The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 58 of 1996

 

The Melanesian Mission Trust Board Appellant

v.

Australian  Mutual Provident Society Respondent

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 17th December 1996

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Present at the hearing:-

Lord Goff of Chieveley

Lord Mustill

Lord Nicholls of Birkenhead

Lord Hoffmann

Lord Hope of Craighead

  ·[Delivered by Lord Hope of Craighead]

 

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This is an appeal against a judgment of the Court of Appeal of New Zealand (Richardson P. and Gault J.; Henry J. dissenting) on the interpretation of a clause relating to the rent payable under a lease of commercial premises.  The proceedings which are the subject of this appeal were heard together with an appeal from a decision of Doogue J. in Australian Provident Society v. Bridgemans Art Deco Limited (1995) 3 N.Z.ConvC. 192,149. Both cases raised the same issue in regard to a Deed of Lease which in each case was in all relevant respects in identical terms.  This was whether the lease on its proper construction had the effect that the rent payable in the event of a rent review was to be not less than the then current rent. The Court of Appeal delivered a single set of judgments in respect of each case, in which this question was answered in favour of the lessee.  Both cases were then the subject of a further appeal to their Lordships' Board, but the dispute between the Australian Mutual Provident Society ("AMP") and Bridgemans Art Deco Limited has been resolved and the appeal in that case was abandoned.  Their Lordships are now concerned only with the action between AMP and the Melanesian Mission Trust Board ("MMT").

1. On 5th March 1990 MMT, who were to be the lessor, and AMP, who were to be the lessee, entered into an agreement to lease for commercial premises to be constructed at Parnell, Auckland on 25th November 1991.  Following completion of the building, the parties executed a formal Deed of Lease for the premises.  The lease was to be for a term of nine years, on the termination of which the lessee was to be entitled to have a further lease for three further terms each amounting to three years.  During the initial term there were to be two rent review dates, namely 14th August 1994 and 14th August 1997.  In the event of their exercising their option to have a further lease of the premises for a further term, AMP were to entitled to have the amount of rent payable for that further term to be determined under the same procedure as that which was to apply in the event of a dispute about the amount of the rent upon the occasion of a rent review during the initial term.

 

2. The Deed of Lease which the parties entered into on 25th November 1991 was based on the standard form of commercial lease published by the Building Owners and Managers Association of New Zealand ("BOMA").  Among the Schedules which formed part of the lease were the First Schedule which contained particulars of the lease, and the Second Schedule which set out the covenants, terms, conditions and provisions which were to be incorporated in it.  The short point of construction raised by this appeal relates to clause 3.1 in section 3 of the Second Schedule, which deals with rent, the lessee's contribution to operating expenses and rent review.  Clause 3.1 is in these terms:-

"The Lessee shall pay to the Lessor during the term of this Lease rent (hereinafter called `Base Rent') at the rate specified in Item 9 of the First Schedule or where increased in accordance with the express provisions of this Lease at the increased rent."

 

3. The phrase "term of this Lease" is defined in item 6 of the First Schedule as meaning the initial term of nine years.  In item 9 of the First Schedule the annual Base Rent is defined as meaning the sum of $499,126.62 per annum plus GST.  It is not in doubt that the lessee's obligation was to pay that sum as the Base Rent for the first three years of the initial term until the date of the first rent review.  The question is whether the effect of clause 3.1 is that the Base Rent cannot fall below the amount specified in item 9 of the First Schedule during the first nine years or whether it is free to move up or down according to the state of the market at each review date.

 

4. In the Court of Appeal the view of the majority was that the intention to be ascribed to the parties in respect of the review of rent  was  that  the  current market  rent  arrived at by the review mechanism was to result in the determination of a new Base Rent, which was to apply from the review date in substitution for the figure specified in item 9 of the First Schedule or for any figure substituted for it under a previous rent review. Thus the rent was to be free to move up or down according to the state of the market at each review date.  In his dissenting judgment Henry J. said that the clause, on its own, was clear and unambiguous.  Its effect was that the lessee was obliged to pay the sum stipulated in item 9 or a higher sum if there had been an increase in accordance with the express provisions of the lease.  He was not persuaded that there was an unacceptable conflict between that interpretation of clause 3.1 and the other provisions of the lease, or that an absurd result would be produced if their ordinary meaning was to be given to the concluding words of that clause.

 

5. Their Lordships have come to be of the opinion that the view which was reached by Henry J. is to be preferred to that of the majority of the judges in the Court of Appeal. Their reasons for reaching this opinion can be stated briefly.  But out of respect for the careful judgments in the Court of Appeal and the arguments of counsel which have been of much assistance to their Lordships in their consideration of this matter, it is appropriate that they should mention the conclusions which they have reached on the various issues which have been raised about the meaning of the clause in its whole context.

