Domino’s Pizza Enterprises Limited v Seldex Pty Ltd [2009] QSC 137

SUPREME COURT OF QUEENSLAND CITATION: Domino’s Pizza Enterprises Limited v Seldex Pty Ltd [2009] QSC 137 PARTIES: DOMINO’S PIZZA ENTERPRISES LIMITED ACN 010 489 326 (applicant) v SELDEX PTY LTD ACN 010 451 555 (respondent) FILE NO/S: BS3958 of 2009 DIVISION: Trial Division PROCEEDING: Application ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 19 June 2009 DELIVERED AT: Brisbane HEARING DATE: 21 May 2009 JUDGE: Martin J ORDER: Declare that: (a) the Applicant has validly exercised the option to renew pursuant to clause 17.1.1 of the Lease between the Applicant and the Respondent dated 3 September 1998, Registration Number 703035592 (“the Lease”) in respect of the premises described as Lot 41 on RP 26129 County of Stanley Parish of Kedron Title Reference 16783048 (“the Premises”); (b) by its valid exercise of the said option, the Applicant acquired an equitable leasehold interest in the Premises for the option period stated in the Lease and otherwise in accordance with the terms set out in the Lease; (c) the Applicant is entitled to a further registered lease in accordance with clauses 17.1.3 to 17.1.7 inclusive of the Lease; and (d) the rent payable by the Applicant for the Lease Year commencing 1 September 2008 is $60,534.46 plus GST. CATCHWORDS: CONTRACTS – GENERAL CONTRACTUAL -- 1 of 11 -- 2 PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – OTHER MATTERS – where parties were subject to lease agreement – where lease includes option to renew – where lease makes provision for market rent review – where rent review provisions include time limits for giving notice – where applicant gave valid notice of intention to renew – where landlord did not give prior notice of market rent review - whether landlord required to give notice of market rent review prior to tenant’s exercise of option – whether subsequent notice of market rent review valid – whether tenant entitled to a renewed lease without market rent review. Property Law Act 1974 (Qld), s 128 Elderslie Property Investments No 2 Pty Ltd v Dunn [2008] QCA 158 Finch v Underwood (1876) 2 Ch D 310 Health Partners Inc v Gonos & Anor BC 9604995, Supreme Court of South Australia No. SCGRG 1197 of 1996; S5834 Reed v Sheehan (1982) 39 ALR 257 Tri-Star Petroleum Co v GPT Funds Managements Ltd [2009] QSC 13446 COUNSEL: P. Franco for the applicant K. Howe for the respondent SOLICITORS: Dibbs Barker for the applicant JC Lawyers for the respondent [1] The applicant seeks declaratory and other relief in relation to the exercise of an option to renew a lease. The respondent cross-applies for declarations and rectification. Background [2] In September 1998, the respondent (as lessor) and three others entered into a lease (“the lease”) over the premises known as Lot 41 on RP 26129 County of Stanley, Parish of Kedron, Title Reference 16783048 (“the premises”). [3] By two separate agreements in August 1999 and 2000, the lessees of the premises transferred their interests to the applicant (formerly known as ‘Domino’s Pizza Enterprises Pty Ltd’). [4] The lease of the premises was for a term of 10 years, commencing 1 September 2008 and ending on 31 August 2009, with an option to renew. [5] The terms of the option to renew were set out in clause 17.1.1 of the contract, which states: -- 2 of 11 -- 3 17.1. “Option to Renew If the Tenant 17.1.1. not less than three (3) months and now more than six (6) months prior to the expiration of this Lease gives written notice to the Landlord that it wishes to renew this Lease; and 17.1.2. has at all times up to the date of expiration of the term of this Lease complied punctually with its obligations under this Lease; then the Landlord will grant to the Tenant a further lease of the premises on the following conditions: 17.1.3. the term of the further lease will be the period referred to in Item 8 of the Reference Data; 17.1.4. the rent for the first year of the further term will be determined in accordance with clause 3.2.2. 