Forte-Senes Hotels Pty Ltd v Austcorp No 473 Pty Ltd & Ors

Court of Appeal (NSW)|2004-02-11|Before: Meagher JA, Giles JA

CITATION : Forte-Senes Hotels Pty Ltd v Austcorp No 473 Pty Ltd & Ors [2004] NSWCA 31 HEARING DATE(S) : 11 February 2004 JUDGMENT DATE : 25 February 2004

JUDGMENT OF : Meagher JA at 1; Giles JA at 2; at 33 DECISION : (1) Appeal allowed; (2) Judgments and orders for costs made below set aside, and in lieu thereof: (i) On the plaintiff's claim, judgment for the plaintiff for $118,634.51 to take effect on 20 December 2002; (ii) Cross-claim dismissed; and (iii) Defendants/cross-claimant pay the plaintiff/cross-defendant's costs of the claim and cross-claim; (3) Respondents pay the appellant's costs of the appeal and have a certificate under the Suitors Fund Act if otherwise qualified.

CATCHWORDS : Lease - intention to assign - lessee goes out of possession and proposed assignee goes into possession - lessor to arrange assignment - does not do so - proposed assignee gives up possession - lessee does not take up possession - lessor places premises with agent for reletting - whether lease surrendered by operation of law because lessor decided to take up new relationship of lessor and lessee with proposed assignee - lessee unaware of this and still contemplated assignment - whether lease surrendered by operation of law when lessee did not take up possession and premises placed with agent - no surrender in either circumstances - guarantee in lease - deletion of a sub-clause in guarantee - whether regard could be had to the deletion - whether deletion showed guarantors not to be liable in the event of an assignment of the lease - no as to both. Chan v Cresdon Pty Ltd (1989) 168 CLR 242; CASES CITED : 193 Crown Street Pty Ltd v Hoare (1969) 1 NSWR 193; Konica Business Machines Australia Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687; NZI Capital Corporation v Child (1991) 23 NSWLR 481. Forte-Senes Hotels Pty Ltd - Appellant PARTIES : Austcorp No 473 Pty Ltd - First Respondent Peter George - Second Respondent Alan Edward Andrew Dobson - Third Respondent FILE NUMBER(S) : CA 40070/03 COUNSEL : M Einfeld QC & P Strasser - Appellant P Hallen SC - Respondents SOLICITORS : Milne Berry & Berger - Appellant Uther Webster - Respondents

LOWER COURT District Court JURISDICTION : LOWER COURT DC 7156/01 FILE NUMBER(S) : LOWER COURT Gibson DCJ JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40070/03 DC 7156/01

MEAGHER JA GILES JA STEIN AJA

Wednesday 25 February 2004 FORTE-SENES HOTELS PTY LTD v AUSTCORP NO 473 PTY LTD & ORS Judgment 1 MEAGHER JA: I agree with Giles JA. 2 GILES JA: Forte-Senes Hotels Pty Ltd ("Forte") became the lessor to Austcorp No 473 Pty Ltd ("Austcorp") of premises at Kings Cross in Sydney ("the premises"). In proceedings in the District Court it claimed from Austcorp and from Messrs Peter George and Alan Dobson ("the guarantors"), directors of Austcorp and guarantors of Austcorp's obligations under the lease, unpaid rent for a period from about the end of May 2001 to 31 August 2002. By a cross-claim in the proceedings Austcorp claimed from Forte rent overpaid for the period to 31 December 2000. Forte's claims were dismissed and Austcorp's cross-claim was upheld. 3 The issues appear to have become obscured in the District Court, and the judge's reasoning is not easy to understand. It is best to focus on the issues on appeal, which were -

(a) whether the lease had been terminated by surrender by operation of law prior to the end of May 2001; and if it had not

(b) whether the lease had been assigned prior to the end of May 2001 and by the terms of their guarantee the guarantors had thereby been discharged. 4 If the lease was surrendered, the appeal will fail in its entirety. If the lease was assigned and the guarantors were thereby discharged, the appeal will fail as against the guarantors.

