Capitol Theatre Management v Council of the City of Sydney

[2005] NSWSC 5

CITATION:	Capitol Theatre Management & Ors v Council of the City of Sydney & Ors [2005] NSWSC 5
HEARING DATE(S):	13 December 2004
JUDGMENT DATE :	4 February 2005
JUDGMENT OF:	McDougall J at 1
DECISION:	See paras [71] and [72] of judgment

CATCHWORDS:	CONTRACT - whether objective intention to contract - whether "last right of refusal" subject to contract - whether right void for uncertainty - agreement for lease - nature of deemed assignment on change in "beneficial control" of lessee
LEGISLATION CITED:	Real Property Act 1900
CASES CITED:	Masters v Cameron (1954) 91 CLR 353 Sinclair, Scott & Co v Naughton (1929) 43 CLR 310 Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622 G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd (1967) 118 CLR 429 Hillas & Co Limited v Arcos [1932] 147 LT 503 Thorby v Goldberg (1964) 112 CLR 597 Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601 Meehan v Jones (1982) 149 CLR 571 Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 ACI Operations Ltd v Berri Ltd [2004] VSC 219 Mackay v Wilson (1947) 47 SR (NSW) 315
PARTIES:	Capitol Theatre Management Pty Limited (first plaintiff) Capitol Investments (Arena) Pty Limited (second plaintiff) Arena Management Pty Limited (third plaintiff) Council of the City of Sydney (cross-claimant) Capitol Theatre Management Pty Limited (first cross-defendant) Arena Management Pty Limited (second cross-defendant)
FILE NUMBER(S):	SC 50117/03
COUNSEL:	T F Bathurst QC/M R Elliott (plaintiffs/cross-claimant) B C Oslington QC/R J Carruthers (cross-defendants)
SOLICITORS:	Robert Kaufmann Lawyers (plaintiffs/cross-claimant) Blake Dawson Waldron (cross-defendants)

LOWER COURT JURISDICTION:

-

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

4 February 2005

& ORS v COUNCIL OF THE CITY OF SYDNEY & ORS

JUDGMENT

1 HIS HONOUR: The defendant (the council) owns the Capitol Theatre in Sydney. On 16 April 2002, the council leased the theatre to the first plaintiff (Capitol) for a term of 99 years commencing on 16 January 1995. That was done pursuant to an agreement for lease made on 31 March 1992. Also on 16 April 2002, Capitol commenced proceedings against the council in this Court relating to the agreement for lease. Capitol and the council agreed to settle those proceedings on the terms of a letter dated 19 April 2002 (the 19 April letter). They agreed, by para 1(d) of that letter, that the council would have “a last right of refusal if an assignment of the lease is proposed … “, and that “[t]he terms of this right are to be finalised by further negotiation”. The question for decision in these proceedings is whether that “right” is enforceable.

The issues

2 Both parties accepted that there was a legally binding contract made between them on 19 April 2002. The sole issue was whether that contract included, as an enforceable term, what was set out in para 1(d) of the 19 April letter. That involves two questions:

(1) Whether the parties intended to contract on the terms of para 1(d) of the 19 April letter?

(2) If the parties did intend to contract, did they succeed in doing so?

3 The council, by its cross-claim, sought a declaration that the lease had been varied by the addition of a new cl 4.4A immediately following cl 4.4. The alleged variation was as follows:

“ Last Right of Refusal
4.4A In addition to the requirements of clauses 4.1, 4.2 and 4.4, the Lessee must not assign or transfer an interest in the Lease to a third party (including as provided by clause 4.4) unless it has first offered to assign or transfer that interest to the Lessor on the same terms and the Lessor has not accepted the offer within a reasonable time.”

4 The council sought an order that Capitol execute and deliver a lease variation in registrable form. Capitol did not submit that, if I concluded that there were an enforceable agreement to vary the lease as alleged by the council, there were nonetheless discretionary reasons for refusing that relief.

Background to the 19 April agreement

5 Prior to 16 April 2002 (the date of both the formal grant of lease and the institution of the earlier proceedings), one of the shareholders in Capitol had agreed to acquire the shares of the other. On 8 March 2002, Capitol sought the written consent of council to that transfer of shares.

6 In the earlier proceedings, Capitol sought a declaration that it was entitled to a lease of the theatre pursuant to the agreement for lease and an order for specific performance. It sought also declarations that it and the council remained bound by the terms of the lease, and that the council was in breach of cl 21.4. Clause 21.4 required (or, once the lease was executed and delivered would require) the council not unreasonably to withhold or delay any approval or consent required of it (with presently irrelevant exceptions). The contentions made it clear that Capitol’s case was that the council had not given its consent to the sale of shares, and was thereby in breach of cl 21.4.

