Supreme Court New South Wales Medium Neutral Citation: AMP Capital Investors Limited v Willis Australia Limited [2022] NSWSC 1415 Hearing dates: 2 June 2022 Decision date: 19 October 2022 Jurisdiction: Equity Before: White J Decision: Plaintiff to bring in short minutes of order within 14 days consistent with reasons. Catchwords: LEASES AND TENANCIES – renewals and options – characterisation of option – whether conditional contract or irrevocable offer – whether condition waived LEASES AND TENANCIES – rent and outgoings – construction and interpretation – whether context required that the definition of base rent would not apply Cases Cited: Amber Holdings (Aust) Pty Ltd v Polona Pty Ltd [1982] 2 NSWLR 470 Burwood Project Management Pty Ltd v Polar Technologies International Pty Ltd [1999] NSWSC 1203 Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 Gange v Sullivan (1966) 116 CLR 418; [1966] HCA 55 Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122 James Adam Pty Ltd v Fobeza Pty Ltd (2020) 103 NSWLR 850; [2020] NSWCA 311 K. Lokumal & Sons (London) Ltd v Lotte Shipping Co Pte Ltd (The "August Leonhardt") [1985] 2 Lloyd's Rep 28 Laybutt v Amoco Australia Pty Limited (1974) 132 CLR 57; [1974] HCA 49 Moratic Pty Ltd v Lawrence James Gordon & anor [2007] NSWSC 5 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 Norton Property Group Pty Ltd v Ozzy States Pty Ltd (in liq) [2020] NSWCA 23 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; [1982] HCA 29 Ryledar Pty Ltd & Anor v Euphoric Pty Ltd [2007] NSWCA 65 Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153; [1983] HCA 46 Tonitto v Bassal (1990) 5 BPR 11,258 Tonitto & Anor v Bassal & Ors (1992) 28 NSWLR 564 Tripple A Pty Limited v WIN Television Qld Pty Ltd [2018] QCA 246 Willing v Baker (1992) 58 SASR 357 Zhu v Treasurer of NSW (2004) 218 CLR 530; [2004] HCA 56 Category: Principal judgment Parties: AMP Capital Investors Limited (Plaintiff/Cross Defendant) Willis Australia Limited (Defendant/Cross Claimant) Representation: Counsel: M Walton SC with N Furlan C Birch SC with A Byrne Solicitors: Minter Ellison (Plaintiff) Holman Webb Lawyers (Defendant) File Number(s): 2021/00169060 Judgment 1. HIS HONOUR: On 21 January 2014 the plaintiff, AMP Capital Investors Limited ("AMP") as landlord and the defendant, Willis Australia Limited ("Willis") as tenant entered into a lease to commence on 1 October 2014 for premises known as Suite 1 on Level 15 and the whole of Level 16, Angel Place, 117-123 Pitt Street Sydney. The lease was for a term of six years commencing on 1 October 2014 and expiring on 30 September 2020. It included an option of renewal for a period of four years from 1 October 2020 and a further option for Willis to take a lease of the balance of Level 15 for four years. The terms of the options were as follows: "New lease 20.1 The Landlord must grant a new lease under this clause 20 on the Expiry Date to commence on the next day only if: (a) the Tenant gives the Landlord a notice stating that it wants a new lease of the Premises for the term specified in item 18; and (b) the Landlord receives that notice at least nine months before the Expiry Date; and (c) when the Tenant gives that notice, and on the Expiry Date, the Tenant is not in breach of this lease, notice of which breach has been given to the Tenant in writing; and (d) the Tenant delivers to the Landlord before the Expiry Date a Bank Guarantee. Terms of new lease 20.2 The new lease is to be identical with this lease except that: (a) this clause 20 and item 18 are deleted; and (b) clauses 23.1(a), 24, 25, 26, 29 and schedule 5 are deleted; and (c) the term, the commencement date, the expiry date and the review dates are to be those specified in item 18; and (d) the Base Rent from the commencement date of the new lease is to be decided under clause 3 and Schedule 4 as if that date were a Market Review Date; (e) the new lease must reflect any variations to this lease which become effective during the Term; and (f) in respect of any Incentive to be paid by the Landlord to the Tenant, the parties must enter into a Related Agreement substantially in the form of any Related Agreement entered into or about the date of this lease. Ability to expand at end of lease term 20.3 If, at the time the Tenant gives a notice under clause 20.1(a), the Tenant gives the Landlord notice that it wants a lease of the balance of Level 15 not then occupied by the Tenant in the Building (Expanded Premises), then clauses 20.4 and 20.5 apply. 20.4 The Landlord must grant a new lease under clause 20.3 for the whole of levels 15 and 16 on the Expiry Date to commence on the next day only if: (a) the Tenant gives the Landlord a notice stating in accordance with clause 20.1 that it wants a new lease of the Premises for the term specified in item 18; and (b) at the same time as the Tenant gives the Landlord a notice pursuant to clause 20.1 the Tenant also gives a notice to the Landlord stating that it wants a lease of Expanded Premises; and (c) the Landlord receives both notices at least nine months before the Expiry Date; and (d) when the Tenant gives the notices, and on the Expiry Date, the Tenant is not in breach of this lease, notice of which breach has been given to the Tenant in writing; and (e) the Tenant delivers to the Landlord before the Expiry Date, a Bank Guarantee for an amount that is equal to the proportion of Base Rent and Outgoings (plus GST) for the whole of level 15 and 16 that is shown in item 16. 20.5 The lease of level 15 and 16 is to be identical with this lease except that: (a) The new lease will commence the day after the Expiry Date for the term specified in item 18; (b) the leased Premises will be 'level 15 and 16, Angel Place 117-123 Pitt Street Sydney' and any necessary consequential amendments to the lease cover page and this annexure A will be made accordingly; (c) this clause 20 and item 18 are deleted; (d) clauses 23.1(a), 24, 25, 26, 29 and schedule 5 are deleted; (e) item 1 is replaced with the net lettable area of level 15 and 16; (f) item 9 is replaced with the Tenant's Proportion calculated as follows: TP = LA/B x 100/1 Where: TP is the percentage to be calculated; LA is the lettable area of levels 15 and 16; and B is the lettable area of the Building expressed in squire metres. (g) the term, the commencement date, the expiry date and the review dates are to be those specified in item 18; and (h) the Base Rent from the commencement date of the new lease for the whole of levels 15 and 16 is to be decided under clause 3 as if that date were a Market Review Date; (i) the new lease must reflect any variations to this lease which become effective during the Term; and (j) in respect of any Incentive to be paid by the Landlord to the Tenant, the parties must enter into a Related Agreement substantially in the form of any Related Agreement entered into or about the date of this lease." 