Agtan Pty Ltd (ACN 007 410 077) v Caltex Australia Petroleum Pty Ltd(ACN 000 032 128)
[2018] VSCA 169
•10 July 2018
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2017 0116
| AGTAN PTY LTD (ACN 007 410 077) | Applicant |
| v | |
| CALTEX AUSTRALIA PETROLEUM PTY LTD (ACN 000 032 128) | Respondent |
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| JUDGES: | SANTAMARIA, McLEISH and HARGRAVE JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 12 April 2018 |
| DATE OF JUDGMENT: | 10 July 2018 |
| MEDIUM NEUTRAL CITATION: | [2018] VSCA 169 |
| JUDGMENT APPEALED FROM: | [2017] VSC 593 (Digby J) |
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CONTRACT – Construction and interpretation – Lease of premises used as service station – Where underground storage tank part of tank system – Where lessee decommissioned tank – Whether lessee under obligation to repair tank – Where clause concerns maintenance and repair of premises – Whether obligation to ‘keep and maintain’ premises distinct from obligation to ‘effect repairs’ to premises ‘as necessary’ – Whether obligation extends to tank system only or also to individual parts of tank system.
CONTRACT – Construction and interpretation – Lease of premises used as service station – Where lessee exercised two five-year options to renew – Where obligation in clause concerning maintenance and repair of premises subject to condition of premises ‘as at the date of commencement of the Lease’ – Whether ‘date of commencement of the Lease’ date of commencement of original lease or date of commencement of renewal period – Nature of lease obtained by exercise of option to renew.
APPEALS – Where findings of fact challenged on appeal – Where certain findings based on inference – Whether inference more probable conclusion to be drawn from facts.
WORDS AND PHRASES – ‘keep and maintain’, ‘effect repairs’, ‘as necessary’, ‘fair wear and tear’, ‘reasonable use’.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr D J Batt QC with Mr G Kozminsky | Slocombe Brand Lawyers |
| For the Respondent | Mr M I Borsky QC with Mr T B Maxwell | Sparke Helmore |
SANTAMARIA JA:
Introduction
This appeal raises several questions of construction under a lease. The original lease commenced on 1 September 1999 for a term of 10 years with two options, each for a term of five years. The lessor is the applicant, Agtan Pty Ltd (‘Agtan’). The lessee is the respondent, Caltex Australia Petroleum Pty Ltd (‘Caltex’). Caltex conducts a service station business from the premises. The premises contains eight underground steel storage tanks, defined collectively in the lease as ‘the Tank System’.
Caltex exercised each of the options under the original lease: the first in 2009 and the second in 2014. In 2011, after Caltex exercised the first option, but before it exercised the second, one of the underground steel storage tanks suffered a water leak and was decommissioned by Caltex. In broad terms, the issue in this appeal is whether Caltex has an obligation under the lease to repair that tank. In resolving this issue, much turns on the proper construction of one clause in the lease: cl 19.1.
In summary, and at the risk of overlooking its complex nature, cl 19.1 makes reference to two obligations. First, it requires Caltex to ‘keep and maintain the Demised Premises and appurtenances in good and tenantable repair and good and efficient working order and condition having regard to their condition as at the date of commencement of the Lease’. As is plain, this obligation is subject to the original condition of the Demised Premises at the commencement of the lease. It is also subject to a ‘fair wear and tear’ exception, among other exceptions that are not relevant at present.
Secondly, cl 19.1 also requires Caltex to ‘effect repairs to the Demised Premises and appurtenances as necessary including the replacement of all worn or defective parts’.
Generally speaking, cl 19.1 relieves Caltex from the need to carry out ‘structural works’; but that exoneration does not apply to ‘structural works to and replacement of the Tank System, Liquefied Petroleum Gas Equipment and Car Wash’, which are to be its responsibility.
At a theoretical level, the issue is whether the obligation to ‘effect repairs’[1] is an aspect of the obligation to ‘keep and maintain the Demised Premises in good and tenantable repair and good and efficient working order and condition’,[2] or whether it is an additional and freestanding obligation. If it is the former, the obligation to effect repairs is subject to the original condition of the Demised Premises and the fair wear and tear exception. Accordingly, Caltex would not be required to repair that tank. If it is the latter, Caltex would be required to effect repairs notwithstanding that the need to effect those repairs had arisen before the commencement of the lease or had arisen due to fair wear and tear. At a practical level, the issue is which of Agtan or Caltex was responsible to repair the tank that had been decommissioned.
[1]See, more specifically, [4] above.
[2]See [3] above.
The trial judge held that cl 19.1 of the lease contained a ‘single central obligation’: the obligation (in shorthand) to ‘keep and maintain’, which included the obligation (in shorthand) to ‘effect repairs’.[3] The single obligation, he held, was subject to the original condition of the Demised Premises and to the fair wear and tear exception. Accordingly, Caltex’s obligation to ‘effect repairs’ was also subject to the original condition of the Demised Premises and to the fair wear and tear exception. This conclusion is the subject of the first proposed ground of appeal.
[3]Caltex Australia Petroleum Pty Ltd v Agtan Pty Ltd [2017] VSC 593 [183] (‘Reasons’).
In view of that conclusion, it became necessary for the trial judge to determine several further questions.
In so far as the relevant tank had been decommissioned after the expiry of the original term and during the term of the first option, and in so far as Caltex had commenced the term of the second option, the question then became: what was ‘the date of commencement of the Lease’ in cl 19.1? If it meant the date of commencement of the original lease (1 September 1999), the responsibility to repair the tank lay with Caltex, as the tank had been decommissioned after the commencement of that original term. If it meant the commencement of any renewal period (and, in particular, the date of commencement of the second deed), Caltex was not responsible to repair the tank as it had already been decommissioned as at the commencement date of the second renewal (1 September 2014). The trial judge held that, on its proper construction, ‘the date of commencement of the Lease’ was the date on which the second option to renew commenced, by which stage the tank had been decommissioned. Accordingly, Caltex had no obligation to repair the tank. This conclusion is the subject of the second proposed ground of appeal.
Each of the remaining grounds was premised on the holding that, for the purposes of cl 19.1, the lease commenced on 1 September 1999.
At trial, Agtan contended that Caltex had failed to keep the Tank System in ‘good and tenantable repair and good and efficient working order’ in so far as Caltex had decommissioned the tank that had become unserviceable. As it happened, while that tank had been decommissioned, the remainder of the Tank System was operational. Accordingly, another question that arose for determination was whether cl 19.1 required Caltex to keep the Tank System in ‘good and tenantable repair and good and efficient working order’ as a whole, or whether it was required to do so with respect to each individual part of it. The trial judge held that the obligation extended only to the Tank System as a whole, and not to individual parts of it. He found that, notwithstanding that one of the tanks had been decommissioned, the Tank System as a whole ‘is and was at all material times in good and tenantable repair and good and effective working order and condition’.[4] In effect, the trial judge accepted Caltex’s submission that cl 19.1 did not give rise to an obligation to replace any part of the Tank System that had become worn. This conclusion is the subject of the third proposed ground of appeal.[5]
[4]Ibid [212], [250(d)].
[5]In particular, this conclusion is the subject of proposed ground 3(a), while proposed ground 3(b) is directed to the conclusion that the only way to repair the tank that had become unserviceable was to replace it, along with two other tanks.
Following on the previous holding, the trial judge found that the Tank System, as a whole, had remained in good and tenantable repair notwithstanding that one of the tanks had been decommissioned. Accordingly, the trial judge held that Caltex was not in breach of its obligation to keep the Tank System in ‘good and tenantable repair and good and efficient working order’. This conclusion is the subject of the fourth proposed ground of appeal.[6]
[6]It will be noticed that this proposed ground overlaps with the third proposed ground in so far as it impeaches the trial judge’s finding with respect to the physical condition of the Tank System as a whole.
Finally, the trial judge held that the fair wear and tear exception in cl 19.1 operated to exempt Caltex from any liability under cl 19.1. He considered that the failure of the tank that had become unserviceable was a result of fair wear and tear on the basis that the tank was made of steel, did not have cathodic protection and had a design life of 20 to 30 years. He also said that the failure of that tank was not due to any neglect or default by Caltex and that there was nothing further that Caltex could have done to maintain the tank. This conclusion is the subject of the fifth proposed ground of appeal.
For the reasons that follow, I would grant Agtan leave to appeal on all grounds of appeal, but I would dismiss the appeal.
Factual background
Agtan is the owner and lessor of a petrol station on Canterbury Road, Kilsyth. Caltex is the tenant of the premises. It carries on a franchised petrol service station business from the premises.
On 29 September 1999, Caltex entered into lease of the premises with Lochmullan Pty Ltd, the owner and lessor of the premises at the time. The lease was for a term of 10 years with two options, each for a further term of five years.
There are eight underground steel storage tanks at the premises. As mentioned above, the tanks collectively form what the lease defines as ‘the Tank System’. One of those tanks is Tank 2, which sits between Tank 1 and Tank 3.
On 1 September 2009, Caltex exercised the first option under the lease. A document styled ‘Deed of Renewal and Variation of Lease’ was executed by Caltex and Ernest James Conyers and Marlene Loris Conyers (the owners and lessors of the premises at the time) (‘the first deed’). The renewed or extended lease was to be in effect for the period 1 September 2009 to 31 August 2014.
Pursuant to cl 2.2 of the first deed, the parties confirmed that their respective covenants and obligations were identical to those contained in the original lease and were incorporated into the first deed as if set out therein, save that the term of the lease was five years, rent was set at $240,000 per annum and only one option for a further term of five years remained. The commencement date of the first deed was 1 September 2009.
On 14 October 2011, Caltex decommissioned Tank 2 after it discovered that water was leaking into the tank. Following the decommissioning of Tank 2, the capacity of the Tank System reduced from about 300,000 litres to about 231,000 litres.
On 22 May 2012, Agtan entered into a contract to purchase the premises from Helen Mathers and Tom Wickers as the personal representatives of the Conyers.
On 29 May 2014, Caltex exercised the second option under the lease. Caltex and Agtan could not agree upon the rental amount.
In early 2015, the dispute over the rental amount was referred to a rental determination. The firm appointed to carry out the rental determination, Sutherland Farrelly, published a report on 26 May 2015 (‘the rental determination report’). That report noted that one of the tanks (Tank 2) was no longer operational.
On 13 May 2015, Agtan appointed Napier & Blackley to prepare, on behalf of Agtan, a make good schedule with respect to the maintenance, upkeep and presentation of the premises.
On 29 May 2015, Agtan served a breach notice with respect to the matters identified in the make good schedule prepared by Napier & Blackley. There were 16 items identified in the breach notice. These items did not include Tank 2 and were not central issues in the proceedings below.
On 11 June 2015, Caltex executed a document styled ‘Deed of Renewal of Lease’, which recorded the exercise of the second option by Caltex on 29 May 2014 (‘the second deed’).
On 15 July 2015, Agtan served a notice of default under the lease (‘the first default notice’). The first default notice claimed that Caltex had breached cl 19.1 of the lease (set out below) by not maintaining Tank 2 such that it was no longer operational. It also gave Caltex 30 days to remedy the breach, failing which Agtan would treat the lease as repudiated and re-enter into possession of the premises.
On 7 August 2015, Agtan executed the second deed. The commencement date of the second deed was 1 September 2014.
Under cl 3.2 of the second deed, the parties confirmed that their respective covenants and obligations under the ‘New Lease’ (as defined in the second deed) were identical to those contained in the lease dated 29 September 1999, as amended by the first deed, and were incorporated into the second deed as if set out therein, except that the lease term was set at five years, rent was set at $265,100 per annum, and there were no further options. The lease will therefore expire on 1 September 2019.
