Peppercorn Holdings No 1 Pty Ltd v DDH Graham Ltd
[2006] QSC 156
To print this judgment please return to the case and click on the PDF icon
next to the
case name. For court use, a full PDF copy is required or preferred.
Exit Distraction Free Reading Mode
Please Note: You are about to print a copy of the onscreen
version of
this judgment. For court use, a full PDF copy of the judgment is required or preferred. Please
return to
the case for PDF printing options.
- Notable Unreported Decision
- Peppercorn Holdings No 1 Pty Ltd v DDH Graham Ltd[2006] QSC 156
- Add to List
Peppercorn Holdings No 1 Pty Ltd v DDH Graham Ltd[2006] QSC 156
Peppercorn Holdings No 1 Pty Ltd v DDH Graham Ltd[2006] QSC 156
SUPREME COURT OF QUEENSLAND
PARTIES: | |
FILE NO: | |
Trial | |
PROCEEDING: | Application |
ORIGINATING COURT: | |
DELIVERED ON: | 23 June 2006 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 15 June 2006 |
JUDGE: | Chesterman J |
ORDER: | 1.Application brought by Peppercorn Holdings No. 1 Pty Ltd be dismissed 2.Order that caveats lodged by Peppercorn Holdings No. 1 Pty Ltd described in Schedule 1 to the application by Ramsey Bourne Acquisitions (No. 2) Pty Ltd and filed by leave on 15 June 2006 be removed |
CATCHWORDS: | LANDLORD AND TENANT – LEASES AND TENANCY AGREEMENTS – OPTIONS AND AGREEMENTS TO PURCHASE – GENERALLY – CONSTRUCTION OF PARTICULAR AGREEMENTS – where applicant is tenant and first respondent is landlord – where the applicant offered to purchase the properties from the first respondent – where third to fifth respondents also interested in purchasing the properties – where heads of agreement entered into for sale of properties between first respondent and third to fifth respondents – where applicant has pre-emptive rights – whether first respondent was in breach of the lease with applicant by offering to sell to third to fifth respondents – whether rights of pre-emption breached by offer of reversionary interest Cook v Taylor [1942] Ch 346, considered Esso Australia Ltd v Air Rid Transportation Pty Ltd (unreported, Supreme Court of Victoria 28 September 1988), considered Gardner v Coutts & Co [1968] WLR 173, considered Jackson Nominees Pty Ltd v Hanson Building Products Pty Ltd [2006] QCA 126, considered JV Property Syndicates v Croakybill [2005] QCA 479, considered Mackay v Wilson (1947) 47 SR (NSW) 315, considered Norco Co-operative Ltd v Parmalat Australia Ltd [2006] QSC 38, considered Sirius International Insurance Co (Publ.) v FAI General Insurance Ltd [2004] 1 WLR 3251, considered THL Robina v Glades Golf Club Pty Ltd [2005] 2 Qd R 186, considered Woodroffe v Box (1954) 92 CLR 245, considered |
COUNSEL: | B O'Donnell QC with D O'Brien for the applicant G Gibson QC with K Barlow for the first and second respondents J McKenna SC with D Kelly for the third, fourth and fifth respondents |
SOLICITORS: | Dibbs Abbott Stillman for the applicant Mallesons Stephen Jaques for the first and second respondents Corrs Chambers Westgarth for the third, fourth and fifth respondents |
[1] The first respondent is the responsible entity of an unlisted property trust, Childcare Property Trust No. 1 in respect of which the second respondent is the custodian. It owns nine parcels of real property on which the applicant operates childcare centres pursuant to nine management lease agreements made with the custodian. The lease agreements are materially identical and contain no option to renew. They were executed on 18 June 2001 and were for fixed, five year terms which were to commence on various dates. Four leases expired on 16 June 2006. Four more will expire on 24 June 2006 and the last in mid-July. Seven of the properties are in Queensland; one is in New South Wales and one in South Australia.
[2] The applicant carries on the business of caring for children. It operated childcare centres from each of the properties. Between 50 and 70 children attend each of the properties. Their ages vary between a few days and 12 years. The third to fifth respondents are in the same line of business. They and the applicant are competitors.
[3] On 27 February 2006 the applicant made an offer to the first respondent (‘Graham’) to acquire the properties and the businesses being conducted thereon. On 7 March 2006 Graham advised the applicant that it was considering the offer but that it had a valuation for the properties for an amount greater than the applicant had offered, and that three other parties had expressed interest in acquiring the properties. On 5 April 2006 the third to fifth respondents told Graham of their interest in purchasing units in the Property Trust. On the same day Graham advised the applicant that it had received a better offer than the applicant’s. On 2 May 2006 Graham informed the applicant that it was ‘close to doing a deal’ with the third to fifth respondents. The applicant replied that it was ‘not interested’. Ten days later, however, on 12 May 2006 the applicant wrote to Graham asserting that its endeavours to sell the properties were in breach of the lease agreements.
[4] On 16 May 2006 Graham and the third to fifth respondents entered into written heads of agreement by which those parties agreed to work in good faith towards formulating and executing written agreements by which:
(1)Graham would lease the properties to the fourth respondent (‘Acquisitions’).
(2)Graham would sell assets of the businesses to Acquisitions.
(3)Subject to the applicant not exercising its first right of refusal Graham would enter into a put and call option agreement with respect to the properties with the fifth respondent (‘RBL No. 1’).
