Alcatel Australia Limited v Scarcella & Ors

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40218/01 EQ 3368/95 BEAZLEY JA STEIN JA DAVIES AJA Tuesday, 13 November 2001 ALCATEL AUSTRALIA LIMITED v Francesco SCARCELLA & Ors The appellant is the lessee of a custom built commercial building at Alexandria. The respondents are the lessors of that property, and there is a lease in place between the parties, dated 15 December, 1969, with a term of 50 years. Three issues were raised on appeal. The first was the construction of a rental review clause, which required that the valuer was to assume a hypothetical lease. At issue was whether the valuer could conclude that there was no market for the lease proposition and whether or not the real market could be taken into consideration. The second issue before the court was the construction of the repair covenant in the lease. This arose out of the corrosion of the buildings' aluminium window frames and the respondents' request that they be repaired and sealed to prevent recurrence of such corrosion. The referee made a decision based on conflicting expert evidence, however Austin J struck out a number of paragraphs of the referee's report and it was submitted that he was not entitled to do so. The third and final issue involved the discontinuance of a claim by the respondents before a referee. This arose out of the appellant's removal of sunscreens mounted on the building and the respondents' notice before the referee that they be replaced. The respondent's withdrew this claim before the referee however the referee, on the submission of the appellant, still answered the question referred to him by the court on that issue. The appellant, upon being served by the respondents with a new notice of default in relation to the sunscreens, argued that the referee's determination of the matter was res judicata . It was also submitted that the respondents could not unilaterally withdraw a claim before a referee, but rather leave of the court was required.

The rent review clause provides that the valuer must envisage a hypothetical willing lessee and lessor and determine the rental at which they would reach agreement.

Austin J did not err in declining to make a declaration that the valuer should have regard to the market. Dennis & Robinson Ltd v Kiossis Establishment (1987) 282 EG 857, F R Evans (Leeds) ltd v English Electric Co Ltd (1977) 36 P & CR 185, British Airways PLC v Heathrow Airport Ltd [1992] 1 EGLR 141 considered.

Austin J was correct to determine that the valuer could not conclude there was no market for the hypothetical lease proposition. The rent review clause required the existence of an assumed market.

Austin J concluded that it was permissible for the valuer to take into account that no other bidder for the lease would be likely. This, and other indications in his reasons, is indicative that his Honour was saying that regard could be had to the real market.

Austin J was correct to determine that the hearing before the referee was not the 'hearing of the proceedings on the claim' for the purposes of Part 21 Rule 2. The referee reports to the court after the hearing and at the time of the hearing of the claim the court considers this report for adoption. If the court adopts the referee's report, it does not follow that the hearing before the referee is to be treated as the 'hearing of the proceedings on the claim'.

It would not be conducive to the efficient use of alternative dispute resolution means if parties were not entitled to withdraw claims before a referee.

In respect to the appellant's claim of estoppel, there was no judgment nor any relevant final orders in place on the issue. The respondents in withdrawing part of their claim in their notice of default did not withdraw their cause of action. That a party issues an incorrect notice cannot mean that it is forever barred from being able to issue a new notice seeking the removal of an alleged breach. 8. Res Judicata and Anshun estoppel do not arise.

9. His Honour was correct in not adopting paragraph 15.8 of the referee';s report as the claims had been withdrawn. He was also correct in rejecting the appellant's application for an injunction restraining the respondents from taking an action on their fresh notice of default.

10. The discretion accorded to the Court in reviewing a referee's report in order to determine whether to adopt, vary or reject it, will normally be confined to questions of law and the application of legal standards to the facts. In such a circumstance, a judge may consider and determine that matter afresh. In relation to paragraphs 16.5 and 16.7 of the referee's report, the factual findings of the referee was open on the evidence and on the referee's expertise. What was said by the referee in the disputed sentences was not an error in principle, some absence or excess of jurisdiction, a patent misapprehension of the evidence or manifest unreasonableness in fact-finding. There was no reason for these sections to be rejected and his Honour should not have intervened to exclude them. Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 applied.

11. When paragraphs 16.5 and 16.7 are reinstated in the referee's report, the referee found that there was no functional defect with the window frames but rather a cosmetic problem. Upon applying the amended Brownie test, it was open to the referee to find that a reasonably minded owner would not replace the windows. The lack of regular cleaning of the window frames had only a cosmetic effect and therefore there was no defect requiring repair and no breach of the appellant's covenant to maintain in good and substantial repair.

1. It is not necessary to remit the matter to the referee to determine what would have comprised reasonable maintenance.

Per Davies AJA contra:

1. On the issue of whether the windows were in a state that a reasonably minded owner would repair them, the referee had to take into account the fact that there was evidence that the windows could not be repaired in situ and that replacement might cheaper than repair. The referee, however, limited his finding to replacement and did not determine the issue in relation to the repair of the window frames.

2. As the referee did not make findings on essential aspects of the issues arising under items 145 and 146 o the notice of default, the matter should be remitted to him for further consideration and determination.

