District Court New South Wales Medium Neutral Citation: Yangdo Pty Limited v Equiti Group Pty Ltd [2017] NSWDC 277 Hearing dates: 30 August 2017, 14 September 2017 Date of orders: 12 October 2017 Decision date: 12 October 2017 Jurisdiction: Civil Before: Dicker SC DCJ Decision: (1) Judgment for the defendant. (2) The Statement of Claim is dismissed. (3) The plaintiff is to pay the defendant's costs of the proceedings as agreed or assessed; (4) Leave is granted to the parties to apply to vary the order referred to in (3) above. (5) Exhibits to be returned after 28 days. Catchwords: Leases – whether defendant sub-lessee owed money to plaintiff sub-lessor for unpaid rent/outgoings – whether parties entered into new agreement for lease – applicable Masters v Cameron category – relevance of post-contractual conduct Legislation Cited: Real Property Act 1900 (NSW) Cases Cited: Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 Blackburn Developments (No 19) Pty Ltd v Downs (1974) 2 VPR 97,089 Brambles v Bathurst City Council (2001) 53 NSWLR 153 Commonwealth of Australia v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 Empirnall Holdings Pty Ltd v Machon Paull Partners (1988) 14 NSWLR 523 Feldman v G&M Australia Ltd [2017] NSWCA 107 Kassabian v Lagonicos [1993] NSW Conveyancing Reports 55-690 Kastro Pty Ltd v ABD Holdings Pty Ltd [2008] NSWSC 1291 Landsmiths v Hall [1999] NSWSC 735 Leitz Leeholm Stud Pty Ltd v Robinson [1977] 2 NSWLR 544 Masters v Cameron (1954) 91 CLR 353 New South Wales Land and Housing Corporation v Diab [2015] NSWCA 133 Wayne Edward John Streat v Fantastic Holdings Ltd [2011] NSWSC 1097 Category: Principal judgment Parties: Yangdo Pty Limited (Plaintiff) Equiti Group Pty Ltd (Defendant) Representation: Counsel: R Marshall SC and T Fishburn (Plaintiff) M Ashhurst SC and L D Corbett (Defendant) Solicitors: Hicksons (Plaintiff) Price & Company (Defendant) File Number(s): 2016/00129773 Judgment 1. These proceedings relate to the sublease by the defendant as sublessee from the plaintiff as sublessor of premises being part of an office block situated at 56 Station Street, Parramatta in Sydney in the State of New South Wales. 2. The background to the commercial arrangements between the parties is as follows: 1. On 4 September 2002, The Uniting Church (NSW) Trust Association as lessor entered into a lease with the plaintiff as lessee for a term of 125 years commencing on 4 September 2002 and terminating on 3 September 2127 of the property in Folio Identifier 100/777917 being the property at 56 Station Street, Parramatta ("the Premises"): see Exhibit A, page 53; 2. At some stage, The Uniting Church (NSW) Trust Association transferred its interest in the Premises to Yangdo Service Pty Ltd, a related company to the plaintiff: see Exhibit A, page 83; 3. At all relevant times the plaintiff engaged the services of Steven Krulis Real Estate Consultants ("Steven Krulis") to manage the plaintiff's interest in the Premises; 4. At some date in 2007, the plaintiff entered into a sublease for Suite 1001 of the Premises with the defendant ("1001 Sublease"): see Exhibit A, page 118. The term of the 1001 Sublease was one year, eight months and 12 days commencing on 1 August 2007 and terminating on 13 April 2009; 5. At some date in 2008, the plaintiff entered into a sublease for Suite 1002 of the Premises with the defendant ("1002 Sublease"): see Exhibit A, page 146. The term of the 1002 Sublease was two years and three months commencing on 1 February 2008 and terminating on 30 April 2010; 6. At some date in 2007, the plaintiff entered into a sublease for Suite 1003 of the Premises with the defendant ("1003 Sublease"): see page 87 of Exhibit A. The term of the 1003 Sublease was two years commencing on 14 May 2007 and terminating on 13 April 2009; 7. The defendant took occupation of Suites 1001, 1002 and 1003 at the Premises pursuant to the subleases. Prior to 15 April 2009, the parties were negotiating the terms of a new sublease relating to Suites 1001, 1002 and 1003 at the Premises. On 15 April 2009 Mr Peter O'Donnell, a director of Steven Krulis, sent a letter to Mr Danny Assabgy, an officer of the defendant, in relation to a proposed new sublease of Suites 1001, 1002 and 1003. This letter set out certain terms for a proposed new sublease of the three suites. The letter will be discussed further below. It appears that Mr Assabgy signed the letter on behalf of the defendant on 23 April 2009; 8. It is not in dispute that a new formal sublease for Suites 1001, 1002 and 1003 incorporating the terms in the 15 April 2009 letter was never executed by the parties; 9. The defendant held over in relation to the various subleases; 10. On 4 December 2012, Mr Assabgy sent an email to Mr O'Donnell headed "Units 1002 and 1003, 56 Station Street, Parramatta". This email will be discussed further below. Pursuant to the email, Mr Assabgy appeared to give one month's notice of the defendant's intention to terminate the subleases on Suites 1002 and 1003 but indicated a desire to continue on a month to month basis the sublease for Suite 1001; 11. On 11 December 2012, Mr J Dohle, the Commercial Property Manager for Steven Krulis, forwarded a letter to Mr Assabgy of the defendant giving notice of termination on behalf of the plaintiff of the defendant's holding over rights under the subleases for Suites 1001, 1002 and 1003 with the sublease for Suite 1002 terminating on and from 12 January 2013 and the subleases for Suites 1001 and 1003 terminating on and from 12 March 2013; 12. The defendant vacated the three suites as requested. 1. Issues have arisen between the parties as to whether the defendant owes outstanding rent/outgoings to the plaintiff and whether it also owes an amount for alleged make good costs in relation to the three suites it rented. 