1. On 20 December 2019 Willis gave two notices by letter to AMP, one pursuant to cl 20.1 of the lease and the other pursuant to cl 20.4 of the lease. The first letter was headed "Notice – Exercise of Option (current space)". It stated: "This is a Notice under clause 20.1 of the Lease dated 21 October 2014 (registration number AJ50597A) ("Lease") to advise that Willis Australia Limited wants a new lease of the Premises (as that term of[sic] defined in the Lease) for the term specified in Item 18 of the Lease. When the new Lease is prepared please sent to me at the contact details below." 1. The second letter contained a heading "Notice – Exercise of Option (expanded space)". It stated: "This is a Notice under clause 20.4 of the Lease dated 21 October 2014 (registration number AJ50597A) ("Lease") to advise that Willis Australia Limited wants a lease of the Expanded Premises (as that term of[sic] defined in the Lease) for the term specified in Item 18 of the Lease. When the new Lease is prepared please send to me at the contact details below." 1. The balance of Level 15 that was not leased to Willis pursuant to the 2014 lease was leased by AMP to Perpetual Limited ("Perpetual"). Pursuant to AMP's lease with Perpetual and a further agreement made between AMP and Perpetual, AMP gave notice to Perpetual that Willis had exercised its option to acquire the additional space on Level 15. Perpetual vacated that area before 1 October 2020. 2. On 7 August 2020 Willis gave notice to AMP that it withdrew its notice of 20 December 2019 regarding the expanded premises referred to in cl 20.3 of the lease. Willis did not withdraw its notice regarding a new lease of the existing premises. 3. AMP did not accept that Willis was entitled to withdraw its notice to take a lease of the expanded premises. It asserted that Willis was required to take up the option to acquire the additional space for a four year term. Willis denied that it was so bound. 4. AMP seeks declarations to the effect that Willis exercised an option to take a lease of the expanded premises on Level 15 for a term of four years commencing on 1 October 2020 on the terms specified in cl 20.5. Alternatively, it seeks a declaration that Willis is estopped from denying that an agreement for lease came into existence. It seeks an order for specific performance. 5. The principal issue is whether, by the service of the notice under cl 20.4(b) on 20 December 2019, Willis exercised its option to take a lease of the "Expanded Premises" on Level 15. Willis contends that cll 20.1 and 20.4 contain an irrevocable offer from AMP to grant new leases of the existing premises and the expanded premises, which offer could be accepted by Willis only if each of the requirements of cl 20.1(a) to (d) in respect of the existing premises, or cl 20.4(a) to (e) in respect of the expanded premises, were complied with. Because Willis did not deliver a bank guarantee to AMP before the Expiry Date (30 September 2020), Willis contends that it did not accept the offer in cl 20.4. 6. On 17 August 2020 Willis noted that the condition in cl 20.4(e) had not been satisfied and confirmed that it would not be satisfied in the future. 7. Willis does not now contend that it was entitled to "withdraw its notice". It submits that the giving of notice under cl 20.4(1)(b) did not amount to an exercise of its option to take up the additional space for a four year term. Rather, it was a step towards that end which it was required to take if it were to take a lease of the expanded premises, but because AMP was not obliged to lease the space unless and until all of the conditions in cl 20.4 were satisfied, no contract for Willis to take up the space arose unless and until the conditions were satisfied or consensually varied. 8. In response, AMP submits that the effect of cll 20.4(d) and (e) is that it is not obliged to grant a new lease of the expanded premises if the tenant is in breach on the Expiry Date or does not provide a bank guarantee before the Expiry Date, but that does not mean that Willis has not exercised its option to expand at the end of the lease term which was exercised by the giving of notice under cl 20.4(b) having also given a notice to take a renewal of its existing space pursuant to cl 20.1(a). It submits that the conditions in cl 20.4(d) and (e) that Willis not be in breach of the lease on the Expiry Date and provide a bank guarantee before the Expiry Date are conditions for its benefit which it is entitled to waive and the contrary construction contended for by Willis makes no commercial sense. It submits that it would be absurd if, having given notice under cl 20.4(b), Willis could deny that it was obliged to take up the lease by putting itself in breach of the lease before the Expiry Date by, for example, not paying the last month's rent. It also submits that the purpose of the requirement that Willis give nine months' notice of its desire to take a lease of the expanded premises was that AMP have sufficient time to make arrangements to be able to procure vacant possession of those premises which were leased to Perpetual. On Willis' construction, AMP would not know until midnight on 30 September 2020 whether it was obliged to grant a lease commencing from the beginning of 1 October 2020. 9. In riposte, Willis submitted that the question of commerciality of the competing constructions was not to be assessed solely from AMP's perspective. Whilst it was in AMP's interest that Willis be bound by the service of a notice under cl 20.4(b), that was not in Willis' interest. AMP could have secured such protection by an appropriately drafted clause. The requirement for nine months' notice was appropriate to enable AMP to put steps in train so that it could grant vacant possession on 1 October 2020 if Willis took each of the steps under cl 20.4 to accept the offer of a lease of the expanded space. But there was nothing in the lease that required it to take all of those steps. 10. Both AMP and Willis said that its construction was clear. 11. AMP pleaded that if its construction of the lease were not accepted, nonetheless Willis was obliged to enter into the lease on the grounds of equitable or conventional estoppel. 12. If, either as a matter of construction of the lease or on the ground of estoppel, Willis is obliged to enter into a lease for four years for the additional space on Level 15, there is an issue as to what rent is payable. 