Batiste v Lenin

Case •

[2002] NSWCA 316

•

27 September 2002

No judgment structure available for this case.
CITATION: BATISTE & ORS v LENIN [2002] NSWCA 316
FILE NUMBER(S): CA 40335/02
HEARING DATE(S): 5 September 2002
JUDGMENT DATE:
27 September 2002

PARTIES :
Donna Batiste - First Appellant
Hazaran Pty Ltd - Second Appellant
Chrystalis Holdings Pty Ltd - Third Appellant
Michael Petrovic Lenin - Respondent
JUDGMENT OF: Sheller JA at 1; Giles JA at 75; Santow JA at 76
LOWER COURT JURISDICTION : Supreme Court - Equity Division
LOWER COURT
FILE NUMBER(S) : 		3548/01
LOWER COURT
JUDICIAL OFFICER :		 Bryson J
COUNSEL: L J Aitken/J M Baxter - Appellants
M Walton SC/A S Bell/D Villa - Respondent
SOLICITORS: Horowitz Bilinski - Appellants
Phillips Fox - Respondent
CATCHWORDS: LEASES - construction of terms of lease - arrears of rent - failure to satisfy covenants/ conditions of lease - "rent free period" - obligation to restore and repair - relief against forfeiture - repudiation of lease - Conveyancing Act 1919 (NSW), s129 - set-off - recoupment - right of re-entry - amendment of statement of claim - application to add further ground of appeal
LEGISLATION CITED: Fair Trading Act 1987 (NSW)
Conveyancing Act 1919 (NSW)
CASES CITED:
 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] 1 QB 137
Lee-Parker v Izzet [1971] 1 WLR 1688
The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17
Shevill v The Builders Licensing Board (1982) 149 CLR 620
Ross T Smyth & Co Ltd v T D Bailey, Son & Co [1940] 3 All ER 60
Carr v J A Berriman Pty Ltd (1953) 89 CLR 327
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26
Shiloh Spinners Ltd v Harding [1973] AC 691
Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 97145
Gill v Lewis [1956] 2 QB 1
Langley v Foster (1909) 10 SR (NSW) 54
Greville v Parker [1910] AC 335
Hayes v Gunbola Pty Ltd (1986) 4 BPR 97263
Dalla Costa v Beydoun (1990) 5 BPR 11379
Tutita Pty Ltd v Ryleaco Pty Ltd (1989) 4 BPR 97311
Jacob v Down [1900] 2 Ch 156
Stephens v Junior Army and Navy Stores, Ltd [1914] 2 Ch 516
DECISION: Appeal dismissed with costs




                          CA 40335/02
                          ED 3548/01

                          SHELLER JA
                          GILES JA
                          SANTOW JA

BATISTE & ORS v LENIN

The appeal was from a decision of Bryson J on 12 April 2002 which gave judgment for the defendant lessor for possession of the whole of the land known as the Great Northern Hotel, Newcastle (the Hotel). From this decision the three plaintiffs appealed claiming principally that the second plaintiff should be relieved against forfeiture of the lease upon terms.

On 15 November 1996 a lease of the Hotel was entered into between the defendant (the lessor) and the second plaintiff (the lessee) for a term of six years with an option to renew for a period of six years and an option to purchase in terms therein set out. Proceedings were brought in the Equity division of the Court against the lessor seeking relief under the Fair Trading Act 1987 (NSW) and an order that the lessee be relieved from forfeiture of the lease and of the option to purchase. The lessor filed a defence and cross-claim against the lessee in which he alleged breaches of the terms of the lease and claimed judgment for possession of the property together with arrears of rent and outgoings, mesne profits, an account and consequential orders.

When the lease was entered into the Hotel was in a severely deteriorated state. It required substantial refurbishment to be suitable for use as a hotel. The dispute between the parties about re-entry and relief against forfeiture centred chiefly:


- on which of the lessor or the lessee had the responsibility to carry out the necessary restoration, renovation and repair work for the premises to be operated as a hotel,


- on the extent to which the lessee had carried out such work, and


- on whether the lessee was entitled to be compensated by the lessor.

Also in dispute was the proper construction to be given to Art 11.02 of the lease which dealt with a "rent free period". It provided that if the lessee, within five years of the commencement of the lease, undertook all work to comply with fire orders, repaired the roof membrane and all external woodwork and remedied the concrete cancer in hallways and bathrooms, the lessor would forego any rental payments from commencement until 1 January 1999. The trial Judge found that Art 11.02 stated the circumstances in which the lessor would forego the rental payments referred to, leaving it to the lessee either to fulfil the circumstances and obtain the benefit of rent being foregone or to leave them unfulfilled and remain under the obligation to make all rental payments.

The trial Judge found that the rent outstanding on 31 October 2001 was approximately $202,000. There was a long continuing pattern of arrears of rent, commencing soon after 1 January 1999. Also, the conditions of the rent free period had not been satisfied.

In answer to the claim to re-enter for failure to pay rent and outgoings, the lessee claimed by way of set-off or recoupment to have expenditure of at least $2.45m in some way set against or treated as recoupment of the obligations to pay rent. This argument was not accepted at trial.

The trial Judge rejected the lessee's claim to relief against forfeiture as there was no evidence that outstanding debts could be paid and the relationship between the parties was such that it should not be continued by a discretionary decision of the Court. The trial Judge concluded that the lessee had repudiated the lease. There were significant breaches of the lease which included failures to complete works relating to fire stairs and repair the external woodwork, and a continuing pattern of arrears of rent and outgoings. These breaches evinced an intention of the lessee not to comply with the terms of the lease.

The trial Judge found that the lessor had a clear right to re-enter based on the failure to pay rent for long periods. His right to possession was perfected by the commencement of the first cross-claim which had the same effect as an actual re-entry to terminate the lease.

The substantive grounds of appeal related to the trial Judge's findings in relation to whether the lessor was under a relevant obligation to restore or repair the premises and, if an obligation existed, whether the lessee was entitled to recoup monies spent in carrying out such restoration or repair. The finding of repudiation and its consequences was challenged. It was also argued that the trial Judge's refusal to relieve against forfeiture, particularly with reference to the lessor's failure to give notices under s129 of the Conveyancing Act 1919 (NSW), was an error of law.

A further ground of appeal was that the trial Judge's failure to permit amendment of the statement of claim on terms as to costs meant that the hearing substantially miscarried.

At the hearing of the appeal an application was made to add an additional ground of appeal directed to an argument that the trial Judge erred in his construction of the lease in that in particular he treated the covenants concerning the erection of a fire stair in the premises as a continuing covenant, and thus relevant to the question of repudiation of the lease, rather than a covenant broken once and for all on breach which sounded only in damages.

HELD (per Sheller JA, Giles JA and Santow JA):

1. There was no sound basis for imposing upon the lessor in the circumstances of this case any obligation to restore or repair. Article 3.12 of the lease stated that it was the lessee's intention to carry out a major refit and refurbishment of the property. The lessee, knowing that the premises were derelict and unsuitable for the permitted use as a licensed hotel unless restored and repaired, was content nevertheless to lease them to be used for that limited purpose.

2. It can be accepted that if the lessor had been under an obligation to restore and repair but had refused to do so and the lessee had carried out that work at its own expense, it would have been entitled to recoup itself to that extent out of future rents and defend any action by the lessor for payment thereof: Lee-Parker v Izzet [1971] 1 WLR 1688; British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] 1 QB 137. However, the lessor was under no obligation to restore and repair.

3. The ordinary principles of contract law including that of termination for repudiation apply to leases: The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 29. The findings made by the trial Judge about the lessee's extensive breaches under the lease were open on the evidence. There was no ground shown for interfering with his conclusion that the lessee had repudiated the lease.

4. When asked to grant relief against forfeiture the Court would not ordinarily take into account breaches which for want of notice under s129(1) of the Conveyancing Act 1919 did not allow a right of re-entry or forfeiture to be enforced by action: Tutita Pty Ltd v Ryleaco Pty Ltd (1989) 4 BPR 97311. But the Court's discretion in considering such an application is not necessarily fettered where the lease was repudiated as a result of very significant breaches of covenant. It would be unjust to the lessor to ignore such breaches in considering whether to exercise the discretion to grant relief.

5. It was open to the trial Judge to take into account the relationship between the parties as a further ground for refusing relief against forfeiture: Shiloh Spinners Ltd v Harding [1973] AC 691 at 725-6. The lessor should not be compelled to remain in a relation of neighbourhood with a lessee in deliberate breach of its obligations. The Court was not persuaded that the trial Judge's discretion in refusing relief against forfeiture miscarried, particularly when the lessee's repudiation of the lease was brought into account.

6. No ground was shown for reversing the trial Judge's decision to refuse late amendment of the statement of claim. The question of amendment was a matter for the trial Judge having heard the witnesses and weighed the matter so as to do justice to both parties.

7. Leave was refused to amend the notice of appeal by adding the additional ground. The arguments raised in support of the ground were not raised before the trial Judge or put to the lessor at trial. Also, the submissions advanced in support of the ground were without substance. There was nothing in the relevant articles of the lease which put the lessee's covenants into the once only breach category: see Jacob v Down [1900] 2 Ch 156, compare Stephens v Junior Army and Navy Stores, Limited [1914] 2 Ch 516.


      Legislation:
      Fair Trading Act 1987 (NSW)
      Conveyancing Act 1919

      Cases cited:
      Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
      British Anzani (Felixstowe) Ltd v International Marine Management (UK)Ltd [1980] 1 QB 137
      Lee-Parker v Izzet [1971] 1 WLR 1688
      The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17
      Shevill v The Builders Licensing Board (1982) 149 CLR 620
      Ross T Smyth & Co Ltd v T D Bailey, Son & Co [1940] 3 All ER 60
      Carr v J A Berriman Pty Ltd (1953) 89 CLR 327
      Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26
      Shiloh Spinners Ltd v Harding [1973] AC 691
      Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 97145
      Gill v Lewis [1956] 2 QB 1
      Langley v Foster (1909) 10 SR (NSW) 54
      Greville v Parker [1910] AC 335
      Hayes v Gunbola Pty Ltd (1986) 4 BPR 97263
      Dalla Costa v Beydoun (1990) 5 BPR 11379
      Tutita Pty Ltd v Ryleaco Pty Ltd (1989) 4 BPR 97311
      Jacob v Down [1900] 2 Ch 156
      Stephens v Junior Army and Navy Stores, Ltd [1914] 2 Ch 516

      ORDERS
      Appeal dismissed with costs.

      **********

                          CA 40335/02
                          ED 3548/01

                          SHELLER JA
                          GILES JA
                          SANTOW JA

                          Friday, 27 September 2002
BATISTE & ORS v LENIN
Judgment

1 SHELLER JA

      Introduction:

      On 15 November 1996 a lease of the Great Northern Hotel, Cnr of Scott and Watt Streets, Newcastle was entered into between Michael Petrovic Lenin, as lessor, and Hazaran Pty Limited (Hazaran), as lessee, for a term of six years from 22 November 1996 with an option to renew for a period of six years and an option to purchase in terms therein set out.

2 On 13 June 2001 Donna Batiste (Ms Batiste), Hazaran and Chrysalis Holdings Pty Limited (Chrysalis) began proceedings by statement of claim in the Equity Division of the Court against Mr Lenin seeking relief under the Fair Trading Act 1987 (NSW) and an order that Hazaran be relieved from forfeiture of the lease and of the option to purchase respectively “as may have occurred prior to the making of the orders”. Mr Lenin filed a defence and cross-claim (the first cross-claim) against Hazaran in which he alleged breaches of the terms of the lease and claimed judgment for possession of the property together with arrears of rents and outgoings, mesne profits, an account and consequential orders. Bryson J heard the proceedings and on 12 April 2002 on the statement of claim gave judgment for Mr Lenin with costs and on the first cross-claim judgment for Mr Lenin for possession of the whole of the land known as the Great Northern Hotel, Newcastle, the judgment to take effect on 12 April 2002. From this decision the three plaintiffs appealed claiming principally that Hazaran should be relieved against forfeiture of the lease upon terms.


      The lease

3 The Great Northern Hotel was built in 1938 and occupies a prominent position near Newcastle’s main railway station. It was once the pre-eminent hotel in Newcastle, distinguished for its patronage and décor, but by the time of the lease it was in a severely deteriorated state. Ms Batiste described it as a derelict building with squatters living in it. It required substantial refurbishment to be suitable for use as a hotel.

4 The dispute between the parties about re-entry and relief against forfeiture centred chiefly:

· on which of the lessor or the lessee had the responsibility to carry out the necessary restoration, renovation and repair work for the premises to be operated as a hotel,

· on the extent to which the lessee had carried out such work, and

· on whether the lessee was entitled to be compensated by the lessor.


      The permitted use of the premises was described as “licensed hotel (including accommodation, restaurant and function rooms)”; Article 4(g) and item 10 of the Reference Schedule of the lease.

5 Article 3 of the lease bore the heading “ALTERATIONS, REPAIRS AND MAINTENANCE”. Article 3.02(a) obliged Hazaran to “maintain and keep in good repair … the premises together with all appurtenances fixtures and other things thereto belonging” with limited exceptions such as reasonable wear and tear. Article 3.02(b) was as follows:

          “(b) The Lessee will without affecting the generality of the foregoing and at the Lessee’s expense :
              (i) at all times keep the premises both inside and out (including external surface of windows and doors) clean and free from dirt and rubbish and keep all garbage and waste in proper receptacles and arrange for the regular removal thereof from the premises; …”

6 Article 3.06 required the lessee forthwith to comply with statutes, ordinances, proclamations, orders or regulations given inter alia by any municipal or other authority with jurisdiction in respect of the premises or the use thereof and to keep Mr Lenin indemnified in respect of all such matters. Article 3.12 was as follows:

          “Notwithstanding the provisions of Article 3 – 3.01 to 3.11 (inclusive), the Lessor acknowledges that it is the intention of the Lessee to carry out a major re-fit and refurbishment of the said property and that during the course of construction and/or refurbishment it may be necessary for the Lessee in order to effect such works, to bring on to the site, such equipment which otherwise would place the Lessee in breach of the terms and conditions of this Lease.”

7 Article 11 dealt with rental and occupancy as follows:

          “11.01 (a) The Lessee shall at such places as the Lessor may from time to time direct and otherwise without demand from the Lessor pay to the Lessor during the term of this lease in the manner set out in item 6 of the Reference Schedule rental without deduction at the rate per annum set out in Item 7 of the Reference Schedule subject to increase as provided in this Article.
          11.02 RENT FREE PERIOD
              (a) The Lessee acknowledges that at the time of commencement of this lease part of the subject premises is affected by an Order or Order from the Newcastle City Council requiring closure of the upper floors therein due to the lessor’s failure to comply with council fire orders.
              (b) Forthwith upon commencement of this lease the Lessee shall at its own expense and as expeditiously as possible carry out such work as is required to satisfy the existing Council orders and thus facilitate the reopening of those parts of the premises presently closed.
              (c) Provided that the Lessee, within 5 years of the date hereof, at his own expense and in a proper and workmanlike manner and in accordance with the requirements of any statutory authority carries out all work necessary to comply with the fire orders, a copy of which are annexed to the Option to Purchase referred to Article 21 hereof, repairs the roof membrane and all external woodwork and the concrete cancer in hallways and bathrooms, the Lessor will forego any rental payments from the date of commencement hereof until the 1st January 1999.”

8 Article 13 was headed “DEFAULT BY LESSEE”. Article 13.01 enabled Mr Lenin, if rent was in arrears for a period of thirty days, although no formal demand had been made, or if default was made in the fulfilment of any covenant or condition to be performed or observed on the part of Hazaran continuing for a period of thirty days after the giving of written notice by Mr Lenin to Hazaran requiring rectification, immediately or at any time thereafter and without notice or demand and notwithstanding prior waiver or failure, take action to re-enter upon the premises.

9 Article 15 was headed “ABATEMENT OF RENT OR TERMINATION OF LEASE ON DAMAGE, DESTRUCTION OR RESUMPTION”. Pursuant to Art 15.01 if the whole or any part of the premises was destroyed or damaged by fire, flood, lightning, storm, tempest or other disabling cause, so as to render the premises during the term substantially unfit for the use and occupation of the lessee, then the lease might be terminated without compensation by either the lessor or the lessee by notice in writing to the other of them. Sub-clause (iii) provided that nothing therein contained or implied should be deemed to impose any obligation upon Mr Lenin to rebuild or reinstate or make the premises fit for occupation.

10 Article 16 was headed “MISCELLANEOUS PROVISIONS”. Article 16.04 provided:


          “The Lessee shall comply promptly with and observe at his own expense all notices received from any statutory public or municipal authority with respect to the premises and further the lessee will notify the lessor of any notices so received and notwithstanding anything herein contained or implied the Lessee expressly agrees and declares that it shall at its own costs and expense be responsible for carrying out and completing in a proper and workmanlike manner any alterations or additions (whether structural or not) as may be required by any competent authority relating to the fire safety of the building the provision of toilets, washbasins and any other amenities and requirements incidental thereto.”

11 Article 16.06 provided:

          “The covenants and conditions contained herein or by statutory implication shall comprise the whole of the agreement between the parties who acknowledge and declare that no other terms and conditions shall be deemed to be implied herein or to arise by way of collateral warranty.”

12 Article 17 granted an option of renewal provided that there was no subsisting breach by Hazaran of any of the terms or conditions of the lease. Notice was to be given to the lessor in writing not less than ninety days but not more than one hundred and eighty days before the expiration of the period of the lease.

13 Article 20 was headed “RENOVATION”. Article 20.02 provided as follows:


          “The Lessor covenants and agrees with the Lessee that:
          (a) The Lessee will at his own expense in all respects carry out works required to satisfy outstanding notices of the Newcastle City Council in accordance with the requirements of the Newcastle City Council, the Australian Heritage Commission and the Heritage Council of New South Wales.
          (b) In respect of the carrying out of works referred to in subclause 20.02(a) hereof the provisions for abatement of rental set out in article 15 hereof shall not apply.”

