Lee v YOUth OK Pty Ltd (No. 2) [2022] NSWSC 1691 (9 December 2022)

Lee v YOUth OK Pty Ltd (No. 2) [2022] NSWSC 1691 (9 December 2022)

Intro: 

This is the Court’s second judgment in these proceedings. The Court gave its first judgment on 17 October 2022: Lee v YOUth OK Pty Ltd [2022] NSWSC 1356. This judgment should be read with the Court’s first judgment. Events, matters and persons are referred to in both judgments in the same way.

The proceedings were re-listed for further short argument on 3 November 2022 and then adjourned for further argument to 30 November 2022. The Court was satisfied by 3 November 2022 that no issue of mitigation of loss was available to be raised by the defendants before they left the property on 26 February 2022. At the hearing on 3 November 2022 the Court entered judgment for unpaid rent and mesne profits for the period up to 26 February 2022 together with interest from 26 February 2022 up to 3 November 2022 on the unpaid rent and mesne profits. The judgment also included a small amount based on exhibit D, representing some pre-trial expenses. And the Court then heard supplementary arguments about mitigation issues that might arise between 27 February 2022 and 30 September 2022.

Facts

The plaintiff, Ms. Annie Lee is the registered proprietor of two parcels of land on Barrenjoey Road in the commercial district of the Sydney beachside suburb of Newport (“the Newport property”). By an unregistered lease dated 26 September 2019, Ms. Lee demised the Newport property to the corporate first defendant, YOUth OK Pty Limited (“YOUth OK”), for a term of three years commencing on 1 October 2019 (“the lease”). The second defendant, Mr. David Hawkins, the principal of YOUth OK, guaranteed the obligations of YOUth OK under the lease.

Ms. Lee claims she terminated the lease on 16 July 2020. She brings these proceedings against the defendants for possession of the Newport property, for recovery of arrears of rental alleged to be due up to the alleged date of termination, for damages under the lease or at common-law, and for loss of the balance of the lease term expiring on 30 September 2022.

The plaintiff claims that she terminated the lease by notice on 16 July 2020 on the grounds of non-payment of rent and non-payment of a security deposit required by the lease. Ms Lee’s attempts to change the locks on 21 July 2021 were resisted and YOUth OK remained in physical possession until the proceedings commenced in February 2022. Ms Lee claims a notional re-entry into the premises as at 21 July 2021 for the purposes of calculating mesne profits. Ms Lee commenced proceedings by Statement of Claim on 17 August 2020. She claims this date as an alternative notional date of re-entry into the premises.

During the first few days of the principal hearing on 21, 22 and 23 February 2022 Mr. Hawkins offered to vacate the premises the following Saturday, 26 February 2022. On 23 February the proceedings were adjourned part heard to 9 March 2022 to allow for the surrender of possession before final submissions. That date was rescheduled to 17 March 2022. During final submissions on that day, issues emerged as to the state of the evidence in relation to YOUth OK’s reliance in its Amended Defence upon the provisions of clause 7.4 of the lease, which requires the landlord to undertake structural work on the property or other work needed to make the property safe to use.

Pursuant to the Court’s directions in the first judgment (at [303](5)) Ms Lee filed an affidavit giving an account of her efforts to lease the Newport property since the Court reserved judgment in May of this year.

Ms Lee’s initial evidence filed after the Court’s first judgment was that she has done “every reasonable thing to mitigate” losses from YOUth OK’s breaches of the lease. As the first judgment explained, she only needed to establish reasonable steps in mitigation between 26 February 2022 and 30 September 2022, as the re-leasing of the property was not possible whilst YOUth OK was in occupation.

The position had been reasonably clear until the Court reserved judgment in May of this year: Ms Lee had not released the Newport property up until that time. Since then, the evidence shows that she has not entered any lease over the Newport property and has not received any income from it. The premises were still vacant at the time of these November 2022 supplementary hearings.

Mr Sokolov of Raine & Horne, Ms Lee’s agent in respect of the Newport property, advised Ms Lee to return the premises to use as a restaurant, which involved a change in the fit-out that had been partially completed on behalf of YOUth OK. Ms Lee took this advice. Due to this reconfiguration work it took some time before the property could be offered to be re-leased.

In addition to reconfiguring the property as a restaurant, after YOUth OK left the property Ms Lee was required to remove rubbish, remediate unfinished works, repair water damage, have the premises commercially cleaned and clear up the garden at the rear of the property. Once that work was done the property was offered for lease, but the premises were still on the market, seeking suitable tenants, as of 30 September 2022.

The defendants’ initial submission was not persuasive. They submitted that the inability of Ms Lee to enter a new lease was solely due to her conduct in allowing the property to fall into disrepair, making it unfit for the operation of any commercial business and that potential lessees have become aware of the non-compliance issues with the Newport property and have been deterred from leasing it.

Ms Lee was not responsible for allowing the property to fall into disrepair. Very little had been done to the property by the defendants throughout 2021 after the builders left the property. And as the Court’s first judgment shows the evidence does not establish that Ms Lee’s dealings with the Council made the premises unfit for operation as a commercial business. Moreover, no clear inference can be drawn against the plaintiff as to whether potential lessees have been deterred by activities on the premises during the period of the defendants’ occupation: the defendants’ activities on the site causing the premises to be unoccupied and unsightly for a long period would appear to be no less responsible for any deterrent effect on potential lessees.

But the main contest between the parties concerned whether Ms Lee had made adequate efforts to release the premises after 27 February 2022. The maximum rent that could accrue between 27 February 2022 and 30 September 2022 was $117,911.18. Any failure to mitigate loss under lease clause 12.6 would go in reduction of that sum. The resolution of this issue can be divided into two sub-periods: the first period from 27 February to 20 May 2022, when the Court reserved judgment and the second period from 21 May 2022 until 30 September 2022.

Issues:

1.) Whether or not indemnity costs should be awarded under the provisions of the lease.

2.) Whether or not interest on costs should be awarded.

Ruling:

Yes.

The defendants’ submissions are not persuasive in respect of the period up to 20 May. This is so for two reasons. First, the various repairs and renovations that Ms. Lee has undertaken since YOUth OK vacated the property could only be assessed and then executed by her after YOUth OK had left the premises. Initially, upon re-entering into possession, Ms. Lee needed an opportunity to assess what needed to be done with the premises to turn them to account to her best advantage. The Court can accept that this would have taken several months until about the time judgment was reserved. Second, Ms. Lee was still much distracted by this litigation until Court reserved judgment on 20 May 2022. And it was not reasonable to expect her to take final decisions about undertaking a major renovation project until the intense preparation for final submissions was complete and it was clear what the final issues for judgment were to be.

The period after 20 May 2022 is more contentious. Ms. Lee says that after 20 May 2022 she was fully occupied for a period of a little over four months (until the expiry of the lease on 30 September) with cleaning up and preparing the property for re-leasing and offering it to the market. She says that she was unable to lease out the property during this period. That is a matter of contention between the parties which is resolved by these reasons.

For the period from 21 May 2022 to 30 September 2022, the issue of whether the plaintiff took reasonable steps in mitigation of loss is best analysed by reference to Ms Lee’s actions in relation to the commercial portion of the premises and then her actions in relation to the residential portion of the premises.