SeaRoad Logistics v Patricks Stevedores
[2014] VSC 170
•15 April 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 04515 of 2013
| SEAROAD LOGISTICS PTY LTD (ACN 123 782 196) | Plaintiff |
| V | |
| PATRICKS STEVEDORES OPERATIONS NO 2 PTY LIMITED (ACN 056 292 687) | Defendant |
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JUDGE: | ALMOND J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 5 December 2013 | |
DATE OF JUDGMENT: | 15 April 2014 | |
CASE MAY BE CITED AS: | SeaRoad Logistics v Patricks Stevedores | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 170 | |
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CONSTRUCTION OF LEASE – Proper construction of head lease and sub lease – Dispute between tenant and sub tenant whether rent review clause from head lease incorporated into sub lease – Rent review to be ‘in the same manner’ – Meaning of ‘manner’– Whether terms inconsistent – Validity of rent review procedure undertaken – Requirement to pay part of the rent sought if sub tenant objects to rent review – Exercise of option to renew sub lease – Obligation to seek consent from head landlord – Whether sub tenant a monthly tenant or a tenant in equity for further term – Objections to evidence.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S M Anderson SC Ms F L Shand | Brian Ward & Partners |
| For the Defendant | Mr R M Peters | Altus Lawyers |
HIS HONOUR:
This case concerns the proper construction of the terms of a sub lease under which the plaintiff, SeaRoad Logistics Pty Ltd (’SeaRoad’) leases land at 3–5 Webb Dock East, Port Melbourne from the defendant, Patrick Stevedores Operations No 2 Pty Ltd (’Patrick’).
Background
Patrick is a provider of port stevedoring, transport and logistics services. SeaRoad carries on business providing freight forwarding and logistics services between mainland Australia and Tasmania.[1]
[1]The Background section is formulated from an Agreed Statement of Facts, 26 November 2013 (‘Agreed Statement of Facts’).
Since around June 2000, Patrick has leased land at 3–5 Webb Dock East, referred to as the ‘Cargo Terminal’, under the terms of a Head Lease (’Head Lease’). The land is owned by the Port of Melbourne Corporation (‘PMC’), the current head lessor.[2]
[2]The Head Lease was made on or about 28 June 2000 between Patrick and Melbourne Port Corporation. On 1 July 2003, by operation of s 163 of the Port Services Act 1995 (Vic) (subsequently named the Port Management Act 1995 (Vic)), the Cargo Terminal was vested in PMC and PMC was substituted for the Melbourne Port Corporation as a party to the Head Lease.
On 22 August 2005, Toll Holdings Limited (’Toll’) announced its intention to make an off market takeover bid for all the shares in Patrick Corporation Limited (a body corporate related to Patrick) that it did not already own (’Proposed Acquisition’). On about 11 March 2006, the Australian Competition and Consumer Commission (’ACCC’) accepted undertakings from Toll in exchange for discontinuing proceedings it had commenced against Toll in the Federal Court to restrain the Proposed Acquisition (‘Undertakings’).[3]
[3]Toll Holdings Limited undertakings to the ACCC, 11 March 2006, Court Book (‘CB’), 70-113.
Patrick objects to evidence of the Proposed Acquisition and the Undertakings being admitted to construe the sub lease between Patrick and SeaRoad on the grounds of relevance. I have found this evidence to be relevant and admissible. The objections are dealt with in detail later in these reasons.
On 7 February 2007, Patrick (and its related entities) agreed to sell and assign its Tasmanian freight forwarding business (‘Freight Business’) to SeaRoad (’Sale Agreement’).[4] The Sale Agreement required Patrick (subject to obtaining PMC’s consent) to sub lease part of the Cargo Terminal to SeaRoad (‘Sub Let Land’) for the same term as the Head Lease, including any options for a further term as exercised by SeaRoad.[5]
[4]Clause 2, Sale Agreement, CB 114.
[5]Clause 12.5(a), Sale Agreement, CB 141. SeaRoad occupies an area of approximately 32,200m2 within the Cargo Terminal, which consists of 25,400 of pavement area and 6,800m2 of shed area.
On 25 March 2007, the Sale Agreement was completed and SeaRoad took possession of the Sub Let Land from Patrick for the purposes of operating the Freight Business, in consideration of payment of an annual rent of $591,807 (exclusive of GST).
Patrick provided SeaRoad a draft sub lease in 2007. For reasons which are not relevant to this proceeding, the sub lease was only executed sometime between January and March 2011 even though the term of the sub lease was from 25 March 2007 until 30 December 2010 and had therefore expired prior to its formal execution (’the Agreed Sub Lease’). During the term of the Agreed Sub Lease, PMC had not been asked to, and did not provide its consent to the Agreed Sub Lease.
The primary issues for determination in this proceeding are whether:
· the rent review clause under the Head Lease is incorporated by reference into the Agreed Sub Lease;
· the terms of the rent review clause under the Head Lease are inconsistent with the Agreed Sub Lease, such that the terms of the Agreed Sub Lease prevail;
· SeaRoad or Patrick is obliged to obtain the consent of PMC to the Agreed Sub Lease; and
· SeaRoad is obliged to pay Patrick 80 per cent of a proposed rent increase.
Incidentally, there is an issue as to whether SeaRoad currently occupies the premises as a monthly sub tenant or as a sub tenant for a fixed term in equity under an agreement for lease.
Construction principles
The relevant principles of construction are well-established. The meaning of commercial documents is determined objectively. The court must decide what a reasonable person in the position of the parties would have understood the terms to mean. This normally requires consideration of the surrounding circumstances and the commercial purpose of the contract. The contract is to be construed so as to give it a commercially sensible construction.[6]
[6]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, [40]; Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337, 350 per Mason J (Stephens J and Wilson J agreed); Royal Botanic Gardens and Domain Trust v South Sydney Council (2002) 240 CLR 45, [10] (Gleeson CJ, Gaudron, McHugh, Gummow, Hayne JJ); Upper Hunter Country District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, [22]; IATA v Ansett Australia Holdings Ltd (2008) 234 CLR 151, 160 [8].