2. The plaintiff seeks the following amounts from the defendant in these proceedings: 1. An amount of $72,196.86 for alleged unpaid rent/outgoings; 2. An amount of $24,364 under the alleged make good obligation in the subleases; and 3. Interest on those amounts. Statement of Claim 1. The plaintiff's Statement of Claim was filed on 28 April 2016. In the Statement of Claim the plaintiff pleads material facts in relation to: 1. The head lease (paragraph 3); 2. The three subleases in relation to Suites 1001, 1002 and 1003 (paragraphs 4-5; 10-11 and 16-17); 3. The 11 December 2012 Notice of Termination relating to the subleases (paragraphs 6, 12 and 18); 4. An allegation that the defendant vacated the three suites but failed to remove fixtures (paragraphs 7, 13 and 19); 5. The rent and outgoings allegedly payable by the defendant under the subleases (paragraphs 8-9, 14-15 and 20-21); 6. The total of rent and outgoings said to be payable under the three subleases together with rent and outgoings actually paid (paragraphs 22-23); 7. Allegations in relation to the make good covenant and the alleged failure by the defendant to make good the suites with the result that it is alleged that the plaintiff suffered damage in the sum of $24,365 (paragraphs 24-25); and 8. A claim of the plaintiff for outstanding rent and outgoings in the sum of $122,563.87 (paragraph 26). Amended Defence 1. An Amended Defence was filed by the defendant on 23 March 2017. In the Amended Defence, the defendant: 1. Admits that it vacated the three suites in issue in or about March 2013 following the plaintiff's Notice of Termination; 2. Does not admit that it was obliged to remove the defendant's fixtures following termination of its subleases; 3. Says that after it vacated the Premises, the plaintiff demolished the entire floor on which the three suites were located as part of extensive building works being undertaken by the plaintiff on the building and the Premises, and the plaintiff therefore suffered no loss through any alleged failure to remove the defendant's fixtures; 4. Claims that the defendant agreed to enter into a new lease on the terms of the 15 April 2009 letter from Steven Krulis to Mr Assabgy ("the April 2009 agreement"), that this included a nine month rent free period and that the plaintiff invoiced and accepted payments by the defendant of rent during the period April 2009 to March 2013 in accordance with the April 2009 agreement; 5. Says that this constituted acts of part performance with the result that the April 2009 agreement was enforceable; 6. Denies that it failed to make good the premises and alternatively pleads the plaintiff suffered no loss because it "gutted" the relevant level in its entirety; 7. Denies the plaintiff's entitlement to the relief the plaintiff seeks; 8. Alleges that the plaintiff breached the covenant of quiet use and enjoyment of the subleases through extensive and intrusive building works which were carried out from late 2012 in areas near the parts subleased and that the defendant accepted the plaintiff's repudiatory breach and terminated the 1002 Sublease and the 1003 Sublease by its 4 December 2012 email; 9. Alleges that the plaintiff purported to terminate the three subleases but pleads that the purported termination by the plaintiff amounted to a repudiation of the April 2009 agreement and that the defendant accepted the plaintiff's repudiation and terminated that agreement by vacating the premises. The plaintiff's evidence 1. The plaintiff tendered in the proceedings the relevant head lease and subleases and some other documents. 2. The plaintiff also read three affidavits of Peter O'Donnell, who is a director of Steven Krulis, sworn 23 December 2016, 15 May 2017 and 7 September 2017. The plaintiff did not raise any issue during the hearing as to the authority of Steven Krulis at all relevant times to act on behalf of the plaintiff. Additional relevant documents 1. In paragraph 24 of the Statement of Claim filed 28 April 2016 the following is pleaded: "24. It was a term of the Sub-Leases that the Sub-Lessee shall make good any breakage, defect or damage to the 1001 Premises, 1002 Premises and 1003 Premises (the Premises). PARTICULARS Sublease AD560524, clause 6.4, Sublease AD789090, clause 25.1 and Sublease AD322704 clause 6.4." 2. Clauses 6.1 to 6.4 of the 1001 Sublease provide as follows: "6. Further covenants The Sublessee further covenants with the Sublessor that: 6.1 Permitted use The permitted use is specified in Item 4. The Sublessee must not use the Premises or permit any other person or persons to use the Premises in any other way. 6.2 Maintenance and repair The Sublessee shall during the whole of the term and otherwise so long as the Sublessee may remain in possession or occupation of the Premises when, where and so often as reasonably needed shall decorate, redecorate, maintain, renew, repair and keep the whole of the Premises in good and substantial repair, working order and condition having regard to their condition at the commencement of this sublease, reasonable wear and tear only excepted provided however that nothing herein contained shall impose any obligation upon the Sublessee to do any work of a structural nature except such as may be occasioned by the act, neglect or default of the Sublessee or by its use or occupancy of the Premises including without limitation as the result of the sex or number of its employees. 6.3 Yielding possession The Sublessee shall at the expiration or sooner determination of this sublease peaceably surrender and yield up unto the Sublessor the whole of the Premises and every part thereof in good and substantial repair order and condition in all respects and clean and free from rubbish, reasonable wear and tear only excepted and if the Sublessee has made any alterations to the Premises or any other part of the Building, the Sublessee shall at the Sublessor's option, return the Premises to their condition prior to such alterations and in any event the Sublessee shall yield up the Premises in a fit and proper state for immediate reletting to another Sublessee 6.4 Making good damage Without affecting the generality of the preceding subclauses 6.1 and 6.2 of this clause, the Sublessee shall at the Sublessee's expense make good any breakage, defect or damage to the Premises or to any adjoining premises or any facility or appurtenance thereof occasioned by want of care, misuse or abuse on the part of the Sublessee, by the Sublessee's contractors, servants, agents, subtenants, invitees or licensees or other persons claiming through or under the Sublessee or otherwise occasioned by any breach or defect by the Sublessee hereunder or under any rules or regulations of the Sublessor made pursuant hereto. …" 1. The 1002 Sublease provides as follows: "Agreed terms 1 Defined terms & interpretation 1.1 Defined terms