INSEARCH LTD v. KIN HING P/L & ORS [2003] NSWSC 875

New South Wales Supreme Court

CITATION : INSEARCH LTD v. KIN HING P/L & ORS [2003] NSWSC 875 HEARING DATE(S) : 15 & 16/09/2003 JUDGMENT DATE : 26 September 2003 JURISDICTION: EQUITY JUDGMENT OF : Bryson J at 1 DECISION : Judgment for defendants

CATCHWORDS : LANDLORD and TENANT - agreement to lease - formation of agreement - correspondence marked "Subject to Lease" and expressing conditions for binding effect requiring execution of formal lease - held no agreement for lease formed, no estoppel or other alleged causes of action LEGISLATION CITED : Real Property Act 1900 s.42 Trade Practices Act s.52 Baulkham Hills Private Hospital Pty Ltd v. GR Securities Pty Ltd (1986) 40 NSWLR 622 Expectation Pty Ltd v. Pinnacle VRB Ltd [2002] WASCA 160 CASES CITED : MacKay v. Dick (1881) 6 App Cas 251 Pentagold Investments Pty Ltd. v. Romanos [2001] NSWCA 425 Insearch Limited - Plaintiff PARTIES : Kin Hing Pty Ltd and Ford Hing Pty Ltd - First Defendants Shop Distributive and Allied Employees' Association New South Wales Branch - Second Defendant FILE NUMBER(S) : SC 4239/2003 R. Harper - Plaintiff COUNSEL : D. Raphael - First Defendants G. Blake SC - Second Defendant Deacons Lawyers - Plaintiff SOLICITORS : Mok & Associates - First Defendants Holman Webb Lawyers - Second Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

BRYSON J.