Facts 5 In late 2000 Austcorp was experiencing financial difficulties. Mr Dobson spoke to Mr Senes of Forte about someone taking over the lease. A Mr Felix Lyle of Kalset Pty Ltd ("Kalset") was introduced to Mr Dobson. There was a meeting with Mr Senes concerning assignment of the lease by Austcorp to Kalset, at or following which Mr Senes conveyed Forte's agreement to the assignment. In about the middle of December 2000 Austcorp went out of possession and Kalset went into possession, and with Mr Senes' consent Kalset was given keys to the premises. A letter was written and telephone calls were made in the latter part of December 2000 with a view to the assignment of the lease. 6 This is but a summary, and it is not easy to distil precise findings from the judge's reasons. The summary is sufficient, because it was common ground in the appeal that Austcorp, Kalset and Forte all contemplated that the lease would be assigned by Austcorp to Kalset and that the change in possession was in anticipation of the assignment of the lease. 7 In the early part of January 2001 Kalset paid $15,000 to Forte in cash. Although it was described as a bond, the $15,000 was credited as rent. Kalset paid two further sums of $7,050 and $7,750 to Forte. While the figures were not clear, it was accepted that rent was paid to about the end of May 2001. 8 For reasons which it is not easy to understand, Austcorp through Messrs George and Dobson expected that Mr Senes would arrange the documentation for the assignment of the lease, and Mr Senes appears initially to have undertaken to do so. He did not do so. That brought a letter of 11 January 2001 from Mr George to Mr Senes, which was much relied on in the appeal and should be set out in full - "It is now several weeks since the new tenants moved into the above premises. Despite repeated requests by myself and Mr Allan [sic] Dobson for formal documentation of the assignment of the lease we have received no correspondence from your or your solicitors. I am not prepared to continue to wait for the promised documentation. I formally give you notice that Alan Dobson and myself no longer accept that our guarantees of the lease of the above premises all [sic] in force, or take any further responsibility for the obligations contained in the lease. You still retain the Bond money we paid to you even though the new tenants have paid a new bond. Mr Dobson and myself have received no payment for the fixtures, fittings and improvements made to the premises. We have agreed the terms of the assignment and you have accepted the covenant and rental from the new tenants. You cannot hold Alan and myself as guarantors simply by not issuing formal documentation, which we have undertaken to sign subject only to our solicitors approval that it fairly represents the agreement reached between us." 9 There was no reply to this letter, and nothing was done. 10 Under the lease rent had to be "at all times paid up three (3) months in advance" (cl 16.2). Presumably because it was not, on 16 March 2001 Mr Senes sent a note to Mr George stating that Kalset was behind in the rent and that he "call[ed] on you as guarantor to meet the rentals". Mr George's response included - "During the course of the new tenants moving into the above premises, Alan Dobson and I made several requests for a proper assignment documentation. At all times I was told that the solicitors were dealing with the matter. In frustration I wrote to you on the 11th January 2001, a copy is attached, but received no reply. I am advised that since you have allowed the new tenant to take possession, have accepted the rent and agreed to document the assignment, it is neither fair or acceptable for you to now expect to rely on my guarantee simply because you will not issue the appropriate assignment document and are endeavouring 'to have your cake and eat it'. I reiterate that I do not accept that my previous guarantee is still in force. If you insist on taking the matter further please address all future correspondence to my solicitors, Messrs Uther Webster and Evans of Level 2, 235 Clarence St, Sydney NSW 2000 marked to the attention of Ms V Evans." 11 Mr Senes replied on 27 March 2000. He asserted that the guarantors would remain liable despite any assignment. He also appeared to assert that because it had not been documented there had not yet been an assignment, but also that an assignment was still intended; his letter included - "We will keep you informed if matters are not concluded, only, if and when the payments are made regularly, will we consider an assignment and your guarantees will remain in force during the term of the lease." (emphasis in original) 12 Mr George's response in early April 2000 reiterated his earlier position. 13 On 20 April 2001 Mr Senes wrote to Messrs George and Dobson saying that Kalset was still in default as to rent and requiring payment from them as guarantors. The letter included, referring to Kalset - "They handed us back the keys on the 19th April, 2001 and for extra security we changed the locks today. The keys are at our office for your collection or can be mailed to you on request." 14 The implicit invitation to go back into possession was not taken up. Mr George replied on 2 May 2001 on behalf of himself and Mr Dobson - "We have repeatedly informed you both verbally and in writing that we do not accept liability for the lease of the above premises, for the reasons already given to you. Further, from enquiries I have made since receiving your letter, I have reason to believe that the facts are not as you claim. The tenants wish to remain and rents have been paid though, admittedly not in a timely manner. If you have decided to take possession on the basis that you can take unreasonable and wrongful advantage of Mr Dobson and myself that is your decision. I can only reiterate that if you wish to proceed with claims against Mr Dobson and myself, please contact our lawyers, of whom you have already been advised." 15 It was not contended in the appeal that Forte had "take[n] possession" as suggested in this letter, as distinct from Kalset giving up possession as stated in Mr Senes' letter of 20 April 2001. 16 In mid-May 2001 Forte placed the premises with an agent for re-letting. The premises were advertised by the agent in newspapers, on a website, by window display and by a sign on the building. Mr Senes agreed in cross-examination that he "took the view that it was [Forte's] right to lease or not lease the premises as it saw fit", but said that he believed he had a responsibility to mitigate Forte's loss. Some offers were received, and some negotiations eventuated but came to nothing. Austcorp was not told of the negotiations. In cross-examination Mr Senes said that he saw no need to tell Austcorp until "something was much closer to being - coming to fruition".

