Natwest Markets Australia Pty Ltd v Tenth Vandy Pty Ltd [2008] VSCA 207

Court of Appeal (Vic)|2008-10-22|Before: NETTLE, ASHLEY and NEAVE JJA

LANDLORD AND TENANT - Lease - Construction - Provision for re-entry for non-payment of rent - Further provision for termination on notice of breach of essential term - Whether right of re-entry under provision for re-entry subject to requirement to give notice under provision for termination for breach - Shevill v The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, The Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, referred to.

2 Like her Honour, I consider that cl 12.01 of the lease the subject of appeal affords the lessor a right of re-entry which may be exercised without compliance with the notice provisions of cl 12.05.

3 The evident purpose of cl 12.05 is not to control the exercise of cl 12.01 but to provide, in a manner which has been commonplace since the High Court's decision in Shevill v The Builders Licensing Board,[1] that particular obligations of a lessee may be treated as essential terms of a lease with consequential rights of rescission and to recover substantial damages.[2]

4 Contrary to the reasoning of the judge below, that does not render otiose the reference in cl 12.05 to the rights of the lessor under cl 12.01. It simply reflects the fact that, when cl 12.05 was drafted, it was still widely considered that re-entry[3] was necessary to forfeit a lease notwithstanding that the lessor may have given notice of intention to treat a breach of covenant as a repudiation of the lease.[4]

5 Further, and despite the subsequent developments in authority essayed by Neave JA, there may still be some cases where that is so. As Deane J said in The Progressive Mailing House Pty Ltd v Tabali Pty Ltd,[5] the actual application to leasehold interests of the common law doctrines of frustration and termination for fundamental breach involves some unresolved questions which are best left to be

considered on a case by case basis whereby adequate attention can be focused on particular problems which might be overlooked in any effort at judicial codification.

6 In the result, the appeal should be allowed. The judgment below should be set aside and in lieu thereof it should be declared that the lessor was entitled to exercise such right of re-entry as it may have had under cl 12.01 of the lease without complying with the notice provisions of cl 12.05.

7 I agree with Neave JA that this appeal should be allowed. For the reasons which her Honour explains, cl 12.01 and cl 12.05 had independent operation. In that event, it was not necessary for the lessor to give notice under cl 12.05 in order to exercise the right of re-entry conferred by cl 12.01 of the lease.

8 This is an appeal from the decision of a Supreme Court judge on a trial of preliminary questions,[6] in proceedings between Natwest Markets Australia Pty Ltd ('the lessor') and Tenth Vandy Pty Ltd ('the lessee'). The lessor appeals against the learned trial judge's finding that it was not entitled to exercise the right of re-entry for non-payment of rent conferred by cl 12.01 of the lease, without first serving a notice on the lessee, as required by cl 12.05.[7] The lessor contends that his Honour incorrectly held that the right of re-entry conferred by cl 12.01 was subject to the notice requirement in cl 12.05.

9 His Honour was required to resolve the following question:

Was the Defendant entitled to re-enter the premises described in the Lease for non-payment of rent on 24 January 1994 ('the re-entry') without first serving on the Plaintiff:

(b) a notice pursuant to clause 12.05 of the Lease?

10 Clauses 12.01 and 12.05 of the lease provided as follows:

(a) the rent hereby reserved or any part thereof or any other moneys payable by the Lessee hereunder shall be in arrear and unpaid for a period of seven days after any of the days on which the same ought to have been paid whether formally demanded or not, or

(b) the Lessee shall at any time fail or neglect to perform or observe any of the covenants conditions or agreements herein contained and on the Lessee's part to be performed and observed and if such default is continued for fourteen days after notice in writing calling on the Lessee to remedy such default shall have been given by or on behalf of the Lessor, or

(c) the Lessee while the said demised premises or any part thereof shall remain vested in a Company shall enter into liquidation whether compulsory or voluntary (not being a voluntary liquidation for the purpose of amalgamation or reconstruction) or enter into any arrangement or composition for the benefit of its creditors, or

(d) the Lessee while the said demised premises or any part thereof shall remain vested in a person not being a Company shall assign his estate or enter into a deed of arrangement for the benefit of his creditors (provided always that any deed of assignment or a deed of arrangement made under the Bankruptcy Act 1966 and any suit or action by or against the Lessee or his property which is or may be deemed to be an act of bankruptcy under the said Act shall be excluded from the operation of this clause), or

(e) any execution either by writ or warrant or by appointment of a Receiver be levied on or against any of the property or assets of the Lessee -

then and in any one or more of such events the Lessor at any time or times thereafter shall have the right to re-enter into and upon the demised premises or any part thereof in the name of the whole to have again repossess and enjoy the same as its former estate anything herein contained to the contrary notwithstanding and thereupon this Lease and the term hereby created shall absolutely determine but without prejudice to any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event and thereupon the Lessor shall be freed and discharged from any action suit claim or demand by or obligation to the Lessee under or by virtue of this Lease.

