Waldorf Australia Pty Ltd v Elias Construction Group Pty Ltd

[2010] NSWSC 164

CITATION:	Waldorf Australia Pty Ltd v Elias Construction Group Pty Ltd [2010] NSWSC 164
HEARING DATE(S):	07/12/09. 08/12/09, 09/12/09
JUDGMENT DATE :	10 March 2010
JURISDICTION:	Equity
JUDGMENT OF:	Barrett J
DECISION:	1. Order that each of the residential tenancy agreements made on 15 October 2005 between the plaintiff as tenant and the first defendant as landlord with respect to units 11, 14, 15, 17, 18, 23, 28, 32, 33, 35, 36, 40, 51 and 52 of premises known as 24 – 28 First Avenue Blacktown be rectified by including therein an option to renew as follows: “The tenant has an option to extend this lease for a further period of three years, exercisable at any time prior to 15 October 2008. The rent for the further term is to be as agreed between the parties or failing agreement to be fair market rental as determined by a licensed valuer appointed by the parties.” 2. Declare that the plaintiff validly and effectually exercised each such option to renew. 3. Order that the plaintiff’s claims against the second defendant be dismissed. 4, Question of costs reserved for further argument.
CATCHWORDS:	EQUITY - rectification - whether leases fail to reflect common intention of parties - non-inclusion of option to renew - EQUITY - equity does nothing in vain - whether rectification by inclusion of option to renew should be decreed when time for exercise of option has passed - whether past acts of lessee amounted to exercise
CATEGORY:	Principal judgment
CASES CITED:	Australian Gypsum Ltd v Australian Plaster Co Ltd [1930] HCA 38; (1930) 45 CLR 54 Commissioner of Stamp Duties v Carlenka Pty Ltd (1995) 41 NSWLR 329 Fowler v Fowler (1859) 4 De G & J 250 Johnson v Bones [1970] 1 NSWR 28 Kelly v Ollis [2003] NSWSC 1032; (2005) NSW ConvR 56-101 Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23; (1973) 128 CLR 336 Pukallus v Cameron [1982] HCA 63; (1982) 150 CLR 447 Tsaoucis v Gallipoli Memorial Club Ltd [1998] NSW ConvR 55-860 Young v Lamb [2001] NSWCA 225; (2001) 10 BPR 18,553
PARTIES:	Waldorf Australia Pty Limited - Plaintiff Elias Construction Group Pty Limited - First Defendant Karvon Sayer Pyatt Property Group Pty Ltd - Second Defendant
FILE NUMBER(S):	SC 2008/00280533
COUNSEL:	Mr G Lucarelli - Plaintiff Mr D L Warren/Mr F F F Salama - First Defendant Mr J J Hyde - Second Defendant
SOLICITORS:	Landerer & Company - Plaintiff Paramonte Legal Pty Ltd - First Defendant Prestige Solicitors - Second Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

WEDNESDAY 10 MARCH 2010

2008/00280533 WALDORF AUSTRALIA PTY LIMITED v ELIAS CONSTRUCTION GROUP PTY LIMITED & ANOR

JUDGMENT

1 The plaintiff (“Waldorf”) carries on a business of letting residential flats as serviced apartments at some 24 locations in Australia and New Zealand. It owns some units and holds others on lease.

2 These proceedings concern leases (or “residential tenancy agreements”) under which Waldorf is the tenant of twelve units in a residential strata title building at Blacktown. There is a separate lease for each unit. Each lease is dated 15 October 2005.

3 The lessor of the twelve flats is the first defendant (“Constructions”), the company by which the building was constructed and which arranged the strata subdivision.

4 Waldorf seeks rectification of each of the twelve leases by the inclusion of a term to the following effect:

“The tenant has an option to extend this lease for a further period of three years, exercisable at any time prior to 15 October 2008. The rent for the further term is to be as agreed between the parties or failing agreement to be fair market rent as determined by a licensed valuer appointed by the parties and if the parties cannot agree on a valuer then as determined by a valuer nominated by the Real Estate Institute of New South Wales.”

5 If it does not succeed in its rectification claim, Waldorf presses a claim against the second defendant (“KSP”) for breach of warranty of authority, alleging that KSP acted as Constructions’ agent in relevant respects. That matter may be left to one side for the moment.

6 The twelve leases, together with leases of an additional eleven units in the same building, were signed at Waldorf’s office at Rosehill on 29 September 2005 but, as I have said, are dated 15 October 2005. Each was expressed to be for a term of 36 months beginning on 15 October 2005 and ending on 15 October 2008. The leases are all in the same form, save for the unit number, the unit description (some are three-bedroom units and the others two-bedroom units) and the rent ($1,343 per month for a three-bedroom unit and $1,083.33 per month for a two-bedroom unit). None contains a provision allowing the tenant to renew the lease for any further term beyond the stated 36 months.

7 It is the contention of Waldorf that it was the common intention of the parties (Waldorf and Constructions) that each lease should contain a provision allowing Waldorf, at its option, to renew the lease for a further three-year term from the expiry of the initial term. It is on the footing that each lease, by error, omitted that provision that Waldorf seeks rectification.

8 The rectification claim is thus based on an allegation of common mistake. In advancing a rectification claim on that basis, Waldorf undertakes an exacting task. It must show the existence of a common intention of the parties that was at odds with the instrument to which they committed themselves; and it must do so by “clear and convincing proof”.

