We see many examples of documents where the drafting does not ensure that the document adequately covers the consequences that arise when a clause is not complied with or fails.
In the recent decision of Shogroup Hotels Pty Ltd v Harris Street Holdings Pty Ltd,[1] the NSW Supreme Court considered whether a provision in a deed which provided that parties were to “meet to discuss and agree” on additional rent relief under their related lease constituted a dispute that fell within the dispute resolution provisions of the lease and that, accordingly, the tenant was entitled to refer the dispute for determination by an expert.
In January 2020, the plaintiff tenant entered into a lease with the defendant landlord in respect of the Dunkirk Hotel in Sydney (Lease).
Following the outbreak of the COVID-19 pandemic, the parties entered into a deed relevant to the parties’ obligations under the Lease (Deed). The Deed set out, among other things, the terms on which rent relief would be granted to the plaintiff tenant in respect of its payment obligations under the Lease. In particular, clause 10 of the Deed provided that:
The parties agree that if the COVID-19 pandemic escalates such that additional restrictions are imposed which would prevent the Tenant being able to trade in the manner it did prior to the date of this deed then the parties will meet to discuss and agree upon an additional rent reduction and extension of the Adjustment Period.
The prevalence of COVID-19 subsequently worsened causing state and federal legislatures to introduce temporary additional restrictions to combat the spread of the pandemic, which heavily impacted the tenant’s ability to trade from the premises, enlivening clause 10 of the Deed.
In July 2021 the tenant requested that the parties meet to discuss the rent relief. In its request, the tenant noted that if there was a delay or failure to negotiate, then it would be required to refer the matter to expert determination in accordance with the dispute resolution provisions contained in clause 28 of the Lease.
In response to the tenant’s request, the landlord advised that clause 10 of the Deed no longer applied as the ‘adjustment period’ under the temporary pandemic legislation had elapsed and so, if required, the parties could only apply for mediation.
The parties subsequently attended mediation, however, were unable to reach agreement on the rent relief.
The Supreme Court was asked to consider a number of construction questions in respect of clause 10 of the Deed.
Central to the case was the applicability of the dispute resolution provisions under the Lease to clause 10. The pertinent questions the Court was asked to consider in relation to this matter were as follows:
In determining the First Issue the Court had regard to the tenant’s submission, that the failure to agree on the rent reduction pursuant to clause 10 of the Deed constituted a dispute under the Lease as it pertained to the parties’ obligations under the Lease. On this basis, the dispute resolution provisions of the Lease were available to overcome the “agreement to agree” issue by providing that the dispute be determined in a binding fashion by a third party expert.[2]
Having accepted that clause 10 should be read as a term of the Lease, the Court then turned its mind to determining whether the failure to agree on the rent relief constituted a dispute for the purposes of the Lease. The landlord contended that the failure of the parties to reach agreement in accordance with clause 10 exhausted the operation of that clause and so no dispute could arise in respect of the provision’s operation.[3]
The landlord further submitted that a reduction in rent pursuant to clause 10 could only arise by virtue of an agreement between the parties and that a rent reduction, as determined by an expert, would be inconsistent with how clause 10 should be read. The landlord also emphasised that the dispute resolution provisions in the Lease did not include any objective framework under which an expert could determine a rent reduction.[4]
His Honour agreed with the landlord’s position, finding that[5]:
“…the mere failure of the parties to reach an agreement pursuant to clause 10 does not give rise to a dispute about the operation of clause 10. The failure to agree simply means that no additional rent reduction and extension of the Adjustment Period comes into existence in the manner provided for.”
In determining the issue, His Honour, Darke J made a distinction between a failure to reach agreement against a dispute between parties about whether an agreement had been reached.
His Honour compared the circumstances in this case to a situation in which there was a disagreement as to whether an agreement had been reached under clause 10. In the latter scenario, a question of whether or not rights have been created under the clause would constitute a dispute that arises under clause 10 for the purposes of the dispute resolution provisions in the Lease.[6]
His Honour also observed that there were no competing arguments concerning existing rights or obligations under the Lease and that it was difficult to imagine how an expert would determine the outcome of such a “dispute”.[7]
While this case was made against the backdrop of the pandemic, it provides an interesting analysis of what is a common occurrence between commercial parties, a promise to ‘negotiate and agree’ on a commercial item at a later date. It serves as a timely reminder of the risks associated with leaving provisions to be agreed at a later date and highlights the importance of including appropriate provisions to deal with the consequences if the parties cannot reach agreement.
We see too many examples of provisions in documents where the parties have not given proper consideration to the consequences of the provision not being fulfilled. In this case, the tenant should have required the clause to provide that if the parties did not reach agreement within a specific period of time, there would be a deemed dispute between the parties to be determined in accordance with the dispute resolution provisions of the document.
[1] [2022] NSWSC 111.
[2] Ibid [21].
[3] Ibid [26].
[4] Ibid [26].
[5] Ibid [28].
[6] Ibid [27].
[7] Ibid [30].
