issue. There were no pleadings. They did not file a cross-summons seeking a declaration that the Lease had come to an end before Mr Nguyen exercised the option. The issue was not raised in their opening submissions. It clearly caught Mr Nguyen by surprise. Quite apart from the question whether the Letter and the Notice complied with s 129 of the Conveyancing Act, the issue raises the question whether Mr and Mrs Valore were disentitled from relying on those documents by their subsequent conduct, which was not addressed by the parties.

Leaving that issue to one side, Mr Nguyen submitted that neither document complied with the requirements of s 129 because neither document specifically said that it was given under that section. The form set out in Sixth Schedule of the Conveyancing Act contains a note at the bottom which states:

In my opinion, the mere failure to refer to s 129 does not render the Notice invalid. The source of the right does not appear to me important. Rather, what is important is that the Notice clearly set out the breaches and the consequences if those breaches are not remedied within a reasonable time.

Consequently, a notice that fails to identify with sufficient particularity the breaches about which the lessor complains and the steps that must be taken to remedy them so that the lessee fairly understands what must be done so as to avoid re-entry by the lessor and forfeiture of the lease will be invalid. As Hodgson JA (with whom Allsop P and Macfarlan JA agreed) explained in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 at [323]-[324]:

In my opinion, neither the Letter nor the Notice complied with the requirements of s 129.

The difficulty with the Letter is that it does not clearly identify the breach, what Mr Nguyen had to do to remedy it, how long he had to do so or what the consequences would be if he did not. The Letter refers to cl 7.6 of the Lease. However, it is not clear from the Letter whether the complaint was that the wall that had been erected was a structural wall or whether it was some other alteration that required written consent. The Letter asked Mr Nguyen’s solicitors to “Kindly instruct your client to revert the premises back to the state/manner it was without the erection of a dividing wall”. However, it was not clear whether what was required was that Mr Nguyen remove the wall or that he remove the wall and reinstate the counter. Mr Nguyen was not told that the work had to be undertaken within a reasonable time. Although the Letter stated that “failure to remedy may result in the landlord electing to re-enter and take possession of the premises”, it was not clear that that would be an immediate consequence of a failure to do what was asked (whatever precisely that was) or whether the threat was that if Mr Nguyen did not do what he was asked, Mr and Mrs Valore might carry out their threat by issuing a notice under s 129. The vagueness of the Letter and the imprecision with which it was drafted gave the impression that it was the latter.

There are two main difficulties with the Notice. The first is that it does not identify with clarity what the relevant breach was and how it had to be remedied. The Notice refers to a failure “to reinstate the works” and a failure “to obtain lessor’s consent and permission for such works”. However, it does not state what the “works” were; and the word “works” itself was used to refer both to what had to be reinstated and what required permission. Second, the Notice did not make it clear that under s 129, Mr Nguyen had a reasonable time in which to remedy any breach. Rather, it appeared to suggest that the Lease by its own terms would terminate if the breach (whatever it was) was not remedied within 14 days.

It follows that the Lease had not been terminated at the time Mr Nguyen purported to exercise the option.

In all, the notice served on 21 September 2017 identified seven breaches of the Lease. However, in substance what was alleged was that there were two. One was permitting Mortgage Choice (incorrectly referred to in the notice as “Money Choice”) to carry on a mortgage broking business from the Premises. It is alleged that that was a change of use of the Premises without consent in breach of cl 6.1.1 of the Lease and involved a transfer or sub-letting of the premises in breach of cls 10.1 and 10.3. The other was the erection of the wall. That was said to be a structural change or other change made without the lessors’ consent in breach of cl 7.6. It was also said to involve an impermissible use of common property in breach of cl 6.3.6, a failure to maintain the Premises in a state of good condition and serviceable repair in breach of cl 7.1.1 and a failure to comply with planning and fire safety regulations in breach of cl 6.1.4.

I am not satisfied Mr Nguyen breached the Lease by permitting Mortgage Choice to occupy part of the Premises. The prohibition in cl 10.1 of the Lease is only a prohibition on the transfer of the Lease. Plainly, Mr Nguyen did not do that. He remained the lessee under the Lease and in possession of the Premises. In my opinion, the proper characterisation of what he did was to licence part of the Premises to Mortgage Choice. There was nothing in the Lease preventing him from doing so.

