Apriaden Pty Ltd v Seacrest Pty Ltd & Anor [2005] VSCA 139

Apriaden Pty Ltd v Seacrest Pty Ltd & Anor [2005] VSCA 139 - VSCA 2005 case summary — Zoe

[4]

1 In this appeal I have had the opportunity of reading the judgment which Williams, A.J.A. is about to deliver. I agree with the conclusions reached by her and I agree in substance with the reasons she gives for reaching them, so that the appeal should be dismissed.

2 I confess that at first I was uncomfortable with the concept that a lessor could re-enter premises still held by a lessee on grounds which could be justified only in terms of the law of contract. The law of landlord and tenant may be said to be so well known, with leases customarily drafted upon the assumption that that law applies to them, at least so far as the right to possession is concerned, that it might lead to commercial uncertainty if more general and arguably more flexible contractual rules were applied to them. Similar views, at least in qualified terms, have been expressed in a number of the judgments cited to us in the course of the appeal, but the question remains whether such concerns can be accommodated into the legal principles relating to leaseholds as they presently stand. Conceptually and historically those principles have always rested on somewhat uncertain bases, such that from very early times in the common law leasehold interests have been considered as personal rather than real property. Moreover the uncertainties, if not peculiarities, of the common law relating to leases have been such that the legislature has frequently intervened, more often than not to ameliorate some harshness perceived in the common law as it was then applied. So text writers writing in, say, 1880, 1920 and 1980, would have expressed (and did express) quite different views as to the current law relating to certain incidents of leaseholds because of legislation passed in the intervening years. Even views expressed as recently as 1980 must be qualified now in practical terms in this State by reference to the Retail Tenancies Reform Act 1998 (and its predecessor) and the Residential Tenancies Act 1997 (and its predecessor).

3 In truth, other than tenancies elaborately controlled by the Residential Tenancies Act and tenancies created under legislative powers, leases these days more often than not take the form of complex commercial documents more akin to contracts than demises. One need only look at the elaborate document recently discussed by this Court in Australia Pacific Airports (Melbourne) Pty Ltd v. The Nuance Group (Australia) Pty Ltd[1]. It is therefore not surprising that the High Court some twenty years ago reached a view, at least by majority, which has never been refuted by that Court and has in fact been implicitly accepted by it,[2] that "the ordinary principles of contract law, including that of termination for repudiation or fundamental breach, apply to leases": see Progressive Mailing House Pty Ltd v. Tabali Pty Ltd[3]. The only exceptions to this general approach acknowledged by the majority are cases where the lease by its very terms can be taken to have excluded conventional contractual remedies and leases of the kind where ordinary contractual remedies are effectively impossible to apply, for example, because the only consideration has been a premium and a nominal rent. It is unnecessary to examine these broad generalisations further for they are recognised and dealt with in terms of both history and principle in the judgments of Mason and Deane, JJ. The dissenting judge, Brennan, J., thought it not possible to imply a term which enabled a lessor to determine a lease, at least where a lease contains an explicit proviso for re-entry.[4] The difference from the majority was one of principle but the majority did concede that to reach a conclusion that the conduct of a lessee amounts to repudiatory behaviour or fundamental breach may be the harder when one is considering a lease and the specific covenants contained therein, having regard to the relationship between the parties as landlord and tenant and to what might fairly be inferred from the conduct of a tenant in particular circumstances.

4 In the end the difference in practical terms between the majority and Brennan, J. may not be so great but I think one must now accept that the decision of the High Court in Tabali represents the common law of Australia, for it has been effectively unchallenged by any decision of authority in the succeeding twenty years and none of the doubts expressed in a few cases in that period would deny the authority of what the High Court then said. The majority were well aware of the theoretical problems posed in the judgment of Brennan, J. but chose deliberately to prefer in the ordinary case the potential application of the law of contract as a basis for determining a leasehold interest.

[6]

6 This is an appeal from orders made by a judge of the Trial Division of the Court, dismissing a claim by the appellant lessee for damages against the respondent lessors for alleged wrongful re-entry, on 1 May 1998, of retail premises known as Shop 8, Ivanhoe Shopping Plaza, Ivanhoe ("the premises"). The appellant also appeals from the learned trial judge's determinations in relation to the amount of damages which would have been awarded against the respondents, had the claim been successful. In addition, it challenges orders made in favour of the respondents on their counterclaim.

