Ocean Square Pty Ltd v Duranzo Holdings Pty Ltd

[1997] QCA 251

IN THE COURT OF APPEAL	[1997] QCA 251
SUPREME COURT OF QUEENSLAND

Appeal No. 7449 of 1996.

Brisbane
[Ocean Square P/L v. Duranzo Holdings P/L]

BETWEEN:

OCEAN SQUARE PTY LTD
ACN 060 252 968

Appellant

AND:

DURANZO HOLDINGS PTY LTD
ACN 003 822 535

Respondent

___________________________________________________________________

Macrossan C.J.
Pincus J.A.

Williams J.

___________________________________________________________________________

Judgment delivered 19 August 1997

Judgment of the Court
___________________________________________________________________________

1.         APPEAL ALLOWED, AND ORDER MADE BY THE LEARNED DISTRICT COURT JUDGE ON 9 AUGUST 1996 SET ASIDE.

2.         JUDGMENT IN THE ACTION FOR THE PLAINTIFF AGAINST THE DEFENDANT IN THE SUM OF $150,000.

3.         THE RESPONDENT DEFENDANT TO PAY THE COSTS OF THE APPELLANT PLAINTIFF HERE AND BELOW.

4.         THE HEARING OF THE APPEAL TO BE ADJOURNED TO A DATE TO BE FIXED, TO ENABLE EACH PARTY TO MAKE A WRITTEN SUBMISSION (WITHIN 7 DAYS) AS TO AN AWARD OF INTEREST.

___________________________________________________________________________

CATCHWORDS: LEASE - Retail Shop Lease - agreement incorporated a lease and a franchise agreement - whether amount paid constituted "key money in connection with the granting" of a lease - whether amount paid was "any other payment or any benefit in connection with the granting" of a lease.

S. 8 Retail Shop Leases Act 1984

Counsel:	Mr C J Stevens QC, with him Mr S Bliim, for the appellant. Mr K Priestly for the respondent.
Solicitors:	Dunhill Madden Butler for the appellant. O’Mara Patterson & Perrier for the respondent.
Hearing date:	28 July 1997.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 7449 of 1996.

Brisbane

Before Macrossan C.J.

Pincus J.A. Williams J.

[Ocean Square P/L v. Duranzo Holdings P/L]

BETWEEN:

OCEAN SQUARE PTY LTD
ACN 060 252 968

Appellant

AND:

DURANZO HOLDINGS PTY LTD
ACN 003 822 535

Respondent

REASONS FOR JUDGMENT - THE COURT

Judgment delivered 19 August 1997

This is an appeal from the District Court in an action in which a judge, having before him a judgment summons, dismissed the appellant plaintiff’s claim. The plaintiff had sued for $150,000 paid under a "Licence Agreement" and it sought judgment under r. 153 of the District Court Rules, on the basis that the action was one to recover a debt and that there was no defence. Although the matter came before the District Court in the way just mentioned, there was no dispute about the facts and the judge dealt with the matter finally; he ordered that there be judgment in the action in favour of the defendant. No complaint is made by either party about his Honour having treated the hearing as one in which it was appropriate to determine the whole fate of the action.

As appears from the pleadings and argument it is common ground that the plaintiff and defendant entered into an agreement on or about December 1993 in respect of the operation and occupation by the plaintiff of premises known as Shop Q 2.2 of "Asian Food Court", Pier Marketplace, Cairns. The document constituting the agreement is in the record and there is no evidence that the written agreement was varied or supplemented by any oral arrangement; therefore, insofar as the plaintiff’s claim depends on the legal effect of the agreement between the parties, that effect is to be gathered from the written agreement alone. It was contended for the defendant, the respondent before us, that evidence before the primary judge that at the time the agreement was made there were 19 "Hokka Hokka Little Asia" shops operating in Sydney and Melbourne has some relevance to the proper outcome of the dispute, but apart from that it was not suggested that it is necessary to look at facts extrinsic to the agreement, in considering its meaning.

