Downward Bricklaying Pty Ltd v Goulburn-Murray Rural Water Authority

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

No. 5362 of 2000

DOWNWARD BRICKLAYING PTY LTD	Plaintiff
v
GOULBURN-MURRAY RURAL WATER AUTHORITY		Defendant

---

JUDGE:	WILLIAMS J.
WHERE HELD:	MELBOURNE
DATE OF HEARING:	3, 4, 5, 6, 9, 10 December 2002
DATE OF JUDGMENT:	27 May 2003
CASE MAY BE CITED AS:	Downward Bricklaying Pty Ltd v Goulburn-Murray Rural Water Authority
MEDIUM NEUTRAL CITATION:	[2002] VSC 171

---

LANDLORD AND TENANT – exercise of option – conditional option clause – illusory consideration – equitable estoppel.

---

APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr J. Brett	McDonald, Slater & Lay
For the Defendant	Mr M. Sifris	Maddocks

HER HONOUR:

The claim

The plaintiff ("Downward") seeks declarations, relief under both s 41 of the Fair Trading Act 1985 and s 87 of the Trade Practices Act 1974, damages and equitable compensation against the defendant ("the Authority") by a third further amended statement of claim filed on 9 December 2002.

Downward’s claim arises as a result the Authority’s refusal to grant it a further term under a lease ("the lease") of land described as the "Brolga Hotel Motel Lease Area B3" on the foreshore of Lake Eppalock ("the land"). The lease was made on 7 July 1976 between Kimbolton Recreational Area Management Committee ("the Committee") as lessor and Dorothy Madge Edgar as lessee. Downward purported to exercise the option under clause 6 of the lease on about 1 July 1999. The validity of the exercise of the option was not challenged by the Authority. However, on 22 June 2000, it advised Downward that it refused to consent to a further 25 year lease.

Downward abandoned its claims under the Trade Practices Act 1974 and the Fair Trading Act 1985. It essentially claims a contractual right to a further 25 year term under the option clause, clause 6 of the lease and the Authority denies any such entitlement. Alternatively, Downward argues, and the Authority denies, that the Authority was estopped in equity from refusing it the further term.

Clause 6 of the lease

Clause 6 of the lease is and was at all relevant times in the following form:

"6.Notwithstanding anything contained in lease (sic) if the tenant gives twelve months notice to the Committee in writing prior to the expiration of the said term that the tenant desires to renew this lease for a further period of twenty-five years the Committee provided prior consent to this renewal is given by the [State Rivers and Water Supply] Commission and Governor in Council shall grant the tenant a lease of the said land for a further period of twenty-five years at a rental to be agreed upon between the Committee and the tenant or in the event of no agreement being reached at such rental as shall be determined by a single Arbitrator in accordance with the Arbitration Act 1958 provided that such rental shall not be less than the immediate previous rental and otherwise subject to the same terms covenants agreements and provisions as contained in this lease with the exception of Clause 6 herein."

Statutory provisions and background

It was common ground that the Authority became both lessor under the lease and successor to the Commission as a result of statutory changes between 7 July 1996 and the commencement of proceedings on 9 December 2002.

The State Rivers and Water Supply Commission (“the Commission”) had controlled the land at all relevant times under the Water Act 1958 (Vic). Powers and duties of the Commission were set out in s33 of the Act. They required it to use such monies as were available to it to make provision for inter alia:

(a)carrying out necessary surveys of the State’s water storage resources and determining the means and cost of their improvement and the profitable supply of water; and
(b)preparing proposals for the construction of water supply works and estimating their cost.

S 206A(1) of the Water Act 1958 provided for an area of land controlled by the Commission to be declared a recreational area to be subsequently managed and controlled by either the Commission or by a committee of management, as follows:

"206A(1)        The Governor in Council may by Order published in the Government Gazette declare any area of land owned or controlled by the [Commission] to be a recreational area …
(1A)   A recreational area shall be managed and controlled by the [Commission] or where the Commission thinks fit by a committee of management appointed in accordance with the regulations under this section.
(1B)    The Commission or where there is a committee of management the committee shall have power subject to the regulations –
(a)       to grant leases or licences in respect of any part of the land within the recreational area;
(b)to impose and receive … rents …in respect of –
…
(ii)the use of such land

…

(1C) All monies received by the Commission or committee of management should not form part of consolidated revenue but shall be applied for or towards the cost of-
(a)carrying out works and improvements in that area;
(b)managing and maintaining that area and the improvements therein; and
(c)providing services in that area.

(2) The Governor in Council may make regulations for or with respect to –
(a)the control management use care and protection of any such recreational area;
(b)the granting of leases or licences in respect of any part of any such recreational area and the fixing imposition collection and receipt of reasonable rents or fees in respect of any such lease or licence…;"

By an Order published in the Government Gazette of 10 November 1965 the Governor in Council declared an area, which included the land, as a recreational area to be known as the “Kimbolton Recreational Area”. The Water (Kimbolton Recreational Area) Regulations 1966 made under s206A of the Water Act 1958 followed. They established the Committee, providing by regulation 5(1) for the Committee to “develop and control the Area as a recreational and tourist area”.

Regulation 6 (1) gave the Committee the power to lease the land, providing :

"6(1) The committee may subject to the approval of the Commission –
(a) demise any land within the [Kimbolton Recreational Area];
…
(c) impose charges by way of rent … for such demise …"

Regulation 9(1) obliged the Committee to “provide facilities, equipment and services for the better enjoyment of the Area for recreational purposes and as a tourist area” and gave it power to make reasonable charges for the use of facilities equipment and services. Regulation 10 required it to apply all monies received in the management, development and maintenance of those facilities, equipment and services. The Committee was required to account to the Commission in relation to its income and expenditure.

The Commission was abolished by s14(a) of the Water (Central Management Restructuring) Act 1984 (Vic). Sub-s14(b) provided for the powers, discretions, functions and authorities formerly exercised by the Commission to be transferred to and exercised by the Director-General (established by the Water Act) and, or the Rural Water Commission. Sub-section 14(d) vested the property and assets of the former Commission in the Rural Water Commission.

The Water (Kimbolton Recreational Area) Regulations 1988 made under s 206A(2) of the Water Act 1958 revoked the Water (Kimbolton Recreational Area) Regulations 1966. Regulation 6, however, appointed a committee of management to be called the Kimbolton Recreational Area Management Committee to administer the 1988 regulations. Regulation 12 gave the Committee power to grant leases of land within the Kimbolton Recreational Area with the approval of the Rural Water Commission.

The Water Act 1989 (Vic) followed. The purposes of the Act were set out in s1:

"1 Purposes
This Act has the following purposes-
(a) to re-state, with amendments, the law relating to water in Victoria;
(b)to provide for the integrated management of all elements of the terrestrial phase of the water cycle;
(c)to promote the orderly, equitable and efficient use of water resources;
(d)to make sure that water resources are conserved and properly managed for sustainable use for the benefit of present and future Victorians;
(e)to maximise community involvement in the making and implementation of arrangements relating to the use, conservation or management of water resources;
…
(h)to foster the provision of responsible and efficient water services suited to various needs and various consumers;
…
(j)to provide formal means for the protection and enhancement of the environmental qualities of waterways and their in-stream uses;
(k)to provide for the protection of catchment conditions;…"

Under s107(3) of the Water Act 1989 an authority managing a recreational area had functions:

“(a) to improve the area;
(b)to provide and arrange services and facilities in the area;
(c)to control land use in the area.”

Section 107 (7) also provided for the authority to use "any money legally available to [it] for or towards the cost of improving the area or of providing or maintaining services in it". S 132(1)(c) gave it power to grant leases in connection with the performance of its functions.

The Kimbolton Recreational Area Regulations 1988 were repealed under s 325 of the Water Act 1989. The repeal resulted in the Committee ceasing to exist on 1 November 1990. The Committee had no successor in law.

Under s 4 of the Water (Rural Water Corporation) Act 1992 the Rural Water Commission was abolished and its powers, rights, property, works and assets, including the land, were vested in the Rural Water Corporation and the districts under its management and control fell under the management and control of the Rural Water Corporation from 1 July 1992

The Authority was established on 1 July 1994 by Order of the Minister for Natural Resources made on 23 June 1994 under powers conferred by Division 2 of Part 6 of the Water Act 1989. The property formerly owned by the Rural Water Corporation, including the land, became vested in the Authority from 1 July 1994 under clause 6(c)(i) of the Order. Clause 6(c)(iii) vested in the Authority, from the same date, all rights, obligations and liabilities of the Rural Water Corporation under any agreements and contracts for the ownership, use or occupation of land, including the land.

Findings

Having taken into account all the evidence and the submissions of counsel, I make the following findings of fact and law.

Background
Lake Eppalock

The Authority undertakes management functions within the six areas of Shepparton, Central Goulburn, Rochester-Campaspie, Pyramid-Boort, Murray Valley and Torrumbarry and along the river and groundwater systems of northern Victoria. It delivers bulk water services through the Goulburn and Murray systems and releases water for production of hydro-electricity.