On 21 September 2015, Agtan issued a second notice of default on substantially the same basis as the first default notice, save that the new default notice was confined to alleged breaches arising from 8 August 2015 (‘the second default notice’).
Lease
At the heart of the dispute is the proper construction of cl 19.1 of the lease, which is incorporated into the New Lease by cl 3.2 of the second deed. The construction issue is best understood by setting out the whole of cl 19:
MAINTENANCE AND REPAIR OF DEMISED PREMISES
19.1The Lessee shall at its own expense keep and maintain the Demised Premises and appurtenances in good and tenantable repair and good and efficient working order and condition having regard to their condition as at the date of commencement of the Lease (fair wear and tear and damage by fire, storm, flood, earthquake, tempest, act of God, riots, civil commotions or act fo [sic] war and without any neglect or default on the part of the Lessee alone excepted) and shall effect repairs to the Demised Premises and appurtenances as necessary including the replacement of all worn or defective parts PROVIDED THAT nothing shall oblige the Lessee to effect structural works except structural works to and replacement of the Tank System, Liquefied Petroleum Gas Equipment and Car Wash or where the need for such works arises out of the neglect or default of the Lessee or the use of the Demised Premises by the Lessee.
19.2Notwithstanding the foregoing the Lessor shall maintain the Demised Premises other than the Tank System, Car Wash and Liquefied Petroleum Gas equipment in a structurally sound and watertight condition during the Term of this Lease but shall not be responsible for any structural unsoundness or water penetration caused and/or contributed to by the action or inaction of the Lessee, its agents, servants, licensees or invitees.
It is necessary also to set out or summarise several other provisions of the lease upon which one or both of the parties rely in support of their proposed constructions of cl 19.1. Some provisions are longwinded, so it is convenient to italicise the relevant language of those provisions.
Clause 1.1 of the lease includes the following defined terms:
‘Building’ means the building situated on the Demised Premises and includes all modifications extensions or alterations from time to time made to it together with the fixtures and fittings and other improvements amenities and appurtenances of it from time to time and the equipment listed in the Schedule.[7]
‘Date of Commencement’ means the 1st day of September 1999.
‘Demised Premises’ means the Land in Certificate of Title Volume 10027 Folio 247 ‘the Land’ and the Building demised by the Lease and includes all fixtures fittings furnishing plant machinery and equipment now or hereafter installed by the Lessor situate at 92–94 Canterbury Road, Kilsyth.
‘Lease’ means the lease of the Demised Premises comprising these terms and conditions and all annexure [sic] and schedules (if any).
…
‘Tank System’ means the underground storage tanks and the product pipes from such tanks to the product pump locations but does not include the liquefied petroleum gas equipment.
‘Term’ means the term of ten (10) years commencing on the Date of Commencement.
[7]The schedule is summarised at [49] below.
Clause 2 is entitled ‘Lessee to pay rent’. Relevantly, cl 2.1 provides:
The Lessee hereby expressly covenants with the Lessor that the Lessee will during the whole of the Term and any extension or renewal thereof or holding over thereunder duly and punctually pay to the Lessor without demand and without any deduction whatsoever the rent specified in Clause 2.2 hereof at such place as the Lessor shall from time to time in writing direct such rent to be paid by equal consecutive calendar monthly instalments in advance:
(a) on the Date of Commencement;
(b) thereafter on the first day of each month during the Term;
(c) on the Date of Commencement of any extension or renewal hereof; and
(d)on the first day of each successive month during any such extension or renewal hereof.
Clause 4 is entitled ‘Lessor’s covenants’. Clause 4.1 provides:
The Lessee paying the rent hereby reserved and duly and punctually observing and performing the covenants obligations and provisions in this Lease on the part of the Lessee to be observed and performed shall and may peaceably possess and enjoy the Premises for the Term hereby granted without any interruption or disturbance from the Lessor or any other person or persons lawfully claiming from or under the Lessor.
Clause 10 is entitled ‘Comply with Acts, regulations, by-laws etc.’ In particular, cl 10.1 provides:
The Lessee will duly observe comply with fulfil and carry out the provisions and requirements for the time being of the Local Government Act, the Health Act, the Factories and Shops Act, and all other Acts, federal or state, the provisions whereof shall have effect in relation to the Demised Premises or the use thereof and all orders regulations rules by-laws orders-in-council ordinances and other subordinate legislation under any such acts and every modifications [sic] amendment or re-enactment thereof and the provisions and requirements of all municipal city health fire brigade and other statutory authorities and bodies affecting the Demised Premises during the Term or any extension or renewal thereof but nothing herein contained shall impose on the Lessee any liability to effect or pay for any structural alterations improvements or additions or structural repairs to the Demised Premises or any part thereof or to erect new additional or substantial sanitary conveniences except that the Lessee shall be liable to effect or pay for any structural alterations improvements or additions or structural repairs to the Tank System, Car Wash and Liquefied Petroleum Gas Equipment, the fittings fixtures or erections of the Lessee or as may be occasioned by virtue of the particular nature of the business of the Lessee or the manner or method of carrying on such business or the number and sex of the persons employed therein. Notwithstanding anything herein contained the Lessee shall comply with insurance sprinkler and fire alarm regulations in relation to the Demised Premises and the Lessee shall pay to the Lessor the cost of any installation of or alteration to the sprinkler or fire alarm equipment which may become necessary by reason of the non-compliance by the Lessee with those regulations or the requirements of the Lessor’s insurer.
Clause 14 is entitled ‘Painting, decorating and cleaning’. Clause 14.1 provides, in effect, that the lessee shall, in certain circumstances, paint, decorate or colour all the inside and outside parts of the premises, including some fixtures, if reasonably required by the lesser once every five years and also before vacating the premises. Clause 14.2 also provides that the lessee will be responsible for all cleaning of the premises during the term of the lease and any extension or renewal.
Clause 15 is entitled ‘Use of premises’. Relevantly, it provides that ‘[t]he Lessee shall not use or permit to be used the Demised Premises or any part thereof for any purpose other than a purpose for which service station premises may be lawfully used from time to time’ under the applicable town planning scheme.
Clause 16.1 is entitled ‘Insurance’. It provides, in effect, that the lessee must take out, at its own expense, insurance in the name of both the lessor and lessee.
Clause 18 is entitled ‘Keep clean and tidy’. Clause 18.1 provides that the lessee will keep the premises in a clean, neat and tidy condition.
Clause 22.1 operates as a release for the benefit of the lessor. It provides, in effect, that the lessee agrees to occupy and use the premises at its own risk and releases the lessor from all claims and liability arising out of accident, damage or injury to any person or property on the premises.
Clause 25 is entitled ‘Removal of fixtures and fittings’. Clause 25.1 provides:
The Lessee having paid all rent payable hereunder and observing all the covenants and agreements on the part f [sic] the Lessee herein contained or implied may at the end or sooner determination of this Lease remove all the property of the Lessee and all trade or tenant’s fixtures and fittings (which term is expressly declared to include internal partitions electric light fixtures and fittings installed by the Lessee with the consent of the Lessor but not the Tank System, Car Wash or structural alterations or additions or any toilets installed by the Lessee) erected or installed by the Lessee provided that such removal can be effected without causing any substantial or irreparable damage to the Demised Premises and the Lessee hereby covenants to make good all damage to the Demised Premises to the reasonable satisfaction of the Lessor or to the fixtures and fittings of the Lessor which shall be caused by reason of the erection installation or removal of such fixtures and fittings provided always that any such fixtures and fittings not so removed shall become the property of the Lessor.
Clause 26 is entitled ‘Determination for breach’ and cl 27 is entitled ‘Repudiation by lessee’. In substance, these provisions concern the lessor’s right of re-entry into the premises and claims for damages for breach or repudiation by the lessee in a number of circumstances.
Clause 27 is entitled ‘Repudiation by Lessee’. Clause 27.1 provides:
It is expressly agreed by and between the Lessor and the Lessee that [specific covenants] constitute essential conditions of this Lease and the Lessor shall be entitled in addition to all other remedies which may otherwise be available to or exercised by the Lessor at the option of the Lessor and notwithstanding any prior waiver of such right to treat any breach or default by the Lessee in the due and punctual performance thereof which shall continue for thirty (30) days as repudiation of this Lease and notwithstanding that the Lessor shall have accepted such repudiation and re-entered into possession of the Demised Premises the Lessor shall be entitled to use for and recover as loss and damage flowing from such breach or default the Rent and other moneys payable by the Lessee for the whole of the balance of the Term current at the time of such repudiation except to the extent to which such loss and damage has been or should have been mitigated by the Lessor (in addition to any other loss and damage flowing from such breach or default and subsequent re-entry by the Lessor whether in respect of the period prior to or subsequent to the date of re-entry).
Clause 30 is entitled ‘Damage or destruction of the Demised Premises’. Clause 30.1 provides:
The Lessor and the Lessee hereby agree and declare that if the whole or any part of the Demised Premises shall be destroyed or damaged by fire, flood, lightning, storm, tempest or other disabling cause so as to render the Demised Premises during the Term substantially unfit for use as a petrol filling station and/or convenience shop then:
(a)upon the happening of any such damage or destruction as aforesaid and provided that the Demised Premises are unfit for the said use by reason of such destruction or damage the annual rent hereby reserved and the Lessee’s obligations under Clause 6 hereof or proportionate part thereof according to the nature and extent of the damage sustained shall abate, and all or any remedies for the recovery of such rent or moneys or such proportionate part thereof shall be suspended until the Demised Premises shall have been rebuilt or reinstated or made fit for the use of the Lessee or until the Lease shall be terminated pursuant to the provisions of sub-clause (c) of this Clause as the case may be PROVIDED THAT the abatement of rent as aforesaid shall not apply in case of destruction or damage caused by the wilful or negligent act or omission of the Lessee or any clerk, servant, invitee, workman, employee, client, agent, customer or visitor of the Lessee or any other persons under the control of the Lessee or where any insurance moneys are or become irrecoverable by reason of any such act or omission;
(b)within one (1) month thereafter either party may give written notice to the other of its intention to make good such destruction or damage and provided the work of making good such destruction or damage has in fact genuinely commenced within six months of the date upon which such destruction or damage took place, the party to whom such notice is given shall apply all insurance moneys received by it for such destruction or damage towards making good such destruction or damage PROVIDED HOWEVER that the party to whom such notice is given shall only be obliged to apply the insurance moneys as aforesaid if it is satisfied that the reinstatement or replacement of the Demised Premises has reached such a state that the application of the insurance moneys will enable the making good of the destruction or damage to be completed not later than twelve months before the expiration of the Term or any renewal thereof;
(c)in the event that a notice under sub-clause (b) of this Clause is not given within the period specified or the work of making good such destruction or damage has not in fact genuinely commenced within the period specified this Lease may be terminated without compensation by either party given written notice to the other part [sic] but any such termination as aforesaid shall be without prejudice to the rights of either party in respect of any antecedent breach, matter or thing;
(d)any dispute or difference as to the application of this Clause shall be referred for determination by an arbitrator appointed under the Commercial Arbitration Act 1984. In any proceedings in relation thereto, the parties reserve the right to have legal or other representation;
(e)nothing herein contained or implied shall be deemed to impose any obligation upon the Lessor to rebuild or reinstate the Demised Premises or to make the same fit for use and occupation of the Lessee.
