Elders Ltd v EJ Knight & Co Pty Ltd

[2009] NSWSC 1462

CITATION:	Elders Ltd v E J Knight & Co Pty Ltd [2009] NSWSC 1462
HEARING DATE(S):	19 October 2009
JUDGMENT DATE :	23 December 2009
JURISDICTION:	Equity
JUDGMENT OF:	White J
DECISION:	Direct counsel for Elders and Caversham to bring in short minutes of order in accordance with these reasons.
CATCHWORDS:	LANDLORD AND TENANT - agreements for lease – lease signed and held in escrow - breach - whether sale of shares in lessee was a breach of lease or agreement for lease – no rights or obligations of lessee were assigned by the sale of shares – lease was not operative when shares were transferred - no breach of lease or agreement for lease – no written notice served requiring rectification of alleged breach – alleged breach not a material breach – lessor not entitled to call on bank guarantee - LANDLORD AND TENANT - lease – termination – construction of contract – meaning of “date of execution” - notice of termination of lease by lessee was effective
LEGISLATION CITED:	Real Property Act 1900 (NSW) Civil Procedure Act 2005 (NSW) Conveyancing Act 1919 (NSW)
CATEGORY:	Principal judgment
CASES CITED:	Alan Estates Ltd v W G Stores Ltd [1982] Ch 511 Security Trust Co v Royal Bank of Canada [1976] AC 503 Fisher v Westpac Banking Corporation (1993) 43 FCR 385 Beesly v Hallwood Estates Ltd [1961] Ch 105 Meredith Projects Pty Ltd v Fletcher Construction Australia Ltd [2000] NSWSC 493 Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443 Celtech International Ltd v Dalkia Utility Services plc [2004] EWHC 193 (Ch) Mobileciti Pty Ltd v Vodafone Pty Ltd [2009] NSWSC 899 In the Estate of Williams (dec’d) (1984) 36 SASR 423 MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24; (1999) 195 CLR 636 Hooker Industrial Developments Pty Ltd v Trustees of the Christian Brothers [1977] 2 NSWLR 109 Xenos v Wickham (1866) LR 2 HL 296 Beesly v Hallwood Estates Ltd [1960] All ER 314 Staple of England v Bank of England (1887) 21 QBD 160 Windsor Refrigerator Co Ltd v Branch Nominees Ltd [1961] Ch 88
PARTIES:	Plaintiff: Elders Limited Defendant: EJ Knight & Co Pty Limited
FILE NUMBER(S):	SC 1322/09
COUNSEL:	Plaintiff: I M Jackman SC with C Withers Defendant: R J Webb SC with N Manousaridis
SOLICITORS:	Plaintiff: Hardings Lawyers agents for Lipman Karas Defendant: UBK Lawyers

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WHITE J

Wednesday, 23 December 2009

1322/09 Elders Limited v E J Knight & Co Pty Limited

JUDGMENT

1 HIS HONOUR: This dispute is about a lease. The defendant (“EJ Knight”) is the registered proprietor of land at Karalta Road, Erina. On 22 July 2005 EJ Knight entered into an agreement with the second cross-defendant (“Caversham”) to lease the land to Caversham if development approval were granted for the establishment of a retirement village on the land. The Lease was to be for 99 years commencing on 15 October 2003. The Lease was to be in the form of a memorandum of lease annexed to the agreement. At about the same time the parties affixed their respective common seals to a memorandum of lease in registrable form in the same terms as the annexure. The Agreement for Lease provided that the Lease would be held by EJ Knight’s solicitor “in escrow” until EJ Knight obtained the necessary consent to the development application for the development of a retirement village of high industry standard upon the land. Consent to the development application was refused by the Gosford City Council, but was given by the Land and Environment Court on 20 August 2008. At that time the condition of the escrow was satisfied.

2 Both the Agreement for Lease and the Lease contained provisions against assignment without the prior written consent of the Lessor. The Agreement for Lease provided that the Lessee (Caversham) could not assign or transfer any of its rights or obligations under that document without the prior written consent of the Lessor (EJ Knight), such consent not to be unreasonably withheld. Clause 9.1.1 of the Lease provided that the Lessee must not assign, underlet or part with possession of the whole of the leased premises without the prior written consent of the Lessor. Clause 9.1.5 of the Lease provided that:

“ For the purposes of this clause 9 an assignment expressly includes the Lessee transferring or allotting more than 51% of the shares in the Lessee Company or otherwise transferring effective control of the Lessee. “

There was no equivalent provision in the Agreement for Lease.

3 All of the shares in Caversham were held by Prestige Property Holdings Pty Ltd, a wholly owned subsidiary of the plaintiff, then called Futuris Corporation Ltd and now called Elders Ltd (“Elders”). On 10 May 2007 Prestige Property Holdings Pty Ltd sold all of the shares in Caversham to Aspen Development Fund No. 1 Ltd (“Aspen Development”). EJ Knight contends that this was a breach of the Agreement for Lease and the Lease. The sale occurred before the condition of the escrow was satisfied. Elders and Caversham say that the sale was not a breach of the Agreement for Lease because no rights or obligations of Caversham were assigned or transferred. They say that the sale was not a breach of clause 9 of the Lease because the Lease was not operative at the time of the sale.

