Restaurant Brands Ltd v QST Ltd
[2021] NZCA 680
•16 December 2021 at 11 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA461/2021 [2021] NZCA 680 |
| BETWEEN | RESTAURANT BRANDS LIMITED |
| AND | QST LIMITED |
| Hearing: | 25 November 2021 |
Court: | Kós P, French and Brown JJ |
Counsel: | M T Davies and P I Comrie-Thomson for Appellant |
Judgment: | 16 December 2021 at 11 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Kós P)
This is a tenant’s appeal against a High Court Judge’s refusal to grant leave to appeal an arbitrator’s interim award concerning the meaning and effect of a sublease. The award had adopted a report by an expert, a Queen’s Counsel appointed by the parties. The Judge said the expert’s analysis was highly persuasive, and the tenant did not have a strongly arguable case that it was wrong.[1] So the Judge declined leave to appeal to the High Court.[2]
[1]Restaurant Brands Ltd v QST Ltd [2021] NZHC 971 [Judgment appealed] at [60]–[64].
[2]At [75].
But the Judge then granted leave to appeal — to this Court — against her original leave decision, on the basis the tenant’s argument about the expert’s approach to contractual interpretation was seriously arguable, and perhaps strongly so.[3]
[3]Restaurant Brands Ltd v QST Ltd [2021] NZHC 1798 [Second leave judgment] at [17].
If we allow this appeal, a Judge in the High Court will now have to hear the original appeal. We are here, therefore, as gatekeepers under the Arbitration Act 1996.
We conclude however that the Judge was right to decline leave to appeal to the High Court. The expert’s analysis of the sublease is plainly right, and the tenant’s argument, while ingenious, is so plainly wrong that it is not strongly arguable. The award should stand.
Background
In this case QST Ltd is the landlord, and Restaurant Brands Ltd is the tenant. We shall use those generic terms for ease of understanding.
The landlord itself is a lessee of land on Quay Street, Central Auckland under a headlease from the Ngāti Whātua O Ōrakei Māori Trust Board. It subleases part of that land to the tenant, which operates a fast food business there. The parties’ rights and obligations in respect of the land are recorded in the headlease and the sublease, the latter formally incorporating the former.
Sublease
The sublease, entered into after a unit plan was deposited in relation to the headlease, is dated 14 April 1998. The sublease comprises a stratum estate in leasehold for several units on the land. It is for a period of 20 years with one right of renewal for a further 20-year term. On 15 April 2017, the tenant gave notice to the landlord to renew the sublease.
The annual rental is reviewed every seven years. The last rent review took place on 2 August 2018. However, the parties were unable to agree on the amount of the annual rental. They advanced different interpretations of the relevant rent review provisions in the sublease and the headlease.
It is necessary to now set out some of the clauses of the sublease. We procced in order of appearance, starting with the recitals to the sublease.
Recital A records the existence of the headlease, the sublessor landlord being the tenant under that instrument. Importantly, recital A establishes two defined terms of importance in the sublease: “the Headlease” and “the Headlease Land”. Recital B then goes on to state:
BThe Sublessor has agreed to sublease that part of the Headlease Land as more particularly described in the First Schedule hereto (such subleased part being hereinafter referred to as “the Land”) and the Sublessee has agreed to take on sub-lease the Land at the rental and upon subject to the agreements covenants conditions and stipulations expressed or implied in this Deed.
Then follows the “Operative Part” of the lease — following the recitals and preceding the schedules and execution. Clause 1 sets out interpretation provisions. It will suffice to set out cl 1.1 in part:
1.1In this Deed unless the context otherwise requires, the following words and phrases shall have the following meanings, namely:
1.1.1“Agreement to Lease” means the Agreement to Lease dated 14 April 1997 between the Sublessor and the Sublessee.
