Payce Properties Pty Limited v BBC Hardware Limited S265/2000 [2001] HCATrans 659 (14 December 2001)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S265 of 2000

B e t w e e n -

PAYCE PROPERTIES PTY LIMITED

Applicant

and

BBC HARDWARE LIMITED

Respondent

Application for special leave to appeal

GLEESON CJ

HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 14 DECEMBER 2001, AT 10.31 AM

Copyright in the High Court of Australia

MR M.H. TOBIAS, QC: If the Court pleases, I appear with MR D.J. HAMMERSCHLAG, SC, for the applicant. (instructed by Morgan Lewis Alter)

MR F.M. DOUGLAS, QC: May it please the Court, I appear with my learned friend, MR. T.G.R. PARKER, for the respondent. (instructed by Allens Arthur Robinson)

GLEESON CJ: Yes, Mr Tobias.

MR TOBIAS: Your Honour, the summary of argument raises two points: one is referred to in the summary as the law development point; the other is the construction point, and I will deal with - - -

GLEESON CJ: The first one is the new point, is it?

MR TOBIAS: The first one is the new point, but I propose to deal with the second point first. Your Honour, the relevant provisions of the lease are set out in the judgment of the primary judge at pages 19 and 20 of the appeal papers. Relevantly at page 20, between lines 20 and 30, in a rent review provision, clause 30(iii), at three yearly periods the rent was to be:

increased by an amount equal to ten per centum or such less factor as the Board may determine of the amount (if any) by which the valuation of the demised premises for rental purposes as determined by the Valuer General . . . exceeds the immediately preceding valuation for rental purposes.

The only relevant provision of the lease that became the subject of discussion is that of clause 20, which is referred to on the previous page, which was the use provision and which provided that the:

demised premises shall be used by the Lessee solely for the purposes of the business of the Lessee . . . or for such other business purposes as the Lessee may hereafter from time to time intend and the Board may in writing approve but such approval shall not be unreasonably withheld.

GLEESON CJ: Is the construction question, whether the expression:

the valuation of the demised premises for rental purposes -

requires the valuer to take account of clause 20?

MR TOBIAS: Not only requires him to take into account, but only permits him to value the premises upon the basis of the use permitted by that provision and no other.

GLEESON CJ: Yes.

MR TOBIAS: There are two valuations. What, in fact, the majority did, in our respectful submission, was to rewrite the provision so that the words "for valuation for rental purposes" meant valuation upon the basis that the premises could only be used for the purpose permitted by the lease. Your Honour, the relevant valuations are then set out at pages 21 to 25 of the appeal papers. There were, in fact, two valuations: one as at 28 February 1996, and it starts at the bottom of the page; and one three years later, 28 February 1999. The valuer, in reference to his instructions, between lines 45 and 50, said that they had:

To provide . . . with a valuation of the land described herein, being a `valuation of the demised premises for rental purposes' in accordance with clause 30 of Lease -

He then dealt with town planning issues and, ultimately, on page 23, line 45, said:

Having regard to the foregoing comments the valuation as at 28 February 1996 has been approached on an industrial basis.

And he thereby determined the valuation accordingly.

By the time of the second valuation the zoning had changed. It commences on page 24. The instructions are identical with the instructions for the earlier valuation, because they were both done at the same time. And at page 25 at about line 45, the Valuer General said:

Having regard to the foregoing comments the valuation . . . has been approached on a residential basis.

And he valued it accordingly.

GLEESON CJ: I just want to see what the difference is.

MR TOBIAS: The difference between $8,500 million and $12 million, for the freehold, fee simple in possession. It was, of course, common ground that what the valuer was required to value was the fee simple in possession and, of course, this was a 40-year lease and does not expire until the year - well it has got 24 years from now to run anyway.

GLEESON CJ: Where is that clause again?

MR TOBIAS: Which one, your Honour.

GLEESON CJ: Page 20, about line 25.

