The trustee for Dawson Street Unit Trust trading as Dawson Street Auto Centre Pty Ltd v 4Cyte Pathology Pty Ltd

1. [1]

   MITCHELMORE JA: I agree with Free JA.

2. [2]

   FREE JA: As of August 2021, the trustee for Dawson Street Unit Trust trading as Dawson Street Auto Centre Pty Ltd (applicant) owned land at 49 Dawson Street, Lismore (Property). The Property was a disused service station, with a secure internal area and a large driveway and apron area. By deed of lease dated 16 August 2021 (Original Lease) the applicant leased the Property to 4CYTE Pathology Pty Ltd (respondent), for an initial term of one year. The respondent was at that time operating coronavirus testing centres throughout the Northern Rivers and Queensland. The Property was leased for the purpose of operating a drive through testing centre in Lismore.

3. [3]

   In February 2022 and again in March 2022 Lismore experienced severe flooding. In the February 2022 floods the Property suffered some damage. More significant damage was caused in the March 2022 floods. The internal area of the Property was rendered unusable. From 19 April 2022 the respondent operated from a portable office installed on the Property at its own expense. It did not resume using the internal area at any point thereafter.

4. [4]

   The Original Lease included an option for the respondent to renew the lease for a further year. In July 2022 the respondent exercised the option. Pursuant to cl 32 of the Original Lease, that had the effect of creating a further lease on the same terms as the Original Lease (save for cl 32 itself), expiring on 15 August 2023 (Further Lease). By October 2022 government funding for coronavirus testing was no longer available and demand for testing dropped. The respondent ceased operating the testing facility at the Property from around 21 October 2022. On 31 October 2022 it issued to the applicant a reinstatement notice under the Further Lease, requiring that the applicant rectify the flood damage to the Property. The respondent also demanded an abatement of rent, pursuant to the Further Lease, on the basis that the Property was damaged and had not been repaired.

5. [5]

   By February 2023 the applicant had not undertaken repairs to the Property. Nor did it allow an abatement of rent. On 8 February 2023 the respondent advised the applicant that it was terminating the lease with effect from 1 March 2023, on the basis that such termination was authorised by the failure to repair. The respondent paid rent under the Further Lease up to and including 1 March 2023. The applicant subsequently undertook repair works and the building on the Property was repaired by May 2023.

6. [6]

   The applicant brought proceedings in the Local Court seeking to recover $22,656.00, which was the amount of rent that would have been due for the period between 1 March 2023 and 15 August 2023, plus interest at the prescribed rate of 10 percent. The respondent denied that it was under any obligation to pay rent for the period after 1 March 2023, because the lease was validly terminated. The respondent cross-claimed seeking the repayment of the rent that it had paid since the Property was flood-damaged, on the basis that it was entitled to an abatement of rent.

7. [7]

   The claim of the applicant in the Local Court failed, on the basis that the Further Lease had been validly terminated. The presiding magistrate was satisfied that the applicant was in breach of its obligations to repair the flood damage to the Property, entitling the respondent to terminate the Further Lease. The respondent was partially successful on its cross-claim, with judgment for $7,778.98 (plus interest) entered in its favour. The cross-claim succeeded on the basis that there had been an overpayment of rent, as rent should have been abated at the rate of $16.06 per day from the time the Property was flood damaged until 8 February 2023. For the period from 8 February 2023 to 1 March 2023 the magistrate concluded that the rent should be abated by 100 percent.

8. [8]

   The applicant appealed to the Supreme Court on questions of law, pursuant to s 39(1) of the Local Court Act 2007 (NSW). The applicant argued that the Further Lease, which ran from 16 August 2022, did not impose any relevant obligation to reinstate the Property, because the flood damage in issue had occurred in March 2022, before the Further Lease commenced. That argument, which turned on the construction of cl 4 of the Further Lease (read in the context of the Special Conditions to the Further Lease), was rejected by the primary judge. His Honour was satisfied that the respondent was obliged under the Lease to repair the damage to the Property, notwithstanding that the damage had occurred before the option was exercised and the Further Lease began. The applicant also argued that the respondent was not entitled to abatement of part of the rent that it had paid, on the basis that the magistrate had awarded restitutionary relief in circumstances where no relevant vitiating factor (such as mistake or duress) had been alleged and established that would warrant restitution. That argument was also rejected by the primary judge.

