Australia: Intention and mistake - every lease lawyers nightmare come true

Last Updated: 1 March 2018
Article by Corinne Attard

A little proof-reading goes a long way

Every lease lawyer's nightmare came true in this case. A long term lease is negotiated and many years later someone discovers an apparent error in the way the outgoings clause is drafted and therefore how the outgoings have been calculated and recovered for all those years. To make it worse, the lease is for the key department store tenant (Myer) in Australia's premier shopping centre (Chadstone) - the stakes were high with about $20 million having been apparently undercharged.1

How the Lease was negotiated

When the matter came to court it was the best part of 30 years since the lease negotiations originally started and the court had to piece together if there was, in fact, a mistake made or not. While some documents and files had been destroyed or lost and memories naturally fade, the court was able to rely on the existing correspondence, board minutes, drafts and witness statements to piece together the long process by which the lease was negotiated including the outgoings provisions.

The lease was to be for a term of 30 years with a 15 year option and the rent and outgoings clauses were heavily scrutinised by teams of lawyers on both sides as well as by the representatives of the landlord and tenant, themselves being very experienced in commercial leasing. The initial heads of agreement itself took a year to negotiate, starting in September 1995, and involved 14 drafts before the agreement for lease (AFL) and lease were even tackled. The outgoings formulations were closely examined and multiple versions passed between the parties before the final version was included in the documents signed by both parties. The AFL was signed in September 1997 and the new lease term commenced in November 1998.

The "Mistake"

So what was the alleged mistake? In summary the provision in the lease's outgoings schedule provided that Myer would pay a proportion of the centre's "Increase in Variable Outgoings". The outgoings schedule defined "Base Accounting Period" as the 12 months commencing on the 1 July following the lease Commencing Date. That is, the first full 12 month "Accounting Period" or financial year of the term.

In paragraph (a) of the definition of 'Increase in Variable Outgoings', this sum was to be determined for the second full Accounting Period in relation to the amount that the Variable Outgoings for that period exceeded the Variable Outgoings for the immediately preceding Accounting Period.

Paragraph (b) of the definition was stated to apply to each subsequent Accounting Period, however quite oddly, it then repeated paragraph (a) so that the method of calculation was actually the same for all years. Further, despite there being a definition of Base Accounting Period included this expression was not used anywhere.

The effect of the provision as written, was that Myer was to pay the increase in outgoings each year above the previous year's and not as the landlord later stated was the intention, that it paid the increase over the original Base Accounting Period. The difference between the two methods cumulatively amounted to millions of dollars.

Each year the landlord invoiced Myer on the basis of the lease provision as written and Myer paid the relevant sum, or adjustments were made between them in accordance with the lease. The rate at which Myer paid outgoings was in fact much lower than comparable tenants and the outgoings recovery did not keep up with inflation - this was known and accounted for in the landlord's budgets during the period.

The "Mistake" is discovered

In about October 2012, the landlord's property analyst and its in-house lawyer reviewed the provisions and formed the view that there must have been a drafting mistake. However the landlord did not immediately advise Myer, apparently because it was in the process of yet another redevelopment of Chadstone and may have needed Myer's consent. In December 2015 (3 years later) the landlord wrote to Myer explaining the "mistake" demanding the shortfall be paid. A year later the litigation commenced.

The Landlord's claims

The Landlord asked the court to correct the "mistake" and substitute its own clause (which would allow it to recover the shortfall which was now almost $20 million). Firstly the landlord asserted the current outgoings clause produced such an absurd result (or one inconsistent with the rest of the contract) that it was self–evident that it was a mistake and the court should replace the clause. This was rejected as the outgoings formula had been used by both sides without problem for the last 20 years, did not produce an absurd result, and was not ambiguous. Also it was not self-evident that the landlord's proposed replacement clause was the one intended. The court agreed the current clause was poorly drafted and not commercially convenient for the landlord but it was not the court's job to make the agreement more beneficial for one party.

The landlord also argued that the lease should be rectified as it did not reflect the common intention at the time of entering into the contract. This was rejected due to the lack of evidence of this alleged common intention. The court noted that the lease had passed through many experienced hands on both sides including several experienced property solicitors. To be a common mistake it would require there to be incompetence on the part of at least 8 skilled and experienced individuals. The judge did not consider that this was likely. The landlord's claims failed.

Myer argues

Although the landlord's claims were dismissed, the court still dealt with each of the defences raised by Myer in the event that they had succeeded. As it turns out, each of Myer's defences failed so it was just as well the landlord did not manage to establish its claim.

Myer firstly argued the landlord should not succeed because of the delay in pursuing its claim. This was rejected since Myer was not prejudiced by the delay as it retained the benefit of the funds during that period. Also no documentary evidence was lost in the period from the landlord becoming aware of the "mistake" to pursuing its claim.

Myer also argued (quite inventively) that each time the landlord issued its annual outgoings statement with the balance payable (offsetting amounts already paid) which was paid by Myer, it was a separate contract and the form of an "account stated" and agreed by both parties. As Myer had paid each amount each contract was finalised and beyond dispute. This argument was rejected since the outgoings statement was not a final determination of the amount owed and could be disputed by the tenant under the lease. Finally Myer argued the statute of limitations prevented the landlord recovering that part of the outgoings shortfall which accrued more than 6 years before the action. This was rejected since the obligation to pay did not arise until the landlord issued the demand for the shortfall (which was less than 6 years before).

The facts are fascinating for those involved in the time-consuming process of drafting and negotiating rental and outgoings clauses. They can be complex and challenging to the arithmetic abilities of many (including lawyers). These types of provisions, which involve calculations over a long period, should be fully tested to ensure they work and achieve the result that is intended. While usually having multiple sets of eyes vetting the provisions will prevent mistakes or ambiguities, this case does show that sloppy drafting can slip through even when the parties are this prominent and experienced. A document can have so many versions and tinkering to clauses that it can make a draftsperson blind to the inconsistencies they create. What presumably seemed clear to them at the time when looked at later is not so clear. In hindsight having a final review by someone completely new to the document would have probably prevented this question arising. A little proof-reading would have gone a long way. The words of Mark Twain should always be remembered:

You think you are reading proof, whereas you are merely reading your own mind; your statement of the thing is full of holes & vacancies but you don't know it, because you are filling them from your mind as you go along.

Footnote

1Perpetual Limited, Bridgehead Limited & Vicinity Funds RE Limited v Myer Pty Ltd [2018] VSC 2

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