Reported Decision: (2007) NSW Conv R 56-182(2007) Aust Contract Reports 90-256 Appeal Outcome: Special leave refused with costs by the High Court - 15 June 2007 New South Wales Court of Appeal CITATION: Boreland v Docker & Ors [2007] NSWCA 94 HEARING DATE(S): 13 March 2007 JUDGMENT DATE: 24 April 2007 JUDGMENT OF: Mason P at 1; Beazley JA at 2; Ipp JA at 137 DECISION: 1. Allow the appeal in part;; 2. Set aside Orders 1, 2, 3, 4, 6, 7, 8, 9, 10 and 11;; 3. Vary the declaration made in Order 5 so as to provide that the appellant is obliged upon the determination of the lease to transfer the poker machine entitlements to the respondents;; 4. Declare that by letters between the appellant and the respondents dated 12 May 2005 and 12 September 2005, the lease entered into by the parties on 1 August 2003 was varied so as to provide for a fixed term ending on 31 August 2007;; 5. Liberty to the respondents to apply for injunctive relief, either on an interlocutory or final basis;; 6. Direct the appellant and respondents to file within seven days agreed minutes of order in respect of the costs orders to be made both at first instance and on the appeal. If there is no agreement, then within 14 days of today's date the appellant and respondents are to file written submissions in respect of costs. CATCHWORDS: Contract – lease – offer and acceptance – ambiguity in terms of offer – use of surrounding circumstances – use of pre-contractual conversations - Contract – lease – offer and acceptance – deviation from offer – whether deviation for sole benefit of offeror - Contract – lease – variation - offer and acceptance – construction of offer – offer must correspond with acceptance – whether trial judge erred in construction of offer - Liquor Law – poker machine entitlements – entitlements attach to hotelier's licence – transfer of poker machine entitlements must accord with Gaming Machines Act 2001 (NSW) - Liquor Law – poker machine entitlements as a species of property – rights to poker machine entitlements – as respondents not holders of hotelier's licence rights only created by contract or trust - Liquor Law – hotelier's licence not property – no beneficial ownership in hotelier's licence Conveyancing Act 1919 (NSW) ss 23C, 23D LEGISLATION CITED: Gaming Machines Act 2001 (NSW) ss 15, 15(2), 19, 19(1), 19(2), 19(3), 19(5), 19(6), 20 Liquor Act 1982 (NSW) ss 18, 18(2)(a) Real Property Act 1900 (NSW) Brambles Holdings Ltd v Bathurst City Council (2001) 55 NSWLR 153; [2001] NSWCA 61 BP Refinery (Westernport) Pty Limited v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266; [1997] HCA 40 Carter v Hyde (1923) 33 CLR 115 Cavallari v Premier Refrigeration Co Pty Ltd (1952) 85 CLR 20 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 Doe d. Warner v Browne (1807) 8 East 165 (103 E.R. 305) Ex parte Fealey (1897) 18 LR (NSW) 282 Jabetin Pty Limited v Liquor Administration Board (2005) 63 NSWLR 602; [2005] NSWCA 92 J W Carter, "Carter on Contract" at 03-220 Jones v Daniel (1894) 2 Ch 332 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 59 ACSR; [2006] FCAFC 144 CASES CITED: Masters & Anor v Garcia & Anor (2005) 65 NSWLR 92; [2005] NSWCA 287 Nader v Lager & Hataier [1960] SASR 49 Nelson Line (Liverpool) Limited v James Nelson & Sons Limited (1908) AC 16 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 Quadling v Robinson (1976) 137 CLR 192; [1976] HCA 31 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289; [2002] HCA 5 Slatter v Railway Commissioners (NSW) (1931) 45 CLR 68; [1931] HCA 13 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 Tonitto & Anor v Bassal & Ors (1992) 28 NSWLR 564 Wonall Pty Ltd v Clarence Property Corporation Limited (2003) 58 NSWLR 23; [2003] NSWSC 497 Woodfall on Landlord and Tenant, 25th ed (1954) John Leslie Boreland (Appellant) PARTIES: Shane Docker (First Respondent) Daniel Thomas Docker (Second Respondent) Liquor Administration Board of New South Wales (Third Respondent) FILE NUMBER(S): CA 40060/07 JM Ireland QC; GA Moore; A Hatzis (Appellant) COUNSEL: DH Murr SC; JB Conomy (First & Second Respondent) Submitting appearance (Third Respondent) Mavrakis & Associates (Appellant) SOLICITORS: JDK Legal (First & Second Respondent) IV Knight Crown Solicitor (Third Respondent) LOWER COURT JURISDICTION: Supreme Court - Equity Division LOWER COURT FILE NUMBER(S): SC 6461/2005 LOWER COURT JUDICIAL OFFICER: White J LOWER COURT DATE OF DECISION: 9 February 2007 LOWER COURT MEDIUM NEUTRAL CITATION: John Leslie Boreland v Shane Docker & 1 Or [2007] NSWSC 53 - 44 - IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40060/07 MASON P BEAZLEY JA IPP JA 24 April 2007 John Leslie Boreland v Shane Docker & Ors Headnote Facts The appellant, as lessee, and the first and second respondents (the respondents) as lessors, entered into a weekly tenancy of hotel premises. The appellant was also the licencee of the Liquor Licence for the hotel. Clause 7.2 of the lease required the lessee to keep current all licences and upon the expiration of the lease transfer back all licences that had been transferred to the lessee at the commencement of the lease. In addition, clause 23.2 of the lease recited that the lessee acknowledged that the lessor was the beneficial owner of the Liquor Licence. By letter dated 12 May 2005, the respondents offered to allow the appellant to stay in the premises until 31 August 2007. The appellant responded to the offer by letter dated 12 September 2005 on the basis that it was an offer of a fixed term. The respondents contended that the offer was that they would not terminate the lease but that the lease was otherwise to remain a weekly tenancy. There was an issue, therefore, as to the proper construction of the letter of 12 May and to whether there had been an acceptance. The respondents also contended that pursuant to clause 23.2 or the combined operation of clauses 23.2 and 7.2, the appellant held 17 poker machine entitlements that existed at the commencement of the lease in trust for them. White J at trial held that the respondents were entitled to possession of the hotel pursuant to 'a notice to quit' they had served on the appellant as there was no agreement between the parties to extend the term of the lease as the appellant's purported acceptance did not reflect the respondents' terms of offer but was in fact a counter-offer. In addition, his Honour held that if the lease had remained on foot, it would be a breach of the combined operations of clauses 7.2 and 23.2 for the appellant to attempt to transfer the poker machine entitlements. The appellant appealed against White J's decision in respect of his Honour's construction of the letters of offer and acceptance and his construction of clause 23.2 of the lease between the parties dated 1 August 2003. The respondents by Notice of Contention, sought to uphold his Honour's orders relating to the poker machine entitlements, on the basis of the operation of clause 7.2. Held: Per Beazley JA (Mason P and Ipp JA agreeing): (i) When seeking to determine whether an offer has been accepted, it is necessary to first construe the offer which was made. In this case, the offer on its terms provided that the appellant's occupation of the leased premises could continue for a fixed term, that is until 31 August 2007, provided he observed the covenants of the lease. Upon that construction of the letter of offer, the letter of acceptance was an acceptance of the offer so that the term of the lease had been extended to 31 August 2007: [45], [56], [60] (ii) When construing a commercial contract the court may have regard to the surrounding circumstances known to the parties and the purpose and object of the transaction: [62] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 (cited) (iii) (Obiter) Pre-contractual conduct is admissible on questions of the construction of a contract if its terms are ambiguous. If there was some ambiguity in the terms of the offer made by the respondents, that ambiguity can be resolved by having regard to the content of the conversation between the second respondent and the appellant so as to objectively determine the surrounding circumstances known to the parties. That conversation supports the construction that the offer was for an extension of the term, and when accepted, both parties became bound to a lease for a fixed term ending on 31 August 2007: [63], [70], [72] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 (cited) (iv) (Obiter) An offer and acceptance must correspond. However, this may be qualified where any deviation from the offer is solely in favour of the offeror. In this case, it could not be said that a variation of the lease so as to provide for a fixed term was not a provision that necessarily was for the benefit of the offeror. However, even if there was a benefit to the respondents, the principle would not operate as on the evidence the extended term was also to benefit the appellant: [28], [76], [78], [86] Tonitto & Anor v Bassal & Ors (1992) 28 NSWLR 564; Ex parte Fealey (1897) 18 LR (NSW) 282; J W Carter, "Carter on Contract" (cited) (v) The Gaming Machines Act 2001 (NSW) does not envisage the detachment of poker machine entitlements from the hotelier's licence to which it has been allocated, other than by way of approved transfer by the Liquor Administration Board to the holder of another hotelier's licence: [100] Jabetin Pty Limited v Liquor Administration Board (2005) 63 NSWLR 602; [2005] NSWCA 92 (followed) (vi) Poker machine entitlements are a species of property with the normal incidents of property, such as ownership, disposal and the capacity to be made subject of a trust. However, the incidents of property must operate within the legislative framework of the Gaming Machines Act 2001 (NSW): [101] Jabetin Pty Limited v Liquor Administration Board (2005) 63 NSWLR 602; [2005] NSWCA 92 (followed) (vii) As the hotelier's licence was held by the appellant, he owned the poker machine entitlements, subject to any property rights in the respondents. As the respondents are not the holders of the licence, any such rights they may have could, in this case only be rights created by contract, or by way of a trust: [104] (viii) A hotelier's licence is not property. As a result, the respondents could not be the beneficial owners of the Liquor Licence. In addition, there is no legal or statutory basis upon which the owner and/or lessor of the hotel premises is entitled to permit the licencee to operate the licence. Accordingly, on its express terms, clause 23.2 has no effective operation: [89], [106], [107], [108] Slatter v Railway Commissioners (NSW) (1931) 45 CLR 68; [1931] HCA 13 (cited) (ix) The trial judge's approach to the construction of clause 23.2, namely determining the implications contained in the express words of the contract was correct. However, it was unlikely given the assumed basis of knowledge of the parties that they would have dealt with something as valuable as poker machine entitlements in Division 23 of the lease which dealt with the Liquor Licence. Therefore, it could not be said that this clause impliedly included a reference to a