An appreciation of the ‘commercial purpose of a contract ... presupposes knowledge of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.[7]
[7]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, [22]; Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989, 995-996; [1976] 3 All ER 570, 574; Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337.
In Eureka Funds Management Ltd v Freehills Services Pty Ltd, a case concerning the construction of a rent review clause in a lease, the Court of Appeal stated that ‘the wording of rent review clauses is infinitely various and the principal focus must be on the interpretation of the language of the lease in question in the light of any admissible evidence of surrounding circumstances’.[8]
[8](2008) 19 VR 676, 682 (Cavanough AJA).
In discerning the parties’ intention, the court must have regard to the contract as a whole and, if possible, construe the words of every clause ‘so as to render them all harmonious’ and give the various components of an agreement a consistent or congruent operation.[9] The court may supply, omit or correct words where it is clearly necessary to avoid absurdity or inconsistency.[10]
[9]ABC v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, [16].
[10]Fitzgerald v Masters (1956) 95 CLR 420, 426-7; Plenary Research Pty Ltd v Biosciences Research Centre Pty Ltd [2013] VSCA 217, [43].
Where the language in a contract is reasonably open to two constructions, courts will prefer a construction which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, ‘even though the construction adopted is not the most obvious or the most grammatically accurate’.[11]
[11]ABC v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109, citing with approval Locke v Dunlop (1888) 39 Ch D 387, 393.
I deal now with the primary construction issue.
Rent Reviews
On about 2 May 2013, PMC notified Patrick that:
(a)a rent review had been undertaken to determine the current market rent for the Cargo Terminal effective 1 May 2012; and
(b)PMC believed $3,600,000 per annum (exclusive of GST) reflected the current market rent at the date of the review.
This figure represents an increase of about 8.67 per cent in the annual rent then payable by Patrick under the Head Lease.
On 27 May 2013, Patrick responded to PMC objecting to the assessment of rent, and stated that given the market and economic conditions, Patrick did not believe an increase was warranted and that the rent should remain as it was.
On 7 June 2013, Patrick notified SeaRoad that:
(a)a rent review had been undertaken to determine the current market rent for the Sub Let Land effective 1 May 2012; and
(b)Patrick believed $1,479,600 per annum (exclusive of GST) reflected the current market rent at the date of the review (‘Purported Notice’).
This figure represents an increase of about 100 per cent in the annual rent payable by SeaRoad under the Agreed Sub Lease as at 1 May 2012 (which was $739,496.35), and a 96 per cent increase in the annual rent payable by SeaRoad as at 1 January 2013 (which had increased to $755,041.32, due to a Consumer Price Index increase).
On 5 July 2013, SeaRoad objected to the rent increase proposed under the Agreed Sub Lease stating that the percentage increase should be the same as the percentage increase under the Head Lease.
Between 10 and 11 July 2013, Patrick and PMC agreed to appoint Knight Frank Valuations (‘Knight Frank’) to determine the rent for the May 2012 rent review of the Head Lease.[12]
On about 11 August 2013, Knight Frank released its rental determination report, which stated that the current market rent under the Head Lease as at 1 May 2012 was $3,369,800 (exclusive of GST) per annum, representing a l.72 per cent increase to the annual rental for the Cargo Terminal payable at 1 May 2012.[13]
On 15 August 2013, SeaRoad requested information from Patrick regarding the manner of the May 2012 rent review for the Head Lease (including the amount of any percentage increase) and confirmation as to whether Patrick intended to continue to rely on the validity of the Purported Notice.
On 2l August 2013, Patrick responded to SeaRoad, declining to provide the requested information and confirming that it considered the Purported Notice to be valid.
The Agreed Sub Lease relevantly provides:
2. SUB-TENANT COVENANTS TO PATRICK
The Sub-Tenant (SeaRoad) covenants with Patrick with effect from the commencement date as follows:
2.1 Sub-Lease Rental and outgoings
2.1.1To pay Patrick a gross annual rental in the sum of $591,908 (“Sub-Lease Rental”), such rental to be paid monthly in advance and reviewed in the same manner and on the same dates in which rent is reviewed under the Head-Lease.
4. COVENANTS CONTAINED IN HEAD-LEASE
The Sub-Tenant and Patrick agree as between themselves and only to each other:
4.1the covenant and conditions contained in the Head-Lease (except the Special Conditions other than Special Conditions 6.3, 6.4 and 6.5) will apply to this Deed as if they were set out in detail with such modifications as may be necessary to make the same applicable to this Deed. In the case of inconsistency between this Deed and the covenants and conditions contained in the Head-Lease, this Deed will prevail. The following covenants in the Head-Lease do not apply to this Deed:
(a) …
(b) the obligation to pay rent under clauses 4.1 and 4.2;
(c) the obligation to pay outgoings under clause 4.4. (emphasis added)
The Head Lease contains a detailed rent review procedure:
4.3 Market Rent Review
4.3.1On each Review Date the Rent will be varied to the Current Market Rent agreed or determined under this clause 4.3;
4.3.2the Current Market Rent shall be the annual rent that can reasonably be obtained for the Premises on the relevant Review Date:
4.3.2.1as if the Premises were available for immediate completion for the Permitted Use by a willing but not anxious landlord to a willing but not anxious tenant for a term equal to the full period for which the Lease was granted;
4.3.2.2 excluding:
4.3.2.2.1the value of the Tenant’s Goods;
4.3.2.2.2the value of any buildings or other improvements erected on the Premises by the Tenant;
4.3.2.2.3any deleterious condition of the Premises because of any breach of the Lease by the Tenant; or
4.3.2.2.4the Tenant’s goodwill; and
4.3.2.3otherwise on the terms and conditions of the Lease;
4.3.3no earlier than 3 months before a Review Date (except where the Review Date is an Option Lease commencing date and the Tenant has made a request for determination as provided in clause 3.5.2), the Landlord will give the Rent Review Notice to the Tenant;
…
4.3.18the Landlord shall not by reason of its failure to give the Rent Review Notice on or before a Review Date forfeit its right under the Lease to have the Rent reviewed. No subsequent Review Date shall be postponed as a result;
4.3.19within 14 days of agreement or determination of the Rent payable from the Review Date the parties shall adjust any underpayment or overpayment of Rent;
…
Incorporation by reference
SeaRoad contends that clause 4.3 of the Head Lease is not incorporated into the Agreed Sub Lease because it is inconsistent with the Agreed Sub Lease.[14] Patrick contends that clause 4.3 of the Head Lease is incorporated into the Agreed Sub Lease by reason of clause 4.1 of the Agreed Sub Lease.[15]
[14]Defence to Counterclaim, 2 October 2013, [2(c)(ii)], [2(d)(ii)], [2(e)(ii)]; Plaintiff’s Outline of Submissions, 28 November 2013, (‘Plaintiff’s Submissions’), [33]–[41].
