Chan v Cresdon Pty Ltd

High Court of Australia|1989-07-01|Before: McHugh JJ

High Court of Australia Mason C.J. Brennan, Deane, Toohey and McHugh JJ. Chan v Cresdon Pty Ltd [1989] HCA 63

ORDER Appeal allowed with costs. Set aside the orders of the Full Court of the Supreme Court of Queensland in so far as they relate to the appellants and in lieu thereof order that the appeal to that Court, in so far as it relates to the appellants, be dismissed with costs.

Dec. 14 Mason C.J.,Brennan, Deane and McHugh JJ.

The respondent brought proceedings against the appellants and Sarcourt claiming a sum of $28,877.70, being the total amount payable by Sarcourt as lessee for rent and other charges and interest. Sarcourt did not appear in the action and the respondent proceeded against the appellants and a third person also named as a guarantor. The appellants successfully contended in the District Court that there had been a total failure of consideration on the part of the respondent as lessor because it had been required to grant to Sarcourt a legal lease for a term of five years, and that accordingly the appellants were relieved of their obligations as guarantors described in the executed instruments.

In the Full Court of the Supreme Court of Queensland, the respondent's appeal was allowed on the grounds that there was no failure of consideration and that the lease was good in equity despite being "void at law" due to the failure of the respondent to see to its registration. The guarantee was held to extend to obligations under that equitable lease. From that decision the appellants now appeal.

The agreement for lease recited that the respondent had agreed at the request of Sarcourt and the appellants to grant, and Sarcourt had agreed to accept, a lease of specified premises "at the rent and for the term and subject to the covenants and conditions set forth" in the agreement. Clause 2.1 stated that the respondent would grant and Sarcourt would accept a lease of the premises "upon the terms and conditions set out in the Annexed Lease". Clause 2.2 authorized the respondent to complete the lease, which had been executed by the other parties along with the agreement, then to execute it and arrange for its stamping and registration, once certain matters were clarified or established. Clause 4.10 contained a guarantee of Sarcourt's "obligations contained in or implied by" the agreement. That guarantee is not relevant to the present appeal.

The "Annexed Lease" referred to in cl. 2.1 was in the same form as the lease which the parties other than, or perhaps including, the respondent had executed simultaneously with the agreement for lease. The lease was in Form E pursuant to the Act and was certified as correct for the purposes of registration by the solicitors for the respondent and Sarcourt respectively. The relevant part of the lease for present purposes is cl. 23 which provided, so far as is relevant:

7.01 Guarantee and Indemnity The [appellants] in consideration of the [respondent] entering into this lease at the [appellants'] request jointly and severally guarantees to the [respondent] due and punctual performance by [Sarcourt] of the obligations on its part to be performed under this lease and indemnifies and agrees to indemnify the [respondent] against all loss damage costs and expenses suffered or incurred by the [respondent] as a result of any failure by [Sarcourt] to pay any moneys under this lease or any breach by [Sarcourt] of any of the covenants and conditions contained or implied in the Lease

It is the guarantee set out above upon which the respondent sued. It was not sought to rely upon the indemnity.

The respondent's claim against Sarcourt and the appellants in the action was for moneys owing to the respondent by Sarcourt but not paid, such moneys being due and payable, so it was alleged, under a covenant to pay rent, a covenant to pay the costs incurred by the respondent in respect of the provision of cleaning and pest control services to the leased premises, a covenant to pay electricity charges and a covenant to pay interest charges on unpaid moneys. Each of these covenants was contained in the lease.

At the outset it is convenient to dispose of the appellants' argument that, in as much as the lease was not registered, there was a total failure of consideration for the giving of the guarantee. The short answer to the argument is that the consideration for the guarantee is expressed in cl. 23.01 to be the "entering into [of] this lease" by the respondent. In their context these words obviously relate to the execution of the instrument of lease by the respondent as lessor. Although the lease was intended to operate as a lease at law and, as will appear, the respondent was under an obligation to register or procure registration of the lease, the statement of the consideration in cl. 23.01 does not support the argument that non-registration of the lease amounted to a total failure of consideration. Whether the appellants came under liability to the respondent pursuant to cl. 23.01 before registration of the lease is another and different question, indeed the critical question in the case.

Stated more precisely, the issue for decision is whether the moneys said to be owing by Sarcourt represent "obligations on its part to be performed under this lease ". The answer depends upon the construction of the lease, in particular the words which we have emphasized. However, in resolving the question it is also necessary to examine the relevant principles of substantive law applicable to unregistered leases of land under the Act. In saying that the matter turns on the construction of the lease, we reject the suggestion that the lease is to be construed as one with the agreement. The lease was entered into pursuant to the agreement for lease but in the absence of an ambiguity in the lease, there is no warrant for looking to the provisions of the agreement for the purpose of construing the lease.

Without looking to cl. 2.2 of the agreement for lease, it is obvious that the parties intended that the lease was to be registered. The lease was not, until registration, "effectual to pass any estate or interest in" the land: s. 43 of the Act. Moreover, the lease was in the form appropriate for registration (Form E) and otherwise complied with the statutory requirements, so that it was in registrable form. In these circumstances the respondent, by executing a lease which was intended to operate as a lease at law, was under an obligation to register, or procure the registration of, the lease: see Laurinda Pty. Ltd. v. Capalaba Park Shopping Centre Pty. Ltd. [1] .

The failure to register the lease did not render it void, unlike the lease for upwards of three years in Hill v. Cox [2] , which was held void because it was not in Form E in the Schedule to the Act, that being the form of lease prescribed by s. 52. As the lease was not void, it was capable of being or becoming a source of rights. For example, in appropriate circumstances the lessee could secure an order in the nature of specific performance requiring the lessor to register, or procure registration of, the lease. Furthermore, as we shall explain in more detail, the existence of the unregistered lease operated to bring into existence or evidence an equitable lease, and occupation and payment of rent under the unregistered lease created an implied tenancy at common law. The respondent's case is that the liability to pay rent under such an equitable lease or such a common law tenancy was an obligation "under this lease" within the meaning of cl. 23.

