New South Wales Supreme Court CITATION : Tribond Pty Ltd v Atinon Pty Ltd [2007] NSWSC 1079 HEARING DATE(S) : 20/09/07 JURISDICTION : Equity Division JUDGMENT OF : Young CJ in Eq EX TEMPORE JUDGMENT DATE : 20 September 2007 DECISION : Lessee's option to purchase not validly exercised. CATCHWORDS : ESTOPPEL [29]- Estoppel by convention- Option to purchase granted to lessee- Option not actually duly exercised- Lessor's solicitor acknowledges receipt of lessee's exercise of option- Detrimental reliance on lessor's conduct not proven- No operative estoppel. LANDLORD & TENANT [57]- Options and agreements to purchase- Time matters- Lessee required to give notice of intention to exercise option and provide valuation- Not necessary for valuation to accompany notice of exercise, but valuation must be provided within reasonably short time of giving notice. LANDLORD & TENANT [60]- Options and agreements to purchase- Construction of particular agreements- Option that lessee may "purachase" freehold during option term- Lessee must at least enter into purchase contract- Not done- Option not validly exercised. LEGISLATION CITED : Retail Leases Act 1994, Schedule 1, s 16 Supreme Court Act 1970 Bragg v Alam [1981] 1 NSWLR 668 Consolidated Development Pty Ltd v Holt (1986) 6 NSWLR 607 Craney v Bugg [1971] 1 NSWLR 13 Eslea Holdings Pty Ltd v Butts (1986) 6 NSWLR 175 Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122 CASES CITED : Giumelli v Giumelli (1999) 196 CLR 101 Jennings v Rice [2003] 1 P & CR 100 Lindsay v Mahoney (1980) 1 BPR 9584 MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 Moweno Pty Ltd v Stratis Promotions Pty Ltd [2003] NSWCA 376 Sullivan v Sullivan [2006] NSWCA 312; (2007) ANZ Conv R 54 Tasker v Small (1837) 3 My & Cr 63; 40 ER 848 Tribond Pty Limited (P) PARTIES : Atinon Pty Limited (D1) Craig Leigh Moran (D2) FILE NUMBER(S) : SC 3470/07 B A Coles QC and G A Sirtes (P) COUNSEL : E Cox (D1) G O Blake SC and P Barham (D2) Home Wilkinson Lowry (P) SOLICITORS : Burridge Harris & Flynn (D1) Somerville & Co (D2) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG CJ in EQ Thursday 20 September 2007 3470/07 – TRIBOND PTY LTD v ATINON PTY LTD JUDGMENT 1 HIS HONOUR: These are rather peculiar proceedings between persons interested in property rights with respect to Nos 68-72 River Street, Maclean. The plaintiff is a company which, on 6 October 2005, entered into an option with the first defendant, the registered proprietor of the relevant land, under which the plaintiff obtained for valuable consideration an option to purchase. Initially, that option was to be exercised by 6 October 2006, but that was later extended and currently the option expires on 30 September 2007. 2 The second defendant is and at all material times has been the lessee of the land. Initially, the lease he was granted was an unregistered lease commencing on 1 February 2004 and ending on 31 January 2006. That lease is set out as part of PX01 at pages 20 and following. 3 The key consideration of the present matter is Item 19 of Annexure A to the lease, headed "Special Conditions", which reads as follows: "The lessee may during the term of this lease and any option term, purchase the freehold of the subject premises on the following terms and conditions ...". 4 Conditions (a), (b) and (c) were then set out. (a) read: "The lessee shall give written notice to the lessor or its Solicitor of such intention and shall provide the vendor with a current valuation of the subject premises giving the market value of same." (b) and (c) then went on to set out a procedure where the landlord could accept that valuation or, alternatively, obtain one of its own and then, if there was a continuing dispute as to value, the matter would be referred to a valuer appointed by the President of the Real Estate Institute. Once a value was properly ascertained then the lessor was to issue a contract in the standard Law Society/Real Estate Institute form providing for settlement 28 days after exchange. If the purchaser did not exchange within 21 days of receipt of the contract, his rights under the clause "are extinguished". 5 The 2004 lease provided that the exclusive use of the demised premises was to be as a motor repair workshop and NRMA agency. There was evidence before me that possibly even before the formal lease was entered into the lessee moved a business that he had conducted in the same town of selling motor accessories into the premises and that the natural persons who controlled the first defendant well knew of this. 6 It was then put that because one sees in Schedule 1 of the Retail Leases Act 1994 that a motor vehicle and motorcycle accessory shop is a retail shop business, the Act by s 16 had the effect of extending the lease that came into being as a result of the exercise of an option to renew into a five year lease from 1 February 2006. Whichever way I look at the matter, I have come to reject that submission. 7 The original 2004 lease contained a clause which had the effect of removing the lease from the operation of the Act if the Act ever applied. It would seem to me, thus, that s 16(4) of the Act operates to exclude it. If that were wrong, then in my view the way in which one calculates the lettable area would also mean that the lease was excluded. 