In Konica Business Machines Australia Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687 Clarke JA said at 694 - "In determining whether a surrender by operation of law has taken place the courts look to the actions of the parties in order to determine whether they have conducted themselves in a manner inconsistent with the continued existence of the lease. Where it is found that both parties have so conducted themselves then the conclusion will be that the surrender by operation of law has taken place." 17 In 193 Crown Street Pty Ltd v Hoare (1969) 1 NSWR 193 at 199-200 Asprey JA said - "For a surrender of a lease by way of operation of law to occur there must be an act done by one of the parties to the lease, assented to by the other, which act is inconsistent with the continuance of the lease. It is necessary to prove an act or acts which are unequivocally referable to an agreement between the lessor and the lessee that the lease shall be terminated. It is not sufficient that the acts in question are merely consistent with the intention of the parties that the lease should [not] continue to exist. Where, as here, the question is whether the existing lease has been surrendered by operation of law and a new lease of the subject premises has been entered into between the lessor and a third party or whether the lessee has assigned his lease to the third party, in order that the first of these alternative positions may be established, it must be proved that there has been a grant of a new lease to such third party by the landlord with the assent of the lessee and a yielding up of possession by the lessee to the third party." (citations omitted) 18 In the same case Walsh JA said at 196 that where there is a change of possession it must be asked whether it should be concluded that it was "the completion and the fulfilment of an agreement to put an end to the term", and that it was necessary - " … that the plaintiff had acted in a way which was inconsistent with the continuance of the defendant's lease and, in order to show this, he had to establish that the assent of the plaintiff to the taking of possession by the Ivermees and the acceptance of rent from them were unequivocally referable to an agreement that the term was to come to an end so that, in the result, the plaintiff was estopped from asserting that it had not come to an end." (citations omitted) 19 Austcorp and the guarantors submitted that although the change of possession in December 2000 had been in anticipation of the assignment of the lease from Austcorp to Kalset, subsequent events had brought about a surrender by operation of law. 20 They first submitted that notwithstanding the initial anticipation of the assignment Forte, through Mr Senes, decided that it would not participate in an assignment but would undertake a new relationship of lessor and lessee with Kalset. They pointed to the failure to see to documentation of the assignment, and to the judge's statement that it "suited [Mr Senes] to terminate this written legal agreement [the lease] so that he had the advantage of entering into an agreement where there was nothing in writing and where, inter alia, money could come to him in a 'paper bag'". The paper bag was a reference to the payment of the $15,000. The judge also said that she thought Mr Senes was hoping to achieve "a paperless lease", and found that there had been created a tenancy at will between Forte and Kalset terminable at the will of either Forte or Kalset. 21 The question was, however, whether the lease had been terminated by surrender by operation of law. It was not whether Mr Senes had chosen unilaterally to bring the lease to an end by replacing it with a new relationship with Kalset, or whether a tenancy at will had been created. A tenancy at will with Kalset as the lessee could have been created after a surrender of the lease, but first it had to be found that there had been the surrender: to do otherwise would put the cart before the horse. And surrender of the lease required regard to the conduct of both Forte and Austcorp. 22 Whatever may have lain behind the failure to see to documentation of the assignment, and even if it were in Mr Senes' mind that an assignment should be overtaken by some other basis for Kalset's possession, it was necessary that Austcorp assented to a demonstration of that state of mind as conduct of Forte inconsistent with the continuance of the lease. It was here that Austcorp and the guarantors relied on the letter of 11 January 2001. They submitted that it was a renunciation by Austcorp of any further obligations as lessee, and thereby acceptance that Kalset's possession of the premises should not be as prospective assignee but as a new lessee from Forte. 23 I do not think that can be accepted. First, the letter is directed to the obligations of the guarantors, not the obligations of Austcorp as lessee. Secondly, its last sentence continues to envisage an assignment of the lease, and there is nothing to show that Mr George was conscious that, if it were the case, Mr Senes had decided that there should not be an assignment but rather a new direct relationship with Kalset. The subsequent letters support both that the letter of 11 January 2001 was directed only to the obligations of the guarantors and that, although there was dispute over the implementation of the assignment, Kalset's possession was still treated as that of a prospective assignee. 24 The respondents then submitted that there was a surrender in April-May 2001 as a result of Forte changing the locks and placing the premises with the agent for re-letting. Those events do not approach surrender by operation of law. While Forte changed the locks, it offered the keys to Austcorp. It did not exclude Austcorp from possession, but invited it to re-enter into possession. It was asserting the continuance of the lease. Forte was entitled to see if a new lessee could be obtained, and if it had obtained one could have re-let the premises without effecting a surrender of the lease if, in the language used in Konica Business Machines Auustralia Pty Ltd v Tizine Pty Ltd, it was found that the re-letting was on the lessee's behalf. Forte's conduct in placing the premises with the agent and dealing with possible new lessees was consistent with the continued existence of the lease, and the point of re-letting was not reached. 25 In my opinion, Forte and Austcorp did not conduct themselves inconsistently with the continuance of the lease, unequivocally indicating an agreement that the lease should come to an end. Surrender by operation of law was not established.

