The Stuart Park (D580060) Reserve Trust v Emibarb Pty Ltd - [2006] NSWSC 603

CITATION: The Stuart Park (D580060) Reserve Trust v Emibarb Pty Ltd [2006] NSWSC 603
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S): 18, 19, 20, 24, 26 and 27 April 2006, 1, 3, 4 and 8 May 2006

JUDGMENT DATE :
23 June 2006

JUDGMENT OF: Bergin J

DECISION: Rectification refused.

CATCHWORDS: [LEASES] - [RECTIFICATION] Suit for rectification of an agreement for lease and deed of lease on basis of mutual mistake - plaintiffs claim drafting error - whether the relevant mind is that of the employees of the council or the councillors - whether plaintiffs have established by clear and convincing proof that the parties had a concurrent intention at the time the lease was executed.

CASES CITED: Aspro’s Pty Ltd v Hayter & Ors [2005] ANZ ConvR 425
Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336
Taylor v Johnson (1983) 151 CLR 422
Telstra Corporation v Hurstville City Council (2002) 118 FCR 198
Tesco Supermarkets Ltd v Nattrass [1972] AC 153

PARTIES: The Stuart Park (D580060) Reserve Trust - First Plaintiff
The Council of the City of Wollongong - Second Plaintiff
Emibarb Pty Ltd - First Defendant
Vania Harrison - Second Defendant
Harry Haralambides - Third Defendant

FILE NUMBER(S): SC 50094/05

COUNSEL: Mr TGR Parker SC, Mr TW Marskell - First and Second Plaintiffs
Mr DE Grieve QC, Ms M Stubbs - First, Second and Third Defendants

SOLICITORS: Clayton Utz - First and Second Plaintiffs
Watkins Tapsell - First, Second and Third Defendants

- 29 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BERGIN J

23 JUNE 2006

50094/05
THE STUART PARK (D580060) RESERVE TRUST & ANOR v EMIBARB PTY LTD & ORS

JUDGMENT

1 The Lagoon Seafood Restaurant in Wollongong (the Restaurant) was established in 1986 and by the year 2000 had been the annual winner of the American Express Best Restaurant Award (Southern Region) for 14 consecutive years and had been inducted into the American Express Hall of Fame on two occasions. When the Restaurant was first established the building in which it was housed was a fairly basic 1930’s building which over time was renovated, refurbished and improved. The land on which the Restaurant was situated is Crown land known as the Stuart Park Reserve.

2 The first plaintiff, the Stuart Park (D580060) Reserve Trust, is a reserve trust established under s 92(1) of the Crown Lands Act 1989 (NSW) (the Act) and is the trustee of the Stuart Park Reserve (the Trustee). The Trustee is the owner of the fixtures and fittings on the land including the buildings in which the Restaurant operated. The second plaintiff, the Council of the City of Wollongong (the Council), was appointed to manage the affairs of the Trustee pursuant to s 95(1)(a) of the Act. It is accepted in these proceedings that the Council was acting on behalf of the Trustee in its negotiations for and entry into the Agreement for Lease and Deed of Lease (Lease documents). I have referred to the plaintiffs jointly as no issue is taken in respect of their separate identity or relevant knowledge.

3 The first defendant, Emibarb Pty Ltd (Emibarb), was established in 1986 and has operated the Restaurant since that time. The second defendant, Vania Harrison, is a director and shareholder of Emibarb and is the wife of George Harrison, a shareholder and former director of Emibarb. The third defendant, Harry Haralambides, is a director of Emibarb and is Mr Harrison’s brother. Mr Harrison was elected as Lord Mayor of the Council in 1999 and at that time resigned as a director of Emibarb. Mr Harrison remained in the office of Lord Mayor until 2002 when he entered voluntary bankruptcy and resigned as Lord Mayor. Mr Harrison was the principal of the legal firm Harrison & Associates in Wollongong. At the time of his voluntary bankruptcy Mr Harrison ceased to practise.

4 The plaintiffs seek rectification of the Lease documents executed in March 2003 to commence on 11 July 2006. The basis of the claim for rectification is mutual mistake in relation to the rent review clause. The plaintiffs claim that the common intention was that the rent review clause would provide for a market rental, to be determined excluding the tenant’s fixtures and fittings but including the landlord’s fixtures and fittings, discounted by various percentages over the period of the proposed lease. The defendants deny that there was a common intention at the time the Lease documents were executed and claim that they understood that the Council had offered a ground rental, to be determined by ignoring both the landlord’s and tenant’s fixtures and fittings, discounted by various percentages over the period of the proposed lease. There were lengthy negotiations in respect of the Lease documents and the plaintiffs claim that the defendants’ denial of the existence of a common intention must be disbelieved and/or rejected. In those circumstances it is necessary to detail the history between the parties and the negotiations that led to the alleged common mistake.

5 Between 1986 and 1996 the land and buildings on the Reserve were leased to Emibarb with an option for a further term of ten years from the expiration of the Lease “at a rent to be agreed upon between the parties” or in default of such agreement “at a rent determined at the then market rent of the Premises”. The Lease provided that the basis of the determination of market rent was:

on a willing Lessor/Lessee basis with vacant possession by a member of the Australian Institute of Valuers appointed by the President thereof and any improvements effected to the Premises by the Lessee during the term hereof shall not be taken into account in assessing the rent for any renewed lease PROVIDED HOWEVER that the rent payable during the term of any renewed lease shall not be less than the rent payable hereunder immediately prior to the expiration of the term of the lease hereby granted. The renewed lease (if any) shall otherwise contain the same terms and conditions as are contained herein PROVIDED HOWEVER that it shall not contain this nor any other covenant for further renewal. The cost of any rent determination as referred to herein shall be borne and paid for equally by the Lessor and Lessee.

6 The rent clause in the Lease provided for a payment of a yearly rent of $18,210 for the first two years and thereafter as increased by CPI (cl 2). The Lease also provided that in the event of total or partial destruction or damage of the Premises by fire or other means the Lessee could elect to rebuild and repair the Premises. In the event of such election the Lessor was not able to terminate the Lease (cl 4.1.1). During the 10 year period to 1996, Emibarb refurbished and renovated the Restaurant.

The 1996 Lease

7 On 13 February 1996 Harrison & Associates wrote to the Town Clerk enclosing Emibarb’s notice exercising the option for renewal of the Lease for a further term of 10 years. The solicitor for the Council at that time, Peedom, Brody & Ward solicitors, prepared a draft lease and forwarded it to Harrison & Associates on 21 January 1997. On 23 January 1997 Harrison & Associates responded noting that the draft lease was not in identical terms to the lease pursuant to which the option was exercised. That letter advised that in those circumstances “all terms and conditions are subject to negotiation” and that Harrison & Associates would advise the Council in due course as to the amendments required.

8 It is apparent that there was a conference between Mr Harrison and the General Manager of the Council at which there was discussion in relation to the prospect of Emibarb obtaining an option for a further 10 years in the 1996 Lease. On 26 February 1997 Harrison & Associates requested the Council’s solicitors to include a 10 year option in the proposed lease, subject to the Minister’s consent, which was required for a lease of Crown land.

9 One of the arguments put forward for a further 10 year option was that unless there was a further option Emibarb would be restricted in carrying out further major improvements to the Restaurant which were required to continue attracting tourism and to cater for increased patronage. It was suggested that without the option the Restaurant would have to wind down its operation to the eventual “shut-down” in year 10, 2006. The Council would not agree to a further option of 10 years and the 1996 Lease was signed on 21 March 1997 granting a lease to Emibarb for the period 11 July 1996 to 10 July 2006.

Request for a 10 year option

10 It is apparent that Emibarb gave consideration to selling its business and notified the Council of that proposal in a letter dated 6 June 2000. On 15 September 2000 Harrison & Associates advised the General Manager of the Council that Emibarb had decided not to sell the business and was to continue operating the business. At that time Harrison & Associates advised the Council that estimated expenses of $102,880 were required for extensive structural works to the Restaurant. The Council was invited to carry out the works or if it required Emibarb to do so it was suggested that Emibarb would require an incentive to justify the “enormous expenditure”. That letter requested an option for a further term of 10 years.

11 On 9 November 2000 Mr M R Harben, the Property Manager of the Council, wrote to Mr Harrison, at Harrison & Associates, indicating that the Department of Land and Water Conversation (the Department) had provided advice to the Council on matters necessary for consideration in deciding whether a 10 year option should be granted and that in order to progress the matter Emibarb was to provide a business plan and reasons why a competitive tendering process should not be followed upon the expiry of the 1996 Lease. That letter also contained the following:

Any proposed new lease, or the granting of a further option period of ten (10) years, will require the lessee company to pay current market rent to be determined prior to the commencement of that lease or option term.
If your client company’s request is approved, the rent will be determined by Council at that time and will reflect the current market value of Council’s asset. Your client company is requested to indicate its willingness to proceed on this basis.

12 On 14 December 2000 Mrs Harrison wrote to Mr Rod Oxley, the General Manager of the Council in terms that included the following:

Emibarb agrees for the independently determined current market rental which should be determined by a mutually agreed independent valuer should be made publicly available which will no doubt serve to evidence that Council and Emibarb have fulfilled their obligations requiring transparency and openness in this transaction.

Insurance

13 Dennis Williams, the Legal and Risk Branch Manager of the Council, suggested to Mr Harrison that an insurance broker, Graham Quinton, could probably assist Emibarb in relation to the insurance of the Restaurant. At a meeting at the Restaurant in December 2000, Mr Quinton suggested to Mr Harrison that an additional $100,000 should be added to the insurance of $1.1 million cover for the building. In a telephone conversation that day with Mr Harrison, Mr Williams referred to a Rushtons valuation and said that $1.2 million was “more than the amount that Rushtons put on the building” and, according to Mr Harrison, Mr Williams said that $1.2 million would more than cover reinstating the building. Insurance in the amount of $2 million was taken out, being $1.2 million for the building and $800,000 for Emibarb’s fixtures and fittings.

The fire

14 On 9 January 2001 the Restaurant was completely destroyed by fire. Various meetings occurred that day including a meeting between Mr Harrison and Mr Oxley in which Mr Harrison asked Mr Oxley about the best way to rebuild the Restaurant. Mr Harrison suggested that the Restaurant could be “up and running” by June if Emibarb obtained a construction certificate. Mr Oxley advised that he could not do that in the “current political climate” and that Emibarb would have to submit a new development application (DA) and that it was an opportunity to build a new building and to get a much better layout for the Restaurant.

