Braewoodland Pty Ltd v Gallop
[2018] VCC 2050
•10 December 2018
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL CASES LIST
Case No. CI-16-05387
| Braewoodland Pty Ltd | Plaintiff |
| v | |
| Roy Ian Gallop and Anthony John Taylor and Mark Damian Pratt | First Defendant Second Defendant Third Defendant |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 14, 15 and 19 November 2018 | |
DATE OF JUDGMENT: | 10 December 2018 | |
CASE MAY BE CITED AS: | Braewoodland Pty Ltd v Gallop & Ors | |
MEDIUM NEUTRAL CITATION: | [2018] VCC 2050 | |
REASONS FOR JUDGMENT
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Subject:LEASE
Catchwords: LEASE – commercial lease – landlord’s claim for damages – premises abandoned by tenant – whether lease was surrendered by operation of law – whether guarantors released from obligations under deeds of guarantee and indemnity – whether plaintiff failed to mitigate its loss – tenant returning keys to demised premises – landlord advertising premises to re-lease – landlord failing to give tenant statutory notice or notice under lease – whether landlord bound to comply with s 146 of Property Law Act
Legislation Cited: Corporations Act 2001 (Cth); Property Law Act 1958 (Vic); Retail Tenancies Act 1986 (Vic); Retail Leases Act 2003 (Vic)
Cases Cited:ACCC v Metcash Trading Limited [2011] FCAFC 151; Apriaden Pty Ltd v Seacrest Pty Ltd (2005) 12 VR 319; Buchanan v Byrnes (1906) 3 CLR 704; Fleeton v Fitzgerald (1998) 9 BPR 16,715 (NSWCA); Hughes v NLS Pty Ltd [1966] WAR 100; Indrisie v General Credits Ltd [1985] VR 251; Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235 (NSWCA); Kavourakis v Waverley Bowling & Recreation Club Ltd [2010] NSWSC 439; Konica Business Machines Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687; Luxer Holdings Pty Ltd v Glentham Pty Ltd (2007) 35 WAR 254; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507; Natwest Markets Australia Pty Ltd v Tenth Vandy Pty Ltd (2008) 21 VR 68; Oastler v Henderson [1877] 2 QB 575; Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57; Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; Sacher Investments Ltd v Forma Stereo Consultants Ltd (1976) 1 NSWLR 5; Tasita Pty Ltd v Sovereign State of Papua New Guinea (1991) 34 NSWLR 691; TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 1308; Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125; Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr E Moon | Belleli King & Associates |
| For the Defendant | Mr R Peters | Darrer Muir Fleiter |
HIS HONOUR:
Summary
1 The main issue in this case is whether the plaintiff, Braewoodland Pty Ltd (“Braewoodland”), is entitled to any and what damages from the guarantors, Roy Gallop, Anthony John and Mark Pratt, in relation to the alleged breach of a lease agreement by the tenant, Wickham Plastics Pty Ltd (“Wickham”).
Background
2 In general terms, the factual background to the case was uncontentious.
3 In May 2004, the defendants became directors of Wickham.
4 On about 1 August 2007, Fifth Glenmar Pty Ltd and Wickham entered into a lease of the property at 56-60 Woodlands Drive, Braeside (“the property”). This first lease was for a term of five years and there were two further options each of five years. The defendants guaranteed Wickham’s obligations under the first lease.
5 Braewoodland became the sole registered proprietor of the property in April 2008. Braewoodland used as its agent regarding the property Richardson Industrial Pty Ltd, which after a merger that took place in October 2014, became Richardson French. For convenience, I will call the agent Richardson Industrial for the whole period under discussion. The director of Richardson French with whom Braewoodland had primary contact was Jeff Richardson (“Richardson”).
6 On about 18 April 2012, Wickham wrote a letter to Braewoodland advising that it wished to exercise its rights under the first lease to enter into a further lease of the property for a term of five years.
7 On 30 May 2012, Braewoodland and Wickham entered into a second commercial lease regarding the property. The lease was for a period of five years commencing on 1 August 2012 and provided an option to the tenant for a further lease of five years. Wickham did not have to pay any security deposit in respect of the second lease.
8 In late May or early June 2012, the defendants signed a guarantee and indemnity in favour of Braewoodland in respect of the obligations of Wickham under the second lease. At the time, the defendants were still directors of Wickham. The first defendant resigned as a director in May 2014.
9 On 3 July 2014, Matthew Burns and Andrew Hewitt were appointed joint and several administrators of Wickham. After the five business day period referred to in section 443B(2) of the Corporations Act 2001 (Cth), Wickham continued to occupy the property.
10 On 25 September 2014, the administrators advised Eugene Khoo (“Khoo”) of Richardson Industrial that they had finalised the contract for the sale of plant and equipment and that material was to be removed from the property by 17 November 2014. Accordingly, the administrators’ expectation was that the property should be empty by that date.
11 By email on 14 November 2014, Daniel Vo (“Vo”) of Liquidity Services Global Solutions Pty Ltd (“Liquidity Services”), the company acting on behalf of the purchaser of Wickham’s plant and equipment, asked Khoo if the company could have until 5:00 PM on Tuesday 18 November to remove the equipment out of the property. Braewoodland agreed to this request.
12 By letter dated 17 November 2014, the administrators advised Richardson Industrial that the letter constituted written notification of the administrators’ intent to vacate the property and no longer to exercise rights in relation to it with effect from 5:00pm that day. The administrators asked for a final invoice for any outstanding rent or costs pertaining to their occupation of the property. The administrators also sought advice on where they should send the keys to the property.
13 From November 2014, Braewoodland advertised the property as available for lease but there was little interest shown.
14 In May 2015, Capital SMART Repairs Australia Pty Ltd (“Capital”) expressed interest in inspecting the property. Thereafter, the parties negotiated a mutually acceptable lease proposal. However, in August 2015, Capital discovered that there was a restrictive covenant on the property which prohibited the use of the property for panel beating, motor vehicle wrecking or as a junkyard without the consent of Melbourne Water Corporation. Capital made representations to Melbourne Water Corporation but the latter refused its consent. Capital then advised Braewoodland that it would not continue with the lease because it could not obtain the requisite permits to conduct its business.
15 Braewoodland began advertising the property again. In December 2015, Sure Gro Treemax Australia Pty Ltd (“Sure Gro”) expressed interest in the property and inspected it before Christmas. The negotiations between Braewoodland and Sure Gro were lengthy and it was not until around late July 2016 that the parties agreed on the terms of a new lease. Sure Gro went into possession in October 2016.
16 Braewoodland issued this proceeding against the guarantors in November 2016. It claims from the defendants damages in the sum of approximately $890,000.
Parties’ positions
17 In summary, the defendants contended that the second lease was surrendered by operation of law with the result that neither the tenant nor the guarantors had any liability under the guarantees. Alternatively, if the guarantors were liable, the defendants contended that Braewoodland failed to mitigate its loss.
18 The plaintiff submitted that, in November 2014, there was no surrender of the second lease whether by operation of law or otherwise. Alternatively, Braewoodland argued that, if there were a surrender in November 2014, then the circumstances were such that it was still entitled to claim damages for the loss of the bargain constituted by the second lease. As to damages, Braewoodland submitted that it acted reasonably in taking appropriate measures to mitigate its loss and there should be no reduction in the damages claimed.
Issues
19 The issues which need to be resolved in this case are as follows:
a) was the lease entered into between Braewoodland and Wickham on 30 May 2012 surrendered by operation of law on or about 17 November 2014?
b) if the second lease were surrendered, are the guarantors released from their obligations under the deeds of guarantee and indemnity?
c) what is the quantum of Braewoodland’s loss and damage?
d) did Braewoodland fail to mitigate its loss?
Was the lease entered into between Braewoodland and Wickham on 30 May 2012 surrendered by operation of law on or about 17 November 2014?
20 In addressing this issue, I deal first with the applicable principles of law. They are relatively clear and were not the subject of any major disagreement between the parties. The principles relate to the position of administrators and to the surrender of leases.
Administrators
21 Pursuant to section 437A(1)(b) of the Corporations Act, an administrator may carry on the business of a company while the company is under administration. If the administrator acts in this way, he is deemed to be the agent of the company.[1]
[1]Section 437B
22 Where an administrator is appointed to a company which is the lessee of a property, the landlord cannot take possession of the property during the administration.[2] If the administrator continues to use the leased premises, he or she becomes personally liable to pay rent owing under the lease. The administrator’s liability continues from five days after the appointment until the administrator ceases to be in possession or the administration comes to an end.[3]
[2]Section 440B
[3]Section 443B(2) and (9)
23 At the second creditors’ meeting, the creditors of a company in administration can resolve either to end the administration, enter a deed of company arrangement, or liquidate the company. Here, the creditors resolved to liquidate Wickham and to appoint the administrators as the liquidators. The liquidation of Wickham did not of itself affect the operation of the second lease. However, liquidators have a statutory power to disclaim a lease where they see fit.[4]
Surrender
[4]Section 568(1)(f)
24 Leases have two features. They create an interest or estate in land and they are simultaneously contracts between a lessor and a lessee. Surrender is the yielding up of the interest in land to the immediate reversioner.[5] Surrender can be express or implied. An express surrender is to be in writing in accordance with section 52 of the Property Law Act 1958 (Vic) (“the PLA”). Surrender implied from the conduct of a lessor and lessee is often called surrender by operation of law. This can occur, for example, where one party acts in a particular way and the other party then assents in a way which is inconsistent with the continuance of the lease.[6] Surrender operates as a form of estoppel.
[5]See discussion in Croft, Hay and Virgona, Commercial Tenancy Law (4th ed) at [16.11].
[6]Ibid at [16.17].
25 Where there is an agreement between a lessor and lessee to determine a lease, followed by the lessor resuming possession of the demised land, that can create a surrender by operation of law. Mere agreement between the two parties is insufficient.[7] The agreement must be acted upon. So, when a tenant abandons possession of the demised land, unless the landlord accepts that abandonment, there will be no surrender by operation of law. In this context, a landlord’s actions must unequivocally indicate that the lease is no longer in existence. If the landlord’s actions are equivocal or consistent with the lease remaining on foot, there can be no inference of a surrender.
[7]Ibid at [16.18].
26 A surrender of a lease, whether express or by operation of law, operates only to release a tenant from any liability in respect of its future obligations. A tenant will remain liable for any breaches of the lease which occurred before the surrender. For this reason, in a case like the present, it is important that the alleged surrender contended for by the defendants occurred before the tenant refused to honour its obligations under the second lease. If Wickham’s repudiation of its obligations under the second lease took place before the alleged surrender, then, having regard to the way in which the defendants conducted the case, there would be no defence to Braewoodland’s claims.
27 The party asserting surrender has the burden of proving it.
28 One matter which emerges clearly from the case law is the high threshold which must be satisfied in terms of unequivocal behaviour to warrant a finding of surrender. This appears from several cases.
29 In Oastler v Henderson,[8] the plaintiffs granted the defendant a lease of a house for seven years from Lady Day (25 March) 1868 at an annual rent of £140. The defendant took possession of the premises and conducted his business from there until quitting the premises in autumn 1868. The defendant found his business was unprofitable and left for America with apparently no intention of returning. He gave the keys to an agent with instructions to let the premises if he could and failing that, to try to induce the plaintiffs to accept the surrender. The agent, unable to find a tenant, returned the keys to the plaintiffs in December 1868. The plaintiffs then tried to find a new tenant but were unable to do so until March 1872. During the period when the plaintiffs were seeking a new tenant, they allowed some of their workmen to stay in the premises for part of 1870 for the purposes of the plaintiffs’ saddlery business.
[8](1877) 2 QBD 575.
30 The plaintiffs sued the defendant for the three and a half years rent which accrued between Michaelmas (29 September) 1868 and Lady Day 1872. The defendant argued that the lease under which the claim was made was surrendered by operation of law before the claimed rent fell due. The plaintiffs succeeded in first instance and again in the Court of Appeal.
31 The defendant relied upon several matters to make good his argument for surrender: the plaintiffs authorised their agent to try and lease the premises in 1869; the plaintiffs gave their agent the keys for that purpose; the agent prepared advertising for the premises and featured such material in the windows of the house; the agent showed potential tenants through the house.
32 The Court of Appeal was unanimous in finding that there was no surrender. Cockburn CJ found that until the plaintiffs actually leased the premises to the new tenant in 1872, they had not acted in a way which was so inconsistent with the continuation of the lease as to constitute a surrender. He found that the plaintiffs had not taken possession of the premises. He commented that while the plaintiffs did take back the keys to the property, with the defendant gone and for all they knew, not likely to return, what else could they do but try and let the house. Had the plaintiffs been able to find a tenant, they would have done so “as much for the benefit for the defendant as of themselves”.[9] He also found that the landlords “did nothing but what they might reasonably be expected to do under the circumstances for the benefit of all parties”.[10]
[9](1877) 2 QBD 575, 578.
[10]Ibid, 578.
33 Bramwell LJ was of the same opinion, saying that there was no evidence of a surrender until 1872. In circumstances where the defendant gave back the keys and intimated that he wanted to be rid of the lease and then left the country, a reasonable person in the plaintiff’s position would have done exactly as they did and tried to let the house.
34 Brett LJ said that there could be no estoppel by mere verbal agreement. There had to be some act in addition which was inconsistent with the continuance of the lease. Here, he found that there was no unequivocal taking of possession or other act amounting to an estoppel until March 1872.
35 In Buchanan v Byrnes,[11] the lessor sued the lessee for damages for breach of a lease dated 1 February 1899 under which the lessor leased to the tenant a hotel property in Townsville for 15 years at an annual rental of £480. The lease contained a covenant to carry on the hotel business and not to do anything whereby the liquor license might be forfeited. Shortly before the end of June 1904, the defendant lessee informed the landlord that he would not continue carrying on the business at the premises after 30 June 1904. The parties negotiated a possible surrender of the lease but could not reach agreement. A couple of days before 30 June, the lessee gave formal notice that he would not carry on the business any longer and advised the plaintiff to do whatever he saw fit to protect his own interest. On 29 and 30 June 1904, the defendant sold at auction all the furniture from the business. The plaintiff bought the furniture and made arrangements to carry on the business in order to prevent the forfeiture of the license. The lessor tried to let the premises, but was not successful for nearly 12 months.
[11](1906) 3 CLR 704.
36 At trial, the plaintiff claimed damages for the 12 month period between the defendant abandoning the lease and the plaintiff obtaining a new tenant. In answer to questions put by the trial judge, the jury found that:
· there was no agreement between the plaintiff and defendant that the defendant should relinquish, and the plaintiff should resume, possession of the premises;
· the defendant did not relinquish the premises and the plaintiff resume possession of the premises pursuant to any such agreement;
· on 30 June 1904, the defendant relinquished possession of the premises;
· the defendant did so with the intent that the plaintiff should resume possession of the premises;
· on 30 June the plaintiff did resume possession of the premises; and
· when so acting, the plaintiff did not do so with the intention of determining the unexpired portion of the lease.
The jury assessed damages in the sum of approximately £899 in favour of the plaintiff. After further argument, the trial judge gave judgment for the defendant and held that there had been a surrender of the lease accepted by operation of law. The plaintiff appealed this decision to the High Court.
37 When the plaintiff took possession of the premises, he did not give the defendant any formal notice to the effect that he was doing so for the joint benefit of both parties. But it was not contested at trial that the landlord did no more than was necessary to keep the goodwill of the premises intact.
38 Griffiths CJ was satisfied that the lessee’s actions in abandoning the hotel and selling the furniture constituted as complete a break to carry on the business as he could commit. The lessor’s actions in resuming possession and keeping the business alive until he could find another tenant occurred after the abandonment and could not constitute an acceptance of any surrender. The lessor was entitled upon the abandonment to sue for breach of covenant and to obtain such damages as properly flowed from that breach. Because the covenant applied throughout the entirety of the lease, Griffith CJ said that the prima facie damages would be the value of the term to the lessor, that is, the difference between the benefit which he would have derived from the premises being kept as a going hotel for 15 years at the agreed rent, being kept in repair, and the value of the premises “as they were thrown on his hands”.[12]
[12]Ibid at 715.
39 Barton J pointed out that the defendant wrongly assumed that the plaintiff’s actions after the complete breach of the contract could be relied upon to infer a surrender. Here the plaintiffs’ conduct in resuming possession could not have created an estoppel relied upon by the defendant because the defendant’s breach was not induced by the plaintiff’s conduct but, rather, preceded it.
40 The third member of the court, O’Connor J, was of similar opinion. He said that the defendant’s conduct in giving up possession of the premises as he did was a repudiation and abandonment of the whole contract. The landlord’s rights upon breach were to get such compensation and damages as the jury might see fit for the loss of benefit of the 15 year contract. Once the claim arose, it could be terminated in one of two ways: release under seal or accord and satisfaction. His Honour said that neither was applicable to the conduct of the lessor. In a case like this where the leased property was abandoned and the landlord took action to preserve his property in its existing condition, it did not follow that a resumption of possession must necessarily establish a surrender by operation of law. Unless this was the case, the landlord would be put in a position whereby either he must stand by and see the value of his property destroyed or he must take possession in such a way as to put an end to his rights under the contract – “the law does not put a party to a contract in that position”.[13]
[13]Ibid at 722.
41 O’Connor J said that the real question for the jury was whether, when the landlord resumed possession, he had done anything more than was necessary for the purpose of preserving the subject matter of the contract for both parties. His Honour said it was open to the landlord to take possession, enter into the hotel and do everything that was necessary for carrying on the business in order “to preserve his rights under the lease and his remedies and to preserve the rights of the defendant also.”[14]
[14]Ibid at 723.
42 Importantly, having regard to the later application of contract law to leases as found by the High Court in Progressive Mailing House Pty Ltd v Tabali Pty Ltd,[15] his Honour said that one could view the plaintiff’s action in taking possession in either of two ways:
[15](1985) 157 CLR 17.
(a) an election to accept the abandonment of the contract and to treat it as at an end; or
(b) having decided to rely upon his right to damages, he elected to treat the contract as existing only for the purposes of an action for damages.
He said that in either case, he would resume possession.
43 The High Court unanimously allowed the appeal and awarded damages in the amount found by the jury.
44 In Konica Business Machines Australia Pty Ltd v Tizine Pty Ltd,[16] the sole issue before the New South Wales Court of Appeal was whether the lease between the parties had been surrendered by operation of law.
[16](1992) 26 NSWLR 687.
45 On 6 September 1979, Permanent Nominees (Aust) Ltd (“Permanent”) leased the land and buildings at 13 Sirius Road, Lane Cove, to the appellant for a period of ten years. On 24 November 1986, Permanent consented to the assignment of the lease to Garvey Direct Marketing Pty Ltd (“Garvey”) on terms, inter alia, that the appellant and its guarantor were not released from their obligations under the lease. Shortly thereafter, the respondent purchased the property from Permanent. Garvey remained in possession of the premises until late 1987 when it abandoned them and TNT Ltd (“TNT”) moved into the premises. TNT remained there until March 1988 when it left the premises. Subsequently, the respondent filed a summons seeking a declaration that the lease of September 1979 remained on foot and had not been determined. It appears that the summons was issued in response to a claim by the appellant’s solicitor that the lease had been surrendered by operation of law. At trial, the court held that there was no surrender. The Court of Appeal dismissed the appellant’s appeal. The leading judgment was that of Clarke JA. Priestley JA agreed with that judgment, and Handley JA agreed generally with the reasons of Clarke JA, but added some further reasons of his own.
