Raciti Boulton Medical Practice Pty Ltd v Dynamic Superannuation Fund Pty Ltd
[2023] QSC 115
•25 May 2023
SUPREME COURT OF QUEENSLAND
CITATION:
Raciti Boulton Medical Practice Pty Ltd v Dynamic Superannuation Fund Pty Ltd [2023] QSC 115
PARTIES:
RACITI BOULTON MEDICAL PRACTICE PTY LTD ACN 608 648 522
(Applicant)
v
DYNAMIC SUPERANNUATION FUND PTY LTD ACN 610 290 652 as Trustee of the Dynamic Superannuation Fund
(Respondent)
FILE NO/S:
File 2502 of 2023
DIVISION:
Trial Division
PROCEEDING:
Application
ORIGINATING COURT: Supreme Court of Queensland at Brisbane
DELIVERED ON:
25 May 2023
DELIVERED AT:
Cairns
HEARING DATE:
14 April 2023
JUDGE:
Henry J
ORDERS:
1. It is declared that, on the true construction of the leases between the applicant and the respondent, made in or around December 2017, and in the events that have occurred, the applicant and the respondent are at liberty to agree the Current Market Rent payable from the market review date on the fifth anniversary of the leases’ commencement date, failing which that Current Market Rent should be determined according to cl 3.2(d) of the leases.
2. The applicant pay the respondent’s costs of the application on the standard basis.
CATCHWORDS:
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – INTERPRETATION OF MISCELLANEOUS CONTRACTS AND OTHER MATTERS – where the applicant leases its business premises from the respondent pursuant to two 10-year leases in relevantly identical terms – where a clause of the leases provides mechanisms for rent variation from five yearly market rental reviews – whether deployment of the leases’ consent or dispute variation mechanism is a pre-requisite to the potential operation of its valuer’s determination mechanism
Australian Mutual Provident Society v National Mutual Life Association of Australia Ltd [1995] 1 NZLR 581 cited
Board of Trustees of the National Provident Fund v Shortland Securities Ltd [1996] 1 NZLR 45 cited
Butt v M’Donald (1896) 7 QLJ 68 cited
Chevron (TAPL) Pty Ltd v Pilbara Iron Company (Services) Pty Ltd [2021] WASCA 193 distinguished
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 followed
COUNSEL: A O’Brien for applicant
P Telford for respondent
SOLICITORS: Colin Biggers & Paisley Lawyers for applicant
Macpherson Kelley for respondent
A tenant medical practice leases its business premises from the same landlord pursuant to two 10-year leases in relevantly identical terms. The tenant and landlord are in dispute about the circumstances in which the landlord can increase the rent pursuant to the leases’ five-yearly market review clause. A declaration is sought to quell the controversy.
The leases’ cl 3.2, the “Market Review of rent” clause, provides two mechanisms by which the rent may be increased, or perhaps decreased, from the leases’ market review date – a consent or dispute mechanism and a valuer’s determination mechanism. The consent or dispute mechanism can only be commenced if the landlord issues a particular notice in time. The landlord did not do so.
The tenant contends that failure precludes the landlord relying upon cl 3.2’s valuer’s determination mechanism because, according to the tenant, the only route to that mechanism is by deployment first of the consent or dispute mechanism. The landlord contends access to the valuer’s determination mechanism is not so confined and may be deployed directly, even if the consent or dispute mechanism has not been deployed.
Thus, the question to be determined is: Is deployment of cl 3.2’s consent or dispute variation mechanism a pre-requisite to the potential operation of its valuer’s determination mechanism?
For the reasons which follow, the answer is “no”. The valuer’s determination mechanism may be accessed directly, as a free-standing option, as well as, potentially, via the consent or dispute mechanism.
The interpretive process
In interpreting the provisions of a commercial document like this it is well established their meaning is informed objectively by their text and context, including the broader context of the document and its commercial purpose, and the understanding of their meaning which a reasonable businessperson would have had.[1] The focus in this exercise is upon the content of the leases. This is not a case in which the parties advance circumstances external to the content of the leases in aid of its interpretation.
[1]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, 116.
As will be seen, some of the leases’ provisions were less than perfectly drafted. Nonetheless, on collective consideration of the whole of the relevant features of the document, applying the aforementioned interpretative approach, it is apparent the interpretation urged by the landlord is the correct one.
The text of cl 3.2
It is necessary to set the text of cl 3.2 out in full to properly understand the force of the competing urged interpretations:
“3.2 Market review of Rent
(a)If a Rent review date is a Market Review Date, then the Rent from that date is the Current Market Rent as determined under this clause.
(b)The Landlord may notify the Tenant of the Landlord’s assessment of the Current Market Rent for a Market Review Date no less than three months before the Market Review Date. If the Tenant does not dispute the Landlord’s assessment within 21 days of receiving the Landlord’s notice, then the Current Market Rent for the relevant Market Review Date is taken to be the amount notified to the Tenant under this clause 3.2(b).
(c)If the Tenant gives a dispute notice under clause 3.2(b) on time, then the Current Market Rent is to be decided under clause 3.2(d). Until then the Tenant must pay, by equal monthly instalments on account of the Rent from the relevant Market Review Date, the Rent immediately before the relevant Market Review Date.
(d)Subject to clauses 3.2(a), 3.2(b) and 3.2(c), the Current Market Rent for a Market Review Date must be decided by a valuer who:
(i)is appointed by the parties (and if they do not agree on who to appoint within 14 days after the Tenant gives the dispute notice, then the valuer is to be nominated at either party’s request by any person required by law, or if there is no such person, the President of the Queensland Division of the Australian Property Institute); and
(ii)has (at the date of his appointment) not less than five (5) years’ practice as a registered valuer valuing office premises in areas similar to the area in which the Premises are located; and
(iii)has any qualifications required by law; and
(iv)must be instructed to give a written valuation setting out what was taken into account, what was disregarded, their respective weightings and any other adjustments; and
(v)must determine the Rent on any basis required by law; and
(vi)acts as an expert (not as an arbitrator) whose decision is final and binding.
(e)The Landlord and Tenant must each pay one half of the valuer’s fee for assessing the Current Market Rent.
(f)If the Rent has not been agreed or determined by the Market Review Date then the Tenant must continue to pay monthly instalments of Rent equivalent to the instalments payable immediately preceding the Market Review Date and upon agreement or determination the Tenant must pay to the Landlord or the Landlord must repay the Tenant as they [sic] case may be, an amount equal to the deficiency or excess (if any) within 14 days.”
As will be seen, the leases provide for a commencement rent and then annual rent review dates, on which the rent increases by 3 percent, except when that date is a market review date, which occurs five-yearly. Clause 3.2 relates to the market review date. It has the effect of adjusting the rent commensurately with market value as agreed or as determined by independent valuation. Its obvious purpose is to safeguard the parties’ interests, in the context of a long lease, from the 3 percent annual increase giving rise to a rent amount which does not fairly reflect the value of the properties’ current market rent rate in the commercial property rental market. As cl 3.2(a) indicates, that current market rent is determined by cl 3.2.
The notice referred to by cl 3.2(b) is of the landlord’s assessment of the current market rent. Clause 3.2(b) contemplates, if the tenant does not dispute the landlord’s assessment, that the landlord’s assessment becomes the current market rent. On the other hand, if the tenant does dispute the assessment, cl 3.2(c) contemplates the current market rent is to be decided by the valuer appointed pursuant to cl 3.2(d), that is, by the valuer’s determination mechanism.
Importantly, the consent or dispute mechanism provided for by sub-cls (b) and (c) is only triggered if the landlord deploys it by giving notice within the time set by cl 3.2(b), “no less than three months before” the market review date. In this case it is common ground the landlord gave the notice belatedly, not within the time stipulated by cl 3.2(b). It is not disputed the time for that notice was of the essence in respect of cl 3.2(b). The dispute is whether the non-deployment of the consent or dispute mechanism precludes the separate operation of the valuer’s determination mechanism.
The tenant argues that the consent or dispute mechanism, which was not activated by the landlord in time here, is the only mechanism by which cl 3.2 allows for there to be a variation in rent by reference to current market rent. In other words, it says the only circumstance in which the valuer’s determination mechanism, of sub-cl (d), can decide the current market rent is if the consent or dispute mechanism, of sub-cls (b) and (c), is complied with and leads to it.
That interpretation is at odds with cl 3.2(b)’s use of the word “may” in describing the landlord’s right to trigger the consent or dispute mechanism. Such language clearly bespeaks a choice which the landlord may or may not choose to make. It means, if the tenant’s urged interpretation is correct, that the landlord has sole control over whether a determination under cl 3.2 will or will not happen. The tenant submits a landlord might not want to trigger a market review, as if the interpretative starting point is that the landlord should hold all power. Quite apart from the lopsided commercial advantage which that submission so unconvincingly confers on the landlord, it overlooks that cl 3.2(a) does not confer an option as to whether or not there should be a determination. Clause 3.2(b) merely gives the landlord the chance to secure an agreed determination, thus removing the need for the process of a valuer’s determination. The imposition of a time limit on the landlord’s attempt at the former is not logically exclusory of the latter. It merely makes for an orderly sequence in the prospective deployment of the two mechanisms of determination contemplated within cl 3.2.
The tenant’s interpretation is also inconsistent with the fact that, on the face of cl 3.2’s text, even if sub-cls (b) and (c) are not deployed, the language of sub-cls (a) and (d) combine to provide a mechanism by which rent is determined pursuant to a valuer’s determination. The text of sub-cl (a), in referring to the current market rent being “as determined under this clause”, favours an interpretation which gives operative effect to the various determination mechanisms which follow, one of which is in sub-cl (d). This combination of potential paths to determination and the need for a determination to occur is distinguishable from a case relied upon by the tenant, Chevron (TAPL) Pty Ltd v Pilbara Iron Company (Services) Pty Ltd,[2] where there was a singular path to a price review which did not need to occur unless there was a notice issued within time by either party.
[2][2021] WASCA 193.
In contrast to sub-cl (b) the deployment of sub-cl (d) is not cast as optional. As much follows from its reference to the fact that the current market rent “must” be decided by a valuer. The language of sub-cl (d) shows it may operate as a stand-alone valuer’s determination mechanism or as a mechanism consequential to a dispute arising under the consent or dispute mechanism, if the landlord chooses to activate it.
A structurally sensible way to accommodate the existence of the optional determination method per sub-cl (b) would be to qualify the mandatory operation of sub-cl (d) by providing it is subject to the possible operation of that option. That is just what sub-cl (d) does, in expressing its operation as “subject to” the possibility of that option having been deployed.
Specifically, cl 3.2(d) begins, “Subject to clauses 3.2(a), 3.2(b) and 3.2(c)”. The reference to cl 3.2 (b) and (c) obviously contemplates two possibilities arising in the event their consent or dispute mechanism is triggered. One such possibility is determination of the current market rent by agreement (a non-dispute by the tenant constituting consent to the landlord’s notified assessment), making a valuer’s determination under cl 3.2(d) unnecessary. The other is a dispute, making a valuer’s determination under cl 3.2(d) necessary because of the need identified by cl 3.2(a) for there to be a determination of the current market rent under cl 3.2.
The tenant emphasises the opening sentence of cl 3.2(c), “If the Tenant gives a dispute notice under clause 3.2(b) on time, then the Current Market Rent is to be decided under clause 3.2(d)”. That does not assist the tenant. It is consistent with the operation of cl 3.2(d) being subject to the possibility of determination of the current market rent by agreement, that is, non-dispute with a timely cl 3.2(b) notice. This is because, if there has been no notice or it has been disputed, it will logically then become necessary for the determination required by cl 3.2(a) to occur via the valuer’s determination mechanism in cl 3.2(d).
It is arguably odd that the opening words of cl 3.2(d) bother to refer to cl 3.2(a) at all, given reference to 3.2(b) and (c) only would be sufficient to have the above-mentioned consequential aspect. Its inclusion ought not be read as meaning the determination contemplated by sub-cl (a) is a singular process so that the mechanism in sub-cl (d) is not reached without the earlier threshold activation of the consent or dispute mechanism. The inclusion of the reference to sub-cl (a) in sub-cl (d) no more suggests the process of determining a current market rent, as sub-cl (a) requires, involves a singular route to a determination than alternative routes.
