Supreme Court of WA|2006-06-30|Before: Miere J

Glentham Pty Ltd v Luxer Holdings Pty Ltd & Anor [2006] WASC 132 (30 June 2006)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : GLENTHAM PTY LTD -v- LUXER HOLDINGS PTY LTD & ANOR [2006] WASC 132

BETWEEN : LUXER HOLDINGS PTY LTD (ACN 009 454 077)

Property law - Commercial lease - Repudiation and termination of lease - Dispute over quantum of land tax and variable outgoings owing under lease - Entitlement to damages - Obligation to mitigate loss - Whether plaintiff failed to act reasonably in mitigation - Onus on defendant to prove failure to mitigate - Refusal of offer by defendant to re-let premises reasonable - Quantum of damages claim

Property law - Commercial lease - Guarantee - Whether guarantee made by second defendant can be described as an undertaking that the principal debtor will carry out contract - Whether plaintiff complied with terms of guarantee - Whether guarantee contained implied term that any demand for rent would not be accompanied by demands for additional moneys

Plaintiff's claim against both defendants successful

Batson v De Carvelho (1948) 48 SR (NSW) 417

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266

Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410

Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337

Goldburg v Shell Oil Co (1990) 95 ALR 711

Hasell v Bagot, Shakes & Lewis Ltd [1911] HCA 62; (1911) 13 CLR 374

Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313

Moschi v Lep Air Services Ltd (1973) AC 331

Progressive Mailing House v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17

Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322

Tri Continental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689

Wenkart v Pitman (1998) 46 NSWLR 502

Young v Lamb [No 2] [2001] NSWSC 1014

Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549

Bunbury Foods Pty Ltd v National Bank of Australasia Ltd [1984] HCA 10; (1984) 153 CLR 491

Donnelly v National Australia Bank, unreported; FCt SCt of WA; Library No 920283bc; 15 May 1992

Elkhoury v Farrow Mortgage Services Pty Ltd (in liq) [1993] FCA 264; (1993) 114 ALR 541

Fresh Express Australia Pty Ltd v Larridren Pty Ltd [2002] FCA 1312

Glentham Pty Ltd v Luxer Holdings Pty Ltd [2002] WASC 80

Heytesbury Pty Ltd v Kelly (1997), unreported; SCt of WA; Library No 970161; 15 April 1997

Mann Judd v Paper Sales Australia (WA) Pty Ltd, unreported; FCt SCt of WA; Library No 9801565A; 25 September 1998

Meredith Projects Pty Ltd v Fletcher Construction Australia Ltd [2000] NSWSC 493

Metal Fabrication (Vic) Pty Ltd v Kelcey [1986] VicRp 52; [1986] VR 507

Mytian v Witham [2001] NSWSC 47

Sotiros Shipping Inc v Sameiet Solholt [1983] 1 Lloyd's Rep 605

Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1989) 166 CLR 245

Westpac Banking Corporation Ltd v Lim & Ors, unreported; SCt of Qld; Library No 1362; 15 August 1995

1 In 1995, the plaintiff in CIV 2733 of 2001 leased premises to the first defendant under a lease guaranteed by the second defendant. The first defendant repudiated the lease by failing to pay rent and other amounts due under the lease. The plaintiff terminated the lease. The plaintiff now sues the defendants to recover amounts due under the lease and damages. Before addressing the issues raised by the parties it is necessary to narrate the circumstances leading to the grant of the lease and its subsequent termination.

2 In April 1991 the plaintiff leased the 15th floor of the BGC Centre to the first defendant for a term of 10 years ("the 1991 lease"). The first defendant was the service company for the law firm of Michell Sillar McPhee. The second defendant was a partner in the law firm and a director of the first defendant. The second defendant and the other partners of Michell Sillar McPhee, including Michael Barter, guaranteed the payment of the rent and the performance by the first defendant of its obligations under the lease. The first defendant and the guarantors under the 1991 lease alleged that the plaintiff or its agents had made misrepresentations to the first defendant and the guarantors which induced them to enter into the original lease.

3 The plaintiff, the first defendant, the second defendant and the remaining partners of Michell Sillar McPhee, including Barter, entered into a deed of settlement dated 21 December 1995 by which the parties agreed to compromise their claims on the following terms. The partners of Michell Sillar McPhee, in their capacity as guarantors under the 1991 lease, agreed to pay a total of $370,000 to the plaintiff and the second defendant and Barter agreed to give security for the payment of part of that sum. The first defendant and the Michell Sillar McPhee partners agreed to execute a deed of surrender of the lease. The first defendant, the second defendant and Barter agreed to execute a fresh five year lease of the 15th floor with the plaintiff on specified terms and a licence for car bays. The second defendant and Barter agreed to guarantee the obligations of the first defendant under the fresh lease.

4 On 21 December 1995 the plaintiff and the first defendant entered a deed of surrender of lease by which the first defendant surrendered the 1991 lease.

5 The plaintiff, the first defendant, the second defendant and Barter entered into a new lease of the 15th floor of the BGC Centre ("the Lease") dated 21 December 1995 on the following terms. The lease was for a term of five years. The first defendant was to pay an annual rent, payable by equal calendar monthly instalments in advance, and was to pay rates and taxes and variable outgoings. There were default provisions concerning failure to pay the rent, failure to pay rates and taxes and variable outgoings, and the breach of other covenants and obligations under the Lease. The second defendant and Barter guaranteed the payment by the first defendant of the rent and the performance and observance by the first defendant of its obligations under the Lease.

6 The plaintiff granted a licence to the first defendant to use certain car bays situated at the BGC Centre and the first defendant agreed to pay a fee for the use of the car bays ("the Licence"). The second defendant did not guarantee the performance by the first defendant of its obligations under the Licence.

7 The first defendant failed to pay any payments due under the Lease. On 20 March 1996 the plaintiff, by its solicitors and under cover of a letter addressed to the directors of the first defendant, sent a default notice addressed to the first defendant. The notice stated that the first defendant had failed to pay rent, variable outgoings, rates and taxes, cleaning charges and car bay rental in the total sum of $59,558.76 as itemised in an attached schedule. The notice required the first defendant to remedy the breach within 14 days and gave notice that if the first defendant did not do so the Lease and car bay Licence would be determined. The first defendant did not pay any part of the amounts outstanding under the Lease. On 4 April 1996 the plaintiff re-entered the premises and repossessed the car bays, thereby terminating the Lease and the Licence.

8 On 1 July 1996 the plaintiff, by its solicitors, wrote to the second defendant enclosing a statement of arrears owing as at 4 April 1996 in the sum of $69,916.30 together with a stamp duty assessment of $2,563.90 but stated that interest on the arrears was not included. The letter made demand for the payment of $72,480.20 within 21 days. On 24 July 1996 the second defendant replied to the plaintiff's solicitor's letter of 1 July 1996. The second defendant stated that he did not accept the figure contained in that letter, that the defendants had not received a statement accurately showing the amount of money outstanding and that the notice of default made a claim of $59,558.76 but that the letter of 1 July 1996 demanded $72,486.20 for the same period.

9 There was then further correspondence between the plaintiff's solicitors and the second defendant. On 10 September 1997 the plaintiffs, through their solicitors, wrote to the second defendant. By the letter the plaintiff claimed arrears of rent totalling $83,765 and damages from 1 May 1996 to 30 November 2000 of $931,675.50 less income received from re-renting part of the premises to the Gas Corporation in the sum of $37,732.58 and, if an existing offer to lease was accepted, a further amount of approximately $189,000, leaving a total of damages in the order of $700,000. The letter went on to say that after making further deductions for the possibility of receiving rent for part of the balance of the premises the plaintiffs' claim, for both the arrears of rent and damages from the date the Lease was terminated, would be approximately $760,000. The letter stated that the plaintiff was sympathetic to Barter's position and would look to the second defendant to discharge his obligations under the Lease and take such action as he may think appropriate to recover any contribution from Barter and his estate. At that time the plaintiff knew that Barter was gravely ill and had ceased work in May 1996. Barter passed away in September 1998. On 16 September 1997 the second defendant informed the plaintiff's solicitors that he did not recognise any obligation to pay damages.

10 Meanwhile, on or about 6 January 1997, the plaintiff had leased part of level 15 to the Gas Corporation. In around June 1997 the Gas Corporation expanded the area it occupied on level 15. In around June 1998 the Department of Resources and Development succeeded the Gas Corporation. The plaintiff entered into a lease with the Department of Resources and Development in relation to the same area that was previously occupied by the Gas Corporation. In around October 1998 the Department of Resources and Development expanded the area it occupied on level 15. The lease with the Department of Resources and Development terminated on 31 January 1999.

11 In around March 1999 Deveraux Holdings Pty Ltd (Deveraux) entered into a lease with the plaintiff of the western side of level 15. Deveraux is the ultimate holding company of the Griffin Coal Mining Company Pty Ltd (Griffin Coal). Griffin Coal was a part owner of the building and leased level 15 and other levels of the building prior to the first defendant.

12 After the Department of Resources and Development vacated level 15, the plaintiff demolished the internal fit out of level 15 in order to lease it to Deveraux. A good deal of floor space on level 15 was taken up by a spa, sauna, bathroom and kitchen which Deveraux did not want as part of their lease of the remainder of level 15. Deveraux agreed to commence leasing the remainder of level 15 on 25 May 2000.

13 The second defendant had proposed to representatives of the plaintiff in 1998 that he would take up a lease of part of level 15. The plaintiff did not accept those proposals. On 8 October 1998 the second defendant made a written offer to lease floor 15. I will say more about that proposal when addressing the first defendant's submission that the plaintiff failed to mitigate its damages.

14 The date for expiry of the Lease was 30 November 2000. On 31 January 2001 the plaintiff's solicitors wrote to the second defendant and stated that the plaintiff's damages had then crystallised. The letter enclosed a schedule showing a calculation of damages and went on to state that the plaintiff's total damages would be in the order of $700,000. The second defendant replied by letter of 14 February 2001 stating that the plaintiff had failed to act reasonably to mitigate its loss.

15 On 8 November 2001 the plaintiff commenced action CIV 2733 of 2001. The plaintiff claims against the first defendant arrears of rent under the Lease and the Licence, damages and interest. The plaintiff claims against the second defendant arrears of rent under the Lease, damages and interest.

16 On 4 April 2002 the defendants commenced proceedings in the District Court of Western Australia against the plaintiff claiming return of a board table left by the plaintiff in the boardroom of the 15th floor and unlawfully detained by the plaintiff or alternatively damages for conversion of the board table. On 22 March 2004 a Judge of the District Court ordered that the action be remitted to this Court. The remitted action is CIV 2592 of 2004. On 24 February 2005 it was ordered that CIV 2592 of 2004 be consolidated with action CIV 2733 of 2001 and carried on as one action. The defendants' claim in the remitted action then proceeded as a counterclaim in the consolidated action.

17 The plaintiff applied for summary judgment against the first defendant for approximately $86,000 in rent due under the Lease and the Licence plus interest and damages to be assessed. The plaintiff sought summary judgment against the second defendant for a slightly lesser sum because he is not a guarantor of the Licence. The defendants' argument in resisting the summary judgment application was that the plaintiff took a number of actions against the first defendant which were so totally inconsistent with its obligations under the Lease as to amount to a repudiation of the Lease by the plaintiff.

18 A Master of this Court found that the first defendant had an arguable case that the water rates, council rates, land tax, variable outgoings and interest claimed were not set out correctly in the default notice. However, the Master found that the defects in the notice of default, taken with other matters raised by the defendants, did not amount to an arguable defence that the plaintiff had repudiated the Lease.

19 The Master went on to find that the first defendant had repudiated the Lease and that the plaintiff was entitled to summary judgment against the first defendant for four months' rent, office cleaning charges and car bay charges plus interest. The Master entered judgment against the first defendant for $66,520.68 inclusive of $23,309.81 interest. The defendants did not appeal from the decision of the Master and the defendants accept that they are bound by the finding that the first defendant repudiated the Lease and the Licence.

20 The Master gave the second defendant leave to defend on the ground that it was arguable that there were various defects in the notice of demand which was a condition precedent to the demand upon the guarantor under the Lease.

21 There are a number of issues between the plaintiff and the first defendant. The first defendant disputes the amount it owes to the plaintiff under the Lease. So far as that is concerned, there are two matters in issue between the plaintiff and the first defendant. The first concerns the first defendant's proportion of land tax payable in respect of the property for the year 1 July 1995 to 30 June 1996. The second matter concerns the payment of variable outgoings during the term of the Lease. The other major issue between the plaintiff and the first defendant is whether the plaintiff failed to act reasonably to minimise its loss.

22 The issues between the plaintiff and the second defendant concern the liability of the second defendant to pay damages. The second defendant says that upon a proper construction of the guarantee provisions of the Lease, or alternatively by reason of terms implied in the Lease, the second defendant has no liability to pay any damages.

23 I will first deal with the issues between the plaintiff and the first defendant concerning the debt owing by the first defendant to the plaintiff for the amounts owing under the Lease up to the date of its termination.

24 The plaintiff claims land tax in respect of the premises for the 1995/1996 year apportioned from 1 December 1995 to 30 June 1996 in the amount of $4,808.61. The defendants say that the 1995/1996 land tax apportioned from 1 December 1995 to 30 June 1996 was included in the settlement between the plaintiff and the first defendant contained in the deed of settlement of 21 December 1995 and as at 20 March 1996 was payable as part of that settlement sum.

25 The starting point is to consider the terms of the Lease. It is common ground that land tax is payable by the first defendant pursuant to the Lease. The defendants' argument is that the apportioned 1996 land tax was included in the settlement contained in the deed of settlement and paid by the first defendant.

26 The deed of settlement provides that the first defendant should execute on or before 30 November 1995 a deed of surrender of the 1991 lease. The deed of settlement further provides, in effect, that the first defendant is released from any liability under the 1991 lease. However, the first defendant's liability to pay the apportioned 1995/1996 land tax arises under the Lease not under the 1991 lease. The deed of settlement does not release the first defendant from its obligation to pay land tax under the Lease. There is no mention in the deed of settlement of the portion of the 1995/1996 land tax relating to the period 1 December 1995 to 30 June 1996. In summary, there is nothing in the deed of settlement from which it might be inferred that the first defendant paid the portion of the 1995/1996 land tax for the period 1 December 1995 to 30 June 1996 and the deed of settlement does not release the first defendant from its obligation to pay that portion of the land tax under the Lease. It follows that the first defendant is indebted to the plaintiff in respect of the apportioned 1995/1996 land tax claimed.

27 The debt claimed by the plaintiff under the Lease includes amounts for variable outgoings and cleaning charges from the commencement of the Lease in December 1995 to the termination of the Lease in April 1996. The defendants do not dispute the quantum of the outgoings claimed. However, the defendants plead that the variable outgoings claimed were not payable because the terms of cl 3.4(b) of the Lease required a written estimate of the expected aggregate of the variable outgoings to be given to the lessee together with a written estimate of the consequent estimate of variable rental and of such rental divided into monthly instalments prior to the lessee being required to pay any contribution for such variable rental and no such estimate was given prior to re-entry by the plaintiff on 4 April 1996.

