Scudooda Pty Ltd v K&E Property Pty Ltd [2018] NSWSC 1397 | Case summary

Determination

I am satisfied that on about 11 March 2014 the plaintiff exercised the first option to renew in accordance with the requirements of cl 16.1 of the registered lease. By its Defence, the defendant asserted that the exercise was not valid because it was effected by express post. This argument was not addressed in submissions and may be taken to have been abandoned. In any case, even if service by express post does not fall within the ambit of the notices provision found in cl 7 of the lease, service in that way would be sufficient because it falls within s 170 of the Conveyancing Act 1919 (NSW).
The plaintiff thereby became entitled to the grant of a new lease for the period 10 September 2014 to 9 September 2019. That contractual entitlement would be able to be specifically enforced in equity, at least whilst the plaintiff was not in serious default of its obligations to the then lessors. There is no suggestion of such default. The plaintiff thus had an equitable interest in the land.
The plaintiff's continued possession after 9 September 2014 should in my view be seen as being pursuant to the agreement for the new lease. Its continued occupation at the rental suggested by the then lessors, namely 5% above that which applied at the end of the term of the lease, is consistent with the rent being calculated as required by cll 16.3 and 20 of the lease. Moreover, as submitted by the plaintiff, continued occupation at that rent (and at subsequently increased rents) is not consistent with the plaintiff merely holding over in accordance with cl 15.1 of the lease.
Nevertheless, the plaintiff and the then lessors did not proceed to execute a new lease in accordance with the option to renew, or have any new lease registered.
Forms of leases for the period 10 September 2014 to 9 September 2019 had been prepared by August 2015, but the terms of those leases differed from those that would be contained in a lease issued in accordance with cl 16.3 upon the exercise of the option to renew. However, the evidence indicates that the plaintiff and the then lessors did not conclude an agreement on the terms of any of those forms of lease. The form of lease that was attached to the defendant's contract for sale was only executed by two of the four lessors and not at all by the plaintiff. The plaintiff later executed an amended form of lease that deleted Mr Toubia as a guarantor and replaced him with Ms Lai. This form of lease was submitted to the then lessors but there is no evidence that it was ever accepted by them.
When the defendant entered into its contract to purchase the land it was plainly on notice of registered lease AF215730 and of the fact that the plaintiff had exercised the first option to renew. The defendant was also aware that a form of lease for the term 10 September 2014 to 9 September 2019 had been prepared but not yet executed by the plaintiff. In these circumstances, and leaving aside for the moment the effect of the Real Property Act 1900 (NSW), the defendant was in the position of a purchaser with notice of the plaintiff's equitable interest in the land that arose from its exercise of the option to renew. The defendant would thus acquire its interest in the land subject to the plaintiff's equitable interest. The effect of the Real Property Act does not produce a different result. When the defendant became the registered proprietor it held its interest subject to the interests comprised in the registered lease, which include the plaintiff's interest under the option to renew (see Mercantile Credits Ltd v The Shell Company of Australia Ltd (1976) 136 CLR 326 at 338-9, 345 and 351-2; Tenstat Pty Ltd v Permanent Trustee Australia Ltd (1992) 28 NSWLR 625 at 629).
Even if that were not the position, I think that in the circumstances of this case, in particular the terms upon which the defendant contracted to acquire its interest in the land, a personal equity would have arisen that would preclude the defendant from claiming its interest free of the plaintiff's interest (see Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 615-6, 638-9 and 653; see also the recent decision of Kunc J in Ideal Business Centres Pty Ltd v Violin Holdings Pty Ltd [2018] NSWSC 1249). The defendant agreed with the former owners that it would acquire its title subject to existing tenancies, in particular the plaintiff's tenancy that derives from the registered lease, and further agreed that following completion it would comply with all obligations owed to the tenant. Recognition of the continued enforceability of the plaintiff's rights was one of the assumptions underlying the agreement by which the defendant was able to obtain its title.
For the above reasons, upon completion of its contract for sale and even after becoming the registered proprietor of the land, the defendant was bound by the plaintiff's equitable interest that arose from the plaintiff's exercise of the option to renew for the further five year term. It was not open to the defendant to treat the plaintiff as merely holding over following the expiry of the term on 9 September 2014. The notice of termination of the plaintiff's tenancy given by the defendant in December 2016 was thus ineffective. The plaintiff continued in occupation on the basis of a specifically enforceable contractual right to the grant of a new lease.