9 Authoritative guidance as to the correct approach to a rectification claim of this kind is provided by members of the High Court in Pukallus v Cameron [1982] HCA 63; (1982) 150 CLR 447. Wilson J said (at p 452):

"The case raises no issue as to the principles which govern the rectification of a contract. Those principles are not in dispute. There need not be a concluded antecedent contract, but there must be an intention common to both parties at the time of contract to include in their bargain a term which by mutual mistake is omitted therefrom: Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 at p.664; Slee v Warke (1949) 86 CLR 271 at p.280; Joscelyne v Nissen [1970] 2 QB 86, at p.98; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336, at p.350. So long as there is a continuing common intention of the parties, it may not be necessary to show that the accord found outward expression, notwithstanding the views expressed to the contrary in Joscelyne at p.98, and Maralinga at p.350. The opposing view is argued by Mr Bromley QC in an article in the Law Quarterly Review vol 887 (1987) p.532. It is unnecessary to pursue the distinction in the present case because the representation of the respondent and its acceptance by the appellants plainly established such an accord.
The second principle governing the rectification of a contract which is material to this case is that which requires the plaintiff to advance ‘convincing proof’ that the written contract does not embody the final intention of the parties. The omitted ingredient must be capable of such proof in clear and precise terms. The Court must not assume for itself the task of making the contract for the parties."

10 Brennan J said (at p 456):

"Although the remedy of rectification is no longer held to depend upon proof of an antecedent concluded contract, Slee at p.280; Maralinga at p.336, it is necessary to show a concurrent intention of the parties, existing at the time when the written contract is executed, as to a term which would have been embodied in the contract if the parties had not made a mistake in expressing their intention. Proof of such an intention is necessary to 'displace the hypothesis arising from execution of the written instrument, namely, that it is the true agreement of the parties' Maralinga at p.351."

11 To these observations may be added that of Mason J in Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23; (1973) 128 CLR 336 at p 350:

"What is of importance is that the purpose of the remedy is to make the instrument conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately. And there has been a firm insistence on the requirement that the mistake as to the writing must be common to the parties and not merely unilateral, except in cases of a special class to which I shall later refer. It is now settled that the existence of an antecedent agreement is not essential to the grant of relief by way of rectification. It may be granted in cases in which the instrument sought to be rectified constitutes the only agreement between the parties, but does not reflect their common intention ( Shipley Urban District Council v. Bradford Corporation [1936] Ch 375; Slee v. Warke (1949) 86 CLR 271). But this circumstance does not affect what I have already said."

12 In Commissioner of Stamp Duties v Carlenka Pty Ltd (1995) 41 NSWLR 329, Mahoney A-P emphasised that what is to be identified is an intention, being, in the case of an agreement between two parties, the intention of both of them. Only if the document fails to give effect to what is seen to be the common intention of those parties will rectification be ordered.

13 The requirement for “clear and convincing proof” was referred to by Young CJ in Eq in Kelly v Ollis [2003] NSWSC 1032; (2005) NSW ConvR 56-101. After referring to a statement in Commissioner of Stamp Duties v Carlenka Pty Ltd (above), his Honour said:

“The phrase ‘clear and convincing proof’ is a key element in this statement. This indeed is a modernization of the requirement in the older authorities that the case for rectification must be established by ‘strong irrefragable evidence’ (per Lord Thurlow in Shelburne (Countess) v Inchiquin (Earl) (1784) 1 Bro CC 338, 341; 28 ER 1166, 1168).”

14 In Australian Gypsum Ltd v Australian Plaster Co Ltd [1930] HCA 38; (1930) 45 CLR 54 at p.64 Rich, Starke and Dixon JJ approved a statement by Lord Chelmsford in Fowler v Fowler (1859) 4 De G & J 250 at p.265 that the plaintiff must establish the alleged intention “in the clearest and most satisfactory manner”. The insistence upon a high degree of proof in this area is a recognition of two realities: first, that persons who take the trouble to record their agreement in writing (particularly when they are, as here, assisted by lawyers) must generally be presumed to intend their written bargain to prevail over what they have not written; and, second, that it is easy for one such party, upon becoming dissatisfied after the event with some element of the written compact, to seek to brand it as inaccurate.

15 In approaching the question of the parties’ common intention, I shall begin with contemporary documents. To understand the documents, it is necessary to appreciate that Mr Avi Rubinstein was the acknowledged representative of Waldorf and Mr Michael Elias was the acknowledged representative of Constructions. There is no question about the authority of Mr Rubinstein and Mr Elias to speak for and bind the respective companies. Mr Boris Pyatt, a principal of KSP, also played a role. At this point it is sufficient to say, in relation to Mr Pyatt, that, whether or not KSP was an agent of Constructions (a matter that is in contention as regards Waldorf’s claim against KSP), it is clear that Mr Pyatt acted as an intermediary. In saying that, however, I do not mean to pre-empt questions whether everything that Mr Pyatt represented to one of Mr Rubinstein and Mr Elias as having been said by the other of them was in fact said by that other.

16 On 8 June 2005, Mr Rubinstein submitted through Mr Pyatt a written “expression of interest” in acquiring “operational and property management entitlements” for the apartment building at Blacktown. The proposal was twofold: first, that Waldorf should manage the whole building as “a 4 star operation offering furnished and unfurnished accommodation”; and, second, that Waldorf “will offer the developer a lease back for 3 years with 2 further 3 year options to up to 24 apartments (4 x 3 bedroom & 20 x 2 bedroom apartments)”. Rents and prices were mentioned.

17 The first aspect carried with it the purchase by Waldorf of a caretaker’s unit, being one of the flats within the building.

18 On 16 June 2005, Mr Pyatt emailed Mr Rubinstein saying that he had met with Mr Elias the previous day and that Mr Elias was “happy with your proposal”, subject to higher rents and a commitment to purchase a second unit.

19 On 22 June 2005, Mr Pyatt emailed Mr Rubinstein a statement of terms on which, he said, Mr Elias was “happy to do business with you”. There followed various matters not including any reference to lease term or option to renew. Mr Rubinstein responded on 23 June 2005 by means of a copy of Mr Pyatt’s email to which Mr Rubinstein’s “notes” had been added.

