The
Assistant
Chairman:—This
is
the
appeal
of
Berlin
Motels
Limited
from
an
assessment
in
respect
of
the
appellant’s
1969
taxation
year.
From
May
1961
to
March
15,
1966
the
appellant
carried
on
the
business
of
a
hotel
and
restaurant
under
the
name
of
“Town
House
Motor
Hotel”,
hereinafter
referred
to
as
“Town
House”.
On
March
15,
1966
the
appellant
entered
into
a
written
agreement
with
C
Leonard
Yanover,
pursuant
to
which
the
appellant
entered
into
a
lease
agreement
with
Mileyan
Hotels
Limited
as
lessee,
C
Leonard
Yanover
as
guarantor
and
Maurice
W
Wright
as
trustee
for
a
term
of
15
years
commencing
on
May
1,
1966
at
an
annual
base
rental
of
$90,000.
Inter
alia
the
lease
contained
a
provision
that
Mr
Yanover
would
purchase
a
debenture
or
deposit
certificate
in
the
amount
of
$75,000
as
security.
The
lease
also
provided
that
if
the
lessee
were
in
default
for
32
days,
then
the
lessor
would
be
entitled
to
serve
upon
the
lessee
a
written
notice.
of
such
default,
and
if
the
default
were
not
remedied
within
15
days
of
the
notice,
the
lessor
would
be
entitled
to
seize
the
said
deposit
certificate.
The
lease
was,
in
fact,
terminated
for
default
on
or
about
January
2,
1969,
and
the
amount
of
$75,000
was
paid
to
the
appellant
during
the
1969
taxation
year.
The
issue
to
be
determined
in
this
appeal
is
whether
the
receipt
of
$75,000
by
the
appellant
in
its
1969
taxation
year
is
rent,
payment
in
lieu
of
rent,
income
from
property,
or
whether
it
is
a
capital
receipt.
Counsel
for
the
appellant
contends
that
the
appellant
is
not
ordinarily
engaged
in
the
business
of
leasing
property,
that
he
leased
a
business
as
a
going
concern,
that
the
$75,000
received
was
not
in
lieu
of
future
rent
but
was
for
liquidated
damages
for
deterioration
of
capital
assets
of
the
business,
and
that
at
no
time
did
the
appellant
enter
into
an
arrangement
for
the
cancellation
of
the
lease
in
consideration
of
payment
of
any
moneys.
Counsel
for
the
respondent
contends
that
the
amount
of
$75,000
received
by
the
appellant
in
1969
was
received
in
satisfaction
of
the
guarantor’s
covenant
to
pay
the
rent
on
default
by
the
tenant,
and
that
the
$75,000
received
by
the
appellant
was
rent
or
payment
in
lieu
of
rent.
From
evidence
adduced,
the
volume
of
business
previously
realized
by
Town
House
decreased
substantially
under
the
lessee’s
management
from
March
1966
to
January
1969
and
some
deterioration
of
the
premises
took
place
because
of
lack
of
proper
maintenance.
The
appellant’s
principal
shareholder,
Mr
Morris
Berlin,
alleges
that
owing
to
the
lessee’s
poor
management,
expenditures
of
$38,510
were
incurred
in
rebuilding
the
assets
of
the
business.
Moreover,
demands
from
Mr
Yanover’s
creditors
in
the
amount
of
$16,500
were
received
by
the
appellant.
Evidence
also
indicates
that
under
Mr
Morris
Berlin’s
management
subsequent
to
the
lessee’s
default
in
January
1969
the
volume
of
business
was
again
increased
to
figures
comparable
to
those
prior
to
the
lease
transaction.
From
this,
one
can
reasonably
conclude
that
the
decrease
in
the
volume
of
business
which
eventually
led
to
the
lessee’s
default
was
due
to
inefficient
management.
However,
it
does
not
necessarily
follow
that
the
payment
of
$75,000
to
the
appellant
was
by
way
of
liquidated
damages
for
the
deterioration
of
capital
assets
of
the
business
including
goodwill.
The
nature
of
the
$75,000
payment
can
only
be
determined
by
the
actual
wording
of
the
lease
agreement.
Counsel
for
the
appellant
contends
that
the
$75,000
was
security
against
the
deterioration
of
the
business
as
well
as
security
for
the
financial
responsibility
of
Mr
Yanover
as
guarantor.
The
appellant’s
contention
that
the
$75,000
payment
was
security
against
the
deterioration
of
the
business
is
not
really
substantiated
by
any
of
the
clauses
of
the
lease,
whereas
clause
22(f)
of
the
lease
is
crystal
clear
in
providing
that
the
$75,000
guarantee
be
paid
to
the
lessor
should
the
lessee
be
in
default
of
rental
payments.
