Willis Australia Ltd v AMP Capital Investors Ltd

1. [1]

   THE COURT: The central issue in the appeal is whether, on the proper construction of an agreement for lease, an option to renew the lease with an expanded space was exercised only when all five conditions specified therein were satisfied or, alternatively, whether the option was exercised (and a binding agreement to proceed to a lease arose) when there was compliance with merely the first three of those conditions. There is also an issue as to whether AMP Capital Investors Limited (AMP or Landlord) could waive the timing of the condition to provide a bank guarantee, as held by the primary judge.

2. [2]

   The case appears to have been conducted below on the basis that the resolution of this central issue turned on whether the option should be characterised as an irrevocable offer or, alternatively, as a conditional contract. As Dixon CJ observed in Braham v Walker (1961) 104 CLR 366 at 376; [1961] HCA 7, there has been a “standing controversy” for many years concerning the legal nature of an option which reflects the choice between these alternative characterisations. It will be necessary to say something more about the “standing controversy” (which remains unresolved), but we consider that the appeal is capable of being resolved by applying well settled principles of construction to the subject lease and without necessarily having to characterise the relevant clause as constituting an irrevocable offer or, alternatively, a conditional contract, as ultimately found by the primary judge.

Background matters

1. [3]

   The appeal is from two judgments and orders of White J dated 19 October 2022 and 11 November 2022 sitting in the Equity Division of the Supreme Court: see respectively AMP Capital Investors Limited v Willis Australia Limited [2022] NSWSC 1415 (the primary judgment or PJ1) and AMP Capital Investors Limited v Willis Australia Limited (No 2) [2022] NSWSC 1552 (PJ2)).

2. [4]

   On 21 January 2014, AMP and Willis Australia Limited (Willis or Tenant) entered into a lease commencing 1 October 2014 for Suite 1 on Level 15 and the whole of Level 16, Angel Place, 117-123 Pitt Street, Sydney (the Lease). The Lease was for a term of six years.

3. [5]

   AMP held the premises as trust property for the benefit of a trust known as AWOF I. From 1 October 2022, Mirvac Funds Management Australia Ltd (the second respondent in the appeal) was appointed as the new trustee of the trust and is now the legal owner of the relevant premises.

4. [6]

   The Lease included an option of renewal for a further term of four years from 1 October 2020. The Lease also contained a further option for Willis to take a lease of the balance of Level 15 (the expanded space) for four years.

5. [7]

   It is well to set out the relevant clauses in the Lease.

6. [8]

   Clause 20 of the Lease is headed: “Option For A Further Term” (noting, however that cl 1.5 of Sch 1 to the Lease states that headings are inserted for convenience and do not affect the interpretation of the Lease). The option for a further term is set out in cl 20.1, which contains four conditions:

7. [9]

   The terms of the new lease are the subject of cl 20.2:

8. [10]

   The option to expand the new lease to cover a wider area is set out in cl 20.3:

9. [11]

   The Landlord’s obligation to grant a new lease for the expanded space (which is the central provision for the purposes of the appeal) is the subject of cl 20.4, which contains five conditions:

10. [12]

    The terms of any new expanded lease are addressed in cl 20.5:

11. [13]

    Further, cl 17.4 states that:

12. [14]

    On 20 December 2019, Willis gave two notices by letter to AMP pursuant to cll 20.1 and 20.4 of the Lease (respectively the Current Space Notice and the Expanded Space Notice). They were as follows (the reference to the Lease being dated 21 October 2014 is in error, but no party suggested this was significant):

    1. (1)

       Notice – Exercise of Option (current space):

    2. (2)

       Notice – Exercise of Option (expanded space):

13. [15]

    On 30 January 2020, AMP’s solicitors wrote to ResolveXO (Willis’s corporate property strategists) attaching a draft lease, stating that AMP was not bound by the terms of the attached documents until they received the documents executed by Willis and, in addition, if there was compliance with the other requirements in the documents. The draft lease was for part of Level 15 (not including the expanded space) and Level 16.

14. [16]

    As a result of the Expanded Space Notice, AMP notified the tenant occupying the expanded space at that time (Perpetual Limited) that Willis had exercised its option to acquire that space. Perpetual vacated that area before 1 October 2020.

15. [17]

    On 7 August 2020, Willis confirmed in writing that it withdrew its Expanded Space Notice. Willis did not withdraw the Current Space Notice. AMP did not accept that Willis was entitled to withdraw its Expanded Space Notice. It asserted that Willis was required to take up the option to acquire the expanded space for a four year term.

16. [18]

    On 12 August 2020, AMP wrote to Willis stating that the exercise of the option was an irrevocable offer which AMP had accepted and stated that Willis could not seek to withdraw from or rescind its position.

17. [19]

    Also on 12 August 2020, AMP’s representative (who had been a party to most of the correspondence described above) emailed Willis’s chief financial officer and said that he wished he was contacting him under “better circumstances”. The email then said:

18. [20]

    This email has some significance in indicating that the parties had previously enjoyed a good business relationship. Indeed, this was confirmed by an email dated 17 August 2020, sent in response to AMP’s 12 August 2020 email, in which Willis’s chief financial officer said, inter alia:

19. [21]

    Also on 17 August 2020, Willis wrote formally to AMP and reiterated its position that it had no obligation to enter into a new lease over the expanded space.

