Reported Decision : (2000) NSW ConvR 55-939 New South Wales Court of Appeal CITATION : Westpac Banking Corporation v Tanzone Pty Limited & Ors [2000] NSWCA 25 FILE NUMBER(S) : CA 40453/99 HEARING DATE(S) : 28 February 2000 JUDGMENT DATE : 29 February 2000 PARTIES : Westpac Banking Corporation v Tanzone Pty Limited, Perpetual Trustee Company Limited and Archie Raymond and Mary Ann Raymond. JUDGMENT OF : Priestley JA at 1; Fitzgerald JA at 1; Foster AJA at 1 LOWER COURT JURISDICTION : Supreme Court LOWER COURT ED 5075/98 FILE NUMBER(S) : LOWER COURT Windeyer J JUDICIAL OFFICER : Appellant - R. Macfarlan QC / P. Durack COUNSEL : Respondents - T. Bathurst QC / D. Hammerschlag Cth Attorney General (Intervening) - R. Orr / M. Duncan Appellant - Allen Allen & Hemsley Respondent 1 - Freehill Hollingdale & Page SOLICITORS : Respondent 2 - Heidtman & Co Respondent 3 - Barker Gosling Intervenor - Cth Govt Solicitor CATCHWORDS : Construction of Rent Review clause in commercial lease - whether absurdity rule applies. LEGISLATION CITED : Judiciary Act Trade Practices Act Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) (1991) 147 CLR 297 Fitzgerald v Masters (1956) 95 CLR 420 CASES CITED: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Mannai Investments Co Pty Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 R v Young (1999) 46 NSWLR 681 Watson v Phipps (1985) 60 ALJR 1 DECISION : Appeal allowed. THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40453/99 ED 5075/98 PRIESTLEY JA FITZGERALD JA FOSTER AJA Tuesday, 29 February 2000 WESTPAC BANKING CORPORATION v TANZONE PTY LIMITED & ORS 1 THE COURT: By a written agreement bearing date 30 July 1984 Westpac Banking Corporation (Westpac) granted to Mainzeal Overseas Pty Limited (Mainzeal) an option to purchase land which Westpac owned in Lithgow. On exercise of the option a contract was deemed to come into existence in the form of the draft contract attached to the written agreement. This agreement was conditional upon Westpac, Mainzeal and Triden Contractors Pty Limited (Triden) entering into an agreement to lease the land to Westpac upon the terms in a draft Agreement for Lease annexed to the draft contract. The draft Agreement for Lease was between Mainzeal as lessor, Triden as the Builder for the lessor, of a Bank on the land and Westpac as lessee of the Bank once completed. By notice to Westpac bearing date 20 August 1984 Mainzeal assigned its rights in the option to Mr and Mrs Raymond (the Raymonds). They exercised the option by notice to Westpac bearing date 21 August 1984. Settlement of the sale of the land took place on 31 August 1984. The agreement for lease was executed and exchanged on that day. Practical completion of the Bank building took place on 15 March 1985. Pursuant to the Agreement for Lease a lease in registrable form under the Real Property Act was then executed and registered. 2 The registered lease was for a term of twenty years commencing on 15 March 1985. Westpac was the lessee and the Raymonds were the lessor. The rent was $69,404. The lease was subject to the covenants and provisions in its Schedule 2. Article 1 of Schedule 2 contained various definitions and interpretations. One term, "Review Date", was defined as follows: "The term Review Date means the date being the second anniversary of the Date of Commencement of the term of this lease and biennally thereafter." 3 Article 2 of Schedule 2 was headed "Rent". Relevant clauses were: " 2.01 yearly rent The Lessee covenants with the Lessor that the Lessee will during the whole of the term hereof pay to the Lessor without demand from the Lessor free of exchange and without any deduction whatsoever the Yearly Rental of $69,404.25 until the first Review Date and thereafter as determined in accordance with Clause 2.02 of this Article. 2.02 The yearly rent payable set out in Clause 2.01 hereof shall be increased on and from each Review Date to an amount equal to the greater of:- (i) The amount of the rent payable immediately preceding the Review Date multiplied by 1.1664 (equivalent to 8% compounded annually), and (ii) the amount of the rent payable immediately prior to the Review Date multiplied by X over Y where X is the Consumer Price Index Weighted Average Sydney All Groups Number for the quarter last preceding the Review Date and Y is the Consumer Price Index Weighted Average Sydney All Groups Number for the last quarter preceding the Date of Commencement of the term of this Lease. " 4 At the first rent Review Date, 15 March 1987, the rent became $82,492, by application of clause 2.02(ii). As at the second rent Review Date, 15 March 1989, the rent became $96,866, again by application of clause 2.02(ii), as interpreted by the parties, conformably with Westpac's submission in the current litigation. As at the third and fourth Review Dates, 15 March 1991 and 15 March 1993, the rent became $112,745 and $131,506 by application of clause 2.02(i). 5 On 4 November 1993 Tanzone Pty Limited (Tanzone) contracted to buy the premises from the Raymonds. The contract provided that the property was sold subject to the lease. The contract was completed on 16 December 1993. 6 On 14 March 1995 Tanzone wrote to Westpac stating that rent as from 15 March 1995 (the fifth Review Date and the first since Tanzone's acquisition of the property) would be $221,558 per annum. This was an increase of 68.5% on the rent as last determined. Westpac disputed the interpretation of clause 2.02 upon which Tanzone relied for its calculated rent figure. 7 On 26 February 1997 Tanzone sent to Westpac notice of increase of rent from 15 March 1997 (the sixth Review Date) to $402,060 per annum. This was an 81.45% increase on the previous rent. Once again this figure was based on the interpretation of clause 2.02 which Westpac disputed. 8 On 25 February 1999 Tanzone sent to Westpac notice of increase of rent from 15 March 1999 (the seventh Review Date) to $741,669 per annum, again on its interpretation of clause 2.02. This was an increase of approximately 84% above the previously determined rent. 9 Thus, from figures in evidence of the Consumer Price Index of which the court may take judicial notice, it appears that while the relevant CPI index rose from 107.4 in December 1992 to 122.4 in December 1998, the rent rose, according to Tanzone, from $221,558 per annum as at 15 March 1995 to $741,669 per annum as at 15 March 1999. 10 During the period of dispute Westpac paid rent in accordance with its interpretation of the disputed clause. Tanzone accepted rent from Westpac without prejudice to its rights under the lease. On 21 December 1998 Tanzone commenced proceedings seeking declarations that, in substance, its interpretation of clause 2.02 was correct. 11 Westpac by its defence and cross claim asserted: 1. that its construction was correct; 2. that if its construction was not correct, it was entitled to rectification so that the lease reflected the actual agreement between the original parties; 3. that Tanzone was estopped, by convention and by representation, from asserting its claim; 4. unconscionable conduct by Tanzone in contravention of s 51AA of the Trade Practices Act, entitling Westpac to relief; and 5. that Westpac was entitled to rescission. 12 In support of assertions 2 to 5 a great mass of material was put before the Windeyer J, the trial judge. Much the greater part of this material is not relevant to the construction question. 13 The trial judge found against Westpac on all its assertions. (He held Westpac would have been entitled to rectification against the Raymonds, but not against Tanzone.) Tanzone succeeded in obtaining orders enabling it to enforce its construction of the rent clause. 14 Westpac appealed to this court. In its grounds of appeal it repeated all the assertions rejected by the trial judge, saying he had been wrong in regard to every one. 15 Tanzone notified Westpac that it would seek leave from the court upon the hearing of the appeal to file a notice of contention contending that s 51AA of the Trade Practices Act was invalid as being contrary to the Commonwealth Constitution. Tanzone caused notices to be served in compliance with s 78B of the Judiciary Act. In response, counsel appeared for the Commonwealth Attorney General. No other Attorney General was represented. The court was satisfied they had all been duly notified. 16 The first question argued in the appeal was the construction question. The court thought it expedient to hear full argument on this question from Westpac and Tanzone before the later questions were argued. At the end of the argument yesterday, the court announced it wished to consider the first point before proceeding with any of the others and adjourned the further hearing of the appeal until today. 17 The court has reached the view that Westpac's first ground of appeal should be upheld. It is therefore unnecessary to consider the other grounds but also desirable to give reasons for our decision on the first ground immediately. 18 In summarising the history of the matter we have confined ourselves to matters relevant to the construction question and have omitted any reference to the very full history contained in the appeal papers of matters leading up to the making of the option deed, of what happened between Westpac and the Raymonds, of what happened within Westpac concerning the rent provisions in the lease, and of other matters relevant to rectification and the other points. We proceed on the basis of Tanzone's submission that those matters are not relevant to the construction question. 19 On the construction question, Westpac repeated the submission it had put to the trial judge, that Tanzone's construction led to absurd results and that clause 2.02 should be construed to avoid the absurdity. Windeyer J accepted the legal proposition upon which the submission was based. He said: " The question is whether these words [ie of clause 2.02] lead to an absurd result looking at the situation in 1985. If they do then they should be construed so as to avoid the absurdity by supplying omitting or correcting words. " 20 Windeyer J cited Fitzgerald v Masters (1956) 95 CLR 420 and Watson v Phipps (1985) 60 ALJR in support of his view. In this we think he was correct. Other authorities are to the same effect: see Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) (1991) 147 CLR 297 for the Australian position and cf, in England, Mannai Investments Co Pty Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 and Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, particularly per Lord Hoffmann in each case. 21 In Australia, Fitzgerald v Masters and Cooper Brookes in particular have been followed many times and are well entrenched High Court authorities. We note at this stage that contrary to submissions put by Tanzone, these cases are by no means limited to instances of ambiguity, nor is their authority affected by R v Young (1999) 46 NSWLR 681. 