In this sublease: … Make Good Works means all works involved in: (a) removing the Sublessee's Property from the Premises and repairing any damage done to the Premises by removing the Sublessee's Property; (b) removing all partitions and walls installed by the Sublessee in the Premises; (c) removing and reinstating floor and roof penetrations in or around the Premises; (d) removing any wiring and cabling installed by the Sublessee, back to the switchboard; (e) repositioning air conditioning ducting and lighting in the Premises to open plan configuration and balancing of air flows; (f) removing supplementary air conditioning units in the Premises and associated cabling and pipework; (g) demolishing and removing any special use areas in the Premises; (h) repositioning the sprinkler heads, heat and smoke detectors and EWIS speakers and reinstating firestopping to comply with all fire regulations which would apply to the Premises if they were open plan and providing the Sublessor with the appropriate statutory certification; (i) steam cleaning the carpets; (j) repainting the internal painted surfaces of the Premises with two coats of premium quality paint; (k) replacing damaged ceiling tiles and grids in or above the Premises; (l) removing all the Sublessee's signage from the Premises and anywhere else in the Building and repairing any damage done to the Premises or the Bunding by removing those signs; (m) reinstating any structural changes made by the Sublessee or its predecessor in title; (n) removing all rubbish and stored goods and leaving the Premises clean; and; (o) replacing all broken light tubes and globes in the Premises. … 25. Yielding up and make good 25.1 Make Good Works Unless the Sublessee has exercised an option to renew this sublease, on the earlier of the Terminating Date and the date this sublease ends, the Sublessee must: (a) vacate the Premises with all Make Good Works complete, unless the Sublessor gives a notice to the Sublessee that the Sublessor does not require some or all of the Make Good Works to be completed; (b) subject to the requirements of the Make Good Works, leave the Premises in a condition consistent with the Sublessee having complied with its obligations under clause 13; and (c) give the Sublessor all keys, access cards and other security devices for the Building and the Premises." 1. The 1003 Sublease provides relevantly as follows: "6. Further covenants The Sublessee further covenants with the Sublessor that: 6.1 Permitted use The permitted use is specified in Item 4. The Sublessee must not use the Premises or permit any other person or persons to use the Premises in any other way. 6.2 Maintenance and repair The Sublessee shall during the whole of the term and otherwise so long as the Sublessee may remain in possession or occupation of the Premises when, where and so often as reasonably needed shall decorate, redecorate, maintain, renew, repair and keep the whole of the Premises in good and substantial repair, working order and condition having regard to their condition at the commencement of this sublease, reasonable wear and tear only excepted provided however that nothing herein contained shall impose any obligation upon the Sublessee to do any work of a structural nature except such as may be occasioned by the act, neglect or default of the Sublessee or by its use or occupancy of the Premises including without limitation as the result of the sex or number of its employees. 6.3 Yielding possession The Sublessee shall at the expiration or sooner determination of this sublease peaceably surrender and yield up unto the Sublessor the whole of the Premises and every part thereof in good and substantial repair order and condition in all respects and clean and free from rubbish, reasonable wear and tear only excepted and if the Sublessee has made any alterations to the Premises or any other part of the Building, the Sublessee shall at the Sublessor's option, return the Premises to their condition prior to such alterations and in any event the Sublessee shall yield up the Premises in a fit and proper state for immediate reletting to another Sublessee. 6.4 Making good damage Without affecting the generality of the preceding subclauses 6.1 and 6.2 of this clause, the Sublessee shall at the Sublessee's expense make good any breakage, defect or damage to the Premises or to any adjoining premises or any facility or appurtenance thereof occasioned by want of care, misuse or abuse on the part of the Sublessee, by the Sublessee's contractors, servants, agents, subtenants, invitees or licensees or other persons claiming through or under the Sublessee or otherwise occasioned by any breach or defect by the Sublessee hereunder or under any rules or regulations of the Sublessor made pursuant hereto. …" 1. In relation to holding over, each sublease provided for holding over on a monthly tenancy requiring the following periods of notice of termination: 1. the 1001 Sublease: determinable by either party at any time by three months' written notice – Clause 11; 2. the 1002 Sublease: determinable by either party at any time by one month's notice – Clause 23; and 3. the 1003 Sublease: determinable by either part at any time by three months' written notice – Clause 11. 1. The 15 April 2009 letter, which is referred to above, relevantly provides as follows: "RE: YOUR TENANCIES - 56 STATION STREET, PARRAMATTA Further to our discussion we list below terms agreed for your new lease. PREMISES: Suites 1001, 1002 and 1003 AREA: 364.3 sqm LEASE TERM: Five (5) years LEASE COMMENCEMENT: 1st May 2009 RENTAL: $239.00 psm pa nett + GST equating to $87,067.19 pa + GST OUTGOINGS: Lessee pays 4.13% of all outgoings- $33,085.73 pa + GST RENT-FREE: Nine (9) months rent-free to be taken as eighteen (18) months on-half (1/2) rental. RENT REVIEW: 4% annually on anniversary of commencement of lease. SECURITY DEPOSIT: Equivalent to three (3) months gross rental + GST ($33,042.19) LESSOR'S WORKS: Lessor to balance air-conditioning LEGAL COST: Each party responsible for their own legal costs. Lessee responsible for stamp duty, registration and mortgagee's consent fees. Please sign a copy of this letter and return to ourselves to that we can forward instructions to prepare a lease, Yours faithfully, Steven Krulis Real Estate Peter O'Donnell Director Direct Ph: xxxxx Mobile: xxxxxx Email: xxxxx I/WE HEREBY AGREE TO THE ABOVE TERMS AND CONDITIONS [signature] DANNY ASSABGY EQUITI GROUP PTY LTD 23/4/09 DATE" 1. The 4 December 2012 email from Mr Assabgy on behalf of the defendant to Mr O'Donnell of Steven Krulis referred to above is in the following relevant terms: "I refer to our conversation this morning regarding our need to reduce our occupied space at 56 Station Street and hereby give one (1) months notice of our desire to terminate the lease on units 1002 and 1003. We would still like to continue, on a month-to-month basis, with our lease on unit 1001." 