Clause 31.1 excludes liability on the part of the lessor. It provides:
The Lessor shall not be liable for any loss or damage sustained by the Lessee arising directly or indirectly from fire or the overflow leakage or escape or the negligent or wilful use waste misuse or abuse by any person of any rain or other water gas electricity or other fluid substance or force or the stoppage of any guttering spouting pipe drain or vent on the Demised Premises or for any loss or damage arising from the accidental escape of any fluid force or substance into or upon the Demised Premises unless the same shall arise from carelessness or negligence on the part of the Lessor or any agent servant or employee of the Lessor.
Clause 36 is entitled ‘Option for renewal’. Clause 36.1 provides:
The Lessor and the Lessee agree that the Lessor shall upon the written request of the Lessee delivered to the Lessor not more than six (6) calendar months nor less than three (3) calendar months prior to the expiration of the Term PROVIDED THAT during the said Term the Lessee has not been regularly late in paying the Rent hereby reserved and all other moneys payable hereunder and has duly performed and observed all of the covenants, terms, conditions and stipulation herein contained and on the part of the Lessee to be performed and observed renew this Lease (‘the Renewed Lease’) for a further term of five (5) years from the expiration of the Term hereby granted at the cost of the Lessee PROVIDED ALWAYS that the rent during the second, third, fourth and fifth years of such further term shall be calculated in accordance with the provisions of clause 36.2 hereof. The rental at the commencement of the further term shall be a rental to be agreed upon between the Lessor and the Lessee and failing agreement to be a rent to be determined by the President for the time being of the Victorian Division of the Australian Property Institute or his nominee as the then market rent of the Premises PROVIDED THAT such valuer must ignore the Lessee’s installations and improvements and ignore the goodwill of the Lessee’s business and the cost of such determination shall be borne in equal shares by the parties. The Lessor shall not be entitled to rely upon a breach or non-observance by the Lessee as a grounds [sic] for refusing the further term unless the Lessor has first served written notice on the Lessee specifying its default and the Lessee failed for a period of 30 days to remedy it. The … Renewed Lease shall otherwise contain the same covenants, agreements and provisions as are herein contained[8] … The Lessor and the Lessee agree that all rent hereunder shall be payable monthly in advance in accordance with the provisions of Clause 2.1 and 2.2 hereof.[9]
[8]At this point, there are several lines of cl 36 that have been struck out. The parts of the clause that have been struck out make reference to ‘the First Renewed Lease’ and ‘the Second Renewed Lease’.
[9]Emphasis added.
Clause 38 is entitled ‘Environmental site assessment’. Clause 38.2 provides that the lessee must obtain an environmental site assessment at the end of the original term and each option period and, if necessary, clean the premises at its own expense. Clause 38.4 provides, in effect, that the lessee agrees to indemnify the lessor against losses with respect to any increased contamination. The indemnity operates for a period of 12 months following the expiration or before termination of the lease or any renewal or extension.
The lease also contains a schedule. The schedule, which is entitled ‘Equipment’, contains several pieces of equipment under different categories. One of the listed categories is ‘Underground Storage Tanks’. Listed below that category are several tanks, each with a specified capacity. During oral submissions before this Court, senior counsel for Agtan said that Tank 2 was one of the listed unleaded tanks with a capacity of 57,130 litres.
Summary of procedural history
By generally indorsed writ filed on 15 September 2015, Caltex issued a proceeding against Agtan. It sought, among other relief, declarations that Caltex was not in breach of cl 19.1 of the lease and that the first default notice was not effective to determine the lease; specific performance by Agtan of its obligations under the lease, in particular its obligation not to interrupt or disturb Caltex’s peaceful possession and enjoyment under cl 4.1 of the lease; and, in the alternative, relief against forfeiture.
Caltex also filed a summons seeking an interlocutory injunction restraining re-entry by Agtan. That application was resolved by consent; Agtan undertook not to re-enter the premises in reliance upon the first default notice pending the resolution of the proceeding.
The pleadings arrived in October. On 1 October 2015, Caltex filed a statement of claim. On 9 October 2015, Agtan filed a defence and counterclaim. In its counterclaim, it sought, among other relief, declarations that Caltex had breached and remained in breach of cl 19.1 of the lease by reason of Tank 2 no longer being operational and that Agtan was entitled under cl 27 to treat the lease as repudiated and re-enter into possession of the premises under the first default notice or, alternatively, the second default notice. Caltex filed a reply and defence to counterclaim on 16 October 2015.
The trial of the proceeding took place on 14 and 16 June 2016. There were six issues that arose for determination at trial. Incidentally, the first five of those issues are reflected in Agtan’s proposed grounds of appeal, which are set out below.
On 3 October 2017, the trial judge delivered judgment in favour of Caltex against Agtan. Relevantly, he held that Caltex was not in breach of cl 19.1 of the lease by reason of Tank 2 no longer being operational. He also held that the first default notice and the second default notice were not effective to terminate the lease. He made declarations to this effect and ordered that there be specific performance by Agtan of its obligations under the lease, including its obligation not to interrupt or disturb Caltex’s peaceful possession and enjoyment under cl 4.1 of the lease.
Reasons of the trial judge
The effect of the trial judge’s decision was that Caltex was not in breach of cl 19.1 of the lease and that it was not required to repair Tank 2. As indicated above, the proper construction of cl 19.1 was central to the resolution of the dispute between the parties. A critical issue that arose at trial was the nature and extent of the obligations that cl 19.1 imposed on Caltex.
In summary, the trial judge held that cl 19.1 of the lease contained a ‘single central obligation’ on the part of Caltex to ‘keep and maintain the Demised Premises and appurtenances in good and tenantable repair and good and efficient working order and condition’, including to ‘effect repairs to the Demised Premises and appurtenances as necessary’.[10] He decided, in effect, that the phrase ‘effect repairs to the Demised Premises and appurtenances as necessary’ qualified what he saw as the sole obligation to ‘keep and maintain the Demised Premises’.[11] In so concluding, he rejected a contention made on behalf of Agtan that cl 19.1 contained separate obligations to ‘keep and maintain’ the premises in good and tenantable repair and to ‘effect repairs … as necessary’.
[10]Reasons [176], [183].
[11]Ibid [181]–[182].
There are four other conclusions of the trial judge that must be noted for the purposes of understanding Agtan’s second to fifth proposed grounds of appeal:
(a) ‘the date of commencement of the Lease’ in cl 19.1 of the lease was 1 September 2014, being the date stipulated to be the ‘Commencement Date’ of the second deed;[12]
[12]Ibid [175].
(b) clause 19.1 of the lease did not require Caltex to keep and maintain Tank 2 (as opposed to the Tank System as a whole) in good and tenantable repair;[13]
[13]Ibid [189]–[192].
(c) the decommissioning of Tank 2 by Caltex did not have a material adverse effect on the Tank System, and the Tank System remained in ‘good and tenantable repair’ at all material times;[14] and
(d) Caltex was entitled to rely upon the exception relating to ‘fair wear and tear’ in cl 19.1.[15]
The trial judge’s reasoning in support of these conclusions will be elaborated below, where necessary, in the consideration of each proposed ground of appeal.
[14]Ibid [203]–[214].
[15]Ibid [195]–[202], [215]–[232].
Application for leave to appeal
Agtan has applied for leave to appeal on the following five grounds:
1.The trial judge erred in finding that clause 19.1 of the lease did not contain both an obligation to ‘keep and maintain’ and a separate obligation to ‘effect repairs … as necessary’.
2.The trial judge erred in finding that the words ‘date of commencement of the Lease’ in clause 19.1 meant 1 September 2014.
3. The trial judge erred:
(a)in finding that clause 19.1 of the lease did not require the respondent to keep and maintain part of the Tank System (i.e. Tank 2) in good and tenantable repair;
(b)alternatively to 3(a), in not finding [that] clause 19.1 was breached having found that the only way to repair Tank 2 was to replace Tank 1, Tank 2 and Tank 3.
4.The trial judge erred in finding that the decommissioning of Tank 2 did not have a material adverse effect on the Tank System and that the Tank System remained in ‘good and tenantable repair’ at all material times, including by relying upon inadmissible evidence.
5.The trial judge erred in finding that the respondent was entitled to rely upon the fair wear and tear exception in clause 19.1 of the lease.
It was common ground between the parties that:
(e) were Agtan to succeed in its first proposed ground of appeal, it would succeed in the appeal and, strictly speaking, there would be no need to consider the second to fifth proposed grounds; and
(f) assuming that Agtan failed in its first proposed ground, the only way in which it could succeed in the appeal was if it succeeded in its second and fifth proposed grounds and at least one of its third and fourth proposed grounds.
Application to amend application for leave to appeal
The relief sought by Agtan in its original application for leave to appeal included:
(g) a declaration that Caltex had breached and remains in breach of cl 19.1 of the lease;
(h) relief against forfeiture to be granted to Caltex on the condition that, before the expiry of the current lease term, Caltex replace Tank 1, Tank 2 and Tank 3; and
(i) alternatively to (b), payment forthwith of damages of $850,000 plus interest.
During the hearing of the application for leave to appeal, Agtan applied for leave to amend its application. In effect, it abandoned the claim for relief against forfeiture (on behalf of Caltex) in par 60(b) above. The effect of the amendment is that Agtan claims only the declaration of breach and the payment of damages.
Caltex did not oppose the making of the amendment. The amendment should be allowed accordingly.
Clause 19.1
Before summarising the issues that are raised by the proposed grounds of appeal, it is convenient once again to set out cl 19.1 in its entirety:
MAINTENANCE AND REPAIR OF DEMISED PREMISES
19.1The Lessee shall at its own expense keep and maintain the Demised Premises and appurtenances in good and tenantable repair and good and efficient working order and condition having regard to their condition as at the date of commencement of the Lease (fair wear and tear and damage by fire, storm, flood, earthquake, tempest, act of God, riots, civil commotions or act fo [sic] war and without any neglect or default on the part of the Lessee alone excepted) and shall effect repairs to the Demised Premises and appurtenances as necessary including the replacement of all worn or defective parts PROVIDED THAT nothing shall oblige the Lessee to effect structural works except structural works to and replacement of the Tank System, Liquefied Petroleum Gas Equipment and Car Wash or where the need for such works arises out of the neglect or default of the Lessee or the use of the Demised Premises by the Lessee.
Five observations should be made about cl 19.1. First, it contains both an obligation to ‘keep and maintain the Demised Premises and appurtenances in good and tenantable repair and good and efficient working order and condition’ and an obligation to ‘effect repairs to the Demised Premises and appurtenances as necessary’. The nature and extent of these obligations, and particularly whether these obligations are independent of each other, is the subject of the first proposed ground of appeal. At the expense of some precision, I will refer to the first of these obligations as ‘the keep-and-maintain obligation’ and the second of these obligations as ‘the repair obligation’ .
Secondly, at the end of the keep-and-maintain obligation is a qualification that requires one to have ‘regard to the condition of the Demised Premises as at the date of commencement of the Lease’. This qualification is relevant to the first and second proposed grounds of appeal. I will refer to it as the ‘original condition qualification’.
Thirdly, there are several exceptions located at the end of the keep-and-maintain obligation and after the original condition qualification. Those exceptions take the form of the parenthesised text and include, relevantly, ‘fair wear and tear’. As indicated above, one of the issues at trial was whether Caltex was exempted from any liability under cl 19.1 by operation of the fair wear and tear exception. It will be recalled that the trial judge found in Caltex’s favour on this issue.