statutory tradeable entitlement: [111], [119], [120] (x) Clause 7.2 of the lease required the appellant to transfer back at the end of the lease each licence transferred at the commencement of the lease with whatever conditions applied and whatever incidents were attached to it. In this case, the hotelier's licence transferred to the appellant at the commencement of the lease had allocated to it 17 poker machine entitlements. Therefore, that is what has to be transferred back to the respondents at the end of the lease. However, clause 7.2 does not impose any restriction upon dealing with the entitlements during the currency of the lease. Accordingly, subject to the operation of the Gaming Machines Act 2001 (NSW), the appellant would be entitled to utilise his property rights in those entitlements whilst the lease is on foot. [130], [131] IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40060/07 MASON P BEAZLEY JA IPP JA 24 April 2007 John Leslie Boreland v Shane Docker & Ors Judgment 1 MASON P: I agree with Beazley JA. 2 BEAZLEY JA: Two principal questions arise on this appeal. The first is whether the parties agreed to a variation of a lease and, in particular, agreed to a variation of the term of the lease, or whether an offer made by the respondents/lessor was not accepted by the appellant/lessee, who rather than accept the offer in the terms on which it was made, made a counter-offer. The trial judge, White J, held that the appellant made a counter-offer which was not accepted by the first and second respondents. The third respondent (the Liquor Administration Board of New South Wales) made a submitting appearance and is not otherwise referred to in these reasons. References to the respondents in these reasons and orders is a reference to the first and second respondents only. 3 The second question is whether the appellant is entitled to sell poker machine entitlements that were allocated to the hotelier's licence held by the appellant during the course of his tenancy of the hotel, or whether those entitlements are attached to the licence in such a way that they must be put at the disposal of the respondent at the end of the lease. Even though I have described this as the second issue, the issue relating to the poker machine entitlements appears to underlie the dispute between the parties. The lease 4 The appellant became lessee of the Arncliffe Hotel on 1 August 2003. The respondents are the lessors of those premises. The lease of the premises was by way of a written lease under the Real Property Act 1900 (NSW) (the Real Property Act). The lease was set out by way of a summary, containing a number of Items followed by Divisions. The term of the lease was one week; commencing 1 August 2003 and terminating 8 August 2003: Item 6. The starting rent was $4,545.45 plus $454.55 GST per week: Item 8. No provision was made for market rent review. Division 3 governed the term of the lease and the holding over. Clause 3.4(4) provided for a holding over after the expiration of the term of the lease as a weekly tenant at the rent payable at the expiration of the term of the lease and otherwise on the same terms as the lease. Clause 3.4(b) provided that the weekly tenancy created pursuant to the holding over clause could "be terminated at any time by either the Lessor or the Lessee giving one month's written notice to the other". Division 7 5 The permitted use of the premises was as a hotel: cl 7.1 and Item 10. The appellant was required to hold a hotelier's licence in order to operate the premises as a hotel: the Liquor Act 1982 (NSW) (the Liquor Act). Clause 7.2 imposed requirements in relation to the maintenance of the licences required for the permitted use in the following terms: "7.2 Business Licences The Lessee will keep current all licences and permits and registrations required for the Permitted Use and where any such licence or permit or registration has been transferred to the Lessee or its nominee by the Lessor or the transfer thereof has been procured by the Lessor, upon the expiration of this Lease or its earlier termination, the Lessee will transfer or cause to be transferred each such licence or permit or registration to the Lessor or its nominee at no cost to the Lessor." Division 16 6 Division 16 provided for a restriction on the lessee's right to assign the lessee's interest in the lease. Clause 16.1(a) provided that the lessee "will not assign … the lessee's interest in the Premises". Subclause 16.1(b) provided that an assignment would not breach subclause (a) if three conditions were satisfied: that the lessee was not in breach of the lease; gave one month's prior notice; and complied with subclause (c). Subclause (c), in effect, provided for the matters that needed to be satisfied in order to obtain the lessor's approval to the assignment. In addition, it required the lessee to procure the necessary approvals of the licensing authorities to transfer all relevant licences. Division 17 7 Division 17, cl 17.3 provided that, subject to the appellant's compliance with the terms of the lease, the respondents would permit the appellant or his nominee to hold and exercise the Liquor Licence. Division 18 8 Division 18, cl 18.3 permitted re-entry on default and forfeiture. Relevantly, it allowed re-entry of the premises and termination of the lease if there was a breach of cl 23.3. Division 23 9 Division 23 related to the Liquor Licence. It provided: "23.1 The Liquor Licence attaches to the Premises or part of them. 23.2 The Lessee acknowledges that the Lessor is the beneficial owner of the Licence and that it is permitted by its nominee to exercise the Liquor Licence while it is Lessee provided that it complies with this Division." Clause 23.3 then provided that the Liquor Licence was not to be exercised in any way that jeopardised its operation. Original term of the lease 10 The background to the lease being of such short duration was that the respondents were building a new hotel at Wolli Creek and proposed to transfer the Liquor Licence from the Arncliffe Hotel to the new hotel. There was an understanding that if the appellant made a success of the Arncliffe Hotel, the respondents would offer him a lease of the Wolli Creek hotel. There was no suggestion that that arrangement was binding in any way and is otherwise not relevant to the issues on the appeal. Background to the proceedings 11 The respondents gave the appellant a notice to quit which expired on 24 March 2006. The appellant asserted that the notice to quit was not effective to determine the tenancy. He claimed that the lease had been varied by correspondence between the parties dated 12 May 2005 and 12 September 2005, which had the effect of extending the term of the lease to 31 August 2007. The appellant also relied upon an estoppel which, if made out, would have had the same effect, namely, to permit the appellant to remain in occupation of the premises until 31 August 2007. The contractual issue: was the lease varied? 12 On 22 March 2004, the second respondent wrote to the appellant, reminding him that he occupied the Hotel premises as a weekly tenant. He said that he had no intention of terminating the lease in the immediate future, but wanted to ensure that the appellant made "no assumptions as to its longevity". The second respondent reminded the appellant of the respondents' long-term plan to move the licence to Wolli Creek and confirmed that if they did so, the appellant would be given a first right of refusal to take a lease of the new hotel. He said that whilst the project was "not something which will happen in the short term", he did not want the appellant spending money "improving the property in the expectation of an extended tenancy". 13 The parties had a conversation shortly thereafter. In a letter to the second respondent dated 24 March 2005, the appellant purported to confirm the content of that conversation. The letter asserts that there was an agreement that the appellant "could be at the Arncliffe Hotel until at least August 2007" as the Wolli Creek project was progressing slowly. The appellant also pointed out that the second respondent knew that the Arncliffe premises were in poor repair and it had been at the second respondent's encouragement that the appellant had borrowed money to fix the Hotel up and put it in operating order. The appellant sought the second respondent's response. 14 On 1 April 2005, the second respondent wrote to the appellant, referring to their meeting the previous week and advising that there had been an offer to purchase the freehold of the Arncliffe Hotel. The second respondent offered the appellant "the first option to purchase the freehold" and sought a response within 14 days. On the same day, there was a letter to the appellant from Bentley Barton Partners Pty Ltd, Chartered Accountants, seeking information about the payment of input tax credit relating to the weekly rent. 15 On 2 May 2005, the second respondent wrote to the appellant in these terms: "As you have not responded to our letter dated 1st April 2005 we advise that effective from Monday 9th May 2005 the weekly rent for the Arncliffe Hotel is $6,000.00 per week plus GST." 16 There had been a conversation between the appellant and the second respondent shortly before the letter of 2 May 2005. The trial judge made the following findings in respect of this and another conversation that occurred after the letter of 2 May 2005: "[12] … Shortly before writing this letter, [the second respondent] had told the [appellant] that he had received an offer from another party to enter into a lease of the hotel at that rent. [The second respondent] told the [appellant] that if he wanted to stay, he could either buy the hotel for $6,000,000 or pay [the second respondent] $6,600 per week in rent. The [appellant] understood that this was not negotiable. [The second respondent] put the matter to the [appellant] on the basis that he could take it or leave it, and if he did not take it, the [appellant] would have to leave. [13] On a later occasion, the [appellant] told [the second respondent] that he needed more time in the hotel to recover the moneys he had expended. The [appellant] asked for a couple of years. [The second respondent] told him that he could stay until August 2007 on the same terms and conditions as the current arrangements." 17 His Honour's summary in para [13] accurately summarises the conversation between the parties, save for any reference to rent. Because the relevance of this conversation is important in two respects, first, as to whether regard can be had to it for the purposes of clarifying any ambiguity as to the terms of the variation of the lease and secondly, as to the issue of estoppel, I will set out the conversation in full, as recounted by the second respondent in cross-examination: "And I said to him that we are going to put up the rent and everything else. He explained to me that he'd had difficulties with his marriage and he said he'd spent a considerable amount of money. And I felt sorry for him, because I've known him for a long time, and I said, 'Well, what do you need?' He said, 'I need time to recoup my money that I spent.' I said, 'John', I said, 'All right, I won't put up your rent, I will give you a break. What time do you need?' he said, '2007, August.' He said it to me. And I said, 'Look, you can stay there. No more rent increases as long as it's on the same terms and conditions as we got on the weekly tenancy.' That's what the whole thing has been about since I got out of Acola Holdings, that's why I bought them out so I could have a free hand so I could move it and do what I want." The reference to " Acola Holdings " was a reference to the previous tenant of the Arncliffe Hotel. 