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[2009] WASC 79
Supreme Court of WA
2009-03-31
Mr J, Beech J
Original judgment source is linked above.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
CITATION : PROGRAMME HOLDINGS PTY LTD -v- VAN GOGH HOLDINGS PTY LTD [2009] WASC 79
MATTER : Commercial Arbitration Act 1985 (WA)
BETWEEN : PROGRAMME HOLDINGS PTY LTD (ACN 053 109 130)
Contract - Lease - Application for declaration as to proper construction of rent review clause - Turns on own facts
Landlord and Tenant - Rent review clause - Construction - Turns on own facts
Arbitration - Commercial Arbitration Act 1985 (WA) - Application for determination of a question of law arising in the arbitration - Application for declaration as to proper construction of rent review clause in lease - Turns on own facts
ADC Buildings Pty Ltd v Barana Properties (No 1) Pty Ltd [2005] NSWCA 224
Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99
Bank of South Australia v SA Health Commission (1996) 65 SASR 409
BBC Hardware Ltd v Payce Properties Ltd [2000] NSWCA 262; (2000) 50 NSWLR 66
Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642
Chemeq Ltd v Shepherd Investments International Ltd [2007] WASCA 117
Commonwealth Custodial Services Ltd as Trustee for Burwood Trust Fund v Valuer General (NSW) [2006] NSWLEC 400; (2006) 148 LGERA 38
Commonwealth Custodial Services Ltd v Valuer General [2008] NSWLEC 310
Goldmile Properties Ltd v Lechouritis [2001] EWCA Civ 1252; [2003] 2 P & CR 1
GWR v VAR [2006] FamCA 894; (2006) 36 Fam LR 237
Home Building Society Ltd v Pourzand [2005] WASCA 242
Horwitz Grahame Books Pty Ltd v Mid-City Centre Pty Ltd [1991] ANZ ConvR 139
International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151
Lamac Developments Pty Ltd v Devaugh [2002] WASCA 245; (2002) 27 WAR 287
Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1
Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181
McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451
Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565
Permanent Building Society (in liq) v Wheeler (1992) 10 WAR 109
Plinth Property Investments Ltd v Mott, Hay & Anderson (1979) 38 P & CR 361
Price Waterhouse v University of Keele [2004] EWCA Civ 583
Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355
Queensland Alumina Ltd v Alinta DQP Pty Ltd [2007] QCA 387
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165
Western Australian Trustees Ltd v Poon (1991) 6 WAR 72
Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530
1 The plaintiff and the defendant entered into leases on 17 July 1995 and 1 April 2003, by which the defendant agreed to lease its premises at 4 and 6 Elcar Lane, Joondalup, to the plaintiff. A dispute has arisen between the parties as to the proper construction of the rent review clause in the leases. The rent review clause requires a valuer to assess the best current open market annual rent that can be reasonably obtained for the premises. In essence, the dispute is whether, in assessing that value, the valuer is limited to taking into account the use or uses of the premises permitted under the lease as at the review date.
2 For the reasons which follow, in my opinion on a proper construction of the lease, the valuer is not limited in this way.
4 Van Gogh Holdings Pty Ltd, the defendant, owns land and buildings at 4 and 6 Elcar Lane, Joondalup.
5 Van Gogh became the owner of 4 Elcar Lane on 21 December 1990.
6 Between September 1991 and July 1995 Programme Holdings Pty Ltd, the plaintiff, carried on the business of an indoor sports centre at 4 Elcar Lane without a written lease agreement. A written lease was entered into in relation to this property with Van Gogh on 17 July 1995 (first lease).
7 On 12 April 2001, Van Gogh became the registered proprietor of 6 Elcar Lane, the property immediately adjacent to 4 Elcar Lane. Van Gogh constructed a building on 6 Elcar Lane. A written lease agreement was entered into in relation to this property on 1 April 2003 (second lease).
8 Both leases are for a term that expired on 30 June 2005, with an option for the tenant (Programme) to renew for a further five years. By deeds of extension and variation made in 2005, both leases have two further options to renew, each of five years, in favour of Programme.
9 Programme has used the premises for an indoor sports centre at all times. Programme has not sought and Van Gogh has not given consent for any use other than an indoor sports centre.
10 Item 6 of the second schedule to the first lease specified that the first rent review was to take place on 1 January 1997, with subsequent rent reviews to take place every 18 months thereafter. Item 6 of the second schedule to the second lease determined that the first rent review on that lease occur on 1 July 2003, 'which accords with the next Review Date' under the first lease, and every 18 months thereafter. The first review date under the second lease of 1 July 2003 did not in fact accord with the next review date under the first lease. Consequently, in January 2008 the parties agreed that there would be a rent review of both leases on 1 January 2008, 1 January 2009, and then every 18 months thereafter. Prior to this, there had not been any rent reviews.
11 By cl 1E of the second lease, the parties agreed that the second lease would be in terms identical to the first lease, except as amended by the second lease. The second lease makes no amendment to the method for rent review, so that the terms of the first lease in this regard are applicable to both leases.
12 Item 6 of the second schedule to the first lease specifies that the reviewed rental shall be as agreed by the parties, or failing agreement, shall be the greater of either:
(a) the current market rent for the premises as determined in accordance with pt 5 of the lease; or
(b) an increase calculated by reference to the CPI.
13 Thus in the event that the parties cannot agree on the reviewed rent, cl 5.3 of the first lease is applicable:
5.3 Review of Base Rent
(a) The Base Rent shall be reviewed and adjusted on each Review Date in accordance with the provisions following and the Method of Review set forth in Item 6 of the Second Schedule.
