Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12
On 29 March 2017, the High Court overturned a decision of the Victorian Court of Appeal about the proper interpretation of the terms of a commercial lease.
This case involved a lease over land. The previous owner had desired to subdivided and sell that land but was prevented from doing so because of town planning restrictions. As a solution, the parties entered into a 99-year lease. The rental for the entire term was paid on entry into the lease. The original lessor and lessee later assigned their interests to Ecosse Property Holdings and Gee Dee respectively.
The assignees were then in dispute as to who must pay the rates and taxes for the land.
The original parties had amended clause 4 of the standard form contract such that it read:
“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).”
It was not in dispute that Clause 4 was ambiguous, such that surrounding circumstances, including the hand amendments, could be taken into account.[1]
Ecosse argued that the proper interpretation of clause 4 was that Gee Dee (the lessee) was required to pay all rates, taxes, assessments and outgoings in respect of the land. The Appellant’s argument for this interpretation relied on clause 13, which stated, “the intention of the Lessor was to sell and the Lessee to purchase the land.”
As such, if the intention was that of a sale scenario, it would make more sense that a lessee is to pay all rates, taxes and other outgoings as that would be the case if they were the purchaser of the land (but not if it was a usual landlord/tenant situation).
The majority in the High Court (Kiefel, Bell, Gageler[2], And Gordon JJ) agreed with Ecosse’s interpretation and adopted (at [7]) the view of Kyrou JA’s dissenting opinion in the Court of Appeal, that this clause indicates that the clear intention of the parties was to recreate, as far as possible in a lease, the conditions which would have followed a sale.
In reaching this conclusion, the majority provided some helpful reminders of how interpretation of commercial contracts is to be approached. The following extract from the judgement of Kiefel, Bell and Gordon JJ confirms the proper approach to construction of contracts:
[16] It is well established that 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 subjectively stated intentions of the parties to the contract.[3] In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. …
[17] Clause 4 is to be construed by reference to the commercial purpose sought to be achieved by the terms of the lease. It follows, as was pointed out in the joint judgment in Electricity Generation Corporation v Woodside Energy Ltd,[4] that the court is entitled to approach the task of construction of the clause on the basis that the parties intended to produce a commercial result, one which makes commercial sense. It goes without saying that this requires that the construction placed upon cl 4 be consistent with the commercial object of the agreement. [Emphasis added]
There were other surrounding circumstances upon which evidence had been led below and which the Court took into account. The length of the term, the payment of the rent as an upfront lump sum that was equivalent to the market value of the land, and the removal of the usual covenants that restrict a lessee’s use of land were clear indicators of a transaction that was an attempt to mirror the sale of land.
Notably, the High Court also took into account evidence that the original lessor was in receivership and considered this something of which the theoretical ‘reasonable businessperson would be aware’.[5] It is remarkable that the High Court went on to impute how a receiver might act in such circumstances and considered it ‘highly unlikely that a receiver would agree to burden the lessor company with uncertain financial obligations over the term of a 99-year lease.’ Whilst that might be factually true, it is a landmark step to impute how a party with a particular position (such as a receiver) might have acted at the time.
The High Court concluded that Court of Appeal majority’s analysis lacked ‘any reason that sounds in commercial sense for the parties to have chosen to amend the usual covenant respecting liability for rates, taxes and other outgoings contained in the standard form with a view to increasing the potential financial burden imposed on the lessor’.[6] The Court of Appeal’s conclusion ‘failed to give effect to the clear statement of the parties’ objective in entering the agreement [in clause 13]. It makes no commercial sense, having regard to that objective, for the lessor to remain liable for the payment of rates, taxes and other outgoings over the term of the lease’. [7]
Ultimately, this case serves as a useful reminder that when approaching the task of objectively interpreting a commercial contract, an interpretation that makes commercial sense should be achieved.
Source: Gratisography
Of course, what might make commercial sense to the interests of one party will usually be different to the other. Hence, the commercial object of the agreement is important. Thus, properly drafted objective clauses or recitals are critical. Some drafters may see these as tedious or immaterial, but in this case they saved the day!
To read the full judgement, follow this link – http://eresources.hcourt.gov.au/downloadPdf/2017/HCA/12
Words and phrases
- Proper approach to construction of contracts
- Contractual interpretation/Construction and interpretation of contracts
- Commercial purpose and objects
- Deletions from standard form contract
- Commercial contract
- Commercial lease
- Extrinsic evidence
- Surrounding circumstances
- Commercial purpose
- Commercial sense
- Objective v subjective interpretation
- Receiver
- 99 year lease
- Lessor and lessee obligations
- Words and phrases – “in respect of the said premises”, “payable by the tenant”, “reasonable businessperson”.
Catchwords
Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (High Court of Australia)