Martin & Anor v Kelly & Ors

Paragraphs numbered 4, 5 and 6 proposed further clauses of the new lease including one relating to poker machine entitlements. 21 By letter dated 4 May 2005 Baxter responded to Somerville in the following terms: "Your offer of 3 May 2005 is rejected. Our client has sought to exercise the option and advises that he requires a Lease to be sent in the terms of the option." 22 At this point it was apparent that the second respondent was insisting on his rights founded upon his exercise of the option in cl 21.1 of the Lease including the turnover rent provision. 23 Notwithstanding the foregoing, by letter dated 11 May 2005 marked "WITHOUT PREJUDICE", Baxter wrote to Somerville in the following terms: "We are instructed that our client will agree to a Lease: 1. Term of six years with no option. 2. Tenant to pay all outgoings. 3. Rent for the first year to be $1,800.00 per week increased annually by CPI." 24 On 2 June 2005 Somerville responded to Baxter's letter of 11 May in the following terms: "I have instructions on the offer set out in your letter dated 11 May and in response to the numbered points those instructions are: 1. Accepted and agreed. 2. Accepted and agreed. 3. A weekly rent of $1,800.00 per week plus GST is acceptable for the first year provided that the rent for subsequent years varies according to the percentage rate advised in my letter of 3 May i.e. the greater of the CPI increase for the previous year and 3%."

The letter then sought to canvass other matters relating to the proposed new lease and in particular noted that the matter of poker machine entitlements " must be addressed and finalised ". The letter concluded by asserting that the basic rental payment of $1,800 per week plus GST was to be paid from 21 March 2005 (being the date the term of the Lease expired). 25 It would appear that Somerville's letter of 2 June 2005 crossed with the following letter from Baxter to Somerville of the same date and again headed "WITHOUT PREJUDICE". It stated as follows: "We are instructed that our client will agree: 1. to pay $1,800.00 per week with a ratchet clause for the increase of the greater between 3% and CPI;

3. to pay rent from 6 June 2005 and will not agree to the rent being back dated to 2 March 2005. We advise that we will revert to the other matters raised in your letter in due course." 26 It may be that Somerville's letter of 2 June 2005 was not received by Baxter, for by letter dated 23 June 2005 Baxter wrote to Somerville in the following terms: "We note we have not received a response to our 'without prejudice' correspondence dated 2 June 2005. We advise that our client has taken up the option on the Lease and at this stage it appears that [there] are a number alternatives, being: o The Lease be done in accordance with the option that has been taken up by our client;

o A sensible resolution to the issues regarding a new Lease which is suitable to our client.

Should the matter not be resolved in the near future, then we shall seek instructions to enforce our client's rights pursuant to taking up the Option." 27 By letter dated 27 June 2005 Somerville responded to Baxter's letter in the following terms: "I have your letter of 23 June. I remind you that you haven't fully responded to my letter of 2 June. Once you do that, I will obtain instructions." 28 The following day Baxter relevantly wrote: "We refer to your letter of 2 June 2005. 1. Your paragraph 3 - this has been agreed upon. 2. Your paragraph 4 - this is not agreed upon. However, our client will agree to provide those figures prior to any Assignment of a Lease. Please note that our client's figures will not be up to the date of the Assignment and are approximately sixty days behind.

3. Your paragraph 5 - we do not agree with your proposition and our client will not consent to any alteration of the terms of the existing Lease. … As previously stated, our client will pay rent of $1,800.00 per week but from 6 June 2005. We again refer you to the alternatives in our letter dated 23 June 2005." 29 Somerville responded to Baxter's letter of 28 June 2005 by letter dated 1 July 2005 in which the following was stated: "I have taken further instructions and they are as follows: - 1. The agreed rent must commence on 22 March 2005 and all back rent together with interest must be paid without delay."

There then followed three further numbered paragraphs indicating that the parties had not yet reached agreement, although Somerville concluded his letter expressing his hope that the matter could be resolved without further delay " so that I can prepare and submit a Lease to you ". 30 By letter dated 14 July 2005, Baxter responded to Somerville's letter of 1 July 2005 relevantly in the following terms: "We refer to your letter of 1 July 2005. We confirm that the back rent must not commence until it has been agreed to be paid. If your client proceeds under the option, then the rent must be paid in accordance with the option. Your client has proposed a new lease and we are agreeing to the terms of that new lease and therefore there is no requirement for our client to pay that rent until agreement has been reached. In respect to your point 2, our client does not agree. Our client relies upon the offer put in our letter of 28 June 2005. In respect to your point 3, as above. Our client states that he believes that the paintwork is satisfactory and further our client has incurred substantial capital costs being the placement of security. Our client advises that he is becoming increasingly upset with your clients desire to have him pay all the costs and your client do reparation work at his leisure." 31 It is clear from the last-mentioned letter that the parties were contemplating, if agreement could be reached, a new lease in substitution for the Lease to which the second respondent asserted his entitlement pursuant to his exercise of the option in cl 21.1 of the Lease. 32 Somerville responded by letter dated 26 July 2005 relevantly in the following terms: "I refer to your letter of 14 July, upon which I have obtained instructions. It would appear that we are at an impasse."

