Progressive Mailing House Pty Ltd v Tabali Pty Ltd

Progressive Mailing House Pty Ltd v Tabali Pty Ltd - [1985] HCA 14 - HCA 1978 case summary — Zoe

[84]

In Total Oil Great Britain Ltd. v. Thompson Garages (Biggin Hill) Ltd. [61] , Lord Denning M.R. thought that a lease, being a demise as well as a contract, does not come to an end on repudiation and acceptance. His Lordship thought that views expressed by Lord Russell of Killowen and Lord Goddard in Cricklewood Property and Investment Trust Ltd. v. Leighton's Investment Trust Ltd. [62] that frustration does not bring a lease to an end supported the view that repudiation and acceptance does not do so. Holding that the lease continued, his Lordship rejected an argument that a breach by the lessor gave the lessee an option to be relieved of its contractual obligations. Subsequently in National Carriers v. Panalpina Ltd. [63] the House of Lords held that the doctrine of frustration can, in principle, apply to leases. Lord Wilberforce [64] said that "there is nothing illogical in implying a term that [the lease] should be determined on the happening of events which in an ordinary contract work a frustration". The speech of Lord Simon of Glaisdale [65] contains a passage to the same effect. The question whether the doctrine of frustration is excluded when the contractual obligation relied on is created by an instrument of lease was considered by this Court in Firth v. Halloran [66] . Opinions were divided. I do not stay to consider that question, for we are not now concerned with a suggested determination of a lease by frustration. Discharge of contract by frustration and discharge by repudiation and acceptance are distinct modes of termination of contract to which different consequences attach. There is no valid analogy between the implication of a term that determines a lessee's interest on the happening of a frustrating event and the implication of a term empowering a lessor to elect to determine a lease before the expiry of the term granted in the event of repudiation by the lessee, especially if the term is to be implied in a lease which contains an express power to determine the lease in the event of a breach of covenant. An implied term that a lease should determine on the happening of a frustrating event is in the nature of a limitation. An implied term that a lessor should have an election to determine if the lessee should repudiate is in the nature of a condition. Where, as in the present case, a lease contains a proviso for re-entry in certain events including the commission of specified breaches of covenant, it is not possible to imply a term which entitles the lessor to determine the lease in the event of anticipatory breaches of covenant that do not constitute a specified breach of covenant. The lessee's interest in the land, once vested in him by the demise, may be divested by breach of a condition of defeasance (as described in Bashir v. Commissioner of Lands [67] ) or by exercise of a power of re-entry for breach of covenant expressly reserved by the lease. A lessee's contravention of the provisions of a lease does not otherwise empower a lessor to determine the lease: Doe d. Dixon v. Roe [68] . Thus Woodfall's Law of Landlord and Tenant, 28th ed. (1978), p. 836 says:

[85]

A lease may be determined by entry or ejectment for a forfeiture incurred either by (1) breach of a condition in the lease; or (2) for a breach of any covenant, in case (and in case only) the lease contain a condition or proviso for re-entry for a breach of such covenant. A footnote reads: It is of importance that a lease for years should contain a proviso for re-entry for non-payment of rent at any rate, as otherwise the lessor may find himself saddled with an impecunious tenant, and not be able to get rid of him. In Hallen v. Spaeth [69] , the lessee sub-demised for the whole of the term contrary to the stipulation in his lease, but Viscount Haldane, delivering the judgment of the Judicial Committee, said that "the lease conferred on the lessor no right to put an end to the term for such a breach, and his remedy was merely in damages for breach of agreement" [70] . It may be noted in passing that the issue in that case turned on a provision in the sub-demise which did not touch or concern the interest which passed to the sub-lessee, and it was in reference to that circumstance that his Lordship said that "it is the contract between the sub-lessor and his sub-lessees, and not the estate which passed, which is the determining factor" [71] . Isaacs J. referred to those words in Firth v. Halloran [72] , but neither that reference nor the speeches in Hallen v. Spaeth support the proposition that a lessor may determine a lease by mere acceptance of a lessee's repudiation of his obligations under the covenants of a lease where the lessee's interest in the land is not liable to forfeiture. It would be a curious law which permitted a lessee in breach of covenant to seek relief against forfeiture while denying the prospect of relief to a lessee who had committed an anticipatory breach. 1. [1972] 1 Q.B. 318, at p. 324. 2. [1945] A.C. 221. 3. [1981] A.C. 675. 4. [1981] A.C., at p. 694. 5. [1981] A.C., at p. 705. 6. (1926) 38 C.L.R. 261. 7. [1960] A.C. 44. 8. (1849) 7 C.B. 134 [137 E.R. 55]. 9. [1923] A.C. 684. 10. [1923] A.C., at p. 687. 11. [1923] A.C., at p. 690. 12. (1926) 38 C.L.R., at p. 269.

