The dispute in these proceedings concerns a landlord's access to three commercial buildings which are let out under long leases. The proceedings are being dealt with in an expedited way. The hearing is fixed on 20 July. This judgment deals with an interlocutory injunction application by the plaintiffs.
Each of the three buildings functions as a "data centre". A data centre is a facility which houses network, data storage and communications infrastructure. The buildings are located in Port Melbourne, Victoria; Macquarie Park, New South Wales; and Malaga, Western Australia.
The buildings are assets of a unit trust known as the Asia Pacific Data Centre Trust, stapled securities of which are listed on the Australian Stock Exchange ("ASX"). The first plaintiff is the custodian of the trust assets. The second plaintiff is the trust's responsible entity. A wholly owned subsidiary of the second plaintiff is the trust's investment manager. I will refer to these entities for the purpose of this judgment as "APDC" without distinguishing between them. The defendant ("NextDC") is the tenant and operates the data centres. Its securities are also listed on the ASX.
The leases for the three buildings are, for present purposes, in identical terms. Each lease is for a term of fifteen years with three options of ten, ten and five years. Accordingly, the potential maximum length of the leases is forty years. The Port Melbourne lease commenced in December 2012; the Macquarie Park lease in May 2013 and the Malaga lease in November 2013.
The properties on which the buildings are built were initially acquired by NextDC between September 2010 and June 2011. The properties were "spun out" of NextDC by way of sale to, and lease back from, APDC, which was floated on the ASX for this purpose. This was completed in January 2013, with NextDC retaining a holding of approximately twenty-three per cent of APDC's securities.
In late July 2017, NextDC, which then held approximately twenty-nine per cent of APDC's securities, made an off-market takeover bid to acquire the rest of APDC. But 360 Capital FM Ltd ("360 Capital"), which held approximately twenty-one per cent of APDC, made its own higher takeover bid. NextDC allowed its offer to lapse in September, and by November, 360 Capital had acquired approximately sixty-seven per cent, and thus control, of APDC.
The stated intention of 360 Capital in making its bid was to increase APDC's borrowings and then make a capital distribution of "surplus" capital. This was to be done with a new $100 million loan facility to be provided by APDC's existing financier, Bankwest. By letter dated 21 November 2017, Bankwest commissioned a valuer, Andrew John Duguid, to undertake a valuation of the properties for mortgage lending purposes. Although the instructions to Mr Duguid formally came from Bankwest, and were given before control of APDC formally changed on 23 November, the instruction clearly reflected the commercial priorities of 360 Capital. Correspondence in evidence before me shows that the approach to Mr Duguid came on 9 November, and came directly from 360 Capital.
APDC then sought NextDC's permission for Mr Duguid to visit the premises for the purposes of his valuations but that was refused.
In December 2017, NextDC, which remained a minority unit holder, announced it proposed to convene an extraordinary general meeting of security holders in APDC for the purposes of winding it up. A few days after NextDC's announcement, APDC announced that it proposed to seek to sell the properties to third parties.
NextDC contends that the proposed sale of the properties brings into play a right of first refusal that it has under the leases. NextDC also contends that a seventy-five per cent majority of security holders would be required to approve 360 Capital's plan to increase APDC's borrowings and make a capital distribution, and that 360 Capital and its associates would not be entitled to vote on that resolution. No meeting as yet has been held, and the question of who would be entitled to vote at such a meeting is the subject of separate proceedings which have been listed for hearing in the Corporations List in June.
Following the decision by APDC to sell the properties, a marketing campaign was carried out to obtain expressions of interest. On the strength of the response to that campaign, the value of the properties was increased from $213 million to $280 million in APDC's published accounts for the half year ended 31 December 2017.
On 6 April this year, as part of its financial reporting surveillance program, the Australian Securities & Investments Commission ("ASIC") wrote to APDC. The letter queried the valuation increase and sought information supporting the increased valuation. On 1 May APDC provided the letter to its solicitors, who on 2 May wrote to the solicitors for NextDC, relying on the letter as an additional basis for inspection of the premises by a valuer. These proceedings had in the meantime been commenced on 18 April.
