Caltex v Agtan

IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL COURT

Not Restricted

S CI 2015 4869

CALTEX AUSTRALIA PETROLEUM PTY LTD (ACN 000 032 128)	Plaintiff
v
AGTAN PTY LTD (ACN 007 410 077)	Defendant

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JUDGE:	DIGBY J
WHERE HELD:	Melbourne
DATE OF HEARING:	14 and 16 June 2016
DATE OF JUDGMENT:	3 October 2017
CASE MAY BE CITED AS:	Caltex v Agtan
MEDIUM NEUTRAL CITATION:	[2017] VSC 593

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CONTRACT – Construction of lease provisions – Construction of lease repair covenant – Renewal of lease pursuant to option to renew – Creation of new lease upon exercise of option to renew – Terms incorporated from original lease – Effect of deed of renewal – Date of commencement of lease – ‘Fair wear and tear’ exception in lease – Obligation to ‘keep and maintain’ – Obligation to effect repairs ‘as necessary’ – ‘Good and tenantable repair’ – ‘Good and efficient working order’ – Relief against forfeiture – Damages.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Borsky with Mr T Maxwell	Sparke Helmore
For the Defendant	Mr S Horgan QC with Mr G Kozminsky	Corrs Chambers Westgarth

HIS HONOUR:

Background

The plaintiff (Caltex) has since 1999 carried on a franchised petrol service station business from premises in Canterbury Road, Kilsyth (the Demised Premises). The lease provides for a 10 year term, with 2 options for a further 5 years. Caltex occupies the Demised Premises as lessee, pursuant to a current lease from the lessor Agtan Pty Ltd commencing 1 September 2014 (the Current Lease). The Current Lease is due to expire in 2019.

Caltex is threatened with eviction by the defendant (Agtan),[1] its current landlord since 2012. Agtan is a company related to United Petroleum Pty Ltd.[2]
[1]Witness statement of Fiona Margaret Garvey, 23 November 2015 (Garvey Statement), [9] and the Contract of Sale dated 22 and 23 May 2012 (CB3.602-625).
[2]The defendant and United Petroleum Pty Ltd have a common Director and Secretary and a common Registered Office and principal place of business: see Affidavit of Timothy Robert Castle, 15 September 2015 (Castle Affidavit), [6] and [7], and Exhibit TRC1 (CB2.100-108). See also Garvey Statement, [5], [7] and Exhibit FMG-1 (CB2.143-158).

On or about 29 September 1999, Caltex as lessee entered into a ten-year lease of the Demised Premises with Lochmullan Pty Ltd as lessor (Original Lease). On or about 1 September 2009, before the Original Lease expired, Caltex exercised its option to renew the lease for a further 5 years pursuant to clause 36.1 of the Original Lease, and entered into a lease of the Demised Premises with the successors in title to Lochmullan Pty Ltd, Ernest James Conyer and Marlene Loris Conyer (the Conyers), as lessors (2009 Lease). The 2009 Lease was for the period 1 September 2009 to 31 August 2014, inclusive.

There are six underground steel storage tanks at the Demised Premises, each with a design life of 20-30 years. These storage tanks were installed in 1988. On 14 October 2011, one of these tanks (Tank 2) was decommissioned because water was leaking into that tank.

The decision to decommission Tank 2 and leave it in the ground was taken by Caltex because it was considered to be difficult to remove the tank without adversely affecting the other tanks and to be dangerous to repair the faulty storage tank, and also because in Caltex’s opinion the fuel station could continue to operate efficiently with only five of six tanks in commission.

Pursuant to clause 2.2 of the 2009 Deed of Renewal and Variation of Lease, the covenants and obligations were identical to those contained in the Original Lease, and the covenants and obligations incorporated the Original Lease into the 2009 Deed of Renewal and Variation of Lease, except that under the Deed of Renewal and Variation of Lease the Term of the lease was set as five years commencing on 1 September 2009, the rent was set at $240,000 per annum, and clause 36.1 of the Original Lease was amended as set out below.

The 2009 Lease between Caltex and the Conyers contains the following relevant covenants incorporated from the Original Lease. These covenants are also incorporated into the Current Lease by the terms of the Deed of Renewal agreed by Caltex and Agtan and dated 7 August 2015:[3]
[3]Current Lease Covenants: CB2.191 and CB2.179 and Deed of Renewal (refer clauses 3.1, 3.2 and 4.1).

(a) Clause 1.1 defines

The ‘Tank System’ as the underground storage tanks and the product pipes from such tanks to the product pump locations but does not include the liquified petroleum gas equipment.
“Demised Premises” as the Land in Certificate of title Volume 10027 Folio 247 “the Land” and the Building demised by the Lease and includes all fixtures fittings furnishing plant machinery and equipment now or hereafter installed by the Lessor situate at 92-94 Canterbury Road, Kilsyth.

(b) Clause 4.1, which provides:

The Lessee paying the rent hereby reserved and duly and punctually observing and performing the covenants obligations and provisions in this Lease on the part of the Lessee to be observed and performed shall and may peaceably possess and enjoy the Premises for the Term hereby granted without any interruption or disturbance from the Lessor or any other person or persons lawfully claiming from or under the Lessor.

(c) Clause 10.1, which provides:

The Lessee will duly observe comply with fulfil and carry out the provisions and requirements for the time being of the Local Government Act, the Health Act, the Factories and Shops Act, and all other Acts, federal or state, the provisions whereof shall have effect in relation to the Demised Premises or the use thereof and all orders regulations rules by-laws orders-in-council ordinances and other subordinate legislation under any such acts and every modifications amendment or re-enactment thereof and the provisions and requirements of all municipal city health fire brigade and other statutory authorities and bodies affecting the Demised Premises during the Term or any extension or renewal thereof but nothing herein contained shall impose on the Lessee any liability to effect or pay for any structural alterations improvements or additions or structural repairs to the Demised Premises or any part thereof or to erect new additional or substantial sanitary conveniences except that the Lessee shall be liable to effect or pay for any structural alterations improvements or additions or structural repairs to the Tank System, Car Wash and Liquefied Petroleum Gas Equipment, the fittings fixtures or erections of the Lessee or as may be occasioned by virtue of the particular nature of the business of the Lessee or the manner or method of carrying on such business or the number and sex of the persons employed therein. Notwithstanding anything herein contained the Lessee shall comply with insurance sprinkler and fire alarm regulations in relation to the Demised Premises and the Lessee shall pay to the Lessor the cost of any installation of or alteration to the sprinkler or fire alarm equipment which may become necessary by reason of the non-compliance by the Lessee with those regulations or the requirements of the Lessor’s insurer.

(d) Clause 19.1, which provides:

The Lessee shall at its own expense keep and maintain the Demised Premises and appurtenances in good and tenantable repair and good and efficient working order and condition having regard to their condition as at the date of commencement of the Lease (fair wear and tear and damage by fire, storm, flood, earthquake, tempest, act of God, riots, civil commotions or act fo [sic] war and without any neglect or default on the part of the Lessee alone excepted) and shall effect repairs to the Demised Premises and appurtenances as necessary including the replacement of all worn or defective parts PROVIDED THAT nothing shall oblige the Lessee to effect structural works except structural works to and replacement of the Tank System, Liquefied Petroleum Gas Equipment and car wash or where the need for such works arises out of the neglect or default of the Lessee or the use of the Demised Premises by the Lessee.

(e) Clause 19.2, which provides:

Notwithstanding the foregoing the Lessor shall maintain the Demised Premises other than the Tank System, Car Wash and Liquefied Petroleum Gas equipment in a structurally sound and watertight condition during the Term of this Lease but shall not be responsible for any structural unsoundness or water penetration caused and/or contributed to by the action or inaction of the Lessee, its agents, servants, licensees or invitees.

(f) Clause 25.1, which provides:

The Lessee having paid all rent payable hereunder and observing all the covenants and agreements on the part f [sic] the Lessee herein contained or implied may at the end or sooner determination of this Lease remove all the property of the Lessee and all trade or tenant’s fixtures and fittings (which term is expressly declared to include internal partitions electric light fixtures and fittings installed by the Lessee with the consent of the Lessor but not the Tank System, Car Wash or structural alterations or additions or any toilets installed by the Lessee) erected or installed by the Lessee provided that such removal can be effected without causing any substantial or irreparable damage to the Demised Premises and the Lessee hereby covenants to make good all damage to the Demised Premises to the reasonable satisfaction of the Lessor or to the fixtures and fittings of the Lessor which shall be caused by reason of the erection installation or removal of such fixtures and fittings provided always that any such fixtures and fittings not so removed shall become the property of the Lessor.

(g) Clause 27.1, which provides:

It is expressly agreed by and between the Lessor and the Lessee that the covenants contained in Parts 2.0, 5.0, 6.0, 10.0, 15.0, 16.0, 19.0 and 20.0 constitute essential conditions of this Lease and the Lessor shall be entitled in addition to all other remedies which may otherwise be available to or exercised by the Lessor at the option of the Lessor and notwithstanding any prior waiver of such right to treat any breach or default by the Lessee in the due and punctual performance thereof which shall continue for thirty (30) days as repudiation of this Lease and notwithstanding that the Lessor shall have accepted such repudiation and re-entered into possession of the Demised Premises the Lessor shall be entitled to use for and recover as loss and damage flowing from such breach or default the Rent and other moneys payable by the Lessee for the whole of the balance of the Term current at the time of such repudiation except to the extent to which such loss and damage has been or should have been mitigated by the Lessor (in addition to any other loss and damage flowing from such breach or default and subsequent re-entry by the Lessor whether in respect of the period prior to or subsequent to the date of re-entry).

(h) Clause 30.1, which provides:

The lessor and the Lessee herby agree and declare that if the whole or any part of the Demised Premises shall be destroyed or damaged by fire, flood, lightning, storm, tempest or other disabling cause so as to render the Demised Premises during the Term substantially unfit for use as a petrol filling station and/or convenience shop then:
(a)upon the happening of any such damage or destruction as aforesaid and provided that the Demised Premises are unfit for the said use by reason of such destruction or damage the annual rent hereby reserved and the Lessee’s obligations under Clause 6 hereof or proportionate part thereof according to the nature and extent of the damage sustained shall abate, and all or any remedies for the recovery of such rent or moneys or such proportionate part thereof shall be suspended until the Demised Premises shall have been rebuilt or reinstated or made fit for the use of the Lessee or until the Lease shall be terminated pursuant to the provisions of sub-clause (c) of this Clause as the case may be PROVIDED THAT the abatement of rent as aforesaid shall not apply in case of destruction or damage caused by the wilful or negligent act or omission of the Lessee or any clerk, servant, invitee, workman, employee, client, agent, customer or visitor of the Lessee or any other persons under the control of the Lessee or where any insurance moneys are or become irrecoverable by reason of any such act or omission;
(b)within one (1) month thereafter either party may give written notice to the other of its intention to make good such destruction or damage and provided the work of making good such destruction or damage has in fact genuinely commenced within six months of the date upon which such destruction or damage took place, the party to whom such notice is given shall apply all insurance moneys received by it for such destruction or damage towards making good such destruction or damage PROVIDED HOWEVER that the party to whom such notice is given shall only be obliged to apply the insurance moneys as aforesaid if it is satisfied that the reinstatement or replacement of the Demised Premises has reached such a state that the application of the insurance moneys will enable the making good of the destruction or damage to be completed not later than twelve months before the expiration of the Term or any renewal thereof;
(c)in the event that a notice under sub-clause (b) of this Clause is not given within the period specified or the work of making good such destruction or damage has not in fact genuinely commenced within the period specified this Lease may be terminated without compensation by either party given written notice to the other part [sic] but any such termination as aforesaid shall be without prejudice to the rights of either party in respect of any antecedent breach, matter or thing;
(d)any dispute or difference as to the application of this Clause shall be referred for determination by an arbitrator appointed under the Commercial Arbitration Act 1984. In any proceedings in relation thereto, the parties reserve the right to have legal or other representation;
(e)nothing herein contained or implied shall be deemed to impose any obligation upon the Lessor to rebuild or reinstate the Demised Premises or to make the same fit for use and occupation of the Lessee.

