Myers, Allan James v Pioneer Concrete (Vic) Pty Ltd

No judgment structure available for this case.

CATCHWORDS
CONTRACT - construction and interpretation - rent review clause - whether a review of rental payable under a lease was intended to occur at each rent review period - whether notice from the lessors was necessary to commence process of determination of new rent - what is the proper description of the rent to be applied - meaning to be attributed to “shall”, “will” and “may” - consideration of the relevance of other clauses to determine the meaning of these words
AMP Society v National Mutual Life Association of Australasia Limited [1995] 1 NZLR 581
Finance Facilities Pty Limited v FCT (1971) 127 CLR 106
Julius v Lord Bishop of Oxford (1880) 5 App Cas 214
National Provident Fund v Shortland Securities Limited [1966] 1 NZLR 45
R & H Australia Pty Limited v Salta Constructions Pty Limited (1993) VConR 65,408
Ward v Williams (1955) 92 CLR 496
Allan James Myers, Jennifer Claire O’Callaghan and Neil John Young v Pioneer Concrete (Vic) Pty Ltd
No VG 260 of 1996
Lockhart, Whitlam and Kiefel JJ
6 December 1996
Sydney (Heard in Melbourne)
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
No VG 260 of 1996
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
ALLAN JAMES MYERS, JENNIFER CLAIRE O’CALLAGHAN and NEIL JOHN YOUNG

Appellants/Cross Respondents
AND:
PIONEER CONCRETE (VIC) PTY LTD

Respondent/Cross Appellant
JUDGE MAKING ORDER:          Lockhart, Whitlam and Kiefel JJ
DATE OF ORDER:  6 December 1996
WHERE MADE:  Sydney (Heard in Melbourne)
MINUTES OF ORDERS
THE COURT ORDERS THAT:
1.        The appeal is allowed in part.
2.In lieu of the declaration numbered 3 made by the Honourable Justice Olney on 17 April 1996 it be declared that:

“The lessor is obliged to give a ‘lessor’s notice’ in respect of each rent review date in the immediately preceding review period”.

3.In lieu of the declaration numbered 5(ii) made by the Honourable Justice Olney on 17 April 1996 it be declared that:

“(ii)the rent for periods referred to in paragraph (d) of Special Condition 3 is the current open market rent determined by an independent valuer or the rent payable for the preceding 18 months’ period, whichever is the greater”.

4. The order for costs of the proceedings below be set aside.
5.The respondent, Pioneer Concrete (Vic) Pty Ltd, pay one half of the appellants’ costs of the appeal to be taxed.

Note:Settlement and Entry of Orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA )
  )
VICTORIA DISTRICT REGISTRY       )    No. VG 260 of 1996
)
GENERAL DIVISION                 )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:ALLAN JAMES MYERS, JENNIFER CLAIRE O'CALLAGHAN and NEIL JOHN YOUNG

Appellants

AND:PIONEER CONCRETE (VIC) PTY LIMITED

Respondent

COURT:       LOCKHART, WHITLAM and KIEFEL JJ
DATE:             6 December 1996
PLACE:       Sydney
REASONS FOR JUDGMENT
LOCKHART J.
This case raises a short question of construction of a lease.
On 1 January 1990, Catchklin Pty Ltd ('Catchklin') agreed with Pioneer Concrete (Vic) Pty Limited (the respondent) to lease to it for a term of fifteen years, commencing on 1 January 1990, premises being the first floor of a building at 1183 Toorak Road, Hartwell, together with certain car-parking spaces.
In July 1990, the appellants purchased the premises from Catchklin and became entitled to the reversion.
The case concerns the provisions of the lease relating to the review of rent. The lease provides for payment of the rent of $402,826 per annum, subject to review as provided in special condition 3 of the lease. The lease provides that the rent is payable in advance by regular and consecutive monthly payments, each equal to one twelfth of the annual rent payable in each year of the lease. The lessee covenants to pay to the lessor during the term of the lease the rent stated in the schedule to the lease (clause 2(a)). Special condition 3 is the critical provision in the schedule; it there appears as follows:
'3.The rent shall be reviewed at the end of each eighteen months of the term hereby created and any renewal thereof ("Rent Review Date") the first of such reviews will take place eighteen months from the commencing date and the rent for each successive eighteen month period of the term and any renewal thereof shall be determined as follows:

(a)The lessor may at any time by noticing (sic) in writing ("the lessor's notice") fix the rent at an amount which in the lessor's opinion would be the current open market rent of the premises as at the rent review date but no less than the rental payable by the lessee for the immediately preceding review
period plus twelve point three two per centum (12.32%).

(b)The amount as fixed shall be the rent payable by the lessee for the next ensuing eighteen month period unless within fourteen (14) days of the lessor's notice the lessee notifies the lessor in writing that the lessee disputes the amount fixed by the lessor.

(c)If the lessee disputes the amount set out in the lessor's notice and if the parties after consultation, are unable to reach agreement as to the rent payable within thirty (30) days after the lessor's notice the current open market rent for the demised premises shall be determined by an independent valuer having not less than five (5) years experience in valuing suburban office space and not less than ten (10) years experience in commercial valuation and who shall be employed in a practice which is predominantly commercial in nature, such valuer to be appointed by the President for the time being of the Australian Institute of Valuers (Victorian Division) at the request of the lessor PROVIDED THAT:

(i)any determination by any such valuer shall be made as an expert and not as an arbitrator;

(ii)all costs incurred with the determination of the rent shall be
paid by the lessee and the lessor equally;

(iii)the lessor and the lessee shall have the opportunity to make written submissions to any such valuer, such written submission or submissions to be made within one (1) month of the appointment of any such valuer;

AND the rent payable hereunder shall be the amount determined by any such valuer as the current open market rental value. In any event such rent shall not be less than the rent payable for the immediately preceding eighteen (18) month review period PLUS an amount equal to twelve point three two per centum (12.32%) of the total rent payable for the immediately preceding eighteen (18) month review period subject to sub-clause (d) hereof.