In refusing access, NextDC relies on cl 12.4 of the lease, which provides as follows:
Restricted Access
The Landlord acknowledges and accepts that the Premises contain infrastructure and equipment which is commercially sensitive and critical to the Tenant's business. Notwithstanding any other provision of this Lease, the Landlord may not enter or access the Premises without the prior written agreement of the Tenant, which the Tenant shall be obliged to provide in circumstances where the Landlord (including its employees, agents, invitees or contractors physically accessing the Premises) pass the Tenant's and the Tenant's customers' security clearance procedures and such access is required in order for the Landlord to comply with:
(a) its obligations contained in this Lease; or
(b) a notice received by the Landlord from any Authority or in respect of any Law.
The Tenant or the Tenant's customers may impose such conditions on the Landlord's access to the Premises as the Tenant reasonably requires.
The lease contains three express provisions concerning the landlord's access. Clause 8.2 provides:
Inspection by Landlord
(a) Subject to clause 12.4, at all reasonable times on reasonable prior written notice provided to the Tenant, the Landlord (and any person authorised by the Landlord) may, in the company of a representative of the Tenant, enter the Premises to view its condition. The Tenant must cause its representative to accompany the Landlord.
(b) The Landlord (and any person authorised by the Landlord) may serve a notice on the Tenant requiring the Tenant to repair, within a reasonable time, defects that are specified in the notice which are the obligations of the Tenant under this Lease.
Clause 12.1 provides:
Right of entry to effect works
Subject to clause 12.4, the Landlord reserves the right to enter the Premises (with contractors, workers and machinery) at all reasonable times and having first provided the Tenant with reasonable written notice (except in an emergency) to:
(a) comply with its obligations under this Lease;
(b) effect alternations or repairs to the Premises which may be required by Law;
provided that in exercising its rights under this clause:
(c) the Landlord must not interrupt or materially interfere with the Tenant's use and enjoyment of the Premises for the Permitted Use; and
(d) the Landlord must all all times take all reasonable steps to minimise any inconvenience or interference to the Tenant (including, where necessary, entering the Premises outside of usual business hours); and
(e) the Landlord follows all reasonable direction given by the Tenant whilst on the Premises.
Clause 12.2 provides:
Viewing
Subject to clause 12.4, the Landlord can at all reasonable times and on reasonable prior written notice:
(a) show prospective purchasers of the Building through the Premises at all reasonable times of the day; and
(b) show prospective tenants of the Premises through the Premises at any time during the 12 months immediately before the Expiry Date or at any other time with the prior written consent of the Tenant.
APDC relies for access on cl 8.2. The purpose of Mr Duguid's visit to the premises is said to be that he wishes to view their condition for the purpose of his valuation.
When this application was first made, APDC relied on the ASIC letter as an additional basis for Ms Duguid to have access. The contention foreshadowed was that the letter was a "notice" for the purpose of cl 12.4 (b) which required NextDC to consent to access so that Mr Duguid's valuation could be obtained in response to ASIC's query. But on 9 May, the day after the application was made, ASIC wrote a further letter to APDC stating that it did not intend to make further enquiries about the matter.
APDC now advances four grounds on which it says that a valuation is necessary:
(a) in accordance with Bankwest's instructions, for the purpose of refinancing;
(b) to comply with APDC's obligations to prepare a financial report for the year ended 30 June 2018;
(c) to comply with the obligation imposed on the responsible entity by s 601FC(1)(j) to value scheme property at regular intervals;
(d) to "recommence" the process of sale of the properties.
