TSAOUCIS v GALLIPOLI MEMORIAL CLUB LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MASON P, HANDLEY and STEIN JJA 9 July 1998, 9 July 1998 [1998] NSWCA 238 LEASE — OPTION TO RENEW — WHETHER PURPORTED EXERCISE EXPRESSED WITH CLEAR AND UNAMBIGUOUS INTENT Mason P The appellants were the lessees of part of the premises at 12/14 Loftus Street which were primarily occupied by the Gallipoli Club. The lease is in the form of a Memorandum of Lease capable of registration under the Real Property Act, but was not registered. Nevertheless it clearly operated as a contract. The appellants occupied part of the premises as a restaurant and take-away food outlet. The term of the lease was from a date in 1993 expiring on 25 April 1997. The appellants were partners in the business. The lease contained two options to renew for periods of "four and three years". When one turns to Pt11 of the annexure, to which reference is made on the front page of the Lease, the statement is: "Ptl1: Option of Renewal, 2 (two) Options of 4 (four) Years and 3 (three) Years respectively. Proceedings were commenced on 12 March 1998. The appellants claimed by summons a declaration that the lease agreement required rectification (we are no longer concerned with that) and a declaration that the appellants had duly exercised the option for renewal of the lease to which I have referred. On 26 April 1998 a Notice to Quit expired. The appellants had been holding-over since 25 April 1997. The issue that was fought before Young J was whether there had been a valid exercise of the option of renewal and that in turn split into three sub-issues. Firstly, whether the lease and s170 of the Conveyancing Act required the option to be exercised in writing. Secondly, whether in any event it had been duly exercised in the conversation that is relied upon. Thirdly, whether the first appellant, who had purported to exercise the option on the appellants' contention, had authority from his partner to do so. Although all three issues are involved in this appeal we have stopped Mr Larkin, counsel for the respondents, at a stage when he was developing his submissions in the second issue alone. The appellants rely upon the unchallenged evidence given in paral0 of the affidavit of Mr Tsaoucis, sworn 9 March 1988. The context was a conversation towards the end of 1994 or early 1995, that is about half way through the term of the lease, in which Mr Tsaoucis met with Mr Steven Ware, the treasurer of the Gallipoli Memorial Club Ltd. The meeting was at the Club premises. Mr Tsaoucis was aware that there had been a proposal put to the Club by a developer about redeveloping the site and that this redevelopment, if it was to proceed, would have necessitated vacant possession of the entire premises. In that situation Mr Ware initiated the meeting. The conversation, as deposed to, was to the following effect: "Mr Tsaoucis: You know that I have two by four and a two by three year options. I will be taking those options up. 2 UNREPORTED JUDGMENTS Mr Ware: I don't think you have two by four and two by three options. Mr Tsaoucis: I'll be staying, even if we go to another place, no matter how many options I've got. " At the same meeting there was discussion about an alternative proposal that the club might move to another location, and for the appellants' restaurant, the Rock Fish Cafe, to trade wherever the club moved. Mr Tsaoucis was invited to inspect various proposed locations, and he did this the following day in company with Mr Ware and other members of the club. During the course of that meeting three other premises in the City of Sydney were inspected. There was discussion of rent and the suitability of those other premises for club operations and also where the Rock Fish Cafe would be conducted if the club moved to those premises. There was a letter written on 24 February 1995, some time after the conversation I have referred to, from the appellants' accountant (Mr Copp) to the club. It is headed "Re Lease of Premises, Ground Floor". It refers to a telephone conversation between Mr Copp and Mr Ware regarding the redevelopment of the building as a whole and the effect on Mr Copp's clients' business. Mr Copp indicated that he had still not received any legal documents that he required. He stated his understanding that under the proposal under discussion Mr Ware would like his clients to vacate the premises for a period of time for redevelopment, the stated time being ten to twelve weeks. The indication was that a rent-free period would not be satisfactory and alternative proposals were advanced on behalf of the appellants. There was no other discussion and no other correspondence touching the alleged option at any time during the currency of the lease. The holding-over clause made it plain that any exercise of the option had to occur prior to the commencement of the holding-over. Mr Jackson, Senior Counsel, has said all that can be advanced in relation to the alleged exercise of the option. In my view this is a case where the conversation falls very far short of the law's requirement that the purported exercise of an option must be expressed clearly and unequivocally as regards what is intended; see Prudential Assurance Company Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673 at 677. The requirement in the law that notices of exercise of option and the like are to be construed objectively in the way they would be understood by a reasonable recipient, and the requirement that they must be