It is not too often, that a case involving the New South Wales Liquor Act 2007 (Liquor Act) makes its way to the High Court of Australia. Most appeals are refused the required special leave. However, there was something in the facts involving an unexecuted lease of part of the Polish Club Limited (Club), alleged by the club to be void for illegality, which captured the attention of the High Court Bench and special leave was granted.
On 17 June 2015, the High Court gave its decision in the case of Gnych v Polish Club Ltd [2015] HCA 23. The agreement for lease was held to be not void for illegality, thereby reversing the decision of the NSW Court of Appeal. The High Court’s decision now brings sharp focus on a common occurrence in hotels and clubs across NSW – their occupation arrangements or leases with other parties, which run their own restaurant businesses within the hotel or club.
The Polish Club Case
The short facts of this case were that Mr & Mrs Gnych (Gnych) approached the Club, a small licensed club in Ashfield, to run their own restaurant business within the Club’s premises and cater for Club functions. The Gnychs never signed a lease or any occupation arrangement for the parts of the Club’s premises to be occupied by them. Various documents were prepared by the parties, but they were never finalised, nor executed and exchanged. Despite this, the Gynchs were allowed into occupation and undertook renovations to the space which they occupied. They traded for a number of years, however the Club then required them to vacate. Litigation inevitably followed.
This is an all too common occurrence in many licensed clubs and hotels in NSW. Often many of the smaller clubs are dependent on this type of arrangement, to be able to offer any form of food service to their members. The same applies for many country hotels. Such an arrangement is contrary to the applicable legislation for licensed clubs and hotels in NSW, in two respects.
Firstly, only the club and its members are entitled to “derive and profit, benefit or advantage” from the club’s licence (s.10(1)(j) Registered Clubs Act 1976). Secondly, the leasing of any part of licensed premises on which alcohol is ordinarily supplied, to anyone other than the licensee, is absolutely prohibited (s.92(1)(b) Liquor Act). Even the other parts of licensed premises cannot be leased, unless the prior approval of the Independent Liquor & Gaming Authority (Authority) is obtained (s.92(1)(d) Liquor Act).
It was this illegality under s.92(1)(d) of the Liquor Act, which was before the High Court. Gnych did not occupy a space on which alcohol was ordinarily sold or supplied, so this aspect of the other prohibition was not relevant. The illegality in question, was the effect of the Club failing to obtain the prior requisite approval from the Authority, for the proposed occupation arrangement for the space in which Gnych was to conduct their restaurant business. The s.10(1)(j) prohibition in the Registered Clubs Act was not raised, despite Gnych being said to be operating their own cash register at the Club’s bar area at ([7]) of the High Court judgment.
Because Gnych ran a restaurant business in the Club’s premises, the operation of the Retail Leases Act 1994, was triggered. Under that Act, any occupation arrangement for one of the “retail shop businesses” listed in the Act, is caught by the Act, regardless of whether the possession granted is exclusive possession. Because of this legislation, Gnych had a five year lease. If the Club wanted vacant possession, Gnych would be entitled to compensation.
The Club argued that because there was a lease for the purposes of the Retail Leases Act, there was also a lease for the purposes of s.92(1)(d) prohibition in the Liquor Act. The Club had not sought the prior approval of the Authority, so an illegality arose. The Club was therefore benefitting from that illegality, something which I believe particularly annoyed the High Court Bench (see the Court’s comments at [45]).
The NSW Court of Appeal considered that because there was a lease for the purposes of the Retail Leases Act, then an illegality arose for the purposes of the Liquor Act. As the prior approval of the “lease” had not been sought from the Authority, the whole occupation arrangement then had to be held to be void for illegality. To do otherwise would not advance the purposes of the Act (see [79] of the Court of Appeal’s decision, referred to at [27] by the High Court).
The High Court came to a different view. Just because there was a lease for the purposes of one NSW law, does not make what is no more than an occupation arrangement between the Club and Gnych, a “lease” for the purposes of the prohibition contained in s.92(1)(d) of the Liquor Act. For the prohibition to arise there had to be a “lease” in the strict or formal sense.
The Court examined the principles behind holding a contract or lease void for illegality. The earlier High Court decision is Equuscorp Pty Ltd v. Haxton [2012] HCA 7, was quoted for summarising three categories or instances, where an agreement may be unenforceable for statutory illegality. These were listed as being:
- The making of the agreement, or the doing of an act essential to its formation, is expressly prohibited, absolutely or conditionally by the statute;
- The making of the agreement is impliedly prohibited by statute. A particular case of an implied prohibition arises where the agreement is to do an act, the doing of which is prohibited by the statute.
- The agreement is not expressly or impliedly prohibited by a statute, but is treated by the courts as unenforceable because it is a “contract associated with or in the furtherance of illegal purposes.” (See [35]).
The High Court observed that on the facts of the case, it was not clear into which category these facts fell. However, in the end it did not matter, as the statutory construction of s.92(1)(d) was the same, no matter which category was applicable ([36]).
On the construction of s.92(1)(d), having regard to the context of the Act as a whole, the High Court held that it could not be the case, that the Club’s failure to seek the requisite approval by the Authority, was sufficient to “sterilise” the arrangements between Gnych and the Club ([47]). As mentioned, there also had to be a “lease”, as strictly understood at common law, in order for the s.92(1)(d) illegality point to become relevant in the first place ([41]).
Ramifications
The Polish Club Case has brought sharp focus upon a very common practice of hotels and clubs granting leases or occupation arrangements, to third parties which then run their own businesses in the licensed premises. Most of these arrangements would be in breach of s.92(1)(d) of the Liquor Act. That breach can be avoided by the hotel or club first seeking the Authority’s approval for that arrangement, before it is entered into. The arrangement could only be in respect to a kitchen area and the other party could not conduct its own restaurant type business. The other party could only provide catering services to the hotel or club.
However, for the prohibition under s 10(1)(j) of the Registered Clubs Act, there is no way for such a breach to be avoided in the circumstances, if the words of this section are given their plain English meaning. Even if the Authority could approve a catering agreement, the other party would definitely not be able to run its own business from the Club’s premises.
The Polish Club Case has been described by another solicitor as a “liability bomb waiting to go off.” I support this view.
The Government is now going to have to face up to this very common and widespread problem in the hotel and club industries. Either the legislation is going to have to be changed, or the existing prohibitions will have to be enforced more effectively. Enforcing the prohibitions will damage many of the smaller clubs and most country hotels, which heavily rely upon these arrangements for food service in their venues.
Bruce Bulford
29 June 2015
