Geltch v McDonald

[2007] NSWSC 1000

CITATION:	Geltch v MacDonald & anor [2007] NSWSC 1000 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	27-28 August 2007
JUDGMENT DATE :	6 September 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Brereton J
DECISION:	Lease prohibits lessees from alienating poker machine entitlements. Declaration that partnership is dissolved; statement of claim otherwise dismissed.
CATCHWORDS:	PARTNERSHIP – rights and duties of partners inter se – where one partner is also lessor of partnership premises – where separate interest of partner as lessor conflicts with interests of partnership – whether fiduciary duty as partner prevents exercise of rights as lessor – LIQUOR AND GAMING – poker machine entitlements – whether lease prohibits lessee from alienating poker machine entitlements – whether court can order person having financial interest in license who is bound by contract or in equity to do so to “support” a transfer – EQUITY – unclean hands – whether doctrine attracted by a mere breach of contract
LEGISLATION CITED:	(NSW) Liquor and Registered Clubs Legislation Further Amendment Act 1996 (NSW) Liquor Act 1982 (NSW) Local Government (Theatres and Public Halls) Amendment Act 1989 (NSW) Local Government Act 1919 (NSW) Gaming Machines Act 2001 (UK) Agricultural Holdings Act (1948)
CASES CITED:	Bevan v Webb [1905] 1 Ch 620 Brenner v Rose [1973] 2 All ER 535 Chan v Zacharia (1984) 154 CLR 178 Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd [2006] HCA 55; (2006) 81 ALJR 352 Jabetin Pty Limited v Liquor Administration Board (2005) 63 NSWLR 602 Keech v Sandford (1726) 25 ER 223 Longton v Wilsby (1897) 76 LT 770 Masters v Garcia (2005) 65 NSWLR 92 Metlej v Kavanagh [1981] 2 NSWLR 339 Meyers v Casey (1913) 17 CLR 90 Protheroe v Protheroe [1968] 1 WLR 519; 1 All ER 1111 Randall v Russell (1817) 36 ER 73; 3 Mer 190 Sykes v Land (1984) 271 EG 1264; [1984] 2 EGLR 8 Thompson’s Trustee in Bankruptcy v Heaton [1974] 1 WLR 605; 1 All ER 1239 Wonall Pty Limited v Clarence Property Corporation Limited (2003) 58 NSWLR 23
PARTIES:	Ian David Geltch (plaintiff) Rodney Peter MacDonald (first defendant) Doreen Elizabeth MacDonald (second defendant)
FILE NUMBER(S):	SC 1887/07
COUNSEL:	Mr M J Leeming Sc w Mr A Hatzis (plaintiff) Dr C J Birch SC w Mr A C Scotting (defendants)
SOLICITORS:	Deutsch Partners Lawyers Pty Ltd (plaintiff) DTA Lawyers (defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRERETON J

Thursday, 6 September 2007

1887/07 Ian David Geltch v Rodney Peter MacDonald & Ors

JUDGMENT

1 HIS HONOUR: The plaintiff Ian David Geltch and the first and second defendants Rodney Peter MacDonald and his wife Doreen Elizabeth MacDonald, are equal partners (50 percent to Mr Geltch and 50 percent to the MacDonalds) in the business of the Wade Hotel at Leeton, which they occupy under a lease originally granted by the then freehold owners, Mr and Mrs MacFarlane, for a term of five years commencing on 19 August 1992 with two options for renewal each of five years. The third defendant Abtourk Pty Limited is a company in which the partners are the shareholders and which operates the hotel on their behalf, pursuant to a management and operating agreement between the partners and Abtourk, a sublease to Abtourk, and a shareholders agreement. Mr Geltch is the licensee, and it is not in dispute that he holds the licence as nominee for benefit of the partners.

2 In 1993, the MacDonalds acquired the reversion from the MacFarlanes. The first option for renewal was not exercised when the first term expired in 1997 and, since then, the partners have occupied the hotel under the holding over provision contained in the lease as monthly tenants, terminable on one month’s notice. Had the options been exercised, the second option would have expired, in any event, on 18 August 2007.

3 When the partners acquired the hotel business there were six approved amusement devices or card machines being operated at the hotel. Following the commencement in 1997 of (NSW) Liquor and Registered Clubs Legislation Further Amendment Act 1996, Mr Geltch, on behalf of the partners, made several applications to the Liquor Administration Board for authority to keep, use and operate poker machines at the hotel. By 19 April 2001, he had obtained authorisations to keep, use and operate 12 poker machines. With effect from 19 April 2001, the number of poker machines in the hotel was frozen at twelve. On commencement of (NSW) Gaming Machines Act 2001 on 2 April 2002, an initial allocation of 12 poker machine entitlements was made in respect of the hotelier’s licence of the hotel.

4 During 2006, if not before, Mr Geltch proposed that the partners sell and transfer the poker machine entitlements, in order to realise their considerable value for the mutual benefit of the partners. The MacDonalds declined to join in any such sale and transfer. On 15 February 2007, following their refusal to join in a sale of the poker machine entitlements for the benefit of the partners, they served notices on Mr Geltch, purporting to terminate the lease and the partnership (and various other related agreements between the parties). On 20 March 2007, Gzell J granted interlocutory relief to Mr Geltch, restraining the MacDonalds until further order from terminating the lease; from taking any other steps to take possession of the hotel or to procure a transfer of the hotelier’s licence to any person other than Mr Geltch; and from terminating the sub-lease between the partners and Abtourk, the partnership agreement, the management and operating agreement between the partners and Abtourk, and the Abtourk shareholders’ agreement.

