The importance of clarity when drafting lease terms: Bebe Nanaki Ji CHC Pty Ltd v Sovereign Healthcare Pty Ltd

By Alicia Hill, Principal, Harrison Breer, Law Clerk and Helena Swidron, Law Clerk

The case of Bebe Nanaki Ji CHC Pty Ltd v Sovereign Healthcare Pty Ltd [2021] VCAT 330 (‘Bebe Nanaki v Sovereign Healthcare’) concerns a dispute between a tenant, Bebe Nanaki, and a landlord, Sovereign Healthcare, about the interpretation of a rental clause that would determine whether rent was payable by the tenant or not.

This article reviews the process of interpretation used by the Tribunal, including the factors considered in determining the appropriate meanings of terms to explain why the Tribunal interpreted the term in favour of the landlord, triggering rent to be payable for roughly $180,000.

Background:

This dispute centres around the interpretation of a rent clause in the lease of a pharmacy building inside a medical centre based in the eastern suburbs of Melbourne. Bebe Nanaki Ji (Bebe) ran the Nova Compounding Pharmacy (Pharmacy) in the building, of which Sovereign Healthcare (Sovereign) was the landlord. Sovereign later sold this building to CHPF South Bunbury Pty Ltd and Perpetual Corporate Trust Limited who are the second and third respondents to this case respectively. The medical centre provided a variety of services including accommodation to general practitioners (GPs), medical specialists, radiology, and dental specialists.

After extensive negotiation in November 2012, Sovereign and a company called PBS Services (PBS) entered into an agreement to lease, which was to begin in February 2016 after the completion of construction of the medical centre. PBS transferred the lease to Bebe in January 2019.

Bebe interpreted the rent clause in the lease in a way which would result in little to no rent being paid for the entire term of the lease. However, Sovereign’s interpretation of the clause would require Bebe to have commenced paying rent in 2019. Member Nash stated that “the stakes here are large”,[1] provided that Sovereign’s interpretation of the clause would result in overdue payments of roughly $180,000.

Item 4 of the lease provided that the commencement date of the Lease was “7 days after the date on which the Landlord advises the Tenant that a minimum of 3 full-time Prescribing Medical Practitioners are practising in the Medical Centre”.[2] Special condition 14.9(a) of the lease agreement provided that the tenant was not required to pay rent until it receives written approval under s 90(1) of the National Health Act 1953 (Cth) to supply pharmaceutical benefits at the premises, which was granted in June 2019. Sovereign invoiced Bebe for rent from June 2019 – August 2019, which Bebe failed to pay. Bebe requested that Sovereign provide its assessment of the number of prescribing medical practitioners operating at the Medical Centre in the previous quarter, of which Sovereign claims it was not obliged to provide.

In September 2019, Sovereign served on Bebe a notice of default for arrears of rent, of which Bebe again failed to pay. In October 2019, Sovereign demanded payment of rent for November 2019, and this continued to occur each month moving forward. Bebe claims that these demands for rent constitute a waiver of its right to forfeit the lease by the Sovereign as it constitutes recognition of an ongoing relationship between the parties.

Bebe remains in occupation of the premises and continues trading but has not yet paid rent. Further, Bebe claims that the obligation to pay rent under the lease was never triggered and therefore, there are no arrears of rent, making the default notice incorrect.

The Rent Clause:

The term of lease was 10 years, with two further options of 5 years. This meant that if Bebe’s term interpretation was correct, they would essentially be renting, for free, for up to 20 years.

The clause in dispute is Item 4, as set out above, which requires three ongoing Prescribing Medical Practitioners for rental payments to become due. Further, Special condition 14.4 requires eight Prescribing Medical Practitioners practicing full time.

Bebe and Sovereign interpreted “full-time” quite differently. Bebe argued that only those GPs working full time (38 hours+) averaged over the period could be counted. Sovereign argued that all GPs working in the medical centre were counted, with all their individual working hours to be added together to then be divided by 38 hours to reflect a hypothetical number.

Member Nash’s Interpretation:

Member Nash stated that the interpretation of the clause required determination of what a reasonable person in the position of the makers of the document would have meant. Member Nash said that, whilst context can be considered, “ultimately the court must attribute meaning to the words actually used”.[3] Thus, she took into consideration the conduct of the parties, contrasted prior lease drafts, referred to expert evidence and contemplated dictionary definitions of ambiguous terms. In doing so, Member Nash interpreted the clause to require “an assessment of all the total numbers of hours worked by medical practitioners at the medical centre” to be totalled and divided by 38, ascertaining the number of ‘full-time’ medical practitioners on average.[4] Consequently, this interpretation triggered the rent clause.

Reasons:

Member Nash noted that each party argued their case with ferocity, given they each held much to gain from a judgement in their favour. Bebe would receive essentially free rent, whereas Sovereign would result a large sum of money for overdue rent. Much of the hearing was spent hearing evidence from witnesses as to the circumstances giving rise to the lease and the subjective understanding that each party had of the respective clauses. However, Member Nash acknowledged that the construction of the clause in favour of the landlord was preferable as it was consistent with the commercial lease objective of the agreement between the parties.[5] A clause construction leading to a tenant paying no rent ever “makes no commercial sense”.[6]

Orders:

For the reasons above, the Tribunal ordered and declared the following:

The Tribunal declared that in the clause, “Full Time on average” means all GPs within the Medical Centre were counted, meaning their individual working hours could be collated to obtain a total number of hours worked. This number is then divided by the 38 hours (adjusted for public holidays) to ultimately reflect a supposed number of full-time workers.

Further, to determine the rent payable by the tenant under the clause, the landlord is required to undertake an assessment prior to their entitlement to demand rent. A copy of the assessment is not required to be provided to the tenant. If the parties cannot reach agreement as to the amount of arrears of rent payable, they are to file submissions as to the amount payable on or before 15 May 2021. Notably, an application for the costs and interest must be made by 15 May 2021.

The Tribunal declares that the Notice of default from 19 September 2019 is valid and in reliance upon this notice, the landlord waived their right to forfeit the lease.

Take-Aways:

There are several take-aways from this case relevant to leasing agreements.

A key take-away from this case is the importance of having clear and unambiguous terms so as to avoid the alarming complications like those in this case. In the event your drafted agreement contains unclear or ambiguous terms, a priority should be to amend such before to entering into long-term agreements to ensure it operates the way you intended.

Secondly, when you are purchasing a property with a lease already in place, it is crucial to ascertain and review the terms of that lease. This is so you can understand and consider the implications of such terms if you were to purchase the property.

If you find yourself facing a tribunal hearing regarding an interpretation issue, this case provides insight into the process of interpretation. A Tribunal is able to take into consideration the context and past actions of the parties at hand. Context for the purposes of clause interpretation similar to this case can include past wording of contractual agreements, the nature of the agreement, expertise of the parties, expert evidence, industry standards and the like.

A Tribunal may also rely on more literal resources to aid in their interpretation of a clause, like dictionary definitions or definitions found within relevant legislation or regulatory frameworks.

Ultimately, the aim of a Tribunal is to give meaning to the words actually written within the agreement from an objective standpoint, disregarding the subjective understandings of the parties. Therefore, a party’s rights and liabilities under provisions of a contract are to be determined objectively.

If you have any queries about any of the matters raised by this case, then please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au

 

[1]Bebe Nanaki Ji CHC Pty Ltd v Sovereign Healthcare Pty Ltd (Building and Property) [2021] VCAT 330, 13.

[2] Ibid, 5.

[3] Ibid, [38].

[4] Ibid, [80].

[5] Ibid, [79].

[6] Ibid.