Bohisa v Freedom

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3276/97 BOHISA PTY. LIMITED v FREEDOM FURNITURE PTY LIMITED

1 The question for decision is whether or not the plaintiff, Bohisa Pty. Limited (Bohisa) is entitled to rent of premises 79 Princes Highway Kogarah for a period from 15 June 1996 to 19 July 1997. Bohisa says that there is an agreement between Bohisa and the defendant, Freedom Furniture Pty. Limited (Freedom No 2 or Freedom) to grant and take a lease of that property for a period of five years from 20 July 1992; that it is entitled to specific performance of that agreement by the Freedom No 2 as lessee, that Freedom No 2 vacated the premises on 7 June 1996 and has refused to pay rent after 15 June 1996; and it is entitled to damages accordingly. Facts 2 The following facts are not in issue. Some are admitted on the pleadings. 3 The premises the subject of dispute were leased by Bohisa to Freedom Furniture Pty. Limited (Freedom No. 1) by lease registered number X617546. That company is not the present defendant. That lease was for a period of five years from 20 July 1987. It contained an option for a further term of five years to be exercised by notice in writing given not less than three months nor more than six months prior to the expiration of the first term. Clause 18 of the lease contained the provisions for exercise of the option and for determination of the rent for the period of the ensuing lease. 4 Four individuals guaranteed the performance by the lessee of its obligations under the lease. The covenants in question are set out in Clause 17 of the lease. Clause 17.7 provided that in case of exercise of option: 17.7 If this Lease shall contain an option for a further lease and the Lessee shall exercise such option the Lessor's obligation to grant such a lease shall be subject to the guaranteeing the Lessee's obligations under such lease and indemnifying the Lessor in respect thereof in the terms of the guarantees and indemnities contained in this clause of this Lease. 5 In June 1991 the lease was assigned by Freedom No. 1 to Pademella Pty. Limited. It seems that on assignment or about that time the lessee Freedom No. 1 changed its name to Feldex No. 1 Pty. Limited and the assignee Pademella changed its name to Freedom Furniture Pty. Limited (Freedom No. 2). Changes such as this can only result in confusion for creditors but that is not in issue here. On 16 May 1992 Freedom No. 2 changed its named to Freedom Furniture Limited. Bohisa consented to the assignment by a deed of assignment which bears date 16 June 1992. The evidence is that it was executed before that date and that consent was given some months earlier and certainly before April 1992. Prior to giving consent to the assignment, Mr. Lyons, on behalf of Bohisa sought advice and received confirmation that the original lessee and the original guarantors were not released from their obligations under the lease on assignment. It was an additional condition of assignment that the obligation of the assignee would be guaranteed by its holding company Jamison Equity Limited, and that took place. While the document in question is called deed of assignment of lease, in fact it was not an assignment of the lease but a consent to the assignment together with the guarantee required from Jamison Equity Limited. However, the original guarantors were party to it. One of the recitals in the document refers to a "transfer of lease of the same date". That transfer was never registered. Thus until it was written off as expired, it seems pursuant to request No. 5530574, as having expired by effluxion of time, the lease on the title was the lease to the company renamed Feldex No. 1 Pty. Limited. 6 There were discussions in April 1992 between Mr. Lyons and Messrs. Hammerschlag and Dewdny representing the assignee. These were in connection with the exercise of the option under the lease which because of the dates of Easter would have needed to be exercised by 16 April. It is not necessary to decide for the purposes of this case whether an equitable assignee of the lease can exercise an option under a registered lease, but only to recognise that the discussions took place with the last date for exercise in mind. 7 On 16 April 1992 there was an exchange of faxes between Bohisa and Freedom No. 2. The first was from Bohisa and was returned with additional words written by Mr. Hammerschlag. I set out the complete document:

Freedom Furniture 27 Nyrang Street LIDCOMBE NSW 2141

ATTENTION: IVAN HAMMERSCHLAG FAX : (02) 649 6625

I confirm our offer to you to renew your lease of the above premises for a further five year term.

Rent from renewal date - $330,000 p.a. Reviews annually to C.P.I. only no 7% minimum

Yours faithfully, (signed) R.M. Lyons Bohisa Pty. Limited DIRECTOR

Dear Ray 16/4/92 This offer is acceptable. (signed) I. Hammerschlag 8 It is this document which is said to bring about a binding agreement for lease giving rise to this action. 9 The solicitor for Bohisa was Mr. Caldwell of Messrs. Michell Sillar McPhee Meyer. He had acted for that company for many years. On 6 May 1992 he sent to Freedom a form of lease for approval enclosed with a letter the terms of which are of some significance and which I set out: We act for the Lessor and now enclose the following documents for your approval: 1. Lease (in triplicate); 2. Authority; 3. Memorandum of Costs and Disbursements; Kindly note that the enclosed Lease has not yet been approved by our client and we therefore reserve the right to make any alterations or additions thereto as our client may require. Subject to our client's approving of the enclosed documents and our client not requiring any amendments thereto, we look forward to receiving the duty executed Lease together with a cheque in payment of our costs and disbursements as set out in the enclosed Memorandum of Costs and Disbursements.

Please ensure that the full details of the Lessee and the Guarantor are inserted in the Lease and that the Lease is signed at the foot of each page and alterations thereto are initialled. Please note that the enclosed documents have been submitted on the basis that no contractual obligation shall be deemed to have arisen between the Lessee and the Lessor pending our receiving the duty executed Lease in the form approved by our client. We advise that our assessment of the stamp duty payable on the Lease has been calculated on a "once and for all" basis whereby the total rent payable under the Lease is calculated by compounding for each year after the first year the rent payable in the first year of the Lease by the percentage increase in the Consumer Price Index last issued prior to commencement of the Lease. As this figure is liable to vary prior to commencement of the Lease, we reserve the right to require additional moneys for stamp duty. In accordance with the recent resolution of the Council of the New South Wales Law Society in respect of leasing practice and procedure, we advise that upon the terms of the Lease being finalised and our receiving your advice that the Lessee is in a position to execute the Lease, we will forward a copy of the Lease to our client for execution. We will then conduct an exchange of Leases in accordance with the requirements of the Law Society.

Please note that our client requires that the Lease be executed and returned to us within twenty one (21) days of the date hereof. 10 There was some discussion between the parties about the condition of the premises. Then on 24 June 1992 Mr. Raward, solicitor acting for Freedom Furniture No. 1 wrote to Mr. Caldwell referring to "the option lease enclosed with your letter of 15 June 1992" and requiring some amendments. No letter of 15 June 1992 is in evidence and it seems more likely than not that he was really referring to the letter of 6 May 1992. While the letter refers to an option lease his evidence was that he did not treat the matter as an exercise of option and was seeking changes to the document submitted. It is of some importance to understand that it is not claimed in this action that there was an exercise of the option. One of the amendments sought was that any guarantee of Jamison Equity Limited be released upon Freedom No 2 being listed on the Australian Stock Exchange. The draft lease submitted by Mr. Caldwell had added the following words to the covenant in clause 4.1 of the original lease to keep in repair "the lessee acknowledges that the premises were in good and substantial repair order and condition at the commencement of the term." 11 There was further correspondence between the solicitors in October 1992. Among other matters Mr. Raward said Jamison would not offer a guarantee. Mr. Caldwell responded. He claimed that there was an enforceable agreement arising from exercise of the option. More importantly he said the requirement for a guarantee by Jamison Equity would not be waived. 12 There was then a gap in correspondence. Freedom No 2 remained in occupation paying monthly rental on the basis of an annual rent of $330,000 plus outgoings. However, it was seeking a reduction in rent and either claiming that it had no lease and could leave at any time, or that it would find a loophole in the lease and leave in any event. In the circumstances it does not much matter as on any basis there was no lease. By this times it seems from a letter of 20 May 1993 from Mr. Caldwell to Mr. Raward, the lessor was claiming that there was an enforceable agreement for lease arising out of "the offer and acceptance contained in correspondence between our clients of 16 April 1992" and gave notice that consideration was being given to proceedings for specific performance and that its rights against the guarantors to the original lease were reserved, this latter claim being quite contrary to the rights asserted. It should be noted those guarantors included Jamison Equity as a result of the consent being given to the assignment to that original lease. Mr. Raward responded that there was no binding agreement as it was clear that the parties had intended that a formal document be executed before there was anything binding upon them. 13 Matters continued for a while in a state of what might be described as armed neutrality during 1993. There was a "without prejudice" offer to make some adjustments to what were called "the terms of the lease agreed to be executed" and a statement from Freedom No. 2 that it was in occupation on a monthly basis. 14 On 8 January 1996 Freedom No 2 wrote to Mr. Lyons of Bohisa stating that it intended to vacate, that it was bound to give only one month's notice but wished to be reasonable, and that it would be vacating the premises between April and June 1996. There were then negotiations between the parties as to what work would be required by Freedom under the make good provisions of the original lease, Freedom apparently accepting that it was bound by those. In April and May there was further correspondence between solicitors at which stage Messrs. Freehill Hollingdale and Page were acting for Freedom. Freedom finally said that it would vacate on 7 June 1996, which it did. 15 Bohisa then attempted to re-let the premises. At the commencement it sought a rent of $400,000 per annum net, meaning with outgoings in addition. While that figure was later reduced, the clear evidence is that the reason the premises were not re-let prior to 19 July 1997 was that Bohisa was seeking an excessive rent, even though it should be noted they did eventually succeed in securing a tenant for ten years with two five year options from 1 July 1998 at a commencing rent of $510,000. It should be noted however that a rent-free period of one year was given to the tenant. It is not necessary to go into this further other than to state that as Bohisa was seeking a rent which was not obtainable it did not do what it could have done to mitigate its loss, that being its responsibility, both under the general law and the specific provisions of the original lease which it claimed were part of the terms of the lease agreed to be entered into. 16 It is necessary to deal with the pleadings as they present some real problems. The plaintiff says that:

A. By the exchange of faxes on 16 April 1992 it agreed to lease the premises for five years from 20 July 1992 at a yearly rent of $330,000 with a review to CPI but otherwise upon the terms of the 1987 lease. I should say it is not pleaded that the defendant agreed to accept that lease by that letter, but that is obviously intended.

B. That Freedom continued in occupation but in breach of the agreement refused to execute a lease.

C. That Freedom vacated on 7 June 1996 in breach of the agreement and refused to pay rent thereafter.

D. That by refusing to execute the lease, vacating the premises and refusal to pay rent, Freedom repudiated the agreement.

E. That the plaintiff accepted the repudiation on 10 July 1996 and that it suffered damage as a consequence of the repudiation. 17 The plaintiff then seeks (a) a declaration as to there being a binding agreement as alleged; (b) a declaration it is entitled to an order for specific performance of that agreement; (c) a declaration the defendant has repudiated the agreement and the plaintiff has accepted that repudiation; and (d) damages and interest. 18 The defendant (a) denies the agreement; (b) denies any damages; (c) says there is a failure to mitigate; (d) as alternative defences says that (i) the parties as from 6 May 1992 abandoned any agreement; (ii) any lease which would have arisen was surrendered by operation of law (iii) any lease which would have arisen was terminated by agreement. 19 I have set the plaintiff's claim out in some detail because it throws up some real problems. This is an action in the Equity Division. Whatever else it could have been intended to be it could hardly have been thought to have been an action for damages for breach of contract properly brought in the Common Law Division. That in some ways would seem to be clear from the claim for a declaration as to entitlement to an order for specific performance. However, while there is a claim for a declaration as to entitlement to the order there is no claim for an order for specific performance. Rather there is a claim for a declaration of termination upon acceptance of repudiation by the defendant which would be quite contradictory to a declaration of entitlement to an order for specific performance. 20 In the light of this rather extraordinary state of affairs and the contradictory claims it is probably best to try to deal with those contradictory claims and I will do so. There are many points which have been argued on some of which it would be possible to write a detailed judgment, perhaps interesting to lawyers but not to the parties, and therefore I will endeavour to deal with the matter in as clear and simple a way as possible. 21 It is clear the court could not make a declaration that the plaintiff is entitled to an order for specific performance if no order is sought or could be sought on the pleaded claim. In those circumstances it is not necessary to consider further the question of backdating an order for specific performance so as to give it some efficacy in this case, in light of the fact that the term of the lease, on any basis, has expired: as to this see the discussion in Chan v Cresdon Pty. Limited (1989) 168 CLR 243. For the same reason it is not necessary to consider what might flow from this on the assumption an order would have been made so as to bring a claim for damages within in the principle of Walsh v Lonsdale [1882] 21 Ch D 9. It follows from this that the claim of the plaintiff must be limited to a claim for damages for refusal to enter into a lease in terms of the agreement pleaded. That is of course a common law claim but nevertheless I will deal with it. Any damages would not necessarily equate with those which would be available on a successful claim for a breach of the covenant in the lease agreed to be entered into. The first answer to a claim is that the plaintiff has never asked Freedom to enter into such a lease. Rather the lease put forward on 6 May 1992 by the plaintiff's solicitors was not a lease in accordance with the pleaded agreement. But even had it been and had Freedom signed it, that would not in itself have been acceptable to Bohisa because it required a guarantee of the