18 On 12 May 2005, the appellant received a letter from the respondents' solicitor. As this is one of the two central documents relevant to the first issue on the appeal, its content needs to be set out in full: "Dear Sir WEEKLY TENANCY OF THE ARNCLIFFE HOTEL, ARNCLIFFE (the "Hotel") We are instructed by our client, Mr Docker [the second respondent], that your rent will increase to $6,000 plus GST per week from 1 July 2005. We are also instructed that Mr Docker will permit you to remain in occupation under the terms of the existing lease until 31 August 2007, subject to you: (a) continuing to observe the covenants of the lease; and (b) paying all arrears of GST for rent by no later than 31 May 2005. We are instructed the amount as at 31 May 2005 will be $38,250. If you fail to comply with (a) and (b), our client's offer to allow you to remain in occupation until 31 August 2007 is automatically withdrawn without further notice." 19 Upon receipt of this letter, the appellant telephoned the respondents' solicitors and advised them that the reference in para (b) to arrears of GST for rent was incorrect. He confirmed this in a facsimile sent to the solicitors on 17 May 2005 and the respondents accepted that the reference in the letter to the arrears was an error. As and from 1 July 2005, the appellant paid rent at the rate of $6,000 per week plus GST. 20 On 12 September 2005, the appellant responded to the letter of 12 May 2005. A contention that he had responded earlier, on 12 July 2005, was rejected by the trial judge and is not challenged on the appeal. 21 The letter of 12 September 2005 was in these terms: " J L Boreland Lease from D T Docker and S Docker The Arncliffe Hotel, 185 Princes Highway, Arncliffe, 1/442336 Your Ref: JCM:030392 I refer to your letter dated 12 May 2005 and reply as follows: 1. I accept the lessor's offer to extend the term of the existing lease until 31 August, 2007 with a weekly rental of $6,000.00 plus GST from 1 July 2005 with no further increases. 2. I have paid via netbank to the lessor in the sum of $6,600.00 being the new rental for the week commencing 1 July 2005 and shall continue to pay by equal weekly instalments in advance on each rent payment date as provided in the lease. 3. I advise that all GST for past rent has been paid as it was due and that the lessor has received input tax credits on the rent of $4,000.00 which was inclusive of the GST. I accept the rental increase to $6,600.00 inclusive of GST but consider this excessive and feel that I am under duress in doing so, given that I have spent in excess of $500,000 on the premises, some items required by notices of authorities, as discussed with the lessor at the time of commencement of the lease, as you are aware. I thank you for extending the term of the lease until 31 August 2007." 22 The second respondent replied to this letter on 20 September 2005. He acknowledged the time and effort that the appellant had put in to develop the business. The letter continued: "From your letter [of 12 September 2005], I now understand that your concern is to secure an extended lease term until 31 August 2007 with provision for no further rent increases from the agreed weekly rental of $6000 plus GST. Although it was not my original intention (which was to keep your tenancy on a week-to-week basis), I am prepared to agree to your proposal." The letter continued: "To accommodate your concerns and to protect my interests, the new arrangements must be properly documented in a new lease to record: (a) the extension of the tenancy. I have nominated 1 July 2005 as the commencement date – this has stamp duty benefits for you; (b) the rent and the fact that there will be no rent review during the extended term; and (c) my undisputed ownership of all poker machine entitlements attaching to the licence (which I note has never been in dispute given that I installed the machines and you only commenced as a weekly tenant after allocation of the entitlements to the licence). The amendment is necessary following recent changes in the law. The proposed new lease is enclosed with this letter. Until the lease is executed and delivered to me, there will be no binding agreement and your tenancy will remain on a week-to-week basis." 23 This letter delineates the difference between the parties as to the proper construction of the letter of 12 May 2005. The trial judge's findings 24 The position of the respondents at trial was that the letter of 12 May 2005 was merely a statement of intention and was not intended to be capable of giving rise to legal consequences. The trial judge rejected that construction and the respondents no longer advance that contention. 25 The trial judge found at [41] that: "… The letter was an offer by the [respondents] to vary the terms of the lease such that from 1 July 2005, the rent would be increased to $6,000 per week plus GST, and the lessors would not give notice of termination of the lease so as to terminate the tenancy before 31 August 2007 if the [appellant] continued to observe the covenants of the lease …" 26 His Honour, at [42], found that the offer was capable of acceptance. He rejected, however a construction of the letter that it was an offer to extend the term of the lease so that it became a fixed term until 31 August 2007. His Honour construed it as an offer that the appellant would be entitled to remain in occupation until that time, if he observed the covenants in the lease. His Honour considered that if it had been an offer to extend the term, the appellant too would have been bound by the terms of the lease until that date. He said that that was not offered. His Honour considered, therefore, that the appellant's response in the letter of 12 September 2005, that he accepted the lessor's offer "extending the term of the existing lease until 31 August 2007" did not reflect the terms of the offer. 27 An additional question arose during the course of the hearing of the appeal as to whether, even if such construction was correct, there had been an acceptance of the offer because he had accepted all that had been offered, but had responded with an additional benefit, that he too would be committed to the term until 31 August 2007, so that the letter was effective to create a contract in any event. 28 The trial judge rejected that on such a construction there was an acceptance. Rather, he considered that "an acceptance must precisely correspond with the offer …". He said that a purported acceptance which sought to vary the terms of an offer operated as a counter-offer. His Honour relied upon J W Carter, "Carter on Contract" at 03-220 and Tonitto & Anor v Bassal & Ors (1992) 28 NSWLR 564 as authority for that principle. The statement in "Carter on Contract" was in these terms: "The offer and acceptance must precisely correspond and any departure from the offer will result in the purported acceptance being ineffective. The position is obvious in relation to a counter offer. However, the rule is a strict one, and is not limited to material deviations from the terms of the offer." 29 In Tonitto v Bassal, the Court was concerned with the question whether an option to purchase certain land had been effectively exercised by the grantees. A number of questions arose for the Court's consideration, including whether, if words used in a document were capable of referring to another document, parol evidence could be led to resolve the ambiguity: see headnote item (2) at 564. There was also a question whether the option had been exercised. Sheller JA (Handley JA and Hope AJA agreeing) stated at 574 that: "It is generally accepted that effectual exercise of an option requires strict adherence to the method prescribed in the instrument creating the option …" 30 There was a dispute as to what the terms of the option required by way of acceptance. Sheller JA resolved the matter on the basis that having regard to the terms of the option as a whole, its exercise required delivery of a written notice of exercise, the specified payment by way of bank cheque and a signed contract for sale, although his Honour concluded that it may not be necessary that each be delivered at precisely the same time. His Honour considered that a document previously delivered for another purpose could not be treated as one of the events of exercise. His Honour considered that that conclusion was clear from the language of the offer. 31 It is apparent from Tonitto v Bassal that although it is authority for the proposition that the exercise of an option requires strict adherence to the method prescribed in the instrument creating the option, it may be a question of construction as to what those requirements are. The task which this Court has to undertake is whether the letter of 12 September 2005 was an acceptance of the offer made on 12 May 2005. 32 There are other authorities which bear on the question as to the proper approach to the construction of the document. In Quadling v Robinson (1976) 137 CLR 192; [1976] HCA 31 the Court was again concerned with the question whether an option had been effectively exercised. Gibbs J observed at 201 that regardless of ther the option was a conditional contract of sale as his Honour considered was the case, or whether it was merely an irrevocable offer to sell, the exercise of an option had to be "absolute and unqualified and must have bound the respondents to perform the very terms set out in the option". 33 His Honour continued: "However, it is not always easy to determine whether the purported exercise of an option should be understood as attempting to vary the terms of the option or as intending to accept its terms without modification, notwithstanding that they may have been misdescribed, or notwithstanding that the grantee of the option may have indicated that he intends to perform the contract in a manner for which the terms of the option do not provide. Thus although a notice misstates the terms of the option which it purports to exercise, it may nevertheless amount to an unqualified and unconditional exercise of the option: see Carter v Hyde (1923) 33 CLR 115 at pp 121-122, 126, 133. On the other hand, if the grantee of an option sets out his own erroneous understanding of the option, and then purports to exercise the option as so understood, there will (speaking generally) be no effective exercise of the option: see Cavallari v Premier Refrigeration Co Pty Ltd (1952) 85 CLR 20 at pp 26-27." 