13. Clause 26.1 of the lease executed on 21 January 2014 (but not to commence until 1 October 2014) provided that the landlord at its cost would obtain a survey of the lettable area. By cl 26.2, Willis authorised AMP to complete the lease promptly after the survey was obtained by inserting the lettable area of the premises in Item 1 of the Commercial Terms Schedule, and inserting the Base Rent payable in Item 4 calculated by multiplying the lettable area expressed in square metres by $670. In Item 1 of the schedule the area of the premises has been written in by hand as 3019.9 m2. The figures for the Base Rent were written in by hand being $2,023,333 per annum or $168,611.08 per month. That rent was calculated in accordance with cl 26.2. 14. Schedule 1 to the lease contained definitions that included the following: "Bank Guarantee means an irrevocable and unconditional undertaking in favour of the Landlord issued by a Bank or other person approved by the Landlord containing such terms and conditions as are acceptable to the Landlord acting reasonably for an amount equal to the item 16 proportion of the Base Rent and Outgoings Contribution payable from time to time plus GST payable in connection with the Base Rent and Outgoings Contribution. A bank guarantee that specifies an expiry date that is earlier than six months after the Expiry Date is unacceptable. Base Rent means the annual rent payable by the Tenant under this lease in respect of the Premises as specified in item 4 and varied in accordance with this lease." 1. Those definitions applied "unless the context otherwise requires". 2. Item 5 of the Commercial Terms Schedule is headed "Market Review Dates". Against that heading, the schedule states "1 October 2020 if the option is exercised". 3. 1 October 2020 is the commencement of a lease to be granted if either or both of the options provided for by cll 20.1 and 20.4 is or are exercised. 4. Clause 3 of the lease provides: "Market Review of Base Rent 3.1 At each Market Review Date the Base Rent must be reviewed in accordance with schedule 4. Fixed Percentage Increase 3.2 The Base Rent from and including each Fixed Increase Date until the next Review Date (or if there is no further Review Date, the Expiry Date) is calculated as follows: BR = (PBR x FPI) + PBR where: BR = the Base Rent payable from and including each Fixed Increase Date PBR = the Base Rent payable immediately before the Fixed Increase Date FPI = the Fixed Percentage Increase." 1. Schedule 4 to the lease contains provisions specifying how a Market Rent assessed for the Market Review Date is to be determined. 2. "Market Rent" is defined as: "the Base Rent for the Premises assessed for the Market Review Date in accordance with the criteria set out in clause 1.3 of this schedule 4". 3. If the parties do not agree on a Market Rent the Market Rent is to be determined by a valuer in accordance with the criteria in cl 1.13. 4. Clause 1.3 of Schedule 4 provides: "1.3 Despite any other provision of this lease, the Base Rent from and including the Market Review Date must not be more than 10% higher nor 10% lower than the Base Rent payable under this lease immediately before the Market Review Date." 1. The effect of these provisions is that if the lease for the existing or expanded premises were renewed the Base Rent was to be reviewed to market, and thereafter be subject to fixed percentage increases, but the Base Rent could not be 10% higher or lower than the Base Rent payable immediately before the Market Review Date (viz 1 October 2020: the commencement date of a renewed lease). The Base Rent was a sum expressed in dollars, not dollars per square metre. 2. AMP submits that the cap and collar in cl 1.3 of Schedule 4 does not apply to a lease of the expanded premises, or, if it does, the cap and collar in cl 1.3 should be applied as a rate per square metre. 3. Willis contends that if it is bound to take up a lease of the expanded premises cl 1.3 of Schedule 4 caps the Base Rent (expressed as a gross sum in dollars, not a rate per square metre) payable after market review for both the existing space and the expanded space. 4. For the reasons which follow I have concluded that AMP's construction is to be preferred and Willis is bound to take up the lease for the expanded space at a rent to be determined as a market rent in accordance with the procedures in Schedule 4, subject to the cap and collar provision in cl 1.3 applied to the assessed market rent on a dollars per square metre basis. Further facts 1. In light of AMP's alternative claim based on equitable or conventional estoppel, the following further facts are relevant. 2. Prior to 1 October 2020 the expanded premises on level 15 were leased by AMP to Perpetual. Perpetual's lease commenced on 1 December 2005. It was a lease for the whole of levels 11 to 16. 3. AMP's offer to Willis to confer on it an option to expand its lease of the balance of level 15 was outlined in a proposal dated 8 November 2013 and accepted by Willis on 12 November 2013. On 11 November 2013 AMP made an offer to Perpetual for it to surrender, amongst other areas, the balance of level 15 comprising approximately 713m2. This was the part of level 15 that was not the subject of the lease proposal to Willis. Perpetual accepted the proposal on 14 November 2013. The offer to Perpetual included a term that: "The Lessee [Perpetual] acknowledges that Willis has a one-off right over the Part of level 15 Premises. The Expansion Right must be exercised by Willis by 30 January 2020 (time of the essence). Should the Expansion Right be exercised, the Lessor must notify the Lessee within 10 business days and the Lessee shall vacate the level 15 Premises by 30 September 2020." 1. Although there is no evidence that Willis was aware of the precise terms of AMP's agreement with Perpetual, there is no doubt that it knew that if it gave notice pursuant to cl 20.4(a) that it wanted to take a lease of the expanded premises on level 15, AMP could and would need to require Perpetual to vacate that area. It knew, after it had given its notice of 20 December 2019, that AMP had put in place the legal steps to enable that to happen. 2. On 10 March 2014 (after AMP and Willis executed their lease but prior to its commencement) AMP and Perpetual executed a variation of the Perpetual lease. The variation of lease was registered, apparently on 21 January 2015. The variation of lease contained an acknowledgement by Perpetual that Willis had been granted the right to lease suite 2 on level 15 by lease commencing on 1 October 2020 and that if Willis gave AMP a notice stating that it wished to exercise its right to lease those premises on or before 30 January 2020, then AMP must give Perpetual a surrender notice no later than 14 February 2020 stating that it required vacant possession of those premises on 30 September 2020. 