Australia: High Court delivers judgment on lease interpretation, highlights importance of clarity and precision in drafting

Services: Real Estate & Construction
Industry Focus: Real Estate & Construction

What you need to know

  • A recent decision of the High Court reinforces the importance of ensuring that all contractual documents, including leases, state fully, clearly and precisely the commercial terms agreed by the parties.
  • While the High Court's decision relates specifically to a long-term farm lease in circumstances where the parties to the lease had changed over time, the lessons learned are applicable to any commercial lease.
  • Both landlords and tenants should take heed of the outcome in the Ecosse Property Holdings case.

As we have explored previously, careless drafting of legal documents can have significant consequences, particularly when those documents come under the microscope in litigation.

In our December update, we looked at the Victorian Court of Appeal's decision in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd1 where the Court had the task of interpreting an outgoings clause in a poorly drafted long-term farm lease which the parties intended to replicate, as far as possible, the conditions following a sale of the 'premises' to the tenant. The Court held that the outgoings clause did not oblige the tenant to pay all the outgoings in respect of the premises, and that a residual liability remained with the landlord for the payment of outgoings that were its responsibility as owner of the land. This, of course, is not what happens when land is sold by one party to another. Under a sale, the purchaser is responsible for the payment of all outgoings following completion.

The High Court has now heard the landlord's appeal from the Victorian Court of Appeal's decision, and has handed down its decision as Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12 (Ecosse Property Holdings). Here, we identify the lessons that can be learned from the High Court's decision.

The facts and issue for the High Court

The lease in question was entered into by Westmelton (Vic) Pty Limited (as landlord) (Westmelton) and Peter Morris (as tenant) in 1988 and registered. The leased land was part of a much larger parcel of land owned by Westmelton. Previously, the parties had considered subdividing the larger parcel of land to create a separate lot for the leased land which could be sold to Mr Morris. Unfortunately, planning restrictions prevented this. The parties then decided to deal with the land by way of a lease for a term of 99 years for a rental of $70,000, which was paid in full in advance of the lease's execution. It was common ground between the parties that the rental of $70,000 reflected the market value of the premises. At the time of entry into the lease, Westmelton was in receivership.

In 1993, Westmelton sold its interest in the land subject to the lease to Ecosse Property Holdings Pty Ltd. In 2004, Gee Dee Nominees Pty Ltd took a transfer of the lease from Peter Morris.

The relevant provisions of the lease which were in dispute between Ecosse Property Holdings as landlord and Gee Dee Nominees as tenant were clauses 4 and 13.

Clause 4:

"AND [the Lessee] also will pay all rates taxes assessments and outgoings whatsoever excepting land tax which during the said term shall be payable by the Landlord or tenant in respect of the said premises (but a proportionate part to be adjusted between Landlord and Tenant if the case so requires)".

Clause 13:

"The parties acknowledge that it was the intention of the Lessor to sell and the Lessee to purchase the land and improvements hereby leased for the consideration of $70,000.00 and as a result thereof the parties have agreed to enter into this Lease for a term of ninety-nine years in respect of which the total rental thereof is the sum of $70,000.00 which sum is hereby acknowledged to have been paid in full."

The issue for the High Court was the significance of clause 13 and other surrounding circumstances for the interpretation of clause 4 governing liability for the payment of rates, taxes and other outgoings.

The decision of the High Court

The High Court held by majority that, on its proper interpretation, clause 4 imposed on the tenant the obligation to pay all rates, taxes, assessments and outgoings whatsoever that were payable during the term of the lease in respect of the land leased to the tenant. Kiefel, Bell and Gordon JJ delivered a joint judgment representing the reasons of the High Court. Gageler J delivered a separate judgment agreeing with the orders of Kiefel, Bell and Gordon JJ for similar reasons. Nettle J dissented.

Each judge approached the task by reference to well established principles of contractual interpretation:2

  • The terms of a commercial contract are to be understood objectively by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjective intention of the parties.
  • This requires that the reasonable businessperson be placed in the position of the parties.
  • It is from this perspective that the court considers the circumstances surrounding the contract, and the commercial purpose and objects to be achieved by it.

With these principles in mind, their Honours approached the task of interpreting the allocation of responsibility for outgoings under clause 4. Two factors were critical to the decision of the majority.

  1. The commercial purpose of the transaction and clause 13's role in identifying that purpose.

Kiefel, Bell and Gordon JJ noted3 that clause 13 did more than just identify the term of the lease, the rental and the basis on which the rental was paid. It also offered an explanation of why the parties entered into a lease rather than a contract for sale and purchase. It explained that the parties had chosen instead to convey a leasehold estate for almost a century for a fixed sum in circumstances where they were unable to convey a freehold estate in the land. This stated purpose, in conjunction with the removal of the covenants restricting the tenant's user and capacity to deal with the land and the landlord's rights of inspection and termination for breach and re-entry, supported the conclusion that the lease was intended to recreate, as far as possible in a lease, the conditions which would have existed following a sale. In their Honours' opinion, this conclusion would have followed even without clause 13 having regard to the surrounding facts and circumstances which a reasonable businessperson in the position of the parties may be taken to have known.

