Strata Corporation No 117066 v Nine Eleven Tasmania Pty Ltd
[2008] TASSC 67
•12 November 2008
[2008] TASSC 67
CITATION:Strata Corporation No 117066 v Nine Eleven Tasmania Pty Ltd [2008] TASSC 67
PARTIES:STRATA CORPORATION NO 117066
THE GASWORKS, 2 MACQUARIE STREET, HOBART
and EQUITY AUSTRALIA CORPORATION PTY LTD
v
NINE ELEVEN TASMANIA PTY LTD
TITLE OF COURT: SUPREME COURT OF TASMANIA (FULL COURT)
JURISDICTION: APPELLATE
FILE NO/S: 415/2007
DELIVERED ON: 12 November 2008
DELIVERED AT: Hobart
HEARING DATE: 11 August 2008
JUDGMENT OF: Crawford CJ, Blow and Tennent JJ
CATCHWORDS:
Contracts – General contractual principles – Construction and interpretation of contracts – Other matters –Avoidance of commercial inconvenience – Commercial lease agreements – Landlords entitled to require reinstatement of premises to original condition –Timing of reinstatement.
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98; Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494, referred to.
Aust Dig Contracts [120]
REPRESENTATION:
Counsel:
Appellants: M O'Bryan SC, A Walker
Respondents: F M Douglas QC, M Bleasel
Solicitors:
Appellants: Dobson Mitchell & Allport
Respondents: Toomey Manning & Co
Judgment Number: [2008] TASSC 67
Number of paragraphs: 36
Serial No 67/2008
File No 415/2007
STRATA CORPORATION NO 117066 THE GASWORKS,
2 MACQUARIE STREET, HOBART and
EQUITY AUSTRALIA CORPORATION PTY LTD v and
NINE ELEVEN TASMANIA PTY LTD
REASONS FOR JUDGMENT FULL COURT
CRAWFORD CJ
BLOW J
TENNENT J
12 November 2008
Orders of the Court
Appeal dismissed.
Serial No 67/2008
File No 415/2007
STRATA CORPORATION NO 117066 THE GASWORKS,
2 MACQUARIE STREET, HOBART and
EQUITY AUSTRALIA CORPORATION PTY LTD v and
NINE ELEVEN TASMANIA PTY LTD
REASONS FOR JUDGMENT FULL COURT
CRAWFORD CJ
12 November 2008
For the reasons given by Blow J, I would dismiss the appeal.
File No 415/2007
STRATA CORPORATION NO 117066 THE GASWORKS,
2 MACQUARIE STREET, HOBART and
EQUITY AUSTRALIA CORPORATION PTY LTD v and
NINE ELEVEN TASMANIA PTY LTD
REASONS FOR JUDGMENT FULL COURT
BLOW J
12 November 2008
This appeal concerns a contractual dispute in relation to the leasing of premises used as a bottle shop. Once there was a gasworks on the site. It closed, and the premises were unused for many years. In more recent times the second appellant, Equity Australia Corporation Pty Ltd, redeveloped the site for residential purposes. A strata plan was registered. It made provision for a number of residential lots. As a result of its registration, the first appellant came into existence as the strata corporation with control of the common property. The respondent, Nine Eleven Tasmania Pty Ltd ("the tenant"), operates a chain of drive-in bottle shops. It entered into negotiations with the strata corporation and Equity Australia for the leasing of some of the lots in the subdivision, as well as part of the common property, for use as a drive-in bottle shop. The negotiations were successful. Leases were entered into. Substantial changes were made to convert the premises from a group of residential apartments to a bottle shop.
In May 2006 the two landlords became aware that the tenant intended to sell its business as a going concern and assign its leases to the purchaser. The landlords asserted that provisions in the leases entitled them to require the tenant immediately to restore the premises to their original condition. They purported to require that that be done, and refused to consent to the assignment of the leases until the premises were reinstated. As a result, the tenant was not able to proceed with the sale of its business.
The landlords brought an action against the tenant seeking declarations to the effect that the tenant was obliged to reinstate the premises, that it was in breach of the leases so long as it did not do so, and that the landlords were not obliged to consent to any assignment of the leases until that was done. That action went to trial. Slicer J dismissed the action and, on a counterclaim, made a declaration to the effect that the tenant is not required to reinstate the premises until the end of the term, or the expiration of any further term, whichever is the later, in respect of each lease. His Honour also made an order that the landlords pay the tenant's party/party costs of the claim and the counterclaim, as well as an order to the effect that Equity Australia indemnify the strata corporation in respect of all costs.