[99]

It must not be forgotten that a right of action had arisen on the termination of the correspondence on the 28th June, as the defendant had given distinct notice of his intention not to perform his covenant. There was at that time a renunciation which, at the plaintiff's option, amounted to a breach of the covenants that throughout the term he would carry on a licensed victualler's business upon the premises and keep them open and in use as an inn, &c., and of the covenant not to do anything which might entail forfeiture of the licence as well as of the subsidiary covenants. The plaintiff was then entitled to claim in an immediate action, prospectively, such damages as would be caused by a breach at the appointed time, subject to any circumstances which might operate in mitigation of damages: Leake on Contracts, 4th ed., 617-618, and cases there cited, especially Hochster v. De la Tour [84] , and Johnstone v. Milling [85] Griffith C.J. [86] and O'Connor J. [1] also held that the lessor was entitled to damages. Subsequently, in Lamson Store Service Co. Ltd. v. Russell Wilkins & Sons Ltd. [2] , Griffith C.J. stated the measure of the damages: In the ordinary case of a demise for a term of years with an express covenant to pay the rent, if the lessee unequivocally repudiates the lease and abandons the land, the lessor may at his option bring an immediate action for breach of covenant, in which he will be entitled to recover the full amount of the agreed rent for the whole term, less such sum as a jury may think he is likely to derive as profits from the use of the land during the residue of the term: Buchanan v. Byrnes [3] This is the ordinary rule of damages. Thus in Hughes v. N.L.S. Pty. Ltd. [4] a repudiation of a lease by the lessee was followed by a surrender and Jackson J. [5] , applying Buchanan v. Byrnes, held that "Until surrender, [the lessor] can sue for rent as such; after surrender, he is limited to damages for loss of rent flowing from the lessee's breach of contract." 1. (1906) 3 C.L.R. 704. 2. (1906) 3 C.L.R., at p. 719. 3. (1853) 2 E. & B. 678 [118 E.R. 922]. 4. (1886) 16 Q.B.D. 460. 5. (1906) 3 C.L.R., at p. 714. 6. (1906) 3 C.L.R., at p. 721. 7. (1906) 4 C.L.R. 672, at p. 684. 8. (1906) 3 C.L.R. 704. 9. [1956] W.A.R. 100 (affd. on different grounds (1966) 120 C.L.R. 583). 10. [1966] W.A.R., at p. 102.

[101]

Although it is correct to say that repudiation by the tenant gives the landlord at that time a choice between holding the tenant to the lease or terminating it, yet at the same time a right of action for damages then arises; and the election to insist on the lease or to refuse further performance (and thus bring it to an end) goes simply to the measure and range of damages. I see no logic in a conclusion that, by electing to terminate, the landlord has limited the damages that he may then claim to the same scale that would result if he had elected to keep the lease alive. With great respect, that approach seems to me to go beyond the principles of anticipatory breach as understood in this country. An election to bring a lease to an end seems to me to be a condition of liability and not simply a factor relevant to "the measure and range of damages". A right of action for damages has not been thought to arise until the innocent party elects to accept the repudiation. Bowen L.J. said in Johnstone v. Milling [8] : It would seem on principle that the declaration of such intention by the promisor is not in itself and unless acted on by the promisee a breach of the contract; and that it only becomes a breach when it is converted by force of what follows it into a wrongful renunciation of the contract. A promisor cannot, by repudiating his obligations, unilaterally alter the legal relationships between himself and the promisee. Until the promisee accepts the repudiation, the rights and obligations arising from the partial execution of the contract and causes of action that accrue from its breach continue unaffected: McDonald v. Dennys Lascelles Ltd. [9] . The promisee's acceptance of the repudiation is an essential element in the cause of action for damages for anticipatory breach. That is because the liability in damages is substituted for the executory obligations to which acceptance of repudiation puts an end. Lord Diplock explained in Lep Air Services Ltd. v. Rolloswin Investments Ltd. [10] : Generally speaking, the rescission of the contract puts an end to the primary obligations of the party not in default to perform any of his contractual promises which he has not already performed by the time of the rescission. It deprives him of any right as against the other party to continue to perform them. It does not give rise to any secondary obligation in substitution for a primary obligation which has come to an end. The primary obligations of the party in default to perform any of the promises made by him and remaining unperformed likewise come to an end as does his right to continue to perform them. But for his primary obligations there is substituted by operation of law a secondary obligation to pay to the other party a sum of money to compensate him for the loss he has sustained as a result of the failure to perform the primary obligations. This secondary obligation is just as much an obligation arising from the contract as are the primary obligations that it replaces 1. (1971) 17 D.L.R. (3d) 710. 2. (1971) 17 D.L.R. (3d), at p. 721. 3. (1886) 16 Q.B.D. 460, at pp. 472-473. 4. (1933) 48 C.L.R. 457, at p. 477. 5. [1973] A.C. 331, at p. 350.

