[1974] HCA 49
Woodside Energy Ltd v Electricity Generation Corporation (2014) 251 CLR 640[2014] HCA 7
Category: Principal judgment
Parties: Parramatta Commercial Holdings Pty Ltd ACN 105 992 658 (Plaintiff)
Judgment (8 paragraphs)
[1]
Summary
These proceedings concern whether a tenant's right of first refusal to purchase the demised premises has not been exercised with the result that the landlord is at liberty to sell the premises to a third party.
The plaintiff, Parramatta Commercial Holdings Pty Ltd ("PCH"), owns a building in Victoria Road, Parramatta (the "Premises"). The first defendant, Vision Medical and Health Pty Ltd ("Vision"), leased the ground floor of that building from PCH pursuant to a lease which commenced on 30 August 2016 for a five-year term, with an option for a further five years (the "Lease"). If PCH wishes to sell the Premises, the Lease gives Vision a right of first refusal on certain terms, including that PCH has a right to sell the Premises within 120 days if Vision does not exercise Vision's right of the first refusal to purchase the Premises.
On 26 or 27 October 2017, PCH granted the third defendant, Max Distribution Pty Ltd ("Max Distribution"), a twelve-month call option to purchase the premises ("the Call Option"). Max Distribution has paid an option fee which is currently being held by the second defendant, Michael Lee ("Mr Lee") as stakeholder. Mr Lee is Max Distribution's solicitor.
The Call Option is expressed to be "subject to and conditional upon the exercise of" the right of first refusal by Vision. The option fee is to be released to PCH "in the event that the Right of First Refusal is not exercised".
PCH says it has complied with the terms of the right of first refusal and that Vision did not exercise it. PCH therefore seeks an order that Mr Lee release the option fee to PCH. Vision submits that an offer in terms of the Call Option (to which, for the sake of simplicity, I will also refer as the Call Option) did not engage its right of first refusal, so that no question of Vision not having exercised the right can arise.
By its summons filed on 21 December 2017, PCH seeks orders which include:
"2. An Order against the First Respondent (VMH) that the Right of First Refusal contained in Clause 31 of the Lease between the parties which commenced 30 August 2016 in respect of Premises known as Ground Floor 1 Victoria Road Parramatta, being Folio Identifier 2/577865 (Property), has lapsed.
3. A Declaration (against the Third Respondent Max Distribution) that the Condition contained in Clause 2.2 of the Call Option Deed between the Applicant and the Third respondent dated 20 October 2017 has been satisfied and the call Option Deed is unconditional.
4. An Order that the Second Respondent (Michael Lee) pay to the Applicant, the Call Option Fee under the Call Option Deed dated 27 October 2017 forthwith by payment to the Trust Account of Duffy Law Group by Bank Cheque being Trust Account BSB: 032 710 Account Number: 174 458 held at Westpac Narellan."
The relief sought in paragraph 3 of the summons was ultimately not pressed.
Although the dispute ultimately turns on the proper construction of the Call Option (being an agreement between PCH and Max Distribution), the protagonists before the Court were PCH and Vision. Mr Lee and Max Distribution in effect interpleaded.
PCH submitted that it had afforded Vision the opportunity to purchase the Premises in accordance with the right of first refusal by offering Vision an option on precisely the same terms as the Call Option, and that Vision did not exercise the right of first refusal within the specified thirty days. Vision submitted that, on the proper construction of the right of first refusal, an offer in the terms of the Call Option was not the offer of terms and conditions of the kind referred to in the right of first refusal.
The Court accepts Vision's argument because the Call Option was not limited so as to require the completion of any sale pursuant to the exercise of the Call Option within the 120 days referred to in the right of first refusal.
It follows that on the proper construction of the Call Option, the occasion for the exercise or non-exercise of the right of first refusal has not arisen so that the obligation on Mr Lee to release the option fee to PCH has not arisen.
The summons will be dismissed with costs. It is important to note that the Court's conclusion is confined to the sole issue that was presented for argument. I express no view as to any other issue concerning any other rights of Vision and Max Distribution under the Call Option as a consequence of this judgment or otherwise.
Mr H Altan of Counsel appeared with Mr P Tiliakos of Counsel for PCH. Mr D K L Raphael of Counsel appeared for Vision. Mr Lee and Max Distribution entered submitting appearances.
[2]
The facts
Clause 31 of the Lease sets out the right of first refusal:
"31. RIGHT OF FIRST REFUSAL
31.1 During the term of this Lease, or any extension or holding over of it, before the Lessor may sell the freehold Property of which the premises form part, to a third party, the Lessor shall first offer the Property to the Lessee or its nominee on the same terms and conditions as are offered by the third party. The Lessee or its nominee shall have 30 days during which to accept the said offer. If the Lessee or its nominee does not accept the said offer within the 30 day period then the Lessor shall be free to accept the third party offer. If the Lessor does not enter into an agreement with the third party on the said terms and conditions and close the transaction within 120 days then the Lessors right to sell the Property to the third party shall expire and the procedure described in this Clause 31 shall again be applicable."
On 20 October 2017, Mr Dean Alcorn, the in-house legal officer of the group of companies which includes PCH, sent an email to Mr G Penhall, Vision's solicitor:
"Although I understand that Vision Medical & Health Pty Ltd has waived its right of first refusal as contained in Clause 31 of the Lease and that were to confirm that in writing, for abundant caution our prospective purchaser has asked that I first offer the property to you formally as required by that right of first refusal.
On this basis I formally offer the property to you on the following terms (identical to those agreed with our prospective purchaser):-
Form - Call Option
Term of Call Option - maximum of 366 days Price - $4,550,000.00
Call Option Fee -- $455,000.000 Period of Contract on Exercise of Option - maximum of 10 weeks (not an essential date)
Please respond by no later than 5pm on 20 November 2017."
Later that same day Mr Penhall replied:
"Dean,
It was understood that the other buyer was doing a straight out purchase.
Since it is a Call Option, could you please provide a complete copy of the Call Option and Contract presently offered to the other buyer, without which we cannot advise our client concerning its right of first refusal.
Vision Medical and Health Pty Ltd may well wish to take a grant of option.
If you can get the documents to me, I am expecting to confer with the Director on Tuesday next week when she returns from Queensland."
Regards"
On 21 October 2017, Mr Alcorn emailed to Mr Penhall a copy of the Call Option. There was no dispute that what was sent to Vision was a document in precisely the same terms as the Call Option that was ultimately executed by PCH and Max Distribution.
On 26 or 27 October 2017, PCH and Max Distribution entered into the Call Option. The Call Option included:
"2. CALL OPTION
2.1 Grant of Call Option
Subject to clause 2.2, in consideration of the execution of this Agreement, the Grantor grants to the Grantee an irrevocable:
(a) Call Option to require the Grantor to enter into the Contract to sell the Property to the Grantee; or
(b) Right to nominate a person, or an entity, as selected by the Grantee, to enter the Contract with the Grantor to purchase the Property on the terms contained in this Agreement.
2.2 Conditional Nature of Call Option
This Call Option is subject to and conditional upon the exercise or otherwise of the Right of First Refusal by the lessee of the Ground Floor at the Property ("Right of First Refusal").
In the event that the lessee exercises the Right of First Refusal then the Grantor will be at liberty to rescind this Call Option and the Option Fee will be refunded to the Grantee and neither party will have a Right against the other for any reason whatsoever.
In the event that the lessee does not exercise the Right of First Refusal then this Call Option becomes unconditionally binding on the Grantor and the Grantee.
2.3 Exercise of Call Option by Grantee
The Call Option may be exercised at any time during the Call Option Exercise Period by serving at the Notice Address of the Grantor's Representative by personal delivery or express post:
(a) a Call Option Exercise Notice signed by the Grantee or its Authorised Representative; and
(b) two copies of the Contract executed by the Grantee or the Grantee's nominee (as the case may require),
or the Grantee may exercise the Call Option during the Call Option Exercise Period by serving Notice by email in which case the Contract referred to in paragraph (b) of this clause must be delivered personally or by express post, within two Business Days of service of the Call Option Exercise Notice.
…
2.5 Binding Contract
On exercise of the Call Option the Grantor and the party exercising the Call Option will become immediately bound as Vendor and as Purchaser respectively under the Contract.
2.6 Date of Contract
The Contract will be dated with the date on which the Grantee or the nominee from the Grantee (as the case may be) exercises the Call Option and both parties are authorised to date the Contract with that date.
2.7 Return of Contract
Within two Business Days after receipt of the Contract, the Grantor must execute the two copies of the Contract and return one executed copy of the Contract to the Grantee's Solicitor and if the Grantor fails to do so, the Grantor appoints the Grantee and each of its Authorised Representatives as its attorney for the purpose of signing the Contract.
2.8 Option Fee
The Option Fee must be paid by the Grantee to the Deposit Holder on the Agreement Date.
The Option Fee will be held by the Deposit Holder for 35 days following the Agreement Date pending the exercise or otherwise of the Rights of First Refusal.
In the event that the Right of First Refusal is not exercised then the Option Fee will be released to the Grantor (or as it directs) forthwith.
The Option Fee will be and remain the property of the Grantor whether or not the Call Option is exercised, but if the Call Option is exercised, the Option Fee will be and be deemed to be a part payment of the deposit and purchase price under the Contract. If this Agreement is terminated as a result of a default on the part of the Grantor or as a result of the Grantee exercising a right of termination, the Option Fee will be refunded to the Grantee."
Those provisions must be read with some of the definitions in Clause 1.1 of the Call Option:
""Call Option Commencement Date" means the date 35 days after the Agreement Date.
"Call Option Expiry Date" means the date which is 366 days from the date of the Call Option Commencement Date.
…
"Call Option Exercise Period" means the period commencing on the Call Option Commencement Date and ending at 5:00pm on the Call Option Expiry Date;
"Call Option" means the option to purchase the Property granted by the Grantor to the Grantee in clause 2.1;
"Contract" means a contract for sale of the Property, to be entered into by the Grantor and the Grantee or the Grantee's nominee upon exercise of the Call Option, which contract will be in the form contained in annexure A and which need not be executed by the parties to be valid and binding, but will regulate the terms of the sale of the parties as if they had entered into it on an unconditional basis and not subject to finance and all statutory protections of the Grantee waived;
…
"Deposit Holder" means the trust account of Michael Lee Solicitor of 205/206 Forest Road Hurstville NSW 2220;"
The contract which would come into existence upon the exercise of the Call Option provided for a 70 day completion period.
On 21 November 2017 a request was made on behalf of Vision to PCH for Vision to have a further two weeks to consider whether it would exercise its right of first refusal. That request was refused on behalf of PCH.
On 23 November 2017, Mr Alcorn emailed Mr Penhall:
"I confirm that the 30 day period set out in the Right of First Refusal contained in Clause 31 of the Lease has now expired.
Vision Medical & Health Pty Ltd did not accept the Offer put to them on 21 October 2017.
I advise that we have now entered legally binding arrangements with the relevant third party Max Distribution Pty Ltd."
[3]
A preliminary issue
Mr Raphael, on behalf of Vision, accepted that Mr Penhall was authorised to receive an offer made to Vision by PCH pursuant to the right of refusal in clause 31 of the Lease. However, he submitted by reference to clause 17.2 of the Lease that Mr Alcorn's emails (see paragraphs [15] and [17] above) did not constitute the making of the requisite offer on behalf of PCH. That submission is rejected for the following reasons.
Clause 17.2 of the Lease provides:
"17.2 Any notice or other document or writing served or given by the Lessor under this Lease shall be valid and effectual if served or given under the hand of the Lessor (being an individual) or under the common seal of the Lessor or under the hand of any director, attorney, manager or secretary for the time being of the Lessor (being a company) or by the solicitor for the Lessor or by the Managing Agent."
There was no dispute that Mr Alcorn is the in-house legal officer of the group of companies of which PCH forms a part. If clause 17.2 of the lease is to be construed as exclusive, that is to say specifying the only way in which relevant notices or documents can be given, then I have no difficulty in inferring from Mr Alcorn's title alone that he is, in the requisite sense, "a manager" under clause 17.2 authorised apparently to give notices or documents, at least of a legal kind, on behalf of PCH.
However, in my view, clause 17.2 is not exclusive. It is an evidentiary or facultative provision which assists in proving whether or not a document or notice has been given on behalf of PCH. It does not, however, conclude the ultimate question of fact as to whether or not an offer has been made on behalf of PCH. That is a fact to be proven by reference to the terms of clause 31.1 of the Lease. Again, by reference to Mr Alcorn's title alone, the Court has no difficulty in concluding that his communication of the offer was one made by and on behalf of PCH. Accordingly, Mr Raphael's preliminary point fails.
[4]
The arguments on construction
PCH submitted that it had done everything which clause 31 required of it. It had made an offer to Vision of a call option on precisely the terms of the Call Option. If the Call Option were exercised, it would result in a sale of the Premises. Clause 31 did not specify how any sale was to be effected. It should, so the argument ran, be construed widely and beneficially. There could be no doubt that a sale pursuant to the exercise of a call option would be understood by reasonable business persons familiar with the circumstances as being a "sale".
Vision submitted that the preliminary words "before the Lessor may sell" in clause 31 made it clear that what had to be offered was a contract for sale. The Call Option was not such a contract, did not in itself effect a sale (that is to say, a disposition of property in the Premises) and was no more than a conditional contract (relying on Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57; [1974] HCA 49). Therefore, it was not something that engaged clause 31. Clause 31, it was submitted, required the offer of terms and conditions which were a contract for sale.
In this case, Mr Raphael accepted that clause 31 would have been satisfied if what had been offered to Vision was an opportunity to purchase the Premises on the terms of the contract that was attached to the Call Option. However, if that had occurred and Vision had declined the offer, PCH could only have sold the Premises on the terms of that contract.
[5]
The principles of construction
This is not a case which requires an exhaustive discussion of the principles of contractual construction. It is sufficient for me to note and apply the approach set out by the High Court in Woodside Energy Ltd v Electricity Generation Corporation (2014) 251 CLR 640; [2014] HCA 7 at [35] (citations omitted):
"Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties ... intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience"."
[6]
Consideration
Mr Altan accepted, correctly, that his client's entitlement to the relief which it sought in relation to the release of the option fee required the Court to determine whether or not the right of first refusal had not been exercised within the meaning of this sentence in clause 2.8 of the Call Option: "In the event that the Right of First Refusal is not exercised then the Option Fee will be released to the Grantor (or as it directs) forthwith".
Mr Altan also accepted, again in my opinion correctly, that as a matter of construction, in order for that sentence to be engaged it was necessary for the occasion to have arisen for the right of first refusal to be exercised or not. It was common ground between the active protagonists that this question had to be determined by reference to the proper construction of clause 31 of the Lease.
Turning to clause 31, one preliminary point may be passed over immediately. In its terms, clause 31 provides that, "The lessor shall first offer the Property... on the same terms and conditions as are offered by the third party." It was also common ground that, as a matter of construction, those words were not confined to the situation where an offer to purchase had been made by a third party. The parties accepted that those words should be read as "offer by or to the third party". The position taken by the parties on that point must be correct. It would be an entirely uncommercial reading of the clause to suggest that it only operated in the case of an offer made by a third party, whereas PCH would be at liberty to sell the Premises to a third party without having to offer Vision the right of first refusal if PCH was the moving party in the transaction.
Looking at clause 31 by reference to the question of what a reasonable businessperson would have understood its terms to mean, in my view it is clear that clause 31 would be understood as being intended to ensure that PCH could not sell the Premises without having given Vision an opportunity to purchase the Premises on precisely the same terms as those that were being treated upon with the third party.
However, I think that the reasonable businessperson's understanding would also be informed by the last sentence of clause 31, a matter to which it seems to me neither party gave sufficient attention. That last sentence provides that the "lessor's right to sell the property to the third party shall expire" within 120 days. Reasonable businesspersons would understand the intention of those words as being to give PCH a "window" of 120 days within which to complete the sale of the Premises - the 120 days commencing immediately after the thirty-day period during which Vision was entitled to accept PCH's offer (and assuming Vision did not accept).
Of course it is necessary to give careful attention to the words of clause 31 itself. In my view the most important words are "the same terms and conditions". This requires construing what sort of terms and conditions must be offered. Mr Raphael submitted that by reference to the earlier reference to "may sell", the requisite terms and conditions for the purposes of clause 31 had to be terms and conditions for the sale of the Premises. In my opinion that submission is correct as far as it goes. However, I am also satisfied that, on its proper construction, clause 31 goes further than contemplating just terms and conditions for a sale simpliciter.
My reason for that conclusion is because it is necessary for the purpose of construing the clause as a whole to give proper weight to the last sentence.
"If the Lessor does not enter into an agreement with the third party on the said terms and conditions and close the transaction within 120 days then the Lessors right to sell the Property to the third party shall expire and the procedure described in this Clause 31 shall again be applicable."
What is significant about the last sentence is that it provides that PCH's right to sell the Premises expires if, within 120 days, PCH has not entered "into an agreement with the third party on the said terms and conditions and close the transaction" (emphasis added).
Mr Altan submitted that in the context of the Call Option that limitation would have been satisfied, including the obligation to "close the transaction", by entering into the call option itself within the 120 days. I do not agree. "Close the transaction" in the context in which it appears has its ordinary and natural meaning (perhaps more frequently in American legal discourse than in our own Anglo-Australian legal terminology) of the completion of the sale.
It follows, in my view, that terms and conditions which could satisfy clause 31 could extend to terms and conditions in the form of a call option, or a put and call option, or any other means of agreeing to sell property, provided that those terms were not inconsistent with the completion of the sale of the Premises within the 120 days limited by the last sentence of clause 31. So understood, the Call Option does not satisfy the requirement of being such "terms and conditions" because, while it could certainly be exercised during the 120 days, it was a one year option that could also be exercised in a way that would result in the completion of the sale outside the 120 day period. By way of another example, the offer of a contract for sale that specified settlement in 150 days would also not be "terms and conditions" of a kind that would engage clause 31.
I am fortified in that conclusion by considering what could happen in the present case. Assuming that the Call Option had engaged clause 31 but was exercised outside the 120 day period, then it would put PCH in breach of clause 31 because its right to sell the Premises would have expired at the end of the 120 day period. The Court is entitled to assume that when they enter into contracts, parties intend to behave lawfully and honour their contractual obligations. As a matter of the objective theory of contract, a party should not (unless the language is intractable) be taken to have intended to enter into inconsistent obligations. The Court should not lightly conclude that PCH intended to be bound to Max Distribution in a way that could put it in breach of its obligations to Vision, particularly when the Call Option was expressly "subject to and conditional upon the exercise or otherwise of the" right of first refusal. Confronted with a choice between a construction of "terms and conditions" in clause 31 that permitted or compelled a breach of the requirement for the sale to occur within 120 days, and a construction which did not have that result, the latter is to be preferred.
It follows from the analysis which I have just set out, that the Call Option does not answer the description of "terms and conditions" contemplated by clause 31. Therefore, for the purpose of applying the sentence in clause 2.8 of the Call Option set out in paragraph [31] above, the occasion for the exercise of the right of first refusal has, in the events which have happened, never arisen.
In those circumstances, as Mr Altan accepted (see paragraph [32] above), it cannot be said that Vision has "not exercised" its right of first refusal within the meaning of the sentence referred to in the preceding paragraph. Mr Lee, as stakeholder, is therefore not obliged by clause 2.8 of the Call Option to release the option fee to PCH.
[7]
Conclusion
The summons will be dismissed with costs.
[8]
Amendments
06 March 2018 - Date of decision and orders amended to 1 March 2018
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Decision last updated: 06 March 2018