CITATION: Jafari v Lituma Pty Ltd [2005] NSWADT 64 DIVISION: Retail Leases Division FIRST APPLICANT Zahra Jafari FIRST RESPONDENT PARTIES: Lituma Pty Ltd SECOND APPLICANT Lituma Pty Ltd SECOND RESPONDENT Zahra Jafari FILE NUMBER: 055016, 055024 HEARING DATES: 14/03/2005 SUBMISSIONS CLOSED: 03/14/2005 DATE OF DECISION: 03/24/2005 BEFORE: Higgins S - Judicial Member APPLICATION: Claim for declaration of rights, obligations and liabilities under a lease - Claim for relief against forfeiture - Claim for the doing of work or provision of services MATTER FOR DECISION: Preliminary matter LEGISLATION CITED : Conveyancing Act 1919 Retail Leases Act 1994 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 CASES CITED: Union Trustee of Australia Ltd v Baker (1948) 65 WN (NSW) 247 Zorbas v McNamara [1960] NSWLR 428 and [1962] NSWLR 53 FIRST APPLICANT F Hicks, counsel SECOND APPLICANT REPRESENTATION: A Monzo, counsel FIRST RESPONDENT A Monzo, counsel SECOND RESPONDENT F Hicks, counsel ORDERS: The Tribunal declares:; 1.The proper construction of cl.1(e) of the Deed is that the lease was assigned to Mrs Jafari on 26 November 2004 when Mrs Jafari made the payments set out in cl.1(b) and (c) of the Deed and Lituma Pty Ltd consented to that assignment at the same time; 2.The proper construction of cl.4 of the Deed is that Mrs Jafari agreed to surrender the lease in the event she failed to make the payments set out in cl.1(b) and (c) of the Deed on 26 November 2004 at 2pm.; 3.Lituma's right of re-entry into the premises after the assignment of the lease for breach of cl.1(d)(i) of the Deed was subject to s.129 of the Conveyancing Act 1919; 4.The matter be stood over for further directions on 7 April 2005 at 11a.m. REASONS FOR DECISION 1 Mrs Jafari and Lituma Pty Ltd ("Lituma") have both filed applications in respect of premises at 331 Penshurst Street, Willoughby ("the premises"), which are owned by Lituma. The dispute between the parties arises from a Deed of Release that was entered into on 26 November 2004 by Mrs Jafari, Lituma and a third party Sayed Mohammad Ali and Khalili-Zohi and Shahin-Mahdavi Nader ("Zohi and Nader"), as joint tenants. A threshold issue in respect of that dispute relates to the proper construction of the terms of that Deed, in particular cl.1(d), which relates to the assignment of the lease in respect of the premises and cl.4, which refers to the "surrender" of the lease. As determination of this threshold issue was likely to determine the matter, with the consent of the parties the Tribunal agreed to hear and determine these issues of construction as a preliminary issue. Background facts 2 It is firstly necessary to set out the background to the dispute. 3 Zohi and Nader had entered into a registered lease with Lituma, on 9 December 2002, in respect of the premises. Zohi and Nader conducted a Darya/Persian and Australian supermarket business from the premises. The lease was for a period of five years with an option to renew for a further five year period. 4 In March 2003, Zohi and Nader allowed Mrs Jafari and her husband, Mr Jafari, to run the business with a view that they would purchase it. In May 2003, Mr and Mrs Jafari executed an agreement for the sale of the business. That sale was never completed, but Mr and Mrs Jafari continued to run the business from the premises. 5 During 2004 a dispute arose between the parties in relation to outstanding rent in that Lituma had not received any rental payment for some considerable period of time. As a consequence, on 14 September 2004, Zohi and Nader filed an application with the Tribunal seeking possession of the premises from Mr and Mrs Jafari (File No. 045106). To complicate matters, at this time, Mr and Mrs Jafari were involved in a matrimonial dispute. 6 At about the same time, Lituma filed an application in the Tribunal seeking possession of the premises from Zohi and Nader (File No 045127). 7 On 26 November 2004, both proceedings were settled and as part of that settlement the parties executed a Deed of Release ("the Deed"). As a consequence of the matter being settled, on the same day, by consent the Tribunal ordered that each application be withdrawn. 8 After 26 November 2004 Mrs Jafari remained in possession of the premises and paid rent up until early February 2005. However, she did not trade. Under the Deed Lituma had agreed to undertake some repair work to the premises (cl. 2 of the Deed), but there was a dispute in respect of the adequacy of the work that had been undertaken. The adequacy of this work is of no importance to the preliminary matters in issue. 