GOLDMAN SACHS (AUSTRALIA) LTD v SBCDB ADMINISTRATION PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY, MEAGHER and SHELLER JJA 21 April 1993, 2 June 1993 [1993] NSWCA 110 In a proviso to one of the preconditions to valid exercise of an option in a sublease, the respondent sublessor covenanted to notify the appellant sublessee, before the end of the original term, whether or not the respondent intended to exercise its option to renew under the head lease. The respondent did not give such notice. The respondent complied otherwise with the preconditions and purported to exercise the option. The appellant claimed that the failure to give notice was either a failure to fulfil a condition precedent or a breach of a promissory condition requiring strict or substantial performance. The appellant appealed from an order that it specifically perform its obligations by executing the sublease. Held: 1. As the covenant had not been performed, the relevant question was whether performance was essential to the valid exercise of the option. 2. The advantage or disadvantage to the appellant of performance or non-performance was inconsequential, so that the importance of the covenant was not such as to require either strict or substantial performance; accordingly performance of the covenant was not essential to the valid exercise of the option. 3. The trial judge's orders should not be disturbed. Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 579 Tramways Advertising Pty Ltd v Luna Park (NSW) Pty Ltd (1938) SR 9NSW) 632 Associated Newspapers Ltd v Bancks (1951) 83 CLR 332 Bentsen v Taylor, Sons and Co [1893] 2 QB 274 Tricontinental Corporation v HDFI Ltd (1990) 21 NSWLR 689 Mahoney JA I agree with the judgment of Sheller JA and the orders proposed. Meagher JA I agree with Sheller JA. Sheller JA This is an appeal from a judgment of Brownie J of 9 March 1993. BACKGROUND FACTS The appeal concerns the exercise of a put option in a sub sublease which is described in the documentation as a sublease. The sublease was never formally prepared but was to be in accordance with an agreement for sublease undated but made in July 1988 between the respondent as sublessor and the appellant as sublessee. The demised property consisted of part of level 7 of a building known as Grosvenor Place erected on land at 225 George Street, Sydney. The term of the sublease was to be for five years to expire on 24 April 1993. The respondent was the sublessee of levels 6 and 7 of the building from Kern Corporation Ltd (Receiver and Manager Appointed) and Superannuation Fund Investment Trust (the Head Lease). Kern Corporation and Superannuation Fund Investment Trust were the lessees under a 99 year lease of the land at 225 George Street, Sydney. 2 UNREPORTED JUDGMENTS Brownie J made the assumption, which is not challenged, that the Agreement for Sublease provided that the sublease would contain a clause in the following terms. In this clause "Lessor" refers to the respondent sublessor and "Lessee" to the appellant sublessee. "18. FURTHER TERM Conditions for Grant of Further Term: 18.1 If the Lessor or Lessee desires to have a further lease of the Demised Premises granted to the Lessee for a further term of five (5) years commencing after the expiration on or about 25 April 1993 of the first term of the Demised Premises granted to the Lessee the provisions of CL18.3 shall apply provided: (a) the Lessee gives to the Lessor or the Lessor gives to the Lessee not more than 6 months nor less than 3 months notice in writing to that effect prior to the expiration of the Term, and (b) this Lease has not been terminated, and (c) in the case of any notice given by the Lessee under CL18.1 (a) prior to the date of commencement of the further term no breach by the Lessee of any of the covenants, terms and conditions and provisions herein expressed or implied has occurred unless the same has been excused or waived by the Lessor or, if such breach is capable of remedy, such breach has been duly and promptly remedied by the Lessee to the satisfaction of the Lessor. (d) The Lessor has lawfully and validly exercised its option to renew the Head-Lease for a further term of five years PROVIDED HOWEVER THAT the Lessor covenants with the Lessee to notify the Lessee in writing at least nine (9) months prior to the end of the Term as to whether or not the Lessor intends to exercise the option to renew contained in the Head Lease. Grant of Further Term: 18.3 Subject to CL18.1 the Lessor shall grant to the Lessee a lease of the Demised Premises for the further term referred to in CL18.1 as the case may be commencing on the day next following the expiration of the then Term at an initial Minimum Rent equal to the Minimum Rent payable at the date immediately preceding the date of commencement of such further term. " This clause mirrors a clause in the Head Lease but with two material differences. In the Head Lease the notice in para(a) was to be given not more than nine months nor less than six months prior to the expiration of the term and para(d) was added in the sublease. The appellant entered into possession and has occupied the demised premises since June 1988. On 27 October 1992 the respondent gave to the appellant a notice which complied with para(a) of CL18.1. The parties did not dispute that the sublease had not been terminated under para(b), that the requirements of para(c) had been