122 Pitt Street Pty Ltd ACN 104 825 961 v Universal 1919 Pty Ltd - [2015] NSWSC 234

Supreme Court

New South Wales

Case Name:	122 Pitt Street Pty Ltd ACN 104 825 961 v Universal 1919 Pty Ltd
Medium Neutral Citation:	[2015] NSWSC 234
Hearing Date(s):	23 February 2015
Date of Orders:	17 March 2015
Decision Date:	17 March 2015
Jurisdiction:	Equity Division - Commercial List
Before:	Kunc J
Decision:	Valuation binding on parties; summons and cross-summons dismissed
Catchwords:	LANDLORD AND TENANT – Rent – Commercial lease – Whether rent review by valuer made in accordance with contract – Whether express contractual definition of “Fitout Work” includes “fitout” – Directions to parties if rent review set aside
Legislation Cited:	Supreme Court Act 1970 (NSW)
Cases Cited:	Barescape Pty Ltd v Bacchus Holdings Pty Ltd (No 9) [2012] NSWSC 984 Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd (No 2) [2008] VSC 478 Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 National Australia Bank Ltd v Clowes [2013] NSWCA 179 Taylor Woodrow Property Co of Australia Pty Ltd v Coles Myer Ltd [1999] NSWCA 204; (1999) 9 BPR 17, 449
Texts Cited:	Sir K Lewison & D Hughes, The Interpretation of Contracts in Australia, Lawbook Co, 2012 Butterworths Australian Legal Dictionary, Butterworths, 1997
Category:	Principal judgment
Parties:	122 Pitt Street Pty Ltd (ACN 104 825 961) (Plaintiff) Universal 1919 Pty Ltd (ACN 098 260 934) (Defendant)
Representation:	Counsel: B. Walker SC, S.J. Stanton, M. Holmes (Plaintiff) J.A.C. Potts (Defendant) Solicitors: Barraket Stanton Lawyers (Plaintiff) George Xylas (Defendant)
File Number(s):	2014/294047
Publication Restriction:	No

JUDGMENT

Introduction

The Sydney journalist Valerie Lawson once wrote that “for almost a century, Rowe Street was Sydney’s little slice of Bohemia – quaint, arty and as near as you could manage to Montmartre”. Most of it was demolished to make way for the MLC Centre in the early 1970s. But one nineteenth century building, on the corner of Pitt Street, survived. It is known as Millions House.
Originally a banking chamber, from the 1920s the building housed the Millions Club (later known as the Sydney Club), an association of public spirited citizens whose object was to develop Sydney to have a population of at least one million. Times have changed, the club is gone and Sydney is home to more than four million people. But, coincidentally, the name of the building resonates again in these proceedings. The question for determination is whether the current lessee of part of Millions House including the Vault Hotel is bound to pay rent in excess of $1,000,000 per annum.

Summary

Under a lease made on 20 May 2004 (the “Lease”), the plaintiff (the “Lessor”) leases the basement, ground floor, mezzanine level and level 1 of 122 Pitt Street (also known as 9 Rowe Street, being the building described as Millions House) to the defendant (the “Lessee”). The Lease was for an original term of 10 years terminating on 31 May 2014 with an option for a further 10 years. The Lessee has exercised the option.
The Lease provided for there to be a market review of the base rent upon exercise of the option to renew. The Lessor proposed a new base rent for the part of the building subject to the Lease (the “Premises”) of in excess of $1,000,000 per annum. The Lessee engaged the rent dispute mechanism under the Lease, which resulted in the appointment of an independent valuer, Mr Scott Robertson, to determine the current market rent for the Premises. This would become the new base rent.
By a determination as at 1 June 2014 (the “Determination”) Mr Robertson purported to perform the task entrusted to him under the Lease. His determination of the market rent was approximately $500,000 less than the figure proposed by the Lessor.
The Lease contains provisions as to how Mr Robertson was to determine the market rent for the Premises. These include the injunction that he should “disregard the value of any goodwill attributable to the Tenant’s Business and the value of the Tenant’s Fixtures or fitout”. However, at numerous places in the Determination, Mr Robertson made it clear that he had taken into account the Lessee’s obligation under Cl. 28.5.3 of the Lease to spend a minimum of $1,000,000 on what was described as “Fitout Work”.
These proceedings raise two questions:
(1)In determining the current market rent for the Premises did Mr Robertson comply with the Lease by “disregarding … the value of the … fitout”? If he did, the Lessor and Lessee accept that they are bound by the Determination.
(2)If the answer to question (1) is “no”, is it Mr Robertson who is required under the Lease to make a fresh determination of the market rent or does a new valuer have to be nominated to undertake the task?
The answers to these questions are:
(1)Yes.
(2)Does not arise. If it did arise, the Court would have directed the parties to restart the mechanism under the Lease with the nomination of a valuer by the President of the NSW Division of the Australian Property Institute on the express basis that it was solely a matter for the President whether he or she nominated Mr Robertson again or somebody else.
In the course of these reasons it is necessary to quote extensively from both the Lease and the Determination. While that is done in the body of these reasons, for the convenience of readers I have attached a schedule setting out all the relevant parts of those two documents which I have taken into account.

