DARIN NOMINEES PTY. LIMITED & ORS. v. FRANKLIN'S SELFSERVE PTY. LIMITED [1999] NSWCA 209

DARIN NOMINEES PTY. LIMITED & ORS. v. FRANKLIN'S SELFSERVE PTY. LIMITED [1999] NSWCA 209 - NSWCA 1998 case summary — Zoe

[8]

2 POWELL JA: The question to be determined on this appeal from a Judgment delivered, and orders made, by Bainton J on 11 February 1997 in proceedings which had been brought by the Appellants against the Respondent in the Commercial Division of the Court is the proper construction to be accorded to the provisions of what might be called "a rent review clause" contained in a lease granted by the Appellants' predecessor in title to the Respondent in 1985 in respect of part of a shopping centre at Port Macquarie, which shopping centre came to be known as "Settlement City Shopping Centre" ("Settlement City"), and which shopping centre appears to have been developed by a company known as McConaghy Holdings Pty. Limited ("McConaghy"). 3 On 9 November 1983, the Respondent wrote to McConaghy a letter which, so far as is relevant to the present question, was as follows (AB 11-17): "RE: PROPOSED SUPERMARKET IN SHOPPING CENTRE DEVELOPMENT SETTLEMENT SHORES NEAR CORNER PARK AND BAY STREETS, PORT MACQUARIE We hereby confirm our agreement to lease the above premises subject to all parties entering into a formal agreement for lease upon the following terms and conditions: ……… 6. PERIOD OF LEASE Fifteen (15) years from Opening Day, as defined in our standard Agreement for Lease 7. OPTION FOR RENEWAL: Two periods of five (5) years, base rent being rent paid in prior term, upon same basis as rent reviews in initial term. 8. RENTAL: Year 1 Whichever is the greater of: A gross rent of $94,500.00 which includes all outgoings payable monthly in advance (not to be increased at any time during the term). OR 1.1/4% of gross annual sales. Year 2 Whichever is the greater of: A base rent equal to the total rent paid in Year 1 plus increases in outgoings of the Centre over Year 1 base (such base outgoings being upon the basis of the revalued site after development). OR 1.1/4% of gross annual sales. Years 3 - 5 Whichever is the greater of: A base rent equal to the total rent paid in Year 2 less the estimate of increases in outgoings payable in Year 3) plus increase in the outgoings over Year 1 base OR 1.1/4% of gross annual sales Years 6-10 Whichever is the greater of: A base rent equal to the total rent paid in Year 5 (less the estimate of increases in outgoings payable in Year 6), plus increase in out- goings over Year 1 base. OR 1.1/4% of gross annual sales Years 11-15 Whichever is the greater of: A base rent equal to the total rent paid in Year 10 (less the estimate of increases in outgoings payable in Year 11) plus increase in out- goings over Year 1 base. OR 1.1/4% of gross annual sales. NOTE Percentage rent (if any) payable shall be paid once annually. We audit sales from the premises within 60 days of the end of each year and within 14 days after your request is received to pay such amount as may be owing thereunder, we shall pay same. ……… An Agreement for Lease is enclosed which is satisfactory to us. It is understood that this is basically acceptable by (sic) you. Please acknowledge acceptance of this agreement by executing the copy of this letter forwarded herewith."

[13]

9 The "new formula" which accompanied that letter was as follows (AB 53-54): "3. The Lessee covenants with the Lessor as follows: (a) to pay during the first year of the term of the Lease a yearly rental equal to the greater of: (i) the sum of Ninety-four Thousand Five Hundred dollars ($94,500) (hereinafter called 'the base rent); or (ii) an amount equal to one and one quarter per cent (1.1/4%) of the annual gross sales of the Lessee's business at the demised premises during such year; (b) To pay during the second year of the term of the Lease a yearly rental equal to the greater of: A(i) the total rent payable in Year 1 of the term hereof; plus (ii) an amount equal to the percentage payable by the Lessee of which (sic) the operating costs of the Centre for the Second Year of the term exceed those applicable to the Centre during the First Year of the term. AND B an amount equal to one and one quarter per centum (1.1/4%) of the annual gross sales of the Lessee's business at the demised premises during such year. (c) To pay during the third to fifth years (inclusive) of the term of the Lease a yearly rental equal to the greater of: A(i) the total rent payable in Year 2 of the term hereof (less the Lessor's estimate of increases in outgoings payable by the Lessee in Year 3 of the term); plus (ii) an amount equal to the percentage payable by the Lessee of which (sic) the operating costs of the Centre for each year exceed those applicable to the Centre during the First Year of the term. AND B an amount equal to one and one quarter per centum (1.1/4%) of the annual gross sales of the Lessee's business at the demised premises for that year. (d) To pay during the sixth to tenth years (inclusive) of the term of the Lease a yearly rental equal to the greater of: A(i) the total rent payable in Year 5 of the term hereof (less the Lessor's estimate of increases in outgoings payable by the Lessee in Year 6 of the term); plus (ii) amount equal to the percentage payable by the Lessee of which (sic) the operating costs of the Centre for each year exceed those applicable to the Centre during the First Year of the term; AND B an amount equal to one and one quarter per centum (1.1/4%) of the annual gross sales of the Lessee's business at the demised premises for that year. (e) To pay during the eleventh to fifteenth years (inclusive) of the term of the Lease a yearly rental equal to the greater of: A(i) the total rent payable in Year 10 of the term hereof (less the Lessor's estimate of increases in outgoing payable by the Lessee in Year 11 of the term); plus (ii) an amount equal to the percentage payable by the Lessee of which (sic) the operating costs of the Centre for each year exceed those applicable to the Centre during the first year of the term; AND B an amount equal to one and one quarter per centum (1.1/4%) of the annual gross sales of the Lessee's business at the demised premises for that year."

[16]

14 The use of the language "enclosing … by way of exchange" coupled with the reference later in the letter "an engrossment of the lease … (to be) executed and returned …" suggests to me that the use, in the first paragraph of the letter, of the phrase "Deed of Lease" was erroneous and that what was being forwarded was the Agreement for Lease, and later events seem to suggest that this was so. Further, the fact that, when finally executed, clause 3 of the Lease was in the same terms as the "new formula" which had been forwarded to Stone Poulos with the letter of 14 May 1984 and agreed upon, while the fact that, when finally executed, clause 3A of the Lease was in the form to which I shall later refer, suggests that the reference, in the second paragraph of this letter to the "new (rent) clause" was also in error and should have been a reference to a new clause 3A. 15 It would appear that, meantime, McConaghy had entered into a contract to sell the land on which the shopping centre was erected to Permanent Trustee Nominees (Canberra) Limited ("Permanent") which appears to have been the trustee for the "AFT Real Property Growth Trust No. 2" (see AB 93). That contract appears to have been completed on 7 November 1984, on which day McConaghy wrote to the Respondent advising it of that fact. 16 Thereafter, on 20 November 1984, Messrs. Cutler Hughes & Harris ("Cutler Hughes") the solicitors for Permanent wrote to the Respondent a letter which, so far as is relevant, was as follows (AB 65-66): "PERMANENT TRUSTEE NOMINEES (CANBERRA) LIMITED PURCHASE FROM McCONAGHY DEVELOPMENTS PTY. LIMITED PROPERTY: SETTLEMENT CITY SHOPPING CENTRE, PORT MACQUARIE LAND IN FOLIO IDENTIFIER 2/702484 We act for Permanent Trustee Nominees (Canberra) Limited which purchased the above property from McConaghy Developments Pty. Ltd on 7 November this year. ……… We refer to your discussions with Mr. Elton Stone regarding the rent and outgoings clauses in the Lease and now confirm that the arrangements are as follows: 1. The rent clause is to be as contained in the enclosed photocopies of pages 2, 3 & 4 of the Lease annexed to the Agreement for Lease. We understand that you are holding the corresponding blue demi pages to be inserted in the engrossed lease. 2. The outgoings clause has been redrafted in accordance with your discussions with the writer and Mr. Stone. We enclose the blue demi pages 6 & 7 for insertion in the engrossed Lease and foolscap photocopies for insertion in the photocopy Lease annexed to the Agreement for Lease. We would be grateful if you would confirm as a matter of urgency that the terms of these clauses are now satisfactory so that we can arrange for execution of the altered pages."

[23]

on the front page of the Lease the term of the Lease was recorded as commencing on 4 December 1984 and terminating on 3 December 1999. 20 The Lease, as so amended, appears to have been executed on or about 15 February 1985 and later lodged with the Land Titles Office where it was registered as Dealing No. W149912. 21 The Appellants which seem (AB 3) to carry on business as "Port Macquarie Partnership", appear (AB 4) to have acquired the shopping centre from Permanent in June 1991, at which time, one assumes, the appropriate Notice of Attornment was given by Permanent to the Respondent. 22 Despite the references in sub-clauses (c), (d) and (e) of clause 3 of the Lease to "the Lessor's estimate of increased (sic) in outgoings" it was accepted on the hearing before Bainton J that, at no time while it was registered as the proprietor of the shopping centre, did Permanent forward to the Respondent any estimate of increases in outgoings and that at no time after the Appellants acquired the title to the shopping centre did they forward any such estimate to the Respondent. 23 The evidence which was tendered on the hearing before Bainton J demonstrated that, in each of the first eight completed years of the term of the Lease, the Respondent's gross sales at the shopping centre were such as to require the annual rental to be calculated on a percentage of sales, the result being that, during the course of each of those years, rental was paid monthly in accordance with the appropriate base rent, the difference between the base rent and the rent calculated on a percentage of sales being paid after audited turnover figures had been forwarded to the managing agents of the Centre. A sufficient indication of how this was done appears from the three letters which I set out below, 24 On 9 July 1986, the then Centre Manager forwarded to the Respondent a letter in the following terms (AB 71): "Thank you for providing the copy of audited turnover figures for the Franklins Store at Settlement City for the period 5 December 1984 to 4 December 1985 as requested. In accordance with clause 3 of your lease, first year base rent is payable at the rate of 1¼% on gross sales of $7,776,333.00 as reported or $97,204.16. Actual rent paid in the first year was $94,500.00 leaving a balance due of $2,704.16. Could you please remit your cheque for $2,716.00 …"

[26]

27 In each of Years 9, 10 and 11 the Respondent's gross sales fell below those of the preceding year, the sales in Year 9 being $15,320,672.00 as compared with $17,097, 888.00 in Year 8, sales in Year 10 being $15,014,099.00 and the sales in Year 11 being $14,838,912.00. Despite the continuing fall in sales, no attempt appears then to have been made to determine whether the rent in each of Years 9, 10 and 11, if calculated in accordance with paragraphs A of each of sub-clauses (d) and (e) of clause 3 would be greater than the amount calculated in accordance with paragraph B of those sub-clauses, and the rent in fact paid appears to have been calculated in accordance with paragraph B of those sub-clauses, the rent in respect of Year 9 which was paid being $191,508.40 compared with $213,723.60 in Year 8, the rent in respect of Year 10 being $187,676.24 and the rent in respect of Year 11 being $185,486.40. 28 It would appear that, during the course of Year 12 - 1996 - the Appellants appointed a new Managing Agent for the Shopping Centre and that that new Managing Agent - Wynn Tresidder Retail Pty. Limited ("Wynn") - determined to, and in fact did, carry out such a comparison. 29 On 4 July 1996 Wynn wrote to the Respondent as follows (AB 88): "We wish to advise that upon checking the lease of your store at Settlement City, we have found that rental has been undercharged for the years ended 3 December 1993 till 1995 inclusive, and consequently the current charge which was established at the end of the tenth year of the lease is also incorrect. According to our calculations, during the ninth year of the lease, 'the total rent payable in Year 5 of the term hereof (less the Lessor's estimate of increased outgoings payable by the Lessee in Year 6 of the term), plus an amount equal to the percentage payable by the Lessee of which operating costs of the Centre for each year exceed those applicable to the Centre during the first year of the term', exceeded 1.25% of your sales for that year. This circumstance also occurred during the tenth and eleventh years of the Lease, and resulted in a new rental of $206,542.92 which in addition to increases in outgoings shall become the new rental figure to apply to Years eleven through fifteen. We enclose a copy of our work sheets for your information, which show rental amounts owing of $16,275.26 for Year 9, $18,866.68 for Year 10, and $46,879.55 for Year 11, although this last figure is subject to receiving our audited outgoings statement. Please confirm your acceptance of the above calculations."

[31]

It should, however, be noted that the calculations which were provided by the parties to Bainton J on the hearing (AB 130) would indicate that, for the purposes of its calculations, there having been no estimate of increases in outgoings, the Respondent has, when calculating the base rent for Year 6, deducted from the rent actually paid in Year 5, the amount of the actual increase in operating costs in Year 6, and that for the purpose of calculating the base rent for Year 11, the Respondent deducted from what it claims is the proper calculated rent for Year 10 the amount of the actual increase in outgoings for Year 11 - that, in the absence of any estimates ever having been made, the Respondent found it necessary to resort to actual outgoings casts more than a shadow of doubt over the validity of its submissions. 33 The reasoning in Bainton J's Judgment was, in my view, less than convincing. Having set out in brief form the background to the proceedings, he continued (AB 137-139): "The parties tendered a sheet setting out how the rent paid for years 1 to 8 and years 9 to 15 had been or in their respective submissions should be calculated. There was no disagreement between them with respect to years 1 to 8 inclusive because in each of years 1 to 8 the amount which was 1.25% of the turnover of Franklin's (sic) at this shopping centre exceeded the alternative calculation. But they are in disagreement as to how the rent for years 3 to 8 inclusive should have been calculated had not the alternative of 1.25% of Franklin's turnover applied. That was because the plaintiff owner simply added to the total rent paid in respect of year 2 ($100,950.64) an additional $26,183.31, while Franklin' (sic) contend that the amount to be added was $19,876.92, the difference of $6,306.39 being, I assume, what should have been the 'lessor's estimate of the increase of outgoings payable by the lessee in year 3 of the term'. There is a similar difference calculated in the same way in respect of years 4 to 8 inclusive. The owner agrees, indeed asserts, that it has never, either for its own use or for provision to others, prepared an estimate of outgoings payable by Franklin's (sic) to them in respect of the Franklin's (sic) lease of part of this shopping centre. That may be so in fact, but such a failure cannot extinguish its obligations so to do. If the lease it granted provides for a rental which is calculated by, inter alia, excluding the lessor's estimation of such increased outgoings. The requirement to deduct the amount of such an estimation in calculating the rent payable to the party whose estimate it is implies an obligation on that party to make an estimate."