3. As noted above, on 20 December 2019 Willis gave "Notice – Exercise of Option (expanded space)". The next day AMP gave notice to Perpetual advising that: "…[Willis has] served notice exercising their option over both the existing and expanded premises (Suite 2 level 15). This will be effective from 1 October 2020. Perpetual, as per clause 29, will be required to comply with the end of lease obligations prior to the handover date." 1. On 30 January 2020 a solicitor from Minter Ellison, AMP's solicitors, wrote to Mr Stuart Allison and Mr Andrew Houghton of ResolveXO. ResolveXO describes itself as "corporate property strategists". The solicitor stated: "We act on behalf of the landlord, AMP Capital Investors, in relation to the above matter. We are instructed to submit the attached draft Lease (Documents) in respect of the abovementioned premises. Settling terms If you require any amendments to the Documents, please mark up the Documents with your suggested amendments and return them to us in electronic form. Not bound The landlord will not be bound by the terms of the attached Documents until such time as we receive the Documents correctly executed by the tenant, together with the other requirements as set out in the Documents, and the Documents have been executed by the landlord. If the Documents are acceptable, please let us know and we will issue executable copies." 1. The email was copied to Mr Mark Museth of AMP who described himself in email correspondence as "General Manager – Angel Place Office and Logistics". 2. AMP did not correct the statement made by its solicitor that AMP would not be bound by the terms of the draft lease that had been prepared to give effect to the Notice of Exercise of Option until the draft lease had been executed by Willis, together with the other requirements as set out in the attached documents. The draft lease attached was for part of level 15 and level 16, not for the whole of level 15. It was a form of lease appropriate for the exercise of the option of renewal of the existing premises. It required insertion of the rent and contained a note that the amount to be inserted as the Base Rent would be inserted once that rent had been determined in accordance with the market review process provided for by the existing lease. The form of lease also provided for the insertion of an amount to be provided for by the bank guarantee once the market rent had been determined. 3. It may be inferred that AMP did not consider that any lease or binding agreement for lease had come into existence merely by the service of the notices of exercise of option for renewal. 4. By February 2020 (which coincided with the commencement of the COVID pandemic) Willis was having second thoughts. Willis obtained legal advice as to what rent it would have to pay for the expanded premises. It can be inferred that, at least initially, it obtained advice that the rent (which was to be redetermined by market review) for the whole of levels 15 and 16 should not exceed the amount that was payable for rent under the lease of part of level 15 and the whole of level 16 under the original lease as at 30 September 2020, plus or minus 10%. At least it can be inferred that its legal advice was that this contention was arguable. (The argument is addressed later in these reasons.) By its cross-claim, Willis seeks a declaration to that effect if it is determined that it has entered into a binding agreement with AMP to lease the whole of level 15. 5. On 18 February 2020 Mr Allison of ResolveXO advised a Ms Victoria Poplett, Senior Real Estate Manager International, of Willis Group Limited in the United Kingdom, that he had spoken to AMP's head of investment management for offices, Ms Andrea Roberts, and "…stated that we have legal advice around the cap and the rent should be the capped amount. She is off checking what their legal advice is and will revert to me but has said they are not in the habit of giving space away for free and will defend it. I have offered a sit down to hear them out and advised that we can look at there being a lease in place to Perpetual for a period of time. She did ask how long for, I said I would check but to around mid-2021, that is correct, isn't it?" 1. On 19 February 2020 Mr Allison advised Ms Poplett that after another call with AMP, AMP had said that they would "defend heavily any position that does not involve collecting rent as they believe that the intent was that we always paid for the space" and "They have already advised Perpetual that we have exercised the right. Perpetual's reaction has been that they are out of the space, but AMP are going to work with them to see if they will stay for a year or so". 1. Accordingly, by this time the parties were in commercial negotiations. Willis was aware that AMP had given notice to Perpetual that would require Perpetual to vacate the space on commencement of the new lease on 1 October 2020 (unless alternative arrangements were agreed). AMP was aware that Willis did not want to take the expanded premises before at least mid 2021 and was prepared to argue that the total rent for both the existing and expanded premises should be no more than 110% of the rent payable under the existing lease in respect of the premises which encompassed only part of level 15. Further inconclusive negotiations took place in March and April 2020. 2. On 9 May 2020 Ms Poplett authorised Mr Allison and Mr Houghton to start "…conversations with AMP re the retraction of our notice to take on the additional space". 3. On 11 May 2020 Mr Allison confirmed that he had spoken to AMP and that they were establishing if Perpetual wanted the space back. On 19 May 2020, Mr Allison advised Ms Poplett that Perpetual did not want the space back and he had asked AMP to take a "surrender of the additional space". He also foreshadowed that AMP would be looking for "…income above the 10% cap on the passing whole rent". 