Alexander James Pty Ltd v Pozetu Pty Ltd

NCAT Appeal Panel|2015-08-24

Solicitors: File Number(s): AP15/31810 Decision under appeal Court or tribunal: Civil and Administrative Tribunal Jurisdiction: Consumer and Commercial Division Citation: [2014] NSWCATCD 183 Date of Decision: 30 September 2014 Before: D Bluth, Senior Member File Number(s): COM 14/45920 and COM 14/45929

Introduction

These appeal proceedings arise from a decision of a Senior Member of the Tribunal in which certain relief was granted to the respondent in the appeal, Pozetu Pty Ltd against the appellants, Alexander James Pty Ltd ("Alexander James"), Christopher Dedman, Anthony James Maxworthy and Christopher Mark Hancock. Of the appellants, Alexander James was the lessee and the remaining three were guarantors under a lease of premises at shop 1, 82 Queen Street Woollahra, NSW together with a lock-up garage. The premises were leased from the respondent.
The original application to this Tribunal was brought by the respondent which claimed, in essence, that Alexander James had originally leased the premises for a period of five years from 1 September 2003 and had exercised an option to renew the lease for a further five years on 6 March 2008. The respondent alleged that the lessee had repudiated the renewed lease by serving what was called a "Notice to Quit" on 24 February 2009, and leaving the premises on 31 March 2009. The sum of $162,530.03 was claimed for unpaid rent and outgoings, for the costs of making good certain items, and for letting and legal costs. The appellants filed proceedings in the Tribunal in the nature of a cross-claim, but those proceedings fell away in circumstances which we do not need to address.

The Proceedings Below

The Senior member identified the issues for determination as follows (at [18]): Contentious Issues Between the Parties Alexander James in its Application for Original Decision file number COM 14/45920 claimed: that Pozetu had repudiated its obligations under the lease by causing to be registered the strata plan without seeking consent from Alexander James and thereby disallowing itself the ability to comply with its obligations under clause 4.6 to provide a new Lease; that Alexander James accepted the repudiatory conduct of Pozetu and treated the Lease as a month-to-month tenancy, consequently Alexander James was entitled to and did give one month's notice to Pozetu to end the lease and vacate; an adjustment of overpayment of land tax as an outgoing, and a refund of overpaid rent on the basis that clause 19(1)(b) of the Lease amended Annexure B to the effect of deleting the annual fixed rent increase of 5%, however that claim was subsequently abandoned during the course of the hearing. Pozetu by its Application for Original Decision file number COM 14/45929 claimed: damages for loss of rent consequent upon the repudiation by Alexander James of its obligations under the Option Lease by its abandonment of the premises; damages for costs of reletting and failure to make good on leaving the premises; and rectification of the Lease consequent upon elimination of the rent review methodology on exercise of the option to determine the rent for the first year of the new term (new rent) which requires the Lease to be rectified to confirm the alleged agreed annual fixed rent increase of 5% (in effect a double rectification application).
The respondent's claim was upheld, and the respondent was awarded compensation in the sum of $400,000.00 against Alexander James and against each of the other appellants as guarantors. The appeal before us is brought from this decision.

The Grounds of Appeal

Before commencing a consideration of the decision under appeal, we shall summarise the grounds of appeal as follows:
All of the appellants submitted that in the factual circumstances as they emerged, there had been no grant of a lease by the respondent for any renewed term. They also rejected the respondent's claim that an equitable lease covering the renewed term had come into existence on the basis that no written lease document was ever entered into by the parties covering the renewed term, and in the circumstances the respondent was not entitled to specific performance.
Furthermore, the appellants submitted that the provisions of the original lease which stipulated the quantum of rent which should be paid during any renewed term were void by reason of certain provisions of the Retail Leases Act, 1994.
The appellants also submitted that the fact that the premises had been the subject of registration of a strata plan after the original lease had been entered into had rendered it impossible for the respondent to grant a renewed lease in the same terms as the original lease.
Finally, the appellants said that the fact that the respondent had agreed that the second appellant should no longer be a guarantor under any renewed lease prejudiced the circumstances of the remaining two guarantors, and would preclude any equitable lease coming into existence.