(d)With respect to the rent reviews to take place on the following rent review dates:

(i)fifty four (54) months from the commencing date;

(ii)one hundred and eight (108) months from the commencing date;

(iii)one hundred and sixty two (162) months from the commencing date; and if the option to renew this lease pursuant to special condition 4 hereof is exercised by the lessee;

(iv)two hundred and sixteen (216) months from the commencing date;

the rental shall be the current open market rent as agreed between the parties and failing agreement as determined by an independent valuer at the current open market rental with no additional increases of 12.32%.

(e)For the purposes of this special condition (3) and special condition (4) the expression "current open market rental value" shall mean the current annual open market rental value of the demised premises based on a lease (exclusive of any incentives and allowances including but not limited to rent-free periods of occupancy) between a willing lessor and a willing lessee for the highest and best use to which the demised premises can be put including all car parking facilities and not necessarily the permitted use herein but taking to account of any goodwill attributable to the demised premises by reason of any trade or business carried on therein by the lessee but taking account of the naming rights (if any) of the demised premises granted to the lessee and in all other respects (except as to rent payable) on the terms covenants and conditions of this lease.

(f)Should the amount of the rent for any period not be so determined by the appropriate rent review date, the lessee
shall pending determination thereof pay rent at the rate specified in the lessor's notice referred to in special condition 3(a) hereof but subject to the revision thereof and upon the rent being determined hereunder any necessary adjustment of rent calculated from the rent review date shall be paid forthwith by the lessee to the lessor or reimbursed by the lessor to the lessee as the case may be.'