7 The premises were let by the respondents to the appellant by a deed of lease, made on 9 August 1990 ("the lease"). They were used as a coffee lounge and café. The trial judge found that the lease had been repudiated by the appellant and terminated by the respondents' acceptance of the repudiation by their re-entry. Neither that conclusion nor the factual findings upon which it was premised are challenged.

8 I have adopted his Honour's findings as to the relevant facts for the purposes of the appeal.

The lease

9 The lease was subject to the Retail Tenancies Act 1986. It was initially for a three year term, commencing on 1 May 1990, and provided the appellant with options for two further terms, each of three years. The lease was varied by a deed, made on 6 September 1993, which acknowledged the exercise of the first option for a renewed term of three years, commencing on 1 May 1993, and also provided for the extension of the terms of each of the option periods to five years. Accordingly, the first option period was to expire on 30 April 1998.

10 The lease was not registered under the Transfer of Land Act 1958, nor was it capable of registration under the relevant provision, s.66(1), because its term did not exceed three years. It is an issue of some complexity as to whether the appellant's leasehold interest was properly characterised as legal or equitable at various times. Written submissions on the question have been made by the parties. It would seem to be common ground that, despite the operation of s.40(1) of the Transfer of Land Act and any practice of the Land Titles Office not to register short term leases, [5] such a lease might be regarded as a common law tenancy from year to year, which would determine at the expiration of the three year term and would be on the terms and conditions of the agreement, in so far as they were consistent with a yearly tenancy.[6] Although counsel for the respondents argue that the appellant's breaches of the rental covenant might have precluded it from being a tenant from year to year and so might have given rise to a tenancy at will, it is not necessary, for present purposes, to decide whether that contention is correct.

11 The term of the lease was subsequently extended to one of five years, by the agreement evidenced by the 6 September 1993 deed. As a result, at all relevant times, the appellant was in possession of the premises under an agreement for a lease of five years. [7] Such a lease is registrable under s.66(1) of the Transfer of Land Act. In my view, the appellant's unregistered interest under the agreement for the extension of the lease was an equitable interest arising under the principle in Walsh v. Lonsdale,[8] commensurate with the specific enforceability of the agreement upon which it was based.[9] However, bearing in mind the characterisation of a five year unregistered lease in registrable form as an equitable lease in The Progressive Mailing House Pty. Ltd. v. Tabali Pty. Ltd.[10] and the general references to leases per se throughout the judgments in that case, it does not appear that anything turns on the distinction in the appeal.

The re-entry clause

12 The lease contained a re-entry provision, in clause 8 (b). The parties are in dispute as to its proper interpretation and effect. I will set the clause out, in full, at this point, and later return to the issue of its construction. Clause 8 (b) was in the following terms:

[7]

"Default of Lessee

(b) If and whenever the rent hereby reserved or any part thereof shall be in arrear or unpaid for twenty-one days after the same shall have become due (whether the same shall have been legally demanded or not and no demand shall be necessary ) or if the Lessee shall go or be placed in liquidation or otherwise take advantage of any law for the time being in force relating to the liquidation of companies (other than for the purpose of reconstruction or amalgamation) or be placed under official management or receivership or if the Lessee's interest in this Lease shall be taken in execution or if the business conducted therein shall be discontinued or the Demised Premises deserted or vacated or left unoccupied for the space of two weeks (unless due to circumstances beyond the control of the Lessee) or if and whenever there shall be any breach or default in the performance or observance of any of the covenants or agreements or conditions of the Lease on the part of the Lessee to be performed and observed then and in every such case it shall be lawful for the Lessor (although the Lessor may not have taken advantage of some previous breach or default of a like nature) to determine this Lease upon or at any time after the expiration of fourteen days after the date of service of the notice required to be served on the Lessee by sub-section 1 of Section 146 of the Property Law Act 1958 (which period of fourteen days is hereby fixed as the time within which the Lessee is to remedy such last-mentioned breach of [sic] default if it is capable of remedy and to make reasonable compensation in money to the satisfaction of the Lessor for that breach of [sic] default) and which section is hereby declared to apply to this Lease by giving fourteen days notice in writing to the Lessee determining this Lease and upon the expiration of that notice the term hereby created shall absolutely cease and determine and the Lessor or any person authorised by the Lessor may thereupon or at any time thereafter re-enter upon the Demised Premises or any part thereof in the name of the whole and the Lessee and all other tenants and occupiers thereof expel and remove from the Demised Premises and peaceably hold and enjoy thenceforth as if this Lease had not been made without prejudice to any right or remedy of the Lessor in respect of any antecedent breach of or default in respect of any of the covenants or agreements with the Lessor or conditions binding upon the Lessee herein contained or implied and without affecting the generality of the foregoing the Lessee hereby expressly acknowledges and agrees that it is a fundamental and essential term of this Lease that the Lessee pay the Lessor the rent reserved hereunder in the manner provided herein and the Lessor may recover as a liquidated debt due from the Lessee any loss or damage occasioned to the Lessor by non-payment for whatever reason including exercise by the Lessor of its right of re-entry under this clause of the rental hereby reserved and/ or any rental arrears due to the Lessor pursuant to this Lease and this Lease may be produced as a Notice to Quit duly given and expired PROVIDED THAT the Lessor shall not be entitled to serve any notice on the Lessee required by section 146 of the Property Law Act unless there shall have first been served upon the Lessee a notice requiring any breach capable of being remedied to be so remedied within a reasonable time having regard to the nature of such breach and the Lessee has not commenced to remedy such breach."

