Starpharma Pty Ltd v Howzit My China Pty Ltd
[2024] VSC 499
•26 August 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S ECI 2023 04561
| STARPHARMA PTY LTD (ACN 075 081 908) | Plaintiff |
| v | |
| HOWZIT MY CHINA PTY LTD (ACN 142 480 724) | Defendant |
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JUDGE: | McDonald J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 18 June 2024 |
DATE OF JUDGMENT: | 26 August 2024 |
CASE MAY BE CITED AS: | Starpharma Pty Ltd v Howzit My China Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2024] VSC 499 |
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LEASE – Landlord not permitted to carry out Major Works without first giving tenant at least 24 months prior written notice – Upon receipt of notice of Major Works tenant could elect to terminate lease – Landlord served notice of Major Works which would entail partial demolition of premises from which tenant conducted its business – Tenant could not continue to conduct its business if landlord undertook Major Works – No right of abatement of rent and building expenses – Tenant did not give landlord notice of termination of lease – Whether landlord entitled to undertake Major Works irrespective of whether tenant terminated lease – Landlord not entitled to undertake Major Works.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S R Horgan KC with Ms L O’Rorke | Moores Lawyers |
| For the Defendant | Mr D Collins KC with Mr L E Hawas | SBA Law |
HIS HONOUR:
The factual background to the present proceeding is not contentious. The plaintiff (‘Starpharma’), is the lessee of offices and a laboratory at Part Ground Floor and Part Level 1, 2–6 Southampton Crescent, Abbotsford (‘Premises’) in which it operates a biopharmaceutical facility. The defendant (‘Howzit’) became the registered proprietor of the land contained in certificate of title volume 9895 folio 022 (‘Land’) which includes the Premises on 7 June 2023. Howzit purchased the Land and the Premises from Hengyi JV (4–6 Southampton) Pty Ltd (‘Hengyi’).
By an undated lease (‘Lease’)[1] whose term was to commence on 20 December 2017, Hengyi as Landlord leased to Starpharma as Tenant premises located in the Building described as Part Ground Floor (described as ‘Office A (West Lab)’ and ‘Office B (East Lab)’ and ‘cool room’; and Part Level 1 (described as ‘Office A’), being a combined area of 1,591.7 square metres as well as a storage area of 106.4 square metres for a term of five years. The Lease contained one option to renew for a term of five years.
[1]Original Lease, undated at Court Book (‘CB’) 63-103.
By Deed of Variation of Lease[2] entered into on about 12 March 2019, Hengyi and Starpharma agreed to vary the terms of the Lease to provide for an extension of the leased Premises to include what is described as the Gas Cage Area, to permit Starpharma to carry out certain work to the Premises, and to require Starpharma to pay certain electricity charges.
[2]Deed of Variation of Lease, undated at CB 104-170.
Starpharma exercised the option to renew the Lease (as varied) for its five year optional term. Hengyi and Starpharma gave effect to Starpharma’s renewal of the Lease by way of a Deed of Renewal and Variation of Lease dated 15 September 2022.[3] The Deed of Renewal and Variation of Lease recorded that Hengyi had granted to Starpharma a lease of the Premises for the further term of five years from 20 December 2022 to 19 December 2027 on the terms of the Lease (as varied by the Deed of Variation) with such further variations as set out in the Deed of Renewal and Variation of Lease (‘Renewed Lease’).
[3]Deed of Renewal and Variation of Lease, 15 September 2022 at CB 52-170.
The Deed of Renewal and Variation of Lease introduced into the Renewed Lease a new Special Provision 8 to the Special Provisions contained in Annexure C of the Lease, which provided for the Landlord to serve on the Tenant a Notice of Major Works giving the Tenant 24 months’ notice of those works and for the Tenant to elect to terminate the Renewed Lease in response to the notice.
By Notice of Major Works dated 11 September 2023,[4] Howzit (as the new Landlord) gave Starpharma 24 months’ notice under Special Provision 8 of the Renewed Lease of the commencement of the Major Works described in the Major Works Notice.
[4]Notice of Major Works, 11 September 2023 at CB 174-193.
Howzit admits that the performance of its proposed Major Works would involve the demolition of part of the Premises, including manufacturing suites, storage (including cool rooms and freezers), laboratory, office and meeting room spaces.[5]
[5]Defence, 9 November 2023 at [8(a)].
