Supreme Court New South Wales Medium Neutral Citation: David v Ryan & Ors [2018] NSWSC 971 Hearing dates: 26 June 2018 Date of orders: 28 June 2018 Decision date: 28 June 2018 Jurisdiction: Equity Before: Slattery J Decision: Declarations made that option is only exercisable after completion of the 2017 Dissolution Deed. Defendants ordered to pay the plaintiff's costs on the ordinary basis. Catchwords: CONTRACT – construction of the Deed of Dissolution of Partnership (the 2017 Dissolution Deed) – grazing partnership conducted on four properties – parties agree to dissolve the partnership and distribute partnership assets – parties own land on which partnership is conducted – some land is a partnership asset but other land is not – 2017 Dissolution Deed provides as part of the unwinding of the partnership for the registered proprietor of the non-partnership land (the plaintiff) to lease that non-partnership land to the other partners (the defendants) – 2017 Dissolution Deed also provides for the other partners to be granted an option to purchase the non-partnership land – whether the 2017 Dissolution Deed confers on the other partners an immediate right to exercise the option or whether certain conditions precedent must be fulfilled at the settlement of the Dissolution Deed before the option may be exercised by the other partners. Legislation Cited: Partnership Act 1892, s 33 Uniform Civil Procedure Rules 2005, rr 7.10(2)(a), 7.10(3) Cases Cited: Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 Walsh v Lonsdale (1882) 21 Ch D 9 Category: Principal judgment Parties: Plaintiff: Bernard David First Defendant: Anthony James Ryan Second Defendant: Sandra Tracey Ryan Third Defendant: Estate of the late James Edward Ryan Representation: Counsel: Plaintiff: M Ashhurst SC; D L Warren Defendants/Cross-Claimants: S Chapple, L Nurpuri Solicitors: Plaintiff: Cheryl Christiansen, Beyond Property Legal Solutions Defendants: Andrew Montrose Graham, Peacockes Solicitors File Number(s): 2017/297995 Publication restriction: No Judgment 1. The township and district of Tilpa are situated north west of Cobar and north east of Wilcannia in the far western region of New South Wales. In 1994 Mr Bernard David and members of the Ryan family commenced a farming and grazing partnership, "the Mount Kew Pastoral Co" partnership, in Tilpa. They incorporated their partnership agreement, giving Mr David a one half share and the Ryan family the other half, into a deed ("the 1994 Partnership Deed"). 2. Their partnership was conducted on four Tilpa properties; either owned in freehold title or held under Western Lands Leases by Mr David and the Ryan family. These four properties are known as "Rosedale", "Mount Kew", "Box Valley", and "Nangara". Mr David owned and held all the land comprising Nangara. The other three properties were held jointly between the Ryan family and Mr David. 3. By 2016 the parties had fallen into dispute about the terms on which they would end their partnership. They ultimately agreed by a Deed of Dissolution of Partnership ("the 2017 Dissolution Deed"), executed on 10 February 2017, that the Mount Kew Pastoral Co was dissolved on 31 August 2016. The 2017 Dissolution Deed superseded and took priority over the 1994 Partnership Deed in the governance of their mutual relations. 4. Now further disputes have broken out between Mr David and members of the Ryan family about the construction of an option for purchase conferred under the 2017 Dissolution Deed, clause 5 ("the Clause 5 Option"). This judgment resolves that dispute, in favour of Mr David and against the surviving members of the Ryan family. 5. The point at issue is whether members of the Ryan family could immediately exercise this Clause 5 Option upon the execution of the 2017 Dissolution Deed, or whether they could only exercise it after an executed form of Option Deed, provided for in Annexure D of the 2017 Dissolution Deed, had been physically delivered to Mr David upon the completion of the 2017 Dissolution Deed. In substance, the issue was whether the Clause 5 Option was immediately available for exercise or whether the right was deferred until after completion of the 2017 Dissolution Deed. 6. The disputes in these proceedings originally related to a wider range of issues than this. But the other issues have now been resolved. Mr David brings these proceedings as plaintiff. The Ryan family members are the defendants, who propound a cross-claim back against Mr David. 7. Mr M Ashhurst SC and Mr D L Warren of counsel, instructed by Beyond Property Legal Solutions, appear for the plaintiff, Mr David. Mr S Chapple and Ms L Nurpuri of counsel, instructed by Peacockes Solicitors, appear for the members of the Ryan family, the defendants and cross-claimants. The Court has been greatly assisted by the submissions of counsel, which have enabled the Court to give judgment two days after the hearing. The Dissolution of the Mount Kew Pastoral Co Partnership Parties to the 1994 Partnership Deed and to These Proceedings 1. The parties to the Mount Kew Pastoral Co have changed over time. The original parties to the 1994 Partnership Deed were: Mr Bernard David as to one half share and the other half share was divided equally among the Ryan family. Mr James Edward ("James") Ryan, Mrs Rona Ryan, Mr Anthony James ("Tony") Ryan and Mrs Sandra Tracey ("Sandra") Ryan each had a one eighth share in the partnership. Mr James Ryan and Mrs Rona Ryan are now deceased. 2. The partnership operated for a period of 22 years between 1994 and 2016. Mrs Rona Ryan died on 21 October 2012. Between then and the dissolution of the Mount Kew Pastoral Co, the parties were in dispute about whether Mrs Rona Ryan's death dissolved the partnership under Partnership Act 1892, s 33 or whether it continued to operate under the terms of the 1994 Partnership Deed. 3. Mr James Ryan became the executor of Mrs Rona Ryan's estate and inherited her share of the partnership. Since her death it has been claimed by the Ryans that Mr James Ryan held a one quarter share, Mr Tony Ryan a one eighth share, and Mrs Sandra Ryan a one eighth share in the Ryan family's other half of the partnership. The 1994 Partnership Deed, clause 1 permitted a partner to give a notice of dissolution of partnership. Mr David gave that notice on 25 February 2016. In response, Mr Tony Ryan and Mrs Sandra Ryan gave a notice under the 1994 Partnership Deed, clause 10 communicating that they wished to exercise their right to purchase Mr David's share in the partnership. But Mr David disputed their notice. This became the origin of one of the early issues dividing the parties in the partnership dissolution. 