KJRR Pty Ltd v Commissioner of State Revenue [1999] VSCA 2

KJRR Pty Ltd v Commissioner of State Revenue [1999] VSCA 2 - VSCA 1999 case summary — Zoe

[4]

On 1 September 1996 the appellant, KJRR Pty. Ltd., and Sportsco Pty. Ltd. executed a franchise agreement whereby the appellant, as franchisee, obtained the right from and undertook the obligation to Sportsco, as franchisor, to conduct a business as a retailer of sports and leisure-wear. The agreement recited, among other things, that Sportsco had established and developed a distinctive system of conducting retail sports and leisure-wear businesses and promoting specified trademarks and intellectual property of which it was the exclusive licensee. The franchise agreement was very detailed but it is sufficient now to say that, subject to its terms, the appellant derived by it the exclusive right for five years from 1 September 1996 to use the system and to enjoy the benefits of the trademarks and intellectual property within certain "Territory", which was designated as Centrepoint Arcade, Warrnambool. Each party became entitled by virtue of the franchise agreement to the performance by the other of a variety of quite elaborate obligations. Among these, the appellant was obliged to submit to a degree of supervision by Sportsco of the conduct of its business. The appellant was also obliged in conducting the business to generate an agreed minimum gross revenue of which Sportsco was entitled to a share, payable monthly, as a franchise service fee. In the events that happened the appellant became further obliged by the franchise agreement to enter into a so-called "property agreement" in relation to Shop 6, Centrepoint Arcade, 125 Liebig Street, Warrnambool which it did, also on 1 September 1996. Sportsco had previously become lessee of that same shop under a lease from Sarclet Pty. Ltd. for five years commencing on 15 August 1996 at a rent of $42,000 per annum, subject to annual review. So far as appears the lease was executed by the parties to it at arms' length. The "property agreement" expresses itself to be a "Licence Agreement" made between Sportsco as licensor and the appellant as licensee. By it the licensor/franchisor granted to the appellant "a Licence to use" Shop 6 "for the use only as a Sportsco Franchise Retail Store". The duration of the grant is from 1 September 1996 until the day before the expiration of the lease of the shop held by Sportsco from Sarclet Pty. Ltd.; but the licence is terminable earlier upon termination of the franchise agreement or the lease. The so-called "licence fee" payable by the appellant to Sportsco or at its direction, in consideration of which the grant to the appellant was made, is an amount equal to the rental and other sums payable by Sportsco under the lease.

[24]

The assumption referred to in paragraph 11 above, on which this case was argued on behalf of the appellant in the Administrative Appeals Tribunal, led Mr Gibson to conclude that "... no case has decided that an agreement is effective to constitute a lease where the parties have expressly covenanted that no rights of exclusive possession (or occupation) have been conferred". The assumption was not justified. As Bright and Gilbert note in their passage above-quoted, there have been several decisions concerning occupation agreements which had expressly provided that the occupant did not have exclusive possession; and in a number the court nevertheless decided, contrary to the submission of the grantor, that the occupant had a lease and not a licence. These, all English, include Aslan v. Murphy; Duke v. Wynne, supra, esp. at 771 and 774; Family Housing Association v. Jones [1990] 1 W.L.R. 779, 788; Westminster City Council v. Clarke [1992] UKHL 11; [1992] 2 A.C. 288, at 296-7 (disapproving of the Family Housing Association Case only on a point not now material); and A.G. Securities v. Vaughan; Antoniades v. Villiers, supra, at 455-457. These cases all arose in the context of the Rent Acts and were clearly enough influenced by a policy that the courts should not permit artificial or illusory provisions of occupation agreements to oust the operation of the statutory scheme to the disadvantage of occupiers for whose protection the scheme had been enacted. This attitude of the courts in the context of occupation agreements had its genesis, or at least received its principal impetus, in the leading decision of the House of Lords in Street v. Mountford, supra. There, a right to occupy two residential rooms was granted by a so-called "licensing agreement" which contained a declaration signed by the grantee that she understood the agreement not to give her a tenancy protected under the Rent Acts. The grantee and her husband took up occupation and it was common ground that they had been given and received exclusive possession. The hallmarks of a lease being present - namely, exclusive possession at a rent for a term - the House of Lords rejected the grantor's contention that the intention of the parties derivable from the actual terms in which the agreement was phrased should be accorded paramountcy in order to classify it as a mere licence. In a passage since much quoted Lord Templeman, who delivered the leading opinion, observed (at 819) -

[41]