[15]Defence and Counterclaim, 20 September 2013, [34]; Defendant’s Outline of Submissions, 28 November 2013 (‘Defendant’s Submissions’), [23].
In my view, it was plainly intended by the parties that clause 4.3 would be incorporated into the Agreed Sub Lease with necessary modifications.
First, the express words of clause 4.1 state that the covenants in the Head Lease will apply ‘as if they were set out in detail with such modifications as may be necessary to make the same applicable’ to the Agreed Sub Lease. In my view, this reflects an objective intention that the regime for rent review under the Agreed Sub Lease would be the same as the regime for review under the Head Lease (allowing for necessary modifications).
Secondly, the parties expressly excluded certain covenants in the Head Lease from the Agreed Sub Lease, notably the covenants in clauses 4.1, 4.2 and 4.4, but not clause 4.3 of the Head lease.[16] This is also a compelling indication that the parties intended to incorporate clause 4.3 in the Agreed Sub Lease.
[16]Agreed Sub Lease, Clause 4.1, CB 198.
Inconsistency
Having found that clause 4.3 of the Head Lease is incorporated into the Agreed Sub Lease, albeit with necessary modifications, it is necessary to consider whether there is nevertheless an inconsistency between the covenants and conditions of the Agreed Sub Lease and the covenants and conditions of the Head Lease. In the event of inconsistency, the Agreed Sub Lease is to prevail.[17]
[17]Ibid.
SeaRoad submits that clause 2.2.1 means that there will be a ‘simple pass through’ of the percentage change to rent payable under the Head Lease to rent payable under the Agreed Sub Lease (i.e. that the 1.72 per cent increase under the Head Lease should apply to the Agreed Sub Lease). SeaRoad submits that the detailed procedure set out in clause 4.3 is inconsistent with ‘the simple pass through approach’ and that the two provisions cannot be read harmoniously. The inconsistency arises because clause 4.3 is a stand-alone mechanism for review, which is not referable to any other review whereas clause 2.1.1 ’requires the review to be linked to the final, completing step of the actual review formed under the Head Lease’.[18] SeaRoad also submits that the rent review under the Agreed Sub Lease is linked to a rent review under the Head Lease in two respects: first, as to manner, and second, as to date. Thus, SeaRoad contends that the objective intention of the parties is for the rent review under the Agreed Sub Lease to be ’in concert with and not independent of’ the Head Lease rent review.[19]
[18]Plaintiff’s Submissions, [38].
[19]Plaintiff’s Submissions, [36].
I am not persuaded by these submissions.
I do not accept the premise that the language of clause 2.1.1 reflects an objective intention for there to be ’a simple pass through’ of the percentage change to rent payable under the Head Lease to the rent payable under the Agreed Sub Lease.
Had the parties objectively intended ’a simple pass through’, it would have been the essence of simplicity to say so, merely by providing that the percentage change to rent under the Head Lease would be the percentage change to the rent under the Agreed Sub Lease. The parties chose not to do so. Rather, the parties chose to incorporate the detailed rent review regime under clause 4.3. If a pass through were intended, the regime would have been superfluous and would have been excluded along with clauses 4.1, 4.2 and 4.4.
In addition, it appears that the parties have deliberately turned their minds to the practicalities of incorporation of clause 4.3 in the Agreed Sub Lease by introducing the qualification ’with such modifications as may be necessary’. Without some modification, the clause as incorporated would have no sensible application. For example, it is obvious that the word ‘Landlord’ would need to be modified to refer to Patrick; ’Tenant’ would need to be modified to refer to SeaRoad; and quarterly instalments (clause 4.3.6 of the Head Lease) would need to be modified to become ’monthly in advance instalments’ (to allow for clause 2.1.1 of the Agreed Sub Lease). The fact that the parties contemplated that modifications would be necessary, and provided for it in the Agreed Sub Lease, fortifies my view that the parties intended to ensure that the detailed regime of clause 4.3 would apply to the Agreed Sub Lease.
After making necessary modifications, in my view clause 2.1.1 of the Agreed Sub Lease can operate harmoniously with clause 4.3 of the Head Lease as incorporated. The former describes generally how a rent review is to occur. The latter describes specifically how a rent review is to occur. In my view, there is no inconsistency and therefore there is no occasion for the Agreed Sub Lease to ‘prevail’. Both clauses lead to the same outcome.