4. On 7 August 2020 Willis wrote to AMP as follows: "I refer to the notice issued by the Lessee dated 20 December 2019 regarding the Expanded Premises referred to in clause 20.3 of the Lease. The Lessee has previously confirmed to you that it withdraws it's [sic] notice and no longer intends to proceed with its right to pursue its option in respect of the Expanded Premises. This note is to provide you further confirmation of same. To avoid any confusion, the notice issued by the Lessee regarding the new Lease for the existing Premises (current space) remains in effect. Should you have any questions, please don't hesitate to contact me." 1. AMP replied on 12 August 2020. It stated: "We refer to your letter dated 7 August 2020. We confirm that by notice dated 20 December 2019, the Tenant in accordance with clauses 20.3 and 20.4 of the Lease validly exercised its option to take a lease over the expanded area of [sic] whole of levels 15 and 16, for the term specified in Item 18 of the Lease, that is, for a further term of 4 years, with a Market Rent Review to occur on 1 October 2020. The exercise of option by the Tenant is an irrevocable offer which the Landlord has accepted and the Landlord now affirms that in accordance with clause 20.4 of the Lease the Landlord will grant a new lease to the Tenant in respect of the whole of levels 15 and 16. In this regard, we note that the conditions in subclauses 20.4(a) to 20.4(d), inclusive, have been satisfied and that subclause 20.4(e) is capable of performance in circumstances where the Landlord does not require the Bank Guarantee to be delivered by the Tenant before the Expiry Date, which is, 30 September 2020, but will require the Bank Guarantee to be delivered by the Tenant once the Base Rent and Outgoings are known, in accordance with item 18, for the whole of levels 15 and 16. We note that the definition of 'Bank Guarantee' is an undertaking in favour of the landlord for an amount equal to the item 16 proportion of the Base Rent and Outgoings Contribution payable from time to time. This is consistent with clause 20.5(h) which provides as follows: 'the Base Rent from the commencement date of the new lease for the whole of levels 15 and 16 is to be decided under clause 3 as if that date were a Market Review Date'. Clause 3.1 of the Lease provides that at each Market Review Date, namely, 1October 2020, the Base Rent must be reviewed in accordance with schedule 4. In short, this will need to be determined first, before the Bank Guarantee amount can be calculated and the Bank Guarantee provided. The Landlord is proceeding on this basis and reserves its rights. In relation to the exercise of option to take a lease of the expanded area, the Tenant cannot now seek to withdraw or rescind from its position in circumstances where the Tenant has, in accordance with clauses 20.3 and 20.4 of the Lease, validly exercised its option to take a lease of whole floors 15 and 16. We deny, as you assert in your letter, that the Tenant has previously confirmed that it withdraws its notice. The Tenant has exercised its option and there is no lawful basis on which the Tenant might now seek to withdraw from its agreed position, and the Landlord will seek to rely upon this letter and all earlier correspondence on the question of costs in the event that the Tenant maintains its position and it becomes necessary for the Landlord to make any form of related application to the Court for relief. Please consider these matters and confirm the Tenant's position by 4:00pm 20th August 2020. The Landlord reserves its rights under the Lease and at law." 1. At the hearing, AMP did not maintain the contention advanced in this letter that "the exercise of option by the Tenant is an irrevocable offer which the landlord has accepted". If there were an irrevocable offer it was made by AMP and could be accepted by Willis in accordance with cl 20.4 of the Lease. 2. Nor did Willis maintain that it sought to withdraw its notice of exercise of option. On 17 August 2020 Willis stated: "● We do not accept that we made an 'irrevocable offer'. We believe that the only matters that can be characterised as an irrevocable offer are the contents of clauses 20.3 and 20.4 of the Lease. Further, those clauses can only be construed as containing an offer by you, as landlord, to us, as tenant, rather than any offer being made the other way around. In order for us to accept your offer, we would have to comply with the clear and express terms relating to what must be done in order to accept that offer. … ● Accordingly, we do not agree with you that there is 'no lawful basis' that we can 'withdraw' from what you say is our 'agreed position'. There is no provision in the existing Lease which provides that a notice of intention to exercise an option once given cannot be withdrawn or that we are bound to enter into a new lease at a future date in respect of the Expanded Premises. ● We understand from your letter that we have satisfied clause 20.4(d) of the Lease in so far as we have complied with all the terms of the existing Lease as at 20 December 2019. We note that we have not complied with clause 20.4(d) as at the Expiry Date of the existing Lease, given that this date has not yet occurred. We further note that the condition in clause 20.4(e) has not been satisfied, and we have communicated to you that it will not be satisfied in the future." 1. On 14 September 2020, AMP advised Willis: "AMP requires Willis to enter into a lease in accordance with the exercised option. A form of lease is being prepared for Willis to execute prior to the Expiry Date of the Lease on 30 September 2020. A Rent Review Notice is also being prepared in accordance with clause 1.2 of Schedule 4 of the Lease and will be served on Willis in due course. AMP will then require that Willis provide a Bank Guarantee in accordance with the terms of the Lease. AMP is prepared to delay performance of this condition in relation to the provision of the Bank Guarantee, until a determination of the Base Rent and Outgoings (plus GST) for the whole of levels 15 and 16 has been undertaken in accordance with the Lease. If Willis refuses to comply with these requirements we will instruct our legal representatives to make application to the Supreme Court of NSW and seek specific performance of the contract constituted by your acceptance and exercise of the option as above described." 1. On 23 September 2020 Willis responded: "We maintain the position that Willis is not obliged to take up a lease over the Expanded Premises. With respect, your letter of 14 September 2020 (and your demand) is based on an incorrect premise – being the statement in the second paragraph of your letter that Willis, by its notice dated 20 December 2019, exercised the Expanded Space option. The correct premise is that such notice was no more than one of several necessary and indispensable integers necessary to exist in order to exercise the option. This was set out in our letter to you of 17 August 2020, which we consider concludes the matter. We note that even if Willis were obliged to take a lease over the Expanded Premises (which we don't accept), the rent payable thereunder would be capped at 110% of the rent payable under the Lease, given that the Lease limits any additional rent payable under a new lease so that it does not increase by more than 10%. It therefore seems to us to be in AMP's interests to lease the Expanded Premises to a third party where market rent can be charged. Accordingly, if AMP commences proceedings against Willis seeking specific performance, this would seem to be a waste of cost and effort with no benefit to AMP. We reserve our rights in this regard." 