New South Wales Supreme Court CITATION : Azkanaad v Galanos (No 2) [2008] NSWSC 476 HEARING DATE(S) : 13 May 2008 JUDGMENT DATE : 16 May 2008 JUDGMENT OF : Gzell J DECISION : Summons dismissed with costs. CATCHWORDS : LANDLORD AND TENANT - Creation of Relationship of Landlord and Tenant - Whether concluded agreement for lease contained in correspondence - Whether in first class in Masters v Cameron (1954) 91 CLR 353 - Whether conventional estoppel applied to failure to demand rent increases - Whether repudiatory conduct precluded specific performance - Whether no agreement for lease in equity - Whether tenancy at will terminated by notice to quit under the Conveyancing Act 1919, s 127(1) - Whether relief from forfeiture available LEGISLATION CITED : Real Property Act 1900 Conveyancing Act 1919 Walsh v Lonsdale (1882) 21 Ch D 9 Marshall v Council of the Shire of Snowy River (1994) 7 BPR 14,447 Masters v Cameron (1954) 91 CLR 353 CASES CITED : Brew v Whitlock (No 2) [1967] VR 803 Whitlock v Brew (1968) 118 CLR 445 Azkanaad v Galanos [2008] NSWSC 398 Moratic Pty Ltd v Lawrence James Gordon & Anor [2007] NSWSC 5 PARTIES : Azkanaad Pty Ltd (Plaintiff) Galanos Bros Pty Ltd (Defendnat) FILE NUMBER(S) : SC 2454/08 COUNSEL : Mr M Sahade (Plaintiff) Mr N Cotman SC (Defendant) SOLICITORS : Philip Goldman & Co (Plaintiff) V A Lawyers (Defedant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J FRIDAY 16 MAY 2008 2454/08 AZKANAAD PTY LTD v GALANOS BROS PTY LTD (NO 2) JUDGMENT Introduction 1 The plaintiff, Azkanaad Pty Ltd, entered into occupation of land at Woolooware, in Sydney on 4 March 2003. The land was owned by the defendant, Galanos Bros Pty Ltd. In March 2008, Galanos served a one month notice to quit. Azkanaad seeks declarations that the notice to quit was of no force and effect, that Galanos is bound by a lease contained in correspondence and Azkanaad is not liable to pay rent increases under the lease. Azkanaad seeks specific performance of the lease or, in the alternative, relief from forfeiture of it. The correspondence 2 On 29 May 2002 the solicitors for Azkanaad wrote to the solicitors for Galanos stating that they were instructed that their respective clients had negotiated the terms of a proposed lease of the land. They summarised its terms as follows: "We summarise below the terms of the proposed new lease: 1. Lessee – Azkanaad Pty Limited (ACN 076 318 280) as trustee for the Magar Sons Trusts. 2. Rent – $180,000.00 per annum plus GST fixed for the first two years. 3. Term – 5 years 4. Options to renew – 5 x 5 x 5 x 5 (the lease will provide a maximum possible for tenancy of 25 years). 5. Rent reviews including upon exercise of any option lease - annual CPI reviews not exceeding 3% of the previous year's rental. 6. User – service station, convenience store, workshop, car wash, fast food outlet and other ancillary services associated with a service station site. 7. Public liability - $10,000,000.00. 8. Outgoings – tenant to pay Council rates and water rates. 9. Option to purchase – to be exercised within the first three years. We await instructions regarding the purchase price and we understand that discussions are taking place between our respective clients on this point. 10 Rent free period – two months. Generally, the remainder of the lease will be on the same terms and conditions as the existing lease for the service station site at Ruse." 3 Azkanaad had negotiated a lease of a service station site at Ruse from Galanos. The terms of that lease were not in evidence. 4 On 20 June 2002, the solicitors for Galanos responded. The letter contained the following: "… we are instructed as follows in relation to Woolooware property: 1. Noted. 2. The rent will be fixed for the first year only. 3. Term - 7 years. 4. Maximum tenancy will be 27 years. 5. Agreed. 6. Agreed. 7. Agreed. 8. Agreed. 9. Not agreed – our client will grant to your client a right of first refusal. 10. One month rent free. 11. The lessee shall obtain the consent of the lessor to the fitout of the premises." 5 Azkanaad's solicitors wrote again on 6 September 2002: "We understand that further discussions have taken place between our respective clients in relation to the proposed terms of the new lease. In addition to the matters which have already been agreed upon, we are instructed that the following outstanding matters are now agreed upon between the parties: 1. Rent will be fixed for the first two years during the first term of the lease. 2. The first term of the lease will be 7 years. 3. The maximum tenancy will be 27 years. 