GMC Healthcare Pty Limited v Shao

[2016] NSWSC 741

Supreme Court

New South Wales

Medium Neutral Citation:	GMC Healthcare Pty Limited v Shao [2016] NSWSC 741
Hearing dates:	13 April 2016
Date of orders:	09 June 2016
Decision date:	09 June 2016
Jurisdiction:	Equity
Before:	Darke J
Decision:	Declarations to be made in conformity with conclusions of the Court on various questions of construction.
Catchwords:	LANDLORD AND TENANT – rent – commercial lease of medical centre – provision for rental discount – construction – meaning of “rent review date” – meaning of “Full Time Equivalence doctors” – whether lessee under an obligation to provide information to lessor in relation to rental discount – at what times is the rental discount to be determined – in respect of what period is the rental discount assessed   CONTRACTS – construction and interpretation – implied terms – commercial lease of medical centre provides for rental discount – discount depends upon number of “Full Time Equivalence doctors” carrying on practice at the premises – information about number of doctors peculiarly within knowledge of lessee – whether necessary that lessee provide information concerning number of doctors to enable performance of obligations under contract
Cases Cited:	Commonwealth Bank v Barker [2014] HCA 32; (2014) 253 CLR 169; Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited (1979) 144 CLR 596
Texts Cited:	“Terms Implied in Fact: the Basis for Implication” (1998) 13 Journal of Contract Law 103; J W Carter et al, ‘Terms Implied in Law: ‘Trust and Confidence’ in the High Court of Australia” (2015) 32 Journal of Contract Law 203
Category:	Principal judgment
Parties:	GMC Healthcare Pty Limited (Plaintiff) Jing Yu Shao (First Defendant) Shelly Peng (Second Defendant)
Representation:	Counsel: Mr M Astill (Plaintiff) Mr D D Knoll AM (Defendants)   Solicitors: BCP Lawyers (Plaintiff) Konstan Lawyers (Defendants)
File Number(s):	2015/292495
Publication restriction:	None

Judgment

Introduction

1. These proceedings involve the construction of a rental discount provision in a commercial lease.

2. The lease was entered into by the plaintiff as lessee and Caroli Holdings Pty Limited as lessor for a term commencing on 15 August 2011. The term of the lease is ten years. The lease contains six options to take renewed terms. Each further term is of five years duration.

3. The property the subject of the lease is described as Tenancy B on the Ground Floor of the building at 53-55 Glebe Point Road, Glebe. It was then part of the land contained in Folio Identifier 1/622635. The premises are used as a medical centre. A plan attached to the lease depicts seven consulting rooms within the premises. Tenancies A and C (also on the Ground Floor of the building) are respectively a pharmacy and a café.

4. In 2013 the building became subject to a strata title sub-division. The property the subject of the lease became Lot 13 in Strata Plan 89158. The defendants acquired title to the lot from Caroli Holdings Pty Limited on about 30 April 2014.

The rental provisions of the lease

5. The lease consists of a Real Property Act form of lease, annexures A and B, and a plan of the premises. Annexure A consists of a Schedule of Items and various Additional Clauses which are said to be in the nature of alterations and additions to the lease covenants in Annexure B. Annexure B is a Law Society of NSW standard form.

6. The rent is primarily dealt with in clause 5 of the lease. By clause 5.1.1 the lessee is obliged to pay the rent stated in item 13A in the Schedule.

7. Item 13A describes the rent by reference to the “lease period” (the period 15 August 2011 to 14 August 2021), and each “further period” the subject of an option to renew.

8. Under the sub-heading “For the lease period”, ten different amounts of a yearly rent (payable by monthly instalments) are specified. It is common ground that each amount specified is the rent for a yearly period, with the first amount applicable from the commencing date of the lease, the second amount applicable from one year after the commencing date, and so on. The amounts increase over the first five years of the term, before reducing at the beginning of the sixth year and then increasing again over the second five years of the term. The expression “review date” is employed to describe times when yearly periods end or commence, and thus times when the amount of rent changes. (I note that this is done inaccurately, in that the second amount should be stated to commence from the first review date, not the second review date. A similar error is made in relation to the third to tenth amounts.)