4. Mr James Ryan, the third defendant, died after these proceedings were commenced. At the commencement of the hearing the parties dealt with the procedural consequences of his death. Probate of his will (Exhibit A) has not been granted. Mr James Ryan's will appoints Mr Tony Ryan and Mrs Sandra Ryan, the first and second defendants, as executor and executrix respectively of his estate. Mr Tony Ryan and Mrs Sandra Ryan do not intend to apply for probate. The parties sought by agreement that the Court make orders under Uniform Civil Procedure Rules 2005 ("UCPR"), r 7.10(2)(a) that these proceedings continue against Mr James Ryan's estate in the absence of a representative of the estate. The Court made the orders. As a result, the declarations and orders made in these reasons bind James Ryan's estate: UCPR, r 7.10(3). 5. These reasons from time to time refer to the parties to the proceedings who are members of the Ryan family as "the Ryans". The expression when used about a time before Mr James Ryan's death refers to all three defendants. But for all times after his death, the expression only refers to Mr Tony and Mrs Sandra Ryan. The Terms of the 2017 Dissolution Deed 1. The fact that the four properties, Rosedale, Mount Kew, Box Valley, and Nangara are held in different ownership drove much of the structure of the parties' negotiations for the dissolution of Mount Kew Pastoral Co and in turn, the structure of the 2017 Dissolution Deed itself. As earlier indicated Mr David is the sole registered proprietor of the freehold titles and is the lessee under the Western Land Leases of all the lands comprising the property known as Nangara. 2. But during the partnership the Ryan family members were the registered proprietors of the freehold titles and lessees under the Western Land Leases of a one half interest in each of the other properties, Rosedale, Mount Kew and Box Valley, with Mr David. These three properties, at the time of dissolution of the partnership, were owned as to one half by Mr Bernard David and as to the other half by the surviving Ryan family members (after the death of Mrs Rona Ryan), namely by Mr James Ryan (it is claimed) as to one quarter share, and each of Mr Tony Ryan and Mrs Sandra Ryan as to one eighth share. 3. The partners at the time of the dissolution of the Mount Kew Pastoral Co were parties to the 2017 Dissolution Deed: Mr David, and Mr James, Mr Tony and Mrs Sandra Ryan. Summary of Disputes Resolved by the Dissolution Deed 1. The 2017 Dissolution Deed broadly provided: that the partnership was dissolved on 31 August 2016; partnership accounts would be prepared up to 31 August 2016, on the assumption that Mt Kew, Box Valley, Rosedale, and various other assets were partnership assets; Mr David would receive the proceeds of sale of Mount Kew and Box Valley, subject to a payment of $30,557.50 to Mr Tony and Mrs Sandra Ryan; and Mr David's interest in Rosedale be transferred to Mr Tony and Mrs Sandra Ryan as joint tenants. 2. On completion of the Deed (defined as a date 14 days after service upon Mr Tony and Mrs Sandra Ryan of the Minister's Consent to the transfer of Rosedale to them) Mr David was to receive his interest in the partnership calculated from the partnership accounts, less $2.75 million (being the agreed value of Mt Kew and Box Valley). Mr David would also Lease/Sub-Lease Nangara to Mr Tony and Mrs Sandra Ryan for a period of five years from 1 September 2016 at a rent of $1,500 per week plus GST. And Mr David would grant to Mr Tony and Mrs Sandra Ryan an option to purchase Nangara for 50 per cent of its market value, as at the date of exercise of the option. 3. In the early stages of their partnership break-up, these parties contested a number of matters: what properties were or were not partnership assets; and what expectations had been raised between the partners over time about the future disposition of partnership and non-partnership real estate. Such disputes had resulted in Mr Tony and Mrs Sandra Ryan lodging caveats over the Nangara titles. These various disputes are adequately described in the Recitals K, L, M, N, O, P and V to the 2017 Dissolution Deed, which essentially resolved them. 4. Recitals K to P of the 2017 Dissolution Deed provide as follows: "K. The property 'Nangara' was never a Partnership Asset. Bernard allowed the Partnership to use 'Nangara', free of rent, and graze livestock on the property. Bernard maintains that the properties 'Rosedale', 'Mount Kew', 'Box Valley' and 'the Garfield Block' (referred to in Recital L hereof) were at no stage Partnership assets and ought not to have been brought into the Partnership accounts but Tony & Sandra say Bernard only formed this view once the parties were in dispute and he received advice. L. The business of the Partnership has variously been carried out on 'Nangara', 'Rosedale', 'Mount Kew' and 'Box Valley'; and in addition, the Partnership also owned non-rural property at 15 Beswick Street, Garfield in Victoria ('the Garfield Block'). M. Since the date of commencement of the Partnership, the day to day operations of the business of the Partnership were undertaken by Tony and Sandra. N. Bernard executed a Will on 16 November 2009 leaving, inter alia, his interest in the Partnership properties to such of Jim, Rona, Tony and Sandra as survived him in equal shares and leaving 'Nangara' to such of Jim, Rona, Tony and Sandra as survived him in equal shares (with a life tenancy for Jim and Rona) ('Bernard's Will')." O. Tony and Sandra allege that relying on promises made by Bernard together with Bernard's Will, they operated 'Nangara' as part of the Partnership business and made improvements to 'Nangara', with the expectation that the ownership of 'Nangara' would pass to Jim, Tony and Sandra upon the death of Bernard. P. On or around 25 November 2015 Tony and Sandra caused a Caveat to be lodged on the titles to 'Nangara'. The Caveat was given number AK15569 ('Caveat No. AK15569')." 