This decision of the High Court demonstrates the difficulty in construing contracts and that a court may give greater weight to the perceived commercial intent of the parties to a contract, rather the language of the bargain alone.
Clause 4 of a standard form lease was amended by the parties to create a 99 year lease by changing various clauses and in particular by striking through the following words:
“pay all rates taxes assessments and outgoings whatsoever
excepting land tax which during the said term shall be payable by the Landlord or tenant in respect of the said premises (but a proportionate part to be adjusted between Landlord and Tenant if the case so requires).”
The tenant contended that the clause should be construed as requiring the tenant to pay only rates, taxes, assessments and outgoings levied on it in its capacity as tenant, leaving the lessor liable to pay imposts levied on it in its capacity as owner. On the other hand, the landlord contended that the clause should be construed as requiring the tenant to pay all rates, taxes, assessments and outgoings in respect of the land. The majority of the Court of Appeal preferred the tenant’s construction of the clause, and found that the lessor was still liable for some payments (Kyrou JA dissented).
The majority of the High Court recognised that both constructions were possible. Because it was accepted by the parties that there was an ambiguity, there was no impediment to the Court considering surrounding circumstances and it focused on what a reasonable person in the position of the parties to the lease would have understood by its language, considered in light of the surrounding circumstances known to them at the time of execution. This included the deleted words in clause 4.
The majority (Kiefel, Bell and Gordon JJ, and Gageler J, Nettle J dissenting) overturned the Court of Appeal’s decision and held that the proper construction was that the lessee bore the obligation to pay all rates, taxes and assessments during the term of the lease. In arriving at that conclusion, the majority placed great emphasis on the perceived commercial purpose of the lease. Of particular relevance to the majority was clause 13:
The parties acknowledge that it was the intention of the Lessor to sell and the Lessee to purchase the land and improvements hereby leased for the consideration of $70,000.00 and as a result thereof the parties have agreed to enter into this Lease for a term of ninety-nine years in respect of which the total rental thereof is the sum of $70,000.00 which sum is hereby acknowledged to have been paid in full.
The majority considered that clause 13 ought to be read as disclosing the circumstances and the intention of the parties leading to the lease, ie. that the parties were unable to convey a freehold estate and had instead decided to convey a very long term (99 year) leasehold estate. As a result, the commercial purpose of the lease was “to recreate, as far as possible, in a lease, conditions which would have existed following a sale”. This meant that the parties should be taken to have intended that the lessor was no longer liable for the liabilities set out in clause 4, because the lessor should be put as closely as possible in the position of a vendor who would not be liable for the payments (and the risks of increases in those payment sums) upon transfer of title. In the majority’s view, even without clause 13, such a purpose could have been discerned from the surrounding facts and circumstances, known to a reasonable businessperson in the position of the parties. For example, the length of the lease term, prepayment of a sum equivalent to the land’s market value at the time of formation, and removing covenants restricting the lessee’s use of the land and the lessor’s right of inspection and termination for breach and re-entry.
The majority agreed with the dissenting judgment of Kyrou JA in the Court of Appeal that even though the rights of the lessee were “not co-extensive with the rights of the owner of the land, they were not inconsistent with an intention to place the lessee in a position as close as possible to that of the purchaser of a freehold estate.” Nettle J (in dissent) considered that primacy needed to be given to the words used by the parties, and the Court was not entitled to look for an assumed intention of ‘sale’. In Nettle J’s view, “the commercial approach to construction is not a licence to alter the meaning of a term “clearly and fairly susceptible of one meaning only”.