KJRR Pty Ltd v Commissioner of State Revenue
[1999] VSCA 2
•24 February 1999
SUPREME COURT OF VICTORIA
COURT OF APPEAL Not Restricted No. 6329 of 1997
KJRR PTY. LTD.
Appellant
v
COMMISSIONER OF STATE REVENUE
(IN HIS CAPACITY OF COMPTROLLER OFSTAMPS)
Respondent
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JUDGES: TADGELL, CALLAWAY and CHERNOV, JJ.A. WHERE HELD: MELBOURNE DATE OF HEARING: 16 November 1998 DATE OF JUDGMENT: 24 February 1999 MEDIA NEUTRAL CITATION:
[1999] VSCA 2 (1st Revision - 8 April 1999)
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STAMP DUTY - Instrument described as licence agreement - Whether assessable as lease - Whether exclusive possession granted - Effect of express term denying grant of exclusive occupation.
Stamps Act 1958, Part 2, Division 3, sub-division (8); Third Schedule, Heading VIII.
LANDLORD AND TENANT - Whether so-called licence agreement created tenancy.
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APPEARANCES: Counsel Solicitors For the Appellant Dr J.F. Bleechmore Mirabelli D'Ortenzio & Co. For the Respondent Mr R.L. Berglund Solicitor for the
Commissioner of State
Revenue
TADGELL, J. A.:
The Revenue successfully appealed to a judge of the Supreme Court against a decision of the Administrative Appeals Tribunal to set aside an assessment of stamp duty. Hence this appeal by the taxpayer.
On 1 September 1996 the appellant, KJRR Pty. Ltd., and Sportsco Pty. Ltd. executed a franchise agreement whereby the appellant, as franchisee, obtained the right from and undertook the obligation to Sportsco, as franchisor, to conduct a business as a retailer of sports and leisure-wear. The agreement recited, among other things, that Sportsco had established and developed a distinctive system of conducting retail sports and leisure-wear businesses and promoting specified trademarks and intellectual property of which it was the exclusive licensee. The franchise agreement was very detailed but it is sufficient now to say that, subject to its terms, the appellant derived by it the exclusive right for five years from 1 September 1996 to use the system and to enjoy the benefits of the trademarks and intellectual property within certain "Territory", which was designated as Centrepoint Arcade, Warrnambool. Each party became entitled by virtue of the franchise agreement to the performance by the other of a variety of quite elaborate obligations. Among these, the appellant was obliged to submit to a degree of supervision by Sportsco of the conduct of its business. The appellant was also obliged in conducting the business to generate an agreed minimum gross revenue of which Sportsco was entitled to a share, payable monthly, as a franchise service fee. In the events that happened the appellant became further obliged by the franchise agreement to enter into a so-called "property agreement" in relation to Shop 6, Centrepoint Arcade, 125 Liebig Street, Warrnambool which it did, also on 1 September 1996. Sportsco had previously become lessee of that same shop under a lease from Sarclet Pty. Ltd. for five years commencing on 15 August 1996 at a rent of $42,000 per annum, subject to annual review. So far as appears the lease was executed by the parties to it at arms' length. The "property agreement" expresses itself to be a "Licence Agreement" made between Sportsco as licensor and the appellant as licensee. By it the licensor/franchisor granted to the appellant "a Licence to use" Shop 6 "for the use only as a Sportsco Franchise Retail Store". The duration of the grant is from 1 September 1996 until the day before the expiration of the lease of the shop held by Sportsco from Sarclet Pty. Ltd.; but the licence is terminable earlier upon termination of the franchise agreement or the lease. The so-called "licence fee" payable by the appellant to Sportsco or at its direction, in consideration of which the grant to the appellant was made, is an amount equal to the rental and other sums payable by Sportsco under the lease.
The so-called licence agreement was assessed by the respondent to be chargeable with stamp duty as a lease by virtue of Part 2, Division 3, Sub-division (8) and Heading VIII in the Third Schedule to the Stamps Act 1958. The appellant unsuccessfully objected against the assessment but succeeded on a review by the Administrative Appeals Tribunal under s.33B of the Act on the footing that the licence agreement is what it is expressed to be and therefore, not being a lease, is not assessable to duty as an instrument of that description. The learned judge from whom this appeal comes restored the assessment upon the conclusion that, howsoever the licence agreement describes itself, it is in substance a lease because it grants to the appellant, for the purpose of the conduct of a business at the shop, exclusive possession without which the conduct of the business there would be impracticable, if not practically impossible. His Honour also discerned evidence of a grant of an interest in land from terms of the licence agreement, such as a covenant that the appellant should occupy the premises at its own risk, and a restriction on assignment without the grantor's consent. Reduced to its essence, therefore, the question we are to decide is whether, for the purpose of assessment to stamp duty, the licence agreement is properly to be regarded as a lease.
It is common ground, for it is trite, that the label with which an agreement is designated by the parties cannot determine its classification for all legal purposes: e.g. Wik Peoples v. Queensland (1996) 187 C.L.R. 1, at 152, and the cases there cited. It is also common ground that the question whether the grant in this case created a lease or a licence is to be resolved by deciding whether the grant was of a right to exclusive possession of the subject premises: Radaich v. Smith (1959) 101 C.L.R. 209, at 214 per McTiernan, J.; 217-8, per Taylor, J.; 220, per Menzies, J. and 222-3, per Windeyer, J., with none of whom Dixon, C.J. disagreed. There are exceptions to the general rule that a grant of exclusive possession for a term will amount to a lease by the grantor to the grantee, but it is accepted here on either side that the present case leaves room for no such exception. The proper characterisation of any occupation agreement will, however, depend on its true construction; and among the provisions of the licence agreement calling for consideration are these clauses -
"2.2 Licence This Licence shall confer no right of exclusive occupation of the premises to the Licensee and the Licensor may at any time and at all times from time to time exercise all its rights as Lessee including (but without in any way limiting the generality of this provision) its rights to use, possess and enjoy the whole or any part of the Premises save only insofar as such rights shall prevent the operation of the Licence hereby granted.
