Ideal Business Centres Pty Ltd v Violin Holdings Pty Ltd atf The Violin Investment Trust

IBC's lease and the Sale Contract

1. By an unregistered lease signed on 27 January 2016, IBC leased part of the Premises (that part being described as "Suites C & D and shared areas") from Jordana ("IBC's Lease"). The term of IBC's Lease was ten years commencing on 1 September 2015 with an option to renew for a further five years.
2. Clause 1 of IBC's Lease included: " 'The lease' means, depending on the context: (a) this document; or (b) the leasehold estate arising on the execution or registration of this document; or (c) any other legal or equitable interest, such as an agreement for lease, an equitable lease, a periodical tenancy, a tenancy at will or other tenancy, arising from entry into possession of the lease premises and/or the payment or acceptance of money for the right to occupy and us the leased premises under, resulting from or relating to this document, the leasehold estate or any agreement, arrangement or negotiations relating to this document or the leasehold estate. …"
3. IBC also drew attention to clause 7 of IBC's Lease: "The lease will apply to the landlord's and tenant's executors, administrators and assigns or, in the case of a corporation, to its successors and assigns, as if they were parties to it."
4. If IBC's case against Violin failed, then IBC's case for damages against Jordana was based upon the contention that Jordana's sale of the Premises was a breach of clauses 5 and 48 of IBC's Lease: "Grant of lease and terms 5. (1) The landlord grants to the tenant the rights: (a) to possess and use the leased premises; (b) to use the common areas in common with the landlord and all persons authorised by it; and (c) to possess and use the fittings and accessories referred to in the inventory, but only in conjunction with the use of the leased premises, for the term stated in item 2 of the reference schedule and in accordance with the provision of the lease. (2) The term will begin and end on the dates stated in item 2 of the reference schedule and will include each of those dates. … Quiet enjoyment 48. If the tenant pays the rent and does not breach the lease it may use and occupy the leased premises during the lease without any interference from the landlord or any person lawfully claiming under the landlord, subject to the provisions of the lease and the landlord's rights under it."
5. Jordana sold the Premises to Violin pursuant to a standard form contract for the sale and purchase of land (2016 edition) dated 30 May 2017 (the "Sale Contract").
6. The Sale Contract included a number of provisions under the heading "Special Conditions - Commercial". This case turns on clause 49: "49. TENANCIES 49.1 The purchaser acknowledges that the purchaser takes title to the property subject to the unregistered lease(s) (Leases) attached to this contract. 49.2 The purchaser represents and warrants that it has satisfied itself in all respects and made its own investigations and enquiries as to all matters relating to the terms, nature, status and enforceability of the Leases. 49.3 In consideration of payment of the price the vendor assigns to the purchaser subject to and with effect from completion the benefit of all covenants under or contained in the Leases on the part of the Lessee, in favour of the purchaser and any successor in title, whether or not they touch and concern or run with the land, together with the full benefit of any guarantees in favour of the vendor. 49.4 The vendor must disclose to the purchaser all material correspondence to and from Lessees and other third parties relating to the property or any Lease. 49.5 Except insofar as this contract otherwise discloses, unless the vendor is required to do so under the terms of any Lease, the vendor agrees that after the contract date it will not without the prior consent of the purchaser (which will not be unreasonably withheld): (a) negotiate or enter into any new lease including any further lease to an existing Lessee; (b) deal with or consent to any variations, assignment, transfer or surrender of any Lease; (c) deal with or consent to any sub-lease or sub-tenancy relating to a Lease; (d) terminate any Lease or exercise any right of forfeiture or re-entry; or (e) carry out any rent review under any Lease. 49.6 The vendor warrants that the lessee's under the leases registered on the title to the property did not exercise any option for a further term under the leases. 49.7 The vendor warrants that there are no unpaid or unperformed Lease Incentives owing to any Lessee. The vendor indemnifies the purchaser against any liability or loss arising from and costs incurred in connection with the vendor's breach of this warranty. This clause does not merge on completion. 49.8 The vendor will provide to the purchaser notices of attornment addressed to each of the Lessees on completion. 49.9 On completion the vendor must deliver to the purchaser: (a) all original and certified copies of the Leases which the vendor holds; (b) a copy of any document served on a Lessee under a Lease and written details of its service, if the document concerns the rights of the landlord or the Lessee after completion; and (c) any document served by a Lessee under a Lease and written details of its service, if the document concerns the rights of the landlord or the Lessee after completion. 49.10 The purchaser may not make a claim or requisition, delay completion, rescind or terminate because: (a) of anything disclosed in the Leases; (b) the vendor does not take any action to enforce obligation under a Lease; (c) any Lessee is in breach of its obligations under a Lease; or (d) any Lease is not registered on the title to the property. 49.11 If the whole or any part of the property is or becomes vacant, the vendor will actively market the vacant premises and use reasonable endeavours to relet it at market rental and otherwise on terms substantially similar or not materially and substantially disadvantageous to the landlord when compared to the immediately preceding lease of the premises being leased (or if none, any other of the leases affecting the property) provided the vendor obtains the purchaser's prior written consent (which must not be unreasonably withheld or delayed). This clause does not merge on completion. 