Spathis v Hanave Investment Co. P/L
[2001] NSWSC 265
•11 April 2001
Reported Decision:
(2001) NSW ConvR 55-983
New South Wales
Supreme Court
CITATION: SPATHIS v HANAVE INVESTMENT CO. P/L & ANOR [2001] NSWSC 265 revised - 1/05/2001 CURRENT JURISDICTION: Equity FILE NUMBER(S): SC 1905/01 HEARING DATE(S): 27/03/01 & 5/04/01 JUDGMENT DATE:
11 April 2001PARTIES :
Gerasimos Spathis - Plaintiff
Hanave Investment Company Pty Ltd - First Defendant
Hanave Pty Ltd - Second DefendantJUDGMENT OF: Bryson J at 1
COUNSEL : M. Neil QC with P. Strasser for Plaintiff
R. MacFarlan QC with Ms K. Williams for DefendantsSOLICITORS: G H Healey & Co - Eastgardens for Plaintiff
Gilbert Mane - Defendants
CATCHWORDS: LANDLORD and TENANT - term of lease - "break" clause for demolition - on the construction of the "break" clause in cl.11 it was held that the landlord's right to terminate on six months' notice to carry out demolition depended on earlier provisions and was only activated by accidental damage by fire, lightning etc. - decision on construction of this lease, not involving general principles. LEGISLATION CITED: Retail Leases Act 1994 (NSW) CASES CITED: Mannai Investment Co. Ltd v. Eagle Star Life Assurance Co. Ltd [1997] AC 749
Prenn v. Simmonds [1971] 1 WLR 1381
Concrete Construction (NSW) Pty Ltd v. Nelson (1990) 169 CLR 594
Director-General of the Department of Corrective Services v. Mitchelson (1992) 26 NSWLR 648DECISION: See para 26
OF NEW SOUTH WALES
EQUITY DIVISIONBRYSON J.
WEDNESDAY 11 APRIL 2001
JUDGMENT1905/01 GERASIMOS SPATHIS v. HANAVE INVESTMENT COMPANY PTY LTD & ANOR
1 HIS HONOUR: Hanave Investment Company Pty Ltd, the first defendant, leased to Mr Spathis, the plaintiff, the shop at 355 Kent Street Sydney by an undated lease registered 3158800F for a term of five years from 13 May 1997 to 12 May 2002. Later the second defendant Hanave Pty Ltd, which is related to the first defendant, became the registered proprietor and is now the lessor. Earlier Mr Spathis held the shop as transferee of a three-year lease which expired on 12 May 1997.
2 On the front page of the lease where the printed form indicates “Property Leased” the property is identified by giving references to two certificates of title and going on “Part being Shop 1, 355-357 Kent Street, Sydney.” In the body of the lease the property leased is identified as “all property described in Item 1 of Part II” and that item says
Folio Identifier 1/77290 and Volume 10896 Folio 41
“CL1(f) PROPERTY
Part being Shop 1, 355 Kent Street, Sydney.”
3 The defendants have treated two adjoining parcels of land with two separate Certificates of Title as one holding. On the larger lot stands a six-storey commercial building; on the smaller lot, which was a laneway before the defendants acquired it, stands a one-storey building comprising Shop 1 on the street frontage and office space to the rear. It seems likely that Shop 1 stands wholly on the land which formerly was the lane, but the lease is notified on both Certificates of Title. There is no plan or detailed description of Shop 1 in the lease and for present purposes it is not necessary to establish the bounds of the premises leased in exact detail.
4 It has not been asserted that Mr Spathis has ever been in breach of his present lease, over payment of rent or in any other way. For several years the defendants have had under consideration a project of demolishing the buildings and redeveloping the site with one building. They have progressively gained possession of all parts of both buildings other than the shop, so that Mr Spathis is the only remaining occupant. The defendants have development approval for demolition and reconstruction but that will lapse on 5 May 2001 unless they have made a substantial commencement by then.
