Dogrow Pty Ltd v Teakdale Pty Ltd

Judgment 1REIN J: Teakdale Pty Ltd ("Teakdale") is the owner of a property in George Street Sydney ("the property"). Dogrow Pty Ltd ("Dogrow") is the lessee and operates at the property, in conformity with the lease, a licensed hotel. 2Dogrow holds, in connection with its liquor license, 19 Gaming Machine Entitlements ("GMEs") and it wishes to transfer those entitlements to third parties. It seeks a declaration that ...upon the proper construction of the Lease bearing registration number AG168410N commencing 14 September 2010 and terminating 13 September 2020, the Plaintiffs, to the exclusion of the Defendant, are entitled, subject to the grant of all requisite applications to the Independent Liquor and Gaming Authority, to sell, transfer, remove or otherwise deal with or dispose of the gaming machine entitlements allocated in respect of hotel licence LIQH400102534. 3The GMEs, and transfers of GMEs, are the subject of the Gaming Machines Act 2001 (NSW) ("the Act"). 4The terms of the lease are found at pp 18-54 of Exhibit A. 5Teakdale has indicated that it disputes Dogrow's right to transfer the GMEs on two basis: (1)That the lease precludes Dogrow from reducing the number of GMEs and that any transfer to reduce the number to below 15 GMEs would constitute a breach of the lease. (2)That Teakdale has a financial interest in the hotel license within the meaning of s 19(5) of the Act with the consequence that any application by Dogrow for transfer of the GMEs requires Teakdale's approval. 6Dogrow disputes both contentions but it was agreed between the parties that it is not appropriate for the Court to deal with the second issue in the absence of any application for transfer having been made to, and a determination by, the Casino, Liquor and Gaming Control Authority. 7Teakdale's argument is based principally on two clauses in the lease, clauses 6.01 and 6.13 which are in the following terms: 6.01 Permitted Use of the Premises The Lessee shall not without the written consent of the Lessor use or occupy the premises otherwise than for a Licenced Hotel and will ensue that the conduct and management of the premises shall be at all times be of such a standard and will during all proper business hours keep the premises open for business and will not in any case use the premise for manufacturing. ... 6.13 Licenses The Lessee shall keep on foot all licences and permits required for the carrying on of the business carried on by the Lessee in or upon the demised premises. 8Mr Meek SC for Teakdale outlined his argument as follows: (1)The lease provides by clause 8.01 that Dogrow will maintain and repair the premises "...in no worse condition than the demised premises now are as evidenced by the Schedule of Condition...". (2)The lease, by clause 3, requires rent to be paid using a base rent, which may increase by review but does not permit a reduction of rent from the initial rent. (3)Clause 6.01 should be read as imposing a minimum requirement of 15 GMEs (the number of GMEs in place at the commencement of the original agreement to lease in 1998). (4)When clause 6.01 is construed in the way required, clause 6.13 has the effect of requiring Dogrow to maintain the 15 entitlements because a gaming entitlement should be viewed as a "license or permit": see Lagudi Holdings Pty Ltd v Horizon Pty Ltd and Ors [2009] NSWSC 240, [9] and [34] per Brereton J [9] and [34]. (5)The requirement of maintaining the minimum number of GMEs is similar to the requirement of keeping the premises to a standard at least as good as they were when the lease commenced and similar to requiring the minimum rent to be paid. (6)The conclusion for which, Teakdale contends, is not novel or surprising. 9Mr Meek submits that as part of the background facts it is relevant that the hotel license, under which Dogrow operates the hotel at the property, was transferred to it by Teakdale as part of the original agreement to lease entered into by the parties in 1998. That license was owned by MSJ Pty Ltd and the licensee was Mr Spiro Houlakis, the son of the sole director and secretary of Teakdale and at that time the license related to other premises in the city. The liquor license transferred to Dogrow had attached to it approval to operate 15 poker machines (this was at a time prior to the introduction of the Act). 10Mr Meek submitted that the middle section of clause 6.01, namely: ...will enure that the conduct and management of the premises shall be at all times be of such a standard...[sic] should be read as: ... will ensure that the conduct and the management of the business shall be at all times of such a standard as at the commencement of the lease... (emphasising the important changes) 11Mr Ireland QC who appears with Ms J. L. Taylor for Dogrow accepts that the words "will enure" should be read as "will ensure" and that the word "be" when second appearing should be read as excised but disputes that the Court should otherwise construe the clause in the way for which Teakdale contends. Mr Ireland conceded for the purposes of these proceedings, at least, that a GME can be viewed as a license or permit within clause 6.13. 