New South Wales Supreme Court CITATION : Kymbo Pty Ltd v Paxton Management Pty Ltd [2001] NSWSC 792 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 3509/01 HEARING DATE(S) : 18/07/01 JUDGMENT DATE : 20 July 2001 PARTIES : Kymbo Pty Limited (P) Paxton Management Pty Limited (D) JUDGMENT OF : Young CJ in Eq COUNSEL : D H Murr SC (P) R Horsley (D) SOLICITORS : Robert Napoli & Co (P) Taylor & Scott (D) CATCHWORDS : CONTRACTS [6]- Uncertain promises- Lease- Badly drawn document- Rental uncertain in document- Tenant in possession for two years- Parties agreed on rent- Contract enforceable. EQUITY [405]- Specific performance- Uncertainty- Ascertainment of rent for renewed lease- How far may court supply deficiency- Ancient doctrine of part performance. LANDLORD & TENANT [39]- Covenant for renewal- Uncertainty as to rent- Whether enforceable. Adams v Broke (1842) 1 Y & CCC 627; 62 ER 1046 Beaton v McDivitt (1985) 13 NSWLR 134 Beattie v Fine [1925] VLR 363 Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 Bradford v Zahra [1977] Qd R 24 Council of Upper Hunter County District (The) v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Gregory v Mighell (1811) 18 Ves Jun 328; 34 ER 341 Hall v Busst (1960) 104 CLR 206 Hardcastle v Shafto (1791) 1 ANST 184; 145 ER 839 Hobbs v Norton (1682) 1 Vern 136; 23 ER 370 Langton v Byngham (1433) unreported CASES CITED : Macaulay v Greater Paramount Theatres Ltd (1921) 22 SR 66 Normanby v Devonshire (1697) 2 Freeman 216; 22 ER 1169 Olsson v Dyson (1969) 120 CLR 365 Price v Strange [1978] Ch 337 Ramsden v Dyson (1866) LR 1 HL 129 Randazzo v Goulding [1968] Qd R 433 Shardlow v Cotterell (1881) 20 Ch D 90 Smith v Gale [1974] 1 WLR 9; [1974] 1 All ER 401 Trade Practices Commission v Tooth & Co (1978) 19 ALR 191 (on appeal (1979) 142 CLR 397)) Trustees of the National Deposit Friendly Society v Beatties of London Ltd [1985] 2 EGLR 59 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 Zucchiatti v Ferrara (1976) 1 BPR 9199 DECISION : See para 54. THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG CJ in Eq FRIDAY 20 JULY 2001 3509/01 - KYMBO PTY LTD v PAXTON MANAGEMENT PTY LTD JUDGMENT 1 HIS HONOUR: These proceedings relate to part of commercial premises at 13-15 Atchison Street St Leonards. In December 1998 the plaintiff took possession of the subject premises. It did so whilst the parties were negotiating a formal lease. In due course that lease, assuming it was valid, came into operation probably on 21 December 1998. 2 The lease is a very peculiar document indeed. The first mistake occurs on the second line where the Real Property Act is referred to as the Rural Property Act, but it gets worse. It would seem that originally the parties intended that the lease would be for four years with an option of two years or perhaps two terms of two years. However, somewhere between the time it was drafted and the time it was executed the term was reduced to two years and the number of options was expanded to three of two years each. Unfortunately, the drafter did not make all the necessary corresponding alterations to the covenants in the lease. 3 Indeed, the defects in the lease go deeper than this. The commencing and terminating dates on page 1 were dropped out, though fortunately under clause 12(b) one can see when the lease commenced and it is almost possible to work out when it terminated, though it is a little unclear whether the lease was only from 21 December 1998 or on and from that date. 4 The second page of the document, which is called page 1, contains 13 items in a reference schedule. Unfortunately, the reference schedule is nowhere incorporated into the document and in some cases is inconsistent with it. For instance, someone has forgotten to cross out the 1 December 1998 commencement date in Item 5. The reference schedule notes the minimum rental of $16,900 per annum and it further says: "ITEM 10: RENT REVIEW DATES: On each second anniversary of the commencement date of the Lease to market capped to 4% per annum (Clause 12)." 5 Strangely for a two year lease, in clause 2.10 the covenant to paint, the covenant has been altered from an obligation to paint every two years to a covenant to paint every four years. 6 Clause 10 in the lease contains some provisions as to what is to happen if there is default. It is rather difficult to construe the provisions and for some strange reason refers to the Companies Code 1981 definition of inability of the tenant to pay its debts. There is a provision that "If the Lessee shall have made default as aforesaid", then the lessor may, inter alia, by notice in writing elect to convert "the said term" into a tenancy from week to week. 7 Clause 12 contains two sub-clauses (a) and (b). Sub-clause (a) provides that the rent for the first year of the lease shall be $16,900 per annum payable by twelve equal monthly instalments and then sets out what those instalments are, unfortunately, inaccurately. Sub-clause (b) deals with when the first rent will be payable. 