Darzi Group Pty Ltd v Nolde Pty Ltd (No 2)

The Court delivered its principal judgment in these proceedings on 28 June 2021: Darzi Group Pty Ltd v Nolde Pty Ltd [2021] NSWSC 774 (“J”). The abbreviations used in that judgment are employed again in these reasons.

The Court required the parties to confer and to forward to my Associate draft short minutes of order to give effect to the reasons for judgment.

On 14 October 2021, the Court made orders in the proceedings, which relevantly included a declaration that Darzi had validly exercised the option to renew the Lease and an order that Nolde specifically perform its agreement to grant a new Lease. Other orders were made and have been made subsequently that are not relevant to the issue the subject of these reasons.

As I understand Darzi's position, the parties were unable to agree as to what orders should be made in relation to the matters dealt with at J [55]-[144] concerning the significance of Darzi's failure to pay rent in the amount required by the Lease for the months of May and June 2020 as a result of the Restaurant being closed because of the COVID-19 pandemic. Darzi sought and was given leave on 14 October 2021 to file a further amended statement of claim.

By revision to its prayers for relief in the further amended statement of claim, Darzi has asked the Court to make the following additional declaration, notwithstanding that a declaration to that effect was not sought in its pleadings before or during the hearing of these proceedings. The declaration sought is:

Darzi seeks this declaration on the basis that it follows from the reasoning in the principal judgment and submits that it should be made because of s 63 of the Supreme Court Act 1970 (NSW), which provides:

This statutory requirement that the Court grant all remedies to which any party may appear to be entitled, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined in the one proceedings is a cardinal principle of our society's system of justice.

The issue that is required to be resolved by these reasons is factually complex and it will be necessary for the Court to assume that the reader understands the part of the principal judgment to which I have referred above.

As will appear from what follows, there is a real prospect that, if the declaration sought by Darzi is not made, a relatively trivial issue between the parties will be enlivened in circumstances that will very likely lead to further legal disputation, whose costs will be entirely out of proportion to the real significance of the outstanding issue. Furthermore, there is doubt that those proceedings will lead to any efficient or proper resolution of the dispute, because of the idiosyncrasies in the regulatory regime that was put in place by the New South Wales Government in response to the COVID-19 pandemic.

Nolde opposes the Court making the additional declaration sought by Darzi and submits that the Court should make orders dismissing Darzi's application and that Darzi pay Nolde's costs of this application.

To put the matter in its proper perspective, the present dispute arises out of the fact that the Lease required Darzi to pay rent of $12,546.74 each month. In May 2020 Darzi made a rent payment of $1,304.86, and in June 2020 it paid $2,942.21. The total shortfall was $20,846.41. That amount is the subject of the continuing dispute.

As I explained at J [55], Nolde pleaded in its cross claim that Darzi had breached the Lease by failing to pay the requisite amount of rent in May and June 2020. At J [56], I set out Darzi's response in par 28 of its defence to the cross claim. In essence, Darzi pleaded that it was not in breach of the Lease because at the relevant time it was an "impacted lessee" as defined in clause 4 of the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) (which I defined as the COVID-19 Regulation), and that Darzi had paid to Nolde the amount required that was calculated in accordance with the relevant principles of the Code adopted by the National Cabinet.

Darzi made the following allegations in par 28 of its defence to the cross claim; that it:

Although Darzi did not claim the declaration that it now seeks, it did put in issue whether Nolde had refused to negotiate the rent as required by the COVID-19 Regulation.

As I noted at J [60], this case was likely to be unusual as, following the restrictions on the operation of restaurants that were initially introduced by the New South Wales Government in response to the COVID-19 pandemic which interrupted their operation and lead to dramatic declines in turnover, the income of the Restaurant operated by Darzi substantially declined in the months of May and June 2020 relative to the same months in the previous year. However, after the two months’ decline in turnover, the turnover of the Restaurant recovered to the extent that Darzi ceased to qualify as an “impacted lessee”, and Darzi paid to Nolde the full amount due for rent under the Lease since June 2020.

Consequently, the whole dispute was for a closed period of two months in 2020 at the beginning of the commercial restrictions caused by the COVID-19 pandemic. Any continuing disputation by the parties will relate only to the consequences of that closed period.

At J [61]-[102], I set out and discussed all the correspondence between the parties and their solicitors concerning the attempt to renegotiate the rent payable by Darzi for the two months on the basis of Darzi's claim that it was an "impacted lessee". I draw attention, in particular, to J [94] where I set out the relevant terms of Nolde's solicitors' 5 June 2020 letter, where they stated that they disagreed with Darzi's solicitors' analysis of the COVID-19 Regulation and stated that Nolde would contact the Small Business Commissioner to organise a mediation between the parties. As I noted at J [97], there was no evidence that Nolde initiated any contact with the Small Business Commissioner.

On 16 July 2020, Darzi's solicitors advised Nolde's solicitors that Darzi did not suffer any decline in revenue in June 2020, compared with June 2019, so that, in accordance with the principles in the Code, Darzi paid the full rent under the Lease for the month of July 2020, and has continued to pay the full rent since that time.