9. For each “further period”, current market rent is specified from the commencement of the further period up to the “first review date”, when a new yearly rental begins. Here, “review date” seems to be used to refer to one of the rent review dates specified for the further period in item 16 of the Schedule. For example, in relation to the further period in item 12A of the Schedule, the “first review date” seems to be a reference to 15 August 2022 when the current market rent set on 15 August 2021 is increased by 3%.

10. Clause 5.2 of the lease provides for the monthly instalments of rent to be paid in advance.

11. Clauses 5.4 to 5.21 of the lease concern the review of rent. Clause 5.4 provides that the rent is to be reviewed on the rent review dates stated in item 16 in the Schedule. Clause 5.5 provides for what is to occur until the new rate of rent is known. Clause 5.6 provides for three different methods for fixing the new rent on a rent review date. These are:

1. increase by a fixed amount or percentage;

2. adjustment by reference to the Consumer Price Index; and

3. adjustment by reference to the current market rent.

12. Item 16 of the Schedule provides (in respect of each of the six further periods), that at or just prior to the commencement of the period the rent is adjusted to current market rent. The rent is increased every year of the period thereafter by 3%.

13. The rental discount provision at the centre of the dispute is additional clause 24. It provides as follows:

24.1 In this clause, Full Time Equivalence (“FTE”) shall have the same definition as found in the Full Time Equivalence Policy 2010, a policy of the Australian General Practice Training.

24.2 The Lessee agrees that on or before the first anniversary of the commencement of this Lease, a minimum of 2 FTE doctors will be practicing in the medical centre business operating from the premises.

24.3 The Lessee will be eligible for a discount in rent payable to the Lessor of 10% as and from the first rent review date after the medical centre operating from the premises has four or more FTE doctors practicing from the premises. After the Lessee has four FTE doctors practising from the premises, each additional FTE doctor will result in a further 10% discount in rent payable to the Lessor by the Lessee effective from the first rent review date after the additional FTE doctor joins the medical centre at the premises.

14. The Full Time Equivalence Policy 2010, referred to in additional clause 24.1, contains the following definition of “Full time equivalent”:

38 hours per week and includes all consultations, AGPT education and program activities the composition of which will vary in accordance with a registrar’s stage of training and college requirements.

The Policy applies to all Australian General Practice Training (“AGPT”) registrars. It is used to measure registrar participation in training within the AGPT program.

Rental payments since the commencement of the lease

15. It appears that from August 2012 a rental discount of at least 10% was applied by the parties ostensibly pursuant to additional clause 24.3. By the time the defendants became the owners of the land in about April 2014, the discount so applied was 30%.

16. In May 2014 the defendants began issuing rental invoices that included the 30% discount. On 2 July 2014 the defendants sent an email to the plaintiff attaching an invoice for the period 16 July 2014 to 15 August 2014. A 30% discount was applied to the rent. The first defendant deposed that the 30% discount was included on the assumption that the previous owner’s calculation of the discount was correct. The email stated that the annual rent review was due on 15 August 2014 and sought advice as to the number of “FTE GP’s” for the period 15 August 2013 to 14 August 2014.

17. On 1 August 2014 the defendants sent an email to the plaintiff attaching a revised invoice for the period 16 July 2014 to 15 August 2014. Amounts for strata levies and water charges were now included. It appears that the discounted rent for the period had already been paid. The email included the following:

As I mentioned to you in the last email, the annual review of the rent is due now and I would like you to assist me how to calculate the rental discount. Therefore, please send me information regarding the FTE doctors for the period of 15/08/2013 to 14/08/2014 with supporting documents.

For this time, I have maintained current discount rate. If I had not received your information or your advise, I would presume that you would give up discount for the rent, so the full rent will be charged without any further notice.