[5] The term of the lease agreements which the applicant contends had been contravened by Graham’s dealings with Acquisitions and RBL No. 1 is cl 23 which appears in each of the nine lease agreements between the custodian (the second respondent) and the applicant. It is this clause which explains the insertion of the condition to which the put and call option is subject.
[6] Clause 23 is in these terms:
‘23.RIGHT OF FIRST REFUSAL
23.1.Notice to Tenant
If at any time during the Term the Responsible Entity:
23.1.1.receives an acceptable bona fide offer from a third party to purchase the Premises; or
23.1.2.desires to market the Premises for sale to a third party,
then the Responsible Entity shall promptly give the Tenant written notice of such offer or desire containing all the terms and conditions on which the Responsible Entity is prepared to sell the Premises, including:
23.1.3.specification of the extent of the interest in the Premises proposed to be sold;
23.1.4.the minimum sale price for which the Responsible Entity proposed to dispose of the Premises (or, if the Responsible Entity is prepared to accept an alternative amount in exchange for imposing different conditions on the sale, such amount and particulars of alternative terms):
23.1.5.the identity of any interested third party (if any).
The Responsible Entity will also promptly provide the Tenant with a true copy of any bona fide offer received from the a third party to purchase the Premises.
The notice shall constitute an irrevocable offer by the Responsible Entity to the Tenant to sell the Premises to the Tenant on those terms and conditions.
23.2.Acceptance
The Tenant may accept the offer within thirty (30) days after the notice is served by written notice to the Responsible Entity accompanied by the deposit payable in accordance with the terms and conditions in the notice from the Responsible Entity and such acceptance shall create a binding contract between the Landlord and the Tenant.
23.3.Lapse
If the Tenant does not accept the offer within the time specified in clause 23.2, the offer shall lapse and thereafter the Landlord may sell the Premises within the next twelve (12) months on terms which are no more materially favourable to the purchaser of the Premises than the terms and conditions which were offered to the Tenant in accordance with clause 23.1.
23.4.Re-offer
If the Responsible Entity wishes to sell the Premises to any person within twelve (12) months after the Tenant does not accept the offer as referred to in clause 23.2 on terms which are materially more favourable to the purchaser than the terms and conditions offered to the Tenant, the Responsible Entity must first comply with the provisions of this clause by offering the Premises again to the Tenant. After the twelve (12) month period referred to in clause 23.3 has lapsed, the Responsible Entity must comply with the requirements of this clause again before it may sell the Premises.’
[7] By an Amended Originating Application the applicant seeks a number of declarations and injunctions. The orders sought fall into two categories. The first category of relief arises from the contention that events which trigger the operation of cl 23 have occurred and that rights have accrued to the applicant which the respondents are ignoring. The second category of relief concerns the applicant’s contention that cl 23, on its proper construction, obliges Graham and the custodian to make it an offer, in circumstances where cl 23 has been triggered, to buy the real properties free of encumbrance and with vacant possession.
[8] On 6 and 7 June 2006 the custodian executed agreements which leased the properties to Acquisitions for terms which, if options to renew are exercised, will extend for 25 years. The leases are to take effect on and from the expiration of the lease agreements between the custodian and the applicant.
[9] It is convenient first to deal with the dispute about the construction of cl 23. Put shortly the applicant submits that when the clause becomes operable Graham must offer to sell the premises to it unencumbered and with vacant possession. The applicant submits that it is a breach of cl 23 for Graham to offer it only a reversionary interest.
[10] The second category of relief claims injunctions restraining the respondents from giving effect to the leases executed on 6 and 7 June until offers to purchase the properties in the manner described has been made to the applicant, and the applicant has had 30 days to consider whether it should accept the offers.
[11] Clause 23 confers on the applicant a right of ‘first refusal’ and is commonly referred to as a ‘pre-emption’. Although these are useful identifications the meaning of such clauses is not fixed by reference to their category. Each clause must be construed according to its own terms and in the context of the particular contract. Accordingly to Fullagar and Kitto JJ in Woodroffe v Box (1954) 92 CLR 245 at 257:
‘The term “first refusal” is not a technical term. It is a colloquial term, and indeed a somewhat inept term, because what the potential offeree wants is an opportunity of accepting an offer rather than an opportunity of refusing an offer. … It seems clear that a mere promise to give the first refusal should be taken prima facia as conferring no more than a pre-emptive right. If I promise to give you the first refusal of my property, I am making prima facia only a negative promise: I am saying: “I will not sell my property unless and until I have offered it to you and you have refused it”. … The truth is, indeed, that, in dealing with such a loose and colloquial expression, it may often be a mistake to cling strongly to a preconceived meaning. The safer and sounder course is to regard it as an expression of fairly flexible import, to look at the whole of what the parties to an instrument have said, and the light of that whole to determine whether they have or have not conveyed an intention that an immediate offer is being made or is to be made.’
[12] The second part of the passage refers to the distinction between rights of pre-emption and options to purchase property.
[13] Clause 23 is clearly not an option.
