Silverleaf Investments Pty Ltd v Tang and Cheng Pty Ltd [No 2] - [2017] WASC 141

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: SILVERLEAF INVESTMENTS PTY LTD -v- TANG & CHENG PTY LTD [No 2] [2017] WASC 141

CORAM: CHANEY J

HEARD: 21 FEBRUARY 2017

DELIVERED : 26 MAY 2017

FILE NO/S: CIV 3016 of 2016

BETWEEN: SILVERLEAF INVESTMENTS PTY LTD (ACN 056 864 969)
Plaintiff
AND
TANG & CHENG PTY LTD (ACN 165 577 677)
Defendant

FILE NO/S :CIV 3168 of 2016

BETWEEN :TANG & CHENG PTY LTD (ACN 165 577 677)
Plaintiff
AND
SILVERLEAF INVESTMENTS PTY LTD (ACN 056 864 969)
Defendant

Catchwords:

Real property - Lease - Option for renewal - Whether properly exercised - Whether formal notice requirements essential for exercise of option - Whether assignment of retail shop lease amounts to novation of lease - Redevelopment clause - Whether 'existing retail shop lease' - Whether lease void by reason of Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA)

Legislation:

Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), s 10(4), s 14A, sch 1 cl 4

Result:

Declaration made in CIV 3016 of 2016
Application in CIV 3168 of 2016 dismissed

Category: B

Representation:

CIV 3016 of 2016

Counsel:

Plaintiff: Mr M F Holler & Mr S R Sirett
Defendant: Mr L A Warnick

Solicitors:

Plaintiff: Borrello Graham Lawyers
Defendant: GV Lawyers

CIV 3168 of 2016

Counsel:

Plaintiff: Mr L A Warnick
Defendant: Mr M F Holler & Mr S R Sirett

Solicitors:

Plaintiff: GV Lawyers
Defendant: Borrello Graham Lawyers

Case(s) referred to in judgment(s):

Comdox No 24 Pty Ltd v Robins & Ors [2009] NSWSC 367
Debonair Nominees Pty Ltd v J&K Berry Nominees Pty Ltd [2000] SASC 244
Dileum Pty Ltd v JK Corporation Pty Ltd (1989) 1 WAR 244
International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151
Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749
Mason, Herring & Brooks v Harris & Anor [1921] 1KB 653
Murray & Roberts Australia Pty Ltd v GB Lifestyles Ltd [2013] WASC 345
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
Westfield Management Limited v AMP Capital Property Nominees Ltd [2012] HCA 54
Whitegum Petroleum Pty Ltd v Bernadini Pty Ltd [2010] WASCA 229

CHANEY J: Both these actions arise as a result of the termination by Silverleaf Investments Pty Ltd (Silverleaf) of a lease of premises to Tang & Cheng Pty Ltd (Tang & Cheng) under a redevelopment clause in the lease. Action CIV 3016 of 2016 was commenced by Silverleaf seeking a declaration that Tang & Cheng is not entitled to compensation under the redevelopment clause. CIV 3168 of 2016 was commenced by Tang & Cheng seeking a declaration that the redevelopment clause was void by the operation of s 14A of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (Retail Shops Act), and a declaration that the notice of termination purportedly given under the redevelopment clause was of no force and effect, or alternatively a declaration that, on the proper construction of the redevelopment clause, Tang & Cheng is entitled to compensation. Tang & Cheng's originating summons also sought an interlocutory injunction, but that aspect of the application fell away after Tang & Cheng agreed to vacate the premises without prejudice to their claims for compensation or damages.
The issues which fall for determination are whether the redevelopment clause in the lease between Silverleaf and Tang & Cheng is valid and if, contrary to Tang & Cheng's contentions, it is valid, then whether the redevelopment provisions preclude any entitlement on the part of Tang & Cheng to compensation for termination.

