Fitness First Australia Pty Limited v Fenshaw Pty Limited

[2016] NSWSC 47

Supreme Court

New South Wales

Medium Neutral Citation:

Fitness First Australia Pty Limited v Fenshaw Pty Limited [2016] NSWSC 47

Hearing dates:

14, 15 and 16 December 2015

Date of orders:

11 February 2016

Decision date:

11 February 2016

Jurisdiction:

Equity

Before:

Darke J

Decision:

Leases construed in manner contended for by landlord. Parties directed to bring in Short Minutes of Orders.

Catchwords:

CONTRACTS – construction and interpretation – outgoings provisions in commercial leases – obligation to pay increases in certain outgoings – whether necessary to depart from literal meaning of words so as to avoid commercial absurdity – scope of expression “in respect of the Premises”

 

REAL PROPERTY – commercial leases – construction and interpretation – obligation to pay increases in certain outgoings – whether necessary to depart from literal meaning of words so as to avoid commercial absurdity – scope of expression “in respect of the Premises”

  WORDS AND PHRASES – “in respect of”

Legislation Cited:

Land Tax Management Act 1956 (NSW), s 3A

Cases Cited:

Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99
Chartbrook Limited v Persimmon Homes Limited [2009] UKHL 38; [2009] 1 AC 1101
Commissioner of Stamp Duties (NSW) v Carlenka Pty Limited (1995) 41 NSWLR 329
Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7; (2014) 251 CLR 640
Fitzgerald v Masters (1956) 95 CLR 420
Jireh International Pty Limited v Western Exports Services Inc. [2011] NSWCA 137
Maggbury Pty Limited v Hafele Australia Pty Limited [2001] HCA 70; (2001) 210 CLR 181
Mainteck Services Pty Limited v Stein Heurtey SA [2014] NSWCA 184
Maralinga Pty Limited v Major Enterprises Pty Limited (1973) 128 CLR 336
McGrath v Sturesteps [2011] NSWCA 315; (2011) 81 NSWLR 690
Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37; (2015) 89 ALJR 990
New South Wales Medical Defence Union Limited v Transport Industries Insurance Co. Limited (1986) 6 NSWLR 740
Newey v Westpac Banking Corporation [2014] NSWCA 319
Pacific Carriers Limited v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451
Pukallus v Cameron (1982) 180 CLR 447
Ryledar Pty Limited v Euphoric Pty Limited [2007] NSWCA 65; (2007) 69 NSWLR 603
Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165
Wonall Pty Limited v Clarence Property Corporation Limited [2003] NSWSC 497; (2003) 58 NSWLR 23
Wyllie v Tarrison Pty Limited [2007] NSWCA 184
Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530

Category:

Principal judgment

Parties:

Fitness First Pty Limited (Plaintiff/Cross Defendant)
Fenshaw Pty Limited (Defendant/Cross Claimant)

Representation:

Counsel:
Ms S Clemmett (Plaintiff/Cross Defendant)
Mr D Hand (Defendant/Cross Claimant)

  Solicitors:
Carneys Lawyers (Plaintiff/Cross Defendant)
Chedid Storey Legal (Defendant/Cross Claimant)

File Number(s):

2015/13683

Publication restriction:

None

Judgment

Introduction

1. This is a dispute between a tenant and its landlord concerning the amount of outgoings and charges properly payable by the tenant pursuant to the provisions of two registered leases. The leases, entered into in 2002 and 2004 respectively, for terms ending on 30 June 2017, are of parts of a building located at 522-524 The Kingsway, Miranda. The building is sometimes referred to as the Forum Centre or the Miranda Forum.

2. The plaintiff (Fitness First) is the lessee in respect of each lease. The defendant (Fenshaw) is the lessor in respect of each lease. Fitness First claims that it has overpaid an amount of $188,284.07 for outgoings and charges, and seeks to recover that sum plus interest from Fenshaw. Declaratory relief is also sought concerning the proper construction of the leases. Fenshaw denies that any overpayment has occurred, and denies any liability to Fitness First.

3. The competing contentions of the parties as to the true construction of the outgoings and charges provisions of the leases lie at the heart of the dispute. The provisions, which are in substantially the same terms, are found in clause 4 of each lease. By clause 4.1, the lessee is required to pay any increases in the amounts of certain outgoings and charges (notably Council rates, water rates and land tax) over and above their amounts in a specified base year or period.

4. In brief summary, Fitness First submitted that the provisions of each lease should be construed so that the amounts of the outgoings and charges are calculated by reference to the proportion that the area of leased floor space bears to the total floor space in the Forum Centre building. Fenshaw denied that was the true construction and submitted that the amounts of the outgoings and charges are constituted by all the amounts of Council rates, water rates and land tax levied against the property at 522-524 the Kingsway, Miranda.

5. By its cross-claim, Fenshaw contended that if the outgoings and charges provisions bear the construction propounded by Fitness First, they should be rectified so that they give effect to a common intention of the parties that the lessee would be liable for any increases in statutory outgoings for the property at 522-524 The Kingsway, Miranda over the amounts of those outgoings in the year the lease was entered into. Fenshaw also contended that Fitness First engaged in misleading or deceptive conduct by failing to disclose, prior to the making of each lease, that it intended only to pay a proportion of any increases in outgoings. On that basis, Fenshaw sought orders under s 87 of the Trade Practices Act 1974 (Cth) for the variation of the leases so that they provide for payment of all of any increases in outgoings. However, after the hearing had concluded, Fenshaw stated that it no longer pressed its claim that Fitness First engaged in misleading or deceptive conduct. Finally, Fenshaw sought damages in respect of the failure of Fitness First to pay outgoings since 2012.

Salient provisions of the leases

6. Before dealing with the events leading up to the making of the two leases, it is convenient to set out their salient provisions.

