A registered club, the holder of a club licence under the Liquor Act 2007 (NSW), lets a husband and wife into occupation of its premises to operate a restaurant. There is no signed agreement between the parties. After about a year, the Club tells the husband and wife to leave. They refuse, asserting that they have a lease for a minimum term of 5 years by operation of the Retail Leases Act 1994 (NSW). The Club responds that any such lease is void and unenforceable because the Club breached s.92(1)(d) of the Liquor Act by not obtain approval from the Independent Liquor and Gaming Authority prior to letting the husband and wife into occupation of the restaurant.

What is a Court to do when confronted with these circumstances?

These are the facts in a nutshell of the case of Gnych v Polish Club Limited which has been heard by the Supreme Court of New South Wales, the Court of Appeal and more recently the High Court of Australia (which reserved judgment following a hearing in Canberra on 5 May 2015).

This case is important for a number of reasons including that it highlights:

  • A person can be granted an interest in land - in this case, a lease - without a signed contract, even if the parties intended that a signed contract would be entered into. Relevantly, as the present case demonstrates "a lease or leasehold interest is created whenever one person gives another the legal right to exclusive possession of land for a period or term that is certain (or capable of being rendered certain)". (See Polish Club Limited v Gnych [2014] NSWCA 321 at [77])
  • So landlords need to be very careful about letting a person into occupation of their property before all the terms have been finalised in writing. And they need to be particularly careful when the property in question is a "retail shop" as defined in section 3 of the Retail Leases Act 1994 (NSW). Because that Act may automatically operate to make the term of the arrangement between the parties for a minimum of 5 years.
  • A licence differs from a lease according to the legal nature of the occupation. Whereas a lessee has an interest in the subject land, a licensee only has a personal privilege to enter and use the premises. The decisive factor in determining whether the occupant has a lease or a licence is whether a right to exclusive possession, or control of the premises during the term of the agreement, has been conferred on the occupant. (See Radaich v Smith (1959) 101 CLR 209)
  • The Retail Leases Act 1994 (NSW) does not only apply to "leases" as legally defined. Subject to some limitations set out in the Act, it applies to "any agreement under which a person grants or agrees to grant to another person for value a right of occupation of premises for the purpose of the use of the premises as a retail shop". The right granted does not have to be a right of exclusive occupation. In other words, the Act covers licences as well as leases (See Retail Leases Act section 3 - definition of "retail shop lease" or "lease").
  • Whether an agreement is void and unenforceable for statutory illegality will not always be clear from the wording of the statute, and may be a question of statutory construction (i.e. gleaning the legislative intention from a careful consideration of the scope and purpose of the relevant statute).

FACTUAL BACKGROUND

For a period of approximately sixteen months between March 2012 and August 2013 the plaintiffs, Mr and Mrs Gnych, operated a restaurant on the first floor of premises owned by the defendant Polish Club in Ashfield.

Mr Gnych commenced negotiation for a lease of the restaurant area with the Club in August 2011. It was agreed in principle that he and his wife would be granted a lease of a restaurant with a capacity of approximately fifty seats with an adjoining kitchen and office (together the restaurant area) as well as a store room and toilet, both of which were downstairs.

In December 2011, Mr and Mrs Gnych's solicitor sent the Club a term sheet setting out the essential terms of a proposed lease of the space that it had been agreed in principle would be made available to Mr and Mrs Gnych. The management committee of the Club resolved to accept the terms set out in the term sheet.

The term of the lease was expressed to be for two years, plus two two year options. The term sheet also set out proposed terms in relation to the selling of liquor. It contemplated that Mr and Mrs Gnych would have their own cash register in the bar area of the Club, that patrons of the restaurant would order their drinks from that area, and Mr and Mrs Gnych would be entitled to keep 10 per cent of the takings from that register.

On 29 March 2012, Mr and Mrs Gnych's solicitor sent the Club a draft lease in registrable form. Two days later, Mr and Mrs Gnych commenced trading. No written agreement was agreed or finalised.

The restaurant operated successfully, however, relations between Mr and Mrs Gnych and at least some members of the management committee of the Club soured.

