Australian Leisure & Hospitality Group Ltd v The Trust Company

1 The parties entered into a most unusual leasing arrangement that permitted the tenant to undertake development of the leased premises. Schedule 3 sets out in detail the terms on which the tenant may develop the premises. The lease and schedule together with the prospectus of each party, issued very shortly after the lease was entered into, reflect the parties' intention that the landlord have a prescribed and continuing level of control over any development.

2 I have had the considerable advantage of reading in draft the reasons of Mandie JA with which I entirely concur. The trial judge correctly answered each of the questions which were posed for his determination. The appeal should therefore be dismissed.

3 This appeal involves the proper construction of a lease dated 4 November 2003 ('the Lease') and is brought by Australian Leisure & Hospitality Group Limited ('ALH') against a judgment and orders made in the Trial Division on 23 April 2010. ALH was the plaintiff in the proceeding below and the respondent, The Trust Company (Australia) Limited, formerly known as Trust Company Fiduciary Services Ltd ('TC'), was the defendant.

4 The demised premises are the Vale Hotel situated in Mulgrave, Victoria ('the Premises') of which ALH is the lessee and TC is the lessor and registered proprietor.

5 The dispute involves the interpretation of development rights conferred upon ALH in relation to the Premises by cl 2.1 of Schedule 3 of the Lease, and associated rights and obligations under Schedule 3 of the Lease, including the appropriate methodology for valuing the Premises before and after a Development (as defined),

and for ascertaining the Market Rent (as defined) payable after a Development. The key question that arose between the parties to the Lease was whether these development rights conferred upon ALH permitted ALH to excise and retain surplus land without notifying to TC a proposed use for that surplus land. Associated questions concerned the appropriate valuation methodology and the definition of the valuer relating to certain valuations required under the provisions of the Lease dealing with development proposals.

6 The Lease was the product of the divestment by Foster's Group Limited, in about August 2003, of its Leisure and Hospitality Division into two publicly listed entities, namely the ALE Property Group (with TC as trustee of a hotel-owning sub-trust, the ALE Direct Property Trust), which was to own the freehold title to 105 hotels or pubs, and ALH, which was to own and conduct the hotel businesses and attached bottle shops pursuant to a number of leases in the same or similar terms.

7 There were two public floats. Under the prospectus issued for the ALE float, it was stated that ALE had acquired the 105 hotels and that the plant furniture and equipment, gaming and liquor licences, goodwill and the right to profit from future development opportunities associated with each hotel in the portfolio was to be owned by ALH and not the ALE Property Group.

8 The Lease provides for an initial 26 year term, commencing in 2003 and expiring in 2028, together with four 10 year options to renew, making a total term of 65 years. Rent is subject to rent reviews linked to CPI annually and Market Rent reviews (subject to a 10% cap and floor) in year 15 (2018), and (without cap or floor) at the commencement of each new term (that is, at the commencement of years 26, 36, 46 and 56). The Lease uses the terminology of 'the Landlord' and 'the Tenant'. The appellant and the respondent were both very critical of the drafting of the Lease. While it must be acknowledged that the drafting of a document designed to apply for up to 65 years is not without difficulty, the criticism by the parties was in my opinion fully justified. The Lease is a tangle of confusing verbiage such that litigation of the kind now before the Court was inevitable.

9 The Lease contains several sets of provisions for works to be carried out on the Premises. Clause 10 deals with 'Tenant's Works.' Clause 10.1 refers to alterations necessitated by a 'Requirement' (this includes any notice given by an 'Authority'). The Tenant is required (at its expense) to carry out such works, unless, generally speaking, they are 'Structural Work'. Under cl 10.2 the Tenant may make 'Minor Alterations', also at its cost, in accordance with cl 10.3. 'Minor Alterations' are defined as works, additions or improvements to the Premises which cost less than $350,000 (subject to CPI increases) and do not include 'Structural Work', or any work, addition, alteration or improvement to the Premises which includes 'Structural Work' but which will cost less than $1,000,000 (indexed) and completed within a certain time. There are other exceptions to the Structural Work limitation. Under cl 10.3, the Tenant is required to follow a prescribed procedure for 'Minor Alterations'. This includes in some instances giving notice to the Landlord.

10 Clause 10.5 provides for the procedure that must be followed on 'Major Alterations'. A 'Major Alteration' means any work, addition, alteration or improvement to the Premises which is not a 'Minor Alteration'. The Landlord's consent is required for Major Alterations. If the Landlord and Tenant do not agree over the Major Alterations, a dispute mechanism contained in cl 31 may be resorted to. A Major Alteration is also to be carried out at the Tenant's cost, unless otherwise agreed.

11 Another set of provisions dealing with works is introduced by cl 27 of the Lease which is headed 'Future Development of Premises' and provides:

The parties must comply with the provisions relating to future development of the Premises as set out in Schedule 3.

12 Schedule 3 contains a complex set of provisions, the most significant features of which are set out or summarised below.

13 Clause 2.1 of Schedule 3 headed 'Term' provides:

Until the expiry of the Term:

(a) the Tenant has an exclusive right to cause the Development of the Premises and retain the associated Proceeds in accordance with clause 2 subject to the Landlord, the RC, the ALE Property Trust and the ALE Direct Property Trust being kept whole.

(b) the Landlord must not redevelop or construct any building or other improvements on the Premises unless the Tenant consents to it doing so; and

(c) the Tenant may at its own cost and expense submit to the Landlord, Indicative Development Proposals, Final Development Proposals (and variations to them) for the Premises for approval in accordance with this Schedule.

Proceeds means, subject to any adjustments arising under clauses 2.7(a), 2.7(b) or 2.10, the payment from a Developer for the Balance Lot net of:

(a) any contribution by the Landlord towards any Works it will own; and

(b) any other costs with respect to a Development the Tenant agrees to bear.

