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

Judges: Samuels JA

Mahoney JA
McHugh JA

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

Judgment date: Judgment handed down 3 November 1986.

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Mahoney J.A.

The issue raised in this appeal is the meaning of the term ``rent'' in Pt III Div. 18 of the Stamp Duties Act 1920 and the relevant paragraph in the Second Schedule to that Act, and the application of it to a franchise document entered into in 1983.

The issue arises in the following context. The John Valentine Health Centres Pty. Limited (``Valentine'') had, prior to the execution of the document, set up a number of health centres. One of these was situated at Crows Nest. At the centres, exercise facilities and other associated facilities were provided for persons who paid for the use of them. The centres were run, not as completely separate businesses, but generally in accordance with a common plan and the Valentine organisation provided various services to each of the centres.

In 1982 Valentine determined to (as it was described) franchise some or all of these centres. The franchise transaction appears, as indicated by the evidence before the Court and the information provided to the Court by counsel, to have been generally of the following kind. A person was found who was prepared to pay a sum to Valentine for the use of the centre and its appurtenances as part of the Valentine organisation. In the present case, this involved, inter alia, two things: a sub-lease to the franchisee of the premises which Valentine held under the lease and on which the relevant business was conducted; and a franchise agreement setting out the way in which the business was to be conducted, the mutual obligations of Valentine and the franchisee, and the payments to be made by the franchisee to Valentine.

The Court is informed that, in relation to the Crows Nest premises, a sub-lease was granted to the franchisee and no question arises in the present case in relation to that sub-lease.

The franchise document, as far as is here relevant, provided for two things: the payment by the franchisee to Valentine of $115,000 for the right to carry on the business for the period there stated; and the payment by the franchisee to Valentine of the two periodical sums, the administration charge and the advertising charge. The Commissioner has levied stamp duty upon the $115,000 and his assessment in that regard is not now in question. The Commissioner has in addition claimed duty in respect of the payment, or obligation to pay, the two periodical payments. He has claimed duty on the basis that these represent payments of ``rent'' within the relevant sections and the relevant item in the Second Schedule. It is this assessment which is in issue in the present case.

The Stamp Duties Act 1920 sec. 4 levies duty in respect of the matters there referred to. In the ordinary case, the levy of duty upon rent paid under a dutiable transaction is effected by the item ``Lease or promise or agreement for lease...'' in the Second Schedule to the Act. This provides, inter alia, for duty ``in respect of the total rent payable during the term...''. However, it is accepted that where, as in the present case, the amount of the rent and therefore of the duty cannot be determined at the date when the document is executed and the duty becomes payable, resort is to be had to the sections in Div. 18 dealing with such a case. The section principally referred to in the present case is sec. 78D. It is not necessary to extract from that section the particular provision which, on the proper interpretation of the document here in question, is applicable. The appeal has proceeded upon the basis that the relevant liability to duty arises if and only if the periodical payments in question fall within the term ``rent'' in these sections and in the Second Schedule. No other basis of charge has been suggested or need be considered.

The respondent has contended that stamp duty is not payable for essentially two reasons: (a) because the payments are not of their nature ``rent''; and (b) because that in respect of which the payments are to be made is not ``property'' either under the general law or

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within the extended definition of ``lease'' contained in the Act: see sec. 76(1).

(a) The meaning of ``rent''

I shall assume for the purposes of this part of the case but without so deciding that the payments in question are made in respect of the use of ``property'' in the relevant sense. However, payments made in respect of the use of property may take many forms and it is not every such payment which is properly described as rent. Therefore the question to be determined is whether the relationship which the payments here in question have to the property in respect of which they are paid is such that they are properly to be so described.