The rent was increased by 5% in September 2015, and by a further 5% in September 2016. This was consistent with the rent being calculated in accordance with the terms of a lease issued in accordance with the terms of the option to renew. The plaintiff essentially kept up its payments of the agreed rent to the defendant until November 2016.
It appears to be common ground that by reason of the operation of s 18(3)(c) of the Retail Leases Act, the provision concerning the rent in the first year of the renewed term is void. On that basis, the commencing rent for the renewed term should not have been increased by 5% above the rent in the final year of the lease. Subsequent increases of 5% each year throughout the renewed term (effected pursuant to provisions not affected by s 18(3)(c)) were consequently based on inflated figures. The Schedule provided to the Court, which was said to be based on figures for rent that take into account the effect of s 18(3)(c), indicates that the plaintiff would have been in credit by almost $3,000 on account of rent as at 8 November 2016. The next payment was due on 10 November 2016. The plaintiff then asserted that the defendant was liable to reimburse it for the amount paid for electricity since 1 December 2015, an amount claimed to be approximately $24,000.
The plaintiff now claims that the defendant is obliged to reimburse it for all amounts paid for electricity since early 2010, an amount in excess of $266,000. Alternatively, the plaintiff claims that it is entitled to set off that amount against rental arrears and future rent (see Amended Statement of Claim paragraphs 12 and 29).
The plaintiff submitted that the defendant is subject to all the covenants imposed on the former lessors under what is described as the original lease and what is described as the renewed lease. Reliance was placed upon s 40(3) of the Real Property Act and s 118 of the Conveyancing Act. It was put that the lease and any renewed lease contained a covenant on the part of the lessor to pay for electricity supplied to the leased premises. The covenant was said to be either express or implied, and derived from the terms of cll 30 and 66 (set out at [8]-[9] above). It was submitted that although cl 30.1 in isolation does not contain any covenant by the lessor to pay the electricity charges, when regard is had to cl 30.2 and cl 66 (especially cl 66.2.5), such a covenant should be found to exist. It was further submitted that the electricity charges fell within cl 30.2 itself. Finally, it was submitted that the decision of the Court of Appeal in Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liquidation) [2016] NSWCA 165 was directly on point on this question of construction.
The defendant noted the apparent acceptance by the plaintiff that cl 30.1 did not itself contain any covenant on the part of the lessor. It was submitted that cl 30.1 said nothing about any obligations on the part of the lessor. As for cl 30.2, the defendant emphasised that it operated only in respect of certain rates, charges and taxes which the lessor "is liable to pay". It was submitted that cl 30.2 does not create any payment obligation in favour of the lessee, and it was put that cl 66.1 only operated to create payment obligations upon the lessee. The defendant noted that cl 66.1 was concerned with outgoings that relate to the whole of the land, and that charges for electricity supplied for the tenant's purposes do not bear that character. As for cl 66.2.5, the defendant submitted that it was merely part of a definition of "Outgoings" and in any event it excludes costs that are "otherwise payable by the Lessee".
The principles applicable to questions of construction of written commercial agreements are not in doubt. Reference need only be made to the well-known statement made by the High Court in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] where it was stated: The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties…intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".
Courts are often pressed with a considerable volume of evidence of surrounding circumstances said to shed light upon a question of construction. That has not occurred in this case. Little is known about the circumstances that existed when the lease was entered into in September 2009. It is not known, for example, whether there was at that time a meter that separately measured electricity supplied to the leased premises (Shop 3). Mr O'Sullivan gave an answer in cross-examination (at transcript page 15) that might suggest that there was no separate meter, but the issue was not further pursued. There was evidence that at some stage City Printers Pty Ltd, which I infer from an answer given by Mr O'Sullivan in cross-examination was the previous tenant, obtained its own electricity account with Energy Australia, but this evidence is not definitive as to whether and if so when a separate meter was installed. The Agreement for Lease entered into on 24 July 2009 provided that the grant of the lease was conditional upon the plaintiff obtaining a development approval to carry out certain works, but details of the proposed works are not in evidence.
It is necessary to focus upon the text of the relevant provisions of the lease, read in the context of the lease as a whole.
