Is it a good idea to use a template or precedent form of lease?

The High Court decision in Gee Dee Nominees Pty Ltd v Ecosse Property Holdings Pty Ltd [2017] HCA 12; (1987) 261 CLR 544; 91 ALJR 486; 343 ALR 58 (29 March 2017) (Kiefel, Bell, Gageler and Gordon JJ with Nettle J dissenting) highlights the risks involved in poor drafting of legal documents and using template documents that are not suitable for the required purpose. 

Here we have a transaction nominally within the jurisdiction of the Magistrates Court of Victoria that has had a Victorian Supreme Court trial, an appeal to the Court of Appeal of the Supreme Court of Victoria, an application for special leave to the High Court of Australia, and a High Court of Australia appeal, no doubt at a cost that significantly outweighed the entire cost of the transaction. 

In total, nine judges examined the lease in this case, and three of them found in favour of the tenant. 

The case concerned the construction of a lease by which the land was leased for a term of 99 years, commencing in 1988.

The landlord had wished to sell and the tenant wished to purchase the leased land for a consideration of $70,000 but they were precluded from doing so because of town planning restrictions.

The contracting parties, therefore, sought to achieve a similar result to a sale, by amending a standard 1980 printed form instrument of a farm lease, with the rent for the entire 99-year term ($70,000) being paid upon entry into the lease. 

The parties agreed to an amendment to clause 4 of the Lease, which contained certain words from the original template struck out, and replaced with:

4. [The Lessee] will pay all rates taxes assessments and outgoings whatsoever which during the said term shall be payable by the tenant in respect of the said premises.

Clause 4 of the agreement (relating to outgoings) was ambiguous. The clause could be read as imposing on the lessee an obligation to pay all rates etc; it could also be read as confining that obligation to those that are payable by the tenant.

In 1993, the original landlord sold the property (subject to the lease) to Ecosse Property Holdings Pty Ltd. In 2004, Gee Dee Nominees Pty Ltd took a transfer of the lease from the original tenant. Therefore, neither of the original parties to the transaction was a party to the litigation. 

Justice Croft (a highly respected property lawyer) found (see [2014] VSC 479) in favour of the landlord. He concluded (at paragraph 47) it was:  

… entitled to a declaration that the Lease on its proper construction provides that the defendant shall pay all rates, taxes, assessments and outgoings whatsoever in respect of the leased land, including land tax. 

On appeal to the Court of Appeal [2016] VSCA 23 (Santamaria, Kyrou and McLeish JJA), only Kyrou JA found in favour of the landlord. Santamaria and McLeish JJA are also highly respected lawyers, and they agreed with the tenant’s interpretation of the lease. 

Somehow, the High Court granted special leave to appeal. Interestingly, Gageler J noted that the case involved no point of disputed legal principle or question of public importance: [45].

In any event, to resolve the ambiguity in clause 4, the majority of the High Court  (Kiefel, Bell and Gordon JJ, and Gageler J in a separate judgment, with Nettle J dissenting) turned to the commercial purpose that the parties sought to be achieved by entering into the lease.

Kiefel, Bell and Gordon JJ (at paragraph 23), held that: 

The Court of Appeal majority's analysis lacks any reason that sounds in commercial sense for the parties to have chosen to amend the usual covenant respecting liability for rates, taxes and other outgoings contained in the standard form with a view to increasing the potential financial burden imposed on the lessor.

At paragraph 25, their Honours also held that:

... the lease does not provide an option to renew or to purchase for a nominal sum at the end of the term. The significance of this omission is suggested to favour the conclusion that the parties bargained for the lessor to bear the expense of any imposts levied on it as owner taking into account the value to the lessor of the reversion. An alternative view is the omission was inadvertent; neither the parties nor their advisers turning their minds to how matters might stand in 2087. Kyrou JA was drawn to that explanation. So are we. A surrounding circumstance of which the reasonable businessperson would be aware is that the lessor company was in receivership. It must be accounted highly unlikely that a receiver would agree to burden the lessor company with uncertain financial obligations over the term of a ninety-nine year lease. 

Finally, they concluded (at paragraphs 26 - 27):

The Court of Appeal majority's conclusion failed to give effect to the clear statement of the parties' objective in entering the agreement. It makes no commercial sense, having regard to that objective, for the lessor to remain liable for the payment of rates, taxes and other outgoings over the term of the lease. That is especially so where the lessor has taken as consideration for the lease the land value, with no provision for future adjustments. The lessor would have been exposed to uncertainties including the effect that any change of (lawful) land use by the lessee might have had on the amount of any rates, taxes and other outgoings.

On its proper construction cl 4 imposes on the lessee the obligation to pay all rates, taxes, assessments and outgoings whatsoever that are payable during the term of the lease in respect of the land. This construction accords with the commercial aim of the parties that the lessee assume the position of owner, so far as a lease may provide, with all of an owner's liabilities.

At paragraph 51 of his judgement, Justice Gageler noted:

Clause 4 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.

Nettle J, who dissented in the High Court, is another highly respected judge. 

This case confirms that either party's interpretation of the ambiguous term of the lease could have ultimately succeeded. 

Conclusion 

The decision is an extreme example of the results that can flow from poor drafting of legal documents and using template documents that are not suitable for the required purpose. 

As a result, it sounds a warning to all lawyers tasked with drafting leases and contracts of sale of real estate: be judicious in the use of precedents and consider carefully whether the particular clause is fit for the purpose for which you are trying to employ it. 

WG Stark

Hayden Starke Chambers