McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542 | Case summary

5600/07 McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd JUDGMENT (ex tempore) 1 HIS HONOUR: The defendant Newtown Colonial Hotel Pty Limited ("NCH") is the owner of the freehold of the Newtown Colonial Hotel. With effect from 1 November 1997, it first leased the hotel to Stessel Pty Limited for a term of five years. That lease contained clause 14.1, which provided as follows: The Hotelier's Licence ("the Licence") attaching to the Premises is the property of the Lessee solely and on or at any time after the termination of this Lease the Lessee shall, subject to clauses 14.2 and 14.3 hereof, be entitled to remove such licence from the Premises and to otherwise deal with or dispose of the same as they in their discretion may wish and the Lessor consents to the Lessee posting on the Premises such notices as may be necessary under the Liquor Act for the purposes of any removal application. 2 The first lease also contained, in clause 3.2, an option to renew for a term of five years, and, in clause 3.5, a restraint of trade in the following terms: (a) If the Lessee does not exercise the option to renew contained herein, it is agreed that the Lessee and each Guarantor will not directly or indirectly and whether solely or jointly with or as director, manager, agent, servant or licensee of any person or corporation in any way carry on or be involved with or interested in any premises licensed under the Liquor Act 1982 within a 1 kilometre radius of the Premises until 31 October 2007. (b) The period and area referred to in clause 3.5(a) are acknowledged by the Lessee and each Guarantor to be no greater than reasonably required to protect the interests of the Lessor. 3 With effect from 1 November 2000, NCH granted a second lease of the hotel to Stessel, again for a term of five years. It is not clear whether or not this was pursuant to the exercise of the option in the first lease, although the circumstance that the terms are identical to those of the first lease, subject to the omission of the option and clause 3.5 which was connected with the option, suggests that it might well have been pursuant to the exercise of the option. In any event, ultimately this does not matter. 4 The second lease contained clause 14.1, identical to that in the first lease. As I have foreshadowed, originally it contained no option to renew and no restraint. However, on 20 January 2003 the second lease was varied so as to restore an option to renew for a term of five years in the terms in which it had appeared in the first lease, and a restraint of trade, in clause 3.5, in the following terms: (a) If the Lessee does not exercise the option to renew contained herein, it is agreed that the Lessor and each Guarantor will not directly or indirectly and whether solely or jointly with or as director, manager, agent, servant or licensee of any person or corporation in any way carry on or be involved with or interested in any premises licensed under the Liquor Act 1982 within a 1 kilometre radius of the Premises until 31 October 2012. (b) The period and area referred to in clause 3.5(a) are acknowledged by the Lessee and each Guarantor to be no greater than reasonably required to protect the interests of the Lessor. 5 It will be noted that, in distinction to the first lease, the word "Lessor" appears in place of "Lessee" in sub-paragraph (a) of clause 3.5 of the second lease, but the provisions are otherwise identical. 6 By contract made on 27 June 2003, Stessel sold the hotel business and the licence to the plaintiff McHugh Holdings Pty Limited ("McHugh"), for a price of $1.1 million. On 8 September 2003, pursuant to that contract, the lease was transferred to McHugh with the consent of NCH, that consent being given in a deed of assignment of that date between McHugh and Stessel to which NCH was a party, by which McHugh agreed to be bound by the second lease as if it were the lessee. A further variation of the second lease was also made on 8 September 2003, but it is immaterial for present purposes. 7 The term of the second lease expired by effluxion of time on 31 October 2007. McHugh did not exercise the option, and was excluded from the premises in early November 2007. McHugh wishes and intends, if possible, to remove the licence from the premises to new premises (which have not yet been identified or obtained) within a one kilometre radius of the hotel, and to trade from those new premises. NCH wishes to apply, pursuant to (NSW) Liquor Act 1982, s 42, for the transfer of the licence to it as the holder of reversion, and has declined to give an undertaking not to make such an application. In the interim, it has been restrained by interlocutory injunction from doing so. 8 In these proceedings, McHugh seeks an injunction restraining NCH from making an application to the Licensing Court under s 42 for transfer of the licence to itself, contending that the effect of clause 14.1 of the second lease is to impose contractual and/or equitable obligations upon NCH not to make such an application. NCH contends that all clause 14.1 does is to permit McHugh to make an application for removal, and does not prevent NCH making its own application for transfer, and that in any event, as a matter of discretion, the Court should not, in effect, prevent the jurisdiction of the Licensing Court from being invoked and exercised. 