Orders:

1. Appeal allowed in part. 2. Order 4 of Austin J be set aside and a declaration that the appellant was not in breach of cl 2(c)(1) of the lease with respect to items 145 and 146 of the notice of default be substituted.
2. Each party to bear its own costs of the appeal.
3. The parties should file agree Short Minutes of Order within 7 days.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40218/01 EQ 3368/95 BEAZLEY JA STEIN JA DAVIES AJA Tuesday, 13 November 2001 ALCATEL AUSTRALIA LIMITED v Francesco SCARCELLA & Ors Judgment

1 BEAZLEY JA: I agree with Stein JA. 2 STEIN JA: Introduction 3 This appeal raises three issues:

(1) the construction of the rent review clause in the lease.

(2) the question of replacement of the window frames in the subject premises.

(3) the discontinuance of the sunscreens claim before the Referee.

Facts 4 To understand these disputed issues it is necessary to recite some relevant facts. The litigation concerns a number of disagreements between the appellant lessee and the respondent lessors, regarding a custom built commercial building at Alexandria. The lease, dated 15 December 1969, is for a term of 50 years. It was varied in 1979 when a new rent review clause was inserted. The construction of this clause is the first issue identified above. 5 The second mentioned issue arises out of the repair covenant in the lease (cl 2(c)(i)). In July 1995 the respondents served a notice of default on the appellant specifying a large number of defects and requiring their rectification. After the notice was served, the respondents commenced these proceedings. 6 By consent the court hearing the respondent's claim referred certain issues out to referees pursuant to Part 72 of the Supreme Court Rules. A lawyer (at first Mr Needham QC but replaced by Mr Brownie QC) was asked to answer certain questions about the construction of the lease, including the nature of the appellant's repair obligations. An architect (Mr Lumsdaine) was asked which of certain items under the notice of default the appellant was required to perform, having regard to the true construction of the repair covenant. 7 Mr Brownie's report was adopted by the court, after some legal questions were resolved by Windeyer J and the Court of Appeal, see Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349. 8 The matter was then returned to the Equity Division and heard by Austin J. Each side sought the adoption by the court of Mr Lumsdaine's report but with differing qualifications. 9 Austin J found that Mr Lumsdaine's report was inconsistent with the evidence tendered by the parties and contrary to legal principle. 10 The court adopted the report but excluded certain paragraphs (16.5, 16.7 and 16.8). His Honour concluded that the appellant's failure to comply with its obligations with respect to corroded aluminium window frames (items 145 and 146 in the respondents' notice of default) constituted a breach of the repair covenant. 11 This lead Austin J to make an order that the window frames be disassembled and removed to be properly treated and repaired or entirely replaced with new items. The parties are agreed that replacement would be less expensive than removal and repair. 12 The third and last issue between the parties concerns certain sunscreens which had originally been attached to the building. Apparently, and for various reasons, the appellant removed them in 1992. This was the subject of the respondents' claims in items 147 and 148 of the notice of default. Essentially these paragraphs required the replacement of the missing sunscreens or alternatively, the fitting of a new type of sunscreen system. Before the Referee the appellant contended that it had no obligation to comply with either item 147 or 148. 13 After a short adjournment, counsel for the respondents informed Mr Lumsdaine that the respondents withdrew those items. He said that while he would not pursue the items in the present proceedings, the respondents would issue a further notice with respect to the sunscreens. 14 The appellant submitted that the Referee should still answer the question referred by the court with regard to these items. 15 The Referee accepted this and answered them in favour of the appellant. 16 On 28 March 2000 the respondents served a new notice of default seeking that the appellant reinstate the sunshades originally installed. This lead to the appellant arguing that the respondents were prevented from withdrawing items 147 and 148 before Mr Lumsdaine and that the Referee's determination is res judicata. It relied on the authority of the Port of Melbourne Authority v Anshun Pty Limited (1981) 147 CLR 589. 17 Austin J held that the items 147 and 148 had been validly withdrawn and that he would not adopt paragraph 15.8 of the Referee's report because it was pointless to do so. (That is, the answer by the Referee regarding items 147 and 148). His Honour said that the case was well removed from Anshun. Accordingly, his Honour refused to grant the appellant an injunction to restrain the respondents from taking any action on their new notice regarding the sunscreens. It may be mentioned that thus far, no further action has been taken by the respondents on the new notice.