2.3 Rights in Contract The Rights hereby conferred shall rest in contract only and shall not create in or confer upon the Licensee any tenancy or proprietary or other estate or interest whatsoever in or over the Premises and the rights of the Licensee shall be that of a Licensee only and do not comprise or include any further or other rights."
The parties recognised in this Court that clause 2.3 can not contribute much to a resolution of the question for decision: it does very little more by way of characterisation of the right conferred by the agreement than is done by the descriptive label that the agreement itself bears. It is true that the characterisation of the right conferred depends on the nature of the right which the parties intended that the appellant should have in relation to the premises; and in a case such as this, where the parties have put their transaction in writing, their intention is to be derived by construing their written words, including clause 2.3. The agreement is, however, to be construed as a whole; and if, taken as a whole, the licence agreement gives the appellant the rights of a tenant, clause 2.3 could not gainsay them by asserting otherwise: Radaich v. Smith, supra, per Windeyer, J. loc. cit.; Street v. Mountford [1985] 1 A.C. 809, esp. at 820-822. Clause 2.3, therefore, may by common consent be put aside.
The significance of clause 2.2 is of a different order. While clause 2.3 purports to state the derivation of the rights conferred by the agreement, and to say how they shall and shall not be characterised or regarded, clause 2.2 purports to prescribe and define rights by reference to the extent to which the agreement allows or does not allow the parties respectively to use the subject premises. It may truly be said that clause 2.2, the same as clause 2.3, is but one provision in a not unsophisticated agreement; and it cannot be allowed, any more than clause 2.3, to exercise a disproportionate influence on the character of the agreement. Clause 2.2, however, appears to address itself specifically, and without any attempt at characterisation, to a right which, according to authority, is generally a fundamental indicator of and a prerequisite to a lease - a right of exclusive possession of the subject premises. As Taylor, J. noted in Radaich v. Smith, at 219-20 -
"... it must be taken as beyond doubt that in cases where there is a real contest between the issues of lease and licence the problem may be solved by considering whether the right which is conferred is a right to the exclusive possession of the property in question. This, however, does not deny that exceptional cases may arise in which it will be seen that a right to exclusive occupation or possession has been given without the grant of a leasehold interest."
Radaich v. Smith concerned an agreement granting occupancy for a five-year term, in consideration of a weekly payment, of a small suburban lock-up shop for use as a milk bar. The agreement described itself as a licence but the High Court decided that it fell to be classified as a lease in the light of the true nature of the grant, having regard not only to the written terms of the agreement but to the relevant surrounding circumstances, including in particular the nature of the premises and the purpose for which the grant was given and taken. In effect it was held, for it was obvious as a matter of common-sense, that the grantee could make use of the premises only if she had the exclusive right to use them as a shop. It could not be said that Radaich v. Smith was one of those exceptional cases where, if what had been granted was a right of exclusive possession, there was not a grant of a leasehold interest. It is the same in this case. Accordingly it was again common ground that, if the appellant did obtain a grant of exclusive possession of the shop, the instrument by which the grant was made should be classified as a lease for the purpose of stamp duty. Conversely, as counsel for the respondent properly conceded, if no right of exclusive possession was conferred on the appellant as franchisee, the appeal must succeed.
Clause 2.2 seeks to deny to the appellant a right of "exclusive occupation" rather than "exclusive possession", although the clause does refer to the licensor's right as lessee to "possess" the premises. No suggestion, however, was made to the Tribunal or to this Court (or, so far as appears, to the learned judge from whom this appeal comes) that anything turns on a distinction between "exclusive occupation" and "exclusive possession". In the context of this case the two expressions may be taken to have the same connotation, as Taylor, J. seems also to have assumed in the passage last quoted. In a similar context the two phrases have indeed been not uncommonly used interchangeably: e.g. A.G. Securities v. Vaughan; Antoniades v. Villiers [1990] 1 A.C. 417, 454-464, per Lord Templeman; Aslan v. Murphy (Nos. 1 and 2); Duke v. Wynne [1990] 1 W.L.R. 766, at 775, per Lord Donaldson of Lymington, M.R.; and see, illuminatingly, Bright and Gilbert, Landlord and Tenant Law: The Nature of Tenancies (Clarendon Press, Oxford, 1995) 127. Moreover, the question here being whether the appellant was granted a right of exclusive possession, a denial by clause 2.2 of a right of exclusive occupation would seem necessarily to carry with it a denial of exclusive possession, even if the converse might not be true. The first question thrown up by clause 2.2 is whether it is to be taken into account at all in a consideration of the nature of the grant to the appellant.
Mr Geoffrey McP. Gibson, who constituted the Administrative Appeals Tribunal upon the reference requested by the taxpayer, regarded the licence agreement as akin to a sub-lease in all but name and form. He concluded, however, that there was no reason not to give clause 2.2 the effect which on its face it appears to seek to achieve; and it was essentially for that reason that he set the assessment aside. On appeal from the Tribunal the learned judge accepted the view of the licensing agreement that the respondent had evidently taken when making the assessment, namely that, looking at the matter realistically, the appellant as franchisee was given exclusive possession of the shop to operate its own business there without interference. Indeed, the learned judge went farther than the respondent had gone when making the assessment or (as we were told) had submitted in argument to the Court. His Honour concluded that -
"It is nothing more than a pretence to suggest that Sportsco would ever introduce other parties into the premises to conduct a business or that it would interfere in any way with the efficient conduct of the respondent's business at the premises.
