GABROVEC and NSM HOLDINGS PTY LTD
[2018] WASAT 135
•21 DECEMBER 2018
JURISDICTION : STATE ADMINISTRATIVE TRIBUNAL
ACT: COMMERCIAL TENANCY (RETAIL SHOPS) AGREEMENTS ACT 1985 (WA)
CITATION: GABROVEC and NSM HOLDINGS PTY LTD [2018] WASAT 135
MEMBER: MR T CAREY (MEMBER)
HEARD: 20 NOVEMBER 2018
DELIVERED : 21 DECEMBER 2018
FILE NO/S: CC 947 of 2018
BETWEEN: BENJAMIN GABROVEC
FELICITY KERMODE
Applicants
AND
NSM HOLDINGS PTY LTD
Respondent
Catchwords:
Landlord and tenant - Restricted use covenant applying to building containing leased premises and adjoining building - Breach of covenant - Physiotherapy and pilates business - Permit - Whether breach where pysiotherapy services only provided - Business
Legislation:
Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 3, s 16
Result:
Liability found in applicant's favour
Category: B
Representation:
Counsel:
| Applicants | : | Mr T Coyle |
| Respondent | : | Mr J Kitto |
Solicitors:
| Applicants | : | Bennett + Co |
| Respondent | : | Kitto & Kitto Barristers And Solicitors |
Case(s) referred to in decision(s):
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Corporation of the City of Adelaide v Australasian Performing Right Association Limited [1928] HCA 10; 40 CLR 481
Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd [1992] 2 VR 732
Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310
Holloway Bros Ltd v Hill (1902) 2 Ch 612
Hope v Bathurst City Council [1980] HCA 16
Kemp v Bird (1877) 5 Ch D 974
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989
REASONS FOR DECISION OF THE TRIBUNAL:
Introduction
On 23 October 2017, the parties entered into a lease of Shop 2, Kinross Centre (lease). The lessor is NSM Holdings Pty Ltd (lessor) and the lessees are Mr Benjamin Gabrovec and Ms Felicity Kermode (lessees). The use of the leased premises permitted by the lease is as a physiotherapy and pilates clinic. The lease provides for a term of five years commencing 1 December 2017 with twofive year extensions at the lessees' option.
The Kinross Centre is a small shopping centre located at 52 Kinross Drive, Kinross. The Kinross Centre is defined by the lease and referred to in these reasons as 'Building'. Next door to the Building is the Edinburgh Family Medical Centre, situated at 23 Edinburgh Avenue Kinross, defined by the lease and referred to in these reasons as Edinburgh Avenue.
Both the Building and Edinburgh Avenue are owned by the lessor. Part of Edinburgh Avenue known as Suite 1 is leased to IS Honey Medical Pty Ltd (IS Honey), the director of which conducts a medical practice there, and which subleases other areas of Suite 1 to a number of allied health professionals.
The lessees had from 2014 to around 23 October 2017 operated a physiotherapy and pilates business from a room forming part of Suite 1 Edinburgh Avenue under a sub-lease from IS Honey. From around 1 November 2017, pursuant to an unidentified arrangement with IS Honey, another physiotherapist has provided physiotherapy services from the same room.
Clause 56 of the lease provides that the lease includes the special conditions set out in item 23 of the reference schedule. Item 23 of the reference schedule includes the following special condition:
2.Use
(a)The parties agree that the Lessee shall have the exclusive right to operate a physiotherapy and pilates business at the Building.
(b)The Lessor agrees that whilst they are the registered proprietor of the Building, and the registered proprietors of the adjoining building situated at 23 Edinburgh Avenue, Kinross being the building situated on the land more particularly known as Lot 1256 on Plan 19277 being the whole of the land comprised in Certificate of title Volume 2139 Folio 793 ['Edinburgh Avenue'] that the Lessor will not, during the term of this Lease, permit any other lessee to operate a physiotherapy and pilates business from the Building or the building situated at Edinburgh Avenue.
The lessees complain that the ongoing provision of physiotherapy services from Suite 1 Edinburgh Avenue is a breach by the lessor of special condition 2 of the lease.