1. The 11 December 2012 letter from Mr Dohle to Mr Assabgy provides as follows: "As you are aware, we act on behalf of Yangdo Pty Limited, the Lessor of the above premises leased by you. We refer to your discussions with Peter O'Donnell of our office and your email of 4 December 2012. Based on these discussions and the email, it is clear to the Lessor you have no intention to execute the lease arrangements put to you around May 2009. Accordingly, we have been instructed to give you notice to terminate your monthly holding over rights of the leases as follows; 1. In respect of the lease of Suite 1001 - the lease shall terminate on and from 12 March 2013 2. In respect of the lease of Suite 1002 - the lease shall terminate on and from 12 January 2G13 3. In respect of the lease of Suite 1003 - the lease, shall terminate on and from 12 March 2013 In addition, as you have not accepted the new lease arrangements of May 2009, you should not have been entitled to receive the 9 month rent concession (from May 2009 to January 2010). In that regard, the Lessor demands the repayment of $65,300.76 + GST within 14 days' of this letter. You are also reminded to comply with all your obligations under the lease (in particular the make good obligations) until the leases come to an end." Issues to be determined 1. The issues to be determined by the court in the proceedings would appear to be as follows: 1. Whether the April 2009 signed letter amounted to a variation of the three existing subleases, particularly as to the rental to be paid; 2. If not, whether the April 2009 signed letter amounted to a binding agreement to enter into a new lease; 3. If the answer to (b) is no, whether subsequent conduct by the parties in charging altered rent, paying altered rent and its acceptance, amounted to an agreement by conduct to enter into a new lease on the terms of the signed April 2009 letter; 4. Whether the defendant owes the plaintiff the amount claimed for unpaid rent under the existing three subleases; 5. Whether the plaintiff has established its make good claim under the subleases. Factual findings 1. Having regard to the evidence and the submissions made by the parties, I make the following findings of fact: 1. Leases and subleases were entered into and negotiations occurred between the parties as set out in paragraph 2 above; 2. The various subleases had the provisions as set out in paragraphs 10–13 above; 3. A letter was sent by Steven Krulis on behalf of the plaintiff to the defendant as set out in paragraph 14 above; 4. Mr Assabgy, on behalf of the defendant, signed the 15 April 2009 letter on 23 April 2009; 5. There was correspondence on behalf of the parties as set out in paragraphs 15–16 above. 1. Certain facts were agreed between the parties as set out in an email which became Exhibit B in the proceedings. These agreed facts are as follows: 1. A rent free period was allowed to the defendant, which commenced on 1 May 2009 and expired on 30 January 2010; and 2. From 1 February 2010 until the defendant vacated the premises, the plaintiff charged, and the defendant paid, rent for the premises calculated in accordance with the rent stipulated in the 15 April 2009 letter. Submissions of the parties 1. Counsel for the parties provided both detailed written submissions and oral submissions. 2. The submissions made on behalf of the plaintiff in support of its claim were, in summary, as follows: 1. The plaintiff's case is that the parties were bound by the terms of the three subleases between the plaintiff and the defendant for the three suites until early 2013; 2. In relation to those two subleases the terms of which had expired as at 15 April 2009, the parties remained bound to those subleases until early 2013 in accordance with the holding over provisions in the subleases (unless notice of termination was properly given); 3. The three subleases were terminated in December 2012 with effect from various dates in January and March 2013; 4. The April 2009 letter signed by Mr Assabgy on behalf of the defendant was a "terms document" only. Under the April 2009 letter, the execution of formal lease documentation and registration of the executed lease was a condition precedent to any binding agreement for a new lease between the parties. Accordingly, no binding agreement to enter into a new lease was entered into by the parties. Between May 2009 and February 2010, the plaintiff did not charge rent to the defendant on the anticipation that a concluded lease would be entered into between the parties as to a new five year term; 5. The fact that execution of formal lease documentation and registration of the executed lease was a condition precedent to any new lease between the parties is clear both expressly and by necessary implication; 6. The express part was in the signed letter dated 15 April 2009 which provided inter alia: "Please sign a copy of this letter and return to ourselves so that we can forward instructions to prepare a lease" (emphasis added); 7. The fact there was a condition precedent is also implied from: 1. The five-year term of the lease. Section 53 of the Real Property Act 1900 (NSW) provides that leases for a term exceeding three years are to be executed in the approved form and registered; 2. The fact the defendant was already in occupation of the premises; 3. The generous nine-month rent free period which each of the parties would have different reasons for documenting; 1. The case therefore fell within the third category in Masters v Cameron (1954) 91 CLR 353 at 360, being a case in which the intention of the parties is not to make a concluded bargain at all unless and until they execute a formal contract. Even though the terms of the bargain have been agreed, there