The gowns, the lease, the landlord and the tenant

A recent decision of the Western Australian Court of Appeal has examined the important questions of cases being fully pleaded ahead of trial, and allowing in extrinsic evidence to assist in finding what parties intended a contract’s terms to mean.¹

Pallas Bride & Fashion Pty Ltd (Pallas) leased premises in Subiaco. It made and sold bridal gowns there. The sole director of Pallas, Mr Morris, was the guarantor of Pallas’s obligations under the lease. The lease was to expire on 2 January 2015.

In November 2014, the landlord and tenant signed a letter agreement pursuant to which the landlord agreed to: “hold over (ie. continue) the Lease on the same terms and conditions as are contained in the Lease document dated 15 December 2009, with the exception of the Rent [which remained at the same amount]”, and pursuant to which the landlord could “increase the Rent on or before 2 January 2016, for rent applicable to any further period of the Lease…beyond 2 January 2016”.

In March 2015, Pallas purported to give one month’s notice of termination of the Lease, and re‑located its business to another store in Claremont.

The landlord sued for damages claiming the tenant had repudiated the Lease. At trial, the competing positions were: the landlord contending the November letter agreement (NLA) created a continuing fixed term lease for a year (ending on 2 January 2016), while Pallas claimed the NLA created a monthly tenancy that could be terminated on giving a month’s notice.

At trial

The trial judge found the NLA provided for a 12-month tenancy. The words “hold over” in the NLA were found to be ambiguous meaning perhaps either: (1) for the lease to “continue” for a term of 12 months; or (2) to holder over under the relevant term of the Lease without a new tenancy being agreed (ie. a monthly tenancy). The trial judge allowed extrinsic evidence to be put into evidence to establish the parties’ intention. His Honour found that evidence of a meeting between the parties about a month before entering into the NLA showed the objectively known fact that the lease would be extended for 12 months at a fixed rental.

The trial judge therefore found for the landlord and awarded $72,070 in damages for the tenant’s repudiation of the Lease. The trial judge also found that if he were wrong as to his interpretation of the NLA, he would have ordered rectification relief of that agreement to provide for a term of the lease expiring on 2 January 2016 (ie. a 12-month term).

The grounds of the tenant’s (Pallas) appeal were: (1) that the landlord succeeded on a case that had not been pleaded; (2) the trial judge erred in the way he relied on extrinsic evidence to interpret the NLA as meaning it provided for a 12-month tenancy; and (3) he erred in finding the NLA could have been rectified to provide for a lease term of 12 months.

The appeal

The Court of Appeal rejected the tenant’s grounds of appeal which complained about the way the tenant had pleaded its case. The appeal court made the observation that the state of a party’s evidence might impact whether a pleaded case can succeed, but it does not preclude a properly pleaded case from being advanced.

The appeal court also rejected the tenant’s argument that it was not given a reasonable chance to meet the landlord’s “fixed term extension of the lease case” at trial. In this regard, the appeal court noted the role that witness statements play in modern litigation, together with filed submissions for trial, in disclosing a party’s case in addition to the pleadings. Equally, if a party’s case is not disclosed in its papers prior to trial but a line of questioning is attempted of the other side’s witnesses in relation to a non-pleaded set of facts, that undisclosed case will not be allowed to be put at trial. Accordingly, the appeal court found there was no procedural unfairness by the tenant being shut out at trial from trying to assert an undisclosed defence based on a breach of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA).

The appeal court determined that the meaning of the words “offer to hold over” as used in the NLA were not ambiguous. When construed in their natural and ordinary meaning in the context of the NLA, the appeal court found that the phrase “hold over” was being used in the sense of continuing the Lease term by renewal or extension. In arriving at that meaning, the appeal court noted the significance of the fact that it was the landlord’s offer made to the tenant (and so did not refer to the giving of consent), there was a more natural indication of the NLA providing for an extension of the term of the Lease. Another factor supporting a meaning of the NLA creating a 12-month fixed term tenancy was the landlord reserving the right to increase the rent for any further period of the lease offered by the landlord after 2 January 2016.

On that basis, the Court of Appeal did not share the trial judge’s view as to ambiguity in meaning of the NLA, and so determined it was unnecessary for the trial court to have examined any extrinsic evidence. In any event, however, the appeal court noted that the extrinsic evidence did not assist the landlord with its case, and decided that it was unnecessary to determine whether it was permissible to have regard to the oral discussions between the parties month before entry into the NLA, or any other extrinsic evidence, to determine the meaning of the NLA.

Lessons for learning

The following learning points flow from this case:

1. the importance of thoroughly pleading a party’s case – a line of argument or questioning at trial will be disallowed if the facts supporting it have not been pleaded by the party;
2. a party may advance alternative cases to argue the proper construction of an agreement where there is ambiguity provided the facts underpinning those cases have been pleaded or disclosed in the party’s papers;
3. whether or not the evidence is capable of supporting alternative cases does not preclude a properly pleaded case from being advanced but rather will go weight; and
4. in considering extrinsic evidence, prior negotiations will not be admissible to establish objective background facts known to both parties if they merely reflect the actual intentions and expectations which are to be found from a natural and ordinary meaning that is found to be conveyed by the contract itself. The contract will always supersede the need for any extrinsic evidence to be admitted if the parties’ intention can be found from the four walls of the agreement.