Factual background

The facts against which the issues are to be decided were not in issue.
Silverleaf is the owner of a shopping centre in Mends Street, South Perth (shopping centre). Prior to termination of its lease, Tang & Cheng occupied shops 18 and 19 located within the shopping centre (premises) and carried on the business of a supermarket at that location.
On 23 January 2006, a former owner of the shopping centre, Caprice Holdings Pty Ltd, granted a lease to Orlando Supa Valu Pty Ltd for a term of 10 years, commencing on 6 January 2006 and terminating on 5 January 2016 (Lease). The Lease contained an option of a further term of 10 years.
On 30 April 2008, Woodcrest Holdings Pty Ltd took an assignment of the Lease from Orlando Supa Valu Pty Ltd (which had changed its name to South Perth Fresh Pty Ltd).
On 7 July 2014, Tang & Cheng became the lessee of the premises by an assignment entered into between it and Woodcrest Holdings Pty Ltd with the approval of Caprice Holdings Pty Ltd (Assignment Deed).
On 21 April 2015, the plaintiff acquired the shopping centre from Caprice Holdings Pty Ltd and thereby became the lessor under the Lease.
On 27 July 2015, Slater & Gordon, lawyers, wrote to Silverleaf (Slater & Gordon letter). The effect of the Slater & Gordon letter is a matter in contention in the proceedings, and it is necessary to set out its contents in full. The letter read:
Dear Mr O'Brien
South Perth Fresh IGA - Millstream Shopping Centre
I advise that I act for Xiaohui Yuan whose company, Tang & Cheng Pty Ltd, is the lessee of Shops 18 and 19 in Millstream Shopping Centre, known as the South Perth Fresh IGA pursuant to a Lease dated 23 January 2006.
I advise that my client now gives you notice that he wishes to exercise the option to renew the Lease for a further term. My client also seeks your agreement to a variation to the Lease in that he wishes to amend Item 4 of the First Schedule to the Lease by deleting the option term of 10 years commencing on 6 January 2016 and replacing it with 4 further option terms of 5 years each.
I would appreciate it if you could please seek the landlord's instructions and advise whether the landlord is in agreement with my client's requested change as soon as convenient.
I look forward to hearing from you shortly.
Should you have any queries, please do not hesitate to contact me.
Yours faithfully
[SIGNED]
Jessica Andersen
Lawyer
SLATER & GORDON
The following day, Mr Robert O'Brien, who occupies the position of asset manager with Silverleaf, wrote to Ms Anderson of Slater & Gordon by email. The email read:
Dear Jessica & Will,
Thank you for the attached letter, I acknowledge receipt and that you have now exercised your 10 year option, I will instruct our solicitors to prepare the extension of lease and will send through a draft to you both in due course for your review & comments.
With regards to the requested amendment and additional options, it is our board policy not to provide any options across the group's portfolio. So unfortunately I'm unable to get approval for the requested amendment.
Will, I will be in South Perth on Thursday morning so I'm more than happy to catch up and discussed this all with yourself.
Kind Regards
Rob O'Brien
Silverleaf and Tang & Cheng then executed a deed dated 20 October 2015 (Renewal Deed). Guihua Tang and Xiaohui Yuan were also parties to the Renewal Deed as guarantors. The recitals to the Renewal Deed read:
A.By the Lease, the Tenant has a leasehold estate in the Premises for the Term.
B.The Landlord is now the registered proprietor of the freehold estate in the Premises.
C.At the request of the Tenant, the Landlord has agreed to grant to the Tenant an extension of the Term for the Further Term on the terms and conditions contained in this Deed.
D.The Guarantor affirms its guarantee and consents to the grant of the lease for the Further Term.
The 'Lease' was defined as being the lease executed between Caprice Holdings Pty Ltd and Orlando Supa Valu Pty Ltd as transferred to Woodcrest Holdings Pty Ltd.
Clauses 2 and 3 of the Renewal Deed provided:
2LEASE TO REMAIN IN FORCE
The Parties acknowledge and agree that this Deed is supplemental to the Lease and the Lease shall remain in full force and effect and be unaffected by this Deed.
3EXTENSION OF LEASE
The Landlord grants the Tenant a lease of the Premises for the Further Term, on the terms and conditions set out in the Lease as varied by this Deed, subject to:
(a)the payment of the Rent and other Money Payable under the Lease; and
(b)the Tenant observing and performing all of the Tenant's Covenants,
but reserving to the Landlord the Landlord's Rights.
'Further Term' was defined in the schedule to the Renewal Deed as a term of 10 years commencing on 6 January 2016 and expiring on 5 January 2026.
On 16 May 2016, Silverleaf gave notice to Tang & Cheng of Silverleaf's intention to terminate Silverleaf's lease on 16 January 2017. The letter read:
Dear Will
IGA SOUTH PERTH
LESSOR:SILVERLEAF INVESTMENTS PTY LTD ACN 056 864 969
LESSEE:TANG & CHEN PTY LTD ACN 165 577 677
PREMISES:SHOP 18/19 MILLSTREAM SHOPPING CENTRE, MENDS STREET, SOUTH PERTH
Thanks for meeting on 12 May 2016. It was nice to catch up.
In accordance with clause 12.31 (Redevelopment) of your lease of the above Premises dated 15 March 2006 (Lease) we write to notify you that we intend to carry out a redevelopment of the Millstream Shopping Centre of which the Premises forms part, we require the Premises for the redevelopment and your Lease will be terminated on 16 January 2017 (Termination Date). We require you to vacate and deliver up vacant possession of the Premises on or before that date.
This letter is to be taken as a Termination Notice as required pursuant to clause 12.31.1(a) of the Lease.
I have attached a timetable of the planning process for your information.
The Lessor is, unfortunately, unable to offer a replacement lease of alternative premises within the Millstream Shopping Centre as the entire property will be demolished and no reasonably suitable alternative premises are available.
As the term of the Lease (including the initial term of the Lease) commenced on 6 January 2006 and the Premises will have been occupied for over eleven (11) years as at the Termination Date you will, pursuant to clause 12.31.5 of the Lease, not be entitled to any contribution to fitout nor compensation for loss of goodwill.
I would like to meet with you and discuss this further once you have considered the above.
Kind regards
Gerard O'Brien
Director
SILVERLEAF INVESTMENTS PTY LTD
After an exchange of correspondence between the lawyers for Silverleaf and Tang & Cheng respectively, in which the issues which now fall for determination were ventilated, these proceedings were commenced.