is no contract because the parties have postponed formation of the contract until execution of a formal contract. Where the parties contemplate the subsequent execution of a formal contract but did not express their agreement to be subject to or conditional upon the execution of a formal contract, it is a question whether the parties intend to be immediately bound; 2. To determine if there is a contract at all the court may have regard to post formation conduct. Subsequent conduct of parties may be considered when the question is whether prior dealings between the parties gave rise to a binding contract; 3. In determining the objective intention of the parties it is both appropriate and necessary to have regard to the commercial circumstances surrounding the exchange of communications and the subject matter of those communications; 4. In the context of a commercial lease for a term of more than three years, which requires formal registration, it is improbable that the parties intended to be bound before the terms of a formal lease were settled by solicitors: Kastro Pty Ltd v ABD Holdings Pty Ltd [2008] NSWSC 1291 at [26]; Landsmiths v Hall [1999] NSWSC 735 at [9]. Here the plaintiff was in the business of being a commercial landlord, both parties had solicitors involved in the lease transaction, the proposed new lease was for a term of more than three years and, accordingly, it is improbable that the parties intended to be bound before the terms of the formal lease were settled by solicitors. 5. In addition, there were multiple attempts made on behalf of the plaintiff to obtain the executed form of the lease from the defendant without success: see Exhibit C; 6. There was no waiver by the plaintiff of the requirement of the condition precedent; 7. The plaintiff is not estopped from denying that the April 2009 accepted letter constituted a binding agreement. The defendant's conduct amounted to unclean hands in equity; 8. There was no implied surrender of the original subleases through unequivocal conduct on the part of both parties inconsistent with the continuation of the original subleases. Possession may be an indication of implied surrender however in the present case there was continued occupation of the premises by the defendant; 9. Although payment was made in accordance with the terms of the draft lease this was merely anticipatory of the draft lease and not sufficiently unequivocal to the April 2009 terms. Further, the parties' conduct in December 2012 was unequivocally referable to the original subleases and not the suggested new lease; 10. Paragraphs 1 and 3 of the affidavit of Mr Assabgy sworn 3 March 2017, in which he expresses the belief that the defendant's occupation of the premises was in accordance with the subleases and there was holding over until March 2013, is consistent with the plaintiff's case and not with the defendant's case; 11. The April 2009 letter was not consistent on its face with a variation of the existing subleases with new terms. Further, there was no consideration for the variation of the subleases. 1. The defendant's submissions, in summary, were as follows: 1. The parties' conduct of putting forward and signing the April 2009 letter constituted a variation to the existing subleases, such that the rent payable under those subleases was the rent charged and paid during the relevant period; 2. Alternatively, a new agreement to lease, whereby the rent payable for the relevant period was the rent that was in fact charged and paid during the relevant period, was constituted by the April 2009 letter as accepted; 3. Further and alternatively, if the April 2009 letter did not constitute a binding agreement to lease, the subsequent charging, paying and acceptance of rent in accordance with the April 2009 letter constituted an agreement to lease on the terms set out in the April 2009 letter. The only other alternative was that the rent free period was granted by a mistake on the part of the plaintiff and there is no claim for that in the proceedings; 4. There is a difference between a binding agreement to grant a lease which is a contract and a lease which is the demise of an interest in land. Ordinary principles of contract law apply to agreements for lease. An agreement for lease and a lease are independent sources of rights which do not merge: Leitz Leeholm Stud Pty Ltd v Robinson [1977] 2 NSWLR 544 at 547; 5. In the ordinary case, for a new commercial lease for a term exceeding three years, where solicitors are involved, parties would not expect to be bound until there was an exchange of formal leases. However, each case depends on its facts and the parties are free to negotiate as they choose; 6. When the parties are already in the relationship of landlord and tenant, the evidence may demonstrate that they intended to agree without the intervention of solicitors, and that the formal lease would merely conform with the terms of their bargain: Kassabian v Lagonicos [1993] NSW Conveyancing Reports 55-690 at 59,943-4. In the present case, there were subsisting leases between the parties which were, in the main, shortly due to expire; the wording of the 15 April 2009 letter was formal and it was signed and returned by the defendant; the letter of 15 April 2009 set out agreed terms in relation to all important matters; the 15 April 2009 letter was not said to be without prejudice and the letter does not state expressly that the agreement was "subject to lease" or that it merely set out "commercial terms" as opposed to formal lease terms. Accordingly, the language used was indicative of solicitors only becoming involved after a binding agreement was reached to give effect to the formal lease as in Kassabian; 7. Post-contractual conduct can be relied upon to shed light on whether an agreement has been formed between the parties: Brambles v Bathurst City Council [2001] 53 NSWLR 153 at [25]. The conduct of the parties from 2009 to 2012 was consistent with the parties intending that the agreement reached in the April 2009 signed letter was to be legally binding: there was no correspondence that suggested that the letter was not binding; the accounts rendered by the plaintiff's agent referred to a new lease and the plaintiff charged rent and accepted rent in accordance with the April 2009 signed letter. The fact that the parties' positions changed as a result of the agreement in the April 2009 signed letter was a very strong indicator that a binding agreement had been reached: Wayne Edward John Streat v Fantastic Holdings Ltd [2011] NSWSC 1097 at [22]–[23]; 8. In the alternative, the rent obligation in the existing subleases was varied by conduct: New South Wales Land and Housing Corporation v Diab [2015] NSWCA 133 at [33]; Commonwealth of Australia v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567 at 579 – 580; 9. Accordingly, the plaintiff's claim should fail. Consideration 1. The fundamental issues to be determined are whether the three subleases between the plaintiff and the defendant continued in the form in which they were entered, whether they were varied as alleged by the defendant and whether a new agreement to lease was entered into on the terms of the April 2009 signed letter. 