Same manner
Clause 2.1.1 requires rent to be reviewed in the same manner as rent is reviewed under the Head Lease. SeaRoad contends that clause 2.1.1 directs the reader to ‘follow the manner of the review undertaken by the Head Lease’.[20]
[20]Transcript, 5 December 2013 (‘Transcript’), 40.2-4.
Concerning the ordinary meaning, dictionary definitions of the word ‘manner’ include:
A way a thing is done or happens.[21]
Way of doing, being done or happening; mode of action.[22]
[21]Judy Pearsall (ed), The New Oxford Dictionary of English, (Oxford University Press, 1st edition, 1998), 1126.
[22]A Delbridge, JRL Bernard, D Blair, S Butler, P Peters, C Yallop (eds), The Macquarie Dictionary, (The Maquarie Library, 3rd edition, 2001), 1311.
Literally applied, the review of rent under the Agreed Sub Lease is to be the same ‘way of doing’ the review of rent under the Head Lease.
In Grosglik v Grant, the High Court considered a rule of the Court requiring appeals to be brought ’in the same manner’ as appeals were to be brought to the state Supreme Court. Latham CJ, who delivered the judgment, stated that the rule related only to the ‘method of bringing appeals’ to the Court.[23]
[23](1947) 74 CLR 355, 357.
In Polgara Pty Ltd v Visionwise Holdings Pty Ltd, Young J said that the word ‘manner’ may have a narrower or wider meaning depending on its context but that ‘the word does not necessarily connote every aspect of the procedure’.[24]
[24](1996) NSW ConvR 55-781, [9].
In my view ‘in the same manner’, in the present context, means that a review of rent under the Agreed Sub Lease must be performed using the same methodology as a review of rent under the Head Lease (applied to different circumstances). This interpretation is consistent with the dictionary definitions and the authorities referred to above.
Reviewed in the same manner does not mean that the review will produce the same outcome in percentage terms or otherwise. The current market rent determined under clause 4.3 will be peculiar to each lease despite the same methodology being applied. For example, the current market rent excludes the value of any buildings or other improvements erected on the premises by the tenant (clause 4.3.2.2.2) and any deleterious condition of the premises because of any breach of the lease by the tenant (clause 4.3.2.2.3). It is common ground that in about 2000, Patrick constructed a shed and related improvements at the Cargo Terminal. In determining the current market rent under the Head Lease, the value of such improvements erected by Patrick would be excluded (presumably translating into a lower rent determination). In determining the current market rent under the Agreed Sub Lease, the value of those improvements would not be excluded because they were not erected by SeaRoad (presumably translating into a higher rent determination). Likewise, had the premises been reduced to a deleterious condition by Patrick, that deleterious condition would be excluded from the determination of current market rent for Patrick but would not be excluded for the purposes of determining current market rent of SeaRoad.
Same dates
Under clause 2.1.1, rent must be reviewed not just in the same manner but also ‘on the same dates in which rent is reviewed under the Head Lease’.[25] SeaRoad contends that the use of the word ‘reviewed’ connotes a process that has occurred and is complete and that the context includes the qualification ‘on the same date’. SeaRoad contends that ‘accordingly it is the final, completing step in the Head Lease rent review process on the same date’ that must be passed through to the review under the Agreed Sub Lease.[26] In oral argument, Senior Counsel for the plaintiff contended that ‘same dates’ means ‘the date upon which the review was undertaken under the Head Lease’.[27]
[25]It would appear that the word ‘in’ before the word ‘which’ is an obvious typographical error and should be ‘on’.
[26]Plaintiff’s Submissions, [37].
[27]Transcript, 41.9-11.
I do not accept SeaRoad’s contention that the clause directs the reader to rent which has already been reviewed under the Head Lease on the same date that it was reviewed under the Head Lease.
This construction seems to ignore, or at least give insufficient weight to, the words ‘to be’ in clause 2.1.1. Putting aside the obligation imposed on SeaRoad to pay Patrick rent monthly in advance, the clause provides that such rental ‘to be … reviewed in the same manner and on the same dates in which rent is reviewed under the Head Lease’. In my view, the use of the word ‘reviewed’ (twice), considered either separately or together in their context, does not require the review under the Head Lease to have occurred. The expression ‘to be reviewed’ does not connote that the review has occurred or is complete. The construction for which SeaRoad contends seems to be driven by a precept that the respective reviews are not only linked but are tied to produce the same outcome. In my view, the rent reviews under the Head Lease and the rent reviews under the Agreed Sub Lease are linked only in a broad sense, namely to the extent that the same methodology is to be employed and that the reviews are to be on the same dates.
In this regard, I reject SeaRoad’s construction that the words ‘same dates’ in clause 2.1.1 relate to the particular date on which the May 2012 review took place under the Head Lease.
The construction of clause 2.1.1 must be considered in its wider context. Rent reviews under the Head Lease are to be conducted on specified review dates, namely on 1 May in each of the years 2002, 2004, 2006, 2008, 2010, 2012, 2014 and 2016.[28] Clause 4.3 engages the expression ‘Review Dates’ as that term is defined.
[28]Head Lease, Item 7, CB 3.
In my view, reference is made to those dates in clause 2.1.1. This is evident from the fact that the word ’dates’ is in plural form (’same dates’). The actual date upon which a review is undertaken under the Head Lease is of no particular significance either under the Head Lease or the Agreed Sub Lease. Conversely, there is utility and logic to synchronising the dates as at which rent is to be reviewed under both the Head Lease and Agreed Sub Lease since this is likely to produce economies of scale and consistency of approach.
For those reasons, I find the reference to ‘same dates’ in clause 2.1 means that the rent should be reviewed as at the same dates as rent is reviewed under the Head Lease (making such modifications as are necessary by ignoring dates which pre-date and are not relevant to the Agreed Sub Lease).