49.12 On completion the vendor assigns to the purchaser its interest in all security deposits held by the vendor as landlord under the Leases (Security Deposits). On completion the vendor must pay the purchaser the amount of the Security Deposits by way of adjustment to the price on completion. 49.13 On completion the vendor assigns (to the extent it is permitted to do so) to the purchaser the benefit of any bank guarantee provided by a Lessee under the Leases. The vendor must hand the bank guarantees provided by Lessees under the Leases to the purchaser on completion. 49.14 All Rent in respect of the Rent period current at completion must be adjusted in accordance with clause 14. 49.15 If the vendor receives Rent or GST relating to a period after the adjustment date, the vendor must pay to the purchaser the Rent or GST at completion or, if received after completion, within 5 business days after receiving it. 49.16 If the purchaser receives Rent or GST relating to a period before the adjustment date, the purchaser must pay to the vendor that Rent or GST within 5 business days after receiving it. 49.17 Clause 24 is deleted. 49.18 In this clause 49: (a) Lease Incentives means all incentives provided to the Lessees under the Leases, including the amount of any contribution of the cost of the Lessee's fit out or the amount of any rent foregone by the vendor as part of a rent concession or rent free period provided to the Lessees. (b) Lessee means a lessee under a Lease. (c) Rent means rent or other money payable by a Lessee under a Lease."
7. It will be noted that clause 49.17 deletes clause 24 of the Sale Contract. Jordana placed considerable reliance on that deletion. For that reason, and to facilitate comparison, it is convenient next to set out that deleted clause 24: "24.4 If the property is subject to a tenancy on completion - 24.4.1 the vendor must allow or transfer - • any remaining bond money or any other security against the tenant's default (to the extent the security is transferable); • any money in a fund established under the lease for a purpose and compensation for any money in the fund or interest earnt by the fund that has been applied for any other purpose; and • any money paid by the tenant for a purpose that has not been applied for that purpose and compensation for any of the money that has been applied for any other purpose; 24.4.2 if the security is not transferable each party must do everything reasonable to cause a replacement security to Issue for the benefit of the purchaser and the vendor must hold the original security on trust for the benefit of the purchaser until the replacement security issues; 24.4.3 the vendor must give to the purchaser - • a proper notice of the transfer (an attornment notice) addressed to the tenant; • any certificate given under the Retail Leases Act 1994 in relation to the tenancy; • a copy of any disclosure statement given under the Retail Lease Act 1994 in relation to the tenancy; • a copy of any document served on the tenant under the lease and written details of its service, if the document concerns the rights of the landlord or the tenant after completion; and • any document served by the tenant under the lease and written details of its service, if the document concerns the rights of the landlord or the tenant after completion; 24.4.4 the vendor must comply with any obligation to the tenant under the lease, to the extent it is to be complied with by completion; and 24.4.5 the purchaser must comply with any obligation to the tenant under the lease, to the extent that the obligation is disclosed in this contract and is to be complied with after completion."
8. A number of other provisions of the Sale Contract are relevant, commencing with the fact that on the front page of the Sale Contract there is an X in the box marked "subject to existing tenancies". The box marked "vacant possession" has been left blank.
9. IBC also relied upon the following provisions of the Sale Contract (all of which were special conditions, with the exception of clause 10): "10 Restrictions on rights of purchaser 10.1 The purchaser cannot share a claim or requisition or rescind or terminate in respect of - … 10.1.9 anything the substance of which is disclosed in this contract (except a caveat, charge, mortgage or writ). … 33. DOCUMENTS ATTACHED TO CONTRACT (paragraph (b) replaces clause 20.1) (a) For the purposes of clause 10, the substance of all material contained in any document (or copy of any document) attached to this contract is disclosed in this contract whether or not included in the list of documents on page 2. (b) If before this contract is signed by or on behalf of the Purchaser a document or copy of a document, at the request of the Vendor or the Vendor's solicitor, was attached to this contract by or on behalf of the Purchaser or the Purchaser's solicitor, the person attaching that document or copy did so as the agent of the Vendor. … 55. LEASEBACK The purchaser acknowledges and agrees that the Vendor shall enter into a lease with Jackson George Fashion Pty Ltd prior to completion for that area shown hatched on the next page plus 10 carspaces on the following terms: a. Rent of $97,000 plus GST per annum; b. Terms - not more than 6 months from the date for completion; c. Nil outgoings payable by the Lessee; and d. Otherwise on the terms set out in the standard Law Society form of lease PROVIDED THAT the Lessee shall not be required to remove any fit out or make good the premises. 56. REQUEST FOR FURTHER INFORMATION 56.1 Despite any other provision in this contract, the vendor warrants to the purchaser that to the best of the vendor's knowledge, as at the contract date: (a) the vendor has provided answers to the purchaser's questions and documentation, as set out in the responses to the Request for Further Information, in good faith; (b) no material information has been omitted from the Request for Further Information provided by the vendor, the omission of which renders those Request for Further Information inaccurate or incomplete in any material respect. 56.2 The vendor acknowledges that in entering into this contract the purchaser has relied on the vendor's responses to the Request for Further Information. … 56.4 In this clause 56: (a) "Request for Further Information" means the vendor's responses and documents provided by the vendor in response to the purchaser's request for further information sent by TressCox lawyers to the vendor's solicitor on 16 May 2017."
10. IBC's Lease was one of the unregistered leases attached to the Sale Contract.

The facts

1. The Premises were commercial premises leased to a number of parties. The obvious purpose of ownership of the Premises was to rent them out for a commercial return.
2. On 27 January 2016 IBC and Jordana entered into IBC's Lease.
3. In September 2016 Jordana leased an additional area of the Premises to IBC comprising what was referred to as "the Showroom" and "Junes and Anna Rooms" (the "Additional Area"). This was confirmed by an email from Mr Jerry Ngo of IBC to Mr George Spyrou of Jordana on 14 September 2016: "Subject: RE: New Area Hi George, Please go ahead. Room 1: Showroom Room 2: Junes + Anna Rooms New Area Lease = 16,500 per annum starting 01/10/2016 Current Lease 158,600 per annum New lease = 158,600 + 16,500 = 175,000 Monthly Pay starting 01/10/2016 = (175,100/12) + GST = 16,050 Many thanks - Jerry"
4. On 10 May 2017 a written agreement in principle was reached between the agents for Violin and Jordana for the purchase of the Premises for $8,700,000 "subject to leases". The purchase price never changed.
5. On 16 May 2017 Violin's solicitors received a draft contract from the solicitors for Jordana attaching, among other things, IBC's Lease and including a proposed special condition 49 concerning tenancies.
6. Later that day the solicitors for Violin informed the solicitors for Jordana that they "will now commence reviewing the contract" and attached a request for information including any leases.
7. On 17 May 2017 the solicitors for Jordana replied to the request for information, including a tenancy schedule that referred to the details of IBC's Lease. This reply is the document referred to in clause 56.2 of the Sale Contract (see paragraph [18] above).
8. On 23 May 2017 the solicitors for Violin proposed amendments, including their own draft of clause 49 (which became the version which appears in the Sale Contract - see paragraph [15] above).
9. On 24 May 2017 Jordana's solicitors agreed to Violin's version of clause 49.
10. An amended contract for sale incorporating the agreed amendments, including clause 49, was sent by the solicitors for Jordana on 26 May 2017.
11. On 30 May 2017 the Sale Contract was exchanged with a 12 week completion period.
12. Mr Spyrou of Jordana gave evidence and was cross-examined. I accept him as a witness of truth. He gave unchallenged evidence that he believed, based on clause 49 in the Sale Contract, that Violin intended to honour all of the agreements for lease, including IBC's Lease, and that he would not have sold the Premises to Violin if Violin had indicated, in any way, that they would not be bound by the unregistered leases.
13. By no later than 22 June 2017 Violin had formed the intention to terminate IBC's Lease and to require vacant possession immediately upon completion of the Sale Contract. Violin did not disclose this intention to Jordana or to IBC before completion of the Sale Contract.
14. At this point in the narrative, I interpose that IBC pressed the facts found in the preceding two paragraphs. However, while I am satisfied of those matters, I have not relied upon them or give them any legal significance in resolving these proceedings.
15. On 15 August 2017 the solicitors for Jordana sent replies to requisitions on title to Violin's solicitors. Those replies included a response that Jordana relied on the leases attached to the Sale Contract (which included IBC's Lease).
16. On 18 August 2017 the solicitors for Violin confirmed that they required on settlement from the solicitors for Jordana: 1. notices of attornment for each unregistered lease; 2. the original unregistered IBC lease; 3. the original bank guarantee from IBC; and 4. a letter confirming that Jordana had no further interest in the bank guarantee from IBC.
17. On 21 August 2017 a copy of IBC's Lease was re-executed by IBC and Jordana to be given to Violin pursuant to the request referred to in the preceding paragraph. This procedure had to be undertaken because the original of IBC's Lease could not be found.