It was then suggested the parties might meet to thrash out the terms of an agreement or submit the matter to mediation. The letter concluded: "… Failing agreement, I suppose that the only thing that is left is to go back to the original Lease terms and the rent payment referred to in the option clause." 33 Baxter's response was by letter dated 16 August 2005 in the following terms: "It is our opinion that the Option has been taken up. At your request, rather than attend to calculating the rent, a rental figure has been agreed upon, being $1,800.00 per week plus CPI plus outgoings. Our client will not agree to any change in the poker machines entitlements other than the Decision in the Supreme Court which, as we understand it, has been confirmed. We do not believe anything needs to be resolved. The issue of the rent has been agreed upon. The issue of poker machine entitlements has been established by the Supreme Court. Please prepare a Lease on behalf of our client." 34 Somerville responded by letter dated 25 August 2005: "I have taken further instructions. We appear to have reached agreement on everything bar the following: 1. My client wants rent at the agreed rate from 22 March but is prepared to waive a claim for interest. This would mean that the new 6-year Lease would commence on that date. 2. Your client is to provide on an annual basis gross turnover from poker machines and turnover from liquor purchases." 35 By letter dated 31 August 2005, Baxter wrote seeking the amount of the back rent. The letter concluded by stating that the second respondent would not provide any figures to the appellants whatsoever, a reference to paragraph 2 of Somerville's letter of 25 August. 36 Somerville responded by letter dated 6 September 2005 advising the amount of the shortfall and making reference to a surveillance system that the second respondent had installed in the Hotel. 37 By letter dated 12 September 2005 Baxter acknowledged receipt of Somerville's letter of 6 September 2005 and continued: "It is our understanding that both parties agree that a new Lease should be drafted. That means in our humble opinion that each term of the Lease has to be agreed upon. Our client did not agree to the rent being backdated but has agreed and has paid the rent from the date the agreement was reached. All other clauses need to be agreed upon. It is not simply a matter for your client to say that as it was in the old lease it is therefore agreed upon." 38 By letter dated 13 September 2005 and marked "WITHOUT PREJUDICE", Baxter again wrote to Somerville acknowledging his letter of 6 September 2005 and stating: "… Our client will agree to the rent being backdated but the cost of the surveillance system be deducted. Please forward your draft Lease for our client's perusal." 39 It is to be noted that in his letter of 12 September 2005 Baxter asserted that it was still necessary for the parties to reach agreement on each term or clause of any new lease. 40 There then followed some further irrelevant correspondence until Somerville sent an email to Baxter dated 11 November 2005 attaching a draft lease. It is apparent from that email that a number of clauses in the proposed new lease were different from those of the Lease. 41 There must then have been some further communication between the parties, for by email dated 24 November 2005 from Somerville to Baxter, the former stated: "I refer to my telephone call to your office this morning and confirm that my client rejects your client's proposal, and there is no counter offer." 42 Baxter responded to this email on 28 November 2005 in the following terms: "We are instructed that our client exercised his option in respect to the Lease. We confirm an agreement has been reached in respect of the rental of $1800 per week plus GST plus outgoings. Our client instructs that he requires this Lease to be prepared and forwarded for signing."

A filenote of the same date by Somerville refers to a telephone conversation between Somerville and Baxter in which the latter was "saying same lease and $1,800 pw. Told him can't have cake and eat it too. He had to go and so not much more conversation." 43 It would appear that at this point Baxter was asserting that his client was entitled to a lease containing the same provisions as the Lease except for the rental, a proposition which Somerville denied. That this was so was confirmed by the following email from Somerville to Baxter dated 29 November 2005: "I refer to your email received yesterday and also to our brief telephone conversation after that. I submitted you a draft Lease on 11 November and which I prepared following many months of negotiations. Your records will of course show that you had been expecting to receive it. My view is that it is a fair and reasonable document, but I appreciate that you and your client need to have some further input. However you will note that the document acknowledges your client's wishes as previously expressed in most, if not all, respects. Amongst other things, you will see that it doesn't direct ownership of the Poker Machine Entitlements to my client and leaves the situation unstated. It would appear that respective our (sic) clients have contrasting claims in that regard. Unless we resolve this matter, then there is potential for it to develop quickly into expensive litigation. This is something that my client would obviously like to avoid, as I would also hope, would yours. Russell, I think that we are there, or at least nearly there, in reaching agreement. With a view to reaching an accord, please have a good look at the draft Lease and respond as soon as you can." 44 Baxter responded by letter dated 8 December 2005 in the following terms: "My client's patience has unfortunately evaporated. On 28 July 2004, our client exercised the option. We note that you advised us on 13 October that you had carriage of the matter. We confirm that there were discussions in respect to a new lease and in respect to the enforceability and workability of the lease. Quite clearly, clause 21 was totally unworkable and unenforceable. It required figures to be provided to calculate rent prior to those figures being available. As a result, figures were provided but not for the precise period and it was agreed that the rent would be equal to the sum of $1800 per week. The rental figure was agreed as per your letter of 2 June 2005. We then had negotiations over a lengthy period of a number of matters. Your client has not attended to repair the roof. Our client instructs us that he requires the option to be exercised at the agreed rental with no further negotiations."

Again it would appear that Baxter was asserting that a lease should be submitted in accordance with his client's exercise of the option apart from the rental provision. However this was not accepted by Somerville who, by email dated 23 January 2006, referred once again to the draft lease emailed to Baxter on 11 November and noted that: "So far you haven't given me any specific comment on the draft Lease. Perhaps you will now be able to do so and hopefully at an early date." 45 By email to Somerville dated 15 February 2006 Baxter stated that he was instructed that: "[T]here is no change from the original Lease apart from the rent figure which has been agreed upon." 46 Somerville responded by email dated 22 February 2006 stating that agreement had been reached on all but two things of which the second was as follows: "… 2. We had an agreement that we would revise the form and wording of the Lease and the draft that you have is the one that we are going to use, but subject to any reasonable submissions that you might like to make in respect to any proposed amendments. You will recall that we agreed not to go back to using the old form of the Lease because of its unsuitability. …"

The letter concluded by stating that unless the matter was satisfactorily resolved by the following Friday, appropriate action would be taken to " terminate the Lease and retake possession ". 47 That the impasse continued is apparent from Baxter's response by email dated 9 March 2006: "I am instructed that our client has taken up the option and an agreement has been reached on a rental figure together with an annual increase of 3%. Our client instructs he has agreed to pay the arrears when he receives a lease in identical terms to the previous lease with the exception of the option to renew clause being Paragraph 21. Please provide a lease in the form as has been taken up by our client and with the rental agreed and our client will pay the arrears as agreed." 48 An exchange of emails then took place in May 2006 in which one party asserted that a lease had been signed which the other denied. In any event, by email dated 23 June 2006 from Somerville to Baxter, a form of lease was attached which, it was stated, was in the form of the lease submitted on 11 November 2005 with some six amendments which were then identified. 49 Baxter responded by email dated 29 June 2006 in the following terms: "We are extremely disappointed to again receive the Lease of 11 November which we rejected. We reiterate our position client's position (sic). The Lessee took up the option on the existing Lease. The only clause that cannot be included in the new Lease is Clause 21, the option, which provided a means of calculation of the rent which is impossible to achieve. As a result of this, the parties agreed on $1,800.00 a week rent to be increased by 3% p.a. We advise that if you do not provide us with the Lease as per the take up of the option, we will be forced to bring proceedings in the Supreme Court."

This email is of some significance for it asserts, in effect, an agreement for lease created by the exercise by the second respondent of the option subject only to a change in the rental provision. Furthermore, it threatens proceedings in the Supreme Court for what could only be specific performance of an agreement based on the exercise of the option amended only with respect to the calculation of rent. 50 In July 2006 Maxwell replaced Baxter as solicitor for the second respondent. By letter dated 12 July 2006 to Somerville, Maxwell referred to the new draft lease indicating that he would be in touch with Somerville in the near future in relation "to the final terms of the document". Maxwell followed this up with a letter to Somerville dated 1 August 2006 where, after referring to having compared the draft lease submitted by Somerville to Baxter on 23 June 2006 with the Lease, the following was stated: "It seems to us that the position is as follows: o It is acknowledged that our client validly exercised his option for renewal under the Lease of 22 March 1999 but the calculation of the rent for the new Lease under Clause 21.1(a) of the Option to Renew Clause was controversial.

o It was agreed between the parties' Solicitors that the rent for the new Lease would be $93,000.00 yearly ($1,800.00 weekly).

o Notwithstanding the usual expectation that the new Lease would be in the same format as the previous Lease the draft document that has been submitted is in substantially different format to the former Lease.

o Our client has no objection in principle to the re-drafting of the document subject to the clauses not placing upon him more onerous obligations or greater restrictions than that in the former Lease.

In these circumstances we consider that the following provisions of the new Lease are objectionable."

The letter then set out some 12 provisions of the 23 June draft lease to which objection was taken. 51 It would appear that there were neither further negotiations between the parties nor any response by Somerville to Maxwell's letter of 1 August 2006. The final piece of correspondence was a letter from Somerville to Maxwell dated 14 November 2006 which stated: "I refer to your letter of 1st August. Clearly agreement cannot be reached on the terms of a suitable replacement Lease and so my clients withdraw from further negotiations and I will submit a Lease pursuant to the option clause of the expired Lease shortly." 52 It is to be noted that the date of this letter is the same as that of Somerville's written submission to the Board in response to the first respondent's application to transfer the relevant poker machine entitlements. To those submissions I now turn.

The parties' submissions to the Board 53 As I have indicated, Somerville's submission on behalf of the appellants was by letter dated 14 November 2006. After referring to the provisions of the Lease and in particular the option to renew in cl 21.1, reference was made to Somerville's letter to Baxter of 27 January 2005 and to Baxter's response of 7 February 2005 in which, so it was asserted, Baxter confirmed the appellants' acknowledgment of the valid exercise of the option and that the proposal for a new lease arrangement had been rejected. 54 The submission then referred to the "replacement lease", a draft of which was emailed to Baxter on 23 June 2006, and to Maxwell's letter of 1 August 2006 objecting to parts of it. 55 Somerville informed the Board that his instructions were now to withdraw from further negotiations with regard to a replacement lease and to submit a lease strictly in accordance with the option clause in the Lease. It was submitted that the rent provision of cl 21 clearly gave his clients a financial interest in the hotelier's licence, an entitlement that had "never been lost". 56 Maxwell responded to Somerville's submission to the Board by letter dated 20 November 2006. He noted that the receipt of Somerville's letter of 14 November 2006 was the first indication received by his client that the appellants were withdrawing from further negotiations in relation to the terms of the new lease. The submission stated: "It was certainly our opinion prior to the receipt of Mr Somerville's letter that the solicitors for the parties had agreed that the rent for the new Lease would be $93,000.00 yearly payable by weekly instalments of $1,800.00. That is the amount of rent that has been paid by the tenant to the Landlord since the end of the term of the previous Lease on 21 March 2005." 57 After referring to some of the correspondence in May and June 2005, the submission continued in the following terms: "It can be seen from this correspondence that there is no doubt that the rent for the new Lease was agreed at $1,800.00 weekly subject to increase in accordance with the greater of 3% or CPI. In any event as no new lease has been entered into between the parties it is clear that the tenants remain in occupation of the premises pursuant to the holdover clause contained in the existing Lease. The board is referred to clause 10 on page 12 of the Lease, a copy of which has been supplied. In the above circumstances it seems clear that the Lessors have no financial interest in the hotelier's licence based upon the authority of Jabetin Pty Ltd v Liquor Administration Board (2005) NSWCA 92." 58 By letter dated 14 December 2006 Somerville responded to Maxwell's submission to the Board noting that the parties over a lengthy period had tried to negotiate new terms and conditions for a replacement lease but with no final or complete agreement having been reached. The submission then stated: "3. The Lessors withdrew from further negotiations as advised in my letter to Maxwell & Co dated 14th November 2006, the consequence of that being that a Lease pursuant to the option clause of the expired Lease applies as from 22nd March 2005." 59 The submission then stated that the negotiations between the parties were carried out on a "Without Prejudice" basis. Reference was made to Somerville's letter of 27 January 2005 and to Baxter's letters of 11 May and 2 June 2005 - all of which had been marked "Without Prejudice". 60 The submission then responded to Maxwell's letter of 20 November 2006 stating the following: "(a) It is conceded that rent of $1,800.00 per week plus GST was being paid and accepted. However, so far as the Lessors were and are concerned, this was only an interim measure and its finality was dependent upon full and final agreement being reached on all other terms. This didn't happen." 61 There then followed a reference to the letters of 11 May 2005 and 2 June 2005 which had been referred to by Maxwell in his submission to the Board. Somerville then observed that it would be helpful for the Board to have copies of all relevant correspondence. He then listed and enclosed copies of the correspondence. The submission concluded in the following terms: "I submit that the only conclusion that could be drawn from all of the correspondence and the facts and circumstances is that there was no binding and final replacement lease agreement reached between the parties. Therefore, the Lessee having properly exercised the option under the expired Lease, the terms of that Lease with the new rent as dictated by the option clause must apply. This is so even though the parties had conditionally reached agreement on certain matters, including the rent. However, it is in my unequivocal view that the parties had to reach agreement on all matters before the said conditionally agreed terms be came unconditional. It is also my view that at no time did the Lessors waive any rights that they had in respect of the Poker Machine Entitlements. It is also my view that there is no principle at law or at equity (including estoppel) that would prevent the Lessors from asserting their rights in respect of the exercise of the option. This would include seeking an Order from the Supreme Court for specific performance . In the circumstances, it is my submission that the Board must find that the Lessors have a financial interest in the Hotelier's Licence and in view of the fact that they do not consent to the Application to the transfer of the Poker Machine Entitlements, the Board must refuse that Application." (emphasis added) 62 It is apparent from that part of the last submission that I have emphasised, when taken in conjunction with the last paragraph of Baxter's email to Somerville of 29 June 2006 to which I have referred at [49] above, that both parties were asserting an entitlement to specific performance in respect of an agreement for lease constituted by the exercise of the option, the only difference being that the second respondent was asserting an agreed variation of the rental provision in the lease to be granted pursuant to the exercise of the option which would otherwise be in the same terms as the Lease apart from cl 21.

The decision of the Board 63 The Board, being an administrative body, from which there was no right of appeal, was not obligated to give reasons: Campbelltown City Council v Vegan & Ors [2006] NSWCA 284 at [20]-[21] per Handley AJA, at [102]-[106] per Basten JA (McColl JA agreeing with both). But it did and it cannot be gainsaid that having done so, the lawfulness of its decision must be judged in light of the reasons it gave, bearing in mind that those reasons were "meant to inform and not to be scrutinised" overzealously: Minister for Immigration and Ethnic Affairs v Wu Shan Liang [1996] HCA 6; (1996) 185 CLR 259 at 272 per Brennan CJ, Toohey, McHugh and Gummow JJ; at 291 per Kirby J. 64 The Board's decision of 20 December 2006, signed by its Chairperson, Magistrate Armati, was in the following terms: On 16 October 2006 the Board received a Poker Machine Entitlement Transfer Form in relation to the Tabulam Hotel, Tabulam from Robert James Kelly as seller, licensee and signed by him as licence owner and by Kenneth John Kelly as business owner. No particulars were given for any other person or corporation having a financial interest. The Board directed that the application be served upon the freehold owner. On 14 November 2006 the Board received submissions from Alister Somerville, solicitor for George Owen Martin and Alison Martin as freehold owners. On 20 November 2006 Maxwell and Co, solicitors for the licensee made written submissions in response. On 14 December 2006 the Board received a further response from Alister Somerville. The Board has considered the submissions. The Board's function is to determine whether the lessors, freehold owners, have a financial interest in the hotelier's license. Section 19 of the Gaming Machines Act 2001 is the relevant provision. In 1999 a 6 year lease was granted for the hotel. In January 2002 the hotel business was sold to Kenneth John Kelly who became the licensee. The licence was transferred to Robert James Kelly in October 2004. The Board does not have documents to confirm this but it appears that the lease was transferred from the previous lessee to one of the Kellys. Clause 21 of the lease contained an option to renew for a further term of 6 years. That clause provided for rent to be 'equivalent to 10% of the combined total of all liquor purchases made by the lessee together with 10% of the gross turnover of all forms of gambling …'. On 28 July 2004 the lessee exercised the option. As a result of the exercise of the option substantial correspondence was exchanged between lessor and lessee as to the terms of the new lease. No agreement was reached and the negotiations have terminated. The Board finds that accordingly the lessee continues to occupy the premises under the holding over provisions contained in the 1999 lease. The Board does not find that the terms of the option to renew the lease which would provide new provisions are in force. Accordingly the determination of whether the lessor has a financial interest is based upon the 1999 lease. That lease contains no provisions which give the lessors a financial interest within the meaning of s 19 of the recent case law upon s 19. The lessors do not argue to the contrary but submit that the lessee is bound by the terms of the lease which were required to be entered into as a result of the exercise of the option. As set out the Board does not accept that these provisions are in force. No other financial interest in the lessors within the meaning of s 19 is identified. The Board is satisfied, that for the purposes of s 19 the only person with a financial interest in the hotelier's licence is the lessee. The Board is satisfied that the Poker Machine Entitlement Transfer Form is accompanied by all necessary signatures and consents required by the legislation and the transfer is approved." (emphasis added) 65 Mr Armati was a licensing magistrate and Chairperson of the Licensing Court. By virtue of both offices, he was an ex-officio member and Chairperson of the Board: Liquor Act 1982 ss 72(1) and (2). In this respect the Board was constituted by the licensing magistrates for the time being holding office under s 8 of that Act together with such other appointed members not exceeding three as the Minister thinks fit and appoints to the Board. It is sufficient for present purposes that the Chairperson of the Board who signed its decision was a licensing magistrate and Chairperson of the Licensing Court.

The submissions before the primary judge 66 The appellants' submissions before the primary judge which were, in essence, repeated in this Court, may be summarised as follows:

(a) On the exercise by the second respondent of the option on 28 July 2004, a valid and binding agreement for lease arose between the appellants and the second respondent on the terms referred to in cl 21.1 of the Lease. That agreement for lease was specifically enforceable so that, in equity, the second respondent was regarded as having a lease for a further term of six years and the parties had rights in relation to that agreement including the right to call for the execution of a formal lease in accordance with its terms;

(b) Although the parties had sought to negotiate a new lease required by force of the exercise of the option, no agreement had been reached. The Board so found which precluded any finding that the agreement for lease which arose on the exercise of the option was discharged or otherwise not operative;

(c) The Board erred in finding that the second respondent was holding over pursuant to cl 10 of the Lease as that would be inconsistent with the agreement for lease created by the exercise of the option;

(d) In any event the rent being paid by the second respondent of $1,800 per week was substantially less than the rent provided for in cl 10 of the Lease on a holding over thereunder;

(e) The Board therefore erred in failing to find that the option provisions were in force, it being clear that the Board misconstrued or did not understand the legal effect of the exercise of the option;

(f) Importantly, the Board erred in finding, as it did in the third paragraph of its decision which I have emphasised, that because no agreement was reached and negotiations for a new lease had terminated, " accordingly " the second respondent continued to occupy the premises under cl 10 of the Lease from which it followed that the terms of the option to renew were not " in force ". 67 The first and second respondents submitted as follows: (a) It was for the Board to resolve the competing claims of the parties so as to answer the question posed by s 19(3)(c) of the Act; the answer to that question depended upon the nature of the tenancy of the second respondent as at the end of 2006 which depended, in the first place, on the facts;

(b) It was common ground that the second respondent was not paying a turnover rent but was paying a fixed rent and that the appellants, at least conditionally, had accepted rent on that basis since the expiration of the Lease on 21 March 2005;

(c) Although the second respondent had expressed an intention to exercise the option, the appellants had not supplied a lease for execution pursuant to that exercise before 20 December 2006. In any event, even if it be assumed that the letter of 28 July 2004 gave rise to a binding agreement for a new lease in accordance with the terms of cl 21.1 of the Lease, unless that agreement was specifically enforceable, the appellants had no equitable interest which entitled them to receive any income derived from the business carried on under the authority of the licence within the meaning of s 19(5) of the Act;

(d) In the circumstances it would be speculative in the extreme to assert that in December 2006 the appellants would have been entitled to specific performance of an agreement entered into in July 2004 when both parties had been acting inconsistently with that agreement for more than 12 months. The fact was that the appellants had not sought to enforce any rights they might have had pursuant to the exercise of the option in July 2004 and thus would have been met with the defences of laches and delay as discretionary grounds for the refusal of specific performance had it been sought at or before the end of 2006;

(e) Accordingly, it was open to the Board to form the view that the " option in the lease was not in force ";

(f) Further, there was evidence to support the Board's finding not least because of the fact that the second respondent was paying a weekly fixed amount of rent reflective of the incremental fixed rental under cl 3.1 of the Lease. The only relevant question was whether there was an equitable lease providing for a turnover rent that was enforceable as at the date of the Board's decision. It was open to the Board in the circumstances to answer that question in the negative. 68 The fourth and fifth respondents submitted as follows: (a) The financial interest to which s 19 refers must be one which is a present and not merely prospective interest. The person claiming the interest must have a present right to receive income from the relevant business: Jabetin at 619 [46].

(b) The appellants did not assert an interest at law but contended that they had an equitable lease which gave them a relevant present interest to receive the income from the business. There were four reasons why that contention was erroneous, namely: (i) The giving of the notice under the option clause did not give rise to a binding agreement for lease;

(ii) The course of conduct thereafter undertaken by the parties was plainly consistent with the parties having abandoned, by late 2006, any such agreement which arose in mid-2004;

(iii) The putative equitable interest was dependent upon the ability of the appellants to obtain specific performance when such relief would not have been granted; and

(iv) Any equitable right which the appellants had was not a present entitlement to receive income from the business as required to satisfy s 19(5) of the Act, but only a prospective right in the event that a lease was actually granted containing an obligation to pay turnover rent;

(c) It was further submitted that from the outset the parties had abandoned the terms of any option lease, particularly as the appellants' solicitor's letter of 13 October 2004 made it plain that they did not wish a turnover rent to be provided as they considered its payment would be unsustainable. Negotiations then took place. The only term that was agreed upon was that the rent would be a fixed and not a turnover rent. In these circumstances it was open to the Board to find that the provisions for the payment of a turnover rent constituted by the exercise of the option were not in force.

(d) As to the question of specific performance, it was submitted that the delay of two and a half years in enforcing an agreement for lease which came into existence in July 2004, coupled with the payment and acceptance of rent on an entirely inconsistent basis during that period, clearly gave rise to available defences of laches, estoppel and change of position. They were described in argument by senior counsel for the first and second respondents as a " ragbag of defences ". 69 The primary judge (at [81]) accepted the respondents' submission that it was open to the Board to conclude that the second respondent had held over under the Lease at an agreed rental that differed from that provided in cl 10. The fact that the second respondent had indicated an intention to exercise the option to renew under cl 21 went nowhere as the appellants had not furnished a new lease in the terms of the option to the second respondent by the time of the Board's decision in December 2006. This was a requirement of cl 21 which had not occurred. I pause to note that that finding, repeated at [87], was an acceptance of the submission on behalf of the fourth and fifth respondents, not made by the first and second respondents, that the letter of 28 July 2004 did not constitute the exercise of the option but only an offer to accept a lease containing the terms referred to in cl 21 upon such a lease being proffered by the appellants to the second respondent. 70 At [83] his Honour expressed the following conclusions with respect to the Board's decision: "(a) the LAB was correct in observing that the lessee exercised the option on 28 July 2004, in the sense of indicating an intention to exercise the option; (b) the LAB was correct in observing that substantial correspondence was exchanged thereafter between the lessors and the lessee as to the terms of the new lease, but no agreement was reached and the negotiations were terminated; (c) it was open to the LAB to find that, accordingly, "the lessee continues to occupy the premises under the holding over provisions contained in the 1999 lease" in the sense of holding over with an agreed rent of $1,800.00 per week plus GST; (d) it was open to the LAB to "not find that the terms of the option to renew the lease which would provide new provisions are in force" - the provisions of clause 21 were not in force, and the parties had acted in a manner inconsistent with clause 21 by agreeing to payment of rent of $1,800.00 per week plus GST which was not calculated by reference to turnover; (e) it was open to the LAB to conclude that "accordingly the determination of whether the lessor has a financial interest is based upon the 1999 lease … that lease contains no provisions which gives the lessors a financial interest within the meaning of section 19 or the recent case law upon section 19"; (f) it was open to the LAB to conclude that the option to renew provisions in the 1999 lease were not in force.." 71 At [84] his Honour found that it was open to the Board not to accept that the appellants had demonstrated that they had a relevant financial interest. A most significant fact in that respect was the conduct of the parties between July 2004 and December 2006 in offering and accepting rent calculated upon a basis unrelated to turnover. 72 At [86] the primary judge accepted the submissions of the respondents that the conduct of the parties, over an extended period of time, would constitute "an impenetrable barrier to any claim for specific performance by the [appellants]." 73 Finally, at [88], his Honour accepted the submission of the fourth and fifth respondents that even if the appellants had demonstrated an equitable lease, this would not have been a present interest in the income of the business so as to constitute a "financial interest" in a hotelier's license for the purposes of s 19 of the Act.

The submissions on the appeal and their resolution 74 The parties' submissions on the appeal generally reflected those made to the primary judge. The appellants submitted that his Honour erred in accepting the submissions of the fourth and fifth respondents that an essential condition for the valid exercise of the option was the submission by the appellants to the second respondent of a lease in terms of that contemplated by cl 21.1 of the Lease. In any event, the appellants submitted that this was not a finding made by the Board, which unequivocally stated that the option had been exercised. Therefore the issue was not open to be decided by the primary judge. As the matter before the primary judge was one for judicial review and not an appeal from the decision of the Board on its merits, the only issue was whether the Board's reasons disclosed an error of law or the failure to take into account a relevant consideration. 75 In my view, there can be no doubt that as at the date of the exercise of the option, an agreement for lease came into existence. His Honour was in error in finding to the contrary. Furthermore, as the appellants submitted, both they and the second respondent, through their respective solicitors, unequivocally asserted and acknowledged the due and valid exercise of the option. In fact, Somerville on behalf of the appellants acknowledged as much in his letter to Baxter of 27 January 2005 and Baxter in his letters of 4 May 2005 and 23 June 2005, made it clear that his client was entitled to a lease in terms of the option. Later correspondence was to the same effect. No doubt this explains why the first and second respondents did not join in the fourth and fifth respondents' submission that the letter of 24 July 2004 only mentioned an offer that had never been accepted.

76 The appellants further submitted that the Board's finding that the second respondent was holding over under cl 10 of the Lease was in error. In my view there can be no doubt that the Board was correct in finding that from the expiration of the Lease until December 2006 the second respondent was indeed holding over at a weekly rental of $1,800 plus GST. Whether the second respondent was holding over under cl 10 or under the common law matters not. The fact, correctly found by the Board, was that he was holding over during the course of the negotiations between the parties for a replacement lease. 77 However, it does not follow from the fact that the second respondent was so holding over that, in the circumstances revealed in the correspondence to which I have referred, the parties had abandoned, as the respondents submitted, the agreement for lease constituted by the exercise of the option so as to justify the rejection by the Board of a finding "that the terms of the option to renew the lease which would provide new provisions" were in force. 78 The difficulty with the Board's decision is that having come to the correct conclusion that no agreement had been reached with respect to the terms of a new lease and that negotiations therefor had terminated, it concluded that it therefore followed ("accordingly") that the second respondent continued to occupy the premises under the holding over provisions of the Lease in circumstances where the agreement for lease constituted by the exercise of the option had ceased to be "in force". 79 It is true, as the respondents submitted, that the Board's apparent reason for finding that the effect of the option was no longer "in force" was because negotiations with respect to the terms of a new lease had terminated so that the second respondent continued to hold over on a fixed rent. However, there was no finding by the Board that the reason that the exercise of the option and what flowed from it was not "in force" was because the appellants had lost the right to obtain an order for specific performance of the agreement for lease constituted by the exercise of the option due to the intervening conduct of the parties. Nevertheless it was submitted, particularly by the fourth and fifth respondents, that it was open to the primary judge to support the Board's finding on a basis other than that which it had adopted. 80 The fourth and fifth respondents submitted and the primary judge found, that specific performance would inevitably be denied by a court of equity whereas the first and second respondents submitted that it was at least likely that that would be the case although not inevitable. 81 The first and second respondents accepted that it was open to his Honour to have reference to the evidence that was before the Board in order to construe or properly understand the Board's reasons. They reiterated their submission at trial that both parties had acted inconsistently with the alleged agreement for lease arising from the exercise of the option by the second respondent tendering, and the appellants accepting a fixed rent of $1,800 per week for almost two years which was explained by the appellants informing the second respondent that they considered a turnover rent to be too onerous. 82 General assertions were made that defences of estoppel by convention, misleading and deceptive conduct and perhaps laches and delay, could be thrown into the mix to counter the appellants' assertion of a current equitable interest constituted by the agreement for lease as at the date of the Board's decision. However, the difficulty with this submission and his Honour's finding adopting it, was that little attempt was made by the respondents to assert facts arising from the correspondence between the parties which it would be open for a court of equity to find in support of the potential defences asserted. 83 The only submission made apart from bare assertions, to identify any alleged misleading or deceptive conduct on the appellants' part was the insistence by the appellants, when negotiations terminated, on the second respondent paying the turnover rent provided under the option, having accepted a fixed rent in the meantime. Why in the circumstances that was misleading or deceptive was not explained. It is certainly not self-evident. Further, no reasoned submission was advanced in support of any relevant change of position or prejudice sustained by the second respondent as a consequence of any particular conduct of the appellants which might support some form of estoppel. Although it may have been suggested that a conventional estoppel could have arisen out of the correspondence which I have detailed above, no reasoned submission was put to support any such suggestion. 84 As I have noted at [80] above, only the fourth and fifth respondents submitted that it was inevitable that a court of equity would refuse specific performance of the agreement for lease arising as a consequence of the exercise of the option. The Board did not consider the issue and adopted different reasons for its conclusion that the option provisions were not "in force". However, the primary judge (at [86]) did hold that the parties' conduct would constitute "an impenetrable barrier to any claim for specific performance" by the appellants. 85 Only such a finding could sustain that of the Board that the option provisions were not "in force" at the time of the decision. Being an application for judicial review, it was not open to his Honour to decide a specific performance suit unless he correctly found that the only conclusion the Board could have reached was that specific performance would be refused. The first and second respondents' submissions on the issue did not go so far although those of the fourth and fifth respondents did. In my view it is simply impossible to speculate, and it could only be speculation, as to whether a court of equity would refuse, let alone inevitably refuse, specific performance given the common stance of the parties as to their rights arising out of the exercise of the option which each maintained throughout the negotiations for a replacement lease. 86 In my opinion the Board's decision cannot be sustained on the basis that specific performance of the agreement for lease constituted by the exercise of the option would necessarily be refused. 87 The first and second respondents also submitted that there had been no agreement reached on the essential terms of the lease to be granted pursuant to the exercise of the option except with regard to rent. Accordingly, there could be no agreement for lease and, in particular, no specifically enforceable agreement for lease. 88 With respect, I have difficulty in understanding this submission. It is true that cl 21.1 of the Lease only stated that upon the exercise of the option the lessor would at the expense of the lessee demise to the lessee the premises for a further term of six years at the turnover rental stated. It did not, as is normally the case, state that the lease so granted would be subject to the covenants, agreements and provisos as contained in the existing lease except for the option to renew provision. However, in my opinion that was clearly implied. In fact it is consistent with the assertions of the parties in the correspondence to which reference has been made. Thus the only complaint made by the second respondent with respect to the terms of the new draft lease that was proffered by the appellants was that its terms were different to and more onerous than those of the Lease. 89 The fourth and fifth respondents nevertheless submitted that even though the reasoning of the Board in coming to its conclusion that the "new provisions" arising out of the exercise of the option were not "in force" might be flawed, nevertheless there was available a substratum of fact and law which would have led to the same finding even if it was not on made the basis that the Board expressed. 90 It was thus submitted that in these circumstances it was open to his Honour to find, as he did at [86], that the conduct of the parties over an extended period of time would constitute an impenetrable barrier to any claim for specific performance of any agreement for lease constituted by the exercise of the option. 91 The difficulty with this submission is that the factual material that was before the Board does not support it. That material established the following: (a) The appellants and the second respondent at all times acknowledged that the option contained in cl 21.1 of the Lease had been validly exercised and as a consequence thereof the second respondent was entitled to receive and the appellants were bound to grant, a lease on the same terms as the Lease except for cl 21 for a term of six years at a rental determined in accordance with cl 21.1(a) and (b);

(b) Nevertheless, the appellants were prepared to negotiate with the second respondent for a lease on different terms to the Lease that provided for the payment of a fixed rather than a turnover rent;

(c) The appellants proffered terms which were not acceptable to the second respondent who insisted, as at 4 May 2005, that he required a lease in terms of the option;

(d) As at 23 June 2005 the second respondent acknowledged that there were two alternatives: either a lease in accordance with the terms of the option or a new lease on terms which were suitable to both parties. At all times both parties, whilst seeking to negotiate the terms of a new lease, reserved their rights to enforce the agreement for lease constituted by the exercise of the option;

(e) The second respondent acknowledged (see Baxter's letter of 14 July 2005), when requested to pay back rent, that such rent would only be paid if any lease granted was pursuant to the exercise of the option. On the other hand if a new lease was entered into (that is, in substitution for that which would otherwise be granted pursuant to the exercise of the option), there was no requirement to pay rent until that lease had been granted;

(f) From 16 August 2005, Baxter was asserting on behalf of the second respondent that the option had been exercised and that his client was entitled to a lease in accordance with the terms of the option subject only to the payment of a fixed rental rather than that provided for in cl 21.1 as had been agreed;

(g) That proposition was disputed by the appellants who made it clear that any agreement with respect to the payment of a fixed rental was subject to the negotiation of lease terms which were different from those of the Lease. Baxter's letter to Somerville of 12 September 2005 made that clear;

(h) Correspondence that occurred between November 2005 and August 2006 also made it clear that the second respondent continued to insist that he had exercised the option and was entitled to a lease in accordance therewith except with respect to the rental. The appellants acknowledged that the option had been validly exercised but that any agreement for a rent of $1,800 per week was subject to negotiation with respect to the terms of the draft lease first submitted on 11 November 2005 and the amended draft lease submitted on 23 June 2006;

(i) Baxter's email of 29 June 2006 is of particular significance as it asserts that the second respondent would be forced to bring proceedings in the Supreme Court, clearly for specific performance of the agreement for lease constituted by his exercise of the option subject only to the alleged agreement to vary the rent provision. 92 In the light of the correspondence which I have sought to summarise above, it is clear and understandable that the second respondent wished to remain in possession of the Hotel and to obtain a lease for a further six year term. Furthermore, neither party was asserting that either had abandoned their or his rights arising out of the exercise of the option. On the contrary, each was asserting those rights at all material times. Thus the reference in some of the correspondence to it being "WITHOUT PREJUDICE" was, in my view, intended to make clear that the negotiations were without prejudice to the rights of the parties arising on the exercise of the option which remained "in force". Furthermore, the appellants were prepared to accept a fixed rent of $1,800 per week only upon the basis of the negotiation of a new lease with terms that differed from those which would otherwise be the subject of a grant pursuant to and in accordance with the exercise of the option. 93 The point that emerges from the foregoing is that at all material times, both parties to the negotiations accepted that the agreement for lease constituted by the exercise of the option remained "in force". However, the second respondent was asserting that agreement had been reached for the grant of a lease pursuant to the exercise of the option but with a variation to the rent provision, whereas the appellants were asserting that their agreement for a fixed rent was subject to the negotiation of the terms of a lease different from that which would be granted pursuant to the exercise of the option. On that issue the parties were never ad idem and it was not open to the Board to find, if impliedly it did, that the rent provisions of cl 21 were not "in force" because agreement had been reached that any lease granted pursuant to the exercise of the option would contain a rental provision based on a fixed rent rather than a turnover rent as required by cl 21.1. 94 The Board's finding that at the date of its decision the second respondent continued to occupy the premises under the holding over provisions of the Lease was not, in law, an answer to the appellants' submission to the Board that as at the date of its decision the agreement for lease constituted by the exercise of the option was still "in force". The Board's finding to the contrary was, in my view, an error of law. That error was compounded by the Board's reasoning, as I understand it, that because negotiations had been terminated in relation to the terms of a new lease, the only outstanding relationship between the parties was one constituted by the holding over provisions of the Lease because any agreement for lease arising out of the exercise of the option was no longer in force. His Honour's findings upholding the Board's reasoning (and supplementing it) cannot, in my respectful opinion, be sustained. 95 Furthermore, it was put squarely to the Board that there was an agreement for lease constituted by the exercise by the second respondent of the option to renew the Lease. However, it is apparent from its reasons that although the Board acknowledged the exercise of the option, it did not appreciate that on the exercise of the option an agreement for lease came into being. The Board's failure to take that relevant fact into consideration amounted to legal error. 96 Finally, I would address the fourth and fifth respondents' submission that even if, as at December 2006, the agreement for lease constituted by the exercise of the option was "in force", nevertheless it did not constitute a present entitlement to receive any income derived from the business carried on under the authority of the hotelier's licence within the meaning of s 19(5) of the Act. 97 It is true that in Jabetin Mason P (at 619 [46]) stated that s 19(5) speaks of present entitlement to income derived from the relevant business. But the mere fact that the relevant parties had not entered into a lease which would constitute a legal entitlement of the appellants to receive a turnover rent, does not detract from the proposition that an enforceable agreement for lease at the relevant time gives rise in equity to a present entitlement to receive that rental. It is important to note that it is the entitlement to receive income which is relevant for the purposes of s 19(5); not the requirement that there be actual receipt of such income. So long as the agreement for lease remained in force, in my opinion, the appellants had a present entitlement in equity to the turnover rent referred to in cl 21.1. 98 For the foregoing reasons, therefore, in my opinion the Board's finding that the appellants had no financial interest in the hotelier's licence was legally flawed. It follows that the decision of the Board approving the transfer of the relevant poker machine entitlements should be set aside and the matter remitted for redetermination.

What relief should be granted? 99 On 1 July 2008 the Act was amended by the Miscellaneous Acts (Casino, Liquor and Gaming) Amendment Act 2007 (the Miscellaneous Act), the effect of which was that the functions of the Board were assumed by the Casino, Liquor and Gaming Control Authority (the Authority) constituted under the Casino, Liquor and Gaming Control Authority Act 2007. The Miscellaneous Act contained transitional provisions, the relevant effect of which was that the Board ceased to exist on 31 December 2008. To the extent to which, upon the setting aside of the Board's decision to approve the transfer, the respondents' application to transfer the relevant poker machine entitlements remains undetermined, the functions of the Board under s 19 of the Act are assumed by the Authority. Accordingly, it is appropriate that the application for approval of the transfer be remitted to the Authority for determination in accordance with the law. 100 One final point that was raised by the Court but which was not fully argued was the date at which the Authority is required under s 19(3)(c) to form the opinion as to whether the appellants have a financial interest in the relevant hotelier's licence. It was submitted by the respondents that that date was the one upon which the application for approval of the transfer was lodged with the Board, being 16 October 2006. On the other hand the appellants submitted that the relevant date is the date upon which the Authority is required to form the opinion as to the persons who have a financial interest in the licence, which is the date at which the transfer is either approved or disapproved. 101 Section 19(3)(c) requires an application for the Board's (now the Authority's) approval of the transfer of a poker machine entitlement allocated in respect of a hotelier's licence to demonstrate to the Board's satisfaction that the proposed transfer is supported by each person who has a financial interest in that licence. However, it is left to the Board's opinion as to who has such an interest. 102 In Masters v Garcia [2005] NSWCA 287; (2005) 65 NSWLR 92 at [79] Basten JA, with whom, relevantly, myself and M W Campbell AJA agreed, observed that the time at which the relevant factual matters must be addressed for the purpose of s 19(3)(c) is either the time at which the transfer was executed or the time at which it was approved by the Board. As no considered argument was directed to the point, his Honour did not come to any conclusion with respect to it. However, I would observe that the first of these alternatives may not relevantly coincide with the respondents' submission that the relevant time is the date upon which the application for approval of the transfer is lodged with the Board. 103 This Court should take the same approach in the present case. Although raised with counsel, the point was not the subject of considered argument. Its resolution should await another day.

Conclusion 104 In my opinion, the following orders should be made:

(a) Summons for leave to appeal dismissed with no order as to costs;

(c) Set aside the orders made by Johnson J on 12 June 2008;

(d) Set aside the approval dated 20 December 2006 of the Liquor Administration Board with respect to the transfer of the poker machine entitlements the subject of its decision of that date;

(e) Remit to the Casino, Liquor and Gaming Control Authority for its consideration under s 19 of the Gaming Machines Act 2001 the application for the Authority's approval of the transfer of one block of three poker machine entitlements from the Tabulam Hotel, Tabulam to the Black Market Hotel, Chippendale lodged with the Liquor Administration Board on 16 October 2006;

(f) The first, second, fourth and fifth respondents to pay the appellants' costs of the proceedings before Johnson J and of the appeal but to have with respect to the latter a certificate under the Suitor's Fund Act , 1951, if otherwise qualified;

(g) No order as to the costs of the third respondent. 105 McCOLL JA: I agree with Tobias JA. 106 MACFARLAN JA: I agree with Tobias JA.

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.