7 The unchallenged evidence of Mr Robert Domm, the former general manager of the council (and its general manager at the relevant time), makes it clear that the council decided to use Capitol’s application for consent to the transfer of shares in it as an opportunity to renegotiate some of the commercial terms of the agreement for lease. In a meeting on 28 March 2002, the council’s then Lord Mayor, Mr Frank Sartor, said that the council had been “cash strapped” when it made the agreement for lease; that it would not normally have given a long term lease; that the council wanted “to start to buy back the ownership of the theatre”; and that the council wanted “the right to buy” if Capitol decided to sell its interest in the leasehold.

8 The earlier proceedings were made returnable as a matter of urgency. They were given a hearing date in late April 2002. The parties negotiated to achieve a settlement. The outcome was the 19 April letter.

The terms of the 19 April letter

9 Omitting formal parts, the 19 April letter read as follows:

“I refer to my letter dated 19 April 2002 and to our ongoing discussions today.
As discussed, the proposed agreement is as follows:
1. The City, Capitol Theatre Management Pty Ltd (Capitol) and Arena Management Pty Limited (Arena) have agreed that:
(a) the Lord Mayor is entitled to nominate one director who will be appointed to the board of Capitol (the lessee) in respect of which there must be prior consultation with the Board, which may be the Lord Mayor;
(b) the Lord Mayor (for the City) is entitled to nominate an observer, to be approved by the board of Capitol as lessee (such approval not to be unreasonably withheld), to attend at least 3 board meetings per annum of the lessee;
(c) the Theatre Management Policy board under the lease is to be abolished;
(d) the City will have a last right of refusal if an assignment of the lease is proposed (including as provided by clause 4.4 of the lease). The terms of this right are to be finalised by further negotiation between the parties;
(e) the formula for rent payable under the lease is to be amended so as to provide an enhanced rental which is calculated on the basis of a percentage of all income of the lessee in respect of the theatre, rather than theatre rental revenue. The details of your proposal are set out in your 19 April 2002 letter. However, the rent payable is to be no less than the greater of:
(i) $100,000 per annum (excluding GST),
adjusted annually for CPI; and
(ii) the amount calculated in accordance with
the current lease provisions.
(f) Capitol is to provide to the City details of all income of the lessee in respect of the theatre. I acknowledge this has been received for the last 4 years, to enable the City to assess Arena’s proposal to amend the rent formula.
2. The proceedings will be discontinued with each party to pay its own costs.
3. The matters outlined above are to be documented as changes to the lease.
4. The parties agree to be bound by the terms of this letter.
I thank you for your cooperation in this matter.
Should you have any queries please do not hesitate to contact me.”

10 The reference in the first line to “my letter dated 19 April 2002” was a reference to a letter of that date from the council to Capitol, whereby the council gave “its irrevocable and unconditional consent to the transfer of shares … as requested in the letter dated 8 March 2002 … “. Arena Management Pty Limited (Arena) was one of the then two shareholders in Capitol. It had agreed to buy the shares of the other shareholder.

Events after 19 April 2002

11 Once the agreement set out in the letter of 19 April 2002 had been made, the parties sought to “document” it. There was correspondence both between the parties directly and between their respective legal advisers. Each party relied on what it said were admissions made in that correspondence as to the effect of the agreement. For example, on 5 July 2002, Mr Domm wrote to Mr Greg Quinn, the company secretary of Capitol and other companies in the group of which it formed part. Mr Domm’s letter said, among other things:

“As you are aware, the Capitol Theatre lease is in the process of being amended to incorporate the terms of a letter dated 19 April 2002 signed by the City, Capitol Theatre Management Pty Limited and Arena Management Pty Limited. The terms of that letter are binding on the parties.”

12 Mr Quinn replied by letter of 16 July 2002. He said, among other things:

“Thank you for your letter of 5 July. It is becoming more pressing for us to get our refinancing arrangements in place. I acknowledge that it had [sic: the process was at that time and for many months thereafter continuing] taken some time to get the lease amendment settled and I think there has been tardiness on both sides over this. We have now seen and reviewed the lease amendment documents and given comments back to our solicitor. So I am now satisfied that this process is now proceeding although I know how these things can sometimes drag on when the lawyers get down to arguing about the details.”

13 I interpose that, although the last sentence that I have quoted was remarkably prophetic, neither side suggested that the other had not negotiated in good faith in trying to agree upon words to give effect to (in particular) para 1(d) of the 19 April letter.

14 In between the dates of these letters, the council’s lawyers, Blake Dawson Waldron, sent draft documents to Capitol’s lawyer, Mr Robert Kaufmann.

