Shogroup Hotels Pty Ltd v Harris Street Holdings Pty Ltd

These proceedings concern a registered lease of the Dunkirk Hotel in Harris Street, Pyrmont, entered into in January 2020 between the plaintiff as Lessee and the defendant as Lessor, and an associated Deed entered into by the parties on 3 July 2020.

The Deed, which was entered into after the outbreak of the COVID-19 pandemic, set out the terms upon which relief was given to the plaintiff in respect of its payment obligations under the lease. In particular, the Deed provided that during an Adjustment Period (defined as commencing on 15 March 2020 and expiring on 27 September 2020), the Tenant’s obligation to pay Rent in accordance with the Lease was reduced by 75%, comprising a Waiver Amount (of $12,187.50 plus GST per month) and a Deferral Amount (of $12,187.50 plus GST per month). The Waiver Amount was waived by the Landlord, but the Deferral Amount was payable by 48 monthly instalments over a four year period commencing on the day after the expiry of the Adjustment Period.

The present dispute arises from cl 10 of the Deed, which provides:

The plaintiff sought to invoke cl 10 of the Deed in July 2021, after the introduction of public health orders that imposed additional restrictions upon the manner in which the plaintiff could operate the hotel. On 28 July 2021, the plaintiff’s solicitors sent a letter to the defendant’s solicitors which included the following:

On 4 August 2021, the defendant’s solicitors sent a letter in response, in which it was stated that cl 10 of the Deed did not apply beyond 27 September 2020. The letter continued:

The parties thereafter engaged in a mediation process in respect of the rent obligations under the lease. It seems that an application for mediation was made to the Office of the Small Business Commissioner in that regard. The mediation was held on 10 November 2021. However, no agreement was reached in the mediation, including for any further reductions in rent. On 23 December 2021, a Mediation Manager at the Office of the Small Business Commissioner certified that mediation had taken place “and the parties were unable to resolve the dispute”.

It seems to be common ground that the mediation process that was undertaken would have simultaneously satisfied any obligations upon the parties to negotiate as to rent, whether those obligations arose under cl 10 of the Deed, or under the then applicable legislation, namely, Schedule 5 to the Conveyancing (General) Regulation 2018 (NSW).

The plaintiff contends that the parties’ failure to agree constitutes a dispute that falls within the dispute resolution provisions of the lease, and that it is thus entitled to refer the dispute for determination by an expert. The plaintiff seeks declaratory relief to that effect, and an order compelling the defendant to co-operate with it in the expert determination process.

The dispute resolution provisions of the lease are found in cl 28. Clause 28 is in the following terms:

The defendant denies that the plaintiff is entitled to any of the relief it claims. In summary, the defendant contends that:

I should add that the defendant accepted that cl 10 might not be unenforceable as an “agreement to agree” if it were construed as an obligation to negotiate in good faith (cf United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618; [2009] NSWCA 177 at [74] per Allsop P, with whom Ipp and Macfarlan JJA agreed). However, the defendant contended that this would not assist the plaintiff in circumstances where the parties have engaged in negotiations and there is no suggestion of any lack of good faith (cf Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318; [2010] WASCA 222 at [60]-[61] per Pullin JA, with whom Newnes and Murphy JJA agreed). The obligations of the parties under cl 10 have thus been discharged.

The plaintiff did not seek to develop any argument based on the notion that cl 10 imposed only an obligation to negotiate in good faith. Rather, the plaintiff pointed to what was described as the emphatic language of the clause to both discuss and agree. The plaintiff thus appeared to accept that there was uncertainty or incompleteness inherent in cl 10. However, the plaintiff contended that such uncertainty or incompleteness could be overcome by means of the “machinery” provided for in cl 28 of the lease (see, generally, JD Heydon, Heydon on Contract (Lawbook Co, 2019) at [3.280]).

The issues identified by the parties give rise to various questions of construction of the Deed and the lease. These questions fall to be determined in accordance with the well-established principles that apply to the construction of written commercial agreements, as enunciated in cases such as Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35], Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[52]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16]; and Price v Spoor (2021) 270 CLR 450; [2021] HCA 20 at [27].

The first question to consider is whether any obligation under cl 10 of the Deed can arise after the expiry of the Adjustment Period on 27 September 2020.

The defendant’s argument, that no obligation can arise under cl 10 after that date, places emphasis upon the concluding words of the clause that refer to an “extension of the Adjustment Period”. The defendant submitted that the ordinary meaning of the phrase necessarily assumes that the Adjustment Period has not expired. It is put that once the Adjustment Period expires (as it did on 27 September 2020) there could be no agreement to extend it. The defendant submitted that its construction is further supported by the fact that the obligations under the Deed are primarily focused on the Adjustment Period. The defendant submitted that its construction gave effect to the ordinary meaning of the words contained in the Deed, and did not give rise to uncommercial results.