15 On 10 January 2001 Mr Harben requested from Mr Harrison advice as to the directors’ intentions regarding the future of the Restaurant. He informed Mr Harrison that Council would be serving a notice on Emibarb requiring it to reinstate the building on the same footprint. At a meeting with Mr Harben on 11 January 2001, Mr Harrison advised Mr Harben that there was not much time left on the 1996 Lease and that Emibarb did not want to put time and expense into rebuilding unless there was a further 10 year option. In a letter dated 11 January 2001 Mr Harben, on behalf of the Council, notified Emibarb that Council required the damage to the whole of the premises to be repaired and that Emibarb was required to lodge a DA. Mr Harben also advised that he would prepare a report for consideration by Council at its February meeting in relation to Emibarb’s request for an option period of 10 years.

Resolution to approve 10 year option – 19 February 2001

16 The Administrative, Works & Community Services Committee of the Council prepared a report for the consideration of the Councillors at the Council meeting on 19 February 2001. That report set out some of the history to the relationship with Emibarb and included the following:

Proposal

During the currency of this lease, the lessee company has transformed an almost derelict building (Attachment 4) into an asset which has become a focus for both residents and visitors in the City and one which represents significant value to the City and its community (Attachment 5). From that point of view alone, there is substantial argument to support the lessee company’s on-going occupation of the premises.

In 1996 Council expressed serious concerns about the rental determined for the first year of the new lease granted pursuant to the original option. At that time the General Manager advised Council that this anomaly occurred as a result of the wording of the original lease agreement which did not allow for the rent to be determined taking into account the value of the improvements. This issue is to be addressed in terms of the granting of a further option to extend the lease by conditioning any new lease as follows:-

(i) rental to be determined by a Registered Valuer appointed by Council on the basis of the value of the land and the improvements erected on that land (thus reflecting value to Council as the improvements become the property of Council upon expiry of the current lease).

(ii) payment to the landlord is to include 6% of gross turnover in excess of a nominated amount on an annual basis.

(iii) annual rent and threshold reviews to CPI with review to market at the commencement of year 6.

(iv) Turnover to be verified with the production of audited statements to Council on an annual basis.

…

Financial Implications
As detailed above, it is proposed that any new lease entered into pursuant to the option proposed to be granted will be subject to a rent which more accurately reflects the value of Council’s asset. Whilst it is difficult to assess what that rent will be in the year 2006, it will be substantially more than the rent which is being paid under the current lease.

17 The Minutes of the Council meeting on 19 February 2001 included the following:

49. MOVED Councillor King seconded Councillor Darling that Council approve the lessee company’s request for a further option to lease the subject premises for ten (10) years commencing 11 July 2006 subject to the following terms and conditions -

1. Approval be sought from the Minister for Land and Water Conservation.

2. Compliance by the lessee company with Council’s notice issued 11 January 2001 pursuant to clause 8.2-4 of the Amendments and Conditions of the lease, ie. repair of the fire damaged building, and re-establishment of the Lagoon Seafood Restaurant business.

3. The rental at the commencement of the option term to be determined as set out in the report.

An AMENDMENT was MOVED by Councillor Martin seconded Councillor Mott that the lease continue to run its full term and that prior to the expiry of the current lease, the issue be brought to Council for further determination.

50. A PROCEDURAL MOTION was MOVED by Councillor Darling seconded Councillor Yates that the AMENDMENT and MOTION be PUT. The AMENDMENT on being PUT to the VOTE was LOST. The MOTION was PUT and CARRIED.

18 By letter dated 23 February 2001 Mr Harben notified Emibarb that Council had approved Emibarb’s request for a further option subject to the conditions (i) to (iv) as outlined above. That letter also advised of the Council’s concern in relation to the execution of allegedly unauthorised work and alleged use of the premises in contravention of the current lease. The letter also suggested that a business plan would be important in obtaining the Minister’s consent to the new Lease.

19 On 6 April 2001 Murray Dribbus, a solicitor at Harrison & Associates, wrote to Mr Oxley suggesting that the determination of rental for the option period should be by two specialist retail valuers appointed by Emibarb and the Council who would be instructed to:

decide what is the current market rent on an effective rent basis that would be reasonably expected to be paid for the Premises on the relevant Market Review Date if they are unoccupied and offered for renting for the Permitted Use having regard to the terms and conditions of this lease and other matters relevant to the assessment of the current market rent (disregarding the goodwill of the Lessee’s business and the value of the Lessee’s fixtures and fittings) but taking into account the lessee’s structural improvements and rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied restaurants.

20 On 30 April 2001 Mr Harben responded to Mr Dribbus advising that the intent of Council concerning the granting of a new lease was explained in his previous letter of 23 February 2001 and that:

The rent for any new lease will be determined by Council prior to expiry of the current lease in accordance with Council’s resolution of 19 February 2001 and therefore I cannot agree to the proposal set out in your letter of 6 April 2001.

21 Emibarb instructed Mr John Tambakis, chartered accountant, to prepare a business plan for the restaurant who advised that the return on the funds to be invested would become attractive after 16 years and that the investment should be looked at over a period of 30 years to produce an acceptable return.

Request for 20 year Lease

22 In May 2002 Mr Harrison met with Mr Brian Dooley, the regional director of the Department, and explored with him the possibility of Emibarb securing a 30 year lease. Mr Dooley advised that it would be more likely that a 20 year lease would be given favourable consideration if a sound commercial argument in support was put forward.

23 In April 2002 the Council instructed the law firm, McCabe Terrill in Sydney, in relation to a number of matters relating to the Restaurant, including the insurance claim and “some solutions” to be considered by the Council. By letter dated 29 May 2002, McCabe Terrill referred to the very slow progress of the insurance claim and the options available to Council in respect of the rebuilding of the Restaurant. That letter included the following:

21. Depending upon the nature of the rebuilding, the cost of rebuilding, and the amount to be funded by Emibarb itself in respect to the rebuilding, it may be that there is little motivation to Emibarb to rebuild. Emibarb may even elect to take an indemnity payment option under the policy. It is in Council’s interests that rebuilding take place as expeditiously as possible to ensure payment of rent and to ensure proper utility of the public reserve facility.

22. One option, which may be of interest to Council, and which may ensure the building is expedited and the interests of Emibarb and Council are properly protected is for Council to consider, at this stage, a renegotiation of the lease such that Council and Emibarb agree that a new lease is entered into to ensure the ongoing commercial viability of the restaurant which ought encourage and motivate Emibarb to promptly repair the site. That is not to suggest that there is any evidence that Emibarb is not acting expeditiously or promptly, but it may be a way of going forward, and a way that Council can ensure some continued positive cooperation in the rebuilding. It is in Council’s interests that the rebuilding take place expeditiously.

…
27. On the other hand it is also prudent that Council ensure the ongoing viability of the site. Options arise either to discharge the Insured for the remainder of their obligations under the lease, upon the benefit of insurance funds being assigned to Council and Council undertaking the rebuilding and subsequent reletting of the premises or alternatively that Council consider entering into negotiations with Emibarb to extend the current term of the Lease to allow some ongoing commercial benefit of rebuilding the premises.

24 On 9 July 2002 Mr Tambakis wrote to Mr Harben emphasising that reopening the restaurant was a long-term investment for Emibarb and should only be undertaken if a lease of a “minimum” of 20 years was offered.

25 On 15 July 2002 the Administrative Works & Community Services Committee met and considered a report of Mr Harben dated 4 July 2002. A number of recommendations were made in respect of the request from Emibarb for the grant of a new 20 year lease including the following:

It would appear that there are three (3) options that might be considered by Council:

1. Rely on the current resolution of Council – the company has already secured an agreement from Council to the grant of a new ten (10) year lease upon expiry of the current lease on 10 July 2006 and such agreement effectively gives the company a fourteen (14) year term from the current date. However, it now appears likely that the company will not resume trading from rebuilt premises until the middle of 2003 based on the best case scenario so the “term” then considered for mortgage purposes would be reduced by one year to a term of thirteen (13) years.

2. Agree to the grant of a new twenty (20) year lease from expiry of the current lease – if the current request of the company is acceded to, it will be able to offer its financier collateral in the form of a lease for a term of twenty-three (23) years.

3. Agree to the grant of a new twenty (20) year lease to take effect from the date building works are completed – the Department of Land and Water Conservation has indicated that it would be prepared to support a case for a new twenty (20) year lease but this would mean executing a new lease to commence immediately the rebuilding is completed and trading from it is resumed.

The conditions of any new lease executed as a result of Council’s consideration of Emibarb’s current request are to be negotiated but generally will conform with the intent outlined in the report considered by Council on 19 February 2001. It is proposed that the terms and conditions be negotiated and that the outcome of those negotiations be the subject of a further report to Council for final approval. In essence however, the rental for the remainder of the current lease has been fixed and the rental for any new lease granted will be determined by Council at the appropriate time.
Notwithstanding the options identified, the company’s request, if granted, constitutes a satisfactory solution to the problems which currently serve to frustrate Council and Emibarb from bringing about the reinstatement of the restaurant at earliest date. The request of Emibarb, if granted will permit (a) Council to achieve all of its objectives associated with reinstatement of the restaurant at no cost to Council and (b) Emibarb to reinstate the restaurant, confident in the knowledge that a sufficient term of lease is available in which to recover its substantial outlay.

26 The report also included the following:

Financial Implications
Any new lease entered into in accordance with the request of Emibarb Pty Ltd and the approval of Council and the Minster for Land and Water Conservation will provide for the payment of current rental value to be determined at the appropriate time. This matter is however, to be the subject of a further report to Council.

27 The Minutes of the meeting of Council on 22 July 2002 record the unanimous resolution to adopt the recommendations made in the report including the following:

2. Council approve the granting of a new twenty (20) year lease to Emibarb Pty Ltd commencing 11 July 2006 subject to agreement on terms and conditions and the approval of the Minister for Land and Water Conservation.
3. Council authorise the General Manager to negotiate the terms of any new lease granted and that the outcome of such negotiations be reported to Council at earliest date for final approval.