15 The council relied upon the correspondence to which I have referred, and other correspondence, as showing that Capitol understood itself to be bound as from 19 April 2002 by the terms recorded in the letter of that date.

16 Capitol relied, among other things, on a memorandum prepared by Mr Domm to advise the council. That memorandum sought “Council’s endorsement of actions taken to vary the Capitol Theatre lease”. It set out the background to the negotiations and continued:

“ …
13. In addition, as a consequence of considering the request for assignment, the City expressed interest in acquiring the lessee’s interest in the lease should a future assignment occur. This has been proposed as a last right of a refusal if an assignment of the lease is proposed by the lessee. Such a provision would give the City the right, but not the obligation, to acquire an interest in the lease. Arena has agreed to this proposal in principle, although the terms will require further negotiation.
…
16. From the City’s perspective, the request for the City’s consent to assignment facilitated the ability to negotiate improved rental terms and greater input into the Theatre’s management under the lease. Accordingly, the proposed lease amendments were agreed in principle concurrently with the City giving consent to the assignment.
…
19. In addition, the City will acquire the right, but not the obligation, to purchase the lessee’s interest in the lease, thereby returning full ownership and control of the theatre to the City.
… “

17 Capitol also relied on the tortuous progress of negotiations between Blake Dawson Waldron and Mr Kaufmann. Those negotiations continued, with the drafting becoming ever more complex, until 11 July 2003. By then, para 1(d)’s four lines of print were expanded to almost six pages of print. In fairness, I think, it was the difficulty of drafting the effect of the parenthesised words in para 1(d) that caused the drafting to assume the length that it did. Nonethless, Capitol relied upon both the history and the terms of the drafting to show that, with so many (it submitted) important matters requiring to be resolved in the drafting process, the parties could not have intended to be immediately bound; and even if they were, their agreement was ineffective because it was uncertain.

18 On 11 July 2003, Mr Quinn wrote (on the letterhead of Arena) to Mr Petar Vladeta, described as “Director, General Counsel” of the council, in the following terms (omitting formal parts):

“The Board of Arena Management Pty Ltd (Arena) confirms with pleasure that agreement was reached with the Council in regard to those matters set out in the Council’s letter of 19 April 2002.
In regard to the Last Right of Refusal the letter of 19 April 2002 states that the terms of this right are to be finalised by further negotiation between the parties. These negotiations have now been in progress for more than twelve months and it is with regret that Arena despite its best endeavours has failed to reach agreement with the Council regarding this matter.
As a result Arena finds itself unable to grant the City a Last Right of Refusal”.

19 On 24 July 2003, Mr Quinn, apparently having had no response to his letter of 11 July 2003, wrote again to Mr Vladeta, enclosing “the Variation of Lease which we ask the City to execute”. Consistent with the terms of the letter of 11 July 2003, the variation of lease propounded by Capitol made no attempt to incorporate the terms of para 1(d) of the 19 April letter.

20 The council did not submit that the matters referred to in the preceding two paragraphs showed any want of good faith, or that they amounted to a repudiation of the agreement contained in the 19 April letter.

Relevant terms of the lease

21 By cl 1 of the terms forming part of the lease, the expression “Lessor” was defined to mean “the Council of the City of Sydney, its successors and assigns”.

22 Clause 4 dealt with assignment, sub-letting and the like. Clause 4.1 contained a general prohibition against assignment, charging, sub-letting and the like. That general prohibition was subject to specific rights to assign (cl 4.2) and mortgage (cl 4.3) on certain terms.

23 Clause 4.4, which is referred to in para 1(d) of the letter of 19 April 2002, read:

“4.4 For the purpose of this Clause 4, as a consequence of any change in the shareholding of the Lessee which a corporation (other than a listed public company), any person or persons who between them hold or beneficially control at the date of this Lease (or if the Lessee is an assignee, the date the Lessee became Lessee by assignment) fifty per centum (50%) (or more of the voting income and capital participation rights therein) subsequently ceases to hold or control fifty per centum (50%) of any such rights shall be deemed an assignment of this Lease.”

24 Clause 16 dealt with default by Capitol. One specified event of default was set out in cl 16.1(d) as follows:

“16. DEFAULT BY LESSEE
Re-entry and forfeiture
16.1 Subject to sub-Clause 16.3 [Capitol commits an event of default] if:
…
(d) the Lessee, being a corporation (other than a listed public company), any person or persons who between them beneficially hold or control at the date of this Lease (or, if the Lessee is an assignee, the date the Lessee became Lessee by assignment) fifty per centum (50%) or more of voting income or capital participation rights therein subsequently ceased to hold or control fifty per centum (50%) or more of such rights without the prior written consent of the Lessor other than where such changes result from the trading of shares in a public listed company;”.

