Scudooda Pty Ltd v K&E Property Pty Ltd

Case •

[2018] NSWSC 1397

•

11 September 2018

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: Scudooda Pty Ltd v K&E Property Pty Ltd [2018] NSWSC 1397
Hearing dates: 27-28 August 2018
Date of orders: 11 September 2018
Decision date: 11 September 2018
Jurisdiction:Equity
Before: Darke J
Decision:

Plaintiff’s claim that defendant is liable for cost of electricity not made out. Defendant entitled to possession of demised premises, and judgment for arrears of rent and mesne profits.

Catchwords: LAND LAW – leases – option to renew validly exercised – party purchasing freehold estate following exercise of option to renew contained in registered lease bound by unregistered renewed lease – agreement of purchaser of freehold estate to take interest subject to leasehold estate gives rise to a personal equity in lessee against purchaser – construction of lease – lease does not contain an obligation on either lessor or lessee to pay for electricity – lessee free to arrange its own electricity supply for which it is liable to pay – lessee not entitled to reimbursement of cost of electricity – lessee not entitled to withhold payments of rent – non-payment of rent amounted to breach of an essential term of the lease and a repudiation of lease – lessor entitled to possession
Legislation Cited: Conveyancing Act 1919 (NSW), s 118, s 170
Real Property Act 1900 (NSW), s 40
Retail Leases Act 1994 (NSW), s 18
Cases Cited: Bahr v Nicolay (No 2) (1988) 164 CLR 604
Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liquidation) [2016] NSWCA 165
Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
Ideal Business Centres Pty Ltd v Violin Holdings Pty Ltd [2018] NSWSC 1249
Mercantile Credits Ltd v The Shell Company of Australia Ltd (1976) 136 CLR 326
Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47
Tenstat Pty Ltd v Permanent Trustee Australia Ltd (1992) 28 NSWLR 625
Category:Principal judgment
Parties: Scudooda Pty Ltd (Plaintiff/First Cross-Defendant)
K&E Property Pty Ltd (Defendant/Cross-Claimant)
Martin Conn O’Sullivan (Second Cross-Defendant)
Representation:

Counsel:
Mr M J Stevens (Plaintiff/Cross-Defendants)
Mr J C Kelly SC (Defendant/Cross-Claimant)

  Solicitors:
Somerset Ryckmans (Plaintiff/Cross-Defendants)
Gerald Aronstan Solicitor & Attorney (Defendant/Cross-Claimant)
File Number(s): 2017/157225
Publication restriction: None

Judgment

Introduction

  1. The plaintiff is the lessee under registered lease AF215730 in respect of the land contained in Folio Identifier 3/SP63152. The leased premises are commonly referred to as Shop 3, 50-54 York Street, Sydney. The lessors under the lease are four individuals, J & D Dounas and R & C Griffiths. The lessors sold and then transferred the land to the defendant in 2015. The defendant became registered as the proprietor of the fee simple.

  2. The lease was for a five year term ending on 9 September 2014, with two options to renew each for further terms of five years. The plaintiff, which claims to have validly exercised the first option to renew in March 2014, remains in occupation of the land. It operates a restaurant and bar from the premises. It seems to be accepted that the lease and presumably any renewed lease is a retail lease within the meaning of the Retail Leases Act 1994 (NSW).

  3. The plaintiff makes a claim for specific performance of the agreement to grant a new lease. The plaintiff further claims that upon the true construction of the lease, and the renewed lease to which it claims to be entitled, the cost of electricity supplied to the premises is a liability that falls upon the lessor. The plaintiff has nonetheless met the cost of the electricity from about the time it went into occupation in late 2009.

  4. In November 2016 the plaintiff sought reimbursement from the defendant in respect of some of the amounts it had paid for electricity. The defendant denied that the plaintiff was entitled to reimbursement. Since December 2016 the plaintiff has declined to pay rent to the defendant, on the basis that it is entitled to set off the amount paid for electricity against its liability for rent.

  5. The defendant disputes that the plaintiff is entitled to a grant of specific performance. The defendant (which has filed a cross-claim) further takes issue with the contention that upon the true construction of the lease or any renewed lease the cost of electricity supplied to the premises is a liability that falls upon the lessor. The defendant says that if it is incorrect on the question of construction the lease should be rectified. The defendant further says that it has validly terminated any rights the plaintiff had to occupation of the premises, such that it is entitled to orders for possession. Finally, the defendant seeks to recover arrears of rent (or alternatively mesne profits) from the plaintiff and from Mr Martin O’Sullivan who gave a guarantee and indemnity in respect of the plaintiff’s obligations under the lease. Mr O’Sullivan is a director of, and shareholder in, the plaintiff.

The registered lease

  1. Lease AF215730 was for a five year term commencing on 10 September 2009 and terminating on 9 September 2014. It contained two options to renew, each for a further term of five years. The rent was expressed to be $72,720 per annum plus GST in the first year, subject to a rent free period and subsequent periodic reviews.