[8]

The dispute

13 A dispute arose between the parties in relation to the respondents' management of the shopping centre and, from about March 1997, the appellant reduced its monthly payments for rental, outgoings and a promotion levy due under the lease, from the sum of $4,488.66 to $3,000. From time to time, the respondents' agent made demands for proper payment, but the breaches continued. Mr Bodo Heller, a director of the appellant, admitted before the trial judge that he continued to make the lower payments in order to cause the respondents to address his complaints, although he was aware that the appellant was breaching its obligations under the lease as a result.

14 It was in that context that, on 29 January 1998, the appellant purported to exercise the option for a further five year term. The respondents denied that the option had been validly exercised and maintained that the lease would expire, by the effluxion of time, on 30 April 1998.

The re-entry

15 No notices were served by the respondents, under either clause 8 (b) or s. 146 of the Property Law Act 1958. Nevertheless, the respondents made a peaceable re-entry of the premises in the early hours of 1 May 1998, changing the locks. They excluded the appellant thereafter.

16 On 11 May 1998, the appellant gave notice of dispute under s. 21 of the Retail Tenancies Act 1986. In the same month, there was a mediation and subsequent correspondence relating to the possibility that the appellant might resume occupation. The respondents contended that the lease had expired. However, they did not re-let the premises and, by their solicitors' letter, dated 13 May 1998, they offered the appellant the right to re-enter, on an overholding basis, under the terms of the lease, until an arbitrator should determine the validity of the purported exercise of the option.

17 The appellant maintained its position that the lease remained on foot, under the provisions of the Retail Tenancies Act 1986. It rejected the respondents' offer, but, under protest, on 13 May 1998, it paid the sum of $21,375.93, being the amount of rental arrears, outgoings and promotional levy due to 30 April 1998. The money was placed in a trust account, pending unconditional payment. The appellant's solicitors contended that the retaking of possession would require the appellant to admit that the lease was at an end. Although the respondents' solicitors advised that no such admission was required, the appellant did not go back into possession of the premises. Mr Heller explained the failure to resume occupation on the grounds that he intended to re-enter and then to sell the business. He knew the business was unsaleable without some leasehold term. No further payments were made under the lease.

18 On 22 December 1998, the arbitrator found that the appellant's purported exercise of the option was ineffective; he concluded that, as a result of the appellant's continuing default, the case fell within both para.(a) and para.(b) of s.14(5) of the Retail Tenancies Act 1986. He concluded that the lease had terminated by the effluxion of time on 30 April 1998 and that he had no jurisdiction.

19 On 5 March 1999, the trial judge declined to give leave to appeal against the arbitrator's decision in relation to the purported exercise of the option. However, his Honour gave leave and allowed the appeal on the ground that the lease had continued, under s. 14(4) of the Retail Tenancies Act 1986, because of the respondents' failure to give the appellant at least three months' notice of the last date upon which it could exercise the option under the lease. His Honour referred the matter back to the arbitrator.

20 On 12 March 1999, the appellant's solicitors informed the respondents that it treated their re-entry as a repudiation of the lease and accepted it as terminating the lease. They advised that the appellant would seek damages. A new tenant took possession of the premises on 22 March 1999 and it was common ground that the lease was at an end, at least by that date.

21 The appellant commenced the foreshadowed proceeding for damages in relation to the alleged repudiation on 8 April 1999. The respondents counterclaimed for rent for the period of the alleged overholding between 1 May 1998 and 22 March 1999.