2. In Masters v Cameron (1954) 91 CLR 353, Dixon CJ, McTiernan and Kitto JJ stated as follows: "Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. It may be 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 those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract." 1. In each of the first two cases referred to by the High Court, there is a binding contract. The third class is fundamentally different. There, the terms of agreement are not intended to have and therefore do not have any binding effect of their own. 2. Later cases have identified a fourth category of Masters v Cameron. However, it is clear that the categories identified in Masters v Cameron "are neither strict nor prescriptive". They are also not "exclusive nor necessarily exhaustive. Rather, they describe circumstances in which a finally binding contract may or may not have come into existence": Feldman v G&M Australia Ltd [2017] NSWCA 107 at [68] per Beazley P. 3. A useful summary of the various principles applicable to Masters v Cameron situations was set out by Beazley P in Feldman at [60]-[71]. 4. Beazley P also quoted the important passage of McHugh JA in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 where his Honour stated at 634–635 the following: "… the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances." 1. That statement reflects the objective theory of contract which is the current law in Australia: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35]. 2. It is with these important principles in mind that I consider the submissions made by the parties. Variation 1. The defendant submits that the parties' conduct of signing the letter of offer of 15 April 2009 and charging, paying and accepting rent in accordance with that offer, constitutes a variation of the existing subleases, such that the rent payable under those subleases was the rent charged and paid during the relevant period. As indicated, the defendant relies on the decision of the Court of Appeal in the Diab case, above, and of the Full Federal Court in Crothall Hospital Services, above. 2. Senior counsel for the defendant said that this argument was a secondary argument to the defendant's main argument of an agreement to enter a new lease. 3. In my view, this variation argument should be rejected for the following reasons: 1. The 15 April 2009 letter, page 207 to the exhibit to Mr O'Donnell's affidavit sworn 23 December 2016, refers to "terms agreed for your new lease". (emphasis added) The final sentence of the letter refers to seeking the letter to be signed and returned so that Steven Krulis could forward instructions "to prepare a lease". These parts of the letter in my view are strongly inconsistent with an intended variation of the existing subleases as opposed to a new lease; 1. The existing sublease for Suite 1002 terminated on 30 April 2010 after the April 2009 letter was signed. Clause 27.1 of that sublease indicated that the sublease may be altered "only in writing signed by each party". Whilst, of course, such a clause cannot operate to prevent a subsequent variation, it is some evidence that a variation of the sublease was not intended by the parties; 2. All of the correspondence which is part of Exhibit D is consistent not with a variation of the existing subleases but with the entry into of a new lease; 3. There is also a question as to whether consideration was provided by the defendant for the alleged variations. The defendant was already bound to continue to rent the premises pursuant to the subleases and the proposed new lease in the present case was longer than the existing subleases. The case accordingly is different to paragraph 33 of Diab, above. In relation to an argument that although there is no consideration, the plaintiff would be bound by an estoppel, the defendant said it was not relying on estoppel but on usual contractual terms. 1. For these reasons, I do not accept that there were variations of the existing subleases. Condition precedent Express condition precedent 1. The plaintiff claims that the terms of the 15 April 2009 letter as accepted by the defendant contain an express condition precedent. That is an event which must occur before a contract is formed or an obligation to perform becomes enforceable. The part of the 15 April 2009 letter which the plaintiff relies upon is the final sentence of the letter which is to the following effect: "Please sign a copy of this letter and return to ourselves [so] that we can forward instructions to prepare a lease." 2. In my view, this does not state an express condition precedent. The letter does not include phrases such as "subject to a formal lease" or "subject to the preparation of a formal contract/lease" so as to create a presumption that the agreement is not immediately binding. The phrase used is equally consistent with the parties intending to be immediately bound by the accepted letter or within the first category in Masters v Cameron. The content of the 15 April 2009 letter is simply, in my view, not consistent with an express condition precedent that the agreement is not binding until a formal lease is executed. Implied condition precedent 1. The plaintiff, in the alternative, submits that there was an implied condition precedent in the 15 April 2009 letter, that there was no binding contract until a formal lease was executed by the parties. 