      Despite the language it was agreed on behalf of Hazaran that Article 20.02 should be read as a covenant by the lessee.

14 Article 21 provided for an option agreement to be entered into at the time of the signing of the lease.

15 The entitlement to install poker machines, the extent of the contribution towards their cost and the right to receive the income thereof was agitated at trial. The relevant article was Article 28 which provided:

          “It is agreed between the Lessor and the Lessee that if the Lessee is lawfully entitled to install poker machines in the subject premises then the Lessee and the Lessor by mutual agreement share the cost and income of the said poker machines, up to a maximum of 15, on either of the following basis [sic]:
          (i) the Lessor will contribute 50% of the cost of acquisition of the said poker machines and will carry out the necessary work to rectify the defects set out in point 1, 2, 3, 4 and 5 as detailed in the report of Burgess and Arnott Pty Limited dated 5th November 1996, whereupon the Lessor shall be entitled to receive 50% of the income generated by the said poker machines after such deductions as are required to be made to the controlling statutory authorities and after the deduction of agreed costs of providing staff, electricity and banking services for the machines; or

          (ii) the Lessor will contribute 25% of the cost of acquisition of the said poker machines and will carry out the necessary work to rectify the defects set out in point 1, 2, 3, 4 and 5 as detailed in the report of Burgess and Arnott Pty Limited dated 5th November 1996, whereupon the Lessor shall be entitled to receive 25% of the income generated by the said poker machines after such deductions as are required to be made to the controlling statutory authorities and after the deduction of agreed costs of providing staff, electricity and banking services for the machines; or

          (iii) the Lessor contributes 10% of the acquisition costs of the said poker machines and shall be entitled to receive 10% of the income generated by the said poker machines, free of any deductions.”

16 The Burgess and Arnott report dated 5 November 1996, referred to in Article 28, gives a good indication of the state of the Great Northern Hotel and what needed to be done to rectify it. The report was as follows:

          “Re: THE GREAT NORTHERN HOTEL, CNR SCOTT & WATT STREETS, NEWCASTLE
          Subject: STRUCTURAL ADEQUACY OF BUILDING

          The above building which suffered damage during the 1989 earthquake has been inspected and reports documented damage and suggested remedial solutions dated 19th July 1990 and 16th January 1992.

          A recent inspection was made on the 1st November 1996 to view and [sic] movements that have occurred over the last six years. Movements in order of 0.2mm (hairline) were found which are considered very slight and of the order that may be expected with thermal changes acting on an existing crack.

          Certain repairs to wall were made which gave the best example of the magnitude of these movements.

          Therefore, it is our opinion that the construction is acting in a manner that is structurally adequate to safely support the dead loads, live loads, wind loads and earthquake loads as laid down in A.S.1170.

          Provided that the following defects are attended to prior to. [sic]

              1. Lintel at northern elevation over external doorway be replaced and brick wall areas over the [sic] rebuilt or repaired as specified in the previous report.

              2. Repair floor slabs in the following locations where reinforcement is exposed and corroded.

· Cellar roof near keg room access at cnr Scott & Watt Sts.

· 3rd floor female toilet ceiling

· 5th floor female toilet ceiling

· 5th floor male toilet ceiling

              3. Repair brickwork at 5th floor male toilet where corrosion of window lintels has caused disruption to brickwork.

              4. Awning tierods that are corroded should be replaced and wall anchors checked.

              5. The Fascia of the building should be checked for loose elements such as broken bricks at window heads, parapet copings, etc., which are endanger [sic] of dislodgment. These elements should be made good by replacement or repair.

              6. External handrails to balconies and roof areas should be replaced.

              7. Roof water proof members to be repaired to water tight condition or repaired.

          The main structure of the hotel being a steel frame for the first two stories [sic] suffered little or no damage during the earthquake, however, the infill masonry walls were buffered [sic] by the lateral movements which cause cracking to the element. This did not affect the adequacy of the main steel frame structure. The top three floors of load bearing brickwork suffered no major damage and most faults in this area of building are due to old maintenance problems.

          In summary, we consider all faults mentioned in this and previous reports should be rectified to prevent future high maintenance costs. However, we have tried to verify the order of importance of attendance to the remedial work for this building.

          Namely: Items 1 to 3 of structural significance and should be attended to prior to occupation or shored in a manner to ensure safety until repairs can be made.

          Items 4 to 5 are matters of public safety and therefore should be attended to as soon as possible.
              Item 7. Water penetration to this building is a major factor in the cause of deterioration. Water tightness of habitual [sic] building is a basic requirement and should be made good. We would suggest temporary measures such as tarpaulins be used until an approved waterproof membrane system is installed.”

      Reasons for judgment

17 Bryson J observed that it had to be understood that Hazaran knew the terms of the report of Burgess and Arnott and the terms and requirements of outstanding notices from Newcastle City Council referred to in Articles 11.02(c) and 20.02(a). As his Honour said, the meaning and effect of the expressed provisions of the lease relating to repair obligations was of high importance for addressing any question as to whether there were any implied obligations on either party relating to repairs. Hazaran’s covenant in Article 3.02(a) to maintain the building and keep it in good repair had, in his Honour’s view, to be understood with a statement in Article 3.12 of Hazaran’s intention to carry out a major refit and refurbishment and measured against the state of the building at the time of the lease, namely a severely deteriorated state as described in the report.

18 The building had been the subject of several orders of Newcastle City Council relating to repairs and fire safety. The orders requiring works for fire safety had not been complied with. This was clear to the parties. The business of a licensed hotel had been conducted in the building by an earlier lessee from Mr Lenin until some time in or about 1994 when the lease expired. The Land and Environment Court of New South Wales had, by injunction, prevented further occupation of the residential part of the hotel and Mr Lenin brought hotel trading to an end. The building was closed up and occupied only by a resident caretaker or manager. From time to time squatters and other intruders got in. An intruder caused fire damage to a room variously described but usually referred to as the florist’s shop on the ground floor. This occurred a few days or weeks before the lease was entered into.

19 In the last years of hotel trading before 1994 a residential low price or budget accommodation business had been carried on. The furniture and furnishings of the residential section had not been cleared away and were in such a deteriorated state as to be of no practical use. The residential area suffered from entry of water through roof leaks, broken windows and decayed wooden window frames and from disruption of plumbing pipes apparently caused by the theft of copper piping. There were signs of concrete cancer, meaning spalling of concrete caused by corrosion of steel reinforcements. Quite apart from the outstanding fire notices and the injunction, there were many difficulties in the path of returning to residential use. The deteriorated state of the building was well understood to the lessee, in the person of Kurt Stephen Braune, who was a guarantor of the lease and, until Ms Batiste acquired control from him, was sole shareholder and director of Hazaran or at least controlled its affairs. Mr Braune had inspected the premises. Mr Lenin cross-claimed against Mr Braune as guarantor (the second-cross claim). The fate of the second cross-claim is not a subject of this appeal.

20 In Bryson J’s view the provisions of Article 11.02(c) relating to work to be carried out by the lessee and to the rent free period neither imposed an obligation on the lessee to carry out work necessary to comply with the fire orders, (failure to perform which the lessor could complain of), nor imposed an obligation to carry out the other work of repairing the roof membrane and all external woodwork and the concrete cancer in hallways and bathrooms. As a matter of language, Article 11.02(c) contained no such promise. Its structure was quite different and showed that it stated the circumstances in which the lessor would forego the rental payments referred to, leaving it to the lessee either to fulfil the circumstances and obtain the benefit of rent being foregone or to leave them unfulfilled and remain under the obligation to make all rental payments. This conclusion was supported by the integration of the provisions of para (c) with other provisions of the lease including Article 3.12 and Article 20.02. Article 3.12 recorded the intention of the lessee to carry out a major refit and refurbishment which would be likely to include repairs to the roof membrane, external woodwork and concrete cancer. Article 20.02 created a positive obligation on the lessee to comply with the fire orders. If the lessor did the work it would diminish or preclude the lessee’s opportunity to perform the work and obtain the benefit of the rent free period.

21 Bryson J said that the language of Article 28, “Poker Machines”, contained several anomalies. His Honour said:


          “35 Article 28 shows contemplation that in some event the lessor would carry out the necessary work to rectify the defects set out in Points 1 to 5 of the Burgess & Arnott report of 5 November 1996. Plaintiffs’ counsel put forward contentions which were not altogether clear but seemed to be directed to show, or seemed to assume that the provisions of Art.28 impose on the lessor an obligation to the lessee to carry out the work in Points 1 to 5, or created an entitlement or expectation on the part of the lessee that the lessor would carry out that work which has some implication for entitlements of the parties under other parts of the lease. The lessee did in fact, after several years, commence trading under a liquor licence of some kind on the ground floor, and installed poker machines. The lessor did not contribute any part of the cost of acquisition of the poker machines and did not carry out any of the work necessary to rectify the defects in Points 1 to 5. The parties did not ever come to any agreement relating to sharing the cost of income of poker machines or adopting one of the clauses in Art.28. In cross-examination Ms Batiste maintained that the question whether the proportion in Art.28 would be 50, 25 or 10% was ‘on the table’ and she maintained ‘...We had agreed that it was 25 or 50 because of the work that was done’ but agreed that that was virtually agreed but never really resolved.”

