Camperdown Dairy International v The Camperdown Cheese Company
[2016] VSC 693
•17 November 2016 (revised 16 March 2017)
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S CI 2016 01283
| CAMPERDOWN DAIRY INTERNATIONAL PTY LTD (ACN 168 442 206) | Plaintiff |
| v | |
| THE CAMPERDOWN CHEESE COMPANY PTY LTD (ACN 102 694 673) | Defendant |
---
JUDGE: | Ginnane J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 26 May 2016 |
DATE OF JUDGMENT: | 17 November 2016 (revised 16 March 2017) |
CASE MAY BE CITED AS: | Camperdown Dairy International v The Camperdown Cheese Company |
MEDIUM NEUTRAL CITATION: | [2016] VSC 693 |
---
LANDLORD AND TENANT – Covenant concerning tenant’s works – Tenant with right under Option Deed to purchase shares in Landlord – Tenant’s request to demolish building – Landlord’s discretion – Condition that tenant provide security for diminution in value of land – Whether unreasonable refusal – Declarations
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Martin QC with Ms C van Proctor | Hall & Wilcox (as agent for McCullough Robertson Lawyers) |
| For the Defendant | Mr D Collins QC with Mr A Rollnik | HWL Ebsworth Lawyers |
HIS HONOUR:
Background
The plaintiff, Camperdown Dairy International Pty Ltd, leases land at 325 Manifold St Camperdown (‘the property’) from the defendant, The Camperdown Cheese Company Pty Ltd, by a written lease dated 21 May 2014 (‘the Lease’). I will refer to the plaintiff as ‘the Tenant’ and the defendant as ‘the Landlord’.
Aqueous Corporation Pty Ltd (‘Aqueous’) is the trustee of the Aqueous Trust, which owns all of the shares in the Landlord. Ms Mary Bevilacqua is the sole director and secretary of both Aqueous and the Landlord.
The area of the leased property is 15 acres and a dairy was once conducted on it. The Tenant wished to demolish a shed at the rear of the property and sought the Landlord’s consent to do so. The Tenant intends to remove most of the decommissioned buildings on the property and construct a milk processing facility. The Tenant has already carried out works on the property as part of what it calls the ‘Stage One Demolition Works’, which were not precisely identified. Demolishing the shed forms part of the Tenant’s ‘Stage Two Demolition Works’.
The Landlord has consented to the demolition of the shed, on the conditions that it has ‘appropriate security to ensure that any structure that [the tenant] demolishes is replaced with another structure of equal value’. It required ‘either a cash deposit, or a bank guarantee, for $2 million, as security for diminution in the value of the property if a new structure is not built by the tenant in place of the shed. The provision of this security is a pre-condition to the landlord consenting to the demolition of the back shed’.
The Landlord also required that the Tenant satisfy other conditions, which were not disputed. They were: the provision of certificates of currency of all insurances required to be provided under the Lease in respect of the demolition works; details of the safety and protective measures to be implemented by the Tenant with respect to undertaking the demolition works; and providing for its approval detailed specifications for the proposed new building works.
The Tenant seeks a declaration that the Landlord has unreasonably withheld consent to the demolition of the shed pursuant to clause 12.1 of the Lease. The Tenant also seeks a declaration that it is entitled to demolish the shed.[1]
[1]The originating motion was amended during the hearing to refer to the area marked in ‘green’ on the plan attached to the originating motion, which identified the shed.
The Transaction documents
The Lease was one of several agreements between the Tenant, the Landlord and their related entities and directors, made on 21 May 2014, the effect of which was that Aqueous sold or would sell all of the shares in the Landlord to the Tenant.
The Option Deed
Those agreements of 21 May 2014 included a Call and Put Option Deed (‘the Option Deed’) for the acquisition by the Tenant of the shares in the Landlord. The effect of the exercise of the option is that the Tenant will acquire all shares in the Landlord so as to be both the owner and tenant of the property. The Tenant has paid the Landlord $895,000 under the Option Deed. That Deed enables the Landlord to require the Tenant to purchase the shares (‘the Put Option’) or the Tenant may exercise the right to purchase the shares (‘the Call Option’).
On 30 October 2014, the Option Deed was varied, primarily in relation to the call option price payable by the Tenant. The ‘call option price’ payable by the tenant consisted of $250,000 payable on or before the execution date of the Option Deed. Under the Option Deed, the Tenant was to pay fees of $645,000 during the duration of the Option Deed and a payment of $5 million on completion. The total amount payable by the Tenant under the Option Deed was therefore $6,115,000. The Deed had different ‘Exercise Periods’ for the Call Option and the Put Option. They commenced on the day after the Execution Date. The Call Option, being the tenant’s option, expired on the earlier of the day being the day 36 months and 14 days after the Execution Date and the day immediately preceding the date of the termination of the Option Deed. The Put Option, being Aqueous’ option, expired on 30 days following the day on which any amount became payable by the Tenant, but which it failed to pay and 30 days following the last day of the Call Option Exercise Period.
All the amounts paid by the Tenant under the Option Deed were to be deducted from the final payment due under the Deed, but they would not be repaid if the option or options were not exercised.
The Guarantee
Next was a Deed of Guarantee and Indemnity (‘the Guarantee’), by which MCG Group Pty Ltd and Mr William James McDonald each guaranteed the obligations of the Tenant under the Lease and the Option Deed. MCG Group Pty Ltd is the parent company of the Tenant. Mr McDonald is the sole director of both MCG Group Pty Ltd and the Tenant.
The Share Sale Agreement
There was also a Share Sale Agreement made between Aqueous, the Landlord and the Tenant providing for Aqueous to sell all the shares in the Landlord to the Tenant upon the valid exercise of the Call or Put Options. The Recitals to the Share Sale Agreement stated:
1. The Seller owns all the Shares.
2. Pursuant to the valid exercise of either the Call Option or the Put Option under the Call and Put Option Deed, the Seller has agreed to sell to the Purchaser and the Purchaser has agreed to buy from the Seller all of the Shares on the terms contained in this agreement.
The Completion Price under the Share Sale Agreement, if the Call or Put Options were validly exercised, was $5,660,000, less all the amounts actually received by the Seller under the Option Deed.
The evidence
The Tenant’s evidence
The Tenant relied on an affidavit made by Mr Dale Francis Cliff, its solicitor, and an affidavit of Mr Tony Addinsall, its project manager. Following objections, a number of sentences in each affidavit were not admitted into evidence.
Mr Addinsall has day to day control of the Tenant’s operations at the property. He commenced work at the property in early 2015. In addition to his affidavit, he gave oral evidence. He said that he had inspected the shed and that it ‘is in a dilapidated state and is not fit for occupation or use as a shed.’ He also said:
The roof is largely rusted with large holes in it. While the supporting structures holding up the roof are largely currently sound, the roof itself and supporting purlins are rusted and entirely unsuitable for reuse.
Mr Addinsall exhibited to his affidavit two colour photographs of the shed, which he took. One shows part of the outside of the shed. The other is of the inside and, in Mr Addinsall’s words, ‘shows holes in the roof and its dilapidated state.’ The photograph showed pools of water on the floor of the shed.