1. Recitals U to W foreshadowed that the operative parts of the 2017 Dissolution Deed would resolve the parties' dispute in a way that included the arguments about Nangara, as follows: "U. The parties have agreed to deal with the assets of the Partnership and various other assets of the parties (including 'Nangara') in accordance with the provisions of this Deed. V. Bernard caused two lapsing notices in respect of the Caveat 15569 to be served on Tony and Sandra on 14 October 2016. Caveat 15569 did lapse and was then replaced by Caveat No. AK921555 on 16 November 2016 ('Caveat No. AK921555'). W. On 1 December 2016, Jim entered into a Deed of Agreement with Tony & Sandra to the effect that Jim will transfer all his right, title and interest in the Partnership and in Rosedale Station and its assets simultaneously with completion of the terms of this Deed ('the Ryan Transfer Agreement')." 1. Recital X reflected an important agreement about when completion would occur under the 2017 Dissolution Deed: "X. The parties agree that completion of the terms of this Deed will occur on or before the date fourteen (14) days after service, upon the solicitor for Tony and Sandra, of the Minister's Consent to the transfer of the Western Lands Leases comprising 'Rosedale' to Tony & Sandra and that date shall be hereinafter referred to as 'Completion of this Deed'." 1. The operative provisions of the 2017 Dissolution Deed fall into three main sections: (1) valuing and distributing partnership assets (clauses 2 and 3); (2) conferring rights of Lease and purchase in favour of the Ryans over the non-partnership property, Nangara (clauses 4, 5 and 6); and (3) various machinery provisions (clauses 7 to 23). The 2017 Dissolution Deed is structured to keep the main architecture of the agreement between the former partners of the Mount Kew Pastoral Co separate from the various instruments (the valuations, the Lease, the Sub-Lease, and the option agreement) that would give effect to that agreement. 2. The 2017 Dissolution Deed first provided for the valuation and distribution of partnership assets. Clause 2 dealt with the dissolution of the Mount Kew Pastoral Co Partnership and the valuation of its undisputed assets. Clause 2(a) and 2(b)(i),(ii) and (iii) are as follows: "2. The parties agree and acknowledge that: (a) The Partnership was dissolved as at 31 August 2016 and its assets will be dealt with in accordance with the provisions of this Deed and not the terms of the Partnership Deed; and (b) The parties will cause accounts ('the Dissolution Accounts') to be promptly prepared for the Partnership by Bartlett Accounting up to the end of 31 August 2016 using the following assumptions, on the basis that the costs of the preparation of the Dissolution Accounts shall be borne by the parties in the proportion to their interests in the Partnership: i. 'Mt Kew', 'Box Valley' and 'Rosedale' are assets of the Partnership; and ii. The agreed combined value of 'Mt Kew' and 'Box Valley' is $2,750,000.00 ('the Mt Kew/Box Valley Value'); and iii. The agreed value of 'Rosedale' is $4,700,000.00; and" …" 1. Clause 2(c) and (d) are as follows: "(c) For the purposes of this Deed, 'BPV' means the value of Bernard's interest in the Partnership as determined in accordance with the Dissolution Accounts, (d) For the purposes of this Deed, 'Amount due to Bernard' and 'ADTB' shall both mean the amount calculated as follows: Amount due to Bernard - BPV - the Mt Kew/Box Valley value i.e. ADTB = BPV - $2,750,000.00" 1. The 2017 Dissolution Deed, clause 3 dealt with the disposition of the real estate that all parties acknowledged was an asset of the Mount Kew Pastoral Co, the three properties, Mount Kew, Box Valley and Rosedale, and then the distribution of other partnership assets. As to the real estate, Mr David took the benefit of Mount Kew and Box Valley, and the Ryans acquired Rosedale, which they apparently intended to use for agricultural purposes in conjunction with Nangara. Clause 3(a) provides as follows: "3. The parties agree that: (a) i. Bernard shall be entitled to the properties 'Mount Kew' and 'Box Valley' and upon Bernard's direction Tony, Sandra and Jim shall promptly sign a Contract for Sale (or Sales) and Transfer/s, to be prepared by Bernard's solicitor at the cost of Bernard, for the sale of each of those properties or parts thereof, and Tony, Sandra and Jim shall do all things necessary to permit and allow the sale/s to proceed to completion without delay. …" 1. Clause 3(b) provides as follows: "(b) All of Bernard's interest in 'Rosedale' shall be transferred to Tony and Sandra as joint tenants and Tony and Sandra shall be responsible for all rates and taxes, including land tax that accrues on the land, from the date of Dissolution of the Partnership as well as stamp duty. Bernard shall be responsible for payment of any capital gains tax that may accrue to him in consequence of the transfer to Tony and Sandra." 1. Clause 3(d) provides for an exchange of titles at completion that would give effect to the major separation of the parties' partnership assets, as follows: "(d) On Completion of this Deed, simultaneous with the delivery of the following to the solicitors for Bernard: i. In the event that the 'Mt Kew' and 'Box Valley' properties and Leases have not been transferred to a third party prior to Completion of this Deed, the Certificates of Title to the 'Mt Kew' and 'Box Valley' properties; ii. Signed blank Transfers of the Freehold and Leases for those properties; iii. A written Undertaking signed by Tony, Sandra and Jim to the effect that they will, promptly upon request, do all that is necessary on their part to — be done to obtain-Minister's Consent to the Transfers of the 'Mt Kew' and 'Box Valley' Leases; and iv. A bank cheque drawn to BERNARD DAVID for the ADTB; and the following items will be delivered to the solicitors for Tony and Sandra: v. the Certificates of Title to the 'Rosedale'; vi. A duly executed Transfer/s and Minister's Consents re all of Bernard's interest in that property to Tony and Sandra (as joint tenants); vii. All documentation (as is submitted to Bernard's solicitors by the solicitors for Tony and Sandra) duly executed by Bernard to Transfer his interest in WAL33790 and WAL33662 to Tony, Sandra; viii. Leases and Sub-Leases for the 'Nangara' property from Bernard to Tony & Sandra, as referred to in Clause 4 hereof, copies of which are annexed hereto; and ix. Option to purchase 'Nangara' a copy of which is annexed hereto." 