12.05 The Lessor and the Lessee hereby acknowledge and declare that the obligation of the Lessee to pay the rent hereby reserved and the obligation to make other payments of money are fundamental and essential provisions of this Lease and that upon the happening of any default by the Lessee in respect of such obligations the default may be treated by the Lessor upon notice to the Lessee as being a fundamental breach of the Lease by the Lessee entitling the Lessor to the rights conferred by clause 12.01 and also the right to recover from the Lessee all damages and losses which may be occasioned by such breach.

11 The lessee's failure to pay rent for November and December 1993 and January 1994 was a breach of the covenant to pay rent contained in cl 3 of the lease. Unless a rental covenant is a fundamental term of the lease, non-payment of rent does not normally amount to a repudiation of the contract which permits the innocent party to accept the breach, bring the contract to an end and recover loss of bargain damages.[8]

12 As his Honour recognised, the purpose of cl 12.05 was to make the rental covenant a fundamental term of the lease, thus allowing the innocent party to elect to accept the fundamental breach and terminate the contract. His Honour said that the notice requirement in cl 12.05 was a qualification of that right.[9]

13 His Honour then identified the following differences between the procedures contained in cl 12.01 and cl 12.05. In his words:

The rights of the lessor under cl 12.05 arise immediately when there is a default of the lessee to pay rent. In the case of cl 12.01 the right of re-entry only arises where the rental is in arrear for seven days.
Under cl 12.01 the lessor may, without notice, re-enter; under cl 12.05 the lessor is required to give a notice. The required terms of such a notice and its function are not altogether clear. The terminology of the provision suggests that the lessor must inform the lessee that the lessor treats the default as being a 'fundamental breach of the lease[10] entitling the lessor to the rights conferred by cl 12.01'.
When the lessor re-enters pursuant to cl 12.01 the lease and the terms thereby created are terminated. If cl 12.05 provides a true alternative forfeiture procedure as counsel for the lessor contends, the notice to which I have referred may, depending upon its terms, amount to an election to terminate the lease for breach of a fundamental term. If that be the case, or if there is some other act of election, the lease is thereupon determined. Any subsequent re-entry is that of an owner evicting a trespasser.[11]

14 His Honour said that it was difficult to reconcile cl 12.01 and cl 12.05. Where one or more of the events stipulated in cl 12.01 occurred (including non-payment of rent for seven days), that clause gave the lessor the right to re-enter and terminate the lease and to recover arrears of rent and also freed the lessor from any claims by the lessee arising under the lease.

15 Clause 12.05 gave the lessor the right to treat the failure to pay rent as breach of a fundamental term, which then entitled the lessor to exercise 'all the rights conferred by cl 12.01' and the right to recover 'all damages and losses which may be occasioned by such breach.'

16 His Honour rejected the submission of counsel for the lessor that the two clauses operated independently, providing separate procedures for terminating the lease if the covenant to pay rent was breached. Counsel for the lessor had submitted that the advantage of the cl 12.01 procedure was that the lessor could exercise the power to re-enter without notifying the lessee, provided that the rent was seven days in arrear. The disadvantage was that the lessor was confined to recovering arrears of rent and could not recover loss of bargain damages. By contrast, cl 12.05 required notice to be given by the lessor that the failure to pay rent was a fundamental breach. The advantage was that 'the lease is brought to an end upon notice to that effect without a requirement of re-entry or its equivalent.'[12]

17 His Honour said that counsel for the lessor's submission required the court to ignore the words 'the rights conferred by cl 12.01' in cl 12.05. He said that if cl 12.05 created an independent means by which the lessor could bring the lease to an end, this would confine the reference in cl 12.05 to 'the rights conferred by cl 12.01' to some only of the rights given by that clause.[13] If cl 12.05 was interpreted in this way, the requirement of notice in that section would be 'denied of any significance.'[14]

18 The lessee's counsel submitted that the notice requirement in cl 12.05 was a pre-condition to the exercise of the right of re-entry under cl 12.01. His Honour said that this interpretation also created difficulties, which he described as follows.

First, cl 12.05 gives to the lessor upon notice the right to treat the default as a 'fundamental breach of the lease'. The legal consequence of this is that the lessor, as innocent party, might elect to put an end to the lease by notice or other act. But the clause immediately withdraws that consequence by requiring the lessor to forfeit by re-entry. Second, if the lessor might move to forfeiture for non-payment of rent only by cl 12.05, this is inconsistent with the terms of cl 12.01 which gives the lessor a right 'at any time or times thereafter' to re-enter because there is a further pre-condition to the right of re-entry, namely, the giving of a cl 12.05 notice. There are, also, one and perhaps two conceptual inconsistencies. The event which triggers cl 12.01 is not a breach of a covenant, but the fact that rent is in arrears; that which triggers cl 12.05 is the default of the lessee in respect of its contractual obligation to pay rent. Furthermore, if the cl 12.05 notice amounts to an acceptance of the lessee's breach of a fundamental term so that it brings the lease to an end, the right of re-entry conferred by cl 12.01 is superfluous.[15]

