Lagudi Holdings Pty Ltd v Horizon Pty Ltd & ors

LEGISLATION CITED : (NSW) Gaming Machines Act 2001 (NSW) Liquor Act 1982

Geltch v McDonald [2007] NSWSC 1000 Jabetin Pty Ltd v Liquor Administration Board [2005] NSWCA 92; (2005) 63 NSWLR 602 CASES CITED : Masters v Garcia [2005] NSWCA 287; (2005) 65 NSWLR 92 Turvern Pty Ltd v Jemwire Pty Ltd & anor [2008] NSWSC 420 Wonall Pty Limited v Clarence Property Corporation Limited [2003] NSWSC 497; (2003) 58 NSWLR 23 Zangne Pty Ltd v Cooper [2007] NSWSC 173

Lagudi Holdings Pty Ltd (plaintiff) PARTIES : Horizon Iris Pty Ltd (first defendant) Alan Lloyd Riley (second defendant) Casino, Liquor & Gaming Control Authority (third defendant)

COUNSEL : Mr M J Leeming SC w Ms J K Taylor (plaintiff) Mr I Lawry (first & second defendants)

Gwynne Thompson Solicitors (plaintiff) SOLICITORS : Shanahan Tudhope (first & second defendants) I V Knight, Crown Solicitor (third defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EXPEDITION LIST

1523/09 Lagudi Holdings Pty Ltd v Horizon Iris Pty Limited & ors JUDGMENT 1 HIS HONOUR: The plaintiff Lagudi Holdings Pty Ltd is the owner of the freehold of the Forbes Hotel at 30 York Street, Sydney. The defendant Horizon Iris Pty Limited is the owner of the hotel business and the lessee of the hotel premises, under a lease for a term of ten years from 24 August 2004, expiring on 23 August 2014. Horizon's nominee, the second defendant Alan Riley, is the licensee. There are eleven poker machine entitlements ("PMEs") "allocated in respect of" the licence under (NSW) Gaming Machines Act 2001 ("the GM Act"), s 19(1). On 13 February 2009 the licensee lodged with the third defendant Casino Liquor & Gaming Control Authority a PME Transfer Application in respect of all eleven PMEs. In these proceedings, Lagudi claims an injunction to restrain the proposed transfer by Horizon of the eleven PMEs allocated in respect of the hotelier's licence. The Casino Liquor & Gaming Control Authority has filed a submitting appearance. Interlocutory relief restraining it from dealing with the transfer application until the determination of these proceedings was granted by consent on 18 February 2009. 2 In Geltch v McDonald [2007] NSWSC 1000, I sought to summarise the essential legal propositions in respect of PMEs, and dealings with them in the context of leasehold interests in hotels, as they have been expounded by the Court of Appeal in Jabetin Pty Ltd v Liquor Administration Board [2005] NSWCA 92; (2005) 63 NSWLR 602 and Masters v Garcia [2005] NSWCA 287; (2005) 65 NSWLR 92, as follows (at [14][19]; see also Turvern Pty Ltd v Jemwire Pty Ltd & anor [2008] NSWSC 420): [14] First, a Poker Machine Entitlement is a species of property capable of being owned, disposed of and made the subject of a trust.

[15] Secondly, although Poker Machine Entitlements are initially allocated "in respect of the hotelier's licence", they can be dealt with separately from the licence, but only within the legislative framework.

[16] Thirdly, a Poker Machine Entitlement can be transferred, but only from one licence to another.

[17] Fourthly, the persons entitled to transfer a Poker Machine Entitlement are the persons who, for the time being, have a financial interest in the licence. For that purpose, the definition of "financial interest" in s 19(5) is exhaustive, and the mere circumstance that a person is the owner of a hotel does not give that person such a financial interest.

[18] Fifthly, a party who has a financial interest in an hotelier's licence can be bound by contractual obligations not to deal, or to deal in a particular way, with Poker Machine Entitlements allocated in respect of that licence, so long as the obligation is not inconsistent with the scheme of the Act.