28 By letter dated 24 July 2002 Mr Harben advised Emibarb that Council had approved the granting of a new 20 year lease subject to the prior reinstatement of the Restaurant, the reaching of agreement on terms and conditions and the approval of the Minister. The letter also advised Emibarb that Council had authorised the General Manager to negotiate the terms of any new lease and that the outcome of such negotiations was to be reported to Council at the earliest date for final approval and that Ministerial approval would not be sought until such time as the terms and conditions had been finalised. Emibarb was requested to meet with the Council to deal with the matters outlined in the letter.

9 August 2002 – Meeting and Letter

29 On 9 August 2002 Mr and Mrs Harrison met with Mr Harben and Mr Williams. On the same day Mr Harben wrote to Mrs Harrison in terms that included the following:

I am forwarding to you a summary of those issues discussed and the agreements reached for inclusion in any new lease to be granted in accordance with Council’s resolution of 22 July 2002.

1. Council and Emibarb Pty Limited will enter into an agreement to lease which will provide for the granting of a twenty (20) year lease to commence 11 July 2006, provided that The Lagoon Seafood Restaurant building is reconstructed in accordance with approved plans and the resumption of trading as a restaurant/kiosk from that building.

2. The essential terms and conditions of this lease are as follows:

Term

Twenty (20) years commencing 11 July 2006.
Rental

Current market rent and 5% of gross turnover in excess of $5,000,000 (excluding GST) and the gross turnover is to be verified with the production of audited statements to Council on an annual basis – rent to be determined by negotiation and if agreement cannot be reached by an independent consultant valuer appointed by the President of the Australian Institute of Valuers (costs to be shared equally between the two parties in respect of the latter).

Rent Reviews

Rent and gross turnover figure to be adjusted to CPI on an annual basis with reviews to market at the commencement of Years 6, 11 and 16.

30 The letter also advised that the proposal was subject to the approval of the Minister and that under the Act the proposal had to be advertised and the Minister had to consider any submissions prior to making a final determination on whether to grant consent.

20 August 2002 Letter

31 Mrs Harrison replied to Mr Harben by handwritten letter dated 20 August 2002 in the following terms:

I refer to your letter of 9th August 2002. We agree with the terms and conditions as set out in your letter with the exception that, on the advise (sic) of our accountant, the company will pay current market rent and pay 5% of gross turnover in excess of $7,000,000.00 (excluding GST).
The gross turnover is to be verified with production of statements certified by our accountant on an annual basis.

32 On 29 August 2002 Mr Harben wrote to Mrs Harrison advising that the Council would instruct its solicitor to begin preparation of the agreement to lease and the lease documents. That letter included the following:

Council acknowledges that you have agreed, on behalf of the lessee company, to accept the terms and conditions outlined in my letter dated 9 August 2002 but that you wish to have the gross turnover figure increased to $7M. I am not prepared to agree to this increase for the reasons outlined in my recent telephone conversation with Mr George Harrison ie. the increase from the previously stated turnover figure in 2000 of $3.5M to $7M represents growth in the business of almost 14% and that Council’s preferred amount of $5M is indexed annually and adjusted at each rent review.

Mr Peedom instructed by Council

33 On 2 September 2002 Mr John Peedom, solicitor, attended upon Mr Williams to receive instructions to prepare the Lease documents. Mr Peedom’s note of that meeting recorded that Mr Williams instructed that “an agreement had now been reached for the company to rebuild the restaurant and to take a new 20 year lease from the termination of the current lease subject to that rebuilding having been completed”. Mr Williams instructed Mr Peedom that rental had not been agreed and that he should leave that part of the agreement “blank”.

34 In late August early September 2002 the Department advised the Council that “in principle” approval had been given by the Director General to the proposal to grant a new 20 year lease to Emibarb. The proposal was to be advertised in the Illawarra Mercury and Mr Harben advised Mr Oxley that in the interim he had asked the administration to prepare the Lease documents on the basis that all agreements were to be subject to the Minister’s consent.

First draft of Agreement for Lease and Deed of Lease

35 On 19 September 2002 Mr Peedom forwarded the draft Lease documents to the General Manager for approval and for referral to Emibarb. Those documents consisted of a draft Agreement for Lease and a draft Deed of Lease that included Annexures A and B. Annexure A consisted firstly of a schedule of items and secondly of amendments and additions to a “printed form”. Annexure B was the “printed form”.

36 Clause 13 of the Agreement for Lease included the following:

13 LEASE

Grant of Lease

13.1 On completion of the construction, the landlord must grant and the tenant must take a lease of the property at the rent, for the term and subject to the provisions of the attached lease.

Commencement

13.2 The lease will commence on the date of completion of the construction or on any other date to which the landlord or tenant agree.

Rent
13.3 The rent payable under the lease from the commencement date to the first rent review date is to be current market rent as at the commencement date determined in accordance with clauses 5.12 to 5.20 inclusive of annexure A to the attached lease. The date for completion shall be taken to be the rent review date for the purpose of the periods referred to in clauses 5.13 and 5.15 of that annexure.

37 The schedule of items in Annexure A recorded the lease period of 20 years, the commencement date at 11 July 2006 and the termination date at 10 July 2026. The item dealing with rent was left blank except that it included the 5% of turnover exceeding the threshold sum of $5 million. The rent review item (item 16) referred to a review on each fourth anniversary of the commencement date at “current market rent” and each other anniversary at CPI. There was also provision for how the percentage of the gross turnover was to be calculated.

38 The printed form, Annexure B, provided the various methods by which rent was to be reviewed. The method by reference to current market rent was contained in clause 5.12 as follows:

5.12 In this case the rent is to be the current market rent. This can be higher or lower than the rent payable at the rent review date and is the rent that would reasonably be expected to be paid for the property, determined on an effective rent basis, having regard to the following matters:
5.12.1 the provisions of this lease;

5.12.2 the rent that would reasonably be expected to be paid for the property if it were unoccupied and offered for renting for the same or a substantially similar use to which the property may be put under this lease;

5.12.3 the gross rent, less the landlord’s outgoings payable by the tenant;

5.12.4 where the property is a retail shop, rent concessions and other benefits that are frequently or generally offered to prospective tenants of unoccupied retail shops; and

5.12.5 the value of goodwill created by the tenant’s occupation and the value of tenant’s fixtures and fittings are to be ignored.

Council Resolution – 23 September 2002

39 The Administrative Works & Community Services Committee met on 16 September 2002 and considered a report of Mr Harben dated 3 September 2002. That report recommended that: “The terms and conditions of the proposed new lease to be granted to Emibarb Pty Limited as set out in the following report be approved”. The report then set out the “essential terms and conditions”, including the following:

2 The essential terms and conditions of this lease are as follows:

TERM

Twenty (20) years commencing 11 July 2006.
RENTAL

Current market rent and 5% of gross turnover in excess of $5,000,000 (excluding GST) and the gross turnover is to be verified with the production of audited statements to Council on an annual basis – rent to be determined by negotiation and if agreement cannot be reached, by an independent consultant valuer appointed by the President of the Australian Institute of Valuers and Land Economists (costs to be shared equally between the two parties in respect of such determination).

The lessee company has made representations to Council to have the gross turnover figure increased to $7,000,000. This request has not been agreed to by Council officers as set out in the letter to Mrs Vania Harrison dated 29 August 2002 (Attachment 1).

RENT REVIEWS

Rent and gross turnover figure to be adjusted to CPI on an annual basis with reviews to market at the commencement of Years 6, 11 and 16.

40 The Minutes of the Council Meeting of 23 September 2002 record the Resolution that “the terms and conditions of the proposed new lease to be granted to Emibarb Limited as set out in the report be approved”.

26 September 2002 Meeting

41 It is apparent that Mr and Mrs Harrison met with Mr Williams on 26 September 2002 in relation to the proposed lease. On 30 September 2002 Mr Williams prepared a report for Mr Harben in relation to matters raised by Mr and Mrs Harrison with him at that meeting. That report included the following:

1. Method for Calculation of Commencement Rental Under the Lease

Mr Harrison is concerned that Emibarb, after having expended $2m of insurance funds and more than $1m of funds sourced by Emibarb on new Lagoon Restaurant premises, should not be subject to a current market rental determination for the new lease commencing 11 July 2006, which fails to take into account the contribution which the company has made to the creation of the new asset. In the absence of an alternative proposal from Mr Harrison, he was advised that he should formulate an appropriate agreement on which a valuer must determine the current market rental, taking into account the amount of contribution which Emibarb has made to the creation of the asset for which the market rental is being determined. This would be considered by Council.

42 On 30 September 2002 Mr Harben advised Mr Williams that he did not see any reason why the provision in the lease for determination of current market rent should be amended.

30 September 2002 Meeting

43 On 30 September 2002 there was a meeting at the Council’s premises between Mr and Mrs Harrison, the then Lord Mayor, Councillor Alex Darling, Mark Hanson, two Council planners and Mr Harben. Mr Harben’s file note of that meeting recorded the following:

Both Mr & Mrs Harrison indicated that the conditions of the new lease have not been agreed to and that Council was holding them up. I denied this and reminded them that the conditions of the lease had in fact been agreed to excluding the gross turnover amount to be used for calculation of the turnover component of the rental ie Council asked for 5% of turnover in excess of $5M and Emibarb countered with 5% of turnover in excess of $7M. This was reported to Council on 23 September 2002 and Council’s resolution effectively sets the gross turnover figure at $5M (minute 406).

…

In general terms Mr Harrison is adamant that special consideration should be given to the level of investment that Emibarb is required to make when it comes time to determine the current market rental for the leased premises. I insisted that the lease was clear on this issue and that quite frankly I didn’t think this should be an issue.

Consideration has been given to Emibarb’s position in this matter and that is precisely why Council resolved to grant a new twenty (20) year lease. In addition to that, the current lease has until June 2006 before it expires and the tenant would continue to enjoy a “concessional” rental if it was able to get back up and running within that period.
Mr Harrison said that he had been told prior to the meeting that I was being inflexible on this issue and that if that continued to be the case then Council and Emibarb would end up in court. I didn’t understand this and told him so. I also added that it was my view that any dispute as to the determination of the rental could adequately be handled at the appropriate time under the provisions of the lease. Mr Harrison continued to express his concern about this issue.

44 On 1 October 2002 Mr Williams met with Mr Peedom and advised him that there were three outstanding issues: (1) the calculation of rent for the new Lease; (2) the amount of the bank guarantee; and (3) whether or not Mr Haralambides was to be a guarantor. Mr Williams requested a copy of the Lease to send to the Department and on 2 October 2002 Mr Peedom forwarded a copy of the Lease to Mr Williams for referral to the Department.