(i) Clause 32.1, which provides:

No waiver by the Lessor of any breach or non-observance by the Lessee of any of the covenants conditions and agreements herein contained on the part of the Lessee to be observed or performed shall be or be construed to be a general or continuing waiver.

(j) Clause 36.1, which conferred on Caltex an option to renew the 2009 Lease for a further five-year term, and as amended in accordance with clause 2.2 of the 2009 Deed of Renewal and Variation of Lease, provides as follows:

The Lessor and the Lessee agree that the Lessor shall upon the written request of the Lessee delivered to the Lessor not more than six (6) calendar months nor less than three (3) calendar months prior to the expiration of the Term PROVIDED THAT during the said Term the Lessee has not been regularly late in paying the Rent hereby reserved and all other moneys payable hereunder and has duly performed and observed all of the covenants, terms, conditions and stipulation herein contained and on the part of the Lessee to be performed and observed renew this Lease (‘the Renewed Lease’) for a further term of five (5) years from the expiration of the Term hereby granted at the cost of the Lessee PROVIDED ALWAYS that the rent during the second, third, fourth and fifth years of such further term shall be calculated in accordance with the provisions of clause 36.2 hereof. The rental at the commencement of the further term shall be a rental to be agreed upon between the Lessor and the Lessee and failing agreement to be a rent to be determined by the President for the time being of the Victorian Division of the Australian Property Institute or his nominee as the then market rent of the Premises PROVIDED THAT such valuer must ignore the Lessee’s installations and improvements and ignore the goodwill of the Lessee’s business and the cost of such determination shall be borne in equal shares by the parties. The Lessor shall not be entitled to rely upon a breach or non-observance by the Lessee as a grounds for refusing the further term unless the Lessor has first served written notice on the Lessee specifying its default and the Lessee failed for a period of 30 days to remedy it. The Renewed Lease shall otherwise contain the same covenants, agreements and provisions as are herein contained. The Lessor and the Lessee agree that all rent hereunder shall be payable monthly in advance in accordance with the provisions of Clause 2.1 and 2.2 hereof.

Agtan signed a Contract of Sale with the registered proprietors of the premises, Helen Mathers and Tom Wickers as the personal representatives of the Conyers, for the purchase of the site on 22 May 2012.[4] Pursuant to that contract of sale the conveyance of the site was settled on 22 June 2012.[5] There is no evidence that at that time Agtan was advised at the time that Tank 2 had been decommissioned.
[4]CB2.162.
[5]Ibid. See also Garvey Statement, [9].

On 29 May 2014, Caltex exercised the second and final option to renew the lease for a further 5 years, however Agtan and Caltex were unable to agree on the rental amount for the period.

In early 2015 unresolved issues which had emerged in the parties’ attempt to negotiate under the agreed rental renewal regime were referred to a rental determination which was ultimately published on 26 May 2015.[6]
[6]CB4.984.

In the Rental Determination Report it was noted that one of the tanks was no longer operational.[7]
[7]Valuation Report Sutherland and Farrelly, 1 September 2014, 8; CB4.996.

In April 2015, a make good schedule[8] was prepared by Napier & Blackley on behalf of Agtan identifying several items of work that Caltex was required to undertake to ensure an adequate level of maintenance, upkeep and presentation at the Demised Premises.
[8]CB4.1058.

On 29 May 2015 Agtan served a Notice to Remedy Breach of Lease (Breach Notice) on Caltex identifying the defects referred to in that notice. There were 16 items Caltex was required to make good, however those items did not include Tank 2. These defects were the subject of further correspondence between the solicitors for Caltex and Agtan, but did not relate to Tank 2 directly and are not central issues to these proceedings.

On 8 July 2015, Agtan sent a letter[9] to Caltex noting the Rental Determination Report and the loss of one of the tanks, and requesting details in relation to the current status of the Tank System.
[9]CB4.1141.

On 11 June 2015, as the disagreement regarding rent had prevented the formal exercise of the option to renew the lease, Caltex executed the 2014 Deed of Renewal to formally record the exercise of the option and provided this document to Agtan.[10]
[10]CB4.1118; Garvey Statement, [57], [58].

On 15 July 2015, Agtan issued a Notice of Default (Notice of Default) under clause 27 of the Current Lease, which claimed that Caltex had breached clause 19.1 by not maintaining Tank 2 such that it was no longer operational.[11] The notice required Caltex to remedy this alleged breach within 30 days, failing which the notice provided that Agtan may treat the lease as repudiated and re-enter into possession of the premises.
[11]The Notice of Default at CB4.1159 refers to Tank 3. However, the parties agree that the reference should be to Tank 2 (T34.23-3131).

On 7 August 2015, Agtan executed a 2014 Deed of Renewal of Lease, which pursuant to clause 3.1 granted Caltex a new lease of the Demised Premises commencing on 1 September 2014 (Current Lease).[12]
[12]Affidavit of Martyn Lindsay, 15 September 2015, (Lindsay Affidavit) [14].

On 21 September 2015, Agtan issued a further Notice of Default (Second Notice of Default) on substantially similar bases to the Notice of Default, save that the Second Notice of Default confined the alleged breaches to those arising from 8 August 2015.

Clause 3.2 of the 2014 Deed of Renewal[13] operates in the same manner as clause 2.2 of the 2009 Deed of Renewal and incorporates all of the covenants and obligations contained in the Original Lease as if they were set out in the 2014 Deed of Renewal, save that the Term of the ‘New Lease’ was five years, commencing on 1 September 2014, the rent was set at $265,000 per annum, and clause 36.1 of the Original Lease was deleted. Under clause 3.2 of the 2014 Deed of Renewal, the Current Lease will expire on 1 September 2019.
[13]CB2.179 (see p 184].

Accordingly, the clauses of the 2009 Lease set out above, with the exception of clause 36.1, were also incorporated into the Current Lease from the Original Lease.

The 2014 Deed of Renewal, in summary, contains the following further relevant terms:

(a) Clause 2, provides:

The parties acknowledge and agree that the Tenant has validly exercised its right to renew under the Original Lease.

(b) Clause 3.1, provides:

The Landlord grants the New Lease of the Premises to the Tenant on the terms and conditions set out in this deed.

(c) Clause 3.2, provides inter alia that the New Lease:

(i) commenced on the Commencement Date of 1 September 2014; and

(ii) was for a term of 5 years; and

(iii) incorporated the covenants and obligations under the Original Lease, except that no further option to renew was granted and save in respect of the amount of rent payable.

(d) Clause 4.1, provides inter alia:

Each party acknowledges and agrees that:
(a)it will perform and observe its covenants and obligations under the New Lease;
(b)there is no subsisting breach of any term of the Original Lease at the date of this deed;
(c)there are no events or circumstances which would cause the termination or enforcement of the Original Lease or the New Lease.

(e) Clause 14, provides:

This deed constitutes the entire agreement between the parties about its subject matter and supersedes all previous communications, representation, understandings or agreements between the parties on the subject matter.

Relief sought by Caltex

Caltex is seeking the following relief:

(a) declarations that Caltex is not in breach of clause 19.1 by reason of Tank 2 no longer being operational, and that the Notice of Default dated 15 July 2015 served by Agtan is not effective to determine the Current Lease,

(b) specific performance by Agtan of its obligations under the Current Lease, in particular its obligation not to interrupt or disturb Caltex’s peaceful possession and enjoyment under clause 4.1,

(c) and in the alternative, relief against forfeiture,

(d) an injunction to restrain Agtan itself, its servants or its agents from re-entering the Premises in reliance on any of the matters the subject of the Notice of Default dated 15 July 2015, and

(e) damages and costs.

Relief Sought by Agtan

Agtan seeks the following relief by way of counterclaim:

(a) declarations that Caltex has breached and remains in breach of clause 19.1,

(b) that Agtan is entitled under clause 27 to treat the Current Lease as repudiated and may accept that repudiation and re-enter into possession of the premises under the Notice of Default, alternatively under the Second Notice of Default at the expiry of the breach period,

(c) an order that Agtan is entitled to possession of the Premises, and

(d) damages, interest, and costs.

The primary issue in this proceeding is whether Caltex is in breach of clause 19.1 by reason of Tank 2 being non-operational. The answer to this question will primarily turn upon the correct construction of the Current Lease, in particular clause 19.1.

Further, if Caltex was, and is, in breach of clause 19.1 the issue arises as to whether Agtan is entitled to treat the Current Lease as repudiated and re-enter into possession of the Premises, or whether Caltex should be granted relief against forfeiture, and further whether Caltex should be required to either replace or repair Tank 2.

Caltex’s Submissions

In essence, Caltex summarises its case as follows:[14]
[14]Caltex’s Closing Submissions, 15 June 2016 (CCS), [1].

(a) there were three leases under which Caltex occupied the Demised Premises;

(b) there was one relevant obligation under each of those leases, namely, to keep and maintain and repair the Tank System. This obligation was qualified by the Tank System’s condition at the commencement of each of those leases. Clause 1.1 of the Original Lease, and the same provision as incorporated into the 2009 Lease and the Current Lease, defines the ‘Tank System’ as ‘the underground storage tanks and the product pipes from such tanks to the product pump locations but does not include the liquefied petroleum gas equipment’;

(c) the above obligation was subject to a fair wear and tear exception as set out in clause 19.1;

(d) Caltex did not breach its obligation under any of the relevant leases because the Tank System is in good and tenantable repair and good and efficient working order and condition and/or the failure of Tank 2 constituted fair wear and tear;

(e) Agtan has agreed that there was no breach by Caltex of its obligations under the 2009 Lease (and Agtan cannot rely upon an alleged breach of the Current Lease); and

(f) alternatively, if there were any breach by Caltex upon which Agtan could rely, Caltex should be granted relief against forfeiture because:

(iv)Agtan will suffer no loss as Caltex undertakes to complete the works to repair or replace the tank by the end of the Current Lease;

(v) there is no evidence of appreciable damage to Agtan arising from any breach;

(vi)there is no history of wilful breaches of more than one covenant, no serious misconduct alleged, and Caltex has met its obligations regarding rent and outgoings;

(vii) similar premises will be unlikely to be available, and relocating would be disruptive;

(viii) staff employment at the station would be jeopardised.

