Fitness First Australia Pty Ltd v Fenshaw Pty Ltd

Disposition of appeal

Although the commercial absurdity is to my mind striking, it is important not to place too much weight upon it. For one thing, in its application to the facts at hand, it is a consequence of the very substantial increase, as it happens, of council rates and land tax throughout the term of both leases. For another, the absurdity is heightened by reference to the second lease, as a result of which the lessor is in the unusual position of welcoming every increase in council rates or land tax, because on its construction it will receive double that increase from the same tenant of less than half of the commercial office space in its building. But that is not a circumstance that obtained when the first lease was entered into.
It was perhaps for those reasons that the primary judge made no reference to the commercial absurdity to which the lessee pointed (a submission which had been advanced at first instance as well as on appeal).
True it is that the normal response of courts when one construction of a contract leads to absurd results is to reject it and prefer another which does not exhibit the same anomalies, as Lord Sumption JSC recently observed in International Energy Group Ltd v Zurich Insurance plc [2015] UKSC 33; [2016] AC 509 at [187]. But the starting point remains identifying the possible meanings the words chosen by the parties can bear, and reaching a conclusion based upon a consideration of text, context and purpose, as recently illustrated in Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392 at [51]-[75]. Of course, where as here the parties have chosen to restrict the scope of the contextual considerations which may be considered, that decision should be respected (not least because of considerations of fairness). To be clear, I do not suggest that there was any error in the course taken by the parties when the appeal was heard. To the contrary, it seems likely that it was perceived that the evidence as to surrounding circumstances addressed at some length in the appellant's written submissions was either equivocal or at odds with what was said in Westfield Management Ltd v Perpetual Trustee Company Ltd [2007] HCA 45; 233 CLR 528 at [35]-[45].
Fenshaw's elaborate submission that Fitness First was better off than it would have been had it agreed to pay a proportion of the total outgoings for the building may also be put entirely to one side. The only question that arises is the construction of cl 4.1, and on no view does that extend beyond statutory outgoings. It does not assist Fenshaw's submissions on construction to point to an entirely different mechanism of sharing outgoings, pursuant to which Fitness First would, as it happens, pay less than it is obliged to pay according to Fenshaw's construction.
I start with the text. The following matters may be observed immediately.
First, the clause contains two sentences. The first sentence imposes the substantive obligation upon the lessee in respect of increases in outgoings and charges, while the second defines outgoings and charges.
Secondly, there is a measure of imprecision in the drafting of cl 4.1. The primary obligation upon the lessee to pay any increase in the "outgoings" does not accord with the heading "outgoings and charges" and the elaborate provision made for "outgoings and charges" in the balance of the clause. The clause contains some minor errors: for example, the "and" after "etc" in the definition is surplus, and the Building was not subject to strata title, so cl 4.1.3 could have no application. I return to the imprecision in the closing words of cl 4.1.1 below.
Thirdly, the words "in respect of" are used repeatedly, and in different contexts. The words are used four times in cl 4.1: twice in the first sentence and twice in the second sentence. On three occasions the words are used so as to connect an amount of an outgoing or charge with the Premises, and once temporally ("in respect of each year or part of a year"). Putting to one side the latter instance, there is an important distinction between the first, third and fourth uses of the words. 1. The first use occurs in the first sentence, which imposed the obligation upon the lessee. The obligation is to pay "by way of additional rent any increases in the outgoings in respect of the Premises". 2. The third and fourth uses appear in the second sentence, in the definition of "outgoings and charges". The words are designed to bring within the scope of the defined term all instances of outgoings and charges. The sense of the third use is "all rates, taxes, assessments [etc] … payable to government … in respect of the Premises". The sense of the fourth use is "all maintenance levies, sinking fund levies [etc] … payable to the Owners Corporation in respect of the Premises". (The fact that this fourth use was inapplicable until and unless a strata plan was lodged does not prevent the text from being considered in the process of construction.)
It is significant that although the words "in respect of the premises" recur three times in cl 4.1, the first occurrence is in the substantive clause imposing an obligation, and is introduced by the word "any", while the remaining occurrences are in a different sentence, which is definitional, and where the words are introduced by "all".
