Saipan Holdings Pty Ltd v City Gym Sydney Pty Ltd - [2023] NSWCA 55

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation: Saipan Holdings Pty Ltd v City Gym Sydney Pty Ltd [2023] NSWCA 55
Hearing dates: 13 February 2023
Date of orders: 31 March 2023
Decision date: 31 March 2023
Before: Ward P at [1];
Gleeson JA at [168];
Simpson AJA at [169]
Decision:
1. Appeal dismissed with costs.

Catchwords:
LEASES AND TENANCIES – Repairs, maintenance and alterations – Obligation to make good including repairs to leaking roof – whether the contractual obligation to repair required the replacement of the roof – whether the meaning of the terms of the contract were construed objectively by the primary judge – whether appellants were prevented from performing their make good obligation by reason of the respondent’s refusal to grant access

Cases Cited:
City Gym Sydney Pty Ltd v Saipan Holdings Pty Ltd [2022] NSWSC 699
Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24
Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
Fitzgerald v Masters (1956) 95 CLR 420; [1956] HCA 53
Georgouras v Bombardier Investments No 2 Pty Ltd [2011] NSWSC 741
Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] Ch 592
HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634; [2020] NSWCA 296
Hepples v Commissioner of Taxation (Cth) (1990) 22 FCR 1; (1990) 94 ALR 81
Lillyman v Pinkerton (No 2) (1982) 71 FLR 135; (1982) 45 ALR 543
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; [1979] HCA 51
Telstra Corporation Ltd v Sicard Pty Ltd [2009] NSWSC 827
Urica Library Systems BV v Sanderson Computers Pty Ltd [1997] NSWCA 326

Texts Cited:
Croft et al, Commercial Tenancy Law (4th ed, 2018, Lexis Nexis Butterworths)

Category: Principal judgment
Parties: Saipan Holdings Pty Ltd (First Appellant)
City Gym (Aust) Pty Ltd (Second Appellant)
City Gym Sydney Pty Ltd (Respondent)
Representation:
Counsel:
HK Insall SC with P Horobin (Appellants)
JC Kelly with L Katsinas (Respondent)
Solicitors:
Creagh & Creagh (Appellants)
Alan Rigas Solicitors (Respondent)

File Number(s): 2022/00181470
Publication restriction: Nil
Decision under appeal

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2022] NSWSC 699

Date of Decision:

30 May 2022

Before:

Darke J

File Number(s):

2021/00082334

HEADNOTE

[This headnote is not to be read as part of the judgment]

The first appellant is the owner of a property in Darlinghurst. In 2017, the respondent entered into a licence with the first appellant to operate a gymnasium at the property.

In 2018, water was discovered leaking out of the ceiling of the property onto the floor of the gym and shortly after this there was a severe hailstorm which caused damage to the roof. There were discussions as to the need for repairs to be effected to make the roof watertight and as to the terms on which the respondent would enter into a lease of the premises. In the course of those discussions, in 2019, a roofer, Mr Perry, carried out an inspection of the roof and reported that the hail damage was found on all roof sheeting, flashings, skylights and gutters, and recommended that the entire roof be replaced.

Instead of entering a lease with the first appellant, at its request the respondent entered into a sub-lease with second appellant, who correspondingly entered into a headlease with the first appellant. The first appellant consented to the sub-lease and agreed to be bound by its terms. Relevantly, item 22 of the sub-lease provided that:

The Premises shall be provided made good by the Lessor, including that repairs to the leaking roof be rectified by the Lessor pursuant to an insurance claim to be made by the Lessor prior to commencement, and the Premises to be otherwise made water-tight and compliant with all requirements of relevant authorities for the term of the Leas[e] …

Item 22 also made provision for the actual direct rectification costs (in circumstances where the costs were not covered by the contemplated insurance claim) to be borne by the parties equally.

In 2020, the first appellant engaged a contractor to carry out roof repair works at the property. The respondent refused access to the premises for the contractor because it contended that the proposed works were not in accordance with the provisions of the sublease. The parties reached an impasse, whereby the respondent maintained that the entire replacement of the roof was required, whereas the appellants maintained that it was sufficient if repairs of a lesser magnitude were carried out, provided that they rendered the roof watertight.

The respondent commenced proceedings seeking relief in relation to the alleged breach of the appellants’ obligations in relation to the roof. The primary judge concluded that the language of item 22 obliged the sub-lessor (i.e., the second appellant), within a reasonable time after commencement of occupation under the sublease, to rectify the leaking roof in accordance with or in conformity with an insurance claim to be made by the sub-lessor for the replacement of the entire roof. The primary judge considered that the ambit of the rectification obligation contained in item 22 was informed by the insurance claim contemplated by the parties at the time, which he inferred was for the replacement of the entire damaged roof. The primary judge further found that the respondent was entitled to regard the works proposed by the appellants as not in accordance with what was required by item 22, and that the respondent did not unreasonably decline to give its approval for the contractor to carry out such works.

The principal issues before the Court of Appeal were as follows:

whether the second appellant as sub-lessor was obliged pursuant to item 22 to replace the entire roof (as opposed to there being an obligation to rectify the leaking roof so as to make it watertight);
whether the sub-lessor was prevented from performing its make good obligations by reason of the respondent’s refusal to grant access to the property.

The Court (per Ward P, Gleeson JA and Simpson AJA agreeing) held, dismissing the appeal:

As to issue (1):

The primary judge correctly considered that something had gone “awry” in the wording of item 22 insofar as it appears literally to provide for the rectification of repairs to the leaking roof. In that context, the primary judge clearly sought to give a common sense meaning to an infelicitous use of language and construed the make-good obligation as including a requirement that the leaking roof be rectified. This part of item 22 can best be understood as reading the verb “rectified” as meaning “effected”: [130]-[132] (Ward P); [168] (Gleeson JA); [169] (Simpson AJA).
The primary judge permissibly had regard to the common awareness of the parties prior to entry into the sub-lease as to particular matters, including that the roof was in poor condition, that water often leaked into the premises as a result, and that the Perry Report found there was hail damage to the roof and recommended that the entire roof be replaced. The primary judge properly drew the inference that the parties contemplated that an insurance claim would be based on the information in the Perry Report: [58]-[61]; [134]-[135] (Ward P); [168] (Gleeson JA); [169] (Simpson AJA).
The sub-lease imposed an obligation on the part of the sub-lessor to provide the premises “made good” and that overarching or general obligation encompasses or includes the obligation to rectify the leaking roof. The words “pursuant to an insurance claim to be made” supply a temporal element with respect to the obligation to effect the repairs. Nothing turns on the different construction placed on this clause by the primary judge because the expert evidence adduced by the respondent established that the make good obligation required replacement of all roof sheeting, flashings, skylights and gutters, which was ultimately the conclusion that the primary judge reached albeit by a slightly different path: [143]-[145] (Ward P); [168] (Gleeson JA); [169] (Simpson AJA).

As to issue (2):

The primary judge did not err (as the appellants contended) by failing to find that the appellants were prevented from performing their make-good obligations under item 22 of the sub-lease. Access was sought in October 2020 for the purpose of carrying out repairs to the roof of a limited kind. As the respondent contended at the time, and as the export report confirmed, the necessary repairs involved more than the works that the appellants intended to effect at the time: [165]-[166] (Ward P); [168] (Gleeson JA); [169] (Simpson AJA).

JUDGMENT

WARD P: This appeal involves a dispute between the appellants (Saipan Holdings Pty Ltd and City Gym (Aust) Pty Ltd), being the owner and sub-lessor, respectively, of premises in Crown Street Darlinghurst, and the respondent (City Gym Sydney Pty Ltd), being the sub-lessee of the said premises from which it operates a health and fitness gymnasium and café. In essence, the dispute is as to the proper construction of a term of the sub-lease imposing an obligation on the sub-lessor to make good the premises (item 22 of the sub-lease, which is extracted below) and as to alleged breaches by the sub-lessee in denying the sub-lessor access to the premises for the purpose of carrying out certain repair works to the roof.
The sub-lessee was successful at first instance (see City Gym Sydney Pty Ltd v Saipan Holdings Pty Ltd [2022] NSWSC 699) (the primary judgment) in obtaining declaratory and other relief, including a declaration to the effect that the sub-lessor’s make-good obligation in respect of the roof required that the entire roof (i.e., all roof sheets, flashings, skylights and gutters) be replaced. The appellants had contended that the obligation required only limited repair works (not replacement of the roof) and that the sub-lessee had unreasonably denied access to the premises for that purpose.

Background

The sub-lessor and sub-lessee entered into the sub-lease on about 3 October 2019 for a five-year term commencing on 1 September 2019 and terminating on 31 August 2024, with a five-year renewal option. The sub-lessee was at that time already in occupation of the premises under a Licence Agreement with the owner (the first appellant), that licence being for a one year term commencing on 15 August 2017 and terminating on 14 August 2018 but which had been varied by a Deed of Variation made on 6 July 2018. The Deed of Variation provided for the term to be extended to a date 15 months after completion of a contemplated change in the shareholding of the sub-lessee (see [5] of the primary judgment).
Before turning to the relevant provisions of the sub-lease, it is relevant to note the following as to the circumstances in which the parties entered into the sub-lease (those being set out more fully in the primary judgment from [5]ff).

Licence

As noted above, the sub-lessee was initially in occupation of the premises as licensee. The primary judge noted that, under the Deed of Variation which extended the term of the licence agreement, on expiration of the extended term the licensee was to make good the premises by removing certain items from the premises and allowing various items to remain ([5]).

Water ingress

On 4 October 2018, prior to the termination of the licence, a director of the licensee (Mr Mamasioulas) discovered water leaking out of the ceiling onto the floor of the gym and onto various pieces of gym equipment ([6]). (There was therefore a leaking roof prior to the hailstorm damage in December 2018.)
On 20 December 2018, the building was struck by a hailstorm that caused significant damage throughout Sydney and water was observed by another director of the licensee (Mr Kokkinis) coming through the roof of the gym ([7]).
On both 23 February 2019 and 13 March 2019, Mr Mamasioulas again attended the premises and found that there was water leaking from the ceiling of the building and damage to parts of a ceiling ([8]).

Discussions as to new lease

In June 2019, there were discussions between Mr Mamasioulas and directors of the owner of the building as to the terms of a new lease, in the context of which Mr Mamasioulas referred to a common understanding that there was a “lot of money to be spent on the building” to achieve the rental rate that the owner was seeking (see his email response to a 5 July 2019 rental offer). His Honour accepted that, in the course of a discussion on 26 June 2019, a director of the owner (Mr Anderson) said that the leaking roof was “only related to a bit of rusting gutter” and suggested that the repair cost be shared equally, in response to which Mr Mamasioulas said that he would have his “roofer” come and give a “break down of the gutter repairs” (see [9]-[11]).
The primary judge sets out communications that occurred in July 2019 as to the proposed terms of a lease of the premises ([12]-[17]), in the course of which on 24 July 2019 Mr Mamasioulas sent to Mr Long a term sheet dated 23 July 2019 which included:

15. Premises condition The Premises shall be provided made good by Lessor, including that repairs to the leaking roof be rectified prior to commencement, and Premises to be otherwise made water tight and compliant with all requirements of relevant authorities for the term of the lease.
Lessee to maintain premises following make good. Lessee to obtain AFFS and be responsible for the maintenance of the premises both inside and outside and including air-conditioning and fire certificate.

On 25 July 2019, Mr Long requested some amendments to the term sheet, including as to the item relating to Premises Condition, namely, “50% cost split between lessor and lessee for roof”.