[32]

I pause here to observe that far from the sum of $6,306.39 being, as Bainton J assumed, "what should have been the 'lessor's estimate of the increase of outgoings payable by the lessee in year 3 of the term'", that sum represented the actual increase in outgoings in Year 3. A similar comment is attracted to the Respondent's calculation of the base rent for Years 6 to 10, the amount of the deduction from the rent in fact paid in Year 5 being the amount of the actual increase in outgoings for Year 6. Having made that comment, I record that his Honour then continued: "I come now to year 9 (ending 3 December 1993). This is the first year in which 1.25% of turnover does not exceed the amount calculated under the alternative formula. The rent for this year, according to clause 3(d) A is 'the total rent payable in year 5 (less the Lessor's estimate of increases (I have corrected the typographical error) payable by the lessee in year 6 of the term'. (The parties now agree that this increase is $11,508.55) (sic) plus 'an amount equal to the percentage payable by (Franklins) of which the operating costs of the centre during (year 9) exceed those attributable to the centre during year one of the term. In years 11 to 15 (ending 3 December 1995 to 1999 the rent is to be calculated in accordance with clause 3(e) A (unless there is achieved a significant increase in turnover in 1997, 1998 and 1999 years). That calculation requires the lessor to have estimated the increases in outgoings payable by the lessee in year 11 of the term (a figure which by now must be known precisely). In its summons the lessor/plaintiff has sought judgment for the unpaid balance of rent (as it calculated it) for the years ended 3 December 1993, 1994 and 1995 in a total amount of $69,464.94. If, however, Franklin's contention as to how that rent is to be calculated is correct, as I hold it to be, then the amount for those three years is $11,238.82. I order that judgment be entered against the defendant for that amount in respect of those three years. I was not asked to enter judgment in respect of the unpaid amount (each party agrees that there is an unpaid amount) in respect of the year ended 3 December 1996, presumably because the summons was filed before that year had ended. I now record the plaintiff's principal arguments which my view as above expressed has rejected. They began by asserting that the reduction of 'the lessor's estimate of increased outgoings payable by the lessee in Year 4 of the term', had its origin in an earlier version of the lease and were inadvertently retained in the re-engrossment; that the provision was strange and made no commercial sense; and that the use of the word 'increased' instead of 'increases' indicated that careful attention had not gone into the preparation of the document. That the provision is strange I can readily accept: I have not been able to discern any commercially sensible reason for it: but that does not mean that there was not such a reason. Franklin's is an experienced operator with many stores (mostly in shopping centres and therefore most probably leased) in New South Wales and must, I conclude, have had a good reason for requiring this provision in this Lease. As I have earlier recorded in these reasons the rental provisions originally prepared by the lessor's solicitors were rejected by Franklin's (sic). The provisions in fact included were Franklin's' (sic) amendments, as its solicitors' letter of 14 May 1984 records. I have rejected the plaintiff's principal claim, namely the proper construction of the lease. I have directed that judgment may be entered for $11,278.82 out of a claim for $69,464.94. That means I have accepted the defendants (sic) submission on construction and that the plaintiff has on that basis accepted Franklin's' (sic) calculation of what it owes for the three years ending 3 December 1995. I turn now to the question of costs. Part 52A r 33 provides: 'where … (c) in proceedings commenced after 30 June 1993 a plaintiff recovers a sum not more than $75,000.00 he shall not be entitled to payment of his costs of the proceedings unless, it appearing to the Court he had sufficient reason for commencing or continuing proceedings in the Court, the Court makes an order for payment.' This rule applies to proceedings in the Commercial Division (r 33(10)(a)). The plaintiff has judgment for $11,278.82 in respect of the three years for which it claimed $41,201.96 (sic). Securing a prompt hearing of an application to determine the appropriate method of determining the rental payable under a Lease such as that to Franklins is, in my view, a sufficient reason for commencing proceedings to determine that question in the Commercial Division of this Court. But the plaintiff has been unsuccessful in its contention on that question. It follows, in my judgment, that the appropriate costs order, which I now make, is that the plaintiff pay the defendant's costs of these proceedings."

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Judgment (49 paragraphs)

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