Commissioner of Stamp Duties (N.S.W.) v. J.V. (Crows Nest) Pty. Limited.

Members: Samuels JA
Mahoney JA

McHugh JA

Tribunal:
Supreme Court of New South Wales - Court of Appeal

Decision date: Judgment handed down 3 November 1986.

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McHugh J.A.

The order under appeal held, in answer to a question on a stated case, that a service fee payable under a deed made between JV (Crows Nest) Pty. Ltd. (the franchisee) and John Valentine Health Group Pty. Ltd. (the franchisor) was not rent for the purposes of the head of charge - ``Lease or Promise of or Agreement for Lease or Hire'' - in the Second Schedule to the Stamp Duties Act 1920. The service fee consisted of a monthly payment by the franchisee to the franchisor of an administration fee of $8,100 and an advertising contribution of $4,300.

The Commissioner of Stamp Duties is the appellant. He claims that the whole of the fee constitutes rent for the purpose of the charging provisions of the Act and that the amount of stamp duty chargeable in respect of the service fee is $23,419.50. Alternatively, the Commissioner alleges that, if the advertising contribution is not rent, but the administration fee is rent, the stamp duty payable is $16,195.50. Lusher J. held that the only stamp duty properly chargeable was $2,587.58 which was payable in consideration of the payment of the sum of $115,000 for the grant to the franchisee of the right to carry on a business known as the John Valentine Health Club.

The principal contention of the Commissioner is that, upon the proper construction of the deed, the service fee was rent because the whole of it was payment for the right to use property. This property is said to consist of the goodwill attaching to the business an element of which was certain know-how of the franchisor.

The contents of the deed

The deed was made on 20 April 1983. The relevant recitals stated:

``1. The Franchisor has expended time, effort and money in developing and acquiring knowledge about a Health Club System consisting of a programme of exercises and nutrition in conjunction with specialised equipment owned by the Franchisor.

2. The Franchisor has set up one such fully-equipped Health Club known as the `John Valentine Health Club' at the location set out in paragraph 3 of the Schedule.

3. The System developed by the Franchisor and referred to in Recital 1 hereof

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incorporates administrative services, advertising data, promotional techniques and training programmes and is the exclusive property of the Franchisor.

4. The Franchisor has carried on business under such names and marks as are set out in paragraph 4 of the Schedule.

5. The Franchisee desires to obtain the benefits of the Franchisor's knowledge, skill and experience and has requested the Franchisor to grant to the Franchisee the right to carry on business of the Health Club referred to in Recital 2 hereof.''

Clause 2 of the deed provided:

``In consideration of the payment now made to the Franchisor by the Franchisee in the sum set forth in paragraph 5 of the Schedule the receipt of which the Franchisor hereby acknowledges and in further consideration of the performance and observance of the covenants herein contained and on the part of the Franchisee to be observed and performed the Franchisor HEREBY GRANTS to the Franchisee the right to carry on the business until termination as hereinafter provided using the methods and techniques developed by the Franchisor as set out in the Sales Manual, the Operation Manual and the Instruction Manual...''

Clause 3 contained covenants by the franchisee. Clause 3(f)(x) provided:

``The Franchisee covenants and agrees with the Franchisor to observe and perform the following covenants and conditions in the carrying on of the business:

• (f) To conduct and operate the business in accordance with the directions, instructions, requirements and procedures set out by the Franchisor in the Sales Manual, the Operation Manual and the Instruction Manual and without limiting the generality of this paragraph to.
  • ...
  • (x) pay the administration fee and advertising contribution hereinafter provided on time...''

Clause 4 which is of considerable importance to the resolution of the case contained the franchisor's obligations. It provided:

``The Franchisor hereby covenants and agrees with the Franchisee as follows:

• (a) To provide management and sales advice and assistance (at the cost of the Franchisor unless otherwise stated) to the Franchisee including:
• ...
• (b) To enable the Franchisee to consult with the Director and the Secretary of the Franchisor at usual times of business
• ...
• (c) To conduct advertising campaigns and other promotional activities for the services offered to the public by John Valentine Health Clubs (including the Franchisee) and to supply the Franchisee with a monthly statement of payments and disbursements from the advertising contributions made by the Franchisee
• ...
• (d) To provide the Franchisee with such technical information and assistance as the Franchisor may deem necessary
• ...
• (e) To provide advice and information to the Franchisee about marketing services offered to the public by the Franchisee
• (f) Not to operate or authorise the operation within the area set out in paragraph 9 of the Schedule of any other health club
• (g) To make available to the Franchisee improvements in and developments to any industrial property belonging to the Franchisor
• (h) To provide the Franchisee with a standard system of bookkeeping and accounts
• ...''

Clause 8 was headed ``Service Fee'' and provided:

``... the Franchisee shall pay to the Franchisor a fee at the rate and in the manner set out in paragraph 10 of the Schedule in consideration of the Franchisor providing the management services and sales advice and assistance specified in Clause 4 of this Agreement.''

