Menuko Pty Ltd v Tinine Group Pty Ltd [2007] NSWADT 149

CITATION: Menuko Pty Ltd v Tinine Group Pty Ltd [2007] NSWADT 149

DIVISION: Retail Leases Division

APPLICANT PARTIES: Menuko Pty Ltd RESPONDENT Tinine Group Pty Ltd

FILE NUMBER: 065205

HEARING DATES: 13 April 2007

SUBMISSIONS CLOSED: 13 April 2007

DATE OF DECISION: 25 July 2007

BEFORE: Higgins S - Judicial Member

CATCHWORDS: Claim for declaration of rights, obligations and liabilities under a lease - Claim for payment of money

MATTER FOR DECISION: Principal matter

LEGISLATION CITED : Interpretation Act 1987 Retail Leases Act 1994

CASES CITED: Hanna v Saracoglu [2005] NSWADT 227 Moratic Pty Ltd v Laurence James Gordon [2007] NSWSC 5 Polgara Pty Ltd v Vision Wise Holdings Pty Ltd (BC9600730)(unreported, NSWSC, 11 March 1996)

APPLICANT D Murr, Barrister REPRESENTATION: RESPONDENT G McNally, Barrister

ORDERS: 1. Declare that the final sentence of clause 8 of the lease is void by reason of s.18(4) of the Retail Leases Act; 2. Parties wishing to make an application for costs to file and serve written submissions within 28 days of this decision, failing which there will be no order as to costs; 3. Subject to submissions being filed as referred to in order 2. above, submissions in reply to be served within a further 28 days and the tribunal to determine costs on the papers.