Issue
The hearing on 20 November 2018 was limited to the question of liability. That question may be expressed thus: Based on the proper construction of the lease, and in particular special condition 2, does the provision of physiotherapy services from a room in Edinburgh Avenue constitute a breach of the lease?
Construction of lease
Apart from the leased premises, the other seven tenancies in the Building include a barber, delicatessen, 'Chef in a Box' franchise, fast food shop, fish and chip shop and bakery. As such, the Building satisfies the definition of 'retail shopping centre' in s 3 of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (CTRSA Act), as a cluster of premises five or more of which are used for the carrying on of a retail business and all of which have a common head lessor. In turn, the leased premises satisfy the definition, in the same section, of 'retail shop', as premises situated in a retail shopping centre that are used wholly or predominantly for the carrying on of a business. In these circumstances, the application comes within the Tribunal's jurisdiction to determine a question arising under the lease (see s 16 of the CTRSA Act), being the issue I have identified above.
The construction of a written contract (a lease being a contract) is to be determined, where possible, on the basis of the words used in the contract. What must be ascertained is the objective intention of the parties - that is, what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (Codelfa) at [351].
The context in which the parties negotiated their contract is central to the construction exercise. To quote Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 997, the court must 'place itself in thought in the same factual matrix as that in which the parties were' when the contract was made.
Further, if the language used is ambiguous or susceptible of more than one meaning, evidence of surrounding circumstances may be used to assist in the interpretation of the contract. Evidence of surrounding circumstances is, however, inadmissible under the parole evidence rule if its purpose is to contradict the plain language of the contract. As the High Court said in Codelfa at [347]:
[T]he broad purpose of the parole evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument[.]
In construing the lease between the lessor and lessees, an admissible item of evidence, either as part of the factual matrix, or as a surrounding circumstance leading to the parties entering the lease, is that between around 2014 and October 2017, the lessees had provided physiotherapy and pilates services from a room comprising part of Suite 1 Edinburgh Avenue, under a sublease from IS Honey.
I turn then to the construction of special condition 2.
My first observation is that both parts of the special condition convey, albeit in quite different language, restrictions concerning the operation of a physiotherapy and pilates business by anyone other than the lessees.
The meaning of part (a) is clear enough. It bestows on the lessee the right to operate such a business at the Building exclusively. This right would entitle the lessee to pursue an action for breach of lease in the event that any other party commenced the operation of a business of the same description at the Building.
According to the language of part (b), for so long as the lessor remains the registered proprietor of the Building and Edinburgh Avenue, and during the term of the lease, it must not 'permit any other lessee to operate a physiotherapy and pilates business' from either the Building or Edinburgh Avenue.
As I comprehend the submission of counsel for the lessees, part (b) of special condition 2 effectively grants the lessees the same exclusive right of operating the described business granted by part (a) only in respect of the Building across both the Building and Edinburgh Avenue. It does this by not permitting any other lessee to operate such a business from either building.
The query one may have regarding the lessees' submission is to ask why the quite different language of part (b) was used, if the intention was for exactly the same right to arise in respect of both buildings.
In my view, although an interesting intellectual exercise, any consideration of this element is unhelpful to the task in hand. That task is to construe the language of part (b) in the manner that the law requires. My roadmap to the objective intention of the words of part (b) is provided by the words of the special condition to which the parties agreed when signing the lease, with recourse to the factual matrix in which the contracting parties found themselves and, where appropriate, surrounding circumstances.
On the basis of the parties' written and oral submissions, their dispute as to the proper construction of part (b) centres upon the following specific elements:
1)the meaning of 'permit';
2)whether both physiotherapy and pilates services must be provided as part of the business of the third party; and
3)the meaning of 'business'.
I will deal with each area of disagreement in turn.
'Permit'
The lessees describe the use of 'permit' in part (b) as elevating the obligation of the lessor from one of not leasing premises for a particular use to not allowing the proscribed use to occur. This was the feature distinguishing the outcome in Holloway Bros Ltd v Hill (1902) 2 Ch 612 (Holloway) from that in Kemp v Bird (1877) 5 Ch D 974 (Kemp) (two authorities upon which the lessees rely).
