Factual background
16 According to Mrs Blakeman's evidence by the early part of 1997, Alphega had been experiencing difficulties in paying the rent for the property. She claimed that the annual rent increases led to a situation where Alphega was continually in arrears. In early March 1997, Dr Graeme Harris, who had been a director of Alphega until disqualified by reason of his bankruptcy, and was a guarantor together with Mr Steve Gracie of Alphega's due performance of the terms and conditions of the lease, Mrs Blakeman's husband Kerry and Mrs Blakeman met with Mr Manoy. At that meeting Dr Harris said words to the effect:
"There is no way that we will be entering into a new lease unless you get rid of the automatic annual rent increases and we will need to review the rent levels."
17 Dr Harris and Mrs Blakeman raised the possibility of Alphega buying the property from Ruthol. $610,000 was discussed on terms of a small deposit with a postponed settlement date. Mr Manoy said words to the effect:
"We will talk about selling you the property. But you have to execute the option and sign the lease first."
18 Mrs Blakeman deposed that she again met with Mr Manoy on or about 18 March 1997 to discuss the possibility of Alphega taking a further five year lease of the premises. Also present at the meeting were Alphega's then solicitor, Richard Legg (Mr Legg), and Mr Blakeman. Mrs Blakeman's recollection was that at the time of the meeting Alphega owed approximately $12,000 to $15,000 in outstanding rent for the premises. Ruthol asserted the figure was even higher. At the meeting, according to Mrs Blakeman, discussion took place in the following terms:
"At some stage during the meeting I recall saying words or words to the effect of:
'Alphega cannot afford to exercise the option if it means having to pay the arrears of rent and having the same level of annual rent increases as the original lease. As we have previously told you, there is no way that Graeme will guarantee a lease unless this is fixed. Mr Gracie is also out as a guarantor.'
Colin Manoy said words to the effect:
'It is very important for us that you sign a document which can be used as an option for renewal.'
I then said words to the following effect:
'Alphega will not exercise the option to renew if it means having to pay the arrears of rent and being subject to the same rent reviews.' "
19 Mrs Blakeman deposed that, after she had made this statement, Mr Manoy made a telephone call to someone. Mrs Blakeman understood it to be his solicitor, Mr Singer. She heard Mr Manoy say words to the following effect:
'What can I write and how can I write it? How can I do this so that they are seen to be exercising an option that we can get them to sign."
20 Mrs Blakeman saw Mr Manoy write something apparently dictated to him. She annexed to her affidavit a document described as a true copy of notes that Mr Manoy produced at the meeting while he was on the telephone. It was in the following terms:
"We confirm that the Rent for the first year is to be the same Rent as is currently payable for current year of our lease and then as provided in the lease.
We are prepared to wave [sic] any arrear [sic] of Rent and Out Going [sic] owing as at this date provide [sic]
1. You exercise the option to renew your lease at a Rent not less than $69,436.20 for the first year.
2. You do not fault [sic] in payment of any further Rent and Outgoings as from this date. If you do then the above arrear will become immediately due and payable."
21 Mr Manoy said words to the effect:
"If you sign a document in the form we need which states that you are renewing the option, we will make sure that you do not have the automatic rent increases and will also address the outgoings. All the arrears will be waived and we will be able to continue negotiating terms for the purchase of the property. But we cannot put these things into your notice of exercise of option as this will cause us legal problems."
22 Mr Manoy next handed Mrs Blakeman the copy of the notes he had been writing. According to Mrs Blakeman another document was prepared on the letterhead of Alphega Medical Practice, a company different from Alphega. The contents of this document were as required by Mr Manoy. It was addressed to Ruthol, dated 18 March 1997 and stated as follows:
"Dear Sir
Re: Lease of 258 Condamine Street, Manly Vale
We hereby confirm that we, by this letter, exercise the option to renew the lease of the above property in accordance with our discussions today and previously. We hand this letter to Mr Manoy today."
23 Mr Manoy asked Mrs Blakeman to sign this document. According to Mrs Blakeman she said: "I want to be clear on this. I am signing this on the basis of our agreement that there will be no more automatic increases in rent." Mr Manoy responded: "That's understood." Mrs Blakeman signed the notice exercising the option to renew the lease and the other document written out by Mr Manoy during the telephone conversation and recording the rent for the first year and the waiver of arrears of rent and outgoings.
24 Mrs Blakeman said that she signed the notice exercising the option on the understanding that there had been an agreement between Alphega and Ruthol which contained not only the terms in the document prepared by Mr Manoy at Mr Singer's dictation, but also these terms: first, the automatic 6 per cent annual rent increases provided by the original lease would not apply to the renewed lease; secondly, the personal guarantees of Dr Harris and Mr Gracie would not be required; and thirdly, rent would be paid fortnightly in advance rather than monthly in advance.