9. [9]

   The applicant seeks to appeal from the decision of the primary judge on these points. As the applicant accepts, it requires leave to do so because the appeal does not involve a matter at issue amounting to, or of the value of, $100,000 or more. Nor is it a matter that involves (directly or indirectly) any claim, demand or question to or respecting any property or civil right amounting to, or of the value of, $100,000 or more. Leave is therefore required pursuant to s 101(2)(r) of the Supreme Court Act 1970 (NSW) (Supreme Court Act).

10. [10]

    The application for leave was determined separately and on the papers. For the reasons which follow, leave should be refused.

Principles governing an application for leave to appeal

1. [11]

   Leave to appeal will ordinarily be granted only when the proposed appeal raises an issue of principle or a question of public importance, or seeks to address a reasonably clear injustice going beyond something that is merely arguable: Be Financial Pty Ltd as Trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 (Be Financial) at [32]-[38]; Secretary, Department of Family and Community Services (NSW) v Smith (2017) 95 NSWLR 597; [2017] NSWCA 206 at [28]. An essential prerequisite of a grant of leave to appeal is that the Court be persuaded that the decision appealed from is attended with sufficient doubt to warrant its reconsideration on appeal: Sharpe v Heywood [2013] NSWCA 192 at [34].

2. [12]

   The monetary limit for appeals as of right in s 101(2)(r) of the Supreme Court Act reflects the need to guard against appeals in which there is disproportionality between the value of the matter at issue and the cost of protracted litigation, both to the parties concerned and to the system more generally. In Cheng v Motor Yacht Sales Australia Pty Ltd t/as The Boutique Boat Company (2022) 108 NSWLR 342; [2022] NSWCA 118 (Cheng) Bell CJ (with whom Ward P and Basten AJA agreed) at [17] emphasised the importance of proportionality between the monetary amount at issue and the costs of proceedings. His Honour quoted with approval the statement of Kirby P in Gurr v Robinson (Court of Appeal (NSW), Kirby P, Hope and Samuels JJA, 10 February 1986, unreported) that the requirement for leave to appeal where small sums are involved also reflects a number of public interests which must be protected by the Court, including the “discouragement of litigation, the principal purpose of which is to recover an order for costs, and the efficient and cost effective use of court time, which necessarily involves large public costs”. Bell CJ said in Cheng at [20]:

3. [13]

   These considerations do more than explain why the requirement for leave exists under s 101(2)(r) of the Supreme Court Act. They also inform the exercise of the Court’s discretion in determining whether or not leave should be granted, if required. There is a special interest in finality when small sums are at stake: Gurr v Robinson, quoted in Cheng at [16]. When the likely costs of the appeal (and any further litigation that might be necessary as a result of the appeal) are disproportionate to the amount in dispute, that will be a factor weighing heavily against a grant of leave: see Be Financial at [39]. Litigation where the costs are likely to exceed the amount in issue is a poor candidate for a grant of leave: Burrows v Macpherson & Kelley Lawyers (Sydney) Pty Ltd [2021] NSWCA 148 at [44] per Leeming JA, quoted with approval in Cheng at [20].

The grounds of appeal concerning the obligation to repair

1. [14]

   The applicant seeks leave to argue that the primary judge misconstrued the Further Lease. The draft notice of appeal contains three grounds of appeal directed to this point. As the applicant submits, they are aspects of the same ultimate issue – did clause 4 of the Further Lease apply to destruction or damage occurring prior to the creation or commencement of the Further Lease?