2. As indicated above, the plaintiff submits that the condition precedent alleged was implied from: 1. The term of five years. Section 53 of the Real Property Act provides that a lease for a term exceeding three years is to be executed in the approved form and registered; 2. The fact the defendant was already in occupation of the premises; 3. The generous nine-month rent free period which each of the parties would have different reasons for documenting; 4. The last sentence of the 15 April 2009 letter to the extent that it does not constitute an express condition precedent. 1. The plaintiff submits that in the context of a commercial lease for more than three years it is improbable that the parties intended to be bound immediately before the terms of a formal lease were settled by their respective solicitors. In Kastro, above, Brereton J stated at [26] as follows: [26] In the context of a commercial lease for a term exceeding three years — which, therefore, has to be registered for practical purposes — it is improbable that parties intended to be bound before the terms of the formal lease were settled by solicitors and exchanged, especially if the parties had in mind the preparation of a formal document. In that respect, consensus on the commercial terms in which a lease is given is not equivalent to an intention that the consensus should, without more, be legally binding [Gobblers Inc Pty Ltd v Stevens (1993) NSW ConvR 55-665 (Cohen J); Kassabian & Rawstron Investments Pty Ltd v Lagonicos (1993) NSW ConvR 55-690 (McLelland CJ in Eq); Longpocket Investments Pty Ltd v Hoadley (1985) 3 BPR 9606 (NSWCA); Blackburn Developments No 19 Pty Ltd v Downs Surgical (Australia) Pty Ltd (1974) 2 BPR 9141 (Helsham J); Landsmiths Pty Ltd v Hall [1999] NSWSC 735 ; (1999) 9 BPR 17,057 (Young J); Long v Piper [2001] NSWCA 342; [2002] ANZ ConvR 43 ; (2002) NSW ConvR 56–000, [51]–[55]; Hali Retail Stores Pty Ltd v Hafaz [2007] NSWSC 412, [17] (Brereton J)]. 1. In Landsmiths, above, Young J stated at [9] as follows: [9] The cases show that the court is entitled to assume that where there is a contract for the sale of land or a lease for three years or more, the parties normally intend to have a formal document, in the case of a lease because it has to be registered. Again, the cases show that it is more likely than not that in such a situation the parties do not intend to be bound until the formal document has been exchanged. This is the case with leases: Blackburn Developments No 19 Pty Ltd v Downs Surgical (Australia) Pty Ltd (1974) 2 BPR 9141. I applied that case in Arjay Investments Pty Ltd v Morrison's Outdoor Catering Pty Ltd, 1 May 1995, unreported, and further said in that case that one also looks to see whether the parties have involved solicitors in the transaction, and that the mere fact that they have hit upon a price or have worked out the basic conditions of their agreement does not necessarily indicate that they have reached a legally binding agreement. 1. The plaintiffs put forward the following matters: 1. It was a commercial lease exceeding three years which had to be registered. It is improbable that the parties intended to be bound by an exchange of letters before the lease was prepared by their solicitors; 2. The plaintiff was a commercial landlord and the letter was from Steven Krulis not the plaintiff. The plaintiff, being a commercial landlord, was likely heavily reliant on its solicitors; 3. Subsequent conduct of the parties may be considered when the question is whether prior dealings between the parties gave rise to a binding contract and the multiple attempts made on behalf of the plaintiff to obtain the executed form of the lease from the defendant over a two-year period were unsuccessful; 4. The defendant's executive himself believed that the subleases remained in effect: see paragraph 3 of Mr Assabgy's affidavit which is set out in Exhibit C. In my view this last matter is not significant. Under the objective theory of contract the real issue is an examination of the parties' conduct objectively not the intention of one of the parties. 1. The defendant submits that the evidence is inconsistent with an implied condition precedent and is consistent with the parties intending to be immediately bound upon the signing of the 15 April 2009 letter. The matters relied upon by the defendant include: 1. The detail in the 15 April 2009 letter including the expression "terms agreed for your new lease". Also the fact that the letter has at the bottom of it "I/we hereby agree to the above terms and conditions" with a place for signature by Mr Assabgy on behalf of the defendant was significant; 2. The fact that there were existing subleases between the parties, two of which were to expire on 1 May 2009, which makes it more likely that the parties intended to be bound by the 15 April 2009 letter; 3. The conduct of the defendant through Mr Assabgy in signing and returning the letter; 4. The 15 April 2009 letter set out all of the important matters that needed to be agreed for the lease to be finalised; 5. The letter is not said to be without prejudice; 6. The letter does not suggest that it is "subject to lease"; 7. The parties were already in the relationship of landlord and tenant and they were accordingly familiar with each other; 8. The situation here is similar to that in the Kassabian case and Blackburn Developments (No 19) Pty Ltd v Downs (1974) 2 VPR 97,089; 9. Post-contractual conduct could be taken into account: Brambles v Bathurst City Council (2001) 53 NSWLR 153 at [25]. The conduct from the parties after April 2009 was consistent with the parties intending that the agreement they reached on 23 April 2009 was to be legally binding. Although the letter dated 4 June 2009 from the solicitors for the plaintiff to the defendant referred to the fact that no binding agreement would be entered into until documents were executed by all parties and the mortgagee's consent to the lease obtained (Exhibit D page 3), there is no evidence that the author of the letter was aware of, or had considered in detail, the 15 April 2009 letter. The remaining correspondence in Exhibit D does not have such a qualification; 10. The invoice forwarded by Steven Krulis to the defendant referred to "new lease start 01.05.09": Exhibit to Mr O'Donnell's first affidavit page 56; 11. The plaintiff charged rent in accordance with the alleged agreement, such new rates were paid by the defendant and were accepted by the plaintiff: Agreed Facts, Exhibit B; 12. The rental ledger referred to 9 months rent free consistent with the agreement: page 21 of Exhibit POD3 being the exhibit to the affidavit of Mr O'Donnell sworn 7 September 2017. 