5 In these proceedings, Mr Geltch contends:

· first, that the MacDonalds, as his partners in the hotel business owed him a fiduciary obligation not to prefer their own separate interests to the interests of the partnership, that the sale of the Poker Machine Entitlements, prior to termination of the lease, was and would be in the interests of the partnership, and that by opposing that sale and terminating the lease, the MacDonalds have preferred their own separate interests to those of the interests of the partnership in breach of that duty; and

· secondly, that as a result the MacDonalds were either not entitled to give notice terminating the lease or, alternatively, are liable to account for any benefit that accrues to them which they ought to have obtained only for the benefit of the partnership, or to pay equitable compensation for any loss occasioned to the partnership.

6 The MacDonalds contend:

· that the lease imposed contractual restraints on the partners as lessees by reason which the partners were not entitled to transfer the Poker Machine Entitlements away from the licence;

· that their admitted fiduciary obligations as partners do not extend to the exercise of the rights and powers they have as proprietors and lessors of the freehold, and that any benefit that accrues to them upon termination of the lease arises only from the legitimate exercise of their powers as lessors;

· moreover, that the Court could not, in any event, order them for the purposes of Gaming Machines Act , s 19(3)(c), to “support” a transfer of Poker Machine Entitlements which they did not, in truth, support; and

· finally, that Mr Geltch is debarred by unclean hands arising from an alleged breach by him of the Abtourk shareholders’ agreement from claiming equitable relief.

7 The context in which these matters arise is provided by the commercial documentation between the parties, and the legislative scheme in respect of Poker Machine Entitlements.

The commercial documentation

8 It is convenient at this point to refer to relevant provisions of the commercial documentation between the partners, all of which was entered into on 20 August 1992. Mr and Mrs MacDonald and Mr Geltch purchased the lease and business of the Wade Hotel, in order to conduct it under a lease from Mr and Mrs MacFarlane. The MacDonalds and Mr Geltch entered into a partnership agreement, clause 15 of which, entitled “Good Faith”, provided that each partner should at all times be just and faithful to the other partners in all matters relating to the partnership [clause 15.1(a)], and unless otherwise agreed by all the partners conduct himself in a probable and responsible manner, and use his best skills and endeavours to promote the partnership business for the utmost benefit of the partnership [15.1(c)]. Clause 22.2 provided that in the event of the termination other than for breach, each of the partners should ensure that the termination was effected over such time and in such manner as to ensure that any loss to be suffered by a partner be reduced as far as possible in all the circumstances. By clause 22.3, termination was permitted, other than for breach, by 60 days’ notice in writing after the first anniversary of the agreement.

9 The lease – originally from the MacFarlanes to the partners – defined “Licence” to mean the “hoteliers licence, serial item 117019, or any replacement Licence or certificate issued in respect of the Licensed Premises including any endorsements thereof”. Clause 4.6, entitled “Holding Over”, provided as follows:

4.6.1 If the Lessor permits the Lessee to continue in the occupation of the Hotel and Land after the expiration of the term of this Lease, then the Lessee shall become a monthly tenant only, a monthly rental to 1/12 of the total of the sum of the annual rent payable for the last year of this Lease ... otherwise subject to the conditions contained in this Lease as are not inconsistent with a monthly tenancy.

10 Clause 9, entitled “Liquor Act Provisions”, contained the following relevant provisions:

9.1 The Lessee shall not use the Hotel and Land otherwise than Licensed Premises of a Hotel and to apply for and maintain all Licences and authorities that may be required by law to enable the sale of food and beverages (alcoholic and non alcoholic) and the provision of entertainment that may be required by law.
…

9.3 The Lessee shall not do or suffer to be done any act matter or thing in or about the Hotel or Land whereby the Licence may be or become liable to be cancelled or suspended or in any way may be imperilled or jeopardised or may be made subject to conditions which fetter the operation of any business conducted pursuant to the Licence.
…

9.10 The Lessee shall not make any application to the Licence Court or Liquor Administration Board for transfer or surrender of or any other application affecting the Licence without the consent of the Lessor.
…

9.14 The Lessee and the Licensee hereby acknowledge and declare that the ownership of the beneficial interest in the Licence shall remain with the Lessor and this Lease shall not operate as an assignment or sale of the same.

11 The MacDonalds and Mr Geltch subscribed for shares in Abtourk. By the Shareholders’ Agreement (between Mr and Mrs MacDonald, Mr Geltch and Abtourk), provision was made regulating the respective shareholdings in Abtourk. In particular, cl 2.2 provided that, notwithstanding anything to the contrary in the Articles of Association, the shareholders agreed that they and Abtourk should not, without the unanimous approval of Abtourk’s Board, increase or issue new shares in Abtourk or alter the present shareholders [cl 2.2(e)]. The Shareholders’ Agreement was expressed to be “collateral to and interdependent with the partnership agreement”, so the breach of any provision of the Shareholders’ Agreement would be a breach of the provisions of the partnership agreement and vice versa, and provisions contained in the shareholders’ agreement regarding termination would apply mutatis mutandis in such provisions of the partnership agreement, but in the event of any inconsistency the partnership agreement was to prevail [cl 9.1].

12 By the Management and Operating Agreement (between Mr and Mrs MacDonald and Mr Geltch as owners, Abtourk as operator and Mr Geltch as licensee), provision was made for Abtourk, through Mr Geltch, to have the day-to-day conduct of the business and for Mr Geltch to exercise the licence as nominee of Abtourk and the partners. It was agreed that Mr Geltch as nominee of the partners would hold the hotelier’s licence until the expiration of the Management and Operating Agreement. Were the partners as lessees under the lease entitled to transfer the Poker Machine Entitlements away from the licence?

Poker machine entitlements

13 The decisions of the Court of Appeal in Jabetin Pty Limited v Liquor Administration Board (2005) 63 NSWLR 602 and Masters v Garcia (2005) 65 NSWLR 92 establish the following propositions in respect of Poker Machine Entitlements and dealings with them in the context of leasehold interests in hotels.

