Challenge Property Nominees Pty Ltd v Leighton Properties Pty Ltd
[2004] VSC 520
•17 December 2004
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 2057 of 2004
F5721
| CHALLENGER PROPERTY NOMINEES PTY LIMITED (ACN 091 336 793) | Plaintiff |
| v | |
| LEIGHTON PROPERTIES PTY LIMITED and ORS (ACN 009 765 379) | Defendants |
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JUDGE: | Byrne J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 10 and 11 November 2004 | |
DATE OF JUDGMENT: | 17 December 2004 | |
CASE MAY BE CITED AS: | Challenger Property Nominees Pty Ltd v Leighton Properties Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2004] VSC 520 | |
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Landlord and tenant – rental guarantee – whether lease or agreement for lease entered into – whether lessor failed to consent to new lease – whether rental guarantee lapsed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P.J. Bick QC with Mr D. Farrands | Herbert Geer & Rundle |
| For the Defendants | Dr C.L. Pannam QC with Mr T.J.P. Walker | Freehills |
HIS HONOUR:
This case concerns the leasing arrangements for a multi-storey office building at 417 St Kilda Road, Melbourne. The building comprises nine levels and a carpark, all of which were let to Mobil Oil Australia pursuant to a written lease dated 1 December 1992. The term of the lease was 10 years, commencing 1 December 1992 together with five options of five years. The landlord was Mamasan Pty Ltd. The lease, by Article XXXV, contained a provision to extend the term for two successive six month periods if the option were not exercised.
In early 2004, when occurred the events with which this proceeding is concerned, Mobil had not exercised its option. It, nevertheless, remained in possession of certain parts of the building although it was progressively vacating it. In February 2004 it had given up possession of Levels 2, 4, 5, 7 and 9. This case concerns Levels 7 and 4.
Under Article XXII of the Mobil lease, the tenant had the right, without the consent of the landlord, to assign the lease or to sub-let the whole or any portion of the premises.
The Mobil lease further provided that the tenant pay a base rental of $250 per annum per net lettable square metre with a rent review provision[1] and a proportion of operating costs and outgoings[2].
[1]Article II
[2]Article III
Although Mobil was the sole tenant of all nine levels and the carpark, the Mobil lease, by s. 4.3, provided that the landlord would provide separate electricity meters for each floor. This clause which is central to this litigation is in the following terms:
“Section 4.3 Electricity
Landlord, at its expense, shall install (if it has not already done so) prior to the Commencement Date and shall thereafter maintain in good working order in accordance with the Electricity Authority’s terms and conditions (i) a meter on each floor comprising the Premises (the ‘Tenant’s Meters’) to measure the electricity provided directly to the Premises by the Electricity Authority and (ii) all necessary conductors, feeders, wires and other electrical equipment (the ‘Tenant’s Electrical Equipment’) necessary to permit the direct provision by the Electricity Authority of electricity to the Premises. Throughout the Term, Tenant’s Electrical Equipment shall be capable of providing electrical energy to the Premises at a level not less than fifty five (55) watts per lettable square metre of the Premises. Tenant shall make its own arrangements with the Electricity Authority for the furnishing of, and Tenant shall pay directly to the Electricity Authority all charges for, electricity consumed in the Premises. Landlord shall not commit any act that would interrupt, diminish or otherwise interfere with the direct provision of electricity to the Premises.”
Some time in the 1990s the freehold and reversion of the building were acquired by Leighton Funds Management Pty Ltd as trustee of the 417 St Kilda Road Trust which then became landlord.
In or about June 2002, during the initial term of the Mobil lease, the plaintiff, Challenger Property Nominees Pty Ltd (“Challenger”), became the trustee of the trust and the registered proprietor of the land at 417 St Kilda Road[3]. At that time, Mobil had already given up possession of three of the floors so that the demised premises then comprised Levels 1, 3, 4, 6, 7, 8 and 9 as well as 355 car spaces in the carpark. On that date, the time for Mobil to exercise its option rights had not yet arrived and the option had not been exercised.
[3]Defence paragraph 5.
On 27 June 2002, Challenger entered into an agreement in writing with the firstnamed defendant, Leighton Properties Pty Ltd (“Leighton Properties”) and its parent, the thirdnamed defendant, Leighton Holdings Pty Ltd (“Leighton Holdings”), called a Limited Income Guarantee. By this Limited Income Guarantee which was recited as having been entered into in conjunction with an agreement whereby Challenger acquired the trust, Leighton Properties agreed to guarantee to Challenger that it would receive the amount of rental, operating costs and carparking licence fees payable by Mobil under the lease for the period from 1 December 2002 for a period of five years unless the Limited Income Guarantee was terminated at an earlier date.