The Perry Report

On about 20 August 2019, Mr Grant Perry of Perry’s Roofing Pty Ltd carried out an inspection of the roof (an inspection which his Honour said appeared to have been organised by Mr Mamasioulas – presumably, Mr Perry was the roofer to whom Mr Mamasioulas had earlier referred) ([20]). Mr Mamasioulas accompanied Mr Perry on the inspection and deposed that he noticed hail damage to the roof and to the air-conditioning units on the roof.
Mr Perry’s report (the Perry Report), which identified the client as Saipan Holdings Pty Ltd (i.e., the owner), a copy of which Mr Mamasioulas sent to Mr Long on 22 August 2019, included the following:

Report findings   Upon inspection of the roof, it was noted that hail damage was to be found on all roof sheeting, flashings, skylights and gutters
Recommendations   Replace entire roof
Conclusion   This is considered storm related and considered related to the December 2018 hailstorm as this was not hail damaged during a previous repair 6 months prior
General condition of entire roof area   Sustainable

(The appellants place weight on the finding by Mr Perry that the general condition of the entire roof area was “sustainable” but this must be read in light of the finding as to the extent of damage and the recommendation that the entire roof area be replaced.)

Proposal that there be sub-lease rather than direct lease arrangement

On about 27 August 2019, in a telephone conversation with Mr Mamasioulas, Mr Long requested that instead of a lease (between the owner and the then licensee) there be a sub-lease between the then licensee and sub-lessor (and that the latter would enter into a headlease with the owner) ([23]).
On 9 September 2019, by which time solicitors had been retained on both sides in relation to the proposed sub-lease, the sub-lessee’s solicitor (Alan Rigas) sent an email to the sub-lessor’s solicitor (Rob Pearson of Creagh & Creagh), which included the following in relation to item 22 (which from its terms was obviously the former item 15 in the sub-lessee’s term sheet):

5. In relation to Item 22 - this clause needs to be amended. We are instructed that the roof is to be repaired pursuant to an insurance claim to be made by the lessor.

Shortly thereafter, on 9 September 2019, Mr Long sent an email to Mr Mamasioulas which forwarded the above email and said:

And for the insurance claim for the roof, excess to be split 50/50 as discussed on phone. Also there should be a contingency in the event that the insurance claim somehow does not go through then we would still go as per the original agreement of splitting the repair cost 50/50.

On 17 September 2019, Creagh & Creagh forwarded to the sub-lessee’s solicitors an amended form of sub-lease and confirming that their client (Saipan Holdings Pty Ltd) consented to “this Sub Lease” from the sub-lessor to the sub-lessee “and shall acknowledge and be bound by the terms of the Sub Lease”. The draft sub-lease contained item 22 in the following terms (these being the same terms in which it later appeared in the executed sub-lease):

Item 22 Condition of Premises
The Premises shall be provided made good by the Lessor, including that repairs to the leaking roof be rectified by the Lessor pursuant to an insurance claim to be made by the Lessor prior to commencement, and the Premises to be otherwise made water-tight and compliant with all requirements of relevant authorities for the term of the Leas [sic]. The Lessee will pay 50% of the actual direct costs of rectification of the leaking roof upon provision of invoices from the Contractor. Contractor to be approved by the Lessee prior to engagement by the Lessor, including terms of Contract.
The Lessee is to maintain the premises following making good. Lessee to obtain AFFS and be responsible for the maintenance of the premises both inside and outside and including air conditioning and fire certificate.

The appellants note that the only change in the final item 22 in the ultimately executed sub-lease compared to the version submitted by the sub-lessee as item 15 on 24 July 2019 is that identified in italics below (and the appellants thus submit that the genesis of the obligation “that repairs to the leaking roof be rectified” was thus the sub-lessee’s term sheet dated 23 July 2019 and not the Perry Report):

Item 22 Condition of Premises
The Premises shall be provided made good by the Lessor, including that repairs to the leaking roof be rectified by the Lessor pursuant to an insurance claim to be made by the Lessor prior to commencement, and the Premises to be otherwise made water-tight and compliant with all requirements of relevant authorities for the term of the Leas [sic]. The Lessee will pay 50% of the actual direct costs of rectification of the leaking roof upon provision of invoices from the Contractor. Contractor to be approved by the Lessee prior to engagement by the Lessor, including terms of Contract. [emphasis added]

Sub-Lease

The sub-lease was signed on or about 3 October 2019 and comprised a lease form with three annexures: Annexure A being a Schedule of Items (items 10-20 of which were details of matters referred to in Annexure B as per cl 1.3 of Annexure B); and items 21-34 of which were independent of Annexure B. Item 22 was as extracted above. Annexure C was an excel spreadsheet dealing with the make good obligations of the sub-lessee on termination or expiry of the sub-lease (and is not relevant for present purposes).
Clauses 7.1 and 7.2 of Annexure B, headed “Condition and Repairs” dealt with the condition of the premises and repairs (see [33]). Clause 9 of Annexure B, headed “Access” dealt with the sub-lessor’s right of access at any reasonable time for the purpose of doing the things there itemised (which included, at [9.1.2], “doing anything that the lessor can or must do under this lease or by law”) and provided for the giving of at least two business days written notice for access except in an emergency (see [32]).

Item 23 of Annexure A provided for access to the premises to commence repair and renovation works (see [31]) in the following terms:

Item 23   Access to Premises
Access to the premises to commence repair and renovation works and provision of the following from the Lessee:
1.   Lessor approved and correctly executed lease by the Lessee;
2.   1 Month Bank Guarantee or Bond
3.   Required insurance Certificate of Currency in relation to requirement for $20 million public liability insurances.

Insurance claim

No insurance claim was lodged in relation to the roof prior to commencement of the sub-lease. However, it is apparent from the communications referred to above and the amendment to item 22 that the parties contemplated that an insurance claim would be lodged.
A claim dated 20 November 2019 was prepared by Mr Long on behalf of the owner. The claim form described the incident as being “[h]ail storm caused damage to roof sheeting, flashings, skylights and gutters”; stated that the damage had been discovered by Mr Perry on 20 August 2019; and attached a copy of the Perry Report, which, as already noted, recommended the replacement of the entire roof. Mr Long did not answer the question on the form directed to whether the property was repairable (question 7, which contemplated either the attachment of a quote for repairs, if it was repairable, or other documents, including a quote for replacement, if it was unrepairable).
The insurance claim was lodged by the insured’s “claims executive” (or broker) by email on 25 November 2019.
It appears that the insurer resolved to accept the claim other than as to the actual replacement of the air-conditioning units and the insured’s claims executive was advised of this on 19 March 2020 (see [50]). The claim was ultimately settled (partially) for the sum of $263,000 (see [61]), there being a component for air-conditioning unresolved until early March 2021 when the owner agreed to accept payment of a further sum of $135,000 ([63]).

Quotes for repair/replacement of roof

On 26 August 2020, a quote was provided to Mr Long by a company associated with the Mamasioulas family (Riverwall Constructions Pty Ltd) for roof replacement and associated works in a sum of $283,718 inclusive of GST ([64]). It appears that what followed thereafter was that the sub-lessor proposed a “temporary fix” or “patch”, on the basis that there was not sufficient funding for a full replacement of the roof ([66]-[67]), although the partial settlement sum would largely have covered this quote.
On 31 August 2020, another company, Timbertek, provided a quote for “roof repairs” (which the respondent notes included components of removal and replacement of items) for the total sum of around $22,000 inclusive of GST.

Requests for access to roof

On 14 October 2020, Mr Long advised Mr Mamasioulas that Timbertek had been engaged to carry out roof repair works to rectify leaks into the building; that the planned works included replacement of damaged roof panels, removal and replacement of roof ventilators, flashings around skylights, and roof plumbing; that the works should take approximately two weeks and would commence on 19 October 2020; and that access would be required to relevant areas ([69]). Mr Long stated in that email that he had advised the builder to minimise disturbance to the gym.
On the same day, Mr Mamasioulas responded by saying that “[a]t this point we have not agreed to this. You guys are obviously not taking the matter seriously. Please do not have anybody attend to the premises until we have finalised all matters” and that that they would discuss the matter further the following week ([70]). His Honour observed that Mr Mamasioulas gave evidence in cross-examination that he refused access to Timbertek because the proposed works were not in accordance with the provisions of the sub-lease ([70]). (The appellants maintain that, irrespective of whether Mr Mamasioulas’ contention was correct, the refusal of access was a breach of cl 9 of the sub-lease – see below.)
A further request for access to the premises appears to have been made on or around 15 December 2020 because on 16 December 2020 (apparently in response to an email dated 15 December 2020 from the sub-lessee’s solicitors, by now Gilbert + Tobin) the sub-lessor’s solicitors advised that the works proposed for the following week were for “the purpose [of] making the roof watertight”. The sub-lessor’s solicitors there set out the scope of works (which seemed largely to follow that contemplated by the earlier Timbertek quotation) and confirmed that access was required to the roof, mens’ change room and aerobics floor. The letter also advised that the sub-lessor was still waiting for its broker to conclude the air conditioner settlement with the insurer, after which it planned to move forward with the “air conditioner repairs/replacement”.
The sub-lessee’s solicitor responded to this letter by email on 17 December 2020, seeking certain information in respect of the proposed work. (The appellants say that none of the information requested was a precondition for access under cl 9 of Annexure B and that the sub-lessee was not entitled to refuse access to the premises.). Access was not granted.
By email sent on 8 April 2021, the solicitor acting for both the sub-lessor and the owner advised the sub-lessee’s solicitor that his clients remained “ready to complete the roof repairs” so long as reasonable and certain access for the tradesmen was provided by the sub-lessee.
The response to this, by letter dated 13 April 2021 from Gilbert + Tobin to Creagh & Creagh, the sub-lessee’s solicitor advised among other things that:

1.2 Our client is ready, willing and able to provide access to [the Property] in a manner that is appropriate and accords with the Sublease for proper and adequate rectification works to be undertaken. Our client considers that full replacement of the roof of the Property is necessary to properly repair [sic] the water ingress. It has also obtained advice from consultants to that effect.

The letter also stated that, under item 22 of the sub-lease, any contractor engaged to rectify the leaking roof and the relevant terms of contract were to be approved by the sub-lessee prior to the contractor’s engagement. (This would seem to have contemplated that the 50/50 cost allocation was applicable.) The letter went on to seek information in relation to the access that had previously been requested in the 16 December 2020 correspondence. This letter also intimated that court proceedings might ensue.

Commencement of proceedings

A statement of claim was filed by the sub-lessee on 24 March 2021 seeking declaratory and other relief, among other things in relation to alleged breaches of the sub-lease relating to an alleged breach of item 22 of the sub-lease.

Further access issues and termination notice

There was further correspondence on the issue of access from May through to July 2021, this being impacted by public health orders during the COVID-19 pandemic. It seems that on 19 July 2021, the sub-lessor issued a termination notice in respect of the sub-lease (see the response dated 3 August 2021 from Gilbert + Tobin, demanding immediate withdrawal of the notice). Presumably that notice was withdrawn, as further correspondence in relation to a request for access to inspect and/or carry out repairs ensued in the period from 8 September 2021.
On 14 March 2022, Creagh & Creagh advised that their client had decided to accept a quotation dated 11 February 2022 from Timbertek, in the sum of $103,563.90, which set out the works to be done on the roof. Further disputes as to access then arose, culminating in the sub-lessor advising that it would await the outcome of the court proceedings and the sub-lessee confirming its willingness to permit access in accordance with the provisions of the sub-lease.

