On 26 February – as the coronavirus panic was emerging worldwide – a contract was inked for the $550k sale of the upscale Palace Lounge in the heart of Brisbane’s Valley entertainment precinct.
The landlord’s consent to the lease assignment of the impeccably appointed supper club and bar to buyer C&L Pty Ltd arrived in mid-March in readiness for a settlement on the 24th of that month. Approval for the transfer of the liquor license from seller Happy Lounge Pty Ltd was also recieved around the same time.
Just before midday on 23 March – and prior to the seller’s solicitor sending draft settlement figures to the buyer’s solicitor – Qld’s Chief Health Officer issued a Public Health Direction prohibiting entertainment venues from operating until the end of the already declared public health emergency.
The following day at 3:00 pm – the time appointed for settlement – the buyer’s solicitors attended the office of the Seller’s solicitor with bank cheques for the balance purchase price.
Happy Lounge’s solicitor produced to him a number of documents including the business name transfer, directors non-compete covenants, transfer consents for the liquor licence and web domain and a stock list that purported to be sufficient evidence to satisfy a contract special condition that the value of the stock on handover was at least $30k.
The buyer’s solicitor refused to complete.
He explained to his counterpart opposite that in his client’s view, the selling party was in breach of its obligations to provide adequate evidence of the value of stock.
The following morning C&L’s solicitor purported to terminate the business contract and demanded its $55k deposit be returned.
That notification was treated as a repudiation by Happy which promptly issued specific performance proceedings to enforce the terms of the sale.
The dispute quickly came before Judge Jennifer Rosengren in Brisbane’s District Court in June.
The entertainment venue upstairs in Duncan Street was of course heavily dependent upon high patronage levels – from loyal and well heeled customers – for ongoing economic viability.
Not unexpectedly, C&L contended the contract had been “frustrated” because its subject matter had “radically changed” in that The Palace could no longer operate within its normal 8 pm to 3 am trading hours providing supper, drink and entertainment.
In making the observation that “all contracts involve the preparedness by a party … to perform in the face of an uncertain future,” Her Honour considered the differences between the outcome that was contemplated and that which actually occurred.
To what degree had the benefit of performing the contract been diminished, she asked.
Given that the Public Health Direction imposed only “short-term trading restrictions” and that the contract was principally for the acquisition of assets – the sumptuous fitout and decor – any temporary deprivation of the right to operate could not, she ruled, be said to have denied the buyer the substantial benefit of the deal.
Put another way, the escalation of the hardship and expense encountered by the buyer was not such as to “unexpectedly create a fundamentally different situation striking at the core of the contract so as to destroy its commercial purpose”.
Thus the adverse circumstances were of insufficient gravity to invoke the doctrine of frustration.
Also relevant to that determination was that in the days and weeks leading up to the contract signing, the Covid pandemic was widely known and public health emergencies at various levels had already been declared in Queensland on three occasions.
Happy’s case was though brought undone by something far more mundane: its failure to obtain the consent of the landlord’s mortgagee to the lease assignment.
It contended that because same was not contemplated in the lease assignment deed – as between the assignee, assignor and landlord – the consent of the landlord’s mortgagee was not required.
C&L on the other hand drew the court’s attention to standard condition 24.2 of the business sale contract which specified that “the consent of the lessor and any mortgagee “if applicable to such assignment” was required to be obtained.
It also produced to the court the landlord’s mortgage which made it clear that the mortgagee’s consent was required to any proposed agreement by the landlord to “vary…any interest in the property”.
Given that express requirement, the failure to obtain the mortgagee’s consent (irrespective any of any agreement between the landlord and the seller) meant the seller had not met its contractual obligations by the time of settlement.
That alone was sufficient to justify C&L’s termination.
The court agreed the termination was also justified on the grounds that the seller’s list of stock on hand at settlement – containing quantities and prices – did not fulfil the requirements of the contract special condition.
The stock list the seller had proffered was – in Her Honour’s view – merely an assumption of value and the “round numbers” appearing on the list raised questions as to its accuracy.
“For example, $120 for a carton of wine would seem to be at best an arbitrary average; and the price of $3,600 for the carton of champagne – Dom seems high as does $10,000 for a carton of 6 L bottles of vodka”.
Proving the value of the stock required more than a mere list of stock to which price estimates had been assigned, notwithstanding that it came in at above $60k when the amount in respect of which “proof” was required was a mere $30k.
Happy was ordered to refund C&L’s deposit and pay its costs of the proceedings.