New South Wales Supreme Court CITATION : L & T (Sales) Pty Ltd v Chief Commissioner of State Revenue [2007] NSWSC 1061 HEARING DATE(S) : 12/09/07 JUDGMENT DATE : 25 September 2007 JUDGMENT OF : Gzell J DECISION : Summons dismissed with costs. CATCHWORDS : TAXES AND DUTIES - Land Tax - The Land Tax Management Act 1956, s 21C(2) provides that a lessee of land owned by a local council is deemed to be the owner of the land and the local council is not considered the owner - Section 21C(1) provides that a local council is not liable for land tax - Plaintiff assessed to land tax - Council executed an instrument in the approved form of lease for 99 years under the Real Property Act 1900, s 53(1) and the lease was registered - Under a schedule to the instrument the plaintiff was required to construct a commercial development - Clause 3.1(1) provided that upon the expiration of a notice period in cl 3.1(2) the Lessor should give and the Lessee should take vacant possession - Clause 3.1(2) provided that the Lessee should grant the Lessor care, control and mangement of the land until it provided one month's notice that it required vacant possession to commence construction - Whether a lease and licence back or merely an agreement for a lease - Whether plaintiff fell within the definition of "owner" in the Land Tax Management Act 1956, s 3(1) - Whether plaintiff was granted the right of exclusive possession - Whether the Real Property Act 1900 applied to render the instrument a lease upon registration Land Tax Management Act 1956 LEGISLATION CITED : Real Property Act 1900 Industrial Arbitration Act 1940 Conveyancing Act 1919 Radaich v Smith (1959) 101 CLR 209 Street v Mountford [1985] 1 AC 809 Wik Peoples v Queensland (1996) 187 CLR 1 Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 Chief Commissioner of Land Tax v Macary (1999) 48 NSWLR 299 BBLT Pty Ltd v Chief Commissioner of the Office for State Revenue [2003] NSWSC 1003 CASES CITED : Goldsworthy Mining Ltd v Federal Commissioner of Taxation (1972-1973) 128 CLR 199 Spiteri Nominees Pty Ltd v The Chief Commissioner for Franchise Licences (Tobacco), NSWSC, unreported, 25 August 1988, Hunt J Zisti & anor v Ryde Joinery Pty Ltd, NSWSC, unreported, 2 May 1996 Travinto Nominees Pty Ltd v Vlattas (1973) 129 CLR 1 Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 Kogarah Municipal Council v Golden Paradise Corporation [2005] NSWCA 230 PT Ltd v Maradona Pty Ltd (1991) 25 NSWLR 643 PARTIES : L & T (Sales) Pty Ltd - Plaintiff Chief Commissioner of State Revenue - Defendant FILE NUMBER(S) : SC 5501/06 COUNSEL : Mr J Garnsey QC/ Mr R Higgins - Plaintiff Mr J Marshall SC/ Ms R Seiden/ Ms L McBride SOLICITORS : Piper Alderman, Solicitors - Plaintiff I V Knight, Crown Solicitor - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J TUESDAY 25 SEPTEMBER 2007 5501/06 L & T (SALES) PTY LTD v CHIEF COMMISSIONER OF STATE REVENUE JUDGMENT The issue 1 The plaintiff, L & T (Sales) Pty Ltd executed an instrument entitled a lease of land of the Council of the Municipality of Burwood said to be for a term of 99 years commencing on 17 April 1991. 2 The Land Tax Management Act 1956, s 21C(1) provides, relevantly for present purposes, that a local council is not liable for land tax in respect of land it owns. Section 21C(2) provides as follows: "A Lessee (other than a sub-Lessee) of land or part of land owned by the Crown, a local council or a county council is for land tax purposes deemed to be the owner of a parcel of land (" the notional parcel" ) consisting of the land or part leased. The Crown, local council or county council is then not to be considered owner of the notional parcel." 3 For the tax years 1998 to 2002, the Chief Commissioner of State Revenue assessed L & T under that provision as the deemed owner of the Council's land. It objects that it is not the owner for the purpose of that provision. The nature of a lease 4 The feature that distinguishes a lease from a licence is the grant of exclusive possession. In Radaich v Smith (1959) 101 CLR 209 an instrument said to create a licence was held, in substance and effect, to grant a right of exclusive possession and thereby to create a leasehold interest. At 222 Windeyer J said: "Whether the transaction creates a lease or a licence depends upon intention, only in the sense that it depends upon the nature of the right which the parties intend the person entering upon the land shall have in relation to the land. When they have put their transaction in writing this intention is to be ascertained by seeing