...
I have already stated what Windeyer, J. said at 224 [of the report in Radaich v. Smith] about the inability to conduct one's business if the other party could permit other people to carry on a business in there also.
It follows that insofar as cl. 2 of the licence agreement purports to provide that the agreement does not grant an interest in land I find that it is a pretence and does not give effect to the common intention of the parties. It can be ignored."
Therein lies the key to this appeal: can clause 2.2 be ignored or not; and, if not, what effect is it to be given?
There was no oral evidence called before the Tribunal or on the appeal to the Supreme Court. The information about the parties' intentions and the manner in which their businesses were expected to operate and interact was to be derived, if at all, from the two written agreements to which they were parties, including the lease from Sarclet Pty. Ltd., which was set out as a schedule to the licence agreement. The learned judge felt able nevertheless to infer sufficient to lead to his conclusions that I have set out. His Honour set considerable store by the decision of the House of Lords in Street v. Mountford, supra. That case, however, unlike the present, did not raise the question whether the relevant agreement granted exclusive possession. The question there was whether the party to whom the owner of residential premises had by agreement admittedly granted exclusive possession was a tenant of the owner and therefore entitled to the benefit of the Rent Acts. The House of Lords decided that a tenancy had been created notwithstanding that the agreement in terms described the grant as one of a licence. In the present case, by comparison, the question is whether the so-called licence agreement is one which is to be taken to grant exclusive possession (or occupation) even in the face of clause 2.2, which declares that "no right of exclusive occupation" is conferred.
The question whether an occupation agreement amounts to a lease conferring a proprietary interest, or merely to a contractual licence, is ancient and familiar. It is nevertheless a question that has over the years posed tantalising problems for the courts in a variety of contexts. It is easy enough to say that a grant of exclusive possession (or occupation) of premises is a hallmark of a lease, and that such a grant carries with it a right to exclude - i.e. to maintain an action for trespass against - all others, including the grantor. A satisfactory statement of the criteria by which such a grant may inevitably be identified is, however, elusive. Sometimes the identification can be made only after a narrow examination of the relevant facts and circumstances; and those that are relevant might not always be obvious. Particular difficulty may arise when the parties have purported by one means or another to stipulate in the agreement the existence or not of an exclusive right. The problem is nicely exposed by Bright and Gilbert, op. cit., at 96, thus -
"Exclusive possession exists when the occupant has the right to exclude all others from the premises. A difficulty that the courts have faced is in deciding to what extent the parties themselves are free to define the existence or non-existence of this right in the contract. In many cases, the parties have stated in the contract that the occupant does not have exclusive possession and yet, in practice, the facts indicate that it would be a physical impossibility for anyone else to share the premises with the occupant. Which prevails? The contractually expressed intention of the parties; or the fact of exclusive possession being enjoyed in practice? Is the classification of the occupation agreement a question of contract law or property law?"
As appears from Mr Gibson's reasons, the case was argued before him for the appellant on the assumption that no case had been decided where a finding of a grant of exclusive possession had been made in the face of an express provision in the agreement to the contrary; but that -
"... the relevant process to be undertaken was that which is involved in implying a term in a contract; and that it was impossible to imply a term in this agreement that KJRR was to have exclusive possession because no such term could be implied in the face of an express provision to the contrary".
Mr Gibson accepted a submission to that effect, regarding himself as practically bound to apply the decision of the New South Wales Court of Appeal in Lewis v. Bell (1985) 1 N.S.W.L.R. 731. That case concerned an occupation agreement (called a licence agreement) made between the Australian Jockey Club and a racehorse trainer which provided that -
"Nothing contained in this agreement shall be construed as granting or shall be deemed to grant to the trainer any estate or interest in the licensed premises and save as to the rights hereby conferred on the trainer the licensed premises remain in the possession and control of the AJC."
As a matter of construction the Court of Appeal, apparently applying principles from Radaich v. Smith but distinguishing that case on the facts, declined in the circumstances, and especially in the face of the provision just quoted, to imply as a term of the agreement, or to infer that the parties intended, a grant of exclusive possession.
The assumption referred to in paragraph 11 above, on which this case was argued on behalf of the appellant in the Administrative Appeals Tribunal, led Mr Gibson to conclude that "... no case has decided that an agreement is effective to constitute a lease where the parties have expressly covenanted that no rights of exclusive possession (or occupation) have been conferred". The assumption was not justified. As Bright and Gilbert note in their passage above-quoted, there have been several decisions concerning occupation agreements which had expressly provided that the occupant did not have exclusive possession; and in a number the court nevertheless decided, contrary to the submission of the grantor, that the occupant had a lease and not a licence. These, all English, include Aslan v. Murphy; Duke v. Wynne, supra, esp. at 771 and 774; Family Housing Association v. Jones [1990] 1 W.L.R. 779, 788; Westminster City Council v. Clarke [1992] 2 A.C. 288, at 296-7 (disapproving of the Family Housing Association Case only on a point not now material); and A.G. Securities v. Vaughan; Antoniades v. Villiers, supra, at 455-457. These cases all arose in the context of the Rent Acts and were clearly enough influenced by a policy that the courts should not permit artificial or illusory provisions of occupation agreements to oust the operation of the statutory scheme to the disadvantage of occupiers for whose protection the scheme had been enacted. This attitude of the courts in the context of occupation agreements had its genesis, or at least received its principal impetus, in the leading decision of the House of Lords in Street v. Mountford, supra. There, a right to occupy two residential rooms was granted by a so-called "licensing agreement" which contained a declaration signed by the grantee that she understood the agreement not to give her a tenancy protected under the Rent Acts. The grantee and her husband took up occupation and it was common ground that they had been given and received exclusive possession. The hallmarks of a lease being present - namely, exclusive possession at a rent for a term - the House of Lords rejected the grantor's contention that the intention of the parties derivable from the actual terms in which the agreement was phrased should be accorded paramountcy in order to classify it as a mere licence. In a passage since much quoted Lord Templeman, who delivered the leading opinion, observed (at 819) -
"Both parties enjoyed freedom to contract or not to contract and both parties exercised that freedom by contracting on the terms set forth in the written agreement and on no other terms. But the consequences in law of the agreement, once concluded, can only be determined by consideration of the effect of the agreement. If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting that they only created a licence. The manufacture of a five- pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade."