Hearing

The proceedings were heard by the primary judge on 16-19 May 2022 and, by leave, a further amended statement of claim was filed on 20 May 2022. The primary judge delivered judgment on 30 May 2022, his Honour noting (at [71]) that the impasse between the parties concerning the extent of the works required to repair the roof had never been resolved (the sub-lessee maintaining that an entire replacement of the roof was required; the sub-lessor maintaining that it was sufficient if works of a lesser magnitude be carried out provided that they made the roof watertight). As noted above, his Honour concluded that on the proper construction of item 22, the sub-lessor’s make good obligation in respect of the roof required the replacement of the entire roof ([104]), and that declarations and orders should be made compelling the replacement of the roof. His Honour did not consider that any clear breaches by the sub-lessee of the access provisions of the sub-lease had been established ([106]). His Honour deferred claims for damages to a later hearing.

Primary judgment

The primary judge addressed the meaning and effect of item 22 of the sub-lease from [73]-[87], setting out the applicable principles for construction of a written commercial agreement (as to which there is no dispute) before examining the language of item 22 and the circumstances in which the sub-lease was entered into, and concluding at [85]-[86] that:

85. The central matter of controversy in this case concerns the extent of the Lessor’s make good obligation in respect of the roof. The language of Item 22, read in the context of the sublease as a whole, and having regard to the surrounding circumstances known to both parties, obliged the Lessor, within a reasonable time after commencement of occupation under the sublease, to rectify the leaking roof in accordance with or in conformity with an insurance claim to be made by the Lessor for the replacement of the entire roof. In my view, the nature of the contemplated insurance claim, being for a replacement of the entire roof, serves to give content to the ambit of the rectification obligation.
86. It is true, as submitted by the defendants, that Item 22 does not include any express reference to replacement of the roof as opposed to repair, and it would have been a simple matter to do so. Nevertheless, the relevant expression focusses upon rectification pursuant to a contemplated insurance claim. In my opinion, reasonable businesspersons in the position of the parties to the sublease would have understood the expression to mean rectification in accordance with or in conformity with a claim for the replacement of the entire storm damaged roof. The obligation is thus one to effect a replacement of the entire roof. That is the obligation regardless of the fate of the insurance claim itself. If the claim were to fail, or generate proceeds that were not sufficient to cover the cost of the work, the direct cost actually borne by the Lessor is to be borne equally by the Lessee.

At [87] his Honour expressly disavowed any hindsight reasoning:

87. In reaching this conclusion concerning the construction of Item 22, I have not taken into account that, after the sublease was entered into, the insurance claim in fact made by the first defendant was essentially for a replacement of the entire storm-damaged roof (viz, roof sheeting, flashings, skylights and gutters), and that the claim was treated that way by the insurer (see Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [35]).

As to the reasoning that led to that conclusion, his Honour noted (at [77]) that item 22 broadly fell into two parts: the first, imposing a make good obligation on the sub-lessor; the second (being the final two sentences), imposing maintenance obligations on the sub-lessee.
His Honour considered that the opening words (that the premises “shall be provided made good by the Lessor”) suggested that the obligation was to be satisfied by or at least within a reasonable time after the commencement of occupation of the premises pursuant to the sub-lease (and referred to item 23 as support for this) ([78]).
As to the following words (commencing with the word “including”), the primary judge said that these indicated that the make good obligation included the undertaking of certain works to the roof; and that it was apparent that something had gone awry with the language insofar as reference was made to repairs to the roof being rectified rather than the roof itself being rectified ([79]). His Honour considered that the words “repairs to” might be read down “even if they cannot be disregarded as erroneous inclusions that would, if read literally, give rise to absurdity” (referring to Fitzgerald v Masters (1956) 95 CLR 420; [1956] HCA 53 (Fitzgerald v Masters) at 426-427; 437). The primary judge went on to say that:

79. … There is no suggestion in the evidence that the parties were concerned with deficiencies in particular repairs to the roof as opposed to deficiencies in the roof as a whole. If the words “repairs to” are read down so as not to be regarded as that which is to be rectified, the language makes sense by providing that the make good obligation includes a requirement that the leaking roof be rectified by the Lessor. Reading the provision as a whole, that seems more likely to be what was intended. The language is clear, however, in stipulating that the leaking roof be rectified “pursuant to an insurance claim to be made by the Lessor prior to commencement”. That is to say, rectified in accordance with or in conformity with the contemplated insurance claim. I do not accept the defendants’ submission that “pursuant to” should be read as “subject to”.

At [80], the primary judge said that the circumstances in which the sub-lease was entered suggested that the parties contemplated that an insurance claim would be made for the replacement of the entire roof, as recommended by the Perry Report, noting that all parties were aware that the roof was in poor condition and that water often leaked into the premises as a result and that, by about 22 August 2019 the parties were aware of the Perry Report. By reference to that report, his Honour concluded that the parties were aware of the finding that hail damage related to the December 2018 storm was found on all roof sheeting, flashings, skylights and gutters; and that the recommendation was that the entire roof be replaced.
His Honour went on to say (at [80]):

80. … Mr Long gave evidence to the effect that the extent of the effects of the December 2018 “hail event” was not recognised until that inspection of the building had occurred. It seems clear that, by 9 September 2019, the parties had discussed the making of an insurance claim, and agreed that a claim would indeed be made by the Lessor. I think it can be inferred that the parties contemplated that the claim would be based upon the information contained in the Perry’s Roofing Pty Ltd report in respect of storm damage to the roof. No other basis for a claim is apparent, and I note again that the report itself, which had been the subject of discussion between Mr Mamasioulas and Mr Long, is stated to have been prepared for the first defendant, at the request of Mr Long.

The primary judge said that the concluding words of the first sentence of item 22 indicated that, apart from the rectification of the leaking roof pursuant to the insurance claim, the premises were otherwise to be made water-tight and compliant with requirements of relevant authorities ([81]).
As to the second and third sentences of item 22, his Honour noted that ([82]-[84].

82.   The second sentence of Item 22 provides for the Lessee to bear half of the “actual direct costs of rectification of the leaking roof”. Read in the context of an obligation to rectify pursuant to an insurance claim, the expression “actual direct costs” seems to me to refer to any direct costs of rectification incurred by the Lessor that are, for whatever reason, not covered by any proceeds of the insurance claim and hence actually borne by the Lessor.
83.   The third sentence of Item 22 provides that any contractor proposed to be engaged by the Lessor to carry out rectification of the leaking roof, and the terms of the proposed contract, are to be approved by the Lessee prior to the engagement.
84.   The opening words of the second part of Item 22 seem to me to provide that the maintenance obligations imposed upon the Lessee by Item 22 only arise once the Lessor has discharged its make good obligations under Item 22.

Turning then to consider whether there had been a breach of item 22, his Honour concluded at [93]-[94] that:

93. The second defendant, as the Lessor under the sublease, thereby breached Item 22. The first defendant admits that it entered into a collateral contract with the plaintiff, but denies that it was a term of the collateral contract that it would be bound by the terms of the sublease as if it were the lessee. The denial may be the product of the plainly erroneous reference to “lessee”. In any case, it is clear that the first defendant requested that the plaintiff enter into the sublease with the second defendant, and in those circumstances agreed with the plaintiff that it would be bound by the terms of the sublease. That should be understood as an agreement on the part of the first defendant to be bound as if it were the Lessor. I therefore conclude that the Lessor’s breach of Item 22 also constitutes a breach by the first defendant of its collateral contract with the plaintiff. In summary, both defendants have obligations to the plaintiff in the terms of Item 22, and both defendants have breached those obligations.
94. The defendants have never accepted the proposition, maintained by the plaintiff, that the make good obligation in respect of the roof requires an entire replacement of the roof. Moreover, the defendants have never sought access to the premises for the explicit purpose of obtaining a quotation or scope of works for the replacement of the roof. Neither have the defendants proposed a contractor for the carrying out of such works, or sought the plaintiff’s approval for such a contractor (and the terms of the contract). In these circumstances, I do not think it can be concluded that any failure on the part of the plaintiff to allow access to the premises or give any relevant approval is a breach of the contract or otherwise conduct that has prevented the defendants from performing their make good obligations in respect of the roof.

As to the other breaches of the sub-lease for which the sub-lessee had contended, suffice it simply to note that his Honour did not consider that a maintenance obligation in relation to the air-conditioning fell upon the sub-lessor under item 22 ([96]).
His Honour then addressed the relief to be granted (from [98]).

Grounds of Appeal

The appellants have raised various grounds of appeal, as set out below. However, in essence, they challenge the primary judge’s finding that the sub-lessor was obliged pursuant to item 22 to replace the entire roof (as opposed to there being an obligation to rectify the leaking roof so as to make it watertight) (grounds 1-5; and the challenge to his Honour’s factual findings raised by ground 8) and his Honour’s finding that the sub-lessor was not prevented from performing its make good obligations by reason of the sub-lessee’s refusal to grant access to the property (i.e., the conclusion that the sub-lessor did not unreasonably deny the sub-lessor access to the premises in breach of the lease) (ground 6). As to the latter, it was accepted by the appellants in oral submissions on the appeal that if the construction of item 22 for which they contend is held not to be correct then their complaint as to the finding as to access to the premises cannot be maintained (see AT 18.28).
The grounds of appeal as pressed at the hearing are as follows:

1 His Honour erred in finding (Judgment [85], [109]) that upon the true construction of item 22 of the sublease (sublease) entered into between the second appellant and respondent in respect of the [Property] the Lessor’s make good obligations required the replacement of the entire roof.

2   His Honour erred in holding (Judgment [79]) that the words “repairs to” in item 22 of the sublease may be read down, and in erroneously disregarding those words in construing item 22.
3   His Honour erred in construing item 22 of the sublease by reference to the parties’ expectations or contemplations prior to the entry into the sublease (Judgment [80]).
4   His Honour erred in holding (Judgment [79]) that the words “pursuant to an insurance claim to be made by the Lessor prior to the commencement” in item 22 meant “in accordance with or in conformity with” a contemplated insurance claim.
5   His Honour erred in holding that item 22 required the roof to be rectified “in accordance with or in conformity with a claim for the replacement of the entire storm damaged roof” (Judgment [85]) when item 22 imposed no requirement on the Lessor to make an insurance claim for the replacement of the entire storm damaged roof prior to commencement and no such claim was made prior to commencement.
6   His Honour erred in failing to find (Judgment [94]) that the appellants were prevented from performing their make good obligations under item 22 of the sublease by reason of the respondent’s refusal to grant access to the property.
7.   [not pressed]
Material Facts that should not have been found by the Court Below:
8   That the parties contemplated that the insurance claim would be based upon the information contained in the Perry’s Roofing Report and/or would be made for the replacement of the entire roof (Judgment [80]).
9.   [not pressed]

Proper construction of item 22 (grounds 1-5; 8)

It is convenient to consider together the challenges made to the conclusion reached by his Honour as to the proper construction of item 22 and, first, the complaint (raised by ground 8) that his Honour should not have found that the parties contemplated that the insurance claim would be based on the information contained in the Perry Report and/or would be made for the replacement of the entire roof.

