Contracts - Construction and interpretation of contracts - Implied terms - Generally - General principles - Nature of intended use of premises.

Maggbury Pty Limited v Hafele Australia Pty Limited (2002) 210 CLR 180, followed.

Contracts - Construction and interpretation of contracts - Other matters - General words - Inconsistency with object and intention of transaction - Restore or reinstate property to its state and condition at commencement of lease.

Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337, considered.

First and Second Plaintiffs: N O'Bryan SC and A Walker

First and Second Plaintiffs: Dobson Mitchell & Allport

Judgment Number: [2006] TASSC 94

STRATA CORPORATION NO 117066, THE GASWORKS, 2 MACQUARIE STREET, HOBART, EQUITY AUSTRALIA CORPORATION PTY LTD (ACN 009 590 416) v NINE ELEVEN TASMANIA PTY LTD (ACN 059 661 442)

1 The first plaintiff ("Strata") is a body corporate to 14 flats and common property ("the property"). The second plaintiff ("Equity") became the registered owner of the 14 flats and, in turn, leased to the defendant ("Nine Eleven"), flats 1 - 7 and 9, and the common property. Robert Hosken was, and remains at all material times, a director of Strata. James Bleasel, the original party to the agreement, was at all material times the controlling director of Nine Eleven.

2 In January 1998, Equity and Bleasel agreed as evidenced by a memorandum of understanding ("MOA") to a lease of flats 1 - 7 and 9 and the common property to Bleasel or his nominee. Bleasel nominated Nine Eleven and eventually separate leases over the flats ("Lots Lease") and the common property ("Common Property Lease") were entered into by the parties. The parties differ on the dates on which the leases were agreed or executed. Their respective pleadings state:

9 Leases were entered into between the plaintiffs and the defendant in respect of the common property and lots 1-7 and 9 dated 26 March 1999 and commencing on 1 October 1998 for a term of 3 years and 1 day in accordance with the MOU.

The leases are in writing and copies may be inspected at the offices of the plaintiffs' solicitors.

(a) by a lease dated 15 December 1998, the second plaintiff leased the Lots to the defendant for a term of 3 years commencing on 1 October 1998 with four options each of 10 years ('the First Lots Lease');

(b) by a lease dated 15 December 1998, the first plaintiff leased the Common Property (excluding the service infrastructure as defined in section 3 of the Strata Titles Act 1998) to the defendant for a term of 3 years commencing on 1 October 1998 with four options each of 10 years ('the First Common Property Lease');

(c) to enable the lease of the Lots referred to in paragraph 9(a) to be registered on the certificates of title to the Lots, by a lease dated 26 March 1999, the second plaintiff leased the Lots to the defendant for a term of 3 years and 1 day commencing on 1 October 1998 with one option of 9 years and 364 days and three further options each of 10 years ('the Second Lots Lease');

(d) to enable the lease of the Common Property (excluding the service infrastructure as defined in section 3 of the Strata Titles Act 1998) referred to in paragraph 9(b) to be registered on the certificate of title to the Common Property, by a lease dated 26 March 1999, the first plaintiff leased the Common Property (excluding the service infrastructure as defined in section 3 of the Strata Titles Act 1998) to the defendant for a term of 3 years and 1 day commencing on 1 October 1998 with four options each of 10 years ('the Second Common Property Lease');

(e) by a lease dated 2 November 2004, Memorandum of Lease No C601890, the second plaintiff leased the Lots to the defendant for a term of 9 years and 364 days commencing on 2 October 2001 with 3 options each of 10 years ('the Third Lots Lease');

(f) by a further lease of part of the Common Property which was dated 5 December 2005, Memorandum of Lease No C661730, the first plaintiff leased part of the Common Property, (which part is set out therein), to the defendant for a term of 10 years commencing on 2 October 2001 with three options each of 10 years ('the Third Common Property Lease'),

the defendant does not admit any of the other allegations in paragraph 9 of the Statement of Claim.

The leases are in writing and a copy of each may be inspected at the offices of the defendant's solicitors."

3 Various amendments were made to the MOA between January and May 1998, with a final document executed on 15 May. Bleasel paid rent on the property and began the process of obtaining planning, building permits for alterations to and use of the premises as a licensed bottle shop and associated activities.

4 In September 1998 Bleasel, having obtained the necessary approvals, undertook extensive modifications to the premises required for the effective conduct of the operations of the nominee. The May document was modified or supplemented by an amendment providing for an existing month to be added to the existing lease period.

