Royal Botanic Gardens and Domain Trust v South Sydney City Council

[2002] HCA 5

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(Decision by: Callinan J)

Royal Botanic Gardens and Domain Trust
vSouth Sydney City Council

Court:

Judges: Gleeson CJ
Gaudron J
McHugh J
Gummow J
Kirby J
Hayne J

Callinan J

Subject References:
Contract
Interpretation
Ambiguous term of lease
Admissibility of evidence of surrounding cir-cumstances to assist in interpretation of ambiguous contract or term
Term that lessor 'may have regard' to certain matters
Whether lessor limited to consideration of those matters
Public or statutory bodies as parties to lease
Relevance of legislation relating to parties in order to construe term of lease
Contract
Terms and conditions
Implied obligation or duty of good faith and fair dealing

Legislative References:
Registration of Deeds Act 1897 (NSW) - The Act
Sydney Corporation Act 1932 (NSW) - The Act
Fourth Schedule of the Local Government (Areas) Act 1948 - s 25(1)
City of Sydney Act 1988 (NSW) - The Act
Crown Lands Consolidation Act 1913 (NSW) - Section 5(1)
Public Trusts Act 1897 (NSW) - s 3
Domain Leasing Act 1961 (NSW) - The Act
Royal Botanic Gardens and Domain Trust Act 1980 (NSW) - s 5(1)
Real Property Act 1900 (NSW) - The Act
Conveyancing Act 1919 (NSW) - s 23B(1)

Hearing date: 6, 7 September 2001
Judgment date: 14 February 2002

Canberra

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Decision by:
Callinan J

[117] For almost 200 years, the Domain in Sydney has been a place of public resort. In Randwick Corporation v Rutledge , ^[111] Windeyer J said this of it: ^[112]

In 1825 and 1826 the need to reserve from alienation lands likely to be required for public needs in the future was emphasized to the Governor in connexion with new land regulations. Before then some land had been set apart for public purposes -- the Government Domain in Sydney being the oldest of such reserves.

Earlier his Honour had said: ^[113]

The term "public reserve" -- and the word "reserve" alone, when not controlled by a definition or a context indicative of a different sense -- have come to be used in common parlance in Australia in an imprecise way to describe an unoccupied area of land preserved as an open space or park for public enjoyment, to which the public ordinarily have access as of right.

[118] By 1916, the Domain was vested in trustees for the purposes of public recreation. By January 1956, Sydney City Council wished to use the subsurface space, and a new level to be opened and created below the Domain for a public car park. On 17 January 1956, an official of the Department of Agriculture (the department) (which acted on behalf of the trustees) wrote to the Sydney City Council stating the terms and conditions upon which the council would be allowed to construct and operate a car parking station under the Domain. It was obviously contemplated by the parties that the original surface would remain available for public recreation. Paragraph 5 of the letter of 17 January 1956 proposed that a lease be granted to the council of the excavated space and new land (the land) on which the car park would be constructed. The term was to be 50 years at a rental of £1000 per annum. The basis for the calculation of adjustments of rental was also stated:

If at the end of each three year period of the term of the lease the additional cost of maintenance of the Domain in consequence of the construction of the Station (namely the cost of employing one additional gardener and one person to provide necessary services on weekends and on public holidays and of supplying additional fertilizers) shall have varied from such cost at the commencement of such period, the rental for the succeeding period of three years shall be correspondingly varied by the amount of such variation but shall not in any case be less than £1,000 per annum.

Paragraph 7 of the letter added that the lease would contain such covenants as the Crown Solicitor might advise to be appropriate for a lease of this kind. The letter concluded by noting that, upon receipt of advice that the conditions were acceptable to the council, the Crown Solicitor would be instructed to prepare a draft instrument which would be submitted to the council for consideration and acceptance. (In 1989, the current respondent assumed the benefits and obligations of the council in respect of the car park. I will refer to each of the councils interchangeably as the respondent.)

[119] On 17 May 1956, the respondent informed the department that the proposed terms were satisfactory subject to two non-material amendments. On 8 June 1956, the department informed the council that the trustees were agreeable to the amendments, subject again to a further (non-relevant) variation. It was then for the Crown Solicitor to prepare the draft agreement for lease.