7. The first lease is of the “Premises” which is defined to mean the Lower Ground Floor of 522-524 The Kingsway, Miranda (see clause 2.1, the definition in clause 1.2(11), and item 3 of the Reference Schedule). The lease has a term of 15 years commencing on 1 July 2002 and terminating on 30 June 2017. There is an option to renew for a further period of five years. The lease provides for the payment of rent of $248,800 per annum (exclusive of GST), such amount to be increased by 3% at the end of each year (see clauses 3.1 – 3.3 and 3.7, and items 7 and 8 of the Reference Schedule). Certain rent reductions are provided for in clause 19.

8. Clause 4, which deals with outgoings and charges, is relevantly in the following terms:

4.1 In addition to the rent hereby reserved the Lessee shall pay to the Lessor by way of additional rent, any increases in the outgoings in respect of the Premises in respect of each year or part of the year, over and above the amounts of the respective outgoings and charges levied assessed or charged for the Base Year or Period as set out in Clause 4.2 following. The term “outgoings and charges” when used herein shall mean the following: -

4.1.1   all rates, taxes, assessments, charges, duties, impositions and fees at any time or from time to time payable to any government, local government, semi-government or any other competent authority in respect of the Premises excluding any tax of an income or capital gains nature and assessing such taxes, charges, duties etc. and (sic) upon the basis that the Premises are the only land owned by the Lessor and are not the subject of a special trust;

4.1.2   all metered costs and charges for the supply of water, sewerage and drainage services to the Premises;

4.1.3   all maintenance levies, sinking fund levies and other account including special levies payable to the Owners Corporation in respect of the Premises.

4.2 For the purposes of Clause 4.1 above, Base Year or Period shall be as follows: -

4.2.1   Council rates and charges – the year commencing 1 July 2002.

4.2.2   Water rates and charges – the year commencing 1 July 2002.

4.2.3   Land Tax – land tax assessed for 2002 on land owned as at 31 December 2001.

4.2.4   Strata Levies – the year commencing 1 July 2002.

4.3 Payments pursuant to Clause 4.1 above shall be made by the Lessee within 14 days of production to the Lessee by the Lessor of any account relating to the above matters. In the event that such payments are not made within 14 days of such production, the Lessor may at its option pay any such account and recover from the Lessee the amount so paid as if such amount was rent.

4.4    (1)   The Lessee must pay to the relevant authorities all charges for gas, electricity, water and telephone where they are separately metered to the Premises;

(2)   The Lessee must pay to the Lessor all expenses due solely to the Lessee’s particular use of the Premises, including excess water charges and waste removal.

4.5 Except where it is the Lessee’s responsibility, the Lessor must pay all rates, taxes and other assessments for the Premises, the Building and the Land but this clause does not limit the Lessor’s right to recover such rates, taxes and other assessments as Outgoings and Charges.

9. As already noted, “Premises” is a defined term. So too is “the Building” and “Land”. Land is defined to mean the land described in the Torrens Title Box on the first page of the lease, together with any other land used by the Lessor in connection with the Building. The Building is essentially defined to mean any improvements erected on the Land. The Torrens Title Box on the first page of the lease refers to folio identifier Auto Consol 14101-133. Clause 16 contains provisions pertinent to a future conversion of the title to strata title.

10. The second lease is of the “Premises” which is defined to mean part of the Ground Floor and Suite 1 on the Mezzanine Floor comprising the gymnasium known as “The Ladies Sanctuary” (see clause 2.1, the definition in clause 1.2(11), and item 3 of the Reference Schedule). The lease has a term of 12 years and 9 months commencing on 1 October 2004 and terminating on 30 June 2017. There is an option to renew for a further term of five years. The lease provides for the payment of rent $173,475.40 per annum (exclusive of GST) such amount to be increased by 3% at the end of each year (see clauses 3.1-3.3 and 3.6, and items 7 and 8 of the Reference Schedule). Certain rent reductions are provided for in clause 19.

11. Clause 4 deals with outgoings and charges. This clause is relevantly in the same terms as clause 4 of the first lease, save that the dates for Base Year or Period were changed by advancing each of them by two years.

12. The Building and Land are defined in the same terms as they are in the first lease. The Torrens Title Box on the first page of the lease refers to Volume 14101 Folio 133 and Auto Consol 14101-133. Clause 16 again contains provisions pertinent to a future conversion of the title to strata title.

Events leading up to entry into the first lease

13. In September 2001, Fenshaw entered into a contract to purchase the property at 522-524 The Kingsway, Miranda. Shortly thereafter, a director of Fenshaw, Mr Shane Chedid, commenced looking for a suitable tenant to lease the lower ground floor. The existing tenant had decided to leave. One of the companies contacted by Mr Chedid in relation to the lower ground floor area was Fitness First. Mr Chedid was put into contact with Mr David Allan, a director of Fitness First. Mr Allan was also employed as a Development Manager for the company.

14. Fenshaw completed its purchase of the property on about 23 October 2001.

15. On 6 November 2001 an inspection of the site took place, attended by Mr Chedid, Ms Lizzie Collins of Richardson and Wrench (Fenshaw’s managing agent), Mr Allan and Mr Simon Jonid (an architect employed by Fitness First). After the inspection, Ms Collins sent a facsimile to Mr Allan in which she advised that the landlord was willing to negotiate a long term (approximately 10 years) lease of the approximately 1300m2 area at a rental of $220 per m2 subject to CPI increases and periodic market reviews.

16. A further inspection of the site had occurred by 21 November 2001. On that day Ms Collins sent another facsimile to Mr Allan. The facsimile attached a lease proposal for the area. The proposal provided for a five year term with an option for a further five years at a rental of $350,000 per annum. No outgoings were payable by the Lessee under this proposal. The proposed lease was described as a “Gross Lease”.

17. On 3 December 2001 Mr Allan sent a facsimile to Ms Collins which contained an offer to lease the area. The offer provided for a 15 year term with two options for further five year periods. The offered rent was “$220,000 per annum Gross inclusive of all outgoings, plus GST, with annual increases of CPI maximum 3%”, and a rent free period of 12 months. The offer also provided for the lessee to pay for all directly metered electricity, water, gas and air-conditioning costs. The offer was expressed to be subject to various conditions, including “final board approval by Fitness First”.

