37 York Road Pty Ltd v Reece Australia Pty Limited [2024] NSWSC 1213

Supreme Court New South Wales

Medium Neutral Citation: 37 York Road Pty Ltd v Reece Australia Pty Limited [2024] NSWSC 1213 Hearing dates: 23 September 2024 Date of orders: 27 September 2024 Decision date: 27 September 2024 Jurisdiction: Equity - Technology and Construction List Before: Hammerschlag CJ in Eq Decision: Answer the separate question as follows: on the proper construction of the lease entered into on 1 November 2013, the defendant is obliged to remove the Tenant Works and reinstate the Premises (except for fair wear and tear) by reference to their condition at the commencement of that lease and not to their condition at the commencement of the prior leases between them Catchwords: LEASES AND TENANCIES – Construction and interpretation – Plaintiff Lessor had previously leased premises to the Defendant Lessee under two leases which required the Defendant to carry out defined Tenant Works and required the defendant to remove those works on the termination of the leases if the Lessor required – The works were carried out – Each lease contained two 5-year extension options – The Defendant exercised its first 5-year option under each lease which provided that the renewed lease must contain the same terms as the original but with no option for renewal after the last option has been exercised – The parties, however, negotiated new terms and a fresh lease, not containing the same terms as the original lease, was entered into for a period of 10 years – The new lease contained a term (cl 16.3) obliging the Lessee, if required by the Lessor, to remove the Tenant Works and reinstate the Premises except for fair wear and tear – The lease defined Tenant Works to mean "any improvement, alteration (whether structural or otherwise), or addition to the Premises or any demolition, landscaping or earthworks on the Premises, to be performed by the Tenant and referred to in Item 11(b) of Schedule 1" – Item 11(b) of Schedule 1 stated that Item 11(b) was "Not applicable" – The Court ordered that there be heard as a separate question, whether on the proper construction of the lease, the Defendant was obliged to remove the Tenant Works and reinstate the Premises to their condition when the Defendant commenced its occupation of the Premises at the times of the two earlier leases or at the time of the third lease – HELD that on the proper construction of the lease, the Defendant was obliged to remove the Tenant Works and reinstate the Premises by reference to the condition of the Premises at the commencement of the third lease Category: Principal judgment Parties: 37 York Rd Pty Ltd (Plaintiff) Reece Australia Pty Limited (Defendant) Representation: Counsel: MR Elliott SC with D Ratnam (Plaintiff) J Pokoney (Defendant)

Solicitors: Roberts & Partners Lawyers (Plaintiff) Mills Oakley (Defendant) File Number(s): 2024/00056097 Publication restriction: Nil

JUDGMENT

Introduction 1. HIS HONOUR: On 2 August 2024, the Court ordered that the following question (the Question) be determined separately and before all other issues in the proceedings: 1. On the proper construction of clause 16.3 of the lease entered into in or about October 2013 (Third Lease) between Mahmoud Zreika and the defendant, is the defendant obligated to remove the Tenant Works and reinstate the Premises (except for fair wear and tear): a. to the condition it was in before the defendant commenced its occupation of the Premises or any part of it, namely prior to the entry into the leases entered into in or about November 2008 (First Lease) and April 2011 (Second Lease), including in a manner consistent with the plan exhibited to the Third Lease so as to reinstate the Premises to be 3 separate commercial warehouses; or b. by reference to the condition of the Premises at the commencement of the Third Lease. The capitalised and defined terms contained in this question are derived from the Third Lease, the Technology and Construction List Statement filed 13 February 2024, the Technology and Construction List Response filed 19 April 2024 and the Reply filed on 30 May 2024 1. Why the Question has been framed in the way it has, will become apparent shortly.

The Facts 1. At 37-39 York Road Penrith NSW, there is a strata titled warehouse development. The premises which are the subject of this dispute are lots 4, 5 and 6 (originally designated units 5, 6 and 7) in that development (the Premises). Lot 5 is between Lots 4 and 6. 2. At all material times, the owner and Lessor of the Premises has been the trustee of the same trust, the York Road Property Trust. The identity of the trustee has changed a few times and is presently the plaintiff. This explains why the person named in the question is not the named plaintiff. Nothing turns on the changes. 3. I shall refer to the Lessor from time to time as the plaintiff or as the Lessor. 4. The defendant and erstwhile Lessee has at all material times carried on the business of supplying plumbing ware.

The First Lease 1. On 1 November 2008, the plaintiff and the defendant entered into the First Lease, referred to in 1a of the Question. The plaintiff leased to the defendant lots 5 and 6 (then designated units 6 and 7) for 5 years, that is, until 31 October 2013, with two five-year extension options. By all accounts, those units were then, colloquially speaking, empty shells separated by partitioning but with a gap to allow access between Lots 5 and 6. There were small areas partitioned off in each lot for kitchen and bathroom facilities. 2. The First Lease required the defendant to carry out Tenant Works which were defined in cl 1.30 as follows: "Tenant Works" means any improvement, alteration (whether structural or otherwise), or addition to the Premises or any demolition, landscaping or earthworks on the Premises, to be performed by the Tenant and referred to in item 11(b) of Schedule 1. 1. The reference to Item 11(b) of Schedule 1 is erroneous. Plainly, it should have been Item 12(b) which is: (b) Tenant Works The Tenant is to complete the works in accordance with the plans and specifications attached in Schedule 3. 1. Schedule 3 describes the Tenant Works as: 1. Repaint the exterior and internal walls; 2. Install an internal mezzanine storage area and racking in unit 6; 3. Install a suitable wall opening between units 6 & 7 (if required). 1. Schedule 3 has an Annexure which describes the Tenant Works in significantly greater detail. 2. The First Lease contained the following pertinent provisions: 14.1 Party to carry out If item 12 of Schedule 1 specifies any Landlord Works or any Tenant Works, the party responsible for the Works must carry out those Works. … 14.5 Termination of Tenancy 14.5.1 Upon termination of this Lease, if required by the Landlord to do so, the Tenant must remove the Tenant's Works and reinstate the Premises to the Landlord's reasonable satisfaction. … 25.1 Conditions for exercise of option The Landlord must renew this lease for the further term or terms stated in item 14 of Schedule 1, or if no further term is stated, for a further term for a period equal to any previous further terms granted under this lease, if: … 25.1.3 the Tenant has requested the renewal in writing not more than 6 months nor less than 3 months before the end of the Term. The latest date for exercising the option is stated in item 15 of Schedule 1. 25.2 Conditions of renewed lease … 25.2.3 must contain the same terms as this lease but with no option for renewal after the last option for a further term stated in item 13 of Schedule 1 has been exercised. 1. Tenant Works so described were carried out. 2. The First Lease also contained provisions for the Lessor to do "Landlord Works" which were described in Item 12(a) of Schedule 1, and in Schedule 2.

The Second Lease 1. On 1 April 2011, the parties entered into the Second Lease, referred to in Question 1a, for lot 4 (then designated unit 5). 2. The term of the Second Lease expired on 31 October 2013, that is, on the same day the First Lease expired. It too had provision for two five-year options. 3. The Second Lease also required the defendant to do Tenant Works referred to in Item 11(b) of Schedule 1. 4. Item 11(b) of Schedule 1 is: (b) Tenant Works Works required to operate the Tenant's Business, including painting, erection of signage and badging of the Premises with the Tenant's standard corporate colours and branding, and installation of suitable wall opening between tenancies 4 and 5 and tenancies 5 and 6, 1. Otherwise, so far as is relevant to the present controversy, the terms of the Second Lease are not materially different to those in the First Lease. One difference in terminology is that cl 16.3, which is the equivalent of cl 14.5.1 of the First Lease, provides: 16.3 if required by the Landlord to do so, remove the Tenant Works and reinstate the Premises except for fair wear and tear; 1. Tenant Works so described were carried out. 2. The provisions for the exercise of an option for renewal in the Second Lease are the same, and numbered the same, as in the First Lease. 3. The Second Lease also made provision for the Lessor to do "Landlord Works" which were a "Full internal clean of Premises".