For present purposes, ‘same dates’ means reviews as at 1 May 2012, 1 May 2014 and 1 May 2016. Such reviews must follow the prescribed methodology in clause 4.3.
Ruling on objections to evidence
Patrick’s challenge to the admissibility of evidence of the Proposed Acquisition, the Undertakings and the completion of the compulsory acquisition of all outstanding shares,[29] is on the grounds of relevance. SeaRoad contends that the circumstances of the divestment of the Freight Business are relevant and are linked to the Agreed Sub Lease by the Sale Agreement.
[29]Agreed Statement of Facts, [14]–[17].
Proposed Acquisition and Undertakings
It is not disputed that the Sale Agreement is relevant and admissible. SeaRoad contends it was part of the broader transaction involving the Agreed Sub Lease and completion was contemporaneous with SeaRoad taking possession of the Sub Let Land. The Sale Agreement refers to the proposed Agreed Sub Lease and vice versa.[30] SeaRoad contends that if evidence of the Sale Agreement is relevant to the surrounding circumstances then so are the circumstances of the Proposed Acquisition as the events are the genesis of the Sale Agreement and give a factual context to entry into the Agreed Sub Lease.[31]
[30]Sale Agreement, clause 12.5, CB 141; Agreed Sub Lease, clause 8.2, CB 202.
[31]SeaRoad’s Submissions on Patrick’s Objection to Evidence, 5 December 2013, [5].
It is uncontroversial that evidence of surrounding circumstances can be used to resolve ambiguities or assist in interpretation where language is susceptible of more than one meaning where the surrounding circumstances are known to both parties. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales, Mason J formulated the ‘true rule’ as follows:
Evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract where it has a plain meaning. Generally speaking facts existing when a contract was made will not be receivable as part of the surrounding circumstances as an aid to construction unless they were known to both parties. Although…if the facts are notorious knowledge of them will be presumed.[32]
[32]Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352; Retirement Services Australia (RSA) Pty Ltd v 3143 Victoria Street Doncaster Pty Ltd [2012] VSCA 134, [48], [84]-[94].
In my view, it cannot be doubted in this case that the circumstances pertaining to the sale of the Freight Business, including the fact of the Proposed Acquisition and the giving of the Undertakings, were known to both parties. In this regard, I note that the Undertakings were undertakings given to the public. Moreover, the Sale Agreement was subject to the ACCC not objecting to SeaRoad purchasing the Freight Business.[33] I accept that the Proposed Acquisition and the Undertakings are a relevant aspect of the genesis of the Sale Agreement and provide a broad context and a setting in which to consider the entry into the Agreed Sub Lease. These surrounding circumstances are admissible to assist in the construction of the Agreed Sub Lease, particularly clause 2.1, as the language is plainly susceptible of more than one meaning.
[33]Sale Agreement, clause 1.1, CB 119; Undertakings, clause 6.2(c), CB 77.
I do not accept the submission by counsel for Patrick that the terms of the Undertakings could not rationally affect the assessment of the objective intention of the parties to the Agreed Sub Lease.
Undertakings were given by Toll to the ACCC to the effect that Toll would procure Patrick to divest the Freight Business and that:
the sale and/or assignment of any assets […] used by, or in, the Divestment Businesses [i.e., the Freight Business] at the date of these Undertakings that are leased or subject to third party consent upon a change of control or transfer of the business will be subject in each case to Toll obtaining the relevant written consent of the lessor or third party to the continuation of the use, after the sale of such a business in accordance with this Undertaking, of such asset […] (including the transfer, assignment or novation of such an instrument if appropriate) by the Divestment Business, on no less favourable terms than enjoyed by the Divestment Business at the date of this Undertaking.[34]
[34]Undertakings, clauses 2(a), 4.4(a) and 19.1, CB 72, 74, 97-101; Agreed Statement of Facts, [16].
Counsel for Patrick submitted that it is not at all clear that the Undertakings refer to anything in the nature of an Agreed Sub Lease because the word lease is not used and the expression ’on no less favourable terms than enjoyed by Divestment Business at the date of this Undertaking’ is ambiguous.[35] Patrick submits that because the Undertakings were superseded by the Sale Agreement which specifically dealt with the Agreed Sub Lease, the evidence should be rejected because it could not rationally assist the court in the determination of the ultimate issue.[36]
[35]Transcript, 11.4–31.
[36]Transcript, 12.4–11.
In my view, the facts of the Proposed Acquisition which are referred to in the Undertakings, and the Undertakings themselves, are admissible. Both parties knew that the demised premises (the Cargo Terminal) had become available for lease as a consequence of the Proposed Acquisition and the divestment required by the ACCC; and that the Undertakings were to the effect that the continuation of the use after the sale of ‘any assets’ used by the Freight Business would continue on no less favourable terms than those enjoyed by Patrick.
I accept that the word ‘lease’ is not used and that the terms of the Undertakings could be expressed more clearly, but taking a pragmatic a view of the drafting, it seems to me that ’any assets’ is sufficiently clear and is meant to be all embracing such that it would include an interest in land under a lease. Further, where in effect the same terms are used (by incorporation in the Agreed Sub Lease), any qualitative questions which could arise from the expression ’no less favourable terms’ in other cases do not arise in this case. One way to ensure that the use was on terms ’no less favourable’ would be to incorporate by reference the covenants and conditions of the existing lease into the new lease. A reasonable person in the position of the parties, knowing the genesis of the transactions and the constraints imposed by the Undertakings may well have been more likely to formulate or agree to terms of a sub lease which adopted terms of the Head Lease in that context.
That said, in my view there is some force in the argument that clause 4.4(a) of the Undertakings is ambiguous or of uncertain meaning. That goes to the probative value of the evidence. As a consequence I give the evidence less weight than I would otherwise.
