New South Wales Supreme Court CITATION : Leap Legal Software Pty Limited and Anor v ADC Buildings Pty Limited [2009] NSWSC 1434 HEARING DATE(S) : 11 December 2009 JUDGMENT DATE : 18 December 2009 JUDGMENT OF : Schmidt J CATCHWORDS : APPEAL - landlord and tenant - surrender of sublease - increase in operating expenses - notified after surrender - whether right to payment of those expenses had accrued before surrender of lease - sublease - construction - appeal dismissed CATEGORY : Principal judgment CASES CITED : Torminster Properties v Green (1983) 1 WLR 676 Westralia Farmers Ltd v Commonwealth Agricultural Service Engineer Ltd (1936) 54 CLR 361 First Plaintiff - Leap Legal Software Pty Limited PARTIES : Second Plaintiff - Leap Disbursement Management Pty Limited Defendant - ADC Buildings Pty Limited FILE NUMBER(S) : SC 13549/2009 COUNSEL : Plaintiffs - Mr GW McGrath, counsel Defendant - Mr B Adam, counsel SOLICITORS : Plaintiffs - Teece Hodgson & Ward Defendant - Graham Nicholls LOWER COURT JURISDICTION : Local Court LOWER COURT FILE NUMBER(S) : 5918 of 2008; 5919 of 2008 LOWER COURT JUDICIAL OFFICER : Magistrate Bradd LOWER COURT DATE OF DECISION : 18 June 2009 LOWER COURT MEDIUM NEUTRAL CITATION : A.D.C Buildings Pty Limited v Leap Legal Software Pty Limited - 10 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION SCHMIDT J Friday, 18 December 2009 13549/2009 LEAP LEGAL SOFTWARE PTY LIMITED AND ANOR v ADC BUILDINGS PTY LIMITED JUDGMENT 1 Her Honour: The plaintiffs appeal a judgment of Magistrate Bradd, given on 18 June 2009. His Honour gave verdict for the plaintiffs in two matters in which he concluded that the surrender of a sublease did not release the defendants from an obligation to pay an increase in operating expenses, relating to a period before the subleases were surrendered. 2 The facts were not in issue. The defendant owned leasehold in a multi-story commercial building in Kent St, Sydney. The plaintiffs leased office space in the building. The first sublease was surrendered in September 2004, by agreement. The defendant gave a credit for certain outgoings paid in advance. The second sublease then commenced. The defendant sold its leasehold in October 2007 and the second sublease was surrendered in December 2007, by agreement before completion of the sale. In May 2008, the defendant claimed further outgoings in respect of the 2004 and 2005 financial years. 3 It was common ground that the plaintiffs had paid all outgoings notified, during the currency of the subleases. The defendant annually notified the plaintiffs of its total estimate of increases in outgoings, above the base year. Outgoings included rent, cleaning and GST. The plaintiffs then made monthly payments in respect of that estimate. Once actual outgoings were determined, the lease provided for an adjustment mechanism. No advice in relation to increased outgoings was given during the currency of the subleases. 4 The issue between the parties turned on the relevant provisions of the subleases. 5 The plaintiffs' case was that the surrender of the subleases had relieved them from all liability in respect of continuing or future obligations under the subleases. The claimed outgoings were not due and payable at the time of surrender and so could not be recovered from the plaintiffs, there having been no agreement at the time of the surrender of either sublease, that it did not extinguish any entitlement of operation of the relevant clause of the sublease. 6 The defendant's case was that his Honour had correctly applied the applicable principles in construing the subleases; that no error of law was shown and that the appeal should be dismissed. The question turned on whether the operating expenses had accrued before the termination of the subleases. There was no provision limiting the time at which a notice as to increases in outgoings could be given under the subleases. The surrender of the subleases had no impact on the obligation to pay increases in outgoings advised subsequently, the defendant having done all that it was obliged to do under the subleases. Its rights were accrued and required no agreement that they were not extinguished by surrender of the subleases. The provisions of the subleases in question 7 The subleases were in relevantly similar terms. They provided a scheme for payment of operating expenses above a specified base, in addition to annual rent. The clause relevantly provided: 7. INCREASE IN OPERATING EXPENSES (a) The Lessee shall pay to the Lessor in addition to the annual rental hereinbefore provided in respect of each outgoings year the Lessee's proportion set out in Item 4 of the Reference Schedule of any increase in operating expenses of the property above the base year set out in Item 3 of the Reference Schedule. (b) The