1. On 23 September 2020 AMP served a rent review notice on Willis in respect of the Market Review Date for the purposes of Schedule 4 of the Lease. It said that it had assessed a market rent for floors 15 and 16 to be $809 per square metre net, or $3,092,402.50 for year 1 of the extended term, based on the expanded square metre of the premises. On 30 September 2020 AMP stated that Willis was required to and ought to have already provided a bank guarantee as security over the premises. It sought a bank guarantee in the amount of $2,154,051.38 being a guarantee for six months' rent at a net rent of $809 per square metre with current outgoings of $215.58 per square metre. 2. On 14 October 2020 Willis provided a bank guarantee in the amount of $1,701,774.70 in respect of the space it currently occupied. Willis stated that the bank guarantee was provided in accordance with cl 20.4(e) of the Lease but Willis stated that it did not admit that it accepted AMP's proposed rent review amount of $809 per square metre. (As the bank guarantee was given only in respect of the existing space Willis then occupied it was presumably given under cl 20.1(d). AMP takes no point about this misdescription.) Has the option for renewal of the expanded premises been exercised? 1. There is no issue that Willis' letter of 20 December 2019 complied with cl 20.4(a). 2. An option granted under seal or for consideration may be characterised either as an irrevocable offer (in this case by the lessor) capable of acceptance by the offeree (in this case the lessee), or as a conditional contract (in this case a contract to lease the existing premises, or the existing and expanded premises) conditionally on the lessee exercising the option. 3. The appropriate characterisation is important in light of AMP's submission that it is entitled to waive the conditions in cl 20.4(d) (that Willis not be in breach of the lease of which notice of breach has been given) and 20.4(e) (that Willis deliver before 30 September 2020 a bank guarantee) because they were solely for its benefit. 4. In Laybutt v Amoco Australia Pty Limited (1974) 132 CLR 57; [1974] HCA 49, Gibbs J (at 71-76) discussed what he called a standing controversy as to whether an option to purchase should be characterised as a conditional contract or an offer together with a contract that the offer will not be revoked during the time specified for its exercise (if any) (see discussion in Tripple A Pty Limited v WIN Television Qld Pty Ltd [2018] QCA 246 at [37]-[48]). But as Bryson J said (Burwood Project Management Pty Ltd v Polar Technologies International Pty Ltd [1999] NSWSC 1203 at [56] and Tonitto v Bassal (1990) 5 BPR 11,258 at 11,272) that characterisation will be resolved by the construction of the agreement for the grant of the option (Norton Property Group Pty Ltd v Ozzy States Pty Ltd (in liq) [2020] NSWCA 23 at [71], [121]). 5. At one point in its written submissions AMP asserted that an option is an irrevocable offer to make a contract. But it also submitted that it was entitled to waive the conditions in cl 20.4 (d) and (e) which is only consistent with a characterisation of the option as a conditional contract. 6. Clause 20 is not expressed in terms of offer but in terms of an agreement to lease if the conditions stipulated are satisfied. The chapeau to cl 20.4 is that AMP "must grant a new lease…if…". The first condition was that Willis should have given notice under cl 20.1 that it wanted a new lease of the existing premises (cl 20.3). If it did, then it could give notice to AMP that it wanted a lease of the balance of level 15 not then occupied by it (the expanded premises) in which case cll 20.4 and 20.5 applied (cl 20.3). 7. Clause 20.4 then specified the conditions on which AMP was obliged to grant a new lease for the whole of levels 15 and 16. The clause is not expressed in terms of an offer by AMP to grant a new lease for the whole of levels 15 and 16 which could be accepted only by the satisfaction of each of the conditions in paras (a)-(e) of cl 20.4. 8. In this respect the present case can be compared with Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122. There the lease provided that if the tenant desired to take a renewed lease and gave three months previous notice in writing of that desire and in the meantime duly and punctually paid the rent reserved by the lease and observed the tenant's covenants contained in the lease up to the expiration of the term, then the lessors would grant a new lease. 9. During the currency of the original lease there were frequent failures to pay rent punctually, to which the lessor raised no objection. Presumably those failures included a failure to pay rent punctually after giving notice of the tenant's desire to take a renewed lease. Treating the option as an offer to make a contract, the Full Court held that the condition for acceptance of the offer, namely, the punctual payment of rent, had not been satisfied and the tenant was not entitled to exercise the option for renewal. It mattered not that the lessor may have waived rights of forfeiture or re-entry for breaches of the covenant to pay rent. The Full Court said (at 123-124): "In the present case the lessor irrevocably offered to grant a lease. Its offer prescribed the time and manner for acceptance. Only by performing the conditions prescribed could it be accepted and result in an agreement for a lease. A purported acceptance without performance of the prescribed conditions would not and could not be an acceptance of the offer. It would in reality be a counter offer by the original offeree requiring acceptance by the original offeror if an agreement were to result. If a conditional offer is made and the offeree without performing the condition purports to accept it, that is to say makes a counter offer and that counter offer is accepted, it is a loose although not uncommon use of language to say that the original offeror has waived performance of the condition which was prescribed by his offer as being the manner of accepting it. In contemplation of law the original offeror has done no such thing. What he has done is to accept a counter-offer and in the result an agreement is made but it is not an agreement consisting of the original offer and an acceptance of that offer. Under the heading 'Waiver of defect in acceptance.' (Vol. 1, s. 92) the learned editors of Williston point out: 'It has sometimes been suggested that a defect in an acceptance may be "waived" by the offeror. If what is meant by this is merely that the offeror may accept a counter-offer by the offeree, which, by reason of delay, or the addition or change of terms failed of being an acceptance of the original offer, and furthermore that sometimes silence under the circumstances stated in the preceding sections may amount to an acceptance