General Summary of Caltex’s Key Construction Argument

In relation to the construction of the key provisions of the leases, Caltex submits that:

(a) there are three separate leases under which Caltex occupied the Demised Premises. Caltex submits that the prima facie common law position is that exercise of an option to renew creates a new lease. Caltex also submits that this is supported here by the provisions of each of the leases and Deeds of Renewal;

(b) the date of commencement in clause 19.1 is 1 September 2014. Further, in clause 19.1, regard is to be had to condition ‘as at the date of commencement of the Lease’;

(c) Clause 19.1 contains one obligation, namely, to keep and maintain the Demised Premises in ‘good and tenantable repair’ and ‘good and efficient working order and condition’ including by effecting repairs ‘as necessary’. Further, repairs ‘as necessary’ is qualified by the ‘fair wear and tear’ exception and the condition of any relevant component at the commencement of the lease.

Caltex further submits that:

(a) the Tank System remains in good and tenantable repair, and accordingly, Caltex did not breach its obligation under any of the relevant leases. Further, there has been no decrease in the operational functionality of the Premises or the Tank System despite the decommissioning of Tank 2;

(b) alternatively, Caltex submits the failure of Tank 2 was caused by reasonable use and the ordinary operation of natural forces, which constitutes ‘fair wear and tear’, and thus is caught by an exception to clause 19.1. Caltex submits that this is the case when considering the Tank System as a whole or Tank 2 in isolation;

(c) alternatively, the decommissioned status of Tank 2 formed part of the condition of the Tank System as at the commencement date of the Current Lease at 1 September 2014;

(d) insofar as both Caltex and Agtan agree that there are no alleged breaches of the 2009 Lease, Caltex submits that it is unnecessary for the Court to decide the agreement/waiver issue raised by Caltex and that the court’s decision as to clause 19.1 of the current Lease would determine the substance of the case;[15]
[15]CCS [41].

(e) alternatively, Caltex should be granted relief against forfeiture, in summary, for the following reasons:

(ix) Agtan will suffer no loss as Caltex has given an undertaking to complete the works to repair or replace Tank 2 by the end of the current lease;

(x) there is no evidence of appreciable damage to Agtan arising from any breach of the current lease;

(xi) there is no history of wilful breaches of more than one covenant, nor any serious misconduct alleged, and Caltex has met its obligations regarding rent and outgoings;

(xii) it is unlikely that similar premises will be available, and relocating would be disruptive; and

(xiii) staff employment at the station would be jeopardised.

There were three separate leases

Caltex contends that there are three separate leases under which they have occupied the Premises as lessee:

(a) the first commenced on or about 29 September 1999 with Lochmullan Pty Ltd as the lessor, and provided for a term of 10 years, with 2 options for a further 5 years each;

(b) the second lease commenced on 1 September 2009 with the successors in title to Lochmullan Pty Ltd, namely the Conyers as lessors; and

(c) the third, the Current Lease commenced on 1 September 2014 with Agtan Pty Ltd as lessor.

Caltex submits that the common law position is that upon exercising an option to renew a lease, a new lease is created.[16]
[16]CCS [2]; Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, [8], citing Gerraty v McGavin (1914) 18 CLR 152 at 163; Caltex’s Opening Submissions, 8 June 2016 (COS), [69]–[72].

Further, Caltex submits that the language in the Original Lease[17] and in each of the Deeds by which the Original Lease was renewed supports this position [18] and Caltex also points to several provisions in the 2014 ‘Deed of Renewal of Lease’[19], as evincing the creation of separate leases.[20]
[17]CCS [4];
[18]CCS [3].
[19]CB2.179; Caltex notes that the 2009 Deed of Renewal of Lease was relevantly in the same terms as the 2014 Deed of Renewal CCS footnote [3].
[20]CCS [3].

Caltex points to the following language in the 2014 Deed of Renewal of Lease which it asserts supports its case:[21]
[21]Ibid.

(a) Clause 1.1 which defined ‘New Lease’ as the lease created by the 2014 Deed of Renewal;[22]
[22]Clause 1.1.

(b) Clause 1.1 which defined ‘Original Lease’ as the lease dated 29 September 1999, as amended by the Deed of Renewal and variation commencing 1 September 2009;[23]
[23]Ibid.

(c) Clause 3.1 which provides that the New Lease was granted on the terms set out in the 2014 Deed of Renewal;

(d) Clause 3.2 which provides that, aside from the changes to the term and rent payable, and the deletion of clause 36 which related to further options to renew, the covenants and obligations under the New Lease are identical to those contained in the Original Lease, and are incorporated into the Deed;

(e) Clause 3.2(a) which refers to the ‘New Lease’ as commencing on 1 September 2014.

Caltex points to the following aspects of the Original Lease, which by the operation of each Deed of Renewal were incorporated into that deed as if they were set out in that deed of renewal, as supporting the common law position that a new lease is created upon the exercise of an option to renew, and that in this case this prima facie position should be accepted because the Deed of Renewal:

(a) defined ‘Lease’ as ‘the lease of the Demised Premises comprising these terms and conditions and all annexures and schedules (if any)’ (clause 1.1);

(b) defined ‘Date of Commencement’ as 1 September 1999, however when the context demanded it used those words to refer either to that date or to the date on which ‘any extension or renewal’ of the Original Lease commenced (clause 2.1(a) and (c));

(c) contrasted an ‘extension’ of the Original Lease with a ‘renewal’, in clause 2.1 and in various other clauses (e.g. clause 29.1);

(d) Clause 36.1, under which the lease was renewed, refers only to ‘renewal’, however, and not to ‘extension’’.[24]

[24]CCS [4].

The ‘Date of Commencement of the Lease’ relevant to clause 19.1 is 1 September 2014

Caltex submits that the ‘date of commencement of the Lease’ relevant to the consideration of the condition of the Demised Premises in clause 19.1, is 1 September 2014. Caltex makes this submission on the following bases:

(xiv) Caltex submits that because the covenants and obligations under the Current Lease are identical to those contained in the Original Lease and were incorporated into the 2014 Deed of Renewal as if set out in the Current Lease, when considering the provisions of the Current Lease, the provisions of the Original Lease should be read as though it is the Current Lease.[25]

(xv) Accordingly, Caltex submits that the definition of ‘Lease’ in clause 1.1 of the Original Lease as incorporated into the Current Lease is ‘the lease of the Demised Premises comprising these terms and conditions’[26] with ‘these terms and conditions’ being the terms and conditions of the Current Lease.[27]

(xvi) Secondly, Caltex submits that clause 19.1 provides that regard is to be had to the condition of the Demised Premises and appurtenances ‘as at the date of commencement of the Lease’. Caltex submits that because the ‘Lease’ commenced on 1 September 2014, the relevant date is therefore 1 September 2014.[28] Caltex contrasts this language with the definition of ‘Date of Commencement’ which refers to the Original lease, noting that ‘date of commencement’ in clause 19.1 is not capitalised.[29]

[25]T168.29-T169.1.

[26]Clause 1.1.

[27]T169.1-4.

[28]T169.28-31.

[29]T169.11-31.

Caltex draws on the above clauses and submits that when read together, and in the context of the common law authorities to the effect that the exercise of an option to renew a lease creates a new lease, the terms of the Original Lease, and the relevant terms of each of the Deeds by which it was renewed, ‘make it plain that the natural reading of ‘date of commencement of the Lease’ in clause 19.1 of the Current Lease, is 1 September 2014’.[30]
[30]CCS [5].

Caltex submits ‘there is nothing un-businesslike about this interpretation’[31] and that ‘it is entirely consistent with the likely commercial intent of the parties that the condition of the property should ‘reset’ at the commencement of the new lease on renewal.’[32] Moreover, Caltex submits that in an agreement of a commercial nature parties ‘should be expected to use very clear language’[33] if they wish to vary the settled common law position.[34]
[31]CCS [6].
[32]Ibid, CCS [7].
[33]CCS [6].
[34]Ibid; Caltex cites Jin Dun Pty Ltd v Di & Li Australia Pty Ltd [2014] VSC 562 as an example where the ‘start of the lease’ was expressly defined as ‘the starting date of the first lease to contain an option for renewal’ at [20] and [21]; T170.12-31.

Clause 19.1 contains one obligation

Caltex submits that a natural reading of clause 19.1 is that it imposes one obligation on the lessee,[35] namely:

an obligation to keep and maintain the premises and appurtenances in good and tenantable repair and in good and efficient working order and condition, including by effecting repairs as necessary (having regard to [the condition of any relevant component] at the commencement of the relevant lease, and subject to an exception for fair wear and tear without neglect or default on the part of the lessee).[36]

[35]CCS [8]; T82.11-T85.18.

[36]CCS [8].

Caltex submits that the words ‘as necessary’ imply a standard against which the requirement to effect repairs is to be judged, and that this standard is the good and tenantable repair and good and efficient working order and condition of the Tank System.[37]
[37]T145.10–22.

Caltex acknowledges that clause 19.1 imposes an obligation on the lessee to effect repairs and to replace worn or defective parts, when necessary, to keep the tank system in good and tenantable repair. In oral submissions, Caltex argued that ‘the question is not whether a part is in good and tenantable repair and thus should be replaced, but rather that the question is whether it is necessary to replace the part so as to keep the premises, including the Tank System, in good and tenantable repair and good and efficient working order’.[38]
[38]T151.14–18.

Importantly, Caltex says that the term ‘repairs as necessary’ is qualified by the ‘fair wear and tear’ exception and the condition of the premises and appurtenances at the commencement of the lease.[39] Caltex submits that if this were not so, it would be required to effect repairs any time any relevant component became defective or worn, and consequently there would be no work for the ‘fair wear and tear’ exception to do as part of the obligation to keep and maintain the premises and all appurtenances in good and tenantable repair.[40]
[39]CCS [9].
[40]T24.26–25.6.

Alternatively, Caltex submits that even if clause 19.1 contains more than one obligation, all obligations are to be applied having regard to the condition of the premises and appurtenances at the commencement of the relevant lease and subject to the operation of the fair wear and tear exception without neglect or default of the lessee.[41] Caltex also points out that Agtan does not suggest any relevant neglect or default.
[41]CCS [12].

Caltex rejects Agtan’s submission that the interpretation that clause 19.1 contains one obligation and that the repair component requires regard to be had the condition of individual parts as at the date of commencement of the lease.[42] Caltex however acknowledges that the standard of the working order of the Tank System as a whole is to be determined having regard to its condition at the commencement of the lease, but Caltex asserts that this qualification does not extend to individual replacement of parts necessary to keep the Tank System at that standard.[43]
[42]T151.23–28.
[43]CCS [17].

Caltex also submits that the authorities cited by Agtan[44] in support of their contention that clause 19.1 contains two obligations and what is meant by ‘as necessary’, namely that it refers to the situation when further maintenance is no longer sufficient to keep the premises and appurtenances to the necessary standard and it is therefore appropriate to effect replacement, are distinguishable on several basis.[45]
[44]Clark & Johnson v Hamilton (1929) 16 S.W. 2d 833 (Clark & Johnson v Hamilton), cited with approval in Gershman Properties LLC v Metals USA Building Products LP (2011) WL 6029883 (N.D. Tex. Dec 1, 2011); Greeting Oxford Koala Hotel Pty Ltd v Oxford Square Investments Pty Ltd (1989) 18 NSWLR 33 (Greeting Oxford).
[45]T150.22-31.

