American Home Assurance Co v Grimes George Street Garage Pty Ltd

[2007] NSWSC 1400

CITATION:	American Home Assurance Co v Grimes George Street Garage Pty Ltd [2007] NSWSC 1400
HEARING DATE(S):	25/06/2007
JUDGMENT DATE :	7 December 2007
JUDGMENT OF:	Howie J at 1
DECISION:	Judgment for the defendant. The plaintiff is to pay the defendant's costs.
CATCHWORDS:	Landlord and Tenant - Rent - Date upon which increase in rent is payable.
CASES CITED:	Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1981) 149 CLR 337 Investors Compensation Scheme Ltd v Westbromidge Building Society (1998) 1 All ER 98 Joint Coal Board v Nonne Pty Ltd (1984) 3 BRP [97207] CH Bailey v Memorail Enterprises [1974] 1 All ER 1003
PARTIES:	American Home Assurance Co v Grimes George Street Garage Pty Ltd
FILE NUMBER(S):	SC 2006/13515
COUNSEL:	D Murr SC - Plaintiff S G Finch SC/T L Wong - Defendant
SOLICITORS:	Minter Ellison Lawyers - Plaintiff Freehills Solicitors - Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

HOWIE J

FRIDAY 7 DECEMBER 2007

2006/13515 AMERICAN HOME ASSURANCE CO
v GRIMES GEORGE STREET GARAGE
PTY LTD

JUDGMENT

1 HIS HONOUR: By statement of claim the plaintiff seeks payment of what it alleges are outstanding payments of rent for premises in George Street Sydney that the defendant leased as a garage. The period over which it is alleged that there was a shortfall in rent payments was from 22 February 2002 to 25 May 2006. Over that period the defendant paid the plaintiff rent at the rate of $450,000 per annum whereas the plaintiff claims that the proper rent was $637,500 per annum. The plaintiff calculates the shortfall between the rent paid and what it submits was the amount to be paid under the terms of the contract as $798,891.13 and seeks an order for the payment of that amount and interest.

2 The issue before the Court is to be resolved by the proper construction of the terms of the lease agreements to determine the date upon which any adjustment of the annual rent applies. The plaintiff contends that, once the adjustment had been determined, the adjusted rent ran from the commencement of the renewed lease (the retrospective approach). The defendant contends that the adjusted rent ran only from the date of its determination (the prospective approach).

The history of the dispute

3 The premises were originally owned by Colonial Mutual Life Assurance Society Ltd and leased to Commercial Union Properties Pty Limited. The premises were sub-leased in part to the defendant for use as a car park. This lease was for a period of ten years from 22 February 1982 with an option to renew for a further term of ten years. This is lease T286947 (“the head lease”).

4 The relevant provisions relating to the determination of rent are contained in Clause 13 of the head lease. Clause 13(i) provided the amount and frequency of payment of the annual rent. Clause 13(ii) contained a rent review provision to the effect that, upon the exercise of the lessee’s option to renew the lease, the lessor was entitled to increase the annual rent payable by the lessee to a rate determined to be the “current market rent”. Clause 13 (iii) of the head lease contained a dispute resolution clause that provided a mechanism for resolving disputes between the lessor and lessee regarding the determination of the “current market rent”.

5 During the term of this lease the property was transferred to Permanent Trustee Australia Limited. The property was leased to the defendant for a further period of ten years from 22 February 1992. This is lease U767721 (“the second lease”). It came into being as a result of the defendant exercising an option provided in the head lease on 25 August 1994. Within the term of this lease, in January 1995, the plaintiff purchased the premises.

6 The defendant exercised an option under the second lease to renew on 25 October 2001.

7 On 19 December 2001 the plaintiff informed the defendant that, in accordance with Clause 13(ii) of the second lease, being similar to that in the head lease, the plaintiff had undertaken a rent review establishing the current market rent at $1.25 m per annum and that this rent would be payable by the defendant at the commencement of the third lease. On 21 February 2002 the second lease expired.