The learned judge, acknowledging that he had been much assisted by Street v. Mountford, referred to the need to be wary about applying English cases because of the Rent Acts, but stated that "... the reasoning in that case did not depend on the statutes and was not influenced by them". His Honour appears, however, if I may respectfully say so, to have been misled. The influence on the decision in Street v. Mountford, as a matter of policy, of the Rent Acts was fundamental, as appears from the following passage from Lord Templeman's opinion, at 825 -
"Although the Rent Acts must not be allowed to alter or influence the construction of an agreement, the court should, in my opinion, be astute to detect and frustrate sham devices and artificial transactions whose only object is to disguise the grant of a tenancy and to evade the Rent Acts."
His Honour's reliance on English authority which was influenced by that policy appears to have led to error, as I shall attempt to show.
The paramountcy of substance over form in the classification of occupation rights for which protection of the Rent Acts is claimed was further emphasised and exemplified in the decisions of the House of Lords in A.G. Securities v. Vaughan and Antoniades v. Villiers, supra. In both of these cases, which were argued and reported together, modest residential premises were occupied for a term and at a rent pursuant to agreements which indicated in terms that exclusive possession was not being given. In his opinion given in the case of Antoniades v. Villiers Lord Templeman, referring (at 462) to the passage in his opinion in Street v. Mountford that I have just quoted, explained thus what he had intended and went on to apply it -
"It would have been more accurate and less liable to give rise to misunderstandings if I had substituted the word 'pretence' for the references to 'sham devices' and 'artificial transactions'. Street v. Mountford was not a case which involved a pretence concerning exclusive possession. The agreement did not mention exclusive possession and the owner conceded that the occupier enjoyed exclusive possession. ... where the language of licence contradicts the reality of lease, the facts must prevail. The facts must prevail over the language in order that the parties may not contract out of the Rent Acts. In the present case clause 16 was a pretence."
The clause 16 in question provided that -
"The licensor shall be entitled at any time to use the rooms together with the licensee and permit other persons to use all of the rooms together with the licensee ...".
The patent artificiality of clause 16 was demonstrated by evidence describing the subject premises and the negotiations between the parties for their occupancy. The accommodation consisted of a house attic that had been converted into a small flat and was obviously sufficient to house reasonably only the two people who had applied to the owner for the use of it so that they might live there together as man and wife. Lord Templeman (at 465) regarded the evidence as indicating the grant of a joint tenancy to these two people (notwithstanding that each of them had been required separately to execute an agreement containing clause 16) because -
"(1) The applicants for the flat applied to rent the flat jointly and to enjoy exclusive occupation. (2) The landlord allowed the applicants jointly to enjoy exclusive occupation and accepted rent. A tenancy was created. (3) The power reserved to the landlord to deprive the applicants of exclusive occupation was inconsistent with the provisions of the Rent Acts. (4) Moreover in all the circumstances the power which the landlord insisted upon to deprive the applicants of exclusive occupation was a pretence only intended to deprive the applicants of the protection of the Rent Acts."
Each of the other Law Lords took a similar view. Lord Bridge of Harwich, at 454, regarded clause 16 as -
"... repugnant to the true purpose of the agreement. No-one could have supposed that those provisions were ever intended to be acted on. They were introduced into the agreement for no other purpose than as an attempt to disguise the true nature of the agreement which it was hoped would deceive the court and prevent the appellants enjoying the protection of the Rent Acts."
Lord Oliver of Aylmerton, at 467, spoke of "an air of total unreality about these documents read as separate and individual licences" and, at 468, described clause 16 as one that -
"... cannot be considered as seriously intended to have any practical operation or to serve any purpose apart from the purely technical one of seeking to avoid the ordinary legal consequences attendant upon letting the appellants into possession at a monthly rent."
Lord Jauncey of Tullichettle, referring to clause 16, said (at 476) -
"If the clause is read literally the licensor could permit any number of persons to share the flat with the two defendants, even to the extent of sharing the joys of the double bed. ... [it can be] inferred from the plan which was made available to your Lordships ... that it would be quite unrealistic for anyone to sleep in the flat elsewhere than in the double bed in the bedroom and on either the table bed or bed settee in the small sitting room. ... This situation certainly does not suggest that the parties ever contemplated that other persons would be nominated to share the flat. ... In all the circumstances I am driven to the conclusion that the parties never intended that clause 16 should operate and that it was mere dressing up in an endeavour to clothe the agreement with a legal character which it would not otherwise have possessed. It follows that it should be treated pro non scripto."
Although in the present case the learned primary judge referred extensively to Street v. Mountford, and referred only in passing to A.G. Securities v. Vaughan; Antoniades v. Villiers, it seems very probable that his expressed conclusion that the licensing agreement incorporated a "pretence" owed a good deal to the opinion of Lord Templeman in the last-mentioned authority. Objection was taken in this Court on behalf of the appellant to his Honour's characterisation of clause 2.2 as a pretence. According to counsel for the appellant this should be understood as imputing to it the nature of a sham, which was something for which the respondent had never contended; and if it had the appellant would have been alerted to the need to call evidence with a view to rebutting the contention.