28 Clause 3.4 of the lease is a covenant by the first defendant, the lessee, to pay to the plaintiff variable outgoings described as "variable rental" and is in the following terms:

"(a) To pay to the Lessor, in addition to the rent described above, variable rental in the manner provided for in this clause;

(b) prior to or at the commencement of a lease year and half way through a lease year, the Lessor may make an estimate of the expected aggregate of Variable Outgoings for the ensuing lease year or half lease year as the case may be and deliver to the Lessee written notification of:

(i) that estimate;

(ii) the consequent estimate of the variable rental; and

(iii) the estimate of variable rental divided into monthly instalments;

(c) the Lessee will, after receiving an estimate in accordance with the preceding subclause, on the 1st day of the month next ensuing after such receipt and thereafter on the 1st day of each month, without any necessity for any account, invoice or demand by the Lessor, pay to the Lessor the specified monthly instalments of the estimated variable rental;

(d) as soon as reasonably possible after each lease year, the Lessor will cause the Lessor's auditors to investigate and certify as to:

(i) the actual amount of Variable Outgoings incurred by the Lessor during the lease year;

(ii) the consequent calculation of the actual amount of the variable rental payable by the Lessee during that lease year

and the Lessor will deliver that certificate to the Lessee; and

(e) upon receipt of the certificate described in the preceding sub-clause the Lessee will forthwith pay the amount (if any) by which the actual variable rental exceeds the total instalments of estimated variable rental paid by the Lessee in respect of that lease year or the Lessor will credit against future instalments (or if the Lease has been determined, pay to the Lessee) any amount by which the total instalments of estimated variable rental exceeds the actual variable rental."

29 A textual analysis of cl 3.4 leads to the conclusion that the delivery of a written estimate under par 3.4(b) is not a condition precedent to the liability of the lessee to pay the variable outgoings. Paragraph 3.4(b) provides that the lessor "may" make an estimate of the expected aggregate of variable outgoings and deliver to the lessee the estimates referred to. The word "may" is permissive, not mandatory. It is to be contrasted with the word "will" in subpar 3.4(c), (d) and (e) which are mandatory. Of course, if the lessor does not serve the written notifications referred to in par 3.4(b) then the lessee's obligation to pay to the lessor the specified monthly instalments of the estimated variable rental provided for by par 3(c) does not arise.

30 Subparagraph 3.4(d) provides that the lessor "will" cause the lessor's auditors to investigate and, certify as to the matters stated and deliver that certificate to the lessee. Paragraph 3.4(e) then provides that upon receipt of the certificate the lessee "will" forthwith pay the amount (if any) by which the actual variable rental exceeds the total instalments of estimated variable rental paid by the lessee in respect of that lease year or credit the lessee any excess paid by the lessee. Thus, if the lessor delivers to the lessee the certificate prepared in accordance with subpar 3.4(d) then the lessee is obliged to pay to the lessor the amount by which the certified rental exceeds the instalments paid by the lessee. If the lessee has not paid any instalments then the lessee is obliged to pay the amount set out in the certificate.

31 Furthermore, the meaning and effect of cl 3 of the lease should be determined in a practical and realistic way, not in a way which adopts an overly fine or theoretical approach that is alien to commercial agreements. Clause 3.4 of the lease is a covenant by the lessee to pay variable outgoings. Paragraphs 3(b) and 3(c) provide a means by which the lessor may obtain monthly instalment payments of variable outgoings prior to the actual outgoing having been calculated for the year. If the lessor chooses or fails to avail itself of those provisions of the lease then the effect of par 3(b) and par 3(e) is that the variable outgoings for the year are calculated and upon the lessor delivering to the lessee a certificate as to the amounts owing the lessee is obliged to pay that amount. It is unbusinesslike and contrary to commonsense to interpret cl 3.4 so that if the lessor fails to provide to the lessee the estimates provided for then the lessee is discharged from all liability to pay variable outgoings.

32 The plaintiff has made out its claim that on 4 April 1996 the first defendant was indebted to it under the Lease and the Licence in the sum of $82,737.38. The plaintiff is entitled to judgment in the sum of $82,737.38 less the amount for which the Master granted summary judgment.

33 The plaintiff is entitled to recover damages resulting from the first defendant's repudiation of the Lease and the Licence. Ordinary principles of the law of contract, including principles with respect to repudiation, apply to leases: Progressive Mailing House v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17 at 29 per Mason J. Where the lessee has repudiated, damages are awarded to the lessor to compensate them for loss of the benefit of the lessee's covenants to pay rent and outgoings: Progressive Mailing (supra) at 55 per Deane J and 47 per Brennan J.

34 The trial commenced on 13 March 2006. By that time the Lease would have expired. Therefore, the plaintiff submitted, the damages to be assessed were for, in effect, a past loss. That loss was to be measured by loss of rent, rates and taxes, variable outgoings, the cost of making good, costs incurred to attract a new tenant, marketing costs and leasing agent fees.

35 An injured party can recover money reasonably spent in mitigating or attempting to mitigate the effects of a breach of contract: Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 at 356. In particular, a lessor is entitled to recover from a lessee who has repudiated the lease money reasonably spent in trying to attract new tenants, including making alterations to the premises for that purpose.

36 The defendants accept that the plaintiff is entitled to the amounts claimed by the plaintiff in respect of the cost of making good, marketing costs, leasing agent fees and the costs incurred to attract a new tenant, except for the cost of demolishing, dismantling and removing existing fittings on level 15 to which costs I will specifically refer. The defendants accept the amount claimed by the plaintiff in respect of the loss of rates and taxes. The defendants dispute the amount claimed by the plaintiff for loss of rent and loss of variable outgoings. More fundamentally, the defendants claim that the plaintiff is not entitled to any damages because it failed to act reasonably in mitigation of any loss and damage which it claims against the first defendant.

37 An injured party cannot recover losses that could have been avoided. The plaintiff must take all reasonable steps to mitigate the loss flowing from the breach of contract and may not recover damages for any part of the loss that is due to failure to take such steps (see Hasell v Bagot, Shakes & Lewis Ltd [1911] HCA 62; (1911) 13 CLR 374 at 388). The issue in this case is whether the plaintiff took reasonable steps to relet the premises.

38 Anne Tindale is a property manager employed by Esther Investments Pty Ltd since July 1998. Esther Investments provides property management services to the plaintiff. Ms Tindale is responsible, among other things, for management of the BGC Centre building.

39 After the plaintiff terminated the Lease and Licence, the whole of both the 14th and 15th floors of the building were vacant. Ms Tindale telephoned Andrew Denny of CB Richard Ellis, the leasing agent responsible for leasing in the building. Ms Tindale instructed Mr Denny to commence the marketing of the top two floors to find tenants for those floors.

40 Ms Tindale and Mr Denny agreed to leave the fit out on floor 15 as it was. Although it was lavish, as it contained a spa, sauna, bathroom and kitchen facilities, they thought that another prospective tenant might want those facilities.

41 Ms Tindale said that when they were looking for a tenant she and Mr Denny generally discussed whether a particular space, for example a whole floor, should be broken down into various areas and what rent they would expect to obtain. I accept that Ms Tindale discussed those matters with Mr Denny in relation to letting level 15.

42 Ms Tindale authorised Mr Denny to arrange for a new colour brochure of the building advertising the vacant space to be produced and sent out to prospective tenants. Ms Tindale discussed with Mr Denny distributing the brochures to various law firms, accounting firms and mining companies.

43 Ms Tindale said that around the time that the first defendant was evicted and for the few years following, it was very difficult to find tenants for the building, especially for whole floors. To attract tenants, in around 1995 or 1996, the plaintiff put in a conference/seminar room on level 6 of the building which contained television and video recording equipment and catering facilities. The conference room was available for use by all tenants, free of charge. Also, in around 1996, showers were installed on the level 2 car park of the building for the use of tenants free of charge.

44 Ms Tindale said, and I accept, that she spoke to Mr Denny at least once a week if not more often about how the attempts to lease floor 15 were progressing and what further things could be done to attract new tenants. They discussed leasing incentives such as rent-free periods, fit outs and cash incentives. However, they did not offer those incentives until someone made an offer or expressed interest in relation to level 15.

45 In late 1996 Ms Tindale attended a meeting with Mr Denny and John Davey, to whom she reported. They agreed that Mr Denny should arrange for an advertisement to be placed in the Australian Financial Review advertising the availability of the top two floors of the building in the new year. They considered that an advertisement in a national newspaper was desirable because a large firm, such as a national law firm or accounting firm, was a likely tenant. The advertisement was subsequently placed but attracted no response.

46 A number of persons inspected the vacant areas on various floors of the building between January 1996 and November 2000.

47 In late 1996 the Gas Corporation expressed interest in leasing a portion of level 15 for a short time. The Gas Corporation entered both into a lease of part of level 15 and a car parking licence with the plaintiff on or about 6 January 1997. In around June 1997 the Gas Corporation expanded the area it occupied on level 15 by 119.67 square metres. From 1 January 1998 onwards the Gas Corporation continued to lease part of level 15 on a monthly basis. In around June 1998 the Department of Resources and Development succeeded the Gas Corporation. The plaintiff then entered into a lease with the Department for the same area that was previously occupied by the Gas Corporation. In around October 1998 the Department expanded the area occupied on level 15 by a further 185.41 square metres. Nothing was done to level 15 whilst the Gas Corporation and the Department leased the space on level 15 because they were happy to lease level 15 as it was left after the Lease had been terminated. The lease with the Department terminated on 31 January 1999.

48 In March 1999 representatives of a company called Marubeni inspected levels 14 and 15 of the building. Marubeni eventually ended up leasing level 5 of the building as the rent was lower.

49 As I have already mentioned, Deveraux Holdings entered into a lease with the plaintiff of the western side of level 15 in around March 1999. Under the lease, Deveraux had a right of first refusal for the remainder of the space on level 15. After the Department left level 15, the plaintiff completely demolished the internal fit out of level 15 in order to lease it to Deveraux. As I have mentioned, Deveraux did not want the spa, sauna, bathroom and kitchen facilities.

50 In around January 2000 Ms Tindale instructed Digby Sutherland of CB Richard Ellis to forward a leasing proposal in relation to part of level 15, to Adelaide Bank whose representatives had met with Mr Sutherland around that time. Also around that time, representatives from Deveraux Holdings expressed an interest in leasing the remainder of level 15, so that it would occupy the whole of level 15. It was preferable for the plaintiff to have one tenant occupying the whole of level 15 as opposed to parts of it being leased to different tenants. It took about a month of negotiations for the representatives of the plaintiff and representatives of Deveraux Holdings to agree that Deveraux would commence a lease of the remainder of level 15 on 25 May 2000 pursuant to a deed of variation of lease dated 8 June 2005.

51 Mr Denny gave evidence that after the lease with the first defendant was terminated, Ms Tindale contacted him to commence the marketing of levels 14 and 15 of the building. Mr Denny said that he went about finding tenants for level 15 in the manner by which he usually tried to find tenants. That involved approaching prospective tenants and producing and distributing brochures, methods to which I have already referred. Mr Denny does not have a record of the persons to whom the brochures were sent but I am satisfied that they were sent to prospective tenants such as law firms, accounting firms, mining companies, engineering firms or State government departments.

52 In cross-examination it was put to Mr Denny that not much advertising to attract tenants had been undertaken. Mr Denny replied:

"That is a fair statement. In terms of newspaper advertising we only ran the one ad in the Australian Financial Review. We certainly don't recommend newspaper advertising as an effective means of getting tenant inquiry for office buildings. We don't use it for - virtually in any of our office buildings that we lease. We don't see much of it in the market and I think the reason for that is it's ineffective. There are better ways of attracting inquiry to lease office space."

53 In cross-examination it was also put to Mr Denny that one of the best things that could have been done in 1996 was to get rid of the spa and sauna to make the property more attractive. Mr Denny did not agree. He considered that the best strategy was to leave the fit out in level 15 because a big part of the market wants existing partition space and he would be able to offer prospective tenants a fully partitioned floor. Mr Denny said that he could also say that the owner would gut level 15 if that is what the prospective tenant wanted or gut part of it.

54 The onus remains on the plaintiff to prove that it has suffered loss. If the defendant contends that the loss of rent by the plaintiff could have been minimised or avoided altogether by the taking of some step which the plaintiff could reasonably have taken but did not take, the onus is on the defendant to make out that contention on the evidence: Goldburg v Shell Oil Co (1990) 95 ALR 711 per Sweeney and Ryan JJ at 714. Despite occasional dicta to the contrary, the generally accepted view is that the onus of proof on the issue of mitigation is on the defendant and if they fail to show that the plaintiff ought reasonably to have taken certain mitigating steps, then the normal measure of damages would apply: Wenkart v Pitman (1998) 46 NSWLR 502 at 523 per Powell JA and see also Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [187] and Young v Lamb [No 2] [2001] NSWSC 1014 per Austin J at [27] - [31].

55 After the plaintiff re-entered the premises and evicted the first defendant, the plaintiff went about trying to relet the premises. It did what it would do in the ordinary course of business, that is, it instructed its letting agent to take steps to let the premises and accepted reasonable offers to relet part of the premises.

56 In their defence, the defendants pleaded a number of steps that the plaintiff failed to take to mitigate its loss. Many of those matters were not pursued at trial. I will consider the matters which the defendants pressed at trial.

57 The defendants say that the plaintiff failed to advertise the premises by displaying a sign on the building in a place that was advantageous to the first defendant and/or reasonably necessary to properly and effectively advertise the availability of the premises for lease. The plaintiff did have a small sign placed on a stand in the foyer inviting prospective tenants to contact the leasing agent. It was suggested to Ms Tindale in cross-examination that the sign was inadequate. Ms Tindale responded that QV1 and other buildings do not put great big signs on the outside of their buildings. Further, Ms Tindale said it would be difficult to place a sign on the building because it is practically all glass. It would be difficult to secure such a sign and if the plaintiff put up a large board it would impinge on the other tenants' views. That included the ground floor because there is a tenant on the ground floor. Furthermore, Ms Tindale stated her belief that signs do not work anyway.

58 There is no evidence that it is the usual practice of owners of a building such as the BGC Centre, or their letting agents, to place large signs on the exterior of the building in an attempt to attract tenants. Nor is there any evidence that such a sign is likely to attract the sort of tenant who is likely to take a lease of the 15th floor of the building, or part of it. The defendants have not established that the plaintiff failed to take reasonable steps to mitigate its loss by putting a sign on the exterior of the building.

59 The defendants allege that the plaintiff failed to carry out any reasonable or adequate advertising campaign to find a replacement tenant for the premises. In cross-examination Mr Denny said that he undertook a number of strategies to try and find tenants and that there were no budgetary constraints imposed on him in endeavouring to do so. It was then put to him that there was not much marketing done in terms of advertising. I have set out above Mr Denny's response. In effect, he said that he ran only one newspaper advertisement - an advertisement in the Australian Financial Review. His company does not use newspaper advertisements to attract tenants to any of the office buildings that they lease. Newspaper advertisements are not used much in the market. Mr Denny believed that newspaper advertising is ineffective. He did not recommend newspaper advertising as a means of getting tenant enquiry for the 15th floor of the BGC building. There is no evidence to contradict the opinion of Mr Denny. The defendants have not made out a failure to mitigate by inadequate advertising.

60 The defendants allege that the plaintiff offered the premises for rent at a rental in excess of that payable under the Lease and took no reasonable efforts to obtain a reasonable rent in mitigation of its loss nor ascertained the actual market rent available for the premises for the balance of the term or to let the premises on the same terms, or for less than the terms contained in the Lease.

61 In January 1997 the Gas Corporation took a lease of part of floor 15 at a rental of $135 per square metre. That is in excess of the rate of $100 per square metre under the Lease. In cross-examination counsel for the defendants put to Ms Tindale that at no time prior to the Gas Corporation going in did she make any attempt to lease the premises at either the rate of $100 per square metre or a lesser amount. Ms Tindale rejected that proposition. She said that the plaintiff and its representatives did not receive any lease proposals from anyone up until then despite a number of inspections and their attempts to lease the area.