GLEESON CJ: That is 10 per cent of the value of the fee simple?

MR TOBIAS: It was common ground at all material times that what he had to value was the fee simple in possession, not the reversion.

GLEESON CJ: Just give me a moment, Mr Tobias. You use the expression "for rental purposes" as descriptive of the purpose for which the valuation exercise is being undertaken.

MR TOBIAS: Especially, because it has been undertaken by the Valuer General, who undertakes valuations for all different purposes, as Justice Giles noted in his dissenting judgment at page 68, paragraph 24, a passage of some note. At 24, his Honour said:

Reference to a valuation for rental purposes immediately invites the question, from what valuations with other purposes is the valuation for rental purposes distinguished? Land may be valued for other purposes, for example, for sale purposes . . . mortgage purposes -

et cetera. And further down, just above 40:

In the present case the Valuer General was a statutory officer with the functions conferred or imposed by or under the Valuation of Land Act 1916 . . . and valued land for a variety of purposes . . . It is therefore understandable that the lease should have stated the purpose of the valuation, making express what may well have been implicit and in particular distinguishing the valuation from a valuation made by the Valuer General for a purpose found in the legislation.

GLEESON CJ: So the valuer was not told to find a rental value for the premises?

MR TOBIAS: No, no.

GLEESON CJ: The valuer was told to find the value of the fee simple in possession, it being explained that the purpose for which he was set that task was to work out the rent, which would be 10 per cent?

MR TOBIAS: Correct. The Court of Appeal or at least Justice Einstein and Justice Giles took the view that that is what those words meant; the majority took the view that they meant that the valuation had to be upon the basis of the limited use, or the use only upon the uses permitted, in clause 20, and then there was a question as to whether that meant the actual use at the time, which, in the present case, was a timber yard, or such other business uses as might ultimately or at any time be permitted under the provisions of that clause. What is more, their Honours seem to assume, wrongly, of course, that under both valuations the highest and best use at the date of the valuations was residential. In fact, it was industrial at the time of the first and residential only at the time of the second.

HAYNE J: Let it be assumed that the question of construction is, as the division in the courts below surely demonstrates, contestable.

MR TOBIAS: It is more than contestable, in our respectful submission.

HAYNE J: Well, why should we take it on to resolve it? There is a difference of opinion below; why should we take it on?

MR TOBIAS: Three reasons: first, the decision of the majority is manifestly wrong; it is more, in our respectful submission, than just doubtful. Secondly, there is at least five leases with identical provisions. These are the old Maritime Services Board leases. The evidence indicates that there are, and it is conceded that there are, five leases still current with terms, including options, that will not expire from between 17 and 27 years hence. So that have at least 17 to 27 years to run, depending on which one you take, and that is including options I might add. Waterways have indicated that these leases are in relation to substantial areas of land, they return substantial income and therefore this decision will have a clear impact upon the further determination of rent under those leases. So it is not just confined to these parties. Further, I accept, of course - - -

HAYNE J: But it is the construction of a particular form of document. Not a form of document - - -

MR TOBIAS: It is not a standard form provision, I accept.

HAYNE J: Just so. Now why should we take it on? I am not saying we should not; I just want to know why you say we should.

MR TOBIAS: Well, the first reason is because the decision of the majority is manifestly wrong. It really is insupportable; it simply rewrites the provision, which, in our respectful submission, in relation to a 40-year term, could never have been the intention of the parties at the time. Secondly, it goes outside the parties to this lease and applies at least to five other leases, long term leases of substantial land; and thirdly, these leases are long term and this lease is long term. If there is an injustice, which, in our respectful submission, the majority decision demonstrates, then that injustice is going to be perpetuated for many, many years or, for at least as far as my client is concerned, for 24 years in the future and, your Honours, in our respectful submission, that error should be corrected.

