Supreme Court of Tasmania|1998-06-23|Before: Wright J

These proceedings commenced on 20 November 1992 when Ambrose sued Renkon as lessee for arrears of rent due pursuant to the lease. The second to fifth defendants were joined in the action as guarantors of Renkon. Renkon counterclaimed against Ambrose, and joined Deming as a defendant to the counterclaim pursuant to the provisions of the Rules of Court, O23, r13, et seq. The counterclaim referred to the fact that Ambrose, Deming and Renkon had entered into the two year agreement on 30 June 1989. The effect of that agreement has already been mentioned, but its actual text (omitting the recitals) was as follows:

(a) the Recorder of Titles has not within two (2) years of the date of completion of the said agreement for sale or within such longer period as the parties may agree upon accepted a petition to amend Sealed Plan 12691 so as to except the land comprised in the said lease from the operation of covenant 3.7 of the Schedule of Easements to that Sealed Plan; or

(b) as a result of the enforcement of that covenant 3.7 the Purchaser are [sic] by order of a court restrained from carrying on the business of a licensed hotel upon the land comprised in the lease;

THEN Ambrose and Deming will forthwith perform the obligations set forth in clause 2 hereof.

2 Upon the happening of either of the events referred to in clause 1 hereof:-

(a) Ambrose will accept a surrender of the said lease;

(b) Deming shall perform the obligations imposed by clause 3(1) of the lease;

(c) Ambrose and Deming or one of them or in such proportions as they consider (but to the intent that their liability to the Purchaser is joint and several) will pay by way of consideration for the surrender of the said lease a sum being the sum of ONE MILLION DOLLARS ($1,000,000.00) less the amount payable under subclause (b) hereof (other than any amount relating to the purchase of stock in trade)."

Although initially disputed in the pleadings, it was conceded before me by counsel for Ambrose and Deming that this agreement was adequately supported by consideration. At no time on or before 1 July 1991 did the Recorder of Titles accept a petition to amend the sealed plan in the way envisaged by the agreement. The lease between Ambrose and Renkon, although providing for an initial term of four years, also contained options for renewal for up to a total of twenty years. Subsequent to the commencement of proceedings between the parties, in or about March 1993, Renkon sought an extension of the lease for a further period of four years. This request, which was served upon Ambrose, was in the following terms:

"TO: ROSS AMBROSE GROUP PTY LTD ACN 009 501 759 of 46 Cameron Street, Launceston.

RENKON ACN 009 581 622 hereby requests you to extend the lease between you and it dated the 1st of July, 1989 of the land the subject of the lease for a further term of four (4) years upon all the terms and condition [sic] of that lease.

The request is in no way a waiver or in derogation of Renkon Pty Ltd's requirement that you accept a surrender of the said lease.

By letters dated 7 and 16 April 1993 respectively, Ambrose's solicitors refused to extend the lease as requested, on the grounds that Renkon was in breach of its obligations to pay rent and was also in breach of several other covenants. On 29 June 1993, Ambrose served notice terminating the lease and giving notice of its intention to re-enter the demised premises. By its counterclaim in the present proceedings, Renkon seeks specific performance of the agreement dated 30 June 1989 or, alternatively, damages. By a third party notice dated 22 December 1992, Ambrose joined in the proceedings Messrs Zeeman Kable & Page, the firm of solicitors which acted for it in the preparation of the agreement of 30 June 1989, on the ground that, if that agreement bore the construction contended for by Renkon, those solicitors had been negligent or in breach of contract and were liable to indemnify Ambrose against Renkon's claim. A similar third party notice was issued against the same firm of solicitors by Deming on 11 May 1995. The third party, in turn, alleged that the fourth party's conduct had been instrumental in preventing the Recorder of Titles from accepting the petition to amend Sealed Plan No 12691 before 1 July 1991 and, accordingly, issued a fourth party notice claiming indemnity against the Meander Valley Council based on allegations of negligence and breach of statutory duty.

