Khanal v FSU Property Pty Ltd

1. [1]

   ADAMSON JA: I agree with Free JA.

2. [2]

   FREE JA: The applicant, Dipak Khanal (Mr Khanal), seeks leave to appeal from a decision of the District Court on 1 May 2025. The District Court’s decision concerned a claim brought by the present respondent, FSU Property Pty Ltd (FSU), against Mr Khanal in his capacity as a guarantor of the obligations of the lessee, Hamro Institute of Business Technology Pty Ltd (Hamro), under a lease granted by FSU. On 1 May 2025 the District Court struck out Mr Khanal’s defence to that claim and awarded summary judgment in favour of FSU, in the amount of $1,358,146.32 (comprising rental arrears and interest). Leave is required to appeal from a decision of this kind of the District Court on an application for summary judgment: s 127(2)(d) of the District Court Act 1973 (NSW).

3. [3]

   The parties, having provided written submissions on the question of leave to appeal, consented to the application for leave being dealt with on the papers. For the reasons which follow, leave to appeal should be refused with costs.

Factual background

1. [4]

   Hamro, which has since been liquidated, operated a school for international students, trading under the business name Kingston Institute of Australia. Mr Khanal was the sole director of Hamro. In August 2020 Hamro entered into a lease with FSU in respect of premises in Haymarket from which the school operated (the Lease). Mr Khanal was a party to the Lease in his capacity as a guarantor. According to the express terms of cl 15.1 of the Lease, Mr Khanal guaranteed to FSU the due and punctual performance by Hamro of its obligations under the Lease. Mr Khanal also relevantly indemnified FSU against any loss suffered by FSU as a result of any failure by Hamro to pay any monies under the Lease.

2. [5]

   The Lease was executed by Hamro through the signature of Mr Khanal, in his capacity as sole director and secretary of Hamro. The Lease was also separately executed by Mr Khanal, in his personal capacity, as guarantor. His signature for that purpose appears under the heading “Executed by Guarantor”. The same signature appears at the bottom of the reference schedule page of the Lease which identifies Mr Khanal as the only guarantor.

3. [6]

   Apparently as the result of disruption to the international education sector brought about by changes in the treatment of student visas by the Commonwealth government, the school encountered financial difficulties and fell behind on its rental payments to FSU. Hamro eventually went into liquidation owing substantial amounts to FSU for unpaid rent. After issuing a number of demands for payment of the outstanding amounts, FSU commenced proceedings against Mr Khanal in the District Court, by statement of claim filed on 16 October 2024, seeking enforcement of the guarantee and indemnity granted by Mr Khanal under the Lease.

4. [7]

   On 11 November 2024 Mr Khanal filed a defence to the statement of claim. Mr Khanal admitted that Hamro failed to pay to FSU amounts owing for rent under the Lease. Mr Khanal denied that he was liable as a guarantor for the default by FSU. He denied that there was any personal guarantee by him under the Lease and pleaded that the only guarantee under the Lease was a bank guarantee. Clause 16.4 (read with item 7 of the reference schedule to the Lease) provided for a bank guarantee of $247,500, equivalent to five months’ rent plus GST. Mr Khanal pleaded that Hamro’s solicitor had confirmed to him that there was no personal guarantee and that if there had been a personal guarantee in the Lease Mr Khanal would not have signed it.

5. [8]

   Mr Khanal sought to rely in his defence on the fact that during the period in which it was not paying the full amount of rent due Hamro made certain representations to FSU about the financial difficulty that it was in, seeking to explain its non-payment of rent and to obtain agreement for an alternative arrangement for payment of outstanding amounts by instalment. Mr Khanal in his defence also sought to rely on Hamro’s proposals to FSU to sub-lease the property to other tenants to address its inability to pay rent. The defence did not go so far as to allege that there had been any agreed variation to the Lease arising from these endeavours or otherwise. Indeed, the defence included allegations that FSU had ignored certain proposals and failed to provide cooperation in response to communications from Hamro about its financial difficulties.

Decision of the District Court on the application to strike out the defence and order summary judgment

1. [9]

   On 24 March 2025 FSU filed a notice of motion in the District Court seeking that the defence be struck out pursuant to r 14.28(1) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) and that summary judgment be granted in favour of FSU pursuant to r 13.1 of the UCPR (which provides for summary judgment) and/or r 17.7 (which provides for judgment based on admissions).