‘Both these types of agreement are well known … There is a clear distinction between them in regard to the results which follow from the adoption of one or the other. Speaking generally, the giving of an option to purchase land prima facia implies that the giver of the option is to be taken as making a continuing offer to sell the land, which may at any moment be converted into a contract by the optionee notifying his acceptance of that offer. The agreement to give the option imposes a positive obligation on the prospective vendor to keep the offer open … so that it remains available for acceptance … It has more than a mere contractual operation and confers upon the optionee an equitable interest in the land, the subject of the agreement …
But an agreement to give “the first refusal” or “a right of pre-emption” confers no immediate right upon the prospective purchaser. It imposes a negative obligation on the possible vendor requiring him to refrain from selling the land to any other person without giving to the holder of the right of first refusal the opportunity of purchasing in preference to any other buyer. It is not an offer an in itself it imposes no obligation on the owner … to sell. But if he does decide to sell, then the holder of the right of first refusal has the right to receive the first offer, which he also may accept or not as he wishes. The right is merely contractual and no equitable interest in the land is created …’
Per Street J in Mackay v Wilson (1947) 47 SR (NSW) 315 at 325.
[14] The applicant’s attack had three thrusts. The first was Re Crosby’s Contract 1949 1 All ER 830 in which Crosby leased the ground floor of a house to a tenant for a term of 21 years. By cl 3(iii) of the lease the landlord promised ‘that if the tenant shall desire to purchase the fee simple … of which the demised premises form part and shall … give … three months notice in writing … then the landlord will … on payment of … £2,000 … convey the said property … in fee simple.’ Mrs Crosby and her husband occupied the upper floor of the house. With knowledge that the tenant intended to exercise the option Mrs Crosby granted a lease of the upper storey to her husband, at fair market rent, for a term of 21 years. The tenant duly gave notice that he wished to exercise the option and insisted that the landlord convey the property to him with vacant possession. He sought a declaration that he was not bound by the lease. Romer J made the declaration.
[15] His Lordship (at 832) regarded cl 3 of the lease as giving ‘ground for implying that, on the exercise of the option, the donee of the option would be entitled contractually to a conveyance in fee simple with vacant possession’, that view arising from the general law. Reference was made to the fourth edition of Williams on Vendor and Purchaser in which it was said:
‘… where land is expressly or impliedly sold with vacant possession a good title is not shown if it is subject to any tenancy … which will not expire before the day fixed … for completion.’
And:
‘It is apprehended that where land is sold under a contract expressly or impliedly promising to convey the fee simple, free from encumbrances, it is prima facia a term of the contract that the purchaser shall on completion be put into actual (not constructive) possession of the property … but it is a question of the intention of the parties, to be gathered from the terms of the contract, whether the land is sold with vacant possession …’
[16] Reference was also made to the judgment of Simonds J in Cook v Taylor [1942] Ch 349 in which it was said (at 352):
‘… there is no reference (in the documents) to vacant possession, but equally there is no reference to any tenancy to which the property is subject, and I think that … it is material to observe that that property was in fact vacant when inspected by the defendant, the intending purchaser, and it must have been known to the plaintiff that it would be found to be vacant by the intending purchaser. Therefore we have this property which is in fact vacant and which is contracted to be sold without any reference to any tenancy. Is there in such a case an implication that it is sold with vacant possession? I think the answer … is … affirmative.’
[17] Romer J concluded (835-6):
‘… the tenant was bound … to accept the state of the title as it was when the lease was granted, and would have been unable to object to any lease … which at that time had subsisted, but that is far removed from compelling him to take the property subject to any other defect which the landlord might at any time think right to bring into being and would have the effect of preventing the tenant from getting possession of the property.’
[18] The second thrust of the applicant’s case is that the right of pre-emption granted by cl 23 would be nugatory if the landlord, Graham and the custodian, could burden the properties with long leases. In the events which have occurred, if the arrangements with acquisition and RBL No. 1 endure, the right of pre-emption will extend no further than to the reversion of the properties which may not fall into possession until 25 years have passed.
[19] The applicant relies upon THL Robina v Glades Golf Club Pty Ltd [2005] 2 Qd R 186 and the cases analysed in that decision. The point of those cases is that a right of pre-emption by which the promisor promises not to sell his property without first offering it to the promisee cannot be defeated by the promisor disposing of the property otherwise than by sale. In Gardner v Coutts & Co [1968] WLR 173 the promisor gave his land away having earlier granted an option to sell it for a nominated price if he decided to sell it or died still owning it. The gift was held to be a breach of the implied negative covenant not to dispose of the property without first allowing the promisee to buy it. In Esso Australia Ltd v Air Ride Transportation Pty Ltd (unreported Supreme Court of Victoria 28 September 1988) a right of pre-emption was found to have been breached when the promisor granted an irrevocable option to purchase to someone other than the promisee and without first offering the property to the promisee. In THL Robina I held that a right of pre-emption prevented the promisor from exchanging land without first offering it to the promisee.
[20] I attempted a summary in THL Robina at 196-7 in these terms:
‘… the answer … is to be found in the nature and scope of the implied negative promise to which the clause gives rise. There is no doubt there is such an implied promise … Its origin is apparently to be found in the doctrine of the law of contract which obliges parties to a contract not to do anything which would make the performance of their bargain impossible. … If (the clause) is to confer a right of pre-emption of real value on the applicant the respondent must offer to sell the land to the applicant before disposing of it. If the respondent were to give the land away or to contrive a mode of disposition so it did not constitute a sale the right of pre-emption could be rendered nugatory. For this reason courts have been prepared to extend the implied negative promise to all modes of disposition.’
