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Artesian Hospitality Pty Ltd v Tsuen Fung Holdings Pty Ltd QSC 288
SUPREME COURT OF QUEENSLAND
Artesian Hospitality Pty Ltd v Tsuen Fung Holdings Pty Ltd  QSC 288
ARTESIAN HOSPITALITY PTY LTD
ACN 623 276 184
TSUEN FUNG HOLDINGS PTY LTD
ACN 106 616 031
BS 10306 of 2021
Supreme Court at Brisbane
17 November 2021
8 October 2021
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – FORMATION OF CONTRACTUAL RELATIONS – AGREEMENTS CONTEMPLATING EXECUTION OF FORMAL DOCUMENT – WHERE CONCLUDED CONTRACT – where the parties executed a Heads of Agreement requiring them to use reasonable endeavours to proceed to execute a lease on the basis of the terms set out in the Heads of Agreement – where the Heads of Agreement came to an end if the parties could not agree a lease in accordance with the Heads of Agreement by a certain date – whether, on its proper construction, the Heads of Agreement was an agreement for lease that left scope only for negotiation regarding the form, but not the substance, of the lease terms, or whether it was merely an agreement to negotiate a lease
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – PERFORMANCE – where the parties were required to use reasonable endeavours to proceed to execute a lease on the basis of terms set out in a Heads of Agreement – where the parties exchanged several drafts of a lease – where the applicant wanted the express inclusion of a certain obligation on the respondent in the lease – where the respondent consistently opposed that express inclusion – where the parties convened a telephone conference to discuss the relevant clause – where the applicant submits that the parties reached agreement on the clause during the telephone conference – where the respondent denies that such agreement occurred – whether the parties satisfied the obligation to use reasonable endeavours – whether the parties agreed on the final terms of the lease – whether the respondent should be ordered to specifically perform the Heads of Agreement by entering into the lease which the applicant submits was agreed to
Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd (2011) 282 ALR 152;  NSWCA 173, cited
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640;  HCA 7, cited
Expectation Pty Ltd v Pinnacle VRB Ltd  WASCA 160, cited
G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, cited
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104;  HCA 37, cited
R R Ivessa, with D E Fawcett, for the applicant
R J Douglas QC, with J K Meredith, for the respondent
McCullough Robertson Lawyers for the applicant
Ellem Warren Lawyers for the respondent
- By amended originating application, the applicant seeks an order that the respondent specifically perform a heads of agreement dated 1 June 2021 (Agreement) by executing and delivering to the applicant a lease and an incentive deed in the form exhibited to the affidavit of Joel David McAndrew affirmed 6 September 2021 or, alternatively, a lease in a form determined by the Court. Both parties signed the Agreement, but the lease and incentive deed are unsigned draft documents provided by the applicant to the respondent on 18 August 2021.
- By order of Kelly J on 8 September 2021, the proceeding has been brought on for early trial. The evidence-in-chief was by way of affidavit with limited cross‑examination
of four deponents. For the reasons which follow, the application should be dismissed. My primary finding is that the Agreement, which was binding on the parties, was lawfully terminated by the respondent on 1 September 2021.
- Va Duong Moc (Mr Moc) is the registered proprietor of two lots located at 297-299 Brunswick Street, Fortitude Valley (Property). The Property is leased to the respondent until 30 June 2039. The Property was significantly damaged by fire in 2020 and has since been unoccupied. Until recently, part of the Property comprising some of the ground floor and the first floor (Premises) was sublet by the respondent to NHJ Enterprises (Aust) Pty Ltd (NHJ).
- Tich Hin Moc, known as Jac Moc, is a son of Mr Moc. Mr Moc authorised Jac Moc to act on behalf of the respondent in negotiating with the applicant. Ellem Warren Lawyers acted for the respondent, initially through Ashleigh Boyce and, subsequently, through David Carrick and Chelsea Lee.
- Matthew Keegan is the managing director, sole director, company secretary and sole shareholder of the applicant. The applicant is part of the Artesian Hospitality Group, which operates four restaurants and four clubs. Joel McAndrew, a solicitor, is a director of McAndrew Law and is contracted to act as the applicant’s general counsel.
- On 19 May 2021, Mr Keegan contacted Jac Moc by text message, introducing himself and enquiring about leasing the Premises. Jac Moc emailed Mr Keegan a copy of the lease between the respondent and NHJ.
- On 25 May 2021, Jac Moc met Mr Keegan at the Premises. Others in attendance at this meeting included Jac Moc’s brother, Dich Hin Moc, who is known as James Moc. The Premises had been largely cleared of debris but remained a damaged shell as a result of the fire, with no internal walls except for the brick-built toilet block. Mr Keegan accepts that, during this meeting, Jac Moc informed him that the tenancy downstairs was linked by one lease with the upstairs part of the Premises and that any lease would therefore be for both the downstairs and upstairs sections. Jac Moc expressed his preference that the Premises operate as a nightclub. He told Mr Keegan that the respondent’s insurer would return the Premises to “what it was” (meaning its pre-fire state) and offered to introduce Mr Keegan to the builder. Mr Keegan stated that he would submit an offer but that he would need 30 days for due diligence and that, if he was happy, he would proceed.
- On 26 May 2021, Mr Keegan emailed Jac Moc a letter of offer to lease the Premises. The letter was headed “Without Prejudice and Subject to Lessee Final Approval”. The letter of offer contained the following paragraph:
“The information contained in this Lease Proposal is not a binding Lease between the Lessor and the Lessee. The Lessee reserves the right to withdraw from and terminate negotiations at any time prior to execution of formal Lease documents by both the Lessor and the Lessee and satisfaction of the other requirements (e.g. payment of the deposit, provision of certificates of currency for insurance and the bank guarantee).”
- On 27 May 2021, Jac Moc had a telephone conversation with Mr Keegan clarifying the rent payable if the lessee exercised its option. This resulted in Mr Keegan emailing an updated offer. On the same day, Jac Moc emailed Mr Keegan a copy of the scope of works being completed through insurance. The remediation work builder was a company named Realm. The applicant had a project team for the fit-out of the Premises, and the scope of works was used for a meeting between the project team and Realm regarding potential synergies with the applicant’s fit-out plans. This was confirmed in an email by Mr Keegan on 27 May 2021.
- On 28 May 2021, Jac Moc emailed Mr Keegan the first draft of the Agreement. Clause 27 expressly stated that it was non-binding:
“a. The terms contained in this Agreement are not binding on the Lessor, Parent Company and Lessee.
b. All parties reserve the right to withdraw from negotiations and terminate this Agreement at any time prior to all of the following being completed:
i. the execution of the lease by both the Lessor and the Lessee;
ii. the Lessee providing the Deposit and Bank Guarantee; and
iii. the Lessee providing the Certificates of Currency under clause 21.
c. The Lessor may terminate this Agreement within 60 days if it elects not to terminate the existing lease of the Premises.”
- The first draft of the Agreement contained the usual clauses one would expect for a lease, including a commencement date (cl 8), expiry date (cl 9), term of the lease (cl 10), rental (cl 13) and rent review (cl 14) together with clauses dealing with deposit (cl 19), bank guarantee (cl 20), insurance (cl 21), signage (cl 23), and repair and maintenance (cl 24). The draft contained a due diligence clause (cl 26), making the lease conditional upon a 30-day due diligence period commencing on the date the last party executed the Agreement.