19 In the learned judge's view neither party's analysis was wholly satisfactory but, on balance, he favoured the view advanced by the lessee's counsel, because the lease had been 'prepared and presented by the lessor'.[16] He said that he was

resistant to an interpretation[17] which would have the effect of rendering the words in the latter part of cl 12.05 otiose. I am unable to construe cl 12.05 so that the expression 'the rights conferred by cl 12.01' is to be understood as referring to certain only of those rights. The right to recover arrears of rental would, in any event, be available to a lessor which accepted the lessee's breach of its rental obligation as a repudiation. Moreover, the other benefit conferred by cl 12.01, the lessee's release, is not easily described as a right. The construction which counsel for the lessor would give to the clauses in question would effectively deprive cl 12.05 of any meaning. I construe cl 12.05 as providing a procedure which, upon notice, permits the lessor to act under cl 12.01 where the event relied upon is the non-payment of rent. This clause, therefore, imposes a restriction upon the right of the lessor to re-enter pursuant to cl 12.01 where rental is in arrear. In such a case the lessor may not forfeit the lease by re-entry under cl 12.01 without first complying with cl 12.05 and may not terminate for breach of a fundamental term at all.[18]

20 Thus his Honour held that the lessor was not entitled to exercise the right to re-enter the leased premises for non-payment of rent without first serving on the lessee a notice under cl 12.05.

21 As I have said, counsel submitted below that cl 12.01 and cl 12.05 created two separate and independent means of terminating the lease. A similar argument was made in the appellant's written submission, which said that the terms of the lease provided for its termination for non-payment of rent either by forfeiture as a result of re-entry under cl 12.01, or by the giving of notice that default in payment was a fundamental breach, which entitled the lessor to determine the lease under cl 12.05 and recover loss of bargain damages. It was said that his Honour had wrongly treated the clauses as inconsistent and as a consequence had reconciled them by construing cl 12.01 in favour of the lessee, rather than interpreting the two clauses so that they could work sensibly together.

22 Counsel submitted that cl 12.01 was a re-entry provision of the kind typically found in leases, which permitted a lessor to terminate a lease by physical re-entry or by the initiation of proceedings claiming possession. Clause 12.05 was drafted in response to the decisions of the High Court in Shevill[19] and Tabali,[20] with the intention of enabling the lessor to terminate the lease by treating non-payment of rent as a fundamental breach. The use of the word 'may' in cl 12.05 reflected the fact that the lessor could elect to notify the lessee under cl 12.05 that the failure to pay rent was a fundamental breach, which would entitle the lessor to the contractual remedy recognised in Shevill and Tabali.

23 However, this did not deprive the lessor of the separate right to re-enter if one of the events specified in cl 12.01 occurred, without first satisfying the notice requirement necessary for the lessor to exercise the right to treat non-payment of rent as a repudiation of the contract. Thus the lessor could terminate the lease if the rent was in arrear for seven days by re-entering the premises under cl 12.01, without giving the notice to which cl 12.05 referred.

24 Counsel referred to the learned trial judge's statement that, in cases where rental was in arrears, 'the lessor may not forfeit the lease by re-entry under cl 12.01 without first complying with cl 12.05 and may not terminate for breach of a fundamental term at all.'[21] He submitted that because Clause 12.05 was an 'anti-Shevill' clause, his Honour had incorrectly treated it as a clause which provided a procedure which 'upon notice, permits the lessor to act under cl 12.01 where the event relied upon is the non-payment of rent.'[22] Since the whole purpose of cl 12.05 of the lease was to establish a foundation for termination on the grounds of fundamental breach, his Honour's interpretation of cl 12.05 rendered the clause meaningless and defeated its purpose.

25 Counsel for the appellant said that if his Honour was correct in holding that the notice requirement in cl 12.05 applied to cl 12.01(a), which covered non-payment of rent for a period of seven days, this must also be the case for cl 12.01(b), which dealt with the lessee's failure or neglect to perform covenants in the lease. This approach would create an inconsistency between cl 12.01(b), which required notice in writing to be given calling on the lessee to remedy the default, and cl 12.05, which contained a different notice requirement.

26 In oral argument, the lessor's counsel made an alternative submission. Counsel referred Deane J's statement in Tabali that '[a] lease for a term of years ordinarily possesses a duality of character ... It is both an executory contract and an executed demise.'[23] Counsel said that although the contractual principle allowing an innocent party to elect to terminate a contract for breach of a fundamental term now applied to leases, such an election did not terminate the leasehold interest. Clause 12.05 was drafted to allow the lessor to terminate the contract by notifying the lessee of the intention to treat the non-payment of rent as a fundamental breach, but it was necessary also to provide a means of terminating the lessee's estate in land, which could only be brought to an end by exercise of the right of re-entry (either by physical re-taking of possession or commencement of an action to recover possession).[24] The reference in cl 12.05 to 'the rights conferred by 12.01' was intended to achieve that result.

27 Counsel for the lessee submitted that his Honour had correctly construed the lease by giving effect to its text, read as a whole.[25] Such a reading made it necessary for his Honour to read cl 12.01 in the context of the other clauses in the lease, including cl 12.05. His Honour had correctly reconciled the inconsistency between the clauses by applying the principle that an ambiguous clause in a contract must be construed against the interests of the party responsible for its drafting.