8 As a result of the option to renew being taken up by the defendant there was a further lease between the parties, being Lease 9863572J, the current lease (“the third lease”). It is for a term of ten years from 22 February 2002. The defendant continued to pay rent, as set by Clause 13(i) of the second lease, at the rate of $450,000 per annum.

9 On 29 April 2002 the defendant informed the plaintiff that it would continue to deal with the plaintiff on the basis that “the rent review process had been triggered”.

10 On 24 July 2003 the defendant entered into the third lease. The defendant continued to pay rent at the rate of $450,000 per annum. In the meantime valuers were appointed by the plaintiff and defendant to determine the adjusted rent to be paid. A dispute between them was resolved on 15 July 2005 with an agreement reached as to the appointment of a third valuer to determine points of difference between the parties.

11 On 25 May 2006 a determination was made that the current market rent as at 22 February 2002 was to be $637,500 per annum. On that date the defendant commenced paying rent at the rate of $53,125 per month.

12 On 10 July 2006 the plaintiff claimed from the defendant arrears of rent for the period 22 February 2002, the date of the commencement of the third lease, to 25 May 2006, the date of the determination of the current market rent.

13 Each party relies upon the terms of Clause 13 of the head lease as incorporated into the two subsequent leases to found their particular contentions. Each says that the terms are unambiguously in its favour, even though there was a concession on behalf of the plaintiff that the relevant provisions were poorly drafted. However, the defendant does rely upon some material as part of the surrounding circumstances to the parties entering the lease in case the Court were of the opinion that the terms presented some ambiguity: see Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1981) 149 CLR 337. It concedes, however, that the documents need to be approached with caution. The plaintiff objected to the documents on the basis that they could not be used in the construction of the relevant clause and relied in particular upon the judgment of Lord Hoffman in Investors Compensation Scheme Ltd v Westbromidge Building Society [1998] 1 All ER 98 at 114 and Mason J in Codelfa at 352. However, on the basis that I might use the defendant’s documents the plaintiff tendered one in reply.

The relevant lease provisions
The head lease (1982)

14 Both the second and third leases incorporated with amendments the terms of the head lease. Many of the amendments were of a formal nature in correction of obvious errors or the change of names of relevant institutions. The option provision in the head lease was contained in clause 14. It relevantly provided:

It is further agreed and declared that the Lessor and/or the Lessee shall have an option exercisable in writing at least three months prior to the expiration of the said term to a renewal of the said Lease for a further term of 10 (ten) years at the rental to be determined in accordance with Clause 13 hereof and such further lease for the said further term shall be subject to the same covenants and conditions as are herein contained including this present covenant …………..

15 Clause 13(i) of the head lease provided for the payment of rent and was as follows:

The rent payable by the Lessee to the Lessor for the term hereof shall subject to the provisions hereof be an annual rental of Two hundred thousand dollars ($200,000.00) payable by equal calendar monthly instalments of Sixteen thousand six hundred and sixty six dollars sixty six cents ($16,666.66) each in advance payable on the twenty second day of each calendar month whereof the first shall be payable on the twenty second day of February, 1982.

16 Clause 13(ii) of that lease provided for review of the rent and was as follows:

The Lessor or the Lessee may by notice in writing given not less than two (2) calendar months from the expiration of the term hereof or of any renewal or extension hereof, by notice in writing given to the other of them increase or reduce (subject to the provisions hereof) the annual rent to an amount which would at such time be the current market rent of the demised premises as between a willing landlord and a willing tenant and any other matter relevant to the determination of such rent and the amount so determined shall be the annual rent thereafter payable by the Lessee PROVIDED THAT the rental so payable by the Lessee shall never be less than the annual rent payable immediately prior to the date of review.

Notwithstanding that the clause purports to permit the lessor to reduce the rent, the proviso would prevent such an unlikely course. On its face the clause provides that the new rent will apply from the time notice is given of the increase.