17.1.5. the yearly rent for each rental year during the further term after the expiration of the first rental year of the further term will be determined in accordance with Item 9 of the Reference Data; 17.1.6. the terms and conditions will be the same as the terms and conditions of this Lease except for the changes specified in the Modification Schedule at the end of this clause; and 17.1.7. the Tenant will pay all costs of the landlord including the legal costs of the landlord calculated on a solicitor and own client basis of and incidental to the grant of the new lease. …” [6] Item 8 of the Reference Schedule specified the renewal option was for a term of 10 years, commencing 1 September 2008. [7] Clause 3.2.2 states: 3.2.2. “Reviews to Market The Rent will be further reviewed so that the Rent for the Lease Years commencing on the Market Review dates will be the greater of: 3.2.2.1. the Rent reserved and payable during the Lease Year last concluded; and 3.2.2.2. the market rent for that Lease Year calculated in accordance with clause 3.3.” [8] Item 9 of the Reference Schedule states: -- 3 of 11 -- 4 “The yearly rent for each rental year during the further term after the expiration of the first rental year of the further term will be the yearly rent paid in the previous year increased by three per centum (3%). [9] Item 5 of the Reference Schedule did not specify any Market Review Dates for the initial lease term. Item 10 of the Reference Schedule lists a single Market Review Date for the Option Period as occurring on 1 September 2009, the same date the new lease would commence, if the option to re-new was validly exercised. [10] Clause 3.3 (“Market Rent Reviews”) states: 3.3. “Market Rent Reviews 3.3.1. The Landlord may not less than six months prior to the Market Review Date give written notice to the Tenant of the amount of rent the Landlord believes is the market rent for the Premises as at that Market Review Date. 3.3.2. If the Landlord does not give written notice in accordance with subclause (1) in respect of a Market Review Date the rent payable for the Lease Year commencing from that Market Review Date will be the same rent as was payable in the preceding lease Year increased by 3%. 3.3.3. If the Landlord gives written notice in accordance with subclause (1) the Tenant may give written notice to the Landlord within twenty- one (21) days of the receipt of the Landlord’s notice disputing the Landlord’s assessment of the market rate. …” [11] By notice dated 28 May 2008, the applicant purported to exercise its option to renew. At no time did the respondent give notice of the amount of rent which it believed was the market rent for the premises at market review date. Both parties accept that the form and timing of the applicant’s notice satisfies the requirements of clause 17.1.1. It is further accepted that, throughout the duration of the initial lease term, the applicant punctually complied with all its obligations under the lease (or, at least, that no breach notices were issued pursuant to s128 of the Property Law Act 1974 (Qld)), thereby remaining eligible to renew under to 17.1.2. The only issue in dispute here is the amount of rent payable during the renewed lease term pursuant to cl 3.2.2 and 3.3. The tenant’s application [12] The applicant seeks a declaration that it validly exercised its option to renew and that, by doing so, it acquired both an equitable interest in the premises for the option period and an entitlement to a further registered lease at the rental of $60,534.46 gross plus GST for the lease year commencing 1 September 2008. It arrives at that amount pursuant to clause 3.2.2 (“the rent payable for the Lease Year commencing from the Market Review Date is the same rent as was payable in the preceding Lease Year increased by 3%”). -- 4 of 11 -- 5 The landlord’s response [13] The respondent brought a cross application, seeking an order that respondent be entitled to set rental for the first year of the further lease term in accordance with the Market Rent Review provisions. It also seeks orders to rectify the lease in accordance with this construction. The respondent assesses the market rental for the first year of the further term at $130,000 plus GST. [14] In response to the applicant’s submissions, the respondent submits that clause 17.1.4 should be not be interpreted as incorporating the time limits for notice contained in clause 3.1.1. Instead, it submits that the reference in clause 17.1.4. of the Lease to rental being determined in accordance with clause 3.2.2 relates only to the calculation of the rental amount (pursuant to clause 3.3, as incorporated by clause 3.2.2.2) and not to the notice clause contained in clause 3.3.1. [15] The respondent submits that the requirement to make proposals of market rent for Market Review Dates does not arise until after the tenant has given notice of its election to renew. It says this construction is consistent with the use of the word ‘then’ in clause 17.1 and commercial practice. To hold otherwise, it submits, would produce an ‘absurd’ result. Notice as a condition precedent [16] In attempting to