Restaurant Brands Limited v QST Limited
[2017] NZHC 166
•15 February 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-1790 [2017] NZHC 166
IN THE MATTER OF an appeal against an arbitral award BETWEEN
RESTAURANT BRANDS LIMITED Appellant
AND
QST LIMITED Respondent
Hearing: 3 February 2016 Appearances:
M T Davies and L E Brittain for the Appellant
L McEntegart and K Keam for the RespondentJudgment:
15 February 2017
JUDGMENT OF GORDON J
This judgment was delivered by me
on 15 February 2017 at 4.30 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors: Meredith Connell, Auckland
Martelli McKegg, Auckland
Counsel: L McEntegart, Shortland Street, Auckland
RESTAURANT BRANDS LTD v QST LTD [2017] NZHC 166 [15 February 2017]
Introduction
[1] This appeal concerns the interpretation of a rent review clause in a sublease. The dispute concerns the interpretation of the words “current freehold market undeveloped block value (as defined in the Headlease)” in cl 4.2 of the sublease. On
24 June 2016, an Arbitral Tribunal ruled in favour of the respondent (“QST”). The appellant (“RBL”) subsequently applied for leave to appeal to this Court.
[2] On 21 September 2016, the High Court granted RBL’s application.1 The issues on appeal were refined to a single question of law:
Did the Tribunal err in concluding cl 4.2 does not require the adoption of the current freehold market undeveloped block value as determined under the headlease?
Background
[3] RBL is the registered sublessee of Principal Unit C and Accessory Units 5, 6,
7 and 8 on the Unit Plan comprised in Certificate of Title NA116A/659 (“sublease land”). QST is the registered sublessor of the sublease land. The sublease land forms part of a larger block of land, originally described in certificate of title NZ 109B/200 (“headlease land”). QST is a member of Body Corporate 18596, which is the registered headlessee.
[4] Clause 3.3 of the headlease provides that from 2 August 2011, “and at each rent review thereafter (every seven years)”, the “reviewed rent [is] to be 6% per annum of the current freehold market undeveloped, block value of the land”. The remainder of cl 3.3 provides a mechanism for undertaking the rent review. In the event that the parties are unable to agree on the “current freehold market undeveloped, block value of the land”, the parties agree to appoint arbitrators to make the determination on their behalf. Clause 3.3(e) provides that in making their determination, the arbitrators shall “disregard the value of any goodwill attributable
to the business of the Lessee, and the value and existence of any improvements.”
1 Restaurant Brands Ltd v QST Ltd [2016] NZHC 2226.
[5] Clause 4.2 of the sublease provides:
4.2Subject to clause 4.3, on 2 August 2011 and each rent review date thereafter, the rental payable shall be 9% per annum of the current freehold market undeveloped block value (as defined in the Headlease) of:
4.2.1 the [sublease land]; and
4.2.2 [a] portion of the total area of the common property …
[6] The first rent review date under the sublease was 2 August 2011, with further reviews to follow every seven years thereafter.
[7] On 27 June 2011, QST issued a rent review notice advising that the “current freehold value” of the sublease land was $3,403,500 plus GST and that the rental payable would be nine per cent of that value, or $306,315 plus GST. However, a dispute arose between the parties as to whether the value of certain improvements should be included in the land value assessment of the sublease land for the purposes of the rent review. This dispute later evolved into a dispute regarding the proper interpretation of cl 4.2 of the sublease, particularly the meaning of the words “(as defined in the Headlease)”. The parties were unable to come to agreement and the matter proceeded to arbitration.
[8] One of the key issues in the arbitration was whether the rental payable should be calculated relative to the value of the headlease land by means of a “pass- through” from the headlease, as contended by RBL, or whether cl 4.2 required the parties to undertake a separate valuation exercise to determine the value of the sublease land, using the methodology provided in the headlease.