met and that the respondent had lawfully and validly exercised its option to renew the Head Lease as mentioned in the first twenty words of para(d). There was also no dispute that the respondent had not notified the appellant in writing at least nine months prior to the end of the term as to whether or not it intended to exercise the option to renew contained in the Head Lease. PROCEEDINGS By summons dated 19 January 1993 the respondent sought a declaration that by its notice dated 27 October 1992 it had validly exercised its option under CL18.1 of the sublease to require the appellant to take a further sublease of the demised premises for a further term of five years commencing on the expiration of the first term of the sublease and for an order that the appellant specifically \ROLDMAN SACHS (AUSTRALIA) LTD v SBCDB ADMINISTRATION PTY LTD (Sheller JAB perform its obligations under the Agreement for sublease by executing a sublease in a form set out. The matter came on before Brownie J who ordered the appellant to perform its obligations under the Agreement for sublease in the manner claimed and to pay the respondent's costs. APPEAL Both before Brownie J and in this Court the parties were agreed that para(a) and para(b) and the first twenty words of para(d) were preconditions or conditions precedent to the valid exercise by the respondent of the option which CL18 granted to it. The appellant's case was that the proviso to para(d) whereunder the respondent covenanted with the appellant to notify the appellant in writing at least nine months prior to the end of the term as to whether or not it intended to exercise its option to renew contained in the Head Lease was either a second limb of, and thus integral to the single precondition or condition precedent expressed in the first twenty words of para(d), or constituted an additional precondition or condition precedent. His Honour did not consider that the language of CL18 permitted either of these constructions and I agree. CL18 provides for both a put and a call option, that is to say, it enables either the respondent sublessor or the appellant sublessee, if so desired, to oblige the other to enter into a further sublease of the demised premises subject to compliance with para(a), para(b) and para(c) and the first twenty words of para(d). It is perhaps curious that the options in the sublease should not be exercisable in the case where the Head Lessor had validly exercised its put option in the Head Lease thereby obliging the respondent to take a further Head Lease. For some reason it is a condition precedent to the exercise of the option in the sublease that the option in the Head Lease to renew the Head Lease be exercised by the respondent Head Lessee. But if it has validly done so, if the appropriate notice has been given by the sublessee or sublessor under para(a), if the sublease has not been terminated and if, in the case of a notice given under para(a) by the sublessee, there has been prior to the date of commencement of the further term no breach by the sublessee of any term or condition of the sublease not excused or waived by the sublessor or remedied by the sublessee to the satisfaction of the sublessor, either sublessor or sublessee may exercise the option. The appellant argued, however, that there is a further precondition or condition precedent to be found in the proviso to para(d). If this be right the respondent sublessor could prevent any valid exercise by the sublessee of the option by the simple expedient of not notifying the sublessee in writing at least nine months prior to the end of the term of its intention with regard to exercising the option to renew contained in the Head Lease. The appellant put its argument in two ways either of which it was said invalidated the exercise of the option by the respondent. The genesis of this approach is found in the joint judgment in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 579 particularly at 555-6. The appellant said that the respondent's failure to notify in writing in accordance with the proviso to para(d) was either a failure to fulfil a condition precedent or a breach of a condition, meaning thereby a promissory condition of such importance as to require strict or substantial performance; see per Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Pty Ltd (1938) 38 SR (NSW) 632 at 641-2; Associated Newspapers Ltd v Bancks (1951) 83 CLR 332 at 337. In this case it is not necessary to explore the distinction. A condition precedent or precondition to liability need not be promissory in character. Non-fulfilment may not involve a breach of contract yet fulfilment be essential to liability. Here the 4 UNREPORTED JUDGMENTS proviso is expressed as a promise. The promise was broken. It matters not whether it was strict or substantial performance that was required. There was no performance. The only question is whether performance of the covenant was essential to the valid exercise of the option and in that sense was relevantly a condition precedent to the appellant's obligation to renew the lease; compare the passage in the judgment of Bowen LJ in Bentsen v Taylor, Sons and Co [1893] 2 QB 274 at 281 cited with approval in Ankar at 556. Of factors of the sort referred to by their Honours in Ankar at 557 favouring an interpretation of the clauses there in question as conditions, the appellant relied upon