Hurren v Keencrest Pty Ltd
[2008] QSC 194
•1 September 2008
SUPREME COURT OF QUEENSLAND
CITATION:
Hurren & Anor v Keencrest Pty Ltd & Anor [2008] QSC 194
PARTIES:
GREGORY ALLAN HURREN AND BETTY ANNE HURREN
(applicants)
v
KEENCREST PTY LTD ACN 081 744 872
(first respondent)
AND
CONNOR HUNTER (A FIRM)
(second respondent)FILE NO/S:
3472 of 2008
DIVISION:
Trial Division
PROCEEDING:
Application
ORIGINATING COURT:
Supreme Court
DELIVERED ON:
1 September 2008
DELIVERED AT:
Brisbane
HEARING DATE:
6 May 2008
JUDGE:
Daubney J
ORDER:
1. I declare that clause 2.3 of the lease dated
27 June 2002 made between the applicants and the first respondent is void to the extent it provides for rent to change in accordance with whichever of CPI and the rent previously payable results in the higher amount2. I further declare that clause 16.2 of the lease dated 27 June 2002 made between the applicants and the first respondent is void to the extent it provides for rent to change in accordance with whichever of a review to market and the rent previously payable results in the higher amount
I grant leave to the first respondent to file a counterclaim for any additional amounts paid pursuant to the operation of clause 2.3 or 16.23.
4. I will hear the parties further as to the appropriate form of orders, the directions necessary for the conduct of any proceedings as against the second respondent, in particular, whether the proceedings should be continued as if started by claim, and as to costs
CATCHWORDS:
LANDLORD AND TENANT – RETAIL AND COMMERCIAL TENANCIES LEGISLATION – OBLIGATIONS, PROHIBITED TERMS AND PROTECTION FOR LESSEES – RENT AND RENT REVIEW CLAUSE – where lease provided for yearly review of rent by reference to Consumer Price Index – where lease provided for review of rent following renewal of lease by reference to market valuation – where lease included a proviso preventing rent from decreasing following review – whether rent review clauses void
Acts Interpretation Act 1954 (Qld)
Retail Shop Leases Act 1994 (Qld)
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
Newcastle City Council v GIO General Ltd (1997) 191 CLR 85
Oz Sushi Pty Ltd v Lloyd Bennett & Associates [2002] QDC 220
Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 355COUNSEL:
P J Roney for the applicants
J K Chapple for the first respondent
T Bradley for the second respondentSOLICITORS:
MacFie Curlewis Spiro for the applicants
McCullough Robertson for the first respondent
Brian Bartley & Associates for the second respondent
The applicants own a restaurant and reception centre at Cleveland. In 2002 they entered into an agreement for the lease of these premises to Keencrest Pty Ltd, the first respondent. This lease was dated 27 June 2002 and commenced on 1 July 2002. The first term of the lease was to expire on 30 June 2007. The lease included two options to extend the lease for a further 5 years. The first respondent exercised its right under the first of these option terms. This option term began on 1 July 2007.
The applicants have applied for a declaration as to the validity of three rent review provisions in the lease. The relevant provisions of the lease are clauses 2.3, 16.1 and 16.2.
Clause 2.3 of the lease is in the following terms:
“2.3 Consumer Price Index adjustment
(a) The yearly rental for the second and each succeeding rental year of the Term or for the second and each succeeding Rental year of any extension or renewal hereof is an amount equal to the amount represented by ‘A’ in the following formula:
A = B x C
D
Where
B = the yearly rental applying in the first rental year of the Term or in the case of any extension or renewal hereof the yearly rental applying in the first rental year of such extension or renewal;
C = the Index Number released for the quarter year ending or applicable immediately preceding the rental year for which the yearly rental is being calculated; and
D = the Index Number released for the quarter year ending or applicable immediately preceding the date of commencement of the Term or in the case of any extension or renewal hereof the Index Number released for the quarter year ending or applicable immediately preceding the date of commencement of such extension or renewal,
Provided always that the yearly rental determined as aforesaid may in no case be less than 100% of the yearly rental payable for the preceding Rental Year;
‘Index Number’ means the All Groups Consumer Price Index Number for Brisbane released from time to time by the Australian Bureau of Statistics together with any supplementary summary.
(b) Until the amount of yearly rental payable for the second and subsequent Rental years respectively can be determined in accordance with the provisions of this clause the Lessee must pay to the Lessor on account thereof on the due date the same rental as was payable during the relevant immediately preceding Rental Year and any arrears are payable within 14 days of ascertainment and request therefore made by the Lessor.
(c) If there is no increase in the Consumer Price (All Groups) Index as at the date of recalculation of rental as herein provided then the yearly payable for the particular second or subsequent Rental Year (as the case may require) is the same rental as was payable during the Rental Year immediately preceding the date of recalculation.
(d) If the index is discontinued or modified or if publication of the index ceases or if the basis of calculating the index has in the opinion of the Lessor substantially changed from the basis used at the date hereof then the yearly rental payable in the relevant Rental Year is such rent as is mutually agreed upon by the Lessor and the Lessee within a period of 2 Calendar Months after the commencement of the Rental year of failing such agreement then at a Current Market Rental to be determined by an independent valuer registered under the Valuer’s Registration Act 1965 or any re-enactment thereof or any Act in substitution thereof appointed for the purpose by the President (or the President’s nominee) for the time being of the Queensland Law Society Incorporated on the application of either the Lessor or the Lessee. In making his determination, the valuer is deemed to be acting as an expert and not as an arbitrator. The decision of the valuer is final and binding on the parties. Pending the determination by the valuer the Lessee must continue to pay on account of the rent ultimately determined to be payable rental at the rate current when the increase ought to have come into force and the balance thereof upon such determination PROVIDED ALWAYS that the yearly rental payable during any Rental Year may never be less than the rental payable by the Lessee to the Lessor for the relevant immediately preceding Rental Year. The cost of such determination by the valuer is to be borne equally by the Lessee and the Lessor.” (Emphasis added)
Clauses 16.1 and 16.2, dealing with market review in case of the exercise of the option to extend, provide as follows:
“16.1Term of the renewed lease
If the Lessee is desirous of taking a renewed lease of the demised premises for a further term of 5 years (commencing upon the expiration of the Term) and, not more than 6 months and not less than 3 months prior to the expiration of the Term, signifies such desire by notice in writing to the Lessor and has not prior to such notice have [sic] made and does not subsequently make default hereunder (save such as are remedied to the Lessor’s satisfaction) then the Lessor must at the expense in all things (including legal costs and stamp duty) of the Lessee, grant a new lease to the Lessee of the Demised Premises for a further term of 5 years at the yearly rental determined in accordance with the provisions of clause 16.2 and otherwise upon the same terms and conditions contained in this lease with the exception of this present clause, provided however that the total term of this lease and any renewals hereof are limited to a period of 15 years.
Rental for further term16.2
The ‘yearly rental’ for the first Rental Year of the further term provided in clause 16.1 is to be fixed by mutual agreement between the parties hereto but failing agreement at least one month prior to the commencement of such year then the yearly rental to be paid for such year is the Current Market Rent as at the commencement of that year to be determined by an independent valuer registered under the Valuer’s Registration Act 1965 or any re-enactment thereof or any Act in substitution thereof appointed for the purpose by the President (or his nominee) for the time being of the Queensland Law Society Incorporated. The valuer in making his determination is deemed to be acting as an expert and not as an arbitrator and no statute relating to arbitration applies. The determination by the valuer is communicated in writing by the valuer to the Lessor and the Lessee and his decision is final and binding on both parties. All costs, including the valuer’s fees of obtaining the determination by the valuer are to be borne equally by the Lessor and Lessee PROVIDED ALWAYS that the rental for the first year of the renewal period is not less than that payable during the immediately preceding Rental Year. In relation to the second and subsequent rent years of the said further term the yearly rental as determined by the valuer is to be increased in accordance with the provisions of clause 2.3(a).”
For the first five years of the lease, the rent increased in accordance with changes to the All Groups Consumer Price Index Number for Brisbane (“CPI”) as provided for in clause 2.3(a). The rent at commencement of the lease was $102,500.00 per annum plus GST. The annual rent as at 30 June 2007 was $115,934.00 plus GST.
Following the exercise of the first option in clause 16.1, the parties were unable to agree on the rent to be payable, and engaged an expert to determine the current market rent in accordance with clause 16.2 of the lease. On 27 January 2008, the expert determined that the market rent of the leased premises was $151,757.00 plus GST.