First issue: the applicable principles

25 The parties approached this issue by reference to the well known three categories formulated by Dixon CJ and McTiernan and Kitto JJ in Masters v Cameron (1954) 91 CLR 353, 360, perhaps supplemented by the “fourth category” described by Knox CJ and Rich and Dixon JJ in Sinclair, Scott & Co v Naughton (1929) 43 CLR 310, 317. (The existence of the fourth category as a separate category was identified by McLelland J in Baulkham Hills Private Hospital Pty Ltd v G R Securities Pty Ltd (1986) 40 NSWLR 622. His Honour’s identification was confirmed on appeal: (1986) 40 NSWLR 631. Whether or not there is a fourth category has been doubted: see, for example, Peden, Carter and Tolhurst, When Three Just Isn’t Enough: The Fourth Category of “Subject to Contract” Cases (2004) 20 (2) JCL 156. For present purposes, it is immaterial for me to consider (if it is open to me to consider) whether the fourth category is in truth no more than the first, differently expressed.)

26 Those four categories relate to the situation where parties who have been negotiating reach agreement on terms of a contractual nature and agree that what they have negotiated should be dealt with by a formal contract. The four categories may be summarised as follows:

(1) The parties have reached finality on the terms of their agreement. They intend to be bound to perform those terms. But they wish to restate the terms, to no different effect, in a fuller or more precise way.

(2) The parties have reached complete agreement on the terms of their bargain. They do not intend to depart from or add to that which they have agreed. But they have agreed to make performance of one or more of the terms conditional on the execution of a formal document.

(3) The parties do not intend to make a concluded bargain at all, unless and until they execute a formal contract.

(4) The parties are content to be bound immediately and exclusively by the terms that they have agreed. But they expect to make a further contract, in substitution for the immediate contract, that will contain additional terms.

27 In the first, second and fourth categories, there is a binding contract. In the first and fourth categories, the parties are bound at once to perform that which they have agreed. In the second category, they are bound to join in bringing the formal contract into existence, and then to perform it. But in the third category, the parties are not bound to perform unless and until they bring into existence the formal contract.

28 The decisive issue is the intention of the parties. But that is not their subjective intention. It is their objective intention, ascertained from the terms of their communications understood in the light of surrounding circumstances. See McHugh JA in G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, 634; see also Gleeson CJ in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 548-549.

29 In the present case, each party relied on conduct after 19 April 2002. That may be relevant to the question of whether a contract was formed: Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153, 163-164 (Heydon JA); Australian Broadcasting Corporation at 547-548 (Gleeson CJ).

30 The parties in submissions referred to a large number of other decisions on this topic, and to the principles that, they said, could be extracted from those decisions. However, I think that the approach that I should take is sufficiently defined by the decisions to which I have referred.

First issue: analysis

31 The opening words of para 1 of the 19 April letter refer to something that has happened in the past: Council, Capitol and Arena “have agreed”. The subject of that agreement is, plainly enough, the matters set out in sub paras (a) to (f). Paragraph 4 makes it plain that the parties intended the terms set out in the letter to be binding. It does not distinguish between (for example) sub para (d) and any of the other sub paras of para 1; or between any of those sub paras and para 2 or para 3.

32 Sub paragraph (d) falls into two parts. The first is the grant of the last right of refusal: “The City will have a last right of refusal if an assignment of the lease is proposed … “. The second is the obligation to finalise the terms of the right by further negotiation. Mr T F Bathurst QC, who appeared with Mr M R Elliott of Counsel for Capitol, submitted that the language of the grant of the last right of refusal was prospective. He drew attention to the use of the future tense. However, I think, what is meant is that when (or perhaps whenever) an assignment of the lease is proposed, the council will thereupon have a last right of refusal. It does not mean that the last right of refusal is to be granted at some time in the future. It is the occasion of its exercise that is prospective. This is confirmed by the introductory words to para 1: the parties “have agreed” that the council will have a last right of refusal if an assignment of the lease is proposed.

33 Likewise, the parties have agreed that the Theatre Management Policy board is to be abolished (sub para (c)), and that the formula for rent “is to be amended” (sub para (e)). In both cases, there is a reference to something to happen in the future. But in each case it is something that the parties, by the words of present agreement (“have agreed”) in the introductory words to para 1, are bound to bring about.

34 In considering whether there is a present or a prospective obligation, I see no sensible distinction between an agreement that something “is to be done” and an agreement that something “will be done”. For the same purpose, I see no sensible distinction between an agreement that something “will be done” and an agreement that someone “will have” a right. In each case, the obligation or right arises (if at all) in the future; but it will then arise (if it does) because of the present grant, not because of some further agreement.