Mr Addinsall also said that he had made inquiries of third parties as to the value of the shed and the cost of dismantling and relocating it. He said that he had engaged a business called ‘WestVic Waste and Recycling’ for that purpose. Exhibited to Mr Addinsall’s affidavit was a quotation from that business for the demolition and removal of the shed. The price quoted was $33,000 including GST. Mr Addinsall said that:
the price offered by WestVic for the shed is nil. That is the value the contractors have placed on the shed taking into account the cost of its removal.
When he took up his position, Mr Addinsall became aware that the shed was being occupied by agricultural contractors, PM and JM Baulch, who used the shed for the storage of equipment. Mr Addinsall said that the Tenant had not undertaken any waterproofing of the shed, or performed any repairs or maintenance on it since it entered into possession of the property. This was because ‘the intention was to demolish the shed for the new development.’[2]
[2]Transcript of Proceedings, Camperdown Dairy International Pty Ltd (ACN 168 442 206) v The Camperdown Cheese Company Pty Ltd (ACN 102 694 673) (Supreme Court of Victoria, S CI 2016 01283, Ginnane J, 26 May 2016) (‘T’) 31:20-25.
During cross-examination, senior counsel for the Landlord showed Mr Addinsall two photographs of the shed dated 6 March 2014. One of those photographs, in contrast to Mr Addinsall’s photograph, appeared to show the inside of the shed with no water on the floor, and with pieces of farming equipment or machinery stored in the shed. Mr Addinsall said that the photograph was ‘pretty dark’, but what it showed was broadly consistent with the condition of the shed when he returned to the property in late 2014.[3]
[3]T 31:8-10.
Ms Bevilacqua’s affidavit
The Tenant also sought to tender certain parts of, and exhibits to, an affidavit of Ms Mary Bevilacqua, affirmed on 13 October 2015, which had been prepared for the purpose of a prior proceeding before this Court, to which I refer below.[4] The Tenant’s basis for the tender was to show that the Landlord had made an admission against interest, relating to the common intention of the parties at the time that they entered into the Lease.[5]
[4]Aqueous Corporation Pty Ltd and Anor v Camperdown Dairy International Pty Ltd and Anor (Unreported, Supreme Court of Victoria, Digby J, 27 October 2015).
[5]T 13:25-31.
The Landlord objected to the admission of Ms Bevilacqua’s affidavit, submitting that, because the Tenant made no application to rectify the Lease, the only relevance of the affidavit could be in support of an argument about the construction of the Lease which would contradict its express terms.[6] After hearing the parties’ submissions, I admitted the redacted version of Ms Bevilaqua’s affidavit into evidence, subject to the objections made by senior counsel for the Landlord on the basis that I would rule on its relevance at a later point.
[6]T 18:12-15 and T 19:26.
Having considered all the evidence, I rule that the parts of Ms Bevilacqua’s affidavit upon which the Tenant relies are not admissible or relevant.[7] The Lease does not contain any ambiguity which would entitle the Tenant to rely on its contents. It does not establish any objective facts that might assist the Tenant’s case about the construction of the Lease. Nor does it establish any common intention of the parties that is not reflected in the Lease. At most, it demonstrates that the Landlord wished to maintain control over developments on the property. But, the Lease itself contains terms dealing with that issue. The affidavit does not contain any admission against interest.
[7]The parties referred to and I have taken into account the decisions in State Rail Authority of New South Wales v Codelfa Construction Pty Ltd (No 2) (1982) 150 CLR 29 and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116-117.
The Practice Court proceeding
The Tenant also referred to a proceeding heard in the Practice Court by Digby J on 27 October 2015 being Aqueous Corporation and another v Camperdown Dairy International and another (‘the Practice Court proceeding’).[8] That proceeding was brought by Aqueous and the Landlord against the Tenant and Mr McDonald. They sought an injunction restraining the Tenant from dismantling or demolishing fixtures on the property without their prior consent. The works concerned were the ‘Stage Two Demolition Works’. The ‘Stage One Demolition Works’ had already been undertaken.
[8]Aqueous Corporation Pty Ltd and Anor v Camperdown Dairy International Pty Ltd and Anor (Unreported, Supreme Court of Victoria, Digby J, 27 October 2015).
Justice Digby did not grant the injunction, finding that damages would be the proper remedy for any proved breach of the Lease. He also stated:
One of the factors I have taken into account in balancing the respective risk of an injunction to the parties is the relatively modest sale price under the transactions to which I have referred, which is in the order of about $5m. This relatively small sum is to be contrasted with the evidence, which I accept as sufficient in weight for an interlocutory application of this type, in Mr Cliff’s affidavit to the effect that MCG has a balance sheet which reflects a net worth of approximately $58m.
In my view, recovery against [the Tenant], if the plaintiffs were successful in establishing a right to damages, would not appear to be risky, or unlikely, on the evidence before me.
Furthermore, in my view injunctive relief should be refused in this instance, on the basis that the proper remedy for the plaintiff on its contractual claims is damages. There is here no offsetting sufficiently demonstrated risk or prospect of non-recovery for the plaintiffs.[9]
[9]Ibid, [26]-[28].
The Landlord submitted that the findings made in Practice Court proceeding could not be relied on to prove any fact in this proceeding, and that it could only be referred to by the Tenant insofar as it was persuasive authority on a question of law.[10] The Landlord relied on s 91 of the Evidence Act 2008 (Vic), which provides:
[10]Defendant’s Supplementary Submissions [9]-[10] and T 4:25, 54:20-27, 94:7.
91 Exclusion of evidence of judgments and convictions
(1)Evidence of the decision, or of a finding of fact, in an Australian or overseas proceeding is not admissible to prove the existence of a fact that was in issue in that proceeding.
(2)Evidence that, under this Part, is not admissible to prove the existence of a fact may not be used to prove that fact even if it is relevant for another purpose.
The Practice Court proceeding was interlocutory and did not determine the issues that are now before the Court. However, that proceeding is part of the context in which the Tenant’s request for the Landlord’s consent must be considered.
The Landlord’s evidence
The Landlord’s evidence consisted of the two colour photographs of the shed, dated 6 March 2014,[11] and a letter from the Tenant’s solicitors dated 23 May 2016. By the letter, the Tenant accepted the fact that the shed was occupied by the agricultural contractors PM and JM Baulch, as at the date of the commencement of the Lease, and agreed to the admission, by consent, of the Term Sheet to PM and JM Baulch’s lease with the Landlord.[12] The Term Sheet provided that the permitted use of the shed was, ‘[a]ny use associated with the running of the lessee’s agricultural contracting business’ and that the Lease could be terminated, by either party, with 90 days’ notice in writing. The rent payable under that lease was $19,200 plus GST per annum.
[11]Defendant’s Exhibit 1.
[12]Defendant’s Exhibit 2.
The Lease
The relevant clauses of the Lease are:
1. DEFINITIONS AND INTERPRETATION
1.1 Definitions
…
Buildings means the improvements on the Land (including all plant, machinery, equipment and fittings) from time to time.
…
Land means the land described in Item 1 of the Schedule.
Landlord’s Property means all plant, equipment, fixtures, fittings, furniture, furnishings, signs and other property in, on or servicing the Premises or the Buildings supplied by the Landlord and on the Premises as at the Commencement Date.
…
Permitted Use means the use stated in Item 8 of the Schedule.
Premises means the Land and includes the Buildings and the Workshop Site from the termination of the Workshop Site tenancy, but does not include the Aussie Farmers Premises during the term of their tenancy or the Countryroad Farm Premises during the term of their tenancy.