1. The 2017 Dissolution Deed next provided (in clauses 4, 5 and 6) for the conferral of rights of lease and purchase in favour of the Ryans over the non-partnership property, Nangara. By the 2017 Dissolution Deed, clause 4 Mr David agreed to lease the Nangara properties to Tony and Sandra Ryan, for five years commencing 1 September 2016 with a five year option at a fixed rent per annum of $77,797.20 plus GST, on the following Terms. Clause 4 provided as follows: "4. Bernard shall lease the freehold titles comprising 'Nangara' and sublease the leasehold title comprising 'Nangara' (retaining exclusive use rights over that part known as 'Nangara Bend' being the whole of the land comprised in CT FI Lot 3/733380 consisting of approximately twenty (20) acres AND the second dwelling on 'Nangara' and its curtilage) to Tony and Sandra (jointly) for a period of five (5) years on the following terms (and in the forms set out in Annexures 'B' and 'C hereto): (a) The lease and sublease shall commence on 1 September 2016; (b) The aggregate rent under the lease and sublease shall be $1,500.00 per week plus GST (where GST is applicable) - however no rent shall be charged between 1 September 2016 and 30 September 2016; (c) The lessee and sublessee shall pay the Council rates and Local Land Services rates from 1 October 2016; (d) The lessee and sublessee shall pay any rents or fees due to Crown Lands in relation to Western Land Leases comprising 'Nangara' from 1 October 2016; (e) The lessee and sublessee shall not be permitted to assign the leases or any of them; (f) The lease and sublease may be renewed for a period of 5 years by the lessee and sublessee, by notice in writing to the lessor served no less than 3 months prior to the expiry of the lease and sublease respectively." 1. The 2017 Dissolution Deed, clause 5 granted an option to purchase Nangara upon the terms set out in Annexure D, which was in the form of an "Option to Purchase" (and which form of option is described in these reasons as "the Annexure D Option"). Clause 5 provides as follows: "5. Bernard hereby grants an option (in the form as set out in Annexure 'D' hereto) to Tony and Sandra jointly to purchase 'Nangara' for 50% of its market value as at the date of exercise of the option. For the avoidance of all doubt, this option to purchase includes that part of 'Nangara' known as 'Nangara Bend' (consisting of approximately twenty (20) acres) and the second dwelling on 'Nangara' together with its curtilage." 1. Clause 6 provides for the execution of the Lease and the Sub-Lease of Nangara and the Annexure D option as follows: "6. Notwithstanding that by this Deed, Bernard has granted the Lease, Sub-Lease and Option to Purchase referred to in clauses 4 and 5, nevertheless it is further agreed that: (a) Bernard and Tony & Sandra shall promptly execute the Lease and Sub-Lease annexed hereto as Annexures B & C which reflect the lease terms set out in clause 4 above and the parties agree and the parties acknowledge that the Lease and Sub- Lease are registrable and may be registered by Tony & Sandra; and (b) The-parties-hereto shall execute the Option to Purchase annexed hereto as Annexure D." 1. Some other provisions of the 2017 Dissolution Deed assisted in its proper construction. Clause 9 provided for the withdrawal of an existing caveat over Nangara and for the form of a new caveat agreed between the parties (Annexure E) on "Completion" as defined under the 2017 Dissolution Deed. The differences between these caveats will be described shortly. Clause 9 provided as follows: "9. On Completion of this Deed: (a) Bernard consents to the Caveat annexed hereto and marked "E" ("the new Caveat") and to evidence his consent he shall sign the same as registered proprietor (in paragraph L of the Caveat) and hand the same to Tony and Sandra; and (b) Tony and Sandra shall promptly cause a withdrawal of Caveat AK921555 to be registered simultaneously with the registration of the new Caveat." 1. Clause 23 anticipated that difficulties might arise in interpreting a Deed structured in the manner of the 2017 Dissolution Deed, which had annexed to it Lease, Sub-Lease and option documents. Clause 23 provided for a hierarchy of precedence in the interpretation of these various components of the 2017 Dissolution Deed: "23. Where there is any conflict between the provisions of this Deed and the provisions of the leases contained in Annexures B & C or the Option to Purchase contained in Annexure D, then the order of priority shall be the Option to Purchase contained in Annexure D, followed by the leases contained in Annexures B & C, followed by the provisions of this Deed." 1. The content of the annexures to the 2017 Dissolution Deed shall now be dealt with in these reasons in the order of precedence that clause 23 prescribed: the Annexure D option, then the Annexure B Lease, and Annexure C Sub-Lease. 2. The 2017 Dissolution Deed provided for the removal of an existing caveat on Nangara (Caveat AK921555) and for the imposition of a further caveat on the title, the form of which was in Annexure E to the 2017 Dissolution Deed. The unsigned caveat and Annexure E nominated Mr Anthony and Mrs Sandra Ryan of Rosedale, Tilpa as caveators and Mr David as a registered proprietor. The land referred to in the Annexure E caveat was all the freehold title in Nangara. In Schedule 1 to the Annexure E caveat the "estate or interest claim" was as follows: "1. Lessee arising from Lease in respect of Folio identifiers 1/755569, 1/755589 and Auto Consols 14964-207 and 9926-93 2. Sub-lease arising from sub-lease in respect of balance of titles 3. Entitlement to purchase pursuant to Option to Purchase, in respect of all titles." 1. In Schedule 1, the instrument which is named as conferring the interest in question was the "Deed of Dissolution" between Mr David, Mr James, Mr Tony and Mrs Sandra Ryan, although the date of the instrument was not specified in the caveat. That is no doubt because the form of Annexure E was prepared before execution of the 2017 Dissolution Deed. The Annexure D Option 1. Annexure D to the 2017 Dissolution Deed set out the full terms of the option agreed to under Clause 5, the Annexure D Option. The Annexure D Option recites at Recital C that "the Grantor agreed to enter into a Lease/Sub-Lease of the Property in favour of Tony and Sandra [Ryan] jointly, for a term of five (5) years commencing on 1 September 2016, together with an option to renew for a further five (5) years". 2. Recital D noted that "the Grantor has agreed to grant [Mr Tony and Mrs Sandra Ryan] an Option to Purchase the whole of the freehold part of the Property and his interest in the Perpetual Leases part of the Property on the terms specified in this Deed". 