Jim Foliou Samios v Augustin Petersilka [1994] ACTSC 39 (22 April 1994)

SUPREME COURT OF THE ACT

JIM FOLIOU SAMIOS v AUGUSTIN PETERSILKA
No. SC105 of 1994
Number of pages - 10
Equitable Estoppel - Lease - Option - Summary Judgement

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
HIGGINS J

CATCHWORDS

Equitable Estoppel - option to renew lease for further term - option not exercised within time provided for in lease - pre-contractual assurance that option need not be exercised until new rent fixed - whether original lessor bound by equitable estoppel arising out of assurance - whether successor in title to leased premises also bound.

Lease - application by lessor for possession of premises and mesne profits - whether the plaintiff's claim as verified entitles him to the relief sought - whether commencement of lease equated with commencement of the business.

Option - for renewal of lease - purported exercise of option - not within time provided for in lease - whether lessor estopped from insisting on strict compliance with notice requirements in lease.

Summary Judgment - application under Supreme Court Rules (ACT), O.15.

Turner and Ors v York Motors Pty Ltd [1951] HCA 52; (1951) 85 CLR 55

Bonnington and Co Pty Ltd v Lynch [1952] HCA 46; (1952) 86 CLR 259

Della Imports Pty Ltd v Birkenhead Investments Pty Ltd (1987) 75 ANZ Conv R 294

Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673; 75 ANZ Conv R 295

Photo Art and Sound (Cremorne) Pty Ltd v Cremorne Centre Pty Ltd (1987) 76 ANZ Conv R 347

Liangis Investments Pty Limited v Daplyn Pty Ltd and Ors (unreported, ACT SC, 31 March 1994, Higgins J)

HEARING

CANBERRA, 11 March 1994
22:4:1994

Counsel for the Plaintiff: Mr G Richardson

Instructing solicitors: Mallesons Stephen Jaques

Counsel for the Defendant: Mr R Arthur

Instructing solicitors: Bernard Collaery and Associates

ORDER

THE COURT ORDERS THAT:
The plaintiff's application be refused.

DECISION

HIGGINS J This is an application by the plaintiff for summary judgment for possession of premises and mesne profits at the rate of $137.19 per day from 18 January 1994 pursuant to Order 15 of the Supreme Court Rules.

2. The claim arises out of a lease document executed by the defendant on 11 May 1991. The lessor was the plaintiff's predecessor in title, Gilroy Investments Pty Ltd ("Gilroy"). The lease was in respect of premises in Garema Place being part of the ground floor of a building erected on Block 19 Section 35, City as delineated on Subleasing Plan No. 210. It was for a period of one year commencing,
"on and from the date of commencement of business or 1st June 1991,

whichever is earlier".

3. It was provided further that the "PERMITTED USE" was,

"Coffee Lounge with 'on' liquor licence".

4. The lease also provided for subsequent rental reviews. The "RENTAL REVIEW DATE(S)" was or were to be,

"On 1st day of June in each and every year during any holding over
or renewal hereunder as provided in Clauses 21 and 28 hereof"

5. Clause 21 was in the following terms,

"21.1 The Lessor must grant to the Lessee a lease for the Further
Term if:
(a) the Lessee has given the Lessor written notice that the Lessee
requires a further lease at least 3 months before the end of this
lease; and
(b) the Lessee has complied with all the Lessee's obligations under
this lease.
21.2 The further lease must contain the same conditions as this lease
save that the lease in respect of the last term shall not contain this
clause. The rent must be determined in accordance with the rent review
procedure set out in Clause 28."

6. Clause 28 sets out the procedure for a rent review. It is relevant, at this stage, to note the terms of the opening sub-clause,

"28. This clause shall apply to any sublease granted pursuant to
Clause 21 hereof:-
RENT SCHEDULE
(a) The term of this Sublease and any extension or renewal thereof
shall be divided into consecutive rent periods each of twelve (12)
months duration computed from the date of commencement of the first
Rent Period."