  1. The receivership of Westmelton

The tenant argued that the failure to include an option to renew or to purchase for a nominal sum at the end of the lease suggested that the landlord had agreed to bear responsibility for outgoings payable by the landlord as owner on the basis there was value in the freehold on expiry of the lease. The landlord countered that the omission was inadvertent. The majority favoured the landlord's view. Kiefel, Bell and Gordon JJ noted[4] that it was highly unlikely that a receiver would agree to burden the landlord company with uncertain financial obligations over the term of a 99 year lease.

Important observations

The first point to note is, as indicated in our previous update following the Court of Appeal's decision, the need for care in drafting. Of the nine judges that considered the lease, three decided the case in favour of the tenant. It could easily have gone the other way.

The second point to note is that care must be taken with the form of document used to document the parties' agreement. This is particularly so in a case such as Ecosse Property Holdings as it is not unknown for leases to be used as documentary vehicles for the disposal of land. Such leases need to be drafted with considerable care. In retrospect, the original parties' decision to use an old precedent form of farm lease for this transaction was ill advised and could have resulted in those parties bearing considerable cost in having the High Court decide what their document meant. In the end, those costs were borne by the landlord who purchased the land from Westmelton and the tenant who took an assignment of the lease.

However, the same is also the case with any commercial lease. A well-drawn lease, like any transaction document dealing with property, needs to take proper account at the outset of the nature of the property being conveyed and the level of control that the landlord or the tenant wishes to have over the building and the premises respectively during the term of the lease. For example, the parties to a lease of land may wish to allocate risk and responsibility for the repair and maintenance of the improvements on the land differently to the way such risk is allocated in a lease of premises where the landlord has ongoing responsibilities to other tenants in the building or on the site. Leases of premises in a building which is subject to a strata scheme add an additional layer of complexity, in that the owners corporation (who will be a stranger to the lease) has control of the common property including the services that are provided to the strata lots within the scheme. These things need to be considered before deciding on the form of lease to be used for a particular transaction.

The third point to note is that the High Court was interpreting the meaning of the outgoings clause in circumstances where the lease was registered presumably because of its long term and neither party to the dispute was a party to the original transaction. A failure to use an appropriate form of document and to draft carefully can have consequences for third parties who take title subject to the document where there is little or no evidence of the objective purpose of the transaction. It can also have consequences for the original parties where poor drafting or document selection may introduce a significant risk to the value of what is being conveyed, either when the land is sold to a purchaser or when the lease is assigned to an incoming tenant.

These risks are amplified when considering the comments of the High Court in a recent case concerning a registered easement (see Westfield Management Limited v Perpetual Trustee Company Limited (2007) 233 CLR 528 (Westfield Case). There, a unanimous High Court said:

"the third party who inspects the Register cannot be expected, consistently with the scheme of the Torrens system, to look further for extrinsic material which might establish facts or circumstances existing at the time of the creation of the registered dealing and placing the third party (or any court later seized of a dispute) in the situation of the grantee".5

Having regard to these comments, it could be said that the landlord in Ecosse Property Holdings was fortunate that clause 13 was included in the lease, as this allowed the Court to interpret clause 4 consistently with the Westfield case by focussing on the significance of clause 13 to the commercial objectives of the lease. The result could have been different if clause 13 did no more than state the term of the lease, the rental and the basis on which the rental was paid.

Key takeaways

The key takeouts from the High Court's decision in Ecosse Property Holdings are:

  1. All contractual documents, including leases, should state fully, clearly and precisely the commercial terms agreed by the parties.
  2. Care needs to be taken at the beginning of any transaction in identifying the right form of document for the transaction. The wrong choice of document can produce unintended commercial consequences resulting in expensive litigation ending up in the High Court.
  3. These risks may be amplified in the case of long term leases when a dispute arises years down the track after the parties have changed. In these circumstances, it may be difficult to refer to evidence outside the terms of the lease to assist a court in interpreting the commercial objectives of the lease. In Ecosse Property Holdings, this issue did not arise as the inclusion of an express term setting out the commercial objectives of the transaction enabled the High Court to resolve the dispute using the usual rules of contractual interpretation that apply to commercial contracts.

Footnotes

1 [2016] V ConvR 54-879.
2 Kiefel, Bell and Gordon JJ at [16] and [17], Gageler J at [45] and Nettle at [73].
3 At [18] and [19].
4 At [25].
5 At 539.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Holman Webb
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Holman Webb
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions