Alcatel Australia Ltd v Scarcella [2001] NSWSC 154

What the court decided

The plaintiff was lessee under a lease for a term of 50 years and 16 days expiring on 31 December 2019 [18]. Repair questions were referred by consent under Part 72 of the Supreme Court Rules to Mr Brownie QC and Mr Lumsdaine [2].

Clause 2 (a) set the rent at each review at the annual market rental value between a willing lessor and a willing lessee, as agreed or decided by a valuer, but never below $140,000 [20]. Orally, the plaintiff argued that if a valuer found no market, as its valuer did, the minimum rent would apply [27], [28]. His Honour rejected that and the plaintiff's written argument, preferring the defendants' oral submission that the clause implies a hypothetical market [32], [34]. The word "market" was ambiguous and, in context, denoted a characteristic of the rental rather than a real market [35]. The clause assumed a figure at which the hypothetical parties would agree, and the minimum rent was a floor rather than a default valuation [36]. Agreeing with Donaldson J in FR Evans (Leeds) Ltd v English Electric Co, his Honour held that there must be a rent on which they will agree [42], [44], [45], [46].

As Mr Brownie had noted, the covenant to keep the premises in good and substantial repair was unusually onerous and had no fair wear and tear exception [49]. Windeyer J replaced Mr Brownie's formulation of the obligation, and the Court of Appeal agreed with his judgment [51]. As Austin J read it, the lessee could not diminish its obligation by pointing to the building's limited remaining life [53].

Mr Lumsdaine accepted that the corroded window frames were sound and functioning, so a reasonably minded owner would not replace them [55]. Austin J held that the referee's finding on the rate of corrosion was inconsistent with both experts' evidence that regular maintenance would have reduced it [60]. The referee also misapplied Windeyer J's test, because the lessee had to put the frames in as good a condition as if properly maintained [61]. He wrongly excluded the possibility that replacing the windows may be necessary [62]. Although courts are disposed to accept a competent referee's technical findings, these confined deficiencies fell in the relatively uncommon category for disagreeing on fact as well as principle [64], [65]. Substituting his own findings rather than referring the matter back, his Honour accepted Professor Young's evidence, holding continuing functionality beside the point because both parties treated the corrosion as a defect warranting repair [66], [67]. Failing to comply with item 145 or 146, at the lessee's election, was a breach; compliance with item 145 required disassembling the windows and treatment off-site [68], [97].

At the referee's hearing the lessors withdrew demands for louvres or tinted glass to replace sunscreens the lessee had removed, but the referee still decided them for the lessee [69], [71]. His Honour held that the referee's hearing was not the hearing in Part 21 Rule 2, which means the final hearing before the court [76]. He left open whether the lessors were a party making a claim for relief [76]. There was no estoppel, as nothing pointed to detriment, prejudice or reliance [77]. The Anshun principles had no application, as there was only a referee's determination not yet adopted [81]. In any event, that determination was consistent with a later claim to replace the sunscreens [82]. The claim to restrain the lessors' fresh notice on that basis fell away [86].

On further contentions for the injunction, his Honour held that removing the sunscreens was not a structural alteration in breach of clause 2 (o), but that did not mean the lease permitted it [87], [89]. Applying Graham v Markets Hotel Pty Ltd, he held that the repair covenant required the lessee to replace them, with a comparable product if the originals could not be re-installed in good condition [90].

Declining the plaintiff's proposed order for adoption, his Honour would adopt the report except paragraphs 15.4 to 15.8, 16.7 and 16.8, the last three sentences of paragraph 15.3 and the last sentence of paragraph 16.5 [96], [97]. Adopting the sunscreen findings was pointless as items 147 and 148 had been validly withdrawn [85]. He would declare that the plaintiff must carry out the referee's recommended minor work on items 5, 18 and 19 [95]. He refused the injunction and would make a declaration on the rent review clause [96]. The matter was stood over for argument on costs and for the making of orders [98].

Why it matters

Under a formula like this one, where the minimum rent is a floor, onerous terms may depress the rent but cannot justify finding no market and defaulting to the floor. The repair holdings rested on an unusually onerous covenant and the parties' acceptance that the corrosion was a defect, so continuing function did not answer the obligation.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.