28 His Honour had correctly found that cl 12.01 created a right of re-entry, but did not regulate the basis on which it could be exercised, and that cl 12.05 was intended to restrict the operation of the power of re-entry conferred by cl 12.01. The purpose of the notice requirement in cl 12.05 was to make it clear to a lessee in default that the lessor could treat the non-payment of rent as a fundamental breach entitling the lessor to the rights under cl 12.01, subject to the restrictions contained in cl 12.05. This was reflected in the inclusion in cl 12.05 of the words 'entitling the lessor to the rights conferred by cl 12.01'. Clause 12.01 should not be read down so as to enable the lessor to re-enter without observing the notice requirement in cl 12.05.

29 Counsel for the respondent said that the word 'may' in cl 12.05 should be read as meaning 'may only' or 'shall'. The clause responded to the decision in Shevill, by balancing the rights of the lessee and the rights of the lessor. The draftsperson had created a procedure which was intended to bring to the attention of the lessee the significance of non-payment of rent and to protect the lessee by prohibiting re-entry without notice.

30 In my opinion cl 12.01 and cl 12.05 of the lease served different purposes and operated independently of each other. This is apparent when the terms of the lease are interpreted against the background of the common law principles regulating leasehold termination.

31 Entry into an enforceable lease passes an estate in land to the lessee, as well as binding the lessor and the lessee to comply with its terms. At common law, breach of a leasehold covenant did not entitle the landlord to bring the lease to an end.[26] This principle was overcome by the common drafting practice of inserting a term in the lease giving the lessor the right to re-enter the land and forfeit the lease for breach of covenant.

32 Under equitable principles, such a clause did not permit re-entry for non-payment of rent unless a formal demand was made for the rent, but it became customary for leases to include a term dispensing with that requirement.[27] In certain situations equity would relieve a lessee against forfeiture if the breach was rectified. The equitable principles controlling forfeiture of leases have now been largely replaced by statutory provisions of the kind now found in the Property Law Act 1958, s 146. This provision requires a notice to be given before a right of re-entry or forfeiture is exercised for breach of a covenant,[28] other than a rental covenant,[29] and allows the lessee to apply to the court for relief against forfeiture.[30]

33 Clause 12.01(a) is a clause of the kind typically included in leases. It is drafted in very similar terms to the re-entry clause in the lease considered in Shevill.[31] The clause dispenses with the requirement for a formal demand for rent and gives the lessor a right to re-enter the land and determine the lease if the rent or other moneys payable under the lease are in arrear and unpaid for a period of seven days.[32] The lessor also has a right of re-entry if the lessee breaches other covenants and continues in default for 14 days after being served with a notice to remedy the default;[33] if the lessee goes into liquidation;[34] or if the lessee assigns his or her estate or enters into a deed of arrangement for the benefit of creditors.[35]

34 The concluding words of cl 12.01 reflect the common law principle that the exercise of the right of re-entry to terminate the lease does not deprive the lessor of the right to recover arrears of rent or damages for breach of covenant. The provisions for notice and relief against forfeiture contained in s 146 of the Property Law Act 1958 cannot be excluded by the terms of the lease. It is noted that s 146 therefore controls exercise of the right of re-entry for breaches of covenant to which cl 12.01(b) applies, though not the breach of the covenant to pay rent.

35 Historically, contractual doctrines, including frustration and the principle permitting an innocent party to terminate a contract by accepting its repudiation by the other party, were not regarded as applying to leases, because leases are both contracts and interests in land.[36]

36 However in Shevill, the High Court[37] decided that the contractual doctrine of repudiation applies to leases, so that if a lessee renounces his or her liabilities under the contract, commits a breach which goes to the root of the contract, or breaches a fundamental term of the contract, the landlord may terminate the lease and sue for loss of bargain damages.[38]

37 In Shevill, it was argued that the covenant to pay rent, coupled with a clause giving the lessor the right to re-enter for non-payment of rent, expressed in similar terms to cl 12.01 of this lease, was a fundamental term and that any non-payment of rent for the period specified in the re-entry clause was a breach which gave the lessor the right to terminate the contract and sue for damages. Gibbs CJ rejected the argument that the covenant to pay rent was 'a fundamental or essential term having the effect that any failure, however slight, to make payment at the specified times would entitle the lessor to terminate the lease'.[39] Wilson J took a similar view. He said that

[c]lause 9(a) does not achieve the effect for which the Board contends. It does not categorize the covenant to pay rent as an essential term. On the contrary, it treats the due payment of rent in the same way as it deals with the 'due and punctual observance and performance of any of the covenants obligations and provisions of this lease'. Some of those covenants cover matters of comparatively minor importance such as the maintenance of the lawns or the painting of the premises. It is understandable that the parties should agree that the lessor should have a right to re-enter and forfeit the lease if the rent is not paid or the covenants not observed, but the intrinsic nature of the obligations in question lend no support to an inference of essentiality carrying in the event of default and termination a right to damages for the loss of the contract. It is one thing to be able to rid oneself of an unsatisfactory tenant; but it is quite another, requiring a clear expression of intention, to be able to hold the evicted tenant liable for whatever damages might be suffered as a result of the premature termination of the tenancy. The Board points to the express reference in the clause to 'damages as a result of any such event' as indicating the extent of the remedy available to the lessor following the exercise of the power to re-enter conferred by the clause. It may be that the scope and operation of this clause is obscure, but I find it impossible to give to it the effect for which Mr. Hodgson contends. The words 'such event' must refer to the non-payment of rent or breach of covenant, and the damages must bear the necessary relation to that event. Damages do not usually flow from a failure to pay money, the proper recourse being an action for the debt: see McGregor on Damages, 14th ed. (1980), pars. 844-848.