5 The plaintiff bought the business and the previous lease about May 1995 and since then he has operated the business himself under the name Kent Street Deli. He paid a significant amount of capital for the business and operating it is his only livelihood. In the past he has considered selling the business, and he has received various offers and discussed prospective sales. In February 2000 he asked the first defendant for consent to transfer the lease but did not receive a clear reply. On 13 October 2000 his then solicitors wrote to the second defendant referring to a prospective sale of the business and asking for consent to assignment. In reply the solicitors representing the second defendant stated by letter on 17 October 2000 “We act for the lessor. The lessor intends to demolish the building. We are therefore instructed to give notice pursuant to cl.11(d) of the lease that this lease shall terminate 6 months’ hence.” Correspondence between solicitors followed several months later but it dealt with a claim by the plaintiff to be entitled under the lease to rent free periods totalling six months, which the lessor disputed. This remains unresolved. On 2 February 2001 Mr Spathis’ present solicitors wrote to the lessor’s solicitors referring to the notice to terminate and asserting that the notice was deficient having regard to s.35 of the Retail Leases Act 1994 (NSW) which requires the lessor to provide details of the proposed demolition sufficient to indicate a genuine proposal to demolish. On 7 February 2001 the lessor’s solicitors replied forwarding a copy of the development application and then on 20 March, Mr Spathis’ present solicitors informed the lessor’s solicitors that after taking advice, Mr Spathis intended to remain as tenant in the premises for the full term of the lease on the view that his lease was valid. They put some argument in support of this and also made some comments about the rent claim.
6 In my view it is unfortunate that the lessor’s claim to be entitled to terminate the lease was not challenged for five months of the six months’ period for which it ran, and was challenged only when the expiry of the development approval was approaching. It was obvious that the lessor maintained its expressed position and relied on the Notice of Termination. The present proceedings were commenced by Summons on 22 March 2001 claiming a declaration that the lease was valid and binding and conferred a leasehold interest terminating on 12 May 2002, declarations that no events had occurred which would entitle the defendant to terminate the lease pursuant to cl.11(d) and that the notice did not operate as a valid and effective termination, and an injunction to restrain interference with the use and occupation of the premises.
7 The dispute turns on the meaning and effect of cl.11 of the lease including its heading, which is this:-
DESTRUCTION OF PREMISES OR BUILDING
11. If during the term of this Lease the premises or the building shall be destroyed or damaged by fire lightning storm tempest or other damaging or disabling cause so as to render the premises or the building or any part thereof substantially unfit for the use and occupation by the Lessee or so as to deprive the Lessee of substantial use of the premises or so as to render the rebuilding or construction of the premises or the building in its previous form impracticable or undesirable in the opinion of the Lessor then:
a. This Lease may be terminated without compensation by either the Lessor or the Lessee by written notice to the other PROVIDED THAT the Lessee shall not terminate this Lease unless the Lessor shall have failed to commence to rebuild or reinstate the premises or the building or to provide access thereto within a reasonable time after written notice from the Lessee.
b. Any such termination as foresaid shall be without prejudice to the rights of either party in respect of any antecedent matter or thing.
d. In the extent of the Lessor desiring to demolish the building the whole or any part of which is subject to this Lease or to reconstruct rebuild or alter such building to such extent that in the opinion of the Lessor the quiet enjoyment thereof by the Lessee would be interfered with to any appreciable extent this Lease may be terminated without compensation by the Lessor upon its giving to the Lessee six (6) months notice in writing of such termination which shall be without prejudice to the rights of either party in respect of any antecedent breach matter or thing.c. On the happening of any such damage or destruction as aforesaid the total yearly rent thereinbefore reserved or a proportionate part thereof according to the nature and extent of the damage sustained shall abate and all or any remedies for the recovery of such rent or such proportionate part thereof shall be suspended until the premises shall have been rebuilt or reinstated or made fit for the occupation and use of the Lessee or until the Lease shall be terminated pursuant to the provisions hereof as the case may be. In the event of any dispute arising out of this clause the same shall be determined by a valuer agreed between the parties or failing agreement appointed for such purpose by the President or other senior officer of the New South Wales Real Estate Institute or its successors. Such valuer shall be deemed to be acting as an expert and not as an arbitrator and his fee shall be borne by the Lessor and Lessee in equal shares.