34 In Carter v Hyde the appellant had granted Hyde an option to buy the lease of a hotel for a specified amount if, within three months of the date of the offer, Hyde signified his assent to the purchase. The precise terms of the option were to offer the "lease, licence furniture and goodwill" of the hotel premises. Hyde died before the expiration of the three month period. However, within that time, his executrices responded to the grantor of the option in terms: "In reference to the option dated 1st February 1921 given by you to the late George Hyde to sell him the lease licence goodwill and furniture as per inventory dated the 22nd day of April 1921 of the … Hotel …we the undersigned being the executrices appointed under the will of the late George Hyde do hereby accept such option to purchase and will pay to you the sum of £1,500 on transfer to our nominee of the whole of the above specified items." ( Carter v Hyde at 119) 35 There was then a dispute as to whether items that the respondents listed in the inventory were included in the option. Knox CJ stated at 121: "The appellant contends that the reference to the inventory contained [in the letter of acceptance] imports a condition into the alleged acceptance and so converts it into a counter-offer. In my opinion this contention cannot be sustained. The reference to the inventory is contained in the opening sentence, which purports to state the effect of the option." 36 The Chief Justice accepted that the acceptance document misstated the terms of the option. However, his Honour at 122 considered that the balance of the document which said "we … do hereby accept such option to purchase and will pay" (emphasis added), made it clear that: "… the acceptance is of the option to purchase given by the appellant on 1st February 1921 whatever it was, and that the acceptance was not qualified or made conditional by the mis-statement as to the inventory." 37 Isaacs J at 126, having referred to the terms of the letter of acceptance, and noting that when it was handed to the appellant, the appellant said "I suppose it is all right", after which the inventory was taken, then, notwithstanding that there was a disagreement as to the items to be included in it, considered that: "… the appropriate question is that of Romer J in Jones v Daniel (1894) 2 Ch at p 335, namely, 'Now, what would anybody when he received that letter fairly understand to be the meaning of it?'" His Honour considered that the addition of the words relating to the inventory was only an indication of what the respondents " understood the offer to import ". 38 Higgins J at 133 also accepted, albeit after some hesitation, that there had been an acceptance of the offer and thereby a valid exercise of the option. His Honour pointed out that the added words "as per inventory dated the 22nd day of April" after the word "furniture" in the letter of acceptance were not justified by the words of the option. His Honour stated: "But they do not occur in the acceptance of the option, as a qualification or condition thereto; they are a mere misdescription of an option which is otherwise clearly identifiable and identified." 39 In Cavallari v Premier Refrigeration Co Pty Ltd the respondent's company was offered an option to purchase specified property for a certain sum. The option was open for a period of seven days. The letter offering the option also stated that the offeror would "require a period of not less than six months to enable me to make arrangements re my business plant etc" (at 25). 40 Within the seven day period, the respondent replied in these terms: "We refer to the option given to our company … to purchase [the property] … Vacant possession to be given after the expiration of six months. We now give you formal notice of our company's exercise of such option." 41 The sole question for the Court's determination was whether the option had been accepted. The determination of that question depended upon the construction of the letter of offer and the letter of acceptance. Dixon CJ, McTiernan, Fullagar and Kitto JJ considered that there were four possible constructions of the letter of offer. On the first two, the offer was not capable of acceptance, so no contract could be formed. 42 On the third view, the offerer was proposing that he could not be called upon to give up possession until he had such time, not being less than six months, as would enable him to make arrangements in respect of his business. The question was whether, on that interpretation, the offer was accepted. Their Honours pointed out that the critical words in the letter of acceptance were "vacant possession to be given after the expiration of six months". Their Honours said at 27: "If those words do not reproduce what was really offered, the offer has not been accepted." Their Honours considered that, on the third view of the proper construction of the letter of offer, the response did not accept the offer which was made, because it did not include any reference to " enabling " the offeror to make the arrangements to which he referred. 43 The fourth possible view was that the letter of offer was to the effect that the offeror was: "… not to be required to give possession in less than six months, because I shall require not less than that time to make arrangements re my business plant etc." 44 Their Honours considered that, on that construction, the company's statement of its understanding of the offer did reproduce the offer. Their Honours said at 27: "There is no justification for reading the word 'after' in the company's letter as meaning 'on' or 'immediately after'. Plainly, the company intended to accept the appellant's offer and it would be obvious to anybody that to require possession to be given immediately on the expiration of six months would be a departure from the terms of that offer … The effect of the contract, which on this view is made, is that possession is to be given within a reasonable time of the making of the contract, but in any case not until after the expiration of six months from the making of the contract. It is not a term of the contract that the vendor shall have such time as will enable him to make his 'arrangements'. But, in considering whether at, or any time after, the end of the six months, a reasonable time has expired, it will be not only legitimate but necessary to have regard to the purpose for which the stipulation was introduced." Proper construction of letters of 12 May and 12 September 45 As the above cases demonstrate, when seeking to determine whether an offer has been accepted, it is necessary to first construe the offer which was made. The letter of 12 May 2005 first gives notice of the increase in rent. It then states: "… Mr Docker will permit you to remain in occupation under the terms of the existing lease until 31 August 2007, subject to you: (a) continuing to observe the covenants of the lease …" 46 The trial judge held that the offer made by the respondents was to vary the lease but not so as to extend the term. Rather, they offered to bind themselves not to give notice of termination of the lease so as to terminate the tenancy prior to 31 August 2007. The rent was also increased. 47 The respondents supported the trial judge's construction of the offer. In particular, they referred to the fact that one of the covenants of the lease provided for a weekly tenancy: see Item 6 and Div 3, cls 3.1 and 3.4. It was submitted, therefore, that the respondents offered the appellant a continuation of the weekly tenancy under the terms of the lease, with a covenant that they would not terminate the tenancy as otherwise permitted under the lease until 31 August 2007. 48 It was submitted that Nader v Lager & Hataier [1960] SASR 49 was an illustration of such lease. In that case, the parties entered into a sublease of premises. The head lease was a weekly tenancy and the draft of the sublease originally provided for a weekly term. The sublessees were not prepared to sign a sublease in those terms, as they wished to conduct a restaurant on the premises and did not want to be "put out" of the premises on a week's notice. 49 The sublease was renegotiated. The term of the sublease remained a weekly tenancy. However, the sublease further provided in cl 2 that: "The lessor hereby agrees that he will not while the lessees observe the terms and covenants herein contained, determine this tenancy for a period of two years from the commencement hereof …" 50 Clause 3 bound the lessees to: "… deposit with the lessor the sum of Four hundred pounds (£400) by way of security for the due performance and observance by the lessees of the covenants on [the lessees'] part herein contained." 51 Clause 4(f) provided for the repayment of the security amount at the determination of the tenancy, provided: "(1) The lessees have complied with all the covenants on their part therein contained (2) The lessees have remained tenant of the premises for a period of two years unless the lessor has terminated the tenancy for any breach by the lessees of the covenants on their part herein contained." 52 The sublessees subsequently gave notice of termination of the subtenancy prior to the expiry of the two year period. The sublessor claimed he was entitled to retain the sum of £400. Whether he was so entitled depended upon whether the sublease was a weekly tenancy or whether there was a tenancy for a fixed term. 53 Brazen J held that if cl 2 was intended to create a sublease for a term of two years, it would have been expressed in the instrument in plain terms. In addition, the judge held that the tenancy being one from week to week, a necessary incident was the right to determine it upon one week's notice. For the judge there was much to be said for the view that, even if the tenants had expressly agreed not to give notice for at least two years, such a promise, being repugnant to the nature of the tenancy, would be void: see Doe d. Warner v Browne (1807) 8 East 165 (103 E.R. 305); "Woodfall on Landlord and Tenant", 25th ed (1954) pp (1022-1023). 54 Finally, the trial judge stated that it is well settled that where there is an absolute promise with an exception engrafted upon it, the exception is to be construed strictly, and extends only so far as it is expressed with clearness and certainty: see Nelson Line (Liverpool) Limited v James Nelson & Sons Limited (1908) AC 16. It could not be said that cl 4(f) expressed with "clearness and certainty" an intention on the part of the defendants to bind themselves to remain in occupation for two years. 