 

6. It is not necessary in this case to say much about the circumstances which provided the background to this contract or the commercial purpose of the transaction. It was of a kind which is familiar to those who engage in the practice of letting commercial property.  On the one hand there was the lessor MMT, whose primary interest in the transaction was to obtain a return on the money which it had invested in the construction of the building.  On the other there was the lessee AMP, whose interests lay in securing terms for the letting of the property which did not exceed those generally available in the market for similar premises.  From the point of view of the investor the most attractive form of lease is one which ensures that the return on the amount invested will be increased if market rentals were to rise but will not diminish if market rentals were to fall.  Its purpose is best served by a system of periodic rent reviews together with a provision, commonly referred to as a "ratchet clause", which will ensure that the rent payable after any review will never be less than the rent payable prior to the review date.  The lessee's purpose will be best served by provisions which will enable the rent to be adjusted either way at each review date.  The balance which requires to be struck between these competing interests  is  a matter for negotiation in each case.  The result of that negotiation is then set out in the formal contract, which supersedes the negotiations and to which one must then turn in order to discover what was agreed.

 

7. The dispute between AMP v. Bridgemans Art Deco Limited, which has now been settled, arose when the lessor took no steps to initiate a rent review to take effect from the first review date.  The lessor was satisfied that no increase in rent would result, and it took the view that it was entitled to continue to receive rent at the rate which was current under the lease up to that date.  AMP sought a declaration in the High Court that the lessor was obliged to undertake a review of the rent and an order for specific performance with a declaration that the rent could reduce on review and, in the alternative, relief by rectification of the lease or under section 7 of the Contractual Mistakes Act 1977.  Doogue J. refused relief and held that the correct construction of the relevant provisions precluded any reduction of the rent on review.  The Court of Appeal allowed AMP's appeal against that decision and granted a declaration and order in the form sought in the prayer for relief.  The dispute in the present case arose after MMT had initiated a rent review and an issue arose in the course of the review as to whether the review could result in a reduction of the rent.  This issue was referred by the High Court to the Court of Appeal for determination at the same time as the appeal in the other case, as the same question of interpretation was involved.  In this case also the lessee's argument was successful before the Court of Appeal.

 

8. The approach which must be taken to the construction of a clause in a formal document of this kind is well settled.  The intention of the parties is to be discovered from the words used in the document.  Where ordinary words have been used they must be taken to have been used according to the ordinary meaning of these words.  If their meaning is clear and unambiguous, effect must be given to them because that is what the parties are taken to have agreed to by their contract. Various rules may be invoked to assist interpretation in the event that there is an ambiguity.  But it is not the function of the court, when construing a document, to search for an ambiguity.  Nor should the rules which exist to resolve ambiguities be invoked in order to create an ambiguity which, according to the ordinary meaning of the words, is not there.  So the starting point is to examine the words used in order to see whether they are clear and unambiguous.  It is of course legitimate to look at the document as a whole and to examine the context in which these words have been used, as the context may affect the meaning of the words.  But unless the context shows that the ordinary meaning cannot be given to them or that there is an ambiguity, the ordinary meaning of the words which have been used in the document must prevail. The preamble to the Deed of Lease states that:-

"... the Lessor hereby leases to the Lessee and the Lessee hereby takes on lease the premises described in Item 5 of the First Schedule for the term and at the rental and subject to the covenants conditions agreements and restrictions hereinafter set out in the Schedules forming part of this Lease."

 

9. Clause 3.1. then sets out the covenant of the lessee to pay rent to the lessor.  The rent payable by the lessee is defined in that clause as "the Base Rent".  The remaining clauses in section 3 of the Second Schedule deal with the manner of payment of the Base Rent, the lessee's contribution to operating expenses of the building and the manner of payment of that contribution, with rent reviews, with interest on overdue rent or other moneys and with the payment by the lessee to the lessor of sums payable by the lessor as GST under the Goods and Services Tax Act 1985.  These remaining clauses are all ancillary to the primary obligation of the lessee, which is to pay the rent which for its part the lessor has the right to receive under clause 3.1.

 

10. The definition of the expression "Base Rent" falls into two parts.  The starting point is the rate specified in item 9 of the First Schedule.  This is the first part of the definition.  The second part consists of the words "or where increased in accordance with the express provisions of this Lease at the increased rent". The word "increased" which is used here is susceptible of only one meaning.  It indicates that the amount of the "increased rent" cannot be less than the amount which was previously payable.  No mention is made anywhere in this clause of an amount which is less than the rate specified in item 9 in the First Schedule.  So, if effect is given to all the words used in this clause according to their ordinary meaning, the lessee's obligation is to pay rent at the rates specified in item 9 or at a rate which has been increased in accordance with the express provisions of the contract.  The lessee would be in breach of this clause if it were to pay rent at a rate which was less than that specified in item 9 or, if that amount has been increased following a rent review, the amount of any increased rent.

 

11. Various points were made about this clause by Mr. Millard on AMP's behalf, in an attempt to demonstrate that some other meaning should be given to it or that it was at least ambiguous.  The use of the word "rent" rather than "rate" at the end of the clause was said to be inelegant, in view of the previous reference to the "rate" specified in item 9 of the First Schedule.  It was said that, as the second part of the definition of "Base Rent" did not expressly prohibit a decrease in the rent, sense could be made of the  clause irrespective of whether the result of a rent review was that the rent should go up or down.  And it was suggested that the purpose of the second part of the definition was to enable any increased amount demanded by the lessor under clause 3.7 for GST to be recovered from the lessee.

 

12. In their Lordships' view there is no real substance in any of these points.  The cases to which they were referred show that practice has varied in regard to the words at the end of clause 3.01.  In Australian Mutual Provident Society v. National Mutual Life Association of Australasia Ltd. [1995] 1 N.Z.L.R. 581 the word used at the end of this clause was "rate".  In Board of Trustees of the National Provident Fund v. Shortland Securities Ltd. [1996] 1 N.Z.L.R. 45 the word at the end of the clause was "rent".  There is little to choose between these words and, whichever is chosen, the result is perfectly intelligible.  The use of the word "rent" may be said to reflect the fact that the purpose of the review procedure in clause 3.5 is to determine the current market rent with a view to an adjustment of the amount of the rent currently payable.  The absence of an express prohibition against any decrease does not mean that deceases in rent are permitted.  It is absence of a provision for a reduction in rent rather than a prohibition against such a reduction which is the critical feature of the clause, as its function is to define the extent of the lessee's covenant in regard to the Base Rent.  The recovery of GST by the lessor is an entirely separate matter.  The amount recoverable under clause 3.7 must be related to the amount of the payments made by the lessee under the lease, including the amount paid as rent. This amount, along with various other payments to be made under the lease, is deemed to be part of the rent for the purposes of clause 9.1 so as to be recoverable by distress.  But it does not fall within the expression "Base Rent" for the purposes of clause 3.1.

 

13. Then it was said that the second part of the definition had been added out of an abundance of caution, so as to ensure that an increase in the rent resulting from a rent review would be recoverable.  On this view it was sufficient to rely on the provisions of clause 3.5 in order to identify the amount payable.  The amount resulting from the rent review, whether it represented an increase on or a decrease from the rent previously payable, would then be substituted for that specified in item 9 of the First Schedule.  But their Lordships can find no justification for reading the clause in this way.  Nor can they agree with the majority of the Court of Appeal that this part of the clause, assuming that it was intended to refer to the result of rent reviews, is superfluous.  Effect must be given wherever possible to all the words which the parties have included in their contract.  There is no indication, taking the clause on its own, that any of the words used in it are superfluous.  The purpose of the clause as a whole is clear and unambiguous.   It is to define the extent of a lessee's obligation to pay rent.  It is designed to ensure that the amount paid by the lessee is the amount specified in item 9 of the First Schedule or a higher amount if the provisions of the lease about rent reviews so require.  As Mr. Fardell said, its effect is the same as that of an express ratchet clause with the result that, in the event of a rent review, the rent will never be less than the Base Rent payable immediately prior to the review date.

 

14. This interpretation of clause 3.1 was said to be inconsistent with section 7 of the Second Schedule, which provides for an abatement of the rent in the event of damage or destruction of the premises.  The argument was that, as the provisions of this section provide for a proportion of the rent to be suspended until the premises have been repaired and reinstated or the lessee has taken repossession of the premises, the definition of the Base Rent must be read as allowing for the rent to be decreased as well as increased.  But this argument involves a misreading of the provisions of section 7.  What the clauses in this section are designed to provide is for a proportion of rent to be suspended in the events referred to in that section, not to adjust the amount of the rent payable for the whole premises.  These provisions have no part to play in the calculation of the Base Rent for the purposes of clause 3.1.