The Second Appellant's Amended Grounds of Appeal

The second appellant was originally represented by the same solicitors and counsel who appeared for all of the other appellants. He was no longer associated with Alexander James at the time that the option was exercised, and, as will be seen, he was not named as one of the guarantors in lease documentation prepared by the respondent after the exercise of the option to renew. In the circumstances, he wished to maintain that no order for the payment of compensation should have been made against him personally, based solely on the ground that he had formerly been a guarantor. Shortly after the decision of the Senior Member, the second appellant retained separate legal representation. An amended notice of appeal was filed on his behalf out of the time otherwise available to appeal from the decision. Accordingly, the second appellant required leave to appeal out of time. This was strenuously resisted by the respondent.
Affidavit evidence of the new solicitor retained by the second appellant indicated he was first approached to give advice in the matter sometime in June 2015. It was not until around the middle of July that he received two lever arch files and papers which constituted the approximate 1500 pages contained in the appeal books before us. Thereafter, he worked assiduously to prepare a notice of appeal and submissions on behalf of the second appellant, retaining counsel for this purpose. The second appellant wished to raise two grounds of appeal in addition to those raised by the other appellants and the respondent was advised of these grounds on 11 August 2015. Written submissions prepared by counsel for the second appellant had been given to the respondent on 7 August 2015.
The first additional ground of appeal was directed to whether a binding lease of the shop premises had been entered into for the period 1 September 2008 to 31 August 2013, being the renewal period. The second ground was directed to whether the second appellant had in some way guaranteed the obligations of Alexander James under any renewed lease.
It was clear to us that all of the other parties in the proceedings had adequate notice that these two additional grounds would be raised. The factual material to found a consideration of these additional grounds was clearly within the evidentiary material before the Senior Member, and consequently before us. The respondent's counsel submitted that her client would be "irreparably prejudiced" because, firstly, she would have conducted cross examination differently; Mr Dedman would have been cross-examined (although he had not given evidence in the proceedings), and the respondent would have led evidence about the circumstances in which and as to why the name of the second appellant was not shown on the option lease. Furthermore, a summons would be issued to obtain documents relevant to the circumstances in which Mr Dedman ceased being a director of Alexander James. We asked her what instructions she held about why the name of the second appellant was omitted from the lease document prepared for the option period, and she replied that the director of the respondent could not recollect how or why this had occurred.
In all the circumstances, we concluded that there was no undue and inappropriate prejudice which would attach to the respondent if the second appellant was granted leave to advance the two additional grounds of appeal. The professed desire by the respondent to issue a summons was, in the circumstances, something in the nature of a "fishing expedition." We declined to adjourn the proceedings. We granted leave to the second appellant to file amended grounds of appeal and extended the time for doing so.
For completeness we note that counsel for the respondent submitted that in connection with the second additional ground, going to the circumstances in which the name of the second appellant was omitted from the lease document covering the option period, that this raised matters which required the grant of leave. Prima facie, the Senior Member had determined that the second appellant, who was no longer relevantly a director of Alexander James, and whose name had been omitted from the lease document prepared by the respondent lessor for the option period could, in some way, be found liable to guarantee the obligations of Alexander James. In our opinion this conclusion is, prima facie, indicative that his decision may not have been fair or equitable. This conclusion is indicative of circumstances which would justify the grant of leave to amend the grounds of appeal.

Is Leave to Appeal Required?

Ms Francois, counsel for the respondent, asserted that the appeal involved mixed questions of fact and law and that leave to appeal was required.
Section 80 of the Civil and Administrative Tribunal Act, 2013 ("the Act") provides that an appeal to this Appeal Panel may be made as of right on any question of law.
Under s 80(2)(b) of the Act, an appeal against a final decision, such as the present, may be made: 1. As of right on a question of law; and 2. With the leave of the Appeal Panel on any other ground.
Further, as the decision appealed against was made in the Consumer and Commercial Division, clause 12 of Schedule 4 of the Act applies. That clause provides: (1) An Appeal Panel may grant leave under section 80 (2) (b) of this Act for an internal appeal against a [Consumer and Commercial} Division decision only if the Appeal Panel is satisfied the appellant may have suffered a substantial miscarriage of justice because: (a) the decision of the Tribunal under appeal was not fair and equitable, or (b) the decision of the Tribunal under appeal was against the weight of evidence, or (c) significant new evidence has arisen (being evidence that was not reasonably available at the time the proceedings under appeal were being dealt with).
The Appeal Panel in Prendergast v Western Murray Irrigation Ltd [2014] NSWCATAP 69 considered what would amount to an appeal on a question of law. Without attempting to be exhaustive, the Panel at [13] identified a number of issues which raised questions of law for the purposes s 80(2). Included within relevant issues are, for present purposes: (b) Whether the Tribunal identified the wrong issue or asked the wrong question. (c) Whether a wrong principle of law has been applied.
Whether the appeal involves a question of law can be disposed of by considering two fundamental questions which arise in the determination of these appeal proceedings, namely, whether when the option was exercised an equitable lease was ipso facto created and whether the exercise of the option created executory rights and obligations.
The issues for determination in this appeal clearly and unequivocally involve questions of law, which obviously need to be determined against a factual matrix.
We shall deal with these proceedings on the basis that there is an appeal as of right.

