Masaka Holdings Pty Ltd as trustee for Shiv Family Trust v Flaxman - [2019] WASC 397

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   MASAKA HOLDINGS PTY LTD as trustee for SHIV FAMILY TRUST -v- FLAXMAN [2019] WASC 397
CORAM:   TOTTLE J
HEARD:   11 OCTOBER 2019
DELIVERED          :   7 NOVEMBER 2019
FILE NO/S:   CIV 2293 of 2019
BETWEEN:   MASAKA HOLDINGS PTY LTD as trustee for SHIV FAMILY TRUST
Plaintiff
AND
GREGORY JOHN FLAXMAN
First Defendant
REGISTRAR OF TITLES
Second Defendant

Catchwords:

Application for extension of caveat - Whether serious question to be tried - Turns on own facts

Legislation:

Transfer of Land Act 1893 (WA), s 138C

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiff	:	Mr C Ko
First Defendant	:	Mr S Standing
Second Defendant	:	No appearance

Solicitors:

Plaintiff	:	Trinix Lawyers
First Defendant	:	Clinch Long Woodbridge Lawyers
Second Defendant	:	No appearance

Case(s) referred to in decision(s):

Bashford v Bashford [2008] WASC 138
Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
Bride v Registrar of Titles [2015] WASC 11
Deputy Commissioner of Taxation v Corwest Management Pty Ltd [1978] WAR 129
Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12; (2017) 261 CLR 544
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; (1983) 153 CLR 455
Halse v Embling (Unreported, WASC Full Court, Library No 970734, 22 December 1997)
Manitowoq Platinum Pty Ltd v WFI Insurance Ltd [2018] HCATrans 243
Servcorp WA Pty Ltd v Perron Investments Pty Ltd [2016] WASCA 79; (2016) 50 WAR 226
Westgyp Pty Ltd v Northline Ceilings Pty Ltd [No 2] [2019] WASCA 145
WFI Insurance Ltd v Manitowoq Platinum Pty Ltd [2018] WASCA 89

TOTTLE J:

Introduction

The plaintiff has applied for an order under s 138C of the Transfer of Land Act 1893 (WA) extending the operation of a caveat registered against the title of a residential property in the Perth suburb of Applecross (Applecross Property). The first defendant and his wife are the registered proprietors of the Applecross Property. The plaintiff is the owner of commercial premises in Joondalup, Western Australia (the Premises).

The evidence

The plaintiff relies upon two affidavits sworn by Mr Upendra Rasiklal Patel on 23 July 2019 and 3 September 2019. Mr Patel is a director of the plaintiff. The first defendant relies upon an affidavit sworn by him on 27 September 2019.