Pursuant to cl. 22 of the Limited Income Guarantee, Leighton Holdings guaranteed the performance by Leighton Properties of its obligations under the Limited Income Guarantee.
It was provided in Recital F to the Limited Income Guarantee that the guarantee was given if Mobil did not exercise its option with respect to all of Levels 3, 4, 6, 7, 8 and 9 or if Leighton Properties did not exercise the right conferred upon it by cl. 7 to take a lease of all of those six levels and a licence of the 355 carparks.
As I have mentioned, Mobil did not in fact exercise its option in December 2002 and it continued progressively to vacate the building. By an agreement of partial surrender dated 31 October 2001, Mobil had surrendered and Leighton Funds Management had accepted the surrender of Levels 2 and 5. There were in evidence three other agreements of variation of the Mobil lease dated respectively 16 November 1998, 9 June 1999 and 1 December 2002, but these are of no present relevance. Moreover, as at 27 June 2002, Mobil remained the tenant of Level 1 but did not occupy it. The premises covered by the Limited Income Guarantee, therefore, were the remaining Levels - 3, 4, 6, 7, 8 and 9, which were collectively called “the Office Component”, and the 355 carparks, which were referred to as “the Carpark Component”. These areas were collectively referred to in the Limited Income Guarantee as the Guarantee Premises.
The evident purpose of the Limited Income Guarantee was to ensure that Challenger, as incoming owner of the building and landlord, would, until December 2007, enjoy the rental which would otherwise have been payable by Mobil as tenant notwithstanding that it may continue its process of progressive vacation of the Guarantee Premises.
The Limited Income Guarantee provided three mechanisms whereby Leighton Properties could minimise the adverse impact of this agreement upon it in the event that Mobil vacated all or part of the Guarantee Premises during the term of the Limited Income Guarantee.
First, Leighton Properties might, pursuant to cl. 7.1, require Challenger to lease to it all or part of the office component of the Guarantee Premises. The terms of such a lease are set out in cl. 7.1.1 as follows:
“7.1If Mobil does not exercise its option to renew its lease for the Guarantee Period in respect of the whole or part of the Office Component, [Leighton Properties] may at its election, by notice in writing to [Challenger] given at any time
·prior to the relevant part of the Guarantee Property being leased or licensed to another party, and
·prior to the expiration of the Guarantee Period:
7.1.1require [Challenger] to lease to [Leighton Properties] the whole or any part of the Office Component for a term which expires on the Termination Date and which Occupancy Agreement ipso facto terminates on the date this agreement terminates if this agreement ends prior to the Termination Date, at a rental of $250 per square metre per annum, and otherwise on the same terms and conditions as would have been in the lease to Mobil had Mobil exercised its option in respect of that area except that…”
The clause goes on to specify seven particular respects in which the terms of the Leighton Properties lease was not to conform with the terms of the Mobil lease. The detail of this is not here relevant except that there is no mention of any deletion of or variation to cl. 4.3 in the Mobil lease.
Second, Leighton Properties was given by cl. 9.1.1 the exclusive right to negotiate a fresh Occupancy Agreement in respect of any part of the Guarantee Premises and subject to that clause, Leighton Properties was entitled to require Challenger to enter into an Occupancy Agreement which it had negotiated. Clause 9.1.1 is in the following terms:
“9.1.1[Leighton Properties] has the exclusive right to negotiate Occupancy Agreements in relation to any part of the Guarantee Property (other than a part in respect of which Mobil has exercised its option for a further term) on behalf of [Challenger] and [Challenger] shall enter into and execute any agreements so negotiated so long as they are on terms and conditions which, when read as a whole, (except in relation to rent and contribution to operating costs) are no less favourable to the [Challenger] than would have been the case if the agreement had been entered into with [Leighton Properties] under the terms of clause 7. A lease entered into under this clause may include a provision which gives the Occupier a right to surrender all or parts of the tenancy during its term.”
It should be noted that “Occupancy Agreement” is defined in cl. 1.1 as follows:
“’Occupancy Agreement’ means any lease or licence by which an Occupier derives a right to use or occupy the Guarantee Property or any part of the Guarantee Property but does not include any sublease, sublicense or right to occupy claiming through or under any person other than the Owner or its predecessor in title.”