4 The Lease provided for an annual base rent of $700,000 subject to the CPI and market adjustments. For the first five years of the Lease commencing 15 October 2003 it was agreed that the Lessor would accept concessional rent subject to the Lessee’s complying with the terms of the Lease, or making good any breach of those terms within seven days of issue of written notice upon the Lessee so to do. It was provided that if the Lessee committed a “material breach of the Lease” which was not rectified in accordance with such written notice, then the total amount of the rent which had been conceded would become immediately due and payable and all concessions on rents would cease. EJ Knight contends that as a result of the alleged breach arising from the transfer of the shares in Caversham, the amount of the rent which had been conceded became payable. On 18 November 2008 EJ Knight demanded payment of $1,809,067.64 as the amount of such rent and interest which it contended had become payable by reason of the alleged breach.

5 Elders guaranteed the obligations of Caversham under the Lease and the Agreement for Lease. On 29 November 2005 it provided EJ Knight with a bank guarantee from the Commonwealth Bank in the amount of $1,500,000. On 19 November 2008, that is, the day after its demand for payment of $1,809,067.64, EJ Knight made demand on the bank guarantee, and it received $1,500,000 from the Commonwealth Bank that same day. Clause 12.2.1 of the Lease provides that

“ The Lessee irrevocably agrees that the Lessor shall be entitled to claim such part of the Bank Guarantee up to the full amount thereof as shall reasonably be required to compensate the Lessor for any loss or damage sustained as a result of any event or [scil. of] default under this lease . ... ”

Elders contends that EJ Knight was not entitled to call on the bank guarantee. It had provided the bank guarantee. It claims the sum of $1,500,000 as money had and received by EJ Knight to its use.

6 Clause 26 of the Lease provides:

“ LESSEE’S RIGHT TO TERMINATE
The Lessor accepts that Caversham Property Pty Limited (the Lessee) has and will be actively seeking to enter into an agreement (‘the Development Agreement’) with a third party whereby that party takes an assignment of the lease pursuant to Clause 9 hereof. In the event that the Lessee is unable to acquire a third party to enter into a Development Agreement and take an assignment of the Lease then the Lessee may within a period of 3 months from the date of execution of this Lease elect to terminate this Lease by giving the Lessor 1 month’s notice in writing of its intention to so terminate. ”

7 As noted above, the condition of the escrow was satisfied on 20 August 2008 when Caversham succeeded in the Land and Environment Court in obtaining development consent. Caversham was unable to reach an agreement with a third party for the third party to enter into a development agreement and take an assignment of the Lease. On 12 November 2008 it gave notice purportedly pursuant to clause 26 that it elected to terminate the Lease, with the termination to take effect on 12 December 2008.

8 EJ Knight contends that the notice of termination was ineffective because clause 26 required a notice under that clause to be given within three months from the “date of execution” of the lease. EJ Knight contends that this meant that notice had to be given within three months after the parties affixed their common seals to the Lease, that is, by 22 October 2005. Caversham contends that the “date of execution of this Lease” in clause 26 was the date when the lease became operative, that is, 20 August 2008. Caversham submitted that the execution of the Lease was not synonymous with the signing of the Lease, and that the Lease was not executed until all the steps were taken as required to give validity to the document.

9 EJ Knight made an alternative claim for payment of the difference between the base rent and the concessional rent. Caversham paid rent only up to 12 December 2008, that is, up to the time it contends the lease was terminated. EJ Knight contends that it was liable to pay rent for January 2009. It contends that by the service of its cross-claim on 23 February 2009 it made demand for the quarterly instalment of base rent of $223,506.69 which became due and payable on 15 January 2009, and made demand for recoupment of outgoings. It contends that as a result, if its earlier demand was not effective Caversham nonetheless became liable to pay the total amount of the rent for years 1 to 5 which had been conceded, with interest.

10 The principal issues are:

1. whether the sale of the shares in Caversham was a breach of the Agreement for Lease or the Lease;

2. if so, whether EJ Knight gave a notice under clause 6(b)(i) of schedule 1 to the Lease requiring Caversham to make good the breach, in default of which the total amount of the rent which had been conceded became immediately due and payable;

3. whether EJ Knight was entitled to call upon the bank guarantee;

4. whether Caversham’s notice of 12 November 2008 purportedly terminating the Lease effective on 12 December 2008 was valid;

5. if not, and if the conceded rent had not already become payable, whether it became payable by reason of Caversham’s failure to pay the amounts demanded by EJ Knight’s cross-claim.

11 For the reasons which follow I have concluded that the sale of shares in Caversham was not a breach of the Agreement for Lease nor the Lease, that EJ Knight was not entitled to call on the bank guarantee, and that Caversham’s notice of termination of the Lease was effective.