Lake Eppalock was constructed between 1960 and 1962 in the Campaspe valley, near the confluence of the Campaspe and Coliban rivers in Victoria. It is a water storage dam having an area of 3,011 hectares and a catchment area of 2,130 square kilometres. Approximately 20 per cent of Lake Eppalock’s capacity of 312,000 ML is provided as drinking water for the city of Bendigo and for towns such as Heathcote. The Lake otherwise provides waters for irrigation and is also used for recreational purposes.

As at 28 November 2002 a recent trend towards deterioration in the quality of the drinking water from the Lake had been noted by Mr David Schier, the Manager- Strategic Projects of Bulk Water Resources (formerly known as “Headworks”) of the Authority.

The land is situated on the foreshore and thus within the catchment area of Lake Eppalock. It has formed part of the Kimbolton Recreational Area at all relevant times and was vested in the Commission at the date of the lease, on 7 July 1976.

The lease

Exercising its power under s207A of the Water Act 1958 and regulation 6 of the Water (Kimbolton Recreational Area) Regulations 1966 and with the approval of the Commission, the Committee leased the land to Dorothy Madge Edgar on or about 7 July 1976.

On 28 September 1976 a Victorian governmental interdepartmental committee chaired by Mr A G Coulthard considered the development of Lake Eppalock for recreational purposes and reported its conclusions to the then Minister for State Development and Decentralisation ("the Coulthard Report"). No further development of the areas surrounding the Lake was permitted after recommendations made in the Coulthard report for minimisation of deleterious effects on water quality.

Consideration of water quality and developmental issues continued and a further State Government interdepartmental committee collaborated with local municipalities to develop guidelines which were accepted for implementation by the Victorian Government in 1983.

In about 1995 Mr Rex Downward, a builder with no formal qualifications, had decided to leave the industry in which he had worked from the age of 13 to the age of 46. He had conducted his own business from about the age of 22, at first as a domestic builder and later engaging in commercial projects. Its scale was indicated by his evidence that his business had, for example, performed one contract worth approximately $750,000 at Southbank Boulevard in Melbourne. He wished to purchase a hotel through Downward, a company controlled by him which was at all relevant times the trustee of the Downward Family Trust.

Mr Downward inspected the Brolga Hotel, in about October 1995. He found the hotel premises to be in poor condition and disrepair. Walls were infested with white ants and cockroaches and mice were present in the kitchen in significant quantities. The hotel was patronised by “bikies”, according to Mr Downward. In his witness statement he said that its turnover was “low”. Numerous notices had been issued in relation to its condition by the relevant health authorities. Mr Downward told the Court that in his opinion was that the condition of the premises “couldn’t have been any worse”.

The vendor of the business and tenant was George Anderson Pty Ltd. That company’s Mr George Anderson informed Mr Downward that the lease would expire in 2001, but that it contained an option for renewal for 25 years. Mr Anderson said to Mr Downward words to the effect that “there wouldn’t be a problem” in relation to the further term.

Mr Downward considered the purchase price for the business of $410,000 to be attractive and was of the view that its purchase would provide Downward with an opportunity to improve the buildings and build up the value of the business, in order to obtain an acceptable profit. He entered into an informal agreement with Mr Anderson to purchase the hotel, subject to the sale of his residence in Wonga Park, Victoria. The property was subsequently sold for $510,0000 and the net proceeds used by Downward to purchase the hotel business and in relation to works carried out at the premises. (I note that I am not satisfied as to the net amount of the proceeds.)

The firm McKinnon, Jacobs, Horton & Irving, solicitors, acted for Downward in relation to the purchase of the business and the assignment of the lease. Mr Downward discussed the renewal of the lease with the solicitor acting for him in relation to the transaction. He relied upon his solicitor's advice in relation to the transaction. Mr Downward understood his solicitor to have advised him that he would encounter no problems in relation to Downward’s exercise of the option under the lease.

As a result of the advice of his solicitor and of what he had been told by Mr Anderson, Mr Downward formed the view that he would be in possession of the premises under the lease for 31 years, being the total of the balance of the term together with the option period of 25 years.

Significantly, Downward made no enquiries, directly or through its solicitors, of the Authority in relation to the exercise of the option before taking the assignment of the lease on 10 April 1996.

Downward spent money in relation to the hotel premises in 1996, even before the assignment of the lease. In March 1996 it laid carpet in the “nominees’ quarters” at a cost of $4,179. Mr Downward showed the carpet some two weeks later to Mr Doug Currie, the Authority's building supervisor at the time.

Downward took an assignment of the lease by a deed of assignment of lease made on 10 April 1996 between George Anderson Pty Ltd as assignor, Downward as assignee, Mr Downward and Mrs Barbara Joy Downward as guarantors and the Authority as lessor ("the assignment"). At the time Downward took the assignment Mr Downward believed that the company would have a 31 year term. The Authority consented to the assignment upon Downward covenanting to pay the rent and to perform the lessee's covenants and conditions under the lease.

Downward changed the name of the hotel to “The Lake Eppalock Hotel-Motel” in order to “restore” its reputation.

At all relevant times Mr Downward was aware of the tenant's duty under the lease to keep the buildings on the land in good repair. He was also aware of the requirement that the prior written consent of the Authority be obtained in relation to the making of any improvements to the land.

In April 1996 Mr Currie instructed Downward to clean the premises at a cost of some $2,536, in order to comply with statutory health and safety requirements.

Downward made purchases for the purposes of running the hotel business, some of which required the consent of Mr Currie. In May and June 1996 Downward repainted the motel with the consent of Mr Currie who instructed Mr Downward to change certain colours he considered inappropriate. Between mid-July and December Mr Downward requested and received the Mr Currie’s consent to repaint the hotel, internally and externally, at a cost of some $13,940.

Meanwhile, at its meeting on 18 July 1996 the Board of the Authority had adopted management policy principles applicable to the land ("the 1996 policy"). The 1996 policy provided for commercial considerations, amongst others, to be taken into account in relation to the management of the land:

"1.All recreation, public use, and marginal land activities, including houseboats and other boating, be incorporated and recognised as a single segment of the Headworks Business division of Goulburn-Murray Water, to be known as the Recreation and Public Use Management Segment.
2.The Recreation and Public Use Management Segment of the Headworks Business division be managed in a commercial and independent manner, be financially self-sufficient, provide a return to Goulburn-Murray Water within the medium term and be managed in accordance with agreed risk management principles.
3.Ownership of lands adjacent to structures and a buffer strip around the storage be retained according to local topographical conditions, and that additional land be acquired where necessary to safeguard the integrity of assets, protect water quality and facilitate erosion control.
4.Surplus land and assets around individual storages be disposed of.
5.In line with the commercial approach being taken in the management of the Recreation and Public Use Management segment, rentals and other charges and lease and licence tenure be determined in line with market principles.
6.Agreed levels of services and maintenance be adopted for recreational facilities and these be applied consistently across the Recreation and Public Use Management segment.
7.Provision be made to retain and return tracts of land adjoining reservoirs to their natural state for passive use.
…
10.Guidelines be established for the development and use of foreshore lands and water areas of all storages and conforming development plans be initiated for each storage in conjunction with municipalities…."

In or about late 1996 or early 1997 Mr Chris Hibbins was appointed as the Authority's officer in charge of all properties around Lake Eppalock. Mr Hibbins was a frequent visitor to the hotel and became well known to Mr Downward. On numerous occasions between 1996 and 2000 Mr Hibbins gave approval to improvements made by Downward.

Within six months of commencing work at the hotel, Mr Downward told Mr Hibbins that he would be at the hotel for a long time and until he retired, and that he wanted to make it a “family hotel”. (I note the absence of any evidence in relation to Mr Hibbins' response to Mr Downward or as to the circumstances in which the communication was made or as to any communication of this information by Mr Hibbins to any other officer of the Authority. The Authority was criticised by counsel for Downward for failing to call Mr Hibbins and I will deal with that criticism later.)

Mr Downward engaged Gerard M Hogan & Associates to prepare a drawing dated March 1997 in relation to a proposed extension to the Downwards’ living quarters at the hotel.

In the meantime the Authority had been negotiating further terms with the two other commercial leaseholders in the Kimbolton Recreation Area, Messrs Alan and Bob Nankervis, the proprietors of a boat servicing and storage business, and Mr Paul Woolley and Mr Bob Lancet owners of Moorabee Lodge Caravan Park business. On about 3 February 1997, Mr Natalizio, then the Manager Property Services of the Authority, had written advising Messrs Woolley and Lancet that the Authority was prepared to grant them a new 25-year commercial lease of the caravan park site, on condition that all improvements should revert to the Authority at the determination of the lease. Mr Lancet and Mr Woolley had purported to accept the offer of the further term on 2 March 1997.

By a letter dated 21 May 1997 Mr John Kendall, Manager Leasing and Legal Services of the Authority, advised the Nankervises that it would be prepared to consider granting them a further lease with a maximum term of 25 years in relation to the land upon which they then carried on their business under a lease due to expire on 15 May 1999. (The evidence did not satisfy me as to whether or to what extent Mr Downward was aware of the details of any negotiations between the Authority and Nankervises or the proprietors of Moorabbee Lodge at any particular point in time.)

In about June 1997 the hotel premises were still in a run-down condition and being upgraded by Downward to meet statutory requirements.