Fourthly, the repair obligation requires the Lessee to ‘effect repairs to the Demised Premises and appurtenances as necessary’,[16] and this requirement is stipulated to include ‘the replacement of all worn or defective parts’.
[16]Emphasis added.
Finally, cl 19.1 contains a proviso. The effect of the proviso is that the Lessee has no obligation to effect structural works, ‘except structural works to and replacement of the Tank System, Liquefied Petroleum Gas Equipment and Car Wash or where the need for such works arises out of the neglect or default of the Lessee or the use of the Demised Premises by the Lessee’. Whether the proviso conditions both the keep-and-maintain obligation and the repair obligation, or only the repair obligation, is in dispute.
Proposed ground 1
By its first proposed ground of appeal, Agtan has challenged the trial judge’s construction of cl 19.1 of the lease in so far as he decided that it imposed on Caltex a single central obligation rather than two independent obligations. Agtan maintained the distinction that it drew at trial between the keep-and-maintain obligation and what it saw as an independent obligation in the form of the repair obligation. Agtan rejected any construction that resulted in the repair obligation being subsumed under the keep-and-maintain obligation.
Agtan contended that each of the keep-and-maintain obligation and the repair obligation has separate work to do. It argued that a duty to ‘keep and maintain’ and an obligation to ‘repair’ are different in nature, and the fact that the two obligations may overlap in some cases is consistent with the structure of the lease.[17]
[17]In this respect, Agtan observed that there is an overlap between cls 26 and 27 (inter se) and cls 14 and 18 (inter se).
Agtan pointed to the requirement, imposed in the repair obligation, that Caltex repair or replace an item that has become ‘worn’ due to Caltex’s ‘use’ of the premises. It contended that such an obligation could not sensibly be subject to the fair wear and tear exception, indicating that that exception attached only to the keep-and-maintain obligation.
Agtan also drew attention to other provisions of the lease that were said to impose an obligation on Caltex in relation to the Tank System. It referred to cl 10.1, which relevantly provides that ‘the Lessee shall be liable to effect or pay for any structural alterations improvements or additions or structural repairs to the Tank System’, and cl 19.2, which relevantly provides that ‘the Lessor shall maintain the Demised Premises other than the Tank System’. In support of its construction of cl 19.1, Agtan observed that neither of those provisions is subject to the exceptions that apply to the keep-and-maintain obligation. Again, this was said to indicate that the repair obligation was also not subject to those exceptions.
Agtan contended that, if, as the trial judge decided, cl 19.1 contained a single obligation, then it is possible that the Tank System could become defective and neither Agtan (by reason of cl 19.2) nor Caltex would be required to repair it. It was submitted that this result produced an unbusinesslike lacuna in circumstances where, in accordance with the lease, the premises is to be used as a service station (cl 15).
Agtan also contended that the onerous nature of the repair obligation, if it were construed as a standalone obligation, is consistent with the lease more generally, which is drafted for its benefit. It referred, in particular, to cl 31.1, which excluded liability on its part for any loss or damage sustained by Caltex arising directly or indirectly from water, which Agtan said includes water leaking into the Tank System.
Agtan said that the existence of two separate obligations in cl 19.1 is also supported by the words ‘fair wear and tear … without any neglect or default on the part of the Lessee alone excepted’, which it said relate to the keep-and-maintain obligation, and the words in the proviso ‘where the need for such works arises out of the neglect or default of the Lessee’, which it said relate to the repair obligation. Agtan observed that it is not apparent why two similar phrases appear in cl 19.1 if it provided for only one obligation.
During oral argument, in support of the contention that the obligations were distinct from one another, senior counsel for Agtan referred to the use of the words ‘shall’ and ‘the Demised Premises and appurtenances’ at the start of each of the keep-and-maintain obligation and the repair obligation. He also highlighted the apparent distinction drawn between the obligations in the heading of cl 19.1 (‘Maintenance and repair’).
Agtan contended that the proviso in cl 19.1 applied only to the keep-and-maintain obligation. First, it singled out the fair wear and tear exception, which Caltex said applied (together with the original condition qualification and the parenthesised exceptions) to the repair obligation. Next, Agtan pointed out that one of the consequences of the proviso was to make Caltex liable to effect structural works where the need for such works arose out of ‘the use of the Demised Premises’ by Caltex. Senior counsel for Agtan argued that ‘the use of the Demised Premises’ must embrace ‘reasonable use’ and, in so far as ‘fair wear and tear is all about reasonable use’, the obligation by Caltex to effect structural works where the need for such works arose out of ‘the use of the Demised Premises’ conflicted with the fair wear and tear exception, rendering untenable Caltex’s construction of cl 19.1 and, specifically, the importation of the original condition qualification and the parenthesised exceptions to the repair obligation.
A matter that assumed some significance during oral argument was the meaning of the words ‘as necessary’ in cl 19.1. Agtan argued that those words, and thus the standard by which the necessity to effect repairs is to be assessed, is apparent when one has regard to the nature of a covenant to repair. Senior counsel for Agtan said that the necessity to effect repairs arises ‘when items are not in repair, that is to say, in a state of disrepair’. Senior counsel found support for this construction in the subsequent words: ‘including the replacement of all worn or defective parts’. He submitted that repairs, in this sense, are not to restore the subject matter of the repair to a pristine condition, but to restore it to the extent that the subject matter of the repair is no longer in ‘disrepair’.
In its written submissions, Caltex supported the trial judge’s construction of cl 19.1 as imposing on Caltex a single central obligation in the form of the keep-and-maintain obligation, subject to the original condition qualification and the fair wear and tear exception, among other things. Caltex contended that the repair obligation was a component of the keep-and-maintain obligation and arose only as necessary to ensure good and tenantable repair and good and efficient working order and condition. Caltex submitted that the repair obligation, like the keep-and-maintain obligation, is subject to the original condition qualification.
Caltex contended that there is no difficulty with the operation of the fair wear and tear exception in circumstances where Caltex would be required to repair or replace an item that has become ‘worn’ due to Caltex’s ‘use’ of the premises. It was submitted that, on a proper construction of cl 19.1, Caltex was required to replace parts worn due to ‘use’ by Caltex that exceeds fair wear and tear. Caltex said that this approach is consistent with the authorities in that fair wear and tear extends only to the reasonable use of premises and the ordinary operation of natural forces.[18] To accept Agtan’s construction, said Caltex, would make redundant the original condition qualification and the parenthesised exceptions in cl 19.1, including the fair wear and tear exception.
[18]Caltex cited Haskell v Marlow [1928] 2 KB 45, 59, and TheManchester Bonded Warehouse Company Limited v Carr (1880) 5 CPD 507, 513.
Caltex also contended that, if Agtan’s construction of cl 19.1 were accepted, and cl 19.1 imposed an independent obligation to repair ‘as necessary’, the standard by which necessity is to be assessed would be left ‘at large’. Caltex argued that such a result is unbusinesslike and that, if its own construction were accepted, the standard by which necessity is to be assessed is expressed at the end of the keep-and-maintain obligation: ‘good and tenantable repair and good and efficient working order and condition’, bearing in mind the original condition qualification and the parenthesised exceptions.
It will be recalled that, in support of its construction of cl 19.1, Agtan said that neither cl 10.1 nor cl 19.2, which it said imposes an obligation on Caltex in relation to the Tank System, is subject to the parenthesised exceptions in cl 19.1. Caltex argued that Agtan’s reliance upon these clauses was misplaced: the obligations contained in cl 10.1, it observed, could not be subject to the exceptions as they are imposed to ensure that the premises comply with all relevant regulatory requirements, while cl 19.2 does not impose any separate and unqualified obligation on Caltex.
During oral argument, Caltex addressed Agtan’s contention that the imposition of a single central obligation in cl 19.1 would create an unbusinesslike lacuna by reason of there being no obligation on the part of either Agtan or Caltex to repair the Tank System were it to become defective. Caltex argued that, in those circumstances, cl 30.1 would apply, provided that there had not been any neglect or default on its part and that, if there had been such neglect or default, the single central obligation in cl 19.1 would apply.
Caltex contended that Agtan’s construction would also make cl 30.1 of the lease redundant. As set out above, cl 30.1 provides, in broad terms, for the abatement of rent, the suspension of remedies or the termination of the lease in circumstances where ‘the whole or any part of the Demised Premises shall be destroyed or damaged by fire, flood, lightning, storm, tempest or other disabling cause so as to render the Demised Premises during the Term substantially unfit for use as a petrol filling station and/or convenience shop’. Caltex said that the regime created by cl 30.1 could never apply if cl 19.1 contained a separate and unqualified obligation to effect repairs.
Caltex also contended that the construction of cl 19.1 proposed by Agtan would render otiose the original condition qualification and the parenthesised exceptions. It argued that a separate and unqualified obligation to effect repairs would override the keep-and-maintain obligation and do away with the original condition qualification and parenthesised exceptions.
As noted above, Caltex argued that the proviso in cl 19.1 applies both to the keep-and-maintain obligation and to the repair obligation, rather than to the repair obligation only. It said that the proviso dealt with the same subject matter as cl 19.2. It drew attention to the word ‘maintain’ in both cl 19.2 and the keep-and-maintain obligation and said that the use of this word supported the existence of a single central obligation in cl 19.1. Caltex submitted that, as a consequence of its proposed construction of cl 19.1, the original condition qualification and the parenthesised exceptions apply to the obligation on the part of Caltex, contained in the proviso to cl 19.1, to effect structural works to, and replacement of, the Tank System, Liquefied Petroleum Gas Equipment and Car Wash.
Caltex also argued that Agtan’s construction of cl 19.1 gives no content to the words ‘as necessary’ in cl 19.1, thereby creating an indeterminate standard by which necessity is to be assessed. On the contrary, Caltex submitted, construing the repair obligation as a subset of the keep-and-maintain obligation sets the relevant standard at ‘good and tenantable repair and good and efficient working order and condition’, while also importing the original condition qualification and the parenthesised exceptions in cl 19.1. Caltex argued that a reasonable businessperson would hardly read the clause in such a way as to leave the relevant standard ‘at large’.
Analysis — proposed ground 1
The principles governing the construction of cl 19.1, or any other clause of the lease for that matter, are not in dispute. It is necessary to determine the obligations of Caltex under cl 19.1 objectively, by reference to its text, context and purpose.[19] ‘Text’ involves not only the words to be construed, but the whole of the document in which they are contained. ‘Purpose’ involves not only the overarching purpose of the document, but also the purpose of the words to be construed in effecting that overarching purpose. It is necessary to ask what a reasonable businessperson in the position of the parties would have understood the terms of the lease to mean.[20] Regard must be had to the language used by the parties in the lease, the circumstances addressed by the lease and any commercial purpose or objects to be secured by the lease.[21]
[19]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116 [46] (French CJ, Nettle and Gordon JJ).
[20]Ibid 116 [47]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 461–2 [22] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 179 [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
[21]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116 [47], citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656–7 [35] (French CJ, Hayne, Crennan and Kiefel JJ). See also White v Timbercorp Finance Pty Ltd (in liq) (2017) 123 ACSR 284, 310–1 [103] (Ferguson CJ, Santamaria and McLeish JJA)
The task of construction in the present case is not without some difficulty. The submissions made on behalf of each of the parties are variously directed, as they should be, to the text, context and purpose of the lease. The starting point, however, is the language used by the parties in the lease, including cl 19.1. Before turning to the specific provisions, it is necessary to say something about the language of the lease both in relation to cl 19.1 and as a whole.