[9] The Tribunal received an expert legal opinion from Mr Barry Paterson QC. Mr Paterson acknowledged it was possible to read cl 4.2 of the sublease in different ways which would support each party’s contentions. However, he did not accept that the pass-through interpretation was correct:
25.However, it is my opinion that when taken in context and against the commercial background of the Sublease, the pass through interpretation is not the correct interpretation. The commercial background in this case is that RBL was taking a Sublease of an enhanced portion of land. The Sub-lessor was required to prepare a
building platform, provide for drainage power and water services, provide common areas roading and gardens, obtain RMA consent for the project including use of the land as a fast food restaurant and providing new traffic islands and lanes on Quay Street.
26.Both the Headlease land and the Sublease land were to be valued disregarding improvements. However, that does not mean that the unimproved value of the land may not itself have been improved by improvements made in the vicinity. Some of the matters provided may not have added to the land value but some may have. It therefore does not follow, in my view, that against this background the valuation parameter to be taken into account would give the same value per square metre for each piece of land.
27.When clause 4.2 is considered in context it does not, in my view, favour the pass through interpretation. I accept the submissions made on behalf of QST in this respect and in particular clause 7.1.8 clearly implies that there is to be a separate Sub-lessor’s Assessment.
[10] Mr Paterson’s expert opinion was unanimously accepted by the Tribunal,
without further discussion.
Approach on appeal
[11] An appeal against the award of an arbitral tribunal proceeds by way of rehearing.2 As such, this Court is required to come to its own view on the merits of the case.3 Counsel for RBL referred the Court to the following passage in Williams & Kawharu on Arbitration:4
High Court Rules, r 26.13(1) provides that an appeal brought under cl
5(1)(a) or (b) proceeds by way of a rehearing. While there is no equivalent to r 26.13(1) for appeals under cl 5(1)(c), there also is no reason to adopt a different approach to appeals brought with leave. In both situations, the rehearing is limited by cl 5 to the question or questions of law raised by the appellant (and in respect of which leave has been granted, if applicable). There is no onus on the appellant; rather the role of the court is to determine whether it has been established that the tribunal erred in law within the terms of the question(s) of law formulated for the appeal. The extent of the court’s consideration of the award appealed from is a matter for the court’s judgment.
[12] I accept that the statements of law in the passage above are correct and applicable in respect of the present proceeding.
2 High Court Rules 2016, r 26.13(1).
3 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [5] and
[16]; see also Campbell v Napier City Council [2000] 1 NZLR 392 (CA) at [13].
4 David Williams and Amokura Kawharu Williams & Kawharu on Arbitration (LexisNexis NZ, Wellington, 2011) at 18.7.6 (footnotes omitted).
Discussion
[13] This case turns upon the interpretation of key provisions in the sublease, particularly cl 4.2. It is a well-established principle that the purpose of contractual interpretation is to identify:5
… the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
[14] The text of the contract is centrally important to this exercise.6 As a general rule, the ordinary and natural meaning of the language will be a strong indication of the parties’ intentions. However, contractual language must be interpreted in context, having regard to the contract as a whole and any relevant background information.7 This is particularly the case where the ordinary and natural meaning of the words leads to a conclusion which undermines the commercial purpose of the contract or is otherwise contrary to business commonsense.8 In that case, “the wider context may point to some interpretation other than the most obvious one.”9
[15] Against this background, I begin by assessing the natural and ordinary meaning of cl 4.2 in its contractual context. I will then consider whether the wider commercial context, including considerations of commercial absurdity, should affect that assessment.
Clause 4 in its contractual context
[16] The dispute between the parties is particularly focused upon the interpretation of cl 4.2 of the sublease. However, for the purposes of the interpretive exercise, it is
useful to set out cl 4 in its entirety:
5 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL), cited in Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1
NZLR 432 at [60].
6 Firm PI 1 Ltd, above n 5, at [63] and [88].
7 At [60].
8 At [77]–[79].
9 At [63].
4. RENT REVIEWS
4.1Subject to clauses 4.2 and 4.3, the rental payable during the term of this Sublease may be subject to review by the Sublessor on the Review Dates set out in the First Schedule.
4.2Subject to clause 4.3, on 2 August 2011 and each rent review date thereafter, the rental payable shall be 9% per annum of the current freehold market undeveloped block value (as defined in the Headlease) of:
4.2.1 the Land;10 and
4.2.2that portion of the total area of the common property resulting from the formula
A x C where: B
A equals the unit entitlement of the Land; B equals the total of the unit entitlements; C equals the area of the common property.