The Factual Background

The narration which follows is based upon those factual matters about which there would seem to be no controversy, as revealed in the submissions of the parties. Where there are matters of controversy, we shall refer to them as necessary, but it is not necessary to resolve any of them in determining the outcome of these proceedings. We should add for completeness that the appeal books filed in the proceedings were more than 1500 pages in length consisting of the pleadings, affidavits of witnesses, transcripts, documentation and submissions.
The respondent as lessor entered into a document of lease purporting to be prepared under the Real Property Act, 1900 on a date which is unclear because it has been left blank, and which provided for a five-year lease of shop 1, 82 Queen Street Woollahra together with lock-up garage from 1 September 2003 and terminating on 31 August 2008. The lessee was Alex James, and the 3 other appellants were guarantors of the obligations of the lessee.
It was the professed intention of the lessor as communicated to the lessee, and it was the intention of the lessee, that the lease be registered by the lessor on the relevant title. Despite enquiries made from time to time on behalf of the lessee, the lease was never registered by the lessor during its term.
On 21 March 2005, a strata plan was issued covering, inter alia, the shop premises which were the subject of the lease. The appellants submit that they were unaware of the registration of the Strata plan, and the respondent asserts that there was a conversation with one of the guarantors indicating that there was an intention to register a strata plan. It is not necessary that we resolve this matter.
By letter dated 6 March 2008, the lessee wrote to the lessor enclosing a "Notice of exercise of option of renewal". The notice stated that the lessee was exercising its option of renewal pursuant to clause 4 of the lease and "requires you to grant it a renewed lease of the premises for a term of five years from the expiration of the term granted by the lease and subject to the covenants, agreements and conditions of the lease." That letter was acknowledged in writing by a director of the lessor dated 17 March 2008.
In October 2008, there were email communications between the lessee and lessor. The lessee indicated that it was suffering adverse trading conditions and the lessor expressed concern whether the lessee wished to continue with the lease. It was said by the lessee that it wished to take up the "new 5 year term lease discussions" in mid-October. There was reference to an expenditure of money by the lessor and a desire to recover that investment "over time by way of a rent increase to market. This is incorporated in the current lease as an essential term of the lease ie "Review to Market"."
There is evidence of further email communications in December 2008. The lessor said that the lessee was in breach and asserted that there had been a failure to meet and discuss the review to market for a couple of months. An electronic communication dated 8 December 2008 from the lessor said: You have to be aware that a correct exercising of the option is not valid until we agree the rate for the second term which will need to be backdated to the date of the new term (1st Oct 2008 I believe). This was followed by a threat of litigation. After a further communication the lessor forwarded an email on 23 December 2008 saying, in part: Hopefully you can stop procrastinating the Review process by moving a lot faster than you have to date. This issue was supposed to be finalised before the expiry date of the first term of the lease ie 1 Sept 2008. I have spent over $70,000 on the refurbishment of 82 Queen St and would like to recover some of that money via a reasonable increase in the Annual Rent to $175,000 pa + GST. I have undertaken a market review with an independent real estate agent who knows the market and believes the above figure to be very reasonable. By email dated 5 January 2009 the lessee asked the lessor to forward "the Lease renewal".
Meanwhile, solicitors acting for the lessee had asked solicitors acting for the lessor by email on 19 December 2008 that the "proposed Lease" be forwarded to them. A lease document was forwarded by letter dated 5 January 2009. The document provided, relevantly, for a term of five years from 1 October 2008 at a yearly rental of $175,000.00. The guarantors were named as Messrs Maxworthy and Hancock only, and there was no reference to the second appellant, Mr Dedman.
By email dated 14 January 2009, solicitors acting for the lessee wrote to the lessor's solicitors. They indicated that they had carried out searches of the relevant property and then referred to the commitment by the lessor to register the original lease and the fact that the lessor had failed to do so. The letter said that that failure allowed the lessor to register the Strata plan and that by doing so the lessor had "wrongfully terminated the lease on or before 15 November 2004." The lessee's rights were said to be "reserved" and the letter sought an explanation from the lessor.
The next communication between the parties was a letter by the solicitors for the lessor enclosing a new front page of the lease which made reference to the Strata plan. This is the first occasion on which that reference had been made in the lease documentation proposed to apply to the renewed term. There accompanied the new front page of the lease a Disclosure Statement which stated that the total annual base rent was $192,500.00 inclusive of GST.
By email dated 24 February 2009, the lessee's solicitors asserted that the current tenancy was on a month-to-month basis, and gave notice of termination and delivery up of possession on 31 March 2009. The letter enclosed a Notice of Intention to Quit.
By email dated 13 March 2009, solicitors for the lessor denied that a monthly tenancy was in existence, asserted that there was an enforceable five-year lease between the parties commencing 1 September 2008, accepted the notice to quit as repudiation and creating an entitlement to regard the lease as terminated and to give rise to a claim for damages. It was said that as at 31 August 2008 there was rent outstanding of $34,757.41 which had increased as at 1 March 2009 to $78,354.88 assuming a market increase of 5% in the rent on the exercise of the option to renew. Furthermore, there was a claim for interest accumulating at 10% per annum.
It is not necessary to refer to the further communications between the parties.