14 First, a Poker Machine Entitlement is a species of property capable of being owned, disposed of and made the subject of a trust.

15 Secondly, although Poker Machine Entitlements are initially allocated “in respect of the hotelier’s licence”, they can be dealt with separately from the licence, but only within the legislative framework.

16 Thirdly, a Poker Machine Entitlement can be transferred, but only from one licence to another.

17 Fourthly, the persons entitled to transfer a Poker Machine Entitlement are the persons who, for the time being, have a financial interest in the licence. For that purpose, the definition of “financial interest” in s 19(5) is exhaustive, and the mere circumstance that a person is the owner of a hotel does not give that person such a financial interest.

18 Fifthly, a party who has a financial interest in an hotelier’s licence can be bound by contractual obligations not to deal, or to deal in a particular way, with Poker Machine Entitlements allocated in respect of that licence, so long as the obligation is not inconsistent with the scheme of the Act.

19 Sixthly, at least generally speaking, where a hotel business is operated under a lease from the proprietor of the freehold, those with the relevant financial interest will be the lessees, who will be entitled to transfer the Poker Machine Entitlements during the term of the lease without the consent of the lessor (except where the lease is one that gives the lessor a financial interest in the licence), unless a term of the lease binds the lessee not to deal with the entitlement. However, upon termination of the lease, the licence reverts to the freehold, the lessor is deemed to be the licensee, and the ability to transfer any Poker Machine Entitlements allocated in respect of the licence reverts to the lessor.

The issues

20 The practical consequences, for present purposes, are that while their lease remains on foot, the partners as lessees are entitled to transfer the Poker Machine Entitlements and realise their considerable value for the benefit of the partnership without the consent of the lessors, so long as the lease is not one under which the lessors had a financial interest in the licence, and so long as the lease did not impose contractual restraints on alienating Poker Machine Entitlements; but upon termination of the lease, the lessees lose that ability, which reverts to the MacDonalds as lessors, and the former licensee and lessees have no further interest in the Poker Machine Entitlements, and cannot realise them for the benefit of the partnership.

21 If the MacDonalds were entitled to give notice terminating the lease, they did so on or shortly after 15 February 2007, terminating the lease with effect from 24 March 2007. If they were entitled to give that notice, then the lease expired on 24 March 2007 and thereafter the partners were no longer able to deal with the Poker Machine Entitlements, since upon termination of the lease the lessor was deemed to be licensee. In my view, the interlocutory injunction granted by Gzell J does not affect this. The Court cannot extend the effective notice period by an interlocutory injunction. Properly understood, his Honour’s order prohibited the parties from acting on the notice until its validity could be determined. But it did not have the effect of extending the lease in the event that it were ultimately determined that the notice was a valid one.

22 Against that background, the issues may be identified as follows:

· Were the partners as lessees under the lease entitled to transfer the Poker Machine Entitlements away from the licence?

· Do the fiduciary obligations of the MacDonalds as partners constrain their exercise of their rights and powers as proprietors and lessors of the freehold?

· Can the Court order the MacDonalds to “support” a transfer of Poker Machine Entitlements, for the purposes of Gaming Machines Act , s 19(3)(c), when they do not subjectively support it?

· Do unclean hands debar Mr Geltch from claiming equitable relief?

Were the partners as lessees under the lease entitled to transfer the Poker Machine Entitlements away from the licence?

23 The first issue is whether, quite apart from any fiduciary obligation, the partners were prohibited by a contractual obligation contained in the lease from alienating the Poker Machine Entitlements during the pendency of the lease. The lessors do not contend that prior to termination of the lease they had any financial interest in the licence within s 19(5) – a concession which, despite the purported reservation to them of a beneficial interest in the licence by clause 9.14 of the lease, appears to be rightly made, having regard to the conclusion of the Court of Appeal in Jabetin that the usual covenants protecting the interests of a hotel proprietor in respect of a licence do not amount to a financial interest within s 19(3) [Jabetin, [3], [4]-[6]]. However, the MacDonalds contend that the partners’ ability to deal with the Poker Machine Entitlements is constrained by clauses 9.1, 9.3 and 9.10 of the lease. I have already set out these clauses above.

24 In my view, the repetition of the phrase "that may be required by law" at the end of clause 9.1 is mere surplusage and does not limit the operation of the clause to such entertainment as is required by law; the phrase "required by law" is referable to the Licences and authorities.

25 As to clause 9.1, the MacDonalds submit that an authority under Gaming Machines Act, s 56, is an authority required by law for the provision of entertainment – namely, poker machines – in a hotel, and that as the alienation of a Poker Machine Entitlement has the effect that there is no longer a corresponding authority for a poker machine, to alienate a Poker Machine Entitlement would be a breach of an obligation to maintain all authorities required by law to enable the provision of entertainment. For Mr Geltch, Mr Leeming SC, submits that "entertainment" in clause 9.1 should be given the same meaning as it has in the Liquor Act. (NSW) Liquor Act 1982, s 4, defines, and at all relevant times defined "entertainment" to mean "entertainment provided by a person or persons physically present and actually providing the entertainment" – in other words, live entertainment. It is true that cl 9 is entitled “Liquor Act Provisions”. However, in the lease, unlike "Licence" which is a defined term, "entertainment" is not defined and does not appear to be used as a term of art. When the lease was executed in 1992, the provision of entertainment in hotels was regulated by (NSW) Local Government Act 1919, Div 4BA, which had been inserted by (NSW) Local Government (Theatres and Public Halls) Amendment Act 1989. By s 317JG, a hotelier could not "promote or conduct an entertainment in any licensed premises unless the premises are the subject of an approval as a place of public entertainment". However, s 317JG(3) provided that there was no requirement to obtain such an approval merely because approved amusement devices were used or available to be used in the premises. On the one hand, Mr Leeming argues that this indicates that in 1992 whereas there was a requirement to obtain approval for the provision of live entertainment (such as a discotheque, which had recently been installed) there was not for the operation of approved amusement devices. On the other hand, Dr Birch SC, for the MacDonalds, submits that the specific exclusion of AADs indicates that, absent specific provision, AADs would have fallen within the scope of "entertainment" requiring an approval. Dr Birch's submission is correct, since s 317JD(3) provides that a reference to entertainment includes a reference to amusement provided by means of any ride or device or by any other means (such as pinball machines and video games), which would plainly catch AADs and poker machines. The Liquor Act does not and did not make provision for approvals or authorisations for entertainment; the Local Government Act did so. In this context, I do not think that the reference to the Liquor Act in the clause heading justifies attributing to “entertainment” the meaning it has in that Act, when another Act regulated the provision of entertainment in hotels. It would have been uncommercial and nonsensical for the lessors to require authorities for entertainment as defined under the Liquor Act to be obtained and maintained, when the obligation was imposed by another Act in respect of a wider class of entertainments.