[21] The applicant submits that the execution of the leases in favour of Acquisitions is a mode of disposition of the properties which infringes the right of pre-emption.
[22] The applicant’s third thrust is that clause 23 should be construed so as to give effect to ‘the evident commercial purpose’ of the clause. The purpose is said to be to allow the applicant to continue to conduct its child care businesses from the properties. The submission is:
‘The leases contemplate an offer to sell to be made to an existing lessee, and one that would be conducting a business on the leased premises at the time the offer is made. The normal inference would be that the offer would be to sell the whole of the premises, including the right to possession, so that the lessee could, by buying the property continue in possession and continue to be able to conduct his business on the premises.
The circumstances of the parties at the time of entry into the leases support this. (The applicant) was an experienced operator of child care centres. ... (Graham) knew that that was Peppercorn’s business. It knew that (the applicant) was taking possession under the leases in order to conduct child care businesses from the premises, and clause 23 was plainly for (the applicant’s) benefit. And (the applicant) did not have a right to renew the leases for a further term. The purpose of the parties … was that if (Graham) decided to offload the property during the term of the lease … (The applicant) would have the option, rather than seeing the properties go to a third party (who might refuse to allow (the applicant) to remain in possession after this expired), of buying a property and thereby insuring the continuity of operation of its business …’
[23] This submission depends for its force on two conditions: first that the businesses operated from the properties during the terms of the leases were the applicant’s businesses; and secondly that the commercial purpose identified by the applicant is to be given paramountcy in construing clause 23. Both matters need to be addressed.
[24] There was some debate about whether the businesses operated from the properties by the applicant were its businesses or Graham’s. I accept the applicant’s submissions that the businesses were its.
[25] The applicant’s submissions correctly identify the features which make the point good. The leases were true leases pursuant to the terms of which the applicant was to conduct a business on the demised premises. Clause 1 provides for the payment of rent and cl 6.1 provides for the tenant to pay most outgoings while others are, pursuant to cl 16.3, to be paid by the custodian. Clause 16.1 provides that the tenant should be entitled to quiet enjoyment of the properties and cl 18.1 provides that on termination the tenant should deliver up possession of the premises to the landlord. Moreover, each lease defines the ‘tenant’s’ business as being the business carried on from the properties, and cl 8.1 provides that the tenant should occupy and use the premises for the purposes of a child care centre. Clause 12 provides that the tenant will use all reasonable endeavours to conduct the business so as to maximise net operating income; the tenant is to employ its own employees and is to obtain all necessary licenses and comply with them. These provisions are typical of leases in which a tenant is to conduct his own business.
[26] The respondents relied upon cl 19 and the manner in which the amount of rent payable was calculated. Rent was defined to mean:
‘… the amount for each month of the Term, equal to Net Operating Income:
(a) less the Base Fee as adjusted from time to time;
(b) less 2% of Gross Revenue;
(c) less 10% of (Net Operating Income less (a) and (b) above).’
[27] ‘Net Operating Income’ was in turn defined to mean gross revenue from the tenant’s business at the premises, less the operating expenses which were extensively defined.
[28] The respondents’ point was that the rent equated to the net income from the operation of the businesses less what was in effect a fee or percentage of the income from the businesses. The point derived from this is that the rent structure indicated that the businesses were being operated for Graham’s benefit and that the applicant was to be remunerated by way of commission.
[29] The submission overlooks the fact that what is being paid is rent however its quantum was calculated, and that the definition necessary for the calculation expressly referred to the business which generated the revenue as being the tenant’s i.e. the applicant’s.
[30] Clause 19 was in these terms :
‘19.1 Application
This clause 19 only applies where this Lease has been terminated (whether by effluxion of time or otherwise) and the Tenant does not remain in occupation of the Premises with the Responsible Entity’s consent.
19.2 Option
If requested by the Responsible Entity, the Tenant shall sell free from all encumbrance whatsoever to any person nominated by the Responsible Entity the property listed in column 1 which is associated with the Premises for the consideration listed opposite such property in column 2 provided payment in accordance with this clause 19.2 is made:
19.2.1 within sixty (60) days after the Landlord makes such request in writing to the Tenant; or
19.2.2 not later than the Expiry Date,
whichever is the later.
Column 1 | Column 2 |
Goodwill | $1.00 |
The financial management and administration records, accounts, brochures, advertising and marketing and promotional material, computer software and electronic data in relation to the Premises and all of its operations and business (other than the Tenant’s operating manuals and procedures and other proprietary data, information, manuals or systems) | $1.00 |
To the extent that they are capable of assignment, the agreements, contracts, licenses, leases, sub-leases, approvals, permits and authorities with relevant bodies and organisations, including agreements for the supply of electricity, gas etc and other service contracts, licences, permits or approvals applicable to the Premises | $1.00 |
Each party shall pay its own costs with respect to such sale and transfer however all stamp duty and registration fees shall be paid by the transferee and the licence fee on any Licence which is transferred shall be apportioned between the Tenant and the transferee.’
[31] The respondents point to the fact that the goodwill, financial records and licenses utilised in the operation of the business are to be transferred to the landlord at the expiration of the leases for $1 each. The smallness of the consideration is said to indicate that the businesses must in reality have been the landlord’s. The submission overlooks the point that clause 19.2 recognises that at the end of the lease the property to be sold, though for a paltry sum, is the tenant’s who was obliged to sell the goodwill business records and licenses. The property to be sold is the applicant’s, not the landlords.