The lease is an old document. It is plain that the contemporary drafting techniques and tools of indentation, punctuation and division of conceptually distinct matters through the use of paragraphs and subparagraphs were lost on the draftsperson. What makes the task of construction especially difficult in relation to cl 19.1 is that it is written in one continuous block of text. One might be tempted to separate the blocks into its constituent parts, as the trial judge did,[22] so as to restructure those parts in a logical fashion. While it might make for easier reading, such restructuring cannot displace the language used by the parties. And any construction based on restructured language must fairly and accurately reflect the objective intention of the parties, as embodied in the original language.[23]
[22]Reasons [176].
[23]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109 (Gibbs J).
Agtan’s contention that cl 19.1 contains two ‘limbs’ and that the two ‘limbs’ describe distinct obligations begs the question. The assumption is that there are two limbs. Certainly, if there are two limbs, that would work in favour of the contention that there are distinct and independent obligations. But, in my opinion, cl 19.1 is not premised upon there being two separate limbs. Rather, the clause contains two matters which are designed to clarify the extent of the obligation to ‘keep and maintain’. The first relates to repairs; the second (in the form of the proviso) relates to structural works.
The words ‘and shall effect repairs’ have been included to resolve what might have been a question about the extent of the obligation to ‘keep and maintain the Demised Premises and appurtenances in good and tenantable repair and good and efficient working order’. The words ‘and shall effect repairs’ make it clear that, if repairs are necessary to ‘keep and maintain … in good and tenantable repair’, it shall be the responsibility of the lessee to effect those repairs. This interpretation best makes sense of the words ‘as necessary’ in the phrase ‘and shall effect repairs to the Demised Premises and appurtenances as necessary’: the necessity contemplated is where repairs are necessary to ‘keep and maintain … in good and tenantable repair’. It also identifies the standard to which the premises are to be kept and maintained (good and tenantable repair) with the activity (effect repairs) needed to maintain or restore that state.
The contention of Agtan that there is a distinction between, on the one hand, keeping and maintaining the premises in the stipulated condition and, on the other, effecting repairs where things have fallen into disrepair, creates, in my opinion, a false polarity and should be rejected. As Caltex pointed out, both activities were directed to the same subject matter: ‘the Demised Premises and appurtenances’.
The construction proposed by Caltex also preserves the force of the original condition qualification and the fair wear and tear exception. I agree with Caltex’s contention that, if cl 19.1 is to be interpreted as conferring upon the lessee a repair obligation that is not subject to the original condition qualification and the fair wear and tear exception, the qualification and the exception become effectively meaningless. According to Agtan’s construction, the repair obligation is an independent obligation not subject to the original condition qualification and the fair wear and tear exception: there will be a ‘need’ to repair ‘when items are not in repair, that is to say, in a state of disrepair’. The obligation is to keep and maintain the premises ‘in good and tenantable repair’ and so forth. That stipulated standard may be able to be maintained without the need for any repairs. However, the presence of the original condition qualification and the fair wear and tear exception reflect the natural expectation that, at times, and over the term of the lease, the standard of the premises will fluctuate, including falling below the stipulated standard. Where the standard of the premises falls below the stipulated standard (‘good and tenantable repair’ and so forth), the obvious way of restoring the premises to that standard is by effecting repairs. Such repairs may involve the replacement of all worn and defective parts. But the stipulated standard is subject to the original condition qualification and the fair wear and tear exception. If the obligation to effect repairs is seen as a freestanding obligation, the original condition qualification and the fair wear and tear exception are effectively eviscerated.
The presence of the fair wear and tear exception must be reconciled with the obligation to replace ‘all worn and defective parts’. If (as I accept) the repair obligation is subsidiary to, or expository of, the obligation to ‘keep and maintain … in good and tenantable repair’ and so forth, the repair obligation does not extend to parts which have fallen below specification due to ‘fair wear and tear’. Nice questions may arise as to whether a part that has become worn or defective has done so because of fair wear and tear or some other cause.
Clause 19.1 also deals, in its proviso, with ‘structural works’ (the term is not defined in the lease). The meaning of the proviso is tolerably clear. Its starting position is that the obligation imposed on the lessee to ‘keep and maintain … in good and tenantable repair’ and so forth (including effecting repairs) does not impose any obligation on the lessee to carry out ‘structural works’. However, there are two qualifications to this that have the effect of extending the lessee’s obligation to ‘keep and maintain’ (including effecting repairs) to carrying out structural works. First, if keeping and maintaining the Tank System, Liquefied Petroleum Gas Equipment and Car Wash ‘in good and tenantable repair’ and so forth requires ‘structural works’, it is the responsibility of the lessee to carry out those structural works. Secondly, in the event that the need for there to be structural works under the keep-and-maintain obligation arises out of (a) the neglect or default of the lessee; or (b) the use of the premises by the lessee, the responsibility for those structural works is imposed on the lessee (the expression ‘such works’ makes it plain that the context is ‘structural works’ only). Ex hypothesi, each of these circumstances will be one that has arisen after the commencement of the lease, and the obligation of the lessee will be to restore the structures to the state in which they were at the commencement of the lease. In both cases, the structural works that are required will themselves be subject to the original condition qualification and the fair wear and tear exception.
It will be noticed that the fair wear and tear exception is itself qualified; it does not avail the lessee to the extent that any ‘wear and tear and damage’ has been caused by ‘any neglect or default on the part of the Lessee’. Similarly, the ‘structural works’ exception is qualified; the lessee must carry out structural works, ‘where the need for such works arises out of the neglect or default of the Lessee’.
Agtan contended that, unless cl 19.1 was understood to impose distinct and independent obligations, a gap or lacuna would arise ‘as to which party is required to repair the Tank System in certain circumstances’. The gap, it said, arose out of the interplay between cls 19.1 and 19.2. It said that ‘it was possible that the Tank System could become defective and neither Agtan nor Caltex would be required to repair it’. Clause 19.2 describes the lessor’s responsibility to maintain the Demised Premises. However, that subclause carves out of that obligation any obligation in respect of ‘the Tank System, Car Wash and Liquefied Petroleum Gas equipment’: the lessor has no responsibility for maintaining these items. Caltex had contended (and the trial judge had accepted) that cl 19.1 imposes an obligation on it to keep and maintain (including effecting repairs to) those three items in good and tenantable repair and so forth (including the carrying out of structural works on those items). However, Agtan contended that, if that was the obligation, it was limited by the fair wear and tear exception. Accordingly, Agtan contended that (on the hypothesis that Caltex’s interpretation of cl 19.1 was accepted) there was no allocation of responsibility in circumstances where the three items had fallen into disrepair due to fair wear and tear. Such a gap or lacuna would not arise, Agtan argued, if its construction were accepted and the obligation to ‘effect repairs’ were seen as independent of the obligation to ‘keep and maintain’ and not subject to the fair wear and tear exception. On that construction, the lessee would be responsible for the repair of the three items in all circumstances, without exception.
It is true that, on the interpretation of cl 19.1 that I prefer, there may be a gap in the lease in the allocation of responsibility for the maintenance of the Tank System, Gas Equipment and Car Wash. However, the gap appears to be very narrow. Clause 19.2 provides that the lessor has no responsibility for their maintenance. Generally speaking, cl 19.1 allocates responsibility for their maintenance to the lessee. Clause 19.1 implicitly draws a distinction between structural works and non-structural works. To the extent that it is necessary to carry out non-structural works in order to keep and maintain the three items of equipment in good and tenantable repair and so forth, the lease allocates responsibility for those non-structural works to the lessee. If the need for those repairs has arisen as a result of fair wear and tear without any neglect or default, the lessee is exonerated from the need to keep and maintain them. However, that exoneration will not avail the lessee if the need for maintenance has arisen as a result of ‘neglect or default on the part of the Lessee’.
As indicated above, cl 19.1 provides that, in general, the lessee has no obligation to carry out structural works. However, if keeping and maintaining the Tank System, the Gas Equipment and the Car Wash in good and tenantable repair requires the carrying out of structural works, the lessee will be responsible for them. That obligation is itself qualified: where the need for the repair of them arises from ‘fair wear and tear’, then the lessee is not liable to repair them. I agree with McLeish JA that the gap in responsibility for effecting repairs thereby caused (cl 19.2 exonerates the lessor from the responsibility to repair the Tank System, the Gas Equipment and the Car Wash) should not be used to deprive the fair wear and tear exception for what is explicitly provided in cl 19.1. I also agree with his observation that, given the term of the lease and the expected life of the Tank System, the prospect that the premises might become unsuitable for use as a service station by virtue of ‘fair wear and tear’ was not obviously one that would have been in the contemplation of the parties.[24]
[24]See [223] below.
The lease makes specific provision for three items of equipment: ‘the Tank System, Liquefied Petroleum Gas Equipment and Car Wash’. Express reference is made to those items in cls 10.1, 19.1, 19.2 and 25.1 (save, in the case of cl 25.1, for the Liquefied Petroleum Gas Equipment). However, in my opinion, the various express references to these items do not assist in the construction of cl 19.1. In cl 19.1, they are specifically carved out from the qualification in relation to structural works. It will be recalled that the requirement that the lessee keep and maintain the Demised Premises and appurtenances in good and tenantable repair and so forth does not extend to the carrying out of structural works. However, that qualification is itself subject to a carve-out. If keeping and maintaining the premises to the stipulated standard requires structural works to be carried out on those three items, the lessee must do so. But the carve-out is much wider. It extends to the case where the need to do structural works arises out of the use of the Demised Premises by the Lessee. As such, the significance of the special treatment of the Tank System, the Gas Equipment and the Car Wash. is greatly reduced.
Clause 10 is entitled ‘Comply with Acts Regulations By-Laws etc.’ It imposes an obligation upon the lessee to carry out works in circumstances where statutory provisions or provisions in subordinate legislation require the carrying out of those works on the Demised Premises. That obligation is subject to a carve-out: no obligation is imposed upon the lessee in respect of ‘any structural alterations improvements or additions or structural repairs to the Demised Premises or any part thereof’. However, that carve-out is itself restricted: cl 10.1 provides that the lessee is liable to effect or pay for ‘any structural alterations improvements or additions or structural repairs to the Tank System, Car Wash and Liquefied Petroleum Gas Equipment, the fittings fixtures or erections of the Lessee’. Again, the carve-out is not confined to the Tank System, the Gas Equipment and the Car Wash.
Clause 25 is entitled ‘Removal of Fixtures and Fittings’. It is a conventional provision requiring the lessee to remove all of its property and all trade or tenant’s fixtures or fittings. However, the clause provides that the lessee is not entitled to remove the ‘Tank System, Car Wash or structural alterations or additions … erected or installed by the Lessee’.[25]
[25]Unlike the other provisions, cl 25.1 makes no reference to the Liquefied Petroleum Gas Equipment. As the definition of that term makes clear, the equipment belongs to a third party (Vital Gas).
Caltex contended that, if the obligation to ‘effect repairs’ is an independent obligation that is not subject to the original condition qualification and the fair wear and tear exception, cl 30.1 becomes effectively redundant. I reject this contention.
During oral argument, counsel for Caltex contended that, if the Tank System became such that it was not ‘in good and tenantable repair and good and efficient working order and condition’, two different possibilities needed to be considered. First, if this transpired without any negligence on the part of Caltex, cl 30.1 would apply. If it arose ‘out of the neglect or default’ of Caltex, cl 19.1 would apply to oblige Caltex to effect repairs. Counsel referred to the chapeau of cl 30.1, which spoke in terms of ‘the whole or any part of the Demised Premises [being] destroyed or damaged by fire, flood, lightning, storm, tempest or other disabling cause so as to render the Demised Premises during the Term substantially unfit for use as a petrol filling station and/or convenience shop’. Counsel emphasised the italicised phrases. He accepted that cls 30.1 and 19.1 may not be ‘on all fours’ or that ‘there is an absolute co-extensiveness between their spheres of application … The submission is that if [Agtan] were right about the construction of [cl] 19.1, [cl] 30.1 could never apply.’