55 Whilst this case is helpful in demonstrating that it is possible to have a weekly tenancy subject to a covenant by the lessor not to terminate within a specified period, each contract must be construed according to its own terms. In Nader v Lager & Hataier, the parties entered into a sublease, the term of which was one week. To construe it as the sublessor contended involved a construction whereby, on the one hand, the lessees had expressly entered into a weekly tenancy and on the other hand, bound themselves to a fixed term. Further, the other provisions of the sublease relevantly made provision for the earlier possibility of a determination in a way which was inconsistent with the sublessees having agreed to a fixed term. 56 This case is different. The parties had originally agreed to a weekly tenancy. The offer on its terms provided for something different. It provided that the appellant's occupation of the leased premises could continue for a fixed term, provided the appellant observed the covenants of the lease. Although the term of the lease is probably correctly referred to as a covenant of the lease, being one of its express covenants, it is not a usual or natural use of language to say that a person "observes the weekly term" of the lease. 57 A requirement that a lessee observes the covenants of the lease in its usual and ordinary meaning, conveys a requirement that the lessee complies with the lessee's various obligations under the lease, such as the obligations contained in the covenant to pay rent in accordance with the terms of the lease: see Div 4 of this lease; the covenant only to use the electricity and gas as supplied through meters: see Div 5; or to observe the requirements as to the use of the premises: see for example Div 8. In my opinion, the qualification in para (a) of the letter of offer dated 12 May 2005 properly understood, refers to the covenants of the lease in the way I have just described. 58 There is one other expression in the letter that needs consideration, namely the phrase "permit you to remain in occupation under the terms of the existing lease terms". If that phrase necessarily means that the lease was to remain a weekly lease, then the trial judge's construction is correct. However, I am not satisfied that that is its meaning. If the question posed by Romer J in Jones v Daniel: see [37] above, is asked in this case, namely what would a person receiving a letter in those terms fairly understand its meaning to be, I am of the opinion that the answer is as I have indicated. The variation of the lease offered in the letter was a variation to extend the term of the lease. 59 I do not consider that, in the absence of some special circumstance known to both parties or reference to some factor extraneous to the letter, it would be understood by a reasonable person to mean that the lessee remained a weekly tenant but that the lessor was bound not to terminate the weekly tenancy for the specified period. It follows on this reasoning that the offer was an offer to the appellant that there be a fixed term tenancy under the terms of the existing lease until 31 August 2007, provided he observed its covenants. 60 Upon that construction of the letter of offer, the letter of acceptance was an acceptance of the offer contained in the letter of 12 May 2005. Use of pre-contractual conversations 61 The next question is whether the conversations between the parties prior to the letter of 12 May 2005 may be considered in order to determine the meaning and effect of the letter of offer. If I am correct in the construction I have given to the letter of offer, then, strictly, this question need not trouble the Court. Nonetheless, the question still arises in two respects. 62 First, recent High Court authority, to which I refer below, is to the effect that when construing a commercial contract, the Court may have regard to "the surrounding circumstances known to the parties and the purpose and object of the transaction": see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52, at [40]. 63 But in any event, the longstanding approach of the High Court has been that pre-contractual conduct is admissible on questions of the construction of a contract if its terms are ambiguous: see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24. I think it is fair to say that there has been a shift of principle or at least a shift in approach in this regard. 64 In Codelfa Construction v State Rail Authority at 352, Mason J said that evidence of surrounding circumstances was admissible (and only admissible) where the language of the contract was "ambiguous or susceptible of more than one meaning". See also Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289; [2002] HCA 5. 65 In Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 the Court was dealing with the meaning of certain letters of indemnity. After noting at [22] that the meaning of commercial documents is to be determined objectively, the Court said: "The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction." (Footnotes omitted) 66 In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd the Court stated at [40]: "This Court, in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. 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. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction." 67 This 'shift' in the High Court's approach was examined by the Full Court of the Federal Court in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 59 ACSR; [2006] FCAFC 144. In that case, each of the members of the Court recognised the High Court's shift in approach to the admissibility of surrounding circumstances when construing a commercial contract. 68 The appellant relies, as part of the surrounding circumstances, upon the conversation he had with the second respondent between the letters of 2 and 12 May 2005 to establish that the parties intended to extend the term of the lease by way of a fixed term until 31 August 2007. 69 I have already expressed my opinion as to the proper construction of the letter of 12 May. It was an offer to extend the term of the lease until 31 August 2007 on the basis that there would be no further increases in rent. The appellant accepted the offer made in the letter of 12 May 2005 as being an offer in those terms. He did not seek to add to it, nor detract from it. The surrounding circumstances, which I discuss below, support this construction. 70 Alternatively, if there is some ambiguity in the terms of the offer, in the sense that more than one possible construction of its terms is available, then the surrounding circumstances also support the construction which I prefer. In accordance with the principles in Codelfa Constructions v State Rail Authority and Royal Botanic Gardens and Domain Trust, that ambiguity is resolved by having regard to the content of the conversation between the second respondent and the appellant so as to objectively determine the surrounding circumstances known to the parties. 71 There may be a question in a particular case whether a pre-contractual conversation in fact constitutes part of the relevant surrounding circumstances to which regard may be had. That may be particularly so if there are a number of conversations or the conversations are between different people. A case where there were conversations between legal representatives as well as parties would provide an example. However, in this case, where there was a single conversation, about which there was no dispute, and which was the genesis of the letter of offer, the content of that conversation provides "the objective framework of facts within which the contract came into existence and … the parties' presumed intention in this setting": Codelfa Constructions v State Rail Authority per Mason J at 352. 72 The "objective framework of facts" in which the parties were operating at the time that the letter of 12 May 2005 was written was that there was an offer to buy the hotel and the respondents had made a "take it or leave it" proposal to the appellant that he buy the hotel or pay a significantly increased rent. The appellant had expended considerable moneys on the hotel and needed time to recover his outlay. He wanted a couple of years to be able to do so. In my opinion, this supports the construction which I have preferred, namely, that the letter of 12 May 2005 offered an extension of the term and as such, if accepted, both parties were thereby bound to a lease for a fixed term ending on 31 August 2007. 73 Before leaving this issue I should mention the finding of the trial judge at [45] where his Honour appears to have had regard to the conduct of the appellant for the purpose of determining contractual intent. In doing so, he appears to be concerned with the appellant's subjective intent. His Honour found at [45]: "Having taken legal advice, he considered it was important, if he were to be able to sell the poker machine entitlements, that he have a lease for a fixed term. He accepted in cross-examination that what he attempted to do was to translate the offer that Mr Docker had made into an offer to have a fixed term lease expiring in August 2007, because he regarded it as important to have such a fixed term lease to enable him to sell the poker machine entitlements." 74 For the reasons that I have given, the correctness of this finding, both as a matter of principle and as a question of his Honour's understanding of the evidence does not arise. The subjective intention of the parties is not relevant, as I have already explained. However, even if his Honour's understanding of the evidence to which he referred in this paragraph was correct, the 'conduct' referred to is not relevant to the proper construction of the offer. If offer and acceptance did not correspond, was the additional term for the sole benefit of the offeror? 75 As I have indicated above, an issue arose as to whether, even if the construction of the letter of 12 May was as found by his Honour, the appellant's acceptance provided an additional benefit to the respondents and was thus effective as an acceptance, so that a binding variation of the lease had been entered into. On the conclusion I have reached on the construction of the contract, this does not arise. However, as there was argument on the issue on the appeal, I will deal with it briefly. 76 JW Carter, in "Carter on Contract", when dealing with the requirement "that offer and acceptance must correspond", stated four principles to illustrate the rule. The first two principles are relevant to the matter presently under consideration here. They are: " First , an acceptance will be effective if it does not depart from the terms of the offer, but simply repeats in the offeree's own words the effect of the offer … Second , any variation in the effect of the offer and not merely a material or important variation, prevents a contract being formed." 77 Carter provides as an example of the first principle Cavallari v Premier Refrigeration Co Pty Ltd, to which I have referred above. 78 Carter then states that the only qualification to the second principle "is where the deviation from the offer is solely in favour of the offeror". He cites Ex parte Fealey (1897) 18 LR (NSW) 282 as an example. In that case, the defendant required a half-inch advertisement in the plaintiff's newspaper. The newspaper inserted a one-inch advertisement, the rate for which was the same as for the half-inch advertisement. That was said to constitute a concluded agreement. 