46 Clarke JA noted that the respondent’s agent wrote to Garvey in October 1987, asking that the rental arrears be paid. Garvey responded by advising that there was a restructure of the company’s shareholding taking place involving TNT. Around this time, TNT’s solicitor contacted the respondent’s solicitor. The latter wrote back advising that the respondent did not consent to TNT being in possession of the premises and asking for an occupation fee equivalent to the current market value of the premises. TNT paid moneys to the respondent.
47 In January 1988, the appellant’s solicitors wrote to the respondent expressing concern that it was not taking all reasonable steps to mitigate its loss following Garvey’s default under the lease. The respondent’s solicitors wrote back stating that TNT was occupying the premises without consent. Thereafter, TNT paid some occupation fees to the respondent purportedly as industrial rental.
48 The appellant submitted that, in the circumstances, there was a surrender by operation of law of Garvey’s leasehold interest. In essence, the appellant submitted that Garvey abandoned possession of the premises, the respondent accepted the abandonment, and this constituted the surrender by operation of law.
49 Clarke JA said that whether the landlord had resumed possession or accepted the tenant’s abandonment of the premises was a question of fact. In deciding the point, an important consideration was whether the landlord had acted in such a manner as to show that it regarded the lease as at an end. His Honour commented that by abandoning a premises, a tenant could place a landlord in a difficult position. The market for leasehold premises might be depressed and there might be a scarcity of potential tenants prepared to pay the same, or a comparable, rent. In circumstances where the landlord was dependent on the rent to pay interest on a mortgage, the landlord could be put in an embarrassing situation if the premises remained vacant. Alternatively, if a tenant were found, it might pay considerably less rent than the rental agreed with the defaulting tenant.
50 The judge also noted that there might be strong reasons why a landlord would consider it in its best interests to maintain the lease while simultaneously getting some financial return from the premises. The example he gave was a guarantee under which the surety guaranteed the tenant’s payments of rent. Such a guarantee would generally only remain effective while the lease was on foot. Clarke JA commented that:[17]
“In principle it would seem odd that a tenant and its guarantor could escape liability for future rent upon the tenant, in contravention of its contractual obligations, abandoning the premises in the knowledge that the landlord would almost certainly be obliged to find another tenant.”
[17](1992) 26 NSWLR 687, 693.
51 His Honour rejected the proposition that there existed a universal rule to the effect that once a landlord re-lets the premises, a surrender by operation of law would occur. His Honour commented that there was a distinction between cases where a landlord re-let on its own account and where it re-let for the benefit of the tenant, either expressly or by applying rent received in part satisfaction of the tenant’s liability under the lease.[18] Clarke JA stated that he saw no reason why it should be held that a landlord who re-let premises and accounted to the tenant for the rent received (in the sense that it credited the tenant with that rent) after the tenant vacated the premises during the term of the lease should be regarded necessarily as having brought, or intended to bring, the tenant’s leasehold interest to an end. He suggested that those facts indicated the landlord wished to keep the lease on foot while at the same time ensuring the premises were not vacant.
[18](1992) 26 NSWLR 687, 695.
52 Near the conclusion of his judgment, his Honour made the following observations:[19]
“The question whether a surrender by operation of law has occurred is not to be answered by the rigid application of an artificial formula. When the question arises the court is required to pay regard to the substance of the matter and to determine whether the landlord’s response to the tenant’s abandonment is inconsistent with the continued existence of the lease.
If it is found that the landlord has acted in such a manner as unequivocally to indicate that it no longer regards the lease as in existence, then it will follow that a surrender has taken place. If the landlord’s actions are consistent with the lease remaining in existence, or are equivocal, then it would not be correct to infer that a surrender had occurred.”
[19](1992) 26 NSWLR 687, 697.
53 Tasita Pty Ltd v Sovereign State of Papua New Guinea[20] concerned a case in which the defendant leased the third floor of its building at 100 Clarence Street, Sydney, to the plaintiff for three years commencing 1 April 1989. The plaintiff operated a travel agency. The Chief Executive Officer and director of the plaintiff was Father Dennis Madigan. In October 1989, the plaintiff amalgamated its business with a travel agency operated by another entity. As a result, the leased premises became too small for the combined business. Father Madigan spoke to the Consul General, Mr Tarua, about exchanging the leased premises for a larger space in the same building. Tarua said that this was a possibility and Father Madigan should talk to the agents for the building. The agents said there was no other available space and so, the plaintiff had to move elsewhere.
[20](1991) 34 NSWLR 691.
54 The plaintiff argued that the effect of the communications between Tarua and Madigan was that the lease was surrendered by operation of law. The plaintiff submitted that when that the fifth floor of the building was not available, as Tarua had believed, Tarua said that if the plaintiff had to vacate the building, that would be okay because the defendant might use the third floor area for trade promotion purposes. Tarua said that the defendant had been looking for some space to do this. Madigan said that when he asked if the plaintiff could terminate the lease at the end of December 1989 and pay rent until then, Tarua said that was okay.
55 The court found that the oral agreement between the parties was established. It also found that when Madigan returned to the agents a form of agreement authorising them to sublet the premises on the plaintiff’s behalf, he did so to be cooperative rather than to change the basis of the agreement that he had made with Tarua. The court found that the plaintiff returned the keys in January 1991 and wrote a letter to the defendant thanking it for releasing the plaintiff from its obligations. Tarua responded to the letter by saying there was no formal document from his government agreeing to the arrangement.
56 Young J found that there was no surrender of the lease by operation of law. He said that although the landlord’s agents were slow in communicating with the plaintiff, and although there was no denial of the agreement, the conduct of the landlord did not amount to an unequivocal acceptance of possession. His Honour said:[21]
“Whether the landlord has accepted possession is a question of fact to be determined upon all the facts and circumstances of a particular case. Generally speaking, if all the landlord has done is what is necessary to protect its interests, there will be no surrender… The landlord may even re-let so long as it is made clear that this is on the tenant’s account… Other cases… again make it clear that the law throws onto the tenant the burden of showing that the landlord has gone beyond doing what was sensible to protect his own interests and has performed such acts as must be taken to amount to an unequivocal acceptance of possession…”
[21](1991) 34 NSWLR 691, 697.
57 The above cases show that:
· when a landlord takes back the keys from a tenant who abandons the leased premises and then tries to find another person to occupy the premises, that can be consistent with the continuation of the lease;
· when a tenant abandons possession of leased premises and the landlord then takes temporary measures to protect those premises, that is not necessarily a surrender;
· a landlord could maintain a lease with a tenant who had left the leased premises and simultaneously seek some financial return from those premises without necessarily accepting a surrender.
Parties’ positions
58 The lessee argued that the lessor resumed possession of the property on 17 November 2014 and thereby, the lease was surrendered by operation of law. The lessee submitted that the evidence showed that it gave notice of its intention to vacate the premises, it did vacate the premises, and gave the keys to the landlord’s agent on that day. The landlord then retook possession and conducted itself in a manner inconsistent with the continued existence of the lease. The landlord accepted the keys, did not advise the lessee that it accepted its repudiation of its obligations and did not take any formal step to terminate the lease in accordance with its terms. It said that the failures to give a notice under section 146 of the PLA reflected the surrender because no notice was required if there were such a surrender.
59 The lessor denied that the second lease was surrendered until the property was leased to Sure Gro. It submitted that the various acts pleaded by the defendants to constitute the surrender were equivocal or irrelevant to establishing that there was a surrender by operation of law on, or with effect from, 17 November 2014.[22]
[22]As the defendants alleged in paragraphs 29 and 30 of the Defence.
Chronology
60 Administrators were appointed to Wickham on 3 July 2014.
61 On 7 July 2014, the administrators gave notice that they would be occupying the premises during the administration and pointed out that under section 443B of the Corporations Act that they would become liable for rent from 11 July 2014. Thereafter, up to and including 17 November 2014, the administrators paid all the rent and outgoings referable to the property.
62 As the administrators indicated on 4 July, creditors who wished to vote at creditor’s meetings had to file a proof of debt. Richardson Industrial lodged a claim by email on 10 July 2014 for debts owing until the end of that month.
63 On 30 July 2014, the Supreme Court of Victoria made orders permitting the date for the convening of the second meeting of Wickham’s creditors to be extended until 15 October 2014.
64 From 1 August 2014, the monthly rental on the property increased to $28,268.13 per calendar month.
65 Richardson received the letter from the administrators dated 4 August 2014 which advised that the administrators had continued to operate Wickham’s business on a limited basis. They were seeking to stabilise the operations of the business. The administrators had sought expressions of interest in a sale of the Wickham business or its assets. The administrators were considering several offers. If there were no suitable offer, then the administrators planned to auction the assets of the company.
66 On about 5 August 2014, Braewoodland sent a tax invoice to the administrators claiming rent and outgoings in the sum of $64,752.52. This included rental for the period 1 July to 31 July 2014, less five days, and the rental for the month of August 2014.
67 On about 26 August 2014, the administrators paid the sum of $51,894.25 being the rent owing in respect of July and August 2014.
68 On 31 August 2014, after an earlier conversation with Richardson, the administrators informed Khoo that they were negotiating a sale of the plant and equipment located on the premises. The discussions with the interested parties suggested that it could take up to three months to finalise the sale and have the assets removed from the property. The administrators proposed that they pay in advance the rent for September and October and that the landlord allow them to have rent free so much of the month of November as they needed to remove the plant and equipment.
69 On 21 September 2014, the plaintiff refused the request for the rent free period. In the same correspondence, Richardson Industrial said:
“Given that the company is no longer trading and is winding up, can you kindly have that in writing so that we can proceed with advertising the property for releasing (sic).”
The defendants contended that this comment reflected Richardson Industrial’s view that the lease would come to an end upon liquidation.