4.3In no circumstances shall the rent payable from any Review Date be less than the rental payable during the 12 months immediately preceding the appropriate Review Date.
[17] As noted above, this case turns on the interpretation of “current freehold market undeveloped block value (as defined in the Headlease)”.
[18] RBL submits that the words “current freehold market undeveloped block value (as defined in the Headlease)” must refer to the actual, numerical value that is ascribed to the headlease land (the pass-through interpretation). It says that the sublease, by necessary implication, provides that the numerical value of the headlease land (per square metre) should be multiplied by the area of the sublease land (cl 4.2.1) plus the relevant proportion of the common property (cl 4.2.2) to give
the final rental payable by the sublessee.11 RBL submits that this interpretation is
supported by the mandatory language of cl 4.2, which provides that rental payable
“shall be” calculated in accordance with that provision. It says there is nothing in
10 “Land” is defined in the First Schedule to the sublease to mean “[a] stratum estate of leasehold within the meaning of the Unit Titles Act in Principal Unit C and Accessory Units 5, 6, 7 and 8 on the Unit Plan comprised in Certificate of Title 116A/659 (North Auckland Registry)”.
11 The concept of a “necessary implication” was introduced by Mr Davies in the course of the hearing.
cl 4.2 to indicate that the parties to the sublease are required to undertake an independent rent review process from that undertaken in respect of the headlease.
[19] Clause 4.2 states that the sublessee is required to pay rental at 9% per annum of the “current freehold market undeveloped block value (as defined in the Headlease)” of the sublease land and common property. So, in order to determine the meaning of the term “current freehold market undeveloped block value”, cl 4.2 directs the reader to the relevant provisions of the headlease. Although “current freehold market undeveloped block value” is not a defined term in the headlease, I accept QST’s submission that the term is effectively defined in cl 3.3 of the headlease. That clause provides:
(e) In determining the current freehold market undeveloped, block value of the Land, the arbitrators, umpire or sole arbitrator (as the case may be) shall:
(i) …
(ii) disregard the value of any goodwill attributable to the business of the Lessee, and the value and existence of any improvements.
[20] This interpretation does not, as RBL submits, require the sublessee to pay rental of “9% per annum of a valuation method”. That submission ignores the existence of cls 4.2.1 and 4.2.2 of the sublease, which clearly state that the valuation method must be applied to the sublease land and common property. Rather, under QST’s preferred interpretation, cl 4.2 requires the sublessee to pay rental of nine percent per annum of the “current freehold market undeveloped block value” of the sublease land and common property, disregarding the value of any goodwill attributable to the sublessee’s business as well as the value and existence of any
improvements.12 In my view, that interpretation is not only available but is the
natural and ordinary meaning of cl 4.2. A further advantage is that QST’s preferred
interpretation does not require the Court to resort to necessary implication, as would be needed in order to facilitate the pass-through interpretation.
12 “Improvements” is defined in cl 1.1 of the head-lease to mean “any buildings, structures, erections, or other items whatsoever on the Land, and includes any fixtures and fittings contained in such improvements.”
[21] QST’s preferred interpretation is also consistent with the provisions of the
sublease as a whole.
[22] Clause 7.1 of the sublease states that all the provisions of the headlease are deemed to be incorporated into the sublease. Clauses 7.1.1 to 7.1.3 further provide that, where the provisions of the headlease are incorporated into the sublease, those provisions must be read as if:
7.1.1References to the lessor under the Headlease were references to the Sublessor and references to the lessee under the Headlease were references to the Sublessee;
7.1.2 All references in the Headlease to the premises leased under the
Headlease were references to the [sublease land];13
7.1.3All references in the Headlease to the rental payable under the Headlease and the term of the Headlease were references to the rental payable under this lease and the term of this lease respectively and excepting that;
…
[23] The starting point must therefore be that cl 3.3 of the headlease, which mandates an independent assessment of the “current freehold market undeveloped block value” of the sublease land, is incorporated into the sublease.