It seems probable that the "pretence" to which Lord Templeman referred several times in Antoniades was not intended to be understood in the sense in which "sham" is usually understood - that the parties have in effect agreed or reached an understanding that the written agreement should not mean what it said: Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786, at 802, per Diplock, L.J. Indeed, in turning away in his opinion in Antoniades from the phrase "sham devices" that he had used in Street v. Mountford, Lord Templeman indicated that he appealed to a novel, wider and more flexible doctrine: cf. Bright and Gilbert, op. cit., 132-3. Those learned authors suggest that the doctrine, where it applies, would enable a term of an agreement to be ignored if inserted for the purpose of avoiding statutory protection, such as that offered by the Rent Acts. At 133-4 they interestingly develop the view that, whereas what they call the "Snook doctrine" of sham is easily reconcilable with conventional contract theory, the "pretence doctrine" is at odds with it. The latter novel doctrine is there perceived to be "policy-driven"; and one according to which, notwithstanding the terms actually agreed between the parties, the court will disregard any provision inserted for the purpose of avoidance of a statutory scheme or provision. There are evident difficulties in settling the limits of such a doctrine and its application. How, for example, is it to be determined whether a term has been inserted for an impermissible and ulterior purpose? How are the courts to decide whether or not to read the agreement at its face value? Some cases are obvious: Lord Oliver regarded the relevant aspects of the agreements in Antoniades v. Villiers as having an air of "total unreality"; and the other Law Lords regarded them as more or less artificial or fanciful. There was eloquent evidence available to their Lordships, apart from the mere terms of the agreement, leading easily to that conclusion. Similarly, in Radaich v. Smith it was readily evident from the uncomplicated agreement there in question, and from the nature of the very simple business for the pursuit of which occupation of the premises was given and taken, that a grant of exclusive possession must have been intended. In Street v. Mountford Lord Templeman noted, at 817, that "in the case of residential accommodation there is no difficulty in deciding whether the grant confers exclusive possession". It may be a question, with respect, whether that proposition is universally true; but the matter was apparently there so plain that it was common ground. It is suggested in Bright and Gilbert, op. cit., at 137, that the approach in Street v. Mountford will apply equally to commercial agreements, but that there will be fewer commercial cases in which the factual matrix will reveal obvious pretence. Shell-Mex and B.P. Ltd. v. Manchester Garages Ltd. [1971] 1 W.L.R. 612 and Dresden Estates Ltd. v. Collinson (1987) 55 P. & C.R. 47 provide examples.

[43]

It seems clear that the licence agreement, in order that the commercial substance of the transaction be correctly understood, is to be read along with the franchise agreement; and there are specific provisions of the latter which, unless they are to be ignored, might well depend on, or at least be consistent with, the appellant's not having exclusive possession or occupation of the premises as against Sportsco. I refer, for example, without setting out their terms, to clauses 6.1 and 6.2 of the franchise agreement. Each of these is evidently designed to enable Sportsco to inspect and investigate the appellant's business and the appellant's conduct of it. Clause 6.1 is expressed to entitle Sportsco, or its agents, in order to determine whether the appellant is complying with the franchise agreement, to enter without notice during business hours the premises in which the appellant keeps its business records and other documents, to inspect them and take copies. The clause also gives Sportsco or its agents the right during business hours "... to conduct or supervise a physical inspection of the Franchised Business". Clause 6.2 confers on Sportsco what appears to be a wide entitlement to enter the premises without notice during business hours and carry out an audit of the appellant's books and records. Again, clause 6.4 entitles Sportsco in certain circumstances, if the appellant abandons the business or becomes incapacitated, to operate and manage it for a limited period. Without some evidence it is not possible, nor is it at present necessary, to say how these provisions would operate in practice. The point now to be made is that it is also impossible to conclude, in the absence of information about the workings of the parties' businesses, that any of these provisions amounts to no more than a brutum fulmen or to a pretence or artifice designed to deceive or mislead the courts or any third party. Nor, if it matters, can it necessarily be supposed that the licence agreement was entered into for the purpose of avoiding its being assessable to stamp duty as a lease. If the so-called pretence doctrine is driven by a curial policy designed to frustrate an intention to avoid a scheme of statutory protection, it is difficult to see that such a policy finds a place here. I do not mean that the Revenue does not deserve to be appropriately protected from artificial avoidance devices. Even if, however, there were room for the pretence doctrine here, there can be no presumption or inference, in the absence of supporting evidence, that clause 2.2 was inserted into the licence agreement for the purpose of avoiding stamp duty so that it is on that account to be ignored as a pretence. Much less is there foundation for a conclusion that there was a sham in the Snook sense.

[74]

Unlike the situations in Antoniades and Aslan, however, where there was evidence of surrounding circumstances which led to the inescapable conclusion that the clause in question could not be acted on and thus, to the conclusion that the parties did not intend it to have any effect, the evidence here does not justify such a view. The respondent asserted that Sportsco could not enjoy its rights as lessee without at the same time interfering with the appellant's business. In support of this claim, it pointed to the provision in the Licence Agreement which entitles the appellant to use all the premises as a "Sportsco Franchise Retail Store". It was argued that if Sportsco were to exercise the rights supposedly reserved to it by clause 2.2, it would necessarily interfere with the appellant's right to use the whole of the premises. There was no evidence before the Court, however, as to the extent to which the premises were physically used by the appellant or as to the layout of the fittings. In any event, even if one assumes that the appellant is using every square inch of the premises to conduct its business, it does not follow that Sportsco could not properly exercise its rights as lessee under clause 2.2. As Callaway, J.A. points out, Sportsco could do so by entering the premises, at a time of its choosing, in order to show a prospective franchisee the operation of the franchise business, including its layout and its system pursuant to which it is operated. Similarly, if the appellant does not physically take up the whole of the premises, Sportsco could use some part of it to store its goods, perhaps for a short period of time, without thereby interfering with the appellant's conduct of the business. In my view, having regard to the evidence, or rather the lack of it, as to the state and use of the premises, it does not necessarily follow that because the appellant is entitled to use all of them, Sportsco cannot exercise any of its rights as lessee. Consequently, this ground for contending that clause 2.2 is illusory, must fail.

At a glance

Court

Decision date

Before

Source

Judgment (76 paragraphs)

Parties