22 Mr Lenin asserted a right of some kind to an interest in poker machine revenue and demanded a share in the profits nominating an amount between $500,000 and $700,000. His Honour observed that this was obviously groundless. The claim, though made in the first cross-claim, was abandoned at the hearing. Hazaran’s counsel contended that the meaning and effect of the lease was that the lessor had an obligation to carry out the work in the first five of the seven points listed in the Burgess and Arnott report referred to in sub-clauses (i) and (ii) (but not in sub-clause (iii)) of Article 28.

23 In Bryson J’s opinion the matters relied on did not show that properly understood the lease imposed an obligation on the lessor to carry out the work in points one to five of the report or an obligation to carry out any work in the interest of public safety or in the interest of making the building suitable for the permitted purpose. Bryson J said:


          “41 …The deteriorated state of the building, the terms of the outstanding orders, the matters reported on by Burgess & Arnott and the lessee’s intention to carry out a major re-fit and refurbishment were well known to both parties, and are prominent parts of the factual matrix into which the lease is to be set when approaching its construction. When so understood, the lessee while entitled to use the building for the permitted purpose faced the practical difficulties of doing whatever was necessary to make it possible to use it; including all practical problems from whatever source, whether they related to obtaining appropriate personnel, obtaining statutory licences and permissions of statutory authorities or to putting the structure into a condition of being fit to use. The lessee was given a large concession of over two years’ rent on condition that the lessee carried out stated work; the contemplation that the lessee would have a great deal to do before it could embark on paying rent, and needed a long time to do it, was clear. The obligations of each party to the lease, with respect to repairs as with respect to many other matters, were stated in terms by the lease, and the extensive express statements are a considerable difficulty for any further implication. Article 16.06 makes a declaration which is inconsistent with the implication of the term contended for. The observations relating to there being, as a matter of fact, a pressing need for extensive work to be carried out before the building could be used do not in my view go any distance [sic] before establishing that the lease imposes an implied obligation on either party to carry out that work; the opportunity was there for the lessee to carry out the works and get the benefit in terms of utility of the building for the permitted purpose. The opportunity was no doubt also there for the lessor to carry out the work, but that opportunity cannot be promoted into an obligation.”

24 Bryson J referred to the judgment of Mason J, as his Honour then was, in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 347 and said that the term propounded, if considered to be an implied term, did not meet any of the first three tests therein set out. The provisions of Article 28 contemplated that in some events the work in points one to five of the report would be carried out by the lessor. That contemplation and the terms of Article 28 did not as a proposition of logic establish that the lessor did not have an obligation from some other source to carry out that work, but the mechanism of Article 28 clearly contemplated that there might be any of three outcomes, in one of which the lessor would not do the work, while in the others the consequence of not doing the work would be that the lessor would not gain the benefit, but otherwise there would be no stated consequence. The mechanism included a need for a further mutual agreement before any one of the three outcomes was selected. This mechanism was strongly adverse to a conclusion that the lessor was obliged to carry out those works in any event. Bryson J said:


          “45 My view then is that the lessee did not have the benefit of any express or implied covenant by the lessor to carry out the works in Points 1 to 5 and had no entitlement to damages or other remedy when the lessor did not carry them out and the lessee did, and there can be no money obligation arising in that way which the lessee could be entitled to recoup out of rent, or to set off against rent, or could go in reduction of its obligation to pay rent.”

25 At the trial, Hazaran relied upon oral representations said to have been made by or on behalf of Mr Lenin to Hazaran through its representatives. Subject to one matter, to which I will refer, the case based on oral representations, which his Honour rejected, was not pursued on the appeal and it is unnecessary further to refer to it. The one matter is this. On the fourth day of the hearing at the conclusion of the cross-examination of Bruce Arthur Roberton, after all Hazaran’s evidence had been produced, Hazaran’s counsel sought leave to amend the statement of claim. His Honour found that Mr Roberton conducted significant parts of the relevant business on Mr Lenin’s behalf. He appeared to the trial Judge to be a frank and open witness. The proposed amendment, although not formulated in writing, was to the effect that on or about 13 November 1996, during the course of the inspection of the hotel before the lease documents were signed, Mr Roberton, as Mr Lenin’s agent, made positive statements as to the use to which the first floor of the hotel could be put, namely that it could be used as a discothèque, as a function room and for accommodating pin-ball machines, and that it would be possible to restore the hotel’s first floor to its status during its glory days. It was further sought to amend so as to allege that Mr Roberton, as agent, and Mr Lenin well knew that Ms Batiste and Mr Braune intended to use the first floor for those purposes, that both were aware at the time of the negotiations at the Bondi Lodge that the plan approved by council which had been shown to Mr Braune and Ms Batiste reasonably contemplated using the first floor only as a dining room or for uses which would necessarily not involve large numbers of people being on the first floor and that they did not disabuse Ms Batiste and Mr Braune of their misunderstanding concerning the uses which they had in view.

26 Bryson J was of the opinion that it would not be procedurally just to allow the plaintiffs to make a radical change in the basis of their claim at that stage in the hearing and adduction of evidence which had then been reached. His Honour said:


          “92 …The allegation that Mr Roberton had made some relevant representation is not found in the pleadings and was quite new and made for the first time in the application for leave to amend after he had been cross-examined. Earlier evidence had been given by Ms Batiste and Mr Roberton which showed that at the inspection (and it seemed to be her principal case that the inspection was not pre-contractual) she had referred to the Crystal Room and to other expressions suggesting the possibility of use of the rooms on the first floor as function rooms in a manner more intense than the uses indicated by the names given to them on the approved plans. However there was no element in the evidence of support for a view that Mr Roberton had in some way endorsed the suitability of the rooms on the first floor for any particular use, by reference to the Crystal Room or like grandiose expressions, or in any other way, and there was no evidence of any statements in the course of the inspection or any other statements which might give support to the view that Mr Braune or Ms Batiste was being led into views about what use they could make of particular parts of the hotel premises by any representations by Mr Roberton. In my view the evidence which had been given before the amendment application was not reasonably open to the view that Mr Roberton made any particular representations about the suitability of rooms for any particular purpose, or that there was any indication in circumstances that Mr Braune or Ms Batiste were in any way relying on Mr Roberton to disabuse them of any wrong ideas, or relying on Mr Roberton in any way for forming their own future plans. It will be remembered that Mr Braune was at that time the principal of Hazaran which was proposing to acquire the hotel, and that Mr Braune has not given any evidence of any such reliance.

          93 The amendment if made would have confronted the defendant with a very sharp turn into a new case, at a time which would involve large problems of reconsideration of the manner in which the defendant’s case was to be conducted, without there being any matter which I regarded as substantial in support of the supposed new case. It is not as if some previously unknown or unavailable evidence had emerged by accident in the course of the hearing; if there was a case of misrepresentation by Mr Roberton, it would have been fully known to the plaintiffs when the litigation was commenced, or if not then, long before the amendment application was made. As I regarded the proposed new case as not having any real substance, and its presentation as procedurally unfair, I refused the application.”

27 Turning next to Mr Lenin’s cross-claim for possession, Bryson J found that the rent outstanding on 31 October 2001 was $201,593.35. A table of calculations (exhibit 1) showed a long continuing pattern of arrears of rent, commencing soon after 1 January 1999. There was extensive correspondence between the solicitors representing the parties about the outstanding rent and outgoings. On 8 February 1999 a call was made to bring matters into order and a threat to take possession if that did not happen. The trial Judge said that payment of rent, interest and outgoings had never been in a satisfactory state at any stage since then.

28 The claim for arrears included a claim for rent for the period from 22 November 1996 to 1 January 1999 not included in the table in exhibit 1. Ms Batiste acknowledged that some of the work on which the rent holiday was conditional had not been done, though she claimed a substantial part had been done. Although the rent holiday period closed on 1 January 1999 the proviso in Article 11.02(c) offered Hazaran the opportunity to carry out the stated works within five years of the date of the lease, that is by 15 November 2001, and until that date it was, at least in concept though with diminishing probability, possible that the proviso would be complied with so that Mr Lenin would not be able to demand or enforce an entitlement for rent for the early period. However, Bryson J observed that it was clear that the conditions for foregoing rent were not fulfilled and rent to 1 January 1999 was unpaid.

29 According to the table in exhibit 1, $40,147.30, in respect of non-payment of outgoings, was outstanding as at 30 November 2001. Hazaran’s failure to maintain payment of Newcastle City Council rates led to the council suing Mr Lenin for outstanding rates in Local Court proceedings. Under the compulsion of these proceedings Mr Lenin paid the council $19,624.15 on about 11 July 2001. This formed part of the outstanding outgoings. Further council rates had since accrued.

30 Bryson J pointed out that in breach of Article 11.02(b) Hazaran had not carried out the work required to satisfy the existing council orders which it was required to do forthwith upon commencement of the lease. Over five years had elapsed. The work had not been completed, or indeed begun, and the breach was clear. Mr Lenin also in his cross-claim relied on Hazaran’s not having performed the work referred to in the proviso in Article 11.02(c). In his Honour’s opinion there was no covenant to carry out that work and there had been no breach of covenant. The work had not all been done but the significance of its not having been done was limited to Hazaran’s not being entitled to have rental payments foregone from 22 November 1996 until 1 January 1999.