The Decision Under Appeal

It is only necessary for present purposes that we summarise the various matters which constitute the findings and conclusions of the Senior Member. We set out below those which are relevant to our determination of these appeal proceedings: 1. Non-registration of the original lease The original lease was not registered as required by the Real Property Act. The Senior Member agreed with the parties that non-registration resulted in the creation of a monthly tenancy at will. However, he determined that all the terms of the lease would be incorporated in an equitable lease, provided that they were not inconsistent with a provision allowing termination with less than one month's notice. Significantly, the Senior Member noted that the agreement the subject of the equitable lease must be capable of specific performance. The Senior Member also referred to a provision in the lease to the effect that it was a deed, and all the covenants were enforceable as such. We shall refer to this aspect later in our reasons for decision. 1. Registration of the strata plan The Senior Member ultimately held that in all the circumstances the "conversion to Strata of this building was not such a fundamental change that meant that Pozetu could not provide a lease in conformity with its obligations."(at [43]). For reasons which will become clear, we are able to determine these proceedings without reference to this matter. However, we note that the Senior Member based his decision substantially on the judgment of Mason P in the New South Wales Court of Appeal in Ashington Holdings Pty Ltd v Wipema Services Pty Ltd [1999] NSWCA 456. The circumstances dealt with in that judgment were clearly distinguishable from those that applied in these proceedings. In that case, the lessee had participated in the registration of the strata plan. In these proceedings, there is no evidence of any such participation by or on behalf of the lessee, and the preponderance of the evidence is to the effect that the lessee was unaware that the strata plan was being registered. The observations in that judgment as they impact upon the circumstances of these proceedings need to be qualified accordingly, and it is arguable that if specific performance is not available to the respondent in these proceedings, the conclusion reached by the Senior Member may not be correct. We need not pursue this matter further. 1. Rent review for the first year of the term under the option lease Counsel for the respondent had submitted that the parties had agreed to a new rent of $175,000.00. This was rejected by the Senior Member, and we agree that there is no evidence that would justify any such submission being made. Counsel for the respondent then submitted that the new rent should be based on a market review, notwithstanding, as we shall discuss later in these reasons, that any reference to a market review was void by statute. Again, there cannot be any proper basis upon which such a submission could be made by counsel for the respondent. The Senior Member held that in the circumstances the rental payable during the first year of the option lease was that which was being paid at the time that the option lease came into effect. We agree, for reasons which we shall discuss later. Again, the issue was clouded because counsel for the respondent sought an order for rectification of the lease by permitting an increase of 5% over the then current rent payable at the commencement of the option lease. The Senior Member correctly, in our opinion, refused the application made by counsel for the respondent, an application which we observe did not appear to have any reasonable basis. 1. Breaches of the lease by Alexander James The Senior Member found that the lease was breached when Alexander James vacated the premises on 31 March 2009. We have come to a contrary view, as will be explained later in our reasons for decision. 1. The guarantors The Senior Member found that the guarantor clause in the initial lease should be incorporated in the lease obligations under the option period lease, and on this basis each of the guarantors remained liable, including the second appellant. As this is based on a finding of the existence of an equitable lease, it fails to consider whether an equity court would grant specific performance in favour of the respondent against a guarantor it had omitted from the lease document. For reasons which will become clear, we do not need to consider this matter further. 1. Land tax adjustment This was left for determination between the parties and we need not consider this matter.
The proceedings were stood over to allow the parties to bring in agreed orders to reflect the findings made by the Senior Member.

What is the Effect of the Lease as a Deed?

The lease is expressed as being "a deed even if it is not registered". The respondent relied on this provision in aid of its submissions. Furthermore, the Senior Member referred to this matter in the course of his reasons.
We did not receive submissions from the parties about the effect of this provision in the lease document and we are unsure of its effect. Accordingly, we refer to this matter for completeness only. We would not understand the provision as being intended to create some relationship which was separate and apart from the provisions of the lease agreement. We would understand the intention as directed to the form of the lease agreement, presumably on the basis that each and every term and condition of the lease agreement should be taken to have the effect of a covenant in a deed and enforceable as such. Accordingly, the provision would facilitate enforcement, but would nevertheless be depended upon the existence of some term and condition which was enforceable. In some cases, a deed is utilised to avoid concerns about the lack of consideration, but this is not the case in the circumstances of the lease under consideration. In any event, we fail to see how expressing the lease agreement as being in the form of the deed would overcome the requirements of the relevant legislation directed to the creation of recognised interests in land, and the declaration that particular leases are in effect tenancies at will terminable upon a month's notice. In the same vein, the fact that the lease document is said to be a deed will not, nevertheless, alter its form for the purpose of registration.
For present purposes, we do not see that anything turns upon this provision.

Consideration

In determining these proceedings we need to consider a number of discrete issues.

The rent payable at the commencement of the option period

As will have been seen from the communications between the parties which we have referred to above, the lessor always asserted that the rental payable at the commencement of the option period was the market rent. Before commencing our examination of the lease provisions, we note that the original lease document appears to have provided for an annual rent increase during its term of 5% per annum, on a compounding basis. The relevant provision in the document is poorly and inelegantly drafted, but the situation appears to be as we have stated it, and certainly the parties conducted themselves on that basis. However, there is specific provision in the original lease document relating to the quantum of the rent payable during the option term. The lease clearly provides that for the further period of five years, the rent is to be the greater of the current market rent and 105% of the rent in the last year of the previous term.
This provision for the ascertainment of the rent at the commencement of the option term as contained in the lease is void by reason of the provisions of section 18 (3)(c) of the Retail Leases Act, 1994 which is in the following terms: 18 Restrictions on adjustment of base rent (1) In this section: base rent means rent, or that component of rent, which comprises a specified amount of money (whether or not there is provision for the amount to change). Note. Turnover rent (rent determined by reference to the lessee's turnover) is not base rent because turnover rent is not a specified amount of money (it varies according to the lessee's turnover). (2) A retail shop lease must not provide for a change to base rent less than 12 months after the lease is entered into and must not provide for a change to that rent less than 12 months after any previous change to that rent. This subsection does not apply to a change to base rent by a specified amount or specified percentage. Note. For example, subsection (2) prevents a lease providing for an increase to current market rent more than once in 12 months. It does not prevent a lease providing for the rent to increase by $100 every 6 months. Nor does it prevent a lease providing for the rent to be increased to current market rent after 12 months and then to be increased by 2% every 6 months after that. (3) A provision of a retail shop lease is void to the extent that it: (a) reserves or has the effect of reserving to one party a discretion as to which of 2 or more methods of calculating a change to base rent is to apply on a particular occasion of a change to that rent, or (b) provides for a method of calculating a change to the base rent but reserves or has the effect of reserving to one party a discretion as to whether or not the base rent is to be changed in accordance with that method on a particular occasion, or (c) provides for base rent to change on a particular occasion in accordance with whichever of 2 or more methods of calculating the change would result in the higher or highest rent. (4) If a retail shop lease provides for a change to base rent in a way that has the potential to cause that rent to decrease (such as a provision for the rent to change to current market rent), a provision of the lease is void to the extent that it: (a) prevents or enables the lessor or any other person to prevent base rent decreasing pursuant to the change, or (b) limits or specifies, or allows the limitation or specification of, the amount by which the base rent is to decrease.
The provision contained in the original lease document providing for the greater of two methods of calculation of rent from the commencement date of the option period is clearly inconsistent with the provisions of section 18 (3)(c). It is therefore void. Accordingly, the rent which is to be paid at the commencement of the option period must be the quantum of rent being paid at the conclusion of the original lease period. That was $156,000.00 per annum.
We note from material previously referred to, that counsel for the respondent lessor sought to argue that even though the rental condition was void, in some way one of the alternative methods would be preserved. Such a submission is contrary to the clear provisions of the legislation. Once the section is enlivened, both methods are avoided.