8 I do not consider that the evidence as to user is sufficiently strong to get over the prima facie rule that I discussed when a member of the Court of Appeal in Moweno Pty Ltd v Stratis Promotions Pty Ltd [2003] NSWCA 376 at [49] to [51]. I really consider that, with respect, reference to that Act is just a complete red herring and I will probably say very little more about it. 9 I said at the beginning of these reasons that this is an unusual case. Part of the reasons for so saying is that under the rule in Tasker v Small (1837) 3 My & Cr 63; 40 ER 848 where a purchaser is claiming specific performance of a contract for the sale of land, the rule is that the only defendant is the vendor. Accordingly, it is most rare to have a situation where the court is dealing in the one action with competing purchasers for the same piece of property. What can happen is that the court will grant specific performance to one person and if another person establishes a contract then the court will give damages. Before the Supreme Court Act 1970 that used to cause some problems because damages would then have to be sent to common law; see Craney v Bugg [1971] 1 NSWLR 13. 10 However, in this particular case it was the plaintiff who commenced the proceedings and it is clear, and indeed, no-one has gainsaid it, that no matter how one classifies its right as the grantee of an option, whether one classifies it as a conditional contract conferring an equitable interest in the land or merely conferring a contractual right, it has a sufficient interest to seek an injunction to prevent its putative vendor from dealing with the property in such a way as would make its right virtually worthless. On that application for an injunction, the second defendant is a necessary party. 11 That claim is technically the lead claim in this litigation, but, in accordance with practical logic, what has happened is that the cross-claim filed by the second defendant for specific performance as a result of his claimed exercise of an option over the property has been the focus of concentration. If that claim is made out then, except for one problem, the first defendant is not unhappy because it will have sold the land to a person who is paying current market value, or at least current market value as at January 2007, and it may well have protection under clause 11 of the option from its agreement with the plaintiff. 12 Clause 11 provides that the plaintiff and first defendant acknowledge the existence and effect of the option to purchase the property contained in item 19 of the lease and then proceeds: "If the lessee, or any assignee, shall validly exercise the lease option during the term of the Lease or any renewal thereof, then this option shall, upon the settlement of the sale to the Lessee of the property, be at an end and neither party hereto shall be entitled to make any claim or demand upon the other for any loss or expense arising from the exercise of the lease option to purchase. In the event that this option shall be frustrated by the exercise of the lease option all option fees paid by the Grantee shall be refunded." 13 Accordingly, should I find that the lease option has been validly exercised during the term of the lease or any renewal thereof, the first defendant is for almost all intents and purposes relieved from any liability to the plaintiff. However, it has been pointed out in argument that the probabilities are that clause 11 does not give exhaustive protection to the first defendant. 14 I am not deciding this, I am merely pointing out the problems that may exist if the court: (1) finds that although the lease option was not validly exercised, the first defendant is estopped from denying it and specific performance is forced upon the first defendant based on such an estoppel; or (2) finds that the lease option was not validly exercised "during the term of the lease or any renewal thereof". There may also be other situations where it could be argued that clause 11 does not give protection. 15 The right of the second defendant to specific performance must depend on whether he has validly exercised his option or whether there is an operative estoppel. To succeed on the first basis he must show that during the term of the lease and any option term he has exercised his right to purchase the freehold. The term of the lease is set out on page 20 of exhibit PX01 as two years. There is no definition of "option term", however, there is really little argument that it is the period from 1 February 2006 to 31 January 2007. 16 Item 19 itself is not described as an option. It is a clause which confers a right on the lessee to purchase the freehold during a certain period and on certain terms and conditions. However, when one looks at page 1 of the lease, clause 5 talks about the lessee having an option to purchase as set out in Item 19 of Annexure A. 17 The so-called option is worded in a very peculiar way. One would normally expect the grant of an option to say that the lessee may have an option to purchase the property provided that the option is exercised by day X by the lessee doing actions Y and Z. Of course, the fact that the clause is not worded in the conventional way does not mean that there is no option, however, it does cast some doubt as to whether it is an option in the strict sense. 