SeaRoad seeks to rely upon clause 4.4(a) of the Undertakings in order to support the argument that the rent determinations under the Head Lease should be passed through to the Agreed Sub Lease and against the outcome which has occurred in this case, where the rent for the Cargo Terminal under the Head Lease has increased by 1.72 per cent and SeaRoad’s rent for its portion of the Cargo Terminal has almost doubled.
The pass through argument fails to take into account any differing considerations between the circumstances of Patrick as head tenant and the circumstances of SeaRoad as sub tenant. A pass through increase would produce an unjust outcome because SeaRoad would obtain the benefit of the use of a shed and related improvements made to the Cargo Terminal by Patrick[37] at no cost and the net consequence would be that SeaRoad would be occupying the premises on more favourable terms than those enjoyed by Patrick.
[37]Agreed Statement of Facts, [5].
As I have previously noted, clause 4.3 of the Head Lease excludes from the determination of rent the value of the tenant’s goods; the value of any buildings or other improvements erected on the premises by the tenant; any deleterious condition of the premises because of any breach of the lease by the tenant or the tenant’s good will. Those exclusions should apply equally to Patrick and SeaRoad if the premises are to be occupied on no less favourable terms than those enjoyed by Patrick’s Freight Business at the date of the undertaking. The effect is to exclude the value of any buildings or other improvements erected on the premises by either Patrick or SeaRoad in the determination of rent. As Patrick alone erected buildings or other improvements on the premises it is Patrick alone which obtained the benefit on the review of rent of the exclusion. This gives force and effect to the notion that the premises are enjoyed by SeaRoad on no less favourable terms than the premises were enjoyed by Patrick, although the outcome on the review of rental might produce a significantly different percentage change to the underlying rent.
It seems to me that the obligation to ensure that the use is on no less favourable terms than those enjoyed by Patrick’s Freight Business at the date of the Undertakings provides a further reason to conclude that the parties intended to incorporate clause 4.3 in the Agreed Sub Lease. Incorporation of the detailed regime for rent review under the Head Lease in the sub lease would be likely ensure that the continuation of use of the Cargo Terminal was on no less favourable terms than enjoyed by Patrick’s Freight Business.
Compulsory acquisition of outstanding shares
I accept the submissions of Patrick that the fact that Toll completed the compulsory acquisition of all outstanding shares in Patrick Corporation on 3 July 2006 does not satisfy the test under s 55 of the Evidence Act 2008 (Vic). I cannot see how it could rationally affect (directly or indirectly) the assessment of the matters in issue.
Accordingly, in my view paragraphs 14, 15 and 16 of the Agreed Statement of Facts (dealing with the Proposed Acquisition and the Undertakings) are relevant and admissible under s 55 of the Evidence Act 2008 (Vic) but paragraph 17 (dealing with completion of the compulsory acquisition of all outstanding shares) is not relevant and is therefore inadmissible.
Urbis Valuation material
It is an agreed fact that Patrick engaged a valuer from Urbis Valuations Pty Ltd to prepare a submission to the Knight Frank valuer who was engaged to determine the rent for the May 2012 rent review of the Head Lease.[38] Patrick submits that these facts are not relevant. I accept this submission as this material relates to the determination of rent under the Head Lease and not the determination of rent under the Agreed Sub Lease. In light of my findings above in relation to clause 2.1.1 of the Agreed Sub Lease, the evidence cannot rationally affect the construction issues that I must determine.
[38]Agreed Statement of Facts, [53]–[55]
Non-renewal of the Agreed Sub Lease
The parties are in dispute over whether SeaRoad or Patrick is obliged to obtain the consent of PMC to the Agreed Sub Lease.
The Head Lease relevantly provides:
9. TRANSFER AND SUB-LETTING
9.1 Restrictions on Transfer
The Tenant will not Transfer the Lease without first obtaining the Landlord’s written consent. It will not be unreasonable for the Landlord to withhold consent if:
9.1.1 the Tenant is in breach of the Lease;
9.1.2the proposed transferee, assignee or sub-lessee proposes to change the Permitted Use;
9.1.3the proposed transferee or assignee is not, in the opinion of the Landlord capable of performing the obligations of the Tenant under the Lease;
9.1.4the Tenant has not complied with the procedures set out in clause 9.2; or
9.1.5the Retail Tenancies (Reform) Act may apply to this Lease after the Transfer.
…
9.2 Procedures for Obtaining Consent
If the Tenant wishes to transfer the Lease:
9.2.1the Tenant will in writing request the Landlord’s consent to any proposed Transfer and will provide the Landlord with such information as the Landlord requires about the financial standing and business experience of the proposed transferee, assignee or sub-lessee and of the Tenant;
…
17.1.34 ‘Transfer’ means to transfer, demise, sub-let, assign, set-over, mortgage, charge or otherwise encumber or to allow any person to use or occupy any part of the Premises…
The Agreed Sub Lease relevantly provides:
5. CONSENTS UNDER HEAD-LEASE
5.1When the consent of PoMC is required to any act or thing under the Head-Lease the Sub-Tenant must obtain PoMC’s consent in accordance with the terms of the Head-Lease before doing that act or thing.
...
5.3The Head-Landlord consents to this sublease.
…
6. OPTION TO RENEW
6.1 If the Sub-Tenant;
6.1.1gives Patrick a written notice on, or within three months before, 30 September 2010; and,
6.1.2is not then in breach of this Deed of which the Sub-Tenant has been given notice;
and Patrick has renewed the Head-Lease for a further term of 7 years commencing on 1 January 2011, then the parties must enter into a new deed for a further term of seven years (less one day)…
On about 23 November 2009, Patrick exercised its option under the Head Lease for a further term commencing on 1 January 2011 and expiring on 31 December 2017.
On 23 July 2010, pursuant to clause 6.1 of the Agreed Sub Lease, SeaRoad notified Patrick of its intention to renew the Agreed Sub Lease for a further term of seven years effective from 1 January 2011.
