Fitness First Australia Pty Ltd v Fenshaw Pty Ltd

[2016] NSWCA 207

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Fitness First Australia Pty Ltd v Fenshaw Pty Ltd [2016] NSWCA 207

Hearing dates:

4 August 2016

Decision date:

15 August 2016

Before:

McColl JA at [1];
Leeming JA at [2];
Payne JA at [58]

Decision:

1. Appeal allowed.

 

2. Set aside orders 1 and 2 made on 1 March 2016.

 

3. Declare that, upon the proper construction of the terms of the lease between the parties dated 1 July 2002 (registered lease number 9825308), the defendant is entitled to claim no more than 26.52 per cent of the total increases in outgoings contemplated by clause 4.1 of the lease, being increases in outgoings since the periods set out in clause 4.2 of the lease.

 

4. Declare that, upon the proper construction of the terms of the lease between the parties dated 1 October 2004 (registered lease number AB170352), the defendant is entitled to claim no more than 17.62 per cent of the total increases in outgoings contemplated by clause 4.1 of the lease, being increases in outgoings since the periods set out in clause 4.2 of the lease.

 

5. Direct the parties to file and serve within 14 days a form of agreed orders for the repayment of overpaid rent and interest, or, in default of agreement, proposed orders and short submissions in support.

 6. The respondent to pay the appellant’s costs at first instance and on appeal.

Catchwords:

LANDLORD AND TENANT – two long term commercial leases between same parties in same building – statutory charges and outgoings – lessee requiring payment as additional rent of any increase in outgoings “in respect of the Premises” – whether lessee obliged to pay whole of increase in outgoings, or proportionate share of increase in outgoings – construction of “in respect of the Premises” in each lease

Legislation Cited:

Land Tax Act 1956 (NSW)
Land Tax Management Act 1956 (NSW)

Cases Cited:

Commissioner of Taxation of the Commonwealth of Australia v Scully [2000] HCA 6; 201 CLR 148
Fitness First Australia Pty Limited v Fenshaw Pty Limited [2016] NSWSC 47
International Energy Group Ltd v Zurich Insurance plc [2015] UKSC 33; [2016] AC 509
Lend Lease Financial Planning Ltd v Southcap Pty Ltd (Court of Appeal (Qld), 2 June 1998, unrep)
Robbins v Federal Commissioner of Taxation (1974) 129 CLR 332
The Queen v Khazaal [2012] HCA 26; 246 CLR 601
Tooth & Co Ltd v Newcastle Developments Ltd (1966) 116 CLR 167
Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392
Westfield Management Ltd v Perpetual Trustee Company Ltd [2007] HCA 45; 233 CLR 528
Workers’ Compensation Board (Q) v Technical Products Pty Ltd (1988) 165 CLR 642

Category:

Principal judgment

Parties:

Fitness First Australia Pty Ltd (Appellant)
Fenshaw Pty Ltd (Respondent)

Representation:

Counsel:
I Jackman SC, S Clemmett (Appellant)
T Lynch SC, D Hand (Respondent)

  Solicitors:
Carneys Lawyers (Appellant)
Chedid Storey Legal (Respondent)

File Number(s):

2016/68442

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2016] NSWSC 47

Date of Decision:

11 February 2016

Before:

Darke J

File Number(s):

2015/13683

Judgment

1. McCOLL JA: I agree with Leeming JA’s reasons and the orders his Honour proposes.

2. LEEMING JA: This appeal concerns a single question of construction recurring in two materially identical long term leases between the same parties in respect of premises in the same seven storey building, which is subject to some 12 tenancies in all. The respondent, Fenshaw Pty Ltd, owns the land. The appellant, Fitness First Australia Pty Ltd, is the lessee. Under the first lease, Fitness First occupies the lower ground floor, being some 26.52 per cent of the total lettable floor space of the building. Under the second lease, Fitness First occupies part of the ground and mezzanine floors, being some 17.62 per cent of the total lettable floor space. The dispute is whether Fitness First is required to pay (a) the entirety of any increases in statutory outgoings and charges incurred by the lessor or (b) a proportionate share (calculated by reference to the proportion of the total lettable floor space) of such increases of statutory outgoings and charges. The primary judge found in favour of Fenshaw: Fitness First Australia Pty Limited v Fenshaw Pty Limited [2016] NSWSC 47.