[24] There is one obvious problem with this state of affairs. Clause 3.3 of the headlease explicitly provides that the lessor (or sublessor for the purposes of the sublease) may review the rental payable under the lease (or sublease), “such reviewed rent to be 6% per annum of the current freehold market undeveloped block value” of the headlease land (or sublease land). The incorporation of this exact clause into the sublease is unlikely to be commercially attractive to the sublessor, for obvious reasons.
[25] Clause 7.1.8 of the sublease can be read in light of that wider context. That clause provides:
7.1.8Rental shall be subject to review as provided for in section 4 of this Deed but in other respects in the manner regulated by the Headlease but the Sublessor acknowledges and agrees that for the purposes of
13 “Land” is defined in the First Schedule to the sublease to mean the sublease land.
any rent review under this Lease, if a Sublessor’s Assessment is served more than 6 months after any particular Rent Review date then the new annual rental payable following the review shall be payable from the date of receipt by the Sublessee of the Sublessor’s notice.
[26] RBL contends that the instruction that “[r]ental shall be subject to review as provided for in section 4 of this Deed” means that cl 4 of the sublease provides a complete code for determining matters relating to rent review. The corollary of that submission is of course that cl 3.3 of the headlease does not apply and accordingly, that there is no mechanism in the sublease for conducting an independent valuation of the sublease land. It is only “in other respects” that the provisions of the headlease apply. RBL draws further support for this proposition from the words “excepting that” at the end of cl 7.1.3. It submits the words “excepting that” indicate that the specific provisions, including cl 7.1.8, override the more general provisions in cls 7.1 to 7.1.3.
[27] In my view, a better interpretation of cl 7.1.8 is that cl 4 of the sublease applies, to the exclusion of cl 3.3 of the headlease, in matters relating to the amount of rent which is to be paid. Clause 4.1 provides that the amount of rent to be paid may be subject to review; cl 4.2 provides the standard for determining the amount of rent on review; and cl 4.3 provides that the amount of rental payable by the sublessee shall not decrease on review (typically known as a ratchet clause). In all other respects, “[r]ental shall be subject to review… in the manner regulated by the Headlease”. The words “excepting that” at the end of cl 7.1.3 do not detract from this interpretation: cl 3.3 of the Headlease has full effect, “excepting that” cl 4 provides a code for determining the amount of rental to paid.
[28] In my view, this interpretation of cl 7.1.8 is grammatically sensible. It is also consistent with the reference in cl 7.1.8 to a “Sublessor’s Assessment”. That term is not defined in the sublease. However, cl 3.3(a) of the headlease provides:
(a) Not earlier than three months prior to a Review Date, the Lessor may give written notice to the Lessee, specifying the amount the Lessor considers to be the current freehold market undeveloped, block value of the Land at the Review Date specified in the notice (“Lessor’s Assessment”).
[29] As noted above, cl 7.1.1 provides that all references to the lessor in the headlease are to be read as references to the sublessee for the purposes of the sublease. Therefore the effect of incorporating cl 3.3 of the headlease into the sublease is that the term “Sublessor’s Assessment” is defined. RBL rejects this line of argument, noting that cl 7.1.8 of the sublease refers variously to the “Sublessor’s Assessment” and the “Sublessor’s notice”. In its submission, this inconsistency suggests that the use of the term “Sublessor’s Assessment” is insignificant. However, cl 3.3 of the headlease also refers variously to a “Lessor’s Assessment” and a “notice”. The fact that this inconsistency is replicated in cl 7.1.8 of the sublease is not particularly surprising.
[30] It is necessary to briefly address two other arguments raised by RBL in favour of the pass-through interpretation. The first is that under QST’s interpretation of cl 4.2, the words “(as defined in the Headlease)” are redundant. The reasoning on this point is that if cl 3.3 of the headlease is incorporated into the sublease, then the definition of “current freehold market undeveloped block value” is also incorporated and accordingly it is not necessary to include the words “(as defined in the Headlease)” in cl 4.2. QST accepts this is the case. The second (related) point RBL makes is that the words “(as defined in the Headlease)” were intentionally added to the final version of the sublease, having been omitted from the original document. This point was recognised by Mr Paterson in his expert opinion:
20.In this case the only relevant factual matrix was an agreement to sublease signed one year before the Sublease itself was signed, together with the fact that QST’s predecessor paid over $5 million to acquire the lessee’s interests in the land in the Headlease. Evidently there are no records available which give details of the negotiations leading to the Agreement to Lease and the Sublease and thus no evidence which would assist in determining the objective intent of the parties when the words “(as defined in the Headlease)” were included in the Sublease. Those words did not appear in the draft Sublease attached to the Agreement to Lease.
