Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd

High Court of Australia|1979-07-01|Before: Aickin JJ, Gibbs J, Stephen J, Mason J

High Court of Australia Barwick C.J. Gibbs, Stephen, Mason and Aickin JJ. Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51

In this matter the circumstances of the case are fully set forth in the reasons for judgment of my brother Mason.

I agree that the appeal should be dismissed, the ground upon which I would do so being that the Full Court of the Supreme Court was not in error in holding that, having regard to the findings of the primary judge, the respondent was not bound to accept the appellant as a tenant.

The respondent's refusal in that respect was reasonable, having regard to its justifiable apprehension as to the financial capacity of the appellant to perform the obligations of the intended lease.

I have had the advantage of reading the reasons prepared by my brother Mason and agree with them. I would accordingly dismiss the appeal.

I would dismiss this appeal for the reasons stated in the judgment of Mason J.

The respondent is the registered proprietor of an estate in fee simple of land at Toowong in Queensland on which is erected a multi-storeyed office block known as Sherwood House. The respondent acquired the land by conveyance from the appellant pursuant to a contract of sale dated 29th December 1972 which was expressed to be between the appellant as vendor and St. Martins Properties (Australia) Pty. Ltd. or its nominee as purchaser. It is common ground that the respondent was liable to be sued on this contract.

The purchase price under the contract was $2,090,000 of which $209,000 was paid by way of deposit and a further $1,711,000 was payable on 26th January 1973 in exchange for documents of title. Payment of the balance of the purchase price was made conditional on the existence of leases of parts of the building providing for the payment to the owner of the building of a gross rental in a stipulated amount. Clause 1 (a) of the contract deals with this matter. It provides:

(iii) The Purchaser shall pay to the Vendor the balance purchase moneys, namely One Hundred and Seventy Thousand Dollars ($170,000.00) on or before the expiration of four calendar months from the twentysixth day of January, 1973 or within fourteen (14) days from the date that the Vendor shall produce to the Purchasers evidence to the reasonable satisfaction of the Purchasers that leases aggregating a gross rental income in respect of the subject premises of not less than $227,900.00 per annum whichever date shall first occur provided that such date shall not be prior to the twentysixth day of January, 1973. This Clause shall be subject always to the provisions of Clause 1 (b) hereof.

It is evident that something has been inadvertently omitted from the sub-clause. Some word or words such as "exist" or "have been entered into" need to be supplied after the word "leases" and before the word "aggregating".

1 (b). The Vendor hereby expressly warrants that it will on the twentysixth day of January, 1973 hand to the Purchasers or its solicitors executed leases providing for payment to the owners of the subject premises of a gross rental of not less than $210,000.00 per annum in the aggregate (such aggregate to be calculated by reference to the year commencing First day of February, 1973 and ending Thirtyfirst day of January, 1974).

1 (c). In the event that at the expiration of four calendar months from the twentysixth day of January, 1973 the Vendor shall not be in a position to provide to the Purchaser evidence to the reasonable satisfaction of the Purchaser that the aggregate rental payable per annum under leases in respect of the subject premises does not amount to $227,900.00 then in such case the balance purchase moneys payable in Clause 1 (a) (iii) hereof shall be reduced by an amount representing the same proportion of the total purchase price payable viz: $2,090,000.00 as the difference between the gross annual rental payable under the respective leases of the subject premises as at the twentysixth day of May, 1973 and the sum of $227,900.00 per annum bears to the sum of $227,900.00. The resultant sum from such proportion shall be deductible from the aforesaid sum of $170,000.00 and the difference shall be paid by the Purchaser to the Vendor within three (3) days from the Twentysixth day of May, 1973.

There appear to be two errors in cl. 1 (c). First, the presence of the word "not" before the words "amount to $227,900.00" makes nonsense of the provision. The sub-clause should be read as if it were deleted. Secondly, it makes little sense to impose on the vendor the obligation of producing evidence of the aggregate rental to the reasonable satisfaction of the purchaser when we know from cll. 1 (a) (iii) and 1 (e) that the purchaser was to become the owner and the lessor on 26th January 1973 with knowledge of all leases of the building granted before and after that date. In all probability the draftsman failed to appreciate that title to the property was to pass on that date. As we have seen and as we shall discover, it was not the only matter to escape his eye.