62 Counsel for the defendants said that in a letter of 10 April 1997 to the Gas Corporation, Ms Tindale said that the plaintiff had received an offer to lease from Wells Gold Corporation NL for an area of approximately 388 square metres. The rental rate was $195 per square metre per annum for one year and for years two and three $215 per square metre plus variable outgoings paid in full. Counsel for the defendants put to Ms Tindale that the rent that the plaintiff was there offered was almost double what the first defendant was paying under the Lease and that that indicated that she was looking for a rate at all times that was significantly higher than the contract rate provided for under the Lease. Ms Tindale said that Wells Gold wanted a complete gutting of the proposed lease area and new carpets and a rent free period of about six months for a two year lease. Counsel for the defendants put to Ms Tindale that she turned Wells Gold down because Wells Gold wanted the spa, sauna and other facilities on the 15th floor demolished. That assertion arises from a statement by Ms Tindale that Wells Gold "wanted a complete gutting of the area that they wanted. They wanted it demolished and they wanted new carpets ...". Ms Tindale rejected the proposition that Wells Gold had requested that the spa, sauna and other facilities be demolished. Ms Tindale's evidence was that the negotiations with Wells Gold did not proceed far because they moved to the eastern States. I accept that evidence.

63 When it was expressly put to her that the plaintiff never indicated to any tenant that it would accept $100 per square metre or less Ms Tindale said that the plaintiff was prepared to consider any rent. When counsel put to her that she never did offer the premises to any prospective tenant at a rate at or below the rate the first defendant was to pay under the Lease she responded that there was no one to offer that to.

64 The thrust of Ms Tindale's evidence was that she, or the plaintiff's representatives, would only discuss rent rates with a prospective tenant after the tenant had expressed interest in taking a lease of the premises. I accept that was so and that it was a reasonable approach. There is no evidence that a reasonable building owner in the position of the plaintiff would have advertised the premises for lease at a rental of $100 per square metre or less. Nor was there any evidence that doing so would have been likely to attract a tenant for the 15th floor or part of it. That allegation of failure to mitigate is not made out.

65 The defendants allege that the plaintiff refused, on or about 1 December 1997 and then again in October 1998, offers made by the first and second defendants to re-lease the premises or a portion thereof for the balance of the Lease's term so as to eliminate or reduce losses claimed by the plaintiff.

66 The offer of 1 December 1997 was contained in a letter of 1 December 1997 from Michell Sillar McPhee and the second defendant to the plaintiff's solicitors. The letter proposed that the balance of the debt under the deed of settlement and the balance of funds payable for the term of the Lease between December 1995 and March 1996 be amortised by payments from the firm at the rate of $5,500 per month until extinguished. The letter said that the "contingent liability" claim was denied but in an effort to resolve the matter put forward the following proposal:

"(a) From the date of expiry of our current lease in West Perth (October 1998 or earlier if we can sublet our West Perth space) we move back into the building to lease 300 square metres at a rate to be fixed; with one car park. The term of our lease be until December 2000, or otherwise as may be agreed.

(b) These arrangements once agreed be in full and final settlement of all claims, future or contingent."

67 An offer of substituted performance by the defendant may bring into operation the principles of mitigation. Where a defendant has failed to perform, but it offers or evinces a willingness to provide substituted performance, a plaintiff must act reasonably. Whether the plaintiff has acted reasonably or unreasonably in refusing such an offer or not pursuing such a prospect depends on the circumstances of each case.

68 I find that the plaintiff did not act unreasonably in failing to accept or pursue the defendants' offer. The defendants required that the plaintiff give up its legal entitlement to substantial damages. In return the second defendant and Michell Sillar McPhee offered only to take a new lease at an undetermined rent for about 33 per cent of the floor area the subject of the Lease for about 60 per cent of the term of the Lease. Furthermore, the second defendant and the partners of Michell Sillar McPhee had effectively defaulted in their obligations under two previous leases - the 1991 lease and the Lease. To grant a further lease to the second defendant and his associates was a risky venture.

69 The offer of 8 October 1998 was contained in a letter of that date from the second defendant to the plaintiff's solicitors. The second defendant's offer was as follows:

"1. I or my nominee guaranteed by me, will re-lease the whole of the 15th floor of the Griffen Centre at the applicable rates contained for such period in the 1995 lease.

2. The benefit of new leases negotiated over any portion since the termination of the 1995 lease, be assigned to me so as to help defray the cost.

3. The term of the new lease, and of any assignment referred to in paragraph 2, be limited to the remaining term of the 1995 lease with any extended term to be subject to mutual agreement.

4. The new lease commence at the date of expiry of my current lease in West Perth namely 15 January 1999, or earlier if the same can be negotiated with my current landlord."

70 I find that the plaintiff's failure to accept or pursue that offer was not unreasonable. At the time the plaintiff had leased 444.67 square metres of floor 15 to the Department of Resources Development. Further, the Department had agreed, subject to the approval of the Chief Executive of the Department, to lease a further 185 square metres of floor 15 from 1 October 1998. The second defendant required the plaintiff to assign those leases to him. That would be to the detriment of the Department. Furthermore, the plaintiff would obtain an unreliable tenant, that is one who had twice defaulted under previous leases, in place of a government department as tenant, albeit for part only of floor 15.

71 In his closing submissions counsel for the defendants raised further matters it was claimed amounted to a failure by the plaintiff to take reasonable steps to mitigate its loss.

72 Counsel for the defendants submitted that a reasonable and prudent landlord would have removed the spa, sauna and other facilities from the 15th floor so as to make the premises more easily lettable. The defendants have not established that a reasonable landlord would have done so or that if the plaintiff had done so earlier then it would have attracted a tenant. Counsel for the defendants submitted that Ms Tindale had, in effect, admitted that Wells Gold wanted the spa, sauna and other facilities demolished and that the plaintiff's failure to agree to that resulted in Wells Gold not taking a lease of part of the 15th floor. There is no evidence that Wells Gold failed to take a lease of any part of the 15th floor because of the failure of the plaintiff to demolish the facilities, or agree to do so. That allegation of failure to mitigate is not made out.

Quantum of Damages Claim against First Defendant

73 The damages claimed by the plaintiff are set out in particulars dated 13 March 2006. The defendants do not dispute the quantum of those damages except for the cost to demolish, dismantle and remove fittings on level 15 in the sum of $21,125. The defendants submit that that work was carried out at the end of the Lease period and was for the purpose of attracting Deveraux Holdings as a tenant for a period after 30 November 2000, that is the date on which the Lease would have expired if it had not been terminated in April 1996.

74 The spa and other facilities were demolished in order to induce Deveraux Holdings to take a lease of the eastern side of floor 15 from May 2000. Deveraux Holdings did not pay any rent from that time to the notional expiry date of the term of the Lease. However, Deveraux Holdings paid variable outgoings during that period. The amount of the variable outgoings exceeded the amount paid to demolish the spa and facilities. If the plaintiff had not demolished those facilities then Deveraux Holdings would not have taken the additional space and would not have paid the additional variable outgoings during that period. The decision of the plaintiff to demolish the facilities and grant Deveraux Holdings a rent-free period was not an unreasonable commercial decision. It did not amount to an unreasonable failure to mitigate. The costs of demolishing the facilities were costs reasonably incurred in mitigating or attempting to mitigate the effects of the first defendant's repudiation of the Lease. Accordingly, the plaintiff is entitled to recover the costs of demolishing the facilities.

75 Deveraux Holdings entered into a lease dated 8 June 2000 for approximately 489 square metres of the 15th floor. The lease was for six years commencing on 15 March 1999 for a monthly rent of $6,531.47 for the first three years and $8,164.34 for the next three years. Deveraux Holdings subsequently entered into a deed of variation of lease by which it leased the remainder of the 15th floor of the building, an area of approximately 429 square metres. The variation provided that no rent was payable from 25 May 2000 to 24 November 2000. From 25 November 2000 to 14 March 2002 the rent for the additional premises leased was $5,715.20 per month and from 15 March 2002 to 14 March 2005 the rent for the additional premises leased was $7,144.00 per month. The initial six month rent-free period was an incentive to encourage Deveraux Holdings to lease the remainder of the 15th floor. The plaintiff also provided an allowance of up to $125,218.60 to Deveraux Holdings to complete a fit out as a further incentive.

