Stokes v MPC Systems Pty Ltd - [2006] SASC 337

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Civil)
STOKES & ORS v MPC SYSTEMS PTY LTD
[2006] SASC 337
Judgment of Judge Lunn a Master of the Supreme Court
10 November 2006
LANDLORD AND TENANT
Plaintiffs hold unregistered lease - registered proprietor transfers land to defendant - held defendant not bound by unregistered lease.
Lease of vacant land and shed to the plaintiffs for use as a paintball field - need for plaintiffs first to obtain consents for such use and to make improvements to the premises before they were able to be used as a paintball field - held lease was not a "retail shop lease" for the purposes of the Retail and Commercial Lease Act 1995.
Inconsistent provisions in lease that rent was to be 25% of income and 25% of gross profit - held covenants were to be construed against the landlord and contra proferentem and in favour of the tenant as 25% of gross profit.
Surrender of lease - held agreement to surrender by plaintiffs was subject to a condition precedent which was not satisfied and thus the surrender did not take effect.
Provision in lease that rent was to be 25% of gross profit of the business of a paintball field - held term "gross profit" had no meaning in the context of the plaintiffs' business and was to be treated as the equivalent of gross income.
Hosking v Barnes [1971] SASR 100, applied.

STOKES & ORS v MPC SYSTEMS PTY LTD
[2006] SASC 337
JUDGE LUNN:
Overview (The matters set out in this Overview were largely common ground between the parties, but insofar as they were disputed I find them proved on the balance of probabilities.)

The late Scot Stokes (”Scot”) was the husband of the plaintiff, Jane Stokes (“Jane”). He was an enthusiast for the sport of paintball and had a dream of setting up and running his own paintball field as a commercial operation. Alfred and Erna Lehermayr (“the Lehermayrs”) owned a large area of land at South Road, Huntfield Heights on which they conducted the business of the Lakeside Leisure Park. That contained a number of facilities for leisure activities such as toboggan rides, a four-wheel drive track and the like. In the mid-1990s Scot negotiated with the Lehermayrs for him to set up a paintball field in the Leisure Park. However, those plans were thwarted when part of the land was compulsorily acquired for the Southern Expressway. The Government paid Scot $74,000 in compensation. In September 2003 Scot obtained provisional Council development approval to set up a paintball field on another part of the Leisure Park which was vacant land except for one shed and which only comprised part of a certificate of title.
The plaintiff, Lawrence Dauchier (“Lawrence”), had been an associate of Scot in playing paintball. In about 2003 they agreed to pursue the project together with Lawrence and his wife, the plaintiff Melanie Dauchier (“Melanie”), to provide most of the $70-80,000 which it was anticipated would be needed to set up the paintball field. Scot had negotiated with the Lehermayrs to obtain a lease of the paintball field for a term of 3 years and at a rental which was to be 25% of the profits of the business.
In 2002 the Lehermayrs had entered into a contract to sell the business of the Leisure Park, including the whole of the land on which it was conducted, to Malcolm Ongley for $2.2 million. Ongley was represented in the transaction by a solicitor, Stephen McNamara (“McNamara”). Ongley was unable to settle on the contract. The Lehermayrs were represented in the transaction by Anthony Curtis (“Curtis”), a registered conveyancer.
The defendant, MPC Systems Pty Ltd (“MPC”), carries on business as a land developer. McNamara and John Chambers (“Chambers”) were two of its three directors. In the latter part of 2003 MPC investigated whether it would seek to take over the contract from Ongley for the purchase of the Leisure Park. In October 2003 McNamara ceased to be the solicitor for Ongley because the involvement of MPC in the transaction was creating a potential conflict of interest for him. On 23 January 2004 MPC wrote to Curtis advising that by arrangement with Ongley it was proposing to enter into a new contract with the Lehermayrs for the purchase of the Leisure Park on terms similar to those in the previous contract with Ongley. Thereafter events moved very swiftly. MPC was aware of the arrangement negotiated between Scot and the Lehermayrs to use part of the land for a paintball field and it was agreeable to that use of the land. Curtis prepared a draft lease for the paintball field. That draft showed the Lehermayrs as lessors and Jane and Lawrence as the only two lessees and stated that the rent was to be 25% of the profits of the paintball business. At about this time Lawrence, Melanie and Jane, but not Scot, registered a business name of “Adrenaline Paintball Sportz” (“Adrenalin”). On 29 January 2004 Lawrence and Melanie executed a written partnership agreement for them to carry on a business of “paintball” trading as Adrenalin. Curtis discussed the first draft of the lease with McNamara who required some alterations to it. He then submitted a further draft lease to McNamara. This further draft lease named Scot and Lawrence trading as Adrenalin as the lessees, but not Jane. These arrangements about the partnership and the business name were not explained, but were indicative of the somewhat cavalier and careless way in which much of the business of the plaintiffs was carried on.
At this time the paintball field had not been constructed. Most of the activities of the Leisure Park were not operating, but MPC had been informed that the four-wheel drive course was functioning, although there was no objective evidence before me to prove it. On 4 February the Lehermayrs terminated their contract with Ongley. On 9 February they entered into a new contract with MPC for the sale to it of the business of the Leisure Park and its land. In Schedule 5 it was provided that if the Lehermayrs were assessed for GST on the transaction the purchase price would be increased by that amount and would be payable by MPC on demand. There was no reference in the agreement to any lease to the plaintiffs. On that day, at the instigation of Curtis, Scot and Lawrence executed a lease from the Lehermayrs to themselves for a term of 3 years from 1 February 2004 until 31 January 2007 (“the first lease”). It provided that the rent was to be 25% of the gross profits of the business payable on the first day of each month in respect of each preceding calendar month and should commence “on the first of the calendar month next following the day of the commencement and operation of the business”. It had a plan of the area leased annexed to it, but it was not in a sufficient form to enable the lease to be registered under the Real Property Act 1886. It has never been so registered. On 11 February Curtis saw McNamara and gave him numerous documents relating to the settlement. He gave him a copy of the lease agreement, but there is no evidence that it was an executed copy or that prior to settlement MPC knew that such a lease had been executed. On 12 February settlement occurred and MPC became the registered proprietor of the Leisure Park land.