The respondent's position on rental payable at the commencement of the option period

It is clear from the narration which we have set out above covering the communications between the lessor and the lessee concerning the exercise of the option for renewal that the lessor always considered that it was entitled to require the payment of a current market rent at the beginning of the option renewal period under the original lease provisions if that was greater than 105% of the rent in the last year of the previous term. On two occasions the respondent lessor asserted in the communications that it had an entitlement to claim current market rent. Indeed, that was the rental amount that was referred to or provided the basis of the amount of the rent in each of the two forms of lease document provided to the lessees. The amount of $175,000.00 exclusive of GST was the figure that the lessor had said represented current market rent as assessed by a valuer retained by it.
Accordingly, we conclude that in providing lease documentation to the appellant lessee, the respondent lessor consistently offered a renewed lease containing a rent assessed by current market value, which was considerably in excess of the rent which the lessee was paying in the last year of the previous term, being $156,000.00 per annum. It is equally clear that at no stage did the lessor offer to provide lease documentation to the lessee providing for rent at the commencement of the term renewed under the option other than rent calculated by the lessor as reflecting its understanding of current market value. Nor is there any evidence that apart from the proffering of the two lease documents that the lessor indicated in any way that it was prepared to allow the lessee to continue in occupation of the leased premises other than upon payment of a rent which it understood to represent current market value.

