Plaintiffs v First Defendant

Supreme Court of Victoria|2015-03-13|Before: HARGRAVE J

LEASES - 99 year lease at nominal rent - Lease included option to purchase for nominal consideration - Option to be exercised at any time within lease term - Breach of lease - Whether lessee repudiated the lease - Whether breach sufficiently serious to justify termination - Held: no repudiation and no right to terminate - Lessor's relief limited to damages for breach - Progressive Mailing House Pty Ltd v Tabali Pty Ltd [1985] HCA 14; (1985) 157 CLR 17; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623; Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd & Anor [2007] HCA 61; ; ;

No appearance by the Second Defendant, Registrar of Titles

1 Until March 2010, the first defendant, Anthony Stephan, was the registered proprietor of the land known as 14A Black Hall Road, Menzies Creek, in Victoria ('the Land'). The Land is divided by the Belgrave-Gembrook Road and comprises a larger undeveloped northern portion and a smaller developed southern portion on the other side of the road. Mr Stephan sold the Land to the plaintiffs, Michael Braham and his wife, Charis Braham. They became registered proprietors of the land in March 2010. They purchased the land under a contract of sale which obliged them to lease the northern portion to Mr Stephan for 99 years at peppercorn rental of $1 which has been paid (the 'Lease').

2 The Lease contains an option for Mr Stephan to purchase the northern portion for $10 (the 'Option'). The Option is exercisable at any time during the 99 year term of the lease. The lease has approximately 94 years to run.

3 The reason for these unusual arrangements lies in the fact that it was not then possible, or at least feasible, for the land to be subdivided into two lots - comprising the northern portion and the southern portion respectively. Subdivision may, however, be possible at some time in the future. It is illegal to sell undivided land in Victoria.[1]

4 The parties were well aware of the situation when they entered into the relevant contractual arrangements. It is necessary to describe the terms of the contractual arrangements in some detail.

(1) Mr Stephan agreed to sell the Land to the plaintiffs for $433,000.

(2) The contract of sale was subject to, and conditional upon, the parties entering into two related contracts, as follows:

(b) a deed of acknowledgment and agreement in the form annexed to the contract of sale ('the Deed').

(3) The sale was conditional upon the plaintiffs procuring an unconditional consent to the Lease from the proposed mortgagee who was financing their purchase of the Land.

6 Second, the Lease contained the following relevant terms:

(1) The northern portion of the Land was leased by the plaintiffs to Mr Stephan for 99 years at a total rent of $1, receipt of which was acknowledged.

(2) Mr Stephan could use the northern portion of the Land for any use permitted by law.

(3) Mr Stephan agreed that he would not during the term of the lease:

Do, use, carry on or allow to be done, used or carried out on the [northern portion of the] Land any noxious, noisome, illegal, immoral or offensive acts, trade, business, occupation, matter or thing ...

(4) Mr Stephan agreed that it was his responsibility to obtain all necessary licences, permits and consents required for his use of the northern portion of the Land.

(5) Contrary to usual leasing practice, Mr Stephan was expressly permitted to assign or transfer the Lease, to assign or transfer his interest in the Land, without the prior consent of Mr and Mr Braham, (for example, his interest under the Option), to mortgage or charge his interest in the Lease or the Land, or to part with possession or effective control of the Land by the grant of a franchise, license or concession; and the plaintiffs agreed that they would sign all documents and do all things necessary to give effect to any such action by Mr Stephan.

(6) The plaintiffs granted Mr Stephan the Option, and acknowledged receipt of an Option fee of $1. The Option could be exercised at any time prior to expiration of the term of the Lease. As already noted, exercise of the Option is conditional upon the Land having been subdivided so that the northern portion becomes a separate lot which is capable of being transferred.

(7) The plaintiffs agreed to sign all documents and give all consents and approvals necessary to allow the Land to be subdivided, and Mr Stephan agreed to be responsible for the payment of the costs associated with the subdivision.