In defending Renkon's counterclaim, Ambrose and Deming alleged that Renkon's entitlement to surrender the lease upon the Recorder of Titles failing to except the subject premises from the operation of the restrictive covenant, was subject to an implied term that such would be done within a reasonable period of time after the expiry of the two year term referred to in the agreement or, alternatively, that Renkon had waived its entitlement, or, was estopped by conduct from asserting its entitlement, or had elected to release Ambrose and Deming from the agreement or had abandoned its right to insist upon their performance of obligations specified in cl 2.

In response to these allegations, Renkon issued a fifth party notice against Clarke & Gee, the firm of solicitors which had acted on its behalf at the time the agreement had been entered into, alleging that their negligence or breach of contract had deprived Renkon of the opportunity to surrender the lease as provided for in the agreement.

The proceedings issued against the third, fourth and fifth parties were all defended. On 4 February 1997, Crawford J ordered that the questions raised by Renkon's counterclaim against Ambrose and Deming, the defence to that counterclaim, and the reply to that defence, be tried before any other questions or issues in the action. On this basis, the proceedings came before me for trial of these issues on 10 June 1998. Counsel for all parties agreed that if Renkon's counterclaim proved successful, I should be asked not to assess damages or interest and, further, that if such were the case, Renkon would consent to an order staying execution of any orders which may be made in its favour to enable the balance of the action to be determined.

During the course of proceedings before me, at which all parties were represented by counsel, no oral evidence was called by any party. The only evidence adduced was that presented in documentary form by Renkon. Counsel for all parties presented argument. The fifth party supported Renkon. The third and fourth parties supported Ambrose and Deming. Minor amendments, not affecting the outcome, were made to the pleadings without objection. Although Ambrose and Deming had raised waiver estoppel, election and abandonment by Renkon, as substantive issues for determination, the critical argument presented dealt with the existence or otherwise of an implied term that Renkon would exercise its right to require Ambrose to accept a surrender of the lease and take other consequential action within a reasonable time after the expiration of the two year period provided for in the two year agreement.

It was argued by Mr Estcourt of counsel for Renkon that to imply a term of the kind and quality contended for by Ambrose and Deming, five conditions must be fulfilled:

2 it must be necessary to give business efficacy to the contract as no term will be implied if the contract is effective without it;

3 it must be so obvious that it "goes without saying";

5 it must not contradict any express terms of the contract;

(PB Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 and Codelfa Construction Pty Ltd v State Rail Authority of NSW (1981 - [1982] HCA 24; 1982) 149 CLR 337 at 347 per Mason J.)

In assessing whether or not these five conditions have been fulfilled, it is permissible to consider the contract in question in light of the matrix of relevant facts, but the subjective intention of either or both parties may not be considered.

Counsel for Ambrose and Deming and the third and fourth parties, did not take issue with these propositions but it was submitted that in effect the two year agreement created an option in favour of Renkon and, as such, it fell within a particular class of contract to which an implication attached as a matter of law that the option must be exercised, if at all, within a reasonable time. In Codelfa at 345, Mason J recognised that in contracts within a special class, an implied term may arise as a legal incident of such a contract. Clear support for this view is also to be found in Lister v Ramford Ice & Cold Storage Co Ltd [1956] UKHL 6; [1957] AC 555 per Viscount Simmonds at 576 - 579.

Mr Estcourt submitted that although the initial period of the lease was for four years only, it was plainly envisaged by the parties that their relationship could be ongoing for up to twenty years and, consequently, a surrender of the lease, even (for example), three years and eleven months into the term which would oblige Ambrose and Deming to pay $1,000,000 (less plant and equipment value) should not be regarded as significant.

In Ballas v Theophilos (No 2) [1957] HCA 90; (1957) 98 CLR 193, the High Court had to consider the effect of a clause in a partnership deed which conferred upon the surviving partner an option to purchase the share of his deceased partner in the capital and assets of the business upon certain terms. However, the deed did not provide for any particular time during which the option could be exercised. The surviving partner purported to exercise the option one year and four months after the death of his partner. At 197 Dixon CJ said:

"The partnership deed limits no time for the exercise of the option. The implication of law is that it must be exercised within a reasonable time. What is a reasonable time is of course affected by the stipulations contained in the option clause itself. That means that due time must be allowed for the calculation of the amounts to be added to the share disclosed by the last balance sheet and the completion of the balance sheet to the date of death, and for the valuation of goodwill if that be required. It means too that a reasonable time must be allowed for the consideration by the surviving partner of the information thus obtained. But thereafter he must act with that promptness which is always required in the case of the exercise of an option to acquire an asset the value of which is affected by the changing conditions which time and the vicissitudes of business bring. It appears to me quite impossible to say that a period of one year and four months is reasonable."

"In the absence of any specific time, there is an implication that an option of purchase must be exercised within a reasonable time, and what is a reasonable time depends on all the circumstances of the particular case. In Collingridge v Niesmann (1920) 37 WN (NSW) 224 Harvey J, as he then was, said:- 'It is a general principle of law that an offer not otherwise limited must be accepted within a reasonable time: see Meynell v Surtee (1855) 25 LJ Ch, at p 260; and Ramsgate Hotel Co v Montefiore (1866) LR 1 Ex 109. I see no reason why the same rule should not apply with equal, if not greater, force to an option for value under which one party only is bound. I, therefore, hold that the option must be read as being an option for a reasonable time only' (1920) 37 WN (NSW), at p 226 . This case was affirmed on appeal: Niesmann v Collingridge [1921] HCA 19; (1921) 29 CLR 177 ; see also Reid v Moreland Timber Co Pty Ltd [1946] HCA 48; (1946) 73 CLR 1, at p13."

In Ellmore (Maitland) Pty Ltd v Tull (1995) 7 BPR 14,305, the New South Wales Court of Appeal had to consider the effect of a provision in a contract for the sale of land which contained a condition that, following completion the purchasers, their successors or assigns would, upon the vendor's written request, lodge a plan of subdivision to create two lots from a lot which had been sold and transfer one such lot to the vendor. Mahoney JA, in giving judgment, said (at 14,307):

"Where power is given to a party to a transaction to exercise a particular right and no time is specified for its exercise, it will commonly be implied that the right must be exercised within a reasonable time: see Reid v Moreland Timber Co Pty Ltd [1946] HCA 48; (1946) 73 CLR 1 at 13 et seq; Amalgamated Television Services Pty Ltd v Television Corp Ltd [1969] HCA 50; (1969) 123 CLR 648 at 654, 655. As Dixon J said in Reid, 'an implication of a reasonable time when none is expressly limited is, in general, to be made unless there are indications to the contrary'. The reason for this is plain. It was referred to by Dixon J: otherwise 'the land must be sterile in the hands of the owner in fee simple awaiting the pleasure of' the party who may give the notice but need not do so. The practical difficulties involved in the continued existence indefinitely of rights of the present kind suggest that the intention of the parties was, or is best to be effected by accepting, that the right must be exercised within a reasonable time."

It is plain enough that a term will not always be implied in respect of the exercise of an option. Sometimes such an implication would be contrary to the intended effect and purpose of the option as inferred from a construction of the relevant document. An example of such a situation may be found in Blacktown Municipal Council v Doneo (1971) 1 NSWLR 157 where a block of vacant land zoned for "special uses (Parking)" was sold to a local council in 1955. The sale was subject to an agreement that if a rezoning of the land should make the land "available for building purposes" then the vendors were to have first option to repurchase the property at the price at which it was originally sold.