The plaintiff submitted that cl 10 specifically contemplates an agreement for additional rent reduction and an extension of the Adjustment Period, such that the clause, by its terms, contemplates further rent relief after the expiry of the Adjustment Period on 27 September 2020. The plaintiff submitted that the conditions for the engagement of the clause (namely, an escalation of the pandemic that causes additional restrictions to be imposed that prevent the plaintiff from trading in the manner it was on 3 July 2020) are not expressed to apply only during the Adjustment Period. The plaintiff further submitted that the overall context of cl 10 suggested that the notion of an extension of the Adjustment Period is not restricted to one that continues from 27 September 2020. The plaintiff suggested that the construction advanced by the defendant would give rise to uncommercial results, including different outcomes where restrictions are imposed shortly prior to 27 September 2020, compared to where restrictions are imposed shortly after 27 September 2020.

In my opinion, the construction advanced by the plaintiff is to be preferred. It seems to me to accord better with the language of cl 10 read as a whole.

Clause 10 is engaged once the conditions set forth in the opening part of the clause are satisfied. If that state of affairs occurs, the clause provides that the parties will “then” meet to discuss and agree upon an additional rent reduction and extension of the Adjustment Period. There is nothing in that language to indicate that the conditions must be satisfied prior to the expiration of the Adjustment Period. Nor is there anything in that language to indicate that any meeting or agreement must occur within that period. The expression “extension of the Adjustment Period”, when read in the context of cl 10 as a whole, seems to me to be broad enough to encompass an Adjustment Period that expires on a date after 27 September 2020, even if the period does not operate continuously from that date. That is to say, it might be open to the parties in, say, December 2020, to agree upon an additional rent reduction and a new Adjustment Period that expires on, say, 30 June 2021. In my view, an agreement upon a new Adjustment Period that expires on 30 June 2021 would be an agreement upon an extension of the Adjustment Period within the meaning of cl 10. A reasonable businessperson in the position of the parties would have understood the terms of cl 10 accordingly. The precise manner in which the rent would be reduced and adjusted throughout the new Adjustment Period would be determined by the particular terms of the agreement reached.

It follows from the above that it was open to the plaintiff to seek to invoke cl 10 of the Deed in July 2021, even though the Adjustment Period had already expired.

Assuming that cl 10 of the Deed was engaged in July 2021, its terms required the parties to meet “to discuss and agree upon an additional rent reduction and extension of the Adjustment Period”. A question plainly arises as to whether the obligation to “discuss and agree” is unenforceable as an “agreement to agree” (see Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 604 per Gibbs CJ, Murphy and Wilson JJ; United Group Rail Services Ltd v Rail Corporation New South Wales (supra) at [56] per Allsop P).

As already noted, the plaintiff did not seek to avoid that question by contending that cl 10 imposed only an obligation to negotiate in good faith. Rather, the plaintiff accepted that by cl 10, the parties covenanted that they would not only discuss or negotiate, they would also agree upon an additional rent reduction and extension of the Adjustment Period. The plaintiff further accepted that cl 10 might be objected to as a form of “agreement to agree”. However, the plaintiff submitted that cl 10 was enforceable because:

I consider that the terms of the Deed, including cl 10, can be read as terms of the lease. The Deed is evidently intended to be read in conjunction with the lease, and to operate as a variation to it, even though the Deed itself is not registered under the Real Property Act 1900 (NSW). That is made clear by the subject-matter of the Deed generally, and by cl 13 of the Deed which provides:

Clause 28 of the lease operates in circumstances where a dispute arises between the Lessor and the Lessee “under a provision of this Lease” (see cl 28.1). As mentioned, “Lease” is defined, with some circularity, in cl 1.1 to mean “this Lease and includes any other tenancy which exists between the Lessor and the Lessee in relation to the Premises”. I think that the notion of “this Lease” would include the lease as varied, so cl 28 could be engaged by a dispute that arises under a provision of the Deed that varies the terms of the lease.

Clause 10 is in my view such a provision. However, there is a question as to whether a dispute has arisen under cl 10 that falls within the scope cl 28.1 of the lease.

The plaintiff contends that, in the context of an existing legal relationship of Lessor and Lessee, the failure of the parties to reach an agreement as envisaged by cl 10 can be regarded as a dispute arising under a provision of the lease. It was submitted that the aim of negotiations under cl 10 is to resolve a dispute about an existing bargain and its performance (see United Group Rail Services Ltd v Rail Corporation New South Wales (supra) at [70] per Allsop P). It was put that even if it were not a dispute arising under cl 10, it could be regarded as a dispute arising under cl 4.1 of the lease which concerns the plaintiff’s obligation to pay rent.

