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

COUNSEL : N.C. Hutley SC and I.M. Jackman (Appellants) G.A. Moore (Respondent) SOLICITORS : Jennifer E. Darin (Chatswood) (Appellants) Parish Patience (Respondent) CATCHWORDS : INTERPRETATION OF INSTRUMENTS - Extrinsic evidence - Course of negotiations - Whether admissible; LANDLORD AND TENANT - Lease - Rent - Rent review clause - Interpretation of - Extrinsic evidence - Course of negotiations - Whether admissible DECISION : Appeal allowed.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40083/97 Comm. Div. 50234/96

MEAGHER JA POWELL JA SHEPPARD AJA

DARIN NOMINEES PTY. LIMITED & ORS v. FRANKLIN'S SELFSERVE PTY. LIMITED

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."

4 On 12 April 1984, Messrs. Stone Poulos & Cowley ("Stone Poulos"), the solicitors for McConaghy, wrote to the Respondent as follows (AB 18): RE: McCONAGHY DEVELOPMENTS PTY. LTD RE: PORT MACQUARIE DEVELOPMENT AT SETTLEMENT SLOPES (SIC) We act for McConaghy Developments Pty. Ltd. and are now enclosing a draft Agreement for Lease with a draft Lease annexed thereto for your consideration. We advise that all development and building approvals have now been obtained and preliminary construction work commenced. Our client has advised that the general format of the draft documents submitted herewith is to be in conformity with like documents in relation to leases of other premises in the Centre but, so far as possible, the terms and conditions of the documents submitted by you to our client have been incorporated therein. Kindly let us have your comments."

5 Clause 3 of the draft Lease provided as follows (AB 22-23): "3. RENT (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 (1¼%) of the annual gross sales of the Lessee's business during such year. (b) To pay during the residue of the term of the Lease a yearly rental equal to the greater of: (i) the amount of the rental payable during the immediately preceding year of the term; or (ii) the amount which exceeds the total of - (1) one and one quarter per cent (1¼%) of the annual gross sales of the lessee's business during such year; and (2) the percentage of outgoings paid or payable in respect of such year pursuant to clause 3A(b) hereof. (c) At the expiration of each five year period of the term of the within Lease, the yearly rent shall be reviewed increasing the base rental to a sum equal to the immediately preceding base rental plus twenty per cent (20%) or to an amount equal to the average annual total rental paid or payable during the three (3) years immediately preceding the expiration of the previous five (5) year period, whichever amount shall be the greater and the amount so ascertained shall be the base rental for the next succeeding five (5) years."

6 Clause 3A of the draft Lease (AB 23-26) defined the phrase "operating costs of the Centre" and provided for the manner of determination of "the lessee's proportion" which were to be paid. Clause 3A also provided (inter alia) as follows (AB 25-26): "(c) The moneys payable by the Lessee to the Lessor pursuant to clause 3A(b) shall be calculated and paid as follows: ……… (ii) as soon as practicable after the expiration of each lease year the Lessor shall furnish to the Lessee a statement giving reasonable details of the operating costs of the Centre for that lease year and indicating the amount of the Lessee's proportion as above mentioned and in the absence of patent error such statement shall be prima facie evidence as to the matters stated therein. Within twenty-one (21) days after the services (sic) of such statement on the Lessee, the Lessee will pay to the Lessor the Lessee's said proportion; (iii) notwithstanding the provision of the foregoing paragraph, the Lessor may from time to time notify the Lessee of the Lessor's reasonable estimate of the Lessee's proportion of the operating costs of the Centre for any period not exceeding one (1) year in advance of the said estimate whereupon the Lessee will pay to the Lessor during such period such estimated proportion by equal monthly instalments on the days hereinbefore fixed for payment of rent PROVIDED ALWAYS that upon computation of the Lessee's proportion of the said outgoings and costs at the end of the then current Lease year as aforesaid any necessary adjustment between the estimated and actual Lessee's proportion of the said outgoings and costs shall be made and any refund to or further payment by the Lessee shall be allowed or made by or to the Lessor accordingly;

7 Clause 4 in the draft Lease provided for the manner of determining "the annual gross sales of the lessee's business". 8 On 14 May 1984 the Respondent wrote to Stone Poulos a letter which, so far as is relevant, was as follows (AB 52): "RE: McCONAGHY DEVELOPMENTS PTY. LIMITED - PORT MACQUARIE DEVELOPMENT AT SETTLEMENT SLOPES (SIC) I refer to your letter of the 12th ultimo and enclose herewith the Lease, amended as required by Franklins. In particular, the rent is totally different to (sic) what was enclosed in the Lease, and this was amended after a discussion by the writer with your client in Brisbane. The new formula has been typed out separately. ………"

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."