The permitted use under the Lease was as a real estate agency and money transfer business. I accept that there was a partial change in use when Mortgage Choice commenced operating from the Premises. However, it appears that Mr and Mrs Valore (or at least their agent) treated Mr Nguyen’s email dated 5 April 2017 as a request for consent to the change in use that was declined by Ms Trajkovski on 26 April 2017. There is no evidence to suggest that that decision was communicated to Mr Nguyen. Moreover, in my opinion, the decision was unreasonable. From the point of view of the lessors, there was no substantive difference between the two uses. Both involved the use of the Premises to carry out a real estate agency with a commercial business that might be seen as an adjunct to that business. A mortgage broker was an obvious and suitable business to have as an adjunct to the real estate agency business. It was not suggested that Ms Ivanov was an unsuitable person to carry on that business. It appears to be accepted that where consent to an assignment is sought and withheld unreasonably, it is not a breach of a term in the lease preventing assignment without consent for the lessee to assign the lease: McMahon v Docker (1945) 62 WN (NSW) 155 at 157 per Herron J. There is no reason why the same principle should not apply to a term preventing a change in use without consent.

In my opinion, Mr Nguyen breached cl 7.6 of the lease by erecting the wall without consent. It was not suggested that he ever asked for consent. Consequently, the question whether consent was withheld unreasonably does not arise: see Eastern Telegraph Co Ltd v Dent [1899] 1 QB 835 at 839 per Romer LJ; McMahon v Docker (1945) 62 WN (NSW) 155 at 157 per Herron J. However, I do not think that erection of the wall involved any of the other alleged breaches. Mr Craig Nisbett, an expert building consultant retained by Mr Nguyen, gave evidence that the wall was not structural in nature. He described it as a “partition”. That description appears to be apt. The wall did not provide any support to the floor above it. Its installation did not involve any structural change to the building. Mr Nisbett was not cross-examined on his opinion. In my view, it should be accepted.

It is difficult to see how the construction of the wall involved the “use” of the common property in breach of cl 6.3.6 of the Lease. The suggestion appears to be that common property was used because the wall was affixed to the ceiling and the floor. No attempt was made by Mr and Mrs Valore to prove what the boundaries of the common property were. Moreover, in my opinion, the affixing of the wall to the ceiling and the floor, assuming that the lower side of the ceiling and the upper side of the tiles formed part of the common property, did not involve a “use” of common property in the sense contemplated by cl 6.3.6. That clause is obviously concerned with the use of that part of the common property that is available for use by anyone who occupies the strata scheme. It is not concerned with the use of the inner boundaries that form part of a lot.

There is no evidence from which it can be concluded that by erecting the wall Mr Nguyen has failed to maintain the ceiling and floor in good condition and serviceable repair. It may be that when the wall is removed, that will cause some damage to the ceiling and floor or expose some damage to the floor. However, the suggestion that that damage exists at the moment is simply speculation. And if there is damage or damage results from the removal of the wall, it is not disputed that Mr Nguyen is required by the Lease to make it good.

As to the question of planning approval, Mr Nguyen relies on an expert report prepared by Mr Jason Storer, who has expertise in building regulation, auditing and certification services. Mr Storer gave evidence, which was not contradicted, that the wall would not have required development approval, but that it would have required building approval from either the local council or a private certifier, who would have had to have certified that the work had been performed in accordance with the Building Code of Australia. That opinion was given on the basis that development consent had been given in 2002 for use of the Premises as two separate businesses. Mr Storer was cross-examined on whether various conditions for the effectiveness of that consent had been satisfied, such as whether the development for which consent had been granted had commenced by 31 October 2004 and whether an occupation certificate had been issued. However, the Premises have been used for a substantial period of time for two businesses. It was plainly occupied. In the absence of any evidence to suggest the contrary, it is reasonable to infer that the conditions had been satisfied. Mr Storer gave evidence that was un-contradicted that the wall did not raise any fire safety issues or questions concerning compliance with fire safety regulations.

Following receipt of Mr Storer’s report, Mr Nguyen has sought to lodge an application for building approval for the wall. However, that application must be signed by the lessor. Mr and Mrs Valore have refused to do so.

The result is that Mr Nguyen breached cl 6.1.4 of the Lease when he erected the wall and remains in breach of that clause.

The granting of relief under s 133F is discretionary and the power is to be exercised in a way that will best achieve justice between the parties in the circumstances of the particular case: Best and Less (Leasing) Pty Ltd v Darin Nominees Pty Ltd (1994) 6 BPR 13,783 at 13,788 per McLelland CJ in Eq.

The relevant principles were described in these terms by White J in Dee-Tech Pty Ltd v Neddam Holdings Pty Ltd [2012] NSWSC 251; (2013) 16 BPR 31,089 at [212]-[213]:

The Court may also take into account the general relationship between the parties and may in some cases refuse relief where the relationship “has soured and is likely to remain disputatious”: see Allsvelte Pty Ltd v Cassegrain Wines Pty Limited [2015] NSWSC 1370; (2015) 18 BPR 35,637 at [76].