At J [99], I set out the terms of the second s 129 notice under the Conveyancing Act 1919 (NSW) that Nolde served on Darzi on 17 July 2020, in which it claimed that Darzi was currently in breach of the Lease in not having paid the outstanding rent. Nolde claimed that Darzi unilaterally decreased the payments of the rent without providing sufficient evidence that it was an "impacted lessee" or obtaining Nolde's consent to the payment of the reduced rent or renegotiating the rent payable under the Lease having regard to the COVID-19 Regulation.

The relevance of the second s 129 notice is that, after Darzi recommenced paying the full rent payable under the Lease, Nolde ceased to negotiate with Darzi and took the stance that Darzi was in breach of the Lease. The matter then proceeded on the basis that that was Nolde's position until the issue was determined in the principal judgment.

I then discussed the COVID-19 regulatory regime at J [103]-[125]. As I explained in that part of the principal judgment, the significance of Darzi's failure to pay the full rent for May and June 2020 was the subject of what I called the COVID-19 Regulation (No 1). However, as stated at J [121], the effect of the provisions of that Regulation, and the extensions made by the later versions of the Regulation, was that Nolde was and would continue to be prohibited until 1 July 2021 from prosecuting so much of the then present proceedings as related to seeking an order for possession of the Premises against Darzi, a declaration that Nolde was entitled to re-enter for breach, or any order that Darzi pay to Nolde the alleged shortfall in rent for May and June 2020.

I found at J [118] that Darzi was in fact an “impacted lessee” for the months of May and June 2020. I found at J [124] that it was clear that Darzi requested Nolde to renegotiate the rent payable under the Lease, and that Nolde was consequently obliged to renegotiate the rent in good faith.

I then concluded at J [125]:

The Note referred to in this paragraph of the reasons was to be found in clause 7 of the COVID-19 Regulation (No 1), which I set out in J [122] as follows:

It will be appropriate for me to set out at length the relevant parts of the reasoning in the principal judgment on the issue of whether Nolde complied with its obligations under the COVID-19 Regulation (No 1), which were as follows:

In summary, I found in favour of Darzi’s pleaded allegation that Nolde refused to renegotiate the rent under the Lease in accordance with the COVID-19 Regulation. Insofar as Nolde had claimed relief in its cross claim based upon the alleged failure by Darzi to pay the full rent for May and June 2020, I found that the claim was precluded by the COVID-19 Regulation. I also found that as Nolde had not complied with its obligation to negotiate the rent in good faith but had throughout the whole of the proceedings since the service of its cross claim prosecuted Darzi for breach of the lease, it was precluded from taking a prescribed action against Darzi in the future. That was essentially because the COVID-19 Regulation’s objective would be thwarted if lessors could repudiate their obligation to negotiate in good faith with impacted lessees, and then later take proceedings against the lessees for breach of the strict terms of the lease after the proceedings ceased to be a prescribed action.

Furthermore, Nolde did not attempt before the end of the hearing and the delivery of the principal judgment to reverse its stance and to renegotiate with Darzi in good faith.

Although the COVID-19 Regulation precluded Nolde from taking any prescribed action against Darzi in the period before 1 July 2021, my findings concerning whether Darzi was an “impacted lessee” and whether Nolde had failed to negotiate in good faith, and what the consequences of that failure were, were relevant to my ultimate decision that the Court should not decline to exercise its discretion in favour of ordering specific performance of Nolde’s agreement to grant a new Lease to Darzi on the ground asserted by Nolde that Darzi was in breach of the Lease.

After the delivery of the principal judgment on 28 June 2021 and after the repeal of the relevant COVID-19 regulation on 1 July 2021, Nolde’s solicitors wrote a letter to Darzi’s solicitors on 18 August 2021 in which they stated that Nolde wished to enter into discussions with Darzi to renegotiate in good faith the rent payable for the months of April and May 2020 under the Lease. The letter stated that, for the avoidance of doubt, it constituted a request to renegotiate the rent in accordance with clause 7 of the COVID-19 Regulation.

Darzi took the view that it was too late for Nolde to require Darzi to enter into a renegotiation to review the rent payable under the lease for the two months, but without prejudice to that position, by its solicitors’ letter to the solicitors for Nolde dated 1 September 2021, Darzi offered to pay 50% of the shortfall in rent by instalments commencing on 1 January 2022.

Nolde’s solicitors responded on 17 September 2021 by stating that Nolde rejected Darzi’s offer, and that Nolde wished to continue to negotiate. On the same day, Nolde’s solicitors requested extensive financial information from Darzi, apparently so as to be able to further conduct the negotiation.

On 20 October 2021, Darzi repeated its offer of 1 September 2021.