3. Over the terms of the leases, the statutory outgoings and charges have approximately doubled. That fact, coupled with the fact that for some years Fitness First had paid in full the amounts demanded by Fenshaw, which it subsequently sought to recover as monies paid by mistake, has meant that the amount in issue is substantial. Fitness First contends that it has overpaid its lessor in the amount of $188,284.07. Its appeal is as of right.

4. In oral submissions, both counsel unequivocally disavowed reliance upon any form of contextual support for their competing constructions, although very substantial documentary materials, both pre-dating and post-dating each lease (and reflecting, at least in part, a rectification suit which had been maintained at trial but was not pressed on appeal) had been tendered, and the appellant’s written submissions had relied on such material extensively. I shall proceed on the same basis, which will obviate the need to summarise most of the evidence before the primary judge.

The terms of the first and second leases

5. The first lease is of the lower ground floor of Fenshaw’s building in Miranda in southern Sydney. It was for a term of 15 years commencing 1 July 2002 with one five-year option. The initial rent was $248,800 per annum with provision for annual increases. The lease distinguished between three defined terms: the “Building”, the “Premises”, and the “Land”. The definitions were not unusual. “Land” was defined by reference to the Torrens title description of the property. “Premises” was defined by reference to the demised premises, being the lower ground floor. “Building” was defined to mean and include various improvements on the Land, principal amongst which is the seven storey building.

6. Some of the clauses in the first lease referred variously, and for the most part appropriately, to the Premises, the Building or the Land. For example, the lessee was required to clean the Premises and the stairwell giving access to the Premises. The lessee also covenanted not to disturb other tenants in the Building, but the lessor acknowledged that noise and vibration created by the permitted use as a gymnasium would not constitute a breach of the covenant unless it breached the zoning or regulations applicable to the Land.

7. The clause giving rise to the question of construction is 4.1. It is convenient to reproduce cll 4.1-4.5 in their entirety, with emphasis added to the words “in respect of”:

“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 EXPENSES DUE TO LESSEE’S SOLE USE

(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 LESSOR’S OBLIGATIONS

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.”

8. The second lease was for a term of 12 years 9 months, commencing 1 October 2004 and with the same termination date of 30 June 2017. It likewise had a single option to renew for a period of five years. The Premises were defined as “[p]art of the Ground Floor and Suite 1 on the Mezzanine Floor comprising the gymnasium known as The Ladies Sanctuary”. The initial rent was $173,475.40 per annum with increases identical to those in the first lease. Otherwise, it was in materially identical terms. In particular, cll 4.1-4.5 in the second lease were identical to those in the first lease, save only that the dates for “Base Year or Period” in cl 4.2 were some two years later than the comparable dates in the first lease.

The reasons of the primary judge

9. The primary judge dealt in some detail with events leading up to the execution of both the first and second leases. His Honour also dealt with the conversations which took place between the principals of the parties, in order to deal with Fenshaw’s rectification suit. In light of the limited scope of Fitness First’s appeal to this Court, and the way in which both parties have argued the appeal, I turn immediately to the reasons given by the primary judge for upholding the lessor’s construction.

10. His Honour’s reasoning is found at [68]-[86]. After dealing with uncontroversial matters, his Honour focussed first (at [73]-[78]) on the closing words of cl 4.1.1 “upon the basis that the Premises are the only land owned by the Lessor and are not the subject of a special trust”. His Honour regarded those words as problematic. His Honour considered that the parties must be taken to have appreciated that rates, land tax, and other statutory charges would be assessed by reference to the land owned by Fenshaw, rather than the demised Premises which formed part of the building erected on the land, and was concerned to avoid a construction which had the result of obliterating any obligation on the part of the lessee to pay increases in such statutory charges. Seemingly for that reason, his Honour concluded that the closing words of cl 4.1.1 were not to be read literally but were capable of extending to rates and land tax imposed on the Land.

11. Turning to the words “and assessing such taxes, charges, duties”, his Honour was of the view that that assessment was not something to be carried out by the parties themselves. His Honour said that if that was the case, “the mode of assessment remains entirely uncertain, and no term would be implied to fill the gap” (at [75]). His Honour thus reached a conclusion in respect of the concluding words of cl 4.1.1 as follows (at [76]):

“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 [XXX] The Kingsway, Miranda is the only land owned by Fenshaw and is not the subject of a special trust.”