18. Later on 3 December 2001, Ms Collins sent a further lease proposal to Mr Allan. It provided for a 15 year term with two options for further five year periods. The proposed rent was $290,000 with annual increases in accordance with the CPI. A rent free period of three months was proffered. Again, no outgoings were payable, the proposed lease being a “Gross Lease”.

19. The negotiations do not appear to have been taken any further in 2001. In February 2002, Mr Chedid and Mr Allan agreed to meet to further discuss the terms of the proposed lease. A meeting took place between the two men on about 25 February 2002 in Mr Allan’s office in Bondi Junction.

20. Mr Chedid deposed that during the course of the meeting there was a discussion about outgoings. He says that during that discussion Mr Allan stated that Fitness First did not want to pay any outgoings, and Mr Chedid stated that Fenshaw could not afford to bear all outgoings as the building “has a lot of expenses like cleaners, maintenance and insurance”. Mr Chedid deposed that the discussion that followed included the following:

Mr Chedid: “You have to pay outgoings. You occupy a substantial portion of the building. Sometimes the government just comes up with a tax like the GST and that tax could be more than all the rent we get from you. You need to pay your fair share. You will be using these areas too.”

Mr Allan: “Look, we have no control over outgoings for the common property and you have no control over statutory outgoings. Would you agree to Fitness First paying you for any increase in the statutory outgoings for the building from the time we entered into the lease?”

Mr Chedid: “What do you mean?”

Mr Allan: “Well, your land tax, council rates and water rates. We will pay for all increases from the base year for the building, which factors in the fact we are not paying any of the other outgoings, such as cleaning, insurance etc.”

Mr Chedid: “OK. I am happy with that.”

21. The conversation set out above forms the basis of Fenshaw’s alternative claims for rectification. Its accuracy was challenged in Mr Chedid’s cross examination. Mr Allan was not called to give evidence.

22. On 28 February 2002, Mr Allan sent a further facsimile to Ms Collins. The facsimile (the first page of which is not in evidence) contained a document headed “Fitness First Health Clubs Agreement to Lease General Terms”. The General Terms were described by reference to 21 numbered items or subjects. The document provided as follows in relation to rent and outgoings:

10. BASE RENT:   $246,600pa Gross rent payable monthly in advance on the 5th of each calendar month by direct debit (plus GST).

……

12A. RENT COMMENCEMENT:   Lessee fit out period of 3 months where no rental is applicable.

On completion of build out period half the applicable rent to be charged for the first two years which will equate to 1 year free period.

13. OUTGOINGS:   (a) INCREASES IN OUTGOINGS:

The Lessee will pay increases in outgoings over a base year 2002.

(b) NON STATUTORY CHARGES:

The Lessee shall be responsible for the cost of supply of its own utilities i.e. electricity, gas and water.

14. RENT REVIEW:   Base Rent will increase by CPI to a maximum amount of 3% each anniversary of the Lease Commencement Date.

23. Provision was made for each of the parties to execute the General Terms document, but it seems that neither party did so.

24. It appears that after receiving the document Ms Collins spoke to Mr Chedid about it. Later on 28 February 2002 she had a conversation about the document with Mr Allan. Ms Collins sent a further facsimile to Mr Allan later in the day recording various amendments discussed during such conversation. None of the amendments concerned the outgoings item.

25. On 1 March 2002, Ms Collins’ facsimile, together with the General Terms document, was sent to Mr Robert Storey, solicitor, who was retained by Fenshaw to act for it in the transaction.

26. Mr Storey gave evidence that, based on the documents he received from Ms Collins, he prepared drafts of a Deed of Agreement to Lease and a lease. He sent drafts of such documents to Fitness First under cover of a letter dated 8 March 2002. The drafts are not in evidence. Mr Storey’s letter suggests that some further discussions had by then taken place between the parties.

27. On 11 March 2002, Mr Peter Elliott, the Legal Counsel of Fitness First, requested Mr Storey to send him copies of the proposed agreements. It appears that on 14 March 2002 Mr Storey sent copies of the documents to Mr Elliott by email. In the meantime, Mr Storey had sent a facsimile to Mr Elliott which set out a number of amendments to the draft lease Mr Chedid had instructed him to make.

28. On 2 April 2002, Mr Elliott sent copies of the Agreement to Lease and lease, amended in accordance with his instructions, to Mr Storey. The covering email contained a request that a meeting be arranged between the parties and their representatives to discuss and finalise the documents.

29. At that stage, the opening sentence of clause 4.1 of the draft lease referred to increases in the outgoings of Lot 1 in SP 53726. That is the title reference of a strata title property in Smithfield that Fenshaw had recently acquired from Ironic Holdings Pty Limited. This reference probably came to be included because Mr Storey had used a lease document pertaining to that property as a precedent. In any event, Mr Elliott raised a query about the title reference with Mr Storey. He did so by inserting a question into the text of the draft.

30. It is likely that the matter was later raised in discussion between them. Mr Elliott and Mr Storey each made handwritten notes, adjacent to clause 4.1 on drafts of the lease, referring to lots in Deposited Plan 8447. The folio identifier for the Miranda property (Auto Consol 14103-133) includes the land in lots 1, 2 and 5 of Deposited Plan 8447. Mr Storey made his note referring to lots in Deposited Plan 8447 on the draft lease which he received on 2 April 2002. (Mr Elliott made his note on his retained copy of a draft lease he sent to Mr Storey on 15 April 2002).

31. On 3 April 2002 Mr Elliott sent Mr Storey a further draft of the Agreement to Lease containing some additional clauses.

