Clasic International Pty Ltd v Lagos

[2002] NSWSC 1155

Reported Decision: 60 NSWLR 241
(2003) NSW ConvR 56-053

New South Wales

Supreme Court

CITATION:	Clasic International Pty Ltd v Lagos and Ors [2002] NSWSC 1155
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4302/02
HEARING DATE(S):	27 and 28 November, 2002
JUDGMENT DATE:	28 November 2002
PARTIES :	Clasic International Pty Ltd - Plaintiff Timothy Lagos - First Defendant Con Kariotoglou - Second Defendant
JUDGMENT OF:	Palmer J

COUNSEL :	R. Carruthers - Plaintiff P.D. Rodionoff - Defendants
SOLICITORS:	Alan Brown & Co - Plaintiff Cumberland Frank - Defendants
CATCHWORDS:	LANDLORD AND TENANT - RETAIL LEASE - CONTRACT - COMMON MISTAKE - MISTAKE OF LAW - Plaintiff and Defendants entered into agreement for lease of retail shop for a period of less than five years in contravention of s.16(1) Retail Leases Act 1994 (NSW) - parties unaware of Act and provisions of s.16(2) extending term of lease to five years - parties would not have entered into agreement for lease if they had known of effect of Retail Leases Act. Held: Parties had been induced to enter agreement for lease by a common mistake as to a fundamental matter - distinction between mistake of fact and mistake of law now abolished for all purposes in Australia.
LEGISLATION CITED:	Corporations Act 2001 (Cth) - s.131 Duties Act 1997 (NSW) - s.304 Retail Leases Act 1994 (NSW) - s.3, s.7, s.16, s.79 Supreme Court Rules - Part 36 r10B
CASES CITED:	Solle v Butcher [1950] 1 KB 671 Cheshire and Fifoot's Law of Contract, 8th Aust Ed
DECISION:	Plaintiff's Summons dismissed; agreement for lease set aside.

Introduction

1 The Defendants are the registered proprietors of a property at 57 and 57A Boomerang Place, Seven Hills, which comprises a shop on the ground floor and a flat above the shop (“the Premises”). By a letter dated 8 August 2001, the First Defendant, Mr Lagos, on behalf of all Defendants, agreed to give to the Plaintiff a lease of the Premises for a term of one year with an option to renew the lease for a further three years (“the Agreement for Lease”). 2 By Summons filed on 9 September 2002, the Plaintiff claims a declaration that the Premises are a retail shop as defined in s.3 of the Retail Leases Act 1994 (NSW) (“RLA”) and that, by virtue of s.16(1) and (2) RLA it is entitled to a valid lease for a term of two years with an option for a further three years, commencing on 2 October 2001. The Plaintiff seeks consequential orders that the Defendants execute and register a lease in the approved form according to the terms set out in the Agreement for Lease. 3 Alternatively, the Plaintiff seeks damages against the Defendants arising from their failure to enter into the lease, an order that the Defendants provide to the Plaintiff receipts for payment of rent and an order that the Defendants carry out certain minor repairs to the Premises. 4 By their Amended Defence and Cross Claim the Defendants allege that:


– the Agreement for Lease is of no effect because the Plaintiff company was not registered until after the lease agreement was signed and it has not subsequently ratified the Agreement;

– the RLA does not apply to the whole of the Premises but only to the shop on the ground floor;

– the Plaintiff is estopped from relying upon its rights under the Agreement for Lease because it induced the Defendants to enter into the Agreement by misrepresentations that, if its business was going well, it would enter into a contract to purchase the Premises by Christmas 2001 and that the option for a further term of three years contained in the Agreement for Lease would not be relied upon;

– the Agreement for Lease is voidable in equity and should be avoided because it was entered into by reason of a common mistake in that all parties were in ignorance of the provisions of the RLA and believed that the Agreement would be effective according to its terms.


The facts

5    While a number of factual issues remain between the parties, they have tendered an Agreed Statement of Facts in the following terms:

“1. Clasic International Pty Ltd (“Clasic”) is the family company of Chandrasegran Elagupillay and his wife Sathiyawani Visuvanathan (“Chandra” and “Vani”).

2. Vani is one of the directors of Clasic. Chandra was not a director.

3. Chandra, Vani and their children live in a residence above a shop at 57 & 57A Boomerang Place, Seven Hills (“the premises”).

4. The premises are jointly owned by Timothy Lagos, Con and & Irene Kariotoglou.

5. The premises are Folio Identifier 29/36637. The zoning is 3a “General Business” which permits a business being conducted on both levels of the premises.