31 Mr Lenin relied on the issue of the first cross-claim on 5 December 2001 as effecting re-entry for breaches of the lessee’s covenants, as it was entitled to do without any actual attempt to take possession of the hotel.

32 In answer to this claim to re-enter for failure to pay rent and outgoings, Hazaran claimed by way of set-off or recoupment to have expenditure of at least $2.45m in some way set against or treated as recoupment of the obligations to pay rent. His Honour said:


          “These contentions relate to the allegation of an implied term that the entirety of the property will be fit for use and occupation and would be available to Hazaran in the conduct of its business.”

33 Bryson J was of the view that there was no implied term and that Mr Lenin was not in breach of any obligation to Hazaran with respect to an implied covenant as to the condition of the property. In any event, the evidence did not show which of the items of repair and reinstatement particularised should rightly be treated as relating to any such obligation. If it had to be undertaken it would require an extensive inquiry or reference to deal with the evidence which was not given at the hearing. Bryson J said that Mr Lenin had a clear right to re-enter based on Article 13 of the lease and the failure to pay rent for long periods and this was perfected by commencement of the cross-claim. The further ground for his right of re-entry was the failure to pay outgoings, admitted on the pleadings.

34 Hazaran relied on the common law right of recoupment in answer to the claim based on its failure to pay rent. Bryson J said:


          “102 …In answer to the lessor’s cross-claim for possession insofar as it was based on breaches of covenants to pay rent and outgoings the lessee relied upon the right of recoupment established by the judgment of Goff J in Lee-Parker v Izzet [1971] 1 WLR 1688. His Lordship referred to the history of recoupment at 1692G to 1693F and concluded ‘I do not think this is bound up with technical rules of set off. It is an ancient common law right. I therefore declare that so far as the repairs are within the express or implied covenants of the landlord, the third and fourth defendants are entitled to recoup themselves out of future rents and defend any action for payment thereof. It does not follow however that the full amount expended by the third and fourth defendants on such repairs can properly be treated as payment of rent. It is a question of fact in every case, whether or to what extent the expenditure was proper.’ The subject was considered again, with further references to authority, in British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] 1 QB 137. Payments made by a lessee in situations of necessity which had the effect of meeting some obligation which by the terms of the lease the lessor was obliged to meet have been treated as payments to the use of the lessor and as discharging pro tanto the obligation to pay rent. The lessor’s obligations considered have usually but not invariably been obligations to repair. There is no reason in principle why the same rules should not be applied to recoup lessee’s expenditure against other moneys payable to the lessors, such as obligations to repay outgoings.

          103 Plaintiffs’ counsel was not able to refer me to any case in which a right of recoupment has been upheld notwithstanding a provision to the effect that rent will be paid ‘without deduction’, as in Art.11. Counsel contended that recoupment by the lessee under this principle is not a deduction but that when the obligation to pay rent arises it is immediately discharged, so that there is no further obligation to make a payment, and withholding an amount paid to meet an obligation which the lessor should have met is not a deduction. Counsel pointed to the view expressed by Mr Andrew Waite in his article ‘Repairs and Deduction from Rent’ in The Conveyancer and Property Lawyer , (1981) 45 Conv. (NS) 199; at p210 Mr Waite expressed the view that ‘Where the tenant has carried out repairs in accordance with the rules and deducted the cost from rent, the rent is deemed to have been paid. In other words the tenant has lawfully spent the rent on carrying out the repairs. The landlord has no claim for the rent. The tenant’s action does not merely provide a defence to a claim for rent (as in the case of set-off), it negates the landlord’s claim’. Mr Waite went on to refer to Sapsford v Fletcher (1792) 4 T.R 511, 100 ER 1147 which however does not directly deal with a covenant to pay rent without deduction.

          104 In Debonair Nominees Pty Ltd v J & K Berry Nominees Pty Ltd (2000) 77 SASR 261 at 271 Mullighan J decided to the effect that literal operation should be given to a provision that rent must be paid clear of all deduction. The authorities to which his Honour referred relate to the principle, which is well established, that the lessee’s obligation to pay rent is independent of any obligation of the lessor to effect repairs; the premises may be in disrepair or may have been destroyed but, subject to any provision of the lease, the obligation to pay rent continues. The operation of reference to payment without any deduction whatsoever in Pt.2 of Schd.4 of the Conveyancing Act 1919 was noted, without decision, by McLelland J in Lambert Pty Ltd v Papadatos Pty Ltd (1991) 5 ACSR 468 at 471.

          105 My view is that on the literal and true meaning of the covenant to pay rent without deduction, there is no room for reliance on the right of recoupment referred to in Lee-Parker v Izzett . In my opinion the literal meaning of ‘without deduction’ makes this clear, and looking further to the purpose of using those words, there is no other purpose available than to prevent the lessee from relying on rights or claims to be entitled to set off, recoup or otherwise withhold payment of part of the rent. In the ordinary use of language to recoup another obligation out of rent is to make a deduction from the rent, and if the use of the words ‘without deduction’ did not achieve this result I cannot see what they would achieve, as the ordinary obligation of a debtor is to pay the whole debt.”

35 This brought his Honour to consider the appellants’ claim to relief against forfeiture. Bryson J said:


          “107 …Hazaran did not bring forward as part of its case any offer to pay arrears of rent or otherwise make good breaches of covenant in support of its claim for relief against forfeiture. When I raised Hazaran’s ability to pay rent up to date Ms Batiste’s evidence was that, for the rent from 1 January 1999 on, Hazaran could not pay the rent up to date if it had to but possibly Provident Capital could; Provident Capital is Hazaran’s funder for the property. This was not accompanied by any evidence of willingness to make advances from the finance company. As to rent for the period up to 1 January 1999, Ms Batiste said that if the Court decided that Hazaran was not entitled to a rent holiday, Provident Capital would pay that rent; I understand from this that Hazaran could not pay that rent except with finance from its funder. This passage (second day of transcript 56,57) was the closest approach made in evidence to an offer to pay rent as a condition of relief against forfeiture with a showing of ability to do so. The plaintiffs did not show, in a clear way, whether Provident Capital has given any commitment to fund the arrears of rent and the first two years’ rent if the need arises. The breaches of covenant extend far beyond failures to pay money, and the plaintiff has not expressed any readiness to comply with the covenant relating to the fire stair but has maintained that it is impossible and has never departed from that position.

          108 The amounts involved are quite large and it cannot be readily assumed that money of the order required could be made available. There is no substantial evidence that any money is available. Until observations by counsel in final address nothing which could be recognised as a clear offer to make payments was made. There was no offer to overcome the failure to comply with the breach of covenant requiring the performance of works; to the end the plaintiffs’ contention was that the works covenanted are impossible. On any reasonable basis there is nothing to hope for from affording an opportunity to the lessee to make outstanding payments and perform the covenants as a condition of relief against forfeiture; compliance is not reasonably to be expected. A further ground on which relief against forfeiture should be refused is that the relationship has been a very poor one. The relationship has been highly combative, characterised by habitual and long-continued lateness in paying rent, going to the length that no rent at all has been paid since the proceedings were commenced in July 2001, even in respect of current occupation. Ms Batiste has beset Mr Lenin for years with requests and claims for him to make contributions which were not on any reasonable view based on any obligation he actually had. Hazaran and Ms Batiste have brought an elaborate and groundless claim asserting misleading and deceptive conduct of Mr Lenin himself in these proceedings. The relationship of the parties to the lease is such an extremely poor one that I am of the view that it should not be continued by a discretionary decision of the Court of Equity.”

36 Next Bryson J dealt with repudiation. Mr Lenin contended that apart from his claim to possession under a right of re-entry for a breach of covenant the breaches of covenant alleged in the circumstances showed that Hazaran had repudiated the lease and that the repudiation was accepted by the cross-claim. Bryson J said:


          “110 There have been very significant breaches of the lease. The covenant to do works relating to fire stairs has not been complied with; indeed there has not even been a gesture towards compliance. The obligation to pay rent up to 1 January 1999 has not been complied with and important items of work on condition of which that rent was to be foregone under Art.11.02(c) have not been performed. The fire stairs have not been built. Not all the external woodwork has been repaired, although some of it has been repaired; and the condition of the external woodwork is very severely deteriorated in many places. The rent to 1 January 1999 was not paid when on 15 November 2001 it was established that the conditions on which it was foregone had not been met. For rent from 1 January 1999 to the present there has been a continuing pattern of arrears, punctuality in payment of the rent has never been observed and the task for the lessor to obtain payment was a continuing struggle. There was at most times significant failure to observe the obligation to pay outgoings. There is no basis for relying on a supposed right of recoupment, or on any other form of set off, as a modification of the interpretation of Hazaran’s conduct as repudiatory. Overall, these breaches have in my view evinced an intention of Hazaran not to comply with the terms of the lease; in the case of the rent and outgoings, not to comply except on terms imposed by the lessee which involved delays and difficulties of collection, while in the case of the works relating to fire orders, having regard to the time which has elapsed and the altogether inadequate explanations put forward by Ms Batiste, accompanied by a contention for which there was no real basis that it is not possible to comply with the fire orders, it must be concluded that this important part of the lessee’s obligations has been entirely repudiated and there is no real prospect of the lessor ever obtaining compliance with it. In the circumstances my conclusion is that the lessee has repudiated the lease and that that repudiation was accepted by initiating the cross-claim.”