26 In my view, the preferable construction of clause 9.1 is that the parties to the lease intended that the lessee be required to maintain all authorities or approvals required for the purpose of providing entertainment from time to time in the premises. While upon inception of the lease no authority or approval was required in respect of AADs – or for that matter poker machines – if that position were to change during the term of the lease, so that an approval or authority was required, the effect of clause 9.1 was to oblige the lessee to apply for and maintain any such authority.

27 By 2001, there was a requirement for a hotelier to have a s 56 authority to keep a poker machine. That authority could only be held if there was a corresponding Poker Machine Entitlement. To alienate the Poker Machine Entitlement would jeopardise, and be contrary to the obligation to maintain, the corresponding authority. Accordingly, in my view, clause 9.1 was a contractual restraint on the ability of the partners as lessees to alienate Poker Machine Entitlements.

28 In Jabetin, as in the present case, the lease predated the concept of Poker Machine Entitlements and did not refer to them. There does not appear to have been any covenant in the lease sufficiently wide to catch Poker Machine Entitlements. In this case, clause 9.1, though not drafted with Poker Machine Entitlements specifically in mind, was drafted with a view to preventing any act that might jeopardise any authority required by law to enable the provision of entertainment in the hotel premises. The alienation of a Poker Machine Entitlement is such an act.

29 In Wonall Pty Limited v Clarence Property Corporation Limited (2003) 58 NSWLR 23, Campbell J, as his Honour then was, considered a lease prepared before and without specific reference to the concept of Poker Machine Entitlements. The lease provided that "when the lease ends for any reason, the lessee must do everything necessary to transfer to the lessor or its nominee any transferable licences or permits that are required to carry on the hotel business". Assuming, without deciding, that a Poker Machine Entitlement counted as a "transferable licence or permit" for the purpose of that clause, his Honour concluded that its effect was that, at the end of the lease, the lessee must do everything necessary to transfer to the lessor any Poker Machine Entitlements required to carry on the hotel business in the form it took within the time shortly before the termination of the lease, there being no requirement under the lease for the lessee to operate the hotel with any particular number of poker machines or, indeed, with any poker machines at all. His Honour thought that the subject lease did not require the lessee to continue to engage in all of the activities associated with operating the premises as a licensed hotel (including poker machines) that were engaged in at the commencement of the lease.

30 The present case is quite different. The obligation imposed by clause 9.1 to "maintain" authorities required by law to enable the provision of entertainment imports the obligation, not found in Wonall, to preserve authorities that exist at the commencement of the lease, to obtain such further authorities as may be required during the lease, and having obtained them, to maintain them. Moreover, the provision in the Wonall lease that corresponded to clause 9.1 in the present lease required only that the lessee "obtain all such licences as are or may be necessary for keeping open the hotel as a hotel duly licensed and ... do nothing ... whereby the licence may be or may become liable to be suspended or forfeited or the renewal thereof refused". No provision of the Wonall lease referred to “any authorities required to enable the provision of entertainment”, or anything like it.

31 The MacDonalds next rely on clause 9.3. They submit that the alienation of Poker Machine Entitlements would make the licence subject to conditions that fetter the operation of the hotel business conducted pursuant to the licence.

32 The business conducted pursuant to the licence is that of a hotel selling liquor. The Poker Machine Entitlements are not an endorsement on the licence, nor a part of the licence. As Campbell J said in Wonall, although in a sense a Poker Machine Entitlement may be an adjunct of the hotelier's licence, an obligation to give back the licence at the end of the lease does not prevent the lessee from transferring Poker Machine Entitlements prior to the end of the term. As the Court of Appeal explained in Jabetin, Poker Machine Entitlements, though initially allocated in respect of a licence, can be dealt with separately from the licence.

33 The transfer of a Poker Machine Entitlement away from a licence does not result in any condition being attached to the licence. Clause 9.3 does not prevent the lessees from alienating Poker Machine Entitlements during the term of the lease.

34 The MacDonalds thirdly rely on clause 9.10. In order to obtain the requisite approval for a transfer of a Poker Machine Entitlement under s 19(2)(a), an application to the Liquor Administration Board is required. The question is whether such an application is one "affecting the Licence". For substantially the same reasons as apply to clause 9.3, it is not. If an application for approval of transfer of Poker Machine Entitlements is approved, the licence itself is not affected in any way. The Poker Machine Entitlements may be in a sense an adjunct to the licence, but the licence is a permission to sell liquor, not to keep poker machines; the source of the right to keep poker machines is the authorisation under Gaming Machines Act, s 56, which, in turn, corresponds with an allocation of entitlements "in respect of" an hotelier's licence. Thus, although Poker Machine Entitlements are allocated "in respect of" a licence, their alienation from a licence does not affect the rights and obligations conferred and imposed by the licence. It does not affect the licence. An application for approval for a transfer of a Poker Machine Entitlement under s 19(2)(a) is not an application "affecting the Licence".