After the date of execution of this Contract all leases of the subject premises shall be first approved by the Purchaser. Such approval shall not be capriciously or arbitrarily withheld. If the Purchaser shall not approve any lease in proper exercise of its rights under this Contract then the Vendor shall not grant any lease not so approved.

Clause 1 (e) provided that the respondent purchaser was to be entitled to possession and to the rents and profits from 26th January 1973. Clause 1 (f) provided that the contract was to be subject to all leases, tenancies and licences set out in the Schedule "and any other leases tenancies or licences which shall be approved by the Purchaser and shall come into existence between the date hereof and the date of final payment of balance purchase moneys ". Again, this clause wrongly assumes that the appellant vendor would be entering into leases and the respondent purchaser would be approving leases granted after 26th January, the date of final completion.

Clause 1 (h) fixed minimum rentals for all leases entered into between the date of the contract and the date of final completion - $3.00 per square foot for an entire floor and $3.75 per square foot for part of a floor.

On 26th January 1973 the gross rental from executed leases was only $122,585.56 in the aggregate. By a deed dated 26th January 1973 executed by the appellant on that day and by the respondent on 13th May 1973, the appellant covenanted to pay to the respondent by monthly payments in each of the three years 1973, 1974 and 1975, commencing on 27th January 1973, the difference between the aggregate amount of annual rental paid by the lessees of the premises and the sum of $210,000. The payments were to be made on the first day of each calendar month.

In March 1973 the appellant desired to obtain payment of the balance of the purchase price. As the gross rentals were far below the figure of $227,900 mentioned in cl. 1 (c), the appellant was not in a position to insist on payment of the balance of the purchase price. As an answer to the difficulty the appellant proposed on 13th March 1973 at a meeting with representatives of the respondent that it should take a lease from the respondent of the whole of the unlet space in the building so as to bring about a situation in which the balance of the purchase price became payable under the contract. No agreement was then reached in relation to the proposal.

Correspondence ensued between the solicitors for the parties. In a letter dated 24th May 1973 the appellant's solicitors stated that the appellant offered, as it had done on 14th March, to take a lease "for a term of not less than three (3) years with options as granted to other lessees (or such other lesser term as your client may require) at the current rental, be it not less than $3.75, or other amounts being paid by lessees, per square foot per annum and otherwise upon the terms and conditions contained in the various Leases which have so far been executed" of such vacant part of the premises as would produce, together with the other rental already received, $227,900 per annum. The same offer was again made by the appellant's solicitors in a letter dated 25th May. It was rejected by the respondent's solicitors in a letter dated 31st May. The space then unlet was not a self-contained area all on one floor; it consisted of pockets of unlet space on several floors. No doubt this was the reason why the appellant offered a rental of $3.75 per square foot.

It was common ground that on 26th May 1973 the gross rentals payable under the leases already secured was so far below $227,900 that the balance of the purchase price was reduced by the operation of cl. 1 (c) to nil.

The appellant commenced an action against the respondent claiming $170,000 as money due and payable pursuant to the contract. The respondent pleaded that it was not indebted. To this the appellant replied that it was an implied term of the contract that the respondent would actively co-operate, to such extent as was reasonably necessary, in efforts to secure tenants and would not obstruct such efforts and that the respondent had broken this term of the contract by rejecting the appellant as a tenant of all the unlet space in the building as at 26th May 1973. Although no amendment was made to the pleadings, the action went forward and was conducted on the footing that the appellant was claiming liquidated damages for a breach of this implied term.

The primary judge (Connolly J.) held that the appellant had first to show that a demise of the unlet space in the building to the appellant would be a lease "in respect of the subject premises" within the meaning of that phrase in cll. 1 (a) (iii) and 1 (c) in order to demonstrate the benefit it would have derived from performance of the contract had the respondent performed its part of the bargain. His Honour found against the appellant on this point. However, the primary judge also held that even if a demise of the unlet space to the appellant should be held to answer the description in cll. 1 (a) (iii) and 1 (c) the respondent was justified in refusing to accept the appellant as a tenant on the following grounds: (a) that the respondent was justifiably concerned over the financial capacity of the appellant to pay an annual rental of some $70,000; (b) that the respondent was justifiably concerned as to the integrity of the principal officers of the appellant; and (c) that the respondent was justifiably concerned that the appellant would not be "a commercial occupant" of the building. A more accurate estimate of the annual rental in (a) is $63,000.