As can be seen, cl 30.1 is entitled ‘Damage or Destruction of the Demised Premises’. It makes provision for the case ‘if the whole or any part of the Demised Premises shall be destroyed or damaged by fire, flood, lightning, storm, tempest or other disabling cause so as to render the Demised Premises during the Term substantially unfit for use as a petrol filling station and/or convenience shop’. In the absence of a clause such as cl 30.1, the lease might be said to be frustrated in those circumstances. But cl 30.1 works to keep the lease on foot. First, cl 30.1(a) provides that the lessee’s obligation to pay rent (together with remedies collateral to that obligation) shall abate. Secondly, it provides for either party to give to the other notice ‘of its intention to make good such destruction or damage’. In such circumstances, the clause makes provision for the allocation of the cost of such making good. Thirdly, it provides that, in the absence of any notice to make good such destruction or damage as aforesaid, either party may terminate the lease, without compensation by either party.
In my opinion, cl 30.1 is addressed to a subject matter different from that addressed in cl 19.1. Clause 30.1 relates not to the activities needed to keep the premises in ‘good and tenantable repair and good and efficient working order and condition’ but to a catastrophic event (‘fire, flood, lightning, storm, tempest’) that makes the Demised Premises ‘substantially unfit for use as a petrol filling station and/or convenience shop’. I would read the expression ‘or any other disabling cause’ as being of the same genus as the words to which it is attached: ‘fire, flood, lightning, storm, tempest’, and not to some other circumstance that occasions disrepair or dilapidation that arose absent such catastrophic circumstances. Clause 19.1, on the other hand, imposes its obligations in circumstances where the premises remain fit for use as a petrol filling station and so forth.
The first proposed ground of appeal must fail.
Proposed ground 2
The second question concerns the meaning of the phrase ‘the date of commencement of the Lease’ in cl 19.1. As indicated above, the trial judge decided that this phrase referred to 1 September 2014, being the date stipulated to be the ‘Commencement Date’ of the second deed.[26] Agtan contended that ‘the date of commencement of the Lease’ refers to 1 September 1999, being the ‘Date of Commencement’ of the lease (cl 1.1).
[26]Reasons [175].
The phrase ‘the date of commencement of the Lease’ in cl 19.1 is contained in the original condition qualification in cl 19.1. The significance of this proposed ground lies in the fact that Caltex decommissioned Tank 2 in October 2011. Both parties accepted that, if this Court were to decide that ‘the date of commencement of the Lease’ in cl 19.1 refers to 1 September 1999, Caltex would be required to comply with the obligation in cl 19.1. On the contrary, if ‘the date of commencement of the Lease’ in cl 19.1 be 1 September 2014, that obligation would not arise by operation of the original condition qualification, the decommissioning of Tank 2 having taken place three years earlier.[27]
[27]At trial, both Caltex and Agtan agreed that there were no breaches of the 2009 lease.
In order to understand the issue raised in this proposed ground of appeal, it is necessary to set out the relevant provisions of the second deed.
Clause 1.1 of the second deed contains the following defined terms:
‘Commencement Date’ means 1 September 2014.
…
‘New lease’ means the lease between the Landlord and the Tenant in relation to the Premises created by this deed.
‘Original Lease’ means the lease dated 29 September 1999 between Lochmullan Pty Ltd (as landlord) and the Tenant in relation to the Premises, as amended by [the first deed] …
Clause 2 of the second deed is entitled ‘Exercise of right to renew’. It provides:
The parties acknowledge and agree that the Tenant has validly exercised its right to renew under the original lease.
Clause 3 is entitled ‘New Lease’. Relevantly, it provides:
3.1 Grant of new lease
The Landlord grants the New Lease of the Premises to the Tenant on the terms and conditions set out in this deed.
3.2 Terms of New Lease
The parties confirm that their respective covenants and obligations under the New Lease are identical to those contained in the Original Lease and are incorporated into this deed as if those covenants and obligations were set out in this deed, except that:
(a)the term of the New Lease is five years, commencing on the Commencement Date;
(b)the rent payable under the New Lease is $265,100 per annum plus GST …
Clause 4 contains acknowledgements by each party. It provides:
Each party acknowledges and agrees that:
(a)it will perform and observe its covenants and obligations under the New Lease;
(b)there is no subsisting breach of any term of the Original Lease at the date of this deed;
(c)there is no other event or circumstance that, with the giving of notice, lapse of time or fulfilment of any condition, would cause the acceleration of any payment to be made under, or the termination or enforcement of, the Original Lease; and
(d)there is no other event or circumstance that, with the giving of notice, lapse of time or fulfilment of any condition, would cause the acceleration of any payment to be made under, or the termination or enforcement of, the New Lease.
The trial judge observed that cl 3.2 of the second deed provided that the terms of the ‘Current Lease’ (which was a reference to ‘a current lease from [Agtan] commencing 1 September 2014’)[28] (a) were to commence on 1 September 2014; (b) be for a term of 5 years; and (c) substantially incorporated the covenants and obligations under the second deed, save that no further option to renew was granted.[29]
[28]Reasons [1].
[29]Ibid [159].
In reaching his conclusion that ‘the date of commencement of the Lease’ was 1 September 2014, being the date stipulated to be the ‘Commencement Date’ of the second deed,[30] the trial judge said that Caltex’s exercise of its option to renew on 29 May 2014, pursuant to cl 36.1 of the second lease, and Agtan’s execution of the second deed on 7 August 2015, brought into existence a ’New Lease’ as provided in cl 3.1 of the second deed.[31] He noted that cl 4.1 of the second deed provided an express acknowledgement by Agtan, and an agreement on its part, that there was no subsisting breach of any term of the second lease as at 7 August 2015, the date on which Agtan executed the second deed.[32]
[30]Ibid [175].
[31]Ibid [161].
[32]Ibid [160].
The trial judge considered that Caltex’s exercise of its option to renew created a new lease,[33] subject to any identifiable contrary intent of the parties. He found that no such contrary intent existed.[34] He observed that the lease, into which the parties entered on 29 September 1999, distinguished between an ’extension’ of that lease and a ’renewal’ and that cl 36.1 of the lease made reference to a ’renewal’, and not an ’extension’.[35]
[33]The trial judge cited Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, 33–4 [8] (French CJ).
[34]Reasons [162].
[35]Ibid [163].
In its written submissions, Agtan contended that the trial judge erred in construing the phrase ‘the date of commencement of the Lease’ in cl 19.1 of the lease to mean 1 September 2014. It argued that, on a proper construction of the lease and the second deed, including the definitions of ‘Date of Commencement’ and ‘Lease’ in the lease,[36] the phrase meant 1 September 1999. It submitted that nothing in the second deed suggested otherwise and, in particular, that the term ‘Commencement Date’ in the second deed had no relation to the lease itself.
[36]See [33] above.
Agtan also contended that any new lease between the parties was created by the exercise of the second option by Caltex. It pointed to the word ‘renew’ in cl 36.1 and said that this word denoted the renewal of something that was already in existence — namely, the lease. Addressing the first default notice, Agtan also said that the original lease created a proprietary demise that remained extant on the same terms as the original lease or, at worst, 1 September 2009, being the commencement date of the first deed.
Agtan argued that, in the context of a ten-year lease with two five-year options, it would not be a businesslike construction to render Caltex’s repair obligation less onerous by reason of its exercising an option, thereby ‘resetting’ the date of commencement of the lease. It referred to cl 36.1 of the lease, which provides that ‘[t]he Renewed Lease shall otherwise contain the same covenants, agreements and provisions as are herein contained’, and said that the parties did not objectively contemplate imposing terms by the second deed that were less onerous than those contained in the lease.
Caltex contended that ‘the date of commencement of the Lease’ for the purposes of cl 19.1 was 1 September 2014. In its written submissions, Caltex contended that the trial judge’s construction accorded with the common law principle that a lease obtained by the exercise of an option to renew is a new lease.[37] It added that the common law position was reinforced by the language of the second deed, which referred to the renewed lease as ‘the New Lease’, ‘created by this deed’ of renewal, contrasted to the defined term ‘Original Lease’. It pointed out that cl 3.2 of the second deed provided that the renewed lease commenced on 1 September 2014.
[37]Caltex cited Gerraty v McGavin (1914) 19 CLR 152.
Caltex also drew attention to cl 36.1 of the lease. That clause provides, in effect, that the lessor shall grant to the lessee an option to renew the lease for a term of five years provided that the lessee ‘has duly performed and observed all, of the covenants, terms, conditions and stipulation [sic]’ in the lease to be performed and observed by the lessee. Echoing the trial judge, Caltex said that this clause is consistent with an intention to ‘reset’ the date of commencement of the lease.
(6) Clause 19.2 expressly limits the Lessor’s structural maintenance obligations to exclude (‘other than’) the specified infrastructure.
(7) The first proviso exception is consistent with clause 19.2, and also with clauses 10.1 and 25.1, each of which disclose an intention to allocate all responsibility for the maintenance and repair of the specified infrastructure to Caltex.
Clause 10.1 imposes obligations on Caltex to comply with and fulfil the requirements of applicable legislation in relation to the Demised Premises or their use, and to comply with orders made under such legislation during the term of the lease or any extension or renewal. As with clause 19, Caltex’s obligations include structural works to the specified infrastructure — including the Tank System.
Clause 25.1 provides that the lessee’s entitlement to remove tenant’s fixtures and fittings does not apply to the Tank System or the Car Wash — it being clear that the Liquefied Petroleum Gas Equipment was owned by a third party, Vital Gas. Thus, if, for example, Caltex replaces a tank forming part of the Tank System in accordance with the repair obligation, that tank is not intended to be a tenant’s fixture.
Notwithstanding the clear intention of the parties as to Caltex’s obligations in respect of the specified infrastructure, the trial judge held that those obligations were subject to the fair wear and tear exception and the original condition qualification. His Honour expressed his conclusions in the following terms:
177.The intent of clause 19.1 of the Current Lease is in my view to impose upon the lessee an obligation to maintain the Demised Premises and appurtenances in good and tenantable repair and good and efficient working order and condition, fair wear and tear excepted.
178.The lessee’s obligation referred to in the last preceding paragraph is to be determined having regard to the condition of the Demised Premises and appurtenances at the date of commencement of the Lease, namely 1 September 2014.
179.As a component of the central obligations on the lessee referred to above, clause 19.1 obliges the lessee, Caltex to carry out repairs to the Demised Premises and appurtenances as necessary including the replacement of all worn or defective parts.
180.The lessee’s obligation to repair as necessary including replacement of all worn or defective parts, does not in my view extend the probable content of the obligations already imposed upon the lessee to maintain in good and tenantable repair and good and efficient working order.
181.The words ‘and shall effect repairs to the Demised Premises and appurtenances as necessary’ serves to qualify the earlier stated central obligation to maintain in good and tenantable repair and good and efficient working order and condition, by requiring the lessee to effect the repairs it is obliged by the earlier language of clause 19.1 to undertake, but only ‘as necessary’.
