Kokos International Pty Ltd v Libra Motors Pty Ltd
[2005] WASC 209
•21 SEPTEMBER 2005
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: KOKOS INTERNATIONAL PTY LTD -v- LIBRA MOTORS PTY LTD & ANOR [2005] WASC 209
CORAM: JOHNSON J
HEARD: 15 DECEMBER 2003
DELIVERED : 21 SEPTEMBER 2005
FILE NO/S: CIV 2477 of 2002
BETWEEN: KOKOS INTERNATIONAL PTY LTD (ACN 009 404 611)
Plaintiff
AND
LIBRA MOTORS PTY LTD (ACN 609 278 344)
WELLMAN ENTERPRISES PTY LTD (ACN 054 953 589)
Defendants
Catchwords:
Equitable estoppel - Construction of lease - Turns on own facts
Legislation:
Trade Practices Act 1974 (WA), s 51A, s 51AA, s 87
Result:
Judgment in part for the plaintiff in the primary action
Judgment for the plaintiff (the defendant in the primary action) on the counterclaim for unpaid rent
Category: B
Representation:
Counsel:
Plaintiff: Mr R H B Pringle QC & Mr T Galic
Defendants: Mr D K Barker
Solicitors:
Plaintiff: Galic & Co
Defendants: Chalmers & Partners
Case(s) referred to in judgment(s):
Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd & Ors (2003) 214 CLR 51
Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45
Commercial Bank of Australia Ltd v Amadio (1982‑3) 151 CLR 447
Commonwealth of Australia v Verwayen (1990) 170 CLR 394
Dilosa v Latec Finance Pty Ltd (1966) 84 WN (Pt 1) NSW 557
Equity Access Pty Ltd v Westpac Banking Corporation (1990) ATPR 40‑994
Giumelli v Giumelli (1998‑1999) 196 CLR 101
Henjo Instruments Pty Ltd & Ors v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216
Jones v Dunkel (1950) 101 CLR 298
Kellcove Pty Ltd v Australian Motor Industries Ltd, unreported; Fed Ct; Woodward J, VG385 of 1987, 6 July 1990
Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191
Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72
Re Monger; Ex Parte Cross [2004] WASCA 176
Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
Case(s) also cited:
Patrick Stevedores Operations No 2 Pty Ltd & Ors v Maritime Union of Australia (No 3) (1998) 195 CLR 1
Riches v Hogben [1985] 2 Qd R 292
Port Kennedy Resorts Pty Ltd v Huat [2000] WASCA 328
JOHNSON J: This is an action in equity and also under s 51A and 51AA of the Trade Practices Act 1974 in respect of the assignment of a lease over a portion of the defendants' building in Murray Street, Perth.
Background
The uncontested facts are as follows: The plaintiff and the defendant companies were at all relevant times incorporated under the Corporations Law and trading corporations within the meaning of the Trade Practices Act 1974 ("the TPA"). At the relevant time the defendants were the owners of a building situated at 113‑123 Murray Street, Perth ("the building").
In or about February 1994, Eugene Lee entered into an undated lease stamped 20 February 1994 between the Hospital Benefit Fund of Western Australia Incorporated ("HBF") as lessor and Mr Lee as lessee in relation to a portion of the building ("the leased premises"). The lease was varied by a written Deed of Renewal and Variation of Lease, undated but stamped 30 September 1998, between the lessor and the lessee. Taken together, these documents will be referred to as the existing lease. On 9 October 1998 the land was transferred from the HBF to the defendants who became the lessors of the leased premises. The term of the existing lease expired on 14 November 2002. Although not admitted by the defendants in the defence and counterclaim, there was really no dispute that Mr Lee operated the leased premises as a budget accommodation business or hostel ("the business").
In or about October 1998 the defendants appointed Kevin Baruffi & Associates as the commercial property manager of the building. Mr Baruffi is a licensed real estate agent, licensed surveyor and a director of Silver Tree Holdings, the licensee of Kevin Baruffi & Associates Real Estate Agents and Licensed Surveyors. He has been a commercial property manager in the central business district of Perth since 1990. He also holds a Bachelor of Business (Valuation and Land Economy). On being appointed commercial property manager of the building in 1998, Mr Baruffi was provided with a copy of the relevant lease documents. At all relevant times Mr Baruffi was authorised to act on behalf of the defendants.
In June 1999 Mr Lee was still in possession of the leased premises. At that time, the plaintiff, represented by Young Chan Yu ("Mr Young"), commenced negotiations with Mr Lee for the purchase of the business. At all material times Mr Young was authorised to act on behalf of the plaintiff. To address issues with respect to the lease, Mr Young met with Mr Baruffi on 17 June 1999. Mr Baruffi was advised that the plaintiff required a further five‑year occupation of the premises. The details of the meeting between Mr Young and Mr Baruffi are a matter of significant dispute between the parties. There is also a dispute as to whether Mr Lee was present at this meeting. On 18 June 1999 Mr Baruffi, on behalf of the plaintiff, sent a facsimile to Mr Young. The facsimile referred to a meeting on the previous day and advised that "[t]he Lessor is prepared to grant a 5 year extension to the existing Lease."
On 25 June 1999 the plaintiff entered into a written contract for the purchase of the business from Mr Lee, subject to the condition that the defendants would approve the plaintiff as an assignee of the lease which would include a five‑year option to renew the lease. Champion Settlements was appointed as settlement agent for both parties. On or about 1 July 1999 and prior to settlement, the plaintiff went into possession of the leased premises and commenced paying rent to the defendants.
On or about 12 July 1999 Mr Young completed the details on a pro forma document which had been provided by Mr Baruffi, titled "Application to Assign Commercial Premises" ("the application to assign"). When provided to Mr Young the application to assign had been partially completed. However, there was no reference in the document to any further term of occupation of the premises. When completing the application to assign Mr Young inserted the words "five years" in Item 12 which dealt with details of any options applicable to the lease. Nowhere in the document was there any specific reference to extensions of the term of the lease, although there was a section in which special conditions could be written.
On or about 27 July, Kerry Derksen, a representative of Champion Settlements, having received the draft copy of the assignment of lease, contacted Mr Baruffi's office and spoke to Michellina Baruffi who was at that time married to Mr Baruffi and also employed by Baruffi & Associates. Ms Derksen notified Ms Baruffi that the draft assignment of lease did not contain an option for a further term. A further factual dispute relates to the details of the conversation between Ms Derksen and Ms Baruffi.
By letter dated 28 July 1999 Ms Derksen wrote to Baruffi & Associates in the following terms:
"Further to our telephone discussions with Michelle at your office on Tuesday 27 July 1999 we confirm having spoken to the purchasers of Murray Street Hostel who advised us this morning that they are willing to take a new lease of 5 years with 2 x 5 year options."
On 4 August 1999 Mr Baruffi wrote to Chalmers & Partners requesting modifications to the draft lease. The modifications sought were the inclusion of a redevelopment clause, that rent review should be market or 5 per cent and that management fees being incorporated in operating expenses. Mr Baruffi also instructed the solicitors to insert into the schedule an annual rental of $35,000 per annum, annual rent review, a term of five years and one option period of five years.
On 2 September 1999 Mr Baruffi wrote to Mr Young confirming that a new lease would be required "to accommodate [the plaintiff's] desire to have further option periods available" [emphasis added]. Mr Baruffi also proposed that, in order to ensure an early settlement of the premises, the existing lease be assigned and that an "Offer to Lease" incorporating the terms set out in the letter, be executed.
Mr Young's copy of this letter bears a handwritten annotation dated 15 September 1999. It says:
"Spoke to Kevin and agreed that
(1)Assign the current lease first
(2)Discuss and negotiate to create a new lease which would comply with the Retail Tenancies Act
(3)Condition to be included
(i)inclusion of redevelopment clause
(ii)Rent Review 5% and 10% after 3 years (this to be re-negotiated if possible)"
The plaintiff had settled the purchase of the business on 10 September 1999 and on the same day Mr Young wrote to Mr Baruffi advising him that settlement of the business had been effected.
On 1 November 1999 Mr Baruffi sent a Deed of Assignment of the lease to the plaintiff for execution. The Deed of Assignment was duly executed and lodged for stamping on 18 January 2000.
By letter dated 15 August 2002 Mr Young gave notice on behalf of the plaintiff of an option to renew the lease for a term of five years, commencing on 15 November 2002. The defendants responded through their solicitors by denying that the plaintiff was entitled to renew the lease for five years or to an extension of the lease for five years. The plaintiff was advised that it was required to vacate the building at the expiration of the lease on 14 November 2002. This it declined to do and as at the date of trial the plaintiff remained in possession of the leased premises.
On signing the Deed of Assignment, the plaintiff became bound by the terms of the existing lease. By cl 5.3.1 of the existing lease the plaintiff covenanted to pay the rent and the outgoings. The rent payable under the existing lease as defined in cl 1.1 and specified in Item 3 of the Schedule is $35,000 pa payable in monthly instalments of $2,916.66 on the 15th day of every month and thereafter as reviewed and varied pursuant to the provisions of cl 2.4 of the lease.
By letter dated 9 December 1999 Mr Baruffi wrote to Mr Young advising that, in accordance with Item 5 of the Schedule, the rent on the premises was due for review on 31 December 1999. Mr Baruffi wrote:
"We have now completed the review and in accordance with the method of review as described in your Lease, rental has been increased by market to $39,600 per annum ($3,300 per calendar month). This being an increase of $383.33 per calendar month over the previous rate."
Management fees were also increased to coincide with the rental increase and the then current outgoings. The letter concluded with a request for Mr Young to contact Mr Baruffi should there be any queries in relation to the rent review and increase. Neither Mr Young, nor any other person on behalf of the plaintiff, responded to this letter and the plaintiff paid the increased rent.
On 21 November 2000 Mr Baruffi wrote to Mr Young advising that the rent was again due for review on 31 December 2000. According to the letter, the review had been completed and the rental increased to $47,916. The variable outgoings were increased to $3,512 per month to coincide with the net rental increase and the then current outgoings payable on the premises. As with the previous rent review letter, Mr Baruffi invited Mr Young to contact him if he had any queries.
On 12 December 2000 Mr Young wrote to Mr Baruffi requesting a copy of the current lease document. He did not raise any issue with respect to the rent review.
Correspondence from Mr Young to Mr Baruffi dated 22 March 2001 reveals that the plaintiff had fallen into arrears with respect to both rent and outgoings from 1 March 2001 in the amount of $13,960.17. However, a handwritten annotation on a copy of the letter indicates that the total rent and outgoings for March were paid on 26 March 2001. The letter also reveals that there existed arrears from September to March totalling $17,659.89. There is no notation on the copy of the letter that this amount of arrears had been paid. The letter refers to difficulties in the cash flow of the business and the downturn in the Australian economy.