The rent review clause 18 Clause 2(a) relevantly provides: That the Lessee will during the said term pay to the Lessor … an annual rent of One hundred and forty thousand dollars ($140,000) per annum, during the period from the 1st day of January 1980 to the 31st day of December 1984 … PROVIDED ALWAYS and it is hereby agreed that at the expiration of each period of five (5) years calculated in each case from the First day of January 1980 of the term hereby granted (the date of expiration of each of such years being hereinafter referred to as the 'date of review') the annual rent of the demised premises for the period of five (5) years thence ensuing from the date of review shall be such sum as shall be agreed between the Lessor and the Lessee in writing as representing the annual market rental value of the demised premises for a term of five years as between a willing Lessor and a willing Lessee with vacant possession and taking no account of any good-will attributable to the demised premises by reason of any trade or business carried on therein by the Lessee or any subtenant and in all other respects on the terms covenants and conditions of this Lease including the provisions of this paragraph and if the Lessor and Lessee shall be unable to agree on the amount of such rent as aforesaid then and in any such case the question as soon as possible shall be referred to the decision of a qualified valuer … acting as an expert and not as an arbitrator and the decision of such person … shall accordingly be final and binding on both the Lessor and the Lessee PROVIDED FURTHER that in no event shall the annual rent payable by the Lessee to the Lessor during the residue of the term commencing on the First day of January 1985 be less than the annual rent of One hundred and forty thousand dollars ($140,000) payable during the period from the 1st day of January 1980 to the 31st day of December 1984 AND such annual rental as agreed or determined as aforesaid shall be payable … during the period of five (5)years from the date of review. 19 In addressing the construction of the clause his Honour ignored as irrelevant the fact that the appellant may receive a windfall gain. The appellant is critical of his Honour even mentioning this but, in my view, nothing turns on it. 20 His Honour commenced his reasons by noting that the clause was a 'rise and fall' clause, in that the rent may be higher or lower after the review than before, although it cannot fall below the base rent of $140,000 pa. 21 On the question of the valuer's instructions, his Honour found that the clause required the valuer to assume a hypothetical lease in which: . the lease is for a term equivalent to the remaining term of the Lease as at the date of review; . vacant possession will be given to the lessee (the assumption being, in effect, that the Lessee had moved out or had never been in occupation); . the premises are being offered in their actual condition, but on the assumption that the Lessee has performed all repair and maintenance obligations up to the relevant date; . no account is to be taken of good-will relating to the business of the lessee or any subtenant; . otherwise, the lease is on the terms and conditions of the (real) Lease, including the provision for rent review. This must mean, as a matter of construction, that the hypothetical lease proposition which is to be valued includes provisions permitting subletting with consent but limiting the use of the building to offices and associated parking … 22 Austin J acknowledged, quite understandably, the distinct element of unreality about the assumptions required to be made by the valuer. 23 Clearly the valuer must envisage a hypothetical willing lessor and willing lessee and determine the rental at which they would reach agreement. 24 The appellant contended that the valuer could not assume that there would always be a market for the hypothetical lease to be valued. The valuer may be entitled to conclude that there was in fact no market for the hypothetical lease at the time. If the valuer were to form this opinion, then no market rental could be ascertained and the new rent would be the floor rent of $140,000. 25 The appellant relied on the evidence of a valuer, Mr Learmonth, that, as a matter of practical reality, there would be no market. 26 His Honour noted that the oral submission made on behalf of the appellant to this effect was inconsistent with its written submission, which acknowledged that it would not be open to the valuer to conclude that there would be no market. Nonetheless, so the written submission ran, the valuer could conclude that the figure at which the hypothetical parties would come together was less than $140,000 pa because he considered that there would be 'little or no market'. [emphasis added] 27 At the same time, his Honour also noted inconsistencies in the submissions made on behalf of the respondents. Their oral submission was that the clause required the valuer to assume a hypothetical market of at least one buyer and one seller. By contrast, the respondents' written submission was, according to his Honour, indistinguishable from the appellant's oral submission. His Honour saw this as a somewhat strange and unusual situation which nevertheless underlined the difficulties of construction of the rental review clause. 28 Austin J rejected the appellant's oral submission. In doing so he said that cl 2(a) called for an assumption that there is a figure at which the hypothetical willing lessor and lessee will come together. He continued: It [cl 2(a)] does not allow for the valuer to conclude that in the particular circumstances there is no rental value, either because there is no actual market or for any other reason . [emphasis added] 29 His Honour said that if it was necessary for the valuer to determine whether there was a market for the hypothetical lease proposition, there would be a real possibility that he would have found that there was no market from the outset. However, it was highly implausible to suggest that commercial parties, who having entered into a 50 year lease, would have contemplated the possibility that under the rent review clause, the rent would be fixed for the base rent for the balance of the term if in fact there was no market at any review date. 30 In rejecting the appellant's written submission, his Honour indicated that the valuer must look at office rentals in Alexandria even if rental for other more common uses were higher. The hypothetical exercise to be carried out did not prevent the valuer from referring to comparable leases provided adjustments were made for differences. Comparison was an essential part of the art of valuation. The lack of marketability was not a bar to comparison. 31 After reference to the judgment of Donaldson J in F.R. Evans (Leeds) Ltd v English Electric Co Ltd (1977) 36 P&CR 185, his Honour concluded as follows: … Difficult though it may be, the task assigned to the valuer is to determine the rental value, taking into account all relevant factors. There must be a rent at which a hypothetical willing lessor and a hypothetical willing lessee will agree. It is not open to the valuer to conclude that there is no market for the lease proposition, but it is permissible for the valuer to take into account that no other bidders for the lease would be likely, in the manner described by Donaldson J. [emphasis added] 32 The valuer under the lease, who it must be remembered, is appointed as an expert and not an arbitrator, and whose decision is final, has not yet been appointed. This raises a question which troubled me during the hearing. Is the appellant's claim for declaratory relief premature? 