Financial Enterprises Ltd v Native Landowners of Te Kauariki PT [1984] CKHC 3; HC OA 1.1984 (12 September 1984)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
(CIVIL DIVISION)

IN THE MATTER of an application by
FINANCIAL ENTERPRISES LIMITED

AND

NATIVE LANDOWNERS of
TE KAUARIKI PT. SECTION 13I, MATAVERA
RESPONDENT

Arnold for Financial Enterprises
MacFadzien for the landowners

Date of hearing: 7 September 1984
Date of Judgment: 12 September 1984

DECISION OF SPEIGHT C.J.

This is an application for a declaratory judgment filed on behalf of Financial Enterprises Limited and it relates to the correct interpretation of clause or clauses in a lease dated the 29th June 1973 between the Native landowners of the site on which there is now erected the Tamure Hotel, as lessors, and Trailways Hotel (Rarotonga) Limited as lessee cited as "together with its successors, transferees, or assigns." For some years, so it seems, Trailways Hotel Limited ran the Tamure but then on the 24th October 1980, there was an assignment of its interests to Financial Enterprises Limited. An affidavit deposes that Financial Enterprises Limited is a land-holding company not in the business of managing hotels and that at some subsequent date, Financial Enterprises Limited entered into an agreement with Compass Hotels Limited which is a management company. Under this arrangement Compass Hotels involves itself in the management of the hotel on behalf of the lessee. I have not however been made aware of the details of that contract.

The question which the court is asked to determine is the correct interpretation and method of computing the rent payable to the Native owners under the lease. The appropriate provisions are contained in clauses 4 and 5 which read as follows:

"4. THE Lessee shall notwithstanding the foregoing provisions for the payment of annual rental pay to the lessors, the lessors agents or as directed by the lessors in writing annually one per centum of all gross receipts each year of the said term derived from or arising out of the said demised land or any improvements thereon.

5. THE lessee shall keep full, proper and correct records of all gross profit so derived and shall supply to the lessors its agents or as directed in writing by the lessors within six months after the end of each financial year of the lessee a true copy of those records."

Mr Arnold on behalf of the applicant submits that these clauses require an examination of the various sources of profit earned from the hotel operation and ancillary activities. His submission is that only some portions of the receipts generated on the property fall within the ambit of these two clauses and the separation is determined by an empirical analysis of the services which produce the profits. Initially I questioned whether the existence of the management arrangement, long after the date of the lease, might complicate the situation. It will be noted under clause 5 that the lessee must keep full and proper records of all gross profits "so derived". In the present arrangement, two companies derived profits. The management company doubtless receives the payments for the various services it provides, deducts some sort of commission or management fee, and then pays the balance to the lessee. My question was whether or not clause 4 related to the receipts paid to the lessee by the management company or all gross receipts from any hotel activity in whoever's hands. This point, if valid, would of course be in Mr Arnold's favour for the lessee receives something less than the gross hotel takings, but he said that his client took the view that it could not maintain such attitude; and that the question for consideration called for an examination of all receipts generated by the hotel business. It appears to me that this is the correct attitude. Clause 4 it will be noted speaks of gross receipts "derived from or arising out of the said demised land or any improvements thereon without reference to who derives those receipts". The reference in Clause 5 to the keeping of records only imposes an obligation on the lessee. Nevertheless, it would be invariable practise in such a matter that a management company would be obliged to render full and proper records of "all gross profit so derived". Further I would take it that the term "assign" in the preamble to the deed would include agents acting on behalf of the lessee - an assign being, as I understand it, a person substituted for the principal party in respect of all or some of its rights or obligations.

I therefore move to the main issue and propose to consider the monies generated on this property, whether at the initiative of Financial Enterprises Limited or Compass Hotels Limited, as being indistinguishable. Accepting therefore that these two companies are amalgamated for the purpose of the present consideration, the question is - what items of income are included in "all gross receipts".

Mr Arnold's contention is that one must analyse the different items of receipts to see whether or not they are principally related to land use. In particular he points to four major sources of income:-