20. [22]

    On 14 September 2020, AMP advised Willis that it required Willis to enter into a lease in accordance with the exercised option relating to the expanded space.

21. [23]

    On 23 September 2020, Willis responded that it was not obliged to take up a lease as the Expanded Space Notice was “no more than one of several necessary and indispensable integers necessary to exist in order to exercise the option”.

22. [24]

    On 23 September 2020, AMP served a rent review notice (assessing all of Levels 15 and 16).

23. [25]

    On 30 September 2020, AMP sent a letter to Willis stating that the rent for the whole of Levels 15 and 16 would be that as set out in the rent review notice dated 23 September 2020. Further, it was noted that, under cl 20.4(e), Willis should have provided a bank guarantee as security over the premises in the amount of approximately $2.15 million.

24. [26]

    On 14 October 2020, Willis provided a bank guarantee (in the amount of approximately $1.7 million) which was expressly stated to relate only to the space that it currently occupied.

25. [27]

    In the Court below, Willis contended that cll 20.1 and 20.4 contain irrevocable offers from AMP to grant new leases of the existing premises and the expanded premises. Each offer could be accepted by Willis only if it complied with all four requirements in cl 20.1(a) to (d) (in respect of the existing premise) or all five requirements in cl 20.4(a) to (e) (in respect of the expanded premises). Willis contended that because it did not deliver the Bank Guarantee to AMP before the Expiry Date (30 September 2020) as required by cl 20.4(e), the option had not been exercised.

26. [28]

    Willis further submitted that the giving of notice was not an exercise of the option, but merely a step towards that end which it was required to take if it were to take a lease of the expanded space. It claimed that AMP was not obliged to lease the expanded space to Willis unless and until all five conditions in cl 20.4 were either satisfied or consensually varied.

27. [29]

    Although AMP had claimed in its letter dated 12 August 2020 that the exercise of the option was an irrevocable offer by Willis, it changed that position in the proceeding below. It contended that cl 20.4 constituted a conditional contract. It claimed that Willis had exercised the option under cl 20.4 by satisfying the first three conditions of cl 20.4, namely giving notice under both cll 20.4(a) and 20.4(b) and the receipt of those notices by AMP at least nine months before the Expiry Date (cl 20.4(c)). AMP’s position was that the conditions in cll 20.4(d) and (e) were conditions subsequent. AMP submitted that the effect of cll 20.4(d) and (e) is that it was not obliged to grant a new lease of the expanded premises if Willis was in breach on the Expiry Date or did not provide the Bank Guarantee before the Expiry Date. AMP submitted that these two conditions were conditions for its benefit which it was entitled to waive. AMP also submitted that Willis’s construction of cl 20.4 made no commercial sense.

28. [30]

    The primary judge accepted AMP’s contention that cl 20.4 should be viewed as a conditional contract. And because the condition in cl 20.4(e) concerning the provision of the Bank Guarantee was wholly for AMP’s benefit, it could waive that condition (citing, inter alia, Gange v Sullivan (1966) 116 CLR 418; [1966] HCA 55).

29. [31]

    In the proceeding below (and also on appeal), Willis placed heavy reliance on the Full Court’s decision in Gilbert J McCaul (Aust) Pty Ltd v Pitt Club (1957) 59 SR (NSW) 122 as supporting its position that cl 20.4 should be viewed as an irrevocable offer. The primary judge distinguished Gilbert J McCaul on the basis that it contained a differently worded lease to the present case, albeit that there were also some similarities (see PJ1[65]).

30. [32]

    The primary judge was well aware of the “standing controversy” referred to above. His Honour noted at PJ1[55] that an option granted under seal or for consideration may be characterised in one of two ways. First, as an irrevocable offer (which in the case of this Lease would be an offer by AMP) which is capable of acceptance by the offeree (i.e., Willis). Alternatively, as a conditional contract (i.e., a contract to lease the existing premises or both the existing and expanded premises) operating conditionally on the lessee (i.e., Willis) exercising the option. The primary judge saw this characterisation as important because of AMP’s claim that it was entitled to waive the conditions in cll 20.4(d) and (e), being conditions which were solely for AMP’s benefit.

31. [33]

    At PJ1[57], the primary judge referred to the judgment of Gibbs J (as his Honour then was) in Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57; [1974] HCA 49 at 71ff. Gibbs J discussed the “standing controversy” as to the true nature of an option and noted at 73 that there were abundant dicta in favour of both the competing views as to the characterisation of an option to purchase. Gibbs J added that it had usually proved immaterial which view was adopted.

32. [34]

    Gibbs J referred, however, to some cases in which it had been held that an option to purchase was a conditional contract and there might have been a different result if the option had been treated as an irrevocable offer (referring to Weeding v Weeding (1861) 1 J&H 424 [70 E.R. 182] and Re Mulholland’s Will Trusts [1949] 1 All E.R. 460).

33. [35]

    Ultimately, Gibbs J concluded that the option to purchase in Laybutt (which was capable of being exercised by the grantee giving notice in writing to the grantor by a specified time and by paying a deposit to an agent – in circumstances where no agent was named in the agreement) was “a contract to sell the land upon condition that the grantee gives the notice and does the other things stipulated in the option” (at 76). Accordingly, the option was not an agreement which gave one of the parties the right to perform it or not as that party so chose. Rather, it gave the grantee “the right, if he performs the stipulated conditions, to become the purchaser”.

