suoement Wo. wt. Le. IN THE FEDERAL RT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION No VG 457 of 1994 BETWEEN: NEIL JOHN YOUNG, ALLAN JAMES MYERS and JENNIFER CLAIRE 0' CALLAGHAN Applicants ~and- PIONEER NCRETE (VI PTY LT Respondent PIONEER NCRETE I PTY LT Cross Claimant -and- NEIL HN YOUN ALLAN JAMES MYER: nd ENNIFER IRE QO' LAGHAN Cross Respondents Coram: Olney J Place: Melbourne Date: 26 March 1996 REASONS FOR JUDGMENT In this proceeding declaratory relief is sought in relation to the proper construction of a lease of commercial premises. The facts are not in dispute. On 1 January 1990 Catchklin Pty Ltd (Catchklin) and the respondent (Pioneer) executed a lease (the lease) of the first floor, 1183.Toorak Road, Hartwell (the premises). The form of the lease was negotiated between Catchklin and Pioneer, each of whom were represented by solicitors in the - 2 _ negotiations. In July 1990 the applicants purchased the premises from Catchklin and became entitled to the reversion of the premises. The lease in paragraph 2(a) contains a covenant by the lessee to pay to the lessor during the continuance of the term of the lease the rent set forth in the schedule to the lease. The relevant item in the schedule provides for an annual rental of a specified sum which is subject to review as stipulated in special condition 3. The special conditions and schedule form part of the lease (paragraph 12). The full text of special condition 3 is set out in the schedule to these reasons. In respect of the 18 month periods commencing on 1 July 1991 and on 1 January 1993, the rent was determined in accordance with special conditions 3(a), (b) and (c) by the applicants giving a lessor's notice to Pioneer. Pioneer did not dispute the amount set out in the lessor's notice on these occasions. The applicants did not give a lessor's notice or otherwise initiate a rent review in respect of the 18 month period commencing 1 July 1994. By letter dated 21 October 1994, Pioneer stated that a rent review in respect of special condition 3(d) was applicable at 1 July 1994 and that such review was to the "current open market rent" at that date. Pioneer sought agreement as to -~3- the current open market rent to apply for the 18 month period commencing on 1 July 1994. In correspondence between October and December 1994 the parties debated the entitlement of Pioneer to initiate a rent review for the 18 month period commencing on 1 July 1994. The date 1 July 1994 is the rent review date which is 54 months from the commencing date of the lease (special condition 3(d)(i)). The applicant's contentions can be summarised as follows: 1. The rent payable under the lease is that which is fixed by the fourth part of the schedule subject to review as stipulated in special condition 3. 2. Special condition 3 is the only provision of the lease which provides for the review of rent. Paragraph 3(d) must be construed as part of the whole procedure and not in isolation. 3. Initiation of the rent determination procedure under paragraphs 3(a) to (f) is permissive at the option of the lessor. That option is to be exercised by the service or withholding of a lessor's notice. 4. If a rent determination is initiated by the lessor in respect of any rent review date, the rent for the next 18 month period is the amount specified in the lessor's notice or, if there is disagreement, either -4- (a) the amount determined by an independent valuer as the current open market rental value or (b) (i) in cases to which paragraph 3(d) does not apply, the amount of the rent for the preceding 18 months plus 12.32% of that amount; (ii) in cases to which paragraph 3(d) applies, the amount of the rent for the preceding 18 months with no additional increase of 12.32% whichever is the greater. 5. The effect of paragraph 3(d) is to provide an exception on the dates therein specified to a mandatory increase of 12.32%. It does not alter the machinery set out in paragraphs 3{a), (b) and (c) nor does it vary the requirement that the rent in any event shall not be less than the rent for the preceding 18 months. If, contrary to the applicant's primary contentions, the rent must be reviewed at the expiry of the periods referred to in paragraph 3(d), or if either the lessor or the lessee may instigate a review of the rent at the expiry of those periods, the rent determined under paragraph 3(d) must in any event be not less than the rent payable for the preceding 18 months. The respondent's primary contentions are: (a) At each of the rent reviews specified in paragraph 3(d) the rent is to be fixed at the current open market rent which if not agreed between the parties is to be determined by an independent valuer. -~5- (b) The rent reviews provided for in paragraph 3(d) are mandatory and are not dependent upon whether or not the lessor gives notice in writing. (c) Upon the assumption that paragraph 3(d) does not provide any machinery for the appointment of an independent valuer then - i) if the lessor fails to co-operate with the lessee to appoint a valuer, it would be in breach of an implied term to the effect that both parties would do all that is reasonably necessary in order to procure the appointment of a valuer; and ii) in those circumstances the Court would determine what was the current open market rent. The applicants' counsel prefaced his argument by rehearsing a number of relevant and well established propositions, notably: 1. In the construction of contracts the intention of the parties is the meaning of the words they have used. There is no intention independent of that meaning. 