Progressive Mailing House Pty Ltd v Tabali Pty Ltd

57 ALR 609

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(Decision by: Mason J)

Between: Progressive Mailing House Pty Ltd
And: Tabali Pty Ltd

Court:

Judges:
Mason JWilson J
Brennan J
Deane J
Dawson J

Subject References:
LANDLORD AND TENANT
LEASE
Memorandum of
Breach of covenant to pay rent
Whether repudiation
Re-entry
Other rights of termination
Lessor's loss of benefit of covenants
Damages for loss
Applicability of ordinary principles of contract law
REAL PROPERTY
Torrens system
Unregistered memorandum of lease
Rights of parties thereunder
DAMAGES
Lessor's re-entry on repudiation
Loss of benefit of covenants
Whether damages recoverable
CONTRACTS
Breach
Fundamental
Leases
Applicability to

Case References:
Shevill v Builders Licensing Board - (1982) 149 CLR 620; 42 CLR 305
National Carriers Ltd v Panalpina (Northern) Ltd - [1981] AC 675

Hearing date: 24 February 1984
Judgment date: 12 March 1985

Canberra

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Decision by:
Mason J

This is an appeal from a decision of the Court of Appeal of the Supreme Court of New South Wales dismissing an appeal from a decision of Lusher J in proceedings by the respondent, as owner, for possession of certain factory premises situated in the Sydney suburb of Artarmon. Lusher J granted the respondent leave to issue a writ of possession and ordered, inter alia, that the appellant pay to the respondent the sum of $85,000 by way of damages in respect of the loss to the respondent, as a consequence of re-entry, of the benefit of covenants contained in a memorandum of lease entered into between the respondent as lessor and the appellant as lessee. The sole question before this court, as before the Court of Appeal, is whether his Honour was correct in awarding damages.

The factory premises comprised land registered under the Real Property Act 1900 (NSW). The memorandum of lease, which was in registrable form but which was not registered, was dated 4 December 1978 and purported to create a term of five years commencing on that date. Clause 3.1 required the lessee during the whole of the term to pay to the lessor the rent specified in the First Schedule. During the relevant period this amounted to $7750 per month payable monthly. Part 4 of the memorandum of lease dealt with the use of the premises and with subletting and assignment of the lease. By cl 4.2 the lessee convenanted, inter alia, not to do or permit to be done anything which might render any increased premium payable for the insurance of the premises. By cl 4.7 the lessee was prohibited from assigning or subletting the premises without the consent of the lessor. Part 5 imposed on the lessee a number of requirements with regard to the maintenance and repair of the premises and alterations, the principal obligations with regard to alterations being imposed by cl 5.1 and with regard to maintenance and repair being imposed by cl 5.2. Clause 5.3 dealt specifically with the lessee's obligation to repair and replace broken glass as well as heating, lighting and electrical equipment.

Part 10 of the memorandum of lease was headed "DEFAULT, TERMINATION ETC". Clause 10.1, so far as it may be relevant, provided:-

10.1

In the event that:

(a)

any rent or any other moneys payable under this lease shall remain unpaid for fourteen (14) days next after the date appointed for payment thereof (although no formal or legal demand shall have been made therefor) or;

(b)

the Lessee being a company, an order is made or a resolution is effectively passed for the winding up of the Lessee (other than for the purposes of reconstruction or amalgamation) or ceases or threatens to cease to carry on business; or

(c)

the Lessee fails to perform or observe any one or more of the covenants or provisions on the part of the Lessee expressed or implied in this lease and the Lessee fails to remedy same after thirty (30) days' notice to rectify from the lessor unless the non-performance or non-observance has been waived or excused by the Lessor in writing;

THEN the Lessor may at any time thereafter but without prejudice to any claim which the Lessor may have against the Lessee in respect of any breach of the covenants and provisions in this Lease on the part of the Lessee to be observed or performed either re-enter into and repossess and enjoy the Demised Premises as of its former estate (anything herein contained to the contrary notwithstanding) and thereupon this Lease shall absolutely determine, or call for an immediate surrender of the Lessee's estate and interest under this Lease and for the more effectual enforcement of this right the Lessee hereby irrevocably appoints the Lessor its true and lawful attorney to surrender or cause to be surrendered this Lease and to sign all notices deeds and documents for the purpose of such surrender in the name of the Lessee, and upon such surrender the Lessor shall be freed and discharged from any action suit claim or demand by or obligation to the Lessee under or by virtue of this Lease.

Clause 10.2 is not material. Clause 10.3 provided for interest where rent or other moneys payable by the lessee were in arrears for 14 days.