The seminal finding in Holloway was that where a lessor had covenanted not to 'suffer' certain uses to be carried out by lessees in adjoining premises owned by the lessor, the mere breach of a corresponding restrictive use covenant by a lessee of one of the adjoining premises was sufficient to found a declaration against the lessor of breach of the covenant. This was on the basis that the lessor's covenant amounted to an agreement between the parties as to the user of the land.
While the lease in Holloway referred to 'suffer', the notional alternate lease posited in Kemp as imposing a positive restriction on premises' use employed 'permit'. No issue was raised before me of any substantive difference in the meanings of the two words. Exposure to leases, particularly those in use in earlier times, indicates use of the two words either interchangeably or in combination, to achieve the identical purpose.
The lessor's proposed interpretation of 'permit' is that provided by the High Court in Corporation of theCity of Adelaide v Australasian Performing Right Association Limited [1928] HCA 10; 40 CLR 481 (City of Adelaide) in the following passage at 487:
I agree with the learned Judges of the Supreme Court in thinking that indifference or omission is 'permission' within the plain meaning of that word where the party charged (1) knows or has reason to anticipate or suspect that the particular act is to be or is likely to be done, (2) has the power to prevent it, (3) makes default in some duty of control or interference arising under the circumstances of the case, and (4) thereby fails to prevent it[.]
City of Adelaide was a breach of copyright case in which the respondent relied upon the appellant's abstention from action to prevent a performance at the appellant's venue which, to its knowledge, would constitute an infringement of the copyright of the respondent. There is no warrant, in my view, to apply the meaning of 'permit' as it has been found in this entirely different context, when persuasive authorities drawn from the same context exist. This is despite their longevity, which counsel for the lessor contended counted against them. City of Adelaide itself is 90 years old, which was regarded by the lessor as establishing acceptance of the test for which it stands authority. The lessor's inability to point to any application of that test in a landlord and tenant case militates against accepting its proposed meaning of 'permit'.
The learned author of WD Duncan, Commercial Leases in Australia (WD Duncan, (6th ed, 2011), relying on authorities including Holloway and Kemp, concluded at 293:
[W]here a lessor has covenanted not to 'permit or suffer' certain uses to be carried on by others in nominated adjoining premises, a mere breach by another lessee would be sufficient to found that injunction against the offending lessee and a declaration against the lessor of breach of that particular covenant[.]
With respect, I concur with this conclusion. Proof of the protected use is all that is necessary to find a breach of covenant by a lessor. No additional requirement of capacity to prevent the breach by the party responsible is required.
I note that, on the facts of the present matter, IS Honey permitted the other physiotherapist to commence providing its services from the room in Suite 1 on or around 1 November 2017, some eight days after the lease was entered into. The lessor therefore had the opportunity to inform IS Honey of the covenant into which it had entered with the lessees, and take whatever protective action available to it at that time. I further note that the permitted use of Suite 1 under the terms of IS Honey's lease with the lessor is 'Medical Centre', which may or may not have been breached when IS Honey entered its arrangement with the other physiotherapist. However, given the proper interpretation of 'permit' as I have found it, a breach arises once the protected use arises, regardless of any capacity of the lessor to take action against IS Honey to prevent it.
For the sake of completeness, I note the concession by counsel for the lessor that the expression 'permit any other lessee' in part (b) of special condition 2 did not mean that a breach would not occur if, for example, a sub-lessee operated the stipulated business from either the Building or Edinburgh Avenue. In my view, this concession is well made, and is consistent with observations to similar effect in Holloway.
The lessor's concession was, however, limited to assignees and sublessees, and did not extend to, for example, licensees. This was said to be on the basis that assignees and sub-lessees have a proprietary interest and licensees do not, and that a 'different level of protection' exists. I do not understand the distinction. In circumstances where engagement in the protected use by a lessee would be sufficient to found an injunction against the lessee (in the event that it is bound under its lease not to engage in the use) and a declaration against the lessor of breach of its covenant, I fail to see how an offending licensee would be in any better position, nor why in the latter case the lessor would not be in breach.