…
1.1.3The expressions “Land”, “Term”, “Commencement Date”, “Initial Annual Rental”, “Monthly Rental Amounts”, “Rent Payment Dates”, “Rent Commencement Date”, “Review Date”, “Use”, “Further Term”, “Renewal Date” and “Final Expiry Date” shall be interpreted by reference to the First Schedule hereto;
…
1.1.5“Common Property” means the part of the Headlease Land shown as common property on the 1.1.5 Unit Plan;
In most instances a defined expression is said to mean something particular — as in cls 1.1.1 and 1.1.5. But cl 1.1.3 provides for interpretation “by reference”.
Clause 2 of the sublease is the demise provision — providing the landlord subleases to the tenant the Land for the term of the sublease at an annual rental and subject to review all as set out in the First Schedule. Clause 3 sets out rights of renewal and need not detain us.
Clause 4.1 provides rent may be reviewed (by the landlord) on the review dates set out in the First Schedule (being 2 August 2011 and each seventh anniversary thereafter). Clause 4.2 of the sublease then 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 Land; and
4.2.2that portion of the total area of the common property resulting from the formula x C where:
A equals the unit entitlement of the Land;
B equals the total of the unit entitlements;
C equals the area of the common property.
“Land” is again, but differently, defined in the First Schedule of the sublease as:
Land: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).
The reader will now have noted that the “Land” to be valued pursuant to cl 4.2.1 is defined twice — once in recital B and again, somewhat differently, in the First Schedule.
Clause 7 of the sublease incorporates all the provisions of the headlease into the sublease as if set out in full. So far as relevant, we now set it out:
7.1All the provisions of the Headlease shall apply to and be deemed to be incorporated into this Sublease as if the same had been set out in full and as if;
…
7.1.2All references in the Headlease to the premises leased under the Headlease were references to the Land;
…
7.1.4Unless the context otherwise requires, the provisions of the Headlease shall apply only to the Land;
…
7.1.9 Where there is any inconsistency or conflict between the provisions of this Sublease and the provisions of the Headlease then the provisions of this Sublease shall prevail.
Headlease
The headlease was entered into between the Ngāti Whātua O Ōrakei Māori Trust Board and the predecessor in title of the landlord, Magellan Orakei Ltd. It is dated 26 March 1997. We mention two clauses. First, in cl 1.1, land is defined thus:
“Land” means the land comprised and described in the Certificate of Title recorded on the front page of this Lease.
Secondly, the rent review clause, cl 3.3, provides that the lessor (the Trust Board) may review the rental on the 15th anniversary of the commencement date (2 August 1996) and every seven years thereafter, “such reviewed rent to be 6% per annum of the current freehold market undeveloped, block value of the Land”. The clause goes on to provide a process for agreement or dispute resolution of these rent reviews. Clause 3.3(e) then 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)be deemed to be acting as arbitrators in accordance with the provisions of the Arbitration Act 1908; and
(ii) disregard the value of any goodwill attributable to the business of the Lessee, and the value and existence of any improvements.
The reader will have noted the timing of rent reviews under the headlease and sublease are in lockstep: 2 August 2011, and every seventh anniversary thereafter. Reviews are at the option of the landlord under each instrument and are ratcheted against reduction. The reader will also have noted the common underlying object of valuation in each instrument (“the current freehold market undeveloped block value (as defined in the Headlease)”) and the margin between a six per cent return for the headlessor and nine per cent for the sublessor.
Earlier litigation
Clause 4.2 of the sublease had previously been the subject of High Court proceedings arising out of the immediately preceding rent review in 2011.[4] In her judgment, Gordon J determined that the headlease and sublease were subject to separate reviews, but the reviews were to be undertaken pursuant to the same valuation parameter, namely the undeveloped value of the freehold land. We will return later to Gordon J’s decision.[5]
Arbitration
[4]Restaurant Brands Ltd v QST Ltd [2017] NZHC 166.
[5]See at [58].
