Alcatel Australia v Scarcella
[2001] NSWSC 154
•14 March 2001
Reported Decision:
(2001) 10 BPR 18,593
[2001] NSWSC 154
[2001] ACL Rep 245 NSW 30
New South Wales
Supreme Court
CITATION: Alcatel Australia v Scarcella [2001] NSWSC 154 CURRENT JURISDICTION: Equity FILE NUMBER(S): SC 3368/95 HEARING DATE(S): 9 March 2001 JUDGMENT DATE:
14 March 2001PARTIES :
Alcatel Australia Limited (P)
Francesco Scarcella, Helen Scarcella, Rocky Scarcella (Ds)JUDGMENT OF: Austin J
COUNSEL : S Motbey (P)
V Gray (Ds)SOLICITORS: Quinn & Quinn (P)
Henshaws (Ds)CATCHWORDS: LANDLORD & TENANT - rent review clause - determination of 'annual market rental value' - whether valuer entitled to find that there would be no market for the hypothetical leasing proposition - covenant to keep premises in 'good and substantial repair' - whether lessee obliged to re-anodise or replace corroded aluminium window frames that were still functional - whether lessee obliged to 'repair' by replacing sunscreens which it had removed from windows - PRACTICE AND PROCEDURE - whether a party appearing at a hearing by a referee appointed under Part 72 is precluded by Part 21 Rule 2 from discontinuing a claim - whether referee's determination of claim gives rise to Anshun estoppel or res judicata LEGISLATION CITED: Conveyancing Act 1990 (NSW) s 129
Supreme Court Rules Pt 1 r 3, Pt 21 r 2, Pt 40 r 9, Pt 72 r 2 and 13CASES CITED: Alcatel Australia Ltd v Scarcella (1998) NSW ConvR para 55-830
Alghussein Establishment v Eton College [1988] 1 WLR 587
Anstruthrer-Gough-Calthorpe v McOscar [1924] 1 KB 716
Australian Development Corporation Pty Ltd v White Constructions (ACT) Pty Ltd (NSWSC, Giles J, 14 October 1993, unreported)
Bermria Pty Ltd v Homebush Abattoir Corporation (1991) 22 NSWLR 600
Bickmore v Dimmer [1903] 1 Ch 158
Bunbury Foods Pty Ltd v National Bank of Australasia (1984) 153 CLR 491
Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1986) 8 NSWLR 621
Campbell v Commercial Banking Company of Sydney (1879) 2 LR (NSW) 357
Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60
Email Ltd v Robert Bray (Langwarrin) Pty Ltd [1984] VR 16
Flick v Nash (NSWCA, 9 December 1987, unreported)
Fox v Jolly [1916] 1 AC 1
FR Evans (Leeds) Ltd v English Electric Co (1977) 36 P&CR 185
Gair v Smith [1964] VR 814
Graham v Markets Hotel Pty Ltd (1943) 67 CLR 567
Guillemard v Silverthorne (1908) 99 LT 584
Harmsworth Pension Funds Trustees Ltd v Charringtons Industrial Holdings Ltd (1985) 49 P&CR 297
Helvering v Walbridge (1934) 70 F (2d) 683
Jolly v Brown [1914] 2 KB 109
Lock v Pearce [1893] 2 Ch 271
Lurcott v Wakely and Wheeler [1911] 1 KB 905
McGill v Commercial Credit Co (1917) 243 F 637
Pannell v City of London Brewery Company [1900] 1 Ch 496
Pearlman v Keeper and Governors of Harrow School [1979] QB 56
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
Shepherd v Lomas [1963] 1 WLR 962DECISION: See paragraphs 96-98.
THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISIONAUSTIN J
WEDNESDAY 14 MARCH 2001
3368/95 ALCATEL AUSTRALIA LIMITED V FRANCESCO SCARCELLA & ORS
JUDGMENT
1 HIS HONOUR: These proceedings began by summons filed in 1995, and amended early in 1996. They relate to disputes between the plaintiff as lessee and the defendants as lessors. In part, the disputes relate to the lessee's repair obligations under the lease. On about 31 July 1995 the defendants served a notice of default on the plaintiff, specifying a very large list of defects and requiring that they be rectified, or else the defendants would carry out the repair work themselves at the plaintiff's expense. The plaintiff commenced the proceedings after that notice had been served.
3 The matter came before me on 24 November and 8 December 2000, to deal with an application for the expedited determination of a notice of motion filed by each party, seeking (inter alia) the adoption of Mr Lumsdaine's report with differing qualifications. I made orders for expedition on the understanding that determination of the issues raised by the notices of motion would substantially determine the proceedings as a whole. I shall first explain why I formed the view that this would be so.2 On 20 August 1996 orders were made by consent under Part 72 of the Supreme Court Rules, referring to Mr Needham QC (later replaced by Mr Brownie QC) some questions of construction of clauses relevant to the plaintiff's repair obligations, and to Mr Geoffrey Lumsdaine (an architect) the question which of certain items of work were required to be performed, having regard to the true construction of the repair clauses. The reports were delivered in due course, and Mr Brownie's report was adopted by the Court, after some legal questions were resolved by Windeyer J and the Court of Appeal: (1998) 44 NSWLR 249.
The relationship between the relief sought in the amended summons and the notices of motion
4 The relief sought in the amended summons raised issues of four kinds. The first issue was whether, prior to the determination of the new rent under a rent review procedure prescribed by a lease between the parties, the lessee was obliged to continue to pay the rent payable at the expiration of the previous rent review period, or could revert to the lower base rent of $140,000. I understand that this issue has now been resolved.
5 Another prayer for relief raised the question of the true construction of clauses 2 (c) (ii) and 2 (f) of the lease. There is no longer any issue about those clauses.
6 Paragraph 5 of the amended summons sought declarations as to the true construction of clause 2 (c) (i) (relating to the lessee's obligation to repair) and, having regard to that construction, whether the plaintiff was obliged to carry out certain works demanded by the defendants in the notice of default dated 31 July 1995. There are two significant matters and one minor matter still to be determined with respect to the lessee's obligation to repair, as I shall explain.
7 Paragraph 7 of the amended summons sought a declaration that, to the extent that the lessor's notices of default (requiring the plaintiff to carry out works and expend money on the premises) are valid, on the true construction of the rental rise and fall clause, the costs involved in complying with those notices must be taken into account by the parties (or the valuer appointed to assess the current market rent) in arriving at the current market rent. As I understand the position, the plaintiff no longer asserts this proposition. However, there is a lively dispute between the parties as to the correct operation of the rise and fall clause. That is the issue raised by the plaintiff's notice of motion, to which I shall refer. My understanding is that, once I determine the question raised by the plaintiff's notice of motion, there will be no remaining issue about paragraph 7 of the amended summons.
9 I have therefore proceeded to deal with the issues raised by the plaintiff's and defendants' notices of motion on the basis that (subject to any appeal and the question of costs) substantially all of the proceedings between the parties will be resolved by my doing so.8 Paragraph 8 of the amended summons raises the question whether the defendants are liable to give credit to the plaintiff, against future non-accrued rental liabilities, for rental already paid in excess of the amount determined as payable. That remains an issue, in the sense that, if I construe the rise and fall clause in the manner contended for by the plaintiff, the plaintiff will have overpaid its rent for a considerable time. Counsel for plaintiff informed me at the hearing of the applications that though he did not have instructions to bind his client, it was unlikely that his client would seek credit in respect of overpaid rental up to the expiration of the previous rental review period on 31 December 1999. However, it was probable that his client would seek credit for overpaid rental as from 1 January 2000. He said it was unlikely, in his view, that there would be any continuing dispute on that issue.
The plaintiff's and defendants' notices of motion
10 The plaintiff's amended notice of motion was filed on 23 February 2001, pursuant to directions made by me on 8 December 2000. The defendants' notice of motion was filed on 2 August 2000.
11 The first area of dispute between the parties relates to the construction of the rent review clause in the lease. Paragraph 5 and 6 of the plaintiff's notice of motion seek the declarations about the proper meaning of the rent review clause, which the defendants contest.
12 Both applications seek the adoption of Mr Lumsdaine's report as referee dated 2 June 2000, subject to one or more qualifications. But there are disputes between the parties as to those parts of Mr Lumsdaine's report that relate to the repair or replacement of corroded aluminium window frames, and the removal by the plaintiff of the aluminium sunscreens across the windows of the demised premises. These substantive disputes are reflected in various prayers for relief in the notices of motion, as follows.