(b) In determining the reviewed rent any valuer or umpire appointed in accordance with this Lease shall take into consideration the following:
(i) the best current open market annual rental value that can be reasonably obtained for the Leased Premises;
(ii) on the basis that the Leased Premises are available for leasing with a sitting tenant for a term equal to the term of this Lease and any additional options for renewal;
(iii) on the terms and conditions contained in this Lease;
(iv) on the highest and best use for the Leased Premises;
(v) on the basis that the Lessee's covenants have been fully performed at the Rent review date in question;
(vi) current open market annual rental values of comparable commercial premises in the Perth Metropolitan Area or other relevant locality;
(vii) permanent structural or other improvements to the Leased Premises installed at the Lessee's expense and which the lessee is not permitted to remove at the expiration of this Lease;
(viii) any rent free period customarily offered to new tenants of vacant premises;
(ix) any fixtures and fittings installed in the Leased Premises by the Lessee;
(x) the rental paid or agreed to be paid by other lessees from the Lessor;
(xi) save where the Leased Premises comprise a retail shop within the meaning of the Commercial Tenancies (Retail Shops) Agreements Act 1985 as amended the definition of market rent contained in Section 11(2) of that Act.
(c) (i) The Lessor shall not later than one (1) month prior to a Rent Review Date, give to the Lessee a notice in writing ('the Lessor's Notice') of the rate at which the Lessor proposes the Base Rent shall be payable after the Rent Review Date at an amount which in the opinion of the Lessor would be the Market Rent of the Leased Premises.
(ii) The Lessee shall within fourteen (14) days of serving the Lessor's Notice or such further period as the Lessor and Lessee may mutually agree ('the Reply Period') give to the Lessor written notice ('the Reply') that he agrees or does not agree to pay the Base Rent at the rate proposed in the Lessor's Notice and if the Lessee neglects to give the Lessor the Reply the Lessee shall be deemed to have agreed to pay the Base Rent proposed by the Lessor in the Lessor's notice. If the Lessee agrees or is deemed to have agreed to pay the Base Rent proposed by the Lessor in the Lessor's notice then the Base Rent so proposed by the Lessor shall apply from the Rent Review Date.
(iii) If the Lessee within the Reply Period serves on the Lessor a Reply that the Lessee does not agree to pay the Base Rent proposed in the Lessor's Notice and the Lessor and the Lessee fail to agree upon the Market Rent of the Leased Premises within the Reply Period then the following provisions shall apply:
14 Clause 8.1 of the first lease provides that Programme shall use the premises for the purpose specified in item 7 of the second schedule and for no other purpose without the written consent of Van Gogh.
15 Under item 7 of the second schedule to both leases, the permitted use for the premises is an indoor sports centre. These items are in identical terms:
Use of Leased Premises:
An indoor sports centre and to that end, shall keep the Leased Premises opened for that business at all usual hours of trading seven days a week and shall not do anything whereby the goodwill of that business shall or may be in any way affected or impaired.
Clause 19.5 of the first lease provides that any consent of Van Gogh may be given conditionally or unconditionally.
16 As I have said, the parties agreed that a rent review based on the market value of the premises was to take effect under both leases from 1 January 2008. Van Gogh instructed Mr Paul McLaren of Egan National Valuers (WA) to determine the current market value of the leased premises on two different bases: first, on the basis of continued use of the premises as an indoor sports centre; and secondly, on the basis of use of the premises as a showroom or warehouse. In his report dated 14 December 2007, Mr McLaren determined the current market rental for use of the premises as an indoor sports centre at $548,000 per annum, and at $607,000 per annum for use of the premises as a showroom or warehouse.
17 By letter dated 27 December 2007 Van Gogh notified Programme that the new rental amount would be $548,000 per annum plus GST, effective 1 January 2008. Programme replied by letter dated 7 January 2008, stating that it did not agree to pay the base rent of $548,000. The parties have agreed that these letters constitute the Lessor's Notice and the Lessee's Reply as required by cl 5.3(c).
18 The parties could not agree on the reviewed rental amount, so both appointed valuers on about 26 May 2008. Van Gogh appointed Mr McLaren, and Programme appointed Mr John Martin of Australian Property Consultants. Mr Robert Richmond from McGees Property was appointed as the umpire in accordance with cl 5.3(c)(iii)(A) of the first lease. By cl 5.3(c)(iii)(C) of the first lease, each of the appointed valuers acts as an arbitrator pursuant to the Commercial Arbitration Act 1985 (WA).
19 Mr Martin published his report on 11 June 2008. He concluded that the current open market annual rental value of the premises for the permitted use was between $376,800 and $426,900. Mr Martin set out the basis for this conclusion at page 5 of his report:
The critical issue in arriving at an opinion of the best current open market annual rental value in my opinion is the Permitted Use condition of the Leased Premises.
...
It is my considered opinion that this implies the permitted use is as an Indoor Sports Centre (and no other purpose).
Furthermore the original building is purpose built to cater for indoor sports and is not readily adaptable to general industrial use even if such a use was permitted by the lease agreement.
Effectively the annual rent applicable is based on the continuance of its permitted/existing use, regardless of whether the existing permitted use represents the highest and best use of the asset or not.
The conversion of the buildings to an alternative use as a consideration in arriving at an opinion of the annual rent is not relevant.
I therefore conclude that the use of showroom/warehouse or bulky goods tenancies rental evidence to be irrelevant in this instance.
