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Connor Hunter (A Firm) v Keencrest Pty Ltd

 

[2009] QCA 156

 

SUPREME COURT OF QUEENSLAND 

PARTIES:

FILE NO/S:

SC No 3472 of 2008

Court of Appeal

PROCEEDING:

General Civil Appeal

ORIGINATING COURT:

DELIVERED ON:

9 June 2009

DELIVERED AT:

Brisbane

HEARING DATE:

4 March 2009

JUDGES:

McMurdo P, Holmes JA and Chesterman JA

Separate reasons for judgment of each member of the Court, Holmes JA and Chesterman JA concurring as to the orders made, McMurdo P dissenting

ORDERS:

  1. Appeal allowed
  2. The orders made in the trial division on 1 September 2008 are set aside and a declaration made that clauses 2.3 and 16.2 of the lease dated 27 June 2002 between the first and second respondents are not invalidated by the Retail Shop Leases Act 1994 (Qld)
  3. The first respondent pay the appellant’s and the second respondents’ costs of the application and the appeal on the standard basis

CATCHWORDS:

LANDLORD AND TENANT – RENT – PROVISIONS AS TO RENT IN AGREEMENT FOR LEASE OR LEASE – RENT REVIEW CLAUSES – the appellant firm drafted a lease containing mechanisms for reviewing the rent payable – where one was referenced to the Consumer Price Index and the other was referenced to market price – where it was held by the primary judge that the two clauses relating to rent review were invalidated by the Retail Shop Leases Act 1994 (Qld) on the grounds that it provided multiple bases for review – whether the clauses in question were invalid

Acts Interpretation Act 1954 (Qld), s 14A(1)

Retail Shop Leases Act 1994 (Qld), s 20, s 27, s 36,

Retail Shop Leases Amendment Act 2000 (Qld), s 13

Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436, considered

CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; [1997] HCA 2, applied

Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297; [1981] HCA 26, applied

Mills v Meeking (1990) 169 CLR 214; [1990] HCA 6, applied

Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28, applied

COUNSEL:

T J Bradley for the appellant

G Newton SC, with J K Chapple, for the first respondent

P J Roney for the second respondents

SOLICITORS:

Brian Bartley & Associates for the appellant

McCullough Robertson for the first respondent

MacFie Curlewis Spiro for the second respondents

[1]  McMURDO P:  Unlike Holmes and Chesterman JJA, I would refuse this appeal.  These are my reasons.

The background to this appeal

[2] The applicants/second respondents, Gregory Allan and Betty Anne Hurren purchased the heritage-listed Courthouse Restaurant at Cleveland from the first respondent, Keencrest Pty Ltd, which I shall refer to as Keencrest.  The sale was conditional upon Keencrest then leasing the restaurant from the Hurrens.  A dispute arose between Keencrest and the Hurrens as to whether clauses of the lease were void under the Retail Shop Leases Act 1994 (Qld) ("the Act").  The appellant/second respondent, Connor Hunter, the firm of solicitors which prepared the lease for the Hurrens, was joined as a party to the original proceedings on the basis that it may be liable in damages to Keencrest for negligence and/or breach of retainer by way of compensation for any excess of rent Keencrest must repay to the Hurrens. 

[3] The primary judge made a number of orders including the following declarations which are at the heart of this appeal:

"1.I declare that clause 2.3 of the lease dated 27 June 2002 made between [the Hurrens] and [Keencrest] is void to the extent it provides for rent to change in accordance with whichever of CPI and the rent previously payable results in the higher amount.

2.I further declare that clause 16.2 of the lease dated 27 June 2002 made between [the Hurrens] and [Keencrest] is void to the extent it provides for rent to change in accordance with whichever of a review to market and the rent previously payable results in the higher amount."

[4] Connor Hunter has appealed from those orders contending that the judge erred in construing the Act and in making those declarations.  It contends that this Court should allow the appeal, set aside the declarations and instead make orders declaring that upon the proper construction of the lease and the Act, cl 2.3 and cl 16.2 of the lease are not void to any extent by reason of the operation of s 36(e) of the Act.

[5] Keencrest has filed a notice of contention in which it submitted that cl 2.3(a), (c), (d) and cl 16.2 of the lease were void to the extent that they were inconsistent with s 27(4) and s 27(5) of the Act because of s 20 of that Act.

[6] Chesterman JA has set out the relevant extracts from the lease and statutory provisions.  I will not repeat them.  As Chesterman JA has identified, there are two questions for determination in this appeal.  Keencrest's notice of contention raises whether cl 2.3[1] and cl 16.2[2] of the lease provide for a review of rent by reference to a single basis under s 27(5) of the Act.[3]  Connor Hunter's appeal raises whether cl 2.3 or cl 16.2 of the lease provides for rent to change on a particular review of the rent in accordance with whichever of two or more methods of calculating the change would result in the higher rent under s 36(e) of the Act.[4]

The purposive approach to statutory construction

[7] The answer to those questions turns on the construction of s 27 and s 36.  As the learned primary judge rightly recognised, a provision of an Act should be construed consistently with the language and purpose of its provisions: Project Blue Sky Inc v Australian Broadcasting Authority.[5] The Acts Interpretation Act 1954 (Qld) s 14A(1) provides that in interpreting a provision of a Queensland Act, the interpretation that will best achieve the purpose of the Act is to be preferred; s 14A(1) applies "whether or not the Act's purpose is expressly stated in the Act".[6]  As Dawson J explained in Mills v Meeking,[7] a provision like s 14A(1) which requires consideration of the purpose of an Act in interpreting its provisions needs:

"… no ambiguity or inconsistency; it allows a court to consider the purposes of an Act in determining whether there is more than one possible construction.  Reference to the purposes may reveal that the draftsman has inadvertently overlooked something which he would have dealt with had his attention been drawn to it and if it is possible as a matter of construction to repair the defect, then this must be done."