2. [10]

   The primary judge concluded that the defence disclosed no reasonable defence to FSU’s claim. Her Honour concluded that nothing in the defence provided a sound basis to gainsay the clear conclusion that, by cl 15.1 of the Lease, Mr Khanal did grant a guarantee to FSU in respect of the performance of Hamro’s obligations under the Lease. FSU was entitled to rely on the guarantee to recover the amounts claimed in the statement of claim. Her Honour considered but rejected the possibility, at best raised implicitly by the defence, that there might be said to have been some frustration of the contract arising from changes in government policy affecting the viability of Hamro’s business.

3. [11]

   The primary judge noted the various claims in the defence about a lack of cooperation from the plaintiff after Hamro encountered financial difficulties. Her Honour observed that in some respects the characterisation of events in the defence by Mr Khanal was factually flawed. For example, although Mr Khanal complained of a lack of notice requiring Hamro to vacate the premises, in fact the documents showed that FSU gave almost four months’ notice. The primary judge observed that, in any event, the matters asserted by Mr Khanal would not provide a legal excuse for Hamro not paying rent, particularly given the requirement under cl 3.1.1 of the Lease that rent be paid by equal monthly instalments in advance without deduction or set-off.

4. [12]

   Having reached these conclusions, the primary judge struck out the defence. Although Mr Khanal had not sought leave to re-plead if the defence were struck out, her Honour considered whether such leave should be granted. However, in circumstances where there was no suggestion of unconscionability or other identifiable basis to avoid enforcement of the Lease, the matter turned on the interpretation of the guarantee and indemnity provision in the Lease, which was clear. The primary judge was satisfied that it was appropriate therefore to grant summary judgment in favour of FSU for the amount claimed for unpaid rent, interest and costs.

Application for leave to appeal and proposed grounds of appeal

1. [13]

   Mr Khanal seeks leave to appeal from the decision of the District Court to strike out his defence and award summary judgment in favour of FSU. Mr Khanal has filed a draft notice of appeal identifying the grounds on which he would seek to demonstrate error on the part of the primary judge, if leave be granted.

2. [14]

   The first proposed ground of appeal essentially repeats, with some variation and elaboration, the matters relied on in Mr Khanal’s defence. Mr Khanal argues, in substance, that the primary judge ought to have found that there was a reasonable defence to the effect that Mr Khanal did not provide an enforceable personal guarantee under the Lease. Mr Khanal seeks to rely in this regard on the negotiations that preceded the Lease, including a “Heads of Agreement” document signed on 1 July 2020 and associated email communications. Mr Khanal relies on the fact that the Heads of Agreement referred to a bank guarantee and did not refer to a personal guarantee, and argues that in the circumstances there is no enforceable personal guarantee under the Lease. The same is true of the negotiations surrounding the Heads of Agreement, according to Mr Khanal. He contends that FSU acted deceptively and in bad faith having regard to the discrepancy between the Heads of Agreement and the Lease. Mr Khanal reiterates that he would not have signed the contract had the guarantee and indemnity clause been “visible or disclosed to me at the time of execution”. Mr Khanal says that he signed the contract “without suspicion or detailed verification, relying on the integrity of the Heads of Agreement that had been presented”.

3. [15]

   The second proposed ground of appeal refers to a cross-claim for $2.5 million. Mr Khanal relies on alleged efforts by Hamro to deal with its inability to pay the outstanding rent owed to FSU and otherwise address the problems faced by Hamro, including proposals to sublease the premises and requests for an extended period of notification before being required to exit the premises. Mr Khanal also refers to regulatory obligations imposed on Hamro under the relevant Commonwealth scheme concerning operations of the school. He relies on such material apparently as a contextual consideration supporting the reasonableness of Hamro’s efforts to resolve its financial difficulties and FSU’s wrongful disregard for Hamro’s obligations. Mr Khanal contends as part of proposed ground two that Hamro suffered a net loss of $2.5 million as a result of FSU’s actions and the resulting closure of the school.

Leave to appeal should be refused

1. [16]

   Leave to appeal will ordinarily be granted only when the proposed appeal raises an issue of principle, a question of public importance, or seeks to address a reasonably clear injustice going beyond something that is merely arguable: Be Financial Pty Ltd as Trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 at [32]-[38]; Secretary, Department of Family and Community Services (NSW) v Smith (2017) 95 NSWLR 597; [2017] NSWCA 206 at [28]. Related to the last point, it is an essential prerequisite of a grant of leave to appeal that the Court be persuaded that the decision appealed from is attended with sufficient doubt to warrant its reconsideration on appeal: Sharpe v Heywood [2013] NSWCA 192 at [34].