It may also be noted that cl. 9(a) in terms does not confer any rights on the lessor other than the right to re-enter and bring the contract to an end. The passage which I have quoted dealing with remedies is a saving clause, designed to preserve remedies rather than create them.[40]

38 Although breach of the rental covenant in Shevill did not entitle the lessor to terminate the lease and sue for loss of bargain damages, Gibbs CJ said that

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 ...[41]

[t]he effect of this decision is to place a heavy onus on legal practitioners to draft leases expressly stating that the covenant to pay rent is an essential term of the lease and/or that the landlord is entitled to sue for loss of future rent wherever a lease is terminated for failure to pay rent.[42]

Clause 12.05 was an anti-Shevill clause designed to achieve that purpose.

40 When cl 12.01 and cl 12.05 are read against the background of common law principles it is apparent that they were intended to create different methods of terminating the lease and the contract between the lessor and lessee. Clause 12.05 stipulated that the lessee's obligation to pay rent and make other monetary payments was a fundamental term of the lease, default in the performance of which could, upon notice to the lessee, be treated as a fundamental breach of the lease, entitling the lessor to terminate it and recover loss of bargain damages.

41 There is no reason to read cl 12.05 as controlling the exercise of the lessor's right of re-entry under cl 12.01. To do so would have the surprising effect that cl 12.05, which was intended to make available to the lessor the right to treat non-payment of rent as a repudiation of the contract, would limit the right of re-entry for non-payment of rent, which has traditionally been conferred by a clause of the kind typified by cl 12.01. Because the clauses were not inconsistent, it was unnecessary for his Honour to reconcile them by finding that the right of re-entry for non-payment of rent created by cl 12.01 could not be exercised without service of a notice under cl 12.05.

42 The attempt to do so creates additional difficulties. If the notice requirement in cl 12.05 controls the exercise of the right of re-entry created by cl 12.01, the notice requirement in cl 12.01(b) appears to be redundant. Clause 12.01(b) provides that if the lessee is in breach of a covenant (including a covenant to pay money other than rent) for 14 days after receiving a notice in writing to remedy the default, the lessor has the right to re-enter the premises. Section 12.05 makes the obligations to pay rent and to make other payments fundamental terms of the lease. It follows from the reasoning of the judge below that if a lessee failed to make a monetary payment other than rent, the lessor would be required to give both the notice required by cl 12.05 and the notice required by cl 12.01(b), before exercising the right of re-entry conferred by cl 12.01. The clauses should not be construed in a way that would produce this result.

43 His Honour said that cl 12.05 should be read as qualifying cl 12.01, because otherwise the reference to 'the rights conferred by cl 12.01 would be meaningless.' I do not agree. It is not uncommon for leases to include provisions which simply confirm existing legal principles. In Shevill, for example, Wilson J commented that the reference in the re-entry clause to the lessor's right to recover damages was 'a saving clause, designed to preserve remedies rather than create them.'[43] The same can be said of the inclusion in cl 12.05 of the cross-reference to the rights conferred by cl 12.01.

44 However the reference to the rights conferred by cl 12.01 is explicable on another basis. In Australia the application of contractual principles to leases is relatively recent.[44] When this lease was drafted in 1990, it was not clear whether the lessor's election to treat non-payment of rent as a fundamental breach terminated the leasehold estate as well as the contract between the lessor and the lessee.[45] The reference to the rights conferred by cl 12.01 is likely to have been included out of an abundance of caution, to ensure that the lessor could terminate the lease by re-entering the premises. Out of similar abundance of caution, cl 12.05 allows the lessor 'to recover all damages and losses occasioned by the breach' (which would include damages flowing from loss of the lease) although it is a consequence of Shevill and Tabali that this would follow inevitably from the lessor's election to terminate the contract for fundamental breach.[46] The lessor's election under cl 12.05 would in any case have permitted it to recover arrears of rent and released it from the obligations created by the lease.