35 As I have said, sub para (d) appears to draw a distinction between the grant of the right and its terms. As a matter of language, I think, sub para (d) indicates an intention or understanding that the right has been granted but that the terms attaching to it are to be the subject of further negotiation. The nature of the right is defined by the words “last right of refusal if an assignment of the lease is proposed”. It seems to me to follow that the parties understood or intended that the “terms of this right” that were to be finalised by negotiation were not the substantive terms, or the substantive right, but the mechanical terms that one would ordinarily expect to find attached to such a right. For example, I think, they might be expected to include terms as to the amount of notice that Capitol is required to give to the council if an assignment of the lease is proposed, and as to the length of time that the council will have to consider whether to exercise its last right of refusal.

36 The parties agreed by para 4 that the terms of the 19 April letter were binding upon them. That must be a reference to all the terms; and it must mean that they intended that all those terms would be binding upon them. In those circumstances, it is very difficult to understand how one could impute to them the intention, notwithstanding the plain language of para 4 of the 19 April letter, that the performance of the term set out in para 1(d) was to be conditional upon the execution of a formal contract.

37 It is certainly clear that the parties intended that there would be negotiations in relation to the last right of refusal. For the reasons that I give below, in discussing the second issue, it is apparent – at least with the benefit of hindsight – that those negotiations would have to deal with the substance of the last right of refusal in so far as it applied to a deemed assignment brought about by the operation of cl 4.4 of the lease. But, as I have said, I think that the parties understood that those negotiations would be as to the machinery dealing with the exercise of the right, not as to terms qualifying or defining the substance of the right. I therefore do not see, in the reservation of the need for further negotiation, any subjective intention inconsistent with that expressed in para 4. To put it another way, I do not see, in the reservation of further negotiation, any subjective intention to except sub para (d) from the operation of para 4.

38 The difficulty is that, as I conclude, the terms of the last right of refusal, in so far as it extended to a deemed assignment, were entirely undefined. It seems to be clear that the parties either did not turn their minds to, or did not understand, the difficulties inherent in accommodating a last right of refusal to such a deemed assignment. For the reasons that I give in discussing the second issue, I think that the nature of the right – its content or substance – is clear enough in relation to actual assignments; and that this is not undercut by the technically inappropriate use of the concept of assignment as between Capitol and the council. But it cannot be said that the nature of the right is clear at all in relation to a deemed assignment.

39 Considering the matter objectively, these considerations may suggest that the intention to contract, with binding force, in terms of para 1(d) should not be imputed to Capitol and the council. However, and without wishing to diverge from the concept of objective intention, I think that the matters referred to in paras [31] to [37] above, when regarded objectively, provide sufficient indications of intention to contract on the basis of para 1(d) to override the inference, or presumption, arising from the particular difficulty to which I have referred in para [38].

40 I therefore conclude that the first issue should be answered “yes”.

Second issue: the applicable principles

41 In looking for the intention of the parties, the Court should take “no narrow or pedantic approach … , particularly in the case of commercial arrangments“: Council of the Upper Hunter County District v Australian Chilling & Freezing Co Ltd (1967) 118 CLR 429, 437 (Barwick CJ). That is because the courts should strive, so far as they can, to ensure that people’s dealings are treated as effective; and so that “the law may not incur the reproach of being the destroyer of bargains”: Hillas & Co Limited v Arcos [1932] 147 LT 503, 512; [1932] All ER 494, 499 (Lord Tomlin).

42 In Thorby v Goldberg (1964) 112 CLR 597, Menzies J at 607 emphasised that there could be no binding and enforceable obligation unless at least the “essential or critical terms” of the contract were agreed. Thus, his Honour said, there could be no concluded contract where an essential or critical term is left to be settled by future agreement; nor where the language was so obscure as to disable the court from attributing to the parties any contractual intention. In this context, there is a distinction between terms that the law regards as essential and terms that the parties agree as being essential. In the former category, a term will be essential if without it the contract could not be enforced: Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601, 619 (Lloyd LJ). In the latter category, it is for the parties to determine what terms are essential and what are not, and to decide the consequences of non agreement upon terms so characterised. But even in this case, as Lloyd LJ pointed out in Pagnan at 619, the more important the term is the less likely it is that the parties should be taken to have left it for future decision.

43 There is a fundamental distinction between uncertainty and ambiguity. Barwick CJ said in Upper Hunter County District Council at 436 that a contract is not void for uncertainty because there can be more than one possible meaning given to its words, or more than one possible result from their application. Where the words of a contract are capable of being given a meaning, they will bear that meaning that the court (or an arbitrator) decides. The decision resolves the ambiguity.