Caltex submits that in Greeting Oxford the words ‘replacement when required’ were interpreted in a manner ‘substantially equivalent’[46] to the standard Caltex submits applies to the repair obligation in clause 19.1. That is, replacement as necessary in order to keep the premises, including the Tank System, in good and tenantable repair and good and efficient working order, and not a ‘strict liability at large’.[47]
[46]T150.13-14.
[47]T150.18.

Caltex submits that the American case Clark & Johnson v Hamilton is distinguishable on a factual basis because in that case it was acknowledged that repairs were necessary to keep the premises in good repair, a fact that Caltex submits has not been occurred in the present case.[48] Caltex submits that this case is also distinguishable on the basis that the language in the lease considered in Clark & Johnson v Hamilton differs from the lease presently considered. Caltex notes that this difference was conceded by Counsel for Agtan in oral submissions.[49]
[48]T150.22-26.
[49]T150.27-30.

Further, Caltex rejects Agtan’s contention that a part might not comply with the first obligation under clause 19.1 but still may not need to be repaired pursuant to the second obligation.[50] Caltex submits that this characterisation of the operation of clause 19.1 is not harmonious, and ‘rather tends to highlight the inconsistencies and overlaps that [Agtan’s] construction of clause 19.1 would produce.’[51]
[50]T152.1–8.
[51]T151.5–8.

Caltex submits that should its submissions as to the construction of clause 19.1 be accepted, the following two questions also become relevant:

(a) Firstly, is the Tank System is in good and efficient working order and tenantable repair;

(b) If not, was the failure due to fair wear and tear without neglect on the part of Caltex.[52]

[52]T153.15–21.

Clause 30.1

Caltex submits that clause 30.1 provides for the scenario raised by Agtan that a situation could arise where the Tank System became defective and neither party would have an obligation to repair it Agtan contends this is an example of the unbusinesslike operation of Caltex’s construction of clause 19.1. [53]
[53]CCS [10].

Caltex submits that clause 30.1 is engaged where the Demised Premises is ‘destroyed or damaged … so as to render the Demised Premises substantially unfit for use as a petrol filling station’. [54] Caltex submits that on Agtan’s construction of clause 19.1, clause 30.1 would have no purpose because all obligations to maintain the premises as fit ‘for use as a petrol filling station would already have been allocated between the lessor and lessee by clauses 19.1 and 19.2’.[55]
[54]Clause 30.1.
[55]CCS [10]–[11].

Caltex submits that Agtan’s contention that clause 30.1 is to be read as solely applying to ‘acts of God’ misconceives its role and should be rejected.[56] Caltex submits that the clause 30.1 cannot be restricted to ‘acts of God’ and points to the words ‘provided that’ in clause 30.1 (a), and submits that they operate as a proviso which disallows any abatement of rent in the case of damage caused by the wilful or negligent act or omission of the lessee.[57] Caltex acknowledges that clause 19.1 contains a similar proviso, but notes that the term ‘acts of God’ is not employed in clause 19.1.[58] Caltex submits that this indicates that both clauses ‘ought to be construed consistently, leaving work for each to do’.[59]
[56]T152.9–10.
[57]T152.26–31.
[58]T153.3–6.
[59]T153.7–9.

Clause 10.1 and Clause 25.1

Caltex submits that clauses 10.1 and 25.1 work against the interpretation that the second obligation for which Agtan contends in clause 19.1 is absolute and unqualified by the condition of the premises at the date of commencement and Agtan’s contention that clause 19.1 is also not subject to the fair wear and tear exception.[60] The ‘second obligation’ for which Agtan contends is that Caltex is required to effect repairs to the premises and appurtenances as necessary, including the replacement of all worn or defective parts.
[60]CCS [13]; Cf. T81.19-T82.10 and T85.4-T85.18.

Caltex argues that clause 10.1 relates to repairs required by statute, subordinate legislation, or the provisions or requirements of statutory bodies and authorities and that it is unlikely that such obligations would be qualified by reference to the condition of any relevant component at a the start of any lease.[61] Further, Caltex submits that under clause 25.1, a delivery up clause, the question is ‘whether the repairs are necessary to ensure that the property is capable of operating as a going concern as a service station.’ [62]
[61]CCS [14].
[62]CCS [15].

Caltex submits that the Demised Premises has met, and will continue to meet this standard notwithstanding the loss of Tank 2.[63]
[63]Ibid.

The obligation is to maintain the Tank System

Caltex submits that in relation to the Tank System, the obligation to keep and maintain as imposed by clause 19.1 does not extend to ‘every individual component’ of the Tank System, but rather requires that the Tank System as a whole be kept and maintained in ‘good and efficient working order’.[64] Caltex acknowledges that clause 19.1 may require the periodical replacement of ‘worn or defective parts’, but adds that this possibility does not create a ‘standalone obligation’[65] to replace any individual worn or defective part, provided that the Tank System continues to be in good and efficient working order.[66]
[64]CCS [16].
[65]Ibid.
[66]Ibid.

The Tank System remains in good and tenantable repair

Caltex has submitted that the relevant issue regarding whether the repair obligation is engaged in relation to a particular part is whether it is necessary to replace the part so as to keep the premises, including the system, in good and tenantable repair and good and efficient working order. Caltex submits that the Tank System meets this standard, and accordingly it is not in breach of the repair component in clause 19.1.[67]
[67]CCS [22].

Caltex submits that under a covenant for repair, the ‘requisite state of repair is that in which premises would be found if managed by a reasonably minded owner, having regard to their age, their character, their ordinary use and requirements of the tenants likely to take them at the time of the demise’.[68]
[68]CCS [19]; T154.8 – 14; Graham v Markets Hotel Pty Ltd (1943) 67 CLR 567 at 585.

Caltex submits that the ‘ordinary use of the premises including the Tank System is as petrol service station’, [69] and as such the ‘question of whether or not the Tank System is in good and tenantable repair and good and efficient working order and condition is therefore to be determined having regard to the requirements of tenants likely to take the premises for use as a petrol service station’, taking into account ‘the age of the premises including the Tank System and the condition as at the commencement of the relevant lease.’[70]
[69]CCS [20].
[70]CCS [21].

Caltex submits that assessed against the standard informed by relevant authority,[71] the evidence demonstrates that the Tank System is in good and tenantable repair and good and efficient working order, and is without any decrease in function, despite Tank 2 being out of operation.[72]
[71]Graham v Markets Hotel Pty Ltd (1943) 67 CLR 567 at 585 per Starke J.
[72]CCS [22]; CCS [27]; CCS [30]; Witness Statement of Stuart Jessop, 9 November 2015 (Jessop Statement), [35]; Witness Statement of David Glase, 9 November 2015 (Glase Statement), [7]–[9]; Affidavit of Mark Wright, 15 September 2015 [7]; Caltex acknowledges that a smaller kerosene tank, known as Tank 8, was also part of the original Tank System as defined in the 1999 lease. This tank has been out of use or a period even longer that Tank 2, but has never been the subject of complaint or alleged breach relied upon by Agtan. See CCS footnote [18] .

In support of these assertions, Caltex also relies on evidence relating to the total capacity of the Tank System (excluding LPG)[73], capacity requirements for standard Caltex service stations, the site[74], and fuel sales data for the site.[75] Caltex notes that this evidence is not relied upon in relation to the construction of the lease’s provisions, but rather to ‘inform the application of the provisions on the objective inquiry of whether or not the Tank System is in good and tenantable repair and good and efficient working order and condition.’[76]
[73]CCS [23]–[24]; Jessop Statement, [34], [35].
[74]CCS [24]; Jessop Statement, [36]; CB3.419; CB3.430; Jessop Statement, 14 December 2015, [5].
[75]CCS [25]–[26]; Glase Statement, [7]-[9], [11]–[12]; Fiona Margaret Garvey XXN T101.16-102.9; Garvey Statement, [4], [14]; Caltex also submits that the rental determination did not consider the current capacity of the Tank System to be an issue at the time of the rental valuation of the premises See: CCS [29]; CB4.996; CCS footnote [33].
[76]CCS footnote [33]; Caltex also submits that ’[t]he requirements of any particular fuel retailer are of course not determinative of that objective inquiry but they are relevant to it. There could be no argument that the requirements of major fuel retailers such as Caltex and United are so idiosyncratic as to be of no weight in determining the requirements of tenants likely to take the premises for use as a petrol station’; T155.3–6.

Caltex rejects Agtan’s assertion that Caltex’s analysis ignores the landlords interests regarding whether the Tank System was in good and tenantable repair and good and efficient working order.[77] Caltex submits that their approach complies with the test established by the authorities,[78] and further submits that the test ‘makes perfect sense because it is in the landlord’s interests to have a premises in a state which is likely to meet the requirements of a likely tenant’.[79]
[77]T154.16–22.
[78]T154.17.
[79]T154.18-20.

Moreover, Caltex contest Agtan’s proposition that the storage capacity impacts on the site’s value, and submits that the evidence relied on by Agtan for this proposition does not support such a statement.[80] Caltex submits that the fact that Tank 2 was not operational did not factor into the rental valuation.[81]
[80]T156.1-5.
[81]T156.14-16; CCS [29]; CCS footnote [33]. Tank 2 not alleged to be defective in Breach Notice dated 29 May 2015; see Valuation Report CB4.996 [refer one Tank not operational and capacity 230,000].

The failure of Tank 2 constitutes fair wear and tear

Caltex submits in the alternative that Tank 2’s failure did not result in Caltex breaching clause 19.1 because the failure was due to ‘fair wear and tear’ of the Tank System as a whole, or Tank 2 when considered in isolation. [82] Caltex submits that Tank 2 failed through ‘reasonable use… and the ordinary operation of natural forces’.[83]
[82]CCS [32].
[83]CCS [35]; Caltex citing Alamdo Holdings Pty Ltd v Australian Window Furnishings (NSW) Pty Ltd (2006) 13 BPR 25,045 (NSWCA) at [31], [34], [35] per Hodgson JA (with whom McClellan CJ at CL agreed at [143]), citing Haskell v Marlow [1928] 2 KB 45 (which was first rejected by the English Court of Appeal in Taylor v Webb [1937] 2 KB 283 but later reinstated as authoritative by the House of Lords in Regis Property Co Ltd v Dudley [1959] AC 370

Caltex points to the Tank System’s steel construction and the absence of cathodic protection[84], its design life of 20 to 30 years and that Tank 2 was 23 years old when it was decommissioned, as supporting its assertion that the failure of one tank out of six constitutes ‘fair wear and tear’.[85]
[84]CCS [33]; Jessop Statement, [8], [10].
[85]CCS [33]; See footnotes [36]–[37] regarding varying analysis of the Tank System’s design life.

Caltex initially submits that the evidence suggests it is ‘likely’[86] the corrosion of the steel wall over a period of 20 years in uncontrolled clay soil as the cause of Tank 2’s failure.[87] Caltex acknowledged at trial however, that the evidence is not sufficient to support a finding by the Court that clay corroding the steel was the probable cause of the Tank 2’s failure.[88]
[86]T157.17.
[87]CCS [35]; Jessop Statement, [11]; A steel underground petroleum storage tanks lifespan depends on its ability to resist corrosion caused by exposure to the surrounding soil over time; See Taylor Report, 14 December 2015, pages 5-7, CB4.1220 - 1222, in which Mr Taylor listed the factors that may affect the lifespan of a tank such as Tank 2. All of those factors were related to corrosion (Cf. Taylor XXN T50, 53-56). See similarly Henderson v Harvison [1916] 10 QJPR 25 at 31.
[88]T157.25-28.