The Agreement for Lease

12 The Agreement for Lease made on 22 July 2005 included the following relevant provisions:

“ RECITALS
...
B. The parties have agreed that the Lessee will apply for development approval for the establishment of a retirement village on the Land, and that if development approval is granted, the Lessor will lease the Land to the Lessee to enable the Lessee to develop and construct there on a retirement village to a high industry standard and thereafter to operate, maintain and manage the village to high industry standards.
...
1. DEFINITIONS AND INTERPRETATION
1.1 Definitions
In this Agreement for Lease, unless the contrary intention appears:
‘Authorities’ means the Gosford City Council and all other government and semi government bodies charged with the responsibility for the approval of the Development Application;
...
‘Consents’ means the consents needed from the Authorities to the Development Application;
...
‘Lease’ means the lease annexed hereto and marked with the letter ‘A’;
...
‘Rent’ means the rental payable by the Lessee to the Lessor under Item 6 of Schedule 1 in the Reference Schedule of the Lease.
...
1.3 Schedules and Annexures
The schedules and annexures form part of this document.
...
3. APPLICATION FOR DEVELOPMENT APPROVAL
3.1 The Lessee must prepare and lodge a Development Application at its own expense in accordance with the provisions of Schedule 1 and in accordance with the Concept Documents as approved by the Lessor.
4. AGREEMENT FOR LEASE
4.1 The Lessee will on the date hereof execute and hand to the Lessor’s Solicitor the Lease (in registrable form) together with the Guarantees and Bank Guarantee referred to in the Lease which shall be held by the Lessor’s Solicitor in escrow until the Lessee obtains the Consents in accordance with the provisions herein contained. The parties expressly agree that the commencement date of the Lease is 15 October, 2003.
4.2 After the Lessee has obtained the Consents the Agreement for Lease shall be unconditional and the Lessor’s Solicitor shall be authorised to date the Lease and the parties shall have entered into the said documentation in accordance with the provisions therein contained.
5. OUTGOINGS AND RENTAL
5.1 The Lessee must pay to the Lessor all Outgoings together with rent payable under the Lease on and from the date of this Agreement for Lease and up to the date when the parties enter into the Lease in respect of the Land pursuant to clause 4 or the date when this Agreement for Lease is terminated for any reason whatsoever.
...
5.3 The Lessee agrees that rental and outgoings as from 15 October, 2003 are payable by the Lessee to the Lessor in accordance with Item 6 of Schedule 1 in the Reference Schedule of the Lease. The Lessee shall on the date hereof pay to the Lessor all rent and outgoings due and payable for the period from 15 ^th October, 2003 to the date of entering this Agreement for Lease and shall from the date hereof continue to pay rental and outgoings as provided for in the Lease. Should this Agreement for Lease be terminated for any reason whatsoever any rental or outgoings previously paid by the Lessee to the Lessor shall not be refundable, nor shall any rental paid in advance for that quarter in which termination occurs be refundable.
6. ACCESS TO THE LAND
From and after the date of this Agreement for Lease and until the parties enter into a lease of the Land pursuant to clause 4 or until this Agreement for Lease is terminated, the Lessor will give the Lessee and its advisers and consultants access to the Land (at their own risk) to enable the Lessee to do everything reasonably necessary to prepare the Concept Documents and to prepare and pursue the Development Application.
...
12. GENERAL
...
12.3 Assignment
(a) The Lessee may not assign or transfer any of its rights or obligations under this document without the prior written consent of the Lessor, such consent not to be unreasonably withheld. No assignment of any obligation will be effective until the assignee has covenanted in favour of, and in form satisfactory to the Lessor, to assume and to be bound by the obligations assigned.
(b) The Lessor may assign or transfer its ownership of the land together with its rights and obligations under this document provided that no sale or assignment of any obligation will be effective until the assignee has covenanted to be bound by the obligations assigned.
...
12.5 Entire Agreement
This document and the Lease annexed hereto constitutes the entire agreement between the parties in relation to its subject matter. No understanding, arrangement or provision not expressly set out in this document will bind the parties. Accordingly, all correspondence, negotiations and other communications between the parties which precede this document are superseded by and merged in it. ”

13 Schedule 1 to the Agreement for Lease referred to in clause 3.1 provided that:

“ 2. The Lessee agrees that no later than three months from the date of this Agreement for Lease (or such longer period approved by the Lessor) the Lessee shall lodge with Gosford City Council all documents required to support a successful Development Application for a retirement village and pay all council fees. ”

14 Clause 11 of Schedule 1 to the Agreement for Lease provided:

“ If the Authorities (or the Land and Environment Court) impose conditions or requirements upon the Lessee or the Lessor which are unacceptable to the Lessee or the Lessor (to be unacceptable to the Lessee or the Lessor such conditions must be other than those which would normally be applied by Gosford City Council to a self-care retirement village build to high industry standards) or if Consents upon conditions acceptable to the Lessee have not been obtained within twelve (12) months of the date of this Agreement for Lease, or such longer period or periods, as may be agreed between the Lessor and the Lessee in writing then the Lessee may (and in this respect Clause 8 of this Agreement for Lease shall apply) by not less than 28 day’s [sic] notice in writing to the Lessor, terminate this Agreement for Lease but such notice cannot be given any later than twelve (12) months from the date of this Agreement for Lease unless otherwise (by reason of any aforementioned extension) agreed in writing by the Lessor. ”

15 The Lease, which was an annexure to the Agreement for Lease, was executed under the common seal of Caversham on 1 July 2005. On 22 July 2005 it was executed by EJ Knight by the affixing of its common seal. Clause 5.1 of the Lease provided that the Lessee was to pay rent as specified in item 6 of schedule 1. Clause 5.2 provided that the Lessee was to pay to the Lessor specified outgoings. Item 6 of Schedule 1 provided:

“ 6 BASE RENT AND CONCESSIONAL RENT
(clause 5.1)
(a) Base Rent is $700,000.00
The parties acknowledge that the Base Rent has been notionally arrived at by reference to a development of 150 Residences and if the Lessee proposes to build more than 150 Residences, then the Base Rent is to be increased by $4,660 per annum for each additional Residence proposed and approved by the council
(b) (i) Concessional Rent – the Lessor will accept concessional rent as set out below in lease years 1 to 5 subject to the Lessee complying with the terms of the Lease or making good any breach of those terms within 7 days of issue of written notice upon the lessee so to do by the Lessor, detailing any such breach.
(ii) Rental shall commence as from the Commencement Date of the Lease namely 15 October, 2003 and shall be payable as follows:
Lease Year 1 : Rent $200,000.00 payable three (3) monthly in advance by four equal payments of fifty thousand dollars ($50,000.00).
Lease Year 2 : Rent $300,000.00 payable by four equal instalments three (3) monthly in advance.
Lease Year 3 : Rent $400,000.00 payable by four equal instalments three (3) monthly in advance.
Lease Year 4 : Rent $500,000.00 payable by four equal instalments three (3) monthly in advance.
Lease Year 5 : Rent $500,000.00 payable by four equal instalments three (3) monthly in advance.
(c) Not withstanding anything elsewhere herein contained it is agreed between the parties that the Base Rent adjusted by the Consumer Price Index in accordance with clause 6.2 from 15 October 2003 shall commence from the earlier of the following dates, namely:-
(i) Lease Year 6; or
(ii) on the Certificate Date; or
(iii) in the event of a breach of the terms of the lease which is not rectified in accordance with item 6(b)(i), immediately.