GLEESON CJ: Mr Tobias, I may have misunderstood some of the evidence in support of the application, but I had an impression that at one stage, at least, the valuer was saying that there was a difference within the reasoning of the two majority judge judgments in the Court of Appeal that would produce different valuations?

MR TOBIAS: Yes, let me just take you to where that is indicated. If your Honour goes to Justice Stein's judgment. Justice Fitzgerald made it clear in his judgment at page 74, between lines 40 and 45, where he said:

In that context, the phrase "valuation . . . for rental purposes" seems to me to refer to the determination of the value of the property for the purpose of the rental of the property for its permitted use, or, if that use is changed consensually, the new permitted use adopted.

That seems to indicate that it is for the actual permitted use at the date of valuation, even though that may change within the meaning of the provision, that is, the meaning of clause 20. Justice Stein at page 60 of the appeal papers said two things. First of all he said, at the top of the page:

In my view, they -

that is, the words "for rental purposes" -

did not mean that the property should be valued unencumbered by the lease and for its highest and best use.

So his Honour seemed to be indicating, contrary to the assumption that the land was to be valued as a fee simple in possession, that it was to be a value in some way encumbered by the lease. The next question which arose is, the whole lease or only the use provision? He tends, to some extent, to clarify that at the first sentence of paragraph 5 of his judgment:

In my opinion, the words "for rental purposes" in the rental review clause mean that the valuer is to determine the value of the property for the purpose of the rental of the property under the use or uses permitted by the lease.

There is some inconsistency between that conclusion and his conclusion in the first sentence at paragraph 4, that it was wrong to assume:

that the property should be valued unencumbered by the lease.

HAYNE J: But at the end of the day parties are bound by the order and the declaration.

MR TOBIAS: That is right.

HAYNE J: What does the declaration say? Does the declaration lead to this difficulty?

MR TOBIAS: I do not think the declaration does.

HAYNE J: Then the point falls away, does it not?

MR TOBIAS: The declaration actually leads to a different point that is not referred to in the summary, and that is the point I mentioned earlier. The declaration is at page 76 about line 35. It says, "the valuation" is "to be made" "on the basis that the Property is used for the purpose specified in clause 20 of the Lease." Now what does that mean? Does it mean the actual use of the date of valuation or does it mean any use or potential use that falls within clause 20?

HAYNE J: Well, these declarations were framed by your side in your notice of appeal, were they not?

MR TOBIAS: No, no, this is on the cross-claim.

HAYNE J: Is it?

MR TOBIAS: But I must accept - I suppose we did not think we were going to lose, but there was no - - -

HAYNE J: Optimism springs eternal, Mr Tobias.

MR TOBIAS: I know, still one has to be optimistic in life these days. This was the declaration sought by the respondent, who was then the cross-claimant, and I confess that we did not seek to object to it, but it still raises the issue to which I have referred, because what the declaration does is, in any event, reflect what was said in the judgment and, of course, by the time a judgment was handed down the declaration followed by the words used in the judgment.

HAYNE J: But parties can go back and ought to go back.

MR TOBIAS: They can go back, I know.

HAYNE J: If they are saddling themselves up with declarations of this kind, there is no choice but to go back if they want to complain about it.

MR TOBIAS: I understand that, your Honour. The simple fact of the matter is, go back or not go back, the issue is still a live issue, because the Valuer General still has to determine what that declaration means when he does the next valuation or when he goes back and does these valuations.

HAYNE J: That rather suggests that it ought to wait for the next case, does it not, Mr Tobias?

MR TOBIAS: Well, no, your Honour, because it means two things - - -

HAYNE J: Rather than us take it on, sort through what ought to have been sorted out in the courts below.

MR TOBIAS: Your Honour, with great respect, this is a subsidiary issue.

HAYNE J: Yes.