3. The Annexure D Option, clause 2 provided for a grant of an option in the following terms: "2. The Grantor grants to the Purchaser an Option to purchase the Property at the price determined in accordance with clause 4 hereof and on the conditions specified in Clause 3 hereof. This Option constitutes an irrevocable offer by the Grantor to enter into a binding agreement for the sale of the Property, which may be accepted strictly in accordance with the provisions of this Deed, otherwise the Option in this offer shall lapse." 1. The Annexure D Option, clause 3 provided for the manner of exercise of the option: "3. (a) The Purchaser may exercise the Option to Purchase the Property at any time during the term of the Lease & Sub-Lease or any renewed term, if the option to renew is exercised. If the Lease &/or Sub-Lease are validly terminated by either party then the Option to Purchase ceases and cannot be exercised in relation to any part of the Property. (b) The Option to Purchase the Property may be exercised by delivery of a written Notice of Exercise of the Option ("the Notice") signed by the Purchaser to the Vendor or to the Vendor's Solicitors (being Beyond Property Legal Solutions, unless or until the Vendor notifies an alternate law firm). (c) Subject to clause 4(d), on delivery of the Notice in accordance with this Clause 3 the Grantor himself or by his attorney, guardian, executors or administrators shall immediately become bound as vendor ('the Vendor'). (d) The Grantor (on behalf of himself and (he persons which may be bound as Vendor by the Option at its date of exercise), covenants and agrees that the Vendor will promptly prepare and issue to the Purchaser a Contract for Sale ('the Sale Contract') in relation to the freehold part of the Property and a Deed of Assignment/Transfer of Lease/s in relation to the Sub-Lease in the standard forms then approved by the Law Society of New South Wales and Real Estate Institute of New South Wales for the Property at the price as determined in accordance with clause 4 hereof and with a completion date as determined by clause 4 (c) and the Sale Contract must include a section 149 zoning certificate, current title search for each folio identifier and a current deposited plan and current Crown Lands financial search and including a condition that the Vendor shall at his own cost comply with all conditions relating to Minister's consent to the transfer of the Property. It shall also contain a Special Condition to the effect that the parties agree to a period of Twenty-one (21) days being sufficient time to be given under any Notice to Complete." 1. The Annexure D Option, clause 4 provided for the calculation of the purchase price upon the exercise of the option: "4. The parties hereto agree that:- (a) The purchase price for the Property ("the Purchase Price") is to be fifty per cent (50%) of the current market value of the Property at the time of service of the Notice as determined in accordance with this clause 4. The parties will negotiate in good faith in relation to determining the (rue current market value for the Property, however where the current market value is not agreed within ten (10) days of service of the Notice then the provisions of clause 4 (b) shall apply: and …" 1. Clause 5(a) and (f) provided other machinery provisions to support the grant of the option: "5. This Option is binding on the Grantor and his successors and assigns and will remain binding even if the Property is sub-divided or consolidated and in such case this Option shall be read as to apply to any folio identifiers that are created as a result of any such subdivision or consolidation. (a) Other than in accordance with clause 11 of this Deed, the Grantor (and his heirs, successors and assigns) are not permitted to sell, transfer, assign, sub-divide, mortgage or charge (for any loan in excess of 50% of the value of the property) or otherwise deal with the Property without prior written consent from Tony and Sandra. … (f) Tony and Sandra are hereby irrevocably authorised to lodge a caveat over the Property to protect their interest in the Property under this Option." 1. The Annexure D Option was unsigned and undated at the time the parties executed the 2017 Dissolution Deed. 2. The Option encompassed property, including a location called "Nangara Bend", that was additional to the land covered by the Lease. Clause 3 of the Lease provided that, until there was a valid termination or surrender of the Lease, or six months after the death of the lessor (Mr David), "[that] part of [the Nangara property] comprising approx. 20 acres and a homestead known as 'Nangara Bend' (the entire Lot and improvements…)" would be reserved for the exclusive use of Mr David. The Annexure B Lease and the Annexure C Sub-Lease of Nangara 1. The 2017 Dissolution Deed also contained a Lease and Sub-Lease of Nangara. The essential terms of those Leases have already been set out in the 2017 Dissolution Deed itself and do not require repetition. Only clause 16 of the Lease and Sub-Lease were of significance to the construction submissions made to the Court. 2. Clause 16 of the Lease and the Sub-Lease provide as follows: "OPTION TO PURCHASE The Lessee shall have an Option to Purchase the property on certain terms and conditions as are expressly provided in the Deed of Option to Purchase a copy of which is annexed hereto and marked B". Events After the 2017 Dissolution Deed 1. Less than a month after the 2017 Dissolution Deed the Ryans purported to exercise the Clause 5 Option. A letter dated 8 March 2017 from their solicitor enclosed a Notice of Exercise of Option signed by Mr Tony Ryan and Mrs Sandra Ryan dated 3 March 2017. Their solicitors' covering letter suggested that an appropriate market value for Nangara was $5 million. The Notice of Exercise of Option was crafted to conform with the requirements of clause 3 of the Annexure D Option. 2. On 20 March 2017, Mr David's solicitor responded, referring to the Notice of Exercise of Option and observing that: "Our client acknowledges your client's right to exercise his option, subject to agreement upon the current market value." 1. On 13 April 2017, Mr David's solicitor further responded, stating that in Mr David's view, the appropriate market value of Nangara was "at least $7 million". He offered to settle the purchase on that basis. In the event that the market value was not agreed, Mr David asked that he be provided with the names of three valuers to consider, for the purpose of preparing a formal valuation. 