It is convenient to consider, first, the respondent's argument based on the existence of a common law tenancy. It is well settled that entry into occupation followed by payment of rent under an agreement for a future lease brings into existence a common law tenancy from year to year, so long as the payment of rent is referable to a yearly tenancy, as where it is for an aliquot part of a year: Dockrill v. Cavanagh [3] . Such a tenancy determines on the expiration of the lease agreed upon and it is on the terms and conditions of the agreement so far as they are consistent with a tenancy from year to year (Moore v. Dimond [4] ; York House Pty. Ltd. v. Federal Commissioner of Taxation [5] ; Progressive Mailing House Pty. Ltd. v. Tabali Pty. Ltd. [6] ). At common law the tenancy from year to year was liable to termination by notice to quit before the expiration of the term contracted for: Moore v. Dimond [7] . A similar tenancy from year to year arises from entry into occupation and payment of rent under an informal lease, including an unregistered lease of land under the provisions of the Act: Moore v. Dimond [8] ; Carberry v. Gardiner [9] . This tenancy is an implied or imputed tenancy. As Patteson J. noted inDoe d. Thomson v. Amey [10] : "[T]he terms upon which the tenant holds are in truth a conclusion of law from the facts of the case, and the terms of the articles of agreement." In Moore v. Dimond [11] , Knox C.J., Rich and Dixon JJ. cited this statement with evident approval.

(1944) 45 S.R. (N.S.W.) 78, at p. 80. 2. (1929) 43 C.L.R. 105, at pp. 113, 118-122. 3. (1930) 43 C.L.R. 427, at p. 436. 4. (1985) 157 C.L.R. 17, at pp. 25-26. 5. (1929) 43 C.L.R., at p. 113. 6. (1929) 43 C.L.R., at pp. 113-114. 7. (1936) 36 S.R. (N.S.W.) 559, at p. 570. 8. (1840) 12 Ad. & E. 476, at p. 480 [113 E.R. 892, at pp. 893-894]. 9. (1929) 43 C.L.R., at p. 114.

Section 43 is not a bar to the creation of a lease or tenancy for a term of less than three years otherwise than by registration of a memorandum of lease: see Property Law Act 1974 Q., ss. 5(1)(b), 10(1), 10(2)(c). The section does not prevent a common law tenancy coming into existence in accordance with the principles stated above. However, account must be taken of s. 129(1) of the Property Law Act. In terms it is identical with s. 127(1) of the Conveyancing Act 1919 N.S.W.. It has been held that the effect of s. 127(1) is that, where conditions would previously have brought into existence a tenancy from year to year, they shall instead bring into existence a lease at will terminable by a month's notice expiring at any time: Burnham v. Carroll Musgrove Theatres Ltd. [12] ; Dockrill v. Cavanagh [13] . Section 129(1) has the same effect. Its operation in no way affects the correctness of the statement that a tenancy at will under s. 129(1) arising from entry into occupation and payment of rent is an implied or imputed tenancy.

(1928) 41 C.L.R. 540, at pp. 565-566. 2. (1944) 45 S.R. (N.S.W.), at pp. 83-84.

Accordingly, in the present case, once Sarcourt entered into possession of the shop premises, which were the subject of the lease, and paid rent, a common law tenancy at will terminable on one month's notice came into existence. There was imported into that tenancy a covenant to pay rent in the terms of the covenant in the unregistered lease, as well as the other covenants in that instrument so far as they were consistent with such a tenancy. Furthermore, the covenant to pay rent under s. 105(1)(a) of the Property Law Act was implied in the tenancy.

However, the obligation to pay rent under that covenant in the common law tenancy at will was not, in our opinion, an obligation "under this lease" within the meaning of that expression in cl. 23.01. The implied or imputed common law tenancy at will was distinct from the unregistered lease which, as will be seen, s. 43 rendered ineffectual as a tenancy at common law. The word "under", in the context in which it appears, refers to an obligation created by, in accordance with, pursuant to or under the authority of, the lease. The obligation which arose under the common law tenancy at will does not answer this description. Nor, for that matter, would the obligation have been a covenant or condition "contained or implied in the lease", to use the language of the indemnity in cl. 23.01.

The respondent's next contention is that the unregistered lease amounts to an equitable lease to which the relevant covenants may be related. The argument, which invokes the doctrine in Walsh v. Lonsdale [14] , is that the lease, though ineffective to create a "legal" lease until registration, was effective to bring into existence an equitable lease for a term of five years on the footing that equity regards as done what ought to be done. The most favourable statement of the position, from the respondent's viewpoint, was that made by Sir George Jessel M.R. in Walsh v. Lonsdale [15] :

There is an agreement for a lease under which possession has been given. Now since the Judicature Act the possession is held under the agreement. There are not two estates as there were formerly, one estate at common law by reason of the payment of the rent from year to year, and an estate in equity under the agreement. There is only one Court, and the equity rules prevail in it. The tenant holds under an agreement for a lease. He holds, therefore, under the same terms in equity as if a lease had been granted, it being a case in which both parties admit that relief is capable of being given by specific performance. These remarks were made in an appeal from an order granting interlocutory relief to a landlord who had been sued by a tenant after purporting to levy a distress for unpaid rent under an agreement to grant a lease for a term of seven years, the right to specific performance of that agreement being conceded. Jessel M.R. appears to have regarded the agreement as amounting to an equitable lease which was the equivalent of a lease at law so as to give rise to a liability for rent for which the common law remedy of distress could be levied. Cotton and Lindley L.JJ. expressed themselves more cautiously, with Lindley L.J. observing that at the hearing of the suit a proper form of lease would be settled [16] . 1. (1882) 21 Ch. D. 9. 2. (1882) 21 Ch. D., at pp. 14-15. 3. (1882) 21 Ch. D., at p. 18.