[120] On 27 August 1957, the department communicated to the council the Crown Solicitor's opinion that the trustees did not have power to grant the lease, in the absence of enabling legislation. By April 1958 however, the car park and footway had been constructed and were in use.

[121] On 1 May 1958, the respondent began to pay rent at £1000 per annum, although the enabling legislation, the Domain Leasing Act 1961 (NSW), was not enacted until 1961. On 4 July 1962, the department proposed further amendments to the original terms to the respondent. On 6 November 1964, the department notified the respondent of an increase in rental to £1200 per annum because of increased costs associated with the employment of an extra garden labourer as well as increases in the costs of fertiliser and other materials.

[122] The respondent responded on 12 April 1965, accepting the amended terms but suggested a variation of its own. The response of the department was that several of the terms and conditions were obsolete, and that a complete revision should and would be undertaken.

[123] On 23 August 1965, some immaterially different terms were offered by the department. It should be noted however, that, again, the rental was to be adjusted by reference to what may compendiously be described as gardening expenses.

[124] On 22 November 1965, the respondent accepted the new terms but proposed some further terms of its own. On 15 September 1966, the Crown Solicitor was instructed to prepare the instrument of lease and on 2 June 1970 the department notified the respondent of a rental increase to $3000 per annum by reason of increased costs for labour and materials since 1965. Almost three years later, on 20 February 1973, the department advised the respondent of another increase in rent to $4500 per annum from 1 May 1973, by reason of the sharp increase in labour and other costs since the last review of rental.

[125] On 23 March 1973, more than 14 years after the respondent had entered into possession, the first draft of the deed of lease was sent by the Crown Solicitor's office to the department. It contained a number of variations and additions to the terms proposed in the correspondence which had passed between the parties in 1956 and 1965. Clause 4(b)(iv) of the draft took this form:

4. PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED:

(b)

That the yearly rent payable during and in respect of each of the fifteen periods each of three years and the remaining period of two years comprising in all the residue of the said term after the first three years thereof (each of such periods being hereinafter referred to as 'the affected periods') may be determined by the Trustees at the commencement of each of the affected periods and the yearly rent so determined shall be payable during and in respect of the then succeeding three years of the term PROVIDED that:

(iv)

in making any such determination the Trustees may have regard to additional costs and ex-penses which they may incur in regard to the surface of the Domain above or in the vicinity of the parking station and the footway and which arise out of the construction operation and maintenance of the parking station by the Lessee.

On 23 January 1975, a revised lease prepared by the Crown Solicitor was forwarded to the respondent.

[126] The respondent sought advice from the City Solicitor. He drew attention to cl 4(b), specifically to para (iv) and stated that "it appears that there is no provision for Council to object to the amount of rent which the trustees determine" and "[i]n the light of my comments above, as long as Council is prepared to accept the restrictions contained therein, I certify that the document is in order for execution". The respondent thereafter accordingly executed the lease which was dated 15 May 1976. The responsible minister's consent was necessary for the lease to be effectual and this was obtained in September 1976.

[127] The appellant seeks to make the point that the provisions for review of rent in cl 4(b) in the lease as executed, differed from the terms referred to in the correspondence in 1956 in four respects. First, any revision of rent was a matter for the decision of the trustees, who were not obliged to adjust the rent by reference simply and exclusively to increases in costs, gardening or otherwise. Secondly, cl 4(b)(iv) was, in terms, worded to entitle the trustees to have regard to certain factors of cost in making the determination, but it did not provide that these were the only factors to be taken into account. Thirdly, the factors of cost in cl 4(b)(iv) operated prospectively rather than retrospectively (as had been the case under the earlier correspondence). Fourthly, the actual wording of the clause had changed, it was submitted, in three significant respects:

(i)

some proposals in the correspondence of 1956 were not pursued;

(ii)

the term "cost" was expanded to "costs and expenses"; and

(iii)

the phrase "additional cost of maintenance of the Domain in consequence of the construction of the Station" was expanded to "additional costs and expenses which they may incur in regard to the surface of the Domain above or in the vicinity of the parking station and the footway and which arise out of the construction operation and maintenance of the parking station by the Lessee".