13 The plaintiff seeks the adoption of the whole of Mr Lumsdaine's report except for paragraph 16.8, which relates to an aspect of the repair or replacement of corroded aluminium window frames. The defendants agree to the deletion of paragraph 16.8, but also seek the deletion of the third, fourth and fifth sentences of paragraph 15.3 and the whole of paragraphs 15.4 to 15.8 inclusive (which relate to the plaintiff's removal of the sunscreens), and paragraph 16.7 (concerning the corroded aluminium window frames).
14 The plaintiff seeks a declaration that, having regard to the true construction of the repair provisions of the lease as indicated in Mr Brownie QC's report, the plaintiff is required to carry out certain specified works. The intention is to limit the plaintiff's obligation to the specified matters. The defendants say that the plaintiff has further obligations with respect to the corroded aluminium window frames and the sunscreens removed from the windows. They seek a declaration that the plaintiff's failure to comply with its obligations with respect to the corroded window frames (identified as items 145 and 146 of Schedule A to the defendants' notice of default dated 31 July 1995) constitutes a breach of the plaintiff's obligations under clause 2 (c) (i) of the lease. As to the sunscreens, the defendants say they should be free to proceed with a new notice of default.
15 The plaintiff contends that it has no further obligation with respect to the aluminium window frames and sunscreens. By its application, it seeks an injunction perpetually restraining the defendants from taking any action against it in respect of a fresh notice of default given by the defendants on 28 March 2000, requiring the plaintiff to re-instate the sunscreens.
17 I shall deal with each of the three major matters in dispute, and then with the minor matter.16 In addition to the substantive matters in dispute, the defendants wish to establish that the plaintiff is required to carry out other minor items of work recommended by Mr Lumsdaine's report (items 5, 18 and 19 in Schedule A of the defendants' notice of default dated 31 July 1995).
The rent review clause
18 The lease of the demised premises was entered into on 15 December 1969. The parties were Legal & General Assurance Society Ltd as lessor and the plaintiff (then called Standard Telephones and Cables Pty Ltd) as lessee. The lease was for a term of 50 years and 16 days beginning on the date of execution and expiring on 31 December 2019. Erected on the demised land was a newly constructed multi-storey building that had been custom built for the plaintiff. The lease cast extensive obligations on the lessee with respect to various matters, including the payment of outgoings and the carrying out of repairs and maintenance.
20 In its varied form, clause 2 (a) is relevantly as follows:19 Legal & General Assurance and the plaintiff entered into a Deed of Variation of Lease dated 13 November 1979, which replaced the rent review clause of the original lease with the present clause 2 (a). In substance, the changes related to the base rent, which was increased from $58,571.24 to $140,000, and the review period, which was reduced from every 10 years to every five years. The wording that has proven to be problematic was not significantly changed. The defendants acquired the freehold title from Legal & General Assurance in 1989.
21 The plaintiff seeks declaratory orders which would reflect its construction of the rent review clause. It poses the issues in the prayers for relief in its amended notice of motion, as follows:
‘That the Lessee will during the said term pay to the Lessor ... an annual rent of One hundred and forty thousand dollars ($140,000) per annum, during the period from the 1st day of January 1980 to the 31st day of December 1984 ... PROVIDED ALWAYS and it is hereby agreed that at the expiration of each period of five (5) years calculated in each case from the First day of January 1980 of the term hereby granted (the date of expiration of each of such years being hereinafter referred to as the ‘date of review’) the annual rent of the demised premises for the period of five (5) years thence ensuing from the date of review shall be such sum as shall be agreed between the Lessor and the Lessee in writing as representing the annual market rental value of the demised premises for a term of five years as between a willing Lessor and a willing Lessee with vacant possession and taking no account of any good-will attributable to the demised premises by reason of any trade or business carried on therein by the Lessee or any subtenant and in all other respects on the terms covenants and conditions of this Lease including the provisions of this paragraph and if the Lessor and Lessee shall be unable to agree on the amount of such rent as aforesaid then and in any such case the question as soon as possible shall be referred to the decision of a qualified valuer ... acting as an expert and not as an arbitrator and the decision of such person ... shall accordingly be final and binding on both the Lessor and the Lessee PROVIDED FURTHER that in no event shall the annual rent payable by the Lessee to the Lessor during the residue of the term commencing on the First day of January 1985 be less than the annual rent of One hundred and forty thousand dollars ($140,000) payable during the period from the 1st day of January 1980 to the 31st day of December 1984 AND such annual rental as agreed or determined as aforesaid shall be payable ... during the period of five (5) years from the date of review.’
‘5. A declaration, having regard to the true construction of the rent review clause in the subject lease, as to whether the valuer appointed to determine the rental value of the hypothetical lease postulated by the rent review clause, is entitled or obliged to assume that there would be a market for that hypothetical leasing proposition in circumstances where it is the valuer's finding/opinion that, in point of practical fact, having regard to the very onerous nature of the commitments the hypothetical lessee would be assuming if it entered into the said hypothetical lease, there would be no market for the proposition.
6. A declaration as to whether, where the valuer considers that in point of practical fact there would be no market, he would be entitled or obliged to assess the annual rental value at any sum greater than the stipulated minimum annual rental of $140,000.’23 Clause 2(a) is a ‘rise and fall’ clause, in the sense that the rent may be higher or lower after the review than before, though it may not fall below the base rent. The task of a valuer, under a clause such as this, is notoriously difficult. The clause necessarily requires some hypotheses, not always clearly articulated and not always realistic. In McGill v Commercial Credit Co (1917) 243 F 637, 647 Rose J spoke of the matter, evidently in some frustration, in this way:22 In response to a question of mine, counsel for the plaintiff informed me that the annual rent payable at the end of the previous rent review period (that is, on 31 December 1999) was $416,816. Therefore, if the plaintiff succeeds and the valuer decides that there is no market, there will be a very substantial reduction of rent. The effect could well be to reduce the rent to the base rental as at 1979, $140,000, for the remaining 20 years of the lease. From a purely commercial point of view, that would give the plaintiff an enormous windfall gain. Counsel for the plaintiff described the question of construction of the rent review clause as a ‘cold, dry question of law’. His point was that the Lease, being for such a long term, was tantamount to a statute governing the relationship between the Lessor and the Lessee. If, for example, the repair clause upon its proper construction is onerous on the Lessee, or the rent review clause cannot operate unless there is a real market for the lease proposition, so be it. Therefore the fact that his client may receive a windfall gain is irrelevant. I agree.
‘The effort is to find out not what a real buyer and a real seller, under the conditions actually surrounding them, do, but what a purely imaginary buyer will pay a make-believe seller, under conditions which do not exist. You are forced to wonder what would have happened if everything had been different from what it was. It is not easy to guess what will take place in Wonderland as other people than Lewis Caroll's heroine have found out.’
24 Clause 2(a) does not directly state the criteria by which the valuer is to make his or her decision, but clearly enough the question for the valuer to determine is the question upon which the Lessor and Lessee have failed to agree. A rental value cannot be determined unless the valuer has instructions as to such matters as the term of the lease and whether the premises are subtenanted. In effect, clause 2(a) requires the valuer to assume a hypothetical lease in which:
· the lease is for a term equivalent to the remaining term of the Lease as at the date of review;
· vacant possession will be given to the lessee (the assumption being, in effect, that the Lessee had moved out or had never been in occupation);
· the premises are being offered in their actual condition, but on the assumption that the Lessee has performed all repair and maintenance obligations up to the relevant date;
· no account is to be taken of good-will relating to the business of the lessee or any subtenant;
· otherwise, the lease is on the terms and conditions of the (real) Lease, including the provision for rent review. This must mean, as a matter of construction, that the hypothetical lease proposition which is to be valued includes provisions permitting subletting with consent but limiting the use of the building to offices and associated parking: cf Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1986) 8 NSWLR 621.25 I have had some difficulty with the length of the assumed term of the lease. The language of clause 2 (a) is quite specific. The drafter carefully distinguishes between the word ‘term’ and the word ‘period’. Rent reviews take place at the expiration of each ‘period’ of five years during the ‘term’ of the Lease. In that context, the words ‘representing the annual market rental value of the demised premises for a term of five years’ could be taken to require a hypothetical term of five years. However, both parties submitted that the hypothetical lease was to have an expiry date of 31 December 2019. This is because the hypothetical lease is ‘in all other respects on the terms covenants and conditions of this Lease including the provisions of this paragraph’. The terms covenants and conditions of the lease include the habendum, granting an estate expiring on 31 December 2019. Further, paragraph 2 (a) provides for rent reviews every five years, implying that the assumed term must be more than five years. On this approach, one must accept that the use of the word ‘term’ in the phrase ‘for a term of five years’ was a slip by the drafter, who should have used the word ‘period’. The matter not having been contested, I am prepared to proceed on that basis.
