Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12

HIGH COURT OF AUSTRALIA

KIEFEL, BELL, GAGELER, NETTLE AND GORDON JJ

ECOSSE PROPERTY HOLDINGS PTY LTD APPELLANT

AND

GEE DEE NOMINEES PTY LTD RESPONDENT

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12 29 March 2017 M143/2016

ORDER

1. Appeal allowed with costs.

2. Set aside orders 2 to 5 of the Court of Appeal of the Supreme Court of Victoria made on 4 March 2016 and in their place order that the appeal to that Court be dismissed with costs.

On appeal from the Supreme Court of Victoria

Representation

M J Colbran QC with G D Bloch for the appellant (instructed by Goldhirsch & Shnider)

N C Hutley SC with A Hanak for the respondent (instructed by SBA Law)

Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd

Contract – Construction and interpretation of contracts – Long-term lease – Standard form contract – Where parties entered lease because unable to effect sale and purchase of land due to planning restrictions – Where standard form lease amended by parties – Where clause pertaining to payment of rates, taxes, assessments and other outgoings ambiguous – Whether parties intended lease to resemble sale and purchase of land – Whether lessee liable to pay all rates, taxes, assessments and other outgoings or only liable to pay those payable in lessee's capacity as tenant.

Words and phrases – "commercial purpose and objects", "commercial sense", "deletions from standard form contract", "in respect of the said premises", "payable by the tenant", "reasonable businessperson".