33 Notwithstanding my misgivings, I accept that his Honour has given judgment and granted declaratory relief. In the hope that this litigation can be expeditiously concluded I proceed to consider the construction issue. To do so will hopefully assist the nominated valuer in his/her task. 34 The principal complaint of Mr Biscoe, QC, appearing on behalf of the appellant, is that his Honour refused to also declare that the valuer was entitled to have regard to the real market. 35 True it is that his Honour declined to make a declaration to this effect. However, his Honour said (in his judgment delivered on the form of orders) that he would allow his reasons to speak for themselves. 36 It is necessary, therefore, to read his Honour's reasons as a whole in order to properly understand what he was saying. When this is done, it is apparent that although his Honour was saying that the valuer could not conclude that there was no market (a position accepted by Mr Biscoe as correct), the valuer could still have regard to the real market in undertaking the exercise. 37 The relevant Orders which Austin J made are as follows: The Court declares that the determination of the rent payable under Lease 994958 for a rent review period pursuant to clause 2(a) of the Lease (as substituted by clause1 of the deed of variation of lease bearing date 13 November 1979) must take into account the matters specified in the schedule hereto. SCHEUDLE A. The hypothetical lease to which clause 2(a) of the Lease refers is one under which: (i) The term is equal to the remaining term of the Lease as at the date of review; (ii) Vacant possession will be given to the lessee (the assumption being, in effect, that the Lessee has moved out or has never been in occupation); (iii) The premises are being offered in their actual condition, but on the assumption that the Lessee has performed all repair and maintenance obligations up to the date of review; (iv) No account is to be taken of good-will relating to the business of Alcatel Australia Limited or any sub-tenant; (v) Otherwise, the terms and conditions of the (real) Lease apply, including the provision for rent review and including provisions permitting sub-letting with consent but limiting the use of the building to offices and associated parking. B. There must be assumed to exist a "market" in which there is at least one willing lessor and one willing lessee and the exigencies of individual circumstances are excluded. 38 The appellant does not complain about the content of these orders save to say that his Honour should have added an additional declaration that the valuer should have regard to the market. I should mention that the form of draft declaration handed to the court by Mr Biscoe plainly goes further and would, in my view, be unsuitable. 39 Indeed, there are good reasons why, in the circumstances, no declaration should be made by the court. The English Court of Appeal adopted this approach in Dennis & Robinson Ltd v Kiossis Establishment (1987) 282 EG 857 at 859 and 862. 40 The discussion of Donaldson J in Evans, quoted extensively by his Honour, is helpful, although great care must be taken when utilising judicial dicta on a differently worded rent review clause. Nevertheless, the thrust of Donaldson J's reasoning is apposite to the present case. 41 Dennis & Robinson, mentioned above, is another helpful authority. In that case, the rental review clause made no reference to a willing lessor and a willing lessee. Nevertheless, the Court of Appeal found it necessary to imply such a term. Fox LJ noted that the clause required a number of assumptions to be made. He continued: … The fact that those assumptions are artificial is irrelevant. That is the bargain which the parties have made. For the reasons which I have given, the clause requires the assumption of a willing lessor and a willing lessee. I do not think that the assumption of a willing lessee, any more than the assumption of a willing lessor, can be qualified by the addition of the words "(if any)". But the dispute which has arisen has, I think, some unreality about it. The assumptions are only a part of the process of computation of the full yearly market rent. It is assumed that there is a willing lessee. But the willing lessee is not going to pay more than the market requires him to pay. It is essentially a matter for the valuer to inquire into and determine the strength of the market. [at 859] 42 In British Airways PLC v Heathrow Airport Ltd [1992] 1 EGLR 141 at 144 Mummery J discussed the approach to be taken in the construction of rent review clauses. The starting point and paramount principle was as stated in Basingstoke and Deane Borough Council v Host Group Ltd [1988] 1 WLR 348 at 353 as follows: What the court is seeking to identify and declare is the intention of the parties to the lease expressed in that clause. Thus, like all points of construction, the meaning of this rent review clause depends on the particular language used interpreted having regard to the context provided by the whole document and the matrix of the material surrounding circumstances. We recognise therefore, that the particular language used will always be of paramount importance. None the less it is proper and only sensible, when construing a rent review clause to have in mind what normally is the commercial purpose of such a clause. [at 144] 43 Mummery J cautioned courts not to trespass into the territory of the valuer. He said: … It is not, however, the function of the court to answer questions or give general directions as to how the independent valuer should go about making his valuation, such as the factors to be taken into account or the weight to be attached by him to those factors … [at 144 F] 44 His Honour discussed the assumptions that needed to be made in the valuation exercise but also warned against confusing the reality with the necessary hypotheses, the latter being those expressly or impliedly agreed in the rent review clause. 45 After discussing a number of the assumptions necessary to be made, and not in dispute in this case, Mummery J referred to Jeffries v O'Neill (1987) 46 P&CR 376. He said that in that case: … the lessee failed to persuade the court that the rental value should proceed on the basis that, having regard to the access arrangements, there was, in fact, no open market for the property. The rent review clause predicated the existence of an open market for the property. The lessee could not negative that hypothesis by asserting that he was in a very special position and that, in fact, there was no open market for that property. [at 144 L] 46 In my opinion, Austin J did not err in declining to make the declaration in the terms urged by the appellant. Although his Honour rejected the appellant's submissions in a global fashion, it is apparent that he did not entirely reject them and indeed, there was much common ground between the parties on the valuer's task and exercise. 47 His Honour was undoubtedly right to say that the valuer could not conclude that there was no market for the hypothetical lease proposition. How could he since the clause required the existence of an assumed market of at least one willing lessor and one willing lessee?