5 In December 1998, separate leases were entered into, Bleasel providing a guarantee for the flats and the common property. Both leases contained an identical provision (cls 6.3 and 6.2) permitting alterations and modifications to the premises with a concomitant requirement that the condition of the premises be reinstated upon the expiration of those leases. In March 1999 those leases were executed in a registerable form, each stated to be for a term of three years and one day from 1 October 1998.

6 In November 2004, a further lease over the flats was executed for a further period of 10 years from 2 October 2001 and the equivalent for the common property, signed in January 2005, stated to commence as and from 2 October. The latter was not registered because of insufficiency of its plan required by the Recorder of Titles in accordance with the Land Titles Act 1990.

7 A problem associated with the leases has been that drafting, execution and registration has invariably followed agreement or occurrence of events, rather than state the terms of agreement before reliance.

8 In May 2006, the plaintiffs became aware that the defendant intended to sell its business as an operating concern and assign its leasehold interests to the purchaser. The defendant sought consent for the assignment whilst the plaintiffs relied on the claimed obligation of reinstatement, and refused consent.

9 The respective pleadings relevant to the final phase of the relationship state:

"19 The defendant denies that it is under any obligation to re-instate the property to its state at the commencement of the leases. Further, the defendant says that the date of commencement of the further leases was 2 October 2001 and by that time Bleasel and/or the defendant had completed all of the alterations referred to in clause 1 of the MOU and accordingly has no obligation to re-instate the property to its original state at the time of the MOU. Accordingly the defendant refuses to re-instate premises in breach of clause 1 of the MOU and the terms of the leases referred to above.

19 As to paragraph 19 of the Statement of Claim the defendant says that:

(a) It admits it is refusing to reinstate in the time required by the plaintiffs;

(b) It denies such refusal is a breach of the MOU as defined by the Statement of Claim or the MOU1 or MOU2 and MOUS;

(c) It denies each and every other allegation in paragraph 19;

(d) Such refusal is not a breach of whichever is the legal document or documents operative between the plaintiffs and the defendant;

(e) If the operative documents are any of the Common Property Leases and the Lots Leases:

(i) the proper construction is that reinstatement should occur 'before or forthwith at the expiration of the Term or any further term' and that such obligation to reinstate does not require reinstatement at any time during the term as the plaintiffs contend, and

(ii) the reinstatement is to a condition that would comply with clause 15.1 of both Leases, which is satisfied if the premises the subject of any of the Common Property Leases or Lots Leases are yielded up in the stated condition at the expiration of the Term;

(f) Alternatively to (e), if the MOU as defined in the Statement of Claim, or MOU1, or MOU2 and MOUS is the operative legal document (or documents), it (or they) expressly provided that such restoration would occur 'at the end of the initial term of the Lease or any extension to the Lease, whichever is later';

(i) all of the First, Second and Third Lots Leases and the First, Second and Third Common Property Leases contained an express term clause 24 that the terms contained therein constituted the whole of the agreement between the Lessor and Lessee in relation to the premises (as defined therein) and that any further term, implication, collateral or other agreement was expressly excluded and negatived, and

(ii) by reason of clause 24 of the Third Lots Lease and the Third Common Property Lease, each of the First and Second Lots Lease and First and Second Common Property Lease was no longer of any force and effect,

(iii) the obligation to reinstate under the Third Common Property Lease and the Third Lots Lease was to reinstate the premises (as defined therein) to their state before the commencement thereof and the works admitted in paragraph 10 hereof were all effected beforehand."

(1) a declaration that the defendant is required "to restore or re-instate the property to its state and condition at the commencement of the lease(s)";

(3) a declaration that the plaintiffs are "under no obligation to consent to any assignment ... unless and until the defendant has honoured its obligations".

(1) declarations that it is not required to restore the property until the expiration of the leases or "further terms";

(2) rectification of the terms of the leases "so as to express the true agreement between the parties by altering the ... lease(s) ..." by deleting the words "before" and substituting "at the end of".

