Carlingford Montessori Academy Pty Ltd v Thallon HLD Pty Ltd

The plaintiff, Carlingford Montessori Academy Pty Limited (CMA) is the lessee of premises known as Level 1 and 2, 1 James Street, Carlingford, New South Wales (the Premises) [1] under a lease that commenced on 18 December 2020 for a term of 10 years expiring on 17 December 2030, with an option to renew for two further terms of 10 years each (the Lease). The defendant, Thallon HLD Pty Limited, is the owner of the Premises and the lessor under the Lease (the Lessor).

The terms of the Lease permit the use of the Premises as a childcare centre with associated car parking. The Lease contains a warranty by CMA that it will comply with all laws and with the terms of any consents or approvals necessary for the operation the childcare business, and that it will not cause or permit any such consent or approval to lapse or to be revoked.

CMA is obliged to keep the Premises in good repair, and to pay rent of $216,000 per annum, increased by 3 per cent annually and subject to market review every five years.

The Lease provides that CMA indemnifies the Lessor against, inter alia, all claims arising during or after the term of the Lease from any cause relating to the Premises, or any property or person inside or outside the Premises, occasioned or contributed to by any act, neglect or default of CMA or its employees.

Clause 8 of the Lease relevantly provides:

The share capital of CMA comprises 100 ordinary shares.

At the time the Lease commenced on 18 December 2020:

In September 2022, MAG acquired from CAVS16 and Miland Estate their 25 per cent shareholdings in CIG (the September 2022 transactions).

As a result of those transactions:

It is common ground that MAG thereby increased its shareholding in CIG from 50 per cent (less than majority ownership) to 100 per cent, which gave MAG control of all of the voting shares in CIG, which in turn owns and controls all of the voting shares in CMA. It is also common ground that the September 2022 transactions resulted in Greentown – the ultimate holding company of MAG and MAG Holdings since 2019 – becoming the ultimate holding company of CMA.

CMA does not claim to have sought or obtained the Lessor’s consent for the September 2022 transactions. CMA contends that it was not required to obtain the Lessor’s consent, because the transactions did not result in a change in the person who beneficially owns or controls the majority of its voting shares within the meaning of clause 8.3 of the Lease, properly construed.

On 3 July 2024, soon after the Lessor says that it first became aware of the increase in MAG’s stake in CIG, the Lessor issued a “Notice of Breach” to CMA setting out the following particulars of breach of the Lease:

The Notice of Breach attached extracts from the audited financial statements of MAG Holdings for the years ended 31 December 2020 and 31 December 2023 which listed the subsidiaries within the Montessori Academy group of companies (the MA Group) as including CMA, and which recorded an increase in the MA Group’s “ownership interest” in CMA from 50 per cent in the year ended 31 December 2020 to 100 per cent in the year ended 31 December 2023.

The Notice of Breach stated:

CMA did not respond to the Notice by seeking the Lessor’s consent to the September 2022 transactions which the Lessor contended constituted an assignment of the Lease. Rather, CMA commenced these proceedings by Summons filed on 5 July 2024 claiming:

On 12 July 2024, upon CMA giving the usual undertaking as to damages, the Court noted the Lessor’s undertaking not to interfere with CMA’s occupation of the Premises in reliance on the Notice of Breach dated 3 July 2024 or otherwise in reliance on clause 8.3 of the Lease.

The Court also made the following additional notation on 12 July 2024:

“The only basis upon which Plaintiff seeks the relief in its Summons filed 5 July 2024 is its assertion that no breach as alleged in the Notice of Breach dated 3 July 2024 has occurred.”