7. "Further Term" was expressed in the Reference Schedule to the Lease as, "four (4) years + five (5) years".

8. Pursuant to an Agreement for Sale dated 22 October 1992 the plaintiff became the registered proprietor of the Crown Lease over the land including the premises leased to the defendant.

9. It had been expected that the defendant would have been able to commence business before 1 June 1991. However, there was a problem. The liquor licensing authority regarded the Crown Lease as forbidding the use of the premises to retail liquor. As a result, the contemplated business could not commence until the Crown Lease was amended.

10. The purposes clause of the Crown Lease was eventually altered in early July 1991. The defendant signed the change of purpose clause on 17 July 1991. I imagine that is a reference to the defendant, as a registered lessee from the Crown lessee, consenting to the change.

11. In any event, the then lessor, Gilroy, agreed that, as a result, rent would be charged only from 17 July 1991 notwithstanding the provisions of the lease.

12. Before entering into the lease, the defendant deposes that he had a conversation with a real estate agent representing Gilroy. For the purposes of this application, it is to be assumed that the defendant's version of events would be accepted at trial.

13. That conversation was in the following terms,

Plaintiff: "I cannot commit myself to a long term until I see whether
the business can support the rent."
Agent: "We will make the first term for one year only with an option
and you can decide whether to exercise the option once you know
what the rent for the new term is going to be."

14. Following the commencement of business, the defendant paid rent at the agreed rate on the 17th day of each month. It was his view that the lease also commenced, notwithstanding its terms, as from 17 July 1991. There had been no expectation, as at 11 May 1991, that the fitting out of the premises would go beyond 1 June 1991. It was not then realised that there was a problem with the lease purpose clause.

15. Against that background, on 8 April 1992, the defendant wrote to the solicitor for Gilroy. The terms of his letter were, relevantly, as follows,

"My first year of operating Cafe Augustin is expiring and I would like
to know the Landlord's intention in regard to the rent.
From my experience I could not afford any rent increases. My
turn-over
has stabilised and it takes all my skill and devotion to keep out of
the 'red'.
There is also opening a new Cafe next door and you are aware of my
difficulties with the Administration to obtain a suitable out door
area.
With the continuation of the present rent charges I would be able to
continue operating. Otherwise I would be forced to vacate or try to
sell the Cafe."

16. There was no direct response to, or acknowledgment of, this letter. It is consistent with the defendant's account of the assurances he had been given on behalf of Gilroy. It did not suggest that the defendant would decline to exercise his option unless the rent remained the same. It was an assertion that he desired to exercise his option if the rent did remain the same.

17. On 7 July 1992, Gilroy's solicitor wrote to the defendant. There was no acknowledgment of the defendant's letter. The opening paragraph was as follows,

"You will remember that the Lease of your Garema Square premises
provides for a rent review on the 1st June 1992, being the anniversary
of the commencement date of the Lease."

18. It then proceeded to assert that the rent review clause required an increase of 7% as from 1 June 1992. It is not necessary, for present purposes, to express a view as to whether that assertion was correct or not. Not surprisingly, the letter did not canvass the effect, if any, of the assurances given by the lessor's agent.

19. There was a response, but it was not until 3 September 1992. The relevant parts of that response, from the defendant's solicitor, was as follows,

"Mr Petersilka believes that he cannot sustain a rent increase and is
prepared to close his shop if your client company presses the terms of
the current sublease.
My client further observes that his first term has expired and that he
can take the option of moving out rather than to accept a rent
increase on the current market."

20. The letter concluded by suggesting a conference to negotiate a solution.

21. The reference to the expiry of the first term is, of course, consistent equally with a belief by the defendant that the term commenced on 17 July 1991 as with a belief that it commenced on and from 1 June 1991. The letter did not expressly address the question of a late exercise of an option to renew the lease.

22. Certainly, if the assurances given by Gilroy's agent had been given, the response of 7 September 1992 must have been disconcerting to the defendant. The solicitor for the lessor wrote,

"We also note from the terms of the Sublease to the premises that
your client is 'holding over' and that he has not renewed or exercised
his option."

