INDIA PTY LTD v FLORLIM PTY LTD & ORS No. SCCIV-03-95 [2003] SASC 161 (19 June 2003)

[2003] SASC 161

1 DUGGAN J. This is an appeal from the decision of a magistrate in a matter which arose out of a tenancy dispute. The magistrate dismissed the appellant's claim against the respondents for damages for wrongful repudiation of a lease agreement entered into between the appellant and the first respondent.

2 At the time at which the dispute arose the appellant was the owner of a shopping arcade known as "The Rundle Arcade" (the arcade). The first respondent, Florlim Pty Ltd (Florlim) leased one of the shops in the arcade. The appellant acquired rights as lessor following a transfer of lease at the time the appellant purchased the property.

3 Florlim set up a newsagency at the shop which it leased. The lease was for a period of five years commencing on 1 October 1999 and ending on 30 September 2005. The newsagency was run by Mr and Mrs Agalianos, the shareholders and directors of Florlim who are also respondents to the appeal. At the time the dispute arose Florlim had been a tenant in the arcade for approximately 14 years. There were several landlords during that period of time.

4 The arcade is situated behind a car park which was operated by David Jones. It would appear that, when David Jones ceased trading at its old building, business in the arcade declined and some tenants left. As a consequence of this decline Florlim sought a reduction in rent in the first half of 2001. Rental relief of 25 per cent was granted at the end of May 2001. On 26 September 2001 Florlim requested a 50 per cent rental reduction, but this was refused. Then on 10 December 2001 the appellant's agent wrote to Florlim advising that the decision to allow rent relief was to be reversed as from January 2002.

5 There was also a dispute in relation to outgoings. The arcade has a basement. When it was a busy shopping centre, the basement was occupied by a tenant and the basement area was included as part of the lettable area of the centre for the purpose of calculating each tenant's share of the outgoings. When the tenant in the basement vacated this area and no tenant could be found as a replacement, each tenant's share of the outgoings was increased as a result of the appellant's decision not to treat the basement as part of the lettable area for the purpose of the outgoings calculation. This questionable reassessment added to Florlim's financial difficulties.

6 At about this time, a developer was preparing the former David Jones building for conversion to a shopping mall (the new development). The building is situated a short distance away from the arcade. In due course, Mr and Mrs Agalianos entered into discussions with the developer of the building with a view to establishing a newsagency in the new development. The discussions took place in February 2002.

7 At the same time, Ms Travers, a principal of the appellant company, was having discussions with another newsagent about the possibility of him conducting a newsagency in the arcade. It was the appellant's case that it was doing no more than assisting Florlim in leaving the shop which it occupied because it was not viable.

8 Things reached a head in March 2002. Mr and Mrs Agalianos are the directors and shareholders of another company, O66 741 544 Pty Ltd. This company entered into an agreement to lease shop premises in the new development. The commencement date for the lease was 1 March 2002. It expired on 28 February 2007 and there was a right of renewal for a further five years. On 15 February 2002 Mr and Mrs Agalianos took out a debenture which operated as a charge over Florlim's assets to secure monies owed to them by the company which then totalled approximately $160,000.

9 According to the findings of the magistrate, Mr and Mrs Agalianos commenced to fit out the newsagency in the new development. Ms Travis heard of this and asked Mr and Mrs Agalianos if it were true. Mr Agalianos denied it.

10 On 27 March 2002, the appellant's solicitors wrote to Florlim's directors in the following terms:

"Our client understands that you may be intending to vacate the premises this week.

If you fail to comply with any of your obligations pursuant to the Memorandum of Underlease dated 22 February 2000 and in particular those obligations outlined in clause 2.8, then proceedings will be issued against you.

If there is any inappropriate disposal of assets of Florlim Pty Ltd then proceedings will be issued not only against Florlim Pty Ltd but also against the directors of that company to recover any losses suffered by our client.

The costs of those proceedings will also be sought from Florlim Pty Ltd and its directors.

Our client reserves all its rights."