Factual background

In 2015 the first defendant was the director and sole shareholder of Massage Club Joondalup Pty Ltd.
On 30 April 2015 the plaintiff as landlord, Massage Club Joondalup Pty Ltd as tenant (the Tenant) and the first defendant as guarantor executed a lease of the Premises (the Lease). The Lease was for a term of five years commencing 1 May 2015.
Clause 68 of the Lease set out the terms of the guarantee and indemnity given by the first defendant. As is common in commercial leases the obligations of the first defendant were described in detail and at length. For present purposes it is sufficient to refer to the chapeau and cl 68.1(a):
68. 1 Guarantee and Indemnity
In consideration of the Landlord agreeing to grant this Lease to the Tenant at the Guarantors' request as testified by the Guarantors' execution of this Lease, the Guarantors enter into this guarantee in the Landlord's favour on the following terms:
(a)the Guarantors, for themselves and for their successors, jointly and severally guarantee the payment of the Money Payable without any set off deduction whatsoever and the observance and performance of all the Tenant's Covenant's throughout the Term, including any Holding Over;
The Money Payable was defined to mean the rent and any other money payable by the Tenant under the Lease.
Clause 44.1 of the Lease provided that:
The Tenant must not transfer assign, mortgage or charge the leasehold estate in the Premises or sublet, part with possession, or dispose, of the Premises or any part of the Premises without the written consent of the Landlord and except under this clause 44.
Clause 44.3 provided that if the 'Tenant' was a corporation not listed on the Australian Stock Exchange 'any change in the beneficial ownership, issue or cancellation of shares in the [Tenant] ... will be deemed to be an assignment of the leasehold created by this Lease' for which the plaintiff's consent as landlord was required.
Clause 44.4 of the Lease provided that the landlord's consent would not be unreasonably withheld to an assignment of the Lease provided there was compliance with certain conditions. Those conditions included a condition that the landlord was satisfied the proposed assignee was 'a respectable and responsible person of good financial standing' and, separately, that an instrument assigning the Lease to which the landlord was a party was prepared and completed by the landlord's solicitors at the Tenant's cost.
The Lease contained a charging clause, cl 72, which provided:
The Tenant and Guarantor agree in order to secure payment of the Money Payable and complete performance of all their liabilities and obligations under this Lease to charge in favour of the Landlord all their legal and equitable interest of whatsoever nature held in any real property both present and future and consent to the Landlord lodging an absolute caveat or absolute caveats noting its proprietary interest hereunder.
On 24 May 2016 the first defendant sent an email to Mr Amar Patel of the plaintiff (Mr Upendra Patel's son) notifying him of a proposed change of ownership of the shares in the Tenant and asking, in effect, what was required to obtain the plaintiff's consent to the deemed assignment of the Lease. The first defendant stated that it proposed to transfer ownership of the Tenant at the end of the month.
On 30 May 2016 the first defendant ceased to be a director of the Tenant and Mr Grant Jones became the sole director and on the same day Matgra Investments Pty Ltd became the sole shareholder of the Tenant.
Between 30 May and 7 June 2016 various communications took place between Mr Grant and Mr Amar Patel and between the first defendant and Mr Amar Patel. On 7 June 2016 Mr Upendra Patel sent an email to Mr Grant in which he stated:
Further to our meeting today in respect of the requested assignment of the Lease for [the Premises], we advise you as follows
We give the Landlord's consent to an Assignment subject to
1.Compliance of Clause 44 Assignment of the Lease;
2.The current Beneficial Ownership of Shares in the "Tenant" 'Massage Club Joondalup Pty Ltd' will change to 'Matgra Investments Pty Ltd';
3.The current "Guarantor" 'Gregory John Flaxman' be replaced with "Guarantors" 'Grant Martin Jones, Katrina Marie Hassan‑Jones, Matgra Investments Pty Ltd and Massage Club Australia Pty Ltd; and
4.The current guarantee and indemnity to the sum of equivalent to the gross Rent for one year will change to the sum equivalent to the gross Rent for two years
Please confirm the above is acceptable to all the parties mentioned above.
In his affidavit sworn on 3 September 2019 Mr Upendra Patel deposed that after he had sent the email set out above he had negotiations and discussions with Mr Jones to try to establish his financial standing before deciding whether he would agree to the assignment of the Lease.
On 1 July 2016 Mr Upendra Patel sent an email to Mr Jones and the first defendant in which he stated:
We refer to the discussions and agreement by all parties on the assignment of the lease of [the Premises].
Attached is the amended draft Deed of Assignment and Variation of Lease received from our lawyers.
Please review and confirm your approval of the draft so that execution copies can be prepared for signing by the parties.
On 8 July 2016 a deed of assignment and variation of lease (the Assignment and Variation Deed) was executed. The parties to the Assignment and Variation Deed were:
(a)the plaintiff as landlord;
(b)the Tenant as assignor;
(c)the first defendant as the assignor's guarantor;
(d)the Tenant as assignee;
(e)Mr Jones, Ms Katrina Hassan-Jones and Matgra Investments (as the assignee's guarantors).
Clause 2 of the Assignment and Variation Deed provided:
The Assignor (with the consent of the Landlord as is evidenced by the Landlord's execution of this Deed) assigns all the Assignor's right, title and interest in and to the Lease and the Premises to the Assignee to hold unto the Assignee from and including the Date of Assignment with the right to exercise any right of renewal contained in the Lease subject to the Assignee duly and punctually paying the Rent and all other monies specified in the Lease, and duly and punctually observing and performing the other Tenant's Covenants from and including the Date of Assignment.
By cl 10 of the Assignment and Variation Deed the assignee's guarantors gave a guarantee in the following terms:
In consideration of the Landlord, at the Assignee's Guarantors' request, entering into this Deed, the Assignee's Guarantors guarantee to the Landlord the due and punctual payment by the Assignee of the Rent reserved and the performance by the Assignee of the Tenant's Covenants and the Assignee's Guarantors covenant to perform and observe the terms, covenants and conditions in clause 68 of the Lease as if the same were repeated in full in this Deed with such modifications only as are necessary to make them applicable to the Assignee's Guarantors.
On 2 January 2019 Mr G M Carrello of BRI Ferrier was appointed as liquidator of the Tenant. By a notice dated 25 January 2019 Mr Carrello disclaimed the Lease pursuant to s 568 of the Corporations Act 2001 (Cth).
Mr Upendra Patel deposes that an amount of $63,393.25 remains owing under the Lease for unpaid rent, and expenses related to re‑leasing the Premises. The liability for this amount accrued after the execution of the Assignment and Variation Deed. Mr Patel deposes that this figure takes into account the sum of $30,000 recovered from Mr Jones and Ms Hassan‑Jones pursuant to the guarantee contained in the Assignment and Variation Deed.
The plaintiff seeks to recover the balance of the debt from the first defendant pursuant to the guarantee contained in the Lease. In reliance on the charging clause in the Lease the plaintiff lodged a caveat against the title of the Applecross Property in respect of the first defendant's interest in it.
On 24 July 2019, I made interim orders extending the operation of the plaintiff's caveat pending a final hearing.