[8] In CIC Insurance Ltd v Bankstown Football Club Ltd,[8] Brennan CJ, Dawson, Toohey and Gummow JJ considered the construction of s 58 Insurance Contracts Act 1984 (Cth).  Section 58 was based on cl 58 of draft legislation in an appendix to a Law Reform Commission (LRC) Report.[9]  Recommendations within that Report[10] identified the mischief which the LRC sought to have remedied in cl 58 of its draft legislation.  Their Honours explained that it was appropriate to rely on the LRC Report in construing s 58 as:

"… the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy."[11]

[9] In my view, consistent with s 14A and the High Court's approach in Project Blue Sky, Mills v Meeking and Bankstown Football Club, the primary judge was right to refer to the relevant explanatory notes and second reading speech so as to understand the context and purpose of the legislature's enactment of s 27 and s 36. 

[10]  The object of the Act "is to promote efficiency and equity in the conduct of certain retail businesses in Queensland[12] … to be achieved through … mandatory minimum standards for retail shop leases".[13]  Those "mandatory minimum standards" include the "minimum lease standards" which are set out in Pt 6 Div 4 (Rent review) including s 27 and s 36. 

[11]  When originally enacted in 1994, s 36 was in its present terms, but s 27 was not.[14]  Like the present s 27, however, the original s 27 did concern retail shop lease rent reviews and sought to limit a rent review to one basis.  The explanatory notes to cl 27 of the 1994 Bill include the following relevant comments:

 

"Clause 27 requires that only one basis must be used for each rent review undertaken during the term of a lease or under an option to renew or extend the lease.

The lease must state the timing of the reviews and the basis on which the reviews are to be made. …

If a retail shop lease provides for review of rent to be undertaken with reference to more than one basis, the rent payable remains the same for the next rental period following a review as the rent which applied to the previous period.

This clause will prohibit the use of 'ratchet' clauses[15] (where rent can rise, but not fall) and 'multiple rent review' clauses (where rent is reviewed by reference to two or more bases and the method resulting in the highest rent is selected)."

[12]  In respect of cl 36, the Explanatory Notes stated:

"Clause 36 reinforces the Bill's provisions on rent review by ruling void certain specified provisions of a retail shop lease that seek to over-ride the Bill's provisions.  For example, a lease provision which requires the lessee to appoint someone to determine the current market rent other than in accordance with the Bill is void."

[13]  In the second reading speech, the Hon J P Elder, Minister for Business, Industry and Regional Development, relevantly stated:

"This Bill represents the outcome of a detailed review of the existing Retail Shop Leases Act, which has been in force since 1984. 

The Bill establishes a basic framework which addresses the imbalance in the market power of lessors and small retail lessees.  It does this by seeking greater visibility of the obligations to be met by the parties.  This ensures enhanced equity and efficiency in retail leasing relationships … .

In general terms, the review of the Act has concluded that the imbalance in market power in lessor/lessee relations is such that continued Government intervention in retail tenancy matters is warranted.  This imbalance in market power has manifested itself in practices such as –

'ratchet clauses' and 'multiple rent review' clauses in leases where 'independently' determined market rents can rise but not fall or where the lessor can 'select' the highest of a number of rental alternatives;

In relation to rent reviews, the Bill prohibits 'ratchet' and 'multiple rent review' clauses.  On each occasion that the rent payable is to be reviewed, such review must only be undertaken by reference to a single basis, for example, CPI, a market rent review or a fixed dollar amount. …"[16]

[14]  The term "ratchet" clause has been used by courts to describe a clause, once common in commercial leases, which provides that in a rent review the rent cannot decrease: see, for example, Amadio Pty Ltd & Anor v Russell Fraser Henderson & Ors[17] and Hirst & Anor v Vousden & Anor.[18]

[15]  Under the Act, the relevant Minister is required to carry out reviews of the Act every five years;[19] to decide if its provisions remain appropriate;[20] to prepare a report on each review and to table the review in parliament.[21]

[16]  Following such a review, the Act was amended by the Retail Shop Leases Amendment Act 2000 (Qld) ("the amending Act"), s 13 of which amended the original s 27 by introducing s 27(3)(a) to (d) and (f) in terms comparable to what was at the relevant time s 27(5)(a) to (d) and (f).[22]

[17]  The explanatory notes to the amending Act included the following relevant statements:

"Objective of the Bill

The objectives of the legislation are to amend the Retail Shop Leases Act 1994 (the Act) to improve its operational efficiency in establishing mandatory minimum lease standards for retail shop leases; to improve the level of disclosure between parties entering into a lease; and to minimise the potential for disputes by managing the expectations of the parties to a lease."

[18]  In relation to the newly introduced s 27(3),[23] the explanatory notes stated that it was:

"to clarify that a rent review may only be undertaken on one of the bases identified in subsection 27(3).  Subsection 27(3)(f) allows two or more of the methods of rent review listed in subsection 27(3)(b) to (e) to be used in combination to form one base of rent review.  Current market rent (s 27(3)(a)) of the leased shop is specifically excluded from the basis which may be used in combination to form a new basis of rent review. 

Sub-clause (4) amends subsection 27(5) to change the remedy that may be applied in circumstances where an invalid 'multiple rent review' is carried out.  Should these circumstances occur, the amendment allows the lessee to choose which of the methods of rent review will apply.  This remedy will also apply where a provision in a lease for a rent review is void under section 36 (d) or (e).

Sub-clause (6) inserts an additional definition of invalid review, linking section 27 to sections 36(d) and (e)."

[19]  This material demonstrates a legislative intention to enhance "equity and efficiency in retail leasing relations [by redressing] the imbalance in market power in lessor/lessee relationships … manifested … in practices such as - 'ratchet clauses', and 'multiple rent review clauses in leases where … market rents can rise but not fall or where the lessor can 'select' the highest of a number of rental alternatives."[24]

The legislature intended the Act to "prohibit … 'ratchet' and 'multiple rent review' clauses."[25]

Does the lease offend s 27?