Developer means the developer named under any development or other agreements entered into with respect to development of the premises.

16 Clause 2.5 gives some indication of the nature of a Developer and shows the involvement of the Landlord in the process, as it relevantly provides:

(c) the Tenant must enter into a Development Agreement with a Developer:

(i) who the Tenant has satisfied the Landlord (acting reasonably) has the experience, expertise and financial and physical resources to undertake the Works ...

17 The process envisaged by Schedule 3 is broadly as follows. The Tenant has the exclusive right to develop the Premises (cl 2.1). The Tenant is entitled to propose to the Landlord a development of the premises (an Indicative Development Proposal - cl 2.2(a)), which the Landlord must consider and may approve with or without conditions or in principle, or refuse (cl 2.2). After the parties have gone through the Indicative Development Proposal process under cl 2.2, the Tenant must prepare a Final Development Proposal. Clause 2.3 sets out the matters which must be contained in a Final Development Proposal and provides as follows:

Criteria for Final Development Proposals

Subject to any matters agreed between the Tenant and the Landlord during the process outlined in clause 2.2, each Final Development Proposal must provide the following information and address the following issues:

(a) Identify the part of the Premises required for the proposed Development.

(b) Identify the air space required for the proposed Development.

(c) Describe the scope of proposed Works.

(d) Describe the Approvals requires for the proposed Development and the steps to achieve those.

(e) Include a worked up feasibility study which includes:

(i) the estimated value of the building and improvements proposed to be constructed under the Final Development Proposal;

(ii) layout and elevation plans, drawings, design brief and a calculation of the estimated design and construction costs;

(iii) a report addressed to both the Tenant and the Landlord concerning the proposed Development from a Quantity Surveyor which:

(A) confirms that the Plans and Specifications are appropriate for the proposed Development;

(B) includes a detailed description of the proposed Works and a listing of the content of the Plans and Specifications; and

(C) confirms that the documentation is sufficient to enable verification of what is built once Practical Completion occurs against the Plans and Specifications the subject of the report;

(iv) an indicative timetable for the Works (including regular meetings with the Landlord);

(v) for the purpose of identifying any proposed payments or rent adjustments as anticipated by clause 2.7:

(A) details of that part of the Premises and the Development which the Landlord will own after the Development is carried out;

(B) details of the premises to be leased by the Tenant after the Development is carried out, including lettable areas (being the same as paragraph (v)(A));

(C) valuations showing:

(1) the then current Market Value of the Premises and an estimate of the Market Value of that part of the Premises and the Development which the Landlord will still own once the proposed Development is carried out, including applicable capitalisation rates;

(2) the Market Rent to be paid by the Tenant after the proposed Development is carried out based on the Market Value of that part of the Premises which the Landlord will own after the Development is carried out assessed in sub-paragraph (C)(1);

(3) details of the Capital Rent (if any ) which is to apply under the Lease of the relevant part of the Premises following Practical Completion of the proposed Development, calculated in accordance with the formula in Schedule 4 and showing all calculations; and

(D) details of the proposed payments or adjustments under clause 2.7 by or to the Landlord and by or to whom; and

(E) if applicable, details of the Market Whole Payment and how it was calculated, using the information provided by the Landlord to the Tenant under clause 2.2; and

(vi) sufficient details and other documentation which the Landlord may reasonably request to enable the Landlord to make an informed assessment of the merits of the Final Development Proposal, including as to tax, depreciation, building allowance, stamp duty, capital gains tax and GST implications (but accounting, tax or legal advice on this information is not required).

(f) Specify whether the proposed Development needs to be funded by the Landlord and to what extent.

(g) If applicable, identify the Balance Lot.

(h) If applicable, provide details of the proposed use of the proposed development on the Balance Lot following subdivision and transfer to the Tenant or its nominee

(i) If applicable, identify restrictive covenants, easements and other rights which will burden and benefit the Balance Lot and the Premises following subdivision of the relevant Premises.

(j) If required by the Landlord, propose appropriate security for the performance of the Development Agreement with the Developer and the delivery of the Development in accordance with the Development Proposal.

(k) Terms sheets with the main commercial terms for and the structure of and parties to the documentation proposed to implement the Final Development Proposal including conditions precedent and a program for completion of them.

Despite any other provision of this Schedule, development proposals which do not satisfy the criteria in this clause 2.3 may be considered by the Landlord in its absolute discretion from time to time.

18 Any refusal by the Landlord to approve an Indicative Development Proposal or a Final Development Proposal (or the imposition of conditions with respect to such approval) is not subject to the dispute provisions contained in cl 31 of the Lease, as is provided by cl 2.4(b) of Schedule 3.

19 Clause 2.7 of Schedule 3 contains adjustment mechanisms with respect to Approved Development Proposals which are described as either 'value up' (cl 2.7(a)) or 'value down' (cl 2.7(b)) - the 'value up, value down process'. The value up process may be summarised as follows. If the estimated Market Value set out in the Approved Development Proposal of that part of the Premises and a Development which the Landlord will own after the proposed Development is carried out is greater than the pre Development Market Value, the Landlord must pay the Developer for that estimated increase in value (less any Make Whole Payment). In addition, the total consideration payable by the Tenant under the Lease is to be adjusted up by varying the Rent to the Market Rent agreed in the Approved Development Proposal. If the Make Whole Payment exceeds the said increase in Market Value, the Tenant has to procure the Developer to pay the excess to the Landlord. The value down process is the other side of the coin. If the estimated Market Value set out in the Approved Development Proposal of that part of the Premises and the Development which the Landlord will own after the proposed Development is carried out is less than the pre Development Market Value of the Premises, the Tenant must, or must cause the Developer to, pay the Landlord for the estimated decrease in value and the total consideration payable by the Tenant under the Lease is adjusted down. Further, the Tenant must, or must procure the Developer to, pay any Make Whole Payment to the Landlord.