Ground 8

The appellants contend that the primary judge erred in this factual finding because the insurance claim had not been made, and was not in existence, at the time the sub-lease was entered into by the parties; and, further, that the insurance claim did not contain a claim for the replacement of the entire roof but only identified the damage to be assessed. The appellants say that the Perry Report was only submitted in support of the claim.
The respondent maintains that the finding challenged in ground 8 was open on the evidence and properly made. The respondent says (and I agree) that the fact that the parties intended that an insurance claim would be made in respect of the damage to the roof is plain from the words of the first sentence of item 22 (see as extracted above). The respondent contends that the inference drawn by his Honour (i.e., that the insurance claim would be based on the information contained in the Perry Report in respect of the storm damage to the roof) is supported by the matters to which his Honour referred – the fact that by 22 August 2019 the parties were aware from that report as to the extent of the hail damage found on the roof (i.e., that the hail damage was found on all roof sheeting, flashings, skylights and gutters) and the evidence by Mr Long that the extent of the hail event was not recognised until the inspection of the building by Mr Perry had occurred.
The respondent says that the fact that the hail damage was to all of the roof and was attributable to an insured event (the hailstorm) became known to both parties based on the same inspection and report immediately prior to the formation of the sub-lease. In that sense, it is contended that the Perry Report was the genesis of the insurance provision (a proposition with which the appellants cavil). The respondent argues that in those circumstances, a reasonable business person in the position of the parties would conclude that the words “an insurance claim”, in item 22, meant a claim in respect of hail damage occasioned by the December 2018 storm, as per the Perry Report. The respondent says that a claim for anything less would be commercially irrational.
As to this ground 8, there is no quarrel by the appellants (nor could there be) as to the findings that the parties were aware, prior to entry into the sub-lease, of the poor condition of the roof and, in particular, that the roof was leaking; nor as to the finding that the parties had discussed the making of an insurance claim and agreed that it would be made by the “Lessor” (as evidenced by the first sentence of item 22). They were also clearly aware of the Perry Report, which had noted the hail damage to all roof sheeting, flashing, skylights and gutters and recommended the replacement of the entire roof (albeit that the parties must also be taken to have been aware that Mr Perry had opined that the general condition of the entire roof area was “sustainable”, whatever that may, in the context of the Perry Report, have meant). Thus, it may be inferred that the parties were at the very least aware of the potential that rectification of the leaking roof might involve or require the replacement of the entire roof (as Mr Perry had recommended be the case).
There can also be no doubt that the circumstances surrounding entry into the sub-lease included that it was contemplated by the parties that rectification of the leaking roof would be funded through the proceeds of the anticipated insurance claim (with the contingency that if the insurance claim did not meet those costs then there would be a 50/50 allocation of any shortfall).
In those circumstances, while there may be some force to the complaint by the appellants as to the respondent’s submission that the Perry Report was the “genesis” of the insurance provision in item 22, nothing turns on this. The existence of the Perry Report and the parties’ awareness of its findings and recommendation were relevant surrounding circumstances that could properly be taken into account by the primary judge in the construction of item 22.
Nor, in my opinion, does anything turn on the complaint as to the inference drawn by his Honour that the parties contemplated that the contemplated insurance claim “would be based upon the information contained in [the Perry Report]”, since I consider that such a finding is not dispositive as to the proper construction of item 22 (see below). Were it necessary to determine I would have concluded that the inference was properly drawn from the facts to which his Honour referred.
Thus, ground 8 is not made good.

Grounds 1-5

Turning then to the challenges made to the construction of item 22, ground 1 challenges the ultimate finding (that item 22 required the sub-lessor to replace the entire roof); grounds 2-5 challenge particular aspects of his Honour’s reasoning leading to that conclusion.

Appellants’ submissions

Relevantly, the appellants submit that the ordinary meaning of the words “repairs to the leaking roof be rectified by the Lessor pursuant to an insurance claim to be made by the Lessor prior to commencement” (as a reasonable person in the position of the parties would understand them) is that the leaking roof of the property was to be repaired by the sub-lessor using the proceeds of an insurance claim to be made by the sub-lessor; and that the provision that “[t]he Lessee will pay 50% of the actual direct costs of rectification of the leaking roof” means that 50% of (any) costs of repair which were not covered by the insurance proceeds were to be paid by the sub-lessee.
The appellants emphasise the absence of any reference in item 22 to ‘replacement’ as opposed to ‘repair’ of the roof; and submit that the contention that the sub-lessor was to be obliged to “replace” the roof with a new roof (as opposed to repairing the roof) would conflict with the word “repairs” that was chosen by the parties. They contend that no constructional choice appears from the words of the contract, between, on the one hand, an obligation to repair and, on the other hand, an obligation to replace the entire roof.
The appellants call in aid in this regard the way in which the case was pleaded, arguing that the ordinary meaning of the words in item 22 is reflected in the way in which the relevant obligation and breach are pleaded by the sub-lessee at [9]-[10] and [14] of the further amended statement of claim (highlighting the references to “repairs” in those paragraphs), namely:

9.   It is a term of the Sublease that the Property shall be provided made good by the second defendant, including that repairs to the leaking roof be rectified by the second defendant pursuant to an insurance claim to be made by the second defendant prior to commencement, and that the Property to be otherwise made water-tight and compliant with all requirements of the relevant authorities for the term of the Sublease, within a reasonable time.
…
10.   It is a term of the Sublease that, until the Property is made good by the second defendant, including by completing the repairs to the leaking roof to be rectified by the second defendant, the second defendant must maintain the air conditioning in a state of good condition and serviceable repair.
…
14   In breach of the term pleaded at paragraph 9 above, the second defendant has not made good the Property, has not carried out repairs to the leaking roof, has not rectified the leaking roof and has not otherwise made the Property water-tight and compliant with all requirements of the relevant authorities for the term of the Sublease, within a reasonable time or at all, in accordance with its obligations under that term.
Particulars
(1)   The second defendant has not been made good the Property [sic] in that the roof of the Building has continually leaked from before 1 September 2019 and still leaks as at the date of this pleading.
(2)   The second defendant has not carried out any repairs to the leaking roof.
(3)   The second defendant has not rectified the leaking roof.
(4)   The second defendant has not otherwise made the Property water-tight.
(5)   Further particulars will be provided following completion of pre-trial procedures.

[emphasis added]

The appellants emphasise that there was no pleading that the sub-lease imposed an obligation on the sub-lessor to replace the entire roof; only an allegation as to an obligation to repair and rectify the leaking roof and a failure to carry out any repairs or rectify the leaking roof.
In oral submissions, the appellants complain that they did not come to Court to meet an argument that the repair obligation was one that required replacement of the roof - an argument that in my opinion is difficult to maintain in circumstances where the sub-lessee alleged that there was an obligation to make good the property “including by” completing the repairs to the leaking roof; alleged that there was a breach of that obligation with the particulars set out at [14] of the pleading; and served an expert report (the report dated 30 September 2021 of Deniz Bekir) in which the expert concluded that in order to make the roof of the building watertight the building’s entire metal roofing, flashing, whirl birds and roof drainage required full replacement (see at [7.8.2]). It was open to the appellants to adduce evidence in response to this expert report if, as is apparently contended, the repairs required to make good the premises, including the repairs to the leaking roof in order to make the premises watertight, would be less than the replacement of the entire roof. (In that regard, the respondent emphasised in its oral submissions that the terms “repair” and “replace” are not mutually exclusive.)
Insofar as the primary judge held that the phrase “pursuant to an insurance claim” meant “in accordance with or in conformity with” the contemplated insurance claim (see at [79]), the appellants submit that a reasonable person in the position of the parties would not have understood the phrase in this way. They argue that the words “pursuant to” are more appropriately understood as “in consequence of” than “in accordance with or in conformity with”. It is submitted that what would have been important to the parties (particularly the sub-lessee, who was liable to pay 50% of the “actual direct costs of rectification”) was that the proceeds of the insurance claim would be available to pay for the rectification of the roof, to the extent possible. In these circumstances, the appellants say that a reasonable person in the position of the parties would have understood that item 22 required a claim be made by the sub-lessor and for the repairs to be carried out consequent upon that claim, in the sense that the proceeds derived from the claim would be used to pay for the repairs.
The appellants contend that it is implicit in his Honour’s reasoning that the parties intended to use the phrase “in accordance with or in conformity with an insurance claim” as a mechanism for specifying the manner in which the roof was to be made good (namely, by replacement of the entire roof) and that this was inherently extremely unlikely (since it would be a convoluted way of expressing an obligation which involved several intermediate steps as to the making of the claim). The appellants say that an obligation to replace the entire roof is a significant obligation and one which a reasonable person in the position of the parties would have expected to have been expressed clearly had it been intended. They argue that had that been the intention the clause could easily have been drafted expressly to make provision for the replacement of the entire roof.
Further, the appellants argue that the following propositions are highly unlikely (or even less likely than highly unlikely). First, that the parties would use a “cryptic and convoluted” reference to an insurance claim, as the means to express an obligation to replace the entire roof (and that an “insurance claim” is not a document which a reasonable person would ordinarily expect to specify the process for rectifying damage), noting that there was no evidence that the parties were aware of the precise terms of the policy or the nature of the cover, though they accept that it can be assumed that the parties were aware that there was an insurance policy which potentially covered damage to the roof. Second, that the parties would adopt the reference to an insurance claim as a means of imposing a contractual requirement to replace the entire roof by referring to an insurance claim “to be made by the Lessor” (i.e., accepting that the details to be included in the claim were to be in the control of the sub-lessor), noting that the parties imposed no requirement that the sub-lessor make a claim of a particular type or in accordance with any previous agreement with the parties and there was no requirement that the sub-lessor make a claim which specified that the entire roof was to be replaced. Third, that the parties would adopt the reference to an insurance claim as a means of imposing a contractual requirement to replace the entire roof on the basis of a report (the Perry Report) which had only a brief reference to replacement in its recommendation. They say that if parties had intended to provide for replacement in accordance with that report, they could easily have stated this.
The appellants also say that to construe the words “pursuant to an insurance claim” as “in accordance with or in conformity with a contemplated claim” (and as thus requiring a replacement of the entire roof) is inconsistent with the express words in item 22 (namely, the words “including that repairs to the leaking roof be rectified”. The appellants say that the construction for which they contend provides for consistency between those words and the phrase “repairs to the leaking roof be rectified”.
Further, the appellants argue that the construction adopted by his Honour does not make commercial sense, noting that the sub-lease had a term of five years (albeit with an option for a further five years) and contained a demolition clause exercisable after seven years (Item 33). The appellants say that a reasonable person in the position of the parties would have considered that the cost of replacement could well be significant and exceed the cost of repair (noting that a cost of $35,000 for roof repairs had been referred to in the sub-lessee’s February 2019 term sheet). The appellants say that it would not make commercial sense for the parties to require replacement rather than repairs, in the case of a relatively short lease containing a demolition clause; particularly for the sub-lessee in circumstances where, if the insurance claim were to be rejected, the sub-lessee would be obliged to pay 50% of the costs of complete replacement when the costs of repair could well be expected to be less.
The appellants also complain that his Honour erred in interpreting “pursuant to an insurance claim to be made by the Lessor prior to commencement” as an obligation to make a claim of a particular type, requiring replacement of the entire roof, based upon what his Honour held to be the contemplations of the parties (see ground 3 below).
Addressing the particular complaints in grounds 2-5, the appellants made the following submissions.
As to ground 2, the appellants submit (as adverted to above) that the primary judge erred in disregarding the word “repairs to” in item 22 and treating item 22 as requiring that “the leaking roof be rectified” ([79]). It is contended that his Honour impermissibly purported to correct the language used by the parties (contrary to the principles articulated in Fitzgerald v Masters per Dixon CJ and Fullagar J). They say that there was no scope for reading down or disregarding the phrase “repairs to” (submitting that to do so it must be clearly necessary in order to avoid absurdity or inconsistency or at the very least a “clear mistake” must be evident and (citing HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634; [2020] NSWCA 296 (HDI Global Specialty) at [52] per Bathurst CJ and Bell P, as his Honour then was, in this regard).
The appellants contend that the phrase was “clear enough” and that there was no absurdity or clear mistake; that the phrase meant that the repairs (in the sense of the matters needing repair) be carried out and that there was no reason to read the word “repairs” as an erroneous reference to repairs which had been carried out in the past but which were themselves defective. They submit that their construction is the way a reasonable person in the position of the parties would have understood the phrase (and, as noted above, they say that the sub-lessee accepted this meaning in its pleading).
Further, and in the alternative, the appellants submit that the primary judge erred in reading down (and then disregarding) the words “repair to” as the first step in construing item 22 (i.e., in considering whether it imposed an obligation to repair the roof or to replace the entire roof). The appellants say that the identification of an absurdity or inconsistency presupposes that the intended meaning of the words has been objectively ascertained in accordance with correct principles of construction; and that the principle in Fitzgerald v Masters operates only when the construction of a written agreement in accordance with those principles reveals that the literal meaning of words is different from the meaning it was intended to bear (citing HDI Global Specialty at [48]-[49]).
The appellants argue that the phrase “repairs to the leaking roof be rectified”, construed as they contend it should be, is consistent with the parties’ intentions that the sub-lessor be obliged to carry out repairs to the leaking roof (and again they say that there was no scope for his Honour to disregard or read down the phrase “repairs to” in item 22).
Addressing ground 3, the appellants contend that his Honour erred in construing item 22 of the sub-lease by reference to the parties’ expectations or contemplations prior to the entry into the sub-lease (submitting that at [86], his Honour at least implicitly found that item 22 imposed an obligation to replace the entire roof on the basis that the parties contemplated that the claim would be based upon the information in the Perry Report). The appellants say that such contemplation was not an objective fact and that it was not a matter which was admissible on the question of the meaning of the obligation to make an insurance claim. They argue that it was of the same character as the matters which the parties “had in mind” in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; [1979] HCA 51 at 606 per Mason J, as his Honour then was; (referring also to Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 at 351), which were held not to be evidence of surrounding circumstances to which recourse could be had in interpreting the contract.