Part 11 dealt with a number of general matters. Clause 11.4 contained a provision that the lease was conditional upon the approval by the local municipal council of a development application for use of the premises within the terms of the purpose clause. Clause 11.6 provided:-

11.6

The Lessor shall within twelve (12) weeks from the date of such development approval in accordance with the requirements of the requisite authorities carry out the work specified in the Second Schedule hereto. The Lessee shall take occupation of the Demised Premises fourteen (14) days after receipt of notice in writing from the Lessor or its Solicitors that the said work has, in the opinion of the Lessor's architect been completed.

The Second Schedule referred to a number of itemized works to be undertaken. Clause 11.7 then provided:-

11.7

Notwithstanding the provisions of the First Schedule hereto the first payment of rent as therein referred to shall be payable at the expiration of two (2) months from expiration of the fourteen-day period referred to in Clause 11.6 hereof.

Notwithstanding the provisions of cl 11.6 as regards the occupation of the premises, the appellant actually entered into occupation prior to the date of the memorandum of lease. The development approval referred to in cl 11.4 was given on 24 August 1978. Thereafter certain work was done and a notice, dated 20 November 1978, was given by the respondent in purported compliance with cl 11.6, to the effect that the work specified in the Second Scheudle had, in the opinion of the respondent's architect, been completed and that the appellant's "formal occupation" of the premises would commence 14 days from that date.

From the beginning the relationship of the parties was strained, as is evidenced by the correspondence between their solicitors. On 12 January 1979 the solicitors for the appellant wrote to the solicitors for the respondent detailing a number of perceived defects in the work carried out on the premises, requesting evidence of the approval by the council of the development application and raising a query with regard to rent in the light of a report stating the total area of the premises to be slightly less than previously thought. The letter stated that, in the circumstances, the appellant did not accept that the respondent's notice was properly given and that payments of rent should commence on 4 February 1979. The respondent's solicitors replied by letter of 22 January 1979 claiming the work required by the memorandum of lease to have been properly carried out as evidenced by the architect's certification and dealing with the other matters raised in the earlier letter. It stated that, in accordance with the notice given, the appellant was required to commence rent payments on 4 February 1979. The appellant's solicitors wrote again on 6 February 1979 disputing that the work was properly carried out and continuing:-

In view of the above, the lessee is not prepared to accept that the architect has properly certified and accordingly no obligation arises for the payment of rent to be made to which you refer. However, as a sign of goodwill, and in the hope that your client will complete its obligations in relation to the work to be carried out on the premises, our client is prepared, without prejudice, to release the funds invested in the New South Wales Permanent Building Society on account of the first month's rent when that payment ultimately becomes due.

The appellant paid the rent in the months of February, March, April and May 1979, notwithstanding the dispute. The appellant then ceased to pay rent and made no payment until October 1979.

On 8 August 1979 the respondent commenced proceedings in the Supreme Court of New South Wales for a declaration that the appellant was bound to pay rent as from 4 February 1979. The appellant filed a cross-claim. Subsequently, on 11 October 1979, the respondent commenced the action out of which this appeal arises. By its statement of claim in this action the respondent pleaded the memorandum of lease, the appellant's entry into possession, a number of the lessee's covenants (including those in cll 3.1, 4.2 and 5.2), cl 10.1, the non-payment of rent since 11 May 1979, that by notice dated 16 August 1979 the respondent had given the appellant notification of breaches of the lease requiring them to be remedied and that the appellant had neglected or refused to do so. The respondent sought an order for possession, leave to issue a writ of possession, judgment for outstanding rent and interest pursuant to cl 10.3, mesne profits and damages and interest.

The appellant by its defence denied the breaches of the lease and the failure to rectify them. The appellant pleaded that it was a condition precedent of the lease coming into operation that the respondent was to carry out certain work on the premises which had not been carried out and denied that the payments made were payments of rent. It further alleged that cl 11.6 of the lease was not complied with so that by virtue of cl 11.7 the time for the payment of rent could not be determined and, accordingly, the appellant was not in default under the covenant to pay rent. The appellant further claimed that certain alleged breaches were consented to by the respondent. The appellant also sought relief against forfeiture of the lease.

The primary judge noted that, although the memorandum of lease was not registered, both parties ultimately agreed that the matter could be considered on the basis that it was so registered and that the appropriate orders or consents for that purpose would be effected. He observed that the document "plainly contains the agreement between the parties".