32. On 4 April 2002 Ms Collins sent a facsimile to Mr Elliott. The facsimile is also addressed to Mr Chedid, but the evidence does not establish that it was sent to him. The facsimile included a proposed outgoings budget for Miranda Forum for 2002. The facsimile coversheet indicates that Ms Collins was requested to provide the budget document. However, neither the evidence of Mr Elliott nor that of Mr Chedid shed any light on the circumstances in which the document was so provided. I note that the fraction 1380/4800 was handwritten on the budget document which was part of the facsimile received by Mr Elliott. It is not clear who wrote the note. Mr Elliott gave evidence that it was not he.

23. On 15 April 2002 Mr Elliott sent an email to Mr Storey which attached further amended drafts of the Agreement to Lease and lease. The email stated that the drafts now incorporated (and highlighted) “all amendments which were agreed during our meeting with the Lessor”. The email includes two other references to such a meeting. I infer that a meeting involving representatives of Fitness First and Fenshaw, during which the terms of the draft documents were discussed, took place shortly prior to 15 April 2002. It is likely that Mr Chedid attended that meeting. Mr Elliott concluded his email with a statement that he understood that Mr Storey and his client were going to discuss the documents on that day.

24. At that stage, the opening sentence of clause 4.1 of the draft lease was in the same terms as it was in the draft sent to Mr Storey on 2 April 2002. Clause 4.1.1, which forms part of a definition of “outgoings and charges”, was also in the same terms as it was in the draft sent to Mr Storey on 2 April 2002. I note that clause 4.7, which had contained a requirement for the Lessee to pay any taxes imposed in the future, had been deleted. Mr Elliott made some handwritten notes on his copy of the draft lease adjacent to clause 4.1. As mentioned earlier, he made a note referring to lots in Deposited Plan 8447. Mr Elliott made other handwritten notes in the following terms:

on a pro rata basis

1380

4800

4900

35. Mr Elliott gave evidence that at that time he understood that the area to be leased by Fitness First comprised approximately 1380m2 out of a total building area of 4800m2 or 4900m2. There is no firm evidence that Mr Elliott discussed those measurements or areas with Mr Storey.

36. It appears that numerous amendments were made to the draft lease on 15 April 2002. For example, items 9 and 10 in the Reference Schedule were altered, as were clauses 6.2(1), 6.3(3), 6.5, 6.9(2), 6.9(4), 7.2(1), 7.2(2) and 12.2. These changes are the subject of handwritten notes apparently made by Mr Elliott on his copy of the draft lease, and appear in a further draft of the lease sent to Mr Storey on about 15 April 2002.

37. Importantly, another change apparently made on 15 April 2002 concerned the opening sentence of clause 4.1. The reference to Lot 1 in SP53726 was deleted and replaced with the words “in respect of the Premises”. Accordingly, the expression “any increases in the outgoings of Lot 1 SP53726” became “any increases in the outgoings in respect of the Premises”. A similar change was made to clause 4.1.3. These changes to clause 4.1 are not reflected in any of the handwritten notes apparently made by Mr Elliott on his copy of the draft lease. It seems clear, however, that the author of the change was Mr Elliott, not Mr Storey.

38. Mr Elliott gave evidence in cross examination to the effect that whilst he had no recollection of discussing the change with Mr Storey, he supposed that such a discussion occurred. He suggested that it may have been agreed to insert the words “the Premises” as “it makes sense to use the one term throughout the document”. The words “the Premises” were employed in several other places in the proposed clause 4.1. However, Mr Storey gave no evidence of any discussion with Mr Elliott about the change. It was not suggested to Mr Storey in cross-examination that he discussed the change with Mr Elliott.

39. By 17 April 2002 Mr Storey had perused the latest draft documents. On that day he sent a letter to Mr Elliott in which he raised numerous matters related to the wording of the documents. No issue was raised in relation to clause 4 of the draft lease. The content of Mr Storey’s letter suggests that he went through the documents with some care.

40. The recently made changes to clause 4.1 were highlighted in the draft by underlining and striking through. I therefore think it is likely that Mr Storey saw those changes. Mr Storey made a concession to that effect in cross examination. Moreover, whilst he could not definitely confirm that he discussed the various changes with Mr Chedid, Mr Storey assumed that he would have done so. It is likely that he did so, even if only briefly. Mr Chedid agreed in cross examination that he discussed various amendments to the lease documents with Mr Storey, although I note that it was not put to Mr Chedid that he discussed these particular changes to clause 4.1 with Mr Storey.

41. Mr Storey wrote a letter to Mr Chedid on 17 April 2002 in relation to the latest draft documents. Mr Storey noted that some additional changes had been made “presumably without reference” to either himself or Mr Chedid, some of which “will not cause any problems”. Mr Storey also noted that a letter to Mr Elliott had been drafted which addressed the issues which concerned him. Mr Storey asked Mr Chedid to “peruse the enclosure” and provide his response. It is not clear what document or documents comprised the enclosure. It appears from a note on Mr Storey’s file that the letter (and enclosure) was not sent by facsimile as intended, but was instead handed to Mr Chedid.

42. On 18 April 2002 Mr Elliott sent an email to Mr Storey. The email concerned matters other than the issue of outgoings.

43. On 22 April 2002 Mr Elliott sent an email to Mr Storey and Mr Chedid which was in the following terms:

Attached are copies of the Agreement to Lease and Lease which I have amended following my most recent meeting with Shane.

The documents now incorporate all of the agreed amendments.

I confirm that I am awaiting the requisite approvals from Fitness First plc. The documents will be executed by Fitness First plc under Power of Attorney.

I can be contacted at this e-mail address until 27 April or on my mobile…….

44. Clause 4.1 remained as it was after it was altered on 15 April 2002.

45. Mr Chedid gave evidence to the effect that he did not have any meetings with Mr Elliott during which the terms of the proposed lease were discussed. He did concede that it was possible such a discussion took place, and he did recall meeting with Mr Allan around that time. Mr Elliott gave no evidence about any meeting with Mr Chedid. It was not suggested to him in cross examination that the reference in his email of 22 April 2002 to his “most recent meeting with Shane” was erroneous. It is likely, in my view, that such a meeting did take place.

