Progressive Mailing House Pty Ltd v Tabali Pty Ltd

57 ALR 609

---

(Judgment by: Deane J)

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

Court:

Judges: Mason J
Wilson J
Brennan J

Deane JDawson 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

---

Judgment by:
Deane J

The facts and issues involved in this appeal are set out in the judgment of Mason J. Since I agree with Mason J's conclusions and am in general agreement with his reasoning, and with the observations made by Wilson J in his judgment, I can confine myself to a statement of my views on what I see as the main general questions of law involved. It is convenient to refer to the appellant as "the tenant" and to the respondent as "the landlord".

A lease for a term of years ordinarily possesses a duality of character which can give rise to conceptual difficulties. It is both an executory contract and an executed demise. Its origins lie in contract rather than in real property in that the lessee's remedies were originally restricted to a personal action against the lessor on his covenant to give enjoyment of the land (see Pollock and Maitland: The History of English Law Before the Time of Edward I, 2nd ed (1898: Cambridge University Press reprint, 1952), vol 2, pp 106-7; Holdsworth: A History of English Law, 5th ed (1942), vol 3, pp 213-4). In time, however, it became accepted that a lessee for a term, although denied "seisin" in the strict sense, had a right to "possession" which was an interest in the land that he was entitled to protect against third parties; initially by a limited writ in ejectment (quare ejecit infra terminum) framed in terms which restricted it to an action against a purchaser from the lessor and subsequently by the remedies afforded under the Statute of Gloucester and by a specialized action of trespass (de ejectione firmae) which, by the end of the middle ages, gave recovery, not merely of damages, but of possession of the land (cf Litt Ten s 324; Co Litt, 2000b; Pollock and Maitland: op cit, vol 2, pp 107ff, particularly p 110; Holdsworth: op cit, vol 3, pp 214ff; Challis' Law of Real Property, 3rd ed (1911) pp 63ff, 80, 98ff, Appendix I). Notwithstanding this legal protection of the lessee's interest in the land, chattels real were never incorporated into the strict system of feudal tenements. The interest of the lessee in the land was, however, accepted as analogous to a form of feudal tenure to the extent that some authorities expressed the view that the lessee was required to do fealty (see eg, Bracton: 27, 80; Challis: pp 63-66, Appendix I).

As they developed, the contractual doctrines of frustration and termination for fundamental breach (or for repudiation) were not seen as applicable to an executed demise under which an interest or estate in land had actually passed to the tenant (see eg, Halloran v Firth (1926) 26 SR (NSW) 183 at 187 and, on appeal, (1926) 38 CLR 261 at 268, but cf at p 269; London & Northern Estates Co v Schlesinger [1916] 1 KB 20 at 24; Total Oil Great Britain Ltd v Thompson Garages (Biggin Hill) Ltd [1972] 1 QB 318 Leightons Investment Trust Ltd v Cricklewood Property and Investment Trust Ltd [1943] KB 493 and, on appeal, [1945] AC 221 at pp 233-5 and 244-5 but cf at pp 228ff and 236ff). The rationale of that approach was the perceived inappropriateness of those contractual doctrines to a leasehold estate viewed as analogous to a form of feudal tenure. On the other hand, the general trend in this century, particularly in relation to leases of urban premises, has been away from the type of lease which can realistically be so viewed. It has been towards the lease, at a commercial rental and for a shorter term, framed in the language of executory promises of widening content and diminishing relevance to the actual demise. It is apparent that the special rules of property law regarding chattels real are inadequate as the exclusive determinant of rights and liabilities under such modern leases. That being so, it has become necessary for courts to look somewhat more critically at the rational basis and justification of the traditional assumption that leases generally were beyond the reach of fundamental doctrines of the law of contract.

