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Sports Club saved from Sharks

Published on September 5, 2016 by Nicholas Huang and Selwyn Black

Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liq) [2016] NSWCA 165 emphasises the risks of relying on oral arrangements.

The Key Facts

1. Caringbah Investments Pty Ltd (Investments) leased premises to Caringbah Business and Sports Club Ltd (in liq) (Sports Club).

2. The lease provided for rent of $170,000 in the first year, $180,000 in the second year and $190,000 in the third year.

3. The primary judge found that an oral conversation occurred prior to the lease being signed in which:

(a) certain directors of Sports Club said it would only be able to pay rent of $150,000, $160,000 and $170,000, in the first three years respectively;

(b) certain directors of Investments said the higher rental figure needed to go into the lease, but Sports Club would only be required to pay the higher amount if Sports Club merged with the Cronulla Sharks Leagues Club.

4. The lease contained a clause which stated that the lease contained all the terms agreed between the parties.

5. After the lease was signed, Sports Club proceeded to pay the lower amount of rent.

6. Sports Club did not merge with the Cronulla Sharks Leagues Club.

7. The managing agent of Investments issued various notices to Sports Club regarding shortfalls in the payment of rent, claiming that the higher rent had to be paid.

8. Sports Club continued to not pay the higher rental amount.

9. The managing agent of Investments issued a notice to Sports Club to terminate the lease.

The primary judge’s decision

10. The primary judge ordered that the lease be rectified to reflect the oral conversation between the directors of the parties so that Sports Club was only required to pay the lower rate of rent.

11. In the alternative, the primary judge also would have found in favour of Sports Club on the basis of promissory estoppel.
Issue before the Court of Appeal.

12. The issue was whether the lease could be rectified to reflect the oral conversation and whether Investments was estopped from requiring the higher rental be paid.

The Court of Appeal’s decision

Rectification

13. The court held that the lease could not be rectified.

14. In order for rectification to be available, there must be a mistake in the document with respect to the words that are used or the legal effect of those words.

15. In this case, both parties knew that the higher rental amounts were inserted into the lease. The fact that there was a side arrangement in relation to the rent did not necessarily mean there was a mistake as to the words which were used in the lease or the legal effect of those words.

Promissory estoppel

16. The court held that Investments was estopped from enforcing the higher rental rate.

17. Sports Club proved that:

(a) based on the representations made by Investments, Sports Club expected:

(i) to only be required to pay the higher rental rate if it merged with Cronulla Sharks Leagues Club; and

(ii) that Investments would not be free to withdraw from that position;

(b) Investments induced Sports Club to adopt that expectation;

(c) Sports Club entered the lease in reliance on that expectation;

(d) Investments knew or intended that Sports Club would rely on that expectation;

(e) Investments would cause detriment to Sports Club if that expectation was not fulfilled; and

(f) Investments failed to avoid that detriment by not fulfilling that expectation.

18. The court noted that:

(a) pre-contractual negotiations can give rise to promissory estoppel;

(b) the entire agreement clause in the lease did not necessarily prevent promissory estoppel from arising;

(c) whether Sports Club relied on Investments’ representation is to be determined by fact and it is not presumed; and

(d) based on the evidence it was open to conclude that Sports Club relied on Investments’ representation before entering the lease.

Conclusion

This case highlights the need to include orally agreed terms in formal legal documentation to ensure that the terms have effect. Although in this case Sports Club ultimately succeeded, that only came after a lengthy and costly court battle.

For further information, contact Selwyn Black, email: sblack@codea.com.au, phone: (+612) 8226 7359 and Nicholas Huang, email: nhuang@codea.com.au, phone: (+612) 8226 7367.

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