On 23 February 2004 McNamara’s legal firm wrote to Lawrence and Jane advising of the settlement and requesting them to contact Chambers to arrange a meeting to discuss the lease. As a result, Scot attended at Chambers’ office to discuss the lease. Chambers said a new lease had to be prepared in the name of MPC and Scot agreed to execute it. There was no dispute that he had authority from the plaintiffs to negotiate about a lease on their behalf. McNamara’s legal firm obtained from Curtis an electronic copy of the lease between the Lehermayrs and Scott and Lawrence. They altered the name of the lessor to MPC and added a description of the lessee as “trading as ‘Adrenalin’”. They altered its Clause 2(a) to provide that the rent was to be 25% “of the gross income of the business”, but they did not alter the provision in the panel form at the commencement of the lease which provided that the rent was to be 25% of the gross profit of the business. Some arrangement was made with Scot for the execution of this new lease (“the second lease”).
Scot approached Lawrence apparently excited about the prospect of the lease and spoke to him about executing it. They both executed the second lease in the presence of Wayne Ker, who was a business associate of Scot, who witnessed their signatures. Scot and Lawrence saw Chambers at his office on an unknown date in probably about early March 2004 when they handed over the executed second lease. Scot told Chambers that as it was expected to take 6 to 9 months to set up the paintball business no rent would be payable until then. There was some discussion about a possible extension of the 3-year term of the lease. Chambers indicated that it could occur if the business traded well, but he made no promise about it. MPC expected it would take at least 3 years to obtain development approval for sub-dividing the land for housing, and possibly longer. This response by Chambers was consistent with MPC keeping its options open to fit in with its longer term plans for the land.
Early in March 2004 Scot full-time, and Lawrence for three days a week, commenced work on clearing the site and preparing it to be a paintball field. They did much of the physical work themselves. On 15 April Scot received conditional development approval from the Council, but subject to a number of major conditions. A six-metre high, wooden post and netting fence was erected around the perimeter of the paintball field. A small shed on the leased area was upgraded and converted into an office and a storage facility for the business. During the remainder of 2004 in excess of $65,000 was spent on setting up the field. For reasons which were not explained in evidence, on 23 August 2004 a further partnership deed was entered into between Lawrence, Melanie, Scot and Jane to carry on business as Adrenalin. However, on 10 September the other partners resolved to remove Scot from the partnership. On that day a further partnership deed was entered into between Lawrence, Melanie and Jane under which Jane had a 50% interest in the partnership and Lawrence and Melanie 25% each. This was because Scot had lost his firearms’ licence and the necessary firearms’ approval for the conduct of the paintball field by Adrenalin could not be obtained if he was a partner. The paintball field commenced operations on 16 December 2004.
Apart from paying the water rates, the plaintiffs paid no rent to MPC in 2005. In March 2005 there was a meeting at Chambers’ office (“the March 2005 meeting”) attended by Chambers, Scot, Jane, Lawrence and Melanie. There were discussions about whether the cost of the paintballs to the business was to be deducted from the gross income for the purpose of calculating the rent payable, but the context of these discussions was very much in dispute. Nothing was agreed about it at that meeting. The plaintiffs informed Chambers that they needed an accountant to prepare financial statements for the business before they could calculate the amount of rent payable. At about this time Melanie, who was then responsible for the bookkeeping for the business, instructed an accountant, Samantha Franklin (“Franklin”), to prepare the necessary accounts.
In July 2005 Scot died in a motor vehicle accident. Some of the business records were also destroyed in that accident. The business closed for a week, but thereafter resumed with the partners taking over the work which had previously been done by Scot.
In early November 2005 Ms Milen, the solicitor for the plaintiffs, contacted Chambers to discuss the outstanding rental payments. She was told that the rental payments were to be paid on the basis of a percentage of turnover, but that had not been able to be done because there had been no access given to the books of the business. On 8 November Ms Milen wrote to Chambers confirming the conversation and advising that she had written to Franklin seeking the books. On 5 January 2006 Ms Milen again wrote to Chambers advising that she had received a message from Franklin to the effect that she had been unable to prepare the books of account because Melanie had yet to supply the primary records. She indicated Franklin expected to be able to provide the books of account by 20 January.
In January 2006 Lawrence was contacted by Adam Kirwan-Taylor (“Taylor”) who represented Delta Force (“Delta”), an international company which operated paintball fields. He enquired whether the plaintiffs were interested in selling their business to Delta. The plaintiffs replied that they would sell for $180,000. Lawrence rang Chambers to advise him of the offer and to enquire whether the plaintiffs could obtain an extension of the lease which they would need to be able to sell the business. Chambers replied that he would talk to Taylor before the matter went further. Lawrence gave Taylor’s number to Chambers. There were then discussions between Taylor and Chambers.
On about 6 February Franklin sent to Chambers a trading statement for the business from 1 July 2004 to 31 March 2005 which showed a gross profit of $12,634 for that period, calculated by deducting the cost of paintballs purchased from the total sales. (Although the evidence of Melanie was that this document was dated 6 February, an annexure to it contained information which relates to a period shortly after that date. Either the annexure summary, or the whole document, could not have been prepared until somewhat later in February.) Chambers had several telephone discussions with Lawrence about payment of the outstanding rent. He had exhausted his patience and made heated demands for payment. On 10 February he made an oral demand for payment within 14 days, failing which he said steps would be taken to terminate the plaintiffs’ lease.
