Court saves badly drafted first right of refusal to lease

In the case of Woolworths Limited v About Life Pty Ltd¹, a first right of refusal to take a lease of premises was held to be enforceable despite poor drafting.

Background

From February 1967, Woolworths operated a supermarket in Double Bay, NSW.

In December 2011, Woollahra Municipal Council (Council), Woolworths and other parties entered into a development deed concerning the development of land including the supermarket premises and the premises. 

The development contemplated a lease of the premises to the “Thomas Dux” brand of stores operated by Woolworths.  For commercial reasons, Woolworths did not proceed with the Thomas Dux offering and was approached by About Life Pty Ltd (About Life) concerning the possibility of taking a lease of the premises.

The premises was a very valuable piece of real estate and Woolworths wanted the ability, if About Life wanted to assign the lease, to itself go back into “that piece of real estate”.

In March 2014, Woolworths and About Life entered into a Deed of Agreement, which included:

“2.5 Right of first refusal to lease [the Premises]
On the date [About Life] enters into a lease of the [Premises] with Council [About Life] irrevocably grants [Woolworths] a first right of refusal to lease the [Premises] if at any time during the lease [About Life]:
(a) wishes to assign its lease of the [Premises] to a third party; or
…”

The commencement date of the lease (Lease) between the Council and About Life was 5 June 2014 and the termination date was 4 June 2044.  It provided for five options to renew, each for a period of 10 years.  Woolworths guaranteed to the Council, About Life’s obligations as tenant under the lease for 5 years. 

At some time after 21 April 2017, About Life made a written request to the Council for consent to transfer the Lease to Harris Farm Markets Double Bay Pty Ltd (Harris Farm).  A contract for sale of business was entered into between About Life and Harris Farm. 

About Life did not make the offer it was required to make to Woolworths.  It did not advise Harris Farm of the right of first refusal.

Harris Farm contended that the right of first refusal was unenforceable on several grounds, including that clause 2.5 was void for uncertainty because it is silent as to what it is that is to be offered to Woolworths and the terms on which the offer is to be made.

Practical issues

There were a number of practical issues with this case:

• The right of first refusal to take a lease of the relevant premises was contained in a document and was not included in the lease to About Life.  Consequently, Harris Farm was not aware of the presence of this first right of refusal to take a lease of the premises from its examination of the lease document.
• Woolworths did not register a caveat on the title to the land on which the premises were located to give persons dealing with the land (or an interest in the land) notice of its right of first refusal to take a lease of the premises.

Had either of these things been done, the costly litigation proceedings would probably have been avoided.

Construction and effect of clause 2.5 of the Deed of Agreement

His Honour considered clause 2.5 and concluded:

1. words not well chosen -
   • the reference to “first right of refusal to lease” the premises is not correct;
   • the owner of the premises is the Council and only the Council had capacity to lease the premises to Woolworths; and
   • the phrase must be understood as meaning a first right of refusal to take an assignment of the Lease;
2. businesslike interpretation -
   • this is the way in which a reasonable businessperson would understand the clause; and
   • in the case of clause 2.5(a), the terms upon which About Life would assign the Lease to Woolworths would be the terms of the sale contract.

The mere fact that a clause is open to multiple interpretations does not result in uncertainty and the Court should strive to avoid the conclusion that a provision is void for uncertainty.

Therefore, clause 2.5 was not void for uncertainty in the circumstances of this case.

This is what saved Woolworths in this case.

Lessons for learning

The following learning points flow from this case from drafting and due diligence perspectives:

• the Court will give a right of first refusal a businesslike interpretation, however, this is not a substitute for good drafting;
• the need to take practical steps to protect a party’s rights under a contract.  In this case, Woolworths could have taken two practical steps to ensure that third parties dealing with the land (or, more correctly, the leasehold interest in the land held by About Life):
  1) include the first refusal to take an assignment of lease within the lease that had been granted to About Life;
  2) if that was not possible, Woolworths should have lodged a caveat over the title to the land on which the premises were located.

The right of first refusal to take an assignment of the About Life lease was a personal right (and not, of itself, a right in the land).  Without more, that personal right did not give rise to a right for Woolworths to register a caveat over the title to the land.  However, this issue could have been overcome by the agreement of the parties.  That is, the landlord could have agreed with Woolworths to allow Woolworths to register a caveat on the title to the land.

This leasehold interest was very valuable – especially to Woolworths.  The risk of Woolworths losing this valuable right could easily have been avoided by some careful and practical thought and measures.

Too often we see documents drafted that do not provide practical ways to protect the relevant party’s interests.