The status of the lease at law on and from 1 September 2008

It is probable that the status of the lease for the original term is irrelevant to the determination of these proceedings. At law, s 53 of the Real Property Act 1900 required the lease for the original term to be executed in an approved form, because the lease was for a term exceeding three years. By s 41 of that Act, the lease was ineffectual until registered. However, under well-known principles, equity will come to the aid of the parties, subject to certain qualifications, principally that a court of equity would grant specific performance. The relevant principles are discussed in the High Court of Australia in Chan v Cresdon Pty Ltd [1989] HCA 63, and we shall refer to this authority later in these reasons for decision.
The situation concerning the period following 1 September 2008 is different. The original term under the original written, but not registered, lease had come to an end, and the lessee would have retained possession on a month to month basis. However, after 1 September 2008 there may not have been a tenancy for such period during which the lessee remained in occupation. This is because there was no agreement about a fundamental provision of any lease, namely the amount of the rent which was payable. Of course, if there was such a tenancy then the provisions of s 127 of the Conveyancing Act would have applied because there was no agreement as to any duration and the tenancy would have been determinable at will by either party giving one month's notice in writing expiring at any time. One might speculate that there may have been a right of exclusive possession during the period whilst the lessee remained in occupation, and accordingly, a tenancy did exist at law, but we do not understand there to be any or sufficient evidence to allow us to come to any definitive conclusion about this. We observe that it is not necessary that we come to any conclusion about this matter for the purpose of determining these proceedings.
The respondent lessor submitted that there was an equitable lease providing for the payment of rent at current market value from 1 September 2008, and relied on the reasoning of the Senior Member in this regard.
In his reasons for decision, the Senior Member found that the exercise of the option constituted "a binding contractual agreement between the parties", and able to be performed by the respondent notwithstanding registration of the strata plan over the property "and the new rent in the Option Lease determinable on the terms of the Lease itself." In so finding, the Senior Member seems to have relied on the fact that the lease was a deed and therefore "all of the agreements and covenants including the exercise of the option survive as enforceable obligations." In her submissions, counsel for the respondent relied on this reasoning.
We disagree. Upon the exercise of the option, and without the existence of any relevant impediment, the lessor and the lessee were obliged to enter into a lease containing the same provisions that were agreed to apply, as identified in the original lease agreement subject importantly to the qualification concerning the appropriate rental, which we have considered above.
The legal status of an option to renew has been described as "…. an agreement to lease though conditional upon the exercise of the option and the performance of the conditions of the lease." (per Barwick CJ in Trentino Nominees Pty Ltd v Vlattas [1973] HCA 14 at [34]) and as an "irrevocable offer" (per French CJ in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41. In Alcan at [8] French CJ said: A lease obtained by the exercise of an option to renew is a new lease and the option is "merely an irrevocable offer, but beyond that there is no contract for a further term, unless and until the offer is duly accepted, by exercising the option." Whether the option was a conditional contract or an irrevocable offer, the respondent as lessor was bound to grant a lease to the appellant lessee upon the terms and conditions provided for, but qualified as to the rental payable because the provisions dealing with the ascertainment of the rent were void, as we have determined.
The focus of attention of the Senior Member as embraced by the respondent was on the obligations of the appellant Alexander James, but ignored entirely the fundamental obligation of the respondent to grant a lease in accordance with the provisions of the option including the rental payable. At no stage did the respondent ever indicate to the appellants that a lease would be provided consistent with the quantum of the rent fixed by the original lease as applying to the option period. This reasoning ignored the executory nature of the obligations of the parties as contemplated by the option provisions. Clause 4.2 of the lease agreement says "If a further period, commencing when this lease ends, is stated in item 12 A in the schedule then the tenant has the option to renew this lease for that period."
In failing to permit Alexander James to lease the property for a further five years at a rent which was consistent with that fixed by the lease agreement as applying to the option period, the respondent repudiated its obligations under the lease with respect to the grant of a renewal, and Alexander James was entitled to accept the repudiation as a breach and to terminate its relationship with the respondent as lessor.
Counsel for the respondent sought to rely on the existence of an equitable lease covering the option period. The difficulty with that submission is that such a lease will only be recognised in circumstances where there exists an agreement which, by reason of some legal impediment is unenforceable, in circumstances where equity would grant specific performance. So much is clear from the joint judgment of Mason CJ, Brennan, Deane and McHugh JJ in Chan v Cresdon Pty Ltd [1989] HCA 63, and especially at [16] and [20]. It is instructive to reproduce [25] of their Honours' judgment: 25. The pre-Judicature Acts cases have a dual importance. They indicate that there was a jurisdiction to backdate specific performance and that it was a jurisdiction to be exercised sparingly. The existence of that jurisdiction supports the view that, notwithstanding the broad language of Jessel M.R., the decision in Walsh v. Lonsdale involved no more than giving the Judicature Acts a procedural operation. But the fact that the jurisdiction was exercised so sparingly demonstrates that in the present case it would be imprudent to assume that specific performance would be awarded as a matter of course. As Evatt J. observed in Dimond v. Moore [1931] HCA 12; (1931) 45 CLR 159, at p 186, with reference to suits for specific performance: "Many circumstances may prevent a plaintiff from succeeding in such a suit, although there was originally a binding agreement for a lease and the plaintiff entered into possession under such agreement. Great difficulties will arise if, in Courts where the judicature system is adopted, a person in possession of land under an agreement is to be treated for all purposes as though specific performance has been decreed from the moment of entry, and the agreement has already been converted into an actual lease on the terms of the agreement." The respondent's failure to register, or procure registration, of the lease, which may have been due to the respondent granting a mortgage to Citibank Limited which was registered in 1987, was a factor which would require to be taken into consideration in deciding whether to award or refuse specific performance. So would the question whether the lease came to an end before the expiration of the term by reason of Sarcourt's default.
Based on the reasoning in Chan, the mere fact that the lessee remained in possession after the time fixed by the original agreement for lease had expired was not ipso facto indicative that an equitable lease had come into existence. We conclude that a lease for a period of five years did not come into existence ipso facto on the exercise of the option. No lease could have come into existence because the respondent lessor refused to submit a lease document reflecting the appropriate rental that was payable at the commencement of the option period under the provisions of the original lease. This refusal would have precluded the respondent from seeking any relief in the nature of specific performance of a lease for the option period, because it was its own conduct which precluded the appellant lessee from entering into the lease. Accordingly, there was no written instrument, no lease at law, and no equitable lease. Alexander James was holding over on the basis that it could, at the least, leave the premises upon giving one month's notice, which it had done. Any obligation to pay monies referable to its occupation of the premises came to an end at the end of the notice period.

