Conveyancing and property

Editor: Peter Butt STATUTORY WARFARE, ROUND 2: HAS THE HIGH COURT CONFUSED THE LAW OF ILLEGALITY? In an earlier note in this column ( Statutory warfare? What happens when retail lease legislation collides with liquor licensing laws? (2015) 89 ALJ 11), I considered Polish Club Ltd v Gnych (2014) 86 NSWLR 650; 17 BPR 33,413, a decision of the New South Wales Court of Appeal. The Court of Appeal held that under the Retail Leases Act 1994 (NSW) a retail shop lease of premises in a registered club was void and unenforceable because it had been granted in breach of the Liquor Act 2007 (NSW). That note posed this question: How could a lease that came into existence by force of one New South Wales statute be rendered illegal by force of another New South Wales statute? On 17 June 2015, the High Court allowed an appeal from the decision of the Court of Appeal, holding that the lease, although illegal, was enforceable: Gnych v Polish Club Ltd (2015) 89 ALJR 658; [2015] HCA 23. Two judgments were delivered: the joint judgment of French CJ and Kiefel, Keane and Nettle JJ; and the judgment of Gageler J. The latter agreed (at [77]) with the reasoning and conclusion of the joint judgment. References in this note are to the joint judgment. The High Court reached its conclusion without answering the question we posed in the earlier note. This present note considers how the High Court achieved this and the consequences of its analysis of whether the lease was rendered void by its illegality. The first floor of the Polish Club in Sydney contained a restaurant. In August 2011, Mr and Mrs Gnych sent the Club a letter offering to run the restaurant. Mr Gnych commenced negotiations with the President and Vice President of the Club, which led to an agreement in principle that he and his wife would be granted a lease of the restaurant. Considerably later, in October 2011, the Club sent Mr and Mrs Gnych a lengthy counter-proposal, under which the Club would engage them as its exclusive contractors for catering services to the Club. In response to that, on 6 December 2011, Mr and Mrs Gnych s solicitors sent the Club a term sheet setting out the essential terms of a proposed lease and licence that it had been agreed in principle would be made available to them, and proposing the terms of a two-year lease of the restaurant with two two-year options, at a rent of $500 per week, beginning with a rent-free period and then a period of reduced rent. The Court of Appeal noted that the term sheet appeared to be incomplete. 1 That evening, the Club s management committee resolved to accept the terms set out in the term sheet but, the High Court noted, it appears this resolution was not communicated to [Mr and Mrs Gnych]. 2 Consistently with this, Mr and Mrs Gnych did not contend that an agreement for lease existed between themselves and the Club. 3 It was agreed that Mr and Mrs Gnych would renovate the restaurant, which they did, commencing in December 2011 and finishing by March 2012. On 29 March 2012, Mr and Mrs Gnych s solicitors sent the Club a draft lease in registrable form, but no lease or licence agreement was ever signed. Nevertheless, the Club permitted Mr and Mrs Gnych to open the restaurant on 31 March 2012. In May 2012, the Club engaged solicitors there were further negotiations about the terms of the lease and licence agreement, but no written agreement was ever finalised. 1 Polish Club Ltd v Gnych (2014) 86 NSWLR 650, [11]; 17 BPR 33,413. 2 Gnych v Polish Club Ltd (2015) 89 ALJR 658, [8]; [2015] HCA 23. 3 See Gnych v Polish Club Ltd (2013) 17 BPR 32,897, [17], [46]; [2013] NSWSC 1249. 12

None of the three judgments that have considered the case stated that Mr and Mrs Gnych paid the Club rent. Presumably, they paid the rent contemplated by their term sheet. 4 The restaurant operated successfully, but ultimately relations between Mr and Mrs Gnych and some members of the Club s management committee deteriorated. On 7 July 2013, the Club s solicitors sent Mr and Mrs Gnych a letter stating that the Club s Board had determined to terminate the relationship and inviting them to vacate the premises as soon as reasonably practical. On 9 July 2013, Mr and Mrs Gnych s solicitors disputed allegations made in the letter and sought a mediation. There was no response from the Club. On 2 August 2013, Mr and Mrs Gnych s solicitors wrote to the Club s solicitors noting that they had been in occupation of the restaurant from about 31 March 2012 and that the Retail Leases Act therefore entitled them to a five-year lease from that date. On 5 August 2013, the Club excluded Mr and Mrs Gnych from the restaurant in the Club that they had been operating since 31 March 2012. As already noted, Mr and Mrs Gnych did not contend that an agreement for lease existed. Instead, they argued that they had a leasehold interest in the restaurant for a five-year period commencing on 31 March 2012, pursuant to ss 8 and 16 of the Retail Leases Act. They obtained ex parte relief in the Supreme Court and, later, a declaration that they had a lease and injunctive relief enjoining the Club from interfering with their rights of exclusive possession during the five-year term of that lease. 