REASONS FOR DECISION 1 The applicant lessor has sought a declaration on the proper construction of cl.8 of a lease made between the applicant and the respondent lessee and the applicability of s.18 of the Retail Leases Act 1994 (the RL Act) to that clause. In addition to this the applicant seeks orders as to the rent which is payable pursuant to the lease, in light of the findings of the tribunal in respect to these issues of construction. 2 The dispute arose after the respondent had exercised its right of a further option to lease the premises. That right was exercised pursuant to cl.8 which also made provision for the rent that was payable at the commencement of the new term of the lease. This rent was to be the market rent as at the date of renewal of the lease, but the clause also contained a 'ratchet' clause that provided that the rent was not to be any less than what the rent had been immediately prior to its renewal. The parties were not able to agree on the market rent and appointed a valuer to determine the rent as at the date of renewal. The valuer determined this rent to be less than the rent that was payable immediately prior to renewal. Furthermore, it was less than the rent at the commencement of the original term of the lease. On receipt of the valuation the respondent agreed to pay rent in accordance with the valuation, whereas the respondent relied on the ratchet provision in cl.8 of the lease. It is the respondent's position that the ratchet provision is void by reason of s.18(4) of the RL Act. The Lease 3 The lease the subject of these proceedings commenced on 1 August 2001. It was a lease for a 5 year period, ending 30 July 2005, with an option to renew for a further period of 4 years. 4 Cl.2(1) of the lease provides that the lessee is to pay the lessor during the term of the lease rent of an amount set out in Item 1 of the Appendix to the lease as varied by upward review calculated in accordance with the provisions of cl.7 of the lease and in the manner set out in Item 2 of the Appendix to the lease. At the commencement of the lease, the amount of rent that was payable was $130,000.00 per annum. 5 Cl.7 of the lease relates to rent reviews and provides, so far as is relevant, as follows: '7. RENT REVIEW (1) For the purpose of this lease the following expressions shall have the meanings assigned to them hereunder namely: "The Rent Review Date" is the date or dates referred to in Item 4 of the Appendix hereto. "The C.P.I. figure" means …. "The Open Market Rent" means the yearly rent for which the premises might reasonably be expected to be let with vacant possession … (2) The yearly rent payable by the Lessee hereunder from and after the rent review date next ensuing (hereinafter called "the Relevant Rent Review Date") in lieu of the yearly rent hereinbefore provided shall be an amount calculated by multiplying the yearly rent payable at the commencement of the term by a fraction, the numerator of which is the most recent C.P.I. figure published immediately before the relevant rent review date and the denominator of which is the C.P.I. figure published immediately before the commencement of this lease. 6 The 'Rent Review Dates' set out in Item 4 of the Appendix are 1 August 2002, 1 August 2003 and 1 August 2004. 7 Cl.7(3) of the lease provides how the rent is to be determined at the relevant Rent Review Dates if cl.7(2) does not apply by reason of the Commonwealth of Australia not publishing a C.P.I. figure for the year in question. In such circumstances, the lease provides that the yearly rent payable as from the relevant Rent Review Date is to be the 'open market rent'. Sub-clauses 7(4), (5) and (6) relate to the manner in which the open market rent is to be determined. It is not necessary to set out these provisions for the purposes of this application as there is no dispute that in each of the relevant Rent Review Dates a C.P.I. figure was published. Nor is it disputed that the determination of the valuer as at the date of the renewal of the lease was made in accordance with these provisions. 8 Cl.8 of the lease, so far as it is relevant, provides: '8. OPTION FOR A FURTHER TERM (1) … [The] rent at the commencement of the further term shall be the open market rent calculated in accordance with the provisions of Cl.7 hereof. The dates to be inserted in Item 4 of the appendix to the lease of the further term shall be the anniversary of the commencement date for each year of the lease for the further term. Items 6 and 7 of the appendix to the new lease for a further term shall be deleted. The rent for the first year of the lease for a further term shall not be less than the rent in the last year of the initial term increased by the fraction contained in Cl.7(2) hereof.' 9 As mentioned above, it is not disputed that the open market rent as at the date of renewal of the lease was calculated in accordance with cl.7 of the lease. Relevant Legislation 10 There is no dispute that the lease, the subject of this application, came within the terms of the RL Act. Part 3 of that Act relates to rent and outgoings. In this case the relevant provision is that contained in s.18 which provides so far as is relevant as follows: 18. Restrictions on adjustment of Base Rent (1) In this section: "Base Rent" means rent or that component of rent, which comprises a specified amount of money (whether or not there is provision for the amount to change). (2) … (3) … (4) If a retail shop lease provides for a change to base rent in a way that has the potential to cause that rent to decrease (such as a provision for the rent to change to current market rent), a provision of the lease is void to the extent that it: (a) prevent or enable the lessor or any other person to prevent base rent decreasing pursuant to the change, or (b) limit or specify, or allow the limitation or specification of, the amount by which the base rent is to decrease. 