what, in accordance with ordinary principles of interpretation, are the rights that the instrument creates. If those rights be the rights of a tenant, it does not avail either party to say that a tenancy was not intended. And conversely if a man be given only the rights of a licensee, it does not matter that he be called a tenant; he is a licensee. What then is the fundamental right which a tenant has that distinguishes his position from that of a licensee? It is an interest in land as distinct from a personal permission to enter the land and use it for some stipulated purpose or purposes. And how is it to be ascertained whether such an interest in land has been given? By seeing whether the grantee was given a legal right of exclusive possession of the land for a term or from year to year or for a life or lives. If he was, he is a tenant. And he cannot be other than a tenant, because a legal right of exclusive possession is a tenancy and the creation of such a right is a demise. To say that a man who has, by agreement with a landlord, a right of exclusive possession of land for a term is not a tenant is simply to contradict the first proposition by the second." 5 That passage was cited with approval by Lord Templeman, with whom the other members of the House of Lords agreed, in Street v Mountford [1985] 1 AC 809 at 827. It was also cited with approval by Brennan CJ in Wik Peoples v Queensland (1996) 187 CLR 1 at 77-78. The instrument 6 The Real Property Act 1900, s 53(1) provides that when any land under the provisions of that Act is intended to be leased or demised for a life or lives or for any term of years exceeding three years, the proprietor shall execute a lease in the approved form. 7 The Council of the Municipality of Burwood did so. It lodged for registration an instrument entitled "Lease" in the form approved by the Registrar-General. The instrument identified the land, the Council as Lessor and L & T (by its former name) as Lessee. It stated that the Lessor thereby leased to the Lessee the land for a term of 99 years commencing on 17 April 1991 and terminating on 16 April 2090 subject to the covenants and provisions set forth in Schedule 2, which covenants and provisions should be deemed to be incorporated in the instrument. Schedule 2 was executed by the Council and by L & T. 8 The incorporation of Sch 2 arises because of the terms of the Real Property Act 1900, s 40(1B). It provides that where in a manual folio the estate or interest of a registered proprietor is expressed to be subject to an estate or interest evidenced by an instrument the whole of the contents of the instrument shall be deemed to be set forth at length in the folio. 9 The only mention of possession in Sch 2 is in Part 3, headed "POSSESSION". It is in the following terms: "3.1 Lessor to Give Possession (1) Upon the expiration of the notice period referred to Clause 3.1(2) the Lessor shall give and the Lessee shall take vacant possession of the Land. (2) The Lessee shall grant the Lessor care, control and management of the Land until such time as it provides one month's written notice to the Lessor that it requires vacant possession to commence construction of the Building ("the Licence Period"). (3) Until such time as the Lessee has given vacant possession pursuant to clause 3.1(2) the Lessor shall have the absolute care, control and management of the Land for the parking of motor vehicles and shall for the duration of the Licence Period have the same powers, rights, duties and obligations in respect of the Land as it had prior to the grant of this Lease to the Lessee except for the Lessee's obligation to pay rates and taxes pursuant to clause 4.10." 10 Schedule 2 provided for the construction of a commercial development on the land by the Lessee and its enjoyment of rents payable by occupants of the commercial development during the 99 year period. 11 Thus, cl 14.1 required the Lessee, at its own expense, to construct a building in accordance with approved development plans and to that end it was required, within 9 months of 17 April 1991, to lodge with the Council a building application with plans and specifications and supporting information sufficient to enable the Council to make a determination. The Lessee might elect to extend that period to 12 months at the expense of an increase in the rent by $20,000 for each additional month. 12 Cl 3.2 of Sch 2 required the Lessee to meet the cost of preparing the land for building construction work including demolition of any buildings and structures and all necessary relocation of Lessor or public utility services. 