20 Mr Rubinstein sent to Mr Pyatt on 30 June 2005 an email setting out what he called “my understanding of the latest version of the proposed agreement”. Among the matters set out were the proposed purchase by Waldorf of two units and the following:

“The Waldorf Group will lease 5 x 3 bedroom and 18 x 2 bedroom apartments for 3 years + 3 year option from the vendor based on [stated weekly rentals]”.

21 Mr Pyatt emailed Mr Rubinstein on 1 July 2005 saying that he had had a meeting with Mr Elias “this morning” and that Mr Elias had asked for “minor changes as follows”. Then followed a copy of Mr Rubinstein’s email of 30 June 2005 with comments endorsed on it. Against the item set out above (regarding leasing and referring to a 3 year term and 3 year option) appeared “OK”.

22 Mr Rubinstein replied to Mr Pyatt on the same day, 1 July 2005, by forwarding the original email and endorsements back to Mr Pyatt with further endorsements. There was no further endorsement against the item concerning lease term and option.

23 On or about 11 July 2005, Mr Pyatt, using the KSP letterhead, prepared a letter to Waldorf’s solicitors forwarding a “sales advice” and setting out “my understanding of the latest version of the proposed agreement”. The “sales advice” related directly to the sale of two units to Waldorf. The letter contained a paragraph as follows:

“The Waldorf Group will lease 5 x 3 bedroom & 18 x 2 bedroom apartments for 3 years + 3 year option from the vendor based on specified rentals.”

24 Mr Pyatt deposed that this letter was not sent by him to Waldorf’s solicitors. Rather, at Mr Rubinstein’s request, he sent the letter to Mr Rubinstein himself. He understood that Mr Rubinstein would give it to his solicitors. Significantly, Mr Pyatt prepared a letter, with a copy of the “sales advice”, addressed to Constructions’ solicitors at Parramatta and sent the letter and its enclosure on or about 11 July 2005. The respective solicitors were not instructed to deal with the leases. They were to attend to the conveyancing of the two units (and perhaps other matters).

25 On 24 September 2005 while on a business trip to New Zealand, Mr Rubinstein sent an email to Ms Georgina Whittaker instructing her to prepare leases for the 23 units. Ms Whittaker is a licensed real estate agent who is employed by Waldorf as a trust account manager. She sometimes prepared lease documents but that did not form part of her routine activities.

26 Mr Rubinstein’s instructions to Ms Whittaker were explicit as to commencement date, rent and special conditions. Mr Rubinstein said nothing, however, about any option to renew. Nor, indeed, did he refer to the initial term.

27 Ms Whittaker received the email on Monday 26 September 2005. She saw at once that no lease term was mentioned. She therefore telephoned Mr Rubinstein and asked him what the term was to be. He said that it was to be 36 months. She did not ask Mr Rubinstein about an option to renew; nor did he say anything to her about an option to renew. Over the next few days, Ms Whittaker prepared the 23 leases.

28 As I have said, the leases were signed at Waldorf’s office at Rosehill on 29 September 2005. Mr Elias went to the office for this purpose. He signed for Constructions. Mr Rubinstein signed for Waldorf. None of the leases contained any provision for renewal.

29 I next consider the evidence about conversations and meetings.

30 Mr Rubinstein gave evidence of having been introduced to Mr Elias by Mr Pyatt in about March 2005 when the three of them went to the premises. Mr Rubinstein says that, over coffee at a nearby café, he said to Mr Elias:

“For us to do business together we will need to agree on the following issues:
First of all, you will need to get council approval to operate a serviced apartment business on the site. Just because you may have council approval to use premises for residential purposes doesn’t mean you can use them for the purposes of serviced apartments.
The next things are management and tenure. Waldorf operates serviced apartments all over Australia and we have a three to four star rating for our serviced apartments. We will need to have an onsite manager 24 hours a day and the body corporate would have to appoint Waldorf as the onsite cleaner and caretaker. Waldorf usually buys a unit outright to use as the caretaker’s unit. We would also want the strata rules to attach caretaker rights to that particular unit so that it can only be used as a caretaker’s apartment.
Setting up a serviced apartment business can be very expensive and for the sort of capital outlay that I think would be involved here I would be looking at least a ten year commitment. I would want the caretaker rights for ten years.
I would be interested in leasing about 25 apartments in total. Of those four or five would be ‘three bedders’ and the rest would be ‘two bedders’. Again, I would be looking at a lease of about ten years; I would want a 3 by 3 by 3 lease. At this stage I would be prepared to pay somewhere in the low two-hundreds per week for the ‘two bedders’ and somewhere in the mid two-hundreds for the ‘three bedders’.
There are also other issues that are fundamental to any deal such as signage and being able to set up a PABX and high-speed internet connection.
Waldorf would also be seeking to be appointed as managing agent for the units you (meaning Mr Elias) own, not just those used for the serviced apartments. Waldorf’s usual terms in acting as managing agents is 7% plus GST of gross rentals.”

31 According to Mr Rubinstein, Mr Elias said:

“I need to lease as many apartments as possible and I want you to buy some apartments outright. I want at least $280 per week for the ‘two bedders’ and at least $330 per week for the ‘three bedders’. I am not sure about locking up the units for nine years but I would be happy with a 3 by 3 lease. I don’t think council approval will be a problem.’”