45 Even if, contrary to the view expressed below, re-entry was required to bring the leasehold interest (as well as the contract) to an end in the case of fundamental breach, the reference in cl 12.05 to the 'rights conferred by cl 12.01' does not require the conclusion that the notice requirement in cl 12.05 limits the right of re-entry in cl 12.01. Clause 12.01 makes no reference to cl 12.05 and I can see no basis for an interpretation that would require the lessor to comply with cl 12.05 in order to exercise the right of re-entry under cl 12.01(a). It follows that the cl 12.01 procedure for re-entry for non-payment of rent applies without the lessor having to serve the notice required by cl 12.05. If the lessor opts for this approach, loss of bargain damages are not available.[47]

46 Because I have concluded that cll 12.01 and 12.05 of the lease served different purposes and operated independently of each other, it is unnecessary to consider the oral submission put on behalf of the appellant that the reference in cl 12.05 is explained by the fact that the giving of a notice under cl 12.05 was effective only to terminate the contract between lessor and lessee and not to terminate the leasehold estate. I note however that, if that view was correct, cl 12.05 would have required the lessor to serve a notice on the lessee that the non-payment of rent was a fundamental breach of the lease and to then wait a further seven days before the right to re-entry created by cl 12.01 could be exercised. This reinforces my view that the clauses were intended to operate independently. Nevertheless I deal briefly with counsel's submission.

47 His Honour took the view that, in the absence of the reference in cl 12.05 to the rights conferred by cl 12.01, the exercise by the innocent party of the right to terminate the contract for a fundamental breach would also bring the leasehold estate to an end, making the lessee a trespasser.[48] The case law supports that view.

48 Counsel for the lessor referred to Deane J's statement in Tabali that '[a] lease for a term of years ordinarily possesses a duality of character ... It is both an executory contract and an executed demise.'[49]

49 In that case the sole question was whether the New South Wales Court of Appeal should have dismissed an appeal from a trial judge's order that the appellant lessee pay damages for loss of the benefit of covenants contained in a lease which had been terminated by re-entry, following the lessee's breach of covenants to pay rent and to repair the premises. The lease contained a typical provision for re-entry for breach, but did not provide that non-payment of rent could be treated as a fundamental breach.

50 The High Court held that the presence of a right of re-entry in the lease did not exclude other methods of terminating the lease, including the right to terminate for repudiation or breach of a fundamental term and that, on the facts, the lessee's non-payment of rent amounted to a repudiation or fundamental breach of the obligations imposed by the lease, entitling the lessor to bring the lease to an end and sue for loss of bargain damages. Deane J's reference to the dual character of leases was intended to make clear that a breach of the rental covenant, without more, does not necessarily amount to repudiation. His Honour said although 'the ordinary principles of contract law are applicable to contractual leases' this was subject to an important qualification, which was that

the further one moves away from the case where the rights of the parties are, as a matter of substance, essentially defined by executory covenant or contractual promise to a case where the tenant's rights are, as a matter of substance, more properly to be viewed by reference to their character as an estate (albeit a chattel one) in land with a root of title in the executed demise, the more difficult it will be to establish that the lease has been avoided or terminated pursuant to the operation of the ordinary principles of frustration or fundamental breach.[50]

Similar remarks were made by Mason[51] and Brennan JJ.[52]

[t]he better view is, in my opinion, that re-entry is essential only where the parties stipulate that advantage shall not be taken of a forfeiture except by an entry upon the land: Liddy v. Kennedy. If it be accepted that the principles of contract law apply to leases, it is not easy to see why the mere presence of an express power to terminate should be regarded as excluding the exercise of such common law rights as may otherwise be appropriate. It is, of course, open to the parties by their contract to regulate the exercise of the common law right to determine for repudiation or fundamental breach. But in this case the parties have not attempted to do so.[54]

52 Brennan J reached the same conclusion as the other members of the Court. However his judgment was largely concerned with defining the circumstances in which a lessor is entitled to loss of bargain damages by virtue of the contractual doctrine of anticipatory breach.[55]

53 In the course of his judgment, Brennan J stated that

Acceptance of a surrender by a lessee who has repudiated a lease is at once an acceptance of the repudiation and a determination of the lessee's interest in the land. Where the lessee repudiates but does not give up possession, a lessor's acceptance must take some other form. Unless the lessee's interest in the land is determined in some way, there can be no rescission of the contract, for the lessee continues to enjoy the benefit of the demise and to be liable to perform at least those covenants which touch and concern the land. So long as the lessee retains the interest which he took under the demise, neither party can put an end unilaterally to the executory obligations under the lease.[56]

54 Although that statement provides support for the proposition that the cross-reference in cl 12.05 to the rights under cl 12.01 was necessary to give the lessor the right to bring the lease to an end by exercise of the right of re-entry, the High Court did not have to decide whether that was the case. It was conceded that the service of the statement of claim by the lessor was equivalent to exercise of the right of re-entry.[57]

55 In Apriaden Pty Ltd v Seacrest Pty Ltd and Anor,[58] Williams AJA considered the relevance of the competing approaches taken by members of the High Court in Tabali to the question of whether acceptance of repudiation is sufficient to determine a leasehold interest. After a comprehensive discussion of the authorities, her Honour concluded that the doctrine of repudiation provides an alternative means of determining a lease. She said:

There was some early support in New South Wales[59] for Priestley JA's views in Wood Factory that the ratio of Tabali should be confined_._ However, more recently, courts in New South Wales,[60] Western Australia,[61] South Australia,[62] the Australian Capital Territory[63] and, significantly, in this state,[64] as well as academic commentators[65] have recognised the general applicability of contractual principles to leases. Further, in Laurinda, the High Court followed the same course, holding that the subject lease had been repudiated, without reference to the termination of the leasehold estate under property law doctrines, in circumstances in which it might have been argued that there had been a surrender of the lease.