6. The premises consists of a shop on the ground floor and an apartment on the first floor. The upstairs apartment contains two bedrooms, a bathroom and kitchen facilities. The upstairs apartment:

i. has its own letterbox number, no 57A as compared to the shop on the ground floor which is no.57.

ii. has a separate entry.

7. The shop which has been opened on the premises operated under the name “Indian Beauty House” sells Indian clothing, haberdashery, costume jewellery and like products.

8. In about late July or early August 2001, Chandra and Vani met with Mr Tim Lagos at the premises. At all times, Chandra and Vani only ever dealt with Mr Lagos and had no dealings at all with Con and Irene Kariotoglou.

9. During their first meeting, Chandra and Vani told Lagos that they were interested in leasing the premises, that is, both the shop and the upstairs. They told Lagos that they eventually intended to turn the upstairs into a beauty salon.

10. On 8 August 2001, Chandra, Vani and Lagos met at the premises. Prior to that meeting, Chandra had prepared a document dated 8 August 2001. The document was signed by Lagos in duplicate. Lagos received a $500 deposit.

11. At the time of signing the 8 August 2001 document, Lagos lived in the first floor apartment and was required to vacate it in order to allow Chandra and his family to take occupation.

12. The Plaintiff says upon occupation, Clasic took occupation of the ground floor shop and commenced renovations and also says an amount of $27,061.33 was expended by Clasic in carrying out renovations to the shop decor and purchasing equipment. The Defendant does not admit that the Plaintiff took occupation or the amount claimed was spent on renovations.

13. Rent for the upstairs apartment was $160 per week. Rent for the ground floor shop was $200 per week for the first 5 months (after a one month rent free period for both upstairs and the ground floor), then $250 per week for the remainder of the first year and $300 per week for the second year and onwards.

14. On 22 March 2002, Lagos signed the document entitled “Commercial Lease” between Lagos and Clasic International Pty Limited. The Defendant says that it has no legal effect or significance.

15. On or about 3 July 2002, Clasic lodged Caveat No.8739541Q (“the Caveat”) on the title of the premises.

16. On 2 September 2002, Windeyer J ordered (inter alia) that the operation of the Caveat be extended until further order, upon the Plaintiff through its director (Vani) and Chandra giving the usual undertaking as to damages, which was given.

17. On 5 September 2002, Clasic applied to the Department of Finance to pay stamp duty on the letter dated 8 August 2001 but no duty was assessed as being payable.”
6    The Agreement for Lease is in the following terms:

“Clasic International Pty Ltd
c/o Level 2
333 George Street
Sydney NSW 2000

08 August 2001

Mr Timothy Lagos
57A Boomerang Place
Seven Hills NSW 2147

Dear Tim,

Re: 57 & 57A BOOMERANG PLACE, SEVEN HILLS

I refer to our recent agreement regarding the rental of 57 & 57A Boomerang Place.

Until finalisation of the lease documents, I have penned the following as the basic terms of our agreement:

1. Premises
57 & 57A Boomerang Place, Seven Hills

2. Term
1 year with an option to renew for a period of 3 years


3. Gross Rent
57A Boomerang Place – $0 per month for first month. $160 per week from 01 October 2001.
57 Boomerang Place – $0 per month for first month
$200 per week for next 5 months, $250 per week for rest of 1st year. 2nd year onwards at $300 per week.

4. Rent Review
Adjusted for CPI annually from 3nd [sic] year.

5. Lease Commencement
1 September 2001

6. Rent Commencement
1 October 2001

7. Bond
One month’s rent $1440 is payable at start of lease.

To seal our understanding on the matter, I enclose herewith a cheque for $500 as deposit. This money will be deducted from the first rent due. If you are in agreement, please sign on the 2nd copy of this note and return to me.

Thank you and regards.

Yours sincerely,
[signature]
V.S. Vani
Director

I acknowledge this note and the deposit paid and am in agreement:
[signed]
Timothy Lagos 08.08.01”
7 On 22 March 2002, the parties signed a Commercial Lease Agreement in the standard printed form issued by the Real Estate Institute. A copy of the document was annexed to the affidavit of Chandrasegran Elagupillay (“Chandra”) of 9 September 2002 and was admitted into evidence. After its admission, I observed that the document did not appear to be stamped and that by s.304(1) of the Duties Act 1997 (NSW) it was of no effect in law or equity and could not be received in evidence. 8 Neither party sought to re-tender the document in accordance with the provisions of s.304(2) of the Duties Act and “the usual undertaking” provided in Part 36 r10B of the Supreme Court Rules . Both parties are content to regard the Commercial Lease as of no effect and they have fought the case on the basis of the Agreement for Lease, which is duly stamped. I therefore reject the tender of the Commercial Lease Agreement and I have paid it no further regard for the purposes of this judgment.