23. It is to be noted that the reply did not directly address the question of the late exercise of the option to renew the lease for a further term. The closest reference is a later cryptic reference in the same letter,

"Clearly it is open to Mr Petersilka to continue to hold over, as it
is open to our client to exercise its rights at some future date in
relation to the status of that tenancy", and
"The terms and conditions of the Lease document which your client
signed were carefully negotiated and our client's instructions are to
rely on that document."

24. Nevertheless, it might have been thought that, at least to the defendant's solicitor, the last paragraph referred to above would have seemed somewhat ominous.

25. However, the negotiations were not continued with Gilroy, because the plaintiff apparently entered into negotiations to purchase the Crown Lease. There was a letter from the defendant's solicitor dated 28 September 1992 seeking confirmation that there was a "new landlord". In that letter it was alleged that the defendant had conveyed "certain information" to a person who had introduced himself as "the new landlord".

26. By letter dated 29 September 1992, the solicitors for Gilroy confirmed that "Contracts have been issued in relation to the sale of the subject property".

27. Following that letter, but not until 18 November 1992, the defendant's solicitor wrote to the Gilroy's solicitor in the following terms,

"Further to your letter of 29 September 1992 I write to advice (sic)
that my client has agreed to a 7% increase in his rent. I am
instructed that he has already forwarded payments at the appropriate
level."

28. During negotiations between the original lessor and the plaintiff, the issue of the defendant's tenancy had been raised. On 21 October 1992, the original lessor's solicitor wrote to the plaintiff's solicitor in the following terms,

"Please note that we are exchanging on the basis that your client is
fully aware that Mr Petersilka has refused to pay the 7% rent increase
contained in his Lease and that he is "holding over" under that Lease
having not exercised his option."

29. The lessor offered certain warranties to the plaintiff in connection therewith. It is not necessary to repeat those warranties or to attempt to construe them.

30. Following his becoming registered proprietor of the Crown Lease, the plaintiff, without further notice to the defendant, instructed his solicitors to issue and serve notice to the defendant to quit the premises.

31. According to the plaintiff, the notice was issued on 29 December 1993. It was affixed to the premises on 30 December 1993. A copy of the notice was delivered to the defendant the same day.

32. The copy Notice to Quit annexed to the plaintiff's affidavit (and that of Mr Larkey, a process server) required possession,

"... on 1 February 1994 or at the expiration of the month of your
Tenancy which shall expire next after the expiration of one month
from the service upon you of this notice."

33. The plaintiff omitted to mention any earlier Notice to Quit.

34. However, by a letter apparently dated 17 December 1992, the solicitor for the defendant had written rejecting a Notice to Quit dated 30 November 1992 allegedly issued on behalf of the plaintiff. The letter enclosed a handwritten cheque for rent dated "15.12.1992".

35. The letter also asserted,

"There seems to be a misunderstanding. Your notice alleges Mr
Petersilka holds the premises as a monthly tenant. Perhaps your
client was not given the full facts when he recently bought the
premises. Certainly if he had made enquiry of my client he would
have been told that Gilroy Investments, the previous owner, has
granted a Sublease to my client."

36. An assertion, attributed to the notice, that the term of the tenancy had expired was rejected.

37. This letter obviously invited enquiry as to the identification of the "full facts" referred to. It put the plaintiff's solicitor on enquiry as to whether the assurances and warranties offered by Gilroy were accurate.

38. It appears from the plaintiff's affidavit that he was registered as proprietor of the Crown Lease over the premises on 4 December 1992. However, he also deposes that he became proprietor of the premises on 30 November 1992.

39. A number of issues are raised by the defendant.

1. Whether the plaintiff's claim as verified entitles him to the
relief sought.
2. Whether the "commencement date" of the lease was 1 June 1991 or
the later date, 17 July 1991.
3. Whether the option was validly exercised, or whether the time for
exercise of the option had expired.
4. Whether (i) Gilroy, or (ii) the plaintiff was bound by any
equitable estoppel arising out of the assurances allegedly given
to the defendant by Gilroy's agent.

