Sydney West Area Health Service v Staracek [2008] NSWSC 744 | Case summary

5607/07 SYDNEY WEST AREA HEALTH SERVICE v GEORGE STARACEK JUDGMENT 1 HIS HONOUR: The plaintiff is the lessee and the defendant is the lessor in lease registered 9025724M over "Mondeval", the house and land at 104-105 Railway Parade Leura, in Folio identifiers A/393076 and B/393076. The use permitted under the lease is "A Frail Aged Day-care Centre and a Dementia Day-care Centre". Since the lease was granted the plaintiff has changed its name and the defendant, one of the two original lessors, has become the sole registered proprietor. The lease term was five years from 22 July 2002 to 21 July 2007. Provisions of Pt 4 - LEASE PERIODS of the Lease and a schedule deal with options to renew the lease for two additional periods of five years, potentially 15 years in all. The lessee claims that it exercised the first option to renew and is entitled to a renewal lease for five years to 21 July 2012. 2 Provisions of Pt 4 which bear on the entitlement to renew are: 4.2 If a further period, commencing when this lease ends, is stated in item 11A in the schedule then the tenant has the option to renew this lease for that period. 4.3 The tenant can renew this lease more than once if that is stated in item 11B in the schedule. However the period of tenancy under this lease and under any renewal(s) is, in total, no longer than the maximum period stated in item 11C in the schedule. 4.4 The tenant can exercise the option only if- 4.4.1 the tenant serves on the landlord a notice of exercise of option not earlier than the first day stated in item 11D in the schedule and not later than the last day stated in item 11E in the schedule; and 4.4.2 there is at the time of service no rent or outgoing that is overdue for payment; and 4.4.3 at the time of service all the other obligations of the tenant have been complied with or fully remedied in accordance with the terms of any notice to remedy given by the landlord. If this lease is extended by legislation, items 11D and 11E in the schedule are adjusted accordingly. 4.4.5 After exercising the option the tenant must continue to pay all rents and outgoings on time and continue to comply with all of the tenant's obligations under this lease. If the tenant does not do so, the landlord may treat any breach as being a breach of the new lease as well as of this lease. 3 Under the general law established by Gilbert J McCaul (Aust) Pty Ltd v The Pitt Club Ltd (1957) 59 SR (NSW) 122 provisions such as cl 4.4.3 operated strictly; a tenant who had not complied with all obligations would not have an enforceable claim to a renewal lease. The principal issues in this case relate to the operation of the reforming legislation in Pt 8 Div. 4 Options in leases of the Conveyancing Act 1919, particularly ss 133E and 133F which greatly changed the rights which appear to arise on the terms of cl 4.4.3. Section 133E and s 133F are: Breach of certain obligations not to preclude option except in certain circumstances 133E Breach of certain obligations not to preclude option except in certain circumstances (1) This section applies to a lease that contains: (a) an option exercisable by the lessee, and (b) provision by which the lessee's entitlement to the option is made to depend on performance by the lessee of any specified obligation , whether such performance is required before, or after, or before and after, the giving of any notice by which the option is exercised. (2) Despite any provision of the kind referred to in subsection (1) (b), no breach by the lessee of any relevant obligation precludes the lessee's entitlement to the option unless: (a) the prescribed notice has been served on the lessee in respect of the breach , and (b) the lessee's rights are extinguished in relation to the notice. (3) In subsection (2): breach of an obligation includes, where the obligation requires any thing to be done, any neglect or failure to do the thing concerned. obligation includes any agreement, covenant, condition or stipulation by which the lessee is required to do or refrain from doing any thing. prescribed notice means a notice in writing: (a) specifying the lessee's breach of the relevant obligation and served on the lessee: (i) within 14 days after the giving of a notice by which the option is exercised, if the breach occurred before the giving of that notice, or (ii) within 14 days after the breach , if the breach occurred after the giving of that notice, and (b) states that, subject to any order of the court under section 133F, the lessor proposes to treat the breach as precluding the lessee from entitlement to the option. (4) For the purposes of subsection (2) (b), the lessee's rights are extinguished in relation to a prescribed notice : (a) if an order for relief against the effect of the breach in relation to the lessee's entitlement to the option is not sought from the court within one month after service of the prescribed notice , or (b) if proceedings in which such relief is sought are disposed of, in so far as they relate to that relief, otherwise than by granting