Third, Leighton Properties may, pursuant to cl. 9.1.2, elect itself to take a lease of any part of the Office Component or of the Guarantee Premises and Challenger agree to enter into such an agreement subject to the provisions of that clause. Clause 9.1.2 is in the following terms:
“9.1.2[Leighton Properties] may elect to take a lease of the any part of the Office Component (other than a part in respect of which Mobil has exercised its option for a further term) at a rental of $250 per square metre per annum for a period which expires on the Termination Date and which Occupancy Agreement ipso facto terminates on the date this agreement terminates if this agreement ends prior to the Termination Date and otherwise on terms and conditions which, when read as a whole, are no less favourable to [Challenger] than would have been the case if the lease had been entered into with [Leighton Properties] under the terms of Clause 7. If [Leighton Properties] so elects [Challenger] and [Leighton Properties] must enter into an Occupancy Agreement which records the terms of the Occupancy as soon as reasonably practicable after [Leighton Properties] makes that election.”
There is in cl. 19 a dispute resolution procedure to which I shall return. Under this clause, disputes arising in connection with the Limited Income Guarantee may be referred for determination by an expert whose determination is binding. By cl. 9.2, a dispute between Leighton Properties and Challenger “as to whether the terms of any Occupancy Agreement required to be entered into by [Challenger] pursuant to the provisions of this cl. 9 comply with cl. 9.1 must be determined in accordance with cl. 19”.
Clause 9.7 then makes provision for the consequences of a failure by Challenger to enter into an Occupancy Agreement presented by Leighton Properties under cl. 9. The text of this provision which is important for present purposes is as follows:
“9.7If [Challenger] refuses to execute an Occupancy Agreement as required by Clause 9 within 28 days of being requested so to do, or upon being requested by [Leighton Properties] at any time to grant its consent to a proposed new Occupancy Agreement of the Guarantee Property or any part of the Guarantee Property, withholds or refuses to give such consent within 14 days of such request then unless the matter is the subject of a dispute between [Leighton Properties] and [Challenger] which has been referred for determination in accordance with clause 19, this Guarantee shall cease in relation to that part of the Guarantee Property as is the subject of the Occupancy Agreement at the expiration of the period of 14 day period and the Guarantee Amount shall be adjusted accordingly with effect from that date. For the avoidance of doubt, the parties agree that where [Challenger] agrees to execute an Occupancy Agreement but due to an administrative delay [Challenger] is not able to actually execute the Occupancy Agreement, there will be no triggering of this Clause 9.7 concerning cessation of that part of the Guarantee Property.”
The events which have provoked this litigation commence with a letter from Freehills, the solicitors for the Leighton companies, to Ms Renee Nutbean of Challenger dated Friday 13 February 2004. This letter, omitting formal parts, is in the following terms:
“In accordance with clause 9.1.2 of the Limited Income Guarantee, we submit a proposed new lease over Level 7, 417 St Kilda Road, Melbourne for the consent of Challenger Property Nominees Pty Ltd.
In accordance with clause 9 of the Limited Income Guarantee, Leighton Properties Pty Ltd requests your consent to the proposed new Lease within 14 days of this letter.
Leighton reserves its rights to have clause 10.2 of the Mobil Lease reinstated in subsequent leases.”
Enclosed was a draft of a lease for Level 7, naming Challenger as lessor and Leighton Properties Vic Pty Ltd (“Leighton Properties Vic”) as lessee. The draft included cl. 4.3 as in the Mobil lease. The letter purports to act under cl. 9.1.2. It will be recalled that this sub-clause permits Leighton Properties to elect to take a lease itself of Level 7 on terms not less favourable than a lease under cl. 7. The proposal that the lessee should be another, albeit related, company, namely Leighton Properties Vic, could not therefore satisfy cl. 9.1.2. The only clause which might support such a proposal is cl. 9.1.1.
Mr John Barrett of Leightons followed this letter up with an e-mail dated Monday 16 February 2004 to Ms Nutbean:
“Renee
Freehills submitted Leighton lease of Level 7 to you on Friday and we expect our subtenant to confirm final details today. I let you know the moment this occurs.
The Leighton lease of Level 7 embodies all the agreed changes in the level 9 lease – except for the issue of electricity costs. I have suggested we have friendly determination on this issue or split costs to get it behind us. Will you please ensure that your solicitors, who will be receiving a copy today, reply promptly. We still don’t have any confirmation from them that the level 9 lease is agreed – apart again from the electricity cost issue, or that the carpark licence is agreed-notwithstanding that long ago we accepted their position on every point. Our solicitors simply cannot get a reply. The result is that Leighton is in possession of Level 9 (and our sub-tenant Thiess) without any documentation being in place and we are not in a position to recover rent, outgoings or carpark licence fees from Thiess until this situation is resolved. Fortunately, being ‘in house’ this is not of great concern but we are anxious to avoid the same situation on level 7.”