46. On 1 May 2002 Mr Elliott sent an email to Mr Storey attaching copies of the Agreement to Lease and lease “with all amendments (including those discussed this afternoon) inserted and accepted”. No amendments had been made to clause 4.1 of the draft lease.

47. The evidence is sparse in relation to the eventual execution of the documents. It is clear that Fenshaw had executed the Agreement to Lease by 8 August 2002. It seems that by then Fitness First had already executed the documents. The stamping of the documents was all that then remained to finalise the matter.

Events leading up to entry into the second lease

48. For some time until mid-2004, and area on the mezzanine level of the Forum Centre was occupied by another gymnasium known as The Ladies’ Sanctuary. In mid-2004, after the operator of The Ladies’ Sanctuary decided to move out of the building, negotiations took place between Fitness First and Fenshaw for Fitness First to take a lease of the area.

49. On 7 June 2004 a facsimile was sent by someone at Fitness First (probably Mr Allan) to Mr Storey. The facsimile consisted of a document headed “General Terms and Conditions for Ladies Only Proposed Gymnasium Premises at Miranda”. Item 13 in the document concerned outgoings. No mention was made of increases in outgoings; only “Non Statutory Charges” were dealt with.

50. Mr Storey deposed that on about 20 July 2004 he sent a copy of a draft lease to Mr Elliott. The draft is not in evidence.

51. On 28 July 2004 Mr Elliott sent an email to Mr Storey in relation to the draft lease. Mr Elliott was instructed (by Mr Allan) to seek various amendments, including to clauses 4.1.3 and 4.2.3 which, it may be inferred, were in terms the same as or very similar to those clauses in the first lease. Mr Elliott’s email relevantly included the following:

3. Clause 4.1.3 should be [amended] by deleting “all maintenance, levies, sinking fund levies and other account including special levies” and inserting in lieu thereof “all general levies”. Special levies and sinking fund levies are struck for the purpose of carrying out capital works to the building or maintenance which is not in the nature of general preventative maintenance. Both are properly the obligation of the Lessor whilst the building remains un-strata’ed (sic) and should not become the obligation of the tenant just because the building has been strata’ed (sic).

4. Clause 4.2.3 should be amended so that it reads “Land Tax – land tax assessed for 204 (sic) on land owned as at 31 December 2003”.

52. Mr Storey replied by email on 31 July 2004. In relation to the amendments sought to clauses 4.1.3 and 4.2.3, Mr Storey wrote:

3. Not agreed, I am instructed that the lease is to be the same as existing lease for the other premises. Clause 4.1.3 is in the other lease, I am instructed there is no plan to strata the building at this point in time.

4. agreed.

53. A file note made by Mr Storey in relation to this lease is in the following terms:

See earlier FF

Lease

for Miranda

Same outgoings clause for

2002

54. It is likely that the note relates to instructions given to Mr Storey by Mr Chedid in connection with the amendments sought to clause 4.

55. On 24 September 2004 Mr Elliott sent an email to Mr Storey in which he stated that, subject to one matter (concerning clause 21.5), the lease was ready to be signed by Fitness First. Mr Storey later confirmed that clause 21.5 could be amended as requested by Fitness First. Mr Storey requested that Mr Elliott return duly executed leases to him.

56. On 27 September 2004 Mr Elliott sent these documents, presumably executed by Fitness First, to Mr Storey. It is likely that the lease, which had a commencing date of 1 October 2004, was executed by Fenshaw shortly prior to that date.

The true construction of the outgoings and charges provisions of the leases

57. The meaning of the terms of a commercial contract is to be determined objectively, by what a reasonable business person would have understood those terms to have meant. That determination requires consideration of the language used by the parties, the surrounding circumstances known to them, and the commercial purpose or objects to be secured by the contract (see Pacific Carriers Limited v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]; Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7; (2014) 251 CLR 640 at [35]; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37; (2015) 89 ALJR 990 at [47]). The subjective beliefs or understandings of the parties are not relevant to such questions of construction (see Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at [40]).

58. It has been held by the Court of Appeal that the statement of the principles in Electricity Generation Corporation v Woodside Energy Limited (supra) at [35] endorses and requires a contextual approach to the construction of commercial contracts, so that the existence of any ambiguity in the contractual language is to be evaluated having regard to the surrounding circumstances and commercial purposes or objects (see Newey v Westpac Banking Corporation [2014] NSWCA 319 at [89], citing Mainteck Services Pty Limited v Stein Heurtey SA [2014] NSWCA 184 at [71]). However, there are limits upon the extent to which those matters may be used as an aid in the construction of a written agreement. Those matters do not, for example, permit the Court to depart from the ordinary meaning of the words used by the parties merely because the Court regards the result as inconvenient or unjust (see Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99 at 109; McGrath v Sturesteps [2011] NSWCA 315; (2011) 81 NSWLR 690 at [17], cited in Newey v Westpac Banking Corporation (supra) at [90]). If, after considering the contract as a whole and the circumstances known to the parties, the Court concludes that the language of a contract is unambiguous, the Court must give effect to that language unless to do so would give the contract an absurd operation (see Newey v Westpac Banking Corporation (supra) at [91], citing Jireh International Pty Limited v Western Exports Services Inc. [2011] NSWCA 137 at [55]).

59. It is well recognised that words may be supplied, omitted or corrected in a written agreement where it is clearly necessary to avoid an absurdity or inconsistency (see Fitzgerald v Masters (1956) 95 CLR 420 at 426-427 and 437). Any such absurdity or inconsistency must be identified by reference to the text of the agreement as understood in its factual and legal context (see Newey v Westpac Banking Corporation (supra) at [85], citing Wyllie v Tarrison Pty Limited [2007] NSWCA 184 at [46]).