[32] The second consideration relevant to the third thrust calls for an examination of the principles to be applied in the construction of commercial documents. The applicant stresses the judgment of Lord Steyn (with whom Lord Nicholls and Lord Walker agreed) in Sirius International Insurance Co (Publ.) v FAI General Insurance Ltd [2004] 1 WLR 3251 at 3257-8:
‘There has been a shift from literal methods of interpretation towards a more commercial approach. In Antaios Cia Naviera v Salen Rederierna AB [1985] AC 191 at 201, Lord Diplock, in an opinion concurred in by his fellow Law Lords, observed:
“… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.”
In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352 at 372 [1997] AC 749 at 771, I explained the rationale of this approach as follows:
“In determining the meaning of the language of a commercial contract … the law … generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language.”’
The passage was approved by de Jersey CJ in JV Property Syndicates v Croakybill [2005] QCA 479.
[33] My understanding of the appropriate principles to apply when construing a commercial document was set out in Norco Co-operative Ltd v Parmalat Australia Ltd [2006] QSC 38 at 11: -
‘(1)The court must first look at the words of the document which constitutes the contract between the parties. The whole of the document must be considered and a construction should be attempted which will make all clauses operate harmoniously. If the words are plain and unambiguous the court must give effect to them even though the result may appear one sided or even unreasonable. See Australasian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.
(2)If the language of the contract is ambiguous, or open to two constructions, or if the plain meaning of the clause renders it inconsistent with another, the court shall resolve the ambiguity, or reconcile the inconsistency, by adopting a construction which accords with “business common sense” or the commercial purpose of the agreement which appears from its terms and the knowledge, common to the parties, which form the background to the formation of their agreement. See Australasian Broadcasting Commission; Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-4 per Kirby P.
(3)If the words of the contract, while plain and unambiguous, lead to a result which is not only unreasonable but absurd, the court should construe the contract, if necessary by supplying, omitting, or correcting words to avoid the absurdity: Watson v Phipps (1985) 60 ALJR 1 at 3; Westpac Banking Corporation v Tanzone Pty Ltd (2000) NSWCA 25 paras 19 and 20. Before this was put into operation it must, I think, be unmistakably clear that the parties cannot have meant what they said was their bargain.’
[34] That summary was approved by Jerrard JA [2006] QCA 129 at 42. His Honour added, and emphasised, the importance of the first proposition, that if a contract be plain and unambiguous in its language the court must give effect to it though the result appear unfair or unreasonable.
[35] There is not, I think, a gulf fixed between the two approaches. The Norco approach looks first at the words which the parties chose to record their bargain to discern its meaning. It is only if the meaning of those words is in some way unclear that one looks, for guidance, to the ‘commercial purpose’ of the contracts to understand what the words mean. If one has to approach words with a close regard for semantics and syntax to understand their meaning it must be that the meaning is not immediately apparent. The same is true of words which require a close attention to the ‘niceties of language’ to know what they say. If the words of a contract do not spontaneously reveal the parties’ intention so that a close attention to grammar, syntax and lexicons is called for, the words are not plain and unambiguous and one can, on any view of the principles of construction, look to the commercial purpose, or the ‘business common sense’ of the contract.
[36] The respondents have answers to the applicant’s submissions.
[37] Crosby is distinguished because it concerned an option to buy for a specified price. Two points follow from this. The first is that an option, as Street J observed, constitutes a continuing offer to sell. The second point is that the property the optionee could purchase at the agreed price was the property as it was when the option was granted. If, as in Crosby’s case, the property was not burdened by leases the option was to purchase the property in that state. By contrast, cl 23 did not constitute an offer to sell the properties as their titles existed when their leases were executed for a price fixed by reference to that state of the title. The promise was to do no more than offer the properties to the applicant before selling them elsewhere.
[38] The second thrust of the applicant’s argument has considerable force. It is supported by the cases relied on. They suggest that a right of pre-emption will be violated if the promisor should dispose of the property by any means so as to nullify the value of the right. The grant of the leases to Acquisitions is a disposition of the promisor’s property though not, of course, a disposition of the whole of its proprietary right.
[39] The respondents’ answer is that if the applicant’s contention is correct, Graham, and the custodian, had, for the entire terms of each lease, to hold the property in a state of readiness lest, at any moment, one of the events specified in clause 23 occurred so that Graham could offer the property for sale to the applicant unencumbered and with vacant possession. This is a serious restriction upon Graham’s ordinary rights of property and it is not to be lightly concluded that this is the intent of the clause.
[40] Secondly, it is argued that the restriction proposed by the applicant would have particularly serious consequences, and is inconsistent with some of the terms of the leases.
[41] The leases make it clear that their particular purpose is the operation of a childcare centre in each premises. The landlord is remunerated by a formula which has as its starting point the revenue of the business and it is given a right to acquire, for a nominal sum, any goodwill generated during the term of the leases. The goodwill will be diminished if the businesses cease to trade for any period. Moreover, the business requires special skill which the landlord does not possess. It follows that the businesses could not continue when the applicant’s leases expire unless, before that event, the landlord had agreed to lease the premises on or from their expiration dates.
[42] Consequently, it is submitted an obligation which prohibited Graham and or the custodian from agreeing to such a lease during the term of the applicant’s leases would cause serious damage to the value of the reversion. This result is so ‘uncommercial’ that it would require clear words before a court should construe cl 23 to require that result.