- The due diligence was to permit the applicant to satisfy itself of the condition of the building and its equipment, as well as satisfaction of any requirements for town planning, building compliance (including fire, health and safety) and any other condition relating to the ability to construct and operate a venue for the “Permitted Use”. Clause 6 defined “Permitted Use” as “Bar/nightclub (primary use) and restaurant (ancillary use)”. Clause 15, which assumed considerable importance in the parties’ subsequent negotiations, defined “Capital Works”.
- On 1 June 2021, Mr Keegan sent an email to Jac Moc, attaching a marked‑up draft and stating:
“Please see attached the agreement our markups. Note that relevantly:
- We have made the Agreement binding around the core terms and the Due Diligence period. This is important to us, as we’ll be spending significant time and money upfront to evaluate the tenancy and the project in the anticipation that (all things going well) we move forward. Accordingly, we need to have comfort around exclusivity and that we will be moving forward to a Lease after Termination.
- To reflect the fact that we are taking things seriously, outside of the time and money we’ll be spending internally, we have volunteered to pay 50% of the deposit as a gesture of good faith and to settle the Due Diligence period prior to the Lease being drawn for us.
- Relevantly, the marked-up draft of the Agreement:
- (a)changed cl 19 to make 50 per cent of the deposit payable once the Agreement was signed and the termination of the prior tenancy with NHJ was confirmed;
- (b)changed the heading of cl 27 from “Agreement not Binding” to “Nature of Agreement”; and
- (c)replaced the original wording of cl 27 (set out at  above) with the following:
“(a) Provided the Lessee satisfies itself during the Due Diligence period, and does not wish to terminate this Agreement, the terms in this Agreement will form the basis upon which, using reasonable endeavours, the parties will proceed to execute a Lease.
(b) The Lessor must notify with the Lessee within 14 days of executing this Agreement if it is not able to terminate the existing lease over the Premises. If no lease is able to be agreed pursuant to this Agreement within 30 days after completion of the Due Diligence Period then the Agreement will come to an end.”
- On 1 June 2021, the applicant and the respondent executed the Agreement. Clause 2 provides that the lessee will be a subsidiary of the applicant, with its trading name and contact details to be confirmed once the lessee is registered. The permitted use in cl 6 is unchanged. The commencement date is 14 June 2021 and the expiry date is 13 June 2026. Clause 11 provides for three five-year options. Clause 13 deals with annual rent, which is payable monthly in advance, and cl 14 provides for rent review.
- Clause 15 deals with capital works:
“The Lessor will, or provide sufficient payment to the Lessee to:
a. return the Premises to a ‘warm shell’;
b. repair all fire damage, including (but not limited to) structural walls, floors and roofs and connections between premises;
c. installation of water, waste and other services; and
d. any other capital services ordinarily required and supplied for the Permitted Use.”
- The Agreement does not define the term “warm shell”.
- Mr Keegan gave oral evidence that, when he uses the term “warm shell”, he refers to premises that have walls and basic services that are able to be terminated in a tenancy and then picked up and run by that tenancy. This would include services such as water, basic waste and electrical. This is to be contrasted with a “cold shell”, which would not have any of those services inside the tenancy. He further explained that a “warm shell” refers to the fact that the tenant obtains electrical, basic water, fire and waste services run to the tenancy so that the tenant can pick up those items and commence a fit-out. This explanation was consistent with paragraph 9(b) of Mr Keegan’s second affidavit.
- In cross-examination, Mr Keegan went further. He said that, based on his experience, for premises to qualify as a “warm shell”, the tenant would have to receive a “certificate of occupancy”. Mr Keegan accepted that cl 15 of the Agreement does not contain express words requiring a certificate of occupancy.
- When the Agreement was executed by the parties on 1 June 2021, the existing lease with NHJ was still on foot.
- On 2 June 2021, the applicant paid the first half of the deposit required under cl 19 of the Agreement.
- On 15 June 2021, the respondent notified the applicant that NHJ’s lease had been surrendered.
- On 21 June 2021, Artesian Operations 2 Pty Ltd, which was the proposed lessee, was incorporated.
- On 24 June 2021, the respondent’s lawyers sent a draft lease to Mr McAndrew.
- Pursuant to cl 26(a) of the Agreement, the initial 30-day due diligence period was to expire on 1 July 2021. However, the expiry date was extended on 30 June, 9 July, 15 July and 21 July 2021, and the due diligence period ultimately expired on 28 July 2021.
- On 21 July 2021, Mr McAndrew sent an email to the respondent in which he:
- (a)attached an amended draft of the lease; and
- (b)noted: “… it seems there are quite a few fundamental items yet to be agreed. … Without limitation, it is essential that the shell tenancy being provided is compliant for the Permitted Use, including fire obligations.”.
- On 28 July 2021, at Mr Keegan’s initiative, Jac Moc had a telephone conversation with Mr Keegan. They discussed cl 15 of the Agreement, the capital works clause. According to Mr Keegan, he said words to the effect that:
- (a)the applicant had been having difficulty in agreeing some simple terms of the lease with the respondent’s lawyers, but most notably the capital works clause;
- (b)for simplicity, the capital works clause in the Agreement could be included in its entirety into the lease; and
- (c)so both parties understood the extent of the base remedial works (that is, the works to bring the property back to a warm, compliant shell), the parties could insert some additional wording in the lease to clarify the respondent’s obligation to provide a certificate of occupancy (from a certifier) that met the requirements for a nightclub use.
- Jac Moc’s recollection of the conversation is slightly different, but he accepts that he agreed to the capital works clause in the lease containing a requirement for a certificate of occupancy. This was confirmed in a subsequent text message from Jac Moc to Mr Keegan, which stated:
“Matt further to our phone call this afternoon. We are agreeable to certifier issuing certificates for base works to match a club [sic] requirements”
- On the same day, the applicant wrote to the respondent, confirming that the due diligence condition was satisfied.
- I find that, as at 28 July 2021, the applicant and the respondent had agreed, at least on a preliminary basis, that the lease would contain a clause which incorporated cl 15 of the Agreement, with additional wording stating that the respondent had an obligation to provide a certificate of occupancy from a certifier that met the requirements for a nightclub use.
- Prior to 28 July 2021, the parties’ solicitors had been exchanging drafts of the lease. The capital works definition was contained in cl 1.2(h). The applicant’s version proposed on 9 July 2021 included additional words to those contained in cl 15 of the Agreement, namely “install grease trap, fire, electrical … and providing the Tenant with evidence from a certifier that the Premises can be lawfully used for the Permitted Use”. The respondent’s version of 16 July 2021 excluded those additional words.
- On 4 August 2021, Ms Lee and Mr Carrick attended a Microsoft Teams meeting with Mr Keegan and Mr McAndrew. A number of clauses of the draft lease were discussed, including the definition of capital works. Ms Lee typed a file note during this meeting which relevantly reads: “Capital works Definition – will be a warm shell, empty premises, they need a grease trap, fire and electrical”. The note concludes:
“We will go to client and let them know what happens. If there’s anything materially outstanding we will do a call with Jac on it. Want to get it squared away by the end of this week.”