Relevant terms of the Lease

Central to the issues which fall for determination in these proceedings are cl 3.2, cl 12.7, and cl 12.31 of the Lease.
Clause 3.2 provides:
3.2Option Term
If the Tenant desires to take a renewed lease of the Leased Premises for the Option Term from the Termination Date and, at least three (3) months prior to, but not earlier than six (6) months prior to, the end of the Term, gives to the Landlord written notice of that desire ('the Tenant's Option Notice') then the Landlord is to grant the renewed lease of the Leased Premises to the Tenant who takes the same for the Option Term from the Termination Date at the appropriate Minimum Rent from time to time and for the time being reserved by this lease payable at the times and in the manner stated in this lease and reviewable at the times and in the manner stated in this lease and subject in all other respects to the same terms, covenants, conditions, agreements, provisions and stipulations as are contained in this Lease but except this clause for renewal.
Following the issue of a Tenant's Option Notice the Tenant shall within fourteen (14) days of receipt of a Deed of Extension of Lease prepared by the Landlord's solicitors duly execute and return the same to the Landlord's solicitors together with payment of the reasonable legal costs for the preparation of the said Deed of Extension of Lease and the stamp duty estimated to be payable thereon.
Clause 12.7 concerns notices. It reads:
12.7Notices
Any notice:
1.Must be in writing addressed to each party at its respective address shown in this lease or to any other address specified by any party to the sender by notice;
2.Must be signed by the sender or an officer of, or under the common seal of, the sender (if a corporation) or in the case of the Landlord by the Landlord or by its solicitor or Managing Agent;
3.Is deemed to be given by the sender and received by the addressee:
(a)if by delivery in person, when delivered to the addressee;
(b)if by post, three (3) Business Days from and including the date of postage to the addressee; and
(c)if by facsimile transmission, when successful transmission to the addressee (at such facsimile number as the addressee may have provided) has been achieved,
but if the delivery or receipt is on a day which is not a Business Day or is after 4.00 pm (addressee's time) it is deemed to be given at 9.00 am on the succeeding Business Day; and
4.Can be relied upon by the addressee, and the addressee is not liable to any other person for any consequences of that reliance if the addressee believes it to be genuine, correct and authorised by the sender.
Clause 12.31 deals with redevelopment. It provides that the landlord has a right to terminate the Lease in the event that the landlord requires the premises to carry out renovations, alterations or extensions, provided certain conditions are met. Clause 12.31.1(a) requires the landlord to give the tenant not less than six months notice. Clause 12.31 then identifies a regime whereby the landlord can offer alternative premises and by which questions of rental payable for the alternative premises can be determined. Clause 12.31.3 requires the landlord, if alternative premises have not been taken, to use its best endeavours for a period of one month from the termination of the Lease, to locate reasonably suitable alternative premises for temporary or other occupation by the tenant. Clause 12.31.4 and cl 12.31.5 then provide:
4.In the event that:
(a)reasonably suitable Alternative Premises are offered in the Offer forwarded to the Tenant and the Tenant either fails to accept the Offer or refused the same then the Tenant shall be entitled to a surrender of this Lease effective as of the End Date as specified in the Termination Notice;
(b)if the Alternative Premises shall be reasonably suitable but shall reasonably require a fit out then the Tenant shall fit out the Alternative Premises with new materials or such used materials (from the Leased Premises or otherwise) as may be approved in writing by the Landlord at the expense of the Tenant PROVIDED ALWAYS that the Landlord shall be required to contribute a reasonable quantum towards such fit out taking into account the following factors:
(i)the period of time that the Leased Premises were occupied prior to the Termination Notice by the Tenant (or any assignee to the Tenant); and
(ii)the reasonable cost of such refurbishment being generally to the standard of that contained in the Leased Premises
on the basis that if the End Date occurs in the first year of the Term of this Lease then the Landlord would contribute the whole of such reasonable refurbishment costs; and such contribution shall reduce proportionally (by one fifth) for each year of the Term so that following the expiry of five (5) years there would be no contribution by the Landlord but the whole of the cost of the refurbishment would be paid by the Tenant. In the event that there is any dispute as to the reasonableness or otherwise of any quantum requested by the Tenant to be contributed by the Landlord for refurbishment then the same shall be determined by arbitration pursuant to the Arbitration Act;
(c)in the event that no reasonably suitable alternative premises (either within the Centre or elsewhere) are offered to the Tenant then the Landlord shall pay to the Tenant compensation for the losses to the Tenant as to the Tenant's goodwill (if any) and the Tenant's rights as to the balance of the Term and for any then unused option terms and including a payment towards the costs of the Tenant in its most recent fit out (provided that the same shall have occurred within the last five (5) years prior to the Termination Notice) such total amount to be calculated on the basis that if the Termination Notice is issued in the first year of the Term of this Lease then the Landlord would pay 4/5ths of such Tenant's losses as properly calculated and such Landlord's contribution shall reduce proportionally for each year of the Term so that following the expiry of five (5) years of such Term there would be no contribution by the Landlord towards such losses AND the quantum of the Landlord's contribution to the Tenant's loss (if any) shall be agreed or otherwise determined pursuant to the procedures of the Retail Shops Act or if that shall not apply then by arbitration pursuant to the Arbitration Act.
5.Irrespective of anything to the contrary in this clause 12.31, if the Tenant has pursuant to this Lease and any former lease occupied the Leased Premises for five (5) years or together with the term of the previous lease and the period prior to the service of the Termination Notice has occupied the Leased Premises for a term of five (5) years or more, then and in either such case, the Tenant shall not be entitled to any contribution from the Landlord towards its fitout nor in such circumstances shall the Tenant be entitled to any compensation for the loss of goodwill following the issue of a Termination Notice.
Clause 12.31 uses a number of expressions that are defined in cl 2.1 of the Lease. Those that are material to the ascertainment of the proper construction of cl 12.31.4 are cl 12.31.5 are as follows:
'Term' means the term of this lease set out in Item 3(c) of the First Schedule and when the context so requires any shorter term (in the event of the early determination of the Term), any extension or renewal of that term, any Option Term, or any extension or renewal of those terms.
'This lease' means this lease including any exhibits, Schedules and annexures as the same from time to time may be amended, varied, supplemented, extended, renewed or assigned, and includes any deed varying this lease.
The original lessee, Orlando Supa Valu Pty Ltd is defined as 'Tenant' in the recital of the parties to the Lease. Clause 2.2 is an interpretation clause which, by cl 2.2.11, provides that a reference to a party to this lease includes that party's successors and permitted assigns.