The rent review requires the use of comparable premises (ie) indoor sports centre. The use of health clubs, bowling alleys or similar facilities is also in my view, not comparable. (Emphasis in original)
20 In his subsequent report dated 12 June 2008, Mr McLaren concludes that a rental value range between $588,750 and $635,850 is appropriate for the premises. He states that this rate range 'is supported by reference to the highest and best use' of the property, and that use 'of the premises for showroom/warehousing/bulky good sales is considered to represent the highest and best use of the property'.
21 Mr Martin and Mr McLaren exchanged submissions, but by letter dated 25 June 2008 they notified the parties that, 'due to differing opinion in the interpretation of lease terms, specifically regarding the "Highest and Best Use" of the premises, agreement on an applicable rental level cannot be reached at this stage'.
22 On 4 September 2008, Programme filed an application to this court for a declaration as to the proper construction of cl 5.3(b).
Application under the Commercial Arbitration Act
23 The application is made pursuant to s 39(1) of the Commercial Arbitration Act 1985 (WA). That section is in the following terms:
39. Determination of preliminary point of law by a Supreme Court
(1) Subject to subsection (2) and section 40, on an application to the Supreme Court made by any of the parties to an arbitration agreement -
(a) with the consent of an arbitrator who has entered on the reference or, if an umpire has entered on the reference, with the consent of the umpire; or
(b) with the consent of all the other parties,
the Supreme Court shall have jurisdiction to determine any question of law arising in the course of the arbitration.
(2) The Supreme Court shall not entertain an application under subsection (1)(a), with respect to any question of law unless it is satisfied that -
(a) the determination of the application might produce substantial savings in costs to the parties; and
(b) the question of law is one in respect of which leave to appeal would be likely to be granted under section 38(4)(b).
24 In order to engage s 39(1) the court must be required to determine a question of law. In this case, a declaration is sought as to the proper construction of the rent review clause in dispute. Both parties submit, and I accept, that a question of construction of an instrument is a question of law for the purposes of s 39. In Lamac Developments Pty Ltd v Devaugh [2002] WASCA 245; (2002) 27 WAR 287 [60], [132] it was held that a question of construction is a question of law for the purposes of s 38. 'Question of law' has the same content in s 38 as in s 39.
25 Van Gogh has consented to Programme making the present application to the court, thereby engaging s 39(1)(b). For that reason, the requirements imposed by s 39(2) do not arise.
26 For these reasons, I am satisfied that the court has jurisdiction to determine the application.
27 It is common ground that in respect of a rent review, the current market rent for the premises must be determined in accordance with cl 5.3(b) of the first lease.
28 It is also common ground that cl 5.3(b) should read as if pars (ii) - (v) were subparagraphs of par (i) of that clause. I accept that proposition, which is supported by the opening word 'on' in each of pars (ii) to (v).
29 That means that cl 5.3(b) is to be construed as requiring the valuer or umpire to take into consideration three matters: first, the best current open market annual rental value that can reasonably be obtained for the premises (the content of which is affected and governed by pars (ii) to (v)); secondly, the current open market annual rental values of comparable commercial premises in the Perth Metropolitan Area or other relevant locality; and thirdly, any permanent structural or other improvements to the premises installed at the lessee's expense and which the lessee is not permitted to remove at the expiration of the lease. The first of these matters is determined on the bases in pars (ii) and (v), on the terms and conditions in the lease and on the highest and best use for the premises.
30 Thus, as Programme submits, all of the matters in pars 5.3(b)(ii) to (v) must be considered, collectively, in forming a single view on the best open market annual rental value that can reasonably be obtained for the premises.
31 Both parties accept that in forming that view the arbitrator or umpire must have regard to both par (iii) and par (iv). The dispute centres on how, on a proper construction, the two paragraphs interact. There is, at first blush, a tension between the paragraphs. Paragraph (iii) requires the valuer to take into consideration the terms and conditions contained in the lease. One of these terms and conditions is cl 8.1 of the first lease. This clause restricts the use of the premises to an indoor sports centre or, with the written consent of Van Gogh, some other use. Paragraph (iv) requires the valuer to take into consideration the highest and best use of the premises. As I will explain in more detail later in these reasons, ordinarily the highest and best use is determined without regard to any constraints arising from the use to which the premises are then being put, or from the use permitted under the terms on which the premises are then being occupied.
32 The issue is, therefore, how the clause is to be construed so as to reconcile these provisions and resolve any apparent tension. In a sense, each party invites a 'reading down' of one of these two paragraphs, but the parties differ as to which paragraph should be read down. By 'reading down', I include giving the paragraph a meaning that differs from its ordinary meaning.
33 Programme contends that the highest and best use of the leased premises must be decided having regard to the terms and conditions in the lease, and that the terms and conditions in the lease (cl 8.1 and item 7 of the second schedule) limit the use of the premises to an indoor sports centre or other use approved in writing by Van Gogh. Therefore, Programme contends, in determining the reviewed rent, any valuer or umpire must have regard only to the use of the premises as an indoor sports centre or any additional use that has, by the time of the review, been permitted under the lease, and not to any other possible use. Programme contends that, on a proper construction, par (iv) means the highest and best use that is within the use or uses that are permitted under the lease as at the review date.
34 Van Gogh contends that the terms and conditions paragraph should operate subject to the highest and best use paragraph, that is, the market value should be determined by taking into account the terms and conditions of the lease apart from as to use, but adopting the highest and best use of the premises.
35 The principles relevant to the construction of deeds and other instruments were not in dispute.
36 The primary duty of the court in construing an instrument is to endeavour to discover the intention of the parties as embodied in the words they have used in the instrument: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99, 109 - 110; Permanent Building Society (in liq) v Wheeler (1992) 10 WAR 109, 119.