Reference should be made at the outset to certain defined terms. Clause 1.1 of the lease contains definitions that apply unless a contrary intention appears. The "premises" is defined to mean that which is specified in Item 5. Item 5 refers to "Shop 3, 50-54 York Street, Sydney NSW 2000". The "building" is defined to mean the building containing the premises specified in Item 5. The "land" is defined to mean the land in Certificate(s) of Title or conveyance upon which the building is erected specified in Item 4. Item 4 refers to "The whole of the property contained in Certificate of Title Folio Identifier 3/SP63152". The land is one of 21 lots in a strata scheme. The strata scheme includes common property in addition to the various lots.
I turn then to the provisions at the centre of the controversy. Clause 30.1 contains a promise by the lessee to punctually pay for all services separately metered in respect of the premises, excluding electricity. It is not clear why electricity was excluded, but there is no doubt it is.
Clause 30.2 contains a promise by the lessor to pay certain rates, charges and taxes; that is, those which are "in respect of the premises the building and the land" and which "it is liable to pay", other than any which the lessee has covenanted to pay under the lease. Under the form of lease employed here the lessee might, for example, be required to pay for all of those amounts pursuant to cl 66 (see cl 66.2.3). Clause 30.2 is directed to liabilities in the nature of rates, charges and taxes which the lessor incurs as owner of the land which includes the demised premises. Charges for electricity supplied to the premises do not seem to me to be of such a character. Clauses 30.1 and 30.2 seem to me to be concerned with different subject areas.
I agree that it is odd that electricity is excluded from cl 30.1. That exclusion, on its own, would leave electricity charges (if separately metered in respect of the premises) ungoverned by cl 30. There is some force in the plaintiff's submission that more than this is likely to have been intended. However, should the parties be held to have intended not only that electricity charges are excluded from cl 30.1, but also that such charges are to be borne by the lessor?
I have come to the conclusion that the parties should not be taken to have had that intention. As the defendant submitted, the terms of cl 30.1 contain promises by the lessee. If it had been intended that the lessor would be liable for electricity charges it would have been very simple to add a few words within the parentheses to that effect, such as "which shall be paid by the Lessor". That was not done. Moreover, having regard to the different subject areas covered by cll 30.1 and 30.2, I do not think that reading the clauses together leads to the conclusion that an obligation upon the lessor to pay electricity charges should be found within, read into, or implied in, the clauses. I agree that cl 30.2 does not create any payment obligation in favour of the lessee.
Clause 66 does not seem to me to take the matter any further. The part of the definition of Outgoings relied upon by the plaintiff, namely cl 66.2.5, can include electricity charges but only if they are "not otherwise payable by the Lessee". That is a broader expression than "not payable by the Lessee under this Lease" (compare cl 30.2). Electricity charges payable by the lessee under a contract for the supply of electricity do not fall within cl 66.2.5. Clause 66.2.5 is concerned with certain costs that are borne by the lessor. Those costs thereby fall within the concept of Outgoings and are capable of being the subject of an obligation to pay imposed on the lessee under cl 66.1. Given that "the land" is a strata scheme lot, I see no reason why the cost of electricity supplied to the premises could not be an outgoing that related to the whole of "the land".
I have considered Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liquidation) (supra). Whilst there are similarities between the provisions dealt with in that case and those dealt with here, the case cannot be said to be directly on point. There are important differences, including the obligation on the lessor in that case to ensure that electricity was separately metered for the premises.
In my opinion, cl 30 of the lease should not be read so as to include any promise on the part of the lessor to pay for electricity supplied to the demised premises. Reasonable businesspersons in the position of the parties would not have understood the lease to impose that obligation upon the lessor. Express words to that effect are absent, and I do not think that an obligation to that effect should be read in or implied. Even allowing that it appears odd to merely exclude electricity charges from the ambit of cl 30, it is far from necessary, in order to give the agreement business efficacy, to impose an obligation upon the lessor to pay those charges.
In my view, it cannot be thought to be commercially unreasonable or nonsensical, for the parties to simply leave to the lessee the matter of arranging and paying for the supply of electricity to the demised premises. I do not think that reasonable businesspersons in the positions of the lessor and the lessee would have thought so. There is no reason to think that it would be other than a straightforward matter. The premises were evidently connected to the network, so it was only necessary to engage a supplier. It is noteworthy that after the plaintiff went into occupation it proceeded to make arrangements with suppliers and pay the ensuing electricity bills. That was done for at least two years before any issue was raised with the former lessors.