44 In Meehan v Jones (1982) 149 CLR 571, Gibbs CJ said at 578 that a contract would not be uncertain only because opinions might differ as to which of two possible meanings could be given to a clause; it would only be if the court could put no definite meaning on the clause that it could be said to be uncertain. In the same case, Mason J observed at 589 that the court, if it concluded that a contract (or a provision of a contract) were void for uncertainty, was imposing “a draconian solution – one which is best calculated to frustrate the intentions of the parties”.

45 Where it is clear that parties regard themselves as having reached a concluded and binding contract, a court should strive to find a means of giving effect to that contract even if there were terms left to be agreed at a later time: Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433, 446. Where, however, there has been a failure to agree on some essential term, and where the Court cannot supplement that failure by recourse to some agreed or contemplated mechanism, then the Court may not be able to give effect to the apparent intention of the parties: ibid, 447. Kirby P said in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1, 20 that this is “because [the courts] are incapable of judging where the negotiation on particular points would have taken the parties, acting bona fide but legitimately in their own interests”.

46 Again, the parties in submissions referred to a large number of other decisions. Again, I think, the approach that I should take is sufficiently defined by the decisions to which I have referred.

Second issue: analysis

47 I do not think that there is any difficulty in the concept of “a last right of refusal” of a proposed actual, as opposed to deemed, assignment of the lease. That means, simply, that where Capitol has negotiated with a third party to assign the lease to the third party, the council is to be offered the assignment, on the terms negotiated with the third party, and to have the opportunity to decide whether it will take it or refuse it. If the council takes the assignment, the transaction with the third party does not proceed. If the council refuses the assignment, the transaction with the third party can proceed. It is of course an inept use of language to speak of a tenant giving its landlord a right of refusal of an assignment of the lease. The effect of such a transaction would be to bring to an end the lease, by merging the leasehold and freehold estates in the one person.

48 In ACI Operations Ltd v Berri Ltd [2004] VSC 219, the plaintiff had the exclusive right, for a defined period, to supply the defendant with a range of products. However, the agreement provided that if the defendant received a “Competitive Offer”, the plaintiff would “have the right of last refusal to match the price set out in the Competitive Offer, failing which the [defendant] may acquire the Products from the relevant third party.” The question for decision was whether two offers that were made to the defendant were Competitive Offers, so as to engage the right of last refusal. It was not suggested that the right of last refusal was too uncertain to be enforceable. The case proceeded on the basis that there was such an enforceable right; the question was whether it had been enlivened.

49 To be sure, it is possible to think of a number of contractual provisions that might give precision to the enlivening and exercise of the right, where what was proposed was an actual assignment. Thus, the parties could have specified the period of notice to be given of the proposed assignment, and the period within which the council must decide whether or not to take an assignment on the proposed terms. But I do not think that the failure to specify matters of that nature detracts from the essential certainty of the nature of the right in the case of a proposed actual assignment. I see no reason why, if the parties could not agree, the Court would not both imply a term that the council should be given reasonable notice, and a reasonable time to consider whether or not to take the assignment; and decide what was, in the particular circumstances, reasonable notice and a reasonable time.

50 In the present case, the essentials of the transaction are defined. The parties are, obviously enough, Capitol and the council. The subject matter is the assignment that Capitol has negotiated, and proposed to transact, with a third party. The price – the consideration for the assignment – is whatever consideration has been negotiated with the proposed assignee (no question arises as to the “price” for the last right of refusal; it was not submitted that, if there were an intention to contract on the terms of the 19 April letter including para 1(d), there was not good consideration moving from each party for the promises of the other). Nothing essential to the transaction has been omitted.

51 It is clear that informal language, omitting the niceties and efflorescences favoured by lawyers, may create binding rights. Thus, in Mackay v Wilson (1947) 47 SR (NSW) 315, the appellants sold a business to the respondents and granted them a lease of the premises from which the business was carried out. The agreement provided an option in the following terms:

“First option for purchasing the property is hereby given to [the respondents] at £ 1,350.”

It was not suggested that an option in those terms was too uncertain to be enforced; the issue, and the question upon which the Full Court was divided, was as to the nature of the right comprehended by those words.