37 In Australian Broadcasting Commission v Australasian Performing Right Association Ltd Gibbs J set out the following general principles relevant to construction (109 - 110):
It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate', to use the words from earlier authority cited in Locke v Dunlop (1888) 39 Ch D 387, 393, which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley's Case (1880) 16 Ch D 681, 686. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; (1932) 147 LT 503, 514, that the court should construe commercial contracts 'fairly and broadly, without being too astute or subtle in finding defects', should not, in my opinion, be understood as limited to documents drawn by businessmen for themselves and without legal assistance (cf Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437.
38 The interpretation of a written contract involves 'the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract': Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 [11].
39 The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and of the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 [8], [53].
40 An instrument should be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience: Zhu v Treasurer of the State of New South Wales [2004] HCA 56; (2004) 218 CLR 530 [82]; Maggbury [43]. However, as Gleeson CJ, Gummow and Hayne JJ observed in Maggbury [43], what comprises 'business commonsense' in respect of a particular contract, as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible.
41 Where different parts of a contract appear to be inconsistent, a court will attempt to construe the contract in a way that avoids any inconsistency and renders those parts harmonious: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (109 - 110); Queensland Alumina Ltd v Alinta DQP Pty Ltd [2007] QCA 387 [51] (citing Goldmile Properties Ltd v Lechouritis [2001] EWCA Civ 1252; [2003] 2 P & CR 1 [8]).
42 There is or may be a question as to the status and content of a requirement of ambiguity in order for evidence of surrounding circumstances to be admissible upon the construction of a written contract. The Full Federal Court has held that there is no requirement of ambiguity: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1 [122]. The position in Western Australia has not been authoritatively determined; see, for example, Home Building Society Ltd v Pourzand [2005] WASCA 242 [25] - [33]; Chemeq Ltd v Shepherd Investments International Ltd [2007] WASCA 117 [154].
43 It is not necessary to say more about this question because the parties are agreed that the background facts do not materially assist in determining the issue of construction in this case.
44 The parties agree that in reconciling apparently conflicting provisions of a written contract, the court should strive to give meaning to each paragraph (see Lewison K, The Interpretation of Contracts (3rd ed, 2004) [7.03]). That is consistent with the cognate principles of construction of a statute, as to which see Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; (1998) 194 CLR 355 [71].
45 In oral and written submissions, some attention was given to cases involving questions of construction of rent review clauses in various terms. These included Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642; Horwitz Grahame Books Pty Ltd v Mid-City Centre Pty Ltd [1991] ANZ ConvR 139; BBC Hardware Ltd v Payce Properties Ltd [2000] NSWCA 262; (2000) 50 NSWLR 66; ADC Buildings Pty Ltd v Barana Properties (No 1) Pty Ltd [2005] NSWCA 224; and Plinth Property Investments Ltd v Mott, Hay & Anderson (1979) 38 P & CR 361. Ultimately, however, both parties accepted that consideration of the decision in questions of construction in these cases is of limited assistance. Each case must be considered in its own circumstances, especially the language and context of the clause in question. None of the cases to which reference was made involved a clause in which 'highest and best use' was specifically identified as a matter to which the valuer must have regard. Thus, to my mind, the observations of Olsson J in Bank of South Australia v SA Health Commission (1996) 65 SASR 409, 416 are apposite:
In the course of debate I was referred by counsel to a series of dicta in cases reported in both England and Australia. They were sought to be called in aid of one contention or another. However, it must be said that all such materials must be viewed with considerable caution. Inevitably each decision has been very much the product of both the precise mode of expression of the relevant clause and also the context in which it appears.
46 Programme submits that the construction that it advances leads to a result that is more just and reasonable and therefore more likely to have been intended by the parties. It points to its obligation under item 7 of the second schedule to keep the indoor sports centre open. It submits that it is unreasonable and unlikely that the parties to the lease, including the guarantors, would have expected or intended the reviewed rent to be based on a more profitable use that is not permitted under the lease.
47 In support of that submission Programme relies upon the decision of the New South Wales Court of Appeal in Burns Philp Hardware Ltd. In particular, Programme points to the reasons of Priestley JA (Glass JA agreeing) in which his Honour rejected an argument by a landlord that, for the purposes of a rent review clause, the landlord could waive the clause limiting the lessee's use of the premises. In that context, Priestley JA held that the limitation of use clause was in part for the benefit of the lessee because, being taken into account in the rent review process, it meant that there was at least a chance that the rent as reviewed would be less than if the permitted use were unlimited (659). However, in my opinion, his Honour's reasoning in relation to waiver is premised upon his earlier holding (at 657 - 658) that on a proper construction of the rent review clause the covenant restricting use was a matter to be taken into account in determining the then current market rent of the premises. Thus his Honour's reasoning in explaining why waiver was not applicable does not give rise to a consideration relevant to the question of construction; rather, it was a consequence of and premised upon his Honour's answer to the question of construction.
48 More generally, it seems to me that the nature and purpose of a rent review clause means that consideration of whether a particular construction is unjust or unreasonable will often be of little assistance. The reasons for that were explained by Ipp JA in ADC Buildings as follows [21] - [23]:
In United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 (cited by Gleeson CJ in GR Mailman and Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80 at 86) Lord Salmon said (at 948):
[A rent review clause] is for the benefit of the tenant because without such a clause he would never get the long lease which he requires; and under modern conditions, it would be grossly unfair that he should. It is for the benefit of the landlord because it ensures that for the duration of the lease he will receive a fair rent instead of a rent far below the market value of the property which he demises. Accordingly the landlord and the tenant by agreement in their lease provide that at stated intervals during the term, the rent should be brought up to what is then the fair market rent. The revision clause itself lays down the administrative procedure or machinery by which the fair market rent shall be ascertained.