32 Mr Elias’s evidence is that he first met with Mr Rubinstein (in company with Mr Pyatt) in or about March 2005 and that the meeting took place at the premises. Mr Elias’s account of the conversation is as follows:

“Avi: ‘I think the development would be very good for us to run a serviced apartment business, it is very close to the train station and shopping centre.’
Michael: ‘If you are going to run a serviced apartment business from here you will need to obtain a DA to do so.’
Avi: ‘We operate serviced apartments all over Australia and have a lot of experience in operating serviced apartments. If we agree to use your development we will need to get around 23 apartments and we will need to be the managing agents for the complex.’
Michael: ‘If you need 23 apartments that will be fine I have them available to be sold.’
Avi: I’m more interested in leasing the units from you not buying them,’
Michael: ‘That doesn’t suit me, as a developer I need to sell as many units as possible to reduce my loan and keep my bank happy. I can’t afford to lease you 23 units, what happens when I need to sell them?’

Avi: ‘Well I can offer you a long term lease of at least ten years.’
Michael: ‘I can’t afford to give you a lease of that time frame especially not on residential property. I need to sell as many as I can at this stage and consider what I will leave to rent after I have satisfied my bank of the sales. I can only lease some units to you for a short time on the condition that you purchase the rest. I’m not going to make the application for a DA or incur any fees for the serviced apartments.’
Avi: ‘I will need to consider the proposal and see if it will be viable for me to buy any apartments. We can offer you rent guarantee on any long term lease.’
Michael: ‘You will need to purchase at least 5 units prior to me considering whether I will lease any units.’
Avi: ‘At this stage I will only commit to buying two units but I may need to lease the rest.’”

33 Mr Elias accepted in cross-examination that he was aware, at or as a result of his first meeting with Mr Rubinstein, that Waldorf would need a development consent from the local council to be able to use the leased units as serviced apartments. Mr Elias also confirmed that Mr Rubinstein had, on that occasion, mentioned his desire concerning lease term. I quote from Mr Elias’s cross-examination:

“Q. And he said to you that he would be looking for a lease of about ten years, three by three by three, he said that to you?
A. Yeah he did.”

34 Mr Elias accepted that he was aware that Mr Rubinstein needed to arrange signs for the building.

35 Mr Elias refers in his affidavit to a separate and subsequent meeting with Mr Rubinstein at the premises in about May 2005 (he says that Mr Pyatt was not present) when there was a conversation as follows:

“Avi: ‘I’m happy to proceed with taking 23 apartments but I will need to lease them for at least three years with an option of three years and have a management agreement for all the units. I will also buy two units prior to the lease commencing.’
Michael: ‘Like I said to you before I can’t give you a lease for that long. The maximum term I can commit to is three years no more. Unless you can buy at least 5 units I’m not interested.’
Avi: ‘If you give me an agency agreement to sell all the units I will be fine to purchase two units immediately and ten units within 12 months of the lease commencing.’
Michael: ‘I don’t mind giving you an agency agreement to sell all the units but it will be a condition of the deal that you purchase at least 10 out of the 23 units that I lease to you and I will only give you a management agreement for the units you lease for the term of the lease. You will need to exchange on the two units prior to the lease starting.’
Avi: ‘I can commit to that no problem. I will need to arrange the DA and I need to be the caretaker and building maintenance company for the complex.’
Michael: ‘Ok, I want $280 per week for the two bedders and $330 for the three bedders. I know they are worth more but I’m happy to reduce the rent on the basis that the units will be sold over the next twelve months.’
Avi: ‘I can only pay $250 for the two bedders and $310 for the three bedders and I will need at least a three by three year lease.’
Michael: ‘The rent you are offering is way to [sic] low, and I cannot give you a three by three year lease, I need to sell the units. Besides there is no point in agreeing on a lease for six years if you are going to buy ten units and sell the rest. We need to give vacant possession to whoever buys them, especially first home buyers.’
Avi: ‘That’s fair enough, but I cannot afford to pay more than $250 for the two bedders and $310 for the three bedders. I’m happy to give a rent guarantee.’
Michael: ‘Ok I can accept that so long as you buy the 10 units within 12 months and sell the rest and you pay all the outgoings.’
Avi: ‘Well the strata will pay the outgoings I won’t have to pay that. We will need to get air conditioners installed in all of the units.’
Michael: ‘Sorry I’m not prepared to go to that expense I can only install twelve air conditions you will have to arrange the rest yourself.’”

36 Mr Elias elaborated on the second site meeting in cross-examination:

“Q. Before we move off the second meeting, you and Avi discussed at the second meeting in May on site the need for Avi to have a long term lease in order to operate a serviced apartment business, isn't that the case?
A. He said it, I didn't.

Q. I am not asking whether you agreed, I'm asking you--
A. I didn't agree. Yes or no you mean?

Q. I am not trying to trick you, I'm just asking you this. You accept don't you that Avi raised with you again the need for a long-term lease?
A. Yep.

Q. Three by three by three, correct?
A. Whatever yes.”

37 Later in his cross-examination, however, the following exchange occurred:

“Q. You, therefore, are telling the court, are you, is this your evidence, so far as you can recollect Avi Rubinstein at the second site meeting in May 2005 committed to, amongst other things, a three year term of the lease?
A. Yes.”

38 Mr Rubinstein also gave evidence of a second site meeting and placed it in late April or early May 2005. He could not recall whether Mr Pyatt was present in addition to Mr Elias. Mr Rubinstein’s affidavit account of this meeting does not refer to anything having been said about the lease term or a provision for renewal.

39 Mr Rubinstein did, however, depose that in the period of about two to four weeks after the second site meeting he had a telephone conversation with Mr Elias in which words to the following effect were spoken:

“Mr Elias: ‘Given the rent you’re offering I’m not prepared to go ahead with a 3 by 3 by 3 lease. All I’m prepared to give you is a 3 by 3 lease with a market review after the first three years.’
Me: ‘Ok. But the usual terms regarding rent review will apply. If we can’t agree on the new rent then we appoint a valuer to determine fair market rent.’
Mr Elias: ’Ok.’”