Physiotherapy and pilates business
The lessor submits that the protected use is the operation of a physiotherapy and pilates business, so that each stipulated aspect to which the lease gives expression must be present before there can be a breach.
In my view, such a conclusion is overly semantic and would lead to a result which, objectively, the parties could not have intended.
The requirement to construe contracts as a whole permits the lessor's submission to be tested with reference to part (a) of special condition 2.
The intention of the reasonable bystander, knowing that the lessees had previously carried out their physiotherapy and pilates business from Edinburgh Avenue, would have been to safeguard the lessees from commercial competition following their move to the Building. In my view, the exclusive right granted to the lessees, described 'to operate a physiotherapy and pilates business at the Building', could not sensibly have been intended to allow a physiotherapy business (exclusive of pilates) to operate from the Building in competition with the lessees' business.
Acceptance of the lessor's submission would lead to the capricious result that rendering exactly the same physiotherapy service by another lessee in the Building would breach the exclusivity provision if the lessees happened to include pilates in their business model, but not otherwise. This, in my view, would be an affront to the commonsense approach to construction required by the courts, particularly in commercial contracts expressed in imperfectly drafted documents (see Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990)20NSWLR310 at[313][314]; Di Dio Nominees PtyLtd v Brian Mark Real Estate PtyLtd [1992] 2 VR 732 at [740]).
The restriction placed upon the lessor by part (b) of special condition 2 to ensure against the operation of a 'physiotherapy and pilates business' from either the Building or Edinburgh Avenue, drafted in the same circumstance as that noted above, compels the conclusion that the provision of either physiotherapy services or pilates services as part of a business operating from either the Building or Edinburgh Avenue would constitute a breach.
'Business'
The lessor notes the reference to a 'business' in part (b) of special condition 2, which it distinguishes from the mutually accepted description of the activity occurring at Suite 1 Edinburgh Avenue of the provision of physiotherapy services.
From the perspective of construction of the lease, once again, I consider that the meaning to be ascribed to 'business' by a reasonable bystander would take into account the intention of the parties to protect the lessees from a commercial competitor operating from either the Building or Edinburgh Avenue. Semantic or technical definitions the adoption of which would deny the efficacy of the clause realising this intention are to be avoided. The point raised on behalf of the lessor is essentially an evidentiary one: that there is no evidence that the physiotherapist is conducting a 'business'. I will deal with this in my findings.
My findings and conclusion
On 23 October 2017, the lessor and the lessee entered a lease of the Building, containing special condition 2.
The parties agree that:
From on or around 1 November 2017, the physiotherapist provides physiotherapy services at [Edinburgh Avenue] pursuant to an arrangement with [IS Honey] in rooms comprising Suite 1 leased by [IS Honey].
In accordance with the proper construction of special condition 2 as found by me:
1)By reason of the arrangement involving IS Honey under which physiotherapy services are provided at Edinburgh Avenue, the lessor has permitted, in the relevant sense, its lessee to provide the physiotherapy services. This is regardless of whether the arrangement is a sub-lease, license, or any other construct.
2)The limitation of the services provided at Edinburgh Avenue to physiotherapy does not exclude the lessor's liability based upon the reference in special condition 2 to 'physiotherapy and pilates business'.
3)Although there is no evidence as to the basis of the operations of the physiotherapist at Edinburgh Avenue, the fact that the physiotherapy services have been provided for in excess of a year strongly suggests that the services are provided for reward (Hope v Bathurst City Council [1980] HCA 16). I am satisfied that the provision of the services has been on a fee paying basis, and that the physiotherapist has been conducting a business at Edinburgh Avenue.
These findings lead me to conclude that the provision of physiotherapy services at Edinburgh Avenue does amount to a breach of the lease.
Order
1.The proceeding is listed for a directions hearing at 9.15 am on 11 January 2019 in order to program the issue of remedy through to resolution.
I certify that the preceding paragraph(s) comprise the reasons for decision of the State Administrative Tribunal.
MR T Carey, MEMBER
21 DECEMBER 2018
0