Mr Downward made a written application which was received by the Authority on 4 June 1997, for permission to erect holiday units in the grounds of the hotel. He also separately wrote on about 4 June 1997, notifying the Authority of Downward's desire to erect a sign in relation to the hotel.

The lease, as varied on 19 October 1984, provided for rent review at three yearly intervals from 30 June 1985. Mr Downward met with representatives of the Authority to discuss the rental from 1 July 1997.

The dates of alleged meetings he attended between in or about June 1997 and August 1997 and the identity of those attending meetings were in issue. Mr Downward’s evidence as to these contentious matters was challenged under cross-examination.

Mr Downward alleged in his witness statement that he first had a meeting with Mr Natalizio and Mr Kendall at which the rental issue was the main topic discussed. Under cross-examination he accepted that Mr Kendall had not attended any meeting with him until May 1998. He agreed that he must have been mistaken about the date of their meeting. He also stated that he was “sort of guessing as to meeting times or whatever”. He agreed that he had no diary record of meetings and “just a general recollection” and nothing more. Subsequently, he was recalled for further cross-examination and counsel for the defendant corrected himself and put to Mr Downward that the first meeting between Mr Downward and Mr Kendall was in August 1999, rather than May 1998, and was attended by Mr Gad Kolsky, Downward’s solicitor. Mr Downward said that he “was not 100% sure” when asked whether he recalled that meeting with Mr Kendall. He said that his evidence would not change in any event.

Either on or before 18 June 1997 Mr Natalizio and the Authority’s Leasing Officer, Mr Peter Walsh inspected the premises in the company of Mr and Mrs Downward.

Mr Natalizio later directed an internal memorandum dated 18 June 1997 to Mr Kendall reporting on the inspection. The memorandum does not specify the date of the inspection. It recommended that the rent in relation to the land should be increased to $12,000 per annum, being approximately five percent of approximate gross receipts of $270,000 per annum. It also referred to the Downwards’ development plans as follows:

"Development Proposal
The lessees have immediate plans to renovate and extend their living quarters at the front of the complex overlooking the lake. They are obviously seeking assurances about tenure prior to expending about $20,000 on this work. Other plans include conversion of some of the 16 motel units to two-bedroom family units, a camping/van complex, outdoor bar/bistro area and landscaping and beautification of the front of the premises down to the foreshore. The complex generally is run down and in need of not only a facelift but also redevelopment to offer more of what the public is seeking nowadays. Only then will income increase and rental return increase.
Facilitation Of Development
With four years of the lease remaining, now is the opportune time to consider and implement the best way of bringing this establishment out of the doldrums. It is considered that consent to a new lease should be conditional upon the carrying out of a substantial redevelopment program within the next four years.
The lessees' request (sic) by letter received 4 June 1997 for permission to establish holiday unit accommodation (altered to camping and on site vans during interview) should not be considered in isolation but rather as part of an overall appraisal of what this establishment needs in order to be appropriately placed in the tourism and leisure market."

The memorandum was endorsed with a handwritten note to the effect that the property was scheduled for detailed inspection in mid July "to determine schedule of improvements to improve general amenity of area".

Mr Kendall wrote on 23 June 1997, notifying Mr and Mrs Downward of the completion of the rent review and of the Authority’s determination that the annual rental for the land would be $12,000 up to the date of the next review on 30 June 2000. The letter referred to the 18 June meeting between Mr Downward, Mr Walsh and Mr Natalizio and continued:

"… It is noted that you are planning certain improvements to the premises and obviously need to know the Authority's attitude to a new lease prior to carrying out any development. I anticipate visiting you in approximately four weeks' time to discuss this with you."

Mr Downward referred to the letter in his witness statement.

Mr Downward said that he and Mr Natalizio met again when the latter called in at the hotel on the way to the Nankervis property –but that nothing of significance was discussed at the meeting. He was not challenged about the encounter under cross-examination.

On 30 June 1997 Mr Hibbins wrote advising Mr Downward to examine his lease to see if it made provision for a jetty and enclosing an application form for a jetty licence.

Mr Downward also alleged in his witness statement that, in or about July 1997, several weeks after their first meeting, he and Mr Kendall had met at the hotel for a second time. This was the subject of the challenge under cross-examination described above and Mr Downward made the concessions to which I have previously referred. He maintained however that he thought that he had had a meeting with Peter Walsh and that he was “pretty sure” that he hadn’t started the extension to the premises. He recalled two meetings, one by a window and one in the bar at the hotel, but I was not persuaded as to who met with whom, where or when. Mr Downward made frank concessions as to his general uncertainty about the people attending and the dates of meetings. I am satisfied that he met Mr Natalizio and another person at some point and discussed rent. I am also satisfied that there was a meeting between Mr Downward, Mr Natalizio and Mr Walsh on or about 18 June 1997 at which the matters referred to in Mr Natalizio’s 18 June 1997 were discussed. I am not satisfied that there was any subsequent meeting, between 18 June 1997 and the permit applications of August 1997, at which Mr Downward discussed any plans for the premises with any representative of the Authority as he alleged.

At some point in time, when he had a discussion during a meeting with representatives of the Authority, Mr Downward was of the view that, as long as he improved the condition of the property, kept it clean, painted and complied with the requirements of health authorities and generally built up the business, the lease would continue. He was also aware that Downward might encounter problems under the terms of the existing lease if the condition of the property remained unchanged. However I am not satisfied that any such discussions resulted in any belief he may have had at the time that the Authority would consent to the exercise of the option if Downward were to comply with its obligations under the lease to repair and improve the premises.

In or about July 1997, without having obtained or applied for any necessary permits, Downward commenced earthworks relating to a proposed extension of the living quarters at the hotel.

Written applications for building and planning permits, referring to Mr Downward as the applicant, signed by him and dated 7 August 1997, were lodged with the City of Bendigo in relation to a proposed extension to the living area at the hotel. The application for the building permit showed the cost of the development to be $14,000.

Mr Kendall asked Mr Natalizio to comment about the Downward planning permit application in relation to the proposed extension. Mr Natalizio responded by an internal memorandum dated 21 August 1997. He referred to his 18 June 1997 report of his previous discussions with Mr and Mrs Downward and noted his opinion that the proposed improvements to the hotel premises were "fairly modest" and necessary to provide more acceptable accommodation for them and the Downward family. He noted his belief that they would "give impetus to embark on further improvements to the premises".

On 28 August 1997 Mr Downward wrote to the Authority, seeking a review of rental and enclosing a cheque for $10,000. The letter was endorsed with a handwritten note by Mr Natalizio referring to his 18 June 1997 memorandum, to their previous discussions and to the fact that they should have a “further on-site meeting.”

The Authority subsequently advised the planning manager of the City of Greater Bendigo, by its letter dated 12 September 1997, that it had no objection to the proposed building extension. A planning permit dated 15 September 1997 and a building permit dated 19 September 1997 issued in relation to the extension.

Meanwhile, on 17 September 1997, Mr Kendall had written in response to Mr Downward’s 28 August letter, stating that the Authority considered the rent increase to $12,000 to be fair and reasonable and that he would arrange a mutually convenient on-site meeting to discuss the matter.

In October 1997 Mr Hibbins instructed Mr Downward to replace concrete paving outside the motel units at the premises in order to comply with statutory health and safety requirements. With the approval of Mr Hibbins, Downward installed brick paving at an estimated cost of $9268, as well as a brick barbecue. I accept Mr Downward’s evidence that he probably would have replaced the dangerous paved area with a different cheaper surface, using concrete slurry rather than brick paving, at a quarter of the cost, had he been aware at the time that Downward would only have a short term left under the lease.

From about October 1997 Mr Kendall was involved in the development of an Environmental Management System by the Authority. One aspect of the project was the development of the report entitled “Environmental Management System Consolidated Significant Environmental Risks”, dated 24 September 1999, in which activities such as sewage disposal and stormwater run-off on marginal lands were identified as risk factors.

On or about 19 January 1998 the Authority issued a media release declaring its intention to prepare a Recreation Development Plan for Lake Eppalock, covering marginal land surrounding the lake as well as water activities. The release indicated that Mr David Schier, Recreational Planner for the Authority, would manage the preparation of the plan. The involvement of representatives of users of the lake, commercial operators, clubs and the City of Greater Bendigo in the formulation of the plan was foreshadowed. (I am not satisfied by the evidence as to whether or not Mr Downward saw a reference to the contents of the release in the media in January 1998, or at all.)

On 22 March 1998 Mr Hibbins gave verbal approval in relation to the laying of new carpet in dining room 1 at the hotel at a cost of $1759.

In about April 1998 there were 40 clubs at Lake Eppalock, most of which used private caravan parks which they administered. Each club held a lease from the Authority. The leases were synchronised and due to expire on 30 June 1999. Tenure and lease terms became an issue in relation to the Recreation Development Strategy and Mr Schier conducted negotiations with the clubs between in or about April 1998 and in or about October 2000.

On 1 May 1998 Mr Hibbins gave verbal approval to Downward’s removal and replacement of existing parquetry in Dining-room 2 at a cost estimated by Mr Barker of $3302.