The first respondent asserts that the review provisions contained in clauses 2.3, 16.1 and 16.2 of the lease are void for inconsistency with the provisions of the Retail Shop Leases Act 1994 (Qld) (“the Act”).
The statutory framework
That the lease of the premises was made under the Act was not contested. The Act was significantly amended in 2000 and again in 2006. Section 13 of the Act governs the application of the act to retail shop leases. It provides:
“13 Application of Act to leases—general
(1) Subject to subsections (2) to (7), this Act applies to all retail
shop leases whether entered into or renewed before or after 28
October 1994.
(2) This part (other than section 14), part 5 and part 6 do not
apply to existing retail shop leases.
(3)Section 27, as in force immediately before the commencement of the Retail Shop Leases Amendment Act 1999, continues to apply to a retail shop lease entered into before the commencement, and any extension or renewal of the lease, as if that Act had not commenced.
(4) Subject to subsection (5), section 27, as amended by the 2000
amendment Act, applies only to a retail shop lease entered
into after the commencement of this subsection.
(5) Section 27(8) applies only to a retail shop lease entered into
after 28 October 1994.
(6) Part 6, division 8A, applies only to a retail shop lease entered
into after the commencement of the division.
(7) Subsection (1) has effect subject to the following
provisions—
• section 15
• section 16
• section 17
• section 21
• section 42
• section 45(3)
• section 46(9)
• part 7.
(8) Despite subsections (1) and (3) to (7), only parts 1 to 3 and 7 apply to a short term retail shop lease entered into on or after the commencement of this subsection.
Note—
Part 12 also contains provisions about the application of this Act.
(9) In this section—
right to extend, a lease, does not include a holding over right of the lessee, if the right operates at the lessor’s discretion.
short term retail shop lease means a retail shop lease for
which the combined period of the following is not more than 6 months—(a) the lease’s original term;
(b) any periods for which the lessee has a right to extend the lease.
The relevant provisions of the Act are contained in sections 27 and 36. Section 13(4) provides that s 27 of the Act, as amended by the Retail Shop Leases Amendment Act 2000 (Qld), applies if the relevant Retail Shop Lease was entered into after the commencement that subsection. Section 13(4) commenced on
1 July 2000. Accordingly, the relevant version of s 27 for present purposes is that following the 2000 amendments.
It provided as follows:
27 Timing and bases of rent reviews
(1) If, under a retail shop lease, the rent payable under the lease or
any renewal or extension of the lease is to be reviewed during
the term of the lease or under an option to renew or extend the
lease, the lease must state the timing of the reviews and the
basis on which each review is to be made.
(2) The rent may not be reviewed more than once in each year of
the lease.
(3) Subsection (2) does not apply to the first year of the lease.
(4) The rent may be reviewed using different bases during the
term of the lease, but each review must be made using only 1
basis.
(5) The basis for a rent review must be a single basis consisting of
1 of the following—
(a) the current market rent of the leased shop;(b) an independently published index of prices, costs or
wages;
(c) a fixed percentage of the base rent;
(d) a fixed actual amount;
(e) another basis prescribed by regulation
(f) a single basis formed by a combination of 2 or more bases mentioned in paragraphs (b) to (e).
(6) If the rent is determined as a base rent plus an amount equal to
a percentage of the turnover of the lessee’s business the
review of the base rent must be made in accordance with subsections (4) and (5).
(7) If, under a retail shop lease, the rent is to be reviewed during
the term of the lease or any renewal or extension of the lease,
the rent payable for the rental period after the timing of an
invalid review is—
(a) for an invalid review mentioned in subsection (9),
definition invalid review, paragraph (a)—the same as the
rent payable before the timing of the review; or
(b) for an invalid review mentioned in subsection (9),
definition invalid review, paragraph (b)—the rent
worked out on 1 of the bases, chosen by the lessee, on
which the review was made; or
(c) for an invalid review mentioned in subsection (9),
definition invalid review, paragraph (c)—the rent
worked out on 1 of the bases, chosen by the lessee, on
which the review was to be made under the void provision.
(8)It is declared that an adjustment of the rent merely to enable the lessor to recover GST from the lessee is not a rent review.