12 The bases for those declarations and plea for rectification include:

"23 In the event that the proper construction of the Third Common Property Lease and the Third Lots Lease is that reinstatement is to occur at any time if demanded by the plaintiffs, then the defendant states:

(a) By the MOU2 and the MOUS it was agreed that if the defendant does not exercise the option for renewal of each of the Lots Leases and Common Property Leases, that at the end of the initial term of the said Leases or any extension to the Leases which ever is the later the defendant would at its own cost restore the properties to their condition at the commencement of the Leases;

(b) By inadvertence or error and contrary to the intention of the defendant and to the true intent of the agreement between the parties the proper construction of the Third Common Property Lease and the Third Lots Lease is that reinstatement is to occur at any time if demanded by the plaintiffs;

(c) The plaintiffs knowingly are taking advantage of the said inadvertence or error by asserting a meaning of the Third Common Property Lease and the Third Lots Lease contrary to the agreement in (a) above;

(d) The defendant is effectively unable to carry out its business on the Premises for the remainder of the term and any extension thereof if the Premises are reinstated now;

(c) Alternatively, at all material times it was the common intention of the parties that restoration or reinstatement to the state the Premises were in at 1 October 1998 would occur at the end of the last Lots Lease and Common Property Lease, and only if requested by the plaintiffs."

13 The leases include general terms governing the state of return of the property:

"Clause 15.1 At the expiration or sooner determination of the Term, the Lessee shall yield up the Premises in the order and condition described in clause 6.1(a).

Clause 6.1(a) During the Term and any holding over period, the Lessee shall keep the Premises, the Lessee's fittings and all the Lessor's Fixtures in the Premises in good repair and condition, subject to:

(b) damage to the Premises covered by the insurance taken out by the Lessor in respect of the Building ... (as therein defined)."

14 The leases over the lots lease (cl 6.3) and the common property (cl 6.2) and their predecessors contain the following provision:

"The Lessee may, subject to the consent of the mortgagee of the Property which shall not be unreasonably withheld nor delayed carry out or do or cause to be carried out or done any work, extension alteration addition or installation in or to the Premises and the Lessor's Fixtures (as therein defined) as the lessee may be authorized to do by any relevant Authority to alter the Premises as the Lessee thinks fit for the purposes of the Lessee's Business PROVIDED THAT before or forthwith upon expiration of the Term (therein defined) or any further term and if required by the Lessor the Lessee shall, at its own cost, reinstate the Premises and the Lessor's Fixtures as near as practicable to such condition as would comply with clause 15.1."

15 Those clauses refer back to the common cl 15.1 (supra). It is the interpretation of that provision which is central to the respective positions of the parties.

(1) At the very least it is not required to restore the property until the expiration of the last day of the lease which here antedates the date on which the plaintiff refused to grant permission for assignment.

(2) The import of the leases requires no restoration until a period immediately before the last permitted further or extended term.

17 The plaintiffs' contention is that the obligation is governed by the words "before or forthwith upon the expiration of the term" which, in turn, permits them to determine the time of that obligation.

18 The parties engaged in commerce had equal bargaining power. The problems earlier referred to, associated with the delay in the execution or registration of leasing documents, have some relevance in the consideration of the competing bases for the interpretation of cls 6.2 and 6.3. Wide powers given to the defendant to perform works on, and modification to, the premises were confirmed rather than granted by the leases executed after the work had been performed, or at least commenced. But that consideration has little import in the interpretation given to cls 6.2 and 6.3 in the leases granted to the defendant by the first and second plaintiff respectively. Whilst the wording differs as between the original memorandum entered into between Bleasel and the plaintiffs, it remains identical in all subsequent documents.

19 The wording permits an objective construction. The Court is entitled to take into account:

(2) The nature of the title, ie, its division with strata components, differing buildings, their age and their independence on "common property" and the leasing of a portion of a number of flats to the defendant, rather than the whole site.

(3) Difference in ownership as between identified units or flats and common property and the need for a uniform approach to disposition as between the parties and including mortgagees and other actual or potential leaseholders.

(4) The context of the leases and the common involvement by Hosken and Bleasel in the commercial dealings.

(5) The nature of the intended use of the premises.

(See generally Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337.)

(1) Permit Nine Eleven, subject to the permission of the mortgagee:

(a) to carry out any work, extension, alteration, addition or installation to:

(b) as may be authorised by any relevant authority;

without specifying a time within which the defendant might carry out such work.

(i) (a) before the expiration of the term of the lease; or

(c) or if a term further to that provided for in (a) and (b);

(d) if required by the lessor which places an obligation on the lessee:

(a) at its own cost the premises and the lessor's fixtures;

(b) as near as practicable to such condition as would comply with cl 15.1.

21 The proviso must be seen in the context of the permission afforded by the first portion of the clause. The condition requiring compliance with cl 15.1 refers to the state or quality of the "returned premises". The use of the word "AND" within cls 6.3 and 6.2 is disjunctive from the temporal requirements. The use of "IF" provides an option to the lessors but not a temporal requirement. Taken together, the clause can easily be read as providing for:

(1) The right of the lessee, subject to permission by a mortgagee and public authorities, to perform extensive modifications to the premises without recourse to the lessor, provided that it is for the purposes of its business.