[43] Next it is argued that if such a restriction were intended it could easily have been expressed. It was not, but another restriction on dealing with the premises was imposed by cl 15 which contains a partial restraint on alienation. It restricts the applicant from assigning, transferring, subletting or parting with possession of the premises without the custodian’s prior consent which should not be unreasonably withheld. By specifying what dealings were prohibited the lease, by implication, forbids no others.
[44] Then it is pointed out that cl 19 expressly contemplates that, at the expiration of the applicant’s leases, a new lessee might be nominated to take over the goodwill, intellectual property and contracts which were the applicant’s property immediately before the expiration of its leases. This supports the view that the custodian could, during the term of the leases, agree to new leases which would succeed the applicant’s. This view is reinforced by the terms of cl 11.1.5 by which the applicant agreed that the custodian could enter upon the premises to ‘allow prospective tenants of the premises to view the premises… upon … giving … reasonable … notice.’
[45] I agree with the respondents’ submission. They substantially diminish the force of the applicant’s argument. There are two more substantial considerations which favour the respondents. The first comes from that part of cl 23 which provides that if an event occurs which makes the clause operable the custodian must promptly give the applicant notice of the terms on which it was prepared to sell the premises, including specifying ‘the extent of the interest in the premises proposed to be sold’. This is, on its face, a strong indication that the interest which the custodian might offer for sale might not be the entire fee simple. The words cannot be ignored. They must be taken into account when construing cl 23 to arrive at the rights of the parties.
[46] Clause 23 comes into effect if, during the term of the leases, Graham receives an offer to purchase the premises or if it forms the desire to sell the premises to a third party. In each case it must, inter alia, specify the extent of the interest it proposes to sell. This must mean, by reference to the terms of 23.1.1 and 23.1.2 that it must be specify the interest which is the subject of the offer from the third party or the interest which it desires to sell. In the present context the offer received from Acquisitions relates to the reversion, not the entire fee simple.
[47] The applicant seeks to overcome the difficulty by reference to the definition of ‘Premises’. Clause 23 speaks of an offer to purchase the ‘Premises’, or a desire to market the Premises and obliges the custodian to specify the extent of the interest in the ‘Premises’ it proposes to sell.
[48] ‘Premises’ means the land described in the ‘… schedule and includes … all buildings and other structures and improvements erected … on the land and all the pertinences, floor coverings, and other objects, fittings, fixtures and chattels installed or located from time to time in the premises ….but does not include chattels owned, hired or leased … by the tenant.’ The expression includes ‘any part of the premises,’ but excludes chattels ‘owned, hired or leased’ by the applicant.
[49] The applicant’s submission is that cl 23.1.3 is directed at the identification of items of personalty which, by definition, form part of the premises and the role of the clause is to require the custodian to identify what chattels installed or located on the realty are to be included in the proposed sale.
[50] I cannot accept this argument. There is no warrant for reading cl 23.1.3 as being limited to one part only of the definition of premises, personalty as opposed to realty. If a proposed offer may be limited to part only of the personalty it is impossible to see why it may not equally be limited to part only of the realty.
[51] In my opinion, cl 23.1.3 is a good indication that a right of pre-emption might apply to a limited interest in the premises, land or chattels.
[52] The second significant answer to the applicant’s case is that the lease itself contemplates that when the right of pre-emption was triggered the custodian may only have an reversionary interest to offer the applicant in accordance with cl 23. That is, the leases themselves contemplate that, in accordance with their terms, the custodian may not be in a position to offer the applicant any more than a reversionary interest. This point erodes the essence of the applicants contention, that cl 23 obliges the custodian to offer an unencumbered fee simple with vacant possession in the event the clause is called into operation.
[53] Clause 15 permitted the applicant to sublet the premises with the custodian’s consent. Suppose that six months after the leases have been executed the applicant sub-let each of them for one day less than the balance of the terms. With the subleases would have gone the right to operate the businesses. Suppose that a month after the subleases had been executed one of the events described in cl 23 occurred; a bona fide acceptable offer to purchase the premises was made, or the custodian desired to market the premises for sale. The clause would oblige the custodian to offer the premises for sale first to the applicant, but all it could offer, consistently with the terms of the lease, was a reversionary interest.
[54] I think the same is true if the applicant had assigned the leases with the custodian’s consent, rather than subletting them. The applicant would have been out of possession and the childcare centres would have been run by someone else. The right of pre-emption does not appear to pass with the assignment of the lease. Clause 23 confers the right of pre-emption on the ‘tenant’ which is defined to mean the applicant and its successes, but not assigns. If this be right the result is that on an assignment of the lease by the applicant, should cl 23 be triggered, the right of first refusal would be offered to the applicant but all that could be offered would be the reversion.
[55] This last consideration has relevance to the third thrust of the applicant’s argument that the commercial purpose of the leases was to protect the applicant’s right to conduct its businesses from the properties, and that the true meaning of the clause is to be found by reference to this requirement. That cannot be the commercial purpose of the leases if they contemplate, as they do, that by operation of cl 15 the properties may cease to be used for the applicant’s business.