An effective rezoning of the land occurred in November 1968. The original vendors required the council to resell the property. This purported exercise of the option was undertaken without delay after the rezoning had taken place. The council, however, argued that it should be implied in the option agreement that the right of repurchase could only occur if the rezoning occurred within a reasonable time after the sale. Not surprisingly, this contention was rejected by the Court of Appeal which said at 161:

"To imply in this contract a term that the change, if it were to happen, had to do so within a reasonable time, would only be warranted if such an implication was necessary to carry out the intention of the parties, and I am not persuaded that it was. The very fact the parties entered into this contact so that the land might vest in the council subject to the special clause is an indication that both parties contemplated that a long period of time might elapse before the user was changed, if it ever was changed. They did not put anything in the contract about this having to take place within a reasonable time. I would respectfully agree with the observations of Jenkins LJ on this topic: 'I do not think that the court will read a term into a contract unless, considering the matter from the point of view of business efficacy, it is clear beyond a peradventure that both parties intended a given term to operate, although they did not include it in so many words'."

This was not a case of delay in exercising an option. It was a case in which the fulfilment of a condition precedent to the exercise of an option did not occur for a long period of time. That is a totally different matter from that now before me.

In the present case, the condition or triggering event upon which Renkon could exercise its option occurred two years after the agreement was signed. At that time, as the land had not become released from the restrictive covenant, Renkon acquired the vested right to exercise the option. It had at its disposal the means to ascertain whether the Recorder of Titles had excepted the subject property from the operation of the covenant. Whether it undertook a search or made inquiries does not appear from the evidence.

Both parties appear to have continued to observe the terms of the lease after 1 July 1991. There is no evidence to the contrary. Not until fifteen months later did Renkon purport to exercise its option. At that time the lease had only nine months to run, although, as already noted, it could have been renewed for a further term provided Renkon gave timely notice of an intention to renew to Ambrose.

In the context of the two year agreement and the nature of the right to surrender which had been provided for therein, I am in no doubt that a term should be implied that Renkon would exercise its right to call upon Ambrose to accept a surrender within a reasonable time of the triggering event on 1 July 1991. I am also in no doubt that, in the circumstances of the case, the period from 1 July 1991 to 30 September 1992, was in excess of a reasonable time.

As already mentioned, on 30 September 1992 when Renkon purported to exercise the option, the lease had only nine months to run. Although there was no evidence to suggest, as alleged in par12 of the Reply and Defence to the Counterclaim, that the value of the lease was diminishing as time went by, such is the almost inevitable conclusion. The value of a lease in relation to commercial premises must always be affected by its remaining duration, even if other factors, such as profitability, location and management practices are of greater overall significance. No doubt before deciding to exercise its option Renkon would need to consider many issues and no doubt would need to receive professional advice from accountants, business analysts and the like. No evidence was presented to show how long these matters should have taken if pursued with reasonable vigour, but I am in no doubt that fifteen months was much too long.

Notwithstanding that Ambrose and Deming had, in cl 1(b), bound themselves to accept a surrender and the consequences provided for in cl 2(b) upon Renkon being restrained by court order from carrying on the hotel business at any time during the currency of the two year agreement, I am of the view that a period of about three months would have been "a reasonable time" within the term of the contract which I believe must be implied.

It should be noted that cl 1(b) could only operate if Renkon's business was actually disrupted by enforcement of the restrictive covenant. The odds against that happening cannot be assessed, but it seems clear enough that the Olde Tudor Motor Inn was an existing and, possibly, flourishing business when Renkon took over and there is no evidence to suggest that its establishment or continuing viability had been impeded or threatened by the restrictive covenant, notwithstanding the existence of that covenant since 1979. Perhaps Ambrose and Deming thought the risk of enforcement of the covenant was not great or, even if substantial, was worth taking.

However, to my mind it is, to use the words of Diplock LJ in United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74 at 86, "commercially inconceivable" that Ambrose and Deming should have bound themselves to accept a surrender of the lease and buy back the stock and plant at any time whatsoever during the currency of the lease after 1 July 1991, simply on the unfettered whim of Renkon.