Final Draft Form of Lease documents

45 On 4 October 2002 Mr Williams wrote to Mrs Harrison enclosing the Lease documents prepared by Council in “final draft form”, for Emibarb’s perusal and comment prior to execution. The rent item in Annexure A to the Deed was amended to increase the turnover to $5.5 million indexed to CPI. The rent review clause was amended so that at each sixth anniversary of the commencement date the rent was to be reviewed on current market rent method and each other anniversary at CPI. The clause in relation to how the percentage of turnover was to be calculated remained within Annexure B.

Meeting 26 November 2002.

46 On 26 November 2002 a meeting was held in the office of the Lord Mayor between the Lord Mayor, Mr Darling, Mr Oxley, Mr Williams and Mrs Harrison. There was apparently a television crew interviewing Mr Oxley at the Council premises prior to the meeting and during the interview, which went to air that evening, Mr Oxley had, according to Mrs Harrison, insinuated that Emibarb was not serious about rebuilding the Restaurant.

47 Mrs Harrison wrote to the Council on 27 November 2002 setting out the detailed history of what Emibarb had done since the fire and suggested that the statements by Mr Oxley were not accurate. The letter included the following:

Recently Council granted to Kolco Pty Limited a 50-year lease to establish a restaurant, two function centres, a kiosk and other faculties (sic) to accommodate the City Beach Surf Club. Council was told that the developer was spending in the vicinity of $4,500,000.00 to establish what would otherwise become a public facility. To enable the developer to recoup his capital expenditure the developer was granted a 50-year lease over the land with 25 years free rent and 25 years half rent.

I believe that this establishes a clear precedent that should have been extended to Emibarb in a fair comparison basis. Emibarb intends to invest an amount in excess of $3,000,000 in the rebuilding of the Lagoon Restaurant, and in order to do so; Emibarb has to recoup this capital expenditure over the duration of its lease. We have heard that Council is somehow intending to charge over $150,000 per annum for the new lease, which is wildly in excess of what Council is entitled to receive for the asset that they own (that is, a refurbished 1930’s beach hut), or should have owned if the fire had not occurred. If Council persists with expectations of extortionate rentals, then this obviously leaves little incentive for Emibarb to invest over $3,000,000.

Council (as Emibarb’s lessor) owes a duty to both Emibarb and the ratepayers to see that the facility of the Lagoon Seafood Restaurant is reinstated in the quickest possible time. To achieve this objective Council has a responsibility to extend such “reasonable” terms and conditions under the lease that would allow Emibarb to take a reasonable commercial risk to recoup its capital investment. Any prudent commercial entity in this circumstance would need some incentive to spend its $3,000,000, recoup its capital and make a return after weighing up the relative risk elements of the venture.

At our meeting of 26 November 2002, some council officers argued that there was no obligation on Emibarb to spend $3,000,000. They are correct in their clinical interpretation of some parts of the lease, however that is not a very commercial approach. In order to ensure success of the Restaurant, a capital amount in excess of the $1,200,000.00/$900,000 required by Council for the building reinstatement has to be invested. We note that Council only required Emibarb to insure the building for $1,200,000.00/$900,000 yet the current estimate for the building reinstatement is in the order of $2,200,000. Would Council invest $1,000,000 to cover their shortfall?
Council took the liberty of taking down our Claude Neon signs and other signs giving directions to the restaurant without first obtaining Emibarb’s approval. This step more than anything has instilled fear that the restaurant would never be rebuilt. Constant statements that are being made to the media by some hopeful aspirants to political office, as well as the threat by some Council officers that the Lagoon Restaurant site is going to be turfed over has given a mistaken and misrepresented but firm belief to our consultants, sub-contractors and our bankers, and not to mention our customers who are eagerly awaiting for the re-opening of our restaurant, that it will never be rebuilt.

Walter Leo Dobrow

enters the debate

48 Walter Leo Dobrow (Mr Dobrow) is a valuer by occupation. He first met with the Harrisons in 1996 when he assisted Emibarb in respect of a dispute in relation to the rental to be paid under the 1996 Lease. At that time the Council had proposed a rental of $150,000 per annum. The parties were unable to agree and the determining valuer was appointed and determined a rental of approximately $42,000 per annum.

49 Mr Dobrow became aware of disputation in relation to the proposed Lease to Emibarb through reports in the local newspaper. Mr Harrison telephoned Mr Dobrow in September/October 2002 and he and Mrs Harrison subsequently attended Mr Dobrow’s home. During that meeting Mrs Harrison advised Mr Dobrow that she was very concerned about the rent review provisions in the proposed new Lease. Mr Dobrow suggested that he would be available to assist both parties. At about the time that Mr Dobrow was contacted by Mr Harrison he telephoned Mr Oxley and advised him that he had noticed that there was a dispute between the Council and Emibarb reported in the press. He suggested that he was happy to assist both parties on an in confidence and without prejudice basis and that he would not be asking for any fee. Mr Oxley said that he would be happy for Mr Dobrow to look at the matter.

50 At another meeting with Mr and Mrs Harrison in about late October or early November 2002, Mr Dobrow said to Mrs Harrison:

There are three items of capital improvements which are relative to the site. These are the original building, the upgraded building, which comprised the original building on the premises at the commencement of the 1986 lease, plus those improvements made by Emibarb, and the newly constructed building. It is my view that the public are only entitled to receive rental under the proposed lease on the capital value of the upgraded building only, and the demised land, from 11 July 2006.
One of the simpler options in looking at a rental review under the proposed lease is to look at the land value alone or ground lease basis. The value of the upgraded building is not going to add much to the land value alone because of the age of the building, and the fact that the upgraded improvements were made to what was originally and basically a beach hut and were fairly ad hoc. I can also see practical difficulties in valuing a unique building like the Lagoon. It will be very difficult to find comparable properties of this size and location. It is my view that the rental return of the ground value is about 6% to 10%. This would be a much more straight forward way of determining the rent payable.

51 During that meeting Mrs Harrison advised Mr Dobrow that the Restaurant could not afford to pay more than about $75,000 in annual rent and that the business would simply not be viable and would “go broke” if it had to pay substantially more than that.

52 On 29 November 2002 Mr Dobrow forwarded a letter to Mr Oxley and to Mrs Harrison. That letter included the following:

Although there are many and various issues contained within this matter, ranging from personalities to political agenda, to material public benefit, we feel that the salient impediments to having this matter moving forward to the benefit of both parties is as follows,
The proposed rent review does not provide clear guidance to a Determining Valuer for the capital works paid for by the tenant over and above those improvements that the Council are fairly entitled to. In the absence of detailed guidance within the lease, a Determining Valuer would be compelled to utilise the principles of the Hudson case and simply value what he sees as at the relevant review date. On the proposed rent review basis, the Determining Valuer would apply a rental on both the capital value of the Council’s improvements as well as the capital value of the Lessee’s improvements. In essence, the Lessee would be charged rental on the buildings and capital works that he paid for.

53 The letter then set out what were described as “three distinct items of capital improvements relative to the site”. It referred to the original building, the upgraded building and the newly constructed building. The letter included the following:

1. The original building owned by Council, and subsequently upgraded by Emibarb.

a. The Council (and the public) are entitled to receive rental on (1) the capital value of the original building, and (2) the demised land from the lease commencement date up until 10 July 2006.

2. The upgraded building (which includes the original building and the upgraded works paid for by Emibarb). The Council would have inherited the upgraded building on 11 July 2006 (less Lessee's fixtures and fittings that can be removed under the renewed lease expiring 10 July 2006).

a. Up until the time of that inheritance, it would appear that the intention of the parties was that the Lessee would not be charged rental on the additional improvements and upgrading that the Lessee had made to the original building. (This is considered a fairly moot point, as the last rental reviewed would be carried out to the lease expiry in July 2006). That is, the "current" rental would reflect the capital value of the original building owned by Council including the value of the demised land.

b. The public and Council are entitled to receive rental on the capital value of the upgraded building and the demised land from 11 July 2006.

The above clause 2b is the most important comment within this entire situation, and one which both parties have to completely understand.

3. The newly constructed building incorporating

(1) a component comprising of the upgraded building and the demised land, and

(2) the additional improvements paid for by the Lessee.

a. In all fairness the public and Council are entitled to receive rental on the capital value of the upgraded building only (and the demised land) from 11 July 2006.

(i) The Lessee to amortise the cost of the Lessee's improvements over the term of the lease, and

(ii) provide incentive for the Council to inherit the newly constructed building at the end of lease term

The analogy in that case would be like taking your money to the Bank and depositing $100,000, and then the bank charging you 7% on your own $100,000. This appears to be exactly the situation that has occurred in this case. There must be clear distinction and understanding between the parties in regard to what rental return the Council is fairly entitled to.

The Rent Review to Market

The market rental review clause of the lease should provide clear direction to a Determining Valuer in regard to what improvements should be valued. It should clearly show the intention of the parties. There are number of options available, some of these are considered to be as follows.

a . Current market rent less fixed percentage for the lessee’s improvements : Direct the Determining Valuer to determine the Current Open Market Rental on the current improvements as existing as at the time of the review. ie the newly constructed building. Then take an arbitrary percentage away from that reviewed rental to reflect the additional improvements paid for by the lessee. For example - 50% of the rental value of the improvements existing as at the time of the rental review, or whatever appropriate percentage. (The benefit of this approach is that it provides clear direction to the Determining Valuer, and allows him (or her) to value something that he can physically inspect, rather than a hypothetical situation).

b. Current market rent of a hypothetical upgraded building : Direct Valuer to determine a Current Open Market Rental Value on only a hypothetical upgraded building, ie an older style 1930’s beach hut upgraded in the mid 1980’s. (Which is really what the Council are entitled to), or

c. Summation method: Direct the Valuer to determine the Capital Value of a hypothetical upgraded building as at the time of the rental review, (ie by the Summation Method of Valuation, providing an area of the upgraded building to determine the depreciated capital value of the improvements, and an area of the currently demised land to determine the land value), and then adopt an appropriate rate of return for this type of property. There are numerous recent Court cases providing guidance for a reasonable rental return on Council land, which is 6%.

These cases also support a capitalisation rate of 10% for any premium to be paid, that is, in order to calculate an up-front single payment for the rental due for the term of the lease. We have also spoken to some of the Valuers who have been involved in the above cases to confirm the valuation methodology. However we do not consider that an up-front single payment for the rental would be applicable in this matter.