I accept that fairness, to the extent described by Lord Salmon, would ordinarily be the general purpose underlying a rent review clause. Nevertheless, the competing interests of ADC and Barana, as lessor and lessee, as to whether or not the land is to be valued without regard to encumbrances or restrictions on use, are irreconcilable. It is difficult - if not impossible - to attempt to resolve their opposing submissions on this issue by reference to fairness. The focus must be, rather on the actual meaning of the words used in their particular context.
As Giles JA in BBC Hardware Pty Ltd v Payce Properties Pty Ltd [2000] NSWCA 262; (2000) 50 NSWLR 66 at 72 noted, the normal commercial purpose of rent review provisions in long term leases is:
to keep the rent in line with current property values. Changes in the locality, in the planning instruments relevant to the land, and in the economically advantageous use of the land could be expected. No doubt the lessee would want to be protected from paying a greatly increased rent while still restricted in the use of the land. But the lessor would not want to be left with an inadequate return from land of greatly increased value. Their bargain must be found in the words they used.
49 As both Ipp JA in ADC Buildings and Giles JA in BBC Hardware observed, it is to the language of the clause in its context that attention must be directed.
50 For corresponding reasons, resort to the evident purpose of a rent review clause will often be of little assistance in resolution of a construction issue. Viewed from the tenant's perspective one might ask why rent should be paid calculated on the basis of a use not permitted by the tenant. From the landlord's perspective, however, the considerations are different. A landlord has a legitimate commercial interest in ensuring that its return on a long-term lease reflects the market value of the land based on the (possibly changing) most advantageous use of the land.
51 Programme submits that its construction of pars (iii) and (iv) is more consistent with the structure of cl 5.3(b) as a whole. As I have said, it is common ground that cl 5.3(b) should be read as if pars (ii) to (v) were subparagraphs of par (i) of that clause. Programme submitted that in those circumstances, pars (ii) to (v) were 'riders' to par (i), and that Van Gogh's submission amounts to an attempt to make par (iv) in effect a 'rider' to par (iii). I do not accept that submission. I do not think that 'rider' is an apt characterisation of the relationship between pars (ii) through to (v) with par (i), or to the relationship between par (iv) and (iii) on Van Gogh's construction. Moreover, it is, in my opinion, plain that those two relationships are quite different in character. To my mind, Van Gogh's construction is consistent with pars (ii) to (v) being construed as effectively subparagraphs of par (i).
52 Next, Programme submits that some of the other paragraphs of cl 5.3(b) reinforce or support its construction of pars (iii) and (iv). First, in written submissions Programme argues that par (ii) reinforces its construction. That paragraph requires that the rental must be assessed on the basis that the premises are available for lease to a tenant for a term equal to the term of the lease and options for renewal. However, I accept Van Gogh's submission that par (ii) serves to identify that a value is to be derived on the basis of a sitting tenant as distinct from the grant of vacant possession to a new prospective lessee and that this clause does not assist in the construction issue in this case.
53 Secondly, Programme submits that par (v) reinforces its construction because one of the covenants referred to in that paragraph is the covenant limiting the lessee's use of the premises. In my opinion, par (v) does not assist the question of construction in this case. The evident purpose of par (v) is to assume performance of all covenants (in particular those, breach of which might affect the value of the premises for the purposes of leasing), to ensure that the lessee does not get the benefit of a lower rent because of any breach of covenant on its part.
54 Thirdly, Programme points to par (vii). Programme submits that the evident purpose of this paragraph is to require the valuer to have regard to permanent improvements installed at the lessee's expense which the lessee is not permitted to remove at the expiration of the lease, and which has or may have improved the rental value of the property. Underlying that clause appears to be a basic notion that it would be unjust to the tenant, in such circumstances, to be required to pay an increased rent by reason of such expenditure. That much is accepted by Van Gogh.
55 Programme submits that if rent is to be calculated without regard to the limitations on permissible use of the premises then it will or may become difficult, if not impossible, to apply par (vii) in some circumstances. I am not persuaded that, on Van Gogh's construction, effect could not be given to this paragraph. In any event, in my opinion, any potential difficulties of application of the paragraph in some circumstances, on Van Gogh's construction, are not sufficient to provide any substantial assistance to the question of construction of pars (iii) and (iv).
56 Van Gogh submits that par (vi) supports its construction of pars (iii) and (iv). It submits that 'comparable commercial premises' under par (vi) is not, on a proper construction, limited to premises put to the same use as is permitted under the lease of the leased premises. To adopt Programme's construction, the submission continues, so as to require the valuer to assess market rent for the limited permitted use under the lease, would not be consistent with par (vi). Alternatively, Van Gogh submits that a greater degree of coherence and consistency between par (vi) and the balance of cl 5.3 is achieved by its construction of pars (iii) and (iv).
57 Programme submits that par (i), read with pars (ii) to (v), should be construed first. When that process of construction is undertaken, the question of whether, under par (i), read with pars (iii) and (iv), the valuer is limited to premises used for a permitted use under the lease is determined. Programme says that that construction will then inform the identification of what are 'comparable commercial premises' for the purposes of par (vi).