His Honour rejected the appellant's submission, centered on cll 11.6 and 11.7, that those clauses raised a condition precedent to the obligation of the appellant under the memorandum of lease to take occupation and thereafter to pay rent. The second element in this submission was that the notice dated 20 November 1978 given by the respondent was not given by an architect but by an engineer. The consequence of this submission, if accepted, was that the notice was deficent and that, in the absence of a valid notice, the date of occupation was not fixed, so that it was not possible to determine the date of the first payment of rent under cl 11.7. According to the appellant, the argument led to the conclusion that no rent was payable under the lease. It was, however, conceded that, though rent was not payable, liability by way of use and occupation or mesne profits could arise.

The primary judge held that the appellant's argument "ignored the circumstance that the events upon which it was based had preceded the date of the commencement of the lease" and that cl 11 only operated from 4 December 1978 and that it was intended as a means of fixing a period for occupation thereafter. As the appellant was already in occupation on that date, the two clauses were inapplicable, so that the provisions of cl 3, containing the covenant to pay rent, applied.

His Honour then held that the appellant was in breach of the covenant to pay rent and in breach of the covenant to maintain and repair and that the breaches had not been rectified. He rejected the appellant's case for relief against forfeiture, observing that the breach of the covenant to pay the rent was in respect of a substantial amount and had been persisted in over a long period. Moreover, he found that in various respects the appellant's breaches of the covenant to maintain and repair and the covenant against subletting had shown a disregard on the part of the appellant for the premises and for the respondent's interest in them.

His Honour, following the majority decision of the Court of Appeal in Shevill v Builders Licensing Board, a decision which was later reversed in this court ((1982) 149 CLR 620; 42 ALR 305), concluded that, although a lessor could not recover rent after forfeiture, he could recover damages for loss of the benefit of the covenant to pay rent. Assuming that a period of six months approximately would elapse before the respondent would succeed in reletting the premises, his Honour awarded $85,000 damages for breach of the covenants to pay rent and to pay outgoings.

In the Court of Appeal, Hutley JA (with whom Reynolds JA agreed), saw the issue in the appeal in these terms:

"... what is the proper way to assess the damages of the plaintiff who has a contract to grant a lease for a term which is required to be registered under the Real Property Act for the term to be constituted and who terminates the contract because of acts which, if the term existed, would justify the forfeiture of the term under circumstances against which equity would not relieve.... The appellant, by its conduct, has caused the respondent to re-enter under circumstances that it is exempted from granting the term which it has contracted to grant and is compelled to re-let the premises in order to mitigate the damages."

According to his Honour, the case was conducted on the basis that the respondent had to show a breach of a fundamental term or that the appellant had abandoned the contract. He considered that the respondent's right to damages was grounded on a termination of the right to the term, brought about by conduct of the appellant which caused consequential loss to the respondent. He concluded that there was no error in the assessment of damages by the primary judge.

Glass JA was of the same opinion, though he preferred to say that, when considered in the evidentiary context, the findings by the primary judge amounted to a finding of substantial breach by the appellant of essential obligations which bound him and entitled the respondent to rescind the agreement and sue for damages. He found it unnecessary to determine the issue of renunciation.

In the first instance it is necessary to examine the legal consequences of the failure to register the memorandum of lease. At common law where there was an agreement for lease but no demise, either because the agreement was expressed as an executory contract or consisted of an intended demise for more than three years which was void under ss 2 and 3 of the Statute of Frauds because it was not under seal, the intended lessee upon entering into possession became a tenant at will and upon payment of rent became a tenant from year to year. The tenancy thereby created had the following characteristics:-

(1)

the terms and conditions of the agreement, save in so far as they were inconsistent with a tenancy from year to year, applied to it; and

(2)

the tenancy from year to year continued only during the term contracted for, and expired at the end of that term by effluxion of time without notice to quit, being in the meantime liable to a sooner determination by notice to quit.

See Moore v Dimond (1929) 43 CLR 105 at 112-4; Carberry v Gardiner (1936) 36 SR (NSW) 559 at 567-8.

By s 127(1) of the Conveyancing Act 1919 (NSW), as amended, it is provided that no tenancy from year to year shall be implied by payment of rent and that if there is a tenancy and no agreement as to its duration then it shall be deemed to be a tenancy determinable by either party by one month's notice in writing expiring at any time.

In Equity, however, a written lease not under seal was regarded as evidencing an agreement for lease. As an agreement for lease was capable of specific performance Equity would decree specific performance of the written lease by ordering the execution of a lease under seal. In the meantime, in accordance with the doctrine of Walsh v Lonsdale (1882) 21 Ch D 9, the relationship between the parties in Equity was that of landlord and tenant (Carberry v Gardiner, supra, at p 569). The landlord could, if necessary, be restrained by injunction from acting on the footing that the other party was merely a tenant at will or a tenant from year to year (Walsh v Lonsdale (1882) 21 Ch D 9; Dockrill v Cavanagh (1944) 45 SR (NSW) 78 at 83). It was otherwise where the agreement had been terminated. Then Equity would not allow one party to allege that any tenancy, even a tenancy at common law, existed (Dimond v Moore (1931) 45 CLR 159).