12. His Honour said that that construction furthered the evident purpose of such a provision, and produced the result that assessed amounts of council rates, water rates and land tax “in respect of the Premises” fell within the operation of cl 4.1, except to the extent that amounts were due to Fenshaw’s ownership of land other than that at the Miranda address, or due to the existence of a special trust.

13. His Honour then turned to the opening words of the clause and stated (at [79]):

“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.”

14. His Honour placed weight on the use of what his Honour regarded as the “broader” words “in respect of”, rather than a narrower term such as “for” or “of”. His Honour acknowledged the fact that the parties had referred to increases in the outgoings in respect of the Premises, rather than in respect of the Building or in respect of the Land. The critical paragraphs of his Honour’s reasoning were then as follows (at [81]-[84]):

“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.

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’.

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.

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.”

15. Accordingly, his Honour formed the view that there was a sufficient link between increases in the various statutory charges incurred by the lessor in respect of the whole of the Land and the obligation in cl 4.1 to pay any increases in the outgoings in respect of the Premises.

16. At [87]-[88], his Honour ruled that a further point advanced, belatedly, by Fitness First was outside the scope of the pleadings. Mr Jackman SC, who appeared with Ms Clemmett, disavowed any reliance upon that issue, and so it too may be passed over.

The parties’ submissions

17. Fitness First pointed to the fact that the operative words in cl 4.1 referred to any increase in the outgoings in respect of the Premises, rather than increases in respect of the Building or the Land.

18. Fitness First emphasised what it regarded as the commercial absurdity in a lessee of part of commercial premises being required to pay the whole of any increase in statutory charges incurred by its lessor. It emphasised that, in the present case, the commercial absurdity was all the more apparent, because of the second lease.

19. The force of this submission is best appreciated by what actually occurred. To take an example referred to during argument, council rates for the Land increased in the year ended 30 June 2007 from $12,297.56 to $13,525.80. That was an increase of some $1,228. According to Fenshaw, cl 4.1 of the first lease required Fitness First to pay an additional $1,228 by way of “additional rent”, and an additional $1,228 by way of “additional rent” under the second lease. Thus, in 2007, Fenshaw paid an additional $1,228 by way of rates to the local council, but received an extra $2,456 from Fitness First, reflecting what on Fenshaw’s construction was its lessee’s cumulative obligations under each of the leases to pay the whole of the increase in rates.

20. There was no evidence as to the terms of the leases which Fenshaw had granted to other tenants in the Building. However, in respect of the approximately 44 per cent of the total lettable floor space of the Building which was leased to Fitness First, Fenshaw was in the unusual position of being better off every time its rates increased.

21. The evidence established that there had been very substantial increases from 2002 until 2014 in both council rates and land tax. The former had risen from slightly less than $8,500 to slightly more than $17,700. The latter had increased from just over $30,000 to some $60,000. Indeed, the reason that the amount in issue in this litigation between the parties is so great is a direct consequence of the increases in statutory outgoings in respect of the Land.

22. Fitness First relied also upon the reasoning of the High Court in Tooth & Co Ltd v Newcastle Developments Ltd (1966) 116 CLR 167. That was a case where a lessee had covenanted to pay “all rates, taxes, duties, burdens, assessments, and outgoings of every description now charged or imposed or hereinafter to be charged or imposed upon or in respect of the demised premises or upon the lessor … in respect thereof”. Fitness First said that the concluding words of that clause produced the result that it was materially identical to the critical words in cl 4.1 of both leases. Tooth & Co had submitted that tax imposed under the Land Tax Act 1956 (NSW) and Land Tax Management Act 1956 (NSW) was a tax imposed upon and by reference to all the land owned, and as such fell outside the lessee’s covenant. That submission was rejected at 170-171:

“It seems to us plain that the concluding words of the covenant were intended to restrict the lessee’s liability thereunder. Clearly enough, it was not intended that the lessee should be under an obligation to pay an amount equivalent to the total land tax liability of his lessor but that the clause was intended to create a liability to pay something in such circumstances is, we think, beyond doubt.”

23. The High Court also dealt with a contention that the apportionment could not be determined, which resembled a submission which found favour with the primary judge. The High Court rejected the submission and concluded that the lessee was required to pay a proportionate part of the lessor’s total liability, calculated by reference to the value of the demised land as a proportion of the total value of the lessor’s land.