It seems probable that the "pretence" to which Lord Templeman referred several times in Antoniades was not intended to be understood in the sense in which "sham" is usually understood - that the parties have in effect agreed or reached an understanding that the written agreement should not mean what it said: Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786, at 802, per Diplock, L.J. Indeed, in turning away in his opinion in Antoniades from the phrase "sham devices" that he had used in Street v. Mountford, Lord Templeman indicated that he appealed to a novel, wider and more flexible doctrine: cf. Bright and Gilbert, op. cit., 132-3. Those learned authors suggest that the doctrine, where it applies, would enable a term of an agreement to be ignored if inserted for the purpose of avoiding statutory protection, such as that offered by the Rent Acts. At 133-4 they interestingly develop the view that, whereas what they call the "Snook doctrine" of sham is easily reconcilable with conventional contract theory, the "pretence doctrine" is at odds with it. The latter novel doctrine is there perceived to be "policy-driven"; and one according to which, notwithstanding the terms actually agreed between the parties, the court will disregard any provision inserted for the purpose of avoidance of a statutory scheme or provision. There are evident difficulties in settling the limits of such a doctrine and its application. How, for example, is it to be determined whether a term has been inserted for an impermissible and ulterior purpose? How are the courts to decide whether or not to read the agreement at its face value? Some cases are obvious: Lord Oliver regarded the relevant aspects of the agreements in Antoniades v. Villiers as having an air of "total unreality"; and the other Law Lords regarded them as more or less artificial or fanciful. There was eloquent evidence available to their Lordships, apart from the mere terms of the agreement, leading easily to that conclusion. Similarly, in Radaich v. Smith it was readily evident from the uncomplicated agreement there in question, and from the nature of the very simple business for the pursuit of which occupation of the premises was given and taken, that a grant of exclusive possession must have been intended. In Street v. Mountford Lord Templeman noted, at 817, that "in the case of residential accommodation there is no difficulty in deciding whether the grant confers exclusive possession". It may be a question, with respect, whether that proposition is universally true; but the matter was apparently there so plain that it was common ground. It is suggested in Bright and Gilbert, op. cit., at 137, that the approach in Street v. Mountford will apply equally to commercial agreements, but that there will be fewer commercial cases in which the factual matrix will reveal obvious pretence. Shell-Mex and B.P. Ltd. v. Manchester Garages Ltd. [1971] 1 W.L.R. 612 and Dresden Estates Ltd. v. Collinson (1987) 55 P. & C.R. 47 provide examples.
I think it is unnecessary in this case to consider whether the so-called "pretence doctrine" should be endorsed in this State. If, as his reasoning inferentially suggests, the learned judge did apply it, or some doctrine akin to it, there is in my opinion no evidentiary basis for the conclusion that he expressed upon which the application depended. There is no evidence at all to suggest that Sportsco had ever intended to introduce, or that it might introduce, any other party into the shop to conduct a business, or that it would seek to interfere with the efficient conduct of the appellant's business there. Were there evidence supporting any such suggestion (whether directly or inferentially) it might justify a conclusion that clause 2.2 of the licence agreement is not to be taken to mean what it says. I should be prepared to assume that the common intention was that the appellant, having been given a right to use the shop, should not have to share it, as a shop, with any other party. Yet, in the absence of some evidence of neither the circumstances surrounding the making of the agreement nor the manner of conduct of the businesses of the appellant and Sportsco, I should not regard as fanciful or necessarily artificial an intention that, as between them, the appellant should not have exclusive possession. A conclusion that clause 2.2 expressly provided only by way of pretence that the appellant should not have exclusive occupation is, in my opinion, not fairly open.
It seems clear that the licence agreement, in order that the commercial substance of the transaction be correctly understood, is to be read along with the franchise agreement; and there are specific provisions of the latter which, unless they are to be ignored, might well depend on, or at least be consistent with, the appellant's not having exclusive possession or occupation of the premises as against Sportsco. I refer, for example, without setting out their terms, to clauses 6.1 and 6.2 of the franchise agreement. Each of these is evidently designed to enable Sportsco to inspect and investigate the appellant's business and the appellant's conduct of it. Clause 6.1 is expressed to entitle Sportsco, or its agents, in order to determine whether the appellant is complying with the franchise agreement, to enter without notice during business hours the premises in which the appellant keeps its business records and other documents, to inspect them and take copies. The clause also gives Sportsco or its agents the right during business hours "... to conduct or supervise a physical inspection of the Franchised Business". Clause 6.2 confers on Sportsco what appears to be a wide entitlement to enter the premises without notice during business hours and carry out an audit of the appellant's books and records. Again, clause 6.4 entitles Sportsco in certain circumstances, if the appellant abandons the business or becomes incapacitated, to operate and manage it for a limited period. Without some evidence it is not possible, nor is it at present necessary, to say how these provisions would operate in practice. The point now to be made is that it is also impossible to conclude, in the absence of information about the workings of the parties' businesses, that any of these provisions amounts to no more than a brutum fulmen or to a pretence or artifice designed to deceive or mislead the courts or any third party. Nor, if it matters, can it necessarily be supposed that the licence agreement was entered into for the purpose of avoiding its being assessable to stamp duty as a lease. If the so-called pretence doctrine is driven by a curial policy designed to frustrate an intention to avoid a scheme of statutory protection, it is difficult to see that such a policy finds a place here. I do not mean that the Revenue does not deserve to be appropriately protected from artificial avoidance devices. Even if, however, there were room for the pretence doctrine here, there can be no presumption or inference, in the absence of supporting evidence, that clause 2.2 was inserted into the licence agreement for the purpose of avoiding stamp duty so that it is on that account to be ignored as a pretence. Much less is there foundation for a conclusion that there was a sham in the Snook sense.