76 The notional expiry date of the Lease, assuming it had not been terminated, is 30 November 2000. That is, the rent-free period virtually coincided with the last six months of the notional Lease term. The defendants submitted that the granting of the rent-free period was for the benefit of the plaintiff in that it induced Deveraux Holdings to enter into the variation of lease which resulted in the plaintiff obtaining rent in respect of the remainder of the 15th floor after the expiry of the notional Lease term. The defendants submitted that because the plaintiff obtained the benefit of a long lease at a good rental as a result of the rent-free period then "you need to amortise some of that benefit into that period". As I understand the argument, the defendants submit that the rent to be received over the term of the lease for the additional part of floor 15 should be "amortised over the whole of the term of the lease, including the rent free period". The amount then attributable to the period from the commencement of the Deveraux Holdings varied lease, that is 25 May 2000, to the expiry of the notional Lease period, that is 30 November 2000, should be credited to the defendants, that is offset against the loss of rental suffered by the plaintiff for that period.

77 I do not accept that argument. The plaintiff's decision to lease the remainder of the 15th floor to Deveraux Holdings on the terms of the deed of variation of lease, including the six month rent-free period, was a reasonable step to mitigate the loss flowing from the first defendant's repudiation of the Lease. Deveraux Holdings did not pay any rent during the six month period but it did pay the variable outgoings. Those variable outgoings were a loss that would have been borne by the plaintiff if they had not been recovered from Deveraux Holdings. In a sense the first defendant has obtained the benefit of those variable outgoings having been paid by Deveraux Holdings. If Deveraux Holdings had not paid the variable outgoings then the plaintiff's loss would have been increased by that amount and the damages payable by the first defendant to the plaintiff would have increased by that amount.

Quantum of Damages payable by First Defendant

78 For the reasons stated the plaintiff is entitled to recover the damages claimed by it in its particulars of loss and damage dated 13 March 2006, that is the sum of $706,557.88.

79 The plaintiff claims against the second defendant under the guarantee in the Lease the amount it characterises as a debt, that is the rent and other amounts owing at the termination of the Lease, and damages for the repudiation of the Lease.

80 In addition to the defences pleaded by the first defendant which I have already considered the second defendant submits that it is not liable to the plaintiff for a number of further reasons. Before considering those defences I will set out the terms of the guarantee.

81 The guarantee is cl 6 of the lease and is in the following terms:

"In consideration of the Lessor having granted this Lease to the Lessee at the request of the Guarantor named and described in item 12 of the First Schedule (herein called 'the Guarantor') the Guarantor HEREBY GUARANTEES to the Lessor the due and punctual payment by the Lessee of the rent reserved by and the performance and observance by the Lessee of the covenants, conditions and stipulations contained or implied in this Lease during the term hereby granted and any extension or renewal thereof upon the following terms and conditions:

(a) if and whenever any instalment of the rent or any part thereof is in arrears or unpaid for the space of one (1) month after it has become due and payable the Guarantor will upon demand pay the same to the Lessor;

(b) if and whenever there is a breach by the Lessee of any of the covenants, conditions or stipulations herein contained the Guarantor will upon the written request of the Lessor cause the breach to be remedied within a reasonable time and pay to the Lessor all losses, damages, expenses and costs which the Lessor is entitled to recover by reason of the breach;

..."

82 The second defendant submits that on the proper construction of the guarantee set out at cl 6 of the Lease he has no liability to pay to the plaintiff any loss or damage suffered by the plaintiff as a result of the plaintiff losing the entitlement to rental for the full term of the Lease following the plaintiff's termination of the Lease.

83 The structure of the guarantee clause is as follows. The scope of the guarantee is set out by the words:

"The Guarantor hereby guarantees to the Lessor the due and punctual payment by the Lessee of the rent reserved by and the performance and observance by the Lessee of the covenants, conditions and stipulations contained or implied in this Lease during the term hereby granted and any extension or renewal thereof."

84 Paragraphs (a) to (e) then set out the terms and conditions upon which the guarantee is given. The relevant paragraphs are par (a) and par (b). Paragraph (a) sets out a precondition for the guarantor being liable to pay to the lessor any unpaid rent. Paragraph (b) sets out a precondition for the guarantor being obliged to remedy the breach by the lessee of any of the covenants, conditions or stipulations contained in the Lease and to pay to the lessor all losses, damages, expenses and costs which the lessor is entitled to recover by reason of the breach.

85 The first part of the guarantee clause provides that the guarantor guarantees to the lessor the due and punctual payment by the lessee of rent reserved by the Lease. The second part provides that the guarantor guarantees to the lessee the performance and observance by the lessee of the covenants, conditions and stipulations contained or implied in the Lease during the term of the Lease and any extension or renewal thereof.

86 In Moschi v Lep Air Services Ltd (1973) AC 331, Lord Reid considered a guarantee clause in these terms:

"... [the appellant] has personally guaranteed the performance by [the company] of its obligation to make the payments at the rate of ₤6,000 per week together with the final payment of ₤4,000 as hereinbefore set out ..."

87 The company failed to carry out its obligations to make the payments. The respondents treated the company's breaches as a repudiation entitling them to terminate the contract and did so. The House of Lords held that they were entitled to do so. The respondents sued the appellant in respect of his guarantee. The appellant argued that the guarantee clause merely guaranteed that each instalment of ₤6,000 shall be duly paid but by reason of the accepted repudiation the contract was brought to an end before the later instalments became payable. So they never did become payable. All that remained after the contract was terminated was a claim for damages. But, the appellant argued, he never guaranteed to pay damages. At 344 - 345 Lord Reid rejected the appellant's argument in these terms:

"With regard to making good to the creditor payments of instalments by the principal debtor there are at least two possible forms of agreement. A person might undertake no more than that if the principal debtor fails to pay any instalment he will pay it. That would be a conditional agreement. There would be no prestable obligation unless and until the debtor failed to pay. There would then on the debtor's failure arise an obligation to pay. If for any reason the debtor ceased to have any obligation to pay the instalment on the due date then he could not fail to pay it on that date. The condition attached to the undertaking would never be purified and the subsidiary obligation would never arise.

On the other hand, the guarantor's obligation might be of a different kind. He might undertake that the principal debtor will carry out his contract. Then if at any time and for any reason the principal debtor acts or fails to act as required by his contract, he not only breaks his own contract but he also puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor, not for the unpaid instalment but for damages. His contract being that the principal debtor would carry out the principal contract, the damages payable by the guarantor must then be the loss suffered by the creditor due to the principal debtor having failed to do what the guarantor undertook that he would do.

In my view, the appellant's contract is of the latter type. He 'personally guaranteed the performance' by the company 'of its obligation to make the payments of ₤6,000 per week'. The rest of the clause does not alter that obligation. So he was in breach of his contract as soon as the company fell into arrears with its payment of the instalments. The guarantor, the appellant, then became liable to the creditor, the respondents, in damages. Those damages were the loss suffered by the creditor by reason of the company's breach. It is not and could not be suggested that by accepting the company's repudiation the creditor in any way increased his loss."

88 In my view, the guarantee in cl 6 of the Lease is of the type described by Lord Reid as an undertaking that the principal debtor will carry out his contract. The second defendant guaranteed the payment by the first defendant of the rent due under the Lease and the performance and observance by the first defendant of the covenants, conditions and stipulations contained or implied in the Lease. The second defendant was in breach of his contract as soon as the first defendant fell into arrears with its payment of the rent. The second defendant, as guarantor, then became liable to the plaintiff, the lessor, in damages. Those damages were the loss suffered by the plaintiff by reason of the first defendant's breach. The damages claimed by the plaintiff are damages caused by the first defendant's breaches of the lease not damages caused by the plaintiff's acceptance of the first defendant's repudiation of the lease.

89 The words "during the term hereby granted and any extension or renewal thereof" in the guarantee clause do not preclude the plaintiff, as lessor, recovering damages from the second defendant, as lessee. The guarantor guarantees payment and performance during the term of the Lease and any extension or renewal. It was the failure of the first defendant as lessee to pay the rent during the term of the Lease that gives rise to the obligation to pay damages. The purpose of the words "during the term hereby granted and any extension or renewal thereof" in the guarantee clause is not to limit the guarantor's obligation but rather to extend it to any extension or renewal of the Lease in addition to the term of the Lease.

90 The plaintiff accepts that it is not entitled to recover the debt or damages claimed unless it complied with the relevant conditions of the guarantee clause.