During the hearing of the Summons on 14 February 2025, counsel for CMA sought to introduce a further basis for the relief claimed by submitting that the Notice of Breach was “bad for lack of specificity”. As senior counsel for the Lessor submitted, paragraph 2(a) of the Notice of Breach, read together with the extracts from the audited financial statements of MAG Holdings to which I have referred above, identified with sufficient particularity the transactions by which the MA Group increased its ownership interest in CMA from 50 per cent to 100 per cent in the period between 31 December 2020 and 31 December 2023 as the change which the Lessor contended constituted an assignment of the Lease that required its consent pursuant to clauses 8.1 and 8.3 of the Lease. Moreover, CMA must have identified the substance and nature of the breach from the terms of the Notice of Breach before taking the step on 12 July 2024 of expressly limiting the basis of its claim for the declaratory and injunctive relief sought in these proceedings to its contention that no breach as alleged in the Notice of Breach had occurred. As I have already mentioned, the basis of that contention is that the September 2022 transactions did not bring about a change in the persons who beneficially own or control a majority of CMA’s voting shares within the meaning of clause 8.3 of the Lease, properly construed.

There is no dispute about the facts concerning the September 2022 transactions. [2] CMA’s contention that those transactions did not attract the operation of clause 8.3 of the Lease depends solely on the construction of that clause.

The Lease is a commercial contract. Its terms are to be understood objectively, according to what a reasonable businessperson, placed in the position of the parties, would have understood them to mean, having regard to the circumstances surrounding the Lease and the commercial purpose and objects to be achieved by it. [3] The Court is entitled to approach the task of construing clause 8.3 on the basis that the parties intended to produce a result which makes commercial sense. However, the commercial object of the Lease cannot be used to give the words of clause 8.3 a meaning that they cannot reasonably bear. [4] Caution is required when resort is had to assertions of commercial sense (or, conversely, commercial inconvenience) as a reason for construing a commercial contract in a manner that departs from the ordinary meaning of the language that the parties have in fact used. [5] There is “no licence for ‘judicial rewriting’ of an agreement”. [6] The Court is not permitted to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust. [7]

CMA submits that, properly construed, clause 8.3 applies where there has been a change in the beneficial ownership of the majority of the voting shares of the lessee company (which counsel for CMA referred to as a change in direct control), but is not enlivened by a change in the beneficial ownership of the majority of the voting shares of a parent company or ultimate holding company of the lessee company (referred to by counsel for CMA as a change in indirect control of the lessee company).

As the Lessor submitted, CMA’s construction ignores the ordinary meaning of the language that the parties have used in clause 8.3(1), which creates a distinction between a change in the persons who beneficially own the majority of the voting shares in the lessee, and a change in the persons who control the majority of the voting shares in the lessee. Clause 8.3(1) expressly provides that the clause applies when there is a change either to the beneficial owners or to the controllers of the majority of the lessee’s voting shares. In my opinion, a reasonable businessperson would understand the second scenario –a change in the control of the majority of the lessee’s voting shares – as including a change in the persons who are in a position to control the casting of the votes attached to a majority of the lessee’s voting shares by reason of a change in the ownership of the majority of the voting shares in the lessee’s parent company or ultimate holding company. The reasonable businessperson would understand that a change in the ownership of the majority of voting shares of a parent or holding company results in a direct or indirect change in control of the voting shares of its wholly or majority owned subsidiaries as a matter of commercial reality, as reflected in s 46(a)(ii) of the Corporations Act 2001 (Cth). [8]

I reject CMA’s submission that the words “the change in shareholding” in clauses 8.3(2), 8.3(3)(b) and 8.3(3)(d) supports its construction of clause 8.3(1) as being limited to a change in the beneficial ownership of the majority of the voting shares of the lessee company itself. As the Lessor submitted, those words are entirely consistent with clause 8.3(1) applying to any change in the shareholding of the lessee’s parent company, intermediate holding company, or ultimate holding company which brings about a change in the person controlling the casting of the votes attached to a majority of the lessee’s voting shares. A change in the control of the majority of the lessee’s voting shares can only be triggered by a change in the majority shareholding of the lessee itself or of another company within the corporate group of which the lessee forms part. For the reasons I have explained above, the reasonable businessperson would understand the language used by the parties in clause 8.3(1) as picking up any such change in shareholding, irrespective of whether it results in a change in the control of the composition of the board of directors of the lessee, or a change in the control of the decision-making of those directors. [9]