54 Mr Dobrow then referred to be provisions of clause 5.12 of the proposed lease and in particular 5.15.4 (which should have been 5.12.5) which provided that be value of the goodwill created by the tenant's occupation and the value of the tenant's fixtures and fittings were to be ignored. The letter then continued:

The above Clause does not direct the valuer to disregard the value of the Lessee's improvements. Therefore the Valuer would be compelled to provide a rental based upon the entirety of the property that he would inspect as at the rent review date. This situation is considered unfair.

…

Recommendations:

The parties should re-visit the Rent Review to Market provisions of the lease, including the proposed turnover provisions.
If required we are prepared to do the following;

· Provide a rent review clause that we consider would provide a clear direction to a Determining Valuer.

· Provide further comments on the terms and conditions of lease proposed by Council.

· We would be happy to attend a Council meeting to clarify any matter raised above.

55 On 12 December 2002 Mr Oxley responded to Mrs Harrison’s letter of 27 November 2002. That letter included the following:

The provisions under the agreement for lease for calculation of rental for the initial period of the lease and from time to time under the lease, is a standard method of calculation for commercial leases in New South Wales and for this reason the method is considered to be appropriate for the lease with Emibarb.

The agreement for lease (with draft lease) was forwarded to Emibarb under cover of Council’s letter of 4 October 2002, with a request for perusal and comment (by Emibarb) prior to being executed on behalf of the company. To date Council is not in receipt of a response to that letter from Emibarb.

…
I advise that Council received a letter on 11 December 2002 from Dobrow Valuations which requests the parties to revisit the rent review to market provisions of the draft lease including the proposed turnover provisions. Although the letter outlines the general justification for such request, it does not contain details of an alternative formula for determination of rental to be included within the agreement for lease and the lease. Although Council remains available to receive requests for alternative considerations of matters with which it deals, you must comprehend that this time:

· Council has prepared an agreement for lease and a lease which contain the standard method for rental determination for premises which is used throughout New South Wales;

· an approval on behalf of the Minister to the grant of the lease has been granted on the basis of the formula for calculation of rentals being as provided within the draft documentation;

· the officers of Council do not regard the request for amendment of the formula for calculation of rental to be justified.

…

· Dobrow Valuations to prepare a justification for and formulation of an alternative rental formula;

· Council will probably be required to engage an expert valuer to assess Dobrow's proposals;

· a recommendation to be submitted to Council for amendment of the draft lease provisions and the officers of Council to be persuaded to see merit in the Dobrow submissions;

· approval of the Minister to be sought should Council resolve to accept the amendment.

56 On 18 December 2002 Wayne Douglass of the Council sent to Mr Dobrow the comments made by the Department on the proposed Lease. Mr Dobrow met with Mr Oxley on 20 December 2002 at Brighton Le Sands. Mr Dobrow had prepared some sketch drawings of the original building, the upgraded building and the proposed building and during this meeting Mr Dobrow said to Mr Oxley:

Firstly, you could try to give the valuer photos of the upgraded building, being the 1932 building plus the “add ons” and to give parameters and guidance in the lease to the valuer to value the property as if those buildings were there and on site at the date of review. The upgraded building is the value of the asset the public would receive in 2006, at the end of the current lease. This is quite difficult because the valuer will have to make an assessment of the value of an old, tired building in 2006 that is no longer physically there and he will have to work from photos and descriptions. Secondly, the other approach you could take is that the valuer could operate on the basis of the Hudson case, and approach the valuation by valuing what he sees at the date of valuation, and then allow a discount to bring the value back to a fair rental value reflective of the upgraded building, that is, what the public would inherit in 2006. This would require the valuer to value the building at its current market rental at the date of valuation, then to deduct a proportion which reflects the difference in value between the new building that will be constructed on the site, which is larger, and better, than the upgraded building. Thirdly, you can work on the land value alone, ignoring all improvements, which is working on a ground lease basis. I do not believe the upgraded building on the land would have added much value in any case. The valuation on this ground lease basis would be on land value alone.

57 During this discussion Mr Dobrow suggested that ground leases were in the vicinity of 6% to 10% of the value of the land and expressed the opinion that it was not fair to Emibarb to seek market rental because Emibarb would be making very substantial contributions to the construction of the new building. He likened this approach to taking savings to the bank and depositing them and then having the bank charge interest on the deposit. Mr Oxley advised Mr Dobrow that he was obtaining advice from Council’s property managers.

9 January 2003 Ultimatum

58 On 9 January 2003 Mr Oxley wrote to Mrs Harrison in terms that included the following:

Council requires the tenant to comply with the following timeframes which it considers to be reasonable in the circumstances:

1. on-site building works must be commenced within 45 days of the date of this letter; and

2. reinstatement of the building, including all improvements comprising or erected on the leased site must be completed eight months after the date on which the building works are substantially commenced.

Should the tenant be in agreement with the foregoing or if it does not agree with the foregoing, it should reply in writing to Council before 5pm on Friday, 17 January 2003 advising of its agreement or alternatively it should advise the periods of time which it does agree to comply with. The alternative periods of time submitted by the tenant will be considered by Council with a view to reaching an agreement with the tenant on the periods of time which are mutually agreeable to the tenant and to Council.
In the event that the tenant either fails to reply to this letter or replies to this letter but does not submit periods of time which are reasonable and acceptable to Council, then Council will be entitled to issue a notice under section 129 of the Conveyancing Act to bring about the termination of the lease. Following termination of the Lease, it is the intention of Council to recover the former leased site and proceed to reinstate the restaurant premises using funds provided under the policy of insurance …

Mr Rusbourne instructed by Emibarb

59 Mr and Mrs Harrison instructed Mr Peter Rusbourne, solicitor, of Watkins Tapsell Solicitors to respond to Mr Oxley’s letter. By letter dated 17 January 2003 Mr Rusbourne suggested that it was in Council’s and Emibarb’s interests to resolve the outstanding matters and rebuild the Restaurant. The letter also requested that no notice be issued under s 129 of the Conveyancing Act 1919.

Mr Dobrow’s letter – 15 January 2003

60 Mr Dobrow prepared a further letter for Mr Oxley and Mrs Harrison, the final draft of which is dated 15 January 2003. Although that letter suggests that there were amendments “agreed in principle by both parties” it is obvious that some of those matters were not in fact the subject of agreement between the parties. The letter proposed that there should be amendments to the Lease, including the following:

Insert clause 5.12.6 “The valuer is to value the premises as inspected as at the date of inspection. That is, the valuer is to make no deduction for any additional improvements carried out by the Lessee to the original building nor from the rebuilding after the fire of 2001.”

Insert clause 5.12.7 “The following table is provided as guidance to the demarcation between the lessee’s fixtures in clause 5.12.5 (and elsewhere within the lease), and the demised premises. It is not intended to be conclusive but provides assistance to the determining valuer”.

Lessee’s fixtures Lessor’s property

All kitchen fit out including benches, stoves, shelves, cooking plant and air handling units.
Cool room fit out including cooling plant and equipment
Air conditioning plant and equipment
Carpets
Kiosk and Bistro fit out including display cabinets, fridges, shelves, cooking plant and air handling units.
The main building and demised land
Internal walls
Bathroom and toilet fit outs
Entry fit out and fixed tiles throughout the premises
The Bar (excluding fridges)
BBQ area including floor tiles

61 The letter also suggested amendment to the Agreement to lease including the following:

Clause 13.3.2 “The rental determined under annexure A for each rent review period in accordance with clauses 5.12 to 5.20 inclusive shall be reduced by a rate of 30% to compensate the lessee for the additional building area that he has constructed at his own cost. The percentage above includes adjustments between an old and a new building as well as the rental value of the demised land area located below the additional building constructed by the lessee. This clause is not to be provided to the determining valuer as it (sic) not a relevant matter for the purpose of determining the current market rental, and shall remain within the agreement to lease or other separate legal form.”

From the sketch plans provided for the "existing" upgraded building, I have deduced a gross building area of 909 square metres. From similar plans of the proposed building I have deduced a gross building area of 1,391 square metres. The difference is illustrated as follows:

"Existing" upgraded building 909 square metres 65.34%
Proposed building 1391 square metres

We do not consider that a difference of the building areas alone should be utilised as the compensation rate. As mentioned earlier, adjustments for the age and condition of the building, as well as the underlying land value should be reflected in the one overall compensation rate. In this regard we comment as follows.

We refer you to our previous letter where we have advised that the public/Council would have inherited in 2006 an older style building, upgraded but tired, and probably needing some further renovation work. Where the current situation is that the public/Council will achieve a market rental based upon a relatively new/modern building on the next market review in 2006. Fairly, this should have the effect of increasing the compensation rate.

Offsetting the above adjustment would be the fact that the public/Council should receive a rental for the land located below the additional 482 square metres constructed by the Lessee. This would have the effect of decreasing the compensation rate.

Meeting 23 January 2003

62 On 23 January 2003 Mr Dobrow met with Mr Oxley, Mr Williams, Mr Douglass and Mr Peedom. Mr Douglass discussed the 15 January letter with Mr Dobrow and later that afternoon Mr Douglass wrote to Mr Oxley in the following terms:

Further to our meeting this morning, I have held further discussion with Wal and am satisfied that the principle of discounting the rent is acceptable in the circumstances. The new building will be some 482 sq metres larger and will be an asset to the community and council notwithstanding the 20 year lease. Wal acknowledged that in his original discussions with you, he was not aware of the extent of the difference in area of the buildings.

I suggested that the proposed 30% discount for the full lease term could be considered high and put to him that a reduction from 30% to 25% after 10 years and a further reduction to 20% after 15 years could be reasonable. He thought this would be a reasonable response from Council.
Subject to you being comfortable with these figures, I will contact him and he can put it to the lessees for consideration.

63 That afternoon Mr Oxley responded to Mr Douglas in writing stating that he was “comfortable with what you were proposing”.

64 On 23 January 2003 Mr Oxley responded to Mr Rusbourne’s letter of 17 January 2003 agreeing that it was in Council’s and Emibarb’s interest for the outstanding matters to be resolved properly. He invited Mr Rusbourne to secure from Emibarb all of the information required to permit Mr Rusbourne’s firm to implement “meaningful and consistent commitments on behalf of Emibarb”.