…
Specified Buildings means the Buildings described in Item 6 of the Schedule.
…
Workshop Site means that part of the Land comprising part of 325 Manifold Street, Camperdown, being the premises occupied at the Commencement Date by PM & JM Baulch – Agricultural Contractors ABN 76 866 476 849.
…
1.3 Other rules of interpretation
In this Lease, unless expressly provided otherwise:
(e)(consents and approvals) if the doing of any act, matter or thing requires the consent, approval or agreement of any party, that consent, approval or agreement may be given conditionally or unconditionally or withheld in that party’s absolute discretion;
…
2. GRANT OF LEASE
…
2.3 Permitted Use
The Tenant must use the Premises only for the Permitted Use.
7. TENANT’S OBLIGATIONS
7.1 Obligations
The Tenant must during the Term:
(a)keep in good repair and order all Buildings, water tanks, windmills, troughs, yards, gates, fences, dams, channels, drains, culverts, water boxes and regulators, on the Land forming part of the Premises;
…
7.2 Prohibitions
The Tenant must not without the prior written consent of the Landlord:
…
(d) alter, interfere or remove the Landlord’s Property from the Premises;
…
or allow any other person to do so.
10. THIRD PARTY TENANCIES
10.1 Workshop Site
(a)The Tenant acknowledges that the Workshop “Site is presently occupied by a third party.
(b)The Landlord will terminate the existing Lease of the Workshop Site with such termination to be effective within 95 days after the Commencement Date.
(c)Notwithstanding any other provision of this Lease, this Lease will commence to apply to the Workshop Site on the date after the termination of the existing occupation of the Workshop Site and the Premises will be deemed to include the Workshop Site as and from that date.
10.2 Aussie Farmers Premises and Countryroad Farm Premises
(a)The Tenant must not in any way with the operations undertaken by the occupiers of the Aussie Farmers Premises and the Countryroad Farm Premises.
(b)Notwithstanding any other provision of this Lease, this Lease will commence to apply to the Aussie Farmers Premises and the Countryroad Farm Premises as from the date their respective occupation of their respective Premises ends and the Premises will be deemed to include the Aussie Farmers Premises and the Countryroad Farm Premises as from those respective dates.
11. CHEESE PLANT AND SPRAY DRIER EQUIPMENT
11.1 Removal at Tenant’s request
(a)The Landlord must upon the provision of not less than 6 months prior written notice from the Tenant during the Term procure the removal of all of the Cheese Plant and Spray Drier Equipment from the Land.
(b)The Tenant will reimburse the Landlord for all costs it incurs in removing the Cheese Plant and Spray Drier Equipment in accordance with clause 11.1(a) within 14 days of receiving from the Landlord details of those costs, including a tax invoice. These costs include removing the Company Plant and Equipment and putting it on to trucks that will transport the Company Plant and Equipment off the Property. Further transport costs, once the trucks leave the Property, will not be payable by the Grantee.
11.2 Removal at Landlord’s election
The Landlord may at its own cost at any time remove some or all of the Cheese Plant and Spray Drier Equipment from the Land without being requested to do so by the Tenant.
12. TENANT’S WORKS
12.1 Landlord prior consent
Notwithstanding any other provision of this Lease, the Tenant may not undertake any works on the Premises without the prior written approval of the Landlord, which consent may not be unreasonably withheld.
12.2 Waterproofing of Specified Buildings
Within six months after the Commencement Date, the Tenant must, at its cost, undertake such works as may be required to waterproof the Specified Buildings. Thereafter, the Tenant shall, from time to time, undertake such works as may be required to keep and maintain the Specified Buildings in a waterproof condition.
…
15. DEFAULT
…
15.2 Landlord’s right to terminate
(a) This Lease ends if the Share Sale Agreement is completed.
(b)The Landlord may at its sole discretion terminate this Lease by giving the Tenant not less than 2 Business Days’ notice or by re-entry if:
(i)the Tenant fails to perform any of its obligations under this Lease and, if the failure is capable of being remedied, is not remedied to the Landlord’s satisfaction within 14 days of the Landlord giving written notice to the Tenant specifying the failure and the remedial action required by the Landlord;
(ii)the Call and Put Option Deed is terminated;
(iii)The Tenant prior to the Expiry Date fails to Complete the purchase of the Shares in accordance with the Share Sale Agreement following the valid exercise of either the Call Option or the Put Option; or
(iv)the Tenant is unable to pay its debts, a receiver, receiver and manager, administrator, provisional liquidator, liquidator or trustee in bankruptcy is appointed to the Tenant, or in respect of any property of the Tenant, a resolution is passed or proceedings are commenced to wind up or bankrupt the Tenant, or the Tenant makes any composition or arrangement with its creditors.
15.3 Tenant to vacate
On the Expiry Date or the earlier date on which this Lease is terminated the Tenant must vacate and restore the Premises to the condition they were in on the Commencement Date.
…
15.5 No removal of certain items
Despite clauses 15.3 and 15.4, the Tenant may not remove items of the Tenant’s Property that form part of structural work carried out to the Premises by the Tenant, unless required by the Landlord.
…
15.7 Reinstatement of Cheese Plant and Spray Drier Equipment
Without limiting clause 15.3, 15.4 or 15.5, upon the expiry of termination of this Lease the Tenant must, if required by the Tenant, re-install, at its cost, upon the Land the Cheese Plant and Spray Drier Equipment to a state and standard as at the date of its removal.
…
18. GENERAL
…
18.3 Waiver
A provision of this Lease or a right created under it may not be waived except in writing signed by the party granting the waiver.
18.4 No Waiver
None of the following things are to be taken as a waiver by the Landlord of any of its rights under this Lease or of any breach of this Lease:
(a)the Landlord accepting rent or other money under this Lease (before or after termination);
(b)the Landlord failing to exercise or delay in exercising any right;
(c)the Landlord giving any concession to the Tenant;
(d)the Landlord accepting delivery of keys;
(e)the Landlord showing prospective tenants through the Premises;
(f)the Landlord attempting to mitigate its loss.
…
18.12 Exercise of a right
A party may exercise a right at its discretion and separately or together with another right. If a party exercises a single right or only partially exercises a right, then that party may still exercise that right or any other right later. If a party fails to exercise a right or delays in exercising a right, then that party may still exercise that right later.
…
18.15 No merger
The rights and obligations of the party will not merge on completion of any transaction under this Lease or any other document. They will survive the execution and delivery of any assignment or other document entered into for the purpose of implementing and transaction.
SCHEDULE
ITEM 1 Land: The whole of the land described in Certificates of Title Volume 2933 Folios 574, Volume 9087 Folio 142 and Volume 10740 Folios 736, 737 and 738 and known as 325 Manifold Street, Camperdown, Victoria, but excluding the Excluded Land. ITEM 2 Premises: The Land and the Buildings except for the Aussie Farmers Premises, the Countryroad Farm Premises and the building occupied by PM & JM Baulch for the period of their respective tenancies. ITEM 3 Commencement Date: The 21st day of May, 2014 ITEM 4 Expiry Date: The 6th day of July, 2017 ITEM 5 Rent: $100.00 per annum, payable annually in advance on the Commencement Date and each subsequent anniversary of the Commencement Date. ITEM 6 Specified Buildings: The old cheese factory building on Manifold Street, the building currently occupied by PM & JM Baulch and all other buildings on the Land, if they are not subject to significant being undertaken by the Tenant (with the Tenant’s prior written approval) within six months of the Commencement Date. … ITEM 8 Permitted Use: Production and storage of dairy products.
