Universal 1919 Pty Limited v 122 Pitt Street Pty Limited

The plaintiff is the lessee of licensed premises known as the Vault Bar, located on the corner of Pitt and Rowe Streets, Sydney. The premises consist of the basement, ground, mezzanine and first floors of a five storey heritage-listed building known as Millions House. The defendant, which purchased the building in 2006, is the lessor.

A development consent issued by the Sydney City Council on 24 April 2002 (02/00095) approved the use of the basement, ground, mezzanine and first floor levels of the building as a “pub”.

The plaintiff became the lessee of the premises in 2004 when it entered into a lease with the then owner N G I Investments (No 2) Pty Limited. The lease was for a term of 10 years ending on 31 May 2014. The lease contained an option to renew for a further period of 10 years. The plaintiff exercised the option. It seems that a new lease instrument has not been issued, but there is no dispute between the parties as to the terms of the new lease. Those terms are the same as those of the initial lease other than in respect of the term, the base rent and the inclusion of an option to renew.

By its Summons filed on 31 March 2016, the plaintiff seeks an order to the effect that the defendant provide its consent as owner to an application the plaintiff wishes to make for modification of a development consent issued by the Council in 2010 for certain refurbishment works. The plaintiff contends that the defendant is obliged, pursuant to the express or implied terms of the lease, to provide such consent. The defendant maintains that it is under no such obligation and has declined to give its consent.

The dispute arises in the context of the provisions of the lease concerning Tenant’s Fitout that are contained within clause 28 of the lease. In brief, it is provided in clause 28 that the lessee must carry out Fitout Work costing at least $1 million, and that the Fitout Work must not be carried out without obtaining the lessor’s prior written approval and all necessary consents from relevant authorities.

The plaintiff has the benefit of a development consent (2009/2185) issued by the Council on 7 October 2010 which permits the plaintiff to discharge its fitout obligations by carrying out certain refurbishment works at an estimated cost of more than $1 million. It is common ground that the defendant gave its written approval to the application for the consent. Further, in September 2015, the defendant provided a consent in relation to an application under s 60 of the Heritage Act 1977 (NSW) for the works. The plaintiff obtained a construction certificate for the works on about 24 September 2015.

Prior to 7 October 2015, the lapsing date of the consent, the plaintiff commenced to carry out preliminary works in accordance with the consent. In December 2015 the plaintiff ceased trading from the premises in order to allow demolition work to commence. The plaintiff has since suspended the works.

The plaintiff wishes to make an application under s 96 of the Environmental Planning and Assessment Act 1979 (NSW) for modification of the consent. In order to do so, it requires the defendant’s consent as owner (see Environmental Planning and Assessment Regulation 2000 (NSW), cl 115(1)(h)).

On 9 February 2016 Mr James Kospetas, a director of the plaintiff, sent an email to Ms Pam Amendolia. It appears that Ms Amendolia is the personal assistant of Mr Lagudi, a director of the defendant. Mr Kospetas’ email contained the following:

On 7 March 2016 Mr Kospetas sent a further email to Ms Amendolia which included the following:

The email was accompanied by an email Mr Kospetas had received from the plaintiff’s architects, Thom Wright Architect. Various documents were attached to that email including a s 96 application form, modified DA drawings depicting various changes, and a Statement of Environmental Affects.

Part B of the s 96 application form contains various details of the proposed application. It was indicated that the original development application was 2009/2185, which concerned internal refurbishment of the ground floor, mezzanine and basement levels for pub and hospitality. The applicable type of modification was indicated as made under s 96(1A) “minimal environmental impact”. The nature of the modification was described as:

The impact of the modification was described in the attached Statement of Environmental Affects prepared by Thom Wright Architect and dated 6 March 2016. It contained the following:

Part B of the s 96 application form concluded with a statement that the total cost of the development was $1.2 million, and statements that the premises were currently operating under or were intended to operate under a hotel liquor licence. Mr Kospetas is the holder of such a licence in respect of the premises.

On 10 March 2016 Mr Kospetas sent another email to Ms Amendolia. He confirmed that the works the subject of the proposed s 96 application had not commenced. The email also included the following:

Mr Kospetas sent a number of follow-up emails over the course of the next week.

