Judgment
1By an agreement for lease dated 24 October 2005, as varied by a Deed of Variation for Lease made on 25 January 2006, the plaintiff, Renaldo, agreed to lease to the defendant, Coles, space in a shopping centre at Oatley. The lease is for a term of 20 years with two options of 10 years each. The lease provides for payment of a base rent together with what is called a "Percentage Rent". These proceedings concern the correct construction of the clause providing for the payment of the Percentage Rent. Coles also filed a cross-summons seeking a declaration concerning the correct construction of the lease and, alternatively, rectification of the lease in the event that the court rejected the interpretation for which it contends. The claim for rectification was abandoned shortly before the hearing.
2The relevant terms concerning payment of rent are set out in Schedule B of the lease which is Schedule 3 to the agreement for lease. Schedule B relevantly provides:
- Base Rent
1.1 The Lessee must pay an annual rent ( Base Rent ) of:
(a) during the first Rent Period an amount equal to $385.00 per square metre per annum plus GST being $1,031,800.00 per annum plus GST based on 2680 square metres (subject to survey);
(b) during each subsequent Rent Period to [sic] the average of total Base Rent and Percentage Rent payable in the preceding 3 years; and
(c) during each Rent Period of any renewed term pursuant to the exercise of any option in accordance with clause 1.1(b).
- Percentage Rent
2.1 The Lessee must pay a rent based on the Lessee's Gross Sales ( Percentage Rent ) for each Lease Year as follows:
(a) 0% where annual Gross Sales are less than or equal to $25,000,000.00;
(b) 2% where annual Gross Sales exceed $25,000,000.00 but are not greater than $40,000,000.00;
(c) 1.75% where annual Gross Sales exceed $40,000,000.00 but are not greater than $50,000,000.00; and
(d) 1.5% of annual Gross Sales in excess of $50,000,000.00
provided that there shall be deducted from the sums so calculated an amount being the difference between the current Base Rent and the Base Rent payable in the first Lease Year. GST is excluded from the calculation of Gross Sales.
2.2 ...
"Lease Year" is defined in cl 67.1 of the lease to mean each period of 12 months commencing on the commencement date of the lease. "Gross Sales" is defined in cl 7.1 of the lease, but nothing turns on its precise definition in this case. The Deed of Variation amends the Base Rent payable by Coles to $420 per square metre, but again, nothing turns on that amendment.
3Renaldo initially contended that cl 2.1 had one of two meanings.
4The first meaning contended for by Renaldo was that the clause requires Coles to pay the Percentage Rent on the whole of its Gross Sales at the rate of 2 percent if its Gross Sales exceed $25,000,000, but are not greater than $40,000,000 and at the rate of 1.75 percent if its Gross Sales exceeded $40,000,000, but are not greater than $50,000,000. In addition, the clause requires Coles to pay 1.5 percent on Gross Sales in excess of $50,000,000.
5The second meaning contended for by Renaldo was that the clause requires Coles to pay 2 percent on the whole of its Gross Sales if Gross Sales exceed $25,000,000, but are no greater than $40,000,000. If Gross Sales exceed $40,000,000, then the clause requires Coles to pay 2 percent on $40,000,000 plus 1.75 percent on Gross Sales between $40,000,000 and $50,000,000. If Gross Sales exceed $50,000,000, the clause requires Coles to pay an additional 1.5 percent on Gross Sales in excess of $50,000,000. Renaldo abandoned this construction at the hearing.
6In support of its preferred interpretation, Renaldo submits that paragraphs (a), (b) and (c) of cl 2.1 (unlike paragraph (d)) do not, on their face, identify the amount or amounts to which the percentages referred to in those paragraphs are to be applied. It is natural in those circumstances to read the percentages as referring back to the amount identified in the introductory words of the paragraph. That amount is "the Lessee's Gross Sales". That expression must mean the total of all Gross Sales, not some (unidentified) proportion of them. Consequently, paragraphs (a), (b) and (c) each says that the Percentage Rent should be paid on the total Gross Sales at the percentage specified for each identified band. On the other hand, paragraph (d) clearly states (by using the preposition "of") that the percentage identified in that paragraph is to be applied to the "annual Gross Sales in excess of $50,000,000.00".
7Implicit in Renaldo's submission is the assertion that paragraphs (a), (b) and (c) are clear alternatives. Paragraph (a) says that the percentage to be applied (to all Gross Sales) is 0 percent where the relevant band is $0 to $25,000,000. Paragraph (b) says that the percentage to be applied (to all Gross Sales) is 2 percent where the relevant band is $25,000,000.01 to $40,000,000 and so on. On this interpretation, it does not matter whether cl 2.1 is read as connecting each paragraph with the word "and" or not. Each paragraph simply specifies the percentage for the band with which it is concerned and the implied conjunction which would normally arise from the use of the word "and" between the last two paragraphs (that is, between (c) and (d)) cannot alter that fact. On the other hand, according to Renaldo, the wording of paragraph (d) makes it clear that the Percentage Rent for which it provides is payable in addition to the Percentage Rent provided for by the other paragraphs.
8Renaldo also submits that, to the extent that there is any ambiguity in cl 2.1, that ambiguity should be construed against Coles in accordance with the contra proferentem rule.
9On the other hand, Coles contends that cl 2.1 should be read as saying that no Percentage Rent is payable on the first $25,000,000 of Gross Sales and that Percentage Rent is payable at the rate of 2 percent on Gross Sales in excess of $25,000,000 up to $40,000,000, at the rate of 1.75 percent on Gross Sales in excess of $40,000,000 up to $50,000,000 and at the rate of 1.5 percent thereafter.
10I prefer the interpretation contended for by Coles for a number of reasons.
11First, in my opinion, the contra proferentem rule is of little assistance in this case. As Campbell J (as he then was) pointed out in North v Marina [2003] NSWSC 64 at [77] ff the principle is one of last resort. In my opinion, the principle is of limited assistance where, as here, the relevant agreement was negotiated between commercial parties both of whom were advised by lawyers - in the case of Coles, by inhouse lawyers. It is also of limited assistance where it is difficult to identify the proferens. In this case, the clause relating to the Percentage Rent was originally drafted by Coles. That clause was in these terms:
The Lessee must pay a Percentage Rent at the rate of:
(1) 0% where annual sales are less than or equal to $25,000,000;
(2) 2% where annual sales exceed $25,000,000 but are not greater than $40,000,000;
(3) 1.75% where annual sales exceed $40,000,000 but are not greater than $50,000,000;
(4) 1.50% of annual gross sales in excess of $50,000,000, ...
12Mr Gaiety, who was the person at Renaldo responsible for negotiating the terms of the agreement for lease, amended that draft to insert the word "plus" at the end of subclauses (2) and (3) and sent the signed amended agreement to Coles on 1 October 2004. The agreement as amended was approved by the Coles Board at some time prior to 6 October 2004. The clause was then amended to take its current form, although it is not clear from the evidence how that came about. Having regard to those matters, in my opinion, it is not obvious that Coles should be taken to be the proferens of the clause. Although it prepared the initial draft, the clause went through significant amendments, apparently as a result of negotiations between the parties. It is not clear who proposed those amendments. In any event, for reasons that I will explain, I do not think that it is necessary to resort to the contra proferentem principle in this case.
13Second, I do not think that it is natural to read the percentages stated in paragraphs (a), (b) and (c) as referring back to the expression "the Lessee's Gross Sales" in the introductory words of the clause. The introductory words of the clause simply say that the Percentage Rent is to be "based on" the Lessee's Gross Sales. The words "based on" are not apposite to indicate that the percentages identified in paragraphs (a), (b) and (c) are to be applied to the "Lessee's Gross Sales". A more natural meaning of the introductory words is that they identify the principle which is to be applied (that is, that there should be a Percentage Rent based on Gross Sales) and that principle is given effect to by the paragraphs that follow. The use of the words "as follows" supports that conclusion.
14Third, on Renaldo's interpretation of cl 2.1, paragraph (a) has no work to do, since it simply says that no Percentage Rent is payable where the Gross Sales are less than or equal to $25,000,000.00. On Renaldo's interpretation, that is something which already follows from paragraphs (b) to (d).