  2. The option to renew is contained within cl 16. By cl 16.1 notice of the lessee’s intention to take a lease of the premises for the further term must be given to the lessor not more than six months and not less than three months before the termination date of the lease. Clause 16.3 provides that the terms of the lease for the further term were, subject to certain exceptions, to be the same as those of the lease. It is further provided that the rent for the further term is to be calculated in accordance with cl 20 of the lease. I note in passing that it appears that the plaintiff gave notice of exercise of the option on about 11 March 2014 by sending a notice by express post to the then lessors at the address specified in the lease. Mr O’Sullivan gave evidence that after 9 September 2014 the plaintiff remained in occupation and paid rent as if a new lease had come into effect following the exercise of the option for renewal. It seems that the plaintiff proceeded to pay rent at the rate suggested by the then lessors, being $92,811.22 per annum (plus GST).

  3. The provision at the centre of the dispute is cl 30 which concerns payment for services and charges. It provides:

30.1   The Lessee shall punctually pay for all telephone and other services (excluding electricity) separately metered in respect of the premises.

30.2   The Lessor shall pay or cause to be paid all rates, charges and taxes in respect of the premises the building and the land which it is liable to pay other than such rates, charges and taxes as the Lessee has covenanted to pay under this Lease, and shall not cause the Lessee interference in the use of the Premises by the failure to make any such payment.

  1. The topic of outgoings is dealt with in cl 66. Whilst the plaintiff is not obliged to make any contribution towards outgoings, the plaintiff placed some reliance upon cl 66 in support of its construction of cl 30. Clause 66 relevantly provides:

66.1   The Lessee shall pay to the Lessor that percentage referred to in Item 14 hereof of any outgoings relating to the whole of the land (hereinafter called “the Outgoings”) in respect of each year during the term of this Lease and any holding over period payable either on demand by the Lessor or by equal monthly instalments throughout the currency of the Lease. The Lessee shall be liable only for a proportion of the amount of outgoings where the term of this Lease is current for only part of the period for which the outgoing relates upon a daily basis.

66.2   For the purpose of the sub clause 66.1 “Outgoings” means: -

66.2.1   all premiums paid or payable by the Lessor in insuring and keeping insured the building (including any air conditioning and other plant equipment fixtures and fittings from time to time being part thereof) against damage or destruction from any insurable risk reasonably required by the Lessor in not less than its full insurable value on a replacement and/or reinstatement basis including any extra costs or premiums paid or payable by the Lessor in insuring against loss of rent for whatever reason for a period not exceeding twenty-four (24) months and all premiums paid or payable by the Lessor to cover other risk and for such amounts as the Lessor shall reasonably require from time to time relating to the premises the building the land or the use of occupation thereof;

66.2.2   the costs of garbage disposal and/or caretaking and/or cleaning and/or pest control of all common areas of the building and the land upon which [t]he building is erected and which are not occupied or available for occupation by a tenant;

66.2.3   all other rates, charges and taxes including Land Tax in respect of the land.

66.2.4 In respect of premises to which the Strata Schemes Management Act 1996 applies, all periodic payments payable in respect of the premises pursuant to that Act, which without limiting the generality thereof shall include contributions to the Administration Fund, Sinking Fund, Special Contributions and Special Levies and any interest which may have accrued as a consequence of he [sic] Lessee’s failure or delay in making any such payment;

66.2.5   The costs of any service to the premises which without limiting the generality thereof shall include water, electricity, gas, telephone and mechanical ventilation or air-conditioning not otherwise payable by the Lessee.

  1. Reference should also be made to cl 63 of the lease, which operates to make Mr O’Sullivan and Mr John Toubia guarantors of the plaintiff’s obligations under the lease, including any extension or renewal thereof.

  2. The lease was preceded by a Deed of Agreement for Lease dated 24 July 2009. That agreement was itself preceded by a Heads of Agreement dated 22 December 2008.

The acquisition of the land by the defendant

  1. The defendant entered into a contract to purchase the land contained in Folio Identifier 3/SP63152 on 22 September 2015. The contract employed the 2005 edition of the Law Society/Real Estate Institute standard form, together with Additional Conditions. The front page of the contract was marked so as to indicate that the purchase was subject to existing tenancies.

  2. Clause 24.4 relevantly provided:

24.4   If the property is subject to a tenancy on completion –

…

24.4.4   the vendor must comply with any obligation to the tenant under the lease, to the extent it is to be complied with by completion; and

24.4.5   the purchaser must comply with any obligation to the tenant under the lease, to the extent that the obligation is disclosed in this contract and is to be complied with after completion.