7 Third, the Deed contained the following relevant provisions:

(1) The following definitions are contained in the Deed:

(a) the southern portion of the Land is defined as the 'Improved Land';

The Owner is registered or is entitled to be registered as the proprietor of the Parent Land.
By the Sale Contract the Lessee sold and the Owner purchased the Parent Land.
It was the intention of the parties that the Lessee sell and the Owner purchase only the Improved Property. However, because at the date of the Contract the Parent Land could not be subdivided so as to allow the separate sale and transfer of the Improved Property, the Parent Land was sold subject to the parties entering into the Lease.
The Lease contains the Option.
The price stated in the Sale Contract represented the value of the Improved Land only.[2]

(3) By clause 2 of the Deed, the parties confirmed the Recitals and recorded their intention about the transaction constituted by the contract of sale, the Lease and the Deed, as follows:

The Owner and the Lessee acknowledge and agree that:

(a) the Recitals to this deed contain an accurate representation of the parties' dealings and intention in respect to the Parent Land, the Improved Land and the Land; and

(b) their intention was for the Lessee to sell and the Owner to purchase only the Improved Land and had that been possible the contract would:

(1) have stated the same price as in the Sale Contract;

(2) have been in respect to the sale of the Improved Land only; and

(3) would not have been made subject to the parties entering into the Lease and the Option; and

(c) the price in the Sale Contract represents the value of the improved Land only.

(4) Under clause 3.1 of the Deed, the plaintiffs agreed (among other things) to do all things and sign all documents as may be necessary or desirable to give effect to the intentions of the parties set out in the Deed, including (but not limited to):

(a) signing all documents necessary to register the Lease with the Land Titles Office;

(b) raising no objection to the lodgement (by the Lessee at the Lessee's cost) of a caveat claiming the Lessee's interest under the Option; and

(c) procuring any purchaser or mortgagee of the Parent Land to formally acknowledge the Lessee's interest in the Lease and the Option.

(d) when requested by the Lessee, immediately sign all documents, give all consents and approvals and do all things necessary to allow the Parent Land to be subdivided.[3]

8 In summary, the transaction between the parties involved the plaintiffs obtaining registered title to the whole of the Land, but only paying for the southern portion of the Land and, by the terms of the Lease and the Deed, giving Mr Stephan effective ownership of the northern portion of the Land subject only to obligations to use the northern portion of the Land for legal purposes, to obtain any necessary permits and to pay his share of the relevant rates and charges applying to the Land.

9 The parties were represented by lawyers in the drafting and execution of the transaction documents.

10 There is evidence that the northern portion of the Land will have significant value if the Land is able to be subdivided. For example, the current Council rate notice values the northern portion at $170,000, and neighbouring land of a slightly larger size is on the market for sale at $550,000.

11 Following the settlement of the transaction, Mr Stephan lodged caveats on the title to the Land to protect his respective interests as Lessee and Optionee.

12 The plaintiffs contend that Mr Stephan has breached his obligation under the Lease to only use the northern portion for legal purposes. During 2011, Mr Stephan allowed his adult son, Robert Stephan ('Robert'), to commence construction of a shed on the northern portion. No building permit was obtained. It is clear on the evidence that the shed required a building permit, because it is more than three metres high when measured from the natural ground level where it is constructed.

13 The Yarra Ranges Shire Council issued a Building Notice dated 2 November 2011, requiring the plaintiffs, as owners of the Land, to stop construction of the shed and to show cause in writing within 60 days as to why it should not be demolished. A copy of the notice was provided to Mr Stephan and his son. As a result, Robert consulted the Council in an endeavour to deal with the issue. There was then a delay of eight months while the Council considered its position.

14 On 17 July 2012, notwithstanding that the Council had been dealing with Robert on behalf of his father, the Council issued a Building Order under s 111 of the Building Act 1993 addressed to the plaintiffs. The order required the plaintiffs to demolish the shed within 60 days (by 17 September 2012). The order was, however, accompanied by a letter which stated that, although it was an order to demolish the shed, the plaintiffs 'still [had] the opportunity up until the expiry of the order to demonstrate that the building works comply or have been brought into compliance with the Building Regulations 2006, in which case the order will be cancelled.'

15 For unexplained reasons, the plaintiffs did not receive the July Building Order until October 2012, when the time for compliance had already expired. Mr Stephan and his son did not learn of the July 2012 Building Order until November 2012. In the meantime, the plaintiffs sought and obtained an extension of time to comply with the order, until 15 December 2012. The terms of the extension included the opportunity to demonstrate by the extended time that the building works complied with or had been brought into compliance with the Building Regulations.