two, the difficulty it would have in the event of breach in proving damages and the necessity of timely notification to give the appellant some indication of how it should order its affairs. The appellant also relied upon the decision of this Court in Tricontinental Corporation v HDFI Ltd (1990) 21 NSWLR 689, particularly the judgment of Samuels JA, who, with Waddell AJA, formed the majority. The President dissented. With respect one has only to examine the text of the clauses found to be conditions precedent in that case to see the distinction between them and the proviso to para(d). The entitlement to demand payment in the event of default was subject to the proviso, in case where the default was not capable of rectification, that "Tricontinental shall notify HDFI in writing of such event of default within twenty four hours of Tricontinental becoming aware of the occurrence of such event of default" and, in case where the default was capable of rectification, that "Tricontinental shall have notified HDFI in writing of such event of default and of the notice requiring rectification issued to the obligor within twenty four hours of the issue of such notice" and so on; (see 711). While the appellant placed reliance upon the use of the contrasting expressions "shall notify" and "shall have notified" I do not regard that case as assisting in the interpretation of the quite different language of CL18. CL18.1 contained conditions precedent, as is conceded. These were expressed by saying that if the sublessor or sublessee desired to have a further sublease the provisions of CL18.3 should apply provided appropriate notice was given, the sublease had not been terminated, no breach had occurred or not been remedied and the sublessor had validly exercised its option under the Head Lease. The proviso to para(d) was not so expressed. It was expressed quite differently as a covenant by the sublessor with the sublessee to notify the sublessee in writing. The contrast, as a matter of language, between the fulfilment of stipulations or the occurrence of an event as a contingency upon which the effective exercise of the option depended is in marked contrast to the proviso expressed in terms of a covenant by the lessor to do something. As Brownie J said the structure of the proviso to para(d) is quite different. The proviso required the sublessor to notify well ahead of time its intention to exercise or not exercise the option to renew the Head Lease. The parties perceived such a covenant to be commercially useful. However the respondent was bound to do no more than indicate its intention at a time which was at least and might have been more than nine months prior to the end of the term. It was not bound to act in accordance with the intention then notified. I do not think the covenant can be read as obliging the respondent, having given notice nine months or more before the end of the term of its then intention to exercise the option to renew contained in the Head Lease, to give effect to that intention and not to change its mind. Conversely the respondent's then notified intention not to exercise the option contained in the Head Lease might subsequently have \ROLDMAN SACHS (AUSTRALIA) LTD v SBCDB ADMINISTRATION PTY LTD (Sheller JAB changed. As the respondent submitted there is nothing in the notice provision which enabled the appellant to react to a notification with certain knowledge of its position. What was essential and a condition precedent to due exercise of the option was that, not more than six and not less than three months prior to the end of the term, notice of exercise be given in accordance with para(a). But a more important and, to my mind, decisive consideration is this. Para(d) made it a condition precedent to a valid exercise of the option that the respondent sublessor had exercised its option to renew the Head Lease. Effective exercise of the option in the Head Lease was conditioned upon notice having been given not more than nine nor less than six months prior to the expiration of the term. If such notice had been given and the conditions of para(a), para(b) and para(c) fulfilled the appellant sublessee might have exercised its option under the sublease. A contention that the appellant would not have entered into the agreement for sublease except on the basis that effective exercise by it of its call option under CL18 depended upon whether or not the respondent had, in accordance with its covenant in para(d), earlier given notice of its intentions regarding the option in the Head Lease seems to me untenable. The covenant was neither fundamental nor essential. Moreover the fact that damages might be difficult to assess or recover in the event of breach of the covenant demonstrates not that compliance was intended to be essential in order to give the covenant effect, as the appellant contended, but rather its insubstantial and elusory character and _ the inconsequential advantage or disadvantage to the sublessee of receiving or not receiving due notification. Such a characterisation of the covenant accords with the structure of CL18. In my opinion the orders made by Brownie J were appropriate and the appeal should be dismissed with costs. Dismissed with costs. Counsel for the Appellant: RA Conti QC/IE Davidson Instructed by: Coudert Brothers Counsel for the Respondent: AR Emmett QC/RJ Kaye Instructed by: Mallesons Stephen Jaques