52 Capitol submitted that one essential term that was not dealt with was “how it was envisaged that the [council] would be able to “match” the terms of any proposed transfer to a third party in circumstances where the [council] would not be a purchaser of Capitol’s leasehold interest (as it was the lessor)” (list of topics/propositions dated 10 December 2004, para 6(k)). I do not think that this is so. An “assignment” (more correctly, under the Real Property Act 1900, transfer) of the lease to a third party would, upon registration, create the relationship of landlord and tenant between the council and that third party. The same would not happen if the lease were “assigned” to the council. Because the council is the proprietor of the reversion, the transaction should be documented as a surrender of lease. But these, I think, are matters of form, not matters of substance. If an assignment were negotiated on commercial terms between Capitol and a third party, the last right of refusal would require that the council be given the opportunity to match those commercial terms. If council decided to do so, then the transaction would be documented, as I have said, as a surrender of lease. But the fact that an “assignment” to a third party and an “assignment” to the council are in law different transactions, having different legal incidents, and requiring to be differently documented, does not seem to me to introduce any element of uncertainty. The 19 April letter is a commercial document, drafted by non lawyers. It is not appropriate to seek to undermine the substance of the transaction, if that is sufficiently clearly expressed, by focussing upon inappropriate terminology.

53 Thus, if para 1(d) did not include the parenthesised words, I would conclude that it was not too uncertain to be enforceable. Indeed, I think, any other conclusion would be so strikingly at odds with the principles that I have referred to in paras [43] to [45] above that it would be untenable.

54 However, the last right of refusal does include the parenthesised words, and a consideration of the certainty of the right must take into account those words.

55 The parties were agreed that it was not necessary for me to determine the proper construction of cl 4.4. For that, I am grateful. However, I think, some understanding of the likely operation of cl 4.4 is essential to understanding, and deciding, the competing submissions of the parties in relation to para 1(d) of the 19 April letter.

56 If one breaks cl 4.4 down, it seems to apply where the lessee is a corporation other than a public listed company. Where the lessee is such a corporation, and where its majority (50 percent or more) shareholders at the relevant date cease to be majority shareholders, there is deemed to be an assignment of the lease. Thus, cl 4.4 directs attention to the situation where there is no change in the legal personality of the lessee (because it remains the same company as was the original lessee or, if applicable, an assignee), but where there is a change in control of the lessee.

57 Where cl 4.4 is engaged, then, for the purposes of cl 4, there is deemed to be an assignment of the lease.

58 Clause 4.4 may thus be engaged by some agreement or arrangement over which the lessee has no control. That is because the effective trigger is a change in the majority shareholding in the lessee. Ordinarily, that would come about either by reason of some agreement or arrangement between the shareholders themselves (where there are two, equal, shareholders): for example, an agreement or arrangement of the kind that gave rise to the first proceedings. Otherwise, the trigger might come about where, as a result of negotiations between a majority shareholder (or the majority shareholders) and a third party, the majority shareholding is sold to the third party. It may very well be that the lessee might have de facto involvement in, and perhaps concurrence with, such an agreement or arrangement. But in law, it is not the decision of the lessee that would trigger cl 4.4, but the decision of its majority shareholders.

59 Prior to 19 April 2002, there were two equal shareholders in Capitol. It was the agreement between them that one would sell to the other (Arena) that led to the first proceedings. Part of the overall settlement of the first proceedings was that the council would give its consent to that deemed assignment. (That was the purpose of the other letter of 19 April 2002, referred to in the introductory words of para 1 of the 19 April letter: see para [10] above.) Presumably, the council would wish to argue that Arena thereby became an assignee (the assignment being that deemed to have been effected by the change in shareholding), and bound by the lease, so that cl 4.4 would continue to operate. On that basis, cl 4.4 would be triggered, in the future, if Arena agreed or arranged to sell its shareholding down to below 50 percent.

60 In circumstances where the assignment is a deemed assignment by the operation of cl 4.4, of what does para 1(d) give the council the last right of refusal? Is it the last right of refusal of the assignment itself (ie, if there is a change in shareholding of the relevant kind, is Capitol bound to offer the council an “assignment” – surrender - of the lease)? And if it is, what are the terms on which that is to be offered? Because there is in law no assignment (as opposed to deemed assignment) of the lease, there are no terms and conditions of assignment that the council, as part of the last right of refusal, must accept or reject. Or is it the transfer of shares that triggers the deeming effect of cl 4.4? In that case, does the last right of refusal mean that council has the right to be offered, and accept or reject, the transfer of shares on the terms agreed between the majority shareholders amongst themselves or with the proposed transferee? If that is what is meant, the council would not have in law the right to an assignment of the lease at all. The lease would remain with Capitol, although the council, if it accepted the transfer of shares, might control Capitol and (subject to questions of oppression or fraud on the minority) might be able to procure Capitol to “assign” (in truth, surrender) the lease to it.