It is common ground that Starpharma has not given Howzit a notice of termination. It is also common ground that the performance of the proposed Major Works would involve demolition of a Gas Cage used by Starpharma to store gas which it needs for the operation of its business.[6]
[6]Demolition Plan, 12 February 2020 at CB 177.
Notwithstanding that Starpharma has not given a Termination Notice, and the Howzit’s admission that the proposed Major Works would involve demolition of part of the Premises, Howzit contends that it is entitled to carry out the proposed Major Works to the Building and the Land (of which the Premises forms part) as described in the Notice of Major Works.[7]
[7]Defence, 9 November 2023 at [11(b)]; Letter from Hicks Oakley Chessell Williams to Moores, 4 August 2023 at CB 171-173.
In this proceeding, Starpharma seeks a declaration that upon the proper construction of the Renewed Lease the Howzit cannot perform the works pursuant to the Notice of Major Works to the extent that it will render the Premises unfit for the Permitted Use[8] and deny Starpharma exclusive possession and quiet enjoyment of the Premises. Howzit denies that Starpharma is entitled to the declaration.
[8]The Permitted Use (Item 10 Reference Schedule to the Renewed Lease at CB 68) is office and laboratory.
Clause 5.2(f) of the Deed of Renewal and Variation of Lease inserts a new special provision (‘SP8’) into Annexure C to the Lease as follows:
8. Tenant Termination For Major Works
8. 1 Notice of Major Works
The Landlord acknowledges and agrees that during the Term and Further Term it must:
(a) not allow or carry out any Major Works without firstly giving the Tenant at least 24 months prior written notice each time the Landlord intends to carry out Major Works, together with such details of the proposed Major Works that are sufficient to indicate a genuine proposal (Notice of Major Works) to carry out the Major Works 24 months after issuing the Notice of Major Works; and
(b) keep the Tenant informed in writing with respect to the Major Works described in the Notice of Major Works (Proposed Major Works), including promptly responding to any reasonable queries from the Tenant with respect to the Proposed Major Works.
8.2 Termination
(a) Within 6 months of receiving the Notice of Major Works, the Tenant may terminate this Lease by giving to the Landlord a notice of termination (Termination Notice) with the effective termination date for this Lease being 18 months from the Termination Notice or a date that is mutually agreed by the Landlord and Tenant (Termination Date).
(b) If SP8.2(a) applies, then the Tenant and Landlord acknowledge and agree that:
(i) the Lease terminates at 11:59pm on the Termination Date;
(ii) clause 2.3 and SP2 does not apply and the Tenant's only obligation on the Termination Date is to vacate the Premises and leave it in a clean and tidy condition, with all loose items belonging to the Tenant removed from the Premises; and
(iii) the Landlord must not allow or carry out Major Works until after the Termination Date.
(c) The Landlord must indemnify the Tenant for all of its relocation costs (including, without limitation, costs of sourcing new premises, fitout, agency, legal and other consultant fees associated with the relocation) if the Tenant has terminated the Lease in accordance with clause SP8.2(a) and the Landlord does not carry out the Proposed Major Works within 30 months of the Notice of Major Works being received by the Tenant.
8.3 Definition
In this clause, Major Works means any works relating to the development authorised by planning permit PLN21/0084 as amended from time to time (including works on adjacent land owned by the Landlord), and any works to the Building or Land that require a planning permit or building permit, or which are likely to generate significant dust, noise or vibration that would reasonably be expected to affect the quiet enjoyment of the Premises by the Tenant, but does not include works for routine maintenance, repair, replacement of capital equipment, cleaning, or fit out works for other tenants within the Building.[9]
[9]CB 57-58 (emphasis original).
The principles as to the construction of a lease are set out in the Court of Appeal’s judgment in Agtan Pty Ltd v Caltex Australia Petroleum Pty Ltd[10] as follows:
The principles governing the construction of cl 19.1, or any other clause of the lease for that matter, are not in dispute. It is necessary to determine the obligations of Caltex under cl 19.1 objectively, by reference to its text, context and purpose. ‘Text’ involves not only the words to be construed, but the whole of the document in which they are contained. ‘Purpose’ involves not only the overarching purpose of the document, but also the purpose of the words to be construed in effecting that overarching purpose. It is necessary to ask what a reasonable businessperson in the position of the parties would have understood the terms of the lease to mean. Regard must be had to the language used by the parties in the lease, the circumstances addressed by the lease and any commercial purpose or objects to be secured by the lease. [11]
[10][2018] VSCA 169.