(d) If the Lessee commits a material breach of the Lease prior to or subsequent to the date the Conceded Rent is due and payable under Item 6 which is not rectified in accordance with item 6(b)(i) then the total amount of the rent which has been conceded pursuant to paragraph 6(b) will become immediately due and payable and all concessions on rents pursuant to paragraph 6(b) will cease. ”

16 Clause 9 included a covenant against assignment without the Lessor’s prior written consent. It provided:

“ 9.1 Sub-letting of the whole
9.1.1 The Lessee must not assign, underlet or part with possession of the whole of the leased premises without the prior written consent of the Lessor. The Lessee and the Guarantor acknowledge that the Lessor has entered into this Lease based on the Lessee’s and Guarantor’s representations that they are solvent and able to meet all of their financial obligations under the Lease.
9.1.2 The Lessee acknowledges that the Lessor will not be required to consent to an assignment, under-let or parting with possession of the whole of the leased premises unless the Lessee is able to demonstrate to the Lessor’s satisfaction acting reasonably that the financial resources of the incoming assignee and guarantor are sufficient to provide adequate security to meet their obligations under the Lease and subject to these assurances and all assignment, guarantee, bank guarantee and all other necessary documentation being signed and sealed to the Lessor’s satisfaction then the Lessor shall release the security previously provided by the Lessee and Guarantor PROVIDED THAT if the Lessee desires to assign, sub-let or part with the whole of the leased premises before the Certificate Date, the Lessor will not be required to consent unless the Lessee is able to demonstrate to the Lessor’s satisfaction that the financial resources of the incoming Assignee and Guarantor are sufficient to construct the Retirement Village and meet the terms and conditions of the lease in every way including the obligations contained in Clause 12, herein and the payment of rent and outgoings. However, it is agreed that if the incoming assignee satisfies in all respects the requirements of an Acceptable Incoming Assignee as defined in clause 1.1 then the Lessor shall effective from the date of the assignment (which date cannot be prior to the Certificate Date) release the initial Lessee and Guarantor from any further obligation under the Lease occurring after the date of assignment.
...
9.1.5 For the purposes of this clause 9 an assignment expressly includes the Lessee transferring or allotting more than 51% of the shares in the Lessee Company or otherwise transferring effective control of the Lessee. ”

17 Clause 12.1 required the Lessee to provide the Lessor with a Bank Guarantee under which a bank undertook unconditionally to pay to the Lessor on demand any sum up to the full amount of the “Guaranteed Sum”. Clause 12.1 provided that initially the Guaranteed Sum should be $1 million. That amount was to increase at the end of every second year having regard to movements in the CPI. Clause 12.2.1 provided:

“ The Lessee irrevocably agrees that the Lessor shall be entitled to claim such part of the Bank Guarantee up to the full amount thereof as shall reasonably be required to compensate the Lessor for any loss or damage sustained as a result of any event or default under this Lease without reference to the Lessee even if the Lessee has instructed the Bank not to pay the Lessor any time after there has occurred any such event of default. ”

18 Clause 23.2 provided:

“ 23.2 Whole agreement
This Lease and its annexures:
23.2.1 constitutes the whole agreement between the parties; and
23.2.2 supersedes all prior representations, warranties, arrangements, understandings and agreements between the parties,
relating to the subject matter of this Lease and its annexures. ”

19 Clause 25 provided:

“ 25. COUNTERPARTS
This Lease may be executed in any number of counterparts and all of those counterparts taken together constitute one and the same instrument. An executed counterpart may be delivered by facsimile. ”

20 Both the Agreement for Lease and the Lease provided on their execution pages that the documents were “executed as an Agreement”. Neither was expressed to be a deed. Neither was expressed to have been executed as a deed by signing, sealing and delivery.

21 On 22 July 2005 EJ Knight, Caversham and Elders (then called Futuris Corporation Ltd) entered into a Deed of Guarantee. Elders guaranteed to EJ Knight the punctual payment of all rent and other money payable under the Lease and the punctual observance by Caversham of all other terms of the Lease.

22 On 29 November 2005, at the request of Elders, the Commonwealth Bank provided its unconditional undertaking to pay on demand any sum which might be demanded by EJ Knight to a maximum aggregate sum of $1.5 million.