relief, or (c) if such relief is granted on terms to be complied with by the lessee before compliance by the lessor with the order granting relief, and the lessee fails to comply with those terms within the time stipulated by the court for the purpose. Court may grant relief from breach of certain obligations 133F Court may grant relief from breach of certain obligations (1) Relief referred to in section 133E may be sought: (a) in proceedings instituted in the court for the purpose, or (b) in proceedings in the court in which: (i) the existence of an alleged breach by the lessee of the lessee's obligations under the lease, or (ii) the effect of the breach from which relief is sought, is in issue. (2) The court may, in proceedings in which relief referred to in section 133E is sought: (a) make such orders (including orders affecting an assignee of the reversion) as it thinks fit for the purpose of granting the relief sought, or (b) refuse to grant the relief sought. (3) The court may, in proceedings referred to in subsection (2), take into consideration: (a) the nature of the breach complained of, (b) the extent to which, at the date of the institution of the proceedings, the lessor was prejudiced by the breach, (c) the conduct of the lessor and the lessee, including conduct after the giving of the prescribed notice referred to in section 133E (2), (d) the rights of persons other than the lessor and the lessee, (e) the operation of section 133G, and (f) any other circumstances considered by the court to be relevant. (4) The court : (a) may make an order under subsection (2) on such terms as to costs, damages , compensation or penalty, or on such other terms, as the court thinks fit, and (b) may make any consequential or ancillary order it considers necessary to give effect to an order made under that subsection. 4 The Annexure which sets out the covenants of the lease has a passage headed "Important Notes" above the signatures of the parties:

Would you kindly, accordingly, seek your client's further instructions at your very earliest convenience in order that this matter may be resolved without any undue delay. 7 The lessee did not institute proceedings under s 133F within one month after receiving this letter, and has not done so since. The principal issue in the case relates to whether this letter is a prescribed notice as defined in s 133E(3) and whether the letter has effect to preclude the lessee's entitlement to the option, in view of their breaches of obligations in the lease and the terms of cl 4.4.3. 8 In interpreting a notice or other document passing between parties to a contract and relating to their rights under it the meaning of the document is to be understood in the context of facts known to them both, and the terms of their agreement are at the centre of those facts. In the present case, in the factual context including the terms of the lease, the "Important note" in the lease and the slightly wider context of communications between legal representatives of the parties it must have been altogether clear to the solicitors who received the response dated 24 April 2007 that the lessor proposed to treat and was treating the breaches of obligation as precluding the lessee from entitlement to the option, and would oppose the claim to a renewed lease with whatever means were available, so that protection of its own interests required the lessee to take whatever means it could to uphold its exercise of the option, including any application to a court which might serve that end. 9 The question for decision is not what the response communicated to the lessee in the context of the parties' dealings including their contract; the question is whether events happened and the notice prescribed by s 133E was given so as to fulfil subs 133E(2) and bring about the result which subs (2) indicates: the extinction of the lessee's rights in one of the circumstances stated in subs (4). 10 In many decisions since 1984 judges in the Equity Division have taken a stringent view of the need for a notice to comply with the definition of "prescribed notice" (or with the corresponding provision in the earlier form of s 133E). In Bay Marine Pty Ltd v Clayton Properties (1984) 9 ACLR 780 Needham J said: There was some discussion as to the effect of the serving, by the defendant upon the plaintiff, of what was said to be a prescribed notice under s 133E of the Conveyancing Act. The effect of the service of such a notice would be, perhaps, to deem the lease to continue in force for a further six weeks, s 133G(1)(a) and (b), or until the proceedings in which the relief is sought by the lessee are disposed of otherwise than by the granting of that relief, s 133G(c). The relevance of that matter would be that, were exhibit O an effective ratification apart from the fact that it could not operate because the time for exercise of the option had passed, that objection would no longer be open to the defendant. There are, I think, two reasons why the purported ratification is, in these circumstances, ineffective. The first I have already expressed, namely, that Mr Crowther was not a party. The second is that the notice given by the defendant was not a "prescribed notice" because it did not comply with s 133E(1)(b). The paragraph requires the giver of the notice to state, inter alia , that "subject to any order of the court under s 133F …". The notice did not do so. I do not think that the court has any discretion to apply a benign construction to the requirements of s 133E, so as to read the notice in a manner contrary to its terms. There is, in my opinion, no "slip rule" applicable to such a notice. 