The actual application to leasehold interests of the common law doctrines of frustration and termination for fundamental breach involves some unresolved questions which are best left to be considered on a case by case basis whereby adequate attention can be focused on particular problems which might be overlooked in any effort at judicial condification. One cannot, however, ignore the fact that the clear trend of common law authority is to deny any general immunity of contractual leases from the operation of those doctrines of contract law (see, eg, National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675; Highway Properties Ltd v Kelly, Douglas & Co Ltd (1971) 17 DLR (3d) 710; Corbin; Contracts, vol 6 (1962), s 1356; and see the cases cited in Brooking and Chernov: Tenancy Law and Practice in Victoria, 2nd ed (1980), para 211; D M McRae: "Repudiation of Contracts in Canadian Law"; Canadian Bar Review vol 56 (1978), 233 and J T Robertson: "Frustrated Leases: 'No to Never-But Rarely if Ever'", Canadian Bar Review, vol 60 (1982), 619).

At first impression, that trend may appear to represent a step back towards the medieval days when the lessee's interest under a term of years was seen as a mere right in personam to sue the lessor for breach of covenant. Upon analysis, however, it involves no more than recognition of the fact that the analogy between a leasehold and a freehold estate is an imperfect one and of the related fact that, except perhaps in the quite exceptional case of a completely unconditional demise for a long term with no rent reserved (cf Knight's case (1588) 5 Co Rep 54b), the leasehold estate cannot be divorced from its origins and basis in the law of contract (cf per Atkin LJ, Matthey v Curling [1922] 2 AC 180 at 199-200): the lease should be seen as "resting on covenant" (or contractual promise) and it is "the contract ...and not the estate ... which is the determining factor" (see per Isaacs J, Firth v Halloran (38 CLR at p 269) quoting from Hallen v Spaeth [1923] AC 684 at 690).

That trend should be followed in this court and it should be accepted that, as a general matter and subject to one qualification, the ordinary principles of contract law are applicable to contractual leases. The qualification is that the further one moves away from the case where the rights of the parties are, as a matter of substance, essentially defined by executory covenant or contractual promise to the case where the tenant's rights are, as a matter of substance, more properly to be viewed by reference to their character as an estate (albeit a chattel one) in land with a root of title in the executed demise, the more difficult it will be to establish that the lease has been avoided or terminated pursuant to the operation of the ordinary principles of frustration or fundamental breach. Indeed, one may reach the case where it would be quite artificial to regard the tenant's rights as anything other than an estate or interest in land (eg, a 99 year lease of unimproved land on payment of a premium and with no rent, or only a nominal rent, reserved). In such a case, it may be difficult to envisage circumstances in which conduct of the tenant short of actual abandonment would properly be held to constitute repudiation or fundamental breach or in which anything less than a cataclysmic event such as the "vast convulsion" referred to by Viscount Simon LC in Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd [1945] AC 221 at 229 would warrant a finding of frustration.

The memorandum of lease in the present case was for five years at a commercial rental without a premium. The consideration which the tenant gave for the demise was in the form of executory covenants. As a matter of substance, the rights of the tenant can also readily be seen as "resting on covenant" since, the memorandum of lease being unregistered, any equitable term which it created was founded upon what equity saw as an agreement to grant a lease in terms of the unregistered memorandum (see, generally, Walsh v Lonsdale (1882) 21 Ch D 9; Australian Provincial Assurance Ltd v Rogers (1943) 43 SR (NSW) 202 at 205-6; National Trustees, Executors and Agency Co of Australasia Ltd v Boyd (1926) 39 CLR 72 at 81-2; National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 690, 704; Hewett v Court (1983) 149 CLR 639 at 666; 46 ALR 87 at 107).

In that regard, one needs to be mindful of the danger of over-emphasizing the equivalence of the equitable estate under an agreement for lease or an unregistered memorandum of lease followed by entry into possession and of a common law leasehold estate for the like term in that one can point to statements of authority which support the approach that the ordinary contractual doctrines of frustration and termination for fundamental breach would, in an appropriate case, operate to destroy the contractual foundation of such an equitable estate even if the view that they were not applicable at all to a common law lease had continued to prevail (see Coatsworth v Johnson (1885) 55 LJ (QB) (NS) 220 at 223 (per Lindley LJ); Swain v Ayres (1888) 21 QBD 289 at 294 (per Lord Esher MR), at p 295 (per Lindley LJ), at pp 296-7 (per Lopes LJ), and Dimond v Moore (1931) 45 CLR 159, esp at 186-7). Be that as it may, however, once it is accepted that the principles of the law of contract governing termination for fundamental breach are, as a matter of theory, applicable to leases generally, there is no difficulty in applying them in the present case in much the same fashion as to an ordinary executory contract:

"If the contract is avoided or dissolved ... the estate in land falls with it"

(per Lord Wright, Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd [1945] AC 221 at 240).