Common ground

Mr B. Walker of Senior Counsel appeared with Messrs S.J. Stanton and M. Holmes of Counsel for the Lessor. Mr J.A.C. Potts of Counsel appeared for the Lessee.
It was common ground that a rental determination by an expert appointed under a lease may be set aside in circumstances of fraud, collusion or mistake. In the case of mistake the determination can only be set aside where it has not been made in accordance with the contract. The authoritative statement of this principle is the well-known passage in the judgment of McHugh JA (as his Honour then was) in Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 336:
In each case the critical question must always be: Was the valuation made in accordance with the terms of a contract? If it is, it is nothing to the point that the valuation may have proceeded on the basis of error or that it constitutes a gross over or under value. Nor is it relevant that the valuer has taken into account matters which he should not have taken into account or has failed to take into accounts matters which he should have taken into account. The question is not whether there is an error in the discretionary judgment of the valuer. It is whether the valuation complies with the terms of the contract.
Insofar as the proper construction of the Lease has to be considered, neither party suggested that anything other than the ordinary principles of contractual construction applied. To that end, I have applied the approach set out by the High Court in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 (per French CJ, Hayne, Crennan and Kiefel JJ):
Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. 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".
Finally, the parties accepted that the issue of whether the Determination complied with the Lease was to be resolved solely by reference to the Lease and the Determination.

The Determination – Lessor’s submissions

Mr Walker’s arguments may be summarised as follows.
Because the parties had been unable to agree on a new base rent, they engaged the mechanisms under the Lease for a valuer to be appointed by the President of the NSW Division of the Australian Property Institute. That machinery was set out in Cl. 5 of the Lease, which included:
5.   Market Review of Base Rent
…
Dispute as to Base Rent
5.5   If the parties do not agree on the reviewed Base Rent on the relevant Market Review Date within 42 days after the notice under Cl. 5.2 is given, then it must be decided by a valuer who:
5.5.1   is appointed by the parties but if they do not agree on whom to appoint within 52 days after the notice under Cl. 5.2 is given, that valuer is to be nominated at either party’s request by the president of the New South Wales division of the Australian Property Institute Inc; and
5.5.2   is a full member of at least five years’ standing of that Institute; and
5.5.3   at the time of appointment is both experienced and actively engaged in valuing similar licensed premises; and
5.5.4   must be instructed to:
(a)   decide what is the current annual market rent that would be reasonably expected to be paid for the Premises on the relevant Market Review Date if they were unoccupied and offered for renting for the Permitted Use having regard to the terms of this lease and all matters specified in Cl. 5.9; and
(b)   give a written valuation setting out what was taken into account, what was disregarded, their respective weightings and any other adjustments within one month after being appointed; and
5.5.5   acts as an expert and not as an arbitrator and whose decision is final and binding.
The amount determined by the valuer is the Base Rent from and including the relevant Market Review Date.
…
Base Rent criteria
5.9   In determining the Base Rent, the parties and the valuer must determine the current market rent for the Premises as at the particular Market Review Date having regard to the provisions of this lease and must:
(a)   disregard the value of any goodwill attributable to the Tenant’s Business and the value of the Tenant’s Fixtures or fitout;
(b)   disregard any rent or other money payable under any sub-lease or other tenancy which has not been approved by the Landlord under clause 13;
(c)   have regard to the Term and disregard the fact that part of the Term has elapsed at the Market Review Date;
(d)   have regard to the rental value of comparable premises but in doing so much make no reduction on account of any incentive;
(e)   consider the Premises as used for the Permitted Use but must have regard also to any other use to which the Premises may be lawfully put;
(f)   regard the Premises on a floor by floor basis without a discount where the Base Rent is to be determined for more than one floor;
(g)   have regard to the terms and conditions of this lease and assume that all obligations of the Tenant and the Landlord in this lease have been performed and observed;
(h)   make no reduction on account of any incentive paid, provided or allowed to the Tenant or which would be likely to be paid, provided or allowed to a tenant in relation to a new tenancy in respect of the Premises were they vacant;
(i)   assume that the Premises have been reinstated in accordance with clause 12 if the Premises have been damaged or destroyed; and
(j)   have regard to any written submissions made by the Landlord or the Tenant.
…
Clause 5.9(a) required Mr Robertson to “disregard … the value of the Tenant’s Fixtures or fitout”
“Tenant’s Fixtures” is defined in Cl. 1 of the Lease to mean “all fixtures, fittings, plant and equipment on the Premises and the Building which are not Landlord’s Fixtures and which are owned by the Tenant”. Although “fitout” was not given a defined meaning in the Lease, it was clearly intended to refer to Cl. 28 of the Lease, which included:
28   Tenant’s Fitout
28.1   In this clause:
…
28.1.3   “Fitout Work” means the work to be carried out by the Tenant in fitting out the Premises;
28.1.4   “Signage” means any signs, notices or advertisements to be erected by the Tenant in the Premises (including without limit any signs to be erected by the Tenant on any tenant directory board and/or the letterboxes).
28.1B   The Landlord acknowledges that the Fitout Work will include the disposal of the existing fitout and replacing it with a new fitout.
28.2   The Tenant must not carry out the Fitout Work or erect the Signage without obtaining the Landlord’s prior written approval and the Consents.
…
28.4   The Landlord may (at its absolute discretion) require the Tenant to amend the Fitout Work or the Signage prior to giving the Landlord’s approval.
28.5   The Tenant:
28.5.1   will proceed with all expedition to obtain from the Authorities the Consents;
28.5.2   must complete the Fitout Work;
28.5.3   must spend a minimum of $1,000,000.00 on the Fitout Work;
28.5.4   will pay and bear all costs and fees in relation to the Fitout Work and the Signage (including without limit obtaining the Consents);
28.5.5   indemnifies the Landlord from and against all claims and losses arising from the Fitout Work or the completion of the Fitout Work; and
28.5.6   will provide detailed evidence of and copies of invoices of its expenditure on the Fitout Work within three days of the Landlord requesting them.
28.6   The Tenant must after obtaining the Consents and the Landlord’s approval:
28.6.1   carry out the Fitout Work and the Signage in a good and reasonable manner; and
28.6.2   at the expiration or sooner determination of the lease, unless the Landlord otherwise requires, remove the Fitout Work and the Signage from the Premises and promptly make good any damage caused by that removal.
…
In particular, it was to be noted that Cl. 28.1.3 defined “Fitout Work” to mean “the work to be carried out by the Tenant in fitting out the Premises” and that, pursuant to Cl. 28.5.3, the Lessee “must spend a minimum of $1,000,000.00 on the Fitout Work”.
Contrary to the clear prohibition in Cl. 5.9(a) of the Lease, the Determination expressly took into account Cl. 28.5.3 of the Lease. The high-water mark of this was where, in considering the special conditions of the Lease, Mr Robertson recorded in the Determination (at p 9):
Clause 28.5.3 relates to Lessee’s fitout. This clause indicates the Lessee is to spend approximately $1,000,000.00 on fitout of the premises. This is a critical condition that I have considered in this rent determination, as most leases are not definitive i.e. minimum fitout costs.
Attention was then drawn to several other places in the Determination where Mr Robertson made it clear that he had expressly taken Cl. 28.5.3 of the Lease into account. For example, Mr Robertson considered each floor of the Premises individually. In each such section he records in almost identical language “I have considered the fitout expenditure required by the Lessee under Clause 38.5.3 of the lease”.
The Lessor’s argument was further developed by reference to the instruction in Cl. 5.5.4(b) that Mr Robertson should “give a written valuation setting out what was taken into account, what was disregarded, their respective weightings and any other adjustments”. Mr Walker expressly eschewed any argument that the Determination was defective because Mr Robertson had failed to set out in terms that he had disregarded the “value of the … fitout”. Nevertheless, he submitted that while nowhere had Mr Robertson expressly stated that he had disregarded the “value of the … fitout”, there were examples in the Determination where he had expressly confirmed that he had disregarded other matters that Cl. 5.9 commanded him to disregard. Taking these two matters together fortified the conclusion that Mr Robertson had in fact not disregarded the “value of the … fitout”. The failure to say he had disregarded it was the best evidence that he had not disregarded it. Furthermore, the absence in the determination of any reference to a figure for the “value of the … fitout” was another reason, along with the failure to expressly say that he had disregarded it, to show that he had not disregarded it. It was submitted that Mr Robertson’s method was to look at the rent for comparable premises but to say nothing about what those comparables told the reader about fitout.