11 These observations do not appear to have been essential to the decision of Needham J, but were obiter dicta. However they have been cited a number of times and have been treated as stating the law. See Brennan v Kanjala Pty Ltd (1993) 6 BPR 13,168. In Ell v Cisera (2001) NSW Conv R 55-991, [2000] NSWSC 768 at [25] Hamilton J said: [25] The law before the insertion of Division 4 in Pt8 of the CA was that, if the option clause in a lease was subject to a precondition that the lease should have been fully complied with, then the slightest breach would preclude the exercise of the option and the Court had no power to excuse any such breach and enforce the grant of a renewed term: Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122. Since the enactment of that Part, the Court has taken the view that the requirements of s133E as to notice must be strictly complied with if the landlord is to be entitled to rely upon a breach as negativing the right to exercise the option: Bay Marine Pty Ltd v Clayton Properties Pty Ltd (1984) 9 ACLR 780. 12 Bay Marine has also been referred to in expositions of the interpretation of other statutory provisions; see Manton v Parabolic Pty Ltd (1985) 2 NSWLR 361 at 377 (Young J). See too Re Infomedia Pty Ltd (2000) 18 ACLC 625 [2000] NSWSC 649 at [10]. References to Bay Marine in judicial consideration of other legislative provisions shows that the view stated in Bay Marine is well established. 13 The lessor's counsel contended to the effect that in Nameless Shameless and Legless Pty Ltd v 2 Rosen Street Pty Ltd [2004] NSWSC 519 Einstein J had not followed or (perhaps the submission was) had distinguished Bay Marine. In my understanding Einstein J did not regard himself as departing from Bay Marine; indeed Einstein J's judgment at [36] states in classic terms what is required for a prescribed notice: "What was required to be provided in the notice was information to a lessee communicating the necessity for the lessee to approach the court and obtain an order under s 133F and making the point that in the absence of the obtaining of any such order, the lessor proposed to treat the breach as precluding the lessee from an entitlement to the option." The question before Einstein J has not so far as I am aware arisen elsewhere. The notice said to have been given under s 133E, quoted by Einstein J at [21], followed quite closely the requirements of the definition, specified the lessee's breaches of obligation and quoted paragraph (b) of the definition almost exactly except that it referred to s 133E, not s 133F. This clerical error or slip meant, following the observations in Bay Marine at their highest, that the notice was not a prescribed notice as defined. 14 Einstein J took the view ([23] and following) that s 80 of the Interpretation Act 1987 applied: that section relates to substantial compliance where an Act or statutory rule prescribes a form. Einstein J also had regard to the speech of Lord Hoffman, the leading speech for the majority in Mannai Ltd v Eagle Star Association Co Ltd [1997] AC 749 which dealt with obligations of strict compliance in contractual documents. Einstein J stated the effect of Mannai thus at [32]: "On appeal, a majority held that the construction of the notices had to be approached objectively, and that the question was how a reasonable recipient would have understood them, bearing in mind their context; that the purpose of the notice was to inform the landlord of the tenant's decision to determine the lease in accordance with the break clauses; that a reasonable recipient with knowledge of the terms of the lease and of the third anniversary date would have been left in no doubt that the tenant wished to determine the lease on 13 January 1995 but had wrongly described it as 12 January; and that, accordingly, the notices were effective to determine the leases." To my reading Einstein J did not apply the views of Lord Hoffmann in Mannai or the holding of the House of Lords to the interpretation of s 133E. It would not in my opinion be appropriate to do so; the document under consideration in Mannai was altogether different in kind, as well as in terms, to the statutory provision now under consideration. 