[114]

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. One cannot however ignore the fact that the clear trend of common law authority is to deny any general immunity of contractual leases from the operation of those doctrines of contract law: see, e.g., National Carriers Ltd. v. Panalpina (Northern) Ltd. [8] ; Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. [9] ; Corbin, Contracts (1962), vol. 6, s1356; and see the cases cited in Brooking and Chernov, Tenancy Law and Practice in Victoria, 2nd ed. (1980), par. 211; D. M. McRae, Repudiation of Contracts in Canadian Law, Canadian Bar Review, vol. 56 (1978), p. 233 and J. T. Robertson, Frustrated Leases: No to Never-But Rarely if Ever, Canadian Bar Review, vol. 60 (1982), p. 619. At first impression, that trend may appear to represent a step back towards the medieval days when the lessee's interest under a term of years was seen as a mere right in personam to sue the lessor for breach of covenant. Upon analysis however, it involves no more than recognition of the fact that the analogy between a leasehold and a freehold estate is an imperfect one and of the related fact that, except perhaps in the quite exceptional case of a completely unconditional demise for a long term with no rent reserved (cf. Knight's Case [10] ), the leasehold estate cannot be divorced from its origins and basis in the law of contract (cf. per Atkin L.J., Matthey v. Curling [11] ): the lease should be seen as "resting on covenant" (or contractual promise) and it is "the contract and not the estate which is the determining factor": see per Isaacs J., Firth v. Halloran [12] quoting from Hallen v. Spaeth [13] . That trend should be followed in this Court and it should be accepted that, as a general matter and subject to one qualification, the ordinary principles of contract law are applicable to contractual leases. 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 or in which anything less than a cataclysmic event such as the "vast convulsion" referred to by Viscount Simon L.C. in Cricklewood Property and Investment Trust Ltd. v. Leighton's Investment Trust Ltd. [14] would warrant a finding of frustration.

[116]

The memorandum of lease in the present case was for five years at a commercial rental without a premium. The consideration which the tenant gave for the demise was in the form of executory covenants. As a matter of substance, the rights of the tenant can also readily be seen as "resting on covenant" since, the memorandum of lease being unregistered, any equitable term which it created was founded upon what equity saw as an agreement to grant a lease in terms of the unregistered memorandum: see, generally, Walsh v. Lonsdale [15] ; Australian Provincial Assurance Ltd. v. Rogers [16] ; National Trustees, Executors and Agency Co. of Australasia Ltd. v. Boyd [17] ; National Carriers Ltd. v. Panalpina (Northern) Ltd. [18] ; Hewett v. Court [19] . In that regard, one needs to be mindful of the danger of over-emphasizing the equivalence of the equitable estate under an agreement for lease or an unregistered memorandum of lease followed by entry into possession and of a common law leasehold estate for the like term in that one can point to statements of authority which support the approach that the ordinary contractual doctrines of frustration and termination for fundamental breach would, in an appropriate case, operate to destroy the contractual foundation of such an equitable estate even if the view that they were not applicable at all to a common law lease had continued to prevail: see Coatsworth v. Johnson [20] (per Lindley L.J.); Swain v. Ayres [21] (per Lord Esher M.R.) [22] (per Lindley L.J.) and [23] (per Lopes L.J.), and Dimond v. Moore [24] . Be that as it may however, once it is accepted that the principles of the law of contract governing termination for fundamental breach are, as a matter of theory, applicable to leases generally, there is no difficulty in applying them in the present case in much the same fashion as to an ordinary executory contract: "[i]f the contract is avoided or dissolved the estate in land falls with it": per Lord Wright, Cricklewood Property and Investment Trust Ltd. v. Leighton's Investment Trust Ltd. [25] .

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Judgment (124 paragraphs)

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