  1. Additional Condition 40.1 provided:

The Property is sold and the Purchaser shall take little [sic – title] subject to all matters including rights of way, covenants and easements noted on the relevant Certificate of Title and the Purchaser shall make no requisition objection or claim for compensation in respect of the same.

  1. A title search was attached to the contract. Lease AF215730 and the options of renewal were noted in the Second Schedule. In addition, the attachments to the contract included a copy of the lease, and a copy of a lease for the term 10 September 2014 to 9 September 2019 apparently executed by two of the four lessors, but not the lessee. The terms of this new lease differed in some respects from those that would be contained in a lease issued in accordance with cl 16.3 upon the exercise of the option to renew.

  2. It is clear from the evidence that in August 2015 an unexecuted copy of the new lease was provided to the defendant’s solicitor, together with a copy of the notice of exercise of option dated 11 March 2014.

  3. Completion of the contract for sale to the defendant occurred on 16 November 2015. On or shortly after that day, the plaintiff’s then solicitors sent the new lease, amended in one respect and now executed by the plaintiff, to the solicitors for the lessors. It is not clear whether this lease was received by those solicitors before or after the lessors had completed their sale to the defendant. The amendment concerned the deletion of Mr Toubia as a guarantor and the inclusion of Ms Belinda Lai as a guarantor in his place. There is no evidence that this form of lease was ever accepted by the lessors. No new lease has ever been registered.

Events after the acquisition of the land by the defendant

  1. On 1 December 2015 solicitors acting for the defendant sent a letter to the plaintiff enclosing a notice of attornment that contained a request that all rent from 1 December 2015 be paid to the defendant.

  2. According to a Schedule provided to the Court, and which I understand was agreed between the parties, the plaintiff thereupon commenced paying rent to the defendant. The plaintiff continued to pay rent to the defendant thereafter, albeit at irregular times and in various amounts, until 20 December 2016 when a payment of $4,000 was made. No further payments of rent have been made to the defendant.

  3. In the meantime, on 15 November 2016 Ms Lai sent an email on behalf of the plaintiff to the defendant’s agent. The email included the following:

Further to your conversation with Martin [O’Sullivan] today, I’ve just attached the requirement for the landlord to pay our electricity bills. As you can appreciate this will assist us in paying the outstanding rent for this week, which is a lesser sum.

As per clause 30.1 “The Lessee shall punctually pay for all telephone and other services (excluding electricity) separately metered in respect of the premises”.

I’ve attached details of amounts outstanding since 1 December 2015 to 10 October 2016 and AGL details so that the landlord can transfer this with total being $24,043.10.

Our bank details are also attached for the outstanding & we’d appreciate if this can be paid before the end of the week. If so we can waive the interest accrued from December until now.

Mr O’Sullivan accepted in cross-examination that this was the first time the plaintiff had asserted to the defendant that it was required to pay for the electricity supplied to the premises.

  1. On 16 December 2016 the defendant’s solicitor sent a letter to the plaintiff in which notice was given under cl 15.1 of the registered lease terminating the plaintiff’s tenancy with effect from 31 January 2017. Clause 15.1 is a holding over provision.

  2. On 25 January 2017 the defendant’s solicitor sent a letter to the plaintiff in which it was claimed that the plaintiff was in arrears of rent in an amount of about $30,000. Demand was made for payment of the alleged arrears. The letter also included the following:

Your claim dated 15/11/2016 to Laing + Simmons requesting that my client reimburse your company the amount of $24,043.10 in respect of electricity bills from AGL going back to 1/12/2015 has been referred to me.

I have examined the bills and it seems obvious that these bills relate directly to your company’s energy consumption in conducting a restaurant business at the premises. The bills are correctly made out to Scudooda Pty Ltd trading as Grasshopper. This has been the position from as far back as 6/5/2011, which is four and a half years prior to my client becoming the registered proprietor.

Your rationale for my client to pay for your energy consumption based on clause 30.1 of the lease is misconceived. The relevant provision is clause 66.2.5. In terms of this clause, services such as water, electricity, gas, telephone, mechanical ventilation or air conditioning “not otherwise payable by the Lessee” is an “Outgoing” of the Lessor which must be apportioned according to the percentage referred to in Item 14 of the lease. Energy consumption of the Lessee that is directly related to the use of the premises as a restaurant is clearly a service that is “payable by the Lessee”. The suggestion that it is payable by the Lessor is plainly nonsensical.

The wording of clause 30.1 is obviously simply due to the assumption at the time of drafting that there was no separate electricity meter for the premises. To now try and suggest some 7 years after the lease was signed that the intent of clause 30.1 of the lease was that the Lessor would pay for the Lessee’s energy consumption is plainly wrong, to say the least.

Your claim for reimbursement of the amount of $24,043.10 is unfounded and is rejected.