The present dispute concerns the meaning of cl 4.2, and (in particular) the words “the current freehold market undeveloped block value … of the Land”. The tenant says the “Land” references the definition in the First Schedule, that is, the leasehold stratum estate there defined. The consequence would be a reduction in value as against the pure undeveloped freehold land because of the imposition of constraints on highest and best use of the land through height restrictions imposed by the unit plan and restrictions on permitted uses of the accessory units. The differing interpretations are said to make a difference of perhaps $3.9 million to the rent payable over the remaining term of the sublease.
The parties referred that dispute to arbitration by a valuer, Mr Philip Curnow. They agreed to the arbitrator then appointing an expert to provide an opinion on the disputed interpretation issue. The expert was chosen by the parties. They appointed a retired Judge of this Court, the Hon Rhys Harrison QC. A separate hearing was convened, after which the expert tendered his report.
The expert came down on the landlord’s side in the argument. That is, he accepted the “current freehold market undeveloped block value” does not include a valuation of the stratum estate on the subleased land. After reviewing the provisions of the sublease and headlease, the expert considered that the agreed definition of the “Land” remained throughout “solely as the physical area of freehold land being demised, unaffected by the stratum estate in leasehold created on deposit of the Unit Plan”. The effect of cl 4.2 was to require valuation (on the basis of the current freehold market undeveloped block value) of two now distinct areas. First, the area within the physical dimensions of the principal unit and four accessory units; and secondly, a proportionate part of the total area of common property based on the unit owners’ beneficial entitlement in its shareholding in the body corporate. The valuation should be undertaken without considering legal constraints attaching to the sublessor’s stratum estate in leasehold. The use of the word “undeveloped” in the formula reinforced that proposition. The terms of cl 4.2 expressly directed the valuer to disregard developments such as bulk and location requirements. It was, the expert said, “a classical, in this case, decisive, fiction of the type inherent in a ground rent lease”.
The arbitrator then adopted the expert’s opinion in his interim award dated 16 September 2020. That was to be expected; no criticism is made of the arbitrator for doing so.
Judgment appealed
The tenant applied to the High Court for leave to appeal the award on a question of law under cl 5(1)(c) of sch 2 of the Arbitration Act. It argued the expert erred in his interpretation of cl 4.2 of the sublease by failing to give effect to the contractual definition of “Land” as contained in the First Schedule.
On 4 May 2021, Harland J declined to grant leave to appeal to the High Court.[6] While the Judge accepted that the statutory test under cl 5(2) was satisfied — that is, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties[7] — she declined leave principally because she was unpersuaded the appeal points were strongly arguable.[8] In declining leave the Judge relied on the guidelines suggested by this Court (sitting as a full Court of five judges) in Gold & Resource Developments (NZ) Ltd v Doug Hood Ltd.[9]
[6]Judgment appealed, above n 1, at [75].
[7]At [10].
[8]At [64]. The Judge gave the “greatest weight” to this factor: at [72].
[9]At [8], citing Gold & Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) at [54] [Doug Hood].
Appropriately, the Judge devoted most attention to the first guideline question, which is whether the plaintiff had a strongly arguable case. After setting out the competing arguments the Judge noted the argument that the expert failed to apply the First Schedule definition of the “Land” was “likely the plaintiff’s strongest argument”.[10] Whether the headlease was incorporated, or whether the provisions of the sublease were to prevail, was also an arguable point.[11] The Judge considered the expert’s analysis was “highly persuasive”, and particularly his findings that on a close reading the sublease and headlease together, the “Land” in the sublease refers to part of the headlease land, which is freehold land; the “stratum estate” definition under the First Schedule was necessary to include because the unit plan deposit created a new interest in the land; and it was impossible to value a freehold estate in terms of encumbrances relating to a leasehold estate, being a different type of estate.[12]
[10]Judgment appealed, above n 1, at [54].
[11]At [55].
[12]At [60].
These findings the Judge said were consistent with first principles of land law: that a lease is the demise of both the lessor’s interest in the land and the physical area of the land itself; that leasehold and freehold estates are fundamentally different types of estates, with different bundles of rights attached, and may exist simultaneously over the same physical area of land; and that the creation of a new leasehold title for part of the land does not affect the existing freehold state of the total land area.[13] The Judge said that she was far from persuaded there was a real doubt that the expert was wrong; he had simply not been persuaded that the tenant’s argument should prevail.[14]
[13]At [61].