11 On Thursday 28 March 2002 Mr and Mrs Agalianos moved the entire stock and the shop fittings from the appellant's shop in the arcade to the new development. The learned magistrate made the following findings concerning these events:

"In the week before Easter on the Wednesday 27 March 2002, the landlord's caretaker, Graham Lord asked permission to take photos of the stock in the premises. The tenant refused and the photos were taken from outside. This made the tenant deeply suspicious. The landlord's letting agent Adrian Raison later that day, explained the photos had been taken because the landlord believed that the tenant was going to leave and take its stock. Mr Agalianos denied that intention. On Thursday 28th the landlord changed the locks on the roller doors at the outside of the premises. This was the day it sent the fax demanding additional outgoings. I have found this claim for additional outgoings was without merit. There are different versions for the reason for changing the locks. Mr Raison the landlord's agent said the reason for changing the locks was because of a concern that if the tenant left the roller doors open there would be a breach of security. Ms Travers said the locks had been tampered with and Mr Graham Lord the caretaker said that some keys had been lost. It is clear that no key was given to the tenants and they did ask for one. This was explained because the landlord did not have enough keys. In fact the evidence from Mr Bateman from Knight Locksmiths, and I accept his evidence, is that 12 keys were issued on 28 March. Clearly the locks on the outer doors were changed to deny the tenant access after hours. The landlord has not given that as the reason but I draw my conclusions as to why the landlord took this step from the surrounding circumstances. The tenant formed the view that the landlord changed the locks preparatory to levying distress for non-payment of the outgoings, which were demanded on the same day. It cites those surrounding circumstances and the prior knowledge that the landlord had levied distress against another tenant, Singer Sewing Machines. There may not be a legal entitlement to levy distress for outgoings and so any attempt to do so based on these alleged arrears may have been invalid. Be that as it may, it is the tenant's evidence that it fled the premises with its stock on that same day, the Thursday before Easter, 28 March 2002, to avoid the risk of having it's stock seized by the landlord. On that day it sent to Mr Raison a facsimile (exhibit P19) in these terms:

'We believe that Naomi Travers is going to lock us out of our tenancy tonight. Because of this, our lawyer has suggested that we move our stock out to preserve it. We will be vacated [sic] our premises immediately.'

12 The premises were left bare after the stock and fittings had been removed. Mr and Mrs Agalianos left some signs in the windows. One read:

"This store is now closed.

All standing newspapers + magazines will be held at just around the corner.

30 M TURN LEFT."

"This store is now closed - but - a brand new store is just around the corner - 30 m turn left in Stephens Place.

Rundle Mall Plaza Newsagency - Ground Floor (old David Jones store).

All magazine [sic] and newspapers will be held at the new store - phone 08 82125121.

Same great staff - same great service - hope to see you there - thanks."

14 The magistrate found that the appellant recalled the locksmith and, on the morning of Saturday 30 March, a new padlock was placed on the doors of the premises. Mr and Mrs Agalianos were no longer able to gain entry to the premises.

15 The appellant's solicitors wrote to the respondents' solicitors on 5 April 2002. The letter read in part:

"We enclose a copy of our client's Statutory Demand served on your client dated 4 April 2002.

It is clear that in breach of our client's lease your client has vacated and abandoned the premises it leased from our client and has outstanding moneys due. Your client is indebted to IPL for:

1 April's rental in the sum of $6,759.64.

2 Outgoings in the sum of $13,632.93.

3 The cost of reinstating the premises.

4 The balance of the rental and outgoings under the lease for the remainder of its term should our client be minded to accept your client's breaches and terminate the lease."

16 The amended claim filed by the appellant in the Magistrates Court asserted that Florlim had wrongfully repudiated the lease. The appellant claimed damages for loss of rental income, costs for reinstatement of the premises and interest. It would appear that, by this stage, the appellant had decided to accept what it claimed was repudiation by Florlim.

17 The principal complaint made by the appellant on the hearing of the appeal concerns the magistrate's approach to the contention that Florlim had breached an essential term of the lease and that this entitled the appellant to treat the breach as a repudiation of the lease.