(2) The right of the lessor to require restoration to a standard subject only to the fair wear and tear clauses (cl 15.1).

(3) The time for the exercise of those respective rights might vary according to the circumstances, which include:.

(a) The lessee could choose to effect modifications shortly before the expiration of the term provided for in the lease. In doing so it might make a commercial judgment detrimental to its own interest but not to those of the lessor. It might effect modifications intending to extend the term as permitted by other clauses in the contract, but change its mind and not extend. It might expend money on alterations, but because of breach of other terms of the lease, lose any right to the further benefit of the lease. In those instances it might suffer commercial loss. But its right to carry out work is not temporally limited.

(b) The lessor has a right to require restoration "if it chooses". Notice that "it so chooses" does not require the lessee to immediately respond. The lessee is under an obligation to restore on or before the end of its term. Thus if notice is given six months before the end of its term and the lessee fails to deliver up or surrender the premises properly restored, it will become liable in damages. If the lessor waits until one day before the expiration of the term to give notice, it would be entitled to require compliance, but be hard pressed to show damage if the work could not be immediately performed. Again, the lessor would undertake a commercial decision.

(4) The rights of each party to either undertake work or give notice of a requirement for restoration are disjunctive from the time required for compliance. The lessor could not expect performance of an obligation to restore immediately after completion of the works early in the term of the agreement. It might give notice, since it believed the alterations would be inimical to its own long-term interest, but early notice would still only require compliance on the date of expiration of the term.

22 The precondition of notice requiring reinstatement or restoration does not give the lessor the right to dictate or determine the time for compliance. The lessor was and remains entitled to have reinstatement completed as at the expiration of the lease. The lessee is not in breach of its contractual obligation until that date.

23 The plaintiffs contended for a different "literal meaning" because, in effect, the defendant was surrendering the lease and assigning its interest in the lease to another. The entitlement of the plaintiffs to require reinstatement at a time of their choosing is said to be warranted for such an eventuality. Here the plaintiffs contend that the terms of extension might allow the defendant or its assignees (or effective successors) many years before any requirement to restore the premises to their original form. But that is an argument for interpretation through possible consequence, namely the combined effect of the assignment and the potential for the extension of the term of the lease. Nor should the word "reasonably" be imported into the right of the lessors to give notice. They might delay notice until the last minute, giving the lessee no time to reinstate the premises. But the "unreasonableness" of notice would not deprive the lessors of a contractual right, although it might impact on remedy if the lessee was unable to fully comply "upon the expiration of the term" because of the lateness of that notice.

24 My approach has been an attempt to ascertain the:

"... meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." [Maggbury Pty Limited v Hafele Australia Pty Limited (2002) 210 CLR 180, Gleeson CJ, Gummow and Hayne JJ at 188.]

25 The parties were dealing with differing titles, structures, types of buildings and fixtures. The nature of those differences and the necessity for suitability for a defined purpose, the utility or otherwise of fixtures and fittings given the intended commercial purpose, were matters which governed the wording of cls 6.3 and 6.2. All parties, through Hosken and Bleasel, knew of the desirability or necessity of modification to the premises to enable statutory permission and intended use. Both parties had a commercial interest in ensuring proper terms and safeguards in their contractual agreements. The meaning contended for by the plaintiffs requires acceptance that a commercial party who or which has undertaken extensive preparation, including the obtaining of permission and licences from public authorities, the expenditure of significant amounts of money and loss of commercial time in the carrying out of those works, could immediately become liable for restoration at the behest of the lessor.

26 It is not necessary to consider in detail the defendant's alternative claim for rectification, except to observe, consistent with its own argument, that if the wording of cls 6.2 and 6.3 clearly favoured the plaintiffs, then a claim for rectification could not be warranted. The defendant chose to enter into a commercial agreement on equal terms and it chose to pursue its commercial interests in assignment of the lease and, as such, ought bear any financial consequences.

27 The claims of the plaintiffs are not upheld. The defendant is entitled to the remedies sought in its counterclaim. The Court will declare that the defendant is not required to restore or reinstate the premises to the condition they were in at 1 October 1998 until the end of the term or the expiration of any further term, whichever is later, of the respective leases.

28 It is likely that any declaration ought extend to the assignee. But this declaration ought not govern other separate issues which might involve the validity, on other grounds or challenge for other reasons, of assignment or entitlement to any further term. For that reason the Court will hear counsel with respect to the wording of the formal declarations and/or orders.