Both landlords have appealed. They contend that the learned trial judge should have made the declarations they sought, and that, whatever the outcome of the action, he should not have made a costs order against them. The central question in the case concerns the proper interpretation of the clauses concerning reinstatement in two leases – one granted by each landlord.
The reinstatement clauses
During 1998 each of the landlords granted the tenant a lease for a term of three years commencing on 1 October 1998, with four options for renewal, each of 10 years. Those leases were not in registrable form. During 1999, they were superseded by leases in registrable form. The strata corporation granted a lease over the relevant common property for three years and one day commencing on 1 October 1998, with four options, each for 10 years. Equity Australia granted a lease of the relevant lots for three years and one day commencing on 1 October 1998, with one option for 9 years and 364 days, and three further options, each for 10 years. Those leases expired. New leases were granted, apparently in accordance with the option clauses. By a lease dated 5 December 2005, the strata corporation granted a lease for 10 years commencing on 2 October 2001, with three options, each for 10 years. By a lease dated 2 November 2004, Equity Australia leased the relevant lots for 9 years and 364 days commencing on 2 October 2001, with three options, each for 10 years. Those leases are apparently still in force.
Clause 6.2 of the common property lease and its predecessors, and cl 6.3 of the other lease and its predecessors, are in practically identical terms. Each of those clauses begins as follows:
"Alterations to Premises
The Lessee may, subject to the consent of the mortgagee of the Property which shall not be unreasonably withheld nor delayed carry out or do or cause to be carried out or done any work, extension alteration, addition or installation in or to the Premises and the Lessor's Fixtures as the Lessee may be authorized to do by any relevant Authority to alter the Premises as the Lessee thinks fit for the purposes of the Lessee's Business PROVIDED THAT before or forthwith upon expiration of the Term or any further term and if required by the Lessor the Lessee shall, at its own cost, reinstate the Premises and the Lessor's fixtures as near as practicable to such condition as would comply with clause 15.1."
The meaning of the words, "before or forthwith upon the expiration of the Term or any further term and if required by the Lessor" is the critical issue in this appeal.
Grounds (a) and (b) of the landlords' grounds of appeal concern the meaning and effect of the reinstatement clause. The landlords contend that, properly interpreted, the clause has the following effect:
·The landlord may require the tenant to reinstate the premises.
·Such a requirement may be made during the term of the lease, forthwith upon the expiration of that term, during any further term, or forthwith upon the expiration of a further term.
·Whenever such a requirement is made, the tenant is then (not by the end of the term of the lease) obliged to reinstate the premises, even if the requirement is made before the expiration of the lease term.
The tenant contends that, on a proper interpretation of the clause, its effect is as follows:
·The landlord may at any time impose a requirement that the tenant reinstate the premises.
·If that requirement is made before the expiration of the lease term, the tenant is not obliged to complete the reinstatement until the expiration of the term, or the expiration of any further term or terms, whichever is the later.
·If the requirement is made upon the expiration of a lease term, the tenant is obliged to undertake the restoration at that time, unless there is a further lease term, in which case the restoration need not be completed until the end of any further term or terms.
Clause 15.1 of each lease, which is referred to in the reinstatement clause, reads as follows:
"15.1 Lessee To Yield up
At the expiration or sooner determination of the Term, the Lessee shall yield up the Premises in the order and condition described in clause 6.l(a)."
Clause 6.1(a) of each lease requires the tenant, during the term of the lease and any holding over period, to keep the premises, including fittings and fixtures, in good repair and condition, subject to fair wear and tear, and subject to any damage covered by insurance.
All parties to this appeal are agreed as to the principles that the Court must apply in interpreting the reinstatement clause, though they disagree as to what the outcome of applying those principles should be. They are agreed that the interpretation of a written contract involves "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract": Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 114; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188. They are also agreed as to the correctness of the following statements of principle made by Rares J in Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (2008) 166 FCR 494 at 511 – 512:
"It is necessary to construe an agreement so as to avoid making it commercial nonsense or working commercial inconvenience. The commercial purpose of the provision, that is to say the purpose of a reasonable person in the position of the parties to the contract, is relevant."
The building works undertaken to convert the premises into a bottle shop were most substantial. A great deal of demolition work was done. In some places, even walls that formed the boundaries of strata title lots were demolished. Without reinstatement, it would be impossible, for all practical purposes, for certain lots to be separately sold or separately let as residential premises or otherwise.