In my view, the ramifications of the recognition of a separate contractual basis for determination of a lease are likely to be limited. It has been repeatedly stated that the courts will be slow to infer repudiation,[66] the existence of which must be objectively ascertained.[67] The proprietary nature of the interests of each party to the lease contract has special ramifications in relation to the application of contractual principles.[68] In other words, a consideration of factors such as the length of the lease and the amount of rent payable is relevant to the determination as to whether or not repudiation has occurred, particularly in the absence of abandonment of possession. In contrast, the terms of a lease and, in particular, a commercial lease, will more often than not provide for its determination for breach of covenant, and, in particular, for non-payment of rent. After Shevill, leases are also even more likely to designate covenants as essential terms.[69]

Further, in my respectful opinion, the position contemplated by counsel for the appellant and referred to by Brennan J in Tabali,[70] of a contract of lease being terminated by repudiation at one point and then, some time later, the leasehold estate being determined by acceptance of a surrender or forfeiture, would seem likely to produce uncertainty and confusion if the parties were bound, in the interim, only by those surviving covenants of the lease touching and concerning the land. [71]

56 Apriaden disposes of the appellant's submission that the reference in cl 12.05 to the rights conferred by cl 12.01 was necessary to allow the lessor to determine the leasehold. However it does not affect my view that cl 12.01 operates independently from, and is not subject to, the notice requirement in cl 12.05.

[2] See Duncan, Commercial Leases in Australia, 5th Ed, 377.

[3] By which I mean some unequivocal act which the law regarded as equal to re-entry.

[4] Rosa Investments Pty Ltd v Spencer Shier Pty Ltd [1965] VicRp 13; [1965] VR 97, 106-7 (Sholl, J); cf. The Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, 29-30 (Mason J), and see Bradbrook and Croft, Commercial Tenancy Law in Australia, 1st Ed (1990), [16-26] esp. at 253-4 where the state of contemporary authority was analysed.

[7] There was no appeal against his Honour's findings on questions 1(a), 2, 3 and 4.

[8] Shevill v The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 ('Shevill'), 627 (Gibbs CJ) and 634 (Wilson J); The Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17 ('Tabali'). If the non-payment of rent amounts to a repudiation of the lease, the lessor could elect to terminate the contract, but this 'is a serious matter and is not to be lightly found or inferred': Shevill, 633 (Wilson J). For a more detailed discussion of the circumstances in which a lessor can terminate the lease and claim loss of bargain damages under contractual principles see A Bradbrook, S V MacCallum and A P Moore, Australian Real Property Law (3rd ed 2002) 478-481.

[10] Given the controversy as to the suggested distinction between a breach of a fundamental term and a fundamental breach, it is not altogether clear how such a notice sits with the opening lines of cl 12.05.

[11] Reasons, [16] (footnote included).

[18] Reasons, [25] (footnote included).

[23] Tabali [1985] HCA 14; (1985) 157 CLR 17, 51 (Deane J).

[24] Rosa Investments Pty Ltd v Spencer Shier Pty Ltd [1965] VicRp 13; [1965] VR 97, 101 ( Sholl J).

[25] He referred to International Fina Services AG v Katrina Shipping Ltd [1995] 2 Lloyds Rep 344, 350 (Neill LJ with whom Roch and Auld LJJ agreed).

[26] Doe d Wilson v Phillips ( [1824] EngR 517; 1824) 2 Bing 13. If the term was expressed as a condition of the lease, rather than as a covenant, the lessor could terminate the lease for breach of condition: Doe d Lockwood v Clarke & Brown [1807] EngR 134; (1807) 8 East 185; 103 ER 313.

[27] RE Megarry and HWR Wade, The Law of Real Property (3rd ed 1966), 666.

[28] The right of re-entry or forfeiture cannot be exercised unless the lessee fails within a reasonable time thereafter, or within a time not less than fourteen days, to remedy the breach and make reasonable compensation to the lessor.

[29] Section 146(12). Query whether this preserves the equitable rules relating to relief against forfeiture for non-payment of rent and see Piazza Grande Pty Ltd v Portis Pty Ltd (1993)

[30] Section 146(2). Under s 146(13), these provisions apply subject to any stipulation to the contrary in the lease, but ss (3) and (4) are to be read subject to the provisions of Part 10 of the Retail Leases Act 2003.

[36] See for example Cricklewood Property & Investment Trust Ltd v Leightons Investment Trust Ltd [1945] AC 221, 234, 244 (Lord Russell and Lord Goddard); Total Oil Great Britain Ltd v Thompson Garages (Biggin Hill) Ltd [1972] 1 QB 318. For a comprehensive discussion of this issue see AJ Bradbrook and CE Croft, Commercial Tenancy Law in Australia (2nd ed, 1997) 359-383.

[37] Gibbs CJ, Murphy, Aickin, Wilson and Brennan JJ.

