Reilly v Liangis Investments Pty Ltd

4404/98 - KEVIN JOHN REILLY & ANOR V LIANGIS INVESTMENTS PTY LTD JUDGMENT

1 HIS HONOUR: This is a dispute between the landlord and tenants of a motel in the Batemans Bay area as to whether the tenants have exercised their option for a renewed lease from 1 December 1998. 2 The parties are bound by lease 3898250L which expired on 30 November 1998. The clauses in the lease that call for review are clause 5, which imposes an obligation on the lessee to pay rent without any abatement, reduction or deduction and clauses 9(a)-(d), 11, 23 and 26, the relevant parts of which read as follows:

" CLAUSE 9. MAINTENANCE REPAIR AND IMPROVEMENTS BY THE LESSEE

(a) The Lessee will during the whole of the term and otherwise so long as the Lessee may remain in possession or occupation when where and so often as the need shall be maintain renew repair and keep the whole of the demised premises in good and substantial repair working order and condition damage by fire flood lightning storm tempest and reasonable wear and tear only excepted. However nothing herein contained shall impose any obligations upon the Lessee to do any work of a structural nature except such as may be occasioned by the act neglect or default of the Lessee or by its use or occupancy of the demised premises.

(b) The Lessee will at the expiration or sooner determination of this lease peaceably surrender and yield up unto the Lessor the whole of the demised premises and every part thereof in good and substantial repair order and condition in all respects and clean and free from rubbish damage by fire flood lightning storm tempest reasonable wear and tear only excepted.

(c) Without affecting the generality of the preceding sub-clauses (a) and (b) of this clause the Lessee will at the Lessee's expense:

(i) Cause the demised premises (including external surfaces of windows and doors) to be cleaned in a proper and workmanlike manner and during the whole of the term of this Lease to be kept clean and free from dirt rubbish and particularly shall store and keep all trade waste trash and garbage in proper receptacles and arrange for the regular removal thereof from the demised premises.

(ii) From time to time make good any breakage defect or damage to any adjoining premises or any facility or appurtenance thereof occasioned by want of care misuse or abuse on the part of the Lessee of the Lessee's servants agents subtenants or Licensees or other person claiming through or under the Lessee or otherwise occasioned by any breach or default of the Lessee hereunder or under any rules or regulations of the Lessor made pursuant hereto.

(iii) From time to time forthwith comply with all statutes ordinances proclamations orders or regulations present or future affecting or relating to the demised premises and with all requirements which may be made or notices or orders which may be given by any governmental semi-governmental city municipal health licensing civic or any other authority over or in respect of the demised premises or the user thereof and will keep the Lessor indemnified in respect of all such matters in this paragraph referred to. However the Lessee shall be under no liability in respect of any structural alterations not caused by the Lessee's use or occupation of the demised premises.

(iv) The Lessee shall at least once during the term of this lease paint the external woodwork and roof of the improvements on the land and undertake the said painting work entirely at its own expense.

(d) The Lessor will not without the previous consent in writing of the Lessor make any alteration or addition in or to the demised premises or any part thereof.";

If the whole or any part of the demised premises shall be destroyed or damaged by fire flood lightning storm tempest or other disabling cause so as to render the same substantially unfit for the use and occupation of the Lessee during the term then: ...

(d) Pending any such termination by either party as aforesaid then upon the happening of any such damage or destruction as aforesaid the total annual rent hereby reserved (or a proportionate part thereof according to the nature and extent of the damage sustained) shall abate and all or any remedies for the recovery of such rent (or such proportionate part thereof) shall be suspended unless and until the demised premises shall have been rebuilt or reinstated or made fit for the occupation and use of the Lessee.";

Each of the covenants by the Lessee which are specified in this Clause are essential terms of this lease:

Clause 5 (Rent Provisions), Clause 7(a)(User), Clause 8 (Sub-letting), Clause 9(a)(Maintenance and Repair by Lessee), Clause 9(c)(i) (Cleanliness of demised premises), Clause 9(c)(iii) (Compliance with Statutory Requirements), Clause 13 (Lessee's Insurance), Clause 14 (Indemnities), Clause 25 (Rates).";