23 On 8 March 2006 EJ Knight, Caversham and Elders entered into a deed to vary certain conditions of the lease. The deed recited that:

“ A. The Lessor and the Lessee are parties to an Agreement for Lease dated 22 July 2005 (‘ Agreement for Lease ’)
B. The Lessor and the Lessee are parties to a signed but undated Lease held in escrow by UBK Lawyers (‘ Lease ’) pursuant to the terms of the Agreement for Lease.
C. the Lessor, the Lessee and the Guarantor are parties to a Deed of Guarantee and Indemnity dated 22 July 2005 (‘ Guarantee and Indemnity ’)
D. The Lessee and the Guarantor wish to vary the Agreement for Lease, Lease and the Guarantee and Indemnity, in the manner set out in this document to which the Lessor agrees. ”

24 The deed provided that clause 12.1 of the Lease be replaced with a new clause 12.1. The new clause provided for an initial bank guarantee of $1.5 million for ten years, to be increased at the end of its term in accordance with CPI during the preceding ten years. Variations were also made to the Deed of Guarantee of 22 July 2005. Clause 2.2 provided:

“ The Lessor, the Lessee and the Guarantor acknowledge and agree that the Agreement for Lease, Lease and Guarantee and Indemnity as varied by this document continue to be in full force and effect. ”

No Breach of Lease by Sale of Shares

25 EJ Knight contended that the sale without its consent of the shares in Caversham was a breach of clause 12.3 of the Agreement for Lease and clauses 9, 9.1.1 and 9.1.5 of the Lease which was an annexure thereto.

26 It is clear that the sale of the shares in Caversham was not a breach of clause 12.3 of the Agreement for Lease unless clause 9.1.5 of the Lease could be used to construe the word “assign” in clause 12.3(a) of the Agreement for Lease to include a transfer of more than 51 percent of shares in the Lessee.

27 The scope of clause 9.1.5 of the Lease is expressly limited to the purposes of clause 9. It matters not that the Lease forms part of the same document as the Agreement for Lease. Clause 9.1.5 does not qualify any term except clause 9 of the Lease.

28 There was no breach of clause 12.3 of the Agreement for Lease because no rights of the Lessee were assigned. Nor were any obligations of the Lessee purportedly assigned.

29 Therefore, the question is whether either the Lease containing clause 9 was operative from 22 July 2005 and hence was operative when the shares were transferred, or whether on satisfaction of the escrow condition the Lease is taken to have been operative from the time it was signed and hence is taken to have been operative when the shares were transferred. Caversham did not argue that if clause 9.1.5 were operative, the clause was not breached because the change of control was effected by a transfer of shares and not an allotment, and the transfer was made not by it, but by its holding company.

30 Counsel for EJ Knight submitted that notwithstanding clause 4 of the Agreement for Lease, the Lease was operative from the date the Agreement for Lease was executed. Counsel referred to clause 1.3 which provides that the annexures form part of “this document”, and clause 12.5 which provides that “this document” (that is, the Agreement for Lease) and the Lease annexed to it constitute the entire agreement between the parties in relation to its subject matter. Counsel submitted that the expression “escrow” in clause 4 merely referred to the period during which the Agreement for Lease, and consequently the Lease, was liable to be terminated by Caversham pursuant to clause 11 of Schedule 1 of the Agreement for Lease if the relevant development authority imposed unacceptable conditions. Counsel also submitted that the condition in clause 4 of the Agreement for Lease was a condition only upon Caversham’s acquiring a legal interest in the land, but that the Agreement for Lease and the Lease annexed to it were both immediately binding as a contractual agreement.

31 Counsel for EJ Knight also submitted that because clause 4.1 of the Agreement for Lease provided for the “Guarantee” and the “Bank Guarantee” referred to in the Lease to be delivered at the time of execution of the Agreement for Lease, it should be inferred that the parties intended that clause 12.1 of the Lease (and hence the Lease as a whole) was operative, because clause 12 was the only source of Caversham’s obligation to procure the Bank Guarantee and Guarantee in the first place. Counsel submitted that the parties intended that the Bank Guarantee and Guarantee be operative as from 22 July 2005 to secure Caversham’s obligation to pay rent “under the Lease”.

32 Dealing with the last point first, the provision for the delivery of the Guarantee and Bank Guarantee does not take the matter further. The obligation to hand those documents over at the time of execution of the Agreement for Lease arose pursuant to clause 4 of the Agreement for Lease. In the light of that express obligation in clause 4, it is not right to say that the only obligation Caversham had to provide those documents was under clause 12 of the Lease.

33 In my view, under clause 4.1 of the Agreement for Lease, the Lease, the Guarantee and the Bank Guarantee were all to be held in escrow until the Lessee obtained the Consents. But even if that construction be wrong, it would not advance the question of whether the Lease was immediately operative. If the Guarantee and Bank Guarantee were not to be held in escrow, they would operate in accordance with their terms. Under clause 2.1 of the Guarantee, Elders guaranteed the punctual payment of all rent and other money payable under the “Lease”. But the “Lease” was defined in the Guarantee as including the Agreement for Lease. Clause 5 of the Agreement for Lease imposed an obligation on Caversham to pay rent and outgoings.

34 Clause 11 of Schedule 1 of the Agreement for Lease does not elucidate the meaning of clause 4 of the Agreement for Lease. If Consents (as defined) were obtained, so that pursuant to clause 4.2 of the Agreement for Lease the Lease was taken to have been entered into, but the conditions of the Consents were unacceptable, by necessary implication the right to terminate the Agreement for Lease under clause 11 of Schedule 1 would also extend to termination of the Lease. If acceptable conditions were not obtained in 12 months and Consents (as defined) were outstanding, on a termination of the Agreement for Lease under clause 11 of Schedule 1, Caversham would not be obliged to enter into the Lease. Clause 4.2 of the Agreement for Lease in effect provides that the parties are to be taken to have entered into the Lease only after the consents are obtained.

