Ideal Business Centres Pty Ltd v Violin Holdings Pty Ltd atf The Violin Investment Trust

These proceedings concern whether a purchaser of commercial premises is bound at law or in equity to honour the terms of an unregistered lease for part of those premises.

The plaintiff, Ideal Business Centres Pty Ltd (“IBC”) was one of several lessees of commercial premises at Mascot (the “Premises”). The second defendant, Jordana Pty Ltd (“Jordana”) was the registered proprietor of the Premises pursuant to the Real Property Act 1900 (NSW) (the “RP Act”).

IBC’s lease was unregistered. The first defendant, Violin Holdings Pty Ltd as trustee for The Violin Investment Trust (“Violin”) purchased the Premises.

There is no doubt that Violin was on notice of the terms of IBC’s lease. A standard form contact for sale of the Premises included special conditions under the heading “Tenancies” which began with clause 49.1: “The purchaser acknowledges that the purchaser takes title to the property subject to the unregistered lease(s) (Leases) attached to this contract.” IBC’s lease was attached.

On the second business day after completion of the sale of the Premises, Violin required IBC to vacate IBC’s part of the Premises on the basis that Violin was not bound by IBC’s lease because it was unregistered, with the consequence that IBC was in occupation as a tenant at will only.

In these proceedings, IBC alleges Violin is bound to honour IBC’s lease. If that allegation is not made out, IBC claims damages from Jordana for breach of IBC’s lease by reason of the sale of the Premises to Violin. The Court has ordered that the quantification of such damages, if any, should be dealt with after IBC’s primary case against Violin has been determined.

IBC was represented by Mr D R Pritchard of Senior Counsel with Mr M Southwick of Counsel. Jordana was represented by Mr S Balafoutis of Counsel with Ms E Doyle-Markwick of Counsel. IBC and Jordana were in common interest insofar as they both submitted that Violin was bound to honour IBC’s lease. Violin was represented by Mr M J Dawson of Counsel.

The Court has concluded that Violin is bound to honour the terms of IBC’s lease for two reasons. First, because that is the effect of clause 49.1 on its proper construction. The “acknowledgement” in that clause is not merely a recognition of the existence of IBC’s lease. It is an agreement to observe and give effect to IBC’s rights under IBC’s lease. Second, IBC has the benefit of an in personam equity against Violin which overcomes what would otherwise be Violin’s indefeasible title to the Premises pursuant to s 42 of the RP Act. This second conclusion is an application of the decision of the High Court in Bahr v Nicolay (No 2) (1988) 164 CLR 604; [1988] HCA 16 (“Bahr”).

I will first set out the relevant contractual provisions and the facts. There was no dispute about the facts which the Court considers to be relevant to its conclusions. I will then record the reasons for those conclusions before explaining why the Court has not accepted Violin’s arguments to the contrary.

By an unregistered lease signed on 27 January 2016, IBC leased part of the Premises (that part being described as “Suites C & D and shared areas”) from Jordana (“IBC’s Lease”). The term of IBC’s Lease was ten years commencing on 1 September 2015 with an option to renew for a further five years.

Clause 1 of IBC’s Lease included:

IBC also drew attention to clause 7 of IBC’s Lease:

If IBC’s case against Violin failed, then IBC’s case for damages against Jordana was based upon the contention that Jordana’s sale of the Premises was a breach of clauses 5 and 48 of IBC’s Lease:

Jordana sold the Premises to Violin pursuant to a standard form contract for the sale and purchase of land (2016 edition) dated 30 May 2017 (the “Sale Contract”).

The Sale Contract included a number of provisions under the heading “Special Conditions – Commercial”. This case turns on clause 49:

It will be noted that clause 49.17 deletes clause 24 of the Sale Contract. Jordana placed considerable reliance on that deletion. For that reason, and to facilitate comparison, it is convenient next to set out that deleted clause 24:

A number of other provisions of the Sale Contract are relevant, commencing with the fact that on the front page of the Sale Contract there is an X in the box marked “subject to existing tenancies”. The box marked “vacant possession” has been left blank.

IBC also relied upon the following provisions of the Sale Contract (all of which were special conditions, with the exception of clause 10):

IBC’s Lease was one of the unregistered leases attached to the Sale Contract.

The Premises were commercial premises leased to a number of parties. The obvious purpose of ownership of the Premises was to rent them out for a commercial return.

On 27 January 2016 IBC and Jordana entered into IBC’s Lease.