  1. On 30 January 2017 the plaintiff’s solicitor sent an email to the defendant’s solicitor. The email included the following:

I have been provided by my client with copies of registered lease AF215730K and a subsequently executed lease that was executed by your client as landlord and which came into existence following due exercise by my client of an option to renew under the former lease.

I note that by letter dated 16 December 2016 you have purportedly sought to terminate the former registered lease operating under the mistaken belief that my client is simply holding over under the former lease which expired on 9 September 2014. Rather, my client is in fact occupying the leased premises under a new lease which arose consequent upon the valid exercise of an option for renewal contained in the former registered lease.

It is manifestly the fact that the parties have since 9 September 2014 acted on the basis that a new lease came into existence, whether or not that lease has been formally registered. That lease is in writing and was executed by my client and by the landlords. Any responsibility for registration of the lease resided with the landlords’ solicitors and in this regard we require your client to immediately register the new lease if this has not already been attended to.

The new lease commenced on 10 September 2014 and expires on 9 September 2019. The lease, but for minor amendments which are not relevant for present purposes, is in the same terms as the former registered lease.

The new lease provides at clause 18 that “The Lessee shall pay to the Lessor the rent set out in Item 11 in the manner set out in Item 12”. Critically, the clause does not state that the rent must be paid without set off, deduction or counterclaim.

Clause 30.1 of the Lease states: “The Lessee shall punctually pay for all telephone and other services (excluding electricity) separately metered in respect of the premises”.

By error, my client has since the lease commencement on 10 September 2009 paid for electricity supplied to the premises. From information obtained to date the total amounts paid by the tenant for electricity consumed on the premises from 2011 to date exceeds $180,000. This figure will only increase once my client is able to procure information from the electricity supplier for the period 2009 to 2011.

The landlord is liable to pay electricity and has not done so. The tenant is clearly entitled to now set off or deduct against the rent due under the lease all amounts paid on behalf of the landlord by the tenant.

I have advised my client that the letter notifying my client of termination of the former registered lease is specious and of no effect given that the tenant validly exercised the option for renewal and executed a new lease – as did the landlord.

Your demand that the tenant vacate the premises with effect from 31 January 2017 is invalid and of no legal effect.

  1. The defendant did not move to take possession of the premises after expiry of the period set out in the notice given on 16 December 2016.

  2. The parties attended a mediation in March 2017 but they remained in dispute on the issues identified in the communications referred to above. A further issue arose concerning liability for invoices issued by Sydney Water. The defendant’s claim that the plaintiff is liable to pay those invoices was not pressed at the hearing.

  1. The plaintiff commenced these proceedings on 25 May 2017.

  2. On 31 January 2018 the defendant’s solicitor sent a letter to the plaintiff’s solicitor in the following terms:

NOTICE OF INTENDED TERMINATION BY DEFAULT PURSUANT TO CLAUSE 12 OF THE LEASE

It is noted that no rent has been paid at all over the last year.

Without taking into account interest and other charges, the outstanding balance in respect of rent is currently $145,622.78. Attached is a copy of your Rent ledger statement.

The Lessor hereby gives the Lessee notice pursuant to clause 12 of the lease that $145,622.78 is now due and payable and calls on the Lessee to pay such amount within seven (7) days of receipt of this written notice that such monies are due and payable.

Should this amount of $145,622.78 not be paid within seven (7) days of receipt of this written notice, the Lessor will be entitled to exercise its rights under clause 12 of the lease in addition to any other rights the Lessor may have.

  1. On 9 February 2018 the defendant’s solicitor sent a letter to the plaintiff’s solicitor in the following terms:

TERMINATION NOTICE

PURSUANT TO CLAUSE 12 OF THE LEASE DATED 12/11/2009

The Landlord’s Notice to the Tenant of Intended Termination by Default dated 31/1/2018 pursuant to clause 12 of the Lease dated 12/11/2009 refers.

This Notice is given without prejudice to any other rights the Landlord may have and it is given without abandonment or waiver in relation to the Landlord’s primary position, which is that the lease was validly terminated by the Landlord on the 16/12/2016 pursuant to clause 15 (Holding Over) of the lease dated 12/11/2009.

7 Days having elapsed since receipt of the aforementioned Notice by the Tenant without any payment of rent having been made by the Tenant, the Landlord terminates the above lease and will re-enter and take possession of the Premises without further notice.

  1. On 12 February 2018 the defendant’s solicitor sent a letter to the plaintiff’s solicitor in the following terms:

TERMINATION NOTICE PURSUANT TO CLAUSE 12 OF THE PURPORTED (UNDATED) LEASE WITH COMMENCEMENT DATE 10/9/2014

The Landlord’s Notice to the Tenant of Intended Termination by Default dated 2/2/2018 pursuant to clause 12 of the purported (undated) Lease with commencement date of 10/09/2014 refers.

