The High Court has allowed an appeal against a decision of the Victorian Court of Appeal on contract clause amendments and liability for rates and land taxes. The respondent is the current tenant on an ambiguously amended old-form 99-year lease, concluded between an earlier landlord and tenant in 1981, over farmland now owned by the appellant. Clause 4 of the lease stated, and was amended by striking through, that: ‘all rates taxes assessments and outgoings whatsoever excepting land tax which during the said term shall be payable by the Landlord or tenant. A majority of the VSCA held that this clause left the landlord liable for those payments including land taxes levied upon the landlord. Kyrou JA, in dissent, held that this interpretation was not tenable because of the existence of cl 13, which required the tenant to pay the entire 99-year rent in advance, which was more or less the market value of the land:

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.

Kyrou J held that cl 13 reflected the parties’ mutual intention that the tenant purchase the land.

A majority of the High Court allowed the appeal (Kiefel, Bell and Gordon JJ, and Gageler J, Nettle J dissenting).

The plurality held that cl 4, on its proper construction, imposed on the lessee an obligation to pay all rates, taxes and assessments during the term of the lease. Adopting Kyrou JA’s general approach and conclusion, the plurality held that this construction accords with the commercial aim of the parties that the lessee assume the position of owner, and thus all owner’s liabilities (at [7], [27], and on commercial aim principles see at [16]ff). The commercial object of the agreement was to effect as close to a freehold sale as was possible, evidence by cl 13 (at [18]):

Clause 13 identifies the term of the lease and the amount of the total rental for that term and contains an acknowledgement that it has been paid in full. These statements form part of the operative terms of the lease. What is said at the commencement of cl 13 stands in a different position. It is an explanation of why the parties entered into a lease rather than a sale and purchase, which had been intended. Although expressed in the past tense it may be understood to convey that the circumstances leading to the lease remained unchanged at the time of its execution. Clause 13 explains that in circumstances in which the parties were unable to convey a freehold estate in the land, they had chosen instead to convey a leasehold estate for almost a century for a fixed sum. It is readily to be inferred that this was as close an approximation to their desired outcome as they thought they could arrange.

Even absent cl 13, the surrounding facts and circumstances, which would be known to a reasonable businessperson in the position of the parties — the length of the lease term, prepayment of a sum equivalent to the land’s market value, and removing covenants restricting the lessee’s use of the land and the lessor’s right of inspection, and allowing termination for breach and re-entry — all support the conclusion that this lease approximated a sale (at [19]). The VSCA majority’s interpretation, which declined to read an intention between the parties to approximate a freehold sale, was based upon the fact that the lessee was burdened by continuing obligations, the retention of the final proviso, and the absence of an option to purchase, renew, or any other provision on improvements at the end of the term (see [20]). The plurality noted that though these were not co-extensive with the rights of the owner of the land, they were not inconsistent with an intention to place the purchaser in a position as close as possible to that of the purchaser of a freehold estate (at [21]ff). Secondly, the VSCA majority’s analysis lacked any reason in sound commercial sense for the parties to amend the usual covenants on rates and land tax to impose the additional burdens on the lessor (at [23]ff), and it made no commercial sense for the lessor to remain liable for various outgoings, particularly where there is no provision for future adjustments (at [26]).

Gageler J also held that the lease, on its proper construction, required the lessee to pay all rates, taxes, assessments and other outgoings, preferring the approach of the primary judge over that of the VSCA majority (at [30]). Gageler J focused on the construction of cl 4, noting that it ‘can only be so construed for what it is: a clumsily tailored variation of an ill-fitting off-the-shelf precedent. To bring linguistic and grammatical precision to its construction would be to burden the clause with more weight than its jumble of words will bear.’: at [51]. In light of this language, Gageler J read the choice between competing constructions as a question of what is more reasonable as a matter of commercial efficacy or common sense (at [52]). Here, the 99-year lease had no restrictions on the use of the land, the ability to transfer or sublet, and the lessor had no right to determine the lease or re-enter the land during the term even if the lessee is in breach or default (at [53]). Clause 13 indicated the lease resulted from an intended sale and sets the rental payment as a lump sum amount of $70,000, and that the parties intended to replicate that earlier sale (at [54]). Had the sale gone ahead, the then lessor would have had no responsibility for rates, taxes and other outgoings, and for the lessor to have taken up those obligations as Lessor, without any corresponding increase in the lump sum it would have received from the lessee, would lead it to take up a commercial risk it would otherwise not have had, without any appropriate gain (at [55]). Consequently, to Gageler J the view that made the most commercial sense is that cl 4 was intended to place the lessor in a position as near as possible to the one it would have been in had it sold the land to the lessee (at [57]).

Nettle J, in dissent, held that the VSCA majority’s approach was correct. Nettle J rejected reading cl 13 as indicating an intention to replicate as far as possible the conveyance of the land (at [74]ff). Had that been the intention, the lessee would surely have insisted on an option to purchase the land for nominal consideration, or at least to renew the lease at nominal rent (at [75]): these absences suggest the lessee was unwilling to give up the right of reversion, and instead provide a ‘clear implication’ that the parties did not intend to make the transaction equivalent to a sale (at [77]). For Nettle J, this essential relationship held, despite the removal of common covenants on leases of land (see [79]), and the possibility that taxes and rates might change markedly over time (see at [80]ff). Finally, the terms struck out in cl 4 relating to land tax were significant and aided construction of the remainder as having its plain and ordinary effect: namely, to limit the rates and taxes that the lessee was liable to pay to those for which, during the term, the tenant becomes liable (at [85]ff, and on ‘lessee’ versus ‘tenant’, see [90]). If the intention of the parties was to produce the result the appellant contends they held (to limit the land tax), then the parties simply would have deleted the words ‘excepting land tax’ (at [92]). Turning to the question of commercial good sense, Nettle J rejected the appellant’s submissions that commercial reality and business commonsense ought to override the plain reading of cl 4 (at [93]): it was not clear that the parties would necessarily, or even probably, have considered that the lessor would be worse off (see at [94]), and it was not clear that a reasonable businessperson at the time would have been concerned about future legislative amendments or tax increases so as to insist on a complete indemnity (at [96]). Finally, despite poor drafting and ambiguities and the possibility of it being a poor deal from one party’s perspective, courts ought not alter the meanings of contract terms that are ‘clear and fairly susceptible of one meaning only’ to achieve a result that it may think to be reasonable, but instead should give the words their effect (at [98]).