On 17 March 2016 Mr Lagudi sent a letter to Mr Kospetas in the following terms:

Later on 17 March 2016 Mr Kospetas sent an email to Ms Amendolia. He stated that he was confused about Mr Lagudi’s request for more drawings, and that he was “resending more approvals & drawings to assist Mr Lagudi”.

On 22 March 2016 Mr Kospetas sent a letter to Mr and Mrs Lagudi. The letter included the following:

I note that in August 2015, copies of the consent (2009/2185) and the approved plans were sent by the plaintiff’s solicitors to the defendant’s solicitors, as stated in Mr Kospetas’ letter.

On 29 March 2016 Mr Kospetas sent a further letter to Mr and Mrs Lagudi, in which he noted that no response had been received to his letter of 22 March 2016. The letter further stated that if consent was not provided that day, proceedings would be commenced. A draft Summons and draft affidavit were attached to the letter.

Mr Lagudi sent a letter to Mr Kospetas on 30 March 2016. The letter is in the following terms:

Later on 30 March 2016 Mr Kospetas sent an email to Ms Amendolia in which it was again stated that there were no plans or drawings signed by the owner.

The proceedings were commenced on 31 March 2016. Points of Claim were served by the plaintiff on 4 April 2016. The defendant provided a response on 11 April 2016. Amongst the matters raised by the defendant was a complaint that the proposed s 96 application involved seeking approval for a change of use of the ground level from “pub/bar” to “restaurant” by way of an amendment to consent 2009/2185.

On 12 April 2016 Mr Kospetas sent an email to Ms Amendolia in which he made a further request for the defendant to sign the s 96 application, and stated that there would be no change of use away from “hotel use as per hoteliers licence attached to lease”.

Clause 8 of the lease imposes various obligations and prohibitions upon the Tenant. In particular, clause 8.1(a) states that the Tenant must use the Premises only for the Permitted Use. Permitted Use is defined (in item 12) to mean the use of “Licensed Hotel (subject to the conditions of the Liquor Licence)”. Clause 8.1(d) requires the Tenant to obtain all necessary consents or approvals in relation to any repairs, changes or works undertaken by the Tenant in or on the Premises.

Clauses 8.8 to 8.10 concern the Tenant’s obligation to comply with relevant laws. These clauses provide as follows:

Clauses 10.6 and 10.7 concern alterations to the premises. They provide as follows:

Clause 15 contains various provisions related to the Liquor Licence. By clause 15.3, the Tenant is required at all times to comply with its House Policy, being a policy in accordance with the requirements of the Liquor Act 1982 (NSW). By clause 15.11 the Tenant is obliged to ensure that the Premises the subject of the Liquor Licence are operated in accordance with the provisions of the Liquor Act and all applicable gaming laws. Clause 15.13 relevantly provides as follows:

Clause 23.1 provides that unless otherwise specified in the lease, where the Landlord’s consent or approval is required under the lease, such consent or approval will not be unreasonably or arbitrarily withheld.

Clause 28, which concerns Tenant’s Fitout, is in the following terms:

The central question is whether the defendant is under a contractual obligation to give its consent to the plaintiff’s proposed s 96 application.

The plaintiff’s Amended Points of Claim and the submissions made at the hearing indicate that the plaintiff primarily invokes the provisions of clause 28 of the lease concerning Tenant’s Fitout. In conjunction with and perhaps in addition to those provisions, the plaintiff placed some reliance upon clause 8.10. Further, the plaintiff relies upon various alleged implied terms, principally of the Mackay v Dick (1881) 6 App Cas 251 character, in support of its claim.

The defendant, for its part, emphasised that the proposed s 96 application and the accompanying documents that were provided by the plaintiff sought approval for a change of use, at least in respect of the ground floor, to “restaurant”. The defendant contended that in those circumstances it was under no obligation to consent to the s 96 application. This was because the change of use departed from the Permitted Use under the lease, or because the s 96 application, to that extent at least, went beyond Fitout Work as contemplated by clause 28. The defendant further contended that there was no obligation to consent to the s 96 application because, for various reasons, the application was incapable of being lawfully approved. In the submissions made at the hearing, the defendant emphasised clause 28.4 (which confers an absolute discretion upon the defendant to require the plaintiff to amend the Fitout Work prior to giving approval), and clause 15.13.5 (which provides that the plaintiff may only proceed with an application in connection with the Premises with the defendant’s prior written consent which can be withheld in its absolute discretion).