In September 2016 Jordana leased an additional area of the Premises to IBC comprising what was referred to as “the Showroom” and “Junes and Anna Rooms” (the “Additional Area”). This was confirmed by an email from Mr Jerry Ngo of IBC to Mr George Spyrou of Jordana on 14 September 2016:

On 10 May 2017 a written agreement in principle was reached between the agents for Violin and Jordana for the purchase of the Premises for $8,700,000 “subject to leases”. The purchase price never changed.

On 16 May 2017 Violin’s solicitors received a draft contract from the solicitors for Jordana attaching, among other things, IBC’s Lease and including a proposed special condition 49 concerning tenancies.

Later that day the solicitors for Violin informed the solicitors for Jordana that they “will now commence reviewing the contract” and attached a request for information including any leases.

On 17 May 2017 the solicitors for Jordana replied to the request for information, including a tenancy schedule that referred to the details of IBC’s Lease. This reply is the document referred to in clause 56.2 of the Sale Contract (see paragraph [18] above).

On 23 May 2017 the solicitors for Violin proposed amendments, including their own draft of clause 49 (which became the version which appears in the Sale Contract — see paragraph [15] above).

On 24 May 2017 Jordana’s solicitors agreed to Violin’s version of clause 49.

An amended contract for sale incorporating the agreed amendments, including clause 49, was sent by the solicitors for Jordana on 26 May 2017.

On 30 May 2017 the Sale Contract was exchanged with a 12 week completion period.

Mr Spyrou of Jordana gave evidence and was cross-examined. I accept him as a witness of truth. He gave unchallenged evidence that he believed, based on clause 49 in the Sale Contract, that Violin intended to honour all of the agreements for lease, including IBC’s Lease, and that he would not have sold the Premises to Violin if Violin had indicated, in any way, that they would not be bound by the unregistered leases.

By no later than 22 June 2017 Violin had formed the intention to terminate IBC’s Lease and to require vacant possession immediately upon completion of the Sale Contract. Violin did not disclose this intention to Jordana or to IBC before completion of the Sale Contract.

At this point in the narrative, I interpose that IBC pressed the facts found in the preceding two paragraphs. However, while I am satisfied of those matters, I have not relied upon them or give them any legal significance in resolving these proceedings.

On 15 August 2017 the solicitors for Jordana sent replies to requisitions on title to Violin’s solicitors. Those replies included a response that Jordana relied on the leases attached to the Sale Contract (which included IBC’s Lease).

On 18 August 2017 the solicitors for Violin confirmed that they required on settlement from the solicitors for Jordana:

On 21 August 2017 a copy of IBC’s Lease was re-executed by IBC and Jordana to be given to Violin pursuant to the request referred to in the preceding paragraph. This procedure had to be undertaken because the original of IBC’s Lease could not be found.

On 24 August 2017 settlement of the Sale Contract occurred. Violin’s solicitors received, among other things:

On 28 August 2017 Violin issued a notice to vacate to IBC:

On 1 September 2017 IBC commenced these proceedings by summons.

There are numerous statements of authority as to how the proper construction of commercial contracts is to be determined. They are conveniently set out and summarised in a manner binding upon me in Cherry v Steele-Park (2017) 351 ALR 521; [2017] NSWCA 295 (“Cherry”). In particular, I take two principles from that case.

First, “the task of identifying the legal meaning of provisions in a commercial contract is the task of identifying the imputed intention of the parties, by reference to the contractual text construed in light of its context and purpose,” (Cherry at 532 [46]).

Second, whether a provision in a commercial contract is ambiguous (that is to say, permitting a constructional choice to be made between two different legal meanings) is “a conclusion, which can only be assessed after regard has been had to context” (Cherry at 540 [85]), or what are sometimes referred to as the surrounding circumstances.

All of the parties took me to decisions interpreting contractual provisions in factual circumstances they submitted were broadly similar to those which had given rise to the present dispute. To the extent I have taken those decisions into account, I have not forgotten that it is the Sale Contract which the Court is called upon to interpret in the light of the facts and circumstances which have been proven in this case. Other decisions interpreting other contracts which bear some similarity to the Sale Contract can only be considered with that caution in mind.