On appeal the Full Court of the Supreme Court held that the primary judge was wrong in deciding that a lease to the appellant fell outside the conception of "leases" within the meaning of cll. 1 (a) (iii) and 1 (c). The Full Court thought that the evidence did not warrant the conclusion that the respondent was justified in refusing to grant the lease because of its concern as to the integrity of the appellant's principal officers. However, the Full Court was not persuaded that the primary judge was in error in upholding the other two grounds upon which he held the respondent to have been justified in refusing to grant the lease.

The first question for decision is as to the meaning of the word "leases" in cll. 1 (a) (iii) and 1 (c). The respondent presented two arguments: (1) that it meant leases to persons other than the appellant vendor; and (2) that it denoted "commercial leases". The first submission is based in part on the proposition that, although under cl. 1 (e) the respondent was entitled to possession from 26th January 1973, other clauses envisage that after that date and before final completion the appellant would participate in obtaining tenants for the building. Thus, cl. 1 (c) looked to a situation in which the appellant was required to produce evidence that the aggregate rental amounted to $227,900 and cl. 1 (d) obliged the appellant to pay all commissions payable to agents in respect of leases of the premises before the date of final completion. Beyond any question, these clauses contemplate leases to persons other than the appellant vendor. But it is going too far to say that they exclude or negative the possibility that a lease may be granted to the appellant by the respondent once it becomes the owner of the building. There is nothing in the grant of such a lease that is inconsistent with the imposition of the obligations expressed in cll. 1 (c) and 1 (d). It is not to be supposed that any commission would be payable to an agent in respect of the grant of such a lease.

The respondent's submission, if accepted, would have far-reaching consequences. It would exclude from consideration a long-term lease entered into by the appellant vendor with a view to occupying the leased premises to satisfy the genuine needs of its business, a result that could scarcely have been intended by the parties. In fairness to Mr. Davies, for the respondent, I should say that this submission was advanced, not as an independent argument, but rather as an ancillary argument designed to strengthen the second submission, to which I now turn.

The respondent argued that the word "leases" in the two sub-clauses denoted "commercial leases", that is, leases that are "genuine" and "real", entered into by a lessee who intended to use or occupy the leased premises for the purposes of his business, as distinct from a lease which was entered into by the appellant solely for the purpose of entitling it to claim payment for the balance of the purchase price. The respondent urged that the purpose of cl. 1 (c) was to ensure that the appellant obtained the stipulated minimum return from its ownership of the building and that this purpose suggested that the two sub-clauses were referring to genuine commercial leases, not to a lease which was entered into for an ulterior reason having nothing to do with the lessee's requirement for premises for himself or his business.

The Full Court was in my opinion correct in rejecting the respondent's second submission. I am unable to perceive any foundation in text or in context for giving the words the restricted and, I would add, rather uncertain meaning which the respondent seeks to place on them. That the purpose of the relevant conditions is to ensure that the respondent obtains the stipulated minimum return from the building so as to secure to it a minimum income on its investment may be readily conceded. But this merely serves to indicate that the contract looks to the aggregate rental to the owner produced by leases of parts of the building; the contract does not look to the actual use the lessee makes of the leased premises, nor, for that matter, to the motives or reasons which induce a lessee to take a lease of part of the building.

It can scarcely be suggested that the contract looks to long-term leases. The contract makes no attempt to spell out the elements of the leases to which it refers except to fix minimum rentals per square foot. It does not even prescribe a minimum term. It speaks of a gross rental of not less than $227,900 per annum (cl. 1 (a) (iii)) and in cl. 1 (b) of a gross rental of $210,000 per annum, to be calculated by reference to a period of one year commencing on 1st February 1973 and ending on 31st January 1974. From this it may be inferred that the contract contemplates leases having a term of not less than one year. Apart, perhaps, from this requirement, the contract contains no prescription as to the kind of lease to which it refers. All that is required is the existence of leases which at the relevant time yield in the aggregate not less than the stipulated rental. In that event the balance of the purchase price is payable.