[14]At [62].
Secondly, considering guidelines two and three relating to how the question arose before the arbitrator and the qualifications of the arbitrator, the Judge said their assessment was relatively straightforward.[15] The parties had chosen the expert. The interpretation point involved a risk for both parties that the expert’s report would favour one over the other. These matters counted against the granting of leave, favouring finality, certainty and party autonomy over wider judicial review.[16]
[15]At [65].
[16]At [66]–[67].
Thirdly, guidelines four to six relating to the importance of the dispute, amount of money involved and delay were, the landlord conceded, factors tending to support the granting of leave.[17]
[17]At [68].
Finally, the Judge considered guideline seven, relating to whether the contract provides for the award to be final and binding, to be neutral, the sublease making no such provision.[18]
[18]At [71]. The Judge mistakenly referred to this as guideline eight.
The Judge concluded:[19]
When I look at matters in the round, I am not persuaded that leave ought to be granted to appeal the interim award to the High Court. In my view, the case was fully and well argued by all parties in front of a very experienced and knowledgeable expert whom the parties had agreed would be an appropriate person to determine the interpretation issue. This is a case where the parties should be held to their choice of arbitration as the preferred manner for the resolution of their dispute.
Leave to appeal to this Court granted
[19]At [74].
In a subsequent judgment delivered on 16 July 2021, the Judge granted the tenant leave to appeal to this Court.[20] The Judge considered that the correct approach to the interpretation issue was a question capable of bona fide and serious argument, and one this Court may consider to be “strongly arguable”.[21]
Jurisdiction
[20]Second leave judgment, above n 3, at [29].
[21]At [17].
The appellate pathways in sch 2 of the Arbitration Act are unusual. A two‑stage leave and special leave formula is well known in the case of tribunal decisions.[22] The essence of that procedural structure features in cl 5(1)(c) and 5(6) of sch 2. Clause 5(6) might simply have referred to cl 5(1)(c) instead of cl 5(5), but it does not. The unusual complication in the Arbitration Act is the provision in cl 5(5) for an appeal to this Court from the High Court’s refusal to grant leave — but with the High Court’s leave. Providing for an appeal (albeit with leave) from a refusal to grant leave cuts across the orthodox position that there is no such right of appeal.[23]
[22]See, for example, Immigration Act 2009, s 245(1).
[23]Simes v Tennant (2005) 17 PRNZ 684 (CA) at [39].
Here the Judge declined leave to appeal to the High Court, under cl 5(1)(c), finding the tenant’s argument not strongly arguable. But she granted leave to appeal that decision to this Court under cl 5(5), finding the tenant’s argument seriously arguable. Those conclusions are not illogical or inconsistent. They are simply the product of the singular appellate pathways in cl 5, engaging different leave tests at each step. And the tests are different: “strongly” imposes a more intense, elevated standard, demanding a higher measure of persuasion than “seriously”. In the Judge’s view, this case fell between the two markers.
In Doug Hood this Court noted:[24]
… our Parliament, like those in the United Kingdom and Australia, has chosen to favour finality, certainty and party autonomy over these considerations. It intended to encourage arbitration as a dispute resolution mechanism. By enacting a statute with the express purpose of redefining and clarifying the limits of judicial review of arbitral awards, Parliament has made clear its intention that parties should be made to accept the arbitral decision where they have chosen to submit their dispute to resolution in such manner. It plainly intended a strict limitation on the involvement of the Courts where this choice has been made.
It went on to say:[25]
The Court should consider in a preliminary way … the strength of the argument that there has been an error of law and the nature of that point. If it is a one-off point, in the sense that it is unlikely to occur again and cannot be seen as having any precedent value, either generally or to the parties on another occasion, then unless there are very strong indications of error leave should rarely be given. In other cases, the Court will be looking for a somewhat less stringent assessment. In those cases a strongly arguable case would normally be required for leave to be granted.
