LEWY v MOSS NOMINEES PTY LTD

ON APPEAL - question of construction of lease and guarantee - whether lessor entitled to recover damages for loss of bargain under particular clauses of the lease and guarantee contained in the lease - whether repudiation in damages clause meant accepted repudiation or simply repudiatory conduct.

Appeal from O'Keefe CJ in Comm D on question of the construction of a lease of commercial premises and of guarantee contained within the lease. Held: dismissing the appeal, 1. on the question of the guarantee and the liability of the guarantors, the relevant clauses of the lease supported the trial judge's findings. The lessee covenanted to compensate the lessor for damages suffered during the terms of the lease in respect of breaches of essential terms of the lease and the obligation remained unaffected by the way the lessor treated the lessee's repudiatory conduct (ie by termination of the lease). 2. The provisions of the particular clauses of the lease made the lessee liable for loss of bargain damages for breach of the covenants and conditions contained in the lease. Moschi v Lep Air Services Ltd (1973) AC 331 and Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; 2. "repudiation" in the relevant clause was used in the sense of accepted repudiation.

Priestley JA Moss Nominees Pty Ltd (Moss) leased commercial premises for a term of five years to Bojote Pty Ltd (Bojote). Messrs RG and D Lewy, Bojote's directors and shareholders, executed the lease as guarantors.

Bojote fell behind in its rental payments and was eventually ejected from the premises with a substantial part of the term of the lease yet to run. Moss took proceedings against the guarantors for unpaid rent, land tax, water rates and damages alleged to be due from Bojote to Moss under the lease.

The guarantors raised many defences to the proceedings. None was successful. The trial judge, O'Keefe CJ Comm D, entered judgment for Moss against the guarantors in the sum of $280,784.67 together with costs.

The guarantors then filed a notice of appeal containing many grounds.

Nearly all of these were abandoned when the appeal came on for hearing. Only grounds 7, 8 and 9 of the notice of appeal were relied on. These grounds raised a question of construction of the lease and the guarantee contained in the lease.

Because of the way the contest between the parties was narrowed in the appeal, only a few of the many matters decided by O'Keefe CJ Comm D need to be mentioned for purposes of the appeal.

Bojote's failure to pay rent and the general circumstances in which that failure continued over a considerable period were found by O'Keefe CJ Comm D to have been such as to convey to a reasonable person the repudiation or disavowal of the contract as a whole or a fundamental obligation under it. He further found that Moss had accepted the repudiation (or terminated the lease because of breach of a term of primary importance) and that Moss had therefore been entitled to recover loss of bargain damages from Bojote.

These findings were accepted by counsel for the guarantors in the appeal.

O'Keefe CJ Comm D further held that the guarantors were liable to Moss in an amount equal to the amount of damages for which Bojote was liable to Moss. This is the holding that was contested by the guarantors on the appeal.

The submission for the appellant guarantors depended entirely on the construction of provisions of the lease, the most relevant of which were as follows:

"41. (i) Each of the covenants which are specified in this paragraph are essential terms of this Lease; namely:

(a) The covenant to pay rent throughout the lease term on the date of commencement hereof and thereafter on the corresponding day of each and every month thence ensuing and in any event at a date not later than seven days after the due date for such monthly payments (cl3 and cl20 hereof)

(ii) In respect of the Lessee's obligation to pay rent, the acceptance by the Lessor of arrears or of any late payment of rent shall not constitute a waiver of the essentiality of the Lessee's obligations to pay rent in respect of those arrears or of the late payments or in respect of the Lessee's continuing obligation to pay rent during the lease Term.

(iii) The Lessee covenants to compensate the Lessor in respect of any breach of an essential term of this Lease and the Lessor is entitled to recover damages from the Lessee in respect of such breaches. The Lessor's entitlement under this clause is in addition to any other remedy or entitlement to which the Lessor is entitled (including to terminate this Lease).

42. (i)In the event that the Lessee's conduct (whether acts or omissions) constitutes a repudiation of the Lease (or of the Lessee's obligations under the Lease) or constitutes a breach of any lease covenants, the Lessee covenants to compensate the Lessor for the loss or damage suffered by reason of the repudiation or breach.

(ii) The Lessor shall be entitled to recover damages against the Lessee in respect of repudiation or breach of covenant for the damage suffered by the Lessor during the entire term of this Lease.

(iii) The Lessor's entitlement to recover damages shall not be affected or limited by any of the following:

(a) if the Lessee shall abandon or vacate the Premises;

(b) if the Lessor shall elect to re-enter or to terminate the lease;

(c) if the Lessor shall accept the Lessee's repudiation;

(d) if the parties' conduct shall constitute a surrender by operation of law.