Communications between the parties – the Tenant’s request for permission
On 10 December 2015 the Tenant wrote to the Landlord requesting permission to commence the ‘Stage Two Demolition Works’ stating:
Pursuant to Clause 12.1 and Clause 7.2 of the Lease, the Tenant requests that the landlord provide its consent to redevelopment works which the Tenant proposes to undertake on the Premises …
Please refer to the attached ‘CDI Demolition Layout Plans’ and the following State 2 Demolition Work Areas description on page 2 herein this letter for the proposed Stage 2 Demolition Works.
Stage 2 Demolition Work Areas
The proposed Stage 2 Demolition works on the Camperdown Premises is to split into three work areas. Those three areas are denoted by the following titles:
Stage 2(a) Demolition – Entire rear Warehouse, Engineers Shed and Office block,
Stage 2(b) Demolition – Chimney, Boiler House and old Sub-station,
Stage 2(c) Demolition – Demolition and Redevelopment of front building with heritage retention areas.
The proposed Stage 2 Demolition works has been split into the above three work areas as each has specific technical requirements to complete the work. The Stage 2 Demolition Schedule will at this point, follow the above works from Stage 2 (a) to (c) and propose to commence Stage 2 (a) works as soon as all required permits and consents have been received. Each work area will be required to obtain an individual Demolition Permit due to the specific technical requirements of each work area before any work can commence.
Camperdown Dairy International has engaged experienced and appropriately qualified contractors to complete the works which will implement all protective work measures required and operate the Site under the current Occupational Health and Safety Act and Regulation to ensure that safety is maintained at all times.
Please let us have your consent within the next 7 days.
We look forward to receiving your response.
…
On 4 March 2016, the Landlord’s solicitors wrote to the Tenant’s solicitor, referring to the Tenant’s request for consent to the ‘Stage Two Demolition Works’ and stating:
In October 2014, the Tenant was issued with a permit by the Corangamite Shire Council authorising the demolition of certain structures on the Premises (Demolition Permit). We are instructed that the Demolition Permit was obtained without the Landlord’s consent.
One of the structures which was authorised to be demolished under the Demolition Permit was the large brick chimney which is shown in the enclosed photograph (Chimney). We note that the Tenant has requested the Landlord’s consent on 10 October 2015 to demolish the Chimney as part of a request to undertake various works on the Premises (Tenant Works Application).
The letter also referred to a structural engineer’s report, dated 6 August 2014, about the structural integrity of the chimney situated on the Premises. The report was commissioned by the Tenant. According to the letter, the report concluded that the chimney ‘is in poor condition and should be demolished prior to commencing any other redevelopment on works on the Premises.’ The Landlord’s solicitors’ letter continued:
Under clause 7.1 of the Lease, the Tenant is required to keep all Buildings in good repair and order. We note that Buildings is defined in the Lease to mean the improvements on the Land from time to time. Accordingly, the Tenant is responsible for keeping the Chimney in good repair and order, which the Tenant has failed to do.
Without prejudice to the Landlord’s rights, the Landlord hereby consents to the demolition of the Chimney (Chimney Demolition Works), subject to the following conditions:
…
6. without prejudice to the Landlord’s rights under the Lease, the Tenant repairs any damage to the Premises or other land caused by the execution of the Chimney Demolition Works; and
7. the Landlord’s consent in this letter is to the Chimney Demolition Works only, and does not extend to any other works referred to in the Tenant Works Application. The Landlord will respond separately in respect of the Tenant Works Application.
Please confirm your client’s agreement to these terms.
On 11 March 2016, the Tenant’s solicitors responded to the Landlord’s solicitors’ letter of 4 March 2016. They stated that the Tenant did not require the Landlord’s consent to obtain a demolition permit under the Lease and that:
There has already been extensive correspondence on this point and again it was raised by your client as a fundamental plank of what became her failed application and abandoned proceedings. Please take us to the provision of the Lease which you rely upon if you do not agree with our position.
In relation to the chimney, they wrote:
It is unsurprising that our client has requested consent to demolish the chimney (as part of other demolition works) in light of the 6 August 2014 report. What your letter does not record is that our client first requested consent to demolish in February 2015. That consent has never been forthcoming.
We find it somewhat odd that your client would instruct you to maintain an argument that our client was somehow obligated under clause 7.1 to improve the structure that she knew and agreed would be demolished. It is also somewhat incongruous of your client to have denied her consent to the demolition of the Chimney and yet now purport to complain about its state or repair.
The Chimney should have been demolished by your client long before our client took possession of the site.
Our client will agree to the terms of consent in respect of the Chimney.
The letter went on to explain that the Tenant would not demolish the chimney until consent to the remainder of the ‘Stage Two Demolition Works’ had been given. In relation to that broader consent, the letter stated:
Our client’s request for consent to Demolition works has now been outstanding for more than 12 months. We have, through you, attempted to negotiate a position that will see the consent given. Your client appears intransigent … Your client has left ours with no alternative but to apply to the court for orders that she provide the consent…
On 1 April 2016, the Tenant’s solicitors send an email to the Landlord’s solicitors, stating: ‘As we have previously requested could you also take you client’s instructions regarding the demolition of the back shed.’
On 4 April 2016, the Landlord’s solicitors replied by email stating:
I have discussed the request in your email of 1 April 2016 below with my client today. My client fails to understand why there is such urgency to this request.
I am instructed to respond as follows:
…
2. Demolition of back shed
The shed located on at the rear of the property has significant commercial value. As stated on previous occasions, my client is concerned that it has appropriate security to ensure that any structure that your client demolishes is replaced with another structure of equal value. I am instructed that my client requires either a cash deposit, or a bank guarantee, for $2 million, as security for diminution in the value of the property if a new structure is not erected by the tenant after demolition of the back shed. The provision of this security is a pre-condition to the landlord consenting to the demolition of the back shed.
My client also requires the following to be provided prior to the commencement of the demolition works to the back shed:
(a)certificates of currency of all insurances required to be provided under the Lease in respect of the demolition works; and
(b)details of the safety and protective measures to be implemented by the tenant with respect to undertaking the demolition works.
For the avoidance of doubt, before any new structure is erected on the property, the tenant must comply with the Lease in respect of such works, including providing to the landlord for approval detailed specifications for the proposed new building works.
The conditions or requirements imposed by the Landlord in the email of 4 April 2016 are described as ‘pre-conditions’. The email could be regarded as a conditional consent, perhaps described as a consent subject to conditions precedent. In my opinion, it is sufficient to say that the Landlord did not expressly refuse consent, it indicated that it would consent if certain preconditions were satisfied.