Pre-registration contract and ratification

9 The Plaintiff was registered as a company on 10 August 2001, two days after the Agreement for Lease was signed by Sathiyawani Visuvanathan (“Vani”) on its behalf as a director. 10 The law relating to pre-incorporation contracts is now codified in s.131 of the Corporations Act 2001 (Cth), which, relevantly, is in the following terms:

“(1) If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract:

(a) within the time agreed to by the parties to the contract; or

(b) if there is no agreed time – within a reasonable time after the contract is entered into.
11    The evidence clearly demonstrates that by the Agreement for Lease, Vani entered into a contract for the benefit of the Plaintiff. The contract does not stipulate an agreed time for ratification by the Plaintiff so that the question is whether the Plaintiff has ratified the Agreement within a reasonable time after it was entered into. 12    During the course of the trial, the Plaintiff produced a minute of a meeting of its directors held on 5 September 2001 at which the directors resolved to approve the budgets and arrangements for renovation of the Premises and expressly agreed “to ratify the lease and other arrangements negotiated by Mr Chandrasegran on behalf of the company” . 13    Mr Rodionoff, who appears for the Defendants, challenged this document as a recent fabrication. Vani denied the allegation. While Vani’s credit was attacked, nothing emerged from that attack which would cause me to regard her as an untruthful witness. The allegation of fabrication is a serious one and I am not satisfied that the Defendants have discharged the burden of proving it. 14    In addition, Chandra gave unchallenged evidence that he made payment of rent for the Premises out of the Plaintiff’s bank account and that the Plaintiff expended substantial sums on renovations of the Premises shortly after obtaining possession. I accept that evidence as evidence of ratification of the Agreement for Lease by the conduct of the Plaintiff. 15    In my opinion, both by the resolutions of its directors on 5 September 2001 and by its conduct shortly after obtaining possession, the Plaintiff has ratified the Agreement for Lease within a reasonable time after it was entered into, so that it is entitled to the benefit of that Agreement.

Whether whole Premises subject to RLA

16 Section 3 of the RLA contains the following definitions:

“ ‘retail shop’ means premises that:
(a) are used wholly or predominantly for the carrying on of one or more of the businesses specified in Schedule 1 (whether or not in a retail shopping centre) …

‘retail shop lease’ or ‘lease’ means any agreement under which a person grants or agrees to grant to another person for value a right of occupation of premises for the purpose of the use of the premises as a retail shop:
(a) whether or not the right is a right of exclusive occupation, and
(b) whether the agreement is express or implied, and
(c) whether the agreement is oral or in writing, or partly oral and partly in writing.”
17 There is no dispute that the ground floor of the Premises is used wholly for the carrying on of a business specified in Schedule 1 so that it is a retail shop, as defined. There is no dispute that the Agreement for Lease is a retail shop lease so far as it extends to the ground floor of the Premises. 18 The Defendants, however, rely upon s.79 RLA, which is as follows:
“If a retail shop lease applies to a retail shop as well as to other separate or adjoining premises that are not a retail shop, this Act applies to the lease only to the extent that the lease is a lease of a retail shop.”
19 The Defendants say that as the Agreement for Lease applies to separate premises that are not a retail shop, namely the upstairs flat, the RLA applies to the Agreement for Lease only as a lease of the ground floor. 20 The Plaintiff says that the whole of the Premises were let for the purpose of use as a retail shop so that the provisions of the RLA apply to the whole of the Premises. 21 The Agreement for Lease does not contain any term stating the purpose for which the Premises may be used. However, the definition of “retail shop lease” includes an agreement which is partly oral and partly in writing and the parties have given evidence as to what was agreed between them prior to entry into the Agreement for Lease as to the proposed use of the Premises. 22 Chandra says that during his first inspection of the Premises he told Mr Lagos:
“I understand you have got the premises up for sale but would you consider renting it to us because we would like to start a business there. We are interested in the premises because we would like to run a ladies’ clothing shop selling Indian clothing and we would like to live in the apartment upstairs for about six months to a year so we can get the business up and running. We would plan to add a beauty salon business upstairs at the end of that period or sooner if the business downstairs went well.”
23    Mr Lagos says that during this meeting the following exchange took place:
“ Chandra said: I’m interested in the whole building, both upstairs and downstairs.
I said: I’m still living upstairs.
He said: I would like the whole building. I wish to put a business for my wife downstairs and I would like to use the upstairs for storage and eventually turn it into a beauty salon.”
24    In cross examination, Chandra said that he told Mr Lagos “the reason why we were taking the business for six months to a year was within about six months to a year of the lease we would want to expand the business and move it upstairs”. 25 I am satisfied that the Plaintiff and Mr Lagos on behalf of the Defendants agreed that the Plaintiff would have the right to use the upstairs flat for the conduct of the Plaintiff’s business as well as the ground floor. Whether the Plaintiff has yet availed itself of that right is not to the point. The point is that the Agreement for Lease contained an oral term whereby the Plaintiff was granted the right of occupation of the whole of the Premises for the purpose of conducting its business therein, if it wished, so that the Agreement is a retail shop lease, as defined, and applies to the whole of the Premises. Section 79 RLA, in my view, applies only where it is an express or implied term of a lease of premises that part of the premises may be used as a retail shop, as defined, and part of the premises may not be so used. That is not the case with the Agreement for Lease.