11 There are two provisions in the RL Act which provide mechanisms for reviews of current market rent. The first provision is in s.19 and it sets out the manner in which current market rent is to be determined in 'a retail shop lease that provides for rent to be changed to current market rent'. That is, it applies to leases which provide for a current market rent review during the currency of the lease. The section also makes provision for the determination of current market rent in the event there is no agreement between the parties on this issue. This includes a mechanism whereby the parties to the lease can either, by agreement appoint a specialist retail valuer to make the determination, or where no agreement can be reached in this regard, by making an application to the tribunal for the appointment of such a valuer: see s.19(1A) of the RL Act. 12 The other provision is found in s.31 of the RL Act. This section is similar in terms to s.19 however, it applies where 'a retail shop lease … provides an option to renew or extend the lease at current market rent.' That is, this section applies to the renewal of a lease pursuant to an option to renew and it provides, so far as is relevant, as follows: 31. Reviews of current market Rent (1) A retail shop lease that provides an option to renew or extend the lease at current market rent is taken to include provision to the following effect: (a) The current market rent is the rent that would reasonably be expected to be paid for the shop, as between a willing lessor and a willing lessee in an arms length transaction (where the parties are each acting knowledgably, prudently and without compulsion), determined on an effective rent basis, having regard to the following matters: (i) the Provisions of the lease, (ii) the rent that would reasonably be expected to be paid for the shop if it were unoccupied and offered for rent for the same or a substantially similar use to which the shop may be put under the lease, (iii) the gross rent, less the lessor's outgoings payable by the lessee, (iv) rent concessions and other benefits that are frequently or generally offered to prospective lessees of unoccupied retail shops. The current market is not to take into account the value of goodwill created by the lessee's occupation or the value of the lessee's fixtures and fittings on the retail shop premises. (b) … 13 As mentioned above, the remainder of s.31 of the RL Act relates to the mechanism by which the current market rent is to be determined where the lessor and lessee cannot agree as to this amount. Again, the mechanism is one whereby the parties to the lease can either, by agreement appoint a specialist retail valuer to make the determination, or where no agreement can be reached in this regard, by making an application to the tribunal for the appointment of such a valuer. 14 Where a retail lease contains provisions that are inconsistent with the provisions of the RL Act, which includes the above sections, then the provisions of the lease are void to the extent of the inconsistencies: see s.7 of the RL Act. That is, the provisions of the lease prevail. 15 S.32 of the RL Act makes provision for the lessee to have current market rent determined early. That is, to have it determined prior to the date on which the lessee is required to exercise his/her/its options to renew under the lease. Applicant's case 16 In support of its application the applicant tendered into evidence: (a) an affidavit sworn by Paul Leonard Wells, the solicitor for the applicant, sworn on 15 February 2007 ("Mr Wells' first affidavit"); (b) a copy of the published consumer price indices for the years 1980 to 2006; (c) an affidavit of Paul Leonard Wells sworn on 13 April 2007 ("Mr Wells' second affidavit"); and (d) an affidavit of Agazio Riitano, the Managing Director of the applicant, sworn on 13 April 2007. 17 In his first affidavit Mr Wells states that the rent for the fourth year of the lease was $1,563m2 being $140,670 per annum (exclusive of GST). He also sets out the steps that were taken in the appointment of Mr McCarney of K.J. McCarney & Co Pty Ltd to determine the market rent of the premises as at the date of the commencement of the new 4 year term of the lease. On 24 March 2006, Mr McCarney wrote to the parties advising them of his determination. A copy of that letter and determination are attached to the affidavit of Mr Wells. In his letter, Mr McCarney stated that the 'pertinent' clause of the lease in respect to his determination was cl.7. He then set out the relevant portions of cl.7 in so far as it related to 'the open market rent'. After setting out some of the other relevant provisions in the lease, Mr McCarney made some general comments about the leased premises. This was followed by details of comparable premises in the Double Bay area. On the final page of his letter Mr McCarney set out his rental calculations as at 1 August 2005 as being $1,420.00 per m2 which equated to $127,800 per annum (exclusive of GST). Mr McCarney also made reference to cl.8 of the lease but expressly stated that he had no comment to make in relation to this particular clause. 18 Mr Wells' second affidavit gives an account of the correspondence and conversations between the legal representatives of the parties following receipt of Mr McCarney's determination. He states that on 4 April 2006, he was instructed by Mr Riitano not to pursue a review of the valuation, as Mr Riitano would seek to persuade the respondent to pay more rent, and if unsuccessful an application was to be made to the tribunal for a determination as to the validity of the ratchet provision in cl.8 of the lease. The conversations and correspondence to which Mr Wells refers show that the parties continued to adhere to their respective positions in respect to the construction of cl.8 of the lease and the validity of the ratchet provision. 