Even without recourse to anything outside the four corners of the Sale Contract, the word “acknowledges” in clause 49.1 of the Sale Contract clearly permits a constructional choice to be made between two different legal meanings. Those legal meanings may be found in two of the six meanings ascribed to “acknowledge” in the Macquarie Dictionary (online edition):

Violin submitted that clause 49.1 was only an expression of its recognition or awareness of the existence of IBC’s Lease. IBC and Jordana contended that it was a promise by Violin to be bound by IBC’s Lease or, in Mr Balafoutis’ submission, “acknowledges” meant “agrees to observe and give effect to”. There are six reasons why the Court accepts IBC’s and Jordana’s submission and finds that, on its proper construction, clause 49.1 is an agreement by Violin to observe and give effect to IBC’s rights under IBC’s Lease.

First, there may have been more force in Violin’s submission if clause 49.1 only said “The purchaser acknowledges the unregistered leases attached to this contract” and no more (although, as is noted in paragraph [53] below, the decision in Bahr casts doubt even on that proposition). However, clause 49.1 (and the balance of clause 49 which is part of the context) contains a great deal more. What is acknowledged is not only the fact of the “leases”, but “that the purchaser takes title to the property subject to the unregistered leases”. The language of taking title to something, subject to another interest, bespeaks a significant legal consequence. Furthermore, it connotes an ongoing state of affairs.

Mr Pritchard SC submitted that the Court should find that clause 49.1 had been modelled on, and was intended to mirror, s 42 of the RP Act, which referred to the registered proprietor “holding” an estate or interest “subject to such other estates and interests…as are recorded in that folio”. It is unnecessary for the Court to go that far. It is sufficient to note that clause 49 was propounded by Violin’s solicitors and that — as the use of similar words in s 42 of the RP Act demonstrates — the use of language of holding or taking title to property subject to something else is language which lawyers would readily understand conveys an intention to effect a significant legal consequence. In this case, the Sale Contract was negotiated through the parties’ solicitors. The use of the words to which the Court has drawn attention points decisively to the conclusion that “acknowledges” is to be understood as a recognition or promise by Violin to be bound by the unregistered leases, including IBC’s Lease.

Second, if clause 49.1 was intended by the parties to be no more than a mere acknowledgement of the existence of IBC’s Lease, presumably such an acknowledgement must have a purpose. The obvious purpose is to ensure that the existence of IBC’s Lease could not be used by Violin to avoid the transaction. However, that purpose is already achieved by clauses 10.1.9 and 33 (see paragraph [18] above). When that is understood, it must be the case that clause 49.1, especially when read in the context of the balance of clause 49, has other work to do. That work can only be to bind Violin to observe IBC’s Lease.

Third, the balance of clause 49 contains an elaborate set of provisions which when taken both individually and together point to the importance of the unregistered leases, including IBC’s Lease. These include an obligation on Jordana to provide to Violin notices of attornment in respect of each of those leases. An elaborate set of provisions such as those set out in clause 49 would only be required if, and powerfully pointed to the conclusion that, the intention of the parties was that the unregistered leases would continue to have an ongoing legal effect according to their terms after completion of the Sale Contract. That could only be achieved by Violin agreeing to be bound by them.

Fourth, the matrix of circumstances in which the Sale Contract was made includes three significant factors which are indistinguishable from those that moved the majority in Bahr to find a contractual obligation on the party in the position of Violin. I gratefully adopt the summary of the facts in Bahr provided by Austin J in Heggies Bulkhaul v Global Minerals Australia Pty Ltd (2003) 59 NSWLR 312; [2003] NSWSC 851 at 338–9 (“Heggies”):

Clause 4 of the agreement between Mr Nicolay and the Thompsons in that case provided the Thompsons “acknowledge [sic] that agreement exists” between the Bahrs and Mr Nicolay. It was this clause that the relevant majority held was an agreement which meant that the Bahrs’ rights under the agreement between the Bahrs and Mr Nicolay were to be enforceable against the Thompsons.

The reasoning of Mason CJ and Dawson J on this point was at (616–617; citations omitted):

The Court accepts Mr Pritchard SC’s submission in one of his written submissions that the factors in Bahr are the same as those in the present case:

The Court also accepts Mr Balafoutis’ characterisation of the language of clause 49.1 as pointing even more clearly to the conclusion which the Court has reached than the language of “acknowledged that an agreement exists” in Bahr. Furthermore, the Court also accepts Mr Balafoutis’ submission that, properly understood, Brennan J (at 651–652) interpreted clause 4 of the agreement in Bahr in the same way as Mason CJ and Dawson J (see paragraph [51] above), so as to constitute a majority of the question of construction.

Applying the High Court’s analysis of those three circumstances in Bahr to the facts in the present case, it follows that clause 49.1 should be construed as obliging Violin to honour or adhere to IBC’s Lease.