- The applicant chose not to cross-examine Ms Lee, and neither Mr McAndrew nor Mr Keegan dispute the accuracy of Ms Lee’s note, nor do they dispute that it was stated during the meeting that the applicant would require, as part of the services, a grease trap, fire and electrical. Mr Keegan accepted in cross-examination that this requirement was not expressly included in the wording of cl 15. He explained why the additional words “grease trap, fire and electrical” were required by the applicant:
“There was no reason to include those words, was there, given what you’d agreed in clause 15 and given that you had garnered a certification agreement with Mr Moc; do you agree?--- I would agree. I think they are already covered. However, we were having difficulty with the other side understanding specifically what we wanted to be installed, obviously, so we specified exactly what services were required for the permitted use.”
- On 11 August 2021, Ms Lee emailed Mr McAndrew and Mr Keegan, stating:
“We are instructed that you spoke to Jac on Monday and are in agreement on the terms of the lease. Please find attached the latest version of the lease for your review.”
- The attached version of the lease defined capital works to mean:
“the work to return the Premises to a ‘warm shell’, repair all fire damage to the Premises and the Building, install water, waste and other services, and any other capital services, other than a grease trap, to but not inside the premises ordinarily required and supplied for the Permitted Use and providing the Tenant with evidence from a certifier that the Premises can be lawfully used for the Permitted Use.”
- The comment column for the definition states:
“Our client advises that the tenant is required to take the premises as is after the insurance works. Our client will not do anything further than what is provided by the insurer.”
- On 17 August 2021, Ms Lee emailed Mr Keegan, attaching a draft of the incentive deed. The parties had agreed that the incentives offered in cl 16 of the Agreement should be the subject of a separate deed so that the incentives offered would not be stated in the lease which was to be registered.
- On 18 August 2021, Mr McAndrew sent an email to the respondent’s solicitors in which he:
- (a)attached a draft amended version of the lease and the incentive deed; and
- (b)requested a time to “resolve the last few points … Preferably later today if possible”.
- Mr McAndrew had reinserted the words “grease trap, fire, electrical” into the definition of capital works. The note to that amendment states:
“As per the previous discussion, we require services (include a grease trap) run to the premises. We cannot lawfully get them to the premises and this is entirely standard.”
- Mr McAndrew accepted that the reference to the “previous discussion” was probably to the meeting of 4 August 2021. He also accepted that the requirement for a grease trap, fire and electrical added to the definition of capital works, over and above that which was contained in cl 15. He believed, however, that the effect was the same:
“I believe the wording was clarified and improved as is something often when you do go from a Heads of Agreement to the formal document. It is expanding and clarifying; that’s obviously why you reduce it to terms and then expand, and that’s – that’s what we were doing. So I don’t believe the effect or the obligations were any different by the clause that was in the lease that we had put forward.”
- Clause 1.2(h) of the draft lease exchanged on 18 August 2021 was, however, different to cl 15 of the Agreement because Mr Keegan had agreed with Jac Moc that the respondent would be responsible for providing evidence from a certifier that the Premises could be lawfully used for the permitted use. Further, by inserting the requirement for the respondent to install a grease trap, fire and electrical, it was clarified that the obligation and cost fell to the respondent and not to the lessee. Mr McAndrew’s evidence, however, was to the effect that the lease could otherwise have been agreed even without those words:
“So the lease and the wording that was in the Heads of Agreement was perfectly acceptable, and had it – enough detail that we could have relied on that. We were merely trying to improve the drafting to make it very clear to the respondent what their obligations were, so that we would avoid any argument. We were still confident that it was already encapsulated by the drafting in the Heads of Agreement.”
- Mr Keegan’s evidence was to similar effect:
“You knew---?--- However---
---at that time that Mr McAndrew, on instructions, was pressing a form of draft lease which included an obligation by the respondent that – to the effect that it would install grease trap, fire and electrical in the premises as part of the capital works?--- Yes, that’s correct.
And that was on your express instructions?--- It was not on my express instructions.
It was a matter that you believed ought to be undertaken?--- It was a matter Mr McAndrew wanted to specify for the abundance of clarity.
And you were content with that?--- Yes.
You thought it was important?--- I thought it was prudent.”
- On 19 August 2021, a telephone conference was conducted in an attempt to reach agreement. According to Mr Carrick, the following matters still remained to be agreed in relation to the draft lease provided on 18 August:
“a. Clause 1.2(h) – the definition of ‘Capital Works’;
b. Clauses 4.3 – the parties respective fire safety obligations;
c. Clause 4.5(a) – the tenant’s conduct and use of the premises;
d. Clause 5.5(a) – the addition of the words ‘acting reasonably’;
e. Clause 5.6(a)(i) – the location of signage to the exterior of the premises to be included in annexure A;
f. Clauses 10.1(e) and (f) – reinstatement of the premises at the end of the lease.”
- The telephone conference was attended by Jac Moc, Mr Carrick and Ms Lee for the respondent, and Mr McAndrew for the applicant. Mr Keegan was unable to attend. Mr McAndrew was driving during the call and did not make a file note. Ms Lee, however, did make a file note of the meeting. The applicant contends that the parties agreed the terms of the lease during this telephone conference on 19 August 2021. The respondent rejects that contention. I consider the evidence relevant to this meeting below. It is sufficient to note at this stage that, during this call, Jac Moc stated that he wished to make enquiries as to how much a grease trap would cost.
- On 20 August 2021, Jac Moc met Mr Moc and James Moc. Jac Moc told his father and brother that grease traps had previously been installed in other tenancies at the Property, costing approximately $45,000 and $80,000, respectively. James Moc informed Jac Moc that the respondent did not have the money to pay for the works the applicant required. The three of them met again a few days later where James Moc reiterated that the respondent could not do anything about installing a grease trap because it did not have any money to do so, and the respondent was not prepared to take the risk of having to meet that cost.
- For the purposes of cl 27(b) of the Agreement, the 30-day period after the extended due diligence period expired on 27 August 2021.
- Jac Moc had a third meeting with his father and brother on a date some time prior to 31 August 2021. His father instructed him to withdraw from the lease negotiations because of the potential costs associated with capital works, including the installation of a grease trap.
- On 26 August 2021, and then again on 31 August 2021, Mr McAndrew emailed the respondent’s solicitors enquiring as to the possibility of signing the lease. On the latter date, Mr Keegan sent a text message to Jac Moc stating, “Just wanting to see where your lawyers are at with the final version so we can sign per the agreements on the call last week”. Jac Moc replied, providing an update stating that the respondent was obtaining quotes for the cost of fire and electrical works and observing that, “We need to know this cost before we can proceed”.
- On 31 August 2021, Jac Moc obtained a further copy of the insurance remediation scope of works. He reviewed the scope of works to determine what extra work, beyond that which was covered by insurance, the applicant required the respondent to perform. Following this review, Jac Moc agreed with his father that the lease negotiations should be terminated.
- On 1 September 2021, the respondent’s solicitors emailed the applicant stating:
“Our client instructs that it considers the Heads of Agreement and any lease negotiations which have occurred between Tsuen Fung Holdings and Artesian Hospitality have ended. As the terms you requested for the lease differed greatly from those originally agreed upon, our client is not willing to start further negotiations to enter into a lease.
Please provide your bank account details so that our client may return the deposit to you.”
- On 1 September 2021, during a telephone conversation, Mr Keegan asked Jac Moc why there had been delay on the respondent’s side in responding to the applicant’s request for the final version of the lease. Jac Moc, according to Mr Keegan, said words to the effect that:
- (a)he had been making enquiries regarding the insurance scope of works and to ascertain what the cost would be in relation to the capital works that the applicant had requested; and
- (b)his family believed there was too much risk in accepting the capital works requirements to bring the Property to a condition that was fit for occupation by the applicant, and they simply wanted to end the agreement and cease negotiations.