On the other hand, there was the view, championed by Lord Lindley and Lord Parker, that a lease and an agreement for lease are two different things which can only be equated in equity for certain purposes if equity would decree specific performance of the agreement: see Holroyd v. Marshall [17] ; Swain v. Ayres [18] ; Manchester Brewery Co. v. Coombs [19] ; Howard v. Miller [20] ; Central Trust and Safe Deposit Co. v. Snider [21] . As to the general topic see the discussion by Gardner, Equity, Estate Contracts and the Judicature Acts: Walsh v. Lonsdale Revisited, Oxford Journal of Legal Studies, vol. 7 (1987) 60; Sparkes, Walsh v. Lonsdale: The Non-Fusion Fallacy, Oxford Journal of Legal Studies, vol. 8 (1988) 350; Sparkes, Back-dating Specific Performance, Journal of Legal History, vol. 10 (1989) 29.

(1862) 10 H.L.C. 191, at pp. 209-211 [11 E.R. 999, at pp. 1006-1007]. 2. (1888) 21 Q.B.D. 289, at p. 295. 3. [1901] 2 Ch. 608, at p. 617. 4. [1915] A.C. 318, at p. 326. 5. [1916] 1 A.C. 266, at p. 272.

The weight of English authority is against Sir George Jessel: but cf. United Scientific Holdings Ltd. v. Burnley Borough Council [22] . No doubt that was one reason why the view of Lord Lindley and Lord Parker attracted support in Australia: see, for example, Redman v. Permanent Trustee Co. of New South Wales Ltd. [23] . Another reason was that under the legislation implementing the system of Torrens title the separation of legal and equitable estates became accepted in the absence of merger. And it is possible that the delayed introduction of the Judicature system in New South Wales served to emphasize the separation of legal and equitable interests and rules and thus contributed towards a climate in this country which favoured the approach insisted upon by Lord Lindley and Lord Parker. Be that as it may, this Court, while acknowledging that an agreement for a lease will be treated as giving rise to a lease in equity in accordance with the doctrine in Walsh v. Londsale, has always rejected the notion that the lessee has a legal interest in the term.

[1978] A.C. 904, at pp. 924-925, 944-945. 2. (1916) 22 C.L.R. 84, at p. 96.

Thus, in National Trustees, Executors and Agency Co. of Australasia Ltd. v. Boyd [24] Knox C.J., Gavan Duffy and Rich JJ. said of such an agreement that it operates, "not merely to create contractual rights and duties, but to create an equitable term of years". See also Progressive Mailing House [25] . Subsequently Knox C.J. and Starke J. went a little further in York House [26] when, with reference to an unregistered lease for ten years of Torrens system land, they quoted the following passage from Swain v. Ayres [27] :

[W]hen there is such a state of things that a Court of Equity would compel specific performance of an agreement for a lease by the execution of a lease, both in the Equity and Common Law Divisions the case ought to be treated as if such a lease had been granted and was actually in existence. There would then be the equivalent of a lease, that is to say, the lease of which equity would compel the execution in specific performance of the agreement. Their Honours went on to acknowledge that a lease and an agreement for lease were "two different things" and that the lessee had "no legal interest" in the term. Their Honours continued on the assumption that the agreement could be specifically enforced, saying [28] : There is thus the equivalent of a lease, and the tenant is the lessee in equity It is not in opposition to ordinary legal parlance to describe such an agreement as a lease, and the person entitled thereunder as a lessee. This conclusion entitled the taxpayer to a deduction under the Income Tax Assessment Act 1922 Cth available to a lessee. Isaacs J. came to a similar conclusion [29] . In Boyd [30] he had earlier stated that under an agreement for lease the intending lessee took "no legal interest" in land. 1. (1926) 39 C.L.R. 72, at p. 82. 2. (1985) 157 C.L.R., at pp. 26-27. 3. (1930) 43 C.L.R., at pp. 435-436. 4. (1888) 21 Q.B.D., at p. 293. 5. (1930) 43 C.L.R., at p. 436. 6. (1930) 43 C.L.R., at p. 439. 7. (1926) 39 C.L.R., at p. 82.

Latham C.J. and Dixon J. expressed similar views about an agreement for lease for three years in Williams v. Frayne [31] . There the intending lessee, by breaking the terms of the agreement, lost the right to specific performance. Latham C.J., speaking with reference to his original right to obtain specific performance, said that this entitlement gave him the additional right "as against the landlord, to be treated in the same way as if such a lease had been granted" [32] . Dixon J. said that before breach the intending lessee was entitled to specific performance "and thus had as against the landlord an equitable term" [33] .

(1937) 58 C.L.R. 710. 2. (1937) 58 C.L.R., at p. 721. 3. (1937) 58 C.L.R., at p. 730.

For present purposes these authorities establish two propositions. First, the court's willingness to treat the agreement as a lease in equity, on the footing that equity regards as done what ought to be done and equity looks to the intent rather than the form, rests upon the specific enforceability of the agreement. Secondly, an agreement for a lease will be treated by a court administering equity as an equitable lease for the term agreed upon and, as between the parties, as the equivalent of a lease at law, though the lessee does not have a lease at law in the sense of having a legal interest in the term.

The first proposition requires some elaboration or qualification in order to accommodate what has been said in later cases. Although it has been stated sometimes that the equitable interest is commensurate with what a court of equity would decree to enforce the contract, whether by way of specific performance (Connolly v. Ryan [34] ; Brown v. Heffer [35] ; Chang v. Registrar of Titles [36] ), injunction or otherwise (Tailby v. Official Receiver [37] ; Redman v. Permanent Trustee Co. [38] ; Legione v. Hateley [39] ), the references in the earlier cases to specific performance should be understood in the sense of Sir Frederick Jordan's explanation adopted by Deane and Dawson JJ. in Stern v. McArthur [40] :

"Specific performance in this sense means not merely specific performance in the primary sense of the enforcing of an executory contract by compelling the execution of an assurance to complete it, but also the protection by injunction or otherwise of rights acquired under a contract which defines the rights of the parties": "Chapters on Equity in New South Wales", Select Legal Papers, 6th ed. (1947), p. 52, n.(e). 1. (1922) 30 C.L.R. 498, at pp. 506-507. 2. (1967) 116 C.L.R. 344, at p. 349. 3. (1976) 137 C.L.R. 177, at pp. 184-185, 189-190. 4. (1888) 13 App. Cas. 523, at pp. 546-549. 5. (1916) 22 C.L.R., at p. 96. 6. (1983) 152 C.L.R. 406, at pp. 446, 456. 7. (1988) 165 C.L.R. 489, at p. 522.

In relation to the second proposition stated above Maitland, in his Lectures on Equity, 2nd ed. (1936), p. 158, in a statement quoted by Latham C.J. in Williams v. Frayne [41] , commented:

An equitable right is not equivalent to a legal right; between the contracting parties an agreement for a lease may be as good as a lease But introduce the third party and then you will see the difference. See also Chronopoulos v. Caltex Oil (Aust.) Pty. Ltd. [42] . So, in Lowther v. Heaver [43] Cotton L.J. said that the rights of a tenant holding under an agreement for lease of which specific performance would be decreed ought to be dealt with in the same way as if a lease had been granted to him. Subsequently, in Foster v. Reeves [44] , where the landlord brought an action for rent in the County Court on an agreement for lease for a term of three years, relying on the doctrine of Walsh v. Lonsdale [45] , he failed but only on the ground that the County Court lacked a concurrent jurisdiction in equity as well as law. In conformity with this approach, in Manchester Brewery Co. v. Coombs [46] , Farwell J. observed that the application of the doctrine in Walsh v. Lonsdale: involves two questions: (1.) Is there a contract of which specific performance can be obtained? (2.) If Yes, will the title acquired by such specific performance justify at law the act complained of, or support at law the action in question? It is to be treated as though before the Judicature Acts there had been, first, a suit in equity for specific performance, and then an action at law between the same parties; and the doctrine is applicable only in those cases where specific performance can be obtained between the same parties in the same court, and at the same time as the subsequent legal question falls to be determined. His Lordship plainly considered that, if specific performance could be so obtained, then the agreement for lease was enforceable between the parties as a lease at law, as though the lease had been granted pursuant to the agreement before the decree for specific performance [47] . 1. (1937) 58 C.L.R., at p. 720. 2. (1982) 70 F.L.R. 8, at pp. 15-16; 45 A.L.R. 481, at p. 489. 3. (1889) 41 Ch. D. 248, at p. 264. 4. [1892] 2 Q.B. 255. 5. (1882) 21 Ch. D. 9. 6. [1901] 2 Ch., at p. 617. 7. [1901] 2 Ch., at p. 618.

The operation thus attributed to the Judicature Acts had the effect of enabling a party to an agreement to enforce, against another party to the agreement, legal remedies in respect of equitable rights and interests. In this respect the English cases referred to in the preceding paragraph proceed on the footing that the Judicature Acts have a procedural operation. This can be demonstrated by reference to the fact that, although there is no recorded instance of a court of equity exercising a jurisdiction to make an order for the payment of rent under an equitable lease, there was a jurisdiction to backdate specific performance to enable an action to be brought at law on the covenants in the lease. As Mr. Sparkes observes, " before the Judicature Acts, equity did not recognize rent due under an agreement for a lease. Rent was recoverable by action only in the common law courts": Oxford Journal of Legal Studies, vol. 8 (1988), at p. 356. In Cox v. Bishop [48] Turner L.J. observed:

Courts of equity do not, as I think, in ordinary cases, decree the payment of rent or the performance of covenants upon a mere agreement for a lease. In such cases the Court does not treat the relation of landlord and tenant as completed by the agreement, and decree the rent to be paid and the covenants to be performed accordingly, but it decrees the execution of the lease, and leaves the parties to their remedies at law consequent upon the relation created by the execution of it. Again, in Vincent v. Godson [49] , Stuart V.-C. held that an actual demise was required in order to provide priority in the form of a distress for unpaid rent as a specialty debt. He said [50] : The contract itself is a mere agreement for a lease, on which if the land were in England there could be no right of distress, or equivalent right, this being a matter remaining entirely in contract. See also Faulkner v. Llewellin [51] . 1. (1857) 8 De G. M. & G. 815, at p. 824 [44 E.R. 604, at p. 608]. 2. (1853) 1 Sm. & Giff. 384 [ 65 E.R. 168]; affd. (1854) 4 De G. M. & G. 546 [43 E.R. 620]. 3. (1853) 1 Sm. & Giff., at p. 394 [ 65 E.R., at p. 173]. 4. (1862) 31 L.J. Ch. 549, at p. 550.

Precisely the same approach was taken by Lord Cranworth L.C. in Walters v. Northern Coal Mining Co. [52] where the question of awarding specific performance retrospectively, after the expiration of the term, arose. His Lordship said [53] :

Perhaps Sir Thomas Plumer was right in declining to say that there might not be a case in which it might be fitting for the Court to decree the specific performance of a contract for a lease after the term had expired. But certainly the circumstances of the case must be very special indeed to warrant such an interposition of this Court. What the Court really would be decreeing in such case would not be the specific performance of an agreement for a lease, but merely that the lessee should make himself a specialty debtor in respect of past benefits received. No lease properly so called could be made after the expiration of the time.