Assignment and Guarantee 26 Clause 17 of the lease was an extensive guarantee and indemnity, in terms framed advantageously to the lessor. It was not disputed that, subject to an argument based on the deletion of cl 17.4, it made the guarantors liable for rent payable by Austcorp. 27 Clause 17.4 was ruled out and initialled. Before deletion it read - "17.4 In the event that the Lease is transferred or assigned to any person or person the benefit of this Guarantee and Indemnity shall extend to the transferee or assignee AND the benefit of this Guarantee and Indemnity shall continue to ensure concurrently for the benefit of the Lessor notwithstanding any such transfer or assignment" 28 The guarantors submitted that regard could be had to cl 17.4 and its deletion, and that because it had been ruled out it should be held that upon assignment of the lease the benefit of their guarantee did not "continue to enure … for the benefit of Lessor". 29 There was not a legal assignment of the lease. Perhaps there was an equitable assignment of the lease by virtue of an enforceable agreement to assign made between Austcorp and Kalset to which assignment Forte had consented, although that is debateable; it may be doubted whether an equitable assignment would suffice for whatever was the intended operation of cl 17.4 (see Chan v Cresdon Pty Ltd (1989) 168 CLR 242). Neither of these matters was the subject of submissions, and neither need be considered. Even if there was an assignment within the meaning of cl 17.4, in my opinion the deletion of cl 17.4 does not do the work required for the submission. 30 There is authority that regard can be had to words deleted from a printed form, possibly also from a precedent. A discussion of cases to 1991 may be found in NZI Capital Corporation v Child (1991) 23 NSWLR 481 at 490-4, although there are many more cases and no attempt was made to refer us to them. I do not think the lease was a document of that kind. The lease was executed in 1998. It was not relevantly in a printed form. That it followed a precedent and cl 17.4 was deleted as an inappropriate part of the precedent can not readily be concluded, in particular because the deletion of cl 17.4 is the only ruling-out and there are indications of individual attention to its typed terms, for example in cl 16 relating to rent. I do not think that the ruling out of cl 17.4 has been shown to be more than part of the negotiations prior to execution of the lease. 31 If this be incorrect, however, I do not think the deletion meant that an assignment of the lease deprived the lessor of the benefit of the guarantee. Clause 17.4 purports to confer the benefit of the guarantee on an assignee of the lease concurrently with the lessor. An assignee of the lease will become the lessee, and it is not easy to see what is meant by conferring the benefit of the guarantee on the lessee. (Perhaps cl 17.4 was deleted because its meaning was unclear.) Whatever may be meant, the deletion is consistent with continuance of the guarantee for the benefit of the lessor.

The result 32 The parties agreed on a judgment amount in the event that the appeal was wholly successful. I propose the orders -

(2) Judgments and orders for costs made below set aside, and in lieu thereof - (i) On the plaintiff's claim, judgment for the plaintiff for $118,634.51 to take effect on 20 December 2002;

(ii) Cross-claim dismissed; and (iii) Defendants/cross-claimant pay the plaintiff/cross-defendant's costs of the claim and cross-claim.

(3) Respondents pay the appellant's costs of the appeal and have a certificate under the Suitors Fund Act if otherwise qualified. 33 STEIN AJA: I agree with Giles JA. **********

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