(9) In this section—
invalid review, of rent under the lease, means—
(a) a review in a year of the lease, other than the first year,
in which the rent is to be reviewed under the lease more
than once; or
(b) a review made under the lease using more than 1 basis;
or
(c) a review under a provision of a lease that is void under
section 36(d) or (e)
……”
Section 36 of the Act is also relevant. Its terms were not altered by the 2006 amendments:
“Certain rent review provisions of leases void
A provision of a retail shop lease is void to the extent that it—
(a) requires the lessee to appoint someone to determine the
current market rent of the leased shop other than in
accordance with this Act; or
(b) requires the lessee to pay for a determination of current
market rent by a specialist retail valuer other than under
section 34; or
(c) requires the determination of the current market rent of
the leased shop to be made other than in accordance
with this Act; or
(d) reserves, or has the effect of reserving, to a party a
discretion to apply 1 of 2 or more methods of
calculating the rent of the leased shop on a particular
review of the rent; or
(e) provides for the rent of the leased shop to change on a
particular review of the rent in accordance with whichever of 2 or more methods of calculating the change would result in the higher or highest rent.”
The validity of clauses 2.3 and 16.2 of the lease
In light of the terms of ss 27(4), 27(5), 36(d) and 36(e), the issues before me may be stated as follows:
(a) whether or not clauses 2.3 and 16.2 provide for review of rent by reference to a single basis in accordance with the methods permitted under s27(5)
(b) whether:
(i) either of clause 2.3 or clause 16.2 reserves or has the effect of reserving to the applicants a discretion to apply one of two or more methods of calculating the rent of the leased shop on a particular review of the rent; or
(ii) whether either of these clauses provides for rent to be reviewed in accordance with whichever of two or more methods of calculation that results in the highest rent.
It may be noted at the outset that a clause will only be capable of offending ss 36(d) or (e) where it provides for two or more ‘methods of calculation’.
The Macquarie Dictionary[1] defines ‘method’ as “a way of doing something” while ‘calculate’ is said to mean “to ascertain by mathematical methods.”
[1](3rd ed, 1997).
Clause 2.3(a) provides for determination of yearly rent by reference to the mathematical formula set out in [3] above. This formula provides that rent will change in accordance with a calculation which multiplies the rent at the outset of the term by the change in CPI over the course of the lease.
This is clearly a method of calculation as contemplated within the terms of s 36.
The same can be said of clause 16.2 which provides for a determination by an independent valuer of ‘Current Market Rent.’ That determination must necessarily involve a ‘method of calculation.’
Either of these ‘methods of calculation’ amount to an acceptable ‘single basis’ of rent review as contemplated in s27(5)(a) in the case of the market rent and 27(5)(b) in relation to the CPI rent.
The real question, then, is whether the provisos seeking to prevent the CPI or market-based calculations resulting in decreased rent can be said to be ‘methods of calculation’ or ‘bases for review’ in their own right.
Clause 2.3(a) provides that “…the yearly rental determined as aforesaid may in no case be less than 100% of the yearly rental payable for the preceding Rental Year…”
The effect of the proviso is further entrenched by the terms of clause 2.3(c):
“If there is no increase in the Consumer Price (All Groups) Index as at the date of recalculation of rental as herein provided then the yearly payable for the particular second or subsequent Rental Year (as the case may require) is the same rental as was payable during the Rental Year immediately preceding the date of recalculation.”
Clause 16.2 includes a proviso similar to that contained in clause 2.3(a):
“…PROVIDED ALWAYS that the rental for the first year of the renewal period is not less than that payable during the immediately preceding Rental Year.”
Whilst there are superficial differences between clauses 2.3 and 16.2, these differences are not such that an independent consideration of the two clauses is necessary.
The question whether provisos such as those contained in these clauses infringe the Act as an impermissible ‘basis for review’ or ‘method of calculation’ was considered in a decision of the Retail Shop Leases Tribunal (the “Tribunal”) dated 20th November 1998,[2] and by Brabazon QC DCJ in Oz Sushi Pty Ltd v Lloyd Bennett & Associates.[3] Both these decisions were made prior to the 2000 amendments to the Act.
[2]In the matter of Decision X/1998, 20 November 1998.
[3][2002] QDC 220.
The version of section 27(5) relevant to those cases provided:
“If, under a retail shop lease, the rent is to be reviewed during the term of the lease or any renewal or extension of the lease using more than 1 basis for a rent review, the rent payable for the rental period after the timing of the review is the same as the rent payable before the timing of the review.”