13 Until practical completion, cl 4.1(6)(a) required the Lessee to pay a base rental of $100,000 per annum adjusted by a consumer price index. 14 Clause 8.5 provided that the Lessee was entitled, from time to time without the consent of the Lessor, to sublet or license part of the premises. From practical completion, the base rental was to decrease to $50,000 per annum adjusted by consumer price index in terms of cl 4.1(6)(b). But in terms of cl 4.1(7), in the year commencing on practical completion, the Lessee was required to pay a percentage rental of $160,000 adjusted by a consumer price index, less any waived income or inducements to tenants, or 5% of the annual net income of that year, whichever was the greater. Thereafter, in terms of cl 4.1(7)(b) the percentage rental was 5% of annual net income provided that, in the second year after practical completion, that amount was not less than the percentage rental paid in the first year after practical completion. 15 Clause 4.10 required the Lessee from 17 April 1991, in addition to the base rental and percentage rental, to pay rates and taxes and other outgoings. 16 Naming rights for the building were conferred on the Lessee by cl 9.1. By cl 16.1, the right to redevelop the site was conferred upon the Lessee subject to the consent of the Lessor. The Lessee was given a right of first refusal with respect to any assignment of the reversion by the Lessor under cl 19.1. 17 By cl 8.1 of Sch 2 the Lessee was entitled to assign or transfer the lease if certain conditions were satisfied. Pursuant to that provision L & T assigned the lease to Kavlyn Pty Ltd on 28 August 2002. L & T disclosed in that document that it had not complied with a number of provisions of the lease and, in particular, it had not substantially commenced the construction by the date that was six months after the date of grant of building approval by the Council. It had not lodged a performance security as required by cl 14.3. L & T was in default in terms of cl 10.1(2). 18 At no time had L & T obtained vacant possession of the land and it had not given written notice under cl 3.1(2) of Sch 2. The arguments 19 It was clearly the intention of L & T and the Council that L & T would not take possession of the land until it was ready to commence construction of the building. L & T submits that on the proper construction of the instrument, including Sch 2, no right to exclusive possession passed on execution. It was an agreement for lease to take effect for its 99 year term one month after L & T gave notice under cl 3.1(2) of Sch 2. 20 For the Chief Commissioner it was argued that there was an immediate grant of a lease for a term of 99 years with a licence back to the Council to expire one month after the giving of a notice under cl 3.1(2) of Sch 2 by the Lessee. The "owner" argument 21 The Land Tax Management Act 1956, s 21C(2) deems a Lessee from a local council to be the owner and the local council not to be the owner of the leased land. The term "owner" is defined in s 3(1) to include: "(a) in relation to land, every person who jointly or severally, whether at law or in equity: (i) is entitled to the land for any estate of freehold in possession; or (ii) is entitled to receive, or is in receipt of, or if the land were let to a tenant would be entitled to receive, the rents and profits thereof, whether as beneficial owner, trustee, mortgagee in possession, or otherwise; (b) (Omitted) (c) in relation to any leasehold estate in land, whether legal or equitable (other than under any lease to which s 21C or 21D applies), a person, or a person who is a member of a class or description of persons, prescribed for the purposes of this paragraph; and (d) a person who, by virtue of this Act, is deemed to be the owner." 22 It was submitted that for the Land Tax Management Act 1956, s 21C(2) to operate, L & T had to fall within the definition of "owner" in s 3(1). It was submitted that it did not do so because the basic definition is in par (a). The deeming in s 21C(2) of leasehold for freehold is picked up in par (d). It refers to "owner" and that takes one back to par (a). Hence what is required is an estate of leasehold in possession. It would be odd if the legislature intended to substitute for an owner a Lessee who was not absolutely entitled. 