expressed with a clear and unambiguous intent is re-stated in the recent decision of the House of Lords, Mannai Investment Company Ltd v Eagle Star Life Assurance Company Ltd [1997] AC 749. The timing, of the conversation is an unpropitious start for the appellants' case. There was no need for the matter of option to be addressed for at least another two years. The statements by Mr Tsaoucis are to be read in the context of broader discussions in which the location of the premises was uncertain. There were, in essence, three possibilities; the existing site undeveloped, the existing site redeveloped or alternative sites. Each of these would have had factors which would have had to have been taken into account by the appellants in making a decision to commit themselves for an exercise of the option, and there was simply no need for them to do so at that stage. The words that were used, and in particular "T will be taking those options up" and "T'll be staying, even if we go to another place, no matter how many options I've got." URJ TSAOUCIS v GALLIPOL] MEMORIAL CLUB LTD (Mason P) 3 are to my mind entirely consistent with the Lessees keeping their powder dry. They do not represent a clear statement of present intention and present commitment to the obligation inherent in the contract that would be formed in the taking up of the first option. The very fact that reference is made to two options is further indication of the fact that a present commitment is not really what the conversation was about. If one adds to that the absence of any confirmatory correspondence or any reference to the matter in the letter from the accountant, and the context of the uncertainty of the actual premises, then one has in my view a clear situation that Young J was correct in concluding that the option had not been taken up. It was submitted by Mr Jackson that, whatever happened to the Club, the appellants had an interest in pegging themselves down, as it were, and using the rights inherent in the exercise of the option as a bargaining chip, particularly if the Club wished to redevelop or move elsewhere. The problem is that there was simply no need for the chip to be played at that point of time. The lease had two years further to go. The rights given by the option clause were good and were capable of being exercised at any time during that period. On the other hand, if the chip were exercised then and there, the appellants themselves would have committed themselves to an arrangement which may not have suited them, as things appeared at the end of the term of the lease. Because his Honour was correct, for reasons I have endeavoured to re-state, in concluding that the option had not been exercised by the conversation relied upon, it is unnecessary to consider the other two matters that were argued. I propose that the appeal be dismissed with costs. Handley JA I agree. Stein JA I also agree. At p26 of the red appeal book the trial judge, Young J, said this: "It seems to me that both the future tense of the word will and the circumstances in which the statement was made indicate that there was no present exercise of the options but merely an indication that at the appropriate time the options would be taken up." I agree with his Honour's statement. Mason P The appeal is dismissed. JACKSON: In the course of your Honours' giving reasons, we've discussed the course in terms of occupation of the premises. We've arrived at an agreement that the Notice to Quit won't take effect until a month from today. And could we ask the Court to note that agreement. LARKIN: It will be necessary, if the judgment doesn't automatically do it, to dissolve an injunction which presently restrains my client, but your Honours can note that we, as a matter of agreement- - HANDLEY JA: We could dissolve it with effect from a month from today. We could dissolve it with effect from a month from today. LARKIN: Your Honours the agreement is that you can note the agreement between the parties that we. will not act on the Notice to Quit for one farther month. MASON P: Does the injunction self-destruct- - JACKSON: It does your Honour. Because as I understand it's made in terms that pending the hearing and determination of the appeal. 4 UNREPORTED JUDGMENTS LARKIN: I'm grateful to my friend. MASON P: I will add to the reasons. It is noted that an injunction maintaining the status quo has been granted, but only until the disposal of the appeal. It is also noted that the parties are agreed that the lessor will not exercise its rights under the Notice to Quit for a further period of one month. HANDLEY JA: That is the whole of the agreement.? LARKIN: Yes your Honours. HANDLEY JA: It's probably implied that there'1I] be some occupation fee. But we're not asked to note anything about that. LARKIN: There is an agreement in place, as I understand it, about continuing fees, and our expectation is that those fees will continue. I don't understand my friend to be suggesting anything different. HANDLEY JA: Any ambiguity ought to be clarified. JACKSON: Yes your Honour. Yes, we'll pay the appropriate occupation fee, your Honours. MASON P: Is it safer to say that the existing arrangement for occupation will continue on existing terms for one month? LARKIN: Yes your Honour. JACKSON: Yes. Appeal dismissed with costs Counsel for the appellant: D F Jackson QC/D L Warren Solicitors for the appellant: N G Cassim & Co Counsel for the respondent: P W Larkin/ L M Byrne Solicitors for the respondent: Madgwick & Partners