Again, the terms of s 36 did not change as a result of either the 2000 or 2006 amendments.
In the first of those cases, the Tribunal was called upon to make a determination as to the validity of a lease provision in the following terms.
“That the yearly rental for the third and fifth year of the original term and for the second and fourth rental years of the extended period shall be the current market rent for the demised premises as agreed between the parties, and in the event of non-agreement, that determined by a valuer appointed in accordance with the provisions of the Retail Shop Leases Act, as amended, with this proviso:
PROVIDED ALWAYS that the yearly rental determined as aforesaid shall in no case be less than the yearly rental payable for the preceding rental period.”
The Chairman of the Tribunal held that that “the ordinary meaning of the words ‘basis for review’ do not apply to a provision which in effect means that rent is not reviewed, but that a provision is made that a previous rental applies.”
Nevertheless, the Chairman stated that:
“That section is a so-called ratchet clause, providing for movement in one direction only. Such a clause is made void.”
The relevant clause in Oz Sushi provided for rent and review thereof in the following terms:
“First year $90,000
Second year $90,000
Third year - CPI (but not less than previous year)
Fourth year - CPI (but not less than previous year)
Fifth year - CPI (but not less than previous year)
Sixth year - Review to market (but no less than previous year)
Seventh year - CPI (but no less than previous year)
Eighth year - CPI (but not less than previous year)
Ninth year - Review to market (but no less than previous year)
Tenth year - CPI (but no less than previous year).”
After quoting from the Explanatory Notes to the Retail Shop Leases Bill 1994 (Qld) as well as the Minister’s second reading speech, Brabazon QC DCJ made the following observations:
“[26] There is no need to turn to the extrinsic materials to see what is meant by s 27. If the reviewer is told to look at the CPI index, or at the current market rent, and also told that the rent must not go down, then the review must be made using two bases. If there were doubt about it, then the extrinsic materials makes Parliament’s purpose, and the meaning of the legislation, quite clear. Ratchet clauses are to be forbidden, and so they are described as a basis for review.
[27] In clause 36(e) there is no difficulty in seeing that the concept of a change in the rent could also include a zero change. In this case, there are two methods of calculating the change. The words used in this case, ‘but no less than previous year’ are void.
Without disagreeing with his Honour’s conclusion that the terms of the Act preclude the use of clauses such as those presently under consideration, I would observe that the operation of the relevant statutory provisions is perhaps not quite as clear as his Honour perceived. It is not sufficient to say, as his Honour does, that ratchet clauses “are to be forbidden, and so they are described as a basis for review.” To do so is, respectfully, to put the cart before the horse; a ratchet clause will be forbidden if it can be described as a ‘basis of review’ as ascertained by reference to Parliament’s purpose – it is not a ‘basis for review’ because it was intended to be prohibited.
It may also be arguable that to conclude that either proviso is a ‘method of calculation’ is, strictly speaking, to take that particular expression beyond its natural meaning. On this view, one might say that the review provisions provide for two options, namely the reviewed rent or the previous rent, but a provision, for example, which indicates that yearly rental will, in the case of a negative CPI, remain the same as the previous year does not, in truth, provide for a separate calculation of rent.
Accordingly, it might be asserted that the ordinary meaning of the language in the section does not favour a construction of the statute whereby the provisos contained in clauses 2.3 and 16.2 fall within the ambit of s36(d) or (e).
The expression ‘basis of rent review’ contained in s27(5) may be broader than the phrase ‘method of calculation’ but is also not without ambiguity. Indeed, there is some intuitive appeal in the Chairman’s statement that the “ordinary meaning of the words ‘basis for review’ do not apply to a provision which in effect means that rent is not reviewed.”
The uncertainty surrounding the application of ss 27(5), 36(d) and 36(e) in this context makes it necessary to return, for a moment, to basic principles of statutory interpretation.
The starting point is section 14A(1) of the Acts Interpretation Act 1954 (Qld) (“AIA”). This section provides that:
“In the interpretation of a provision of an Act, the interpretation that will best achieve the purpose of the Act is to be preferred to any other interpretation.”
Similarly, in Project Blue Sky v Australian Broadcasting Authority[4] the High Court observed that:
“The primary object of statutory construction is to construe the relevant provision so that it is consistent with the language and purpose of all the provisions of the statute.”[5]
[4](1998) 194 CLR 355.
