Court of Appeal (WA)|2003-02-12|Before: Mr P, Murray J, Parker J, McLure J

Old Papa's Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd & Ors [2003] WASCA 11 (12 February 2003)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : OLD PAPA'S FRANCHISE SYSTEMS PTY LTD -v- CAMISA NOMINEES PTY LTD & ORS [2003] WASCA 11

Landlord and tenant - Assignment of equitable interest in lease - Whether covenant not to assign applies to an equitable assignment - Whether beneficiary of "bare trust" in possession of leased premises - Meaning of bare trust in Sale Agreement and trust deed - Whether assignment of trustee's interest vested under s 10(1) of the Trustees Act - Whether s 10(7) of Trustees Act applied -Whether refusal to consent to assignment of trustee's interest unreasonable - Relevance of financial position of assignee - Whether liquidation of assignor after assignment was a breach of the lease - Whether alterations to leased premises a breach of the lease - Whether lessor consented to alterations - Whether without prejudice communications admissible on issue of consent - Whether assignee has standing to seek relief from forfeiture - Entitlement to relief from forfeiture - Whether conduct unconscionable under s 51AC or s 51AA of the Trade Practices Act

Trade Practices Act 1975 (Cth), s 51AA, s 51AC, s 80

First Respondent (First Defendant) : Mr S Owen-Conway QC &

Second Respondent (Second Defendant) : Mr S Owen-Conway QC &

Third Respondents (Third Defendants) : Mr S Owen-Conway QC &

First Respondent (First Defendant) : Godfrey Virtue & Co

Second Respondent (Second Defendant) : Godfrey Virtue & Co

Third Respondents (Third Defendants) : Godfrey Virtue & Co

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1 MURRAY J: I have read in draft the reasons for decision to be published by McLure J. I agree generally with them and with her Honour's conclusion that the appeal should be dismissed.

2 PARKER J: For the reasons given by McLure J I agree that this appeal should be dismissed and that the appellant should pay the respondents' costs of the appeal to be taxed.

3 The appellant (second plaintiff) appeals from the decision of the trial Judge dismissing its claims for a declaration that there had been no breach of a lease of a Fremantle landmark known as "Old Papa's" ("the Lease"), an injunction restraining the respondents from terminating the Lease and its alternative claims for relief from forfeiture and for breach of s 51AA and s 51AC of the Trade Practices Act 1975 (Cth).

4 The first plaintiff in the consolidated action the subject of the appeal was Gabstone Pty Ltd (In Liquidation) ("Gabstone"). Gabstone was placed in liquidation on 10 May 2001. It took no part in the proceedings thereafter.

5 Gabstone in its own right and as trustee for the Gabstone Trust and Gumina Investments Pty Ltd ("Gumina") in its own right and as trustee for the N A J Gumina Family Trust No 2 entered into the Lease with the respondents on 30 January 1996. The Lease is of premises at 17 South Terrace, Fremantle ("the leased premises"). It is for a term of 10 years from 1 October 1995 with two options for renewal each of five years. The business of Old Papa's Cafe has at all material times operated from the leased premises.

6 Prior to the start of 1999, a number of disputes had arisen between the respondents and the lessees, including disputes relating to the respondents refusal to consent to the assignment of the Lease to Gabstone and to a liquor licence application and associated works to the leased premises. In January 1999 Gabstone commenced proceedings in the Supreme Court concerning these and other matters ("original action"). The original action was settled.

7 By an assignment of lease dated 29 July 1999 ("1999 assignment") the Lease was assigned from Gabstone and Gumina to Gabstone "in its own right and as trustee for the Gabstone Trust".

8 In or around October - November 1999, Gabstone carried out improvements to the leased premises which included the construction of a new toilet and associated structures to facilitate access for persons with disabilities and other works ("the Improvements"). The Improvements were necessary in order to obtain a liquor license which was granted to Gabstone in December 1999. The respondents served a notice of default dated 10 November 1999 under the Lease in relation to the Improvements ("default notice"). The respondents required the defaults to be remedied by removing the Improvements, failing which they would terminate the Lease. Gabstone commenced proceedings ("second action") claiming it was not in breach of the Lease because the respondents had consented to the Improvements as part of the settlement of the original action. This Court granted an interlocutory injunction restraining the respondents from terminating the Lease on the basis of the matters the subject of the default notice. The interlocutory injunction had not been dissolved or varied prior to trial.

9 The trial Judge concluded that the respondents had not consented to the Improvements and that Gabstone was in breach of the Lease.

10 By a sale agreement dated 4 May 2000 between Gabstone and Old Papa's Holdings Limited ("OPHL"), Gabstone agreed to sell the assets and goodwill of the business known as Old Papa's ("the Business") to OPHL ("the Sale Agreement"). Further, Gabstone agreed to hold the Business "on bare trust" for OPHL on the terms and conditions of a trust deed of the same date between Gabstone and OPHL ("the Trust Deed"). The trial Judge held that the effect of the Sale Agreement and Trust Deed was that Gabstone had assigned an interest in the Lease or the leased premises and parted with possession of the leased premises in breach of cl 8.01 of the Lease. That clause prohibits assignment or parting with possession without the respondents' consent.

11 On 22 December 2000 Gabstone gave notice to the respondents under s 10(2) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) requesting the respondents' consent to the assignment of the Lease to the appellant, Old Papa's Franchise Systems Pty Ltd.

12 Notwithstanding the respondents' refusal to consent, by an undated Deed of Assignment between Gabstone and the appellant, Gabstone assigned all its "legal and beneficial" estate and interest in the Lease and leased premises to the appellant ("undated Deed of Assignment"). A Deed dated 24 April 2001 between Gabstone, OPHL and the appellant ("April 2001 Deed") clarified that the assignment was subject to the rights of OPHL under the Trust Deed and that the effect of the undated Deed of Assignment was to change the trustee of the bare trust from Gabstone to the appellant ("the 2001 assignment"). The appellant commenced further Supreme Court proceedings ("third action") and obtained an interlocutory injunction restraining the respondents from terminating the Lease on the basis of the 2001 assignment. The second and third actions were consolidated. The trial Judge held that the 2001 assignment of the Lease to the appellant was in breach of cl 8.01 of the Lease.

13 As stated earlier, Gabstone was placed in liquidation on 10 May 2001. The trial Judge concluded that, notwithstanding the assignment of the Lease to the appellant in April 2001, Gabstone's liquidation in May 2001 resulted in a breach of the Lease justifying its forfeiture. Further, the trial Judge dismissed the appellant's claim for relief from forfeiture on the ground that the remedy was not available to the appellant but only to Gabstone "because it is only [Gabstone] that had the legal rights pursuant to the lease".

14 In the alternative to the claim for relief from forfeiture, the appellant claimed the respondents had acted unconscionably in breach of s 51AA and s 51AC of the Trade Practices Act ("TPA") and sought relief under s 80 of that Act restraining the respondent from terminating the Lease. The trial Judge held that the unconscionable conduct claims had not been made out.

15 The appellant's grounds of appeal address, in the following order, the May 2000 transactions, the 2001 assignment, the Improvements claim, the effect of Gabstone's liquidation, relief from forfeiture and the TPA claim. I will deal with the issues in the order in which they are raised in the grounds of appeal.

16 The grounds of appeal are very lengthy. They are to the effect that the trial Judge erred in fact and law in holding that, by entering into and performing the Sale Agreement, Gabstone breached clause 8.01 of the Lease. In particular it is claimed that the trial Judge erred in holding that:-

(1) a declaration of bare trust pursuant to a contract of sale constitutes:-

(a) an assignment to which covenants in leases against assignment are generally applicable, and in not following and applying MacDonald v Robins [1954] HCA 5; (1954) 90 CLR 515 in that regard; and

(b) an assignment to which clause 8.01 of the Lease applied;

(2) the making or performance of the Sale Agreement and the Trust Deed by Gabstone amounted to a parting with possession of the leased premises by Gabstone in favour of the purchaser/beneficiary (OPHL).

17 Thus, the appellant's claim is that the Sale Agreement and the Trust Deed effected an equitable assignment to which cl 8.01 of the Lease does not apply and that Gabstone did not at any material time before the 2001 assignment part with possession or occupation of the leased premises.

"The Lessee shall not without the prior written consent of the Lessor assign sub-let or part with possession or occupation (including the granting of a licence) of the Leased Premises or any part thereof or this Lease or any estate or interest therein but in the event of the Lessee wishing to assign or sub-let the whole of the Leased Premises the Lessor shall not unreasonably withhold its consent to such assignment or sub-letting if:

(a) ...

(b) The proposed assignee or sub-lessee is a respectable and financially sound person the onus of proving which fact to the satisfaction of the Lessor shall be upon the Lessee;

(c) The Lessee has procured the execution by the proposed assignee or sub-lessee and such guarantors as are referred to in Clause 8.01(d) of an assignment of this Lease ... to which the Lessor is a party and which is in a form prepared or approved of by the Lessor and its solicitors and has delivered such assignment or sub-lease to the Lessor;

(d) Where the proposed assignee ... is a corporation the performance of the covenants by the assignee ... with the Lessor contained in the assignment ... shall be guaranteed by such of the directors and principal shareholders of such corporation and by such third parties as the Lessor may require."

19 The terms and effect of the Sale Agreement and Trust Deed are not straightforward. Matters that arise for consideration include the capacity in which Gabstone purported to contract, whether the sale included the Lease and the entity who was to carry on the Business after the sale.

20 Gabstone is a party to the Sale Agreement. The recitals to the Sale Agreement record that Gabstone is the owner of the Business which it agreed to sell to OPHL. However, it is not recorded that Gabstone is a party or was the owner of the Business in its capacity as trustee of the Gabstone Trust.

21 The Business is defined to mean the business of [Gabstone] previously carried out from the [leased premises] and known as "Old Papa's". Clause 2.1 of the Sale Agreement materially provides:

"[Gabstone] sells to [OPHL], which purchases, the Business, including the Sale Assets, with effect from the Effective Date free from all encumbrances in accordance with the terms, covenants and conditions contained herein."

22 The effective date means the latest of seven days after the date on which the condition in cl 6.1 has been fulfilled. Clause 6.1 provides that the agreement is conditional on the Director of Liquor Licensing giving his approval to the agreement. By cl 4.1 the parties acknowledge and agree that on and from the effective date Gabstone shall hold the Business on bare trust for OPHL on the terms and conditions of the Trust Deed.

23 The term "Sale Assets" is defined to mean the "Fixed Assets, Stock and Goodwill of the Business". Fixed Assets is defined to mean all the plant and equipment and vehicles of the Business set out in the Schedule. The Schedule is a depreciation schedule the heading to which is "The Gabstone Trust Trading as OLD PAPAS". That is the only reference in the documents to the Gabstone Trust.

24 The Lease is not expressly referred to in the definition of "Business" or "Sale Assets". However, there is an express reference to the Lease in cl 5.1 which is in the following terms:

5.1.1 [Gabstone] shall hold the right title and interest in the Business, including the Sale Assets free from all encumbrances as bare trustee for [OPHL] on the terms covenants and conditions contained in the Trust Deed;

5.1.2 The risk in and benefit attaching to the Business, including the Sale Assets, shall pass to [OPHL];

5.1.3 Without limiting clause 5.1.1 [Gabstone] shall hold:

5.1.3.1 the Lease;

5.1.3.2 the Business Name;

5.1.3.3 the Eating Licences; and

5.1.3.4 the Liquor Licence,

as bare trustee for [OPHL] on the terms covenants and conditions contained in the Trust Deed."

25 Gabstone is described in the Lease and the 1999 assignment thereof as the lessee "in its own right and as trustee of the Gabstone Trust". The terminology suggests that Gabstone itself had some beneficial interest as lessee under the Lease. The Gabstone Trust Deed is not in evidence. There is no evidence concerning the nature of the trust (whether it be discretionary or otherwise), the powers of the trustee or the identity of the beneficiaries.

26 The Trust Deed also notes that Gabstone is the proprietor of the Business. The Trust is in the form of a declaration of trust. Clause 2 provides:

"[Gabstone] hereby declares that from and including the Effective Date it will at all time hold its entire estate right title and interest in the Business (including but not limited to [Gabstone's] right title and interest in the Lease, the Liquor Licence, the Licences, and the Business Name) as bare Trustee for and on behalf of [OPHL]."

27 This clause suggests the Business includes the Lease. Pursuant to cl 3.2 of the Trust Deed Gabstone was required upon receipt of a written direction from OPHL to transfer to it the entire estate, right, title and interest held by Gabstone in the Business. However, any transfer was to be subject to and conditional upon Gabstone "obtaining the consent of the relevant lessor (and of any other person whose consent is required) to the assignment of the lease" to OPHL.

28 The terms of the documents to which I have referred suggest that what was intended was the sale by Gabstone of the full beneficial interest in the Business and the Lease to OPHL. It would appear that the author of the Sale Agreement and Trust Deed did not know that Gabstone held the Business in its capacity as trustee of the Gabstone Trust.

29 It was not an issue at the trial or in the appeal as to whether Gabstone had the power to sell the beneficial interest in the Business. There is no doubt that beneficiaries of a trust may in certain circumstances and in a number of different ways transfer the beneficial interest in trust assets to a third party: Comptroller of Stamps (Vic) v Howard Smith [1936] HCA 12; (1936) 54 CLR 614 at 621-623. There is no suggestion in this case that the beneficiaries transferred or assigned their beneficial interest in the Business to OPHL. If that had occurred, there would be no breach of cl 8.01 of the Lease because the beneficiaries (whoever they are) are not parties to the Lease. Further, there is no evidence that the beneficiaries had directed Gabstone to henceforth hold the trust property upon trust for OHPL and that Gabstone was acting in accordance with those instructions (as to which, see Comptroller of Stamps (supra) at 622-623).

30 However, it was accepted by the parties that the Sale Agreement and Trust Deed effected the transfer by Gabstone of the full beneficial interest in the Business and the Lease from the Gabstone Trust (and Gabstone itself to the extent it had any beneficial interest in the Lease) to OPHL. That being the attitude of the parties, the analysis will proceed on that basis.

31 It follows that at all material times the property the subject of the transfer was equitable property. Equitable property can only be the subject of an equitable assignment. The trial Judge concluded that cl 8.01 prohibited the assignment of an equitable interest (he did not identify in what) without the consent of the respondents. He distinguished the facts of this case from those in MacDonald v Robins [1954] HCA 5; (1954) 90 CLR 515 in which there had been a transfer of an interest in a lease from one co-tenant to another. The issue before the High Court in MacDonald v Robins (supra) was whether an option contained in a lease to purchase farm land had been validly exercised. It was a condition precedent to the exercise of the option that the lessee observe the terms and conditions of the lease. The lessor argued that there had been a breach of a clause of the lease which prohibited assignment without the lessor's consent. The lessees were two brothers and they farmed the leased land under a partnership agreement. The partnership was subsequently dissolved and the brothers entered into a dissolution agreement. The dissolution agreement provided that one brother should sell and the other should purchase as from the date of cessation of the partnership "all the one-half share of the former in the business and in the assets thereof (including the benefit of the lease and the option of purchase therein contained)". The Court held that the clause amounted at most to an equitable assignment of the brother's interest in the term of the lease.

32 The lease contained a covenant by the lessees "Not to transfer assign sub-let or part with the possession of the said land without the consent in writing of the lessor first had and obtained ... ". The Court held that the covenant did not apply to an equitable assignment.

"An assignment by one co-tenant of his share in the demised premises operating at law, as distinguished from equity, to vest his share in his co-tenant would constitute a breach of such a covenant as the present against transfer or assignment of the land. At all events it has been so held: Varley v. Coppard; Horsey Estates Ltd. v. Steiger ...; Langton v. Henson. In the last case, as in Varley v. Coppard the co-tenants themselves took by assignment and a reason given for the result was that the one co-tenant by assigning to the other destroyed the privity of estate between himself and his landlord. It may be remarked that in the case of lessees, parties to the lease, the liability on the covenants is not affected by the assignment. But probably this is an insufficient ground for distinguishing the decisions. An equitable assignment, however, is an entirely different matter. The privity of estate and the liability on the covenants of the lease all remain. Even when the entirety as distinguished from an undivided share in the term is equitably assigned there is no breach of such a covenant against assignment: Gentle v. Faulkiner ...; Martin v. Coultas."

34 Dixon CJ's reference to Gentle v Faulkiner [1900] 2 QB 267 was to pages 274 and 277 of that report. In Gentle v Faulkiner (supra) the lessee executed an assignment of all his real and personal property, except a lease, to a trustee for the benefit of his creditors. In relation to the lease, he declared that he would stand possessed of all his leasehold property upon trust for the trustee. The trustee entered into possession of the leased premises, but no legal assignment of them was executed. The lessor served on the trustee a notice alleging a breach of a covenant against assignment. The covenant materially provided that the lessee would "not ... assign or underlet the said demised premises or any part thereof without the consent in writing of the lessor ... ".

35 The covenant did not prohibit parting with possession of the demised premises.

"What, then, is the meaning of a covenant not to assign the demised premises? In my judgment the meaning is not to execute a legal assignment. An equitable assignment is not sufficient to operate as a breach of the covenant. There must be an assignment at law."

" ... it seems to me to be clear that a covenant in a lease against assigning the demised premises, in the absence of any context shewing that the covenant is to have an extended meaning, covers only a legal assignment. The covenant against assignment is, therefore, not broken by anything short of a legal assignment. In my opinion such a covenant is not broken by the lessee executing a declaration of trust of the demised premises."

38 However, a declaration of trust by a legal owner with full beneficial ownership is not a transfer or assignment of a subsisting equitable interest because a legal owner in that situation does not own two estates, one legal and the other equitable: DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1980] 1 NSWLR 510. Thus, if a legal owner with full beneficial ownership declares a trust he or she creates a new equitable interest in the relevant property. No assignment is involved. However, the statement of principle in Gentle v Faulkiner (supra) has not been confined to a declaration of trust by a legal owner but has been held to apply generally to an equitable assignment of legal or equitable property.

39 The appellant says the statement of the law in MacDonald v Robins (supra) applies irrespective of the terms of the covenant in the lease under consideration. There is some support for the appellant's position. In "Hill and Redman's Law of Landlord and Tenant", Butterworths, London, 2002, Binder 1, par 2483 it is stated in effect that a covenant "not to assign" is only broken by a legal assignment for the entire residue of the term.

40 However, that position is inconsistent with the reasons of Romer LJ in Gentle v Faulkiner (supra) where he refers, (at 276) to "context" by which I understand him to mean that the terms of a covenant may indicate a contrary intention. That is consistent with principle, as acknowledged by the Court of Appeal in Brown & Root Technology Ltd v Sun Alliance & London Assurance Co Ltd [2000] 2 WLR 566 at 573.

41 It must be the case that whether or not an equitable assignment is prohibited is a question of construction of the relevant covenant in the lease. I do not regard anything said by the High Court in MacDonald v Robins (supra) as inconsistent with that view. However, the covenant has to be construed in the light of the matters adverted to by Dixon CJ in that case. In particular, a lease gives rise to contractual and property rights. Both the contractual rights (but not obligations) and property rights can be assigned at law or in equity. The burden of covenants in the lease that touch and concern the land will run with the assignment of the leasehold estate. A legal or equitable assignment of a lease does not alter the contractual relationship between the lessor and the lessee assignor. Privity of contract remains. However, a legal assignment of a leasehold estate creates privity of estate between the lessor and the assignee and brings to an end the privity of estate between the lessor and the lessee: Picton-Warlow v Allendale Holdings Pty Ltd [1988] WAR 107 at 110. An equitable assignment of the leasehold estate has no such effect. An equitable assignment of the leasehold estate does not create privity of estate between the lessor and the assignee or bring to an end the privity of estate between the lessor and lessee. Privity of estate is a legal relationship not equitable: Manchester Brewery Co v Coombs [1901] 2 Ch 608 at 614; Purchase v Lichfield Brewery Company (1915) 1 KB 184.

42 Further, as a covenant against assignment fetters a lessee's right of property which is an incident of the leasehold estate, it is strictly construed: Burton v Camden London Borough Council [2000] UKHL 8; [2000] 2 AC 399 at 409; Killick v Second Covent Garden Property Co Ltd [1973] 1 WLR 658.

43 Thus, the question at issue is whether, on its proper construction, cl 8.01 of the Lease applies to an equitable assignment of legal or equitable property. The trial Judge answered that question in the affirmative by reference to the words "or any estate or interest therein" in cl 8.01. Certainly those words are capable of including an equitable estate or interest in the relevant property. In my view the relevant property is the Lease and the leased premises for the following reasons. The reference in cl 8.01 to the "Lease" cannot be intended to refer to the physical document. In ordinary circumstances it would be a reference to the contractual and property rights it embodies. That, in my view is what is meant by the word Lease in cl 8.01. The "leased premises" is a reference to the physical property to link with the concepts of "sub-let", "possession" and "occupation".

44 Not all the conduct conditionally prohibited by cl 8.01 can sensibly refer to both the leased premises and the Lease. The concepts "sub-let", "possession" and "occupation" have little application to the Lease. Further the word "assign" in the context of a lease is usually a reference to an assignment of the Lease, in particular the lessee's proprietary interest in the leased premises (ie the leasehold estate). It is not an assignment (transfer) of the leased premises as such. However, it seems to be the intention that the word "assign" in cl 8.01, also refers to the leased premises because it provides that the lessor cannot unreasonably withhold its consent in the event the lessee wishes "to assign ... the whole of the leased premises". Thus, it must have been intended that the words "or any estate or interest thereon" apply to the leased premises as well as the Lease because an assignment of a leasehold estate is an assignment of an estate or interest in the leased premises.

45 That leaves the question whether cl 8.01 is intended to apply to the assignment of an equitable estate or interest in the leased premises. As stated earlier, an equitable estate or interest can only be assigned in equity. Prima facie, the word "assign" refers only to a legal assignment. That is clear from MacDonald v Robins (supra). In which case, the phrase "or any estate or interest therein" would be confined to a legal estate or interest in the leased premises or the Lease, such as, for example, the leasehold interest or a legal interest by way of security.

46 In my view, there is nothing in the language of cl 8.01 which mandates a conclusion that it conditionally prohibits the equitable assignment of a legal or equitable interest in the Lease. In the circumstances, I conclude that cl 8.01 on its proper construction applies only to a legal assignment of an estate or interest in the leased premises or the Lease.

47 The trial Judge also concluded that as a consequence of the Sale Agreement and the Trust Deed, OPHL went into possession of the leased premises and thus was in breach of cl 8.01 of the Lease. In particular, he said the effect of the Sale Agreement was to transfer the Business from Gabstone to OPHL with Gabstone remaining as bare trustee of the Lease and that the "chain of documentation" made it clear that on completion of the agreements, OPHL owned and operated the Business. He further concluded that as a result of the sale of the Business to OPHL, Gabstone parted with possession of the Business and the leased premises.

48 The trial Judge said there were many similarities with the facts in Richardson v Somas [1967] WAR 109. In that case, the lessee sold a business he was conducting from shop premises and the sale agreement provided that the lease would be assigned to the purchasers if the lessor consented to the assignment. It emerges from the judgment of D'Arcy J that the covenant against assignment in that case required the assignment to be operative at law as distinguished from equity and thus did not prohibit an agreement to assign. However, the purchasers went into possession of the premises before the lessor had been given a proper opportunity to consider whether to consent.

49 The evidence was that when the lessor visited the leased premises, there was no sign of the lessees who had in fact departed. The purchasers were in possession and had installed a new refrigeration unit. Wolff CJ said (at 111):

"By law the lessee parts with possession of the leased premises when he allows someone else to enter into free and uncontrolled possession to his exclusion:"

50 Thus, whether a person has parted with possession (or occupation) of the leased premises will depend upon all the relevant facts and circumstances: Lam Kee Ying v Lam Shes Tong [1975] AC 247 at 256.

51 However, the respondents in their pleading and at trial relied solely on the terms of the Sale Agreement and the Trust Deed and on formal admissions to the effect that:

(a) Each of the parties to the Sale Agreement wholly performed the Sale Agreement in accordance with the terms of the Sale Agreement and the bare trust in all respects on or before 28 July 2000.

(b) The Sale Agreement became unconditional in or about July 2000 and on or before 28 July 2000.

(c) Each of the parties to the bare trust wholly performed on or before 28 July 2000 the obligations imposed by the bare trust to enable completion of the Sale Agreement.

(d) Each of the parties to the bare trust has, since 28 July 2000, performed all obligations imposed on it by the bare trust.

52 There are a number of indicators in the Sale Agreement and Trust Deed that Gabstone would continue to carry on the Business, albeit as trustee for OPHL. It was accepted by the parties that on a proper construction of the Sale Agreement and the Trust Deed, OPHL was to be the beneficial owner of the Business. Gabstone was the legal owner. Under the Sale Agreement, Gabstone was to terminate the services of all the employees of the Business and offer to re-employ them in its new capacity as trustee for OPHL. Gabstone was to hold the books of account of the Business as bare trustee for OPHL. Under the Trust Deed OPHL agreed to pay or reimburse Gabstone for payments required to be made by it "at any time associated with the establishment ... development or holding of the Business ... ".

"All income derived from the Business shall be paid to and received by [Gabstone] who shall pay all expenses associated with the Business and the operation of the Trust and keep and maintain all books of account relating to the operation of the Business upon and subject to the term of this trust deed."

54 There are also indicators to the contrary. The Sale Agreement and Trust Deed consistently describe Gabstone as a bare trustee and as holding the trust property on a bare trust. The term "bare trustee" is often used in statutes where its meaning depends on its context: Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370 at 398; Thorpe v Bristile Ltd (1996) 16 WAR 500 at 505-506.

55 In the context of the companies legislation considered in Coruma Holdings (supra), the term was held to mean a trustee who was no more than a nominee or cypher in a common sense commercial view.

56 In Thorpe v Bristile Ltd (supra) Malcolm CJ (at 505), with whom Pidgeon and Owen JJ agreed (at 507), referred with approval to the statement in Jacob's Law of Trusts in Australia to the effect that:

"A 'bare trust' is simply a trust in which the trustee has no active duties to perform. In its classic form it occurs when a principal vests property in his agent as his nominee, but obviously can occur in other circumstances. There are only two circumstances in which it is relevant to consider whether or not a trust is a 'bare trust'. The first concerns the question of possession: a cestui que trust is entitled to the possession of the trust assets if a trust be a 'bare trust', but not otherwise. The second concerns the effect of the creation of a sub-trust. If A holds property on trust for B, and B declares himself a trustee of his interest for C, if the intermediate trust is a 'bare trust', but not otherwise, it is arguable (but not certain) that the effect of B's declaration of trust is to bring A and C into a direct relationship, so that A becomes a trustee for C."

57 Although the beneficiary of a bare trust is "entitled to possession" of the trust property, it does not necessarily follow that it is in actual possession. Further, as Meagher JA observed in Corumo Holdings (at 398), in reality almost no situation can be postulated when a trustee cannot in some circumstances have active duties to perform. However, by no stretch of the imagination can it be said that a trustee carrying on a business would or could be a bare trustee.

58 Neither the Sale Agreement or the Trust Deed expressly requires or empowers Gabstone to carry on the business. However, such power may be implied from the trust instrument and it has been suggested that there is statutory authority to do so: Ford H A J and Lee W A, "Principles of the Law of Trusts", 3rd ed, Law Book Company, Australia, 1996, par 12,500.

59 Having regard to the documents as a whole, I have difficulty in reconciling Gabstone's express obligations under the Sale Agreement, in particular its role as an employer of the staff of the Business, and its obligation to receive the income of the Business and pay its expenses with the label of "bare trustee". In my opinion, as a result of the inconsistent and contradictory indicators in the Sale Agreement and the Trust Deed, it is not possible based on those documents and the agreed facts to make a finding on the balance of probabilities that Gabstone parted with possession or occupation of the leased premises. Thus, the trial Judge erred in finding that, based on the construction of the Sale Agreement and the Trust Deed, Gabstone parted with possession of the leased premises. For these reasons I would uphold the appellant's appeal in relation to the May 2000 transactions.

60 The appellant contends that the trial Judge erred in fact and in law in holding that the undated Deed of Assignment and the April 2001 Deed did not effect a vesting of the legal interest held by Gabstone as trustee for OPHL to which s 10(7) of the Trustees Act 1962 (WA) applied in that:

(a) it was not pleaded that the May 2000 transactions and/or the 2001 assignment were ineffective or shams or illegal or unenforceable;

(b) there was no evidence that the 2001 assignment was not a genuine transaction;

61 The appellant's case in substance is that the trial Judge erred by not giving effect to s 10(7) of the Trustees Act 1962 (WA). The grounds of appeal imply that the reason for the failure to apply s 10(7) was because the trial Judge found that the May 2000 transactions and/or the 2001 assignment were shams or that he had conflated the effect of the two separate transactions. There is no basis to infer that the trial Judge found that the relevant transactions were shams or that he conflated the effect of the two.

62 The trial Judge concluded that as a result of the 2001 assignment Gabstone had "totally divested" itself of any interest in the leased premises. He then states (at par 92-93):

"Section 10(7) of the Trustees Act 1962 upon which counsel for the plaintiff relies has no application to these facts. ...

Gabstone leased the premises from the defendants in its own right and as trustee for the Gabstone Trust. There was no vesting of this trust in a new trustee within the meaning of that section."

63 I infer from the trial Judge's reasons that he held that s 10(7) did not apply because just prior to the 2001 assignment Gabstone had an interest in the lease in its own right. That conclusion is inconsistent with the accepted effect of the Sale Agreement and the Trust Deed which was that Gabstone's interest in the Business, including the Lease, was solely as trustee for OPHL. Accordingly, it is necessary to consider whether s 10(7) of the Trustees Act applies.

64 Section 10 of the Trustees Act materially provides:

"(1) Where a new trustee is appointed, the execution of the instrument of appointment vests, subject to the provisions of this section, the trust property for which the new trustee is appointed in the persons who become and are the trustees, as joint tenants for the purposes of the trust, without any conveyance.

(2) ...

(3) Subsections (1) and (2) do not apply -

(a) ...

(b) to any property, including property subject to the operation of the Transfer of Land Act 1893, which is transferable ... in manner directed by or under an Act of Parliament.

(4) ...

(5) ...

(6) ...

(7) For the purposes of a covenant against assignments, or against assignment without licence or consent, contained in any lease, underlease or agreement for a lease or underlease, a vesting under this section shall be deemed not to be an assignment."

65 The undated Deed of Assignment provides that Gabstone "assigns to [the appellant] absolutely" with effect from 20 February 2001 all the legal and beneficial estate and interest held by Gabstone in the leased premises and under the Lease for the unexpired residue of the term of the Lease. The subsequent April 2001 Deed asserted that OPHS held the beneficial interest in the leased premises and the Lease and that the effect of the undated Deed of Assignment was to change the trustee of the trust.

66 Under s 10(1) of the Trustees Act, the execution of the instrument of appointment of a new trustee effects an automatic assignment or transition of property rights to the new trustee, subject to s 10(3). In this case, the parties intended the assignment to take effect by way of deed and not automatically by operation of law. For that reason alone, s 10(1) and thus s 10(7) have no application.

67 There is a further ground for this conclusion. The creation and assignment (transfer) of the legal interest in the leasehold estate under the Lease can only be effected by registration of the transfer under the Transfer of Land Act 1893 (WA) ("TLA"): ss 68 and 82 of the TLA. There is no evidence on whether the Lease, the 1999 assignment from Gabstone and Gumina to Gabstone or the assignment from Gabstone to the appellant were registered. However, the parties conducted the trial and the appeal as if there had been a transfer of the legal leasehold estate to the appellant. I will proceed on that basis. It follows that s 10(1) of the Trustees Act would be excluded by s 10(3) and accordingly s 10(7) would not apply.

68 As to the relationship between Torrens title land and of s 10 of the Trustees Act, the authors of "Principles of the Law of Trusts" (supra) note (at par 8440):

"The provisions under discussion are untidy in appearance because they all share the wrong point of departure, namely adherence to a provision deriving from the context of 19th century private conveyancing practice in England. In that practice the title to the legal estate was transferred by a simple deed of conveyance and the statute provided that an appointment of new trustees have the effect of a conveyance. In Australia the provision is inadequate to deal with the transfer of forms of property requiring a tripartite mechanism of transfer and registration or notification, and so the general vesting provision becomes hedged about by exceptions which merely serve to emphasise its irrelevance."

69 For these reasons there has been a prima facie breach of cl 8.01 of the Lease as a result of the 2001 assignment. However, a further ground of appeal, albeit in the context of the appellant's case on relief against forfeiture, was that there was no breach of cl 8.01 resulting from the 2001 assignment because the respondents had unreasonably withheld their consent to the assignment. If a lessor unreasonably withholds consent, the lessee is not in breach of the lease by assigning without consent: Yared v Spier [1979] 2 NSWLR 291; Haberecht v Chapman [1993] ANZ ConvR 277 at 279. It is convenient to deal with this ground at this stage.

70 The trial Judge dealt with this matter as follows (at par 94):

"Counsel for the plaintiffs maintains that the plaintiffs have requested the defendants to consent to an assignment of the lease from the first plaintiff to the second plaintiff as trustee for OPHL ... It is contended by counsel for the plaintiffs that the effect of the defendants consenting to such an assignment would be that the second plaintiff would replace Gabstone as the bare trustee of the lease, the beneficiary being OPHL. As a matter of law, I accept that proposition as being correct. It would, nonetheless, remain the case that, if assigned, the defendants would have had as tenant the [appellant], a company about which the defendants knew very little apart from the limited material provided. It is contended by counsel for the plaintiffs that the [appellant] would be a lessee in the capacity of a trustee only, the beneficial interest remaining with OPHL. Nonetheless, the fact remains that OPHL, as a company with an appointed administrator, would operate the business."

71 Thus, it appears the trial Judge held that it was reasonable to withhold consent, in part, because OPHL was operating the Business from the leased premises. I have already concluded that the trial Judge was in error in making that finding. However, the financial position of the trust is relevant to the financial position of a trustee carrying on the business of the trust because the trustee is entitled to an indemnity from the trust assets in relation to trust related liabilities.

72 The factual background to this matter is as follows. By a notice dated 22 December 2000 ("assignment notice") Gabstone requested the respondents to consent to the assignment of the Lease to the appellant. The assignment notice was issued under s 10(2) of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) ("Retail Shops Act"). It was accepted by all parties that the Lease is a retail shop lease as defined in that legislation and is thus regulated by the Retail Shops Act. Under s 10, a retail shop lease is to be taken to grant to the tenant a right to assign the lease, subject only to a right of the landlord to withhold consent to an assignment on reasonable grounds.

73 The recitals to the assignment notice refer to the Lease and to the assignment in July 1999 from Gabstone and Gumina to Gabstone but make no mention of OPHL's interest under the Sale Agreement and Trust Deed. In the assignment notice, Gabstone requested the respondents to consent to an assignment of the Lease to the appellant and advised that it was proposed that the new guarantors of the Lease would be OPHL and Mr Monteath. Enclosed with the assignment notice were balance sheets as at 31 October 2000 for each of the appellant and OPHL. Although these documents might be thought to support a finding that OPHL was carrying on the Business and in possession of the leased premises, they formed no part of the respondents' pleaded case on that subject. The appellant's balance sheet as at 31 October 2000 disclosed a negative equity of $171,921. The OPHL balance sheet as at 31 October 2000 showed positive equity of $1,249,593. However, according to the appellant, the balance sheet records the value of the goodwill of the Business at $1,142,400 which value would be very significantly affected by the early termination of the Lease.

74 The respondents' lawyers responded to the assignment notice advising that the assignment of the lease should await the outcome of the Supreme Court proceedings and their clients withheld their consent to the assignment on the grounds that:

Old Papa's Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd & Ors [2003] WASCA 11

At a glance

Court

Decision date

Before

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Judgment (334 paragraphs)

Old Papa's Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd & Ors [2003] WASCA 11 (12 February 2003)

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Legislation Cited (7)

Cases Cited (50)