The demise, which was the very object of the contract, could not be made, or if made in words would in substance be a mere fiction.

Before the Judicature Acts, the jurisdiction to backdate specific performance of an agreement for a lease in order to enable an action at law to be brought on covenants in the lease seems to have been exercised in one case only, Mundy v. Joliffe [54] , and then only as between the lessor and the lessee: see Sparkes, Journal of Legal History, vol. 10 (1989), at p. 33 . 1. (1855) 5 De G. M. & G. 629 [43 E.R. 1015]. 2. (1855) 5 De G. M. & G., at pp. 638-639 [43 E.R., at p. 1019]. 3. (1839) 9 L.J. Ch. 95, at pp. 97-98.

The pre-Judicature Acts cases have a dual importance. They indicate that there was a jurisdiction to backdate specific performance and that it was a jurisdiction to be exercised sparingly. The existence of that jurisdiction supports the view that, notwithstanding the broad language of Jessel M.R., the decision in Walsh v. Lonsdale [55] involved no more than giving the Judicature Acts a procedural operation. But the fact that the jurisdiction was exercised so sparingly demonstrates that in the present case it would be imprudent to assume that specific performance would be awarded as a matter of course. As Evatt J. observed in Dimond v. Moore [56] , with reference to suits for specific performance:

Many circumstances may prevent a plaintiff from succeeding in such a suit, although there was originally a binding agreement for a lease and the plaintiff entered into possession under such agreement. Great difficulties will arise if, in Courts where the judicature system is adopted, a person in possession of land under an agreement is to be treated for all purposes as though specific performance has been decreed from the moment of entry, and the agreement has already been converted into an actual lease on the terms of the agreement. The respondent's failure to register, or procure registration, of the lease, which may have been due to the respondent granting a mortgage to Citibank Ltd. which was registered in 1987, was a factor which would require to be taken into consideration in deciding whether to award or refuse specific performance. So would the question whether the lease came to an end before the expiration of the term by reason of Sarcourt's default. 1. (1882) 21 Ch. D. 9. 2. (1931) 45 C.L.R. 159, at p. 186.

But even if it be assumed that specific performance would be awarded in favour of the respondent, that is not enough, in our opinion, to establish liability on the part of the appellants as guarantors. What they guaranteed was the "obligations [of Sarcourt] under this lease", that is, the instrument of lease in its character as a lease. In our view, only a lease at law would meet this description for the purposes of the guarantee. In Ankar Pty. Ltd. v. National Westminster Finance (Australia) Ltd. [57] , Mason A.C.J., Wilson, Brennan and Dawson JJ. observed:

At law, as in equity, the traditional view is that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety. In the light of this settled principle governing the interpretation of contracts of guarantee, there is no justification for reading cl. 23.01 as extending to obligations which, at best, as between the landlord and the lessee, arise, not under the lease at law but under an equitable lease which is the equivalent of the lease at law. 1. (1987) 162 C.L.R. 549, at p. 561.

In any event, s. 43 of the Act presents an insuperable obstacle to the respondent's success. The section provides, in relation to land under the Act, that, until registration, no instrument of transfer shall be effectual to pass an estate or interest in the land. Notwithstanding this provision, it has been said from time to time that unregistered instruments may confer equitable estates and interests: see Boyd [58] ; York House [59] ; Progressive Mailing House [60] . These statements need to be read in conjunction with the remarks of Isaacs J. in Barry v. Heider [61] . His Honour, in the context of s. 41 of the Real Property Act 1900 N.S.W., the counterpart of s. 43 of the Act, said:

[S]ec. 41, in denying effect to an instrument until registration, does not touch whatever rights are behind it. Parties may have a right to have such an instrument executed and registered; and that right, according to accepted rules of equity, is an estate or interest in the land. Until that instrument is executed, sec. 41 cannot affect the matter, and if the instrument is executed it is plain its inefficacy until registered - that is, until statutory completion as an instrument of title - cannot cut down or merge the pre-existing right which led to its execution. The point made in this passage is that, though the unregistered instrument is itself ineffective to create a legal or equitable estate or interest in the land, before registration, the section does not avoid contracts or render them inoperative. So an antecedent agreement will be effective, in accordance with the principles of equity, to bring into existence an equitable estate or interest in the land. But it is that antecedent agreement, evidenced by the unregistered instrument, not the instrument itself, which creates the equitable estate or interest. In this way no violence is done to the statutory command in s. 43. 1. (1926) 39 C.L.R., at pp. 81-82. 2. (1930) 43 C.L.R., at pp. 435-436. 3. (1985) 157 C.L.R., at pp. 26-27. 4. (1914) 19 C.L.R. 197, at p. 216.

In Brunker v. Perpetual Trustee Co. (Ltd.) [62] , Latham C.J., in dissent, though not on this point, speaking with reference to s. 41 of the Real Property Act N.S.W., said:

Thus the instrument of transfer in itself cannot be effectual to vest in the defendant either a legal or an equitable interest in the land (See Williams v. Papworth [63] ). But where there is a transaction for value which is recorded in a contract followed by an instrument of transfer, or where there is a transaction for value which itself is recorded in a transfer (Mathieson v. Mercantile Finance and Agency Co. Ltd. [64] ), then "the transaction behind the instrument" and upon which it rests may create an equitable interest in the land which will be recognized in the courts See also, per Dixon J. [65] (with whom Rich J. concurred); Currey v. Federal Building Society [66] ; Carberry v. Gardiner [67] . 1. (1937) 57 C.L.R. 555, at p. 581. 2. [1900] A.C. 563, at p. 568. 3. (1891) 17 V.L.R. 271. 4. (1937) 57 C.L.R., at p. 599. 5. (1929) 42 C.L.R. 421, at pp. 448-449. 6. (1936) 36 S.R. (N.S.W.), at p. 569.