[5]Ibid at 381 per McHugh, Gummow, Kirby and Hayne JJ.
The Act’s object is, according to section 3, “to promote efficiency and equity in the conduct of certain retail businesses in Queensland.”
In CIC Insurance Ltd v Bankstown Football Club Ltd,[6] the High Court explored the present approach to the construction of statutory instruments. The majority stated:
“the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy.” [7]
[6](1997) 187 CLR 384.
[7]Ibid at 408 per Brennan CJ, Dawson, Toohey and Gummow JJ.
Thus, it is necessary for me to consider the broader context of the legislation, as well as the mischief it is directed to curing.
Neither the purpose expressly stated in s 3 nor anything else in the Act seeks to prevent rent from increasing. The Act does not attempt to restrict the size of an increase which might be agreed to by the parties. Moreover, it is entirely possible for parties to agree to terms which effectively ensure that rent will increase but not decrease. Section 27(5), for example, allows for clauses which require fixed annual increases (either by reference to a percentage or quantified amount).
The applicants contend that the mischief which the Act seeks to avoid is uncertainty in relation to the method of rent review to be applied in a particular instance. They submit that the provisos contained in clauses 2.3 and 16.2 do not create such uncertainty. In their submission, the clauses do not give the lessor an option as to the method of rent review to be adopted; rather, they serve only to constrain the possible result of any review.
The applicants sought support in the fact that other States have explicitly prohibited the use of clauses which allow for rent to increase but not decrease. The Retail Leases Act 1994 (NSW), for example, provides:
“if a retail shop lease provides for a change to base rent in a way that has the potential to cause that rent to decrease (such as a provision for the rent to change to current market rent), a provision of the lease is void to the extent that it:
(a) prevents or enables the lessor or any other person to prevent base rent decreasing pursuant to the change, or
(b) limits or specifies, or allows the limitation or specification of, the amount by which the base rent is to decrease.”
Similar provisions are contained in the equivalent legislation of South Australia, Victoria, Western Australia, the Australian Capital Territory and the Northern Territory. There is no such provision in the Queensland legislation.
There is very little written on this point. I was taken, in the course of argument, to W D Duncan’s, Commercial Leases in Australia.[8] The author notes[9] that there are provisions in the retail shop lease legislation of all states which regulate market rent review provisions. He then indicates that in New South Wales, Queensland and South Australia, clauses in retail shop leases are void to the extent that they reserve or have the “effect of reserving a discretion to apply one of two or more methods of calculating rent on a particular review, or [provide] for the rent to change on a particular review in accordance with whichever of two or more methods of calculating the change would result in a higher or the highest rent.” Finally, reference is made to the fact that in New South Wales, South Australia and Victoria, “ratchet clauses, which provide that rent payable after a review must not be less than rent payable immediately before the review, have been declared void.” The author does not specifically refer to the validity of ratchet clauses in Queensland.
[8](2008, 5th Ed).
[9]At page 175.
It might be said that the absence of comment is indicative of a view that the Queensland legislature has not invalidated ratchet clauses. Again, there is some intuitive appeal to this suggestion. I would not, however, be minded to draw a firm conclusion one way or the other from the mere absence of comment in a well-regarded academic work such as this. The fact that ‘ratchet clauses’ are not specifically addressed in the Queensland legislation does not necessarily preclude a conclusion that they are nonetheless prohibited by the more general restrictions contained in ss 27(4)-(5) and 36(d)-(e).
Reference to extrinsic material
In an endeavour to persuade me that clauses 16.2 and 2.3 infringe the terms of the Act, the first respondent drew my attention to certain explanatory materials, specifically, the explanatory memorandum and the Minister’s second reading speech.
Section 14B of the AIA deals with the use of extrinsic material to aid statutory interpretation. It provides:
14B Use of extrinsic material in interpretation
(1) Subject to subsection (2), in the interpretation of a provision
of an Act, consideration may be given to extrinsic material
capable of assisting in the interpretation—
(a) if the provision is ambiguous or obscure—to provide an
interpretation of it; or
(b) if the ordinary meaning of the provision leads to a result
that is manifestly absurd or is unreasonable—to provide
an interpretation that avoids such a result; or
(c) in any other case—to confirm the interpretation
conveyed by the ordinary meaning of the provision.