182.The words in clause 19.1 ‘as necessary including the replacement of all worn or defective parts’ clarifies that the earlier central obligation imposed upon the lessee to maintain in good and tenantable repair and good and efficient working order and condition shall include the replacement of all worn or defective parts, but only as necessary.
183.Accordingly, clause 19.1 provides that the lessee’s single central obligation is required to be effected in respect of repairs, including replacement of worn or defective parts only where necessary to ensure good and tenantable repair and good efficient working order and condition in respect of that subject.[106]
[106]Reasons [177]–[183] (emphasis added, citations omitted).
In summary, the trial judge construed clause 19.1 as containing a ‘single central obligation’ on Caltex to maintain the Demised Premises in good and tenantable repair and good and efficient working order, fair wear and tear excepted. His Honour further held that the repair obligation was a component of,[107] or a qualification to, the maintenance obligation — and was thus subject to the fair wear and tear exception[108] and the original condition qualification.[109]
[107]Ibid [179].
[108]Ibid [181].
[109]Ibid [178].
Caltex contends that the trial judge was correct to reach the conclusion that there was no separate repair obligation. Its contentions involved the following steps.
First, Caltex contends that the text of clause 19.1 is inconsistent with an intention to create two separate obligations. Caltex points to the fact that the maintenance obligation requires it to maintain the Demised Premises ‘in good and tenantable repair’[110] and that the repair obligation — ‘effect repairs to the Demised Premises and appurtenances as necessary’[111] — simply repeats that part of the maintenance obligation which requires the maintenance of ‘tenantable repair’. Caltex contends that it is improbable that the parties intended to impose two separate repair obligations — with only one obligation being the subject of the fair wear and tear exception and original condition qualification.
[110]Emphasis added.
[111]Emphasis added.
Second, Caltex relies on the fact that the repair obligation is qualified by the words ‘as necessary’. The necessity for repairs can only arise where the particular part of the Demised Premises is in a state of disrepair. Indeed, Agtan contends that this is what the words ‘repair … as necessary’ mean. Caltex contends that the Lease provides the necessary standard for when repairs are necessary, namely, the maintenance obligation to ‘keep and maintain the demised premises and appurtenances in good and tenantable repair and good and efficient working order and condition’. It contends that this approach is consistent with the trial judge’s conclusion that the repair obligation is no more than a component part of the central maintenance obligation.
Third, Caltex contends that clause 30.1 of the lease is inconsistent with a separate repair obligation. Clause 30.1 provides that:
if the whole or any part of the Demised Premises shall be destroyed or damaged by fire, flood, lightning, storm, tempest or other disabling cause so as to render the Demised Premises during the Term substantially unfit for use as a petrol filling station and/or convenience shop then:
(a)upon the happening of any such damage or destruction [Caltex’s obligation to pay rent] … shall be suspended until the Demised Premises shall have been rebuilt or reinstated or made fit for the use of the Lessee … PROVIDED THAT the abatement of rent … shall not apply in the case of destruction or damage caused by the wilful or negligent act or omission of [Caltex, those for which it is responsible, or its invitees] …
(b)[either party may elect to ‘make good such destruction or damage’ using insurance moneys for that purpose] …
(c)… [if neither party elects to reinstate the premises, either party may terminate the lease ‘without compensation by either party’] …
(d)… [disputes or differences about clause 30.1 are to be referred to arbitration] …
(e)nothing herein contained or implied shall be deemed to impose any obligation upon the Lessor to rebuild or reinstate the Demised Premises or to make the same fit for use and occupation of the Lessee.[112]
[112]Emphasis added.
Caltex contends that clause 30.1 would have no work to do if there was an unqualified obligation on Caltex to effect all necessary repairs to the premises, whatever the ‘disabling clause’ of the need for repair may be.
Fourth, Caltex contends that if the repair obligation is a separate obligation, free of the fair wear and tear exception and original condition qualification, then neither the exception nor the qualification could ever have work to do. This is because a separate obligation to ‘repair as necessary’ would require Caltex to repair whenever there is ‘disrepair’ — and such an obligation is not susceptible to a fair wear and tear exception or an original condition qualification. This is said to be an extremely improbable construction — especially in circumstances where the exception and qualification are clearly stated over five lines of text in clause 19.1. On this basis, Caltex contends that a construction of clause 19.1 as involving two separate obligations — a maintenance obligation subject to the exception and qualification on the one hand, and a repair obligation which is not subject to the exception and qualification on the other — yields irreconcilable conflict or inconsistency within clause 19.1. The trial judge’s interpretation, reading the repair obligation as a component of the maintenance obligation, harmonises the two obligations and thus avoids inconsistency.
For the following reasons, I do not accept Caltex’s contentions on this issue.
First, Caltex’s textual contentions do not give sufficient recognition to the requirement that contractual terms must be construed in the context of the contract as a whole. While Caltex refers to clause 30.1 to support its construction, its contentions do not pay sufficient regard to the clear contractual intent of the parties to impose specific repair and maintenance obligations on Caltex in respect of the specified infrastructure — relevantly, the Tank System. These obligations are contained in clause 19.1 itself, and in clauses 19.2, 10.1 and 25.1 as referred to above. Those clauses clearly convey the intention of the parties that Caltex alone is responsible for repairing the whole of the Tank System and its component parts, such as Tank 2, whenever necessary during the term of the lease.[113] By a combination of these consistent provisions, reasonable persons in the position of the parties would understand that Caltex is required to be wholly responsible for the repair, including structural repair and replacement where necessary, of the specified infrastructure during the term of the lease. Subject to clause 30.1 (which is considered below) that allocation of responsibility applies however the need for repair arises.
[113]Subject to clause 30.1 which is considered below.
Second, I do not accept that construing clause 19.1 as containing two separate obligations would wholly deprive the maintenance obligation of any work to do. There is no irreconcilable inconsistency between the two obligations. They are capable of being read together so that the repair obligation operates separately from the maintenance obligation. This approach is consistent with the following statement of the High Court in Re Media Entertainment & Arts Alliance; ex parte Hoyts Corp Pty Ltd:
A conflict … involving apparently inconsistent provisions in the one instrument, is to be resolved, if at all possible, on the basis that one provision qualifies the other and, hence, that both have meaning and effect … that rule is an aspect of the general rule that an instrument must be read as a whole.[114]
[114](1993) 178 CLR 379, 386–7 (Mason CJ, Brennan, Dawson, Toohey, Gaudron and McHugh JJ) (citations omitted).
Examples of the separate operation of the maintenance obligation can be postulated. The need to apply grease and oil to moving parts of machinery or other fittings does not fall within the repair obligation, but is clearly covered by the maintenance obligation — to ensure the equipment, machinery or other fittings remain in good and efficient working order having regard to both the fair wear and tear exception and the original condition qualification. When, notwithstanding the application of grease and oil where required, such machinery or equipment becomes so worn that it requires repair or replacement, the repair obligation arises. But this does not mean that there is not a maintenance obligation in the meantime. Indeed, performance of the maintenance obligation is in the interests of Caltex so as to avoid the more costly repair obligation. In short, a separate maintenance obligation has work to do, even if full effect is given to the repair obligation as a separate obligation unconstrained by the fair wear and tear exception or the original condition qualification.
Third, clause 19.1 makes no sense if the repair obligation — which obliges Caltex to replace ‘all worn or defective parts’[115] — is read as subject to the fair wear and tear exception (‘worn parts’) and the original condition qualification (‘defective parts’). As noted, there is direct inconsistency if that is the case.
[115]Emphasis added.
Fourth, I do not accept Caltex’s contention that the standard of the ‘necessary’ repairs is wholly fixed by the terms of the maintenance obligation. That interpretation gives no meaning to the express necessity, as part of the repair obligation, to replace ‘all worn or defective parts’.[116] As stated, those replacement obligations are inconsistent with the fair wear and tear exception and the original condition qualification.
[116]Emphasis added.
Fifth, if, as Caltex contends, there is a single keep, maintain and repair obligation under clause 19.1 which is qualified by the fair wear and tear exception, clause 19.2 has the effect that the Lease makes no provision as to who is to repair the specified infrastructure where, because of fair wear and tear, it becomes structurally unsound or is penetrated by water — as here. On this interpretation, Caltex is excused by the fair wear and tear exception in clause 19.1, and Agtan is excused by the exception in clause 19.2, from any repair obligation. Such a result is inconsistent with the intention of the parties expressed in the Lease as a whole, and particularly in clauses 10.1, 19 and 25.1, to allocate all responsibility for the repair of the specified infrastructure to Caltex.
Sixth, the intent of the parties to allocate all responsibility for the repair of the specified infrastructure during the term of the lease is supported by clause 25. Clause 25.1 expressly and unambiguously provides that if Caltex is required to replace any of the specified infrastructure, that infrastructure will not form part of its ‘tenant’s fixtures’ but must remain at the Demised Premises at the end of the Lease for the purpose expressed in clause 25.2, namely: ‘with a view to ensuring that the Demised Premises are handed back to the Lessor capable of operating as a going concern as a service station’.
Seventh, when the lease is read as a whole, the express allocation of responsibility to Caltex for the specified infrastructure does not represent commercial nonsense or work commercial inconvenience. The specific provisions of the Lease concerning the specified infrastructure may be thought harsh on Caltex, but it had the choice as whether it would exercise its options to renew the Lease for further terms in circumstances where the specified infrastructure was aging and the chances of a significant failure of parts of it was increasing.
Finally, Caltex’s reliance upon clause 30.1 is misplaced. The clause is not inconsistent with a separate repair obligation, because it is not concerned with the obligation to make repairs. If it is, it forms an exception to the repair obligation in the circumstances in which it operates, namely, distinct events causing destruction of or damage to the petrol station or any part so as to make it substantially unfit for use.
My reasons for rejecting Caltex’s reliance on clause 30.1 follow.
First, the language of clause 30.1 clearly shows that it is directed to the occurrence of a specific event. The reference to ‘other disabling cause’ follows upon a list of specific events — ‘fire, flood, lightning, storm, tempest’. Reasonable persons in the position of the parties would understand the reference to ‘other disabling cause’ to be of the same genus as the specified events, and thus similarly limited to a specific event causing destruction or damage. Further, the commencing words of paragraph 30.1(a) — ‘upon the happening of such damage or destruction’[117] — are, in ordinary language, words used to refer to the happening of a particular kind of event; rather than gradual processes of fair wear and tear, which may eventually cause damage, or even destruction, requiring repair.
[117]Emphasis added.
Second, an interpretation of clause 30.1 which confines its operation to such events is consistent with the existence of the general maintenance obligation and repair obligation. Reasonable persons in the position of the parties would understand the purpose of clause 30.1 as being to cater for significant events which make the petrol station substantially unfit for its intended use.[118] In other words, clause 30.1 is not intended to apply to damage resulting from breaches of the maintenance and repair obligations.
[118]That use is also a required use under clause 15.1.
Third, clause 30.1 does not require ‘repair’. It requires either Caltex or Agtan (at its election) to ‘make good such destruction or damage’[119] within a specified period; and in doing so to apply all insurance monies received by it towards the make good works.
[119]Emphasis added.
Fourth, it is clear from clause 30.1 as a whole, and paragraphs 30.1(b) and (d) in particular, that clause 30.1 is directed towards options to make good, not obligations to do so. Thus, if an event falling within clause 30.1 occurs, Caltex’s maintenance and repair obligations would yield to the operation of clause 30.1. For example, if either party elected to make good the damage or destruction during the specified period, Caltex would remain obligated by its maintenance and repair obligations in respect of the undamaged parts of the petrol station and, upon the completion of the make good works, the maintenance and repair obligations would apply to the completed works. However, once the one month period to elect under paragraph 30.1(b) has passed, if neither party has elected to make good then it is likely that one of the parties will elect to terminate the lease — thus bringing Caltex’s maintenance and repair obligations to an end. Viewed in this way, there is harmony between a construction of clause 19.1 which imposes separate obligations — a maintenance obligation and a separate repair obligation — and clause 30.1.