The words "in respect of" are words which require a connection or relationship between the two matters to which they refer. However, the nature of the requisite connection or relationship is, as a matter of ordinary English language, highly dependent upon context. That was made clear in the intervention recorded during submissions in Commissioner of Taxation of the Commonwealth of Australia v Scully [2000] HCA 6; 201 CLR 148 at 154: "The phrase 'in respect of' is intended to convey some connection or relation between the two subject matters. [GUMMOW J. Decisions about phrases such as this must be considered in context.]"
Exchanges between Bar and Bench during argument are of no precedential authority, but the exchange reflected existing authority, including Workers' Compensation Board (Q) v Technical Products Pty Ltd (1988) 165 CLR 642 at 653-654: "Undoubtedly the words 'in respect of' have a wide meaning, although it is going somewhat too far to say, as did Mann CJ in Trustees Executors & Agency Co Ltd v Reilly, that 'they have the widest possible meaning of any expression intended to convey some connection or relation between the two subject-matters to which the words refer'. The phrase gathers meaning from the context in which it appears and it is the context which will determine the matters to which it extends."
The majority of the High Court approved that passage in Scully at [39]. More recently, the words "in respect of" were one of the examples provided by French CJ in The Queen v Khazaal [2012] HCA 26; 246 CLR 601 at [31] of a "relational term". His Honour then observed that: "The task of construing such terms does not involve the resolution of ambiguity. They are ambulatory words and may be designed to cover a variety of subjects and a variety of relationships between those subjects. The nature and breadth of the relationships they cover will depend upon their statutory context and purpose."
Where the words "in respect of" are used on the third and fourth occasions in cl 4.1, in the definition of "outgoings and charges", they require a connection or relation between the outgoing or charge to which the lessor is subject, and the Premises which have been let to the lessee. I would respectfully agree with the reasoning of the primary judge that those words proceed on the basis that, for example, land tax and council rates are levied in respect of the Land, and the words "in respect of the Premises" where appearing on the third and fourth occasions in the clause must be construed so as to extend to the (indirect) relationship which exists between those taxes and the part of the Land which has been let to Fitness First. Since the whole thrust of the first limb of the definition in cl 4.1.1, as well as the definitions of Base Year in cll 4.2.1 and 4.2.3 is that council rates and land tax can be "in respect of" the Premises as opposed to the Land, ordinary principles of construction suggest that an indirect relationship or connection is sufficient. If that were not so, then council rates and land tax could never fall within "outgoings and charges", which would be a strikingly unusual result and would leave much of the elaborate definition inutile.
But it does not follow that the words must bear the same meaning where they first appear in cl 4.1. The presumption that the same words should be given the same meaning is a weak one, and as Walsh J said in Robbins v Federal Commissioner of Taxation (1974) 129 CLR 332 at 339: "There is no rule of general application that the same meaning ought to be given to an expression in every part of the document in which it appears."
The context in which the words "in respect of" are used in the obligation-imposing first sentence of cl 4.1 is quite different from that in which the words are used in the definitional second sentence, because the term with which a relation or connection to the Premises is required is "any increases in the outgoings".
Inherent in the word "any" is the possibility that there is nothing to which it applies; hence it is a natural word to use in circumstances where there may not, in fact, be an increase in outgoings in a particular year. That is to say "any increase" implicitly and necessarily connotes the possibility that there is no increase. However, if there be an increase, there are two potential meanings which the words can bear. If there is an increase in outgoings and charges, then one possibility is that the words ask whether the whole of that increase bears the requisite relationship or connection with the Premises. But another possibility is that the words require an identification of that part of the increase in outgoings and charges which bears the requisite relationship or connection with the Premises.
I readily accept that one available grammatical meaning of "any increase in the outgoings in respect of the Premises" is the whole of any increase in rates, taxes etc which have been levied on the Land of which the Premises forms part. But I do not accept that that is the only available grammatical meaning, especially given the various clumsily drafted elements of the clause to which I have referred above. Indeed, I consider that this is the central flaw in the dispositive reasoning of the primary judge, and in the only substantial submission advanced by Fenshaw on appeal. As a matter of language, the words "any increase in the outgoings in respect of the Premises" may also mean that part of any increase in rates, taxes etc which have been levied on the Land of which the Premises forms part which is attributable to the Premises.