40 Mr Rubinstein says in an affidavit that between 23 June 2005 and 30 June 2005 he spoke by telephone with Mr Elias and Mr Pyatt up to five times. He says that, while he cannot remember the precise words spoken, he does recall discussing with Mr Elias and Mr Pyatt his original proposal for each lease to be for a three year term with two options to renew, each for three years; and that Mr Elias said that he would not agree to two three year options but would be happy to give Waldorf one three year option. Mr Rubinstein further said that these conversations also concerned the issue of rent review in the event of exercise of an option and that he said to Mr Elias:

“The usual terms would apply. If we cannot agree on the new rent then we appoint a valuer to determine fair market rent.”

41 By leave, oral evidence was adduced from Mr Rubinstein as to Mr Elias’s response:

“Q. What do you recall of that conversation?
A. Mr Elias say to me a few times that he's not happy with the rental and the rental to be there for a long period of time is unfair and I told him if we can't reach an agreement we'll go to the normal provision of the termination of rent review after the first three years.

Q. And what did he say?
A. He say it's fair.

Q. What did you mean by the normal provisions of a rent review after the first three years?
A. That if we don't agree about the rent review we appoint a third party to determine it.

Q. Did you express that to Mr Elias?
A. Yes.

Q. During this conversation?
A. Yes.

Q. What did he say?
A. He say that it's fair.

Q. It's fair?
A. It's fair enough, it's fair.”

42 Mr Elias gave evidence of a meeting with Mr Rubinstein at the premises in about late July 2005 at which the following conversation occurred:

“Avi: ‘This is very good for serviced apartments, I really want it.’
Michael: ‘Yeah it’s good for your [sic] but not for me if I can’t sell the units.’
Avi: ‘Believe me I will sell them all for you just sign the lease.’
Michael: ‘But the rent you are offering is too low. Anyway it’s for three years only and you are going to sell the units in twelve months.’”

43 Mr Rubinstein’s evidence about this conversation was as follows:

“Q. First of all do you recall having a conversation with Mr Elias to that effect at any time?
A. I had a conversation of some of the issues that is raised here but not, yes.

Q. Do you recall having a conversation with Mr Elias in which Mr Elias said to you ‘Anyway it's for three years only and you're going to sell the units in 12 months’?
A. No.

Q. Let me understand you Mr Rubinstein, do you say you never had such a conversation with Mr Elias in which he said those words to you?
A. If Mr Elias would tell me this thing at any stage of the discussion the deal would be dead, I wouldn't proceed with the deal.

Q. What is the deal killer that you've just referred to?
A. The deal killer is basically it's only three year lease and basically some indications that I am responsible to sell X units, if I make a commitment to sell units. I did make, we did agree that I'm going to try to sell the units as an agent but the sale of the unit would be subject to the lease of three plus three, and if I was told at any stage that the deal is 12-month or 3-month lease the deal will come to an end.

Q. You mentioned three months lease--
A. Sorry, three years lease.

Q. Did you say words to the effect to Michael ‘Believe me I will sell them all for you, just sign the lease’?
A. I didn't say, I wouldn't say a thing like this. The market was very bad for selling apartment and the idea was both us and the agent would attempt to sell it as real estate agent. We didn't have exclusivity, other people could sell it as well, and we say we try to help because of his condition with the bank, but to say that I can sell twelve units within a short period, twelve months, I wouldn't say it and I didn't say it.”

44 Mr Elias denied having had any meeting with Mr Pyatt, except for the first site meeting attended by himself, Mr Pyatt and Mr Rubinstein. Mr Elias did say in cross-examination, however, that he had several telephone conversations with Mr Pyatt in the weeks after that meeting. I quote from his cross-examination:

“Q. Focus on your discussions with Boris at the moment. In that week up to 30 June, you discussed with Boris, did you not, Avi's request for a three year term with two three-year options. Boris discussed that with you, didn't he?
A. Discussed, yes.

Q. And in that week leading up to 30 June Avi also spoke to you and discussed with you Waldorf's requirement for a three year lease with two three-year terms, correct?
A. Yes.

Q. In one discussion with Boris, you said to Boris, "I'm not going to give Avi a three by three by three but I'm happy with a three by three?
A. No, never.

Q. In one of those discussions with Avi in the week before 30 June 2005 you said the same thing, namely, ‘Avi I can't give you three by three by three but I will give you a three year term with one option of three years’, didn't you?
A. No, never.”

45 And later, referring also to June 2005:

“Q. And you discussed with Boris, didn't you, Waldorf's requirement of a three year lease with a one three-year option?
A. No.

Q. I'm not asking you whether you agree to it, I'm just asking you to tell us whether you discussed with Boris in June 2005 Waldorf's requirement for a lease for three years with one three-year option. Did you discuss that with Boris or did you not?
A. Yes.

Q. You discussed that with Boris, did you?
A. Yes.”

46 And later still:

“Q. Did you discuss with Boris as at this time, 30 June, the proposal to lease 4 three-bedroom apartments and 18 two-bedroom apartments? Did you discuss that with Boris?
A. Yes.

Q. Did you discuss the Boris the 3 x 3 term wanted by Avi?
A. No. Never discuss.

Q. Never discussed that?
A. Yes, yes, we talk about it.

Q. You talked about it in June with Boris; correct?
A. We discuss with Boris.

Q. In June, late June, the 3 x 3 lease wanted by Avi. Correct?
A. Yes.”

47 I turn now to Mr Pyatt’s evidence.

48 He was present at the site meeting at which Mr Rubinstein and Mr Elias first met in about March 2005. He gave evidence of statements made on that occasion to the following effect:

“Rubinstein: We normally look for long lease arrangements.
Elias: I would not be that interested in a long term lease.”