If the Lessee shall desire to take a renewed Lease of the demised premises for the further term set out in Item 4 of Schedule Two from the expiration of the term of this Lease then the Lessee shall prior to the expiration of the said term, give to the Lessor not less than three (3) nor more than six (6) calendar months previous notice in writing of such desire and shall in the meantime duly and punctually pay the rent reserved by this Lease at the time herein appointed for payment and shall duly observe and perform the covenants and agreements by and on behalf of the Lessee contained in this Lease up to the expiration of the term hereby granted THEN SUBJECT TO the Lessee not being in breach or default of any covenant or condition of this Lease at that time but not otherwise, the Lessor will at the cost of the Lessee demise to the Lessee the said premises hereby demised for that further term as is set out in Item 4 of Schedule Two ..." 3 Under clause 26, in order to get a renewed lease for five years the lessee had to do three things: (a) give to the lessor a notice no later than 31 August 1998; (b) in the meantime, duly and punctually pay the rent; and, (c) duly observe and perform the covenants and agreements up to the expiration of the term, ie 30 November 1998. However, clause 26 continues with the words following "THEN SUBJECT TO", the most significant of which being "the Lessee not being in breach or default of any covenant or condition of this Lease at that time ...". I will return to those words in due course. 4 On 15 June 1998, the lessee's solicitors gave the landlord a notice. Paragraphs 2, 4 and 5 of that notice are as follows:

"Pursuant to the terms of the Lease executed by our client and, in particular, clause 26 of Memorandum X170879, our clients hereby give notice of their intention to seek a renewal of that Lease pursuant to the option granted.

"Our clients have also asked us to indicate to you that they would be interested in a further Lease beyond the period contained in the option to this Lease. In that respect, our clients would seek a further Lease for five years with a further five year option. You might let us have your advices as to whether you would be interested in granting a Lease on those terms to our client.

"In respect of the exercise of option, we look forward to receiving a Lease for the five year period at your earliest convenience." 5 The landlord replied, after other correspondence dealing with various matters, to the effect that it did not recognise that the lessees had put themselves in the position where they were entitled to a new lease. 6 The demised premises consist of what can conveniently be described as a motel on two levels - a ground floor level consisting of units 1-5, and the first floor consisting of units 6-10. The demised premises also include a bistro and the tenants' residence. The physical building also contains a flat that the landlord has retained, which has never been part of the lease. 7 The lessees informed the managing agent on 25 June 1998 that they had discovered on 20 June 1998 that the floor tiles in unit 6 of the motel "have exploded off the concrete slab inside the doorway and underneath the carpet." The notice asked the landlord to rectify the problem as the unit was uninhabitable in that condition. 8 On 4 July a further letter in similar terms was written in respect of unit 9, where the tiles exploded off the floor while the unit was being occupied by an elderly lady. The managing agent replied that the matter was one for the tenants to look after. Neither side budged from their position. 9 Commencing on 1 August 1998, the lessees made an abatement of rent because they could not let units 6 and 9. They considered that the landlord was in default and that, in the words of clause 11 of the lease, part of the premises were substantially unfit for use and occupation. 10 On 2 September 1998, the landlord locked units 6 and 9 and thereafter denied the lessees any access to those units. The lessees say they lost their Christmas trade for the 1998/99 period because of this, and claimed substantial damages. 11 On 30 July 1999, the court made a mandatory order, seemingly by consent, permitting the tenants to go in and do the repairs. The repairs were effected by removing the tiles, re-laying the carpet at a cost of some $1,560, though there was a further $500 for ancillary work. 12 The apparent issues between the parties when the case commenced involved a number of matters, which, when one analysed the case properly, were completely irrelevant. The Chief Judge held a directions hearing on 2 December 1999 and was told that no amendment to the pleadings was necessary. However, today the landlord mended both its defence and its cross claim to add substantially new matters. These were allowed, over objection, as no further evidence was required. The monetary amount involved in this case is relatively small and so it would be tragic to decide the matter on a series of technicalities. However, because ample opportunity has been given for amendments of the pleadings, the court really needs to look at what the parties have sued each other in respect of fairly closely. 13 Another problem in this case is that it is another situation where the true extent of s133E of the Conveyancing Act is up for consideration. That section has been differently construed by various judges in this Division. In the most recent reported case on the section, Flagstaff Investments Pty Ltd v Cross Street Investments Pty Ltd (1999) NSW Conv R 55-920, Windeyer J at paragraph 34 said that:

"In the absence of Appellate decision, clearly legislation should be enacted as quickly as possible ..."