[19] Sixthly, at least generally speaking, where a hotel business is operated under a lease from the proprietor of the freehold, those with the relevant financial interest will be the lessees, who will be entitled to transfer the Poker Machine Entitlements during the term of the lease without the consent of the lessor (except where the lease is one that gives the lessor a financial interest in the licence), unless a term of the lease binds the lessee not to deal with the entitlement. However, upon termination of the lease, the licence reverts to the freehold, the lessor is deemed to be the licensee, and the ability to transfer any Poker Machine Entitlements allocated in respect of the licence reverts to the lessor. 3 Also germane to the debate are "authorisations" under the GM Act, Part 5. Section 56 imposes a requirement on an hotelier who keeps or disposes of a gaming machine to have an authorisation to do so, relevantly providing as follows: 56 Requirement for authorisation to keep or dispose of gaming machines

(1) A hotelier or registered club must not keep or dispose of an approved gaming machine unless: (a) the keeping or disposal of the gaming machine is authorised by the Board, and (b) the hotelier or club complies with the requirements of or under this Act in relation to the keeping or disposal of the gaming machine and with the conditions to which the authorisation is subject.

(2) The Board may, by instrument in writing, authorise a hotelier or registered club to keep or dispose of approved gaming machines. An authorisation to keep approved gaming machines may be varied by the Board from time to time. 4 Thus, while sub-section (1) prohibits and makes it an offence to keep or dispose of a gaming machine unless the keeping or disposal is authorised, sub-section (2) empowers the Board to authorise a hotelier to keep or dispose of such machines and to vary such authorisation from time to time. An hotelier must hold an authorisation under s 56 in order to keep gaming machines in the hotel. 5 Section 20(7) provides that if the Board approves the transfer of Poker Machine Entitlements, it is also to vary the authorisation under Pt 5 of both the transferor and transferee to keep approved poker machines. As s 20(3) requires that, upon a transfer of a block of three PMEs, one must be forfeited, the result is that the authorisation of the transferor is reduced by the number of PMEs transferred, and those of the transferee increased by two-thirds of that number. Issues

6 As in Turvern, so too in the present case, it is common ground that the lessor does not have a relevant financial interest in the licence. Rather, it relies on what it contends are contractual obligations binding on the lessee not to deal, or to deal in a particular way, with PMEs allocated in respect of the licence. Lagudi acquired its interest by assignment from the previous lessee on 1 April 2008, when it took possession of the hotel. Although the lease commenced on 24 August 2004 - after the commencement of the GM Act - the lease does not explicitly refer to or make provision in respect of PMEs. This is because it was the result of the exercise of an option to renew an earlier, pre GM Act, lease. However, Lagudi contends that the proposed transfer would contravene: · Clause 4.2 (which requires the lessee to obtain and keep current all licences and permits required for the carrying on of all activities conducted by the Lessee in or upon the Premises) - because it would result in the loss of the authorisation under the GM Act, s 56, which is a "licence" or "permit" required for the carrying on of gaming, which is an activity conducted by Horizon in the Premises; · Clause 4.3 (which obliges the Lessee to comply with all statutory requirements and licences governing conduct and activities at the hotel) - because this imports an obligation to maintain the s 56 authorisation, which will be lost if the proposed transfer proceeds; · Clause 14.1 (which provides that the Licence is the property of the Lessor) - because a PME is within the definition of "Licence"; and

· Clauses 14.2 (which provides that the parties shall not without the consent in writing of each other surrender transfer remove or attempt to remove or apply for removal of the Licence), and 14.4 (which obliges the lessee to do everything in its power to ensure the maintenance of the Licence, and not to do anything that will or is likely to result in the Liquor Licence being jeopardised, imperilled, cancelled, revoked or varied in a materially adverse way) - because it would effect the surrender of, or be a failure to maintain, or jeopardise or imperil, the authorisation under the GM Act, s 56, which is within the definition of "Licence". Clause 4.2

