Shevill v Builders Licensing Board

149 CLR 620
42 ALR 305

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(Judgment by: Wilson J)

Between: Shevill
And: Builders Licensing Board

Court:

Judges: Gibbs CJ
Murphy J

Wilson JBrennan J

Subject References:
Landlord and Tenant

Hearing date: 4 November 1981
Judgment date: 1 September 1982

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Judgment by:
Wilson J

This appeal raises the interesting question of the right of a lessor who, having re-entered into possession of leased premises following the lessee's default in payment of the rent, seeks damages for the loss of his bargain. 

The facts of the case are not in dispute. In April 1976, Twin M. Pty. Ltd. and Manhattan Investments Pty. Ltd. by a memorandum of lease ("the lease") leased premises in Milperra to Shevill Truck Sales & Service Pty. Ltd. ("the lessee"). The lease incorporated an instrument of guarantee which provided that the appellants (the defendants at first instance) guaranteed the due performance by the lessee of all the terms and conditions of the lease. The lease was for a term of three years from 7 March 1976. By a memorandum of transfer dated 13 July 1976 the property was transferred to the respondent ("the Board") and thereafter the lessee attorned tenant to the Board. The guarantee in the lease was assigned to the Board by deed dated 1 September 1977 and notice of the assignment was given to the appellants on or about 10 October 1977. 

It is apparent from correspondence between the Board and the lessee from December 1976 onwards that the latter was having difficulty in paying the rent punctually. In May 1977 arrangements were made to ensure that the arrears in rent were paid by the lessee. These arrangements included an undertaking by the lessee to pay $500 per week in addition to the normal monthly payments. The lessee was substantially successful in fulfilling its undertaking with respect to the arrears, but unfortunately it fell behind in meeting its accruing monthly commitments. By the beginning of August the total arrears were in excess of $5,000. On 3 August 1977 the Board issued and served a statement of claim. The effect of that statement of claim was to exercise the Board's right of re-entry, thereby forfeiting the lease. Judgment for possession was entered on 13 October 1977 and the Board obtained possession on or about 14 October 1977. The Board then attempted to find a new tenant for the property but was unsuccessful till 1 July 1978. The new annual rental was $31,386 as compared with the original annual rental of $35,655. 

The Board then commenced this action in the Supreme Court of New South Wales for recovery of unpaid rent from 1 June 1977 to 3 August 1977 together with a claim for damages. There is no dispute as to the arrears of rent amounting to $5,442.50 and that sum has been paid. The learned trial judge, Carmichael J., upheld the claim for damages and awarded the sum of $42,261 to the Board, together with interest of $4,085. The measure of the damages was calculated substantially on the rent the Board would have received had the lease run its full term, less the rent received from the new lessee from July 1978. A majority of the Court of Appeal (Glass and Mahoney JJ.A., Samuels J.A. dissenting) dismissed the appeal by the appellants and they now appeal to this Court. 

The damages were assessed on the basis that the Board had lost the benefit of the bargain entered into with the lessee. Before this Court, Mr. Hodgson for the Board relies on alternative grounds. In the first place he argues that the lessee by its conduct had shown such an inability or unwillingness to perform the contract as to amount to a repudiation of the lease, thereby entitling the Board to terminate the lease and sue for the damages claimed. Alternatively, he submits that by the terms of the lease the parties have indicated that the covenant to pay rent was an essential term of the contract, a breach of which entitled the Board to bring the contract to an end, and to obtain damages for the loss of the benefits which performance of the contract would have conferred on it. The appellants concede that, if the lessee is liable for damages, they are liable as guarantors. 

I turn to the Board's first alternative, that the lessee by its failure to pay the rent punctually had repudiated the agreement. Mr. Young for the appellants submits that Carmichael J. found against such a repudiation. He relies on his Honour's statement that: 

"By the express provision of the contract itself (cl. 9 of the lease) the failure of the lessee to pay rent gives a right to the lessor to treat the failure to pay as a repudiation. Contrary to most cases involving the question as to whether a contract has been brought to an end by acceptance of repudiation, no question arises here as to whether the lessee by its failure to pay rent evinced an intention no longer to be bound by the contract so as to give the lessor an option to terminate the contract. .. ."

and the remark of Mahoney J.A. in the Court of Appeal that: 

"The learned trial judge did not find that the lease had been repudiated: I think he found to the contrary."

The Board argues that the trial judge did not direct his mind to this point at all, and that the question was not taken up in the Court of Appeal. With respect, I do not think that Carmichael J. made any finding, one way or the other, with respect to the issue of repudiation. He found, by reference to cl. 9(a) of the lease, that the lessee's failure to pay the rent was in effect equivalent to a repudiation. 

At the hearing of this appeal the Board tendered, without objection, certain evidence (Ex. R) which was received by the trial judge but which was omitted from the appeal books before the Court of Appeal and this Court. The evidence is of letters and discussions between the Board and the lessee between December 1976 and July 1977, which the Board says show a complete inability to pay the rent as it became due, such conduct amounting to an implied repudiation of the lease by the lessee. 

