Parramatta Commercial Holdings Pty Ltd v Vision Medical and Health Pty Ltd

These proceedings concern whether a tenant’s right of first refusal to purchase the demised premises has not been exercised with the result that the landlord is at liberty to sell the premises to a third party.

The plaintiff, Parramatta Commercial Holdings Pty Ltd (“PCH”), owns a building in Victoria Road, Parramatta (the “Premises”). The first defendant, Vision Medical and Health Pty Ltd (“Vision”), leased the ground floor of that building from PCH pursuant to a lease which commenced on 30 August 2016 for a five-year term, with an option for a further five years (the “Lease”). If PCH wishes to sell the Premises, the Lease gives Vision a right of first refusal on certain terms, including that PCH has a right to sell the Premises within 120 days if Vision does not exercise Vision’s right of the first refusal to purchase the Premises.

On 26 or 27 October 2017, PCH granted the third defendant, Max Distribution Pty Ltd (“Max Distribution”), a twelve-month call option to purchase the premises (“the Call Option”). Max Distribution has paid an option fee which is currently being held by the second defendant, Michael Lee (“Mr Lee”) as stakeholder. Mr Lee is Max Distribution’s solicitor.

The Call Option is expressed to be “subject to and conditional upon the exercise of” the right of first refusal by Vision. The option fee is to be released to PCH “in the event that the Right of First Refusal is not exercised”.

PCH says it has complied with the terms of the right of first refusal and that Vision did not exercise it. PCH therefore seeks an order that Mr Lee release the option fee to PCH. Vision submits that an offer in terms of the Call Option (to which, for the sake of simplicity, I will also refer as the Call Option) did not engage its right of first refusal, so that no question of Vision not having exercised the right can arise.

By its summons filed on 21 December 2017, PCH seeks orders which include:

The relief sought in paragraph 3 of the summons was ultimately not pressed.

Although the dispute ultimately turns on the proper construction of the Call Option (being an agreement between PCH and Max Distribution), the protagonists before the Court were PCH and Vision. Mr Lee and Max Distribution in effect interpleaded.

PCH submitted that it had afforded Vision the opportunity to purchase the Premises in accordance with the right of first refusal by offering Vision an option on precisely the same terms as the Call Option, and that Vision did not exercise the right of first refusal within the specified thirty days. Vision submitted that, on the proper construction of the right of first refusal, an offer in the terms of the Call Option was not the offer of terms and conditions of the kind referred to in the right of first refusal.

The Court accepts Vision’s argument because the Call Option was not limited so as to require the completion of any sale pursuant to the exercise of the Call Option within the 120 days referred to in the right of first refusal.

It follows that on the proper construction of the Call Option, the occasion for the exercise or non-exercise of the right of first refusal has not arisen so that the obligation on Mr Lee to release the option fee to PCH has not arisen.

The summons will be dismissed with costs. It is important to note that the Court’s conclusion is confined to the sole issue that was presented for argument. I express no view as to any other issue concerning any other rights of Vision and Max Distribution under the Call Option as a consequence of this judgment or otherwise.

Mr H Altan of Counsel appeared with Mr P Tiliakos of Counsel for PCH. Mr D K L Raphael of Counsel appeared for Vision. Mr Lee and Max Distribution entered submitting appearances.

Clause 31 of the Lease sets out the right of first refusal:

On 20 October 2017, Mr Dean Alcorn, the in-house legal officer of the group of companies which includes PCH, sent an email to Mr G Penhall, Vision’s solicitor:

Later that same day Mr Penhall replied:

On 21 October 2017, Mr Alcorn emailed to Mr Penhall a copy of the Call Option. There was no dispute that what was sent to Vision was a document in precisely the same terms as the Call Option that was ultimately executed by PCH and Max Distribution.

On 26 or 27 October 2017, PCH and Max Distribution entered into the Call Option. The Call Option included:

Those provisions must be read with some of the definitions in Clause 1.1 of the Call Option:

The contract which would come into existence upon the exercise of the Call Option provided for a 70 day completion period.

On 21 November 2017 a request was made on behalf of Vision to PCH for Vision to have a further two weeks to consider whether it would exercise its right of first refusal. That request was refused on behalf of PCH.