Extension of a caveat - legal principles

The principles applicable to an application such as this were summarised by Beech J (as his Honour then was) in Bashford v Bashford,[1] and more recently by Edelman J in Bride v Registrar of Titles.[2] Those are the principles that I apply to this determination.
[1] Bashford v Bashford [2008] WASC 138.
[2] Bride v Registrar of Titles [2015] WASC 11.
Essentially, there are two questions for determination:
(a) First, has the plaintiff demonstrated that its claim has or may have substance, or as it is sometimes put, has it established that there is a serious question to be tried in respect of the estate or interest in the land claimed by it?
(b)Second, does the balance of convenience favour the extension of the operation of the caveat?
The two questions are interrelated. The court must balance the injustice that might be suffered by the first defendant if the application to extend the caveat is granted and the plaintiff later fails at trial, against the injustice that might be suffered by the plaintiff if the application is not granted and it later succeeds in establishing its interest in the property.
If there is a serious question to be tried but the validity of it can only be determined by findings of fact then the caveat should remain and the caveator should be left to proceed by way of action to establish the interest or estate.[3]
[3] Deputy Commissioner of Taxation v Corwest Management Pty Ltd [1978] WAR 129, 140 ‑ 141 (Brinsden J); Halse v Embling (Unreported, WASC Full Court, Library No 970734, 22 December 1997), 11 - 14 (Parker J).