18 As Mr Coles QC for the plaintiff points out, the literal wording of the clause is that, "the lessee may during the term of the lease and any option term purchase...". The natural meaning of these words are that the purchase must take effect before 31 January 2007. 19 Now, if that is the meaning of the clause then it could be seen at once that the second defendant did not purchase the property in that time. "Purchase" at the very least means exchanging a contract binding one to purchase and to pay the purchase price which may potentially be the subject of specific performance proceedings. 20 Mr Blake SC, who appeared for the second defendant lessee, said that that would be a very artificial way of construing the words. He says that when one looks at what is in (a), (b) and (c) of Item 19 one can see that there is a process which is likely to take some time and the parties surely would not have agreed that all those steps must be completed before 31 January 2007. 21 I can see sense, of course, in that submission, but on the other hand, the counter submissions are that this is a commercial document with respect to a commercial lease of commercial premises and, although no times are mentioned, one normally implies that either time is of the essence or, alternatively, only reasonably short times should be allowed to take the various steps; see for instance Lindsay v Mahoney (1980) 1 BPR 9584. 22 Secondly, there is a lot of force in Mr Coles' submission that what the parties were looking for was a seamless transition from the second defendant as a person with the status of a lessee to the second defendant as a person with the status of a purchaser, so that the parties were not thinking that on the very last day of the lease there could be a notice of intention given and then a process which could take many months would take place during which the premises would either be vacant or let to a third party before there was a specifically enforceable contract. 23 Another factor is that the notice to be given under Item 19(a) is not a notice to exercise the option, but merely a notice of giving intention to purchase the freehold. This, again, tends in favour of what Mr Coles was putting. 24 I consider that on the proper construction of the lease, Item 19 means that there had to be a purchase contract entered into before 31 January 2007. However, I think I should assume that that is incorrect and go on to consider the matter as if that is the case because I believe one gets to the same result. 25 The first problem is that, on 31 January 2007, the solicitor for the lessee gave an indication in writing to the lessor or its solicitor of intention. There was no argument put to me that there was a dichotomy between the "lessee" on the one hand in (a) and the "lessor or its Solicitor" in (a) so that it would have to be the lessee personally who had to give the notice, and that this did not happen. That argument may have had merit. 26 The notice that was given was not a notice of intention to purchase within the meaning of (a). It was phrased in terms of the exercise of an option. It was also not provided with a current valuation. I considered this sort of clause when I was dealing with Consolidated Development Pty Ltd v Holt (1986) 6 NSWLR 607 at 617 and following and noted that it is sometimes very difficult to come to a view as to whether the requirements, such as in the instant case of providing the vendor with a current valuation of the subject premises, has to take place at the very same time of the notice of exercise of option or whether it can take place afterwards. 27 My view is that on the words which have been used, the probabilities are that it is sufficient that the valuation be provided at some reasonably short time after the notice and I would not think that it is mandatory that the valuation should be included in the same envelope as the notice. However, in the present case, the valuation was not forwarded until a month and a half later with the lessee's solicitor's letter of 13 March 2007. The valuation was $1,000,000. 28 Where one has a contract which fixes the date at which the valuation is to take effect, as here, 31 January 2007, then it would seem to me in a commercial contract one would expect the valuation no later than one month after the notice of intention and thus, one and a half months is too late. Accordingly, the lessee has not complied with (a) so as to properly exercise the option. Thus, were it not for principles of estoppel, I would find against the second defendant. 29 Mr Coles put that this is not a case where estoppel could give any comfort to the second defendant. He quotes from the well-known decision of the Full Court of this Court in Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122 at 129 where the Court, consisting of Owen J, Roper CJ in Eq and Herron J, said that a lessee who had not properly exercised an option to renew a lease according to law or according to the principles of equity could not rely on an estoppel that the landlord was prevented from denying that the option had been duly exercised. The last sentence of page 129 of the report says: "The argument seems to us to be based upon the fallacious notion that the fact that a defendant is estopped from denying the existence of a fact affords evidence that that fact exists." 