- During this conversation, Mr Keegan referred to the significant cost (approximately $64,000) that the applicant had incurred in carrying out due diligence and progressing the fit-out plans. Jac Moc responded with words to the effect:
- (a)that the respondent or entities associated with it had other leases where he did not have to do any capital works and that was what he thought should have been the case here;
- (b)that he had spoken with the respondent bank, who had indicated they would not provide any additional financing; and
- (c)“what if I have found someone else who is willing to take the lease on those conditions?”
- Mr Keegan responded with words to the effect that he was aware that the respondent had been speaking with other potential tenants. By cl 26 of the Agreement, the respondent acknowledged that the applicant was spending significant time and money in conducting due diligence and agreed that, during the due diligence period, it would deal exclusively with the applicant in relation to the leasing of the Premises. There is no evidence, however, that the respondent was negotiating with any other potential lessee during the extended due diligence period.
- Jac Moc’s recollection of this telephone conversation is that he told Mr Keegan that the family was not prepared to incur further costs improving the Premises beyond that which the insurance work covered. He reiterated that the respondent would provide the certificate of occupancy but, because the applicant wanted to change the lease too much, including the scope of capital works, the respondent was no longer prepared to continue with the lease with the applicant.
- There are no pleadings. In its written submissions, the applicant identifies the following three issues:
- (a)Is the Agreement binding on the parties?
- (b)If so, did the parties agree the terms of a lease in the teleconference on 19 August 2021?
- (c)If (a) is satisfied but (b) is not, is the respondent prevented from relying on a failure of a condition that the parties agree the terms of the lease by 30 August 2021 because its failure to agree was a breach of the Agreement?
- The respondent identifies eight issues, three of which generally align with the three issues identified by the applicant:
- (a)Was the contractual character of the 1 June HOA that of an agreement to lease, or an agreement to negotiate/agree an agreement to lease?
- (b)Were the final terms of the draft lease and incentive deed exchanged on 18 August 2021 agreed to by the parties during the telephone conference on 19 August 2021?
- (c)If ‘no’ to (b), after the telephone conference on 19 August 2021, and before 27 August 2021, did the respondent engage in conduct, in breach of cl 27 of the Agreement, which caused there to be no agreement as to the terms of a lease by 27 August 2021, and thereby disentitling termination by the respondent on 1 September 2021?
- The respondent seeks to agitate five additional or alternative issues to those identified by the applicant, including whether the Agreement is unenforceable because it is void for uncertainty or, in the alternative, whether any agreement to lease made on 19 August 2021 is unenforceable for want of a memorandum in writing as required by the Property Law Act 1974 (Qld). Further issues identified by the respondent include whether the applicant engaged in repudiatory conduct and whether an order for specific performance ought to be refused on discretionary grounds, including whether the applicant is ready, willing and able to discharge its obligations under the Agreement. As my primary finding is that the Agreement constituted a binding agreement which was lawfully terminated by the respondent on 1 September 2021, it is unnecessary to consider the additional or alternative issues identified by the respondent.
Issue one – Was the contractual character of the Agreement that of an agreement to lease, or an agreement to negotiate/agree an agreement to lease?
- I have adopted the respondent’s characterisation of the first issue because there is no real dispute between the parties that they were bound by the Agreement. In deciding whether an agreement is binding, “the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances”. As correctly submitted by the applicant, the Agreement was formally executed by both parties in accordance with s 127 of the Corporations Act 2001 (Cth). The presence of cl 26 (which made the lease conditional upon a 30-day due diligence period and gave the lessee a right to terminate the Agreement if it was not satisfied the Premises were suitable for a nightclub/restaurant) would be unnecessary if the Agreement was not a binding contract. Additionally, while cl 27 of the first draft of the Agreement expressly provided that it was not binding on the parties and that the parties were free to withdraw from negotiations, cl 27 was redrafted as outlined at (b) and (c) above.
- The real issue is what was actually agreed between the parties. This issue is resolved upon a proper construction of the Agreement. In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd, the plurality stated:
“In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.”
- Much of the parties’ submissions centred around the proper construction of cl 27(a) and (b). The applicant submits that cl 27(b) should be construed:
“… as a fall back contingency that while the parties remain bound by the Agreement, if for some reason there is an obstacle to those terms being transposed into a registrable lease and the parties, both using reasonable endeavours, are unable to overcome such by agreement, then the Agreement may be brought to an end.”
- The applicant contends that the right of termination provided in the second sentence of cl 27(b):
“was not triggered if no lease document was entered into by 30 August 2021 but rather ‘if no lease is able to be agreed’ by that date – accordingly there is no requirement for a lease document to be signed and a partly written partly oral agreement as to the terms of a lease would suffice”.
- The respondent’s construction of cl 27 is as follows:
“(a) By clause 27(b), second sentence – in the event of due diligence being satisfied – their agreement or concurrence as to the final terms of the lease be negotiated within 30 days, and if successfully agreed then executed in registerable form.
(b) By clause 27(a), the proposed lease terms – stipulated in the first three pages of the 1 June HOA – be the starting point of the negotiated agreement of the lease terms for execution (‘the terms … will form the basis upon which the parties, using reasonable endeavours, will proceed to execute a lease’).”
- Clause 27 must be construed in the context of the Agreement as a whole. The Agreement was entered into in circumstances where the Premises were fire damaged. For the Premises to be suitable for the specified permitted use (that is, a bar/nightclub and restaurant), it was necessary that capital works be undertaken. This is reflected in cl 15, which is set out in  above. I accept, as submitted by the respondent, that:
“[t]he ‘Capital Works’ to be undertaken were expressed in language of generality, namely returning the premises to a ‘warm shell’ (without definition thereof), installation of ‘water, waste and other services’ (emphasis added) and ‘services ordinarily required and supplied for the Permitted Use’ (emphasis added).”
- Clause 19 provided that 50 per cent of the deposit would be paid on the later date of signing the Agreement and confirmation that the prior lease was terminated. This was to be paid as security for the lessee entering into the lease. The remaining 50 per cent was to be paid upon the lessee signing the lease. The initial 50 per cent of the deposit would be forfeited to the lessor if the lessee elected not to enter into the lease after the due diligence period. No such election was made and the initial payment of 50 per cent of the deposit was not forfeited.
- Clause 26 deals with due diligence:
“(a) The lease is conditional upon a 30 day Due Diligence Period, commencing on the date the last party executions [sic] this Agreement, for the Parent Company and/or Lessee to conduct enquiries to satisfy itself of the condition of the building and its equipment, as well as satisfaction of any requirements for town planning, building compliance (including fire, health and safety) and any other condition relating to the ability to construct and/or operate a venue for the Permitted Use.
(b) The Landlord accepts that the Lessee is spending significant time and resources to conduct the Due Diligence and, in return, during the Due Diligence Period, the Lessor is to deal exclusively with the Parent Company and the Lessee in relation to the leasing of the Premises.
(c) During the Due Diligence Period the Lessee may terminate this Agreement where it is not able to satisfy itself that the premises is [sic] suitable to construct or operate the proposed business.”