10 On 22 May 1984 Stone Poulos wrote to the Respondent a letter which, so far as is relevant, was as follows (AB 55-56): "RE: McCONAGHY DEVELOPMENTS PTY. LIMITED RE: PORT MACQUARIE DEVELOPMENT - LEASE TO FRANKINS SELFSERVE PTY. LTD. We refer to your letter of the 14th instant and advise that our client has confirmed that a formula different to (sic) that set out in the draft documents is to apply and the formula enclosed with your letter is acceptable. ……… To the amendments that you have made to the draft Lease submitted, we comment as follows: ……… 2. Alteration to clause 3(b). The new rental provisions are to be inserted here. ………"

11 In the result, although it was agreed that the formula for calculating the rent of the subject premises during the term should be changed - in substance, although not in precise language, to that which originally had been proposed by the Respondent - the provisions as to the manner of calculation and the payment of the Respondent's share of outgoings contained in the draft Lease which had been forwarded with the letter from Stone Poulos on 12 April were to be retained. 12 The formal Agreement for Lease, to which was annexed the form of Lease proposed and agreed upon, appears to have been forwarded by Stone Poulos to the Respondent for execution on 6 July 1984 (AB 61) and to have been returned duly executed on 10 September 1984 (AB 62). 13 Thereafter, on 19 October 1984, Stone Poulos wrote to the Respondent a letter which, so far as is relevant, was as follows (AB 63): " MCCONAGHY DEVELOPMENTS PTY. LTD TO FRANKLINS - PORT MACQUARIE DEVELOPMENTS We refer to our recent telephone conversation in connection with this matter and are now enclosing Deed of Lease (sic) executed by our client by way of exchange. We refer to our recent telephone conversation with you in connection with the rent clause, and have now drafted and are enclosing for your approval a new clause setting out what we understand to be the position. If this is acceptable to you, you might kindly advise us and we can agree by letter that the new clauses should be substituted for those in the agreement for lease as it presently stands. We are also enclosing an engrossment of the lease in duplicate and would be obliged if you would arrange to have this executed and returned to us to enable us to stamp and lodge same for registration with as little delay as possible. ………"

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."

17 The new pages 2, 3 and 4, which incorporate the rent clause in the Lease, as I have earlier noted do not appear to do more than reproduce the "new formula" which accompanied the Respondent's letter to Stone Poulos of 14 May. The new pages 6 and 7 to be incorporated in the Lease, which pages covered clause 3A(b),(c) did, however, make changes to the form of clause 3A(c) in the previous draft Lease. Thus, the words "and paid", where appearing after the words "shall be calculated" in the introductory part of that clause, were omitted; there was omitted from paragraph (ii) of that sub-clause the second sentence which read: "Within twenty-one (21) days after the services (sic) of such statement on the Lessee, the Lessee will pay to the Lessor the Lessee's said proportion;"

and there was omitted from that subclause the whole of paragraph (iii) which read: "Notwithstanding the provision of the foregoing paragraph, the Lessor may from time to time notify the Lessee of the Lessor's reasonable estimate of the Lessee's proportion of the operating costs of the Centre for any period not exceeding one (1) year in advance of the said estimate whereupon the Lessee will pay to the Lessor during such period such estimated proportion by equal monthly instalments on the days hereinbefore fixed for payment of rent PROVIDED ALWAYS that upon computation of the Lessee's proportion of the said outgoings and costs at the end of the current lease year as aforesaid any necessary adjustment between the estimated and actual Lessee's proportion of the said outgoings and costs shall be made and any refund to or further payment by the Lessee shall be allowed or made by or to the Lessor accordingly."