Caltex nevertheless submits that even if it cannot be established on the balance of probabilities that if corrosion was the cause[89] of the failure of Tank 2, without cathodic protection, there was little they could do to maintain the underground steel tanks beyond monitoring and testing,[90] which Caltex submits it carried out in accordance with the relevant standards.[91]
[89]CCS [36].
[90]CCS [34]; Jessop Statement, [12]; Colt Services Expert Report “CJT 1” annexure to Affidavit of Colin John Taylor, 14 December 2015, [15], CB4.1230 (not the subject of challenge on cross-examination).
[91]CCS [34]; Jessop Statement, [12]–[16].

Caltex submits that it ‘acted reasonably’[92] in decommissioning Tank 2,[93] thereby preventing further consequential damage,[94] and further submits that their decision to decommission Tank 2 was in the ‘nature of a repair to the Tank System’.[95]
[92]CCS [37].
[93]As it had ceased to be water tight as required for operation in accordance with the applicable standards; CCS [37]; CB3.458-459; CB4.1225-1226.
[94]CCS [37]; See Alamdo Holdings Pty Ltd v Australian Window Furnishings (NSW) Pty Ltd (2006) 13 BPR 25,045 (NSWCA) at [31], [35].
[95]CCS [38].

Caltex also submitted that the decision in Haskell v Marlow, relied on by Agtan to support the proposition that the fair wear and tear exception will not apply to further consequential damage flowing from a triggering cause that was fair wear and tear, is distinguishable from the present case.[96] Caltex seeks to distinguish the two on the basis that the scenario in Haskell involved inaction by the tenant to repair the original damage whereas in this case Caltex acted to fix the Tank System by decommission Tank 2.[97]
[96]T159.5-10.
[97]T159.10-21.

Caltex further submits that Agtan has not pursued any allegation, nor has there been any finding, of ‘neglect or default on the part of’[98] Caltex which caused wear and tear to, or failure of Tank 2.[99]
[98]Clause 19.1.
[99]CCS [34].

Agtan is unable to rely on the alleged breach or breaches

Insofar as both Caltex and Agtan agree that there are no alleged breaches of the 2009 Lease[100], it is unnecessary for the Court to decide the agreement/waiver issue raised in Caltex’s opening submissions.[101]
[100]CCS [40]; Agtan’s Closing Submissions, 15 June 2016 (ACS), [50] ’there can be no doubt that the first tank notice was issued under the current lease and related to breaches of the current lease’; T86.26–87.21, 89.4-9.
[101]CCS [41].

Furthermore, Caltex submits on the basis of its construction argument that it was not required by clause 19.1 of the Current Lease to maintain Tank 2 at a capacity of 57,130 litres. Caltex points out that its primary argument in this regard may ‘assume greater importance’, given that Agtan only alleges that there was a breach of the Current Lease.[102]
[102]Ibid.

Caltex also submits that should its construction argument on this aspect be accepted, all other issues in the case would be unnecessary to decide.[103]
[103]Ibid.

The condition of Tank 2 on 1 September 2014

Caltex submits that under clause 19.1 of the current lease, the Tank System must be maintained ‘having regard to [its] condition as at the date of commencement of the Lease.’[104]
[104]COS [66].

Caltex submits that the ‘date of commencement of the Lease’, that is the Current Lease, is 1 September 2014.[105]
[105]COS [67]–[68]; CCS [5].

Because Tank 2 was decommissioned on 14 October 2011, Caltex contends that this fact ‘formed part of the condition of the Tank System (and, if it be relevant, of Tank 2 itself)’[106] as at 1 September 2014.[107] Accordingly, Caltex submits, clause 19.1 of the current lease cannot have been breached due to Tank 2 being decommissioned.[108]
[106]COS [68]
[107]Ibid.
[108]Ibid.

Caltex submits further that by failing to rely on the alleged breach before executing the 2014 Deed of Renewal of Lease signed on 7 August 2015, Agtan ‘expressly [agreed] that there was no subsisting breach of clause 19.1 of the 2009 lease as at 7 August 2015’.[109]
[109]COS [72].

Caltex relies on the decisions Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd[110] and Callaghan v Merivale CBD Pty Limited[111] in support of their submission that ‘[t]he general principle that renewal by exercise of an option creates a new lease has been accepted in the specific context of ascertaining relevant dates for the purposes of applying repair covenants’.[112]
[110][2015] VSC 515 at [50]-[57].
[111][2006] ANZ ConvR 114 (NSWSC) at [34].
[112]COS [69].

Further to this, Caltex points to the decision Jin Dun Pty Ltd v Di & Li Australia Pty Ltd.[113] Caltex submits that in Jin Dun, it was accepted that under the prima facie common law position that the exercise of an option to renew a lease creates a new lease, the relevant date for the application of a repair covenant would be the date of the renewed lease.[114]
[113][2014] VSC 562 (Jin Dun).
[114]COS [71].

Alternatively, Caltex should be granted relief against forfeiture

Caltex submits that if it be wrong in the above submissions, it should be granted relief from forfeiture and would be entitled to such relief notwithstanding its earlier submissions that it is not in breach of the Current Lease.[115]
[115]CCS [42]; Chamberlain Early Learning Centre Pty Limited v Chamberlain Group Pty Limited [2015] NSWSC 751, at [29], citing with approval Water Wine & Juice Pty Ltd v Steve Konstantopoulos [2010] NSWSC 312, [77]-[88].

In support of this claim, Caltex submits that it comes to Court with ‘clean hands’ and that any breach that might be found to arise from the decommissioning of the tank ‘cannot be described as wilful’,[116] because, on the evidence, ‘a steel tank without cathodic protection cannot be maintained’.[117]
[116]CCS [44]
[117]Ibid.

Caltex and Agtan both agree that when grating relief against forfeiture, the Court has a broad general discretion and will have regard to all the relevant circumstances of the case.[118]
[118]CCS [45]; Agtan’s Opening Submissions, 8 June 2016 (AOS), [82].

Caltex submits that the following circumstances support the granting of relief to it in the nature of specific performance:

(a) ‘There is no history of wilful breaches of more than one covenant], nor any ‘serious misconduct’’,[119] and Caltex has met its obligations to pay rent and outgoings.[120]
[119]CCS [45]; Beamer, [443]-[444] [citations omitted]; and see Primary RE Limited v Great Southern Property Holdings Limited & Ors [2011] VSC 242, [183].
[120]CCS [45](a); Lindsay Affidavit, [15].

(b) Forfeiture would be especially disruptive due to Caltex’s long history at the site.[121]
[121]CCS [45](b); Leahy v Fimiston Investments Pty Ltd & Anor [2011] QSC 22 (‘Leahy’) at [22] and [44].

(c) The franchisee and its staff (third parties) ‘may be adversely affected’[122] in that their employment would be at risk.[123]
[122]CCS [45](c).
[123]CCS [45](c); Leahy at [22] and [44].

(d) Alternative and similarly strategically significant premises are unlikely to be readily available.[124]

(e) There is no evidence that Agtan has suffered any appreciable damage from any breach arising from the decommissioning of Tank 2.[125]

(f) Agtan will not suffer any loss as a result of any ongoing breach as Caltex undertakes to ‘complete works to repair or replace the tank by the end of the current lease term if … not having done so is found by the Court to have constituted a breach of Caltex’s obligations under the lease upon which [Agtan] is entitled to rely’.[126] Caltex submits that this undertaking will secure the essentials of the bargain for Agtan.[127]

[124]CCS [45](d); Leahy at [22] and [44]; Glase statement [15].

[125]CCS [45](e); Australian Mutual Provident Society v 400 St Kilda Road Pty Ltd [1990] VR 646 at [669].

[126]CCS [45](f); Prior to trial, Caltex undertook to pay the cost of works to replace Tank 2 by the end of the current lease term insofar as (contrary to the position Caltex had advanced and would at trial maintain) the alleged failure or refusal by Caltex to replace Tank 2 were found to be a breach of Caltex’s obligations on which Agtan is entitled to rely. Caltex submits that it makes this new undertaking in a further attempt to remedy any loss.

[127]CCS [45](f); Australian Mutual Provident Society v 400 St Kilda Road Pty Ltd [1990] VR 646 at [671]–[672].

Caltex rejects Agtan’s assertion that an allegation that Caltex made had no proper basis and therefore Caltex cannot be said to have come to the Court with clean hands.[128] Caltex submits that the relevant allegation was clearly made as an alternative in the generally endorsed writ as part of the particulars to that allegation, that it was based on Caltex’s understanding at the time, and that the generally endorsed writ was filed under time pressure.[129] Caltex submits that upon investigating and not finding evidence to support the allegation, it was excluded from the statement of claim filed in the current proceeding.[130]
[128]T166.17-24; ACS [61].
[129]T166.24-T167.2.
[130]T167.1-10.

Caltex also rejects Agtan’s assertion that Caltex has benefited from the onerous nature of clause 19.1 by obtaining a lower rental on the premises and now seeks to ‘shy away’ from its onerous nature.[131] Caltex submits that it does not shy away from clause 19.1’s onerous nature, but that it is arguing that the clause does not have the effect that Agtan says it has on the facts of the case.[132]
[131]T167.15-19.
[132]T167.19-23.

Caltex’s response to Agtan’s conditions for any agreement to relief from forfeiture

Caltex submits that Agtan’s submission that relief should only be granted upon the condition that Caltex rectify the breach of clause 19.1 and pay Agtan’s costs should not be accepted.[133]
[133]CCS [46]; AOS [83].

Firstly, Caltex submits that as the grant of relief ‘is not to be constrained by precedent’,[134] such conditions should not be accepted simply because Agtan submits they are ‘usual conditions’ for the grant of relief.[135]
[134]Ibid; Beamer at [439].
[135]Ibid; T76.19-22; T89.25-T89.27.

Secondly, as to the condition that Caltex rectify the breach of clause 19.1, Caltex submits that given the undertaking proffered by it referred to in its Closing Submissions [48], any breach found to be constituted by the failure to repair or replace Tank 2 would not impose any practical disadvantage on Agtan, while a requirement that Caltex remedy the breach immediately would significantly disadvantage Caltex.[136]
[136]CCS [48]; T166.2-8.

Caltex submits that significant costs, disruption to business at the site and other possible significant risks would be incurred as part of a repair or replacement of the tank.[137] Further, that there remains significant uncertainty about the achievability of repair[138], and the possibility of costs exceeding estimates for either repair or replacement of the tank.[139] Caltex submits that there would be ‘significant advantage’ [140] to them in delaying the works, thereby allowing them to manage and coordinate the process with the steps to be taken under clause 25 at the end of the Current Lease in 2019.[141]
[137]CCS [49].
[138]CCS [50](a); T66.6-T66.17.
[139]CCS [50](b); Taylor Report, p 14, CB Vol. 4, p. 1229. T61.26-T62.5.
[140]CCS [51].
[141]Ibid.

Thirdly, as to the condition that Caltex pay Agtan’s costs, Caltex submits that the argument that there exists a general rule that the lessee seeking relief should pay the costs was recently rejected and that the Court ‘must have regard to all relevant circumstances in deciding what costs order is just’.[142]
[142]CCS [52]; Dee-Tech Pty Limited & Anor v Neddam Holdings Pty Limited (No. 2) [2012] NSWSC 517 at [62]ff and [68].

