Plaintiff v Defendants

Supreme Court of Victoria|2007-08-07|Before: SMITH J

LEASE - Transfer - Refusal by landlord to consent - Reasons not given at the time but later - Whether unreasonably refused consent.

1 By originating motion filed 4 July 2007, Kids Campus Holdings Pty Ltd, the plaintiff, seeks the following orders against Peter and Leonie Anne Kelly, the defendants,

2 On 8 October 2004, the plaintiff entered into a lease from the defendants of the above-mentioned property for a five-year period (with options to renew) at an initial rent of $75,900. The plaintiff is a wholly owned subsidiary of ABC Learning Centres Limited and it leases the premises for the purpose of conducting a childcare centre.

3 On 21 December 2005, the plaintiff entered into an agreement to sell its business to CCG1 Pty Ltd. On 27 April 2006, the plaintiff approached the defendants to seek their consent to the transfer of its lease to CCG1. In its letter, it referred to the fact that it had already supplied references and other materials relating to the proposed tenant and that both it and the proposed tenant were prepared to use the L. I. V. Transfer of Lease with the addition of a special condition which was enclosed. The effect of that proposed condition was that if the new tenant listed on an Australian stock exchange or if the lease was transferred to such a company, the directors would not be required to personally guarantee or indemnify the landlord and if any guarantees had been given prior to such listing, they would cease to operate from the date of that listing.

4 Some months later on 22 January 2007, the defendant sought information about the financial position of CCG1 and its solicitors provided a response listing five childcare centres which it owned as at 31 December 2006, purchased at a cost of $4,725,000, the fact that it had contracted to acquire a further eight centres valued at $10.6 million, and were expected to settle within three months, and had secured a debt facility from Bank West and was receiving additional funding support from the Abacus Property Group, a $1 million ASX listed Property Trust.

5 A few days later, on 25 January 2007, the plaintiff's solicitors wrote to the defendants' solicitor seeking consent to the assignment of the lease. Five days later, on 30 January 2007, and before the defendant had responded to the request for consent, the plaintiff's solicitor wrote to the defendant advising that the lease was now to be assigned to Abacus Funds Management Limited and sublet to CCG1.

6 On 3 April 2007, the plaintiff's solicitors sent a transfer of lease to the solicitors for the defendant for their consideration. Despite attempts by the solicitors for the plaintiff to obtain the response of the defendants, it was not until 16 May 2007 that the plaintiff was advised by the agents for the defendants that they would not give consent to the transfer and that the solicitors for the defendants would give reasons for that refusal. On 4 July 2007 these proceedings were commenced. The foreshadowed reasons had still not been received. On 18 July 2007, however, the defendants' solicitor wrote to the plaintiff's solicitor setting out reasons for refusing consent. It stated the following:

Under the Lease, the current tenant has unambiguous obligations to pay the agreed rent, together with certain outgoings and the landlords are entitled to recover such amounts from the tenant in the event of any default. The proposed transfer (by clause 16) seeks to restrict the new tenants' liability by reference to a trust, which is entirely beyond the knowledge and control of the landlords. The transfer in no way compensates the landlords for the increased commercial exposure in this regard.

Under the Lease, the current tenants' obligations are guaranteed by third parties, being a company and an individual. By clause 15 of the lease, both guarantees would expire at the conclusion of the current term as a consequence of the proposed transfer of Lease. The proposed transfer of Lease contains no effective replacement guarantee. Again the proposed transfer in no way compensates the landlords for a substantive reduction in their rights under the Lease.

Although the current Lease does not explicitly provide for rent to be reviewed to market at the conclusion of each five-year term, your client will recall that was the common intention of the parties when the Lease was entered into. Should the current Lease be transferred to a third-party without rectification and/or a suitable term in the transfer, the landlords' ability to have the Lease rectified, if necessary, is likely to be prejudiced.

For the avoidance of doubt, we emphasise that the landlords have no objection, in principle, to the tenant transferring the Lease to an appropriate third-party, provided that the landlords' legal and commercial interests are not prejudiced.

Any further transfer requests from the current tenant will be considered accordingly.

7 To understand the significance of the content of the reasons it is necessary to refer to the two clauses identified in those reasons. As to clause 16 of the proposed transfer document, it provides, inter alia,

16.1 Abacus Funds Management Ltd (the "Trustee") enters into this transfer only in its capacity as trustee of the Abacus Childcare Trust ("the Trust") and in no other capacity. The liability of the Trustee arising under or in connection with this transfer is limited to and can be enforced against the Trustee only to the extent to which it can be satisfied out of the property of the Trust out of which the trustee is actually indemnified for the liability.

8 As to clause 15 of the lease, it provides inter alia that

15.2 The liability of the Guarantor will not be affected by -

15.2.3 transfer (......) or variation of this lease, but if this lease is transferred the Guarantor's obligations, other than those which have already arisen, end when the Term ends and do not continue into a term renewed by a new tenant nor a new period of overholding.

9 It is common ground that the lease is not a lease of retail premises for the purposes of the Retail Leases Act 2003. It is also common ground that the lease expressly excludes the operation of section 144 of the Property Law Act 1958. The issues raised in this matter are to be determined by the application of clause 4.2 and 4.3. They provide as follows

4.2.1 subject to sub-clause 4.2.2 must not unreasonably withhold consent to a transfer of this lease or a sublease of the Premises if the Tenant has complied with the requirements of clause 4.3.

4.3 To obtain the Landlord's consent to a transfer or sublease the Tenant must-

4.3.1 ask the Landlord in writing to consent to the transfer or sublease,

(a) in relation to each proposed new tenant or sub-tenant such information as the Landlord reasonably requires about its financial resources and business experience, and

(b) a copy of the proposed document of transferred or sublease.