I think it is easy to see what purpose the reinstatement clause was intended to serve. So long as the premises were leased to the operator of a bottle shop, there is no reason to think that the landlords could derive any benefit from their reinstatement as residential apartments. Once the premises ceased to be leased to the operator of a bottle shop, it might or might not be to the advantage of the landlords for them to be reinstated. It seems clear that the clause was inserted to give them a contractual right that could be advantageous when they recovered possession of the premises, whenever that might be. It was a right to have the premises reinstated when they got them back.
The contractual arrangements made in 1998 included a series of options which allowed the tenant to continue to rent the premises for as long as 43 years. If the tenant were obliged to reinstate the premises during any of the lease terms, that could create an enormous financial burden and a substantial interference with the bottle shop enterprise carried on upon the premises. If, for example, the tenant were required to reinstate the premises during the first year of a 10-year lease term, the impact upon the tenant's business could well be catastrophic, and the landlords would not receive any benefit until the end of the 10-year term. To take another example, if the landlords' suggested interpretation is correct, they would have been entitled to require the reinstatement of the premises immediately upon the tenant completing the alterations of 1998. As these examples illustrate, the landlords' suggested interpretation could lead to unreasonable and nonsensical results.
By contrast, the interpretation contended for on behalf of the tenant makes commercial common sense. According to that interpretation the tenant could not be compelled to commence the reinstatement of the premises unless its last lease term had expired or was about to expire. A requirement that the premises be reinstated by the end of its last lease term could be communicated at any time. However the reinstatement would not need to occur other than at a time associated with the return of the premises to the landlords.
Ground (c) of the landlords' grounds of appeal includes an assertion that the learned trial judge erred in failing to take into consideration the extent of the alterations to the property, including the removal of boundary walls. In my view the radical extent of the alterations was relevant, but only as a factor supporting the tenant's interpretation of the clause. The alterations were so radical that reinstatement would have destroyed or substantially interfered with the tenant's business operations on the site. That is a reason to treat the clause as requiring reinstatement only at or about the time of the premises returning to the possession of the landlords.
Ground (c) also contains an assertion that the learned primary judge erred in failing to take into consideration a personal guarantee given by the director of the tenant company, Mr Bleasel. Before the execution of the first leases, a memorandum of understanding was executed by Equity Australia and Mr Bleasel. The memorandum of understanding recited that Equity Australia owned the property; that the property was divided into fourteen flats; that Mr Bleasel or his nominee wished to lease eight of the flats and the whole of the common property; and that Mr Bleasel intended to use the property as a bar and drive-through bottle shop. Equity Australia agreed to enter into a lease for three years, with four options, each for 10 years, provided Mr Bleasel obtained certain consents from relevant authorities within four months. Reinstatement was dealt with by cl 1(ii) of the memorandum, which provided as follows:
"1(ii) Bleasel shall carry out the Alterations at his own cost and, if Bleasel does not exercise the Option, at the end of the initial term of the Lease or any extension to the Lease whichever is later Bleasel shall at his own cost restore the Property to its condition at the commencement date of the Lease."
The leases that were subsequently executed all contained personal guarantees by Mr Bleasel. Under cl 30.7 of each lease, his liability as guarantor is to continue throughout the term of the lease, any further term arising following the exercise of an option, and any period of holding over by the tenant, and during the whole period that it occupies the premises or has any interest in them.
Senior counsel for the landlords advanced an argument that was based on the proposition that an assignment of the leases could result in the landlords losing the benefit of Mr Bleasel's guarantee. However cl 30.6 of each lease provides that, if the lease is transferred or assigned, the benefit of the guarantee "shall extend to the transferee or assignee and shall continue to enure concurrently for the benefit of the Lessor notwithstanding any such transfer or assignment". Further, cl 30.3(f) of each lease provides that the obligations of the guarantor will not be affected by the assignment of the lease. Also, there are provisions as to assignment in cls 7.1 and 7.2 of each lease. Clause 7.1 contains a general provision prohibiting assignment, but cl 7.2 provides that the tenant will not be in breach of cl 7.1 if certain requirements are met. Clause 7.2(c) requires the lessee to prove "to the satisfaction of the Lessor that the Incoming Tenant is a respectable responsible and solvent person capable of complying with the terms and conditions of this Lease and experienced in conducting a business substantially similar to the Lessee's Business". Clause 7.2(g) requires that the tenant provide "such guarantee as may be required by the Lessor, of the obligations and covenants of the Incoming Tenant in a form acceptable to the Lessor". In the light of those provisions, it is clear that the possibilities of assignments and new guarantees have no bearing on the proper interpretation of the reinstatement clause.