34. [36]

    The primary judge noted at PJ1[58] that, at one point during the trial, AMP claimed that the option was an irrevocable offer by Willis to make a contract while also maintaining that it could waive the conditions in cll 20.4(d) and (e). His Honour said that the latter submission was only consistent with the option being characterised as a conditional contract.

35. [37]

    The primary judge then explained at PJ1[59]ff why he considered that cl 20.4 is best characterised as a conditional contract and not an irrevocable offer. In brief, those reasons may be summarised as follows:

    1. (1)

       Clause 20.4 is not expressed in terms of an offer but rather in terms of an agreement to lease if the specified conditions are satisfied.

    2. (2)

       The conditions specified in cl 20.4 on which AMP was obliged to grant a new lease for the existing and expanded space are contained in the clause which is not expressed in terms of an offer by AMP to grant such a lease which could be accepted only by all five of those conditions being satisfied.

    3. (3)

       After referring to the terms of the lease in Gilbert J McCaul and the Full Court’s view that the option for renewal there was an irrevocable offer to grant a lease, the primary judge said at PJ1[65] that, although there were some similarities between the lease in Gilbert J McCaul and the Lease, they were sufficiently differently worded so as not to apply Gilbert J McCaul. His Honour then proceeded to conclude at PJ1[69] that cl 20.4 should be regarded as a conditional contract, under which AMP could waive the conditions in cll 20.4(d) and (e).

36. [38]

    The core of the primary judge’s reasoning is set out at PJ1[69]:

37. [39]

    The primary judge concluded that Willis had exercised its option under cl 20.4 and was bound to take the new lease with the expanded space.

38. [40]

    The primary judge also concluded that the rent payable under the new lease is the Base Rent (reviewed to market) assessed on a per square metre basis for the expanded premises subject to the cap and collar in cl 1.3 of Sch 4.

39. [41]

    In addition, in the event that his conclusions as to the expanded premises were wrong, the primary judge found that no equitable estoppel arose.

40. [42]

    After the parties provided short written submissions regarding costs and final orders, the primary judge published second reasons for judgment on 11 November 2022. His Honour noted at PJ2[2]-[4] that Mirvac should be joined as the second plaintiff.

41. [43]

    His Honour then addressed the implications of his earlier finding regarding AMP’s capacity to waive cll 20.4(d) and (e). AMP sought an order for specific performance, which included reference to the parties completing a market review to determine the base rent for the area the subject of the expanded space and that Willis should pay the new base rent and outgoings contribution plus GST to Mirvac, together with interest. Willis opposed such orders.

42. [44]

    The primary judge noted at PJ2[7] that Willis’s opposition misconceived his previous reasons. His Honour said at PJ2[7] and [8] (emphasis in original):

43. [45]

    The primary judge declined to amend the orders proposed by AMP concerning the provision of a bank guarantee. The primary judge also rejected Willis’s opposition to there being an order requiring it to pay interest. His Honour then made final orders as follows:

Grounds of Appeal

1. [46]

   Willis appeals on the following grounds:

   1. (1)

      The primary judge erred in finding (at PJ1[29], [69] and [70]) that Willis had exercised, and was bound by, an option to take a lease over premises known as Suite 2, Level 15, 123 Pitt Street, Sydney (“the premises”) by issuing a notice stating that it desired to take a new lease of the premises such error being upon the grounds described below.

   2. (2)

      The primary judge erred in finding (at PJ1[69]) that cl 20.4 of the Lease was to be construed as a conditional contract instead of an irrevocable offer by AMP to Willis in regard to which irrevocable offer the primary judge ought to have found could only be accepted by Willis taking the steps or satisfying each of the conditions set out in cll 20.4(a),(b),(c),(d) and (e) of the Lease between the parties.

   3. (3)

      The primary judge erred in finding (at PJ1[68] and [69]) that cll 20.4(d) and (e) of the Lease were capable of being waived by AMP because:

   4. (4)

      The primary judge erred in finding (at PJ1[69]) that cl 20.4 should be construed as conditional by the landlord because doing so avoids a commercial nonsense or commercial inconvenience and so to construe the clause as a conditional contract accords with what reasonable persons in the position of the parties would regard as its commercial purpose. To the contrary, cl 20.4 was drafted by AMP to suit its commercial purposes, which included the purpose that no binding agreement would come into existence unless and until the entirety of cl 20.4 was complied with. Absent compliance, the parties would remain at liberty to negotiate the terms of any new lease over the premises, and no commercial nonsense followed from the construction of the clause as an irrevocable offer.

   5. (5)

      The primary judge erred in finding at PJ1[10] that Willis no longer contended that it was entitled to withdraw its notice to AMP (pursuant to cl 20.4(b) of the Lease).

Consideration and determination

1. [47]

   To avoid adding unduly to the length of these reasons for judgment, we will not summarise the parties’ respective submissions but will endeavour to address the primary submissions in this section of the judgment.

2. [48]

   It is desirable first to identify some relevant legal principles concerning construction of the Lease (upon which there was substantial but not complete agreement). It is uncontroversial that, in construing the Lease, the Court should apply the settled principles relating to the construction of commercial contracts (see, for example, Saipan Holdings Pty Ltd v City Gym Sydney Pty Ltd [2023] NSWCA 55 at [128] per Ward P (Gleeson JA and Simpson AJA agreeing)).

3. [49]

   The principles are identified in cases such as Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52] per French CJ, Nettle and Gordon JJ and Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 644; [2017] HCA 12 at [16] per Kiefel, Bell and Gordon JJ. They may be summarised as follows:

   1. (1)

      The rights and liabilities of the parties are determined objectively by reference to the contract’s text, context (as a whole) and purpose.

   2. (2)

      It is necessary to ask what a reasonable businessperson would have understood the terms of a commercial contract to mean, which requires consideration of the language used by the parties, the circumstances addressed by the contract and the commercial purpose or objects to be secured by it.

   3. (3)

      Ordinarily, this process of construction is possible by reference to the contract alone and, if an expression in the contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to alter its plain meaning.

   4. (4)

      Recourse to such events, circumstances and external things may be necessary to identify the commercial purpose or objects of the contract or where there is a constructional choice.

   5. (5)

      Each of the events, circumstances and external things to which recourse may be had is objective but those events, circumstances and external things need to be known to the parties or assist in establishing the purpose or object of the transaction, including its history, background and context and the market in which the parties were operating.

   6. (6)

      Evidence of the parties’ statements and actions reflecting their actual intentions and expectations are inadmissible.

   7. (7)

      Unless a contrary intention is indicated in the contract, a Court is entitled to approach the task of construction on the assumption that the parties intended to produce a commercial result, in the sense that a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience” (citing Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]).

4. [50]

   The relevance of these principles in construing a commercial lease was acknowledged by Barrett AJA (Beazley P and Ward JA agreeing) in Papantoniou v Stonewall Hotel Pty Ltd [2018] NSWCA 85 at [40]:

5. [51]

   Because of its significance to the appeal, it is desirable to say something more about the relevant approach where a particular construction of a commercial contract produces a commercial nonsense or commercial inconvenience.

6. [52]

   In Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297, the original lease stated in cl 17.7 that the tenant would pay $45,000 immediately on receipt of the executed lease for a new fit out of the premises. The option to renew did not exclude the operation of that clause from the renewed lease. In considering the concept of absurdity, Basten JA noted at [13] (McColl and Campbell JJA agreeing):

7. [53]

   After reviewing some relevant authorities (which are discussed below), Basten JA stated at [18] (emphasis added):

8. [54]

   Basten JA concluded at [21]-[22] that cl 17.7 was, on the proper reading of the contract, included within the new lease which resulted from exercising the option.

9. [55]

   In International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2015] NSWCA 363 at [147] and [148], this Court (Ward JA; Bathurst CJ and Macfarlan JA agreeing) approved what Basten JA said in Miwa and added that the Court “has no mandate to rewrite agreements merely to give them a more commercial operation”.

10. [56]

    Other cases have highlighted the distinction between an absurd outcome produced by a particular construction as opposed to an uncommercial outcome.

11. [57]

    In Jireh International Pty Ltd t/as Gloria Jean’s Coffee v Western Exports Services Inc [2011] NSWCA 137, at [55]-[56] Macfarlan JA (with whom Young JA and Tobias AJA agreed) made the following observations regarding that distinction (emphasis added):

12. [58]

    In H Lundbeck A/S v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd (2022) 399 ALR 184; [2022] HCA 4 Edelman J (writing separately though agreeing with the outcome in the joint judgment) said at [104]:

13. [59]

    It is also well to bear in mind the observations of Kirby P (as his Honour then was) in Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-314:

14. [60]

    Kirby P’s observations were referred to approvingly in Zhu v Treasurer of NSW (2004) 218 CLR 530; [2004] HCA 56 and in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407.

15. [61]

    As noted above, the “standing controversy” relates to the possibility of an option clause being characterised in one of two ways. The first is where the option is construed as being an irrevocable offer by the grantor that may be accepted by the grantee at any time during the period specified. Alternatively, an option may be a conditional contract. The first characterisation essentially involves the notion of there being two agreements. One agreement involves the offer of the option being kept open for the specified time and the other agreement is that which is created when the option is exercised.

16. [62]

    The second characterisation involves simply one agreement. On this analysis, the agreement is subject to one or more condition(s) subsequent, such that, if the condition(s) is (are) not satisfied, that part of the agreement terminates.

17. [63]

    As has been pointed out in Seddon and Bigwood, Cheshire & Fifoot Law of Contract (LexisNexis, 12th ed, 2023) at [3.69], it seems that the particular wording of an option is not necessarily determinative of the characterisation of an option. For example, in Carter v Hyde (1923) 33 CLR 115; [1923] HCA 36, the option was expressed as an irrevocable offer, yet a majority of the High Court viewed it as a conditional contract.

18. [64]

    Although there are many cases in favour of both characterisations of the nature of an option, as noted above, Gibbs J said in Laybutt at 73 that “it has usually proved immaterial which view was adopted”.

19. [65]

    There are, however, two main areas where the issue may be significant. First, where there is a question of the proprietary status of an option. If a particular option is viewed as an interest in land, it is possible that the legal basis of the option will need to be resolved. Secondly, different considerations arise concerning the assignment of options depending upon the nature of the particular option.