22 Returning to Windeyer J's line of reasoning, he went on to cite authority to the effect that mere unreasonableness of itself is not enough to justify application of the absurdity rule. Again, we agree with him that the authorities justify this distinction. 23 Put shortly, Westpac's submission in this court was that the present case fell into the absurdity category, not the merely unreasonable one. Notwithstanding Windeyer J's view to the contrary, which commands respect, we agree with Westpac's submission. Windeyer J's view expressed Tanzone's basic submission to him and this court. 24 Westpac's analysis of clause 2.02 ran upon the following lines. Clause 2.02 showed that the parties were well aware of the possibilities of inflation and that they were agreed the lessor should be protected against it. Clause 2.02(i) provided that at every Review Date the lessor's rent should be increased by an amount equal to at least 8% compounded annually of the rent payable immediately preceding the Review Date. Further, if an increase calculated pursuant to clause 2.02(ii) was greater than that calculated under 2.02(i) then the rent was to be increased by that greater figure. Next, at the first Review Date paragraph (ii), if applicable, produced an increase calculated by reference to the rent payable during the first two years of the lease multiplied by a fraction using the Consumer Price Index Weighted Average Sydney All Groups Number (the CPI number) for the quarter last preceding the Review Date and the CPI number for the last quarter preceding the first two years of the term. That is, the fraction for the first Review Date had the effect, when the CPI number increased, of increasing the amount of rent payable by reference to the increase in the CPI number during the two years of the term preceding the Review Date, being the first two years of the term. Paragraph (i), for all rent reviews, and paragraph (ii) for the first rent review, provided for an increase in rent based on an inflation factor referable to the two years preceding the rent review. 25 However, in regard to reviews after the first, either no provision was made for which CPI number should be used, for purposes of paragraph 2.02(ii), for comparison with the CPI number for the quarter preceding the Review Date, or alternatively the paragraph required that the CPI number for the last quarter before the commencement of the term be used. Westpac submitted that the latter possibility, which Tanzone contended was the literal meaning of the paragraph, could not have represented the intention of the parties, looked at objectively, because of the absurd results it could produce. It was further submitted that it must have been the intention of the parties that for each later Review Date after the first, the increase was to be calculated in the same way, that is the amount to be added to the pre-existing rent should reflect any increase in the CPI number since the last Review Date. It was conceded for Westpac that if paragraph (ii) were to be read literally as Tanzone contended, it did not provide for the calculation Westpac asserted was the intended one. 26 Instead, on Tanzone's submission, it provided that the increase should be arrived at by applying the entire CPI increase since the commencement of the term of the lease to a rental which had already been so increased to the last Review Date. That is, putting it in slightly different words, the lessor got the benefit of an increase including the entire increase in the CPI number since the beginning of the lease added to a figure which itself included the benefit of an increase at the previous rent review which included the entire increase in the CPI number from the commencement of the term to the date of the previous rent review. This meant that the lessor, throughout a twenty year lease, got at least a multiple inflation effect increase at every rent review after the first. 27 Westpac submitted that there could be no rational reason supporting a common intention to the effect involved in Tanzone's asserted construction. Counsel for Tanzone was unable to suggest any. He relied entirely (for the construction point) on what he submitted was the literal interpretation of the words. Nor can we see any rational explanation for a form of words with the meaning asserted by Tanzone. We reach this conclusion by reference to the terms of the lease itself against the background of a history of widely differing rates of inflation in Australia over the ten years preceding the option agreement. 