18. Some information concerning the number of doctors working at the premises was provided to the defendants, but no agreement was reached as to whether the plaintiff was entitled to any discount. Nonetheless, invoices that included the 30% discount continued to be issued until June 2015. (The invoices between 1 December 2014 and 30 June 2014 expressly noted that the discount might be subject to change.)

19. By February 2015 the parties had engaged solicitors.

20. Invoices issued from 1 July 2015 made no allowance for the discount to the rent. The defendants also sought to recover arrears of rent from August 2014 on the basis that no discount applied. The view was taken at the time by the defendants that additional clause 24 was unenforceable or void. It was also contended that even if the provision was valid, the discount only applied where the number of individual “FTE doctors” was four or more.

21. The plaintiff maintained that additional clause 24 was valid, and that “FTE doctors” was calculated by reference to the total number of hours worked by doctors at the premises. The plaintiff has continued to pay rent subject to the discount to which it says it is entitled. Since September 2015 the claimed discount has been 40%.

22. On 25 September 2015 the defendants issued a Notice of Termination of the lease based on the alleged failure to pay rent in accordance with the lease. The plaintiff commenced these proceedings on 7 October 2015. The defendants thereafter undertook not to disturb the plaintiff’s occupation of the premises until further order of the Court.

Outline of issues

23. The plaintiff and the defendants, by the Summons and the Cross Summons respectively, seek declaratory relief as to the proper construction of additional clause 24.3 of the lease. In summary, four main issues arise for determination:

1. What is meant by the expression “rent review date” in additional clause 24.3?

2. What is meant by the expression “FTE doctors” in additional clause 24.3?

3. Is the plaintiff under any obligation to provide information to the defendants in relation to the rental discount for which additional clause 24.3 provides?

4. At what times, or upon what occasions, is the rental discount for which additional clause 24.3 provides to be determined?

“Rent review date”

24. The defendants contend that additional clause 24.3’s reference to the first rent review date is a reference to the first rent review date that appears under item 16 of the Schedule – that is, 15 August 2021.

25. Mr Knoll of counsel, who appeared for the defendants, submitted that the notion of “rent review dates” is found in clause 5.4 of the lease, and that it is made clear in that clause that such dates are stated in item 16 of the Schedule. “Rent review dates” are dates upon which a review is carried out based on the one of the three methods described in clauses 5.6 and following. Those dates are to be distinguished from “review dates” which are referred to in item 13A of the Schedule. Mr Knoll pointed out that whilst item 13A refers to “review dates” in relation to the lease period, no rent reviews are carried out during that period in accordance with clause 5.4 utilising any of the three methods of review described in clause 5.6. Rather, the rent is merely adjusted to a stipulated figure each year throughout the lease period. Mr Knoll further supported his argument by reference to evidence to the effect that, in the initial draft lease, “rent review dates” were included in item 16 in respect of both the lease period and the further periods, but the dates in respect of the lease period were deleted from subsequent versions of the lease. By contrast, the text of additional clause 24 appears to have remained the same throughout.

26. Mr Astill of counsel, who appeared for the plaintiff, submitted that the term “review date” when used in item 13A means “rent review date”. He submitted that otherwise the words “review date” in item 13A would have no work to do. On this basis, the first rent review date for the purposes of additional clause 24.3 would be 15 August 2012. It was put that item 13A includes rent review dates in relation to the lease period notwithstanding that the lease period is not dealt with in item 16 – that is, item 16 does not deal comprehensively with rent review dates. Mr Astill also noted that in many of the clauses that deal with rent review (for example clauses 5.6, 5.7, 5.8 and 5.9) the abbreviated term “review date” is used in circumstances where it is clear that the reference is intended to be to a “rent review date”.

27. The relevant question concerns the meaning of the words “rent review date” as found within additional clause 24.3 of the lease. The expression “rent review date” is not defined in the lease, although clause 5.4 makes it clear that there are rent review dates stated in item 16 of the Schedule. The first rent review date so stated is 15 August 2021. On that date the rent is reviewed to current market rent for the first year of the first further period.