Caltex submits that relevant circumstances in the present case that would weigh against there being an order as to costs as a condition on the grant of relief might include Agtan ‘having repeatedly threatened re-entry, counterclaimed for possession and declined to confirm that it would not resist a grant of relief against forfeiture (except, ultimately, on unjustified conditions), and its continuing refusals to Caltex’s requests for an undertaking not to re-enter until after Caltex commenced this proceeding in response to those refusals.’[143]
[143]CCS [53].

Furthermore, Caltex submits that ‘questions of costs should be considered as an exercise of the Court’s discretion after liability has been determined’. [144]
[144]CCS [54].

Agtan’s Submissions

Agtan’s submissions can be summarised as follows:

(a) Caltex has been, and remains in breach of clause 19.1 since at least 1 September 2014.

(b) Properly understood, clause 19.1 contains two separate obligations:

1.The first obligation is to keep and maintain the Premises and its appurtenances in good and tenantable repair and good and efficient working order, having regard to their condition as at the date of commencement of the lease, and subject to two exceptions;
(i)fair wear and tear; and
(ii)a list of events that ‘arise without any neglect or default on the part of the lessee alone’.

2.The second obligation is to effect repairs to the Premises and its appurtenances as necessary, including the replacement of all worn or defective parts. This second obligation is not subject to the fair wear and tear exception, nor is it qualified by the condition of the Premises as at the date of commencement of the lease.

(c) The Tank System is not in good and tenantable repair and good and efficient working order, and Caltex is accordingly in breach of the first obligation in clause 19.1. This is so because Tank 2 has been decommissioned and has ceased to be operational and the total Tank System capacity has, by the loss of Tank 2, been reduced by 20%.

(d) Caltex cannot rely on the fair wear and tear exception because the second obligation is not subject to the fair wear and tear exception. Alternatively, by decommissioning Tank 2, it is not in a state resulting from fair wear and tear.

(e) On Agtan’s construction of clause 19.1 the date of commencement of the lease is not relevant to the repair obligation. Alternatively, if it be relevant, the date of commencement of the lease relevant to clause 19.1 is 1 September 1999.

(f) Principally, Agtan opposes the granting of relief against forfeiture unless Caltex undertakes to rectify the breach of clause 19.1 forthwith and pay Agtan’s costs.

(g) Several other points are raised by Agtan in opposition to the grant of relief. These include:

(xvii) Caltex indicated in a letter dated 26 May 2016 that even if there was a finding against it on its construction argument it did not intend to comply with the lease;

(xviii) Several breaches listed on the Breach Notice dated 29 May 2015 have not, despite assurances being given by Caltex, been remedied;

(xix) At the time Tank 2 was decommissioned, Caltex had not been given the consent of its landlords, the Conyers. In early correspondence from Caltex, it was alleged, without a proper basis, that consent had been given by the Conyers to the decommissioning. Caltex does not come to the court with clean hands;

(xx) Caltex received a lower rental because of the onerous nature of clause 19.1, and now seeks to shy away from the onerous nature of clause 19.1. Those seeking equity must do equity;

(xxi) Caltex’s claims regarding the impact of re-entry are overstated;

(xxii) The contention that Agtan is seeking to end their lease due to dissatisfaction with the rental determination is unfounded.

(h) If relief against forfeiture is not granted, then Agtan is entitled to damages. Agtan’s claim for damages includes:

(i) The cost of replacing or repairing the tank, either by relining Tank 2, the installation of a replacement tank in a new location, or the installation of a new farm of tanks.

(ii) Lost rent.

The Proper Construction of Clause 19.1
Clause 19 contains two separate obligations

Agtan submits that clause 19.1 contains two separate obligations, namely an obligation to keep and maintain the Demised Premises, and an obligation to repair the same as necessary.[145] Agtan acknowledges that there may be instances where the two might overlap, such as were fair wear and tear results in a defective part,[146] but submits that ‘this does not alter the existence of two separate obligations’, and indeed is a permissible outcome.[147]
[145]AOS [30].
[146]T127.16–17.
[147]ACS [20]; T116.4-5.

Agtan submits that the lessee’s first obligation is to ‘keep and maintain’ the premises in ‘good and tenantable repair and good and efficient working order and condition having regard to their condition as at the date of commencement of the Lease’. [148] Agtan submits that the obligation is subject to two exceptions:[149]

(a) fair wear and tear; and

(b) damage caused by fire, storm, flood, earthquake, tempest, act of God, riots, civil commotion or act of war that arise ‘without any neglect or default on the part of the Lessee alone’.

[148]Clause 19.1.

[149]AOS [31].

Agtan submits that the lessee’s second obligation is to ‘effect repairs to the Demised Premises and appurtenances as necessary including the replacement of all worn or defective parts’, and that this includes wear caused by the reasonable use of the lessee.[150] Agtan contends that this second obligation:
[150]T127.3-7; Clause 19.1.

(a) is not subject to the fair wear and tear exception;

(b) is not qualified by the condition of the premises as at ‘the date of commencement of the Lease’;[151] and

(c) extends not only to the Tank System as a whole, but to the replacement of individual worn or defective parts, such as individual tanks.

[151]AOS [32]; T114.23-28.

The meaning of ‘as necessary’ in Clause 19.1

Agtan submits that the plain understanding of the words ‘shall effect repairs as necessary’, in the context of clause 19.1 as a whole, is ‘as and when it is necessary to effect such repairs’.[152] Further, Caltex submits that ‘as necessary’ only attaches to the repair obligation in clause 19.1, and should not be read as applying to any other aspect of clause 19.1.[153]
[152]T114.8-10.
[153]T114.10-13.

Agtan relies on the decision of Justice Young in Greeting Oxford[154] for its submission that the proper meaning of the words ‘as necessary’ in clause 19.1’s repair obligation refers to the situation ‘when the reasonable observer would be of the opinion that the stage has been reached’[155] that further maintenance is no longer sufficient to keep, in that case lifts, to the necessary standard, and that it is therefore appropriate to effect replacement.[156] In Greeting Oxford, the relevant words were ‘replacement when required’.[157]
[154](1989) 18 NSWLR 33.
[155]Ibid, [40].
[156]T124.29-T125.16; T172.21-T173.3.
[157](1989) 18 NSWLR 33, [40].

Five Construction Aids

Agtan advances five points which it submits support the existence of two obligations in clause 19.1.

Firstly, Agtan notes the inclusion of the words ‘or the use of the Demised Premises by the lessee’ in clause 19.1, and submits this fact supports the construction that replacement is still required where the worn or defective parts are the result of use of the premises by the lessee.[158] Therefore, Agtan contends that the second obligation ‘expressly requires Caltex to undertake repairs that would be exempt under the fair wear and tear exception contained in the first obligation.’[159]
[158]T115.1-7.
[159]AOS [34] T115.18-21.

Agtan submits that it is necessary to recognise the two separate obligations in order to ensure that clause 19.1 functions harmoniously and to ensure that all of its operative words have work to do.[160]
[160]Ibid.

Secondly, Agtan submits that the intended separation of the obligations in that clause is evident in that they involve different work. For example the second obligation in clause 19.1 covers structural works while the first does not,[161] and additionally those parts address different subject matters.[162] Agtan in oral submissions described the first obligation as ‘the maintenance of a standard’[163] while the second ‘is a positive obligation to effect repairs as necessary.’[164]
[161]Agtan submits that the second obligation does not require Caltex to effect structural works except for such works ‘to the Tank System, Liquefied Petroleum Gas Equipment and Car Wash’, or which ‘arises out of’ the ‘neglect or default of’ Caltex or the ‘use’ of the premises by Caltex; AOS [32].
[162]AOS [35].
[163]T116.1-2.
[164]T116.2-3.

Thirdly, Agtan submits that the clause 19.2 exclusion of the lessor’s responsibility regarding the structural integrity and watertightness of the Tank System, Car Wash and Liquefied Petroleum equipment reflects Caltex’s responsibility pursuant to the second obligation regarding the Tank System.[165] Agtan submits that this reflects a ‘clear division of responsibility [and] … risk between 19.1 and 19.2, between the tenant and landlord’[166] and that this ‘is consistent with the allocation of responsibility to Caltex for the Tank System more generally’.[167]
[165]AOS [36].
[166]T116.13-15.
[167]AOS [36]; Agtan also points to clause 25 which relates to delivery up as reflecting the same allocation of responsibility described regarding clauses 19.1 and 19.2; T116.16-19; ACS [3].

Fourthly, Agtan submits that if clause 19.1 contained one obligation as contended by Caltex, that is; the lessee is to keep and maintain the premises and appurtenances in good repair, and good and efficient working order and condition, including by effecting repairs, having regard to the premises’ and appurtenances condition at the commencement of the lease and subject to a fair wear and tear exception, this could lead to an unbusinesslike result.[168]
[168]AOS [37].

Agtan submits that under Caltex’s construction ‘it is possible the Tank System could become defective and neither Agtan (because of clause 19.2) nor Caltex would be required to repair the system’.[169] Moreover, Agtan submits that having the repair obligation qualified by the condition of individual parts as at the commencement of the lease is ‘untenable’[170] as it is unfeasible for the parties to ‘know what the state of [the] part was as at the commence of the lease’.[171]
[169]Ibid]; T116.20-25.
[170]ACS [21].
[171]Ibid.

Fifthly, Agtan contends that the ‘onerous nature of the second obligation is consistent with the lease more generally’[172] which is drafted for Agtan’s benefit. Agtan points to several clauses which it says reflect nature of the lease in these respects.[173]
[172]AOS [38].
[173]Ibid; These clauses include: clause 16.1 which relates to insurance which Caltex must take out in the name of both Caltex and Agtan; clause 21.1 and 38.4 which relate to indemnities provided by Caltex for Agtan’s benefit; clause 22.1 whereby Caltex releases Agtan from all claims and liability arising out of accident, damage or injury to any person or property on the premises; clauses 26 and 27 relating to Agtan’s right of re-entry and claims for damages in a number of circumstances; and clause 38.1 whereby Caltex must obtain an environmental site assessment at the end of original term and each option period and, if necessary, clean the premises at its own expense.

Clause 30.1

Agtan rejects Caltex’s assertion ‘that clause 30.1 would have no work to do if there were two separate obligations in clause 19.1’.[174] Agtan submits that applying accepted canons of contract construction reveals that clause 30.1 only applies to ‘acts of God’ rendering the premises ‘substantially unfit for use as a petrol filling station’,[175] an interpretation which it says is consistent with the exception in clause 30.1(a).[176]
[174]ACS [5].
[175]ACS [8]; T117.27–T118.26; Clause 30.1.
[176]ACS [9]; T118.19-24.

Agtan also points to clause 16.1 which relates to insurance that Caltex must take out in the name of both Caltex and Agtan and which is required to cover, inter alia acts of God, and which fully indemnifies Agtan.[177] Agtan submits that the purpose of clause 30.1 is different[178] to that of clause 19.1’s second obligation which it notes would apply ‘in any situation where the Tank System becomes defective other than due to an act of God (for example, due to wear and tear)’.[179]
[177]ACS [10]–[11].
[178]T119.19-23.
[179]ACS [12].