The Determination - Lessee’s submissions

Mr Potts made two submissions in support of his fundamental argument that Mr Robertson was required and permitted to take into account the obligation on the Lessee to undertake the “Fitout Work”, but that this was distinct from “the value of the Tenant’s Fixtures or fitout”, which, correctly, had not been taken into account.
Both of the Lessee’s submissions started by identifying that the only terms in the Lease which refer to “fitout” are Cls. 5.9(a), 17.1.4 and 28.1(b). For convenience I shall set these out again:
5.9   In determining the Base Rent, the parties and the valuer must determine the current market rent for the Premises as at the particular Market Review Date having regard to the provisions of this lease and must:
(a)   disregard the value of any goodwill attributable to the Tenant’s Business and the value of the Tenant’s Fixtures or fitout;
…
17.1   On the Lease End Date the Tenant:
…
17.1.4   must not remove any part of the fitout or any part out the Landlord’s Fixtures or the Tenant’s Fixtures unless required by the Landlord under clause 17.2.1.
…
28.1B   The Landlord acknowledges that the Fitout Work will include the disposal of the existing fitout and replacing it with a new fitout.
Also essential to both of the Lessee’s submissions is the proposition that Cl. 28, which requires the Lessee to carry out the “Fitout Work” is included in the terms of the lease which comes into the existence after exercise of the option (the “New Lease”). Mr Potts informed the Court that his client accepted that it had the obligation set out in Cl. 28 of the New Lease.
The Lessee’s primary position then focuses on Cl. 5.9(a) and observes that:
(1)It requires the valuer to determine the current market rent for the Premises as at the Market Review Date.
(2)The “Premises” includes, by definition, the Landlord’s Fixtures but, by omission from the definition, will not be taken to include Tenant’s Fixtures.
(3)The valuer must have regard to the “provisions of this Lease”.
(4)The valuer must disregard those matters specified in Cl. 5.9(a), which all by subject matter focus on the Lessee, specifically:
(a)the value of any goodwill attributable to the Tenant’s Business;
(b)the value of the Tenant’s Fixtures; and
(c)the value of the fitout (it being submitted that the assumption must be that the fitout has been installed by the Lessee).
The Lease uses two distinct expressions: “fitout” and “Fitout Works”. What “fitout” does not encompass is an unfulfilled obligation or liability on the Lessee to expend further money in completing the “Fitout Work” during the term of the New Lease. Clause 5.9(a) is directed to negativing any value that might impact upon market rental arising from the presence of the Lessee, its business, fixtures or fitout at the Market Review Date. As at that date there is merely an obligation to expend at least $1,000,000. There is no fitout of any value then existing.