61 So far, I have looked at the situation that existed, and exists, in fact. But Mr Bathurst, in submissions, postulated the case where the majority shareholders held 50 percent of the shares in Capitol, and agreed to sell a 1 percent shareholding to a third party. That would trigger the operation of cl 4.4. In those circumstances, Mr Bathurst asked, what would it be that is to be offered to the council pursuant to the last right of refusal? Is it an assignment of the lease? Or of 1 percent of the leasehold interest? Or of a 1 percent shareholding in Capitol?

62 Mr Bathurst submitted that these considerations showed that para 1(d) read as a whole, was uncertain because it was impossible to derive from it what was the subject matter of the right that it purported to grant when that right was triggered by a cl 4.4 deemed assignment.

63 Mr B C Oslington QC, who appeared with Mr R J Carruthers of Counsel for the council, submitted that these considerations did not affect the validity of para 1(d). That is why the council, in its cross-claim, sought a declaration in the terms that I have set out in para [3] above. He submitted that the nature of the right created by para 1(d) was clear, and that the application of that right in a particular case, depending as it would upon the facts of that particular case, could not make the right itself uncertain.

64 On analysis, I think that Mr Bathurst’s submission is correct. It is impossible to spell out of para 1(d) the substance or nature of the right that is granted to the council in the event of a cl 4.4 deemed assignment. This is not a matter of machinery: of something that may be supplied by implication in the absence of agreement. It is something going to the heart of the bargain.

65 The trigger is not a proposed assignment of the lease by Capitol to a third party. It is a proposed dealing in the capital of Capitol. There will not in law be any impact on the lease. It will remain in force between the council as lessor and Capitol as lessee. What then is to be offered, pursuant to the last right of refusal, to the council?

66 This is not a matter of ambiguity. If it were possible to say that, reading together para 1(d) with cl 4.4, there might be several different and inconsistent rights that might be intended to be granted by para 1(d) in the case of a cl 4.4 deemed assignment, then it might be possible to say, as a corollary, that as a matter of construction one of those rights could be identified as, objectively, the right intended to be granted. But where it is not possible – as in my view it is not – to identify any right, then the problem goes beyond mere ambiguity.

67 Nor do I think that the problem can be resolved simply by leaving it for future determination. Firstly, that in essence admits that there is a fundamental difficulty. Secondly, I think, it creates a further problem. If I were to make a declaration of right as prayed by the council in its cross-claim, then (subject to any appeal and its outcome) I would be determining conclusively not only that by para 1(d) council was given the last right of refusal of an assignment of the lease, but that it was given such a right where the assignment was a deemed assignment flowing from the operation of cl 4.4. In those circumstances, the parties would be bound by the effect of that declaration, and I do not think that it would be open to Capitol to argue, in future proceedings resulting from a dispute over the effect of a deemed assignment, that the last right of refusal that had been declared to exist, and (by necessity) to extend to the case of a deemed assignment, had no content: that there was no assignment upon which, in the particular case, the right fastened. In those circumstances, I think, a determination that there was no right, or no assignment upon which the right could operate, would conflict directly with the declaration that council asks me to make.

68 In summary, I think, the introduction of the parenthesised words creates an insoluble problem. That is because it is simply not possible to derive from the terms of para 1(d), read in context, any understanding of the substance of the rights that the parties intend the council to have where the proposed assignment that triggered the last right of refusal was not an actual assignment – ie, a proposed transfer of lease to a third party – but a deemed assignment under cl 4.4 of the lease. In the former case, the nature of the right can be ascertained, by a process of construction, by taking into account the relationship between the council and Capitol and the legal nature of the triggering transaction (see para [52] above). That process enables the substance of the right to be defined. But it is not so in the latter case. The substance of the right that the parties intended the council to have where the “assignment” is a deemed assignment arising by operation of cl 4.4 is left at large. It is that which must be dealt with by negotiation; and it is that which, for the reason given by Kirby P in Coal Cliff Collieries (see para [45] above), the Court cannot do for the parties.

69 I conclude that the second issue should be answered “no”.

70 It is therefore unnecessary to consider the alternative arguments advanced by Capitol. Those arguments, and council’s responses, are noted in the parties’ written and oral submissions. I should however make it clear that the council did not submit that, if I were to come to the conclusion to which I have come, the parenthesised words could be excised from para 1(d) so as to leave available an enforceable right in the case of a proposed actual assignment.

Conclusion and order

71 I conclude that Capitol is entitled to a declaration to the effect that para 1(d) of the 19 April letter imposes no binding obligation on it, and that the council’s cross-claim should fail. Ordinarily, costs should follow the event in each case; but I will hear the parties on costs if any party wishes to advocate a different view.

72 I direct the parties to bring in short minutes of order to give effect to these reasons. That is to be done within 14 days, on a date to be arranged with my associate. If the parties cannot agree on the proper order to be made as to costs, I will hear argument on that occasion.

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