On 15 February the plaintiffs paid $3,000 to MPC on account of the rent. Between 20 and 23 February they paid a total of $8,200 in e-banc trade dollars to another company related to MPC. These e-bank dollars were credits in a mutual trading arrangement. There was a dispute whether MPC had agreed to accept them in part-payment of the rent, but it is not necessary to resolve it. The annexure summary to the trading statement up until 31 March 2005 prepared by Franklin contained assertions of the gross profits of the business for the months from April 2005 to December 2005 which showed the total rent due until 31 December 2005 as being $15,029 calculated as 25% of gross profit. After credits for payments already made by the plaintiffs and the e-banc dollars it showed a balance owing for rent to 31 December 2005 of $1,730. That amount was paid by the plaintiffs to MPC on 27 February 2006.
On 24 February 2006 there had been a meeting between Taylor, Chambers and McNamara at which it had been agreed in principle that if the plaintiffs vacated the paintball field MPC would grant a new lease to Delta for $25,000 per annum. On 27 February Taylor sent an e-mail to Melanie and Lawrence offering to pay the arrears of rent plus a reasonable price for any fixtures and fittings on the site which would be left if the plaintiffs vacated. Taylor pointed out that if MPC shut down the business the plaintiffs would loose their fixtures and fittings with no compensation. On 28 February Melanie sent a copy of this e-mail from Taylor to Chambers and said that they proposed to pay the rent bi-monthly on 14^th of the following month.
On 28 February Chambers sent the following e-mail to Lawrence:
I have reviewed the rent paid and all though (sic) the board set the dead line of Friday 24/02/06 the date has now past. The rent remains seriously in arrears and the only payments made to date were $3000.00 on 15/2/06 and $1730.00 on 27/2/06 plus an amount paid in ebanc credits. As the lease calls for payments in Australian Dollars the board was unable to accept ebanc credits.
By your figures to December 05 we should have been paid 25% of the gross income (refer page 3 section 2a). This amounts to $25,682.72 Plus GST which is required to be paid. (Page 5 Section 5A). In addition to that the lease calls for payment monthly and until last week no attempt to pay rent has been made and now the attempt is too little too late. Current out standing rent is $23,520.20 inclusive of GST. Plus rent for January and February 2006. Estimated at $6278.00 inclusive of GST. This is the situation as the board sees it and they require the payment of the out standing rent immediately. No further extension will be given.
This was a demand for a total payment of $29,798 on the basis that the rent to the end of February was properly calculated as a percentage of gross income, and not of gross profit, and that MPC had not agreed to accept e-banc dollars as part payment. At about this time there were also some heated telephone conversations between Chambers and Lawrence in which Chambers referred to termination of the lease being a consequence of not paying the rent. At the same time negotiations between Lawrence and Taylor were continuing. Taylor had obtained a copy of Franklin’s report and was seeking further information about the plaintiffs’ development costs of the field. The plaintiffs apparently made enquiries of other paintball operators in Australia about the possibility of selling their equipment to them. On 2 March Lawrence sent an e-mail to Taylor saying that a Victorian field was interested in the fence posts and netting and that they were still awaiting a proposal from him. I infer Taylor interpreted this as a bluff tactic. He immediately responded saying that if they had other buyers to go ahead and that Delta had decided to do its own developing without any of the plaintiffs’ fencing.
The plaintiffs contacted their solicitor Ms Milen. On Friday 3 March she faxed a letter to Chambers, but as it showed the wrong fax number it is unclear when it came to the attention of Chambers and McNamara. The relevant parts of the letter are as follows:
I refer to our brief telephone discussion this morning ….. I was also informed by my client that Mr Dauchier had been told that you did not want to evict Adrenalin Paintball.
I do note that your statement of, “too little, too late” does not give my client much confidence that the problem can be solved and does seem to be in contrast to what you told Mr Dauchier.
I do wish you to raise with your board this correspondence because it is my view that there is some difficulty with the terms of the lease in that as pointed out in one part of the document you refer to the rent as being 25% of the gross profit with the next reference to the rent as being 25% of gross income. As you know these terms are quite distinct and in this case due to the very high non fixed overheads lead to quite a different rental rate. As I understand it by your calculation you say that the rental due totals $25,682.75 up until December 2005 with my client’s accountant calculating the rental due at $15,029.58 as the same date but using the 25% of the gross profit rental taken from page 2 of the lease document. I would suggest to you that given the uncertainty created by the two different rental rates specified in the document it would probably be the case that a Court would construe the rental figure against your company and determine the rental rate to be at the lessor (sic) figure. I would also suggest to you that if the proper rental rate were to be determined at 25% of income then the rental rate to be paid in respect of the land would make the business unviable.
It is my clear instructions that my client and you reached a verbal agreement that you would accept Ebay dollars to catch up the arrears of rental. My client acting in good faith did deposit 8,2000 Ebay dollars into your account and on my instructions those Ebay dollars remain in your account. …..
…..
My client’s business partner is in the process of borrowing funds sufficient to meet rental arrears. ….. Whilst you sate that it is too late for my client to remedy the situation my client does hope that you will present her position to the board at your earliest convenience and that the business is able to continue with the lease and increase the business. …..
My client tells me that she and her partners, the Dauchier’s have agreed that as soon as the loan and the expected cheque are obtained payments will be made to catch up the arrears and that now that trading is reasonably established they do not expect to be in a situation where the rent is in arrears again.
It is also the case that the issue of rental needs to be revisited given the uncertainty generated by the two different rental rates specified in the lease agreement.
I trust that this situation can be resolved.