26 The assumptions required by clause 2 (a) have a distinct element of unreality about them. A lessor who was in the position, on 31 December 1999, to offer vacant possession of the demised premises would almost certainly not be offering a lease on the above terms; it is much more likely that the lessor would put the property on the market for sale to a person willing to exploit it for its commercially highest and best use. Nevertheless, making those assumptions, the valuer must determine the ‘annual market rental value’ between a willing lessor and a willing lessee. How much further into Wonderland must the valuer fall?
28 In the present case, the plaintiff engaged Mr Geoffrey Learmonth, a professional valuer, to express a valuation opinion pursuant to the rent review clause. In his affidavit of 25 October 2000, Mr Learmonth expressed the view that, as a matter of practical reality, there would be no market for the hypothetical leasing proposition that he was required by clause 2 (a) to value. He said:27 Obviously, the valuer must envisage a hypothetical willing lessor and a hypothetical willing lessee, and form a view about the rental amount at which they would reach agreement. In oral submissions, the plaintiff contended that the valuer cannot go further than this; in particular, he or she cannot assume that there will always be a market for the hypothetical lease proposition that is to be valued. Upon this submission, it would be open to the valuer to reason that, in the unlikely event that the Lessor were really to offer the lease proposition on the terms required by clause 2 (a), no one would take up the proposition, and the building would simply remain vacant. In other words, the valuer may conclude that there was in fact no market for the hypothetical lease proposition at the relevant time. If the valuer were to form that opinion, then according to this submission, no market rental value could be ascertained. In that event, the proviso to clause 2 (a), that in no event is the annual rent to be less than $140,000, would apply.
29 The plaintiff proposed at the hearing that Mr Learmonth's predicament be resolved in its favour by the Court making the following declaration:
‘My view is that as a matter of practical reality there would be no market for such a proposition for the reason that a typical space user who would be regarded as a willing tenant in the marketplace would not enter into a long-term commitment like that and given the inefficient nature of the floor plate, ie about 575.0 sq m per floor. Normal reasonable would-be tenants won't commit themselves to taking on the financial responsibility for the repair and maintenance of buildings to the very high standards imposed by this lessor for 20 years. The only possibility I can see, and I do not consider it as very likely or even likely, is that someone might be prepared to take it on for a contribution towards the would-be landlord's outgoings.
What I do not understand is whether or not the rent review clause permits the valuer called upon to assess the rental value of the hypothetical lease having regard to the reality of the marketability of the proposition (which may well be there is no market) or whether or not the rent review clause requires the valuer to assume that there will be a market even though he considers that there would not be. In other words: ‘If the valuer is of the view that the proposition is so inherently unattractive as to be unmarketable if you were ‘on the block’, is here required nonetheless to somehow assess a value or does he just say the value is the minimum sum of $140,000 pa?’30 The plaintiff's written submissions, prepared more than a week before the hearing, put forward a somewhat different construction. Having contended that if the hypothetical lease proposition were to be proposed it would be highly unlikely that anyone would take up the proposition, the submissions continued:
‘That upon the true construction of [the Lease] any valuer required under clause 2 (a) ... to decide the sum of money which represents the annual market rental value of the premises for the five years commencing 1 January 2000 is bound in law to consider and decide as a question of fact (and may not assume without considering and deciding) whether or not there was, or would have been, any market for the hypothetical lease postulated by the said clause 2 (a) and, in the event, for whatever reason, the said valuer is of the opinion that there would not have been any market for the said hypothetical lease he must assess the annual market value as $140,000. [For the purposes of this declaration, the phrase ‘hypothetical lease postulated by the said clause 2 (a)’ refers to a lease of the premises for a term of 20 years commencing on 1 January 2000 with rent reviews at five-year intervals commencing on 1 January 2005 and in all other respects on the same terms and conditions as the existing lease.]’
31 The submissions continued:
‘It is submitted that that fact, if it is a fact, is relevant to the issue as to what the market rent of the building, applying the instructions given by the rent review clause, is. In other words, although it would not be open to a valuer called upon to undertake the hypothetical inquiry dictated by the rent review clause, to conclude ‘I consider there would be no market and therefore the building has no rental value’, it would be open to such a valuer to conclude ‘Although I am required to arrive at a hypothetical rental value, whether in fact there would be no market for the proposition or not, because I consider that there would be little or no market for the proposition, I consider that the figure at which the hypothetical lessor and the hypothetical lessee would come together would be, as a net figure (allowing for outgoings and repair costs over 20 years) less than $140,000 per annum’.’
‘Alcatel submits that what is not permitted by the rent review formula is for the valuer to say ‘Because I am required to arrive at a market value, even though I do consider that there would be no market for the hypothetical proposition postulated by the rent review clause, I will assume - even though I consider that it is not the fact - that the building would be leased at the sorts of per metre rates that offices are let out for in or around December 1999’. In other words, the fact that the hypothetical proposition is in fact unmarketable must be relevant to the intellectual process of attempting to rationally assess the market rental value. The unmarketability of the proposition must have a negative impact upon the hypothetical market rent. The landlord cannot end up with more than $140,000 pa or the market rental value whichever is the greater. If the market rental value, due to the absence of any market as a matter of reality, is less than $140,000 pa (as it must be if there is no market) then the annual rent is $140,000.’
33 In their written submissions, however, the defendants said:32 As with the plaintiff, there are some differences between the defendants' written submissions and their oral submissions. The defendants' oral submissions were to the effect that clause 2 (a), by requiring the valuer to assume a willing lessor and a willing lessee, implies that there is a hypothetical market of at least one buyer and one seller. Therefore, say the defendants, the declaratory relief sought by the plaintiff is inconsistent with the Lease.
‘The defendants do not contest that if, as a matter of fact, there is no market for a leasehold estate hypothetically offered for lease, then any provisions in the lease regulating what rent is to be paid in that circumstance will take effect. ... If, in the present case, the evidence proved that there was no demand for the leasehold estate hypothetically offered at the relevant rent review date, then the provisions of the lease regulating the rent payable in such circumstances would take effect.’
34 The variations in the submissions of both parties serve to underline the difficulty of the question before the Court. Each side has had further thoughts as the hearing approached. In the circumstances, it would be wrong to hold those variations against either party. As I read them, the defendants' written submissions are indistinguishable from the plaintiff's oral submissions. Therefore the submissions of the parties offer the Court three choices. I have decided that the correct approach is the one outlined in the defendants' oral submissions. I reject the plaintiff's oral submissions (and for the same reasons, the defendants' written submissions), and I reject the plaintiff's written submissions.
35 I turn first to the plaintiff's oral submissions. The word ‘market’ in the phrase ‘market rental’ is ambiguous, and must be given meaning by recourse to both the textual and the factual contexts in which it is used. A market rent is different from a ‘reasonable rent’: Email Ltd v Robert Bray (Langwarrin) Pty Ltd [1984] VR 16, 19. In the Burns Philp Hardware case, Powell J said that the phrase ‘market rent’ meant ‘what the property in question would fetch in the market under the state of things for the time being in question’ (8 NSWLR at 636), and Young J was disinclined to treat the expression as ambiguous, although he felt bound by authority to do so. But neither judge in that case had to consider the issue before me now, and it is in this respect that the phrase is ambiguous. The word might refer to a real market, a place where buyers and sellers actually compete for a product (the product being, in this case, a lease proposition); or it might merely denote a characteristic of the rental, namely that it is determined by certain commercial considerations which are characteristic of a market, rather than considerations of pure fairness. In my opinion, both the textual and the factual contexts point to the latter rather than the former construction.