The defendant contends that the mere failure of the parties to reach an agreement pursuant to cl 10 exhausts the operation of the clause, and that in those circumstances no dispute arises as to the operation of the clause, or indeed as to the operation of cl 4.1. The defendant submitted that a reduction in rent pursuant to cl 10 can only arise where the parties reach an agreement to that effect, such that the imposition of a reduction in rent by means of an expert determination would be inconsistent with cl 10. It was further submitted that cl 28 did not provide any objective framework by which an expert could determine an amount by which rent should be reduced.

I agree that the mere failure of the parties to reach an agreement pursuant to cl 10 does not give rise to a dispute about the operation of cl 10. The failure to agree simply means that no additional rent reduction and extension of the Adjustment Period comes into existence in the manner provided for. That position may be contrasted with the position if there were a disagreement as to whether an agreement had been reached under cl 10. A disagreement of that character, that involves a question of whether or not rights have been created pursuant to the clause, would be a dispute that arises under cl 10 for the purposes of cl 28.1. It would be a dispute of a kind that is amenable to determination by a third party applying relevant expertise (in that case, knowledge of the law). No such questions arise from the mere failure of the parties to agree under cl 10.

For similar reasons, the mere failure of the parties to reach an agreement pursuant to cl 10 does not give rise to a dispute about the operation of cl 4.1. The failure to agree simply means that cl 4.1 continues to operate unaffected by any variation under cl 10.

I accept that the parties, having failed to reach agreement pursuant to cl 10, can, in a sense, be considered to be in dispute. They may be considered to be at odds as to what terms should be included in an agreement between them concerning an additional rent reduction and extension of the Adjustment Period. However, I do not think that a dispute of that character is a dispute that falls within the intended scope of cl 28.1 of the lease (cf May & Butcher Ltd v The King [1934] 2 KB 17 at 22 per Viscount Dunedin).

In my opinion, cl 28.1 is concerned with disputes that arise under a provision of the lease and concern existing rights and obligations of the parties under the lease. Disputes of that character are suitable for determination by a third party expert who would employ relevant expertise to determine the outcome of the dispute. A failure to reach consensus upon the terms of an agreement (which, only if made, would operate as a variation to the lease) does not give rise to a dispute that is suitable for expert determination in the manner described. There are no competing arguments concerning existing rights or obligations under the lease, and it is difficult to conceive how an expert would determine the outcome of such a “dispute”.

In that regard, I also agree with the defendant’s submission that cl 28 does not provide any objective framework by which an expert could determine an amount by which rent should be reduced. Would the expert be deciding what agreement ought to have been reached between the parties? If so, what criteria would the expert employ in reaching a conclusion? Would the expert be deciding the matter on some other basis? If so, upon what basis? The matter seems to me to be most uncertain. I would add that the uncertainty extends to the identification of the type of expert, or types of experts, that would be appropriate to undertake such a task (see cl 28.5 of the lease).

It is true, as submitted by the plaintiff, that the parties to a contract can leave a matter to be determined by a third party, including in the absolute discretion of the third party, in which case the obligation of the third party is only to act impartially and without fraud. However, I do not think that the parties did that here by means of cl 10 of the Deed and cl 28 of the lease. Had the parties intended that, in the absence of agreement under cl 10, the matter of additional rent reduction and extension of the Adjustment Period should nonetheless be determined on some identified basis by a third party (including in the absolute discretion of the third party), it would have been quite simple to incorporate language appropriate for that purpose. In my opinion, the parties did not do so, and cl 28 fails to fulfil that purpose.

In my view, a reasonable businessperson in the position of the parties would not have understood cl 28.1 as providing for an expert to determine the matter upon which the parties failed to agree under cl 10 of the Deed. The plaintiff is not entitled to refer that matter for determination by an expert under cl 28 of the lease. Moreover, as submitted by the defendant, the imposition of a reduction in rent by means of an expert determination seems inconsistent with cl 10 of the Deed which provides that such a reduction only arises where the parties reach an agreement to that effect (cf May & Butcher Ltd v The King (supra) at 22 per Lord Warrington of Clyffe).

For the above reasons, I have concluded that the obligation under cl 10 of the Deed to “discuss and agree” is unenforceable as an “agreement to agree”, and that the uncertainty and incompleteness that is thus inherent in cl 10 is not overcome by means of the “machinery” provided for in cl 28 of the lease.

It follows that the plaintiff’s claims for relief have not been made out. The Court will order that the proceedings be dismissed, and that the plaintiff pay the defendant’s costs of the proceedings.