[38] Shevill [1982] HCA 47; (1982) 149 CLR 620, 626 (Gibbs CJ). There is some dispute as to 'whether there is a continued justification for the use of both the terms 'repudiation' and 'fundamental breach', whether as synonyms for each other or as labels for two distinct contractual doctrines':

CJF Boge, 'Repudiation of Leases' (1996) 26 Queensland Law Society Journal 125, 126. See generally JW Carter, E Peden and GJ Tolhurst, Contract Law in Australia (5th ed, 2007) 676-677.

[39] Shevill [1982] HCA 47; (1982) 149 CLR 620, 627. See also 634 (Wilson J).

[42] A Bradbrook, SV MacCallum, AP Moore, Australian Real Property Law (3rd ed 2002) 479.

[44] It was accepted much earlier in Canada: see Highway Properties Ltd v Kelly, Douglas & Co Ltd (1971) 17 DLR (3d) 710.

[45] Indeed, in their 1997 text, learned authors Bradbrook and Croft opined that it not do so: AJ Bradbrook and CE Croft, Commercial Tenancy Law in Australia (2nd ed, 1997) 369. See however paragraphs [55]-[56] below.

[46] Another example may be the notice provisions in cl 12.01(b), which largely reproduce s 146(1)(a) of the Property Law Act 1958.

[47] Shevill [1982] HCA 47; (1982) 149 CLR 620, 637 (Wilson J).

[48] Reasons, [16]. His Honour also said that if the notice under cl 12.05 amounts to 'an election to terminate for breach of a fundamental term ... the re-entry is little more than a property owner's self-help to eject a trespasser': [18].

[49] Tabali [1985] HCA 14; (1985) 157 CLR 17, 51 (Deane J).

[53] Wilson J delivered a separate judgment agreeing with Mason J; Dawson J agreed with Mason J and the additional observations of Deane and Wilson JJ.

[54] Tabali [1985] HCA 14; (1985) 157 CLR 17, 29-30 (footnote omitted).

[55] In the context of leases this issue has been thought to arise because 'a lease is a contract that has been executed or substantially executed by the lessor and ... the principles relating to anticipatory breach apply only where the innocent party puts an end to the executory obligations resting on him': Ibid, 43 (Brennan J).

[58] [2005] VSCA 139; (2005) 12 VR 319 ('Apriaden'). In this case, the lessor re-entered the demised premises, but did so without serving the lessee with a notice under either the relevant clause of the lease or s 146 of the Property Law Act 1958. It was in this context that the Court considered whether acceptance by the lessor of the lessee's repudiation was an alternative means by which the lease could be determined.

[59] See J & C Reid Pty Ltd v Abau Holdings Pty Ltd (1988) NSW ConvR 55-416, 57-799, 57-809 (Hope JA with whom McHugh JA agreed); compare: 57-801 (Kirby P); and Vickers & Vickers v Stichtenoth Investments Pty Ltd (1989) 52 SA SR 90, 99 (Bollen J).

[60] See: Scarcella v Linknarf Management Services Pty Ltd (in liq) [2004] NSWSC 360; Batiste & Ors v Lenin [2002] NSWCA 316; Liristis v Wallville [2001] NSWSC 428; Karacominakis v Big Country Developments Pty Ltd & Ors [2000] NSWCA 313; Lagouvardis v Brett and Jane Cottee Pty Ltd (unreported decision of Young J, Supreme Court of New South Wales, 3 August 1994); BC 9402842.

[61] See: Swanville Investment Pty Ltd & Ors v Riana Pty Ltd [2003] WASCA 121.

[62] See: Nai Pty Ltd v Hassoun Nominees Pty Ltd (1985) ANZ ConvR 349.

[63] See: Leda Commercial Properties Pty Ltd v DHK Retailers Pty Ltd (1992) 111 FLR 81; (appeal dismissed): DKH Retailers Pty Ltd v Leda Commercial Properties Pty Ltd [1993] ANZ Conv R 635; BC 9304701).

[64] Ripka Pty Ltd v Maggiore Bakeries Pty Ltd [1984] VicRp 53; [1984] VR 629; Nangus Pty Ltd & Anor v Charles Donovan Pty Ltd (in liq) & Anor [1989] VicRp 17; [1989] VR 184; Emhill Pty Ltd v Bonsoc Pty Ltd [2003] VSC 333.

[65] See: Butt, Land Law (4th ed) (2001), [15-131], 336-7; Redfern, 'Repudiation and Leases' (1998) 6 APLJ 153.

[66] See: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623, 647 (Brennan J).

[68] See: The Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17, 33-4 (Mason J), 53 (Deane J).

[69] See: Duncan, Commercial Leases in Australia, (3rd ed) (1998), 268.

[71] Apriaden [2005] VSCA 139; (2005) 12 VR 319, 334-335 (footnotes included) (Ormiston and Batt JJA agreeing). The lease under examination in this case included a clause which created a right of re-entry and also provided that the rental covenant was a fundamental term of the lease. As a matter of construction, it was held that the requirements for re-entry did not regulate the contractual right to terminate for repudiation. In other words, the provisions were treated as operating independently despite the fact that they were contained in the same clause of the lease.

Court (General Civil Procedure) Rules 2005

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