In about early May 1998 Mr Hibbins instructed Mr Downward to “tidy up the gardens” at the premises and agreed to Mr Downward’s proposals for landscaping which was carried out subsequently at a cost of some $7390.

Negotiations with the Nankervises had continued and, by a letter dated 4 June 1998, Mr Kendall advised them that their request to enter a new lease for a period of 25 years commencing on 1 July 1999 had been noted. The letter went on to say:

"I would take this opportunity to reiterate the advice of the Authority's Chief Executive, Mr Denis Flett, that the Authority is prepared to consider entering into a commercially based long-term lease, subject to reaching prior agreement concerning the relevant terms and conditions."

The Authority's memorandum to "all clubs/lessees at Lake Eppalock and interested individuals, agencies and groups" from David Schier dated 15 June 1998, entitled "Update No. 2", set out the terms of reference for the Lake Eppalock Recreation Development Plan including the objective:

"1.4 To ensure that a commercial approach is taken in the management of recreation and public use lands and water and that leases, licences and related fees be determined in line with market principles."

By 13 July 1998 negotiations had failed to produce agreement in relation to the renewal of the Nankervis lease. Mr Denis Flett wrote to Messrs Allan and Keith Nankervis advising that the Authority was formally withdrawing from the negotiations. The letter stated:

"You will be aware that the Authority is preparing a Recreational Development Strategy for Lake Eppalock, which will make recommendations on the utilisation of this important regional asset, having regard to the objectives of Government and Lake users. The Sunset Drive precinct where you are located is considered to be a most significant focal point for fostering development opportunities. It is intended to have the Recreational Development Strategy completed by December 1998.
The Authority may then have discussions with you regarding the future of your business. This may include a new lease or alternatively conclude the current lease by 15 May 1999."

In July 1998 Mr Schier appointed a Stakeholder Liaison Group of 20 members, representing various interested parties, including Mr Downward, the City of Bendigo and representatives of clubs and caravan parks associated with Lake Eppalock ("the SLG"). At its first meeting, at Heathcote on 10 July 1998, the SLG requested the agency responsible for catchment-wide issues, the North Central Catchment Management Authority, to initiate a study focused on the sustainable management of the Lake Eppalock catchment. Mr Downward did not attend the SLG’s first meeting. He subsequently attended SLG meetings held at the Bendigo City Council premises. I note that I am not satisfied as to the number of meetings attended by him.

The study recommended by the SLG was commenced in 1998 and completed in April 2000. Regular reports as to the progress of the study were provided to SLG members through a formal "update" bulletin. Mr Downward received some of the bulletins. From time to time he received documents relating to water quality issues. I am not satisfied as to which of the memoranda in evidence were received by Mr Downward. He was aware that water quality was an important issue for the SLG. However he said in re-examination that up to the commencement of the proceeding he never “had reason to believe” that water quality concerns of the Authority would have any impact upon his right to run the hotel. Further, in re-examination, he said that no one had ever suggested to him in discussions that the hotel had a negative impact on the water quality of the Lake.

Mr Flett of the Authority wrote on 14 August 1998 advising Mr Peter Cahill, solicitor for the Nankervises, that the lengthy negotiations had indicated that a negotiated agreement for a renewal of the Nankervis lease could not be achieved. The letter went on to state:

"We submit that clause 6 of the lease agreement is clear in that the grant of a further term under the lease is conditional upon our Authority providing its consent. Such consent is not given for reasons of which your client is well aware."

Again, by a letter dated 7 September 1998 from Mr Kendall to Mr Cahill, the Authority stated its view that there was no "compelling or mandatory provision" requiring it to extend the Nankervis lease. It regarded its role as "clearly discretionary".

On 20 March 1999 Mr Hibbins gave verbal approval for new carpet to be laid in the second dining room at the hotel replacing existing carpet at a cost of $11,056.

Downward first sought a renewal of the lease for a further term of 25 years by service of a Notice of Exercise of Option dated July 1999 upon the Authority, under cover of a letter dated 21 July 1999 from its then solicitors, Shatin Bernstein Kolsky.

Mr Kendall responded by a letter dated 23 July 1999 acknowledging receipt of the notice and referring to correspondence with Downward's previous solicitors. Mr Kendall's letter stated that matters raised in his 18 May 1999 letter were to have been the subject of an impending meeting with Mr Downward and that Mr Kendall had indicated his availability to discuss any unresolved matters in relation to rental. The letter continued:

"I remain prepared to discuss any issues about which your client seeks clarification in relation to the lease. Notwithstanding this, it is clearly inappropriate to contemplate matters beyond the term of the current lease until the immediate matter of rental has been determined."

In August 1999 Mr Kendall attended a meeting at the hotel with Mr Downward and Mr Gad Kolsky of Shatin Bernstein Kolsky. He expressed concern in relation to a future lease, in light of an unresolved rental dispute between the parties. He advised them of the Recreation Development Plan then being prepared reviewing appropriate land and water use at Lake Eppalock. Mr Kendall referred to the sensitivity of the catchment area and to the Authority's policy that commercial principles should be applied in relation to the management of leases. Mr Kendall mentioned the Coulthard Report, noting how it had restricted development within the catchment to minimise deleterious effects on water quality within Lake Eppalock's immediate environs. A copy of the report was requested by Mr Kolsky and subsequently provided to him by Mr Kendall.

In the course of its development of an Environmental Management System relating to its business activities, the Authority had compiled a consolidated register of significant environmental risks, in a report dated 24 September 1999 entitled "Environmental Management System Consolidated Significant Environmental Risks". It identified risks related to sewage and stormwater run-off or waste water disposal relevant to the management of the land generally.

In the meantime, negotiations had continued between the Authority and the proprietors of the Moorabbee Lodge Caravan Park, culminating in an October 1999 offer of a 25 year lease.

Subsequently, by their letter dated 7 March 2000, Maddock Lonie & Chisholm advised Mr Kolsky of the proviso in clause 6 of the lease requiring the consent to renewal of both the Governor in Council and the Authority, as successor to the Commission. The letter went on to advise that the Authority considered it premature to make a decision in relation to Downward's request for a renewal of the lease, as the lease would not expire until July 2001. The letter noted arrears of rental in the sum of $20,050.30, requiring payment forthwith.

As for the Nankervis dispute: some time before 22 June 2000, negotiations had resulted in the Nankervises accepting a five-year lease from the Authority which would expire in June 2005.

Then, on 22 June 2000, Maddock Lonie & Chisholm, solicitors for the Authority, wrote to Mr Kolsky advising him that it had determined not to consent to the new lease sought by Downward's exercise of the option. The letter enclosed an internal memorandum from Mr Kendall described as “Principal Advisor Property and Legal” to Mr Natalizio, as Manager Property and Legal, dated 14 June 2000 which set out the reasons for the decision as follows:

"The Authority is currently engaged in the development of a Recreational Management Strategy at Lake Eppalock.
It is explicit Authority and Government endorsed policy that guidelines are established, as is occurring at Lake Eppalock for both the development and use of foreshore lands and, that ensure recreational based activities are managed to safeguard the environment and water quality in particular.
It is therefore considered inappropriate to enter into a long term (25 year) lease until the outcome of the strategy is known. Particularly as regards any impact it may have on the public's use of Lake Eppalock. Although when we embarked on the strategy it was anticipated it would have been completed by now, it is not envisaged to be completed in the short term due to reasons set out in the above progress report.
The current Lease terms are not commercially based and to replicate them through the issue of a further 25 year lease is inappropriate. The current lease is silent on reversion of improvements and contains clauses that provide for the determination of rental for a year 1 of a new lease on the basis of arbitration and proposes the term of 25 years or clauses which comprise commercial principles (sic).
The Authorities (sic) public use management policy (copy attached) requires that this segment of the Headworks Business is managed in a financially self-sufficient manner. As you are aware, this segment of the business is not yet financially self-sufficient. As you further appreciate to consent to a new lease on the terms proposed is inconsistent with achieving this objective.
The Authorities (sic) also requires that the Public Use Management segment is managed in line (sic) market principles and, once again, the issue of a further lease on the current terms and conditions is inconsistent with this position.
The recent outcome of the Nankervis lease matter also provides the opportunity to reconsider the options available for the future use of that site. Accordingly with the expiry of this lease in June 2005 would be inappropriate as it would encumber a major review opportunity of this area through the issue of a further 25 year lease at this time.
The issue of a further lease on the basis of current terms and conditions would also effectively mean that the development at the site may be limited to its current status. If not renewed the premises will be 50 years old at its expiry. This proposition is totally unacceptable to the Authority.
A further lease on current terms and conditions would also preclude the option of introducing developmental development clauses, therefore the Lessor is unable to require either the upgrading of the premises to accord with rising community expectations, its own expectations or, avoid the potentially aesthetically unsatisfactory development on its land.
Finally granting this long term lease would be totally inconsistent with the authority's current practice of where possible only agreeing to short term leases with its site holders pending determination of the development strategy."

The 1996 policy was the "explicit Authority and Government endorsed policy" referred to in the second paragraph of the extract from the reasons.