The notion of apportionment (which I have emphasised in the previous sentence) is something which the words "in respect of" bear as a matter of their ordinary meaning. Indeed, it is precisely that meaning of the same words which the High Court upheld in Tooth & Co Ltd v Newcastle Developments Ltd. Although land tax was levied on all the land owned by the lessor in that case, and the lessee was required to pay all taxes "to be charged or imposed upon or in respect of the demised premises or upon the lessor ... in respect thereof", the High Court confirmed that the part of the land tax attributable to the lessee's hotel was caught by the words in the clause.
Although the primary judge considered that there was "nothing in the language" of cl 4.1 to warrant any apportionment, I respectfully disagree. To the extent that the question is one of authority, as opposed to language, my conclusion is strengthened by the reasons in Tooth & Co Ltd v Newcastle Developments Ltd, a decision to which his Honour appears not to have been taken.
Having identified a possible alternative grammatical meaning, should it be preferred? A powerful collection of considerations support a construction which includes the notion of apportionment identified above.
First, it accords with the parties' choice to frame the obligation in cl 4.1 by reference to any increases in the outgoings in respect of the Premises as opposed to the Building or the Land, in a lease where the parties have generally been sensitive to the different meanings of these three defined terms.
Secondly, it avoids a capricious outcome. The area of the first lease is considerably more than the second lease (some 50 per cent more), and the initial rent under the first lease is also some 50 per cent more. Why should the parties be taken to have agreed that the obligations of the first lease to pay the entirety of any increase in rates, taxes etc upon the Land are identical to those under the second lease, where the demised premises and the rent are much smaller? I acknowledge the force of Fenshaw's submission that there are many ways in which these parties may have agreed to allocate the burden of outgoings and charges, but I struggle to see any commercially sensible rationale for a smaller tenancy and a larger tenancy each bearing the whole of an increase incurred by the lessor.
Thirdly, it is clear that the parties are to be taken to have distinguished between the statutory charges levied in the Base Year, and increases in those statutory charges. By reason of the fact that Fitness First has two leases in the same Building, that distinction would be steadily eroded if Fenshaw's construction be accepted. Fenshaw pointed to a document in evidence which stated that the total statutory outgoings for the Building for the financial year ended 30 June 2003 were $45,829.12, rising to $90,308.01 for the financial year ended 30 June 2014. On Fenshaw's construction, the whole of the increase was to be borne by Fitness First under cl 4.1 of the first lease, and the majority of that increase was to be borne once again by Fitness First under cl 4.1 of the second lease (noting that the Base Year was later in the case of the second lease). However, each time statutory outgoings increased, the double contribution by Fitness First had the result that not only was Fenshaw able to pass on the entirety of any increase, it was also paying progressively less of the base amount of statutory charges (so much so that by the end of the leases, Fenshaw was passing on almost the entirety of statutory charges). This collides with the distinction made plain by the substantive obligation in the opening words of cl 4.1 and the definition in cl 4.2 between the base amount of statutory outgoings and increases in such outgoings.
Fourthly, this construction is supported by the closing words of cl 4.1.1 "assessing such taxes, charges, duties etc and upon the basis that the Premises are the only land owned by the Lessor". I respectfully agree with the primary judge that these words are problematic. But it is clear that the words require a counterfactual assumption that the lessor owns less land than it does. Although it is less than pellucidly clear, those words seem to support a reading that one assumes that the Premises (ie parts of various floors of the Building) is the only land owned by Fenshaw, which in turn suggests that, to the extent that outgoings and charges have been determined based on the whole of the Land, an apportionment is required.
Finally, contrary to Fenshaw's submissions, I do not regard this construction as incapable of application. The Building is a commercial building, subject to 12 tenancies, with a total lettable floor space which is well defined. Each lease must perforce identify with precision the demised premises. There can be no dispute as to what proportion of the total lettable floor space each lease occupies. The facts that the leases occupy 26.52 per cent and 17.62 per cent of the total lettable floor space were admitted on the pleadings. And given that the statutory outgoings and charges are on the whole based on the unimproved value of the Land (land tax and council rates are the largest components by far) there is no reason not to apply those proportions. Even if the upper storeys of the Building commanded additional rent, they did not contribute to the unimproved land value on which council rates and land tax are based.

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