[11]Ibid at [88] (Santamaria JA) (citations omitted); see also Siemens Gamesa Renewable Energy Pty Ltd v Bulgana Wind Farm Pty Ltd & Anor [2020] VSC 126 at [87] and [88] (Riordan J).
The objective approach to construction of the lease requires reference to the text and its ordinary meaning together with the context, being the entire text of the lease including matters referred to in the text, and its purpose. Mr Collins, who appeared with Mr Hawas for Howzit, submitted that the purpose of SP8 is to provide what the entitlements of the Landlord and Tenant would be in the event that the Landlord or its successor (Howzit) wished to proceed with Major Works which would interfere with the tenant’s (Starpharma) use and quiet enjoyment of the premises.[12] I accept this submission. However, the identification of this purpose still requires the Court to determine what are the entitlements of Starpharma and Howzit in circumstances where Howzit wishes to proceed with Major Works.
[12]Transcript of Proceedings, 18 June 2024, p 43 L 28–p 44 L 3 (‘T’) (Mr Collins).
The question of construction is whether, subject to providing at least 24 months prior written notice, SP8 confers upon Howzit a right to carry out Major Works, irrespective of whether Starpharma has exercised the right of termination conferred upon it by SP8.2. Howzit submits that this question should be answered in the affirmative. Starpharma submits that the question should be answered in the negative.
SP8.1(a) provides that the Landlord must not allow or carry out any Major Works unless it has first given the Tenant at least 24 months prior written notice. If SP8.1(a) is read in isolation there is some force in Howzit’s contention that SP8.1(a) confers a positive right to carry out Major Works provided the notice requirement in SP8.1(a) has been complied with. However, when read in the context of the entire lease, SP8.1(a) should not be read as conferring a right to carry out Major Works irrespective of whether Starpharma has exercised its right to terminate the lease.
SP8.1 must be read in conjunction with the definition of Major Works in SP8.3, which includes ‘any works relating to the development authorised by planning permit PLN21/0084’. This planning permit involves significant demolition works, including demolition of the Gas Cage where Starpharma stores gas which it needs to operate its business. Mr Horgan submitted, without opposition, that it would not be possible for Starpharma to operate its biopharmaceutical facility without access to the gas stored in the Gas Cage.
SP8.1(b) requires the Landlord to ‘keep the Tenant informed in writing with respect to the Major Works described in the Notice of Major Works (Proposed Major Works), including promptly responding to any reasonable queries from the Tenant with respect to the proposed Major Works’. Mr Collins submitted that SP8.1(b) only makes sense if the works are proceeding.[13] I do not accept this submission. SP8.1(b) does not mandate a finding that once notice has been provided under SP8.1(a) the Landlord has an unqualified right to proceed with the works irrespective of whether the Tenant exercises its right of termination under SP8.2(a). First, the provision of information about the Major Works will assist the tenant to make a decision as to whether it exercises its right of termination. Second, if the Tenant does exercise its right of termination the provision of information under SP8.1(b) would inform a decision by the Tenant as to whether it agrees to a termination date with the Landlord other than a date 18 months from the date of the Termination Notice provided to the Landlord by the tenant under SP8.2(a).
[13]T 50 L 24–25 (Mr Collins).
SP8.2(a) confers a right of termination upon a Tenant who has received a Notice of Major Works. The conferral of this right of termination is inconsistent with the Landlord having an unqualified right to proceed with Major Works which would prevent the Tenant conducting its business, irrespective of whether the Tenant exercises its right of termination.
Howzit does not contend that SP8.1 confers upon it a right to terminate the lease. This is plainly correct. The question therefore arises: If SP8.1 confers upon Howzit the right to proceed with Major Works in circumstances where Starpharma has not terminated the lease, what rights are conferred upon Starpharma under the lease? Howzit submits that in circumstances where the Landlord serves a notice of Major Works upon the Tenant but the Tenant elects not to terminate the lease:
…The Tenant may conclude that the Major Works will not affect its quiet enjoyment of the Premises in a material way and that it can tolerate the works. Or the Tenant may conclude that the Major Works will substantially interfere with its use or enjoyment of the Premises but that it would prefer to keep the Renewed Lease on foot so that it may benefit from the Major Works by way of improved Premises once the works are complete. In that event, insofar as the Major Works will damage the Premises or render them unfit for use while the works are under way, rent and Building Expenses will abate accordingly under clause 11.1 of the Renewed Lease. Alternatively, the Tenant may conclude that it would prefer to terminate the Renewed Lease under Special Provision 8.2.[14]
[14]Defendant’s Written Submissions, 22 May 2024 at [30].
I reject Howzit’s contention that, ‘the Tenant may conclude that the Major Works will not affect its quiet enjoyment of the premises in a material way’. Mr Collins accepted that it is clear that undertaking Major Works in accordance with the planning permit will interfere with Starpharma’s quiet enjoyment of the property.[15] In fact, the Major Works will do more than interfere with Starpharma’s quiet enjoyment of the property. Mr Collins did not cavil with Mr Horgan’s submission that the operation of Starpharma’s business required the supply of gas to its laboratory and that the Major Works included demolition of the Gas Cage where Starpharma stores gas.[16] It is therefore necessary to address the question as to what rights, if any, are conferred upon Starpharma if it elected to keep the lease on foot in circumstances where the Major Works preclude it from conducting its business.
[15]T 43 L 31 – T 44 L 3 (Mr Collins).
[16]T 30 L 3–9 (Mr Horgan).
Howzit submits that insofar as the Major Works will damage the Premises or render them unfit for use while the works are underway, Starpharma’s liability for rent and Building Expenses will abate under clause 11.1 of the Renewed Lease. I reject this submission.
Clause 11 provides as follows:
11.1 Abatement in case of damage
If the Premises or the Building or both are damaged so that the Tenant is unable to use or access the Premises, the Tenant's liability for rent and Building Expenses abates according to the extent of the loss of use while that situation exists.
11.2 Landlord not obliged to reinstate
The Landlord is not obliged to reinstate the damaged Premises or Building but if the Landlord does not terminate this Lease pursuant to clause 11.3, the Landlord must commence and complete the reinstatement work with reasonable promptness subject to the Tenant covering the cost of such work if and to the extent required by clause 7.6 or any other provision of this Lease.
11.3 Termination by Landlord
If the Landlord considers that reinstatement of the damaged Premises or Building is impracticable or undesirable, the Landlord may terminate this Lease on giving the Tenant seven days written notice of termination.
11.4 Termination by Tenant
If the Landlord:
(a) having given the Tenant written notice of its intention to reinstate the damaged Premises or Building; or
(b) having been given a written request by the Tenant to reinstate the damaged Premises or Building,
does not commence and complete the reinstatement work with reasonable promptness, the Tenant may terminate this Lease by giving the Landlord 7 days written notice of termination.
11.5 Where Tenant at fault
Without limiting the other rights of the Landlord, the Tenant is not entitled to abatement under clause 11 .1 or to terminate under clause 11.4 if:
(a) the Tenant has substantially caused the damage or destruction; or
(b) indemnity is lawfully refused by the Landlord's insurer by reason of any negligence or default of the Tenant or the Tenant's Agents.[17]
[17]CB 88-89 (emphasis original).
Ms O’Rorke, who appeared with Mr Horgan for Starpharma, submitted that clause 11.1 does not have any application in circumstances where the leased premises have been intentionally damaged by the landlord as a consequence of Major Works carried out in accordance with the planning permit. I accept this submission. When clause 11.1 is read in the context of clause 11.2 to 11.5, intentional demolition of the Premises for the purpose of carrying out Major Works does not constitute damage for the purposes of clause 11.1. The reference to ‘reinstatement work’ in respect of damaged Premises in clause 11.2 does not include the renovation of the Premises following demolition works. The ordinary meaning of ‘reinstate’ is to reinstall or reestablish (a person or thing) in a place, station, condition etc.[18] The Major Works do not entail reinstatement of the premises.
[18]Oxford English Dictionary (2nd edition, 1989) ‘reinstate’.
The Renewed Lease incorporates the terms of the lease as varied by the Deed of Variation. Clause 4 confirms the continuation of the Landlord’s obligation to afford the Tenant quiet enjoyment under clause 8.1 of the lease. The right to quiet enjoyment is subject to an express exception in clause 8.1, namely, ‘where the Landlord exercises a right under this Lease’. Clause 9.1 to 9.11 prescribe ‘Rights reserved by Landlord’. Clause 9.5 prescribes the Landlord’s rights in respect of the Building, Common Areas and Landlord’s Fittings. These rights are expressly limited:
(i) So as not to ‘materially and adversely affect the Tenant’s use over any parts of the Land, including the Premises’ (clause 9.5(c)); and
(ii) For the right to repair, renovate, alter or extend the Building, so as ‘not [to] cause more inconvenience to the Tenant than is reasonable in the circumstances’ (clause 9.5(e)).
I accept Starpharma’s submission that there is nothing in clause 9 which authorises the Landlord to demolish part of the building and destroy the Tenant’s quiet enjoyment of the premises, or a substantial part of the premises.
Howzit submits that SP8 is a ‘superior provision’ which prevails over the Tenant’s right to quiet enjoyment of the Premises.[19] It points to three matters in support of this submission. First, that pursuant to clause 14.1 of the Lease, if there is any inconsistency between SP8 and the right to quiet enjoyment under clause 8, SP8 prevails. Second, that by agreeing to SP8 the Tenant expressly agreed that the Landlord could carry out Major Works that interfere with its quiet enjoyment of the Premises. Third, that the Tenant’s right to quiet enjoyment is subject to the Landlord’s exercise of a right under the Renewed Lease. Howzit submits that the Landlord’s right under SP8 to serve a Notice of Major Works also entitles the Landlord to carry out the Major Works irrespective of whether the Tenant terminates the lease.
[19]Defendant’s Written Submissions, 22 May 2024 at [25].
There is only inconsistency between SP8 and clause 8.1 and 8.2 of the lease if SP8 confers upon the Landlord a right to undertake Major Works irrespective of whether the Tenant exercises a right of termination under SP8.2(a). The only unqualified right conferred upon the Landlord by SP8 is the right to serve a Notice of Major Works. If the Tenant, having received the Notice, exercises the right of termination under SP8.2(a), the Landlord has the right to undertake the Major Works once the lease is terminated. However, if the Tenant does not terminate the lease, the Landlord does not have the right to undertake the Major Works.
Howzit submits that if a Tenant has been served with a Notice of Major Works and elects not to terminate the lease under SP8.2(a) a reasonable person in the position of the parties would read SP8 as conferring upon the Landlord the right to carry out Major Works which will interfere with the Tenant’s quiet enjoyment of the Premises.[20] Howzit submits that if the Tenant was able to prevent the Landlord from carrying out the Major Works this would be contrary to the purpose of SP8.[21] I reject this submission. A reasonable person in the position of the parties would read the right conferred upon the Landlord to carry out Major Works as being subject to the Tenant declining to exercise its right to terminate the lease under SP8.2(a). This construction is not inconsistent with the purpose of SP8, which is to prescribe the entitlements of the Landlord and the Tenant in circumstances where the Landlord wishes to undertake Major Works. Further, I do not accept Howzit’s submission that this construction does not produce a commercial result and deprives SP8 of any real meaning or purpose. SP8 must be construed consistently with all of the terms of the Renewed Lease and Lease. If SP8 confers upon Howzit the right to carry out Major Works subject only to a requirement to provide the Tenant with notice this would place Starpharma in a position where it could no longer continue to conduct its business, but would have no right of abatement of rent and building expenses under clause 11.1 of the Renewed Lease. This would render illusory the right conferred upon it by SP8.2(a) to elect not to terminate the lease.
[20]Defendant’s Written Submissions, 22 May 2024 at [31].
[21]Ibid.
The plaintiff is entitled to a declaration as follows:
On the proper construction of the Varied Lease commencing 20 December 2022 between the plaintiff and the defendant, the defendant cannot perform the works described in the Notice of Major Works served by the defendant on the plaintiff on 11 September 2023 to the extent that it would render the Premises unfit for their Permitted Use and deny the plaintiff quiet enjoyment of the Premises, in the event the plaintiff did not elect to terminate the lease pursuant to Special Provision 8.2 of the Varied Lease.
I shall provide the parties with an opportunity to make submissions on costs. My provisional view is that the defendant should pay the plaintiff’s costs on a standard basis, to be taxed in default of agreement.
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