2. [15]

   By the first proposed ground of appeal the applicant contends that the primary judge erred in finding that there was ambiguity in the wording of the Further Lease, or a constructional choice that needed to be made, such as to justify consideration of the surrounding circumstances. The second proposed ground of appeal is that the primary judge erred in any event in having regard to the circumstances that existed on 22 July 2022 (when the option was exercised to renew the lease) rather than those existing in August 2021 when the terms of the Original Lease were agreed. By the third proposed ground of appeal the applicant contends that even if such surrounding circumstances are taken into account it is erroneous to construe the Further Lease as imposing an obligation to repair damage that existed prior to the commencement of the Further Lease.

3. [16]

   The premise of the argument is that cl 4(b) of the Further Lease is expressed in a future tense and as such it is apt to apply only to destruction or damage that occurred during the term of the Further Lease. Clause 4 of the Further Lease provides:

4. [17]

   The Special Conditions of the Further Lease also impose relevant obligations on the Lessor. Relevantly, the Special Conditions provide:

5. [18]

   As the primary judge correctly stated, it is necessary to construe cl 4(b) in the context of the Further Lease as a whole, including the Special Conditions. His Honour was satisfied that the Special Conditions plainly imposed obligations on the Lessor in respect of the condition of the building on the Property which would be engaged in respect of past as well as future damage. That being the case, the Special Conditions did not sit well with the proposition that cl 4(b) imposes no obligations where the premises have been rendered unfit for occupation and use by damage occurring prior to the commencement of the lease. An obligation on the lessor pursuant to the Special Conditions to maintain the structural elements of the premises and repair structural defects in a timely fashion would be commercially nonsensical, or at least improbable, if the premises were in an unusable condition because of earlier damage and the lessor was under no obligation to rectify such damage.

6. [19]

   His Honour was satisfied that on its proper construction cl 4(b) of the Further Lease applied to extant damage as well as future damage. On that basis it applied to the flood damage that had occurred to the Property in March 2022. This conclusion was reinforced by the surrounding circumstances that existed when the respondent had exercised the option to renew the lease. Those circumstances, known to both parties, included that the premises had been rendered unusable by flood damage and there was a need for the premises to be reinstated by the applicant, but this had not occurred.

7. [20]

   The applicant has not demonstrated, for the purposes of its application for leave to appeal, that this conclusion on the question of contractual construction involves a reasonably clear injustice going beyond something that is merely arguable. The applicant’s argument as to the operation of cl 4(b) involves a textual analysis that is divorced from the context of the Further Lease as a whole and would lead to a commercially improbable result.

8. [21]

   When cl 4(b) is compared with cl 4(a), it is apparent that those two subclauses serve to differentiate between damage to the premises that does not render the premises unfit for occupation and use (in which case the Lessor is not obliged to repair or reinstate the premises) and damage that does render the premises unfit for occupation and use (in which case different consequences follow, including if the Lessor fails to rebuild or reinstate the premises once requested to do so). Contrary to the applicant’s submission, the words used in cll 4(a) and 4(b) do not make clear that the only forms of destruction or damage that can engage the subclauses are those that occur after the lease has commenced. It is not decisive to observe, as the applicant does, that the words are used in a future conditional tense. Where cl 4(b) describes the consequences that follow if the premises “shall be destroyed or damaged” the words used are capable of being read as referring to the condition of those premises in the future (ie their condition as being destroyed or damaged to the requisite degree), even if the causative event occurred earlier and even if the condition also existed at some earlier point in time.

9. [22]

   The applicant suggests that the Special Conditions relating to maintenance, repair and refurbishment are entirely separate from cl 4, because the heading to the relevant special conditions is “Maintenance, Repair and Refurbishment (Other than the provisions of Conditions 4 & 7)”. However, that reference does not signify that the conditions are concerned with entirely separate and unrelated obligations. There is a clear overlap in subject matter. Moreover the special conditions explicitly include matters that are said to be “[f]or Clarity [sic] in addition to all the obligations of Clause 7”. The heading to the Special Conditions does not mean that the substantive obligations lose their significance as part of the context in which cl 4 must be construed.