On 5 April 2016, the Tenant’s solicitors responded to the email of the previous day stating that the security amount demanded by the Landlord ‘relates to a dilapidated unused shed.’ They also stated that the Tenant had no obligation to provide security under the Lease or any other agreement as a precondition to the giving of consent to the demolition of the shed; and also asserted that the Landlord had ‘a positive obligation not to act unreasonably.’ The email continued:
We cannot think of a more obvious example of acting unreasonably than to demand further compensation or security beyond the terms of the existing deal. Your client’s demand for security is entirely unreasonable. We take it that is now your client’s final position in which case we are instructed to move the court for orders compelling her to give the consent…
On 11 April 2016, as foreshadowed, the Tenant commenced this proceeding seeking declaratory relief.
Submissions
The Tenant’s submissions
The Tenant’s case was that the Landlord unreasonably refused consent to the demolition of the shed, in breach of its obligation under clause 12.1 of the Lease. The demolition works plainly fell within the scope of the term ‘works’ in clause 12.1. It submitted that clause 7.2 (d) had no application to the proposed demolition. Clauses 7 and 12 of the Lease were not inconsistent because the proposed works would not constitute alteration, interference or removal of ‘Landlord’s Property’, as defined. The Premises and the Buildings were not ‘Landlord’s Property’, and were not ‘fixtures’ within the definition of ‘Landlord’s Property’, as otherwise the definition would be read as meaning ‘[buildings] … in, on or servicing … the Buildings’.
The Tenant also submitted that:
(a) if the proposed demolition work fell within clause 7.2, clause 12.1 expressly qualified that clause and governed the exercise of the Landlord’s consent. The opening words of clause 12.1 – ‘notwithstanding any other provision of this lease’ – were paramount and demonstrated that clause 12.1 overrode any inconsistent provision. Clause 12.1 gave effect to the parties’ intention;
(b) the word ‘works’ in clause 12.1 should be given its ordinary meaning, which included all works, without limitation;
(c) to the extent that there was any ambiguity in the construction of the Lease, it was to be construed against the Landlord, as it was the Landlord’s document; and
(d) if the Landlord’s construction of clause 12.1 were accepted, it would confer power on the Landlord in terms wider than necessary for the protection of its legitimate interests having regard to the purpose of the Lease viewed in the context of the other transaction agreements.
The Tenant’s obligation to reinstate the premises at the end of the Lease was not relevant if clause 12.1 was applicable, because of its opening words: ‘notwithstanding any other provision of this Lease’. Clause 12.1 was a specific clause dealing with works that were to be undertaken on the premises.
The Tenant submitted that clause 12.1 required that the reason for the Landlord’s refusal to consent must be something that affected the subject matter of the Lease, and not something extraneous or dissociated from its subject matter. The reasonableness of any refusal must be assessed objectively.
The Tenant asserted that the terms of the Option Deed and the Guarantee were relevant to the construction of clause 12.1. The reasonableness of the Landlord’s refusal to provide its consent to the proposed demolition of the shed, and its ‘pre-condition’ of a $2 million security, was to be assessed by reference to the ‘broader transaction’ and the associated transaction documents.
For the Landlord’s refusal of consent to be valid, it must have been directed at obtaining protection against a particular ‘danger’ from which clause 12.1 was designed to protect. Those dangers were that the Landlord might suffer some loss or damage as a result of the works, for which it was not otherwise protected under the Lease, the Option Deed or the Guarantee. Because the shed had no, or nominal, value, the Landlord would suffer no loss from its removal. The Landlord had not suggested that the demolition of the shed could cause it a loss of $2 million. The purchase price of the Landlord’s shares fixed by the transaction agreements was only $6 million, and a third of that price, or $2 million, could not be attributed to the shed. The Tenant had already paid Aqueous $890,000 under the Option Deed. The Landlord was trying to obtain better security than the Tenant had agreed to provide by the transaction agreements. That was not a valid basis for withholding consent. The Court may infer unreasonableness in a Landlord withholding consent when a Landlord refuses consent but is, at the same time, willing to engage in negotiations to vary the terms of the Lease in a manner favourable to it.
The Landlord had been unsuccessful in persuading the Court in the Practice Court proceeding that it was exposed to any financial risk attached to the project.
The Lease envisaged that the Tenant’s works would be carried out with the consent of the Landlord, and that its consent to those works was not to be unreasonably withheld. The permitted use of the premises under the Lease was never undertaken by the Tenant, because the dairy had previously been decommissioned. Works had to be carried out before dairy products could be produced. Substantial works, including the ‘Stage One Demolition Works’ had been completed without the Landlord’s opposition. The Court could have regard to that conduct in determining whether the Landlord’s refusal of consent to the Stage 2 works was unreasonable.
The Tenant also submitted that the provisions of the Lease had to be construed commercially and that there was no commercial sense in preventing the Tenant from commencing the redevelopment. The annual rent under the Lease was only $100.
No waterproofing of specified buildings, as provided for under clause 12, was required under the Lease if the premises were to be the subject of significant tenant’s works.
In summary, the Tenant submitted that the only reasonable position that the Landlord could have taken in response to its request for consent to demolition of the shed was to consent to the proposed works, or to consent to them on condition that it received reasonable compensation for any loss suffered as a result. Because the Landlord did not adopt either of those courses, the Court should infer that its reason for withholding consent was not to protect an interest envisaged by its right to withhold consent under clause 12.1 of the Lease and, therefore, was unreasonable.
The Landlord’s submissions
The Landlord submitted that the demolition of the shed would be a breach of express terms of the Lease. Clause 7.1 of the Lease obliged the Tenant to keep the ‘Buildings’ in good repair and order, and clause 15.3 required the Tenant, on the expiration or termination of the Lease, to restore the ‘Premises’ to the condition they were in at its commencement. The Landlord submitted that it was entitled to withhold consent to work which would deprive it of its rights arising under the Lease, namely, to have the property restored to its original condition on the termination or expiry of the Lease. The Tenant was seeking to demolish the existing building, but accepting no obligation to replace it.
The Tenant bore the onus of proving that consent has been unreasonably withheld. It had to establish that the Landlord’s decision to withhold consent was a decision that no commercially reasonable landlord could make. The Tenant had not satisfied that onus.
The Landlord submitted that the only inference to be drawn was that the Tenant sought consent to demolish the shed so that it could progress its redevelopment of the property. The Tenant was seeking a head start on the development without purchasing the shares in the Landlord. The demolition of the shed for the purposes of the Tenant’s potential redevelopment was inconsistent with the permitted use of the property for the storage and production of dairy products. If the Tenant wished to proceed with the demolition of the shed, it could exercise the option and purchase the shares in the Landlord from Aqueous.
The Landlord also submitted that the demolition of the shed was an alteration, interference or removal of ‘Landlord’s Property’ which was prohibited unless the Landlord’s prior written consent was obtained under clause 7.2(d). Consent under that provision could be withheld at the Landlord’s absolute discretion, because of clause 1.3 of the Lease.
The Landlord contended that clauses 7.2(d) and 12.1 of the Lease were not inconsistent and that each could operate in accordance with its terms. Works which altered, interfered with or removed the ‘Landlord’s Property’ required consent pursuant to clause 7.2(d). The Landlord submitted that the Tenant’s reading of the term ‘Landlord’s Property’ would be inappropriate because its operation could be avoided by destroying what was a fixed or part of a building, rather than the building itself. Works which did not involve an alteration, interference or removal of the ‘Landlord’s Property’ could be performed with consent obtained in accordance with clause 12.1. For example, works involving the installation of a fence or drain would only require consent under clause 12.1.