 

15. In their Lordships' view the whole matter is put beyond doubt when regard is had to the terms of clause 3.5 which deal with rent reviews, and they are compared with those of clause 2.3 which deal with the position in regard to rent if the lessee desires to have a further lease of the premises for a further term of three years.  Clause 3.5(a)(i) provides:-

"At any time not earlier than 4 months prior to each successive date stated in Item 12 of the First Schedule (each of such dates being called `the review date'), the Lessor shall notify the Lessee in writing of the Lessor's assessment of the current market rent to apply from that particular review date in respect of each part of the Premises."

 

16. Clause 2.3(b) and (c) are in these terms:-

"(b)The Lessor shall not less than two (2) months prior to the termination date give a written notice to the Lessee stating the amount of Base Rent which the Lessor considers to be the current market rent of the premises as at the date of commencement of the further term.

 

  (c)The Lessee shall within one (1) month of the date of receipt of the Lessor's notice given under paragraph (b) of this Clause or within such other period as may be agreed notify the Lessor in writing that either:

 

(i)The Lessee accepts the Lessor's statement of Base Rent for the first period of the further term;

 

OR

 

(ii)The Lessee rejects the Lessor's statement of Base Rent and requests that the Base Rent be determined in accordance with the procedure set out in Clause 3.5(b)."

 

17. It can be seen that during the initial term the initiative in regard to rent review lies with the lessor.  The Court of Appeal held that the word "shall" in clause 3.5(a)(i) must be read as imposing an obligation on the lessor to initiate a rent review. This led them to the view that the provision for rent review during the initial term had been inserted into the lease in the interests of the lessee as well as of the lessor.  On this approach, assuming that the lessor was obliged to initiate the process even in a situation where it was clear from the outset that the current market rent was less than the rent currently payable, it would seem odd if clause 3.1 allowed the rent to be increased if the current market rent was above that currently payable but did not allow for it to be decreased if it was less.  But in their Lordships' opinion the function of the word "shall", as used repeatedly throughout clause 3.5, is merely to identify the course of action which the lessor or the lessee must follow in order to obtain the results for which the clause provides.  It does not oblige either party to seek these results.  What it does is to lay down the route which must be followed if these results are to be achieved.  In that sense, and in that sense only, it is mandatory because if the procedure is not followed any right to achieve these results will be forfeited.  There is no machinery available to the lessee either to initiate a rent review or to compel the lessor to do so.  As Henry J. pointed out, the absence of such machinery is inexplicable if the lessee was to have the right to have the rent reviewed. But it is consistent with a reduction in rent during the initial period not having been contemplated.

 

18. The position is quite different in the event of the lessee seeking a renewal of the lease for a further term under clause 2.3.  Here provisions have been included which are expressed in favour of the lessee. The lessee is to have the option, according to a strict timetable of procedure, to have the amount of the Base Rent determined so that the amount specified in item 9 of the First Schedule will conform to the current market rent of the premises as at the date of commencement of the further term.  The structure of clause 2.3 is in sharp contrast to that of clause 3.5.  Its effect is worked through the definitions in the First Schedule by the  variations to  that  Schedule which are set out in clause 2.4.

 

19. Their Lordships find here a clear demonstration of the point that, where provisions are included in the lease in favour of the lessee, the lease is careful to spell them out in express terms. If it had been the intention that the lessee was to have a similar right to initiate a rent review during the initial period as that which is given by clause 2.3(c) one would have expected that to be stated expressly.  As it is, the effect of these various provisions is that the lessor was guaranteed a minimum return by way of contractual rent for the first nine years, after which the rental return was to be free to move according to the rents prevailing in the open market. There is no reason to think that this was an arrangement which was not within the contemplation of the parties when they entered into the contract.

 

20. A number of other points were made which their Lordships do not find it necessary to discuss in detail.  They are content to adopt the observations of Henry J. on these matters.  At the end of the day the solution to the problem raised in this case lies in the clear and unambiguous language of clause 3.1. None of the other provisions in the lease to which their Lordships were referred are inconsistent with the plain meaning of the words used in this clause, which is that the measure of the lessee's obligation to pay rent is the amount specified in item 9 of the First Schedule or any increase in that amount which may result from a rent review under clause 3.5.  Except in the case of damage to or destruction of the premises, for which special provision is made by section 7 of the Second Schedule, there is no provision in the lease which would enable the lessee to fulfil its obligation to pay the Base Rent during the initial period by tendering less than the amount defined by this clause.

 

21. Their Lordships will humbly advise Her Majesty that the appeal should be allowed, that the application for a declaration should be dismissed and that the remaining issues including that of  rectification be referred back to the High Court for determination.  The respondent must pay the appellant's costs in the Court of Appeal and before their Lordships' Board.

 

© CROWN COPYRIGHT as at the date of judgment.