18. On 24 August 2017 settlement of the Sale Contract occurred. Violin's solicitors received, among other things: 1. notices of attornment in respect of all of the unregistered leases, including IBC's Lease; 2. the original (re-executed) copy of IBC's Lease; 3. the original bank guarantee from IBC; 4. a letter from Jordana confirming that he had had no interested in the bank guarantee from IBC.
19. On 28 August 2017 Violin issued a notice to vacate to IBC: "Lease between Jordana Pty Limited (ACN 004 018 446) and Ideal Business Centres Pty Ltd (ACN 145 277 676) (Tenant) in respect of the Premises dated 27 January 2016 (Unregistered Lease) Premises: Suites C & D and shared areas, 38 Ricketty Street, Mascot NSW 2020 Violin Holdings Pty Ltd ACN 612 105 281 (Owner) became the registered proprietor of the Premises on 24 August 2017. As the Unregistered Lease was not registered on the title of the land and is for a term in excess of 3 years, the Owner is not bound by the terms of Unregistered Lease pursuant to section 42(1)(d) of the Real Property Act 1900 (NSW). Accordingly you are given notice that you are required to vacate the Premises within 30 days from the date of this notice and you are required to remove your property and deliver to the Owner the keys and security devices to the Premises."
20. On 1 September 2017 IBC commenced these proceedings by summons.

Contractual interpretation - the applicable legal principles

1. There are numerous statements of authority as to how the proper construction of commercial contracts is to be determined. They are conveniently set out and summarised in a manner binding upon me in Cherry v Steele-Park (2017) 351 ALR 521; [2017] NSWCA 295 ("Cherry"). In particular, I take two principles from that case.
2. First, "the task of identifying the legal meaning of provisions in a commercial contract is the task of identifying the imputed intention of the parties, by reference to the contractual text construed in light of its context and purpose," (Cherry at 532 [46]).
3. Second, whether a provision in a commercial contract is ambiguous (that is to say, permitting a constructional choice to be made between two different legal meanings) is "a conclusion, which can only be assessed after regard has been had to context" (Cherry at 540 [85]), or what are sometimes referred to as the surrounding circumstances.
4. All of the parties took me to decisions interpreting contractual provisions in factual circumstances they submitted were broadly similar to those which had given rise to the present dispute. To the extent I have taken those decisions into account, I have not forgotten that it is the Sale Contract which the Court is called upon to interpret in the light of the facts and circumstances which have been proven in this case. Other decisions interpreting other contracts which bear some similarity to the Sale Contract can only be considered with that caution in mind.

Resolution of the contractual argument

1. Even without recourse to anything outside the four corners of the Sale Contract, the word "acknowledges" in clause 49.1 of the Sale Contract clearly permits a constructional choice to be made between two different legal meanings. Those legal meanings may be found in two of the six meanings ascribed to "acknowledge" in the Macquarie Dictionary (online edition): "2. to express recognition or awareness of: to acknowledge an acquaintance by waving. … 6. Law to own as binding or of legal force: to acknowledge a deed."
2. Violin submitted that clause 49.1 was only an expression of its recognition or awareness of the existence of IBC's Lease. IBC and Jordana contended that it was a promise by Violin to be bound by IBC's Lease or, in Mr Balafoutis' submission, "acknowledges" meant "agrees to observe and give effect to". There are six reasons why the Court accepts IBC's and Jordana's submission and finds that, on its proper construction, clause 49.1 is an agreement by Violin to observe and give effect to IBC's rights under IBC's Lease.
3. First, there may have been more force in Violin's submission if clause 49.1 only said "The purchaser acknowledges the unregistered leases attached to this contract" and no more (although, as is noted in paragraph [53] below, the decision in Bahr casts doubt even on that proposition). However, clause 49.1 (and the balance of clause 49 which is part of the context) contains a great deal more. What is acknowledged is not only the fact of the "leases", but "that the purchaser takes title to the property subject to the unregistered leases". The language of taking title to something, subject to another interest, bespeaks a significant legal consequence. Furthermore, it connotes an ongoing state of affairs.
4. Mr Pritchard SC submitted that the Court should find that clause 49.1 had been modelled on, and was intended to mirror, s 42 of the RP Act, which referred to the registered proprietor "holding" an estate or interest "subject to such other estates and interests…as are recorded in that folio". It is unnecessary for the Court to go that far. It is sufficient to note that clause 49 was propounded by Violin's solicitors and that - as the use of similar words in s 42 of the RP Act demonstrates - the use of language of holding or taking title to property subject to something else is language which lawyers would readily understand conveys an intention to effect a significant legal consequence. In this case, the Sale Contract was negotiated through the parties' solicitors. The use of the words to which the Court has drawn attention points decisively to the conclusion that "acknowledges" is to be understood as a recognition or promise by Violin to be bound by the unregistered leases, including IBC's Lease.