to save the great expense of landlords and tenants in this area of the law. I wholeheartedly agree with his Honour's observation. 14 The first point raised by the landlord's second notice, the gravamen of which I have set out, was that the lessees' notice was insufficient to exercise the option. Mr Beasley, of counsel, who appeared for the landlord, reminded me of what I had said recently in Tsaoucis v Gallipoli Memorial Club Limited (1998) NSW Conv R 55-860. That decision was affirmed by the Court of Appeal. However, I cannot, with respect, see how one can compare the circumstances of the present case with the circumstances in Tsaoucis' case, and the mere fact that notices contained similar phraseology is not sufficient. The Tsaoucis case really concerned a notice that was given well in advance of when it should have been given, and that was the key point in the case. The present notice was given within the three-sixth period that it was required to be given. 15 In my view, looking at the notice fairly, particularly the final paragraph, it is a notice intending there and then to exercise the option, though the penultimate paragraph shows that the tenants were also proposing that they would be happier with a five plus five year lease rather than that to which they were strictly entitled under clause 26. 16 Accordingly, in my view, that argument does not assist the landlord. 17 The landlord's next argument is that the tenants were in breach of the lease as at 15 June 1998. The landlord says they are so in breach for two reasons: (a) breach of clause 9(c)(iv) re painting; and (b) breach of clause 9(a) maintaining the premises in good and substantial repair. 18 However, no notice was given under s133E of the Conveyancing Act 1919 by the landlord within the required time, as a result of which that section operates that no such acts or omissions, even if established, can be relied on by the landlord. 19 A problem occurs with a condition such as clause 9(a). As I have said, this was one of the alleged breaches as at 15 June 1998, which was relied upon by the landlord. By an amendment made today, the landlord also said in paragraphs 19 and 20 that there was a breach of clause 9(a) in that the plaintiffs failed to effect repairs to the tiles in units 6 and 9 between 25 June 1998 and 21 August 1999. This is rather odd because the lease finished on 30 November 1998. But putting that aside, one has a second breach of what would appear to be a continuing covenant. 20 As quite clearly appears from the standard textbooks of landlord and tenants, there are three different types of covenants to repair which are common in leases: (a) a covenant to put in repair; (b) a covenant to keep in repair; and (c) a covenant to yield up in repair. Both (a) and (c) are covenants which may be breached once and for all, and then give rise to only one claim for damages: see for instance, Coward v Gorton (1866) LR 2 CP 153 at 169 to 170. However (b) is a continuing covenant, which may be the subject of separate breaches. I did worry that the fact that a s133E notice had not been given in respect of the covenant in clause 9(a) meant that no breach of clause 9(a) could be relied on by the landlord. However, on more mature consideration, it seems that the words "acts or omissions" were raised deliberately by the Legislature in s133E of the Conveyancing Act so that, even though one has the same covenant, one can look at different breaches. 21 The next matter is whether the landlord or the tenants were guilty of any breach of clause 9(a). This is a very awkward matter and raises at least two problems. The first is whether the problem of the tiles was one which, to quote clause 9(a), involved "the Lessee to do any work of a structural nature". Mr Morahan, counsel for the tenants, said it did. Mr Beasley said it did not. 22 The position was complicated because two "experts" gave slightly different views as to the problem. Looking at the matter sensibly on the evidence, the problem was that the tiles became heated, the adhesive on the floor tiles deteriorated so that the adhesive could no longer hold the tiles in place. Probably there was an inadequate allowance for expansion and when the tiles expanded and the adhesive was no longer capable of retaining them they "popped up". 23 The work that was required to be done was one of three possibilities: (a) re-lay the tiles by putting more adhesive on them, though one would have thought that would be a rather short term solution because as soon as the adhesive went again the same problem would recur; (b) re-lay the tiles with proper expansion and proper adhesive; or (c) remove the tiles. 24 It does not seem to me that any of those three pieces of work involved interfering with the structure of the building; see Hampson v Clyne (1967) 86 WN (NSW) (Pt 1) 321, 322. What clause 9(a) contemplates is that the tenants have the use of the building, but that the wholeness of the building is a matter for the landlord alone. Anything that interferes with the stability of the whole or involves interference with structural members is something for the landlord. Other work is work for the tenants. 25 It may well have been that the tenants would have had to get the landlord's consent to do work which, without that consent, might be a breach of clause 9(b) or 9(d) of the lease. But, even the shortsighted solution (a) that I have mentioned above, could actually have been done by the tenants without being a problem to anybody. 26 Thus, in June/July 1998, it was a matter for the tenants to repair this defect and they have only themselves to blame for any consequences of non-repair, at least up to 2 September 1998 when the landlord made it impossible for them to repair. 27 There was some discussion as to whether renewing the tiles or removing the tiles was a matter of repair. I was referred to authorities such as Lurcott v Wakeley [1911] 1 KB 905. Really, the matter is one of fact. There is a delineation between renovation on the one hand and repair on the other, but many repairs do involve renewing something. 