Clause 12.1 did not empower the Tenant to carry out any work, rather it prohibited work. The Tenant’s reading of clause 12.1 would destroy the effect of clause 7.2(d).
Alternatively, the Landlord submitted that, if clauses 7.2(d) and 12.1 were found to be inconsistent, then clause 12.1, being the later clause, should be rejected as repugnant and the earlier clause 7.2(d) should be taken to prevail. Clause 12.1 was a broad ‘catch all’ provision which had been inserted for the benefit of the Landlord and it did not limit the clear and express operation of clauses 7.2(d) and 1.3, which specifically applied to any alteration, interference or removal of the Landlord’s Property. The maxim generalia specialibus non derogant applied, so that the specific provision applied.
Ms Bevilacqua’s affidavit could not be relied on to alter the clear meaning of the Lease. It did not establish that the Landlord was willing to have buildings demolished. Nor did any evidence of conduct by the parties after the execution of the Lease enable that interpretation even if that evidence was admissible. The failure of the Landlord to object to the ‘Stage One Demolition Works’ did not prevent its objection to the ‘Stage Two Demolition Works’.
Legal principles
Landlord unreasonably withholding consent
The authorities to which I will refer establish that the Tenant bears the onus of showing that the Landlord’s withholding of consent was unreasonable. The question of whether the Landlord’s conduct was reasonable or unreasonable is a question of fact for the Court to decide. The question is whether the landlord’s conduct was reasonable, not right or justifiable.[13]
[13]Ashworth Frazer Ltd v Gloucester City Council [2002] 1 All ER 377; [2001] 1 WLR 2180, 2183 [5] (Lord Bingham). Mason J also stated that he was ‘inclined to the view’ that a landlord is entitled to rely on a ground not taken at or about the time of refusal.
Many of the authorities deal with a landlord’s refusal to consent to a lease or to an assignment of a lease. In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd,[14] Mason J referred to the judgment of Walsh J in Colvin v Bowen[15] who wrote:
According to the view thus preferred the grounds upon which a refusal may be based must be concerned either with the character and personality of the proposed assignee, or with matters affecting the use or occupation of the premises which may result from the proposed assignment. The somewhat less narrow view, to which reference is made by Sargant L.J. in Houlder's Case, requires that the reason for refusal must be something affecting the subject matter of the contract which forms the relationship between the landlord and the tenant, and not something extraneous and dissociated from the subject matter of the contract.
It appears to me to be clear from the judgments in the cases mentioned that the principles contained in those cases would exclude from consideration, as a ground for refusal of consent, the circumstance that the lessor desires to resume possession of the property in order to occupy it.[16]
[14](1979) 144 CLR 596.
[15](1958) 75 WN (NSW) 262.
[16](1958) 75 WN (NSW) 262, 264 (citations omitted).
In Cathedral Place Pty Ltd v Hyatt of Australia Ltd,[17] Nettle J emphasised the significance to be attributed to the terms of the Lease, its nature, and the relations between the parties resulting from it.[18]
[17][2003] VSC 385.
[18]See also Perry Park Pty Ltd v City of Darwin [2016] NTSC 27 (Kelly J).
The English authorities were considered in detail by Lewison J in Sargeant v Macepark (Whittlebury) Ltd.[19] They include the English Court of Appeal decision in Iqbal v Thakrar[20] in which Peter Gibson LJ stated the following propositions, of which the seventh is particularly important:
[19][2004] 4 All ER 662.
[20][2004] All ER (D) 304 [26] (Longmore LJ agreeing).
(1) The purpose of the [covenant] is to protect the landlord from the tenant effecting alterations and additions which damage the property interests of the landlord.
(2) A landlord is not entitled to refuse consent on grounds which have nothing to do with his property interests.
(3) It is for the tenant to show that the landlord has unreasonably withheld his consent to the proposals which the tenant has put forward. Implicit in that is the necessity for the tenant to make sufficiently clear what his proposals are, so that the landlord knows whether he should refuse or give consent to the alterations or additions.
(4) It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable landlord in the particular circumstances.
(5) It may be reasonable for the landlord to refuse consent to an alteration or addition to be made for the purpose of converting the premises for a proposed use even if not forbidden by the lease. But whether such refusal is reasonable or unreasonable depends on all the circumstances. For example, it may be unreasonable if the proposed use was a permitted use and the intention of the tenant in acquiring the premises to use them for that purpose was known to the freeholder when the freeholder acquired the freehold.
(6) While a landlord need usually only consider his own interests, there may be cases where it would be disproportionate for a landlord to refuse consent having regard to the effects on himself and on the tenant respectively.
(7) Consent cannot be refused on grounds of pecuniary loss alone. The proper course for the landlord to adopt in such circumstances is to ask for a compensatory payment.
(8) In each case it is a question of fact depending on all the circumstances whether the landlord, having regard to the actual reasons which impelled him to refuse consent, acted unreasonably.[21]
[21]Sargeant v Macepark (Whittlebury) Ltd [2004] 4 All ER 662, 672 quoting Iqbal v Thakrar [2004] All ER (D) 304 [26] (Peter Gibson LJ). I have separated the numbered points for ease of reference.
In Mount Eden Land Ltd v Straudley Investments Ltd,[22] the English Court of Appeal stated:
(1) It will normally be reasonable for a landlord to refuse consent or impose a condition if this is necessary to prevent his contractual rights under the [lease] from being prejudiced by the proposed assignment or sublease.
(2) It will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the [lease].
[22](1996) 74 P & CR 306, 310.
After considering the English authorities, Lewison J in Sargeant v Macepark (Whittlebury) Ltd[23] stated in respect of a landlord’s giving consent subject to conditions:
When considering the reasonableness of conditions, it seems to me that if the landlord would have been entitled to refuse consent on some particular ground, a condition neutralising the landlord's concern will ordinarily be reasonable. The most common example would be a case in which the landlord would be entitled to refuse consent to an assignment to a financially weak assignee, but in fact grants consent on condition that the assignee's obligations are guaranteed or that the assignee puts up a rent deposit. In considering the reasonableness of a condition imposed to allay a particular concern of a landlord, Peter Gibson LJ's principle in Iqbal v Thakrar is also relevant…
[23][2004] 4 All ER 662.
In respect of the Landlord’s claim in this case, the authorities accept that a landlord has a legitimate interest in ensuring that a tenant will not diminish the value of the leased property. The authors of Woodfall’s Law of Landlord and Tenant, say of this interest:
Pecuniary damage only
An objection by the landlord on the ground of pecuniary damage only is not a reasonable ground for refusing consent absolutely. If the landlord wishes to avail himself of his right to require as a condition of his consent the payment of a reasonable sum in respect of damage to or diminution in the value of premises, and expenses properly incurred, he must either ask for a particular sum or say that he would his consent and makes no condition as to payment of any compensation, he cannot afterwards be heard to say, as evidence of reasonableness, that the premises have suffered, or will suffer, damage or any diminution in value and that the tenant has not offered to compensate him. Where the landlord demands a sum as compensation, the onus is upon the tenant to prove that the landlord has in demanding that sum unreasonably withheld his consent.[24]
[24]Sir Kim Lewison (ed), Woodfall’s Law of Landlord and Tenant (Sweet & Maxwell, 2014) [11.262].