20. [66]

    The “standing controversy” is discussed in a helpful article by Mr CJ Rossiter in “Options to Acquire Interests in Land – Freehold and Leasehold” (1982) 56 Australian Law Journal 576. The following extract from that article highlights some of the problems created by the “standing controversy” (at p 576 with footnotes omitted):

21. [67]

    Drawing on Mr Rossiter’s helpful article, the following principles may be stated:

    1. (1)

       Whether a step required to be taken by the grantee be construed as a condition precedent or as an obligation to be performed after the creation of the agreement depends on the wording of each particular instrument. A requirement that a notice be sent to the grantor to exercise an option appears always to be cast as a condition precedent by the draftsman. In contrast, the terms of an option providing for the payment of money (e.g., as a deposit or otherwise) are often ambiguously worded and several cases have presented difficult problems of interpretation. By way of illustration, the following phrases referring to the payment of money have been held to constitute conditions precedent:

    2. (2)

       It is necessary to have regard not only to the terms of the clause containing the option but to other relevant clauses in the agreement. This is illustrated by George v Cluning (1979) 28 ALR 57, where the High Court divided three to two on whether a particular clause requiring payment upon exercise of an option constituted a condition precedent. Barwick CJ, Wilson and Murphy JJ said it did not because of other clauses in the agreement. In dissent, Mason and Aickin JJ viewed the payment requirement as a condition precedent.

    3. (3)

       Even where a requirement for payment of money is properly characterised as a condition precedent, such requirement may be held to have been “waived” by the grantor.

    4. (4)

       It is desirable to set out Mr Rossiter’s comments on Gilbert J McCaul at p 586 (footnotes omitted):

22. [68]

    These three grounds challenge the primary judge’s core reasoning at PJ1[69] (which is set out at [38] above) as to why cl 20.4 was to be construed as a conditional contract and that the option was exercised by Willis satisfying the first three conditions in that clause. For the following reasons, and with great respect to the primary judge, we consider that his Honour’s reasoning on this central issue was in error.

23. [69]

    First, the text does not support AMP’s construction of cl 20.4, which construction was accepted by the primary judge. The following features of the text favour Willis’s construction:

    1. (1)

       The chapeau to cl 20.4 makes plain by the use of the term “must” that the Landlord has an obligation to grant a new lease for the expanded space if certain conditions are met.

    2. (2)

       That obligation arises “only if” the five conditions specified in (a) to (e) are met.

    3. (3)

       Significantly, the five conditions are expressed conjunctively and not disjunctively, as is reflected in the use of the word “and” at the end of each of the first four paragraphs.

    4. (4)

       The primary judge’s construction effectively draws a line under paragraph (c) such that, if the conditions in paragraphs (a) to (c) are satisfied (which all involve the giving or receipt of notices at least nine months before the Expiry Date), the Landlord has a binding obligation to grant a new lease at that point in time.

24. [70]

    The conditions in (d) and (e) are, on the primary judge’s construction, conditions subsequent, fulfilment of which is not essential in order to give rise to an obligation on AMP to grant a new lease. By characterising the conditions in paragraphs (d) and (e) as conditions subsequent which are wholly for the benefit of AMP, his Honour then reasoned that they were capable of being waived by AMP.

25. [71]

    For reasons which will be developed below, we consider that this analysis of paragraphs (d) and (e) was also in error.

26. [72]

    In our respectful view, reading cl 20.4 as a whole, there is no warrant to draw the distinction which the primary judge drew between the first three, as opposed to the last two, of the conditions in cl 20.4. Having regard to the features of the terms of the text which are outlined above, all the conditions are equal, and all must be satisfied before the Landlord is obliged to grant the new lease.

27. [73]

    Secondly, this construction, which gives primacy to the text, is not displaced by considerations of “commercial nonsense” or “commercial inconvenience”. That is because:

    1. (1)

       It is far from clear that any such commercial nonsense or inconvenience flows from Willis’s alternative construction. When the Lease was executed in 2014, AMP or a reasonable businessperson in its position may well have thought (or hoped) that there would be a rising market when the Expiry Date arrived. Under that scenario, upon receiving notices from the Tenant under cll 20.4(a) and (b), the Landlord would have to give notice to any existing tenant occupying the expanded space that the space would have to be vacated by the Expiry Date. If, in the subsequent interim period between the giving of the relevant notices and the occurrence of the Expiry Date, there is non-compliance with either conditions (d) or (e) by the Tenant of the existing space (as opposed to the tenant of the expanded space), the Landlord has no obligation to grant a new lease for the expanded space. In those circumstances, the Landlord would be at liberty to lease the expanded space to another tenant, perhaps at a higher rent, if there was in fact a rising market. It is unlikely that anyone could have confidently predicted in 2014 whether the market would be rising, falling or stable when the Expiry Date arrived, but that is not to say that a reasonable businessperson would not have been prepared to bear the risk implicit in Willis’s construction of cl 20.4. Alternatively, even if there was not an expectation (or hope) of a rising market, AMP or a reasonable businessperson in its position may have been confident that it could negotiate suitable terms with either Willis or another tenant. Accordingly, there is no necessary commercial nonsense.

    2. (2)

       As Edelman J observed in H Lundbeck (see at [58] above), it rarely assists in the construction of a commercial agreement that the Court considers that, from the perspective of one commercial party, a clause is commercially unwise or inconvenient.

    3. (3)

       There is no reason why, objectively viewed, the parties to the Lease here intended cl 20.4 to mean anything other than what its terms suggest given their ordinary meaning. The original parties are both significant and sophisticated commercial entities. Moreover, as part of the context, it is evident from the exchange of emails referred to at [19] and [20] above that they enjoyed a positive business relationship and were on good terms.