On 23 March 2001 Mr Young wrote to Mr Baruffi raising what he describes as a number of "anomalies" with the application of the lease. One anomaly related to the rent review. Mr Young alleged that the plaintiff had never received a notice in accordance with the relevant clauses of the lease. Mr Young advised that these clauses were being "evoked" [sic]. Mr Young continued:
"All monies paid you prior to this date, are not to be deemed as our acceptance of your demands for the proposed increase, but were to placate the situation of your threats of commencement of legal proceedings, and your unfair charges."
Mr Young also expressed concern with respect to the calculation of the outgoings and notified Mr Baruffi that the plaintiff was invoking its right under cl 5.21.2.2 of the existing lease to notification of the budgeted expenditure, requesting copies of calculations of the estimated budget and a copy of the independent audited accounts for the previous years together with copies of invoices.
Mr Baruffi responded to this letter in writing on 3 April 2001. Mr Baruffi advised that cl 2.4.4 of the existing lease stipulated that a notice given outside the time specified in cl 2.4.1.1 has the same force and effect as if it had been given within the specified time. Mr Baruffi identified his letter of 21 November 2000 as the notice in accordance with cl 2.4.1.1. Mr Baruffi further advised that as no notice had been received from the plaintiff in accordance with cl 2.4.1.2 no rental dispute had occurred and the rental review stood.
On 4 April 2001 Mr Young again wrote to Mr Baruffi. In relation to Mr Baruffi's explanation of the rent review process he said:
"Again we make the statement that all monies paid to you has been paid 'under duress' and was only paid to placate your intimidating demands and threats of legal proceedings."
He described Mr Baruffi's responses to his concerns as "a furphy" and advised that the plaintiff was left with no other alternative but to take legal action.
On 3 May the plaintiff was advised by Mr Baruffi that as no notice of dispute was received the reviewed rental rate would stand. Mr Baruffi further advised that failure to pay any outstanding monies may be considered to be a breach of the lease and the plaintiff may be subject to the consequences as outlined in the lease. In his reply dated 7 May 2001 Mr Young stated that, as a notice in the proper form had never been received, the plaintiff would continue to pay what it considered to be the legally correct amount of rent, that is, the rent payable prior to the first purported notice to review. Since that time the plaintiff has paid only the monthly amount of rent set out in the original lease document and has demanded repayment of the amounts already paid in excess of the original rental amount. The defendants have refused to repay the amount, its position being that the rent reviews were valid and therefore no entitlement to repayment existed.
After May 2001 there was regular communication between Mr Baruffi and the plaintiff, represented either by Mr Young or by the General Manager of the business, Darron Larsen‑Brahe. Apart from the rent dispute there was a dispute as to the plaintiff's proportion of the outgoings payable under the existing lease. Resolution of that dispute was impaired by the realisation that the lease contained two different provisions relating to outgoings: cl 3.2 and cl 5.21.2. Mr Baruffi's position, as stated in his letter of 20 June 2001, was that the lessor was entitled to determine which of cl 5.21.2 or cl 3.2 it would rely upon in relation to each particular outgoing.
On 7 September 2001 Mr Baruffi wrote to the plaintiff advising that the rent was due for review on 31 December 2001. He stated that the lessor had completed the review and determined that the new rental commencing on 1 January 2002 would be $55,000 pa payable calendar monthly at the rate of $4,583.33. On 18 September 2001 Mr Young, on behalf of the plaintiff, gave notice in writing disputing the amount of the rent review.
By letter dated 15 August 2002, Mr Young gave notice of a "formal request….to have a continuance granted to our lease". Specific reference was made in this letter to the facsimile of 18 June 1999. On 22 August 2002 Mr Young received a letter from the defendants' solicitor denying the existence of an agreement for a five‑year extension and advising the plaintiff to vacate the premises.
The Pleadings
(a) The Plaintiff's Claim
The first aspect of the plaintiff's claim lies in equity. On behalf of the plaintiff it is alleged that the defendants, through Mr Baruffi, expressly or impliedly represented to the plaintiff that it would be granted an extension of the existing lease on the same terms for a further term of five years from 15 November 2002, unless the terms of a new lease were to be agreed. In the alternative, it is alleged that Mr Baruffi represented that the plaintiff would have an option to renew the lease on the same terms for a further period of five years from 15 November 2002. The plaintiff further alleges that the defendants, through Mr Baruffi, impliedly represented that the plaintiff could safely purchase the business, as it would have security of tenure in the premises until 14 November 2007. The statements were intended to encourage and did encourage the plaintiff to believe that it would be entitled to at least a further five years occupation of the premises and, in reliance on these representations, the plaintiff took occupation of the leased premises, settled the purchase of the business, took a formal assignment of the lease and carried on the business on the basis that it was entitled to a further term. It is said that the plaintiff would not have entered into the purchase on the basis of a tenancy until 14 November 2002 only. It is also alleged that the plaintiff relied on the representations to its prejudice because the purchase price of the business was assessed with reference to tenure to 14 November 2007 and the purchase would be financially disastrous without the extended term. On the basis of these assertions, it is said that it is unconscionable for the defendants to refuse to grant a lease to the plaintiff on the same terms as the existing lease but for a further term of five years and the defendants are estopped from denying that the plaintiff is entitled to the grant of a lease in those terms.
The plaintiff further pleads claims under s 51A and s 51AA of the TPA. In this respect the plaintiff relies on the above mentioned representations as well as a failure to warn the plaintiff that unless the terms of a new lease were to be agreed, the plaintiff would have no entitlement to the grant or assignment of a lease for a further term of five years. It is said that the defendants' conduct constituted conduct in trade or commerce, that the representations related to a future matter within the meaning of s 51A TPA and was misleading and deceptive. As a result of the conduct the plaintiff suffered or is likely to suffer loss and damage which can be avoided by the making of an order under s 87 of the TPA modifying the Deed of Assignment to provide for an extension of the lease.
Alternatively, the conduct mentioned above, including the defendants refusal to grant an extension of the lease for five years on the same terms as the existing lease, is said to be unconscionable within the meaning of s 51AA of the TPA. The plaintiff pleads that by reason of the unconscionable conduct, the plaintiff has suffered or is likely to suffer loss and damage.
Another aspect of the plaintiff's claim is the allegation that there has been no rent review in accordance with the terms of the existing lease. It is said that the defendants did not give to the plaintiff three months' notice in writing, of the annual rent proposed by the defendants to become payable from the rent review date, as required by cl 2.4.1 of the lease. Since there was no determination of the annual rent from the rent review date in accordance with the existing lease, the rent payable under the lease remained the same as immediately prior to the rent review date. Consequently, it is said that the increased rental amounts were paid under a mistake of fact, namely that there had been a valid rent review in accordance with the lease and the plaintiff was liable to pay the increased rent.
The final aspect of the plaintiff's claim relates to the payment by the lessee of outgoings under the lease. The plaintiff alleges that, in breach of the terms of the lease, it has been charged, and paid under protest and without prejudice to its rights, more than its fair share of the various types of outgoings. The plaintiff specifically makes reference to payments made for water and council rates, insurance, land tax, security, cleaning and sanitary waste. The plaintiff also claims it has twice paid for certain items, has paid more that its apportionment of other items, and has paid for items which were not in fact spent on the leased premises.
By way of relief, the plaintiff claims:
(1)A declaration that it is entitled to the grant of a lease on the same terms as the lease for a term of five years from 15 November 2002;
(2)An order directing the defendants to grant such a lease to the plaintiff;
(3)Alternatively equitable compensation;
(4)Further or alternatively:
(a)Damages under s 82 or 87 of the TPA;
(b)An order under s 87 of the TPA modifying the Deed of Assignment so as to provide for the grant of a lease to the plaintiff on the same terms as the lease for a term of five years from 15 November 2002;
(c)An order directing the defendants to grant such a lease;
(d)Interest.
(5)A declaration that it is entitled to credit rebates in relation to overpayments of rent and outgoings.
(b) The Defence
The defendants dispute that the alleged representations were in fact made. Although the defendants admit that on 17 June 1999 a meeting took place between Mr Young and Mr Baruffi, they deny that any meeting took place in the presence of Mr Lee. It is further denied that Mr Young advised Mr Baruffi that, if the plaintiff were unable to obtain another five years' occupation of the premises, it would not agree to purchase the business. They also deny that Mr Baruffi proposed that the lease be varied by extending it on the same terms for a further five years.
The defendants assert that the facsimile sent by Mr Baruffi on 18 June 1999 was in response to a request made at the meeting on 17 June by Mr Young for Mr Baruffi to advise whether the defendants would be prepared to grant any extension on the term given by the lease. Further, the defendants join issue on the plaintiff's proposition that when the plaintiff entered into the contract to purchase the business and went into possession of the leased premises, it was acting in reliance on any assurance from Mr Baruffi of a five‑year extension of the existing lease. It is further said that the plaintiff took possession of the leased premises on 1 July 1999 without the defendants' consent and contrary to the then lessee's obligation not to part with possession without the consent of the lessor (see cls 5.3.2 and 3.33.1)
The defendants maintain that Mr Young inserted the words "five years" in Item 12 of the Application to Assign Commercial Premises without the knowledge of the defendants. The defendants deny that Ms Baruffi told Ms Derksen that an option for five years had been omitted from the draft deed of assignment and assert that Ms Baruffi only informed Ms Derksen that any variation to the lease would have to be subject to consent by the plaintiff of the inclusion of a GST clause. Subsequently, on 27 July 1999 Ms Baruffi, acting for and on behalf of the defendants, orally informed Ms Derksen that the defendants would be prepared to grant a new lease for a term of five years plus two five‑year options. On the following day Ms Derksen wrote to Mr Baruffi confirming and advising that (i) the defendants were willing to take a new lease of five years with two x five‑year options; (ii) there would be a need to surrender the existing lease; (iii) the defendants would not be charged any fees for the preparation of the Assignment of Lease document.
By letter dated 2 September 1999 Mr Baruffi wrote to the plaintiff saying that a new form of lease would be required to accommodate the defendants' wishes to have further option periods available. The letter proposed that the existing lease be assigned in its present form and the plaintiff submit to the defendants an offer to lease which incorporated the terms set out in the letter. The defendants allege that on 15 September Mr Young orally advised Mr Baruffi that this proposal was accepted by the plaintiff and the parties would proceed on that basis. However, the defendants concede that the plaintiff did not at any time submit an offer to lease.