An understanding of the position as it now obtains in New South Wales, following the enactment of the Supreme Court Act 1970 (NSW), may be gleaned from the observations of Jordan CJ in Dockrill v Cavanagh. His Honour said, at p 83:

"After the passing in England of the Judicature Acts, which invested the superior courts with jurisdiction in both equity and common law, it was held that in a court which possessed the combined jurisdictions (although not in a court which had only a common law jurisdiction: Foster v Reeves [1892] 2 QB 255), a party to an agreement for a lease, if the lease was specifically enforceable (but not if it was not; Coatsworth v Johnson (1886) 54 LT 520; Inland Revenue Commissioners v Derby [1914] 3 KB 1186), could obtain against the other all the remedies which would be available to him if a proper lease had actually been executed: Walsh v Lonsdale (1882) 21 Ch D 9, although the agreement was not thereby converted into an actual lease: Borman v Griffith [1930] 1 Ch 493 at 497-8."

In National Trustees, Executors and Agency Co of Australasia Ltd v Boyd (1926) 39 CLR 72, the High Court held that a lease for a term of seven years which was not registered as required by s 61 of the Transfer of Land Act 1915 (Vic) was effective to give the lessee an equitable lease for seven years and was a good defence to an action by the successors in title of the lessor to recover possession of the premises. Knox CJ, Gavan Duffy and Rich JJ, having said that the real argument before them was that the instrument, for want of registration, could operate only as a contract and not as a lease binding the remainder, continued (at p 82):

"The simple answer is that it operates, not merely to create contractual rights and duties, but to create an equitable term of years and a tenure by estoppel between the lessor and her privies and the lessee."

I should prefer to say that the equitable term arises by virtue of the doctrine in Walsh v Lonsdale and the maxim that Equity considers as done what ought to be done, rather than by reference to the doctrine of estoppel. That was the approach taken in York House Pty Ltd v FC of T (1930) 43 CLR 427 at 435-6. And it is an approach which accords with the comprehensive explanation given by Jordan CJ in Carberry v Gardiner Dockrill v Cavanagh, and in Australian Provincial Assurance Ltd v Rogers (1943) 43 SR (NSW) 202 at 205-6.

It follows that the rights of the parties in the present case are to be determined on the footing that as between them, notwithstanding the failure to register the memorandum of lease, it brought into existence an equitable term of the duration which it specified and subject to the conditions which it contained. The question which arises is the extent, if at all, to which the relevant rights, duties and liabilities of the parties to the memorandum of lease fall to be determined by reference to the ordinary principles of contract law.

In Shevill Gibbs CJ (149 CLR at p 625) assumed, without deciding, that the ordinary principles of contract law, so far as they are relevant to the questions that arose in that case, applied to leases. He acknowledged that a contrary view had been expressed in Total Oil v Thompson Garages [1972] 1 QB 318, where the English Court of Appeal held that the principle that acceptance of a repudiation brings a contract to an end had no application to a lease because the lease was more than a contract - it created an estate or interest in land. The consequence in that case was that the lessee's claim that the lease for a term had been terminated by the lessee's acceptance of conduct of the lessor amounting to a repudiation failed. Lord Denning MR (with whom Edmund Davies and Stephenson L JJ agreed) placed some reliance (at p 324) on the opinion expressed by Lord Russell of Killowen and Lord Goddard in Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd [1945] AC 221 at 234 and 244, that frustration does not bring a lease to an end. However, recently in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, the House of Lords held that the doctrine of frustration was in principle applicable to leases. Lord Wilberforce and Lord Simon of Glaisdale pointed out (at pp 695-6 and 702-3) that both in the United States and in Canada it had been accepted that a lease might be terminated by frustration - see Williston on Contracts vol 18 (3rd ed, 1978) §.1955; Corbin on Contracts (1962) §.1356; Highway Properties Ltd v Kelly, Douglas & Co Ltd (1971) 17 DLR (3d) 710 at 721. Their Lordships quoted the following passage from the judgment of Laskin J in the last-mentioned decision (at p 721):

"It is no longer sensible of pretend that a commercial lease, such as the one before this court, is simply a conveyance and not also a contract. It is equally untenable to persist in denying resort to the full armoury of remedies ordinarily available to redress repudiation of covenants, merely because the covenants may be associated with an estate in land."

Laskin J drew attention to the decision of this court in Buchanan v Byrnes (1906) 3 CLR 704 where it was decided that upon abandonment by a tenant, in breach of covenant, of a hotel property the subject of a lease for 15 years, the landlord was entitled to claim damages over the unexpired term of the lease. In Buchanan, Barton J said (at p 719):

"There was at that time a renuciation 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, etc, and of the covenant not to do anything which might entail forfeiture of the licence (Licensing Act 1885, s 101), 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. ..."

See also p 714, per Griffith CJ.

Although Knox CJ and Gavan Duffy J in Firth v Halloran (1926) 38 CLR 261 at 268, held that the doctrine of frustration did not apply to leases, Isaacs J (at p 269) was of the contrary opinion. Later Williams J, in Minister of State for the Army v Dalziel (1944) 68 CLR 261, stated (at p 302) that the House of Lords, in Matthey v Curling [1922] 2 AC 180, had decided that the doctrine did not apply to leases. But, as we have seen, the House of Lords has now held in Panalpina that it does. For the sake of completeness I should mention that Buchanan was followed in Hughes v NLS Pty Ltd [1966] WAR 100; affd on different grounds 120 CLR 583, and that the New South Wales Court of Appeal has favoured the view that the doctrine of repudiation applies to a lease (Leitz Leeholme Stud Pty Ltd v Robinson [1977] 2 NSWLR 544).

The decisions in Australia and Canada, and the speeches in Panalpina reflect the point made by William O Douglas and Jerome Frank in "Landlords, Claims in Reorganizations" (1933) 42 Yale Law Journal 1003, in footnote 6, that, as the law of landlord and tenant had outgrown its origins in feudal tenure, it was more appropriate in the light of the essential elements of the bargain, the modern money economy and the modern development of contract law that leases should be regulated by the principles of the law of contract.

Accordingly, the balance of authority here as well as overseas, and the reasons on which it is based, support the proposition that the ordinary principles of contract law, including that of termination for repudiation or fundamental breach, apply to leases. However, it has been suggested that the presence of an express proviso for re-entry in a lease excludes any other right of termination of the lease by the lessor. Thus, in Rosa Investments Pty Ltd v Spencer Shier Pty Ltd [1965] VR 97, it was held that at common law re-entry is necessary to forfeit a lease unless dispensed with by contract. The better view is, in my opinion, that re-entry is essential only where the parties stipulate that advantage shall not be taken of a forfeiture except by an entry upon the land (Liddy v Kennedy (1871) LR 5 HL 134 at 151). If it be accepted that the principles of contract law apply to leases, it is not easy to see why the mere presence of an express power to terminate should be regarded as excluding the exercise of such common law rights as may otherwise be appropriate. It is, of course, open to the parties by their contract to regulate the exercise of the common law right to determine for repudiation or fundamental breach. But in this case the parties have not attempted to do so.

The respondent seems to have asserted at first instance and in the Court of Appeal that the lease was brought to an end by commencement of the action, this step amounting to a re-entry under cl 10.1. There is no suggestion in the judgments that the respondent asserted at any time that it was determining the lease otherwise than under this provision. Although it is now conceded by the appellant that the lease was terminated under cl 10.1, the issue of repudiation arises because, as will appear later, the respondent cannot recover damages for loss of the benefit of the lease unless it establishes repudiation or fundamental breach by the appellant.

Shevill decided (a) that the proviso for re-entry in that case, cl 9(a), did not make breach of the covenant to pay rent breach of an essential term of the contract; and (b) that the evidence did not justify a finding that there was a fundamental breach of contract which would have entitled the lessor to rescind under the general law and sue for damages. The court was not called upon to decide whether a lessor can sue to recover damages for loss of bargain when he re-enters under a proviso for re-entry in consequence of the lessee's repudiation or fundamental breach. Gibbs CJ, with whom Murphy and Brennan JJ agreed, in passing observed (at p 629):

"It may be that cl 9(a) excludes the rights that would ordinarily flow from an accepted repudiation of the contract."

This observation looks back to the construction of the clause which his Honour had already examined in some detail. It should not be taken as an indication that a proviso for re-entry necessarily excludes damages for loss of bargain whenever the lessor forfeits the lease pursuant to the proviso. And the Chief Justice's earlier comment (at p 628) on the need for very clear words to bring about the result that whenever a lessor could exercise the right to re-enter he could recover damages for loss of bargain is not directed to damages for repudiation by the lessee; it is aimed at the suggestion that the proviso should be so construed as to provide for such damages when re-entry takes place on the occurrence of a breach which is non-fundamental or minor.

It is often said that repudiation or fundamental breach - in the sense of breach of a condition or breach of another term or terms which is so serious that it goes to the root of the contract, and thus deprives the other party of substantially the whole benefit of the contract (Federal Commerce & Navigation Co Ltd v Molena [1979] AC 757 at 779) - entitles the innocent party to rescind the contract and sue for damages for loss of the bargain (see, for example, Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 at 458; 9 ALR 309 at 319-20). But this does not mean that such damages are recoverable only in the event of discharge for breach though it is essential to an award of damages for loss of bargain that the defendant can no longer be required to perform his contractual obligations in specie. This essential foundation may be established by a common law rescission of the contract by the innocent party or by a termination of the contract in the exercise of a contractual power so to do. In either event, assuming repudiation or fundamental breach by the defendant, he could no longer be required to perform the contract and is liable for damages for loss of bargain. The well recognized distinction between common law rescission and termination pursuant to a contractual power supplies no reason in principle why such damages are recoverable by the innocent party in one case and not in the other, provided of course that the exercise of the power is consequent upon a breach or default by the defendant which would attract an award for such damages.

Termination in the exercise of a contractual power is not an affirmation of the contract which debars the innocent party from suing for damages for breach on the ground of repudiation or fundamental breach. This is because the termination, so far from insisting on performance by the party at fault, brings to an end his obligaiton to perform his promise in specie.

Nor can it be said in the case of repudiation or fundamental breach, that loss of the bargain is attributable to the innocent party's exercise of his contractual power to terminate. It is different in the case of termination for non-essential breach, as Shevill demonstrates, because, by terminating pursuant to the contract at that stage, the innocent party puts it beyond his power to insist on performance, thereby bringing to an end any possibility of repudiation or fundamental breach with consequential damages for loss of bargain.

If the lessor has a common law right to recover damages for loss of bargain consequent upon repudiation or fundamental breach, in the event that the lease is determined, either by acceptance of that repudiation or fundamental breach or by forfeiture as a result of re-entry, there is a difficulty in asserting that the lessor's right to recover after re-entry is subject to an acknowledgment of that right by the terms of the lease. It would be consistent with the principle to say that the right continues unless it is excluded by the lease.

The appellant's first submission in this court is that on the exercise by the respondent of its right of re-entry for breach of covenant, its right to recover damages was limited to damages for breaches which had already occurred and that they did not extend to damages for loss of the benefit of the covenant to pay future rent and outgoings, that is, rent and outgoings accruing due after the re-entry. The appellant contends that this result follows from the terms of cl 10.1 which confer the right of re-entry for breach of covenant. On its true construction, so the argument runs, the clause restricts the lessor's right to sue for damages to those breaches which have taken place before re-entry. The weakness in this argument is that the clause does not exclude liability for non-performance of obligation accruing after the date of re-entry. The clause explicitly preserves "any claim which the Lessor may have against the Lessee in respect of any breach of the covenants and provisions ... to be observed or performed ...". A claim based on a repudiation or a fundamental breach occurring before re-entry, necessarily answers this description. The comments of Gibbs CJ in Shevill (149 CLR at pp 627-9) give no support to the appellant's submission because his Honour was rejecting an argument that cl 9(a) in the lease in that case conferred on the lessor who re-entered the same rights as would have been available to him if he had accepted a repudiation of the contract or had rescinded it on the ground that the lessee had committed a breach of an essential term.

The appellant's next submission is that the evidence does not justify the conclusion that the appellant had demonstrated that it would or could no longer perform its obligations under the memorandum of lease or that there had occurred a fundamental breach entitling the respondent to rescind and recover damages for loss of bargain. In support of this submission the appellant points out, correctly, that repudiation of a contract is a serious matter and is not to be lightly inferred and that neither a breach of a covenant to pay rent nor a breach of a covenant to repair, without more, constitutes a breach of a fundamental term, nor amounts to a repudiation of a lease.

Our consideration of the issue of repudiation and fundamental breach is complicated by the circumstance that the primary judge made no finding on the issue of repudiation because he thought, in the light of the Court of Appeal decision in Shevill, that it was unnecessary to do so and because Hutley JA, with whom Reynolds JA agreed, instead of examining the evidence relevant to the issue of repudiation, merely concluded that the appellant's conduct was repudiatory on the ground that it would have justified forfeiture "under circumstances in which the court would refuse relief". The primary judge's reasons for refusing relief against forfeiture were expressed in the following passage:

"The breach of the covenant to pay rent was in respect of a substantial amount and has been continued and persisted in over a long period. The matters of the roof and electrical fittings, apart from the breaches involving an unnecessary misuse of the premises and their continuance has shown a disregard for the premises and the plaintiff's interest in them. The defendant's attitude is further illustrated by its disregard of the requirements concerning the important restrictions on the use of the drive and parking areas and its conduct in relation to the fire doors and staircases. It is further shown by the sub-letting of the premises. ... I find that on all the circumstances it would be inequitable that relief should be granted."

This finding, though it comes close to a finding of repudiation, stops short of it. What needs to be established in order to constitute a repudiation is that the party evinces an intention no longer to be bound by the contract or that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way (Shevill, at pp 625-7).

Likewise, the primary judge's finding does not amount to a finding that there was a fundamental breach of contract in the sense that the party at fault, though wishing to perform the contract, was guilty of such default in performance that the breach went so much to the root of the contract that it made commercial performance of it impossible. Whether fundamental breach is but another illustration of repudiation, as Mahoney JA thought in Honner v Ashton (1979) 1 Butterworths Property Reports 9478 at 9490, or is a separate category, is a question which may be put to one side.

Repudiation or fundamental breach of a lease involves considerations which are not present in the case of an ordinary contract. First, the lease vests an estate or interest in land in the lessee and a complex relationship between the parties centres upon that interest in property. Secondly, this relationship has been shaped historically in very large measure by the law of property, though in recent times the relationship has been refined and developed by means of contractual arrangements. Thus, traditionally at common law a breach of a covenant by a lessee, even breach of the covenant to pay rent, conferred no right on the lessor to re-enter unless the lease reserved a right of re-entry (Lane v Dixon (1847) 3 CB 776; [136 ER 311]; Doe d Dixon v Roe (1849) 7 CB 134; [137 ER 55]). And in Equity the proviso for re-entry was treated as a security for the payment of the rent (Howard v Fanshawe [1895] 2 Ch 581 at 588; Ezekiel v Orakpo [1977] QB 260 at 268 [1977] QB 260-9), so that on payment of the rent Equity would relieve against the forfeiture (Dendy v Evans [1910] 1 KB 263). The object and effect of s 129 of the Conveyancing Act was to give further protection to the lessee and to preclude forfeiture of his interest in property within the sphere of the section's operation, except in accordance with its terms.

These incidents of the law of landlord and tenant indicate that mere breaches of covenant on the part of the lessee do not amount to a repudiation or fundamental breach. Indeed, it is of some significance that the instances in which courts have held that a lessee has repudiated his lease are cases in which the lessee has abandoned possession of the leased property. But too much should not be made of this as very few cases of repudiation by lessees have come before the courts. I would therefore specifically reject the appellant's submission that abandonment of possession is necessary to constitute a case of repudiation by a lessee. On the other hand, it should be acknowledged that it would be rare indeed that facts which fell short of abandonment would properly be seen as constituting repudiation by the lessee in the case of a long lease at a rental which was either nominal or but a fraction of the amount which could be obtained in the market place.

It is evident that the appellant was responsible for physical damage to the premises which it failed to rectify in accordance with the requirements of the respondent's notice dated 16 August 1979 under s 129 of the Conveyancing Act. The primary judge found that the appellant caused damage to the roof structure by stacking pallets on or against the roof trusses causing damage to them, producing cracks in the roof which resulted in leaks. His Honour found that in failing to rectify these defects the respondent committed breaches of cll 5.1, 5.2 and 5.3 of the lease. However, it seems that the nature of the construction was such as to make the roof susceptible to damage and his Honour thought that the leaks were, in some respects at least, minor. There is no suggestion that the damage to the roof trusses was deliberate.

By May 1979 damage was done by the appellant to the electrical system on the premises. This included smashed light fittings, illegal joints in cables, exposed wiring, smashed power outlets and damaged wiring. In that month the respondent rectified earlier breaches, but it then caused further damage so that in August 1979 the condition of the electrical system was much as it had been before the repairs undertaken in May. The damage was such as to create a possibility of electrical shock to individuals and of fire. The damage was not deliberate and seems to have been due to carelessness.

Damage was also done to down pipes leading to leaks, but it seems that no effort was made to repair down pipes until June 1981. However, the primary judge made no finding on this matter or in relation to windows which, it is admitted, were broken.

The lease permitted subletting with the previous written consent by the lessor and upon certain conditions as to the character of the tenant. The appellant sublet part of the premises, being approximately one tenth of the area, without having sought consent to do so.

The appellant was also in breach of cl 5.8 of the lease. This clause required the lessee to comply with all laws governing the use of the premises. Clause 77 of the Willoughby Planning Scheme Ordinance provided that any person who contravened or failed to comply with the terms and conditions of any consent given under the Ordinance should be deemed to have committed an offence. The Schedule to the Development Consent which regulated the lessee's use of the premises required that (a) the proposed vehicular drive-through area be permanently marked out and be kept solely free for that purpose; and (b) all parking and loading areas be kept free from obstruction at all times and be used for off street parking and loading purposes respectively. The appellant caused the vehicular drive-through area to be obstructed by steel shelving used for storage of commodities and caused the parking and loading area to be blocked and obstructed by crates and rubbish. The appellant's excuse for this breach was merely that there was no other usable space available.

