Australia: Drafting mistake costs the owners of Chadstone Shopping Centre millions

Last Updated: 30 May 2019
Article by Richard Skopal and Mara Norton

Most Read Contributor in Australia, July 2019

Myer has won a long-running lease dispute with the owners of Chadstone Shopping Centre, after the Victorian Supreme Court dismissed claims Myer's lease contained a mistake which resulted in the retailer's underpayment of variable outgoings totalling approximately $19 million.

Perpetual Ltd v Myer Pty Ltd [2019] VSCA 98

Chadstone's joint owners sought leave to appeal from the Supreme Court alleging that the formula for calculating Myer's contribution to increases in variable outgoings contained an apparent error and did not reflect the common intention of the parties when negotiating the long-term lease.

The alleged mistake fixed Myer's outgoings contribution as a proportion (80 per cent) of the centre's increase in variable outgoings by reference to the year immediately preceding the relevant year. The owners contended that the commercial agreement was in fact that Myer should be paying its contribution based on the increases to a defined 'Base Year', being the first 12 months of the lease term. The economic impact of the different methodologies is best shown in the example below:

Lease year Variable outgoings for the Centre Myer's contribution under lease provisions Landlord's calculation of Myer's contribution
0-1 $100 $0 $0
1-2 $110 $8 $8
2-3 $120 $8 $16
3-4 $130 $8 $24
Total payable $24 $60

The landlord's position is that Myer should be paying 80 per cent of the increase in any lease year when compared to a defined Base Year (being the first year of the term). However, as the lease was drafted and administered for the first 16 years of the term, Myer was only being charged and was paying its proportion of the increase compared to the previous year. As the example in the table above shows, the economic impact is significant.

The lease in dispute commenced in 1998 for a term of 30 years with a further 15 year option, taking the lease through to 2043. For the first 16 years Myer paid variables outgoings calculated in accordance with the formula contained in the lease, the effect of which was that Myer was paying less than other tenancies including rival David Jones, despite occupying a larger premises and the gap was projected to widen over time.

It wasn't until 2012, about 12 years into the lease term, that the alleged mistake came to light. However, despite having formed the view that there was a mistake, the owners did not immediately inform Myer but rather, for commercial reasons associated with ongoing redevelopment negotiations, decided not to notify Myer until December 2015. As Myer had the ability to effectively veto any centre redevelopment, the owners took the commercial position not to raise the apparent error until after the redevelopment was completed.

The Court considered the conduct of the parties in implementing the formula for many years before the owners raised concerns about the alleged mistake and placed emphasis on the fact that both parties were represented in lengthy negotiations by experienced negotiators and solicitors (both internal and external counsel).

Despite acknowledging the contentious lease provision produced a 'peculiar' outcome, the Court dismissed the owners' claim for rectification, not satisfied that the owners established what the true agreement of the parties was.

Key takeaways

This case serves as an important reminder for the need for checks and balances when negotiating and finalising lease agreements, and in particular, long term lease agreements. The process of drafting and negotiating can be time-consuming and complex, with multiple versions of documents being produced before a final form is agreed. Often 'deal fatigue' can lead to errors arising and it is vital to ensure the final document reflects the true intent of both parties.

Rental and outgoings provisions can involve complex calculations to be applied over a long period of time which can be costly if calculated incorrectly as evidenced by this example. Calculations and formulas should be fully tested and tried to ensure they work and achieve the result intended by the parties. It is also a good practice to include worked examples to demonstrate how a formula should be applied, which in our experience avoids any potential ambiguity or misunderstanding.

Version control is also critical and documents should be vetted by multiple people to reduce the likelihood of any errors or ambiguities being overlooked.

Read the full decision here.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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