The rent was determined in accordance with sub-clauses (a), (b) and (c) of special condition 3, by the appellants giving a lessor's notice to the respondent, for the periods of eighteen months commencing on 1 July 1991 and on 1 January 1993. They did not give a lessor's notice or otherwise initiate a rent review concerning the eighteen-month period commencing on 1 July 1994, which was fifty-four months from the commencement date of the lease and therefore governed by sub-clause (d) of special condition 3.
By letter dated 21 October 1994 the respondent asserted that a rent review prescribed by special condition 3(d) was applicable at 1 July 1994 and that such review was to establish and institute the 'current open market' rent at that date. The respondent sought the appellants' agreement on the 'current open market' rent which they considered ought to apply to the eighteen-month period commencing on 1 July 1994. Correspondence
ensued between the parties in which the entitlement of the respondent to initiate the rent review was disputed by the appellants.
The learned primary Judge (Olney J.) found that the introductory words of special condition 3 were couched in imperative terms which left no doubt about the intention of the parties. His Honour referred to the fact that the rent shall be reviewed periodically, that the first review will take place at the time specified therein, and that the rent for the subsequent period shall be determined in the manner set out in the lease. His Honour said that, taken in isolation, the only conclusion open was that the initial words of special condition 3 indicated an intention that the rent must be reviewed every eighteen months and that the reviewed rent must be determined in accordance with sub-clauses (a) to (f) of special condition 3.
His Honour said that the opening words of special condition 3(a), namely 'The lessor may at any time by noticing (sic) in writing ... fix the rent', indicated that the lessor had a discretion as to when the notice was given; but he also said that they did not otherwise contradict or qualify the primary requirements of special condition 3 - that the rent shall be reviewed at the end of each eighteen-month period, and that the rent for each successive eighteen-month period after the initial
eighteen months shall be determined in accordance with sub-clauses (a) to (f). His Honour said the lease imposed an obligation on the lessor to give a lessor's notice to facilitate each review of rent for each successive eighteen-month period.
His Honour rejected the proposition that, if no notice were given, the rent remained unchanged (a view which he said both parties seemed to share).
His Honour held that in respect of the rent review period referred to in special condition 3(d) of the lease, the rent payable, in default of agreement, was simply the current open market rent determined by an independent valuer. This is the case because his Honour found that the concluding words of the final sentence of special condition 3(c), namely '... subject to sub-clause (d) hereof', qualified the whole of the final sentence of special condition 3(c).
The primary argument of counsel for the appellants was that the initiation of the rent review procedure at rent review dates was optional at the discretion of the lessor. The argument found its genesis in the word 'may' which appears in sub-clause (a) of special condition 3 of the lease.
The point was made on behalf of the appellants that it is common for rent determination clauses to be at the option of the lessor and that similar rent review clauses have been so construed. Reference was made to AMP Society v National Mutual Life Association of Australasia Limited [1995] 1 NZLR 581; National Provident Fund v Shortland Securities Limited [1996] 1 NZLR 45; and R & H Australia Pty Limited v Salta Constructions Pty Limited (1993) VConvR 65,408. It was submitted on behalf of the appellants that one way in which the rent may be determined in respect of each rent review date is for the lessor to decline to give a notice, in which case the rent for the review period will be the same rent as was paid for the immediately preceding eighteen-month period.
Counsel for the respondent adopted the primary Judge's reasoning except on one point, namely, his Honour's finding that the notice which the appellants were required to give can be given 'at any time'. Counsel submitted that the notice must be given before the expiration of a current eighteen-month period to apply for the ensuing eighteen-month period.
The judgments in the AMP Society, Shortland Securities and Salta Constructions cases are helpful, and so are certain of the other cases to which we were referred; but ultimately this case
must fall for determination according to the terms of the lease itself, as did the cases to which we were referred.
I propose first to construe the lease in this matter and then to turn to the authorities for assistance.
Special condition 3 is to some degree a cut-and-paste job and lacks felicity of expression. I do not say this critically; it is too easy to criticize drafting of documents when one has no idea of the circumstances in which the drafting occurred. But it is a relevant point when considering the proper construction to adopt.
I do not accept the argument of counsel for the appellants that special condition 3 must be construed on the basis that the lessor has a discretion whether or not to invoke the procedure for a review of rent at eighteen-month intervals; nor do I accept the related proposition that, if the lessor decides not to invoke the review procedure before a given period of eighteen months, the rent that applies is the rent payable during the preceding eighteen months.
Special condition 3 imposes upon the parties a compulsory regime of review of rent at the end of each eighteen months of the fifteen year term granted by the lease. This is made clear
by use of the imperative 'shall' in the first line, 'will' in the fifth line, and 'shall' in the eighth line of special condition 3. These opening provisions of the special condition, which govern sub-clauses (a), (b), (c), (d), (e) and (f) that follow it, must, in my opinion, be taken as evincing the intention of the parties to the lease that there shall be a review of rent at the end of each eighteen-month period. This conclusion is reinforced by the language of paragraph (d) (and perhaps of paragraph (f)). Paragraph (d) commences with the words ‘With respect to the rent reviews to take place on the following rent review dates’, at the intervals there stated, ‘the rental shall be ...’. Certainly, the word 'may' in the first line of paragraph (a) is not used in the imperative sense as importing an obligation of the kind discussed in such cases as Julius v Lord Bishop of Oxford (1880) 5 App Cas 214; Ward v Williams (1955) 92 CLR 496; and Finance Facilities Pty Limited v Federal Commissioner of Taxation (1971) 127 CLR 106; it is used in its primary facultative sense, empowering the lessor to give notice in writing to fix the rent in accordance with paragraph (a). However, the discretion conferred by the use of the word 'may' does not refer to whether the notice is to be given at all; but to the time at which it is to be given. On this point, I respectfully differ from the primary Judge who held that a notice could be given by the lessor at any time. If his Honour meant that it could be given either before or after the
expiration of the current eighteen-month period of the lease, then I disagree. In my view it must be given before the expiration of the current eighteen-month term. Further, paragraph (a) does not mean that the lessor can decide not to give a notice at all (subject to paragraph (d) to which I shall refer later). The parties to the lease have assumed that there will be a review of rent at the end of each eighteen-month period. The lessor cannot, by simply refraining from giving a notice, prevent the review procedure set out in sub-clauses (a), (b), (c) and (d) taking place. If the lessor does decline to give a notice for whatever reason, then the lessee is entitled to seek relief from a court of competent jurisdiction, akin to a suit for specific performance, seeking orders that the lessor be required to give a notice in accordance with sub-clause (a), and, failing the lessor giving such notice, the court may appoint one of its officers to do the lessor's work for him - a decree familiar to courts of equitable jurisdiction.
Normally in the lease in question, the lessor by his notice will fix the rent for each eighteen-month period at an amount which in his opinion would be the 'current open market’ rent of the premises as at the rent review date, but not less than the rent payable by the lessee for the immediately preceding review period (that is the period in which the notice is given) plus 12.32 per cent. The amount so fixed shall be the rent payable
by the lessee for the ensuing eighteen months, unless sub-clause (b) comes into play and the lessee disputes an amount fixed by the lessor and notifies the lessor in writing of that fact within fourteen days of the giving of the lessor's notice. The procedure by which an independent valuer fixes the amount of the rent would then be invoked under sub-clause (c). Importantly, the concluding lines of sub-clause (c) commencing with the word 'AND' apply only to sub-clause (c) itself, and not to the preceding paragraphs (a) and (b); that is the way sub-clause (c) is structured, and it is the obvious intent of the draftsman. Those final lines mean that when the valuer performs his exercise of determining the current open market rent, the figure so determined shall be the rent payable during the ensuing eighteen months, provided it is not less than the rent payable for the immediately preceding eighteen-month period plus an amount calculated as 12.32 per cent of the total rent payable for the immediately preceding eighteen-month period.
Sub-clause (d) presents some difficulty of construction. I interpret it as standing independently of sub-clauses (a) and (b) of special condition 3. For whatever reason, the parties have agreed that at fifty-four-month intervals during the currency of the term of the lease, rent is to be determined, not by notice from the lessor, but by the parties agreeing upon the current open market rent as at the rent review date, and failing
agreement, by independent valuation without the minimum prescribed by sub-clauses (a) and (c). Thus, at fifty-four- month intervals, rent due under the lease was envisaged to return to the unembellished yardstick of current open market rent - untied to the rent due during the preceding eighteen-month period, and to a regimental 12.32 per cent increase.
Sub-clause (f) does not apply to the case where sub-clause (d) operates because sub-clause (f) is predicated on the assumption that the lessor has given a notice under paragraph (a). Assuming the lessor gives a notice within the eighteen-month period then current, but the review procedure has not been completed until some time thereafter, sub-clause (f) operates to ensure that there is a later adjustment of the rent between the parties to be calculated according to the terms of sub-clause (f).