This Notice is given without prejudice to any other rights the Landlord may have and it is given without abandonment or waiver in relation to the Landlord’s primary position, which is that the Tenant has been holding over under the lease dated 12/11/2009 and that this lease was validly terminated by the Landlord on the 16/12/2016 pursuant to clause 15 (Holding Over) of the lease dated 12/11/2009.

7 Days having elapsed since receipt of the aforementioned Notice by the Tenant without any payment of rent having been made by the Tenant, the Landlord terminates the above lease and will re-enter and take possession of the Premises without further notice.

  1. The plaintiff was prompted to file a Notice of Motion seeking an injunction to restrain the defendant from interfering with its possession of the premises. The motion was heard on 23 March 2018. On that occasion an injunction to that effect was issued upon certain terms, including that the plaintiff pay into Court the sum of $125,000, along with a monthly occupation fee of $9,373. For reasons not entirely explained, the plaintiff has not complied with the terms of the order. The Court was informed that it has instead paid almost $75,000 into Court. Nonetheless, the defendant has not sought to discharge the injunction or take any further steps to recover possession of the premises.

Determination

  1. I am satisfied that on about 11 March 2014 the plaintiff exercised the first option to renew in accordance with the requirements of cl 16.1 of the registered lease. By its Defence, the defendant asserted that the exercise was not valid because it was effected by express post. This argument was not addressed in submissions and may be taken to have been abandoned. In any case, even if service by express post does not fall within the ambit of the notices provision found in cl 7 of the lease, service in that way would be sufficient because it falls within s 170 of the Conveyancing Act 1919 (NSW).

  2. The plaintiff thereby became entitled to the grant of a new lease for the period 10 September 2014 to 9 September 2019. That contractual entitlement would be able to be specifically enforced in equity, at least whilst the plaintiff was not in serious default of its obligations to the then lessors. There is no suggestion of such default. The plaintiff thus had an equitable interest in the land.

  3. The plaintiff’s continued possession after 9 September 2014 should in my view be seen as being pursuant to the agreement for the new lease. Its continued occupation at the rental suggested by the then lessors, namely 5% above that which applied at the end of the term of the lease, is consistent with the rent being calculated as required by cll 16.3 and 20 of the lease. Moreover, as submitted by the plaintiff, continued occupation at that rent (and at subsequently increased rents) is not consistent with the plaintiff merely holding over in accordance with cl 15.1 of the lease.

  4. Nevertheless, the plaintiff and the then lessors did not proceed to execute a new lease in accordance with the option to renew, or have any new lease registered.

  5. Forms of leases for the period 10 September 2014 to 9 September 2019 had been prepared by August 2015, but the terms of those leases differed from those that would be contained in a lease issued in accordance with cl 16.3 upon the exercise of the option to renew. However, the evidence indicates that the plaintiff and the then lessors did not conclude an agreement on the terms of any of those forms of lease. The form of lease that was attached to the defendant’s contract for sale was only executed by two of the four lessors and not at all by the plaintiff. The plaintiff later executed an amended form of lease that deleted Mr Toubia as a guarantor and replaced him with Ms Lai. This form of lease was submitted to the then lessors but there is no evidence that it was ever accepted by them.

  6. When the defendant entered into its contract to purchase the land it was plainly on notice of registered lease AF215730 and of the fact that the plaintiff had exercised the first option to renew. The defendant was also aware that a form of lease for the term 10 September 2014 to 9 September 2019 had been prepared but not yet executed by the plaintiff. In these circumstances, and leaving aside for the moment the effect of the Real Property Act 1900 (NSW), the defendant was in the position of a purchaser with notice of the plaintiff’s equitable interest in the land that arose from its exercise of the option to renew. The defendant would thus acquire its interest in the land subject to the plaintiff’s equitable interest. The effect of the Real Property Act does not produce a different result. When the defendant became the registered proprietor it held its interest subject to the interests comprised in the registered lease, which include the plaintiff’s interest under the option to renew (see Mercantile Credits Ltd v The Shell Company of Australia Ltd (1976) 136 CLR 326 at 338-9, 345 and 351-2; Tenstat Pty Ltd v Permanent Trustee Australia Ltd (1992) 28 NSWLR 625 at 629).

  7. Even if that were not the position, I think that in the circumstances of this case, in particular the terms upon which the defendant contracted to acquire its interest in the land, a personal equity would have arisen that would preclude the defendant from claiming its interest free of the plaintiff’s interest (see Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 615-6, 638-9 and 653; see also the recent decision of Kunc J in Ideal Business Centres Pty Ltd v Violin Holdings Pty Ltd [2018] NSWSC 1249). The defendant agreed with the former owners that it would acquire its title subject to existing tenancies, in particular the plaintiff’s tenancy that derives from the registered lease, and further agreed that following completion it would comply with all obligations owed to the tenant. Recognition of the continued enforceability of the plaintiff’s rights was one of the assumptions underlying the agreement by which the defendant was able to obtain its title.