Relevant provisions of the Retail Shops Act

The Retail Shops Act regulates certain leases of retail shops. A retail shop is defined in s 3 of the Retail Shops Act. There is no issue in these proceedings that the premises occupied by Tang & Cheng are a retail shop for the purposes of the Retail Shops Act. Nor is there any issue that the lease to Tang & Cheng is a retail shop lease for the purposes of the Retail Shops Act.
Section 14A of the Retail Shops Act was inserted by the Commercial Tenancy (Retail Shops) Agreements Amendment Act (2011) (2011 Amending Act), the relevant provisions of which came into operation on 1 January 2013. Section 14A(1) provides:
14A.Relocation
(1)A provision of a retail shop lease about the relocation of the tenant's business is void unless -
(a)it is in the form prescribed for the purposes of this section; or
(b)it is in a form approved by the Tribunal under subsection (3); or
(c)if 5 years of the term of the lease (including any period during the extension of the term under an option to renew) have already expired, it is in accordance with subsection (2).
It is not in issue that the lease to Tang & Cheng does not meet any of paragraphs (a), (b) and (c) of s 14A(1). Clause 12.31 is therefore void by reason of s 14A of the Retail Shops Act, unless s 14A is inapplicable to the lease by reason of the transitional provisions which are found in div 2 of sch 1 of the Retail Shops Act.

Clause 4 of sch 1 provides that, despite the amendments effected by the 2011 Amending Act a number of sections, including s 14A do not apply to, or in relation to, an 'existing retail shop lease'. An 'existing retail shop lease' is defined in cl 3 of sch 1 as meaning a retail shop lease that was entered into before the commencement day (1 January 2013), or pursuant to an option granted, or agreement made before the commencement day.
Tang & Cheng contends that its lease of the premises is not an 'existing retail shop lease' for the purposes of sch 1 on two grounds. First, it contends that there was no effective exercise of the option to renew the Lease, so that the present lease was a new lease entered into after the commencement day of the 2011 amendment act and was not entered pursuant to the option granted in the Lease which was entered before the commencement day. Thus, they contend cl 12.31 of the Lease is void, Silverleaf had no right to terminate the new lease, the termination was a breach of the new lease, and Tang & Cheng is entitled to compensation by way of damages for breach of the new lease.

