The NSW Supreme Court has recently delivered a very interesting analysis of a promise by two parties to "negotiate and agree" rent relief due to the impact of the COVID-19 pandemic. However, the case has ramifications well beyond pandemic issues. Rather, it represents a thoughtful exploration of the difference between using a dispute resolution provision in a contract to compel parties to agree versus determining whether an agreement has, in fact, already been made.
The parties in Shogroup Hotels Pty Ltd v Harris Street Holdings Pty Ltd  NSWSC 1119 entered into a deed relevant to their obligations under a registered lease. The deed contained the following clause 10:
"The parties agree that if the COVID-19 pandemic escalates such that additional restrictions are imposed which would prevent the Tenant being able to trade in the manner it did prior to the date of this deed then the parties will meet to discuss and agree upon an additional rent reduction and extension of the Adjustment Period."
The pandemic had an impact on trading, enlivening the clause. However, despite attending mediation the parties did not agree on the rent relief.
There were a number of construction questions before the court. The primary question was whether clause 10 comprised an "agreement to agree" and was thus unenforceable.
The plaintiff tenant submitted, amongst other things, that while clause 10 might be objectionable and an "agreement to agree", the dispute resolution provisions in the lease could cure the problem by referral to a third party expert.
Having accepted that clause 10 of the deed should be read as a term of the lease, it fell to the Court to determine whether the failure of the parties to agree on the rent relied upon was a "dispute" for the purposes of the dispute resolution provisions of the lease (clause 28).
The plaintiff submitted that the failure to reach agreement about rent relief was to be regarded as a dispute arising under a provision of the lease constituting by the failure of the parties to agree (i.e. pursuant to clause 10 of the deed) on performance obligations under the lease. In the alternative, the plaintiff submitted that the dispute arose under the provisions of the lease compelling it to pay rent – presumably, a dispute about what rent should be paid.
The defendant contended that a failure to reach agreement under clause 10 of the deed exhausted the operation of that clause and there was otherwise no dispute as to the obligation to pay rent which remained as per the lease. To find that rent relief was to be determined by an expert (i.e. rather than the parties as agreed) would be inconsistent with clause 10 of the deed.
The Court's analysis
The Court contrasted a failure to reach agreement on the one hand, with a dispute about whether an agreement had been reached, on the other hand. In the latter case, the dispute is about whether the operation of the lease has been altered by an agreement alleged to have been made – a question for an expert with legal knowledge. The Court found that the dispute resolution provisions concerned "...disputes that arise under a provision of the lease and concern existing rights and obligations of the parties under the lease..." (at 30).
In finding against the plaintiff, the Court went on to say:
"A failure to reach consensus upon the terms of an agreement (which, only if made, would operate as a variation to the lease) does not give rise to a dispute that is suitable for expert determination in the manner described. There are no competing arguments concerning existing rights or obligations under the lease [emphasis added], and it is difficult to conceive how an expert would determine the outcome of such a 'dispute".
The Court further said that it would be inconsistent to find that the rent obligations under the lease should be altered by an expert in circumstances where the parties has expressly agreed that it would only be altered if they agreed so (at 33).
The Court concluded that the obligation under clause 10 to "discuss and agree" as unenforceable as "an agreement to agree" and not able to be overcome by the operation of clause 28 of the lease.
It is not uncommon for contracting parties to leave future matters for further agreement. Where this is to occur, it is wise to bestow the parties with obligations of good faith and to contemplate and draft for circumstances where agreement cannot be reached.
In this case, the Court noted that it would have been a simple matter to incorporate drafting to have an expert take over in the absence of agreement.
1 The Court determined that clause 10 should
be read as a term of the lease.
2 Interestingly, the plaintiff did not seek to contend that clause 10 was, in fact, an obligation to "negotiate in good faith". This was so, primarily it seems, because the parties had discharged that obligation in any event.
3 The dispute resolution clause was largely unremarkable and not in issue. If the Court were to find in favour of the plaintiff a referral would, it is expected, have been made to a valuer to determine rent relief. Importantly however, the Court did note that there were no express provisions for determining rent relief as contemplated by clause 10 of the deed.
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