36 As to the textual context, by referring to the rental value as between a willing lessor and a willing lessee, clause 2 (a) calls for the assumption that there is a figure at which the hypothetical willing lessor and the hypothetical willing lessee will come together. It provides for the valuer to make a decision about the ‘amount of such rent’, and says that the valuer's decision is final and binding. It does not allow for the valuer to conclude that in the particular circumstances there is no rental value, either because there is no actual market or for any other reason. The proviso that sets the base rent is not expressed as a default valuation that comes into play if the valuer cannot determine the rent, but is rather a floor price to be substituted for the valuer's figure if the valuation is below it.
37 Considerations relating to the factual context in which the lease was entered into also support the latter over the former construction. From the outset, the lease proposition in this case was a very particular and even peculiar one. Apart from the length of the lease’s term, the subject matter was a purpose-built building erected for the lessee, and the covenants in the lease confined the use of the building to offices and imposed extensive maintenance and repair obligations on the lessee. If it were necessary for the valuer to determine whether there was a true market for the lease proposition, there would have been at least a real possibility that the valuer would have found no market from the outset. In my opinion, it would be highly implausible to suggest that the commercial parties who entered into the lease would have contemplated the possibility that under the rent review clause the rent would be fixed at the base rent for the whole term, if there was in fact no market for the lease proposition at any review date. Although the economy had not been ravaged by the oil-price financial crisis of the 1970s, and financial deregulation was still a long way off, commercial parties contracting in 1969 would have been well aware of the need to take inflation into account in striking a price over a term of 50 years. And yet the plaintiff's oral submissions would produce these consequences.
38 I turn to the plaintiff's written submissions. In my view those submissions give too much significance to the word ‘market’ as a criterion of valuation. It is true that the aspects of the lease proposition that would make it unattractive in the market are to be taken into account by the valuer as negative influences on the rental value. Thus, it is a negative influence that the lease, being of premises in an industrial part of Sydney, restricts the use to offices. The valuer must look to office rentals in Alexandria even if rentals for other, more common uses are higher. The covenants in the lease which impose extensive obligations on the Lessee with respect to outgoings and repairs are also a negative influence on the value of the lease proposition. The cost of compliance with these covenants can be estimated and taken into account in the valuation. It is even appropriate to take into account the valuer's opinion that no one other than the Lessee would be interested in the lease proposition - provided that attention is confined to a hypothetical willing lessor and a hypothetical willing lessee (rather than the real Lessor and Lessee), and it is recognised that they will agree on a price.
39 The plaintiff's written submissions contend that, since the task is to assess the market rental value ‘of the demised premises’, regard must be had to all the relevant geographical and demographic factors, and land use regulations and like market factors, that applied to the particular property in question on 31 December 1999. That is true. But the valuer is not prevented from referring to ‘comparable leases’, provided that they are truly comparable and adjustments (possibly in large amounts) are made for points of difference. The process of comparison is an essential part of the valuation process, and knowledge of comparable propositions is a central ingredient of the valuer's expertise. Even if there would be little or no market interest in the hypothetical lease proposition under consideration, it is still relevant to refer to ‘comparable leases’ provided that appropriate adjustments are made. The lack of marketability is not an absolute bar to comparison.
41 The function of the word ‘market’ in clause 2 (a) is, as Learned Hand J said of similar words in Helvering v Walbridge (1934) 70 F (2d) 683, 684, to presuppose ‘enough competition between buyers and sellers to prevent the exigencies of an individual from being exploited’. He continued:40 The plaintiff's written submissions take some specific figures. If one assumes outgoings of $173,200 per annum and a provision for repairs of $30,000 per annum, then in order for the net rent to exceed $140,000 per annum the lessee would have to be willing to pay $343,200 per annum gross. If, however, the lease proposition was not marketable, then according to the plaintiff, any hypothetical rent figure exceeding $140,000 per annum net could not be a determination of the sort contemplated by the lease. I disagree. A valuer considering all relevant factors, including both the unlikelihood of there being any other interested lessee and evidence of comparable rental values, might reach a gross figure in excess of $343,200 and then apply discounts for the cost of outgoings and repairs and any other relevant factors.
‘It may well imply that the goods have several possible buyers, so that a necessitous seller shall not be confined to one; and that there are several possible sellers of the same goods or their substantial equivalent, so that a hard-pressed buyer shall not have to accept the first offer.’
These are matters to be assumed by the valuer, independently of the facts.
42 Observations by Donaldson J in FR Evans (Leeds) Ltd v English Electric Co (1977) 36 P&CR 185 are to the same effect. The rent review clause in that case allowed the rent to be revised to represent the ‘full yearly market rental’, defined as ‘the rent at which the demised premises are worth to be let with vacant possession on the open market as a whole between a willing lessor and a willing lessee for the remainder of the said term outstanding ...’. I do not regard that wording as materially different from clause 2 (a).
44 After observing that the rent review clause assumed that there was in fact a rent on which a willing lessor and a willing lessee would agree, Donaldson J considered whether the willing lessor and lessee should be identified with the actual lessor and lessee. He said (at 189):43 The demised premises were an exceptionally large factory and land premises in Liverpool, comprising 60 acres. Problems arose because the arbitrator who was appointed to determine the rent made some findings of fact, including the finding that apart from the present lessee, it was unlikely that there would have been a potential lessee in the market. One of the questions for the court was whether that fact was relevant.
45 Applying those principles, he later said (at 190):
‘Similarly, in my judgment, the willing lessee is an abstraction - a hypothetical person actively seeking premises to fulfil needs which these premises could fulfil. He will take account of similar factors, but he too will be unaffected by liquidity problems, governmental or other pressures to boost or maintain employment in the area and so on. In a word, his profile may or may not fit that of [the present lessee], but he is not that company.’‘In a sense, the willing lessor must be the landlords because only they can dispose of the premises, but for the purposes of the clause the landlord is an abstraction - a hypothetical person with the right to dispose of the premises on an 18-year lease. As such, he is not affected by personal ills such as a cash-flow crisis or importunate mortgagees. Nor is he in the happy position of someone to whom it is largely a matter of indifference whether he lets in October 1976 or waits for the market to improve. He is, in short a willing lessor. He wants to let the premises at a rent which is appropriate to all the factors which affect the marketability of these premises as industrial premises - for example, geographical location, the extent of the local labour market, the level of local rates and the market rent of comparable premises, that is to say, premises which are directly comparable or which, if not directly comparable, would be considered as viable alternatives by a potential tenant.
‘The fact that it is very likely that the English Electric Co Ltd would have been the only potential lessee is relevant, but its relevance is indirect. It does not matter whether the only potential lessee was this company or the XYZ Company Ltd. What matters is that in the state of the market there was not likely to be more than one willing lessee. The effect of this is not, however, decisive because this single potential lessee is to be assumed to be a willing lessee - neither reluctant nor importunate, but willing. Just as the hypothetical lessor cannot rely overmuch on the fact that no property similar to the Walton Works is available on the market, so the hypothetical lessee cannot rely too much upon the fact that he has no competitors - he is, and is known to be, a willing lessee. Furthermore, it is known that he will remain a willing lessee so long as the willing lessor does not press his demand for rent beyond the point at which he is ceasing to act as a willing lessor and at which a willing lessee would cease to be such.’
47 I am prepared to make a declaration reflecting these views, and I shall direct counsel for the defendant to prepare draft short minutes of orders.46 I agree with those observations, and I regard them as applicable to the present case. Difficult though it may be, the task assigned to the valuer is to determine the rental value, taking into account all relevant factors. There must be a rent at which a hypothetical willing lessor and a hypothetical willing lessee will agree. It is not open to the valuer to conclude that there is no market for the lease proposition, but it is permissible for the valuer to take into account that no other bidders for the lease would be likely, in the manner described by Donaldson J.
48 One of the questions for Mr Brownie QC, as referee with respect to matters of construction of the Lease, related to the extent of the repair obligation. Clause 2 (c) (i) of the Lease stated:
The window frames
‘That the Lessee will during the said term well and substantially repair and keep in good and substantial repair the demised premises and all appurtenances thereto belonging and all additions thereto and the boundary walls and fences thereof and all sewers and drains soil and other pipes and sanitary and water apparatus.’