binding both parties, no fault can be found; but if, as seems to be the case, the meaning is that the offeror may at his option assert either that there has not been a valid acceptance and hence no contract because of some defect, or that there has been a contract made because he is willing to disregard the defect in the acceptance, and that this option on the part of the offeror may be exercised without communication with the offeree, and perhaps without any limitation of time, a vital principle of the law of contracts is violated. Nothing is more fundamental than that in bilateral contracts both parties must be bound, or neither; and that in unilateral contracts, the performance requested must be simultaneous with the creation of any obligation on the part of the promisor. To allow a waiver of a defect of an acceptance is virtually to say that the acceptance is binding on the acceptor, or may be treated as binding by the offeror (which amounts to the same thing) from the time when it is made though the offeror himself is still perfectly free to assert that the acceptance was defective, and though no estoppel forbids the acceptor from showing the true facts. In truth, a defective acceptance can only amount to a counter-offer, and the only way a contract can be formed is by acceptance of the counter-offer in the same way as if it were an original offer'." 1. On that reasoning the outcome would have been the same if the lessor had sought to hold the tenant to his exercise of the option. In such a case the tenant could say that he had not accepted the lessor's offer of a renewed lease because he had not punctually paid the rent. 2. It does not follow that the same outcome would follow if the option were properly characterised as a conditional contract for the grant of a lease. If the obligation of punctual payment of rent is solely for the benefit of the lessor, the question would arise whether the lessor could waive the benefit of that condition. 3. The Full Court's construction of the lease in Gilbert J McCaul does not determine the construction of the differently worded lease in the present case, albeit that there are some similarities. As Bryson J observed in Tonitto v Bassal at 11,272 the view stated in Gilbert J McCaul cannot now be accepted unreservedly as applicable to all options. [1] 4. In the present case cl 20.4(d) is not engaged. Willis was not in breach of the lease. But AMP contends that it was entitled to waive the condition in cl 20.4(e) that Willis deliver to it before the Expiry Date, that is before 1 October 2020, the bank guarantee provided for in cl 20.4(e). 5. If the condition in cl 20.4(e) was wholly for the benefit of AMP, then AMP could waive the condition (Gange v Sullivan (1966) 116 CLR 418; [1966] HCA 55 at 430 and 443; Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 543, 560, 565; Sandra Investments Pty Ltd v Booth (1983) 153 CLR 153 at 159, 165; [1983] HCA 46; Amber Holdings (Aust) Pty Ltd v Polona Pty Ltd [1982] 2 NSWLR 470 at 475 per Holland J; Willing v Baker (1992) 58 SASR 357 at 370-373). 6. Willis' provision of a guarantee by a bank of its performance of its obligations was of no benefit to it, but was solely for AMP's benefit. The timely provision of the guarantee was therefore capable of being waived. 7. The construction of cl 20.4 as a conditional contract, pursuant to which AMP could waive the conditions in cl 20.4(d) and (e) which were inserted wholly for its benefit, rather than as an irrevocable offer that could only be accepted by satisfaction of all of the stated conditions, is not only supported by the text, it avoids a commercial nonsense or commercial inconvenience and accords with what reasonable persons in the position of the parties would regard as its commercial purpose (Zhu v Treasurer of NSW (2004) 218 CLR 530 at 559, [82]; [2004] HCA 56; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at 656-657 [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at 117, [51]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at 551 [17]). As counsel for AMP submitted it would make no commercial sense for it to be required to obtain vacant possession of the expended premises but not know until midnight on 30 September 2020 whether its "offer" to grant a lease of those premises had been accepted. Although this would give Willis a commercial advantage, it is still a commercial nonsense that a landlord would stipulate a nine month notice period to enable it to obtain vacant possession without any corresponding obligation on the tenant to take the lease. 8. For these reasons I conclude that Willis has exercised the option under cl 20.4 and is bound to take the new lease. Estoppels 1. In light of this conclusion AMP's estoppel case does not arise. Because there are no disputed primary facts (there was no oral evidence) I need not deal with AMP's alternative case based on estoppel at any length. If my conclusion that Willis has exercised its option to take the expanded premises is wrong the Court of Appeal will have the same materials as I have to determine the estoppel claims. 2. If I had reached a contrary conclusion on the primary issue I would have rejected the claimed estoppels. I would not conclude from the giving of notice under cl 20.4(a), albeit in a letter headed "exercise of option" that Willis was representing anything more than that it was its then intention to take up the lease. If Willis' construction of cl 20.4 is correct, AMP would not have had reasonable grounds for assuming that Willis was bound to take the lease or would do so. It may be inferred that AMP did not consider itself bound to grant the lease (see [36]-[38] above). By 11 May 2020 Willis had advised of its wish not to take up the additional space. 3. From these facts I would conclude that no conventional estoppel arises because the evidence does not establish that: 1. both parties assumed that the giving of the notice under cl 20.4(a) created binding legal relations; 2. both parties conducted their relationship on the basis of that mutual assumption; 3. each party knew and intended that the other would so act. (Moratic Pty Ltd v Lawrence James Gordon & anor [2007] NSWSC 5 at [32]; Ryledar Pty Ltd & Anor v Euphoric Pty Ltd [2007] NSWCA 65 at [200]; K. Lokumal & Sons (London) Ltd v Lotte Shipping Co Pte Ltd (The "August Leonhardt") [1985] 2 Lloyd's Rep 28 at 34-35). 1. I would also conclude that no equitable estoppel arises because AMP did not assume that both parties were contractually bound. If AMP assumed that Willis would, or was bound to, enter into a lease of the expanded premises, that assumption arose only from its interpretation of the effect of cl 20.4, not from other conduct of Willis. 