- By cl 26(a), it is the lease (not the Agreement) which is made conditional upon the 30-day due diligence period. The due diligence period permitted the lessee to conduct enquiries to satisfy itself of various matters, including the condition of the building and equipment, as well as various requirements relating to the ability to construct and/or operate a venue for the permitted use. The effect of cl 26 is that the lessee was entitled to terminate the Agreement if it was not satisfied of those matters. The only consequence of terminating in those circumstances was that half of the deposit would be forfeited.
- Clause 27(a) proceeds on the premise that the lessee has satisfied itself in accordance with cl 26(a) and does not wish to terminate the Agreement. On that premise, the terms in the Agreement, namely clauses 1 to 26, would form the basis upon which, using reasonable endeavours, the parties would proceed to execute a lease. Clause 27(a) does not, in terms, provide that clauses 1 to 26 of the Agreement constituted the terms of the lease. Likewise, it does not, in terms, require the parties to enter into a lease upon the terms of the Agreement once the due diligence condition was satisfied. Rather, it requires them to use reasonable endeavours to proceed to execute a lease, the basis of which would be the terms in the Agreement.
- The first sentence of cl 27(b) requires the lessor to notify the lessee within 14 days of executing the Agreement if it is not able to terminate the existing lease over the Premises. The Agreement, however, is silent as to the consequences of such notification being given. One consequence would be that the first instalment of the deposit would not become payable. Pursuant to cl 12, another consequence would be that there could be no handover date, which was defined as the day following the later of:
- (a)the parties executing the Agreement; and
- (b)the existing lease being terminated.
- The second sentence of cl 27(b) reads:
“If no lease is able to be agreed pursuant to this Agreement within 30 days after completion of the Due Diligence Period then the Agreement will come to an end.”
- The lease to be agreed is one “pursuant to this Agreement”. The words “if no lease is able to be agreed pursuant to this Agreement” encompass the circumstances contemplated by the first sentence of cl 27(b); that is, where notification is given by the lessor that it is not able to terminate the existing lease. However, the operation of the second sentence of cl 27(b) is not limited to those circumstances. As a matter of construction, there are several circumstances in which the parties may be unable to agree a lease pursuant to the Agreement. Another circumstance in which a lease may be unable to be agreed pursuant to the Agreement is where the parties, despite using reasonable endeavours, are unable to proceed to execute a lease using the terms in the Agreement as the basis for doing so, contrary to cl 27(a). In such circumstances, the Agreement would come to an end 30 days after completion of the due diligence period, which was 27 August 2021.
- The respondent submits that the effect of the applicant’s construction of cl 27 is that, even if no lease is able to be agreed, the parties would nonetheless be bound to proceed to execute a lease solely on the terms stipulated in the Agreement. That construction, according to the respondent, gives the second sentence of cl 27(b) no work to do. The applicant, however, submits that its construction does not render cl 27 redundant:
“… the Applicant’s position is that clause 27 is reconcilable with the Agreement constituting an agreement for lease in that it deals with a situation where, despite having agreed on the terms of the sublease and their reasonable endeavours to reduce it to a formal document, the parties cannot agree upon the form of the sublease’s terms.”
- On both parties’ constructions of cl 27, it is accepted that the parties contemplated further negotiations to execute a lease based on the terms of the Agreement. I do not accept that cl 27 limited those negotiations merely to the form of the lease terms. While the terms of the Agreement formed the basis upon which the parties would proceed to execute a lease, cl 27(b) still contemplated that the parties would negotiate to agree a lease. The wording of cl 27(a) and (b) does not expressly or impliedly limit such negotiation to the form, as opposed to the content, of the lease terms.
- This construction is consistent with how the parties actually conducted themselves. As is evident from the relevant background set out above, the parties commenced negotiating the terms of the lease as early as 24 June 2021 (prior to the expiry of the due diligence period) and continued to negotiate through to 31 August 2021.
Issue two – Did the parties agree the terms of a lease in the teleconference on 19 August 2021?
- The amended originating application seeks an order that the respondent specifically perform the Agreement by executing and delivering to the applicant the lease and the incentive deed in the form of the drafts sent by Mr McAndrew on 18 August 2021. That relief may only be granted if the terms of the lease and incentive deed were agreed between the parties on 19 August 2021. Before I consider that question, it is convenient to deal with the alternative relief sought by the applicant, namely that the respondent execute and deliver a lease in a form determined by the Court. This alternative relief is sought on the following basis:
“… if the Court considers that any part of the draft [lease] does not accord with the terms of the Agreement the Court is free to order specific performance by requiring the Respondent to deliver an executed [lease] with any deletions or modifications that the Court considers necessary.”
- The effect of that submission is that, if the Court is of the view that, for example, the applicant’s requirement for the respondent to install a grease trap was not agreed, the Court may otherwise fashion a lease that does not contain such a requirement.
- I have already found that, as at 28 July 2021, the applicant and respondent had agreed, at least on a preliminary basis, that the lease would contain a clause which incorporated cl 15 of the Agreement, with additional wording stating that the respondent had an obligation to provide a certificate of occupancy. The difficulty is that the applicant thereafter continued to require the inclusion of words additional to those which had been agreed on 28 July 2021. As outlined at  above, during the Microsoft Teams conference on 4 August 2021, the applicant required the definition of capital works to include a requirement that the respondent provide a grease trap, fire and electrical. The respondent’s draft of the lease provided to the applicant on 11 August 2021 deleted this requirement. The requirement was subsequently reinserted in the applicant’s drafts provided by Mr McAndrew on 18 August 2021.
- In circumstances where the parties continued to negotiate the terms of the lease (including the definition of capital works) after 28 July 2021, the Court should not adopt a definition of capital works that had not been negotiated and finally agreed by the parties. That is because any order for specific performance based on a preliminary agreement made on 28 July 2021 fails to give effect to what the parties agreed in cl 27(b) of the Agreement. If no lease was able to be agreed pursuant to the Agreement by 27 August 2021, then the Agreement would come to an end. This created a right in both parties to terminate the Agreement if a lease could not be agreed. The respondent exercised that right on 1 September 2021. The alternative relief sought by the applicant seeks to circumvent both the operation of cl 27(b) and ignores the fact that, after 28 July 2021, the parties continued to negotiate the terms of the lease, including the definition of capital works. It follows that, if specific performance was to be ordered, it may only be done on the basis that the terms of the lease and the incentive deed provided by Mr McAndrew to the respondent on 18 August 2021 were agreed by the parties on 19 August 2021. For the reasons which follow, I find that no such agreement was reached.
- At 9.03 am on 19 August 2021, Mr McAndrew sent an email to Mr Carrick, stating that, at 11.30 am, Mr McAndrew would be in the car on the way to a 12.00 pm meeting. The teleconference commenced at 11.30 am and was conducted on Microsoft Teams. At one point during the teleconference, Mr McAndrew’s voice was breaking up and he expressed that he was having difficulty hearing the respondent’s representatives. He left the meeting and re-joined shortly after. Ms Lee extracted the teleconference data from Microsoft Teams. The teleconference was open from 11.31 am until 11.50 am. Mr McAndrew attended from 11.36 am to 11.45 am and then from 11.46 am to 11.50 am. The gap between Mr McAndrew’s attendance was one minute and three seconds. Jac Moc attended the teleconference from 11.39 am until 11.50 am.