The Plaintiff's Claim
40. The plaintiff's case is that, on 29 December 1993, a Notice to Quit was issued and, on 30 December 1993, affixed to the premises and served on the defendant.

41. The form of the Notice to Quit allowed for the uncertainty resulting from the payment of rent on the 17th day of each month as opposed to the first. If the tenancy was a monthly tenancy, it was effective to determine it, as from 1 January 1994 or 17 January 1994 (see Turner and Ors v York Motors Pty Ltd [1951] HCA 52; (1951) 85 CLR 55, 91 per Kitto J). The landlord might then seek possession by an action of ejectment (see Bonnington and Co Pty Ltd v Lynch [1952] HCA 46; (1952) 86 CLR 259).

42. The monthly tenancy so determined was alleged to arise from cl.24 of the lease ("Holding Over"). That clause provides,

"24.1 If the Lessee continues to occupy the Premises after the end
of this lease then the Lessee does so as a monthly tenant at the rent
then applying and on the conditions of this lease.
24.2 The monthly tenancy may be terminated by either party by
1 month's notice in writing to the other."

43. The lease makes provision (cl.30) for the rent payable "in any renewal of the first term" to be the rent calculated in accordance with cl.28. I will assume, for present purposes, that cl.28 and cl.30 apply to both the first term, the extension of one month and the automatic renewals of the tenancies from month to month.

44. However, the evidence adduced by the defendant, referring to a Notice to Quit in relevantly identical terms that was served 13 months earlier raises a question as to whether the monthly tenancy created pursuant to cl.24 had by 29 December 1993, ceased to exist. The nature and extent of the tenancy, if any, as at 29 December 1993, would be unknown if that evidence were accepted. It would not, however, be the tenancy pleaded by the plaintiff or referred to in the Notice to Quit dated 29 December 1993.

45. It may be, of course, that the Notice to Quit itself would be defective. It purports to rely on cl.24 of the lease. However, it is not necessary to decide if that reference is mere surplusage.

The "Commencement Date" of the lease
46. The lease contemplated a "Commencement Date" no later than 1 June 1991. The "Rent Review Date(s)" is (or are) consistent with that expectation. In his application for Registration of Business Name, the defendant, on 7 May 1991, notified 15 June 1991 as the date upon which he then expected to commence business. It seems from the defendant's affidavit and the correspondence exchanged that the commencement of business was, in fact, 17 July 1991. That delay was occasioned by the need to amend the purpose clause of the Crown Lease.

47. Rent payments in fact commenced on and from 17 July 1991 notwithstanding the terms of cl.27.

48. Clause 27 provides,

"The amount of two months rent being $7,800 paid as provided in Item
12 of the Reference Schedule shall be applied:-
(a) in payment of the two month's rental due on and from the date of
commencement of business or 1st June 1991, whichever is earlier;
and (sic)."

49. Item 12 of the Reference Schedule provides,

"The Lessee shall pay two (2) month's rent in advance with such
payment to be applied in respect of rent hereunder as provided in
Clause 27 hereof."

50. Otherwise the lease provided for yearly rent of $46,800.00, with monthly payments of $3,900.00 due on the 1st day of each and every month.

51. It is clear that the lease document distinguishes between the commencement of the term of the lease and the commencement of business. There is no substance in the argument that the lease agreement makes the two concepts synonymous. It follows that the commencement date of the lease was and remains 1 June 1991. However, it does not seem to me, for reasons which I will later express, that the resolution of this issue determines the matter.

Whether the option was validly exercised
52. There are two aspects to the argument advanced by the defendant. As to the first, it does not seem to me that the delay in the commencement of business, nor the discussion about it, amounted to a variation of the terms of the lease agreement.

53. The lease agreement required three month's notice in writing, prior to 1 June 1992, for the option to be exercised so as to bind the lessor to renew the lease for a further term. On no view of the evidence was that done. Notice would have been required before 1 April 1992.