10. [23]

    As the applicant correctly points out, construing cl 4(b) as applying to damage that pre-dates the Further Lease has the consequence that the lessor would have been entitled to terminate the lease immediately pursuant to cl 4(b)(i). While that may be seen as a somewhat unusual arrangement, it is more commercially practical than the outcome which would flow from the applicant’s alternative construction. On that construction, from the commencement of the Further Lease, the lessor had no obligations of repair and the lessee was obliged to pay rent under the lease even though the premises the subject of the lease were unsuitable for occupation and use for the purposes for which they were leased.

11. [24]

    The applicant highlights a point of principle about the appropriate time at which to assess the “surrounding circumstances” bearing on the interpretation of the Further Lease (to the extent that it is found to be appropriate to have regard to those circumstances). The point arises because, on the applicant’s approach, the agreement to create the Further Lease, while conditional on the exercise of the option, was made at the time the Original Lease was agreed. That being so, the applicant submits, it was inappropriate to refer, as the primary judge did, to the surrounding circumstances that existed when the option was later exercised. Viewed in isolation, that is a point of principle the resolution of which could potentially also have broader significance. However, in the context of this case the issue is unlikely to be decisive on the question of construction. Given that factor and the other circumstances of this case, the fact that there is a point of principle embedded within at least one of the applicant’s proposed arguments does not justify a grant of leave.

12. [25]

    A further consideration pointing against the grant of leave is the small sum of money involved. The applicant, if successful, seeks the unpaid rent between 1 March 2023 and 15 August 2023. At the time proceedings were commenced in the Local Court the amount sought, including interest, was $22,656.00. Even allowing for the fact that additional interest might now be recovered, the ultimate award of compensation to the applicant would be small, and would almost certainly be dwarfed by the cost of the appeal itself.

The ground of appeal concerning abatement of rent

1. [26]

   The primary judge was satisfied that there was no legal error in the magistrate awarding $7,778.98 (plus interest) to the respondent for rent that was paid in circumstances where the respondent was entitled to an abatement of rent. The applicant argues that this conclusion was unwarranted because relief was awarded on a restitutionary basis without the respondent having established a proper basis for such relief. The applicant relies on the principle that “whether enrichment is unjust is not determined by reference to a subjective evaluation of what is unfair or unconscionable: recovery rather depends on the existence of a qualifying or vitiating factor falling into some particular category”: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [150]; see also David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 379; [1992] HCA 48; Mann v Paterson (2019) 267 CLR 560; [2019] HCA 32 at [168]; Redland City Council v Kozik [2024] HCA 7; (2024) 98 ALJR 544 at [73]. The applicant argues that in the present case the respondent did not plead or prove that it had paid rent because of a mistake or because it was under duress. Nor did it point to any other qualifying or vitiating factor that would justify restitution.

2. [27]

   The respondent resists the premise and says that the award of compensation by the magistrate was justified as contractual damages, because the respondent had an entitlement under the Further Lease to abatement of rent.

3. [28]

   It is unnecessary to resolve the debate about the underlying basis for the award of compensation by the magistrate. Even on the assumption, favourable to the applicant, that the relief was restitutionary, a grant of leave is not warranted.

4. [29]

   On that favourable assumption, the applicant has a firmer foundation on this limb of the proposed appeal to argue that a question of general principle arises and that the answer to that question would likely be decisive if leave were granted. However, this is not an appropriate case in which to grant leave to appeal on the basis that the appeal would involve consideration of such a point of principle. An appeal would involve the parties incurring costs that would be, in all likelihood, grossly disproportionate to the amount in issue. As noted above, there is a special interest in finality where small sums are at stake. Here the stakes are especially small and considerations of finality are overwhelming.

5. [30]

   Leave to appeal should be refused, with costs.