    4. (4)

       Finally, as the primary judge correctly observed at PJ1[87], the Lease was “carefully and skilfully drafted”. There was no reason to doubt that, given the skilful drafting, a reasonable businessperson would have understood the terms of cl 20.4 to have anything other than their ordinary meaning.

28. [74]

    Thirdly, given the way the case was conducted below and, in particular, the prominence given by the parties to the need for the Court to choose between two alternative characterisations of the option in cl 20.4, it is unsurprising that the primary judge attached particular significance to the fact that cl 20 “is not expressed in terms of offer” at PJ1[59]. This drafting omission swayed the primary judge to conclude that the option was a conditional contract. In our respectful view, resolution of the central issue in the proceeding turned not on a determination whether, properly construed, the option was an irrevocable offer or a conditional contract but rather: applying the relevant principles of construction to cl 20.4 and the Lease as a whole, what steps did Willis need to take in order to enliven AMP’s obligation to grant a new lease for the expanded space.

29. [75]

    Fourthly, and without losing sight of Edelman J’s observations in H Lundbeck (see at [58] and [73(2)] above), the conditional contract characterisation of cl 20.4 produces anomalies and outcomes which are uncommercial when viewed from Willis’s perspective. Assuming the conditional contract analysis, all of the listed conditions must be satisfied before any entitlement arises, including that concerning the Bank Guarantee. The conclusion that some of these could be waived confers an option on AMP to render the contract unconditional by waiver. Satisfaction of the Bank Guarantee condition is converted from a condition where if satisfied Willis is entitled to receive an option, to become an obligation (following waiver) in which failure to provide the guarantee would constitute breach by Willis enabling AMP to rescind and seek damages. Moreover, under this analysis, if the Bank Guarantee was not produced, or a breach existed at the Expiry Date, AMP could terminate the agreement for lease constituted by the exercise of option, and Willis could seek relief against forfeiture relating to the termination. The intention behind cl 20.4 is that AMP is obliged to grant a lease only upon satisfaction of all of the conditions. In that case, it is doubtful that relief against forfeiture could be invoked where no binding agreement has been created and there has simply been a failure to satisfy conditions.

30. [76]

    Fifthly, AMP contended that, under Willis’s construction, having complied with the notice requirements in cl 20.4, Willis could avoid entering into a new lease by committing a trivial breach just prior to the Expiry Date which would allow Willis to take advantage of its own wrongs. This complaint is addressed in Cheshire & Fifoot Law of Contract at [3.69] (footnotes omitted):

31. [77]

    Moreover, the complaint fails to take into account the potential operation of cl 20.4(d). The clause refers to the Tenant not being in “breach of this lease, notice of which breach has been given to the Tenant in writing” (emphasis added). In circumstances where the Tenant has already delivered the Bank Guarantee before the Expiry Date and satisfied cl 20.4(e), but the Tenant then seeks to avoid being bound by deliberately breaching the terms of the existing lease, the Landlord could hold the Tenant to the renewal by not giving the Tenant notice of the breach in writing.

32. [78]

    Sixthly, AMP submitted that the primary judge’s construction is supported by the difficulties created in calculating the amount of the Bank Guarantee. It submitted that that amount had to be calculated with reference to the Base Rent and Outgoings and that these matters can only be calculated after the Market Review Date (i.e., 1 October 2020). Accordingly, AMP claimed that it is possible that the calculation of the amount for the Bank Guarantee may not be possible until as late as six months after the Market Review Date.

33. [79]

    For the following reasons, we reject those submissions. As submitted by Willis, if the Base Rent for the new term had not been determined at the commencement of the new term, then the Base Rent for the new term would be the old Base Rent. Accordingly, Willis’s obligation was to provide a Bank Guarantee calculated with regard to that sum.

34. [80]

    If a rental determination made after the Market Review Date resulted in an increase in rent and therefore an increase in the Bank Guarantee, Sch 4 of the contract empowered the parties to serve the relevant notices three months prior to the Market Review Date, such that the new rent could be determined prior to the end of the lease period. Even if this did not occur, there would nonetheless still be a determined rent as elucidated above – with the original Base Rent subsisting until a new Base Rent for the new term was calculated.

35. [81]

    Seventhly, while we accept that careful attention must of course be given to the construction of the wording of the terms of the particular lease in determining the true legal nature of an option, we consider that the primary judge erred in concluding at PJ1[65] that the Full Court’s decision in Gilbert J McCaul is distinguishable on the basis that the lease there was differently worded to the Lease here. It is necessary to say something more about Gilbert J McCaul.

36. [82]

    The lease in Gilbert J McCaul was for a term of five years. It included an option to renew which was exercisable upon the giving of a written notice, the punctual payment of rent and the due observance of covenants by the lessee. The tenant frequently failed to pay rent punctually during the course of the original term, but no objection was raised by the lessor. The tenant’s solicitors gave written notice during the currency of the original term purporting to exercise the option to renew. The lessor refused to grant a new lease. The tenant sought an order for specific performance of the term of the original lease relating to the option and claimed that the lessor had waived the performance of the provisions concerning punctual payment of the rent and was estopped from relying on the tenant’s breach of such provisions.