22 Subsequently, on 11 May 2000, this Court dismissed an appeal from the trial judge's decision of 5 March 1999.[11]

The trial judge's decision

23 The trial judge held that the appellant's "deliberate and persistent breach" of the covenants to pay rent, outgoings and, probably, the promotion levy, amounted to common law repudiation of the lease. His Honour cited Carr v. J.A. Berriman Pty Ltd[12] and Progressive Mailing House[13] and concluded that the lease was brought to an end by the respondents' acceptance of the repudiation, by their re-entry. This conclusion was reached despite the respondents' failure to serve any of the three notices, which the judge considered were perhaps required by clause 8 (b), and notwithstanding that they had re-entered on the erroneous basis that the term had expired.

24 His Honour went on to make findings as to the amount of damages which he would have awarded, had he found that the respondents had repudiated the lease by wrongful re-entry. Evidence had been given of the appellant's alleged loss of profits of $67,000, during the period from 1 May 1998 to 12 March 1999, and its alleged loss of the goodwill of its business, valued, approximately, at between $110,000 and $115,000. However, the trial judge stated that he would have assessed the loss of profits at $4,000, on the basis of what he found to be the declining profitability of the business and the appellant's failure to resume occupation and recommence business in May 1998. His Honour assessed the value of the goodwill of the business at nil, on the ground that the appellant would have been in occupation as a tenant holding over, with no long-term tenure, in March 1999. He valued the lost stock at $2,000.

25 The respondents did not pursue their claim for rental after 30 April 1998.

The appeal

26 The appellant concedes that contractual principles apply to leases. However, it challenges the conclusion that the lease was brought to an end by the respondents' re-entry, in all the circumstances. It submits that the respondents breached the lease by their wrongful re-entry, entitling the appellant to damages for their breach of the lease. The appellant also appeals in relation to the assessment of damages.

27 The grounds of appeal are stated as follows:

[9]

"1. The learned trial judge erred in finding that the Respondents had rescinded the lease dated the 9th August 1990 as extended and varied by a deed dated the 6th September 1993 by their entry into the premises on the 1st May 1998 despite the fact that the Respondents had not served the notices required by clause 8 (b) of the lease prior to such re-entry ...

2. The learned trial judge erred in failing to find that the Respondents did not and could not rescind or otherwise determine the lease by their entry into the premises on the 1st May 1998 or by any other act without first serving the notices required by clause 8 (b) of the lease and the Appellant then failing to comply with such notices.

3. The learned trial judge erred in failing to find that the term of the lease continued until the lease was rescinded by the Appellant by notice dated the 12th March 1999.

4. The learned trial judge erred in finding that the Respondents had not wrongfully excluded the Appellant from the premises for the period 1st May 1998 to the 12th March 1999 ... .

5. The learned trial judge erred in finding that loss of profit by the Appellant, if his Honour had found for the appellant, should only be assessed for a 12 week period instead of the period [from the] 1st May 1998 to the 12th March 1999 ... .

6. The learned trial judge erred in finding that the goodwill of the business conducted by the Appellant from the premises must represent the value of the business on the basis that it was being conducted by an overholding tenant with no long-term tenure ... .

7. The learned trial judge erred in failing to find that the loss of goodwill of the business conducted by the Appellant from the premises should be calculated on the basis that as from and including the 14th May 1998 to the 12th March 1999 the Appellant was entitled, upon service of the required notice under section 14(3) and (4) of the Retail Tenancies Act 1986, to exercise the option in the lease and compel the grant of a further five year term as:

[13]

29 There are two aspects to the estates argument. The appellant contends that contractual principles relating to repudiation did not supply the respondents with an additional means of termination of their leasehold estate. It goes on to argue that, even if they did, s. 146 of the Property Law Act 1958 required the respondents to give it notice of the termination of the lease by acceptance of the repudiation.

30 The respondents answer the estates argument by submitting that their acceptance of the appellant's repudiatory conduct terminated the lease, under applicable contractual principles, and that no notice of the termination was required by s. 146 of the Property Law Act 1958.

31 In relation to the construction argument, they contend that the re-entry provision, clause 8 (b) of the lease, was irrelevant to the exercise of the common law rights. Further, they argue that, in any event, clause 8(b), properly construed, did not require them to serve any notice, in order to effect a forfeiture on the basis of the appellant's failure to pay rent. They contend that the trial judge erred in so far as he concluded that clause 8 (b) required service of any notice upon the appellant, in order to justify re-entry for non- payment of rent.