- In his first affidavit, Mr McAndrew asserted that during this teleconference:
“(a) the parties agreed to the terms of a [lease] based on the terms of the Draft [Lease] with the following changes agreed to in the teleconference:
- (i)the Respondent was to provide a lease plan depicting the Premises that the parties had agreed on;
- (ii)the definition of ‘Capital Works’ was to be amended to include the words ‘grease trap, fire, electrical’;
- (iii)clause 4.3 was to be amended to reflect that:
(A) the Respondent would be responsible for ensuring that the Premises and the Building (as defined in the Draft [Lease]) at all times comply with all fire safety laws and regulations, having regard to the Permitted Use (as defined in the Draft [Lease]); and
(B) the Applicant would be required to comply with any fire safety laws and regulations arising solely from the Applicant’s use of the Premises; and
- (iv)the words ‘acting reasonably’ were to be deleted from clause 5.5.”
- Mr McAndrew recalled that Jac Moc stated that the respondent intended to obtain:
- (a)clarification on the works being carried out by its insurer in repairing fire damage to the Premises; and
- (b)quotes for the completion of the capital works to the extent that they were not being carried out by the insurer, in order for the respondent to comply with the agreed lease terms.
- Ms Lee does not agree with Mr McAndrew’s account of events during the teleconference. As I have already observed, Ms Lee, unlike Mr McAndrew, made a file note of the discussions. Ms Lee took handwritten notes but subsequently had these notes typed. The file note reads:
- cl 1.2(h) – Joel stated that they required the grease trap installed as part of the Capital Works. Jac said he will look into what services will be provided after insurance works and see how much a grease trap will cost. Jac said there is already one downstairs. Jac said he needs to discuss any additional costs with the family since the family does not want to spend any money on the premises.
- cl 4.3 – Joel would like the base fire obligations provided by Jac. Artesian will pay for anything additional. Joel argues fire obligations are broader than just the premises but relate to the whole building. Joel said Artesian are having issues with fire obligations at Cali right now (I assume Cali Beach Club). Again Jac said he would have to check with the family and see what the additional costs are.
- cl 5.5(a) – We all agreed to delete Joel’s addition since it was redundant.
- Jac and Joel just agreed that they would like to keep things simple in the Deed. Did not discuss any specific clauses.
Jac said he needs 3 days then he will come back to Artesian.”
- Mr Carrick also disagrees with Mr McAndrew’s account of the teleconference. Further to Ms Lee’s file note, Mr Carrick recalls that:
“a. Mr McAndrew said he was driving to another meeting;
b. Jac Moc attended the teleconference a few minutes after Ms Lee, Mr McAndrew and I had entered;
c. Mr McAndrew dropped off the Teleconference and had to re‑enter;
d. the only matter which was agreed between Mr McAndrew and Jac Moc was that the words ‘actively reasonably’ were not necessary to not be included in clause 5.5(a) of the proposed lease as that clause already provided that the landlord ‘cannot unreasonably’ act.”
- Mr Carrick further recalls that Mr McAndrew said words to the effect that the applicant required the grease trap, fire and electrical to be included in the capital works because they were the usual works to be included in a premises. He recalls that Jac Moc stated that he needed to speak to the insurer and the builder to find out the costs, because the family needed to know the costs before it could proceed as they did not want to spend any money on the Premises. Jac Moc said he needed a few days to find out the costs. Mr McAndrew said that was okay and they could then move on.
- Mr Carrick also recalls Mr McAndrew stating that the fire obligations were the landlord’s responsibility and that the landlord had to install and maintain the fire system. Mr Carrick responded, stating that it was a commercial lease and the landlord could require the tenant to be responsible for the fire obligations. Mr McAndrew stated that the applicant was having issues with fire obligations with another one of its businesses. Mr McAndrew further stated that the fire obligations were for the entire building, not just the Premises, and the tenant could not be responsible for the fire obligations of another tenancy. Jac Moc said that the deal was that the insurer would do whatever works and fire safety it had to; that anything else was to be the applicant’s responsibility; and that, again, he would have to check the costs.
- When Mr McAndrew raised the requirement for a grease trap, fire and electrical, Jac Moc’s recollection is that he said words to the effect that it was a sticking point and that he would have to speak to the family because the respondent was not prepared to put any money into the property in excess of what the insurer repaired or replaced, and that was always the deal. Jac Moc further recalls Mr McAndrew stating that the applicant did not want to be stuck with any costs for things like a grease trap, electricity and fire obligations. Jac Moc believes he said words to the effect that it was never the deal that the respondent would pay for a grease trap and that he would need at least three days to investigate the costs.
- In response to this evidence from Mr Carrick and Jac Moc, Mr McAndrew recalls that he said words to the effect that a grease trap and compliance with fire obligations formed part of the capital works that were to be completed by the respondent to comply with its obligations under the Agreement. He further recalls that he said words to the effect that the applicant could not be legally responsible for ensuring compliance with fire safety obligations outside of the Premises. He stated that, as Jac Moc had previously agreed that the respondent would provide certification for the Premises to be operated as a bar/nightclub and restaurant, Mr McAndrew expected certification would require legal fire compliance of the building. He recalls that Jac Moc said words to the effect that there was a grease trap already at the Premises or the building, and he would investigate this further. According to Mr McAndrew, he responded with words to the effect that having a grease trap already at the Premises or the building would be helpful. After Jac Moc referred to investigating the cost of a grease trap and fire safety, he said words to the effect that he would “come back from there” and then, according to Mr McAndrew, would “get the lease finalised”.
- In oral evidence, Mr McAndrew acknowledged that there were approximately four or five clauses to be discussed during the 19 August teleconference. He accepted that not all of the disputed clauses were, in fact, discussed and that the substance of the discussion concerned the grease trap and fire obligations. He did not accept that Jac Moc’s requirement to investigate the cost meant that no agreement had been reached:
“My understanding of Mr Moc going away to investigate costs was merely for his own knowledge of what the costs were going to be as opposed to what the scope of insurance works were. It wasn’t relating back to any negotiation of the capital works. That definition was already, at worst, in the Heads of Agreement. So my understanding was, he was not coming back to say he agrees or does not agree. It was more he was checking how much it was going to cost on the basis that my interpretation was he didn’t want to sign a document where he’s inadvertently obliged to pay an excessive amount of money that they couldn't afford or didn't understand they had to. So I – that was my understanding of Mr Moc coming back, was not because it was not agreed.”
- While this may have been Mr McAndrew’s understanding, it was not Jac Moc’s recollection. In cross-examination, Jac Moc’s recollection was that he told Mr McAndrew that the inclusion of a grease trap and fire services were “extra costs of what was agreed”. Jac Moc stated that he needed to work out what these costs were and let the family know before they could agree. Jac Moc accepted that he did not say that the grease trap and fire services did not fall within the capital works clause in the Agreement. He did, however, say to Mr McAndrew that the deal had changed and that these costs were not included. When asked if he raised any other issues at the teleconference, Jac Moc responded:
“No. Because that one was the most pressing issue. … That was the deal-breaker, in a sense, for us, to discover more about that works.”
- Apart from Mr McAndrew’s assertion that the terms of the lease were agreed during the teleconference, there is not a substantial difference in the witnesses’ versions of what was discussed. From Ms Lee’s file note, it is apparent that Mr McAndrew stated that the applicant required the grease trap installed as part of the capital works. It may also be accepted that Jac Moc stated that there was already a grease trap downstairs and that he wished to discuss any additional costs with the family since the family did not want to spend any money on the Premises. It is also evident that Mr McAndrew requested that the respondent be responsible for the fire obligations. Ms Lee’s file note records that Jac Moc stated that he would have to check with the family and ascertain the additional costs. The only matter that was clearly agreed at this teleconference was the deletion of the words “acting reasonably” in cl 5.5(a).