35 The escrow condition in clause 4 cannot have been merely a condition upon Caversham’s acquiring a legal interest as Lessee of the land. Caversham would not acquire such an interest until registration of the Lease. If the condition of the escrow were satisfied, the Lease would be taken to have been entered into and would be operative to confer an equitable title on Caversham as lessee prior to registration.

36 Clause 5.1 of the Agreement for Lease required the lessee to pay outgoings and rent “payable under the Lease on and from the date of this Agreement for Lease and up to the date when the parties enter into the Lease ... pursuant to clause 4”. If the Lease were immediately operative, there would be no need for that provision. The obligation to pay rent and outgoings before the “Consents” were obtained would arise directly under the Lease. Clause 5 at least indicates that the Lease was not operative prior to the satisfaction of the escrow condition. The use of the language “up to the date when the parties enter into the Lease” also suggests that rather than the Lease being then binding, but its operative effect suspended until the escrow condition was satisfied, it is not to be taken to have been entered into pending satisfaction of that condition. That is also supported by clause 4.2 which provides that it is only on the Consents being obtained that the parties are to be taken to have “entered into the said documentation”.

37 The word “escrow” is usually used in connection with the delivery of deeds. It refers to the specification of a condition or conditions upon which delivery of a deed is effective. Prior to the satisfaction of such a condition the maker of a deed delivered in escrow is bound to the extent that he or she cannot withdraw the deed whilst the time for fulfilment of the condition continues to run. Where the deed conveys an interest in land, the maker of the deed will be restrained from disposing of the land or from mortgaging it in derogation of the conditional grant (Alan Estates Ltd v W G Stores Ltd [1982] Ch 511 at 520). The better view is that the operative effect of the deed so delivered is suspended whilst the condition remains unfulfilled, but on fulfilment of the condition, the deed operates from the time of first delivery, not from the time of fulfilment of the condition. It does so only for such purposes as are necessary to give efficacy to the transaction (Security Trust Co v Royal Bank of Canada [1976] AC 503 at 517; Alan Estates Ltd v W G Stores Ltd at 521, 528; Fisher v Westpac Banking Corporation (1993) 43 FCR 385 at 390-391).

38 Neither the Lease nor the Agreement for Lease was expressed to be a deed. Upon registration, the lease would have the effect of a deed (Real Property Act 1900 (NSW), s 36(11)), but prior to registration it would not operate as a deed. Counsel for Elders and Caversham submitted that prior to satisfaction of the condition, the Lease was not effective and did not become effective for any purpose until the condition was satisfied. Counsel referred to a passage from the speech of Lord Evershed MR in Beesly v Hallwood Estates Ltd [1961] Ch 105 at 120, cited with approval by Rolfe J in Meredith Projects Pty Ltd v Fletcher Construction Australia Ltd [2000] NSWSC 493 where Lord Evershed MR said (at [156]):

“ ... there is an important distinction ... between an instrument in writing, which may be executed conditionally, and a deed. For in the case of the former, until the condition is performed, there is nothing at all. The position is not the same in the case of an instrument under seal executed and delivered, for in the latter case ... when the time has arrived or the condition has been performed the delivery becomes absolute and the maker of the deed is absolutely bound by it ... "

Counsel submitted that prior to the satisfaction of a condition of an agreement under hand, as distinct from a deed, “ there was nothing at all ”.

39 The question is what the parties are taken to have intended by their use of the language of “escrow” in clause 4.1 of the Agreement for Lease in conjunction with the provisions that on the obtaining of the Consents, that is, upon satisfaction of the condition of the escrow, the parties should then be taken to have entered into the Lease. The statement that the Lease was to be held in escrow until the Lessee obtained the Consents is at least inconsistent with the Lease being of immediate effect.

40 There are other indications that the Lease and the Agreement for Lease were not intended to have concurrent effect. One to which I have already referred is that the Agreement for Lease makes its own provision for the payment of rent which would be unnecessary if the Lease had immediate effect. The fact that both documents contained provisions dealing with assignment, but the provisions were in different terms, also indicates that the documents were not to have concurrent effect. I do not see that the fact that clause 1.3 of the Agreement for Lease provided that the Lease in annexure A formed part of “this document” or that the Agreement for Lease and the Lease constituted the entire agreement between the parties (cl 12.5) takes the matter any further. Those provisions say nothing as to the time from which the annexed Lease is to be operative.

41 The Lease was not operative when the shares in Caversham were sold.

42 This conclusion is not affected by clause 2.2 of the Deed of Variation of 8 March 2006. The agreement that the Agreement for Lease, Lease and Guarantee and Indemnity as varied “continue to be in full force and effect” must mean that the instruments continue to have full force and effect according to their tenor. The force and effect of the Lease, whatever it might be, was continued. The Lease was not given greater force or effect by the Deed of Variation. If, immediately prior to 8 March 2006, the documents did not have full force and effect, they were not given it by clause 2.2. On no view did the Lease and the Agreement for Lease have effect unconditionally. Clause 2.2 did not purport to further vary the Lease or the Agreement for Lease.

43 If clause 4.1 were read in isolation, it might be inferred that on satisfaction of the escrow condition, the Lease would operate with effect from 22 July 2005 so far as was necessary to give efficacy to the Lease, so that Caversham’s title as lessee would relate back to that day. Even so, it would not follow that the effect of the relation-back was retrospectively to put Caversham in breach of its personal covenant not to assign the leased premises within the extended meaning of assignment in clause 9.1.5 of the Lease. The principle of relation back does not apply for all purposes, but only for the passing of title and those matters necessary to give efficacy to the transaction.