[20]  I turn now to the first question: whether cl 2.3 and cl 16.2 of the lease provide for a review of rent by reference to a single basis in accordance with the methods permitted under s 27(5) of the Act.

[21]  The formula, the primary method for calculating the rent review in cl 2.3(a), is

A = B x C:

   D

where A is the reviewed rent; B is the yearly rental in the first rental year of the term of the lease; C is the CPI for the quarter immediately preceding the rental year for which the yearly rental is being calculated; and D is the CPI for the quarter immediately preceding the commencement of the term of the lease.

[22]  "B" was both "a fixed percentage of the base rent"[26] (namely 100 per cent of the base rent) under s 27(5)(c) and a "fixed actual amount" under s 27(5)(d).  "C" and "D" were each "an independently published index of prices" under s 27(5)(b).  It follows that the formula in cl 2.3(a) was "a single basis formed by a combination of two or more bases mentioned in paragraphs (b) to (e)" under s 27(5)(f). 

[23]  Were the yearly rental to be determined solely on the basis of that formula, cl 2.3(a) would not offend s 27(4) and s 27(5).  But the calculation of the rent review by means of the formula in cl 2.3 was subject to qualifications.  The proviso in cl 2.3(a) was "… that the yearly rental determined as aforesaid may in no case be less than 100% of the yearly rental payable for the preceding Rental Year".  Clause 2.3(d) contained a similar proviso.  Clause 2.3(c) also provided that: 

"If there is no increase in the Consumer Price (All Groups) Index as at the date of recalculation of rental as herein provided then the yearly rental payable for the particular second or subsequent Rental Year (as the case may require) is the same rental as was payable during the Rental Year immediately preceding the date of recalculation."

[24]  Those qualifications to the formula for calculating the rent review in cl 2.3(a) have this result.  If the Consumer Price Index falls so that the rent calculated according to the formula would decrease, the rent payable under the rent review would not decrease because it would remain at the previous rental.  It follows that under cl 2.3(a), the rental payable is determined, not solely on the formula (which is a single basis formed by a combination of two or more bases under s 27(5)(f)) but on another independent basis, namely, the rental payable for the preceding rental year.  This construction is consistent with the following.  The terms of s 27 and legislative purpose of the Act revealed by the Act's stated object.[27] The clear purpose extracted from the explanatory notes to the original s 27.  The responsible Minister's second reading speech to which I have referred.[28]  The qualifications in cl 2.3(a), (c) and (d) of the lease are inconsistent with the mandatory requirement in s 27(4) and s 27(5) of the Act that each rent review must be on a single basis under s 27(5).  Under s 20, a provision of the lease is void to the extent it is inconsistent with the Act.  The qualifications in cl 2.3(a), (c) and (d) of the lease are therefore void to the extent they are inconsistent with s 27(4) and s 27(5).

[25]  It follows that the primary judge was right to declare that cl 2.3 of the lease is void to the extent that it provides for the rent to change in accordance with whichever of CPI and the rent previously payable results in the higher amount. 

[26]  Clause 16.2[29] of the lease deals with the yearly rental payable if Keencrest exercises its option to extend the term of the lease.  That rental is to be based on an amount to be agreed between the parties.  Failing agreement, the rental is to be determined by an independent valuer ("the current market rent of the leased shop" under s 27(5)).[30]  The rental as agreed or at current market valuation was subject to the qualification "PROVIDED ALWAYS that the rental for the first year of the renewal period is not less than that payable during the immediately preceding Rental Year".  Thereafter, the yearly rental is to be determined in accordance with cl 2.3(a).  For the reasons given in respect of cl 2.3, if the Hurrens sought to rely on the qualifications in cl 16.2 or cl 2.3(a), that rent for the renewal period can never be less than that payable previously, then the rent review would not be a "review … made using only one basis" (including a single basis found by a combination of two or more bases under s 27(5)(f)).[31]  It would be in breach of the mandatory requirements of s 27(4) and (5) and therefore void to the extent of this inconsistency under s 20.  This construction is consistent with the terms of s 27 and the legislative purpose of the Act. 

[27]  It follows that the primary judge was right to declare that cl 16.2 of the lease is void to the extent that it provides for rent to change in accordance with whichever of a review to market and the rent previously payable results in a higher amount.

Does the lease offend s 36?

[28]  This is sufficient to dispose of the appeal, but for completeness I will also deal with the second question, whether cl 2.3 or cl 16.2 provides for rent to change on a particular review of the rent in accordance with whichever of two or more methods of calculating the change would result in the higher rent under s 36(e). 

[29]  Both cl 2.3 and cl 16.2 provide "for the rent of the lease … to change on a particular review of the rent" under s 36(e) of the Act.  As I have explained, each clause in its qualifications allows for a change to the rent only if the change was more than the rental payable for the preceding year; otherwise there would be no change to the rent.  It is well arguable on a literal reading of the terms of s 36(e) that the provisos and qualifications to cl 2.3 and cl 16.2 do not offend s 36(e) because there is no change to the rent when they are applied. 

[30]  But the provisos and qualifications to cl 2.3 and cl 16.2 have the effect of providing in a rent review that the rent cannot decrease.  Such clauses are sometimes known as “ratchet” clauses: Amadio Pty Ltd & Anor v Russell Fraser Henderson & Ors and Hirst & Anor v Vousden & Anor.  The object of the Act,[32] the explanatory notes and the portions of the second reading speech which I have set out, unequivocally show that the legislature in enacting s 36(e) was intending to prohibit such provisions in retail shop leases.  Adopting the purposive construction in accordance with s 14A(1) Acts Interpretation Act and the High Court's approach to legislative interpretation discussed in cases such as Project Blue Sky, Mills v Meeking and Bankstown Football Club, s 36(e) should be construed as rendering void the provisos and qualifications in cl 2.3 and cl 16.2 that prohibit a change in rent in the way provided in these clauses if it is less than the rent previously payable.  The term "change" in the line of s 36(c) should be construed as also meaning "rent".  It follows that those provisos and qualifications to calculating rent in cl 2.3 and cl 16.2 are void to the extent that they provide for the rent to change on a particular review of the rent in accordance with whichever of CPI (cl 2.3) or a review to market (cl 16.2) and the rent previously payable results in a higher amount. 