28 Accordingly, between 25 June and 2 September there was a breach of clause 9(a). 29 It is hard to classify the landlord's action on 2 September 1998. I suppose practically speaking, the landlord just thought the units were unsafe, and acted without thinking through the legal ramifications. However, the landlord really had the option of either putting an end to the lease altogether, or doing nothing. The tenants' lease, in any event, was to continue through to 30 November 1998 and the landlord had no right to go onto the premises at all, except for the purposes authorised by the lease such as inspection after due notice. The tenants say that there was a breach of the covenant to peaceably possess and enjoy without interruption by the landlord's action on 2 September 1998. That must be so. 30 Furthermore, the involvement of the landlord was something which would have constituted a trespass against the tenants but the plaintiffs have elected to sue in contract rather than in tort. A further consequence of the action of the landlord is that, as a person cannot benefit by their own wrong, any obligation on the tenants to repair after 2 September until 30 November was, at least, put into suspension because the landlord had put it out of the tenants' power to do so. Moreover, the landlord cannot be heard to say that it had acted wrongfully in acting as it did. Although there was a breach after a reasonable period from 25 June - it continued until 2 September 1998 - there was thus not a breach on 30 November 1998 in respect of clause 9(a). 31 I have put further consideration of clause 9(a) aside for a short time. 32 The other breach is non-payment of rent. 33 The tenants again, it would seem, by some gut feeling, rather than consideration of their legal position, abated the rent from August through to November because they could not let units 6 and 9 due to the problem with the tiles. 34 The question is whether, under clause 11, the premises were substantially fit for use and occupation during this period. If they were, then clause 11(d) would make the rent abate. It seems to me that the landlord's action on 2 September amounts either to an admission, or conduct from which one can readily infer that both landlord and tenants thought that the units were unfit for use and occupation. That is, they were in the same condition from the time of the explosion of the tiles until 2 September. The same must have been the situation in August. Accordingly, in my view, the rent properly abated from August until November, and there was no breach of the covenant to pay rent. 35 Returning then to clause 9(a), there is the matter that the tenants did not have to repair damage caused by reasonable wear and tear. The onus was on the tenants to show that the problem was caused through reasonable wear and tear. But, in my view, on my finding that it was gradual wearing out of the adhesive, then the effects of heating after that wearing down, the problem would appear to be one that was caused by reasonable wear and tear. 36 However, that may not be the end of the matter because, although there was a problem that was caused by reasonable wear and tear, the result was that one had this ridge in the middle of the floor which called out for remedial action and the remedial action was one which had to be done by the tenants. The cases show that if one has a problem through reasonable wear and tear, which results in the premises being exposed, for instance, to water so that they would suffer damage, the obligation under the covenant is on the tenant to make that repair: Regis Property Company Ltd v Dudley [1959] AC 370. It seems to me that the present case falls within that category, so that even though the original problem came through reasonable wear and tear, its manifestation was one that it was a breach for the tenants not to have repaired. 37 One then has to face the problem as to what s133E of the Conveyancing Act really means. It has been the subject of a series of decisions in this court, unfortunately, not all going in the one direction. In previous cases, I have said that where a notice has to be given X months before the end of the lease, and there is an obligation on the tenant to keep the premises in proper repair until the end of the lease, s133E covers the situation up to the notice and thereafter one relies on general equitable principles; see Brennan v Kinjella (1993) 6 BPR 13, 168. 38 The Chief Judge has said that one allows the landlord in such a situation the appropriate period from the end of the lease in which to give the notice: Nessmine Pty Ltd v Devuzo Pty Ltd (1989) NSW Conv R 55-496. Both Bryson J, in Rethmeier v Pioneer House Pty Ltd (1990) NSW Conv R 55-516, and Windeyer J, in the Flagstaff case, declined to follow both those cases and said that the teeth in s133E are drawn at the date of the notice and thereafter the old law of Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1957) 59 SR (NSW) 122 applied. That law was that a clause such as clause 26 gave to tenants the right to accept the landlord's offer of a new lease if, and only if, they strictly complied with every condition of that offer. If they did not comply with every condition of that offer, then there was just no contract and if there was no contract then it was not possible for equity to give any relief against forfeiture. 39 In my view, in the present case it does not matter which line of authority one follows, as due to the peculiar drafting of this clause the tenants are still entitled to succeed. As I have said, I agree with Windeyer J's remarks that this is a matter that requires the urgent attention of the Legislature, and if more money were involved in the present case, I might have referred it to the Court of Appeal. 40 However, in my view, the approach taken by myself in earlier cases or that taken by the present Chief Judge is more in accordance with what the Court of Appeal said as to the wide construction that must be given to s133E. In Stellar Mining NL v Evanel Pty Ltd (1983) NSW Conv R 55-118 at 56,867, Hope JA, with whom Glass and Samuels JJA agreed, said:

"... before 1972 Courts in New South Wales had no jurisdiction to grant relief to a lessee who wished to exercise an option given by the lease but who had failed to comply with the terms of the lease, compliance with which was a condition of the right to exercise the option. This hiatus in the general and statutory law having been remedied elsewhere, Div. 4 was inserted in the Conveyancing Act to fill that hiatus in New South Wales." 41 When one reads those words, especially in the light of the decision of Wootten J, at first instance, Evanel Pty Ltd v Stellar Mining NL [1982] 1 NSWLR 380, it seems to me that one must read the section, which is a remedial section, fairly widely, which one does not do if one says that between the date of the notice and the date of the expiry of the lease McCaul's case applies in full force. 42 However, even assuming that the Flagstaff decision is correct, one must still not be carried away by generalities, but must look at the particular clause. If the clause finished before the words "then subject to" there would be a lot to be said for Mr Beasley's argument, assuming the Flagstaff case was correctly decided. But one has to read all the words of the clause, and the words after "then subject to" seem to focus on the time which must mean the time that the lease expires, which is 30 November 1998. One must ask at that time whether there was a breach of any covenant or condition. 43 That is a sensible approach in many ways because otherwise any breach at any time after the notice was given, even if it was trifling and had been remedied, such as payment of rent a day late, would destroy the option. That is not what the parties intended. They faxed what the situation was on 30 November. On 30 November for the reasons I have given, there was no current breach and so there was no reason why the exercise of the option to renew by the tenants should not take effect according to its tenor. 44 Putting all these thoughts together and looking at the relief sought by the various parties, I can now give some answers. It is necessary to deal with one matter in a little more detail. 45 The principal relief sought by the plaintiffs is that the defendant specifically perform the contract that came into effect as a result of the option being exercised. The plaintiffs are entitled to that relief. Secondly, the plaintiffs seek orders that the defendant perform its obligation to perform structural repairs to units 6 and 9. They are not entitled to that. Thirdly, the plaintiffs claim that they are entitled to damages for breach of the covenant to peace and quiet enjoyment. The plaintiffs are entitled to damages for the period from 2 September 1998 to 30 November 1998, when the lease came to an end. It may be that some compensation, et cetera, can be allowed in accordance with the specific performance suit, but that is another matter which I will leave until the short minutes are brought in. 46 So far as the damages are concerned, the damages, in my view, must only be nominal. The causa causans of the loss was really the plaintiffs own fault for not repairing the floor. The action of the defendant in putting it out of their power to do so probably did them a favour rather than anything else, because otherwise they would probably have lost their option. Accordingly, I find damages of $10. 47 Turning to the cross claim, there are applications for reverse declarations. These cannot be made for the reasons I have already given. 48 Secondly, there is an application for delivery up of possession. This order cannot be made because, first of all, the option was properly exercised and, secondly, in any event, the landlord has been accepting rent even after 30 November 1998 and has never given a proper determination of the tenancy that would result. 49 Thirdly, the landlord seeks orders that the tenants repay the amount which had been abated from the rent. It is not entitled to that for the reasons I have given. I cannot see how any damages flow, in the circumstances of this case, from any other possible breaches on behalf of the tenants. Accordingly, the cross claim should just be dismissed.

50 I will stand the proceedings over to 9.50 am on 7 March 2000 for short minutes to be brought in, when I will decide the question of costs. The only argument appears to be whether the Calderbank letter of 28 January 2000 should affect the position. I suspect this is of academic interest only as, by then, briefs on hearing would have been delivered.

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