35 However, while I conclude that neither clause 9.3 nor clause 9.10 prevents the partners as lessees from alienating the Poker Machine Entitlements, clause 9.1 does so. The partners, as lessees, were not entitled during the lease to transfer the Poker Machine Entitlements, but were bound to maintain them and upon termination of the lease to return them, with the licence in respect of which they were allocated, to the lessors.

Do the fiduciary obligations of the MacDonalds as partners constrain their exercise of their rights and powers as proprietors and lessors of the freehold?

36 This issue pertains to the intersection of the MacDonalds’ rights as lessors and their duties as partners. If the lessees were not contractually restrained from alienating the Poker Machine Entitlements, there would be an obvious conflict between the MacDonalds’ interest as lessors and the partners’ interests. This is highlighted by some evidence of a registered valuer of real estate, Andrew Duggan Magin, that as at 24 March 2007, twelve Poker Machine Entitlements were worth $1,270,000; that the hotel business with the twelve Poker Machine Entitlements was worth $1,270,000 plus the written down value of plant and equipment; and that the hotel business without the Poker Machine Entitlements was worth only the written down value of the plant and equipment. As at 24 March 2007, and indeed at any time after 18 August 1993, the interest of the partners in the hotel business was a precarious one, because as they occupied the hotel premises only under the holding over provision in their lease, they had no security of tenure. A potential purchaser, knowing this, would have appreciated that the practical prospects of the purchaser obtaining the benefit of the Poker Machine Entitlements was slight in the extreme, since the lessor would be in a position to terminate the lease on one month’s notice before any transfer by the purchaser could be approved by the Liquor Administration Board. Accordingly, valuing the business as a going concern, the evidence suggests that its value did not exceed that of the written down value of the plant and equipment employed in it. However, the same evidence demonstrates that, were it possible for Poker Machine Entitlements to be realised for the benefit of the partnership, the position of the partnership would be enhanced by some $1,270,000 approximately.

37 Accordingly, the separate interests of the MacDonalds would be that the lease be terminated without any prior transfer of the Poker Machine Entitlements, the benefit of which would then revert to the freehold of which they are the proprietors, so that they would solely benefit from the Poker Machine Entitlements. On the other hand, the interests of the partnership would be for the Poker Machine Entitlements to be realised for the benefit of the partnership by being transferred prior to any termination of the lease, in which case the partnership as a whole, including Mr Geltch, would benefit from the Poker Machine Entitlements and, to that extent, the benefit to the MacDonalds separately would be reduced. The issue would be whether, in that context, the MacDonalds’ fiduciary obligations as partners constrain the exercise of their rights as lessors.

38 No argument has been advanced on behalf of Mr Geltch to the effect that the acquisition by the MacDonalds of the reversion from the MacFarlanes was in breach of any equitable obligation or has any relevant consequences. There is a significant body of authority for the view that the rule in Keech v Sandford [(1726) 25 ER 223], that a trustee must obtain a renewal of a lease if only for the benefit of the trust, does not apply to the acquisition by a trustee or partner of the reversion [Randall v Russell (1817) 36 ER 73; 3 Mer 190; Longton v Wilsby (1897) 76 LT 770; Bevan v Webb [1905] 1 Ch 620; Brenner v Rose [1973] 2 All ER 535]. However, these cases were considered in this Court by Waddell J, as the later Chief Judge then was, in Metlej v Kavanagh [1981] 2 NSWLR 339. Although his Honour thought that authorities to the contrary – including Protheroe v Protheroe [1968] 1 WLR 519; 1 All ER 1111 and Thompson’s Trustee in Bankruptcy v Heaton [1974] 1 WLR 605; 1 All ER 1239 – were inconsistent with the previous decisions to which I have referred, his Honour felt constrained to follow a decision of the English Court of Appeal, in the absence of any binding Australian decision to the contrary. However, his Honour added that even acceptance of Lord Denning’s statement of principle in Protheroe – that if a trustee who owns the leasehold gets in the freehold, the freehold belongs to the trust and the trustee cannot take the property for himself – did not require that a similarly broad rule be employed to a purchase by a partner of the reversion to a lease held by the partnership, concluding (at 348F) that it was going too far to say that in every case where the assets of a partnership include a leasehold interest, a partner contemplating acquiring the reversion for his separate benefit was obliged to give his partners the opportunity of coming in on the acquisition, and that that would be so in a particular case only if the opportunity of acquiring the reversion came to him because he was a partner or the lessee, or if the reversion came within the subject matter of the venture or undertaking for which the partnership existed. But his Honour added: “It seems to me that it is likely in the great majority of cases that it would be a breach of duty for a partner to acquire such a reversion without informing his partners of the opportunity.”

39 That statement still admits that although that will often be so, it is not invariably so. No complaint is made on that account here, and I must proceed on the basis that the MacDonalds were not in breach of any duty in acquiring the reversion.

40 In Brenner v Rose, Brightman J seems to have reasoned that, once it was accepted that a partner was entitled to acquire the reversion, their was no reason why that partner’s rights as lessor should be diminished by his or her obligations as a partner, holding that the fiduciary capacity of a member of a partnership which included a leasehold interest, did not raise any sort of equity which could prevent that partner from exercising the rights of a landlord which he would have had as a stranger to the partnership:

In my judgment the right of the landlord in such circumstances either to have possession or to recover the rent is not to be whittled away by the mere fact that he is one of the partners, and is a purchaser of the reversion expectant on the underlease. I do not see that the defendant’s fiduciary capacity as a member of a partnership which includes the benefit and burden of the underlease raises any sort of equity which should be allowed to prevent him from exercising the rights as landlord which he would have had if he were a stranger to the partnership. I need only refer to Bevan v Webb .