The term ``rent'' in its ordinary or at least its essential meaning in the law refers to a payment made for the possession of realty under a lease:
Junghenn v. Wood (1958) S.R. (N.S.W.) 327 at p. 331 , per Owen J. See generally Halsbury's Laws of England 4th ed., vol. 27, para. 221; Hammond & Davidson, Law of Landlord & Tenant 4th ed., para. 198 at p. 65, and the cases there referred to. The initial suggestion in the respondent's argument was, I think, that the nature of ``rent'' for the purposes of the Stamp Duties Act should be, or be derived from, the nature of rent in that branch of the law. The meaning of rent in the context of the lease of land, whilst of assistance in determining the meaning of the term in the present Act, does not, I think, determine that meaning. It has been said that, in the law of landlord and tenant, rent must issue from land as to which the lessor has the right to distrain and that the possibility of distraint is the mark of rent: see Halsbury's Laws of England 3rd ed., vol. 23, para. 1193 at p. 537 and the references there cited. However, in England it has been said that a payment for use of land may be rent notwithstanding that there is no right of restraint and that whether a payment is rent is to be ascertained according to the true construction of the contract: see
T. & E. Holmes Ltd. v. Robinson (1979) 1 W.L.R. 452 , per Orr L.J. and Templeman L.J. In that case, and in the cases there referred to, rent was seen as ``a payment which a tenant is bound by his contract to make to his landlord for the use of the land'': see
United Scientific Holdings Limited v. Burnley Borough Council (1978) A.C. 904 at p. 956 .

Upon this test, it is necessary to determine in each case whether the payment is ``for the use of'' the land in question. But such a test, if it is intended to be such, will require in each case that it be determined whether the payment is ``for'' the use of the land or otherwise related to it.

In the context of the grant of a lease, involving as it does exclusive possession and therefore the right to use realty, the term has been restricted to some only of the payments to be made as the result of the lease transaction. In a lease, various kinds of provisions are made for the payment by the lessee of sums of money. The lessee may, for example, be obliged to expend moneys generally, e.g., upon repair or improvement of the realty. He may be required to expend moneys by payment of obligations which otherwise would fall to be met by the lessor, e.g., payment of municipal or other rates and taxes. He may be obliged to make payments to the lessor in respect of particular matters, e.g., amounts paid by the lessor for municipal rates the burden of which is by the lease cast on the lessee. See
Langmore v. Vines (1917) V.L.R. 595 . None of these amounts would, in my opinion, ordinarily be described as ``rent'', notwithstanding that the payment of them arose as an incident of the transaction under which the lessee was granted the right to use the realty. Such payments would, in the context of the suggested test, be made not for but merely in respect of the use of the land by the lessee.

Whatever be the test of the meaning of ``rent'' in relation to leases of land and the relationship which a payment must have to the use of the land to fall within the term, I do not think that the meaning of ``rent'' in the present Act is determined by it. It is accepted by the parties in this appeal that, as used in the Act in its present form, ``rent'' has a wider meaning. Thus, ``lease'' is defined by sec. 76 to include, inter alia, the right to use any property in New South Wales. The term therefore must include payments made in respect of the use of forms of property other than realty. Without stating exhaustively the nature of the ``use'' or the ``right to use'' to which reference is made in sec. 76(1), the term ``lease'' has been extended to include a payment for the right to use personal which is not exclusive use of the kind granted by a lease.

I do not think that it is appropriate to attempt a statement, in a verbal formula, of the relationship which a payment must have to the

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use of property to constitute rent within the provisions here in question. There is, in my opinion, a general distinction between those payments which are made or to be made in the context of the use of property which are for and the consideration for the right to use the property and those payments which are in reality only an accidental or incidental part of the transaction by which the right to use is granted. The determination of the nature of a particular payment is to be made, in my opinion, upon a case by case basis. Such a general distinction is, for the reasons to which I shall refer, sufficient for the determination of the present case.