Finally, I note that it was suggested, by the defendant, that the word "excluding" in cl 30.1 was an obvious error, and that "including" should have been there instead. I do not agree. Whilst the reason for excluding electricity from cl 30.1 remains obscure, I cannot accept that it is an obvious error. That it is an error is certainly possible having regard to the terms of the Heads of Agreement dated 22 December 2008 and Mr O'Sullivan's evidence concerning the drafts of the later Agreement for Lease, but I am far from satisfied that the suggested error must have occurred.
For the above reasons I have come to the conclusion that, properly construed, neither the lease nor any renewed lease requires the lessor to pay for electricity supplied to the premises.
Accordingly, the plaintiff was not justified in claiming a right to reimbursement from the defendant of amounts it paid for electricity, or in thereafter withholding the payment of the rent on the basis that it was entitled to set off amounts it paid for electricity.
It appears from the Schedule provided to the Court that the plaintiff has been in arrears of rent since November 2016. By January 2018 the arrears were in excess of $123,000. The plaintiff was in occupation of the premises on the basis that it was entitled to a new lease in accordance with the option to renew. The terms of its occupation were those of the renewed lease that would be granted accordingly. The plaintiff's failures to pay rent were breaches of essential terms of the renewed lease (see cll 18 and 67), and amount to a repudiation of it. The plaintiff would not in those circumstances be able to obtain specific performance of its contractual right to the grant of a new lease. In my opinion it was open to the defendant to terminate the plaintiff's occupation of the premises as it did on 12 February 2018, and recover possession for itself.
It should be noted that at the commencement of the hearing the plaintiff made an application to amend its Defence to the Cross-Claim to make an application for relief against forfeiture in the event that its arguments were otherwise unsuccessful. However, the plaintiff decided not to press the application and it was made clear that the plaintiff did not, at least at this stage, seek relief against forfeiture. In these circumstances it is appropriate to give judgment for possession of the premises as sought by the defendant in its Cross-Claim.
Judgment should also be entered on the Cross-Claim for a sum comprising the amount of unpaid rent (and interest thereon) up to the date of termination on 12 February 2018, and an amount of mesne profits for the period from 13 February 2018 up to the date of judgment (calculated on the basis of the rent that would have been payable under the renewed lease). These amounts should be calculated having regard to the effect of s 18(3)(c) of the Retail Leases Act. I note that an additional claim to recover water rates was ultimately not pressed. This monetary judgment should be entered against both the plaintiff and Mr O'Sullivan pursuant to the guarantee and indemnity he gave under cl 63 of the lease.
The conclusion I have reached renders it unnecessary to deal with various other issues, including whether (and the extent to which) any obligation upon the lessor to pay for electricity was enforceable against the defendant, and whether the plaintiff would be entitled to set off against its obligations to pay rent any amount the defendant, in breach of such an obligation, failed to pay. It is also unnecessary to deal with the defendant's alternative argument that cl 30.1 of the lease should be rectified to replace "excluding" with "including". However, in this regard I will state that in my opinion no case for rectification was made out.
The rectification case largely rested on the terms of the Heads of Agreement dated 22 December 2008 which provided that the lessee "shall be responsible for all costs associated with power, gas, phone, water etc. consumed within the Premises". That might establish the existence of a common intention at that time that the lessee pay for electricity, but it is necessary to show that the common intention existed up to the time of execution of the instrument sought to be rectified (see Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 at 345; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [41]). This was not done. As envisaged by the Heads of Agreement itself, the parties engaged in further negotiations for an Agreement for Lease. The evidence showed that the various drafts of the Agreement for Lease, and the final Agreement for Lease, contained a provision in the terms of what ultimately became cl 30.1 of the lease. No evidence was adduced to show that the terms of the provision were the product of a mistake and that the terms thus failed to reflect a common intention held by the parties (see Simic v New South Wales Land and Housing Corporation (supra) at [103]). The Court was in effect invited to infer that, due to mistake, the terms of the Agreement for Lease failed to reflect a continuing common intention that the lessee pay for electricity. In my opinion it would not be appropriate to draw such inferences. A claim for rectification must be established by clear and convincing proof. That proof was lacking in this case.

Scudooda Pty Ltd v K&E Property Pty Ltd

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Judgment (7 paragraphs)

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Cases Cited (10)