The Defendants plead that, insofar as there may have been any reliance by the plaintiff on statements made by Mr Baruffi when proceeding to settlement, such reliance was confined to the matters set out in Mr Baruffi's letter of 2 September 1999. The plaintiff did not at any time submit an offer to lease to the defendants as proposed in that letter. The defendants allege that Mr Young's letter of 15 August 2002 was a formal request for a continuance to the lease rather than notification of an extension which had previously been agreed upon.
The defendants agree that no‑one on behalf of the defendants warned the plaintiff that, unless the terms of a new lease were to be agreed, the plaintiff would have no entitlement to the grant of a lease for a further term of five years but deny that there was any onus, obligation or circumstances by which the defendants should have given such a warning.
Whilst the defendants admit that at all material times they were acting in trade or commerce, they deny the representations were made as alleged and deny that they acted in a misleading, deceptive or unconscionable manner such as to entitle the plaintiff to equitable or statutory relief.
With respect to the allegation that the rent review notices were invalid, the defendants assert that the plaintiff accepted the notices on each occasion by paying the reviewed amount of rent. The defendants allege that, as a consequence, the plaintiff is estopped from denying its acceptance of the rent reviews. Alternatively, the defendants allege that the plaintiff has waived its rights by failing within 14 days to give the lessor notice disputing the amount of the proposed rent and in failing to state the amount considered to be the correct rent as required under cl 2.4.1.2 of the existing lease. The defendants allege that it would now be difficult to appoint valuers to make a proper assessment of the market rent in the relevant years. Further, the defendants rely on cl 5.2.1 of the lease as the basis of their entitlement to re-enter, occupy and resume possession of the leased premises if the rent, or any part of the rent remains unpaid for seven days, whether formally demanded or not.
As to the outgoings, the defendants allege that cl 3.2.1 of the existing lease does not apply as the leased premises represent a portion rather than the whole of the building. Consequently, it is said that cl 5.21.2 identifies the outgoings to be paid under the lease. The defendants deny that land tax has been included in the monthly variable outgoings payable by the plaintiff. Between 1 July 99 and 30 June 2001 the variable outgoings charged monthly pursuant to cl 5.21.2.2 of the lease were council rates, water rates, insurance, maintenance and management fees and for the period of 1 July 2001 to 14 November 2002 the variable outgoings charged were water and sewerage consumption, insurance, maintenance and management fees. On the defendants' case, cl 5.21.2.3 of the existing lease requires the plaintiff to pay a proportion of the outgoings by equal calendar monthly instalments in advance of the days on which rent was payable being the 15th day of each month. The defendants allege that the plaintiff has not paid all of the outgoings on the 15th day of each month as required. The defendants assert that cl 5.3 of the existing lease provides that the lessee's covenant to pay outgoings is an essential terms of the lease, any breach of which is to be regarded as a fundamental breach and repudiation by the lessee.
The plaintiff has remained in possession of the leased premises beyond the expiry date of the lease of 14 November 2002 without the consent of the defendants and despite demands that it deliver up possession.
Further, if the plaintiff is entitled to an option for a further term, the defendants rely on the plaintiff's conduct in relation to rent and outgoings as disentitling the plaintiff from exercising the option.
(c) The Counterclaim
The defendants, relying on the plaintiff's conduct in failing to pay rent and outgoings in a timely fashion or to the full extent owed, counterclaim for possession of the premises, mesne profits until delivery of possession and outgoings to 14 November 2002. The defendants further plead that, if the plaintiff was entitled to an option and validly exercised that option, then the new term of lease would be upon the same terms and conditions as set out in the existing lease with necessary date modifications. However, the defendants allege that the plaintiff's conduct in relation to the payment of rent and outgoings would entitle the defendants to re‑enter, occupy and resume possession of the leased area.
In its defence to counterclaim the plaintiff denies the matters pleaded in the counterclaim and, in particular, denies that the lease is determined, that it is required to deliver up possession of the leased premises and that the defendants are entitled to possession, mesne profits or to any relief at all.
(d) The Substituted Reply and Defence to Counterclaim
In the Substituted Reply the plaintiff pleaded that the letters of 9 December, 1999 and 21 November, 2000 represented that the rent review had been completed in accordance with the method of review described in the lease. The plaintiff asserts that the letters did not constitute notices of proposed rent and that the rent reviews had neither been commenced or completed. The plaintiff denies that it is estopped from asserting that rent reviews were not commenced or completed in 1999 or 2000. As to the defendants' allegation that it was entitled to re‑take possession, the plaintiff states that the defendants did not serve a prescribed notice in terms of s 83C of the Property Law Act within time or at all.
With respect to the defendants' claims of unpaid rent and outgoings, the plaintiff denies that cl 5.21.2.1 of the lease applies. The plaintiff further pleads that the figures in dispute have largely been agreed, subject to the determination by the Court of the proper construction of the lease. The plaintiff's final plea is that if it has failed to pay in full rent and outgoings under the lease, the plaintiff has been willing to pay in accordance with its true liability under the lease and relief from forfeiture ought to be granted on terms as to payment of any arrears.
The Evidence
It can be seen from the summary of facts and from the pleadings that there are three primary points of dispute between the parties. They are:
(1)Whether the plaintiff had an expectation to a further term of five years under the existing lease. Central to the resolution of this issue is a determination of:
(i)The content of the conversation between Mr Young and Mr Baruffi on 17 June 1999;
(ii)The content of the conversation between Ms Derksen and Ms Baruffi on or about 27 July 1999;
(iii)The effect of the subsequent discussions and correspondence concerning a new lease with further option periods.
(2)The legal effect of the "rent review notices" sent on behalf of the defendants on 9 December 1999, 21 November 2000 and 7 September 2001.
(3)The relevant clause of the existing lease which creates the plaintiff's obligation to pay outgoings and defines the extent of the obligation.
I will deal with the evidence on each of these issues in that order.
(1) The expectation of a further term of five years at the expiration of the existing lease.
(i) The conversation between Mr Young and Mr Baruffi on 17 June 1999
Mr Young is Korean by birth and migrated to Australia with his family when he was 14 years old. I mention this only because it becomes relevant to the interpretation of certain letters written by Mr Young with respect to the lease. He is an accountant by profession and is a director of the plaintiff. In June 1999 Mr Young commenced negotiations on behalf of the plaintiff to purchase Mr Lee's business. Under the existing lease Mr Lee was entitled to occupy the premises from which he ran his business for a five‑year term which was to expire on 14 November 2002. In the course of the negotiations for the purchase of the business, Mr Young had numerous discussions with both Mr Baruffi and Mr Lee. In his evidence, he specifically recalled telling Mr Baruffi that the plaintiff required a five‑year extension of the lease. He also recalls saying to Mr Baruffi words to the effect that the plaintiff would not purchase the business unless the lease was extended for another five‑years. At no time in his evidence did Mr Young resile from either proposition
Mr Young recalls the meeting with Mr Baruffi on 17 June 1999 ("the 17 June meeting"). It was the only meeting he had with Mr Baruffi although he did have other discussions with him. Mr Young's recollection was that Mr Lee was also present at this meeting. Mr Baruffi denies that Mr Lee was there. As Mr Lee was not called by either party, and there is therefore no independent witness to confirm either version of events, in my view nothing turns on the issue of whether Mr Lee was present. Therefore, there is no necessity to resolve this point of difference.
According to Mr Young's oral evidence, at the 17 June meeting he told Mr Baruffi that he was negotiating to purchase the business and wished to discuss obtaining extra terms on the lease. He also said that one of the key considerations with respect to the purchase of the business was obtaining the extra terms. In Mr Young's responsive written statement which was received into evidence, he said that he told Mr Baruffi that the plaintiff was interested in buying the business and were negotiating to buy it but would require a five‑year extension or option under the lease or preferably an even longer term. I see no significant conflict between these accounts. If Mr Young's evidence is accepted, then Mr Baruffi was indeed advised of two significant matters: (1) The plaintiff had yet to purchase the business and (2) an extension to the existing lease was central to proceeding with the purchase. It is also pertinent to note that Mr Young raised the possibility of being granted more than one further term under the lease.
One further point of significance is raised on Mr Young's version of the 17 June meeting and in his evidence generally: at times he uses the terms "extension" and "option" as if they have the same meaning and effect. Mr Young stated that at the time he did not appreciate the distinction between an option to extend the term of the lease for five years and a variation of the lease to extend the term by five years. He understood the practical effect to be the same. Mr Young said in his evidence that he now understood that the terms have different meanings. Whereas an extension, once granted, accrued automatically, an option had to be exercised by the lessee at the appropriate time. Whatever terminology was used, if Mr Young's evidence is accepted, Mr Baruffi was advised that the plaintiff wanted to obtain a right to occupy the premises for a further five‑year term before it purchased the business.
According to Mr Young, at the 17 June meeting Mr Baruffi told him that he was agreeable to a five‑year extension of the lease on the same terms and conditions as the existing lease, subject to discussing the matter with his clients. Mr Young maintained this position under cross‑examination. On Mr Young's evidence, Mr Baruffi said that if his clients were agreeable, then there would be a variation to the existing lease, extending its term by a further five years and the plaintiff would then take an assignment of the lease. Mr Young insisted that Mr Baruffi said these words to him before the plaintiff decided to purchase the business. In fact, he specifically told Mr Baruffi at the meeting that no decision had been made on the purchase of the business.
Mr Young was cross‑examined on his failure in his initial witness statement to mention anything that he had said to Mr Baruffi, as opposed to what had been said to him. That proposition is in fact, without substance. In his statement Mr Young says as follows:
"I recall saying to Mr Lee, words to the effect that we would not purchase his business unless the owners extended the lease for five (5) years. I also recall saying those exact same words (or words to that effect) to Mr Baruffi several times during my discussions with him."
Mr Young's response to the proposition was that many things had been said and discussed at the meeting but the issue which came to his mind, and which he considered most important, was the term available under the lease. He considered the term to be the most important issue because it was the key to a decision to purchase the business. In my view, Mr Young's response provides a credible explanation for any suggested lack of detail in his statement. The evidence that Mr Baruffi was told that the plaintiff would not purchase the business unless the lease was extended, has clearly been maintained by Mr Young throughout.