19 In his affidavit, Mr Riitano explained that between 20 September 2005 and 12 June 2006 he sent quarterly tax invoices for the payment of rent to the respondent in the sum of $12,895.23 per month representing rent of $11,722.94 (exclusive of GST). The latter amount being that which was due and payable during the final year of the initial term of the lease. Mr Riitano then went on to state that from 1 April 2006, following the determination of Mr McCarney, the respondent took the position that it was only liable to pay the amount determined by Mr McCarney and he deducted from this amount that which he had previously paid since 1 August 2005 and which exceeded the amount assessed by Mr McCarney. Notwithstanding this, Mr Riitano continued to send quarterly tax invoices for rent in the amount that had applied during the last year of the term of the initial lease. However, in September 2006, following receipt of a letter from the solicitor of the respondent requesting that the applicant correct its invoices to reflect the rent amount determined by Mr McCarney, Mr Riitano amended the invoices accordingly. At the same time he marked these invoices with the words; "increase of rent pending review". Mr Riitano states that at no time did he agree to waive any rights the applicant had in regard to its rights under the lease nor did it reach an agreement with the respondent that the rent was as set out in the invoices from 25 September 2006. 20 The respondent contended that cl.8 of the lease was unambiguous in that it provided for a rent which was the greater amount of rent determined on the basis of current market rent and rent determined on the basis of a further annual CPI increase as provided in cl.7(2) of the lease. The applicant then contended that by its express words, s.18 of the RL Act only apply to 'changes' in 'base rent' and that such words should be construed as only applying to changes during the currency of the terms of a lease. That is, as a new lease is entered into following the exercise of an option to renew it could not be said that there was a 'change' in the 'base rent'. Therefore, s.18 had no application to cl.8 of the lease. Respondent's Case 21 The respondent did not dispute the evidence that was tendered into evidence by the applicant. It also relied on two affidavits of Christopher Michael Finn, the solicitor for the respondent. These affidavits attach invoices that were also part of the applicant's evidence. 22 The respondent contends that on the proper construction of cl.8 of the lease there was an inconsistency between the two methods of determining the rent as at the time of the renewal of the lease following the exercise of the option. These it contended could not stand together and the latter method, which included the ratchet clause was void. 23 In the alternative, the respondent contended that s.18 of the RL Act should be given a broad interpretation to include 'changes' in the base rent at the time of renewal of a lease pursuant to the exercise of an option to renew. It argued that this approach was supported in the second reading of the speech on the Retail Leases Amendment Bill 1998 by Ms S. Nori MP (Legislative Assembly Hansard 28/10/1998 at page 9168), which included amendments to s.18 of the RL Act. It was also contended that the decision of Young J. in Polgara Pty Ltd v Vision Wide Holdings Pty Ltd BC9600730 (unreported)(NSWSC 11 March 1996) also provided supported for such a wide construction. 24 Further in the alternative, the respondent contended that the course of dealing between the applicant and the respondent was such that it can be inferred that they had reached an agreement as to the rent that was payable and were bound by it on the basis of the principles set out in Moratic Pty Ltd v Laurence James Gordon [2007] NSWSC 5 at [30] and the respondent was bound by that agreement. This was strenuously opposed by the applicant and the respondent did not really press this ground. In any event it was arguably a matter for which the respondent would have been required to seek specific orders by way of a separate application in the form of a cross application. As this matter was not duly pressed and the application can be determined on the other grounds relied on, I have not considered this part of the respondent's arguments any further. Consideration 25 It is appropriate to first deal with the issue of inconsistency in cl.8 of the lease as contended by the respondent. In my opinion, the argument is misconceived. The two sentences should not be examined in isolation, but should be read in the context of the entire clause. In this regard I agree with the construction advanced by the applicant. The decision in Polgara Pty Ltd v Vision Wise Holdings Pty Ltd (supra) does not in my opinion assist in constructing cl.8 of this lease. It is noted that in Polgara the terms of the lease the subject of that decision was substantially different to the lease the subject of this application. In Polgara the issue was whether the ratchet provision that applied during the term of the initial lease also applied in determining the rent on renewal of the lease following the exercise of the option to renew. Young J. held it did not on the basis of the proper construction of the overall contractual agreement between the parties and the specific terms of the option to renew clause in that lease. In this application, as pointed out by the respondent, the ratchet clause is contained in the clause relating to the option to renew and not in the rent review clause that applied to the initial term of the lease. 