Effective exercise of the option

Tang & Cheng contend that the letter of 27 July 2015 from Slater & Gordon to Silverleaf was an attempt to exercise the option in the Lease, but was not an effective exercise of the option because it was:
(a)a notice given on behalf of Mr Xiaohui Yuan, not on behalf of Tang & Cheng;
(b)it did not comply with the mandatory requirements for notices given under the lease, as imposed by cl 12.7.2; and
(c)it was not a written notice of the tenant's desire 'to take a renewed lease of the leased premises for the option term' (defined in item 4 of the schedule as a term of 10 years commencing on 6 January 2016), but instead was a notice of the desire of Mr Xiaohui Yuan that the Lease should be extended for a further term of 5 years with three further 5 year options.
In Whitegum Petroleum Pty Ltd v Bernadini Pty Ltd [2010] WASCA 229, Buss JA with whom Murphy JA agreed, outlined the principles governing the purported exercise of an option to renew a lease as follows:
The test for determining whether a lessee has exercised an option to renew the term of the lease is whether the purported exercise clearly and unequivocally manifests an election to enter into a lease for the renewed term in accordance with the option. See Ballas v Theophilos (No 2) [1957] HCA 90; (1957) 98 CLR 193, 196 (Dixon CJ); Quadling v Robinson [1976] HCA 31; (1976) 137 CLR 192, 200 ‑ 201 (Gibbs J); Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673 at 683 (McHugh JA). This test and its application have been elaborated upon in numerous authorities.
If the lessee sends the lessor a letter purporting to exercise the option to renew, the letter is not to be evaluated in isolation, by reference only to the words used. It must be evaluated in the context of the circumstances of its receipt, including the dealings between the parties. See Carter v Hyde [1923] HCA 36; (1923) 33 CLR 115, 126 (Isaacs J); Prudential Assurance (677) (Kirby P).
If the lessee purports to exercise the option to renew by letter, proof of the election to enter into the lease for the renewed term depends on whether a hypothetical reasonable person who received the letter, and was aware of all the circumstances of its receipt including the dealings between the parties, would fairly understand the option to be exercised. See Jones v Daniel [1894] 2 Ch 332 at 335 (Romer J); Carter (126) (Isaacs J); Prudential Assurance (683) (McHugh JA).
In Ballas (No 2), Williams J said (204 ‑ 205):
'Options have been held to have been exercised, where the context is sufficient, although the document, instead of stating unequivocally that "the optionee hereby exercises the option," or words to that effect merely states that he desires or intends or is prepared to exercise it: Mills v Haywood ((1877) 6 Ch D 196); Nicholson v Smith ((1882) 22 Ch D 640); Collingridge v Niesmann ((1920) 37 WN (NSW) 224).'
Where the lessee's letter merely states that it desires or intends to exercise the option to renew, the critical issue is whether, in the context of the circumstances of its receipt including the dealings between the parties, the lessee has clearly and unequivocally expressed its election, then and there, to acquire a new lease upon the terms of the option. See Ballas (No 2) (196 ‑ 197) (Dixon CJ).
The extensive litigation which has occurred in relation to whether options (including options to renew granted to lessees) have been validly exercised reflects, perhaps, the observation of Jordan CJ in Mackay v Wilson (1947) 47 SR (NSW) 315 that an option is "nearly always a ticklish thing"(318). It is unprofitable, however, to review previous cases. Each case necessarily turns on the application of the settled principles I have identified to its own particular facts and circumstances, including the proper construction of the document or documents in dispute. See Prudential Assurance (674) (Kirby P) [32] ‑ [37].
If particular requirements of the exercise of an option are, on the proper construction of the terms of the option, intended by the parties to be essential for the effective exercise of the option, then compliance with those requirements is necessary if the exercise of the option is to be effective: Comdox No 24 Pty Ltd v Robins & Ors [2009] NSWSC 367 [23]; Murray & Roberts Australia Pty Ltd v GB Lifestyles Ltd [2013] WASC 345 [81]. The question is whether the Lease, properly construed, prescribed essential requirements for the effective exercise of the option.
Tang & Cheng's first contention is that the Slater & Gordon letter was not an effective notice because it was not given by the tenant, but rather was given on behalf of Mr Xiaohui Yuan. I do not accept that submission. The letter makes no sense if it is construed as being written on behalf of Mr Xiaohui Yuan independently of Tang & Cheng. The letter makes reference to the Lease, and expressly gives notice of the wish to exercise the option to renew. The option was held by the lessee, Tang & Cheng, and not Mr Xiaohui Yuan in his personal capacity. The letter makes clear that Tang & Cheng is Mr Xiaohui Yuan's company, and the only reasonable construction to place on the letter is that Mr Xiaohui Yuan's instructions to Slater & Gordon were given on behalf of Tang & Cheng, and that Tang & Cheng, through Mr Xiaohui Yuan, desires to exercise the option.
The second of Tang & Cheng's contentions is that the notice did not comply with the mandatory requirements for notice imposed by cl 12.7.2 of the Lease. That contention assumes that the requirements of cl 12.7.2 are essential for the exercise of the option to be effective. In particular, Tang & Cheng contend that the notice was not 'signed by the sender or an officer of, or under the common seal of, the sender'.
Clause 3.2 provides for notice of the tenants desire to exercise the option in the period at least three months prior to the end of the term, but not more than six months prior to the end of the term. The Slater & Gordon letter fell within that period. The clear purpose of the notice requirement is to enable the landlord to know the tenant's intention in advance of the end of the term, conveyed by someone with proper authority, so as to enable the landlord to put in place the preparation of a deed of extension of lease, or alternatively make any arrangements necessary if the tenant is not to remain in occupation after the end of the term. Strict compliance with cl 12.7.2 is not required to meet that objective. If the notice given by the lessee, or someone acting as the lessee's agent, clearly and unequivocally conveys an intention to exercise the option, then I do not consider that the proper construction of the option term requires strict compliance with cl 12.7 of the Lease.
That raises Tang & Cheng's third contention, namely that, on the proper construction of the Slater & Gordon letter, it did not clearly and unequivocally amount to an exercise of the option, but rather was a proposal to vary the Lease to provide four further option terms of 5 years each, and thus constituted an offer to take a new and different lease. I do not accept that contention. In my view, objectively construed, the Slater & Gordon letter served two functions. The first was to give notice pursuant to cl 3.2 of the lease of the tenants desire to exercise the option for a further term of 10 years. The second, illustrated by the use of the word 'also', was to enquire as to the landlord's preparedness to vary the Lease to provide for four terms of 5 years, rather than one term of 10 years. The expression of the desire to exercise the option was unequivocal. There is nothing in the Slater & Gordon letter which suggests that the exercise of the option was conditional upon Silverleaf's agreement to different lease terms. Although the question of whether or not the option has been exercised is not determined by how the landlord understood the notice, but rather on the objective construction of the notice (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 768; Whitegum Petroleum Pty Ltd v Bernadini [91] (Newnes JA), it is clear from Silverleaf's response in its letter of 28 July 2015, that it took the Slater & Gordon letter as conveying two separate points, and that the parties subsequently conducted themselves on that basis. In my view they acted consistently with the objective import of the Slater & Gordon letter.
For those reasons, I reject Tang & Cheng's contention that the option was not validly exercised by the Slater & Gordon letter.