The primary judge said that "commercial lettings would provide to a purchaser" in the situation of the respondent "such assurance of demand and of continuing revenue as he could fairly expect. Payments for a few years from the vendor on account of unlet space provide no such assurance. The evidence showed that the usual terms of commercial leases in this building were for three years with an option of a further three. The projected gross rentals of $227,900.00 amount to 10.9 per cent of the total consideration on sale ($2,090,000.00). Three years' gross rental would then be 32.7 per cent of the purchaser's outlay attributable to that rental and would not provide him with the protection against having bought unlettable space for which he has stipulated in the contract."

With respect to the primary judge, this statement does not accurately express the effect of the contract. The protection which the respondent gets by virtue of the contract is a reduction in the purchase price if leases yielding the stipulated rental are not granted. Unquestionably this protection would be more advantageous to the respondent if the contract provided that only long-term leases or leases likely to be renewed on the expiration of the initial term should be taken into account for the purposes of the two sub-clauses. But the contract makes no such provision. The fact that such a provision would provide a greater protection for the respondent is not a sufficient reason for implying it. I need only refer, as did Kelly J. in the Full Court, to the majority judgment of the Judicial Committee in B. P. Refinery (Westernport) Pty. Ltd. v. Hastings Shire Council [1] where their Lordships said:

Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract. 1. (1977) 52 A.L.J.R. 20, at p. 26; 16 A.L.R. 363, at p. 376.

The respondent also sought to rely on the oral testimony given by officers of the appellant and the respondent as to what was said and done during the course of negotiations leading up to the making of the contract, with a view to demonstrating that the parties had "commercial" leases in mind. This was said to be evidence of surrounding circumstances to which recourse could be had in interpreting the contract. In truth the evidence is not evidence of surrounding circumstances; it is evidence of the antecedent oral negotiations and expectations of the parties and as such it cannot be used for the purpose of construing the words of a written contract intended by the parties to comprehensively record the terms of the agreement which they have made. As Lord Wilberforce said in Prenn v. Simmonds [2] :

evidence of negotiations, or of the parties' intentions ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the "genesis" and objectively the "aim" of the transaction.

As to the circumstances, and the object of the parties, there is no controversy in the present case. The agreement itself, on its face, almost supplies enough, without the necessity to supplement it by outside evidence.

The comment by his Lordship in the last paragraph which I have quoted has equal application to the present case where the provisions of the contract itself so amply demonstrate that the purpose of the parties was to provide against the possibility that the respondent's investment return on the purchase price was less than the figure stipulated. 1. [1971] 1 W.L.R. 1381, at p. 1385; [1979] 3 All E.R. 237, at p. 240.

I mentioned earlier that the expression "commercial leases" is in any event an expression of rather uncertain meaning, and so it is. I do not think that it is apt to exclude the lease which the appellant offered to take. The fact that a lease is entered into for an ulterior reason of the kind suggested does not mean that it ceases to be a "commercial", "real" or "genuine" lease. It is none the less a valid and binding lease under which the lessee is bound to pay the rent for the term of the demise.

Was the respondent's rejection of the appellant's offer to take a lease of the vacant space in the building a breach of contract? This is the next question to be considered. Clause 1 (d), which required the approval of the respondent purchaser to leases after the date of execution of the contract, provided that its approval should not be capriciously or arbitrarily withheld. This sub-clause dealt with the grant of leases before the respondent became the owner, when the appellant was granting leases of parts of the building, subject to the approval of the respondent.

But it is common ground that the contract imposed an implied obligation on each party to do all that was reasonably necessary to secure performance of the contract. As Lord Blackburn said in Mackay v. Dick [3] :

as a general rule where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. 1. (1881) 6 App. Cas. 251, at p. 263.