17 Clause 13(iii) of that lease provided for the mechanism of the resolution of any dispute as to what was “the current market rent”. It was as follows:

Any dispute between the Lessor and the Lessee as to such current market rent shall be determined by two Valuers of the Commonwealth Institute of Valuers one appointed by the Lessor and one appointed by the Lessee and the said Valuers shall determine such annual rent which rent the Lessor and the Lessee hereby agree shall never be less than the annual rent payable at the commencement hereof together with such increases as may have been made pursuant to any provision in this Lease other than sub-clause (ii) hereof and this sub-clause. In the event of the Lessor or Lessee failing to appoint a Valuer the President of the Real Estate Institute or his nominee shall be appointed as the Valuer concerned and if the two Valuers cannot agree a third valuer of the Commonwealth Institute of Valuers so qualified shall be appointed by the two Valuers and subject as aforesaid the decision of the two Valuers and of a third Valuer if any as to any such points of difference shall be binding on both the Lessor and the Lessee and the costs incurred in the valuations and determinations of the annual rent shall be borne by the unsuccessful party or if both parties be partially successful then in proportion to the extent of their respective successes.

The second lease (1992)

18 This lease on its face adopted the provisions of the head lease so far as there was no inconsistency between the head lease and the second lease. If there were any inconsistency the terms of the second lease were to prevail. There were, however, a number of amendments to the provisions of the head lease one being a new clause 13(i) which was as follows:

The rent payable by the Lessee to the Lessor for the term of this Lease shall, subject to the provisions of this Lease, be an annual rental of FOUR HUNDRED AND FIFTY THOUSAND DOLLARS ($450,000.00) payable by equal calendar monthly instalments of THIRTY SEVEN THOUSAND FIVE HUNDRED DOLLARS ($37,500.00) each in advance on the TWENTY SECOND (22nd) day of each calendar month. The first instalment shall be payable on 22 February 1992.

19 This lease also contained a provision found in Clause 9 of the Annexure to the lease being as follows:

9. Amortisation of back rent
(a) The parties acknowledge that in the period from 22 February 1992 to the date of this Lease the Lessee paid rent at the interim rate of $200,000.00 per annum pending determination of the annual rent in accordance with clause 13 of the Previous Lease.
(b) In this clause, “Back Rent” means the back rent for the first 2 years of the Lease, namely $500,000.00
(c) On or by 15 March 1994, the Lessee must pay to the Lessor ONE HALF (1/2) of the Back Rent, namely $250,000.00.
(d) The other HALF (1/2) of the Back Rent must be amortised over the term of the Lease from and including 22 February 1994. Any adjustments to the monthly instalments of rent for February and March 1994 shall be paid by the Lessee at the time the next instalment of annual rent is due.
(e) The Lessor release the Lessee in relation to any other claim that the Lessor may have had against the Lessee in respect of payment of the Back Rent (including any claim for interest on arrears).
(f) This clause will not be contained in any further lease.

The third and current lease (2002)

20 Again on its face this lease incorporated the provisions of the head lease to the extent they were not inconsistent with the specific terms of the third lease. There were amendments to the head lease including a new clause 13(i) as follows:

The rent payable by the Lessee to the Lessor for the term of this Lease shall, subject to the provisions of this Lease, be an annual rental payable by equal calendar monthly instalments of one-twelfth of the annual rental each in advance on the 22nd day of each calendar month, with the first instalment payable on Commencing Date of this Lease. If the annual rent under this Lease is not the subject of a current market rent review (pursuant to a prior lease giving rise to this Lease) or is subject of such a rent review which is not determined at the Commencing Date of this Lease, then until determination of the annual rent the Lessee shall pay the annual rental payable under clauses 13(i), (ii) or (iii) as appropriate, of the Lease of the demised premises existing immediately prior to this Lease.