I pass over Ms Nutbean’s acknowledgement by e-mail dated later on the same day, 16 February. On 27 February, Herbert Geer & Rundle, the solicitors for Challenger, wrote to Freehills in the following terms:
“Angie
We refer to your letter of 18 February 2004 which enclosed the proposed new lease for Level 7 of the Property between Challenger Property Nominees Pty Ltd (‘CPN’) and Leighton Properties (Vic) Pty Ltd (‘Lease’).
1. Consent
Subject to the following comments, we are instructed CPN consents to the Lease.
2.Electricity metering
CPN’s position in respect of Section 4.3 of the new lease proposed for Level 9 of the Property applies to the Lease in identical form:
(a)the first sentence of Section 4.3 of the Lease should be deleted so that the clause begins with the words ‘Throughout the Term, the…’; and
(b) the definition of ‘Tenant’s Electrical Equipment’ should be retained but inserted at the end of Section 4.3.
We understand that CPN has this afternoon put a proposal to your client whereby it agrees to contribute toward the cost to your client of installing separate electricity meters at the Property.
In such circumstances we do not believe it appropriate for Section 4.3 to remain in its present form.
Please confirm your client’s acceptance of CPN’s offer of contribution and then provide us with an amended execution copies of the Lease.”
The final letter in this sequence relating to the Level 7 lease is another e-mail dated Wednesday 31 March from Mr Barrett to Ms Nutbean:
“Renee
I have been overseas for a month so have not been following up.
I believe I copied you in on a note to our solicitors indicating the slit of the electricity costs prosed by you was not acceptable to us. We believe our offer to contribute half the cost was very generous, particularly taking into account our previous expenditure on fees - and of course an immense amount of our own time. As you did not accept our offer we confirm that it is withdrawn.
As to the other issues discussed and referred to in your note under reply - particularly refurbishment costs – have you reached any decision or can you advise any general principles that you are prepared to adopt please///”
Then followed a similar sequence of correspondence with respect to Level 4. This comprised an identical letter from Freehills to Ms Nutbean dated 7 April 2004 enclosing a relevantly identical draft lease including cl. 4.3. Herbert Geer & Rundle’s response of 21 April 2004 is in terms similar to their letter of 27 February:
“Angie
At the outset, we request that you copy us on all future correspondence forwarding proposed tenancy agreements to Challenger Property Nominees Pty Ltd (‘CPN’). This will better enable CPN to respond in a timely matter to such proposals.
1. LEVEL 4 LEASE
We refer to your letter of 7 April 2004 which enclosed the proposed new lease for level 4 of the Property between CPN and Leighton Properties (Vic) Pty Ltd (‘Level 4 Lease’).
1.1 Consent
Subject to our comments below at paragraph 1.2, we are instructed that CPN consents to the Level 4 Lease.
1.2Electricity metering
CPN’s position in respect of Section 4.3 of the Level 4 Lease is identical to that previously expressed in respect of the leases proposed for Levels 7 and 9 of the Property. If retained at all Section 4.3 must be amended as follows:
(a)the first sentence of Section 4.3 of the Lease should be deleted so that the clause begins with the words ‘Throughout the Term, the…’; and
(b)the definition of ‘Tenant’s Electrical Equipment’ should be retained but inserted at the end of Section 4.3.
We understand that by e-mail to John Barrett of 27 February 2004, CPN made an offer of contribution to the cost to your client of installing separate electricity meters in the Property. CPN has received no response to such offer from your client.
In such circumstances (whilst the parties are apparently still negotiating a side agreement in respect of electricity metering) we do not believe it appropriate for Section 4.3 to remain in its present form.
Please confirm your client’s acceptance of CPN’s offer of contribution and then provide us with amended execution of the Level 4 Lease.”
Freehills’ letter of 27 April 2004 responds with respect to both Levels 4 and 7 in the following terms:
“Dear Sirs,
Leighton Properties (Vic) Pty Ltd (Leighton) and Challenger Property Nominees Pty Ltd (CPN), Limited Income Guarantee (Guarantee) Levels 4 & 7, 417 St Kilda Road Melbourne
We refer to your letters of 27 February and 21 April 2004.
As matters currently stand we are obliged to serve leased issues under the Guarantee to your clients representative Renee Nutbean. If CPN wishes to change this arrangement, please request CPN to formally notify us of its requirements.
1.Level 4 Lease
1.1Consent
We note CPN’s consent is subject to conditions. Those conditions are not acceptable to Leighton. Accordingly our client does not regard your response as consent in accordance with the Guarantee.
1.2 Electrical Metering
Leighton’s position with respect to Clause 4.3 is unchanged. Our client will not agree to amend clause 4.3.