28. As noted earlier, the expression “review date” is employed in item 13A of the Schedule. In respect of each “further period”, the term “review date” seems to be used to refer to one of the “rent review dates” specified for the further period in item 16 of the Schedule. However, in respect of the “lease period” the term “review date” is not used to refer to any rent review dates specified for the lease period in item 16 of the Schedule – given that there are no such dates in relation to the lease period. It follows that “review date”, when used in item 13A, encompasses more than, and is not synonymous with, the rent review dates identified in item 16.

29. The question remains whether the expression “rent review date” within additional clause 24.3 should be construed as including a “review date” used in item 13A in respect of the lease period.

30. It is true that “review date”, where so used, concerns rent; the term describes times when the amount of rent changes during the lease period. To that extent, the term “review date” has work to do. However, in no sense does it involve any “review of rent”; when the amount of rent changes during this period it changes to a new amount that was set when the lease was entered into. No element of examination of the amount of rent is involved.

31. The parties chose to use the expression “rent review date” within additional clause 24.3, not “review date”. The notion of a “rent review date” is readily ascertainable by reference to clause 5.4 and item 16. On such dates the rent is to be reviewed by being fixed in accordance with one of the three methods referred to in clause 5.6. I do not think that the term “rent review date” within additional clause 24.3 should be read as extending any further than the rent review dates that are stated in item 16. The ordinary meaning of the text, when read in the context of the lease as a whole, does not suggest that a broader meaning was intended. Accordingly, no dates prior to 15 August 2021 are capable of being the first “rent review date” for the purposes of additional clause 24.3.

32. I appreciate that there is no clear commercial rationale for the rental discount to be unavailable during the lease period. However, that can hardly be regarded as a commercially absurd or capricious outcome, particularly in circumstances where the amounts of rent payable throughout that period are fixed at the time of entry into the lease and where the rental discount may eventually become available during the further periods.

33. I note that my conclusion concerning the meaning of “rent review date” within additional clause 24.3 was reached without resort to the circumstances in which rent review dates within the lease period were deleted from item 16 of the Schedule in the course of the lease negotiations.

34. It follows from the above that the earliest date upon which the plaintiff will be eligible for a discount in rent pursuant to additional clause 24.3 is 15 August 2021.

“FTE doctors”

35. The essence of this dispute is whether the tally of FTE doctors for the purposes of additional clause 24.3 is derived from the total number of hours worked by doctors at the premises divided by 38, or whether this tally is instead derived from the number of doctors working at the premises who satisfy the definition of Full Time Equivalence. The plaintiff contends for the former position; the defendants contend for the latter.

36. Mr Astill referred to the known circumstance that the leased medical centre is adjacent to the leased pharmacy, and that the lease itself (in additional clause 21.2) recognises the important relationship between the medical centre and the pharmacy. He submitted that the rationale for the rental discount was that the greater the number of hours worked by doctors at the medical centre (and hence the greater the number of prescriptions written), the greater the benefit to the pharmacy. It was argued that hours worked rather than the number of individual doctors was what was important. In this regard, Mr Astill noted that the parties chose the concept of Full Time Equivalence doctors, not full time doctors, as the concept governing the availability of the rental discount.

37. Mr Knoll submitted that the AGPT Full Time Equivalence Policy 2010 was directed to individual registrars and served the function of measuring each registrar’s participation in the AGPT programme – that is, whether such participation is “Full time equivalent (FTE)”. The definition of FTE, as imported into additional clause 24.3, is 38 hours and includes some activities aside from consultations. Mr Knoll submitted that the relevant “equivalence” is applied to the hours spent by the doctor each week – the question being whether those hours are FTE. Mr Knoll submitted that an “FTE doctor” is an individual practising at the medical centre who satisfies the FTE definition. Mr Knoll pointed to the final sentence of additional clause 24.3, which envisages an additional FTE doctor joining the medical centre; he submitted that this language reinforced that an FTE doctor is an individual, not a “deemed doctor” to be derived from the total number of hours worked by doctors in the medical centre.