41 The authority of that view in this court must be diminished by Metlej v Kavanagh, which confined Brenner v Rose to a case on it own particular facts.

42 The intersection of conflicting obligations as a partner and rights as a landlord was considered by the English Court of Appeal in Sykes v Land (1984) 271 EG 1264; [1984] 2 EGLR 8. There, Mrs Land and Mr Sykes carried on a farming business in partnership under an agreement which provided that on dissolution of the partnership otherwise than by death, Mr Sykes was to be entitled to purchase Mrs Land’s share in the capital and profits of the partnership. Mr Sykes and Mrs Land held the farm on which the business was carried on under a lease. Subsequently, on the death of her husband, Mrs Land became entitled to the freehold reversion. As landlord, she gave the partnership notice to quit and she gave Mr Sykes notice of intention to terminate the partnership. Mr Sykes gave notice of his intention to exercise his rights under the partnership agreement to purchase Mrs Land’s share of the assets including the leasehold in the farm if it continued. At first instance, it was held that Mr Sykes was entitled to acquire the tenancy which was a partnership asset, that service by Mrs Land of the notice to quit would be a breach of her obligation of good faith as a partner, and that she should be required to concur in the service of a counter-notice under the (UK) Agricultural Holdings Act 1948, the effect of which would be to countermand the notice to quit. The Court of Appeal upheld the conclusion that the tenancy was an asset of the partnership which Mr Sykes was entitled to acquire upon electing to exercise his rights to acquire Mrs Land’s share on dissolution; that the notice to quit served by Mrs Land was not invalid; but that Mr Sykes having given notice of intention to exercise his election to purchase the partnership assets, whereupon he became beneficial owner of all the partnership assets including the tenancy, Mrs Land was obliged, as trustee, to comply with a request to join in the service of a counter notice.

43 Fox LJ accepted that, prima facie, a landlord was entitled to exercise his powers as such notwithstanding his status as a partner, for which his Lordship cited Brenner v Rose. In holding that the notice was not invalid, his Lordship rejected the primary judge’s view that service of a notice to quit would bring about the impossibility of performance of any provisions of the partnership agreement, as it would do so only if no counter notice under the Agricultural Holdings Act were served. His Lordship thought that the crucial question was not whether Mrs Land could serve the notice to quit but whether she could refuse to join in the service of a counter notice, and concluded that, it being the duty of a trustee to preserve the trust property for the benefit of the ultimate beneficiaries and not to let it be destroyed, it was her duty as a trustee to comply with any request to consent to the service of a counter notice. This decision illustrates that although a landlord may be entitled to exercise his or her powers as such, notwithstanding his status as a partner, fiduciary obligations arising from the relationship of partner may attend the exercise of such rights.

44 In Chan v Zacharia (1984) 154 CLR 178, Gibbs CJ said (at 183):

In the present case there is another and important circumstance which affected the capacity of Dr. Chan to obtain a new lease for his own benefit. The winding up entailed the application of the surplus assets of the partnership in payment of what might be due to the partners. The option for renewal, being part of the lease, was an asset of the partnership. To enable that asset to be realized, it was, in my opinion, the duty of each partner to join in exercising the option, assuming that the renewal was of value (as obviously it was) and assuming that the other party required it. A refusal by one partner to enable the option to be exercised meant that an asset of value was lost to the partnership. Dr. Zacharia attempted to persuade Dr. Chan to join in exercising the option, and if Dr. Chan had genuinely wished to incur no further obligations as lessee, it may be that he could have insisted on obtaining from Dr. Zacharia proper protection before he joined in exercising the option. However, Dr. Chan refused to exercise the option because he wished to obtain a new lease for himself. He made it impossible for the partnership to exercise the option, and in those circumstances it is inequitable that he should be permitted to retain for himself the new lease which could not have been granted if the option had been exercised.

45 Brennan J said (at 186):

I agree with Deane J. that Dr. Chan, as a former partner of Dr. Zacharia, owed him a fiduciary duty in respect of the partnership property. A new lease of the Mansfield Park premises could be obtained only if the partnership's option of renewal were not exercised. Though Dr. Chan was not bound to join in the exercise of that option, he could not take advantage of his refusal to secure the benefit of a renewal of the lease for the partnership in order to secure the benefit of a new lease for himself. There was a misuse of his position as a former partner to obtain a personal benefit and that, as Deane J. points out, was a breach of his fiduciary duty. Therefore I agree that Dr. Chan holds the fruits of his conduct upon a constructive trust for those entitled to the property of the dissolved partnership.

46 More recently, in Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd [2006] HCA 55; (2006) 81 ALJR 352, Gummow J said (at [15]):

Further, given the nature and scope of the joint venture arrangements, the joint venture possessed fiduciary characteristics of the kind identified in United Dominions Corporation Ltd v Brian Pty Ltd. For Parramatta to deny consent to the use by Concrete of the plans and drawings as consequent upon the acquisition of the development site would be to pursue its interests in conflict with the purposes of the joint venture as earlier identified.