49 As Mr Brownie noted in his report, the Lease was unusually onerous on the Lessee with respect to repairs. It imposed no obligation on the Lessors to carry out any work in relation to the building. The Lessee's repair covenant was not qualified by some such expression as ‘fair wear and tear excepted’, and was an obligation to ‘keep’ the building in good and substantial repair on a continuous basis. Most importantly, the clause used the words ‘good and substantial repair’ rather than, for example, ‘good tenantable repair’.
50 In the original version of his report, Mr Brownie interpreted the words ‘good and substantial repair’ to mean, in effect, ‘substantially good repair’ or ‘reasonable repair’. He said that the word ‘substantial’ carries the idea of reasonableness, rather than perfection. Referring to the authorities, he formulated the test as whether a reasonably minded owner would carry out the repair work, having full regard to the age of the building, the locality, the class of tenant likely to occupy the building, and the maintenance of the property in such a way that only an average amount of annual work would be necessary in the future. He said it would be relevant for Mr Lumsdaine to take into account a report by Taylor Lauder Pty Ltd to the effect that the building had a design life of 50 years. The implication seems to be that the Lessee could allow the building and its appurtenances steadily to deteriorate, commensurately with its decline into obsolescence, without being in breach of the repair covenant, as long as they continued to function.
52 The new text inserted by Windeyer J into Mr Brownie's report was as follows:51 Mr Brownie's interpretation of clause 2 (c) (i) was challenged by the present defendants before Windeyer J and the Court of Appeal. Windeyer J held ((1998) NSW ConvR para 55-830, at p 56,498) that the covenant to keep the premises in good and substantial repair was a double covenant, having both a qualitative obligation (‘good’) and a quantitative one (‘substantial’). In his Honour's view, a covenant to ‘keep in good and substantial repair’ imposes greater obligations on the covenantor than a covenant to keep in ‘good tenantable repair’. While acknowledging that it was not necessary for the Lessee to keep the premises in ‘mint condition’, he disagreed with Mr Brownie's formulation and replaced relevant parts of the report with a new formulation. The Court of Appeal agreed with Windeyer J's judgment: (1998) 44 NSWLR 349.
‘The lease obliges the plaintiff to keep the building ‘in good and substantial repair.’ What must the plaintiff do to perform this covenant? At the commencement of the lease the building was brand new. What is required to keep a brand new building in good and substantial repair? Time must be taken into account. A 28-year old building is not to be made new. But so far as repair can make good, or protect against the ravages of time and the elements, it must be undertaken. This means that if deterioration to the building is now evident after 28 years but would not have been evident, or evident to such degree, if in earlier years maintenance or repairs which could have been undertaken had been undertaken, then the plaintiff is required to put the building in the condition in which it would have been if the maintenance had been undertaken in the earlier years. This may entail renewing subsidiary parts of the building (though not renewal of the whole building). The plaintiff is not allowed to neglect the building and then, by reason of the neglect, at a later date say that the deterioration to the building which has occurred by reason of that neglect diminishes the extent of its obligation to put and keep the building in good and substantial repair. He is bound by seasonal application of labour to keep the premises as nearly as possible in the same condition as at the commencement of the lease.
‘No doubt, at least in respect of some of the items complained about this raises questions of degree, but it seems clear that the test established by the authorities is whether, in relation to each item said to require repair, a reasonably minded owner would carry out that repair work, having full regard to the age of the building, the locality, and the class of tenant likely to occupy the building, all such matters to be considered as at the date of commencement of the lease; and bearing in mind the obligation to maintain the property in such a way that only an average amount of annual work would be necessary in the future: Anstruthrer-Gough-Calthorpe [ Anstruthrer-Gough-Calthorpe v McOscar [1924] 1 K B 716].
‘Thus, one of the documents placed before me was a copy of a report by Taylor Lauder Pty Ltd dated 1 November 1995 in which the author said that it was generally accepted that the design life of a building of the type in question was 50 years. Such evidence is irrelevant. The true legal position is expressed in Lurcott v Wakely and Wheeler [1911] 1 KB 905 at 917 as follows:
‘Supposing there is a house on a plot of land which is let on a lease for 80 years, and the person who takes the lease undertakes to keep that house in good condition for the 80 years, he cannot assert that it is a house which from the nature of the case would under ordinary circumstances last out 20 years and therefore that he may let it die at the end of 20 years. He must do all that is necessary to keep that house in good condition for the period for which he has covenanted.’’
53 As I read Windeyer J's judgment, it seems to me that a central part of his disagreement with Mr Brownie related to the question whether the content of the repair obligation would be allowed to diminish over time, having regard to the general deterioration of the building. Mr Brownie clearly thought that the remaining life of the building was a highly relevant factor. Windeyer J's view was that:
· the age of the building is relevant, in the sense that there is no obligation to bring the premises back to ‘mint condition’ and the standard for repairs must allow for the inevitable effects of ageing, but
· the standard requires that repairs must be undertaken, to the extent that repairs can protect the premises against the ravages of time and the elements, and
· if repairs to that standard have not been carried out in the past, the Lessee is obliged to put the building in the condition in which it would have been if those repairs had been undertaken, and
· the Lessee cannot diminish its obligation to make the building good by pointing to the building's limited remaining life or state of deterioration.55 One of the issues contested before the referee was whether remedial repair work had to be done to the window frames of the building. In his report Mr Lumsdaine found that the exterior of the anodised aluminium window frames had become coated with various degrees of oxidation or corrosion resulting from atmospheric pollution over the 30 years since the building was erected (paragraph 16.1). He noted the Lessors' claim that the frames should be re-anodised, a process that would have to be carried out off-site, and that the replacement of the windows would be a cheaper alternative. In his opinion, regular maintenance, for example monthly washing (in his view, a most onerous and unusual burden to place on a tenant), would operate only to slow down the rate of corrosion, which was a function of the material used to construct the window frames and the atmospheric environment of the subject building (paragraph 16.5). He quoted the ‘reasonably minded owner’ test, as modified by Windeyer J, and said (paragraph 16.7):54 Windeyer J preserved Mr Brownie's test of the ‘reasonably minded owner’, but he qualified it by insisting that the matters which the owner must consider should be considered ‘as at the date of commencement of the lease’. In my view, this qualification was intended to incorporate into the test the principles that I have just set out.
‘Would a reasonably minded owner, bearing in mind the industrial environment in which the building is located, consider for example that the windows should be replaced because of the appearance of corrosion products on the frames? I note here that, despite the dire prognostications of Dr Young, the expert retained by the Landlord, I accept Dr Corderoy's evidence to the effect that the windows are sound and fully functioning, and will continue functioning for many years. The defect is one of appearance. In my view a reasonably minded owner in these circumstances would not replace the windows.’
56 He noted that the Lessee had agreed to remove the corrosion from the window frames and seal them, and clean the window glass. Evidently the Lessee intended that the work would be done without removing the windows. Mr Lumsdaine referred to expert evidence to the effect that it was improbable that any method of sealing would prevent the recurrence of corrosion. He said (paragraph 16.8) that it was incumbent on the Lessee to provide some satisfactory indication that the sealing which it proposed to carry out would provide the degree of protection which would have been afforded if regular maintenance had been carried out for the previous 30 years.
57 The plaintiff submits that the Court should adopt Mr Lumsdaine's report with respect to the window frames, except for paragraph 16.8, which (it says) imposes too high an obligation on it. The defendants object to paragraphs 16.5 and 16.7, as well as paragraph 16.8. They contend that the referee should have recommended replacement of the window frames, and that he was in error in two ways. First, they complain that, in reaching the conclusion stated in paragraph 16.5 of his report, he failed to pay proper regard to expert evidence to the effect that if the window frames had been kept clean throughout their time in service, the anodic coating would be in very much better condition and a regimen of regular cleaning would substantially lengthen the lifetime of the window frames. They refer to paragraph 4.0 of the report of Professor Young, the expert witness for the defendants, and paragraph 3.5 of the report of Dr Corderoy, the expert witness for the plaintiff, and his evidence under cross-examination at the hearing before the referee (T127/46, 1 May 2000).