30 It was also put by Mr Coles that one must be very careful to see what it is that is said to be the subject of estoppel. Here, it could only be that there was an estoppel against denying that the lessee's option had been validly exercised. 31 First, that is put not to be an estoppel of a matter of fact, but rather, estoppel as a matter of legal consequences of fact and is so not properly a matter for there being either a conventional or an equitable estoppel. That proposition, with respect, appears not to have survived well in recent authority, indeed, there is strong authority now, see MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd [2005] NSWCA 39 and Sullivan v Sullivan [2006] NSWCA 312, noted in (2007) ANZ Conv R 54, that one can have an estoppel against a legal consequence such as that an option has been exercised in the year 2007, even if one might not have been able to do so in 1957. See also Eslea Holdings Pty Ltd v Butts (1986) 6 NSWLR 175, 185. 32 The next matter is whether it is necessary that there be shown: (a) that there has been reliance on the statements, in this case made by the first defendant's then solicitors; (b) whether there has been any detriment because of such reliance; (c) whether on a true construction of the correspondence one can see that there has been a clear indication of a state of affairs which has brought about that reliance and detriment; and (d) whether as a consequence the court should, notwithstanding the fact that as a matter of legal analysis the option was not properly exercised, still find specific performance. 33 Mr Cox, who appeared for the first defendant, put that there was no reliance shown in the evidence by the second defendant on the first defendant's conduct at any time to support the estoppel. He says it should be emphasised that the notice of intention to exercise the option was served on the final day. No statement or inducement was made by the second defendant prior to that notice being given. Any purported reliance such as engaging a valuer was prior to any conduct of the first defendant, the first defendant's principal piece of prejudicial conduct being committed on 12 April 2007. That was the date when the plaintiff's then solicitor wrote to the second defendant's solicitor, "I refer to your client's exercise of his option to purchase the freehold of the above property", etc and referring to a counter valuation of $1.2 million. This was the first explicit acknowledgement that the plaintiff considered the lessee's option to purchase as having been exercised. 34 There had been previous correspondence between the solicitors. On 9 February 2007 at page 200 of the bundle the first defendant's then solicitor had said: "I refer to the notice of exercise by your client of his option to purchase, and to your letter of the 7th February. My client is not prepared to grant any further term at this time, although your client may hold over until it becomes clear whether Tribond will exercise its option. If Tribond does not exercise its option, then further consideration will be given to the grant of a new lease. I note that your valuation will be available by the 23rd of this month and I look forward to receiving a copy." 35 That letter is significant for a number of reasons. First of all, it does refer to an exercise of the option to purchase. Secondly, however, in the middle paragraph, it focuses on the circumstance if Tribond does not exercise its option and the grant of a new lease. 36 Mr Coles puts that what that letter is saying is that the Tribond option is still valid and, indeed, he points out that subsequently in March 2007, for a large consideration, the Tribond option was extended for a further six months and this indication in the letter of 9 February is not an indication that there was a convention held by both the first defendant and the second defendant that the option had been properly exercised and was binding because the second paragraph would just not make sense in that scenario. 37 However, the second defendant does get some comfort from the final paragraph which suggests that had the valuation been made available by 23 February 2007 that may well have been considered to be within time, however, that is not a complete comfort because, even though one might have allowed a month, a month and a half I think is just a bit beyond time. 38 The correspondence from 12 April then shows that the parties endeavoured to get the Real Estate Institute to appoint a valuer and they each contributed a small amount towards the fee. A valuer was in due course appointed, but by August 2007, the parties agreed that they would not progress that until the essential matter in this case had been resolved. 39 There is some dissension in the authorities for the proposition that detriment is necessary in a case of conventional or common law estoppel. Justice Handley, writing extra-judicially, says that it is not necessary; see paragraph 8-008 in his Estoppel By Conduct and Election (Thompson, London, 2006). However, binding authority on me from cases such as MK & JA Roche Pty Ltd v Metro Edgley Pty Ltd, to which I have already referred, strongly suggests that it is necessary to show detriment. 