KIEFEL, BELL AND GORDON JJ. The facts surrounding the making of the lease that is the subject of this appeal and its terms are set out in Gageler J's reasons. The original lessor was the owner of land which included the land the subject of the lease. Had it not been for town planning restrictions, a subdivision of that land would have taken place and the land the subject of the lease sold to the original lessee. When the parties were unable to achieve a sale and purchase they entered into a lease for a long term, ninety-nine years. The rental for the entire term was paid on entry into the lease. The issue on which the Court of Appeal of the Supreme Court of Victoria divided concerned the significance of cl 13 of the lease to the construction of an ambiguous provision governing liability for the payment of rates, taxes and other outgoings. Clause 13 contained the following information: "The parties acknowledge that it was the intention of the Lessor to sell and the Lessee to purchase the land and improvements hereby leased for the consideration of $70,000.00 and as a result thereof the parties have agreed to enter into this Lease for a term of ninety-nine years in respect of which the total rental thereof is the sum of $70,000.00 which sum is hereby acknowledged to have been paid in full." It is common ground that the consideration there mentioned was more or less equivalent to the market value of the land. The clause on which the appellant relied in bringing the proceedings in the courts below as lessor, for recovery of rates, taxes and other outgoings, from the respondent as lessee, is cl 4, which is in these terms: "AND [the Lessee] also will pay all rates taxes assessments and outgoings whatsoever excepting land tax which during the said term shall be payable by the Landlord or tenant in respect of the said premises (but a proportionate part to be adjusted between Landlord and Tenant if the case so requires)." On the appellant's case, cl 4 obliges the lessee to pay all rates, taxes, assessments and outgoings in respect of the land. On the respondent's case, cl 4 obliges the lessee to pay only those imposts that are levied on it in its capacity as the tenant, leaving the lessor liable to pay those imposts that may be levied on it as owner of the land. For the reasons to be given, the appellant's construction is to be preferred and it follows that the appeal must be allowed. The appellant's argument focuses on cl 13, which is said to identify the genesis and aim of the transaction between the original lessor and lessee. Adopting what was said by Kyrou JA, who dissented in the Court of Appeal, it is said that it was clearly the intention of the parties to recreate, as far as possible, in a lease, the conditions which would have obtained following a sale. On that approach, the position of the lessee under the lease would have more closely resembled that of a purchaser, upon whom liability for rates, taxes and other outgoings would fall. The respondent denies cl 13 the effect for which the appellant contends, observing that the clause does not contain a statement that it was the parties' intention to replicate the conditions of sale and purchase. The respondent points to other reasons for inclusion of cl 13: it was necessary to state the amount of the rent (a need created by the deletion of cl 2), and it was prudent to record that the sum had been paid in full. More generally, the respondent's submission, which found favour with the Court of Appeal majority, is that when the lease is read as a whole there is no warrant for treating cl 13 as an instruction as to its interpretation. It was not disputed in the Court of Appeal that cl 4, as settled by the parties, is ambiguous and argument in this Court proceeded upon that acceptance. And it was not disputed that in the circumstances it is open to the court to take account of the words crossed out of the standard form as an aid to the proper construction of the clause. The deletions do not evidence a prior intent, which could have changed, but rather they identify a matter which, on the face of the document, was rejected by both parties. The respondent's argument draws on the structure and language of cl 4. The words "Landlord" and "tenant" in the unamended text are not found elsewhere in the lease. Their employment here is suggested to reflect the function of the clause in allocating liability for such enforceable obligations as arise independently of the lease to the lessor and lessee in their respective capacities as landlord and tenant. In the original form of cl 4, the words "AND also will pay", when read with cl 3, identified the party to whom the obligation applied. The words "all rates taxes assessments and outgoings whatsoever excepting land tax" identified the subject of the clause. The words "which during the said term shall be payable by the Landlord or tenant in respect of the said premises" identified the characteristics of the imposts to which the clause applied. The amendments are said by the respondent not to have altered the grammatical structure of the clause, which remains adjectival. The imposts to which the clause applies must have two characteristics: they must be "in respect of the said premises" and they must be "payable by the tenant". It is said the words "payable by the tenant", in their natural and ordinary sense, convey a liability which the tenant is under an enforceable obligation to pay, and which arises independently of the lease. The respondent's construction lays emphasis on the deletion of the words "Landlord or" as signifying the parties' intention that the lessee's obligation be confined to those imposts levied on it as tenant. The respondent also contends that, given the land formed part of a larger parcel, it is to be expected that the mechanism for apportionment contained in parentheses would have been retained had it been the parties' intention to make the lessee liable for the payment of all rates, taxes and other outgoings. The last-mentioned submission directs attention to the concluding words of the clause, "in respect of the said premises". The appellant observes that on the respondent's construction, these words are redundant: if the lessee's liability is confined to the payment of those imposts that are "payable by the tenant" they will necessarily be imposts "in respect of the said premises". The appellant's argument points to the retention of this phrase as a recognised means of conveying that the lessee's liability to pay land tax assessed on the whole of the lessor's landholdings is confined to the demised land. On the appellant's construction, the words "payable by the tenant in respect of the said premises" reiterate the lessee's obligation, tying it to the leased premises. It is a construction which the appellant submits rendered the reference to the landlord and the mechanism for apportionment in parentheses in the standard form unnecessary and confusing. The choice to amend cl 4 by crossing out words in the printed text is apt to lessen the force of arguments that depend upon analysis of its grammatical structure. This standard form of farm lease imposed liability on the lessee for the payment of all imposts on the land, save for land tax. As amended, cl 4 reads: "AND [the Lessee] also will pay all rates taxes assessments and outgoings whatsoever which during the said term shall be payable by the tenant in respect of the said premises." As each of the judges below rightly acknowledged, each of the constructions proposed by the parties is plausible. The determination of the proper construction is not advanced by observing that on the appellant's case the phrase "payable by the tenant" is redundant or that on the respondent's case the phrase "in respect of the said premises" is redundant. The amendments to the standard form of lease were poorly crafted. The only explanation for the deletion of the lessee's covenant to the lessor (in relation to all succeeding covenants) in cl 2 and for the retention of cl 3, which in light of the deletion of cl 2 is redundant, is inadvertence. In the circumstances it hardly assists the determination of the proper construction of cl 4 to observe that the effect for which the appellant contends might have been achieved economically by simply deleting the words "excepting land tax". It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it. Clause 4 is to be construed by reference to the commercial purpose sought to be achieved by the terms of the lease. It follows, as was pointed out in the joint judgment in Electricity Generation Corporation v Woodside Energy Ltd, that the court is entitled to approach the task of construction of the clause on the basis that the parties intended to produce a commercial result, one which makes commercial sense. It goes without saying that this requires that the construction placed upon cl 4 be consistent with the commercial object of the agreement. Consideration