Clause 10.1 and Clause 25.1

Agtan submits that further support for their interpretation that clause 19.1 contains two obligations and that the second is not subject to the fair wear and tear exception and is not qualified by the condition of the Demised Premises as at the date of commencement of the lease, can be found in clauses 10.1 and 25.1

Agtan submits that the important words in clause 10.1 are the following:

… nothing herein contained shall impose on the Lessee any liability to effect or pay for any structural alterations improvements or additions or structural repairs to the Demised Premises or any part thereof or to erect new additional or substantial sanitary conveniences except that the Lessee shall be liable to effect or pay for any structural alterations improvements or additions or structural repairs to the Tank System … (emphasis added)

Agtan submits that on a plain reading, clause 10.1 makes Caltex liable to effect repairs to the Tank System and further, this obligation does not reference fair wear and tear, nor does it provide for there to be regard had to the commencement date of the lease.[180]
[180]T82.2-10.

Agtan compares the wording of clause 10.1 with the ‘counter situation’ in clause 19.1 whereby the Lessor is not responsible for structural repairs to the Tank System.[181]
[181]T84.415

Agtan notes that the obligation in respect of structural repairs to the Tank System being borne by the Tenant while other structural repairs are the Landlords responsibility reflects the onerous obligations inherent to dangerous use leases such as those involving inflammable, corrosive and explosive hydrocarbons as in the present case.[182]
[182]T84.21-27.

In relation to clause 25.1, Agtan notes that the delivery up requirements in this clause exclude the Tank System which is to remain as part of the Demised Premises at the end of the lease.[183] Further, Agtan submits that the obligation under clause 25.1 that the Lessee make good all damage to the Demised Premises to the reasonable satisfaction of the Lessor is ‘entirely consistent’ with the second obligation in clause 19.1.[184]
[183]T112.25-113.14.
[184]T85.12-18.

The scope of the first obligation

Agtan submits that Caltex’s assertion that clause 19.1 only requires it to keep and maintain the Tank System as a whole, and that the Tank System is in good and tenantable repair and good and efficient working order, and is without any decrease in function, despite the decommissioning of Tank 2, ‘is untenable once it is recognised that clause 19.1 contains two separate obligations and that the second requires the replacement of all worn and defective ‘parts’.’[185]
[185]AOS [41].

Accordingly, Agtan submits that by Tank 2 being decommissioned, it has ceased to be operational, and is therefore worn and defective.

Further, Agtan submits that even if clause 19.1 only contains one obligation, by Caltex decommissioning Tank 2, the Tank System is not in good and tenantable repair as the total Tank System capacity has been reduced by 57,130 litres, or approximately 20%.[186]
[186]AOS [42]–[43]; ACS [25].

In support of this submission, Agtan advances two points:

(iii) firstly, Agtan submits that capacity usage is a commercial decision;[187]

(iv)secondly that Caltex’s analysis of whether the Tank System is in good and tenantable repair and good and efficient working order ‘ignores the interests of the lessor’[188] by not accounting for the impact of the site’s storage capacity on its value[189], and ‘focuses only on the interests of the lessee’. [190]

Further I accept that at all material times, for the reason outlined, the Tank system at the Demised Premises was in good and tenantable repair and good and efficient working order even without Tank 2 being in service.[303]
[303]CB3.419 establishing that the original Tank System as defined in the 1999 Lease comprised 7 tanks one of which was a 5,000 litre kerosene tank which had become redundant but was at no stage the subject of complaint or alleged breach by Agtan.

I am satisfied that notwithstanding that Tank 2 was decommissioned, the Tank System worked efficiently without decrease in function[304] and that the total capacity of the Tank System, excluding LPG, is approximately 231,000 litres,[305] which is in excess of the facilities operating requirement.[306]
[304]Jessop Statement, [34] and [35].
[305]Jessop Statement, [30]-[36].
[306]CB3.430; Jessop Statement, [5], [36].

Further, I note that the evidence establishes that the Demised Premises, even operating without Tank 2 is a service station facility which provides a relatively large fuel storage capacity compared to a large number of petrol stations under Agtan’s control.[307]
[307]Garvey Statement, [4] and [14]; T101.16-T102.9.

I also accept Caltex’s submission that there is no evidence that Caltex’s operation of the Demised Premises is unusual in some way which might support a finding that the current capacity at the Kilsyth Service Station in question would be unlikely to meet the requirements of another tenant also operating a petrol station on the Demised Premises.

Agtan did not contend in relation to market rental valuation, or otherwise, that increased tank capacity at the Demised Premises was required to achieve increased sales and earnings.[308]
[308]CB4.816-817; 823; 949-950.

Similarly the Expert who undertook the rental determination, instructed as to a Tank System capacity of 230,000 and the fact that Tank 2 was decommissioned, did not consider that the decommissioning of Tank 2 or the resultant working fuel storage capacity at the Demised Premises were matters which were material to his rental valuation of the Demised Premises or that those factors materially decreased the adequacy of the fuel storage capacity or the value of the Demised Premises.[309]
[309]CB4.996; CB4.1004.

In summary on this aspect I find that the decommissioning of Tank 2 has had no adverse effect on the Tank System or on the operation of the subject service station facility at the Demised Premises.[310]
[310]Jessop Statement, [35].

Conclusion
The Tank System remains in good and tenantable repair

In my view Caltex has not breached any obligation under clause 19.1 of the Lease to keep and maintain the Tank System in good and tenantable repair and good and efficient working order and condition, because Tank 2 reached the end of its effective working life by about 2011 or because Tank 2 was decommissioned in about October 2011.

In the circumstances of this matter and given my above findings I consider that the Tank System is and was at all material times in good and tenantable repair and good and effective working order and condition for the purposes of clause 19.1 of the Current Lease, notwithstanding that Tank 2 was decommissioned in about 14 October 2011.

Furthermore, because the date of commencement of the Current Lease was 1 September 2014, the condition of the Demised Premises and appurtenances at that determinative point in time was relevantly constituted by a Tank System in which Tank 2 was defective and had been decommissioned. Accordingly, the condition and status of Tank 2 was expressly accepted by Agtan by 1 September 2014 and could not thereafter give rise to a breach of the maintenance covenants in clause 19.1 of the Lease.

Agtan agreed at the time of signing the Deed of Renewal on 7 August 2015, in particular by clause 4.1 thereof, that there were no subsisting breaches of clause 19.1 by Caltex. Agtan knew well before that time that the fuel storage capacity was only 230,000 litres and Agtan knew, or should have known, that Tank 2 was decommissioned.[311]
[311]Sutherland Farrelly CB4.996 and United Letter, 1 May 2015 CB4.949.

Fair Wear and Tear – Agtan submissions

Agtan contends that Caltex has failed to establish that water ingress into Tank 2 was the result of fair wear and tear and that indeed Caltex is unable to establish the cause of damage to Tank 2.

Agtan observes that on the evidence Caltex is unsure as to the relevant ground conditions in which the tanks have been placed or the type of steel used to construct the tanks.[312]
[312]CB1.63 at [8(c)]; T13.25-29.

I consider that Tank 2 has experienced relevant wear and tear and is at the end of its expected life. In this regard I reiterate and expand on my findings above on this aspect.

In particular I find that the Tank System at the Demised Premises was of steel construction and that the tanks comprising the tank farm at the Demised Premises were placed in the ground with no cathodic protection.[313] I also find that the design life of the steel tanks was 20 to 30 years[314] and that Tank 2 was 23 years old when it was decommissioned in about October 2014.
[313]CCS [33]; Jessop Statement, [8], [10].
[314]CCS [33]; See footnotes [36]–[37] regarding varying analysis of the Tank System’s design life.

I am not however satisfied that the failure of Tank 2 was as a result of the likely[315] corrosion of the steel wall of that tank over a period of 20 plus years in uncontrolled clay soil.[316] Caltex acknowledges however, that the evidence adduced at trial was not sufficient to support a finding that the clay soil surrounding Tank 2 had corroded the steel of that tank and was the probable cause of Tank 2’s failure.[317]
[315]T157.17.
[316]CCS [35]; Jessop Statement, [11]; A steel underground petroleum storage tanks lifespan depends on its ability to resist corrosion caused by exposure to the surrounding soil over time; See Taylor Report, 14 December 2015, pp [5]-[7], CB4.1220-1222, in which Mr Taylor listed the factors that may affect the lifespan of a tank such as Tank 2. All of those factors were related to corrosion (Cf. Taylor XXN T50, 53-56). See similarly Henderson v Harvison [1916] 10 QJPR 25 at 31.
[317]T157.25-28.

I further find that in the circumstances namely that the tanks at the Demised Premises were made of steel with no cathodic protection system, their location in the ground, their operating environment and likely service life and the testing and maintenance regime undertaken in respect of the tanks, including Tank 2 at the Demised Premises, there was nothing Caltex could do to better maintain the underground steel tanks and prevent their failure beyond the monitoring and testing[318] which I am satisfied Caltex appropriately undertook, including in accordance with the relevant standards.[319]
[318]CCS [34]; Jessop Statement, [12]; Colt Services Expert Report, 14 December 2015; “CJT-1” annexure to Affidavit of Colin John Taylor, 14 December 2015, [15], CB4.1129-1230 which was not the subject of challenge on cross-examination.
[319]CCS [34]; Jessop Statement, [12]–[16].

I also find that Caltex acted reasonably[320] in decommissioning Tank 2[321], because that action was required to prevent further consequential danger and damage[322] and was, in the circumstances the only appropriate and practical course open to Caltex.[323]
[320]CCS [37].
[321]As it had ceased to be water tight as required for operation in accordance with the applicable standards; Jessop Statement, [26], [29], [32] and [33]; CCS [37]; CB3.458-459; CB4.1225-1226.
[322]Jessop Statement, [26]-[33]; Colt Report [7(ii), (iii], (c)] , [9(c)]; CB4.1225.1229; CCS [37]; See Alamdo Holdings Pty Ltd v Australian Window Furnishings (NSW) Pty Ltd (2006) 13 BPR 25,045 (NSWCA) at [31], [35] per Hodgson JA.
[323]Jessop Statement, [26]-[33]; Colt Report [7(ii), (iii), (c)], [9(c)]; CB4.1225.1229.

I do not however accept Caltex’s submission that its decision to decommission Tank 2 was in the ‘nature of a repair to the Tank System’.[324]
[324]CCS [38].

I also note in this regard that Agtan has not pursued any allegation, nor have I made any finding, of neglect or default on the part of[325] Caltex which caused wear and tear to, or the failure of Tank 2.[326] Furthermore, Agtan has made no allegations that Caltex’s action in decommissioning Tank 2 was wrongful or ill-advised in any way other than referring to the effect of such decommissioning on fuel storage on site.
[325]Clause 19.1.
[326]CCS [34].

I am not persuaded, for reasons I have already outlined, that it was feasible or practical for Caltex to replace or repair Tank 2, even if it was obliged to do so under the Current Lease in the circumstances (which I have found it is not), for reasons I have addressed, including that Tank 2 was at the end of its service life and had failed for that reason in the ordinary course of events.[327]
[327]Colt Report [10], CB4.1230 and Jessop Statement, [34]-[39].

Agtan on the other hand points out that there is a defective tank which has not been repaired or replaced and that the Tank System has lost significant capacity. Agtan also observes that the storage capacity of the site impacts on its value therefore harming the lessor.[328]
[328]T101.1-6.