On 25 March 2011, Patrick provided SeaRoad with a draft deed for the Sub Let Land which amended the Agreed Sub Lease by extending the expiry date to 30 December 2017 and increasing the gross annual rental to $717,328.14 (’Draft Renewed Sub Lease’).
On 8 April 2011, SeaRoad advised Patrick that before SeaRoad sought board approval for the Draft Renewed Sub Lease, it would be prudent for PMC to execute the Agreed Sub Lease. PMC was not asked to, and did not, provide its consent to the Agreed Sub Lease prior to or during the term of the Agreed Sub Lease. From April 2011 until November 2011, Patrick asked for PMC’s consent to the Agreed Sub Lease but PMC declined to give its consent. From August 2011, Patrick requested PMC’s consent to the Draft Renewed Sub Lease but PMC did not provide its consent. SeaRoad did not obtain the consent of PMC to enter into either the Agreed Sub Lease or the Draft Renewed Sub Lease.
SeaRoad contends that following the exercise by SeaRoad of its option to renew the Agreed Sub Lease, Patrick was required to enter into a new deed for a further term of seven years (less one day) but has not done so and, accordingly, has not done all of the things which are necessary to enable SeaRoad to enter into the new deed.[39]
[39]Plaintiff’s Submissions, [44].
There is substance in this submission. Clause 9.1 of the Head Lease restricts transfer without Patrick first obtaining the written consent of PMC. The definition of ‘Transfer’ includes subletting or allowing any person to use or occupy any part of the premises (clause 17.1.34). Clause 9.2.1 provides that if Patrick wishes to transfer the lease, Patrick will in writing request PMC’s consent to any proposed transfer and will provide PMC with such information as PMC requires about the financial standing and business experience of the proposed transferee.
Patrick submits that clause 5.1 of the Agreed Sub Lease imposes on SeaRoad the obligation to obtain PMC’s consent to the Agreed Sub Lease. SeaRoad submits that clause 5.1 obliges SeaRoad to seek PMC’s consent for matters that would occur after the parties had entered into the Agreed Sub Lease not beforehand, and applies only to matters that SeaRoad did or could control. SeaRoad cites as an example the requirement in the Head Lease for the tenant to obtain PMC’s consent if it wishes to bring animals onto the premises or use the premises for storing dangerous goods.[40]
[40]Plaintiff’s Submissions, [46]; Head Lease, clauses 5.14 and 5.1.16, CB 12.
I accept SeaRoad’s submissions on this point. Self-evidently, the obligation under clause 5.1 of the Agreed Sub Lease cannot arise prior to entry into the Agreed Sub Lease. Prior permission is required to enter into a sub lease or to occupy the premises. Further, clause 5.3 expressly provides that the head landlord (PMC) consents to the Agreed Sub Lease and the execution clauses of the Agreed Sub Lease show that it was intended that PMC would be a signatory to the Agreed Sub Lease.[41]
[41]Agreed Sub Lease, execution page, CB 204.
In this context, clause 5.1 should be construed as dealing with subject matter other than the subject matter of clause 5.3. In my view, the reference to ’any act or thing under the Head Lease’ in clause 5.1 does not extend to obtaining the consent of PMC to the Agreed Sub Lease. Clause 5.3 shows that there was an intention that consent will already have been obtained on execution of the Agreed Sub Lease. It follows that it is Patrick’s obligation to obtain PMC’s consent to the Agreed Sub Lease and that this obligation arose before Patrick and SeaRoad agreed to the Agreed Sub Lease.
Additional rent
Patrick contends that SeaRoad is obliged to pay 80 per cent of the back rent claimed by Patrick on the first day of each month commencing from 1 July 2013 pursuant to the Head Lease, which relevantly provides:
4.3.5 if the Tenant objects to the Rent Review Notice strictly as provided in clause 4.3.4, the Rent Agreement Period will commence. If the Landlord and the Tenant do not agree within the Rent Agreement Period (time being of the essence) on the Current Market Rent to apply from the Review Date clauses 4.3.6 to 4.3.17 will apply;
4.3.6the Tenant must, from the Review Date, continue to pay the Rent at the rate applying immediately prior to the Review Date, and must also pay by equal quarterly instalments in advance eighty (80) per centum of the increase (if any) in rent sought by the Landlord and specified in the Rent Review Notice…
In my view, clauses 4.3.5 and 4.3.6 operate to require the tenant to continue to pay the rent at the rate applying immediately prior to the review date but also to pay equal monthly in advance (80 per cent) of any increase in rent sought by the landlord and specified in the rent review notice.
As I have found that clauses 4.3.5 and 4.3.6 of the Head Lease are incorporated by reference into the Agreed Sub Lease and allowing for modifications to align the payments of the increase in rent to the monthly payments of rent under the Agreed Sub Lease (cf equal quarterly instalments under the Head Lease), it follows that SeaRoad is required to pay 80 per cent of the increase sought by Patrick.
Interest and GST
SeaRoad contends that if the Purported Notice is valid, the Agreed Sub Lease, properly construed as a whole, does not require SeaRoad to pay any amount for a taxable supply until the due date on the relevant tax invoice issued by Patrick.
The Agreed Sub Lease relevantly provides:
8.5 GST
(a) …
(b)Despite the definition of consideration in the GST Law, and unless otherwise expressly stated in this Deed, prices or other sums payable or consideration to be provided under or in accordance with this Deed are exclusive of GST.
(c)If a party makes a taxable supply under or in connection with this Deed, the recipient must pay to the supplier at the same time, and in addition to the GST-exclusive consideration, an amount equal to the GST payable on that supply.
(d)The supplier must, as a precondition to the payment of an amount under clause 8.5(c), give the other party a tax invoice.