establish that the provision of notice by the applicant of its intention to renew was a condition precedent to the respondent’s obligation to provide notice of market rent review, the respondent relies on a number of authorities, including Health Partners Inc v Gonos & Anor. 1 The renewal clause in question there stated: "That if a renewal period is specified in Schedule XVI hereto then provided that the lessee SHALL HAVE DULY COMPLIED WITH ALL THE COVENANTS, TERMS AND CONDITIONS OF THIS LEASE DURING THE TERM HEREOF AND SHALL NOT HAVE COMMITTED ANY BREACH OR BREACHES THEREOF AND THERE SHALL BE NO SUBSISTING BREACH AT THE TIME and the lessee shall give to the lessor not less than three (3) nor more than six (6) calendar months prior to the date of expiration of the term of this Lease, notice in writing of the lessee's desire to renew the Lease then the lessee shall be entitled to an additional term or terms as set out in Schedule XVI hereto commencing immediately on the expiration of the initial term of this Lease upon and subject to the same covenants terms and conditions as are herein set out except for this right of renewal unless more than one period of renewal is specified in the said Schedule. The rental for the term comprised in the right(s) of renewal shall be determined in accordance with the provisions contained in subcl(d) and subcl(e) of cl3 hereof and Schedule XIX mutatis mutandis. The renewal period specified in Schedule XVI of the Lease is four (4) years." (emphasis in original) 2 1 BC 9604995, Supreme Court of South Australia No. SCGRG 1197 of 1996; S5834. 2 Ibid, at 2. -- 5 of 11 -- 6 [17] In that case, the tenant had failed to comply with the rental obligations contained in the lease agreement. Instead of paying the rental amount owing under the contract, the lessee had paid a lesser amount. It did so with the express consent of the prior landlord. Upon obtaining the freehold interest in the land, the incumbent applicant landlord did not object to the reduced rental payments and, indeed, continued to issue rental invoices and receive rental payments at the reduced amount. When the tenant indicated its desire to renew the lease, the landlord sort to rely on the reduced rental payments as a basis for refusing to grant the renewal, claiming the tenant had breached the rental covenants contained in the lease. The court held, however, that the landlord’s actions constituted a waiver of the lease obligations concerning rental, and the applicant was estopped from relying on the reduced payments as a ground for refusing to grant the renewal. In coming to this conclusion, Matheson J (on appeal) accepted that the requirement to comply with the lease’s terms and provide notice was a condition precedent to the entitlement to the grant of an additional lease term. [18] The decision in Health Partners and other cases referred to therein 3 assist in demonstrating that the requirement to give notice and comply with the lease terms were a condition precedent to the grant of a further lease, but that is all. They do not go to show that such notice and compliance were conditions precedent to the landlord’s obligations concerning rental increases, nor do they establish how rental terms contained in the renewed lease should be construed. In fact, in his reasons, Matheson J expressly notes, albeit with regard to a different question, that “the renewal aspect is separate and distinct from the question of what the landlord can ask in rent”. 4 As such, it may still be possible to find that “while the giving of notice exercising the option may have been a condition precedent to the grant of the option, it was not a condition precedent to the procedures in clause 3.3, which take place during the initial term of the lease”. 5 [19] The question, then, is whether the lease should be interpreted as binding the landlord to time limits associated with a renewed lease before the tenant has given any indication that it intends to renew. Construing the option and rent review provisions [20] In construing the lease provisions, and clause 3.3.1 in particular, one must draw upon the broad principles of construction of contracts. These were clearly articulated by Wilson J in Tri-Star Petroleum Co v GPT Funds Managements Ltd 6 , another case involving notice requirements in a rent review clause: [16] The lease is a contract between two commercially sophisticated parties. The Court's task is to interpret the words they used and to determine their true intent. As Gleeson CJ said of an insurance policy in McCann v Switzerland Insurance Australia Ltd14 — 3 Finch v Underwood (1876) 2 Ch D 310; Reed v Sheehan (1982) 39 ALR 257. 