lessee's obligations from Jamison Equity Limited which Freedom was not able to obtain. The clear evidence of Mr. Lyons, made even clearer by the correspondence, was that the guarantee was necessary. Thus it cannot be said there was any loss which would have arisen had Freedom Furniture been asked to sign and refused to sign a lease on the terms set out. As I have said it was not asked to do so. It follows from this that the plaintiff's claim must fail. 22 In fairness to the parties I should deal with some of the other matters. The contract was required to be in writing - Conveyancing Act 1919 s54A. Assuming then that it was a contract to enter into a lease upon the terms of the existing lease as altered, as set out in the letter, then the letter did not make it clear that the guarantee of Jamison Equity Limited was required. It was an essential term. However, I think that the better view is that it could be taken to be necessarily implied in view of the negotiations on the assignment. Nevertheless it was essential to the landlord being willing to grant a lease and was a condition precedent to any lease being entered into. It has not been claimed that Freedom contracted to obtain the guarantee. As the agreement put forward to enter into the lease was admittedly dependent upon the guarantee being available, there could be no breach of the agreement if that condition was not fulfilled. 23 Most of the argument in this case was directed towards the question of whether the parties intended to be bound upon the signing of the letter or faxes, or whether their intention was that there be no binding agreement until formal documentation was drawn up. The parties were, I think, directing their minds towards an option for renewal rather than a new lease. It would have been possible to arrange a valid exercise of the option with the rent agreed in advance and appropriate documentation, but that was not done. Nevertheless I consider that the parties intended to enter into binding relations by the exchange on 16 April 1992, but that their intention was that there would be a lease following an exercise of option. They expected the agreement to be encapsulated in formal documentation as at a later date. While the case law establishes that in commercial agreements of the magnitude of this one which relate to land, the general principle is that the executing of formal documentation is necessary for a contract to come into existence, it nevertheless remains a question of intention: Blackburn Developments No. 19 Pty. Limited v Downs Surgical (Australia) Pty. Ltd. [1994] 2 BPR 97-689; Landsmiths Pty. Limited v Hall [1999] NSWSC 735. I consider here that it was the intention of the parties to be bound, but on the basis of a common mistake as to the effect of their action. However I have also concluded that if I am wrong in this and there was a binding agreement the parties acted so as to abandon or bring that agreement to an end, and embarked upon negotiations for a new agreement. So far as the plaintiff is concerned that is made perfectly clear by the letter from its solicitor dated 6 May 1992 and the proposed alterations to the lease clearly brought about as a result of negotiations about the state of the building which took place between the parties. So far as the tenant is concerned, it is made clear by the negotiations upon the terms of the lease and the inability to offer the guarantee. The plaintiff's solicitor never sought to retract the statements in his letter of 6 May 1992. What he did on 23 October 1992 was adopt a new position based upon exercise of the option which position was not maintainable. Neither party proceeded on the basis of the contract originally made, both parties proceeded on a basis contrary to it. Thus it is proper to conclude that they both abandoned it, both acting on that basis in their actions towards the other; Summers v The Commonwealth (1918) 25 CLR 144 at 151; Air Great Lakes Pty. Limited v K S Easter Pty. Limited [1985] 2 NSWLR 309 at 324. 24 For these various reasons I find that the plaintiff's claim fails and that the amended statement of claim should be dismissed with costs.

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