23 Reference was made to Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490, Chief Commissioner of Land Tax v Macary (1999) 48 NSWLR 299 and BBLT Pty Ltd v Chief Commissioner of the Office for State Revenue [2003] NSWSC 1003 in which the definition of "owner" in the Land Tax Management Act 1956, s 3(1) or its forerunner was considered. None of the decisions, however, touch upon the construction put forward by L & T. 24 That construction would give par (d) of the definition of "owner" in the Land Tax Management Act 1956, s 3(1) no separate operation in a context in which each of the other paragraphs of the definition has a separate operation. 25 The reason for the inclusion of par (d) in the definition of "owner" in the Land Tax Management Act 1956, s 3(1) is, in my view, clear and it should be construed to give effect to that intention. Paragraph (c) of the definition excludes from the holding of leasehold interests that constitute ownership, leases to which s 21C or s 21D apply. Each of those provisions deems a Lessee to be an owner for the purpose of the Act. The former deems a Lessee of land of the Crown, a local council or a county council to be the owner. The latter deems a Lessee of a leasehold strata lot to be the owner. The purpose of par (d) of the definition was to include these deemed ownerships within the definition. 26 There is no reason why par (d) of the definition of "owner" in the Land Tax Management Act 1956, s 3(1) should not be given its ordinary meaning thereby including as owners the persons deemed to be such by s 21C and s 21D and any other like provision. 27 Furthermore, the argument does not resolve the issue. If the instrument is not a lease, the Land Tax Management Act 1956, s 21C(2) does not operate and there is no need to consider the definition of "owner" in s 3(1). If the instrument is a lease, and L & T's construction of the definition is correct, L & T is entitled to the land for an estate of leasehold in possession and par (a) of the definition is satisfied. Construction of cl 3.1 28 The resolution of the issue depends upon the proper construction of cl 3.1 of Sch 2. 29 While it is not as well drafted as it might have been, I am of the view that it constitutes the grant of a licence back to the Council until the Lessee gives notice and one month expires. Clause 3.1(2) presupposes that the Lessee has power to grant care, control and management of the land to the Council. It had that power if the instrument constituted a lease of the land to it. It lacked that power if the instrument was but an agreement for lease to commence one month after the giving of the notice. 30 A somewhat similar situation arose in Goldsworthy Mining Ltd v Federal Commissioner of Taxation (1972-1973) 128 CLR 199. Under a lease, an area of seabed was expressly demised and leased to a joint venture company for a term of years. Generally, the lease was expressed in the formal language ordinarily found in leases. There were, however, limitations upon the rights of the company whereby it could be required to permit the Crown or any vessel to use any part of the demised premises for navigation, anchorage or any other purpose incidental to shipping. Provisions in the lease expressly negatived the implication of a covenant for title and a covenant to hold and enjoy the demised premises without interruption by the lessor or those claiming under him. Mason J held it to be a valid lease. At 213 his Honour said: "Although these provisions restrict the use to which the joint venturers may put the premises and impose obligations of an important kind, in my view they are not inconsistent with existence of a right of exclusive possession in the joint venturers. Indeed the provisions assume the existence of that right." 31 It was submitted that the facts in Goldsworthy were different and, indeed, they were. But I draw some comfort for my view that cl 3.1(2) presupposes the existence of a power from the analogous approach taken by Mason J. 32 It was submitted that interpreting cl 3.1(2) in that fashion gave it undue weight. It should be regarded as no more than a condition precedent to any right of possession. The draftsman had placed it second because cl 3.1(1) was the predominant provision. 