15 In my respectful opinion the statements of Needham J. in Bay Marine to which I earlier referred were soundly based on the terms of s 133E as it then stood and also as it now stands, and I should take the same course as has been be taken by other judges in the Equity Division and follow Needham J's opinion. In my understanding Einstein J did not in Nameless Shameless and Legless depart from this opinion, but made a finding (which his Honour recognized was a finding on a very close question) about the meaning of the notice before him. The terms of that notice are altogether unlike the terms of the notice before me. Einstein J was of opinion that s 80 of the Interpretation Act 1987 (NSW) applied; I am (with respect) of the view that this may not be correct as I do not see s 133E as an Act which prescribes a form. If s 80 of the Interpretation Act does apply the view that the reference to s 133E substantially complied with the need to refer to s 133F cannot by analogy be brought to bear on the question before me. Even if it were appropriate to apply a test of substantial compliance, the response would not pass that test because it does not state, literally or substantially, the matter referred to in para (b) of the definition. 16 Section 133E and related sections should be understood as reforming legislation which overcame what was perceived as the mischief of excessive stringency in the law in McCaul v The Pitt Club. The terms of the reforming legislation are themselves stringent in their own way, although far less so than the previous law. There is no reference, in the definition of "prescribed notice" or elsewhere in s 133E, to the lessee's actual understanding, or to what could reasonably be communicated to the lessee or understood by the lessee on receiving the notice, or in any other circumstances. The notice referred to is to be in writing, and is to specify in writing some matters and state in writing some matters, and what the notice communicates by implication, or by reference to knowledge shared between the parties, is not part of the statutory formulation. A conforming notice produces results as enacted: no results are provided to flow from any other notice. 17 I address the response of 24 April 2007 for its compliance with the definition of prescribed notice. It is of course a notice in writing. It does in its terms plainly specify the lessee's breaches of the relevant obligation. Although the lessee's counsel contended to the contrary effect it is my finding that the response does state that the lessor proposes to treat the breach as precluding the lessee from entitlement to the option; this statement is in my view clearly made by the words "We are further instructed to dispute your client's entitlement to exercise the Option under the subject Lease …" and this reading is reinforced by the reasons which the response goes on to give. It was contended that there is some relevant distinction between the statement that solicitors were instructed to dispute entitlement and a statement that the lessor proposed to treat a breach as precluding the lessee from entitlement; but I do not accept this contention. 18 What is wholly absent from the response of 24 April 2007 is any statement that the dispute of entitlement is subject to any order of the court under s 133F. There is no reference, exact or inexact, to s 133F, or to the possibility of any application to any court under that section or any other. That it must have been obvious to the recipient of the letter that an application to the court and s 133F merited immediate consideration goes no distance at all towards establishing that the notice in writing states that the position taken was subject to any order of the court under s 133F. It is not difficult to see a purpose for which the legislature prescribed that the notice should state this; the prescription ensures that the recipient's attention is directed to s 133F which in its terms, and in its interaction with s 133E(4), imposes stringent time-related requirements with which the lessee must comply in the lessee's asserted rights are not to be extinguished. The lessee has one month after service of the prescribed notice to seek an order for relief from the court; if that time provision is not complied with the lessee's rights are extinguished. The chain of provisions is consistently stringent. A court or anyone else outside the leasehold relationship can see what effect the documents produced by reading them, without enquiring into the surrounding states of knowledge. 19 The functions of the prescribed notice are not limited to pointing out that the recipient can apply to the Court under s 133F. The Notice can have the effect of shaping the recipient's rights, whether or not the recipient understands the notice and its implications. As ss 133E and 133F operate, the recipient's rights take one form if he does make an application to the Court and another form if he does not; whichever result follows, the outcome is dictated by the terms of the notice, not by what the recipient understands from the terms of the notice, or from other sources. Both sides are in circumstances of stringency. The context includes an expiring lease and a need to establish who is entitled to possession of the property. The passage of time is important and it is understandable that the legislature infused the procedure with precision. It does not matter what either party understands. If the stated procedure is not followed, the stated result does not occur. 