37. [83]

    The Full Court (Owen J, Roper CJ in Eq and Herron J) held that performance of the term requiring punctual payment of rent was a condition precedent to the tenant being able to accept (so as to bind the lessor) the offer of renewal contained in the relevant clause.

38. [84]

    After pointing out that the option was an irrevocable offer which, if accepted, would produce a contract, the Full Court said at 123-124:

39. [85]

    After referring to passages from Williston on Contracts and the American Law Institute’s Restatement of the Law of Contract, the Full Court made the following observations at 125:

40. [86]

    The reasoning in Gilbert J McCaul was applied by the Full Court of the Federal Court in Commonwealth of Australia v Antonio Giorgio Pty Ltd (1986) 67 ALR 244.

41. [87]

    The issue in Antonio Giorgio was whether a licensee had validly exercised the option to renew a licence which provided for the removal of material from the appellant’s land in return for the payment of royalties. Under cl 8 of the licence, the licensee was required to take all necessary steps to prevent erosion of the land. Clause 18 of the licence stated that, upon paying the royalty and observing the covenants and conditions in the licence, the licensee had “the right by giving six months notice in writing to the Licensor of its intention, to exercise the right to renew this Agreement for a further term…”.

42. [88]

    Having regard to the terms of the licence as a whole and the parties’ intention gathered from its language, the Full Court concluded that there was no doubt that, “upon a proper construction of cl 18, compliance with cl 8 of the agreement was a condition precedent to the exercise by the respondent of the right to renew”. The Court described the language of cl 18 as capable of no other meaning.

43. [89]

    The Full Court found that Gilbert J McCaul applied to the option for renewal of a licence, such that only by performing the conditions prescribed, could the irrevocable offer to grant a lease be accepted and result in an agreement for a lease.

44. [90]

    The reasoning in Gilbert J McCaul was accepted by Stephen J in Bowman v Durham Holdings Pty Ltd (1973) 131 CLR 8; [1973] HCA 55 (with whom Menzies J agreed) in considering the doctrine of waiver.

45. [91]

    The reasoning was also referred to approvingly in BS Stillwell & Co Pty Ltd v Budget Rent-A-Car System Pty Ltd [1990] VR 589 at 595 per O’Bryan J, and at 603 per Gray J (with whom Crockett J agreed). In Stillwell, Gray J referred to a submission which was designed to distinguish Gilbert J McCaul which relied upon cases which viewed the grant of an option to purchase as a conditional contract as opposed to an irrevocable offer. The submission was that, using the concept of conditional contract, the grantee has the right if he performs conditions to become the purchaser (citing inter alia Laybutt at 75-76 per Gibbs J).

46. [92]

    But as Gray J pointed out at 603, even if the conditional contract analysis was correct in relation to the option in Stillwell, this does not affect the reasoning in Gilbert J McCaul concerning waiver. His Honour said (emphasis added):

47. [93]

    It is desirable now to summarise in greater depth the primary judge’s reasons why he considered that cl 20.4 should be characterised as a conditional contract, with the consequence that the conditions in cll 20.4(d) and/or (e) could be waived and why the primary judge considered Gilbert J McCaul to be distinguishable.

48. [94]

    The primary judge noted at PJ1[63] that, on the Full Court’s reasoning in Gilbert J McCaul, the outcome would have been the same if the lessor had sought to hold the tenant to the exercise of its option and the tenant could say that it had not accepted the lessor’s offer of a renewed lease because of the failure punctually to pay the rent. His Honour added in the following paragraph that it did not follow that the same outcome would ensue if the option “were properly characterised as a conditional contract for the grant of a lease”. His Honour said that if the obligation of punctual payment of rent is solely for the lessor’s benefit, a question would arise whether the lessor could waive the benefit of that condition. The primary judge ultimately reasoned that as the condition in cl 20.4(e) was wholly for the benefit of AMP, the condition could be waived by AMP (see PJ1[67]).

49. [95]

    The primary judge noted at PJ1[65] that Bryson J had observed in Tonitto v Bassal (1990) 5 BPR 11,258 at 11,272 that the view stated in Gilbert J McCaul “cannot now be accepted unreservedly as applicable to all options”.

50. [96]

    That may well be correct but that does not mean that the principles in Gilbert J McCaul should not be applied here.

51. [97]

    Having regard to the language in cl 20.4, AMP had no “right” to have Willis perform any or all of the five conditions set out therein. Rather, as was the case in both Gilbert J McCaul and Stillwell, the conditions were such that Willis might or might not perform any of them as it thought fit. It was not obliged to give any notice if it did not wish to do so. Nor was it obliged to provide the Bank Guarantee if it did not wish to do so. Willis only needed to fulfil the five conditions in cl 20.4 if it wished to enliven AMP’s obligation to grant the new lease. Accordingly, the critical reasoning in Gilbert J McCaul which is set out at [84]-[85] above, applies equally to cl 20.4. As was pointed out in Wagners Cement Pty Ltd v Boral Resources (Qld) Pty Ltd [2020] QCA 289 at [39] by Fraser JA (with whom Philippides JA and Crow J agreed), this “reasoning does not depend upon characterisation of an option as an irrevocable offer rather than a conditional agreement to grant a renewal upon the due exercise of the option”.