(2) In determining whether consideration should be given to
extrinsic material, and in determining the weight to be given
to extrinsic material, regard is to be had to—
(a) the desirability of a provision being interpreted as
having its ordinary meaning; and
(b) the undesirability of prolonging proceedings without
compensating advantage; and
(c) other relevant matters.
In Newcastle City Council v GIO General Ltd,[10] McHugh J provided a further exposition of the principles governing the use of extrinsic materials in statutory interpretation.
“Extrinsic material cannot be used to construe a legislative provision unless the construction of the provision suggested by that material is one that is “reasonably open”. Even if extrinsic material convincingly indicates the evil at which a section was aimed, it does not follow that the language of the section will always permit a construction that will remedy that evil. If the legislature uses language which covers only one state of affairs, a court cannot legitimately construe the words of the section in a tortured and unrealistic manner to cover another set of circumstances. As Brennan CJ and I said in IW v City of Perth even when a court adopts a purposive construction to remedial legislation it “is not at liberty to give it a construction that is unreasonable or unnatural”.
Nevertheless, when the purpose of a legislative provision is clear, a court may be justified in giving the provision “a strained construction” to achieve that purpose provided that the construction is neither unreasonable nor unnatural. If the target of a legislative provision is clear, the court's duty is to ensure that it is hit rather than to record that it has been missed. (references omitted)
[10](1997) 191 CLR 85 at 109-113
Hence, I am only able to have recourse to the relevant extrinsic material if I am satisfied:
(a) that the provision is ambiguous or obscure or that the ordinary meaning would be likely to lead to an absurd or manifestly unreasonable result; and
(b) that the construction supported by the material is “reasonably open” in light of the words of the statute.
Whilst it might be said that there is nothing inherently ambiguous in the terms ‘method of calculation’ or ‘basis of review’, there is certainly at least some doubt in respect of their application to so-called ‘ratchet clauses.’
In the circumstances, therefore, I consider it appropriate to construe the relevant statutory provisions with regard to these extrinsic materials.
The Explanatory Notes to the 1994 Bill state[11] that:
“If a retail shop lease provides for a review of rent to be undertaken with reference to more than one basis, the rent payable remains the same for the next rental period following a review as the rent which applied to the previous period.
This clause will prohibit the use of ‘ratchet’ clauses (where rent can rise, but not fall, and ‘multiple rent review’ clauses (where rent is reviewed by reference to two or more bases and the method resulting in the highest rent selected).”
[11]At p. 576.
This would appear to be a clear indicator that the provisions of the Act were intended to preclude the use of ‘ratchet clauses’ such as the provisos contained in clauses 2.3 and 16.2.
The Minister’s second reading speech included the following passage:
“In general terms, the review of the act has concluded that the imbalance in market power in lessor/lessee relations is such that continued government intervention in retail tenancy matters is warranted. This imbalance in market power has manifested itself in practices such as –
‘ratchet clauses’ and multiple rent review clauses in leases where ‘independently’ determined market rents can rise but not fall or where the lessor can ‘select’ the highest of a number of rental alternatives…
…
In relation to rent reviews the Bill prohibits ‘ratchet’ and ‘multiple rent review clauses’. On each occasion that the rent payable is to be reviewed such review must only be undertaken by reference to a single basis, for example CIP, and market rent review, or a fixed dollar amount.”
Again, this extract tends towards a conclusion that the legislature intended to prohibit ratchet clauses such as those presently under consideration.
The applicants, however, asserted that the inclusion of the words “where ‘independently’ determined market rents can rise but not fall” calls into question the specific mischief to which the Act was directed. This statement would, in the applicants’ submission, tend to indicate that only ‘ratchet’ clauses occurring in the context of market review provisions are to be regarded as offensive. I do not consider that any such limitation is to be inferred. The statement on which the applicants rely simply listed one form of ‘ratchet clause’ as an example of the manner in which the ‘imbalance in market power’ between lessor and lessees could be manifested. There is nothing to indicate that the legislature was seeking only to exclude ratchet clauses in the context of reviews to market. On the contrary, the subsequent statement that “the Bill prohibits ‘ratchet’ and ‘multiple rent review clauses’” indicates that an unqualified prohibition on clauses which allow rent to rise but not fall was intended.