48 Contrary to the submission made on behalf of the appellant, Austin J did not say that the valuer could not have regard to the real market. Indeed, his Honour's conclusion that it was permissible for the valuer to take into account that no other bidder for the lease would be likely is indicative that his Honour was saying that regard could be had to the market. I have already referred to other indications in his Honour's reasons which support such a conclusion. 49 In my opinion, his Honour did not err in failing to make the declaration sought by the appellant. Making such a declaration would be inappropriate and have the capacity to mislead the valuer in carrying out the exercise required of him under the rent review clause.

The sunscreens 50 It is convenient to turn to the third issue in dispute. The brief facts have already been set forth. The appellant submits that the respondents could not unilaterally withdraw any claim. They could only do so with the leave of the court, which was never sought. 51 Little need be said about this issue in my view. Austin J was correct to find that the hearing before the referee was not the 'hearing of the proceedings on the claim' for the purposes of Part 21 Rule 2. After the referee's hearing she or he reports to the court. At the hearing of the claim the court considers the report for adoption. At this hearing, the court may permit additional evidence to be adduced. If the court decides to adopt the referee's report, it does not follow that the hearing before the referee is to be treated as the 'hearing of the proceedings on the claim' within the rule. 52 In any event, there are good policy reasons why a party ought to be entitled to withdraw a claim before a referee. Building disputes, indeed lease disputes such as this, often involve numerous claims. It would not be conducive to the efficient use of the alternative dispute resolution means (the process of reference out to a referee) to hamstring a party (and the referee) from withdrawing an item or part of a claim. The argument of the appellant seems to run contrary to good sense and contrary to the 'just, quick and cheap resolution of the real issues' in proceedings (Part 1 Rule 3). 53 The second aspect of this issue concerns the claim of estoppel by the appellant. I can see nothing in the submission. The facts of this case are a far cry from Anshun. The appellant's argument is at best, entirely premature. First, there is no judgment on the issue in the subject proceedings. There are no relevant final orders. And there are no other legal proceedings afoot, only the issue of a contractual notice. It is very difficult to see that there could be any possibility of an inconsistent judgment in any event. All that occurred is that the respondents withdrew part of a claim in their notice of default relied on in the proceedings. They did not withdraw their cause of action. The respondents then issued a new notice of default in different terms. That a party issues an incorrect notice cannot mean that it is forever barred from being able to issue a new notice calling for an alleged breach to be removed. Res judicata and Anshun do not arise, at least certainly not at this stage. 54 In these circumstances, his Honour was right not to adopt paragraph 15.8 of the referee's report since the claims had been withdrawn. 55 His Honour was also correct to reject the appellant's application for an injunction to restrain the respondents from taking any action on their fresh notice of default. His Honour's relevant construction seems perfectly good and, in any event, there would be good discretionary reasons why the injunction should have been refused even if the case for one had been made out.

