Solicitors for the Plaintiffs: Zeeman Kable and Page

UNDERWOOD J The plaintiffs used to conduct a small daytime restaurant on the first floor of retail premises in Charles Street, Launceston. They bought it as a going concern for $150,000 and took over on 1 February 1991. It was modestly successful and was the sole source of income for the plaintiffs and their four children. The whole of the two storey premises was leaded to Venture Stores (Retailers) Propriety Limited ("Venture") by the defendant. Venture sub-let part of the first floor to the plaintiffs. The plaintiffs complied with the terms of their sub-lease in all respects. It was not due to expire until 31 July 1995. But in November 1992, the plaintiffs were given notice to quit. They did not want to leave. On 21 December 1992 these proceedings were commenced. The plaintiffs continued to operate their restaurant until Friday 1 January 1993. On that day, Venture had a final sale and closed its doors to the public. On Monday, 4 January 1993 workmen moved in and the next day, over the protests of the plaintiffs, their restaurant fittings and equipment were dismantled and taken into store. The plaintiffs were devastated. They had lost their livelihood through no fault of their own and have since suffered financially and emotionally. The following sets out how this state of affairs came about:

1 The defendant was the owner of a two-storey building with

a floor area of approximately 45,800 square feet. It has a

frontage on two streets and is known as 154-162 Brisbane

Street and 78 Charles Street, Launceston.

2 By an indenture of lease dated 27 September 1976 (the

head-lease), the defendant leased the whole of these premises

to Venture from 21 May 1976 until 31 July 1995.

3 By a lease dated 20 April 1979 (the sub-lease), Venture

leased to Charlie's (Launceston) Pty Ltd 189 square metres of

the first floor for the purpose of conducting a restaurant.

The term was from the 13 July 1976 until 31 July 1991. The

defendant consented to the grant of this sub-lease.

4 By Deed dated 31 January 1991, Venture and Charlie's

(Launceston) Pty Ltd agreed (inter alia) that the term of the

sub-lease be extended from 31 July 1991 until 31 July 1995 so

that it expired at the same time as the head lease. The

defendant consented to this variation.

5 By Deed of Assignment made 12 February 1991 Charlie's

(Launceston) Pty Ltd assigned the sub-lease to Hayes Catering

Pty Ltd.

6 By a further Deed of Assignment also dated 12 February

1991, Hayes Catering Pty Ltd assigned the sub-lease to the

plaintiffs.

7 It appears the Venture got into financial difficulties,

and on 8 July 1992 a Mr David Beatty was appointed receiver

and manager. By letter dated 23 July 1992 Mr Beatty advised

the defendant that he did "not adopt the lease for the above

property entered into between Venture and Meriton Pty Limited

dated 27 September 1976 and I am not to be taken as doing

so". I assume that this statement was made as a piece of

self-serving evidence in an attempt to establish that the

Receiver had not become personally liable for Venture's

obligations under the lease. Mr Beatty went on to advise

that he was negotiating with some potential buyers of Venture

and proposed that he and the defendant enter into a licence

agreement with respect to the premises. A draft agreement

was enclosed with the letter. It is unnecessary to go into

the detail of the somewhat unusual proposal except to observe

that the draft recited the head lease, that the Receiver was

not adopting it and that the defendant had agreed to let the

Receiver into the premises in accordance with the licence

agreement. It provided that amongst other events the licence

could be terminated on 30 day notice.

8 On 4 August, Mr Beatty sent the defendant a cheque for the

rent then due under the head lease and repeated that he was

not adopting the lease.

9 The defendant's solicitor Mr Szental, replied that the

draft licence agreement enclosed in Mr Beatty's first letter,

was acceptable subject to some amendments which he set out in

his letter.

I interpolate here that, by virtue of cl5.1 of the head

lease, the appointment of a receiver entitled the defendant

to forfeit the lease and re-enter after service of the notice

prescribed by the Conveyancing and Law of Property Act 1884,

s15.

10 There followed correspondence which I infer, concerned

the purchase of the whole of Venture's retailing operation

from 45 locations throughout Australia. Venture Stores

(1992) Pty Ltd became involved. With respect to the

Launceston store, a proposal was put for a 10 year lease at a

specified rental. Meantime Mr Beatty continued to pay the

rent under the head lease and continued to deny that he was

thereby adopting the lease.

11 On 6 October 1992 Mr Szental wrote to Mr Davey to the

effect that they were not in agreement about the terms of a

proposed licence and that all the defendant's rights under

the lease were reserved. At the same time Mr Szental put a

counter proposal with respect to the terms of the proposed

licence.