[128] On 14 October 1976, the trustees increased the rent to $10,500 per annum citing "the sharp increase in labour and other costs since the last review".

[129] The next relevant event occurred on 29 June 1977 when the department drew attention, in a letter to the respondent, to the fact that cl 4 provided a basis upon which the trustees might review the rent and that the rent review in May 1970 had not been accompanied by specific advice to the respondent of the basis of the increase. The letter went on to state:

Basically the situation is that the determination of the revised rental is at the discretion of the Trustees and while it is open to them to have regard to certain cost factors the Department does not consider that they are strictly bound to a justification of their calculations to Council.

[130] The legal personalities of the parties were altered, in 1980, by establishing the appellant as a statutory body representing the crown; and, in 1989 the current respondent replaced the Sydney City Council and the benefit and burden of the lease passed to it.

[131] Mr Grieve of Queen's Counsel was asked in 1989 to advise the respondent whether it might obtain an order for rectification of the lease "to amend clause 4(b) ... to bring it into line with the proposed rental clauses in 1956 and 1965". In May 1989 he gave a negative answer to that question.

[132] In summary, the rent had been paid at the rate of £1000 per annum to 30 April 1965, at the rate of £1200 ($2400) per annum from 1 May 1965 to 30 April 1970, $3000 per annum from 1 May 1970 to 30 April 1973, and $4500 per annum from 1 May 1973 to 30 April 1976. On each occasion of an increase, the trustees explained that it was related to increased costs.

[133] The first increase in rent after the execution of the lease, to $10,500 per annum from 1 May 1976 to 30 April 1979, was again justified by the trustees by reference to increased costs, as was the next rent increase, to $13,640 per annum from 1 May 1979 to 30 April 1982. The subsequent increases were to $34,300 per annum from 1 May 1982 to 30 April 1985, and then to $50,000 per annum from 1 May 1985 to 30 April 1988.

[134] From May 1988 rent has been demanded and paid as follows:

Proceedings in the Supreme Court of New South Wales

[135] These proceedings were commenced on 11 March 1996 in the Equity Division of the Supreme Court of New South Wales. There, the respondent claimed: declarations that the appellant could only fix the rent by reference to additional costs and expenses and that the rents demanded and paid from 1985 to 1996 were excessive; an order that those rents, to the extent that they went beyond additional costs and expenses be repaid; or, in the alternative, rectification of the lease to confine increased rents to sums related to additional costs and expenses. At first instance, the parties also litigated a claim, that the payments of rent from 1985 to 1996, were made under a mistake of law.

[136] The case was tried by Hodgson J (as he then was). His Honour held that on the proper construction of the lease, the appellant was entitled to charge a "fair and reasonable rent". The trial judge rejected the claim for rectification.

[137] The respondent appealed to the New South Wales Court of Appeal (Spigelman CJ, Beazley and Fitzgerald JJA). In that court Fitzgerald JA, with whom the other members of the court substantially agreed, after reciting the arguments of the parties said this:

While it is possible to find some support for each alternative presented by the parties' rival arguments, ^[114] neither argument is compelling on the basis of language, linguistic context or purpose, and each alternative is subject to objections. It is permissible to seek assistance in discerning what the parties intended by the terms in which their agreement was expressed from the background circumstances at the material time. ^[115] This view is reinforced by the consideration that the concept of "fair and reasonable" which the Trust seeks to apply to the determination of rent under the lease is intrinsically ambiguous. A "fair and reasonable" rent as between a particular lessor and lessee might be, but is not necessarily, the market rent. Even when one party is entitled to determine the rent, it must be possible to decide whether the rent determined is "fair and reasonable", which will commonly be influenced by surrounding circumstances.

The fundamental ambiguity for present purposes concerns the meaning of the phrase "may have regard to" in subcl 4(b)(iv) of the lease, and in particular whether or not that phrase is intended to confine the matters which the Trust may consider in determining the rent, irrespective of the width of its discretion otherwise; for example, with respect to which, if any, "additional costs and expenses ... [it] may incur" it considers, and the manner in which all or each of them is brought into consideration.