8 To put the matter broadly Mr Spathis contends that cl.11(d) is governed by the opening provisions in the first seven lines of the clause and can be relied on only in the circumstances stated, whereas the lessor contends that cl.11(d) stands free of the opening provisions and can be relied on whether or not the building has been destroyed or damaged or otherwise affected in one of the ways indicated. It is quite clear and the parties agreed that neither of the two buildings has been destroyed or damaged in any of those ways and the circumstances which led to the Notice of Termination were that the lessor and its related companies had decided to undertake redevelopment, and to demolish the buildings in the course of doing so.
9 During argument some reference was made to ss.35 and 36 of the Retail Leases Act 1994 (NSW), which override provisions in leases having regard to s.7 of that Act. There were contentions to the effect that provisions of cl.11 are avoided or overridden or affected by s.36 but in my view s.36 can have no relevant operation as the shop and the building have not been damaged. If s.35 operates, it has been complied with and there was no argument to the effect that s.35 affects the operation of cl.11.
10 Senior counsel for the plaintiff contended to the following effects. It was contended that cl.11(d) operates as part of cl.11 and is not a stand-alone demolition clause; and that cl.11(d) can only operate if the building has been destroyed or damaged in one of the ways stated in the opening provisions. It was submitted that reading the whole of cl.11 in this way does not leave cl.11(d) without work to do notwithstanding that it covers somewhat the same subject matter as cl.11(a). Counsel contended that that terms of the lease were clear. It is a contractual document but its provisions create an estate or interest in land. It was contended that the headings of clauses such as the heading of cl.11 can be taken into account in the construction of the clause; as I understood, it was contended that it is significant that cl.11(d) was included under the heading “Destruction of premises or building”.
11 Counsel pointed to the structure of the opening provisions of clause 11 in which, as a matter of language, everything which follows including cl.(d) is stated - “then” - to be things which follow when - “if” - the previously stated circumstances exist. Counsel pointed to cl.12(c) which excludes any obligation on the lessor to build reinstate or make good for occupation in case of structural damage, and said that this provision reinforces the reading that the whole of the lease is designed to deal with circumstances of destruction or damage and to give the lessor options when those things happen, and also to give the lessee protections when they happen. He contended that the terms of the lease as a whole are not directed to giving the lessor a right to demolish the buildings and terminate the lease at the lessor’s discretion, yet that if cl.11(d) stood alone the second part of cl.11(d) set a very low threshold for termination and in effect left termination in the discretion of the lessor. He said it would be a draconian provision if the lessor had such a power, and that this was an indicium in favour of reading cl.11(d) as one of the consequences of the opening provisions. Clauses 11(a) and 11(b) operate in the context of cl.11(d). It should be concluded that the lease does not provide an absolute right, or anything with the effect of an absolute right to terminate the lease in the events in cl.11(d).
12 In the absence of one of the events in the opening provisions it was submitted that the reading the plaintiff contends for is very plain - “As plain as day”. Counsel pointed out that the lessor was the proferor of the lease so that if there is any ambiguity it should be read in a fair manner in favour of the lessee.
13 Counsel referred to passages in the speech of Lord Hoffmann in Mannai Investment Co. Ltd v. Eagle Star Life Assurance Co. Ltd [1997] AC 749 at 779 including his Lordship’s statement at 779 F-G that, apart from designated exceptions “… commercial contracts are construed in the light of all the background which could reasonably have been expected to have been available to the parties in order to ascertain what would objectively have been understood to be their intention: Prenn v. Simmonds [1971] 1 WLR 1381, 1383.”
14 Counsel pointed out that the lease did not impose any obligations on the plaintiff to state that he disputed the effectiveness of the Notice of Termination. In this connection counsel introduced a reference to s.35 of the Retail Leases Act and the opportunity in subs.(1)(c) for the lessee to take significant action up to 7 days before expiry of the six months there referred to. I do not regard this reference as significant. Counsel said that there was no application to rectification of the lease and no basis for any.