79 It appears that this principle may have formed the basis of one of the appellant's submissions at trial. White J rejected the appellant's argument in these terms: "[44] [The appellant] submitted that what was 'accepted' by him was at least as beneficial to the defendants as what they had offered, with the additional benefit that the [appellant] would be committed to the term until 31 August 2007, the letter was effective to create a contract on the terms of the letter of 12 May 2005. Everything that the [respondents] had offered had been accepted with something more proposed. Even if this analysis were correct, it would not follow that the offer had been accepted." 80 His Honour did not analyse the letter of acceptance in the terms of the principle with which I am presently dealing. The difference between the offer, on the premise upon which the argument was based, and the acceptance, was that under the offer the respondents were to be bound to permit occupation until 31 August 2007, subject to the appellant's observance of the covenants of the lease, but that the appellant could terminate the lease at any time upon giving one month's notice. Accordingly, it would seem on the argument, the appellant's "acceptance" forewent the advantage he had of being able to terminate the lease during the extended period, upon giving one month's notice. An acceptance in that form favoured the respondents: they would have an ongoing tenant for a further two year period at the increased rent. 81 Senior counsel for the respondents submitted that a lease in the terms contained in the appellant's acceptance did not provide a benefit to the respondents at all. He submitted that the appellant's offer involved differences in documentation and might also involve differences in assignability. He submitted that the respondents might have been prepared to accommodate the appellant's wish to stay in the premises for the extended period of time, but may not have been prepared to accept any other person to whom the appellant proposed to assign the lease. It followed on this submission the 'deviation' from the precise terms of the offer was not in favour of the offeror. 82 The first argument can be dismissed shortly. First, there was no suggestion in the letter of 12 May 2005 that the proposed variation be documented beyond the letter itself. The second respondent's letter of 20 September 2005 appeared to be an additional requirement which was not part of the original offer. Secondly, there was no requirement at law for such lease to be in writing – the effect of the combined operation of ss 23C and 23D of the Conveyancing Act 1919 (NSW) (the Conveyancing Act) is that a lease for a term not exceeding three years is not required to be in writing. But even if there was to be a more formal documentation than the letter of offer, there would be no difference in the documentation, although the terminology would differ to reflect the difference in the terms of the acceptance. 83 The second argument, that is, in respect of assignability, involves a consideration of the terms of the lease. Division 16 governs the assignment and sub-letting of the lease and contains a primary provision prohibiting assignment or sub-letting: cl 16.1(a). However, cl 16.1(b) in effect permits an assignment, provided there is compliance with cl 16.1(c). Those matters include the lessee having to: "(i) prove to the Lessor's satisfaction that the New Lessee is respectable, responsible and solvent and capable of adequately carrying out the Permitted Use and that the New Lessee is of no lesser financial standing than the Lessee and Guarantor were collectively at the date that the Lessee first occupied the Premises; [and] (ii) procure the agreement of the New Lessee with the Lessor in the form required by the Lessor to observe and perform the covenants of the Lessee in this Lease … [and] (vi) comply and procure that the New Lessee complies with the Lessor's requirements in relation to documenting, stamping and registering the transaction …" 84 There are other provisions in cl 16.1(c) which also require matters to be attended to, to the lessor's satisfaction. Even though these provisions are inserted for the lessor's benefit, they involve active participation by the lessor in the process of ensuring that the assignment or sub-letting is not detrimental to the lessor. In this regard, it is relevant that the running of licensed premises is subject to a strict regulatory regime, a breach of which could have a significant commercial impact upon the lessor. For example, the licence could be suspended or cancelled. In that case, the viability of the lease may be jeopardised, with a consequential detrimental effect to the lessor by way of loss of rental. Accordingly, a lessor, faced with an intended assignment of the lease, would be particularly vigilant to ensure that the assignee was a suitable and viable lessee. This could involve considerable work by the lessor. It would certainly involve active participation in the assignment process. 85 It could be argued that under the original terms of the existing lease the lessor would be involved in the same processes if the lessee wished to assign the lease. However, in reality, a lessee would not assign this weekly tenancy. Given the terms with which the lessee had to comply, some of which are referred to above, it would not be worthwhile to do so. 86 It follows, in my opinion, that it cannot be said that a variation of the lease so as to provide for a fixed term was not a provision that necessarily was for the benefit of the offeror. But, even if there was a benefit to the respondents, I am not satisfied that the principle under discussion would operate in this case, as on the evidence, it appears that the extended term was also to benefit the appellant. The appellant wished to have a sufficient period of time in which to recoup his expenditure on the premises and on his Honour's finding, to have a lease for a specified term so as to be able to sell the poker machine entitlements. Either of those matters was only achievable if the term of the lease was extended for a fixed period. Estoppel 87 Having regard to the conclusion that I have reached, it is not necessary to determine whether the appellant had established an entitlement to stay in the premises until 31 August 2007 by the operation of an estoppel. The second issue: the poker machine entitlements 88 The trial judge made a declaration and order relating to the poker machine entitlements in the following terms: "5. Declare that the [appellant] is now, and has been since 25 March 2006, obliged to do all things on his part necessary to transfer to the [respondents] or their nominee the hotelier's licence relating to the Arncliffe Hotel and the poker machine entitlements that were allocated in respect of that licence as at 1 August 2003, at no cost to the [respondents]; 6. Order that the [appellant] by himself, his servants and agents be restrained from taking any steps or further steps to apply for the transfer of the poker machine entitlements allocated in respect of the said hotelier's licence otherwise than in accordance with directions of the [respondents] …" 89 At the commencement of the lease, 17 poker machine entitlements had been allocated by the Liquor Administration Board in respect of the hotelier's licence for the hotel. The allocation of poker machine entitlements to a hotelier's licence is a statutory allocation introduced by the Gaming Machines Act 2001 (NSW) (the Gaming Machines Act). Such entitlements have been held to be property: Jabetin Pty Limited v Liquor Administration Board (2005) 63 NSWLR 602; [2005] NSWCA 92. I deal with this later. It should be observed and was accepted by both parties that a hotelier's licence itself is not property: see Slatter v Railway Commissioners (NSW) (1931) 45 CLR 68; [1931] HCA 13. 90 By 12 November 2005, the respondents had become aware that the appellant was attempting to sell the poker machine entitlements attaching to the Liquor Licence. The respondents' solicitors wrote to the appellant's solicitors, informing them that the respondents intended to take whatever steps were necessary "to protect the unauthorised disposition of [their] property". On 30 November 2005, the appellant's solicitors wrote to the respondents' solicitors, claiming that the appellant had a leasehold interest in the Hotel and the purported notice to quit that had been served upon him was invalid. The solicitors also enclosed a draft summons which contained proposed claims for declaratory relief to the effect that the appellant had an unencumbered title to sell the poker machine entitlements. 91 The respondents' solicitors responded on 1 December 2005, advising that they had instructions to accept service of the appellant's summons and that the respondents proposed to file a cross-claim seeking an order for possession. The respondents also required an undertaking from the appellant that he would not take any steps to dispose of the poker machine entitlements pending resolution of the dispute. 92 The appellant's summons was filed on 22 December 2005. The respondents brought a cross-claim in which they sought an order for possession and also sought declarations and an injunction, the intent of which was that the respondents be declared the beneficial owners of the poker machine entitlements and an injunction restraining the appellant from transferring those entitlements to any other person without the approval of the respondents. 93 The thrust of the respondents' claim in respect of the poker machine entitlements was that the appellant held the entitlements on trust for them. That claim was based upon the claimed operation of cls 7.2 and 23.2 of the lease. Those clauses are set out respectively at [5] and [9] above, although it is convenient to restate them at this point: "7.2 The Lessee will keep current all licences and permits and registrations required for the Permitted Use and where any such licence or permit or registration has been transferred to the Lessee or its nominee by the Lessor or the transfer thereof has been procured by the Lessor, upon the expiration of this Lease or its earlier termination, the Lessee will transfer or cause to be transferred each such licence or permit or registration to the Lessor or its nominee at not cost to the Lessor." "23.2 The Lessee acknowledges that the Lessor is the beneficial owner of the Liquor Licence and that it is permitted by its nominee to exercise the Liquor Licence while it is Lessee provided that it complies with this Division." 94 Poker machine entitlements are created by the Gaming Machines Act. Part 3 establishes a statutory tradeable poker machine entitlement scheme in respect of poker machines in hotels and registered clubs. This case is concerned with entitlements in relation to poker machines in a hotel. 95 The poker machine entitlements themselves were initially created by s 15 which provided that upon the commencement of the section one poker machine entitlement was to be allocated for each approved poker machine. There are restrictions on the total number of entitlements for the State. Those restrictions are not presently relevant, although the effect of the restrictions is to increase the cost of obtaining entitlements. 