21 This clause of course is to be read in the context of the clauses that notionally follow it and are derived from the original lease with amendments. They are as follows:

Clause 13(ii)
The Lessor or the Lessee may by notice in writing given not less than two (2) calendar months from the expiration of the term hereof or of any renewal or extension hereof, by notice in writing given to the other of them increase or reduce (subject to the provisions hereof) the annual rent to an amount which would at such time be the current market rent of the demised premises as between a willing landlord and a willing tenant and any other matter relevant to the determination of such rent and the amount so determined shall be the annual rent thereafter payable by the Lessee PROVIDED THAT the rental so payable by the Lessee shall never be less than the annual rent payable immediately prior to the date of review.
Clause 13(iii)
Any dispute between the Lessor and the Lessee as to such current market rent shall be determined by two Valuers of the Australian Property Institute Inc. New South Wales Division one appointed by the Lessor and one appointed by the Lessee and the said Valuers shall determine such annual rent which rent the Lessor and the Lessee hereby agree shall never be less than the annual rent payable immediately prior to the date of review. In the event of the Lessor or Lessee failing to appoint a Valuer the President of the Australian Property Institute Inc. New South Wales Division or his nominee shall be appointed as the Valuer concerned and if the two Valuers cannot agree a third valuer of the Australian Property Institute Inc. New South Wales Division so qualified shall be appointed by the two Valuers and subject as aforesaid the decision of the two Valuers and of a third Valuer if any as to any such points of difference shall be binding on both the Lessor and the Lessee and the costs incurred in the valuations and determinations of the annual rent shall be borne by the unsuccessful party or if both parties be partially successful then in proportion to the extent of their respective successes.
Clause 14
It is further agreed and declared that the Lessor and/or the Lessee shall have an option exercisable in writing at least three months prior to the expiration of the said term to a renewal of the said Lease for a further term of 10 (ten) years less 7 days at the rental to be determined in accordance with Clause 13 hereof and such further lease for the said further term shall be subject to the same covenants and conditions as are herein contained excluding this present covenant PROVIDED FURTHER that the Lessee shall have duly and diligently paid the rental hereby reserved and duly performed and observed the covenants and agreements by and on the Lessee’s part herein contained or implied except so far as the performance or observance of the same shall have been waived by the Lessor.

The plaintiff’s argument

22 The plaintiff notes that the rent review that was operative at the time the third lease was entered into was initiated under the provisions of the second lease and therefore the applicable provision was clause 13 as set out in the second lease subject to specific amendment in the third lease. Under clause 13(i) the rent payable was an annual rent paid by monthly instalments.

23 It contends that the rent payable is determined initially by the amount specified in the notice issued by the lessor under clause 13(ii). If there were no dispute to be resolved as to the amount of the rent equal to “the current market rent”, there could be no question but the adjusted rent would be payable from the receipt of the notice. The “thereafter” in clause 13(ii) refers to the date of the issuing of the notice.

24 If there is a dispute, then the provisions of clause 13(iii) apply to resolve it but that would merely delay the ascertainment of the adjusted rent to be paid. Reference is made to the determination of “such current market rent” in clause 13(iii) which is a reference back to the “annual rent” in clause 13(ii). But when that dispute is resolved so that the annual rent is determined, the payment of the adjusted rent is due from the date of the notice. There is nothing in clause 13(iii) that provides for any date for the payment of the adjusted rent other than the date of the issuing of the notice under clause 13(ii).

25 Where there has been a new lease entered into after the date of the notice given under clause 13(ii) the “thereafter” in that clause continues to apply and should be construed as referring to the date of the new lease. Clauses 13(ii) and 13(iii) continue to apply to the new lease so that, if there is a continuing dispute as to the adjusted rent, the dispute resolution mechanism applies notwithstanding the entry into a new lease.

26 Therefore, clause 13(i) in the third (current) lease operates so that, as the annual rent was subject to a rent review under provisions of the second lease, the defendant was to pay the annual rent under the second lease until the adjusted rent was determined as an interim payment. This is the purpose of clause 13(i) in the third lease, and as the adjusted rent can never be less than that which was in existence, the adjusted rent must be at least the existing annual rent.

27 If the rent was not retrospective, the lessee could secure an economic advantage by delaying for as long as possible the resolution of the dispute thereby delaying the payment of the increased rent which is, after all, the amount equivalent to the marketable rent at the time of the issuing of the notice.

28 Reliance was placed upon the similarity of the clauses being construed in CH Bailey v Memorial Enterprises [1974] 1 All ER 1003.