9 On 18 January 2005, Lituma re-entered the premises by changing the locks. Lituma contend that this re-entry was pursuant to cl.4 of the Deed, in that Mrs Jafari had failed to comply with cl.1(d)(i) of the Deed in that she had failed to provide Lituma with a Bank Guarantee for 3 months rent within 28 days of executing the Deed. There is no dispute as to this failure, however a Bank Guarantee has subsequently been obtained, after the commencement of proceedings by Mrs Jafari. 10 On 2 February 2005, Mrs Jaffari lodged an application before the Tribunal seeking possession of the premises and interim orders to this effect. Interim orders were not made. However, on 28 February 2005, Mrs Jafari lodged an amended application and Lituma also lodged an application seeking declarations including a declaration that it was entitled to retain vacant possession of the premises. Mrs Jafari's amended application included an unconscionable conduct claim, pursuant to s.71A of the Retail Leases Act 1994. This claim was withdrawn on 1 March 2005 and a further amended application was filed on 10 March 2005. Issues 11 The preliminary issues for determination are: a) whether on a proper construction of cl.1(e) of the Deed, the lease was assigned to Mrs Jafari on 26 November 2004 and whether Lituma consented to that assignment on that day; and b) if the lease is found to have been assigned on 26 November 2004, whether s.129 of the Conveyancing Act 1919 applied, to a default by Mrs Jafari of her obligations under the Deed. The Deed 12 In the Deed, Lituma is described as the "lessor", Zohi and Nader are described as the "vendors" and Mrs Jafari is described as the "purchaser". 13 Paragraph C of the Recitals to the Deed acknowledge that Mrs Jafari had been in occupation of the premises and conducting the business since 3 March 2003. It also states that: "There have been disputes between the parties regarding the amount due by the purchaser to complete the purchase and obtain the lessor's consent to the assignment of the lease". 14 Paragraph E of the Recital makes reference to the proceedings instituted by Zohi and Nader against Mr and Mrs Jafari, and the proceedings issued by Lituma against Zohi and Nader. It goes on to state that: "The settlement of the sale of the business in accordance with the terms of this Deed will resolve all issues in the Administrative Decisions Tribunal." 15 Clause 1 of the Deed relates to the completion of the sale of the business between Zohi and Nader as joint tenants and Mrs Jafari. So far as is relevant, that Clause provides as follows: "1. The vendor and the purchaser will complete the sale of the business as follows: (a) completion of the sale will take place at the officers of the Administrative Decisions Tribunal, Sydney, on 26 November 2004 at 2.00pm. Time shall be of essence; (b) the purchaser will pay the vendor the sum of $53,000 by bank cheque; (c) the purchaser will pay the lessor $63,535.87, being in respect of arrears of rent and other outgoings and interest thereon, pursuant to the lease and in respect of it's costs; (d) the purchaser must deliver to the lessor: (i) a bank guarantee in favour of Lituma Pty Ltd for an amount equal to 3 months plus GST under the lease within 28 days after the date of this Deed; and (ii) a certificate of currency of insurance evidencing the insurances required under the lease within 7 days after the date of this Deed; (e) the vendor hereby assigns all the right, title and interest in the lease to the purchaser and the lessor hereby consents to the assignment. Lituma hereby releases the vendor in respect of any liability under the lease, whether arising before or after the date of this Deed. The purchaser covenants that she will pay the rent and other outgoings and observe and perform all the terms of the lease as if she were the lessee under the lease" 16 Clause 2 of the Deed relates to the lessor's obligation to carry out works to the premises. Those works were defined to mean repairing the shop floor. That clause, so far as is relevant, provided as follows: "Immediately after completion the lessor will, at its cost, carry out the Works to the premises as soon as possible…" 17 Clause 3 of the Deed makes reference to the relevant releases given by each of the parties to the Deed. This clause is prefaced by the words "immediately after completion". 18 Clause 3(f) of the Deed provided that the vendor, purchaser and lessor would execute and file terms of settlement in terms of Annexure B to the Deed. These terms were that by consent the applications of Zohi and Nader and that of Lituma were to be withdrawn. On 26 November 2004, the Tribunal made orders in accordance with these Short Minutes of Order. 