  8. For the above reasons, upon completion of its contract for sale and even after becoming the registered proprietor of the land, the defendant was bound by the plaintiff’s equitable interest that arose from the plaintiff’s exercise of the option to renew for the further five year term. It was not open to the defendant to treat the plaintiff as merely holding over following the expiry of the term on 9 September 2014. The notice of termination of the plaintiff’s tenancy given by the defendant in December 2016 was thus ineffective. The plaintiff continued in occupation on the basis of a specifically enforceable contractual right to the grant of a new lease.

  9. The rent was increased by 5% in September 2015, and by a further 5% in September 2016. This was consistent with the rent being calculated in accordance with the terms of a lease issued in accordance with the terms of the option to renew. The plaintiff essentially kept up its payments of the agreed rent to the defendant until November 2016.

  10. It appears to be common ground that by reason of the operation of s 18(3)(c) of the Retail Leases Act, the provision concerning the rent in the first year of the renewed term is void. On that basis, the commencing rent for the renewed term should not have been increased by 5% above the rent in the final year of the lease. Subsequent increases of 5% each year throughout the renewed term (effected pursuant to provisions not affected by s 18(3)(c)) were consequently based on inflated figures. The Schedule provided to the Court, which was said to be based on figures for rent that take into account the effect of s 18(3)(c), indicates that the plaintiff would have been in credit by almost $3,000 on account of rent as at 8 November 2016. The next payment was due on 10 November 2016. The plaintiff then asserted that the defendant was liable to reimburse it for the amount paid for electricity since 1 December 2015, an amount claimed to be approximately $24,000.

  11. The plaintiff now claims that the defendant is obliged to reimburse it for all amounts paid for electricity since early 2010, an amount in excess of $266,000. Alternatively, the plaintiff claims that it is entitled to set off that amount against rental arrears and future rent (see Amended Statement of Claim paragraphs 12 and 29).

  12. The plaintiff submitted that the defendant is subject to all the covenants imposed on the former lessors under what is described as the original lease and what is described as the renewed lease. Reliance was placed upon s 40(3) of the Real Property Act and s 118 of the Conveyancing Act. It was put that the lease and any renewed lease contained a covenant on the part of the lessor to pay for electricity supplied to the leased premises. The covenant was said to be either express or implied, and derived from the terms of cll 30 and 66 (set out at [8]-[9] above). It was submitted that although cl 30.1 in isolation does not contain any covenant by the lessor to pay the electricity charges, when regard is had to cl 30.2 and cl 66 (especially cl 66.2.5), such a covenant should be found to exist. It was further submitted that the electricity charges fell within cl 30.2 itself. Finally, it was submitted that the decision of the Court of Appeal in Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liquidation) [2016] NSWCA 165 was directly on point on this question of construction.

  13. The defendant noted the apparent acceptance by the plaintiff that cl 30.1 did not itself contain any covenant on the part of the lessor. It was submitted that cl 30.1 said nothing about any obligations on the part of the lessor. As for cl 30.2, the defendant emphasised that it operated only in respect of certain rates, charges and taxes which the lessor “is liable to pay”. It was submitted that cl 30.2 does not create any payment obligation in favour of the lessee, and it was put that cl 66.1 only operated to create payment obligations upon the lessee. The defendant noted that cl 66.1 was concerned with outgoings that relate to the whole of the land, and that charges for electricity supplied for the tenant’s purposes do not bear that character. As for cl 66.2.5, the defendant submitted that it was merely part of a definition of “Outgoings” and in any event it excludes costs that are “otherwise payable by the Lessee”.

  14. The principles applicable to questions of construction of written commercial agreements are not in doubt. Reference need only be made to the well-known statement made by the High Court in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] where it was stated:

The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties…intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience".

  1. Courts are often pressed with a considerable volume of evidence of surrounding circumstances said to shed light upon a question of construction. That has not occurred in this case. Little is known about the circumstances that existed when the lease was entered into in September 2009. It is not known, for example, whether there was at that time a meter that separately measured electricity supplied to the leased premises (Shop 3). Mr O’Sullivan gave an answer in cross-examination (at transcript page 15) that might suggest that there was no separate meter, but the issue was not further pursued. There was evidence that at some stage City Printers Pty Ltd, which I infer from an answer given by Mr O’Sullivan in cross-examination was the previous tenant, obtained its own electricity account with Energy Australia, but this evidence is not definitive as to whether and if so when a separate meter was installed. The Agreement for Lease entered into on 24 July 2009 provided that the grant of the lease was conditional upon the plaintiff obtaining a development approval to carry out certain works, but details of the proposed works are not in evidence.

  2. It is necessary to focus upon the text of the relevant provisions of the lease, read in the context of the lease as a whole.