7 Clause 4.2 provides as follows: Business Licences. The Lessee shall obtain and keep current all licences and permits required for the carrying on of all activities conducted by the Lessee in or upon the Premises. 8 One of the "activities conducted by the Lessee in or upon the Premises" is gaming, in a dedicated gaming room. Necessary for that activity is the authorisation under the GM Act, s 56, to keep the eleven poker machines in that room. If the PMEs are transferred, the authorisations will be lost [GM Act, s 20(7) and s 56]. Lagudi submits that the authorisation is a "licence", or alternatively a "permit", within the meaning of clause 4.2, and that the proposed transfer would be a breach of that covenant. 9 I accept that the s 56 authorisation is a "licence" or a "permit" required for the carrying on of gaming in the hotel: the authorisation is a permission to do something which would otherwise be prohibited. However, Horizon contends that clause 4.2 obliges the Lessee to keep such a "licence" current only so long as it carries on the activity which requires it, and that if it no longer carries on gaming, it is no longer obliged to keep current a licence that permits it to do so. In this respect, Horizon draws attention to the context of clause 4.2, which appears in Part 4 of the lease, headed "USE OF PREMISES". Within Part 4, clause 4.1 provides: Permissible Use. The Lessee shall not use or permit to be used the Premises otherwise than for the purpose of conducting the trade business or activity specified in Item 13 of the Summary of Lease Particulars and shall keep the Premises open for the usual hours of such trade business or activity …. The lessor makes no warranty as to whether the Premises are able to be or are licensed to be or approved to be used for the trade, business or activity specified in Item 13 …. 10 Item 13 specifies "Bar and Restaurant". Horizon contends that so long as the premises are used as a bar and restaurant, the provision of gaming machines is a matter for the lessee: the lease imposes no obligation on the lessee to maintain or operate poker machines [see Wonall Pty Ltd v Clarence Property Corporation [2003] NSWSC 497; (2003) 58 NSWLR 23, [49]], nor to provide entertainment [cf the obligation under clause 9.1 in Geltch v MacDonald [2007] NSWSC 1000], and if the lessee chooses not to provide poker machines or entertainment it is not obliged to keep current a licence or permit for an activity it does not carry on. 11 In Geltch v MacDonald [2007] NSWSC 1000, clause 9.1 - which was part of clause 9, entitled "Liquor Act Provisions" - was relevantly as follows: 9.1 The Lessee shall not use the Hotel and Land otherwise than Licensed Premises of a Hotel and to apply for and maintain all Licences and authorities that may be required by law to enable the sale of food and beverages (alcoholic and non alcoholic) and the provision of entertainment that may be required by law. … 12 I concluded (at [26]-[28]) that the preferable construction of that provision was that the lessee was required to maintain all authorities or approvals required for the purpose of (inter alia) providing entertainment from time to time in the premises, so that while upon inception of the lease no authority or approval was required in respect of approved amusement devices - or for that matter poker machines - if that position were to change during the term of the lease, so that an approval or authority was required, the effect of clause 9.1 was to oblige the lessee to apply for and thereafter maintain any such authority. When, in 2001, it became a requirement for a hotelier to have a s 56 authority to keep a poker machine, which authority could only be held if there was a corresponding PME, alienation of the PME would jeopardise, and thus be contrary to the obligation to maintain, the corresponding authority; thus clause 9.1 was a contractual restraint on the ability of the lessees to alienate PMEs. Thus clause 9.1, though not drafted with PMEs specifically in mind, was intended to prohibit any act that might jeopardise any authority required by law to enable the provision of entertainment in the hotel premises, and the alienation of a PME was such an act. I distinguished (at [29]). In Wonall Pty Limited v Clarence Property Corporation Limited [2003] NSWSC 497; (2003) 58 NSWLR 23 - in which Campbell J, as his Honour then was, concluded that a lease prepared before and without specific reference to the concept of PMEs did not require the lessee to continue to engage in all of the activities associated with operating the premises as a licensed hotel (including poker machines) that were engaged in at the commencement of the lease - on the basis that the obligation imposed by clause 9.1 to "maintain" authorities required by law to enable the provision of entertainment imported an obligation, not found in Wonall, to preserve authorities that exist at the commencement of the lease, to obtain such further authorities as may be required during the lease, and having obtained them, to maintain them. Moreover, the provision in the Wonall lease that corresponded to clause 9.1 required only that the lessee "obtain all such licences as are or may be necessary for keeping open the hotel as a hotel duly licensed and ... do nothing ... whereby the licence may be or may become liable to be suspended or forfeited or the renewal thereof refused"; no provision of the Wonall lease referred to "any authorities required to enable the provision of entertainment", or anything like it. 13 I have considered anxiously whether my reasoning in Geltch in this respect leads in the present case to the same conclusion, namely that the obligation in clause 4.2 to "obtain and keep current" requisite licences and permits obliges Horizon to preserve licences and permits that exist at the commencement of the lease, to obtain such further licences and permits as may be required during the lease, and having obtained them, thereafter to keep them current. However:

· In Geltch , clause 9.1 appeared under the heading "Liquor Act Provisions", whereas in the present case, clause 4.2 appears under the heading "Use of Premises", and another part of the lease - clause 14 - appears under the heading "Licence Provisions" and makes provision in respect of dealings with and preservation of the Licence. In this respect, the context in Geltch more strongly favoured a construction that gave clause 9.1 work in respect of preservation of the licence than in the present case. · In Geltch , clause 9.1 imposed an obligation to maintain licences necessary for the provision of entertainment, without limiting the obligation to activities currently carried on in the premises. In the present case, clause 4.2 links the obligation to "obtain and keep current" requisite licences with the carrying on of relevant activity in the hotel premises.

· In the present case, clause 4.2 is juxtaposed to the provision in clause 4.1 that the lessor does not warrant that the premises are able to be or are licensed for the specified business or activity. This suggests that the purpose of clause 4.2 is to emphasise that it is the lessee (as distinct from the lessor) who has the obligation of obtaining and maintaining any requisite licences or permits for activities the lessee chooses from time to time to conduct as part of its business. 14 Thus, despite initial similarities with clause 9.1 in Geltch, in my view clause 4.2 in the present case was not intended to require the lessee to keep current licences for activities that it decides no longer to conduct. Upon transfer of the PMEs, the lessee will no longer be conducting gaming, and in those circumstances clause 4.2 would not require it to maintain the s 56 authorisations. The proposed transfer would not contravene clause 4.2. Clause 4.3

15 Clause 4.3 provides as follows: Statutory Requirements . The Lessee shall at all times and at its own cost comply with all statutes ordinances proclamations orders and regulations present or future affecting or relating to the Premises, the use thereof or any licences pertaining to the use of the Premises including any Liquor Licence and any Entertainment Licence … 16 The purpose of this clause is to oblige the lessee to comply with all statutory requirements relevant to the conduct and use of a hotel, including the terms and conditions of any relevant licence. It is concerned with compliance with statutory provisions and licences, not with maintaining licences. If poker machines are not to be operated at the hotel, the transfer of the PMEs will result in no contravention of any statutory provision, nor of any licence condition. There is no basis for implying into clause 4.3 an obligation to maintain a licence for an activity that the lessee no longer proposes to carry on. 17 The proposed transfer would not contravene clause 4.3. Clause 14.1

18 Clause 14.1 provides as follows: The Lessee acknowledges that the Licence is and shall remain the property of the Lessor. 19 Lagudi submits that the PMEs are "Licences" within the definition of that term in clause 1.14, as extended by clause 1.28. However, I am unpersuaded that a PME is itself a "licence" at all. PMEs are, in a sense, an adjunct to the liquor licence, but the liquor licence is a permission to sell liquor (when to do so would otherwise be unlawful); and the source of the permission to keep poker machines (when to do so would otherwise be unlawful) is the authorisation under the GM Act, s 56 - not the liquor licence, nor the PME. While the number of PMEs held by an hotelier caps the number of machines that can be authorised to be kept in the hotel, the PME is not of itself a grant of permission to keep the corresponding machine; it is the authorisation that grants that permission. 20 I am therefore unpersuaded that the proposed transfer would contravene clause 14.1. Clauses 14.2 and 14.4