Lessor may in respect of each outgoings year notify the Lessee in writing of its estimate of such increase in operating expenses of that outgoings year. (c) On the first day of each calendar month during each outgoings year the Lessee shall pay to the Lessor one twelfth of the Lessee's proportion of the Lessor's estimate of such increase in operating expenses. (d) Within fourteen (14) days of the Lessor delivering to the Lessee a statement setting out: (i) the amount of all the outgoings of the property in respect of an outgoings year (ii) the amount payable by the Lessee pursuant to sub-paragraph (a) in respect of that outgoings year (iii) the total amount received by the Lessor from the Lessee pursuant to sub-paragraph (c) in respect of that outgoings year (iv) the unpaid balance (if any) payable by the Lessee pursuant to sub-paragraph (a) in respect of that outgoings year, the Lessee shall pay to the Lessor the amount of that unpaid balance. (e) If there is no unpaid balance payable and the Lessee has paid to the Lessor an amount in excess of its proportion of the said increase of outgoings the Lessor shall, unless requested to repay same to the Lessee, credit the Lessee with the amount thereof on account of amounts to become payable pursuant to sub-paragraph (a) in respect of future outgoings years. ... (f) The words "operating expenses of the property" shall mean the total of the costs charges and outgoings paid or payable by or on behalf of the Lessor in and about the conduct and management of the building and without limiting the generality of the foregoing shall includes: - ... (xiv) in the event of this Lease being a sub-lese the rental for the time being payable under and pursuant to the head lease. ... (i) The Lessor may from time to time during any outgoings year notify the Lessee of a variation in the amount of its estimate made pursuant to paragraph (b) of this Clause whereupon the amount of the said monthly instalments shall be varied accordingly and the amount of the instalments as so varied shall be paid by the Lessee to the Lessor for the remainder of the said outgoings year. 8 It was common ground that operating expenses included increases in rent under the head lease, in accordance with cl 7(f)(xiv). Clause 7(h) provided for the defendant's auditor to issue a certificate, which was final and conclusive as to the amount of the outgoings for the period specified. There was no issue as to the provision of such a certificate in either case. 9 The question lying between the parties was whether the defendant was entitled to deliver a statement under clause 7(d), after surrender of the subleases. His Honour concluded that the surrender of the subleases did not preclude the giving of such a statement. Was error shown? 10 The plaintiffs accept that if the outgoings had accrued or become payable at the date of surrender, they were recoverable - Torminster Properties v Green (1983) 1 WLR 676 at 682: 2. Rent which has accrued or become due at the date of surrender is recoverable: Walker's Case (1587) 3 Co.Rep. 22a and Attorney-General v. Cox (1850) 3 H.L.Cas. 240, 275. 3. A surrender of a lease operates only to release the tenant from liability on covenants taking effect after the date of the surrender, leaving him liable for past breaches, e.g., of repairing covenants: Dalton v. Pickard [1926] 2 K.B. 545 n.; Richmond v. Savill [1926] 2 K.B. 530, in which the court followed Dalton v. Pickard; Walker's Case and Attorney-General v. Cox . 11 The plaintiffs argued that while the rent under the head lease formed part of the outgoings dealt with in clause 7 of the sublease, under clause 7(f)(xiv), it was only rent notified to the plaintiffs during the currency of the sublease, to which they were obliged to contribute. They had paid all that had been notified during the currency of the subleases, having in mind the estimate they were given in accordance with clause 7(b). Upon surrender, all rights and obligations under the subleases were extinguished. The defendant had no entitlement to recalculate the outgoings after surrender or to give notices under clause 7(d) in relation to increased rent under the head lease. 