  3. Reference should be made at the outset to certain defined terms. Clause 1.1 of the lease contains definitions that apply unless a contrary intention appears. The “premises” is defined to mean that which is specified in Item 5. Item 5 refers to “Shop 3, 50-54 York Street, Sydney NSW 2000”. The “building” is defined to mean the building containing the premises specified in Item 5. The “land” is defined to mean the land in Certificate(s) of Title or conveyance upon which the building is erected specified in Item 4. Item 4 refers to “The whole of the property contained in Certificate of Title Folio Identifier 3/SP63152”. The land is one of 21 lots in a strata scheme. The strata scheme includes common property in addition to the various lots.

  4. I turn then to the provisions at the centre of the controversy. Clause 30.1 contains a promise by the lessee to punctually pay for all services separately metered in respect of the premises, excluding electricity. It is not clear why electricity was excluded, but there is no doubt it is.

  5. Clause 30.2 contains a promise by the lessor to pay certain rates, charges and taxes; that is, those which are “in respect of the premises the building and the land” and which “it is liable to pay”, other than any which the lessee has covenanted to pay under the lease. Under the form of lease employed here the lessee might, for example, be required to pay for all of those amounts pursuant to cl 66 (see cl 66.2.3). Clause 30.2 is directed to liabilities in the nature of rates, charges and taxes which the lessor incurs as owner of the land which includes the demised premises. Charges for electricity supplied to the premises do not seem to me to be of such a character. Clauses 30.1 and 30.2 seem to me to be concerned with different subject areas.

  6. I agree that it is odd that electricity is excluded from cl 30.1. That exclusion, on its own, would leave electricity charges (if separately metered in respect of the premises) ungoverned by cl 30. There is some force in the plaintiff’s submission that more than this is likely to have been intended. However, should the parties be held to have intended not only that electricity charges are excluded from cl 30.1, but also that such charges are to be borne by the lessor?

  7. I have come to the conclusion that the parties should not be taken to have had that intention. As the defendant submitted, the terms of cl 30.1 contain promises by the lessee. If it had been intended that the lessor would be liable for electricity charges it would have been very simple to add a few words within the parentheses to that effect, such as “which shall be paid by the Lessor”. That was not done. Moreover, having regard to the different subject areas covered by cll 30.1 and 30.2, I do not think that reading the clauses together leads to the conclusion that an obligation upon the lessor to pay electricity charges should be found within, read into, or implied in, the clauses. I agree that cl 30.2 does not create any payment obligation in favour of the lessee.

  8. Clause 66 does not seem to me to take the matter any further. The part of the definition of Outgoings relied upon by the plaintiff, namely cl 66.2.5, can include electricity charges but only if they are “not otherwise payable by the Lessee”. That is a broader expression than “not payable by the Lessee under this Lease” (compare cl 30.2). Electricity charges payable by the lessee under a contract for the supply of electricity do not fall within cl 66.2.5. Clause 66.2.5 is concerned with certain costs that are borne by the lessor. Those costs thereby fall within the concept of Outgoings and are capable of being the subject of an obligation to pay imposed on the lessee under cl 66.1. Given that “the land” is a strata scheme lot, I see no reason why the cost of electricity supplied to the premises could not be an outgoing that related to the whole of “the land”.

  9. I have considered Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liquidation) (supra). Whilst there are similarities between the provisions dealt with in that case and those dealt with here, the case cannot be said to be directly on point. There are important differences, including the obligation on the lessor in that case to ensure that electricity was separately metered for the premises.

  10. In my opinion, cl 30 of the lease should not be read so as to include any promise on the part of the lessor to pay for electricity supplied to the demised premises. Reasonable businesspersons in the position of the parties would not have understood the lease to impose that obligation upon the lessor. Express words to that effect are absent, and I do not think that an obligation to that effect should be read in or implied. Even allowing that it appears odd to merely exclude electricity charges from the ambit of cl 30, it is far from necessary, in order to give the agreement business efficacy, to impose an obligation upon the lessor to pay those charges.

  1. In my view, it cannot be thought to be commercially unreasonable or nonsensical, for the parties to simply leave to the lessee the matter of arranging and paying for the supply of electricity to the demised premises. I do not think that reasonable businesspersons in the positions of the lessor and the lessee would have thought so. There is no reason to think that it would be other than a straightforward matter. The premises were evidently connected to the network, so it was only necessary to engage a supplier. It is noteworthy that after the plaintiff went into occupation it proceeded to make arrangements with suppliers and pay the ensuing electricity bills. That was done for at least two years before any issue was raised with the former lessors.

  2. Finally, I note that it was suggested, by the defendant, that the word “excluding” in cl 30.1 was an obvious error, and that “including” should have been there instead. I do not agree. Whilst the reason for excluding electricity from cl 30.1 remains obscure, I cannot accept that it is an obvious error. That it is an error is certainly possible having regard to the terms of the Heads of Agreement dated 22 December 2008 and Mr O’Sullivan’s evidence concerning the drafts of the later Agreement for Lease, but I am far from satisfied that the suggested error must have occurred.