16 Robert and his father were informed of the extension of time. They endeavoured to meet it by obtaining an expert report from a building surveyor, Bushy Miles, dated 12 December 2012. The Bushy Miles report expressed the expert opinion that the shed did not require a building permit because it was no more than three metres in height and did not have a floor area exceeding 10 square metres. There is no dispute that the floor area does not exceed that dimension. Mr Miles considered the other requirements for construction of a freestanding Class 10(a) building under sch 8, item 1 of the Building Regulations, and expressed the opinion that all five requirements were met and that no permit was required.

17 A copy of the Bushy Miles report was provided to Council, albeit shortly after the 15 December 2012 extended period of the building order. Council then delayed for another eight months, until 22 August 2013. On that day, the Council wrote to the plaintiffs, rejecting the opinion in the Bushy Miles report that the shed did not exceed three metres in height. In rejecting that opinion, the Council relied upon Mr Miles's own statement in section 9 of his report that the ground level around the shed had been raised above the natural ground level. Council drew attention to the definition of 'height' in the Regulations, as meaning the vertical distance between natural ground level and the top of the roof, and not from the raised fill level referred to as the current ground level in the Bushy Miles report. If the fill level was not included, Council concluded that the height of the shed from the natural ground level was about 4.6 to 5 metres high - and thus the structure required a building permit.

18 A copy of Council's rejection of the Bushy Miles report was provided to Robert soon after it was received by the plaintiffs. Robert did not accept Council's decision and lobbied his local members of Parliament in an endeavour to have Council reverse its decision. Those efforts were misguided, as the shed was obviously too high when measured from the natural ground level. Council maintained its position. By email sent 8 November 2013 to one of the members of Parliament and Mr Stephan, Council explained its interpretation of 'natural ground level', while noting that it was not a term defined by applicable legislation or regulations. Taking the evidence as a whole, however, I am satisfied that Robert retained an honest, albeit erroneous, belief in the Bushy Miles report, which itself referred to the raising of the ground level by fill material.

19 At this stage, Robert elected to wait for the Council to take legal action and to have his day in Court. He swore in his first affidavit that he 'expected that proceedings would then be issued against me and that I would have a chance to argue my case. However, nothing happened.' I infer that Robert believed proceedings would be issued against him (or his father) because he had procured the Bushy Miles report and the report stated it was prepared on his father's behalf. Alternatively, it would in any event have been reasonable for him to believe that the plaintiffs would inform him of any legal proceedings by Council, thus giving him the opportunity to attend the hearing and, perhaps, seek to be heard. As appears below, Mr Stephan and his son heard nothing more about the matter for 14 months - until November 2014.

20 In fact, things did happen. After a further eight month delay by Council, the Council filed a charge and summons on 28 May 2014 against Mr Braham, for failing to comply with the July 2012 Building Order. The prosecution was heard by the Ringwood Magistrates' Court on 17 July 2014. Mr Braham accepted the Prosecution summary of the breach of the Building Act and pleaded guilty. No conviction was recorded against him, and he was released upon his own undertaking to be of good behaviour until 16 February 2015. He was ordered to pay $223.20 in costs. Further, pursuant to s 253 of the Building Act, the Magistrates' Court ordered that the shed be demolished by 13 January 2015.

21 The plaintiffs did not inform Robert or his father of the Magistrates' Court prosecution, of Mr Braham's guilty plea, or of the Magistrate's orders. Instead, after a further delay of about four months, their solicitor served a notice under s 146 of the Property Law Act 1958 on Mr Stephan. The first notice was served on 17 November 2014 but was unsigned. The signed notice was dated 28 November 2014 and served by hand on that day. The s 146 notice alleged:

(1) a breach of the Lease by erecting the shed without a building permit, in contravention of Mr Stephan's obligation under the Lease to only use the northern portion of the Land for legal purposes and to obtain all necessary licences, permits and consents required for such uses;

(2) that the breach had not been remedied despite Mr Stephan knowing of the July 2012 Building Order; and

(3) that, in all the circumstances, Mr Stephan had either repudiated the Lease, or that the consequences of his breach were sufficiently serious to justify the plaintiffs terminating the Lease at common law.