10 Counsel for the plaintiff accepted that the plaintiff bore the onus of proving that the refusal or withholding of consent was unreasonable[1]. Counsel submitted that his client had complied with the requirements of clause 4.3. Counsel argued that at the time of the refusal, the defendants gave no reasons for that refusal and that this has the consequence that the court will more readily imply that the refusal was unreasonable[2]. Counsel also submitted, relying upon passages from the judgement of Mason J. in Secured Income[3], that the defendants should not now be permitted to rely upon a ground of refusal which had not been taken earlier.

11 The passages relied upon from the judgement of Mason J. support the proposition that the question to be considered is whether the landlord's consent was unreasonably withheld in light of the reasons which, at the time of refusal, prompted the landlord to refuse. At the same time, His Honour accepted that there may be cases where it is appropriate to consider and rely upon a ground not taken at or about the time of the refusal. He did not exhaustively state the circumstances in which the landlord may or may not be entitled to rely upon reasons that have been thought of later .

12 In the present case, it is unclear from the evidence contained in the affidavits whether the reasons advanced were reasons which existed at the time the refusal was given or whether they have been developed later. That issue was not explored by cross-examination. In those circumstances, and bearing in mind that the onus of proof is on the plaintiff, it appears to me that the issue of whether the consent was unreasonably withheld should be determined by considering two scenarios. The first is that the reasons advanced were held by the defendants at the time the defendants withheld their consent. The other is that there is no direct evidence of the reasons why the defendants withheld their consent at the time they did.

13 Assuming that the reasons that were advanced subsequently were held at the time when the consent was withheld, Counsel for the plaintiff submitted that it was unreasonable to rely upon the concerns about clause 16 of the transfer because they were in terms no different to the special condition forwarded under cover of the letter of 27 April 2006 referred to above and no concern was ever raised by the landlords about that special condition. It was put that it was significant that concern had not been raised about that special condition and concern about clause 16 of the transfer was something recently invented.

14 In my view, the provisions of clause 16 of the transfer are very different in their effect to the special condition and the proposal contained in clause 16 was a change from the terms of the lease such as to cause any landlord legitimate concern about the change causing a substantial adverse change to his or her financial risks.

15 In relation to the second concern raised, the expiry of guarantees, Counsel submitted that it was significant that this had not been raised prior to commencement of proceedings and in any event the complaint about the loss of guarantors in respect of any future term was not a legitimate concern because the new tenant was a listed company. The significance of the company being listed was said to be that it would not be listed if it was insolvent. Accepting for present purposes that assertion, the fact was that the termination of the guarantees had a very different impact under the proposal because the proposal effectively limited the landlords in any future pursuit of moneys owed by the assignee to the trust assets of the trust to be set up of which the listed company would be a trustee. It seems to me that the proposal for which consent was sought was one which significantly reduced the security that the landlords had under the existing lease arrangements.

16 As to the third point, it was submitted for the plaintiff, relying upon the judgement of Nettle J. in Cathedral Place Proprietary Ltd v Hyatt of Australia Ltd [2003] VSC 385, that the issue of whether the plaintiff and defendants had a common intention that future rental reviews when options were exercised would be based on market values at the time was an extraneous matter that was dissociated from the subject matter of the contract. In my view, the assertion that there was a common intention of the kind described which was not expressly dealt with in the lease but could be dealt with by rectification was not a matter extraneous to the subject matter of the contract but went to the precise terms of the original lease and was a relevant matter for the landlords to consider bearing in mind that the tenant was proposing to transfer the lease without that rectification having occurred. I note the point made by Counsel for the defendants that the plaintiff did not lead evidence to contradict the evidence of the defendants that the above-mentioned common intention existed.

17 Considered separately and in combination, and assuming that the reasons advanced were held at the time the landlords refused to consent to the transfer, I am not persuaded that the withholding of consent for those reasons would have been unreasonable. Rather, the withholding of consent for those reasons would have been amply justified and reasonable.

18 Considering the alternative approach, the plaintiff is in some difficulty in demonstrating that the withholding of the consent was unreasonable. Assuming that the reasons advanced were reasons later invented, we do not have any direct evidence of the reasons that existed at the time the consent was withheld. While the delay raises concerns about whether there were genuine and reasonable grounds for refusing consent which were held at the time, there were very sound reasons why a landlord would not agree to the transfer which would have been apparent to a landlord considering the issues at that time. In particular, the trust structure coupled with the reality that a transfer would in due course bring the guarantees to an end provided an obvious and reasonable basis for withholding consent at the time it was withheld.

19 The plaintiff carries the onus of proof, and notwithstanding the legitimate comments made about the delay in providing reasons for withholding consent, the plaintiff is not able, on the evidence as a whole, to prove that the decision to withhold consent was unreasonably made at the time that decision was taken.

20 For these reasons, I am not persuaded by the plaintiff that the consent was withheld unreasonably. In those circumstances, the application must fail.

21 That leaves the issue of costs. A matter relevant to that issue, in my view, is the fact that the defendants failed to respond from early April 2007 to 16 May 2007 either by requesting information or by indicating that they were withholding consent and providing their reasons for withholding consent. Having indicated on 16 May 2007 through their estate agent that consent was withheld they did not supply any reasons for two months and only did so a fortnight after the present proceedings had been issued. In my view, this was unreasonable behaviour which left the plaintiff with little choice but to issue proceedings.

22 Before ruling on the question of costs I will hear further submissions.

[1] Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596, 609

[2] Berry (Frederick) Ltd v Royal Bank of Scotland (1949) 1 All ER 706

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