[31]  As the rent review under cl 2.3 and cl 16.2 based on the qualifications to those clauses offended s 36(e), the primary judge was right in declaring that cl 2.3 of the lease was void to the extent that it provided for rent to change in accordance with whichever of CPI and the rent previously payable results in the higher amount.  His Honour was also correct in declaring that cl 16.2 of the lease was void to the extent that it provides for rent to change in accordance with whichever of a review to market and the rent previously payable results in a higher amount.

[32]  The view of the majority has the effect that ratchet clauses like those in cl 2.3 and cl 16.2 of the lease are valid despite s 27 and s 36 of the Act.  If that view does not reflect the legislative intent, parliament may consider it necessary to amend the Act.

[33]  The appeal should be dismissed with costs to be assessed.

[34]  HOLMES JA:  I respectfully agree with Chesterman JA that the Retail Shop Leases Act 1994 (Qld) evinces no intention to render void clauses in a lease which permit increases but not decreases in rent.  Not only does the Act contain no such provision, but, as Chesterman JA has pointed out, it expressly permits the use of mechanisms with that effect.  More generally, I agree, for the reasons he has given, that the appeal should be allowed, with the order as to costs which he proposes.

[35]  CHESTERMAN JA:  The second respondents, who were the applicants at first instance, own a restaurant and reception centre at Cleveland, south of Brisbane.  By an instrument dated 27 June 2002 they leased the premises to the first respondent for a term of five years commencing on 1 July 2002.  The lease contained two options, by each of which the first respondent could extend the term for five years.  The first respondent exercised its first option:  the extended term began on 1 July 2007.

[36]  By an originating application filed on 16 April 2008 the second respondents sought declarations as to the validity of clauses 2.3 and 16.2 in the lease which allow for the rent to be adjusted upwards throughout the term.

[37]  On 1 September 2008 the learned trial judge declared that:

“… clause 2.3 ... is void to the extent it provides for rent to change in accordance with whichever of CPI and the rent previously payable results in the higher amount.’

and

‘... clause 16.2 ... is void to the extent it provides for rent to change in accordance with whichever of a review to market and the rent previously payable results in a higher amount.’

[38]  The rent for the first year of the lease was $102,500.  It increased during the first term in accordance with clause 2.3(a).  For the final year of that term the rent was $115,934.  The rent fixed in accordance with clause 16.2 for the first year of the extended term was $151,757.  The declarations had the effect that rent in excess of the initial annual rent was not payable and could be recovered.

[39]  The appellant who was the second respondent below is the firm of solicitors who prepared the lease for the lessors, the second respondents to the appeal.  It was joined as a party to the proceedings on the basis that it may be liable in damages for negligence and/or breach of retainer to the second respondents by way of compensation for any excess of rent they must repay the first respondent.

[40]  Clause 2.3 of the lease was in these terms:

2.3     Consumer Price Index adjustment

(a) The yearly rental for the second and each succeeding rental year of the Term or for the second and each succeeding Rental Year of any extension or renewal hereof is an amount equal to the amount represented by ‘A’ in the following formula:

A = B x C

D

Where

B =the yearly rental applying in the first rental year of the Term or in the case of any extension or renewal hereof the yearly rental applying in the first rental year of such extension or renewal;

C =the Index Number released for the quarter year ending or applicable immediately preceding the rental year for which the yearly rental is being calculated; and

D = the Index Number released for the quarter year ending or applicable immediately preceding the date of commencement of the Term or in the case of any extension or renewal hereof the Index Number released for the quarter year ending or applicable immediately preceding the date of commencement of such extension or renewal,

provided always that the yearly rental determined as aforesaid may in no case be less than 100% of the yearly rental payable for the preceding Rental Year;

‘Index Number’ means the All Groups Consumer Price Index Number for Brisbane released from time to time by the Australian Bureau of Statistics together with any supplementary summary.

(b) ...

(c) If there is no increase in the Consumer Price (All Groups) Index as at the date of recalculation of rental as herein provided then the yearly payable for the particular second or subsequent Rental Year (as the case may require) is the same rental as was payable during the Rental Year immediately preceding the date of recalculation.

(d) If the index is discontinued or modified or if publication ... ceases or if the basis of calculating the index has ... substantially changed ... the yearly rental payable in the relevant Rental Year is such rent as is mutually agreed upon by the Lessor and the Lessee within a period of 2 calendar months after the commencement of the Rental Year or failing such agreement then at a Current Market Rental to be determined by an independent valuer registered under the Valuer’s Registration Act 1965 ... appointed for the purpose by the President (or the President’s nominee) for the time being of the Queensland Law Society Incorporated on the application of either the Lessor or the Lessee. In making his determination, the valuer is deemed to be acting as an expert and not as an arbitrator. The decision of the valuer is final and binding on the parties. ... PROVIDED ALWAYS that the yearly rental payable during any Rental Year may never be less than the rental payable by the Lessee to the Lessor for the relevant immediately preceding Rental Year”. (Emphasis added)

[41]  Clause 16.2 dealt with the rent to be paid in the event that the first respondent exercised the option to extend the term.  It provided:

16.2Rental for further term

The ‘yearly rental’ for the first Rental Year of the further term provided in clause 16.1 is to be fixed by mutual agreement between the parties hereto but failing agreement at least one month prior to the commencement of such year then the yearly rental to be paid for such year is the Current Market Rent as at the commencement of that year to be determined by an independent valuer registered under the Valuer’s Registration Act 1965 ... appointed for the purpose by the President (or his nominee) for the time being of the Queensland Law Society Incorporated. The valuer in making his determination is deemed to be acting as an expert and not as an arbitrator and no statute relating to arbitration applies. The determination by the valuer is ... final and binding on both parties. ... PROVIDED ALWAYS that the rental for the first year of the renewal period is not less than that payable during the immediately preceding Rental Year. In relation to the second and subsequent rent years of the said further term the yearly rental as determined by the valuer is to be increased in accordance with the provisions of clause 2.3(a).”(Emphasis added)

[42]  The Retail Shop Leases Act 1994 (Qld) (“the Act”) applies to all retail shop leases “entered into, or renewed before or after, 28 October 1994.”  It is common ground that the lease between the first and second respondents is a retail shop lease to which the Act applies. 