1. Profits from the sale of beverages.

2. Profits from the sale of meals.

3. Income from the hiring of motorcycles, which are stores and displayed on the property and let out by the hotel.

The submission is that one must analyse what it is that produces the receipts. In an affidavit filed on behalf of the company, it is said that the gross receipts in respect of the sale of beverages, both alcoholic and non alcoholic, involve payment for the purchase of liquor or soft drinks and the use of glassware, cleaning materials, wages and the like and that these purchases are unrelated to the demised property. It is said that the cost of purchases of the beverages concerned comprise between 55% and 60% of the sale price: other items for wages, cleaning, glassware etc., make up most of the balance. Similarly in respect of the restaurant facility it is contended that the food content accounts for over 40% of the cost of the sales made. Under the third heading, the pushbikes and motorcycles are kept on the hotel premises, but their use is on the roads of Rarotonga. Mr Arnold does not claim that accommodation receipts can be broken down in the same way as the other three items. Based upon this analysis, he contends that the only gross profits which are to be the subject of a percentage deduction for the purpose of the rent calculation are those in which what might be called the land content is the predominant factor; he submits that where the ingredients (such as the liquor in the bar receipts) are a major ingredient in the total price, the clause under consideration does not apply. I find this a surprising proposition and contrary to the plain unambiguous wording of the clause.

It will be noted that the phrase says, "derived from or arising out of the land or improvements". I accept Mr Arnold's submission that for present purposes the terms "derived from" or "arising out of" may be treated as synonymous. The concept that he presses for however, is that the profits are in large part derived not from the land but from ingredients and labour. I do not accept this. Land of itself does not produce a profit. It is the use of land which does so. If it is agricultural land, it is the seed planted and the labour applied in cultivating and harvesting, but the money received is still derived from the land. And it seems, with respect, immaterial whether the cost of the seeds and the labour are a lesser ingredient than the inherent nutritive properties of the soil, and yet by analogy, this is the same argument as is pressed in respect of the liquor, the food, the wages of the staff and similar matters. This is commercial land and its gross receipts derive not from the land itself, but from its use for commercial purposes; in a trade such as the hotel business these can cover an infinite variety of services. The only reported case which Mr Arnold has cited in support of his contention that the ascertainment of gross receipts requires one to dissect the contributing factors is Commissioner of Taxes v Can [1936] NSWStRp 34; 1936 4 ATD 32 in which an analysis was made of labour and property content in the production of income. That however is a special case in Taxation Law where one of the bases of liability requires an examination of income derived from personal exertion. No such concept is applicable in the present case. I hold on the plain meaning of the words that "derived from or arising out of land or improvements" means receipts derived from the use of the land or the improvements to any material degree or in any way in which the land or the improvements are of significance no matter that that be comparatively minor significance. If it were otherwise, then the contract must have been contemplating an infinite variety of activities, the analysis of which would vary from time to time as new methods of hotel keeping developed, as new attractions were introduced, new methods of entertaining and charging the patrons were devised. If that were so, one would have expected some formula or other help to be gained from the deed as to the mode of calculation. But it is silent on any such suggestion and the plain meaning must be that all gross receipts generated by the lessee on the property are to be subject to the 1% calculation. If it can be said, contrary to the view that I have just expressed, that this is an ambiguous clause, then one is entitled to take cognisance of oral evidence and of any other collateral documents for the purpose of explaining the ambiguity. I have some such material before me in the form of the minutes of the meetings of assembled owners on the First of May 1973. The representatives of the landowners met with Mr Short, Solicitor, who appears to have been acting for Trailways Hotel Limited, and a Mr Mike Webber, a representative of that company. It is clear from the minutes of that meeting, which of course was fundamental to the formation of the contract relating to a disposition of Native Land, that the figure discussed for rent was $100 per year "plus 1% of gross receipts". Similarly, the Certificate of the Resolution of assembled owners signed by the Recording officer indicates that the agreement reached was for $100 p.a. plus 1% of the gross receipts. Similarly, the application which was made to the Land Court by Trailways for approval recited the same figures without qualification. It is apparent that the Deed which was subsequently drawn by Mr Short expanded on this simple formula to facilitate its enforcement, by providing clause 5 calling for the keeping of records and tying the gross receipts to the use of the land in clause 4. If therefore there were ambiguity, and I do not find it, this collateral evidence shows that the agreement between the parties reached as a necessary antecedent to the preparation of the deed of lease, which would express in formal terms their agreement, indicated nothing more and nothing less than 1% of the gross receipts generated by any form of the hotel operation on this site. And it is particularly to be noted that under Cook Islands law, the terms of the lease must follow the terms of the Owner's meeting. Certainly it would be never within the contemplation/ of parties to such preliminary agreement that the bar and restaurant trade would be excluded. I concede that a minor development since then in the hire of motorcycles may appear a little remote from the ordinary concept of hotel management. Nevertheless, the bicycles and the motorcycles are stored, displayed and controlled from the hotel land and by the hotel staff using the hotel facilities, and they too, are receipts generated by the use of the demised land and its improvements. The questions asked in the originating summons are to be answered in accordance with the foregoing judgment.

Costs to the Respondents $200.