5. Second, if clause 49.1 was intended by the parties to be no more than a mere acknowledgement of the existence of IBC's Lease, presumably such an acknowledgement must have a purpose. The obvious purpose is to ensure that the existence of IBC's Lease could not be used by Violin to avoid the transaction. However, that purpose is already achieved by clauses 10.1.9 and 33 (see paragraph [18] above). When that is understood, it must be the case that clause 49.1, especially when read in the context of the balance of clause 49, has other work to do. That work can only be to bind Violin to observe IBC's Lease.
6. Third, the balance of clause 49 contains an elaborate set of provisions which when taken both individually and together point to the importance of the unregistered leases, including IBC's Lease. These include an obligation on Jordana to provide to Violin notices of attornment in respect of each of those leases. An elaborate set of provisions such as those set out in clause 49 would only be required if, and powerfully pointed to the conclusion that, the intention of the parties was that the unregistered leases would continue to have an ongoing legal effect according to their terms after completion of the Sale Contract. That could only be achieved by Violin agreeing to be bound by them.
7. Fourth, the matrix of circumstances in which the Sale Contract was made includes three significant factors which are indistinguishable from those that moved the majority in Bahr to find a contractual obligation on the party in the position of Violin. I gratefully adopt the summary of the facts in Bahr provided by Austin J in Heggies Bulkhaul v Global Minerals Australia Pty Ltd (2003) 59 NSWLR 312; [2003] NSWSC 851 at 338-9 ("Heggies"): "[97] … In Bahr v Nicolay (No 2) (1988) 164 CLR 604 the Bahrs sold land to Mr Nicolay, who leased it back to them for three years. Their contract provided, in cl 6, that on the expiration of the lease, the Bahrs would enter into a contract to re-purchase the land. Mr Nicolay sold the land to the Thompsons by a contract containing a provision (cl 4) by which the Thompsons acknowledged the existence of the re-purchase provision of the earlier contract. The Thompsons became the registered proprietors and informed the Bahrs that they recognised the re-purchase clause and would agree to re-sell the land on the terms of that provision. But they subsequently refused to do so. [98] The High Court held that the Bahrs were entitled against the Thompsons to specific performance of the agreement to re-sell the land. All members of the Court took the view that the agreement between Mr Nicolay and the Thompsons, especially cl 4, involved more than a mere acknowledgement of the existence of the rights of the Bahrs under cl 6 of their contract. This was therefore not a case of a person becoming registered proprietor merely with notice of an unregistered interest. From that point the reasoning of the members of the High Court was not uniform."
8. Clause 4 of the agreement between Mr Nicolay and the Thompsons in that case provided the Thompsons "acknowledge [sic] that agreement exists" between the Bahrs and Mr Nicolay. It was this clause that the relevant majority held was an agreement which meant that the Bahrs' rights under the agreement between the Bahrs and Mr Nicolay were to be enforceable against the Thompsons.
9. The reasoning of Mason CJ and Dawson J on this point was at (616-617; citations omitted): "What then was the purpose and effect of cl. 4 of the agreement between the first and the second respondents? The matrix of circumstances in which the agreement was made throws up three significant factors. First, the making of an agreement between the first and second respondents which would result in the destruction of the appellants' existing rights, or allow the destruction of those rights, by registration of a transfer in favour of the second respondents in circumstances whereby the rights became unenforceable would expose the first respondent to liability for breach of contract: see the discussion by Jordan C.J. in Queensland Insurance v. A.M.F. Insurance. Secondly, as we have seen, upon registration of such a transfer, the combined effect of ss. 68 and 134 would, in the absence of fraud, bring about the destruction of the appellants' rights. Thirdly, at least until registration of such a transfer, the appellants' equitable interest under the 1980 agreement, being first in time, had priority over the interest of the second respondents as purchasers under their agreement with the first respondent. Viewed in this setting, cl. 4 of the later agreement was designed to do more than merely evidence the fact that the second respondents had notice of the appellants' rights. If that were the only purpose to be served by the acknowledgment it would achieve nothing. It would enable the second respondents to destroy the appellants' interest and would leave the first respondent exposed to potential liability for breach of contract at the suit of the appellants. In the circumstances outlined it is evident that the purpose of cl. 4 was to provide that the transfer of title to lot 340 was to be subject to the appellants' rights under cl. 6 of the 1980 agreement in the sense that those rights were to be enforceable against the second respondents. At first glance it might seem that the words of cl. 4 are inadequate to achieve this purpose. But an acknowledgment of an antecedent agreement in an appropriate context may amount to an agreement or undertaking to recognise rights arising under that antecedent agreement. And here the inferences to be drawn from the matrix of circumstances are so strong that they necessarily influence the interpretation of cl. 4. These inferences provide a secure foundation for imputing an intention to the parties and reading cl. 4 as a reflection of that intention: see Hope v. R.C.A. Photophone of Australia Pty. Ltd.; Thomas National Transport (Melbourne) Pty. Ltd. v. May & Baker (Australia) Pty. Ltd.; Reardon Smith Line v. Hansen-Tangen; Khoury v. Government Insurance Office (N.S.W.)"