The duty of fidelity

Counsel for the respondent submitted that the appellants owed a duty of fidelity to the respondent which dictated that they should have acted in a timely fashion and not delayed the process of discussing the new rent. It was said that the failure of the respondent to offer the appropriate rent was brought about by the delays of the appellants in discussing the rent and that because of a failure to comply with their duty to act in good faith, they were unable to take advantage of the delay that they had created.
There is no evidence that we can see that the failure of the respondent to offer to enter into a lease at the appropriate level of rent was brought about by any delay on the part of the appellants in finalising their discussions with it. This submission, to the extent that it relies on delay on the part of the appellants must fail.
Counsel for the respondent supplemented her submissions on this point by written submissions dated 7 September 2015. The submissions were intended to "address the legal consequences and duties that arose upon the exercise of the option by the first appellant on 6 March 2008." Counsel said that a contract was formed immediately upon the exercise of the option, and that it became: ... necessary to understand that it was ultimately the contract that was formed upon the exercise of the option that the respondent was entitled to have specifically performed, not the draft contract that was later provided as part of performing the contract which arose upon the exercise of the option. Furthermore, both parties owed "fidelity (ie. good faith) to that bargain and to do all things necessary to enable the other party to have the benefit of that contract." She referred to this as an "implied term of "good faith"."
Counsel for the respondent gave a number of examples of why it was said that, in some way, the appellants had breached their duty of fidelity. She said that at all times the respondent lessor was able to issue a lease complying with the requirements of the option lease as set out in the original lease document. "(t)he fact that the rent in the draft contract was not … ultimately the correct rent was, and is, immaterial to whether the contract could be performed." In support of this submission counsel relied on the decision of the House of Lords in Sudbrook Trading Estate Ltd v Eggleton [1983] AC 444. As counsel for the second appellant, Mr Allan, correctly submitted, that case was concerned with the enforceability of a provision for the calculation of a purchase price, and is irrelevant to the enforcement of any renewed lease in these proceedings. We are concerned with what the respondent should have done in presenting a lease document, not with what the respondent could have done, but did not do, pursuant to its obligations once the option was exercised. The appellants bear no responsibility for the failure of the lessor to offer a renewed term at the correct quantum of rent.
The respondent's counsel also relied upon the conduct of the appellants after the exercise of the option. This was said to be relevant with respect to "the negotiation of the rent and the naming of the guarantors." The respondent's counsel said that "the appellants had an obligation to negotiate the rent in good faith (ie. duty of cooperation and fidelity to the bargain) which the evidence clearly demonstrates that they did not do." It was suggested that the appellants were at fault and in breach of a duty of fidelity by not reminding the respondent that it could only provide a renewed lease at the same rental as applied at the end of the initial five year period, and in failing to insist that a lease document be prepared to reflect this. Accordingly, any deficiency in what the respondent had done was always capable of being rectified if drawn to the attention of the lessor by the appellants. She submitted that in failing to alert the respondent to the fact that it had not proffered a lease in correct form, the appellants were in breach of their duty of fidelity.
Counsel for the respondent relied on a number of authorities in support of her submission, one of which was the judgment of Allsop P (as his Honour then was) in United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSW CA 177.
We have carefully read this judgment. It arises out of proceedings in which there was a dispute resolution clause contained within a series of contracts. That clause required the parties to undertake "genuine and good faith negotiations." The circumstances which pertain in those proceedings are relevantly distinguishable from those which apply to these proceedings. It is true that in a long and learned judgment, his Honour makes a number of observations concerning "the notion of fidelity to the bargain" and the obligations of parties to bring an "honest and genuine approach" to settling a contractual dispute so as to give fidelity to an existing bargain, but that notion has no application to the facts applying to these proceedings.
An example of the application of a duty of good faith in the context of lease arrangements is provided by the decision of the High Court of Australia in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51. Mason J (as his Honour then was) said (Barwick CJ, Gibbs, Stephen and Aickin JJ agreeing): 24. Was the respondent's rejection of the appellant's offer to take a lease of the vacant space in the building a breach of contract? This is the next question to be considered. Clause 1 (d), which required the approval of the respondent purchaser to leases after the date of execution of the contract, provided that its approval should not be capriciously or arbitrarily withheld. This sub-clause dealt with the grant of leases before the respondent became the owner, when the appellant was granting leases of parts of the building, subject to the approval of the respondent. 25. But it is common ground that the contract imposed an implied obligation on each party to do all that was reasonably necessary to secure performance of the contract. As Lord Blackburn said in Mackay v. Dick (1881) 6 App Cas 251, at p 263 : "as a general rule . . . where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect." (at p607) 26. It is not to be thought that this rule of construction is confined to the imposition of an obligation on one contracting party to co-operate in doing all that is necessary to be done for the performance by the other party of his obligations under the contract. As Griffith C.J. said in Butt v. M'Donald (1896) 7 QLJ 68, at pp 70-71 : "It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract." (at p607) 27. It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself. (at p608)
There are observations to similar effect in the New South Wales Court of Appeal in Alcatel Australia Ltd v Scarcella (1998) 44 NSW LR 349. Sheller JA observed that, relying on previous decisions of the Court at 368: In New South Wales a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of the contract. There is no reason why such a duty should not be implied as part of this lease. Powell and Beazley JJA agreed in his Honour's conclusion.
The submissions of the respondent based on a duty of fidelity focus in their entirety on the conduct of the appellants. In doing so, the submissions failed to consider the conduct of the respondent at all. We are asked to conclude that the appellants' several failures to ensure that the respondent granted a lease in strict conformity with its obligations following the exercise of the option should be considered without any reference at all to the fact that the respondent persistently failed to indicate in any way that it was prepared to accept rent other than calculated at the market rental. We are asked to conclude in the circumstances that notions of fairness and equity would entitle the respondent to have the appellants committed to a lease for a period of five years at a lesser rental than the respondent was demanding.
The duty of fidelity does not operate in this way. There is a fundamental flaw in the reasoning of the respondent. The law will not permit a person to enforce rights in circumstances where it entitles someone at fault to take advantage of their own blameworthiness. The application of this principle in the context of a lease situation is provided by the decision of the New South Wales Court of Appeal in Ruthol Pty Ltd v Mills [2003] NSWCA 56. Sheller JA (Meagher JA agreeing) said: 94 The maxim (that no party may take advantage of its own wrong) is well established at common law. It has its roots in the sixteenth century where it can be found in the writings of Sir Francis Bacon and Sir Edward Coke. Its influence on the law of contracts has been discussed notably by Reading CJ in the English Court of Appeal in The New Zealand Shipping Company Limited v the Societe des Ateliers et Chantiers de France [1917] 2 KB 717 at 723-4 (see also [1919] AC 1), by the House of Lords in Alghussein Establishment v Eton College [1988] 1 WLR 587 and by this Court in TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 147 and Mitchell v Pattern Holdings Pty Ltd (2002) NSWCA 212 where many of the cases are cited and discussed by Powell JA at [55]. It was recognised in this State in Green v Woodroffe (1828) Dowling Select Cases Vol 1 per Forbes CJ, Stephen and Dowling JJ. In Suttor v Gundowda Pty Limited [1950] HCA 35; (1950) 81 CLR 418 at 441 the High Court said that: "if the stipulation be that the contract shall be void on the happening of an event which one or either of them can by his own act or omission bring about, then the party, who by his own act or omission brings that event about, cannot be permitted either to insist upon the stipulation himself or to compel the other party, who is blameless, to insist upon it, because to permit the blameable party to do either would be to permit him to take advantage of his own wrong, in the one case directly, and in the other case indirectly in a roundabout way, but in either way putting an end to the contract." (my emphasis). 95 However, in Hooper v Lane at 461-2 and 1376, Bramwell B instanced limitations of the rule that "no man shall take advantage of his own wrong." See Broom at 200. 96 In the case of In re London Celluloid Company (1888) 39 Ch D 190 at 206, Bowen LJ described the observations of Bramwell B as being "very instructive" and said that the maxim meant "that a man cannot enforce against another a right arising from his own breach of contract or breach of duty". The case concerned a claim by the liquidator of a company to enforce against directors the payment of calls on shares. At 207 Bowen LJ said: "Here there has been a breach of contract by the company but the right to enforce payment of calls does not arise from that breach. Even if it did, I doubt whether the maxim would apply. You cannot sue a person whom you have wronged, for a demand arising out of the wrong, but that rule does not apply in favour of transferees, unless they have by special agreement been clothed with all the rights and cross demands of the transferors. Again, the maxim cannot be applied so as to defeat rights which have subsequently arisen..." (my emphasis.)
In the circumstances of these proceedings, the respondent persistently declined to grant a lease to the appellant lessee in the terms to which it was entitled under the option which had been granted to it. In doing so, it was in breach of its duty of fidelity to do what was necessary to effect the agreement it had made with the appellant lessee. Thereupon, the appellant lessee accepted the refusal of the respondent to grant a lease as a repudiation of its obligations and terminated its relationship with the respondent. To permit the respondent to seek to enforce a lease for a period of five years in the face of this conduct would be to permit the blameable party to take advantage of its own wrong. This clearly falls within the maxim described in Ruthol, as observed by Bramwell B "that a man cannot enforce against another a right arising from his own breach of contract or breach of duty."
It was the respondent who persistently and, incorrectly, insisted that the relevant rental to be paid at the commencement of the option period was market rent. If there was some principle of fidelity which applied, it would arguably be breached by the respondent persisting with this assertion. We cannot apprehend that any breach of any principle or notion of fidelity recognised at law could apply to any conduct of the appellants in dealing with the respondent concerning the negotiation of the lease for the renewed option period. In circumstances where the raising of an issue of this kind had tenuous validity at best, we do not understand why counsel for the respondent insisted on pursuing it. We find that the submission that in some way the appellants should have insisted that the respondent conduct itself in accordance with its obligation under the option provision to be contrary to accepted business practices, commercially unrealistic, impractical, and contrary to the principles of law concerning the application of a duty of fidelity.
For these reasons we reject the respondent's submission that in some manner, a duty of fidelity operates so as to enable the respondent to seek to enforce a five-year lease against the appellants which it was not, on the evidence, prepared to grant to the appellant lessee.
Because of the reasons why we have determined to uphold the appeal, it is not necessary for us to deal in any detail with the application of the duty of fidelity to the circumstances of the second appellant.