First defendant's submissions

In summary the first defendant submits:
(a)On its proper construction the Assignment and Variation Deed had the effect of discharging the guarantee given by the first defendant in the Lease.
(b)Alternatively, if this court does not accept his construction argument, the first defendant submits the agreement should be rectified in order to reflect the true intentions of the parties, which was that the guarantee given by him would be discharged.
(c)In the further alternative the plaintiff is estopped from relying upon the guarantee.
(d)The balance of convenience does not favour extending the plaintiff's caveat.
In support of his construction argument the first defendant relies primarily on cl 5 of the Assignment and Variation Deed. It is as follows:
5.Preservation of Landlord's Rights
5.1Assignor and Assignor's Guarantor Not Released
Nothing in this Deed shall:
(a)release the Assignor or the Assignor's Guarantor from any obligation to pay the Rent or other monies specified in the Lease or to duly and punctually observe and perform the Tenant's Covenants prior to the Date of Assignment;
(b)prejudice or affect any action, claim, proceeding or demand the Landlord may (but for the execution of this Deed) have against the Assignor or the Assignor's Guarantor for any breach of the Tenant's Covenants prior to the Date of Assignment; and
(c)be evidence that the Tenant's Covenants have been observed and performed.
The first defendant argues that the phrase 'prior to the Date of Assignment' qualifies the statement that nothing in the deed amounts to a release and thereby makes it plain that the guarantee was discharged in respect to any liability that might arise after the date of assignment.
The first defendant submits that this construction is supported by a fair reading of the deed of assignment as a whole and he points to the following factors:
(a)there was a change in ownership of the Tenant;
(b)guarantees were given by three new guarantors;
(c)the guarantee created by the the Assignment and Variation Deed increased the potential liability that had existed under the guarantee in the Lease by 100% - from the equivalent of one years' rent to two years' rent;
(d)the term of the Lease was extended by six months; and
(e)from a commercial perspective it is unlikely that the parties intended that the outgoing director of the Tenant would remain guarantor of an entity in which he no longer had an interest or right of control, in circumstances where an extended term had been agreed, where three new guarantees would be given and where the obligations of the new guarantors extended beyond the original guarantors' liability.
The first defendant submits that there is no evidence that the first defendant is presently considering disposing of his interest in the Applecross Property or that he is otherwise unable to meet any prospective judgment. In those circumstances it is submitted that the balance of convenience does not favour the extension of the caveat.

Plaintiff's submissions

In summary, the plaintiff submits that the Assignment and Variation Deed did not expressly release the first defendant from the guarantee and that on its proper construction cl 5 cannot be read as implying such a release.
In support of its construction the plaintiff relies not only on cl 5 but on the following provisions of the Lease which it contends make it plain that the first defendant remained liable on his guarantee:
(a)Clause 68.1(h)(ii),(v) and (xii) of the Lease which provide as follows:
(h)the Landlord's rights against the Guarantors are not affected by any of the following:
…
(ii)any absolute or partial release of or compromise with the Tenant any one or more of the Guarantors by the Landlord;
…
(v)any assignment or sublease of the Premises or part thereof;
…
(xii)any collateral or other security and guarantee now or hereafter held by the Landlord. The Guarantor agrees that the Landlord's rights under this guarantee and indemnity shall not be merged, discharged or substituted in any such other security and guarantee,
(b)Clause 68.1(l) of the Lease which provides:
(l)in the event that this Lease is transferred or assigned to any person or persons the benefit of this guarantee and indemnity shall extend to the transferee or assignee and the benefit of this guarantee and indemnity shall continue to enure concurrently for the benefit of the Landlord notwithstanding any such transfer or assignment;
(c)Clause 68.1(c) which provides:
(c)this guarantee and indemnity shall be irrevocable and continuing and shall extend to cover the whole period while the Tenant:
(i)occupies the Premises or is entitled to occupy the Premises as the Tenant; or
(ii)is holding an equitable interest over the Premises under an agreement for lease as a periodical tenant,
and it shall continue and remain in full force and effect until the Tenant duly performs, observes and fulfils all of the Tenant's Covenants;
(d)Clause 68.1(i) which provides:
(i)neither the Guarantors' liability nor the Landlord's Rights under this guarantee and indemnity or otherwise shall be altered, limited, prejudiced, discharged or diminished by any act or omission or any event of any description which might otherwise have (whether at law in equity or under statute) the effect of altering, limiting, prejudicing, discharging or diminishing the liability of the Guarantors either as a guarantor or principal debtor or as an indemnifier;
The plaintiff also relies on cl 2 of the Assignment and Variation Deed to support its contention that the first defendant remains liable on his guarantee in support of its construction. Clause 2 is reproduced at [17]. The plaintiff argues, in effect, that the assignment was subject to a condition subsequent - that the assignee would comply with the obligations set out in the Lease and the assignment would cease to have effect if those obligations were not fulfilled.