37 The consequence was, as I have already indicated, that on his cross-claim Mr Lenin obtained judgment for possession. An inquiry was to be conducted in private chambers to ascertain and certify the amounts to which Mr Lenin was entitled for rent, interest and outgoings and judgment entered for him against Hazaran for recovery of amounts so certified. Further consideration on other claims was reserved.


      Grounds of appeal

38 The plaintiffs challenged

· the finding of repudiation and its consequences (ground 1), and the failure to relieve against forfeiture (ground 2),

· the failure to hold that Hazaran was entitled to recoup the entirety of any amount found upon further inquiry to have been paid by it in refurbishing and restoring, from the rent claimed to be owed to Mr Lenin with the result that no rent was payable by Hazaran at the date of the issue of the first cross-claim (ground 3),

· failure to hold that it was an implied condition of the lease that the premises could be used as a hotel upon occupation by Hazaran as lessee and that in default of the performance of this obligation Hazaran was entitled to restore the premises and make then tenantable and thereupon recoup, from any rent subsequently to become payable, those sums (ground 4),

· failure to hold that certain of the covenants in the lease requiring reconstruction and refurbishment of the hotel could not be complied with during the time contemplated by Art 11.02 and Mr Lenin thereupon became disentitled from relying upon any alleged breach of those covenants in order to claim that the “rent free period” never accrued in favour of Hazaran (ground 5), and failure to permit the amendment of the statement of claim to rely upon the representations made by Mr Roberton on behalf of Mr Lenin (ground 6),

· failure to find that Hazaran was entitled to recoup moneys which it had expended in carrying out the work specified in the Burgess and Arnott report in pro tanto reduction of the rent (amended ground 8), and

· error in holding that Mr Lenin was entitled to terminate the lease for alleged breaches of non-rent covenants when no notice whether pursuant to s129 of the Conveyancing Act 1919 or otherwise had been given to Hazaran as lessee requiring their performance (ground 9).

39 As indicated ground 8 was amended by leave. The appellants did not press grounds 7 and 10. The appellants applied to amend the notice of appeal by adding ground 11 as follows:


          “11 His Honour erred in failing to hold that Hazaran’s failure to perform the building covenant with respect to the works to the Hotel (including the fire stairs) was not a once and for all breach which sounded in damages once the time for performance was passed, and therefore it was an irrelevant matter to consider in the exercise of his discretion in relation to relief against forfeiture.”

40 I think it is convenient to deal with these grounds of appeal first by looking to see whether the lessor was under any relevant obligation to restore or repair the premises and, if so, whether the lessee was entitled to recoup anything it had spent in carrying out such restoration or repair. I will next consider repudiation and its effects and look at the reasons for which Bryson J refused to relieve against forfeiture, particularly in light of the failure to give notices under s129 of the Conveyancing Act. Finally, I will deal with the claims to amend at trial and on appeal.


      Obligation to restore or repair

41 Bryson J recognised the importance of the express provisions in the lease in determining whether either party was under an implied obligation to repair. The context was that when the lease was entered into the premises were in an unusable state for the permitted use of a licensed hotel including accommodation, restaurant and function rooms. The lessor acknowledged the lessee’s intention to carry out a major refit and refurbishment of the premises (Art 3.12). In summary, the lessee covenanted to maintain and keep in good repair the premises and appurtenances, and without affecting the generality of this, to keep the premises both inside and out clean and free from dirt and rubbish and make good any breakage, defect, damage or want of repair to the premises (Art 3.02). The lessee, without limiting previous generality, covenanted to comply with all statutes, ordinances, proclamations, orders or regulations affecting or relating to the use of the premises and with all requirements which might be made or notice or orders which might be given by any municipal or other authority having jurisdiction in respect of the premises or the use thereof and to keep the lessor indemnified in respect of such matters. The lessee’s liability extended to any necessary structural alterations (Art 3.06).

42 The lessee acknowledged that at the time of commencement of the lease the premises were affected by an order or orders from the Newcastle City Council requiring closure of the upper floors due to the lessor’s failure to comply with council fire orders (Art 11.02(a)). The lessee covenanted at its own expense upon commencement of the lease and as expeditiously as possible to carry out such work as was required to satisfy the existing council orders and thus facilitate the reopening of those parts of the premises that were then closed (Art 11.02(b)). By the timely performance of this covenant the lessee could earn the benefit of a rent free period provided that within five years of the date of the lease and at its own expense and in a proper and workmanlike manner and in accordance with the requirements of any statutory authority it carried out all work necessary to comply with the fire orders, and repaired the roof membrane and all external woodwork and the concrete cancer in hallways and bathrooms. This done, the lessor agreed to forego any rental payments from the date of commencement until 1 January 1999 (Art 11.02(c)). Article 11.02 is self-contained in terms of a covenant to carry out particular work and the enjoyment of a rent free period if the lessee carried out the work within time and in a proper manner. It imposed no obligation to perform the work within a fixed time, merely “as expeditiously as possible”. That disposes of ground 5 of the appeal. If the work was not carried out within the five year period, for whatever reason, the lessor was not required to forego any rental payments.

43 By contrast in Article 15 - which provided for the circumstances of appropriation, destruction or damage of the premises and termination of the lease - Art 15.01(c)(iii) states: “nothing herein contained or implied shall be deemed to impose any obligation upon the Lessor to rebuild or reinstate or make the premises fit for occupation”. Hazaran agreed that Art 20.02 would be read as a covenant by it at its own expense to carry out works required to satisfy outstanding notices of the Newcastle City Council in accordance with the council requirements and those of the Australian Heritage Commission and Heritage Council of New South Wales.

44 Article 28 was a discrete provision evidencing an agreement about the installation of poker machines in the premises. If the lessee was lawfully entitled to install poker machines the lessor agreed to contribute to the cost of acquisition and to carry out the necessary work to rectify the defects set out in points one to five of the Burgess and Arnott report. This is the only article in the lease which obliges the lessor to carry out rectification work of the premises and it does so only in the context of an agreement about sharing the cost and income of poker machines which, apparently, was never reached.

45 Hazaran can do no more than submit that a combination of the state of the premises when the lease was entered into and the permitted use of the premises meant that the lessor was obliged completely or to some extent to restore or repair the premises. There is no express obligation. Article 16.06 provides that the covenants and conditions contained in the lease or by statutory implication shall comprise the whole of the agreement between the parties who acknowledge and declare that no other terms and conditions shall be deemed to be implied in the lease. Apart from Art 28, in so far as the lease expressly deals with renovation or repair the obligation is imposed upon the lessee. Furthermore, Art 3.12 states that it is the lessee’s intention to carry out a major refit and refurbishment of the property. That statement is consistent with what is in no way extraordinary, namely that the lessee, knowing that the premises were derelict and unsuitable for the permitted use unless restored and repaired, was content nevertheless to lease them to be used for that limited purpose.

46 In my opinion, there is no sound basis for imposing upon the lessor in the circumstances of this case any obligation to restore or repair.


      Recoupment

47 For present purposes it can be accepted that if the lessor had been under an obligation to restore and repair but had refused to do so and the lessee had carried out that work at its own expense, it would have been entitled to recoup itself to that extent out of future rents and defend any action by the lessor for payment thereof; see Lee-Parker v Izzet [1971] 1 WLR 1688; British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] 1 QB 137 at 146 and following. In British Anzani Forbes J referred to Waters v Weigall (1795) 2 Anst 575 in which MacDonald CB said at 576:

          “If the landlord is bound in law or equity to repair in consequence of the accident that has happened, and you were right in expending this sum in repairs for him, it is money paid to his use, and may be set off against the demand for rent.”

48 In this case such a claim must inevitably fail unless the remedy extends to a situation where not only does the lessee carry out such work under no obligation to do so, but also, the lessor is under no obligation to carry out the work. Nothing was advanced to the Court by way of authority or sound reasoning for enabling the lessee to call in aid a remedy which would effectively impose an obligation upon the lessor which could neither be found in nor implied from the terms of the lease. Although claims were made that in consequence of forfeiture the lessor would benefit from a windfall the result of work done voluntarily by the lessee, that result would always follow if the lessee carried forward its intention to carry out a major refit and refurbishment of the property and then failed to pay the rent or otherwise acted in breach of its obligations under the lease so as to entitle the lessor to re-enter.

49 No argument was otherwise advanced based on unjust enrichment. I should add that I am not persuaded that had the lessee been entitled to be recouped on the basis of the common law principle the claim could have been defeated by the provision in Art 11.01(a) requiring the lessee to pay rental “without deduction”; see Waite, “Repairs and Deduction from Rent” (1981) 45 Conv (NS) 199 at 210. But I do not need to consider this further.