47 Hayne J said at ([124]):

Once it is recognised that all three companies – Parramatta, Landmark and Toyama – joined in a common business enterprise, it must also be recognised that the relationship between those participants was one of mutual trust and confidence. It matters not whether the participants could properly be described as partners, or whether it is only the necessarily less precise expression “joint venture” ( United Dominions Corporations Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10-11; 59 ALJR 676) that can be applied to their relationship. The critical consideration is that the relationship was one of mutual trust and confidence ( Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 407-408; McPherson, “Joint Ventures”, in Finn (ed) Equity and Commercial Relationships (1987) 19 at 26-30). The obligations of each of the participants, when the relations between them broke down, extended not only to realising, to the advantage of each of the participants, all of the assets that had been committed to the venture, but also to not impeding that realisation whether by pursuing the individual interests of one participant in conflict with the interests of others, or in some other way. As Gummow ACJ points out, for Parramatta to deny consent to the use by Concrete of the plans and drawings would be to pursue its interests in conflict with the interests of other participants. Section 15 of the Copyright Act was thus engaged.

48 These passages reiterate that a partner owing fiduciary obligations is not entitled to prefer its own interests to those of the partnership. To the contrary, a partner’s fiduciary obligations require that it gives priority to the interests of the partnership over its own separate interests.

49 Assuming that it was open to the lessees to alienate the Poker Machine Entitlements, then when it became apparent in 2006 that the partnership was unlikely to continue in the long term and that Mr Geltch wished to withdraw from it, a stark conflict arose between the interests of the partnership and the interests of the lessors. The interests of the partners were to maximize the assets of the partnership for division between the partners by a sale of the Poker Machine Entitlements while the lease remained on foot and before they reverted to the freehold. The interests of the lessors, as I have indicated, were that that not take place so that the Poker Machine Entitlements revert to the freehold for their benefit alone. Accordingly, it seems to me that if the lessees had been at liberty to alienate the Poker Machine Entitlements during the term of the lease, then by declining to join in a sale of the Poker Machine Entitlements and serving a notice terminating the lease, the MacDonalds preferred their own separate interests to those of the partnership in breach of the obligation to which I have referred. That any other lessor of the hotel than the MacDonalds or any assignee from them could have done the same thing would be beside the point; so much is a common feature of fiduciary obligations.

50 However, "there is no class of case in which one ought more carefully to bear in mind the facts of the case ... than cases which relate to fiduciary and confidential relations and the action of the Court with regard to them" [Re Coomber: Coomber v Coomber [1911] 1 Ch 723, 729 (Fletcher Moulton LJ)]. And as Deane J said in Chan v Zachariah (at 204):

Many of the statements of general principle requiring a fiduciary to account for a personal benefit or gain are framed in absolute terms – 'inflexible', 'inexorably', 'however honest and well-intentioned', 'universal application' – which sound somewhat strangely in the ears of the student of equity and which are to be explained by judicial acceptance of the inability of the courts, 'in much the greater number of cases', to ascertain the precise effect which the existence of a conflict with personal interest has had upon the performance of fiduciary duty: see per Lord Eldon, Ex parte James ; per Rich, Dixon and Evatt JJ, Furs Ltd v Tomkies . The principle is not however completely unqualified. The liability to account as a constructive trustee will not arise where the person under the fiduciary duty has been duly authorised, either by the instrument or agreement creating the fiduciary duty or by the circumstances of his appointment or by the informed and effective assent of the person to whom the obligation is owed, to act in the manner in which he has acted.

51 In this case, the contractual obligations contained in the lease circumscribe the scope of the fiduciary obligation. Given the contractual provision effectively requiring the partners as lessees to obtain and maintain the Poker Machine Entitlements for the benefit of the lessors, their fiduciary obligations did not require them in that respect to subordinate their interests to those of the partnership.

52 Accordingly, in my view, the MacDonalds were not in breach of their fiduciary obligation and were entitled, consistent with that obligation, to give the notice of termination when they gave it, with the consequence that the Poker Machine Entitlements reverted, with the licence, to them. In the particular context of this lease, their rights as lessors in that respect were not limited by their fiduciary obligation.

Could the Court order the MacDonalds to “support” a transfer of Poker Machine Entitlements, for the purposes of Gaming Machines Act, s 19(3)(c), when they do not subjectively support it?

53 The next issue is whether, assuming that the partners as lessees were entitled to transfer the Poker Machine Entitlements and the lessors were bound by a fiduciary obligation to co-operate in the realisation of those entitlements, it would be open to the Court to order that the lessors "support" the proposed transfer for the purposes of s 19(3)(c).

54 The question of demonstrating that a person “supports” the proposed transfer arises only where the person has a financial interest in the licence. In the present case, it would arise only if the lease had been terminated by analogy with Sykes v Land. It is conceivable that, notwithstanding a valid termination of the lease, if the fiduciary obligation of the lessors as partners might preclude them from taking advantage for their own benefit of the Poker Machine Entitlements to the exclusion of their partner, Mr Geltch.

55 It would be inconsistent with the view inherent in Jabetin and Masters v Garcia, that a party who has a financial interest in a license can assume a contractual obligation in respect of associated Poker Machine Entitlements, if he or she were able to withhold “support” from a transfer he or she was contractually bound to make.

56 The concept of "support" in s 19(3)(c) is closely analogous though not identical, to that of "consent": it requires an objective act of support rather than a subjective state of mind on the part of the relevant party. The Court often compels a party who does not subjectively consent to an application to give the requisite consent where some contractual or equitable obligation requires that the consent be given. Where the party has undertaken to support an application, the Court could, notwithstanding his or her change of mind, order him to do all things and execute all documents reasonably necessary to demonstrate to the Board that the transfer is supported by him. This is no more giving false evidence to the Board than it is for a person under order to sign an instrument of consent where subjectively the person does not agree with the proposal.

57 I therefore do not accept that a person having a financial interest in a licence cannot fetter his or her ability to withhold support under s 19(3(c) by contractual or fiduciary obligations.

Do unclean hands debar Mr Geltch from claiming equitable relief?