60. As stated by Bathurst CJ in McGrath v Sturesteps (supra) at [18], there are exceptional cases where, to use the words of Lord Hoffmann in Chartbrook Limited v Persimmon Homes Limited [2009] UKHL 38; [2009] 1 AC 1101 at [15]-[16], something has clearly gone wrong with the language so as to interpret it in accordance with the ordinary rules of syntax makes no commercial sense. In such cases, the Court is entitled to depart from the ordinary meaning of the words in order to give effect to what objectively speaking the parties intended. The Court thus acts in accordance with the principle that a commercial contract is to be construed so as to avoid it making commercial nonsense or working commercial inconvenience (see Electricity Generation Corporation v Woodside Energy Limited (supra) at [35]; Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530 at [82]; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (supra) at [51]).

61. As noted earlier, the question of construction raised in the present case is essentially whether or not the amounts of outgoings and charges within clause 4.1 of each lease are to be calculated by reference to the proportion that the area of leased floor space bears to the total floor space in the Forum Centre building.

62. The competing contentions of the parties concerning the true construction of clause 4.1 in each lease were primarily focused on the expression “in respect of the Premises” where it appears in the opening sentence of the clause.

63. Ms Clemmett of counsel, who appeared for Fitness First, noted that the defined term the Premises was used, rather than other defined terms such as the Building or the Land. She also drew attention to clause 4.5 of each lease, where all three terms are used, and to various other provisions (such as clauses 5.1, 6.4 and 6.5) where both the Premises and the Building are found. Ms Clemmett submitted that it was clear that the parties appreciated the distinct meanings of the three defined terms.

64. It was put that on an ordinary meaning of clause 4.1 the relevant outgoings are limited to those that are in respect of the Premises as distinct from those that are in respect of the Building or the Land. It was further put that the outgoings that were only in respect of the Premises were to be determined by reference to the proportion the leased floor space bears to the total floor space in the building.

65. Mr Hand of counsel, who appeared for Fenshaw, emphasised the expansive nature of the words “in respect of”, which have traditionally been construed as having a broad meaning (see, for example Wonall Pty Limited v Clarence Property Corporation Limited [2003] NSWSC 497; (2003) 58 NSWLR 23 at [41]-[42] and the cases there cited). Mr Hand submitted that it was enough for an outgoing to be “in respect of the Premises” if it touched or concerned the Premises. He noted that Council rates, water rates and land taxes are not levied against the Premises as such, but rather against the land of which the Premises forms part.

66. Mr Hand also called in aid clause 4.5, which uses more confined language insofar as it speaks of rates, taxes and other assessments “for” the Premises, the Building and the Land. He further noted that clause 4.5 seemed to envisage that such rates, taxes and other assessments, once paid by Fenshaw, may be recovered from Fitness First as outgoings and charges. Mr Hand also submitted that clause 4.1 was devoid of language indicating that the obligation was to pay some proportion of outgoings and charges.

67. Neither party suggested that a construction might apply to one lease that differed from the construction applicable to the other lease. It was not suggested, for example, that the existence of the first lease, or any circumstances occurring after entry into the first lease, might call for a different construction to be given to the second lease.

68. The language of clause 4.1 of each lease must be considered in its entirety and read together with the other terms of the lease, including the other provisions in clause 4.

69. In general terms, clause 4.1 operates to impose an obligation upon the Lessee to pay any increases in the amounts of certain outgoings and charges (which must be “in respect of the Premises”) over and above their amounts in a specified Base Year or Period. A comparison is called for between the amount of the outgoing or charge in the specified Base Year or Period and the amount of the outgoing or charge in a subsequent year or period.

70. The Base Year or Period for an outgoing or charge is set out in clause 4.2. Clause 4.2 identifies four classes of outgoings and charges, namely, Council rates and charges (cl 4.2.1), water rates and charges (cl 4.2.2), land tax (cl 4.2.3), and strata levies (cl 4.2.4). It therefore seems that the obligation to pay any increases can only apply to outgoings and charges that fall within one of the four identified classes.

71. In relation to the fourth class, namely, strata levies, I note that no part of the building was subject to strata title at the time the leases were entered into, or later became subject to strata title. Thus, no strata levies were ever sought to be recovered by Fenshaw pursuant to clause 4.1.

72. In addition to the requirement that outgoings and charges fall within one of the classes identified in clause 4.2, it seems that the payment obligation under clause 4.1 can only apply to outgoings and charges that fall within the definition of “outgoings and charges” found in clause 4.1. Insofar as Council rates, water rates and land tax is concerned, the relevant part of the definition is found within clause 4.1.1. Subject to the exclusion of taxes of an income and capital gains nature, clause 4.1.1 defines rates, taxes, charges and duties etc. broadly, and reiterates that they must be payable “in respect of the Premises”.

73. Clause 4.1.1 further seems to require such taxes, charges and duties etc. to be assessed “upon the basis that the Premises are the only land owned by the Lessor and are not the subject of a special trust”. Those words are problematic. The parties must be taken to have known when each of the leases was entered into that the Premises (defined in the first lease as the Lower Ground Floor area, and in the second lease as part of the Ground Floor and the Mezzanine Level) was not the only land owned by Fenshaw. The leased areas were plainly only part of the land at 522-524 The Kingsway, Miranda. The parties must also be taken to have known, from the legal context in which the leases were made (see Maggbury Pty Limited v Hafele Australia Pty Limited [2001] HCA 70; (2001) 210 CLR 181 at [11]), that any Council rates, water rates or land tax levied or charged in respect of the Premises would not be assessed by the taxing authority on the basis that the Premises was the only land owned by Fenshaw. Rather, the parties must be taken to have known that such rates and taxes would be assessed on the basis that Fenshaw was the owner of the land at 522-524 The Kingsway, Miranda upon which the Forum Centre (which includes the Premises) was built.

57. In those circumstances, unless some other type of assessment was envisaged, I do not think that the words can be read literally. To do so would effectively obliterate any obligation to pay increases in Council rates, water rates or land tax. In my view that would be an absurd result which would make no commercial sense. The parties clearly intended, by the provisions of clauses 4.1 and 4.2, that the Lessee would have an obligation to pay increases in amounts of Council rates, water rates and land tax over and above the amounts in the relevant Base Year or Period.