19 Clause 4 of the Deed provided: "In the event that the purchaser fails to comply with any term of this Deed, the purchaser must immediately upon such a default surrender and give vacant possession of the premises to the lessor." Construction of the Deed 20 The parties are in agreement that the general principles applicable to the construction of express terms of a written contract apply in construing the terms of this Deed. In summary they are: a) the primary "object" of construction of a term of a contract is to determine the intention of the parties: see Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; b) this intention is it to be ascertained firstly from the words used in the contract, and not the party's subjective intentions, desires, aspirations or expectations: see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352-3. That is, the intention is to be assessed objectively and the essential question is: "What would reasonable business people in the position of the parties have taken the clause to mean?" (see Schenker & Co (Aust) Pty Ltd v Maplas Equipment & Services Pty Ltd [1990] VR 834 at 840), or as stated by the majority in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd & Ors [2004] HCA 52, at p.16 "What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe"; and c) parole evidence such as a party's subjective intentions, desires, aspirations or expectations are only relevant where the express words in the written contract are ambiguous. 21 As pointed out by Sneddon and Ellinghaus in Law of Contract (seventh edition) at [10.32] it is also well accepted that: "…a narrow or pedantic approach is not warranted in the construction of commercial agreements … Its methodology must necessarily be flexible and resourceful. It must rest on the premise that the contract was made in good faith with the object of mutual benefit by due performance. The Court should be astute to give effect to discernible commercial purpose". (see also Upper Hunter Country District Council v Australian Chilling & Freezing Co. Ltd (1968) 118 CLR 429 at 437) 22 In this case, there is no dispute about the circumstances in which the Deed of Release came into existence or the overall purpose of the Deed. These are reflected in the Recitals to the Deed. As mentioned above, prior to the Deed being executed, the matters in dispute between the parties was the completion of the sale of the business to Mrs Jafari and the outstanding rent owed to Lituma. In respect of the completion of the sale of the business, this involved the assignment of the lease to the premises and Lituma's consent to that assignment (Recital C). a) Construction of clause 1(e) – date of assignment 23 Mr Hicks, on behalf of Mrs Jafari, argued that on a proper construction of clause 1(e) of the Deed, the assignment of the lease occurred on 26 November 2004, the date on which the sale of the purchase of the business by Mrs Jafari from Zohi and Nader occurred. That is, on Mrs Jafari paying the amounts referred to in clause 1(a) and (b) of the Deed the sale was complete. This occurred on 26 November 2004 on the execution of the Deed. 24 Mr Monzo, on behalf of Lituma, argued that on a proper construction of clause 1(e) of the Deed, the assignment of the lease did not occur until each of the matters referred to in clause 1(a) to (d), including the provision of a Bank Guarantee by Mrs Jafari to Lituma within 28 days of signing the Deed, had occurred. In my opinion, for the reasons set out below such a construction is inconsistent with the express words that are used in the Deed and the conduct of the parties after the Deed was executed. 25 The first sentence in clause 1(e) states that the vendor "hereby" assigned all their interest and rights in the lease and that the lessor "hereby" consented to that assignment. The term "hereby" is not defined in the Deed. Accordingly, it must be given its ordinary meaning. The Australian Concise Oxford Dictionary (fourth edition) defines the term to mean: "adv: by this means: as a result of this." 26 Accordingly, the question is by what means, or as a result of what conduct did the parties intend, assessed objectively, the assignment of the lease to have taken place and the consent to that assignment. In my opinion, the fact that both are referred to in the same sentence indicates that the parties intended one to occur immediately after the other. As the clause correctly provides it is for the vendor, in the first instance, to assign the lease. The lease is usually a valuable asset of the business that is being sold and a purchaser will only purchase the business if there is an assignment of the lease and the lessor consents thereto. Accordingly, an assignment is usually part of the completion of a sale of a business that is being conducted from leased premises. In this case the introductory words of clause 1 expressly provides that the "vendor and purchaser" would "complete the sale of the business" as set out in that clause. Clause 1(a) then provides that the completion of the sale would take place "at the offices of the Administrative Decisions Tribunal … on 26 November 2004 at 2pm" and time was to be of essence. There does not appear to be any dispute that clause 1(b) and (c) were payments that the purchaser was required to make in order to complete the sale on the date in question and that these payments were in fact made by Mrs Jafari. 