Further, I am unpersuaded that the Tank System has lost capacity which is significant in the overall operating context of the Demised Premises or that the reduction in tank capacity has resulted in a devaluation of the Demised Premises. Sutherland Farrelly, the agreed expert who evaluated the site and rental issues in 2014, well aware of the decommissioning of Tank 2, did not suggest any material reduction of tank capacity.[329]
[329]CB4.986 (Ref: 996); In relation to adequate operating capacity Jessop Statement, [34]-[39].

For the above reasons, I also reject Agtan’s assertion that the decommissioning of Tank 2 is not the result of Tank 2 being the subject of fair wear and tear and that the positive act of decommissioning was not a direct consequence of reasonable use by Caltex nor in the ordinary operation of natural forces.

I consider that it follows from my findings that Tank 2 has failed from fair wear and tear, has for safety reasons been decommissioned, that in this case the decommissioning of Tank 2 was an aspect of the reasonable use of Tank 2 and that because I accept that Tank 2 had reached the end of its operational life, its failure was probably as a result of the ordinary operation of natural forces.

I also reject Agtan’s assertion that Caltex has not established whether the ingress of water was the result of fair wear and tear because corrosion was not proven to be the cause of damage to Tank 2. In my view the evidence supports the probable conclusion that the failure of Tank 2 was as a result of it reaching the end of its operational design life over which period it was exposed to the wear and tear of the ordinary operation of natural forces while in commission, resulting in failure of the tank’s single steel wall which has permitted water ingress.[330]
[330]Cody Report CB4.1230 (first three paragraphs).

Further I note that the decommissioning of Tank 2 is not alleged by Agtan to have caused any additional damage to the tank or the Tank System. I find that, however, the decommissioning of Tank 2 made it safe including in relation to the egress of flammable vapours.[331]
[331]Jessop Statement, [26]-[32].

In my view the failure of Tank 2 is in the nature of fair wear and tear for the purposes of clause 19.1 of the Current Lease for the reasons I have outlined above.

Accordingly, I am satisfied that on the evidence to which I have referred Tank 2 failed as a result of the ordinary fair wear and tear to which it was exposed in the ordinary course of Caltex’s operations at the Demised Premises given the tank‘s construction, service, location and surrounding physical environment.

Agtan’s reliance upon alleged breaches of a Lease

Agtan submits that the breaches which it alleged Caltex has perpetrated were notified by it pursuant to the Notice of Default issued on 15 July 2015 and accordingly those breaches were thereby notified under the Current Lease and related to breaches of the Current Lease.[332]
[332]ACS [50].

Caltex also submits that if the Court accepted Caltex’s construction argument in these circumstances, all other issues in the case would be unnecessary to decide.[333]
[333]CCS [41].

It follows however from my findings and conclusions in relation to the proper construction of the Current Lease that Caltex has not breached the Current Lease as alleged by Agtan and accordingly Agtan’s Notice of Default dated 15 July 2015 is ill-founded and ineffective for those reasons.

Furthermore, given my above findings and conclusions as I have earlier noted, Caltex and Agtan’s arguments in relation to waiver or agreement not to sue do not need to be further addressed.[334]
[334]CCS [41] and ACS [50] and [52].

For the reasons outlined I find that Caltex has not breached clause 19.1 of the Current Lease by reason of Tank 2 no longer being in commission, or otherwise.

Further for the reasons outlined above it follows that Agtan’s Notice of Default dated 15 July 2015 is not effective to determine the Current Lease.

Accordingly I also consider that Caltex has established that it is entitled to specific performance by Agtan of its obligations under the Current Lease in particular Agtan’s obligation not to interrupt or disturb Caltex’s peaceful possession and enjoyment of the Demised Premises under clause 4.1 of the Current Lease.

Conversely, and for the reasons outlined, I shall dismiss Agtan’s counterclaims for declarations that Caltex has breached, and remains in breach, of clause 19.1 of the Current Lease and that Agtan is entitled under clause 27 of the Current Lease to treat that lease as repudiated and re-enter into possession of the subject premises under the Notice of Default, alternatively the Second Notice of Default at the expiry of the Breach Period.

For the same above reasons I do not consider that Agtan is entitled to possession of the Demised Premises.

Caltex’s alternative claim for relief against forfeiture

Caltex pleads and submits an alternative claim for relief against forfeiture on the basis that re-entry or forfeiture by Agtan in the circumstances would be unconscionable. Specifically Caltex seeks relief against forfeiture pursuant to s 146 of the Property Law Act 1958 (Vic).[335]
[335]Caltex’s Statement of Claim, 1 October 2015 [38]; CCS [42]-[54].

I consider that given my primary findings and conclusion in relation to the proper construction of clause 19.1 of the Current Lease and associated matters, that it is not necessary for me to deal with Caltex’s alternative claim in relation to relief against forfeiture.

However, in case I am wrong in my findings and conclusion in respect of clause 19.1 Current Lease and associated matters, and because it may be of assistance hereafter, I make the following findings in connection with the facts germane to the Caltex claim for relief against forfeiture:

(a) Caltex’s conduct in relation to the decommissioning of Tank 2 was justified, reasonable and in no way inappropriate or wilful;[336]
[336]Caltex’s monitoring and testing of the tank – in accordance with applicable standards; Jessop’s Statement [12]-[15]; Monaghan Affidavit, 14 September 2015 [7]-[13]; Lindsay Affidavit, [21]; CB4.1110; Garvey Statement [42]-[48]; Lindsay Statement, 7 December 2015 [5]-[7].

(b) Caltex has performed its obligations to pay rent and outgoings and has not been shown to have a history of wilful breaches nor any other lease related history of misconduct;[337]
[337]Lindsay Affidavit [15].

(c) Caltex has conducted its business from the Demised Premises for a substantial period of time which is a factor likely to make forfeiture more disruptive for Caltex;

(d) If Agtan re-entered the Demised Premises it is likely that Caltex would have great difficulty obtaining suitable alternative premises and further the significant benefits to Caltex of trading at the Demised Premises would be unlikely to be easily re-established at another location;[338]
[338]Leahy [22] and [44]; Glase Statement [15].

(e) In the event of re-entry by Agtan, Caltex employees are likely to be disrupted and adversely affected at least temporarily and there is the potential for significant impact on the franchisee’s staff whose immediate employment may well be jeopardised;[339]
[339]Leahy [22] and [44]; Wright Statement, 15 September 2015, [22]-[23].

(f) Ejection from the Demised Premises is likely to give rise to substantial losses in respect of the franchisee’s loss of and costs liquidating its perishable stock which is likely to be of a value of $60,000 to $80,000.[340]
[340]Wright Statement [23].

(g) Agtan has not suffered any substantial damage or prejudice as a result of the decommissioning of Tank 2; and

(h) Caltex has acted reasonably and has undertaken to remedy Agtan’s losses at the end of the term of the Current Lease or compensate Agtan in the event that its position in relation to its obligations pursuant to clause 19.1 of the Current Lease are held to be contractually unsustainable.[341]

(i) Caltex has acted reasonably and in a manner which sought to provide comfort and assurance to Agtan in relation to the payment of certain remedial costs and in several attempts to resolve the subject dispute between the parties.

[341]CCS, [45(f)].

Finally, taking into account the undertakings proffered by Caltex, in particular as communicated in paragraph 45(f) of Caltex’s Closing Submission of 15 June 2016, I can see no practical disadvantage to Agtan likely to arise from any breach of the Current Lease which may be identified, contrary to my above findings and conclusions, whereas in my view on the evidence available at trial, the cost to Caltex of the potential detriments referred to above, were Agtan to re-enter and take possession of the Demised Premises, are likely to be significant and materially detrimental to Caltex.

Further I accept the evidence that it would not be feasible to replace just Tank 2. Tanks 1, 2 and 3 would have to be replaced at a cost of approximately $670,000-$850,000.[342]
[342]Taylor Report, CB4.1229; ACS [77] and footnote [64].

Finally I observe that the evidence of Mr Jessop was that the cost of replacing a single tank would be approximately $80,000 with associated works at a cost of $30,000 to $45,000 and the cost of replacing Tanks 1, 2 and 3 would be approximately $350,000 to $400,000 and the cost of replacing the whole system would be approximately $1.2m.[343]
[343]Jessop Statement, [36]-[39].

Given the above on Agtan’s case, Caltex would potentially be exposed to very substantial costs and damages in relation to the replacement of a storage tank not disputed to be at the end of its design life and in respect of which it is not suggested by Agtan that Caltex has been in any way neglectful or in default under the Current Lease, or any former lease. In my view this is not an outcome which is likely to have been intended by the parties, nor one which is commercial including because the subject tank is an asset owned by the lessor and its removal and replacement are in the nature of substantial structural works with likely major cost consequences.

Summary of Key Conclusions
Clause 19.1 of the Current Lease does not require either repair or replacement of Tank 2

I consider that, in the circumstances, Caltex is neither obliged to repair or replace Tank 2 under the terms of clause 19.1 of the Current Lease.

This is because:

(a) the lessee’s obligation to effect repairs or replace worn or defective parts to the Demised Premises and appurtenances is qualified by the words ‘as necessary’;

(b) Tank 2 developed a substantial defect as a result of fair wear and tear prior to the commencement of the Current Lease on 1 September 2014 and had been decommissioned in about October 2011, 3 years before the commencement of the Current Lease and accordingly there was no obligation upon Caltex to effect repairs or undertake replacement of parts in relation to Tank 2, ‘having regard to their condition at the date of commencement of the Lease’;[344]
[344]Is estimated to be Caltex’s offer of $125k in relation to a new tank – rejected by Agtan; Caltex’s Statement of Claim [25] and [26]; admissions by Agtan in its Defence [25] and [26]); see Jessop Statement ,[37].

(c) further, as I have earlier emphasised, pursuant to clause 4.1 of the Deed of Renewal, Agtan acknowledged and agreed that there were no subsisting breaches of any term of the second lease as at 7 August 2015 when the Deed of Renewal of Lease, giving rise to the Current Lease, was executed by Agtan;

(d) further, the Tank System remained in good and tenantable repair and good and effective working order and condition notwithstanding the decommissioning of one of the six tanks, namely Tank 2 and accordingly no repair or replacement in relation to Tank 2 was necessary;

(e) clause 19.1 exempts Caltex from any obligation to maintain, repair or replace, if the relevant part of the Demised Premises is the subject of fair wear and tear.

For the reasons I have explained I do not consider it necessary or appropriate to decide or make any alternative orders in relation to Caltex’s claim for relief against forfeiture, nor in the circumstances do I propose to order any aspect of the injunctive relief sought in paragraph D of Caltex’s Statement of Claim.

Orders

I propose to make orders declaring that:

1.Caltex is not in breach of clause 19.1 of the Current Lease by reasons of Tank 2 no longer being operational, and
2.Agtan’s Notice of Default dated 15 July 2015 is not effective to determine the Current Lease.
And order that:
1.There be specific performance by Agtan of its obligations under the Current Lease, in particular its obligation not to interrupt or disturb Caltex’s peaceful possession and enjoyment under clause 4.1 of the Current Lease.

I shall, when convenient to the parties hear submissions as to the appropriate form of final orders and in relation to submissions, if necessary, in relation to costs.

[2017] VSC 593

3 October 2017