58. However, I do not think that the assessment contemplated by the definition is an assessment to be carried out by the parties themselves. If that had been the intention it would be expected that at least some provision would have been made detailing the manner in which the assessment was to be carried out - for example, provisions for the ascertainment of a value to be attributed to the Premises. In the absence of such detail, the mode of assessment remains entirely uncertain, and no term would be implied to fill the gap.

59. How, then, should this part of clause 4.1.1 be read? It seems to me that, despite the use of the defined term the Premises, the words “the Premises are the only land owned by the Lessor and are not the subject of a special trust” should be construed as extending to the land of which the Premises forms part. That is, taxes, charges and duties within the purview of clause 4.1 must be assessed upon the basis that the property at 522-524 The Kingsway, Miranda is the only land owned by Fenshaw and is not the subject of a special trust.

60. The evident purpose of such a provision is to ensure that amounts of taxes, charges and duties do not, for the purposes of clause 4.1, comprise amounts included in assessments by reason of Fenshaw’s ownership of other land or the existence of a special trust. The concept of a “special trust” is not defined in either of the leases. Nonetheless, it should be read in each lease as a reference to the concept of a special trust as found in the land tax legislation, notably the Land Tax Management Act 1956 (NSW), s 3A. The leases (and in particular clauses 4 thereof) were entered into against the background of the applicable taxation and rating regime, including the statutes dealing with land tax and the imposition of rates.

61. On that basis, assessed amounts of Council rates, water rates and land tax “in respect of the Premises” fall within the operation of clause 4.1 save to the extent that the amounts are due to Fenshaw’s ownership of land other than 522-524 The Kingsway, Miranda or due to the existence of a special trust within the meaning of the Land Tax Management Act.

62. I turn now to deal with the ambit of the expression “in respect of the Premises”. In my view, it is appropriate that the expression “in respect of the Premises” within clause 4.1 of each lease be given a wide meaning, largely as submitted by Mr Hand. In my opinion the expression should be read as requiring no more than a discernible link or association between the outgoing or charge and the Premises. The expression is generally construed broadly, and I do not think that the context in which it is found in the two leases here provides any good reason to take a different view.

63. The subject matter of the clause, read with clause 4.2, includes amounts that are imposed on the land or the owner of the land of which the Premises forms part, not on the Premises or the owner of the Premises as such. In that context, the use of the broader “in respect of” rather than a narrower term such as “for” (as used in clause 4.5) or “of”, seems apt.

64. It is no doubt true that, instead of employing “the Premises” within clause 4.1, the parties could have employed “the Building” or the “Land”, but did not. I accept that the parties should be taken to have deliberately made that choice. Nonetheless, I do not think that the parties, by employing “the Premises” in conjunction with “in respect of”, should be taken as intending that clause 4.1 be confined to outgoings that are in respect of the Premises as distinct from outgoings that are in respect of the Building or the Land.

65. The existence of such a distinction is elusive. “In respect of” requires a certain connection or relationship. It is difficult to see why outgoings or charges of the types falling within clauses 4.2.1, 4.2.2 and 4.2.3 would not be sufficiently connected or related to the Building or the Land as well as to the Premises. The point is reflected in the argument advanced by Fitness First. It accepts that it has an obligation to pay a portion of any increases in the Council rates, water rates and land tax levied or assessed in respect of the Building or the Land. That is, it is accepted that this portion of such increases is also “in respect of the Premises”.

66. Moreover, the size of such portion is said to be derived from the proportion which the floor space of the leased area bears to the total floor space in the Forum Centre, yet there is nothing in the language of clause 4.1 or any other provision of either lease to suggest that such an exercise in apportionment was intended. Ultimately, Fitness First was merely able to suggest that the calculation of the portion “ought practically be done” in that fashion.

67. Further, I do not think that the terms of clause 4.5 provide support for the construction advanced by Fitness First. The distinction between the Premises, the Building and the Land is recognised, but the clause seems to contemplate that rates and taxes “for” the Building and the Land might be recoverable by Fenshaw as outgoings and charges, presumably pursuant to clause 4.1.

68. In my opinion, Council rates, water rates or land tax levied, assessed or charged against Fenshaw as the owner of the land at 522-524 The Kingsway, Miranda are outgoings or charges “in respect of the Premises” within the meaning of clause 4.1 of each lease. I think that there is a sufficient link or association between the Premises and such outgoings and charges for the outgoings and charges to be properly regarded as being “in respect of the Premises”. The link or association derives from the fact that in each lease the Premises forms part of the building erected on the land at 522-524 The Kingsway, Miranda.

69. For the foregoing reasons, I have concluded that the construction of the outgoings provisions advanced by Fitness First should not be accepted. The Court therefore declines to give the declaratory relief sought in the Statement of Claim, and the claim to recover $188,284.07 for overpayments of outgoings and charges must be rejected.

70. It should be noted that in its closing submissions in writing, Fitness First referred to some evidence which showed, so it was said, that Fenshaw based some of its calculations concerning land tax on assessments affected by Fenshaw’s ownership of land other than 522-524 The Kingsway, Miranda. Some further declaratory relief was mooted. The evidence referred to consisted of Notices of Assessment for Land Tax issued on 14 January 2008 and 11 January 2012. Those notices do refer to property other than 522-524 The Kingsway, Miranda, but it does not follow that amounts included in those assessments by reason of the ownership of such additional land have been impermissibly included in Fenshaw’s calculations of amounts due to it under clauses 4.1 of the leases. Indeed, the calculation that rests upon the 2012 assessment seems to be based on only the $3.8 million land value attributed to 522-524 The Kingsway, Miranda. The position is not clear in relation to the 2008 assessment.

71. In any case, it seems to me that the issue is a new one, not covered by Fitness First’s Statement of Claim. In circumstances where no formal application to amend the Statement of Claim was made, and in the absence of consent by Fenshaw to the raising of the issue, I do not propose to consider it further.

Rectification

89. My conclusion as to the true construction of clause 4.1 of each lease renders it unnecessary to proceed to determine Fenshaw’s claims for rectification of the leases. Nevertheless, in case my conclusion is incorrect, it is appropriate that I make some further findings relevant to the rectification claims.

90. In order to make out its claims for rectification of clause 4.1 of each of the leases, Fenshaw must establish, by clear and convincing proof, that the parties had a common intention, existing up to the time of execution of the relevant lease, which intention, by mistake, is not given effect by the lease (see Maralinga Pty Limited v Major Enterprises Pty Limited (1973) 128 CLR 336 at 349-350; Pukallus v Cameron (1982) 180 CLR 447 at 452 and 456-457; Commissioner of Stamp Duties(NSW) v Carlenka Pty Limited (1995) 41 NSWLR 329 at 331A-C, 336F, 340C-F, 345C-D; Ryledar Pty Limited v Euphoric Pty Limited [2007] NSWCA 65; (2007) 69 NSWLR 603 at [122]-[134], [259], [279]-[281]; Newey v Westpac Banking Corporation (supra) at [168]-[171]). It is not necessarily a bar to relief that the parties have purposely used the words sought to be rectified (see New South Wales Medical Defence Union Limited v Transport Industries Insurance Co. Limited (1986) 6 NSWLR 740 at 747; Commissioner of Stamp Duties (NSW) v Carlenka Pty Limited (supra); Ryledar Pty Limited v Euphoric Pty Limited (supra) at [129]; and Newey v Westpac Banking Corporation (supra) at [179]).

91. In respect of each lease, Fenshaw asserts that it was the actual common intention of the parties that Fitness First would be liable to pay monies towards statutory outgoings, calculated by reference to any increases in land tax, council rates and water rates for the property at 522-524 The Kingsway, Miranda over the amounts of those outgoings in the year the lease was entered into.

92. The source of the alleged common intention is the conversation between Mr Chedid and Mr Allan on about 25 February 2002, as deposed to by Mr Chedid. Fenshaw contended that it was agreed on that occasion that Fitness First would pay any increases in land tax, council rates and water rates “for the building” from the time the lease was entered into. Fenshaw further contended that the agreement in that respect was evidenced by the General Terms document prepared by Fitness First which notes, under the sub-heading “Increases in Outgoings”, that “The Lessee will pay increases in outgoings over a base year 2002”. Fenshaw then contended that the topic of outgoings was not further discussed by Mr Chedid and Mr Allan, who were (it was claimed) the two relevant decision makers, such that the common intention reached in the February meeting should be taken to have continued up to the time of execution of the first lease, and indeed the second lease.

93. As noted earlier, Mr Allan was not called as a witness. There was evidence that he informed Fitness First’s solicitor that he had no recollection of what was said, and was unwilling to attend a conference to discuss the matter. Mr Chedid was called and he was cross examined. I accept that Mr Chedid gave his evidence honestly and to the best of his recollection, and that he genuinely believes that the conversation occurred as he deposed. Nonetheless, his evidence of the terms of a conversation that took place more than 13 years ago must be treated with some caution.

94. His account is not based on any notes taken at the time of the meeting. The risk that such an account may be infused with inaccuracies or reconstructions is well known. Moreover, I note that here, quite apart from the fact that the conversation occurred so long ago, Mr Chedid had no recollection of some other events which the contemporaneous documents suggest occurred in the course of the transaction. For example, he did not recall any meetings with Mr Elliott in which the provisions of the draft lease were discussed, but the reference in Mr Elliott’s email of 22 April 2002 to his “most recent meeting with Shane” indicates that there was at least one such meeting. He also had no recollection of discussing various amendments to the draft lease, even amendments he accepted were important, and which he would very likely have discussed with at least Mr Storey.

95. I note further that when Fitness First asserted in 2013 that it had overpaid outgoings (because they had been calculated by reference to the whole building, not Fitness First’s proportionate share of the space), it seems that Mr Chedid did not, despite at least some involvement in giving instructions to Mr Storey about the matter, assert the agreement he now says he reached with Mr Allan.

96. I accept that Mr Chedid and Mr Allan discussed the topic of outgoings, and in particular the notion of Fitness First paying increases in “statutory outgoings” such as land tax, council rates and water rates. I further accept that it was agreed that Fitness First would pay increases in such outgoings over a base year. That much is reflected in the General Terms document. However, I am not persuaded on the evidence that agreement or consensus was specifically reached that the outgoings were to be calculated by reference to the whole building. It would be appropriate to refer to or describe outgoings such as land taxes, council rates and water rates as “outgoings for the building”. Such words may well have been used. It does not follow, however, that if such words were used, they were used in a way that gave rise to an agreement or consensus about how the outgoings would be calculated. Had the parties, in the course of their discussion about outgoings, agreed that the outgoings should be calculated by reference to the whole of the building, it is likely that this would have been referred to in the General Terms document, or sought to be included in the document by Fenshaw when it reviewed the document on 28 February 2002. The absence of any such reference or suggested inclusion satisfies me that the discussion did not go that far.

97. It follows that the alleged common intention was not shown to exist, even as at late February 2002, let alone at all times up to the execution of the leases. Had it been necessary to determine the rectification claims, I would have rejected them on that basis. I should add that I do not regard any of the conduct of Fitness First subsequent to the making of the first lease, including its payment of outgoings between 2007 and 2012 in accordance with invoices issued by Fenshaw, provides clear and convincing proof of the existence of the alleged common intention. I do not think it is necessary to say anything about the various other arguments raised by Fitness First in opposition to the rectification case.

Conclusion

98. The Statement of Claim must be dismissed. Fenshaw is entitled to relief in respect of the failure of Fitness First to pay outgoings under the leases since 2012. Fitness First should pay Fenshaw’s costs of the proceedings. The Court directs the parties to bring in Short Minutes of Orders to give effect to these reasons. This should be done within 14 days.

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Decision last updated: 12 February 2016