70 On 25 September 2014, the administrators advised Khoo that they had finalised the contract for the sale of Wickham’s plant and equipment, and that it should be removed from the property by 17 November 2014. Khoo told Richardson that the property should be empty on 17 November and that they could conduct an inspection regarding the making good of the property.
71 On the same day, the plaintiff’s agent listed the property on various internet advertising sites: realcommercial.com.au, commercialview.com.au and commercialrealestate.com.au. In addition, the property was listed on the website of Richardson Industrial, the plaintiff’s agent. The advertisements said that the premises were “Available Immediately”.
72 By letter dated 26 September 2014, Richardson wrote to Ian Dodgshun, the director of Braewoodland, enclosing an exclusive leasing authority for execution. The authority permitted Richardson Industrial to market the property at an asking rental of $26,800 plus GST per month plus outgoings. This was equivalent to a rate of $80 per square metre. Braewoodland signed and returned the authority to Richardson Industrial.
73 By 26 September 2014, advertising brochures for the property had been prepared which said that the premises were “Coming Soon”. Richardson Industrial also arranged for production of a board to be placed outside the property stating that the premises were available “For Lease”.
74 Under cover of a letter dated 3 October 2014, the administrators advised creditors that the second meeting of creditors was to be held on 13 October 2014 pursuant to section 439A(1) of the Corporations Act. The administrators enclosed a notice of meeting, proof of debt form, proxy form and their report to creditors pursuant to section 439A(4) of the Corporations Act. In their report to creditors, the administrators noted that they recommended that Wickham be placed into liquidation. When addressing the issue of the estimated return from a winding up, the administrators said that the estimated return to priority creditors in the liquidation was $0.51 in the dollar. However, the administrators said that there was unlikely to be any distribution to unsecured creditors.
75 By letter dated 10 October 2014, the administrators advised Braewoodland that the second meeting of creditors was due to be held at the offices of Grant Thornton Australia Limited on 13 October 2014. At that meeting, the creditors would vote on whether the administration would come to an end, the company would enter a deed of company arrangement or the company would be placed into liquidation. In circumstances where no deed of company arrangement had been proposed and the company was insolvent, the administrators advised that the only option was to put Wickham into liquidation. The administrators advised that, following the creditors meeting, they required the continued use of the property for a short period of time in order to effect the orderly sale and disposal of Wickham’s assets to a third party purchaser. The administrators sought confirmation from Braewoodland that they could continue to occupy the property (as could any subsequently appointed liquidators) on the terms of the existing second lease until 17 November 2014 (or such earlier time as notified by the administrators in writing). The administrators also notified Braewoodland that they would be seeking to adjourn the second meeting of creditors until 18 November 2014 in order to facilitate the removal of assets from the property by the third party purchaser. The administrators asked that Braewoodland execute an enclosed deed of forbearance and return it to the administrators by 13 October 2014.
76 On the same day, the administrators sent out a supplementary report to creditors. This set out the administrators’ recommendation to creditors that Wickham be wound up. It repeated the earlier observation that there was unlikely to be a distribution to unsecured creditors. Richardson read the report briefly and took from it that there would be nothing for the unsecured creditors.
77 On 13 October 2014, at the second meeting of Wickham’s creditors, the creditors resolved to adjourn the meeting until 18 November 2014.
78 On 14 November 2014, Vo, project manager at Liquidity Services, emailed Khoo to ask if his client could have until 5:00pm on 18 November to remove all the machines from the premises. By email on 17 November 2014, the administrators wrote to Khoo notifying him that they intended “to vacate the premises and no longer exercise rights in relation to the Leased Premises” on behalf of Wickham or anyone else from 5:00pm on 17 November. They asked for an invoice for any amounts outstanding for the term of the administrators’ occupation and where the keys to the leased premises were to be returned to. Khoo asked that the keys be returned to Richardson Industrial’s office before 5:30pm that day. The administrators did as they were asked.
79 The defendants argued that the taking of the keys by the plaintiff’s agent was compelling evidence that the plaintiff was taking possession of the property and that the administrators were thereafter excluded from it.
80 Also on 17 November 2014, Vo informed Khoo that his team needed access to the property the next day to collect the remaining containers of equipment. Vo asked that Khoo direct the administrators to hand over the keys to him after they left on Monday 17 November 2014. Vo said that he would return the keys later to the office of Richardson Industrial in Dandenong. The agent made the keys available to Vo on the basis that they were returned to Richardson Industrial’s office by 5:30pm on Tuesday 18 November 2014.
81 Richardson advised Dodgshun at about 5:13pm on 17 November 2014 that the advertising and signboard for the property were in place. Richardson, together with another employee, Joe Rondo, inspected the property a day or two later and took photos. The photos showed papers, filing cabinets and some office equipment in the office area and plastic containers and some other rubbish in the warehouse and external area.
82 On 18 November 2014, Wickham’s creditors resolved to wind up the company.
83 On 9 December 2014, Richardson Industrial sent the liquidator a purported proof of debt claiming an amount of $21,632.33 for rent for November 2014 and outgoings incurred in the period commencing from 11 July 2014. It was not a true proof of debt because the claim related to the occupation of the property by the administrators, not the liquidators. The administrators were personally liable for the rent and outgoings incurred during their occupation. The claim was said to be a final statement of adjustments up until 17 November 2014. The administrators paid the sum of $21,632.33 a few days later. During the period of their appointment, the administrators paid Richardson Industrial an amount of $141,794.09 in respect of rent and outgoings on the property.
84 On about 12 December 2014, the plaintiff arranged for the removal from the premises of some of Wickham’s property which had been left behind. Richardson Industrial arranged for Dallas Ijajic to remove all old machinery, steel, plastic and detritus left behind.
85 On 15 May 2015, Richardson accompanied representatives of Capital on an inspection of the premises. In July 2015, the plaintiff at one point left the keys to the premises for Capital to collect so that its spray booth contractor was able to commence work.
86 On 4 May 2016, the plaintiff’s solicitors wrote a letter of demand to the defendants in which they said that the lease of the premises was terminated prior to the contractual five year term which ought to have been completed on 31 July 2017.
Defendants’ position
87 In considering the defendants’ position, I note that the defendants did not plead or argue for an express surrender of the lease. This was understandable in circumstances where there was no evidence of any request by Wickham or the administrators for a surrender. The defendants’ case relies wholly upon a surrender by operation of law or an implied surrender.
88 The defendants’ case depends upon a particular characterisation of the evidence. It is not disputed that:
· the administrators gave notice of their intention to vacate the property on 17 November 2014;
· the administrators vacated the property at that time;
· the administrators gave the keys to the plaintiff’s agent on the day they vacated;
· the plaintiff advertised the property for lease on websites and with a sign outside the premises after 17 November 2014;
· after about 18 November 2014, the plaintiff’s agent inspected the property without seeking any permission or consent from the liquidators;
· in about December 2014, the plaintiff engaged Dallas Ijajic to remove from the property old machinery, plastics, steel and detritus. The plaintiff did so without seeking any permission or consent from the liquidators;
· the plaintiff made no demand on the liquidators for rent or outgoings in the months after November 2014;
· the plaintiff did not at any time serve upon the administrators or the liquidators a notice pursuant to section 146 of the PLA;
· after 17 November 2014, it was the plaintiff and not the administrators or the liquidators who decided which people, if any, had access to the property;
· the plaintiff did not at any time write a letter to the administrators or liquidators advising that it accepted Wickham’s repudiation of the lease;
· the plaintiff’s agent negotiated at length with Capital to become the new tenant of the property. This venture failed because of the issue with the restrictive covenant and Capital’s inability to obtain the permits it required to operate its business.
89 According to the defendants, the control which the plaintiff exercised over the property after 17 November 2014 reflected a re-entry and resumption of possession by the plaintiff. This was reinforced by the failure to accept Wickham’s repudiation in writing and to serve a section 146 notice. The resumption of possession was said to be unlawful because no section 146 notice was served.[23] But where there was a surrender, as opposed to a forfeiture, no such notice was required.[24]
[23]Defendant’s Submissions, paragraphs 73 and 76
[24]Fleeton v Fitzgerald (1998) 9 BPR 16,715 (NSWCA), 16,717-8.
90 Overall, the plaintiff’s conduct, principally through its agent, was said to provide compelling evidence of the implied surrender. The defendants contended that the plaintiff was not justified in acting as it did and would not have so acted unless it agreed to the termination of the second lease through the surrender.
Plaintiff’s position
91 Braewoodland raised several points in opposition to the defendants’ contentions:
· there was no need for, or utility in, serving a section 146 notice in this case;
· the return of the keys by the administrators to the plaintiff’s agent did not of itself constitute a surrender;
· the plaintiff’s actions were equivocal;
· even if there were a surrender on 17 November 2014 and Wickham’s future obligations ceased, Braewoodland could still sue for loss of bargain and so the defendants remained liable as guarantors.
92 Braewoodland contended that there was no need to serve a section 146 notice in the circumstances of this case. Wickham was in administration from 3 July until 17 November 2014 and went into liquidation on the following day. During the administration, the Corporations Act created a statutory moratorium whereby the plaintiff was unable to recover possession of the property from the administrators without either their consent or leave of the court.
93 The administrators successfully applied in July 2014 to extend the time for convening a meeting of creditors. Ultimately, the administrators managed to adjourn the second meeting of creditors until 18 November 2014. It was apparent from the minutes of the creditors’ meeting on 13 October 2014 that Byrnes, one of the joint and several administrators, was well aware that adjourning the meeting until 18 November 2014 meant that, in effect, the plaintiff could not take possession of the leased premises before that date.[25]
[25]At least where the administrators paid the rent and outgoings due under the lease while they occupied the property.