Similarly, if a rent review has taken place under sub-clause (d) and been completed after a fifty-four-month period has elapsed, I see no difficulty construing that sub-clause so that it will have a retrospective operation to take effect from the commencement of the relevant eighteen-month period. If the review process concludes later than the end of the eighteen-month period which precedes the review period, it seems to me
that, once the rent has been determined, it must take effect from the commencement of the relevant period of eighteen months.
I have read the cases to which we were referred by counsel. I see no point in dwelling on them at length because each of them turned on its own facts and, in particular, the terms of the relevant leases. The AMP Society case is a judgment of the Court of Appeal of New Zealand where their Honours, relying on the word ‘may’ where appearing in clause 3.06(a) of the lease, construed the relevant clause as conferring an overriding right on the lessor to have a review of the rent if it wished. But importantly, there was no introductory provision to the relevant clause of the kind which appears in special condition 3 of the lease presently before us, and which in my opinion is critical to its construction.
Likewise, in the other New Zealand case of Shortland Securities, clause 3 of the relevant document contained sub-clause 3.05(a) which used the word 'may' in relation to the lessor giving a notice in writing to the lessee setting out the amount which the lessor considered to be the current market rent of the premises at the relevant review date. Again, that case turned on the wording of the particular clause, which is different from the language of special condition 3 of the lease in this case.
Salta Constructions was a decision of Byrne J. of the Supreme Court of Victoria. It too turned on the language of the relevant clauses of the lease, in particular clause 8 (clause 8 is set out at 26-750 in the Victorian Conveyancing Reporter, separately from the report of the case itself; see the editorial comment on the Salta case at 65,408). The opening provision (clause 8.1 of the lease) stated as follows:
'The lessor may by notice in writing to the lessee fix the annual rent ...'

The lease in that case clearly supported the construction attributed to it by Byrne J., being that the lessee itself did not have a right to initiate a rental adjustment; the right lay solely with the lessor who had an option to set in train the adjustment procedure for rent, but no obligation to do so. Again the clauses in that lease were different from special condition 3 of in the lease here. See also New Zealand Post Limited v ASB Bank Limited [1995] 2 NZLR 508 at 510 and 512; and Weller v Akehurst [1981] 3 All ER 411.
I am therefore in substantial agreement with the conclusion reached by the primary Judge; but still, difficult questions arise concerning the proper orders to be made. The Court asked
counsel for each party to submit forms of order which they thought appropriate; but in my opinion neither form really reflects the orders that ought to be made.
I shall set out the orders made by the primary Judge, namely:
'THE COURT DECLARES THAT, on a proper construction of the lease of the premises situate at the First Floor, 1183 Toorak Road, Hartwell between Catchklin Pty Ltd and Pioneer Concrete (Vic) Pty Ltd made 1 January 1990 ("the lease"), the lease provides as follows:

1.The rent payable under the lease must be reviewed in respect of each successive 18 month period of the term or any renewal thereof.

2.The only method of reviewing the rent payable under the lease is by observing the procedure set out in paragraphs (a) to (f) of Special Condition 3.

3.The lessor is obliged to give a "lessor's notice" in respect of each rent review date but such notice may be given at any time.

4.If the lessee does not dispute the amount of rent fixed by the lessor in the lessor's notice, the rent payable for the next ensuing 18 month period is the amount fixed by the lessor.

5.If the lessee disputes the amount of rent set out in the lessor's notice, in the absence of agreement between the lessor and the lessee:

(i)the rent for each review period other than those referred to in paragraph (d) of Special Condition 3 is the current open market rent as determined by an independent valuer or the rent payable for the preceding 18 month period plus 12.32% thereof whichever is the greater;

(ii)the rent for the periods referred to in paragraph (d) of Special Condition 3 is the current open market rent determined by an independent valuer.

AND THE COURT ORDERS THAT the applicants pay the respondent's costs of the proceeding.’

I agree with the declarations made by the primary Judge and referred to in paragraphs 1 and 2; but I would vary the other declarations to read as follows:
'3. The lessor is obliged to give a "lessor's notice" in respect of each rent review date, but not the rent review dates specified in paragraph (d) of special condition 3, and any such notice given by the lessor may be given at any time during the currency of a period of 18 months of the term which immediately precedes the 18 month term for which the rent review process is invoked.

4.If the lessee does not dispute the amount of rent fixed by the lessor in the lessor's notice, the rent payable for the next ensuing 18 month period is the amount fixed by the lessor; but not with respect to a review period
referred to in paragraph (d) of special condition 3.

5.If the lessee disputes the amount of rent set out in the lessor's notice, in the absence of agreement between the lessor and the lessee, the rent for each review period other than those referred to in paragraph (d) of special condition 3 is the current open market rent as determined by an independent valuer or the rent payable for the preceding 18 month period plus 12.32% thereof whichever is the greater.

6.The rent for the periods referred to in paragraph (d) of Special Condition 3 is the current open market rent determined either by agreement between the parties or by an independent valuer.'