The schedule to the deed provided that the term of the agreement was 40 years or a period

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of 21 years after the death of the last survivor of the descendants then living of King George VI or whichever occurred earlier. Paragraph 10 of the schedule was headed ``Service Fee''. It provided:

``The Franchisee shall pay to the Franchisor a monthly fee consisting of the following amounts:

• (a) An administration fee of $8,100...
• (b) An advertising contribution of $4,300...''

This paragraph of the schedule provided for the administration fee to be increased annually according to movements in the Consumer Price Index; the advertising contribution was also to be increased from time to time in accordance with increases in media, production and other costs incurred by the franchisor in advertising and promoting John Valentine Health Clubs.

The Act

Section 4 of the Stamp Duties Act 1920 provides that there shall be charged upon and in respect of the instruments and matters mentioned in the Act and the Second and Third Schedules, the duties and rates in the Act and in the Schedules. The relevant provision is para. (3) of the Second Schedule under the heading ``Lease or promise of or agreement for lease or hire of any property...''. The amount payable under that paragraph is 35 cents in each 100 dollars ``on the rent'' under the lease. Section 76 of the Act defines ``Lease'' to include ``any instrument (not being an instrument liable to ad valorem duty as a conveyance) whereby a right to use at or during any time or times any property in New South Wales for any purpose whatever is conferred on or acquired by any person''. Section 3 defines ``property'' to include real and personal property and any estate or interest in any property real or personal, any debt, any thing in action, or ``any other right or interest''.

The property the subject of the deed

Although the concluding words of the definition of ``property'' in sec. 3 refer to ``any other right or interest'', it is established that the definition refers only to proprietary rights or interests:
Commr of Stamp Duties (N.S.W.) v. Yeend (1929) 43 C.L.R. 235 at pp. 241 and 244-245. The goodwill of a business is ``property'' for the purposes of the Act:
I.R. Commrs v. Muller & Co.'s Margarine Limited (1901) A.C. 217 at pp. 223, 226, 228, 230, 234 and 235 . But knowledge, however valuable, is neither real nor personal property:
F.C. of T. v. United Aircraft Corporation (1943) 68 C.L.R. 525 at pp. 534-535 ;
Brent v. F.C. of T. 71 ATC 4195 at pp. 4198-4199; (1971) 125 C.L.R. 418 at p. 425 .

The appellant says that, even if the ``know-how'' referred to in the first and third recitals of the deed is not property in the traditional sense, the franchisor clearly regarded it as enhancing the goodwill of the business. The Commissioner then says that the principal effect of the deed was to give the franchisee during the currency of the franchise the right to exploit the goodwill built up by the franchisor and its predecessor. The payments under cl. 8 were therefore made for the use of ``property''.

I find difficulty in accepting the proposition that the ``know-how'' referred to in cl. 8 of the deed was part of the goodwill of the business or that it enhanced the goodwill of the business. The management services, sales advice and assistance to which cl. 8 referred were to be provided in the future. They were not part of goodwill; they were not part of the good name, reputation or connection of the business. They were not the attractive force which brings in custom. Rather the services, advice and assistance mentioned in cl. 8 consisted of knowledge and information which when later imparted and applied in the conduct of the business would assist in its operation. But they were not property transferred at the time of the execution of the deed. They were not matters passing in consideration of the payment of $115,000 to which I have referred. Moreover, the ``know-how'' referred to in cl. 8 was quite different from the knowledge, services, data, techniques and training programs to which reference is made in recitals 1 and 3 of the deed. That knowledge, etc., was part of the system referred to in those two recitals. It was part of the goodwill of the business. But the system was a description of matters which were already recorded and which could be applied by a follower of the system. In my opinion the system was identical with the methods and techniques set out in the sales manual, the operation manual and the instruction manual: cl. 2. The distinction between the system referred to in recitals 1 and 3 and the ``know-

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how'' referred to in cl. 8 was the distinction between what was recorded and passed on execution of the deed and what would be done for the franchisee from time to time during the currency of the deed.

In my opinion the only relevant property in this deed was the goodwill of the business. The ``know-how'' referred to in cl. 8 was not part of the goodwill and did not enhance the value of the goodwill.

Rent

The Commissioner contended that in any event the goodwill was property and that under cl. 2 the franchisor granted to the franchisee the right to carry on the business in consideration of the payment set forth in the schedule ``and in further consideration of the performance and observance of the covenants herein contained and on the part of the Franchisee to be observed and performed''. He contended that one of the covenants to be performed and observed by the franchisee was cl. 8. It was then submitted that the payments made pursuant to cl. 8 were rent for the use of the property granted.