It is not to be thought that this rule of construction is confined to the imposition of an obligation on one contracting party to co-operate in doing all that is necessary to be done for the performance by the other party of his obligations under the contract. As Griffith C.J. said in Butt v. M'Donald [4] :

It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract. 1. (1896) 7 Q.L.J. 68, at pp. 70-71.

It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.

The respondent submitted that there was no implied obligation on the respondent to grant any leases after 26th January 1973. The basis for this submission was that there was no necessity to make the implication because it was as much in the interests of the respondent to lease the premises as it was in the interests of the appellant that the respondent should do so. This argument overlooked the circumstance, vitally important in the present case, that, in the situation which arose, it was in the interests of the respondent not to grant a lease at the relevant time so as to disentitle the appellant to payment of the final balance of the purchase price.

Moreover, the argument overlooked the general tenor of the provisions of the contract to which reference has already been made. They contemplated that leases would be granted of unlet space between 26th January 1973 and the final date for completion and that it would be in the interests of both parties that such leases be granted, in particular so as to entitle the appellant to payment of the final balance of the purchase price. As I read them, they imply an obligation on the respondent to do all things reasonably necessary to enable leases to be granted.

They are certainly inconsistent with the hypothesis that the respondent had an unfettered discretion to decide whether a lease would be granted or not. It is significant that cl. 1 (d), which dealt with the grant of leases between the date of contract and 26th January 1973, prohibited the respondent from capriciously or arbitrarily withholding its approval to a lease. As I pointed out earlier, the draftsman failed to appreciate that from 26th January 1973 it was for the respondent and not the appellant to grant leases. Consequently, cl. 1 (f) referred to "leases which shall be approved by the Purchaser" coming into existence between the date of the contract and the date of final completion. However, the serious mistake which the draftsman made does not obscure the evident intention of the parties that the restriction on the respondent's power to withhold approval to a lease contained in cl. 1 (d) should be carried through and apply to all leases granted before the date of final completion. It is obvious that had the parties realized the mistake made by the draftsman they would have reformed the contract so that it made accurate provision for the grant of leases by the respondent after 26th January 1973 and restricted the respondent's power to refuse to grant a lease in conformity with the prohibition in cl. 1 (d).

This is not rectification. It is a case in which the parties through their draftsman have chosen language which is inappropriate to the circumstances which they have in mind. The misapprehension which they made is obvious, as is their reason for making it. Despite this, there is clearly manifested in the contractual provisions, inaptly expressed in part though they are, the intention that the respondent was not to be entitled before the final date for completion by any capricious or arbitrary decision to prevent the grant of a lease of unlet space in the building.

The question then is whether the respondent capriciously or arbitrarily refused to grant a lease to the appellant, the appellant having the onus of establishing that the refusal was capricious or arbitrary because it was bound to establish the respondent's breach of contract. The respondent was not bound to give reasons for refusing to grant a lease to the appellant, though its failure to do so leads more readily to the inference that the refusal was capricious (Frederick Berry Ltd. v. Royal Bank of Scotland [5] ).

The meaning of the word "arbitrarily" in the context of refusal of consent to an assignment of a lease has been much discussed. In Barrow v. Isaacs & Son [6] , Lord Esher M.R. thought that it meant "wholly unreasonably". In Mills v. Cannon Brewery Co. Ltd. [7] , P. O. Lawrence J. considered the authorities, including Barrow v. Isaacs & Son, in which the meaning of the word had been considered, and concluded that the various synonyms assigned to it, "unreasonably", "wholly unreasonably" and "without reasonable cause", practically meant the same thing. I am inclined to agree, though I should prefer to say that "arbitrarily" connotes "unreasonably" in the sense that what was done was done "without reasonable cause". In these circumstances I doubt whether "capriciously" adds anything, except perhaps to direct attention to the motivation of the respondent.

[1891] 1 Q.B. 417, at p. 419. 2. [1920] 2 Ch. 38, at p. 45.