On its website NextDC invites members of the public to request a tour of any of the data centres. An intending visitor is required to supply only basic name and contact details and is told that a NextDC staff member will then be in touch to organise the tour. But although NextDC is apparently quite prepared for ordinary members of the public to visit the premises, and indeed encourages them to do so, it will not tolerate Mr Duguid visiting. Its reasons apparently have nothing to do with the security issues referred to in cl 12.4. This is underlined by an open offer that NextDC has made that it will permit an "independent valuer" appointed by APDC to have access, NextDC apparently taking the view that Mr Duguid is not "independent" for this purpose.
One does not need to be unduly cynical to think that corporate manoeuvring is going on behind the scenes. Counsel for APDC submitted that the explanation was that NextDC is trying to force a winding up of APDC so as to acquire the properties cheaply. This may, or may not, be correct but if the leases permit NextDC to single out Mr Duguid for refusal of access then it is entitled to do so.
As mentioned, the proceedings have been fixed for hearing in July in order for the dispute to be determined on a final, basis. The interlocutory application before me is made by way of Notice of Motion which was filed on 8 May, and which was referred to me by Darke J on 11 May. Prayer 1 in the Notice of Motion, which was the only claim to interlocutory relief pressed, seeks:
An order in the nature of an interlocutory injunction that the defendant permit Mr Andrew Duguid, or another valuer appointed by the plaintiffs, to inspect the Leased Properties, on such terms as are reasonably necessary to protect the interests of the defendant, including any reasonable requirements concerning security having regard to clause 12.4 of the Leases.
An order requiring NextDC to permit Mr Duguid access to the premises would be a final order. An order in that form is in fact sought by APDC by way of final relief in the Amended Summons. I do not think that the substance of the matter can be altered by the simple expedient of inserting the phrase "in the nature of an interlocutory injunction" to qualify the order sought. I suppose that the motion could have been expressed in an interlocutory form by providing that NextDC was required, until further order, to permit Mr Duguid access to the premises. But that only underlines the fact that, however it may be expressed, the order sought would have a final effect. Once the inspection took place, APDC would obtain the benefit of Mr Duguid's valuation, and even if APDC were to fail on a final hearing, the valuation could not be undone. No doubt NextDC would be entitled to enforce the undertaking as to damages but it is hard to see what damages could be recovered.
The principles which govern the grant of interlocutory mandatory injunctions are the same as those which govern interlocutory injunctions generally, in that the Court must consider the strength of the applicant's prima facie case and measure that against the balance of convenience. But in a case such as this where the grant of an interlocutory mandatory injunction would have irreversible consequences that must be taken into account in assessing the balance of convenience: Ocean Dynamics Charter Pty Ltd v Hamilton Island Enterprises Ltd [2015] FCA 460 at [34].
Counsel for both parties addressed me in some detail concerning the construction issues which arise. On the face of it, the clause imposes a requirement that the tenant give prior written consent before there can be any access by the landlord, whether under the provisions of the lease or otherwise, but provides that such access shall be granted if the necessary security tests are satisfied and access is sought in circumstances prescribed in sub-paragraph (a) or (b) of the clause. Those sub-paragraphs parallel, but are not exactly the same as, the circumstances under which the landlord would have a right of access under cl 12.1. But there is no provision which reflects the access provisions in clauses 8.2 and 12.2.
Counsel for APDC contended that cl 12.4 could be read in such a way that there is no need for the landlord's written consent outside the circumstances specified in sub-paragraphs (a) and (b). In such a situation, so it was argued, the tenant is limited to imposing conditions on access which are reasonable having regard to the fact that the infrastructure is commercially sensitive and critical to the tenant's business. For their part, counsel for NextDC contended that cl 12.4 conferred an absolute right on NextDC to refuse access except in the circumstances specified in sub-paragraphs (a) and (b).