58 Both Professor Young and Dr Corderoy expressed the view that the corrosion of the external window frames was caused by pollution from the industrial atmosphere surrounding the premises, although Professor Young expressed the view that lack of regular cleaning was a contributing factor. Professor Young's opinion was to the effect that, although 100 percent prevention of corrosion is never possible, a very large reduction in the rate of attack can easily be achieved through regular cleaning with detergent and water. A thorough cleaning and removal of corrosion products after 30 years was needed but it would be inadequate, because corrosion would resume immediately. In his view, what was required was the reinstatement of the anodised coating, followed by regular cleaning. Although in principle the necessary re-coating could be achieved by first disassembling the windows and then cleaning and coating the frames, a more economic and practical solution would probably be to replace the entire window framing structure in the building. Dr Corderoy disagreed with Professor Young as to the cleaning that would be required. He said that high-pressure waterblasting on a weekly basis would be necessary to remove contaminants. He claimed that the existing window frames had performed well in an aggressive industrial atmosphere and the only criticism of them was their aesthetic appearance. If the window frames were replaced with similar aluminium framing, the problem would re-emerge.
59 In cross-examination, Dr Corderoy agreed with the proposition that, whether onerous or not, some form of cleaning could have been employed which would have substantially reduced the corrosion that had become evident on the window frames. He gave evidence that, if he had been given responsibility in 1969 for taking every available measure to minimise the corrosion that would otherwise have occurred, he could have taken steps which would have reduced the corrosion, though not to a large degree. Other evidence before the referee was to the effect that the windows and frames had been washed only once, in 1995.
60 In my opinion, Mr Lumsdaine's finding in paragraph 16.5 of his report is inconsistent with evidence accepted by both experts. While the experts agreed that regular maintenance would only slow down but not eliminate corrosion, the evidence of both of them is inconsistent with Mr Lumsdaine's proposition that the rate of corrosion ‘is a function of the material used to construct the window frames and the atmospheric environment of the subject building’. Both experts accepted that regular maintenance would have reduced the rate of corrosion.
61 Secondly, the defendants submit that in paragraph 16.7, Mr Lumsdaine misapplied Windeyer J's test. I agree. It appears to be common ground that the corrosion to the exterior window frames was a defect requiring repair, for both parties took the view that something should be done by way of repair, while disagreeing about the nature and extent of the remedial work. According to the principles adopted by the Windeyer J, the repairs should be such as to make the window frames good and protect them against the ravages of time and the elements. If the present deterioration would not have been evident to such a degree, if maintenance had been undertaken in earlier years, then the repairs should put the building in the condition in which it would have been if that maintenance had been undertaken. As I have said, it was common ground between the experts that if the windows and window frames had been regularly cleaned, substantially less corrosion would have occurred, and therefore the Lessee's obligation was to put the window frames in as good a condition as if they had been properly maintained.
62 Mr Lumsdaine was right to say that it was incumbent on the Lessee to provide the windows with the degree of protection they would have retained if regular maintenance had been carried out over the previous 30 years, but in my opinion he was wrong to exclude the possibility that in order to do so, it may be necessary to replace the windows. His reason for excluding replacement of the windows was based on a ‘reasonably minded owner’ test which appears to have eliminated the ingredients of principle upon which Windeyer J insisted, and which were incorporated in his qualification to Mr Brownie's test.
63 As the defendants submitted, if the referee's approach were to be taken to its logical conclusion, the plaintiff could disregard its repair obligation for 49 years, and then argue that as the design life of the building would shortly expire, it would be unreasonable to compel it to rectify the effects of 49 years' accumulated neglect. This could well act as a powerful incentive to lessees to disregard their repair obligations: Harmsworth Pension Funds Trustees Ltd v Charringtons Industrial Holdings Ltd (1985) 49 P&CR 297; Alghussein Establishment v Eton College [1988] 1 WLR 587, 595. Such an outcome would be flatly incompatible with Windeyer J's judgment, expressed in the passage incorporated into Mr Brownie's report.
64 My conclusion is that Mr Lumsdaine's report was inconsistent with the evidence tendered by both sides, and contrary to legal principles, to the extent that I have indicated. It is clear that the Court has a wide discretion in relation to the adoption or rejection of a report pursuant to Part 72 Rule 13 (1) (a) to (d), although that discretion must be exercised ‘according to law’: Bermria Pty Ltd v Homebush Abattoir Corporation (1991) 22 NSWLR 600. Where the questions for consideration by the referee are technical questions of fact, as in this case, and the referee is a person of apparent competence and expertise, and the parties have had the opportunity to put all relevant matters before him, the Court will have a disposition towards accepting the referee's report, for to do otherwise would be to negate the purpose and facility of referring complex technical issues to independent experts for inquiry and report: Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; Alcatel Australia Ltd v Scarcella (1998) NSW ConvR para 55-830, p 56,4 96-7; generally, see Ritchie's Supreme Court Procedure , para [72.13.1].
65 However, in the present case the two deficiencies in the report are within a confined compass and the Court is in a good position to assess them. One relates to the application of legal principles to the facts found by the referee, and the other relates to the referee's findings on a matter upon which the principal evidence came from the experts for the parties, who were in agreement on the relevant point. In my opinion the present case falls into the relatively uncommon category of cases where it is appropriate for the Court to disagree with the referee as to a finding of fact, as well as the application of legal principles.
66 I have considered whether the matter should be referred back to the referee for further consideration, in light of the principles enunciated in this judgment. Given the history of this matter, it would be highly undesirable to drag out the dispute more than is necessary. Additionally, the nature of my disagreement with the referee is sufficiently specific that further consideration of the overall case would be pointless. I believe the correct course is for me to substitute my findings on the disputed matters for the findings of the referee.
68 By making orders along the lines of paragraphs 1 and 2 of the defendants' notice of motion, I shall give effect to my findings. The order for adoption of the referee's report should exclude paragraphs 16.7 and 16.8, as sought by the defendants, and also the last sentence of paragraph 16.5, which I have found to be incorrect. I should make it clear that the plaintiff's failure to comply with items 145 or 146 (at its election) of Schedule A to the notice of default dated 31 July 1995 constituted a breach of clause 2 (c) (i) of the Lease. My declaratory order should reflect my findings by making it clear that compliance with item 145 would require disassembling of the windows and treatment off-site.67 My findings are, therefore, as follows. I find that regular maintenance by cleaning would have been a factor reducing the rate of corrosion to the external window frames. It is unnecessary for me to make a finding as to whether the cleaning should have been by high-pressure water blasting or merely washing with detergent and water. It is enough that cleaning of either kind would have reduced the rate of corrosion to some degree. Professor Young's evidence was that reinstatement of the anodised coating was needed, of a kind that required disassembling of the windows and treatment off-site, but a practical and more economical alternative would be to replace the entire window framing structure of the building. Dr Corderoy's evidence amounts to no more than that the existing window frames have performed well and are still functional, although they have degraded the aesthetic appearance of the building. But since both parties take the view that the corrosion of the frames, although perhaps only aesthetic, is a defect warranting repair, their continuing functionality is beside the point. Something must be done by way of repair, to the standard enunciated by Windeyer J, and Professor Young's evidence is the only evidence that addresses the correct question. In my opinion that evidence should be accepted.
69 As originally constructed, the building had sunscreens made from aluminium mesh, outside the glass of the windows. The plaintiff removed them in 1992, because the mesh had become clogged with oxidation and dirt, reducing light penetration and rendering them unsightly and unsuitable for their purpose. In their notice of default dated 31 July 1995 the defendants demanded:
The sunscreens
‘147. Replace missing sunscreen system with removable louvres.
148. ALTERNATIVELY to 147 above, replace glass with solar tinted glass.’70 The order for reference out to Mr Lumsdaine under Part 72, made on 20 August 1996, required him to advise the Court, having regard to the true construction of the repair covenant, which of the items in the notice of default of 31 July 1995 were ‘required to be performed in order to well and substantially repair and keep in good and substantial repair the demised premises and all appurtenances thereto belonging and all additions thereto’.
71 The Court's order required Mr Lumsdaine to decide whether the Lessee was required, at its option, to install louvres or tinted glass. The plaintiff's case before the referee, at the hearing conducted by him on 20 March 2000, was that it had no obligation to introduce a new type of appliance or fitting of the sort demanded by paragraphs 147 and 148 of the notice of default. The plaintiff raised this contention in cross-examination of the defendants' expert. After a short adjournment, counsel for the defendants informed the referee that he was instructed to withdraw, inter alia, items 147 and 148. He said that his clients would issue another notice in respect of those matters, but would not pursue them in the present proceedings. The plaintiff submitted that the referee should still answer the question referred to him by the Court with respect to paragraphs 147 and 148. The referee accepted that he should still do as the Court had required, and so he decided the issue raised by items 147 and 148 in favour of the plaintiff. He said: ‘I accepted the Tenant's contention that it is not obliged to replace a defective element with an element superior to that which was provided in the original building’.