4. The lease will contain an option to purchase which will be exercisable during the third and fourth year of the lease. The purchase price will be $2,150,000.00 plus GST. Thereafter, the lessee will have a right of first refusal. 5. The lease will provide a rent free period of one month. In addition to the above, our client seeks the following: (i) An indication as to the proposed commencement date. (ii) Is the service station complete? Our client will require a Section 149D Building Certificate to ensure that all Council requirements have been met prior to executing the lease. (iii) Prior to the commencement of the lease, our client requires a copy of the plans and drawings for the building, the underground tanks, the electrical layout plan and the engineer's drawings as to drainage. Upon receiving confirmation that your client agrees to these matters we will commence preparation of the lease. Please note, we will require particulars of title including a description of the premises to be leased." 6 On 24 September 2002, the solicitors for Galanos wrote: "On instructions we enclose your letter dated 6 September 2002 signed by our client". The letter of 6 September 2002 was signed on behalf of Galanos on each page and adjacent to the paragraph seeking an indication as to the proposed commencement date, there was included on behalf of Galanos "10/10/2002". 7 On 28 October 2002, the solicitors for Azkanaad forwarded to the solicitors for Galanos a lease based upon the Ruse lease. Azkanaad does not, however, rely upon that document. It submits that the above correspondence establishes an equitable lease. Further negotiations 8 There were further negotiations between the parties. On 5 November 2002, the solicitors for Azkanaad informed the solicitors for Galanos that their instructions were that the parties had agreed that Azkanaad would be entitled to use an area of vacant land adjacent to the service station throughout the term of the lease provided Azkanaad lawfully commenced using the vacant land for any period of time within the first four years of the term or exercised its option to purchase under the terms of the lease. 9 On 30 January 2003, the solicitors for Galanos said the option to purchase could only be exercised after the expiration of three years from the commencement date and prior to the expiry of 30 days from the three year anniversary. The time for settlement of the contract was to be three months. The solicitors said that in relation to the adjoining land Azkanaad should be entitled to use the land and it would form part of the leased property on the proviso that Azkanaad did in fact use the land prior to the expiration of the option exercise period. If Azkanaad had not commenced to use the land and the period in which to exercise the option had passed, the land would be removed from the leased property by way of a variation of lease. 10 On 6 March 2003, the solicitors for Azkanaad wrote that the period of 30 days before the exercise of the option to purchase should be extended to three months. The time for settlement on the contract of three months was agreed. Azkanaad agreed to the arrangement with respect to the adjoining land. 11 The solicitors for Galanos responded on 2 July 2003 stating that the 30 day period for the exercise of the option was not unreasonably short as Azkanaad would have three years of trading in the premises which was sufficient time to make a decision and the exercise was purely a mechanical process. 12 On 14 August 2003, the solicitors for Azkanaad referred to two outstanding matters: the commencement date for the lease would be 4 March 2003 and the period for exercise of the option to purchase would commence on 4 March 2005 and would end at 4 pm on 3 March 2006 with a three month period to settle. 13 Notwithstanding several requests by the solicitors for Galanos for a response to this letter, none was forthcoming before the notice to quit was served. Lease 14 Because the alleged agreement for lease exceeded three years and was not registered, Azkanaad did not obtain a lease under the Real Property Act 1900, s 42(1)(d). In consequence, Azkanaad became a tenant at will under the Conveyancing Act 1919, s 127(1) determinable at the will of either party by one month's notice in writing expiring at any time. 15 If the correspondence constituted an agreement to lease and it is specifically enforceable, the correspondence will be treated, in equity, as an agreement to lease conferring a term equal to that which would have been obtained had there been a registered document. The doctrine of Walsh v Lonsdale (1882) 21 Ch D 9 operates only if, and to the extent that, the agreement is specifically enforceable, for the lessee's equitable estate is commensurate with the specific enforceability of the agreement out of which it arises (Marshall v Council of the Shire of Snowy River (1994) 7 BPR 14,447 at 14,456). 