[31] RBL says that the drafters of the sublease must have intended those words to have an effect and therefore it would be wrong to adopt an interpretation which renders them redundant. QST says that the Court should not place excessive weight
upon this consideration. It accepts Mr Paterson’s conclusion that the words may
simply have been added out of an abundance of caution.14
[32] RBL identifies three cases in support of its submissions. In the first, Melanesian Mission Trust Board v Australian Mutual Provident Society, the Privy Council considered the proper interpretation of a rental clause in a lease.15 The clause read as follows:
3.1The Lessee shall pay to the Lessor during the term of this Lease rent (hereinafter called ‘Base Rent’) at the rate specified in Item 9 of the First Schedule or where increased in accordance with the express provisions of this Lease at the increased rent.
In the Court of Appeal, the respondent successfully argued that the wording of cl 3.1 permitted the Base Rent to move up or down in accordance with the rent review process. However, the Privy Council on appeal accepted the appellant’s submission that the words of cl 3.1 did not permit the lessee to pay a decreased rent.
[33] One of the arguments put forward for the respondents on appeal was that the second part of cl 3.1, referring to an increased payment, was added out of an abundance of caution and did not preclude the lessee from paying a decreased sum. The Privy Council rejected this submission:16
But their Lordships can find no justification for reading the clause in this way. Nor can they agree with the majority of the Court of Appeal that this part of the clause, assuming that it was intended to refer to the result of rent reviews, is superfluous. Effect must be given wherever possible to all the words which the parties have included in their contract. There is no indication, taking the clause on its own, that any of the words used in it are superfluous. The purpose of the clause as a whole is clear and unambiguous. It is to define the extent of a lessee’s obligation to pay rent. It is designed to ensure that the amount paid by the lessee is the amount specified in item 9 of the First Schedule or a higher amount if the provisions of the lease about rent reviews so require. As Mr Fardell said, its effect is the same as that of an express ratchet clause with the result that, in the event of a rent review, the rent will never be less than the Base Rent payable immediately prior to the review date.
14 Citing the expert opinion provided by Mr B J Paterson QC at para 29(c).
15 Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 1 NZLR 391 (PC).
[34] RBL submits that in this case, as in Melanesian Mission Trust Board, QST’s interpretation of cl 4.2 requires the Court to treat the words “(as defined in the Headlease)” as superfluous. It says that result would contravene the instruction above that “[e]ffect must be given wherever possible to all the words which the parties have included in their contract.”
[35] This statement of principle is undoubtedly correct. However, I am not persuaded that it assists RBL in the present case. In Melanesian Mission Trust Board, the interpretation advanced by the respondents was inconsistent with the plain meaning of the text.17 The only way to achieve the outcome sought by the respondents was therefore to strike a line through the inconvenient parts of the clause. That is not the case here. As I have found, the plain meaning of the text in cl
4.2 supports the interpretation advanced by QST. It is not necessary to strike out the
words “(as defined in the Headlease)” in order to make sense of the clause.
[36] The second case identified in support of the redundancy point is the recent
Court of Appeal decision in Vincent v Lakes International Golf Management Ltd.18
The case concerned a restrictive covenant which required the appellant to pay levies to a golf club, defined for the purposes of the covenant to mean “the golf club to be incorporated as an incorporated society to provide for playing rights on the golf course”. However, an incorporated society was never formed. The respondent argued that this omission was insignificant and that the words “to be incorporated as an incorporated society” could effectively be ignored. The Court rejected that argument:
[38] The fact the drafters made a deliberate choice to specify the mode of incorporation also undermines arguments that the mode of incorporation was somehow unimportant or immaterial. It also undermines arguments that interpreting the covenant to require the golf club to be an incorporated society is a commercial absurdity. After all the developers were business people and the drafters were their lawyers acting on their instructions.