Other alleged breaches of covenant have been debated by the parties. With the exception of the breach of the covenant to pay rent, I do not find it necessary to discuss them because they seem to be insignificant or because they throw insufficient light on the issue of repudiation or fundamental breach.

It is not suggested that the breaches so far discussed, viewed in isolation, amounted to a repudiation or fundamental breach of the lease. It is the breach of the covenant to pay rent, in association with the other breaches, which is the central feature of the respondent's case on this issue. As we have seen, rent was not paid for the first two months of the lease and from May 1979 to 19 October 1979, notwithstanding the assertion by the respondent's solicitors in a letter dated 9 August to the appellant's solicitors that the appellant was bound to pay the rent. On 19 October 1979 after the issue of the statement of claim the appellant's solicitors paid $20,750 representing "an occupation fee" in respect of the months June to October 1979 less a sum of $18,000 retained to cover a claim which the appellant made for certain work, a claim which seems to have had no basis in law or fact. The sum of $18,000 has never been paid by way of rent or occupation fee.

The appellant's refusal to pay rent was associated with its claim that the certificate required by cll 11.6 and 11.7 had not been properly given. The certificate was not given by an architect as those provisions contemplated and the appellant claimed that the respondent had not carried out the works specified in the Second Schedule. The appellant consistently maintained an attitude that the completion of those works was a condition precedent to its liability to pay rent.

The object of cl 11.6 was to fix a date on which the appellant became bound to take possession of the premises. Clause 11.7 then provided that rent should be payable at the expiration of two months from the expiration of the 14 day period specified in the notice for which cl 11.6 provided. The appellant was permitted to occupy the premises in October 1978 and then began to use the premises for the warehousing, packaging and distribution of goods. The primary judge's finding that the lease commenced on 4 December 1978 has not been challenged, though the appellant does challenge the conclusion that rent became payable at that date. Although the evidence does not disclose the circumstances under which the appellant entered into occupation, it is not in question that the appellant was in possession under the lease. Indeed, as the appellant claimed to have been in possession under the unregistered lease, it was liable to pay the rent fixed by the lease, the only question being whether the liability to pay rent arose on 4 December, as the primary judge thought, or two months later on the footing that the date of entry into occupation was to be equated to the date of expiration of a notice provided for by cl 11.6. It is unnecessary to resolve this question because, on any view, the appellant was in breach of the covenant to pay rent and the respondent has not pressed for the payment of the first two months' rent at any stage of these proceedings. The two months "rent free holiday" contemplated by cl 11.7 was apparently taken into account by the primary judge when he fixed 4 December rather than October 1978 as the date of commencement of the lease. His Honour seems to have thought that the appellant was allowed this period in which to settle into the premises and establish its business there. He evidently came to the conclusion that the appellant had established its business there by 4 December.

The appellant's excuse for not paying the rent was the work specified in the Second Schedule had not been carried out satisfactorily. Even assuming that this claim was well founded it did not entitle the appellant to refuse to pay the rent. The appellant persisted in maintaining a claim which was without any foundation, namely that it was under no liability to pay the rent until the work in question was carried out satisfactorily. This was a refusal to carry out its obligation according to the terms of the unregistered lease and a persistence in carrying them out in a way substantially inconsistent with these terms.

It is not to the point that the appellant acted in accordance with counsel's advice. This is not a case like DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 431-3; 19 ALR 223 at 230-2, in which there was a bona fide dispute as to the true construction of a contract expressed in unclear terms. Here there was simply no basis in the provisions of the lease to support the appellant's refusal to pay rent. The rent did not represent but a nominal amount or but part of the valuable consideration which the appellant had agreed to provide in return for the right of use and occupancy which it argued under the memorandum of lease. It represented the whole of what the respondent was entitled to receive in the ordinary course in respect of the demised land during the term of the lease in a context where it would continue to be liable for some of the outgoings in respect of the premises.

In the result the evidence supports the conclusion that the appellant's conduct amounted to a repudiation of the lease or a fundamental breach of its obligations under the lease. The fact that the appellant lodged a caveat on 11 July 1979 to protect its interest as lessee under the unregistered lease is not at all inconsistent with this conclusion. Though maintaining a claim to the benefit of a contract, a party may repudiate it or commit a fundamental breach of it by refusing to perform his obligations according to its terms.

I would dismiss the appeal.