12 Some confusion appeared to exist with respect to the

identity of the various parties who became involved in the

negotiations over the future of the demised premises but, on

19 October, Mr Beatty wrote to Mr Szental saying, "I assumed

that the said arrangement is a monthly tenancy between your

client and Venture (and not between your client and myself as

Receiver). If that is the basis of the proposed arrangement

I advise that I agree in principle to such an arrangement."

13 By facsimile note dated 30 October 1992 Mr Szental wrote

to Mr Beatty advising:

"My client hereby accepts the offer contained in your

letter to convert the tenancy into a monthly tenancy

between my client and Venture Stores (Retailers) Pty Ltd

(Receiver and Manager appointed).

The monthly tenancy therefore, commences today and you

should ensure that future rental payments are made on the

30th day of each month. Since rental has been paid up to

and including the 31 instant, you should ensure that the

next instalment of rental is for the period 1st November,

1992 to 29th November, 1992 inclusive."

14 By letter of the same date as the facsimile (30 October

1992), Mr Szental referred to the creation of a monthly

tenancy and thereunder gave Venture a month's notice to quit

the premises. There followed some correspondence between the

defendant and Venture Stores (1992) Pty Ltd about Venture

staying in occupation of the Launceston store as a licensee

from the expiry of the monthly tenancy (30 November 1992)

until 5pm, 5 January 1993.

15 Freehill Hollingdale and Page became involved as

solicitors for Mr Beatty and Venture. They wrote about the

extension of time until 5 January 1993 and referred to Mr

Beatty "as agent of Venture." By 18 November 1992 the

solicitors, the defendant and the Receiver had it all sorted

out down to the time that the fittings had to be out of the

premises on 5 January 1993. It appears that the defendant

was anxious to get on with letting the building to the

present lessors, Target. No one appears to have given the

plaintiffs and their sub-lease any consideration at all.

16 No consideration that is until 19 November when Mr

Szental faxed Mr Beatty with the query, "what steps have been

taken to terminate the sub-tenancy?" Without waiting for a

reply Mr Szental himself sent the plaintiffs a notice to

quit. He signed it as a director of the defendant. It

recited (inter alia) that the head lease was terminated on

the 30 October 1992, being the day Mr Szental accepted the

offer to convert the head lease into a monthly tenancy. The

notice to quit purported to terminate the sub-lease on the

day the notice was served "pursuant to Clause 6(3) of the

Sub-Lease."

17 Freehill Hollingdale and Page, decided that they had

better do something about the plaintiffs. They too sent a

notice to quit. It was dated the 1 December 1992 and gave 30

days notice. This notice, although sent to the plaintiffs,

was addressed to Charlie's (Launceston) Pty Ltd. The

recitals referred to the head lease but specified the

incorrect term, referred to Charlie's holding over as a

monthly tenant after the term under the head lease had

expired and referred to Charlie's remaining in occupation

after expiry of the term. Clearly, it had no effect.

18 Meantime, an exchange correspondence continued in an

attempt to settle the terms of the licence agreement between

the defendant and Venture under which Venture was to remain

in the premises until 5 January 1993. It was finally signed

and sealed by Venture and the Defendant on 4 December 1992.

It contained the following recital:

"The term of years created by the (head) Lease was

terminated by mutual agreement between the Licensor and

the Licensee with effect from the 30th October 1992 and

on that date the Licensee became a monthly tenant of the

Premises."

2. In the body of the document the plaintiffs were described as a sub-licensee of the licensee. It seems that no one bothered to tell them that according to the defendant, the Receiver, Venture and their legal advisers, their term for years had been converted into a licence due to expire 4 pm on 5 January 1993.

3. 19 On 4 January 1993, Venture began to strip the store of its fittings and by the end of the next day, all the fixtures and fittings, including those of the plaintiffs had been removed and possession of the premises was delivered up to the defendant in accordance with the terms of the licence agreement.

4. What then are the legal consequences that flow from that recital of the facts, none of which were in dispute?

5. First, there is no doubt that the defendant did not exercise its right of forfeiture. It did not purport to do so and no notice of intention to do so was served as is required by the Conveyancing and Law of Property Act, s15. Second, the notice of termination given by Mr Szental as director of the defendant, on 19 November 1992 did not terminate the sub-lease. It purported to rely on cl16(3) of the sub-lease. That clause provided that if, pursuant to the terms of the head lease, the head lease was lawfully determined or terminated by either the defendant "(otherwise than by re-entry under clause 5.1 thereof)" or by Venture, either of them could, by notice in writing, terminate the sub-lease. The head lease did not come to an end pursuant to any of its terms, although there were clauses that gave the defendant a right to give notice of termination (otherwise than by re-entry under clause 5.1), eg, if the premises were damaged or destroyed by fire.

6. It was submitted by learned counsel for the plaintiffs that on 30 October 1992, Venture surrendered the head lease to the defendant, that the surrender was by operation of law and in consequence the plaintiffs became tenants of the defendant and remain its tenants in accordance with the terms of the sub-lease.