If we assume that the agreement for lease would have been specifically enforced in equity and that, as a result, an equitable lease for a term of five years came into existence between the respondent as lessor and Sarcourt as lessee, that equitable lease is a thing different from the unregistered form of lease executed by the parties. Although such an equitable lease would incorporate the terms of the unregistered lease, by virtue of s. 43 it necessarily arises not from the instrument but from the agreement which lies behind it. On this score alone, it would be impossible to conclude that a liability to pay rent under the equitable lease was an obligation "under this lease" within the meaning of cl. 23.01.

In the result, for the foregoing reasons, we would allow the appeal.

This appeal concerns the enforceability of a guarantee given by the appellants to the respondent.

In early 1984 the respondent was the owner of land on which it was building a retail shopping complex. A company, Sarcourt Pty. Ltd., wished to take a lease of one of the shops. To that end, on 13 March 1984 Sarcourt executed a lease of shop premises for a term of five years commencing on 20 March 1984, with the appellants and others who are not parties to these proceedings also executing the lease as guarantors. The respondent did not execute the lease until some months later. Clause 23.01 of the lease read:

Guarantee and Indemnity The Guarantor in consideration of the Landlord entering into this lease at the Guarantor's request jointly and severally guarantees to the Landlord due and punctual performance by the Tenant of the obligations on its part to be performed under this lease and indemnifies and agrees to indemnify the Landlord against all loss damage costs and expenses suffered or incurred by the Landlord as a result of any failure by the Tenant to pay any moneys under this lease or any breach by the Tenant of any of the covenants and conditions contained or implied in the Lease

By an agreement, which is undated but was executed at or about the same time as the lease, the respondent agreed to grant Sarcourt "a lease of the demised premises upon the terms and conditions set out in the Annexed Lease". The appellants were also parties to the agreement, cl. 2.2 of which read:

Simultaneously with the making of this Agreement the Grantee and (where appropriate) the Guarantors have executed the Lease and delivered it to the Grantor's solicitors. The "Lease" referred to in cl. 2.2 is the lease mentioned at the outset of these reasons. Although the precise date does not appear, Sarcourt thereafter entered into possession of the premises.

The agreement contained other provisions relating to the position of the guarantors. Because it was the guarantee under the lease upon which the respondent sued the appellants, it is unnecessary to refer to the agreement in any detail though some further reference to that document will be necessary because of the relevance the appellants contend it has in construing their obligations under the lease.

The claim against the appellants was for the sum of $28,877.70 for "arrears of rent, interest and other moneys" due by Sarcourt under the lease for the period 1 March 1986 to 1 October 1986.

The trial judge found against the respondent and he did so for these reasons:

the [appellants] entered into the guarantee in consideration of the [respondent] granting to [Sarcourt] a lease for a term of five years.

The lease has not been registered pursuant to the provisions of The Real Property Act. [Sarcourt] did not get the term for which it contracted. It seems that it has at best a tenancy at will.

The promise upon which the [appellants] entered into the guarantee has not been fulfilled. the [appellants] are not bound by the guarantee

The Full Court allowed the respondent's appeal and entered judgment for the respondent against the appellants in the sum claimed.

Reduced to its essentials, the appellants' argument was that the consideration for their guarantee was, in terms of cl. 23.01 of the lease, "the Landlord entering into this lease"; that it was a condition precedent to the assumption of liability by the guarantors that the respondent granted to Sarcourt a term of years; that the lease, although executed, was not registered under the provisions of the Real Property Act 1861 Q.; that it was therefore void at law; and that, in consequence, the appellants never came under any obligation in terms of their guarantee.

The primary question is one of construction of the lease. As a matter of construction of cl. 23.01, the appellants' undertakings were expressed to be "in consideration of the Landlord entering into this lease". The respondent did enter into the lease by executing it, as did Sarcourt. There was therefore no failure of consideration. By the terms of the lease Sarcourt assumed a number of obligations including an obligation to pay rent and other moneys. This it failed to do. It might therefore be thought that that was the end of the matter.

However, the appellants contended that their undertakings were conditional upon registration of the lease. This they sought to demonstrate by adapting for their purpose the observation inAnkar Pty. Ltd. v. National Westminster Finance (Australia) Ltd. [68] , that "when performance by the creditor of a contractual promise is a condition precedent to the liability of the surety under a contract of suretyship the creditor's promise is necessarily an essential term of the contract". Of course, the observation necessarily begs the question now before the Court. If there was no condition precedent to the appellants' undertakings other than the respondent entering into the lease, that was done. The appellants must satisfy the Court, because it is their case, that cl. 23.01 of the lease has the result that the respondent was bound to register the lease before the appellants came under any liability to the respondent under that document.

The appellants contended that, the lease and agreement for lease having been executed at the same time, it was permissible to look at the terms of the agreement as a guide to construction of the lease. The recital to the agreement speaks of the respondent's agreement "to grant or to procure the grant of the "demised premises" ". Clause 2.1 of the agreement provides that the respondent "will grant or procure the grant to and [Sarcourt] will accept a lease of the demised premises upon the terms and conditions set out in the Annexed Lease". In Hoyt's Proprietary Ltd. v. Spencer [69] , Isaacs J. said in relation to a "single bargain" recorded in contemporaneous documents:

In such case, if there be an action on the whole agreement as one entire indivisible agreement, the whole of the documents are read together, and the words of one may have to be modified by the words of another. But that is not the case here. The respondent sued the appellants on the undertaking given by them in the lease, not by reason of any obligation said to have been undertaken under the agreement for lease. There is no warrant for using the latter as a guide to the construction of the former, particularly as the lease is not relevantly ambiguous or uncertain. 1. (1919) 27 C.L.R. 133, at p. 144.