[24]Doug Hood, above n 9, at [52] (emphasis in original).
[25]At [54(1)].
Here then is the “strongly arguable case” threshold used by the Judge, applicable to an intended appeal to the High Court that has cleared the initial “substantial [e]ffect” threshold in cl 5(2). As the passage above makes clear, the next, “strength of the argument” threshold involves a sliding scale. The Judge put the present dispute at the lower end of that scale, counsel agreeing that was so given the context involves a repeatable rent review process.[26]
[26]Judgment appealed, above n 1, at [42].
But the threshold for further leave to appeal to this Court, under cl 5(5), is different. It involves a preliminary assessment of the likelihood of success on the appeal against refusal of leave, which must “raise some question of law … capable of bona fide and serious argument” (and in a case of sufficient importance to justify the cost and delay of further appeal).[27] The first part of that test, as Sir David Williams QC and Amokura Kawharu note, is slightly different to, and it is not as rigorous as, the primary leave threshold.[28]
[27]Cooper v Symes (No 2) (2001) 15 PRNZ 166 (HC) at [12], as cited in Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd [2007] NZCA 355, [2008] 2 NZLR 591 at [33].
[28]See David Williams and Amokura Kawharu Williams and Kawharu on Arbitration (2nd ed, LexisNexis, Wellington, 2017) at [18.10.3].
Leave having been granted to appeal to this Court, we are concerned only with the Judge’s primary leave decision.
Issue
The sole issue on this appeal, as the tenant properly recognised, is whether the Judge was right to find the tenant’s argument (on the construction of the sublease) not strongly arguable.
Appeal
For the tenant, Mr Davies submits there is a strongly arguable case of error inasmuch as the expert failed to give effect to the contractual definition of “Land” given by the First Schedule of the sublease. That was the defined term, and the meaning that should then be applied. That defined term should take priority over a contractual recital. But here the expert created and applied a completely different definition. The point, as Mr Davies expressly acknowledged, was a narrow one.
Secondly, Mr Davies submits it is conceptually possible, and consistent with the terms of the sublease, to give effect to the definition of “Land” as contained in the First Schedule. The deposit of the unit plan and its creation of the stratum estate on the subleased land was not “development” in terms of cl 4.2; taking the unit plan into account is not inconsistent with the meaning of “undeveloped block value”. Secondly, valuers can account for the fact that what is to be valued is a stratum estate in the same way as they would any other development restrictions on that estate, such as height and use restrictions.
Response
For the landlord, Mr McEntegart submits that leave to appeal the award was properly refused with reference to the first, second and third guidelines in Doug Hood.[29] He says the tenant’s construction is plainly wrong. Moreover it is inconsistent with the arguments before, and conclusion reached by, Gordon J in 2017: see [19] above. The word “undeveloped” requires an assessment of land on the basis that nothing, physical or otherwise, has been done to it. The deposit of the unit plan represented a form of development of the subleased land. Its impact should have no part to play in an undeveloped freehold land valuation. The contention that the sublease requires a valuation of the current freehold market undeveloped value of a stratum estate of leasehold is a contradiction in terms and incapable of competent instruction to a valuer.
Discussion
[29]The landlord accepts guidelines four, five and six weigh in favour of granting leave. It submits that guidelines seven (whether the contract provides for the award to be final and binding) and eight (whether the dispute is an international or domestic one) are not relevant for consideration in the circumstances of this case. We agree.
As noted above, the sole issue on this appeal is whether the Judge was right to find the tenant’s argument (on the construction of the sublease) not strongly arguable.
Principles of interpretation
We start with the correct approach to interpretation of the sublease. Contractual interpretation was the subject of a comprehensive survey in the recent decision of the Supreme Court in Bathurst Resources Ltd v L & M Coal Holdings Ltd.[30] The essential difference between the reasoning of the Supreme Court and the Court of Appeal in that case related to the admissibility of extrinsic evidence, this Court having preferred a more conservative approach to its receipt for the purposes of interpretation (in contrast to rectification).[31] But the essential principles guiding the primary task of construing the contract itself are reasonably well settled.