[43] Section 27 of the Act was amended by the Retail Shop Leases Amendment Act 2000 (Qld).  Again it was common ground that the section as amended applies to the lease.  Section 27, as amended, provides:

“27Timing and bases of rent reviews

(1)If, under a retail shop lease, the rent payable under the lease or any renewal or extension of the lease is to be reviewed during the term of the lease or under an option to renew or extend the lease, the lease must state the timing of the reviews and the basis on which each review is to be made.

(2)The rent may not be reviewed more than once in each year of the lease.

(3)Subsection (2) does not apply to the first year of the lease.

(4)The rent may be reviewed using different bases during the term of the lease, but each review must be made using only 1 basis.

(5)The basis for a rent review must be a single basis consisting of 1 of the following—

(a)the current market rent of the leased shop;

(b)an independently published index of prices, costs or

wages;

(c)a fixed percentage of the base rent;

(d)a fixed actual amount;

(e)another basis prescribed by regulation;

(f)a single basis formed by a combination of 2 or more bases mentioned in paragraphs (b) to (e).

(6)If the rent is determined as a base rent plus an amount equal to a percentage of the turnover of the lessee’s business above a stated amount, the review of the base rent must be made in accordance with subsections (4) and (5).

(7)If, under a retail shop lease, the rent is to be reviewed during the term of the lease or any renewal or extension of the lease, the rent payable for the rental period after the timing of an invalid review is—

 

(a)for an invalid review mentioned in subsection (9), definition invalid review, paragraph (a)—the same as the rent payable before the timing of the review; or

(b)for an invalid review mentioned in subsection (9), definition invalid review, paragraph (b)—the rent worked out on 1 of the bases, chosen by the lessee, on which the review was made; or

(c)for an invalid review mentioned in subsection (9), definition invalid review, paragraph (c)—the rent worked out on 1 of the bases, chosen by the lessee, on which the review was to be made under the void provision.

(8)It is declared that an adjustment of the rent merely to enable the lessor to recover GST from the lessee is not a rent review.

(9)In this section—

invalid review, of rent under the lease, means—

(a)a review in a year of the lease, other than the first year, in which the rent is to be reviewed under the lease more than once; or

(b) a review made under the lease using more than 1 basis;

or

(c) a review under a provision of a lease that is void undersection 36(d) or (e).”

Section 36 of the Act provides:

Certain rent review provisions of leases void

A provision of a retail shop lease is void to the extent that it—

(a)requires the lessee to appoint someone to determine the current market rent of the leased shop other than in accordance with this Act; or

(b)requires the lessee to pay for a determination of current market rent by a specialist retail valuer other than under section 34; or

(c)requires the determination of the current market rent of the leased shop to be made other than in accordance with this Act; or

(d)reserves, or has the effect of reserving, to a party a discretion to apply 1 of 2 or more methods of calculating the rent of the leased shop on a particular review of the rent; or

(e)provides for the rent of the leased shop to change on a particular review of the rent in accordance with whichever of 2 or more methods of calculating the change would result in the higher or highest rent.”

[44]  The first respondent’s argument is that each proviso found in clause 2.3(a) and (d) and in clause 16.2, which I have underlined, constitutes an alternative means of determining rent to the primary method described in those clauses: either by reference to an inflation index or market rent determined by a valuer.  The argument was, at first instance and on appeal, that the inclusion of the provisos meant that the clauses provided for more than one basis for reviewing the rent and therefore offended s 27(4), and/or provided for the rent to change in accordance with whichever of two or more methods gave the higher result, thereby offending s 36(e).

[45]  The learned trial judge found that clauses 2.3 and 16.2 contravened s 36(e) of the Act because:

“Both clauses provide for the rent payable under the lease to change in accordance with whichever of two different calculations yields the highest result.  In the case of clause 2.3, rent will be ascertained by reference to the highest of :

(a) the rent previously paid; or

(b) the rent ... increased in accordance with ... CPI.

In relation to clause 16.2, rent is ... determined in accordance with the highest of:

(a) rent previously paid;  or

(b) ... rent determined following review to market.”

[46]  The trial judge came to this conclusion reluctantly.  His Honour noted:

“[33]It may also be arguable that to conclude that either proviso is a ‘method of calculation’ is, ... to take that particular expression beyond its natural meaning...

[34]Accordingly, it might be asserted that the ordinary meaning of the language in the section does not favour a construction of the statute whereby the provisos contained in clauses 2.3 and 16.2 fall within the ambit of s 36(d) or (e). 

[35]The expression ‘basis of rent review’ contained in s 27(5) may be broader than the phrase ‘method of calculation’ but is also not without ambiguity.  ... there is some intuitive appeal in the ... statement that ‘ordinary meaning of the words ‘basis for review’ do not apply to a provision which in effect means that rent is not reviewed’.”

[47]  Having expressed those reservations but having concluded that the provisos were “to be considered methods of calculating changes in the rent”, the learned judge said:

“[61]The fact that neither proviso operates to alter the rent payable may make this interpretation seem counter-intuitive”.

[48]  His Honour came to that opinion because of some remarks found in the Explanatory Note to the Retail Shop Leases Bill 1994 (Qld) and to the Minister’s second reading speech when introducing the Bill to Parliament.  The relevant passage in the Explanatory Note was:

“If a retail shop lease provides for review of rent to be undertaken with reference to more than one basis, the rent payable remains the same for the next rental period following a review as the rent which applied to the previous period.