The appellants relied, as a further or alternative argument, on the proposition that they assumed no obligations to the respondent by reason of cl. 23.01 because, until registration, there was no "lease" obliging Sarcourt to perform obligations. The reference to "under this lease" in cl. 23.01, it was said, was a reference to a "legal lease" which could only exist once registration had been effected. Therefore, it was contended, the appellants incurred no liability under the guarantee.

It is common ground that the lease was not registered under the Real Property Act. In Laurinda Pty. Ltd. v. Capalaba Park Shopping Centre Pty. Ltd. [70] , Brennan J. said:

A covenant by a registered proprietor of land under the Real Property Act 1861 Q. to grant a lease of the land for a term exceeding three years is not performed until an appropriate instrument of lease is registered: see ss. 43 and 52 and cf. the Real Property Act 1877 Q., s. 18. a covenant to grant a legal lease of such land for a term exceeding three years necessarily implies that an appropriate instrument of lease will be registered. With those propositions there can be no quarrel for "grant" carries with it the notion of conveying or transferring an estate in land and s. 43 of the Real Property Act expressly ensures that, while unregistered, no lease "shall be effectual to pass any estate or interest" in land under the Torrens system. But the propositions enunciated by Brennan J. do not carry the appellants as far as they need to go. Whatever may be said as to the appropriateness of equating registered and unregistered interests on the one hand with legal and equitable estates on the other, there is a wealth of authority dating back to Barry v. Heider [71] that an unregistered instrument under the Torrens system may give rise to an equitable interest. National Trustees, Executors and Agency Co. of Australasia Ltd. v. Boyd [72] is but one example of an unregistered lease being held to give rise to an equitable term of years. There is also a wealth of authority that, pending registration, a lease gives rise to contractual rights and obligations: see, of the more recent decisions, Leitz Leeholme Stud Pty. Ltd. v. Robinson [73] . 1. (1989) 166 C.L.R. 623, at p. 641. 2. (1914) 19 C.L.R. 197. 3. (1926) 39 C.L.R. 72. 4. [1977] 2 N.S.W.L.R. 544, at pp. 549-550.

No doubt it is simplistic to equate an equitable lease, recognized by virtue of the doctrine in Walsh v. Lonsdale [74] , with a lease registered under the Torrens system. Dependent as it is upon recognition in equity, an equitable lease will be upheld only if a court would grant specific performance of a contract for the grant: Moore v. Dimond [75] ; Dimond v. Moore [76] . To that extent an equitable lease is vulnerable. The matter is the subject of detailed analysis by Gardner, Equity, Estate Contracts and the Judicature Acts: Walsh v. Lonsdale Revisited, Oxford Journal of Legal Studies, vol. 7 (1987) 60 and see the later comment by Sparkes, Walsh v. Lonsdale: The Non-Fusion Fallacy,Oxford Journal of Legal Studies, vol. 8 (1988) 350. But that possible complication does not arise here for the question of the parties' entitlement to specific performance formed no part of the proceedings below. That is made clear by Matthews J., with whose judgment the other members of the Full Court agreed. In any event there was no obvious bar to a grant of specific performance of the lease. On the face of it, there is no reason to assume that the lease had come to an end or that it was not registrable at the time proceedings were begun.

(1882) 21 Ch. D. 9. 2. (1929) 43 C.L.R. 105, at pp. 123-124. 3. (1931) 45 C.L.R. 159, at pp. 169, 170, 186.

As to whether the lease had come to an end, the respondent initiated proceedings seeking the enforcement of the guarantee in 1986. Its claim was later amended to cover the period from March 1986 to October 1986. Although the point was not argued, it would seem that Sarcourt made some payments relating to that period within the period itself. The inference is that the lease was still on foot when the respondent took action.

As to registrability of the lease, s. 52 of the Real Property Act demands that a lease for a term exceeding three years be "in the prescribed form"; that means a lease in registrable form. But it was not suggested by the appellants that the lease in this case was not in the prescribed form or that for any formal reason it was not capable of registration. Indeed, the lease was in Form E as prescribed by s. 52 of the Act as it stood at the time of execution, and see s. 10(4)(c) of the Act as amended by the Real Property Acts and Other Acts Amendment Act 1986 Q.. And although there was in existence, at the time of execution of the lease, a mortgage from the respondent to the Commonwealth Trading Bank of Australia, the bank consented to the lease. The existence of its mortgage was therefore no bar to registration of the lease.

An obligation to obtain or procure registration of an instrument may be inferred from the form of the instrument itself: see Mason C.J. in Laurinda [77] . And it may be inferred from the form of the lease used in this case that it was intended to be registered. But the lease contained no undertaking by the respondent to "grant" a lease to Sarcourt: such an obligation is to be found only in cl. 2.1 of the agreement. Moreover, in the absence of any provision whereby the lessee undertook to pay for the costs incurred by the lessor in obtaining registration, it cannot be concluded that the respondent as lessor was obliged to obtain or procure registration rather than to deliver a lease in registrable form to Sarcourt. Nothing said in argument would entitle the Court to find that the respondent was in breach of its obligations under the lease as opposed to its obligations under the agreement. The lease might have been registered at the instance of the lessee as well as of the lessor. "Application to register may be made by any party interested": National Trustees v. Boyd [78] .

(1988) 166 C.L.R., at pp. 631-632. 2. (1926) 39 C.L.R., at p. 84.