At no stage between 21 July 1999 and the refusal of consent to the further term on 22 June 2000 had any inquiry been made of the Authority, by or on behalf of Downward, as to whether its consent would be given to the further term. Meanwhile, Downward had continued to spend money making improvements to the land.

On 8 July 2000 Mrs Barbara Downward addressed two memoranda “To Whom It May Concern”: the first advising that: “We have put a fish pond and fountains in the entrance to the hotel”, and the second stating: “We have constructed brick paving in between the hotel and the lake to create a new path motel level”. Mr Downward obtained verbal approval on the same day from Mr Hibbins in relation to the building of a brick walkway to the Lake at a cost estimated by Mr Barker to be $1454.

Mr Kendall referred to the Downward case in an internal memorandum of 8 November 2000 to the Authority’s Manager Property and Legal in which he noted that the Authority was required to determine whether to grant a new lease to Moorabee Lodge Caravan Park under the conditional option clause in its then current lease. He referred to similar issues which had arisen in relation to the Nankervis and Downward matters and stated his advice as follows:

"Consistent with Goulburn-Murray Water's approach in the Nankervis and Downward matters, it is considered inappropriate to approve the issue of a long term lease."

Minutes of the Authority's Board meeting of 16 November 2000 recorded that:

"Lake Eppalock Recreational Development Plans
The Manager Headworks reported on the status of recreational planning at Lake Eppalock and advised that lease conditions for clubs and commercial activities located on perimeter lands play a major part in the future recreational development policy. He reported on action to offer lease renewal periods of five years in lieu of long term leases.
The shorter period leases being offered contain environmental protection and improvement terms and a procedure for annual site inspections, conditions which are compatible with the draft storage management plan policies that are to be submitted to the December 2000 Board meeting."

During the 12 months leading up to December 2000, an internal working group of the Authority was developing a framework for storage management plans for all its storages.

At its meeting on 21 December 2000 the Authority's Board adopted policies in relation to its function with respect to recreation and public use management systems. The policies adopted included one entitled "Commercial Leases Adjacent To Goulburn-Murray Water Storages – Tenure And Conditions". The policy document stated, inter alia:

"1. Purpose of policy
The policy provides direction for the tenure and conditions of commercial leases on perimeter lands adjacent to G-MW Headworks storages, such that the ongoing protection of water quality and environmental values remain paramount, while they are considered in conjunction with the social and commercial values of the leases.

2. Policy Statement
2.1 Tenure
The period of tenure of a commercial lease in the vicinity of a Goulburn-Murray Water storage will be determined by a consideration of the impact of the lease and land use on the primary purpose of the water storage. This will primarily include any adverse effects on water quality.
…

Where there is a high risk of adverse effects on water quality or where there is uncertainty in the effect on water quality, the tenure of leases will be shorter and the terms and conditions more stringent than in cases where risks to water quality can be shown to be minimal.
All leases shall include the maximum period of tenure of the lease, after which time the decision to renew or terminate will be made by GMW in accordance with this policy.”

By letter dated 19 April 2001 Maddock Lonie & Chisholm advised Mr Kolsky that the Authority was prepared to offer Downward a lease for a five-year term from 30 June 2001. A first right of refusal to any further lease proposed by the Authority would be given to Downward under the lease. A draft lease was forwarded to Mr Kolsky under cover of Maddock Lonie & Chisholm's letter dated 18 October 2001. Maddock Lonie & Chisholm noted in their 18 October 2001 letter that the lease offer was conditional upon Downward paying rental arrears of $24,599.20.

The Authority submitted a draft lease for a five-year term to club representatives under cover of its letter dated 11 October 2000 which stated, inter alia:

"Lease term and renewal
It is fundamental that G-MW have a discretion with respect to providing leases beyond 2006. You are aware of the submissions we have made regarding the maintenance and improvement of water quality and of the measures needed for the protection of the lake, the water and the environs. These are flag bearer themes for the future and must be accorded paramountcy in our negotiations.
Over the past two years, together we have come a long way in securing the Clubs' understanding and appreciation of these imperatives.
We have devised a set of environmental terms within the frame of the draft lease which basically require the Clubs to share the duty and obligation in consideration of being able to stay at the lake. If that challenge is taken up and positively responded to, the Club will be favoured with an exercise of discretion in its favour."

By June 2001 all 38 clubs had either signed or returned the new lease or had committed in writing to the acceptance of it.

By a letter dated 18 October 2001 the Authority’s solicitors forwarded a draft lease conditional upon Downward paying $24,599.20 arrears of rental. The term of the lease was five years and it provided for the Authority to provide first offer of a further lease to Downward in the event that it intended to grant further lease of the land.

At its Board meeting on 21 December 2001 the Authority adopted a number of policies including one providing for any renewal of leases to be limited to a period of no more than five years. The policies reflected work done over many months by an internal working group of the Authority’s Headworks and Natural Resources department which had developed a framework for storage management plans for all the Authority’s storages.

On 28 November 2002 in his witness statement Mr Ian Howley, Manager Bulk Water Services of the Authority, expressed his opinion that in light of recent deterioration in water quality the improvement of the management of the perimeter land owned by the Authority was critical to the discharge of its obligations to take all appropriate action to address water quality issues.

A report on Best Practice Review to the Authority by Gutteridge Haskins and Davey Pty Ltd, dated December 2002, entitled “Lake Eppalock-Waste water Systems Review”, identified the septic tank at the Brolga Hotel, which was 2.5 times larger than the next biggest tank examined in the study, as presenting the highest risk to the lake from a leaking tank. The Report also concluded that the hotel would “have a much greater risk (sic) than the other two commercial sites as it serves a much larger population and has a much more complex wastewater system”. (The two other commercial leased sites at the lake examined were described as those occupied by the Nankervis Boat Repair business and the Kimbolton Kiosk and Residence).

The Downward claim based on the construction of the lease

It was common ground that clause 6 of the lease would read as follows after the statutory changes described above:

"6.Notwithstanding anything contained in lease (sic) if the tenant gives twelve months notice to the [Authority] in writing prior to the expiration of the said term that the tenant desires to renew this lease for a further period of twenty-five years the [Authority] provided prior consent to this renewal is given by the [Authority] and Governor in Council shall grant the tenant a lease of the said land for a further period of twenty-five years at a rental to be agreed upon between the [Authority] and the tenant or in the event of no agreement being reached at such rental as shall be determined by a single Arbitrator in accordance with the Commercial Arbitration Act 1984 provided that such rental shall not be less than the immediate previous rental and otherwise subject to the same terms covenants agreements and provisions as contained in this lease with the exception of Clause 6 herein."

The illusory consideration argument

Counsel for Downward urged the Court to construe clause 6 as conferring an unconditional entitlement to a further term after proper exercise of the option, on the basis that, otherwise, the option clause lacked promissory content. Alternatively, he argued that, if the matters which the Authority could take into account in deciding whether or not to grant a further term were limited to matters relating to water quality issues, the option clause might be enforceable, where as if the Authority were to be entitled to take into account “large commercial considerations”, it would not.

Counsel for Downward relied upon authorities relating to the enforceability of option clauses in circumstances where the promise of the further term was held to be illusory, but conceded that the option clause did not amount to an illusory promise as at the date of the lease. He contended, however, that, in light of subsequent events, the Court should not construe the clause so as to deprive the lessee of its previous entitlement to an enforceable option, subject to the consent of a third party, and to leave it with what should be regarded as an illusory promise by the lessor to grant a further term subject to its own consent.

Counsel for Downward relied upon the principle referred to in the judgment of Gipps J in Godecke v Kirwan:[1]

"… There would be no binding contract in '… a case, which would fall within the principle that "where words which by themselves constitute a promise are a accompanied by words which show that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought": Thorby v Goldberg (1964) 112 C.L.R 597 at p. 605, citing Loftus v Roberts (1902) 18 T.L.R. 532 at p. 534; Placer Development Ltd v The Commonwealth (1969) 121 C.L.R 353 at pp. 359-361."

[1][1973] 129 CLR 629 at 646-7.

He also referred the Court to Beattie v Fine[2] in which Cusson J held that an option for renewal of a lease "at a rental to be agreed upon by the lessor" did not give rise to any contractual obligation.
[2][1925] VLR 363.

He resisted the proposition that any finding that the option clause lacked promissory content would result in the entire clause being unenforceable. He urged the Court to simply construe the clause as unconditional, or as one requiring the Authority to take into account only water quality issues when determining whether or not to approve the further term, so as to prevent the promise from being illusory. Counsel for Downward relied upon the decision of the Court of Appeal of the New South Wales Supreme Court in Biotechnology Australia v Pace[3] in support of his latter submission. He submitted that if an external standard were to be applied, it might save the option clause.
[3](1988) 15 NSWLR 130

Counsel for the Authority correctly, in my view, responded that the time at which the question as to the sufficiency of consideration fell to be decided was the date of the lease, 7 July 1976, and not thereafter. Counsel for Downward conceded that the option clause was enforceable as at that date. All Downward’s arguments were premised upon the Court analysing the sufficiency of consideration as at the date upon which the Authority assumed the role of lessor as well as that of the party whose consent was required to the further term.

Downward’s construction argument based on illusory consideration fails.

The alleged implied terms

Counsel for Downward submitted that by refusing its consent to a further term in the circumstances, the Authority had breached terms which should be implied into the lease.

The implication of a term in a lease

The majority of the High Court in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council[4] held that the grounds for the implication of a term into a contract were that the term:

(1)must be reasonable and equitable;
(2)must be necessary to give business efficacy to the contract;
(3)must be so obvious that it goes without saying;
(4)must be capable of clear expression; and
(5)must not contradict any express term of the contract.

[4](1977) 52 ALJR 20 at 26.

A covenant may be implied into a lease by the application of general contractual principles.[5]
[5]See Carbure Pty Ltd v Brile Pty Ltd [2002] VSC 272.

The first alleged implied term

Counsel for Downward first argued, in written submissions that, on a proper construction of the lease, the legislative change after 7 July 1976 had the effect of enabling the Authority, as the lessor, to act without the consent of any third party under the terms of the lease. As a result, he submitted, its power to grant or refuse consent to a further term under the lease was lost and the Authority was bound to grant a further lease after proper exercise of the option

Insofar as this argument is based on the terms of the lease, it would appear to require the implication of a term to the effect that, if the Committee were to cease to exist and its role be assumed by a successor to the Commission, the lessee would be entitled to a further term if it exercised the option in accordance with the terms of the lease, without the need for the consent of the Commission’s successor (“the first alleged implied term”).

Counsel for the Authority denied the existence of the first alleged implied term.

He submitted that the subsequent conduct of the parties could not be taken into account in determining the intention of the contracting parties, relying upon the decision in FAI Insurance Traders Pty Ltd v Savoy Plaza Pty Ltd[6] in support of that proposition. However counsel for Downward did not appear to be suggesting that the Court should use subsequent conduct of the parties to the lease to interpret its terms.
[6][1993] 2 VR 343

Counsel for the Authority went on to submit that, in any event, there was more reason for the Court to conclude that the parties would have intended that the Commission would retain its power to grant or refuse consent to the option, if it were to become lessor in place of the Committee.

In my view, the first alleged implied term fails to meet the necessary criteria for implication:

(1)The Water Act 1958 and the Water (Kimbolton Recreational Area) Regulations 1966 gave the Committee management powers which included the power to lease the land vested in the Commission, but only with the Commission’s consent. In such a statutory context, it would not seem reasonable or equitable that the Commission should be deprived of the right to refuse to renew the lease if it assumed the position of the lessor. On the other hand, as submitted by counsel for the Authority, it would rather seem reasonable and equitable that the status quo, requiring the consent of the Commission to any further term at the time of the exercise of the option, be maintained. It would be more reasonable for the Commission or its successor to retain the power to consent or refuse consent in the context of its statutory functions with regard to the proper management of water resources.

(2)Under clause 6 the lessor had no discretion as to the granting of a further term, provided the requisite consent was obtained. It is not apparent why the lease should be regarded as lacking business efficacy because it failed to provide for an automatic grant of a further term if the lessor and party whose consent was required should, in the future, become one and the same. The effect of clause 6 in both that and the original situation was the same, as the consent of the Commission or its successor to the grant of a further term was required.
(3)It follows that I also conclude that it would not have been so obvious that it went without saying that the proposed term should be implied.

In light of my conclusions as to the first three conditions for implication, it is unnecessary to consider the remaining two. The first alleged implied term should not be implied as a term of the lease.

The second alleged implied term

Downward went on to argue that the following further term should be implied into the lease:

"The [Lessor] and its servants and agents would act in good faith and fairly in its dealings with and in respect to the [Lessee] and would do all things reasonably necessary in order to give the benefit of the option clause and the lease to the [Lessee]”
('”the second alleged implied term'”).

The statement of claim pleaded that the Authority had certain differently worded obligations under the second alleged implied term (as well as a further alleged implied term) and had failed to act in good faith and reasonably in relation to the exercise of its discretion, as well as in relation to obtaining the consent of the Governor in Council to a further term.

Counsel for the Authority noted that the Authority’s defence denied the existence of the alleged duty under the lease to act fairly, in good faith and reasonably in relation to the exercise of the Authority’s discretion. He said that it was unclear how any such duties arose in relation to the exercise of its discretion when the Authority, acting in its capacity as the party whose consent was required, was not a party to the lease. (I note that the statement of claim was amended during the running of the case to include the third alleged implied term which focussed on the ambit of the Authority’s discretion in respect of its role as the third party from whom consent was to be sought.)

Counsel for the Authority conceded that his client had a duty to act in good faith as a landlord and, perhaps, to act reasonably.

Griffiths CJ in Butt v M'Donald said:[7]

"It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract."

[7](1896) 7 QLJ 68 at 70-71.

The High Court has endorsed this statement of the general duty of co-operation implied in every contract.[8]
[8]See Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] 144 CLR 596 at 607 per Mason J; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 137-8 per Dawson J; Nullagine Investments Pty Ltd v The West Australian Club Inc (1992) 177 CLR 635 at 659 per Deane, Dawson and Gaudron JJ for example.

Counsel for Downward referred to City of Camberwell v Camberwell Shopping Centre Pty Ltd[9]. There Marks and Gobbo JJ considered the implication of a “best endeavours” clause in the context of an argument as to whether an express term of such a type was authorised by statute. Their Honours said, at 186-7:
[9][1994] 1VR 163

“The best endeavours clause is the kind of clause which in any event would be implied. The much cited general proposition stated by Lord Blackburn in Mackay v Dick (1881) 6 App Cas 251, at 263, is in point:
‘I think I may safely say, as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.’

(See Ansett Transport Industries (Operations) Pty Ltd v the Commonwealth (1977) 139 CLR 54 at 102, per Aickin J and Barwick CJ, at 61.) Even more pertinent are the words of Cockburn CJ in Stirling v Maitland (1864) 5 B & S 840, at 852, cited by Lord Atkin in Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701, at 717:
‘If a party enters into an arrangement which can only take effect by the continuance of an existing state of circumstances . . . I look on the law to be that . . . there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative.’

Lord Atkin said:
‘That proposition in my opinion is well established law. Personally I should not so much base the law on an implied term, as on the positive rule of the law of contract that conduct of either promisor or promisee which can be said to amount to himself 'of his own motion' bringing about the impossibility of performance is in itself a breach.’

In Ansett, at 61, Barwick CJ referred (without expressly saying so) to what was said by Lord Atkin (above) as a ‘general rule’".

I am satisfied that the Authority as lessor had an implied obligation to act in good faith and to do all things necessary to enable Downward as lessee to have the benefit of the lease.

The third alleged implied term

Downward further submitted that there should be implied into the lease another term, namely, that:

“In the event that the Lessee sought to exercise the option provided in Clause 6–
(a)the Lessor would use its best endeavours to obtain the approval of the Commission and the Governor-in-Council; and
(b)the submission by the Lessee and the Lessor to the approval of the Commission and the Governor-in-Council was to be a submission only to the approval of those bodies in so far as the same was exercised in accordance with their statutory and constitutional functions and duties, that is, solely with regard to the proper control of water supply.”

(“the third alleged implied term”).

(a) The Committee would use its “best endeavours” to obtain the consent of the Commission and the Governor in Council to the further term

The research of counsel failed to find any authority concerning the ambit of any obligation on the part of a contracting party to use “best endeavours” to procure its own consent.

In light of what was said in City of Camberwell I am of the opinion that there should be implied into the lease a term requiring the Committee to use its best endeavours to obtain the consent of the Commission and the Governor in Council to the further term.

(b) the submission by the Lessee and the Lessor to the approval of the Commission and the Governor-in-Council was to be a submission only to the approval of those bodies in so far as the same was exercised in accordance with their statutory and constitutional functions and duties, that is, solely with regard to the proper control of water supply.

Counsel for Downward submitted that the Court should imply a term to the effect that the Commission’s power to refuse consent was not at large and could only be based upon limited reasons associated with water quality control.

He relied upon the High Court’s decision in Shrimpton v the Commonwealth[10] as authority for the implication of a term to limit the matters which the Authority could take into account. In Shrimpton it was held that a wartime National Security Regulation requiring the deposit of monies with the Commonwealth Bank as a condition of approval of the purchase of a property was invalid and went beyond the purpose of the Regulations. Latham CJ said at 619-20:

“the discretion to which the Treasurer is entitled to exercise, though described as absolute, is, in my opinion, not arbitrary and unlimited; it must be exercised bona fide and for the purposes of the Regulations”.

[10][1945] 69 CLR613

Counsel for the Authority submitted however that the Authority’s discretion under the lease as to whether or not it would consent to a further term was unfettered. Alternatively he argued that, if the Authority did not have an unfettered discretion, then it was entitled to take into both account water quality issues and financial or commercial considerations in relation to the grant of the further term.

Counsel for Downward sought to distinguish between the Authority’s power in respect of the consent to a further term as the successor to the Commission and its power to lease as successor to the Committee. He argued that the commercial decision to grant the further lease had already been taken, by the Committee, in 1976 and that the parties to the lease must have intended that only matters relating to water quality issues could be taken into account by the Commission when it considered whether to consent to the further term. He relied upon the limits on the Commission’s powers under s 33 of the Water Act 1958 in support of his submission that it was impliedly agreed that the Commission’s role under clause 6 was so restricted.