[56] The applicant’s right to conduct its businesses from the properties is to be ascertained from the terms of the leases including cl 15 and cl 23. The clauses are not to be read from the preconceived point of view that they were to achieve a particular purpose, namely preserving the applicant’s rights to remain in possession and conduct its businesses. I think the applicant is in error when it submits that the commercial purpose of the leases was to preserve to the applicant the rights to continue to operate its childcare centres from them should the custodian receive an offer to purchase all or part of a property, or an interest in a property or if it should desire to sell all or part of a property or an interest in a property, and that cl 23 must be construed to achieve this result regardless of any detriment to the proprietary interests of Graham or the custodian.
[57] The error in this approach was demonstrated by McMurdo J (with whom Jerrard JA agreed in Jackson Nominees Pty Ltd v Hanson Building Products Pty Ltd [2006] QCA 126). His Honour pointed out that there is a distinction between an obligation, implied in every contract, to give the other contracting party the benefit bargained for, and performing acts which will enhance the commercial value of the contract for the other party. According to McMurdo J:
‘The duty to do what is necessary to enable the other party to have the benefit of the contract is limited to acts which are necessary to the performance of obligations under the contract. To assess the scope of the duty in a particular case, it is first necessary to define the relevant obligation, and in particular, to define the circumstances in which the parties have agreed that a certain obligation must be performed. It is not a duty upon one party to act so as to enhance the commercial value to the other party of the contract.’
[58] The applicant’s submission is that it is the custodian’s obligation to act so as to enhance its commercial benefit from the leases and that the lease should be construed to give rise to that obligation. This is to invert the process of construction.
[59] Both applicant and respondents rely upon cl 19 to support their arguments but it seems to me that the clause has little to say that is helpful in the construction of clause 23. Clause 19 is directed at circumstances different to those on which cl 23 operates.
[60] The points are not free from difficulty and there is substance in both sets of submissions. A party who gives a right of pre-emption should be bound by it and courts should be reluctant to find that promisors may deal with this property to defeat or diminish the right. But this general proposition must give way to the terms of the particular contract in which one finds the right of pre-emption. The parties’ bargain must be found in the words they chose to express it. They may have chosen to limit or qualify the right. In this case it appears to me that by expressly providing that the right of pre-emption may extend to a limited proprietary interest in the property the subject of the pre-emption and that the lease itself allowed for circumstances in which all that could be offered would be a reversion that the ‘ordinary’ considerations must give way. In the end, for the reasons I have endeavoured to articulate, I prefer the submissions of the respondents and conclude that cl 23 did not preclude the custodian from making the agreements to lease to Acquisitions, nor does it oblige the custodian to offer to sell the entire fee simple in the properties to the applicant rather than a reversionary interest.
[61] The conclusion which I have just expressed substantially disposes of the dispute between the parties. There remains the question whether the custodian and Graham were in breach of cl 23 in not earlier offering to sell the properties to the applicant. They have now made such an offer which is to sell the reversionary interest in each of the properties for the aggregate price which RBL No. 1 has agreed to pay, subject to the applicant not accepting the offer. Little turns on the outcome of this dispute because, whether late or not, the offer has now been made and the applicant may purchase the properties if it wishes. No harm will flow from the lateness of the offer, if it was late. The applicant’s real concern was to secure an offer from the custodian and Graham for the sale of the properties with vacant possession. That was the point behind the argument that cl 23 was triggered before the execution of the agreements to lease on 6 and 7 June last. I have held it had no such right and no consequences flows from the fact that the offer, which I have held to be proper, was not made until 16 June. The only rights which, in my opinion, the applicant has pursuant to cl 23, have been preserved.
[62] Nevertheless for the sake of convenience I will deal briefly with the question of the time at which cl 23 became operable.
[63] I mentioned that on 16 May 2006, Graham and the third, fourth and fifth respondents entered into a heads of agreement which committed them to working in good faith towards the execution of further agreements. On 25 May Graham and Acquisitions agreed upon and executed a Business Asset Purchase Agreement which provided for the sale of business assets, as defined, and which contemplated the execution of new leases between them for the demise of the properties on terms to commence when the applicant’s leases expired. As I also mentioned, on 6 and 7 June, Graham and Acquisitions executed the new leases. On 15 June, Graham and the custodian received an offer from RBL No. 1 to purchase the properties for $10.585 million. The interest being acquired is the reversionary interest. It is subject to the applicant not exercising its rights under cl 23. On 16 June, Graham offered to sell the properties to the applicant on the same terms and conditions contained in the offer to it from RBL No. 1.
[64] Clause 23 provides that if during the term of the leases Graham should:
(a) Receive an acceptable bona fide offer from a third party to purchase the properties or
(b) Desires to market the properties for sale to a third party;
it must promptly give the applicant notice of the offer or desire, setting out the terms on which it was prepared to sell the properties. The notice constitutes an irrevocable offer to sell the properties on those terms. The applicant has 30 days to accept.
[65] The applicant submits that the negotiations between Acquisitions and RBL No. 1, and/or the signing of the heads of agreement, and/or the execution of the new leases, demonstrate that the custodian had received a bona fide offer to purchase the properties, or that Graham had manifested a desire to market the properties so that it should have made an offer by no later than the last of those events.
[66] The execution of the Business Assets Purchase Agreement is said to be a trigger for cl 23 because it indicated that, prior to that event, Graham must have formed the desire to market the properties and must have received an acceptable bona fide offer to purchase them. The submission cannot be accepted. It is clear that Graham was acting throughout the course of its negotiations with the third, fourth and fifth respondents in accordance with legal advice and that it was conscious of the applicant’s rights under the leases. It gave several assurances to the applicant that it would honour its obligations to it. The heads of agreement and Business Assets Purchase Agreement were drawn with that solicitude in mind. Of course what is important is not what was intended but the legal effect of what was done. It appears to me, however, that the respondents have not infringed the applicant’s rights.