4 At 9. 5 Applicant’s Written Submissions in Reply, [1]. 6 [2009] QSC 13446 -- 6 of 11 -- 7 … [It] … is a commercial contract and should be given a businesslike interpretation.15 Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.16 [17] The Court must begin with the words used by the parties, and seek to ascertain what a reasonable person would have understood them to mean. In Toll (FGCT) Pty Ltd v Alphaharm Pty Ltd17 the High Court said18 — This Court, in Pacific Carriers Ltd v BNP Paribas,19 has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.20 In Watson v Phipps21 the Privy Council said22 — The function of a court of construction is to ascertain what the parties meant by the words which they have used. For this purpose the grammatical and ordinary sense of the words is to be adhered to, unless they lead to some absurdity or to some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified so as to avoid that absurdity or inconsistency, but no further. In Ryledar Pty Ltd v Euphoric Pty Ltd23 the New South Wales Court of Appeal reviewed relevant authorities about the interpretation of commercial contracts. Tobias JA (with whom Mason P and Campbell JA agreed) approved this passage from the decision of the trial judge— 24 -- 7 of 11 -- 8 31. However, that does not mean that when the Court begins the task of construction it puts the words of the document aside and endeavours first to ascertain the commonly known factual context and purpose of the transaction, often only by resolving a strenuous contest between the parties. The Court does not, once it has found the commonly known factual context and purpose, then look at the words of the contract and, if they do not readily accommodate the context and purpose so found, force them to do so by a process of interpretation. 32. When the Court is construing a commercial contract, it begins with the words of the document: there it often finds expressed the factual context known to both parties and the common purpose and object of the transaction. But the court is alive to the possibility that what seems clear by reference only to the words on the printed page may not be so clear when one takes into account as well what was known to both parties but does not appear in the document. When that is taken into account, the words in the contract may legitimately have one or more of a number of possible meanings. It is then the Court’s task to identify which of the possible meanings represents the parties’ contractual intention. 33. However, when a party to a contract argues that the known context and common purpose of the transaction gives the words of the contract a meaning which, by no stretch of language or syntax they will bear then, in truth, one has a rectification suit, not a construction suit. [21] Further assistance can be garnered from the judgment of Muir JA in Elderslie Property Investments No 2 Pty Ltd v Dunn7: “[20] The object of contractual construction is to “ascertain and give effect to the intentions of the contracting parties.”2 Those intentions, to be determined objectively, are 'what a reasonable person would have understood [the words of the contract] to mean.'3 And to ascertain that “normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.”4 Such a reasonable person is one who has all the background knowledge which would reasonably have been available to the parties in the situation which they were in at the time of the contract.5 The Deeds, as commercial 7 [2008] QCA 158. -- 8 of 11 -- 9 contracts, “should be given a businesslike interpretation”. The interpretation of each Deed requires “attention to … the commercial circumstances which the document addresses, and the objects which it is intended to secure.”6 Commercial contracts are to be construed with a view to making commercial sense of them. [21] In Wickman Machine Tool Sales Ltd v L Schuler AG7 Lord Reid said: The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear. [22] In Antaios Compania Naviera SA v Salen Rederierna AB,8 Lord Diplock expressed stronger views concerning the imperative to make business sense of commercial contracts, stating: If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.” [22] The foregoing principles have application to clause 3.3.1 and to the construction of the lease generally. Commercial purposes [23] The respondent argues that the landlord was not required to give notice of what the future market rental would be, before the option to renew was available to be exercised. It