2. On 30 May 2017, Mr Tony and Mrs Sandra Ryan submitted to Mr David an application to the President of the Australian Property Institute for the appointment of a valuer to conduct a valuation of Nangara. 3. On 20 June 2017, Mr David changed position. His solicitor advised the solicitor for Mr Tony and Mrs Sandra Ryan that day that they had not exercised the option to purchase Nangara. Mr David then took an aspect of the point that has been debated in this hearing: "A Deed of Option, signed by your client, was to have been delivered to you on completion of the dissolution of partnership. As the formal Deed of Option had not yet been delivered, the purported exercise of option was premature." 1. Further correspondence was exchanged. The parties set out their respective positions about the purported exercise of the option. The parties accept in these proceedings that at the time the Ryans purported to exercise the option, neither the date of 'completion' of the 2017 Dissolution Deed (as that term is defined in Recital X) nor the delivery of all the documents referred to in clause 3(d) of the Deed had taken place. These Proceedings 1. On 3 October 2017, Mr David filed a Summons seeking declaratory and consequential relief: that $4.1 million, held in the controlled moneys account of Mr David's solicitor, be paid to Mr David; a declaration as to the amount payable to Mr David on completion of the 2017 Dissolution Deed; and a claim for a decree that the 2017 Dissolution Deed be specifically performed. 2. On 10 November 2017, Mr Tony and Mrs Sandra Ryan filed a Cross-Summons. They also sought a declaration as to the amount payable to Mr David on completion of the 2017 Dissolution Deed, and a further declaration that "… pursuant to clause 5 of the deed, the Cross-Claimants exercised an option to purchase 'Nangara' on 3 March 2017". 3. Mr David filed an Amended Summons on 23 February 2018. It adjusted the sum said to be owed to Mr David. And the Amended Summons sought additional declarations: that the option to purchase Nangara would only be binding and effective from the time of completion of the 2017 Dissolution Deed and from the delivery of the Annexure D Option, signed by Mr David; and that the option to purchase Nangara cannot be exercised before completion of the 2017 Dissolution Deed and the delivery to the Ryans of the signed form of Annexure D Option. 4. The parties resolved part of their dispute. On 1 June 2018, Darke J made orders and notations agreeing on and recording: the net amount owing by Mr Tony Ryan and Mrs Sandra Ryan to Mr David pursuant to clause 2(d) of the 2017 Dissolution Deed at $2,792,518; additional sums to be paid to Mr David on account of interest and costs; final payment of a bank cheque for these sums by 29 June 2018 (and interest thereon if unpaid); and that upon payment of the whole amount owing to Mr David, he should deliver to the Ryans signed Transfers of Rosedale to them with Minister's Consents; signed water licences transfers; the Annexure D Option signed by Mr David; and a signed Lease and Sub-Lease for Nangara in the form set out in the 2017 Dissolution Deed Annexures B and C. 5. These consent orders mean that completion of the 2017 Deed of Dissolution is now due to occur this Friday, 29th June 2018. 6. His Honour further ordered that the hearing of the proceedings shall be limited to the relief sought by the Plaintiff in paragraph 7A and 8(b) of the Amended Summons and of the Cross-Claim filed by the Ryans. Other costs orders were also made. 7. Mr David subsequently did not press the relief in 8(b) of the Amended Summons. The only remaining issue between the parties is now in Prayer 7A of the Amended Summons and Prayer 2 of the Cross-Summons: whether or not the option to purchase Nangara was (or could be) exercised by Mr Tony and Mrs Sandra Ryan on 8 March 2017. Construction of the 2017 Dissolution Deed 1. The 2017 Dissolution Deed and its Annexures are all part of a commercial agreement. There are many appellate pronouncements as to how courts should construe commercial contracts. I am guided by one of the most recent of these, the High Court's decision in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] ("Woodside") where the majority (French CJ, Hayne, Crennan, and Kiefel JJ) described the approach to construction of a commercial contract in the following way (omitting footnotes): "The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating', unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". 1. In his Honour's dissenting judgment in Woodside, Gageler J compactly expressed the same idea at [53], as follows: "Commercial parties contracting at arm's length are free to agree on terms each considers to be to its own commercial advantage. The terms of their agreement, however, are construed by a court to mean what reasonable commercial parties in their position can be taken together to have meant." 1. These principles were restated in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52]. 2. This judgment does not call for any further discussion of the principles of the construction of commercial contracts. The 2017 Dissolution Deed is a reasonably well-crafted document. Despite the present disputes, its provisions are drafted in a way that conveys clear meaning and, as these reasons show, can be construed in a way that clearly defines the obligations of each party. Submissions and Analysis 1. The Court first sets out the Ryans' submissions and then Mr David's submissions. The Court has found the latter to be the more persuasive and has adopted their analysis. The Ryans' Submissions 1. The Ryans submit that clause 5 takes immediate effect on execution of the 2017 Dissolution Deed. They submit this is quite clear from the inclusion of the phrase, "hereby grants". They submit the plain meaning of that phrase, expressed as it is in the present tense, is that the option rights in clause 5 are conferred upon Mr Tony and Mrs Sandra Ryan immediately. The grant of option rights is not made contingent upon any other event. 2. Mr Chapple rightly concedes on behalf of the Ryans that on their construction there is some degree of tension between clause 5 of the 2017 Dissolution Deed and clause 3(d)(ix), which provides that on "completion" of the Deed, the parties agree that among the items that "will be delivered to the solicitors for [Mr] Tony and [Mrs] Sandra [Ryan]", is the "Option to Purchase 'Nangara', a copy of which is annexed hereto". The tension is that clause 5 appears to make an immediate grant of an option but clause 3(d)(ix) requires a formal signed Annexure D Option to be provided later on completion. 