9 By cross-claim, NCH seeks an injunction restraining McHugh from being interested in the conduct of a hotel business within a one kilometre radius of the hotel for a period of five years. McHugh contends that, properly construed, the restraint in clause 3.5 does not prevent it (as distinct from the lessor, NCH) from carrying on such a business, but that in any event, the restraint is void as being unsupported by any legitimate interest of NCH, and alternatively excessive. Finally, McHugh contends that an application to enforce the restraint is premature in circumstances where the precise premises from which it might carry on business have not yet been identified. The effect of clause 14.1 10 The first issue, then, is what effect does clause 14.1 of the second lease have on the ability of NCH as lessor to make an application under Liquor Act, s 42 (which applies where a licence is current and the owner of the premises to the exclusion of the licensee comes into or becomes entitled to possession of the premises, and provides that, in those circumstances, application for a transfer of the licence may be made by the owner of the premises). Provision is made for notice of such an application to be given to the dispossessed licensee. The section confers on the lessor of a hotel, upon termination of the lease, first, a deemed licence for a period of 28 days, or (if an application is made), until the application is heard and disposed of; and secondly, the right to apply for a transfer to the lessor of the licence. McHugh contends, however, that the effect of clause 14.1 of the second lease is to prevent NCH from exercising that statutory right, by reason of an implied negative stipulation that NCH, as lessor, would not exercise rights in respect of the licence inconsistent with those granted by clause 14.1 to the lessee. 11 It is undoubted that a statutory right may be excluded by contract unless the right is of a kind that public policy dictates cannot be contracted away, particular examples of which are rights to apply for maintenance under matrimonial or family provision legislation. Mr Leeming SC, for NCH, with his customary frankness, eschewed any suggestion that public policy would avoid any attempt to exclude by contract the right of a lessor to make an application under s 42. Despite a suggestion by Murphy J in Dalgety Wine Estates Pty Ltd v Rizzon (1979) 141 CLR 552 (at 576) that provisions restricting the ability of parties to make applications under the licensing legislation may be void as contrary to public policy, the prevailing view clearly favours the position which Mr Leeming adopted in that respect. As Gibbs CJ said in Dalgety (at 563): It was not submitted that contractual provisions such as those found in the underlease are contrary to public policy, and there is nothing in the Act which invalidates contractual provisions of that kind. Similar provisions have been considered by the courts on a number of occasions, and it has not been held that they are objectionable; on the contrary, they have been enforced by injunction: see Slatter v Railway Commissioners (NSW) (1931) 45 CLR 68; Metropolitan Theatres Ltd v Harris (1935) 35 SR (NSW) 228; Griffin v Clark (1940) 40 SR (NSW) 409; and see also Ex parte Berry; Re Kessell (1936) 36 SR (NSW) 485. 12 Mason J said (at 573): It was not suggested in argument that the covenant was either invalid or unenforceable by reason of inconsistency with provisions of the Act or the policy which underlies it … Certainly s 57(d) proceeds on the footing that a covenant of the kind referred to is valid. It may be assumed also that the section proceeds on the footing that the covenant is enforceable. 13 NCH's argument is not that any such provision is void as contrary to public policy, but that, accepting its validity, on its proper construction clause 14.1 does not have the effect of excluding any right of the lessor to make an application under s 42, but merely confers on the lessee a right, which might not otherwise subsist, to make an application for removal. 14 There are a number of textual indications in the second lease which assist in resolving this dispute. Significant indicators are to be found in clause 14.1 itself. It speaks of the licence as being "the property of the lessee solely". Consistently with what the Court of Appeal has recently said [Boreland v Docker [2007] NSWCA 94, [89], [106]-[108]], I am content to accept, for the purposes of this case - despite the considerable force in the submissions of Mr Muddle SC, for McHugh, to the contrary - that a hotelier's licence may not be property in the strict sense. But even so, the authorities that most strongly support that proposition all recognise that parties may by agreement create binding and enforceable legal and equitable obligations in respect of liquor licences and dealings with them. Thus, in Slatter v Railway Commissioners (NSW) (1931) 45 CLR 68, McTiernan J said (at 79): Although an Australian wine licence, granted under the Liquor Act 1912-1929, is not property in the strict sense and assignable as property, the licensee may bind himself by a contractual or fiduciary obligation with respect to the exercise of his rights under that Act to apply for the renewal or transfer or removal of such licence, and such an obligation will in a proper case be enforced [ Jack v Smail (1905) 2 CLR 684]. 15 And in Ex parte Berry; Re Kessell (1936) 36 SR (NSW) 485, Jordan CJ said (at 488-9): The license is personal to the licensee. … The right constituted by the license may be regarded as a right of property in the sense that it has, or in a particular case may have, a substantial pecuniary or material value as contrasted with a moral, social, or political, value … but it creates no right of property in the place in which it is exercisable; … If the licensee is not the owner of the licensed premises, he may enter into any arrangements that he pleases with the owner with respect to the licence, so long as the arrangement is not unlawful; and if the arrangement is one that gives rise to legal or equitable rights or duties, each party may be able to enforce the rights so created in the ordinary course, so far as those courts may be able to give effect to them. 16 Similarly, in more recent times, the ability of parties to create binding and enforceable legal and equitable obligations in respect of poker machine entitlements - though admittedly they have been held to be property - have been recognised by the Court of Appeal in Jabetin Pty Ltd v Liquor Administration Board [2005] NSWCA 92; (2005) 63 NSWLR 602 (particularly at [87]), and Masters v Garcia [2005] NSWCA 287; (2005) 65 NSWLR 92 (particularly at [75]). 17 Although a licence may not be property in the strict sense, that is really a side issue in these proceedings: the question for resolution is, what is the meaning and effect of clause 14.1, not whether as a matter of law the hotelier's licence is property in the strict sense. The assertion in clause 14.1 that the licence is property is not to be disregarded as having no effect whatsoever, simply because, viewed strictly, the licence might not be property. Even the dicta of McTiernan J and Jordan CJ, to which I have referred, admit that a licence might be property "in a sense". More importantly, the description of the licence as property in clause 14.1 is a powerful indication of a contractual intent that the lessee, to the exclusion of the lessor, is to have rights of disposition in connection with the licence - or, in other words, that such rights to remove, assign, transfer, or make application for removal, assignment or transfer of the licence as the legislation allows, are to be exercisable by the lessee, to the exclusion of the lessor. The assertion that the licence is the property of the lessee is inconsistent with the idea of competing applications by lessor and lessee in respect of the licence. 18 The next significant indication, again in clause 14.1, is that it confers, or at least purports to confer, an entitlement to remove or otherwise deal with the licence "on or at any time after the termination of this lease". The right to remove or otherwise deal with the licence after termination of the lease as well as upon termination is inconsistent with the reversion of the licence to the freehold and the exercise by the lessor of the right it might otherwise have to make an application under s 42. There is not to be found, in this lease, the "usual covenant" that the lessee will do all things necessary and co-operate with the lessor upon termination of the lease to ensure that the licence is transferred to the lessor - unsurprisingly, given the terms of clause 14.1. If an application under s 42 were to succeed, the dispossessed licensee would thereafter not have standing to apply for removal of the licence. In this way, by providing for removal "at any time after termination", the provision is inconsistent with the idea of competing applications by lessor and lessee. 19 It was suggested for NCH that McHugh's right to apply for removal must be exercised within "a reasonable time", for which the judgment of Rares J in Australian Performing Rights Association Ltd v Monster Communications Pty Ltd [2006] FCA 1806 was invoked. But the implication of such a limitation would fly in the face of the words "at any time" in clause 14.1, an express provision, and it is of course fundamental that a term is not to be implied if it would be inconsistent with the express terms of the contract. A fortiori, it would be impossible to imply into clause 14,1 a proviso to the effect that the right would exist at any time after termination "but only so long as a s 42 application were not successful", or to that effect. 20 The next significant indicium in clause 14.1 is the phrase "entitled to remove such licence from the premises and to otherwise deal with or dispose of the same as they in their discretion may wish". These words, which are to be read in conjunction with the statement that the licence is the property of the lessee solely, strongly indicate that, as between lessor and lessee, the lessee alone was to have rights of disposition in connection with the licence. 21 It was submitted for NCH that, as dealings with licences require an application to the Licensing Court and its approval, the phrase "entitled to remove" could not mean what it says, and at best confers on the lessee a right to make an application to the Court. But in my view it goes further than that, and confers a right to deal with the licence conditional on or subject to all requisite approvals of the Licensing Court, each party being bound to do all things reasonably necessary on its part to procure such approvals. The implication of such a term is consistent with the approach that the law adopts in cases of sale of Crown land where Ministerial consent is required but the contract is silent [Butts v O'Dwyer (1952) 52 SR (NSW) 256; Duncan v Mell (1914) 14 SR (NSW) 333; Public Trustee for New South Wales v Gavel (1927) 40 CLR 169; Brown v Heffer (1967) 116 CLR 344, 350]. It would be quite inconsistent with such a term that the lessor should have the right to make an application to have the licence transferred to it under s 42, in competition with the lessee's entitlement to remove the licence. For the lessor to do so would be contrary to its implied obligation to do all things reasonably necessary on its part to enable the lessee to obtain the requisite approvals for removal. 22 Further, important context is provided by clause 14.3, which gives the lessor a right of first refusal to purchase the licence (if the lessee proposes to sell it), at valuation. It makes manifest that it was not the contractual intent of the parties that the lessor be able to acquire the lease for nothing, pursuant to a s 42 application. 23 NCH invokes, in particular, clause 14.11 of the second lease, which provides, "for the more effectual preservation of the licence", that the lessee appoints the lessor its attorney to do things in the name of the lessee in respect of the lease - including to cause it to be transferred to any person or to apply for its renewal or its removal. However, clause 14.11 is expressed to confer such rights on the lessor "only after default". Even without those words, such a clause confers no beneficial interest in the licence on the lessor, though it does give the lessor enforceable contractual rights [Slatter v Railway Commissioners]. The circumstance, in the present case, that the lessor's rights are exercisable only on default is of great significance. As I have pointed out, this lease does not contain the usual covenant that the lessee will upon termination transfer the licence to the lessor. However, it does contain, in clause 14.2 (to which clause 14.1 is expressly subject) a provision to the effect that the licence is charged as security for any moneys overdue and owing by the lessee to the lessor on expiration or earlier termination of the lease. When clauses 14.2 and 14.11 are read together, in my view it becomes clear that clause 14.11 has important work to do, in preserving the security which clause 14.2 creates. It also operates in aid of the lessor's right of first refusal under clause 14.3. Once it is appreciated that it - like the other clauses that give the lessor some rights in respect of the licence, such as clauses 8.6 and 14.6 - has that work to do, there is no warrant for straining what is otherwise the clear intent apparent from clause 14.1 in order to give those provisions work. In this case, of course, there is no suggestion of any default such as to attract the operation of clause 14.2, let alone clause 14.11. 24 It follows that, in my opinion, the proper construction of clause 14.1 is to the effect that the lessee, to the exclusion of the lessor, is entitled, subject to all requisite applications and approvals, to remove the licence or otherwise deal with or dispose of it. In those circumstances, I do not think it could be seriously disputed that there is implicit in clause 14.1 a negative stipulation that the lessor would not do any act which would prevent or disable the lessee from removing, dealing with, or disposing of the licence [cf Slatter v Railway Commissioners, 78 (Gavan Duffy CJ, Starke and Dixon JJ); Dalgety, 569 (Mason J)]. An application under s 42 would have just that effect. Accordingly, clause 14.1 has the effect that NCH is bound not to make an application for transfer to itself of the licence under s 42. Should the Court decline relief? 25 Invoking the judgment of the High Court in Dalgety, however, NCH submits that, as a matter of discretion, this Court should not, in effect, encroach on the jurisdiction of the Licensing Court and deprive it of the opportunity of considering and resolving whether the licence should be transferred to the lessor or removed on the application of the lessee. 26 Dalgety was concerned with South Australian legislation which, in contrast to the New South Wales Act, provided that one of the grounds of objection available in connection with an application for removal was that the lease contained a covenant or prohibition against removal without consent of the lessor, and that such consent had not been obtained. Stephen J said (at 567): The legislative intent must be taken to be that even licensees whose applications for removal are in breach of a negative covenant into which they have entered may have their licences removed if the Licensing Court, in all the circumstances of the case, thinks fit. That Court, as the specialist tribunal charged with responsibility in the field of liquor licensing, is to be free to exercise the very wide discretionary powers with which s 61(1) has armed it, paying regard, inter alia, to relevant breaches of covenant but not being obliged to regard them as factors determining the fate of the application. In the present case I am not called upon to say whether there are any circumstances in which the Supreme Court would, as a matter of discretion and on the ground that the making of the application is in breach of covenant, enjoin an applicant for removal from making application to the Licensing Court. It is enough to conclude that there exists in this case no special circumstances which would justify intervention by injunction. The Supreme Court was correct in refusing to enjoin the respondents. For the Supreme Court to grant an injunction would have the effect of withdrawing from consideration by the Licensing Court a subject matter, the removal of licences, which the legislature has exclusively conferred upon it. To grant such an injunction because the applicant for removal was in breach of covenant would be to go even further, fixing upon a circumstance as ground for grant of the injunction which was a circumstance specifically adverted to by the legislature and determined by it to be the proper subject of consideration by the Licensing Court. 27 His Honour then continued (at 568): The view which I take does place a particular restraint upon the exercise by the Supreme Court of its general equitable jurisdiction, otherwise available for the protection by injunction of contractual relationships threatened by breach. But this is not the case of a true dilemma, of a choice having to be made between two courts, one or other of which must be denied the opportunity for exercise of jurisdiction. The South Australian legislature has, after express advertence to the question, clearly entrusted the question of breach of covenant, as it may affect the transfer of a licence, to the Licensing Court, whereas the relevant jurisdiction of the Supreme Court has not, of course, been the subject of any such express legislative advertence. 28 An important distinction in the present case is that the New South Wales legislature has not, expressly or at all, adverted to the question of whether breach of covenant should be entrusted to the Licensing Court. Unlike the South Australian legislation, the New South Wales legislation does not entrust that question to the Licensing Court. 29 In Dalgety, Mason J said (at 574) that the Supreme Court should not have exercised its discretion to prevent the respondent, in breach of covenant, from invoking the jurisdiction of the Licensing Court in a matter in which jurisdiction was conferred on it by the Act. As well as pointing out that a superior court should hesitate to grant an injunction to restrain a party from commencing or maintaining proceedings in a court or tribunal especially constituted with a specialist jurisdiction, his Honour also adverted to the fact that the Licensing Court was specifically directed to determine the grounds of objection, of which one of those available was the breach of covenant. Referring to the observations of Jordan CJ in Ex parte Berry; Re Kessell his Honour said (at 575): In this case, however, the Licensing Court as well as the Supreme Court has jurisdiction to decide whether there has been a breach of covenant. But the Licensing Court alone has jurisdiction to decide whether the licence should be removed. To grant an injunction having the effect of preventing the Licensing Court from exercising its overriding discretion to grant or refuse the application would be to encroach on its jurisdiction, indeed to prevent it from exercising its jurisdiction. 30 Again, in the present case, the statute does not confer on the Licensing Court jurisdiction to decide whether there has been a breach of covenant. The circumstance that that was a matter for the Supreme Court appears clear from the judgment of Jordan CJ to which reference has already been made; his Honour said (at 492-3): When difficult questions arise as to the rights which may exist as between licensee and owner by virtue of transactions to which they have been parties, the licensing tribunal is not concerned with resolving such difficulties. It may do what it considers best in all the circumstances, giving special regard to the requirements of public interest, and leaving the parties to their remedies in the ordinary Courts to enforce any trusts or obtain remedies for any breaches of contract which they may allege or exist. When those Courts are invoked, they may be able to afford some relief, but they cannot for the purpose of doing so encroach upon the jurisdiction of the licensing tribunals. 31 The evidence in the present case given by Mr Tony Schwartz, a solicitor with extensive experience in the field, uncontested and unchallenged, is that when considering an application under s 42 the Licensing Court does not give consideration to or enforce equitable or contractual rights, but adjourns the matter and requests the parties to reach agreement or invites them to commence the relevant proceedings before the Supreme Court, being at pains to point out that it does not rule on equitable or contractual claims. 32 In my view, Dalgety (in which there were strong dissents by Barwick CJ and Gibbs J, who would have granted relief) is plainly distinguishable from the present case, because of the difference in the legislation, the New South Wales legislation not conferring on the Licensing Court the ability to consider and determine contractual rights. Ex parte Berry, rather than Dalgety, is in the present circumstances the controlling authority. Granting an injunction in this case would not encroach on the jurisdiction of the Licensing Court. It would not purport to approve an application for removal, nor to refuse an application under s 42 for transfer. It would not affect the status quo in respect of the licence in any way. It would simply prohibit the lessor from making an application which if successful would result in a breach of its contractual obligation under the lease. To my mind, there is a significant difference between compelling a change in the status of a licence, where such a change requires the approval of the Licensing Court, and restraining the making of an application to give effect to a lawful contractual obligation not to make such an application. It is worth observing that, in Slatter v Railway Commissioners, the High Court had not the slightest difficulty in granting injunctive relief restraining the prosecutor from making an application before the Licensing Court, in circumstances where to make such an application was inconsistent with an implied negative stipulation. To my mind, to decline to intervene in these circumstances would be to disregard the contractual and equitable rights which the courts have repeatedly recognised can be created in respect of licences, and to set aside enforcement of those rights in favour of the general discretion of the Licensing Court to determine the fate of the licence. To my mind, it would be positively wrong to decline to intervene by injunction in the context of the present case. 33 In addition to the injunctive relief, McHugh claims a declaration as to the effect of clause 14.1, upon its proper construction, in respect of the licence and associated poker machine entitlements. NCH submits that the declaration sought is inappropriate, first because it is hypothetical - in that there is no actual proposed dealing at this stage - and secondly, that in any event one could not declare that McHugh was entitled to remove the licences or transfer the associated poker machine entitlements, since any "entitlement" to do so must be subject to the approval of the Licensing Court. 34 As to the second point, I have already explained that the proper construction is that the entitlement is a conditional one, being subject to the appropriate application to the Licensing Court being granted; there is no difficulty in incorporating in any declaration a condition to that effect. As to the first point - hypotheticality - it is true that, at this stage, there is no crystallised proposal to transfer the poker machine entitlements, but the factual situation and the terms of clause 14.1 are pregnant with the potential for such an application, and for dispute as to which of the parties is entitled to deal with the poker machine entitlements. A declaration would not bind the Licensing Court to approve, or refuse, any particular application; but it would resolve the controversy between the lessor and the lessee as to which of them was entitled to deal with the licence and the entitlements associated with it. The conclusions I have so far reached establish that the lessee, to the exclusion of the lessor, has the rights referred to in clause 14.1, subject to the requisite applications to the Licensing Court being granted. As that is a necessary step to the decision to grant the injunctive relief claimed, a declaration to that effect is not hypothetical. 35 It is now well established that the poker machine entitlements allocated in respect of a licence travel with the licence, and upon termination of a lease revert with the licence to the freehold, in the absence of special contractual terms. However, that a contractual term may produce a different result was expressly recognised in Jabetin Pty Ltd v Liquor Administration Board, where Mason P said (at [78]): Quite apart from the implications derived from the scheme of the [ Gaming Machines Act] to which I shall turn, the statutory allocation "in respect of " the hotelier's licence at the Hotel brought about the situation that, absent any separate contract or dealing giving rise to a trust situation capable of recognition consonant with the [ Gaming Machines Act] , the entitlements will go with the licence. The lease is silent as to separate disposition of the entitlements, but it does provide that the licence is effectively at the lessor's disposal after termination. 36 Contrary to the position in Jabetin, here the licence provides that the licence is effectively at the lessee's disposal. After termination, the entitlements go with the licence to the lessee. Only the lessee has a financial interest in the licence, and is entitled to transfer the licence. 37 In Masters v Garcia, Basten JA, with whom Campbell AJA concurred, observed that, where there is not a clear absence of jurisdiction in the Liquor Administration Board, the Court should not be asked to make a declaration as to whether any person had a financial interest in the licence before the Board has performed its obligation to form that opinion itself under (NSW) Gaming Machines Act 2001, s 19(3)(c) (at [86]). 38 However, in the present case it has been necessary to consider, for other purposes, the effect of clause 14.1. The question of who is entitled to transfer the poker machine entitlements has been squarely raised by the claim for the declaration in the summons. The parties have had to come here in any event to litigate the claim for the injunctive relief that I have determined to grant. The just, quick and cheap resolution of the whole of the issues between the parties favours the exercise of discretion to make a declaration, rather than to leave the parties first to approach the Liquor Administration Board. In those circumstances, to decline to resolve this issue by declaration would simply invite further litigation, and fail to resolve the whole of the dispute between the parties. The cross claim - restraint of trade 39 The terms of clause 3.5 have already been set out. For McHugh, Mr Muddle submitted that lessor means lessor, and accordingly that the restraint does not bind the lessee. He contended that to produce a different result, rectification would be necessary. I disagree. Where extrinsic evidence is not required to ascertain the true contractual intention of the parties, that result can be achieved by construction, as opposed to rectification. A useful touchstone in this respect is whether the mistake can be ascertained on the face of the instrument, without recourse to extrinsic evidence [cf Meagher Heydon and Leeming, Equity Doctrines and Remedies, 4th Ed, [26-040]]. As those authors point out, without any recourse to the doctrine of rectification, Lord St Leonards had no difficulty in reading "Mary" for "John" in Wilson v Wilson (1854) 5 HL Cas 40, 67; Megarry J read "coloured blue and red" for "coloured blue" in St Edmundsbury and Ipswich Diocesan Board of Finance v Clark (No 2) [1973] 3 All ER 902, 915, and the High Court of Australia read "inconsistent" as "consistent" in Fitzgerald v Masters (1956) 95 CLR 420. In the context in which it appears in clause 3.5, inserted by the variation of the second lease, I have not the slightest difficulty in reading "lessor" as "lessee". Its association with "guarantor" and with sub-clause (b), in the context that the business was carried on by the lessee, makes it manifestly clear that that was the true contractual intent of the parties, without any need to resort to extrinsic evidence. 40 Clause 3.5, so read, is a restraint of trade. In New South Wales, a restraint of trade is valid to the extent to which it is not against public policy, even if not in severable terms [(NSW) Restraints of Trade Act 1976, s 4(1); Koops Martin Financial Services v Reeves [2006] NSWSC 449, [26]-[27]]. A restraint of trade is not contrary to public policy if it is reasonable having regard to the interests of the parties concerned and the interests of the public, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public [Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535, 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 706, 707; Lindner v Murdock's Garage (1950) 83 CLR 628, 653]. Whether a restraint is reasonable having regard to the interests of the parties depends upon two questions: first, whether the covenantee has a legitimate protectable interest, and secondly, whether the restraint is no more than reasonable for the legitimate protection of that interest. A covenantee is not entitled to be protected against mere competition; the legitimate interests which may be subject of protection by covenant are in the nature of proprietary subject matter [Vanderwell Products Ltd v McLeod [1957] RPC 185; Tank Lining Corporation v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659, 664], including trade secrets and confidential information, and goodwill including customer connection. 41 Accordingly, the first step in establishing that the covenant is reasonable, the onus of which is borne by the covenantee NCH, is to show that the covenant protects a legitimate interest, as distinct from merely precluding competition. Conventionally, the interests that may be the subject of such protection include proprietary information (for example, of an employer); in this case there is no suggestion that protection of proprietary information supports the restraint. A second interest that may support a restraint is goodwill or customer connection of an employer or of a business. The present context is not one of employment or sale of business, but lease of premises. There are cases in which the lessor of business premises has a legitimate interest in protection of the goodwill of the business [Mouat v Ross (1935) 35 SR (NSW) 566]. However, it is significant that in that case the business had been the lessor's until the commencement of the lease, and reverted to the lessor upon termination of the lease (unless the lessee exercised an option to purchase it). As Davidson J pointed out (at 574): The deceased [lessor] had a business to protect. He had purchased it and carried it on for some years and thereafter had kept it in existence by means of his tenants. Although the defendant is said to have purchased the goodwill from a tenant, his title to it must only have been for the remainder of the term then assigned to him, particularly in view of the fact that the deed sued upon contains an option to the defendant to purchase the goodwill. The covenant would therefore appear to be deliberately designed to prevent the defendant from going out of the premises and seeking to destroy the goodwill by commencing business nearby in competition and without the necessity of purchasing under the option given to him by the deed. 42 This is quite distinct from the present case, where the hotel business and the goodwill belong to the lessee. NCH has no legitimate intent in protection of the goodwill of the business, which is not its own but McHugh's. 43 It was suggested that NCH had a legitimate interest in goodwill attached to the premises, as distinct from attached to the business. I accept that, in the context of some businesses, an element of goodwill may attach to and enhance the value of the premises from which the business is conducted, as distinct from the business name and proprietors [cf Whiteman Smith Motor Co v Chaplin [1934] 2 KB 35]. I readily accept that a hotel is such a case, in that at least some of the patrons will resort to it, not because of the particular licensee or business, but because it is conducted from particular premises, and thus is, in the vernacular, their "local". These patrons are the "cats" referred to in Whiteman v Chaplin. 