would not, it was submitted, make commercial sense to require a landlord to give that notice or face the prospect of there being no review to market in a lease which would stand for 20 years. [24] It is necessary, then, to examine the true effect of the various clauses. [25] These clauses must be read together in order to determine their meaning. In summary form they provide: (a) Not less than six months before the Market Review Date the landlord may give notice of what it believes the market rent is at the Market Review Date. (b) The tenant can do two things in response to that: (i) Do nothing and, thus, accept that level of rent if it renews, or (ii) Dispute the assessment and, thus, trigger the arbitration mechanism which will determine the market rent. (c) If the landlord does not give notice of what it believes the market rent is then the rent for the first year after the Market Review -- 9 of 11 -- 10 Date will be the rent for the year preceding the Market Review Date increased by three per cent. [26] That series of steps is the only provision the lease makes for any review to market. It casts the onus on the landlord to act or face the consequences. [27] The important factor in this process is that it contemplates that a tenant can know what the market rent is before exercising an option to renew. The timing suggests that that was what was in contemplation. This is just as commercial a purpose as allowing a rent review arbitration to occur after the tenant has renewed the option. Absurdity? [28] Counsel for the lessee submitted that the interpretation for which the lessor contends would lead to absurdity, namely that: “[B]efore the condition precedent is satisfied and a tenant has exercised the option to new, the Landlord must give notice of what the market rental will be or face the consequences that there will be no market review. In this case, it leads to the unreasonable and absurd result that potentially for a 20 year period there will be no market review.” 8 [29] Against this, counsel for the lessee submits: “24. Fifth, the timetable set out in clause 17.11 (which requires the tenant to give between three and six months’ notice of the exercise of the option) dovetails nicely with clause 3.3.1, which requires the landlord to give at least six months’ notice of the market rent that the landlord believes applies, failing which an automatic 3% ratchet applies to the rent. 25. This procedure enables the tenant to exercise the option on an informed basis. It is to both sides’ benefit for the tenant to know where the landlord stands before it makes its election, as this provides the parties with an early opportunity to avoid a dispute and ensure that the tenant does not commit itself to a lease that it cannot afford.”9 [30] That does not, to my mind, evidence an absurd result. The landlord need only give notice of what it believes the market rent will be. It is not required to engage in any unnecessarily onerous activities in order to do that. The construction [31] The terms of the lease are clear – if the landlord wants to have the rent reviewed to market it must take steps by a particular time. There is no other mechanism available under the lease to review the rent in that manner after the tenant has given notice of renewal. This lease may be more “tenant friendly” 8 Respondent’s Submissions, filed 21 May 2009, para [24]. 9 Applicant’s Submissions, filed 21 May 2009 -- 10 of 11 -- 11 than other commercial leases but that, in itself, is no reason to abandon the plain words of the lease. Rectification [32] The respondent sought an order for rectification but it was agreed by the parties that any such application should await the findings on construction. Orders [33] I make the following declarations: (a) the Applicant has validly exercised the option to renew pursuant to clause 17.1.1 of the Lease between the Applicant and the Respondent dated 3 September 1998, Registration Number 703035592 (“the Lease”) in respect of the premises described as Lot 41 on RP 26129 County of Stanley Parish of Kedron Title Reference 16783048 (“the Premises”); (b) by its valid exercise of the said option, the Applicant acquired an equitable leasehold interest in the Premises for the option period stated in the Lease and otherwise in accordance with the terms set out in the Lease; (c) the Applicant is entitled to a further registered lease in accordance with clauses 17.1.3 to 17.1.7 inclusive of the Lease; and (d) the rent payable by the Applicant for the Lease Year commencing 1 September 2008 is $60,534.46 plus GST. -- 11 of 11 --