8 Clause 13 is headed "Option for Renewal" and sub-clause (aa) says: "Subject to the conditions hereinafter appearing the Lessee shall be entitled to exercise an option for renewal of three terms of two years duration commencing on the [the date is left blank]" 9 Sub-clause (a) indicates that: "If the Lessee desires to take a renewed Lease of the demised premises for a further term of three periods of two (2) years from the expiration of the term of this Lease ..." 10 It then goes on to provide the time when the notice is to be given and says that: "…the Lessor will at the cost of the Lessee demise to the said Lessee the premised (sic) for a further term of three periods of two (2) years subject to the variation to covenants referred to in paragraph (b) and (c) hereof." 11 Paragraph (b) then deals with variations including noting that the renewed lease shall delete clause (aa). However clause (c) is quite meaningless in its present context. It reads: "(c) Should the Lessor under the provisions of paragraph (b) hereof serve upon the Lessee notice of the rent to be applied in any rental year and the Lessee fails to notify the Lessor within twenty-one (21) days of service thereof (and time is of the essence) of any objection to the rent so calculated by the Lessor then the Lessee will be deemed to have accepted the rent specified in the notice served on the Lessee by the Lessor; and for all purposed (sic) the rent so specified shall become the new rental for the subject rental year." 12 The tenant recognised that it had been slightly overpaying the rent somewhere at the end of the year 2000 and there was correspondence about this matter. The landlord purported to increase the rent by 4 per cent in December. Correspondence flowed between the parties up until May this year. On 17 May the landlord advised that the building had been sold with vacant possession and that it would have to vacate the premises next Monday 23 July. It then said: "I am therefore obliged under Clause 11A of the lease, to give you one month's notice of termination of said lease." 13 There is of course no clause 11A but there is a clause 11(a) which notes that should the lessee continue to hold over after the term of the lease, the tenancy shall continue as a tenancy from month to month commencing on the day following that on which the lease expired. From what I have said earlier, this would mean that the lease would have expired, if the option had not been exercised, on 21 or 22 December 2000. Thus the giving of one month's notice on 17 May is of little value. 14 After some further skirmishing the landlord advised the tenant that it had not paid rent for two months and the tenancy would continue as a weekly tenancy. This letter was given on 4 June. 15 On 7 June the tenant reminded the landlord that it had in fact exercised the option the previous September. That exercise was a simple letter which merely said: "We wish to exercise our option to lease the above premises for a further two years." 16 The solicitors then got into the act and these proceedings were commenced on 12 July 2001 for a declaration that the option had been properly exercised and for specific performance of the new lease that came into operation thereby. 17 The evidence shows that on about 4 May 2001 the tenant received from the landlord a sheet setting out its calculations of the rent including alleged arrears. There was a discussion between the landlord's representative and the tenant's accountant. The tenant's accountant, who was not cross-examined, said that there was an agreement reached. She thereafter transmitted to the landlord the agreed amount, the monthly rent being $1854.66 and the evidence shows that this was accepted. 18 The position is slightly complicated because in addition to the premises there are also licences to certain car spaces, but it is not necessary to go into this complication. The important fact is that the quantum of the rent was agreed and was paid and accepted on at least May after the dispute in the first part of 2001. 19 The proceedings were commenced by summons with Mr D Murr SC appearing for the plaintiff and Mr R Horsley appearing for the defendant. As the proceedings were commenced by summons, no formal defence was filed. However, Mr Horsley announced that his client was resisting the plaintiff's claim on two bases: (a) that the provisions in the lease as to rent were sufficiently uncertain as to vitiate either it or the optional vote; and (b) that the exercise was deficient in that it specifically indicated that the tenant was exercising the option for a two year lease, whereas under clause 13, as I have indicated, the renewed lease appears to be a document that does not contain such an option, but is for "three periods of two years". 20 The discussion during submissions was based on the following propositions: (1) whether the arrangement between the parties was affected by the uncertainty of the lease document; (2) whether there was some equity which would remedy any such deficiency; (3) the formal exercise of the option point; and (4) what were the appropriate orders that should be made. 21 The discussion when the case came on before me on 18 July reached a very technical point and I indicated to counsel that if they wished, further submissions could be made in writing. I received thirteen pages of submissions from the defendant's counsel at 5.17 last night after the majority of the judgment had been prepared, but I have taken those into consideration. Plaintiff's counsel did not make any further submissions or reply to the additional written submissions of defendant's counsel. 