Conclusion

We have concluded that the appellant lessee was entitled to terminate its occupation of the premises by the giving of the notice to the respondent which we have earlier described. Accordingly, it had no continuing obligation to pay any monies to the respondent referable to any occupation of the premises on and after the date of termination of its occupancy, namely 31 March 2009.
It is not clear what were the components of the amount of the compensation that the appellants were ordered to pay, because the Senior Member was bound to apply a monetary limit of $400,000.00. It appears that all of the compensation which the Senior Member ordered to be paid to the respondent by the appellants was calculated by reference to obligations under the putative five year option lease and an asserted breach of that lease, because he rejected the claim for the costs of making good. In circumstances where we have held that that lease does not exist, it follows that the respondent has no entitlement to any compensation.
We conclude that the Senior Member erred when he found that the lease did come into existence and that decision and consequential orders must be set aside pursuant to s 81(1)(c) of the Act.

Costs

The second appellant sought a costs order in his favour. The remaining appellants did not seek any costs order in these appeal proceedings. The respondent sought that costs be reserved. The parties are no doubt cognisant of the provisions of s 60 of the Act. We shall reserve costs, including any question concerning the costs of the proceedings before the Senior Member and grant liberty to apply, including the costs of all appellants referable to the adjournment necessary to consider the fidelity issue raised by counsel for the respondent.

Orders

We make the following orders: 1. The appeal is allowed 2. The order of the Tribunal for the payment of monies by the appellants to the respondent is quashed 3. Liberty to apply to any party with respect to costs which must be exercised within one month of this date.

I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar

Amendments 03 November 2015 - Coversheet - spelling correction 04 November 2015 - Coversheet - amendment to Member name to include ADCJ for F Marks. 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. Decision last updated: 04 November 2015

(1998) 44 NSW LR 349

At a glance

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Decision date

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Judgment (19 paragraphs)

Parties

Cases Cited (14)

Cited By (3)