The 17 June meeting was followed by a letter from Mr Baruffi sent by facsimile on 18 June 1999 ("the 18 June facsimile") in which he referred to the meeting on the previous day and advised Mr Young that the lessor was prepared to grant a five‑year extension to the existing lease. Mr Young understood the words "is prepared to grant" to mean "would grant". According to Mr Young, it was as a result of receiving the 18 June facsimile that he proceeded on 25 June 1999 to sign on behalf of the plaintiff an offer to buy the business. Mr Lee accepted the offer on the same day. One of the conditions of the offer was that it was "subject to the approval by the lessor of the purchasers as tenants and satisfactory assignment of lease which will include a five (5) year option". The condition was written by Ms Derksen so the term 'option' is not necessarily the term used by Mr Young. Mr Young explained the inclusion of this condition as a "mere formalisation of paperwork". He said that he understood the condition to mean that he had the extra term as indicated in the 18 June facsimile, not that he hoped to get it. Mr Young said that he didn't understand the condition to mean he could withdraw from the contract and it never crossed his mind to withdraw from the contract.
Ms Derksen was also questioned about the condition. She could not recall whether she had told Mr Young that, in the absence of compliance with the special condition, he could terminate the contract. She was asked if that would be the sort of advice she would give if a special condition were not met. According to Ms Derksen, it would be if that was the only alternative but on her understanding, "the five‑year lease was there and, yes, I would have definitely said that terminates the contract if he hadn't indicated that he was willing to take the five‑year lease." In my view, Ms Derksen's evidence substantially confirms Mr Young's evidence that approval had been granted for a five‑year extension and he relied on that approval in his subsequent dealings with respect to the purchase of the business. Further, I accept Mr Young's evidence that the insertion of the condition concerning the "option" was made by Ms Derksen and that it played no part in his dealings which were based on the 18 June facsimile. There is, in any event, no inconsistency between including the condition to protect the client's interests and the existence of any expectation that the approval of the five‑year extension was in place and would be given effect to in the future.
Mr Young made it clear that if it were not for the statement that the owner would grant a five‑year extension of the lease, the plaintiff would not have signed the offer to buy the business. On the basis of Mr Baruffi's statements at the meeting on 17 June and the statements made on behalf of the owners in the facsimile of 18 June 1999, the plaintiff went into possession of the leased premises on 1 July 1999 and commenced paying rent to the owners. From that time onward at least, the defendants must have been aware that the representations made by Mr Baruffi, whatever they are determined to be, had operated and would continue to operate on the mind of Mr Young in his dealings with respect to the purchase of the business.
There is substantial conflict between Mr Young's version of the 17 June meeting and that of Mr Baruffi. Mr Baruffi maintains that on approximately 17 June 1999 Mr Lee told him that he had sold his business and wanted to know what would happen with the lease. He told Mr Lee that the purchaser would have to apply for an assignment of the lease. He agrees that on 17 June 1999 he met with Mr Young. He had not met him before. At this meeting Mr Young said to him that he had purchased Mr Lee's business and wanted a longer term than that provided for under the existing lease. According to Mr Baruffi, he asked Mr Young what term he was looking for and was told that he wanted five years with two further five‑year options. He told Mr Young that if he wanted five years with options for further terms then a new lease would be required. Alternatively, the lease could be extended by five years. Mr Baruffi advised Mr Young that he would have to get instructions from the defendants. Under cross‑examination, Mr Baruffi maintained that he suggested the possibility of a five‑year extension to the lease following Mr Young's request for a lease for five years with two five‑year options. Mr Young denies Mr Baruffi's assertion that at the meeting he told him that any extended term would have to be by way of a new lease. If Mr Baruffi's evidence on this point is accepted, it would prove more difficult to conclude that the decision to move to a new lease occurred at a later time when the defendants' realised the disadvantages to it of allowing an extension of lease on the same terms and after the plaintiff had already acted upon the representation that it would obtain a five‑year extension.
According to Mr Baruffi, he also recalls discussing at the 17 June meeting the cost of a new lease in comparison to the cost of extending the lease. He also recalled inquiring of Mr Young when he was taking over the business to which Mr Young replied that it was to be around the middle of the year. Mr Baruffi believes that it was at this meeting that he delivered to Mr Young an application to assign the lease. On Mr Baruffi's evidence, this is the only meeting he had with Mr Young at which the purchase of the business was discussed.
After speaking to Mr Young, Mr Baruffi took instructions over the telephone from Mr Lukman on behalf of the defendants. According to Mr Baruffi, he advised Mr Lukman that the business was being sold and the new purchasers had asked for an extra term on the existing lease. There was than a discussion of the merits of granting an extra term before Mr Lukman indicated that he was prepared to grant the extension sought. It is significant to note that Mr Baruffi's initial reference to Mr Young's request is for one extra term rather than a five‑year term with two five‑year options. Further, he describes this as a request made by Mr Young rather than a suggestion by Mr Baruffi himself as an alternative to the number of options allegedly requested by Mr Young. In that regard Mr Baruffi's account of his conversation with Mr Lukman is more consistent with Mr Young's version of the 17 June meeting than with his own. On Mr Baruffi's evidence he did also mention that Mr Young wanted options to renew the lease but this followed the discussion about the extension to the lease. According to Mr Baruffi, Mr Lukman confirmed his view that approval of the request for options would involve entering into a new lease.
Mr Baruffi's evidence under cross-examination about the 17 June meeting differed in certain respects from his initial version of events. Initially he said he had been told both by Mr Lee and Mr Young that the business had been sold. At a later point he said that he understood that Mr Young was buying the business although he wasn't aware of the point to which the purchase had progressed. To his recollection, Mr Lee had said: "I think I've sold my business". He was also aware that if a lessee said that he had sold his business that sale must be conditional on the lessor accepting the purchaser as an assignee. Further, although he had no recollection of Mr Young telling him that unless the extra five‑year term were granted, the plaintiff would not purchase Mr Lee's business, he conceded that it may have been said.
In my view, Mr Baruffi was not told that the business had been purchased by the plaintiff and was aware that finalisation of the purchase would be affected by the defendants' decision whether or not to extend the term of leasehold title, by whatever means. It is difficult to resist the inference that Mr Baruffi's evidence was intended to refute any suggestion that he might have been aware that the plaintiff would rely upon the information provided by him in the 18 June facsimile.
It is apparent from Mr Baruffi's evidence that the outcome of the meeting with Mr Lukman was approval by the defendants of an extension of the existing lease for five years or approval of a new lease for a five‑year term and two five‑year options. There is no suggestion that Mr Lukman expressed a preference for one alternative such that it might be wise to initially offer only that alternative. If Mr Baruffi's account of the 17 June meeting is accurate, it is difficult to see why he omitted from the 18 June facsimile Mr Lukman's approval of a five‑year term with two five‑year options by way of a new lease. Mr Baruffi was cross‑examined on this issue. It was suggested to him that if Mr Lukman had approved a new lease with additional options, it was his duty to include that approval in his letter of 18 June. Mr Baruffi's explanation was that he had already told Mr Young in the meeting that if he wanted a five‑year lease with options it would have to be by way of a new lease. In my view, this is a wholly inadequate answer. The information that should have been conveyed was not that there would have to be a new lease, but that the landlord had approved a five‑year term with two five‑year options achieved by way of a new lease. Another explanation given by Mr Baruffi was that he wasn't too sure at that time what Mr Young ultimately wanted because they had talked about the cost of a new lease as opposed to an assignment of the lease and Mr Young was uncertain as to which way he wanted to go. In my view, neither explanation is plausible. In the absence of a credible explanation, the content of the 18 June facsimile supports Mr Young's version of the conversation on 17 June and is crucial to the resolution of the plaintiff's claim.
Mr Young denied Mr Baruffi's allegation that at the 17 June meeting he told Mr Baruffi that the plaintiff had purchased the business. In fact, Mr Young denied almost all of the assertions made by Mr Baruffi concerning the 17 June meeting. As indicated above, to Mr Young's recollection, at the meeting on 17 June 1999 he told Mr Baruffi that the plaintiff was interested in buying the business and was negotiating to buy it but would require a five‑year extension or option or preferably an even longer term. According to Mr Young, at this stage the plaintiff was still negotiating to buy the business and that from 2 June to 11 June, a significant portion of the period preceding the meeting, Mr Young was away in Korea as evidenced by his passport, the relevant portion of which was tendered in evidence without objection. He did not return to work until Monday 14 June 1999. It was on his arrival back that Mr Young first began to negotiate with Mr Lee to purchase the business. Prior to then he had not even met Mr Lee and no decision had been made or agreement reached in the space of the three days following Mr Young's return from Korea. Mr Young's account is supported by the fact that the offer to purchase was not made until 25 June 1999, not only after the meeting but after receipt of confirmation that a five‑year extension of the existing lease had been granted. Mr Young went into possession on 1 July 1999, again after being advised of the approval of the five‑year extension. Settlement did not take place until 10 September 1999 and on the same day Mr Young wrote to Mr Baruffi advising him that settlement of the business had been effected. There seems to be no commercial advantage to the plaintiff in misstating the stage to which the acquisition had advanced.
According to Mr Young, if Mr Baruffi had not stated to him that his clients had agreed to a five‑year extension of the lease, the plaintiff would not have agreed to purchase the business. Mr Baruffi's letter of 18 June 1999 encouraged Mr Young to believe that the plaintiff had secured at least a further five years' occupation of the leased premises from 15 November 2002 on the same terms as the existing lease. The price of the business was assessed with reference to tenure to 14 November 2007. Any further extensions were not a prerequisite to purchasing the business. Consequently, the plaintiff proceeded to settle the purchase of the business before any new lease allowing further terms was in place.
On Mr Young's evidence, the asking price for the business was approximately $100,000. In the Offer and Acceptance the purchase price was stated to be $42,000. However, Mr Young frankly admitted that, at the request of Mr Lee, he paid a further $40,000 in cash bringing the total purchase price to $82,000, substantially less than Mr Lee's asking price. It was suggested to Mr Young that the reduced amount reflected the fact that what Mr Lee had to sell was a business conducted under a lease which was to expire on 14 November 2002. Mr Young agreed that the price was in relation to a business that only had until 14 November 2002 to operate out of the premises, but he refuted the proposition that the price didn't reflect the fact that the business would be entitled to operate until November 2007. He maintained that the extra term had been negotiated and approved as a result of the meeting of 17 June and the facsimile of 18 June.
It is always of concern when a witness involves himself in the practice of understating a purchase price on a contract of sale. Even if it were accepted that the other party initiated the practice, it would appear that Mr Young was a ready participant. However, it does not necessarily follow that his credibility in relation to his dealings with Mr Baruffi is called into question. One factor in Mr Young's favour is that he made no attempt to hide the understatement of the purchase price when giving his evidence. In my view, Mr Young's involvement in this practice is not, of itself, sufficient to reject Mr Young's evidence nor does it require corroborations of his evidence before it is accepted.