22 (1) Mr Horsley says that it is quite plain that the rental due under a lease is a vital part of the lease and that if the rental of the lease is uncertain then the whole lease will fall. He referred to cases such as Beattie v Fine [1925] VLR 363 and Randazzo v Goulding [1968] Qd R 433, to show that this is so. They were cases where, in essence, the agreement of the parties was for a rental to be agreed. 23 Mr Horsley points to the fact that in the lease clause 12(a) only refers to the first year's rent and says nothing about the rent for the second year. It says nothing about the rent for the new lease after the option has been exercised, nor how the minimum rental is set out in the reference schedule without it being related to anything in the document. Further, although the lease has the flavour that there is to be rent review, there does not appear to be anything in the document which firms this up. Clause 13(c) appears to allow the lessor to nominate the rent which either has to be accepted by the lessee or else there is no rent because there is no machinery for resolving any problem. 24 It is a very difficult argument to put that a commercial contract is void for uncertainty. The parties in the present case were companies involved in commerce and it is not to be assumed that either of them went through any solemn farce. Even putting aside the question of the existing lease and directing one's mind to the questions as to whether the options provisions are void for uncertainty, the clear intention of the parties from the document was that there was to be a four year term with two two year extensions or a two year term with two three year extensions and there are a number of provisions in the document which are only consistent with carrying out that intention. 25 In The Council of Upper Hunter County District v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437, Barwick CJ set out the classic test, that is that the court is to divine the intention of the parties if it possibly can, particularly in the case of commercial arrangements and is not to adopt any narrow or pedantic approach in divining that intention. However, Mr Horsley pointed out there are limitations to that principle which were examined by Hope JA in Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130, 143. However, those limits are hardly ever reached except in cases where the promises are almost illusory. 26 In addition to those rules of contract, there are also rules of equity. Jones and Goodhart, Specific Performance, 2nd ed (Butterworths, London, 1996) at p 10 correctly sets out the law when the learned authors point out: "…courts are properly reluctant to hold void a provision which the parties intended to have legal effect, particularly if there has been partial performance of the terms of a contract from which the party resisting specific performance has derived a benefit. Only if the contract provides no means of resolving the ambiguity should a term be held void for uncertainty." 27 One of the cases relied on by Jones and Goodhart for that proposition, Trustees of the National Deposit Friendly Society v Beatties of London Ltd [1985] 2 EGLR 59, is a good illustration of it. The defendants had been running a toy shop in High Holborn in London for about 75 years and at the time when the dispute took place the building in which they were operating the shop was due for remodelling and the parties entered into an arrangement for the tenancy to continue. The document that was produced was one which had a series of serious uncertainties about it including that the tenant was to have a rent-free period of four months from the completion of the legal formalities or its physical possession, whichever occurred first. The rent was to be the greater of 33,000 pounds per annum or such rent as agreed as from the architect's certificate of completion. Goulding J in the English Chancery Division considered the various authorities including many of the authorities that have been referred to in this case and his Lordship said at page 62 that the landlords' argument: "… offends the court's conscience, and the court must find some way of supplying the want of the machinery for determining the covenants and conditions which the parties had contemplated. I think it ought to be done by declaring that the lease is to be in such form as the landlords may reasonably require." 28 It was held that the landlords' claim for vacant possession should be dismissed and a new lease should be granted. 