Novation

The second basis upon which Tang & Cheng contend that the Extension Deed constituted a new lease, and is thus not 'an existing retail shop lease', is a contention that the contractual arrangement between Caprice Holdings Pty Ltd and Tang & Cheng was novated by the Assignment Deed.
Tang & Cheng initially argued that, if the option was validly exercised, the Lease was entered into pursuant to an option granted at the time of assignment of the Lease to Tang & Cheng, because at the time of that assignment, the option was novated and, or alternatively, the entire contractual arrangement between the lessor and Tang & Cheng was novated. At the hearing of the matter, Tang & Cheng abandoned the argument that the option was novated, but maintained the contention that the entire contractual arrangement was novated.
Tang & Cheng submit that the effect of the Assignment Deed was twofold. First, by cl 2 of the Assignment Deed, Woodcrest Holdings Pty Ltd, as assignor, assigned to Tang & Cheng all of the estate and interests of Woodcrest Holdings Pty Ltd in the premises and all of its rights under the Lease for the unexpired residue of the term together with the benefit of the option. Second, the assignment deed made variations to the terms of the Lease by cl 9. Clause 9 contained mutual covenants by the lessor and the assignee to vary the Lease by introducing a provision for the payment of turnover rent and varied some other terms of the Lease. That part of the Assignment Deed which affected the assignment of the leasehold interest contained a consent by the lessor to the assignment, but otherwise involved no covenants on the part of the lessor. In relation to the variation to the Lease, both the lessor and the assignee mutually covenanted and agreed to the variations to the effect set out.
Tang & Cheng acknowledge that there is a body of authority to the effect that an assignment of a lease is not a novation: see Mason, Herring & Brooks v Harris & Anor [1921] 1KB 653, 655; Dileum Pty Ltd v JK Corporation Pty Ltd (1989) 1 WAR 244, 253 ‑ 254 (Brinsden J), 256 (Kennedy J); Debonair Nominees Pty Ltd v J&K Berry Nominees Pty Ltd [2000] SASC 244 [21] ‑ [23]. Tang & Cheng contend, however, that those cases which suggest that an assignment of a lease is not a novation were based on the proposition that privity between the lessor and the assignor was maintained after the assignment, and that, by reason of s 10(4) of the Retail Shops Act, they can be distinguished from the present case. In Debonair Nominees, Mullighan J referred with approval to the position explained in Duncan, Commercial Leases in Australia (3^rd ed, 1998) as follows:
Upon the creation of a valid lease, there is both privity of contract and privity of estate between lessor and lessee. The former arises from the existence of a contract between the parties and the latter arises from the tenure between the parties. Upon an assignment of the lease, that tenure is broken but the privity of contract remains. After the assignment, whilst there is privity of estate between the lessor and the assignee of the lease, the original lessee remains liable upon the express covenants [21].
Silverleaf contends that the position in relation to leases under the Retail Shops Act is different by reason of s 10(4). That subsection provides that a provision in a retail shop lease to the effect that a landlord may recover from the assignor any monies that are payable under the lease by the tenant to whom the Lease has been assigned is void. Silverleaf argues that provision removes the privity of the assignor which underlies the proposition that an assignment does not create a new lease. There are two reasons why that contention is not made out.
The first reason is that the estate to which the assignee accedes by reason of the assignment is not created by the assignment, but is created by the original lease. The assignee obtains its interest in the land by reason of the assignment to it of the assignor's interests. Although the lessor consents to the assignment, no new grant of a leasehold interest is effected by the assignment.
The second reason is that cl 8.5 of the Lease provides that upon any assignment of the Lease, the tenant remains liable under the Lease save that if the Retail Shops Act applies to the Lease, in the case of any assignment of the Lease, 'nothing in this lease enables the landlord to recover from the tenant or its guarantor or its covenantor, or obliges the tenant or its guarantor or covenantor to pay the landlord, any monies properly payable under this lease by the assignee or transferee'. It is clear, therefore, that notwithstanding s 10(4) of the Retail Shops Act, the original tenant remains liable in relation to other covenants under the Lease not involving a liability to pay monies. Having regard to that provision, s 10(4) of the Retail Shops Act does not destroy, but merely limits, the privity of contract as between the assignor and the lessor, a limitation expressly acknowledged in the Lease.
It follows that, because the lease of the premises was granted pursuant to an option granted before 1 January 2013, Tang & Cheng's lease is an 'existing retail shop lease' with the result that s 14A of the Retail Shops Act has no application. It is necessary therefore to turn to the question of whether, on its proper construction, cl 12.31 of the Lease entitles Tang & Cheng to any compensation.