12Counsel were in agreement that clause 6.01 has been poorly drafted. One problem about the drafting is that the words "such a standard" seem to be framed on the assumption that some standard has been outlined literally when it has not. Counsel accepted that the approach which should be taken to construe clauses of commercial contracts are summarised accurately in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 per Allsop P (as his Honour was then) [19] - [23], with Giles JA at [63] agreeing, and Campbell JA at [361] - [362] with Giles JA at [42] - [43] agreeing. The High Court's comments on Metcash in Western Export Services Inc and Others v Jireh International Pty Ltd [2011] HCA 45 relate to another aspect of the Metcash judgment. I shall summarise these principles as: (1)A commercial contract should be given a business-like interpretation. (2)The nature and extent of the commercial aims and purposes of the agreement are part of the essential background circumstances. (3)Words should be given a construction that avoids making commercial nonsense or to produce a commercially inconvenient result. (4)The terms should be read fairly and broadly without the Court being too astute or subtle in finding defects. (5)The courts should eschew detailed semantic and syntactical analysis to lead to a construction contrary to business commonsense as objectively ascertained. (6)The process does not however involve judicial rewriting of the agreement. 13Mr Ireland drew attention to the fact that Mr Meek's proposed construction of clause 6.01 requires the word "premises" to be replaced by "business" and that is in a context where the heading and subheading both refer to premises and all other subclauses within clause 6 are dealing with the state of the premises. Secondly, it involves inserting the words "at the commencement of the lease" as the standard to which the business should be maintained. Mr Ireland drew attention to the fact that the unaltered clause already provides a more likely standard which should be read as the relevant standard - namely the standard of a licensed hotel. 14Mr Meek drew attention to the decision of Campbell J (as his Honour was then) Oblift Pty Ltd v Liquor Administration Board [2006] NSWSC 1279 in which his Honour, in granting an interlocutory injunction against transfer of GMEs, held that there was a serious question to be tried as to whether the proposed transfer of the GMEs was contrary to the express terms of the lease. Mr Meek contended that the clause in Oblift, although not identical, was similar to the clause in the present case. He accepted that Oblift is not authority for the proposition that a clause in similar terms preclude transfer but he contends that it is of some guidance in considering the ambit of clause 6.01. There are differences between clause 6.01 and the clause under consideration in Oblift but as Mr Meek accepted I must consider myself whether clause 6.01 should be construed in the manner contended by Teakdale. 15In my view, the subclause should not be construed in the manner for which Teakdale contends. 16On a plain reading of the subclause there is nothing to suggest that the subclause was intended to deal with the business of the lessee and nothing to suggest that gaming entitlements were in view. I agree with Mr Ireland's submissions that: (1)The standard to which reference is made, implicitly at least, is to the standard of a licensed hotel. (2)There is no warrant to change the word "premises" to "business" either of itself or in context. There is no obvious commercial purpose that makes the literal and plain construction nonsensical or uncommercial. (3)Clause 6.13 does not require the lessee to run the hotel in any particular way or to include any particular element of a hotel business. Rather what it does is to require the lessee to ensure that whatever elements it does incorporate into its business are each the subject of an appropriate license, and that the terms of the license are adhered to. (4)Teakdale is, in effect, seeking to rewrite the lease to accommodate a commercial interest that might have been protected by a relevant clause but was not. A clause of that type can be found in Alliance Engineering Pty Ltd v Yarraburn Nominees Pty Ltd [2011] NSWCA 301, see clause 4.11 cited at [37] of that judgment and see also Lagudi Holdings Pty Ltd v Horizon Pty Ltd [2009] NSWSC 240, [13]. 17It follows that, in my view, transfer of the GMEs is not precluded by the terms of the lease. 18I should mention that in the course of argument the question arose as to whether at the end of the lease Dogrow would be free to transfer the liquor license to another premises of its choosing. Mr Meek accepts that the lease is silent on that question but he asserts that s 61 of the Liquor Act 2007 (NSW) has the result that the liquor license would revert to the lessor. Mr Ireland indicated that that is not accepted by Dogrow which contends that, in the absence of any contrary provision in the lease, the liquor license is owned by the owner of the business (i.e. Dogrow) and that Dogrow is free to transfer the license. Dogrow does not accept that s 61 (or its predecessor s 42 of the Liquor Act 1982 (NSW)) affects the position. Were it the case that the licensee or owner of the business was free to transfer the liquor license at the end of the lease it might strengthen the conclusion to which I have come but since there is no agreement on the point, and it was not fully argued, I have formed no view on the point and exclude it from my consideration. 19It follows that Dogrow is entitled to the declaration it seeks and to an order that its costs be paid on the ordinary basis by Teakdale.