Counsel for the Authority responded that, if the Commission’s power to consent was fettered, the parties to the lease must be taken to have agreed that the Commission should act in accordance with its duties and within its powers, as they stood at the date of the decision whether to consent to the further term. He submitted that the duties and powers of the Authority on or about 14 June 2000 required the decision to be made with reference to both water quality and financial and commercial considerations.

In my view, examination of the provisions of the Water Act 1958, even as they stood on 7 July 1976, indicates that both the Commission and any committee of management of any recreational area were empowered to take financial or commercial considerations into account in the exercise of their respective statutory functions.

As can be seen from the description of certain of the Commission’s powers and duties under s33 (which is set out above,) cost was a relevant factor to be taken into account, even in relation to their exercise. It would seem unlikely that the Commission could fulfil its duties and powers in relation to ensuring the profitable supply of water or assessing the costs and benefits of construction of water supply works under s 33 without reference to financial or commercial considerations, generally, as well as in relation to any particular project.

Even if the exercise of its powers and duties under s33 of the Water Act 1958 were not to be regarded as involving consideration of financial or commercial matters, in my opinion the relevant statutory provisions and regulations relating to the Kimbolton Recreational Area indicated a legislative intent that such matters were relevant to the Commission’s decision whether to consent to the grant of a further term. Under s206A the management of a recreational area involved its financial administration, the use of funds for its improvement and the provision of equipment, facilities and services, as well as a duty to account for income and expenditure on the part of any committee. There was in my view, a statutory objective of proper financial management which could only be met if financial and commercial factors were taken into account by the managing body, whether it was the Commission or a committee of management.

S 206A gave the Committee power to lease any part of the Kimbolton Recreational Area subject to the regulations. The Water (Kimbolton Recreational Area) Regulations 1966 gave powers of management of the area to the Committee, but made its power to lease subject to the approval of the Commission. Taking into account the statutory scheme, in my opinion, it would not have been intended by the legislature that the Commission should be limited to consideration of water quality issues when deciding whether to consent to a further term under a lease, when the proper management of the recreational area would require an assessment of financial and commercial matters in relation to any decision to grant a lease.

As it stood at the date of the Authority’s refusal to grant a further term on or about 14 June 2000, s1 of the Water Act 1989 set out the statutory objectives of the promotion of “the orderly, equitable and efficient” use of water resources, under sub-s1(c), of ensuring that “water resources are conserved and properly managed for sustainable use for the benefit of present and future Victorians” under sub-s1(d) and of fostering “the provision of responsible and efficient water services suited to various needs and various consumers” under sub-s (h). In managing a recreational area the Authority had relevant functions listed in s107(3) of improving and providing and arranging services and facilities in the area, as well as that of controlling land use in the area. S 123 also provided it with power to do everything “necessary or convenient” to perform its functions. I consider that it was open to the Authority to take into account financial and commercial considerations in order to achieve its statutory purposes and properly perform its functions.

In any event I am not persuaded that paragraph (b) of third alleged implied term should be implied as a term of the lease. Applying the first three tests in BP Refinery is sufficient:

(a)       In my view it would not be reasonable or equitable to imply a term to the alleged effect because the Committee only had power to lease the land with the consent of the Commission at the date of the lease and it was not open to it to grant a further term without the consent of the Commission, no matter what considerations were taken into account by the latter.
(b)      It follows that the implication of term limiting the matters which could be taken into account by the Commission in deciding whether or not to consent to the further term would not in my view be necessary to give business efficacy to the lease; and
(c)       That in my opinion it would not be so obvious as to go without saying that the alleged term should be implied.
Did the Authority breach its admitted duty under the lease to act in good faith?

Counsel for Downward submitted that the Authority acted in bad faith in relation to the exercise of its consent. He submitted that it acted for commercial reasons. He referred to "a disclosed motive" of attempting to obtain the improvements on the land.

Counsel for the Authority rejected the suggestion that the Authority had acted in bad faith. He asserted that, however any duty was framed, and whether or not it was owed as landlord or as necessary consenting party, the Authority had at all times acted honestly, reasonably, in good faith and in accordance with its statutory duties. He submitted that there was no evidence that it had acted solely for commercial considerations or to avoid the consequences of a bad bargain.

I am not satisfied by the evidence that the Authority acted in bad faith in its dealings as lessor with Downward or in relation to the exercise of its discretion (insofar as it had any implied obligation not to do so).

Downward alleged that the Authority breached its duty to act in good faith in relation to the grant or refusal of consent to a further term, by improperly seeking to retain the improvements made by Downward. The lease made provision in cl 3(v) for the tenant to yield up the land at the expiration of the term together with all buildings and improvements in good order and substantial repair and condition. It went on in cl 5(h) to provide for the lessor to arrange for an incoming party to purchase from the tenant any buildings on the land and, otherwise, for the tenant to remove buildings constructed by her, provided she made good any damage caused by their removal. In his memorandum of 14 June 2000 recommending that consent be refused, Mr Kendall noted that the lease was “silent on reversion of improvements” in the context of remarks about clauses which “compromise[d] commercial principles”.

I am not satisfied that the Authority's memoranda referred to by counsel for Downward established that it was improperly motivated by a desire to retain the improvements on the land when refusing its consent to a 25-year lease. It was entitled to take commercial considerations into account and in those circumstances did not demonstrate bad faith by endeavouring to have the lease deal with the reversion of improvements.

I accept Mr Howley’s evidence as representative of the Authority’s view that improving the management of the perimeter land around the lake was at all relevant times critical to the protection of its water quality. Since the 1976 Coulthard report there had been ongoing consideration of the issue of water quality in Lake Eppalock. By the 1996 Principles the Authority had publicly recognised the importance of foreshore development to protect the integrity of water storages. The Lake Eppalock Recreation Development Plan announced in 1998 pursued the goal of protection of water quality in the context of the management of the foreshore area as part of the marginal lands surrounding the Lake. By the time it refused consent to Downward’s exercise of its option in relation to a further 25 year term the Authority had been engaged in policy development relating to the foreshore land and was awaiting its outcome. It was in the process of negotiating five year leases with clubs in respect of foreshore land and was developing a policy for the phasing out of grazing, in favour of the growth of buffer zones of native timber vegetation on foreshore lands. Ultimately, on 21 December 2000 the Authority’s Board adopted the Headworks Policies which provided for shorter terms for leases in situations where there was uncertainty as to the effect on water quality than in cases in which the risks to water quality could be shown to be minimal. The hotel’s septic tank and stormwater run-off were risk factors listed in the December 2002 Guttridge Haskins & Davey report. Ultimately the Authority adopted a policy on 20 December 2001 which limited leasehold tenure of land surrounding water storages to five years.

I consider it appropriate in the statutory context for the Authority to have taken into account commercial considerations when deciding whether to approve a further term of 25 years, as opposed to a shorter term.

I accept that Mr Kendall recommended the refusal of consent to the further term for the reasons he set out in his 14 June 2000 memorandum. I am satisfied that he considered that it would be inappropriate to grant a 25 year lease until the outcome of the recreational Management Strategy was known.

I am satisfied by the evidence of the Authority’s witnesses, Mr Howley, Mr Kendall and Mr Schier that it would have been inconsistent with good water management practice in all the circumstances to consent to a 25-year lease.

I am satisfied that the Authority acted in good faith at all relevant times in relation to the exercise of its functions and that commercial considerations did not predominate in its determinations in relation to the refusal of consent to the further term.

Did the Authority breach its duties under the lease to do all things reasonably necessary and to use its best endeavours to enable Downward to have the benefit of the lease and the option clause?

In light of my findings in relation to its duty of good faith, I am satisfied that the Authority did not breach its duties as lessor to do all things reasonably necessary and to use its best endeavours to enable Downward to have the benefit of the lease and the option clause.

The Downward claim based on equitable estoppel

Downward further alleged that the Authority was estopped from refusing its consent to the exercise of the option after Downward had acted to its detriment in improving the premises in reliance upon its representation that it would consent or on the assumption induced by it that it would consent. He relied upon the principles enunciated in Waltons Stores (Interstate) Ltd v Maher[11] including the following passage from the judgment of Brennan J :

“In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant’s property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiff’s reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.”

[11](1988) 164 CLR 387

I am satisfied that Mr Downward assumed or expected that the Authority would grant Downward a further term after a proper exercise of the option as a result of his discussions with the solicitor acting for him in relation to the purchase of the business and the lease and from his conversations with the principal of the vendor, Mr Anderson. I accept his evidence that he continued to act on that assumption at all relevant times throughout his dealings with the Authority.

Counsel for Downward urged the Court to conclude that the Authority knew of and encouraged Mr Downward’s assumption that Downward would be granted a further term. He submitted that it had stood by and allowed Downward to act to its detriment by improving the premises for the benefit of the Authority. He said that it would be unconscionable for it to be permitted to refuse consent to a further term and to benefit from the improvements made by Downward in reliance upon the assumption. He referred in that regard to the Authority’s statements in relation to the reversion of improvements at the expiration of the lease.