It is clear on the uncontroverted evidence that, from the outset, Mr Young was seeking possession of the premises beyond the expiry date of the existing lease. To state that all Mr Lee had to sell was a business conducted under a lease which was to expire on 14 November 2002 is to state the obvious. It does not follow that the price the purchaser was prepared to pay did not take into account the understanding that a further term would be forthcoming. Neither can any inference be drawn from the fact that the plaintiff paid less than the price sought by Mr Lee. Such is often the case, irrespective of any understanding as to extensions of the term of the lease. It commonly arises from a mere difference in perspective as to the actual worth of the business or the need on the part of the vendor to sell the business as soon as possible.
Mr Young agreed that when he signed the contract to purchase the business he still had to do something to acquire the five‑year extension. He believed that he had to formalise the agreement reached and recorded in the 18 June facsimile with the appropriate paperwork. He understood that would involve the assignment of the existing lease which would also create the extra five years extension.
According to Mr Young, the application to assign was given to him by Mr Baruffi. Initially Mr Baruffi stated that this document was provided to Mr Young at the 17 June meeting but later said that he couldn't recall exactly when he gave Mr Young the form. Mr Young was unable in his evidence to give a precise date for the receipt of this document but denies that it was given to him at the 15 June meeting.
Mr Baruffi partly completed the assignment of lease. Before handing it to Mr Young he filled in the details of the existing lease. Item 12 on the application relates to "Option Details". According to Mr Baruffi, he left Item 12 blank as there were no options left in the existing lease. Mr Young stated that he used the assignment of lease to seek an assignment of the existing lease together with an extra five‑years as had been approved in the 18 June facsimile. When asked how he had used the application to assign to obtain an extra five years on the lease Mr Young identified Item 12 which related to option details where he had written "5 years". On Mr Young's evidence, completing the application to assign formalised the discussions of 17 June 1999.
The application to assign was filled out by Mr Young and forwarded to Mr Baruffi on 12 July 1999. At the time of receiving the completed application the only arrangement which the defendants had approved and communicated to Mr Young was a five‑year extension of the existing lease. In the normal course of events that would be achieved by a Deed of Assignment of Lease which would include a term varying the existing lease by extending the term by five years. It is significant to note that the Deed of Assignment which was ultimately entered into contains a provision to amend the lease. Clause 8 of the application to assign provides for amendment of the lease. Clause 8.1 states: "From (and including) the Possession Date the Lease shall be amended in the manner described in the Schedule." The Schedule contains the heading "Amendment of Lease". Inserted under that heading is the word "Nil". On receiving the application to assign Mr Baruffi knew that Mr Young had only been advised of an approval for a five‑year extension. On his evidence, he had told Mr Young that his request for a five‑year term with two five‑year options would have to be achieved by way of a new lease. It was also perfectly clear that the one thing Mr Young did not want was a mere assignment of the existing lease. In those circumstances I consider that, on receipt of the application to assign, Mr Baruffi should have known that Mr Young was seeking a five‑year extension of the existing lease. At the very least he should have enquired whether the plaintiff wanted a five‑year extension or a five‑year option. Indeed, based on the approval transmitted to Mr Young, when filling out the application to assign, Mr Baruffi should have included the five‑year option.
However, on Mr Baruffi's evidence he didn't even see the words "five years" written next to the heading "Option Details" and doesn't recall even reading that page of the application to assign. He says that he went straight to the parts containing information on the applicant's assets and liabilities. I find that explanation difficult to accept. To go to those parts Mr Baruffi would have had to go past the relevant page on which Mr Young has written in a different hand. Further, he wrote to the solicitors on 14 July 1999 asking them to prepare an assignment of lease "in accordance with the following application form". Prudence should dictate that he be aware of the content of the document he has instructed his solicitors to rely upon when drafting a document which would bind his clients when executed.
Having observed Mr Baruffi giving evidence and considered his written and oral evidence as well as the documentary evidence reflecting the meeting with Mr Young, I found Mr Baruffi to be quite an unconvincing witness. His evidence was often in conflict with earlier statements made by him and, most importantly, with the documentary evidence on the same issues. I also found many of his explanations, on this and also on other issues, to be implausible. I found Mr Young to be a far more credible witness on almost every issue and I certainly prefer his evidence of the meeting of 17 June 1999.
Accordingly, I find that on 17 June 1999 Mr Young communicated to Mr Baruffi that he was considering buying the business but that he required a five‑year extension to the lease without which he would not make the purchase. I also find that he indicated that he would like an even longer term, if possible, but the five‑year extension was the key to the purchase. In view of the fact that the 18 June facsimile contains no reference to any approval for a new lease for a five‑year term with two five‑year extensions, and also because of my view of Mr Baruffi's credibility, I do not accept his evidence that in his conversation with Mr Lukman, Mr Lukman approved both the extension for five years and a longer term by way of a new lease. In my view, the 18 June facsimile reflected the defendants' approval of Mr Young's request for a five‑year extension of the existing lease and, in filling out the application to assign the lease, Mr Baruffi should have included a five‑year extension or, at the very least, should have expected a five‑year extension to be included by Mr Young.
In the circumstances to which I have referred, the 18 June facsimile made it apparent that the approval was in place and created an expectation that the approval would be given effect at an appropriate time. The 18 June facsimile led Mr Young to believe that his pre‑condition to the purchase of the business would be met.
(ii) The conversation between Ms Derksen and Ms Baruffi on or about 27 July 1999.
Some time after completing the application to assign and sending it to Mr Baruffi, Mr Young received a Deed of Assignment of Lease. When he received the Deed of Assignment Mr Young did not immediately identify any omission in the document. Mr Young's recollection is that Ms Derksen brought to his attention the fact that the Deed did not provide for the five‑year option.
In her statement Ms Derksen said that during her discussions with Mr Young, he stated to her words to the effect that the purchaser wanted a five‑year extension to the lease and it was either going to be a five‑year extension or alternatively a new lease for up to 15 years broken up into an initial term of five years with two option periods of five years which he said he would be happy with or words to that effect. This evidence is in conflict with Mr Young's version of the 17 June meeting and the 18 June facsimile.
In her evidence, Ms Derksen said that she received a letter from Mr Baruffi dated 16 July 1999 in which he provided certain information and concluded as follows:
"The Lease Assignment documents are currently being prepared by the Landlord's solicitor and we expect them to be ready on Monday 19 July 1999 for signing. We will make contact with you on their arrival at our office."
When Mr Young brought in the lease assignment documents to her office she told him that they were incorrect due to the five‑year option not being inserted. Her evidence on this point confirms Mr Young's recollection. Ms Derksen recalls that she discussed the matter over the telephone with a woman named Michelle at Mr Baruffi's office (Michellina Baruffi) and said to her that the documents were not correct because one of the conditions of settlement was that there be a five‑year extension or option to extend the existing lease in favour of the purchaser. I note that, despite her recollection of being told by Mr Young that the purchaser was going to receive a five‑year extension, or alternatively a new lease with at least two options, it is clear from the documentation and her evidence that when she came to deal with the purchase, the five‑year extension, or option as she referred to it, was the only arrangement the parties were acting upon. In my view, this casts some doubt on the accuracy of Ms Derksen's recollection on this point. On Ms Derksen's evidence she was told to return the documents and that they would be sent back to the solicitors to have the five‑year option inserted. Ms Derksen sent the documents back to Mr Baruffi's office.
Ms Baruffi gave a slightly different account of the conversation. She said that at the time she was employed by Mr Baruffi to set up a system for looking after and tracking lease documents, assignments of leases and the exercise of options by tenants. She recalls receiving a telephone call from Ms Derksen a couple of days prior to 27 July 1999. Ms Derksen introduced herself as being the settlement agent for the plaintiff. Ms Baruffi knew that the plaintiff had applied for an assignment of the lease held by Mr Lee as she had undertaken credit checks as part of her duties.
According to Ms Baruffi, Ms Derksen informed her that the assignment of the existing lease was incorrect, as it did not contain an option for a further term. On being told this she put Kerry Derksen on hold and checked the records. She found that the office had no record of having sent out the assignment of lease. She told Ms Derksen that there was no record of the lease being sent but later realised that she did actually have a record of it. In her oral evidence she said that she could not now remember whether she found the assignment or not.
On being advised that there was no record of the assignment of lease, Ms Derksen informed Ms Baruffi that the plaintiff's purchase of the business was conditional on being granted an option for a further term of five years. Knowing nothing of the document being referred to, Ms Baruffi asked Ms Derksen to return it to the office so that the issue of the option for a further term of five years could be brought to the attention of Mr Baruffi. In her oral evidence Ms Baruffi said that she did in fact know of the document. There was conflict in her evidence about whether or not she told Ms Derkson that the assignment of lease was to be sent back to the solicitors to have the five‑year option inserted. She initially denied it but later in her evidence admitted that she had said it. She also agreed that there were GST implications and an issue with respect to the Retail Tenancies Act, which had come into effect by then.
On Ms Derksen's account, when she did not receive the documents back she had a later conversation with Ms Baruffi in which she was advised by her that the owners were willing to give to the purchasers a new lease for five years with two five‑year options or words to that effect. She did not, however, say that it was not intended by the owners to include the option. Ms Derksen was cross‑examined on the precise order of events. She was taken to her written statement which was in the following terms:
"When I spoke to her Michelle most definitely did not say to me words to the effect that it was not intended by the owners to include the option. I remember her saying words to the effect that the owners were willing to give the purchasers a new lease for five (5) years with two five (5) year options."
The context would indicate that this is a reference to the first conversation. Ms Derksen's explanation for the conflict in her evidence was the number of years since the event took place. Her final position was that "it would probably be the next conversation with her, that she came back and told me that they were willing to offer a five‑year lease". In my view that version is to be preferred as it is consistent with the content of a letter that Ms Derksen sent to the purchasers on 27 July 1999. In that letter she mentions the fact that Mr Baruffi's office advised that the five‑year option was not inserted "due to an additional condition being required to accommodate the provisions of the GST", an issue which was never raised again. The letter does advise that Mr Baruffi's office has now confirmed that they are willing to offer a new lease of five years plus two x five‑year options and also confirms that the purchasers had advised her by telephone to request the managing agents to proceed with the new documents.
Another possible explanation for the variation in Ms Derksen's evidence on this point is that, although she may have spoken to Ms Baruffi on 27 July, she believes that she had more than one conversation with her on that day and that in the first conversation she was told to return the documents for them to be amended and in a subsequent conversation Michelle made the offer of a new lease with further options to renew. Ms Derksen's order of events is confirmed by Mr Young who stated that after his initial conversation with Ms Derksen she came back to him by telephone saying that five years plus two x five‑year options has been offered and he instructed her that he was willing to have a look at that. According to Mr Young, Ms Derksen didn't tell him that if a new lease was entered into, the existing lease would be surrendered, nor that an option of five years would not be included in the assignment.
Mr Young's recollection that there were two conversations is confirmed by Ms Baruffi's evidence on this issue and also by a facsimile she sent to Chalmers & Partners on 27 July 1999, stated to be "Re: Deed of Assignment – Murray Street Hostel", the contents of which are as follows:
"We have a little 'hiccup' with the above lease that has now found its way to Champion Settlements. I was today advised that the Lease did not include a five‑year option period as stated in the Lease Application; thereby making it a Deed of Assignment and Variation.
The documents are being dropped off today at your offices, courtesy of Champion Settlements. Could you please prepare the necessary alterations at your earliest convenience."
Ms Baruffi believes she would have sent this off after the first conversation. She couldn't remember whether she discussed this with Mr Baruffi but stated that most of the time she did have to refer everything to him. According to Ms Baruffi: "You virtually didn't do anything in that office without his consent. He had control of everything completely."
When questioned on the content of her written statement, Ms Baruffi said that she actually would have said to Ms Derksen that she would pass on the assignment and have it amended to include the option with a further term. She denied that she would have said during the first conversation that a new lease would have to be prepared.
There is a handwritten annotation on the bottom of the facsimile of 27 July 1999. The annotation bears the same date as the facsimile. Ms Baruffi identifies the handwritten annotations as belonging to Mr Baruffi. On her reading of the note it says: "Admit..varied..will make this a reviewable contract for GST purposes and no GST ….subject to GST clause. She will call back." On considering the annotation I believe the more accurate reading is "Advised variation will make this a reviewable contract for GST purposes …". It appears that Mr Baruffi was aware of the facsimile and had been advised that as a result of the variation to include the five-year option period, it would be necessary to include a GST clause. In my view, this note is of considerable significance for two reasons: First, because Mr Baruffi is having a conversation about the effect of the variation rather than simply indicating that variation by option is not available. Secondly, it is at this point that Mr Baruffi takes a different approach to his dealings with Mr Young and instructs Ms Baruffi to offer a five‑year term with two five‑year options by way of a new lease. That, of course, would allow the defendants to include in a new contract clauses considered to be in its interests. In my view that conclusion is open on the evidence of Ms Derksen, Mr Young and Ms Baruffi, together with the documentary evidence.
As to the second conversation in which Ms Baruffi advised that the defendants were prepared to offer a five‑year term with two five‑year options, she said she would more than likely have been directed by Mr Baruffi to provide that information. Although there was some confusion on Ms Baruffi's part in relation to the second conversation, she did recall that there was a change in the options. She also recalls a discussion which, to her memory, involved something to do with development or redevelopment and that it would be in the interests of one party, she could not remember which, to change the documentation. Ms Baruffi does not say who was involved in this discussion, however, in view of Mr Baruffi's evidence of his conversations with Mr Lukman and the evidence of his control over all activities of his business, the inference that Mr Baruffi was involved in the discussion is easily drawn as is the inference that it was the defendant's interests which were being discussed.
Mr Baruffi gave evidence that he did indeed instruct Ms Baruffi to advise Ms Derksen that, in order for the plaintiff to obtain an option for a further term, a new lease would have to be entered into. On his evidence, Ms Baruffi told him that the option had been omitted from the assignment document and he said to her that there was no option to be put in the assignment documents. However, if the tenants wanted options there would have to be a new lease and the defendants were prepared to give them "a 5 plus 5 plus 5". According to Mr Baruffi, he relied on his earlier conversation with Mr Lukman as authorisation for that offer. At a later point in his evidence he said that he could not remember whether he went back to Mr Lukman to discuss the matter but had no recollection of any further conversations with Mr Lukman after the initial one. One of the many difficulties with Mr Baruffi's evidence is that, knowing that a five‑year extension had been requested and approved, he rejected the five‑year option out of hand without making any enquiries of Mr Young as to whether it was indeed an option that he wanted, and without going back to Mr Lukman to find out his attitude to a five‑year option. Mr Baruffi asserted that his discussion with Mr Lukman on 17 June 1999 included instructions to recover all outgoings if the plaintiff opted for further options to be included in a new lease. This point had not previously been raised by Mr Baruffi when recounting the conversation with Mr Lukman. I did not find Mr Baruffi's evidence on this point particularly convincing. His failure to mention this aspect of the conversation with Mr Lukman leads me to conclude that this aspect of the conversation did not occur at that time, as later alleged In my view, it is highly unlikely that the discussion at that early point in time would have descended to the level of detail contained in Mr Baruffi's instructions to the solicitor and in his letters to Mr Young. Accordingly, in my view, the changes requested by Mr Baruffi are more likely to be the result of a discussion with Mr Lukman.
As to what transpired after the 27 July discussions, according to Ms Derksen, Mr Young later said to her that the purchasers could not agree to terms with the owners for a new longer‑term lease but that he was nonetheless happy with a five‑year extension of lease, or words to that effect. This account also supports Mr Young's evidence that his understanding was that the five‑year extension remained open to him despite his willingness to negotiate for an even further term of possession and that the expectation created by the 18 June facsimile still operated on Mr Young's mind and on his actions with respect to the purchase of the business..
In response to the evidence of Ms Derksen about her conversation with Ms Baruffi, Mr Baruffi gave evidence that in July 1999, as is still the case, there is a firm office rule in Kevin Baruffi & Associates that only he could make decisions in respect to lease matters on behalf of clients and that employees could only pass on information about leasing matters that he had instructed them on. Ms Baruffi confirmed that there was a rule that no staff, including her, were to negotiate leasing transactions. This is despite the fact that she was a director and secretary of Silver Tree Holdings Pty Ltd the licensee of Kevin Baruffi & Associates. According to Ms Baruffi she adhered to the rule when she spoke to Ms Derksen. She was allowed to talk to Ms Derksen and to the solicitors but she wasn't entitled to enter into full lease negotiation on behalf of the owner. The defendants appear to rely on this evidence to counteract Ms Baruffi's statement to Ms Derksen that the five‑year option had been omitted and the omission would be rectified. However, it is apparent that the evidence is adduced, not to establish an agreement for a five‑year extension made on behalf of the defendants but as evidence which is consistent with the understanding of Mr Young that the Deed of Assignment was supposed to include the five‑year extension which had been agreed between the parties. In fact, to my mind, this evidence simply supports a conclusion that, if there was a change of position with respect to the lease over the premises, Mr Baruffi was the one behind that change.
Ms Derksen appeared to have no vested interest in the outcome of the proceedings and gave her evidence in a calm and credible manner. However, on occasions she had difficulty with her memory due to the lapse of time. On some occasions her recollection was in conflict with the documentary evidence. In giving her evidence Ms Baruffi appeared to be extremely nervous and was very cautious when answering questions. At times she also appeared confused in her recollection of events. In cross‑examination she conceded that, although she remembered Ms Derksen calling, she remembered little of the detail of the conversations without referring to correspondence and notes made at the time. I have some reservations about the accuracy of her account and consider the most accurate account of the conversation to be contained in Ms Derksen's letter of 28 July 1999. However, overall, there was no significant conflict in the evidence of Ms Derksen, Ms Baruffi and Mr Young concerning the events of 27 July 1999.
I consider that the initial reaction of Ms Baruffi on behalf of Baruffi & Associates in response to Ms Derksen's enquiry was in accordance with the agreement to allow a five‑year extension to the existing lease. Further, I consider that the most probable explanation for what transpired thereafter was that a realisation was reached that extending the term for five years, by whatever mechanism, left the defendants with a lease which it considered inadequate. It was therefore in the best interests of the defendants for the plaintiff to agree to a new lease. The only realistic way to achieve that purpose was to offer the plaintiff an even longer term by way of a new lease. Acting on the instructions of Mr Baruffi, Ms Baruffi made that offer to Mr Young through Ms Derksen. However, at no stage did any person on behalf of the defendants advise Mr Young that, in offering a new lease for an extended term, the defendants were also withdrawing approval of the five‑year extension. In reaching that conclusion I have drawn on some of the evidence to which I will refer when dealing with the final issue. Further, it must have been apparent to Mr Baruffi that if the plaintiff agreed to negotiate a new lease and forego any entitlement to the extra term he would be almost bereft of bargaining power in those negotiations. To the contrary, Mr Baruffi must have been aware that Mr Young might consider the terms offered to be too onerous leading him to forego the extra options and proceed with the five‑year extra term he repeatedly identified as being necessary to the purchase. For these reasons, if Mr Baruffi considered the agreement to negotiate a new lease with extended terms operated in lieu of the approval of the five‑year extension he should have made it abundantly clear to the plaintiff.
(iii) The effect of the subsequent correspondence concerning a new lease with further option periods.
On the evidence of Ms Derksen and Ms Baruffi, the offer put to Mr Young was that the defendants were willing to offer a new lease of five years plus two five‑year options. On 28 July 1999, Ms Derksen wrote to Baruffi & Associates advising that the plaintiff was willing to take a new lease of five years with two x five‑year options. Sometime between then and 4 August 1999 Mr Baruffi was provided with a draft lease. On 4 August 1999 Mr Baruffi sent a facsimile to Chalmers & Partners, the solicitors for the defendants, with respect to "the draft lease you provided on Tuesday". In the facsimile Mr Baruffi stated that the draft lease needed the following modifications to suit the premises:
"1.A redevelopment clause is required to provide redevelopment option as exists in the existing lease.
2.Rent review should be market or 5%. As this is not a retail premises I believe we do not have to have only one mechanism operating at each review.
3.Management fees need to be incorporated in operating expenses."
He further stated:
"Please also insert the following in the schedule.
1.Option period of five years
2.Term of five years
3.Annual rent review
4.Annual rental $35,000 per annum."
Mr Baruffi's explanation for why the offer of two five‑year terms which was accepted by Mr Young was not included in the new lease was that it was an oversight on his part. I did not find Mr Baruffi's explanation to be particularly compelling, particularly in view of the fact that he was later to use Mr Young's request for the further five years as a reason not to accede to Mr Young's request for the minimum rent increase to be based on an increase to the CPI.