58 In support of that submission, Programme refers to the statement of Malcolm CJ in Western Australian Trustees Ltd v Poon (1991) 6 WAR 72, 80 (Pidgeon and Franklyn JJ agreeing) that the determination of whether particular premises are comparable involves the making of an expert judgment, or formation of a professional opinion, in accordance with accepted principles of valuation. However, I do not accept that that general statement controls the question I am now considering. In my opinion, it is a question of construction of cl 5.3(b), not a question for expert opinion, whether premises used for a purpose not within the permitted use clause of the lease are necessarily thereby excluded from being comparable commercial premises within the meaning of par (vi). In my opinion, on a proper construction, the answer to that question is no.
59 However, it seems to me to be an overstatement to say, as Van Gogh submits, that that means Programme's construction of pars (iii) and (iv) is inconsistent with par (vi) as so construed. I do accept that, to an extent, Van Gogh's construction results in a greater degree of coherence and consistency between par (vi) and par (i) read with pars (ii) to (v). However, to my mind, it is not a matter of significant weight. If I were wrong in my construction of par (vi) it would not alter my construction of pars (iii) and (iv).
The proper construction of pars (iii) and (iv)
60 I return to the language of pars (iii) and (iv). For the reasons I have given, it seems to me that the languge of the paragraphs is the consideration of greatest assistance in the resolution of this construction issue.
61 As the submissions of Programme emphasise, the ordinary meaning of par (iii) is that the current open market annual rental value is to be assessed on all of the terms and conditions contained in the lease.
62 However, as Van Gogh submits, a construction involving the qualification of an earlier general provision in apparently absolute terms by reference to a subsequent provision containing a more particular statement is a familiar judicial technique. For the reasons that follow, that seems to me to reflect the proper construction of pars (iii) and (iv).
63 Paragraph (iv) provides that the best current open market annual rental value that can reasonably be obtained for the leased premises is to be derived 'on the highest and best use for the leased premises'. The phrase 'highest and best use' is not used in ordinary non-legal language. It is a well recognised concept in the context of the law respecting valuation. It was described by Biscoe J in Commonwealth Custodial Services Ltd v Valuer General [2008] NSWLEC 310 [9] as 'hallowed by usage'. In essence, it means the most advantageous and valuable purpose for which land can be used.
64 The longstanding and well-established meaning of the notion of 'highest and best use' is reflected in the following passages.
65 In Commonwealth Custodial Services Ltd as Trustee for Burwood Trust Fund v Valuer General (NSW) [2006] NSWLEC 400; (2006) 148 LGERA 38, Biscoe J said as follows [14] - [15]:
In my opinion, under s 6A(1) land must be valued on the basis that the hypothetical purchaser is purchasing the land for the purpose of its highest and best use, which may not be its current use. 'The law is quite plain that under the Valuation of Land Act the unimproved value of land must be based upon the best or most profitable potential use and if the land was legally capable of being subdivided for residential purposes... it was proper to value it on a subdivisional basis': Spicer v Valuer-General (1963) 10 LGRA 319 at 320 per Else-Mitchell J. In Stubberfield v Valuer-General [1991] 1 Qd R 278 at 283 Carter J said: 'It is also a well recognised principle that land be valued for its highest and best use. What it can best be used for will be reflected in its true market value which takes account of any detriment the land possesses relevant to its use as well as any potential it has for its present or other use. Again the relationship between value and land use is immediately apparent'. In Goode v Valuer-General (1979) 22 SASR 247 at 256, 61 LGRA 424 at 434 Wells J said that: 'The sale referred to in the definition of unimproved value is a sale of the land in a market where at least some of the potential buyers are interested in making a use of the land that will realise the highest price'. Similarly in relation to compulsorily acquired land, 'It is now settled, and for good reason, that a dispossessed landowner should be compensated for the value of his or her land on the basis of its highest and best use': Boland v Yates Property Corporation Pty Ltd [1999] HCA 64; (1999) 167 ALR 575 at 649 [271] per Callinan J.
There is no statutory definition of _'_highest and best use'. It has been described in the High Court as 'the most advantageous purpose for which [the land] was adapted': Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418 at 441 per Isaacs J. It 'is the present value alone of such advantages that falls to be determined': Cedar Rapids Manufacturing and Power Co v Lacoste [1914] AC 569 at 576 per Lord Dunedin. In Park v Allied Mortgage Corporation Ltd (FCA, 5 July 1995, unreported) Hill J said at [70]: 'As Spencer's case itself makes clear the valuation must proceed by reference to the best use of the property. For this purpose the valuer will take into account not only the present use to which the land is applied, but any more beneficial use to which it may reasonably be applied. This is the process which a purchaser negotiating to purchase the property would undertake. Thus, it is not inappropriate in valuing property to take into account a potential development of the property, for among the range of hypothetical purchasers can be assumed to be a person who would undertake such a development as would maximise the usage of the land'. In Adelaide Clinic Holdings Pty Ltd v Minister for Water Resources (1988) 65 LGRA 410 at 415 (SC/SA) Jacobs J said:
Common experience shows that land ideally suited for commercial development will fetch a higher price per unit of area than residential land, but it does not follow that the highest and best use of all land is a commercial use, for the highest and best use means exactly what it says - the most advantageous use of the subject land having regard to planning and all other relevant factors affecting its present and future potential. The first task of the valuer is to determine what that use is and then to value the land on that basis. It is not appropriate to determine the highest and best use by reference only to value.