In case any difficulties arise in the course of working out or implementing the orders of the Court, I would remit the proceeding to the primary Judge or another judge of the Court for further consideration. Also, I would give general liberty to any party to apply to that judge on seven days notice in writing. Finally, I would defer the operation of the orders for a short time so that the parties may make submissions about them.
The appellants must pay the costs of the respondent of the appeal.
Otherwise I would dismiss the appeal.
I certify that this and the
preceding nineteen (19) pages
are a true copy of the reasons
for judgment of the Honourable
Justice Lockhart.
Associate
Dated: 6 December 1996

IN THE FEDERAL COURT OF AUSTRALIA      )
  )
VICTORIA DISTRICT REGISTRY  )           VG 260 of 1996
  )
GENERAL DIVISION           )
On appeal from a Judge of the Federal Court of Australia
NEIL JOHN YOUNG,
  ALAN JAMES MYERS and
  JENNIFER CLAIR
  O'CALLAGHAN

Appellants

PIONEER CONCRETE (VIC) PTY LTD

Respondent

Coram: Lockhart, Whitlam and Kiefel JJ
Place: Melbourne
Date:6 December 1996

REASONS FOR JUDGMENT

Whitlam J
I agree with the judgment of Kiefel J and with the orders that her Honour proposes. I wish to add only a few comments of my own.

The terms of Special Condition (3) of the lease are set out in the judgment of
Kiefel J. In my opinion, the key to the correct construction of this poorly drafted condition lies in the phrase "with no additional increase of 12.32%" used in paragraph (d). That phrase must refer to the percentage increase specified, not just in paragraph (c), but also in paragraph (a). (The adjective "additional" would seem, strictly speaking, superfluous.) Paragraphs (a) and (c) provide for an increase that is to be calculated by reference to the rental payable for the review period immediately preceding the rent review date, not by reference to the current open market rent at such date. Paragraph (d) has, therefore, to operate in respect of the rental payable for such preceding period. Once that point is recognized, it becomes clear in the context that the phrase modifies the restriction on the amount set out in the lessor's notice under paragraph (a), as well as the minimum rent following a valuation prescribed by the last sentence of paragraph (c). The phrase "subject to sub-clause (d) hereof", which would appear to have been used out of an abundance of caution at the end of paragraph (c), could just as easily have been added at the end of paragraph (a).

The amount of rent payable under the lease for each successive period of 18 months will be determined in one of the following ways: the lessee's default in disputing the amount set out in the lessor's notice, the agreement of the parties, the valuation by the expert or the application of the minimum rent provision. If the last sentence of paragraph (c) had been placed in a separate paragraph, it might have been arguable that the minimum rent provision applies to determine the rent where a lessor's notice has not been given prior to the review date. However, placed where it is, the word "event" in the introductory phrase is apt merely to identify the result of the expert's valuation. There is accordingly no provision whereby the rent for the ensuing period is determined in the absence of a lessor's notice initiating the review process.

I certify the preceding 2 pages are a true copy of the reasons for judgment herein of the Hon. Justice A.P. Whitlam

Associate:

Date: 6 December 1996

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
No VG 260 of 1996
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
ALLAN JAMES MYERS, JENNIFER CLAIRE O’CALLAGHAN and NEIL JOHN YOUNG

Appellants/Cross Respondents
AND:
PIONEER CONCRETE (VIC) PTY LTD

Respondent/Cross Appellant
CORAM:Lockhart, Whitlam and Kiefel JJ
DATE:6 December 1996
PLACE:Sydney (Heard in Melbourne)
REASONS FOR JUDGMENT

KIEFEL J:
This Appeal requires the resolution of the question, firstly, whether a review of rental payable under a lease was intended to occur at each rent review period and as part of that question, whether a notice is on each occasion required to be given by the lessor to commence the process of determination of the new rent, or whether the giving of notice and the undertaking of a review remains an option which may or may not be exercised by the lessor. It arises because of the use of words which appear to require a review (“shall be reviewed” and “will take place”) which are followed, however, by a provision with respect to the giving of the notice which was expressed in discretionary terms (“may” ). His Honour (Justice Olney) resolved the question by concluding that the discretion there given was to be seen as limited to the time when notice could be given. A review of, and the fixing of rent for each period was,
in his Honour’s view, otherwise required by the special condition in question.
The other question in this appeal is as to the proper description of the rent to be applied, and if necessary valued, with respect to rent reviews falling on specified dates. Although I have expressed it as a secondary question it has greater practical or financial implications for the parties.

The few relevant facts were not in dispute. On 1 January 1990 Catchklin Pty Ltd (“Catchklin”) and the respondent executed a lease with respect to premises at Toorak Road, Hartwell. The form of the lease was the result of negotiations and each of the parties was represented by solicitors in them. In July 1990 the appellants purchased the premises from Catchklin.

By Clause 1 of the lease it was provided that the lessee was to hold the premises for the term referred to in the fourth part of the Schedule, namely 15 years, and “at the rental set forth in the Fourth Part of the Schedule hereto (subject to review as hereinafter provided).” The fourth part of the schedule provided for an annual rent “subject to review as stipulated in Special Condition 3 hereof ¼”. Special Condition 3 to this schedule was in the following terms:
“(3)The rent shall be reviewed at the end of each eighteen months of the Term hereby created and any renewal thereof (“Rent Review Date”) the first of such reviews will take place eighteen months from the Commencing Date and the rent for each successive eighteen month period of the Term and any renewal thereof shall be determined as follows:-
(a)The Lessor may at any time by noticing (sic) in writing (“the Lessor’s notice”) fix the rent at an amount which in the Lessor’s opinion would be the current open market rent of the premises as at the rent review date but no less than the rental payable by the Lessee for the immediately preceding review period plus twelve point three two per
centum (12.32%).