44 In any event, there are other relevant provisions. Upon the Lease taking effect, the title of the Lessee dates back to 15 October 2003. As earlier noted, the effect of clauses 4.2 and 5.1 of the Agreement for Lease is that the parties are only taken to have entered into the Lease on satisfaction of the escrow condition. Although the Lessee’s title dates back to 15 October 2003, it cannot have breached clause 9 of the lease before the Lease is taken to have been entered into.

45 It follows that EJ Knight was not entitled to give notice under clause 6(b)(i) of Schedule 1 to the Lease requiring Caversham to make good the breach of the Lease such that if the breach were not rectified the conceded rent would become payable pursuant to clause 6(d) of the Schedule.

No Written Notice Requiring Rectification of Alleged Breach

46 In any event, EJ Knight did not serve written notice requiring Caversham to make good the alleged breach. On 30 July 2007 it gave notice that the transfer of a controlling interest in Caversham was a breach of clause 12.3 of the Agreement for Lease and clause 9 of the Lease. It asked to be informed how Caversham intended to cure the breach, but went on to say that before taking action on the alleged breach there should be a meeting between executives of the parties, at which time it expected Caversham to provide a full explanation of its actions so that EJ Knight was in a better position to consider its actions. This was not a notice requiring the alleged breach to be made good. On 3 September 2007 EJ Knight wrote again to Caversham referring to a meeting held on 17 August 2007 and seeking information. The correspondence was answered on 3 October 2007. On 22 October 2007, EJ Knight wrote referring to the various provisions of the Agreement for Lease and the Lease, including item 6 of Schedule 1, and asserting that by transferring to the Aspen Group a controlling interest in Caversham, it had committed a material breach of the Lease and therefore the Agreement for Lease. EJ Knight concluded by saying that it reserved its right to take action in respect of the alleged breach. But it referred to the penultimate paragraph of its letter of 30 July 2007 and said that there would be value in a meeting taking place. The penultimate paragraph of EJ Knight’s letter of 30 July 2007 requested a meeting before action was taken on the alleged breach.

47 Accordingly, even if the transfer of shares in Caversham were a breach of the Lease, no notice under clause 6(b)(i) of Schedule 1 to the Lease requiring the breach to be made good was issued.

Alleged Breach not Material

48 Further, the conceded rent only became payable under clause 6(d) of Schedule 1 if the unrectified breach was a “material” breach of the Lease. Caversham did not contend that to be a material breach the breach had to be fundamental (compare Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443 at [68]). Counsel correctly submitted that the focus is on the materiality of the breach rather than the materiality of the obligation (Celtech International Ltd v Dalkia Utility Services plc [2004] EWHC 193 (Ch) at [26]). Counsel submitted that for the breach to be material, it must have had a serious effect on the benefit which the Lessor would otherwise have had from the transaction, that is, it must be of serious or substantial import (Celtech International Ltd v Dalkia Utility Services at [26]; Mobileciti Pty Ltd v Vodafone Pty Ltd [2009] NSWSC 899 at [58]). I agree with this submission. The context in which the expression “material breach” is used in clause 6(d) is that such a breach, if not rectified, would result in an obligation to pay an additional $1.8 million of rent plus interest. In that context I think it is clear that a reference to a material breach is only to a breach which substantially adversely affects the interests of the Lessor.

49 In my view, one can test whether the (assumed) breach of clause 9 of the Lease was material by asking whether the Lessor would have been required to give its consent to the assignment if that consent had been sought. If the Lessor would in any event have been bound to consent to the transfer of the shares, the failure to obtain its prior consent, whilst a breach of the Lease, would not be a material breach because it would not seriously adversely affect its interests.

50 Clause 9.1.2 assumes that on an assignment of the Lease there would be a new Lessee (called the assignee) and a new guarantor. The clause requires the Lessee to demonstrate to the Lessor’s reasonable satisfaction that the financial resources of the incoming assignee and guarantor are sufficient to provide adequate security to meet their obligations under the Lease including the obligations to construct the retirement village. Because the alleged breach does not involve a transfer of the leasehold interest, but of the shares in the Lessee, there was no change to the financial position of the Lessee. Nor was there a proposed change of guarantor. Elders continues to guarantee Caversham’s financial obligations. Caversham is itself a substantial company. Following the sale of the shares in Caversham, Caversham continued to carry on its business in the same manner and with the same personnel as it did prior to the sale. The assets and revenues of the Aspen Group, of which Caversham is now a part, are smaller than the assets and revenues of the Elders group. But, insofar as the assets and revenues of each group of companies might be relevant, there is nothing to indicate that the resources of the other members of the Aspen Group, if they were to be called on, would be inadequate to support Caversham.

51 The party liable under the lease is Caversham and its obligations remain guaranteed by Elders. Clause 9.1.5 shows that the Lessor has an interest in the identity of those controlling Caversham. There is no evidence from EJ Knight that it had any objection or doubt as to the competence or integrity of those controlling the Aspen Group.

52 For these reasons, I conclude that had consent to the transfer of shares been sought, EJ Knight would have been required to provide its consent. The assumed breach would not be material.

53 For these reasons the conceded rent did not become payable as a result of the alleged breach of clause 9 of the lease. EJ Knight was only entitled to call on the bank guarantee to compensate it for any loss or damage sustained as a result of any event of default under the lease. It had suffered no loss as a result of the non-payment of the conceded rent as none was payable. It was not entitled to call on the bank guarantee. On these findings, there is no issue that Elders is entitled to judgment against EJ Knight for $1.5 million as moneys had and received plus interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW).