The notice required Mr Braham to remedy the breach, by demolishing the shed within 14 days of service of the notice, and also required Mr Stephan to pay compensation by paying the plaintiffs' legal fees of $550 for preparation and service of the notice. The notice concluded with a statement that the plaintiffs intended to re-enter the northern portion of the Land and determine the Lease if the breaches were not remedied within 14 days from service.

22 I note that the 14 day period specified in the s 146 notice expired on or about 12 December 2014. This was one month prior to the time for demolition of the shed expressed in the demolition order, which required demolition of the shed by 13 January 2015.

23 Following service of the s 146 notice, Robert made enquiries of the Council and was informed by a Council officer about the Magistrates' Court proceeding and orders. Following receipt of this information, Robert sent an email to the plaintiffs' solicitor asking for a copy of the Magistrates' Court orders. He did not receive a reply to this email. I infer, however, that Robert became aware at this time of the Magistrates' Court's orders, and, in particular, that the demolition order made under s 253 of the Building Act required the shed to be demolished before 13 January 2015. In this context, Robert sent a further email to the plaintiffs' solicitors, asserting that the s 146 notice was invalid (I infer because the s 146 notice required demolition of the shed before 13 January 2015) and informing the plaintiffs' solicitors that 'steps [were] being taken to remedy the outstanding issue with Council and [would] be complete before January 13, 2015'. From this email, I infer that Robert believed at this time that, as a matter of law, he had until 13 January 2015 to demolish the shed. He started demolition work on 9 January 2015 and completed it to Council's satisfaction by 23 January 2015. The initial demolition work had been completed on 13 January 2015, but Council inspected the works on 16 January 2015 and required the sub-floor area to be removed and fixed a further inspection for 23 January 2015. Following that inspection, Council was satisfied that the shed had been demolished.

24 In the meantime, by letter dated 14 December 2014 from their solicitors, the plaintiffs asserted that, because the s 146 notice had not been complied with in the 14-day period specified, the Lease had been repudiated, that they accepted the repudiation, that the Lease and the Option were at an end, and that they had taken possession of the property. They asserted that Mr Robert or his father would be trespassing if they entered on the northern portion of the Land and would call Victoria Police to attend if such trespass occurred.

25 By originating motion filed 2 February 2015, the plaintiffs applied to the Court under s 49(1) and/or s 137 of the Property Law Act for the Court to determine questions arising out of or connected with the Lease and the Option. In summary, the originating motion asked the Court to determine whether Mr Stephan has repudiated the Lease and, if so, whether the plaintiffs have accepted that repudiation and thereby terminated both the Lease and the Option. In the event that the questions are answered affirmatively, the plaintiffs seek removal of Mr Stephan's caveats, and declarations that the Lease and the Option have been terminated.

26 The parties agreed that it was appropriate for the Court to determine the questions in a summary way on affidavit material without cross-examination. This was a sensible course to avoid disproportionate costs being incurred and to resolve the dispute expeditiously and efficiently.

27 It is clear that the plaintiffs bring this proceeding because Mr Stephan's caveats are affecting their ability to extend their mortgage loan to obtain finance for their business at favourable rates. Those caveats are, however, permitted by the transaction documents and are necessary to protect Mr Stephan's interests, at least under the Option.[4] The shed itself has no adverse impact on the plaintiffs or their business on the southern portion of the Land.

28 Before leaving the facts, I note that the July 2012 Building Order also contained 'NOTES', including the following:

Right of owner to carry out required work on occupied building or land (Section 250 of the Act)

If the owner of a building or land is required to carry out any work or do any other thing under this Act or the regulations the owner may give a written notice to the occupier of the building or land -

stating particulars of the work to be carried out or thing to be done; and
requiring the occupier to permit the owner and any other person to enter the building or land and carry out the work or do the thing.

If the occupier of the building or land does not comply with a notice within 7 days after the notice is given, the owner of the building or land may apply to the Magistrate's Court for an order.

The Magistrate's Court may make an order requiring the occupier of the building or land to permit the owner and any other person to enter the building or land and carry out the work or do the thing.

The occupier of the building or land must comply with the order.

Penalty: 10 penalty units

While the occupier of the building or land fails to comply with the order the owner of the building or land is not liable for an offence for failing to carry out the work or do the thing.