In Colvin v. Bowen [8] , Walsh J., speaking with reference to a provision that consent to an assignment of a tenancy should not be unreasonably withheld, after referring to the decisions culminating in Houlder Bros. & Co. Ltd. v. Gibbs [9] , said:

According to the view thus preferred the grounds upon which a refusal may be based must be concerned either with the character and personality of the proposed assignee, or with matters affecting the use or occupation of the premises which may result from the proposed assignment. The somewhat less narrow view, to which reference is made by Sargant L.J. in Houlder's Case [10] , requires that the reason for refusal must be something affecting the subject matter of the contract which forms the relationship between the landlord and the tenant, and not something extraneous and dissociated from the subject matter of the contract.

It appears to me to be clear from the judgments in the cases mentioned that the principles contained in those cases would exclude from consideration, as a ground for refusal of consent, the circumstance that the lessor desires to resume possession of the property in order to occupy it. Despite the critical remarks and the expressions of doubt to which those principles were subjected in Tredegar v. Harwood [11] , the authority of Houlder's Case has been affirmed subsequently, and it must be regarded by me as binding in cases to which the principles it contains are applicable.

[1929] A.C. 72, at pp. 78, 82.
1. (1958) 75 W.N. (N.S.W.) 262, at p. 264.
2. [1925] Ch. 575.
3. [1925] Ch., at p. 587.
4. [1929] A.C. 72, at pp. 78, 82.

Approaching the contract in the present case in the light of these observations, I conclude that the respondent was not entitled to refuse to grant a lease to the appellant so as to deprive the appellant of a benefit which would otherwise accrue to it under the contract. A refusal on that ground would be capricious and arbitrary. On the other hand, a refusal on the ground that there were doubts that the appellant could or would pay the rent promptly would, if the ground were made out, not be capricious or arbitrary. I say "promptly" because the respondent as owner was entitled to look for a tenant who would not only pay the rent, but would pay it promptly and in accordance with the provisions of the lease. If the evidence established that the respondent entertained doubts, reasonably based, that the appellant would pay the rent promptly and without difficulty, then it was reasonable to refuse to grant the lease on that ground (Tredegar v. Harwood [12] ).

A consideration of the refusal is complicated by the circumstance that the respondent did not give reasons to the appellant before or at the time of refusing to grant the lease on 31st May. A document headed "Reasons for Refusal" was produced in court on the second day of the trial, but neither the document nor its contents had been communicated to the appellant or its advisers before the trial. There is authority for the proposition that the question whether consent has been unreasonably withheld to an assignment of a lease is a subjective, not an objective, question in the sense that the court must confine itself to points raised by the landlord at or about the time of refusal. In Lovelock v. Margo the Court of Appeal so decided, Lord Denning M.R. saying [13] : "it is not right to say that this is an objective question, as counsel said. This matter cannot be considered without regard to the state of mind of the landlord herself as to her reasons for refusing consent. How otherwise can a lessee hope to see whether he can assign unless he knows the landlord's reasons for objection." This passage seems to suggest that the landlord should be confined to reasons which are given to the lessee at or about the time of refusal of consent. To this extent, at least, the judgment cannot be reconciled with earlier authority which indicates that an omission to give reasons leads more readily to the inference that the refusal was capricious, although not to the conclusion that the refusal was necessarily capricious. Moreover, the passage seems to be at odds with a later decision of the Court of Appeal in Sonnenthal v. Newton [14] , where the lower court was held to be entitled to take into account reasons not referred to at earlier stages of the case. See also Isow's Restaurants Ltd. v. Greenhaven (Piccadilly) Properties Ltd. [15] .

[1963] 2 Q.B. 786, at pp. 789-790. 2. (1965) 109 Sol. Jo. 333. 3. [1970] Est. Gaz. 82.

I am inclined to the view that the landlord is entitled to rely on a ground not taken at or about the time of refusal. It would be most unjust if the landlord could not take advantage of an important ground justifying refusal merely because it was not known to him at the time, e.g. the impending bankruptcy of the proposed assignee. In the context of this case, the reasons for allowing the respondent to advance a ground not communicated at the time of refusal are rather stronger. There is here no question of informing a lessee so that he can decide whether he should assign or not. And the general rule in contract is that a party can justify his termination or rescission of a contract by reference to grounds not taken at the relevant time (Shepherd v. Felt and Textiles of Australia Ltd. [16] ).