26 The real question is whether the ratchet provision in this clause is void by reason of s.18(4) of the RL Act. This in turn is dependent on the proper construction of s.18. 27 In construing legislation s.33 of the Interpretation Act 1987 provides that a purposive approach is to be taken, namely a construction that would promote the purpose or object underlying the Act in question. 28 In this case the purpose and object of the RL Act is to make provision for good leasing practices in the retail industry of New South Wales so that there is more equitable bargaining position between the parties to the lease and to provide for a cost effective and timely resolution to disputes: see Second Reading Speech of Retail Leases Amendment Bill 1998. Its objective is not to protect tenants from trading difficulties or diminishing the rights of property owners. 29 There is no dispute that a retail lease which contains a clause providing for a rent review mechanism, with a ratchet provision, and which is applicable during the currency of the initial term of the lease, that clause so far as it contains the ratchet provision is void by reason of s.18 of the RL Act: see Hanna v Saracoglu [2005] NSWADT 227 at [39]. In the case of the lease the subject of this application the rent renew provision in cl.7(3) of the lease does not contain such a ratchet provision. 30 In my opinion, having regard to the express words used in s.18, in particular the definition of 'base rent' in s.18(1) and the words 'retail shop lease' and the use of the word 'retail shop lease' in ss.19, 31and 32 of the RL Act, s.18(4) equally applies to any change in the rent at the commencement of an additional term of the lease by reason of the exercise of an option to renew that is contained in the lease for the original term. 31 The term 'base rent' is firstly defined without reference to any particular time such as the commencement of the lease or any other period of time. It is only given such a reference as to time in s.18(2), (3) and (4) of the RL Act and the relevant reference to time is when that rent is to 'change'. Accordingly, on its proper construction the 'base rent' is effectively the rent paid immediately prior to any adjustment to the rent as provided by the terms of a lease. 32 The term 'retail shop lease' is defined in s.3 of the RL Act to mean the following: "retail shop lease" or "lease" means any agreement under which a person grants or agrees to grant to another person for value a right of occupation of premises for the purpose of the use of the premises as a retail shop: (a) whether or not the right is a right of exclusive occupation, and (b) whether the agreement is express or implied, and (c) whether the agreement is oral or in writing, or partly oral and partly in writing. 33 In my opinion this term is used in a broad contractual sense as described by Young J in Polgara (supra)(see BC 9600730 at 5): "… [the] plaintiff, put that whenever there is the exercise of an option to renew under a lease such as the present, there is a grant of a completely new lease and, accordingly, it is submitted that one starts a new regime because the grant is the grant of a new estate. It appears to unarguable that as a matter of the law of estate that is so. However, for the last five years or so, decisions of the High Court of Australia in The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 and the Court of Appeal in Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105, make one look at leases in the same way as one looks at contracts under the general law. This has meant that when looking at leases which grant options to renew, one looks at the contractual regime which the parties have set up to cover the relations. Even though there is a grant of a new lease, except in so far as the deed of regrant merges within the terms of the existing contract, the original contract continues to govern. Thus when one is looking to see the contractual arrangements that the parties have made one looks to see the contractual regime which was set up by the original contractual document and paid less attention than the court would have paid before the change of track in the superior court to the actual fact that according to the law in the states there is a regrant of an interest. I made this point in Erolmall Pty Ltd v Sarodom Investments Pty Ltd (1995) NSW Con v R 55-744 at 55, 750." 34 That is a 'retail shop lease' is a reference to the contractual arrangements the parties have made in respect to the retail shop the subject of the lease. In this regard it is noted that the same expression is used in s.19 and also s.31 of the RL Act. Furthermore, in my opinion, to hold otherwise would defeat the overall purposes of the RL Act of providing consistency in leasing practices in the retail industry. 35 In my opinion, the proper construction of s.18(4) of the RL Act is that it applies to any change in the rent during the currency of the agreement between the parties, regardless as to whether that change occurs during the initial term of the lease, the commencement of a new term by reason of the lessee having exercised an option to renew or any time thereafter. 36 Accordingly, the appropriate order is a declaration that the final sentence in cl.8 of the lease is void by reason of s.18(4) of the RL Act. 37 As the parties have indicated that costs are sought it is appropriate to make the usual orders as to the filing and serving of submissions in this regard and for the matter to be determined on the papers.