As to ground 4, the appellants’ submissions on this ground were dealt with under the overall submissions on ground 1.
Addressing ground 5, the appellants contend that his Honour erred in finding (either expressly or implicitly) that item 22 required rectification in accordance with a “contemplated” insurance claim (and that this meant an insurance claim providing for the replacement of the entire roof because the parties “contemplated” that the claim would be based upon the information contained in the Perry Report). They say that his Honour erred in this finding because item 22 imposed no requirement on the sub-lessor to make an insurance claim for the replacement of the entire storm damaged roof prior to commencement; rather, that the contractual obligation in item 22 provided for no more than “repairs to the leaking roof be rectified by the Lessor pursuant to an insurance claim to be made by the Lessor prior to commencement”.
The appellants contend that the obligation to make an insurance claim was clear from the language actually used and the objective facts known to both parties; that it involved an obligation on the part of the sub-lessor to lodge “claim under the Lessor’s Insurance Policy in respect of the damage causing the leaking roof”. The appellants say that the nature and extent of the damage to the roof relevant to the claim to be made was clear from objective facts known to both parties and that nothing more was required to understand the extent or content of the obligation. The complaint is that the obligation was not to make a claim pursuant to a “contemplated” insurance claim.
Further, and in any event, the appellants say that his Honour erred in inferring that the parties contemplated that the claim would be based upon the information contained in the Perry Report (this being the gravamen of the complaint raised by ground 8 which is dealt with above). The appellants say that there was no evidence to support this conclusion and that the evidence suggested the contrary (referring to Mr Mamasioulas’ evidence as to his discussion with Mr Long prior to 9 September 2019 as to the making of a claim for the roof “to be repaired”; and the email on 9 September 2019 from the sub-lessee’s solicitors, sent after the Perry Report, as to the amendment to item 22, referring to the fact that the roof “is to be repaired”.
The appellants say that the contemplation of the parties (even if admissible and relevant) was not that the insurance claim would be based upon the information contained in the Perry Report, requiring replacement of the entire roof; rather, the parties’ contemplation was for the roof to be repaired. (This submission, of course, assumes that the terms repair and replace are mutually exclusive; and does not accept of the possibility that repair might involve or necessitate the replacement of the roof.)
Thus, the appellants contend that his Honour erred in finding, first, that the contractual obligation extended to an obligation to rectify in accordance with a contemplated insurance claim (ground 3), and, second, that the parties contemplated that a claim would be made based upon the information in the Perry Report (ground 5 and ground 8).

Respondent’s submissions

The respondent emphasises that item 22 is a make good provision. The respondent argues that it would not likely be understood by a reasonable business person in the position of the parties as an obligation that would be satisfied by a “temporary fix” or a patch-up job (here adopting the language used in the evidence as to the conversation between Mr Mamasioulas and Mr Long).
I interpose to note that in their reply submissions the appellants, identifying this as raising submissions as a false issue (namely, that the dispute concerns whether item 22 of the sub-lease required replacement of the entire roof or “a ‘temporary fix’ or a patch-up job” or “half measures”), whereas they emphasise that the actual dispute is whether, upon the true construction of the sub-lease, the meaning of the obligation in item 22 that “repairs to the leaking roof be rectified pursuant to an insurance claim to be made by the Lessor” was, as his Honour held, to effect a replacement of the entire roof or, as they contend, to repair the roof.
Insofar as the respondent asserts that the relevant obligation was not the obligation to effect “repairs to the leaking roof’ (in the phrase following the word “including” in item 22) but rather the obligation to provide the premises “made good”, the appellants complain that this is an attempt to run a new case on appeal, which was neither particularised or argued below, and which they say is not supported by the primary judge’s findings. (I deal with this complaint in due course.)
The respondent points to the following matters in relation to the construction of item 22. First, that the obligation here is borne by the sub-lessor, not the sub-lessee, and was required to be satisfied at the commencement of the sub-lease, not at the end of the term. Noting that it is common ground that the parties knew that the premises had a leaking roof before the sub-lease commenced, the respondent says that the obvious purpose of the provision that the premises be “provided made good” by the sub-lessor was to ensure that the premises were fit for the permitted use by the sub-lessee at the commencement of the term. It is said that in that context it is improbable that a reasonable businessperson would consider that the sub-lessor’s obligation to provide the premises “made good” would be satisfied by a temporary fix or a roof patch.
In response, the appellants say that the fact that the obligation under item 22 was required to be satisfied at the commencement of the sub-lease, rather than the end of the term, sheds little light on the real question in dispute. They argue that more pertinent is the fact that the sub-lease was only for a five-year term (plus five-year option). It is submitted that in this context, the fact that the sub-lessee was to be liable for 50% of the cost of rectification, if not covered by insurance, speaks strongly against the contention that the obligation under item 22 mandated replacement of the entire roof.
The second matter to which the respondent refers is that in the Perry Report, which was received some 11 days before the commencement of the sub-lease on 1 September 2019, Mr Perry found that there was hail damage on all roof sheeting, flashings, skylights and gutters; and recommended the replacement of the entire roof.
Third, the respondent notes that the sub-lessor made an insurance claim in respect of that damage and amended item 22 in the then draft sub-lease to take account of that claim. It is in this way that the respondent says that the Perry Report was the genesis of item 22, as executed, and the respondent contends that it informs the intended effect of item 22. The respondent says that a reasonable businessperson would not infer that the insurance claim referred to in item 22 would be a claim for anything less than replacement of the entire roof because: the content of the Perry Report was known to each party no later than 22 August 2019; that report recorded that hail damage was to be found on all of the roof sheeting, flashings, skylights and gutters and recommended that the entire roof should be replaced; and the parties to the sub-lease had bound themselves to pay 50% each of any cost of rectification not met by the insurer. The respondent says that in those circumstances, it would make no commercial sense to contemplate an insurance claim for anything less than full value.
As to those matters, the appellants complain that the reliance placed on the Perry Report repeats the errors in his Honour’s approach to that report but in any event, the appellants note that in the 9 September 2019 email from the sub-lessee’s solicitor there is no reference to the Perry Report, nor any agreement for replacement of the entire roof (notwithstanding that the Perry Rreport had been received by this time); rather, the sub-lessee asserted that the roof “is to be repaired”. The appellants point out that nor is there any such reference in the email at about the same time by Mr Mamasioulas. The appellants maintain that the genesis of the obligation “that repairs to the leaking roof be rectified” was the sub-lessee’s Term Sheet of 24 July 2019, noting that no change to the wording of that obligation was made based upon the Perry Report.
Further, the appellants say that if the Perry Report was the genesis of any obligation, then it is inexplicable why the parties chose to express the obligation in item 22 as “including that repairs to leaking roof to be rectified”, rather than “that the entire roof be replaced”. Further, it is noted that the Perry Report referred to “hail damage” to the roof which was much broader than the concern of repair obligation in item 22, namely “the leaking roof’. The appellants say that the description of condition in the Perry Report goes no further than stating that upon inspection of the roof, hail damage “was to be found” on all roof sheeting, flashings, skylights and gutters; and that no statement was made to the effect that any of this damage was causing leaks in the roof. It is said that there was no evidence that the items of damage identified in the Perry Report were each causing a leak, and that there was no finding by the primary judge that hail damage was to be found on “all roof sheeting, flashings, skylights and gutters”.
The fourth matter to which the respondent refers is that the first sentence of item 22 is poorly expressed. The respondent says that the clause was obviously not intended to limit the obligation of the sub-lessor to make good to the rectification of any earlier “repairs to” the leaking roof which may have been carried out (as distinct from rectifying the leaking roof itself). It is noted that the second sentence of item 22 provides that the sub-lessee will pay 50% of the actual direct costs “of rectification of the leaking roof”, not 50% of the cost of rectification of any earlier repairs that required rectification.
As to this, the appellants maintain their position that the ordinary meaning of the words of item 22 is clear (namely as requiring “repairs to the leaking roof to be completed”) and that this was reflected in the way in which the sub-lessee itself pleaded the effect of the provision.
Fifth, that the permitted use of the premises (“Gym use and all ancillary uses including cafe, pilates, spin room, physiotherapy, massage etc”) involves entry to the premises by members of the public and heavy physical activity on site which involves the use of weights and exercise equipment, which may become slippery and dangerous when wet. It is noted that water penetration before commencement included water flowing through electric light fittings and ponding in the vicinity of gym equipment. The respondent points out that the rent from commencement to the first rent review date was $450,000 plus GST a year. It maintains that, in those circumstances, having the premises made good and watertight at the commencement of the sub-lease was a matter that the hypothetical reasonable business person would take very seriously.
As to this, the appellants accept that it was important that water not leak into the gym. However, they say that it was irrelevant to users of the gym that any damage to the roof which was not causing any leak (such as indentations in the roof) be dealt with by replacement of the entire roof.
Turning then to the submissions directly referable to ground 1 of the grounds of appeal, the respondent points out that Order 1(a) as made by his Honour did not in terms require the replacement of the “entire roof”; rather, it is said that it accepted in effect the scope of work recommended to be done in the Perry Report.
The respondent says that the obligation to provide the premises “made good” is ambulatory in the sense that, the scope of the obligation to provide the premises in the stipulated state, condition or quality of having been made good, depends upon what needs to be done to achieve that state, condition or quality; and that, in the context of this case, so far as the leaking roof is concerned, this meant to achieve the condition or quality of the premises being “watertight”. The respondent again emphasises the finding as to the extent of the hail damage and the recommendation of Mr Perry that the entire roof should be replaced (which the respondent contends was accepted by the primary judge).
The respondent says that the relevant starting point for construction of item 22 is the requirement that the premises “shall be provided made good”, which precedes the word “including”; and says that the question is whether those words are apt to require the replacement of the roof in the sense indicated by the primary judge’s orders or whether the obligation to provide the premises “made good” is confined to the sub-lessor carrying out a lesser scope of works more aptly described as “repair”.
Insofar as the appellants say that there is nothing in item 22 to suggest an obligation to replace the roof, the respondent says that the obligation to make good is to be found in the words “shall be provided made good”, not in the words which follow the word “including”; and that use of the word “including”, after the (opening) operative words may extend the meaning of the words used beyond their ordinary meaning or may “specify as falling within the definition that which might otherwise have been in doubt” (citing Hepples v Commissioner of Taxation (Cth) (1990) 22 FCR 1; (1990) 94 ALR 81 at 101 per Gummow J, his Honour there citing Lillyman v Pinkerton (No 2) (1982) 71 FLR 135; (1982) 45 ALR 543 at 138; which was applied in Urica Library Systems BV v Sanderson Computers Pty Ltd [1997] NSWCA 326 at 12 per Sheller JA (with whom Mason P and Meagher JA agreed). In the context of item 22, the respondent says that the presence of the word “including’’ indicates that what follows forms part of the obligation to provide the premises “made good”; and that they are not words of limitation. By way of example, the respondent says that if a defect had been found in the premises which had nothing to do with the leaking roof, that defect would also need to be made good by the sub-lessor.
In response to the submission by the appellants that no constructional choice appears from the words of the contract between an obligation to repair and an obligation to replace the entire roof, the respondent identifies the constructional choice as whether the words “shall be provided made good” are wide enough to require replacement of “all roof sheets, flashing, skylights and gutters”, if replacement of all of those damaged parts needs to be carried out in order to rectify the leaking roof (as distinct from there being something in item 22 which confines the make good obligation to carrying out repairs, even if some or all of those parts need to be replaced in order to stop the roof from leaking). The respondent argues that the constructional choice thus goes to the scope or ambit of the make good obligation, not the means by which the sub-lessor is to satisfy that obligation.
The respondent contends that the obligation in item 22 to provide the premises “made good” is properly construed to include replacement of any or all of the damaged parts of the leaking roof (be they roof sheets, flashing, skylights and gutters or any other damaged part of that roof); and that the obligation is not confined to the “repair” of the roof, having regard to the matters referred to at the outset of its submissions and noting that the text of item 22 features the word “including” followed by two matters (rectification of the leaking roof and otherwise making the premises water-tight). The respondent says that those words make it clear that the obligation to provide the premises made good is not limited in any particular way, let alone by any distinction between “repair” and “replacement” of damages parts of the roof.
It is submitted that in a context in which each party was aware that the subject premises had a leaking roof that needed to be rectified, a reasonable business person in the position of the parties would see no practical difference between “repair” and “replace”; rather, he or she would understand the concept of the lessor providing defective premises in a condition that had been “made good” as meaning made fit for the permitted use.
The respondent says that the hypothetical reasonable business person would appreciate from the terms of item 22 that the obligation to maintain the premises after making good fell on the sub-lessee and that it involved maintenance inside and outside (such that if the roof were not made good and watertight at the commencement of the sub-lease, the sub-lessee would be paying for any further work that needed to be done, up to a decade later). It is submitted that in that commercial setting, it would make no commercial sense for the scope of works sufficient for the premises to be provided “made good” to be anything less than the scope of works recommended by the Perry Report shortly before commencement of the term.
As to ground 2, the respondent says that the primary judge was correct to conclude that the phrase “including repairs to the leaking roof be rectified by the Lessor” in the first sentence of item 22 would, if read literally, give rise to absurdity in the Fitzgerald v Masters sense (for the reason given by his Honour at [79]) and that the primary judge was correct to read down the words “repairs to” so as “not to be regarded as that which is to be rectified”. The respondent says that this is necessary to avoid the absurdity of a construction which assumed that damage to previous repairs was the parties’ only concern. It is submitted that it is also a clear mistake because a confined construction such as that would be inconsistent with the words “and the Premises to be otherwise made water-tight and compliant with all requirements of relevant authorities for the term of the Leas [sic]”. The respondent says this makes it clear that the premises as a whole are to be made water-tight, not just those parts of the roof which had previously been repaired.
As to ground 3, the respondent says that the primary judge did not impermissibly take into account the subjective intention of the parties; rather, his Honour at [80] said that the circumstances in which the sub-lease was entered into suggested that the parties contemplated that an insurance claim would be made for the replacement of the entire roof, as recommended by the Perry Report and his Honour then said it could be inferred that the parties contemplated that the claim would be based upon the information contained in the Perry Report in respect of the storm damage to the roof.
The respondent points out that the first sentence of item 22 makes clear that the parties intended that an insurance claim be made and says that, in construing what “an insurance claim” means in this clause, it is permissible to have regard to surrounding circumstances known to each party at the time of formation of the sub-lease. The respondent says that the inference that the proposed claim would be based on the Perry Report is supported by, first, the awareness of the hail damage to all of the roof sheeting, flashings, skylights and gutters; and, second, the evidence given by Mr Long as to the extent of the effects of the hail event. In those circumstances, the respondent again argues that a reasonable business person in the position of the parties would conclude that an insurance claim in item 22 meant a claim in respect of hail damage occasioned by the December 2018 storm as per the Perry Report and that a claim for anything less would be commercially irrational.
The respondent contends that the primary judge properly excluded post contract events (the making of the claim and its settlement, as well as the proposal of the sub-lessor to spend only a portion of that money on a temporary fix) from consideration for the purpose of construction.