Estoppel

26    Mr Lagos says that when Chandra and Vani first inspected the Premises he made it clear to them that the Defendants were only really interested in selling the property. He says that Chandra said that he was serious about buying the property and asked: “Just give me ’til around Christmas as I have some property in Singapore for sale. I’m just waiting for this property to be sold” . 27    Mr Lagos says that when Chandra and Vani came to see him on 8 August 2001 with the Agreement for Lease which Chandra had already prepared, he repeated that he was really only interested in selling the property. He says that Chandra responded: “Yes, I remember, just give me ’til Christmas. I have some property which is in Singapore” . Mr Lagos says that when he asked Chandra about the reference in the Agreement for Lease to a three year option, which had not previously been discussed, Chandra said: “That’s normal on all agreements. We won’t get to that point. I would have bought the property by then. Don’t worry about it” . 28    Chandra denies that any conversation took place in the terms alleged by Mr Lagos. He says that all he told Mr Lagos was to the effect that “we might consider purchasing the property if the business went well” . 29    Mr Lagos concedes that in the discussions preceding the signature of the Agreement for Sale, he did not ever mention a price which he was seeking for the sale of the property, nor did Chandra and Vani mention a figure at which they were prepared to buy. 30    In the light of the fact that the Plaintiff wanted to lease the Premises in order to start up a new business and that it was not possible to say at that stage whether the business would prosper, I think that it is inherently unlikely that at or prior to the signing of the Agreement for Lease Chandra and Vani would have expressed a firm intention to buy the property, particularly as early as Christmas that year. The fact that no price or other term of the sale was even mentioned indicates that the purchase of the property by the Plaintiff was discussed only as a possibility. 31    In my opinion, there was no representation as to the purchase of the property as alleged by Mr Lagos. Mr Lagos may have come to the view that he should enter into the Agreement for Lease on the basis of what Chandra and Vani had said about the possibility of a purchase, but it was not reasonable on his part to regard what was said as an assurance upon which the Defendants could rely. 32    Likewise, I regard it as inherently unlikely that Chandra would have told Mr Lagos not to worry about the three year option to renew the lease on the basis of an assurance that the Plaintiff would have purchased the property before the time for exercise of the option had arrived. 33    The Defendants’ case on estoppel, therefore, fails on the facts.

Common mistake

34 Section 16(1) RLA relevantly provides as follows:

“(1) The term for which a retail shop lease is entered into, together with any further term or terms provided for by any agreement or option for the acquisition by the lessee of a further term as an extension or renewal of the lease, must not be less than 5 years. An agreement or option is not taken into account if it was entered into or conferred after the lease was entered into.

(2) If a lease is entered into in contravention of this section, the validity of the lease is not thereby affected but the term of the lease is extended by such period as may be necessary to prevent the lease contravening this section.

(3) This section does not apply to a lease if a lawyer, or a licensed conveyancer, not acting for the lessor certifies in writing that he or she has, at the request of the prospective lessee, explained the effect of subsections (1) and (2) to the prospective lessee and that the giving of the certificate will result in this section not applying to the lease.”