10. The Court accepts Mr Pritchard SC's submission in one of his written submissions that the factors in Bahr are the same as those in the present case: "10. The making of the contract between Jordana and Violin will result in the destruction of IBC's existing rights or allow the destruction of those rights by registration of a transfer in favour of Violin in circumstances whereby the rights becoming unenforceable will expose Jordana to liability for breach of contract (i.e. the Lease): the "First" factor in Bahr at 616. 11. Upon registration of a transfer in favour of Violin pursuant to the contract, the effect of the Real Property Act will, in the absence of fraud and personal equities, bring about the destruction of IBC's rights: the "Secondly" factor in Bahr at 616. 12. At least until registration of a transfer, IBC's equitable interest under the Lease, being first in time, had priority over the interest of Violin as purchaser under their contract with Jordana: the "Thirdly" factor in Bahr at 616."
11. The Court also accepts Mr Balafoutis' characterisation of the language of clause 49.1 as pointing even more clearly to the conclusion which the Court has reached than the language of "acknowledged that an agreement exists" in Bahr. Furthermore, the Court also accepts Mr Balafoutis' submission that, properly understood, Brennan J (at 651-652) interpreted clause 4 of the agreement in Bahr in the same way as Mason CJ and Dawson J (see paragraph [51] above), so as to constitute a majority of the question of construction.
12. Applying the High Court's analysis of those three circumstances in Bahr to the facts in the present case, it follows that clause 49.1 should be construed as obliging Violin to honour or adhere to IBC's Lease.
13. Fifth, the continuation of the unregistered leases with, in effect, Violin substituted as the lessor is consistent with the commercial background to the transaction, namely the purchase of an asset (being the Premises with the unregistered leases) which generated rental income.
14. Sixth, while not of its itself dispositive, and noting my observations in paragraph [43] above, I am fortified in the conclusions I have reached by the decision of White J (as his Honour then was) in Ryan v Starr (2005) 12 BPR 22,803; [2005] NSWSC 170 ("Ryan"). In that case, his Honour construed a clause that the relevant contract was "subject to the purchasers' acknowledgement of a right of carriageway" to be of similar effect to clause 49.1 in the case at bar.

IBC'S equity

1. In his judgment in Heggies, Austin J summarised the effect of the judgments in Bahr (emphases added): "103 For present purposes, what emerges from the judgments is that: (i) an unregistered interest may be asserted against the registered proprietor if there was fraud at the time of transfer or registration, under the fraud exception to s 42; (ii) if the registered proprietor subsequently engages in unconscionable conduct intended to deny or defeat the unregistered interest, the holder of the unregistered interest may obtain relief against the registered proprietor, either because the registered proprietor's conduct comes within the fraud exception to s 42, or because the conduct creates an equity which the holder of the unregistered interest may assert against the registered proprietor; (iii) but such an equity will not be created merely because the registered proprietor asserts his registered title after acquiring it with notice of the unregistered interest, the additional ingredient being some form of acknowledgement of the unregistered interest, or an agreement or undertaking to act in accordance with it, from which the registered proprietor later resiles."
2. This part of Austin J's judgment in Heggies was the subject of detailed consideration by Young CJ in Eq (as his Honour then was) in The Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd (2007) 64 ACSR 31; [2007] NSWSC 676 ("Presbyterian Church"). After considering a number of relevant cases, Young CJ in Eq concluded: "[112] Despite the fact that the cases I have recently digested may not all be entirely consistent one with another, it seems to me, with respect, that Austin J was correct in Heggies at [103] (quoted earlier) when he said that the additional factor to be superadded to notice to constitute fraud (or alternatively to create a personal equity) was "some form of acknowledgment of the unregistered interest, or an agreement or undertaking to act in accordance with it, from which the registered proprietor later resiles". … [114] One must be a little careful with this word "acknowledgment". Acknowledgment in this type of case means more that the realisation that a right exists. It connotes the case where a person not only recognises that a right exists, but also undertakes to respect that right. However, it does not appear necessary that the undertaking need be known to the person whose right is in question at the time when it is made."
3. With the utmost respect, it seems to me that there is an ambiguity in Austin J's expression that the additional factor was "some form of acknowledgement of the unregistered interest, or an agreement or undertaking to act in accordance with it". It is not clear whether his Honour intended the "form of acknowledgement" and the "agreement or undertaking" to be two different things, or whether his Honour's reference to "an agreement or undertaking" was just another way of describing the "form of acknowledgment of the unregistered interest". Young CJ in Eq, in the passage I have quoted from Presbyterian Church, appears to have adopted the latter construction of Austin J's analysis. I shall do the same.