The defendant’s argument

29 A consideration of the leases over the period shows that the concept of backdating rent was foreign to the relationship between the parties.

30 The words of clause 13(i) are clear: the existing rent is payable until an existing rent review under clause 13(iii) is determined; that is until the dispute is resolved. Only from that point is the higher rent payable. There is no reference in the clause to payments being made on an interim basis.

31 The existing clauses should be compared with those construed in Joint Coal Board v Nonne Pty Ltd (1984) 3 BRP [97207] which specifically stated when the increased rent was to take effect so providing for the backdating of increased rental payments. The clauses of the lease should also be compared with that considered in CH Bailey v Memorial Enterprises where the date upon which the increased rent was to apply was stated in terms that indicated an intention that the increased rent should apply from the date of the lease notwithstanding that it was determined after the lease had commenced.

32 The second lease provided for back rent in clause 9, a provision that did not apply to the third (current) Lease.

33 A proper reading of clause 13(ii) indicates that the word “thereafter” applies not to the date upon which notice is given of the increase in rent but to “the amount so determined”. That is the amount so determined by resolution of any dispute between the parties. Clause 13(ii) only fixes the date of determination to the date of the issuing of the notice if there is no dispute between the parties as to the appropriate rent.

34 This interpretation is commercially appropriate. There would be no uncertainty for either party if the payment of the increase in rent was not due until after that increase had been determined. The lessee had to take into account rent as part of its overheads and needs to have certainty as to what it was. If the plaintiff were correct, the lessee would have to structure its finances to take into account the increased rent sought by the lessor even though it might not be anywhere near the amount ultimately determined. Commercial uncertainty for the lessee accompanies a prolonged dispute resolution process as much as it does the lessor.

Decision

35 It seems to me that the arguments of the defendant should prevail. The terms of the original clause 13(ii) appear to me to be instructive, if not decisive, of the meaning of clause 13(i) in the third lease conveyed by the words used in that clause.

36 Clause 13(ii) in the head lease speaks of a “determination”. On the plaintiff’s reading of the clause “the determination” of the adjusted rent must be the giving of the notice regardless of the attitude of the lessee to the amount stated in the notice. In the present case the amount stated was not in fact the “current market rent” but an amount significantly greater than that determined by the dispute resolution procedures. I do not understand how the serving of a notice purporting to state the “current market rent” but not in fact doing so, can amount to a determination of the “current market rent” for the purposes of clause 13(ii) where it is not accepted as such by the lessee.

37 This seems to me to be the plain reading of the clauses of what was a commercial lease that the parties entered into with the assistance of legal advice and in light of the history of the leases in which they had been involved in respect of the same property. The reading preferred by the plaintiff does not in my opinion fit comfortably with the words used and requires the addition or substitution of words from those actually used. There is a necessity to infer or presume the concept of an interim arrangement or provisional rent that is not apparent from a plain reading of the provisions. It would substitute the words “the amount so notified” for the words of clause 13(ii), “amount so determined”.

38 I concede that initially I was persuaded by the force of the argument of the plaintiff that its reading of the provisions make more commercial sense than that proposed by the defendant. But that argument gave way to the wording of the clause in light of the history of the leases. The defendant’s reading does not deprive the date of the notice of serving any purpose. It provides the date to which the determination of the “current market rent” relates. It may be that the plaintiff finds itself in a difficult situation by being unable to advance the dispute resolution procedures but that is a result of the drafting of those provisions. On the other hand I accept that there is no reason for the lessor to unduly delay the determination of the dispute over the adjusted rent, as it can never be lower than it was at the outset of the lease.

39 There is no reference in the current lease to the terms “interim payments”, “back rent” or the like. Yet clause 9 of the second lease dealt with back rent. True it might have been, as the plaintiff contends, a once only provision intended to meet a particular situation but an acceptance of the plaintiff’s submissions would, so it seems to me, achieve much the same result but without the benefit to the defendant of such a provision.

Order

40 I enter judgment for the defendant. The plaintiff is to pay the defendant’s costs.

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