Disposition

The construction of the Assignment and Variation Deed does not involve the resolution of any disputed factual issues. Both parties accepted that the resolution of the question of construction fell to be determined by reference to the terms of the Assignment and Variation Deed read with the terms of the Lease and no extrinsic evidence was either required or admissible.
The amount in issue between the parties, approximately $63,000, is relatively modest. The relevant materials have been put before the court and the parties have made their submissions. There is no reason why the construction issue, an issue of law, cannot be determined now rather than requiring the parties to incur the further costs associated with proceedings in another jurisdiction.
The ordinary principles of construing commercial contracts apply to the construction of a commercial lease.[4] In Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd, Kiefel, Bell and Gordon JJ stated:[5]
It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it.
Clause 4 is to be construed by reference to the commercial purpose sought to be achieved by the terms of the lease. It follows, as was pointed out in the joint judgment in Electricity Generation Corporation v Woodside Energy Ltd, that the court is entitled to approach the task of construction of the clause on the basis that the parties intended to produce a commercial result, one which makes commercial sense. It goes without saying that this requires that the construction placed upon cl 4 be consistent with the commercial object of the agreement. (footnotes omitted)
[4] Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12; (2017) 261 CLR 544.
[5] Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [16] - [17] citing Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640.

Gageler J, who concurred in the result, said of the clause in the lease before the court:[6]
Clause 4 can only be so construed for what it is: a clumsily tailored variation of an ill-fitting off-the-shelf precedent. To bring linguistic and grammatical precision to its construction would be to burden the clause with more weight than its jumble of words will bear.
The competing constructions of cl 4 being open on its language, and the textual indications in favour of each being at best equivocal and at worst conjectural, the choice between them comes down to deciding which is more reasonable considered as a matter of 'commercial efficacy or common sense'.[7]
[6] Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [51] - [52].
[7] Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; (1983) 153 CLR 455, 464.
The applicable principles were summarised by the Court of Appeal in Black Box Control Pty Ltd v Terravision Pty Ltd,[8] and those principles are applicable to the construction of deeds.[9] They are the principles I apply to the construction of the Assignment and Variation Deed.
[8] Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219 [42].
[9] Westgyp Pty Ltd v Northline Ceilings Pty Ltd [No 2] [2019] WASCA 145 [154] (Murphy JA), [180] (Mitchell JA).
The construction of cl 5.1 for which the first defendant contends does not emerge immediately from the language used. The first defendant's construction requires a term providing that the first defendant is not to be released from any liability accrued at the date of the assignment to be read as a release of any liabilities that might arise after the assignment, even though the clause does not refer to any kind of release. The absence of words expressing an intention that the first defendant be so released constitutes a difficulty for the first defendant.
As noted earlier the first defendant seeks to overcome this difficulty by arguing that a release from prospective liabilities is necessarily implied by the use of the words 'prior to the date of assignment' in conjunction with the statement that nothing in the deed releases him from accrued liabilities. It is important to understand that in so doing the first defendant is not contending that a release from prospective liabilities is to be implied into the Assignment and Variation Deed as an ad hoc implied term in accordance with the BP Refinery(Westernport) Pty Ltd v Hastings Shire Council[10] criteria. Rather, he is contending that the meaning advanced arises by implication or interpretation of the express terms in accordance with the authorities referred to by Buss JA (as his Honour then was), with whom Martin CJ and Murphy JA agreed, in Servcorp WA Pty Ltd v Perron Investments Pty Ltd.[11]
[10] BP Refinery(Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, 282 - 283.