27 In my opinion, these payments formed the consideration by Mrs Jafari for the purchase of the business and the assignment of the lease. This construction is also consistent with the remaining terms of the Deed and the conduct of the parties after 11 November 2005. For example, pursuant to clause 2 of the Deed, which was prefaced with the words, "immediately after completion", Lituma did in fact under take repair work as soon as possible after the Deed was executed. It did not wait until the 28 day period had expired. Furthermore, under clause 3 of the Deed the relevant releases were stated to take effect from the date of completion. However, the most significant matter is the fact that Mrs Jafari remained in possession and paid rent in advance, which is consistent with the lease being assigned. 28 While I accept, Mr Monzo's argument that the provision of a Bank Guarantee is an important, if not essential, protection that a lessor generally requires when agreeing to lease its premises. In this regard I note that the lease in question provided that the Guarantee was to be provided by the lessee "herewith" on the execution of the lease (see clause 15 of the lease). It was not a condition precedent to the lease being entered into and I note that a failure to provide the Guarantee was not included as being an essential term of the lease (see clause 14.3 of the lease). The lease has a similar provision in respect of insurance (see clause 8 of the lease). In any event nothing turns on this as I am of the opinion, for the reasons I have stated, that the assignment of the lease and the consent thereto occurred on 26 November 2004. This means that the matters referred to in clause 1(d) of the Deed were conditions subsequent to the lease having been assigned. 29 Accordingly, in my opinion the requirements set out in cl.1(d) of the Deed were conditions subsequent to the assignment of the lease. Had the parties intended otherwise they would have expressly stated that while the lease was assigned by the vendor on the completion of the purchase of the business, the lessor did not consent to that assignment until the provisions of clause 1(d) of the Deed had been complied with in the specified time. This they did not do. b) Does s.129 of the Conveyancing Act apply? 30 Having determined that under the terms of the Deed, the lease for the premises was assigned on 26 November 2004, as mentioned above, the next question to determine is whether s.129 of the Conveyancing Act 1919 applied. If it did apply, then it was accepted that Lituma was required to serve a notice on Mrs Jafari if it chose to re-enter the premises on her having failed to provide the requisite Bank Guarantee within the time specified in clause 1(d)(i) of the Deed. 31 In my opinion, the answer to this question lies in the proper construction of clause 4 of the Deed and whether Lituma's conduct in taking possession of the premises was as a result of a "surrender" by Mrs Jaffari. As mentioned above, clause 4 expressly uses the term "surrender" upon default by Mrs Jafari under the terms of the Deed. 32 Mr Hicks, who appeared for Mrs Jafari argued that the provisions of the Deed came within the terms of the definition of the term "lease" in s.128 of the Conveyancing Act 1919 and that by reason of this s.129 of that Act applied. He went on to argue that by reason of sub-s.129(10) of that Act parties were unable to contract out of the requirements of that section. In his submission, clause 4 of the Deed contravened that particular sub-section and must be read down accordingly. 33 Mr Monzo, on other hand argued that on its proper construction clause 4 of the Deed was an express "surrender" of the premises in the event Mrs Jafari defaulted under the terms of the Deed and it did not involve a re-entry or forfeiture of the lease. His argument was based on the premise that Mrs Jafari's occupation of the premises after 26 November 2004 was not that of a lessee under the terms of the lease. On what basis she occupied the premises was not made clear in Lituma's argument. Even though I have found that her occupancy was pursuant to the lease I will briefly consider whether clause 4 of the Deed operates as an agreed "surrender". 34 It is well established that parties may expressly terminate a lease by surrender: see W D Duncan Commercial Leases in Australia (3rd edition, LBC Information Services) at p.301-302. The essence of an express covenant to surrender is for the lessee to agree to give vacant possession: see Union Trustee of Australia Ltd v Baker (1948) 65 WN (NSW) 247. That is, the lessee agrees to surrender or give up any rights it may have to or under the lease. The requirements of an express surrender is that it be made by deed and signed by the lessee or his/her agent: see s23B(1) Conveyancing Act 1919. Where the lease is a registered lease, s.54 of the Real Property Act 1900 provides that the lessor and lessee are required to execute a surrender of the lease in the approved form and that it is not until the surrender is registered that the estate or interest of the lessee in the lease revests in the lessor. 35 Duncan, at p.302 suggests that there is some doubt as to whether a formal agreement to surrender a lease may be able to operate at a future date. Zorbas v McNamara [1960] NSWLR 428 and [1962] NSWLR 53(on appeal) are cited as authorities for this doubt. These decisions concerned a settlement agreement reached between the lessor and lessee in which the lessee agreed to surrender the lease in consideration of the payment of certain money. In that case the lessor had issued a notice to quit because he wanted to occupy and use the premises himself. In accordance with the settlement agreement the lessor paid the money agreed to and he was otherwise ready to complete his obligations under the agreement, however, the lessee refused to vacate the premises. The lessor then successfully brought proceedings for specific performance of the lessees promise to execute a surrender of the lease. 36 In my opinion, the facts in Zorbas differ significantly to the facts in the current application. In Zorbas case the surrender was not due to any default on the part of the lessee, indeed it was as a result of the lessor repudiating the lease that the lessee agreed to a surrender of the lease on the condition it was compensated in some way. The agreed surrender had the effect of protecting the lessee from any further liability under the lease after the agreement to surrender. 37 As I have already mentioned, clause 4 of the Deed is stated to operate on the default of the purchaser, Mrs Jafari, of a term under the Deed. In my opinion, having regard to the express purpose of the Deed (i.e. completion of the sale of the business and the assignment of the lease) this clause must be read down accordingly. That is, for the reasons I have already given, once Mrs Jafari had met her obligations in respect of the completion of the sale as set out in clause 1(b) and (c) of the Deed, she became the lessee under the lease and was required to comply with the lessee's obligations under that lease. One such obligation was the provision of a Bank Guarantee. The effect of clause 1(d)(i) of the Deed was to set the period within which that Guarantee was to be provided. Accordingly, a failure to provide the Guarantee became a breach of the lease as amended by the Deed. At the same time, in my opinion, on a proper construction of clause 4 of the Deed it ceased to have any operation once the sale had been completed. 38 Again, in my view, the conduct of the parties is consistent with such a construction in that Lituma did not make an application for specific performance, which is the appropriate action to take where the surrendering party refuses to act in accordance with the surrender agreement. Instead it changed the locks, which is in effect a re-entry for breach of a lease. 39 For the reasons set out above the Tribunal declares: a) The proper construction of cl.1(e) of the Deed is that the lease was assigned to Mrs Jafari on 26 November 2004 when Mrs Jafari made the payments set out in cl.1(b) and (c) of the Deed and Lituma Pty Ltd consented to that assignment at the same time. b) The proper construction of cl.4 of the Deed is that Mrs Jafari agreed to surrender the lease in the event she failed to make the payments set out in cl.1(b) and (c) of the Deed on 26 November 2004 at 2pm. c) Lituma's right of re-entry into the premises after the assignment of the lease for breach of cl.1(d)(i) of the Deed was subject to s.129 of the Conveyancing Act 1919. d) The matter be stood over for further directions on 7 April 2005 at 11a.m. 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.