4. It follows from the construction of clause 49.1, which the Court has adopted in the preceding section of these reasons, that clause 49.1 is the "additional ingredient", being an agreement or undertaking to act in accordance with the unregistered interest, in this case IBC's Lease. Because that is an agreement or undertaking of the benefit of IBC, IBC has a personal equity against Violin.
5. A differently constituted majority in Bahr from that on the construction issue (being Wilson and Toohey JJ (at 638) and Brennan J (at 656)) held that the personal equity is to be given effect through the imposition of a constructive trust. In this case that is a constructive trust by which Violin holds its interest in the Premises subject to IBC's rights under IBC's Lease. As the beneficiary of that constructive trust, IBC is entitled to enforce it against Violin. This is also the approach adopted by White J in Ryan at [90]-[95], with which I respectfully agree. I also note that, as White J said of the words he was construing in Ryan, I do not consider that clause 49 (and clause 49.1 in particular) can be construed as an express declaration of trust.
6. Finally, I record for completeness that the conclusions set out above mean I do not have to consider other arguments advanced by IBC. These included reliance on clauses 7 and 49.3 of the Sale Contract as constituting an assignment or novation, and the effect of s 118 of the Conveyancing Act 1919 (NSW).

Violin's arguments

1. I will now give the Court's reasons for rejecting Violin's arguments.
2. Mr Dawson placed considerable reliance on the fact that clause 24 of the standard conditions had been deleted in favour of special condition clause 49. He drew attention to the fact that deleted clause 24.4.5 provided that "the purchaser must comply with any obligation to the tenant under the lease, to the extent that the obligation is disclosed in this contract, and is to be complied with after completion". He submitted that the deletion of that clause, in particular, was a matter which the Court could take into account as a clear indication of the parties' mutual intention that clause 49 was not to have the effect of binding Violin to IBC's Lease: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 91 ALJR 486; [2017] HCA 12 at 502 [73], and Ginger Development Enterprises Pty Ltd v Crown Developments Australia Pty Ltd [2003] NSWCA 296 at [20].
3. In The Interpretation of Contracts in Australia by Sir K Lewison and D Hughes (2012, Thomson Reuters), the learned authors summarised the position in relation to the use which may be made of deleted words at p 62: "Despite older authority to the contrary, the court will nowadays often look at words which the parties have deleted from their contract in order to resolve an ambiguity in the words which remain, although they are often an unsafe guide to meaning."
4. In their subsequent exposition, they wrote (at pp 66 to 67; citations omitted): "Where a contract has been varied by agreement, the court is able to look at the contract both before and after the variation. In Punjab National Bank v de Boinville, Staughton LJ said that: "if the parties to a concluded agreement subsequently agree in express terms that some words in it are to be replaced by others, one can have regard to all aspects of the subsequent agreement in construing the contract, including the deletions, even in a case which is not, or not wholly, concerned with a printed form". If it is permissible to look at deleted words, however, the assistance they give must necessarily be limited. As Mason J observed in Codelfa, such evidence "is receivable so as to negative an inference sought to be drawn from surrounding circumstances". "[T]he use of a word or phrase in the deleted part of a clause may throw light on the meaning of the same word or phrase in what remains of the clause. … But it seems to me quite another thing to say that the deletion itself has contractual significance; or that by deleting a provision in a contract he parties must be deemed to have agreed the provision, they may have thought it unnecessary; they may have thought it inconsistent with some other provision in the contract; it may even have been deleted by mistake." It is submitted that the explanation given by Lloyd J points powerfully to the conclusion that a consideration of deleted words is an unsafe guide to the meaning of a contract. At best, the consideration of deleted words may negative the implication of a term in the form of the deleted words. Even in the cases where the fact of deletion is admissible as an aid to interpretation, there is a great difference between a case where a draft is amended and effectively re-cast. It is one thing to say that the deletion of a term which provides for "X" is suggestive that the parties were agreeing on "not X'; it is altogether a different thing where the structure of the daft is changed so that one provision is replaced by another provision. Further, where the first provision contains a number of ingredients, some assisting one party and some assisting the other, and that provision is removed, it by no means follows that the parties intended to agree the converse of each of the ingredients in the earlier provision."
5. Their counsel of caution was most recently followed by Nicklin J in Health & Case Management Limited v The Physiotherapy Network Limited [2018] EWHC 869 (QB) at [72]-[73]. Professor J W Carter in The Construction of Commercial Contracts (2013, Hart Publishing) at [14-30] acknowledges that "Generally, the modern cases have distinguished between negotiated and standard form documents, and taken the view that deletions can be taken into account in relation to the latter but not the former." However, in his discussion of deletions in standard form documents, Professor Carter concludes at [14-32] that: "There remains the problem of what to make of the deletion (or insertion). It is simplistic to say that the deletion - or any other amendment - must be significant. There are various reasons why the deletion might have been made, including that the parties misconstrued the standard form. Without the benefit of evidence of why the deletion occurred it is difficult to know what inference should be drawn. However, such evidence would usually relate to the parties' intention or their negotiations."