      Repudiation

50 The ordinary principles of contract law including that of termination for repudiation apply to leases: The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 29. At 30 Mason J said:


          “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 a common law right to determine for repudiation or fundamental breach.”

51 In the same case Mason J, citing Shevill v The Builders Licensing Board (1982) 149 CLR 620 at 625-627, said at 33:


          “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.”

52 Bryson J identified what he described as very significant breaches of the lease by Hazaran. There was no gesture by Hazaran towards compliance with a covenant to do works relating to the fire stairs. The obligation to pay rent had not been complied with. The rent to 1 January 1999 was not paid when on 15 November 2001 it was established that the conditions on which it was foregone had not been met. There had been a continuing pattern of arrears from 1 January 1999 and punctuality in payment had never been observed. There had been significant failures to observe the obligation to pay outgoings. As I have said, there was no basis for relying on the supposed right of recoupment. Taking these matters into account his Honour found that the breaches evinced an intention by Hazaran not to comply with the terms of the lease or in the case of the rent and outgoings, not to comply, except on terms imposed by Hazaran, which involved delays and difficulties of collection. In the case of the works relating to the fire orders his Honour had regard to the time which had elapsed and what he regarded as the altogether inadequate explanations put forward by Ms Batiste, accompanied by contention for which there was no real basis that it was not possible to comply with the fire orders. Bryson J concluded that this important part of the lessee’s obligations had been entirely repudiated and there was no real prospect of the lessor ever obtaining compliance. None of these findings of fact upon which his Honour’s conclusions were based and which were open on the evidence and hence unappealable on ordinary principles, is challenged. To the extent that these conclusions turn upon findings about the parties’ obligations which have been challenged, those challenges have failed.

53 In Shevill at 625-6, Gibbs CJ spoke of repudiation as an ambiguous word used in various senses but said that a valid and binding contract may be repudiated if one party renounces his liabilities under it by evincing an intention no longer to be bound by the contract (Freeth v Burr (1874) LR 9 CP 209 at 213) or shows that he intends to fulfil the contract only in a manner substantially inconsistent with his obligations and not in any other way; Ross T Smyth & Co Ltd v T D Bailey, Son & Co [1940] 3 All ER 60 at 72; Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 at 351. Moreover, if one party, although wishing to perform the contract, proves himself unable to do so, his default in performance will give the other party a right to rescind the contract, if the breach goes “so much to the root of the contract that it makes further commercial performance of the contract impossible”: Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 64. The Chief Justice said:


          “There is high authority for treating such cases as a form of repudiation of a contract: Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 at 421-422; Federal Commerce v Molena Alpha [1979] AC 757 at 778-9.”

      With these reasons Murphy and Brennan JJ agreed.

54 Bearing these principles in mind and the unchallenged facts found by Bryson J, there is no ground for interfering with his conclusion that the lessee had repudiated the lease - a repudiation which was accepted by the lessor initiating the first cross-claim.


      Relief against forfeiture

55 Bryson J found that Mr Lenin had a clear right to re-enter based on Art 13 of the lease and the failure to pay rent for long periods, including any rent at all from June 2001 onwards. His right to possession was perfected by the commencement of the first cross-claim which had the same effect as an actual re-entry to terminate the lease. A further ground for his right of re-entry was failure to pay outgoings which was admitted on the pleadings.

56 The speech of Lord Wilberforce in Shiloh Spinners Ltd v Harding [1973] AC 691 at 725-6 is most instructive. That case turned upon whether a right of entry could be validly reserved on an assignment of a leasehold property when the assignor retained no reversion. It having been held that it could there was a question of whether the Court should grant relief against the exercise of that right. Lord Wilberforce said:


          “Failures to observe the covenants having occurred, it would be right to consider whether the assignor should be allowed to exercise his legal rights if the essentials of the bargain could be secured and if it was fair and just to prevent him from doing so. It would be necessary, as stated above, to consider the conduct of the assignee, the nature and gravity of the breach, and its relation to the value of the property which might be forfeited. Established and, in my opinion, sound principle requires that wilful breaches should not, or at least should only in exceptional cases, be relieved against, if only for the reason that the assignor should not be compelled to remain in a relation of neighbourhood with a person in deliberate breach of his obligations.

          In this light should relief have been granted? The respondent’s difficulty is that the Vice-Chancellor, who heard the witnesses and went into all the facts, clearly took the view that the case was not one for relief. I should be reluctant, in any event, except on clear conviction to substitute a different view of my own. But I have examined in detail the evidence given, the correspondence over a period of four years, the photographs and plans of the site. All this material establishes a case of clear and wilful breaches of more than one covenant which, if individually not serious, were certainly substantial: a case of continuous disregard by the respondent of the appellants’ rights over a period of time, coupled with a total lack of evidence as to the respondent’s ability speedily and adequately to make good the consequences of his default, and finally a failure to show any such disproportion between the expenditure required and the value of the interest involved as to amount to a case of hardship. In my opinion the case is not, on established principles, one for relief.”

      With that speech the others members of the House of Lords agreed.

57 The arguments against Bryson J’s refusal to grant relief turn upon two matters to which he referred. In the first place his Honour said that when he raised Hazaran’s ability to pay rent up to date, Ms Batiste’s evidence was that, for the rent from 1 January 1999 on, Hazaran could not pay the rent up to date if it had to, but possibly Provident Capital Limited (Provident Capital), a company of substance, which was described as the “funder for the property”, could. This was not accompanied by any evidence of willingness by the finance company to make the necessary advances. As to the rent for the period up to 1 January 1999, Ms Batiste said that if the Court decided that Hazaran was not entitled to a rent holiday, Provident Capital would pay the rent. From this his Honour understood, correctly I would have thought, that Hazaran could not pay that rent except with finance from its funder. Bryson J found that the plaintiffs had not shown, in a clear way, whether Provident Capital had given any commitment to fund the arrears of rent and the first two years rent if the need arose. He went on to refer to breaches of covenant which extended far beyond failures to pay money and the plaintiffs’ failure to express any readiness to comply with the covenant relating to the fire stairs. To my mind, particularly in a case with a history of non-payment of rent such as was revealed here, it was well open to Bryson J in his discretion to refuse relief.

58 In doing so his Honour referred to the fact that there was no offer to overcome the failure to comply with the breach of covenant requiring the performance of works. To that end, the plaintiffs’ contention was that the works covenanted were impossible. It was accepted on behalf of Mr Lenin that s129(1) of the Conveyancing Act 1919 provides that the right of re-entry for breaches of covenant other than the non-payment of rent is not enforceable by action, except where the lessor serves on the lessee a notice in the form set out in the sixth schedule or to similar effect and the lessee fails within a reasonable time thereafter to remedy the breach or pay reasonable compensation, as the case may be. No such notices were given. Subsection (8) provides that the section does not affect the law relating to re-entry or forfeiture or relief in case of non-payment of rent. The appellants argued that as no notices had been given Bryson J should not have taken into account breaches of covenant requiring the performance of works in determining whether relief should be granted.

59 The appellants relied upon what was said by Hope J, as his Honour then was, in Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of NSW Ltd (1970) 2 BPR 97145 at p9576. After referring to the judgments of members of the English Court of Appeal in Gill v Lewis [1956] 2 QB 1 at 13 and 17 Hope J said:


          “These statements seem to me to justify the view that breaches of other covenants should generally not be taken into account if the lessor is not entitled to effect a forfeiture by reason of those breaches. Indeed, this follows from what Wigram VC said [in Bowser v Colby [1841] 1 Hare 109; 66 ER 969], for he considered that the breaches of other covenants would be relevant where they would have occasioned the forfeiture of the lease. Section 129 of the Conveyancing Act 1919, as amended, requires that the lessor give a notice complying with the section before effecting a forfeiture, and the lessee is consequently given an opportunity of remedying the breaches. Where such notice has not been given, or where it has been given but the breaches have been remedied, the lessor is not in a position to effect a forfeiture. No notice was given by the lessor in the present case so that it would seem that the breaches of the covenants other than the covenants to pay rent and royalties should not preclude the granting of relief in the present case.”

60 Hope J did not consider that this was inconsistent with the decision of AH Simpson CJ in Eq in Langley v Foster (1909) 10 SR (NSW) 54, where notices under the then equivalent legislation had been given by the lessor, and the decision of the Privy Council in Greville v Parker [1910] AC 335, which concerned the exercise of an option to renew. In two cases - Hayes v Gunbola Pty Ltd (1986) 4 BPR 97263 and Dalla Costa v Beydoun (1990) 5 BPR 11,379 - Young J agreed with and applied what Hope J said, to the effect that where there had not been a proper notice given under s129 of the Conveyancing Act one did not take into account breaches of the lease, other than non-payment of rent, when considering relief against forfeiture.

61 In Tutita Pty Ltd v Ryleaco Pty Ltd (1989) 4 BPR 97311 at 9638 Meagher JA, with whose judgment Priestley and Clarke JA agreed, in upholding an appeal from a decision to refuse relief against forfeiture so that the Court was required to exercise that discretion afresh, said:


          “Before this court can adequately perform that exercise, it will be necessary to determine what, if any, effect can be given to the circumstance that the lessee was in breach of the covenant requiring it to obtain the mortgagee’s consent which undoubtedly did take place although the notice under s129 had not specified that breach. This is a matter which is the subject of one decision by this Court viz the decision of Hope J (as he then was) in Pioneer Quarries (Sydney) Pty Ltd v Permanent Trustee Co of New South Wales Ltd . In that case, after a careful review of the authorities, his Honour concluded that where a notice is issued specifying one breach a court cannot, unless there are special circumstances, take into account other breaches which have not been referred to in the notice. His Honour did not decide that in no circumstance can a court take into account such other breaches, and such a conclusion would be surprising in view of the ample discretion of the court. Indeed, in some cases (for example where there have been continued and repeated breaches of covenants after the notice has been served) a court of Equity, asked to relieve against any forfeiture, would necessarily have to take into account unspecified breaches. Nevertheless, in my view his Honour in that case correctly laid down the law applicable, and in the present case I do not see any special circumstances which could enable us to take into account the lessor’s failure to obtain the mortgagee’s consent to the sub lease in question.”

62 I accept, as this Court did in Tutita Pty Ltd v Ryleaco Pty Ltd, that the Court when asked to grant relief against forfeiture would not ordinarily take into account breaches which for want of a notice under s129(1) did not allow a right of re-entry or forfeiture to be enforced by action. But, as Meagher JA pointed out, the Court’s discretion in considering such an application is not necessarily fettered in a case such as the present. Bryson J found that Hazaran had repudiated the lease as the result of very significant breaches of covenant. These led his Honour to the conclusion that Hazaran had evinced an intention not to comply with the terms of the lease. It would, in my opinion, be quite unjust to the lessor to ignore such breaches in considering whether to exercise the discretion to grant relief. The claim to possession was based not merely on breaches of conditions in the lease but also on the lessee’s repudiation of the lease.

63 Nor do I think that his Honour wrongly took into account the relationship between the parties as a further ground for refusing relief. To adapt the language from the passage I have quoted from the speech of Lord Wilberforce, the lessor should not be compelled to remain in a relation of neighbourhood with a lessee in deliberate breach of its obligations. In large measure that relationship was poisoned by Hazaran’s habitual and long continued lateness in paying rent to the point, as his Honour noted, of not paying it at all since the proceedings were begun in July 2001 and making claims for contribution which were not on any reasonable view based on any obligation the lessor actually had. I am not persuaded that his Honour’s discretion in refusing relief against forfeiture miscarried particularly when the lessee’s repudiation of the lease is brought into account. It is not necessary to consider relief against forfeiture in connection with the lessor’s acceptance of the lessee’s repudiation of the lease as a separate basis for the order for possession of the hotel; compare Progressive Mailing House Property Limited v Tabali Property Ltd at 43 per Brennan J and see Abidogun v Frolan Health Care Ltd [2001] EWCA Civ 1821.


      Late amendment of the statement of claim

64 The appellants claimed that Bryson J’s failure to permit amendment of the statement of claim on terms as to costs meant that the hearing substantially miscarried. In my opinion, the reasons given for the refusal were impeccable. The representation claimed to have emerged from Mr Roberton’s evidence was not previously any part of the appellants’ case and not supported by the evidence already given by Hazaran’s principal witness, Ms Batiste. His Honour found that the evidence which had been given before the application to amend was not reasonably open to the view that Mr Roberton made any particular representations about the suitability of rooms for any particular purpose, or that there was any indication in circumstances that Mr Braune or Ms Batiste were in any way relying on Mr Roberton to disabuse them of any wrong ideas or relying on Mr Roberton in any way for forming their own future plans. This finding was reasonably open. The question of amendment was very much a matter for the trial Judge having heard what Mr Roberton said and what the appellants’ other witnesses said and weighing the matter so as to do justice to both parties. To the extent that the appellants’ case relied upon representations, to allow an amendment after their evidence had been given without any mention in that evidence of such a representation and hence reliance upon it, is fraught with difficulty and the probability of irremediable injustice to Mr Lenin. Not only am I satisfied that no ground has been shown to reverse his Honour’s decision, I agree with his Honour’s decision.


      Application to rely upon ground 11 of the appeal

65 Ground 11 was directed to an argument that the trial Judge erred in his construction of the lease in that in particular he treated the covenants concerning the erection of a fire stair in the premises as a continuing covenant and thus one relevant to the question of repudiation of the lease, rather than a covenant broken once and for all on breach which sounded only in damages at the suit of the lessor and for which the lessor could have been salved as a condition of relief against forfeiture.

66 Article 11.02(b) obliged Hazaran forthwith upon commencement of the lease at its own expense and as expeditiously as possible to carry out such work as was required to satisfy existing council orders. One such order required the provision of a new fire stair in accordance with approved drawings. This work was not done. The appellants sought to call in aid the decision of Sterling J in Jacob v Down [1900] 2 Ch 156 concerned with a lease wherein the lessee covenanted within twelve months to erect certain buildings on the demised land. The buildings were never erected and the lessors accepted rent which accrued next after the expiration of the twelve months limited for the erection of the building. Sterling J upheld an argument that the covenant to build was completely broken at the end of the period of twelve months. However, in that case there was also a repairing covenant. At 161-2 Sterling J said:


          “The object of the covenant is to secure that at all proper times the messuages referred to shall be in proper repair; and in my opinion the covenant imposes an obligation to do all things necessary for that purpose, including the erection of the messuages, if not completed within the period prescribed in the building covenant. If this be not so, it seems to me that the lessee by omitting to perform the building covenant might practically escape from any obligations of the lease. In my judgment, therefore, there is no continuing breach of the building covenant, but there is a continuing breach of the repairing covenant.”

      The issue in that case was whether the statutory notice of breach was sufficient and it was held that it was not because it alleged breach of the building covenant but made no mention of the repairing covenant.

67 Article 11.02(b) speaks of carrying out work required to satisfy existing council orders “forthwith” and (c) contemplates, if Hazaran is to have the benefit of the rent free period, that the work necessary to comply with the fire orders be carried out within five years of the date of the lease. Article 3.06 requires that Hazaran shall “from time to time forthwith” comply with orders given by municipal or other authorities. There is nothing in the language of these articles which puts the lessee’s covenants which they embody, into the once only breach category any more than the language of the lease considered in Jacob v Down put the covenant to repair into that category.

68 The appellants also referred to Stephens v Junior Army and Navy Stores, Limited [1914] 2 Ch 516 in which the English Court of Appeal dissented from Sterling J’s view that the repairing covenant in Jacob v Down imposed an obligation to do everything necessary in order that the premises might be found, during the term, in existence and in a proper state of repair. At 523 Lord Cozens-Hardy MR said:


          “An express covenant to build within ten years, which could only be broken once, cannot be consistent with an implied covenant to build, which might be continuously broken.”

69 At 525 Swinfen Eady LJ observed that it was not disputed in that case that the covenant to build on or before a date which was passed was not a continuing covenant. At 531 Pickford LJ said:


          “I think that the repairing covenant attaches only to the buildings when built, and does not in a lease where there is an express building covenant imply an obligation to build. ... With the exception of [ Jacob v Down ] we were not referred to any authority in which a covenant to repair had been held to attach to any but existing buildings.”

70 The argument advanced in favour of this proposed amended ground was directed to repudiation and particularly Bryson J’s finding in that context that the covenant to do works relating to fire stairs had not been complied with and there had not even been a gesture towards compliance. The two English cases concern express covenants to build within a period expressed as “twelve months” or “on or before” a given date. They cannot determine in the light of Arts 11.02 and 3.06 that Hazaran’s obligation to satisfy the existing council order by erecting the fire stair had been breached once and for all and could not be taken into account in determining whether Hazaran had repudiated the lease or should be relieved against forfeiture. Indeed, so far as relief against forfeiture is concerned, the appellants’ argument seemed to assume that the breach of this obligation could be taken into account. Both the English cases were concerned with whether the lessors were entitled to recover possession. In both cases it was held that the lessor was not so entitled.

71 Bryson J made no mention of the argument or the decisions relied upon. It was put on behalf of Mr Lenin that the argument was not advanced to him. That is sufficient reason not to allow Hazaran to rely on the proposed ground 11. In any event, the submission is without substance for the reasons I have given. I would refuse leave to amend the notice of appeal by adding ground 11.


      Conclusion

72 In my opinion, the appellants have failed to establish any grounds for disturbing Bryson J’s judgment. The appeal should be dismissed with costs.

73 On 5 September 2002, when the appeal was called on for hearing, an application for leave to appeal by Provident Capital was also listed for hearing. That application for leave to appeal was against a decision by Bryson J to refuse to permit Provident Capital to be joined as a party to the proceedings for the limited purpose of applying to stay the granting of any relief pending the hearing of a claim by it for relief against forfeiture. The application for leave to appeal was resolved by consent orders.


      Order

74 I propose the following order:

          Appeal dismissed with costs.

75 GILES JA: I agree with Sheller JA.

76 SANTOW JA: I agree with Sheller JA.

      **********
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Cases Cited

5

Statutory Material Cited

2

Ogle v Comboyuro Investments Pty Ltd [1976] HCA 21
Ogle v Comboyuro Investments Pty Ltd [1976] HCA 21
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24