Application of cl 12.31.5

Tang & Cheng contend that if cl 12.31 is not void by reason of s 14A of the Retail Shops Act, it nevertheless does not apply to exclude Tang & Cheng's entitlement to compensation. That is because, Tang & Cheng contend, 'Tenant' as that word is used in cl 12.31.5 is a reference to Tang & Cheng, and not to any prior tenant who has occupied the premises under the Lease, and Tang & Cheng had not occupied the premises for five years prior to service of the termination notice. Under the Renewal Deed, Tang & Cheng is, in the recital as to the parties to the Renewal Deed, defined as 'Tenant'. As noted above, cl 3 of the Renewal Deed provided that the landlord (Silverleaf) 'grants to the Tenant a lease of the Premises for a Further Term...'. 'Further Term' was defined in the Renewal Deed as being the term of 10 years commencing on 6 January 2016 and expiring on 5 January 2026. The Lease contained a definition of the expression 'Option Term' being 'the further term or terms of this lease' described in the first schedule, namely 10 years commencing on 6 January 2016 'capable of being granted pursuant to cl 3.2'.
Clause 14 of the Renewal Deed provided that if there is any inconsistency between the terms of the Renewal Deed and the terms of the Lease then the terms of the Renewal Deed will prevail to the extent of that inconsistency. Silverleaf contend that there is a clear inconsistency between the Renewal Deed and the Lease in terms of the identity of the 'Tenant' and the definition of Tang & Cheng as the Tenant in the Renewal Deed should prevail over the inconsistent definition of Tenant derived from the wording of the original Lease document.
Tang & Cheng contend that the use of the definite article in the expression 'The Tenant' focuses on the tenant actually in occupation at the time of the application of the clause. It submits that it would have been easy for a drafter, if it was intended to refer to occupation by any tenant under the Lease, to have used words which made that intention clear such as 'the Tenant and any prior tenant' or 'any Tenant'. It contends that cl 2.2.11 has no application to the context of cl 12.31.5 since it has no backward looking operation.
In determining the rights and liabilities of parties to a contract, what matters is what each party, by words and conduct, would have led a reasonable person in the position of the other party to believe. That question is to be answered objectively. The meaning of the terms of a contract is to be determined by what a reasonable person would have understood them to mean which normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 [40] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ); reaffirmed in International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 [53] (Gummow, Hayne, Heydon, Crennan and Kiefel JJ).
Silverleaf placed considerable reliance on the proposition that the statutory context of the Retail Shops Act is a legitimate aid to the construction of the Lease: see Westfield Management Limited v AMP Capital Property Nominees Ltd [2012] HCA 54 [36] (French CJ, Crennan, Kiefel and Bell JJ). It submits that the Lease was made in the context of the operation of the Retail Shops Act, a proposition that can be readily accepted given the references to the Retail Shops Act in a number of clauses of the Lease. In particular, Silverleaf relied on the provisions of s 13 of the Retail Shops Act which have the effect of guaranteeing a minimum five year term in a retail shop lease, and which, by s 13(6), preclude the termination of a lease within five years of its commencement, subject to specified exceptions. Silverleaf asserts that there is no reason why a lessor would pay compensation for termination of a lease after the minimum statutory term of the Lease, and cl 12.31 should be construed in that context.
Whilst the statutory background against which the contract is made may provide context against which the terms of the contract are to be construed, the starting point is to have regard to the language of the contract. For the purposes of construing cl 12.31.4(c) and cl 12.31.5, attention must be given to the word 'Tenant' as used in those clauses. It is apparent that where cl 12.31.4(c) speaks of an offer to 'the Tenant', and payment to the 'Tenant' of compensation, the reference can only be to the person in occupation under the Lease at the time that the notice of termination is given. Clause 12.31.5 refers to the period of occupation by the 'Tenant' and specifies that if it is more than five years, the 'Tenant' shall not be entitled to any contribution from the landlord. Logically, those references to 'Tenant' can only be sensibly construed as references to the person in occupation as lessee.