29 There is no evidence as to why the plaintiffs, who have been legally represented throughout, did not take proceedings under s 250 of the Building Act to deal with the Building Order or the Magistrates' Court demolition order. Such a course would have allowed Mr Stephan an opportunity to be heard as to whether a permit was required, would have been cheaper than proceedings in this Court, and would likely have been successful, with costs awarded against Mr Stephan. The shed would then have been demolished by the plaintiff at Mr Stephan's cost. But such a course would not have led to Mr Stephan's caveats being removed - which was the purpose of the s 146 notice and this proceeding.

30 The critical issue for determination is whether, in all the circumstances, Mr Stephan's conduct concerning the shed and the failure to demolish it until January this year constituted a repudiation of his obligations under the Lease. The parties accepted at the hearing that Mr Stephan was not involved in the construction of the shed or in personally dealing with the issues arising from its construction, but was largely content to leave matters in Robert's hands. In part, this is because Mr Stephan is elderly and was absent from Melbourne for lengthy periods of time travelling. I accept that Robert acted as his father's agent in all matters concerning the shed and that his knowledge is to be attributed to his father.

31 Repudiation is to be determined objectively. The relevant question is whether Mr Stephan (by his own conduct and that of his son) evinced an intention to no longer be bound by the terms of the Lease or that he would fulfil his obligations only in a manner substantially inconsistent with those obligations.[5] In Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd & Anor, Gleeson CJ, Gummow, Heydon and Crennan JJ stated:

The test is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.[6]

32 A conclusion that a party has repudiated a contract is 'a serious matter and is not to be lightly found'.[7] This is all the more so in respect of a lease, especially a long term lease such as the Lease in this proceeding.

33 In Progressive Mailing House Pty Ltd v Tabali Pty Ltd, the High Court held that ordinary principles of contract law, including that of termination for repudiation of fundamental breach, apply to leases.[8] Mason J stated, however, that repudiation or fundamental breach of a lease involves considerations which are not present in the case of an ordinary contract.[9] Mason J rejected the submission in that case that abandonment of possession was necessary to constitute repudiation of a lease, but added the qualification:

On the other hand, it should be acknowledged that it would be rare indeed that facts which fell short of abandonment would properly be seen as constituting repudiation by the lessee in the case of a long lease at a rental which was either nominal or but a fraction of the amount which could be obtained in the market place.[10]

34 Deane J also considered that the application of contractual doctrines of termination for repudiation or fundamental breach required courts to consider different considerations from ordinary contracts. His Honour expressly referred to a 'qualification' to the general principle that ordinary principles of contract law are applicable to contractual leases, in the following terms:

The qualification is 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 the 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. Indeed, one may reach the case where it would be quite artificial to regard the tenant's rights as anything other than an estate or interest in land (e.g., a ninety-nine year lease of unimproved land on payment of a premium and with no rent, or only a nominal rent, reserved). In such a case, it may be difficult to envisage circumstances in which conduct of the tenant short of actual abandonment would properly be held to constitute repudiation or fundamental breach ...[11]

35 In Apriaden Pty Ltd v Seacrest Pty Ltd & Anor,[12] Ormiston JA referred to the qualification referred by Mason and Deane JJ as one of the 'only exceptions to the general approach that conventional contractual remedies for repudiation or fundamental breach apply to leases.'[13] Ormiston JA stated that the exception applied to 'leases of the kind where ordinary contractual remedies are effectively impossible to apply, for example, because the only consideration has been a premium and a nominal rent.'[14]

36 In the same case, Williams AJA echoed the qualification expressed by Mason and Deane JJ in Tabali in the following terms:

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, the existence of which must be objectively ascertained. The proprietary nature of the interests of each party to the lease contract has special ramifications in relation to the application of contractual principles. 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.[15]

37 In Willmott Growers Group Inc v Willmott Forests Ltd (receivers and managers appointed) (in liquidation),[16] the High Court reaffirmed the general applicability of contractual principles of repudiation and fundamental breach to leases. The Court did not, however, consider the qualification or exception for cases such as the present, involving long term leases at a nominal rent which are effectively an estate or interest in land. Of course, in this case, the Lease includes the Option which is also for a peppercorn sum and is exercisable at any time prior to the expiration of the term of the Lease.