The window frames 56 In my summary of the facts I mentioned Mr Brownie's report, which referred to his interpretation of cl 2(c)(i), the repair covenant. His construction was, as mentioned earlier, varied by Windeyer J (1998) NSW ConvR 55-830 at 56,498 and this was later affirmed by the Court of Appeal in Alcatel Australia Ltd v Scarcella. 57 The relevant new text inserted by Windeyer J into Mr Brownie's report is set out at paragraph 52 of Austin J's judgment. It includes the following: "The lease obliges the plaintiff to keep the building 'in good and substantial repair'. What must the plaintiff do to perform this covenant? At the commencement of the lease the building was brand new. What is required to keep a brand new building in good and substantial repair? Time must be taken into account. A 28 year old building is not to be made new. But so far as repair can make good, or protect against the ravages of time and the elements, it must be undertaken. This means that if deterioration to the building is now evident after 28 years but would not have been evident, or evident to such degree, if in earlier years maintenance or repairs which could have been undertaken had been undertaken, then the plaintiff is required to put the building in the condition in which it would have been if the maintenance had been undertaken in the earlier years. This may entail renewing subsidiary parts of the building (though not renewal of the whole building). The plaintiff is not allowed to neglect the building and then, by reason of the neglect, at a later date say that the deterioration to the building which has occurred by reason of that neglect diminishes the extent of its obligation to put and keep the building in good and substantial repair. He is bound by seasonal application of labour to keep the premises as nearly as possible in the same condition as at the commencement of the lease. 58 Mr Brownie's report also said, as noted by the Referee: … but it seems clear that the test established by the authorities is whether, in relation to each item said to require repair, a reasonably minded owner would carry out that repair work, having full regard to the age of the building, the locality, and the class of tenant likely to occupy the building, all such matters to be considered as at the date of commencement of the lease: and bearing in mind the obligation to maintain the property in such a way that only an average amount of annual work would be necessary in the future: … [emphasis added] 59 The relevant claims of the lessors in its notice of default are items 145 and 146. Item 145 required the appellant to '[R]emove all traces of corrosion from aluminium framed windows and seal to prevent recurrence, clean glass on both sides'. Item 146 was in the alternative to 145 and required the appellant to 'replace windows'. 60 Austin J noted that the report of Mr Brownie, as varied by Windeyer J, had been formally adopted by the court and therefore became the final word on the law to be applied by Mr Lumsdaine, the Referee. 61 In the relevant parts of his report with regard to the window frames the Referee said: 16. 5 The evidence was clear that regular maintenance, for example monthly washing, (a most onerous and unusual burden to place on a tenant), would operate only to slow down the rate of corrosion. That rate of corrosion is a function of the material used to construct the window frames and the atmospheric environment of the subject building. 16.6 The Landlord contends that the Tenant is obliged to perform regular preventative maintenance to preserve the element in its original condition - even if this involves high pressure cleaning at weekly intervals. This follows from Mr. Brownie's finding that: … so far as repair can make good, or protect against the ravages of time and the elements, it must be undertaken. However, he also states: … it seems clear that the test established by the authorities is whether, in relation to each item said to require repair, a reasonably minded owner would carry out that repair work, having full regard to the age of the building, the locality, and the class of tenant likely to occupy the building, all such matters to be considered as at the date of commencement of the lease. 16.7 Would a reasonably minded owner, bearing in mind the industrial environment in which the building is located, consider for example that the windows should be replaced because of the appearance of corrosion products on the frames? I note here that, despite the dire prognostications of Dr. Young, the expert retained by the Landlord, I accept Dr. Cordery's evidence to the effect that the windows are sound and fully functioning, and will continue functioning for many years. The defect is one of appearance. In my view a reasonably minded owner in these circumstances would not replace the windows. 16.8 The Tenant has agreed to do precisely what the Landlord has claimed in claim 145, and that no doubt closes the issue. I note however, based on the evidence given by the experts in relation to the limited protection afforded by anodising, that it is highly improbable that any method of sealing will prevent recurrence of corrosion. That would require substitution with a material such as bronze. The Landlord's claim does not specify any particular method of sealing, and the Tenant's acceptance is in a similar imprecise state. The experts were not questioned as to whether there is any alternative material or process which may be used in situ to seal the aluminium after cleaning off the corrosion products; and which may provide the material with the degree of protection which would have remained if regular maintenance had been carried out for 30 years. I believe it is incumbent on the Tenant to provide some satisfactory indication that the sealing which it proposes to carry out will satisfy that standard. [emphasis added] 62 Austin J adopted the report but excluded paragraphs 16.7 and 16.8, as well as the last sentence in paragraph 16.5, which he said was incorrect. The deleted portions are bolded in the above quotation. According to his Honour, the appellant's failure to comply with item 145 or, at its election 146, constituted a breach of the repair covenant. His order so declared. 63 His Honour referred to the expert evidence before the Referee - that of Professor Young and Dr Corderoy. He said that the finding of the Referee in the last sentence of 16.5 was inconsistent with the evidence accepted by both experts that regular maintenance would have reduced the rate of corrosion. I should say that I am unable to see the inconsistency. Indeed, the Referee's finding was entirely consistent with the evidence that regular maintenance would reduce the rate of corrosion. 64 His Honour also found that the Referee had misapplied Windeyer J's test in 16.7 because it was common ground between the experts that the corrosion was a defect requiring repair (which statement is disputed by the appellant) and that both parties took the view that something should be done while disagreeing upon the nature and extent of the remedial work. While the Referee was correct to say that the lessee was to provide the windows with the degree of protection that regular maintenance would achieve, he was wrong to exclude the possibility that to do so it may be necessary to replace them. According to his Honour the Referee's reason for excluding replacement was contrary to the principles upon which Windeyer J insisted. 65 Austin J concluded that regular maintenance by cleaning would have reduced the rate of corrosion to the window frames and that something must be done by way of repair to the standard enunciated by Windeyer J. Only Professor Young had addressed the correct question and his evidence was therefore accepted by Austin J. 66 Accordingly, the appellant was required to comply with item 145 or, at its election, replace the window frames pursuant to item 146. 67 The two experts were at odds before the Referee about whether the corrosion to the window frames was merely cosmetic or functional. Professor Young said that their functioning was affected. Dr Corderoy said that they were all in good working order. In 16.7, excluded by his Honour, the Referee had rejected Professor Young's 'dire prognostications' and accepted Dr Corderory's evidence 'to the effect that the windows are sound and fully functioning, and will continue functioning for many years'. It was a defect in appearance only. The Referee then said 'a reasonably minded owner in these circumstances would not replace the windows'. 68 It seems plain that although the appellant had offered to clean the outside window frames, an offer which the respondents rejected, it never agreed nor conceded that the corrosion on the outside of the frames constituted a defect requiring repair. Its case was that the blemishes were cosmetic only and did not require repair. 69 The submission made on behalf of the appellant that the Referee was sitting as an expert and entitled to bring his own personal knowledge, experience and expertise to bear on the issues before him must be accepted, Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 at 557. He could bring into account his own knowledge of the way in which aluminium windows react to the environment and the pollutants within it. 70 In any event, there was evidence that the corrosion was a function of the chemistry of the metal and pollutants in the atmosphere. In my view, his Honour was not entitled to alter the Referee's factual finding in 16.5. 71 While his Honour was exercising a discretion in reviewing the report in order to decide whether to adopt, vary or reject it, that discretion will normally be confined to questions of law and the application of legal standards to the facts. In such a circumstance a judge may consider and determine that matter afresh (Super at 563). However, in relation to 16.5 and 16.7, the factual findings of the Referee was both open on the evidence and on the Referee's expertise. What the Referee said in the disputed sentences of 16.5 and 16.7 was not an error in principle, some absence or excess of jurisdiction, a patent misapprehension of the evidence or manifest unreasonableness in fact-finding, (Super at 563). There was, in my opinion, no reason for rejecting them. Moreover, in cases where the evidence is conflicting, where there is evidence available to support a finding of a Referee or the issue involves a choice between evidence, a judge should not ordinarily interfere, Super at 564. 72 It follows also in my view that his Honour should not have intervened to exclude 16.7, a finding which involved no more than choosing between conflicting evidence. 73 Leaving 16.5 and 16.7 in the report means that the Referee found that there was no functional defect with the window frames but rather a cosmetic problem. Once this is accepted, and upon applying the amended Brownie test, it was open to the Referee to find that a reasonably minded owner would not replace the windows. I do not see how it can be said that this conclusion eliminated the ingredients in the principles to be applied in the Windeyer J qualification of the Brownie report. While it is true that this repair covenant casts a heavy burden on the appellant, that burden is qualified by the obligation that it must be measured against the standard of a reasonable owner. 74 The lack of regular cleaning of the window frames had only a cosmetic effect (by the preference for Dr Corderoy's evidence by the Referee). Accordingly, there was no defect requiring repair under the covenant and no breach of the appellant's covenant to maintain in good and substantial repair. 75 That at one point the appellant had offered to do some work on the window frames, which was rejected by the lessors, was irrelevant to the determination of the claim in item 145. Accordingly, his Honour was right to exclude 16.8. Indeed, both parties before his Honour had sought exclusion of 16.8. 76 As I have said, in my view, his Honour was wrong to exclude the last sentence in 16.5 and the whole of 16.7. It follows that his Honour was not entitled to conclude that the appellant was in breach of the repair covenant and had to comply with item 145 or, at its election, item 146. His Honour was also wrong to find that the continued functionality of the window frames was beside the point. This conclusion was based, at least in part, upon his Honour's perception that the parties were agreed that the corrosion was a defect warranting repair. As I have pointed out, this was not the case. To the contrary, it was the appellant's case that the corrosion was aesthetic only and not in breach of the repair covenant. 77 One issue debated before us was whether it is necessary to remit the matter to the Referee to determine what would have comprised reasonable maintenance. Given the Referee's findings of fact in 16.5 and 16.7, which should be adopted, I do not believe that any remitter is necessary. I add that, in light of the Referee's conclusion, which should be adopted, there would in any event be no utility in a remitter. The parties had accepted that repair would be more expensive than replacement and this was the reason that the Referee directed himself to replacement. 78 It follows that his Honour's declaration that the appellant's failure to comply with item 145 or in the alternative item 146, constituted a breach of cl 2(c)(i) of the subject lease, should be set aside. According to his Honour's judgment of 22 March 2001, that order appears to be number 4 (see judgment at Red AB 28 para 7), however, the court does not have a copy of his Honour's final orders. 79 The result is that the appellant loses on issues 1 and 3 in the appeal, but succeeds on issue 2. The appeal should be allowed in part and his Honour's order mentioned immediately above be set aside. There should be substituted therefore a declaration that the appellant was not in breach of cl 2(c)(i) of the lease with respect to items 145 and 146 of the notice of default. 80 In the circumstances, I believe that it is appropriate that each party bear its own costs of the appeal. I would not, however, disturb the costs order of the trial determined by his Honour. 81 The parties should file agreed Short Minutes of Order within 7 days. 82 DAVIES AJA: The facts and issues are set out in the reasons of Stein JA.