20 Clause 2.8 of Schedule 3 provides (on practical completion of the Works) that the parties will arrange for a quantity surveyor to inspect and certify whether the Works have been carried out substantially in accordance with the approved plans and specifications. If either party is of the view that the Market Value of the part of the Premises to be owned by the Landlord is different from that previously estimated, there is a mechanism in cl 2.9 for the joint appointment of a Valuer to determine the Market Value and the Market Rent if the parties disagree thereon.

21 Clause 2.11 of Schedule 3 deals with the 'Balance Lot' and provides:

If an Approved Development Proposal contemplates the transfer of a Balance Lot to the Tenant or its nominee, then (subject to terms of any document entered into under clause 2.5(b) and anything else the parties may agree in writing) the Landlord agrees to make an offer for the Tenant or its nominee to purchase the Balance Lot for $1.00, which offer shall remain open until the date of expiry of the Term with respect to the relevant Premises.

22 While any Balance Lot is to be transferred to the Tenant for $1, Schedule 3 contains other mechanisms for compensating the Landlord if that is appropriate (the value up, value down process and the Make Whole payment).

23 In the case at hand, the trial judge was asked whether a Development Proposal must include development of the Balance Lot. The issue arose because the Tenant put forward a Development Proposal that merely provided for the subdivision of the Premises and the transfer of the Balance Lot to the Tenant for $1. This would have reduced the value of the Premises and presumably the Tenant would be required to pay to the Landlord an amount. That amount would be calculated on the reduced value of the Premises (not on the value of the Balance Lot). The amount might be less than the stand alone value of the Balance Lot.

24 Clauses 2.5 and 2.6 of Schedule 3 provide as follows:

2.5 Approved Development Proposals

If the Landlord approves a Final Development Proposal during the Term, then:

(a) the Tenant must procure Practical Completion of the Works undertaken pursuant to that Development Proposal and perform the Tenant Duties with respect to it;

(b) the Tenant and the Landlord must (and the Tenant must procure the Developer to) promptly enter into the necessary documents and do everything reasonably required to give effect to the rights and obligations (including payments) of each party to the other as anticipated by the Approved Development Proposal and this Schedule; and

(c) the Tenant must enter into a Development Agreement with a Developer:

(i) who the Tenant has satisfied the Landlord (acting reasonably) has the experience, expertise and financial and physical resources to undertake the Works;

(ii) which is consistent with the then current industry standards for contracts for development and construction of works similar to the Works to be undertaken pursuant to the Approved Development Proposal (including in respect of the provision of warranties; and

(iii) which provides for (among other things):

(A) the delivery of the development not materially different to the Approved Development Proposal (including to the quality and standard specified in the Development Proposal);

(B) obtaining and maintaining the necessary Approvals for the development;

(C) construction of the Works in a proper workmanlike manner and in accordance with any Approvals and the Law;

(D) a defects liability period of not less than 12 months or such other period as the Landlord may reasonably require;

(E) reasonable warranties and guarantees from manufacturers or suppliers of any materials or goods incorporated in the Works;

(F) no variations to plans and specifications or the Works without the consent of the Tenant;

(G) where the Works relate to buildings, structures or other improvements which the Landlord owns or will own (other than leasehold improvements), the benefit of depreciation and building allowances to vest in the Landlord and for all materials necessary to enable tax, depreciation, building allowance, capital gains tax, GST and related impacts to be assessed and records to be created and maintained;

(H) appropriate insurances including insurance of the Works for their full replacement value on a replacement and reinstatement basis, public liability insurance, professional indemnity insurance and workers compensation insurance at levels consistent with then current industry standards, such insurances to name the Landlord as co-insured;

(I) where the Landlord is a party to the agreement, the Landlord's then current limitation of liability provisions; and

(J) any other provision the Landlord and the Tenant each acting reasonably agrees.

2.6 Overriding provisions in relation to certain types of development

Despite anything in this clause 2 or clause 3, if an Approved Development Proposal:

(a) does not involve the refurbishment or demolition or redevelopment of the existing improvements on the Premises; and

(b) only involves development on the Balance Lot which is to occur after subdivision of the Premises and the transfer of the Balance Lot to the Tenant or its nominee,

Then the Landlord agrees that the Tenant's only obligations under this clause 2 are to:

(c) procure the subdivision in accordance with the Development Proposal approved by the Landlord;

(d) procure such restrictive covenants, easements and other rights which benefit and burden the Premises and the Balance Lot as are reasonably required by an Authority or the Landlord if directly attributable to the Approved Development Proposal; and

(e) comply with clause 2.7, 2.8, 2.9, 2.10, 2.12, 2.13, 2.14, 2.15 and 2.16.

25 Clause 2.6 appears to contemplate that a Final Development Proposal might be approved where the proposal does not involve the refurbishment or demolition or redevelopment of the existing improvements on the Premises and only involves development on the Balance Lot which is to occur after subdivision of the Premises and after the transfer of the Balance Lot to the Tenant or its nominee.

26 Thus, a Development Proposal might (if not must) involve development on the Balance Lot which is to occur after subdivision of the Premises and transfer of the Balance Lot to the Tenant. In that event, the Landlord agrees that the Tenant's only obligations under cl 2 of Schedule 3 are to procure the subdivision and procure restrictive covenants, easements and other rights which benefit and burden the Premises and the Balance Lot as are reasonably required by an Authority, or by the Landlord if directly attributable to the Approved Development Proposal, and to comply with certain identified provisions of the Schedule. I interpolate here that, in so far as covenants prevent the use of the land in a certain way, that could only be 'directly attributable' to an Approved Development Proposal if the uses were specified or implicit in the proposal.

27 By email dated 22 December 2006, ALH submitted an Indicative Development Proposal to TC to subdivide and transfer to ALH for $1 part of the land upon which the Vale Hotel is situated ('the Balance Lot'). By letter dated 14 February 2007, TC gave in principle approval to the Indicative Development Proposal subject to various conditions.

28 Under cover of a letter dated 24 July 2007, ALH submitted a document headed 'Final Development Proposal' to TC for the subdivision and transfer of the Balance Lot to ALH. The Final Development Proposal stated that the Proposed Development was the subdivision and creation of the Balance Lot, and that there was no current proposal for development following the subdivision and transfer of the Balance Lot. The Final Development Proposal was accompanied by a report from Mr Lunney, concerning the valuation matters required by cl 2.3 of Schedule 3 of the Lease.

29 Relevantly, Mr Lunney's report concluded that the adjusted Market Rent payable by ALH to TC after the proposed development - applying the Valuation Methodology set out in Part A of Schedule 1 of the Lease - was $405,000 per annum.

30 Mr Lunney was engaged by ALH and was not appointed by agreement between ALH and TC.

31 By letter dated 31 July 2007, TC informed ALH that it considered that the Final Development Proposal was not valid because it did not comply with cl 2.3 of Schedule 3 of the Lease in various respects including that the valuation required for a Final Development Proposal must be prepared by a Valuer (as defined under the Lease) appointed by agreement between the parties and that the methodology used by Mr Lunney in his valuation was incorrect.

32 TC's valuer, Mr Close, arrived at a different valuation of the Premises and the Market Rent in a report he provided for the purposes of the proceeding below, dated 22 December 2008. Relevantly, Mr Close's report concluded that the adjusted Market Rent payable by ALH to TC after the proposed development - applying the Valuation Methodology set out in Part A of Schedule 1 of the Lease - was $738,396 per annum.

33 The valuation methodology used by Mr Lunney and Mr Close for assessing Market Rent differed.[1]

34 At trial, notwithstanding the scope of the pleadings, the parties agreed that the following four questions should be answered and the judge answered them in substance as follows:[2]

Q1: Does the development right conferred upon [ALH] under cl 2.1(a) of Schedule 3 of the Lease permit [ALH] to excise and retain surplus land (a Balance Lot) without any proposed use or further development of the Balance Lot?

A1: No - His Honour found that '[i]n the absence of agreement to waive the requirements of cl 2.3, a Final Development Proposal involving the subdivision of a Balance Lot must provide details of the development on and the use or proposed use of the Balance Lot following subdivision and transfer to the tenant or nominee.'

Q2: Does such a development come within cl 2.6 of Schedule 3 of the Lease?

A2: No - His Honour found that '[t]he overriding provisions of cl 2.6 require there to be an Approved Development Proposal which is a Final Development Proposal approved by the Landlord under cl 2.4 of Schedule 3'

Q3: What is the appropriate valuation methodology under the Lease for determining the valuations referred to in cl 2.3(v)(C)(i) and (ii) of Schedule 3?

A3: As to the appropriate valuation methodology, his Honour found that 'cl 2. 3(e) (v) (C) in Schedule 3 requires a Valuer of the Premises to assess the Market Rent on the basis of a going concern, ignoring or putting to one side and making no allowance for, any value attributable to licences. It is only by adopting such an approach that a Valuer can take into account 'the use conducted on the Premises' and at the same time 'disregard (any) value attributable to licences ....'

Q4: Is it a requirement under the Lease that the valuation accompanying a Final Development Proposal under cl 2.3(e)(v)(C) of Schedule 3 be provided by a 'Valuer' as defined in cl 1 of Schedule 3?

A4: Yes - His Honour found that 'The assessment of Market Rent under cl 2.3 requires the application of the Valuation Methodology [set out in Part A of Schedule 1]. That methodology assumes an assessment by a Valuer. It requires the Valuer to take into account, amongst other things, submissions provided by the landlord and tenant. It is not a unilateral process. The purpose of assessing Market Value and Market Rent under cl 2.3 is to provide the basis for adjustments under the Lease. That purpose is best served by a Valuer appointed by both parties. Under Schedule 3 a Valuer means 'a person who ... is appointed by agreement between the parties ...' It is consistent with the purpose of the assessments that they be made by a Valuer appointed by agreement. It would lead to absurd consequences if they were not. In my opinion the valuations referred to in cl 2.3(e)(v)(C) are assessments made by a Valuer.'

35 On 23 April 2010, the judge made declarations in favour of TC as follows:

1. The development rights conferred upon [ALH] under cl 2.1(a) of Schedule 3 of [the Lease] did not permit [ALH] to require the subdivision and transfer of a Balance Lot in the absence of a proposal which includes details of the proposed development on, and the use or proposed use of, the Balance Lot following subdivision and transfer to the Tenant or its nominee;
2. The overriding provisions of cl 2.6 of Schedule 3 of the Lease will only operate in respect of an Approved Development Proposal which is a Final Development Proposal approved by TC under cl 2.4 of Schedule 3;
3. [ALH's] development proposal dated 24 July 2007, described by it as a Final Development Proposal, was not one to which cl 2.6 of Schedule 3 of the Lease applied;
4. Valuations to be made under cl 2.3(e)(v)(C) of Schedule 3 of the Lease are to be made by a Valuer as defined in cl 1 of Schedule 3 of the Lease;
5. The valuation prepared by Lunney Watts & Associates, dated 19 July 2007, which accompanied [ALH's] development proposal, dated 24 July 2007, was not a valuation of Market Rent or Market Value of the Premises for the purpose of cl 2.3(e)(v)(C) of Schedule 3 of the Lease; and
6. A Valuer of the Premises required to assess the Market Rent of the Premises under cl 2 3(e)(v)(C) of Schedule 3 of the Lease is required to take into account the business conducted on the Premises as a going concern, but is to ignore or put to one side and make no allowance for any value attributable to a Gaming Licence or Liquor Licence as defined in cl 1.1 of the Lease.