The plaintiff’s contention is, and was before the primary judge, that it is entitled to recover the $150,000 sued for plus interest and costs under s. 8(4) of the Retail Shop Leases Act 1984 ("the 1984 Act"), which has since the events in issue occurred been replaced by the Retail Shop Leases Act 1994.

The principal provision of the 1984 Act which it is necessary to discuss is s. 8 which reads

in part as follows:

" 8(1) The landlord under a retail shop lease or any person acting under the landlord’s authority shall not be entitled to-

(a)         any key money in connection with the granting, renewal, extension or assignment of the lease; or

(b)         any amount for the goodwill of the business carried on at or from the retail shop in question; or

(c)         any other payment or any benefit in connection with the granting, renewal, extension or assignment of the lease.

(2) This section shall not be construed so as to prevent a landlord-

(a)         from recovering from the tenant the landlord’s costs reasonably incurred in investigating a proposed assignee of the tenant under a retail shop lease; or

(b)         from recovering from the tenant the landlord’s fair and reasonable expenses of and incidental to the documentation of a retail shop lease or an assignment of a lease and any necessary consents to such a lease or assignment of a lease; or

(ba)       from receiving payment of rent in advance if the sum paid in advance does not exceed the amount of rent payable in respect of 1 rental period under the lease; or

(bb)	from securing by means of a bond from the tenant the tenant’s obligations under the lease; or
(c)	from seeking and receiving payment for goodwill of a business from a purchaser of the business if at the time of sale the business is conducted in a retail shop by the landlord who, in connection with the sale of the business, grants to the purchaser a lease of the retail shop.
.	. .

Subject to this Act, a person who is a landlord under a retail shop lease or any person claiming through such a landlord shall not, in connection with the granting, renewal, extension or assignment of a retail shop lease, demand or accept payment of any amount or the provision of any benefit to which a landlord under a retail shop lease is not entitled by reason of subsection (1) or (2A).

(3)

Maximum penalty - $5,000.
(4) Any amount or the value of any benefit accepted by a person in
contravention of this section may be recovered from the person by the person by
whom the amount was paid or the benefit was granted by action in a court of
competent jurisdiction as a debt due and owing to the first person by the person
by whom it was accepted. "

We have omitted s. 8(2A) which says, among other things, that the landlord under a retail shop lease is not entitled to payment by a tenant for or in respect of certain amortisation costs and expenses.

It is common ground that the agreement in question embodies a "retail shop lease" within the meaning of the definition in s. 4(1) of the 1984 Act; it is therefore unnecessary to set that definition out. The word "lease" is also defined in the statute, and includes an agreement for a tenancy; the word "lease" will be used in these reasons as descriptive of such part of the "licence agreement" in question as constitutes an agreement for a tenancy. Reading the agreement as a whole, and although it is in some respects elliptical, the conclusion that it embodies a lease rather than a mere licence is seen to be correct; it contemplates that the licensee under the agreement will obtain occupation of the premises for a period of 7 years, and although one of the clauses (cl. 15) appears to imply that the licensor may enter the premises to give certain assistance to the licensee, there is no general right to enter given to the licensor from which one may reasonably infer that it is intended that the document gives exclusive possession to the licensee.

The contention for the plaintiff is that a sum of $150,000 paid under the agreement constituted "key money in connection with the granting" of a lease within the meaning of s. 8(1)(a) quoted above, or alternatively fell within the description "any other payment or any benefit in connection with the granting" of a lease within para. 1(c) of the section. "Key money" is defined in s. 4(1):

" ‘key money’ means any money that is to be paid to or at the direction of a landlord or a landlord’s agent, by way of a premium, non-repayable bond or otherwise, or any benefit that is to be conferred on or at the direction of a landlord or a landlord’s agent in connection with the granting, renewal or assignment of a lease;"

It was submitted for the defendant before us that although the licence agreement required payment of a sum of $150,000, and that was paid, the plaintiff licensee did not pay that sum "in connection with the granting of the lease" embodied in the licence agreement, because the payment of the sum was consideration for the benefits obtained under a franchise agreement which was also embodied in the licence agreement. To put the point more broadly, the question discussed by counsel who appeared before us was whether and if so in what circumstances a lump sum initial payment made to a landlord who is also a franchisor is beyond the scope of s. 8 of the 1984 Act quoted above. In the present case, however, it is inappropriate to answer that more general question; there is no need to discuss the problem raised except insofar as it has to do with the agreement here in question, which is of an unusually vague and incomplete character.