While the question is not without difficulty, I agree with other members of the court that the tenant's breaches of the memorandum of lease amounted, in the circumstances of the present case, to fundamental breach of contract. It is not now suggested that the tenant is entitled to rely upon any special statutory provision precluding or controlling re-entry or providing for relief against forfeiture. It follows that the landlord was entitled to terminate the lease and, in accordance with ordinary contractual principles, sue the tenant for damages for loss of the benefit of the tenant's covenant to pay future rent and outgoings. The question arises whether that right to sue for general damages for loss of bargain survived the landlord's action in exercising the contractual right of re-entry contained in cl 10.1 of the memorandum of lease.

In Shevill v Builders Licensing Board (1982) 149 CLR 620; 42 ALR 305 it was held by the court that the lessor in that case was entitled only to unpaid past rent upon termination of the lease pursuant to the exercise of a contractual right of re-entry for breach of the covenant to pay rent promptly. The basis of the decision was not, however, a rejection of the proposition that the ordinary principles of contract law were applicable to the lease. The decision turned upon the conclusion that the breaches of the covenant to pay rent in that case did not constitute repudiation or fundamental breach (see 149 CLR at pp 626ff; 42 ALR at 309). While the distinction between termination for fundamental breach and termination for a breach which the parties have agreed in advance would be such as to give rise to a right to terminate is not without difficulty (cf Larratt v Bankers and Traders' Insurance Co Ltd (1941) 41 SR (NSW) 215 at 225-6; Sotiros Shipping Inc v Sameiet Solholt (The Solholt) [1983] 1 Lloyd's Rep 605), the majority's reasoning in Shevill proceeded on an assumption (see (CLR) at p 625; (ALR) at p 307) that general damages for loss of the lease would have been recoverable if the lessee's failure to pay rent had, in the circumstances of that case, constituted repudiation or fundamental breach. The present case is in contrast to Shevill in that, as has been said, the tenant's breach of covenant constituted a fundamental breach of the memorandum of lease.

If follows from the foregoing that, in the circumstances which had arisen, the landlord had both a contractual right to terminate the lease by re-entry under cl 10.1 for breach of covenant and, on the application of the ordinary principles of contract law, a common law right to terminate for fundamental breach. The landlord was not obliged to elect between the two grounds for terminating the lease: it was entitled to rely upon them both. A party entitled to terminate a contract for repudiation or fundamental breach may rely upon both a specific contractual right to terminate the contract and the common law right to terminate unless, as a matter of construction, the former excludes the latter (see, eg Rawson v Hobbs (1961) 107 CLR 466 at 480; Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 at 377-8 and, generally, the cases referred to in Carter: Breach of Contract (1984), paras 914, 1006). More specifically, where a contractual right to terminate for past breach and the common law right to terminate for repudiation or fundamental breach exist concurrently, the reliance upon the contract involved in the exercise of the contractual right to terminate will not preclude the recovery of damages for loss of the future benefit of the contract by reason of repudiation or fundamental breach unless the contract expressly or impliedly so provides (cf Yeoman Credit Ltd v Waragowski [1961] 1 WLR 1124).

Clause 10.1 of the memorandum of lease in the present case did not preclude the common law right to sue for fundamental breach. To the contrary, it expressly provided that the landlord's exercise of the right of re-entry thereunder would be "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". That being so, the exercise by the landlord of the right of re-entry under cl 10.1 did not deprive it of the right to claim damages for the loss of the future benefit of the tenant's covenant to pay rent which it sustained by reason of the tenant's fundamental breach of the provisions of the lease.

The appeal should be dismissed.