28 The increases in rent claimed by Tanzone give some idea of the absurdity of the interpretation contended for by Tanzone. However, to some extent they actually mask the full potential of the clause because if Tanzone's interpretation had been applied to the second, third and fourth reviews, instead of beginning with the fifth, the rent figures would be much larger. The extraordinary possibilities of the paragraph were illustrated by calculations done on the basis of the alternative contentions assuming constant increases in the CPI. Worked out by Westpac, on its construction, and in the events that happened, the rent would increase from $69,404 in 1985 to $208,510 in 1999; worked out on Tanzone's construction, the rent would increase to $1,659,838 in 1999. If a 12% per annum (compounded) increase in CPI was assumed for each review period then, on Tanzone's construction, the rent in 1999 would be $39,582,431. Although a steady inflation rate of 12% annually may have seemed unlikely, even in 1984, it was not so unlikely that any person in business would have taken such a chance. 29 Although the construction argument does not depend on these illustrations, they show vividly, in our opinion, the absurd possible consequences of the construction put forward by Tanzone, looking at possibilities that must have been apparent to the parties in 1984. 30 The broad object of clause 2.02 was to entitle the lessor to biennial rent increases. Again broadly stated, the purpose of the first subclause (i) was to guarantee the lessor a minimum rental increase of 8 percent per annum, while the purpose of the second subclause (ii) was to entitle the lessor to a higher rental if, during a material period, inflation exceeded 8 percent per annum: the inflation indicator chosen was the Consumer Price Index Weighted Average Sydney All Groups Number. 31 Two different mechanisms might rationally have been adopted. The rent at the commencement of the lease might have been chosen as the base with 8 percent compounded annually from the commencement of the lease to the material review date selected as the multiplier for the purpose of subclause (i) and the inflation increase over the same total period selected as the multiplier for the purpose of subclause (ii). 32 The alternative was to choose the adjusted rent payable immediately prior to the material review date with 8 percent compounded annually for the two years since the last review date selected as the multiplier for the purpose of subclause (i) and the inflation increase over the same limited period selected as the multiplier for the purpose of subclause (ii). 33 A rational hybrid might also have been devised, with one of the two subclauses using the rent at the commencement of the lease as the base with a multiplier related to either annual percentage increases compounded from the commencement of the lease to the material review date or inflation over the same period, and the other subclause using the rent payable immediately prior to the material review date as the base with a multiplier related to annual percentage increases compounded over the two years from the last review date to the material review date or inflation over the same period. 34 The mistake made by the draftsperson is obvious. Both subclauses (i) and (ii) take the rent payable immediately prior to the material review date as the base, with subclause (i) using a multiplier related to the preceding two year period and subclause (ii) using a multiplier related to the total period since the commencement of the lease. 35 There is no rational connection between the different approaches adopted in subclauses (i) and (ii), the former ceases to have any potential operation (in the absence of deflation) once the inflation increase over the expired portion of the term of the lease exceeds 1.1664, and sub-clause (ii) is capable of producing absurdly high rentals which could not have been intended. 36 In our opinion, paragraph (ii) should be read as if the words underlined below were added to it: " (ii) the amount of the rent payable immediately prior to the Review Date multiplied by X over Y where X is the Consumer Price Index Weighted Average Sydney All Groups Number for the quarter last preceding the Review Date and Y is, for the first Review Date , the Consumer Price Index Weighted Average Sydney All Groups Number for the last quarter preceding the Date of Commencement of the term of this Lease, and for each subsequent Review Date, that Number for the last quarter preceding the immediately preceding Review Date . " 37 This is because, in our opinion the omission of those words or some convenient equivalent must have been a mistake. The mistake produces an absurdity. Construing the paragraph as if the words mistakenly omitted were contained in it in our opinion avoids the absurdity of the Rent Review Clause and properly reflects the intention of the parties to be gathered objectively from the whole context of the lease. 38 The appeal will therefore be upheld for the reasons given and the judgment below in Tanzone's proceedings set aside. Draft minutes of appropriate orders should be filed within seven days. In the absence of an agreed draft, draft minutes should be filed within seven days by Westpac and Tanzone, supported by written submissions not exceeding three pages. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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