16 It follows that Azkanaad must first prove that the correspondence constituted a concluded agreement. In Masters v Cameron (1954) 91 CLR 353 at 360 the High Court discussed three classes of case where parties negotiate to reach an agreement. The first class is one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of the terms, but at the same time, propose to have the terms restated in a form that will be fuller or more precise but not different in effect. 17 Azkanaad submits that the correspondence falls within this class. 18 I have difficulty with that proposition. Not only had the option to purchase provision not been agreed, but also the extent of the land the subject of the negotiations had not been settled by the time of the correspondence. It was only at a later stage that the vacant adjoining land was to be included within the proposed lease. 19 Azkanaad submitted that the provision with respect to the exercise of the option could be severed from the agreement. 20 In Brew v Whitlock (No 2) [1967] VR 803, approved on appeal in Whitlock v Brew (1968) 118 CLR 445, the Victorian Full Court said at 807-808 that the authorities on severability in cases concerning uncertainty in part of a contract point to the test being the intention of the parties as to whether the operation of the contract apart from the impugned part was to be conditional on the efficacy of that part, or whether it was to take effect notwithstanding the failure of that part. That intention is to be ascertained from the construction of the contract as a whole. 21 I do not think that the correspondence bears the construction of a concluded agreement for lease in the absence of a provision as to purchase by option and right of first refusal. They seem to me to be essential provisions in an agreement for lease for a substantial period with a substantial consideration for purchase. 22 In my view, the proper construction of the correspondence brings the matter within the third class in Masters, one in which the intention of the parties was not to make a concluded bargain at all unless and until they executed a formal contract. 23 The statements in the letter of 6 September 2002 that the building certificate and plans and drawings are required prior to execution of the lease tends towards this conclusion. The phraseology does not take the form of making a present agreement conditional upon the provision of this material. It takes the form of requiring the material to be produced before an agreement is concluded by execution of a lease. 24 The continued pleas by the solicitors for Azkanaad that Galanos give its urgent attention to the two outstanding matters also supports this conclusion. That suggests that Azkanaad did not regard the matter as concluded. 25 Furthermore, the late introduction to the negotiations of possession of the adjoining vacant land adds to the conclusion I have reached. It is an answer to Azkanaad's submission that the correspondence constituted a concluded agreement. The land the subject of negotiation changed after the correspondence relied upon by Azkanaad had ended. The fact that the parties accepted that it was appropriate to change the area of the subject land meant that they did not regard this variation as foreclosed on the basis that a concluded agreement with respect to other land had already been entered. 26 Azkanaad submitted that this was an unlikely conclusion in light of its being put in possession and in light of its significant expenditure on the installation of bowsers and the fitout of the convenience store. It was said that Azkanaad could not be supposed to have made this level of expenditure if it had no equitable lease. But the items in question were, no doubt, tenant's fixtures severable by Azkanaad on the conclusion of any lease. 27 While at the interlocutory level, I regarded the question whether the correspondence constituted a concluded agreement for lease as a serious question to be tried (Azkanaad v Galanos [2008] NSWSC 398 at [16]), I am of the view that on a final basis, Azkanaad has not made out its claim that it had, in equity, an agreement for lease. Rent 28 If I be wrong in this view and there was, in equity, an agreement for lease, Azkanaad bore the onus of establishing that that agreement was specifically enforceable. 29 The correspondence spoke in terms of rent reviews based upon annual CPI changes with a cap at 3% of the previous year's rent. Galanos did not make demands upon Azkanaad during its occupation of the service station site for annual adjustments. Its complaint that rent was in arrears was based upon the non-incremented figure of $198,000 per annum. 