94 Apart from the legal protection which the administrators enjoyed, Braewoodland benefited from the administrators selling Wickham’s plant and equipment and moving it from the property. It meant that, when the administrators vacated the property, it was largely empty and the bulk of the task of clearing out the property had been completed. Meanwhile, at a time when prospective tenants were in short supply, the administrators were paying the rent prescribed by the second lease. During the period of administration, the administrators paid the plaintiff over $140,000.
95 While it was extremely unlikely that the administrators would have agreed to any litigation involving their removal from the property, the position is less clear regarding the attitude of the court. A description of the matters which a court might take into account is set out in Kavourakis v Waverley Bowling & Recreation Club Ltd.[26]
[26][2010] NSWSC 439 at [5].
96 I note in passing that the defendants relied upon Hi-Fi Sydney Pty Ltd (Administrator Appointed)[27] to argue that the appointment of an administrator to a company could constitute breach of a condition in a lease and, therefore, require a lessor to give notice under section 129 of the Conveyancing Act1919 (NSW),[28] before relying upon that event to terminate the lease. I make no comment about the merits of that decision. In my view, the facts in this case are significantly different because, apart from anything else, the plaintiff did not rely upon the appointment of the administrators to terminate this lease. Rather, it was the administrators of Wickham who unilaterally told the plaintiff that they were vacating the leased premises.
[27][2015] NSWSC 1312.
[28]This is the equivalent of section 146 of the PLA.
97 Regarding the keys to the property, Braewoodland contended that the mere acceptance of the keys did not equate to surrender. The broader context meant that Braewoodland had no real option but to take them back when Wickham advised that it was leaving the premises from 5:00pm on 17 November 2014.
98 Braewoodland submitted that the defence was founded upon three assumptions, each of which was misconceived:
(a) the second lease was surrendered by operation of law or by agreement on 17 November 2014;
(b) Wickham’s obligations under the lease ceased immediately upon the surrender;
(c) as a consequence, the defendants’ obligations under the guarantees were released.
99 In dealing with the first assumption, Braewoodland submitted that there was no request that it agree to the surrender of the second lease and there was no express written agreement between the parties to that effect. It suggested that, had Braewoodland been asked to agree to a surrender, in circumstances where Braewoodland refused to grant a rent-free month to the administrators, it was unlikely that it would have agreed to a release of the tenant’s obligations which accrued between November 2014 and the time at which the lease would have expired in accordance with its terms. I agree that the evidence did not reveal Wickham requesting a surrender of the lease. Nor was there any written agreement regarding a surrender.
100 In my view, had Braewoodland been formally asked to agree to a surrender, I do not believe it would have consented. I say this because of the nature of the property and the lease. The lease was for a five year period beginning on 1 August 2012. Thus, at the time when Wickham abandoned the lease, there remained about two years and nine months before it expired. In the context, this was a substantial period being over half the duration of the lease. Also, the rental which would have been foregone was significant. With rental of over $300,000 per annum, the rent lost through Wickham’s abandonment of the lease totalled an amount in excess of $600,000. Added to this, Richardson said the factory/warehouse was on a large sized block being over 4,000 square metres. It had a smaller concentration of offices compared to a building which was designed simply for warehousing and administration. There was a particularly large power supply. As at September 2014, Richardson said that there was a plentiful supply of good and reasonable second hand industrial buildings. There was a lower level of enquiries than at any other time in the market cycle. These factors combined to make it more difficult to obtain another tenant for the property.
101 I assume that, if the agent were aware of the factors affecting the marketability of the property, this information was probably passed on to the landlord. The combination of the substantial loss of revenue, the features of the particular property and the state of the leasing market for such a property made it less probable, in my view, that a landlord in Braewoodland’s position would have agreed to a release of all Wickham’s future lease obligations.
102 As to the implied surrender by operation of law, the plaintiff argued that the only factual matters pleaded to occur before 17 November 2014 were the failure to serve a section 146 notice and the return of the keys to the property. The plaintiff submitted that serving the section 146 notice was pointless and the return of the keys was equivocal because, at the time, with the administrators abandoning the premises, there was no practical option other than to take them back.
103 Finally, Braewoodland contended that under clause 3(e) of the lease, where Wickham breached essential terms like those relating to the payment of rent and outgoings, apart from re-entry, the plaintiff could sue for damages for loss of the benefit conferred in its favour by the covenants in the lease.
104 As to the second assumption,[29] Braewoodland submitted that it was incorrect because the weight of authority supported the view that where a party breached a lease agreement to a degree which constituted a repudiation or breach of a fundamental term, the innocent party was entitled to claim damages for loss of bargain. Braewoodland referred to certain authorities on the issue.[30]
[29]See paragraph 98 above.
[30]See paragraph 32-34 of the Plaintiff’s Closing Submissions.
105 Finally, Braewoodland contended that because the first and second assumptions were incorrect, it followed that the final assumption was similarly flawed.
Analysis
Section 146 of the Property Law Act
106 Perhaps the first issue to address is the question of the section 146 notice. Although the defendants suggested that Braewoodland’s actions in taking possession of the property after 17 November 2014 were unlawful, I am not satisfied that the absence of a section 146 notice created any significant issue in this particular case. This view stemmed from both my interpretation of the provision and the factual context in which it was sought to apply the provision.
107 In Apriaden Pty Ltd v Seacrest Pty Ltd,[31] the tenant was a lessee of Torrens title premises in a shopping centre owned by the defendant landlord. The lease was subject to the Retail Tenancies Act 1986 (Vic).[32] Clause 8 of the lease conferred upon the landlord a right of termination and re-entry in the event of breach by the tenant. This right was without prejudice to any other right which the landlord had. The landlord was entitled to exercise the right 14 days after service of a notice under section 146.
[31](2005) 12 VR 319.
[32]This Act was repealed on 1 May 2003.
108 There was a dispute between the parties about the defendant’s management of the shopping centre. From about March 1997, the plaintiff reduced its monthly payments for rental, outgoings and a promotion levy due under the lease. From time to time, the defendant’s agent made demands for proper payment but the breaches continued. A director of the plaintiff said at the trial that he continued to make the lower payments with the intention of causing the defendant to address his complaints, even though he was aware that the plaintiff’s conduct constituted a breach of its obligations under the lease. In May 1998, the defendant re-entered the premises and changed the locks.
109 The trial judge held that the plaintiff’s deliberate and persistent breach of the covenants to pay rent and outgoings amounted to repudiation of the lease and concluded that, by its re-entry, the defendant brought the lease to an end in accepting that repudiation. The trial judge reached this view despite the defendant’s failure to serve any section 146 notice.
110 At the hearing in the Court of Appeal, the first issue between the parties was whether the contractual doctrine of repudiation provided an additional means by which the innocent party could terminate the lease. The court held unanimously that the landlord was able to terminate the lease either in accordance with the terms of the lease or in reliance upon its acceptance of the tenant’s repudiation at common law.
111 As a result of this decision, the Victorian Government amended the Property Law Act “to address the decision of the Court of Appeal in Apriaden Pty Ltd v Seacrest Pty Ltd [2005] VSCA 139 to ensure that section 146 applies in circumstances where there has been a breach amounting to repudiation which the landlord has accepted as such”.[33]
[33]Part 5 of the Explanatory Memorandum to the Retail Leases (Amendment) Act 2005 (Vic) concerning section 51 of that Act.
112 Accordingly, section 146(1) of the PLA was amended to insert:
(a) after “stipulation in a lease” the words “or otherwise arising by operation of law”; and
(b) after “condition in the lease” the words “including a breach amounting to repudiation”
so that the provision was altered to read:
“A right of re-entry or forfeiture under any proviso or stipulation in a lease or otherwise arising by operation of law for a breach of any covenant or condition in the lease, including a breach amounting to repudiation, shall not be enforceable, by action or otherwise, unless and until the lessor serves on the lessee a notice…”
113 Notwithstanding the change to the statute, I am by no means sure that the amended provision affects this case. The purpose of a section 146 notice is to protect the position of tenants and give them an opportunity, where possible, to remedy breaches of a lease and remain in possession of the demised premises. Section 146(1) states that the right of re-entry or forfeiture is one pertaining to “a breach of any covenant or condition in the lease, including a breach amounting to repudiation”. Here, the tenant, Wickham, acted in such a way as to repudiate all its obligations under the second lease and simply walk away from the property. Its conduct reflected a total rejection of the lease rather than a mere breach of one or two of its covenants or conditions. Given the conduct of Wickham, I do not consider that the failure to serve a section 146 notice affects the plaintiff’s claim. Wickham repudiated the second lease and, consistent with contractual principles, the plaintiff could accept the repudiation and sue for damages for loss of bargain.
114 In circumstances where Wickham, through the administrators, informed Richardson that it was vacating the leased premises, the administrators were not mere hapless tenants in need of statutory protection and assistance in dealing with a malign landlord. They unilaterally repudiated the second lease.
115 Moreover, on the day following abandonment of the lease, Wickham went into liquidation. Had the landlord sought to enforce the lease against the liquidators, it seems to me virtually certain that the liquidator would have disclaimed the lease immediately. The preferred creditors of Wickham hoped to receive about 50 cents in the dollar but there was expected to be no dividend at all for the unsecured creditors. In short, there was no money with which to pay rent and outgoings. Indeed, in circumstances where Wickham’s plant and equipment had been sold and Wickham no longer had a business, there was no need to maintain a lease.
116 Further, having regard to the facts in this case, I am not satisfied that section 146 is applicable. The provision states that the right of re-entry and forfeiture is not enforceable by action or otherwise unless the lessor serves a notice on the lessee. Probably because Wickham, through the administrators, abandoned the property by around 5:00pm on 17 November 2014, Braewoodland never sought to enforce through a court a claimed right of re-entry or forfeiture for a breach of covenant or condition in the lease. Braewoodland did not seek to obtain in this, or any other, proceeding anything which, absent the giving of notice, the statutory provision made unenforceable.
117 In addition, even if Braewoodland ought to have served a notice upon the administrators and failed to do so, the defendants did not spell out with any specificity what consequence flowed from that failure. They simply said the plaintiff’s resumption of possession was unlawful. If it meant that, for example, the lessor was not entitled to issue proceedings against Wickham or to set foot on the property without Wickham’s consent, then neither the administrators nor the liquidators raised any such claim against the lessor in reliance upon the omission. Indeed, even if such a claim were available to the tenant through the administrators or liquidators, I doubt that it would have assisted the defendants here because it was not a claim which they could necessarily make or use to reduce or eliminate their liability under the guarantees.[34]
[34]See the situation which arose in Indrisie v General Credits Ltd [1985] VR 251.
118 Next, in my opinion, it would not be correct to infer Braewoodland’s acceptance of the abandonment of the lease and premises simply from the acceptance of the keys to the property. It is clear from cases like Oastler that sometimes when a tenant leaves leased premises before the expiration of the term, the landlord must do the best it can. This can include taking back the keys and trying to find someone else to occupy the premises so there is a source of replacement income, something which benefits both landlord and tenant. Here, Wickham notified Braewoodland in advance that it was proposing to abandon the leased premises in the near future. While the notice did not say it explicitly, I inferred that the object of informing Braewoodland in advance was to enable the landlord to take such steps as it could to reduce the financial impact of the repudiatory abandonment of the lease. It would be surprising if a tenant which initially leased premises for five years, then opted for another five year term, was unaware that its proposed abandonment of the premises constituted a serious breach of the lease. It makes good sense, pursuing its own self interest, that Wickham would wish to minimise the financial impact of the breach on Braewoodland, and, as a likely consequence (through litigation), on itself and its guarantors, who were directors of Wickham.
119 The case law shows that an innocent landlord, faced with a major breach of lease by a tenant, can take back the keys and look for another party to occupy the leased premises.[35] By this means, the landlord can credit the payments received against the moneys owing but unpaid by the defaulting tenant who failed to perform its obligations.
[35]See, for example, Oastler v Henderson [1877] 2 QB 575; Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105; Buchanan v Byrnes (1906) 3 CLR 704.
120 The New South Wales Court of Appeal in Konica went so far as to say that there is no universal rule that, once the landlord re-lets the premises abandoned by the prior tenant, a surrender by operation of law occurs.[36] Some judges have commented about the unfairness which might result if a tenant and guarantor could escape liability for rent owing for the balance of a lease term by abandoning the premises and relying upon the landlord to find another tenant. Some cases indicate that a landlord can act sensibly to protect his own interests by finding another occupant for the premises without necessarily being taken to unequivocally accept possession of the premises.
[36]Konica Business Machines Pty Ltd v Tizine Pty Ltd (1992) 26 NSWLR 687, 693.
121 In this case, Braewoodland tried for a substantial period to obtain a new tenant for the leased premises. The attempt with Capital proved unsuccessful and it was not until August 2016 that Sure Gro signed a new lease with Braewoodland for the property.
122 I consider that Braewoodland acted reasonably to protect its own interests and those of Wickham and the guarantors in trying to obtain, and ultimately finding, another tenant. I find that, until Braewoodland and Sure Gro entered the new lease of the property in August 2016, Braewoodland did not act unequivocally to take possession of the property and, accordingly, there was no surrender of the second lease by operation of law. The fact that Braewoodland did not serve a section 146 notice and took back the keys to the property when the administrators abandoned it is not fatal to the plaintiff’s case. Braewoodland was entitled to act as it did. In listing the property on several commercial real estate sites and arranging for an advertising board for the front of the property in September/October 2014, Braewoodland was taking prudent measures which were for the benefit of both itself and the tenant. They were sensible steps whether the landlord treated the second lease as still on foot or the landlord treated the lease contract as repudiated. In other words, the actions taken were equivocal because they were consistent with both possibilities. Until Braewoodland actually entered the new lease with Sure Gro, its actions were consistent with the second lease continuing. Braewoodland later credited the payments from Sure Gro against the money owing to it due to Wickham’s failure to meet its financial obligations under the second lease.
123 I accept Braewoodland’s submission that if the surrender occurred after the breach giving rise to the tenant’s repudiation of the contract, then it was too late to prevent Braewoodland’s entitlement to damages for loss of bargain.[37] Any alleged surrender cannot affect the landlord’s entitlement to damages for breach in the period before any surrender.
[37]See, for example, Hughes v NLS Pty Ltd [1966] WAR 100.
124 I also accept the gist of the plaintiff’s submissions about the second assumption. Cases from Progressive Mailing House Pty Ltd v Tabali Pty Ltd[38] onwards have accepted that once a tenant repudiates a lease agreement, the landlord can accept the repudiation and claim damages for the loss of the bargain.
[38](1985) 157 CLR 17.
125 In Tabali’s case, Tabali, by unregistered lease dated 4 December 1978, leased factory premises to Progressive Mailing House for five years commencing on that date. Clause 10.1 provided that if rent remained unpaid for fourteen days, the lessor might “without prejudice to any claim which he might have against the lessee in respect of any breach of the covenants” of the lease, re-enter the premises. Clause 11.6 required the lessor, within twelve weeks of obtaining development approval from the council, to carry out certain works. It also provided that the lessee would take possession of the leased premises fourteen days after the lessor had given written notice that, in the opinion of its architect, the works had been completed. The first payment of rent was due two months after the expiration of the fourteen days. The lessee went into possession before the lease was executed. Later, the lessor notified the lessee that, according to its architect, the works had been completed. The lessee denied the works had been satisfactorily completed and ceased to pay rent. The lessee contended that the lessor’s failure to complete the work satisfactorily relieved the lessee of liability to make further payments. The lessor sued for possession, outstanding rent and damages. The trial judge gave judgment in favour of the lessor for possession and awarded damages of $85,000 for its loss of the benefit of the covenant to pay rent. The Court of Appeal dismissed the tenant’s appeal and the matter was further appealed to the High Court. It affirmed the decision of the Court of Appeal.
126 The High Court found that the ordinary principles of contract, including that of termination for repudiation or fundamental breach, applied to leases. Mason J, with whom Wilson and Dawson JJ agreed, noted the suggestion that the presence of an express proviso for re-entry in a lease excluded any other right of termination by the lessor. He rejected this and said that the better view was that re-entry was essential only where the parties stipulated that advantage was not to be taken of a forfeiture except by entry upon the land. He said that, if it were accepted that contractual principles apply to leases, it was not easy to see why the mere presence of an express power to terminate should be regarded as excluding the exercise of common law rights which might otherwise be appropriate.
127 His Honour also noted that, if a lessor had a common law right to recover damages for loss of bargain consequential upon repudiation or fundamental breach, in the event that the lease was determined either by acceptance of the repudiation or fundamental breach or as a result of re-entry, there was a difficulty in contending that the lessor’s right to recover after re-entry was subject to an acknowledgment of that right by the terms of the lease.
128 Deane J, with whom Dawson J also agreed, expressed the view that, where a landlord had a contractual right to terminate a lease by re-entry under the lease agreement and a common law right to terminate the contract for fundamental breach, the landlord was not obliged to elect between the two grounds for termination, but could rely upon both. His Honour said that where a contractual right to terminate for past breach and the common law right to terminate for repudiation or fundamental breach existed concurrently, the reliance upon the contract involved in the exercise of the contractual right to terminate did not preclude the recovery of damages for loss of the future benefit of the contract by reason of repudiation or fundamental breach unless the contract so provided.[39]
[39](1985) 157 CLR 17, 56.
129 Brennan J said that the sole question in the appeal was whether the lessor was entitled to damages for the loss of the benefit of the covenant or, more precisely, for the loss of the benefit of the lease. His Honour stated that a lessor can recover damages for loss of the benefit of a lease only where the lessee has repudiated the lease before determination of the term. Repudiation by anticipatory breach occurred if a party evinced an intention no longer to be bound by the contract or showed that he or she intended to fulfil the contract only in a manner substantially inconsistent with his or her obligations and not in any other way. In such an event, the innocent party could accept the repudiation, thereby discharging himself from further performance and sue for damages.
130 His Honour stated that a promisee’s acceptance of a repudiation was an essential element in the cause of action for damages for anticipatory breach. That was because the liability in damages was substituted for the executory obligations to which acceptance of a repudiation puts an end. Relevantly, he said that acceptance of a surrender by a lessee who has repudiated a lease is simultaneously an acceptance of the repudiation and a determination of the lessee’s interest in the land – at least where the lessee gives up possession of the leased premises.
131 Because I have found in favour of Braewoodland on the surrender point, I do not strictly need to consider in any detail its argument based upon clause 3(e) of the second lease. However, I will make some brief observations on the issue.
132 I consider that clause 3(e) of the second lease also assisted the plaintiff. The clause read as follows:
“The covenants contained in Clauses (1)(a), 1(b), 1(c), 1(d), 1(f), 1(h), 1(j), 1(o), 1(s) and 1(t) are essential terms of this Lease and where there is a breach of any of these covenants by the Lessee, the Lessor shall, in addition to the right of re-entry, be entitled to sue the Lessee for loss of the benefits which performance of the covenants by the Lessee would have conferred on the Lessor between the date of the default giving rise to the re-entry and the date the Premises are re-let. The Lessor may also recover any deficiency between the rental payable by the new tenant and the rental payable by the Lessee had the Term of this Lease not been determined provided that the Lessor shall take all reasonable steps to mitigate the loss.”
133 The provision makes several points:
· the covenants listed are essential terms of the second lease;
· if any one of the nominated covenants is breached, then in addition to a right of re-entry, the landlord is entitled to sue for the loss of benefits which the landlord would have received between the date of default and when the premises were re-let;
· the landlord could sue also for any difference between the rent paid by the new tenant and the rent payable by the lessee had the second lease not been determined prematurely;
· the landlord was obliged to mitigate its loss.