38. In my view, those submissions of Mr Knoll should be accepted.

39. Additional clause 24.1 imports the definition of Full Time Equivalent (referred to in the lease as Full Time Equivalence) from the 2010 AGPT Policy. Additional clause 24.2 imposes a requirement that, after a certain time, a minimum of 2 FTE doctors will be practising in the medical centre business operating from the premises. Additional clause 24.3 imposes a condition upon eligibility for a rental discount – namely, that the medical centre operating from the premises has four or more FTE doctors practising from the premises. Greater rental discounts may be available once additional FTE doctors join the medical centre.

35. In my opinion, the language of the clause naturally suggests that an FTE doctor is an individual medical practitioner who is carrying on practice from the medical centre premises. The medical practitioner may be a person who carried on such practice at the time the lease commenced, or a person who subsequently “joins” the medical centre. In order for the individual medical practitioner to be treated as an FTE doctor practising from the premises for the purposes of additional clause 24.3, the practitioner must satisfy the imported definition by undertaking 38 hours per week of activity falling within the definition. Such activity plainly includes all consultations with patients at the premises. Mr Knoll accepted that AGPT continuing education activity would also be included.

36. The counting of FTE doctors by reference to the total number of hours worked by doctors at the premises might better serve the rationale for the rental discount provided for in additional clause 24.3. However, the language of the provision does not in my view support such a construction. The construction advanced by the defendants is in my view correct.

Obligation to provide information in relation to rental discount

42. The defendants contend that if the plaintiff claims a rental discount pursuant to additional clause 24.3 it must provide to the defendants “verifiable evidence” that the conditions for the application of the discount have been satisfied. In particular, the defendants assert that the plaintiff must provide verifiable evidence that the requisite number of FTE doctors practice from the premises.

43. The plaintiff accepts that there is an implied obligation that requires it to provide information to the defendants concerning the number of FTE doctors, so that the rent payable under the lease can be properly calculated.

44. I agree that before the plaintiff could obtain the benefit of a rental discount under additional clause 24.3, it would be incumbent upon it to provide sufficient evidence to the defendants to enable a reasonable assessment of whether it is entitled to a discount. I think that an obligation of that character would be implied, perhaps as part of a duty of good faith in the exercise of a contractual right (to the extent that additional clause 24.3 might be seen as conferring a right rather than as defining the amount of rent payable), or more likely as part of a duty to co-operate in doing what is necessary for the performance of the obligations under the contract (see Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited (1979) 144 CLR 596 at 607 (Mason J)). The operation of this duty to co-operate is not affected by whether the duty is characterised as the product of an implied term or the result of a rule of construction (Commonwealth Bank v Barker [2014] HCA 32; (2014) 253 CLR 169 at [25]; see also J M Paterson, “Terms Implied in Fact: the Basis for Implication” (1998) 13 Journal of Contract Law 103 at 119; J W Carter et al, ‘Terms Implied in Law: ‘Trust and Confidence’ in the High Court of Australia” (2015) 32 Journal of Contract Law 203 at 212-214).

45. The amount of rent properly due by the lessee to the lessor is undoubtedly a matter of fundamental importance to the parties and must be reasonably ascertainable. In circumstances where:

1. the lease provides for a rental discount if certain conditions exist;

2. the evidence as to whether those conditions exist is peculiarly within the province of the lessee; and

3. absent production by the lessee of sufficient evidence to enable a reasonable assessment of whether those conditions exist, the lessor would be unable to form a reasonable view as to how much rent was payable,

it seems to me necessary for the intended performance of the contract that the lessee provide such evidence to the lessor unless, of course, the lessee disclaims the existence of any discount.