40 The detriment that is claimed in the instant case is the contribution towards the $495 fee of the Real Estate Institute to appoint a valuer, the loss of executive time in making arrangements with solicitors, and solicitors' fees. There is some disagreement amongst members of the Court of Appeal in Sullivan as to whether that is sufficient. One must look to see in each case whether there is a detriment which is substantial and not just de minimus and in the instant case whether that detriment was brought about in reliance upon the matters which could be laid at the feet of the first defendant which might be thought to have lulled the second defendant into thinking that the option had been exercised. 41 In the instant case, Mr Coles says that the second defendant must have well known what the situation was. It may be that he and his lawyers misinterpreted the contract, but they knew that they had not given the valuation within a reasonable time of the so-called notice of exercise of option and the fact that some of the correspondence could be interpreted as meaning that the first defendant was prepared to go along with that assertion must be tempered by the fact that they knew the effect of their own acts. 42 Furthermore, Mr Coles puts that when one reads the whole of the correspondence properly it amounts to no more than that the solicitor for the first defendant was keeping the second defendant as what might be called a first reserve in case the plaintiff did not exercise the option. 43 On the whole, as a matter of fact on the construction of the documents, I think that is right and I do not see any actual evidence from the second defendant that he was at all induced to accept the position that the first defendant was acknowledging that he had exercised his option or that he made the expenditure in reliance on that fact. 44 However, even if that is wrong, it seems to me that the so-called detriment in the instant case is de minimus and is merely in the nature of a person who hopes to be able to put together a purchase paying out preliminary expenses towards that object. This thought is reinforced by the fact that the parties were still at the situation where they did not have a firm contract price, they did not know what the independent valuer would come to by way of a valuation, and the second defendant still had a complete out because his rights would be extinguished if he did not sign the contract that was proffered if he did not like the price within 21 days. 45 There were also arguments placed before me as to whether people could avoid their rights under the contract by conduct such as was dealt with by Justice Rath in Bragg v Alam [1981] 1 NSWLR 668 and it may be that the exercise of the second defendant's right not to execute the contract within 21 days and so have his rights extinguished might not have been a full answer to a specific performance suit brought by the other side, but I do not need to go into that area. I do not consider there was sufficient detriment as a matter of fact. Even if there was, it would seem to me that this is not a case where the equity to prevent any unconscionable result arising would be to fulfil the expectation. 46 There has been considerable literature about this subject. The High Court considered it in Giumelli v Giumelli (1999) 196 CLR 101 and it may be that as a general rule one can say that, in promissory estoppel cases at least, the normal way one satisfies the equity is fulfilling the expectation. However, that is not a rule that applies in every case. The court must direct its mind as to the proper remedy to neutralise unconscionable conduct and, as Robert Walker LJ, as his Lordship then was, said in Jennings v Rice [2003] 1 P & CR 100 at 114, where the detriment is relatively small that result does not necessarily follow. 47 I have given an ex tempore judgment because everybody is here and the parties are entitled to hear what the result of the case is and, furthermore, the option needs to be exercised by next week. I apologise that what I have given orally is probably not as detailed or as grammatically correct as might be if I had spent a week or so putting it together and correcting it. When I revise it I reserve the right to correct some of the judgment and to include references to extra cases. 48 The orders are that: 1. The court declares that the plaintiff is entitled to exercise its option granted by deed of 6 October 2005 as subsequently varied up to 30 September 2007 or such later time as may be agreed between the plaintiff and the first defendant. 2. That the first defendant is restrained from selling, transferring or otherwise dealing with that land otherwise than in accordance with the deed referred to in order 1. 3. That the second defendant pay the plaintiff's costs for the proceedings and the costs of the first defendant to the proceedings. 4. That the cross-claim is dismissed. 5. The exhibits may be returned on an undertaking to restore them to the court should there be an appeal. ******************* 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.