2. [17]

   The appeal sought to be brought by Mr Khanal does not exhibit any of these characteristics. The decisive issue is the enforceability of an express term of the Lease. The resolution of that issue turns on the application of well settled principles of contractual construction. No issue of principle or broader question of public importance arises.

3. [18]

   Nor does the decision of the District Court involve a reasonably clear injustice. There is insufficient doubt about the correctness of the primary judge’s decision warranting reconsideration on appeal. Mr Khanal’s defence to the claim brought by FSU is based on an untenable claim that he is not subject to a personal guarantee. As is apparent from Mr Khanal’s own submissions, he does not dispute that the signature which appears on the Lease, including expressly in his capacity as a guarantor, is his. The signature signifies Mr Khanal’s agreement to be bound by the terms of the document. One such term, cl 15.1, plainly imposed on Mr Khanal the obligation to guarantee the performance of Hamro’s obligations and to indemnify FSU against loss caused by non-performance of those obligations. Mr Khanal does not seek to argue that cl 15.1, if it applies to him, does not have this effect. He simply denies that it applies to him.

4. [19]

   Mr Khanal’s attempts to avoid the application of cl 15.1 reduce, in essence, to two propositions. The first is that Mr Khanal did not understand the Lease to impose any obligations on him as a personal guarantor. For the purposes of a matter of this kind, involving striking out of the defence and consequential summary judgment, it is appropriate to assume that Mr Khanal could succeed on that contention as a matter of fact. The problem for Mr Khanal is that the contention is legally irrelevant. The governing objective theory of contractual construction means that the legal effect of the Lease does not depend on Mr Khanal’s subjective understanding of the effect of the Lease. The legal effect of a contract depends on the common intention of the parties, as expressed in the words of the contract, objectively construed. That depends on what each party, by words or conduct, would have led a reasonable person in the position of the other party to believe: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 (Toll v Alphapharm) at [40].

5. [20]

   In the case of a written document like the Lease, the parties are bound according to the interpretation which would be given by a reasonable person to the words of the contract, understood in context (including legally relevant surrounding circumstances). The significance of a signature on an agreement, like the signature of Mr Khanal, is that it objectively conveys assent to the contents of the signed document. In the absence of fraud or some other special vitiating factor, it is no answer to say that the signatory did not in fact read or understand the contents of the signed document: Toll v Alphapharm at [57]. Mr Khanal does not allege fraud on the part of FSU. Nor does he identify any other relevant vitiating factor. The proposition that the guarantee and indemnity clause was not “visible or disclosed” to Mr Khanal at the time of execution is plainly untenable. And if, as Mr Khanal alleges, he signed the contract “without suspicion or detailed verification”, the unfortunate reality for Mr Khanal is that he is nevertheless bound by the legal consequences of having agreed to the terms of the contract that he signed.

6. [21]

   The second proposition advanced by Mr Khanal is that there was a material discrepancy between the Heads of Agreement, which did not contain or contemplate a personal guarantee being given by Mr Khanal, and the Lease which did provide for such a guarantee. Mr Khanal also relies on the lack of reference during the course of negotiations to the requirement for a personal guarantee. This argument is legally flawed and does not constitute a reasonable defence to FSU’s claim under the guarantee, for essentially the same reasons. The Lease has legal effect according to the objective construction of its terms, and it is beside the point that Mr Khanal might subjectively have had a different expectation of the content of the Lease based on the pre-contractual negotiations. By his signature Mr Khanal indicated to any reasonable objective observer assent to the terms of the Lease, including cl 15.1.

7. [22]

   The point is reinforced by specific aspects of the Heads of Agreement and the Lease itself. The Heads of Agreement took the form of a “Lease Proposal” setting out various commercial terms. Clause 26 of the Heads of Agreement dealt with “Documentation” in terms which included the following:

8. [23]

   Clause 30 contained “Special Conditions” and relevantly included the following:

9. [24]

   Unsurprisingly given the nature of a “Heads of Agreement” document of this kind, the parties in that agreement thus contemplated that there would be an ensuing process of negotiation and agreement over a formal lease document. In the circumstances the parties cannot be understood by the Heads of Agreement to have agreed in comprehensive and fixed terms about every aspect of their relationship, including any guarantees that might be required in the lease documentation ultimately negotiated and agreed.