His Honour, then referred to circumstances of the kind which Mason J discussed in Codelfa Construction Pty Ltd v State Rail Authority (NSW ) ^[116] as an aid in the construction of the lease and he concluded as follows:

In my opinion, when the lease is read against the background of those circumstances, the parties' "presumed intention" in their reference to the costs and expenses to which the lessor "may have regard" in determining the rent was to specify exhaustively the considerations material to that determination.

[138] Because of the conclusion of the Court of Appeal with respect to the meaning of the relevant clause in the lease, it became necessary for that court to decide the respondent's claim for restitution. It had been unnecessary for the primary judge to determine this matter, because of his decision on the point of construction in favour of the appellant. This issue was resolved by the Court of Appeal in favour of the appellant.

The appeal to this court

[139] The appellant appealed to this court. Neither the claim for rectification nor the claim for restitution is pursued in this court, although the respondent has filed a notice of contention, challenging, if the court were to take the view that the lease was not ambiguous, the decision in Codelfa , to the extent that it holds that absent ambiguity recourse to surrounding circumstances is impermissible.

[140] The appellant's first submission is that the lease was a complete and final agreement between the parties and was covered by the parol evidence rule.

[141] Clause 4(b) of the lease provides that the yearly rent in respect to each of the periods of three years after the first may be determined by the trustees at the commencement of each of the succeeding periods. The use of the word "determined" in each of cl 1 and cl 4(b) is a repetition of the language of s 3 of the Domain Leasing Act. ^[117] A power to make a determination of the rent for the period, the appellant submits, connotes a power in the appellant exclusively to decide the relevant factors and the weight to be given to them in fixing that rent.

[142] The appellant points out that the broad powers conferred by cll 1 and 4(b) are then followed by four provisos. They deal with these subjects: an obligation to notify; how and when adjustments of rent will be made; a minimum sum for the rent as determined by the trustees (there being no maximum specified); and the enabling or facilitative function of para (iv). The last refers to some factors to which the trustees may have regard in making the determination, without stating or implying that these are the only factors to which they may have regard.

[143] The appellant also places weight on the word "may", seeking to emphasise its presumably permissive meaning and the absence of the word "only" after it. The appellant emphasises that but one of the provisos, the last, uses the word "may" whereas the others use the word "shall".

[144] The appellant submitted that its construction of cl 4 was supported by cl 4(k) which permits the trustees (or their delegate in the department) to form any opinion under the lease "on such materials as they or he may think sufficient" and in so doing be exercising "merely administrative functions".

[145] The appellant next put a submission that, as both the trial judge and Spigelman CJ recognised, the construction of cl 4(b) contended for by the appellant did not render the deed of lease unenforceable for uncertainty: it is orthodox and well established that a court may imply an obligation of reasonableness when the parties intend to enter a valid and binding agreement and there is machinery, but no formula for determining price (or, also, it may be said, rent). ^[118]

[146] The appellant sought to rely on two recent decisions of the New South Wales Court of Appeal, Alcatel Australia Ltd v Scarcella ^[119] and Burger King Corp v Hungry Jack's Pty Ltd ^[120] which held that a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract.

[147] The appellant's submissions should be rejected. In my opinion, cl 4(b)(iv) is ambiguous. This is certainly not the first case and it will not be the last in which a court has thought, or will think a sentence in which the word "may" has been used, ambiguous. If the relevant factors to which the trustees may, as opposed to must, have regard on each occasion for a determination, are not confined to those enumerated, then it becomes very difficult, as Fitzgerald JA pointed out, to catalogue others to which the trustees may look, to determine what the primary judge held was determinable, a fair and reasonable rent. The appellant seeks to meet this by saying that it was not contested in the Supreme Court, that the rent actually demanded and paid from 1985 was fair and reasonable.

[148] This is not a case in which there is no formula for determining the rent. The formula was a formula composed of the elements of increases in costs and expenses, the question being whether the increases were to be related to particular items of increased costs.