(b)The amount as fixed shall be the rent payable by the Lessee for the next ensuing eighteen month period unless within fourteen (14) days of the Lessor’s notice the Lessee notifies the Lessor in writing that the Lessee disputes the amount fixed by the Lessor.
(c)If the Lessee disputes the amount set out in the Lessor’s notice and if the parties after consultation, are unable to reach agreement as to the rent payable within thirty (30) days after the Lessor’s notice the current open market rent for the Demised Premises shall be determined by an independent Valuer having not less than five (5) years experience in valuing suburban office space and not less than ten (10) years experience in commercial valuation and who shall be employed in a practice which is predominantly commercial in nature, such Valuer to be appointed by the President for the time being of the Australian Institute of Valuers (Victorian Division) at the request of the lessor PROVIDED THAT:-
i)any determination by any such Valuer shall be made as an expert and not as an arbitrator;

ii)all costs incurred with the determination of the rent shall be paid by the Lessee and the Lessor equally;

iii)the Lessor and the Lessee shall have the opportunity to make written submission or submissions to any such Valuer, such written submission or submissions to be made within one (1) month of the appointment of any such Valuer;

AND the rent payable hereunder shall be the amount determined by any such Valuer as the current open market rental value. In any event such rent shall not be less than the rent payable for the immediately preceding eighteen (18) month review period PLUS an amount equal to twelve point three two per centum (12.32%) of the total rent payable for the immediately preceding eighteen (18) month review period subject to sub-clause (d) hereof.
(d)With respect to the rent reviews to take place on the following Rent Review Dates:-

i)fifty four (54) months from the commencing date;
ii)one hundred and eight (108) months from the commencing date;
iii)one hundred and sixty two (162) months from the commencing date; and if the option to renew this Lease pursuant to Special Condition 4 hereof is exercised by the Lessee;
iv)two hundred and sixteen (216) months from the commencing date;

the rental shall be the current open market rent as agreed between the parties and failing agreement as determined by an independent valuer at the current open market rental with no additional increase of 12.32%.
(e)For the purposes of this Special Condition (3) and Special Condition (4) the expression “current open market rental value” shall mean the current annual open market rental value of the Demised Premises based on a lease (exclusive of any incentives and allowances including but not limited to rent-free periods of occupancy) between a willing lessor and a willing lessee for the highest and best use to which the Demised Premises can be put including all car parking facilities and not necessarily the permitted use herein but taking no account of any goodwill attributable to the Demised Premises by reason of any trade or business carried on therein by the Lessee but taking account of the naming rights (if any) of the Demised Premises granted to the Lessee and in all other respects (except as to rent payable) on the terms covenants and conditions of this Lease.

(f)Should the amount of the rent for any period not be so determined by the appropriate Rent Review Date, the Lessee shall pending determination thereof pay rent at the rate specified in the Lessor’s notice referred to in Special Condition 3(a) hereof but subject to the revision thereof and upon the rent being determined hereunder any necessary adjustment of rent calculated from the Rent Review Date shall be paid forthwith by the Lessee to the Lessor or reimbursed by the Lessor to the Lessee as the case may be.”

In respect of the 18 month periods commencing on 1 July 1991 and on 1 January 1993, the rent was determined in accordance with paragraphs (a) and (b) of Special Condition 3. His Honour observed that, on these occasions, the respondent did not dispute the amount set out in the lessor’s notice. The appellants did not however give a notice or otherwise initiate a rent review in respect of the 18 month period commencing on 1 July 1994, which was the first of the rent review dates referred to in paragraph (d) of Special Condition (3). That provision required the rent for the following period to be calculated by reference to different criteria than that set out in the preceding paragraphs, although there remains a dispute as to just what that rent was to encompass.

In construing the provisions in the Special Condition with respect to the lessor’s discretion, in the way described, his Honour reasoned that the words of obligation, “shall” and “will”, ought be given their proper meaning and effect. And it may here be observed that the approach his Honour took also gave effect to the discretionary “may”, although limiting its operation. To the contrary of this construction the appellants submitted that “may” is not given its ordinary meaning, and that it ought be taken as intended that the lessor have the full discretion as to whether to initiate the process. On this view of it the words which might be thought to require a review would need be read as a mere assumption on the part of those of the person who drafted the lease, that the lessor would do so on each occasion. Reliance was placed by the appellant upon the decision in Australian Mutual Provident Society v National Mutual Life Association of Australasia Ltd [1995] 1 NZLR 581, and cases following it, as providing authority for the view that “may” ought be given its ordinary meaning in circumstances similar to those here.

In the AMP case, the issue was whether the provision that the lessor “may give notice” in the rent review clause meant “shall give notice” because other provisions clearly assumed that a review would take place (“shall take place”). I infer however that it was the view of the New Zealand Court of Appeal that there was nothing which could be gleaned elsewhere from the provisions of that lease to suggest to the contrary, as provided, that the lessor have the right to set in train a procedure which might or might not result in an increase in rent and might indeed result in a reduction. And it seems to me that, operating as influential, was their Honours’ view that valid reasons could be advanced for construing the provision either as obligatory or as permissive but that at least that which permitted the lessor to determine whether

to give a notice involved an acceptance of the risk that the rent would be fixed at less than that currently prevailing and, therefore, that it more closely approximated commercial reality (584). A similar approach is not however available here when regard is had to both the provisions which bear upon the matter.