49 He said that, when the three participants went to the coffee shop, there was conversation as follows:

“Rubinstein: Anything less than a lease of three years by three years is not feasible for my business.
Elias: We can do three by three but I need more rental and preferably more sales of the units.
Rubinstein: We’ll do more research on the rental conditions but at this stage we only need two units to purchase.”

50 Mr Pyatt confirmed in evidence that he was not present at the second site meeting between Mr Rubinstein and Mr Elias.

51 Mr Pyatt further said that he met with Mr Elias on 15 June 2005 to discuss Mr Rubinstein’s documents of 8 June 2005 and that, when they came to the part of it referring to a lease “for 3 years with 2 further 3 year options” for up to 24 units, Mr Elias said:

“I can only give him a three plus three.”

52 In relation to his 1 July 2005 email to Mr Rubinstein, Mr Pyatt gave evidence that it was on Mr Elias’s instruction that he endorsed “OK” against the item regarding leasing and referring to a 3 year term and a 3 year option.

53 In cross-examination, Mr Pyatt gave an unequivocal and positive answer to the question:

“Michael Elias specifically told you to accept that. Didn’t he?”

54 It is relevant at this point to refer to certain commercial considerations. From Mr Rubinstein’s viewpoint, the establishment of a serviced apartment venue involved certain non-refundable establishment costs. These included the obtaining of development consent, the commissioning and installation of signage, the fitting out of a reception area and reception desk, the obtaining of strata by-laws conferring certain exclusive rights and, of course, the purchase and fitting out of a unit for use as a caretaker’s unit. Mr Rubinstein took steps after 11 July 2005 to arrange signage and artwork. He received a quote for $9,995 plus GST and arranged to be provided with a sample. He arranged for KSP to deal with an application for development consent. Such a consent (by way of variation of existing consent) was received on 16 August 2005.

55 These measures and the expense they entailed were additional to the costs of fitting out the units to be used by short term occupiers. There was thus a considerable capital commitment at inception. That commitment would not be warranted except by an arrangement under which possession of the units to be let was for a significant period over which the initial outlay could be recouped.

56 Mr Elias was subject to different commercial pressures. Despite his denials that he was being pressed by his bank for repayment of money borrowed to undertake construction of the units, it is clear that he needed money. Evidence about Constructions’ egregious defaults in its financial obligations to the owners’ corporation once the building was operational makes this clear. Mr Elias was at pains to say in evidence that his preoccupation was with selling; and that he looked to Waldorf to assist with early sales of a significant number of units.

57 The next matter to be considered is the position of KPS, Mr Pyatt’s firm.

58 I should say at once that I am not satisfied that KPS was the vendor’s agent, in the traditional sense of the term, in relation to the sale of the units sold by Constructions to Waldorf or the lessor’s agent, in the traditional sense of the term, in relation to the letting of the leased units by Constructions to Waldorf. Mr Pyatt readily conceded that there was no written agency agreement between KPS and Constructions. It is also clear from Mr Pyatt’s evidence that he brought Mr Rubinstein and Mr Elias together without any request from or arrangement with either of them. He knew Mr Elias and his business activities from earlier property transactions. He had been introduced to Mr Rubinstein on a social occasion in 2004 and became aware of the business he operated. Mr Pyatt said that, on that occasion, Mr Rubinstein had mentioned Blacktown as a good place for a serviced apartment operation.

59 It is, to my mind, clear that Mr Pyatt brought Mr Rubinstein and Mr Elias together in the hope that they might do business and that he might thereby earn a fee for his company. His action in introducing them was speculative. The evidence shows that he negotiated or attempted to negotiate a flat fee of $50,000 with Mr Elias when the transaction with Waldorf looked like coming to fruition, that Mr Elias later declined to pay such an amount and that Mr Pyatt then asked Mr Rubinstein to pay $15,000.

60 In July 2005, Mr Pyatt prepared a form of letter addressed by both Waldorf and Constructions to KSP whereby each acknowledged KSP’s “part in the negotiation of the above matter” and that KSP would be receiving a fee from both of them. He also prepared a form of agency agreement for execution by Waldorf. There is no evidence that either of these documents was signed by anyone or otherwise activated. Their purpose, in my view, was to bolster KPS’s chances of obtaining a fee. Each party did, in the end, make a payment to KPS.

61 In the course of cross-examination by counsel for Constructions, Mr Pyatt eventually accepted that KPS had a relationship with both parties:

“Q. And you considered yourself as a consultant to both of them didn't you?
A. On the end it's ended up being consulting to both parties because I have been paid by both parties.

Q. So you were representing Mr Rubinstein as well in your mind?
A. Yeah.

Q. So you were representing both of them?
A. Yes.”

62 It is necessary to address the question of the authority that KPS – and therefore Mr Pyatt – had from Constructions by reason of its role “representing both of them”. Analogy with the case of a traditional selling agent is not helpful. Resort must be had to the particular circumstances.

63 Two particular points emerge from the evidence. First, it is clear that Mr Elias did make use of the services of Mr Pyatt (that is, KPS) in order to communicate with Mr Rubinstein. It is true that Mr Elias sought in his evidence to distance himself from Mr Pyatt, to deny that they met face to face on occasions referred to by Mr Pyatt as involving such meetings and to suggest that there was no more than occasional telephone contact. But there is no doubt in my mind that Mr Pyatt did communicate to Mr Rubinstein things he was told by Mr Elias to communicate; and that he did so with Mr Elias’s consent and at his request. I say this because the terms of the emerging bargain, as they developed through the emails ostensibly sent by Mr Pyatt in order to relay Mr Elias’s wishes, came to be, in their final form, the terms of the transaction – with the sole exception of the now controversial matter of the period of the lease. It is inconceivable that this process of development could have occurred in the absence of an ability of Mr Pyatt to speak for Mr Elias. That ability obviously derived from ad hoc authority conferred by Mr Elias, for Constructions, that enabled Mr Pyatt to relay Mr Elias’s statements to Mr Rubinstein.