This clause will prohibit the use of ‘ratchet’ clauses (where rent can rise, but not fall) and ‘multiple rent review’ clauses (where rent is reviewed by reference to two or more bases and the method resulting in the highest rent selected).”

[49] The Minister said:

“In general terms, the review of the Act has concluded that the imbalance in market power in lessor/lessee relations is such that continued Government intervention in retail tenancy matters is warranted. This imbalance in market power has manifested itself in practices such as –

‘ratchet clauses’ and ‘multiple rent review’ clauses in leases where ‘independently’ determined market rents can rise but not fall or where the lessor can ‘select’ the highest of a number of rental alternatives…

In relation to rent reviews, the Bill prohibits ‘ratchet’ and ‘multiple rent review’ clauses. On each occasion that the rent payable is to be reviewed such review must only be undertaken by reference to a single basis, for example, CPI, market rent review or a fixed dollar amount.”

[50]  Having referred to that indicated intention that the Bill was intended to prohibit “ratchet” clauses the trial judge continued:

“Accordingly, the ambiguity which exists in the context of ss 27(5) ... and 36(e) should be resolved in favour of a construction which prohibits ‘ratchet’ clauses of the type contained in clauses 16.2 and 2.3 of the lease. That this may require the statutory provisions ... to be given a slightly ‘strained’ construction is not fatal to this conclusion”.

[51]  There was a spirited debate between the parties in their written outlines as to whether the learned trial judge was justified in turning to extrinsic materials to aid in the construction of s 27 and s 36.  Much authority was cited and there was much exhortion that the pre-conditions found in s 14B of the Acts Interpretation Act 1954 (Qld) (“AIA”) had, or had not, been satisfied. 

[52]  It is not necessary to enter the debate, or attempt to resolve it, for the reason that the resort to extrinsic materials in this case led to confusion rather than clarification.  It is apparent that the argument before the trial judge focused on what was meant by the Explanatory Note and the Ministerial speech rather than on the words of the Act itself.  This was a serious distraction.

[53]  If one looks at the Explanatory Note and/or the Ministerial speech to discern the legislative purpose for which the Act was passed, one discovers only that it intended to redress the “imbalance in market power” between lessors and lessees and to prohibit “ratchet” and “multiple rent review” clauses.  An examination of the extrinsic materials will not reveal what a “ratchet clause” is, or how the provisions of the Bill (or the Act) were meant to invalidate them.  The learned judge appears to have thought that the statement that the Bill aimed to prohibit such clauses:

“indicates that an unqualified prohibition on clauses which allow rent to rise but not fall was intended.” 

[54]  Senior counsel for the first respondent sternly warned against construing the Act by reference to dictionaries and the meanings ascribed in them for the words used in the legislation.  The court was reminded that “statutes always have some purpose ... to accomplish”, and the task of a court when construing a statute was the “sympathetic and imaginative discovery” of the meaning which will achieve the purpose.  The reference was to the judgment in Cabell v Markham (1945) 148 F(2d) 737 at 739.

[55]  It is no doubt right, as the High Court pointed out in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408:

“... the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses ‘context’ in its widest sense to include such things as the existing state of the law and the mischief which ... one may discern the statute was intended to remedy.”

[56]  What was meant by “context” was explained by Lord Simonds in Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436 at 461:

“... words, and particularly general words, cannot be read in isolation;  their colour and content are derived from their context.  So ... I ... examine every word of a statute in its context, and I use ‘context’ in its widest sense ... as including not only other enacting provisions of the same statute, but its preamble, the existing state of the law, other statutes in pari materia, and the mischief which I can, by those and other legitimate means, discern the statute was intended to remedy.”

[57]  But the starting point for the construction of a statute is a consideration of its language.  Gibbs CJ explained the process in Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 304-5:

“It is an elementary and fundamental principle that the object of the court, in interpreting a statute, ‘is to see what is the intention expressed by the words used’:  River Wear Commissioners ... .  It is only by considering the meaning of the words used by the legislature that the court can ascertain its intention.  And it is not unduly pedantic to begin with the assumption that the words mean what they say ... .  Of course, no part of a statute can be considered in isolation from its context – the whole must be considered.  ...  However, if the language of a statutory provision is clear and unambiguous, and is consistent and harmonious with the other provisions of the enactment, and can be intelligibly applied to the subject matter with which it deals, it must be given its ordinary and grammatical meaning, even if it leads to a result that may seem inconvenient or unjust.  To say this is not to insist on too literal an interpretation, or to deny that the court should seek the real intention of the legislature.”

[58]  If one looks not to the Explanatory Note or the Ministerial speech but to the Act itself it is immediately apparent that the trial judge’s conclusion quoted in para 20, is unjustified.  Section 27 expressly permits rent review clauses which will lead to increases but not permit any decrease in rent.  A lease may provide that the rent for the second and each subsequent year of the term will be the previous year’s rent increased by x%.  This is expressly permitted by s 27(5)(c).  A clause may provide that the rent each year should be $n more than the previous year’s rent.  This will be expressly permitted by s 27(5)(d).  A clause may provide that rent will increase annually by x% plus $n.  This is allowed by s 27(5)(f).  All these clauses have the effect that rent may (will) go up, but not down, throughout the whole of the term of the lease.  They are therefore, in one sense “ratchet” clauses but are valid.  It is not, therefore, helpful when considering whether clauses 2.3 and/or 16.2 are invalidated by the Act to categorise them as “ratchet clauses”. 

[59]  Whether or not the clauses in question are valid, or are prohibited by the Act, can only be determined by an examination of the words used in the Act to effect its purpose.  Recourse to the extrinsic materials supplies too general a description of the legislative purpose to be of any assistance in the particular task of construction.