33 I do not accept that submission. Clause 3.1(1) speaks of vacant possession of the land. The Lessee is not to have vacant possession until one month after it gives the notice. That does not mean that the Lessee under the instrument lacked the right to exclusive possession. If the instrument was a lease the right to exclusive possession was conferred upon L & T. 34 There is a distinction between physical possession and the right to possession. In Spiteri Nominees Pty Ltd v The Chief Commissioner for Franchise Licences (Tobacco), NSWSC, unreported, 25 August 1988, Hunt J explained the difference thus at 6: "The word "possession" may certainly be used in many different senses; and the concept which it represents is itself deceptively simple, as Lord Scarman observed in a slightly different context in Regina v Boyesen [1982] AC 768 at 773. The principal distinction in its use is between actual possession (meaning possession by way of physical control) and legal possession (meaning possession by way of ownership or the legal right to possession, without necessarily having physical control). There are various other senses in which the word may be used, and in which the meaning is different again, but the particular distinction is the one which is important for present purposes." 35 As was explained in Glenn with respect to the forerunner of par (a) of the definition of "owner" in the Land Tax Management Act 1956, s 3(1), an essential element of an estate of freehold in possession is that the person entitled to the land for that estate has a present right of beneficial enjoyment of the land, whether accompanied by actual physical possession or not. 36 The interpretation for which L & T contends gives no meaning to the grant from Lessee to Lessor in cl 3.1(2). It requires that provision to be interpreted as if it said the Lessor shall retain care, control and management of the land until such time as the Lessee provides one month's written notice to the Lessor that it requires vacant possession to the commence construction of the Building. 37 There is no justification, in my view, for rewriting cl 3.1(2) in that fashion. It calls for too great a surgery on the provision to be justified. The ordinary meaning of the words is clear. The Lessee is to grant specified rights to the Lessor and if that is so the Lessee must have the power to do so. That requires more than a contractual obligation. It requires the Lessee to have the entitlement to do so. And that stems from the grant of a lease by the Council to L & T. 38 In Zisti & anor v Ryde Joinery Pty Ltd, NSWSC, unreported, 2 May 1996, one issue arose from the fact that the solicitors for lessees forwarded the lease duly executed by their clients under cover of a letter that stated that acceptance of the final lease was expressly subject to the lessor repairing major leaks in the roof of the demised premises. At 11, Young J doubted that one could have a lease subject to a condition precedent. 39 It was submitted that the condition precedent in cl 3.1(2) meant that the instrument could only be an agreement for a lease. But the condition precedent in this case is one to be performed by the lessee and not by the lessor and this case is distinguished from the circumstances in Zisti. 40 More to the point, the giving of a notice by the Lessee under cl 3.1(2) was not a condition precedent to the lease and its grant of the right to exclusive possession, but a condition precedent to the termination of the licence and the obtaining of physical possession. 41 In my view the instrument constituted a lease by the Council of its land with a licence back to the Council granted by the Lessee. Effect of Real Property Act 1900 42 The instrument was registered under the Real Property Act 1900. Upon registration, the instrument acted as a deed under s 36(11) and passed a leasehold interest in the land to L & T. Section 41(1) provides: "No dealing, until registered in the manner provided by this Act, shall be effectual to pass any estate or interest in any land under the provisions of this Act, or to render such land liable as security for the payment of money, but upon the registration of any dealing in the manner provided by this Act, the estate or interest specified in such dealing shall pass, or as the case may be the land shall become liable as security in manner and subject to the covenants, conditions, and contingencies set forth and specified in such dealing, or by this Act declared to be implied in instruments of a like nature." 43 L & T argued that there was no definition of "lease", "leased" or "lessee" in the Land Tax Management Act 1956 and the provisions of the Real Property Act 1900 should not be imported into that legislation. 