29 Mr Horsley however says that that type of solution cannot be found in Australia because of the decision of the High Court of Australia in Hall v Busst (1960) 104 CLR 206. That case concerned an arrangement between parties that one would sell the other a Queensland island, but that, when the purchaser was tired of the island, the original vendor would buy it back. There were provisions for working out the price but those provisions had malfunctioned. An action was brought in the Supreme Court of Queensland for damages. 30 The High Court divided three to two, the majority being Dixon CJ, Fullagar and Menzies JJ, and those learned judges took a very restrictive view as to how far the court can provide machinery to make a contract of this nature work. Because of what those three justices said, some of the English cases decided between 1970 and the present day must be read with reserve because the English courts have quite clearly thrown over the previously held technical approach to fixing defective contracts and have embraced an approach as to what is just and equitable in all the circumstances. However, in Australia, at least at law, the courts are bound by what the High Court said. 31 I say "at least at law" because at page 223 Fullagar J made it quite clear that it could not rely on some of the equitable authorities because "We are here dealing with an action at law". He refers to Gregory v Mighell (1811) 18 Ves Jun 328; 34 ER 341 as a case where "equity would probably use its machinery to enforce an agreement for sale in similar terms after conveyance." 32 (2) It is thus expedient to examine equitable principles in this area of the law. The leading authority is the decision of Needham J in Zucchiatti v Ferrara (1976) 1 BPR 9199. At page 9205 his Honour set out four rules to deal with these sorts of cases. He acknowledged that although these rules were justified by the authorities the cases were not entirely consistent one with another. Needham J's four rules were as follows: "1. While the price at which property (other than goods) is to be sold must be certain, it is not necessary for the parties to agree upon the price; they may leave the determination of the price to a third person. 2. f that person refuses or fails to determine the price, no binding contract exists and specific performance cannot be granted. 3. If the substantial terms as to price are agreed upon, but ancillary and non-essential terms have not been determined, the court, in ordering specific performance, may settle those terms. 4. It may be that, even though the essential term of price has not been agreed upon, if the contract has otherwise been executed, the court will fix the price." 33 His Honour gave as an illustration of the fourth point the decision of Goulding J in Smith v Gale [1974] 1 WLR 9; [1974] 1 All ER 401. In that case a partnership had been dissolved and there was some uncertainty as to the amount to be paid for goodwill. The court became involved in the exercise of fixing the amount, as otherwise the remaining partners would have retained the retiring partner's share without having to pay for it. 34 How far does this equitable principle go? 35 In his written submissions, Mr Horsley put that the principle goes no further than what is described as proprietary estoppel or acquiescence. He skilfully traces through the cases in which Gregory v Mighell has been considered, particularly Ramsden v Dyson (1866) LR 1 HL 129, 171 and Olsson v Dyson (1969) 120 CLR 365, 378-9 as saying that modern cases consider Gregory v Mighell to be an illustration of proprietary estoppel. It is however not to my mind a complete answer. The current rules of equity have come about over a long process of development. There have been times of free development and then particularly under the fathers of equity, Lords Hardwicke, Nottingham and Eldon, a period of classification and thereafter further development and classification. 36 The principle that we now have as proprietary estoppel may well have evolved into its present form about 1850, but there have been developments since then. However, it is to my mind wrong to say that the modern principle of proprietary estoppel has excluded those other peripheral equities which were in existence in 1850, but which do not squarely fit within proprietary estoppel. For instance in the instant case, because the proceedings went by way of summons and because this point only came out lately in the defence, there is no evidence as to inducement and reliance which one would expect if one were trying an estoppel case. 37 It is clear that what later became the principle of proprietary estoppel was in some form or other in existence at least in 1682, see Hobbs v Norton (1682) 1 Vern 136; 23 ER 370, though it would be hard to recognise it because that case involved a person who had a remainder in a fee tail encouraging a stranger to purchase the annuity and the remainderman's father giving certain assurances as to title. Sir Francis North gave relief. 38 There are many other examples as are set out in the leading books, particularly Spencer, Bower and Turner, Estoppel by Representation, 3rd edition (Butterworths, London, 1977) at page 289, and Pawlowski on the Doctrine of Proprietary Estoppel, (Sweet and Maxwell, London, 1996) at p 5. I will only mention one other case and that is Hardcastle v Shafto (1791) 1 ANST 184; 145 ER 839, which was a case where a person was in possession of land under a long lease. There was a dispute as to the area of the lease. There was, accordingly, uncertainty of the rent because it was based on an area, the tenant had been constructing improvements and equity gave relief under a similar sort of principle. 39 It also must be noted that specific performance is a very ancient principle, and we find examples of it as early as 1433 in the University of Cambridge case Langton v Byngham (1433) noted in Barbour The History of Contract in Early English Equity, (OUP, 1914) at p 221. In that case the Chancellor of the University of Cambridge wanted to erect a new college next to the existing colleges and made an agreement with the defendant for land swap. Equity granted specific performance because the University had done all that it could to complete the contract and, obviously, damages were not an adequate remedy. The cases show that from then onwards, indeed up until relatively recently, the fact that the plaintiff had done all he or she possibly could in the execution (ie carrying out) of the agreement and that the other party had obtained some benefit, was considered to be a special case where specific performance should be granted. The early cases tend to talk in terms of that being "part performance". We tend to think today that part performance is an equitable doctrine limited to overcoming the problems that sometimes occur with the Statute of Frauds. Under the classic doctrine of part performance of the present day, the court does not enforce a contract which is made unenforceable by the Statute of Frauds, but rather the court makes an order compelling the defendant to enter into a contract in proper form because it is against his or her conscience not to. This is made clear by Brennan J's judgment in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, 433. 40 However, it is clear that part performance existed even before the Statute of Frauds. If one goes to the case of Normanby v Devonshire (1697) 2 Freeman 216; 22 ER 1169, one can see that the reporter noted: "It was said that before the Statute of Frauds and perjuries, this court would not execute a parol agreement, unless it had been executed in part of one side or the other; and then it would, because it was but reason, when one party had performed of his part, that the other party should be compelled to perform of his part." 41 It seems to me then that the whole of the history shows that there is a principle of part performance which is wider than the modern principle of part performance and is wider than proprietary estoppel, but rests on the same basic ground that it would be equitable fraud and against the conscience of a person to take the benefit of a contract and yet not fulfil the burden of it. It really does not matter what label one puts on the proposition, a fraud by any other name smells just as foul. 42 It is also incorrect, with respect, as Mr Horsley puts, that specific performance is only granted in respect of contracts. First of all, it is clear that in the Waltons Stores v Maher type situation, equity does not grant specific performance of the contract, but compels the contract to be made and then specifically enforces it. Pawlowski at page 5 cites my decision in Beaton v McDivitt (1985) 13 NSWLR 134 at 150-151, that one can enforce not only contracts, but also supposed contracts and also non-contracts where there has been detrimental reliance on representations. 43 The old equity books, see eg Fonblanque, Treatise of Equity, 5th ed (Abr'm Small, Philadelphia, 1820) p 176-7, make it quite clear that whilst a court was very cautious of enforcing agreements other than agreements in writing complying with Statutes of Fraud, they would in appropriate cases make such an order. 44 After that long digression I come back to dealing with the particular document in question. It is a most inelegantly drafted document. However, if I can see from the document the parties' intentions and construe it so that it has certainty, then orders can be made. If I cannot, then I must turn to the doctrine of equity to see whether notwithstanding that there is an imperfect contract, it would be against the defendant's conscience not to grant the plaintiff specific performance. If either of those fail probably I should adjourn the proceedings so that one or both parties can seek rectification. 45 Mr Murr SC puts that really the matter is quite simple. Clause 13(c) and (d) have got misplaced and they should be (c) and (d) of 12. There is a lot of attraction in this submission, but even if one were to make that transposition it would be difficult to ascertain what is picked up by the reference in the first line of 13(c) to the "Lessor under the provisions of paragraph (b) hereof", serving a notice upon the lessee. 46 However, one can see that the drafter of the lease has had what might be called a "bad hair day". One is a little more free to glean the intention of the parties than one would be in the case of a very tightly, technically and well drawn document. One can approach the document with a broad brush approach. 