2. AMP also submitted that, by giving the notice of 20 December 2019, Willis represented that a binding agreement had come into existence. That was not the estoppel pleaded. A representation that a contract had come into existence would be a common law estoppel based on representation of an existing fact. If Willis' construction of cl 20.4 is correct no such representation was made. If, as I consider to be the case, Willis' construction of cl 20.4 is not correct, no issue of estoppel arises. Rent payable under the lease of expanded premises 1. Clause 20.5 requires the lease of levels 15 and 16 to be identical to the original lease except (relevantly) for the description of the leased premises to include the whole of both levels (cl 20.5(b)); for the calculation of item 1 of the Commercial Terms Schedule, "Area of Premises" to be replaced with the net lettable area of both levels (cl 20.5(e)); for the "Tenant's Proportion" (of outgoings) (specified as 6.39%) to be replaced by the proportion that the lettable areas of levels 15 and 16 bears to the lettable portions of the Building expressed in square metres (cl 20.5(f)); and that "the Base Rent from the commencement date of the new lease for the whole of levels 15 and 16 is to be decided under clause 3 as if that date were a Market Review Date" (cl 20.5(h)). 2. Clause 3 is quoted at [21] and the definition of Base Rent is quoted at [17]. As noted at [16] a figure for Base Rent was inserted in item 4 ($2,023,333 per annum). That figure was calculated, as appears from the face of the lease, as a rent per square metre ($670) multiplied by the lettable area (3019.9 square metres). 3. During the term of the original lease the Base Rent increased by a fixed percentage (3.75%) each year as specified in item 8 of the Commercial Terms Schedule (cl 3.2 and definition of Fixed Percentage increase in Schedule 1). 4. As noted above, on the exercise of the option for renewal of the lease of the existing premises and the option to take up the expanded premises the Base Rent was to be reviewed to market. 5. Under cl 1.3 of the "Market Review Provisions" in Schedule 4 the "Base Rent" (which is not separately defined in Schedule 4) is not to be more than 10% higher or lower than the "Base Rent payable under this lease immediately before the Market Review Rate". 6. Schedule 4 was to be applied to the new lease "for the whole of levels 15 and 16" (cl 20.5(h)). The definition of Base Rent (quoted at [17]) was the "annual rent payable by the Tenant under this lease in respect of the Premises…". The "Premises" referred to was the original leased space. 7. As noted at [18] the definition of Base Rent in Schedule 1 applied unless the context otherwise required. 8. Clearly the context required that for the new lease of the expanded premises the definition of Base Rent was to apply not to the original Premises (defined as the part of the Building described by the original lease (Schedule 1)) but to "the whole of levels 15 and 16" (cl 20.5(h)). 9. As the specified sum of Base Rent was payable only in respect of the original Premises, but on the face of the lease, was calculated by applying a rent per square metre to the leased area, it is clear that the Base Rent under the new lease is to be calculated on the basis of a rent per square metre applied to the expanded premises. 10. There is no need for additional words to be inserted into cl 1.3 to make this clear. The construction is evident once it is appreciated that the definition of Base Rent in Schedule 1 applies unless the context otherwise requires. 11. This case bears no resemblance to James Adam Pty Ltd v Fobeza Pty Ltd (2020) 103 NSWLR 850; [2020] NSWCA 311, on which Willis relied where Leeming JA, with whose reasons Bell P and Macfarlan JA agreed, held that where an evident mistake has been made in the drawing of a contract, absent rectification, before the mistake can be corrected as a matter of construction, the intended meaning must be self-evident (at [26], [57]). 12. Here there was no mistake. ResolveXO's negotiations with AMP suggest that either or both parties contended that whoever drafted the lease erred. I do not agree. The lease is carefully and skilfully drafted. On a proper construction the Base Rent under the new lease is to be determined on a square metre basis for the whole of levels 15 and 16. This requires no correction of the terms of the lease. 13. It also follows that the cap and collar in cl 1.3 of Schedule 4 applies to the calculation of the Base Rent under the new lease. 14. Contrary to AMP's alternative submission there is no warrant for construing cl 1.3 of Schedule 4 as applying only to the area leased before the Market Review Date. To the contrary, cl 20.5 requires the Base Rent to be applied for the whole of levels 15 and 16. Conclusion and Orders 1. For these reasons I conclude that Willis was bound to take up a lease of the expanded premises and that the rent payable under the new lease is the Base Rent (reviewed to market) assessed on a per square metre basis for the expanded premises subject to the cap and collar in cl 1.3 of Schedule 4. 2. For these reasons I will make declarations 1, 2, 3 and 5A as sought in the Further Amended Statement of Claim filed on 2 June 2022. 3. I will make an order in terms of para 6(a) of the Further Amended Statement of Claim. If there is any dispute in relation to the order sought in para 6(b) that is to be addressed in writing in accordance with the direction below. 4. I will give the parties liberty to apply in respect of any further orders that may be required to implement the order for specific performance and will reserve the proceeding for further consideration. 5. AMP sought damages in the alternative to specific performance and interest. As it has succeeded on its claim for specific performance no claim for damages arises and no submissions were made in respect of that claim. The claims for relief in paras 4, 5 and 8 of the Further Amended Statement of Claim will be dismissed. 6. If any issue arises in respect of interest (as to which no submissions were made) that issue can be determined pursuant to the liberty to apply. 7. Willis' cross-claim should be dismissed. 8. AMP is entitled to its costs of the proceedings. 9. I direct that, within 14 days, the plaintiff's counsel bring in short minutes of order in accordance with these reasons. If there are any issues in relation to these short minutes the parties should exchange and provide to my associate short written submissions in respect of those proposed orders. Subject to any further order, any such dispute will be dealt with on the papers. ********** Endnote 1. His Honour's decision in Tonitto v Bassal was reversed but on other grounds (Tonitto v Bassal (1992) 28 NSWLR 564). DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 19 October 2022