It was submitted by Mr Estcourt, and also by counsel for the fifth party, Mr Procter, that significance should be attached to the use of the words "then" and "forthwith" in relation to Ambrose and Deming's obligation to perform in accordance with cl 2 as required by the concluding words of cl 1. Counsel for Ambrose, Mr Griffiths, referred me to Measures v McFadyen [1910] HCA 74; (1910) 11 CLR 723 at 729 where Griffith CJ discussed the various meanings which may be attributed to the word "forthwith" but it seems to me to be of little relevance whether such an expression means "instanter" or "within a reasonable time". The term is used in the two year agreement in relation to the obligations of Ambrose and Deming to act once Renkon has signified that it intends to exercise the optional course of conduct provided for in cl 1. It does not really assist in construing the agreement in respect of the time limit which may apply to Renkon if it should wish to exercise the option.

If Renkon had effectively exercised that option by requiring Ambrose to accept a surrender of the lease and by requiring Deming to make the purchases provided for in cl 3(b) of the lease within a reasonable time, a question may have arisen as to the speed with which Ambrose and Deming should have attended to their obligations. But, in the circumstances which occurred, such a question has never arisen.

More importance may attach to the opening words used in cl 2 of the agreement which provides "Upon the happening of either of the events referred to in clause 1" [my emphasis]. This provision, whilst literally bearing upon the performance of an obligation by Ambrose and Deming once they have been properly required to do so, more directly bears upon Renkon's exercise of the option because the "events" referred to in this phrase are the triggering events which enlivened Renkon's right to exercise the option.

As Tindall CJ said in R v Humphery [1839] EngR 314; (1839) 113 ER 128, "the word 'upon' ... in different cases, may undoubtedly either mean before the act done to which it relates, or simultaneously with the act done, or after the act done, according as reason and good sense may require the interpretation, with reference to the context, and the subject matter of the enactment." This and other cases were reviewed by Tomkins J in Kuratau Land Co v Kahu Te Kuru [1966] NZLR 544 at 547, and, as his Honour pointed out, in many cases "upon" has been construed as meaning "within a reasonable time after" the specified event. Similar views were expressed by Gibbs J in Brien v Dwyer [1978] HCA 50; (1978) 141 CLR 378 at 391. In my opinion, this is the appropriate meaning to be given to that term in the present case and it seems to me that this view can only support Ambrose's argument as to the scope of any implied term.

As Renkon has failed to establish that it sought to exercise the option conferred by par1(a) of the two year agreement within a reasonable time, its counterclaim must fail. There were additional arguments advanced by Ambrose and the third and fourth parties as a basis for defeating the counterclaim. Insofar as these defences were based upon equitable grounds referable to the state of mind of relevant parties, Mr Procter correctly pointed out that there was a dearth of evidence. Accordingly, it may be doubted whether these defences could succeed. However, there is no need for me to express a concluded view of any of these matters.

Ambrose and Deming are entitled to judgment against Renkon on the counterclaim and there will be an order accordingly.

As to whether or not additional orders should be made, I will await the submissions of counsel.

Ross Ambrose Group Pty Ltd v Renkon Pty Ltd [1998] TASSC 72 (23 June 1998)

PB Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266; Blacktown Municipal Council v Doneo (1971) 1 NSWLR 157; Measures v McFadyen [1910] HCA 74; (1910) 11 CLR 723, considered.

Codelfa Construction Pty Ltd v State Rail Authority of NSW (1981 - [1982] HCA 24; 1982) 149 CLR 337; Lister v Ramford Ice & Cold Storage Co Ltd [1956] UKHL 6; [1957] AC 555; Ballas v Theophilos (No 2) [1957] HCA 90; (1957) 98 CLR 193; Ellmore (Maitland) Pty Ltd v Tull (1995) 7 BPR 14,305; United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74; R v Humphery [1839] EngR 314; (1839) 113 ER 128; Kuratau Land Co v Kahu Te Kuru [1966] NZLR 544; Brien v Dwyer [1978] HCA 50; (1978) 141 CLR 378, followed.

Ross Ambrose Group Pty Ltd v Renkon Pty Ltd [1998] TASSC 72

At a glance

Court

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Judgment (48 paragraphs)

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Cases Cited (11)

Ross Ambrose Group Pty Ltd v Renkon Pty Ltd [1998] TASSC 72 (23 June 1998)