On Monday 6 March Lawrence, Melanie and Jane saw Chambers at his office. Lawrence and Melanie produced a large sum of cash which they had just borrowed. They handed over to Chambers at least $21,529 in cash. Chambers then indicated that MPC would accept the e-banc credits. This meant that the whole of the outstanding rent was paid up to the end of February on the basis demanded by MPC in its e-mail of 28 February. Nothing was said by the plaintiffs to the effect that their payment was being made under protest. Some aspects of what was said at this meeting are in dispute and will be dealt with later. The plaintiffs said they wished to honour some bookings which they had taken up until the end of the month, and Chambers agreed that they could do so and not pay any rent for March. Chambers signed an MPC receipt for $21,529. As typed it contained a mistake referring to “rental payment through to the 321^st March 2006”. Either at the end of, or shortly after, the meeting Melanie saw the error and asked that the receipt be corrected. However it was corrected in handwriting, but to 21^st, and not to 31^st, March.
Chambers and McNamara were surprised, but pleased, that the plaintiffs had paid the whole of the amount demanded for the rent. It seemed inconsistent with the contents of the letter of 3 March from Ms Milen. On 7 March Chambers wrote to Ms Milen acknowledging her letter of 3 March and stating, “We advise the parties have now settled the issue and the tenants are leaving the premises on 31 March 2006. Accordingly the matter has now been resolved.”
Ms Milen replied by letter of 10 March disputing that MPC was entitled to the rent on a gross turnover basis and that the plaintiffs were to vacate by 31 March 2006. She required an undertaking that MPC would not seek to terminate the lease or take possession of the property. MPC’s solicitors replied to the effect that on 6 March the plaintiffs had orally surrendered the lease and requiring them to vacate.
The plaintiffs instituted this action on 30 March 2006. They sought an interlocutory injunction to prevent MPC from evicting them from the paintball field. There have been a series of undertakings and injunctions preserving the status quo pending the resolution of this action. On 19 May 2006 the Chief Justice ordered there be an early trial of the action before a Master in order to resolve the issues.
The plaintiffs’ paintball business
Paintball is a game played between opposing teams of players. The players are dressed in camouflage clothing with protective gear. They are armed with guns powered by compressed air which fire paintballs. The object of the game is to hit an opposing player with a paintball in such a way that the referee rules that player to be out of the game. Many hundreds of paintballs can be fired in the course of a game.
Generally each player in a game at the plaintiffs’ field was required to pay a $10 site fee which entitled the player to the use of the facilities, camouflage clothing and an air gun supplied by the plaintiffs. In addition the players had to purchase their own paintballs. The plaintiffs had paintballs available for sale and most players did purchase their paintballs from the them, although some did not. The plaintiffs sold the paintballs at a mark-up of up to six times what they cost them, but many were sold for less that this mark-up. Lesser prices were offered to children and where substantial numbers were bought by the one person. Not all of the paintballs bought by the plaintiffs were sold by them. Some were used by Scot and Lawrence when they participated as players, some were given to casual employees as payment for their services and, particularly in the early months, many were given away in promotional and marketing activities.
Initially the plaintiffs would open the field on any day when they had bookings. Their best days were weekends. In more recent times they have only opened on days other than weekends when they had been able to obtain a substantial number of bookings for the day. In some months of the year, when it was either very hot or wet, there have not been a great number of participants.
The plaintiffs’ primary accounting system was very rudimentary. Most of the income was received in cash. Some expenses were paid out in cash and only the balance was banked. There was no till which recorded the moneys received. Some records were kept of the number of players and what they paid on loose sheets of paper, but it was not systematic or comprehensive. It is not surprising that Franklin had considerable delays and difficulties in producing trading figures for the business.
Evidence and the witnesses
By far the most reliable evidence is the contemporaneous documents. Apart from the experts the only witness who did not have a vested interest in the outcome of the case was Curtis. He was an impressive witness. I prefer his evidence where it is in conflict with that of any other witness.
There was obviously considerable animosity at the time of trial, and probably well before, between the plaintiffs on the one hand and Chambers and McNamara on the other hand. Their evidence was not entirely independent and objective. It was significantly coloured by at least a subconscious desire to win the case. Parts of their evidence were ex post facto reconstructions of what they thought must have occurred rather than their actual memories of what did occur. It is not a case where any one of them should be preferred against any other of them, but rather parts of their evidence are to be accepted on the balance of probabilities as what occurred where it fits in better with other more acceptable evidence.
The evidence of each of Lawrence, Melanie and Jane was undermined by their lack of understanding of the legal nature of the transactions in which they were involved. They had little appreciation of how a business such as the paintball field should have been run to avoid accounting and legal difficulties. They, and Scott, approached the venture as the fulfilment of a personal dream to set up and operate a paintball field rather than to conduct a profitable business. Their evidence was in part coloured by what they had been told by Scot about his dealings, but that was not evidence which they could properly give of their own knowledge.
Lawrence was a very unimpressive witness. He found it difficult to address the questions put to him and he gave many vague and unresponsive answers. I reject his evidence that he and Scot signed the second lease in Chambers’ office. The fact that their signatures were witnessed by Wayne Ker, who was a business associate of Scot’s, and who was unknown to Chambers, strongly suggests that it was signed elsewhere. After initially being certain that it was signed in Chambers’ office he was forced in cross-examination to back down and to say he did not know. It was clear that he had no reliable memory of that event or of many others.