72 On 28 March 2000 the defendants served a new notice of default requiring the plaintiff to ‘reinstate and install the sunshades originally installed and fitted’. The plaintiff seeks to establish that the defendants cannot proceed under such a notice.
73 The plaintiff submits that the defendants were prevented by the Supreme Court Rules from withdrawing the claims made in paragraphs 147 and 148, and that they were estopped from doing so, and that the referee's determination is res judicata preventing the defendants from proceeding with their later notice of default.
74 Part 72 of the Supreme Court Rules authorises the Court to make orders for a reference to a referee appointed by the Court to inquire into and report on any questions arising in the proceedings: Rule 2 (1). Once the report has been made, the Court may adopt, vary or reject it in whole or in part, and must give such judgment or make such order as it thinks fit: Rule 13 (1). Thus the process of commissioning the referee and receiving his or her report is an interlocutory part of the proceedings. However, the process may, and frequently does, lead to adoption of the report and an immediate judgment without a further substantial hearing before the Court, since the purpose of Part 72 is to provide an alternative form of dispute resolution rather than another level in the hierarchy of decision-making: Australian Development Corporation Pty Ltd v White Constructions (ACT) Pty Ltd (NSWSC, Giles J, 14 October 1993, unreported). This is part of the machinery established by the Rules for the ‘just, quick and cheap resolution of the real issues’ in proceedings: see Part 1 Rule 3 (1).
75 Part 21 Rule 2 states that ‘a party making a claim for relief may, before the beginning of the trial or hearing of the proceedings on the claim (but not otherwise), discontinue the proceedings so far as concerns the whole or any part of any claim for relief made by him’, provided that certain conditions are met. The consequence of this provision, as Samuels JA remarked in Flick v Nash (NSWCA, 9 December 1987, unreported), is that once the trial has commenced no discontinuance, by leave or otherwise, is permissible and the action can be disposed of only by judgment. The plaintiff says that once the hearing before the referee commenced, it was too late for the defendants to discontinue their claim in paragraphs 147 and 148 of the notice of default. They point out that no application was made under Part 40 Rule 9 for variation of the order referring questions to Mr Lumsdaine for report.
76 There is room for doubt whether, since the proceedings were a commenced by summons by the plaintiff and there is no cross-claim, the defendants are ‘a party making a claim for relief’ for the purposes of Part 21 Rule 2. But the short answer to the plaintiff's submission is that the hearing before the referee was not the ‘hearing of the proceedings on the claim’ for the purposes of Part 21 Rule 2. Those words refer to the final hearing of the relevant claim before the Court. In the normal course, the referee's hearing will be followed by his or her report, and the report will come before the Court for adoption. At the hearing to consider the report, the Court has a very wide discretion under Part 72 Rule 13, and may permit additional evidence to be adduced with leave. If the report recommends a resolution of the claim and the Court adopts the report, it is likely that the Court will make orders finally disposing of the claim. But the fact that the Court adopts the report does not mean that the hearing before the referee, rather than the hearing for adoption of the referee's report, is to be treated as the hearing of the proceedings on the claim, for the purposes of Part 21 Rule 2.
77 In my opinion, the facts of this case are insufficient to establish any form of estoppel against the defendants, that would prevent them from withdrawing paragraphs 147 and 148 of the notice of default. The plaintiff's answer to paragraphs 147 and 148 appears to have been, at all relevant times, that it had no obligation to do what those paragraphs demanded. It appears, from the transcript of the hearing before the referee, that as soon as this approach was revealed in cross-examination, the defendants withdrew those claims. The facts do not point to any detriment or prejudice to the plaintiff, nor even the adoption of any course of conduct in reliance on the claims. Moreover, the defendants did not represent that they were withdrawing any claim in respect of the sunscreens, but only that they withdrew the specific demands contained in paragraphs 147 and 148 of the notice of default. Indeed, they made it clear that they intended to pursue another claim with respect to the sunscreens.
78 The res judicata claim relies on the well-known decision in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589. In that case one of the defendants to an action for damages in tort, the owner of a crane, failed to raise a contractual claim to an indemnity against its co-defendant, the hirer, whose use of the crane had caused injury to the plaintiff. The proceedings were concluded, final orders being made against the defendants, on the basis that the owner was liable to contribute a portion of the damages. Subsequently the owner commenced separate proceedings seeking to be indemnified by the hirer.
79 In the High Court, Gibbs CJ, Mason and Aickin JJ found that the determination of the earlier proceedings did not give rise to any res judicata that would prevent the owner from bringing subsequent proceedings on the indemnity. The rule as to res judicata comes into operation when a party attempts in the second proceedings to litigate a cause of action which has merged into judgment in the first proceedings. In the case before the Court, the indemnity cause of action had not been litigated in the first proceedings: at 597; see also at 610-11 per Brennan J. Nor was there any issue estoppel in the strict sense, for it was not a necessary step to the decision on the question of contribution to decide that the owner was not entitled to an indemnity; and while the owner could have raised its claim to an indemnity as a defence to the hirer's claim for contribution, he did not do so and consequently the judgment did not decide the indemnity question: at 598.
80 However, their Honours recognised that there were extended principles of res judicata and estoppel arising out of Henderson v Henderson (1843) 3 Hare 100 [67 ER 313], even in cases where the cause of action in the second proceedings has not merged in a judgment (cf Brennan J at 614-5). The extended principle of res judicata is that the parties to litigation will not be permitted to raise a cause of action in new proceedings where the cause of action arises out of the subject matter of proceedings previously before the Court, in which it ought to have been raised but was not, due to negligence, inadvertence or accident. The extended principle of estoppel relates to the circumstances in which the failure to raise a defence in earlier proceedings prevents the defendant from taking new proceedings concerning the same subject matter. An estoppel arises when a party wishes to assert in new proceedings rights so closely connected with the subject matter of previous proceedings that it is to be expected those rights would have been relied upon as a defence in the previous proceedings. In these cases, a useful test is whether the second proceedings, if successful, would result in a judgment declaring rights which are inconsistent with the rights declared in the judgment in the previous proceedings, in respect of the same transaction, whether or not on the same cause of action: at 603-4.
81 This case is well removed from the Anshun case. Here there have been no final orders, only a determination by the referee which has not yet been adopted by the Court. This is not a case of a party failing to raise a relevant issue at the appropriate time, and then subsequently seeking to raise it, but rather it is a case of a party seeking to withdraw a claim before determination. None of the principles laid down by the High Court has any application here.
82 Moreover, even if the referee's report were regarded as a determination capable of giving rise to res judicata or estoppel in the Anshun sense, the referee's decision was only that the defendants were not entitled to insist upon a new product such as louvres or tinted windows. That decision would be consistent with a later claim by the defendants that the plaintiff was obliged to repair the building and its appurtenances by replacing the sunscreens.
83 The plaintiff emphasised in its submissions that the defendants elected to formulate their case about the sunscreens in a specific way. By demanding that particular things be done in the notice of default, and having precise questions referred to the referee, the parties narrowed the issues down to the construction and validity of those specific demands. That, says the plaintiff, was the battleground upon which the case was fought, and the proceedings should be determined on the basis of the outcome of that battle. But the contest before Mr Lumsdaine was not the final battle, since his report would lead to an application for adoption of the report and final orders by the Court. It was not too late for one of the combatants to withdraw some artillery at that stage.