This case is not at all like Radaich v. Smith, or Street v. Mountford or Antoniades v. Villiers. In the first of these there was no other conclusion, as a matter of fact, fairly open on the material before the Court than that exclusive possession of the subject premises had been intended to be given and taken. In the second there was no contest that the occupants of the premises were granted, and had, exclusive possession; and the reasoning which led to a decision that the occupation agreement was a lease (even though it described itself as a licence) is of no assistance to the respondent's case that the licence agreement gave the appellant exclusive possession. In Antoniades a conclusion that exclusive possession was not given and taken was irreconcilable with common sense, irrespective of the statement to the contrary effect in the occupation agreement; and the decision is, as a matter of practicality, not much different from Radaich v. Smith. In my opinion, therefore, none of these decisions requires a conclusion that clause 2.2 of the licensing agreement is properly to be ignored; and that provision is to be taken into account in deciding whether the applicant was granted a right of exclusive possession.
Counsel for the respondent submitted that the rights of entry given to Sportsco by the franchise agreement would not be necessary if the appellant did not have a right to exclusive possession of the subject premises pursuant to the licensing agreement. The point would be strong only if clause 2.2 of the licensing agreement were to be ignored. Since the question, however, is whether clause 2.2 can properly be ignored the argument assumes what it seeks to prove. In the face of clause 2.2 the point seems to me to be turned on its head: the rights of entry, being given to Sportsco by the franchise agreement but in association with clause 2.2, are limited by the rights conferred by the licensing agreement, which rights are in turn limited by clause 2.2. The rights of entry are in my opinion not shown to be inconsistent with a relationship of licensor and licensee.
It was also submitted for the respondent that the rights reserved to Sportsco by clause 2.2 are in truth illusory because they are exercisable only so far as they do not prevent the operation of "the licence hereby granted": to exercise the reserved rights would necessarily, so it was submitted, interfere with the appellant's right to use the whole shop for a retail store. Again this submission depends on facts which are not proved and, in my opinion, cannot be fairly inferred.
Certain obligations imposed on the appellant by the licensing agreement were relied on by the learned judge as indications of a lease. These were obligations on the appellant to conduct its activities to ensure that "the rights granted under the Licence are exercised so as not to in any way interfere with or adversely affect the Lease created so as to cause the lease to be determined"; to occupy and use the premises at its own risk; not to assign or attempt to assign the licence without the written consent of Sportsco, which consent is not to be unreasonably withheld; not to sub-licence or part with the rights granted under the licence; and, following the determination of the licence by effluxion of time or for any other reason, "... on receiving an appropriate written request from the licensor to remove all fixtures and other works contracted or brought on to the shop ...". Counsel for the respondent claimed before us also to rely on these provisions but it has not been made clear to me why any of them should be treated as inconsistent with the relationship of licensor and licensee, especially in the light of clause 2.2.
Some reliance was placed for the respondent on Federal Airport Corporation v. Makucha Developments Pty. Ltd. (1993) 115 A.L.R. 679. This was a decision of Davies, J. in the Federal Court granting relief against forfeiture of a so-called licence to use land near Mascot Airport as a carpark. The agreement contained terms in most respects comparable to those of clauses 2.2 and 2.3 of the licensing agreement in the present case. There was a wealth of evidence placed before the Court upon which Davies, J. concluded, at 700, that the agreement granted an interest in land in the nature of a lease; and that, even if it did not constitute a lease, it conferred "a proprietary interest in land, beyond a mere personal interest to use the land in common with others". I mention the decision only to explain that I have not overlooked it for, with respect, I have not found it of assistance. The licensing agreement there fell to be construed in the context of the negotiations and the circumstances which led to its execution, of which there was extensive evidence. The distinction between that case and this, where there is no evidence comparable in nature or extent, is obvious. Moreover, the opinion expressed by Davies, J. was apparently not necessary for the decision of the case, not having been contended for by counsel for the party in whose favour it was given.
Much of the interest in the case of Lewis v. Bell for present purposes lies in the two-stage approach suggested by Mahoney, J.A. at 735-7 (with whom Kirby, P. and Samuels, J.A. agreed) to the question of construction of an occupation agreement in order to decide whether it gives a right to exclusive possession. According to that approach, the expressed terms of the grant are first to be investigated in their whole context with a view to discovering as a matter of construction the nature of the rights that have been granted and the intention of the parties. If such an investigation does not indicate that exclusive possession is granted it may be necessary to infer it -
"... because the rights which have in terms been granted can be enjoyed only by one who has been granted exclusive possession. The grant of exclusive possession has been inferred from the nature of what has been expressly granted. This was the basis of the decision of their Honours in Radaich v. Smith ...".
Mahoney, J.A. suggested that such an inference depends on the process of implication of a relevant term, and that the process of implication will be governed by principles conventionally applied to the implication of contractual terms.
Whether the decision in Radaich v. Smith is properly to be understood as depending ultimately on principles governing the implication of terms may one day have to be considered. None of the judgments contains anything about the implication of a term; and Windeyer, J. alone appears to have mentioned an inference - and that an inference of fact. It may, if I may respectfully say so, yet be debatable whether an inability to imply a term in accordance with conventional principles (because, for example, it would be inconsistent with an express provision) must inevitably lead to a conclusion that no exclusive possession has been granted. Mahoney, J.A. himself conceded, at 737, that -
"There are, of course, cases in which rights purport to be granted or reserved which are intended never to be operative. Instances of this have been found in, e.g., the context of legislative restrictions on eviction or control of rents. The Court may treat such rights as not having operation and construe the transaction accordingly. But, if on its proper construction the relevant rights were intended to be granted then, in my opinion, the transaction is to be construed and classified accordingly."