7. According to Woodfall on Landlord and Tenant, 25th ed, at 964 "a surrender is the yielding up an estate for life or years to him who has the immediate estate in reversion or remainder, wherein the estate for life or years may merge by mutual agreement" Co Lit 337(b) is the authority cited for that proposition. See also Foa The Law of Landlord and Tenant, 6th ed, 688. The Conveyancing and Law of Property Act, s60(1) provides that the conveyance of any legal estate is void unless made by deed except (inter alia) in cases of surrender by operation of law. As no deed was executed on 30 October 1992, learned counsel for the plaintiffs submitted that surrender of the head lease was effected by operation of law. For the defendant it was submitted that there was no surrender, merely a variation of the head lease from a term of years to a monthly tenancy.

8. Estoppel is the basis upon which surrender by operation of law rests. By the lessee accepting the new lease he is estopped from disputing the validity of the new lease, one that could not be granted if the old lease remained in existence. In Lyon v Reed [1844] EngR 754; 13 M and W 285; 153 ER 118 Parke B who delivered the judgment of the court said at 305-306; 127:

"(Surrender at law) is applied to cases where the owner of

a particular estate has been the party to some act, the

validity of which he is by law afterwards estopped from

disputing, and which would not be valid if is particular

estate had continued to exist. There the law treats the

doing of such act as amounting to a surrender. Thus, if

lessee for years accepts a new lease for his lessor (sic)

he is estopped from saying his lessor had not power to

make the new lease; and, as the lessor could not do this

until the prior lease had been surrendered, the law says

that the acceptance of such new lease is in itself a

surrender of the former."

9. In Buchann v Byrnes [1906] HCA 21; (1906) 3 CLR 704 it was held that surrender by operation of law will occur where the acts of the parties lead to the inference that the term granted was to be terminated and there was some subsequent act referrable to that agreement because the plaintiff is estopped from saying that he had not agreed to the surrender of the term. It is a question of fact in each case as to whether there is sufficient evidence of estoppel. See also Foster v Robinson (1951) 1 KB 149; 195 Crown Street Pty Ltd v Hoare Ivermee and Anor (1969) 1 NSWR 193 at 196. It would seem that the most common instance of surrender by operation of law arises where the lessee accepts a fresh lease during the period demised. An example is Foster v Robinson (supra) in which it was held that a yearly tenancy for a stipulated rent held by an employee from his employer/landlord was surrendered when the landlord agreed that, as the tenant was to old to work, he could continue to live in the cottage rent free for the rest of his life. Sir Raymond Evershed MR said at 346, the question was whether, in the events that had occurred, the tenant was estopped from denying that the landlord was capable of entering into the new licence arrangement. Another example is Joseph v Joseph and Anor (1966) 3 All E R 486. In that case it was held that a change in tenants from three brothers to two, a reduction in the term and a new rent, all agreed during the term of an existing lease, was sufficient to operate as a surrender of that existing lease. Lord Denning quoted with approval the following passage from 23 Halsbury's Laws of England (3rd Ed) 686:

"A surrender by operation of law takes place when the

tenant takes a new lease from the landlord to commence

during the term of the old lease, even though the new

lease is for a shorter term than the residue of the old

term. This surrender is founded on estoppel and takes

place without regard to the intention of the parties."

10. For the defendant reliance was placed on Penny v Craber (1967) 1 NSWR 683. During the term demised, the landlord sold off portion of the ground upon which was built the house in which the tenant lived. Isaacs J said at 685 that "the parties can if they so chose after the execution of the lease agree to such mutual variations and alterations." That statement is correct in the general sense in which it was meant but is obiter dicta on the issue of surrender as the learned judge found that the reduction in the area demised was not consensual and does not purport to affect the principle laid down in Lyon v Reed and consistently applied since then. Jenkin R Lewis and Son Ltd v Kerman (1971) Ch 477 was another case concerning a rent variation. It was held by the Court of Appeal that in the circumstances, the variation did not constitute a surrender of the existing lease. Russell LJ, who read the judgment of the court said at 496 that the question was whether "a mere agreement by landlord and tenant for an increase in the rent reserved on a letting necessarily involves a new letting despite their contrary intentions?" His Lordship then set out the general principle in accordance with Lyon v Reed (supra) and said:

"If, for example, a tenant holds a lease of land for 20

years and he and his landlord wish the period of his right

to hold the land to be extended by a further 20 years,

their object can be achieved by the landlord granting the

tenant a reversionary lease to take effect on the expiry

of the existing lease, but if they wish a single term for

the extended period to come into being that result can

only be achieved if the existing term is surrendered and a

new term is created. It is not possible simply to convert

the existing estate in the land into a different estate by

adding more years to it, and even if the parties use words

which indicate that this is what they wished to achieve

the law will achieve the result at which they are aiming

in the only way in which it can, namely by implying a

fresh lease for the longer period and a surrender of the

old lease: see in re Savile Settled Estates (1931) 2 Ch

210; Baker v Merckel (1960) 1 QB 657."

11. Application of that principle to the facts of this case leads to the conclusion that the creation of a monthly tenancy during a term for years could only be effected if the latter is surrendered. A term from month to month ie, one which entitles the landlord to terminate it on a month's notice without there being a breach, could not be granted if the same estate was already demised for a term of years. There is nothing in the other authority relied upon by the defendant, Smirk v Lyndale Developments Ltd (1975) 1 All E R 690 to suggest to the contrary. Fenner v Blake (1900) 1 QB 426 provides direct support for the plaintiff's proposition. In that case an agreement was made to shorten the term of a yearly tenancy. Channell J said at 428:

"It seems to me that the effect of the agreement in

December was that the defendant accepted a new tenancy for

six months terminable in June in lieu of the existing

tenancy. And if so, then all the authorities agree that

the acceptance of a new tenancy works a surrender of the

old tenancy by operation of law."

12. I find that Venture and the defendant agreed on 30 October 1992 that the term for years would be replaced by a term from month to month. I find that this agreement was acted on and is recited under seal on 4 December 1992. Such agreement could only be made if the term for years were surrendered.

13. What then is the position of the plaintiffs under the sub-lease upon the surrender of the head lease? Foa says in his 6th edition at 703, that surrender does not "... operate to extinguish the rights of third persons not parties or privies thereto, who have acquired an interest under the lease before its surrender." The editors of Woodfall (supra) say at 975, that "the surrender of a lease will not affect or prejudice a sublease previously granted" unless the sub-tenant consents. Their statements are amply supported by authority. See for example Mellor v Watkins (1874) LR 9 QB 400; Leschallas v Woolf (1908) 1 Ch 641. An explanation for this is given by Channell J in Walter v Yalden (1902) KB 304 at 310:

"The law is that a lessee can only give title to his

lessor by a surrender to the same extent that he could

give it to another person by his assignment. If the

lessee has created underleases, the underleases remain

notwithstanding his surrender; the lessee cannot assign

his term to anyone else so as to put an end to those

underleases."

14. However, Lord Denning gave a different explanation. In St Marylebone Property Co Ltd v Fairweather [1962] UKHL 1; (1963) AC 510 his Lordship said at 546:

"I have come to the clear conclusion that a surrender

operates as a determination of the term. It is not an

assignment of it. I am aware that no less an authority

than Lindley LJ once said that 'the surrender of the term

only operated as an assignment of the surrenderor's

interest in it: see David v Sabin (1893) 1 Ch 523 at 533.

But if that be true, it is not by any rule of the common

law, only by force of statute: and then only in the case

of underleases, not in the case of a trespasser or

squatter."

15. Whether surrender of the head lease operates as an assignment of it to the landlord or a determination of it is of no practical significance in the light of the Conveyancing and Law of Property Act, s82 which provides:

"When the reversion expectant on a lease of any

tenements or hereditaments of any tenure is surrendered

or merged, the estate which for the time being confers

the next vested right to the land shall be deemed the

reversion for the purpose of preserving such incidents

to, and obligations on, the reversion, as but for the

surrender or merger thereof would have subsisted, and be

deemed the reversion expectant on the lease."

16. In short, the statute provides that upon the surrender of the head lease, the sub-lease becomes a lease between the landlord and the sub-lessee. The reason for the statutory provision lies in the common law as expounded by Lord Denning in St Marylebone Property Co Ltd v Fairweather (supra) at 546 and by Fullagar J in Andrews v Hogan [1952] HCA 37; (1951-1952) 86 CLR 223 at 248. His Lordship and his Honour were agreed that at common law, the surrender of the head lease did not extinguish the sub-lease and, were it not for the statute making the sub-lessee a tenant of the landlord in accordance with the terms of the sub-lease, the latter would be unable to enforce any of the covenants of the sublease including one granting a right of forfeiture during its term. See Wilson v Jolley (1948) 48 SR (NSW) 460; Evans v Barboutis [1957] VicRp 3; (1957) VR 35. For more ancient authority for this proposition, see Webb v Russell (1789) 3 Term Rep 393[1789] EngR 2542; , 100 ER 639 at 402, 644.

17. Accordingly, I find that the head lease has been surrendered but the sub-lease remains in full force and effect between the plaintiffs and the defendant. There will be a declaration to that effect. I will hear counsel with respect to its precise terms and the final disposition of these proceedings.