Section 7 provides as follows:
“This Act operates despite the provisions of a lease. A provision of a lease is void to the extent that the provision is inconsistent with a provision of this Act. A provision of any agreement or arrangement between the parties to a lease is void to the extent that the provision would be void if it were in the lease.”
35 The parties entered into the Agreement for Lease without the benefit of legal advice. Each party says that when the Agreement for Lease was entered into, he or she was entirely ignorant of the provisions of the RLA and that the effect of that Act would be to convert the agreed term of one year into a term of two years. 36 Chandra says that the Plaintiff wanted only a one year initial term because “we felt one year would be a good time to see whether the business would take off … what came to our mind was to take a one year lease with an option for an extension for three years so that we can examine how the business took off … it should take off in six months to a year and then we could consider a longer lease …” . 37 M Lagos says, and I accept, that the Defendants were primarily interested in selling the property as soon as possible and that they would never have agreed to enter into the Agreement for Lease had they known that the effect of the RLA would be to convert the initial term of one year into two years so that the term of the lease would be five years if the option were renewed. 38 I am satisfied that both parties believed that the Agreement for Lease would validly take effect according to its terms and that had they known of the substantial variation which the RLA would impose upon the Agreement, they would not have entered into it. 39 The Defendants invoke the principle that equity may set aside a contract if both parties were induced to enter into it by a common mistake as to a fundamental matter, provided that the party seeking to set aside the contract was not at fault. 40 The principle is expressed thus by Denning LJ in Solle v Butcher [1950] 1 KB 671, at 692:
“A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or to their respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault.”
41    Mr Carruthers does not submit that Solle v Butcher is not good law in Australia. He makes only two submissions. First, that it is not yet clear in Australia that the principle of common mistake is applied to a mistake of law rather than only to a mistake of fact and in the present case there was a mistake of law not of fact; second, the terms of s.16(2) RLA are mandatory and override any rights under the general law which may otherwise operate upon the validity of a retail shop lease. 42 I do not need to consider the vexed question of whether the mistake in the present case is one of fact or one of law. As to whether, in the law of Australia, the doctrine of common mistake applies to a mistake of law, I need do no more than set out the following passage from Cheshire and Fifoot’s Law of Contract , 8th Aust Ed., para.12.8:

“Operative mistake traditionally has been confined to mistakes of fact and not of law. This distinction has always been blurred and has been notoriously difficult to apply. It appears that equity did not draw a clear line between mistakes of fact and law. If there was such a rule, it was often honoured in the breach. In Western Australia the law/fact distinction has been abolished by legislation (with certain safeguards). The whole question has now almost certainly been laid to rest by the decision of the High Court in David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353. In that case the distinction between mistake of law and mistake of fact was rejected in the light of a very considerable body of judicial and academic criticism of the distinction:

… the rule precluding recovery of moneys paid under a mistake of law should be held not to form part of the law in Australia.

Admittedly, this was a case about the law of restitution and so it could be argued that the case has nothing to say about mistakes of law in contract. However, the High Court has also rejected the distinction between law and fact for the purpose of estoppel, (see Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; Foran v Wight (1989) 168 CLR 385; Commonwealth v Verwayen (1990) 170 CLR 394) and so the conclusion is inescapable that the distinction must now be regarded as dead, wherever it might arise.”
43 In my opinion, the conclusion expressed in the last sentence of this passage is correct and ought now to be accepted as the law in Australia. 44 As to Mr Carruthers’ second submission, I cannot accept that s.16(2) RLA is intended to negate such rights as a party to a retail shop lease may have under the general law to challenge its validity. Mr Carruthers’ submission, if correct, would mean that a retail shop lease for a term of less than five years procured by fraud, duress or misleading and deceptive conduct within the Trade Practices Act or the Fair Trading Act would nevertheless be inviolate for the benefit of a wrongdoer. This cannot have been the intention of the legislature. 45 In my opinion, all that is intended by the words in s.16(2) “the validity of the lease is not thereby affected” is that if a lease is entered into in contravention of s.16(1), a party to the lease cannot raise a defence that the lease is unenforceable for illegality. 46 For these reasons I am satisfied that the Defendants have made good their defence of common mistake, and that the mistake was fundamental to the Agreement for Lease. The Plaintiff was not at fault as to how that common mistake arose. There is no circumstance which militates against setting aside the Agreement at their suit. 47 I do not think that any terms should be imposed as a condition of setting aside the Agreement for Lease. The Plaintiff has now been in possession of the Premises for more than a year, which was the initial term granted under the Agreement for Lease which it wished to secure. The Plaintiff has not exercised the option to renew the lease for a further three years prior to the expiry of the one year term granted under the Agreement for Lease. It is true that the Plaintiff has expended a considerable sum on renovating the Premises but it has done so in the belief that it would have only a guaranteed one year term, which it has already enjoyed.

Orders

48    For these reasons, the Plaintiff’s Summons is dismissed. The Defendants are entitled to orders setting aside the Agreement for Lease, for the removal of the caveat lodged by the Plaintiff and for the giving up of possession of the Premises. 49    I will stand the proceedings over for a short time for the bringing in of Short Minutes of Order and for argument as to costs.
– oOo –

Last Modified: 12/02/2002