Another oddity in cl 3.2(d) is the wording of the bracketed passage in (d)(i), namely:
“(and if they do not agree on who to appoint within 14 days after the Tenant gives the dispute notice, then the valuer is to be nominated at either party’s request by any person required by law, or if there is no such person, the President of the Queensland Division of the Australian Property Institute)”
The obvious purpose of this bracketed passage is to provide for the nomination of a valuer in the event the parties do not agree on who to appoint. However, the tenant seizes upon the reference to “within 14 days after the Tenant gives the dispute notice” as contemplating that the triggering of the consent or dispute mechanism, which includes the tenant giving a dispute notice, is the only path to the operation of cl 3.2(d). Were it otherwise it might be thought words such as “if one is given” would be included after the words “gives the dispute notice”. The point is a credible one in its own right but its force dissipates in light of the weight of other considerations discussed in these reasons trending in favour of the tenant’s interpretation. The more credible conclusion is that the bracketed passage is merely infelicitously drafted and its reference to the time frame of 14 days after the giving of the dispute notice should be read as applicable in the event such a notice is given. After all, the whole sub-clause reads at its outset as being “subject to” the possibility of such an event.
The tenant contends such a view leaves the valuer’s determination mechanism without any stipulated time within which it must occur. However, that does not tell materially against the interpretation urged by the landlord. The context in which cl 3.2 operates is in determining the current market rent from the market review date – a five-yearly event. The absence of imposition of a precise time relative to that date for the occurrence of the determination is unremarkable given it will be in each parties’ interests to see to the determination occurring close in time to the market review date, lest a deficiency or excess in rental accrues. As much is obvious from cl 3.2 (f), which provides, in the event a determination has not occurred by the market review date, for there to be a process for the payment of amounts between the parties to reconcile any deficiency or excess in rent paid after that date up to when the determination does occur.
The tenant submits, on the strength of the temporal limitation which only applies in respect of cl 3.2’s consent or dispute mechanism, that cl 3.2’s purpose was to conclude the determination of current market rent prior to the passing of the market review date. That is plainly at odds not only with sub-cl (d) but also with sub-cl (f), which expressly contemplates there may not have been a determination by the market review date.
The tenant submits the absence of a specific time requirement in connection with sub-cl (d) is uncommercial because there could theoretically be years of delay before a valuation occurs. It submits that could potentially be all the way up to when the tenant needs to consider whether to exercise the five-year option as the 10-year mark approaches and thus could not make an informed decision. It also submits that exposes an untenable power imbalance because the landlord could delay in initiating a determination. These are not commercially realistic contentions. It is within the power of each party to instigate the appointment of a valuer. It is realistic to expect that at least the party who most strongly suspects the valuation will be favourable to the party’s financial position, will act to secure that position as soon as possible. That reality makes it unnecessary to consider the landlord’s associated reliance upon the implied obligation of co-operation of contracting parties.[3]
[3]Butt v M’Donald (1896) 7 QLJ 68.
It is convenient at this point to consider cl 3.2’s context within the leases.
Context of cl 3.2 within the lease
The leases, which commenced on 27 November 2017, are for a period of 10 years plus an option of a further five years. The “Rental/Consideration” stipulation in the leases’ covering page does not specify the rent or when it is to be paid and rather reads “See Schedule”.
That schedule, headed “Reference Schedule”, contains a table of certain items followed by the operative terms of the leases. The obligation to pay rent monthly is provided for by 2.1, which states:
“2.1 Tenant to pay Rent
The Tenant shall pay to the Landlord the Rent by equal monthly instalments in advance on the first day of each month throughout the Term in the manner directed by the Landlord.”
So, what is the rent which is to be paid? Clause 1.1 of the leases’ operative terms defines rent as follows:
“Rent means the yearly amount in item 1 of the Reference Schedule as varied under this Lease.” (emphasis added)
As that definition obviously contemplates, the leases make provision for the rent to be varied. The forms of variation for which it provides occur via an annual fixed percentage increase or a five-yearly market review.