21 Part 14 of the Lease is entitled "LICENCE PROVISIONS". Clause 14.2 provides: The parties shall not without the consent in writing of each other on each occasion surrender transfer remove or attempt to remove or apply for removal of the Licence. 22 Clause 14.4 provides: So far as the parties are obligated under the terms of this Lease, the parties will do everything in their power to ensure the maintenance of the Licence and compliance with the Liquor Act 1982 and any other Acts affecting the conduct of the licensed premises regarding the sale of liquor and operation of amusement machines and will not do anything that will or is likely to result in the Liquor Licence being jeopardised, imperilled, cancelled, suspended, revoked or varied in a materially adverse way. 23 In clause 1.14, "License" is defined in the following terms: "License" means a licence issued under the Liquor Act, 1982 in respect of the Premises (or any part thereof) in relation to the sale of liquor and the keeping and operating of amusement devices as renewed and/or varied from time to time. 24 Clause 1.28 provides: References to statutes regulations ordinances and by-laws include all statutes regulations ordinances and by-laws amending consolidating or replacing the same. 25 Lagudi submits that the s 56 authorisation is a "Licence" within the definition of that term in clause 1.14, as extended by clause 1.28, and that the transfer application if granted will have the necessary consequence of "surrendering" the authorisation (contrary to clause 14.2); failing to "maintain" it (contrary to clause 14.4), and causing them to be "jeopardised, imperilled, cancelled …" (contrary to clause 14.4). Horizon submits that clause 14.2 is concerned with the preservation of the liquor licence (pointing to the words surrender transfer and remove as being particularly apt to cover what can be done with a liquor licence), and that clause 14.4 is concerned with compliance with the (NSW) Liquor Act 1982, so that continuation of the liquor licence at the premises is not threatened by the way in which it is exercised; in this respect, the particular reference to "the Liquor Licence" in the second limb of clause 14.4 is emphasised. 26 Prior to 2 April 2002, when the GM Act commenced, the use of gaming machines in hotels was regulated by provisions of the Liquor Act. In Part 11, entitled "Approved gaming devices", Division 1 (which predated 1994) made provision in respect of "Keeping of approved gaming devices". Section 161 authorised the Liquor Administration Board to impose a condition on an hotelier's licence authorising the hotelier to acquire and keep in the hotel, and to permit the use and operation of, approved gaming devices. Division 2A, which made provision in respect of "Poker machines", was introduced in 1997. Division 3, which created various offences in respect of approved amusement devices, also predated 1994. 27 The GM Act repealed from the Liquor Act those provisions that regulated the use and operation of gaming machines, and replaced them with the provisions of the GM Act. The Explanatory Memorandum asserted that one of the purposes of the Act was to replace the provisions of the Liquor Act in respect of gaming machines. In the Second Reading Speech (Hansard, 30 November 2001), the Minister said: It is proposed to take this opportunity to transfer all gaming machine provisions relating to clubs and hotels from the Liquor and Registered Clubs Acts, and place them in a new Gaming Machines Act. 28 In my view, in respect of the operation of amusement machines, the GM Act is an act replacing the Liquor Act. The definition of "License" in clause 1.14 must therefore be read as extending to a licence issued under the GM Act in respect of the Premises (or any part thereof) in relation to the keeping and operating of amusement devices. 29 In Zangne Pty Ltd v Cooper [2007] NSWSC 173, White J expressed the view - on an interlocutory application - that it was at least seriously arguable (and indeed, prima facie correct) that an authorisation to keep approved gaming machines under s 56, given to the holder of an hotelier's licence, could be said to attach to the licence. However, in that case his Honour was concerned with a definition of "licence" which extended its ordinary meaning to include "all permits and authorities attaching thereto". Accordingly, the substance of what his Honour concluded was that, for the purpose of the particular definition of "licence" applicable in that case, a s 56 authority could be said to be an authority attaching to the relevant licence. 30 In Turvern, where there was no equivalent definition - the term used being "permit under", which differs in content from "authority attaching to" - I did not accept that the authorisation was "under the license", nor that an application which could ultimately lead to the extinction of a poker machine authorisation was one "in respect of the license" as defined in the relevant lease in that case: [13] Section 56(2) has the effect that only an hotelier or a registered club can be given a s 56 authorisation, and that is reflected in s 57(1) (which provides for applications for such authorisation or variations of them by an hotelier or registered club). But it does not follow that an authorisation granted under s 56(2) is an authorisation, a permit or anything else "under" the licence held by the hotelier. The licence does not provide for, or authorise, or govern, the issue of authorisations, nor contemplate their existence or their grant. Provision in respect of those matters is made by s 56 and other aspects of Pt 5 of the Gaming Machines Act . A s 56 authorisation is granted under s 56, not under the liquor licence. It is not a permit under the relevant liquor licence. 31 The present case is different again, because of the extended scope of the definition of "License", so as to include a licence issued under the GM Act in respect of the Premises (or any part thereof) in relation to the keeping and operating of amusement devices. The s 56 authorisation is such a license: it is a grant of permission to keep a poker machine, when to do so would otherwise be prohibited. The unique reference in the second limb of clause 14.4 to "the Liquor Licence" (those words, as distinct from "the Licence", appear nowhere else in the lease) appears to be a slip, and - in the light of the legislative regime operative when the original lease was executed, under which authority to keep gaming machines was a condition on the liquor licence, being replaced by the dual system under which a separate s 56 authorisation is now granted under the replacement statute - is to be construed as extending to the s 56 authorisation. 32 The proposed transfer will, or at least is likely to, result in the authorisation being jeopardised, imperilled, cancelled, revoked or varied in a materially adverse way. In any event, the proposed transfer is contrary to the obligation of Horizon in the first limb of clause 14.4 to do everything in its power to ensure the maintenance of the authorisation: the proposed transfer would result in extinction of the authorisation. Accordingly, the proposed transfer would contravene Horizon's obligations under clause 14.4. It is unnecessary to consider whether it would also amount to a surrender, transfer or removal within clause 14.2. Conclusion

