Australia: High Court decision highlights the impact of legislative change on contractual lease obligations

Services: Property & Projects
Industry Focus: Property

What you need to know

  • The High Court decision of Victoria v Tatts Group Limited highlights dramatically the impact of legislative change on long term contracts such as leases.
  • It may be necessary to review existing leasing agreements to ascertain the impact of legislative changes on the rights and obligations under those agreements.
  • A prudent negotiator should include terms that provide a fall-back position that will apply if the legislation ceases to exist or is substantially changed.

In this month's alert, we review the recent High Court decision of Victoria v Tatts Group Limited (2016) 328 ALR 564 (Tatts Group Case) and look at the significance of legislative change in a long term leasing context. Although the Tatts Group Case is not a leasing case, it does highlight dramatically the impact of legislative change on long term contracts such as leases. When the legislative setting changes, how will courts interpret the parties' agreement when the content of that agreement is based on concepts in a statutory setting that is either obsolete or has fundamentally changed? And what can you do to combat the consequences of that change?

The facts

Gambling activity involving the use of gaming machines was legalised in Victoria under the Gaming Machine Control Act 1991 (Vic) (1991 Act). In 1992, the Victorian government created a gambling duopoly by granting both Tatts Group Limited (Tatts) and the Totalisator Agency Board of Victoria (TAB) a "gaming operator's licence" under Part 3 of the 1991 Act to conduct gaming on gaming machines at approved venues in Victoria. In 1994, the TAB was privatised resulting in the formation of Tabcorp Holdings Limited (Tabcorp). In the same year, the Gaming and Betting Act 1994 (Vic) (1994 Act) was enacted and a gaming operator's licence was issued to Tabcorp pursuant to that act. The licence issued to Tabcorp contained a terminal payment provision which provided a mechanism for compensating Tabcorp if its gaming operator's licence expired without a "new gaming operator's licence" being issued to Tabcorp. However, no compensation was payable if a "new gaming operator's licence" was not issued at all.

The inclusion of the terminal payment provision in the licence granted to to Tabcorp was considered to be unfair and inconsistent with the level playing field intended by the duopoly. In order to overcome this inconsistency, the Victorian government and Tatts entered into an agreement (1995 Agreement) which, amongst other things, provided for a terminal payment to be paid to Tatts under clause 7 "if the Gaming Operator's Licence expires without a new gaming operator's licence having issued to [Tatts]" but for no amount to be payable if a new gaming operator's licence was not issued at all, or was issued to Tatts or a related entity of Tatts.

In 2003, multiple pieces of legislation in Victoria regulating gambling in its various forms, including the 1991 Act, were re-enacted and consolidated into the Gambling Regulation Act 2003 (Vic) (2003 Act). Tatts retained the authority to carry on gaming operations under its gaming operator's licence on substantially the same terms as under the 1991 Act. However, in 2008, the Premier of Victoria announced that a new structure for Victoria's gaming industry would be introduced. One consequence of the restructuring was that Tatts' gaming operator's licence would not be renewed upon its expiry. The Premier noted specifically that the Victorian government had formed the view that neither Tatts nor Tabcorp would be entitled to compensation under the restructure.

In 2009, the 2003 Act was amended so that no further gaming operator's licences could be issued. Those amendments also established a new gaming entitlement called a "gaming machine entitlement" (GME). A GME permitted the holder to conduct gaming on an approved gaming machine. 27,500 GMEs were created and came into effect on 16 August 2012, being the day after Tatts' gaming operator's licence expired. Tatts did not apply for, or receive, any GMEs. The result was that the gaming operations which Tatts conducted under its gaming operator's licence ceased and were then carried on by the holders of GMEs. Tatts claimed it was entitled to payment under clause 7 of the 1995 Agreement.

The decision

Both the primary judge and the Court of Appeal found in Tatts' favour, concluding that the reference in clause 7 of the 1995 Agreement to the issue of a "new gaming operator's licence" would have been understood by a reasonable businessperson as the issue of any licence or authority of substantially the same kind as Tatts' existing gaming operator's licence. A sum of $540,467,887.92 was at stake. The Victorian government appealed and the High Court allowed its appeal. The Court unanimously held that the phrase "new gaming operator's licence" in clause 7 of the 1995 Agreement referred only to a gaming operator's licence granted under Part 3 of the 1991 Act (as it might be amended, re-enacted or replaced from time to time). As a "new gaming operator's licence" was never issued, Tatts was not entitled to payment under clause 7 of the 1995 Agreement.

For the purposes of this alert, it is unnecessary to discuss the Court's reasons at length. It is enough to say that the High Court adopted an orthodox approach to the interpretation of 1995 Agreement concluding that the text, context and purpose of the 1995 Agreement supported the Court's conclusion on the meaning of the phrase "new gaming operator's licence" in clause 7. In particular, an important feature of the Court's approach was its conclusion that the 1995 Agreement and the operation of its provisions depended on the continuing existence of the duopoly. Once the duopoly ceased to exist as a result of the implementation of the GME regime, there was no basis for a terminal payment to be made to Tatts.

Significance of legislative change for leasing

The impact of legislative change may vary. In some cases, legislative change will amend existing legislation or consolidate existing legislation in a manner that does not substantially alter statutory rights and obligations under the original legislation. A common device for dealing with incremental changes of this kind is the inclusion of a boilerplate clause that states that a reference to any legislation includes any amendment to or replacement of that legislation. A clause of this kind will pick up the amending legislation and superimpose those rights and obligations under the lease.

In other cases, legislative change may introduce a new statutory liability that was not foreseen in the parties' agreement and which is not covered by any catch all clause. In these circumstances, the legislation may itself provide for transitional arrangements as with the introduction of GST under A New Tax System (Goods and Services Tax) Act 1999 (Cth). Under those transitional arrangements, commercial leases entered into before the relevant dates where the landlord had no contractual right to recover GST from a tenant were not to be liable to GST until 1 July 2005 unless there was an earlier "review opportunity".

Finally there is legislation which abolishes existing statutory arrangements. In the Tatts Group Case, Tatts was made well aware of the risk of legislative change before it entered into the 1995 Agreement. It would have been easy enough (given the sum at stake) for Tatts to have sought an amendment to clause 7 to provide for the outcome it had hoped to achieve through litigation. The fact that it did not and used language based on the 1991 Act did not assist its case. Perhaps Tatts was unable to obtain such an amendment and took its chances that generic words would result in the desired outcome. If so, it was a gamble which while successful at first instance and in the Court of Appeal ultimately failed in the High Court.

In each of these scenarios, it would be prudent (especially where there is significant amendment or consolidation of existing legislation or the likelihood of it) to review existing leases to ascertain the impact of statutory change.

Key takeaways

The following points arise from this discussion:

  1. Depending on the scope of legislative change, it may be necessary to review existing leasing agreements to ascertain the impact of the legislative change on the rights and obligations under those agreements. It may be the case that common boiler plate provisions are sufficient or that the legislative change addresses the likely impact of that change on existing agreements.
  2. When reviewing contractual obligations that have a legislative setting, a prudent negotiator should negotiate terms that provide a fall-back position that will apply if the legislation ceases to exist or is substantially changed as it was in the Tatts Group Case.

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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