36 ALH, by its notice of appeal dated 6 May 2010, contended that the judge should have found that:

(a) The development rights conferred by cl 2.1(a) of Schedule 3 of the Lease permitted ALH to subdivide and retain a Balance Lot without providing details of any proposed development and use of the Balance Lot following subdivision and transfer to ALH.

(b) Clause 2.6 of Schedule 3 of the Lease applied to a Development Proposal which involved only the subdivision of the Premises and the transfer of a Balance Lot to ALH;

(c) ALH's development proposal dated 24 July 2007 was one to which cl 2.6 of Schedule 3 applied;

(d) The valuation required to be made under cl 2.3(e)(v)(C) of Schedule 3 of the Lease could be made by a valuer appointed by ALH; and

(e) Clause 2.3(e)(v)(C) of Schedule 3 of the Lease did not require a Valuer to assess the Market Rent of the Premises having regard to the hotel business conducted on the Premises but [the Valuer] was required to assess the Market Rent of the Premises on the basis of the land and buildings only excluding the business conducted on the Premises.

37 In his reasons, the judge concluded[3] that the scheme for the redevelopment or further development of the Premises found in the Lease, when read as a whole, conveyed a clear intention that the 'Development' to be proposed by the tenant to the Landlord as part of an Indicative Development Proposal or Final Development Proposal where that involved the subdivision of a Balance Lot, required a proposal for development on the Balance Lot. His Honour said that, if the development was to take place in the future (after subdivision), it had to be approved in advance by the Landlord (if the Landlord so required).

38 His Honour said[4] that cl 2.6 of Schedule 3 presupposed the existence of an Approved Development Proposal and, thus, a precondition to the operation of the overriding provisions of cl 2.6 was compliance with cll 2.3 and 2.4. In other words, his Honour concluded that the Tenant had to provide details of the proposed use of the proposed development on the Balance Lot following subdivision (cl 2.3(h)) as a precondition to the operation of cl 2.6.

39 His Honour said[5] that compliance with cl 2.3(h) would ensure that the Landlord would have an informed opportunity to consider restrictive covenants, easements and other rights[6] which would burden and benefit the Balance Lot and the Premises following the subdivision. His Honour said that, consistently with that approach, cl 2.3(h) should be interpreted as a requirement applicable in every case where there was proposed to be a Balance Lot. Once it became necessary to identify a Balance Lot under cl 2.3(g) (and that would be necessary whenever a Balance Lot was proposed), cl 2.3(h) became applicable and required the provision of details of the proposed use of the proposed development on the Balance Lot following subdivision.

40 His Honour said[7] that, unless a development proposal that involved a Balance Lot informed the Landlord of the future use of the land, the Landlord would be denied any real opportunity to consider and approve covenants to achieve the legitimate and contemplated protection afforded under the scheme.

41 His Honour said[8] that the words in cl 2.6 'Despite anything in clause 2 or clause 3' did not eliminate the process under which the Landlord might approve a Development Proposal. His Honour said that those words were intended to give paramountcy to the terms of the Approved Development Proposal over the requirements of cl 2.5 and the Tenant's duty set out in cl 3.

42 For those reasons, his Honour answered questions 1 and 2 'no'.

43 ALH submitted that the provisions of the Lease are to be construed in accordance with what a reasonable commercial person in the position of the parties would understand those provisions to mean having regard to the text (construed in the context of the Lease as a whole), the surrounding circumstances known to the parties and their commercial purpose and object. ALH said that the objective was to give the Lease a harmonious and commercially sensible construction, not one which was unduly literal or technical or one which produced consequences which were unreasonable, inconvenient or unjust.

44 ALH submitted that the Tenant's exclusive right to cause the Development of the Premises and retain the benefit of the Development permitted it to subdivide and retain surplus land. ALH submitted that the word 'development' embraced the widest form of activity, including the subdivision of land. The fact that some of the provisions of Schedule 3 assumed enhancement of the Balance Lot beyond a mere subdivision did not distract from that construction. The commercial object of the development right, ALH submitted, entitled it to generate profits beyond those derived from the existing use of the Premises, and that included subdividing and retaining surplus land as an asset, this being an obvious manner in which that commercial object could be achieved. ALH submitted that the construction adopted by the judge led to artificial outcomes. For example, the Tenant would be entitled to subdivide and retain surplus land if it bitumenised a part of the surplus land to create a car park, or by building a small storage shed on it.

45 Further or in the alternative, ALH said that, in the present case, the proposed development was the undertaking of works to sever the Balance Lot from the Premises, namely any works that were required to effect a subdivision and transfer of the Balance Lot. ALH, while conceding that no physical works were specified in the Development Proposal, said that at a bare minimum there would have to be a survey in order to prepare a plan of subdivision.

46 ALH submitted that the words 'if applicable' in cl 2.3(h) indicated that it was only if there was a proposed development on the Balance Lot that details of the proposed use needed to be provided - there was not necessarily going to be a proposed use at all. Not every Development Proposal would involve information under every one of the provisions in cl 2.6. For example, there might not be a developer.

47 ALH submitted that the word 'and' in cl 2.6(a) was disjunctive, although that might not be crucial to the outcome of the case. However, senior counsel for ALH then conceded that if 'and' was conjunctive and development on the Balance Lot involved more than the mere creation of the subdivision, TC would succeed on its construction. ALH accepted that this was, indeed, part of the trial judge's reasoning.

48 ALH submitted that there was no reason why the Landlord needed to know of the future use of the Balance Lot in order to determine what covenants were necessary to protect the retained Premises.

49 ALH submitted that a Development Proposal merely involving the subdivision and retention of surplus land fell within cl 2.6 and the protective rights of the Landlord under cl 2.5 were inapplicable.

50 In relation to cl 10 of the Lease dealing with 'Tenant's Works', ALH said that 'apparently' this provision, in relation to minor and major alterations, had to be satisfied in addition to the provisions of Schedule 3.

51 The submissions on behalf of TC took the same general approach to construction of the Lease as that advanced on behalf of ALH.[9] TC submitted that, having regard to the structure and language of the Lease as a whole, including Schedule 3, the Tenant was obliged, as part of a Final Development Proposal, to provide details of the proposed use of the proposed development on the Balance Lot and that cl 2.6 of Schedule 3 contemplated and necessarily applied to the situation where development works were to take place on the Balance Lot after subdivision and transfer thereof, as was also contemplated by cl 2.3(h) of Schedule 3. TC submitted that the words 'if applicable' in cl 2.3(h) meant 'if there is a Balance Lot'.

52 In its submissions, TC emphasised the importance of the references in the Lease and in Schedule 3 to 'the Developer'. TC referred in cl 2.1(a) of Schedule 3 to the exclusive right of the Tenant to 'cause' the Development of the Premises coupled as it was with the right to retain the associated 'Proceeds'. TC emphasised the definition of Proceeds as being the payment from a Developer for the Balance Lot and also referred to the definition of Developer as meaning the developer named under any development or other agreements entered into with respect to Development of the Premises. In that regard, TC pointed, by way of background, to the ALH prospectus which stated, inter alia:

ALH's venue redevelopment activities involve the sale of excess land adjacent to ALH venues to third party developers and will generally involve redevelopment of the existing ALH venue.

the agreements are all with third party property developers whereby the developer offers to construct, at its cost, new residential or commercial premises on the remainder of the land not occupied by the pub in addition to renovating or reconstructing the pub premises. The land is subdivided so the developer keeps the land on which the residential or commercial premises are located.

53 TC said that it was thus conceived that there would be potential for development involving third party developers of what the parties called the Balance Lot and that this background confirmed the indications in the document itself that a third party developer was to be involved.

54 In my opinion, these central submissions of TC in relation to questions 1 and 2 should be accepted and the learned trial judge was correct in his answers to these questions. The development right conferred upon ALH does not permit it to excise and retain surplus land without any proposed use or further development of the Balance Lot. A Final Development Proposal involving a Balance Lot must provide details of the development thereon and the proposed use thereof. I so conclude for the reasons stated by the learned trial judge[10] and for the following reasons which are essentially those advanced on behalf of TC on appeal.

55 I consider that the natural interpretation of cl 2.6 is that the provision is intended to apply conjunctively to the position where an Approved Development Proposal 'does not involve the refurbishment or demolition or redevelopment of the existing improvements on the Premises' and 'only involves development on the Balance Lot' occurring after 'subdivision of the Premises and the transfer of the Balance Lot to the Tenant or its nominee'. This means, as it says, that there must be development on the Balance Lot after subdivision and transfer thereof.

56 Thus, once due weight is given to the expression 'after subdivision of the Premises and the transfer of the Balance Lot', it can be seen that the plain meaning of cl 2.6(b) is incompatible with the submission of ALH that the provision was intended to embrace the mere subdivision of the Premises or such development as might be constituted by a survey or other work necessary for the subdivision. Further, ALH's submission is incompatible with the relevant ordinary meaning of 'development', quite apart from the context provided by the Lease with its many references to 'the Developer' and to 'Development Agreement' and to 'Works' defined as meaning 'construction and any other works undertaken pursuant to a Development'.

57 As to the ordinary or natural meaning of the word 'development', Sugerman J said, in Ex Parte Arnold Homes Pty Ltd:[11]

It is ... questionable whether mere subdivision consisting of no more than a division into lots and sale of the individual lots, without road construction or other works, is development in the natural sense of the term, which seems to envisage some improvement upon the natural condition of the land so as to enable it to be put to some better use.

58 The interpretation that the nature of the development on the Balance Lot is such that there must be a third party developer involved is supported by reference to cl 2.7 of Schedule 3, which provides in the value up process for the Landlord making a payment to the Developer (and which in the value down process also appears to assume the existence of 'the Developer').

59 Further, cl 2.6 of Schedule 3 depends for its operation upon the existence of an Approved Development Proposal. For an Approved Development Proposal to come into existence, it is necessary (subject to any agreement to the contrary) for the Tenant to comply with the mandatory requirements of cl 2.3 of Schedule 3. Among other things, the Tenant must identify the part of the Premises required for the proposed Development, describe the scope of proposed Works, include a worked up feasibility study including claims and drawings and a report from a quantity surveillor and a number of matters anticipating the operation of cl 2.7. Of course, one of the requirements of cl 2.3 is the one in issue in this case, namely, the provision of 'details of the proposed use of the proposed development on the Balance Lot following subdivision and transfer...'[12]

60 Further again, cl 2.6 requires the Tenant to comply with cll 2.7, 2.8 and 2.10. Clause 2.8 requires the parties to arrange for a quantity surveyor for the purposes therein described, again confirming the assumption that works are to be carried out on the Balance Lot. Clause 2.10 also refers to the role and involvement of 'the Developer'.