In modern times the word ``rent'' can and often does mean a sum of money which a person has contracted to pay for the use of property for a term:
United Scientific Holdings Limited v. Burnley Borough Council (1978) A.C. 904 at pp. 935, 947 and 963 . The distinction between a payment which is made for the use of property for a term and a payment made by a lessee to a lessor which does not relate to the use of the property is often difficult to draw in practice. In the decided cases the distinction seems more often than not to have turned on the form or manner of the payment than the answer to the question whether in substance the payment was made for the use of the property. Payments made by the lessee for services and use of furniture were held to be rent in
Property Holding Co. Ltd. v. Clark (1948) 1 K.B. 630 . Evershed L.J. said (at pp. 648-649) that ``the question in each case is to determine what in substance is the subject matter of the tenancy granted to the tenant by the contract: prima facie rent is the monetary compensation payable by the tenant in consideration for the grant, howsoever it be described or allocated''. Although the case was decided under the Rent Restriction Act 1920 (U.K.), I think that the statement was intended to have general application. In
Sidney Trading Co. v. Finsburg Corp. (1952) 1 T.L.R. 512 money paid by the lessee to the lessor for rates was held to be rent. The Court applied the reasoning in Clark's case. But rates payable by the tenant to a local authority were held not to be rent in Re Richmond Borough JJ (1893) 10 T.L.R. 68. In
Langmore v. Vines (1917) V.L.R. 595 Hodges J. said (at p. 599) that the payment of rates in that case constituted rent, but Hood J. (at p. 601) took the opposite view.

In
Yanchep Sun City Pty. Ltd. & Anor v. Commr of State Taxation (W.A.) 84 ATC 4761 Olney J. applied the statements made in United Scientific Holdings Limited v. Burnley Borough Council as to the meaning of ``rent''. His Honour held that for the purposes of the West Australian stamp duties legislation a covenant by a lessee to pay all rates and taxes charged upon the land was not rent. Olney J. said (at p. 4767) that it was not enough:

``... to look merely for a contractual liability on the part of the lessee to pay money to or on behalf of the lessor. To be rent the payment must be one which is essentially a payment for the right to use the demised premises.''

The illustrations which Olney J. gave in the course of his judgment together with his actual decision indicate that he thought that, if a payment by the lessee was directed to indemnifying a liability of the lessor, it was not a payment for the right to use property. The distinction which his Honour appears to make does not seem satisfactory. For it seems to call for a different result depending on whether the lessor calculates a single lump sum payment to compensate him for the cost of letting and maintaining his property or whether he segregates his various overheads from the net return which the letting of property gives. His Honour's approach is also, I think, inconsistent with the meaning of ``rent'' as it is defined in the modern cases. That definition is concerned with whether the payment - whatever its purpose - is part of the consideration for the right to use the premises. It is immaterial that the payment may reimburse the lessor in respect of one of his obligations if the payment is part of the consideration for the use of the property. In most, if not all, cases a payment by a lessee of rates and taxes owing by the lessor is made as part of the consideration for the use of the premises and for no other purpose.

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Payment of the service fee in the present case, however, seems to me to be far removed from what can be properly described as rent. It is a payment for administrative and advertising services which are rendered quite independently of the grant of the right to use the property. The ``management services and sales advice and assistance'' referred to in cl. 8 seem plainly enough to be a reference to the franchisor's obligation under cl. 4(a) ``to provide management and sales advice and assistance''. The performance of the obligation under cl. 4(a) is ``at the cost of the Franchisor unless otherwise stated''. Clause 8 seems to give effect to the ``unless'' condition in cl. 4(a) by transferring the obligation to the franchisee. It may be that some other obligations of the franchisor under cl. 4 are part of the services for which payment is made under cl. 8. However, even if some obligations in addition to those specified in cl. 4(a) are covered by cl. 8, I do not think that clause embraces the obligation under cl. 4(f) not to operate or authorise any other health club within the area. The Commissioner contended that the payment of the service fee was consideration for the obligation under cl. 4(f). He argued that since cl. 4(f) and 8 were interrelated the payments made under cl. 8 were for the protection of the goodwill of the business. But in my opinion the payments under cl. 8 have nothing to do with the goodwill or the grant of the right to carry on the business. They are independent payments which are made in consideration of services rendered from time to time by the franchisor.

Nor in my opinion does the case for the Commissioner gain any assistance from the use of the words ``and in further consideration of the performance and observance of the covenants herein contained'' in cl. 2. Upon the proper construction of the deed, the payments made under cl. 8 are not part of the consideration for ``the right to carry on the business'' but are made in respect of services rendered from time to time. The promise to perform and observe the covenants is distinct from the individual promises which constitute the covenants. The promise (cl. 8) to pay the service fee in consideration of the provision of management services, etc., is, in my opinion, distinct from the separate promise (cl. 2) to perform the covenant to pay the service fee. This promise to perform a promise does not constitute ``rent''.

In my opinion none of the payments made under cl. 8 were or are made for the use of any property during a term. The payments do not constitute ``rent''.

ORDERS

The appeal should be dismissed with costs.