However, in circumstances where there is a deemed assignment under clause 8.3(1) by reason of a change in the indirect control of the majority of CMA’s voting shares, rather than a change in the direct ownership of the majority of CMA’s voting shares, clause 8.3(3) operates to limit the circumstances in which the Lessor may withhold consent to the deemed assignment of the Lease to the following:

If the change in indirect control of the majority of CMA’s voting shares does not result in any change in the directors of CMA, then clauses 8.3(b) and (c) will have no work to do, and the Lessor will not be entitled to withhold consent to the deemed assignment unless clause 8.3(a) and/or clause 8.3(d) applies.

Thus, clause 8.3 requires CMA to seek the Lessor’s consent for any change in the direct or indirect control of a majority of its voting shares, thereby affording the Lessor the opportunity to be apprised of the fact of the change and, in case of a change in indirect control, to ascertain whether it will result in a change in the composition of the directors of CMA in whom the management of the company is vested, including the company’s operation of its childcare business at the Premises in a manner that complies with the terms of the Lease. The scope of the circumstances in which the Lessor may withhold consent to a change in indirect control, as described above, is commensurate with the Lessor’s interest in CMA’s compliance with its obligations under the Lease and in ensuring that any changes in control of the majority of CMA’s voting shares does not undermine or adversely affect CMA’s ability to carry on the business for which it is permitted to use the Premises and its ability to comply with its obligations under the Lease, and that the Lessor continues to hold adequate security for CMA’s performance of those obligations. I accept CMA’s submission that this is the object of clause 8.3, but for the reasons explained above I reject CMA’s submission that this supports the construction of the words “any change in the persons who beneficially own or control a majority of the [lessee’s] voting shares” as referring only to a change in the ownership of the majority of the voting shares in the lessee company, and excluding a change in the control of those shares by reason of a change in the beneficial ownership of the majority of shares in a parent or holding company of the lessee.

Moreover, as the Lessor submitted, clause 8.3(4) of the Lease plainly contemplates that clause 8.3 will apply to a change in ownership of the majority of the shares in the lessee’s parent company (as occurred in this case), and excludes the operation of clause 8.3 in that scenario only if the lessee or its parent company is a publicly listed company. Clause 8.3(4) therefore provides further support for the construction of clause 8.3 as applying to a change in the persons who control the majority of the voting shares in the lessee by reason of a change in ownership of the majority of the shares in a parent or holding company of the lessee.

I consider that this construction of clause 8.3 is consistent with the ordinary meaning of the words used by the parties in clause 8.3(1) in the context of clause 8.3 and the Lease as a whole, as they would be understood by a reasonable businessperson placed in the position of the parties, and produces a result that makes commercial sense by giving effect to the object which I have described above. I reject CMA’s submission that it produces commercial inconvenience by requiring CMA as the lessee to seek the Lessor’s prior consent for changes in the ownership of its parent and holding companies over which CMA has no control. The Court does not have a licence to rewrite the terms of clause 8.3 to avoid any commercial inconvenience that may result from CMA needing to take steps to ensure that its parent and holding companies are aware that any change in the ownership of their shares may trigger a requirement for CMA to seek the Lessor’s prior consent under the Lease which is of central importance to CMA’s business. I do not consider that a need for CMA’s parent and holding entities to facilitate its compliance with clause 8.3 in order to avoid jeopardising the conduct of the business of their subsidiary at the Premises rises to the level of commercial inconvenience in any event.

For all of those reasons, there will be an order dismissing the Summons.

The Lessor’s submissions foreshadowed an application for damages under the usual undertaking as to damages given by CMA on 12 July 2024, as referred to at [16] above. I will hear the parties in relation to the directions to be made concerning any such application, and in relation to the costs of the proceedings.