Melanie was unconvincing in her denials that she was responsible for the delays in Franklin producing any financial statements. She was also wrong in her evidence about one aspect of the meeting of 6 March 2006 in saying that she and her husband only took $21,529 in cash to that meeting. Chambers was likely to have been correct in saying that Melanie and Lawrence produced about $30,000 in cash, but after he had counted out the $21,529 he said MPC would accept the e-banc dollars which meant he did not have to count the rest and he handed it back. Although it is a mystery why they did it, it is clear that the plaintiffs went to that meeting with the intention of paying everything that MPC had demanded in the e-mail of 28 February to avoid MPC being able to terminate the lease and jeopardise the plaintiffs’ investment in the project. There was nothing said by the plaintiffs before the cash was handed over to the effect that they were only paying the amount claimed less the e-banc dollars. While they alleged that MPC had reneged on its alleged agreement to take the e-banc dollars, they then believed that MPC was not going to take them. Their mind-set was that they were going to do whatever was necessary to ensure there was no possibility of there being any outstanding rent on which MPC could act to terminate the lease. While Melanie’s evidence was better than that of Lawrence I still had considerable reservations about it.
The evidence of Jane that she always believed that it was a 5-year lease was quite absurd. As will be dealt with below, Curtis believed that the lease was one which was subject to the Retail and Commercial Leases Act 1995 (“the Shop Leases Act”), and, if so, its minimum term was 5 years. In the disclosure statement he had given on behalf of the Lehermayrs to Scot and Lawrence he had only said that the lease may be for a term of 5 years and not that it would be for 5 years. He had also spoken to Scot about this. However, an allegation that the lease was for an initial term of 5 years, and not 3 years, was not raised again in any document or conversation until it appeared in the second statement of claim filed on 30 June 2006. An assertion that the lease was for a term of 5 years would have been very relevant in the negotiations with Taylor, but there is no suggestion it was ever mentioned. The evidence of Jane that they had always thought it was a 5-year lease was an amateurish and naïve attempt by her falsely to bolster the plaintiffs’ case. It adversely colours the credibility of the rest of her evidence.
There are substantial inconsistencies between the evidence of McNamara and Curtis about the events surrounding the sale of the Leisure Park business to MPC and the creation of the first lease. My acceptance of Curtis’ evidence on these matters shows that McNamara did not have an accurate and reliable memory about the events of early 2004. Accordingly, I am not prepared to place much weight upon his evidence on disputed matters. (I have had no regard to the allegation made against him in cross-examination, which he denied, of having had a judgment entered against him in other proceedings in the District Court. This allegation was not substantiated, and was later withdrawn by the cross-examiner.)
There was no evidence led by MPC about how the second lease, which it prepared, came to have two inconsistent provisions in it about the rent being both 25% of gross profit and also 25% of income. Chambers and McNamara in their evidence both described the reference to gross profit as a typographical error, but neither of them personally prepared the document and no evidence was called from the author or the typiste about how the discrepancy occurred. It remained a mystery. I reject the evidence of Chambers that he pointed out this “typographical error” at the March 2005 meeting. It did not seem necessary that accounts should be prepared by Franklin if the rent could be calculated merely from gross income, but it did make more sense that accounts were required from Franklin before gross profit, whatever that meant, could be calculated. The fact that MPC was prepared to wait for Franklin to prepare accounts was consistent with it then accepting that the rent was to be calculated on gross profit. The discussions at the March 2005 meeting were more in accord with what deductions could be made from the turnover in calculating gross profit than in the plaintiffs attempting to re-negotiate the basis of the rent calculation, as was asserted by Chambers. This conclusion is consistent with the evidence of Curtis that he had told Scot that gross profit meant profit before tax and the undisputed evidence about the debate on whether the cost of paintballs given away for promotional purposes could be deducted. I find that at the March 2005 meeting Chambers believed that the proper basis for the calculation of the rent was 25% of gross profit and that he did not realise that the second lease had a provision for payment of rent based on gross income until late 2005 when he first raised it with the plaintiffs. This also colours the credibility of his evidence about other matters.
The plaintiffs have been deprived of the evidence of Scot Stokes because of his unfortunate death. Where a party to an oral transaction is deceased the law as to how the Court treats the evidence of the other parties is laid down in re Garnett, Gandy v Macaulay (1885) 31 Ch D 1 at 9 where Brett MR said:
“The law is that when an attempt is made to charge a dead person in a matter, in which if he were alive he might have answered the charge, the evidence ought to be looked at with great care; the evidence ought to be thoroughly sifted, and the mind of any Judge who hears it ought to be, first of all, in a state of suspicion; but if in the end the truthfulness of the witness as is made perfectly clear and apparent, and the tribunal which has to act on their evidence believes them, the suggested doctrine becomes absurd.” (The suggested doctrine was the evidence could be accepted without corroboration).
The crucial issue concerning Scot was whether at his meeting with Chambers in about late January 2004 about the terms of the second lease, and in some discussion with McNamara immediately after that meeting, he agreed and/or confirmed that the basis of the rent calculation was to be changed from 25% of gross profit to 25% of income. For the reasons canvassed above I am not satisfied that it has been made perfectly clear and apparent on the evidence of Chambers and McNamara that Scot did in fact agree to such a change. I am prepared to accept that the issue may have been discussed, but in the absence of Scot’s evidence I am not prepared to find that he went as far as agreeing to it.
The Lease between the parties.
The plaintiffs’ primary position is that the first lease is still the operative lease and binds MPC. I do not accept this as a matter of law. The contract of sale between the Lehermayrs and MPC did not make the vendors’ interest in the land which was transferred subject to any lease to Scot and Lawrence. The registered title of MPC to the Leisure Park land does not show it being subject to any lease. While it is unclear whether MPC was aware that the first lease had been executed at the time of settlement, even if it had been so aware, its interest in the land would not have been subject to it at law: R M Hosking Properties Pty Ltd v Barnes [1971] SASR 100. I reject the submission of the plaintiffs’ counsel that this decision was distinguishable because here the contract was for the sale of a business whereas in that case it was for the sale of land. The indefeasibility provisions of the Real Property Act which were the basis of the decision in Hoskings v Barnes above, operate without regard to the nature of any contract between the vendor and the purchaser of the land. In her oral submissions counsel for the plaintiffs contended that the exception to indefeasibility for fraud under s 69(a) of the Real Property Act 1886 applied because MPC had fraudulently avoided payment of GST on the sale of the land by knowingly and falsely documenting the sale as one of an ongoing business when there was no business being purchased. The simple answer to the point is that no such allegation of fraud was pleaded, and it should have been pleaded with proper particularity: Civil Procedure South Australia, 1987 Rules Volume, para [R 46.14.10]. In any event the necessary facts to establish such a fraud were not proved. Also the alleged fraud was between the defendant and/or the Lehermayrs on the one hand and a third party, the Commissioner of Taxation, on the other hand which is not a fraud within the scope of s 69(a) of the Real Property Act. Accordingly the second lease is the operative lease between the parties. (No issue was taken that the lessees named in the second lease are Scot and Lawrence whereas the plaintiffs, and the proprietors of Adrenalin, are Lawrence, Melanie and Jane.)
The second lease contains two provisions about the calculation of rent which are inconsistent. It was not pleaded that the defendant had fraudulently inserted the reference to the rent being 25% of income. As I have found elsewhere it remains unexplained how these two inconsistent provisions both became part of the document which was signed. I find that at the time of signing the second lease no party subjectively appreciated that it contained these two inconsistent provisions. No matter what any party thought was the agreement about the rate of rent none would have signed it if they had known there was a clause in it inconsistent with their understanding of the prior oral agreement. Therefore, the issue to be resolved is how is the second lease to be construed about what amount of rent is payable. There is no proper basis in law to resort to extrinsic evidence to resolve the issue. Where there is no other way of resolving an inconsistency or ambiguity the rule of interpretation is that a lease is to be construed against the grantor (ie the defendant): Savill v Bethell [1902] 2 Ch 523 and in favour of the lessee (ie the plaintiffs): Russell v Beecham [1924] 1 KB 525. This is supported by the contra proferentem rule that a document is to be construed against the party which prepared it: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500. That rule applies to leases: Love v Paves (1810) 104 ER 297 . Accordingly, the rent payable is to be calculated as 25% of gross profit. (It is not necessary to pursue the plaintiffs’ claim for rectification of the document or their claims for misrepresentation or the like about the rent provision.)
I reject the plaintiffs’ claim that they have a right of renewal for a further term of 3 years as from 31 January 2007. At the best for the plaintiffs was the evidence of Lawrence that Chambers said “he was quite happy to give us an extension on our lease if we traded well”. I find that Scot and Lawrence told Chambers that there was an expectation that on good weekends they would anticipate an income of $10,000. Any representation of Chambers about a renewal upon the plaintiffs trading well was in the context of that representation of turnover of about $10,000 on good weekends. The plaintiffs’ business has never achieved a turnover on a weekend of anything like $10,000. The proper inference from the accounting evidence, such as it is, is that the business has been largely unprofitable. Thus the precondition for any extension of the lease has not been satisfied. In any event I accept the evidence of Chambers that he did not bind the defendant to any renewal as it would have been inconsistent with MPC’s longer term plans for alternative uses of the land. I also do not accept the plaintiffs’ evidence that they were not prepared to enter into the second lease unless they were assured of a renewal for a further 3 years so that they could trade for 6 years less the time needed to set up the paintball field to recoup their substantial outlay on the fixtures and fittings which they would loose when the lease expired. It was an instance of their commercial naivety that they were prepared to expend substantial sums in setting up the paintball field without a legal right to occupy the field for more than 3 years.
Was the second lease a retail shop lease?
The plaintiffs contend they had a minimum term of 5 years under the second lease by virtue of the Shop Leases Act. Section 20B of that Act provides:
(1)The term for which a retail shop lease is entered into must be at least five years.
…..
(2)A lease is not invalidated by contravention of this section but the terms of the lease is extended to bring the term (or aggregate term) to five years.
…..
Section 3(1) of the Act defines “retail shop lease” for the purposes of s 20B as:
“retail shop lease” or “lease” means an agreement under which a person grants or agrees to grant to another person for value a right to occupy a retail shop for carrying on a business –
(a)whether or not the right is a right of exclusive occupation; and
(b)whether the agreement is express or implied;
to which this Act applies.
…..
That section also defines “retail shop” as:
“retail shop” means –
(a) business premises –
(i)at which goods are sold to the public by retail; or
(ii)at which services are provided to the public, or to which the public is invited to negotiate for the supply of services; …..
Section 6 of that Act provides:
When the lease is entered into
6For the purposes of this Act, a retail shop lease is taken to have been entered into when –
(a) both parties have executed the lease;
…..
Under s 6(a) of the Act the relevant time at which to assess whether s 20B applies to the second lease is when the second lease was executed which was about early March 2004. (There would be no material difference if it was assessed at the commencement of the term of the lease which was 1 February 2004.) At that time the land over which the lease was granted (“the premises”) was bare, vacant land with a small shed upon it. The shed was not then fitted out so as to be suitable for use in the business of a paintball field. The necessary Council approval under the Development Act 1993, and approvals under the Firearms Act 1977, for the premises to be used as a paintball field had not been obtained. There was no certainty that the necessary approvals would be granted to the plaintiffs or that any conditions attached the approvals could be satisfied. It is undisputed that the lease was granted for the purposes of carrying on the business of a paintball field and that the operation of a paintball field involved the provision of services to the public which satisfies para (a)(ii) of the definition of “retail shop”. However, at that time it was uncertain whether the premises would be able to be either physically or lawfully used as a paintball field at some future time before the expiration of the lease. What was certain was that it could not be physically or lawfully used as a paintball field for the whole of the term of the lease.