47 With the broad brush approach focussing only on the rent, the parties anticipated that the tenant might be in possession for a total of eight years and that there was to be an initial lease which at first was to be of four years but when it was executed it was to be of two and then there were to be three new leases. However, there would be a rent for the first term which would be a minimum rent and it seems to me that there is no difficulty at all in saying that after the second year, the rent would be the same because the flavour of the lease is in Item 10 of the reference schedule, even though it is disconnected, that the rent review would be over two years. At that stage there would be a cap of either market rental or four percent per annum over and above the minimum rental. Clause 13(c) could under those limits cut in here. However, even if there were some difficulty in theory it is quite clear that where parties have left a term of their agreement uncertain but have determined the certainty at the time when the action of specific performance is commenced then that is sufficient; see Adams v Broke (1842) 1 Y & CCC 627; 62 ER 1046 and Shardlow v Cotterell (1881) 20 Ch D 90. 48 In Macaulay v Greater Paramount Theatres Ltd (1921) 22 SR 66, 74 Harvey J held that where the uncertainty which might have precluded a decree for specific performance had been removed before the suit was instituted, a decree could be made. There was earlier authority to the contrary. However, this decision has been followed since; see eg Bradford v Zahra [1977] Qd R 24 and was endorsed by the English Court of Appeal in Price v Strange [1978] Ch 337 and I should follow it. 49 As I have said, any uncertainty as to the rent was remedied by May 2001 before these proceedings were commenced. 50 In my view the rent for the renewed period is as agreed between the parties. 51 Thus I do not consider that, at law, the argument as to certainty succeeds and it is necessary to look into Needham J's fourth rule and the rules of equity to see how far, if at all, the equity has been restricted by the High Court's decision in Hall v Busst, but if I were wrong on the first point it would seem to me that this is a classic case where equity would give relief even under the rules applicable in Australia. Mr Horsley says that this is not a case where the landlord has taken advantage of the contract by taking the rent for the first two years because there is a clear distinction between the lease for two years and the option period. That is only partially true, with respect, the whole of the matrix shows that the parties were clearly contemplating that there would be occupation of the premises for a longer period, but the landlord having taken advantage of the lease and receiving income from the building for the two years, the treaty with the tenant is in a situation of an executed lease having received advantage where the equity cuts in. However, as I say, it is not necessary to deal with that point in the present case. 52 (3) I have now dealt with points 1 and 2 mentioned earlier and I now deal with point 3 which is whether the letter of September 2000 was sufficient to exercise the option. I have already looked at clause 13 of the lease. It is hard to know what is a lease for a further term of three periods of two years because three periods of two years are not a term. The only legal interest which can be demised is of a two year term with two two year options. The distinction between an interest under a lease and under a right of renewal of that lease is a very narrow one as discussed by the Full Federal Court in Trade Practices Commission v Tooth & Co (1978) 19 ALR 191, 199 and on appeal in the High Court (1979) 142 CLR 397, 419-422. It seems to me that the document that was given in September 2000 was sufficient and indeed it is significant that until Mr Horsley made his submissions no-one in any correspondence had seemed to indicate otherwise. 53 (4) Accordingly, in my view, the plaintiff is entitled to succeed. There may be difficulties in the actual form of the lease which is to be given. Under clause 13 it is to be in accordance with the present document with certain alterations. However, as the present document is so defective it may need to be rectified or it may be that the Master needs to certify the form of lease that is to be granted, but it would seem ridiculous if this present conglomeration of legal mumbo jumbo was allowed to get on to the register book. 54 Accordingly I will make order 1 in the summons. I will declare that the plaintiff is entitled to specific performance of the lease for two years from 21 December 2000 with two two year options in such form as the parties may agree or in default of agreement as the Master shall certify. I reserve further consideration generally and I order that the defendant pay the plaintiff's costs of the proceedings. **************** Last Modified: 09/10/2001 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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