"To keep the Premises open for business during normal business hours for trading from the Premises and during the days and hours from time to time notified by the Lessor to the Lessee as the designated operating hours for the Centre subject to compliance with Section 61 of the Retail and Commercial Leases Act 1995 provided that the Lessee shall not be required to keep the Premises open for business during any days and hours during which the conduct of the Lessee's business from the Premises is prohibited by law."

19 Clause 4.1.1 provides that various clauses, including Clause 2.8, are:

"Essential terms of this Lease and that the Lessor may at its option treat any breach or default by the Lessee in the observance or performance by the Lessee of its duties and obligations under such clauses as a repudiation by the Lessee of this Lease."

20 After referring to these clauses in his reasons for decision, the learned magistrate said:

"On the night of Thursday 28 March the tenant had cleared all its stock from the premises. The rent was paid and there was no other breach of the lease. It had not failed to trade although it was obvious that it would not trade on the next business day. Before the tenant in fact failed to trade the landlord locked the premises so that the tenant could not gain access. At that point there was no breach that the landlord could rely upon to constitute a basis to re-enter and terminate. Further the removal was explained as a preventative measure to avoid the risk of an unlawful levy of distress. For the reasons I have set out this was a realistic fear. The fact that was realistic is borne out by Ms Travers' angry evidence when she described the stock in the newsagency as 'my stock'. In those circumstances the removal of stock was not a breach at all but a sensible precaution. Regardless of whether in fact the landlord intended to levy distress the appropriate course for the landlord was to give notice requiring the tenant to continue to trade. Locking the premises to prevent the tenant to enter the shop was a repudiation of the lease by the landlord and had the effect of a re-entry. The tenant passively accepted the landlord's repudiation and the lease terminated without further liability by the tenant to the landlord. Clause 4 cannot avail the landlord because the termination occurred outside its terms."

21 Particular criticism is made of the magistrate's finding that, at a time before Florlim failed to trade, the appellant locked the premises so that the tenant could not gain access. In my view, the criticism is justified. The exterior doors to the arcade were locked on the evening of Thursday 28 March, but this did not prevent Mr and Mrs Agalianos from gaining access to the arcade during business hours. The locks on the shop were not changed until 9.00 am on Saturday 29 March. This task took approximately 10 minutes.

22 It is obvious that Florlim was not going to trade at the shop on the Saturday morning or for some time into the future. All stock and the fittings had been removed from the shop. Signs directed customers to the other shop. Although Mr and Mrs Agalianos said they intended to return at some stage to begin trading again and that they would then operate the two shops, Mrs Agalianos said that this was not going to take place until the beginning of May. Florlim did not inform the appellant of any of these plans.

23 Both Mr and Mrs Agalianos said that they could not have traded on the Saturday as all the stock and fittings had been removed. Mr Agalianos said that he went around to the arcade shop on the Saturday morning at about 9.30 or 10.00 am, but only to see whether any stock had been delivered there by mistake.

24 Mr and Mrs Agalianos said that they moved the stock on the Thursday evening because they were concerned that the appellant might seize their stock by way of distress. They said they had heard that this had happened to another tenant. They also said they were influenced by the statement in the letter from the appellant's solicitor dated 27 March 2002:

"If there is any inappropriate disposal of assets of Florlim Pty Ltd then proceedings will be issued not only against Florlim Pty Ltd but also against the directors of that company to recover any losses suffered by our client."

25 Whatever was meant by this comment in the letter, there was no suggestion that the respondent's stock was in jeopardy if they continued to trade in the normal fashion. Their views about the possibility of distress being levied on their stock could not justify action which would prevent them from carrying out their obligations under the lease.

26 In my view there was a clear breach of clause 2.8.4 which required the tenant to keep the premises open for business during normal business hours. In addition, there were breaches of other provisions of clause 2.8 which required the tenant to carry a full and complete stock of seasonal merchandise for sale and to use all space available in the premises to display and properly merchandise the tenant's goods.