[60]  The questions for the appeal are:

(a) Whether or not clauses 2.3 and 16.2 provide for a review of rent by reference to a single basis in accordance with the methods permitted under s 27(5) of the Act.

(b)    Whether either of the clauses provides for rent to change on a particular review in accordance with whichever of two or more methods of calculating the change results in the higher rent (s 36(e)).

[61]  It is convenient to answer the second question first.  Do the clauses offend s 36(e)?  The section provides that a provision of a retail shop lease is void to the extent that it:

“provides for the rent ... to change on a particular review ... in accordance with whichever of 2 or more methods of calculating the change would result in the higher ... rent.”

Does either of clause 2.3 or 16.2 provide for the rent to change in accordance with whichever of two methods of calculating the change gave the higher result?  It is clear that for the subsection to apply there must be two (or more) methods of calculating a change in rent.  Are the provisos found in clauses 2.3(a), (c), (d) and 16.2 such a method?

[62]  Clause 2.3(a) says that the yearly rental is to change by the percentage equal to the percentage change in inflation during the previous year, measured by a defined index, provided that the rent may not be less than the previous year’s rent.  Clause 2.3(c) operates where the index does not increase in the relevant period.  It may be ignored.  This particular subclause will operate to produce the same result, with or without the proviso.  If the index numbers C and D are the same, which they will be if “there is no increase in the (CPI) as at the date of recalculation of rental” the application of the formula found in clause 2.3(a) will give the same result as the proviso to clause 2.3(c).  Clause 2.3(d) applies where the index ceases to exist or becomes inapplicable.  In that event the rent is market rent determined by a valuer, again with the proviso that the rent may not be less than the previous year’s figure. 

[63]  Clause 16.2 applies to the first year of an extended term should the option to renew be exercised.  The clause allows for an increase in rent for that year in accordance with a valuer’s determination of current market rent with the same proviso.  Thereafter increases are determined by the formula in clause 2.3(a), again with the proviso.

[64]  In none of these circumstances does the proviso operate to calculate a change in the rent.  In each case it preserves the status quo ante.  It prevents any change to rent in the circumstances identified by the subclauses, deflation as measured by an index, or a fall in market rental levels.  They operate to limit the application of the method of calculating change set out in the subclauses.  Where that method would produce a decrease in rent the proviso operates to make the calculation inapplicable, or inoperable.  The structure of the clauses is to provide for an annual review of rent by reference to a described method, or criterion.  If that method does not produce an increase in rent there is to be no review.  The method is not to be used.  This is how the provisos operate.

[65]  One does not need a dictionary to understand what is meant by “change”, “calculating”, or “method of calculating”.  The words are not apt to fit the provisos which cannot by their terms occasion any change in rent. 

[66]  The consequence is that the clauses do not provide for a change in rent by reference to the results from two methods of calculating the change.  The subclauses provide for only one method of calculating a change to rent.

[67]  The learned trial judge would have come to this conclusion but for his Honour’s reliance on the extrinsic materials.  That reliance was misplaced for two reasons.  The first is that the primary means of construing a statute are its own words and regard should first be had to the language of the Act.  The second is that the extrinsic materials in this case did not answer the question posed by the application.

[68]  The second question is whether s 27 invalidates the clauses.  It will be recalled that the section relevantly provides that each rent review must be made using only one basis which must be:

  • Current market rent
  • An independently published index of prices etc
  • A fixed percentage of the base rent
  • A fixed actual amount
  • A single basis formed by a combination of two or more of the second, third or fourth bases.

The first respondent submits that the clauses provide for a review of rent on two bases: increases in a published index and the proviso in the case of clause 2.3 and market rent and the proviso in the case of clause 16.2. 

[69]  Whether the submission should be accepted depends on what is meant by the phrase “rent review”.  The word “review” has a number of meanings.  According to the Oxford English Dictionary it relevantly means either “to view, inspect or examine a second time”, or “to look over in order to correct or improve, to revise.”  The meanings are to survey or to adjust.  Which meaning is appropriate depends, obviously, upon the context, statutory or contractual.  For an example in which “review” had both meanings in the same contract depending upon the particular context see Callide Coalfields (Sales) P/L v CS Energy Ltd [2008] QCA 408 at paras 37 and 41.

[70]  There can be no doubt that in s 27 “review” means to adjust, or correct, or revise.  The whole tenor of the section is concerned with changes, alterations, adjustments, to the rent payable under shop leases.  It limits the frequency with which and the means by which change may occur.  It is not concerned with an inspection or a survey of the rents.

[71]  Is, therefore, the proviso to each of the subclauses a basis for reviewing rent payable under a lease in the sense of adjusting or revising it?  The answer is clearly negative.  Neither in form nor substance do the provisos effect any change in rent.  Their effect is to determine the circumstances in which there may be such a change which will occur in accordance with the method, or basis, for effecting it found in the particular subclause to which each proviso attaches.  More accurately the provisos determine the circumstances in which there will be no change to the rent.  They do so by making the method of calculating change ineffectual, or inoperative, where the result of the calculation is a lower figure than the previous years’ rent.

[72]  It follows that the subclauses do not provide for two bases for reviewing the rent.  In the case of clause 16.2 one basis only is allowed for the rent review:  review to market in those circumstances where market rent is higher than the existing rent.  In the case of clause 2.3(a) there is also only one basis:  index of inflation where the index for the year in question was greater than the index for the previous year.  The clauses do not contravene s 27(4).

[73]  Although it is unnecessary to do so because of the conclusion I have just expressed, it may be said that the first respondent’s basis for contending that the rent review clauses are invalid would not yield the result for which it would hope.  The basis is s 20 of the Act which provides that:

“If a provision of this Act is inconsistent with a provision of a retail shop lease, the provision of this Act prevails, and the provision of the lease is void to the extent of the inconsistency.”