134 It seems the clause was designed to provide a landlord with two routes to bring the lease to an end: one relying on the breach to justify service of a notice and re-entry; the other relying on breach of an essential term of the lease.[40] If after 18 November 2014 there was a breach of covenant by Wickham or the liquidators arising from a failure to pay rental, outgoings, building operating expenses or insurance, then (save for a breach regarding the payment of rent) the landlord would need to serve a section 146 notice before entering the property. But relying on the breach of essential term, the landlord could terminate the lease and seek damages for loss of the bargain. Hence, Braewoodland can probably rely upon this provision to pursue its claim against the defendants.
[40]See Natwest Markets Australia Pty Ltd v Tenth Vandy Pty Ltd (2008) 21 VR 68 (CA).
135 In arguing that even if there were a surrender, Braewoodland can still sue for damages for loss of bargain,[41] Braewoodland relied upon cases such as Progressive Mailing House Pty Ltd v Tabali Pty Ltd and Wood Factory Pty Ltd v Kiritos.[42]
[41]See paragraph 104 above.
[42](1985) 2 NSWLR 105.
136 Priestley JA summarised the position in Wood Factory Pty Ltd v Kiritos:[43]
“Surrender by operation of law: (a) Where this comes about by an agreement either manifested by or inferred from a giving up of possession by the tenant and immediate resumption of possession by the landlord, the position is the same as with surrender by express agreement. (b) Another situation under this heading comes about where the tenant abandons the premises without agreement with the landlord, in circumstances manifesting his intention to put the lease to an end, and the landlord does not retake possession until some time later. There are actually two varieties of this kind of situation; one of which results in a surrender, and the other of which does not: (i) Where the landlord, in retaking possession does so on his own account. This is the situation where Progressive Mailing has shown the legal result is different from what it was once thought to be. In Buchanan for example, it was taken for granted that a surrender by operation of law became complete upon the landlord taking possession on his own account and the landlord could not get damages for loss of the lease. Under the Progressive Mailing doctrine, upon the landlord taking possession on his own account the lease still comes to an end (and the situation can still be called an example of surrender by operation of law as well as a contractual termination following accepted repudiation or breach of fundamental term) but the landlord is entitled to any damages suffered by loss of the lease. (ii) Where the landlord, as discussed in Walls v Atcheson and as occurred in Oastler v Henderson, takes possession, not solely on his own account, but either on the tenant's account or for the benefit both of the tenant and himself. Then, so long as that position remains, the lease is not terminated, there is no surrender by operation of law and the tenant remains liable for the rent. As a matter of theory, there seems no reason why the landlord, on this approach, should not actually re-let on account of the tenant, credit the new lease rental against the continuing tenant's obligation to him and claim the balance.
There was however a very strong tendency to treat the leasing to a new tenant as a surrender of the old lease, no doubt strengthened because it avoided the problem of distinguishing between a case where the landlord was granting the new lease on the tenant's account and where he was not. The importance of this type of situation was that it kept the lease on foot and left the landlord, under the old law, in a better position than in the previous situation described. Now that the position in regard to that previous situation has changed, there would seem to be no practical difference in result for a landlord between the two situations. In the former, the right to damages for loss of the lease will enable him to recover rent lost following the termination of the lease as part of his damages, and in the latter, the breach of the covenant to pay rent under the continuing lease will enable him to recover what will be substantially the same amount.”
[43](1985) 2 NSWLR 105, 133.
137 In the same case, McHugh JA referred to the argument of the defendant in Tabali which assumed that the effect of a surrender by operation of law deprived the plaintiff landlord of a claim for damages based on repudiation. His Honour said that this assumption was wrong. McHugh JA quoted with approval[44] from the judgment of Brennan J in Tabali, where His Honour said that acceptance of a surrender by a lessee who has repudiated a lease is at once an acceptance of the repudiation and a determination of the lessee’s interest in the land.[45] His Honour commented that Brennan J pointed out that, where the lease is liable to forfeiture, enforcing the forfeiture both determines the lessee’s interest in the land and constitutes the lessor’s election to accept the repudiation. McHugh JA said that he saw no distinction in principle between a landlord accepting a repudiation by forfeiting a lease by re-entry and a landlord accepting a repudiation by accepting a surrender whether by agreement or by operation of law. He said that in both instances, the tenant has repudiated the lease and the landlord’s acceptance of the repudiation by accepting a surrender determines the tenant’s interest in the demised premises.
[44](1985) 2 NSWLR 105, 144.
[45]Samuels JA also accepted the comment as correct: (1985) 2 NSWLR 105, 118.
138 In my view, a couple of points emerge from this. First, while the judgments speak of surrender, in the context, the focus is on the termination of the tenant’s interest in the leased land and not, in effect, an agreement to release the tenant from the performance of all future obligations under the agreement. Secondly, the principles discussed are appropriate where, as here, the repudiation by abandonment of the premises precedes the surrender. On the bases set out in the circumstances of this case, Braewoodland’s argument on this point is correct.
139 In summary, I find that there was no surrender of the lease between Braewoodland and Wickham by operation of law. I have so concluded for the following reasons:
(a) there was no surrender by written agreement;
(b) the administrators, by notifying Braewoodland of the date when they proposed to leave the property, implicitly invited Braewoodland to take measures to protect itself and the property in the situation which the administrators’ abandonment of the property created. Braewoodland did nothing more than was necessary to protect itself and the property;
(c) on the facts of this case, Braewoodland taking back the keys at or about the time at which the administrators abandoned the property did not constitute acceptance of the alleged surrender. With the administrators abandoning the property on 17 November 2014 and wanting to return the keys, Braewoodland had no realistic option for securing the property other than to accept the keys;
(d) even if there were a breach of the lease before the vacation of the property on 17 November 2014 (which the defendants did not establish), there was no utility in serving a section 146 notice under the PLA. The administrators were aware that, during the course of the administration, they had statutory protection enabling them to remain at the property. Accordingly, they would not have consented under section 440B of the Corporations Act to their expulsion from the property. Especially given the short term nature of the administration, and the fact that the administrators paid the rent and outgoings associated with their occupation and otherwise appeared to observe the terms of the lease, it was unlikely that a court would have authorised legal action against the administrators to remove them from the property;
(e) In any event, I do not consider that it was necessary for Braewoodland to serve a section 146 notice in this case before terminating this lease by accepting Wickham’s repudiation. The administrators abandoned the whole contract and did not merely breach a condition or covenant. In the circumstances, the section did not apply. I note in passing that the defendants did not identify any specific condition or covenant which Wickham breached by abandoning the property;
(f) other conduct by Braewoodland such as signing up Richardson Industrial to be the sole agent for re-leasing the property, arranging for internet advertising listings and an advertising board for the property was equivocal because it was consistent with taking suitable preparatory steps to protect the property and the parties’ financial position. It was not conduct compatible only with the acceptance of the surrender of the second lease. A property owner might perform the same work if it was proposing to accept the tenant’s repudiation of the lease and to look for a replacement tenant.
If the second lease were surrendered, are the guarantors released from their obligations under the deeds of guarantee and indemnity?
140 If the second lease were surrendered by operation of law from 17 November 2014, then it would mean that Wickham would have no continuing obligations under the lease after that time. The guarantors too would have been released from their obligations for the future. Hence, upon a surrender, the guarantors’ liability would have ceased because the liabilities alleged in this case arose not before November 2014 but for the period between when the administrators abandoned the property and the time at which the second lease would have come to an end in accordance with its terms.
141 I do not need to examine the detail of the guarantee document. This is because at trial, the parties agreed as a fact and the defendants accepted that, if their defence of surrender of lease failed, then Wickham was liable under the second lease for the amount claimed in the damages schedule handed up to the court. As a result, subject to the issue of mitigation, the defendants, as guarantors, were liable for the amount claimed.
What is the quantum of Braewoodland’s loss and damage?
142 The quantum of Braewoodland’s damages was agreed at $890,937.15 being the total claim as set out in the detailed page of calculations handed up to the court on the first day of trial.
Did Braewoodland fail to mitigate its loss?
143 In dealing with the issue of mitigation, there are some additional factual matters which give context to the parties’ submissions.
144 As noted previously, Braewoodland made preparations in September 2014 to re-lease the property after the administrators advised that they proposed to sell Wickham’s plant and equipment and expected to vacate the property by the end of November 2014. The market for leasing when Wickham abandoned the property was, according to Richardson, one of plentiful supply and a lower level of enquiry than was seen at other times in the market cycle. There were virtually no enquiries about the property between about late September 2014 and 15 May 2015. Capital inspected the property in mid-May 2015. Richardson said it was a good, solid inspection. During the inspection, Richardson learned from Jim Vais of Capital that the proposed use of the business was for panel repairs.
145 On 20 May 2015, Capital made its first offer to lease the premises and the offer was accepted a few days later.
146 On 9 June 2015, Braewoodland and Capital exchanged heads of agreement. They were signed about ten days later.
147 By 23 June 2015, the landlord and prospective tenant had exchanged an initial draft lease. By 10 August 2015, Braewoodland sent the final form of lease to Capital for execution.
148 On 14 August 2015, Capital’s agent sent to Richardson a copy of a title search which referred to covenants affecting the property. In substance, the search showed that the property was not to be used “for the purposes of Panel Beating, Motor Vehicle Wrecking or Junkyard as those uses may be described or defined in the Springvale Planning Scheme” without the prior written consent of Melbourne Water.
149 On 18 August 2015, the council advised orally that it would not grant Capital a permit to conduct its business on the property unless the restrictive covenant was removed.