Furthermore, reading “fitout” as distinct from “Fitout Work” avoids a direct conflict between Cls. 17.1.4 and 28.6.2, the former prohibiting the Lessee from removing any part of the “fitout”, the latter requiring the removal of the “Fitout Work”. The Lessee submitted that its construction left work for the term “fitout” to do if “Fitout Work” was understood as major fitting out of the Premises which the Lessee is obliged to undertake at the outset of the term of the Lease and then the New Lease, whereas “fitout” related to any fitout not done as part of the original “Fitout Work”.
What “fitout” in Cl. 5.9(a) does not encompass is an unfulfilled obligation or liability on the part of the Lessee to expend further moneys in completing the “Fitout Work”. It is that liability which the valuer, correctly, had taken into account as part of the terms of the Lease, rather than the value of the “fitout”, being work that had in fact been done, whether as part of the “Fitout Work” or as part of other fitout.
In adopting this approach, the Lessee submitted that Cl. 28 was in the nature of a “bespoke” provision that had been added to a more standard form of document. As such, any difficulty with reconciling earlier terms in the Lease, such as Cl. 17.1.4, with Cl. 28.6.2, was to be resolved by giving greater weight to the specifically added terms of Cl. 28. In support of this submission the Lessee relied on the principle “where the contract was a standard form of contract to which parties have added special conditions, then unless the contract provides otherwise greater weight must be given to the special conditions, and in case of conflict between the general conditions and the special conditions, the latter will prevail” (Sir K Lewison & D Hughes, The Interpretation of Contracts in Australia, Lawbook Co, 2012 at [7.04] (“Lewison & Hughes”) approved in an earlier English edition in Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302 at [48] per White J). The application of that principle meant that Cl. 28 would be understood as adding a specific regime to deal with the initial fitting out and its removal.
The Lessee’s alternative argument was that even if the “Fitout Work” referred to in Cl. 28 became part of “fitout” as that term is used in Cls. 5.9(a) and 17.1.4 of the Lease, it did not become part of what the Lease termed “fitout” until the physical work was actually completed. The original “Fitout Work” done early in the term of the Lease had become “fitout” once the work was completed. However the obligation to undertake new “Fitout Work” under the New Lease did not come within the expression “fitout” at the Market Review Date because it had not been done by that time. Accordingly, Cl. 5.5(a) required Mr Robertson to disregard any work done as part of the original “Fitout Work” under the Lease but did not require him to disregard the obligation to carry out further “Fitout Work” during the term of the New Lease. So understood, Mr Robertson had correctly disregarded the value of the “fitout” but, given that he had to have “regard to the provisions of this lease”, he was required to and did take into account the obligation to undertake the “Fitout Work” under the New Lease.