- The applicant concedes that there is no evidence of an express statement by the parties at the end of the teleconference that “we have now agreed all the lease terms”. However, it submits that, from the context and content of the discussions, it may be inferred that all the lease terms were agreed at the teleconference. The inference arises, it is submitted, because the teleconference occurred in a context where several drafts had already been exchanged, narrowing the issues in the lease upon which the parties disagreed. I do not accept this submission. The definition of “Capital Works” in cl 15 of the Agreement did not expressly contain any requirement either for a certificate of occupancy or for a grease trap, fire and electrical. On the last day of the expiry of the extended due diligence period, Jac Moc and Mr Keegan agreed to add to the definition of “Capital Works” in cl 15 a requirement for a certificate of occupancy. It was upon the basis of that agreement that notification was given by the applicant that the due diligence condition was satisfied. Despite this, at a meeting on 4 August 2021, the requirement for a grease trap, fire and electrical was raised. This requirement was not reflected in the respondent’s version of the draft lease sent on 11 August 2021. This version expressly excluded a grease trap. Such a requirement found its way back into the applicant’s version sent on 18 August 2021, which was the basis of the discussion at the teleconference on 19 August 2021. In circumstances where Jac Moc had made a concession to Mr Keegan on 28 July 2021, it is understandable why he would have viewed the applicant’s express requirement for a grease trap as constituting an additional cost which required investigation.
- While fire obligations and the grease trap constituted the substance of the discussions at the teleconference on 19 August 2021, there were several other clauses yet to be agreed. I accept the respondent’s submission that, after the teleconference, there remained some significant items of difference between the parties in relation to the final form of any lease and incentive deed. Not all these differences were discussed at the teleconference.
- It cannot be inferred that the terms of the draft lease and incentive deed sent by Mr McAndrew to the respondent on 18 August 2021 were agreed at the teleconference of 19 August 2021.
Issue three – Is the respondent prevented from relying on a failure of a condition that the parties agree the terms of the lease by 27 August 2021 because its failure to agree was a breach of the Agreement?
- As I have already observed, the phrase in cl 27(a) “using reasonable endeavours” refers to the parties proceeding to execute a lease using the terms in the Agreement as a basis for doing so. The Court having found that the parties did not agree the terms of the lease in the teleconference, the applicant submits in the alternative that:
“[t]o the extent that the Respondent refused to agree to the terms of the 18 August Draft [Lease] because of the position it had taken in earlier draft [leases] as to the few terms remaining that had not been agreed prior to the Teleconference, it failed to use reasonable endeavours.”
- According to the applicant:
“[i]t would have been a reasonable endeavour for the parties, in the case of any clause of the draft lease that they could not agree language using the terms of the Agreement as a basis, to simply incorporate the language of the relevant term of the Agreement as a term of the [lease] and then execute the [lease]”.
- The applicant submits that Jac Moc’s evidence demonstrates that, following the 19 August teleconference, the respondent was no longer using any endeavours to execute a lease pursuant to the Agreement.
- The respondent contends that the applicant’s submissions can only be directed at the approximate eight-day period between 19 August and 27 August 2021, which was the extended cl 27(b) termination date. That was, according to the respondent, the last eight days of a contractually approved (after extension) approximate 88-day period from 1 June to 27 August and the 30-day period from 28 July to 27 August. I accept that no complaint can be made of the respondent using reasonable endeavours at least up to 19 August 2021. The respondent secured a termination of the NHJ lease on 15 June 2021. It agreed to four extensions to the due diligence period. On the final day of that due diligence period, Jac Moc agreed with Mr Keegan to amend the definition of capital works to include an obligation on the respondent to provide a certificate of occupancy that met the requirements for a nightclub use. Even prior to the expiry of the extended due diligence period, the parties’ solicitors had exchanged drafts of the lease and the incentive deed. After the expiry of the due diligence period, the respondent forwarded an updated draft lease on 11 August and, on 18 August, agreed to meet and confer with the applicant.
- Subsequent to that meeting, and as outlined at - above, Jac Moc had three meetings with his father and brother to discuss the cost of installing a grease trap. Jac Moc further reviewed the scope of works for the insurance restoration to determine the extent of works that would be paid for by the insurer and what extra work he believed the applicant required the respondent to perform.
- In my view, the course of negotiations between the parties (even after Jac Moc had agreed with Mr Keegan on 28 July to the provision of a certificate of occupancy) shows that the applicant continued to require the respondent to expressly agree to an obligation to install grease trap, fire and electrical. While Mr Keegan and Mr McAndrew may have held a belief or understanding that the original definition of capital works in cl 15 of the Agreement incorporated such requirements, the definition did not contain this express obligation. I do not accept that the respondent failed to use reasonable endeavours to proceed to execute a lease based on the terms in the Agreement.
- It is significant, in my view, that the applicant’s insistence on the respondent having this express obligation continued after the due diligence condition had been satisfied. By cl 26, within the due diligence period, the applicant was to conduct enquiries to satisfy itself of a number of things. These included the condition of the building and its equipment, as well as satisfaction of any requirements for town planning, building compliance (including fire, health and safety) and any other condition relating to the ability to construct and/or operate a venue for the permitted use. Prior to the expiry of the due diligence period, Mr Keegan achieved an agreement with Jac Moc that the respondent would provide a certificate of occupancy. The evidence does not reveal whether the respondent could have obtained such a certificate without installing a grease trap, fire and electrical. Jac Moc, having agreed with Mr Keegan on 28 July, was, however, content to proceed on the basis that the respondent was obliged to obtain a certificate.
- Another circumstance that supports a finding that the applicant insisted that the respondent install a grease trap, fire and electrical is Mr McAndrew’s own assertion that the respondent agreed to such a term during the 19 August teleconference. The applicant’s submission that the respondent failed to use reasonable endeavours to execute a lease based on the terms in the Agreement fails to address the point that the original definition of capital works in cl 15 of the Agreement did not contain either an express obligation for the respondent to obtain a certificate of occupancy, nor to install a grease trap, fire and electrical.
- The obligation to use reasonable endeavours was considered by Bathurst CJ in Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd:
“The expressions ‘best endeavours’ and ‘reasonable endeavours’ generally speaking have been considered by the courts as imposing similar obligations. In Transfield Pty Ltd v Arlo International Ltd, a provision requiring the appellant to use best endeavours in and towards the design, fabrication, installation and selling of the respondent’s pole was described by Mason J as a standard of reasonableness and further as a standard of endeavour which is measured by what is reasonable in the circumstances having regard to the nature, capacity, qualifications and responsibilities of the licensee viewed in light of the particular contract. In the same case Wilson J described it as an obligation to do all that could be reasonably expected having regard to the circumstances of the licensee’s business operation.”
- There was, in my view, nothing unreasonable in the respondent’s refusal to accept an additional obligation which was not expressly stated in cl 15 of the Agreement. A condition requiring a party to use “reasonable endeavours” does not oblige a party to agree to terms sought to be imposed by the other party. Nor does such a condition prohibit a party from acting in its own best interest. As the majority observed in Electricity Generation Corporation v Woodside Energy Ltd:
“… the nature and extent of an obligation imposed in such terms is necessarily conditioned by what is reasonable in the circumstances, which can include circumstances that may affect an obligor’s business. …
… An obligor's freedom to act in its own business interests, in matters to which the agreement relates, is not necessarily foreclosed, or to be sacrificed, by an obligation to use reasonable endeavours to achieve a contractual object.”