150 Between mid-August when the covenant issue first arose, and 2 October 2015 when Capital’s solicitors wrote to advise that it was no longer proceeding with the proposed lease transaction, Braewoodland and Capital attempted to obtain Melbourne Water Corporation’s consent to the proposed tenancy. Melbourne Water Corporation initially consented to the proposed use of the property by Capital for motor vehicle assessment and repairs. But once it became clear to Melbourne Water Corporation that the tenant would assess and repair motor vehicles on-site and that most of the repair work undertaken would be the replacement and spray painting of panels, Melbourne Water Corporation changed its position and said on 29 September that it objected to the proposed use.
151 The following day, Richardson Industrial reactivated the advertising for the property. By late October 2015, there being no interest in the property, Richardson sent a notice to a collection of about thirty commercial estate agents offering 6% of the first year’s rental as an introduction fee if they could find a tenant for the property. This fee was higher than the usual 5% normally offered in such circumstances. Soon after, Braewoodland and Richardson decided to reduce the proposed rent from $80 per square metre to $70 per square metre. This took the annual rental from $321,600 to $282,000 (exclusive of GST). Richardson Industrial advised the same thirty agents of the reduced rent. Slashing rent and offering other incentives was a well-recognised means of trying to create interest in a property which had been vacant for a lengthy period.
152 On 7 December 2015, an agent sought to nominate Sure Gro on a 50/50 split of the commission. Soon after, another agent from the same firm, Cameron Stuckey, took over negotiations for Sure Gro. Although Richardson was keen to finalise arrangements before Christmas 2015, the negotiation process was slow. Sure Gro undertook several inspections in March 2016. Then the process of an agreed heads of agreement and lease agreement was drawn out. Sure Gro was largely responsible for the delay. Sure Gro raised issues about the limitation of the directors’ liability under the guarantee, its desire to be subject to the operation of the Retail Leases Act 2003 (Vic), and then it refused to sign the lease until the landlord guaranteed certain work to be performed on the property would be completed by a particular date. These issues took time to resolve. As a result, the new lease agreement was not signed until early August 2016 and the lease itself commenced on 1 October 2016.
Legal principles
153 The parties did not disagree about the relevant principles. Braewoodland was obliged to take reasonable steps to mitigate its loss.[46] As the innocent party, it did not have a strict duty to mitigate its loss.[47] Rather, an innocent party which acts unreasonably by failing to minimise the loss claimed from a breach will have the damages reduced where a court considers that, assuming the innocent party had acted reasonably, its loss would have been less than the amount claimed.[48] The onus lies upon the wrongdoer to prove the failure to mitigate by establishing both the unreasonable conduct of the innocent party and the amount by which the damages should be reduced.[49] The innocent party is required only to act reasonably.[50] That party is not required to act other than in the usual course of business.[51] Nor is that party obliged to undertake measures which are costly or complex or likely to impair its position or reputation.[52]
Defendants’ submissions
[46]Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507, 513.
[47]Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235 (NSWCA) at [187]; Portbury Development Co Pty Ltd v Ottedin Investments Pty Ltd [2014] VSC 57 at [157]-[158].
[48]Ibid
[49]TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130, 138; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507; Luxer Holdings Pty Ltd v Glentham Pty Ltd (2007) 35 WAR 254 at [36].
[50]Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507, 513.
[51]Sacher Investments Ltd v Forma Stereo Consultants Ltd (1976) 1 NSWLR 5, 9; Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235 (NSWCA) at [187].
[52]Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603, 607 and 654; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507, 513.
154 The defendants submitted that:
(a) Braewoodland unreasonably wasted the period from 12 May 2015 when Capital first showed interest in the property until 2 October 2015 when Capital advised that it was no longer proceeding with the lease;
(b) Braewoodland should have done in June 2015 what it did in October/November 2015;
(c) if Braewoodland had so acted, the property would have been tenanted by Christmas 2015 and the guarantors’ liability reduced significantly.
155 The major point about the plaintiff’s unreasonable conduct concerned Richardson Industrial’s failure to obtain a title search of the property and thereby become aware of the restrictive covenant over the property. Knowledge of the restrictive covenant first surfaced in the middle of August 2015. A representative of Capital brought the restrictive covenant to the attention of its Melbourne agent who, in turn, informed Richardson Industrial. The material part of the restrictive covenant was set out in paragraph 148 above. The defendants relied upon Richardson’s evidence at trial that he had a statutory duty to make all reasonable enquiries to ascertain information relevant to a service which the estate agent provided. Richardson agreed that his firm’s services included the negotiation of leases on behalf of the plaintiff.
156 The defendants argued that if Richardson Industrial had conducted a search, it would have known of the restriction in September 2014. Hence, when Capital exhibited some interest in the property in May 2015, the potential problem about the proposed use would have been addressed sooner. It followed from this, said the defendants, that with there being no interested tenant for the property, it was likely that Braewoodland would have slashed the rent and offered the generous commission share to other agents by June 2015 – thus, the actions initiated around October/November 2015 would have occurred several months earlier. The experience with Capital suggested, said the defendants, that a lease could be negotiated from initial inspection to signed agreement in about three months. On this basis, it was probable that a new tenant would have taken possession of the property by Christmas 2015 at an annual rent of $282,000 (exclusive of GST).
General observations
157 Before addressing the detail of the defendants’ submissions, I wish to make some general observations.
158 The defendants raised in their defence the alleged failure by Braewoodland to mitigate. However, they pleaded no details about precisely what Braewoodland did, or failed to do, which was unreasonable. There were no criticisms that Braewoodland failed properly to advertise the property or to present the property to market for lease.
159 I consider the defendants were wise not to criticise Braewoodland on this basis because, in my view, there was no factual foundation to contend the landlord conducted itself unreasonably in this context. Braewoodland advertised the property online on specialist websites for commercial property. There was an advertising board outside the property. Braewoodland cleaned the premises by removing rubbish and other material left behind by the administrators. In order to attract a tenant, Braewoodland reduced the rent, gave a rent free period under the lease, painted the building, installed new carpet and air conditioners, and limited the potential liability of the tenant’s directors under the guarantee.
160 In general terms:
· Braewoodland sought to find a new tenant to replace Wickham after it abandoned the property;
· Braewoodland was not responsible for the state of the market and the negligible interest shown in the property. There was no evidence that Braewoodland rejected any prospective tenant on specious or contrived grounds;
· Braewoodland explored the potential tenancy arrangement with those who showed interest.
Analysis
161 I do not accept the submission that Braewoodland unreasonably wasted the time between May 2015 and October 2015 because it should have been, but was not, aware of the restrictive covenant. Richardson’s evidence was that it was not standard practice for an agent to obtain a title search. There was no evidence to the contrary adduced by the defendants from a similarly experienced agent. That being so, it is difficult to find that the defendants have discharged their onus on this aspect of the matter. Further, Richardson pointed to the standard REIV lease used in the negotiations with Capital which contains clause 1(o)(iii) in the following terms:
“The Lessee acknowledges that no promise or representation has been given by the Lessor or the Agent as to the suitability of the Premises or any Lessor’s fixtures or chattels for any purpose or use which may be intended by the Lessee.”
The lease between Braewoodland and Sure Gro contains a clause in similar terms which obliges the tenant to obtain and comply with any approval, consent or permit to use the leased premises for the permitted use. In addition, there is an annexure to the lease in which the parties acknowledge that the landlord makes no representation about the use permitted by the planning authorities for the demised premises or whether a permit is required for the use proposed by the tenant. It seems that the commercial reality is that landlords seek to put the obligation upon tenants to check that they can use any particular property for their intended purpose. Landlords do not accept responsibility for this task.
162 On these facts, it is difficult to say that Braewoodland acted unreasonably in observing that usual practice and seeking to enter an REIV standard commercial lease agreement with a tenant.
163 More importantly, even if the comments about whether Richardson Industrial ought to have obtained a title search are incorrect, the restriction in the covenant here was not absolute. Melbourne Water Corporation had the option to consent or permit the proposed use. Braewoodland was well within its rights to pursue the approval process with Capital to see if Melbourne Water Corporation would grant the necessary permission. Indeed, Richardson’s evidence was that Braewoodland was led to believe there was a high likelihood of obtaining consent to the proposed usage. To the extent that the council indicated verbally that it wanted the restrictive covenant removed before granting a planning permit, the magnitude of that problem remained unclear. For example, it was not known whether the council’s attitude would have been different if Melbourne Water Corporation agreed to the proposed use.
164 The evidence did not disclose any prospective tenants other than Capital and Sure Gro. There is no way of knowing exactly what prompted Sure Gro to show its interest in the property when it did or whether, under different circumstances, it would have acted sooner. Likewise, this court cannot draw any conclusion about the effect, if any, on prospective tenants on the slashing of the rent and the incentive package which Braewoodland ultimately agreed to.
165 Overall, I am not satisfied I can safely conclude that the property would have been tenanted earlier if the rent had been reduced in June and that fact was publicised at that time to the thirty agents Richardson later notified. It is possible that, if the rent had been reduced earlier, a tenant might have taken the premises by Christmas 2015. But it is also possible that, due to the state of the market and the characteristics of the property, it would have made no difference and the property would have remained unoccupied well into 2016. On the evidence, it is impossible to know.[53] Because of that, I am not satisfied that the defendants have discharged their onus in relation to mitigation. In short, I consider that Braewoodland should not be prevented from recovering the loss it claimed because of an assertion by the defendants that the loss ought to have been lower.
[53]See the discussion regarding the standard of proof in civil proceedings in Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125, 141 per Tadgell JA (with whom Winneke P and Phillips JA agreed); ACCC v Metcash Trading Limited [2011] FCAFC 151 at [31].
Conclusion
166 In conclusion, I find that the defendant guarantors are liable to the plaintiff. There was no surrender of the lease by operation of law which released Wickham, and in turn the defendants, from their obligations to the plaintiff. Subject to hearing the parties on the form of final orders and costs, I propose to order that there be judgment for the plaintiff against the defendants in the sum of $890,937.15 together with interest and costs.
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