15 On behalf of the lessors, senior counsel contended to the following effects. He submitted that the plaintiff’s position depends on the context and setting of cl.11(d) in which, at least as a matter of arrangement, it is part of cl.11, and counsel contended that if the words of cl.11(d) stood on their own there would not be any room for argument against the lessor’s position. However the plaintiff’s argument, it was submitted, was based on two matters, the heading of cl.11, and the opening words in cl.11. Counsel submitted that the role of context is that if there is ambiguity in the provision under consideration, contextual matters may provide assistance in understanding how to resolve the ambiguity, and the contextual matters may include the headings of clauses; but if the subject provision is clear it was submitted that its words should be given effect. Counsel referred to references in case law and legislation to the significance of headings in the construction of statutes, and also made submissions on the effect of recitals, of which he said that they do not usually control substantive provisions of a contract but are of use where there is ambiguity (to which I would add obscurity).
16 Counsel for the lessors pointed to some features of cl.11 as follows. He said that cl.11(d) and the earlier parts of cl.11 deal with different and distinct subject matters; the earlier parts deal with actual destruction which has taken place, whereas cl.11(d) is prospective and deals with the desire of the lessor to do something in the future which can be done to an undamaged building, that is demolish, reconstruct, rebuild or alter the building. Counsel contended that the first parts of cl.11 deal with circumstances which are out of the control of the lessor such as fire, lightning and so forth, and leave out of account acts of intentional destruction by the lessor, with which cl.11(d) is concerned. Clause 11(d) is a second part concerned with intentional destruction by demolition. It is a contradiction to say that it is the condition for the operation of cl.11(d) for the lessor to have the intention spoken of there, but also a condition, drawn from earlier parts of cl.11 that there be some act of nature or other destructive incident involved. The two sets of circumstances are conflicting. There are two different provisions for termination in cl.11(a) and in cl.11(d), and each can be seen to have its own state of preconditions for the exercise of the right of termination which is relevant to it. Otherwise cl.11(d) adds nothing to the operation of cl.11(a) because its effect is to impose not only the conditions to which cl.11(a) is subject, but also additional conditions - a desire to demolish the building, and an opinion about quiet enjoyment. There are no circumstances in which there could be a right of termination under cl.11(d) but not a right of termination under cl.11(a).
17 Counsel observed that the provisions of ss.35 and 36 of the Retail Leases Act reflect the fact that demolition and construction clauses are commonly found in retail leases, and that they are commonly found as distinct and separate powers.
18 Counsel referred me to judicial observations on the significance of headings of sections and statutes in Concrete Construction (NSW) Pty Ltd v. Nelson (1990) 169 CLR 594 and in Director-General of the Department of Corrective Services v. Mitchelson (1992) 26 NSWLR 648, and to passages in texts dealing with the significance of recitals in contracts.
19 It was submitted then that the Court should conclude that the lease has been terminated pursuant to cl.11(d), and that the plaintiff should not succeed.
20 In reply the plaintiff’s counsel submitted, in my view correctly, that the heading and the opening provisions of cl.11 are not recitals, and that the opening provisions are substantive provisions. He submitted that there is no conflict or anomaly in the presence of both cl.11(a) and cl.11(d) as cl.11(d) offers the lessor the opportunity to terminate yet have the benefit of the lease for a further six months after giving notice to the lessee. He pointed to the mechanism within cl.11(a) in which the proviso limits the lessee’s opportunity to terminate the lease; however this does not to my mind impact on the force of the defendant’s submissions with respect to the presence of two powers of termination conferred on the lessor. Counsel contended that if the lessor has a genuine proposal for demolition after accidental damage there is extra work for cl.11(d) to do if termination under cl.11(a) would not, in the lessor’s perception, do enough to achieve the lessor’s purposes. He submitted that the provisions of cl.11 are not ambiguous, but that if this was not correct the heading would assist a conclusion that all the subclauses including cl.11(d) are gathered together under the general subject of Destruction of Premises or Building; the heading is not an epitome of cl.11 but it does indicate that everything in cl.11 is gathered under the same general subject.