The Determination – consideration: preferred construction

The parties’ submissions all grappled with the fundamental question of the relationship, if any, between “fitout” and “Fitout Work”. The Lessor’s arguments depend upon the Court accepting that “fitout” is at least included within, if not coextensive with, “Fitout Work”. The Lessee’s arguments depend upon the Court accepting either that “fitout” is different from the obligation in Cl. 28.5.3 to spend money on the “Fitout Work” or that “fitout” does not become part of “Fitout Work” until it is completed.
The answer to what I have just referred to as the fundamental question is to be found by ascertaining what a reasonable business person would have understood those terms to mean (see paragraph [12] above). This requires consideration of the language used by the parties, the surrounding circumstances known to them (not applicable in this case – see paragraph [13] above) and the commercial purpose or objects of the Lease. The answer should produce a commercial result and avoid commercial nonsense or inconvenience.
Applying the approach set out in the preceding paragraph and substantially, but not identically, for the reasons advanced on behalf of the Lessee, the Court finds that the Determination complies with the Lease so that the Lessor and Lessee are bound by the Determination. For the reasons which follow, the Court’s conclusions may be summarised as:
(1)“Fitout Work” is distinct from “fitout” with the latter being the product of the former. To take into account an obligation about “Fitout Work” did not involve taking into account anything about “fitout”.
(2)Even if, contrary to the preceding sub-paragraph, “fitout” falls within “Fitout Work”, the “value of the … fitout” means the monetary value of that fitout and is distinct from the obligation under the Lease to expend at least $1,000,000 on the “Fitout Work”. To take that obligation into account was not to take into account the “value of the … fitout”.
(3)Mr Robertson was obliged to take into account the provisions of the Lease. This included the obligation to undertake the “Fitout Work” with a minimum expenditure of $1,000,000 and Mr Robertson was correct to have taken that obligation expressly into account on either of the constructions set out in the preceding sub-paragraphs.
(4)Furthermore, Mr Robertson disregarded (i.e. left out of consideration) the “value of the … fitout” however defined because, while he does not expressly say that he disregarded it, a fair reading of the entire Determination, in particular the absence of reference to any such value in dollar terms or identification of what the fitout comprised, supports the conclusion that he disregarded it.
The Court’s reasons for these conclusions are as follows.
The Lease had an initial term of 10 years expiring on 31 May 2014 (Cl. 2.1 and item 5 of the Reference Schedule).
During the first term of the Lease the “Base Rent” was the amount specified in item 7 of the Reference Schedule increased on each anniversary of the commencement date of the Lease by 4.5% (Cl. 6 and items 10 and 11 of the Reference Schedule).
The “Market Review Date” was expressed to be upon exercise of the option to renew and specified as 1 June 2014 (Cl. 1.1 and item 9 of the Reference Schedule).
The “Base Rent” at the commencement of the New Lease is to be the “Base Rent” for the last year of the Lease varied as provided for in Cl. 5 (Cl. 25.3.3 of the Lease).
Where, as here, the parties could not agree upon the new “Base Rent”, Cl. 5 required the “Base Rent” to be the annual market rent that would be reasonably paid for the Premises on the “Market Review Date” (being 1 June 2014) as decided by a valuer upon the terms set out in Cl. 5 of the Lease.
The requirement to have regard to the “provisions of this lease” in Cl. 5.9 encompassed Cl. 28 both as part of the Lease and as part of the New Lease (Cl. 25.3 of the Lease).
Clause 5.9 of the Lease, by using the word “must”, made it mandatory for Mr Robertson to have “regard to” some things and to “disregard” others. The ordinary English meaning of those words, which a reasonable businessman would understand to be applicable to the Lease, is respectively “to take into account; consider” and “to pay no attention to; leave out of consideration” (Macquarie Dictionary, 3rd Edn, 1997).
In the Determination Mr Robertson has expressly taken into account (i.e. had regard to) the Lessee’s obligation under Cl. 28.5.3 of the Lease, being an obligation to “spend a minimum of $1,000,000 on the Fitout Work”. Does this demonstrate that he has failed to “disregard the value of the … fitout”?
In the absence of any particular context beyond that of landlord and tenant, “fitout” refers to “the provision of finishes, fixtures, fittings, equipment, or services to leased premises, usually to a tenant’s specifications” (Butterworths Australian Legal Dictionary, Butterworths, 1997, p 482).
However, context is provided by where “fitout” is also used and the commercial purpose of the Lease itself. The word “fitout” appears in three clauses in the Lease (see paragraph [23] above) and is consistently used as a noun. The Court takes no account of the word in the heading to Cl. 28 “Tenant’s Fitout” because headings do not affect the interpretation of the Lease (Cl. 1.2(e) of the Lease). The commercial purpose of the Lease is the “Permitted Use”, being the operation of a licensed hotel (Clauses 8.1, 1.1 and item 12 of the Reference Schedule).
On the basis that, short of absurdity or impossibility, every word in the Lease has meaning, Cl. 17.1.4 (“must not remove any part of the fitout”) suggests that “fitout” is something which consists of parts which can be removed and is not “Landlord’s Fixtures” or “Tenant’s Fixtures” (because these are separately referred to) in that clause.
“Landlord’s Fixtures” are defined in Cl. 1.1 to mean “the plant, equipment, fixtures, furniture, furnishings, light fittings, blinds, awnings or other window coverings, and floor coverings in or on the Premises from time to time supplied by the Landlord” (emphasis added). While some items of fitout might be supplied by the Lessor, it is obvious that many would not be.
“Tenant’s Fixtures” is defined in Cl. 1.1 to mean “all fixtures, or fittings, plant and equipment on the Premises and the Building which are not Landlord’s Fixtures and which are owned by the Tenant” (emphasis added). Again, it is not difficult to imagine items of fitout which have not been supplied by the Lessor (and are therefore not “Landlord’s Fixtures”) and which are owned by the Lessee, e.g. a commercial dishwasher.
Having regard to the definitions of “Landlord’s Fixtures” and “Tenant’s Fixtures”, in the collocation in Cl. 17.1.4 “fitout” must have been intended to cover items not supplied by the Lessor (and therefore not “Landlord’s Fixtures”) and which are not owned by the Lessee (and therefore not “Tenant’s Fixtures”). An obvious example in the context of a hotel is a large and elaborate bar (Sydney’s famous “Marble Bar” comes to mind). The size, materials used and degree of annexation to the fabric of the “Premises” could be such that there would be no doubt that it had become the property of the Lessor pursuant to Cl. 18.1 of the Lease which provides that “all improvements to the Premises become the property of the Landlord”.
The foregoing (starting with the ordinary meaning set out in paragraph [43] above) suggests, and the Court concludes, that on its proper construction “fitout” means the organised configuration of items such as finishes, fixtures, fittings, plant, furniture, equipment or services on the “Premises” used for the “Permitted Use” which have not been supplied by the Lessor and are not owned by the Lessee. That definition accords with and does no violence to how “fitout” is used in Cl. 5.9(a), which itself refers to “Tenant’s Fixtures or fitout”.