On 9 August 1999 Mr Baruffi wrote to Mr Young enclosing the new draft lease. In the letter of 9 August Mr Baruffi provided an estimation of the monthly outgoings to enable Mr Young "to complete a fair comparison of costs under this revised lease". The monthly outgoings figure reflected water rates, council rates, insurance, variable outgoings and maintenance and management fees. The figure identified is $2,820.00 per calendar month. Based on that figure the total annual outgoings in the new draft lease would be $33,840.00, a substantial increase in fees from the $23,730.53 for the previous financial year. Further, unlike the existing lease, the new lease provided for the lessee to pay land tax.
After reviewing the draft lease document, on 28 August 1999 Mr Young wrote to Mr Baruffi raising some points for discussion and consideration. One point raised by Mr Young related to the minimum rent increase per annum. Under the original lease the increase was calculated by reference to the consumer price (CPI). The draft lease provided for a 5 per cent minimum rent increase. Mr Young recommended that the increase be subject to the CPI as with the original lease. In relation to the term of the lease Mr Young wrote:
"As per our initial discussion, we would prefer a total of 15 years available under the lease. This would mean five years plus five years option and a further five years option."
Mr Young then addressed the restriction on using the premises for any purpose other than a hostel and also sought an undertaking from the landlord not to redevelop the premises for the first five years of the term. Mr Young then concluded:
"Considering the increased financial commitment by ourselves under the new lease agreement, I believe the above mentioned requests are reasonable. We look forward to your favourable response to finalize this matter as soon as possible."
It can be seen that Mr Young was well aware that there was an increased financial burden under the draft new lease. He also confirms that the initial discussion involved a total of 15 years available under the lease rather than the reduced term offered by Mr Baruffi.
Mr Young denied that the initial discussion mentioned in the letter was a reference to the meeting on 17 June 1999. He stated that he was referring to the discussion which happened after 17 June with regard to the new lease. Despite his concession that there was no reference to such a conversation in his statement, Mr Young maintained that he had a further discussion with Mr Baruffi about the options and was not merely told about it by Ms Derksen.
However, unsuitable though they were, it does not follow that they are invalid. The primary reason that Mr Young did not realise that he could dispute the amount of rent identified in the notices was because he had absolutely no knowledge of some very significant terms of the lease. There is no obligation on the lessor to advise the lessee of its rights under the lease or to provide a copy of relevant terms of the lease in relation to particular events that occur during the term of the lease. Neither is the defendant required to provide the plaintiff with a copy of the lease in order for the plaintiff to determine its rights, unless requested to do so.
I consider that the purpose and intent of the clause is to provide notice of the change to a different rental rate. In my view, the notices provided were sufficient to achieve that purpose and to constitute a notice for the purposes of 2.4.1.1. While it would have been helpful to identify that the rate mentioned was "proposed", a failure to do so does not invalidate the notices. Not having questioned the review within the time allowed, the plaintiff is not now entitled to do so.
The plaintiff submits that its actions were taken in good faith. I would have less difficulty with that proposition if the plaintiff had agreed to pay the prior rent plus the CPI increase. However, I do accept the evidence that it was the unsatisfactory wording of the defendants' notices which led to the decision not to pay the increased rent. In those circumstances I do not accept the defendant's argument that the plaintiff is disentitled to the equitable relief sought. However, the declaration that the term of the lease is to be extended for the five years as stated in the 18 June facsimile is conditional on payment of the arrears of rent calculated in accordance with the first and second rent review notices and interest thereon.
(3) The relevant "outgoings" clause
The dispute as to the payment of outgoings essentially commenced when Darron Larsen‑Brahe became the manager of the business in March 2001. Between 1998 and 1999 he had worked as the manager of the business under the former owner, Mr Lee. Mr Larsen‑Brahe was the manager when the plaintiff took possession of the premises on or about 30 June 1999. Between those two periods Mr Larsen‑Brahe spent some time overseas. When he was appointed as the general manager, Mr Larsen‑Brahe started going through the paperwork, the administration documents and the lease, and pointed out to Mr Young various issues which were subsequently raised in correspondence to Mr Baruffi. Mr Young denied that Mr Larsen‑Brahe had been asked to raise these issues in order to give the plaintiff an excuse for not paying its share of outgoings because of cash flow problems and I accept his evidence on this point, supported as it is by that of Mr Larsen‑Brahe.
In his written statement Mr Larsen‑Brahe stated that since March 2001 the plaintiff has been in dispute with the defendants about the plaintiff's proper share of outgoings payable under the lease. In fact, there was a history of correspondence between the plaintiff and Mr Baruffi addressing fairly minor issues with respect to the outgoings payable under the lease.
On 8 June 2000 Mr Baruffi wrote to Mr Young advising that he had brought forward the reconciliation of the variable outgoings actual expenditure against the budgeted expenditure figures in order to avoid the imposition of GST to the variable outgoing expenditure adjustment for 1999/2000 financial year. The reconciliation showed a short fall and the managing agent therefore raised an invoice to the plaintiff for its portion calculated to reflect its specific liability under the terms of the lease. Annexed to the letter were two variable outgoings budget comparisons. The items included as variable outgoings were water rates, council rates, land tax, insurance, maintenance, security, cleaning, and sanitac/waste. When questioned on this document, Mr Baruffi agreed that that land tax was not an outgoing to which the lessee had to contribute under the existing lease. A reconciliation was also undertaken in August of the next financial year. Each of these letters dealt with actual and budgeted variable outgoings expenditure. It is apparent from a perusal of the existing lease that the contractual basis for budgeted variable outgoings expenditure is cl 5.21.2.2, a subclause of cl 5.21 which is headed "Common Areas, Variable Outgoings". Accordingly, it would appear that, in determining the extent of the plaintiff's obligation to pay outgoings under cl 5.3.1, Mr Baruffi was relying on cl 5.21.
On 23 March 2001 a letter written by Mr Larsen‑Brahe, but signed by Mr Young, was sent to Mr Baruffi querying, inter alia, the percentage outgoings calculations and referring to cl 5.21.2 of the existing lease and the definition of aggregate variable outgoings under cl 5.21.2.1 of the lease to support the plaintiff's position. Mr Larsen‑Brahe also insisted on notification of the budgeted or estimated amount of the aggregate variable outgoings as provided for in cl 5.21.2.2 and required a copy of the independent audited accounts to which the plaintiff was entitled under cl 5.21.2.4, together with copies of the invoices. Prior to that point, the plaintiff had never received any accounts. The relevant portion of cl 5.21.2.4 is in the following terms:
"Adjustment of amounts paid on account of Variable Outgoings shall be made as follows:-
'As soon as possible after the 30th day of June in each year the Lessor's nominated accountant shall certify as to the amount of the Aggregate Variable Outgoings and notice therefore shall be given by the Lessor to the Lessee; if such amount is greater than the amount paid on account of Variable Outgoings the difference shall be paid by the Lessee to the Lessor within 14 days of receipt of the notice of the accountant's certificate ...'"
In that letter, specific reference was also made to cl 5.21.2.1(m) which was said to stipulate that in each year the lessor may set aside such sum as it reasonably decides as a fund to cover repairs, renovations, replacements and maintenance of a substantial but infrequent or irregular nature. However, any such expenditure shall only be deemed as an operating expense to the extent to which the fund shall not be sufficient at the time the expenditure is actually made.
By way of response only to the reference to cl 5.21.2.1(m), on 3 April 2001 Mr Baruffi wrote to the plaintiff pointing out that this subclause is for a reserve fund for future replacement and maintenance of a substantial nature. He further advised that no provisions for such a fund had been made in the Variable Outgoings budget. In cross‑examination, Mr Larsen‑Brahe disputed that this response answered his concerns.
The response to the request for the audited accounts was not forthcoming and on 4 April 2001, Mr Larsen‑Brahe wrote a further letter to Mr Baruffi which was signed by Mr Young. In that letter another request was made for the audited account, copies of the invoices and copies of the new budgeted accounts for the financial year. On or about 3 May 2001 the audited variable outgoings accounts, and the invoices were provided.
On 3 May 2001 Mr Baruffi again wrote to the plaintiff addressing, amongst other issues, certain maintenance and repair costs in dispute which were said to have arisen with respect to the installation of smoke detectors in the plaintiff's premises due to insurance requirements. According to Mr Baruffi, variable outgoings expenditure is made for common facilities and not for items contained within tenancies and it would not be fair for other tenants to bear the costs of work done with respect to the plaintiff's premises.
On 7 June 2001 Mr Larsen‑Brahe wrote a letter to Mr Baruffi complaining that the water consumption charges were being billed to the plaintiff separately when monthly outgoings instalments were being paid by the plaintiff. Mr Larsen‑Brahe further advised that the rent and outgoings being paid were being paid under dispute. One specific issue raised was Mr Baruffi's decision that the plaintiff should meet the costs of interest on an account from the Water Authority left unpaid by Mr Baruffi's firm.
In his letter in reply dated 8 June 2001, Mr Baruffi relied on cl 5.21.2.1(a) of the lease to justify recovering rates and charges payable to the Metropolitan Water Authority.
On 12 June 2001 Mr Larsen‑Brahe responded by suggesting that, as it was Mr Baruffi's responsibility to pay the accounts on the due date, his firm should be responsible for the late payment fee, such sum to be deducted from the management fee.
It is apparent from a review of this correspondence that, at least at this stage, both parties were relying on cl 5.21 of the existing lease with respect to the outgoings payable under the lease. It is also apparent that the requests made in the letters signed by Mr Young were reasonable in the circumstances. I also find that there were differences of interpretation of the clauses of the lease dealing with variable outgoings. The matters of dispute raised by the plaintiff with respect to the plaintiff's obligation to pay variable outgoings, even if proved to be incorrect, were not to my mind unreasonable.
In cross‑examination, Mr Larsen‑Brahe was questioned about whether he had a real belief that a problem existed with respect to the payment of outgoings under the lease. He maintained that he did. Apart from being questioned on this issue, no real attack was made on Mr Larsen‑Brahe's credibility. I certainly found him to be a witness of truth and accept that he was the one who initiated the correspondence voicing concerns about payment of outgoings and had not been used by Mr Young, or any other person, to avoid payment due to financial difficulties. In any event, once it became apparent that Mr Baruffi was having the best of both worlds by shifting between two inconsistent clauses of the lease, depending on which one brought the greatest benefit to the lessor, it cannot be said that the dispute as to outgoings lacked bona fides. In my view, the plea that the conduct of the plaintiff with respect to the payment of outgoings should in any way disentitle it to the relief sought must fail.