21 In my opinion cl.11(d) confers a right of termination on the lessor only if circumstances stated in the opening provisions of cl.11 exist. The grammar and setting-out of cl.11 seem to show that each of the subclauses is governed by the opening provisions, so that the literal reading of the words used makes for this conclusion. I see no real difficulty or anomaly in giving cl.11(d) this literal reading. The literal reading is quite reasonable. It is not anomalous and not a difficult reading that cl.11 confers two different rights of termination on the lessor in the circumstances stated by the opening provisions. In the first the lessor can terminate by written notice, and termination happens when the written notice is delivered. On the other hand, the lessor can proceed in a different way under cl.11(d) if the conditions stated exist - that is, a desire to demolish the building, or a desire to reconstruct, rebuild or alter to an extent that would interfere with quiet enjoyment to any appreciable extent - and then the lessor may hold the tenant to the lease for six months before the termination is effective. There could be advantages for the lessor in choosing this procedure, as the lessor would be entitled to receive the rent or abated rent during the six months, would be entitled to performance by the lessee of other covenants, and would have an interval during which to prepare plans and apply for consents of public authorities.
22 At the highest the apparent anomaly of the lessor having much the same right conferred in two different ways at different points in the same document is not a serious one. It is not difficult to suppose that the parties truly intended the lessor to have both rights even though they cover the whole or part of the same ground, and it is not realistic to attribute to the parties a completely rigorous drafting process in which a subject must be taken to have been dealt with once and once only, with such force as to modify the literal meaning. A piece of clockwork can be interpreted in that way, but a piece of language usually can not. The parties can cover much the same ground twice in different ways if they really intend to.
23 Overall, I regard the meaning of cl.11 and the integration of cl.11(d) into the matter governed by the opening provisions as quite clear. In my view it would be a striking departure from the literal meaning, form and setting-out of cl.11 if cl.11(d) had been intended to be a free-standing right of termination depending only on decisions of the lessor and irrespective of whether or not there had been damage from causes external to the lessor’s wishes. Overall, the lease evinces an unmistakably clear intention that the term of the lease should be five years. Any provision which empowered the lessor to break the term at a time of its own choosing would go to the heart of the parties’ relationship and it can be expected that it would be very clearly expressed. It is very unlikely that such an intention would find expression in a clause such as cl.11, or would depend on implication or on a doubtful reading.
24 There were some observations in the course of argument about the approach which should be taken to ambiguity; I do not regard the provisions of cl.11 as ambiguous. The heading to cl.11 does not in my opinion make any real contribution to understanding the clause.
25 Counsel for the defendants contended that if it is established that the lease has not been terminated the plaintiff should be left to his remedy in damages for the termination and no injunction should be granted. He submitted that there is a discretion to be exercised, and referred to authorities which establish the essentially discretionary character of injunctive relief, particularly authorities relating to a grant of injunctions to restrain negative breaches of contractual stipulations. Counsel also referred to texts on the same subject. These submissions were I take it based on the view that the ground for an injunction is a claim to restrain breach of the covenant for quiet enjoyment, which is not difficult to understand as an impliedly negative covenant against premature termination and ejectment. In my view the plaintiff’s claim to injunction is much clearer; the plaintiff has a proprietary interest in the land under his registered lease, and is entitled to defend his possession, while the defendants have clearly threatened to interfere with his legal right of possession by giving the Notice of Termination and by the position they have adopted in these proceedings. It would be very undesirable to leave open the possibility of a struggle on the ground and at the shop over physical possession. Notwithstanding the discretionary element in granting injunctive relief I regard the plaintiff as having an irresistibly strong claim to an injunction to protect his proprietary right.
26 Orders:
(1) Declarations in terms of Claims 1, 2 and 3 in the Summons.
(3) Order that the defendants pay the plaintiff’s costs of the proceedings.(2) Permanent injunction in terms of Claim 4.
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