[30]Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85.
[31]See generally David McLauchlan “A new conservatism in contract interpretation?” [2020] NZLJ 273 and 312; and David McLauchlan “The lottery of contract interpretation” [2021] NZLJ 256 and 295.
In this appeal extrinsic evidence was put to one side. The tenant was critical of use made by the expert of a prior agreement to sublease and argued we should disregard it. As it happens, we have not found it necessary to have regard to that instrument in any case, the meaning of the sublease being apparent from its own terms and its general context. The prior agreement to sublease does not add materially to that.
In Firm PI 1 Ltd v Zurich Australian Insurance Ltd the Supreme Court said (in a passage also approved in Bathurst) that the proper approach to be taken is:[32]
… an objective one, the aim being to ascertain “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”.
The “background” is itself not conceptually limited, but is restricted to that which “a reasonable person would regard as relevant”.[33]
[32]Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60] per Winkelmann CJ and Ellen France J; and Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 30, at [43].
[33]Firm PI 1 Ltd v Zurich Australian Insurance Ltd, above n 32, at [60] per Winkelmann CJ and Ellen France J.
That modest restriction is significant here. Detail is important, but the objective observer will be concerned first with understanding the big picture. And she will keep that picture in mind when descending into the detail.
Perhaps the most important passage in Bathurst is this:[34]
The objective approach as articulated in Firm PI is one grounded in the policy objectives identified above: the desirability of providing the certainty needed to facilitate the efficient conduct of commerce; of holding people to the bargains they make; and of supporting access to justice through the efficient and just conduct of proceedings. Giving primacy to the written words of the agreement accords with the policy of providing commercial certainty. It also recognises that since the written contract contains the words the parties chose to record their agreement, the language used to do so has to be important. But by allowing a contextual reading of those words, the Firm PI approach recognises both that words have to be read in context and that the promotion of commercial certainty should not be allowed to defeat what the parties actually meant by the words in which they recorded their agreement. The objective approach to this contextual assessment is a legal construct designed as the best way of reliably determining the true agreement as recorded in the words of the contract. It rejects the parties’ subjective evidence of intent as irrelevant to what both parties meant and as generally unreliable. Rather, the court (embodying the reasonable person) assesses the evidence reasonably available to both (or all) of the parties at the point of contract which could bear upon the meaning of those words.
Context
[34]Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 30, at [46].
With that in mind, we turn then to the background context in this case. We have set that out at [5]–[18] above, and will not repeat those matters here. But the objective observer would also bear in mind that we are dealing with a long-term contract, lasting up to 40 years. Further that it involves the sublease of land only — that is, a ground lease — the buildings being constructed by, and remaining the property of, the tenant. The objective observer would note that the landlord is itself a lessee under a lease of the freehold land from the Trust Board; the astute observer would bear that in mind in relation to the likely intent of the landlord in entering the sublease, and would remind herself that the tenant knew that status also.
The meaning of cl 4.2 of the sublease
Turning then to the contract itself, we make five points.
First, the objective observer would note that “Land” is defined twice, as we noted at [14] above. It is not suggested by either counsel that the two definitions are effectively identical; they are not. The definition in recital B focuses on the Land as that “part of the Headlease Land as more particularly described in the First Schedule”; it suggests the “Land” is the relevant physical part of the headleased Land. The definition in the First Schedule defines it as a leasehold estate by reference to certain parts of the unit plan. The latter is more open to the interpretation being advanced by the tenant than the former is.