MR TOBIAS: If your Honours are going to grant leave, your Honours are going to grant leave upon the basis of the primary point we have put and if that fails, then, of course, the Court would be entitled, in any event, to vary the form of the order. So, your Honour, in our respectful submission, the decision is just simply wrong. The both Justices Stein and Fitzgerald seem to come to their conclusions, in the case of Justice Stein upon the basis that he thought it wholly illusory that the premises could be put to a residential use, even though that was permissible by the current zoning; and Justice Fitzgerald, his reason was that the feasibility of a lease for residential development of the land was not obvious. What they both overlooked, of course, that in the case of the first valuation it was an industrial zoning, not residential, but that is a fairly slender support, in our respectful submission, for what we submit is a clear, plain revision of

the lease outside the words that the parties chose to use.

GLEESON CJ: What is the use that the respondent is making of this land at the moment?

MR TOBIAS: A timber yard.

GLEESON CJ: A timber yard.

MR TOBIAS: And that means that if it continues to use it, the lessee has total control over the amount of the rent, because if it continues to use it as a timber yard, it will only ever be valued as a timber yard surrounded by residential development and, on one view of it, probably the valuation will go down by virtue of the fact that a valuer would need to take into account the problems associated with having a timber yard in the middle of a residential area. So, your Honour, that is the first point.

GLEESON CJ: Now, the second point is paragraph (b) on page 82, is it?

MR TOBIAS: No, no. Your Honour, I have already dealt with that, your Honour, in relation the Valuer General asserting that - and Justice Hayne took me up with the terms of the order as to the problem associated with the way that the majority expressed themselves and the difficulty that the Valuer General would have and then actually doing the exercise because of the - - -

GLEESON CJ: Are you sure about that?

MR TOBIAS: Yes.

GLEESON CJ: Paragraph (a) is the point you have been arguing so far, is it not? Ground (a)? I am talking about your amended draft notice of appeal on pages 81 and 82.

MR TOBIAS: Yes, I am sorry.

GLEESON CJ: Is not paragraph (b) your second point?

MR TOBIAS: Yes, that is so. Your Honour, the majority decision points up the difficulty with the Hudson principle, that a valuation cannot be set aside because of a valuer's mistake except where it is in accordance with the terms of the agreement. We submit that that principle needs to be revisited, because that concept causes difficulty, especially in those cases, which are quite common, when the valuer or an auditor or an accountant or whoever it might be is required to construe the agreement as part of a valuation exercise committed to him by the parties by the words they have chosen. That extended principle, in our submission, is one implicitly applied by Justice Cole in the minority in Holt's Case and explicitly by the Ontario Court in Re Standard Life, namely that a valuation will not be in accordance with the terms of the agreement only where the valuer's explicit or implicit interpretation of the contractual provision, which commits him to the valuation task, is patently unreasonable, to use the words in the Canadian case, or Wednesbury-type unreasonableness, accepting the analogy with administrative law principles that President Mason adopted in the majority judgment in Holt.

GLEESON CJ: I have difficulty seeing how we will get to this point. If you are right in relation to your first point - - -

MR TOBIAS: Well then, you do not get to it.

GLEESON CJ: No. And if you are wrong in relation to your first point - - -

MR TOBIAS: Then you do get to it.

GLEESON CJ: How?

MR TOBIAS: You get to it upon the basis that the implicit interpretation of those words by the Valuer General was that it was an interpretation consistent with Justice Stein and Justice Giles. That is, that was the purpose for which he was required to produce the valuation; not that that limited the use that he was to take into account. Clearly that was a reasonable approach on his part, which is exemplified by the fact that you have two judges either way in any event. Therefore, even if the true construction of that provision is as the majority asserts, notwithstanding the Valuer General's implicit interpretation of it to the contrary, is not such as would mean that the valuation is not in accordance with the agreement.

GLEESON CJ: Thank you, Mr Tobias. Yes, Mr Douglas.

MR DOUGLAS: If your Honours please, in relation to the second point which was raised, it was not raised down below or in the Court of Appeal. This is the first occasion - - -

GLEESON CJ: Yes, we do not need to hear you on the second point.

MR DOUGLAS: If it please the Court. In relation to the first point, it is simply a question of construction of a lease. There are apparently five other similar leases in existence; we do not know what is happening in relation to them. The simple question was whether it was descriptive of the purpose for which the valuation was to be obtained or whether those words were included within the lease document so as to enable the valuer to take into account the purpose for which the land was to be used during the period of 40 years.

GLEESON CJ: But the question is whether those words describe the object of the valuation or define the basis of the valuation.

MR DOUGLAS: That is right, and two of the members of the Court of Appeal formed the view that what those words were intended to do was to enable the valuer to take into account the purpose for which the land was to be used over 40 years.

GLEESON CJ: But this was a valuation of the fee simple.

MR DOUGLAS: Well, it does not say that, your Honour, but it certainly is not a valuation of the reversion, but it was a lease for 40 years and my learned friend, ad misericordiae, has said, well, we have a timber yard, which we bought off the Maritime Services Board, is to be used as a timber yard for the next 40 years. But there is a reverse coin to that as well, because we can be held to the lease for 40 years, we have no right to get out of it, and that is a very important consideration to take into account in determining the construction of a lease of this nature, and they can charge us 10 per cent of the residential value of the land for a period of 40 years. So that is the reverse side of the ad misericordiae argument which he presents to this Court.

HAYNE J: Well, he said that it would leave to you the fixing of the rent because you could chose the use. Is not the use fixed by the lease?

MR DOUGLAS: The use is fixed by the lease, yes, because it is fixed by that provision. It can be changed on our application, but, of course, that requires their consent.

HAYNE J: But, as it presently stands, is it "may be used only for the purpose of"?

MR DOUGLAS: It may be used only for the purposes of a timber yard, yes, your Honour.

HAYNE J: Where do I find that? Can you show me?

MR DOUGLAS: It is in clause 20 on page 19:

That the said demised premises shall be used by the Lessee solely for the purposes of the business of the Lessee as carried on and/or for such other business purposes as the Lessee may hereafter from time to time intend and the Board may in writing approve but such approval shall not be unreasonably withheld.

GLEESON CJ: That reference to "the Board" - - -

MR DOUGLAS: That is the Maritime Services Board.

GLEESON CJ: Yes.

MR DOUGLAS: But I think there is some provision in relation to succession to that office. So whilst we can make an application, they then have a discretion whether or not to accept or reject our application. I think the present rezoning of the land, as my learned friend has pointed out, is residential. It was "special purposes/industrial" before then. There was no argument run below that its highest and best use was as an industrial site.

HAYNE J: Sorry, go back a stage; I am obviously a furlong behind the pace. The lease provides that it can be used only for business purposes?

MR DOUGLAS: Yes.

HAYNE J: Either the present business purposes or such other business purposes as may be approved?

MR DOUGLAS: Yes.

HAYNE J: So it cannot be used for residential purposes?

MR DOUGLAS: No, and we have no right to terminate the lease, so we are stuck with this lease for 40 years. So, if, for example, it became a very significant and valuable residential precinct - it is very close to the Olympic site - then we would have to pay 10 per cent of its residential value for 40 years, and that was a consideration which weighed heavily with the Court of Appeal because in looking for the reason why these words were included in the lease, were they there as purely descriptive of the purpose for which a valuation was to be obtained or was it intended to incorporate the purpose for which the land could be used, they had regard to the effect which it would have on both parties and which those parties would have contemplated at the time the agreement was entered into. So, having regard to those matters, it is not, as my learned friend has argued in this Court, manifestly unreasonable for the majority of the Court of Appeal to have come to the view which they did.