[11] Servcorp WA Pty Ltd v Perron Investments Pty Ltd [2016] WASCA 79; (2016) 50 WAR 226 [66(a)]. See also WFI Insurance Ltd v Manitowoq Platinum Pty Ltd [2018] WASCA 89 [107] (Martin CJ, Murphy JA & Chaney J agreeing), special leave to appeal refused Manitowoq Platinum Pty Ltd v WFI Insurance Ltd [2018] HCATrans 243 (Bell, Keane & Nettle JJ).
In my view, a reasonable business person would understand cl 5.1 as releasing the first defendant from prospective liabilities. My reasons are as follows:
(a)If cl 5.1(a) and cl 5.1(b) are to be understood as merely restating the effect of the clauses of the Lease that provide that: the first defendant's obligations as guarantor are not affected by any assignment; the guarantee continues notwithstanding any assignment (cl 68.1(l)); and that the guarantee is irrevocable and continuing (cl 68.1(c), (h)(ii), (h)(xii) and (i)); then, they add nothing to the terms of the Lease. And if they are to be understood in that way, they are unnecessary because the provisions of the Lease are otherwise clear beyond peradventure - the guarantee continues notwithstanding any assignment and there is nothing else in the Assignment and Variation Deed that suggests otherwise either expressly or impliedly.
(b)It may be accepted that contracts often contain provisions that are strictly unnecessary but are included in an attempt to remove potential causes of uncertainty. If cl 5.1(a) and cl 5.1(b) went no further than simply restating that nothing in the Assignment and Variation Deed released the first defendant from the guarantee given by him, then it might readily be accepted that the purpose of the provisions was to avoid uncertainty and remove any room for the argument that the Assignment and Variation Deed did release the first defendant. The clauses, however, go further and include the words 'prior to the Deed of Assignment'.
(c)Effect must be given to the words 'prior to the Deed of Assignment'. Viewed objectively, these words must be taken as disclosing the parties' intention that a distinction is to be drawn between accrued and prospective liabilities. The first defendant is not released from accrued liabilities but I consider there is force in the submission that by necessary implication the parties intended that he be released from prospective liabilities.
(d)It is important to remember that there was, in reality, no assignment of the Lease - cl 44.3 created a legal fiction in the form of the deemed assignment. The same legal entity was the Tenant before and after the execution of the Assignment and Variation Deed. This supports the conclusion that cl 5.1(a) and cl 5.1(b) were included in the Assignment and Variation Deed to serve a purpose other than merely restating the Lease referred to in subpar (a). The relevant purpose being to record the parties' intention that the first defendant was to be released from his guarantee of prospective liabilities.
(e)There are matters of context that support the construction of cl 5.1 of the Assignment and Variation Deed for which the first defendant contends. These are: the change of ownership of the shares in the Tenant; the taking of guarantees from persons associated with the new shareholders and the new director; the increase in the limit of potential liability under the guarantee from an amount equal to one year's rent to two years' rent; and the extension of the lease term by six months. I accept the first defendant's submission that these matters of commercial context, all of which emerge from the Assignment and Variation Deed and the Lease, support the construction for which he argues.
In my judgment, the first defendant was released from the guarantee given by him in the Lease with effect from the execution of the Assignment and Variation Deed. It was common ground that the plaintiff's claim for rent and other expenses (Money Payable) arose after the Assignment and Variation Deed.
The plaintiff's submission based on cl 2 of the Assignment and Variation Deed is misconceived. It is plain from the terms of that clause that the conditions on which the plaintiff seeks to rely as conditions subsequent are conditions relating to the exercise of the right of renewal.
For the reasons given, I have concluded that the plaintiff does not have a claim that has substance. It is not necessary to consider the first defendant's rectification and estoppel arguments.
I will not make an order extending the caveat. I will hear the parties in relation to orders and costs.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
AS
Research Orderly to the Honourable Justice Tottle
7 NOVEMBER 2019