The agreement, which is headed "Licence Agreement" and describes the parties as "Licensor" and "Licensee", contemplates that the licensee shall have the premises for the permitted use, which is "Chinese only, excluding Soup Noodles" for a period of 7 years, that it will pay certain monies and in exchange the licensor is to provide a completely fitted shop (cl. 12) and certain other services.

The consideration to be provided by the licensee under the agreement is in four parts:

1.          A "Base Rent" of $110,000 per annum with provision for CPI increases.

2.          A "Percentage Rent" related to gross sales.

3.          $32,500 per annum for "Outgoings" and "Fees", further detailed below, again with provision for CPI increase.

4.          An "Initial Licence Fee" of $150,000 payable prior to the commencement of trade.

It is the "Initial Licence Fee", the last item, which is in issue.

There is nothing in the agreement to say what the "Initial Licence Fee" is for; it is evidently in consideration of some or all of what the licensee obtains under the licence agreement. Some help in determining what the initial licence fee is for may be obtained from details of the "Fees and Outgoings" of $32,500 per annum which we have already mentioned, as the third item to be paid by the licensee:

"Outgoings:	Operational Expenses, Replacing Crockeries, Maintenance of ‘Asian Food Court’ Common Facilities, Cleaning and Bussing of ‘Asian Food Court’ Common Area.
Fees:	Ongoing Licence Fee, Promotion, Marketing and Provision of Ongoing Management Support."

Because of the juxtaposition of the expression "Ongoing Licence Fee" with the other language set opposite the word "Fees", the possibility arises that the intention was to make the on-going licence fee payable for promotion, marketing and provision of ongoing management support.

Then one might argue, the expression "Initial Licence Fee" should have an analogous meaning and be treated, also, as a payment for promotion, marketing and provision of ongoing management support. This line of reasoning should not be adopted, as it is essentially speculative; the agreement does not say that the "Ongoing Licence Fee" is a payment for promotion, marketing and provision of ongoing management support. A conclusion which is more compelling is that opposite "Fees" the draftsperson intended to set out a number of separate matters (in addition to those opposite "Outgoings") covered by the $32,500 per annum, those matters being first "Ongoing Licence Fee", second "Promotion", third "Marketing" and fourth "Provision of Ongoing Management Support". This view does not involve the assumption that the services mentioned after "Ongoing Licence Fee" are intended to be recompensed by payment of that fee and it produces the result that the services to be provided in exchange for the ongoing licence fee are simply unspecified.

As we understood the argument put forward on behalf of the respondent, it was that the "Ongoing Licence Fee", being part of the $32,500 per annum, as well as the "Initial Licence Fee", are to be taken to be fees payable under that part of the "Licence Agreement" which is properly characterised as a franchise agreement. Counsel for the defendant argued that a fundamental provision of the agreement is cl. 19:

"The Licensee acknowledges that the Licensor is the owner of the Marks and
that the Licensee’s right to use them are derived solely from this Agreement."

It was put for the defendant that this implies that certain marks - unidentified - may be used during the term of the agreement by the licensee and that this is part of what the licence fees mentioned in the agreement are paid for. The argument was that the licence agreement should be treated as containing two distinct agreements, one a lease and the other a franchise agreement, and that one should treat certain of the clauses of the licence agreement as being part of the latter. In this way one could achieve the result that the obligation to pay $150,000, although included in the "Licence Agreement", is properly to be treated as unconnected with that part of the document which is a lease agreement.