Fifth, the continuation of the unregistered leases with, in effect, Violin substituted as the lessor is consistent with the commercial background to the transaction, namely the purchase of an asset (being the Premises with the unregistered leases) which generated rental income.

Sixth, while not of its itself dispositive, and noting my observations in paragraph [43] above, I am fortified in the conclusions I have reached by the decision of White J (as his Honour then was) in Ryan v Starr (2005) 12 BPR 22,803; [2005] NSWSC 170 (“Ryan”). In that case, his Honour construed a clause that the relevant contract was “subject to the purchasers’ acknowledgement of a right of carriageway” to be of similar effect to clause 49.1 in the case at bar.

In his judgment in Heggies, Austin J summarised the effect of the judgments in Bahr (emphases added):

This part of Austin J’s judgment in Heggies was the subject of detailed consideration by Young CJ in Eq (as his Honour then was) in The Presbyterian Church (NSW) Property Trust v Scots Church Development Ltd (2007) 64 ACSR 31; [2007] NSWSC 676 (“Presbyterian Church”). After considering a number of relevant cases, Young CJ in Eq concluded:

With the utmost respect, it seems to me that there is an ambiguity in Austin J’s expression that the additional factor was “some form of acknowledgement of the unregistered interest, or an agreement or undertaking to act in accordance with it”. It is not clear whether his Honour intended the “form of acknowledgement” and the “agreement or undertaking” to be two different things, or whether his Honour’s reference to “an agreement or undertaking” was just another way of describing the “form of acknowledgment of the unregistered interest”. Young CJ in Eq, in the passage I have quoted from Presbyterian Church, appears to have adopted the latter construction of Austin J’s analysis. I shall do the same.

It follows from the construction of clause 49.1, which the Court has adopted in the preceding section of these reasons, that clause 49.1 is the “additional ingredient”, being an agreement or undertaking to act in accordance with the unregistered interest, in this case IBC’s Lease. Because that is an agreement or undertaking of the benefit of IBC, IBC has a personal equity against Violin.

A differently constituted majority in Bahr from that on the construction issue (being Wilson and Toohey JJ (at 638) and Brennan J (at 656)) held that the personal equity is to be given effect through the imposition of a constructive trust. In this case that is a constructive trust by which Violin holds its interest in the Premises subject to IBC’s rights under IBC’s Lease. As the beneficiary of that constructive trust, IBC is entitled to enforce it against Violin. This is also the approach adopted by White J in Ryan at [90]–[95], with which I respectfully agree. I also note that, as White J said of the words he was construing in Ryan, I do not consider that clause 49 (and clause 49.1 in particular) can be construed as an express declaration of trust.

Finally, I record for completeness that the conclusions set out above mean I do not have to consider other arguments advanced by IBC. These included reliance on clauses 7 and 49.3 of the Sale Contract as constituting an assignment or novation, and the effect of s 118 of the Conveyancing Act 1919 (NSW).

I will now give the Court’s reasons for rejecting Violin’s arguments.

Mr Dawson placed considerable reliance on the fact that clause 24 of the standard conditions had been deleted in favour of special condition clause 49. He drew attention to the fact that deleted clause 24.4.5 provided that “the purchaser must comply with any obligation to the tenant under the lease, to the extent that the obligation is disclosed in this contract, and is to be complied with after completion”. He submitted that the deletion of that clause, in particular, was a matter which the Court could take into account as a clear indication of the parties’ mutual intention that clause 49 was not to have the effect of binding Violin to IBC’s Lease: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 91 ALJR 486; [2017] HCA 12 at 502 [73], and Ginger Development Enterprises Pty Ltd v Crown Developments Australia Pty Ltd [2003] NSWCA 296 at [20].

In The Interpretation of Contracts in Australia by Sir K Lewison and D Hughes (2012, Thomson Reuters), the learned authors summarised the position in relation to the use which may be made of deleted words at p 62:

In their subsequent exposition, they wrote (at pp 66 to 67; citations omitted):

Their counsel of caution was most recently followed by Nicklin J in Health & Case Management Limited v The Physiotherapy Network Limited [2018] EWHC 869 (QB) at [72]–[73]. Professor J W Carter in The Construction of Commercial Contracts (2013, Hart Publishing) at [14-30] acknowledges that “Generally, the modern cases have distinguished between negotiated and standard form documents, and taken the view that deletions can be taken into account in relation to the latter but not the former.” However, in his discussion of deletions in standard form documents, Professor Carter concludes at [14-32] that:

In the present case there is no evidence as to why Violin’s solicitors did not accept Jordana’s original version of clause 49 and proposed deleting standard condition clause 24 to replace it with their version of clause 49. Nor is there any evidence as to why Jordana, through its solicitors, accepted the amendment proposed by Violin’s solicitors.