23. Reliance was also placed upon Lend Lease Financial Planning Ltd v Southcap Pty Ltd (Court of Appeal (Qld), 2 June 1998, unrep). The clause there was much less opaque; it provided: “Tenant to pay a proportion based on the area of the tenancy to include air conditioning electricity costs”. However, Fitness First referred to McPherson JA’s endorsement of a passage from a standard text to the effect that outgoings, in the case of a sale of land, was a term which:

“normally refers, in the absence of an express provision to the contrary, to expenses payable in respect of the property actually comprised in the contract, and not in respect of a larger property of which, in the hands of the vendor, it may have formed part.”

25. Mr Lynch SC, who with Mr Hand appeared for Fenshaw, denied there was any commercial absurdity in the construction upheld by the primary judge. Fenshaw observed that outgoings under the first and second leases were treated in three separate ways. Some (such as water), where there was a metered amount directly attributable to the lessee, were wholly borne by the lessee. Some were wholly borne by the lessor (indeed this was the majority, non-statutory charges such as lift maintenance, security services etc). The third category were the outgoings in cl 4.1, which were, so it was said, shared between lessor and lessee, with the lessor paying the base rate and the lessee paying all of any increases. The question of commercial absurdity had to be assessed in light of the way in which the parties had chosen to apportion all outgoings.

26. Fenshaw relied upon some quite elaborate calculations to the effect that if the lessee were required to pay a proportion of all outgoings (rather than statutory outgoings), it would have ended up worse off. That was a consequence of the fact that (to take one example) while the total building’s statutory outgoings for 2013/2014 were slightly in excess of $90,000, the total outgoings for the same period were substantially more, in excess of $350,000.

27. Fenshaw maintained that Tooth & Co could be distinguished, because it did not require apportionment over part of a parcel of land.

28. Fenshaw also submitted that if the lessee’s construction were accepted, then cl 4.1 could have no work to do. Essentially the submission was that in order to bring matters such as council rates and land tax into the defined term “outgoings and charges”, it was necessary for the words “in respect of the Premises” to extend to taxes imposed in respect of the Land, and once that was done, then the entirety of those taxes and other charges became the subject of the lessee’s obligation to pay increases in the opening words of cl 4.1. It was put orally thus:

“There is a difficulty in my friend’s submissions and it is in our submission illustrated by Tooth & Co. If the council rates and the land tax which are identified in 4.2 are not themselves charges in respect of the Premises because they do not in their own terms relate to the Premises ... then no amount is payable under 4.1 because on my friend’s approach, Tooth & Co would exclude the council rates and the water rates and the land tax charges because they are not in respect of the Premises. If they are in respect of the Premises, then they can’t be excluded by 4.1.1 because that would take the whole of the charges in respect of the Premises which are payable out of the operation of 4.1.”

29. I regard this as essentially the same submission which was accepted by the primary judge, turning on repetition of the words “in respect of the Premises”.

Disposition of appeal

30. Although the commercial absurdity is to my mind striking, it is important not to place too much weight upon it. For one thing, in its application to the facts at hand, it is a consequence of the very substantial increase, as it happens, of council rates and land tax throughout the term of both leases. For another, the absurdity is heightened by reference to the second lease, as a result of which the lessor is in the unusual position of welcoming every increase in council rates or land tax, because on its construction it will receive double that increase from the same tenant of less than half of the commercial office space in its building. But that is not a circumstance that obtained when the first lease was entered into.

31. It was perhaps for those reasons that the primary judge made no reference to the commercial absurdity to which the lessee pointed (a submission which had been advanced at first instance as well as on appeal).

32. True it is that the normal response of courts when one construction of a contract leads to absurd results is to reject it and prefer another which does not exhibit the same anomalies, as Lord Sumption JSC recently observed in International Energy Group Ltd v Zurich Insurance plc [2015] UKSC 33; [2016] AC 509 at [187]. But the starting point remains identifying the possible meanings the words chosen by the parties can bear, and reaching a conclusion based upon a consideration of text, context and purpose, as recently illustrated in Victoria v Tatts Group Ltd [2016] HCA 5; 90 ALJR 392 at [51]-[75]. Of course, where as here the parties have chosen to restrict the scope of the contextual considerations which may be considered, that decision should be respected (not least because of considerations of fairness). To be clear, I do not suggest that there was any error in the course taken by the parties when the appeal was heard. To the contrary, it seems likely that it was perceived that the evidence as to surrounding circumstances addressed at some length in the appellant’s written submissions was either equivocal or at odds with what was said in Westfield Management Ltd v Perpetual Trustee Company Ltd [2007] HCA 45; 233 CLR 528 at [35]-[45].