In the present case, I have concluded that it is appropriate to grant relief under s 133F. I have reached that conclusion for a number of reasons.

First, Mr Nguyen has in substance only committed one breach of the Lease, which is the construction of the wall, although on the conclusions I have reached that conduct involved the breach of two separate clauses of the Lease. That breach was not inadvertent and it has been persistent in the sense that, despite a number of requests, Mr Nguyen has not removed the wall. However, his conduct is mitigated by a number of factors. The wall replaced a previous partition that had been constructed during the term of the First Lease. Mr and Mrs Valore had not raised any objection to the construction of that partition and Mr Nguyen might reasonably have concluded that Mr and Mrs Valore were not concerned about the erection of partitions that were consistent with the dual use of the Premises.

When the issue was first raised with Mr Nguyen, various assertions were made that were not correct. So, for example, Ms Dam originally asserted that Mr Nguyen was in breach of cl 7.2 of the Lease. However, that clause states that the lessee does not have to alter or improve the property. It does not state that the lessee is forbidden from doing so. Subsequent correspondence complained that the wall was structural, when it is not, and much of the debate between the parties centred on that issue. Mr Nguyen says, and there is no reason to doubt, that he has acted on legal advice. He proposed a mediation which was refused by Mr and Mrs Valore. When it became apparent that he required building approval for the wall, he sought to obtain that approval. During the course of the hearing Mr Nguyen through his counsel indicated that he was prepared to undertake to remove the wall if the Court concluded that that should be a condition of relief. There is no reason to think that Mr Nguyen will engage in similar breaches, or other breaches, of the Lease in the future.

Second, Mr Nguyen gave evidence that he would lose substantial business if he were forced to move. That evidence was not seriously challenged. It was put to him that there were other places in Cabramatta where he could move his business. However, no specific place was put to him and Mr Nguyen’s evidence was that if he had to move out of John Street he was likely to lose some passing business. He also said that it was important to have a shopfront to display properties for sale and lease. The effect of his evidence was that an alternative location was unlikely to offer the same advantages as his current location in that respect. I accept that evidence.

Third, and in contrast to the second point, there is no evidence that Mr and Mrs Valore have suffered or will suffer any loss as a consequence of the erection of the wall. Mr Valore gave evidence that the Premises were unsightly because of the wall. I accept that that is his view and that that is a matter he would be entitled to take into account in refusing permission to erect it. However, it is not suggested that Mr and Mrs Valore have suffered any financial loss as a consequence of the wall. It appears that the main reason they have taken the position they have is because Ms Trajkovski believes that she will be able to get a higher rent from a different tenant.

Fourth, this is not a case where there has been a breakdown in the relationship between the parties and continued co-operation is necessary for the proper functioning of the Lease. The Lease is a commercial one. The property is let through an agent and there are no personal dealings between Mr and Mrs Valore and Mr Nguyen. The property was bought by Mr and Mrs Valore to earn rental income. The evidence is that Mr Nguyen has always paid rent on time.

I should add that my conclusions would be the same even if it was a breach of the lease for Mr Nguyen to have changed the use partially by permitting Mortgage Choice to operate from the Premises. That appears to me to be such a trivial breach of the Lease that it should carry little weight in considering the question whether the discretion given by s 133F of the Conveyancing Act should be exercised in Mr Nguyen’s favour. It is true that after Mortgage Choice moved out Mr Nguyen allowed ITIJ Securities to move in for a short period of time. However, it has now moved out. Again, any breach was trivial. Mr Nguyen struck me as someone who was anxious to comply with what he understood were his obligations under the Lease. In the light of what has happened, there is no reason to think that he will change the use of the Premises in the future without first seeking consent.

Under s 133F, the Court has power to impose conditions on the granting of relief. In my opinion, it would be appropriate for the Court to impose a condition that Mr Nguyen remove the wall within a specified time, or such further time as is allowed by the Court. Mr Nguyen required Mr and Mrs Valore’s consent to erect the wall. It is plain that they are not prepared to give their consent. As I have explained, it appears that their objection to the wall is that it makes the Premises look unattractive. In my opinion, that is a matter that they are entitled to take into account in refusing permission. In those circumstances, such a condition on the granting of relief would be reasonable.

The parties should bring in short minutes of order to give effect to these reasons for judgment, and costs if costs can be agreed, within 14 days of today’s date. If the parties cannot agree on the terms of the short minutes of order, or if the parties cannot agree on costs, within that time, the matter should be relisted by contacting my Associate to deal with any outstanding issues.