(iv) The Lessor shall be entitled to institute legal proceedings claiming damages against the Lessee in respect of the entire /ease term, including the periods before and after the Lessee has vacated the Premises, and before and after the abandonment, termination, repudiation, acceptance of repudiation or surrender by operation of law referred to in para(iii) whether the proceedings are instituted either before or after such conduct.

44. In consideration of the grant of the lease by the Lessor to the Lessee at the request of the Guarantor (as evidenced by the execution hereof by the Guarantor)-

(a) The Guarantor hereby guarantees to the Lessor the due and punctual payment of all rent and other moneys and the due and punctual performance and observance by the Lessee of all other covenants and conditions on the part of the Lessee to be performed and observed under the lease and to the extent (if at all) that this guarantee may be void or unenforceable by reason of the fact that all or any obligations of the Lessee to the Lessor to pay rent or other moneys or perform or observe covenants and conditions as aforesaid may not be or may cease to be enforceable against the Lessee the Guarantor hereby unconditionally indemnifies the Lessor in respect of any failure of the Lessee to make any payment or perform or observe any covenant or condition as aforesaid AND the Guarantor hereby indemnifies the Lessor against all loss damage costs and expenses suffered or incurred by the Lessor as a result of any failure by the Lessee or any person to pay in a due an punctual manner on the due dates the rent or other monies payable by the Lessee or as a result of any breach or non-performance of any of the covenants and conditions on the part of the Lessee to be performed and observed under this lease AND the Guarantor hereby covenants with the Lessor that:

(i) this guarantee shall be a continuing guarantee (it being the intent of the Lessor and the Guarantor that this guarantee and the obligations of the Guarantor hereunder shall be absolute and unconditional in any and all circumstances) and shall be irrevocable and shall remain in full force and effect until the obligations of the Lessee under the lease shall have been fully satisfied;

(ii) this guarantee shall not be considered as wholly or partially discharged by the payment at any time of any moneys on account or by any time credit or any indulgence or concession extended by the Lessor to the Lessee or the Guarantor or any other person or by any compounding compromises release abandonment waiver variation relinquishment or renewal of any rights of the Lessor against the Lessee or the Guarantor or any other person or by the neglect or omission of the Lessor to enforce any such right or by the neglect or omission of the Lessor to enforce any such rights or by any other dealing matter or thing whatsoever which but for this paragraph could or might operate to abrogate prejudice or affect this guarantee or by any alteration modification variation or addition to the lease;

(iii) this guarantee is in addition to and not in substitution for any other rights which the Lessor may have under or by virtue of the lease and may be enforced against the Guarantor without first having recourse lo any such rights and without taking any steps or proceedings against the Lessee; (iv) this guarantee shall not prejudicially affect or be prejudicially affected by any security or guarantee now or hereafter held by the Lessor for any moneys for the lime being owing pursuant

to the lease but such security shall be deemed to be collateral and the Guarantor shall not as against the Lessor in any way claim the benefit or seek the transfer of any security or any part thereof;

(v) this Guarantor warrants that the Guarantor has full power and authority to enter into the guarantee and that the obligations of the Guarantor hereunder are in no way diminished fettered or controlled by the provisions of any deed or instrument including but in no way limiting the generality of the foregoing the provisions of any debenture trust deed relating to securities issued or given by the Guarantor;

(vi) this guarantee shall not be affected by any assessment transfer subletting or parting with possession by the Lessee (whether with or without the Lessor's consent) of the whole or any part of the demised premises but shall continue in full force and effect until the obligations of the Lessee under the lease shall have been fully satisfied.

(b) The Guarantor hereby covenants with the Lessor that in the event that at any time during the Term a liquidator of the Lessee who disclaims the lease or in the event of the Lessor becoming entitled to exercise any power or right of re-entry tinder the provisions of the lease and pursuant thereto determining the lease or procuring the surrender of same to the Lessor then the Lessor may require the Guarantor to accept as Lessee from the Lessor a registrable lease of the demised premises for a term equal in duration to the residue then remaining unexpired of the term of the lease such lease to contain the like reservation of rent (applying to the said residue) the like Lessee's and Lessor's covenants respectively and the like conditions and in all respects (including the proviso for re-entry) as are contained in the lease such new lease and the rights and liabilities thereunder to take effect as from the date of the said disclaimer or re-entry or surrender as the case may be PROVIDED THAT within the period of three (3) months after the date of the said disclaimer or re-entry or surrender as the case may be the Lessor shall have served on the Guarantor a notice in writing requiring the Guarantor to accept a registrable lease as aforesaid.