52. [98]

    In any event, a significant relevant feature of the Lease in the present case is the effect of cl 17.4, which required any waiver or variation to be in writing and signed by the party or parties to be bound. Thus, assuming contrary to the above, that AMP had a right to waive the timely provision of the Bank Guarantee, cl 17.4 applied. If AMP elected to waive the timely performance of the condition in cl 20.4(e) so as to commit the parties to having to execute a new lease for the expanded space, cl 17.4 required that such a waiver be signed in writing by both parties (see further at [105] below).

Ground 3: Waiver

1. [99]

   As noted at [46(3)] above, Willis challenged the primary judge’s findings on waiver on several grounds, some of which are expressed to be in the alternative. There is no need to address Willis's complaints under ground 3 which are directed to the condition in cl 20.4(d) because there was no allegation or finding that Willis had failed to meet that condition.

2. [100]

   Before addressing the balance of ground 3, it is desirable to emphasise several features. The issue of waiver was not raised by the respondent below in its defence, nor addressed by either of the parties in their written or oral submissions prior to the first primary judgment. It received only cursory attention in the parties’ submissions regarding final orders. This may explain why the subject received only limited attention in the primary judge's second reasons for judgment (see at [44] and [45] above). The primary judge did not have the benefit of the detailed submissions and references to caselaw on waiver which have been made to this Court. In addition, the parties below made only passing reference to the potential operation and effects of cl 17.4 of the Lease which may explain why the primary judge did not refer to this clause in either his first or second judgments.

3. [101]

   Ground 3(a) raises the question whether AMP had any right to waive the timing of the performance of the condition in cl 20.4. The issue of waiver in a contractual context can give rise to some difficult questions, as is evident from the discussion in Agricultural and Rural Finance Pty Ltd v Gardener (2008) 238 CLR 570; [2008] HCA 57; Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38 and Wagners Cement. As Gummow, Hayne and Kiefel JJ considered in Gardener at [51], the cases in which the term waiver has been used have revealed the application “of a more specific principle, typically election or estoppel”. In such circumstances:

4. [102]

   In conformity with this observation, when the primary judge used the term waiver in his reasons for judgment, he meant electing not to insist on the performance of a particular contractual requirement.

5. [103]

   In Allianz, the High Court recently observed that “the most common usage of waiver is to describe an unequivocal decision by a party, communicated to the other party, not to insist upon a right or not to exercise a power” (at [28], emphasis added). For the reasons given above, in relation to grounds 1, 2 and 4, AMP had no right created under the Lease in relation to the condition in cl 20.4 which was capable of being waived, applying the critical passages in Gilbert J McCaul (see at [84]-[85] above).

6. [104]

   But that is not a complete answer on the issue of waiver because regard must be had to all the terms of cl 17.4 (which are set out at [13] above). That clause expressly states that a provision of, or a right created under, the Lease could not be waived or varied except in writing, signed by the party or parties to be bound. The condition in cl 20.4(e) is a provision of the Lease. The primary judge clearly found that AMP had waived the timing of the performance of that condition.

7. [105]

   It is therefore desirable to focus upon the complaint raised by Willis in ground 3(c), which squarely raises the relevance of the requirements imposed by cl 17.4. As Willis pointed out in its submissions on appeal, AMP contended that the effect of its limited waiver was to alter the rights of the parties by obliging Willis to enter into the new lease for the expanded space, notwithstanding that it no longer wished to do so. As explained above, applying the principles in Gilbert J McCaul, AMP had no such right. Clause 17.4 might apply, however, to the condition in cl 20.4(e) on the basis that it constitutes a "provision" within the meaning of cl 17.4. But even under this analysis, for the waiver of this provision to be valid it would be necessary for the waiver to be in writing and signed by both parties who are affected by the purported waiver. This requirement was not satisfied and accordingly, the purported waiver was invalid and of no effect. Ground 3(c) should be upheld.

8. [106]

   It is unnecessary to determine grounds 3(d) and (e) as they add nothing to the successful ground 3(c).

Ground 5: Withdrawal of the Expanded Space Notice

1. [107]

   This ground challenges the finding at PJ1[10] that Willis did not press its contention that it was entitled to withdraw its Expanded Space Notice prior to AMP informing it of its position that Willis had exercised the option to renew, notwithstanding that the condition in cl 20.4(e) had not been satisfied.

2. [108]

   It is not necessary to determine this ground. It is related to ground 3(e) which is also unnecessary to determine. In oral address, Dr Birch SC appeared to accept that ground 5 added little if anything to Willis's primary grounds of appeal.

Conclusion

1. [109]

   For these reasons we propose that the following orders be made:

   1. (1)

      Pursuant to UCPR r 51.16(1)(c), the date for filing of the notice of appeal be extended to 12 December 2022.

   2. (2)

      Appeal allowed.

   3. (3)

      Declarations 2,3,4 and 5 of the Court below be set aside.

   4. (4)

      Orders 6,8 and 9 of the Court below be set aside.

   5. (5)

      An order that the further amended statement of claim be dismissed.

   6. (6)

      An order by way of restitution against the second respondent for all sums paid by Willis pursuant to order 6(d) of the orders made below.

   7. (7)

      Order that within 14 days hereof the parties seek to agree the sums as referred to in order 6 above. If they cannot agree, each should provide within that time a brief submission of no more than two pages, explaining their position. Final orders will then be made on the papers and without a further oral hearing.

   8. (8)

      The respondents pay the appellant’s costs of the appeal and of the proceeding below.