Mr Dobrow’s letter of 6 February 2003

65 On 6 February 2003 Mr Dobrow wrote to the Council, to the attention of Mr Williams and Mr Douglass and a copy to Emibarb, advising that he had met with Emibarb’s solicitors and the Harrisons on 24 January 2003. He advised Council that he had carried out some investigations in relation to the opportunity to fix the rental for the first review only and made the following comments:

A reasonable rental in July 2006 should be around $75,000 net with the lessee responsible for land tax, council rates, water rates, insurance, structural repairs and maintenance, amongst other costs specified within the lease.

…
As we have discussed with Council earlier, and in this regard we consider that in order to finally resolve the issues between the parties then an agreed rental for the first review only, should be sufficient to entice to the lessee to accept the majority of the proposals made by Council for the lease of the Lagoon site.

66 On 12 February 2003 Mr Rusbourne forwarded to Mr Douglass a letter of 5 February 2003 addressed to the General Manager. That letter included the following:

1.23 An additional clause 13.5 must be inserted as requested by Mr Dobrow as clause 13.3.1. In addition the details as to the variation in the size of the building must be included.

…
2.14 Clause 5.12 must be amended to indicate Landlord and Tenant’s fixtures and fittings and as requested by Mr Dobrow, the valuer, should make no deduction for additional improvements carried out by the Tenant to the original building nor from the rebuilding after the damage and destruction of the premises in 2001. We note that a Schedule of Tenant’s fixtures and Landlord’s fixtures have been indicated and such Schedule should be included in the Lease.

67 On 18 February 2003 Mr Williams wrote to Mr Peedom instructing him to prepare an appropriate response to Mr Rusbourne’s letter of 5 February 2003. He was instructed to require Emibarb to advise Council in writing of its final agreement with the contents of his letter by 28 February 2003. The letter of instructions to Mr Peedom included the following:

7. Lease Rental

At a discussion held by Council officers and yourself with Mr Dobrow, it was agreed for a reduction in rental to be paid by Emibarb during the term of lease commencing 2006. Mr Dobrow offered to submit a substitute clause for calculation of rental, however this has not been provided.

Council’s position is therefore that the rental to be paid during the first 10-year term of lease is to be that calculated initially and after five years in accordance with the provisions of the draft lease which has been submitted to Emibarb. By an agreement to be entered into outside the lease, the rental determined is to be reduced by an amount of 30%. The rental for the third term of five years is to be determined on the same basis discounted by 25%. The rental for the fourth term of five years is to be determined on the same basis discounted by 20%.

68 On 18 February 2003 Mr Douglass wrote to the General Manager of the Council in relation to Mr Dobrow’s suggestion that a reasonable rent in July 2006 should be $75,000. Mr Douglass suggested that it was totally unrealistic and not indicative of fair market value of the rent that would have applied to the Restaurant. Mr Douglass recommended that any negotiations in respect of the rental should be within a range between $160,000 and $220,000 subject to the agreed discount.

Mr Rusbourne’s letter 19 February 2003

69 On 19 February 2003, as a result of a request from Mr Peedom to provide some “actual wording” for clauses 5.12.6 and 5.12.7, Mr Rusbourne wrote to Mr Peedom in terms that included the following:

2.14 Clause 5.12: We note that you have requested that we provide a proposed clause and we suggest the following:

“5.12.6. The valuer is to value the Property and to make no deduction for any additional improvements carried out by the Tenant in reinstating the building that had previously been destroyed by fire on 9 January 2001.

5.12.7. The valuer will take into account the following table of Tenant’s fixtures and fittings and landlord’s fixtures and fittings (such table not exhaustive):

Tenant’s Fixtures and Fittings:

All kitchen fit out including benches, stoves, shelves, cooking plant and equipment, refrigeration and cool room plant and equipment, exhaust equipment, air conditioning plant and equipment, carpets and floor coverings, decorations, kiosk and bistro fit out and display cabinets, fridges, shelves, cooking plant and all barbeque stoves.

Landlord’s Fixtures and Fittings:

All of the structure of the building, internal walls, bathroom and toilet fit outs, entry fit out (but not including decorations hanging on the walls) and fixed tiles, bars (excluding fridges) and a barbeque area including fixed floored tiles.

70 Mr Peedom forwarded a copy of Mr Rusbourne’s letter to Mr Williams and on 20 February 2003 Mr Williams provided instructions that were recorded in Mr Peedom’s file note as follows:

In relation to the lease rental, he said that the agreement reached was that there would be a separate deed or the like providing that after the valuer had determined the current market rent in accordance with the terms of the lease, the rent during the first 10 years of the term would be reduced by 30%, during the next 5 years would be reduced by 25% and during the 4th term of 5 years, would be reduced by 20%. I said that Mr Rusbourne had proposed that that agreement be incorporated in the agreement for lease and I said that I believed that was appropriate.

71 Mr Williams asked Mr Peedom to send him a copy of the letter he proposed to send to Mr Rusbourne for his approval.

Mr Peedom’s letter – 21 February 2003

72 On 21 February 2003 Mr Peedom sent a draft of the letter that he proposed to send to Mr Rusbourne to Mr Williams for his approval. That letter included the following:

2.14 We note that you have elaborated on this matter in your letter of 19 February 2003. A new sub-clause 16.6 will be added as follows:
16.6 Clause 5.12: Add:

“Despite clause 5.12.5 the current market rent is to have regard to the following fixtures and fittings:

5.12.6 tenant’s fixtures and fittings comprising all kitchen fit-out (including benches, stoves, shelves, cooking, plant and equipment) refrigeration, cool room, exhaust and air-conditioning plant and equipment, carpets and floor coverings, decorations, kiosk and bistro fit-out (including display cabinets, refrigerators, shelves and cooking plant and equipment) and all barbeque stoves; and

5.12.7 landlord’s fixtures and fittings including all of the structure of the building including all of the structure of the building, internal walls, bathroom, toilet and entry fitouts (excluding decorations hanging on walls), fixed tiles, bars (excluding refrigerators) and the barbeque area including fixed floor tiles.

73 Mr Williams telephoned Mr Peedom on receipt of this letter to discuss the contents with him and gave him instructions in relation to the amendments. The way in which the letter was set out in Mr Peedom’s draft is of some significance in this case. Clause 2.14 commenced towards the bottom of page 5 of Mr Peedom’s letter. Clause 5.12.6 was included on that page. Clause 5.12.7 in relation to the landlord’s fixtures and fittings was at the top of page 6. When Mr Williams and Mr Peedom discussed the amendments to item 16 of the letter, Mr Williams advised Mr Peedom that the tenant’s fixtures and fittings were not be taken into account in the determination of the current market rent. To accommodate this change the preamble to the proposed addition was changed from:

Despite clause 5.12.5 the current market rent is to have regard to the following fixtures and fittings.

to:

For the removal of doubt the value of the following fixtures and fittings are to be ignored:

74 There was no discussion about ignoring the landlord’s fixtures but the effect of the insertion of the new preamble of the clause meant that the tenant’s fixtures and fittings and the landlord’s building and fixtures and fittings were to be ignored. Mr Peedom gave evidence that this was a mistake and it occurred because he failed to turn the page to page 6 and read the balance of the clause in the context of the new words at the beginning of the clause. This mistake remained in the letter when it was forwarded to Watkins Tapsell on 21 February 2003. The repetition of the words “including all of the structure of the building” in clause 5.12.7 also remained in the letter.

75 Mr Peedom’s letter also included the following paragraph:

We are further instructed that clause 13.2 of the agreement for lease is to be amended by adding:

“However, the rent determined under this clause 13.2 and reviewed under clause 5.4 of the lease is to be reduced:

13.2.1 During years 1 to 10 of the lease period, by 30%;

13.2.2 During years 11 to 15 of the lease period, by 25%; and

13.2.3 During years 16 to 20 of the lease period, by 20%,

of the rent fixed by the methods stated at item 16 in the Schedule to the lease.

This clause continues for the benefit of the tenant after completion of this agreement.”

76 When Mr Rusbourne received the letter from Mr Peedom he forwarded it to Mr and Mrs Harrison for their comments. Instructions were provided in writing and all that was said in relation to paragraph 2.14 of Mr Peedom’s letter was “Noted”. Mrs Harrison’s letter included the following:

I note with some interest the terms of the reduction of rent proposed by Council. My instructions are:

i. To insist on the 35% that was carefully worked out by Mr Dobrow as being the percentage of the additional area that will be constructed by Emibarb and
ii. There must be a commencement rental that is not to exceed $75,000.00 per annum. Otherwise how is Emibarb going to be able to do its business plan to raise money if it is unable to know what its commitments are going to be?

Meeting 25 February 2003

77 Mr Rusbourne met with Mr and Mrs Harrison on 25 February 2003. Mr Haralambides claimed that he was at this meeting but that he arrived late. Mr Rusbourne did not have a recollection of him being present although Mr and Mrs Harrison were adamant in their evidence that Mr Haralambides was present.

78 Mrs Harrison gave affidavit evidence that Mr Haralambides arrived about 15 minutes after the meeting commenced. She recalled discussing the percentage reduction and claimed to have said to Mr Rusbourne: “I am not happy about this reduction. We are building a building which is 35% bigger and I feel we should still be compensated for that. I still want that deduction kept at that level”. Mrs Harrison claimed that Mr Rusbourne then said: “Vania, they have made some compromises and we have to make some too. It looks like they have given you what you wanted and they have traded that off by reducing the amount of the discount you get in the rent reviews under the lease and I don’t think that they are going to move on this”. Mrs Harrison claimed she then said: “I am not happy about this” to which Mr Haralambides said: “Vania, Mr Rusbourne is happy with it. I don’t think you have any more time to press this further without risking losing the lease. I think Council are very serious about their ultimatum to Emibarb. I think we should sign the lease”. Mrs Harrison claimed she then said: “no, I still want you to try to get 35%, Peter. Just write to them and see what their response is. I still want a guaranteed commencement rental of $75,000 in the lease”. Mrs Harrison claimed that Mr Rusbourne then said: “I don’t believe there is any point going back to them with a demand for $75,000. They have already made as many concessions as I believe they are going to”.

79 Mrs Harrison claimed Mr Haralambides then said “Vania, Council have come our way” and that she then said: “no, Emibarb is still building a building which is 35% bigger than what council had before. I still want Emibarb to be compensated for that and I still want you to go back and ask for it”. Mr Rusbourne then said: “Vania, we only have two days left. I don’t think they will change on this point”. Mrs Harrison then said: “I still want you to ask for it”. Mr Rusbourne then said: “I will write to them in relation to this. There are also some errors in Mr Peedom’s correspondence and I will draw these to his attention”.