54. It follows that the option to renew was, unarguably, not exercised in accordance with the terms of the lease agreement.

Whether (i) Gilroy, or (ii) the plaintiff was bound by any equitable estoppel arising out of the assurances given by Gilroy's agent.
55. It is necessary first to consider whether Gilroy is arguably bound by any estoppel.

56. Two assurances were given by Mr Griffith in the conversation deposed to by the defendant. The first related to the time for exercise of the option. The conversation alleged by the defendant is capable of being construed as an assurance that time for exercise of the option would be extended until the rent for the new term had been fixed. Clause 28 provided for the fixing of the new rent. It would have permitted rent for the new term to have been fixed after 1 April 1992 and possibly even after 1 June 1992.

57. Subclause 28C provided that, at least for the first renewal of the lease, the yearly rent for the first year thereof would be "the greater of (a) the indexed rent or (b) the percentage increases (sic) rent". Those concepts were defined in subclause 28(b). Whilst a calculation of "Indexed Rent" would require expert knowledge, the concept of "Percentage Increase Rent" effectively involves adding 7% to the previously applicable rental.

58. Subclause 28E provides for a dispute resolution mechanism. However, it seems to be applicable only to a dispute as to "current market rent". That concept has no relevance to any renewal other than a renewal pursuant to the second option.

59. Subclause 28G seems to me to be of general application. It states,

"The lessee shall continue to pay the current instalments of rent due
until the new rent is determined. Within 21 days after being notified
of the new rent the lessee shall adjust and pay the amount due to the
lessor as rent from the Rent Review Date, ..."

60. By letter dated 7 July 1992, Gilroy asserted that the new rent was $4,173.00, that is, 7% more than the preceding year. It also asserted that the date of commencement of the new rental was 1 June 1992.

61. The response from the defendant clearly was not a decision to exercise the option, it was a proposal to freeze the rent at current levels and to renew the lease for the first further term if that was agreed.

62. It seems to me that, given the assurance offered by Gilroy's agent, it would arguably have been inequitable for Gilroy to insist that the option could not be exercised by giving three months notice in writing prior to a date after 7 July 1992. It was arguably inequitable for Gilroy to have insisted on the terms of the option agreement in its original form.

63. Gilroy's subsequent letter of 7 September 1992 included an assertion that the plaintiff was then "holding over". It was silent as to whether the plaintiff was regarded by Gilroy as precluded from exercising his option to renew for four years as from 1 June 1992. It seems to me that this letter might be interpreted as representing that, unless the plaintiff was prepared to accept the increased rental and exercise his option to renew the lease for the first further term, the tenancy from month to month which the occupation otherwise would be, could be terminated at some future date. It could also be interpreted as indicating that Gilroy regarded the right to exercise the option as having lapsed. However, that inference is the less probable one and it is at least arguable that the defendant would not have so interpreted it.

64. It was certainly open to Gilroy to decline the defendant's offer to renew at the same rental and put him to an election whether to accept the 7% increase or not.

65. Had the defendant been put to an election, it would have been incumbent upon him to have exercised the option or to have declined the opportunity. If he had then failed to make an election, his assertion of his equitable rights could have been met with a claim of acquiescence.

66. The next relevant communication was the letter from the defendant agreeing to the proposed increment in rent. Gilroy had not, until then, responded to his request to "freeze" the rent level. Notwithstanding the terms of the lease, it was always open to Gilroy to waive its legal right to an increase. Indeed, the defendant had not asserted a view that Gilroy was not within its rights in proposing a 7% increase. He was arguably representing merely that he was endeavouring to decide between terminating his tenancy or taking up the option.

67. By its letter of 7 September 1992, Gilroy did not accept or reject that offer. It did not place any restriction on the time for the exercise of the option as it could have done by rejecting the defendant's proposal and requiring an election by the defendant within a reasonable time.

68. As it happened, the defendant terminated that "stand-off" by accepting the increased rent. That acceptance is capable of being interpreted as an exercise of the option.

69. It is regrettable that neither of the solicitors concerned saw fit to express himself in clear terms. If either or both of them had done so, it is likely that the area of uncertainty would be greatly reduced.

70. It is clearly open to a lessor to accept the exercise of an option to renew a lease otherwise than in accordance with the terms providing for its exercise. A notice of intention to exercise an option does not need to be in precise terms. It is enough that the intention of the party seeking to exercise it is clear.

71. In Della Imports Pty Ltd v Birkenhead Investments Pty Ltd (1987) 75 ANZ Conv R 294, McLelland J noted that the question is whether a party seeking to exercise an option is, in all the circumstances, expressing a desire to take a renewed lease. Even if the actual notice is mistaken in its reference to the relevant premises it may be effective.

72. A similar view was expressed by the Court of Appeal in Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673; 75 ANZ Conv R 295. Kirby P described the document purportedly exercising the option in question as "imperfect (and possibly even ambiguous)". It was a case where the purported exercise of the option was expressed to be "subject to satisfactory terms and conditions being negotiated". The document was, nevertheless, found to be a valid exercise of the option in question.

73. An option may be validly exercised by virtue of an equitable estoppel arising in favour of a lessee (see Photo Art and Sound (Cremorne) Pty Ltd v Cremorne Centre Pty Ltd (1987) 76 ANZ Conv R 347).

74. It is certainly arguable that, by accepting the proposed increase in rent, the defendant was purporting to exercise the option contained in the lease document.

75. Depending on other factors, such as the respective merits and bargaining position of the parties, it is possible to argue that Gilroy was estopped from asserting that the option granted to the defendant was not capable of being exercised by the acceptance of the proposed rent increase, notwithstanding the terms of the lease document concerning notice being given not less than three months before 1 June 1992 (see Liangis Investments Pty Limited v Daplyn Pty Ltd and Ors (unreported, ACT SC, 31 March 1994, Higgins J).

76. However, the existence of an equitable right in the defendant against Gilroy does not necessarily imply that that right may be asserted against the plaintiff.

77. The plaintiff sought and obtained assurances from Gilroy that the defendant had not exercised his option to renew the lease. It is not clear whether the plaintiff was aware of the actual dealings between the defendant and Gilroy. However, the plaintiff does not adduce evidence that it did not know of those dealings.

78. Of course, the plaintiff may well have believed that the legal effect of the correspondence between the defendant and Gilroy was that the option had not been exercised. It may also have been of the opinion that if the option had not been exercised in conformity with the terms of the lease document, it could not be exercised at all. It may have believed that the assurances given to the defendant had created no equity in favour of him. However, those erroneous assumptions would not prevent the plaintiff being bound by the equity in favour of the defendant created by Gilroy. It would be enough that the plaintiff was aware of the dealings between Gilroy and the defendant or, at least, was put on enquiry as to those dealings.

79. Equally, the defendant's view of the effect of his actions is not necessarily determinative. The defendant deposed that he intended to exercise his option by 17 April 1992. He commenced the process by his letter of 8 April 1992. He also had in mind, he said, that he was entitled to a firm agreement as to the proposed rent before being obliged to elect whether or not to exercise the option for a further term.

80. There is, also, evidence that, at some time before settlement of the sale of the Crown Lease to the plaintiff, the plaintiff spoke to the defendant concerning the latter's continued occupation of the premises. It is possible that their conversation was sufficient to put the plaintiff on notice that the defendant claimed to be entitled to exercise (or that he had exercised) his option under the lease. It does seem that the defendant entertained a real concern as to that issue. Otherwise he would not have needed the extensive assurances and warranties which he asked for and received from Gilroy prior to settlement.

81. The plaintiff does not adduce evidence of the terms of that conversation. Neither has the plaintiff, in terms, denied that he was aware of the relevant correspondence between Gilroy and the defendant.

82. Whether the defendant would succeed in fixing the plaintiff with notice of his equitable rights is not certain. However, I am not persuaded that it is unarguable.

83. It follows that the plaintiff's application must be refused.

84. I will hear the parties as to costs.