We do not accede to the tenant’s argument that the definition in recital B should simply be set to one side, on the basis that the recitals are not within the “operative part” of the sublease. The recitals in this contract are more than a mere aid to interpretation; as Mr Davies had to acknowledge, they also expressly define some important terms undefined elsewhere: “the Headlease” and “the Headlease Land”. Alongside those is the first definition given to the “Land”, the subject of the demise under the sublease. As Sir Kim Lewison has pointed out, a number of the older authorities diminishing the interpretive significance of recitals can no longer stand in light of the greater reception given to context and background.[35] Recitals can provide a valuable insight into common intention, so long as the objective observer bears in mind that, in that respect, they are inevitably an incomplete account.
[35]Kim Lewison The Interpretation of Contracts (7th ed, Sweet & Maxwell, London, 2021) at 619.
Here, the significance of this double definition is itself twofold. One is that it undercuts the exclusive emphasis the tenant places on the First Schedule definition (which is said then to import unit plan encumbrances impairing value). The other is that it would cause the objective observer to ask herself, “if there is this uncertainty in the expression ‘Land’, then what effect were the parties trying to achieve by using it in cl 4.2.1?” We turn now to that.
Secondly, we think the tenant’s focus on definition is apt to distract. For reasons just mentioned, the First Schedule definition offers no definitive conclusion. But more fundamentally, we think the approach is excessively literal in the face of inherent uncertainty, reminding ourselves that as Lord Hoffman observed in Investors Compensation Scheme Ltd v West Bromwich Building Society:[36]
The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.
Because of the double definition, that remains the task here. The First Schedule definition does not trump the recital definition. But even if it did, and the recital definition faded from view, the application of the First Schedule definition in the context of cl 4.2.1 does not slot in fully formed and instantly meaningful to an interested observer. Construction is still required, against the parties’ inferred common intention. We now pursue that exercise.
[36]Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 913.
Here, the “Land” defines the demise. The objective observer would say, of course, the subject of the demise is a leasehold estate. And that leasehold estate is, also of course, subject to a unit title development, with the estate subdivided accordingly. The demise does not include the common property owned by the body corporate established as part of the associated unit title development (but which unit holders are entitled to access, and for which they must pay rent on a proportional basis — here under cl 4.2.2 of the sublease). All this is tolerably obvious. It is the business of cl 2.1, the demise clause. But it is not really the business of cl 4.2, which is a rent-setting clause.
Looking at cl 4.2, the objective observer would note that the rental formula is set on the basis of “9% per annum of the current freehold market undeveloped block value (as defined in the Headlease)” of the items then identified in cls 4.2.1 and 4.2.2. The formula requires the valuer to find the “current freehold market undeveloped block value” of those two items. The question, then, is what the intended character or function of those items is. A subdivided area, as the landlord says? Or a subdivided estate, as the tenant says?
One thing seems likely: that the function each item in cls 4.2.1 and 4.2.2 serves is likely to be the same, as each has to be valued according to its current freehold market undeveloped block value. The function of cl 4.2.2 is very plainly to define location and extent (that is, the area) of the common property. The objective observer would then be bound to ask why the function of cl 4.2.1 would be any different? Why would the parties have intended that difference? And how that would work in practice? The difficulties perpetrated by these questions tend to suggest that the reference to the “Land” in cl 4.2.1 serves to identify that part of the relevant headleased land required to be valued (as if it were freehold land) in addition to the area of common property to be valued under cl 4.2.2. It does not impose the prima facie perverse task of applying a freehold value to a leasehold estate.
Thirdly, we have been here before. The rent-setting formula in cl 4.2 was considered by Gordon J in her 2017 judgment involving the same parties.[37] There the tenant was seeking to advance a “pass-through” argument to the effect that the cl 4.2 rent review simply piggy-backs on the headlease rent review. The Judge summed up the tenant’s argument in these terms:[38]
[The tenant] 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.
To be clear: in 2017 the tenant argued that cl 4.2 worked by summing the physical areas of the subleased land in cl 4.2.1 and the (pro rata proportion of) the common property in cl 4.2.2.
[37]Restaurant Brands Ltd v QST Ltd, above n 4.
[38]At [18] (emphasis added and footnote omitted).