1. I was initially attracted to the argument, having regard to the authorities relied upon by the plaintiff, that there was an implied condition precedent due to the fact the plaintiff was a professional landlord, the fact that solicitors were not involved in relation to the April 2009 letter, the length of the new lease and the formal requirement for registration of a 5 year lease. 2. However, in my opinion the factors relied upon by the defendant in the end establish that the parties objectively intended there to be a binding agreement to lease as recorded in the signed 15 April 2009 letter with the subsequent formal lease merely formally recording that agreement. Whilst the matters relied upon by the defendant all tend to support that conclusion, in my view the subsequent post-contractual conduct is significant in determining whether a binding agreement was formed. The agreed facts and the other evidence establish that the plaintiff charged rent in accordance with the April 2009 signed letter, the defendant paid rent in accordance with that letter and the plaintiff accepted that rent. These, in my opinion, are powerful indications that the parties intended to be immediately bound. I prefer the defendant's submissions in relation to this issue. 3. The plaintiff points to the fact that the lease for Suite 1002 expired on 30 April 2010 and accordingly a surrender of the lease would be necessary. It is said that an implied surrender of the leases requires unequivocal conduct by both parties which is inconsistent with the continuance of the tenancy and referable to an intention to end the lease. Possession is not relevant here because the defendant was always in possession. In my view, the conduct of the parties relied upon by the defendant in charging the new rent, that rent being paid and the new rent being accepted by the plaintiff, together with the entries in the invoice and the ledger, are sufficient to amount to unequivocal conduct surrendering the leases, to the extent that is necessary. In my opinion the conduct relied upon by the defendant was more than merely being "anticipatory of the draft lease" as suggested by counsel for the plaintiff in paragraph 52 of their written submissions. 4. Accordingly, I find that there was an agreement to lease in the form of the signed 15 April 2009 letter. That signed letter was binding on the parties and the plaintiff's claim for the allegedly outstanding rent and other moneys should be rejected. Subsequent agreement 1. The alternative argument advanced by the defendant is that even if the court finds that the signed 15 April 2009 letter did not at the time it was signed amount to a binding agreement to enter into a lease on the terms set out in the letter, the subsequent conduct of the parties was only consistent after that time with the entry into of an agreement on the terms set out in the 15 April 2009 letter. 2. The defendant relied upon paragraphs 8(c) and (d), 14(c) and (d) and 20(c) and (d) of the Amended Defence filed on 23 March 2017. 3. The argument, as I understand it, is that the conduct of the parties in invoicing the altered rent, paying the altered rent and accepting the altered rent amounted to conduct which was only consistent with a contract on the terms set out in the 15 April 2009 letter as signed even if that letter was not binding at the time it was signed. 4. The defendant submitted that in relation to this point, the plaintiff's argument of unclean hands was irrelevant because part performance was not relied upon but simply a new offer and acceptance for a new agreement to lease which was determined in accordance with normal contractual principles. 5. It is clear that a contract can be entered into by conduct: Empirnall Holdings Pty Ltd v Machon Paull Partners (1988) 14 NSWLR 523 at 531 and 534 – 535; Diab, above, at [33]. 6. In my view, if I am in error in relation to the previous point, the defendant's submissions on this point should be accepted. The conduct of the parties which I have referred to above after 23 April 2009, establishes the parties entering into an agreement for lease on the terms set out in the 15 April 2009 letter even if that letter itself did not constitute a binding agreement. This is an alternative basis in supporting the defendant's submissions in these proceedings. Claim for make good works 1. The plaintiff made a claim for costs allegedly incurred by it pursuant to make good works under the subleases in the sum of $24,365. 2. The evidence in support of this claim includes the following: 1. Invoice number 120598 from Steven Krulis to the defendant in the sum of $24,365: Exhibit A, page 353; 2. Paragraphs 21-22 of the affidavit of Peter O'Donnell sworn 23 December 2016; and 3. Paragraph 25 of the affidavit of Peter O'Donnell sworn 15 May 2017. 1. At the final hearing this claim was not pursued by the plaintiff. Unpaid rent - quantum 1. If I am in error in relation to the conclusions I have reached on the plaintiff's rent claim, then the issue of the amount to which the plaintiff is entitled will arise. 2. The make good amount of $24,365 is no longer pressed by the plaintiff. 3. Accordingly, the amount which would be owed by the defendant to the plaintiff would be that set out in the affidavit of Peter O'Donnell sworn 7 September 2017 less the amount for the make good claim. This is $96,561.86-$24,365=$72,196.86. An appropriate claim for interest will also need to be considered. Determination 1. I thank counsel for the parties for their detailed and helpful submissions. 2. The claim of the plaintiff for outstanding rent is rejected. 3. Having regard to the above, I make the following orders: 1. Judgment for the defendant. 2. The Statement of Claim is dismissed. 3. The plaintiff is to pay the defendant's costs of the proceedings as agreed or assessed; 4. Leave is granted to the parties to apply to vary the order referred to in (3) above. 5. Exhibits to be returned after 28 days. ********** 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. Decision last updated: 13 October 2017