66 In GWR v VAR [2006] FamCA 894; [2006] FamCA 894; (2006) 36 Fam LR 237 [52] - [54] the Full Court of the Family Court (Bryant CJ, Finn & Coleman JJ) said:
In our view, the wife's intention in relation to the property was not relevant to the issue of fact his Honour was required to determine, namely its value. The passage relied upon by Counsel for the husband in Spencer v Commonwealth [1907] HCA 82; (1907) 5 CLR 418 is relevant in this context. Also relevant for present purposes is the reference to the valuation of land 'for the most advantageous purpose for which it was adapted' (Spencer at 441) which the learned authors, Rost RO & Collins HG, of Land Valuation and Compensation in Australia, 3rd ed, Australian Institute of Valuers, 1984 at 90 suggest gave rise to the 'principle' which is known widely as 'valuation for highest and best use'. The learned authors suggest at 90 that:
Recognition of the willing-selling-willing-buyer concept necessarily involves valuation for the highest and best use for which the land is adapted. The prudent and well-informed vendor (whose existence must be assumed) would not willingly part with his land for a price less than that appropriate to its highest and best use; and the well-informed buyer would not expect to be able to purchase it for less. Each party would take into account 'not only the present purpose to which the land is applied, but also any more beneficial purpose to which, in the course of events at no remote period it may be applied, just as an owner might do if he were bargaining with a purchaser in the market. This is the mode in which the land would be valued.' (Isaacs J in the Spencer case.)
The term 'highest and best use' appears to derive from the observation of Isaacs J in Spencer that:
... whatever the property might have fetched as a future factory site, the highest value of the land was for workmen's cottages.
The principle of 'highest and best use' finds repeated expression throughout the authorities relevant to the valuation of real property (see Brisbane City Council v The Valuer-General for the State of Queensland [1978] HCA 40; (1978) 140 CLR 41; Housing Commission of New South Wales v San Sebastian Pty Ltd & Others [1978] HCA 28; (1978) 140 CLR 196; and The Valuer-General v Fenton Nominees Pty Ltd [1982] HCA 46; (1982) 150 CLR 160. The principle was succinctly stated by Pullin J in Flotilla Nominees Pty Ltd v Western Australian Land Authority [2003] WASC 122; (2003) 129 LGERA 65; [2003] at paragraphs 18 and 19:
The test of market value is well known. It is what the hypothetical purchaser desiring to purchase the land would have had to pay for it on the date of resumption to a hypothetical vendor willing to sell it for a fair price but not desirous to sell: Spencer v Commonwealth [1907] HCA 82; (1907) 5 CLR 418.
Regard must be had to every element of value which the lands possess. Every such element must be taken into consideration insofar as they increase the value to the owner of the land: Minister of State for Home Affairs v Rostron [1914] HCA 66; (1914) 18 CLR 634 at 637. In short, regard should be had to the highest and best use of the subject land, meaning the most advantageous use of the subject land having regard to planning and all other relevant factors affecting its present and future potential: Adelaide Clinic Holdings Pty Ltd v Minister for Water Resources (1988) 65 LGRA 410 at 415.
67 See also Hyam A, The Law Affecting Valuation of Land in Australia (3rd ed, 2004), 122 - 124.
68 Where parties to a contract prepared by lawyers use a term with a settled meaning, or a legal term of art, then unless the context suggests otherwise, it may be taken that they intended to adopt that meaning for the term they used in their instrument: ADC Buildings [48] - [52]; Lewison [5.08]; and, in the context of insurance contracts, McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 [74].
69 The parties' use of the phrase 'highest and best use' seems to me to engage this principle of construction.
70 Programme submits that its construction involves giving the term 'highest and best use' its ordinary meaning, but applying that meaning only within a limited sphere because of par (iii) of cl 5.3(b). It submits that par (iv) means the highest and best use of the premises from within the use or uses that are permitted as at the review date. In response, Van Gogh submits that on a closer analysis Programme's construction means that par (iv) does no work, or alternatively very little work.
71 Those submissions invite closer attention to the question of how par (iv) operates if Programme's construction is adopted.
72 Van Gogh submits that a useful starting point is to consider the position if par (iv) were not included in par 5.3(b). Programme submits that that is the wrong question to ask, suggesting that it is not useful to speculate why the draftsman included any particular criterion. I do not accept Programme's submission. To inquire as to what the position would be absent a provision, seems to me to be a legitimate way to test whether that provision does any work.
73 At the time the parties entered into the first lease they would have contemplated as possibilities that, by the time of a rent review, Van Gogh either had not granted any consent to a different use, or had done so (on one or more occasions). It is, I think, useful to consider the operation of par (iv) in each of those two alternative scenarios.
74 Where, by the time of a rent review, Van Gogh had not given any consent to a different use of the premises, it is difficult to identify any operation for par (iv) if Programme's construction of pars (iii) and (iv) is adopted. On this scenario, there is, under the lease, a single permitted use: an indoor sports centre. Programme points out that there may be different species of use within that permitted use class. For example, the premises could be used solely for indoor cricket. Programme submits that, if that occurred, par (iv) would make it clear that in assessing rental value, the valuer must have regard to the highest and best use, namely use as an indoor sports centre generally, and the valuation is not to be restricted to use as an indoor cricket centre. However, to my mind, the same conclusion is clear beyond any reasonable doubt in the absence of par (iv). Paragraph (iii) requires that a valuer take into account the best market rental that can be obtained 'on the terms and conditions of the lease'. Those terms and conditions involve use as an indoor sports centre. There could be no justification for the valuer restricting himself or herself to consideration of use for an indoor cricket centre (assuming that the broader use for an indoor sports centre might support a higher valuation).