Item 1 of the schedule identifies the monetary amount of the first year’s rent. Item 2 carries the short description:
“Dates and percentages of annual rent increases (clause 3.1)” (emphasis added)
Against that description it states the percentage is “3%” and the dates, namely:
“Dates: each anniversary of the Commencement Date during the initial term and any further term (other than the commencement date of a lease granted pursuant to an option in this lease). (emphasis added)
It is on one view odd that the bracketed words of that passage do not also include the five-yearly review date, for that point in time is akin to the point reached after 10 years in the event the option to renew is exercised. However, as will be seen, from item 4, both such anniversaries can attract the operation of a market review and thus a potential variation in rent. It is likely the parties intended that such a variation would occur instead of, not in addition to, a 3 per cent increase and as much will be obvious when these reasons come to the operation of cl 3.1 with cl 3.2.
That there are annual 3 percent increases and five-yearly rental reviews makes it unremarkable that, as item 3 indicates, CPI adjustment dates are “Not Applicable” to the leases.
Item 4 of the reference schedule states:
“Item 4 Market Review Dates (clause 1.1 and clause 3.2)
Dates: The fifth anniversary of the Commencement Date and at the commencement date of the Option Term.”
The bracketed reference to cl 1.1 is to the leases’ definitions clause.
It will be recalled that rent is defined as the yearly amount in item 1 “as varied under this lease”. The only clauses of the leases which provide for such variation of rent are cll 3.1 and 3.2. Clause 3.1 provides:
“3.1 Rent Reviews
On each date in Item 2 of the Reference Schedule, the Rent will increase by the percentage in Item 2.”
By its reference to the anniversary of the commencement date and percentage identified in item 2 of the schedule, cl 3.1 stipulates that the rent “will increase” by three per cent annually.
Clause 3.2 is the only clause of the leases which provides for a potential variation in the rent by reference to the five-yearly market review dates contained in item 4 of the schedule. It was quoted in full earlier but its opening words, in cl 3.2(a), bear repeating:
“(a) If a Rent review date is a Market Review Date, then the Rent from that date is the Current Market Rent as determined under this clause.”
The term “rent review date”, used in cl 3.2(a) is not defined but the clear contextual implication is it is a reference to the annual anniversary of the commencement date, that is, to the dates referred to in cl 3.1, which are the dates in item 2. They are dates on which, per cl 3.1, the rent is determined by a 3 per cent increase of the existing rent. However, bearing in mind the context that cls 3.1 and 3.2 are the only clauses providing for variation of the rent, cl 3.2(a)’s language impliedly excludes the application of cl 3.1 in respect of annual anniversaries which are market review dates.
That is because of cl 3.2(a)’s unambiguously clear language that on rent review dates which are market review dates, the rent from that date “is the Current Market Rent as determined under this clause”. Such language is inconsistent with rent from a market review date being a 3 percent increase per cl 3.1.
Clause 3.2 re-visited
Clause 3.2’s exclusory effect upon the operation of cl 3.1 leaves it as the only clause by which the rent from a market review date is determined. Its language unambiguously states that the rent from such a date:
·“is”
·“the Current Market Rent”
·“as determined under this clause”.
Such language does not contemplate some other rent or means of determining the rent. The rent from the market review date is the current market rent - which directly contradicts an argument of the tenant that the determination of the current market rent is not mandatory. The current market rent is as determined under cl 3.2 - which is at odds with the notion that the 3 percent increase of cl 3.1 is some form of default formula for what is meant by current market rent. As much is clear. For good measure, it is confirmed by the definition in cl 1.1:
“Current Market Rent means the Rent determined under clause 3.2.”
Not only does cl 3.2 say the current market rent is as determined under cl 3.2, the leases also do not include any other provision which determines what the current market rent is. It follows that the rent from a market review date can only be the rent as determined under cl 3.2. In short, the language of cl 3.2 speaks conceptually in sub-cl (a) of a determination which must occur and in sub-cl (b) of one mechanism within cl 3.2 by which it may occur.[4]
[4]See, for example, the conceptual distinctions in Australian Mutual Provident Society v National Mutual Life Association of Australia Ltd [1995] 1 NZLR 581; further discussed in Board of Trustees of the National Provident Fund v Shortland Securities Ltd [1996] 1 NZLR 45.
