Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Practice and procedure - Appeal from summary judgment - Whether option to renew lease validly exercised - Whether appellants have arguable defence to claim - Turns on own facts

Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552

Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256

Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87

Spencer v The Commonwealth of Australia [2010] HCA 28; (2010) 241 CLR 118

Whitegum Petroleum Pty Ltd v Bernadini Pty Ltd [2010] WASCA 229

1 JUDGMENT OF THE COURT: This is an appeal from a decision of Master Sanderson who ordered that summary judgment be entered for the respondents for declarations that the first-named appellant (Sutton Investments) had validly exercised an option to renew the lease of a property from the respondents and that an enforceable lease of the property by Sutton Investments existed as at 1 July 2015.

2 The appellants contend that the master erred in finding that Sutton Investments had no arguable defence to the respondents' claim. As the appeal notice was served out of time, the appellants require an extension of time to appeal.

3 By a deed of lease dated 28 August 2007, Sutton Investments leased from the respondents a property described as Suite 3, Mandurah Legal Centre, 4 Sutton Street, Mandurah. The lease was for a term of two years, commencing 1 July 2007, with three options to renew the term for periods of one year each. The second-named appellant (Mr Reyburn), who is a director of Sutton Investments, conducted a legal practice from the leased premises and guaranteed the obligations of Sutton Investments.

4 Under the lease, the respondents were entitled to review the rent on 1 July 2008 and, if the options were exercised, on the first day of July 2009, 2010 and 2011 respectively (schedule, item 8).

5 The lease provided (relevantly) that the options to renew were exercisable by Sutton Investments giving notice to the respondents not earlier than six months and not later than three months, before the end of the then current term (cl 20.1). An extension of the lease would be on the same terms as the lease except that the rent applicable at the commencement date of the extended lease would be the same as the rent immediately prior to the extension unless the commencement date of the extended lease was also a rent review date, in which case the rent was subject to review under cl 2 of the lease (cl 20.3).

6 The lease provided, in effect, that if the respondents elected to review the rent on a rent review date they were required to give Sutton Investments notice of the proposed rent (cl 2). If Sutton Investments disagreed with the proposed rent, it was to be determined by a valuer appointed by the president of the Australian Property Institute (Inc) Western Australian Division. Pursuant to cl 2.8, on a rent review the rent was not to be reduced below that payable immediately prior to the rent review; that is, the rent review was subject to what is commonly known as a 'ratchet clause'.

7 The term of the original lease was extended by agreements made in each of May 2009, May 2010 and May 2011, with the result that it was due to terminate on 30 June 2012.

8 On 4 May 2012, the parties entered into a deed of extension of lease (the deed) pursuant to which Sutton Investments was granted an extension of the lease for a period of three years commencing on 1 July 2012 (cl 2.0), with an option to renew the term for a further period of three years commencing on 1 July 2015 (cl 8.0(d)). The deed provided for annual rent reviews, in the manner specified in the original lease, on the dates contained in the schedule to the deed. Those dates were 1 July 2013 and 1 July 2014. As the deed did not provide for a rent review on 1 July 2015, if the option to renew the term on that date were to be exercised, the rent for the extended term would be the rent applicable as at 30 June 2015.

9 In an affidavit sworn on 20 November 2015 in opposition to the application for summary judgment, Mr Reyburn said that, in January 2015, the respondents' managing agent, Mr Brian Matthews of H & N Perry, wrote to him enquiring whether Sutton Investments was proposing to exercise the option to renew the lease for the further term of three years. Shortly afterwards Mr Reyburn had a discussion with Mr Matthews. He told Mr Matthews that he was interested in renewing the lease but thought the existing rent of about $320 per square metre was too high. He told Mr Matthews that the rent would need to be sorted out. There was no other discussion of the rent. Mr Reyburn said that Mr Matthews subsequently sent him the necessary documents for renewal of the lease.

10 On 20 January 2015, Mr Reyburn sent to Mr Matthews a duly executed notice of exercise of the option for a term of three years from 1 July 2015 (notice of exercise). The covering letter, signed by Mr Reyburn, simply said:

Enclosed is the signed notice of exercise of lease.