3. But the Ryans submit that any tension between clause 5 and clause 3(d) is resolved by the 2017 Dissolution Deed, clause 6 and that resolution is one of the functions of clause 6. The Ryans submit that clause 6 is critical to the question in the present proceedings, because it confirms the primacy and immediacy of the rights conferred in clause 5. 4. They submit that clause 6 affirms that "by this deed [Mr David] has granted… the Option to Purchase referred to in clauses 4 and 5". That is, they say, the rights in clause 5 are expressly acknowledged as already existing (and not being prospective or conditional). Further, they submit clause 6 is introduced by the word, "Notwithstanding", which makes clear that the additional procedural steps identified in clause 6, sub-clauses (a) and (b) are to be undertaken in addition to and do not derogate from the rights conferred in clause 5. These steps, they say, are thereby signalled as being purely procedural. 5. Thus they submit that on and from execution of the Deed, Mr Tony and Mrs Sandra Ryan had a right to exercise the option on the terms set out in clause 5 and Annexure D to the Deed and that they did so validly in March 2017. 6. The Ryans also submit that the construction of clause 5 that they propound is consistent with the 2017 Dissolution Deed, when viewed as a whole. They submit that in some commercial contracts 'completion' can refer to a point at which the parties' legal obligations crystallise. The word does not have special inherent meaning. But the language and structure of particular contracts can provide for certain obligations to take effect on and from a particular date, which may be called 'completion' in some contracts. 7. But, the Ryans submit, no such language is used in the 2017 Dissolution Deed. Indeed, they say the opposite is true: the 2017 Dissolution Deed expressly moulds the parties' obligations, and grants to the parties substantive rights to take effect prior to the date for completion. The most relevant examples of this in the 2017 Dissolution Deed to which the Ryans point are: 1. in clause 2(a), the parties agree that the Partnership is to be dissolved on 31 August 2016; 2. in clause 10, the parties provide mutual releases, to take effect on execution of the 2017 Dissolution Deed; and 3. in clause 4, Mr David grants to Mr Tony and Mrs Sandra Ryan a Lease/Sub-Lease of Nangara, and in the process the clause grants rights and imposes obligations that take effect prior to 'completion' of the 2017 Dissolution Deed, as defined. 1. The Ryans submit clause 4 is a particularly important signpost to their construction because, like clause 5, it specifically relates to the land at Nangara. They submit that it is clear from the features of the 2017 Dissolution Deed that the partnership was dissolved from 31 August 2016, the term of the Lease of Nangara was to take effect from 1 September 2016, and the terms of clause 4, show that the parties intended for the Lease/Sub-Lease to be in force prior to completion, and that rent would be payable prior to completion. In those circumstances, there can be no doubt, it is said, that the Lease granted pursuant to clause 4 takes effect immediately in equity in accordance with the principles in Walsh v Lonsdale (1882) 21 Ch D 9. The immediate operation of the Lease in clause 4 is confirmed by the operation of clause 6, which deals with both the clause 4 Lease and the Clause 5 Option. They submit the Clause 5 Option operates in the same way as the clause 4 Lease: it is operative immediately in equity. 2. In conclusion, the Ryans submit that notwithstanding that by clause 6 the 2017 Dissolution Deed required formal documentation to be provided upon 'completion', it conferred on the Ryans substantive rights upon execution. Those rights include the grant of an option on the terms set out in clause 5 and Annexure D to the Deed. Once this is accepted, they submit that as the Lease and the Sub-Lease were on foot, it follows that the exercise of the option by the Ryans on 8 March 2017 was available to them and their exercise of it was valid. Mr David's Submissions and the Court's Analysis 1. The Court finds the submissions Mr Ashhurst SC has advanced on behalf of Mr David to be the more persuasive. So, the Court's analysis in this section incorporates those submissions. 2. Mr David submits that clause 5 of the 2017 Dissolution Deed cannot be construed as an immediate grant of an option upon signing of the Deed of Dissolution. Likewise Mr David submits that clause 4 is not an immediate grant of a lease. 3. Mr David maintains that any exercise of the option could on the proper construction of the 2017 Dissolution Deed only take place after Completion of the Deed of Dissolution by the simultaneous execution of the various acts provided for in clause 3(d). And completion will require: 1. a bank cheque drawn and delivered for the amount due to Mr David (ADTB). This is the sum of $2,792,518 referred to in the agreement dated 1 June 2018 and the other items referred to in clause 3(d); 2. the parties to execute a Lease and Sub-Lease for Nangara in accordance with the ordinary practice of solicitors or conveyancers as described in Waltons Stores Interstate Limited v. Maher (1987) 164 CLR 387 per Deane, J. at p.436; and 3. Mr David executes and delivers to the Ryans the form of Annexure D Option. 1. Mr Ashhurst SC propounds three main arguments in support of Mr David's construction. First, although the wording in clause 5 of the 2017 Dissolution Deed uses the expression "hereby grants an option" and in clause 6 "Notwithstanding that [Mr David] has granted the Lease, Sub-Lease and option to purchase", the 2017 Dissolution Deed clearly contemplates that there will be a subsequent formal execution and delivery of both the Lease and option to purchase on Completion of the Deed, as is described in the balance of clause 6, and in the provisions of clause 3(d). 2. If the Lease Clause 5 Option had been initially granted and were immediately legally operative upon execution of the 2017 Dissolution Deed, the delivery of a signed Lease and the Annexure D Option as contemplated by clauses 6(a), 6(b) and 3(d) would be entirely otiose. If the Ryans' argument is correct, the requirements of clause 6(a) and (b) for such delivery would be but an empty ceremony. 