44 However, I am unable to accept that this covenant protects such "locational" goodwill. If McHugh set up in competition to the Newtown Colonial Hotel, even next door, that would not detract from any locational goodwill. The "cats" would continue to resort to the old Newtown Colonial Hotel. It is only the "dogs" who would shift to the new business. If a new licence were obtained for the Newtown Colonial Hotel, or the existing licence not removed from it, then the presence of a competing business, even next door, would have no impact on any locational goodwill. If patrons chose to go to the new competing business, it would not be because of locational goodwill, but because of personal goodwill attached to the business or person of McHugh, in which NCH has no legitimate interest whatsoever. 45 I accept that the categories of interest which may be protected by restraint are not closed. Thus, it has been accepted, though probably not conclusively resolved, that staff connection may support a restraint on recruitment of staff [Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717]. In this case, I have given close consideration to whether there is any other basis upon which the restraint can be supported. I accept that it was restored to the lease in conjunction with the restoration of the option. The one kilometre radius of the restraint corresponds with the radius in which a licence can be readily removed, without a full social impact assessment. The term of five years of the restraint corresponds with the term of the option. On one view, the restraint has the practical effect that if McHugh wishes to carry on a hotel business within the radius of one kilometre of the hotel within the term of five years, it can do so only by exercising the option. 46 I accept that a lessor has an interest in deriving rent from premises on the basis that the premises are licensed. As the Full Court said in Tooheys Ltd v Housing Commission of New South Wales (1953) 53 SR (NSW) 407, the circumstance that premises are licensed, as well as the usual covenant that the licence will be transferred to the landlord on termination of the lease, enhances the value of the freehold. Herron J explained (at 414): The value of the company's reversion, however, is affected partly because of the existence of the licence and partly because of the special covenants in the lease designed to preserve the licence for the benefit of the premises in such a way that the plaintiff company would be able to place any succeeding tenant in possession of the licence. These considerations would affect the rental value of the premises, and would clearly affect the capital value or notional sale price of the reversion. 47 The force of that in the present case is reduced by the circumstance that there is no such special covenant in this lease, but I am still inclined to accept that the mere circumstance that premises are licensed adds something to their value to the freehold owner. 48 However, while the restraint may have the practical effect of inhibiting removal of the licence from the hotel for five years unless the option is exercised, its express terms do not suggest that that was its purpose. It is not expressed as prohibiting, and does not prohibit, removal of the licence. The restraint does not ensure that the premises will remain licensed if the option is not exercised, and does not prevent removal of the licence if the option is not exercised: the licence could be removed to premises outside the one kilometre radius, although that is a more difficult and expensive exercise for the licensee; or it could be removed within one kilometre in conjunction with a sale to an arms length third party. 49 On the other hand, the restraint prohibits competition with the lessor, even if the lessor obtains a new licence or exercises its right of first refusal in respect of the subject licence; and it prohibits competition, even if the lessee obtains a new licence for its proposed competing premises other than by removal of the Newtown Colonial Hotel licence. 50 Those considerations compel me to conclude that the substantive purpose and effect of the restraint is to reduce competition for clientele of the hotel, in the event that NCH obtains a new licence, or a new tenant with a licence. Within its scope, it prevents exploitation by McHugh of the personal goodwill attached to its business, in which NCH has no legitimate interest. It follows that the restraint prohibits competition, without protecting any legitimate interest of NCH. Accordingly, it is wholly contrary to public policy, and wholly void. Orders 51 My orders are: 1. Order that the defendant be restrained from bringing or proceeding with any application to the Licensing Court of NSW to transfer Hoteliers Licence No. 104189 ("the Licence") to the defendant or the defendant's nominee pursuant to (NSW) Licensing Act 1992, s 42.

McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd

At a glance

Court

Decision date

Before

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Judgment (15 paragraphs)

Parties

Cases Cited (15)

Cited By (20)