44 But the terms must be given some meaning and when the parties chose to record their transaction by an instrument that said that the Council as Lessor thereby leased to L & T as Lessee the land described, that instrument answered the meaning given to a lease under the general law. The provisions of the Real Property Act 1900 had the effect that upon registration of the dealing the estate or interest specified, passed to L & T. 45 There is no reason to give to the word "lessee" in the Land Tax Management Act 1956, s 21C(2) a meaning different from that achieved by operation of the Real Property Act 1900. Counsel was unable to point to any decision in which a lease registered under Torrens Title legislation has been held not to be a lease for other purposes. 46 Reference was made to Travinto Nominees Pty Ltd v Vlattas (1973) 129 CLR 1 for the proposition that registration of the instrument under the Real Property Act 1900 did not create a lease. The case involved an option to renew a lease that was rendered void under the Industrial Arbitration Act 1940. A majority of the High Court held that registration under the Real Property Act 1900 had not validated the lease because the illegality of the option would have been a bar to a suit for specific performance of the option which did not, therefore, create an equitable interest in land which could be the subject of indefeasibility of title under the Real Property Act. 47 It was submitted that cl 3.1 was like an option. But the gravamen of the decision of the majority was based upon illegality, a feature that is not present in the instant circumstances. 48 Reference was made to a number of decisions on the effect of registration of otherwise void instruments (for example, Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313, Kogarah Municipal Council v Golden Paradise Corporation [2005] NSWCA 230). For the same reason, I do not gain assistance from them. 49 In PT Ltd v Maradona Pty Ltd (1991) 25 NSWLR 643 it was held that registration under the Real Property Act 1900 does not validate all of the terms and conditions of the instrument that is registered: it validates those terms or conditions that delimit or qualify the estate or interest or are otherwise necessary to assure the estate or interest to the registered proprietor. 50 It was submitted that registration of the instrument did not satisfy the condition precedent in cl 3.1(2) nor did it convert a contingent right to a present right to a leasehold estate in possession. This submission presupposes that the instrument did not create a lease. For the reasons already stated I am of the opinion that it did. 51 It was submitted that the effect of the incorporation of Sch 2 in the manual folio under the Real Property Act 1900, s 40(1B) meant that the instrument failed to be a lease upon the proper construction of cl 3.1 and the operation of s 40(1) was overcome. It provides, relevantly for present purposes that a manual folio shall be conclusive evidence that any person recorded in the folio as the registered proprietor of an estate or an interest in the land comprised in the folio is the registered proprietor of that estate or interest and that the land comprised in that folio has been duly brought under the provisions of the Act. 52 I have rejected the argument that the instrument with the incorporation of Sch 2 does not constitute a lease. The Real Property Act 1900, 40(1B) does not avail L & T. 53 When parties chose to use the approved form of lease under the Real Property Act 1900, s 53(1) and use the words of lease and cl 3.1 can be given a meaning consistent with the grant of a lease, they ought to be given that meaning and the provisions of the Real Property Act 1900 ought to apply. Particularly, this is so when a construction that reads the provisions of lease down to an agreement for a lease requires the ordinary meaning attributed to the words in cl 3.1(2) to be substituted by different words that do not appear in the instrument. 54 The Conveyancing Act 1919, s 120A(1) provides that the doctrine of interesse termini is abolished. L & T and the Chief Commissioner each claimed that the abolition favoured their argument. On the view I have formed I do not need to deal with this issue. Conclusion 55 The arrangements between the parties may have been structured differently. The Council might have granted L & T an agreement for a lease. But, in my view, it did not. The parties executed a lease and L & T granted a licence back to the Council. The Land Tax Management Act 1956, s 21C(2) operated with respect to the five tax years before L & T assigned the lease to Kavlyn. L & T in those years was deemed to be the owner of the land. It has failed to establish to the contrary. 56 The summons is dismissed with costs. ********** 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.