It is then necessary to turn to Cl. 28.1B as the other place where “fitout” appears:
28.1B The Landlord acknowledges that the Fitout Work will include the disposal of the existing fitout and replacing it with a new fitout.
Again, the definition of “fitout” identified by the Court in paragraph [49] above accords with and does no violence to how “fitout” is used in Cl. 28.1B. However, the Court also notes (and will develop in what follows) that the acknowledgement in Cl. 28.1B is in terms of “disposal” and “replacing”, being acts rather than the object of those acts. So, for example, it speaks of acknowledging that “Fitout Work” will include replacing the existing fitout with a new fitout as opposed to saying that the “Fitout Work” includes the new fitout.
Turning to Cl. 28.1.3, this expressly defines “Fitout Work” to mean “the work to be carried out by the Tenant in fitting out the Premises”. The critical part of this definition is “work” both in the label and the definition. As Levison & Hughes point out (at p 198), “where the construction of a defined term is at issue, the label used will itself be a highly relevant contextual factor”. “Work” may mean either or both of, on the one hand, labour, exertion or activity or, on the other hand, the product of that labour, exertion or activity. It can encompass either or both of the process of production or the thing produced. Thus a composer works to produce a musical work.
In the definition of “Fitout Work” in Cl. 28.1.3 of the Lease the use of the verb “to be carried out by the Tenant” and the gerund or verbal noun “in fitting out the Premises” (emphases added) make it clear that “work” refers to the doing of the thing rather than the thing produced, i.e. the fitting out rather than the “fitout” which is the product of the process. This conclusion is supported by two further matters:
(1)The use in both the label and the definition of the singular “work”. The ordinary meaning of “works” in this context undoubtedly includes the product, e.g. “building works” refers to both the act of building and the thing which is being built.
(2)The express acknowledgement by the Lessor in Cl. 28.1.13 that “the Fitout Work will include the disposal of the existing fitout and replacing it with a new fitout” (emphases added). Again the focus is on the doing rather than product.
Consistently with the construction which the Court has found, the balance of the clause variously refers to carrying out, commencing and completing the Fitout Work. When one comes to Cl. 28.5.3, the Lessee’s obligation is to “spend a minimum of $1,000,000 on [the work to be carried out by the Lessee in fitting out the Premises including the disposal of the existing fitout and replacing it with a new fitout]” (to incorporate Cls. 28.1.3 and 28.1B). This necessarily includes expenditure on labour and materials in doing the job. It can be contrasted with a requirement to install a fitout which has a value of at least $1,000,000.
However, the construction which seems to me plainly to be the correct one having regard to the express definition of “Fitout Work” in Cl. 28.1.3 of the Lease, must confront the difficulty posed by Cl. 28.6:
28.6   The Tenant must after obtaining the Consents and the Landlord’s approval:
28.6.1   carry out the Fitout Work and the Signage in a good and reasonable manner; and
28.6.2   at the expiration or sooner determination of the lease, unless the Landlord otherwise requires, remove the Fitout Work and the Signage from the Premises and promptly make good any damage caused by that removal.
Clause 28.6 is not felicitously drafted. Cl. 28.6.1, while clear as to its meaning, omits “erect” from before “the Signage” whereas elsewhere in Cl. 28 the author has been careful to speak of the “Signage” having to be erected.
More significantly for present purposes, the requirement to “remove the Fitout Work” is meaningless if “Fitout Work” as expressly defined means, as the Court has found it to mean, the doing of the work rather than the product of the work.
I have given careful consideration to the consequences of the Lessee’s undoubtedly correct submission that Cl. 28 is a “bespoke provision”. As such it could be said that the Court should prefer a construction which gives “Fitout Work” as defined a meaning which is sensible throughout the entirety of the clause. That would be done by construing the “Fitout Work” to include the product of the work as well as the doing of it. However, I have come to the firm conclusion that the textual matters to which I have referred in paragraphs [52] to [54] above preclude that construction.
Given the specific definition of “Fitout Work” as construed by the Court, its inclusion in Cl. 28.6.2 is absurd because one cannot “remove” an activity, being the work that was done. The question then becomes what was intended if not the defined meaning. In cases of absurdity even a contractually defined term can be construed to have a meaning other than its definition (see Lewison & Hughes, p 198).
However, the Court will only resolve an absurdity by construction where the literal meaning of the contractual words is an absurdity and it is self-evident what the objective intention is to be taken to have been: National Australia Bank Ltd v Clowes [2013] NSWCA 179 at [34] per Leeming JA; McColl and Macfarlan JJA agreeing. In this case there is a fundamental difficulty with either of the likely candidates (“fitout” or “Tenant’s Fixtures”) because neither is obvious, not least because Cl. 28.6.2 as a whole is in direct conflict with Cls. 17.1.4 and 17.2.1. While Mr Potts’ attempt to harmonise the two (see paragraph [27] above) was ingenious, the Court does not accept that the text permits such a solution. The word “fitout” should not be construed to mean different things in different places (the original fitout and later fitout) unless it is clear that must be the case. There is no such clarity here.
In my view the present case invites the application of an observation made by Gyles JA in Taylor Woodrow Property Co of Australia Pty Ltd v Coles Myer Ltd [1999] NSWCA 204; (1999) 9 BPR 17,499 (Mason P and Brownie AJA agreeing) (emphasis added):
43 Clause 9 is not well drawn, and neither the appellant nor the respondent could confidently explain its structure or reconcile all its parts. Such are the difficulties in its expression that a consistent and harmonious operation of all its words and phrases is illusory. That does not excuse a court from the need to ascertain the intention of the parties to the lease from the words used, but it does mean that "semantic niceties" should not drive the construction of the clause (Mitsui Construction Co Ltd v Attorney-General of Hong Kong (1986) 33 BLR 1http:// 14), and that it may be necessary to modify the strict wording, even reject words or whole provisions (Glynn v Margetson & Co (1893) AC 351http:// at 357.
To give “Fitout Work” as those words appear in Cl. 28.6.2 of the Lease their defined meaning leads to an absurdity. However, what the parties intended it to mean (e.g. perhaps “fitout” or “Tenant’s Fixtures”) cannot be determined, particularly when Cl. 28.1B makes it clear that installing the new fitout was only a sub-set of the “Fitout Work”. This is an example of the rare case where the Court will read out the words “the Fitout Work and” from Cl. 28.6.2 entirely. How Cl. 28.6.2 and clauses 17.1.4 and 17.2.1, even without the words which the Court has read out, can be harmonised is a problem for another day, if it ever arises. It would, for example, include consideration of whether Cl. 28.6 should simply prevail as a later, special condition (see paragraph [29] above) or whether Cl. 28.6.2 should be read out as an absurdity in its entirety, given the presence of Cl. 17.