64 A particular aspect of this system of communication concerns a proposal that the prices of the two units to be bought by Waldorf should be artificially inflated, with Waldorf then charging Constructions a “fee” of some kind to take care of the inflation factor. No such arrangement formed part of the final transaction. Mr Pyatt represented to Mr Rubinstein in his email of 22 June 2005 that the idea came from Mr Elias. Mr Elias denied this. The documents make it clear that Mr Rubinstein was not the originator of the proposal. There is, in any event, no apparent reason why he would wish to implement such a proposal. Nor would it have advantaged Mr Pyatt for such a course to be taken. It was Mr Elias and Mr Elias alone who had a motive – the motive of making it appear that units in Constructions’ newly completed building were changing hands at prices higher than those actually pertaining. The events concerning this aspect confirm that Mr Pyatt, in his communications with Mr Rubinstein, was executing instructions received from Mr Elias.

65 The second point of particular importance concerning Mr Pyatt’s authority concerns the letter he sent Constructions’ solicitors, on or about 11 July 2005 enclosing a copy of the “sales advice”. Had Mr Pyatt been acting without the authority of Mr Elias (and Constructions) in negotiating terms, he would not have represented to Constructions’ solicitors that what was, in reality, some concoction of his own represented “the proposed agreement”. The fact that he was willing to expose to Constructions’ solicitors what he understood to be “the latest version of the proposed agreement” indicates strongly that he believed that, to the extent that he had made contributions to the negotiations ostensibly on the instruction of Mr Elias, he had authority to make those instructions. He must have assumed that the solicitors would confer with Mr Elias who would have exposed any unauthorised concoction made by Mr Pyatt. Mr Pyatt would not have put himself at risk in that way.

66 In summary, therefore, I accept that KPS, through Mr Pyatt, had actual authority from Constructions, through Mr Elias, conferred specifically from time to time as negotiating points came up, to communicate to Waldorf, through Mr Rubinstein, things said and things accepted by Constructions. In particular, I am satisfied that the “sales advice” and Mr Pyatt’s letters of 11 July 2005 to the parties’ respective solicitors, reflected the commercial agreement the parties had reached, with Mr Pyatt relaying Mr Elias’s instructions to Mr Rubinstein from time to time.

67 It follows that I accept that the commercial arrangement negotiated by the parties involved a lease term of three years with a single option for the tenant to renew for a further three years. This aspect was explicitly stated in the “sales advice” prepared by Mr Pyatt. There is nothing in the evidence to suggest that the matter was later revisited or revised. Mr Elias accepted that three plus three – indeed, three plus three plus three – had been discussed in negotiations. In the light of my findings about the “sales advice” and the absence of later revision, his evidence to the effect that he never expressed agreement to three plus three must be rejected.

68 In expressing this conclusion, I do not overlook evidence of and concerning Mr Elias’s wife, Samira Elias. Mr Rubinstein deposed to having received a telephone call from Mrs Elias in about September or October 2006 in which Mrs Elias asked whether Waldorf was going to “exercise its option over all the remaining apartments” or whether it wishes “to hand some back”. Mr Rubinstein’s evidence is that he said that Waldorf would be exercising its option over all remaining apartments. Mrs Elias’s affidavit evidence is that she phoned Mr Rubinstein in about August 2006 to arrange accommodation for a relative of hers at Waldorf serviced apartments at Rouse Hill and did not speak to him about the Blacktown leases or the renewal of them.

69 Each of Mr Rubinstein and Mrs Elias denied in cross-examination the material part of the conversation deposed to by the other. Two objective facts must be mentioned. First, Mrs Elias, on her own evidence, helped her husband in his business. She explained that she is responsible for keeping records for him and deals with business matters in an office at their home, spending on average three days a week on business matters. It is therefore to be expected that Mrs Elias would be conscious of and attuned to business matters such as whether continuation of occupancy by Waldorf as lessee would inhibit plans to sell units with vacant possession. In the circumstances, there was good reason for her to make of Mr Rubinstein the inquiry he says she made.

70 Second, there is no aspect of the evidence, apart from the consensus of Mr Rubinstein and Mrs Elias that they spoke by telephone somewhere in the period August to October 2006, to suggest that Mrs Elias had had any dealings at all with Mr Rubinstein (although it is clear that she was aware that her husband had had such dealings). It would, in that context, have been odd for Mrs Elias to approach Mr Rubinstein about accommodation at Rouse Hill for her relative. He was, from her perspective, merely a business acquaintance of her husband. He was also the head of an organisation with 24 serviced apartment locations in Australia and New Zealand obviously not in touch with bookings and availability at Rouse Hill. While she may have telephoned him about a business matter, it is inherently unlikely that she would have approached him about a personal or family matter.

71 I conclude, on the balance of probabilities, that the conversation between Mr Rubinstein and Mrs Elias was as deposed to by Mr Rubinstein and not as deposed to by Mrs Elias.

72 This lends some weight to the conclusions, separately reached and already expressed, that the commercial arrangement negotiated by Waldorf and Constructions involved a lease term of three years with a single option for the tenant to renew for a further term of three years. This was the parties’ common intention.

73 There is a question, however, as to the parties’ common intention as to matters of detail.

74 In particular, there is a question regarding the rent to be paid under any renewed lease for a further three year term. That matter should, in my view, be resolved by a finding that the common intention was as indicated by Mr Rubinstein’s evidence at paragraph [41] above. I did not understand Mr Elias’s evidence to say anything specific on that subject – by which I mean anything beyond his general denials of having reached any agreement on the matter of an option to renew.