2. To arrive at the true interpretation of a document a clause must not be considered in isolation, but in the context of the whole document. 3. If a clause in a contract is followed by a later clause which destroys the effect of the former, the latter is to be rejected as repugnant and the former prevails unless the latter can be read as qualifying the former in which - 6- case the two are read together and effect is given to both. 4. All parts of a contract must be given effect to where possible and no part of it should be treated as inoperative or surplusage. Counsel referred the Court to authority for each of the above assertions but it is unnecessary to canvass same as there is no contention between the parties as to the validity of any of the propositions stated. The first thing that can be said about special condition 3 is that it is couched in imperative terms. The introductory words leave no doubt as to the parties' intention. The rent shall be reviewed periodically, the first review will take place at the specified time, and the rent for the subsequent periods shall be determined in the manner set out. Taken in isolation, the only conclusion open is that the opening words of special condition 3 indicate an intention that the rent must be reviewed every 18 months and that the reviewed rent must be determined in accordance with paragraphs (a) to (f). Paragraph 3(a) seems to contemplate that the lessor has the option either to give a lessor's notice or to refrain from giving such a notice. The use of the permissive "may" is in sharp contrast with the earlier imperatives. However, I do not think that the lessor does have a discretion to refrain from giving a lessor's notice. The special condition -7- expresses in unequivocal terms that there shall be a review every 18 months and that the determination of the reviewed rent shall be as provided in the various paragraphs of the special condition. It would be entirely inconsistent with the clear words of the opening sentence if paragraph (a) were to be construed as giving the lessor a discretion as to whether or not the rent should be the subject of a new determination. To construe paragraph (d) in the manner advocated by the applicants is to isolate it from its full context. Paragraph (d) would be repugnant to the opening passage of special condition 3. Furthermore, there is no specific provision in the lease (or the special conditions) that applies in the case that no lessor's notice is given. I do not accept the proposition that if no notice is given the rent remains unchanged, a view which both parties seem to share. But it is clear from paragraph 2(a) of the lease and the fourth part of the schedule that the lessee's obligation is to pay the agreed rent subject to review as stipulated in special condition 3. Having regard to the whole of the context in which the words appear, I am of the opinion that the opening words of paragraph 3(a) namely "The lessor may at any time by noticing (sic, notice) in writing ... fix the rent" indicate that the lessor has a discretion as to when the notice is given, but they do not otherwise contradict or qualify the primary requirements of special condition 3 that the rent shall be reviewed at the end of each 18 month period and that the rent for each successive 18 month period after - g8- the initial 18 months shall be determined in accordance with paragraphs (a) to (f). The only way that the process for determining rent for the purpose of the mandatory 18 monthly reviews can be initiated is by the lessor giving a notice under paragraph 3(a). In my opinion the lease imposes an obligation on the lessor to give a lessor's notice to facilitate each review. In a case in which the lessee has disputed the amount fixed by the lessor in a lessor's notice and the parties after consultation are unable to reach agreement as to the rent, the current open market value is to be determined by an independent valuer (para 3(c)). All that having occurred, the lease then provides: AND the rent payable hereunder shall be the amount determined by any such valuer as the current open market rental value. In any event such rent shall not be less than the rent payable for the immediately preceding eighteen (18) month review period PLUS an amount equal to twelve point three two per centum (12.32%) of the total rent payable for the immediately preceding eighteen (18) month review period subject to