12 If the defendant had not wanted to take the risk that the estimate it had given before surrender was incorrect, it could have refused to agree to the surrender, or could have agreed only on the proviso that the plaintiffs had to make good any shortfall between the estimate and actual outgoings. Having taken neither of those courses, it was not entitled to give a notice under clause 7(d) after surrender. Reliance was also placed on the terms of a schedule to the second sublease which contained a provision that: 13. (a) In consideration of the Lessor and the Lessee entering into this Lease, the Lessor and the Lessee shall execute Surrenders of Lease in respect of the premises currently leased to the Lessee being Suite 7, Level 10, 189 Kent Street, Sydney and the premises leased to Leap Disbursement Management Pty Limited ACN 092 724 251 being Suite 2, Level 9, 189 Kent Street, Sydney provided that the respective lessees of those suites have paid all Base Rent, cleaning, estimated increases in outgoings and Goods & Services Tax payable under those leases up to and including the date of Surrender, are not otherwise in default under those leases and have paid all moneys due and payable under this Lease, including disbursements previously forwarded to the Lessee. 13 The controversy between the parties seems an understandable one, given the circumstances. On the one hand the plaintiffs resist paying increases in outgoings only notified after surrender of the subleases. On the other, the defendant insists that it is entitled to payment of the increased rent, delayed only as a result of of its resistance to an increase in the head lease rent. The question must be resolved by application of well settled principles, there being no real dispute as to either the facts or the law. 14 The difficulty, it seems to me with the plaintiffs' argument is the starting point from which it flowed. The question of when the outgoings accrued, depends on the terms of the two subleases and the nature of the agreement which they each reflect. 15 The sublease required that the defendant permit the plaintiffs to occupy the premises and that in return, the plaintiffs pay rent and a share of operating expenses. The subleases contemplated that increases in operating expenses might not be known and so provided a mechanism for payment of any increase above the stipulated base level, on an annual basis by way of estimate - (cl 7(a) to (c)). There was also an adjustment process which could be undertaken during the course of a year, whereby that estimate could be revised - (cl 7(i)). There was also another mechanism provided whereby, when the actual operating expenses became known, they could be notified to the plaintiffs, who would then be obliged to pay the difference between the estimated and actual expenses (cl 7(d)). Subclause 7(d) did not contemplate that advice of actual operating expenses had to be given by the defendant at any particular time. Clearly it contemplated that notice would only be given after actual expenses had crystallised. 16 That the actual amount of the operating expenses which the plaintiffs were obliged to pay under the subleases was not ascertainable until some time after the period of occupation in respect of which rent and operating expenses were payable, does not alter the fact that the plaintiffs agreed to pay the defendant both rent and operating expenses for the period of their occupation under the subleases. In those circumstances, that the effect of the contractual terms was that the obligation to pay actual outgoings accrued when the premises were occupied, even though then not known, does not seem to me to be open to argument. 17 His Honour came to a similar view below, concluding at [20] that in these circumstances, the obligations to pay operating expenses were not extinguished by the surrender of the subleases. He followed the approach of Stephenson LJ in Torminster. There in issue was the question of whether there was an accrued obligation to pay rent determined under a rent review, which was only concluded after the surrender of the lease in question. Like the situation in this case, there was no reference made to liability to pay any increased rent in the terms of surrender. It was concluded that all of the tenant's liabilities had been extinguished by the surrender 'except those which have already accrued or have been expressly reserved' (at 682). At 684 it was observed that: "It may be said that the tenant who pays rent in arrear will have already received when he pays it a substantial part of the benefit of the occupation for which he has agreed to pay it, yet his liability does not survive a G surrender. But in my judgment the liability to pay rent determined in accordance with a rent review clause is a liability which is not destroyed or discharged by a surrender after the period for which it will ultimately be paid has started to run. There is, when that period has started, a right to sue, not for the as yet undetermined rent but for a declaration that the tenant is liable to pay it when determined, as Cheapside Land Development Co. Ltd. v. Messels Service Co. [1978] A.C. 904 shows. There is not an H , antecedent breach of an obligation—indeed there could not be until the quarter day immediately following January 25, 1980; but there is an antecedent obligation accruing before surrender puts an end to the lease. The lessee has no right to occupy the premises after the review date rent free; he owes a contractual duty to pay at least the initial rent as long as he holds the lease, however long the determination of the new rent may be delayed." 