In reply submissions, the appellants say that his Honour’s explicit conclusion in [80] related to the parties’ contemplation; and that this was not an objective surrounding circumstance.
As to the contention by ground 4 that the primary judge erred by holding that the words “pursuant to an insurance claim to be made by the Lessor prior to the commencement” in item 22 meant “in accordance with or in conformity with” a contemplated insurance claim, the respondent notes that at the hearing at first instance the appellants had contended that “pursuant to” should be read as “subject to” (which is Honour rejected at [79]) but now contends that ‘“pursuant to” is more appropriately understood as “in consequence of” rather than “in accordance with or conformity with”.
The respondent submits that the words which precede the phrase in question, (namely, “The Premises shall be provided made good by the Lessor, including that ... the leaking roof be rectified by the Lessor pursuant to an insurance claim to be made by the Lessor prior to commencement”) and the words which follow (namely, “The Lessee will pay 50% of the actual direct costs of rectification of the leaking roof upon provision of invoices from (an approved) Contractor”) make plain that what was intended was that the sub-lessor would make an insurance claim for rectification of the leaking roof (being a claim which the respondent says the surrounding circumstances allow the court to infer was a claim for replacement of the entire roof, as per the Perry Report); that, if that claim was successful, the proceeds of the claim would be applied by the sub-lessor to rectify the roof (as per that claim and therefore that report); and, if the claim was unsuccessful or the proceeds of the claim were not sufficient to cover the cost of rectification of the leaking roof (as per the claim and report), the sub-lessee would pay 50% of the cost actually incurred by the sub-lessor, upon provision of invoices from an approved contractor.
(The appellants say that the respondent’s submission as to the sharing of costs misconstrues item 22 and that the agreement to share costs 50/50 only applies to the specific obligation that repairs to the leaking roof be rectified. The appellants further say that this shows that new argument (that there was an overriding obligation to repair the roof under the general “make good” requirement) cannot be correct.)
It is submitted that, in that way, “pursuant to” bears its ordinary and natural meaning of “in accordance with or conformity with”. The respondent says that it cannot be given the meaning “in consequence of” because the sub-lessor was obliged to provide the premises made good, including rectify the leaking roof and make the premises water-tight, in any event. The respondent argues that if the insurance claim wholly failed because, for example, the sub-lessor allowed the cover to lapse, the obligation to make good remains on foot, with the cost of replacing the damaged parts being shared 50/50 between sub-lessor and sub-lessee.
In response to the appellants’ submission that the imposition of an obligation to replace the entire roof was a significant one, such that a reasonable person would have expected the parties to express that obligation clearly, the respondent says that this exaggerates what is involved in replacing the “entire roof”, noting that the Perry Report and Order 1(a) indicate that what needs to be replaced are “all roof sheets, flashings, skylights and gutters”. It is submitted that a·reasonable person would not expect anything less to be replaced in circumstances in which a roofing specialist retained by the sub-lessor inspected the roof, published a report and made that recommendation shortly before the sub-lease commenced. The respondent accepts that item 22 is poorly drafted but says that the fact that other language could have been used does not alter the proper construction which is apparent from the instrument.
As to the appellants’ submission that the reference to “insurance claim” is a document in which a reasonable person may expect the process for rectifying damage to be identified because the damage in question was perceived by the roofing specialist to have been caused by a potentially insured event, namely, a hailstorm, and the intention was for the insurance to cover the cost rectification, the respondent again places weight on the (opening) operative words of item 22 and says there are numerous ways that obligation might be “fleshed out” by use of the word “including”, followed by the description of something which needs to be done, but that the paucity of description and the availability of a clearer form of words to describe what is intended to be included does not alter the scope of the obligation.
The respondent says that in any event his Honour’s construction is consistent with the requirement in item 22 that the premises be made “water-tight”, and that it makes perfect commercial sense. It is submitted that a reasonable person in the position of the parties would not necessarily consider that the cost of replacement “could well be significant and exceed the cost of repair”; and that the cost of repair of damaged goods may well exceed the cost of replacement, making replacement the most economical way to rectify a damaged roof. The respondent says that neither the presence of a demolition clause, exercisable after seven years, or an obligation to contribute 50% to any shortfall, makes any difference; the initial term was five years. It is submitted that to a reasonable person in the position of the parties, five years of prospective use would be more than enough to expect the premises to be provided made good, in a thorough-going manner, rather by a temporary fix.
Finally, as to ground 5, the respondent says that this does not accurately reflect what the primary judge found. Reference is made to what his Honour said at [85], namely that item 22, read in the context of the sub-lease as a whole, and having regard to the surrounding circumstances known to both parties, obliged the sub-lessor “within a reasonable time after commencement of occupation under the sublease” to rectify the leaking proof in accordance with or in conformity with an insurance claim to be made by the sub-lessor for the replacement of the entire roof. The respondent says that his Honour did not construe item 22 to require the sub-lessor to make an insurance claim for replacement of the entire storm damaged roof “prior to commencement” of the sub-lease.

Reply submissions as to ground 1

In reply submissions, as to ground 1, complaint is again made by the appellants that the respondent’s submissions advance a case not particularised or argued below and not the subject of any finding at first instance. It is noted that his Honour’s relevant finding (at [85]) was that the sub-lessor’s make good obligation was “to rectify the leaking roof in accordance with or in conformity with an insurance claim to be made by the Lessor for the replacement of the entire roof”. The appellants say that there was no finding that the requirement that the premises be provided “made good” required, of itself, replacement of the entire roof (or any action in relation to the roof).
The appellants maintain that the respondent’s pleaded and particularised case was limited to a case alleging: that the roof “still leaks”; that the sub-lessor had not carried out any repairs or rectified “the leaking roof”; and that the premises were not made “water-tight” ([14] of the pleading); that the particulars to [14] made no allegation that the “make good” obligation was breached because hail damage was to be found on all roof sheeting, flashings, skylights and gutters and no reference to the Perry Report. The appellants complain that the case now advanced on appeal to the effect that there was a breach of the general requirement to “make good” based upon the proposition that the Perry Report records the extent of the hail damage to be found cannot now be maintained. The appellants say that had such a case been particularised and run at first instance, they could have conducted the case differently. Similarly, the appellants complain that the submission that the words in item 22 “shall be provided made good” required the sub-lessor to replace the roof (and that the words following “including” in item 22 are not words of limitation) cannot be advanced on appeal.
In any event, the appellants say that the words used by the parties in item 22 show that the parties intended to deal fully with the obligation to rectify the roof in the way specified in the words following “including” (in particular, that the parties agreed that the proceeds of the insurance claim were to be applied to the cost of repairs to the roof but that if the claim did not cover the costs, the costs were to be borne, as to 50%, by the sub-lessee). The appellants say that if the respondent’s “new” argument were to be accepted, then the sub-lessor would be subject to two different obligations in relation to the roof under item 22 (first, an obligation to provide the premises with the roof “made good” (by total replacement) at its sole expense; and, second, an obligation to repair the roof utilising any insurance proceeds or if insufficient, sharing the costs 50:50 with the sub-lessee).
As to the respondent’s submission that the obligation to provide the premises “made good” is properly construed to include replacement of any or all of the damaged parts of the leaking roof, again the complaint is that this is not the case pleaded and particularised or found by the primary judge.
The appellants say that the primary judge made no factual finding that all of those parts were damaged by hail and required replacement, rather, the extent of the findings in respect of the damage referred to in the Perry Report were that, by 9 September 2019, the parties were aware of the Perry Report (and thus aware of the finding by Mr Perry that hail damage was found on all roof sheeting flashings, skylights and gutters and the recommendation that the entire roof be replaced); and that the parties contemplated that the insurance claim would be based upon the information in the Perry Report ([80]).
The appellants maintain their submission that there is nothing in the words after “including” in item 22 to suggest that the sub-lessor was obliged to replace the roof with a new roof, as opposed to repairing the roof.
The appellants maintain that there is a clear difference between a requirement to replace the entire roof (as required by the primary judge) and a repair; and that had the parties intended to impose an obligation to replace the roof, rather than repair it, they could simply have expressed the obligation in item 22 as a requirement to “replace the entire roof” (which they did not do, instead expressing the requirement as one involving “repairs” to the leaking roof).