The plaintiff, in response to the defendant’s points concerning a change in use, contended that no change to the lawful building use was actually sought by the proposed s 96 application. It was pointed out that the consent the subject of the proposed modification (2009/2185) was concerned only with refurbishment works, not building use. The plaintiff further contended that if the s 96 application was granted and works were carried out in accordance with the consent as modified, it would continue to use the Premises for the Permitted Use of Licensed Hotel, albeit that a restaurant would be established on the Ground Floor.

The issues raise various questions of construction of the lease. There was no dispute about the applicable principles. The relevant principles to apply in construing the provisions of a written commercial agreement were recently summarised in the following terms by the High Court in Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7; (2014) 251 CLR 640 at [35]:

Mr Kospetas’ emails of 9 February 2016 and 7 March 2016 establish that the proposed s 96 application, for which the defendant’s consent as owner would be needed, was advanced in the context of the substantial fitout work being undertaken by the plaintiff. That fitout work may be taken to be Fitout Work as contemplated by clause 28. The Fitout Work, insofar as it was encompassed within the works the subject of consent 2009/2185, was the subject of the defendant’s written consent and, at least since the issuing of the construction certificate in September 2015, all necessary Consents had been obtained. Since that time, the plaintiff has not been precluded by clause 28.2 from carrying out such Fitout Work, and indeed it is required by clause 28.5.2 to complete it.

The plaintiff now wishes to carry out different Fitout Work and seeks the defendant’s approval for such. Clause 28 does not in its terms accommodate a situation in which a second approval is sought in this way for the carrying out of different Fitout Work. Nevertheless, I will assume that such an approval can be sought under clause 28; the parties did not dispute that this is the case.

The plaintiff’s request should in my view be regarded as the seeking of the defendant’s approval to Fitout Work which includes the works the subject of the s 96 application. That is, the plaintiff seeks the defendant’s approval to carry out the works the subject of consent 2009/2185 as modified by the content of the proposed s 96 application.

Clause 28.2 makes it clear that the defendant’s written approval is required before the plaintiff may carry out Fitout Work. It is thus a situation to which clause 23.1 of the lease is directed. Clause 23.1 provides that “unless otherwise specified”, where the Landlord’s approval is required under the lease, such approval will not be unreasonably or arbitrarily withheld.

Clause 28.4 of the lease confers an absolute discretion upon the Landlord to require the Tenant to amend the Fitout Work prior to giving approval. It seems to me that this provision gives the Landlord the right to determine the nature of the Fitout Work, and to withhold its approval if it is not satisfied with proposed Fitout Work. In my opinion, the provision specifies otherwise than that the Landlord’s approval is not to be unreasonably or arbitrarily withheld; that is, clause 28.4 excludes the operation of clause 23.1 where the former applies. An absolute discretion to require changes to the Fitout Work before approval is given provides the Landlord greater freedom than if the Landlord was bound to act reasonably and not arbitrarily in relation to the giving of approval to proposed Fitout Work.

The absolute discretion thus conferred would enable the Landlord, prior to giving approval, to require the Tenant to amend the proposed Fitout Work by deleting certain parts of it and adding other works instead, even if requiring such changes might be objectively unreasonable or arbitrary. On that basis, it would have been open to the defendant, faced with a request for approval to carry out Fitout Work consisting of the works the subject of consent 2009/2185 as modified by the content of the proposed s 96 application, to require the deletion of the modification. Senior Counsel for the plaintiff seemed to accept that this was the case, but pointed out that the defendant did not in fact require any amendment to the proposed Fitout Work; it simply refused its approval to what the plaintiff proposed. That is true, although the defendant’s refusal nonetheless left the plaintiff in a position where it had the defendant’s approval to carry out Fitout Work as contemplated by clause 28 of the lease.

In any event, it does not necessarily follow that on 30 March 2016, when the defendant declined to provide consent to the proposed s 96 application, the defendant was under a contractual obligation to give such consent.