11 The notice of exercise was, relevantly, as follows:

We, [Sutton Investments] ... and [Mr Reyburn] [guarantor] being the tenant of the above premises under the Lease dated 28 August 2007 made between [the respondents] and [Sutton Investments] and [Mr Reyburn] and four (4) subsequent Extensions of Lease dated 14 May 2009, 18 May 2010, 27 May 2011 and 4 May 2012 respectively:

1. GIVE NOTICE THAT pursuant to the Lease we exercise our option to renew the Lease for the further term of three (3) years commencing on 1 July 2015 and expiring on 30 June 2018; and
2. ACKNOWLEDGE AND AGREE THAT:
   1. this exercise of the option constitutes a binding and enforceable agreement to Lease the above premises for the further term specified in item 1 and that we are bound by the terms and conditions of the Lease for that further term including the review of the annual rent at the commencement of that further term (if not yet agreed) and during that further term; and
   2. you will arrange for your solicitors to prepare a deed of extension of the Lease for the further term pursuant to my/our exercise of the option and that we will execute that deed of extension of Lease and return it to you within 7 days of our receipt of that deed.
3. AGREE to ensure that the guarantors under the Lease execute the deed of extension of Lease prior to returning that deed to you pursuant to item 2(b) above.

12 Also enclosed with the letter was a document in the following form, signed by Mr Reyburn:

SUITE 3, 4 SUTTON STREET MANDURAH

NOTICE OF EXERCISE OF OPTION

ACKNOWLEDGEMENT AND AGREEMENT OF GUARANTOR

I, John Henry Reyburn, of 4 Sutton Street Mandurah, being the guarantor of the above tenant's obligations under the Lease acknowledge and agree that:

1. My guarantee and indemnity under the lease applies to the agreement to Lease the above premises for the further term constituted by the above exercise of option and to the formal deed of extension of Lease to be prepared pursuant to that exercise; and
2. I will exercise the deed of extension of Lease within 7 days of my receipt or [sic] that deed.

13 Mr Reyburn said that the notice of exercise he sent to Mr Matthews was accompanied by a 'With Compliments' slip, on which he had handwritten the following:

Brian

Just to confirm our recent discussion, I am not happy with the current rent; it is now way above market rent; we must agree on the rent for the next three year term if I am to proceed.

14 Mr Reyburn said that, in about mid to late May 2015, he entered into discussions with a third party concerning the sale of his legal practice. Both he and the third party had discussions with the managing agent about a possible assignment of the lease. As it turned out, the assignment to the third party did not proceed.

15 On 26 June 2015, Mr Reyburn, on behalf of Sutton Investments, wrote to the respondents in the following terms:

As the conditions (rent to be agreed, variation of term to be agreed) upon which the exercise of the option was made have not been accepted by the landlords:

1. Notice of exercise of the option by the tenant is now withdrawn.
2. Notice is given of the tenant's intention not to further renew the lease which will now expire 30 June 2015.
3. Notice is given that the tenant will hold over subject to the terms of the existing lease as from the 1st July 2015 as a monthly tenant.

16 The respondents' solicitors responded by a letter dated 2 July 2015 in which they said that the withdrawal of the notice of exercise was rejected by the respondents and the respondents would hold the appellants to the renewal of the lease.

17 Mr Reyburn said that, in July and August 2015, Sutton Investments paid rent and variable outgoings on the basis that the lease term had expired and it was holding over. The respondents subsequently caused the locks on the premises to be changed and advertised for a new tenant. Mr Reyburn said that if there was then an extant lease between Sutton Investments and the respondents, by doing so the respondents repudiated it.

18 On 14 July 2015, the respondents commenced proceedings by a writ of summons endorsed with a statement of claim. They sought:

(1) A declaration that the option contained within the Deed of Extension of Lease dated 4 May 2012 has been validly exercised.

(2) A declaration that a new lease now subsists between the [respondents] as lessor and [Sutton Investments] as lessee, and the [Mr Reyburn] as guarantor, for a period of 3 years commencing 1 July 2015 and otherwise on the terms and conditions contained in the Lease and Deed of Extension of Lease dated 4 May 2012.