[67] The Business Assets Purchase Agreement defined the business assets which were the subject matter of that contract. They included goodwill, business contracts and business names but excluded ‘all other property and assets that would satisfy the definition of “Premises” under the … leases made between Graham and the applicant’. The transaction deals only with property which is outside the scope of the pre-emption clause. The right of pre-emption relates only to ‘the premises’ as defined in the leases.
[68] Neither do the heads of agreement amount to an offer capable of acceptance by a third party to purchase the ‘premises’. That document identifies a proposed transaction which includes an arrangement for put and call options between Graham and RBL No. 1, the options to be exercised within five months after the expiry of the applicants leases. The heads of agreement also identified the documents which would need to be prepared to give effect to the proposed transactions and identified some of the key terms which would be included in the contractual documents. One such term was the condition that the put and call options be subject to the applicant not exercising its rights to pre-emption. In the event that the applicant did accept the offer Graham and Acquisitions would proceed with the Business Acquisition Purchase Agreement and the leases. The heads of agreement contained an obligation on the parties to it to ‘work together in good faith to structure the proposed transaction and draft the definitive agreements so as to avoid any unintended adverse tax or accounting consequences …’. Graham had a right to terminate the heads of agreement if the terms of the documents had not been settled within thirty days.
[69] I accept the submissions of counsel for the third to fifth respondents that the heads of agreement is:
‘… properly characterised as a binding agreement to work towards the formulation and execution of a document which, once executed, would create (inter alia) a conditional call option exercisable by the (third to fifth respondents) after the expiry of the Peppercorn leases. The call option was to be conditional upon the applicant not exercising its right of first refusal.’
[70] Clause 23 becomes operable if Graham receives an ‘acceptable bona fide offer from a third party.’ The context strongly indicates that the offer must be one capable of immediate acceptance thereby giving rise to a binding contract. The offer must be to ‘purchase the premises’. The term ‘premises’ is defined and ‘purchase’ must have its conventional legal meaning. The inclusion of the requirement that the offer be ‘acceptable’ must mean that an offer, to satisfy cl 23, is one that Graham has decided it will accept. Moreover, the ‘acceptable offer’ must contain all the terms and conditions upon which Graham was prepared to sell the premises because these matters must be included in the notice which constitutes the offer to the applicant.
[71] The entry into the heads of agreement did not constitute an offer to purchase the premises. It was an agreement to negotiate a document which would contain such an offer. Until the document was agreed and executed by RBL No. 1 there was no offer. Equally there was no acceptable offer until the negotiations contemplated by the heads of agreement were complete. Until an offer was made which contained terms and conditions which Graham found acceptable the pre-condition found in clause 23.1.1 had not been satisfied.
[72] The second event which might make cl 23 operable was that Graham formed the ‘desire to market the premises for sale to a third party’. ‘Market’ is not defined but its context and ordinary connotation suggest that it means to place the property for sale in a market, or to solicit offers to purchase it. What happened was that Graham received a number of invitations to treat, or proposals, for the sale of its properties. There is no evidence that it engaged agents to find a buyer or put the properties ‘on the market’. The receipt and considerations of proposals, or even offers for sale does not constitute ‘marketing for sale’.
[73] The word ‘desire’ can give rise to imprecision. The word is capable of embracing mental states ranging from vague interest to ardour. I accept the respondents’ submissions that it is ‘most unlikely that a serious change in the parties legal position was intended to be triggered by anything short of a … determination … to sell on definite terms’. I think this is clear from the requirements of the clause. Once Graham formed a desire to market the premises for sale it had promptly to give the applicant written notice of that desire ‘containing all the terms and conditions on which (Graham) was prepared to sell…’. The relevant desire must be a wish or intention to sell a property on particular, identified, terms and until those terms had been formulated precisely, at least in Graham’s mind, the precondition in cl 23.1.2 will not have been satisfied. A desire to sell in the abstract or ‘if the right offer comes along’ it is not sufficient to satisfy the clause.
[74] There is no evidence that prior to the receipt of RBL No. 1’s offer on 15 June that Graham had formed the requisite desire.
[75] For these reasons I conclude that there has been no breach of cl 23. Accordingly, I order that the application brought by Peppercorn Holdings No. 1 Pty Ltd be dismissed. I order that the caveats lodged by Peppercorn Holdings No. 1 Pty Ltd described in Schedule 1 to the application by Acquisitions and filed by leave on 15 June 2006 be removed.
[76] The applicant’s point is persuasive. A party who gives a right of pre-emption should be bound by it and the court should be reluctant to find that the promisor of such a right may deal with his property in such a way as to defeat or diminish the right. But this general proposition must give way to the terms of the particular contract in which one finds the right of pre-emption. The parties’ bargain must be found in the words they chose to express it. The parties may have chosen to limit or qualify the right. In this case it appears to me that by expressly providing that the right of pre-emption may extend to a limited proprietary interest in the property the subject of the pre-emption and that the lease itself allowed for circumstances in which all that could be offered would be a reversion that the ‘ordinary’ considerations must give.