Your statement that our client did not respond to CPN’s offer made on 27 February to contribute to the cost of the metering, is incorrect. In an email on 31 March to Renee Nutbean our client rejected CPN’s offer. That email was copied to us and is now attached for your information.
You will note from that email, Leighton offered to contribute half the cost to CPN of meeting its requirements under clause 4.3 as well as absorbing the design fees and other costs incurred to date. As the offer was rejected, it was withdrawn.
1.3 Guarantee Payments
By letter delivered on Friday 13 February 2004 Leighton submitted to CPN for consent, a lease for Level 7 which provided for a commencement date of 1 March 2004.
By letter delivered on 7 April 2004 Leighton submitted to CPN for consent a lease for Level 4 which provided for a commencement date of 1 May 2004.
In accordance with clause 9 of the Guarantee both leases are no less favourable to CPN than would have been the case if the leases had been entered into with Leighton under the terms of clause 7.
As CPN has not consented to the leases without qualification, Leighton regards the Guarantee as having lapsed in accordance with clause 9.7 with respect to Level 7 from 1 March 2004 and will lapse with respect to Level 4 from 1 May 2004.
As a consequence Leighton has not paid the combined invoices for March and April (or May which has just been received) for Levels 4, 6, 7 and 8, but will be happy to do so once CPN issues a new tax invoice omitting the amount for Level 7 for March and April and Levels 4 and 7 for May or, alternatively, issues an appropriate credit note for GST purposes.”
I interrupt this chronology to remark that, by the date of the Freehill letter of 7 April 2004, negotiations with respect to the obligations of Challenger to provide separate metering for Level 7 and to accept cl. 4.3 in the proposed lease of that level had broken down[4]. The correspondence with respect to Level 4 must be read in the light of this.
[4]See paragraph [48] below.
On 28 May 2004, a new firm of solicitors acting for Challenger, RAJ Lawyers, responded, asserting that a disagreement existed between the two parties and rejecting Leighton Properties’ claim that the Limited Income Guarantee in respect of Levels 4 and 7 had lapsed to pursuant to cl. 9.7. The letter then gave notice of dispute pursuant to cl. 19.1.
Correspondence then was exchanged between the solicitors throughout May and June without any resolution of their differences.
On 5 August 2004, Challenger wrote to Leighton Holdings asserting that Leighton Properties was indebted to it in the sum of $603,793.28 under the Limited Income Guarantee and calling upon Leighton Holdings to pay this amount under its guarantee. Challenger followed this by a writ initiating this proceeding on 23 September 2004.
The issues
The issues were complex, but, in outline, they came down to the following contentions and the various responses to them. Challenger, as the party entitled to the benefit of the Limited Income Guarantee, contended that it was entitled to receive rental from Leighton Properties Vic under the proffered leases of Levels 7 and 4 or from Leighton Holdings under its guarantee, or to payment of the equivalent by Leighton Properties under the rental guarantee provisions of the Limited Income Guarantee or by Leighton Holdings as its guarantor. The position adopted by the Leighton parties was that, for various reasons, no obligation to pay rental existed and that the rights of Challenger to receive payment under the Limited Income Guarantee in respect of the two floors had been lost pursuant to cl 9.7 following its failure to consent to the two proposed leases.
Challenger’s claims for rental
The primary submission put on behalf of Challenger was that there exists a lease, or alternatively an agreement for lease, in respect of each of Levels 7 and 4 and that the tenant, Leighton Properties Vic was obliged to pay rental under these leases. In each case, the lease or agreement for lease was said to be contained in some or all of the following documents:
·The Limited Income Guarantee
·The letters from Freehills in each case enclosing a draft lease. This was the letter of 13 February 2004 in respect of level 7 and that of 7 April 2004 in respect of level 4.
·The letters from Herbert Geer & Rundle dated 27 February 2004 in respect of level 7 and that dated 21 April 2004 in respect of level 4.
There were alternative analyses offered by counsel for Challenger based on these documents in support of this contention.
First, passing over the incorrect reference to cl 9.1.2 in the Freehills’ letter, this letter represented the exercise by Leighton Properties of its right to negotiate an occupancy agreement with a third party, namely Leighton Properties Vic, and that, under cl 9.1.1, Challenger was obliged to execute such an agreement, subject only to its relevant terms being no less favourable than a lease under cl 7. Upon such a lease being tendered an agreement to execute it came into existence. Thereupon, there exists an agreement to execute the proffered lease and this is an enforceable agreement for lease or alternatively a lease in equity.