19 On 30 October 2015, the respondents applied for summary judgment. That application came on for substantive hearing before the master on 28 January 2016. The master found the appellants had no arguable defence to the claim and, relevantly, made declarations as follows:

1. It is declared that that the option contained within the Deed of Extension of Lease dated 4 May 2012 has been validly exercised.
2. It is declared that as at 1 July 2015 a new lease subsisted between the [respondents] as lessor and the [Sutton Investments] as lessee and the [Mr Reyburn] as guarantor, and otherwise on the terms and conditions contained in the Lease dated 28 August 2007 and the Deed of Extension of Lease dated 4 May 2012.

20 The master gave brief ex tempore reasons. He noted the legal principle that the exercise of an option must be unequivocal and concluded that it was 'difficult to imagine a more unequivocal exercise of an option' than the notice given by Sutton Investments. He dismissed an argument by the appellants, based on the contents of the 'With Compliments' slip, that the exercise of the option was conditional on agreement being reached on the rent.

21 The master found that the option had been exercised by Sutton Investments and that, as at 1 July 2015, there was a valid and binding lease, which the appellants had subsequently repudiated by their conduct. That repudiation had not been accepted by the respondents, who chose to enforce the agreement and were consequently entitled to the declarations sought, amended to reflect the fact that the lease was in existence as at 1 July 2015. The master observed that events after that date were matters for another day.

22 On 11 February 2016, an appeal notice was filed on behalf of the appellants. For reasons that are explained in an affidavit of the appellants' solicitors, it was not served until 1 March 2016.

The learned Master erred in fact and law in failing to conclude that the appellants have an arguable defence to the respondents' claim, namely that [Sutton Investments] did not validly and effectively exercise the option to renew the lease.

24 The principles to be applied on an application for summary judgment are well-established. Summary judgment will be granted only when there is no real question to be tried. The power to order summary judgment is one that should be exercised with great care: Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87, 99. It is only in the clearest of cases, when there is a high degree of certainty about the ultimate outcome of the proceedings if it went to trial, that summary judgment ought properly be granted: Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552 [57]; Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256 [46]; Spencer v The Commonwealth of Australia [2010] HCA 28; (2010) 241 CLR 118 [24], [53] - [55].

25 The relevant principles to be applied in determining whether an option has been validly exercised were stated in Whitegum Petroleum Pty Ltd v Bernadini Pty Ltd [2010] WASCA 229 [32], as follows:

The test for determining whether a lessee has exercised an option to renew the term of the lease is whether the purported exercise clearly and unequivocally manifests an election to enter into a lease for the renewed term in accordance with the option. See Ballas v Theophilos (No 2) [1957] HCA 90; (1957) 98 CLR 193, 196 (Dixon CJ); Quadling v Robinson [1976] HCA 31; (1976) 137 CLR 192, 200 - 201 (Gibbs J); Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673, 683 (McHugh JA). This test and its application have been elaborated upon in numerous authorities.

If the lessee sends the lessor a letter purporting to exercise the option to renew, the letter is not to be evaluated in isolation, by reference only to the words used. It must be evaluated in the context of the circumstances of its receipt, including the dealings between the parties. See Carter v Hyde [1923] HCA 36; (1923) 33 CLR 115, 126 (Isaacs J); Prudential Assurance (677) (Kirby P).

If the lessee purports to exercise the option to renew by letter, proof of the election to enter into the lease for the renewed term depends on whether a hypothetical reasonable person who received the letter, and was aware of all the circumstances of its receipt including the dealings between the parties, would fairly understand the option to be exercised. See Jones v Daniel [1894] 2 Ch 332, 335 (Romer J); Carter (126) (Isaacs J); Prudential Assurance (683) (McHugh JA).

26 The sole question on the appeal is whether, on the material before the master, Sutton Investments has an arguable defence to the respondents' claim. That is not, of course, a high threshold. The answer depends upon whether, having regard to the circumstances of the receipt of the notice of exercise by the respondents, including the prior dealings between the parties, Sutton Investments clearly and unequivocally manifested an election to enter into a lease for the renewed term in accordance with the option.

27 The notice of exercise itself was in unambiguous terms. Senior counsel for the appellants did not contend otherwise. He submitted, however, that the statement in the accompanying 'With Compliments' slip that the rent had to be agreed if the term was to be renewed was inconsistent with the terms of the option and was plainly a precondition to the renewal of the term. It was not a matter that went to how the renewed lease would or might be performed but was a condition that had to be satisfied before a lease for the renewed term came into existence. Sutton Investments had not therefore clearly and unequivocally manifested an election to enter into a lease for the renewed term in accordance with the option; that is, it had not, or arguably had not, exercised the option.