The estates argument

32 Counsel for the appellant submit that a leasehold interest only comes to an end when the acceptance of repudiation terminates the estate under property law principles. This aspect of the estates argument turns largely upon the ambit of the High Court's decision in Progressive Mailing House, to which I will now refer.

33 In Progressive Mailing House the High Court considered the applicability of contractual principles to the alleged termination of an unregistered lease of Torrens system land. As noted above,[14] the High Court characterised the lease as equitable, on the basis of the doctrine of Walsh v. Lonsdale[15]. The lessor respondent had sought to exercise its right of re-entry for non-payment of rent and obtained judgment for possession from the trial judge against the appellant, as well as an award of contractual damages for the loss of the benefit of the covenants in the lease. The sole question for the High Court was the correctness of the decision to award the damages.

34 Mason, J. (with whom Dawson, J. agreed and Wilson, and Deane, JJ. generally agreed) considered whether the rights of the parties to the equitable lease were to be determined in accordance with the ordinary principles of contract law. His Honour reviewed the relevant law and concluded that:

[31]

47 They more generally submit that the appellant's reliance upon Brennan, J.'s judgment in Progressive Mailing House is misplaced, given that Mason, J. delivered the leading judgment and Dawson, J. agreed with him, whilst Wilson, and Deane JJ. also generally agreed.

48 The respondents cite the Victorian authorities: Ripka Pty. Ltd. v. Maggiore Bakeries Pty. Ltd.[34] and Nangus Pty. Ltd. v. Charles Donovan Pty. Ltd. & Ors.[35] In Ripka Gray, J. followed Highway Properties (quoting the passage from the judgment of Laskin, J. relied upon by Mason, J. in Progressive Mailing House) and held that a lease was terminated by acceptance of the lessee's repudiatory persistent failure to pay the rent, even though there had been no re-entry under the terms of the lease. In Nangus Kaye and Southwell, JJ. (with whom Young, C.J. substantially agreed) referred to the judgment of Mason, J. in Progressive Mailing House and acknowledged that ordinary principles of contract law, including those relating to termination for repudiation, were applicable to leases. The defendants in that case had conceded the point[36] and there was no issue as to whether the lease had been determined under a re-entry clause, or otherwise by the application of property law doctrines.

49 The respondents also rely upon decisions of single judges in other jurisdictions, referring the Court to Leda Commercial Properties Pty. Ltd. v. D.H.K. Retailers Pty. Ltd[37] and Vickers & Vickers v. Stichtenoth Investments Pty. Ltd.[38] in support of their arguments. Further, they note the general applicability of contractual principles to what they argue is the analogous case of contracts for the sale of land, where a purchaser has also acquired an equitable interest. [39] They too call in aid the opinions of learned commentators.[40]

50 Counsel for the appellant reply that the Court should not follow Ripka, arguing that it preceded Progressive Mailing House, and that Gray, J. did not have the benefit of Brennan, J.'s analysis which, in counsels' submission, might have caused his Honour to reconsider. They also argue that Nangus should be read in light of both the concession by counsel for the defaulting lessee that Gray, J. was correct in Ripka and the resulting absence of analysis of that decision. They submit that the Court should not follow the approach adopted in Leda or Vickers and argue that Vickers should be regarded as standing only for the proposition that the duty to mitigate loss applies in relation to leases. Finally, they point to the differences between a demise effected by a lease and the proprietary interests held under a contract for sale.

51 Before expressing my conclusions on these arguments, I will consider the submissions relating to s. 146 of the Property Law Act 1958.

Section 146 of the Property Law Act 1958

52 Both parties make submissions in relation to authorities dealing with the issue as to whether s. 146 or its statutory equivalents require notice to be given of the termination of a lease by acceptance of repudiation.

53 The appellant relies generally upon the judgments of Brennan, J. in Progressive Mailing House and Priestley, J.A. in Wood Factory. Counsel for the appellant submit that Priestley, J.A. contemplated compliance with s. 146 being a pre-condition to determination of a lease under contractual principles, when his Honour stated his view that the r_atio_ of Progressive Mailing House required a lessor wishing to terminate on such a basis to be "in a position to forfeit the lease".[41]

54 The respondents rely upon Findlay & Anor v. Nut Farms of Australia Pty. Ltd.[42] in which the relevant statutory notice had been given, but it had, nevertheless, been impliedly accepted by Pidgeon, J. in the Supreme Court of Western Australia that the notice would not have been necessary in circumstances involving repudiation. They also cite the decision of Zelling, J. of the South Australian Supreme Court in Nai Pty. Ltd. v. Hassoun Nominees Pty. Ltd., [43] in which it was held that there was no need for a statutory notice, where re-entry followed the lessee's repudiation by deliberate non-payment of rates, repairs and liquor licensing fees.