For the purposes of the present application, Darzi’s position is that Nolde, having failed in its obligation to renegotiate the Lease in good faith before the repeal of the relevant COVID-19 Regulation, cannot seek to enliven the provisions of a repealed instrument in an attempt to remedy its failure to comply with the requirements while it was in force. Because Nolde terminated any renegotiation by issuing the second s 129 notice dated 17 July 2020, there was no renegotiation on foot at the time the relevant COVID-19 Regulation was repealed.

Darzi’s submissions acknowledged the effect of s 88 of the Retail Leases Act 1994 (NSW), which provides:

However, Darzi submitted that, at the time the COVID-19 Regulation was repealed, there was no renegotiation occurring, and Nolde cannot now seek to retrospectively remedy its refusal to renegotiate the Lease.

Nolde’s response to these submissions was to submit, first, that contrary to the Court’s “tentative findings” in the principal judgment at J [139] and J [142], Nolde’s failure in July 2020 to continue its negotiations with Darzi did not have the result that Nolde was permanently prohibited from either seeking to engage in further negotiations under clause 7 of the COVID-19 Regulation, or alternatively, having the dispute adjudicated by NCAT in accordance with clauses 8 and 9 of the COVID-19 Regulation.

Secondly, Nolde submitted that the delivery of the principal judgment has not affected Nolde’s entitlement to engage clause 7 of the COVID-19 Regulation because s 88 of the Retail Leases Act has preserved the operation of the Regulation. Nolde submitted in par 29(a) of its written submissions that the renegotiation between Nolde and Darzi was “not concluded” before the expiry of the “prescribed period” so that it may now be continued.

Thirdly, Nolde submitted that the evidence establishes that, after the delivery of the primary judgment, Nolde sought to recommence negotiations with Darzi concerning the rent payable for the months of May and June 2020, and those negotiations have not yet resulted in any agreement between the parties. Nolde submitted that those negotiations are presently stalled because of Darzi’s refusal to provide the further financial information requested by Nolde. Nolde wishes to avail itself of the opportunity, if the stalemate continues, to seek to have the dispute determined by NCAT under Part 8 of the Retail Leases Act, pursuant to clauses 8 and 9 of the Covid-19 Regulation.

Darzi’s response to these submissions was essentially that it was not open for Nolde to assert that the renegotiation had “not concluded” in the face of the Court’s finding at J [138] that Nolde’s serving on Darzi of the second s 129 notice in practical terms brought the renegotiation to an abrupt halt.

Further, Darzi submitted that the appropriate forum for Nolde to dispute the Court’s decision as to the consequences of Nolde’s failure to renegotiate in good faith would be an appeal. Currently, the Court is concerned only with the form of an order to give effect to the principal judgment.

Finally, Darzi submitted that, as Nolde had terminated the renegotiation under the COVID-19 Regulation and had not sought to reinstate the renegotiation before the Regulation was repealed, s 88 of the Retail Leases Act did not preserve any right in Nolde to commence a new renegotiation.

The effect of Nolde’s submission is that the COVID-19 regulatory regime permits a lessor to refuse at the time a lessee seeks to renegotiate the rent payable under the lease to do so in good faith, to contest the validity of the lease (or, in this case, the enforceability of an agreement to grant a further lease) on the basis that the lessee is in breach of the rent covenant, and then, after judgment is delivered finding that the lessor is legally precluded from asserting the breach of the lease because its conduct wrongfully terminated the renegotiation, to reinstitute a new negotiation to revise the rent covenant.

I accept Darzi’s submission that, if Nolde wishes to challenge any determination made in the principal judgment that Nolde’s conduct had terminated the renegotiation and that the effect of Nolde’s refusal to renegotiate in good faith was that it was permanently precluded from seeking to engage the application of the now-repealed COVID-19 Regulation, the proper manner to do that is by prosecuting an appeal from my determination.

Furthermore, the parties were given full opportunity to follow the course of action that they considered to be appropriate in the implementation of the COVID-19 Regulation before the conclusion of the hearing, and the Court has determined the rights of the parties on the basis of their conduct as disclosed in the evidence. Nolde’s position before the Court was that Darzi had failed to provide it with financial information to which it was entitled during the course of the renegotiation that occurred and that Nolde’s service of the second s 129 notice was justified. The Court, by the conclusions reached in the principal judgment, has now finally determined the parties’ rights in respect of these issues. Nolde should not now be permitted to require a new renegotiation that may have an outcome that is inconsistent with the result of these proceedings.

Nolde’s submissions appear to assume that if it is entitled to reinstate the renegotiation of the rent payable under the Lease for May and June 2020 and the parties do not reach agreement, then the dispute can be resolved in the absence of a successful mediation by order made by NCAT under Part 8 of the Retail Leases Act. I refer to my discussion of this issue in Sneakerboy Retail Pty Ltd trading as Sneakerboy v Georges Properties Pty Ltd (No 2) [2020] NSWSC 1141 at [77]-[87] and observe that it is not clear how NCAT has the power to determine the amount of the rent reduction that should be made or the period over which deferred rent should be paid.

In my view the declaration sought by Darzi should be made, and accordingly I make the following orders: