Plaintiff v Defendant

Plaintiff v Defendant - [2014] VSC 556 - VSC 2014 case summary — Zoe

[101]

Special condition 3 imposes upon the parties a compulsory regime of review of rent at the end of each eighteen months of the fifteen year term granted by the lease. This is made clear by use of the imperative "shall" in the first line, "will" in the fifth line, and "shall" in the eighth line of special condition 3. These opening provisions of the special condition, which govern sub-clauses (a), (b), (c), (d), (e) and (f) that follow it, must, in my opinion, be taken as evincing the intention of the parties to the lease that there shall be a review of rent at the end of each eighteen-month period. This conclusion is reinforced by the language of paragraph (d) (and perhaps of paragraph (f)). Paragraph (d) commences with the words "With respect to the rent reviews to take place on the following rent review dates", at the intervals there stated, "the rental shall be...". Certainly, the word "may" in the first line of paragraph (a) is not used in the imperative sense as importing an obligation of the kind discussed in such cases as Julius v Lord Bishop of Oxford (1880) 5 App Cas 214; Ward v Williams [1955] HCA 4; (1955) 92 CLR 496; and Finance Facilities Pty Ltd v Federal Commissioner of Taxation [1971] HCA 12; (1971) 127 CLR 106; it is used in its primary facultative sense, empowering the lessor to give notice in writing to fix the rent in accordance with paragraph (a). However, the discretion conferred by the use of the word "may" does not refer to whether the notice is to be given at all but to the time at which it is to be given. On this point, I respectfully differ from the primary Judge who held that a notice could be given by the lessor at any time. If his Honour meant that it could be given either before or after the expiration of the current eighteen-month period of the lease, then I disagree. In my view it must be given before the expiration of the current eighteen-month term. Further, paragraph (a) does not mean that the lessor can decide not to give a notice at all (subject to paragraph (d) to which I shall refer later). The parties to the lease have assumed that there will be a review of rent at the end of each eighteen-month period. The lessor cannot, by simply refraining from giving a notice, prevent the review procedure set out in sub-clauses (a), (b), (c) and (d) taking place. If the lessor does decline to give a notice for whatever reason, then the lessee is entitled to seek relief from a court of competent jurisdiction, akin to a suit for specific performance, seeking orders that the lessor be required to give a notice in accordance with sub-clause (a), and, failing the lessor giving such notice, the court may appoint one of its officers to do the lessor's work for him - a decree familiar to courts of equitable jurisdiction.

[178]

The objective of variable rents can thus be more precisely identified as a method to maintain so far as possible the original bargain struck between the parties, a bargain that would otherwise be radically transformed by the impact of inflation. Messrs Colyer and Brewer have suggested (Blundell Memorial Lectures 1977) that it is because a grant of a lease involves a division of ownership that inflation so seriously affects the agreement of the parties; in enhancing the value of the lessee's interest the bargain may be effectively destroyed. (The authors of that lecture consequently adopted the term 'inflation proofing' to describe the process of utilising variable rent devices in the terms of the lease to combat the problem.) The provision for payment of a periodically reviewable rent in a lease thus becomes one term of the contract between the parties.

If a periodic attempt is made to maintain and restore the original bargain between lessor and lessee it is not only the fall in the value of money by inflation that can be taken into account, for the bargain was made in relation to a particular property, the intrinsic value of which might also have altered and fluctuations in its market value may differ from the rate of inflation. For example, there may be a general increase in property values that is considerably greater than the rate of inflation or property levels overall might fall while inflation continues. Similarly, local issues might modify property values: for example, the attractiveness, say, of a new shopping precinct will have a spin-off effect of adjoining premises. (Consideration of just such an event and of the exact time at which it started to affect rent levels in near-by shopping streets formed a significant issue in Ratners (Jewellers) Ltd v Lemnoll Ltd (1980) 255 EG 987.) The older forms of variable rents are unable properly to account for such fluctuations in the market value of particular premises. This is particularly true of indexation. Only a sophisticated, complex and detailed property index could provide an index that could truly allow for fluctuations in property market values - and such an index appears not to exist at the present time. A well-drawn rent review clause will cope with all such changes in that it will allow the substitution of a rent that will most closely accord with the parties' original bargain, a rent that might well have been agreed if the parties were concluding their bargain at the later date.

The objective of a rent review clause may be viewed as the means of restoring the position of the parties in the light of changes in money values and in the property market. In theory, such a review clause ought to allow the rent to be adjusted up or down. This argument was accepted by Cross J in Stylo Shoes Ltd v Manchester Royal Exchange Ltd (1967) 204 EG 803 where in an application for a new tenancy under Landlord and Tenant Act 1954, Pt II, the plaintiff tenants successfully argued for the inclusion of a clause giving them a right to apply for a reduction of the rent in the review after seven years if conditions then warranted, such application balancing the landlords' right to apply for an increase at that time. Provision for an upwards or downwards review on statutory renewal was also made in Janes (Gowns) Ltd v Harlow Development Corporation (1979) 253 EG 799. In practice, however, many (if not most) clauses allow for a rent to move upwards only, a trend that results from the stronger bargaining power of lessors and their desire to protect their investment in every way they can; a trend in which tenants tend to acquiesce since the prospect of a downwards review proving appropriate has, so far, been slight. However, 'upwards only' clauses limit the objective of rent review clauses to countering the effect of inflation on the monetary value of the rent or on the value of the property rather than in every case restoring the true value of the lessor's and lessee's interests under the lease.

The modern rent review clause in commercial leases will be more complex and more far reaching in its implications than its nineteenth century forerunners but the overall objective is not dissimilar. Its flexibility has enabled lessors to reduce the impact of inflation and other external factors on the value of their investment. Yet that very flexibility has contributed to the problems facing the draftsman of the review clause and the parties who, some years later, set the prescribed review machinery in motion.

[179]

42 As the preceding discussion indicates, it is not a simple task to discern the objective purpose of rent review provisions in any particular case - or more generally. The difficulty lies in the fluctuations of the rental market and changing economic conditions. As a general proposition, the objective purpose of a rent review provision should be understood in the context of the rental market at the time the lease was executed, and by reference to the nature of the demised premises, and also, by reference to the length of the lease.[89] A safe starting point is to say that where a rent review provision is accompanied by a ratchet provision, the objective purpose is to benefit the landlord by ensuring an increase in rent, regardless of downward market trends. In the absence of a ratchet provision, it is uncontroversial to say that a variable rent, which might move upwards or downwards on review, is a method to maintain, so far as possible, the original bargain struck between the parties in real financial and current market terms. It is equally uncontroversial to say that, all things being equal, rents trend upwards over time - and more clearly so the longer the period of time considered. This, of course, must be qualified having regard to anomalous economic circumstances, such as a recession, depression, or property market crash. It must also be qualified where the demised premises is only capable of catering to a specific industry, which might be volatile, or liable to decline. However, in so far as rents normally increase over time, in my view, rent review provisions are normally to be regarded as being for the benefit of the landlord; their purpose being to safeguard the landlord against inflation and to maintain parity with the current rental market over time. This is especially so where the term of the lease is substantial. In my view, the purpose of clause 4.2 and Part B, read together, in the context of clause 4.1, clause 4.3 and Parts A and C of Annexure B, is to benefit the defendant by safeguarding it against the deleterious effects of inflation and to maintain parity with the current rental market over time. As indicated previously,[90] the consideration of the commercial purpose of a contractual provision is intrinsic to its construction.

[194]

The primary judge had referred to what he described as "the summary of principles" in Franklins Pty Ltd v Metcash Trading Ltd ((2009) 76 NSWLR 603; 264 ALR 15; [2009] NSWCA 407 at [19] and following). The applicant in this Court refers to that decision and to MBF Investments Pty Ltd v Nolan ([2011] VSCA 114 at [195][204]) as authority rejecting the requirement that it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and object of the transaction. The applicant also refers to statements in England said to be to the same effect, including that by Lord Steyn in R (Westminster City Council) v National Asylum Support Service ([2002] 1 WLR 2956; [2002] 4 All ER 654; [2002] UKHL 38 at [4][5]).
Acceptance of the applicant's submission, clearly would require reconsideration by this Court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW ((1982) [1982] HCA 24; 149 CLR 337 at 352; [1982] HCA 24; 41 ALR 367 at 374; [1982] HCA 24 (Codelfa).) by Mason J, with the concurrence of Stephen J and Wilson J, to be the "true rule" as to the admission of evidence of surrounding circumstances. Until this Court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.
The position of Codelfa, as a binding authority, was made clear in the joint reasons of five Justices in Royal Botanic Gardens and Domain Trust v South Sydney City Council ((2002) 240 CLR 45; 186 ALR 289; [2002] HCA 5 at [39]) and it should not have been necessary to reiterate the point here.
We do not read anything said in this Court in Pacific Carriers Ltd v BNP Paribas ((2004) 218 CLR 451; 208 ALR 213 ; [2004] HCA 35 at [22]); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd ((2004) 219 CLR 165; 211 ALR 342; [2004] HCA 52 at [40]); Wilkie v Gordian Runoff Ltd ((2005) 221 CLR 522; ; at ) and ((2008) ; ; ; ) as operating inconsistently with what was said by Mason J in the passage in to which we have referred.

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