Alamdo Holdings Pty Ltd v Croc’s Franchising Pty Ltd

1. [1]

   The plaintiff, Alamdo Holdings Pty Ltd (“Alamdo”), is the registered proprietor of Unit 5 of a property in Hudson Avenue, Castle Hill (“the Premises”).

2. [2]

   On 16 November 2017, Alamdo and Croc’s entered a suite of documents comprising:

3. [3]

   Croc’s accepts that it “entered into possession” [1] of the Premises on or about 18 June 2018, following completion of the fit out.

4. [4]

   Croc’s is a franchisor of a number of playcentres in various locations throughout Australia.

5. [5]

   Although Croc’s accepts that on or about 18 June 2018 it “entered into possession” of the Premises, the actual occupant of the Premises was one of Croc’s franchisees, Golden Rock & Hope Pty Ltd.

6. [6]

   Unbeknown to Alamdo, at the time that Croc’s entered possession of the Premises, pursuant to the license agreement between Croc’s and its franchisee, the franchisee was required to pay the full amount of the rent due to Alamdo. The fact that Croc’s franchisee was in possession of the Premises is not relevant to the matters with which this judgment is concerned, although it is relevant to the issues that arise between the parties with which I will deal in a later judgment.

7. [7]

   Between June 2018 and March 2020, no controversy arose between Alamdo and Croc’s.

8. [8]

   However, the onset of the COVID-19 pandemic in March 2020 adversely affected the business conducted by Croc’s franchisee at the Premises, giving rise to the dispute with which these proceedings are concerned.

9. [9]

   Ultimately, on 3 December 2020, Alamdo purported to terminate Croc’s entitlement to possession of the Premises and physically retook possession.

10. [10]

    Alamdo now seeks to recover from Croc’s unpaid rent and outgoings, loss of bargain damages and the refund of the incentive payment the subject of the Agreement for Lease.

11. [11]

    Croc’s contends that Alamdo’s purported termination of the lease was carried out in contravention of a regulation made pursuant to s 87 of the Retail Leases Act 1994 (NSW), comprising Sch 5 to the Conveyancing (General) Regulation 2018 (NSW) entitled “Commercial leases – COVID-19 pandemic special provisions” (“the COVID Regulation”).

12. [12]

    There is a dispute between Alamdo and Croc’s as to whether the steps Alamdo took in 2020, leading up to its retaking of possession on 3 December 2020, were in contravention of the COVID Regulation.

13. [13]

    However, Alamdo also contends that, to the extent that the COVID Regulation purported to prohibit recovery of possession or termination of a lease by a lessor under the terms of their agreement, it was not authorised by s 87 of the Retail Leases Act and is accordingly ultra vires and invalid.

14. [14]

    The parties very sensibly notified the New South Wales Crown Solicitor’s Office of the fact that Alamdo was advancing this contention. As a result, the State of New South Wales (“the State”) sought leave to intervene in these proceedings for the purposes of making submissions as to the asserted invalidity of the COVID Regulation.

15. [15]

    I granted that leave and joined the State as the fourth defendant in the proceedings. I have been greatly assisted by the submissions made on behalf of the State by Mr Waterson of Counsel, as well as by the submissions made by Mr Potts SC, who appeared with Mr Langshaw for Alamdo, and Mr Farland, who appeared with Mr Meyerowitz-Katz for Croc’s.

16. [16]

    Because of the complexity of the issues arising between Croc’s and Alamdo, I am not yet in a position to give judgment on those issues.

17. [17]

    However, as the question of whether or not the COVID Regulation was invalid to the extent alleged by Alamdo is a matter of public importance, and with the consent of the parties, I have decided to publish a preliminary judgment dealing with that question.

18. [18]

    For the reasons I set out below, my conclusion is that the COVID Regulation is not invalid.

The response to the COVID-19 pandemic

1. [19]

   On 11 March 2020, the World Health Organization declared COVID-19 to be a worldwide pandemic.

2. [20]

   On 18 and 23 March 2020, the relevant Minister made the Public Health (COVID-19 Mass Gatherings) Order 2020 (NSW) and the Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW), which had the effect of, respectively, restricting the size of mass gatherings in indoor areas to 100 persons and prohibiting recreation facilities (such as the Croc’s playcentres) from being open to members of the public.

3. [21]

   On 7 April 2020, the National Cabinet adopted the “National Cabinet Mandatory Code of Conduct – SME [2] Commercial Leasing Principles during COVID-19” (“the National Code”) and State and Territory Cabinets committed to implement legislative measures giving effect to it.

4. [22]

   On 9 April 2020, the Coronavirus Economic Response Package (Payments and Benefits) Act 2020 (Cth) came into effect, permitting the Commonwealth to prescribe payment of benefits to respond to the COVID-19 situation. On the same day the Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth) came into effect which, relevantly, created the “JobKeeper” benefits scheme.

5. [23]

   The COVID Regulation was promulgated to give effect, in New South Wales, to the National Code.