of that object invites attention to cl 13. Clause 13 identifies the term of the lease and the amount of the total rental for that term and contains an acknowledgement that it has been paid in full. These statements form part of the operative terms of the lease. What is said at the commencement of cl 13 stands in a different position. It is an explanation of why the parties entered into a lease rather than a sale and purchase, which had been intended. Although expressed in the past tense it may be understood to convey that the circumstances leading to the lease remained unchanged at the time of its execution. Clause 13 explains that in circumstances in which the parties were unable to convey a freehold estate in the land, they had chosen instead to convey a leasehold estate for almost a century for a fixed sum. It is readily to be inferred that this was as close an approximation to their desired outcome as they thought they could arrange. Even without cl 13, the surrounding facts and circumstances which a reasonable businessperson in the position of the parties may be taken to have known would have pointed to that conclusion. Clause 13 itself does not explain how the parties' desire for a sale and purchase was thwarted, but it is a fact that it was the impossibility of subdivision of the land the subject of the lease. The length of the term, prepayment of a sum equivalent to the market value of the land, and the removal of the covenants restricting the lessee's user of and capacity to deal with the land and the lessor's rights of inspection and termination for breach and re-entry, support the conclusion that the parties' intention was, as Kyrou JA stated it, to recreate, as far as possible, in a lease, the conditions which would have existed following a sale. The addition of the words "whatever purpose is allowable by law" to the chapeau also supports that conclusion. Clause 13 puts that conclusion beyond doubt. The Court of Appeal majority acknowledged the express statement in cl 13 of the parties' intention, before entering the lease, to effect a freehold sale. Their Honours considered this explained why the rental for the whole term was paid in a single instalment at the commencement of the lease and why the lessor was given no power to terminate for breach and no power of re-entry. Their Honours considered that it also served to explain the lessee's unfettered rights of assignment and transfer and to build on the land. Nonetheless, reading the lease as a whole, their Honours were not prepared to find that it was the parties' intention to achieve a transaction that approximated a freehold sale. Their Honours' reservation took into account: (i) that the lessee was burdened by continuing obligations; (ii) the retention of the final proviso; and (iii) the absence of an option to purchase or a right of renewal, or any provision respecting the improvements at the end of the term. As Kyrou JA observed, the fact that the rights of the lessee under the lease are not co-extensive with the rights of the owner of the land is not inconsistent with the intention to place the lessee in a position as close as possible to that of the purchaser of a freehold estate. As Kyrou JA also observed, the retention of the lessee's covenants in cll 6, 7, 10 and 12 serves to protect the lessor's interest in the adjoining land. They impose limitations of the kind found in restrictive covenants on the subdivision of land. This standard form of farm lease is evidently an old precedent. The final proviso confers on the lessor power to pay any unpaid "rates agreed to be paid by the Lessee as aforesaid" and "distrain sue for or recover" them as if they were arrears of rent under the Landlord and Tenant Acts. As the primary judge observed, distress for rent was abolished in Victoria in 1948. The evident purpose of the final proviso was to make summary proceedings for the recovery of rent available as an additional remedy to an ordinary action on the covenants in the lease. The reference to the rates "agreed to be paid by the Lessee" is to cl 4, which the appellant contends is apt to support its construction. However, again, the haphazard amendments made to the printed text lessen the force of that submission. The primary judge was right to consider that the retention of the final proviso is consistent with either construction of the obligation imposed by cl 4. It suffices to observe that its retention does not argue against Kyrou JA's conclusion as to the parties' intention. The Court of Appeal majority's analysis lacks any reason that sounds in commercial sense for the parties to have chosen to amend the usual covenant respecting liability for rates, taxes and other outgoings contained in the standard form with a view to increasing the potential financial burden imposed on the lessor. The respondent seeks to meet this criticism by submitting that there is insufficient evidence of the "extrinsic details of the transaction" to permit a determination as to the commercial common sense of the Court of Appeal majority's construction. The respondent illustrates the submission by contending that assessment of the commerciality of the agreement would need to take into account the value of the reversion. It would also need to take into account, in the respondent's submission, that at the time the lease was entered into, a lessee in occupation might be levied in relation to rates and land tax. While land tax at that time was usually levied on the owner in respect of the unimproved value of land, in a case in which the Commissioner of Land Tax was of the opinion that the owner's interest was lessened by the covenants in a lease, he or she was empowered to determine that part of the assessed land tax would be payable by the lessee. It may be accepted that this lease would have supported such an assessment. General rates were levied on the occupier of rateable property and were recoverable from the owner absent agreement to the contrary. Water and sewerage rates could also have been levied on the lessee in occupation. Again, absent contrary provision in an agreement, sewerage rates were recoverable from the owner. Water rates, subject to a limited exception, were not recoverable. Acceptance that at the time the lease was entered into the lessee may have been levied for land tax and rates and may have had limited rights of recovery against the lessor (any agreement apart) does not explain the commercial sense of amending the clause to increase the lessor's financial obligations. Among other matters, reasonable businesspersons may be taken to appreciate the likelihood that the incidence of rates, taxes and other outgoings on land may be subject to legislative change over the course of a century. Notwithstanding that the consideration was the market value of the land, the lease does not provide an option to renew or to purchase for a nominal sum at the end of the term. The significance of this omission is suggested to favour the conclusion that the parties bargained for the lessor to bear the expense of any imposts levied on it as owner taking into account the value to the lessor of the reversion. An alternative view is the omission was inadvertent; neither the parties nor their advisers turning their minds to how matters might stand in 2087. Kyrou JA was drawn to that explanation. So are we. A surrounding circumstance of which the reasonable businessperson would be aware is that the lessor company was in receivership. It must be accounted highly unlikely that a receiver would agree to burden the lessor company with uncertain financial obligations over the term of a ninety-nine year lease. The Court of Appeal majority's conclusion failed to give effect to the clear statement of the parties' objective in entering the agreement. It makes no commercial sense, having regard to that objective, for the lessor to remain liable for the payment of rates, taxes and other outgoings over the term of the lease. That is especially so where the lessor has taken as consideration for the lease the land value, with no provision for future adjustments. The lessor would have been exposed to uncertainties including the effect that any change of (lawful) land use by the lessee might have had on the amount of any rates, taxes and other outgoings. On its proper construction cl 4 imposes on the lessee the obligation to pay all rates, taxes, assessments and outgoings whatsoever that are payable during the term of the lease in respect of the land. This construction accords with the commercial aim of the parties that the lessee assume the position of owner, so far as a lease may provide, with all of an owner's liabilities. Orders For these reasons, there should be the following orders. 1. Appeal allowed with costs. 2. Set aside orders 2 to 5 of the Court of Appeal of the Supreme Court of Victoria made on 4 March 2016 and in their place order that the appeal to that Court be dismissed with costs.