This case does not call for a detailed examination of the law touching repudiation, because in my opinion the circumstances do not even approach the point at which it can be said that by its words or conduct the lessee had demonstrated that it would or could no longer perform its obligations under the contract. Repudiation of a contract is a serious matter and is not to be lightly found or inferred: Ross T. Smyth & Co., Ltd. v. T.D. Bailey, Son & Co. (1940) 3 A11 ER 60, at p 71 . In considering it, one must look to all the circumstances of the case to see whether the conduct "amounts to a renunciation, to an absolute refusal to perform the contract": Mersey Steel and Iron Co. v. Naylor, Benzon & Co. (1884) 9 App Cas 434, at p 439 . There is no question here of abandonment of possession of the property by the lessee, such as furnished the basis for the decisions in Buchanan v. Byrnes (1906) 3 CLR 704 ; Hughes v. N.L.S. Pty. Ltd. (1966) WAR 100; affd (1966) 120 CLR 583 ; Highway Properties Ltd. v. Kelly, Douglas & Co. Ltd. (1971) 17 DLR (3d) 710 . Notwithstanding the initiation of proceedings by the Board on 3 August 1977, whereby the lease was determined, the lessee continued in possession of the premises, conducting its business therefrom after that date. It did not vacate until ordered to do so by the Court on 14 October. It is true that it did not seek relief from forfeiture, as it might have done, but the Board's case of repudiation can derive no support from that fact. 

Furthermore, the reliance of the Board upon Ex. R is misconceived. The material reflects the difficulties experienced by the lessee in meeting its rental obligations, and the consequent anxiety and effort thereby imposed on the Board. There were many instances of late payment of rent and some cases of insufficient funds to meet cheques when presented by the Board. However, I know of no authority or of any principle of law which requires me to hold that consistently late payment of rent without more is sufficient to establish repudiation of a lease. It would indeed be a harsh doctrine. Although not directly in point, the practice in equity of viewing a proviso for re-entry as a security for the payment of rent affords an indication to the contrary: cf. Howard v. Fanshawe (1895) 2 Ch 581 , at p 588 . Here there is no sufficient evidence of a refusal or inability to perform the contract. On the contrary, the evidence reveals serious and consistent effort on the part of the lessee to meet its obligations. While it did not succeed entirely, the fact remains that during the two months immediately preceding the termination of the lease the lessee paid a sum which was equivalent to more than two months' rental, thereby making some reduction in the arrears. While it requested the understanding and co-operation of the Board in meeting its financial difficulties, there is no suggestion that it sought to be relieved of its obligations altogether. For these reasons, the Board's argument based on an alleged repudiation of the lease by the lessee must fail. 

The main argument before this Court, as it was in the Court of Appeal, is directed to the alternative submission that cl. 9(a) of the lease allows for the Board's recovery of the damages claimed. Clause 9(a) provides as follows:- 

"9. DEFAULT, TERMINATION ETC:

The Lessor and the Lessee COVENANT AND AGREE

(a)

That if the rent hereby reserved or any part thereof shall be unpaid for the space of fourteen (14) days after any of the days on which the same ought to have been paid in accordance with the covenant for payment of rent herein contained (although no formal or legal demand shall have been made therefor) or if the Lessee commits or suffers to occur any breach or default in the due and punctual observance and performance of any of the covenants obligations and provisions of this lease or of any Rules made hereunder or if the Lessee be a company an order is made or a resolution is effectively passed for the winding up of the Lessee (except for the purpose of reconstruction or amalgamation with the written consent of the Lessor which consent shall not be unreasonably withheld) or if the Lessee goes into liquidation or makes an assignment for the benefit of or enters into an arrangement or composition with its creditors or stops payment of or is unable to pay its debts within the meaning of any relevant Companies Act or ordinance or if execution is levied against the Lessee and not discharged within thirty (30) days or if the Lessee (being an individual) becomes bankrupt or commits an act of bankruptcy or brings his estate within the operation of any law relating to bankrupts then and in any one or more or either of such events the Lessor at any time or times thereafter shall have the right to re-enter into and upon the demised premises or any part thereof in the name of the whole and to have again repossess and enjoy the same as its former estate anything herein contained to the contrary notwithstanding but without prejudice to any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event and thereupon 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."

With respect to the obligation to pay rent, it is sufficient to notice that by cl. 3 of the lease the lessee expressly covenanted to pay a yearly rental of $35,655, subject to increase in the final year. The rent was to be paid (in advance on the first day of each month) by equal monthly instalments amounting to one-twelfth of the annual rental. 

Carmichael J. decided that cl. 9 gave the Board a right to treat the failure to pay rent as a repudiation, the Board had exercised that right and therefore damages for the loss of its bargain should be awarded. 