To use the expression used by Lewison and Hughes, the change from deleted clause 24 to clause 49 is not simply an amendment. It is a recasting of the Sale Contract provision in relation to tenancies. As such, I do not think that it is possible for the Court to draw safely any conclusion about what that change says about the parties’ intentions about the meaning of clause 49. In some respects clause 49 repeats the effect of parts of deleted clause 24 (compare clause 49.8 with clause 24.4.3; clauses 49.9(b) and (c) with clause 24.1; and clauses 49.12 and 49.13 with clause 24.4.1). Clause 49.10 is also to the same effect as clauses 10.2 and 33(a). In other respects, clause 49 is quite different from the deleted clause 24. Furthermore, for the same reason, I am satisfied that it would be quite wrong to conclude that the deletion of clause 24.4.5 means that the parties intended to agree to the opposite effect in clause 49.1.

In the same contractual vein as the preceding point, Mr Dawson drew the Court’s attention to the decision of Wood J in Snowlong Pty Ltd v Choe (1991) 23 NSWLR 198, and Croft J in Specialist Diagnostic Services Pty Ltd v Healthscope Ltd [2010] VSC 443, both of which interpreted provisions not dissimilar to clause 24.4.5. In those cases, the Court accepted that the party in the position of Violin was bound to honour the relevant obligation to a third party such as IBC. In neither of those cases, however, did the contracts in question use the word “acknowledgement” or anything similar to clause 49.1.

I accept Mr Balafoutis’ submission that for Violin to rely on those cases was neither a logical nor helpful way to approach the problem. This is because it does not follow that just because a court has held a particular collocation of words to mean “X”, then any other collocation of words cannot also have the effect of “X”. As I have observed in paragraph [43] above, the Court must bear in mind that every contract must be interpreted according to its own words, their context and the relevant factual circumstances.

It was also submitted for Violin on the issue of contractual interpretation that the mechanisms set out in clause 49 were equally consistent with the possibility that Violin would treat the unregistered leases as tenancies at will. At a very high level of generality, that proposition may be true. However, when the particular words, their context and the overall circumstances are taken into account, the Court does not accept that submission for the reasons set out in paragraphs [46] to [56] above.

Turning to the equitable issues, Mr Dawson submitted that the “extra ingredient” identified by Austin J in Heggies as explicated by Young CJ in Eq in Presbyterian Church was not present in this case. For the reasons set out in paragraph [61] above, that submission is rejected.

It was also submitted that the variation to include the Additional Area as part of IBC’s Lease (see paragraph [22] above) meant that there was now nothing to which an equitable interest could attach. Those variations were not notified to Violin under the Sale Contract, in the due diligence checklist or by way of answer to requisitions. Violin argued that IBC could not “ratchet back” its claim to IBC’s Lease attached to the Sale Contract.

The Court rejects the submission set out in the preceding paragraph for three reasons, all to the effect that the past variations were rendered irrelevant by the Sale Contract. In doing so, I note that it makes no difference whether what occurred were variations to IBC’s Lease in the strict contractual sense or whether the arrangement evidenced by the email referred to in paragraph [22] above was something of a more informal character.

First, the acknowledgement in clause 49.1 bound Violin “to the unregistered leases attached to this contract”. That included IBC’s Lease and it is that lease which Violin is bound to honour.

Second and putting the matter beyond doubt, the Additional Area which had been leased to IBC is the subject of the leaseback expressly provided for in clause 55 of the Sale Contract (see paragraph [18] above). In other words, the effect of the Sale Contract itself was that the Additional Area became the subject of a new lease from Violin as lessor to Jackson George Fashion Pty Ltd.

Third and consistently with the leaseback arrangement, IBC does not suggest it has any entitlement to the Additional Area. IBC only claims the entitlement to occupy that part of the Premises demised to it by IBC’s Lease.

IBC succeeds in its claim against Violin. IBC therefore has no claim in damages against Jordana.

The Court will give the parties an opportunity to endeavour to agree on a form of orders to give effect to these reasons, including as to costs. I will fix a date for a further, short hearing to resolve any disagreements about those matters.