The tenant’s urged interpretation is that if the consent or dispute mechanism in cl 3.2 is not activated by the giving of the landlord’s assessment no less than three months before the market review date, the valuer’s determination mechanism cannot be activated. It must follow that in such a situation, on the tenant’s interpretation, there can be no determination of current market rent pursuant to cl 3.2. The assumption seems to be that the rent would in that event be the rent as determined under cl 3.1 but, as just explained, cl 3.2(a) excludes such a scenario because it expressly provides the rent from a market review date is the current market rent as determined under cl 3.2. It follows, carrying the tenant’s interpretation to its logical end that, unless the landlord gives notice of the landlord’s assessment no less than three months before the market review date, there can be no determination of what the current market rent is, despite it being the only rent identified by the leases as payable from that date.
Such an outcome – no rent determined by the sole clause created to determine it – is an absurd, unworkable, uncommercial outcome.It is obvious, from the text of cl 3.2(a) and the context of cl 3.2 within the leases, that cl 3.2’s commercial purpose is to be the clause which determines what the new rent, described as the current market rent, will be, not might be, from the date of every five year anniversary.
This heralds another point about commerciality touched on earlier. Market rent will, as a matter of common experience, potentially increase over the years and may sometimes do so to an extent exceeding the annual three per cent increases contemplated by the leases. However, it is not inevitable, particularly in respect of commercial property, that market rental will always increase markedly. Indeed, there may be intervening circumstances, such as a surplus of commercial rental space becoming available after the outset of a lease, having the effect of decreasing market rental. That the outcome of a valuation may result in an increase or a decrease is obviously a prospect each party was alive to and concerned to protect their position about, given the arrangement in cl 3.2(f).
That arrangement contemplates the outcome of the market review may not occur by the time of the market review date. So it is, sub-cl (f) provides for either the tenant to pay the landlord the “deficiency” or the landlord to pay the tenant the “excess” which may respectively have arisen in comparison between the rent being paid since the market review date and the rent as determined by the market review. That the rental reconciliation thus contemplated may require payment by either party is consistent with the prospect the market review may result in a decrease or increase in the rent but does not rest comfortably with the tenant’s urged interpretation of cl 3.2.
The tenant’s urged interpretation of cl 3.2, which presumably favours its present subjective purposes, is objectively uncommercial from a tenant’s perspective. That is because under the tenant’s urged interpretation, only the landlord can instigate a process of rental variation pursuant to cl 3.2. This would have the uncommercial consequence that the leases leave it entirely to the generosity of the landlord to institute a valuation process by which the rent might potentially be reduced. There may exist some charitable landlords of commercial properties. But it is a reasonable commercial inference that most would not institute a valuation process which could theoretically result in a reduction in the rent payable, unless confident the valuation would result in an increase or at worst no change. In the event of there having been a reduction in current market rental rates, the interpretation urged by the tenant, would have the uncommercial consequence that the tenant cannot instigate the occurrence of a valuer’s determination under cl 3.2(d) and thereby have its rent reduced. These are commercial leases and the tenant is a medical practice, that is, a business. The interpretation of cl 3.2 now urged by the tenant of cl 3.2 is plainly at odds with the meaning a reasonable businessperson would understand it to have.
Conclusion and orders
These reasons have demonstrated the interpretation urged by the landlord is correct.
It was common ground that, whichever interpretation prevailed, a declaration reflecting it should be made to quell the controversy. The declaration sought by the landlord allows for the possibility the parties may reach agreement. It is uncontroversial that it remains within the mutual discretion of the parties to agree upon a current market rent and, in effect, waive compliance with cl 3.2(d)’s requirement that a valuer make the determination.I will make the declaration sought.
It was common ground that costs should follow the event.
My orders are:
1. It is declared that, on the true construction of the leases between the applicant and the respondent, made in or around December 2017, and in the events that have occurred, the applicant and the respondent are at liberty to agree the Current Market Rent payable from the market review date on the fifth anniversary of the leases’ commencement date, failing which that Current Market Rent should be determined according to cl 3.2(d) of the leases.
2. The applicant pay the respondent’s costs of the application on the standard basis.
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