96 Section 15(2) provides that in the case of a hotel, the poker machine entitlements are allocated in respect of the hotelier's licence that relates to that hotel. 97 The transfer of poker machine entitlements is governed by ss 19 and 20. A poker machine entitlement is transferable: s 19(1)), but a transfer is only effective if approved by the Liquor Administration Board: s 19(2). An application for transfer must demonstrate that the proposed transfer has the support of all persons with a financial interest in the hotelier's licence: s 19(3). A person does not have a financial interest merely by being the owner of the hotel: s 19(6). A transfer of a poker machine entitlement may only be transferred to another hotelier's licence: s 20. 98 The operation of Pt 3 of the Gaming Machines Act and s 19 in particular, has been the subject of consideration by this Court in Jabetin Pty Ltd v Liquor Administration Board and in Masters & Anor v Garcia & Anor (2005) 65 NSWLR 92; [2005] NSWCA 287. 99 In Jabetin, Mason P at [70] emphasised that the poker machine entitlements were: "… simply allocated by statute in respect of the Licence; they arose by an Act of the Parliament." 100 His Honour observed at [85] that the Act does not envisage the detachment of the entitlement from the hotelier's licence to which it has been allocated, other than by way of Board approved transfer to the holder of another hotelier's licence. There are statutory exceptions to the foregoing that are not relevant to this case. 101 Mason P concluded at [87] that notwithstanding their statutory base, poker machine entitlements were a species of property with the normal incidents of property, such as ownership, disposal and the capacity to be made subject of a trust. However, the incidents of property had to operate within the legislative framework of the Gaming Machines Act. 102 Although the correctness of the Court's decision in Jabetin was raised as an issue in Masters v Garcia, that challenge was not finally pressed. In Masters v Garcia, Tobias JA stated at [3] that: "… this Court's reasoning in Jabetin … establishes that under the Act a person cannot hold either a legal or equitable interest in a poker machine entitlement allocated in respect of a hotelier's licence in which that person no longer holds an interest." 103 Basten JA at [72] similarly considered that the decision in Jabetin was limited in the way described by Tobias JA. 104 In this case, as the hotelier's licence is presently held by the appellant, he owns the poker machine entitlements, subject to any property rights in the respondents: see Jabetin per Mason P at [85] and [87]. As the respondents are not the holders of the licence, any such rights they may have can only be rights created by contract, or trust. That brings me back to the terms of the lease, and in particular, cls 7.2 and 23.2. Clause 23.2 105 White J, at [110], considered that it was to be implied from the specification in cl 23.2 that the lessors were the beneficial owners of the licence and that "the [appellant] may not deal with property appurtenant to the licence for his own benefit without the consent of the [respondents]". His Honour held that the contract that had been entered into by the appellant for the sale of the poker machine entitlements and the application to the Liquor Administration Board to approve the transfer was a breach of the implications drawn from that term. 106 The immediate difficulty with his Honour's conclusion is that, as stated earlier, a hotelier's licence is not property, so that the acknowledgement in cl 23.2 has no legal foundation. In that sense, it is an acknowledgement of nothing. As a licence is not property, the respondents could not be the beneficial owners of the Liquor Licence. The first part of the clause could not, therefore, have effect, at least in accordance with its express terms. 107 Nor does the second part of cl 23.2, that is, that the licensee is "permitted" by the lessor's nominee "to exercise the Liquor Licence while it is Lessee" have any legal effect. A Liquor Licence is granted by the Liquor Licensing Court of New South Wales. The Court may authorise a licensee to sell liquor on the premises specified in the licence: the Liquor Act 1982 (NSW) (the Liquor Act): s 18. Various categories of licence may be granted, including, relevantly, a hotelier's licence: s 18(2)(a). There is no legal or statutory basis upon which the owner and/or lessor of the hotel premises is entitled to permit the licensee to operate the licence. 108 Accordingly, on its express terms, cl 23.2 has no effective operation. Put simply, it is wrong, as a matter of law, and is meaningless. Should the clause then be construed as having the meaning his Honour found it to have? 109 His Honour recognised the problems with the clause. He observed at [99] that "the draftsman of the lease was mistaken in providing that the parties acknowledged that the lessors were the beneficial owner of the licence". However, he was of the opinion that, whilst the clause did not have the effect of declaring a trust over the licence, it was not without effect. His Honour considered it was necessary to construe the clause so as to "ascertain what the mutual intentions of the parties were as to the legal obligations each assumed by the contractual words in which they … chose to express them": Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 per Lord Diplock at 736. The trial judge thus posed the question at [100]: "… what … [are] the parties to be taken to have meant as to their respective legal obligations by their providing that the lessors would beneficially own the licence?" 110 In approaching the matter this way, his Honour noted that the inquiry was not an inquiry as to whether a term was to be implied to give business efficacy to the contract in accordance with the requirements in BP Refinery (Westernport) Pty Limited v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 at 283; [1997] HCA 40. Rather, his Honour considered that the inquiry that he was pursuing was "concerned with the implications contained in the express words of the contract": Brambles Holdings Ltd v Bathurst City Council (2001) 55 NSWLR 153; [2001] NSWCA 61 at [28]-[30]. 111 In Brambles Holdings, Heydon JA pointed out that when the relevant inquiry relates to the "implications contained in the express words of the contract", the Court is engaged in a process of construction and is not concerned with the requirements for the specification of a term particularised in BP Refinery (Westernport). I agree that this was the correct approach to the construction question. In other words, his Honour's task was to determine, as a matter of construction the "implications contained in the express words of the contract". 112 His Honour considered, at [107], that the clause was to be construed by having regard to "the mutually known objective facts" that existed when the lease was entered into. Relevantly, those facts included the coming into effect of the Gaming Machines Act and the creation of tradeable poker machine entitlements. 113 His Honour was of the view that because, before the lease was entered into, poker machine entitlements had already been allocated to the licence and amusement devices allocated to the licence had been converted to poker machine entitlements "it could be taken that the parties were conscious that the poker machine entitlements were tradeable and that they went with the licence". He observed that there was no separate provision in the lease relating to the poker machine entitlements nor was there any separate consideration for the acquisition of poker machine entitlements. 114 His Honour concluded, therefore, at [109]: "…Consistently with the decision in Jabetin , during the period of the lease at least, the lessors could not be beneficially entitled to the poker machine entitlements. However, that does not mean that there was no implied contractual obligation on the lessee in his dealing with the entitlements consonant with the personal obligations he would have if it were possible to declare a trust of the licence. Whilst such an implication might not preclude the lessee from selling the poker machine entitlements (just as a trustee may, unless expressly forbidden by the trust instrument, invest trust funds in any form of investment and vary such investment ( Trustee Act 1925 (NSW) s 14)), the implication would preclude the lessee from selling the entitlements for his own benefit." 115 With respect to his Honour, I do not agree with this reasoning. Division 23 is headed "Liquor Licence". Clause 23.1 states that the licence attaches to the premises, or part of them. That is a statement of the manner in which licences operate under the Liquor Act. 116 Clause 23.2 on its express terms contains an acknowledgement, which, as already explained is ineffectual, that the respondents are the beneficial owners of the licence. It also purports to permit the appellant to exercise the Liquor Licence provided it complies with Div 23 as a whole. This is presumably a reference to cl 23.3. 117 Clause 23.3 requires the lessee to operate the Liquor Licence in a way which did not restrict or jeopardise its current operation. Subclause (b) is particularly instructive. It provides that the Liquor Licence is not to be exercised or dealt with so that: "A licensing authority adds any condition to the Liquor Licence that is restrictive and adverse to the commercial value of the Liquor Licence". (Emphasis added) 118 Paragraph (c) provides that the licensee must not place the Liquor Licence in jeopardy in such a way that the licensing authority: "… threatens to suspend the operation of the Liquor Licence, cancel the Liquor Licence or restrict its use". 119 The poker machine entitlements are subject to a separate regime from the Liquor Licence. If, as his Honour found at [108], it could be taken that the parties were conscious that poker machine entitlements were tradeable and went with the licence, then, it seems to me, they must also be taken to know that a separate statutory regime operated in respect of the entitlements. It is unlikely, in my opinion, against that assumed basis of knowledge, that the parties would have dealt with the ownership of something as valuable as poker machine entitlements in Div 23, which deals with the Liquor Licence, both in the heading to the Division, as well as in the express provisions of its clauses. In my opinion, it does not do so. 120 It follows that I do not agree with his Honour's construction of cl 23.2. In this regard, whilst a court will not lightly reach a conclusion that a term has no operative effect, it will not construe a term of the contract so as to merely ensure it has some operative effect. For the reasons I have given, I do not consider that a clause dealing with a Liquor Licence impliedly includes a reference to some other licence or right, or, in this case, a tradeable statutory entitlement. Clause 7.2 121 That leaves cl 7.2. White J dealt with cl 7.2 at [111]. He said: "Clause 7.2 and clause 23 should be construed together. If clause 7.2 stood alone, I doubt that the obligation to transfer the liquor licence to the lessors at the end of the lease should be construed as requiring the transfer of the liquor licence together with the poker machine entitlements that were appurtenant to it when the transfer of the licence was directed by the lessors at the commencement of the lease. However, read with clause 23.2, and the implications derived from it, I consider that clause 7.2 does require the lessee, at the end of the lease, to transfer to the lessors, or the lessors' nominee, the licence with the same appurtenant entitlements as were transferred to the lessee. That is because clause 23.2 prevents the lessee from dealing with the appurtenant poker machine entitlements for his own benefit and without the consent of the lessor during the term of the lease. If the lease were on foot, the dealing with the poker machine entitlements which, if consummated, would disable the plaintiff from fulfilling his obligation, would be an anticipatory breach of the lease and be liable to be restrained. As the lease has been determined, there is an actual breach of clause 7.2." 