46. However, it is not necessary that I express a concluded view on this question which, in light of my conclusion concerning the first rent review date, has not yet arisen. In any event, in the absence of a clearly defined dispute I do not think that it would be appropriate to give any declaratory relief on the question of what information the plaintiff is obliged to provide in relation to the rental discount.

At what times, or upon what occasions, is the rental discount to be determined?

47. The parties also sought rulings from the Court as to the times or occasions when the rental discount is to be determined. Two issues were raised:

1. whether the plaintiff is permanently entitled to a rental discount once the threshold of four or more FTE doctors is met; and

2. at what times and in respect of what periods is the rental discount assessed.

48. As to (a), Mr Astill submitted that the first sentence of additional clause 24.3, and in particular the words “as and from the first rent review date”, had the effect that once it was established that there were four or more FTE doctors practising from the premises, the plaintiff would thereafter be entitled to a rental discount of 10%, or a greater percentage depending upon whether additional FTE doctors joined the medical centre.

49. Mr Knoll submitted that the words “as and from the first rent review date”, when read together with the opening words of additional clause 24.3, should be construed as merely stipulating the time from which the lessee first becomes eligible to seek a discount.

50. I agree with Mr Knoll’s submission. The first sentence of additional clause 24.3 is concerned with when the lessee “will be eligible” for a discount in rent. The answer is “as and from the first rent review date after the medical centre…has four or more FTE doctors practicing from the premises” – that is, as and from that time the lessee is eligible (or qualified) to seek a rental discount. The existence and extent of any such discount depends, of course, upon the number of FTE doctors carrying on practice at the premises.

51. As to (b), Mr Astill ultimately submitted that the question of rental discount is to be determined on rent review dates, and that the applicable discount (if any) is then applied for the forthcoming yearly rent.

52. Mr Knoll submitted that the question of rental discount is to be determined on a month to month basis, given that the rent is paid by monthly instalments.

53. In my opinion, the approach favoured by Mr Astill is correct. Whilst additional clause 24.3 does not expressly identify when the question of rental discount is to be determined, there are textual indications that it is to occur in conjunction with rent reviews that are to take place on rent review dates. Aside from the fact that the lessee’s eligibility for a rental discount arises on a rent review date, the further discounts that result if additional FTE doctors join the medical centre are stated to be effective from the first rent review date after the doctor joins. This construction accords with the language of the clause; it is also commercially convenient that all issues concerning the amount of yearly rent are dealt with at about the same time.

54. It follows that the question of rental discount is to be considered upon the first rent review date when the plaintiff is eligible to receive a rental discount, and thereafter upon subsequent rent review dates. As stated earlier, I think that on those occasions it would be incumbent upon the plaintiff to provide sufficient evidence to the defendants to enable a reasonable assessment of whether a discount is applicable in the circumstances. That would involve the provision of evidence to enable a reasonable assessment of the number of FTE doctors practising from the premises.

Conclusion

55. I will give the parties the opportunity to consider these reasons and to settle upon appropriate declarations to give effect to the conclusions I have reached.

56. In light of my conclusion that the plaintiff is not yet eligible for a rental discount, the plaintiff must pay the defendants the shortfall in the rent, together with interest. It seems to me that the defendants are entitled to be paid the full amount of the shortfall from 1 May 2014. It appears that Caroli Holdings Pty Limited agreed to rental discounts prior to the defendants becoming owners of the land. However, the circumstances in which such agreements were made are not explained in the evidence. I do not think that any waiver by Caroli Holdings Pty Limited which would be binding upon the defendants, has been established. Further, the issuing by the defendants of invoices that provided for a 30% discount in rent is not in itself effective to vary the amount of rent payable under the lease. There is no suggestion that the defendants are precluded from now claiming the full amount of the rent by reason of any estoppel.

57. The defendants have been substantially successful. There is no apparent reason why costs should not follow the event.

58. I direct that within 14 days the parties bring in Short Minutes of Orders to give effect to these reasons.

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Decision last updated: 09 June 2016