75 In the result, therefore, Waldorf has established an entitlement to have each of the twelve leases rectified by adding a provision as follows:

“The tenant has an option to extend this lease for a further period of three years, exercisable at any time prior to 15 October 2008. The rent for the further term is to be as agreed between the parties or failing agreement to be fair market rental as determined by a licensed valuer appointed by the parties.”

76 This formulation omits the aspect for which Waldorf contends dealing with what is to happen if the parties cannot agree on the choice of a valuer. But since the evidence does not show that that element formed part of the common intention, the rectification the court orders cannot extend to it.

77 I turn now to a submission made on Constructions’ behalf to the effect that it would be futile for the court to order rectification in the terms just stated since the option will be exercisable only by action taken before 15 October 2008 and it is now too late for any such action to be taken.

78 It was submitted on Constructions’ behalf that any exercise must be in writing (Tsaoucis v Gallipoli Memorial Club Ltd [1998] NSW ConvR 55-860) and that no relevant writing passed from Waldorf to Constructions before 15 October 2008. Counsel for Constructions also referred to a statement in an affidavit of Mr Rubinstein of 6 September 2008 filed in these proceedings (emphasis is placed on the word “will”):

“If the court does order the leases to be rectified, Waldorf will exercise the option.”

79 Counsel for Waldorf pointed to several matters in support of the proposition that there had been, before 15 October 2008, unequivocal written statements on behalf of Waldorf amounting to exercise of an option. Reference was first made to a pre-action letter of 19 August 2008 from Waldorf’s solicitors to Constructions’ solicitors containing the following demand:

“The purpose of this letter is to require that within a period of seven (7) days from the date of this letter, Elias agrees to enter into an appropriate written agreement to vary the Tenancy Agreements such that they provide an option to Waldorf to renew for a period of 3 years or, alternatively, a written agreement by which Elias agrees to renew the Tenancy Agreements for a further period of 3 years from their expiry dates. Should we not receive written confirmation from you that Elias agrees to enter into such written agreement within the period stipulated above, Waldorf intends to commence legal proceedings …”

80 Waldorf also points to one of the claims made by it in its summons filed in these proceedings on 9 September 2008, being a claim for:

“A declaration that pursuant to the terms and conditions of the Leases as rectified in the manner specified in Schedule B the plaintiff has validly exercised an option to extend the term of the Leases for a period of three years beginning on 16 October 2008 and ending on 16 October 2011.”

81 It is the contention of Waldorf that the solicitors’ letter of 19 August 2008 and the summons of 9 September 2008, considered in the light of the statement in Mr Rubinstein’s affidavit of 6 September 2008 quoted above, constituted sufficient written communication of Waldorf’s taking up of a further term of three years in accordance with what it considered to be its right to do so (albeit a right that was, by mistake, not recorded in the leases).

82 Counsel for Waldorf referred, in this connection, to the decision of the Court of Appeal in Young v Lamb [2001] NSWCA 225; (2001) 10 BPR 18,553. It was there held that what was, in terms, a statement of intention to exercise an option operated, in the light of surrounding circumstances, as a present and operative exercise. Reliance was placed on what someone receiving the letter containing the statement would fairly have understood it to convey. Reference was also made to the decision of Hope J in Johnson v Bones [1970] 1 NSWR 28 in which it was held that service of a statement of claim alleging a completed exercise of an option manifested an intention of the plaintiff to inform the defendant that the plaintiff regarded the option as exercised; and that the defendant receiving the statement of claim could be under no misapprehension about the matter.

83 When regard is had to the whole of Waldorf’s relevant conduct before 15 October 2008, Constructions cannot but have been clearly on notice that Waldorf wished to have, and considered itself entitled to have, a renewal of each lease for a further term of three years. Waldorf was inhibited in delivering a routine notice of exercise in a routine way because there was, at that point, no explicit recognition of the option. That explains Mr Rubinstein’s statement cast as an intention in his affidavit of 6 September 2008.

84 Despite that inhibition, Waldorf’s position, clearly articulated and communicated through the solicitors’ letter of 19 August 2008, Mr Rubinstein’s affidavit of 6 September 2008 and the summons filed on 9 September 2008, was that Waldorf considered itself to have an established entitlement to a lease of each relevant property for a further term of three years. To the extent that that entitlement depended on communication of a decision of Waldorf to take up such new leases, the letter, the affidavit and the summons conveyed that communication in unmistakeable terms. To the extent that writing may have been required, it was provided by means of all three documents.

85 In view of my findings regarding communication to Mr Rubinstein by Mr Pyatt, with the consent of Mr Elias and at his request, of things that Mr Elias told Mr Pyatt to communicate, it is not necessary to pursue the allegation of breach of warranty of authority levelled at KPS by Waldorf.

86 The outcome of these proceedings is as follows:

1. Order that each of the residential tenancy agreements made on 15 October 2005 between the plaintiff as tenant and the first defendant as landlord with respect to units 11, 14, 15, 17, 18, 23, 28, 32, 33, 35, 36, 40, 51 and 52 of premises known as 24 – 28 First Avenue Blacktown be rectified by including therein an option to renew as follows:
“The tenant has an option to extend this lease for a further period of three years, exercisable at any time prior to 15 October 2008. The rent for the further term is to be as agreed between the parties or failing agreement to be fair market rental as determined by a licensed valuer appointed by the parties.”
2. Declare that the plaintiff validly and effectually exercised each such option to renew.
3. Order that the plaintiff’s claims against the second defendant be dismissed.

87 Given this outcome and the relationship between the claims against Constructions and the claims against KSP, the question of costs is reserved for further argument. I shall make directions in that respect.

**********