61 In my opinion, Schedule 3 contemplates a redevelopment of the Premises in some way, either by selling of part of the Premises to a developer for some development to take place on it or by redeveloping the Premises or by a combination of these. I accept TC's submission that cl 10 of the Lease dealing with Tenant's Works is designed to cover situations where no Developer is involved[13] and where the Tenant might wish to retain a builder to construct some improvement on the Premises (for example, an additional storey on the hotel). On the construction which I accept, Schedule 3 discloses a rational commercial scheme whereby the Landlord is involved in the Development Proposal process, thereby enabling the Landlord to disapprove or approve of the proposal and to assess what protection it might require by way of covenants and easements. The whole process under Schedule 3 is subject to the obligation to keep the Landlord (and associated parties) 'whole'. Schedule 3 contains a scheme under which the Tenant is entitled to the Proceeds as defined but the quid pro quo is that the Landlord has a measure of control and is entitled to know, in the case of the Balance Lot, what the proposed development is going to be. The Landlord would not have that measure of control if the Tenant could merely retain or sell off the Balance Lot. Accordingly, the natural construction of the provisions in issue appears to me to conform to the commercial objectives disclosed by the Lease and the surrounding circumstances.

62 There remain some difficulties under cl 2.6 having regard to the identification in cl 2.6(e) of those parts of cl 2 with which the Tenant is obliged to comply (thereby excluding some parts of cl 2, such as cl 2.5). Further, the opening words of cl 2.6 'despite anything in this clause 2 or clause 3' and the following words 'the Tenant's only obligations under this clause 2 are ...' were argued by ALH to have the effect that the Tenant was not obliged to comply with relevant parts of cll 2.3 and 2.5. On the other hand, the preconditions to the existence of an 'Approved Development Proposal' must necessarily be satisfied before cl 2.6 can have any operation at all. In addition, the Tenant's duties under cl 3 of Schedule 3 include obligations to ensure that Developers perform their obligations under Development Agreements and also include obligations of the Tenant in relation to the Balance Lot. Further, and in any event, cl 2.6 expressly provides for compliance with cl 2.7 (the value up, value down process) which in turn is predicated upon the existence of 'the Developer'. Although, as is evident, it is not possible to completely reconcile or harmonise all of the relevant provisions, I consider that the construction adopted by the judge best accords with the language of the relevant clauses and the objectives disclosed by the document as a whole.

63 The learned trial judge decided that the 'valuations' that had to be included in the worked up feasibility study required as part of each Final Development Proposal under cl 2.3(e)(v)(C) of Schedule 3 had to be prepared by a 'Valuer' as defined - that is to say, a valuer appointed by agreement between the parties.[14] His Honour said that these valuations were to be employed under cl 2.7 in the value up, value down process and that the valuations 'are not intended as a unilateral position advanced by a party for the purpose of a negotiation' but rather 'intended to be binding valuations resulting in the adjustments under cl 2.7'. His Honour said that this purpose was 'best served' by a valuer appointed by both parties.

64 ALH submitted that the judge's construction was wrong. ALH said that there was no express requirement that a valuation pursuant to cl 2.3(e)(v)(C) had to come from a 'Valuer' appointed by the parties whereas elsewhere in the Lease such a requirement was expressly stated. Further, ALH pointed out that cl 2.3 was directed to the Tenant and set out the information that the Tenant had to include with a Final Development Proposal.

65 ALH submitted that there was no reason why, contrary to what was stated by the judge, the valuations could not be a 'unilateral position' advanced by the Tenant because the function of these valuations was the provision of an 'estimate' of the Market Value of the Premises which the Landlord would still own once the development was carried out and the Market Rent payable by the Tenant based upon that Market Value. ALH said that the valuations accompanying a Final Development Proposal were not binding upon the Landlord and that it was plain from cl 2.7 that the Landlord might agree or disagree with the valuations and, further, once the development was completed, the Landlord could still invoke cll 2.8 and 2.9 and require the parties to 'jointly appoint a Valuer' to determine the Market Value and the Market Rent.

66 ALH pointed out that the word 'valuations' in cl 2.3(e)(v)(C) was in lower case whereas in the definitions in Schedule 3, 'Valuation' and 'Valuer' were capitalised. ALH submitted that the trial judge was therefore not entitled to rely upon those definitions.

67 On the other hand, TC submitted that, the parties having gone to the trouble of including a detailed definition of 'Valuer' in Schedule 3, it defied common sense that the parties would have left the cl 2.3 valuations to be carried out by any person who met the undefined descriptor 'valuer'. Further, TC referred to the reference to 'Market Rent' in cl 2.3(e)(v)(C) and pointed out that 'Market Rent' was defined as meaning 'the current rent for the Premises determined having regard to the matters set out in part A of Schedule 1 (Valuation Methodology)' and that the Valuation Methodology uses the defined term 'Valuer'. TC also referred to cl 4.11(a) of the Lease which relevantly provides:

Within ten Business Days of ... the commencement of any Valuation process under this Lease which requires a determination of market rent, the Tenant must arrange for its auditor to provide to the Valuer copies of the EBITDA figures for the business of the Tenant conducted from the Premises for the previous three financial years.

68 TC submitted that the above textual considerations also supported the construction adopted by the trial judge.

69 I would accept the submissions advanced on behalf of TC. In my opinion, the better view is that the reference to 'valuations' is to be read as a reference to 'Valuation' as defined. I agree that it makes little sense for the parties to have set out a detailed definition of 'Valuer' and 'Valuation' and then to leave the valuations referred to in cl 2.3(e)(v)(C) to be prepared by any person who might be considered as a valuer, whether or not that person satisfies the requirements of the definition. I do not think that the use by the parties of the word 'valuations' with a lower case 'v' is a good guide to interpretation. Looking at Schedule 3 as a whole, there are a couple of references to a valuation with a capital 'V'[15] but in cl 5, there is a reference to valuation with a lower case 'v' in a context where it is clearly intended to refer to a valuation prepared by a defined Valuer. In a document of this complexity with a plethora of terms sometimes capitalised and sometimes not, I am not assisted by that approach.