6. In the present case there is no evidence as to why Violin's solicitors did not accept Jordana's original version of clause 49 and proposed deleting standard condition clause 24 to replace it with their version of clause 49. Nor is there any evidence as to why Jordana, through its solicitors, accepted the amendment proposed by Violin's solicitors.
7. To use the expression used by Lewison and Hughes, the change from deleted clause 24 to clause 49 is not simply an amendment. It is a recasting of the Sale Contract provision in relation to tenancies. As such, I do not think that it is possible for the Court to draw safely any conclusion about what that change says about the parties' intentions about the meaning of clause 49. In some respects clause 49 repeats the effect of parts of deleted clause 24 (compare clause 49.8 with clause 24.4.3; clauses 49.9(b) and (c) with clause 24.1; and clauses 49.12 and 49.13 with clause 24.4.1). Clause 49.10 is also to the same effect as clauses 10.2 and 33(a). In other respects, clause 49 is quite different from the deleted clause 24. Furthermore, for the same reason, I am satisfied that it would be quite wrong to conclude that the deletion of clause 24.4.5 means that the parties intended to agree to the opposite effect in clause 49.1.
8. In the same contractual vein as the preceding point, Mr Dawson drew the Court's attention to the decision of Wood J in Snowlong Pty Ltd v Choe (1991) 23 NSWLR 198, and Croft J in Specialist Diagnostic Services Pty Ltd v Healthscope Ltd [2010] VSC 443, both of which interpreted provisions not dissimilar to clause 24.4.5. In those cases, the Court accepted that the party in the position of Violin was bound to honour the relevant obligation to a third party such as IBC. In neither of those cases, however, did the contracts in question use the word "acknowledgement" or anything similar to clause 49.1.
9. I accept Mr Balafoutis' submission that for Violin to rely on those cases was neither a logical nor helpful way to approach the problem. This is because it does not follow that just because a court has held a particular collocation of words to mean "X", then any other collocation of words cannot also have the effect of "X". As I have observed in paragraph [43] above, the Court must bear in mind that every contract must be interpreted according to its own words, their context and the relevant factual circumstances.
10. It was also submitted for Violin on the issue of contractual interpretation that the mechanisms set out in clause 49 were equally consistent with the possibility that Violin would treat the unregistered leases as tenancies at will. At a very high level of generality, that proposition may be true. However, when the particular words, their context and the overall circumstances are taken into account, the Court does not accept that submission for the reasons set out in paragraphs [46] to [56] above.
11. Turning to the equitable issues, Mr Dawson submitted that the "extra ingredient" identified by Austin J in Heggies as explicated by Young CJ in Eq in Presbyterian Church was not present in this case. For the reasons set out in paragraph [61] above, that submission is rejected.
12. It was also submitted that the variation to include the Additional Area as part of IBC's Lease (see paragraph [22] above) meant that there was now nothing to which an equitable interest could attach. Those variations were not notified to Violin under the Sale Contract, in the due diligence checklist or by way of answer to requisitions. Violin argued that IBC could not "ratchet back" its claim to IBC's Lease attached to the Sale Contract.
13. The Court rejects the submission set out in the preceding paragraph for three reasons, all to the effect that the past variations were rendered irrelevant by the Sale Contract. In doing so, I note that it makes no difference whether what occurred were variations to IBC's Lease in the strict contractual sense or whether the arrangement evidenced by the email referred to in paragraph [22] above was something of a more informal character.
14. First, the acknowledgement in clause 49.1 bound Violin "to the unregistered leases attached to this contract". That included IBC's Lease and it is that lease which Violin is bound to honour.
15. Second and putting the matter beyond doubt, the Additional Area which had been leased to IBC is the subject of the leaseback expressly provided for in clause 55 of the Sale Contract (see paragraph [18] above). In other words, the effect of the Sale Contract itself was that the Additional Area became the subject of a new lease from Violin as lessor to Jackson George Fashion Pty Ltd.
16. Third and consistently with the leaseback arrangement, IBC does not suggest it has any entitlement to the Additional Area. IBC only claims the entitlement to occupy that part of the Premises demised to it by IBC's Lease.

Conclusion

1. IBC succeeds in its claim against Violin. IBC therefore has no claim in damages against Jordana.
2. The Court will give the parties an opportunity to endeavour to agree on a form of orders to give effect to these reasons, including as to costs. I will fix a date for a further, short hearing to resolve any disagreements about those matters.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 August 2018