33 My conclusions may be summarised as follows. 34 The s 56 authorisation is a "licence" or a "permit" required for the carrying on of gaming in the hotel within clause 4.2. However, clause 4.2 was not intended to require the lessee to keep current licences for activities that it decides no longer to conduct. Upon transfer of the PMEs, the lessee will no longer be conducting gaming, and in those circumstances clause 4.2 would not require it to maintain the s 56 authorisation. The proposed transfer would not contravene clause 4.2. 35 There is no basis for implying into clause 4.3 an obligation to maintain a licence for an activity that the lessee no longer proposes to carry on. The proposed transfer would not contravene clause 4.3. 36 A PME is not itself a "licence". The proposed transfer would not contravene clause 14.1. 37 In respect of the operation of amusement machines, the GM Act is an act replacing the Liquor Act. The definition of "License" in clause 1.14 must therefore be read as extending to a licence issued under the GM Act in respect of the Premises (or any part thereof) in relation to the keeping and operating of amusement devices. The s 56 authorisation is a "License" within the definition in clause 1.14 as extended by clause 1.28. The proposed transfer will, or at least is likely to, result in the authorisation being jeopardised, imperilled, cancelled, revoked or varied in a materially adverse way, contrary to the second limb of clause 14.4. In any event, the proposed transfer is contrary to the obligation of Horizon in the first limb of clause 14.4 to do everything in its power to ensure the maintenance of the authorisation: the transfer would result in extinction of the authorisation. The proposed transfer would therefore contravene Horizon's contractual obligations under clause 14.4. It is unnecessary to consider whether it would also amount to a surrender, transfer or removal within clause 14.2. 38 Lagudi is entitled to an injunction to restrain the threatened contravention of clause 14.4. 39 Subject to any submissions as to the appropriate orders, I will make orders to the following effect: (1) Order that the first and second defendants be restrained from, by themselves their servants or agents, taking any steps or further steps to prosecute the application lodged on their behalf with the third defendant on 13 February 2009 for the transfer of the Poker Machine Entitlements allocated in respect of the hotelier's licence relating to the Forbes Hotel, and within seven days take all necessary steps to withdraw that application.

(2) Order that the first and second defendants pay the plaintiff's costs. **********

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