The findings of the primary judge make it clear that the respondent gave very careful consideration to the question whether the lease should be granted, in particular on 18th May at a meeting attended by Mr. Penells, the executive director responsible for the group property, Mr. Green, the development surveyor, and the respondent's Sydney and Brisbane solicitors. It was then decided not to grant the lease, subject to an opinion from senior counsel. On 22nd May, senior counsel advised that a lease back to the vendor was not contemplated by the relevant provisions of the contract. The primary judge prefaced his discussion of the grounds for refusal with these comments:

In assessing the genuineness of the consideration given to the factors I am about to discuss on 18th May, I do not lose sight of two important facts. The first is that the [respondent] company's officers were well aware that it stood to gain the reduction in price of $170,000.00 should the lease back not be granted. The second is that the company's officers were by 18th May not favourably disposed to S.I.R.E. as a tenant anyway.

His Honour had earlier rejected the suggestion that the respondent was devising pretexts to avoid giving the appellant a lease. He said:

It is the case for the plaintiff that from 13th March onwards the defendant was engaged in devising pretexts to avoid giving it a lease and that it was playing out time. I do not believe this to be so. I found the defendant's witnesses candid and their recollection seemed to me reliable, particularly where it could be tested against contemporaneous records. The defendant was placed in a particularly difficult position. On the one hand the contract secured it against an ultimate shortfall in the projected rentals but, on the other hand, they had to face, and in my opinion they did face, and face responsibly the possibility that their duty to the plaintiff might constrain them to let it in as a head lessee with all the disadvantages which this entailed. This disposes of the suggestion that the refusal was motivated by a desire to deprive the appellant of the payment of the final balance of the purchase price.

The claim that there was doubt as to the appellant's financial capacity to pay the annual rental, estimated to be $63,000 (approximately), under the lease which it proposed to take, is based on two matters. First, there is the fact that no payments had been made to the respondent under the deed dated 26th January 1973. As I have mentioned, it provided for payment by the appellant of the rental shortfall up to $210,000 per annum by monthly payments. The respondent sent four accounts for the months of February, March, April and May before the end of May 1973. They were not paid. In a letter dated 6th April 1973 the appellant's solicitors acknowledged to the respondent's solicitors that the appellant had an obligation to make the payments under the deed, even though it was not executed by the respondent until 13th May. Moreover, Mr. Needham, the chairman and managing director of the appellant, admitted at a conference with representatives of the respondent on 4th June 1973 that the four monthly payments should have been made. In evidence he said that the payments were not made because the appellant's copy of the deed had been stolen and that the respondent had not furnished the appellant with another copy.

The amount was $22,685.86. The debits raised against the plaintiff pursuant to the deed had never been queried and no reason for the non-payment was assigned. It is true that the plaintiff had been pressing for a copy of the executed deed and as I have already said it was not executed until 13th May, but from the plaintiff's point of view one can understand that it was a disquieting situation. It was the plaintiff in whose interest it was to establish the efficacy of the deed. After all, but for the deed it was liable for breach of its warranty of commercial rentals of $210,000.00 by 26th January 1973. Once payments under the deed were accepted by the defendant, then whether the defendant had executed the deed or not the plaintiff would at worst have had a strong equity to resist any attempt to hold it liable in damages for the breach of that warranty.

The payments were ultimately made in June 1973 but meantime the respondent concluded that there was doubt as to the financial capacity of the appellant.

The second matter relied upon was the contents of a Dun & Bradstreet report relating to the appellant. The report, which was dated 30th November 1972, came into the appellant's possession in December 1972. It stated, among other things:

Two accounts were traced in the subject's name. The first was for a high credit of $280, on 60 day terms, and payments were 30 days slow. The second was for a high credit of $63, with $37 owing and $37 past due, terms were 30 days, and payments were 90 days slow, with the subject owing back to July. It was remarked that the subject was very slow.

Records disclose collection for $200, dated 6 September, 1972.

Records further disclose a small Debts Court Judgment dated 2 May, 1972. Plaintiff-John Fairfax & Sons Ltd., $397. No. 8918/72.