80 Mrs Harrison was challenged in cross-examination in relation to her understanding at the time of the meeting with Mr Rusbourne that the rental was to be on the land or ground rent (tr 316-319). She claimed that it was always an option and pointed to a portion of Mr Dobrow’s letter or 15 January 2003 in support of such claim and gave the following evidence (tr 319-321):

Q. Tell us where it talks about ground rental first. Are you referring to the material in the box?
A. Going down from the box where it says: “We do not consider that a difference of the building areas alone should be utilised as the compensation rate. As mentioned earlier, adjustments or the age and condition of the building as well as the underlying land value should be reflected in the one overall compensation rate.”

That meant we had to be compensated for the extra size of the building we were giving council and be compensated for the new building we were giving council. If you take both of those away, you are left with ground rent. That is not a bad thing. Back in 1996 a valuer would have given them rent of 165,000. They are probably getting the calculation of the rent just on the calculation of the ground rent.

Q. Does that mean you understood the reference to rental at the top of the page was a reference to ground rental?
A. No, I didn’t know what that referred to. As I said previously with the 25 per cent I didn’t know how that ground rent was going to be calculated.

Q. You told us before you didn’t understand these letters and now you understand these letters as meaning a ground rental?

207 Mr Rusbourne was cross-examined as to why he did not include the conversation in his affidavit. He gave the following evidence (tr 399-400):

Q. Given that understanding of the issue, you thought it crucial to include in your affidavit a recounting of that conversation, correct?
A. I now see that I have should have done that, yes.

Q. When did you make your affidavit? 13 February 2006?
A. Yes.

Q. Ten weeks ago. If it was obvious to you today, it was obvious to you then?
A. Yes.

Q. Your appreciation as to the issue about what your clients believed on 25 February 2003 has not changed in the ten weeks since February 2006?
A. No.

Q. Would you like to look at your affidavit and tell us whether you have recounted the conversation in it?
A. I can't remember. I would need to look at the exhibit as well.

Q. I am only asking about the affidavit and recounting the conversation, so I can't see you need to look at the exhibit. Perhaps just look at the affidavit.
A. There is nothing in my affidavit on that point.

Q. When you made this affidavit as an experienced solicitor, you knew that it was or your belief was that it was vital that it should be as accurate and complete as it could be, correct?
A. Yes.

Q. According to you it's incomplete in a vital respect, is it not?
A. Yes.

Q. Do you have any reason to offer for why it was incomplete in that vital respect?
A. I would have discussed the whole letter and document with them. I have not put down the entire conversation. No. I have no other recollection.

Q. I am not asking about your recollection of events in 2003. I am asking why when you made this affidavit ten weeks ago you did not include a recounting of this vital conversation which you agreed with me you knew you ought to do?
A. I don't know. I have no explanation.

Q. You can't offer any explanation at all?
A. No.

Q. I suggest to you the conversation you have just recounted in the witness box did not take place?
A. That is not correct.

Q. Did you make a note of this vital conversation?
A. Can I look at my exhibit?

Q. Before you do, in your normal practice you agree with me this is a normal thing you would have made a note of?
A. Yes.

…

Q. Have you noted the conversation in that note?
A. No, I have not.

…

Q. This is a note of your advice to your client and their instructions to you about Mr Peedom's letter and the earlier correspondence, was it not?
A. Yes.

Q. It does not include any reference to clause 2.14?
A. No, it does not.

Q. That was because you did not give any advice to your clients on that occasion about clause 2.14, did you?
A. Yes, I did. We discussed it.
Q. What explanation do you have to offer for why if you gave that advice, and I assume you are referring to the conversation which you recounted earlier, you did not record it in your note?
A. My explanation is that we were looking at the things that were in contention rather than the things that had been agreed. I understood that had been agreed. I don't have a reason as to why I don't have a file note of that.

208 Of course the word “vital” used by Mr Parker in his cross-examination was to be understood as “vital” to the issues in this case. There is no doubt that a significant issue in this case is whether or not Mrs Harrison, and to a lesser extent Mr Harrison, comprehended that Mr Peedom’s letter had removed the landlord’s fixtures and fittings from the determination of the valuation process. That is a “vital” issue. At the time Mr Rusbourne was making his notes and preparing a response to Mr Peedom’s letter, the issue of their understanding, vis-à-vis the issues in this case, had not arisen. Certainly it was an important aspect of what the Council was offering and one that was a significant change to that which had been offered in its agreement to lease that had been forwarded in the latter part of 2002. It has to be remembered that there were the intervening events of January 2003 with Mr Dobrow’s faxes on 15 January 2003 and the desire expressed by Mrs Harrison to have rental of $75,000, a matter that Mr Dobrow raised with Council in his letter of 6 February 2003. It does not seem to me that the absence from the note is fatal to Mr Rusbourne’s evidence that he did have a conversation with his clients in relation to clause 2.14.

209 It seems to me that Mr Rusbourne’s credit and credibility is a significant matter in this case. A number of matters were raised by Mr Parker to suggest that I should not accept Mr Rusbourne’s evidence that he discovered the change in Mr Peedom’s letter. The first of these matters was Mr Rusbourne’s failure to pick up or notice the duplication of the words that appeared in clause 5.12.7. It seems to me that Mr Rusbourne’s failure to pick up the duplication in 5.12.7 does not mean that he did not read the clause at all. I regarded his evidence in relation to this aspect of the matter as honest and persuasive. The duplication in clause 5.12.7 was an obvious error and he did not draw it to Mr Peedom’s attention. He said that he read the clause but he did not read the error and did not see the error. In those circumstances he accepted that he could not have read the clause carefully (tr 348). He was then cross-examined (tr 352):

Q. And I ask you again: How is it, if you did not read those words carefully, that you were able to form the view that this was a ground rent valuation?
A. By the words at the commencement. "These things were being ignored".
Q. Is there anything more you want to say in answer to the question I asked you?
A. No. We had a list of fixtures and fittings, tenant's fixtures and fittings, landlord's fixtures and fittings, and this was something that had gone backwards and forwards already.

210 There is no doubt that the evidence is quite accurate in that these paragraphs relating to the fixtures and fittings had been the subject of documentation between the parties for some time. Mr Rusbourne was then cross-examined in relation to the suggested illogicality and/or irrelevance of a percentage reduction for the size of the building when the method of valuation for rental was a ground rental. He gave the following evidence (tr 356):

Q. If it was a ground rent, the valuer would ignore any building which was built, either which might have been built under the reinstated obligation or had been built, wouldn't the valuer?
A. Yes.

Q. So there would be no commercial sense in then taking that figure which the valuer arrived at and then deducting further because Emibarb had built another building, do you agree?
A. No.

Q. Why not?
A. This was part of a counteroffer being put by the council for a stepped reduction in the rent. At the end of the lease the council would have the building.

…
Q. Please explain to me how consistently with what you have told us you understood the commercial basis of this proposed percentage reduction to be there would be any sense in applying that percentage reduction to a ground rent where the valuer under a ground rent would have no regard to the value of the building?
A. We had asked for certain matters to be taken into account and ignored a certain percentage reduction for the term of the lease. What the council responded with was taking out the fixtures and fittings but giving us a stepped reduction perception. I saw it as part of the overall offer.

211 Mr Rusbourne was asked about the content of the letter of instruction provided to him by Mrs Harrison dated 23 February 2003. Mrs Harrison had instructed Mr Rusbourne to insist on a 35% discount as being the percentage of the additional area that was to be constructed by Emibarb. In cross-examination in relation to this aspect of Mrs Harrison’s letter, Mr Rusbourne gave the following evidence (tr 397):

Q. What they have said in clause 2.19 they did not understand to be a change to ground rent because they have referred to something which was irrelevant if ground rent was in question?
A. Yes, I can only agree with you on that.
Q. So the only factor in this letter which bore on the question was a factor which counted against them having appreciated that matter as you understood it, correct?
A. If you look at that clause in isolation, yes; if you look at the letter in full as to what had been asked and what was responded to, then no.

212 Mr Rusbourne was cross-examined in relation to the Council letter to the Crown Lands Department on 17 June 2003 as follows (tr 356, 358, 359-361):

Q. In June 2003 you received a copy of correspondence which had taken place between council and the department about the approval of the lease, correct?

OBJECTION

Q. (Shown volume 10 page 3270) [letter dated 17 June 2003 from Council to the Department of Lands]. You see that letter?
A. Yes, I did.

Q. Did you see it before you had the conversation with George that you deposed to in par 169 of your affidavit?
A. Yes, I did.

Q. … you understood that council in negotiating the lease had intended to have as the starting point a rental calculated by reference to the building as built and then discounted, did you not?
A. Yes.

…

Q. You understood that to be a reference to what the council had agreed on the trust’s behalf with Emibarb in February and March 2003, did you not?
A. From this letter, yes.

Q. And the letter went on to say that the rental under the new 20-year lease was to be calculated for the whole building in accordance with the provisions of the draft lease?
A. This letter says that, yes.

Q. When you read the whole building, you understood that to mean the building as it was to be rebuilt by Emibarb, is that not right?
A. Yes.

…

Q. When you read that paragraph you understood that the department was being told that the rent would be calculated by starting with the current market rent of the premises as rebuilt and then discounting that amount by the percentage referred to in the letter, correct?
A. Yes.

…

Q. You agreed with me that when you got this letter in June 2003 you understood the department was being told that the rent was going to be calculated in a particular way?
A. Yes.

Q. I am suggesting to you that the way your understanding was in June 2003 was the same, namely, that you thought the rent was to be calculated in that way as well?
A. No. That’s not correct.

Q. Did you think that the council had been saying something inaccurate to department in this letter?
A. I didn’t think it reflected the agreement reached between Emibarb and the council.

213 Mr Parker then asked Mr Rusbourne what steps he took to draw that inaccuracy to the council’s attention. It was at this stage that objection was taken and after some legal debate the court adjourned for the day. It was the following morning that Mr Parker advised that the plaintiffs were abandoning the “Taylor and Johnson claim” (tr 368-369). Mr Rusbourne’s cross-examination on the topic continued the following day with reference to Mr Rubourne’s affidavit evidence of a conversation with Mr Harrison in June 2003. That affidavit evidence was as follows:

169. On 17 June 2003 I spoke with George in relation to the letter from the Department of Lands (annexed at paragraph 168 above). I kept a file note of our conversation. In particular George said:

“I have read the letter from the Department of Lands regarding the Minister’s consent. It says that is general now and can be varied in 2006 because the Local Government Act. What are our rights if the Minister does not agree on the rent, on compensation or on limits on compensation.”