sub-clause (d) hereof. Ignoring for the present the final words of this passage (i.e. "subject to sub-clause (d) hereof") the effect of the valuation process is to ensure that as a minimum the rent for the subsequent 18 month period will be the current rent plus 12.32%, which is entirely consistent with paragraph 3(a) which requires the lessor to fix the rent for the renewal period at not less than that sum. ~9g- What then is the effect of the final words of paragraph 3(c) "subject to sub-clause (d) hereof"? The applicants say that they qualify the words - Plus an amount equal to 12.32% of the total rent payable for the immediately preceding 18 month review period so that in respect of the reviews to take place on the dates mentioned in paragraph 3(d) the rent for the subsequent 18 months will be the greater of the current open market rental value determined by an independent valuer, and the rent payable for the preceding 18 months. For the respondent it is said that the final words of the paragraph qualify the whole of the last sentence and have the effect that in respect of the periods to which paragraph 3(da) applies the final sentence of paragraph 3(c) does not operate and the rent payable would be the amount referred to in the penultimate sentence of paragraph 3(c) namely the amount determined by the valuer as the current open market rental value and this is entirely consistent with the provisions of paragraph 3(d). But for the words "with no additional increase of 12.32%" at the end of paragraph 3(d) there would be little basis to support the applicants' argument on this issue. What the applicants say however is that the opening words of the final sentence of paragraph 3(c) "In any event" prevail not only in the context of paragraph 3(c), but also over the provisions of paragraph 3(d) so that paragraph 3(d) should be read as if it provided for a rental - -~10- at the current market rental or in any event an amount not less than the rent payable for the immediately preceding 18 month review period with no additional increase of 12.32%. It is said that to construe paragraph 3(d) otherwise would be to render the final words "with no additional increase of 12.32%" mere surplusage. But the same position prevails on the basis of the construction advocated by the applicants. If the rent payable for the periods referred to in paragraph 3(a) is to be the current open market rent as determined by an independent valuer or in any event an amount not less than the rent payable for the immediately preceding 18 month review period, the addition of the words "with no additional increase of 12.32%" add nothing. Whichever way the matter is approached, these words appear to be mere surplusage. And if they are surplusage they must be treated as such. There is in my opinion no reasonable construction of special condition 3 which can attribute any effect to those words. The general principle that all parts of a contract must be given effect to and should not be treated as inoperative or surplusage is subject to the qualification that it is possible to give a meaning to the words in question. In this case the words in question serve no purpose. They have no bearing upon the rights or obligations of the contracting parties and should be treated as having no effect. The preferred construction of the final sentence of paragraph 3(c) is that advocated by the respondent. The whole sentence -1.1- should be understood as being qualified by the last 5 words. The sentence has no application in respect of a rent review for those periods specified in paragraph 3(d). On those occasions the provisions of paragraph 3(d) prevail. On this basis, paragraph 3(d) is not repugnant to paragraph 3(c) and it is possible for both provisions to be given effect to. The conclusions I have reached are that upon the proper construction of the lease: 1. The rent payable under the lease must be reviewed in respect of each successive 18 month period of the term or any renewal thereof; 2. The only method of reviewing the rent payable under the lease is by observing the procedure set out in paragraphs (a) to (f£) of special condition 3; 3. The lessor is obliged to give a "lessor's notice" in respect of each rent review date but such notice may be given at any time; 4. If the lessee does not dispute the amount of rent fixed by the lessor in the lessor's notice, the rent payable for the next ensuing 18 month period is the amount fixed by the lessor; 5. If the lessee disputes the amount of rent set out in the lessor's notice, in the absence of agreement between the lessor and lessee, (i) the rent for each review period other than those referred to in paragraph 3(d) is the current open market rent as determined by an independent valuer (3) ~12- or the rent payable for the preceding 18 month review period plus 12.32% thereof whichever is the greater; the rent for the periods referred to in paragraph 3(d) is the current open market rent determined by an independent valuer. THE_SCHEDULE The rent