In July 2013 the Club's solicitors sent Mr and Mrs Gnych's solicitor a letter advising that the Club had determined to terminate the relationship and requesting that Mr and Mrs Gnych vacate the Club's premises within 4 weeks.

Mr and Mrs Gnych's solicitor responded noting that the restaurant is a "retail shop" as defined in the Retail Leases Act 1994 (NSW) (the RL Act). The letter asserted that by the provisions of sections 8 and 16 of the RL Act, Mr and Mrs Gnych obtained a leasehold interest in that part of the Club's premises they occupied for a term of 5 years.

Those provisions provide that a retail shop lease is considered to have been entered into when a person enters into possession or begins to pay rent, whichever happens first (s 8); and the term for which a retail shop lease is entered into, together with any further term or terms provided for by any agreement or option, must not be less than 5 years (s 16(1)).

The Club's solicitor responded noting that Mr and Mrs Gnych's occupation of the premises was not only subject to the RL Act but was also subject to the provisions of the Liquor Act 2007 (NSW) (the Liquor Act); specifically sections 92(1)(c) and (d). Those provisions provide:

"(1) A licensee or a related corporation of the licensee must not:

...

(c) lease or sublease any part of the licensed premises on which liquor is ordinarily sold or supplied for consumption on the premises or on which approved gaming machines are ordinarily kept, used or operated, or

(d) lease or sublease any other part of the licensed premises except with the approval of the Authority.

Maximum penalty: 50 penalty units ($5,500)."

In August 2013, the Club excluded Mr and Mrs Gnych from the restaurant area. Mr and Mrs Gnych then commenced proceedings in the Supreme Court of New South Wales seeking, amongst other relief, a declaration that they have a leasehold interest in the space they occupied for a five year period commencing on the date they entered into possession.

SUBMISSION THAT LEASE WAS ILLEGAL UNDER THE LIQUOR ACT

The Club disputed Mr and Mrs Gnych's claim on a number of grounds including that the lease is illegal under s 92 of the Liquor Act and that consequently, Mr and Mrs Gnych are not entitled to the relief that they seek.

It was common ground that the Club had not obtained approval from the Authority (meaning the Independent Liquor and Gaming Authority) prior to letting Mr and Mrs Gnych into occupation. The trial judge, Ball J, observed in his reasons for judgment (Gnych v Polish Club Limited [2013] NSWSC 1249) that:

  • "It is the place where liquor is sold or supplied for a particular purpose - that is, consumption anywhere on the premises - that attracts the prohibition" in s 92(1)(c). On the other hand, parts of the premises where liquor is not sold or supplied are governed by s 92(1)(d);
  • In the present case, if patrons purchase liquor from the bar and take it back and consume it in the restaurant, the liquor is sold or supplied to them in the bar area. However, if liquor is delivered to a patron in the restaurant, then that act falls squarely within the definition of "supply" in s 92(1)(c);
  • Section 92(1) creates a single offence. The offence is committed at the time when the lease is entered into. A limitation period of three years starts to run from that time: see Liquor Act s 146(2).

Ball J was not satisfied that there had been a breach of s 92(1)(c) of the Liquor Act. His Honour found that there was no evidence concerning the question whether liquor was ordinarily supplied in the restaurant area to patrons at the time the lease commenced. Rather, there was evidence that Mr and Mrs Gnych developed a practice of permitting patrons who had booked the restaurant for functions to order liquor from the bar and for that liquor to be supplied to them, either by the bar staff or restaurant staff who held an RSA licence, in those areas.

Ball J was however satisfied that there had been a clear breach of s 92(1)(d) of the Liquor Act. The restaurant was part of a licensed premises and it was leased to Mr and Mrs Gnych without the approval of the Authority.

Mr and Mrs Gnych submitted that that breach of the Liquor Act on the part of the Club did not disentitle them from relief. They relied on the principle stated in Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 where the English Court of Appeal said (at 71):

"a man's right to possess his own chattels will as a general rule be enforced as against one who, without any claim or right, is detaining them or has converted them to his own use, even though it may appear ... that the chattels came into the defendant's possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek and is not forced either to found his claim on the illegal contract or to plead its illegality in order to support his claim."