There is no dispute that clause 8.5 applies. Patrick concedes it is making a taxable supply to SeaRoad under or in connection with the sub lease.[42]
[42]Defendant’s Submissions, [63].
SeaRoad submits that clause 8.5(d) means that Patrick must as a pre-condition to the payment of rent and the GST payable with respect to that rent give SeaRoad a tax invoice. I do not accept that submission.
Under clause 2.1.1, SeaRoad is to pay rent monthly in advance. Under clause 4.3.6, (which is incorporated by reference and modified), SeaRoad is required to pay by equal monthly instalments in advance 80 per cent of the increase in rent sought by Patrick in the rent review notice. Neither of these clauses refer to GST, which is explicable because GST is dealt with separately in clause 8.5 of the Agreed Sub Lease. In particular, clause 8.5(b) provides that unless otherwise expressly stated in the Agreed Sub Lease, prices or other sums payable are exclusive of GST. Under the terms of the Agreed Sub Lease, the payment of GST is treated as a separate obligation governed by clause 8.5.
Properly construed, there is a pre-condition to the payment of ‘an amount under clause 8.5(c)’ that Patrick give SeaRoad a tax invoice. The amount and the only amount referred to under clause 8.5(c) is ’an amount equal to the GST payable on that supply’. It follows that the pre-condition of a tax invoice applies only to the payment of GST. In my view, rent is not subject to the pre-condition. As a result, interest should be calculated on the rent from the date it fell due for payment. Interest on applicable GST should be calculated from the date Patrick gave SeaRoad the relevant tax invoice (in accordance with clause 4.5 of the Head Lease).
On what basis did SeaRoad occupy the Sub Let Land from 30 December 2010?
In its amended statement of claim, SeaRoad alleges that it is a monthly tenant, based on a holding over clause in the Head Lease which is incorporated by reference in the Agreed Sub Lease in the following terms:
13.2 Holding Over
If the Landlord agrees to the Tenant remaining in the Premises after the expiry or earlier termination of the Lease
13.2.1the Tenant shall be deemed to be a monthly tenant on the same terms and conditions as are contained in the Lease so far as they are applicable to a monthly tenancy and the tenancy shall be determinable by either party on one month’s prior notice in writing which notice may be given to expire at any time.[43]
[43]Agreed Sub Lease, clause 4.1, CB 198.
Patrick contends that by exercising the option to renew the Agreed Sub Lease under clause 6 of the Agreed Sub Lease, SeaRoad has, since 1 January 2011, been a tenant in equity for a seven year term expiring on 30 December 2017.
Patrick relies on the principle that the exercise of an option to renew contained in a sub lease creates a sub lease for a further term in equity in the nature of an agreement for lease, and that if either the tenant or the sub tenant desires a lease at law either may obtain specific performance of the agreement for lease if the other refuses to execute the sub lease for the further term.[44]
[44]Patrick’s Submissions, [21]; Chan v Cresdon Pty Ltd (1989) 168 CLR 242, 250-252; Swanville Investment Pty Ltd v Riana Pty Ltd [2003] WASCA 121, [22]-[37]; Apriaden Pty Ltd v Seacrest Pty Ltd (2005) 12 VR 319, [11]; Cooma Clothing Pty Ltd v Create Invest Develop Pty Ltd [2013] VSCA 106, [25].
SeaRoad did not seek to challenge this analysis. In my view, the authorities are clear that the lease obtained by the exercise of an option to renew creates a new lease in equity.[45] The position was summarised in Swanville Investment Pty Ltd v Riana Pty Ltd, where the court said:
an agreement for lease constituted by the exercise of an option to renew constitutes a lease in equity, under which the lessee was obliged to pay the rent and the lessor was bound to observe the covenant of quiet enjoyment, so long as the lessees performed their obligations under the equitable lease...If the respondent called upon the appellants to execute a lease in accordance with the agreed terms and conditions they could be compelled to do so.[46]
[45]Gerraty v McGavin, (1914) 18 CLR 152, 163.
[46][2003] WASCA 121, [25]-[27].
I also accept the submissions of Patrick consistent with authority that a sub lease executed without the landlord’s consent is a contract which is binding upon the tenant and the sub tenant and gives the sub tenant an interest in the sub let land. The making of the sub lease without consent of the landlord merely exposes the tenant to forfeiture of the lease.[47]
[47]Massart v Blight (1951) 82 CLR 423, 440; The South Yarra Project Pty Ltd v Gentsis [1985] VR 29, 34.
Conclusion
In this matter, I have found that:
(a)clause 4.3 of the Head Lease is incorporated by reference into the Agreed Sub Lease with necessary modifications;
(b)there is no inconsistency between clause 2.1.1 of the Agreed Sub Lease and clause 4.3 of the Head Lease as modified;
(c)the regime for rent review under the Agreed Sub Lease is the same as the regime for rent review under the Head Lease and requires the same methodology to be applied as at the same review dates under the Head Lease;
(d)SeaRoad is not obliged to obtain the consent of the head lessor to the Agreed Sub Lease under clause 5.1 of the Agreed Sub Lease;
(e)SeaRoad is obliged to pay 80 per cent of the rent increase as provided for under the provisions of clause 4.3.6 as incorporated in the Agreed Sub Lease;
(f)a tax invoice is a pre-condition to payment for GST but not to payment of rent under the terms of clause 8.5 of the Agreed Sub Lease; and
(g)SeaRoad occupies the premises pursuant to a sub lease for the further term in equity under an agreement for lease.
The parties suggest that the appropriate course is for counsel to quantify amounts of additional rent, interest and GST owing after the delivery of reasons. In this case, I consider this to be an appropriate course, as the calculation is in part dependent on my findings. It also seems to me that the calculation is likely to be uncontentious.
I will hear counsel on the appropriate form of orders to give effect to these reasons.
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