In the present case, both the administration fee and the advertising fee are, in my opinion, not payments for the use of the property in question but are payments which are, in the relevant sense, accidental or incidental to that use. The document is of considerable complication. The essential terms of it have been set forth in the judgment of McHugh J.A. and I shall not repeat them. But the two periodical payments derive from activities or ongoing exchanges between the parties and not from the use of property as such. The administration fee derives from various services and things done in the course of the conduct of the business. To put the matter broadly, Valentine was of the view that, for the business to be conducted effectively it should be conducted according to particular procedures established by Valentine. For this purpose, it bound itself to provide information and material relating to such matters and the franchisee was bound to use what was provided to it. This was the nature of the ongoing relationship which the parties were to have.

It was accepted for the Commissioner that the administration fee was genuinely a fee payable in respect of services and material to be provided by Valentine to the franchisee. It was not suggested that the fee was a sham payment by way of substitution for rent or that it was not in substance a payment for the administrative services specified in that regard in the document. In my opinion, a payment made in such a context is a payment (if and in so far as such distinctions are relevant) for the services supplied or to be supplied under the document and not in respect of the use or right to use property granted by it.

Without limiting the breadth of the submissions made for the Commissioner two matters arose from them. First, the suggestion was that, in the context of the administrative services provided, the franchisee became entitled to use and/or was safeguarded in the use of the essential goodwill of the business and the other information and property which in the course of the provision of the services would be made available to it. On this basis, the suggestion was, the administration fee was a payment for the use of property.

Two things at least may be said in this regard. First, whilst it may be accepted for the purposes of the submission that some of the administrative services might assist in the protection and use of goodwill and other relevant property, I do not think that the fee paid was in any relevant sense for that use. It was, I think, incidental or ancillary to it.

And, second, the fact that there is in the provision and acceptance of the administrative services the use of some form of property does not make the administration fee rent. If forms or circulars supplied by Valentine were, i.e., the documents were, used by the franchisee, and were contemplated to be so used. I do not think that the administration fee, as a fee involving such a use of property, would take the character of ``rent''. As I have said, I do not by this decision determine the boundaries of ``whereby a right to use... any property in New South Wales''; sec. 76(1); but I do not think that the words comprehend an incidental use of property or the consumption or use of property in this sense.

The suggestion also emerged in argument that the periodical fees should be seen as payments for the use of property because, in substance, of the form of the grant of the franchise. Clause 2 of the document was in the following terms:

``2. GRANT OF FRANCHISE

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

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carry on the business... The Franchisor FURTHER GRANTS to the Franchisee the right to utilise the equipment fixtures and fittings.''

In form, cl. 2 makes the performance of the ``covenants'' to be observed and performed by the franchisee part of the consideration for the grant of the franchise and, in so far as that involves the use of the property, of the use of that property. The obligations to be performed in relation to the periodical payments arise from covenants in the document. In this sense, therefore, the performance of the covenants is part of the consideration for, inter alia, the use of the relevant property. The suggestion therefore was that the payments made in performance of the covenants were payments for the use of the property in question.

I do not think that the Court is to determine whether a particular payment is rent within the Act in this way. As I have said, payments made by a lessee of land take many forms. It is not unusual to find performance of covenants of that kind made, by the form of the lease, part of the consideration for the grant of the right to use the land. But I do not think that, for that reason, incidental payments of the kind to which I have referred would thereby constitute rent within the provisions of the Stamp Duties Act. If and in so far as the meaning of ``rent'' is to be determined by a formula such as ``for the use of the property'', I do not think that ``for'' is to be determined by matters of form of this kind.

Upon this basis, the advertising fee is, a fortiori, not ``rent''. The document envisaged that Valentine would conduct advertising which would benefit a number of the franchisees and provision was made for a fee to be paid to Valentine for that service. The fee was to be paid in the context of the use of the property dealt with in the franchise agreement but, whatever be the relevant relationship between the property used and the payment for this purpose, I do not think that the advertising fee had such a relationship.

(b) The use of ``property''

The reasons which I have already given make it unnecessary to consider whether any rights involved in the periodical payments are ``property'' in the sense here relevant.

In my opinion the appeal should be dismissed with costs.