85 Paragraph 15.8 of Mr Lumsdaine's report would have been correct if the claims in items 147 and 148 had been pursued. Given, however, that they have been validly withdrawn, it would be pointless to adopt paragraph 15.8 and I shall not do so. It is equally pointless to adopt Mr Lumsdaine's reasoning for the conclusion in paragraph 15.8, found in paragraphs 15.4 to 15.7 and the last three sentences of paragraph 15.3.84 In the present case the defendants made a written demand requiring that a large number of things be done. They subsequently withdrew two of their demands. I see no reason for preventing them from doing so, or for holding that the balance of the demand was thereby invalidated. Cases concerning notices under s 129 of the Conveyancing Act 1919 (NSW) provide a helpful analogy, regardless of whether the notice of default of 31 July 1995 was a notice under that section. It is established that a notice of default under s 129 may specify more than one alleged default under the lease, but if the notice specifies at least one valid default, it is not invalidated by also containing matters which do not constitute any breach of covenant ( Fox v Jolly [1916] 1 AC 1 at 12, 14-15; Gair v Smith [1964] VR 814; Jolly v Brown [1914] 2 KB 109; Pannell v City of London Brewery Company [1900] 1 Ch 496; Lock v Pearce [1893] 2 Ch 271; Shepherd v Lomas [1963] 1 WLR 962, 967), unless the valid and invalid portions of the notice are inseverable and the effect of the inseverability is to invalidate the entire notice: Guillemard v Silverthorne (1908) 99 LT 584. It follows that if a lessor serves a notice under s 129 and later recognises that something in the notice is incorrect, the lessor may correct the notice without necessarily destroying its validity. In the same way, a demand for an excessive sum of money due is a valid demand for the correct amount actually due: Campbell v Commercial Banking Company of Sydney (1879) 2 LR (NSW) 357; Bunbury Foods Pty Ltd v National Bank of Australasia (1984) 153 CLR 491.
Injunction to restrain further claim
86 As I have mentioned, the plaintiff seeks an injunction to restrain the defendants from taking any action in respect of their fresh notice of default dated 28 March 2000. Since I have found that there is no basis under the Rules or the law of estoppel or res judicata for preventing the defendants from proceeding on their fresh notice, the claim to an injunction on that basis falls away. It is unnecessary for me to comment on whether it would be appropriate to grant a perpetual injunction upon an interlocutory application.
88 Clause 2(o) is in the following terms:87 I should note, however, two other contentions by the plaintiff in support of its claim to an injunction. First, the plaintiff says that it has no obligation under the repair clause by virtue of its removal of the sunscreens. It asserts that under clause 2 (o) of the Lease, the only restriction placed upon it with respect to alterations to the demised premises is that it cannot carry out structural alterations except with consent. Since the sunscreens had no structural significance, it claims that it was free to remove them.
‘That the Lessee will not build or permit or suffer to be built or erected any building on the demised premises or make or permit or suffer to be made any additions or alterations of a structural nature to the demised premises except in accordance with plans elevations sections and specifications previously approved by the Lessor's architect or property consultant for the time being PROVIDED THAT such approval shall not be unreasonably withheld.’
89 The plaintiff says that by removing the sunscreens it made an alteration, which was clearly not a structural alteration, and therefore it was permitted to do so. I agree with the plaintiff that the removal of the sunscreens was the making of an alteration. An alteration is effected when the construction or fabric of the demised premises is altered ( Bickmore v Dimmer [1903] 1 Ch 158), and in the present case the sunscreens were part of the fabric of the building, or at least an appurtenance that was part of the demised premises. I also agree that the alteration constituted by removing the sunscreens was not a structural alteration, as a question of fact in the circumstances of the present case: cf Pearlman v Keeper and Governors of Harrow School [1979] QB 56. It follows that the removal of the sunscreens was not a breach of clause 2 (o). But that does not mean that it was permitted by the Lease.
91 Secondly, the plaintiff submits that unless a repair has the quality of being ‘necessary’ for the purposes of clause 2 (e), which gives the defendants their right to re-enter to conduct repairs, the defendants will not be able to enter the premises and thus, even if there has been a breach of the repair covenant, the defendants are confined to the remedy of damages. This contention would obviously not entitle the plaintiff to an injunction restraining the defendants from pursuing their claim to damages. Further, it misreads clause 2 (e). For the purposes of that clause, repairs ‘necessary’ to be done are repairs that the Lease obliges the Lessee to carry out, expressly or by implication. The clause does not invite some extraneous assessment of the need to carry out the work for functional reasons.90 Clause 2(c)(i) obliged the Lessee to keep in good and substantial repair ‘the demised premises and appurtenances thereto belonging and all additions thereto ...’. The sunscreens were an appurtenance belonging to the demised premises or an addition to the premises, for the purposes of this provision. The obligation of the Lessee, therefore, was to keep the sunscreens in good and substantial repair. In Graham v Markets Hotel Pty Ltd (1943) 67 CLR 567, a tenant was held liable for the cost of installing a new lavatory to replace the one that it had removed, together with consequential alterations to the premises to obtain the requisite statutory approvals. The obligation to repair was, in that case, held to require replacement of something removed by the tenant. Similarly here, the obligation imposed upon the Lessee by clause 2 (c) (i) requires it to replace the sunscreens that it removed. They must be replaced with a comparable product, if the original sunscreens cannot be re-installed in good condition.
The minor items in the report
92 Mr Lumsdaine inspected the demised premises with two experts, one retained by each party. He obtained a joint report from the experts, noting the matters upon which they agreed, and noting their views where they differed. Agreement was reached on the majority of the items in Schedule A of the notice of default dated 31 July 1995. In paragraph 12 of his report, Mr Lumsdaine adopted the conclusions reached jointly by the experts, and in paragraph 13 he set out the relevant findings.
93 In its notice of motion the plaintiff seeks a declaration that on the true construction of the Lease, it is required to carry out the work specified in various paragraphs of the notice of default. The list does not include paragraphs 5, 18 and 19. In respect of each of those paragraphs, the notice of default required certain work to be done, but paragraph 13 of Mr Lumsdaine's report advocated only more minor work. Thus, item 5 required replacement of certain doors, but Mr Lumsdaine said that replacement of the doors was not warranted, and that damage to the doors should be corrected in specified ways. Paragraphs 18 and 19 required that an engineer be retained to investigate a certain matter, but Mr Lumsdaine said it was unnecessary to retain an engineer provided that certain specified work was done.
95 Nothing before me suggests that the referee's recommendations on these items are unreasonable. His report implies that the experts retained by the parties agreed that this work should be done. Mr Lumsdaine's recommendations fall within the concept of repairs for the purposes of clause 2 (c) (i) of the Lease. Under Part 72 Rule 13 (1) (d) I have the power to decide any matter on the evidence taken before the referee, and to make an order accordingly. In the interests of removing items, admitted by the plaintiff to be trivial, from the realm of disputation, I shall declare that the plaintiff is required to carry out the work specified against items 5, 18 and 19 in paragraph 13 of Mr Lumsdaine's report.94 The defendants say that Mr Lumsdaine's recommendations with respect to paragraphs 5, 18 and 19 should be included in the list of things that the plaintiff must do. The plaintiff says that the only question for the referee, and therefore the Court, is whether it is required by the Lease to do the things specified in the notice of default. The referee has found that the work specified in items 5, 18 and 19 in the notice of default is not required. Although these items are relatively trifling matters, the plaintiff says there is no basis for an order requiring it to implement the referee's recommendations.
Conclusions
96 On the plaintiff's notice of motion, I shall not make an order in terms of paragraph 1 (which seeks adoption of Mr Lumsdaine's report with the sole exception of paragraph 16.8), since I intend to make the more qualified order sought by the defendants. I shall make an order in terms of paragraph 2, dealing with the plaintiff's obligations with respect to uncontested items, but adding the matters specified adjacent to items 5, 18 and 19 in paragraph 13 of Mr Lumsdaine's report. I shall not grant the injunction with respect to the sunscreens sought in paragraph 4. As to paragraphs 5 and 6, dealing with the question of construction of the rent review clause, I shall make a declaration of the kind outlined in these reasons for judgment.
98 I shall direct counsel for the defendants to bring in short minutes of the appropriate orders. I shall stand the matter over for the purpose of hearing argument as to costs, and for the making of orders.97 On the defendants' notice of motion, I am prepared to make an order in terms of paragraph 1 (that the Court adopt the report of the referee except for the last three sentences of paragraph 15.3, and paragraphs 15.4 to 15.8, 16.7 and 16.8), although it seems to me that I should exclude the last sentence of paragraph 16.5 as well. I shall make a declaration in terms of paragraph 2, that the plaintiff's failure to comply with items 145 or (in the alternative) 146 constituted a breach of clause 2 (c) (i), adding words to make it clear that I accept Professor Young's evidence that disassembly and removal are required.
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