[37] RBL argues that in this case, as in Vincent, the drafters made a “deliberate
choice” to include the words “(as defined in the Headlease)” in the final sublease and
therefore it would be wrong to treat those words as being “somehow unimportant or immaterial”.
[38] The difficulty which RBL faces in respect of this submission is that the facts of the present case differ from those in Vincent. In order to achieve the interpretation sought by the respondents in Vincent, it was necessary to strike a line through the words “to be incorporated as an incorporated society”. That is not the case here. Even if the words “(as defined in the Headlease)” in cl 4.2 are redundant, it is not necessary to strike a line through them in order to achieve QST’s preferred interpretation.
[39] RBL also referred to the case Bell v Hobbs, a decision of the former Supreme Court (now the High Court).19 In that case, the Court was required to interpret a document which granted the plaintiff an option to buy certain land in Whataroa. The option was for a period of 12 months. The document included two different dates: the date at the top of the document was 20 October 1952; the date at the bottom of the document was 3 November 1952. The outcome of the case turned upon the meaning to be ascribed to those dates. Adams J held:20
If extrinsic evidence is to be completely disregarded and attention paid only to the wording of the document, I am of the opinion that the second date must be regarded as the date of signature, and the earlier date as the operative one from which the period of twelve months was to run. This construction has the virtue of giving meaning and effect to both dates. “One leans towards treating words as adding something, rather than as mere surplusage” : per Somervell L.J. in S.A. Maritime et Commerciale of Geneva v. Anglo-Iranian Oil Co., Ltd., [1954] 1 All R.R. 529, 531. One starts from the assumption that every word that appears in a document is there for a purpose, and it requires a strong and clear case to justify the Court in drawing a pen through any words if a meaning can reasonably be attributed to them.
[40] RBL submits that “the assumption that every word that appears in a document is there for a purpose” is inconsistent with Mr Paterson’s finding that the words “(as defined in the Headlease)” may have been added to the final sublease text out of an abundance of caution.
[41] Again, I am not persuaded that this principle assists RBL in the present case. In Bell v Hobbs, the Court was asked to ignore the existence of the second date (3
November 1952); to strike a line through that part of the text. Adams J was understandably unwilling to do so. However, as I have previously explained, the Court in this case is not required to strike a line through the words “(as defined in the Headlease)” in order to make sense of QST’s preferred interpretation. Further, “the assumption that every word that appears in a document is there for a purpose” is not necessarily inconsistent with QST’s preferred interpretation. Words that are added to a clause out of an abundance of caution are added for a purpose: the purpose is to enhance clarity. I am not prepared to depart from what is, in my view, the plain meaning of the words “(as defined in the Headlease)” in order to attribute some other, more substantive purpose to those words.
[42] In summary, my view is that a reasonable person, having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would interpret cl 4.2 of the sublease to mean the rental payable on review “shall be 9% per annum of the current freehold market undeveloped block value” for the unit (comprising the subleased land and the relevant portion of the common property), such value to be assessed in accordance with cl 3.3 of the headlease and in particular, disregarding the value of any goodwill attributable to the sublessee’s business, as well as the value and existence of any improvements.
The commercial context
[43] Although the text of a contract is centrally important to its interpretation, the wider context may sometimes suggest an alternative meaning that is consistent with “business commonsense”.21 For that reason, it is necessary to consider the commercial context surrounding the sublease to determine whether there is any reason to depart from the plain meaning of the text.
[44] RBL submits that the pass-through interpretation is consistent with the commercial context surrounding the sublease, for a number of reasons:
21 Firm PI 1 Ltd, above n 5, at [63] and [77]–[79].
[45] The headlease and the sublease are interrelated documents and as such it is desirable that the term “current freehold market undeveloped block value” should bear the same meaning in each.
[46] Clause 11.1 of the sublease provides that rental payments will flow from the sublessee, through the sublessor to the headlessor, indicating a clear connection between the headlease and sublease, which is consistent with the pass-through interpretation.