Clause
22(f)
of
the
lease
provides:
As
a
condition
of
the
execution
and
delivery
of
the
within
lease
and
as
security
for
payment
of
the
rental
by
the
Lessee
in
thet
event
of
the
death
of
Charles
Leonard
Yanover
and
as
further
security
for
the
guarantee
herein
given
by
the
said
Charles
Leonard
Yanover,
the
Lessee
and
Yanover
agree
with
the
Lessor
as
follows:
.
.
.
(f)
If
at
any
time
during
the
term
of
the
within
lease,
the
Lessee
should
be
in
default
for
a
period
of
thirty-two
(32)
days
in
making
any
of
the
rental
payments
referred
to
in
paragraph
2
hereof,
then
the
Lessor
shall
be
entitled
to
serve
upon
the
Lessee
a
written
notice
of
such
default
and,
if
such
default
shall
not
be
remedied
within
a
period
of
fifteen
(15)
days
from
the
date
of
delivery
of
such
notice,
then,
in
such
case,
the
Trustee
shall
request
the
Bank
or
Trust
Company
to
transfer
the
said
certificate
to
the
name
of
the
Lessor
and
the
said
certificate
shall
thereupon
become
the
absolute
property
of
the
Lessor.
The
agreement
signed
by
the
lessee,
the
lessor
and
the
trustee
on
January
3,
1969
(Exhibit
A-2)
authorizing
the
lessor
to
enter
and
to
operate
Town
House
before
the
expiry
of
the
period
of
15
days
referred
to
in
subparagraphs
(f)
and
(g)
of
paragraph
22
of
the
lease
is
quite
significant
in
that
it
follows
directly
upon
the
lessee’s
incapacity
to
pay
the
arrears
of
$18,400
for
rent
and
its
acknowledgement
that
it
is
in
default
for
a
period
of
32
days
in
making
its
rental
payments.
The
procedure
followed
in
that
agreement
in
having
the
certificate
transferred
to
the
lessor,
in
authorizing
the
lessor
to
take
immediate
possession
of
the
premises,
and
discharging
the
guarantor
from
further
liability
is
strictly
pursuant
to
subparagraphs
(f),
(g)
and
(h)
of
paragraph
22
of
the
lease
which
deal
specifically
and
clearly
with
the
default
of
rental
payments.
The
fact
that
the
appellant
may
have
had
to
make
expenditures
in
refurbishing
the
premises
and
may
have
so
used
part
of
the
$75,000
guarantee
cannot,
in
my
view,
alter
the
nature
of
the
$75,000
payment
made
by
the
guarantor.
Counsel
for
the
appellant
suggests
that
the
$75,000
payment
was
for
the
lessee
a
means
of
buying
its
way
out
of
honouring
its
covenants.
Certainly
that
is
true
for
the
lessee’s
obligation
to
pay
the
lessor
a
monthly
rent,
and
is
specifically
provided
for
in
subparagraphs
(f)
and
(g)
of
paragraph
22
of
the
lease,
but
the
relationship
between
the
payment
of
$75,000
and
the
lessee’s
other
covenants
is
undetermined
and
nebulous.
The
fact
that
the
appellant
required
as
a
condition
for
the
execution
of
the
lease
that
a
$100,000
insurance
policy
on
the
life
of
C
Leonard
Yanover
be
purchased
by
the
lessee
and
made
payable
to
the
trustee
as
security
for
the
payment
of
rent
in
the
event
of
the
death
of
C
Leonard
Yanover
cannot
reasonably
be
interpreted
in
a
way
that
the
$100,000
life
insurance
was
considered
security
for
rental
payments
and
that
the
$75,000
was
security
for
the
fulfilment
of
the
lessee’s
other
covenants.
If
these
two
guarantees
are
indicative
of
anything,
it
is
the
importance
that
the
appellant
placed
on
the
rental
income
from
the
premises.
Whether
the
lease
is
an
ordinary
commercial
lease
or
not,
it
is
a
legal
document
relative
to
the
leasing
of
Town
House
as
an
operating
concern.
One
can
neither
ignore
the
clauses
that
are
contained
therein
and
agreed
upon
by
the
parties,
nor
interpret
the
lease
on
the
basis
of
ex
post
facto
considerations.
On
the
facts
of
this
appeal
I
have
come
to
the
conclusion
that
the
amount
of
$75,000
received
by
the
appellant
was
not
for
liquidated
damages
arising
out
of
the
deterioration
of
capital
assets
of
Town
House
but
was
received
as
payment
in
lieu
of
rent.
The
appeal
is
therefore
dismissed.
Appeal
dismissed.
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