Whether, as Mr Gibson held following Lewis v. Bell, a term granting exclusive possession cannot be implied here because of clause 2.2, or whether in the total context clause 2.2 is to have effect in accordance with its terms, the result is in my opinion that a conclusion that the appellant received a grant of exclusive possession is not open. I conclude by quoting a further passage from the judgment of Mahoney, J.A., at 737, which immediately preceded the passage last quoted and which is apt here -
"It is, in my opinion, important in determining the nature of a transaction, to have in mind that, in the end, it is for the parties to determine what rights they will grant and accordingly what is the nature of their transaction. The parties (or the party who effectively determines the form of the transaction) may desire, e.g., that the transaction does not produce the incidents of a lease and they may, to achieve that result, grant or reserve rights which are inconsistent with the grant of exclusive possession. For example, in circumstances in which it would ordinarily be expected that the rights granted would carry, by implication, the right to exclusive possession, the transaction may reserve to the grantor the right to possession or to do such things in relation to the premises as are inconsistent with the grantee having exclusive possession. And that may be done in order that the transaction be one of licence rather than of lease. If, upon its proper construction, that be the transaction into which the parties have entered, the effect should, in my opinion, be given to it according to its terms."
Thomas, J., sitting in the Supreme Court of Queensland in Hamilton Island Enterprises Ltd. v. Croycom Pty. Ltd., unreported, 24 April 1998, remarked of that passage, in words of equal aptness here, that -
"I do not think that this adds anything to the ordinary process of construction, but it is a timely warning that disregard by the courts of terms that the parties have been prepared to adopt may sometimes be taken too far. In the end one looks at the substantive rights that have been written into the instrument and is not distracted unduly by any labels that are attached."
I propose that the appeal be allowed and the decision of the Administrative Appeals Tribunal restored.
CALLAWAY, J.A.:
In Aslan v. Murphy (Nos. 1 and 2) [1990] 1 W.L.R. 766 Lord Donaldson of Lymington, M.R., delivering the judgment of the Court, said at pp.770-771:
"Quite apart from labelling, parties may succumb to the temptation to agree to pretend to have particular rights and duties which are not in fact any part of the true bargain. Prima facie, the parties must be taken to mean what they say, but given the pressures on both parties to pretend, albeit for different reasons, the courts would be acting unrealistically if they did not keep a weather eye open for pretences, taking due account of how the parties have acted in performance of their apparent bargain. This identification and exposure of such pretences does not necessarily lead to the conclusion that their agreement is a sham, but only to the conclusion that the terms of the true bargain are not wholly the same as those of the bargain appearing on the face of the agreement. It is the true rather than the apparent bargain which determines the question 'tenant or lodger?'"
I apprehend that the learned judge used the word "pretence" in a similar sense in the passages set out by Tadgell, J.A. in paragraph 8 of his Honour's judgment. The distinction, if any, between a pretence and a partial sham need not be explored in the present case. Counsel for the respondent conceded that such a pretence, the existence of which is a question of fact, was not established by the evidence. His contention was that the rights reserved by cl. 2.2 were illusory.
I similarly find it unnecessary to consider the applicability or not of the law relating to implied terms in relation to this licence agreement. There is no conceptual difficulty in a lessee desiring to grant extensive rights of user to a licensee for a term but not the exclusive possession that would ordinarily result in a sub-lease. The lessee may desire to enter the premises from time to time in such manner as will not disturb the licensee's enjoyment of its rights. In the present case, for example, the lessee might desire to show intending franchisees at other centres over the premises, out of business hours, using them as a display model. Clause 2.2 would enable it to do so. That would, in my view, be incidental to the permitted use under the lease. Section 6 of the franchise agreement may in part extend and in part limit the rights the lessee would otherwise enjoy, but it is not inconsistent with a licence.
I am not persuaded that there is any difficulty in giving the words of Clause 2.2 their natural effect. In particular the circumstances are not such that those words cannot be given that effect in practice. Accordingly I, too, would allow the appeal and restore the decision of the Administrative Appeals Tribunal.
CHERNOV, J. A.:
I have had the benefit of reading the draft reasons for judgment of Tadgell and Callaway, JJ.A. in this case. I agree with their Honours that the appeal should be allowed and that the decision of the Administrative Appeals Tribunal be restored.
It is common ground that the principal issue in this appeal is whether the Licence Agreement grants to the appellant exclusive occupation (or possession) of Shop 6. Clause 2.2 of that agreement is the critical clause for the purpose of the resolution of this question. On its face, it denies the appellant exclusive possession of the shop. It does so by reserving to Sportsco its rights as lessee of the shop, albeit on the condition that it not exercise them so as to interfere with the franchisee's right to conduct its business in that shop. The respondent claims that clause 2.2 is illusory and should be disregarded for the purpose of determining whether the Licence Agreement grants the appellant exclusive occupation (or possession) of the shop.
Tadgell, J.A. refers in his judgment to cases which dealt with the question of whether clauses in agreements which appear to deny the grantee exclusive possession of the premises, can be disregarded in the context of determining whether exclusive possession has in fact been granted. The cases include A.G. Securities v. Vaughan; Antoniades v. Villiers [1990] 1 A.C. 417; Aslan v. Murphy (Nos.1 and 2); Duke v. Wynne [1990] 1 W.L.R. 766.
In Antoniades, the House of Lords effectively disregarded clause 16, describing it variously as a "pretence", "an attempt to disguise the true nature of the agreement", as a provision that "cannot be considered seriously" and as "unrealistic". Their Lordships concluded that clause 16 could not have any practical operation and that, therefore, the parties did not intend it to have any effect. It was included in the document only for the purpose of circumventing the protective provisions of the Rent Acts. The conclusion that clause 16 could not, as a matter of commonsense, have any practical operation, was based on the evidence before the Court which included not only the instrument in question, but also the events which surrounded its making, including the negotiations between the parties which culminated in the letting and a plan showing the physical layout of the premises and its contents.