38 If the Lease in this case has been repudiated, there is no issue that the repudiation has been accepted and that, accordingly, both the Lease and the Option included within it have been terminated.[17]

39 I turn to consider the application of these principles to the facts of this case.

40 It was submitted on behalf of the plaintiffs that the conduct of Mr Stephan and his son, in constructing the shed and refusing to demolish it until January this year, evinced an intention to no longer be bound by the Lease. The plaintiffs rely in particular upon the following facts:

(1) The shed was constructed without first obtaining a building permit. That was an illegal act, as a permit was required.

(2) Any suggestion that the shed did not require a building permit was laid to rest in unequivocal terms on 22 August 2013, when the Council wrote to the plaintiffs and rejected the opinion in the Bushy Miles report that the shed did not exceed three metres in height. Given that the Council rejection of Mr Miles's opinion was based upon material contained in his own report, Robert should then have realised that there was no substance in his belief that the shed did not require a building permit.

(3) The continued refusal to demolish the shed after this time was deliberate conduct in contravention of the law, and did not involve any rational belief that the opinion expressed in the Bushy Miles report was correct.

(4) While the plaintiffs could have provided more information to Mr Stephan or his son about events between the 22 August 2013 letter and the service of the s 146 notice in November 2014 (in particular as to the prosecution, Mr Braham's conviction and the July demolition order) the fact remains that Mr Stephan and his son refused to comply with the July 2012 Building Order on an unreasonable basis, and thereby exposed Mr Braham to a possible criminal conviction and the possibility of being held in contempt of court if the shed was not demolished in accordance with the Magistrates' Court demolition order.

(5) Notwithstanding the terms of the demolition order, Mr Stephan and his son should have demolished the shed within the 14-day period specified in the s 146 notice, because that was more than sufficient time to dismantle a rudimentary shed - a task which should take no more than a day or so. Robert's conduct in waiting until 9 January 2015 to commence demolition was simply too late in all the circumstances of the case. By then, Mr Stephan and his son had already repudiated the Lease.

41 I do not accept the plaintiffs' contentions. This is an exceptional case falling within the qualification or exception to the general principle that contractual principles of repudiation and fundamental breach apply to leases. That is clear from the contractual arrangements outlined above. Mr Stephan had all but full legal ownership of the northern portion - everything short of being its registered proprietor - and the contractual arrangements allowed for changes in planning policy during the term of the Lease to allow for subdivision and exercise of the Option. In these circumstances, it would be a very serious thing to find repudiation in the absence of abandonment of possession for a lengthy period of time. There has been no such abandonment in this case.

42 In the absence of the qualification or exception applying, the circumstances do not, in my opinion, evince an objective intention on the part of Mr Stephan to no longer be bound by the Lease. Taking the facts as a whole, Robert simply wished to have his day in court and to argue that the shed did not require a building permit. He and his father were deprived of that opportunity, because the Council took proceedings against Mr Braham and they were not informed about those proceedings, Mr Braham's plea of guilty, or the Magistrates' Court demolition order. When they ultimately learned of that demolition order, by Robert's own enquiries and not from information provided by the plaintiffs, they took reasonably prompt steps to comply with it. The fact that they may have been a few days late is not to the point. By this time, they were endeavouring to comply with the order, and thus rectify the breach of the Lease. As to the 14-day period specified in the s 146 notice, no repudiation had then occurred and the notice had no sound basis on that ground.

43 Mr Stephan has, however, breached the Lease as a result of Robert's conduct concerning the shed. In doing so, he exposed the plaintiffs to criminal prosecution. Mr Braham was in fact prosecuted. The result of the prosecution was, however, at the very low end of a finding of illegality. No conviction was entered and the costs order was of a modest amount. The plaintiffs have, however, suffered some compensable loss by reason of Mr Stephan's breach of the Lease and are entitled to recover damages - at least for the costs order against Mr Braham in the Magistrates' Court. Although a damages claim is not made specifically in the originating motion, there is a claim for further or other relief, and it would accord with justice and the overarching purpose to enable the damages claim to be ventilated as part of this proceeding. I will hear the parties as to how damages should be assessed.

Was the breach sufficiently serious to justify termination?

44 In case they failed on their repudiation case, the plaintiffs put forward an alternative case based upon a serious breach of an 'intermediate' or 'innominate' term.