18 The nett result of these alterations was that, whereas, previously, the Lessor was to have the option of seeking to recover in advance through each year of the term the Lessee's proportion of the operating costs, that option was withdrawn and the Lessor was to be able to recover that share of the operating costs only after the completion of each year of the term. 19 In order to accommodate the changes to the form of the Lease which had previously been forwarded to the Respondent for execution, the following steps appear to have been taken:

1. the name of McConaghy where appearing on the front page of the form of Lease and on each of the pages - of which there were 34 - setting out the terms and conditions of the Lease which constituted an Annexure to the form of Lease was struck through and the name of Permanent substituted;

2. the new pages 2, 3 and 4 appear to have been substituted for the original pages 2, 3 and 4 in the Annexure;

3. each of the original pages 6 and 7 was struck through but retained, and the new pages 6 and 7 inserted, in the Annexure;

4. 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 …"

25 On 20 December 1987, the then Centre Manager forwarded to the Respondent a letter in the following terms (AB 72): "Thank you for providing the copy of audited turnover figures for the Franklins store at Settlement City, Port Macquarie for the period 5 December 1985 to 4 December 1986 as requested. In accordance with clause 3 of your lease, second year base rent is payable at the rate of 1¼% on gross sales of $10,170,716.00 as reported or $127,133.95. Actual base rent paid in the second year was $94,500.00 leaving a balance due of $32,633.95. Could you please remit your cheque for $32,633.95…"

26 On 21 January 1988, the then Centre Manager wrote to the Respondent a letter which was as follows (AB 73): "Thank you for providing the copy of audited turnover figures for the Franklins store at Settlement City, Port Macquarie for the period 5 December 1986 to 4 December 1987 as requested. In accordance with clause 3 of your lease, third year base rent is payable at the rate of 1¼% on gross sales of $12,831.13 as reported or $160,387.66. Actual base rent paid in the second year was $127,133.95 leaving a balance due of $33,253.71. Could you please remit your cheque for $33,253.71 …"

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."

30 Although the materials which are before the Court do not reveal what reply was written to that letter, it is plain enough that the Respondent did not accept either the interpretation which Wynn, on behalf of the Appellants, sought to place upon clause 3 of the Lease or its calculations, for, on 8 November 1996 there was filed the Summons (AB 1-6) which led to the hearing before Bainton J, by which time, as will shortly appear, the balances said to be outstanding in respect of Years 9, 10 and 11 had been recalculated. 31 In that Summons, the Appellants sought the following (inter alia) relief: "1. A declaration that for the purposes of calculating the rent payable under clause 3(d) A(i) of Lease dated 15 February 1985 Registered No. W149912 and in the events that have happened, the words 'less the Lessor's estimate of increased (sic) in outgoings payable by the Lessee in Year 6 of the term' do not require the making of any deduction from the rent otherwise payable. 2. A declaration that for the purposes of calculating the rent payable under clause 3(e) A(i) of Lease dated 15 February 1985 Registered No. W149912 and in the events that have happened, the words 'less the Lessor's estimate of increases and outgoings payable by the Lessee in Year 11 of the term' do not require the making of any deduction from the rent otherwise payable. 3. Judgment for $69,464.94. 4. Interest pursuant to s.94 of the Supreme Court Act."

The sum of $69,464.94 in respect of which Judgment was sought represented the total of $12,911.29, $15,351.67 and $41,201.98 said to be the balances outstanding in respect of the years ended 3 December 1993, 3 December 1994 and 3 December 1995 respectively. 32 A document entitled "Questions for Consideration", which we were informed had been provided to Bainton J at the time of the hearing, would indicate that the cases which the parties sought to advance before his Honour took the following form:

(a) The Appellants' case (i) the reference in each of clauses 3(c) and (d) to "the Lessor's estimate of increased (sic) in outgoings" and in clause 3(e) to 'the Lessor's estimate of increases in outgoings" is a reference to such an estimate for the year beyond which the "total rent" is being determined for the forthcoming period and, assuming it has any meaning, could only be intended to remove from that year's rental payments any amount which has been paid in respect of a subsequent period. (ii) no estimates as to increases in outgoings in relation to the Lease have ever issued by the Lessors to the Respondent. (iii) the Respondent has only ever paid the actual amounts as known (whether as to outgoings or turnover) and no amounts have been paid on account of a liability to be determined at some time in the future when actual figures are known. (iv) there is accordingly no basis for trying arbitrarily to determine some amount which will take the place of the "estimate" which has never issued and in respect of which no amounts have been paid or been payable and then to deduct that amount from the "total rent". (v) rental for the years since the acquisition of Settlement City by the Appellants has been paid on the basis of the amount calculated in accordance with clause 3(d) B and clause 3(e) B. (vi) in the premises, the Respondent is liable to the Appellants in respect of the amounts claimed as arrears of rental and shall continue to be liable for the balance of the term of the Lease for payment of rental the amounts of which shall be similarly determined.

(b) The Respondent's case (i) clause 3(d) A requires the Lessor to: (i) estimate in good faith the Lessee's percentage of operating costs for Year 6; (ii) deduct from it the Lessee's percentage of operating costs for Year 1; (iii) deduct that figure from the percentage rent paid in Year 5 and (iv) for each succeeding year from 6 to 10 add the Lessee's percentage of operating costs for the relevant year minus the Lessee's percentage of operating costs for Year 1. (v) clause 3(e) A requires a similar process in respect of Years 11 to 15.

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."

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."

34 The foundation for my description of the reasoning in Bainton J's Judgment as less than convincing is sufficiently illustrated by the paragraph in which he recorded his reasons for dismissing the Appellants' arguments, which paragraph was in the following terms: "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 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. The provisions in fact included were Franklin's amendments, as its solicitors' letter of 14 May 1984 records."

35 These reasons, as it seems to me, either completely overlook, or, at least, fail to have regard to, the following matters:

as a general rule, the meaning of a document such as a lease is to be sought for in the document itself;

the document is to be construed as a whole, the objective being so to construe the instrument as, if it be possible, to produce a consonant whole (see, for example, Hume v. Rundell (1824) 2 S & S 174, 177 per Leach V-C ; Lloyd v. Lloyd (1837) 2 My & Cr 192, 202 per Lord Cottenham LC );

if, in any case, it is clearly necessary so to do in order to avoid absurdity or inconsistency, then words may generally be supplied, omitted or corrected ( Fitzgerald v. Masters (1956) 95 CLR 420, 426-427 per Dixon CJ and Fullagar J );

should the context in which it appears in the instrument render the meaning to be attributed to some word of phrase doubtful, then the court which is called upon to interpret the instrument may admit evidence of surrounding circumstances in order to identify the meaning to be attributed to that word or phrase (see, for example, Reardon Smith Line v. Hansen-Tangen [1976] 1 WLR 989, 995-996 per Lord Wilberforce ; D T R Nominees Pty. Limited v. Mona Homes Pty. Limited (1978) 138 CLR 423, 429 per Stephen and Jacobs JJ ; Burns Philp Hardward Limited v. Howard Chia Pty. Limited (1987) 8 NSWLR 642 );

as a general rule, however, evidence of the parties' negotiations, or of the parties' subjective intentions, in relation to the instrument ought not to be received (see, for example, Prenn v. Simmonds [1971] 1 WLR 1381, 1383-1385 per Lord Wilberforce ; L. Schuler A.G. v. Wickman Machine Tools Limited [1974] AC 235, 261 per Lord Wilberforce ; Secured Income Real Estate (Australia) Limited v. St. Martins Investments Pty. Limited (1979) 144 CLR 596, 606 per Mason J (as he then was) );

if it transpires that the parties have refused to include a particular provision in the instrument, evidence of that refusal is admissible so as to negative an inference otherwise sought to be drawn from surrounding circumstances; this is certainly so if the fact that the parties have directed their minds to such a provision and have rejected it appears on the fact of the instrument (see, for example, Heimann v. Commonwealth of Australia (1938) 38 SR 691, 695 per Jordan CJ ; Codelfa Construction Pty. Limited v. State Rail Authority of New South Wales (1981-1982) 149 CLR 337, 352-353 per Mason J (as he then was) )