The authors cite the English Court of Appeal judgment in Lambert v F. W. Woolworth & Co[25] (‘Lambert’s Case’) for this proposition. In that case, MacKinnon LJ stated with reference to the effect of the provisions of the Landlord and Tenant Act 1927 (UK), but in terms that apply equally to the question before the Court, which arise in respect of the operation of clause 12.1:
[25][1938] Ch 883. The other members of the Court, Slesser LJ, and Greer LJ (in dissent) did not specifically consider a situation where a landlord had demanded as a precondition to consent a sum greater than a reasonable sum. That case concerned the application of s 19(2) of the Landlord and Tenant Act 1927 (UK), which was in the following terms: "In all leases whether made before or after the commencement of this Act containing a covenant condition or agreement against the making of improvements without licence or consent, such covenant condition or agreement shall be deemed, notwithstanding any express provision to the contrary, to be subject to a proviso that such licence or consent is not to be unreasonably withheld; but this proviso does not preclude the right to require as a condition of such licence or consent the payment of a reasonable sum in respect of any damage to or diminution in the value of the premises or any neighbouring premises belonging to the landlord, and of any legal or other expenses properly incurred in connection with such licence or consent nor, in the case of an improvement which does not add to the letting value of the holding, does it preclude the right to require as a condition of such licence or consent, where such a requirement would be reasonable, an undertaking on the part of the tenant to reinstate the premises in the condition in which they were before the improvement was executed."
Simonds J. held that [the landlord] had not unreasonably withheld consent. He came to that conclusion on the ground that the plaintiffs, if desirous of requiring the payment of a reasonable sum, must quantify the amount they required, and if it should thereafter be held that they had named too large a sum they would be held to have acted unreasonably, and the defendants need pay them nothing. In view of this hazard he thought that the plaintiffs did not act unreasonably in not consenting at all.
I cannot accept this reasoning. In the first place it would render the operation of the Act wholly nugatory in every case in which the amount claimable by the landlord is uncertain. This seems to be an invention or evasion for the continuance of the mischief which the statute was designed to remedy. Secondly, I see no reason why the plaintiffs need have specified the sum they demanded. They could in perfect compliance with the Act have replied to the letter: "We give our consent provided you pay us a reasonable sum for damage to or diminution in the value of the premises. We are advised that such sum should be £X, but if you do not agree with that estimate the difference between us must be settled by some competent tribunal." Such a dispute, merely as to the quantum of an admitted liability, may commonly arise, for example, under s. 8 of the Sale of Goods Act, 1893 .
But, thirdly, I entirely dissent from the view that if the plaintiffs had named the sum which they considered to be reasonable, and it was subsequently held to be too much, the Court would hold that they had unreasonably withheld their consent. It is true that if a lessor attaches to his consent a condition that the Court thinks is unreasonable, it may make a declaration that the lessee may act without any further consent of the lessor: Young v. Ashley Gardens Properties, Ld. If in answer to the letter of January 4, 1937, the plaintiffs had said:
"We give our consent provided you pay us £X and we will not take a penny less,"
that result might follow when £X was found to be too much. But it would not follow if they said:
"We give our consent provided you pay a reasonable sum, and we are advised and consider that £X is such a sum."
In Brodan Pty Ltd v Clearview Industrial Estate Pty Ltd,[26] in which the applicable legislation was in similar terms to that in Lambert’s Case,[27] Young J said the following:
In Lambert's case (No. 2) it was held by the majority (see Slesser LJ at 906 and MacKinnon LJ at 911-912) that where the landlord wishes to object to the improvements sought to be effected by the tenant on the ground that such may damage or cause a diminution in value of the premises, the landlord must consent subject to reasonable compensation. If he does not take this course, but rather refuses consent outright, then he will be almost certainly held to have acted unreasonably. I say ‘almost certainly’ because really the question of unreasonableness is a question of fact, but because the legislature has specifically provided for the case where the landlord says the premises will suffer a diminution in value, a landlord can either take the course offered by the statute, but no other course, if he is to act reasonably.
[26](1986) 4 BPR 97, 252; (1987) NSW ConvR 55-328.
[27][1938] Ch 833.
Analysis
Which clause applied?
Clause 7.2(d), if it stood alone, would apply to the Tenant’s application for consent and would give the Landlord an unfettered discretion in respect of the application. I consider that the definition of ‘Landlord’s Property’ contained in clause 1.1, which is applied in clause 7.2(d), contains two subclauses separated by the disjunctive ‘or’. So read, the shed falls within the second subclause as a building ‘supplied by the Landlord and on the Premises as at the commencement date’.
However, I consider that clause 12.1, rather than clause 7.2(d) is the operative provision governing the validity of the Landlord’s consent to the Tenant’s request to demolish the shed. Clause 12.1 is headed ‘Tenant’s Works’ and the Tenant’s demolition of the shed meets that description. The clause opens with the words ‘notwithstanding any other provision of this Lease, the Tenant may not undertake any works on the Premises’. Clause 7.2(d) is one of the ‘other provisions’ of the Lease. I do not accept the Landlord’s submission that clause 12.1 is only a prohibition. Read as a whole, and in context, it provides a mechanism for the Tenant to obtain the Landlord’s consent to undertake work on the property. While clause 12.1 is the general provision and clause 7.2(d) is specific, I consider that clause 12.1 is intended to apply to all ‘Tenant’s works’.
Therefore, clause 12.1 applied to the Tenant’s application for consent to demolish the shed and the Court must determine whether the Tenant has established that the Landlord unreasonably withheld consent.
Has the Tenant established that the Landlord unreasonably withheld consent?
The Tenant only challenged the condition relating to the provision of the $2 million and did not challenge the Landlord’s other conditions.
So far as the condition for the provision of the $2 million is concerned, the questions are: what were the Landlord’s legitimate concerns and were the proposed conditions reasonable protection of those concerns?
As previously mentioned, the email of 4 April 2016 first states that the Landlord requires appropriate security to ensure that any structure that the Tenant demolished was replaced with another structure of equal value. But, the email then switches to stating that the Landlord:
requires either a cash deposit, or a bank guarantee, for $2 million, as security for diminution in the value of the property if a new structure is not erected by the tenant after demolition of the back shed. The provision of this security is a pre-condition to the landlord consenting to the demolition of the back shed.
The email does not state what would become of that security if the Tenant exercised the Option and purchased the shares in the Landlord. No submissions were made about that question. It was not suggested that any lack of clarity as to the effect of the condition made it invalid. The Tenant did not pursue any further information about how the condition would work before commencing this proceeding. It may well be that a term would be implied that the Landlord would discharge the security if the Option was exercised. Such a term would give effect to the context in which the Tenant was legally obliged to purchase the shares if the Landlord exercised the Option.
I consider that the Landlord had a legitimate concern to ensure that the Tenant would restore the Premises to the condition that they were in on the Commencement Date of the Lease. Secondly, if the Landlord was otherwise willing to consent to any Tenant’s works, it had a legitimate concern to ensure that the value of the property was not diminished by those works.
No proper evidence of the cost of replacing the shed was presented – the evidence of the removalist did not establish that cost and was not properly before the Court. Nor was there any evidence of how the demolition of the shed would affect the value of the property. The condition of the property had already been altered by the performance of the ‘Stage One Demolition Works’.