Counsel for the Authority responded that it would not be reasonable to infer that the Authority knowingly perpetuated the alleged assumption by Downward.

Counsel for Downward relied upon Mr Downward’s discussions with Mr Hibbins in support of his submission that the Court should conclude that the necessary representation was made or that Mr Downward’s assumption and detrimental action was knowingly encouraged by the Authority. Counsel for the Authority responded to the contrary. He submitted that no inference of knowledge of the assumption on the part of Mr Hibbins should be drawn. He referred to the context in which the statements to Mr Hibbins had been made in 1997 and pointed out that Downward still had a balance of some four or five years remaining under the lease and a possible further term when Mr Downward said that he would be at the premises for a long time and until he retired.

I am not persuaded that I should draw any inference that the evidence of Mr Hibbins would not have assisted the Authority, or that I should otherwise use his absence as permitted by the principles in Jones v Dunkel[12] and O’Donnell v Reichard[13], as urged by counsel for Downward. Mr Downward did not allege that Mr Hibbins had given him any assurance of a successful outcome to the exercise of the option. His unexplained absence could not fill a gap in Downward’s case[14] in that regard.
[12](1959) 101 CLR 298
[13]{1975] VR 916
[14]ibid at 929

I am not satisfied that any express representation was made in relation to the success of the exercise of the option either at the meeting at the hotel on about 18 June 1997 between Mr Natalizio, Mr Walsh and Mr and Mrs Downward, or at all.

Mr Downward’s evidence was to the effect that during the discussions referred to in his evidence, neither he nor any representative of the Authority said anything about the option. His witness statement referred to his own understanding throughout his discussions with both Mr Hibbins and Mr Kendall that if he “continued to improve the hotel there would be no problems with the option”. Under cross-examination he explained his confusion about the names of those in attendance at various alleged meetings on the basis that he had not seen the Authority’s various representatives very often. He described a meeting by a window at the hotel, saying that “we” had a discussion with Peter Walsh, but that it might have been Tony Natalizio and that he wasn’t quite sure. He said that they had talked about the lease and “…he was more in the understanding (sic) if I got the hotel up and running … That things wouldn’t be a problem, … as long as the building was presentable, because they weren’t very happy with the buildings the way they were”. Under re-examination he said that his intention to be at the premises for the long term was discussed “quite a few times” but he couldn’t say if it was discussed at the meeting on 18 June 1997 with Mr Walsh and Mr Natalizio. When asked during re-examination what he had meant when he had said that if he fixed the place up “things wouldn’t be a problem” he said, in effect, that he had understood that “the basis” of what was being said to him was that there would not be a problem with the lease if he cleaned, painted, complied with relevant health requirements and built up the business. The lease, in those circumstances, would “just follow on through and just keep going”. However he said that “it was mentioned that if the premises remained as they were, then there could be a problem with the lease”.

Counsel for Downward submitted that the Authority might have been reasonably expected to have called Mr Natalizio to give evidence in relation to what he said were alleged statements by him in respect of the grant of a future term to Downward. Counsel for the Authority responded that there was no allegation by Mr Downward that Mr Natalizio had made any representation and so had no allegation to which to respond.

I am not persuaded that I ought to draw any inference favourable to Downward as a result of the Authority’s failure to adduce evidence from Mr Natalizio or Mr Walsh. Mr Downward asserts that he gained the impression that the lease would continue if Downward did what was required in relation to the condition of the premises and improvement of the business. He acknowledged that his belief that Downward would encounter no problems in relation to the exercise of the option stemmed from his discussions with his own solicitor and dealings with the vendor of the hotel business. Although he said that he had indicated to officers of the Authority his intention to remain at the premises in the long term, he acknowledged that the option itself was not discussed.

Taking into account all the evidence, I am not satisfied that the Authority either made any representation or otherwise induced Mr Downward to adopt his assumption or expectation. I am not satisfied that the Authority was aware of Downward’s assumption that the further term would be granted.

Furthermore, even if it were to be inferred that the Authority knew of Mr Downward’s assumption that a further term would be granted, notice was given that a future term was not to be assumed when Mr Kendall stated in his letter of 23 June 1997 that:

“It is noted that you are planning to carry out certain improvements to the premises and obviously need to know the Authority’s attitude to a new lease prior to carrying out any development.”

This letter would have given reasonable notice of the intended departure from the assumed course sufficient to preclude Downward from reliance upon any detriment subsequently incurred.

The majority of the improvements, the cost of which was relied upon as a detriment incurred in reliance upon his assumption, were made after the 23 June 1997 letter. Under cross-examination, Mr Downward agreed that the claimed expenditure fell into categories. It related to business expenses, expenses which were obligatory in order to comply with the lease and those which would not have been incurred but for his expectation that Downward would have a long lease of 31 years.

Mr Downward listed the items falling into the third category. He said that he would have built a timber wall instead of a solid block wall to divide the games room from the dining room. He said that he wouldn’t have extended his living quarters at a cost of $86,585. Second-hand rather than new carpet would have been used and carpet would probably have been re glued. Brick paving would not have replaced existing paving: rather a slurry would have been applied over the existing surface, at approximately one quarter of the cost. He would not have built the brick path to the Lake.

Apart from carpet laid in the Nominees’ quarters at the hotel before the assignment of the lease was taken in April 1996, at a cost of $4179 and only later shown to Mr Currie, Mr Barker’s report indicates that each of the items of expenditure falling within the third category to which he specifically referred were incurred after the letter of 23 June 1997.

The cost of the extensions to the living quarters at the hotel represented the largest item of alleged detriment incurred in reliance upon Mr Downward’s incorrect assumption. Mr Downward had commenced building the extension in about July 1997, even before obtaining the necessary permits and approval. The application lodged for permits for the extensions specified a cost of $14,000 for the works and the Authority gave its consent to the construction works in relation to which the application had been made. There was no evidence that the Authority was aware of a possible cost exceeding the amount of $20,000 referred to in the memorandum from Mr Natalizio to Mr Kendall of 18 June 1997. Mr Downward conceded under cross-examination that he had not discussed the amount of the cost of the extension with any representative of the Authority.

Furthermore, Mr Downward also continued to spend notwithstanding his involvement in the Recreational Development Plan process. He made no enquiry of the Authority in relation to Downward’s prospect of a future term.

Mr Downward also said that there were “quite a lot of items” which he would have treated “very much differently”, without being more specific. Counsel for Downward relied upon this statement in support of the proposition that the Court should be satisfied that he was referring to the renovations throughout the complex. He submitted that the Court could take a “broad brush” approach and consider that some portion (and he suggested 50 per cent) of the total cost was incurred in the expectation that Downward would have further 25 year term. I am not persuaded by this submission in light of Mr Downward’s evidence categorising the improvements.

Downward has not made out its case for any relief based on the principles enunciated by Brennan J in Waltons Stores.

Could an estoppel fetter the exercise of the Authority’s discretionary power to lease the land?

Even if there were grounds for a finding that the Authority might be estopped from denying a further term to Downward, in my view the doctrine of estoppel could not operate so as to fetter the exercise of the Authority’s statutory discretion to lease the land in the performance of its statutory functions under s132 of the Water Act 1989.

Gummow J stated the relevant principle in the Federal Court decision in Minister for Immigration and Ethnic Affairs v Kurtovic[15] at p 210:

"… in a case of a discretion, there is a duty under the statute to exercise a free and unhindered discretion and an estoppel cannot be raised (any more than a contract might be relied upon) to prevent or hinder the exercise of the discretion; the point is that the legislature intends the discretion to be exercised on the basis of a proper understanding of what is required by the statute, and that the repository of the discretion is not to be held to a decision which mistakes or forecloses that understanding”.

[15](1990) 21 FCR 193 at 208

Mason CJ in Attorney-General (NSW) v Quin[16] after quoting the above passage explained:

“No doubt the principle gains some of its force from the circumstance that the discretion has a legislative foundation and it is not readily to be supposed that the legislature intended that a proper exercise of the discretion in the public interest was to be frustrated, hindered or circumvented by executive action”.

Hi Honour went however to state:
“What I have said does not deny the availability of estoppel against the Executive, arising from conduct amounting to representation, when holding the Executive to its representation does not significantly hinder the exercise of the discretion in the public interest. And, as the public interest necessarily comprehends an element of justice to the individual, one cannot exclude the possibility that the courts might in some situations grant relief on the basis that a refusal to hold the Executive to a representation by means of estoppel will occasion greater harm to the public interest by causing grave injustice to the individual who has acted on the representation than any detriment to that interest that will arise by holding the Executive to its representation and narrowing the exercise of the discretion: see the observations of Lord Denning M R in Laker Airways v Dept of Trade[1977] QB 634 at 707; but see also the criticism of this approach by Gummow J in Kurtovic (1990) 92 ALR at pp 121-2”

[16](1990) 170 CLR 1 at 17-8

I am not persuaded that any public interest would be better served by ensuring fairness to Downward in a situation where the countervailing public interest is in the protection provided to the water resource represented by Lake Eppalock by preserving the discretionary power of the Authority to consider whether to consent to a further lease of the land.

The claims are dismissed.

[2003] VSC 171

27 May 2003