55 Counsel for the appellant reply that the implicit finding in Findlay should be regarded as obiter, in light of the finding that the relevant provisions had been satisfied by the notice given. They seek support from English decisions recognising the applicability of contractual principles, subject to statutory requirements relating to the recovery of possession: Hussein & Ors v. Mehlman, [44] and Nynehead Developments Ltd. v. R. H. Fibreboard Containers Ltd. & Ors[45] and Chartered Trust plc v. Davies[46] in which Hussein was followed. They also refer to Abidogun v. Frolan Health Care Ltd. & Anor,[47] in which the Court of Appeal held that the lessor's right to bring a lease to an end for a denial of title was based on a breach of implied terms in the lease and amounted to a forfeiture, within the meaning of s. 146 of the Law of Property Act 1925 (UK), but did not, in the circumstances, arise as a result of the lessor's acceptance of repudiation.

56 The respondents urge the Court not to follow the English authorities. They argue that Australian cases have taken a different and preferable course.

57 The respondents place particular emphasis on the recent decision of the Court of Appeal of the New South Wales Supreme Court in Marshall v. Council of The Shire of Snowy River,[48] which was followed in South Australia, in 2003, in India Pty. Ltd. v. Florlim Pty. Ltd. & Ors[49]. In Marshall the lessor failed to serve the notice required by s.129 of the Conveyancing Act 1919 (NSW) (the equivalent of s. 146 of the Property Law Act 1958), before purporting to terminate an agreement for a five year lease by giving the lessee notice to vacate. The lessee had repudiated the lease by persistent breaches of covenant and the notice alleged " a fundamental breach" of the contract. Meagher J.A. considered the effect of the lessor's failure to serve the statutory notice and concluded, at 14,457:

[37]

(I note that the respondents also rely upon this passage in support of their argument that a lease may be terminated for repudiation. They submit that Sheller, J.A. assumed that the termination of a lease, brought about by the acceptance of repudiation, will, independently, justify an order for possession.)

Conclusions in relation to the estates argument

61 It is common ground that contractual principles relating to repudiation apply to leases after Progressive Mailing House and that, if the acceptance of repudiation also determines the lease under property law doctrines, contractual damages will be available to the innocent party.

62 The first issue between the parties is as to whether the contractual doctrine of repudiation provides an additional means by which a lease may be terminated by the innocent party. In my opinion, the balance of authority suggests that it does.

63 There was some early support in New South Wales[55] for Priestley, J.A.'s views in Wood Factory that the ratio of Progressive Mailing House should be confined_._ However, more recently, courts in New South Wales,[56] Western Australia,[57] South Australia,[58] the Australian Capital Territory[59] and, significantly, in this state[60], as well as academic commentators[61] have recognised the general applicability of contractual principles to leases. Further, in Laurinda, the High Court followed the same course, holding that the subject lease had been repudiated, without reference to the termination of the leasehold estate under property law doctrines, in circumstances in which it might have been argued that there had been a surrender of the lease.

64 In my view, the ramifications of the recognition of a separate contractual basis for determination of a lease are likely to be limited. It has been repeatedly stated that the courts will be slow to infer repudiation,[62] the existence of which must be objectively ascertained.[63] The proprietary nature of the interests of each party to the lease contract has special ramifications in relation to the application of contractual principles.[64] In other words, a consideration of factors such as the length of the lease and the amount of rent payable is relevant to the determination as to whether or not repudiation has occurred, particularly in the absence of abandonment of possession. In contrast, the terms of a lease and, in particular, a commercial lease, will more often than not provide for its determination for breach of covenant, and, in particular, for non-payment of rent. After Shevill, leases are also even more likely to designate covenants as essential terms.[65]

65 Further, in my respectful opinion, the position contemplated by counsel for the appellant and referred to by Brennan, J. in Progressive Mailing House,[66] of a contract of lease being terminated by repudiation at one point and then, some time later, the leasehold estate being determined by acceptance of a surrender or forfeiture would seem likely to produce uncertainty and confusion, if the parties were bound, in the interim, only by those surviving covenants of the lease touching and concerning the land.

Conclusions in relation to s.146 of the Property Law Act 1958

66 I am further of the view that the trial judge was correct in finding that the lease was terminated by the acceptance of the appellant's repudiation, notwithstanding the respondents' failure to serve a notice under s. 146 of the Property Law Act 1958.

67 Once again, in my opinion, the balance of authority and, in particular, Victorian authority, favours the respondents' position. I prefer the approach of the courts in Marshall, Florlim, Kiama and Batiste to that adopted in the English decisions relied upon by the appellant. I am also influenced by the High Court's recognition, in Laurinda of the lessee's right to accept the lessor's repudiation of the subject lease for breach of covenant, despite its failure to give effective notice to make the time for the lessor's performance of the essence of the agreement.

68 I do not agree with the appellant's submission that, in Kiama, Young, J. considered contractual principles applicable to determine leases, in the case of some forms of repudiatory conduct, but not in others. Further, in my opinion, any such approach would be likely to produce undesirable uncertainty and confusion.

69 In my view, it is unlikely that the inapplicability of the statutory notice regime will result in feared injustice to lessees,[67] given that repudiatory conduct by a party to a lease will not readily be found by the courts. It should also be borne in mind that the repudiating lessee has indicated an intention not to be bound by any of its obligations under the lease. It has put itself in quite a different position from that of a lessee who faces the risk of forfeiture or re-entry, for breach of one or more particular covenants, but who has not demonstrated such an attitude to the contract.

70 Finally, I am persuaded that the judgments of Mason, Wilson, Deane and Dawson, JJ. in Progressive Mailing House represent a majority view favouring the acceptance of the respondents' position in relation to all aspects of the estates argument.

71 The estates argument should be rejected.

The construction argument

72 The appellant submits that, even if the lease could be terminated by repudiation, it was not brought to an end on 30 April 1998, because the requisite notice of termination under clause 8(b) was not given by the respondents. The respondents contend that clause 8(b) does not apply to termination by acceptance of the appellant's repudiation. They go even further and submit, pursuant to a notice of contention, that the learned trial judge erred, in so far as he considered that any notice of re-entry for non-payment of rent might have been required.

73 Counsel for each party made complex submissions, dividing up the terms of clause 8(b) into separate sections and making some references to other clauses of the lease, in order to make good their respective arguments.

Conclusion in relation to the construction argument

74 Clause 8(b) is somewhat difficult to interpret. Nevertheless, in my view, it both makes sense and specifically refers to the facts which might result in the determination of the lease and re-entry under its provisions. The appellant's submissions have not persuaded me that clause 8(b) attempts to regulate the exercise of the common law contractual right to terminate for repudiation.[68] Further, like the relevant provision in the lease under consideration in Progressive Mailing House,[69] it expressly provides that the lease may be terminated without prejudice to any rights in the lessor arising as a result of previous breach of covenant by the lessee. The construction argument should be rejected.

The respondents' contention

75 However, if it had been necessary for the respondents to rely upon their rights under clause 8(b) of the lease, I am not persuaded that no notice of forfeiture or re-entry for non-payment of rent would otherwise have been required under clause 8(b), as they contend. I consider that the emphasised words in the analysis in the following paragraph would have required the respondents to give the appellant 14 days' written notice of the determination of the lease for breach of the covenant for rent.[70]

76 In my view, clause 8 (b) should be relevantly interpreted as follows:

[41]

Grounds 5-7

77 Grounds 5 to 7 challenge the correctness of the learned trial judge's assessment of the damages to which the appellant would have been entitled had it succeeded in its claim. Notwithstanding my opinion that the appeal from the judge's rejection of the claim should be dismissed, I will state my views in relation to the appeal against his Honour's findings in relation to damages, in case this matter should go further.

78 The appellant sought damages for the loss of the business resulting from the respondents' alleged repudiation by their re-entry on 1 May 1998. The appellant challenges only the trial judge's assessment of the loss of profits and his Honour's determination as to the value of the goodwill of the lost business. Ground 5 deals with the assessment relating to loss of profits and grounds 6 and 7 relate to the finding in respect of the value of lost goodwill of the business.

Ground 5

79 The appellant submits that his Honour should have assessed its loss of profits with reference to the whole of the period between the respondents' claimed repudiatory breach by their re-entry on 1 May 1998, and the appellant's termination of the lease by the acceptance of the repudiation on 12 March 1999.

80 As noted above, the learned trial judge held that the appellant would have been able to charge the respondents only with the loss of profits for a 12 week period after its exclusion on 1 May 1998. His Honour found that the appellant was, in fact, only excluded from the premises until the respondents proposed that it resume possession, on an overholding basis, later in the same month, and he allowed for a further period of loss during the re-establishment of the coffee lounge business.

81 The appellant does not challenge that it had an obligation to mitigate its loss.[71] However, counsel for the appellant argue that it would have been unreasonable, in all the circumstances, for it to go back into possession, when the respondents afforded it the opportunity to do so, later in May 1998. They also submit that his Honour's conclusion fails to give credit to his implied findings that "the parties were in a position of Mexican stand-off", each maintaining the status quo, without making any admissions, whilst awaiting the outcome of the arbitration and court proceedings.

Conclusion in relation to ground 5

82 I am not persuaded that the trial judge erred in concluding that the appellant could not charge the respondents with the consequences of its own failure to re-take possession and revive its business, in light of the invitation extended to it.

83 It was made clear that the respondents did not make the resumption of occupation conditional upon any acknowledgement that the lease was at an end. Mr Heller's explanation was to the effect that he intended to re-enter and to sell the business, but knew that the business was unsaleable without some leasehold term and so did not take up the respondents' offer. In my view, that explanation does not provide any reasonable justification for the appellant's failure to continue its business, until the issue of the validity of the exercise of the option was resolved, one way or another. The appellant maintained that the lease was current because it had exercised the option. If, indeed, it intended to sell its business, it would appear counter-productive not to try to keep it going, in the meantime.

84 Ground 5 should not be upheld.

Grounds 6 and 7

85 The appellant finally challenges the trial judge's assessment of the loss of the goodwill of the business. His Honour valued the goodwill at nil, on the basis that, when the appellant accepted the respondents' claimed repudiation on 12 March 1999, the business would have been one "conducted by an overholding tenant with no long term tenure". His Honour found that the evidence of the expert witnesses had established that a purchaser would pay nothing for the goodwill of such a business.

86 Counsel for the appellant argue that it was "open" to the judge to find that, as a result of the operation of s. 14(5) of the Retail Tenancies Act 1986, at any time prior to 12 March 1999, the appellant could have validly exercised the option for a further term of five years and that the goodwill should therefore be valued at more than nil.

87 Section 14(5) provided at the relevant time :

[44]

88 The appellant refers to its payment, on 13 May 1998, of the arrears outstanding under the lease as at 30 April 1998, arguing that it would not fall under para.(a) or (b) of s.14(5) in the period to 12 March 1999. It contends that it had remedied the only defaults of which it had notice by making that payment.

89 The respondents dispute the appellant's proposition by arguing that the arbitrator's findings in relation to the attempted exercise of the option on 29 January 1998 gave rise to an issue estoppel. However, as counsel for the appellant point out, the arbitrator's findings related to the validity of the purported exercise of the option on 29 January 1998 and, in particular, to the question as to whether the appellant had, as at that date, "persistently defaulted under the lease throughout its term," within the meaning of s.14(5)(b). Such a finding cannot, by being coupled with evidence of further default, give rise to an estoppel in relation to a state of affairs at the later date.[72] The respondents' argument should, at least for this reason, be rejected.

90 However, it must be borne in mind that the situation under consideration is hypothetical. The option would only have been exercisable, under s.14(4) of the Retail Tenancies Act 1986, at any time before the expiration of three months from the date upon which the appellant had been given the requisite notice under s.14(3). The appellant relies upon the 13 May 1998 payment of arrears to mount its argument that it would not have been in default at the time of the exercise of the option. In my view, the argument is flawed. It does not follow from the fact that the arrears were paid, after the appellant had been put out of possession by the respondents' re-entry, that the payment would otherwise have been made by the time of any further attempt to exercise the option.

91 In any event, as his Honour noted, the two expert accountants called by the parties agreed that the business would have no value, apart than that attaching to its tangible assets, if the appellant were entitled to possession only by virtue of the statutory overholding under s. 14(4).

Conclusions in relation to grounds 6 and 7

92 In all the circumstances, I am not persuaded that his Honour erred in his assessment of the loss of goodwill, even if he did not expressly refer to the possibility of a further attempt to exercise the option. Grounds 6 and 7 fail.

Conclusion

93 The appeal should be dismissed.

At a glance

Court

Decision date

Before

Source

Judgment (45 paragraphs)

Parties

Legislation Cited (2)