28 Counsel for the respondents argued that in light of the unequivocal terms of the notice of exercise and the express acknowledgment that it constituted a binding and enforceable agreement, Sutton Investments had clearly manifested an election to exercise the option. It was submitted that in assessing how a reasonable recipient would understand the notice of exercise and the 'With Compliments' slip, it was a relevant circumstance that the notice of exercise had been executed on behalf of Sutton Investments by Mr Reyburn, an experienced lawyer who had drafted the lease and the extension of lease. In the circumstances, it was evident that Sutton Investments had elected to exercise the option and by the 'With Compliments' slip was doing no more than seeking to negotiate a lower rent without putting at risk the validity of the exercise of the option.

29 In our respectful view, the master erred in finding that the appellants did not have an arguable defence. While it is the case that the notice of exercise was expressed in unequivocal terms, it was not in issue that it has to be read together with the 'With Compliments' slip that Mr Reyburn attached to it when he returned the executed form to the respondents' agent. In our view, the statement in the 'With Compliments' slip that the parties 'must agree on the rent for the next three year term if [Sutton Investments is] to proceed [to enter into a lease for the extended term]' is arguably inconsistent with an intention to enter into a lease for the renewed term in accordance with the option; that is, a lease on the existing rent. It is arguable that in the circumstances a reasonable person receiving both documents would have understood that Sutton Investments did not intend to enter into a lease for the renewed term in accordance with the option, but would enter into a lease for the further term only if agreement could be reached on a lower rent. That is, it is arguable that Sutton Investments had not clearly and unequivocally manifested an election to exercise the option.

30 We should add that there was, of course, no means by which, under the terms of the deed, a lower rent could come about except by agreement. There was, if the option were exercised, no provision for a rent review and, in any event, the ratchet clause in the rent review provisions of the lease would have precluded a reduction in the rent by such a process.

31 The respondent placed considerable store by the fact that Mr Reyburn, who had executed the notice of exercise, was a lawyer. In other words, the respondent relied, at least to this extent, on extrinsic evidence. The fact that Mr Reyburn was a lawyer arguably forms part of the circumstances in which the understanding of a hypothetical reasonable person who received the correspondence is to be assessed. It is arguable that a reasonable person would understand the execution of a legal document by a lawyer to indicate that the document was to have effect according to its clear and unequivocal terms.

32 On the other hand, it may be argued that the fact that Mr Reyburn is a lawyer is not necessarily a factor of great weight particularly in circumstances where he was not the author of the notice of exercise. That document, which bears the hallmarks of a standard form document, was prepared by or on behalf of the respondents and simply sent to Mr Reyburn for execution. It may be argued that while it would have been open to Mr Reyburn to alter the document or to prepare his own version, little weight should be given to the fact that he instead chose to make handwritten comments on an accompanying 'With Compliments' slip. Evidence on such matters might arguably be admissible.

33 A summary judgment application is not the occasion to resolve which argument is to be accepted, particularly where not all of the relevant facts have been agreed. Nothing in these reasons should be taken to anticipate the outcome of the present proceedings. For present purposes it is sufficient to conclude that this is not one of those very clear cases where the court is able to make a certain and concluded determination that the respondent would succeed. Summary judgment should not have been entered for the respondents.

34 It was common ground on the hearing of the appeal that if the appeal were upheld, the matter should be remitted to the general division to proceed to trial. It appears that if it was determined that there is a triable issue as to whether the option was exercised by the notice of exercise, there are other issues between the parties that may need to be resolved, including whether the 'With Compliments' slip was in fact sent to the respondents, a matter that the respondents apparently dispute.

35 We would extend the time to appeal, allow the appeal, set aside the orders of the master and remit the matter to the general division.

1. The time within which the appeal may be commenced be extended to 1 March 2016;
2. The appeal be allowed;
3. The orders of the master of 28 January 2016 be set aside;
4. The appellants have leave to defend; and
5. The matter be remitted to the general division.