5 Section 16(1) of the Retail Leases Act provides that a retail shop lease must have a term of at least five years. There is one relevant exception: the Act as a whole and therefore s 16 does not apply to a retail shop lease with a term less than six months without a right to renew (s 6A(1)). In this situation, however, as the High Court noted, 6 if a lessee with a retail shop lease with a term less than six months in fact remains in possession without interruption for more than a year, the Act does apply to the lease and grants the five-year term provided by s 16 but only if, after the year has run, the lessee in writing notifies the lessor that the lessee elects to have the benefit of s 16 (s 6A(2), (4)). The effect of the lessee s election is that on and from the day on which the lessee has been in possession of the shop for more than one year (s 6A(2)(a)) the Act retrospectively creates a five-year lease. The commencing day of the five-year lease thus created is the first day of the period for which the lessee has already been in possession without interruption (s 6A(4)). Section 8 of the Retail Leases Act operates differently. Section 8(1) provides that a retail shop lease is taken to have been entered into when a person enters into possession of the retail shop as lessee under the lease or begins to pay rent as lessee under the lease (whichever happens first). If s 8 applies, a retail shop lease comes into existence as soon as one of the events referred to in it takes place; the consequence of s 16 then is that the lease has a five-year term. One does not have to wait at least a year in order to know whether a five-year retail shop lease exists. The Club s position was that, because no term was agreed between the Club and Mr and Mrs Gnych, s 127(1) of the Conveyancing Act 1919 (NSW) applied: No tenancy from year to year shall be implied by payment of rent; if there is a tenancy, and no agreement as to its duration, then such tenancy shall be deemed to be a tenancy determinable at the will of either of the parties by one month s notice in writing expiring at any time. The trial judge (Ball J) had agreed with this analysis, but held that Mr and Mrs Gnych had elected on 2 August 2013 to have a five-year retrospective lease under the Retail Leases Act and, therefore, the Conveyancing Act did not apply. 7 His Honour went on to hold that the Club s grant of this lease breached s 92(1)(d) of the Liquor Act, but that such a breach did not render the lease unenforceable: Mr and Mrs Gnych s claim does not depend on any illegality. They simply assert that a lease arose from the conduct of the parties and by operation of s 16 of the RL Act In those circumstances, there is no 4 In the Court of Appeal, Tobias AJA inferred that rent was paid for about 17 months: Polish Club Ltd v Gnych (2014) 86 NSWLR 650, [76]; see also [77]; 17 BPR 33,413. 5 Gnych v Polish Club Ltd (2013) 17 BPR 32,897, [48]; [2013] NSWSC 1249. 6 Gnych v Polish Club Ltd (2015) 89 ALJR 658, [33]; [2015] HCA 23. 7 Gnych v Polish Club Ltd (2013) 17 BPR 32,897, [34]-[35]; [2013] NSWSC 1249. 13

reason why Mr and Mrs Gnych should not be entitled to a declaration concerning the existence of a lease and an injunction restraining the Club from interfering with their rights of exclusive possession during the term of that lease. 8 The Court of Appeal reversed the trial judge s holding on illegality, finding that illegality rendered the lease unenforceable. 9 In the High Court, Mr and Mrs Gnych argued in their written submissions that the Court of Appeal erred in concluding that they had a lease under the general law. This argument ran that the lease was created by the Retail Leases Act by virtue of the parties conduct and the operation of ss 8 and 16 of that Act, and that s 92(1)(d) of the Liquor Act did not apply to a lease created by statute. 10 In oral argument, however, senior counsel for Mr and Mrs Gnych did not advance this submission. Rather, he was content to accept that there was a breach of s 92 and to argue that the Court of Appeal erred in holding that the consequence was that the lease was unenforceable. 11 Given this, the High Court said: It may therefore be accepted that the Court of Appeal was right to hold, even though there was no concluded agreement between the parties as to the duration of the appellants occupation of the restaurant area, a lease under the general law was created by the Club s admitting them into possession of that area on the terms contained in the term sheet. By virtue of s 127 of the Conveyancing Act 1919 (NSW), the lease was initially terminable by either party by one month s notice in writing, expiring at any time [footnotes omitted]. 12 With respect, this passage misstates in two ways what the Court of Appeal held. The Court of Appeal did not hold that a lease under the general law was created by the Club s admitting them into possession of that area on the terms contained in the term sheet. Nor did the Court of Appeal hold that the lease initially was terminable by one month s notice in writing pursuant to s 127 of the Conveyancing Act. What the Court of Appeal in fact held was that: 1. For a lease to exist at general law, there must be a grant of exclusive possession for a term that was certain or capable of being rendered certain. 13 2. Mr and Mrs Gnych had conceded that there was at least an implied agreement that [Mr and Mrs Gnych] would have exclusive possession of the restaurant area. 14 3. Once [Mr and Mrs Gnych] entered into possession the term of their right to occupy was rendered certain by s 16(1) of the RL Act. It follows that there was created between the parties a lease at law. 15 The Court of Appeal s coupling of the entry into possession with the imposition by the Retail Leases Act of a five-year term shows that it must have reasoned that s 8 of the Retail Leases Act created a retail shop lease that arose immediately upon Mr and Mrs Gnych s entry into possession, with a five-year lease term provided by s 16 of the Act. With respect, the Court of Appeal was correct so to hold. The significance of this holding by the Court of Appeal is that the operation of the Retail Leases Act was integral not just to the term of the lease but to its very existence as a lease under the general law. But for the Act, Mr and Mrs Gnych at best would have had a periodic monthly lease a lease for one month that is automatically extended from month to month until terminated by either party. 16 8 Gnych v Polish Club Ltd (2013) 17 BPR 32,897, [48]; [2013] NSWSC 1249. 9 Polish Club Ltd v Gnych (2014) 86 NSWLR 650, [79]; 17 BPR 33,413. 10 Gnych v Polish Club Ltd (2015) 89 ALJR 658, [30]; [2015] HCA 23. See also the appellants writtens submissions, http://www.hcourt.gov.au/assets/cases/s58-2015/gnych_app.pdf, paras 93-108. 11 Gnych v Polish Club Ltd (2015) 89 ALJR 658, [32]; [2015] HCA 23. 12 Gnych v Polish Club Ltd (2015) 89 ALJR 658, [33]; [2015] HCA 23. 13 Polish Club Ltd v Gnych (2014) 86 NSWLR 650, [77]; 17 BPR 33,413. 14 Polish Club Ltd v Gnych (2014) 86 NSWLR 650, [76]; 17 BPR 33,413. 15 Polish Club Ltd v Gnych (2014) 86 NSWLR 650, [77]; 17 BPR 33,413. 16 Gnych v Polish Club Ltd (2013) 17 BPR 32,897, [34] (Ball J); [2013] NSWSC 1249. 14

According to the Court of Appeal, such a lease would not have been a lease under the general law. 17 The grant of such a lease therefore would not have breached s 92 of the Liquor Act. In short, on the Court of Appeal s reasoning, there would not but for the operation of the Retail Leases Act have been in existence a lease under the general law and therefore no illegality. Had the High Court accepted this reasoning, it would have had to deal with the question whether a lease created by one New South Wales statute can be characterised as illegal by reference to another New South Wales statute. Instead, the High Court s mis-statement of what the Court of Appeal had held led it to accept the trial judge s analysis that Mr and Mrs Gnych s five-year lease came into existence, retrospectively, when they gave a notice after more than a year in possession. This analysis not only leads to some strange results but, with respect, undermines the Court s conclusion that the illegality of the lease did not render it void or unenforceable. The High Court held that Mr and Mrs Gnych had a five-year lease under the Retail Leases Act but that that state of affairs did not come into existence until 2 August 2013, when Mr and Mrs Gnych (having been in possession since March 2012) gave notice under s 6A(4) of the Retail Leases Act electing to have the benefit of the five-year term provided by s 16. If, on 2 August 2013, they retrospectively acquired a five-year lease commencing on 31 March 2012, the legal result seems to be that there was no breach of the Liquor Act by reason of the Club s granting them possession from 31 March 2012 until 1 August 2013 but that, upon Mr and Mrs Gnych serving notice under s 6A(4) on 2 August 2013, the Club s conduct retrospectively had to be treated as having breached the Liquor Act on 31 March 2012. This result seems inconsistent with the High Court s analysis of s 92 of the Liquor Act as creating an offence that was complete at the moment when the Club allowed Mr and Mrs Gnych into exclusive possession: The breach of s 92(1)(d) on which the Club sought to rely was a breach by the Club which gave rise to an offence that was complete at the moment when the Club allowed the appellants into exclusive possession. The subsequent observance by both parties of the terms of the lease was not prohibited and did not give rise to any continuing offence. 18 Let us examine more closely the Court s analysis that the five-year lease commencing on 31 March 2012 only came into existence, retrospectively, on 2 August 2013. Had one asked, after 31 March 2012, Has the Club breached s 92(1)(d) of the Liquor Act by letting Mr and Mrs Gnych into exclusive possession of the restaurant without the consent of the Authority?, the answer would seem to be: 1. One cannot know until at least a year has run after 31 March 2012. 