Commercial Leases and the Dangers of Ambiguity in the Lease Terms

The Victorian case, Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12, has been considered by the Australian High Court.

Proceedings began in 2013 when the lessor sought a declaration that the lessee was required to pay all rates, taxes, assessments and outgoings in respect of the land. The original trial judge granted the declaration but subsequently the Court of Appeal set the declaration aside following an appeal by the lessee. The High Court then set aside the Court of Appeal’s decision and reinstated that of the original trial judge.

The High Court had to consider not just the wording of the text but also the commercial objective of the agreement, the circumstances in which the agreement had come about and a context where the original parties were no longer involved.

The Court had to decide which of two conflicting interpretations of a clause best fitted the commercial object of the lease agreement.

The original parties had used a standard printed form for a farm lease. Clause 13 outlined the intention that the nature of the lease was to be as close to a sale of the land as possible. This clause required the tenant to pay the entire 99 year’s of rent in advance which more or less equated to the market value of the land which could be interpreted as the parties’ mutual intention that the tenant was buying the land. Clause 4, somewhat clumsily amended by striking through certain key words, imposed an obligation on the lessee to pay certain outgoings such as rates and taxes.

The High Court had to consider the proper construction of clause 4 consistent with the intention and objective of the agreement.

Key Issues

The High Court of Australia had to consider the appeal from the Victorian courts regarding the unusual lease agreement which involved amendments to a clause in a standard form of lease agreement concluded between a previous landlord and tenant.

The High Court had to interpret two apparently conflicting clauses in the lease agreement affecting financial “outgoings” and which party, lessor or lessee, was liable for them.

The original trial judge had decided that the original parties to the lease agreement had intended, in effect, a conveyance of the freehold title in the knowledge that it was not possible to do so at the time purely for technical reasons.

Resolving Ambiguity in Lease Agreements

The famous Scottish philosopher, Thomas Reid, once opined that the ambiguity of words was ‘the greatest impediment to the advancement of knowledge’. Ambiguity in the wording in contracts is likely to result in an increased propensity to disputes and litigation. Such disputes can arise between landlords and tenants on the meaning of a particular term after the start of a lease and may have considerable financial implications.

 

The disputed agreement involved a 99-year lease, entered into in 1988, for a block of rural land with no separate title. The original contracting parties had (in 1993 and 2004 respectively) transferred their interests to the parties now represented in the action.

In essence, the question, as framed to be considered by the High Court, was whether clause 4 of the lease obliged ‘the Lessee to pay all the rates, taxes, assessments and outgoings in respect of the leased land or instead obliges the Lessee to pay these rates to pay those rates, taxes, assessments and outgoings that are levied on the Lessee’.

The parties had adopted a standard form of farm lease. Clause 4 of the standard form stated ‘that rates, taxes, assessments and outgoings whatsoever excepting land tax which during the said term shall be payable by the Landlord or tenant. The words shown here in italics were deleted from the actual agreement by striking through. A majority of the Victorian Court of Appeal had held that this clause left the Landlord liable for land taxes. A dissenting judge, however, argued that this was not a tenable position because of the existence of Clause 13 in the agreement which required the tenant to pay the entire 99 years of rent in advance which equated more or less to the market value of the land. The $70,000 paid by the original tenant was acknowledged ‘to have been paid in full’ and ‘that it was the intention of the Lessor to sell and the Lessee to purchase the land’.

In the High Court, however, the majority agreed with the dissenting judge adopting his approach and conclusion. It was felt that this construction accorded with the commercial aim of the two parties with the lessee in effect assuming the position of owner along with its associated liabilities.

The Court ruling was that it would not make commercial sense for the lessor to remain liable for the outgoings based on its interpretation of the agreement’s objective.

What does this mean?

The case was finely balanced with the majority deciding in favour of the tenant.

The case demonstrates the need to take care in drafting. It is essential to ensure all the terms in a lease are clear and understood by all parties before signing or acquiring a lease and emphasises the need to seek expert legal advice when entering into any lease arrangement in order to consider the risks of ambiguous terms.

It provides further guidance on how to interpret contracts which could produce a result that may not make commercial sense if read literally.

The case shows that commercial sense may be the critical consideration in arriving at the meaning of a disputed clause.

It highlights that the risks can be amplified in cases of long-term leases where changes in the parties often occur.

Although the lease was a farm lease the lessons are also applicable to commercial, retail and industrial property leases.

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