3. In my view, clauses 5 and 6 constitute a contract that upon the taking of certain positive steps at completion in accordance with clause 3(d)(ix) Mr David agreed he would grant a legally effective option but there was no immediate grant of a legally effective exercisable option with the 2017 Dissolution Deed. 4. But an argument against Mr Ashhurst SC's contention is based on the chapeau to clause 6 the words, "has granted" cover "the Lease, Sub-Lease and Option to Purchase referred to in clauses 4 and 5". If it is arguable that a lease in equity is already created by clause 4, then it is equally arguable that an option is created in equity by clause 5 and that clause 6(a) and (b) truly are formalities. 5. But Mr Ashhurst SC answers this by pointing to the words "promptly" that appears in clause 6(a) but not in clause 6(b). He advances a persuasive submission that this word indicates that the clause 4 Lease was intended to become effective immediately and that is why execution of the Lease needed to be performed "promptly". In my view, further in support of the distinction between the treatment of the Lease and the Option are the words in clause 6(a) "and the parties agree that the parties acknowledge that the Lease and Sub-Lease are registrable and may be registered by [Mr] Tony and [Mrs] Sandra [Ryan]". These words may found an immediate right to caveat to protect the Lease on execution of the 2017 Dissolution Deed. But the absence of any of that apparatus in clause 6(b) distinguishes the Option from the Lease and points to the conclusion that the Option was only to be operative upon the later execution and delivery of a document in the form of the Annexure D Option. 6. Mr Ashhurst SC's second point is that clause 23 of the 2017 Dissolution Deed provides that if there is any conflict between the provisions of the 2017 Dissolution Deed, the Leases and the Annexure D Option that the order of priority in interpretation shall be the Annexure D Option followed by the Leases and then the 2017 Dissolution Deed itself. 7. But in my view the Annexure D Option in clause 2 clearly refers to the first grant of an option. It does not refer to or assume that any form of enforceable option already exists for which the Annexure D Option is only a formal procedural record. The only reasonable way to read the form of Annexure D Option as a whole is that the option is granted only on execution by the grantor and grantee of that Annexure D form of option. 8. And the timing of the exercise of the Annexure D Option is important. Clause 4(a) of the Annexure D Option fixes the purchase price of the property at "fifty per cent (50%) of the current market value of the property at the time of service of the notice [of exercise]". If the Ryans' submissions are correct that notice can be served and the market value fixed at any time before completion of the 2017 Dissolution Deed. If Mr David is correct that notice can only be served and the market value fixed after completion. The competing contentions set up a direct conflict in relation to the calculation of the value of Nangara on exercise of the Option. In my view, clause 23 of the 2017 Dissolution Deed commands that the timing and therefore the price of Nangara will be determined in accordance with the Annexure D Option, which contemplates the first grant and exercise of the option upon execution and delivery of the Annexure D Option and not before. 9. Finally, Mr Ashhurst SC submits that clause 9 of the 2017 Dissolution Deed assists Mr David's construction. Clause 9 permits the registration of a caveat which would record and protect the grant of the option. The agreed form of the caveat is in Annexure E. Mr David consents to that caveat being lodged only from completion. That means that, as the registered proprietor of Nangara, he would be entitled to issue a lapsing notice in respect of any such caveat lodged before completion. That is quite inconsistent with the idea that enforceable rights to an option arise immediately upon execution of the 2017 Dissolution Deed. Indeed, if the Ryans' construction were correct, clause 9 would have to permit the filing of the caveat that could not be removed at any time from execution of the 2017 Dissolution Deed. The parties clearly contemplated the later filing of the caveat to protect the option, which in my view is a strong signpost of the timing from which it commenced to be effective. 10. In my view, the 2017 Dissolution Deed is structured this way for the simple commercial reason that Mr David did not want to lose Nangara before he received his partnership payout upon dissolution and that this structure makes sure that all the other steps towards partnership dissolution are promptly taken by the Ryans if they want to take the benefit of the option over Nangara. 11. A result of the Court's analysis is that the completion which is now scheduled to take place on 29 June 2018, that is tomorrow, should (unless the obligation is expressly waived by the parties) include the provision by Mr David of an executed copy of the Annexure D Option. It is possible, should the Ryans so choose for them to immediately exercise that option or to do so at any time during the term of the Lease and the Sub-Lease. Should any issues arise in relation to settlement or any other matter in relation to the working out of the declarations and orders made (for example if a supplementary specific performance order were to be required) the Court grants liberty to apply in the orders below. Conclusions and Orders 1. For these reasons, the Court makes the following declarations and orders: 1. Declare that on the true construction of the Deed of Dissolution made between the plaintiff and the first, second and third defendants on 10 February 2017 ("the 2017 Dissolution Deed") that the option to purchase all the lands comprising "Nangara" provided for in clause 5 and Annexure D of the 2017 Dissolution Deed will only be binding and effective, and therefore may only be exercised, from "completion" as defined by the 2017 Dissolution Deed and upon the delivery of the option in the form of the said Annexure D, signed by the plaintiff. 2. The Amended Summons and the Cross-Claim are otherwise dismissed. 3. Order that the defendants/cross-claimants pay the plaintiff/cross-defendant's costs of the determination of the issues decided by this judgment. 4. Grant liberty to apply to the Real Property list judge, Darke J, or to Slattery J, on 1 day's notice. ********** 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: 28 June 2018