[47] The pass-through interpretation would ensure that QST could preserve a premium of 3 per cent on the rental payments it received from RBL (and the other sublessees).
[48] The rent review dates under the headlease and the sublease are the same, falling on 2 August 2011 and each succeeding seventh anniversary of that date, which is consistent with the pass-through interpretation.
[49] The pass-through interpretation would avoid an unnecessarily repetitive and costly arrangement, whereby the various parties to the headlease and sublease would be required to undertake multiple valuations and arbitrations in order to determine the rental payable under each lease.
[50] I do not find these submissions persuasive.
[51] I acknowledge that there is an inevitable degree of interconnectedness between the sublease and the headlease. I also agree it is desirable that the term “current freehold market undeveloped block value” should have the same meaning in relation to each lease. However, that does not mean that the numerical value needs to be the same. It will be sufficient, in my view, if the definition of the “current freehold market undeveloped block value” is the same; in other words, if “the current freehold market undeveloped block value” of the headlease and sublease land respectively is defined as the current freehold market block value of the land,
disregarding the value of any goodwill attributable to the business of the sub/lessee, and the value and existence of any improvements. There is no need to depart from the plain meaning of the text in order to achieve this outcome.
[52] Similarly, although I acknowledge that there is a degree of interconnectedness in the arrangements for the payment and review of rent, I do not think this weighs in favour of either party. It is inherent in the nature of a sublease that the sublessee pays rent to the sublessor, and that the sublessor ensures that rent is paid to the headlessor. The manner in which rent is to be paid is a separate issue from the amount of rent which is to be paid.
[53] That brings me to RBL’s third submission, namely that the pass-through interpretation ensures QST retains a premium of 3 per cent on the rent it receives from sublessees. I agree that in this respect, the pass-through interpretation produces a tidy result. However, the fact that RBL’s preferred interpretation produces a tidy result is not a sufficient reason for this court to depart from the plain meaning of the text. Further, while I agree that the premium received by a sublessor can sometimes be relevant to the task of contractual interpretation, I do not think it is significant in the present case. In some cases, the size of any premium received by the sublessor (or lack thereof) may be a factor which goes to business commonsense. However, in this case, there is no suggestion that QST’s preferred interpretation would lead to a result which is inconsistent with business commonsense, at least in this particular respect. Under those circumstances, I do not think this factor can bear any weight in the contractual interpretation process.
[54] The significance of the rent review dates is also questionable. Again, I agree that in this respect, the pass-through interpretation produces a tidy result. However, that is not a sufficient reason to depart from the plain meaning of the text, as I have found it to be.
[55] Regarding RBL’s last submission above, I agree that QST’s preferred interpretation of cl 4.2 may result in additional costs to the parties, both in time and in money. Many of these costs could be avoided under the pass-through interpretation. However, there are good reasons why the parties might prefer to
conduct an individual valuation of each unit and why they might prefer to have access to dispute resolution procedures. In particular, this arrangement ensures that the sublessee has an active role in the rent review process and retains some (very limited) control over its rental expenditure. I cannot see any justification for departing from the plain meaning of the text on this basis.
[56] Finally, the interpretation advanced by QST is arguably consistent with business commonsense. On RBL’s interpretation of cl 4.2, the only factor which is taken into account in determining the value of the sublease land is its relative area in comparison to the headlease land. The effect of this is that every square metre of the headlease land is deemed to be of equal value, so that two units of equal area will be deemed to have exactly the same value, irrespective of their dimensions or other attributes. On QST’s interpretation of the clause, however, each sub-lessee will be required to pay rent in accordance with the true value of their unit. Of course, it would be open to the parties to agree to adopt an unrealistic approach to valuations for the purposes of rent reviews. However where, as here, the ordinary and natural meaning of the disputed provision appears to coincide with business commonsense, a court is unlikely to depart from that meaning.
[57] I consider that the commercial context surrounding the sublease supports the natural and ordinary meaning of the words in cl 4.2. Accordingly, I see no reason to depart from that meaning.