[74]  The inconsistency identified by the first respondent is that the provisos to clause 2.3(a) and (d), and clause 16.2, are a separate basis for reviewing the rent so that the clauses offend s 27(4) or s 36(e).  The inconsistency can be removed, in accordance with s 20, if the provisos are avoided.  That is the extent necessary to remove the inconsistency.  The clauses would be left with one basis only for adjusting rent and would not offend the Act.  The rent reviews that have occurred would be unaffected.

[75]  There is another point.  It is that s 27 itself determines the consequences if a clause in a retail shop lease does not comply with the section.  It contains a number of prohibitions:

  • Rent may not be reviewed more than once a year.
  • Rent must be reviewed on one basis only.
  • Those bases must be those described in s 27(5), or a Regulation.

[76]  Subsection 7 defines the consequences should rent be reviewed other than in accordance with the preceding subsections.  If rent is reviewed more than once in a year the second review is ineffective.  If rent is reviewed on more than one basis, or in a manner prohibited by s 36(d) or (e), the lessee may choose the basis for the adjustment.  A rent review is invalid only if it falls within the ambit of s 27(7).  Because the review here was not made on more than one basis, or on the basis prohibited by s 36(e), the section has no application.

[77]  I would allow the appeal, set aside the orders made in the trial division on 1 September 2008 and instead declare that clauses 2.3 and 16.2 of the lease dated 27 June 2002 between the first and second respondents are not invalidated by the Retail Shop Leases Act 1994 (Qld).  The first respondent should pay the appellant’s and the second respondents’ costs of the application and the appeal.

Footnotes

[1] Set out in Chesterman JA's reasons at [37].

[2] Set out in Chesterman JA's reasons at [37].

[3] Retail Shop Leases Act 1994 (Qld), s 27(5) as it was at the relevant time is set out in Chesterman JA's reasons at [43]. The Act was amended by the Retail Shop Leases Amendment Act 2006 (Qld), s 15, which added a further basis for rent review and renumbered the provisions of s 27(5) following s 27(5)(e). Nothing turns on this for the purposes of this appeal.

[4] Set out in Chesterman JA's reasons at [43].

[5] (1998) 194 CLR 355.

[6] Acts Interpretation Act 1954 (Qld), s 14A(2).

[7] (1990) 169 CLR 214 at 235.

[8] (1997) 187 CLR 384 at 408.

[9] LRC Report No 20 Insurance Contracts, delivered in 1982.

[10] LRC Report No 20 Insurance Contracts, delivered in 1982 at [264].

[11] CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408.

[12] Retail Shop Leases Act 1994 (Qld), s 3.

[13] Retail Shop Leases Act 1994 (Qld), s 4.

[14] Division 4—Rent review

Rent may be reviewed on only 1 basis

27.(1) If, under a retail shop lease, the rent payable under the lease or any renewal or extension of the lease is to be reviewed during the term of the lease or under an option to renew or extend the lease, the lease must state the timing of the reviews and the basis on which the reviews are to be made.

(2)The reviews must be made using only 1 basis for each rent review.

(3)The basis for a rent review must be—

(a)an independently published index of prices, costs or wages; or

(b)a fixed percentage of the base rent; or

(c)a fixed actual amount; or

(d)the current market rent of the leased shop; or

(e)another basis prescribed by regulation.

(4)If the rent is determined as a base rent plus an amount equal to a percentage of the turnover of the lessee’s business above a stated amount, the review of the base rent must be made in accordance with subsections (2)and (3).

(5)If, under a retail shop lease, the rent is to be reviewed during the term of the lease or any renewal or extension of the lease using more than 1 basis for a rent review, the rent payable for the rental period after the timing of the review is the same as the rent payable before the timing of the review.

[15]See [14] of these reasons.

[16] Second Reading Speech, pp 8971 - 8973.

[17] (1998) FCA 823.

[18] [2002] NZCA 143 at [5].

[19] Retail Shop Leases Act 1994 (Qld), s 122(2). This was amended by the Retail Shop Leases Amendment Act 2006 (Qld), s 44 to now provide for a review within seven years of the previous review.

[20] Retail Shop Leases Act 1994 (Qld), s 122(1).

[21] Retail Shop Leases Act 1994 (Qld), s 122(3).

[22] Which equates s 27(5) of the Retail Shop Leases Act 1994 (Qld) when the contract between the parties was created. This section is set out in Chesterman JA's reasons at [43].

[23] Which equates to what was at the relevant time Retail Shop Leases Act 1994 (Qld), s 27(5) as set out in Chesterman JA's reasons at [43].

[24] Second reading speech, p 8972.

[25] Retail Shop Leases Act 1994 (Qld), s 3 and s 4 and second reading speech, pp 8971 to 8973.

[26] The term "base rent" is defined in Retail Shop Leases Act 1994 (Qld), s 5 as "rent, or the part of rent, that is a specified amount of money (whether or not the amount is subject to change)".

[27] Retail Shop Leases Act 1994 (Qld), s 3 and s 4(a).

[28] See [19] of these reasons.

[29] Set out at [41] of Chesterman JA's reasons.

[30] The parties have not contended that fixing rental by agreement and otherwise as determined by an independent valuer is itself offensive to s 27(5).

[31] Retail Shop Leases Act 1994 (Qld), s 27(4).

[32] Retail Shop Leases Act 1994 (Qld), s 3 and s 4.

Close

Editorial Notes

  • Published Case Name:

    Connor Hunter (A Firm) v Keencrest P/L & Ors

  • Shortened Case Name:

    Connor Hunter (A Firm) v Keencrest Pty Ltd

  • MNC:

    [2009] QCA 156

  • Court:

    QCA

  • Judge(s):

    McMurdo P, Holmes JA, Chesterman JA

  • Date:

    09 Jun 2009

  • White Star Case:

    Yes

Litigation History

Event Citation or File Date Notes
Primary Judgment [2008] QSC 194 01 Sep 2008 -
Appeal Determined (QCA) [2009] QCA 156 09 Jun 2009 -

Appeal Status

{solid} Appeal Determined (QCA)