33. Fenshaw’s elaborate submission that Fitness First was better off than it would have been had it agreed to pay a proportion of the total outgoings for the building may also be put entirely to one side. The only question that arises is the construction of cl 4.1, and on no view does that extend beyond statutory outgoings. It does not assist Fenshaw’s submissions on construction to point to an entirely different mechanism of sharing outgoings, pursuant to which Fitness First would, as it happens, pay less than it is obliged to pay according to Fenshaw’s construction.

34. I start with the text. The following matters may be observed immediately.

35. First, the clause contains two sentences. The first sentence imposes the substantive obligation upon the lessee in respect of increases in outgoings and charges, while the second defines outgoings and charges.

36. Secondly, there is a measure of imprecision in the drafting of cl 4.1. The primary obligation upon the lessee to pay any increase in the “outgoings” does not accord with the heading “outgoings and charges” and the elaborate provision made for “outgoings and charges” in the balance of the clause. The clause contains some minor errors: for example, the “and” after “etc” in the definition is surplus, and the Building was not subject to strata title, so cl 4.1.3 could have no application. I return to the imprecision in the closing words of cl 4.1.1 below.

37. Thirdly, the words “in respect of” are used repeatedly, and in different contexts. The words are used four times in cl 4.1: twice in the first sentence and twice in the second sentence. On three occasions the words are used so as to connect an amount of an outgoing or charge with the Premises, and once temporally (“in respect of each year or part of a year”). Putting to one side the latter instance, there is an important distinction between the first, third and fourth uses of the words.

1. The first use occurs in the first sentence, which imposed the obligation upon the lessee. The obligation is to pay “by way of additional rent any increases in the outgoings in respect of the Premises”.

2. The third and fourth uses appear in the second sentence, in the definition of “outgoings and charges”. The words are designed to bring within the scope of the defined term all instances of outgoings and charges. The sense of the third use is “all rates, taxes, assessments [etc] … payable to government … in respect of the Premises”. The sense of the fourth use is “all maintenance levies, sinking fund levies [etc] … payable to the Owners Corporation in respect of the Premises”. (The fact that this fourth use was inapplicable until and unless a strata plan was lodged does not prevent the text from being considered in the process of construction.)

38. It is significant that although the words “in respect of the premises” recur three times in cl 4.1, the first occurrence is in the substantive clause imposing an obligation, and is introduced by the word “any”, while the remaining occurrences are in a different sentence, which is definitional, and where the words are introduced by “all”.

39. The words “in respect of” are words which require a connection or relationship between the two matters to which they refer. However, the nature of the requisite connection or relationship is, as a matter of ordinary English language, highly dependent upon context. That was made clear in the intervention recorded during submissions in Commissioner of Taxation of the Commonwealth of Australia v Scully [2000] HCA 6; 201 CLR 148 at 154:

“The phrase ‘in respect of’ is intended to convey some connection or relation between the two subject matters. [GUMMOW J. Decisions about phrases such as this must be considered in context.]”

40. Exchanges between Bar and Bench during argument are of no precedential authority, but the exchange reflected existing authority, including Workers’ Compensation Board (Q) v Technical Products Pty Ltd (1988) 165 CLR 642 at 653-654:

“Undoubtedly the words ‘in respect of’ have a wide meaning, although it is going somewhat too far to say, as did Mann CJ in Trustees Executors & Agency Co Ltd v Reilly, that ‘they have the widest possible meaning of any expression intended to convey some connection or relation between the two subject-matters to which the words refer’. The phrase gathers meaning from the context in which it appears and it is the context which will determine the matters to which it extends.”

41. The majority of the High Court approved that passage in Scully at [39]. More recently, the words “in respect of” were one of the examples provided by French CJ in The Queen v Khazaal [2012] HCA 26; 246 CLR 601 at [31] of a “relational term”. His Honour then observed that:

“The task of construing such terms does not involve the resolution of ambiguity. They are ambulatory words and may be designed to cover a variety of subjects and a variety of relationships between those subjects. The nature and breadth of the relationships they cover will depend upon their statutory context and purpose.”

42. Where the words “in respect of” are used on the third and fourth occasions in cl 4.1, in the definition of “outgoings and charges”, they require a connection or relation between the outgoing or charge to which the lessor is subject, and the Premises which have been let to the lessee. I would respectfully agree with the reasoning of the primary judge that those words proceed on the basis that, for example, land tax and council rates are levied in respect of the Land, and the words “in respect of the Premises” where appearing on the third and fourth occasions in the clause must be construed so as to extend to the (indirect) relationship which exists between those taxes and the part of the Land which has been let to Fitness First. Since the whole thrust of the first limb of the definition in cl 4.1.1, as well as the definitions of Base Year in cll 4.2.1 and 4.2.3 is that council rates and land tax can be “in respect of” the Premises as opposed to the Land, ordinary principles of construction suggest that an indirect relationship or connection is sufficient. If that were not so, then council rates and land tax could never fall within “outgoings and charges”, which would be a strikingly unusual result and would leave much of the elaborate definition inutile.

43. But it does not follow that the words must bear the same meaning where they first appear in cl 4.1. The presumption that the same words should be given the same meaning is a weak one, and as Walsh J said in Robbins v Federal Commissioner of Taxation (1974) 129 CLR 332 at 339:

“There is no rule of general application that the same meaning ought to be given to an expression in every part of the document in which it appears.”

44. The context in which the words “in respect of” are used in the obligation-imposing first sentence of cl 4.1 is quite different from that in which the words are used in the definitional second sentence, because the term with which a relation or connection to the Premises is required is “any increases in the outgoings”.

45. Inherent in the word “any” is the possibility that there is nothing to which it applies; hence it is a natural word to use in circumstances where there may not, in fact, be an increase in outgoings in a particular year. That is to say “any increase” implicitly and necessarily connotes the possibility that there is no increase. However, if there be an increase, there are two potential meanings which the words can bear. If there is an increase in outgoings and charges, then one possibility is that the words ask whether the whole of that increase bears the requisite relationship or connection with the Premises. But another possibility is that the words require an identification of that part of the increase in outgoings and charges which bears the requisite relationship or connection with the Premises.

46. I readily accept that one available grammatical meaning of “any increase in the outgoings in respect of the Premises” is the whole of any increase in rates, taxes etc which have been levied on the Land of which the Premises forms part. But I do not accept that that is the only available grammatical meaning, especially given the various clumsily drafted elements of the clause to which I have referred above. Indeed, I consider that this is the central flaw in the dispositive reasoning of the primary judge, and in the only substantial submission advanced by Fenshaw on appeal. As a matter of language, the words “any increase in the outgoings in respect of the Premises” may also mean that part of any increase in rates, taxes etc which have been levied on the Land of which the Premises forms part which is attributable to the Premises.

47. The notion of apportionment (which I have emphasised in the previous sentence) is something which the words “in respect of” bear as a matter of their ordinary meaning. Indeed, it is precisely that meaning of the same words which the High Court upheld in Tooth & Co Ltd v Newcastle Developments Ltd. Although land tax was levied on all the land owned by the lessor in that case, and the lessee was required to pay all taxes “to be charged or imposed upon or in respect of the demised premises or upon the lessor ... in respect thereof”, the High Court confirmed that the part of the land tax attributable to the lessee’s hotel was caught by the words in the clause.

48. Although the primary judge considered that there was “nothing in the language” of cl 4.1 to warrant any apportionment, I respectfully disagree. To the extent that the question is one of authority, as opposed to language, my conclusion is strengthened by the reasons in Tooth & Co Ltd v Newcastle Developments Ltd, a decision to which his Honour appears not to have been taken.

49. Having identified a possible alternative grammatical meaning, should it be preferred? A powerful collection of considerations support a construction which includes the notion of apportionment identified above.

50. First, it accords with the parties’ choice to frame the obligation in cl 4.1 by reference to any increases in the outgoings in respect of the Premises as opposed to the Building or the Land, in a lease where the parties have generally been sensitive to the different meanings of these three defined terms.

51. Secondly, it avoids a capricious outcome. The area of the first lease is considerably more than the second lease (some 50 per cent more), and the initial rent under the first lease is also some 50 per cent more. Why should the parties be taken to have agreed that the obligations of the first lease to pay the entirety of any increase in rates, taxes etc upon the Land are identical to those under the second lease, where the demised premises and the rent are much smaller? I acknowledge the force of Fenshaw’s submission that there are many ways in which these parties may have agreed to allocate the burden of outgoings and charges, but I struggle to see any commercially sensible rationale for a smaller tenancy and a larger tenancy each bearing the whole of an increase incurred by the lessor.

52. Thirdly, it is clear that the parties are to be taken to have distinguished between the statutory charges levied in the Base Year, and increases in those statutory charges. By reason of the fact that Fitness First has two leases in the same Building, that distinction would be steadily eroded if Fenshaw’s construction be accepted. Fenshaw pointed to a document in evidence which stated that the total statutory outgoings for the Building for the financial year ended 30 June 2003 were $45,829.12, rising to $90,308.01 for the financial year ended 30 June 2014. On Fenshaw’s construction, the whole of the increase was to be borne by Fitness First under cl 4.1 of the first lease, and the majority of that increase was to be borne once again by Fitness First under cl 4.1 of the second lease (noting that the Base Year was later in the case of the second lease). However, each time statutory outgoings increased, the double contribution by Fitness First had the result that not only was Fenshaw able to pass on the entirety of any increase, it was also paying progressively less of the base amount of statutory charges (so much so that by the end of the leases, Fenshaw was passing on almost the entirety of statutory charges). This collides with the distinction made plain by the substantive obligation in the opening words of cl 4.1 and the definition in cl 4.2 between the base amount of statutory outgoings and increases in such outgoings.

53. Fourthly, this construction is supported by the closing words of cl 4.1.1 “assessing such taxes, charges, duties etc and upon the basis that the Premises are the only land owned by the Lessor”. I respectfully agree with the primary judge that these words are problematic. But it is clear that the words require a counterfactual assumption that the lessor owns less land than it does. Although it is less than pellucidly clear, those words seem to support a reading that one assumes that the Premises (ie parts of various floors of the Building) is the only land owned by Fenshaw, which in turn suggests that, to the extent that outgoings and charges have been determined based on the whole of the Land, an apportionment is required.

54. Finally, contrary to Fenshaw’s submissions, I do not regard this construction as incapable of application. The Building is a commercial building, subject to 12 tenancies, with a total lettable floor space which is well defined. Each lease must perforce identify with precision the demised premises. There can be no dispute as to what proportion of the total lettable floor space each lease occupies. The facts that the leases occupy 26.52 per cent and 17.62 per cent of the total lettable floor space were admitted on the pleadings. And given that the statutory outgoings and charges are on the whole based on the unimproved value of the Land (land tax and council rates are the largest components by far) there is no reason not to apply those proportions. Even if the upper storeys of the Building commanded additional rent, they did not contribute to the unimproved land value on which council rates and land tax are based.

Orders

55. For those reasons, I have concluded that the appeal should be allowed, and the declaratory relief sought by Fitness First at first instance should issue.

56. The primary judge ordered judgment against Fitness First, but granted a stay pending appeal, and the judgment amount has not been paid. There was no dispute raised in the written or oral submissions as to the overpaid amounts of rent to which Fitness First is entitled. However, reference was made to an error in the notice of appeal in relation to the date of the fourth overpayment of rent, which will affect the calculation of interest. Fitness First accepted that the appropriate course was, in the event the appeal was allowed, to give the parties an opportunity to reach agreement on those calculations. Costs should follow the event.

57. Accordingly, I propose the following formal orders:

1. Appeal allowed.

2. Set aside orders 1 and 2 made on 1 March 2016.

3. Declare that, upon the proper construction of the terms of the lease between the parties dated 1 July 2002 (registered lease number 9825308), the defendant is entitled to claim no more than 26.52 per cent of the total increases in outgoings contemplated by clause 4.1 of the lease, being increases in outgoings since the periods set out in clause 4.2 of the lease.

4. Declare that, upon the proper construction of the terms of the lease between the parties dated 1 October 2004 (registered lease number AB170352), the defendant is entitled to claim no more than 17.62 per cent of the total increases in outgoings contemplated by clause 4.1 of the lease, being increases in outgoings since the periods set out in clause 4.2 of the lease.

5. Direct the parties to file and serve within 14 days a form of agreed orders for the repayment of overpaid rent and interest, or, in default of agreement, proposed orders and short submissions in support.

6. The respondent to pay the appellant’s costs at first instance and on appeal.

58. PAYNE JA: I agree with Leeming JA.

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Amendments

30 November 2016 - [19] - "way" inserted after "$1,228 by"

[24] - "the larger property" replaced by "a larger property of"

[42] - "cause" replaced by "clause"

[50] - "increase" replaced by "increases"

Decision last updated: 30 November 2016