Friday 26 September 2003

4239/2003 INSEARCH LIMITED v. KIN HING PTY LTD, FORD HING PTY LTD & SHOP DISTRIBUTIVE AND ALLIED EMPLOYEES' ASSOCIATION JUDGMENT 1 HIS HONOUR: These proceedings relate to leasing commercial premises at Level 3, Prince Centre, 8 Quay Street, Haymarket. Level 3 is the stratum in Folio Identifier 155/SP 34481. By lease dated 9 February 1999 the first and second defendants referred to as Kin Hing, who were then registered proprietors granted Insearch a lease now registered 5587858C of Level 3 for a term of five years commencing on 8 November 1998 and expiring on 7 November 2003, with an option to renew for a period of five years set out in cl.20 in these words: 20. Option 20.1 The Lessee has the option to take a renewed lease of the premises for a further term of the period of time set out in Item 17 of the Schedule (the "Option Term") from the explanation of the term of this Lease. The Lessee can exercise the option only if: 20.1.1 the Lessee gives to the Lessor a written notice of exercise to option not less than six (6) months and not more than twelve (12) months prior to the expiration of the term of this Lease; and 20.1.2 there has been no breaches of any of the covenants on the part of the Lessee contained in this Lease during the term of the Lease. 20.2 The Lessor shall at the cost of the Lessee grant to the Lessee a Lease of the premises subject to the same covenants and conditions as are contained in this Lease except that: 20.2.1 the commencement date shall be the day following the expiration of the term of this Lease: 20.2.2 the annual rental for the first year of the term of the renewed Lease, being subject to such reviews as hereinbefore provided, shall be determined by the method set out in Item 18 of the Schedule: 20.2.3 the annual rent shall be reviewed at the anniversary of the date of the commencement of the renewed lease by the method set out in Item 19 of the Schedule; and 20.2.4 this Clause 20 for renewal shall be omitted from such renewed lease. 2 It will be seen that the option was required by cl.20 to be exercised on or before 7 May 2003. Item 18 in the Schedule referred to Method C in cl.19.2.3, which required review by agreement or if the parties could not agree determination by a valuer. Item 19 said "To be negotiated between the Lessor and the Lessee at the time of the exercise of the Option to Renew." It is open to question whether cl.20 of the lease contained any effectual provision establishing what the annual rental was to be after the first year; and for this reason it is open to question whether the option, if exercised, was enforceable. 3 These proceedings were commenced on 8 August 2003, and were heard with expedition on 15 and 16 September 2003. Insearch's claim is presented in a number of alternatives. The first claim was to the effect that an agreement for a new lease for a term of three years with a three year option was made by exchange of letters on 21 and 24 February 2003. In paras.6 to 17 of the Statement of Claim, it is alleged that Kin Hing had breached this agreement in several ways including by failing to prepare necessary documents to bring into existence a lease document for execution reflecting the agreement for lease. 4 It is then in paras.18 to 25 alleged that Kin Hing are estopped from denying the validity and effect of an agreement for lease such as was earlier alleged. The allegations are to the effect that the letter of 24 February 2003 constituted a representation that Kin Hing had entered into an agreement to lease the premises on the terms and conditions contained, and would prepare and deliver a written lease document for consideration and execution. It is then alleged (SC21) that a number of circumstances and events, particularly in the course of negotiations, had encouraged or created a reasonable expectation in Insearch that the agreement for lease was effective or would be made effective. Further allegations relating to estoppel allege that Insearch was induced to act to its detriment in that it did not take any step on or before 8 May 2003 to exercise the option. 5 In Statement of Claim paras.26 and 27 it is alleged that the lease and option contained implied terms obliging Kin Hing to act reasonably and do all things necessary to enable Insearch to receive the benefit of the option, and an obligation not to do anything which would deny Insearch the benefit of the option. 6 In Statement of Claim para.28 it is alleged that Kin Hing from February 2003 onwards held the property on trust; so far as can be understood the trust alluded to is a trust to carry out the arrangement recorded in the letters of 21 and 24 February. 7 Paragraphs 29 to 39 deal with the position of the second defendant, referred to as S.D.A.E.A. 8 Insearch purportedly exercised the option on 7 August 2003, outside the time for which cl.20 provides, and SDAEA is not prepared to treat that purported exercise as effectual. SDAEA contracted to purchase Level 3, and also five other lots in a different strata plan representing parking spaces, for $3.7m by a contract of sale in writing exchanged on 16 April 2003. The sale was completed on 27 May 2003 and the transfer was registered on 29 May 2003. The property had earlier been offered for sale at auction on 7 March 2003, SDAEA was the only bidder and the property was not sold at auction. The allegations against SDAEA in the Statement of Claim were shortly to the effect that before exchange of contracts, and also before completion, SDAEA knew or ought to have known of the entitlements of Insearch earlier alleged in the Statement of Claim, took its interest in the property subject to equities in favour of Insearch and became bound by the alleged estoppels and equities; and is so estopped itself. It is also alleged (SC38) that the registration of SDAEA as proprietor of the property was affected by fraud within the meaning of s.42 of the Real Property Act 1900. 9 Insearch uses Level 3 for educational purposes, and conducts English courses for students with low levels of fluency and literacy in the English language, and also a Diploma Program at a computer laboratory on the premises. The premises were fitted out by Insearch with 10 class rooms, three computer laboratories and a language laboratory and as well as the fixtures comprising that fit out are equipped with computers, desks, chairs and office equipment necessary for Insearch's purposes. The premises were especially designed and fitted out for Insearch's purposes and the fit-out includes additional air-conditioning units, bathrooms and partitioning. On average about 250 to 270 people including employees and students use the premises at any one time while Insearch classes are being held. The students pay fees to Insearch. Insearch maintains that it has the right to remain in the premises after 7 November 2003. If required to re-locate it will come under the need to find another suitable site and design and equip that site for the purposes for which it now uses the subject premises. This will involve considerable work in the fit-out and expense which Insearch's architects have estimated to be approximately $925,000. 10 The principal sources of evidence in Insearch's case were Mr Michael Nugara who is Insearch's Property Administration Manager, and Ms Joanne Farmer, a chartered surveyor employed by GVA Grimley International Property Advisors, which has been advisor to Insearch and has conducted some of its business relating to the lease. 11 Early in November 2002 Mr Nugara gave Mr Stewart Allison, a director of GVA Grimley, oral instructions that Insearch would like to hold over, and that Insearch had an option which needed to be exercised by 7 May 2003 but wanted to negotiate a new lease of three years plus three years instead of exercising the option. He said that if agreement could not be reached on a lease of three years plus three years he would like to exercise the option. He authorised GVA Grimley to negotiate with the landlord. Mr Allison agreed, accepted this retainer and instructed Ms Farmer to assist him in negotiating a new lease. 12 On 19 November 2002 Ms Farmer wrote to Kin Hing in care of BP Woodward & Associates, Real Estate Agent, who were then associated with Kin Hing; she said that Insearch was seeking to discuss the possibility of renegotiating the lease and asked for discussion. Then on 19 December 2002 she sent a letter directed to Mr Dominic Li and Kin Hing and addressed to them in care of BP Woodward & Associates with a more formal proposal. This proposal was for a lease for three years to commence on 1 January 2003. The proposal had a number of aspects including these. There was to be no rent until 1 April 2003; that is to say, there was to be no rent for the first three months. The lease was to be for a term of three years to 31 December 2006 with an option of a further three years on three months' notice. The lessee was to be entitled to terminate the lease on three months' notice during the last two years of the first term. The rental was to be fixed for a three year term, and to be reviewed to market at exercise of the option. There was to be no guarantee provision. Each party was to bear their own legal costs incurred in the transaction but the lessee was to be responsible for stamp duty and registration costs. 13 The reference to there being no guarantee recurred to a matter which had been under negotiation in 1998. In the course of negotiation Insearch had asked that there be no guarantee provision and Kin Hing had insisted on a guarantee or security bond, provided for in cl.17 of Lease 5587858C and supported by a bank guarantee given by State Bank of New South Wales Ltd. 14 The letter of 19 December 2002 included some matters which appeared again in later correspondence from GVA Grimley between the parties. The letter was headed, in capital letters and with prominence.