Second, assuming that the incorrect reference to cl 9.1.2 cannot be ignored, the Freehills’ letter in each case with its enclosure was an offer to lease independently of the Limited Income Guarantee and the response of Herbert Geer & Rundle to this should be construed as an acceptance of that offer. This would have the consequence that there is an enforceable agreement for lease and a lease in equity.
In respect of each of these analyses counsel for the Leighton Properties placed reliance upon the response by Challenger to the request that it give consent pursuant to cl 9.7 of the proposed lease in each case. It is convenient to analyse this clause a little more closely.
The first matter is the need for consent at all. It will be recalled that Leighton Properties might itself take a lease of some or all of the Office Component pursuant to cl 7 or pursuant to cl 9.1.2. Under the cl 7 procedure, the terms of the new lease were defined in strict terms. The rental was to be $250 per metre per annum, the term was specified and, as to the remaining terms, these were to be the same as would have applied had Mobil exercised its option, subject to certain exceptions. The lease to Leighton Properties which is provided for in cl 9.1.2 specifies the same term and the same rent. The essential difference is that the other terms, when read as a whole, must be no less favourable to Challenger than would have been the case had a cl 7 lease been entered into. The procedure for Leighton Properties to take a lease under this provision is therefore more flexible than that under cl 7. This flexibility carries with it the possibility of uncertainty as to whether the relevant terms, read as a whole, are no less favourable. Clause 9.2 seeks to dispel this uncertainty in the three situations dealt with in sub-clauses 9.2.1, 9.2.2 and 9.2.3. In its first sentence, cl 9.2 establishes a procedure for resolving these uncertainties by referring them to an expert under cl 19.
The terms of the lease to a third party pursuant to cl 9.1.1 are also expressed in general terms. The rental is not specified and provision is made in cl 9.2.1 for the possibility that it might be significantly less than the $250 mentioned in cl 7. the term of the lease is not specified; it may be that the tenant might surrender all or part of its tenancy during the term. The remaining provisions of the third party lease must satisfy the same standards as those in the Leighton Properties lease under cl 9.1.2: they must be no less favourable to Challenger than would have been the case had a cl 7 lease been entered into.
Another product of this uncertainty created by cll. 9.1.1 and 9.1.2 is the likelihood that the parties may wish to negotiate with Challenger the terms of such a lease. Hence, cl 9.7 contemplates two situations: first, a request by Leighton Properties that Challenger execute a proffered Occupancy Agreement; and, second, a request that Challenger grant its consent to the proposed new Occupancy Agreement. The possibility that Leighton Properties might approach the matter of a lease under either sub-clause of cl 9.1 by first seeking the consent of Challenger is not addressed in cl 9.1, but it must be implicit in it for, otherwise, there is no obligation upon Challenger to give its consent to a proposed new Occupancy Agreement and no consequence of its giving such consent. This is consistent with cl 9.8 which speaks of the withholding or refusal of consent as being a breach by Challenger of the Limited Income Guarantee in the same way as to its refusal to execute an Occupancy Agreement.
I return now to the first analysis offered by Challenger. It requires that I pass over the suggested erroneous invocation of cl 9.2.1 in the Freehills’ letters. It requires that I ignore the response of Challenger in the Herbert Geer & Rundle letters assuming these are to be taken as something other than an unqualified acceptance of the proffered document. More importantly, it involves a distortion of the essential substance of the Freehills’ letters. There were no requests that Challenger execute the proffered Occupancy Agreement; they were requests that it give its consent within 14 days to the proposed new lease. In these circumstances, the first analysis must fall to the ground.
The alternative scenario is that the Freehills’ letters in each case constituted an offer to lease and that these offers were accepted in the Herbert Geer & Rundle letters in response. I have already[5] set out these responding letters. I do not read the Freehills’ letters as offers to lease. I do not read the Herbert Geer & Rundle responses as unconditional acceptances of the Freehills’ proposal. While they use the words “consent” this is subject to certain “comments”. Looked at as a whole, a fair reading of these responses shows that Challenger was resistant to the Freehills’ proposals. Its comments were, in effect, counter-proposals. Its responses also must be read against the background of an unresolved dispute with respect to its obligations to provide separate metering under cl. 4.3. This dispute had, before the correspondence relating to Level 7, concerned Level 9 and had apparently been a sticking point which prevented the execution of a lease with a third party tenant with respect to that level. This dispute had extended to Level 7 by the time of the correspondence with respect to Level 4. It may be that, if pressed, Challenger would have yielded the point; it was certainly not doing so in the letters in question.
[5]See paras [20] and [22] above.
The conclusion I reach, therefore, is that there is no agreement for lease and no lease in existence with respect to Levels 7 or 4. Accordingly, Challenger is not entitled to rental from Leighton Properties Vic as tenant nor from Leighton Holdings as its guarantor.