The Declaratory Order 83 I agree with the declarations made by Austin J with respect to the operation of the rent review clause. Those declarations were entirely appropriate. 84 I agree with Stein JA that it would have been inappropriate for Austin J to make a declaration with respect to the hypothetical circumstance propounded in the affidavit of Geoffrey Learmonth. It is unwise, even unjudicial, to make declarations concerning hypothetical circumstances. 85 Moreover, Mr Learmonth understood that the clause postulated the hypothetical situation that the whole building was empty and was being offered for lease for a twenty year term with market rent reviews every five years, the whole building to be let to one tenant for use as offices and associated parking. Mr Learmonth, a valuer, expressed the view that there would be no market for such a lease. Counsel for Alcatel Australia Limited ("Alcatel") asked Austin J to declare what would be the effect for the purposes of the rent review of the fact, if it were the fact, that there was no market for a lease of the premises. 86 It is impossible to accept the hypothetical situation propounded by Mr Learmonth. The building was occupied by the tenant, Alcatel, and had indeed been constructed to Alcatel's requirements. The rent review was conducted on the footing that Alcatel would continue in occupation and the issue to be decided in the rent review was: what was a fair rental for the premises. Such an assessment must be based on market values but not on the basis that there was no willing tenant. 87 A review of the rent between an existing lessor and an existing lessee necessarily requires, as it did in the subject lease, that the rent should be "the annual market rental value of the demised premises for a term of five years as between a willing Lessor and a willing Lessee".