6. [24]

   The COVID Regulation was inserted into the Conveyancing (General) Regulation by the Retail and Other Commercial Leases (COVID-19) Regulation 2020 (NSW) and took effect on 24 April 2020. It has subsequently been amended and replaced on several occasions. [3]

Clause 4(2) of the COVID Regulation

1. [25]

   Clause 4(2) of the COVID Regulation prevented a lessor from taking “prescribed action” during the “prescribed period” against an “impacted lessee” for specified breaches of an “impacted lease” occurring during the “prescribed period”, including a failure to pay rent.

2. [26]

   Relevantly, “impacted lessee” was defined in cl 2 of the COVID Regulation to mean, in summary, a lessee that qualified for JobKeeper and whose turnover in the 2018-2019 financial year was less than $50 million.

3. [27]

   An “impacted lease” was defined in cl 1 of the COVID Regulation as a “commercial lease” to which an “impacted lessee” was a party. “Commercial lease” was defined in cl 1 of the COVID Regulation as, relevantly, any agreement to which the Conveyancing Act 1919 (NSW) applied relating to the leasing of premises for commercial purposes.

4. [28]

   The “prescribed period” was defined in cl 1 of the COVID Regulation as the period beginning on the commencement of the COVID Regulation and ending, ultimately, on 31 December 2020, subject to savings provisions the detail of which is not relevant here.

5. [29]

   The term “prescribed action” was defined in cl 1 of the COVID Regulation to mean taking action under the provisions of a “commercial lease” or seeking orders or commencing proceedings for specified matters, including exercising a right of re-entry into leased premises, recovery of the leased premises, and possession or termination of the lease.

Clause 5(1) of the COVID Regulation

1. [30]

   Clause 5(1) of the COVID Regulation prevented a lessor under an “impacted lease” from taking or continuing “prescribed action” against the “impacted lessee” on the ground of a breach of the lease for failure to pay rent during the “prescribed period” unless the lessor complied with the remainder of the clause which, in summary, established a regime for the renegotiation of the rent and other terms of the lease.

2. [31]

   By operation of the definition of a “prescribed action” as set out above, the subject matter of cll 4(2) and 5(1) of the COVID Regulation included the taking of action by a lessor under the provisions of a lease itself. [4]

Section 87 of the Retail Leases Act

1. [32]

   As I have said, the COVID Regulation was made pursuant to s 87 of the Retail Leases Act which provided, relevantly:

2. [33]

   Section 87 was inserted into the Retail Leases Act by the COVID-19 Legislation Amendment (Emergency Measures) Act 2020 (NSW) (“the Emergency Measures Act”). As stated in its long title, the Emergency Measures Act amended “… a number of Acts to implement emergency measures as a result of the COVID-19 pandemic”.

3. [34]

   The Bill for the Emergency Measures Act when introduced into the Legislative Assembly did not include s 87 of the Retail Leases Act. This provision was introduced as a result of an amendment proposed by The Greens in the Legislative Council which also included a provision amending the Residential Tenancies Act 2010 (NSW) to empower the making of regulations under that legislation in respect of residential leases.

4. [35]

   In the debate in the Legislative Council, The Greens member, Mr David Shoebridge, addressed the purpose of the amendment in the following way:

5. [36]

   As Mr Waterson submitted, these references indicate that a central objective of s 87 was to empower the making of regulations to protect tenants from the loss of the benefits of their lease, in particular, to avoid evictions that may have otherwise occurred as a result of difficulties arising from the pandemic.

6. [37]

   This is also reflected in the title of Pt 11 to the Retail Leases Act, which contains s 87, and which is styled “Response to COVID-19 Pandemic” as well as in the chapeau to s 87(1) which requires regulations to be made “for the purpose of responding to the public health emergency caused by the COVID-19 pandemic”. [7]

7. [38]

   Before me, it was common ground between Alamdo and the State that:

Section 87(1)(c)

1. [39]

   Turning first to s 87(1)(c), Mr Potts and Mr Langshaw put Alamdo’s position concerning whether s 87(1)(c) authorised the making of the COVID Regulation insofar as it purported to prohibit recovery of possession or termination of a lease by a lessor under the terms of a lease this way:

2. [40]

   Mr Potts’ and Mr Langshaw’s submissions involve reading s 87(1)(c) of the Retail Leases Act as if the words “regulating or preventing the exercise or enforcement of another right of a lessor or owner of premises or land” related to or governed the succeeding words “under the relevant Act or an agreement relating to the premises or land in particular circumstances”.

3. [41]

   The submission thus involves reading s 87(1)(c) as if it provided there was a power to make regulations:

4. [42]

   So read, the only power to regulate the enforcement of a right under “an agreement relating to premises or land”, such as the Agreement for Lease or the Lease in this case, would be in respect of “another” right; that is a right other than those referred to in s 87(1)(a) (recovery of possession) or s 87(1)(b) (termination).