On 20 June 2001 Mr Baruffi wrote a letter to the plaintiff which set out his approach to determining the payment of outgoings under the lease. He wrote:
"Your obligation under the lease to pay outgoings falls under two provisions namely:-
1.clause 3.2 (outgoings), and
2.clause 5.21.2 (Variable Outgoings)
The monthly instalments to which you refer fall under clause 5.21.2 (Variable Outgoings).
Clause 3.2 obliged you to pay the outgoings as defined in Item 8 of the Schedule throughout the term. This clause provides that in connection with the payment of the outgoings the Lessor may serve on you notice of the outgoings or any of them and you are required to pay the amount stated in the notice and shall indemnify the Lessor against all claims, penalties, fines and charges relating from late payment of any of the outgoings.
The outgoings referred to in Item 8 of the schedule include all charges for and costs in relation of the supply of water and sewerage services excess water and the removal of waste and other garbage and sullage from the land and the premises …
The Lessor may determine which of clause 5.21.2 or 3.2 it may recover the relevant outgoings – depending on its nature.
The water consumption fees are outgoings which fall within clause 3.2 and in respect of which demand for payment has been made."
This last letter from Mr Baruffi identifies the central dispute between the parties in relation to the payment of outgoings. There are two clauses in the existing lease which deal with the payment of outgoings. They do not compliment each other so that the two clauses have separate areas of operation. Neither is it the case, as asserted by Mr Baruffi, that the lessor is entitled to determine under which of cl 5.21.2 or 3.2 it may recover the relevant outgoing. The parties agree that both clauses address the same issue, the payment by the lessee of outgoings, in quite different terms and cannot stand together. Accordingly, only one can have effect and the question for the court to determine is which is the operative clause.
In determining which of the two competing clauses should take effect, it is necessary to consider the wording of each in the context of the document as a whole. In particular, regard should be had to cl 5.3 which provides that the lessee's covenant to pay "Rent and Outgoings" are essential terms of the lease. Counsel for the plaintiff contends that this is an essential point in deciding which of the two provisions apply. I agree with that submission.
The term "Outgoings" is defined in cl 1.1 to mean the outgoings specified in Item 8 of the Schedule. Item 8 of the Schedule defines the Outgoings as "All costs and expenses incurred or payable by the Lessor for and in respect of the Premises in connection with:-" and goes on to include costs in relation to the supply of water, premiums for insurance, cleaning costs, the supply of light and power, costs and expenses of maintenance, operation, inspection, servicing and upkeep of and repairs to the Premises, all management fees, a sum equivalent to interest at the prescribed rate on any moneys expended by the Lessee in carrying out work other than structural alterations, all rates, taxes charges and fees imposed but excluding Land Tax.
Cl 3.2 of the lease is headed "Outgoings" and states:
"3.2.1The Lessee shall throughout the Term duly and punctually pay the Outgoings. Where any Outgoings are not separately assessed or charged in respect of the Premises the Lessee shall pay the same proportion thereof as the area of the Premises bears to the net lettable area of the land or premises the subject of the assessment or charge. At the commencement of the Term and at the expiration or sooner determination thereof the Outgoings shall (if necessary) be apportioned as between the Lessor and the Lessee. [emphasis added]
3.2.1 In connection with payment of the Outgoings the Lessor may serve on the Lessee notice of the Outgoings or any of them and the Lessee shall pay to the Lessor (or as the Lessor may otherwise direct) the amount of the Outgoings stated in the notice and shall indemnify the keep indemnified the Lessor against all claims, penalties, fines or charges arising from late payment of any of the Outgoings.
It can be seen that cl 3.2 sets out a comprehensive system for recouping reasonable costs and expenses. Its terms are defined elsewhere in the lease and the description of the obligation as "Outgoings" is consistent with the wording of cl 5.3 which is a particularly significant term of the lease, providing as it does that the lessee's covenant to pay "Rent and Outgoings" are essential terms of the lease.
In submitting that cl 3.2 is the operative clause, the plaintiff relies on the inclusion of the terms used in that clause in cl 1.1 of the lease and in the schedule to the lease and notes that there is no reference to the terms "variable outgoings" or to "aggregate variable outgoings" which are the significant terms used in cl 5.21.
Counsel for the plaintiff also submits that cl 3.2 fits the case where the premises are not the whole of the land or the whole of the building. In that regard, reliance is placed on cl 3.2.1 which provides for the lessee to pay the same proportion of outgoings as the area of the Premises bears to the net lettable area of the land or premises the subject of the assessment or charge, where any Outgoings are not separately assessed or charge.
The term "Premises" is defined in cl 1.1 to mean the premises (if any) specified in Item 1 of the Schedule erected on the land together with the fixtures fittings chattels furnishings plant machinery and equipment of the Lessor (if any) therein from time to time details of which or some of which are specified in Item 1 of the Schedule.
Under Item 1 of the Schedule the Premises are defined as:
"Those portions of the ground floor labelled lobby, reception and laundry as are outlined in orange on the plan annexed hereto and the whole of the first, second and third floors of the building erected on the land the ground floor being known as YMCA Arcade and the remainder being known as 113‑123 Murray Street, Perth."
This description is reproduced in the Deed of Assignment – Murray Street Hostel entered into by the plaintiff in or about January 2000. Significantly, it is apparent from the evidence that the Premises do not represent the whole of the building. Other tenancies exist within other areas of the building. The term "land" is defined as the land specified in Item 1 of the Schedule. Item 1 of the Schedule identifies the whole of the land in the relevant Certificate of Title.
It is further submitted on behalf of the plaintiff that cl 5.21.2 is the later of the inconsistent provisions and so should be rejected as being repugnant to cl 3.2.1: Halsbury's Laws of Australia volume 10 par 140‑595. However, that statement of principle is qualified in Halsbury's Laws of Australia as follows:
"Since the object of construction is to give effect to the parties intention, this rule must be subject to the proviso that effect will always be given to that part which is calculated to carry into effect the real intention of the parties and that part which would defeat it, whether it occurs first or not, must be rejected."
It is further said that the rules as it relates to inconsistent clauses has been described as an expedient rule to which the court will very reluctantly have recourse, and never unless absolutely compelled to do so, having exhausted every other means in its power to reconcile apparent inconsistencies. Accordingly, mere position in the document is a resolution of last resort in determining which of two conflicting provisions should apply.
On behalf of the defendants it is said that cl 5.21 should be preferred and not only because historically it has been the basis upon which the parties have dealt with outgoings. It is said that cl 3.2 of the lease requires the plaintiff to pay the outgoings. Outgoings are defined in Item 8 of the lease to be those in respect to the premises. The essence of the defendants' submission is that there are no outgoings covered by clause 3.2 and Item 8 that are in respect to the leased premises. In my view, this argument is overcome by the reference in cl 3.2.1 to the situation where outgoings are not separately assessed and are then determined, pro rata, according to the proportion of the leased premises to the premises the subject of the assessment.
Portions of cl 5.21 have been set out above. The opening words under the heading are:
"Where the Premises are not a strata lot or part thereof and are not the whole of the Land or all buildings and improvements thereon:-"
The first subclause, cl 5.21.1, addresses the use of common areas, a necessary clause where the lease does not relate to the whole of the building. On behalf of the defendants it is said that cl 5.21.2.1 clearly deals with a lease of part of the building which is exactly what the plaintiff has entered into. It may be that cl 5.21.2.1 was pasted in to an existing lease but that existing lease, in the defendants' submission would have been a lease for the whole of the land and buildings thereon by one tenant. I accept the submission that cl 5.21.1 is clearly stated to address the situation where the lease does not relate to the whole of the building. However, in view of the reference in the lease to the relevant terms of cl 3.2 and the omission from the lease, in particular the Schedule to the lease, of any reference to the specific terms used in cl 5.21.2, in my view cl 5.21.2 will only be the operative clause if 3.2 does not address the situation where the lease does not relate to the whole of the building. That, however, is not the case. The "proviso" in cl 3.2.1 to which I have already referred clearly deals with the situation where the premises the subject of the lease is not the whole of the building or land to which the outgoing applies.
It is common ground between the parties that the plaintiff's proportion of the outgoings is 57.51 per cent based on the proportion of the leased premises to the whole of the building. However, rather than determining in this judgment the amount payable by the plaintiff to the defendants, the parties have requested that, pursuant to O 45 r 2, the matter be referred to a Master for an inquiry and report. This approach will also give the parties the opportunity to agree the relevant figures with respect to the appropriate clause of the lease. Making an order for an account is discretionary but I am persuaded that it is the most effective method of disposing of this aspect of the claim.
The Relief Granted
The doctrine of estoppel permits a Court to do what is required to avoid detriment and does not, in every case, require the making good of the assumption: Verwayen per Gaudron at 487 agreeing with Mason CJ at 412; per Deane J at 354; see also Giumelli v Giumelli (supra) at 124‑5 per Gleeson CJ, McHugh, Gummow and Callinan JJ; see also Re Monger; Ex Parte Cross [2004] WASCA 176 per Malcolm CJ at 25‑6.
I consider the effect of the doctrine of equitable estoppel in this case is to estop the defendants from retreating from their promise to complete a lease with a five-year extension. In my view, the equity in the circumstances of this case can only be accounted for by holding the defendants to the assumed state of affairs and making a declaration that the plaintiff is entitled to the grant of a lease on the same terms as the existing lease for a term of five years from 15 November 2002.
With respect to the breach of s 52 of the Trade Practices Act, I am prepared to make an order under s 87 of the Act modifying the Deed of Assignment so as to provide for the grant of a lease to the plaintiff on the same terms as the existing lease for a term of five years from 15 November 2002. In my view, fairness dictates that rectification is the appropriate statutory remedy in the circumstances of this case: Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281.
In the case of both the equitable and statutory remedy, the making of the orders directing the defendants to grant the lease on the same terms as the existing lease for a term of five years from 15 November 2002 will be conditional on payment by the plaintiff of all arrears of rent calculated on the basis of the rental amount set out in the first and second notices. I will hear the parties as to whether the plaintiff should be given time to pay and, if so, the relevant time period. I will also hear the parties on the form of words which will best express the defendants' entitlement to return to this Court for further orders if the arrears of rent are not paid.
I propose to further order that this claim be referred to a Master under O 45 r 2 for an assessment of the outgoings payable under the lease in accordance with cl 3.2 of the lease. Unless I am advised that the parties have agreed to a figure representing the arrears of rent, that issue will be referred to the Master. I will also hear the parties on this issue.
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