27 Failure to keep the premises open for business was clearly the most important of these obligations. It is not as though this was an inadvertent or fleeting breach of Florlim's obligations under the lease. I have pointed out that on 27 March 2002 the appellant's solicitors wrote to Florlim and, after referring to the information that the company might be vacating the premises that week, warned it of the consequences of failure to comply with the obligations under clause 2.8.

28 The magistrate appears to have erred in finding that the appellant locked the premises before Florlim failed to trade. In fact, the locks were changed on the shop only after it was obvious that the tenant did not intend to trade for some time and had not commenced to trade at the normal time on the Saturday morning. There was evidence that the normal commencement time for the newsagency in the arcade to trade on Saturday mornings was 7.30 am.

29 It is appropriate at this stage to refer to the legal effect of the relevant clauses in the lease. Clause 4.1.1 states that a breach of any of the clauses referred to therein enables the lessor to treat such breach as a repudiation by the lessee of the lease. Gibbs CJ commented on a provision to this effect in Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 627:

"However, the parties to a contract may stipulate that a term will be treated as having a fundamental character although in itself it may seem of little importance, and effect must be given to any such agreement: see Wickman Tools v Schuler A.G. [1973] UKHL 2; [1974] AC 235 at p 251. In other words, a right to forfeit a lease might arise 'in the case of any breach of covenant however trifling, if the parties had agreed that a breach of that covenant should create a forfeiture': Campbell v Payne and Fitzgerald (1953) 53 SR (NSW) 537 at p 539."

30 It is also important to have regard to the courses of action open to a landlord in the event that a breach of a covenant of this nature is treated by the landlord as a repudiation.

31 In The Progressive Mailing House Pty Ltd v Tibali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17 at 29 Mason J held that "the ordinary principles of contract law, including that of termination for repudiation or fundamental breach, apply to leases". In the same case Deane J (at 55) pointed out that there may be both a contractual right to terminate a lease for breach of covenant and a common law right to terminate for fundamental breach. If that were the case, the landlord will not be obliged to elect between the two grounds for terminating the lease but would be entitled to rely upon both.

32 In my view, it follows that in the present case the appellant was entitled to treat the breach of clause 2.8.4 as a repudiation of the lease by the respondents and to exercise the common law remedy of accepting the repudiation and pursuing a claim for damages.

33 The magistrate referred to section 10 of the Landlord and Tenant Act 1936 which requires a statutory notice to be served on the lessee in cases in which the lessor wishes to enforce a right of re-entry or forfeiture which is provided for in the lease. However, I am of the opinion that this is not a necessary requirement when the common law remedy to which I have referred is pursued. I respectfully adopt the analysis of Meagher JA in Marshall v Council of the Shire of Snowy River (1994) 7 BPR 14,447 at 14,457 when dealing with s 129 of the Conveyancing Act 1919 (NSW) which is to the same effect as s 10 of the Landlord and Tenant Act. Meagher JA said:

"An examination of the decision of the High Court of Australia in The Progressive Mailing House Pty Ltd v Tabali [1985] HCA 14; (1985) 157 CLR 17, particularly per Deane J at 55, demonstrates that, a lease being a contract, when one party to it repudiates it or commits a fundamental breach or a breach of one of its essential terms, the other party may 'accept' the repudiation or breach and terminate the lease. In such a case the lessor, presuming him (as in the present case) to be the innocent party, will have two rights: first, a contractual right to terminate the lease by re-entry for breach of covenant (in this case contained in cl 4 of the lease), and secondly on the application of the ordinary principles of contract law to terminate for breach. If he relies on the former right, he must comply with s 129 of the Conveyancing Act before re-entering; if, as here, he relies on the latter right, s 129 becomes an irrelevance."

34 It would follow in the present case that pursuit of the common law remedy rendered it unnecessary to follow the procedure for termination and re-entry set out in clause 4.1.2 of the lease.

35 The appeal will be allowed and the orders of the learned magistrate set aside.

36 I will hear the parties as to what other orders should be made.