15Fourth, the interpretation contended for by Renaldo has consequences which make little business sense. The obvious purpose of the Percentage Rent is to allow Renaldo to share in the benefit Coles derives from increased sales. Having regard to that purpose, it is to be expected that the Percentage Rent would increase in proportion to the increase in Gross Sales in a way which gives both the lessee and the lessor an incentive to take steps designed to bring about that increase. However, on Renaldo's interpretation, if Coles' Gross Sales increase from $25,000,000 to $25,000,001, its rent increases by $500,000 (that is, 2 percent of the total Gross Sales). That provides Coles with a disincentive to strive to increase its Gross Sales as those sales approach $25,000,000. If Gross Sales exceed $40,000,000 then, on Renaldo's interpretation, the rent actually decreases until the Gross Sales rise substantially above $40,000,000, since the Percentage Rent is calculated at a lower rate on the total amount of Gross Sales. Mr Stevenson, who appeared for Renaldo, described this effect in written submissions as a "curiosity". It is, however, a curiosity that it is hard to believe the parties intended.
16The position is even more extreme if the Gross Sales exceed $50,000,000. In that event, none of paragraphs (a), (b) or (c) applies since none of the preconditions to the operation of those paragraphs operates - that is, the Gross Sales do not fall within any of the bands identified in those paragraphs. The result is that only paragraph (d) applies and, on Renaldo's construction, that clause simply provides that the Percentage Rent is 1.5 percent of annual Gross Sales in excess of $50,000,000. Consequently, if annual Gross Sales are $50,000,001, the total Percentage Rent is 1.5 cents. Renaldo seeks to avoid this conclusion by submitting that cl 2.1 should be interpreted as saying that the amount payable under paragraph (d) is in addition to the amounts payable under the other paragraphs. That much may be accepted. The question, however, is why on Renaldo's construction any rent is payable under paragraph (c) once the annual Gross Sales exceed $50,000,000. According to Renaldo's construction of the clause, each paragraph identifies a percentage of total Gross Sales that is to be paid as Percentage Rent when the Gross Sales fall within the bands identified in the paragraph. However, the band identified by paragraph (c) ceases to apply when the Gross Sales exceed $50,000,000. The only operable band then is the one set out in paragraph (d). Consequently, the result I have identified seems to me to be an unavoidable consequence of Renaldo's interpretation.
17A difficulty with the construction propounded by Coles is that, because paragraphs (a), (b) and (c) (in contrast to paragraph (d)) use the preposition "where", those paragraphs do not expressly state the amount to which the percentage identified in each of them is to be applied. However, in my opinion, it does not involve a distortion of language to interpret each paragraph as stating that the percentages are to be applied to Gross Sales falling within the range specified in that paragraph. So, for example, paragraph (b) should be read as saying that Coles should pay 2 percent on Gross Sales that exceed $25,000,000, but are not greater than $40,000,000. Read in that way, paragraphs (a), (b) and (c) operate in the same way as paragraph (d). It might be thought odd of the parties to choose different language when the clauses are intended to operate in the same way. However, in my opinion, the explanation of their choice is that each of paragraphs (a), (b) and (c) is concerned with a range fixed by both a minimum and maximum (in the case of paragraph (a), an implied minimum of $0) whereas paragraph (d) has no maximum. Necessarily, then, the drafting of paragraph (d) could not be identical to the drafting of the other paragraphs. Given that, I do not think that too much can be read into the fact that paragraph (d) is expressed in different language; and I do not think the fact that the parties could have chosen language in paragraphs (a), (b) and (c) which followed more closely the language of paragraph (d) is enough to establish that they must have intended the earlier paragraphs to operate in a way that was different from the operation of paragraph (d). Read in the way contended for by Coles, the clause has a reasonable commercial operation. No Percentage Rent is payable on the first $25,000,000 of Gross Sales. But Coles is still liable to pay the Base Rent. If Coles' Gross Sales exceeds $25,000,000, it starts paying a Percentage Rent in respect of the excess - first, at the rate of 2 percent and then at reduced rates in accordance with paragraphs (c) and (d). Both lessor and lessee benefit from any increase in Gross Sales. That gives them both an incentive to seek to achieve that result. That gives the clause a sensible commercial operation.
18It follows that the amended summons should be dismissed. There should be a declaration in terms of paragraph 1 of the cross summons. Renaldo should pay Coles' costs of the proceedings.