I think both of these positions may be too extreme. I had some difficulty in understanding the construction advanced by counsel for APDC at a textual level. On the other hand, I think that it may be going too far to say that cl 12.4 gives an unfettered right to refuse access except in the circumstances specified in sub-paragraphs (a) and (b). The clause does not actually say that; it does not deal in express terms with other circumstances at all. If there has to be an implication, an implication that outside the circumstances in sub-paragraphs (a) and (b) consent should not be unreasonably withheld would sit much more comfortably with the general rule that commercial contracts, including commercial leases, contain duties of good faith and fair dealing (Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 369). This may especially be so where, on the reading advanced by counsel for NextDC, cll 8.2 and 12.2 would effectively be rendered nugatory. Arguably the use of the phrase "subject to clause 12.4" suggests that it was intended that the clauses would have some degree of overlapping operation rather than cl 12.4 annihilating the others.
Counsel for APDC contended that the issue before me was a pure matter of construction and urged me to resolve that issue on this application. I am not at all sure that that was something which Darke J had in mind when this application was fixed for hearing before me on an urgent basis. In any event, I think there are two problems with the submission.
First, because the application before me has been formulated as an interlocutory one, my decision on the application cannot determine any questions of construction on a final basis. If I decide the construction issue in favour of one party, it will be open to the other party to contend for a different construction at the final hearing. My decision, being an interlocutory one, will not bind either of the parties. I think it is inevitable, given the intensity of the forensic contest, that the losing party will challenge my decision and accordingly no time will be saved.
The second difficulty with counsel's submission is that I do not think the issues in the proceedings are confined to matters of construction. On APDC's most plausible case, NextDC does have a right of refusal but it must be exercised in good faith and for a proper purpose, and, perhaps, reasonably. Whether the refusal to allow Mr Duguid to inspect satisfies these conditions is a factual issue. I have made some preliminary observations about the commercial context of this dispute, but I would be reluctant to try to resolve this factual issue in a summary way at an interlocutory hearing.
Furthermore, APDC may need to demonstrate that its request satisfies the requirements of cl 8.2. Counsel for NextDC submitted that the provision for inspection in cl 8.2(a) had to be read in the context of cl 8.2(b) which provides for the landlord to issue a repair notice to the tenant. Even if I found myself able to reject the argument that the power under cl 8.2 is restricted by its context, there would remain an underlying factual question as to what the purpose of what Mr Duguid's visit actually is. There may be room to argue about whether purpose is to be distinguished from motivation in this context. Even so, a factual finding would still be required.
In these circumstances, there would need to be quite extraordinary factors in APDC's favour on the balance of convenience to justify the Court in determining the construction and factual issues for interlocutory purposes. I do not think such factors are present. The refinancing is required to take place before November 2018. It was not suggested that a delay until after the final hearing in July would make that impossible. I think the other grounds on which APDC says it needs to carry out the valuation carry any more weight. To take the completion of APDC's annual accounts as an example, that obligation does not require APDC to do the impossible. If access cannot be obtained for the purposes of the valuation, then the valuation can be done without the benefit of access. In any event, the evidence does not demonstrate why it is that the valuation for this purpose must be carried out by Mr Duguid or, that if Mr Duguid must do it, he could not do it in time to meet APDC's reporting deadline, which would be some time after 30 June.
Counsel for APDC forcefully submitted that there was no prejudice whatever to NextDC from the proposed inspection by Mr Duguid. So far as I can see, that is quite true; but the onus is on APDC in this application to justify the extraordinary step the Court is asked to take in its favour, and that is not done by pointing to an absence of prejudice from the inspection itself. The real prejudice to NextDC would be to deprive it of the entitlement that it claims to have to prevent Mr Duguid from entering the premises. This will be lost if the injunction is granted, and I do not think that the matters raised by APDC come close to outweighing that prejudice.
For these reasons, the application must be refused. The orders of the Court are:
Order that the plaintiffs' notice of motion dated 8 May 2018 be dismissed.
Order that the plaintiffs pay the defendants' costs of the motion.
[2]
Amendments
05 September 2018 - amend typographical error at [32]
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Decision last updated: 05 September 2018