The dispute regarding subsequent conduct
[58] One issue remains to be dealt with, which is the matter of subsequent conduct. QST seeks to rely upon certain correspondence between the parties referred to in paragraph [7] above which, in its submission, demonstrates that the subsequent conduct of the parties was consistent with its preferred interpretation of cl 4.2.
[59] The correspondence in question was before Mr Paterson in the Tribunal. However he made no factual findings in respect of the correspondence and did not address the issue of the subsequent conduct. RBL submits that the question of subsequent conduct would therefore require the Court to make findings of fact and is
outside the scope of this appeal; but submits that even if the Court has jurisdiction to consider this matter, the subsequent conduct is irrelevant.
[60] It is well established that the High Court on appeal from an arbitral tribunal is
restricted to questions of law. A “question of law” is defined in the Arbitration Act
1996 as follows:22
For the purposes of this clause, question of law—
(a) includes an error of law that involves an incorrect interpretation of the applicable law (whether or not the error appears on the record of the decision); but
(b) does not include any question as to whether—
(i) the award or any part of the award was supported by any evidence or any sufficient or substantial evidence; and
(ii) the arbitral tribunal drew the correct factual inferences from the relevant primary facts.
[61] Neither party was able to point to any relevant decision of the Supreme Court or Court of Appeal regarding this issue. However, in the High Court decision Shell (Petroleum Mining) Company Ltd v Vector Gas Contracts Ltd, Venning J considered the definition above and held that:23
[39] … against the clear direction of Parliament’s intent in relation to the place of arbitration as a dispute resolution mechanism as noted by the Court of Appeal and confirmed by the 2007 amendment, I tend towards Mr Scott’s submission that, on an appeal on a question of law, this Court does not have the ability to make further findings of fact where the Tribunal has not done so.
[40] The parties are bound by findings of fact, however flawed they may be. In this context and against the background of the restriction of the right of appeal to appeals on a question of law, where the Tribunal has been silent on an issue or has not made a finding of fact, then I do not consider this Court on an appeal on a question of law can properly determine new facts not determined by the Tribunal. Put another way, the parties agreed the fact finding body was to be the Tribunal. It is not for this Court to take a different view to the Tribunal of the facts. Given a question of law does not extend to whether the Tribunal drew the correct inferences, I do not consider this Court can determine facts left undecided by the Tribunal. Such an
22 Clause 5(10) of sch 2 to the Arbitration Act 1996.
23 Shell (Petroleum Mining) Company Ltd v Vector Gas Contracts Ltd [2014] NZHC 31. See also Nixon v Walker HC Auckland CIV-2007-404-1372, 12 December 2008 at [16]; Ex UCL Ltd v Solarix Networks Ltd [2015] NZHC 1474 at [34]–[35].
exercise does not come within the intentional confined ambit of a question of law.
[62] I adopt that approach for the purposes of this appeal.
[64] In Gibbons Holdings Ltd v Wholesale Distributors Ltd, the Supreme Court held that the subsequent conduct of the parties would be relevant if the conduct in question could logically bear upon the original meaning of the contract when it was signed.24 In order to determine the relevance of the subsequent conduct, therefore, the court is required to evaluate the evidence and draw inferences regarding the parties’ intentions. These are inherently factual findings and therefore fall outside the scope of the present appeal.
[65] Even if I am wrong on this point, however, any relevant evidence regarding subsequent conduct could only assist QST. Given my findings above regarding the plain meaning of cl 4.2 and the impact of the surrounding commercial context, this would have no impact on the outcome of the appeal.
Conclusion
[66] The answer to the question of law is therefore that the Tribunal did not err in concluding cl 4.2 does not require the adoption of the current freehold market undeveloped block value as determined under the headlease.
[67] Accordingly, the appeal against the decision of the Tribunal is dismissed.
Costs
[68] Costs should follow the event. The appeal has previously been categorised as category 2. I expect that counsel will be able to agree costs. In the event that
counsel are unable to agree, counsel for QST is to file a memorandum within
24 Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277.
10 working days after receipt of this judgment and RBL is to respond within
five working days after receipt of QST’s memorandum.
Gordon J
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