Gordon J rejected the tenant’s pass-through argument. She said:[39]
… 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 [the landlord’s] submission that the term is effectively defined in cl 3.3 of the headlease.
The Judge’s analysis focused very much on cls 4.2.1 and 4.2.2 furnishing the land areas to be valued under cl 4.2:[40]
This interpretation does not, as [the tenant] 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 [the landlord’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. In my view, that interpretation is not only available but is the natural and ordinary meaning of cl 4.2.
[39]At [19].
[40]At [20] (footnote omitted).
Although Gordon J rejected the pass-through argument (which would have created a valuation margin in favour of the tenant), the common supposition underlying the arguments of both parties was that cls 4.2.1 and 4.2.2 served to identify the physical areas of land (by exact location and area) to which the rental formula in cl 4.2 must apply. That analysis underpinned, and was integral to, the decision of the Judge to answer the question of law before her in the negative. The judgment was not appealed to this Court. We do not think it is open to the tenant to now attack that reasoning collaterally, and in terms at odds with its argument at the time.
Fourthly, we think the objective observer might have some difficulty reconciling the argument now made by the tenant not only with the argument it made in 2017, but more particularly with the implication of the word “undeveloped” in cl 4.2. The expert considered the purpose of the formula in cl 4.2 was to derive the value of the underlying land free of the impact of any benefit or detriment attributable to the parties’ capital expenditure. As the expert put it, “[t]he inclusion of a direction to the valuer to assess the undeveloped freehold block value is decisive against [the tenant’s] proposition.” The usage limitations the tenant seeks to exploit are inherent in the leasehold estate as a consequence of the unit title subdivision. However, in this instance in agreement with Mr Davies, we accept it is at least arguable whether the unit title subdivision amounts to a “development” for the purposes of cl 4.2. That argument would matter if the function of cl 4.2.1 went beyond defining the location and area of land. But we have concluded it does not.
Finally, and reverting to a contextual point we made earlier at [49], the objective observer would bear in mind that the landlord under the sublease is also a tenant under the headlease. In short, the landlord stands between the rent reviews under each instrument. The rent review dates are identical, and the rent review formula is essentially the same, save for a three per cent margin protecting the landlord under the sublease. As the expert observed, that suggests an objective of symmetry between the two instruments, “requiring a unitary approach to both valuation exercises on the shared premise of assessing only the undeveloped freehold value of the subject leased land”. We agree. An objective observer would, we think, be comprehensively puzzled at the potential impairment to the margin, and risk faced by the landlord, by the valuation of different subjects.
Conclusion
The expert characterised the tenant’s argument that the valuer should assess the freehold value of a leasehold estate — impaired as to value by development restrictions imposed under the unit plan subdivision — as an oxymoron. We agree; it is the consequence of a too-literal application of a defined term where doubt underlies the definition (because of double definition) and context demands analysis of the function of the words to resolve their meaning. It is here illogical to value the component parts of cl 4.2 — cls 4.2.1 and 4.2.2 — differently. It is also economically illogical, as we have just noted. The objective observer would be compelled to conclude that those component parts both define area, not a leasehold estate in one instance and a physical area in the other. In the terms laid down by Bathurst and Firm PI, that is what the parties actually meant by the words in which they recorded their agreement.
We therefore consider the expert was clearly right to conclude that cl 4.2 requires the valuer to assess the freehold value of the underlying land in its bare and undeveloped state, having regard to the exact locations and areas of the land identified in cls 4.2.1 and 4.2.2. We agree with Mr McEntegart’s submission that encumbrances on the leasehold estate attributable to the unit plan development do not form any part of that exercise. They are inconsistent with the natural and ordinary meaning of the words, and the evident economic objective of the parties inferred from the headlease and sublease, read together.
The argument advanced for the tenant is ingenious. But in agreement with the Judge below, we consider it plainly wrong and not strongly arguable. It should not be given leave, and the award should stand.
Result
The appeal is dismissed.
The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Meredith Connell, Auckland for Appellant
Thompson Blackie Biddles, Auckland for Respondent
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