It is true that while the lease was unregistered there was the risk that some other interest could be registered to its destruction or prejudice. In the events that happened, a mortgage to Citibank Ltd. was registered, though not until 12 March 1987. The evidence relating to this mortgage was scant. It seems to have been common ground that Citibank did not consent to the lease to Sarcourt but it does not appear whether its consent was ever sought. If the existence of the Citibank mortgage constituted a barrier to registration of the lease, it was for the appellants to make good that proposition. They did not discharge that onus. In any event, proceedings for the recovery of rent were already on foot before the Citibank mortgage was registered.

In the circumstances, this appeal must be disposed of on the footing that Sarcourt and the respondent were each entitled to an order for specific performance of the lease. To do otherwise is to construct a case for the appellants that was not one of their choosing.

On that basis, though unregistered, there is no reason to suppose that the lease document was not effective to give Sarcourt an equitable lease for five years, arising in accordance with Walsh v. Lonsdale [79] , equity considering as done what ought to be done: Progressive Mailing House Pty. Ltd. v. Tabali Pty. Ltd. [80] . As was said by Knox C.J. and Starke J. in York House Pty. Ltd. v. Federal Commissioner of Taxation [81] : "If the agreement can be specifically enforced, the landlord has the same rights as if a lease had been granted, and the tenant is protected in the same way as if a lease had been granted."

(1882) 21 Ch. D. 9. 2. (1985) 157 C.L.R. 17, at pp. 26-27. 3. (1930) 43 C.L.R. 427, at p. 436.

The appellants sought to meet this argument by saying that the doctrine of Walsh v. Lonsdale was confined to the relationship of lessor and lessee and that it had no application where the position of a third party was at issue. It is of course true that there are differences between the legal estate created by a lease and the rights arising under a contract for a lease and that one of these differences relates to the position of third parties: see, by way of example, Chronopoulos v. Caltex Oil (Aust.) Pty. Ltd. [82] . But that does not assist the appellants. They are sued as guarantors of the obligations assumed by Sarcourt when it executed the lease from the respondent. The relationship between the respondent and Sarcourt was in equity that of lessor and lessee. It is no answer to say that, in some other situation, someone else may not have been affected by the relationship between the respondent and Sarcourt because the lease was not registered.

(1982) 70 F.L.R. 8, at pp. 15-16; 45 A.L.R. 481, at p. 489.

There was some discussion, during argument, of the position of a lessee under an unregistered lease who, unable to obtain specific performance of the lease, has nevertheless entered into possession of the subject land. In those circumstances entry into possession may constitute a tenancy at will and, on payment of rent, a tenancy from year to year: Moore v. Dimond [83] (but see the Property Law Act 1974 Q., s. 129, which abolished yearly tenancies arising by implication of law). In consequence the lessee will be liable for rent, not by reason of the lease, but by reason of the agreement implied between the parties. But when an unregistered lease is specifically enforceable, it is unnecessary to resort to such an implied agreement; both lessor and lessee may sue upon the terms of the lease itself.

Absence of registration does not mean that there were not obligations to be performed by Sarcourt. It has long been held that a lessor may sue for rent on the covenant contained in an unregistered lease: Munro and Baillieu v. Adams [1] ; Ahern v. L. A. Wilkinson (Northern) Ltd. [2] . Absence of registration does of course mean that there is no passing of any registered estate or interest. Moreover, a lease enforceable only in equity, may not answer the description of "lease" in a statute: see, e.g., City Permanent Building Society v. Miller [3] . But this is not always so, as is evidenced by Rickett v. Green [4] ; Rye v. Purcell [5] and also by the reasoning underlying Swain v. Ayres [6] . Whether the lease was registered or unregistered, Sarcourt was obliged to pay the rent and other moneys for which it was sued. The touchstone of the appellants' liability under cl. 23.01 of the lease is whether the obligations to be performed by Sarcourt may be said to arise under that lease.

(1891) 17 V.L.R. 703. 2. [1929] St. R. Qd 66. 3. [1952] Ch. 840. 4. [1910] 1 K.B. 253. 5. [1926] 1 K.B. 446. 6. (1888) 21 Q.B.D. 289.

It may be argued that Sarcourt's obligations arose, not out of the lease, but out of an antecedent agreement which is enforced in equity, and which is merely evidenced by the unregistered instrument. While it is true that equity does not enforce a transfer, as such, but "the transaction behind the instrument" (see Latham C.J. in Brunker v. Perpetual Trustee Co. (Ltd.) [7] ), it is apparent that such a transaction need not, and in this case does not, comprise any actual agreement that the parties believed they were entering into. It would be paradoxical to hold that the formal agreement between the parties executed contemporaneously with the lease is irrelevant to the existence and construction of obligations incurred under the lease instrument, while at the same time positing some "transaction behind the instrument" as being the source of the parties' obligations. Whether or not those obligations are said to arise from an antecedent agreement, of which the lease is evidence, or from a transaction behind the instrument, it is the instrument itself which ultimately is the source of those obligations.

In truth, what is at issue here is the construction and enforceability of the document executed by the parties under the heading "Lease". The appellants' undertaking to guarantee Sarcourt's obligations arising "under this lease" is not ambiguous. And Sarcourt's obligations in truth arose "under this lease", an expression which is apt to embrace the lease document even while it was unregistered, particularly as the lease was specifically enforceable.

In some situations it will be necessary to distinguish an unregistered instrument from the transaction behind it. But this is not always the case and where, as here, the question is one of construction of the lease document, there is no unorthodoxy in holding the appellants to their express undertaking to guarantee Sarcourt's obligations.

In my view the decision of the Full Court was correct and this appeal should be dismissed with costs.

At a glance

Court

Decision date

Before

Source

Judgment (91 paragraphs)

Parties