It was said that this term was implied to give business efficacy to the lease.
49 The defendant pleaded that by including in the application to the Willoughby Council for development approval the application to use part of the lower ground floor car park as a loading dock, which was not part of the premises leased to the plaintiff, the plaintiff prejudiced the application for the change of use of the premises. This was alleged to be a breach of the alleged implied terms. I do not think it necessary to imply the second term for which the plaintiff contended. The question is not one of implication of terms but whether, on the proper construction of clause 12.01, the application for consent fell within that clause, or whether the defendant is estopped from denying that it did. For the reasons I have given, I consider that the application which was made was one which fell within clause 12.01, because the application for the relocation of the loading dock was an integral part of the application which was made for approval for the use of the demised premises.
50 If, contrary to my view, it is necessary to imply a term to the effect which the defendant alleges, I consider that the defendant would be estopped from contending that the plaintiff was in breach of the lease. It consented to the plaintiff lodging the application. There is a difference between contending that the application lodged did not fall within the terms of clause 12.01 and contending that the plaintiff had breached the lease by lodging the application which it did. I have found that the defendant is not estopped from making the former contention, although I have rejected it.
51 However, by consenting to the application which was lodged and encouraging its being lodged and pursued, the defendant induced the plaintiff to assume that it was acting properly and in accordance with its contract with the defendant. It is unconscionable for the defendant now to contend that the plaintiff was in breach of the lease by making the application to the Council in the form which it did.
52 For these reasons, the plaintiff is entitled to the declaration sought in paragraph 1 of the summons, that the lease was terminated by the plaintiff by its notice of termination of 7 December 2004.
53 The plaintiff sought a consequential order that the defendant deliver up to the plaintiff the bank guarantee given by Westpac Banking Corporation to the defendant on 28 June 2004. Whether the plaintiff is presently entitled to that order depends upon whether, notwithstanding the termination of the lease on 7 December 2004, it has obligations under the lease to the defendant, for which the guarantee can stand as security.
The Cross-Claim
54 By its cross-claim, the defendant sues for rent due on 1 February 2005 and 1 March 2005 in accordance with the lease. As the lease was terminated on 7 December 2004, that claim fails. However the defendant also claims money in respect of rent and outgoings, even if it be held that the lease was validly terminated by the plaintiff.
Repayment of Incentive Rent
55 As I have said, the lease commenced on 1 August 2004. Clause 4.01 required the lessee to pay to the lessor "during the term of the Lease free from all deductions in each year the rent and other payments (if any) specified calculated and payable in the manner provided in the First Schedule hereto."
56 The First Schedule provided that the rent payable by the lessee should include a base rent and, in addition thereto, a reimbursement of outgoings, being the lessee's proportion of operating expenses relative to each year of the lease or part of the year. Clause A of the First Schedule provided that:
"The Lessee will during the Term pay to the Lessor without demand and without any deduction whatsoever rent (hereinafter called "Base Rent") at the annual amount set out in item 9 of the Reference Schedule in advance by monthly payments of one twelfth of the Base Rent on the first day of each month in each year during the Term ….."
57 Item 9 of the Reference Schedule provided as follows:
" Base Rent
One hundred and fifty thousand dollars ($150,000) per annum (plus GST) payable calendar monthly in advance at the rate of $12,500 per calendar month nett to the lessor (plus GST) with an incentive rent-free period for the first six months and the first payment commencing on 1st February 2005.
… In the event that the lease term of five (5) years is not completed for any reason whatsoever, the incentive shall be repayable at the rate of one month per year for the remaining term of the lease calculated from the time that rent payments commenced on 1st February 2005.
…."
58 Item 9 of the Reference Schedule is to be contrasted with clause 12.01 of the lease, which provides that upon and after termination of the lease, pursuant to that clause, no further rent, outgoings or other moneys, charges, damages or compensation shall be payable by the lessee.
59 The liability of the plaintiff to pay monthly instalments of rent during the term under clause A of the First Schedule quoted in paragraph 56 was qualified by item 9 of the Reference Schedule. By item 9, the plaintiff was not liable to pay monthly instalments of rent before 1 February, 2005. The obligation under item 9 to "repay" the "incentive" was to pay moneys calculated in accordance with item 9 consequent upon the lease term not being completed.
60 The lease was terminated on 7 December, 2004. The obligation under item 9 to repay the incentive could only have arisen upon or after the termination of the lease. Clause 12.01 provides that upon and after termination of the lease under that clause, the lessee is under no obligation to pay further rent, outgoings or other moneys. However, item 9 in the Reference Schedule imposes the obligation to repay the incentive if the lease term is not completed for any reason whatsoever. Each provision is unambiguous, but they are in direct conflict.
61 Probably neither party turned its mind to the eventuality which has arisen. The inconsistency between the two provisions arises because Item 9 was in the form of the lease prepared by the lessor's solicitors. The last sentence of clause 12.01 was inserted at the request of the lessee's solicitor, who did not request an amendment to item 9. By the same token, the lessor's solicitors accepted the inclusion, without seeking to have the obligation to repay incentive rent under Item 9 excluded from the last sentence of clause 12.01. The inconsistency cannot be resolved by reading one or other provision contra proferentem.
62 Courts attempt to resolve such inconsistencies, by ascertaining the parties' intentions from the language which they have used, considering the document as a whole, and endeavouring to harmonise the apparently conflicting parts so as to give effect to each of them. Item 9 deals with the case where the lease term of five years is not completed. There are numerous ways in which the lease term might not be completed. One of them is by the early termination of the lease by the lessee pursuant to clause 12.01. Others would be by termination of the lease by the lessor following the lessee's breach of a covenant, or the reduction of the term by the lessor if it becomes entitled to re-enter or determine the lease. The parties might agree upon a surrender of the lease. The lease might be frustrated. Were it not for the words "for any reason whatsoever" in item 9, it is clear that clause 12.01, which specifically deals with the consequences of termination under that clause, would prevail against the more general provision in item 9. However, one cannot ignore the words "for any reason whatsoever" in item 9. Both provisions are equally emphatic. It is not possible to give effect to both.
63 It might be argued that the two clauses can be reconciled by reading item 9 as meaning "for any reason whatsoever except if the lease is terminated pursuant to clause 12.01". But one could equally read the last sentence of clause 12.01 as if it concluded, "other than the incentive repayable in accordance with item 9 of the Reference Schedule".
64 The defendant did not submit that rent was payable during the first six months of the lease, but the lessor waived that obligation on the condition that the lease term of five years was completed, such that the liability to "repay" the "incentive" should be characterised as the lifting of a suspension of an existing obligation to pay rent. In my view it was right not to do so. The effect of item 9 was that the liability to make monthly rental payments commenced on 1 February, 2005, by which time the lease had been terminated. However, it was submitted for the defendant that the two provisions could be read harmoniously by construing the third sentence of clause 12.01 as applying to rent, outgoings or other moneys referable to the occupation of the tenant after the termination of the lease, as distinct from obligations arising on or after termination to pay rent, outgoings or other moneys referable to events occurring prior to termination. Counsel submitted that the latter were not caught by the clause. I do not accept that submission. Clause 12.01 deals with the time at which a liability to pay rent, outgoings or other moneys arises. If the obligation to pay arises on or after termination of the lease by the lessee pursuant to clause 12.01, the third sentence exempts the lessee from any such liability. It is then in conflict with item 9 of the Reference Schedule.
65 Can the inconsistency be resolved by reference to the purpose of the incentive of the rent-free period, and the purpose of the requirement to repay a part of the incentive if the full lease term is not completed? Clearly enough, the purpose of the incentive was to attract the plaintiff to entering into the lease. Where the use by the lessee of the premises was only permissible with the consent of a public authority, the lessee would derive no benefit from entering into the lease, unless the consent was obtained. The parties recognised that in that event, or if the consent was given on conditions which were not satisfactory to the lessee, the lessee could terminate the lease. In such circumstances, it is improbable that the lessee would have derived any substantial benefit from entering into the lease. It would not have been permitted to use the premises. One may ask why, in those circumstances, should an intention be imputed to the parties that nonetheless the lessee should be required to pay a substantial part of the rent which would have been payable from the commencement date of the lease, but for the incentive rent-free period? The answer is that by entering into the lease, the lessor has given up the property to the lessee and has not been able to let it to any other tenant or use it itself. It is one thing to forego rent on the property for six months in the expectation of receiving rent under a long-term lease, it is quite another to do so when the lease can be terminated for reasons which may include that the lessee is not satisfied with conditions which may be attached to a consent to the use of the premises. Thus the inconsistency is not resolved by considering the purpose of the provisions.
66 Is it possible to resolve the inconsistency according to the reasonableness of the rival constructions? As Lewison says, in "The Interpretation of Contracts" 3 ed, para 7.15, p 234, "The reasonableness of the result of any particular construction is a relevant consideration in choosing between rival constructions". This principle usually becomes relevant when the Court is asked to decide between rival constructions, where one produces a capricious, unreasonable, inconvenient or unjust result, or flouts business common sense. In the present case, neither party's position is unreasonable. The plaintiff may ask why it should pay an amount as rent when it derived no benefit from the lease, but terminated it as it was entitled to do, and on the basis that on and from the termination it would have no liability. The defendant may say: "Why should I have to forego rent for the period while the lessee was pursuing its application to the Council and making up its mind, when I only agreed to forego rent as an incentive to the lessee taking a long-term lease and on the basis that I could claw it back if the lease period was terminated early?".
67 Prima facie, and subject to any contrary agreement, a landlord expects to be paid rent for the period that the lessee is in possession. The lessee was in possession of the premises, even though it was not yet able to use them. If a lessee enters into a lease before it has the required permission to use the premises in the way for which the lease provides, it would ordinarily still be required to pay rent. This is subject to what the parties may have agreed. But here the lease contains inconsistent agreements which negative each other, and the question is, which is to prevail? They cannot be qualified so that effect is given to each. If the agreement in Item 9 prevails, effect would be given to what I consider to be the prima facie position, that the lessee should pay rent when it has possession. However, the Court cannot make a contract for the parties by choosing between two constructions, each of which is reasonable, to bring about a situation it considers the parties would generally expect.
68 There is a principle of construction, but it is one of last resort, that:
"If a clause in a contract is followed by a later clause which destroys the effect of the first clause, the later clause is to be rejected as repugnant and the earlier clause prevails." (Lewison, The Interpretation of Contracts , 3 ed, para 9.08, p 299; Forbes v Git [1922] 1 AC 256 at 259; Joyce v Barker Bros. Builders Ltd (1980) 40 P & CR 512 at 513-514).
69 In Durban v Perpetual Trustee Co. Ltd (1995) NSW Conv R 55-725, Kirby P (at 55,604) described resort to this principle of construction as an expedient to which the Court should only have recourse reluctantly and when every other avenue of resolving apparent inconsistencies has been exhausted. I am in that position. Here, the earlier clause is clause 4.01, which requires payments to be made in accordance with the First Schedule, which in turn requires payments in accordance with item 9 of the Reference Schedule. The later clause is clause 12.01, which, in the circumstances of a termination under that clause, destroys the obligation created by clause 4.01 to repay the incentive if the lease period is not completed for any reason whatsoever. In this respect, clause 12.01 is to be rejected as repugnant to the requirement of clause 4.01 that the lessee repay the incentive rent.
What Rent is Payable Under Item 9?
70 The amount to be repaid is "the incentive", calculated on a certain basis. The "incentive" is rent which would have been payable but for the rent-free period. Therefore, rent which would not in any event have become payable because the lease was terminated does not become repayable as "the incentive".
71 If this were not so, one could have the absurd position that if the lease were terminated after one week under clause 12.01, the lessee could be liable to pay four and a half months' rent as repayment of the incentive under Item 9.
72 Rent was payable monthly in advance. Therefore five months' rent became payable before the lease was terminated. However, the incentive to be repaid is to be calculated at the rate of "one month per year for the remaining term of the lease calculated from the time that rent payments commenced on 1st February, 2005.." That period is four and a half years. Therefore four and a half months' "incentive" is owing as rent under Item 9. It was payable on 7 December, 2004.
73 The rent was $12,500 per month plus GST. The defendant is entitled to judgment on its cross-claim for $61,875 plus interest pursuant to s 94 of the Supreme Court Act from 7 December 2004, to the date of this judgment.
Outgoings
74 The defendant by its cross-claim also claims outgoings for the period from 1 August 2004 to 10 March 2005. The obligation to pay outgoings is found in Part B of the First Schedule. The lessee is required to pay "the lessee's proportion of Operating Expenses relative to such year or part". This is described as "reimbursement rent". Reimbursement rent is payable within 21 days of service of notice of the amount of such reimbursement rent by the lessor on the lessee. By clause B(4), the lessor may from time to time notify the lessee in advance of the lessor's reasonable estimate of the lessee's proportion of operating expenses for any period not exceeding twelve months in advance, whereupon the lessee is required to pay to the lessor during such period the estimated proportion by equal monthly instalments, in advance, on the days fixed for payment of the base rent. Provision is made to adjust any payments made on the basis of the lessor's estimate against the actual operating expenses incurred by the lessor. The plaintiff was required to contribute 50% to the operating expenses applicable to the whole of the land and the whole of the building, and 100% in respect of the operating expenses attributable to the ground floor premises, such amounts to be calculated from the commencement date of the lease.
75 No notice was served on the lessee by the lessor for the payment of reimbursement rent in accordance with clause B(3) before the lease was determined. Nor had the lessor provided an estimate to the lessee of its proportion of operating expenses under clause B(4). The defendant submitted that such an estimate was provided in the Heads of Agreement, signed before the lease was entered into. Whilst that document contained an estimate, it was not an estimate given under clause B(4). Even if an estimate under clause B(4) had been provided, no amount was payable before the first day upon which the lessee was required to pay rent. That was 1 February 2005, and the lease was terminated before then. The lessee did not incur any obligation to pay a share of operating expenses, or Reimbursement Rent, as it was called. This conclusion is reinforced by clause 12.01.
76 For these reasons, the balance of the defendant's cross-claim should be dismissed.
77 As the plaintiff has not yet discharged its obligations to the defendant, it is not yet entitled to the return of the bank guarantee.
78 The plaintiff has made a claim for damages. No evidence has been adduced of any damage suffered by the plaintiff.
79 Accordingly, I make the following declarations and orders: