New South Wales Supreme Court CITATION : Napatarra v Perpetual Trustee [1999] NSWSC 750 CURRENT JURISDICTION : Equity Division FILE NUMBER(S) : 2370/99 HEARING DATE(S) : 21/07/99 JUDGMENT DATE : 28 July 1999 PARTIES : Napatarra P/L v Perpetual Trustee Co. Ltd & Anor JUDGMENT OF : Bryson J at 1 COUNSEL : P. Walsh for Plaintiff J. Stevenson & M. White for Defendants SOLICITORS : Harris Wheeler for Plaintiff Phillips Fox for Defendants CATCHWORDS : CONTRACT - formation; LESSOR and LESSEE - agreement to lease - formation - Lessor's agent by letter set out "the essential terms" of proposed new lease on expiry of current lease and asked for acceptance and discussion - letter said "Your acceptance and/or our discussion of this offer is subject to Owner approval and the provision of a formal Letter of Offer" - Lessee signed Acceptance at foot of letter - on construction of letter it was HELD that no enforceable agreement had been formed - decision on terms of a particular document. Masters v Cameron (1954) 91 CLR 353 at 360 Dellwest Pty Ltd v Cafabe Pty Ltd (Bryson J) Unreported 26 November 1997 Arjay Investments Pty Ltd v Morrisson's Outdoor Catering Pty Ltd (Young J) Unreported 1 May 1995 at p4 CASES CITED : Hudson v Buck (1877) 7 Ch D 683 Marten v Whale [1917] 2 KB 480 Caney v Leith [1937] 2 All ER 532 Peet & Co. Ltd v Rocci [1985] W.A.R. 164 DECISION : See paragraph 23. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRYSON J. WEDNESDAY 28 JULY 1999 2370/99 NAPATARRA P/L v PERPETUAL TRUSTEE CO. LTD JUDGMENT 1 HIS HONOUR: The plaintiff operates a fast food shop called Charlie's Chopsticks at Shop E10 in the Food Court at the Charlestown Square Shopping Centre. The plaintiff first leased the shop from Burns Philip Trustee Co. Ltd. by lease from 4 April 1989 to 3 April 1994 and when that expired by a sublease granted by ANZ Leasing (NSW) Pty Ltd from 4 April 1994 to 3 April 1999. In some way ANZ Leasing's leasehold ended before expiry of the sublease, the second defendant Perpetual became registered proprietor of the shopping centre and the parties came to stand in a direct relationship with each other. ANZ Leasing (NSW) Pty Ltd was formerly the first defendant but the proceedings against it have been discontinued. Perpetual holds as trustee for the General Property Trust. Actual management of the shopping centre has been in the hands of various companies in the Lend Lease Group throughout; at the time of the relevant events this year the manager traded as Lend Lease Retail, its full name being Lend Lease Property Management (Australia) Pty Ltd. The plaintiff's direct dealings were with Lend Lease Retail. 2 The plaintiff's principal claim is for a declaration that a new lease was entered into between the plaintiff and Perpetual to commence on 4 April 1999 for a period of five years. No formal or registrable lease has been granted and the claim must be understood as a claim for an equitable lease or a contractual entitlement to the grant of a lease. The plaintiff also sought specific performance and made ancillary claims including claims relating to a caveat. The defendant cross-claimed for a declaration establishing its entitlement to possession and for a number of orders under which it would recover possession, damages and mesne profits. On 20 January 1999 the plaintiff made a written arrangement with Lend Lease Retail - Document 16 in Exhibit 1 - and the decision of the case turns on whether that arrangement constituted an agreement for the grant of a lease and, if it did, whether a condition contained in it has been fulfilled. 3 In the evidence the history of the parties' negotiations both before and after that document was traversed extensively and the context of the parties' dealings into which the document fits was well established. The significant issues in the case appear to me to have turn on an understanding of expressions within the letter itself as a matter of ordinary English. 4 On each of the two earlier occasions when the plaintiff obtained a lease there had been a process in which there had first been a formal letter of offer on which a written acceptance was endorsed, then a Deed of Agreement to Lease of later date, then a lease in registrable form granted still later. In 1994 during the term of the sublease the Retail Leases Act 1994 came into effect and s.11 imposed formal and procedural requirements on a lessor in relation to formation of a retail shop lease, while s.8 created presumptions about the time at which a retail shop lease is considered to have been entered into for the purpose of that Act. 5 On 10 December 1998 Mr Jimmy Tai on behalf of the plaintiff wrote to Lend Lease Retail asking to commence talks to renew his shop lease. On 14 December Lend Lease replied, saying that they looked forward "… to contacting you in the near future to discuss the possibility of a new lease" and they also asked to view the plaintiff's business plan. The plaintiff sent another letter on 16 December and on 6 January 1999 Lend Lease Retail sent Mr Tai a letter relating to discussing the opportunity of a new lease. This letter sets out in considerable detail terms for a new lease. The plaintiff replied on 14 January saying that he found the terms and conditions difficult to meet and asking for discussion. There was some discussion on 20 January between Mr Tai and Ms Katherine Weir, the Retail Manager of Lend Lease Retail at Charlestown. At this meeting Ms Weir modified the letter of 6 January 1999 to make several significant changes in response to the discussion. The letter was reprinted although by oversight the date was not altered and still appeared to be 6 January 1999. Mr Tai signed and dated the endorsement on the letter there and then and gave it back to Ms Weir. 6 Thereafter some discussions continued between Mr Tai and Ms Weir, and also with Mr Bowden, Ms Weir's superior officer. In these discussions Mr Tai sought to obtain agreement to reduce the rent, but Lend Lease Retail did not agree. On 4 March 1999 Lend Lease Retail wrote to Mr Tai stating "Subsequent to discussions for a renewal of this lease, the lessor has concluded from both recent research and recent and past history of this store that a renewal is not appropriate" and called for possession on 3 July 1999. The plaintiff did not give possession and commenced these proceedings on 18 May 1999. They have been heard with expedition. 7 The terms of the letter of 20 January 1999 must be taken as a whole and my reasons for judgment largely turn on commentary on it; a copy of the letter is a schedule to these reasons. The context of fact is of assistance because it shows what the existing relationship was and shows that the agent and the plaintiff had proceeded through a formal Letter of Offer to an agreement for lease on earlier occasions, and also shows that the earlier leases had been complex documents, as is only to be expected of a lease for some years of commercial premises. The factual setting does not establish any unusual practices or special meanings of terms used in the letter. 8 Disputes about whether negotiations for a lease for commercial premises have reached the stage of a binding contract come before this Division quite often, and it is a recurring source of difficulty to know at what point the parties intended to be contractually bound when they first discussed and came to agreement on the most important aspects of a contemplated leasehold relationship and then turned to preparing a formal document dealing with the whole subject, with much fuller expression and in registrable form. The difficulty is formalised in the classification in the judgment of Dixon CJ McTiernan and Kitto JJ in Masters v Cameron (1954) 91 CLR 353 at 360; the plaintiff contended that the agreement made by this letter falls within the first class - "… the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect." If I accepted the defendant's submissions I would place the agreement in the third class: "… one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract." The defendant's submissions were not directed to establishing any particular classification other than to excluding the arrangement from the first class. In Dellwest Pty Ltd v Cafabe Pty Ltd (Bryson J) Unreported 26 November 1997, p7 I said: "Counsel referred me to Arjay Investments Pty Ltd v Morrison's Outdoor Catering Pty Ltd (Young J 1 May 1995 unreported) at p4 and p5 where his Honour set out guidelines to assist in coming to a conclusion as to whether there is a binding agreement arising out of commercial correspondence. The dominance of the facts of the present case is such that, in my opinion, guidelines and normal expectations are of little value. Judges of the Equity Division have, I think it is right to say, approached allegations that there has been an agreement to grant a commercial lease with the knowledge that commercial practice is that a binding relationship is made at the point of execution and delivery of the lease. However that is no more than an approach, as it is quite open to persons in negotiation for a commercial lease to proceed as they choose and to make an agreement for lease in an informal way, by correspondence or orally; if they do come to an agreement in that way the Court must recognise that this is so and act on their agreement." See too Arjay Investments Pty Ltd v Morrisson's Outdoor Catering Pty Ltd (Young J) Unreported 1 May 1995 at p4. There is considerable gulf between taking this approach and reaching a conclusion on the facts of any particular case, as the conclusion must be dominated by those facts. 9 The arrangement of 20 January 1999 at some places uses language appropriate to the formation of a binding agreement. Indications in support of that view are the reference to the essential terms required and their enumeration, as these references support an understanding that what was essential was established by the letter. It must be said that they also show that other terms are required. The conclusion that there was contractual finality is also supported by some other language used: references to acceptance, to the letter as "This offer" and its formality of expression, particularly in the third last and second last paragraphs. Formality and finality are also indicated by the terms of the endorsement, in which the preceding passages are referred to as "The offer as set out above". 10 However there are many other indications. One is the contemplation that there will be a later document, a formal Letter of Offer. This expression can be seen as pointing each way; its description as a letter of offer is an indication that the offer susceptible of acceptance and contract formation is still to come; the reference to it as formal is an indication that it is to be a matter of form and that the substance is elsewhere, perhaps in the present letter. It should be said however that a formal Letter of Offer is an opportunity for compliance with s.11 of the Retail Leases Act, such as retail lessors acting reasonably would wish to make. 11 Overall the meaning and effect of the letter are established by some passages which I regard as of the first significance in explaining what was thereby intended. The opening words of the second paragraph are "We wish to discuss the opportunity of a new lease for this tenancy, the essential terms required would be as follows: …" (and a number of terms follow). To my mind this places the essential terms in the subject under discussion as something which Lend Lease Retail would require in a new lease, not as establishing everything significant which was to be in the new lease. The new lease was an opportunity which was to be discussed, not something which was to be brought about forthwith. Then in the third last paragraph there is again reference to discussion, and it is plain that the discussion is not to be brought to an end with the letter or with the acceptance, as there are to be other conditions. The references to discussion and to an opportunity appear to me to establish that the letter was not intended to be an offer capable of immediate acceptance, but to be the opening, on a fairly concrete basis, of negotiations. The plenitude of statement of Lend Lease Retail's position does not obliterate the indication that what is sought is discussion, not finality. 12 The two conditions referred to in the opening sentence of the third last paragraph - "subject to owner approval" and "subject to the provision of a formal letter of offer" - are further indications that there is not to be finality with the plaintiff's acceptance, or indeed with discussion. The terms of the acceptance which Mr Tai signed again refer to the formal Letter of Offer. 13 The nature of the invitation to discuss an opportunity, and the nature of a number of what are referred to as essential terms appear to me to show that the formal Letter of Offer which is contemplated for the future is not to be limited to a formulation or more careful statement of matters which have already been agreed, but is to go further. Some of the things referred to as essential terms are highly concrete and not capable to much more restatement; those relating to commencement, identification, area and lease term. However the words used to establish the base rental and the provision relating to the outgoings are capable of much fuller statement and it seems unlikely that a full and exhaustive definition of the parties' rights could have been intended to be made by the words used. I make the same observation of the provision relating to rent reviews. There is room for many different formulations of clauses establishing what the base rental was to be and how it was to be adjusted at rental reviews. There is also room for many different formulations of what the provisions about outgoings were to say in detail, what obligations they were to impose on the parties, and what was involved in the note saying "Outgoings items are audited, reviewed and adjusted annually". The processes of audit review and adjustment need much fuller statement before they could be understood and enforced. 14 Term 9 - "Full refit of the premises" is highly indeterminate, and no provisions establishing what was meant by full refit of the premises were established by the oral negotiations. There was much more which needed to be established before what was acquired for the refit could be defined. 15 The same is true of term 10 - "The Lessor requires a review of operational standards." It is left indeterminate what this review is to be, when and how it is to take place, and what is to be the outcome. It could well be among the things to which owner approval is to relate. 16 These observations, and a general understanding of the complexity of commercial leases lead me to conclude that it was intended that there should be a wide range of latitude in the preparation of the contemplated letter of offer, and it was intended that the lessor was to be at liberty to choose what the terms of its letter of offer were to be, while the lessee was to be at liberty to choose whether or not it would accept what the letter was to say. It is not proper view of the letter of 20 January that it shows that the preparation of a formal Letter of Offer was to be a mere formality, or an expression in better form of what was already established. 17 An altogether predominant consideration is that the acceptance and discussion of the offer was stated to be "subject to owner approval". In my view those words show, as a clear matter of expression and according to the ordinary meaning of language, that unless there was owner approval, which was still to take place, the offer, the plaintiff's acceptance, the discussion and all the arrangements were not to have effect. In what I regard as plain language Lend Lease Retail reserved to the owner the opportunity to state that it approved, or did not approve of what had been arranged. 18 I do not accept the contention that the reference to the owner's approval was a formality, or another contention which appeared to mean that, because of the extent to which authority had been delegated to Lend Lease Retail (and that authority extended to giving such an approval in this case), the owner's approval was a formality or foregone conclusion. Whether owner approval was to be given by the owner itself or was to be given by Lend Lease Retail under delegated authority, there was a need that it should be given and the opportunity to do so was reserved. There is no evidence that it was ever given and the letter of 4 March 1999 shows in a clear way that it was refused. 19 The plaintiff's counsel contended that the defendant is subject to an obligation to act reasonably and in good faith in granting or withholding approval. In support of this contention he referred me to a number of authorities which dealt with situations in which approval by someone representing one party such as that party's solicitor was required for a lease or other document to which the parties had agreed. The references began with the decision of Fry J in Hudson v Buck (1877) 7 Ch D 683; his Lordship's observations at 687 show the view that approval or disapproval was required to be given in good faith and reasonably. I was also referred to Marten v Whale [1917] 2 KB 480, Caney v Leith [1937] 2 All ER 532 and Peet & Co. Ltd v Rocci [1985] W.A.R. 164. In various ways these cases illustrate that there is a good faith requirement where the parties have made a contractual arrangement and for that arrangement to be carried out there is a need for a lease or other document to be prepared and approved. I distinguish the principle in those cases from cases such as this where approval relates to contract formation and not to the carrying out of some contractual obligation which has already been made; in relation to contract formation a party is at liberty to act according to its own concept of its interests, and even to act unreasonably. 20 If the position were that the owner's approval was subject to a good faith requirement, ample grounds objectively existed for a decision to withhold approval, as Lend Lease Retail had received an expression of interest from another prospective tenant who was regarded as more satisfactory commercially and otherwise, and there were objectively strong grounds for not wishing to continue in a contractual relationship with the plaintiff having regard to false statements which had been made over a long period by the plaintiff in returns of its turnover which it was required to furnish under the sublease. Further the plaintiff's business had been the subject of inspections and adverse observations by Municipal Health Inspectors, and of customer complaints which had become known to Lend Lease Retail. In the presence of reasonable grounds for electing not to deal further with the plaintiff it could not be said that, if a test of good faith and reasonableness had applied, the defendant had not complied with it. 21 In my finding the defendant has no contractual obligation to grant a lease such as is alleged and the plaintiff should not succeed. 22 Lend Lease Retail on behalf of the defendant gave the plaintiff permission to remain in occupation after expiry until 4 July, but since that date the plaintiff's possession of the premises has been unlawful. The defendant is entitled to a declaration as cross-claimed establishing its interest, and to judgment for possession. 23 I make the following orders: 1. The plaintiff's proceedings are dismissed with costs. 2. On the Cross-claim I make declaration 1 as claimed in the Cross-claim. 3. I give judgment for Perpetual Trustee Co. Ltd for possession. 4. I give leave to issue a writ of possession. 5. The whole of the Cross-claimant's claims for damages and mesne profits and interest, and for costs in relation thereto, are referred to a Master of this Court for determination. 6. I order that the Cross-defendants pay the cross-claimant's costs of the Cross-claim, other than costs in relation to the claims which have been referred to a Master. The Schedule "6 January, 1999 Mr. Jimmy Tai Charlies Chopstick Shop E10 Charlestown Square CHARLESTOWN NSW 2290 Delivered by Hand Dear Sir, Lease at Shop E10 Charlestown Square Please be advised that the lease on your tenancy at Charlestown is due to expire on the 3rd April, 1999. We wish to discuss the opportunity of a new lease for this tenancy, the essential terms required would be as follows: 1. Lease commencement: 4th April, 1999 2. Shop Number: E10 3. Area: 55.8 sqm 4. Lease Term: 5 years 5. Base Rental: $108,000 per annum plus outgoings Airconditioning $24.80 psm Marketing Levey $45.00 psm Operating Expenses $91.69 psm Eatery Cleaning Levy $10,000 pa 7. Fitout period: 3 weeks gross rent free Note: Outgoings items are audited, reviewed and adjusted annually. 8. Rental Reviews: The base rent will be subject to the following increments: Year 2 Year 1 + CPI + 1.5% Year 3 Year 2 + CPI + 1.5% Year 4 Year 3 + CPI + 1.5% Year 5 Year 4 + CPI + 1.5% 9. Full refit of the premises. 10. The Lessor requires a review of operational standards. Your acceptance and/or our discussion of this offer is subject to Owner approval and the provision of a formal Letter of Offer. Under the terms of your lease, you must respond to us by 5 February, 1999. Should you wish to not enter into a new lease, then the lease will end on 5th May, 1999. Please sign and return the attached duplicate if you wish us to prepare a formal Letter of Offer. Please do not hesitate to contact the writer should you have any queries in relation to this matter. Yours sincerely LEND LEASE PROPERTY MANAGEMENT (AUSTRALIA) PTY LTD Kate Weir Retail Manager The offer as set out above is acceptable to me/us - please proceed to prepare a formal Letter of Offer on the above terms: Name(s) JIMMY TAI For and on behalf of: NAPATARRA PTY LTD (Company) Signed: (Signature) Jimmy Tai Date: 20 January 1999 " ******** Last Modified: 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.