2. After that year has run, Mr and Mrs Gnych, if still in possession will be entitled to give the Club a notice under s 6A(4) of the Retail Leases Act. 3. If they give a notice, they will be deemed to have a five-year lease commencing on 31 March 2012, grant of which lease will breach s 92 of the Liquor Act on that date although no one could have known that to be the case until the notice was given more than a year later. 4. If Mr and Mrs Gnych do not give a notice, there will be no breach of the Liquor Act. 5. Mr and Mrs Gnych could give a notice under the Retail Leases Act at any time within the five years following 31 March 2012. Potentially, therefore, one could not know whether the Club had breached s 92 of the Liquor Act on 31 March 2012 until five years after that date. But s 146(2) of the Liquor Act provides that proceedings for an offence under s 92 may not be commenced later than three years after the date on which the offence is alleged to have been committed. Accordingly, if notice were given any time after three years from 31 March 2012, an offence under s 92 would have been committed on that date, but any proceedings for prosecution of the offence would be incompetent. 17 Polish Club Ltd v Gnych (2014) 86 NSWLR 650, [75]; 17 BPR 33,413. 18 Gnych v Polish Club Ltd (2015) 89 ALJR 658, [46]; [2015] HCA 23. Conveyancing and property 15

This is a strange result, but strangeness is not unknown to the law. Of more concern is that the strangeness seems to undermine the High Court s conclusion that the illegality of the lease did not render it void and unenforceable. In so holding, the Court heavily relied on the principle that once a statutory penalty has been provided for an offence the role of the common law in determining the legal consequences of commission of the offence is thereby diminished. 19 In holding that the lease was not void or illegal, the High Court reasoned: The offence created by s 92(1)(d) was committed by the Club when the Club granted the appellants possession of the restaurant area. That offence was committed at that time, once and for all, because the approval of the Authority to the lease had not then been obtained. The continuation of the lease was not a continuing offence. One consequence of the contravention was that the Club was liable to a fine; but that was not the only consequence. The Club s breach of the Act also meant that the Authority was empowered to cancel the Club s licence should it decide to do so. It might do so, but it might not. Whether the licence should be cancelled is a matter for the Authority. The Authority might decide that the licence should be permitted to stand if it does not regard the current arrangements between the parties as unacceptable insofar as the public interest in the due observance of the standards required by the Liquor Act is concerned. If the Authority were to make such a determination, there would be no reason connected with the licence why the lease should not continue. 20 Based on this, the Court concluded that the lease to Mr and Mrs Gnych, although illegal, was not thereby rendered void or unenforceable. With respect, this conclusion is undermined by the fact that it was not possible for the Authority to know whether there had been a breach of the Liquor Act for at least a year after the date when Mr and Mrs Gnych went into possession and, potentially, for up to five years. The Authority s hands thus were completely tied for at least a year and, thereafter, until if it ever happened Mr and Mrs Gnych exercised their right under the Retail Leases Act to give a notice that caused them, retrospectively, to have a five-year lease from the date they went into possession. Further, such a notice might be given more than three years after the date of possession, in which case, because of the effluxion of time, the Authority would be powerless to take proceedings for breach of s 92 of the Liquor Act. The basis on which the Court found Mr and Mrs Gnych s lease to arise therefore seems to undermine the basis for its conclusion that the lease, although illegal, was not void or unenforceable. The High Court had a choice. It could have found that the very existence of the lease depended on the operation of the Retail Leases Act, in which case it would have had to decide whether such a lease could be characterised as illegal by reference to the Liquor Act. Or, as occurred, it could have found that there was a lease whose term depended on the operation of the Retail Leases Act, but not its existence. Having chosen the latter, it is respectfully submitted that the Court should not have relied on the Authority s ability to impose sanctions on the licensee for breach of the Liquor Act as a basis for holding that the lease was not void or unenforceable for the reason that it might not be apparent for years whether the Act had been breached. It is submitted with respect that the Court could and should have concluded that the lease was not void or unenforceable, by finding that it could not sensibly characterise as illegal under the Liquor Act a lease whose existence depended on the Retail Leases Act. Robert Angyal SC 19 Gnych v Polish Club Ltd (2015) 89 ALJR 658, [47]; [2015] HCA 23, quoting with approval Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, 429 (Mason J). 20 Gnych v Polish Club Ltd (2015) 89 ALJR 658, [56]-[57]; [2015] HCA 23. 16