Validity of Caversham’s Notice of Termination of 12 November 2008

54 There is no dispute that Caversham actively sought to enter into a development agreement with a third party for that party to take an assignment of the lease. There is no issue that Caversham was unable to procure such an agreement with a third party. On the question of whether Caversham validly terminated the Lease pursuant to clause 26, the only issue is whether it did so within three months of the “date of execution of this Lease”.

55 E J Knight argued that the date of execution of the Lease was the date by which both parties had affixed their common seals to the lease, that is, 22 July 2005, not the date upon which the escrow condition was satisfied. Clause 4.1 of the Agreement for Lease provided for the Lessee to “execute” the Lease on the date of the agreement. Caversham had already done so on 1 July 2005. On 22 July 2005 the Lessor also affixed its common seal to the Memorandum of Lease.

56 “Execution” is an ambiguous term. In In the Estate of Williams (dec’d) (1984) 36 SASR 423, King CJ said (at 425) that:

“ To execute a document is to do what the law requires to be done to give validity to the document . ... Execution and signature are, of course, not synonymous. ”

This was referred to with approval by the High Court in MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24; (1999) 195 CLR 636 at [9]. In Terrapin International Ltd v Inland Revenue Commissioners (1976) 1 WLR 665, Walton J said (at 670) that “ execution of a deed is a process rather than a single matter at a single instant of time. It consists of signature, sealing and unconditional delivery. ”

57 However, even in the case of deeds it is natural to speak of the deed being “executed” under seal prior to delivery, although in some cases delivery may be intended by the act of affixing the seal to the deed. One often speaks of a deed being “executed” before it “acquires validity” by delivery. It is in that sense, that Parliament, in s 51A(1) of the Conveyancing Act 1919 (NSW), refers to a deed being “duly executed” (Hooker Industrial Developments Pty Ltd v Trustees of the Christian Brothers [1977] 2 NSWLR 109 at 119, 122-123; see also Xenos v Wickham (1866) LR 2 HL 296 at 312; Beesly v Hallwood Estates Ltd [1960] All ER 314 at 325; Staple of England v Bank of England (1887) 21 QBD 160 at 165, 166; Windsor Refrigerator Co Ltd v Branch Nominees Ltd [1961] Ch 88 at 98; MYT Engineering Pty Ltd v Mulcon Pty Ltd at [10], [11]). By clause 4.1 of the Agreement for Lease the Lessee was required to “execute” the Lease and hand it over to the Lessor’s solicitor to be held in escrow. Clearly, in that clause “execute” meant the act of the Lessee’s affixing its seal to the Memorandum of Lease.

58 It is thus clearly arguable that in clause 26 of the Lease the phrase “date of execution” means the date on or by which the parties affixed their seals to the document. However, clause 26 must be read as a whole. Where the condition is satisfied it gives the Lessee the right to terminate the Lease within three months of the date of execution of the Lease. This necessarily assumes that the Lease has been entered into, even if its operative effect may have been suspended. But, as explained earlier in these reasons, clauses 4.2 and 5.1 of the Agreement for Lease provide that the Lease is to be entered into on satisfaction of the escrow condition. The parties are not taken to have entered into the Lease by affixing their seals to it. Even though, in one sense, they thereby “executed” the Lease, that is not the sense in which clause 26 refers to the “date of execution” of the Lease. In clause 26, the “date of execution” is the date the parties are taken to have entered into the Lease. Otherwise, the clause would confer a right on the Lessee to terminate that which might not, and in this case, did not, then exist.

59 Moreover, clause 26 contemplates that Caversham will be seeking out a third party to take an assignment of the Lease. That assumes that the Lease will be in existence so that it can be assigned.

60 Counsel for EJ Knight submitted that there could be no assignment under clause 9 prior to the “Certificate Date”, being the date of practical completion of the works to be constructed. Assuming this to be so, it does not change the fact that clause 26 contemplates that prior to the right of termination being exercisable, the Lease is to be in existence and capable of being assigned, even if the date for assignment is postponed until practical completion of the works.

61 I have reached this view as to the preferred construction of clause 26 without regard to what may be the more commercially reasonable outcome. The parties have conflicting interests and a construction which is more reasonable in the interests of one party would adversely affect the other. Nonetheless, considering the matter objectively, I consider that the preferred construction of clause 26 is the more reasonable. Clause 26 recognises that Caversham was not expected to be the long-term Lessee of the development. If it could not find a suitable party to take over the development within three months of the date of execution of the Lease, it was to have the right to terminate. Until it was known whether development consent could be obtained, and until the conditions of such a consent were known, it would be at least problematic whether any third party could be expected to commit to taking an assignment of the Lease.

62 For these reasons, I conclude that Caversham’s notice of termination of the Lease was effective. No question arises of Caversham being required to pay conceded rent because it failed to pay rent claimed in EJ Knight’s cross-claim as having fallen due in January 2009.

Conclusion

63 For these reasons, it appears to me that the appropriate orders are to direct the entry of judgment for Elders against EJ Knight for $1.5 million plus interest pursuant to s 100 of the Civil Procedure Act at the rates prescribed by Schedule 5 to the Uniform Civil Procedure Rules, to dismiss EJ Knight’s cross-claim, and to declare that by its notice of 12 November 2008 Caversham terminated the Lease effective on 12 December 2008. However, I was asked not to make final orders until after the parties had the opportunity to consider my reasons. I will stand the matter over to a convenient time for that to be done. I will then hear argument on costs if there is any dispute about costs. I direct counsel for Elders and Caversham to bring in short minutes of order in accordance with these reasons.

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