Determination

The applicable principles in relation to the construction of commercial contracts were not in dispute (see Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] per French CJ, Hayne, Crennan JJ and Kiefel J, as her Honour then was; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52] per French CJ, Nettle and Gordon JJ; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16] per Kiefel J, as her Honour then was, Bell and Gordon JJ) and these were referred to by his Honour at [73].
As to the particular complaints made in grounds 2 and 3, these can be disposed of briefly.
His Honour correctly (and charitably, in my opinion) considered that something had gone “awry” in the wording of item 22 insofar as it appears literally to provide for the rectification of repairs to the leaking roof (“including that repairs to the leaking roof be rectified”). Nothing in the circumstances known to the parties at the time (including the Perry Report) suggests that the need for repairs to the roof related to defective earlier repairs. In that context, what his Honour was clearly seeking to do was to give a common sense meaning to an infelicitous use of language (not impermissibly correcting the language used by the parties in item 22 as the appellants contend). (In submissions on the appeal it seemed to be accepted that there was some surplusage in the wording of item 22 – see at T 11.21. The appellants submitted that the phrase “repairs to be rectified” meant that the repairs that the parties knew needed to be rectified were to be carried out – see at T 11.20.)
It is clear from [79], that his Honour did not go so far as to disregard the word “repairs to” (this is evident from his Honour’s observation that the words may be read down “even if they cannot be disregarded as erroneous inclusions that would, if read literally, give rise to absurdity”). Hence the premise of the second limb of ground 2 is not made good. Rather, his Honour read down the words “repairs to” as not relating to that which was to be rectified. While it is not wholly clear what meaning was there attributed to those words as read down by his Honour, what was made clear was that his Honour construed the make good obligation as including a requirement that the leaking roof be rectified.
This part of item 22 can in my opinion best be understood as reading the verb “rectified” as meaning “effected”; in other words, there was an obligation to provide the premises “made good” by the sub-lessor and that obligation included the obligation that repairs to the leaking roof be effected by the sub-lessor. Such a construction makes sense and is consistent with the common understanding of the parties at the time of entry into the sub-lease that the roof was leaking and that it was to be made good at or around the time of commencement of the sub-lease.
Ground 2 is therefore not made good.
As to ground 3, the criticism here made of his Honour’s reasons is that his Honour erred in construing item 22 by reference to the parties’ expectations or contemplations prior to entry into the sub-lease; in other words, that his Honour impermissibly had regard to the parties’ subjective states of mind rather than to what was the objectively ascertainable common intention of the parties as embodied in their written agreement. I do not accept that the primary judge fell into error in this regard.
What his Honour was clearly referring to in [80], when observing that the circumstances in which the sub-lease was entered into “suggest[ed]” that the parties contemplated that an insurance claim would be made for the replacement of the entire roof, as recommended by the Perry Report, was the common awareness of the parties as to particular matters (that the roof was in poor condition; that water often leaked into the premises as a result; that the Perry Report had found that there was hail damage on all roof sheeting, flashings, skylights and gutters; and that the recommendation in the Perry Report was that the entire roof be replaced). It is not disputed that the parties were aware of those matters. His Honour’s conclusion that it could be inferred that the parties contemplated that an insurance claim would be made based on the information in the Perry Report is not a conclusion based on the parties’ subjective states of mind. It is an inference drawn from the facts that the parties had a common awareness of those particular matters; had, as his Honour found, discussed and agreed that an insurance claim would be made; and that there was no other apparent basis for an insurance claim (than the storm damage identified in the Perry Report). Such an inference was in my opinion properly drawn – in other words, that the parties contemplated that an insurance claim would be made based on the information in the Perry Report in respect of the storm damage to the roof. Whether or not that translated to an obligation to replace the entire roof is another matter (and turns, in my view, on whether replacement of the roof was necessary in order to comply with the obligation to provide the premises “made good”, including with the rectification of the leaking roof and otherwise with the premises made watertight).
Ground 3 is not therefore made good.
Grounds 1, 4 and 5 can be addressed together, since they go to the ultimate finding as to the proper construction of item 22.
As noted above, I do not accept the complaint that the respondent, on the appeal, is seeking to advance a case that was not pleaded or particularised; nor that the appellants did not have the opportunity to address that case in their evidence. The respondent pleaded the contractual term (item 22); alleged that the roof was leaking and that the term had been breached; and adduced evidence of an expert report that recommended the replacement of the roof. I consider that there is force to the submission of the respondent that the appellants’ submissions raise a false dichotomy between repair and replacement; and that in some circumstances repair may involve replacement. Hence, I do not consider that the significance attributed by the appellants to use of the word “repairs” in item 22 rather than replacement is warranted.
The construction for which the appellants contend does not, to my mind, give appropriate recognition to the use of the word “including”. The structure of item 22 is that it commences with the obligation that the sub-lessor provide the premises “made good” (i.e., in a state of having been made good). While, as the respondent notes, a make good obligation in a lease would ordinarily fall on the lessee and would arise at the end of the term of the lease, in the present case there is commercial sense to the requirement that the sub-lessor make good the premises at or about the commencement of the sub-lease, since the parties already knew that there was a leaking roof and storm damage to the roof (though I accept that this does not indicate one way or another whether the make good obligation required the replacement of the entire roof).
The clause then provides for what is to be included in the make good obligation by dint of the word “including”. Clearly what the parties were there providing was that the make good of the premises was to include rectification of the leaking roof (see my conclusion as to ground 8 above) and it was further provided that the premises were “otherwise to be made water-tight and compliant with all requirements of relevant authorities”. While the requirement that the premises otherwise be made water-tight might seem otiose insofar as the preceding words imposed an obligation to rectify the leaking roof, it is not clear that they were meaningless in that there might have been water ingress other than from the roof (as seems to have been accepted – see T 5) and hence there would be operation for the “otherwise be made water-tight” part of the clause.
To this point, it seems to me clear that (as his Honour considered at [79]), the make good obligation included the requirement that the leaking roof be rectified by the sub-lessor. I do not accept that such a construction imposes two separate (or inconsistent) obligations on the sub-lessor. Rather, there is an obligation to provide the premises made good and that overarching or general obligation encompasses or includes the obligation to rectify the leaking roof (and the obligation otherwise to make the premises water-tight and compliant with relevant authorities’ requirements). Nor is it inconsistent with the way in which the funding of the works was to be effected (particularly given the appellants’ acceptance in submissions in this court that the funding obligation was to be that the respondent’s obligation to pay 50% of the costs arose if the insurance moneys did not cover the works but that there was no funding obligation otherwise on the sub-lessee – see at T 4.5-7).

The next issue of construction relates to the meaning to be attributed to “pursuant to an insurance claim to be made by the Lessor prior to commencement”. At the hearing at first instance, the appellants had contended that the words “pursuant to” meant “subject to” (by which I understand it to have been suggested that this meant, in effect, that the obligation to rectify the roof was conditional upon a successful insurance claim being made). The primary judge construed the words as meaning “in accordance with or in conformity with”.
In my opinion, when read with the balance of item 22 which deals with the manner in which the “actual direct costs of rectification” were to be borne, I consider that the words “pursuant to an insurance claim to be made …” supply a temporal element with respect to the obligation to effect the repairs (i.e., that the sub-lessor was to make an insurance claim and that following that claim the premises would be made good including the effecting of the repairs to the leaking roof). This makes commercial sense given that the parties contemplated that an insurance claim would be made in respect of the storm damage to the roof and implicitly that the insurance proceeds would be available to meet (wholly or partially) the work required to the roof. This accords with the appellants’ contention on appeal that “pursuant to” should be read as following upon, i.e., as a temporal limitation (though not with its argument at the hearing below that it meant “subject to”).
With respect to the primary judge, I consider that this is the more natural reading of “pursuant to” in item 22 than the construction his Honour adopted (i.e., of the obligation being to effect the repairs in accordance with or in conformity with the insurance claim that the parties contemplated would be made). Thus, I consider that ground 4 is made good. However, I do not consider that anything turns on this in the present case because I consider that the evidence established that the make good obligation (including repair to the leaking roof) required the replacement of all roof sheeting, flashings, skylights and gutters, which was ultimately the conclusion that his Honour reached (albeit by a slightly different path).
In that regard, I accept that the Perry Report was not expert evidence as to the requirement for replacement of the entire roof (simply a recommendation made at the time). However, there was expert evidence adduced by the respondent (the Bekir Report dated 30 September 2021) which concluded that in order to make the roof of the building watertight the building’s entire metal roofing, flashing, whirl birds and roof drainage required full replacement. (The admission of this report was objected to by the appellants at first instance and on appeal it was submitted that the Bekir Report had limited relevance because it was produced two years after the event – see at T 2.1-9; T 15.29ff. Nevertheless, the appellants did not call expert evidence at first instance, and on appeal conceded at T 17.24 that the Bekir Report may have been consistent with what the insurance company’s investigations revealed.)
Accordingly, ground 5 is not made good.