Accordingly, the ambiguity which exists in the context of ss 27(5), 36(d) and 36(e) should be resolved in favour of a construction which prohibits ‘ratchet’ clauses of the type contained in clauses 16.2 and 2.3 of the lease. That this may require the statutory provisions, particularly ss 36(d) and (e), to be given a slightly ‘strained’ construction is not fatal to this conclusion; the construction promoted by the first respondent is neither ‘tortured’ nor ‘unrealistic.’ In those circumstances, the court’s duty is, as outlined by McHugh J in Newcastle City Council v GIO General Ltd, to ensure that the clear aim of these legislative provisions is achieved.[12]
[12]Newcastle City Council v GIO General Ltd (1997) 91 CLR 85 at 109-113 per McHugh J.
In this regard, the observations of the High Court in Project Blue Sky are again instructive:
“However, the duty of a court is to give the words of a statutory provision the meaning that the legislature is taken to have intended them to have. Ordinarily, that meaning (the legal meaning) will correspond with the grammatical meaning of the provision. But not always. The context of the words, the consequences of a literal or grammatical construction, the purpose of the statute or the canons of construction may require the words of a legislative provision to be read in a way that does not correspond with the literal or grammatical meaning.”[13]
[13](1998) 194 CLR 355 per McHugh, Gummow, Kirby and Hayne JJ.
In my view, the provisos contained in clauses 16.2 and 2.3 are to be considered methods of calculating changes in the rent. The fact that neither proviso operates to alter the rent payable may make this interpretation seem counter-intuitive, but it is clear that a result where the rent remains the same falls within the purview of the expression ‘method of calculating the change.’ If the opposite were true, a provision which allowed the lessor to choose between CPI and market rent would not contravene the section if, hypothetically speaking, the rental market remained absolutely stable or inflation, as measured by CPI, was zero.
In those circumstances, clauses 2.3 and 16.2 of the lease clearly contravene s 36(e) of the Act. Both clauses provide for the rent payable under the lease to change in accordance with whichever of two different calculations yields the highest result. In the case of clause 2.3, rent will be ascertained by reference to the highest of:
(a) the rent previously paid; or
(b) the rent as increased in accordance with the CPI.
In relation to clause 16.2, rent is to be determined in accordance with the highest of:
(a) rent previously paid; or
(b) the rent determined following review to market.
Both these approaches to rent review are invalidated by the legislation.
Practical considerations
The question remains as to the effect this finding has on the validity of the lease. Section 36 speaks of a provision of a lease being void ‘to the extent’ it contravenes that section. The applicants submitted that this means that only the parts of the lease (namely, the provisos that rent may not decrease) which operate as ratchet clauses will be void. This, they say, yields the result that, notwithstanding the invalidity of the provisos, the provision for review to market contained in clause 16.2 remains valid.
However, whilst it is true that s 36(e) operates to render clauses 2.3 and 16.2 void only to the extent that they provide for the rent to change in accordance with whichever of the previous rent or the current market rent / CPI yields the highest result, the review conducted in reliance on, and pursuant to those clauses, was an “invalid review” within the terms of s 27(9)(c). The rental payable for the period immediately following the invalid review would then, by virtue of s27(7)(c), be worked out in accordance with whichever of the bases under the review provision the lessee chooses. Thus, in the case of the review following the exercise of the option (as governed by clause 16.2), it would be open to the lessee to nominate the relevant basis of review as the rent previously payable.
The same could be said for the increases which were implemented in the second and subsequent years of the lease in accordance with CPI under clause 2.3.
In relation to the additional amounts paid pursuant to these increases, the first respondent seeks leave to file a counterclaim for their repayment. I would be minded to grant such leave, noting that Brabazon QC DCJ in Oz Sushi allowed repayment of excess rent paid as a result of the operation of void rent review provisions.
Conclusion
In light of the above findings, I would declare that clauses 2.3 and 16.2 of the lease dated 27 June 2002 made between the applicants and the first respondent are void to the extent they allow for rent to change in accordance with whichever of the rent previously payable and either CPI or market review yields the highest result.
I would grant leave to the first respondent to file a counterclaim for any additional amounts paid pursuant to the operation of clause 2.3 or 16.2.
I will hear the parties further as to the appropriate form of orders, the directions necessary for the conduct of any proceedings as against the second respondent, in particular, whether the proceedings should be continued as if started by claim, and as to costs.
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