while it is open to the Court concerned to construe an instrument in an appropriate case to imply a term in it, no term can be implied if it is inconsistent with the express terms in the instrument nor can a term be implied if it appears on the face of the instrument that the parties adverted to the point and either deliberately rejected it or deliberately abstained from dealing with it (see, for example, Maritime National Fish Limited v. Ocean Trawlers Limited [1935] AC 524 ; Chandler Bros Limited v. Boswell [1936] 3 AER 179, 186-187 per Greene LJ (as he then was) ; Heimann v. Commonwealth of Australia ibid ); 36 It is, I believe, made apparent by that part of his Judgment which I have set out above that, when he concluded that the construction for which the Respondent contended was correct, his Honour:

failed to have regard to the whole of the terms of the Lease, or, at least, to all of the terms - which included clause 3A - of the Lease which bore on the subject of the payments to be made by the Respondent in respect of its occupation of the shopping centre;

although recognising the "strange" nature of paragraph A(i) where appearing in each of sub-clauses (c), (d) and (e) of clause 3, and although being unable "to discern any commercially sensible reason for it", did not consider whether, in all the circumstances, the words "less the lessor's estimate of increased (sic) in outgoings payable by the lessee in Year of the term" ought to be treated as having been omitted;

although recognising the "strange" nature of that provision, and being unable "to discern any commercially sensible reason for it", did not consider whether there might be something in the surrounding circumstances which cast some light on the matter;

appears to have rejected as irrelevant material - the original pages 6 and 7 which, although struck through formed part of the Lease when registered and the new pages 6 and 7 - which made it abundantly clear that, although, at one stage, the parties had intended that the Lessor might have the option, by making estimates of increased outgoings, to seek to recoup increases in outgoings in advance and progressively through each year of the term, they had thereafter declined to include that term in the lease;

in concluding, as he did, that there should be implied in the Lease an obligation on the Lessor in each year to make an estimate of increased outgoings contravened the rule against the implication of terms if it appears on the face of the instrument that the parties adverted to the point and either rejected such a term or deliberately abstained from dealing with it. 37 In all the circumstances, I conclude that sub-clauses (c), (d) and (e) of clause 3 of the Lease should be read as if the words, figures and symbols "less the Lessor's estimate of increased (sic) in outgoings payable by the Lessee in year 3 of the term"' "(less the Lessor's estimate of increased (sic) in outgoings payable by the Lessee in year 6 of the term)" and "(less the Lessor's estimate of increases in outgoings payable by the Lessee in year 11 of the term)" respectively were omitted from paragraph A(i) thereof and that the appeal should be allowed and the appropriate declarations made. 38 If that view finds favour with the other members of the Court, then there should be Judgment in favour of the Appellants in the sum of $69,464.94 together with interest pursuant to the provisions of s.94 Supreme Court Act. 39 Further, if that view finds favour with the other members of the Court, the effect is likely to be that the rental payable by the Respondent in respect of Years 12, 13, 14 and 15 of the Lease will be greater by a sum of approximately $200,000.00 than that which would be payable if the Respondent's view had succeeded (see AB 130). In these circumstances, so it seems to me, the Appellants' should have their costs both of the hearing before Bainton J and of the appeal. 40 The formal Orders which I propose are as follows:

1. ORDER that the appeal be allowed. 2. ORDER that the Judgment directed by Bainton J on 11 February 1997 be set aside. 3. IN LIEU THEREOF - (a) make Declarations in terms of Prayers 1 and 2 in the Summons filed by the Appellants in the Commercial Division of the Court on 8 November 1996; (b) DIRECT that Judgment be entered for the Appellants in the sum of $69,464.94, such Judgment to carry interest from 8 November 1996 for the periods and at the rates prescribed in Schedule J to the Supreme Court Rules until payment; (c) ORDER that the Respondent pay the Appellants' costs of the hearing before Bainton J. 4. ORDER that the Respondent pay the Appellants' costs of the appeal.

41 SHEPPARD AJA: I agree with Powell JA. ******

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