[149] I do share the opinion of Fitzgerald JA that there is an ambiguity, but that it is capable of resolution by reference to, among other matters, the surrounding circumstances to which his Honour referred. The other matters are the contextual indications to be found elsewhere in the lease. One of these is the quantum of the initial rent itself, of only $2000 per annum, on no possible view an ordinary commercial rent for a lease for a long term of a large car park close to the centre of the most populous city in Australia.

[150] The second contractual indication, and it is a significant one, is the reference in cl 4(b)(iv) itself to "additional costs and expenses". The use of the word "additional" is almost, but not quite a strong enough indicator on its own, of a mutual intention to relate and confine the rent to be paid over the term of the lease to a rent determined by reference to costs and expenses. The use of the phrase "additional costs and expenses" rather than the words "costs and expenses" means that there must have been basic costs and expenses at the outset that the parties had in mind and to which increased costs and expenses could, after calculation, be added so that the aggregate of this would become the rent payable from time to time.

[151] The fact that the nature of the costs and expenses in question is identified is also relevant. There is in cl 4(b)(iv) reference to expenses "in regard to the surface of the Domain above or in the vicinity of the parking station and the footway and which arise out of the construction operation and maintenance of the parking station by the Lessee". The surface at least, was and could only be used pursuant to the Public Parks Act 1912 (NSW) in force at the inception of the term and subsequent enactments all of which require that the Domain be used for public recreation. This reference in the lease, served further to indicate that the parties contemplated recoupment of expenses and not profit.

[152] Another relevant matter apparent on the face of the lease is that the respondent's predecessor had to construct, obviously at much expense, the parking station. ^[121] In that sense the lease was in the nature of a building lease. And it would not be surprising in a lease of that kind, between public authorities seeking to exploit, within power, and completely for public purposes, land in public ownership, that the rent payable would be designed to do no more than recoup costs and expenses incurred, and to be incurred by the authority in whose name the land is owned.

[153] It is also relevant that the lease required that the respondent pay all rates, taxes, charges and assessments, payable in respect of the demised land; keep the parking station in good repair; indemnify the appellant and others against claims and demands, arising out of the use of the land for a parking station; keep the car park insured; pay for services to, or in respect of the parking station; and, at the end of the term, if so required by the appellant, remove any building structure from the site. Some of these are of course conventional terms in many leases, but to impose upon the lessee a separate obligation to pay all rates, taxes, charges and assessments in respect of the land rather than a part of them as a component of the rent is unusual, and again is indicative of an arrangement between lessor and lessee of a non-commercial kind.

[154] The internal indications in the instrument of lease to which I have referred, together with matters external to it, the long history of the Domain as a park, the trustees' role as the public's guardians of the park, the statutory context of the legislation ^[122] under which the parties function, including the requirement that the responsible minister consent to the lease, ^[123] that the parties are statutory, non-commercial creatures, that the Domain had not apparently been used for other than public purposes before the lease was granted, that the respondent was let into possession long before the lease was executed, that the respondent has in fact constructed, obviously for much money, a public car park, and that at the time of entering into possession gardening and related expenses equated approximately to the amount of rent agreed, together compel the conclusion that the increases in rent were confined to additional costs and expenses of this kind.

[155] I do not think that the fact that the respondent has from time to time paid the appellant rent considerably in excess of additional costs and expenses when demanded by the appellant, dictates a different result. The lease stands without amendment. As an instrument in writing, it could only be amended by further writing intended to have and having that effect. No estoppel arises. There is no suggestion that the appellant altered its position to its detriment on the basis of over-payment of rent by the respondent. The position simply seems to be that different officials on each side at various times took different views of the effect of cl 4(b) of the lease.

[156] In view of the conclusion I have reached, it is unnecessary to answer the questions raised by the rather far-reaching contentions of the appellant, and for which, it says, Alcatel Australia Ltd v Scarcella ^[124] and Burger King Corp v Hungry Jack's Pty Ltd ^[125] stand as authorities: whether both in performing obligations and exercising rights under a contract, all parties owe to one another a duty of good faith; and, the extent to which, if such were to be the law, a duty of good faith might deny a party an opportunistic or commercial exercise of an otherwise lawful commercial right.

[157] I would dismiss the appeal with costs.