20 In my opinion s 133E has the effect that despite the provisions of Pt 4 of the lease no breach by the lessee of any repair obligation precludes the lessee's entitlement to the option. 21 Where, as in this case, the option of renewal is conferred by a lease which was registered before the time for exercise of the option, the lessee has an equitable interest for the renewal term, conditioned on due exercise of the option, and that equitable interest is indefeasible under section 42 of the Real Property Act 1900. In saying this I state the effect of observations of Barwick CJ in Mercantile Credits Ltd v The Shell Co. of Australia Ltd (1976) 136 CLR 326 at 337-339; see too Gibb J at 344-346. The characterisation of the interest of the lessee in the renewal terms as an equitable interest is far clearer than the characterisation of the interest of a purchaser under an uncompleted contract for sale of land as an equitable interest, the difficulties of which were pointed out in Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315; see Black v Garnock (2007) 230 CLR 438 at 449[32] (Gummow and Hayne JJ). The equitable interest is created by a registered instrument, it is indefeasible, and the conditions to which its continuance is subject are wholly in the control of the lessee. Although there is always a discretionary element in the decision to grant or withhold specific performance, the claim for specific performance of the entitlement to a renewal term is a very strong one; specific performance will give effect to an equitable interest which already exists. 22 Counsel for the lessor contended that specific performance should be withheld, in the exercise of discretion, having regard to unsatisfactory elements in the landlord-and-tenant relationship and to unsatisfactory performance by the lessee of its repair obligation. 23 The lessee has made a very poor showing of observance of its repair obligations. Efforts by the lessor to obtain compliance have caused him a great deal of trouble over some years, commencing in 2003. At some time about November 2003 a chimney sweep employed by the lessee broke a ceramic chimney pot, one of an identical pair standing on a chimney stack above the slate roof. The chimney pots are illustrated by several colour photographs in evidence. Their appearance is consistent with their having been in position since the house was built towards the end of the 19th Century, and it is not surprising that it had been found difficult to replace the broken chimney pot. Several slates on the roof were broken by the falling chimney pot. A workman for the lessee effected temporary repairs, with lead flashing and silicone composition, but did not effect a complete repair by replacing damaged slates. The lessor has had many discussions and dealings with representatives of the lessee, but the damage remains unrepaired. The lessee has accepted that it has the responsibility of replacing the broken slates, located below the broken chimney pot. Reinstatement of broken slates may not be altogether simple in view of the need to obtain supply of slates and a tradesman with the skill to place them. 24 Another long-standing complaint relates to the top step or tread in a set of four matching marble steps at the front of the building. The steps are illustrated by photographs which show considerable weathering and signs of deterioration, consistent with their having been in position for many years; information obtained by the lessor suggested they had been in position for over 50 years. The highest marble tread has damage and chips along the edge; the lessor's evidence is to the effect that this damage appeared long after grant of the lease, and on one occasion he saw a bright unweathered surface which indicated recent damage. What was at first a small chip has become a substantial break extending along much of the nose or front face of the tread. This is unsightly and it could also be a trip hazard. There is no evidence which establishes when or how this damage occurred, except that it can be inferred that it occurred in some way after the lease was granted; and I would not attribute it to fair wear and tear, as the other treads are very weathered but do not show similar deterioration or damage. 25 The need for repair of the chimney pot, the slates and the marble tread has been present, and has been the subject of complaint and discussion, since (at the latest) November 2003, and the lessee has not carried out significant repairs. These things do not affect or threaten the structure; on the other hand they should not have been left in the state they are in. They are not vital; but they are important. The lessor had some other complaints about matters which were eventually put right; although not all of them had been put right at the time of exercise of the option. These included reinstating vegetation - lilacs - in the grounds which had been damaged by contractors on site, removing a sail shade structure and supporting posts which had been erected without his approval, replacing a wooden rail on the veranda at the rear entrance and replacing a broken window on the French door in the ballroom. These were ultimately put right but the lessor had to give his claims a remarkable amount of attention before they were. A matter which has not been put right is that wallpaper in the office area which has been damaged by securing some equipment to the wall should be repaired. This is a small matter; it is not insignificant and it has not been attended to. A further problem relating to a drainage pit arose after exercise of the option and has now been rectified. There have been a number of other complaints which were satisfied sooner or later. 