The appellants concede that there was a breach of the covenant to pay rent and that, in accordance with cl. 9(a), this breach entitled the landlord to re-enter and forfeit the lease. The issue in the case will be determined by the meaning which is to be given to the phrases in cl. 9(a) which follow the right to re-enter, namely,

"... without prejudice to any action or other remedy which the Lessor has or might or otherwise could have for arrears of rent or breach of covenants or for damages as a result of any such event . . ." (my emphasis).

The appellants argue along the lines of the dissenting judgment of Samuels J.A. in the Court of Appeal. They submit that "any such event" must mean the event which grounded the re-entry, namely, the breach of the covenant to pay rent, and that the Board's remedy pursuant to the clause I have underlined can only be for such damages, if any, as result from the breach. The argument then proceeds on the basis that the damages which are the subject of the claim result not from the failure to pay the rent, but from the action of the Board in terminating the lease.

On the other hand, the Board argues that cl. 9(a) should be construed as an express indication by the parties that every covenant, including the covenant to pay rent in the manner prescribed, is an essential term of the contract and carries the implication that any breach will not only entitle the lessor to re-enter and terminate the contract but give him a right to damages for the loss of the benefits which performance of the contract would have conferred on him. 

In my opinion, the Board's contention must be rejected. The covenant to pay the rent, construed in the light of cl. 9(a), fails to meet the test of essentiality. That test was stated by Jordan C.J. in Tramways Advertising Pty. Ltd. v. Luna Park (NSW) Ltd. (1938) 38 SR (NSW) 632, at pp 641-642 in terms which were subsequently adopted by this Court in Associated Newspapers Ltd. v. Bancks (1951) 83 CLR 322 , at p 337 . The Chief Justice said: 

"The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promise that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor: . . . If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight."

In D.T.R. Nominees Pty. Ltd. v. Mona Homes Pty. Ltd. (1978) 138 CLR 423 , at p 431 in the course of a joint judgment, Stephen, Mason and Jacobs JJ. emphasized-

" . . . that the quality of essentiality depends for its existence on a judgment which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances."

Clause 9(a) does not achieve the effect for which the Board contends. It does not categorize the covenant to pay rent as an essential term. On the contrary, it treats the due payment of rent in the same way as it deals with the "due and punctual observance and performance of any of the covenants obligations and provisions of this lease". Some of those covenants cover matters of comparatively minor importance such as the maintenance of the lawns or the painting of the premises. It is understandable that the parties should agree that the lessor should have a right to re-enter and forfeit the lease if the rent is not paid or the covenants not observed, but the intrinsic nature of the obligations in question lend no support to an inference of essentiality carrying in the event of default and termination a right to damages for the loss of the contract. It is one thing to be able to rid oneself of an unsatisfactory tenant; but it is quite another, requiring a clear expression of intention, to be able to hold the evicted tenant liable for whatever damages might be suffered as a result of the premature termination of the tenancy. The Board points to the express reference in the clause to "damages as a result of any such event" as indicating the extent of the remedy available to the lessor following the exercise of the power to re-enter conferred by the clause. It may be that the scope and operation of this clause is obscure, but I find it impossible to give to it the effect for which Mr. Hodgson contends. The words "such event" must refer to the non-payment of rent or breach of covenant, and the damages must bear the necessary relation to that event. Damages do not usually flow from a failure to pay money, the proper recourse being an action for the debt: see McGregor on Damages, 14th ed. (1980), pars. 844-848. 

It may also be noted that cl. 9(a) in terms does not confer any rights on the lessor other than the right to re-enter and bring the contract to an end. The passage which I have quoted dealing with remedies is a saving clause, designed to preserve remedies rather than create them. 

Again, if one has regard to the impact on the lessor of the lessee's failure to pay the rent when due (cf. Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [1962] 2 QB 26 , at pp 62-63, 69-70 ), such a consideration yields no support for a finding of essentiality. Although the lessee's failure to pay the rent promptly was a serious breach of contract which the Board should not have been obliged to tolerate indefinitely, it was aware that it might have difficulty in finding another tenant if it were to re-enter and terminate the lease. It was not bound to take that step. Substantial payments in reduction of arrears of rent were made in June and July. The Board had the added security of the guarantee. It could have sued the lessee or the guarantors for arrears of rent. Re-entry was a drastic step which the Board ought to have taken not only if it desired to be relieved of an unsatisfactory tenancy but provided it had another one to take its place. If it exercised its right of re-entry only in order to apply greater pressure on the tenant with a view to regular payments of rent in the future, it took the risk that the lessee would accept the forfeiture. That is what happened, with the result that the Board effectively terminated the lease and secured possession of premises which it could not thereafter let for a considerable time. That consequence was not the fault of the former lessee. 

In my opinion, therefore, the Board was not entitled to damages for the loss of the contract which it chose to bring to an end. When these proceedings were instituted, the statement of claim included a claim for arrears of rent in the sum of $5,442.50. The appellants do not contest their liability in this regard, and the arrears were paid before trial. The Board is therefore entitled to the costs of the proceedings in respect of this part of the claim. In all other respects, the appellants are entitled to the costs of the action. 

I would allow the appeal.