30 In Moratic Pty Ltd v Lawrence James Gordon & Anor [2007] NSWSC 5, Brereton J considered a lease that contained two provisions for rent. In addition to a fixed rent there was a further rent equivalent to 4% of annual liquor purchases from the hotel on the demised premises. The landlord had not demanded payment of further rent and the assignee of the lease originally granted did not contemplate any rent being payable under that provision when it arrived at the purchase price for the assignment. His Honour found that it assumed at the time of the purchase of the hotel business and subsequently that the only rent payable under the lease was the fixed rent. His Honour concluded that the landlords also assumed that the only rent payable was the fixed rent. Thus each party conducted its relationship on the basis of that assumption. Each party knew the other was conducting the relationship on that basis and a departure from the assumption would occasion detriment to the lessee. His Honour concluded that it was a case in which a conventional estoppel precluded either party from departing from the conventional basis of their relationship. 31 Azkanaad submitted that the same considerations applied in the instant circumstances. I do not accept that submission. 32 Where, as in Moratic, there were two provisions for rent, it is understandable that both parties might assume that the only rent was the fixed rent. It is logically more difficult in the instant circumstances to conclude that Mr Galanos assumed the rent provision was without increment. 33 There is a danger in reliance upon authorities for their similarity of fact as counsel for Azkanaad conceded. Estoppel issues in each case must be determined on the whole of the evidence. There will be, necessarily, differences because no two cases are identical. 34 Anthony Galanos, the director of the defendant, was cross-examined. He said that he had raised with the representative of Azkanaad increases in the rent but had not demanded payment of an incremented rent because the representative of Azkanaad had said it was incapable of paying the higher amount. That puts an end to any finding of fact that Mr Galanos acted upon an assumption that the rent was not subject to increment. 35 It was submitted that the court should conclude that Galanos had waived the increments. I do not accept that submission, either. A forbearance to insist upon performance in accordance with the terms of the correspondence does not preclude an entitlement, at a later date, to make demand in accordance with the alleged contractual term. 36 Galanos made a demand for payment of rent incremented annually together with interest on late payments in an amount of $135,190.18 up to 3 March 2009. Azkanaad made the calculation without annual increment and tendered payment of $67,378.55. 37 Counsel for Azkanaad conceded that if this was not a case of conventional estoppel, Azkanaad's conduct was repudiatory and Galanos was entitled to terminate Azkanaad's possession of the site, subject only to relief against forfeiture. 38 A lease being a contract, when one party repudiates it the other has, on ordinary principles of contract law, the entitlement to accept repudiation and terminate for breach (Marshall at 14,457). 39 Thus, if I am wrong in my view and the correspondence did not constitute a concluded agreement, Azkanaad could not have established an entitlement to specific performance because of its repudiatory conduct. And in the absence of an entitlement to specific performance, no agreement for lease in equity arose. Relief from forfeiture 40 Counsel for Azkanaad sought, in the alternative, relief from forfeiture conditional upon its paying to Galanos the full amount of the rent claimed by it. 41 If I am correct in my view, there was no concluded contract and hence no lease in equity. If there was a concluded contract, the repudiatory conduct of Azkanaad denied it a right to specific performance and, again, no equitable lease arose. In either event there was no right in Azkanaad that was forfeited for non-payment of rent. The tenancy at will was terminated by one month's notice under the Conveyancing Act 1919, s 127(1). Nothing remained with respect to which a court of equity would grant relief from forfeiture. Conclusion 42 In my view Azkanaad has failed to establish any entitlement to the relief claimed in the summons. The summons is dismissed. Azkanaad must pay the costs of Galanos. ********** 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.