122 His Honour held at [113] that there was no general principle that a lessee who is a licensee, or a lessee through his nominated licensee, could deal with poker machine entitlements before the end of the lease. He said that whether a lessee could do so depended upon the terms of the lease. He reiterated his opinion that in this case if the lease had remained on foot (his Honour having found that the lease had been determined), it would be a breach of the combined operations of cls 23.2 and 7.2 for the appellant to have attempted to deal with the poker machine entitlements as he did. 123 If I am correct in my conclusion in respect of cl 23.2, his Honour's reasoning at [113] cannot stand. 124 However, the respondents, by Notice of Contention, seek to uphold his Honour's Declaration and Order on the basis that cl 7.2, by itself, requires the appellant at the end of the lease to transfer to the respondents the poker machine entitlements that were appurtenant to the hotelier's licence at the commencement of the lease. 125 Before dealing with that argument, I should make reference to his Honour's comments at [113]. His Honour's view that there is no general principle that, relevantly, a lessee who is the licensee, can deal with poker machine entitlements before the end of the lease, does not accord with this Court's judgments in Jabetin and Masters v Garcia. 126 As I have explained, those judgments establish that poker machine entitlements are property and carry with them all the usual incidents of property, including the right of disposal, save only that the exercise of such rights must be in accordance with the legislation. Accordingly, any disposition of the entitlements would need to be made in accordance with ss 19 and 20 of the Gaming Machines Act. It may also be that in a given case there are contractual or other restrictions on the right of disposal, subject, of course, to the operation of the Act. 127 The right to deal with the property rights inherent in the entitlements, including the right of disposal, may be affected by contractual rights, such as by the terms of a lease. Thus, it may be that in a particular case the terms of the lease for a hotel may restrict a lessee/licencee's right to transfer the entitlements. But if the lease does not deal with the matter, then the lessee/licencee may dispose of the entitlements in conformity with the Gaming Machines Act. 128 Clause 7.2 is contained within Div 7: "Lessee's Business". Clause 7.1 provides the lessee will only use the premises for the "Permitted Use" which is as a "Hotel": see Item 10 of the Lease Summary. I have mentioned that, at the time the lease was entered into, the poker machine entitlements had been granted and the operation of the poker machines was part of the existing operation of the hotel, that is to say, when the appellant commenced using the leased premises as a hotel, that use included the use of the poker machine entitlements. In those circumstances, the permitted use of the premises as a hotel must be understood as including the operation of the poker machines (subject to that use being authorised by the necessary statutory entitlements). 129 As I have already explained, the statutory entitlements are allocated to the hotelier's licence. Once the permitted use includes the operation of the poker machines, the poker machine entitlements, in my view, are encompassed by the expression in cl 7.2, "each such licence". 130 The language of cl 7.2 is specific. It requires the appellant to transfer back at the end of the lease each licence transferred at the commencement of the lease. Put simply, what has to be transferred back is what was originally transferred. In my opinion, upon its proper construction, cl 7.2 means that the hotelier's licence in the form in which it was transferred, that is with whatever conditions applied at the commencement of the lease and whatever incidents were attached to it, must be transferred back. For example, the licence as transferred back would have to have the same hours of operation that were permitted for the operation of the licence at the commencement. The incidents of the licence would include any right, whether of property or otherwise, that attached to the licence, at its commencement. 131 In this case, the hotelier's licence transferred to the appellant at the commencement of the lease had allocated to it 17 poker machine entitlements. In my opinion, what has to be transferred back to the respondents at the end of the lease is the hotelier's licence with the 17 allocated poker machine entitlements. Clause 7.2 does not impose any restriction upon dealing with the entitlements during the currency of the lease. Accordingly, subject to the operation of the Gaming Machines Act, the appellant would be entitled to utilise his property rights in those entitlements whilst the lease was on foot. If, during the term of the lease, the appellant sought to transfer the entitlements, it would be a question for the Liquor Administration Board as to whether the respondents had a financial interest in the entitlements by reason of the terms of cl 7.2: subss 19(3), (5) and (6). That is not a question in issue in these proceedings. However, even if a sale or other form of disposition is made during the currency of the lease, the appellant's contractual obligation to return the entitlements at the end of the lease remains. 132 Thus far, I have considered the construction of cl 7.2 without reference to the decision of Campbell J (as his Honour then was) in Wonall Pty Ltd v Clarence Property Corporation Limited (2003) 58 NSWLR 23; [2003] NSWSC 497. In Wonall a question arose as to the construction of a clause which required the lessee at the end of the lease to transfer to the lessor any transferable licences. The appellant relied upon Campbell J's refusal of injunctive relief in that case to support his argument that it was the Board's role to determine whether the respondents had a financial interest in the poker machine entitlements within the meaning of s19(5) and that this was not a matter for the Court to adjudicate upon. It was submitted that this Court should not pre-empt that question by granting declaratory and injunctive relief. 133 I do not propose to deal with the decision in Wonall. It was decided before Jabertin and Masters v Garcia and to the extent that it says anything different as a matter of principle those decisions are now the authority in this Court. In any event, the relevant clause in Wonall was sufficiently different from cl 7.2. so that Campbell J's construction of the clause in that case does not carry any persuasive weight for the construction of cl 7.2. More importantly, however, the appellant accepted that in the Court below, the case had not been run on the basis that the Court should not grant declaratory or injunctive relief. There was no error in his Honour granting such relief, subject of course to the correctness of his decision. Conclusion 134 In my opinion, the correspondence between the parties on 12 May and 12 September resulted in a variation of the term of the lease. It follows on my reasoning that his Honour's conclusion to the contrary was not correct so that part of the appeal should be allowed. I have also reached a different conclusion from his Honour as to the construction of cls 7.2 and 23.2. However, I consider that upon its proper construction cl 7.2 requires the appellant to transfer back to the respondents at the end of the lease, the poker machine entitlements that were allocated to the hotelier's licence at the commencement of the lease. 135 For that reason, I would uphold the Declaration made by his Honour, subject to the necessary variation to take account of my conclusion that the term of the lease had been extended to 31 August 2007. However, the conclusion I have reached means that the basis upon which White J granted the injunction no longer exists. In that circumstance, I would set aside the injunction, but give liberty to the respondents to apply should there be any basis, consistent with my reasons, that an injunction, interlocutory or final, may be considered to be necessary. Although the appellant and respondents each sought an order for costs of the appeal, neither made any submission as to the appropriate order for costs, should the result be different from his or their respective position on the appeal. In particular, no argument was directed to the operation of cl 6.1(iii) of the lease, which was the basis upon which his Honour made an indemnity costs order in respect of the proceedings at first instance. (I note in passing that any such order should, strictly, have been on the basis of "legal costs as between solicitor and client"). In those circumstances, the appellant and the respondents should have an opportunity to agree as to the costs at first instance and on the appeal and, in the absence of agreement, are to file written submissions as directed, with the question of costs to be decided on the papers. 136 The orders I propose are as follows: 1. Allow the appeal in part; 2. Set aside Orders 1, 2, 3, 4, 6, 7, 8, 9, 10 and 11; 3. Vary the declaration made in Order 5 so as to provide that the appellant is obliged upon the determination of the lease to transfer the poker machine entitlements to the respondents; 4. Declare that by letters between the appellant and the respondents dated 12 May 2005 and 12 September 2005, the lease entered into by the parties on 1 August 2003 was varied so as to provide for a fixed term ending on 31 August 2007; 5. Liberty to the respondents to apply for injunctive relief, either on an interlocutory or final basis; 6. Direct the appellant and respondents to file within seven days agreed minutes of order in respect of the costs orders to be made both at first instance and on the appeal. If there is no agreement, then within 14 days of today's date the appellant and respondents are to file written submissions in respect of costs. 137 IPP JA: I agree with Beazley JA. ********** 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.