Special Condition 3 of the lease here contains other indicators which tend to confirm, not deny, that a rent review was predicted, and intended, to occur. The initial assertion that rent “shall be reviewed” (and as to the first, that it “will take place”) is confirmed by the terms of paragraphs (d) and (f). In paragraph (d), the reference to the particular rent review dates at 54, 108, 162 and 216 months from commencement are expressed in the context of a regime of reviews “with respect to the rent reviews to take place on the following rent review dates ¼ the rental shall be ¼”. Paragraph (f), which provides for the rent to be paid pending determination of the proper rent where it has not been calculated by the rent review date again appears to assume that there will, for each period, be such a determination. These provisions make it difficult to accept the proposition that, nevertheless, the words requiring a review at the commencement of the Special Condition ought be read down because a word imports some discretion in the lessor.

And it is necessary, I think, to view the discretion given in paragraph (a) in its context. By the conclusion stated by his Honour I understood this to be the approach taken. The discretion given is with respect to the giving of notice which is to commence the process of fixing the rent for the period. It is part of the mechanism by which that is achieved. It may be compared with the opening general statement, in the nature of the object of the special condition, that it is intended that
reviews be had. A view that paragraph (a) is concerned with when the notice ought be given, and what is contained in it, as part of a process enables one more readily to conclude that “may” was intended to govern the time when the lessor might give it. As I shall later refer, in this respect however I respectfully differ from his Honour’s view that it might be at any time. But that is not presently relevant.

Although there are sufficient indications to the contrary of the appellants’ argument, that they have an unqualified discretion as to whether a notice is given for any rent review period, there may have been a stronger argument in their favour had it been the case that the rent would only ever increase. That situation might introduce concepts of commercial reality which, as I have said, were to an extent influential in the AMP case. One might, in those circumstances, be able to conclude that it was to be a matter for the lessor whether to seek the increase.

It is clear enough, by reference to the last two parts of paragraph (c) commencing “AND the rent payable hereunder ¼” that the rent is usually to be the current open market rental value, so long as it is not less than the sum made up of the rental which had been paid in the preceding 18 months together with 12.32% of the total rent payable over that period. But that leaves paragraph (d). The rental there described, the appellants submit, is as described in paragraph (c) and omits only the increase of 12.32% to the existing rent, despite no words referring to the rent paid in the preceding 18 months appearing in (d). It was then submitted for the lessors that paragraph (d) ought be seen to import what is contained in the three preceding paragraphs and, in this connexion, that it should be recognised that it utilises shorthand expressions to refer to what went before. This submission was in aid of the argument that the reference in (d) to rental “as determined by an independent valuer at the current open market rental with no additional increase of 12.32%” is to be taken to refer to the full description provided at the conclusion of paragraph (c), namely current open market rental which is however not less than that payable in the preceding 18 months. So understood paragraph (d) in this respect would simply operate to negate the additional increase of 12.32% but a minimum rental payable, that previously paid, would remain.

I have no difficulty with the view that the paragraphs following paragraph (a) to paragraph (c), and in particular paragraphs (d) and (f), were intended to refer back to the earlier paragraphs for some purposes. For example, the independent valuer referred to in paragraph (d) is no doubt the valuer more fully described in paragraph (c). And, it seems to me that it was likely intended that a notice was to be given by the lessor fixing a figure. This is reinforced by paragraph (f) which utilises the notice with respect to any period where rent has not been determined prior to the review date, as providing the rent payable in the interim. But if the description of rent in paragraph (d) differs from that in paragraph (c) the result, so far as concerns the notice, will be that the figure reflected in the lessor’s opinion of rent in the notice will be calculated differently. One cannot assume by reference to the rent being included in the notice in paragraph (a) that that is what is referred to in paragraph (d). What it may do however is to reinforce the notion, to which I shall shortly refer, that the rent at all times save for the periods referred to in paragraph (d) is to be that described at the conclusion of paragraph (c) which, of course, accords with that description provided for in paragraph (a).

The resolution of what was intended to be the rent referred to in paragraph (d) depends, in my view, upon the connection between that paragraph and the description in the preceding paragraph. And this will be established by the words in the concluding part of paragraph (c). Submissions on the appeal focused upon these matters. In particular the words “subject to sub-clause (d) hereof” are likely to be critical because they create the direct link. The question is how they are to operate. Words such as “subject to” usually convey that what goes before is to be qualified by what follows. In that event the rent described in paragraph (c) might be seen as intended to be the rent for all periods save those specified in paragraph (d) and standing as qualified then by what is taken away from the description. That is to say, the relevant qualification of the rent described in paragraph (c) is provided by the negation of the percentage increase in the phrase in paragraph (d) “with no additional increase of 12.32%”. Support for this approach is to be found in the words “in any event”, appearing in paragraph (c) which convey the sense of a regime which is always to operate (as in “but at all times”). As I have said that then stands as qualified only by the concluding words “subject to sub-clause (d) hereof”.