shall be reviewed at the end of each eighteen months of the term hereby created and any renewal thereof ("Rent Review Date") the first of such reviews will take place eighteen months from the commencing date and the rent for each successive eighteen month period of the term and any renewal thereof shall be determined as follows: (a) The lessor may at any time by noticing (sic) in writing ("the lessor's notice") fix the rent at an amount which in the lessor's opinion would be the current open market rent of the premises as at the rent review date but no less than the rental payable by the lessee for the immediately preceding review period plus twelve point three two per centum (12.32%). (b) The amount as fixed shall be the rent payable by the lessee for the next ensuing eighteen month period unless within fourteen (14) days of the lessor's notice the lessee notifies the lessor in writing that the lessee disputes the amount fixed by the lessor. (c) If the lessee disputes the amount set out in the lessor's notice and if the parties after consultation, are unable to reach agreement as to the rent payable within thirty (30) days after the lessor's notice the current open market rent for the demised premises shall be determined by an independent valuer having not less than five (5) years experience in valuing suburban office space and not less than ten (10) years experience in commercial valuation and whe shall be employed in a practice which is predominantly commercial in nature, such valuer to be appointed by the President for the time being of the Australian Institute of Valuers (Victorian Division) at the request of the lessor PROVIDED THAT: i) any determination by any such valuer shall be made as an expert and not as an arbitrator; ii) all costs incurred with the determination of the rent shall be paid by the lessee and the lessor equally; dii) the lessor and the lessee shall have the opportunity to make written submissions to any such valuer, such written submission or submissions to be made within one (1) month of the appointment of any such valuer; AND the rent payable hereunder shall be the amount determined by any such valuer as the current open market rental value. In any event such rent shall not be less than the rent payable for the immediately preceding eighteen (18) month review period PLUS an amount equal to twelve point three two per centum (12.32%) of the total rent payable for the immediately preceding eighteen (18) month review period subject to sub- clause (d) hereof. (a) (£) Heard: Place: With respect to the rent reviews to take place on the following rent review dates: i) fifty four (54) months from the commencing date; ii) one hundred and eight (108) months from the commencing date; iii) one hundred and sixty two (162) months from the commencing date; and if the option to renew this lease pursuant to special condition 4 hereof is exercised by the lessee; iv) two hundred and sixteen (216) months from the commencing date; the rental shall be the current open market rent as agreed between the parties and failing agreement as determined by an independent valuer at the current open market rental with no additional increase of 12.32%. For the purposes of this special condition (3) and special condition (4) the expression "current open market rental value" shall mean the current annual open market rental value of the demised premises based on a lease (exclusive of any incentives and allowances including but not limited to rent-free periods of occupancy) between a willing lessor and a willing lessee for the highest and best use to which the demised premises can be put including all car parking facilities and not necessarily the permitted use herein but taking to account of any goodwill attributable to the demised premises by reason of any trade or business carried on therein by the lessee but taking account of the naming rights (if any) of the demised premises granted to the lessee and in all other respects (except as to rent payable) on the terms covenants and conditions of this lease. Should the amount of the rent for any period not be so determined by the appropriate rent review date, the lessee shall pending determination thereof pay rent at the rate specified in the lessor's notice referred to in special condition 3(a) hereof but subject to the revision thereof and upon the rent being determined hereunder any necessary adjustment of rent calculated from the rent review date shall be paid forthwith by the lessee to the lessor or reimbursed by the lessor to the lessee as the case may be. I certify that this and the preceding 12 pages are a true copy of the Reasons for Judgment of the Honourable Justice Olney Associate: cludes. Ms. KGa Dated: 260, Mack 1946 26 and 27 February 1996 Melbourne Judgment: 26 March 1996 Appearances: Mr K. Hargrave QC with Mr K. Lyons (instructed by Mahony Galvin Rylah) appeared for the applicants. Dr C.L. Pannam QC with Mr R.J. Weber (instructed by Cornwall Stoddart) appeared for the respondent.