Grounds (d) and (e) of the landlords' grounds of appeal assert factual errors on the part of the learned trial judge. Ground (d) asserts that he erred in finding "that the parties were dealing with different structures, types of building and fixtures, when the evidence was that the substantial proportion of the works concerned one building comprising five stratum titles and the works included demolition of many title boundary walls within that one structure". Any such error was inconsequential. What is significant in relation to the interpretation of the reinstatement clause is that the works were extensive and expensive, and that boundary walls were removed. Ground (e) asserts "that his Honour erred in finding that all parties, through Hosken [of Equity Australia] and Bleasel knew of the desirability or necessity of modification to the premises to enable statutory permission and intended use, when there was no evidence of any modification being either desirable or necessary for any statutory permission, and further there was no evidence that Hosken knew of the extent of the intended modifications prior to entering into the MOA [sic] [memorandum of understanding] in May 1998". Again, I think it is clear that any such error must have been inconsequential. It is the nature and extent of the modifications to the premises that is relevant to the interpretation of the reinstatement clause, not the extent to which the modifications were required by statutory authorities. It is what the parties knew and intended when they executed the first leases in October 1998, with the reinstatement clauses in them, that is critical to the interpretation of those clauses, rather than their knowledge in May of that year. Grounds (d) and (e) must fail.
Senior counsel for the landlords advanced another argument based on the decision of the Full Court of the Federal Court in Bowen Investments Pty Ltd v Tabcorp Holdings Ltd (supra). That case concerned a 10-year lease of a multi-storey office building, the foyer of which had been altered substantially by the tenant in breach of the lease. The Full Court decided that the appropriate measure of damages was the cost of reinstatement, not the diminution in the value of the reversion, which was minimal. The case contains references to authorities as to situations when the cost of reinstatement is not recoverable as damages. Counsel pointed out to us that the learned trial judge did not refer in his reasons to the authorities as to situations when the diminution in the value of the reversion will be the appropriate measure of damages. However there is no reason why those authorities should have any relevance to the interpretation of the reinstatement clause. As Finkelstein and Gordon JJ made clear in Bowen Investments at 499, the cases in which the diminution in value has been held to be the appropriate measure of damages relate to breaches of repair covenants by tenants still in possession of premises, whereas the cost of reinstatement has been regarded as the appropriate measure of damages for an action brought at or near the termination of a lease: Conquest v Ebbetts [1896] AC 490 at 494; Gooderham & Worts Ltd v Canadian Broadcasting Corporation [1947] AC 66 at 83; Joyner v Weekes [1891] 2 QB 31. Since the construction adopted by the learned primary judge was one whereby the reinstatement covenant could only be breached at or near the termination of the lease, there would be no risk that the diminution in the value of the reversion would be regarded as the appropriate measure. There was therefore no need to consider the authorities relevant to that method of measuring damage.
There is no merit at all in any of the landlords' arguments as to the interpretation of the reinstatement clause. Their suggested interpretation is preposterous. The learned trial judge was perfectly correct in dismissing the action and granting a declaration as counterclaimed by the tenant. Grounds (a) and (b) must fail.
The order for costs
After the learned trial judge had dismissed the landlords' claims and decided to make a declaration in favour of the tenant, he heard argument as to costs. The landlords argued that each party should bear its own costs. It was said that the tenant had been only partly successful on its defence and counterclaim. It was said that the tenant had pleaded matters that it abandoned at the trial, with the result that costs were wasted. The learned trial judge rejected those arguments, concluded that costs ought to follow the event, and made an order accordingly.
Grounds (f), (g) and (h) of the landlords' grounds of appeal relate to the order for costs. Ground (f) relates to orders sought by the tenant as set out in the prayer for relief in its counterclaim. It sought a declaration that it or its assignee was not required to reinstate the premises "to the condition they were in at 1 October 1998 until the end of the Term or the expiration of any further Term whichever is later". In the alternative, it sought a declaration that it or its assignee was not required to reinstate the premises "to the condition that they were in at 2 October 2001 until the end of the Term or the expiration of any further Term whichever is the later". The evidence established that the demolition and modification works had begun by 1 October 1998, and were complete well before 2 October 2001. Ground (f) asserts that the tenant was contending at trial that the landlords could only ever require partial reinstatement, to the condition that the premises were in on 1 October 1998, or that no reinstatement was required at all because the relevant date was October 2001. That ground is based on a false premise. It was accepted by the tenant at the trial that the relevant date was 15 May 1998, which was before any demolition work began. Ground (f) must therefore fail.