The Third Lease 1. On 6 June 2013, the defendant exercised its first 5-year option under both the First Lease and the Second Lease. 2. There then ensued an exchange of correspondence about what was to be the rental payable in respect of the two new leases. The parties were in dispute about it. 3. On 19 August 2013, the plaintiff, through its then solicitors, made the following written offer to resolve their differences: As a compromise if your client were to agree to extend the term of its lease by a further 5 years then only on this basis will my client agree to the rent for the first year of the new term remaining at current level. In additional however my client is happy to include the land area at the rear of the premises which is currently vacant as part of the area to be leased to your client at no additional rent (and my instructions are that area can be used for parking cars and containers, visitor parking, storage etc.) We believe this is a reasonable compromise in the circumstances and request that you obtain instructions and revert. 1. The defendant agreed to the suggested compromise and instead of the exercised options taking effect on the terms of the First Lease and the Second Lease, the parties entered into the Third Lease, referred to in Question 1b. 2. The Third Lease commenced on 1 November 2013 and expired on 31 October 2023. 3. It contained a provision (not in the First Lease or the Second Lease) restricting the future use, by the plaintiff or any other person, of the courtyard area. I infer that this came about as part of the compromise. 4. It is fair to say that, as at the date of the Third Lease, by reason of Tenant Works carried out under the First Lease and the Second Lease, the Premises were a badged, bespoke warehouse facility from which the defendant conducted business. Depictions of the facility are in evidence. 5. The following are the pertinent provisions of the Third Lease: 1. DEFINITIONS In this lease: … 1.6 "Commencement Date" means the date set out in item 6 of Schedule 1. … 1.21 "Premises" means the premises described in item 4 of Schedule 1 and includes the Landlord's Property within the Premises. In relation to the Buildings, it includes the area from the undersurface of the floor to the upper surface of the ceiling, and to the inside surface of the walls. … 1.31 "Tenant Works" means any improvement, alteration (whether structural or otherwise), or addition to the Premises or any demolition, landscaping or earthworks on the Premises, to be performed by the Tenant and referred to in item 11(b) of Schedule 1. … 12. MAINTENANCE OF PREMISES AND LANDLORD'S PROPERTY 12.1 Tenant to maintain Except for fair wear and tear and subject to clause 12.4, the Tenant must keep the Premises, the Landlord's Property and the Tenant's Property in the same condition and state of repair as at the Commencement Date. … 16. TENANT'S OBLIGATIONS AT END OF LEASE At the end of this lease, the Tenant must: 16.1 vacate the Premises and leave the Premises in the condition in which the Tenant must keep them under this lease; 16.2 remove all the Tenant's Property from the Premises, and any signs, notices or advertisements placed in or near the Premises; 16.3 if required by the Landlord to do so, remove the Tenant Works and reinstate the Premises except for fair wear and tear;. 1. Schedule 1 Item 4 is: The Premises known as Units 4, 5 and 6, 39 York Road, Penrith as shown on the plan exhibited to the parties on the date of Lease. (emphasis added) 1. Schedule 1 Item 11(b) is: (b) Tenants (sic) Works Not applicable

The Controversy 1. Both the First Lease and the Second Lease provided for Tenant Works to be carried out and for removal of those works and reinstatement of the Premises on termination of the lease, if required by the Lessor. 2. The Third Lease, on the other hand, made no provision for the doing of any Tenant Works, obviously because the Tenant Works contemplated by the First Lease and the Second Lease had already been done. Hence the words "Not applicable" in Item 11(b) of Schedule 1. 3. It follows that if, in cl 16.3, Tenant Works is construed as meaning Tenant Works as described in Item 11(b) of Schedule 1, there are none, and cl 16.3 does not have any work to do. 4. The plaintiff wishes to require the defendant to remove the Tenant Works as defined in, and carried out under, the First Lease and the Second Lease and argues that the term "Tenant Works" in cl 16.3 of the Third Lease should be construed as a reference to the Tenant Works defined in Item 12(b) of Schedule 1 to the First Lease and Item 11(b) of Schedule 1 to the Second Lease. 5. Put another way, as the Question reflects, the plaintiff argues that where cl 16.3 of the Third Lease refers to the Premises, it is referring to the Premises as at the commencement dates, respectively, of the First Lease and the Second Lease (which are different), and not to the commencement date of the Third Lease. In this context it argues that the words "remove the Tenant Works and reinstate the Premises" are to be read disjunctively so that even if there is no obligation to remove the Tenant Works there is a separate and distinct obligation to reinstate the Premises (which would comprehend removing the earlier Tenant Works). 6. In support of its submission that cl 16.3 should be so construed, it argues that the definition in cl 1.31 refers to Item 11(b) of Schedule 1 without saying "to this Lease", with the consequence, it argues, that the reference to Schedule 1 can be taken to be Schedule 1, not only to the Third Lease, but also to the First Lease and the Second Lease. 7. It argues that it lacks commercial sense and would be brutal literalism for the Third Lease to have the operation that Tenant Works done under the First Lease and the Second Lease respectively, do not now have to be removed, whereas, they would have had to have been removed on termination of those two leases if the Lessor had required it.

Decision 1. Applying orthodox and settled canons of contractual construction for commercial contracts, that contended for by the plaintiff is untenable. It is out of accord with the plain grammatical meaning of the words in cl 16.3 read with the definition of "Tenant Works" in cl 1.31 and Item 11(b) of Schedule 1. 2. Clause 16.3 incorporates the capitalised definition of "Tenant Works" in cl 1.31, not some other definition. That, on the facts, cl 16.3 has no practical role to play is of no moment. There are other provisions in the Third Lease which also have no work to do because Schedule 1 contains other Items which are also "Not applicable", such as Items 13 and 14 which relate to the term for the exercise of an option for renewal and the last date for the exercise of such an option. 3. The First Lease and the Second Lease also contain provisions for the Lessor to carry out "Landlord Works" described in Items in Schedule 1 to each of those leases. Schedule 1 to the Third Lease contains the words "Not applicable" in that Item as well. 4. By inserting the words "Not applicable" in Item 11(b) of Schedule 1 to the Third Lease, the parties can be taken to have made a conscious decision that cl 16.3, so far as it refers to Tenant Works, was not to operate. It is not suggested that it is an error. 5. I reject the submission that the reference in cl 1.31 of the Third Lease to Item 11(b) of Schedule 1 is, or can construed as, a reference to anything other than a reference to Schedule 1 of the Third Lease. There are various other provisions of the Third Lease which refer to Items in Schedule 1, including cl 1.23 which defines the rent payable as the "amount specified in Item 8 of Schedule 1" (which is a different amount to the rent payable under the First Lease or the Second Lease). This can hardly be a reference to some other Schedule 1. Also, Tenant Works was not described in Schedule 1 Item 11(b) to the First Lease but in Item 12(b). The plaintiffs contended for construction requires the insertion of words. 6. The Third Lease is (as are the First Lease and the Second Lease) a commercial agreement between resourced commercial parties. It cannot be said that the absence of an obligation on the tenant to remove at the end of the Third Lease (that is 10 years later) Tenant Works done under the First Lease, or the Second Lease makes commercial nonsense, works commercial inconvenience, or is unreasonable or capricious. To the contrary, it can be seen as part of the bargain under which the Tenant was committed for 10 years, rather than only 5, which would have been the case had it exercised its first option but not its second. 7. The Third Lease is not the lease contemplated in the renewal option provisions in the First Lease or the Second Lease (cls 25.1.3, 25.2.3), but a new and standalone agreement for a different term reached after negotiations. 8. The plaintiff's submission that cl 16.3 should be read "disjunctively" so that there is one freestanding obligation to remove any Tenant Works and a separate freestanding obligation to reinstate the premises, which includes removing any Tenant Works, is unsustainable. On the plain wording of the clause, if there are any Tenant Works (as defined) they must be removed and then if any further work is required to reinstate the Premises, it must be done as well. But there are two hurdles standing in the plaintiff's way. First, there are no Tenant Works under the Third Lease and second, the Premises which must be reinstated are the Premises "on the date of Lease" (cl 1.21 read with Schedule 1 Item 4). The Premises on the date of the Third Lease included the Tenant Works under the First Lease and the Second Lease. 9. The meaning of the words in cls 1.31 and 16.3 and Item 11(b) of Schedule 1 in the Third Lease is clear and unambiguous. There is no real constructional choice to be made. 10. The answer to the Question is: 1. a. no; and b. yes. 1. I provisionally order that the plaintiff is to pay the defendant's costs of and incidental to the Question. This order will solidify unless, within seven days of delivery of this judgment, any party notifies, in writing, the opposing parties and my Associate that some other order is sought, specifies what it is and provides brief reasons why. If such notice is given, the order will not take effect and I will make directions for the resolution of costs.

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