In my opinion the defendant was not obliged to give its approval to the proposed s 96 application. Clause 28 of the lease, read as a whole and in the context of the lease generally, does not impose such an obligation. As noted, clause 28.4 gives the Landlord the right to determine the nature of the Fitout Work, and to withhold its approval if it is not satisfied with proposed Fitout Work. Clause 23.1 does not govern the giving of an approval under clause 28 so that such approval may not be unreasonably or arbitrarily withheld.

That is not to say that circumstances might not arise in which the Landlord would be in breach of the lease for failing to give an approval to Fitout Work under clause 28. Clause 28 contemplates that there will be Fitout Work that is approved by the Landlord and carried out by the Tenant. The parties have agreed that such Fitout Work will be done. Notwithstanding the terms of clause 28.4, there is, I think, room for an obligation of co-operation in that regard, at least so that the fulfilment of that contractual purpose is not hindered or prevented (see Shepherd v Felt and Textiles of Australia Limited (1931) 45 CLR 359 at 378 (Dixon J); William Cory & Son Limited v London Corporation [1951] 2 KB 476 at 484; Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited (1979) 144 CLR 596 at 607-608 (Mason J)). Such circumstances do not exist in the present case, where a particular form of Fitout Work has previously been approved.

The conclusion that the defendant was not obliged to give its approval to the proposed s 96 application is further supported by clause 15.13.5. This clause provides that during the term of the lease the Tenant must give written details of any application the Tenant proposes to make in connection with the Premises, and may only proceed with any such application with the Landlord’s prior written consent which can be withheld in its absolute discretion.

Senior Counsel for the plaintiff submitted that clause 15.13.5, which appears in the section of the lease concerning the liquor licence, had no application to the present circumstances which fall within clause 28, in particular clause 28.2. However, it seems to me that even though clause 15.13.5 is found within a large group of provisions that are concerned with the liquor licence, its terms encompass the plaintiff’s proposed s 96 application. The language of the clause clearly indicates that it is not confined to applications made in connection with the liquor licence itself; it extends to applications made in connection with the Premises. The particular context in which the clause appears does not in my view warrant a reading down of that language. It is conceivable that an application for development consent, or modification of a development consent, could have an indirect effect upon the conduct of the hotel business carried on at the Premises, and upon the liquor licence itself.

I do not think that clause 8.10 avails the plaintiff. The clause operates in relation to the conduct of the Tenant in complying with Laws (as defined) or the requirements of any Authority (as defined). It is the case that, by law, the plaintiff is unable to make a s 96 application without including the defendant’s consent as owner. However, the making of the proposed s 96 application is not something that would be done by the plaintiff in compliance with any Law, and it is not something required by any Authority. I would read clause 8.10 as stipulating that where, in complying with Laws or requirements of any Authority it is necessary for the Tenant to have the Landlord’s consent, the Tenant must obtain it and the Landlord may not unreasonably withhold it.

Mention should be made of clause 10.6 of the lease, which concerns alterations and additions to the Premises. Such alterations or additions may only be made with the Landlord’s prior written consent. Where such consent is required, clause 23.1 would operate so that the consent may not be unreasonably or arbitrarily withheld. However, I do not think that clause 10.6 applies to the approval sought from the defendant in relation to the proposed s 96 application. Clause 10.6 is expressly made subject to clause 28 which governs Tenant’s Fitout. In my opinion, the question of the defendant’s approval of the proposed s 96 application falls to be determined pursuant to the provisions of clause 28, not clause 10.6. In any case, the plaintiff did not seek to rely upon clause 10.6 in support of its case.

For the reasons set out above, the plaintiff has not established that the defendant was under a contractual obligation to give its approval to the proposed s 96 application.

It is not necessary to consider whether the defendant’s refusal to give its approval was unreasonable in the circumstances, or arbitrarily withheld. I note, however, that Mr Lagudi gave no reason for the refusal save that he was unable to determine the extent of the modification requested. No evidence was adduced by the defendant to explain or amplify the position as stated in Mr Lagudi’s letter of 30 March 2016. The position apparently rested upon a “lack of original plans signed by the owner”, although Mr Kospetas’ evidence suggested that no such plans existed. I note further that it is not clear on the evidence whether the plaintiff submitted to the defendant all of the information referred to in clause 28.3. Neither party addressed that matter, or the question whether compliance with clause 28.3 is necessary before the Landlord may be obliged to give its approval to Fitout Work.

The plaintiff’s Summons is dismissed with costs.