Williams v Frayne [1937] HCA 16

[1937] HCA 16

High Court of Australia|1937-07-01|Before: Tiernan JJ, Macfarlan J

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At a glance

Source facts

Court

High Court of Australia

Decision date

1937-07-01

Before

Tiernan JJ, Macfarlan J

Source

Original judgment source is linked above.

Judgment (130 paragraphs)

[1]

H.C. or A. Guarantee - Lease - Assignment to creditor as security - Failure of creditor to obtain

[2]

landlord's consent - Omission to exercise option to renew lease - Breach of covenant - Novation - Agreement to give time to deblor - Property Law Act 1928 ( Vict.) (No. 3754), sec. 146,

[3]

A tenant under an agreement for a lease of business premises borrowed money from a merchant supplying his stock and assigned his interest under the lease to the lender, the loan being guaranteed. The landlord's consent was not obtained to the assignment as required by the agreement for the lease. The tenant sold the business carried on on the premises, and successive resales took place to different purchasers; each purchaser took possession and paid the rent directly to the landlord and dealt directly with the lender, who by his books treated the purchaser for the time being as his debtor. Finally, the last purchaser at a time prior to the expiration of the agreed term obtained a new lease from the landlord in substitution for the old. The Jand- Jord was unaware that the old Jease had been assigned to the lender as a security. In an action brought by the borrower and the guarantor for a declaration that they were discharged from repayment of the loan, both plaintifis relied on novation alleged to arise from the buyers of the business having been accepted as substituted debtors. The guarantor pleaded a discharge by reason of the creditor's having given time to the debtor, and by his having negligently failed to preserve the security by failing to procure the landlord's consent to the assignment of the agreement and by failing to exercise an option to extend the original term.

[69]

was fora term of three years. In fact the " lease " was an agreement for a lease. Owing to the breach of condition it was not specifically enforceable and no equitable term within Walsh v. Lonsdale (1) continued to subsist after the assignment. Of course a common law tenancy arose from entry and payment of rent (See Moore v. Dimond (2), where the reasons for implying a tenancy from year to year as opposed to a lesser recurring period are explained). But a tenancy from year to year liable to be determined by breach of condition affords no very valuable security for the debt owing to the assignee of the term. Such as it was it appears to have been lost when the new lease was granted to the purchaser Purse, if not before when rent was accepted by the landlord from the first purchaser as tenant. If Purse were assignee of the old lease as the landlord believed, the grant of a new lease to him would involve a surrender by operation of law of the existing tenancy from year to year. I cannot think that the respondents who suppressed from the landlord all knowledge of the assignment to them and allowed Purse with their knowledge to assume the position of assignee of the previous tenants would remain at liberty to set up their tenancy from year to year against the new term. It is just as if they had consented to the grant of a new lease. They are precluded from denying its efficacy. But the main fact which leads to their estoppel is the failure of all parties at the time of the assignment of the original term to obtain the landlord's consent. The subsequent failure to disclose the assign- ment was the natural if not necessary consequence of the fact that it was not a permitted assignment. No failure can be imputed to the respondents in continuing the non-disclosure. The original failure to obtain the landlord's consent is a matter preceding the creation of security and cannot be accounted negligence on the part of the creditors in dealing with the security. It probably arose from a misunderstanding, but whatever its cause the solicitors for all parties prepared the assignment and carried it through on the basis that the landlord should know nothing about it, and, in my opinion, it follows that none of the consequences of this non-disclosure ean be relied upon by the appellant as surety as a discharge from

[86]

The third ground upon which the guarantor relies is that through the default of the creditors the benefit has been lost of the lease of the bakery, by the assignment of which the principal debt was secured. This means that, owing to the omission to obtain the landlord's consent or to notify him of the assignment, and, perhaps, owing to further conduct of the creditors amounting to active encouragement, dealings have taken place between the landlord and the successive purchasers of the business who entered in posses- sion of the premises, particularly the third to whom the new lease was given, as a result of which the creditors have lost the rights in respect of the security to which on payment of the principal debt the surety would otherwise be subrogated. The contention neces- sarily calls for some examination of the successive changes of interest in the tenancy of the premises and of the ultimate fate of the security given over the lease or agreement for a lease. The document itself was undoubtedly an agreement for a lease, not a lease. But the lessee, the principal debtor, before the date of the assignment had entered under it and paid rent and, no doubt, a legal tenancy from year to year had arisen (Moore v. Dimond (1) ). In addition, he was before the assignment entitled in equity specifically to enforce the agreement and thus had as against the landlord an equitable term according to the tenor of the agreement. But, as the agree- ment for a lease contained a covenant against assignment without the landlord's consent, and as this was broken by the assignment to the creditors, the landlord became entitled to resist specific performance and consequently there ceased to be an equitable term as distinguished from a legal tenancy from year to year. It is true that the statutory provisions disabling a landlord from forfeiting for breach of condition until he has given notice and the tenant has failed in compliance therewith to remedy the breach if it is capable of remedy and to make compensation in money apply now to con- ditions against assignment (sec. 146 of the Property Law Act 1928). But an agreement for a lease does not come within the provisions unless "the lessee has become entitled to have his lease granted." His breach of covenant appears to prevent fulfilment of this require- ment (Coatsworth v. Johnson (2) ). The legal tenancy from year to

[89]

to non-compliance with a notice, therefore, the landlord might have terminated that tenancy by forfeiture for breach of condition in assigning without consent, but, unless and until he did so, the tenancy from year to year subsisted. The document expressly stated that the tenancy should continue until notice, so that the tenancy from year to year would not ipso facto determine at the end of three years under the doctrine explained in Doe d. Davenish v. Moffatt (1). On the other hand, in the absence in fact of any waiver by the landlord, no exercise of the option could be specifically enforced and, subject to sec. 146 of the Property Law Act 1928, the tenancy was liable to termination at any time. But, as the assignment was under seal, it was capable of passing any term of years, including a tenancy from year to year, and, although the interest assigned is described as that existing under the document, there can, I think, be no doubt that it would suffice to carry the term arising from entry in pursuance of the document and payment of rent, An assignment, although in breach of condition, operates to transfer the estate or interest (See, per Blackburn J., Williams v. Earle (2)), although it is true that Shee J. seems to have been under the contrary impression (Elliott v. Johnson (3)). A tenancy from year to year is assignable by deed, and an assignment transfers the interest without the assignee's entry and payment of rent (White v. Hunt (4) ). But it is not settled at what stage the liability to the landlord is incurred by the assignee of a tenancy from year to year or whether that of the lessee continues after his assignee has entered and has been accepted, although up to that time it undoubtedly does (Cp. Allcock v. Moorhouse (5); Elliott v. Johnson (6); Buckworth v. Simpson (7) ). Of course the lessee who assigns remains liable upon his agreement for a lease as a contracting party, whatever may be the position of the obligations implied from his entry and payment of the rent.

[94]

precedent to the passing of the property in that tenancy. The principal debtor who remained in possession as their mortgagor became in law a tenant at will to them. When he agreed to assign his lease to the immediate purchaser to whom he sold the business, he had no interest in the premises which he could transfer except the equity of redemption in the tenancy from year to year. When that purchaser was put into possession, apart from any question of estoppel, he in turn would become at law the tenant at will of the creditors. The landlord, who was ignorant of the assignment by way of security, accepted rent from the purchaser. But it would seem on the facts that the landlord supposed him to be assignee of the residue of the term of three years which the agreement for a lease was intended to create, and in these circumstances an intention to create a new tenancy would not be imputed. In the absence of such an intention, the purchaser would acquire only a derivative title ; he would obtain no interest superior to that which his vendor, the principal debtor, purported to confer. In fact the latter executed no actual assignment, and the parties to the sale were content to act upon the contract between them without completing it by formal documents. This is unimportant if the purchaser understood that a security existed over the lease so that he was buying only an equity of redemption. But it is or may be suggested that he was entitled to suppose that he was acquiring the unencumbered residue of the term of three years and that by their silence at a time when they knew the transaction was on foot the creditors have estopped themselves from setting up their assignment against him or his successors in title. No facts sufficient to support such an estoppel have been proved. It does not appear what the purchaser believed about the lease. He may have been fully aware that the creditors claimed a security over whatever interest the principal debtor had as tenant of the bakery. It does not appear who had custody of the tenant's part of the agreement for a lease, much less that it was produced to the purchaser by the principal debtor as vendor. The transactions by which the two succeeding purchasers acquired possession of the bakery stand, as regards proof, in the same position. No affirmative inference can be drawn that either

[104]

under the prior agreement for a lease he had meant to create. He thus assumed that he could grant to him a new lease in extinguish- ment of that subsisting. Was this assumption the consequence of the creditors' failure to speak, in circumstances which made it incumbent upon them to do so? An affirmative answer to this question means, I think, that they were precluded from setting up, as against the landlord, their title to the tenancy from year to year, and, of course, neither the principal debtor as owner of the equity of redemption nor the guarantor in virtue of his right of subrogation would be in any better position. The question itself falls into two parts. Did the occupier of the bakery to whom he granted the new lease present the appearance of having succeeded to the subsistin$ term, that is, was he ostensible owner of the outstanding lease ? If so, were the creditors called upon to disclose the truth to the landlord? I say two parts, because little doubt can exist that if the claim of the creditors to the old lease had been disclosed, the landlord would not have granted the new lease until it had been disposed of. In ordinary circumstances ostensible ownership of an interest in land does not arise from possession and is little aided by it. But, in the present case, the circumstances make the fact that the grantee of the new lease had been put in possession important from the landlord's standpoint. For the successive purchasers of the business were put into possession of the bakery by their prede-

cessors in title who obtained the landlord's consent. The tenancy agreement made that consent necessary for an assignment and the landlord would naturally conclude affirmatively, on the one hand, that each of them had acquired the beneficial right to the tenancy and negatively, on the other hand, that no other disposition of the term had been made. The condition contained in the agreement for a lease was against sub-letting, assigning over, or in any way disposing of, or parting with the possession of, the shop and premises. It may be that a mere equitable charge would not contravene this condition, but it covers every form of alienation which would deprive the landlord of the right to deal with the occupier of the demised premises as the tenant. A landlord would assume that no such alienation had been made without his consent and that he might

[106]

surrender from him, at any rate if he were able to produce the tenant's part of the agreement of tenancy. The evidence does not trace the history of that document. But it does not appear to have been kept in the custody of the creditors as mortgagees. Notwith- standing the deficiency of the evidence upon this point, I think on the whole that the landlord was justified in dealing with the purchaser then in possession as beneficially entitled to the tenancy under the agreement for a lease and to all rights arising therefrom. The creditors were, or must be taken to have been, aware of the circum- stances to which I have referred. They knew that successive purchasers were put forward to the landlord and entered with his consent. They knew that he was ignorant of their assignment. They knew or must be taken to have known that the tenancy agree- ment contained a condition against disposing of the tenancy. This knowledge made it incumbent upon them to disclose their interest if they wished to preserve it. Before there is an estoppel from failure to speak, there must be a duty to do so, a duty the sanction of which is preclusion, not liability. I do not wish to repeat what is already stated in Thompson v. Palmer (1). But in the circumstances in which the creditors stood they did incur such a duty. It follows that, in my opinion, after the date of the new lease the tenancy from year to year could not be set up against the landlord. The position of the tenant under the new lease in relation to the creditors need not, I think, be considered. If he was unaware of the existence of their security, he would hold the new lease absolutely and free from any encumbrance in their favour. If not, it might be bound by an equitable charge in their favour. Such a charge would not be the same but a different security and in relation to the guarantor could be relied upon by the creditors only for the purpose of diminishing the amount of the injury suffered by him, if the question between them became one of equitable discharge pro tanto. On that question the burden of proof would be upon the creditors and as they have given no evidence that, when the third successive purchaser took the new lease, he was aware of their security, they have not made good the first step in establishing that they became entitled to a

[119]

should not be lost. What steps reasonable care demanded depended upon the circumstances, including the nature of the security taken and the conditions attending it. Doubtless the state of the law and perhaps the provisions of the lease were not actually within the cognizance of the creditors and probably they formed no part of the considerations from which their inaction arose. But they constitute some of the conditions which determine the reasonableness of their actual conduct. In point of law the security was exposed to forfeiture at the landlord's instance, unless by complying with the requirements of a notice to remedy the breach of condition, if capable of remedy, and to pay compensation, the forfeiture could be avoided. To inform the landlord of the assignment would have been to raise the question what course he would take and what demands he would make. Whether the breach of a condition against assignment can be remedied by re-assignment is, perhaps. uncertain, but, if the landlord could insist on a restoration of the lease to the principal debtor, the creditors presumably could refuse to comply without immediate repayment of the debt. The solicitors for all parties have adopted the form of security out of which these difficulties arose. and the creditors might assume that on behalf of the guarantor they were content that he as well as they themselves should encounter the risks it involved. Of those risks that material to the present question was the danger of one of the successive purchasers acquiring from the landlord rights superior to the security. The creditors knew that the guarantor himself was responsible for the negotiation and completion of the first sale and participated in the second transaction. If the successive purchasers understood that they were acquiring an encumbered lease, none of them could without bad faith attempt to take a new lease in deroga- tion of the old, and, if he did, the new lease, because of the tenant's notice of the existing security, would become subject to an equitable charge as a substituted security. In all these conditions I do not think that it was an unreasonable course on the part of the creditors to continue the policy of not apprising the landlord of the existence of their security. It must be remembered that notification to the landlord is not a recognized legal precaution for the protection of