Ground (g) attacks comments made by the learned trial judge in his written reasons for making the usual costs order. His Honour set out a list of seven matters which had affected the exercise of his discretion. The sixth read as follows:
"(6)There was no dominant or severable issue argued at the hearing, (rather than initially raised on the pleadings) which was decided adverse to the defendant. The case as argued at trial was not one which enabled the Court to differentiate between those issues on which the defendant succeeded and those on which it might have failed had it chosen to pursue at trial."
Ground (g) asserts that the second of the two sentences in this quotation constituted an erroneous finding. I disagree. In that second sentence, I think his Honour was only trying to explain that, because no issue argued at the hearing was decided adversely to the tenant, his experience of the matter as the trial judge was of no help to him in differentiating, for the purposes of a costs order, the costs relating to the tenant's successful contentions and the costs relating to the tenant's abandoned contentions. Ground (g) must fail.
Ground (h) asserts that the learned trial judge erred in failing to give consideration to the costs incurred by the landlords in preparing for certain arguments raised by the landlords that were abandoned or unsuccessful. Those arguments include arguments as to rectification and unilateral mistake.
In its prayer for relief in the counterclaim, the tenant sought an order for rectification. Specifically, it sought an order changing the wording of the reinstatement clause in each lease in relation to the time when the landlord was entitled to require reinstatement, so that it would read, "at the end of or forthwith upon expiration of the term or any further term" instead of "before or forthwith upon expiration of the Term or any further term". The claim for rectification was abandoned at the trial.
A plea of unilateral mistake was included in the counterclaim. It was pleaded that, if the proper construction of the leases was that reinstatement was to occur at any time if demanded by the landlords, then the tenant had made a mistake as to the proper construction of the leases, and the landlords were knowingly taking advantage of that mistake. That contention was abandoned at the trial.
Apart from rectification and unilateral mistake, ground (h) relates only to "the claims by the respondent that the condition to which the building was to be rectified was as at 1 October 1998 or alternatively 1 [sic] October 2001".
The central contention in ground (h) is that the learned trial judge failed to consider the fact that the tenant had raised arguments that were either abandoned or unsuccessful. That contention is plainly incorrect. His Honour referred in his written reasons to "different matters raised by the pleadings, but conceded or agreed for trial". He also referred to issues raised by the tenant "on which it might have failed had it chosen to pursue at trial". He specifically acknowledged that the tenant had conceded at the trial that the claim based on unilateral mistake could not succeed. Whilst he did not refer to the abandoned claim for rectification, there is no reason to think that he overlooked it. Similarly there is no reason to think that he overlooked the concession at the trial that the appropriate date for reinstatement purposes was 15 May 1998 rather than 1 October 1998 or 2 October 2001. His Honour made some general comments as to concessions made at the trial in the following passage in his reasons:
"I observed competent counsel conducting a complex case effectively and commendably. Their respective cases were fully and properly put and argued with an appreciable savings in the costs of trial. The issues were clearly defined and formulated. Appropriate concessions were made which enabled the parties and Court to more quickly deal with the central contentions of the parties. The hearing was not prolonged by separable or secondary issues upon which the defendant was unsuccessful, or its contentions futile."
Ground (h) must fail.
Since I have concluded that each of the grounds of appeal relating to the costs order is based on a false premise and must fail, there is no need for me to review the authorities as to when it is appropriate for a court to depart from the usual principle that costs follow the event. In my view no error can be seen in the manner in which the learned trial judge approached the question of costs.
Conclusion
I would dismiss the appeal.
File No 415/2007
STRATA CORPORATION NO 117066 THE GASWORKS,
2 MACQUARIE STREET, HOBART and
EQUITY AUSTRALIA CORPORATION PTY LTD v and
NINE ELEVEN TASMANIA PTY LTD
REASONS FOR JUDGMENT FULL COURT
TENNENT J
12 November 2008
I have had the opportunity to read the reasons for judgment of Blow J. I agree with his reasons and the conclusions he has drawn. I would also dismiss the appeal.
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