26 Overall, the need for repairs has given the lessor a great deal of unwarranted trouble and the lessee has not responded reasonably or promptly to needs to carry out significant repairs, or to requests from the lessor to comply. The lessor has been assiduous in seeking compliance. Several notes and minutes prepared by him of meetings with representatives of the lessee are in evidence; overall, his complaints received responses, but not properly and not completely. There was something of a demarche in April 2007 when the lessee told Ms Kate Harrison an officer of the lessee of his view that there was a lack of responsibility and urgency in dealing with his concerns and for that reason he would not agree to grant the option under the lease, although he would consider a lease under new terms and conditions. This was followed shortly by communications from Mr Paul Wynn, who had just taken up duty as the lessee's Facility Manager and who, I am satisfied, has given better attention to the lessee's repair obligations than they earlier received. In particular he has given attention to the project of replacing the chimney pots, no simple matter in view of their age, the difficulty of finding matching chimney pots in builders' yards and elsewhere and the need which has presented itself to have corresponding chimney pots manufactured. Mr Wynn has made wide searches for sources of supply and was severely disappointed by a tradesman who for many months held out that he was able to replace the chimney pot. 27 At one point the lessor complained that they have been delays in payment of rent. This complaint led to the adduction of evidence which showed that in fact the lessee is and can be expected to be altogether reliable and punctual in this respect. 28 It was put to me that refusal of specific performance and termination of the lease at Mondeval would involve disruption and hence hardship to clients of the Frail Aged and Dementia day-care services. It is probable however that the lessee would find other premises and I do not regard this as a significant element in the discretionary decision. 29 The lease operates contractually between the present parties, and if specific performance is withheld it will still be the case that the lessor has a contractual obligation to grant a renewal term and would be liable in damages if it did not do so. The lessee will also be liable in damages if it does not conform to its repair obligations. If specific performance is withheld, grounds for controversy will continue. This to my mind is a consideration strongly adverse to withholding specific performance. 30 The end result is that I am now asked to compel the lessor to execute a renewed lease although after he has been put to a great deal of trouble, three significant repair items have not been carried out. On one hand I am reluctant to compel the lessor to grant the lessee its entitlements when he has not received his own. On the other hand I regard it as disproportionate to refuse to enforce entitlement to because of non-performance of repair obligations which, while they are not insignificant, are of relatively low value, in the scale of what must be the value of the property and of the leasehold entitlement. There is no reason to doubt that the lessee has the resources to meet its obligations. 31 Overall I am of the view that I should order specific performance, but before I do I should require the lessee to conform with its outstanding repair obligation, and if this does not happen within a reasonable time, which I estimate at four months, specific performance should be withheld. The caveat should continue in effect until the renewal lease is granted or the proceedings are otherwise disposed of. I will publish these reasons and take the proceedings under consideration again when I return to duty on 10 November 2008. If the repairs have not been carried out I will require the lessee to pay money to the lessor on account of damages, and this will be assessed on a generous basis, the lessor to pay back any surplus after he has had the repairs done himself. The parties should come prepared to show how much money should be paid over as a condition of ordering specific performance. 32 My orders are:

Sydney West Area Health Service v Staracek

At a glance

Court

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Before

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Judgment (19 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (7)

Cited By (5)