75 Alternatively, Programme submits that par (iv) should be viewed as having been inserted by the parties out of an abundance of caution, and that it should be considered to do some work notwithstanding that it might serve only to confirm what would otherwise be the position on ordinary valuation principles. I will return to that submission after I have considered the second scenario.
76 In the second scenario the landlord has, by the review date, consented to one or more different uses of the premises. Van Gogh submits that, in that scenario, if par (iv) were excluded from cl 5.3(b), ordinary principles of valuation would anyway require the valuer to select the most remunerative of the permitted uses in deriving the best current open annual market rental value that can be reasonably obtained. The subsequent consent by the landlord to a different use is not, strictly speaking, a 'term and condition' contained in the lease within par (iii). Nonetheless, I accept Van Gogh's submission in this regard. The considerations set out in par (i) to (vii) are not exhaustive. In my opinion, the valuer could have regard to any subsequent consent to a different use of the premises and would then be required to select the most remunerative of the permitted uses. That is because the valuer's task under cl 5.3(b) is to determine the 'best' rent reasonably obtainable.
77 Programme submits that it is possible to postulate scenarios where some complexities may arise because conditions may be attached to consent by the landlord in relation to a different use. For example, consent to a different use may apply to part only of the premises and may be conditional upon keeping a stated business open for stipulated hours. I accept that such possibilities may be postulated. Whether such may have been within the contemplation of the parties when they entered into the lease is open to doubt. However, even if that is accepted, I am not persuaded that such possibilities provide a satisfying explanation for the inclusion by the parties of par (iv) in cl 5.3(b).
78 I accept that, when construing contracts, some caution is required in applying the maxim that all words of a contract should be construed as doing some work: see, in this regard, Lewison [7.03]. In some contractual contexts the conclusion is readily available that parties have included certain words only out of an abundance of caution. However, in the context of cl 5.3(b) I am not persuaded that inclusion out of an abundance of caution provides a satisfying explanation for the inclusion of par (iv), using the legal term of art 'highest and best use'.
79 On Programme's construction of pars (iii) and (iv), I am unable to identify any practical operation for par (iv). To put it another way, on Programme's construction cl 5.3(b) would seem to me to operate in the same way as it would if par (iv) had not been included. That conclusion seems to me to provide strong support for Van Gogh's construction of pars (iii) and (iv).
80 Even if, on Programme's construction, par (iv) can be seen to do some work, that work seems to me to be so little and so removed from the core meaning of 'highest and best use' that it does not reflect the parties' intention in including par (iv) in cl 5.3(b).
81 Programme submitted that a ground for preferring its construction to Van Gogh's construction is as follows. Van Gogh's construction is said to render pars (iii) and (iv) inconsistent while Programme's construction merely involves a qualification or modification of the operation of par (iv). In support of that submission Programme relies upon the following statement of Bingham LJ in Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565, 575 (cited with approval in Price Waterhouse v University of Keele [2004] EWCA Civ 583 [18]) as follows:
It is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses.
82 I do not think this passage is of assistance to the resolution of this case. In Pagnan it was necessary to identify whether there was an inconsistency or conflict between the general conditions and the special conditions because there was a provision in the contract to the effect that where there was a conflict, the provisions of the special conditions prevailed. That is why the court drew the distinction between inconsistency and qualifying or modifying the effect of another term. In any event, I do not think that there is any significant difference in the kind of reading down invited by Programme and that invited by Van Gogh. Both constructions endeavour to resolve the tension between the two paragraphs by reading one of them down. Van Gogh's construction does so by reading the general words of par (iii) as being subject to the provision on the specific consideration in par (iv). Programme's construction does so by substantially diminishing the sphere of what would naturally be the ordinary operation of par (iv).
83 Further, I am not persuaded that Van Gogh's construction involves any greater degree of violence or surgery to the words of pars (iii) and (iv) than does the construction advanced by Programme. To the extent that there is any difference in that regard, that difference does not, to my mind, outweigh the matters to which I have already referred which favour Van Gogh's construction.
(a) the use by the parties of the legal term of art 'highest and best use';
(b) the natural and ordinary meaning of the phrase 'highest and best use';
(c) the difficulty of identifying any operation for par (iv) if Programme's construction of pars (iii) and (iv) is adopted; and
(d) my conclusions that none of the structure of cl 5.3(b), its evident purpose, the other paragraphs of the subclause, or arguments based on unreasonableness or injustice of the result, provide any significant assistance to the question of construction;
85 I prefer Van Gogh's construction of pars (iii) and (iv).
86 For the reasons I have given, Programme's claim for a declaration should be dismissed with costs. I will hear from the parties as to the precise form of orders and as to costs.
ADC Buildings Pty Ltd
Barana Properties
(1973) 129 CLR 99
(1996) 65 SASR 409
(2000) 50 NSWLR 66
(1987) 8 NSWLR 642
(2006) 148 LGERA 38
(2006) 36 Fam LR 237
(2008) 234 CLR 151
(2002) 27 WAR 287
(2006) 156 FCR 1
(2001) 210 CLR 181
(2000) 203 CLR 579
(2004) 218 CLR 451
(1992) 10 WAR 109
(1998) 194 CLR 355
(2004) 219 CLR 165
(1991) 6 WAR 72
(2004) 218 CLR 530
(1991) 24 NSWLR 80
(1979) 22 SASR 247
(1999) 167 ALR 575
(1907) 5 CLR 418
(1978) 140 CLR 41
(1978) 140 CLR 196
(1982) 150 CLR 160
(2003) 129 LGERA 65
(1914) 18 CLR 634