If one attempts to identify provisions of the licence agreement which contain promises by the licensor of a kind which one would not expect to find in a lease agreement, little emerges. We have mentioned that there is provision for promotion, marketing and provision of ongoing management support, but that does not assist the defendant for, depending on the precise content of what is intended to be promised, an ordinary lease of part of a shopping centre could sensibly contain matters of this kind. We note that under cl.20.1 of the Retail Shop Lease precedent published by the Queensland Law Society in 1992 the landlord has to establish, maintain and manage a promotion fund and use it "for the purpose of promoting and advertising the Complex". Clause 15 of the licence agreement requires the licensor to assist the licensee during the term of operation of the business. The nature of the assistance is however described only as being such as "the Licensor in its discretion deems necessary and appropriate". Then there is cl. 19 which is as we have mentioned argued to imply a right in the licensee to use certain unidentified marks. Counsel for the defendant wished to rely upon the evidence that in Sydney and Melbourne there are "Hokka Hokka Little Asia" shops; it appears from the terms of the licence agreement that it was contemplated that the premises the subject of these proceedings would be another "Hokka Hokka Little Asia" shop. It is not clear to us what counsel sought to derive from the evidence of the existence of other such shops, but we proceed on the assumption that the "Hokka Hokka Little Asia" name has some goodwill value in the south.

In the end, all that can be said to be contained in the licence agreement which is characteristic of franchising agreements, is the promise to give some assistance at discretion, and the reference to marks.

The parties have not said, in the licence agreement, that the $150,000 is to be paid in exchange for these promises and a simple answer to the defendant’s case is that there is no sensible reason to read that into the agreement. There was some discussion before us as to the likely fate of arrangements, the parties to which explicitly made two separate agreements, one being a lease agreement and the other a franchise agreement. In those circumstances, a tenant might argue that a lump sum payment made under the franchise agreement at the inception of occupation of the premises should be treated as one in connection with granting of the lease. Here the boot is, so to speak, on the other foot. On the face of it, there is a single agreement which contains at most two obligations on the part of the "Licensor" of a kind which one would not expect to find in an ordinary lease agreement: the promise to assist at discretion and whatever can be implied from the reference to ownership of the marks. The contention is in effect that we must treat this - on the face of it - single agreement, as in reality two separate contracts, and treat the parties as having agreed that the $150,000 is to be paid in respect of these two licensor’s obligations. According to the defendant’s argument, what the parties have not severed should be severed by the Court.

The learned primary judge accepted this invitation, holding that the payment of

$150,000 -

" . . . was in consideration for the grant of the licence to carry on the business under the ‘Hokka Hokka’ name and style and for the promise to provide services in the future in connection with that business."

His Honour also expressed a view as to the meaning of the critical expression:

" . . . the phrase ‘in connection with’ . . . does not fall within the prohibition unless in a practical business sense it can be said that the landlord has given nothing of substance in return for the payment other than the granting of the lease.".

If this is the proper construction of "in connection with" in the relevant context, the expression would seem to have a narrow reach indeed; if as long as something of substance, other than the lease itself, were included in the lease agreement as a lessor’s obligation the prohibition would not apply. Presumably something of substance could be the right to use a trade name, a vague promise of help or the benefit of a promise by the landlord to promote the tenant’s business and other businesses in the same complex.

It is our respectful opinion that the inclusion in the licence agreement of the two matters to which we have alluded does not produce the result that the $150,000 payment is other than one made in connection with the grant of a lease. We are of opinion that there was both in form and in substance a single agreement which, although it contained provisions which might perhaps be unusual in an ordinary lease, does not provide any basis for a conclusion favourable to the defendant. The payment of $150,000 had the requisite connection with the grant of the lease and the appeal must be allowed.

It is desirable to mention one formal matter; although the record discloses that the judge dismissed the plaintiff’s action and gave judgment for the defendant with costs, the order taken out deals only with the application for summary judgment, which is recorded as having been dismissed. It was, as we have said, not contended by either side that the Court should deal with the dispute other than finally. The orders will be:

1.          Appeal allowed, and order made by the learned District Court judge on 9 August 1996 set aside.

2.          Judgment in the action for the plaintiff against the defendant in the sum of $150,000.

3.          The respondent defendant to pay the costs of the appellant plaintiff here and below.

4.          The hearing of the appeal will be adjourned to a date to be fixed, to enable each party to make a written submission (within 7 days) as to an award of interest.