On 23 November 2017, Mr Alcorn emailed Mr Penhall:

Mr Raphael, on behalf of Vision, accepted that Mr Penhall was authorised to receive an offer made to Vision by PCH pursuant to the right of refusal in clause 31 of the Lease. However, he submitted by reference to clause 17.2 of the Lease that Mr Alcorn’s emails (see paragraphs [15] and [17] above) did not constitute the making of the requisite offer on behalf of PCH. That submission is rejected for the following reasons.

Clause 17.2 of the Lease provides:

There was no dispute that Mr Alcorn is the in-house legal officer of the group of companies of which PCH forms a part. If clause 17.2 of the lease is to be construed as exclusive, that is to say specifying the only way in which relevant notices or documents can be given, then I have no difficulty in inferring from Mr Alcorn’s title alone that he is, in the requisite sense, “a manager” under clause 17.2 authorised apparently to give notices or documents, at least of a legal kind, on behalf of PCH.

However, in my view, clause 17.2 is not exclusive. It is an evidentiary or facultative provision which assists in proving whether or not a document or notice has been given on behalf of PCH. It does not, however, conclude the ultimate question of fact as to whether or not an offer has been made on behalf of PCH. That is a fact to be proven by reference to the terms of clause 31.1 of the Lease. Again, by reference to Mr Alcorn’s title alone, the Court has no difficulty in concluding that his communication of the offer was one made by and on behalf of PCH. Accordingly, Mr Raphael’s preliminary point fails.

PCH submitted that it had done everything which clause 31 required of it. It had made an offer to Vision of a call option on precisely the terms of the Call Option. If the Call Option were exercised, it would result in a sale of the Premises. Clause 31 did not specify how any sale was to be effected. It should, so the argument ran, be construed widely and beneficially. There could be no doubt that a sale pursuant to the exercise of a call option would be understood by reasonable business persons familiar with the circumstances as being a “sale”.

Vision submitted that the preliminary words “before the Lessor may sell” in clause 31 made it clear that what had to be offered was a contract for sale. The Call Option was not such a contract, did not in itself effect a sale (that is to say, a disposition of property in the Premises) and was no more than a conditional contract (relying on Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57; [1974] HCA 49). Therefore, it was not something that engaged clause 31. Clause 31, it was submitted, required the offer of terms and conditions which were a contract for sale.

In this case, Mr Raphael accepted that clause 31 would have been satisfied if what had been offered to Vision was an opportunity to purchase the Premises on the terms of the contract that was attached to the Call Option. However, if that had occurred and Vision had declined the offer, PCH could only have sold the Premises on the terms of that contract.

This is not a case which requires an exhaustive discussion of the principles of contractual construction. It is sufficient for me to note and apply the approach set out by the High Court in Woodside Energy Ltd v Electricity Generation Corporation (2014) 251 CLR 640; [2014] HCA 7 at [35] (citations omitted):

Mr Altan accepted, correctly, that his client’s entitlement to the relief which it sought in relation to the release of the option fee required the Court to determine whether or not the right of first refusal had not been exercised within the meaning of this sentence in clause 2.8 of the Call Option: “In the event that the Right of First Refusal is not exercised then the Option Fee will be released to the Grantor (or as it directs) forthwith”.

Mr Altan also accepted, again in my opinion correctly, that as a matter of construction, in order for that sentence to be engaged it was necessary for the occasion to have arisen for the right of first refusal to be exercised or not. It was common ground between the active protagonists that this question had to be determined by reference to the proper construction of clause 31 of the Lease.

Turning to clause 31, one preliminary point may be passed over immediately. In its terms, clause 31 provides that, “The lessor shall first offer the Property... on the same terms and conditions as are offered by the third party.” It was also common ground that, as a matter of construction, those words were not confined to the situation where an offer to purchase had been made by a third party. The parties accepted that those words should be read as “offer by or to the third party”. The position taken by the parties on that point must be correct. It would be an entirely uncommercial reading of the clause to suggest that it only operated in the case of an offer made by a third party, whereas PCH would be at liberty to sell the Premises to a third party without having to offer Vision the right of first refusal if PCH was the moving party in the transaction.