I said:

“I can not advise you on this. You will need to get a barrister’s opinion who is familiar with the Local Government Act. We can write to Council or you can do a letter to Council. I would suggest Craig Leggat barrister”.

He said:

“Speak with Craig Leggat and get a fee for the advice.”

He then said:

“Council have sent me a copy of their letter to the Department. Council are saying that the rent may be in the order of $200,000.00. Can you do a letter for me to send to Council.”

I said:

“Yes, how did you get a letter.”

He said:

“I got it from Council directly. Council said I could have a copy. The rent in the letter is too high but Council cannot say what the rent will be until we have built and they have valued the rent.”

214 The letter that Mr Rusbourne was referring to at the beginning of this paragraph (referred to as annexed at par 168 of his affidavit) was a letter from Mrs Harrison enclosing the letter from the Department of Lands to the Council dated 16 June 2003 in which the following appeared:

When a market rental figure for the new lease is determined in 2006, this matter will again need to be referred to the department for additional approval pursuant to section 103 of the Crown Lands Act 1989.

215 The letter referred to in the latter part of paragraph 169 is the letter dated 17 June 2003 from the Council to the Department of Crown Lands. It is apparent from the context of this paragraph that Mr Rusbourne did not have a copy of that letter at the time he spoke with Mr Harrison although in the cross-examination extracted above, he said he did have a copy of that prior to his conversation with Mr Harrison. The further cross-examination of Mr Rusbourne was as follows (404-405):

Q. In your affidavit, paragraph 169, you deposed to a conversation you had with George on 17 June 2003?
A. Yes.

Q. Among other things you record him saying in reference to the letter: I got it from council directly, council said I could have a copy. The rent in the letter is too high, but council cannot say what the rent will be until we have built and they have valued the rent. That is the way you have recorded the conversation?
A. Yes.

Q. And you made a note of that conversation as well?
A. Yes, I did.

Q. What Mr Harrison said to you about the council not being able to say what the rent was until they, that is Emibarb, had built was nonsense if one was dealing with a ground rent, was it not?
A. Yes.

Q. Did you tell Mr Harrison that?
A. No, I did not, I had not seen the letter.

Q. Yesterday you told me that you read the letter before you had the conversation with Mr Harrison?
A. I read the letter from the Department of Lands.

Q. No. The letter from council, don't you remember saying that yesterday?
A. If you could give me a minute.

Q. “Q. In June 2003 you received a copy of correspondence which had taken place between council and the department about the approval of the lease? A. Correct." After an objection you were shown 3270. "Did you see that letter? OBJECTION. A. Yes, I did. Q. Did you see it before you had the conversation with George that you depose in your paragraph 169 of your affidavit? A. Yes, I did." So you had seen the letter in the conversation before?
A. Yes.

Q. Why did you suggest you had not?
A. There are so many dates going on. I am sorry if I am making mistakes.

Q. I think you agreed with me that the statement attributed to George is nonsense if you didn't say anything about the ground rent?
A. I didn't say anything to him that it was a nonsense, no.

Q. Why not?
A. I don't know.

Q. May suggest to you it was because at the time you had the conversation you did not think it was a ground rent, you thought it was a current market value?
A. No, that is not correct.

Q. That would explain, would it not, why it would have been relevant to current market value as we have defined it to say council will not know until we have built, would it not?
A. It would be relevant to that.

Q. Are you able to offer any other explanation other than the one I have put to you as to why you did not correct your client on that important matter?
A. On 17 June?
Q. Yes.
A. No.

216 I am of the view that this evidence reflects accurately the true position in June 2003. That is, that at the time Mr Rusbourne spoke with Mr Harrison as deposed to in paragraph 169 of his affidavit, he did not have a copy of the letter from the Council to the Department of Crown Lands dated 17 June 2003, but he did have a copy of the letter from the Department of Lands to the Council dated 16 June 2003 as sent to him by Mrs Harrison. In those circumstances I do not regard the fact that he did not inform Mr Harrison that his suggestion was “nonsense” as reflecting adversely on Mr Rusbourne’s credit.

217 The letter that Mr Rusbourne wrote to Mr Peedom in August 2004 after Mr Peedom advised that there had been a “mistake” in clause 16.6 “which had been overlooked by both parties”, prima facie, may appear inconsistent with the change having been noticed. However it must be remembered that this correspondence occurred about 18 months after the Lease documents were executed. Mr Rusbourne’s statement that “at this stage we do not admit that a mutual mistake has been made” may have been made merely to protect his clients’ interests until the further material and documentation was provided and reviewed. There was no cross-examination in relation to this letter and in those circumstances I do not intend to draw any inference adverse to Mr Rusbourne and/or the defendants in respect of the contents of this letter.

218 Mr Rusbourne accepted that at a meeting on 24 January 2003 with Mr and Mrs Harrison and Mr Dobrow his instructions were that the valuation was to occur by reference to the premises as rebuilt with a discount of 30%. However, he said that when he received Mrs Harrison’s letter after Mr Peedom’s letter of 21 February 2003 those instructions changed (tr 345). He received instructions that the 30% should change in circumstances when he understood Mr Peedom’s letter to propose a discounted ground rental. He accepted that was radically different to the previous position (tr 346).

219 The plaintiffs claim that Mr Rusbourne did not notice the change to the valuation method in Mr Peedom’s letter. I do not accept that. I am of the view that Mr Rusbourne did notice the difference and that he understood that both landlord’s and tenant’s fixtures and fittings were to be “ignored” in the valuation process. It is curious that he did not include, in his affidavit, the conversation that he had with his clients in relation to that change. It is less curious that it was not in his file note. It would appear that his affidavit relied upon his file note and in those circumstances the lack of inclusion of the conversation is perhaps explicable. Mr Parker submitted that I do not have to find that Mr Rusbourne gave false evidence and that I would be satisfied that he was simply mistaken. Mr Rusbourne was given every opportunity to agree that the conversation at the meeting with Mr and Mrs Harrison on 25 February 2003 did not take place in the terms he suggested in his cross-examination, but he resisted it.

220 Mr Rusbourne seemed to me to be a very balanced and honest witness. He made the concession when the duplication in clause 5.12.7 was pointed out to him that it must mean that he did not read that particular clause “carefully”. As I have said, that does not mean that he did not read it at all. He also made concessions along the way in respect of Mr Parker’s cross-examination of what was relevant or irrelevant, including the matters raised in relation to his conversation with Mr Harrison on 17 June 2003. Ultimately, however, and on the balance of probabilities, I believe that Mr Rusbourne did say to Mr and Mrs Harrison on 25 February 2003 that the rent determination did not include landlord’s or tenant’s fixtures and fittings and that it was a “ground rent”, or words to that effect.

221 I do not accept that once a ground rent had been offered that any percentage reduction was illogical or irrelevant. One significant factor was that Mrs Harrison wanted a rental that was certain or definite for the purposes of preparing her business plan and obtaining finance. There were many facets to the negotiations, and I accept Mr Rusbourne’s evidence that he saw the offer in Mr Peedom’s letter as something that the Council was giving to Emibarb in respect of the ground rental but counter balancing it with requiring a stepped rent reduction as opposed to the 30% requested by Emibarb.

222 There is little doubt that up until the receipt of Mr Peedom’s letter of 21 February 2003 the parties had proceeded upon the basis that the valution method would exclude the tenant’s fixtures and fitting and include the landlord’s fixtures and fittings. The “heart” of the negotiations up to that time (as Mr Harrison put it (tr 206)) was the amount of the discount. It was not commercially unreasonable to take the view that Mr Dobrow took that the Council had held this change, or offer, back until the end of the negotiations to conclude the deal. I do have some reservations about the evidence of Mr and Mrs Harrison and Mr Haralambides and there are some curiosities to the evidence given by Mr Rusbourne in relation to the conversation on 25 February 2003 and 17 June 2003. However, the plaintiffs have the onus of establishing by “convincing proof” that the defendants did not notice the change in the letter and proceeded on the same mistaken belief as the plaintiffs at the time the lease was executed. I am not satisfied that the plaintiffs have discharged that onus in the circumstances of this case.

Conclusion

223 I refuse to grant the relief sought by the plaintiffs. The Summons is dismissed. If the parties are unable to agree on a costs order I will hear argument on a date to be fixed by arrangement with my Associate by no later than 30 June 2006.

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23/06/2006 - judgment - Paragraph(s) front page

CITATION:	The Stuart Park (D580060) Reserve Trust v Emibarb Pty Ltd [2006] NSWSC 603 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	18, 19, 20, 24, 26 and 27 April 2006, 1, 3, 4 and 8 May 2006
JUDGMENT DATE :	23 June 2006
JUDGMENT OF:	Bergin J
DECISION:	Rectification refused.
CATCHWORDS:	[LEASES] - [RECTIFICATION] Suit for rectification of an agreement for lease and deed of lease on basis of mutual mistake - plaintiffs claim drafting error - whether the relevant mind is that of the employees of the council or the councillors - whether plaintiffs have established by clear and convincing proof that the parties had a concurrent intention at the time the lease was executed.
CASES CITED:	Aspro’s Pty Ltd v Hayter & Ors [2005] ANZ ConvR 425 Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 Taylor v Johnson (1983) 151 CLR 422 Telstra Corporation v Hurstville City Council (2002) 118 FCR 198 Tesco Supermarkets Ltd v Nattrass [1972] AC 153
PARTIES:	The Stuart Park (D580060) Reserve Trust - First Plaintiff The Council of the City of Wollongong - Second Plaintiff Emibarb Pty Ltd - First Defendant Vania Harrison - Second Defendant Harry Haralambides - Third Defendant
FILE NUMBER(S):	SC 50094/05
COUNSEL:	Mr TGR Parker SC, Mr TW Marskell - First and Second Plaintiffs Mr DE Grieve QC, Ms M Stubbs - First, Second and Third Defendants
SOLICITORS:	Clayton Utz - First and Second Plaintiffs Watkins Tapsell - First, Second and Third Defendants