58 The final issue is that of "unclean hands". Clause 2.2(e) of the shareholders' agreement has been set out above. According to a Change of Company Details Form, dated 30 June 2004 and authorised by Mr Geltch, a second B Class Redeemable Preference Share was created that day and issued to Mr Geltch's wife, Tanya Geltch. Mr MacDonald said he first became aware of Tanya becoming a shareholder of Abtourk on or about 8 May 2006, that there was no meeting of Abtourk or its directors to authorise any such issue of shares, and that he would not have consented to any such issue without obtaining advice about its potential consequences. However, the question appears to have been adverted to in correspondence to Mr MacDonald on 16 March 2005. A file note made by Mr Collins, Abtourk's accountant, of a meeting with Mr MacDonald, Mr and Mrs Geltch on 13 October 2005 records that Mr MacDonald was "okay with set up". Mr Collins says that the idea for the issue of the preference share was first raised by the MacDonalds' accountant, Mr Webley in late 2003 or early 2004, and that at a meeting on 25 June 2004, Mr MacDonald indicated assent to "a preference share strategy".

59 I do not think the evidence establishes that Mr MacDonald knew specifically that it was proposed to issue a share to Tanya Geltch before the share was issued. There never was a meeting of the directors of Abtourk at which they could unanimously approve any issue of new shares. Indeed, it appears that there has never been a valid issue of new shares at all, the directors never having met for that purpose. It follows, on the other hand, that if there has indeed been an issue, it was in contravention of clause 2.2(e).

60 However, in my view the conduct alleged against Mr Geltch is insufficient to constitute the type of impropriety, sufficiently related to the equity sued for to debar him from seeking equitable relief. A mere breach of contract on the part of a plaintiff does not disentitle that plaintiff from obtaining equitable relief, even if there is a direct relationship between the breach and the equity sued for. If it were not so, then it is difficult to conceive of any circumstance in which equity would grant relief against forfeiture. Yet it is, of course, trite that equity does grant relief against forfeiture where a tenant or mortgagor has defaulted in performance of its contractual obligations. The cases in which the "clean hands" doctrine has been invoked involve impropriety that extends beyond mere breach of contract. The evidence does not reveal any intentional injury, or for that matter any injury at all, to the interests of the MacDonalds. Although Mr MacDonald continued to raise questions about the transfer, Mr Collins' evidence indicates that he came to accept the explanations proffered for it, though he remained annoyed that it was done without his knowledge. The MacDonalds took no step, prior to the institution of these proceedings, to have the share issue declared void or cancelled.

61 In any event, there does not appear to me to be a sufficiently close relationship between the conduct relied on and Mr Geltch's cause of action. The type of connection required was illustrated, albeit in a negative way, by Isaacs J in Meyers v Casey (1913) 17 CLR 90, [24] where his Honour distinguished the case there under consideration from "cases where the right relied on, and which the Court of Equity is asked to protect or resist, is itself to some extent brought into existence or induced by some illegal or unconscionable conduct of the plaintiff, so that protection for what he claims involves protection for his own wrong."

62 If Mr Geltch were entitled to the relief he claims in these proceedings, that entitlement would be quite independent of the issue of a redeemable preference share to his wife, and adjudication of that issue is not a necessary part of his case. I would, therefore, not decline relief on grounds of unclean hands.

Conclusion

63 My conclusions may be summarised as follows:

64 Although the MacDonalds as lessors did not have a financial interest in the licence during the term of the lease and their "support" in that capacity for a transfer of the Poker Machine Entitlements was not required by s 19(3)(c), they have a contractual right under clause 9.1 of the lease to have the Poker Machine Entitlements maintained, and the partners as lessees have a corresponding contractual obligation, the effect of which was that they could not, during the term, alienate any Poker Machine Entitlements that were obtained in connection with the licence.

65 Clauses 9.3 and 9.10 do not assist the MacDonalds.

66 Because of clause 9.1, the MacDonalds were not bound by any fiduciary obligation to facilitate the realisation of the Poker Machine Entitlements for the benefit of the partners before termination of the lease.

67 Had I concluded that the MacDonalds owed Mr Geltch a fiduciary obligation to facilitate realisation of the Poker Machine Entitlements for the benefit of the partnership, it would have been open to make an order to the effect that the MacDonalds do all things requisite on their part to support any transfer, and I would not have declined Mr Geltch equitable relief on grounds of unclean hands.

68 However, the conclusion that clause 9.1 of the lease prohibits alienation of Poker Machine Entitlements by the lessees is dispositive.

69 My orders are:

(1) Order that the Statement of Claim be dismissed.

(2) Order that the orders made by Gzell J on 20 March 2007 be discharged.

(3) Reserve liberty to the defendants to apply by motion within 28 days for an inquiry as to damages pursuant to the plaintiff’s undertaking as to damages.

(4) Declare that registered lease NE824570 ("the Head Lease"), dated 20 August 1992 between the first and second defendants as lessors, and the plaintiff and the first and second defendants as lessees, of the Wade Hotel Leeton, was terminated with effect from 24 March 2007.

(5) Declare that the Management and Operating Agreement, dated 20 August 1992 between the first and second defendants, the plaintiff and the third defendant, was terminated with effect from 24 March 2007.

(6) Declare that the Partnership Agreement, dated 20 August 1992, between the first and second defendants and the Plaintiffs was dissolved with effect from 23 April 2007.

(7) Declare that the Shareholders' Agreement, dated 20 August 1992, between the first and second defendants, the plaintiff and the third defendant, was terminated with effect from 23 April 2007.

(8) Reserve leave to any party to apply for further orders in respect of the dissolution of the partnership on five days or such less notice as the Judge hearing the application may deem appropriate, any such application to be made in the first instance by arrangement with my Associate and to specify the orders to be sought.

(9) Order that the plaintiff pay the first and second defendants' costs.

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26/09/2007 - Spelling correction - Paragraph(s) Judgment Title