  3. For the above reasons I have come to the conclusion that, properly construed, neither the lease nor any renewed lease requires the lessor to pay for electricity supplied to the premises.

  4. Accordingly, the plaintiff was not justified in claiming a right to reimbursement from the defendant of amounts it paid for electricity, or in thereafter withholding the payment of the rent on the basis that it was entitled to set off amounts it paid for electricity.

  5. It appears from the Schedule provided to the Court that the plaintiff has been in arrears of rent since November 2016. By January 2018 the arrears were in excess of $123,000. The plaintiff was in occupation of the premises on the basis that it was entitled to a new lease in accordance with the option to renew. The terms of its occupation were those of the renewed lease that would be granted accordingly. The plaintiff’s failures to pay rent were breaches of essential terms of the renewed lease (see cll 18 and 67), and amount to a repudiation of it. The plaintiff would not in those circumstances be able to obtain specific performance of its contractual right to the grant of a new lease. In my opinion it was open to the defendant to terminate the plaintiff’s occupation of the premises as it did on 12 February 2018, and recover possession for itself.

  6. It should be noted that at the commencement of the hearing the plaintiff made an application to amend its Defence to the Cross-Claim to make an application for relief against forfeiture in the event that its arguments were otherwise unsuccessful. However, the plaintiff decided not to press the application and it was made clear that the plaintiff did not, at least at this stage, seek relief against forfeiture. In these circumstances it is appropriate to give judgment for possession of the premises as sought by the defendant in its Cross-Claim.

  7. Judgment should also be entered on the Cross-Claim for a sum comprising the amount of unpaid rent (and interest thereon) up to the date of termination on 12 February 2018, and an amount of mesne profits for the period from 13 February 2018 up to the date of judgment (calculated on the basis of the rent that would have been payable under the renewed lease). These amounts should be calculated having regard to the effect of s 18(3)(c) of the Retail Leases Act. I note that an additional claim to recover water rates was ultimately not pressed. This monetary judgment should be entered against both the plaintiff and Mr O’Sullivan pursuant to the guarantee and indemnity he gave under cl 63 of the lease.

  8. The conclusion I have reached renders it unnecessary to deal with various other issues, including whether (and the extent to which) any obligation upon the lessor to pay for electricity was enforceable against the defendant, and whether the plaintiff would be entitled to set off against its obligations to pay rent any amount the defendant, in breach of such an obligation, failed to pay. It is also unnecessary to deal with the defendant’s alternative argument that cl 30.1 of the lease should be rectified to replace “excluding” with “including”. However, in this regard I will state that in my opinion no case for rectification was made out.

  9. The rectification case largely rested on the terms of the Heads of Agreement dated 22 December 2008 which provided that the lessee “shall be responsible for all costs associated with power, gas, phone, water etc. consumed within the Premises”. That might establish the existence of a common intention at that time that the lessee pay for electricity, but it is necessary to show that the common intention existed up to the time of execution of the instrument sought to be rectified (see Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 at 345; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [41]). This was not done. As envisaged by the Heads of Agreement itself, the parties engaged in further negotiations for an Agreement for Lease. The evidence showed that the various drafts of the Agreement for Lease, and the final Agreement for Lease, contained a provision in the terms of what ultimately became cl 30.1 of the lease. No evidence was adduced to show that the terms of the provision were the product of a mistake and that the terms thus failed to reflect a common intention held by the parties (see Simic v New South Wales Land and Housing Corporation (supra) at [103]). The Court was in effect invited to infer that, due to mistake, the terms of the Agreement for Lease failed to reflect a continuing common intention that the lessee pay for electricity. In my opinion it would not be appropriate to draw such inferences. A claim for rectification must be established by clear and convincing proof. That proof was lacking in this case.

Conclusion

  1. The plaintiff’s claims have not been made out. The Amended Statement of Claim should be dismissed. The defendant is entitled on its Cross-Claim to judgment for possession of the premises, and also monetary judgments calculated in the manner described above.

  2. The Court directs that the parties confer with a view to seeking agreement concerning the calculation of the monetary judgments and, within 7 days, bring in Short Minutes of Order to give effect to these reasons. The Short Minutes should also deal with costs. Prima facie, costs should follow the event so that the costs of the defendant/cross-claimant are paid by the plaintiff and Mr O’Sullivan. The Short Minutes should also deal with any monies that have been paid into Court.

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Decision last updated: 11 September 2018

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Mercantile Credits Ltd v Shell Co of Australia Ltd [1976] HCA 9
Mulkearns v Chandos Developments Pty Ltd (No 4) [2005] NSWSC 511
Mercantile Credits Ltd v Shell Co of Australia Ltd [1976] HCA 9