I have considered the opposing contention which might have the words ‘subject to ¼” read as creating an exception and not a qualification. If that were the case it might be argued that paragraph (d) takes effect not as interdependent with paragraph (c) but in its own terms. In that event the description it provided would not include any reference to rent previously payable expressed as a minimum. This would however deny effect to the usual meaning of the words “subject to ¼” and to the preceding phrase “in any event”. This latter view of the operation of the concluding last five words of paragraph (c), as creating an exception in what follows
in paragraph (d), was that favoured by his Honour. The matter is not free from difficulty. That approach however affords no meaning to the words “in any event” in paragraph (c) and, perhaps more importantly, treats the reference to the removal of the percentage increase in paragraph (d) (“with no additional increase of 12.32%”) as mere surplusage. His Honour expressed the view that the construction contended for by the lessors had a similar result. But, with respect, that does not seem to be so. The construction advanced by them not only enables the two paragraphs to be read, and to operate together, it involves the use of all the words contained in them according to well accepted meanings. On ordinary principles of construction it is the approach which must be taken.

It follows from the conclusion I have reached as to the operation of paragraph (d) that the rental will never decrease. What may be taken as intended by the parties with respect to paragraph (d) is to provide some control mechanism on an ever-increasing rent. The question that then arises, according to my earlier observation, is whether the fact that the rental would never reduce affords reason to conclude that it was intended that the lessor have a complete discretion as to whether to give a notice requiring a review. It may be accepted the lessor will be most interested in any increase, to be achieved by setting the process in motion by the giving of notice. Were the language equivocal that may have operated as an important consideration. But the Special Condition not only describes a regime, as I have said, but the words used concerning the giving of notice are clearly obligatory and are stated on a number of occasions. In these circumstances it would not be appropriate to approach the question as to the parties’ intention by reference to what might be thought to be the level of the their interest in a review. The words they have chosen to reflect that
intention ought be allowed to operate. Whilst I am, with respect, unable to agree with his Honour’s construction of paragraph (d) I am in entire agreement that the lessor is obliged on each occasion to give a notice and that the words “shall” and “will” ought be given their proper meaning. However, as I have earlier referred, his Honour was also of the view that the word “may” imported a discretion as to when the lessor might give notice and that it might be at any time. I turn then to that question.

Paragraph (a) of Special Condition (3) speaks prospectively of the amount which the lessor considers will be the correct rent at the next rent review date, the opening words of the Condition having established that the rent review date falls every eighteen months. In that, and what follows, it may be seen as intended that the new rent be fixed or determined by that review date. The amount as fixed by the notice is to be rent payable in the next rent period of eighteen months ((b)). Quite short periods of time are provided in paragraphs (b) and (c) for notification of dispute and appointment of a valuer in the event of continued disagreement. That leaves of course the potential for some delay in the determination by the valuer. It is of some significance that paragraph (f) then provides that “should the amount of the rent for any period not be so determined by the appropriate rent review date ¼” the lessee pays rent according to the lessor’s notice. The rent paid is later adjusted if necessary. It follows, in my view, from a consideration of these provisions that the parties contemplated that the only matter which might not be complete by the rent review date was the valuation. At the least though it was determined as necessary that the lessor fix the rent, by notice, prior to the rent review date so that if there was dispute, and delay, in its final determination there could at least be none about the
rental to be paid in the interim.

I am in the result, unable with respect, to agree with his Honour that it was intended that the lessor could give notice at any time. For the reasons I have outlined it seems clear enough that the mechanism provided for rent review depended on a notice being given before the rent review date.

So far as concerns the declaration made by his Honour, as to the giving of notice, I would add to the first part of the declaration 3 namely “The lessor is obliged to give a ‘lessor’s notice’ in respect of each rent review date” the words “in the immediately preceding review period.” The declaration numbered 5(ii) ought read:
“(ii) the rent for the periods referred to in paragraph (d) of Special Condition 3 is the current open market rent determined by an independent valuer or the rent payable for the preceding 18 months’ period, whichever is the greater”.

So far as concerns costs, the appellant has been, in part, successful in its appeal. It failed with respect to the question whether the lessor was obliged to give a notice. The respondent, whilst having filed a notice of cross appeal based upon a different construction than that reached by his Honour, one which would permit the lessee to give such a notice, did not pursue this on the appeal. In argument, but not as a ground of cross appeal, it took the point that the lessor’s notice ought not be given “at any time” as his Honour had determined. The respondent’s case has been attended with some shifting of issues. In these circumstances I would propose that the order for costs below be set aside. The only order I would then make is on the appeal and that the respondent Pioneer Concrete (Vic) Pty Ltd, pay one-half of the appellant’s costs of the appeal to be taxed.
I certify that this and the preceding twelve pages are a true copy of the reasons for judgment herein of the Honourable Justice Kiefel.

Associate:
Date:6 December 1996

Counsel for the applicant:   KWT Hargrave QC and KJA Lyons
Solicitors for the applicant:   Mahony, Galvin Rylah
Counsel for the respondent:   R Conti QC and RM Garratt
Solicitors for the respondent:                   Cornwall Stodart
Date of Hearing:  8 October 1996
Place of Hearing:  Melbourne
Place of Judgment:  Sydney
Date of Judgment:  6 December 1996

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Citations

Myers, Allan James v Pioneer Concrete (Vic) Pty Ltd [1996] FCA 1073

Cases Citing This Decision

0

Cases Cited

3

Statutory Material Cited

0

Finance Facilities Pty Ltd v Federal Commissioner of Taxation [1971] HCA 12

Smith v Watson [1906] HCA 80

Finance Facilities Pty Ltd v Federal Commissioner of Taxation [1971] HCA 12

[1996] FCA 1073

6 DECEMBER 1996