Silverleaf contends that cl 2.2.11, which provides that a reference to a party to the Lease includes that party's successors and permitted assigns, means that the reference to 'Tenant' in cl 12.31.5 is a reference to all of those entities which were from time to time lessees under the Lease, at least where there is a reference to the tenant being in occupation for five years or more. That construction requires that 'Tenant' be read as bearing different meanings within cl 12.31.5, and the reference to the 'Tenant' who has occupied the premises (in cl 12.31.5) bears a different meaning from the 'Tenant' referred to in cl 12.31.4(c). In my view that requires too strained a construction of the clauses. The ordinary sense of the clauses is enhanced if the reference to 'Tenant' is understood as being a reference to the tenant in occupation, that is Tang & Cheng.
That construction is supported by the description of Tang & Cheng in the Extension Deed as 'Tenant', a definition inconsistent with the definition of 'Tenant' in the Lease, and one that should be preferred as the operative definition by reason of cl 14 of the Renewal Deed.
It is not in issue that Tang & Cheng had not been in occupation of the premises for five years at the time that the termination notice was served. It follows that cl 12.31.5 does not operate so as to preclude Tang & Cheng from an entitlement to compensation for termination of the Lease.

Meaning of the 'Term of this Lease' for the purposes of cl 12.31.4(c)

Having concluded that cl 12.31.5 does not operate so as to remove any entitlement of Tang & Cheng to compensation, it is necessary to consider the effect of cl 12.31.4(c) on Tang & Cheng's entitlement. That clause provides for a reducing entitlement to compensation over five years commencing when the termination notice is issued 'in the first year of the Term of this lease' and then reducing proportionately 'for each year of the Term' so that following the expiry of five years 'of such Term' there will be no contribution by the landlord by way of compensation.
By cl 3.1 of the Lease, the Term is said to commence on the commencement date (6 January 2006), and end on the Termination Date (5 January 2016). As already noted, the 'Option Term' is a further 10 years commencing on 6 January 2016. As noted above, 'Term' is a defined term under cl 2.1 as including the first 10 year period and 'when the context so requires ... any extension or renewal of that term, any Option Term'.
The Renewal Deed is consistent with those definitions. By cl 1.1 of the Renewal Deed, 'Term means the current term of the Lease specified in item 4' of the schedule. Item 4 of the schedule identifies the Term as the period from 6 January 2006 to 5 January 2016. 'Further Term' is defined to be the 10 years commencing on 6 January 2016.
Tang & Cheng contend that in the present context and circumstances, the expression 'Term' where it is used in cl 12.31.4(c) means, having regard to the definition in the Lease, the 'Option Term' as defined in the Lease being the term of 10 years commencing on 6 January 2016.
The consequence of that construction is that the liability to contribute to compensation would expire after five years of the initial term of the Lease, but then would be revived upon the execution of an extension of the Lease for the further term of 10 years. In the context of this case, that would mean that, when Tang & Cheng became tenants pursuant to the Assignment Deed on 7 July 2014, in the eighth year of the initial term, any entitlement to contribution to their losses pursuant to termination under cl 12.31.4 would not exist, but upon the landlord renewing the Lease for a further term commencing in January 2016, an entitlement to compensation under that clause would be revived. In my view, objectively considered, a reasonable person would not understand the parties to the agreement to have contemplated that outcome. In my view, it is clear that the object of the redevelopment clause, consistent with the statutory prohibition on termination of a retail shop lease within five years, was that the lessor should be entitled to terminate the Lease for the purposes of redevelopment without liability for compensation after five years from the commencement of the initial term of the Lease. That construction is also consistent with cl 12.31.2 of the Lease which contains an acknowledgement by the tenant that the terms of the Lease have been negotiated and that the tenant has entered into the Lease with full knowledge that the landlord is likely, or intends during the term, to carryout renovations.
I accept that the conclusion I have reached as to the proper construction of cl 21.31.4(c) renders cl 12.31.5 is superfluous because cl 12.31.4(c) has the effect that any entitlement to compensation for early termination is reduced to zero after five years from the beginning of the initial term of the Lease. Counsel for Silverleaf suggested that cl 12.31.5 was, in effect, simply a reinforcement of the scheme of cl 12.31, namely that the tenant's rights under the clause were limited to the mandatory five year minimum term prescribed by the Retail Shops Act. Given the difficulty in reading cl 12.31.4(c) and cl 12.31.5 together, counsel's suggestion may well be correct. Whether or not that is so, I do not consider that the fact that cl 12.31.5 might be superfluous can lead to any different construction of cl 12.31.4(c) from that which I have concluded is the proper construction.
For those reasons, I have concluded that cl 12.31.4(c) precludes any requirement for contribution by Silverleaf to the losses suffered by Tang & Cheng by reason of the termination of their Lease.

Conclusion

It follows that Silverleaf is entitled to the declaration which it seeks in its originating summons in CIV 3016/2016 and the application for declarations sought by Tang & Cheng in CIV 3168/2016 should be dismissed.