In the definitions of “retail shop lease” and “retail shop” the elements of “occupy ….. for carrying on a business” and “services are provided to the public” are expressed in the present tense, and not a future tense. This suggests that the premises must be at least capable of being occupied for carrying on the business and for providing services to the public at the time of the execution of the lease. I do not consider that these definitions are satisfied where the proposed business cannot be carried on, and the services cannot be provided to the public at that time, but only at some future time within the term of the lease and after further pre-requisites essential for the carrying on of the business and the provision of the services to the public have come into existence. This interpretation is consistent with s 18 of the Act whereby, unless specifically excluded, the lessor warrants that the premises will for the duration of the lease be structurally suitable for the purpose of the business in question. Lessors cannot be expected to give such warranties where lessees have to make substantial improvements to the premises to make them structurally suitable for their purposes. It is significant that this statutory warrant is for “the duration of the lease”.
The definition of “retail shop”, quoted above, required that the alleged shop should be “business premises”. That term is not defined in the Act. “Business” qualifies, and limits, “premises”. “Business” was defined in Eglinton v Barmera Hotel (1980) 25 SASR 465 at 467 by White J in these terms:
A “business” has been described as any activity having a commercial flavour carried on continuously and seriously, that is, not merely for pleasure.
At the time the lease was taken to have been entered into for the purposes of s 6 of the Act it is clear that the premises could not be properly categorised as business premises. They may have become business premises before the end of the term of the lease, but there was even no certainty of that. For this reason also the premises did not qualify as a “retail shop”, and thus s 20B of the Act did not apply to it.
Counsel for the plaintiffs argued that the Act should be construed so as to give effect to its objects in s 20A which were to achieve an appropriate balance between the conflicting expectations of lessors and lessees of retail shop leases. However, that does not entitle the Court to legislate to make the Act operate over leases which do not qualify under the terms of the Act as retail shop leases. There is clearly a difficulty in the Act applying in situations where the use of premises as a shop is not for the whole of the period of the lease and where it is conditional upon improvements being made, and regulatory approvals being obtained, by the tenants. These are matters outside the scope of the statutory interpretation and need to be addressed by Parliament.
Accordingly, I hold that the second lease was not a retail shop lease under the Shop Leases Act and therefore its term was not extended to 5 years by virtue of that Act. My view is consistent with that taken by Judge Bowen Pain in Rowen v Pastars action 675/97, judgment delivered 8 December 1997. There is no other decided authority on the issue.
Was the lease surrendered?
MPC contends, and the plaintiffs dispute, that at the meeting on 6 March 2006 the plaintiffs surrendered the lease and entered into a legally binding agreement to vacate the premises on 31 March 2006. (There was confusion in the pleadings and the evidence on the use of the expression “termination of the lease”. It was ambiguous as to whether it meant a termination by MPC, presumably for breach in non payment of rent, or a termination by the plaintiffs which was accepted by MPC. As a matter of proper legal categorisation a termination of the lease could only be by an act of MPC and any termination by an act of the plaintiffs would be a surrender of the lease. In these reasons I use those terms in such ways).
Leading up to this meeting MPC had become intent upon regaining the premises from the plaintiffs by any legitimate means available to it so that it could pursue an arrangement with Delta which would be to its financial advantage. The plaintiffs were in a state of bewilderment and panic. They realised that if MPC terminated the lease they would lose much, if not all, of the substantial moneys which they had invested in setting up the paintball field. It is unclear why all three plaintiffs went to see Chambers on 6 March and what they hoped to achieve by doing so. I do not know what legal advice they had received from Ms Milen when they instructed her to write the letter of 3 March 2006, but it is inconsistent with that letter that she advised them to pay the whole of the amount which MPC was then demanding. In her evidence in chief Jane disclosed they had received some advice from Franklin at about this time, but she did not say what it was. It may be that the plaintiffs were acting under that advice in what they did on 6 March.
On the evidence it is impossible to resolve precisely what was said at the meeting of 6 March and whether it amounted to an agreement for a surrender of the lease. However, the issue can be resolved on one narrow aspect of what occurred. In the course of the discussions Jane said that she was not prepared to vacate by 31 March unless she received compensation from Delta. Chambers conceded this in his cross-examination and said that he had agreed to speak to Taylor about it. Melanie also spoke of this statement by Jane. It is unclear whether Lawrence and Melanie were making an agreement to vacate conditional upon receipt of compensation from Delta, but as Jane was a 50% partner no agreement could be made binding the partnership unless she assented to it. (As a matter of law one joint lessee cannot surrender a lease: Leek v Clark [1952] 2 QB 788). I am satisfied that she did impose a condition precedent to what was otherwise agreed about vacation of at least some compensation being paid by Delta. There is no evidence of any further communications with Taylor and this condition precedent was not satisfied. While there was an agreement in all other respects for vacation on 31 March it is not legally binding on the plaintiffs because of the failure of this condition precedent: Coupland v Maynard (1810) 104 ER 53. Accordingly, the second lease has not been terminated and, unless it is otherwise legally terminated, it will continue until it expires by efluxion of time on 31 January 2007.
Although it was not pleaded or mentioned at the hearing, it would seem there was no surrender of the lease by the plaintiffs effective in law because it was not effected by a document signed by the plaintiffs as required by ss 28-30 of the Law of Property Act 1936: Halsbury’s Laws of Australia Vol 16 para 245-4135. The plaintiffs have always remained in possession of the premises and there has been no act of part performance consistent with a surrender to activate any of the exemptions in s 31 of that Act.