5. [43]

   As Alamdo has only purported to exercise the rights referred to in ss 87(1)(a) and (b), and not “another right”, the consequence of this reading of s 87(1)(c) would be that the subsection does not authorise the making of the COVID Regulation insofar as it purports to regulate the actions taken by Alamdo.

6. [44]

   That is certainly an available reading of the subsection.

7. [45]

   However, its effect would be to restrict, to a very significant extent, the practical operation of the COVID Regulation; notwithstanding Mr Shoebridge’s statement to the Parliament that the object of the amendment was for the COVID Regulation to provide “protection for those facing the reality that they are unable to pay their commercial lease”. [10]

8. [46]

   There is a presumption that legislatures intend to enact legislation that is valid and that if there is a “choice … between reading a statutory provision in a way that will invalidate it and reading it in a way that will not invalidate it, a court must always choose the latter reading when it is reasonably open”. [11]

9. [47]

   That presumption is enshrined in s 31 of the Interpretation Act 1987 (NSW) which provides:

10. [48]

    The relevant principle was summarised in Federal Commissioner of Taxation v Munro [12] as follows [13] :

11. [49]

    Of course, if the language is intractable, effect must be given to it and:

12. [50]

    Further, as has been said:

13. [51]

    Mr Waterson submitted that there is an available construction of s 87(1)(c) which would render the COVID Regulation valid.

14. [52]

    That construction is to read s 87(1)(c) as if the words “regulating, or preventing the exercise or enforcement of” separately governed or related to each of the expressions “another right of a lessor or owner of premises or land under the relevant Act” and “an agreement relating to the premises or land”.

15. [53]

    That would involve reading s 87(1)(c) as if it provided there was a power to make regulations:

16. [54]

    That construction may involve reading the expression “the exercise or enforcement of” distributively so that “the exercise of” refers to “another right of a lessor or owner of premises or land under the Act” and the words “the enforcement of” refer to “an agreement relating to the premises or land”. That does not, however, detract from this reading of the COVID Regulation.

17. [55]

    I accept Mr Waterson’s submission that this construction is open, and, to adopt the language of Isaacs J in Federal Commissioner of Taxation v Munro, I do not find that the language of s 87(1)(c) is “so intractable as to be incapable of being” read this way.

18. [56]

    Such a reading preserves the validity of the COVID Regulation in the relevant sense and is consistent with the obvious legislative intention of s 87 of the Retail Leases Act.

19. [57]

    For that reason, this reading of s 87(1)(c) is to be preferred.

20. [58]

    The result is that the COVID Regulation is not invalid to the extent that it regulates the “enforcement” of “an agreement relating to the premises or land”.

Section 87(1)(d)

1. [59]

   Mr Waterson, for the State, submitted that s 87(1)(d) of the Retail Leases Act provided an alternative source of power for the COVID Regulation.

2. [60]

   Under s 87(1)(d), provision can be made for “exempting a lessee … from the operation of a provision of … any agreement relating to the leasing or licensing of land”.

3. [61]

   As I have set out, cl 4(2) of the COVID Regulation operated to prevent a lessor from taking action under the provisions of a lease in respect of a breach of a lease where particular circumstances applied; for example that the lessee was an “impacted lessee”, the breach occurred during the “prescribed period” and the breach comprised a failure to pay rent or other specified matters.

4. [62]

   Mr Waterson submitted that cl 4(2) of the COVID Regulation could be characterised as conferring an “exemption” on a lessee from the operation of provisions of the lease that would otherwise operate in accordance with their terms to enable the lessor to take action in respect of the breach; for example a provision entitling a lessor to terminate the lease.

5. [63]

   Similarly, Mr Waterson submitted, cl 5(1) of the COVID Regulation can be seen as conferring an “exemption” on a lessee in that, in the particular circumstances in which it applied, the lessee was not obliged to pay rent unless and until the lessor complied with the obligations to engage in good faith negotiations.

6. [64]

   I accept these submissions. This is an available reading of s 87(1)(d) and one which is to be preferred.

Croc’s alternative argument

1. [65]

   Croc’s developed an alternative argument, to the effect that the COVID Regulation, insofar as it regulated the recovery of possession of premises by a lessor and the termination of the lease, was authorised by ss 87(1)(a) and (b) because the words “under the relevant Act” in those subsections should be seen as governing the words “premises or land” rather than the prohibition referred to in the subsections.

2. [66]

   This was not a submission advanced by Mr Waterson for the State and I find it hard to see how ss 87(1)(a) or (b) could be read that way.

3. [67]

   However, in light of my conclusions concerning Mr Waterson’s submissions on ss 87(1)(c) and (d), it is not necessary for me to express any final view about that matter.

Conclusion

1. [68]

   Alamdo has failed to establish that the COVID Regulation was ultra vires or invalid insofar as it purported to regulate Alamdo’s recovery of possession of the Premises and termination of the Lease; or at all.