In that context, their Lordships recognised that evidence of subsequent conduct which, they said, was not admissible on the question of construction of the contract, was nevertheless admissible on the issue of whether a particular provision of it was intended to have legal effect or was only a pretence. Lord Oliver said this, at 469:
".. though subsequent conduct is irrelevant as an aid to construction, it is certainly admissible as evidence on the question of whether the documents were or were not genuine documents giving effect to the parties' true intentions."
See also the speech of Lord Jauncey, at 475.
In Aslan, the evidence was that the written agreement under which the defendant had the right to occupy a small basement room (4ft 3in x 12ft 6in) provided that the defendant was not granted exclusive possession of any part of the room, but had a licence to use it with other licensees. The instrument also provided that the defendant only had a licence to use the room from midnight to 10.30 a.m. and from noon to midnight every day. The Court of Appeal held that on the facts, the defendant had not been denied exclusive possession of the room (and, therefore, was a tenant). It regarded the provisions which required the defendant to share the room with others, as a pretence and effectively disregarded them. Lord Donaldson said, at 772-773, that what the trial judge should have done was to consider "whether the whole agreement was a sham and, if it was not, whether in the light of the factual situation the provisions for sharing the room and those depriving the defendant of the right to occupy it for 90 minutes out of each 24 hours were part of the true bargain between the parties or were pretences. Both provisions were wholly unrealistic and were clearly pretences."
For reasons given by Tadgell, J.A., two of the cases relied on by the respondent, namely, Radaich v. Smith (1959) 101 C.L.R. 209 and Street v. Mountford [1985] 1 A.C. 809, are of limited relevance to the resolution of the principal issue on the appeal, although, as his Honour pointed out, in the former case, the High Court had before it by way of evidence not only the instrument in question which described the parties as licensors and licensee and which, in terms, granted the respondent a "sole and exclusive licence" to carry on business on the subject premises, but it also had evidence concerning the nature of the premises and the nature of the business that was to be conducted on them by the "lessee". In Street v. Mountford, supra, the Court did not examine the question whether the agreement granted exclusive possession to the grantor. The case was concerned essentially with whether the description of the instrument in question as a "licensing agreement" and the declaration in it, signed by the grantee, that she understood that the agreement did not give her a tenancy protected by the Rent Acts, precluded the grant from being that of a leasehold interest, given that it was common ground that the grantee was given exclusive possession of the premises.
Turning to the issue of whether clause 2.2 is illusory, it should be borne in mind that this provision is part of a bargain between a franchisor and a franchisee. There is no reason in principle why a prospective franchisor and a prospective franchisee cannot agree that as between themselves, the latter was not to have exclusive possession of the subject premises and that the franchisor would continue to enjoy them as owner or lessee, providing that enjoyment did not hinder the franchisee's conduct of its franchised business. There may be many sound commercial reasons why the franchisor would insist on this. One such reason may be that it would ease the franchisor's task of controlling and supervising the franchisee. The ultimate question is, of course, whether the effect of the franchisor's grant constituted the franchisee a licensee or a lessee of the franchisor (or, for present purposes, whether it had the effect of giving the franchisee exclusive possession of the premises)?
As I have said, on its face, clause 2.2 denies exclusive occupation (possession) to the appellant. It does not give it the right to exclude Sportsco from the premises (so long as it complies with the proviso or qualification contained in that clause). The respondent did not suggest that the clause was illusory on the basis that it was inserted for the purpose of avoiding the incidence of stamp duty. Its principal argument on this point, was that in reality, Sportsco would not be able to take advantage of clause 2.2. The underlying conclusion was that because of this, the parties did not intend it to have effect. Hence, clause 2.2 was illusory.
Unlike the situations in Antoniades and Aslan, however, where there was evidence of surrounding circumstances which led to the inescapable conclusion that the clause in question could not be acted on and thus, to the conclusion that the parties did not intend it to have any effect, the evidence here does not justify such a view. The respondent asserted that Sportsco could not enjoy its rights as lessee without at the same time interfering with the appellant's business. In support of this claim, it pointed to the provision in the Licence Agreement which entitles the appellant to use all the premises as a "Sportsco Franchise Retail Store". It was argued that if Sportsco were to exercise the rights supposedly reserved to it by clause 2.2, it would necessarily interfere with the appellant's right to use the whole of the premises. There was no evidence before the Court, however, as to the extent to which the premises were physically used by the appellant or as to the layout of the fittings. In any event, even if one assumes that the appellant is using every square inch of the premises to conduct its business, it does not follow that Sportsco could not properly exercise its rights as lessee under clause 2.2. As Callaway, J.A. points out, Sportsco could do so by entering the premises, at a time of its choosing, in order to show a prospective franchisee the operation of the franchise business, including its layout and its system pursuant to which it is operated. Similarly, if the appellant does not physically take up the whole of the premises, Sportsco could use some part of it to store its goods, perhaps for a short period of time, without thereby interfering with the appellant's conduct of the business. In my view, having regard to the evidence, or rather the lack of it, as to the state and use of the premises, it does not necessarily follow that because the appellant is entitled to use all of them, Sportsco cannot exercise any of its rights as lessee. Consequently, this ground for contending that clause 2.2 is illusory, must fail.
There were other, subsidiary, submissions made on behalf of the respondent in support of its contention that clause 2.2 was illusory. They are summarised and analysed by Tadgell, J.A. in his reasons for judgment and I respectfully adopt what his Honour said in relation to them and his finding that "a conclusion that clause 2.2 expressly provided only by way of pretence that the appellant should not have exclusive occupation is .. not fairly open".
Consequently, I would also allow the appeal and restore the decision of the Administrative Appeals Tribunal.
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