Window frames 88 The Referee, Mr Geoffrey Lumsdaine AM, proceeded upon the assumption that Alcatel had agreed to do precisely what the landlord had sought in item 145 of its Notice of Default, namely, "Remove all traces of corrosion from aluminium framed windows and seal to prevent recurrence, clean glass on both sides". It is agreed by both parties that the Referee misunderstood something said in the course of negotiations. As the Referee's report proceeded on an incorrect basis, the Referee's finding in respect of item 145 must be rejected. 89 Austin J also misunderstood the parties. His Honour said:- "It appears to be common ground that the corrosion to the exterior window frames was a defect requiring repair ..."

And:- "But since both parties take the view that the corrosion of the frames … is a defect warranting repair, their continuing functionality is beside the point."

I accept the statement of counsel for Alcatel that Alcatel did not concede that the window frames required repair. 90 The windows of the building had aluminium frames which were coated with an anodised coating. An expert called for the respondents, Professor David Young, reported, inter alia:- "Regular cleaning of an anodised surface lengthens its lifetime greatly. … However, if the frames had been kept clean throughout their time in service, the anodic coating would be in very much better condition and continuation of a regimen of regular cleaning would lengthen its lifetime substantially. … Regular cleaning to remove deposited pollutants prevents the occurrence of accelerated corrosion. Harsh abrasive cleaning is not required. Instead, cleaning with detergent and water is normally sufficient." 91 An expert called for Alcatel, Dr D J H Corderoy, expressed a contrary view. Dr Corderoy, in his report dated 26 April 2000, said:- "However, in practice the cleaning required would have been quite onerous. Rather than the simple swab with a wet cloth which is implied in the statement, high pressure water blasting on a weekly basis would be necessary to remove contaminants from the re-entrant corners of the window tracks on the aluminium sills and lintels. … The existing window frames are now more than thirty years old and, in my opinion, have performed well in an aggressive industrial atmosphere with the only criticism being that the aesthetic appearance of the building has been degraded although the functionality of the building has not been affected." 92 In Graham v The Markets Hotel Pty Ltd (1943) 67 CLR 567 at 585, Starke J said:- "The state of repair required by a covenant to yield and deliver up premises well and substantially repaired depends primarily upon the words used. It involves, in the present case, an obligation to yield and deliver up the premises in such a state of repair as that in which they would be found if managed by a reasonably minded owner having regard to their age, their character, their ordinary use and the requirements of the tenants likely to take them at the time of the demise or subletting."

This passage was cited by Sheller JA in Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 354-5. 93 The test in relation to both repair and maintenance is thus what would be or should have been done by a reasonably minded owner if the owner were managing the premises. 94 On the issue whether the windows were in such a state that a reasonably minded lessor would repair them, the Referee had to take into account the fact that there was evidence that the windows could not be repaired in situ and that replacement might be cheaper than repair. The Referee said:- "I accept Dr Cordery's evidence to the effect that the windows are sound and fully functioning, and will continue functioning for many years. The defect is one of appearance. In my view a reasonably minded owner in these circumstances would not replace the windows."

However, the Referee limited his finding to replacement and did not determine the issue in relation to repair. 95 On the issue of maintenance, the Referee appears to have held the view that regular washing of the kind Professor Young had in mind would have been an onerous burden to place upon a tenant and, inferentially, that it would not have been a course taken by a reasonably minded owner. The Referee said:- "The evidence was clear that regular maintenance, for example monthly washing, ( a most onerous and unusual burden to place on a tenant ), would operate only to slow down the rate of corrosion. That rate of corrosion is a function of the material used to construct the window frames and the atmospheric environment of the subject building." (emphasis added)

No doubt the Referee founded this view upon the fact that the building had seven storeys and two frontages. However, the Referee made no formal finding on the issue, because he believed that Alcatel had conceded that it should repair the window frames. 96 I agree with Stein JA that Austin J was wrong in excluding the last sentence of paragraph 16.5 and the whole of paragraph 16.7 of the Referee's report. Austin J also excluded paragraph 16.8 and the Referee's finding that item 145 in the Notice of Default should be complied with. However, those findings of the Referee were based on the Referee's belief that a concession had been made that item 145 should be complied with. 97 As the Referee did not make findings on essential aspects of the issues arising under items 145 and 146, I would remit the matter to him for his further consideration and determination. I consider that it would be unfair to the parties to decide the issues now on the material before the Court. The issues are ones for an expert to decide. 98 The ultimate issue for the Referee will be whether the tenant, Alcatel Australia Ltd, is bound to carry out the following repairs, itemised in the Notice of Default dated 31 July 1995:- "145. Remove all traces of corrosion from aluminium framed windows and seal to prevent recurrence, clean glass on both sides.

(i) because, by reason of the present state of the premises, a reasonably minded owner would carry out such repairs; and (ii) because, by reason of the tenant's failure to maintain the premises as a reasonably minded owner would have done had it managed the premises, it is necessary to carry out such works so as to restore the premises to the state they would have been in had they been properly maintained. 99 In considering these issues, the Referee should apply the statement of principle which was inserted by Windeyer J into the report of the Honourable J E H Brownie QC.

Other issues 100 I agree with Stein JA on all other issues and with the order which he proposes.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.