For the appellant guarantors it was submitted that their liability depended upon and was limited by the opening words of cl44(a), namely, that they guaranteed "to the Lessor the... payment of all rent and other monies and the... performance and observance by the Lessee of all other covenants and conditions on the part of the Lessee to be performed and observed under the lease... ". It was submitted that these words were not apt to embrace the Lessee's own liability for loss of bargain damages.

In support of this submission counsel for the appellants carefully analysed the terms of the clauses I have set out above. With due respect to his argument, it seems to me that the relevant clauses of the lease justify the contrary conclusion, as was held by O'Keefe CJ Comm D.

Cl41(iii) and cl42, read together, state in express terms the width of damages the Lessor may recover from the Lessee for breaches of the covenants and conditions with which the Lessee must comply under the lease.

One provision which contributes to the width of protection by way of damages conferred by the lease is cl42(ii). It refers to the recovery of damages for damage suffered by the Lessor during the "entire term" of the lease.

It was submitted for the appellant guarantors that the "entire term" of the lease could only refer to the whole of the period during which the lease subsisted. That is, in the circumstances of the present case, the entire term came to an end either

upon the termination by the Lessor of the lease, or the ejectment of the Lessee from the premises. (For present purposes it is not necessary to consider the precise time of the coming to the end of the term.)

I do not think the submission is correct. On the appellants' view of the meaning of the expression, the word "entire" is surplusage. More decisively, cl42(iv) uses the term "the entire lease term" in a way which seems to be a clear reference to the almost identical phrase in cl42(ii). In the context of cl42(iv) it seems to me that it is quite clear that "the entire lease term" is referring to the interval of time stated in the lease as being the length of the term of the lease. Put another way, "the entire lease term" is the term that was granted by the Lessor to the Lessee by the lease, not the foreshortened part of that term to which the "entire term" was reduced by the repudiatory conduct of the Lessee accepted by the Lessor, or the breach of an important term of the lease by reason of which the Lessor terminated the lease.

For the appellants it was sought to reduce the effect of cl42 by arguing that it was only subcl(i) which gave a contractual benefit to the Lessor; the succeeding sub-clauses, it was argued, did not enlarge the Lessor's rights against the Lessee but were simply declaratory of them.

I see no reason to read the sub-clauses in the way for which the appellant guarantors contend; even if there were anything in the submission, the meaning of subcl(i) would have to be understood in the light of the succeeding sub-clauses. Read in this way, cl42(i), in my opinion, has the effect that the Lessee covenants to compensate the Lessor for damages suffered during the five year period of the term of the lease, suffered in respect of breaches of an essential term of the lease unaffected by the Lessor's acceptance of the Lessee's repudiatory conduct.

On what I have said to this point, both on the general effect of the relevant clauses, and in dealing with certain specific arguments put for the appellants, it seems quite clear to me that the appeal should fail.

A further question argued was whether in cl42(i) the word "repudiation" where last appearing meant "accepted repudiation" or simply "repudiatory conduct". The word can have either meaning dependent on context. An unaccepted repudiation is not something for which, of itself, an innocent party can sue the repudiatory party for damages. Until "accepted" the "repudiatory conduct" has for all presently relevant purposes, no legal effect.

It would thus seem that the word where last used in cl42(i), and also where used in cl42(ii), must be used in the sense of accepted repudiation. If this view be right, it provides powerful confirmation for my opinion that the appeal fails.

Even if a different view be taken of the word "repudiation" in the two sub-clauses mentioned, it seems to me that the provisions of cl41(iii) and the whole of cl42 are successful in making the Lessee liable for loss of bargain damages for breach of covenants and conditions in the lease, because of the wide language used in those provisions.

On behalf of the appellant guarantors, the court's attention was directed to the leading authorities concerning guarantees and the liability of guarantors in situations analogous to the present; the principal ones of these being Moschi v Lep Air Services Ltd (1973) AC 331 and The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17. However, there is nothing, in my opinion, in those cases and the other authorities referred to on behalf of the appellant guarantors, which in any way prevents the court giving effect to what, in my opinion, is the relatively clear meaning of the clauses in question.

In my opinion the appeal should be dismissed with costs. Clarke JA I agree with Priestley JA. Giles AJA I agree with Priestley JA.

Counsel for the appellant: BA Coles QC/TN Barrett 10 Solicitors for the appellant: Dickson Fisher Macansh

Solicitors for the respondent: Dunhill Madden Butler