Challenger’s claims for rental guarantee
The alternative Challenger claim was put against Leighton Properties as guarantor under the rental guarantee provisions of the Limited Income Guarantee and against Leighton Holdings as its guarantor. The obligation of Leighton Properties under the Limited Income Guarantee arose in December 2002 after this document was executed and continued until December 2007 unless the agreement was terminated pursuant to cl 13. This has not occurred. Leighton Properties relies upon cl 9.7 which, it says, operates to cause the rental guarantee to cease to with respect to Levels 7 and 4.
Clause 9.7 deals with the case where Challenger refuses to comply with its obligations under cl 9.1 The consequence of a refusal is the loss of the benefit of the rental guarantee with respect to that part of the guarantee property as is the subject of the rejected lease. Such a consequence arises in either of two situations: a refusal to execute an Occupancy Agreement within 28 days of request; and the withholding or refusal of consent to a proposed new Occupancy Agreement within 14 days of request. The apparent objective of the second situation is to relieve Leighton Properties of the burden of preparing an Occupancy Agreement where Challenger has refused to agree to its terms. It permits Leighton Properties to propose at any time the terms of an Occupancy Agreement to Challenger and, presumably, to negotiate them with Challenger at a time when the proposed tenant is itself at negotiation stage. This is indicated also by the use of the word “proposed” in the expression “proposed Occupancy Agreement” for which consent is sought.
It seems that in the two Freehills’ letters of 13 February and 7 April, Leighton Properties sought consent pursuant to cl 9.7. Enclosed in each case was a draft of a proposed lease. I do not see the erroneous reference to cl 9.1.1 as significant or as fatal to the effectiveness of the request for consent. It certainly caused no confusion in the minds of Challenger or its legal advisers.
It was submitted on behalf of Challenger that, in order to activate cl 9.7, the “proposed new Occupancy Agreement” must be in a form such that its execution by Challenger would create immediately a binding lease; that is, it must have been executed by the proposed tenant. I think not. If that were the case, then the consent procedure would be otiose. If this required the submission to Challenger for consent of an engrossed and executed lease, then its failure by Challenger to execute it would trigger the clause. As I have mentioned, the consent procedure is an invitation to the parties to seek to achieve accommodation before the lease is itself prepared. I conclude that each of the two Freehills’ letters is a request of Challenger to grant its consent to an Occupancy agreement in terms of the enclosure.
Next, it was said that neither of the letters seeking consent to the terms of the draft lease was a request which required a response from Challenger because the terms of the proposed lease in each case were in fact less favourable to Challenger than would have been the case had a cl 7 lease been entered into.
This submission must fail for any of a number of reasons. First, it is the purpose of cl 9.7 to avoid this type of argument. If Challenger accepts that the proposed lease is no less favourable, then it will consent and, in due course, execute it as is required by cl 9.1. If it does not, the issue passes to the expert under clauses 9.2 and 19. It cannot, therefore, be a precondition to the applicability of cl 9.7 that the lease will some time later be found by the expert to contain terms no less favourable.
Second, it was common ground that the only provision in the draft lease which might make it less favourable is the presence of cl 4.3. It is true that in the Mobil Lease the landlord agreed by this clause to provide separate metering prior to the commencement date. Nevertheless, this clause is not excluded in renewal leases under article 34 of the Mobil Lease. There is, as a matter of construction, no difficulty in including in the renewal leases a cl 4.3 which will require compliance prior to the new commencement date. The benchmark for the “no less favourable” provisions of cl 9.1 is the terms of a supposed Mobil renewal lease.
Nor can it be said that, in terms of its enforceability, cl 4.3. had no work to do because it had been waived. The no-waiver provision of cl 28.1(b) of the Mobil Lease would prevent that if the ingredients of waiver were otherwise present. In any event, the option provisions of the Mobil Lease required that cl. 4.3 be included in any renewal.
Next it was said that the consent procedure of cl. 9.7 applied only to a proposed new lease to Leighton Properties under cl. 9.1.2. Accordingly, the question of consent and the consequence of a withholding of consent was not relevant to a proposal for a lease to a third party under cl. 9.1.1. It was put that the word “new” in the expression “proposed new Occupancy Agreement” carried with it the idea of a renewal of an existing leasehold rather than a different one to a different tenant. Again, I do not agree. The expression means a proposed fresh agreement under cl. 9.1.1 or cl. 9.1.2. There is no reason as a matter of construction or commercial sense to exclude a third party lease from the consent procedure.