Claim for loss of bookings
Paragraph 35 of amended Statement of Claim pleaded that at the meeting on 6 March MPC by Chambers purported to give the plaintiffs verbal notice of termination of the lease and stated the plaintiffs were to vacate the premises by 31 March 2006 on the basis there had been various periods in which rent had remained unpaid for 14 days after becoming payable. There was no evidence that Chambers made any such oral termination of the second lease. He did threaten to terminate the lease and the plaintiffs expected that he was going to do so, but he never actually did so. At the meeting of 6 March he assumed by reason of the plaintiffs’ recent negotiations with Delta, and apparently with other paintball field operators, that they wished to surrender the lease. The plaintiffs did not tell him that his assumption was incorrect, but rather only made it conditional upon them receiving compensation. (There was the strange evidence of Lawrence at T 136:
(Chambers) said to us “when are you going?” We told him that we couldn’t go because we still had some bookings and some tournaments happening at the time. We basically left it at that. I didn’t tell him “yes, we are going”. I just left it as “Think what you like”.)
The plaintiffs have claimed damages or compensation for loss of bookings for the period from 6 to 31 March. If the plaintiffs did not take bookings in that period, it was because they were awaiting the fulfilment of the condition precedent mentioned above. They have no legal cause of action against MPC for any such damages or compensation. They have continued to remain in possession of the premises, and on the legal position which they adopted they have been entitled to operate the business as they saw fit. Even if there was some liability of MPC on this head, the plaintiffs have adduced no sufficient evidence about the bookings which they lost, and their quantum, to enable any proper assessment of damages or compensation to be undertaken by the Court.
Recovery of overpayment of rent
The plaintiffs are entitled to recover any difference between what they have paid to MPC for rent up until 28 February 2006 and what was properly due for rent in that period under the terms of the second lease as I have found them to be on the basis of a mistake of law and such moneys, if any, having been paid where MPC was not legally entitled to them: David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. This raises the issue of what was meant by “gross profits” in the second lease.
The accounting experts, Mr Benton called by the plaintiffs, and Mr Ellery called by MPC, were both doing their best to assist the Court. They were broadly agreed that as an accounting term “gross profit” meant in respect of businesses selling goods the difference between the price received for the goods less the cost to the business of those goods. For businesses which both sold goods and had other sources of income Mr Ellery said that the concept of “gross profit” was only applicable where the business predominantly sold goods whereas Mr Benton said it was a matter of professional judgment whether the concept of gross profit could be used for such other businesses. They were agreed that the cost of goods sold could only be deducted in calculating gross profit where the goods were actually sold, and it could not include the cost of goods given away in promotional and marketing exercises, given to employees in lieu of wages or consumed by the business proprietors themselves.
Mr Ellery concluded from what he had been told of the plaintiffs’ business that it was predominantly providing an entertainment experience rather than one for the retailing of paint balls, although he was careful to say that this was ultimately a conclusion for the Court to draw on the whole of the evidence. To the contrary, Mr Benton, on the information which he had about plaintiffs’ business, concluded that the business was that of retailing paint balls. He saw the charging of the $10 site fee as merely incidental to the primary business of retailing paint balls. After conceding that the cost of paint balls for promotional and marketing activities, the payment of wages, and those used by the proprietors could not be taken to account in calculating “gross profit”, he agreed that from the records he had seen, he was unable to determine what was the predominant source of the income of the business.
On the figures used by Mr Benton, in the initial period from December 2004 to 30 June 2005, about 72% of the income for that period had been spent on paint balls. Other evidence suggests that it was in this period that there was substantial promotion of the business by giving away paint balls. In the six months from 1 July to 31 December 2005 the figures used by Mr Benton showed that the cost of paint balls was $34,724.00 which generated an income for that period of only $51,901.00. Lawrence said that they had a mark up of 5 – 6 times the cost of the paint balls. Melanie made the bald assertion that the average amount received from each player was $28.00, which presumably was a $10.00 site fee and $18.00 for the purchase paint balls. She gave no evidence about how she reached that conclusion and she was not cross-examined on it. It is not known over what period this average was taken. It suggests that about 64% of the income was from the sale of paintballs. If that is correct, it would mean that of the $51,901 income for the second half of 2005 the money received for paintballs only exceeded their cost by $1,508. It is impossible to reconcile this with the evidence of Lawrence of a markup of 5-6 times the cost of the balls, even after making some allowance for special packages, discounts to children and the like. On this approach almost the whole of the difference between the income and the cost of the paintballs would have been attributable to site fees. There was no suggestion that the whole of the income for the second half of 2005 had not been disclosed to Mr Benton. The problem may be that the plaintiffs did not keep sufficient contemporaneous primary records to enable proper calculations now to be made, but I can only act on the evidence which I have.
If, as is my conclusion on the evidence, the major part of the profit of the business was derived from site fees, and not from profit on the sale of paintballs, it strongly points to the predominate purpose of the business not being for the sale of paintballs, but for the provision of an entertainment experience. This conclusion means that the view expressed by Mr Ellery is to be preferred over that of Mr Benton. This was not a business in which the term “gross profit” can be given any meaning or role to play. Hence the gross profit in the rental formula under the second lease is to be assessed as the equivalent of the gross income.
Even if I am wrong in the conclusion in the previous paragraph, and some meaning can be given to “gross profit”, there is no sufficient evidence by which that gross profit can be calculated. At the best for the plaintiffs there could only be an order that an account be taken as to what amount of rent had been overpaid which would give them the opportunity to adduce further evidence, if they were able to do so, to assist in the calculation.
Counterclaim on the findings made above
The defendant has not made out any entitlement to relief on the counterclaim. The claim for damages for misrepresentation about the expected turnover of the business fails, inter alia, because there is no evidence that the defendant relied upon any such representation in entering into the second lease.
I will hear the parties on the orders which should now be made in the light of these reasons, and on costs