91 Clause 6(a) of the Lease provides that whenever any instalment of rent is unpaid for one month the guarantor will upon demand pay it to the lessor. By letter of demand from its solicitors to the second defendant dated 1 July 1996 the plaintiff demanded payment from the second defendant of the arrears of rent and variable outgoings due and owing under the Lease. The plaintiff made a further demand for payment by letter of 10 September 1997 from its solicitors to the second defendant. Those demands are sufficient compliance with the condition prescribed in cl 6(a) of the Lease.

92 The plaintiff says that compliance with cl 6(b) of the Lease is a pre-condition for the plaintiff to be entitled to recover damages from the second defendant as guarantor. The clause provides that whenever there is a breach by the lessee of any of the covenants, conditions or stipulations of the Lease the guarantor will upon the written request of the lessor cause the breach to be remedied within a reasonable time and pay to the lessor all losses, damages, expenses and costs which the lessor is entitled to recover by reason of the breach.

93 The second defendant submits that the plaintiff did not issue a written request to the second defendant calling on him to remedy any alleged breach of covenant, condition or stipulation by the first defendant. Alternatively, the second defendant submits that any entitlement the plaintiff has to claim damages from the second defendant following termination for any breach by the first defendant is conditioned on the plaintiff having an obligation to request the second defendant in writing to remedy such a breach during the currency of the Lease so as to give the second defendant an opportunity to avoid the consequence of termination so that he can limit any consequential liability he may have for the damages sustained by the plaintiff for the loss of the bargain for the remainder of the term of the lease.

94 I do not accept the second defendant's submissions. The second defendant submits, in effect, that failure to pay rent on a particular date is not a default which is capable of rectification because the date has passed and nothing can be done to re-establish what should have been done. However, in my opinion, the default in failing to pay rent was capable of rectification by paying the money due, together with additional interest as provided by the Lease and damages, at a future date. I adopt the reasoning of Sugerman J in Batson v De Carvelho (1948) 48 SR (NSW) 417 at 427 in relation to whether a default under a lease can be remedied and of Waddell AJA in Tri Continental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 at 722 - 723 in relation to whether default in failing to pay bills on a particular date was capable of rectification.

95 The plaintiff requested the second defendant to remedy the first defendant's breaches of the Lease by the plaintiff's solicitor's letters to the second defendant of 1 July 1996 and 10 September 1997. The latter letter also requested that the second defendant pay to the plaintiff damages which the plaintiff was entitled to recover by reason of the first defendant's breaches.

96 In my opinion the letter of 7 October 1998 from the plaintiff's solicitors to the second defendant is not a written request that complies with the terms of cl 6(b) of the Lease. It is not a request for payment but rather foreshadowing that such a request would be made. I consider that the letter of the plaintiff's solicitors dated 31 January 2001 to the second defendant is a written request that complies with the terms of cl 6(b) of the lease insofar as it requested payment of damages.

97 The conditions set out in subclauses 6(a) and 6(b) of the Lease, which specify provisions as to the making of demand for the payment of unpaid rent and a request to remedy any breach, are pre-conditions to the plaintiff recovering unpaid rent and damages from the second defendant. However, those conditions were complied with and the plaintiff is entitled to recover arrears of rent and damages from the second defendant.

98 The second defendant says that the guarantee contained an implied term that any demand for rent would not be accompanied by demands for additional moneys which were not due under the Lease or due from the guarantor under the guarantee.

99 For a term to be implied into a written contract the following conditions must be satisfied:

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that "it goes without saying";

(5) it must not contradict any express term of the contract: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283; Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 347 and 404; Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410 at 447.

100 The plaintiff submits that the pleaded implied term is not required to give the guarantee business efficacy. The guarantee is just as efficacious if a demand is made for more than is due. The very reason why a notice of demand is required upon a lessee or a guarantor is to enable the lessee or guarantor an opportunity to identify those parts of the claim which are well made and those parts which are not. If every demand that can validly be issued under a lease must be free of error, the efficacy of the lease would be undermined because it is a commercial reality that mistakes can be made in demands, and estimates of potentially disputed items are often made before judgment after a trial in a claim for damages.

101 I accept the plaintiff's submission. The alleged implied term is neither necessary to give business efficacy to the contract nor so obvious that "it goes without saying".

102 The second defendant says it was an implied term of par 6(b) of the guarantee contained in the Lease that the plaintiff would make any written request of the sort referred to in par 6(b) of the guarantee while the Lease remained on foot. Paragraph 6(b) of the Lease is set out earlier in these reasons. It sets out a precondition for the guarantor being obliged to remedy the breach by the lessee of any of the covenants, conditions or stipulations contained in the Lease and to pay to the lessor all losses, damages, expense and costs which the lessor is entitled to recover by reason of the breach. The condition is that the lessor must make written request of the guarantor to cause the breach to be remedied and pay to the lessor all losses, damages, expense and costs which the lessor is entitled to recover by reason of the breach.

103 The second defendant also says that it was to be implied in the guarantee cl 6(1)(a) and cl 6(1)(b) of the Lease relating to rent and breaches of other covenants, stipulations or conditions of the Lease that any demand for rent payable by the guarantor was required to be made of the guarantor prior to the re-entry of the premises by the lessor so as to afford the guarantor the opportunity to pay any rent so demanded exclusive of any other claims that the lessor claimed to have against the lessee or the guarantor at the date of re-entry, thereby enabling the preservation by the guarantor of the security of the lease.

104 In my opinion, neither of those terms are necessary to give business efficacy to the Lease and neither are so obvious that "it goes without saying".

105 The creditor is under no obligation to notify the guarantor of the principal's default, unless such notification is required by the terms of the guarantee: Moschi (supra) per Lord Simon at 356 - 357; O'Donovan & Phillips "The Modern Contract of Guarantee" 3rd ed at [10,1550]. Where the guarantor undertakes that the principal debtor will carry out his contract, then if at any time the principal debtor fails to act as required by his contract, he puts the guarantor in breach of his contract of guarantee. Then the creditor can sue the guarantor, not for the unpaid instalment but for damages: Moschi per Lord Reid at 345. The obligation upon the guarantor to pay damages arises upon breach by the principal debtor unless the guarantee prescribes preconditions to liability such as the giving of notice.

106 In this case, the guarantee clause requires the plaintiff to make written request of the second defendant that the breach be remedied within a reasonable time and pay to the plaintiff all losses, damages, expense and costs which the plaintiff is entitled to recover by reason of the first defendant's breach. The condition prescribes what notice is to be given. There is no requirement that the notice, or written request, should be given before the lessor accepts the lessee's repudiation of the lease and terminates the Lease.

107 The guarantee clause is effective without implying a term that the written request must be given before the lessor terminates the Lease. The implied term that the notice, or written request, must be given before the Lease is terminated is not so obvious that it goes without saying. The general principle is that the creditor is under no obligation to notify the guarantor of the principal's default unless such notification is required by the terms of the guarantee. All the guarantee requires is that the creditor make a written request to the guarantor that the guarantor remedy the breach before the creditor can enforce the guarantee. It would be contrary to the general principle to which I have referred to imply a further term that the written notice or request must be given before the Lease has expired or has been terminated.

108 The same reasoning applies to the alleged implied term that any demand for rent payable by the guarantor was required to be made prior to the re-entry of the premises by the plaintiff.

109 Furthermore, the alleged implied terms are inconsistent with the express terms of the Lease. Clause 5.3 of the Lease provides that if the rent or any other moneys payable by the lessee remain unpaid for 14 days then the lessor may re-enter the premises and following such forfeiture the lessor is entitled to recover from the lessee damages for loss of the benefits which performance of the covenants of the Lease by the lessee would have conferred on the lessor between the date of forfeiture and the expiry of the Lease by the effluxion of time. Clause 6.3(a) has the effect that the guarantor is not liable to pay outstanding rent until it has been in arrears for one month and the lessor has given notice of demand. The parties to the Lease could not sensibly have intended that the lessor may re-enter the premises and terminate the Lease when rent has been in arrears for 14 days but must wait until rent is one month in arrears before making demand upon the guarantor for payment and by that time the Lease is no longer on foot and the guarantor is not under any liability to pay.

110 None of the implied terms pleaded by the second defendant are established.

111 The plaintiff's claim against the second defendant for damages is made out.

112 The first defendant pleads that it is and at all material times was the owner of a large granite board table left by the defendants in the board room at the premises on the 15th floor on 4 April 1996. The defendants say that the second defendant was entitled to the immediate possession of the board table by virtue of his arrangement with the first defendant. The defendants say that the plaintiff is in wrongful possession of the board table. By their counterclaim, the defendants counterclaim for an order for delivery up of the board table or its value as assessed, damages for detention, damages for conversion and costs. At trial the defendants claimed only delivery up of the board table.

113 This issue received little attention at trial and there is little evidence concerning the board table.

114 Ms Tindale gave evidence by way of witness statement that at no time to her knowledge did the plaintiff ever sell the boardroom table to the first or second defendant. She said that as far as she was aware the boardroom table was installed as part of a fit out for Griffin Coal who occupied level 15 prior to the first defendant. She said that at no stage prior to these proceedings did she recall any claim being made by the defendants that they owned the boardroom table nor did they ask if they could remove it.

115 The defendants have not made out their claim in respect of the boardroom table.

116 The plaintiff is entitled to judgment against the first defendant for the amount the first defendant was indebted to the plaintiff under the Lease and Licence in the sum of $82,737.38 less the amount of the summary judgment. In addition, the plaintiff is entitled to recover damages from the first defendant in the sum of $706,557.88.

117 In respect of its debt claim, the plaintiff is entitled to judgment against the second defendant in the sum of $75,037.38 less the amount of the summary judgment. The plaintiff is entitled to recover damages from the second defendant in the sum of $706,557.88.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : GLENTHAM PTY LTD -v- LUXER HOLDINGS PTY LTD & ANOR [2006] WASC 132 (S)

BETWEEN : LUXER HOLDINGS PTY LTD (ACN 009 454 077)

Interest on damages award - Operation of s 34 of the Limitation Act 1935 (WA) - Whether amount is "arrears of interest"

Limitation Legislation Amendment and Repeal Act 2005 (WA), s 4

Mellersh v Brown (1890) 45 Ch 225

Queen Anne's Bounty v Tithe Redemption Commission [1938] Ch 229

Thomson v Eastwood (1877) 2 AC 215

Dillon v Cruise (1840) 3 I Eq R 70

Henry Roberts (1880) 14 Ch 49

1 LE MIERE J: This is an action arising from the repudiation of a commercial lease agreement. The plaintiff sued the lessee and the guarantor both to recover amounts due under the lease and for damages in the order of over $700,000. I delivered judgment against the defendants on 30 June 2006, however, the motion for judgment was adjourned to a later hearing in order for parties to make submissions as to the quantum of interest that had accrued on the debts and damages payable.

2 At the resumed hearing, counsel for the defendants submitted, essentially, that s 34 of the Limitation Act 1935 (WA) (the "Act") operated to cap the total amount of interest that could be recovered by the plaintiff. It was accepted by counsel for the plaintiff that the Act applied to this case, in spite of the recent repeal of that legislation by the Limitation Legislation Amendment and Repeal Act 2005 (WA). The application of the earlier legislation to the present case is preserved by virtue of s 4(2) of the amending Act; I need not consider the new legislation further.

Section 34 of the Limitation Act 1934

"34. No arrears of rent or interest to be recovered for more than 6 years

No arrears of rent or of interest in respect of any sum of money charged upon or payable out of any land or rent, or in respect of any legacy, or any damages in respect of such arrears of rent or interest, shall be recovered by any distress, action or suit, but within 6 years next after the same respectively have become due, or next after an acknowledgment of the same in writing has been given to the person entitled thereto, or his agent, signed by the person by whom the same was payable, or his agent:

...

Provided also, that this section is subject to section 38(1)(d) and (e)."

4 The initial question is whether the present case falls within the scope of s 34; that is, in the first instance, whether this case relates to arrears of rent or of interest. The defendants' submissions refer briefly to the words in the heading of s 34, which conflict with those in the section proper and arguably suggest a different scope for the clause. However, while the heading stipulates that the section refers to "arrears of rent or interest", the section itself refers to "arrears of rent or of interest". Subsection 32(2) of the Interpretation Act 1984 (WA) states that "a heading to a section ... of a written law, or to a portion of a section ... shall be taken not to be part of the written law" and in my opinion, the words of the section itself are plainly the correct source of the law.

5 Whether this case falls within the scope of s 34 therefore depends upon whether it:

2. relates to arrears of interest in respect of:

a. any sum of money charged upon or payable out of any land or rent, or

3. relates to damages in respect of such arrears of rent or interest.

6 The defendants argue that the damages claimed, which are loss of bargain damages, are damages in respect of arrears of rent. On that basis, the defendants submit that "interest on those damages under s 34 is capped at 6 years".

7 In my opinion, this interpretation of s 34 is not correct. Under s 34, whether or not interest is capped (or at any rate, whether the right to begin an action to recover interest is limited) depends upon whether the arrears of interest are in respect of any sum of money charged upon or payable out of any land or rent or any legacy. These are the only circumstances in which s 34 constrains arrears of interest. The arrears of interest covered by s 34 do not include interest flowing from a damages award, irrespective of whether the damages are in respect of arrears of rent.

8 Counsel for the defendant relied upon several authorities from the United Kingdom, which dealt with virtually the same legislation as it appeared in Britain prior to being received into Western Australian law (See The Law Reform Commission of Western Australia, "Report on Limitation and Notice of Actions", January 1997 at p 43 for discussion of the history of the Limitation Act 1935 (WA)). These cases were provided in support of the argument that arrears of interest were to be capped at six years from their due date. Importantly, these cases all relate to interest as a debt in arrears itself, rather than interest as it arises from damages. (See, for example, Thomson v Eastwood (1877) 2 AC 215, in which interest from an estate was bequeathed under a Will; Byrne v Robinson (1839) 1 I Eq R 333; (1839) 1 Dr & Wal 688, in which interest upon a fixed sum was to be paid to a person until one year after the death of her father, at which time the principal sum was to be paid; or Mellersh v Brown (1890) 45 Ch 225, in which interest pursuant to a mortgage was in a state of arrears.) In all of those cases, interest formed a component of the claim against the defending party.

9 "Arrears" has been described as a "well known word commonly used to describe sums overdue and payable in respect of periods of time": Queen Anne's Bounty v Tithe Redemption Commission [1938] Ch 229. It is clear that the interest in dispute in this case is not an amount that became overdue as a result of any arrangement between the parties; rather the interest has been calculated after judgment, on the basis of the award made to the plaintiff. The interest claimed against both defendants includes components of interest on debt and interest on damages. The interest was not itself an unpaid sum due to the plaintiff in respect of a period of time and therefore cannot properly be characterised as arrears of interest.

10 Counsel for the defendants conceded that if it could not be said that s 34 limits interest related to damages in respect of arrears of rent, then s 34 did not apply at all to this case. In my opinion, the amount in dispute is not an amount of arrears of rent or an amount of arrears of interest. For the reasons stated I do not accept that interest relating to loss of bargain damages in respect of arrears of rent is in any way affected by the provisions of s 34 of the Act. It is therefore not necessary for me to consider whether the interest is in respect of a sum of money charged or payable upon any land or rent or any legacy; nor is it necessary for me to consider whether the interest itself or simply the right to commence an action is limited by the scope of s 34.

11 I find the defendants liable to pay interest in respect of both the debt and damages awarded to the plaintiff in my judgment of 30 June 2006.

Legislation Amendment and Repeal Act 2005

Glentham Pty Ltd v Luxer Holdings Pty Ltd & Anor [2006] WASC 132

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (198 paragraphs)

Glentham Pty Ltd v Luxer Holdings Pty Ltd & Anor [2006] WASC 132 (30 June 2006)

Parties

Legislation Cited (1)

Cases Cited (13)