25 On the other hand, Mr Manoy said that he did not agree that there would be no 6 per cent annual rent increases during the term of the renewed lease. He said that he agreed only that the rent for the first year of the new term would remain at the current rate, but thereafter the 6 per cent annual increases would apply. He said that he did not agree to the proposition that Dr Harris and Mr Gracie would not be guarantors of the renewed lease. He did agree, however, that Mrs Blakeman requested that the new lease provide that rent be paid fortnightly in advance rather than monthly in advance, and that he assented.
26 Neither Mr Legg nor Mr Blakeman was called by Mr and Mrs Mills to give evidence.
27 On 21 March 1997 Mr Milch sent to Mr Manoy for approval a copy of the new lease to be entered into by Alphega. The rent for the first year was $69,436.20 as stipulated in the document signed at 18 March meeting. But the lease still contained provisions for the 6 per cent annual rent increases, personal guarantees to be given by Dr Harris and Mr Gracie (referred to as Dr Gracie), and for rent to be paid monthly in advance. The covering letter noted Mr Manoy's instructions to Mr Singer "to cancel the option with Mills notwithstanding that the lease has not been signed by the tenant".
28 In the letter of 21 March 1997, which Ruthol's solicitors sent to Mr and Mrs Mills' solicitors, the solicitors wrote:
"We have been informed by our client that the lessee of the above premises has exercised its right to renew under the lease."
29 Mr Mills asked his solicitor to request proof that the option to renew the Alphega lease had been exercised. That request was made. On 17 April 1997, Mr Singer, by way of compliance, sent a copy of the handwritten document exercising the option to renew which had been signed by Mrs Blakeman at the meeting of 18 March. Palmer J observed that Mr Singer did not send a copy of the other document which Mrs Blakeman and Mr Manoy had signed on that day nor did he give any information as to what the current position between Ruthol and Alphega was. Upon receipt of the copy notice from Alphega apparently exercising unconditionally the option to renew the lease, Mr Mills concluded that there was nothing further he could do. He allowed the period, during which the option to purchase could be exercised, to expire on 30 June 1997 without attempting to exercise it. He said that had he not been told that Alphega had exercised its option to renew the lease he would definitely have exercised the option to purchase within the option period. His evidence to that effect was not challenged and Palmer J accepted it without reservation.
30 On 8 May 1997, Alphega's solicitors, by now Kaufmann Peters (KPL), wrote to DLS saying that it was not clear to them whether the option to renew Alphega's lease had been properly exercised. They said that the draft new lease Ruthol's solicitors had prepared did not reflect the agreement between the parties reached at the 18 March meeting. They wrote that their client was under the impression the rental sum of $69,436.20 was a gross figure inclusive of all outgoings. "The draft lease presumes the abovementioned figure is net of outgoings." This would accord with Art 2 of the lease whereunder Alphega covenanted to pay the yearly rental "without any deduction whatsoever" and Art 4 which provided for the payment by Alphega of outgoings as defined therein. The solicitors went on to say that guarantees had been included although Dr Harris and Mr Gracie were not prepared to guarantee any new lease and requested further discussion about the purchase of the property.
31 According to Palmer J, Mrs Blakeman said that she participated with Dr Harris in instructing KPL that the draft lease, which had been sent by Ruthol's solicitors, did not conform to the terms which she said were agreed with Mr Manoy on 18 March. Palmer J observed
"that Alphega's solicitors do not complain that the 6 per cent annual rent increases have not been deleted from the new draft lease and that payment of rent monthly in advance had not been altered to fortnightly in advance, although they do complain about the retention of Dr Harris and Mr Gracie as guarantors. This is a circumstance which I must take into account in assessing whether Mrs Blakeman's evidence of what was discussed and agreed at the 18 March meeting is accurate."
32 On 28 July 1997 KPL telephoned Mr Singer noting that there had been no answer to their letter and requesting a meeting to discuss the issues. No response from Ruthol was received. Palmer J said that it was not until October 1997 that Mr Manoy gave his attention to the Alphega lease. Alphega had remained in occupation after expiry of the term of the original lease on 30 June 1997, paying the rent fixed for the final year of the original lease.
33 On 3 October 1997 Mr Manoy sent a fax to Mr Singer advising that he had had a meeting that day with Dr Harris and Mr and Mrs Blakeman. He said that the points that needed discussing were: whether the rent for the first year of the new term was net of outgoings or gross, the possible sale of the property to Alphega and "option - same lease or new lease".
34 On 10 October 1997 Mr Singer discussed with Mr Manoy the possible purchase of the Manly Vale property by Alphega. Mr Singer's diary note contained the following:
"DS (ie Mr Singer) to check whether we have to have a fresh lease executed because terms vary from old lease. Rent is definitely fixed until December 98 so this is a reason that there should be a new lease."
35 Palmer J said that the fixing of the rent until December 1998 was a reference to a discussion between Mr Manoy and Alphega earlier in October in which the suggestion was made, as a compromise, that there be no rent review at the end of the first year of the new lease, namely 30 June 1998, but that the rent for the first year remain fixed for another six months before the next review. His Honour said that this term, if incorporated into the renewed lease, would "of course" have been a variation of the terms of the original lease. Hence, Mr Singer's comment "that there should be a new lease".
36 On 12 November 1997 Mr Manoy sent a fax to Alphega commenting in numbered paragraphs on various points for discussion and containing this paragraph:
"2. $69,420 Net [ie the first year's rent under the new lease] + Increases must go in the lease but you pay $69,420 N [ie net] to 31/12/98. Bal. of all o/s amounts will be adjusted on settlement."
37 Palmer J said:
"42 Mr Manoy was asked about this paragraph in cross examination: T40.10-41.5. His attempt to explain it as meaning that there was to be an express variation in the lease so that the first rent review would take place, not on 1 July 1998 but on 1 January 1999, is unconvincing and I do not accept it, for the following reasons. First, his explanation is contrary to the natural meaning of the words which he used: ' Increases must go in the lease but [i.e. notwithstanding what is in the lease] you pay … '. Second, his explanation flies in the face of the advice which Mr Singer had given him on 10 October that to vary the rent review provisions in the original lease would require a fresh lease, not a renewal - a situation which Mr Manoy was obviously anxious to avoid. Third, it was clear from the way in which Mr Manoy gave this evidence that he found it very awkward to explain away what seemed clear from his facsimile. At first, he sought to avoid answering the question 'What did you mean by the expression '$69,420 net plus increases must go in the Lease'. In the answers which followed, he appeared to me to prevaricate, saying at first that he knew what he meant but finally saying that he did not know what were the 'outstanding amounts' referred to at the end of the paragraph.
43 I regret to say that I have reached the conclusion that Mr Manoy was not telling the truth when he denied that his facsimile was intended to suggest that 'the lease will say one thing but what will happen in reality will be something different'. I conclude that what he was proposing to Alphega was that the new lease contain the same provisions for rent review as the original lease, but that there be a 'side agreement' varying the rent for the first half of the second year - a side agreement which would not be discoverable by anyone, such as Mr Mills, searching the new registered lease."
38 These observations cannot be faulted and the conclusion reached was clearly one open to the trial judge.
39 On 13 November 1997 Mr Manoy had a conversation with Mr Milch of DLS, who had taken over the conduct of the matter from Mr Singer. Mr Milch gave advice to Mr Manoy recorded in a diary note as follows:
" Advised
If previous grantee finds out that lease not pursuant to option or granted option to purchase - he would commence proceedings for breach of contract. You rescinded on basis that tenant exercised option to lease. He not worried, he's a dead duck, do it all the time."
40 Mr Manoy, when asked, said that he did not recall the conversation. Mr Milch agreed that the concluding words of the diary note probably recorded a statement by Mr Manoy in response to Mr Milch's advice to this effect: "I'm not worried; Mills is a dead duck; I do it all the time." Palmer J ascribed that meaning to Mr Manoy's words. Again, such conclusion was open to the trial judge. In his Honour's opinion, one could legitimately draw the inference from these words, in the context in which they were said, that Mr Milch told Mr Manoy that what was being done between Ruthol and Alphega was not a renewal of the Alphega lease pursuant to the option to renew but was, rather, a fresh lease with different terms. If Mr Mills found out what had happened he would commence proceedings for breach of the Millses' option to purchase. Palmer J inferred from Mr Manoy's response, as recorded by Mr Milch, that Mr Manoy's attitude to this advice was: "I'm not worried about the possibility of being caught out by Mr Mills; I've succeeded in manoeuvring him out of his option rights; I do this sort of manoeuvre all the time", this latter remark being a reference to his extensive experience in negotiating commercial leases in the course of conducting his business. Palmer J said:
"It may well be that Mr Manoy felt confident that he had little to fear from Mr Mills because he believed that the new lease would contain no variation of the annual rent increase provision as the proposed variation that there be no rent review until 1 January 1998 would be contained in an undisclosed 'side agreement' with Alphega."