45 In Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd & Anor, the High Court confirmed that breach of an 'intermediate' or 'innominate' term may be sufficiently serious in its effect upon the innocent party so as to justify the innocent party in terminating the contract.[18] In doing so, the plurality (Gleeson CJ, Gummow, Heydon and Crennan JJ) distinguished termination for breach of such a term from repudiation, on the basis that repudiation depends upon the intention evinced by the defaulting party at the time of breach, while the right to terminate for breach of an intermediate term depends upon, among other things, 'contractual intention, considered in the light of the language of the contract, the circumstances in which the parties have contracted and their common contemplation as to future performance'.[19]

46 The plaintiffs contend that the provisions of the Lease which require Mr Stephan to use the property for only legal purposes and to obtain all necessary permits for the use he makes of it, should be classified as intermediate or innominate terms. So much may be accepted. They then contend that the breach in this case was sufficiently serious as to be classified as 'going to the root of the contract' and thus justifying termination.

47 The plurality in Koompahtoo described the relevant principle to be applied in determining whether breach of an intermediate term is sufficiently serious to justify termination in the following terms:

Breaches of this kind are sometimes described as 'going to the root of the contract', a conclusory description that takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party. Since the corollary of a conclusion that there is no right of termination is likely to be that the party not in default is left to rely upon a right to damages, the adequacy of damages as a remedy may be a material factor in deciding whether the breach goes to the root of the contract.

A judgment that a breach of a term goes to the root of a contract, being, to use the language of Buckley LJ in Decro-Wall International SA v Practitioners in Marketing Ltd, 'such as to deprive the injured party of a substantial part of the benefit to which he is entitled under the contract', rests primarily upon a construction of the contract. Buckley LJ attached importance to the consequences of the breach and the fairness of holding an injured party to the contract and leaving him to his remedy in damages. These, however, are matters to be considered after construing the agreement the parties have made. A judgment as to the seriousness of the breach, and the adequacy of damages as a remedy, is made after considering the benefit to which the injured party is entitled under the contract.[20]

48 The plaintiffs' argument for a right to terminate under these principles rests upon the same facts as discussed above. The argument focussed upon the degree of the breach and the consequences of the breach for them, in particular the finding of the Magistrates' Court that Mr Braham had breached the Building Act.

49 I do not accept the plaintiffs' arguments in this respect. They pay insufficient regard to the nature of the Lease and other transaction documents, and the adequacy of an award of damages for Mr Stephan's breach of the Lease. As appears above, the nature of the Lease in this case involved giving Mr Stephan all but registered legal title to the northern portion of the Land. The parties expressly acknowledged that the purchase price of the Land did not include any consideration for the northern portion. In these circumstances, I am not satisfied that the parties intended at the time they entered into the Lease that a breach such as that which occurred in this case would entitle the plaintiffs to anything other than damages.

50 The alternative argument based on a right to terminate for breach of an intermediate term must fail.

51 The questions posed for determination should all be answered in the negative. There has been no repudiation of the Lease and no sufficiently serious breach to justify termination. None of the declarations sought in the originating motion should be made. The caveats should not be removed.

52 The plaintiffs have, however, established a breach of the Lease and an entitlement to damages. The Court will assess those damages.

53 I will hear the parties as to damages and costs.

54 The affidavit evidence discloses a possible further illegal structure on the northern portion of the Land, constituted by a shipping container. Council is apparently considering whether to serve a notice or take action requiring its removal. The shipping container is shown in a photograph annexed to the November 2011 Building Notice as being adjacent to the shed. Notwithstanding this, Council has taken no action to date. If Council acts, Mr Stephan should take appropriate advice and act promptly to address Council's actions.

[4] His interest under the Lease may be protected by s 42(2)(e) of the Transfer of Land Act, but it is understandable that he has lodged a caveat to protect his interest as lessee.

[5] Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623, 634; Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd & Anor [2007] HCA 61; (2007) 233 CLR 115, 135.

[7] Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620, 633 (Wilson J).

[15] Ibid 334, [64] (citations omitted; emphasis added).

[17] For example, Tim Barr v Narui Gold Coast Pty Ltd [2010] NSWSC 29, [202] (citing Longmuir v Kew [1960] 1 WLR 862, 863).

[20] Ibid 140, [54]-[55] (citations omitted).

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