70 ALH, as noted above, also submitted that the valuations required by cl 2.3(e)(v)(C) were not binding because the Landlord could invoke the mechanism provided by cll 2.8 and 2.9 to resolve any disagreement but an examination of cl 2.8(c) and cl 2.9(a) discloses, I think, that the review mechanism is limited and its existence does not, in my opinion, detract from the construction adopted by the learned trial judge.

71 The proposition that the valuations referred to in cl 2.3(e)(v)(C) must be prepared by a Valuer as defined, and the proposition that the reference to Market Rent in that provision necessarily imports the Valuation Methodology contained in part A of Schedule 1, are mutually reinforcing propositions as the learned trial judge indicated.[16] I am satisfied that, in any event, the valuations required by cl 2.3(e)(v)(C) must use the said Valuation Methodology. Indeed, the dispute on this aspect appeared to centre more on the interpretation of the provisions contained in part A of Schedule 1 than on the question as to whether they applied at all.

72 ALH submitted that the judge erred in concluding that for the purposes of cl 2.3 a valuer was required to determine the Market Rent of the Premises after the proposed development on a 'going concern' basis and that his Honour erred in rejecting Mr Lunney's approach, which was to avoid capturing any rental premium or value attributable to the actual business conducted upon the Premises and to determine the Market Rent for the land and buildings only. ALH referred to the definition of 'Premises' contained in cl 1.1 of the Lease as meaning:

(a) the Land; and

(b) the Building,

But expressly does not include all Authorisations (unless required by Law) or the business conducted by the Tenant from the Premises (including goodwill)

73 ALH said that an assessment of the Market Rent on a 'going concern' basis necessarily involved assessing the Market Rent having regard to the business (and the licences associated with it) conducted on the Premises and was therefore contrary to cl 2.3 and the definition of 'Premises'. The conventional approach of assessing the market rent of hotel premises on an earnings basis was therefore excluded because, under the Lease, ALH owned the hotel business including the licences. It was submitted that ALH should not be required to pay rent for an income producing asset (the business) which it already owned.

74 ALH submitted that his Honour misstated the significance of the Valuation Methodology because all that cl 2.3(e)(v)(C) required was that the Market Rent be 'based on' the Market Value of the Premises and the valuer was directed only to have regard to the Valuation Methodology.[17]

75 Further, ALH submitted that his Honour wrongly discounted the requirement in the Valuation Methodology that '[t]he rent shall be a fair rent for the Premises only and shall disregard ... any value attributable to licences, goodwill [etc] ... [which] remain and are deemed to remain in the ownership of the Tenant.' ALH said that the said requirement supported the approach taken by Mr Lunney.

76 ALH further submitted that his Honour was wrong to conclude that the valuer had to have regard to the 'use conducted on the premises' because the Valuation Methodology only required the valuer to take that into account as at any relevant Rent Review Date.

77 Finally, ALH submitted that his Honour was not entitled to find any support for his construction on the basis that the Valuation Methodology required the valuer to take into account the EBIDTA because the EBIDTA could be used (as Mr Lunney explained) simply to assess the sustainability of the rent based on an underlying commercial rate for the land and buildings only.

78 On the other hand, TC placed great emphasis upon the factor that the valuer was obliged to take into account in assessing the rent the information (EBIDTA) provided to him by the Tenant under cl 4.11.[18] That the valuer was obliged to disregard the value of licences etc did not mean, TC submitted, that the valuer could disregard the actual and potential use of the Premises. The use of the Premises was also required to be taken into account under the Valuation Methodology and its relevance was rendered even more obvious by the obligation of the Tenant to provide information as to the earnings of the business under cl 4.11.

79 TC submitted that, as the trial judge found, it was only by assessing Market Rent, having regard to the business as a going concern and making no adjustment or allowance for any value attributable to the licences, that a valuer can both take into account 'the use conducted on the Premises' and at the same time 'disregard [any] value attributable to the licences.'

80 I would reject the submissions by ALH and accept the said submissions made on behalf of TC as set out above. 'Market Rent' is defined by cl 1 of Schedule 3 to mean 'the current market rent for the Premises determined having regard to the matters set out in part A of Schedule 1 (Valuation Methodology)'. The Valuation Methodology thus imported requires the Valuer to take into account, inter alia, the use conducted on the Premises and the information provided to the Valuer under cl 4.11 of the Lease. This necessitates the approach advanced by TC and adopted by his Honour in his answer to question 3.

81 For the foregoing reasons, I would dismiss the appeal .

82 For the reasons given by Mandie JA, I agree that the appeal should be dismissed.

[1] The judge contrasted the approaches at [58]-[71] of his reasons for judgment.

[2] Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd [2009 VSC 574.

[3] Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd [2009] VSC 574, [45].

[4] Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd [2009] VSC 574, [46].

[5] Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd [2009] VSC 574, [47].

[7] Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd [2009] VSC 574, [48].

[8] Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd [2009] VSC 574, [49].

[10] See [37]-[41] above.

[11] Ex Parte Arnold Homes Pty Ltd; Re Blacktown Municipal Council (1962) 9 LGRA 268, 271 (Herron CJ, Sugerman and MacFarlan JJ) - see too the consideration of the above passage in the judgment of Sugerman J by the High Court in Vumbaca and Anor v Baulkham Hills Shire Council [1979] HCA 66; (1979), 141 CLR 614, 628-9.

[13] The independent operation of these sets of provisions is confirmed by cl 7 of Schedule 3.

[14] Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd [2009] VSC 574, [55]-[57].

[15] See cl 2.10(a)(i)(B) and 2.10(b)(i)(B).

[16] Australian Leisure and Hospitality Group Ltd v Trust Company Fiduciary Services Ltd [2009] VSC 574, [55].

[17] This was to be contrasted, it was argued, with cl 2.6 of the Lease which stated that the 'Current Rent' must be determined in accordance with the Valuation Methodology.