Australia: Ambiguous clause struck out of option lease in Toga case

Last Updated: 11 March 2013
Article by Gary Newton and Nancy Yu

In brief - One year rent-free period not to be included when retail lease renewed

The Administrative Decisions Tribunal Appeal Panel has handed down a decision in Toga Pty Ltd v Perpetual Nominees Ltd (RLD) [2013]. The Appeal Panel held that the contentious provision, Item 14 of the reference schedule, was in fact ambiguous and is to be excluded upon proper construction, in line with the parties' common intention.

Ten year lease of retail premises with option to renew

On 15 January 2013, the Administrative Decisions Tribunal Appeal Panel handed down the decision of Toga Pty Ltd v Perpetual Nominees Ltd (RLD) [2013], where the Tribunal's original decision was affirmed with a different path of reasoning.

As outlined in our previous article Landlords and tenants must uphold the fidelity of the bargain, the case concerned a 10 year retail lease of premises near Sydney Central Railway Station. The lease contained an option to renew for a further term of 10 years and a covenant that provided for a rent (and outgoings) free period of one year (Item 14).

Upon exercising the option, the tenant asserted the express and clear term of the lease that Item 14 was to be included and repeated in the new option lease, and thus the tenant refused to pay the first year's rent and outgoings for the option term.

Tribunal's decision: no ambiguity, Item 14 included in option lease

In the first instance, the Tribunal applied Lewis v Stephenson (1898) which held that the option lease is to be "on the same terms". Accordingly, as Item 14 was not excluded in clause 16.2, the clause stating what were to be the terms of the renewed lease, Item 14 was incorporated into the option lease.

The Tribunal considered the High Court decision of Codelfa Construction Pty Limited (1982) and held there is no ambiguity and the evidence of the surrounding circumstances cannot be called upon to construe the plain and clear language in Item 14.

Implied "fidelity of the bargain" trumps unambiguous express provision

The earlier decision of the Tribunal was clear that Item 14 was to be repeated in the option lease. However, this unambiguous term was circumvented by the implied term of "fidelity of the bargain".

It was found that the "common intention", the "bargain" was to exclude Item 14 from the option lease. Although the Tribunal did not have the power to rectify the lease without consent of both parties, the Tribunal determined that by the tenant not consenting to the rectification, the tenant has breached this implied term of "upholding the fidelity of the bargain".

Appeal finds that provision was ambiguous

Item 14 of the reference schedule provided a rent free period "up to the first anniversary of the Commencing Date".

Despite neither party, nor the Tribunal questioning in the first instance whether the provision was ambiguous, the Appeal Panel found that Item 14 was in fact ambiguous. This is due to the use of the different terms; "Commencing Date" in Item 14, and "Commencement Date of the renewed Term" in Item 16.

Applying Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28 at 382 [71], ignoring the difference amounts to a failure to "give meaning to every word".

The Appeal Panel shows support for the argument that as the words "and Commencement Date of the renewed Term" were not included in Item 14, Item 14 was a "spent" provision that ended prior to the renewal of the option and thus did not need to be expressly excluded in clause 16.2 and will be automatically excluded from the option lease.

This creates ambiguity as Item 14 can be interpreted as either being incorporated in the option lease, or being excluded for reason that it is "spent".

Surrounding circumstances can be considered to help resolve ambiguity

The Appeal Panel held there was sufficient ambiguity within the contentious provisions to render evidence of "surrounding circumstances" admissible as an aid to interpreting the ambiguous provision.

The next question became what kinds of surrounding circumstances can be admitted.

In construing the contentious provisions, the court held the preferable view is as stipulated in Phoenix Commercial Enterprises Pty Limited v City of Canada Bay Council [2010] NSW CA 64, that permissible surrounding circumstances are not particular, private knowledge of the people who entered the lease, but rather background circumstances ascertainable by anyone.

However the Appeal Panel at [116] went on to say "but in determining... what was the 'common intention' of the parties... the Tribunal did admit a significant quantity of evidence about their negotiation", which was the personal knowledge of the people who entered the lease.

The implication is that although private knowledge cannot be used to construe the meaning of an express term, it can be used to determine the "common intention" of the parties, which can add significant weight to the court's decision regarding the parties' rights and obligations under a lease.

Rectification not required in this case

The question of rectification was not considered by the Appeal Panel, as it was held that the courts have the power to interpret the provision, and upon the court's interpretation, there is no conflict between the terms of the contentious provisions, on their proper construction, and the Tribunal's finding as to the common intention of the parties. Item 14 is excluded from the option lease on both counts.

The Appeal Panel was silent on the issue of rectification in accordance with "upholding the fidelity of the bargain", leaving express terms in a lease vulnerable to challenge by this implied duty to "uphold the fidelity of the bargain". It remains to be confirmed how rectification will be applied in future cases, where common intention differs to proper construction.

"Fidelity of the bargain" principle still stands

The appeal decision cautiously avoided deciding on the issue of rectification in accordance with the implied "upholding the fidelity of the bargain" principle. However this silence indicates that the principle still stands and remains an important consideration for tenants and landlords when determining their rights and obligations under a lease.

Landlord and tenants should also be consciously aware of what they say or do in the negotiation process, as evidence regarding these negotiations can be considered by the Tribunal or the Court when a dispute arises.

Gary Newton Nancy Yu
Property acquisition, development and sale
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Gary Newton
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