Allegation of breach re refusal of access to property (ground 6)

The remaining ground of appeal relates to the contention by the appellants that his Honour erred in not finding that the sub-lessor was prevented from performing its make good obligations by reason of the sub-lessee’s refusal to grant access to the property ([94]).
The appellants submit that it follows, if their construction of item 22 is found to be correct, that the sub-lessor was prevented by the sub-lessee because its refusal was based upon the sub-lessee’s erroneous understanding of item 22 (referring to his Honour’s reasons at [106] and Mr Mamasioulas’ evidence as recorded at [70]).
In their written submissions the appellants contended that even if their construction of item 22 was not accepted, the sub-lessee was still in breach of the sub-lease by refusing access to the sub-lessor to repair the roof. (As noted above, in oral submissions the appellants conceded that if their construction were to be incorrect then this ground could not be maintained. However, in the event that I have misunderstood that concession I deal with this below.)
The appellants contend that there are two clauses of the sub-lease that expressly provide for access by the sub-lessee to the premises (item 23 of Annexure A and cl 9 of Annexure B, both of which have been extracted above). The appellants note that at [78] his Honour said that item 23 contemplated that access to the premises to undertake the repair and renovation works could occur once certain things had happened. As indicated earlier, I would have construed item 23 as referring to access by the sub-lessee not sub-lessor – it seems to me that the fact that access was conditional on the sub-lessee doing certain things indicates that it was access by the sub-lessee that was there contemplated. The reference to this item by his Honour viewed it as contextually supportive of the conclusion that the obligation under item 22 was to be satisfied by or within a reasonable time after occupation of the premises pursuant to the sub-lease. Whether item 23 should be construed as referring to access by the sub-lessee not sub-lessor, because access was conditional on the sub-lessee doing certain things, need not be determined. Nothing here turns on this.
The appellants contend that cl 9 mandated that the sub-lessee give the sub-lessor access to the property in order to assess the condition of the property and to carry out its obligations under the sub-lease (including in respect of repairs), subject to the time for doing so being reasonable and subject to cl 9.2, which required at least two business days’ written notice for access (except in an emergency).
The appellants refer to the principles summarised by Brereton J, as his Honour then was, in Telstra Corporation Ltd v Sicard Pty Ltd [2009] NSWSC 827 at [9] as to the effect of a term giving a lessor a right of access and summarised the relevant principles. It is not necessary here to set those out.
The appellants refer to the evidence at the hearing as to the refusal by the sub-lessor of access to the property by the sub-lessor on a number of occasions. They say that in so doing the sub-lessee on each occasion breached the sub-lease.
Reference is made to authority for the proposition that a lessee must not act unreasonably by obstructing the lessor in exercising its right of entry for the purpose of doing particular work, or to take the matter out of the lessor’s hands by doing the work itself before the lessor has had a reasonable opportunity of doing so (the appellants citing Georgouras v Bombardier Investments No 2 Pty Ltd [2011] NSWSC 741 at [46] per Einstein J; and Croft et al, Commercial Tenancy Law, (4th ed, 2018, Lexis Nexis Butterworths) at 206- 207 there citing Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] Ch 592 at 608 per Jenkins LJ).
In their written submission the appellants contend that the sub-lessor attempted to do the (repair) work on a number of occasions and did so within a reasonable time having regard to intention of the parties that an insurance claim be made and, subject to the outcome, payment for the repairs be made by either the sub-lessor or, to the extent an insurance payment did not cover the full extent of repairs, equally by the parties. The appellants maintain that the sub-lessee unreasonably obstructed the sub-lessor in its right of entry in circumstances where the sub-lessor had an express contractual right to gain entry and had at all times endeavoured to undertake access reasonably and with prior notice to the sub-lessee; and that the fact that the sub-lessor sought a particular form of rectification (namely, replacement of the entire roof) was not a proper basis for the sub-lessee to refuse access to the sub-lessor.
The appellants say that the sub-lessee’s claim for equitable relief should have failed on the basis of the repeated breach of the sub-lessee’s obligation to grant access to the sub-lessor, or its agents, to carry out the requisite repairs pursuant to cl 9. They maintain that the proper course was for the sub-lessee to have allowed the sub-lessor access to carry out the repairs and that if the repairs had been inadequate then the sub-lessee would have had recourse against the sub-lessor.

Respondent’s submissions as to ground 6

As to ground 6, the respondent notes that the sub-lessor does not challenge any of the factual findings in [94], namely that: the sub-lessor never accepted the proposition, maintained by the respondent, that the make good obligation in respect of the roof requires an entire replacement of the roof; the sub-lessor never sought access to the premises for the explicit purpose of obtaining a quotation or scope of works for the replacement of the roof; and the sub-lessor has never proposed a contractor for the carrying out of such works, or sought the sub-lessee’s approval for such a contractor (and the terms of the contract). (In reply submissions, the appellants say that there is no need for them to challenge the findings of fact here identified by the respondent. They say that his Honour did not find that the sub-lessor did not seek access at all to carry out repairs to the roof.)
The respondent submits that nothing in the history of the sub-lessor’s various efforts to effect a temporary fix impugns any of the findings in [94] or his Honour’s opinion that, in those circumstances, it cannot be concluded that any failure on the part of the sub-lessee to allow access to the premises or give any relevant approval was a breach of the contract or otherwise conduct that has prevented the sub-lessor from performing the make good obligation in respect of the roof. As to the submission by the appellants as to what the proper course for the sub-lessee to have followed would have been, the respondent says that this overlooks and is inimical to the express provision in item 22 that any contractor is to be “approved by the Lessee prior to engagement by the Lessor” together with the “terms of Contract”.
In reply submissions, the appellants maintain that his Honour’s conclusion (that there was not any failure on the part of the sub-lessee to allow access to the premises that was a breach of the contract which prevented the sub-lessor from performing the make good obligations in respect of the roof – [94]) is contrary to the proper construction of the clauses which govern the sub-lessor’s entitlement to access (referring to item 23 of Annexure A and cl 9 of Annexure B) which they say were unhindered by item 22.
As to the respondent’s contention that the grant of access by the sub-lessee would be inimical to item 22 because any contractor had to be “approved by the Lessee prior to engagement by the Lessor” together with “the terms of the Contract”, the appellants say that such approval does not inform the sub-lessor’s entitlement to access and makes no reference to it. It is said that those words are directed to the engagement of a contractor, which would, in turn, inform whether the sub-lessee was liable for the cost of that contractor. The appellants say that the respondent has not identified how the words of item 22 have displaced the clear words of item 23 of Annexure A and cl 9 of Annexure B of the Lease.

Determination

It is relevant to bear in mind the context in which the question as to whether there was a breach of the sub-lease by the respondent in refusing access to the premises arose. The appellants, in their defence to the respondent’s claim, denied the allegation of breach pleaded at [14] (see [15] of the defence) and asserted that the second appellant had twice arranged to have the roof repaired in October and December 2020 but the relevant contractor was refused access to do so by the plaintiff. In the defence at [15] the appellants further said that the respondent had, contrary to the terms of the sub-lease unreasonably withheld its consent in order for it to determine the scope of rectification works to the roof. At [26] of the defence the claim for loss and damage was denied and the appellants alleged that the refusal to consent to the repair of the roof and maintain air conditioning meant that the respondent had acted unreasonably in failing to mitigate its loss.
Thus, in essence, the allegation as to breach of the sub-lease by reference to the refusal of access to the premises was put, first, as a matter preventing the appellants from performing their obligations under item 22 (assuming those obligations had arisen) and, second, as an unreasonable failure on the part of the respondent to mitigate its loss. It also seems to have been argued as a discretionary matter against the grant of relief by way of specific performance (see at [106]).
As to the first of the ways in which the allegation was put, it may be noted that the defence at [9] had denied the pleaded allegation as to the term of the lease comprised by item 22 and had asserted that the obligations under item 22 were contingent on: the insurance claim, the respondent approving the contractor prior to its engagement including the terms of the contract, and the respondent paying 50% of the actual direct costs of rectification (whereas in submissions on the appeal the appellants say that the issue of approval of the contractor and payment of 50% of the costs arise only if there is a shortfall in the funding obtained on the insurance claim).
In any event, the primary judge clearly understood the relevance of the alleged breaches of the sub-lease by the respondent in refusing access to the premises as a matter going to whether the appellants had been prevented from performing their make good obligations in respect of the roof (see at [94]). At [106] (which is not the subject of challenge) the primary judge in the context of considering whether access issues gave rise to a discretionary basis to decline the relief sought by way of specific performance, said that he did not think that the appellants had established any clear breaches by the respondent of the access provisions of the sub-lease (cll 9.1 and 9.2) whether in relation to the rectification of the roof or otherwise.
Clause 9 of the sub-lease entitled the sub-lessor to access in the circumstances there set out. Insofar as the alleged breach was said to be refusal of access to which the sub-lessor was entitled under cl 9.1.2 (for the purpose of “doing anything that the lessor can or must do under this lease or by law”), the difficulty here is that access was sought in October 2020 for the purpose of carrying out repairs to the roof of a limited kind. True it is that item 22 obliged the sub-lessor to rectify the leaking roof and make it water-tight but, as the respondent contended at the time (and as the expert report subsequently confirmed) the necessary repairs involved more than what was contemplated by the Timbertek quotation (and that was all that the appellants intended to effect at the time).
There may well be an interesting academic argument as to whether it was a breach of the sub-lease or otherwise unreasonable for the respondent to deny access on the basis that what the sub-lessor was proposing to effect was not in compliance with its obligations under the sub-lease but it is not necessary to explore this further. The simple answer seems to me to be that the primary judge did not err in failing to find that the appellants were prevented from performing their make good obligations under item 22 of the sub-lease by reason of the respondent’s refusal to grant access to the property, in circumstances where the appellants were not seeking access in order to carry out the repairs that it has been found were required in order to make good the premises. Thus the concession in oral submissions that this ground of appeal goes nowhere if the appellants’ construction of item 22 is not correct seems to me to be well-founded.

Orders

For the above reasons, the appeal should be dismissed with costs.
GLEESON JA: I agree with Ward P that the appeal should be dismissed with costs for the reasons given by her Honour with respect to the construction of the sub-lessor’s “make good” obligation in item 22 of the sub-lease. In these circumstances, as the appellants properly accepted in oral argument, ground 6 relating to access to the premises does not arise. If it were necessary to determine ground 6, I agree with Ward P that this ground should be rejected for the reasons given by her Honour.
SIMPSON AJA: I agree with Ward P.

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Decision last updated: 31 March 2023

Medium Neutral Citation:	Saipan Holdings Pty Ltd v City Gym Sydney Pty Ltd [2023] NSWCA 55
Hearing dates:	13 February 2023
Date of orders:	31 March 2023
Decision date:	31 March 2023
Before:	Ward P at [1]; Gleeson JA at [168]; Simpson AJA at [169]
Decision:	1. Appeal dismissed with costs.
Catchwords:	LEASES AND TENANCIES – Repairs, maintenance and alterations – Obligation to make good including repairs to leaking roof – whether the contractual obligation to repair required the replacement of the roof – whether the meaning of the terms of the contract were construed objectively by the primary judge – whether appellants were prevented from performing their make good obligation by reason of the respondent’s refusal to grant access
Cases Cited:	City Gym Sydney Pty Ltd v Saipan Holdings Pty Ltd [2022] NSWSC 699 Codelfa Constructions Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 Fitzgerald v Masters (1956) 95 CLR 420; [1956] HCA 53 Georgouras v Bombardier Investments No 2 Pty Ltd [2011] NSWSC 741 Granada Theatres Ltd v Freehold Investment (Leytonstone) Ltd [1959] Ch 592 HDI Global Specialty SE v Wonkana No 3 Pty Ltd (2020) 104 NSWLR 634; [2020] NSWCA 296 Hepples v Commissioner of Taxation (Cth) (1990) 22 FCR 1; (1990) 94 ALR 81 Lillyman v Pinkerton (No 2) (1982) 71 FLR 135; (1982) 45 ALR 543 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; [1979] HCA 51 Telstra Corporation Ltd v Sicard Pty Ltd [2009] NSWSC 827 Urica Library Systems BV v Sanderson Computers Pty Ltd [1997] NSWCA 326
Texts Cited:	Croft et al, Commercial Tenancy Law (4th ed, 2018, Lexis Nexis Butterworths)
Category:	Principal judgment
Parties:	Saipan Holdings Pty Ltd (First Appellant) City Gym (Aust) Pty Ltd (Second Appellant) City Gym Sydney Pty Ltd (Respondent)
Representation:	Counsel: HK Insall SC with P Horobin (Appellants) JC Kelly with L Katsinas (Respondent) Solicitors: Creagh & Creagh (Appellants) Alan Rigas Solicitors (Respondent)
File Number(s):	2022/00181470
Publication restriction:	Nil
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Division Citation: [2022] NSWSC 699 Date of Decision: 30 May 2022 Before: Darke J File Number(s): 2021/00082334