18 It was the plaintiffs' case that the facts of this case were distinguishable from those in Torminster, because here the defendant had not given any notice of the increase in outgoings before the surrender and the plaintiffs had not breached any obligation to pay rent or outgoings of which they were given notice during the term of the subleases. Reliance was placed on the passage above quoted to support that argument, but neither it, nor the distinguishing facts, it seems to me, can assist the plaintiffs, given the terms of the subleases here in question. 19 Under those subleases, there was an antecedent contractual obligation to pay the actual operating expenses, which accrued before the surrender of the subleases. The subleases obliged the plaintiffs to pay the difference between estimated and actual expenses, once the notice contemplated by clause 7(d) was given. 20 The definition of operating expenses in clause 7(f)(xiv) may not be understood as limiting the defendant's right to give a notice as to actual operating expenses under clause 7(d). Clause 7(f)(xiv) defined the term 'operating expenses of the property' to include 'the rent for the time being payable under and pursuant to the head lease'. There was no question that the rent payable under the head lease for the period of the plaintiffs' occupation was that which the defendant notified to the plaintiffs, after the surrender of the subleases. That advice reflected 'the rent for the time being payable under and pursuant to the head lease'. 21 The timing of the notice given was the result of the defendant's challenge to the amount of the rent payable under the head lease. The result of that unsuccessful challenge was that the rent payable under the head lease, during the plaintiffs' occupation of the premises, was not known until after the surrender of the subleases. 22 It is apparent from clause 7(d) that it was intended that the plaintiffs could give notice of the actual operating expenses, once they became known. When so advised, the plaintiffs were obliged to pay the difference between the estimated expenses they had already paid and what the actual operating expenses for the period of their occupation had proved to be. 23 While the submission that to the extent that Torminster applies 'it is applicable only to situations where the obligation to pay rent under a review clause has accrued prior to surrender' may be accepted, on the proper construction of these subleases, it must be concluded that the obligation to pay increased operating expenses did accrue prior to surrender, even though the amount of the actual outgoings was not then known and did not become known, until after surrender. 24 In this respect, the defendant's reliance on what was observed in Westralia Farmers Ltd v Commonwealth Agricultural Service Engineer Ltd (1936) 54 CLR 361 at 380 was not misplaced, as the plaintiffs sought to argue. There it was observed by Dixon J: "But if all the facts have occurred which entitle one party to such a right as a debt, a distinct chose in action which for many purposes is conceived as possessing proprietary characteristics, the fact that the right to payment is future or is contingent upon some event, not involving further performance of the contract, does not prevent it maturing into an immediately enforceable obligation." 25 Here, the critical facts were the occupation of the premises under the subleases and the obligation to pay what the subleases specified, in return for that occupation. The giving of the statement provided for by clause 7(d) was merely the mechanism whereby the crystallisation of the events which permitted what had been agreed would be paid for the occupation of the premises, to be advised to the plaintiffs. This was what allowed the difference between estimated and actual operating expenses to be calculated, so that what remained outstanding for the occupation of the premises could be paid. The provision of the 7(d) statement was not an event which involved further performance of the contract. The relevant performance was the occupation of the premises in return for the obligation to pay the actual operating expenses, once they became known and were notified. Orders 26 For the reasons given, I order that the appeal be dismissed. The usual order as to costs is that they should follow the event. If there is any disagreement in that respect the parties should approach. Otherwise, they should file orders in agreed terms. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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