Under cl 9.7, Challenger, having received a request for consent must within 14 days either give its consent or refer the matter for determination by an expert pursuant to cl 19. If it does neither of these things the income guarantee is, pro tanto lost.
Challenger then argued that it gave its consent in each case and thereby complied with cl. 9.7. Its response to each of the Freehills’ letters was to give its consent “subject to the following comments”. These comments raised a matter which had been in contention with respect to Level 9 – the matter of cl 4.3. Counsel for Challenger contended that the mention of this matter was simply a comment, not a qualification to its consent. I do not agree. The question of cl 4.3 and the landlord’s continuing obligation to provide separate meters was under debate at this time including in the correspondence to which I have referred. In each case, the Herbert Geer & Rundle letter concludes with a request that Leighton Properties agree to Challenger’s counterproposal to contribute to the cost of metering and “then provide us with an amended execution copies of the lease”. The Challenger counterproposal was apparently rejected and Leighton Properties further proposal withdrawn on 31 March 2004. Freehills on behalf of Leighton parties wrote on 27 April in response to the Herbert Geer & Rundle letters noting that the Challenger consent was subject to conditions and that these conditions were not acceptable to their clients. I conclude that Challenger did not give its consent to either of the proposed new Occupancy Agreements within 14 days or at all.
Next, it was said that the qualified consent was in fact a consent because cl 9.2 of the Limited Income Guarantee obliged the parties to refer any dispute as to this matter to expert determination. A consent which is subject to the resolution of a qualification pursuant to cl. 19 is in fact an unqualified consent. It is correct that such a term exists; it does not, however, have the effect contended for. Clause 9.7 offers Challenger the choice of two courses in response to a request for consent: to consent or to refer the dispute under cl 19. It cannot be correct to say that Challenger’s withholding of consent on the ground that the proposed lease does not comply with cl 9.1 is in fact a consent subject to the determination of that matter by the expert. If that were the case, the second course available to challenger under cl 9.7 would have little value. In my opinion a consent under cl 9.7 must be unqualified and unconditional and certainly not subject to the condition of an expert determination.
The alternative position taken by Challenger was that it had, within the 14 day period, referred the matter at issue to expert determination under cl 19 so that the lesser provision did not operate. Clause 19 is in the following terms:
“19.1If a dispute or difference (‘dispute’) between Leighton and the Owner arises in connection with this agreement or its subject matter and the dispute is required by the terms of this agreement to be determined in accordance with this clause, either party shall give notice to the other party a notice of dispute in writing adequately identifying and providing details of the dispute.
19.2Within 14 days of service of notice of a dispute, the parties shall confer at least once to attempt to resolve the dispute or to agree on methods of resolving the dispute by other means. At any such conference Leighton shall be represented by Manager Corporate Services (John Barrett) Leighton Properties Pty Ltd, Level 50, Rialto, 525 Collins Street Melbourne and the Owner shall be represented by General Manager – Challenger Property Management Pty Ltd, Level 41, 101 Collins Street, Melbourne.
19.3If the dispute has not been resolved within 21 days of service of the notice of dispute, either party may refer the dispute for the determination of an expert and the following provisions will apply:
19.3.1The determination of the expert is not an arbitration within the meaning of the Commercial Arbitration Act 1984 and that act shall not apply to the determination.
19.3.2The parties must seek to agree on an expert to resolve the dispute. If the parties cannot agree within 7 days of either party proposing an expert, either party may request the President of the Australian Property Institute (Victorian Chapter) to appoint an expert within 14 days after the parties’ request.”
It will be seen that the process requires three steps: notice of dispute; an attempt to resolve the dispute; and the option in either party to refer the dispute to the expert. Given the mandatory terms of cl 9.7, it may be that the third step in the case of a cl 9.2 dispute is likewise mandatory.
It was contented on behalf of Challenger, and accepted by counsel by the Leighton parties, that Challenger would satisfy the requirements of cl 9.7 if it took the first of these three steps within the 14 day period. I am content to proceed on that basis.
The contention of Challenger was that the Herbert Geer & Rundle letters in response and Mr Barrett’s email contained or constituted a notice in writing of dispute under cl 19.1. It was put against this that, on no fair reading of these letters, is there to be found the giving of a cl 19.1 notice. I agree. The Barrett email was sent on 16 February 2004, before either request was made. In any event, none of these documents makes mention or even hints at the cl 19 procedure. Nor, it seems, were they understood by the recipients as setting in train the cl 19 procedure.
It follows from all of this that the circumstances for the operation of the lesser provisions of cl 9.7 exist and that the rental guarantee has been lost.
Conclusions
I conclude that the claim of Challenger Properties fails and propose that there should be judgment for the defendants.
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