The terms of the Lease are to be taken as containing the parties’ contractual intentions. They should be read in the context of the other transaction documents including the Option Deed and the Share Sale Agreement. Their effect was to fix an amount under the Option Deed, on payment of which the Tenant would have possession of the property and be able to use it as it wished. If the Tenant made the payments due under the Option Deed, then, in any sense, the Landlord would have received the agreed value of the property. The Tenant had made payments under the Option Deed totalling almost $895,000, but substantial payments remained to be made.
But, the Lease provided for the circumstance where the Tenant’s obligations under those agreements were not honoured and, for instance, the Option Deed was terminated by the Tenant prior to the expiry date or the Tenant failed to complete the purchase of the shares in accordance with the Share Sale Agreement (clause 15.2). If the Lease was terminated, or the expiry date reached without the shares being purchased, the Tenant had to vacate and restore the premises to the condition they were in on the Commencement Date (clause 15.3).
The grant of the Lease gave the Tenant a right to occupy and use the Premises for the permitted use. The Premises were a decommissioned dairy, so some Tenant’s works might have been anticipated. To the extent that the Tenant needed to undertake works to enable that permitted use to occur, the Lease enabled the Tenant to seek the consent of the Landlord and prevented the Landlord unreasonably withholding consent. The Tenant wished to demolish the shed as part of its development of the site in the ‘Stage Two Demolition Works’ and not because of its condition.
But, the Landlord had a legitimate interest in keeping the property in the condition it was in when it was leased, save for alterations due to Tenant’s works to which it consented. That was a ‘property interest’ that, in accordance with the authorities, the Landlord was entitled to protect. The waterproofing obligations imposed on the Tenant by clause 12.2 also reflected that interest. That interest was protected by the terms of clause 12.1 in respect of works generally and clause 7.2(d) in respect of particular types of works.
The fact that the Landlord did not object to the ‘Stage One Demolition Works’ did not by itself remove its right to require the satisfaction of the preconditions that it imposed. There was no waiver of rights.
I do not consider that the Landlord was obliged to consent to the Tenant’s application because it might later have become the owner of the property by purchasing the shares. The Landlord was entitled to protect its legitimate interests in the preservation of the property, pending the exercise of the Options.
The photographs of the shed that were in evidence show that it was a substantial structure of considerable size. Mr Addinsall stated that the walls of the shed were ‘simple corrugated iron’ and that its structure ‘comprises a simple strutted design with steel stanches and some minor brick work’. There was no evidence of the cost of rebuilding it. The fact that a waste and recycling business would offer nothing for it if it was engaged to remove it, does not assist in determining what value, if any, it might contribute to the property.
There was conflicting evidence about the condition of the shed, but it did not show that it was incapable of being used. Mr Addinsall described it as in a dilapidated state and ‘not fit for occupation or use as a shed’. He said that the roof and supporting purlins were ‘largely rusted’ and ‘entirely unsuitable for reuse’. It was subject to an existing third party Lease at the commencement of the Lease to the Tenant, Camperdown Dairy, as clause 10, the Third Party Tenancies Clause, reflected. That existing tenant paid rent of $19,200 plus GST per annum and used the shed for storing machinery.
The question to be asked, as was stated in Iqbal v Thakrar,[28] is whether the condition that is challenged might be imposed by a reasonable landlord in the particular circumstances. I consider that the Tenant has not established that it was unreasonable for the Landlord to decide that the demolition of the shed might diminish the value of the property.
[28] [2004] All ER (D) 304.
The Practice Court proceedings demonstrated that the Landlord was concerned about the Tenant’s financial capacity to meet its obligations under the Option Deed. The Lease conferred rights on the Landlord if the required payments were not made. But those rights, if exercised, would have terminated the Lease and would have left the Landlord with the property in the condition it possessed after Tenant’s works had been undertaken. That possible outcome is a further reason why a reasonable landlord could have had a legitimate concern about the diminution of the value of the property as a result of the demolition of the shed and have required security against that possible outcome as a condition of its consent.
It is important to keep in mind that the Tenant bears the onus of proving that the Landlord unreasonably withheld consent. There are a range of facts that are relevant in considering whether the Tenant has met that onus, including:
(a) The Tenant was seeking to take steps towards developing the milk processing plant before it had exercised the Option and purchased the shares in the Landlord – it had already been permitted, expressly or impliedly, to undertake Stage One of the development;
(b) Applying the amounts payable under the Option Deed as a guide, the property was valued at about $6 million;
(c) The property was 15 acres in area;
(d) The shed was a substantial structure, at least in size;
(e) The Tenant had already paid about $895,000 under the Option Deed, which would be deducted from the balance of the amounts that the Tenant would be required to pay if it exercised the Option. These amounts would not be refunded if the Option was not exercised;
(f) In contrast, the Tenant paid $100 rent per annum under the Lease, which suggests that the significant financial commitment by the Tenant to the Landlord or Aqueous flowed from the Option Deed;
(g) The precondition of the provision of the $2 million security for the diminution of the value of the land was not explained by reference to any valuation report;
(h) The third party tenant had paid the Landlord $19,200 plus GST per annum rent for use of the shed;
(i) The Landlord bore a risk that if the Options were not exercised or the payments due under the Option Deed not made, it might end up with control of the property, in whatever state it would be after all, or some, of the Tenant’s works had been undertaken.
In all these circumstances, the Tenant’s request to demolish the shed was a significant matter. The Landlord’s precondition that the Tenant provide monies, or alternatively, a guarantee, as security in the event that the demolition diminished the value of the property was reasonable in all the circumstances. As I read the condition, as stated in the email of 4 April 2016, it required security, not that the Tenant necessarily pay the amount of $2 million to the Landlord. The Landlord’s first condition was that any structure demolished be replaced by another structure. That condition was not the subject of detailed submissions. Rather, the parties concentrated on the Landlord’s alternative preconditions, which involved the provision of security in case the value of the property was diminished. I have adopted a similar approach and concentrated on those alternative preconditions.
I do consider that the Landlord was entitled to seek security in a reasonable sum for the possible diminution of the value of the property caused by the demolition of the shed.
However, I also consider that the Tenant has established that the Landlord’s requirement that the security be in the amount of $2 million was not reasonable. That amount was very large in the circumstances. It appears to have been an arbitrary figure and there was no evidence as to how it was calculated. The shed appeared to be old and in need of repairs and occupied only a part of the 15 acres of the property. The whole of the Landlord’s assets were assessed by the parties as having a value of about $6 million for the purposes of the Option Deed and payments of $895,000 had been made to the Landlord under that deed. The rent of the property was only $100 per annum.
Conclusion
I have found that the Landlord was entitled to impose a condition of granting consent for the demolition of the shed that the Tenant provide security in a reasonable sum against the possible diminution of the value of the property that might result. I have found that the sum of $2 million contained in the condition was greater than was reasonable by way of security.
I have set out above the statements of MacKinnon LJ in Lambert’s Case[29] as to the effect of a landlord seeking greater compensation than was justified for the effect of ‘improvements’ to the property and whether the landlord had thereby unreasonably withheld consent to the improvements.
[29][1938] Ch 833.
The parties did not address the orders that should be made if I found that the Landlord was entitled to some security against any diminution of the property from the demolition of the shed, but not in the amount claimed.
In view of my findings, I will invite further submissions about what, if any, declarations or other orders I should make and on the question of costs.
0
4
0