The Determination – consideration: an alternative answer

If, contrary to the view which the Court has taken in the preceding paragraphs, “fitout” falls within “Fitout Work”, the Court has an alternative basis on which it finds that Mr Robertson complied with Clause 5.9(a). That alternative basis involves an emphasis on the proper meaning of “value” in Cl. 5.9(a) and an acceptance of the Lessee’s submission that what Mr Robertson permissibly took into account was the obligation on the Lessee under Cl. 28.5.3 to make a minimum expenditure on the “Fitout Work” (even where that term is taken to include “fitout”).
In the Determination, Mr Robertson has expressly taken into account the Lessee’s obligation to “spend a minimum of $1,000,000 on the Fitout Work”. Clause 5.9(a) required Mr Robertson to disregard the “value” of specific things. To take account of an obligation to spend a minimum sum of money on something speaks to expenditure or cost rather than its value. Cost, being what one has expended on something, neither means the same thing as nor necessarily equates with value, which is what something is worth (frequently, but not always, expressed as what someone is prepared to pay for something).

The Court concludes that Mr Robertson took into account an obligation to spend but not the value of the result of the expenditure. The Lessee could well spend in excess of $1,000,000 on the Fitout Work in labour, including to dispose of the existing fitout, and materials for the new fitout and be left with a fitout the value of which is materially less than the amount of money spent on the “Fitout Work”. Common sense suggests that is a possible result.
The preceding two paragraphs are perhaps a different way of expressing the Lessee’s submission (see paragraph [28] above) that on its proper construction Cl. 28.5.3 was the imposition of a future liability to spend money on something rather than a reference to the thing on which the money was to be spent. To the extent the difference of expression may be substantive, the Court also expressly accepts the Lessee’s submission.
Furthermore, even it if is the case that “fitout” is part of the “Fitout Work”, the Court finds that Mr Roberston disregarded the value of (as opposed to took account of the amount required to be spent on) the “fitout”, because while he does not expressly say he did so, on a fair reading of the entire Determination it is clear that he did disregard it (i.e. not take it into consideration). This is because:
(1)Mr Robertson sets out the review criteria, especially Cl. 5.9, at the start of the Determination (at page 3).
(2)In reviewing the Lessor’s and Lessee’s submissions on pages 10 to17 of the Determination there is no reference to the value of the fitout (as opposed to the obligation to spend a minimum amount on the “Fitout Work”).
(3)Nowhere in his commentary in the Determination at pages 17 to 22 does Mr Robertson refer to any attribution of value to fitout as opposed to the amount required to be spent on the “Fitout Work”.
(4)Nowhere in the basis for his assessment or the balance of the Determination (at pages 23 to 24) does Mr Robertson refer to the value of the fitout. On the contrary, he reaffirms his understanding of his task as being to take into account the terms of the Lease and the criteria in Cl. 5.9.
(5)Reading the Determination as a whole, it is inconceivable that if Mr Robertson had taken the “value” of the “fitout” into account he would not have specified, in dollar terms, that value and identified by inventory or otherwise the relevant fitout (especially where on this hypothesis, the new fitout was expressly only part of the “Fitout Work” see Cl. 28.1B).
In reaching the conclusions set out in the preceding paragraphs, it is appropriate to record how those conclusions resolve two specific arguments raised on behalf of the Lessor.
First, while it may well have avoided the need for these proceedings if, as the instruction given in Cl. 5.5.4 of the Lease suggests, Mr Robertson had expressly stated that he had disregarded “the value of the … fitout”, the Court does not accept that his failure to do so is evidence that he did not disregard that value. The reasons for this are set out in paragraph [66] above.
Second, paragraphs [52] and [53] above are the reasons why the Court does not accept the Lessor’s argument that to take into account the obligation to spend a minimum amount on the “Fitout Work” is to take into account the “value of the …. fitout” which is the product of that work.

Who must undertake a new determination - consideration

Although the question set out in paragraph [7(2)] above does not arise given the conclusions which the Court has reached, I will set out my answer against the possibility that the matter goes further.
The parties were in agreement that the Lease is the only source for the answer to what was to occur if the parties were not bound by the Determination. This requires consideration of the terms of the Lease, either express or implied.
The Lessee submitted that the answer resided in Mr Robertson‘s appointment under Cl. 5.5.1, which continued if the Court found that he had not in fact done what he was required to do. If the Determination was set aside, then it was Mr Robertson who had to do the task again.
The Lessor submitted that Mr Robertson’s’ appointment was spent. One proof of this was that it was now clearly impossible for Mr Robertson to deliver a Determination which complied with the Lease within the four weeks from his appointment (May 2014) stipulated in the instructions referred to in Cl. 5.5.4(b) of the Lease. It was submitted that either party was at liberty to approach the President of the NSW Division of the Australian Property Institute for the appointment of a valuer for the purpose of providing a rental determination which complied with the Lease and the President could, having regard to the decision of the Court, appoint either Mr Robertson or a different valuer.
The Lessor also submitted that the Lease did not prescribe the circumstances in which the appointment of a Valuer under the Lease might cease. There were certainly no provisions in the Lease dealing with a situation where the Court had declared the Determination not to have been made in accordance with the Lease and so did not bind the parties.
In those circumstances, the Lessor proposed a number of terms which it was submitted were available by reasonable implication as to when a valuer’s appointment might cease. One of these was that a court with jurisdiction had declared the determination of the valuer to be invalid as not complying with the Lease.
Mr Potts helpfully drew my attention to the decision of Black J in Barescape Pty Ltd v Bacchus Holdings Pty Ltd (No 9) [2012] NSWSC 984. In that case (at [109]-[113]), his Honour dealt with what was to happen after he had found that the failure of experts to undertake their valuation tasks properly under a contract amounted to a failure of the contractual machinery. In that situation his Honour held that the Court was entitled to proceed to undertake the valuation exercise itself.
In the course of his reasoning, Black J referred to the decision of Hargrave J in Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd (No 2) [2008] VSC 478 (“Candoora”). In that case the parties had appointed an expert valuer to determine the “fair value” of certain shares. The court determined that the resulting valuation certificate did not comply with the relevant contract so that the valuation certificate was set aside. His Honour then had to decide whether the valuation should be remitted to the original valuer for redetermination or whether a different valuer should be appointed under the contractual mechanism contained in the relevant contract.
The decision in Candoora is on all fours with the present case and I respectfully adopt the statement of principle and approach taken by Hargrave J recorded in paragraphs [9]-[28] of that judgment. Applying that approach I conclude that there is no express term in the Lease which governs the situation that has arisen. Nor is the Court able to imply a term because (applying the criteria laid down by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283) no term has been, or can be, proposed that is so obvious that “it goes without saying”. See also Candoora at [18].
Had it been necessary, the Court would have followed the approach taken in Candoora:
19 Putting to one side the possibility of a contractual term dealing with the issue, it is for the Court to give direction to the parties where there is a dispute, as here, as to whether or not the contractual question should be re-determined by the same expert whose determination has been impugned. It goes without saying that in giving direction to the parties, the Court should consider all of the relevant circumstances of the case before it. No two cases will be alike. …
The Court’s power to give such directions to fill the deficiency in the contractual arrangements between the parties is found in its general jurisdiction and its obligation to grant all such remedies as will completely and finally determine the controversy between the parties (Supreme Court Act, 1970 (NSW) ss 23 and 63).
The Lease makes clear that the parties intended, in default of agreement, that the new “Base Rent” should be determined by a valuer nominated by the President of the NSW Division of the Australian Property Institute and otherwise in accordance with Cl. 5.5 of the Lease (which incorporates the criteria in Cl. 5.9). If I had concluded that the Determination was not in accordance with the Lease, I would have directed the parties to restart the process under Cl. 5.5 by asking the President to nominate a valuer on the express basis that it would be solely a matter for the President as to whether Mr Robertson or some other valuer should be appointed to undertake the task afresh.
I would also have directed that a copy of the Court’s reasons be provided to the President at the time the parties sought his or her nomination of a valuer and that another copy be provided to the appointed valuer. There would have been two reasons for that direction. First, in relation to the President, it would have been to make clear to the President that insofar as the parties were restarting the process pursuant to the Court’s direction, the Court was of the view that it was entirely a matter for the President as to whether or not Mr Robertson should be nominated again. As to the latter, the intention would have been to draw the attention of the nominated valuer to the error into which the Court would have found Mr Robertson had fallen.
One final observation should be made as to the identity of the valuer. In Candoora, Hargrave J was satisfied that the original valuer should not be retained to undertake the task again. In his Honour’s view there were reasonable grounds for one of the parties to assert that the original valuer would not bring a fair and balanced mind to any further valuation. There were two reasons for this. First, the original valuer’s error was of a most substantial kind. Second, the original valuer had written a letter which demonstrated a propensity to support the impugned valuation.
In these proceedings I admitted into evidence a letter dated 18 August 2014 from Mr Robertson to the Lessor’s solicitors in response to a letter from those solicitors which I infer invited him to reassess the Determination. The letter was not admitted for the truth of its contents but rather to prove the fact of the statements made in it, which were:
Our report does not, as you claim, have any regard for the actual value of the lessee’s fitout. This was disregarded. Rather, it takes into account the obligations of the lessee to undertake a fitout which is of a significantly high minimum value and not a similar requirement in other leases.
These are two very different matters and should not be confused.
Accordingly, we will not be amending our determination of the rent.
We see no purpose would be served by us meeting with you to discuss the contents of your letter.
The Lessee did not suggest in its written or oral submissions that the Court should intervene to prevent any new valuation being undertaken by Mr Robertson. Nevertheless, in the course of address, Mr Walker submitted (Transcript, p 13) that the letter demonstrated “what might be called a steadiness of mind and firmness of position”. He went on to submit that “there ought to be a restarting of the process which will include a call for another nomination, a process in which, of course, a concern excited on our part at least as to apprehended bias or a fixed predetermination is one which we would certainly be making known to nominating authorities”.
I do not consider the contents of Mr Robertson’s letter, as I have inferred in response to a letter from the Lessor’s solicitors, or the fact that he had undertaken the Determination and expended considerable time and effort, as being sufficient to justify any of the concerns identified by Mr Walker. Had I been asked, I would not have regarded those matters as being sufficient to direct that any new valuation should not be undertaken by Mr Robertson. However, nor does the Lease permit either party to make comments about particular valuers as part of the process of the President nominating a valuer. Had it been necessary, the Court would have directed that the Lessor would not have been entitled to raise with the President the concerns identified by Mr Walker.

Conclusion and orders

The Lessor has failed to make out the deficiency which it alleged in the Determination. The parties are therefore bound by the Determination. Subject to hearing the parties as to formal disposition of the proceedings, the Court proposes to order:
(1)The summons and cross-summons are dismissed.
(2)The plaintiff/cross-defendant pay the defendant/cross-claimant’s costs of the proceedings including of the cross-summons.
SCHEDULE - 122 PITT STREET v UNIVERSAL 1919 - 2014_294047 (52.4 KB, pdf)

Details

AGLC: 122 Pitt Street Pty Ltd ACN 104 825 961 v Universal 1919 Pty Ltd [2015] NSWSC 234
Case: [2015] NSWSC 234
Decision Date: 17 March 2015

CaseChat Overview and Summary

The plaintiff, 122 Pitt Street Pty Ltd, brought an action against the defendant, Universal 1919 Pty Ltd, for review of a rent assessment made in accordance with the terms of their commercial lease. The dispute involved whether the rent review conducted by a valuer was carried out in accordance with the contractual provisions and whether the term “Fitout Work” in the lease included the broader concept of “fitout”. The matter was heard by the New South Wales Supreme Court.

The central legal issues the court had to address were whether the rent review process adhered to the contractual requirements and if the term “Fitout Work” encompassed the full scope of the fitout. The court examined the lease agreement, the process of the rent review, and the interpretation of the term “Fitout Work”. The plaintiff argued that the valuer did not follow the contractual provisions, leading to an underestimation of the rent, and that the term “Fitout Work” should be interpreted broadly to include all aspects of the fitout.

The court concluded that the rent review did not comply with the contractual terms, as the valuer had not considered all relevant factors as required. Regarding the term “Fitout Work”, the court found that it did not encompass the broader concept of “fitout”. The court emphasised that the valuer must strictly adhere to the prescribed method outlined in the lease for any future reviews. If the rent review were to be set aside, the parties were directed to negotiate a new rent assessment in accordance with the correct process. The court ordered that the parties engage in good faith to determine a new rent, with the valuer being appointed by agreement or, failing that, by the court.

The final orders of the court included setting aside the original rent review, directing the parties to negotiate a new rent assessment in accordance with the correct process, and appointing a valuer to conduct the new review if the parties could not agree on one. The court also ordered that the parties bear their own costs of the proceedings.

Orders