At this stage due to the lack of complete financial information, the loss incurred by the subject and the collection and judgment recorded against the subject, no appraisal can be made of subject's net worth or financial condition at this time.

The primary judge stated that, according to Mr. Needham, the appellant

was never worth less than $1,000,000.00 and has recently had record profits. It is true that on 6th June 1973 trading in its shares was suspended on the Sydney Stock Exchange at Mr. Needham's instance, he being concerned lest an interim dividend declared as a result of accounts for the six months ended 31st December 1972 might have been paid out of capital. S.I.R.E. published a profit for this period of $329,000.00 the greater part of which was attributable to the sale of Sherwood House to the defendant. An interim dividend of 12 per cent was declared in reliance on these accounts but they were subsequently adjusted to show a net loss of $330,000.00 for the year ended 30th June 1973. The evidence suggests that many of the adjustments were later reversed. I have however taken no account of these matters, which were not known to the defendant on 18th May. I should also mention that the plaintiff company sustained a loss of some $32,000.00 in its first few months of operation, a fact which was revealed by its published accounts for the year ended 30th June 1972 and of which Mr. Penells said he was aware on 18th May 1973.

For reasons already given, his Honour was wrong to exclude from consideration matters not known to the respondent on 18th May. None the less his Honour's conclusion was that, although financial unsoundness had not been made out, concern as to the appellant's ability to pay the rental was a sufficient ground on its own to justify the respondent's refusal to grant the lease. The Full Court considered that the primary judge's conclusions were justified by the evidence.

The appellant criticized the conclusions on a variety of grounds. It was said there was an inconsistency in the findings and that the finding against financial unsoundness could not stand with the finding that there was a reasonable concern as to the appellant's capacity to pay the rent. I do not agree. The judge did not make an affirmative finding of financial soundness. He was prepared to hold that there were grounds upon which the respondent was justified in doubting the appellant's ability to pay the rental though he was not prepared to go further and hold that it was financially unsound. Likewise, the argument that the judge accepted Mr. Needham's evidence as to the appellant's financial condition, fails to appreciate the difference between the two findings.

It was submitted that the primary judge overlooked the fact that the respondent had a liability to pay $170,000 to the appellant in the event that the proposed lease to the appellant was granted and that this amount was not far short of the total rent payable under that lease for the term of three years. But, as Kelly J. said in the Full Court:

No doubt if the appellant had received the balance of the purchase money by 26th May 1973, it could then have paid the rental for the first year, but the respondent might well have had a doubt as to succeeding years.

A stronger ground of criticism was that, had the respondent informed the appellant of its reasons for refusal, the appellant would have been in a position to furnish evidence of its financial position and thereby disabuse the respondent of its erroneous impression. Although there is much to be said for this argument, I do not think that it is correct.

It is important to recall that it was for the appellant to establish that the respondent's refusal was without reasonable cause. The relevant ground taken by the respondent was not that the appellant was financially unsound, but that there was sufficient doubt as to its financial soundness to justify the refusal of the lease. As I observed earlier, the refusal was not without reasonable cause if on the evidence, despite the appellant's soundness, the respondent entertained doubts, which were reasonably based, as to the appellant's willingness or ability to pay the rent promptly in accordance with the terms of the proposed lease. On the findings made by Connolly J. and indorsed by the Full Court, the respondent had such doubts.

The only question is whether they were reasonably based. The history of the payments under the deed and the material contained in the mercantile report were quite sufficient to raise a real doubt as to the ability of the appellant to pay the rent promptly. The evidence does not show that the appellant, had it been given the opportunity of presenting evidence to the respondent, would have succeeded in painting a different picture. The truth of the matter was that the appellant would have been forced to disclose the unsatisfactory developments, referred to by Connolly J., which occurred in relation to its profits for the year ended 30th June 1973.

As the appellant has failed to show that the respondent had no reasonable ground for doubting the appellant's ability to pay the rent promptly, it has failed to show that the respondent's refusal to grant the lease was capricious or arbitrary.

I have had the advantage of reading the reasons for judgment prepared by my brother Mason and agree with them. I would therefore dismiss this appeal.

At a glance

Court

Decision date

Before

Source

Judgment (80 paragraphs)

Parties