10. [25]

    This sequence is reflected also in the Lease. Clause 13.8 is an “Entire Agreement” clause, which includes the following:

11. [26]

    Given the clear terms of cl 13.8.1, as a matter of objective construction it cannot be coherently argued that, despite the terms of the Lease, the parties did not intend to make Mr Khanal a personal guarantor of Hamro’s obligations, because that was the enduring agreement or understanding that the parties had reached at the time of the Heads of Agreement. The parties expressly agreed that the Lease superseded any prior agreement or understanding, which would encompass anything arising from the Heads of Agreement about the arrangements addressed in the Lease. To rely on the Heads of Agreement either to change the meaning of the clear terms of the Lease or to source a collateral agreement that prevailed despite the Lease would be directly contrary to the parties’ intention in cl 13.8.1: Nassif v Fahd [2007] NSWCA 269 at [35]-[36]; see, in relation to entire agreement clauses and the exclusion of collateral warranties or contracts, J D Heydon, Heydon on Contract (2019, Thomson Reuters (Professional) Australia Limited) at [9.120].

12. [27]

    Mr Khanal seeks to characterise FSU’s conduct in enforcing the personal guarantee as an act of bad faith, because of the discrepancy between the Heads of Agreement and the Lease. However, once the terms of the respective documents are properly analysed in the manner set out above, there is no substance to that allegation.

13. [28]

    For these reasons, Mr Khanal’s attempts to show that the primary judge erred in striking out his defence and awarding summary judgment fall well short of showing a reasonably clear injustice of the kind that would warrant a grant of leave.

The cross-claim or putative cross-claim

1. [29]

   As noted above, the second of the two proposed grounds of appeal concerns a cross-claim for damages arising from the failure of Hamro’s business, which is said to have been caused by wrongful conduct on the part of FSU. The claim as articulated by Mr Khanal does not involve denial of Hamro’s obligations under the Lease to pay rent or of Mr Khanal’s obligations as guarantor. The proposition is instead that FSU was obliged to facilitate a more orderly transition process arising from Hamro’s financial difficulties, which caused the failure of the business.

2. [30]

   It is unnecessary to express any view about the viability of this claim. That is because this proposed ground of appeal does not properly respond to the decision from which Mr Khanal seeks to appeal. The primary judge struck out Mr Khanal’s defence, which was a defence to the statement of claim brought by FSU, and proceeded to give summary judgment in favour of FSU in respect of that claim. Even assuming that there was substance to Mr Khanal’s contentions that a cross-claim could legitimately be pursued for damages based on the failure of Hamro’s business, that would not constitute a defence to the claim brought by FSU for enforcement of the guarantee under cl 15.1 of the Lease. It would instead be a basis for a separate claim or cross-claim. As FSU alluded to in its submissions to this Court, on its face it would appear to be a claim that could only be brought by Hamro, rather than Mr Khanal. It is unnecessary to express any final view on that issue. It is sufficient to conclude that the possibility of such a cross-claim does not gainsay the primary judge’s conclusion that Mr Khanal has no reasonable defence to the claim under the guarantee arising from non-payment of rent. As the primary judge correctly observed, the contractual obligation of Hamro to pay rent under the Lease was an obligation to pay the required amounts without deduction or set-off.

3. [31]

   Relatedly, there is some ambiguity about whether there may already be a cross-claim on foot between Mr Khanal and FSU. The primary judge makes no reference to a cross-claim in her Honour’s reasons. A cross-claim and statement of cross-claim dated 7 March 2025 appear to have been filed on 11 March 2025 in the District Court, although a stamped version of the cross-claim does not appear on the file. If the cross-claim has in fact been commenced, it would remain on foot despite the dismissal of the original proceeding brought by FSU against Mr Khanal: see r 9.10 of the UCPR. The primary judge made no orders in relation to any such cross-claim and as such no issue regarding the fate of that cross-claim arises as part of the application for leave to appeal.

4. [32]

   The orders that I would make are:

   1. (1)

      Application for leave to appeal dismissed.

   2. (2)

      The applicant is to pay the respondent’s costs.