For these reasons, contrary to the other members of the Court, I consider that ground 1 is made out. I would allow the appeal and set aside the declaration and orders made by the trial judge. In place of those orders, Agtan has elected by its amended application for leave to appeal to seek damages for Caltex’s breach of its obligation to repair or replace Tank 2 as part of the repair obligation. Agtan’s claim for specific performance of the repair obligation has been abandoned. I turn to consider whether this court is in a position to assess the damages, or if remitter is necessary for that purpose, should my view have prevailed and the appeal was to be allowed.
Should this court assess Agtan’s damages?
On the hearing of the appeal, Agtan applied for leave to amend the orders sought if its appeal was allowed. Prior to amendment, it has been seeking to vindicate its interpretation of clause 19.1 and, consequent upon a declaration to that effect, sought an order that Caltex be granted relief against forfeiture on condition that, prior to expiry of the current lease, it replaced Tanks 1, 2 and 3. The effect of the amendment is that Agtan no longer presses an order for conditional relief from forfeiture, but instead seeks damages fixed in the sum of $850,000 plus interest. Agtan contends that this result is consistent with the trial judge’s factual findings. I do not accept that contention.
Agtan relies on the trial judge’s statement that he accepted ‘the evidence that it would not be feasible to replace just Tank 2. Tanks 1, 2 and 3 would have to be replaced at a cost of approximately $670,000–$850,000’.[120] On this basis, Agtan contends that the trial judge accepted the evidence of an expert called by Caltex at the trial. That may be so, but the finding must be seen in its context. The trial judge was not considering the assessment of damages when he made the finding relied upon. He was considering whether, had Agtan been successful on the issues at trial and was thus entitled to re-enter the Demised Premises consequent upon Caltex’s breach of clause 19.1, relief against forfeiture would have been granted. In that context, Caltex had offered an undertaking during final submissions — to replace Tanks 1, 2 and 3 before the end of the current lease.[121]
[120]Reasons [246].
[121]Ibid [242]–[248].
On the other hand, elsewhere in the trial judge’s reasons, he referred to other alternatives to replacing Tanks 1, 2 and 3. Specifically, when considering Agtan’s damages claim, his Honour noted that there were three alternative means of repairing or replacing Tank 2:
(1) by relining Tank 2 if possible; noting, however, that ‘it is unknown whether the tank can in fact be relined in accordance with [Australian Standards] due to the decision to decommission the tank and fill it with foam’.[122] His Honour noted that the estimate to reline Tank 2 of $183,000 did not include the costs of several expected contingencies and would likely be subject to significant variation;[123]
[122]Ibid [150], [151].
[123]Ibid [152].
(2) by installing a new tank at a different location on the Demised Premises. His Honour noted that the costs of this method of replacing Tank 2 would be approximately $300,000, less the costs of decommissioning but plus the costs of a number of contingencies which cannot be accurately estimated until works commenced;[124] and
(3) by removing Tanks 1, 2 and 3 at an estimated cost of $868,000 plus an allowance for contingencies.[125]
[124]Ibid [150], [153]–[154].
[125]Ibid [150], [155].
While noting the alternatives on the basis of the evidence, the trial judge did not, however, decide which was the most appropriate method of assessing damages in the event that Agtan succeeded.
For the above reasons, I would allow ground 1 and thus allow the appeal, and remit the damages question. As the other members of the Court take a contrary view on ground 1, it is necessary to consider the other grounds of appeal. Further, should my view on ground 1 have prevailed, the High Court has stated that intermediate courts of appeal such as this court should determine all issues raised by way of appeal, whether or not that is necessary in order to dispose of the appeal.[126]
[126]Cornwell v The Queen (2007) 231 CLR 260, 300–1 [105] (Gleeson CJ, Gummow, Heydon and Crennan JJ); Kuru v New South Wales (2008) 236 CLR 1, 6 [12] (Gleeson CJ, Gummow, Kirby and Hayne JJ); Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (recs and mgrs apptd) (2011) 244 CLR 1, 20 [56] (Gummow, Heydon, Crennan, Kiefel and Bell JJ).
Ground 2: What date is specified in clause 19.1 as the ‘date of commencement of the lease’?
For the reasons given by Santamaria JA, I would reject this ground.
Ground 3(a): Did the repair obligation require Caltex to maintain, or repair when necessary, Tank 2?
Ground 3(a) alleges that the trial judge erred in concluding that clause 19.1 did not require Caltex to keep and maintain Tank 2 in good and tenantable repair.
The trial judge expressed his conclusion in the following terms:
189.Given my conclusions about the operation of clause 19.1 above, I accept the Caltex submission that the words ‘keep and maintain’ in that clause mean in relation to the Tank System that it is sufficient to maintain the whole of the Tank System rather than the individual components of it in good and tenantable repair and good and efficient working order and condition.
…
191.For these same reasons I accept Caltex’s submission to the effect that clause 19.1 requires only that it maintain the Tank System (as distinct from for example an individual Tank) and that the system should be considered to be in ‘good and tenantable repair’ and good and efficient working order if the whole of the Tank System is in good and efficient working order and condition.[127]
[127]Reasons [189], [191] (emphasis added).
Caltex submits that the trial judge’s conclusion was correct. It contends that the maintenance obligation requires maintenance of the Demised Premises as a whole, as does the repair obligation.[128] However, Caltex accepts that the maintenance and repair obligations apply, to some degree, to lesser parts of the whole of the Demised Premises. The parties differ as to the level at which component parts of the Demised Premises are subject to the maintenance and repair obligations. In the case of the Tank System, is it the system as a whole or its major components — for example each tank or each tank and associated pipework? Caltex contends that the answer to this question is that found by the trial judge: the Tank System is globally defined and thus the obligations relate only to the Tank System as a whole. I do not accept this contention.
[128]The reference in clause 19.1 to ‘and appurtenances’ is unnecessary, given the broad definition of Demised Premises.
First, the definition of Demised Premises expressly includes ‘the Building’ and ‘all fixtures fittings furnishing plant machinery and equipment’ installed by the lessor. The definition of ‘Building’ includes all ‘fixtures and fittings and other improvements amenities and appurtenances of [the building] from time to time and the equipment listed in the Schedule’.[129] As already stated, the Schedule lists each of the specific tanks making up the Tank System in some detail. Each of the petroleum tanks is large and obviously forms part of the key infrastructure of the petrol station. Further, reading the maintenance and repair obligations as aspects of a single obligation, as the trial judge held, still requires giving meaning to the express obligation to effect repairs including ‘the replacement of all worn or defective parts’.[130] In my view, reasonable businesspeople in the position of the parties would understand that to include each of the tanks, and not just the Tank System as a whole.
[129]Emphasis added.
[130]Emphasis added.
Further, the approach of the trial judge in this regard produces an uncommercial result which could work considerable commercial inconvenience. The failure and decommissioning of one large tank may enable a petrol station business to be profitably conducted on the Demised Premises without any, or any significant, commercial inconvenience. However, when one tank falls into disrepair and is decommissioned, the reserve capacity which the Tank System apparently enjoys is substantially affected. For example, if another large 57,130 litre tank becomes non-operational, there may be considerable disruption to the commercial operation of the petrol station while repair or replacement occurs. Or the timely delivery of petroleum products to the petrol station may be adversely affected by strikes or international events, making reliance upon the reserve capacity of the Tank System as a whole of considerable commercial consequence.
Ground 3(a) has been made out.
Grounds 3(b) and 4: Did the Tank System remain in good and tenantable repair, notwithstanding the decommissioning of Tank 2?
These grounds allege that the trial judge erred in finding that the decommissioning of Tank 2 did not have a material adverse effect on the Tank System as a whole and that, accordingly, the Tank System remained in ‘good and tenantable repair’ notwithstanding the decommissioning of Tank 2.[131]
[131]Reasons [203]–[214].
I note that my comments above, concerning the commercial inconvenience flowing from the decommissioning of Tank 2, are relevant to these grounds of appeal. Indeed, a principal contention by Agtan is that his Honour’s conclusion is not businesslike.
Before considering the trial judge’s reasons, it is necessary to set out some of his factual findings — and to note that Agtan challenges the admissibility of some of the evidence relied upon by the trial judge in this regard. Relevantly, the trial judge found the following facts:
(1) Notwithstanding the decommissioning of Tank 2, Caltex’s petrol station business at the Demised Premises ‘continued to operate well and efficiently’[132] because: (a) the remaining capacity of the Tank System (excluding LPG) of approximately 231,000 litres exceeded Caltex’s ‘operating requirement’;[133] and (b) the remaining petrol storage capacity was ‘relatively large’ when compared to a large number of the petrol stations under Agtan’s control.[134]
(2) Thus, his Honour inferred that the remaining petrol storage capacity was likely to be sufficient to meet the requirements of another tenant operating a petrol station on the Demised Premises.
(3) Finally, the trial judge relied upon the fact that the valuation expert did not consider the decommissioning of Tank 2 to be material to his rental valuation.[135]
[132]Ibid [203].
[133]Ibid [205].
[134]Ibid [206].
[135]Ibid [209].
Caltex supports the trial judge’s reasons. It notes that these grounds of appeal are premised upon it having succeeded in its defence of ground 3(a), with the effect that the single question for determination is whether the Tank System as a whole is in good and tenantable repair.
Putting to one side whether all of the evidence relied upon by the judge for his findings was admissible, these grounds of appeal are, in my opinion, made out. The parties accepted that the relevant test to be applied was that stated by Starke J in Graham v The Markets Hotel Pty Ltd,[136] where his Honour stated:
The state of repair required by a covenant to yield and deliver up premises well and substantially repaired depends primarily upon the words used. It involves, in the present case, an obligation to yield and deliver up the premises in such a state of repair as that in which they would be found if managed by a reasonably minded owner having regard to their age, their character, their ordinary use and the requirements of the tenants likely to take them at the time of the demise or subletting … such a covenant connotes the idea of making good damage so as to leave the subject matter as far as possible as though it had not been damaged. It involves renewal of subsidiary parts: it does not involve renewal of the whole.[137]
[136](1943) 67 CLR 567.
[137]Ibid 585 (emphasis added) (citations omitted).
In my opinion, a reasonably minded owner would, for the commercial reasons stated above in allowing ground 3(a), repair or replace Tank 2 in the circumstances of this case.
In these circumstances, I do not find it necessary to consider whether all the evidence relied upon by the trial judge was in admissible form.
Ground 5: Did the fair wear and tear exception apply to Caltex’s repair obligation in respect of Tank 2?
For the reasons given by Santamaria JA, I agree that this ground must fail.
Conclusion
For the above reasons, I conclude as follows:
(1) Ground 1 has been made out. As a result, contrary to the other members of the Court, I would allow the appeal and remit the proceeding to the trial judge to assess damages.
(2) If ground 1 had not been allowed, I agree with Santamaria JA that ground 2 has not been established — and thus the appeal should be dismissed.
(3) Grounds 3(a), 3(b) and 4 have been established. But the dismissal of ground 1 (by majority) and ground 2 means that Agtan’s success on these grounds provides no reason to disturb the trial judge’s findings.
(4) Ground 5 must fail.
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