The second reason why he suggested the Court should entertain the matter, was there were five leases with identical provisions. We do not know anything about the relationships between the parties to those leases, except to say that there is some material in the appeal books which show that that land is being used for different purposes. We do not know if there are any disputes, we do not know what is happening under those leases in any relevant sense, and if, in fact, there is to be a dispute in relation to these provisions and it does assume some significance, and, I think, as your Honour Justice Hayne pointed out, that is a matter which could be raised in some other and some different dispute.

The third point which was raised by my learned friend as being suggestive of a reason why this Court should entertain this matter is that there are different approaches by both the justice of the majority in the Court of Appeal. In our respectful submission, when one reads Justice Stein's judgment and Justice Fitzgerald's judgment, one will see that they are to the same effect, although expressed in different words and, in any event, the declaration is made in the one form, and that is what would guide the Court. That is a point we have made in our written submissions. It is noted by Justice Fitzgerald in his judgment, but no point was raised in relation to the form of the declaration sought. That is a footnote which appears at page 75, where it says:

The respondent did not contest the form of the declarations sought by the appellant if the appeal succeeds.

So, effectively, at the end of the day what this Court is left with is a dispute about a lease, which is not in any standard form, which at most, or the applicant can point out, is that it is referable to five other contractual documents of a similar nature. The matter is one which went our way down below, but the only purpose of bringing it up to this Court would be to argue the matter, not as a matter of any particular point of importance, but rather as a matter to seek to obtain a different result. That is not sufficient for a grant of special leave, in our respectful submission.

GLEESON CJ: Thank you. Yes, Mr Tobias.

MR TOBIAS: Your Honour, clearly, in our respectful submission, to use your Honours dichotomy, the words were used to describe the object of the valuation. But even if it was to be used to describe the basis of the valuation, there is nothing in those words, in our respectful submission, that leads to the conclusion that the basis that was being referred to was that which the majority adopted, which makes it probably more clear that they were to describe the object of a valuation and only the object of a valuation.

Secondly, your Honour, my learned friend, in response to Justice Hayne, referred to clause 20. I mean, the suggestion was that the land could not be used for residential purposes. With respect, that is not so. Clause 20 on page 19 says:

such other business purposes as the Lessee may hereafter from time to time intend -

If the lessee's business is that, of say, leasing residential property, then, in our respectful submission, that would be a purpose that fell within clause 20. So that the proposition we put to the Court, that it is the lessee that controls wholly the rent in this case, is made good.

The third point he made, your Honour, related to the five other leases. It is true that we do not know in relation to those what the valuations of those have done and what the zonings have been, but they have a long time to go and zonings tend to change. The evidence of Waterways, which is at page 138 of the appeal papers at paragraph 15 at the bottom of the page, says:

Waterways is therefore affected by the Court of Appeal decision, which is not only of significant interest, but is of serious concern to Waterways.

And in paragraph 6:

The Waterways Leases expire during the period 31 December 2018 to 30 September 2028 (including option terms) and operate in respect of a substantial area of land, which generate substantial income for Waterways.

Your Honours, I know money is not everything, of course, but to say the least, your Honours, these matters raise, in our respectful submission, given what we have put in relation to the incorrectness of the majority judgment, a case which justice requires a grant of special leave. If the Court pleases.

GLEESON CJ: Thank you, Mr Tobias.

The applicant seeks special leave to appeal from a decision of the Court of Appeal of New South Wales upon two grounds. As to the first ground, which is that in paragraph (a) of the amended draft notice of appeal, there was a division of opinion between the majority in the Court of Appeal, on the one hand, and the primary judge and the minority member of the Court of Appeal on the other. The point which the applicant seeks to raise is fairly arguable but it turns upon the construction of the particular lease granted by the applicant's predecessor to the respondent. That ground does not raise an issue appropriate to the grant of special leave.

The second ground raises a matter that was not considered at trial or on appeal to the Court of Appeal and that is not a matter in respect of which leave should be given at this stage of the proceedings. The application is refused with costs.

AT 11.05 AM THE MATTER WAS CONCLUDED