Ball J found that Mr and Mrs Gnych's claim did not depend on any illegality. They simply asserted that a lease arose from the conduct of the parties (i.e. the Club gave Mr and Mrs Gnych the right to exclusive possession of the restaurant area) and by operation of s 16 of the RL Act, which rendered certain a lease for a minimum term of five years. In the words of his Honour, "It is the Club that seeks impermissibly to rely on the illegality."

His Honour therefore granted Mr and Mrs Gnych a declaration concerning the existence of a five year lease and an injunction restraining the Club from interfering with their rights of exclusive possession during the term of that lease.

TRIAL JUDGE'S DECISION OVERTURNED

The Club lodged an appeal against the decision of Ball J, including challenging Ball J's decision to enforce the lease to Mr and Mrs Gnych notwithstanding that it was granted in breach of s 92(1)(d).

Tobias AJA delivered the lead judgment of the Court of Appeal (Polish Club Limited v Gnych [2014] NSWCA 321). His Honour noted judicial criticism of the Bowmakers rule, including that it has regard "only to the procedural issue; and it is that issue and not the policy of the legislation or the merits of the parties which determines the outcome." (Nelson v Nelson (1995) 184 CLR 538, at 609 per McHugh J).

The Court of Appeal also noted that the most recent pronouncement of the High Court of Australia in this area is Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498. At [23] French CJ, Crennan and Kiefel JJ observed that an agreement may be unenforceable for statutory illegality where:

  1. the making of the agreement or the doing of an act essential to its formation is expressly prohibited absolutely or conditionally by the statute;
  2. the making of the agreement is impliedly prohibited by statute. A particular case of an implied prohibition arises where the agreement is to do an act the doing of which is prohibited by the statute;
  3. the agreement is not expressly or impliedly prohibited by a statute but is treated by the courts as unenforceable because it is a 'contract associated with or in the furtherance of illegal purposes'."

In the third category of case, the Court acts to uphold the policy of the law ... [and] must discern from the scope and purpose of the relevant statute 'whether the legislative purpose will be fulfilled without regarding the contract or the trust as void and unenforceable'."

Applying the above principles to the present case, the Court of Appeal observed (at [72]) that "The policy of the Act generally, and ss 91 and 92 in particular, is to ensure that the licensee or in the case of a licensee which is a corporation, the manager of the licensed premises, at all times is responsible for the personal supervision and management of the (lawful) conduct of the business of the licensed premises. That objective cannot be realised if any part of the licensed premises is subject to a lease to a third party who might not be a fit and proper person to be a licensee or, for that matter, a manager, but who, by virtue of the lease has exclusive possession of part of the licensed premises thus having the right to exclude therefrom the licensee or in the case of a corporate licensee, the manager."

The Court of Appeal continued (at [81]): "when one considers the legislative purpose of the relevant provisions of the Liquor Act as well as the policy behind the subject prohibitions, then it follows that the prohibition stated expressly in the statutory text of s 92 requires the conclusion that any lease caught by that provision is not to be enforced by the courts. It follows that the Club is entitled to a declaration that the lease of the restaurant area to the respondents is void and unenforceable."

SPECIAL LEAVE TO APPEAL TO THE HIGH COURT

On 13 March 2015, the hearing of Mr and Mrs Gnych's application for special leave to appeal to the High Court took place. Before special leave was granted, Hayne J posited that the question in the case is: does the lessor who has acted in breach of the law "by granting to someone else an interest in land - can that person say, there we are, that was unlawful, the grant I made is of no value?"

The appeal was heard in Canberra on 5 May 2015. The transcript of that hearing indicates that the resolution of the case might actually turn upon implied terms and the difference between a lease and a licence, and specifically the questions:

  • whether there is implied into every lease of a licensed premises a right on the part of the landlord (or holder of the relevant liquor license) to enter upon the premises to exercise the licensee's statutory responsibilities; and
  • if the answer is yes, how does this impinge upon the right to exclusive possession which is the decisive factor in determining whether an occupant has a lease or a licence (in circumstances where a licence is not captured by section 92 of the Liquor Act).

It will be very interesting to see how the High Court rules when its judgment is delivered.