- The respondent has not failed to use reasonable endeavours by refusing to agree to an obligation that would potentially have incurred additional costs which was previously not expressly contained in cl 15 of the Agreement.
- The applicant faces a further difficulty in asserting that the respondent breached cl 27(a). There is no evidence that any breach of the respondent’s obligation to use reasonable endeavours to proceed to execute a lease based on the terms of the Agreement caused the Agreement to be wrongfully terminated. The applicant submits that the respondent using reasonable endeavours could have offered to agree and execute a version of the otherwise agreed lease that removed any clause in dispute and replace it with the equivalent clause wording from the Agreement. However, the evidence tends to support the conclusion that the applicant would have insisted on the respondent being expressly obliged to install a grease trap, fire and electrical. The closest the evidence comes to supporting a finding that the applicant would not have insisted on this express obligation is Mr McAndrew’s evidence set out in  above. That evidence, however, is not consistent with the exchange of draft leases in which the requirement for a grease trap was consistently removed by the respondent and subsequently added by the applicant.
- In Expectation Pty Ltd v Pinnacle VRB Ltd, Steytler J (as his Honour then was and with whom Miller J agreed) stated:
“If non-compliance with a contractual obligation is to take away the defaulting party's right to terminate, there must be a direct causal relationship between that non-compliance and the failure to complete the contract, with the onus of proof lying upon the non-defaulting party.”
- Jac Moc left the teleconference on 19 August 2021 having stated that he needed to speak to his family concerning the costs that would be incurred in adopting an express obligation to install a grease trap, fire and electrical. As I have already observed, Jac Moc had three meetings with his family. There is no evidence that, had the respondent refused to agree to the amended definition of “Capital Works”, that the applicant would have been agreeable to proceed on the basis of the preliminary agreement made on 28 July 2021.
- I find that the respondent did not breach the condition to use reasonable endeavours in cl 27(a).
- The amended originating application is dismissed. I will hear the parties as to costs.
 Affidavit of T H Moc sworn 16 September 2021, CD-14, exhibit page 60 (Second Moc Affidavit).
 Second Moc Affidavit, exhibit page 63.
 Second Moc Affidavit, exhibit page 115.
 Second Moc Affidavit, exhibit page 117.
 Second Moc Affidavit, exhibit pages 120-122.
 Affidavit of J D McAndrew affirmed 6 September 2021, CD-3, exhibit pages 5-6 (First McAndrew Affidavit).
 T 1-31, ln 1-10.
 Affidavit of M R Keegan affirmed 27 September 2021, CD-17, paragraph 9(b) (Second Keegan Affidavit).
 T 1-36, ln 28-31.
 T 1-37, ln 36-38.
 First McAndrew Affidavit, exhibit page 31.
 Affidavit of M R Keegan affirmed 6 September 2021, CD-2, paragraph 8 (First Keegan Affidavit).
 First Keegan Affidavit, exhibit page 4.
 Affidavit of C Lee affirmed 6 October 2021, CD-24, exh CL-4 (Fourth Lee Affidavit).
 T 1-42, ln 15-31; T 1-54, ln 20-32.
 T 1-42, ln 42-43.
 T 1-43, ln 13-18.
 First McAndrew Affidavit, exhibit page 44.
 Affidavit of D Carrick affirmed 8 September 2021, CD-10, exhibit page 5 (emphasis added) (First Carrick Affidavit).
 Affidavit of D Carrick affirmed 16 September 2021, CD-15, exhibit page 188 (Second Carrick Affidavit).
 First McAndrew Affidavit, exhibit page 43.
 First McAndrew Affidavit, exhibit page 54.
 T 1-60, ln 29-31.
 T 1-56, ln 45-46.
 T 1-56, ln 15-21.
 T 1-62, ln 3-8.
 T 1-46, ln 46 to T 1-47, ln 13.
 First Carrick Affidavit, paragraphs 9 and 10.
 First Keegan Affidavit, exhibit page 5.
 Affidavit of T H Moc sworn 6 October 2021, CD-26, paragraphs 16-20 (Third Moc Affidavit).
 First McAndrew Affidavit, exhibit page 140.
 First Keegan Affidavit, paragraph 14.
 Applicant’s Submissions, paragraph 2.
 Respondent’s Submissions, paragraph 14.
 T 1-101, ln 39-47.
 G R Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, 634 (McHugh JA), citing Godecke v Kirwan (1973) 129 CLR 629, 638 (Walsh J); Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, 332-334 (Mahoney JA), 337 (McHugh JA). See also, Moffatt Property Development Group Pty Ltd v Hebron Park Pty Ltd  QCA 60,  (Keane JA).
 Applicant’s Submissions, paragraph 43.
 (2015) 256 CLR 104,  (French CJ, Nettle and Gordon JJ).
 Applicant’s Submissions, paragraph 46.
 Applicant’s Submissions, paragraph 53 (emphasis in original).
 Respondent’s Submissions, paragraph 43 (emphasis in original).
 Respondent’s Submissions, paragraph 49(c).
 See  above.
 Respondent’s Submissions, paragraph 51.
 Applicant’s Reply Submissions, paragraph 40 (emphasis in original).
 Applicant’s Submissions, paragraph 41; Respondent’s Submissions, paragraph 44.
 See -.
 Applicant’s Reply Submissions, paragraph 23.
 See  above.
 First McAndrew Affidavit, paragraph 26.
 First McAndrew Affidavit, paragraph 26(c).
 Affidavit of C Lee affirmed 8 September 2021, CD-8, paragraph 5 (First Lee Affidavit).
 First Lee Affidavit, exhibit page 3.
 First Carrick Affidavit, paragraph 12.
 First Carrick Affidavit, paragraph 15.
 Second Carrick Affidavit, paragraph 3(j)-(l).
 Second Carrick Affidavit, paragraph 3(m)-(o).
 Second Carrick Affidavit, paragraph 3(p)-(q).
 Affidavit of T H Moc sworn 8 September 2021, CD-9, paragraph 14(c) (First Moc Affidavit).
 Second Moc Affidavit, paragraph 44(f)-(h).
 Affidavit of J D McAndrew affirmed 5 October 2021, CD-23, paragraph 11 (Third McAndrew Affidavit).
 T 1-55, ln 5-30.
 T 1-55, ln 44-T 1-56, ln 6.
 T 1-77, ln 16.
 T 1-77, ln 15-17.
 T 1-77, ln 21-24.
 T 1-77, ln 46-T 1-78, ln 2.
 Applicant’s Reply Submissions, paragraph 59.
 Applicant’s Reply Submissions, paragraphs 60-61.
 Respondent’s Submissions, paragraph 94.
 Applicant’s Submissions, paragraph 76.
 Applicant’s Submissions, paragraph 78.
 Respondent’s Submissions, paragraph 104.
 (2011) 282 ALR 152,  (citations omitted).
 (2014) 251 CLR 640, - (French CJ, Hayne, Crennan and Kiefel JJ).
  WASCA 160,  (citations omitted).
- Published Case Name:
Artesian Hospitality Pty Ltd v Tsuen Fung Holdings Pty Ltd
- Shortened Case Name:
Artesian Hospitality Pty Ltd v Tsuen Fung Holdings Pty Ltd
 QSC 288
17 Nov 2021