Looking at clause 31 by reference to the question of what a reasonable businessperson would have understood its terms to mean, in my view it is clear that clause 31 would be understood as being intended to ensure that PCH could not sell the Premises without having given Vision an opportunity to purchase the Premises on precisely the same terms as those that were being treated upon with the third party.

However, I think that the reasonable businessperson’s understanding would also be informed by the last sentence of clause 31, a matter to which it seems to me neither party gave sufficient attention. That last sentence provides that the “lessor’s right to sell the property to the third party shall expire” within 120 days. Reasonable businesspersons would understand the intention of those words as being to give PCH a “window” of 120 days within which to complete the sale of the Premises — the 120 days commencing immediately after the thirty-day period during which Vision was entitled to accept PCH’s offer (and assuming Vision did not accept).

Of course it is necessary to give careful attention to the words of clause 31 itself. In my view the most important words are “the same terms and conditions”. This requires construing what sort of terms and conditions must be offered. Mr Raphael submitted that by reference to the earlier reference to “may sell”, the requisite terms and conditions for the purposes of clause 31 had to be terms and conditions for the sale of the Premises. In my opinion that submission is correct as far as it goes. However, I am also satisfied that, on its proper construction, clause 31 goes further than contemplating just terms and conditions for a sale simpliciter.

My reason for that conclusion is because it is necessary for the purpose of construing the clause as a whole to give proper weight to the last sentence.

What is significant about the last sentence is that it provides that PCH’s right to sell the Premises expires if, within 120 days, PCH has not entered “into an agreement with the third party on the said terms and conditions and close the transaction” (emphasis added).

Mr Altan submitted that in the context of the Call Option that limitation would have been satisfied, including the obligation to “close the transaction”, by entering into the call option itself within the 120 days. I do not agree. “Close the transaction” in the context in which it appears has its ordinary and natural meaning (perhaps more frequently in American legal discourse than in our own Anglo-Australian legal terminology) of the completion of the sale.

It follows, in my view, that terms and conditions which could satisfy clause 31 could extend to terms and conditions in the form of a call option, or a put and call option, or any other means of agreeing to sell property, provided that those terms were not inconsistent with the completion of the sale of the Premises within the 120 days limited by the last sentence of clause 31. So understood, the Call Option does not satisfy the requirement of being such “terms and conditions” because, while it could certainly be exercised during the 120 days, it was a one year option that could also be exercised in a way that would result in the completion of the sale outside the 120 day period. By way of another example, the offer of a contract for sale that specified settlement in 150 days would also not be “terms and conditions” of a kind that would engage clause 31.

I am fortified in that conclusion by considering what could happen in the present case. Assuming that the Call Option had engaged clause 31 but was exercised outside the 120 day period, then it would put PCH in breach of clause 31 because its right to sell the Premises would have expired at the end of the 120 day period. The Court is entitled to assume that when they enter into contracts, parties intend to behave lawfully and honour their contractual obligations. As a matter of the objective theory of contract, a party should not (unless the language is intractable) be taken to have intended to enter into inconsistent obligations. The Court should not lightly conclude that PCH intended to be bound to Max Distribution in a way that could put it in breach of its obligations to Vision, particularly when the Call Option was expressly “subject to and conditional upon the exercise or otherwise of the” right of first refusal. Confronted with a choice between a construction of “terms and conditions” in clause 31 that permitted or compelled a breach of the requirement for the sale to occur within 120 days, and a construction which did not have that result, the latter is to be preferred.

It follows from the analysis which I have just set out, that the Call Option does not answer the description of “terms and conditions” contemplated by clause 31. Therefore, for the purpose of applying the sentence in clause 2.8 of the Call Option set out in paragraph [31] above, the occasion for the exercise of the right of first refusal has, in the events which have happened, never arisen.

In those circumstances, as Mr Altan accepted (see paragraph [32] above), it cannot be said that Vision has “not exercised” its right of first refusal within the meaning of the sentence referred to in the preceding paragraph. Mr Lee, as stakeholder, is therefore not obliged by clause 2.8 of the Call Option to release the option fee to PCH.

The summons will be dismissed with costs.